As filed with the Securities and Exchange Commission on January 5, 2007
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: 811-21334
NEUBERGER BERMAN INCOME OPPORTUNITY FUND INC.
---------------------------------------------
(Exact Name of the Registrant as Specified in Charter)
c/o Neuberger Berman Management Inc.
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
c/o Neuberger Berman Management Inc.
Neuberger Berman Income Opportunity Fund Inc.
605 Third Avenue, 2nd Floor
New York, New York 10158-0180
Arthur C. Delibert, Esq.
Kirkpatrick & Lockhart Preston Gates Ellis LLP
1601 K Street, N.W.
Washington, D.C. 20006-1600
(Names and Addresses of agents for service)
Date of fiscal year end: October 31, 2006
Date of reporting period: October 31, 2006
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,
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under the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO SHAREHOLDERS
ANNUAL REPORT
OCTOBER 31, 2006
[NEUBERGER BERMAN LOGO]
A LEHMAN BROTHERS COMPANY
NEUBERGER BERMAN
INCOME OPPORTUNITY FUND INC.
NEUBERGER BERMAN OCTOBER 31, 2006
CHAIRMAN'S LETTER
Dear Shareholder,
I am pleased to present to you this annual report for the Neuberger Berman
Income Opportunity Fund Inc., for the fiscal year ended October 31, 2006. The
report includes portfolio commentary, a listing of the Fund's investments, and
its audited financial statements for the reporting period.
The Fund's investment objective is to provide high current income with capital
appreciation as a secondary objective through a diversified portfolio of both
real estate securities and high yield bonds. Portfolio Co-Manager Steven Brown
manages the real estate portion of the Fund. His investment approach combines
analysis of security fundamentals and real estate with property sector
diversification. His disciplined valuation methodology seeks real estate
securities that are attractively priced relative to their historical growth
rates and the valuation of other property sectors.
Portfolio Co-Managers Ann Benjamin and Tom O'Reilly manage the high yield bond
portion of the Fund. Their investment approach focuses on generating income and
managing risk. They seek to avoid the default and volatility risk associated
with many high yield bonds by applying rigorous credit analysis to higher
quality issues, and by emphasizing the intermediate range of the yield curve.
We believe that our conservative investing philosophy and disciplined investment
process will benefit shareholders by providing attractive current income over
the long term.
Thank you for your confidence in Neuberger Berman. We will continue to do our
best to earn it.
Sincerely,
/s/ PETER SUNDMAN
- ----------------------------------
PETER SUNDMAN
CHAIRMAN OF THE BOARD
NEUBERGER BERMAN INCOME OPPORTUNITY FUND INC.
"Neuberger Berman" and the Neuberger Berman logo are service marks of Neuberger
Berman, LLC. "Neuberger Berman Management Inc." and the individual fund name in
this shareholder report are either service marks or registered service marks of
Neuberger Berman Management Inc. (C)2006 Neuberger Berman Management Inc. All
rights reserved.
CONTENTS
CHAIRMAN'S LETTER 1
PORTFOLIO COMMENTARY 2
SCHEDULE OF INVESTMENTS/TOP TEN EQUITY HOLDINGS 6
FINANCIAL STATEMENTS 15
FINANCIAL HIGHLIGHTS/PER SHARE DATA 26
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 28
DISTRIBUTION REINVESTMENT PLAN 29
DIRECTORY 31
DIRECTORS AND OFFICERS 32
PROXY VOTING POLICIES AND PROCEDURES 41
QUARTERLY PORTFOLIO SCHEDULE 41
MARYLAND ANTI-TAKEOVER STATUTES 41
NOTICE TO SHAREHOLDERS 42
BOARD CONSIDERATION OF THE MANAGEMENT AND SUB-ADVISORY AGREEMENTS 43
1
INCOME OPPORTUNITY FUND INC. PORTFOLIO COMMENTARY
For the fiscal year ended October 31, 2006, on a net asset value (NAV) basis,
Neuberger Berman Income Opportunity Fund Inc. (AMEX: NOX) provided a strongly
positive return.
The Fund pursues a primary objective of high current income by investing a
portion of its assets in intermediate term, high yield corporate bonds with
maturities of primarily 10 years or less at the time of initial investment and
another portion in real estate company securities, including real estate
investment trust (REIT) common stock and REIT preferred shares.
At the end of the reporting period, the Fund held 47.8% of its investments in
REIT common stocks, 12.9% in REIT preferred stocks, 36.8% in bonds, and 2.5% in
cash and cash equivalents.
REAL ESTATE INVESTMENT TRUSTS
Improving commercial real estate fundamentals, increased merger and acquisition
activity, and a strong flow of funds from institutional and retail investors
translated into excellent gains for the REIT market during the reporting period.
Although REIT preferred stocks, which make up approximately 20% of the
portfolio's real estate component, delivered solidly positive returns, their
results trailed the strong gains of REIT common stocks, causing our real estate
holdings to lag their benchmark.
Overall, commercial real estate fundamentals remain healthy. Rising demand and
restrained supply growth resulting from an estimated 10% to 20% increase in
development costs have translated into higher occupancy rates, increasing rental
and lease prices, and above average REIT earnings growth in most property
sectors. With REITs currently trading at 19 times earnings versus a historical
average P/E of 12.2, strong earnings growth in the year ahead is at least
partially discounted in REIT valuations. Also, REITs' 4% average yield is well
below the roughly 7% historical average.
However, it is important to remember that because REITs must distribute at least
90% of earnings to shareholders, rising earnings translate into dividend
increases.
REITs have become more fully valued relative to historic average price/earnings
ratios and yield. Relative to net asset value (NAV), they are trading at their
historical average premium of 107%. Recent M&A purchases have been made at a
premium to published NAVs--an indication that NAVs should be revised upward to
more accurately reflect "real world" economic value. We expect institutional
money to continue to flow into alternative investment pools including real
estate opportunity funds.
Historically REITs have delivered average annual percentage returns in the low
teens, with approximately 60% of the return coming from dividends and 40% from
price appreciation. In the year ahead, we believe that REITs are capable of
matching this historical return average with earnings- and deal activity-driven
price appreciation playing a bigger role in the total return equation.
HIGH YIELD SECURITIES
The high yield bond market provided attractive returns for the 12-month
reporting period. Performance of the asset class was driven in part by the
favorable level of coupon income available from high yield bonds relative to
higher-rated alternatives. Also contributing to returns was capital
appreciation, as prices rose in response to the narrowing of credit spreads.
Both economic factors and market fundamentals contributed to this performance.
On the economic front, the U.S. and global economies were generally steady
performers and corporate earnings were reasonably strong. Meanwhile, U.S.
monetary policy normalized, with the Federal Reserve pausing in August 2006
after 17 straight 0.25% rate increases over the previous two years. This helped
2
NEUBERGER BERMAN OCTOBER 31, 2006
ease intermediate to long-term interest rates, which dipped below levels seen a
year earlier. At the same time, market fundamentals were solid, with an
attractive supply/demand balance and low default rates. These factors
contributed to steady demand for higher yielding bonds and rising prices.
Among high yield bonds, credit spreads tightened throughout the year and lower
quality CCC-rated bonds outperformed higher quality tiers. Across sectors,
diversified financial services, capital goods, media/cable and automotive and
auto parts were particularly good performers.
For the fiscal year, the high yield fixed income portion of the Fund generated a
favorable return, benefiting from a combination of high coupon bonds that
provided attractive income, and rising prices (both in absolute terms and
relative to Treasuries). However, the portfolio was not as heavily exposed to
the lower quality tiers of the high yield market and hence did not participate
as fully when spreads narrowed for riskier issues.
At the beginning of the fiscal year, the high yield portfolio management team
began transitioning the portfolio to include a broader range of securities--a
process that continued into early calendar 2006. One of our initial steps was to
add to the Fund's position in the automotive sector. Previously, the Fund had
been less exposed to autos, which provided particularly strong performance over
the past year.
The portfolio continues to maintain a reduced level of exposure in the
lower-rated credit tiers. Given that credit spreads are at historically tight
levels and that the economy could begin to show signs of weakening, a slightly
more cautious stance is warranted at this stage of the economic cycle.
Toward the end of the year, there were an unusual number of ratings actions, due
to a new credit-loss assessment methodology at Moody's which has been applied to
all below-investment-grade bonds. The portfolio benefited from these actions, as
the upgrades among our holdings significantly outweighed downgrades.
The high yield portfolio is currently positioned in accordance with our outlook
across industry exposures and credit quality. To summarize, it is tilted toward
industries that have exhibited a high level of cash flow stability and away from
more cyclical industries. While the high yield segment of the portfolio is
generally neutral versus the market with respect to broad credit quality tiers,
it holds a less-than-market weight position in the more risky companies with
questionable business plans.
Sincerely,
/s/ STEVEN R. BROWN /s/ ANN H. BENJAMIN
- -------------------------------------- ---------------------------------------
/s/ THOMAS P. O'REILLY
--------------------------------------
STEVEN R. BROWN, ANN H. BENJAMIN
AND THOMAS P. O'REILLY
PORTFOLIO CO-MANAGERS
3
INCOME OPPORTUNITY FUND
INCOME OPPORTUNITY FUND
AMEX TICKER SYMBOL NOX
1 YEAR TOTAL RETURN
NAV(1),(3) 25.13%
MARKET PRICE(2),(3) 31.71%
AVERAGE ANNUAL TOTAL RETURN (Life of Fund as of October 31, 2006)
NAV(1),(3) 19.01%
MARKET PRICE(2),(3) 14.33%
INCEPTION DATE 06/24/2003
RATING DIVERSIFICATION
(% OF HIGH YIELD BOND RATINGS)
AAA/Government/Government Agency 0.0%
AA 0.0
A 0.0
BBB 1.1
BB 14.5
B 26.9
CCC 8.4
CC 0.0
C 0.0
D 0.0
Not Rated 0.0
Short Term 0.0
INDUSTRY DIVERSIFICATION
(% OF EQUITY HOLDINGS)
Apartments 6.7%
Commercial Services 9.0
Community Centers 3.5
Diversified 16.1
Health Care 8.6
Industrial 4.0
Lodging 5.3
Office 18.5
Office-Industrial 2.8
Regional Malls 6.5
Self Storage 2.1
Specialty 0.3
Short-Term Investments 7.2
Liabilities, less cash, receivables and other assets (41.5)
Closed-end funds, unlike open-end funds, are not continually offered. There is
an initial public offering and once issued, common shares of closed-end funds
are sold in the open market through a stock exchange.
The composition, industries and holdings of the fund are subject to change.
Investment return will fluctuate. Past performance is no guarantee of future
results.
4
NEUBERGER BERMAN OCTOBER 31, 2006
ENDNOTES
(1) Returns based on Net Asset Value ("NAV") of the Fund.
(2) Returns based on market price of Fund shares on the American Stock
Exchange.
(3) Neuberger Berman Management Inc. has contractually agreed to waive a
portion of the management fees that it is entitled to receive from the
Fund. The undertaking lasts until October 31, 2011. Please see the notes to
the financial statements for specific information regarding the rate of the
management fees waived by Neuberger Berman Management Inc. Absent such a
waiver, the performance of the Fund would be lower.
(4) Unaudited performance data current to the most recent month-end are
available at www.nb.com.
5
SCHEDULE OF INVESTMENTS INCOME OPPORTUNITY FUND INC.
TOP TEN EQUITY HOLDINGS
HOLDING %
1 iStar Financial 6.4
2 NorthStar Realty Finance 5.1
3 Mid-America Apartment Communities 3.7
4 American Financial Realty Trust 3.4
5 Maguire Properties 3.0
6 Brandywine Realty Trust 3.0
7 First Industrial Realty Trust 3.0
8 Glimcher Realty Trust 2.9
9 Spirit Finance 2.7
10 Gramercy Capital 2.7
NUMBER OF SHARES MARKET VALUE(+)
(000'S OMITTED)
COMMON STOCKS (65.7%)
APARTMENTS (4.1%)
56,000 Apartment Investment & Management $ 3,210
85,000 BNP Residential Properties 2,031
71,000 Education Realty Trust 1,098
66,500 Mid-America Apartment Communities 4,233
66,300 Post Properties 3,247
--------
13,819
COMMERCIAL SERVICES (8.7%)
161,100 Capital Trust 7,171
50,700 Deerfield Triarc Capital 753
325,600 Gramercy Capital 9,084
788,400 NorthStar Realty Finance 11,944
--------
28,952
COMMUNITY CENTERS (3.0%)
68,800 Cedar Shopping Centers 1,150
151,000 New Plan Excel Realty Trust 4,349
122,000 Tanger Factory Outlet Centers 4,550
--------
10,049
DIVERSIFIED (11.5%)
152,100 Colonial Properties Trust 7,665
11,200 Correctional Properties Trust 363
268,300 Crescent Real Estate Equities 5,849
256,600 iStar Financial 11,888
171,000 Lexington Corporate Properties Trust 3,642||
763,800 Spirit Finance 9,097
--------
38,504
HEALTH CARE (7.9%)
19,000 Health Care Property Investors 597
197,802 Health Care REIT 8,165||
64,800 Healthcare Realty Trust 2,624
134,300 Nationwide Health Properties 3,860
386,800 OMEGA Healthcare Investors 6,529
119,700 Ventas, Inc. 4,666
--------
26,441
INDUSTRIAL (4.0%)
61,400 EastGroup Properties 3,268
215,800 First Industrial Realty Trust 9,921||
--------
13,189
LODGING (1.5%)
74,500 Ashford Hospitality Trust 959
82,000 Hospitality Properties Trust 3,974
--------
4,933
OFFICE (17.4%)
968,200 American Financial Realty Trust 11,299
300,136 Brandywine Realty Trust 10,012
22,400 Glenborough Realty Trust $ 582
163,900 Highwoods Properties 6,261
350,000 HRPT Properties Trust 4,165
105,500 Mack-Cali Realty 5,581
234,500 Maguire Properties 10,027
162,200 Newkirk Realty Trust 2,748
169,000 Reckson Associates Realty 7,456
--------
58,131
OFFICE--INDUSTRIAL (1.7%)
115,000 Liberty Property Trust 5,543
REGIONAL MALLS (3.8%)
257,000 Glimcher Realty Trust 6,621||
143,000 Pennsylvania REIT 6,163
--------
12,784
SELF STORAGE (2.1%)
2,700 Public Storage, Depositary Shares 73
115,900 Sovran Self Storage 6,836
--------
6,909
TOTAL COMMON STOCKS
(COST $156,644) 219,254
--------
PREFERRED STOCKS (17.7%)
APARTMENTS (2.6%)
12,400 Apartment Investment & Management, Ser. T 317
10,000 Apartment Investment & Management, Ser. U 255
302,200 Mid-America Apartment Communities, Ser. H 8,008
--------
8,580
COMMERCIAL SERVICES (0.3%)
20,000 Anthracite Capital, Ser. C 526
20,000 Newcastle Investment, Ser. B 521
--------
1,047
COMMUNITY CENTERS (0.5%)
20,000 Cedar Shopping Centers, Ser. A 535
12,000 Developers Diversified Realty, Ser. I 309
34,000 Tanger Factory Outlet Centers, Ser. C 863
--------
1,707
DIVERSIFIED (4.6%)
9,000 Colonial Properties Trust, Ser. E 228
18,400 Crescent Real Estate Equities, Ser. B 475
200,000 iStar Financial, Ser. E 5,190
160,000 iStar Financial, Ser. F 4,173
200,000 NorthStar Realty Finance, Ser. A 5,190
--------
15,256
6
NEUBERGER BERMAN OCTOBER 31, 2006
SCHEDULE OF INVESTMENTS INCOME OPPORTUNITY FUND INC. CONT'D
NUMBER OF SHARES MARKET VALUE(+)
(000'S OMITTED)
HEALTH CARE (0.7%)
25,000 Health Care REIT, Ser. D $ 648
18,200 LTC Properties, Ser. E 983
34,000 LTC Properties, Ser. F 876
-------
2,507
LODGING (3.8%)
36,500 Eagle Hospitality Properties Trust, Ser. A 927
182,000 Equity Inns, Ser. B 4,821
22,600 Hersha Hospitality Trust, Ser. A 590
16,000 Host Hotels & Resorts, Ser. E 437
77,500 LaSalle Hotel Properties, Ser. B 2,015
28,000 LaSalle Hotel Properties, Ser. D 728
33,000 LaSalle Hotel Properties, Ser. E 858
31,000 Strategic Hotels & Resorts, Ser. B 809
51,300 Strategic Hotels & Resorts, Ser. C 1,356
-------
12,541
OFFICE (1.1%)
60,000 DRA CRT Acquisition, Ser. A 1,457
25,878 Glenborough Realty Trust, Ser. A 656
60,000 Kilroy Realty, Ser. E 1,563
6,800 SL Green Realty, Ser. D 175
-------
3,851
OFFICE--INDUSTRIAL (1.1%)
25,000 Digital Realty Trust, Ser. A 652
16,900 Digital Realty Trust, Ser. B 434||
50,000 LBA Realty 2,285
8,000 PS Business Parks, Ser. K 210
-------
3,581
REGIONAL MALLS (2.7%)
60,000 Glimcher Realty Trust, Ser. F 1,536
61,800 Glimcher Realty Trust, Ser. G 1,563
80,000 Mills Corp., Ser. B 1,732
131,400 Mills Corp., Ser. E 2,798
19,800 Pennsylvania REIT, Ser. A 1,100
11,300 Taubman Centers, Ser. G 299
-------
9,028
SPECIALTY (0.3%)
40,000 Entertainment Properties Trust, Ser. A 1,028
TOTAL PREFERRED STOCKS
(COST $58,085) 59,126
-------
See Notes to Schedule of Investments
7
SCHEDULE OF INVESTMENTS INCOME OPPORTUNITY FUND INC. CONT'D
PRINCIPAL AMOUNT RATING @@ VALUE(+)
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
CORPORATE DEBT SECURITIES (48.9%)
AEROSPACE (0.8%)
$1,000 Delta Air Lines, Pass- Through Certificates,
7.57%, due 11/18/10 BB $ 1,003
1,740 L-3 Communications Corp., Senior Subordinated Notes,
Ser. B, 6.38%, due 10/15/15 Ba3 BB+ 1,714
-------
2,717
BROADCASTING (1.0%)
1,895 CMP Susquehanna Corp., Senior Subordinated Notes,
9.88%, due 5/15/14 B3 CCC 1,831~~~
40 LIN Television Corp., Guaranteed Notes, Ser. B,
6.50%, due 5/15/13 Ba3 B- 38
775 LIN Television Corp., Senior Subordinated Notes,
6.50%, due 5/15/13 Ba3 B- 735
500 Young Broadcasting, Inc., Guaranteed Notes,
10.00%, due 3/1/11 Caa1 CCC- 473
240 Young Broadcasting, Inc., Senior Subordinated Notes,
8.75%, due 1/15/14 Caa1 CCC- 206
-------
3,283
CABLE & WIRELESS VIDEO (3.5%)
715 CCH I LLC, Guaranteed Notes, 10.00%, due 5/15/14 Caa3 CCC- 574
3,185 CCH I LLC, Secured Notes, 11.00%, due 10/1/15 Caa2 CCC- 3,069
960 CCH II LLC, Senior Notes, 10.25%, due 9/15/10 Caa2 CCC- 991
880 Charter Communications Operating LLC, Senior Notes,
8.00%, due 4/30/12 B3 B- 898~~~
830 CSC Holdings, Inc., Senior Notes, Ser. B, 8.13%, due 7/15/09 B2 B+ 856
430 DirecTV Holdings LLC, Senior Notes, 8.38%, due 3/15/13 Ba3 BB- 446
955 DirecTV Holdings LLC, Guaranteed Notes, 6.38%, due 6/15/15 Ba3 BB- 914
725 EchoStar DBS Corp., Senior Notes, 7.00%, due 10/1/13 Ba3 BB- 719~~~
885 EchoStar DBS Corp., Guaranteed Notes, 7.13%, due 2/1/16 Ba3 BB- 865~~~
1,345 Mediacom Capital Corp. LLC, Senior Unsecured Notes,
9.50%, due 1/15/13 B3 B 1,380
460 Rogers Cable, Inc., Secured Notes, 7.88%, due 5/1/12 Ba2 BB+ 491
575 Rogers Cable, Inc., Secured Notes, 6.25%, due 6/15/13 Ba2 BB+ 568
-------
11,771
CHEMICALS (1.6%)
1,525 Equistar Chemicals, L.P., Senior Notes, 10.63%, due 5/1/11 B1 BB- 1,632
1,485 Hexion US Fin. Corp., Senior Notes, 9.75%, due 11/15/14 B3 B- 1,485~~~^^^
500 Lyondell Chemical Co., Guaranteed Notes, 8.25%, due 9/15/16 B1 B+ 515
595 Methanex Corp., Senior Notes, 8.75%, due 8/15/12 Ba1 BBB- 641
1,135 PQ Corp., Guaranteed Notes, 7.50%, due 2/15/13 B3 B- 1,087
-------
5,360
CONSUMER PRODUCTS (1.4%)
1,465 Amscan Holdings, Inc., Senior Subordinated Notes,
8.75%, due 5/1/14 Caa1 CCC+ 1,384
910 Le-Natures, Inc., Senior Subordinated Notes,
9.00%, due 6/15/13 B3 CCC+ 928~~~@@@
915 Levi Strauss & Co., Senior Notes, 9.75%, due 1/15/15 B3 B- 970
415 Rayovac Corp., Senior Subordinated Notes,
8.50%, due 10/1/13 Caa2 CCC 361
1,150 Spectrum Brands, Inc., Guaranteed Notes,
7.38%, due 2/1/15 Caa2 CCC 932^^
-------
4,575
8
NEUBERGER BERMAN OCTOBER 31, 2006
SCHEDULE OF INVESTMENTS INCOME OPPORTUNITY FUND INC. CONT'D
PRINCIPAL AMOUNT RATING @@ VALUE(+)
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
DIVERSIFIED MEDIA (3.6%)
$ 710 AMC Entertainment, Inc., Guaranteed Notes, Ser. B,
8.63%, due 8/15/12 Ba3 B- $ 732
490 AMC Entertainment, Inc., Guaranteed Notes,
11.00%, due 2/1/16 B3 CCC+ 542
310 Dex Media West LLC, Senior Notes, Ser. B,
8.50%, due 8/15/10 B1 B 321
1,125 Dex Media West LLC, Senior Subordinated Notes, Ser. B,
9.88%, due 8/15/13 B2 B 1,222
2,200 Houghton Mifflin Co., Senior Notes, 8.25%, due 2/1/11 B1 CCC+ 2,266
1,000 Lamar Media Corp., Guaranteed Notes, 7.25%, due 1/1/13 Ba3 B 1,005
1,445 Primedia, Inc., Guaranteed Notes, 8.88%, due 5/15/11 B2 B 1,434
3,045 R.H. Donnelley Corp., Senior Notes, 8.88%, due 1/15/16 B3 B 3,140
1,500 Warner Music Group, Senior Subordinated Notes,
7.38%, due 4/15/14 B2 B 1,467
-------
12,129
ENERGY (2.7%)
1,435 AmeriGas Partners, L.P., Senior Unsecured Notes,
7.25%, due 5/20/15 B1 B 1,432
225 Chesapeake Energy Corp., Senior Notes, 7.50%, due 9/15/13 Ba2 BB 230
1,090 Chesapeake Energy Corp., Senior Notes, 6.38%, due 6/15/15 Ba2 BB 1,052
980 Ferrellgas L.P., Senior Notes, 8.75%, due 6/15/12 B2 B- 1,012
2,000 Forest Oil Corp., Guaranteed Senior Notes, 7.75%, due 5/1/14 B1 B+ 2,010
2,225 Newfield Exploration Co., Senior Notes, 7.63%, due 3/1/11 Ba1 BB+ 2,303^^
470 Pioneer Natural Resources Co., Senior Notes,
5.88%, due 7/15/16 Ba1 BB+ 437
635 Targa Resources, Inc., Guaranteed Notes, 8.50%, due 11/1/13 B3 B- 633~~~
-------
9,109
FINANCIAL (0.9%)
1,000 American Real Estate Partners L.P., Guaranteed Notes,
7.13%, due 2/15/13 Ba3 BB+ 997
330 American Real Estate Partners, L.P., Senior Notes,
8.13%, due 6/1/12 Ba3 BB+ 337
1,740 Cardtronics, Inc., Senior Subordinated Notes,
9.25%, due 8/15/13 B3 B- 1,797
-------
3,131
FOOD, DRUG & TOBACCO (2.0%)
1,465 Dean Foods Co., Senior Notes, 6.63%, due 5/15/09 Ba2 BB- 1,476
3,295 Jean Coutu Group PJC, Inc., Senior Subordinated Notes,
8.50%, due 8/1/14 Caa2 B- 3,233
1,155 NPC Int'l., Inc., Senior Subordinated Notes, 9.50%, due 5/1/14 Caa1 B- 1,170~~~
875 SUPERVALU, Inc., Senior Notes, 7.50%, due 11/15/14 B1 B 889
-------
6,768
FOREST PRODUCTS & CONTAINERS (2.1%)
620 Ball Corp., Guaranteed Notes, 6.88%, due 12/15/12 Ba1 BB 626
1,740 Bowater, Inc., Debentures, 9.00%, due 8/1/09 B2 B+ 1,810
1,205 Crown Americas LLC, Senior Notes, Ser. B,
7.75%, due 11/15/15 B1 B 1,237
780 Graphic Packaging Int'l., Inc., Senior Notes,
8.50%, due 8/15/11 B2 B- 801
200 Graphic Packaging Int'l., Inc., Senior Subordinated Notes,
9.50%, due 8/15/13 B3 B- 205
See Notes to Schedule of Investments
9
SCHEDULE OF INVESTMENTS INCOME OPPORTUNITY FUND INC. CONT'D
PRINCIPAL AMOUNT RATING @@ VALUE(+)
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
$ 2,215 Owens-Brockway Glass Container, Inc., Senior Secured Notes,
8.75%, due 11/15/12 Ba2 BB- $ 2,337
-------
7,016
GAMING, LEISURE & LODGING (3.1%)
1,400 AMF Bowling Worldwide, Inc., Senior Subordinated Notes,
10.00%, due 3/1/10 B3 CCC+ 1,456
760 Chukchansi Economic Development Authority, Senior Notes,
8.00%, due 11/15/13 B2 BB- 790~~~
885 Mohegan Tribal Gaming, Senior Subordinated Notes,
6.38%, due 7/15/09 Ba2 B+ 883
1,160 Pokagon Gaming Authority, Senior Notes, 10.38%, due 6/15/14 B3 B 1,244~~~
815 Royal Caribbean Cruises, Debentures, 7.50%, due 10/15/27 Ba1 BBB- 795
680 San Pasqual Casino, Notes, 8.00%, due 9/15/13 B2 B+ 694~~~
310 Station Casinos, Inc., Senior Notes, 6.00%, due 4/1/12 Ba2 BB- 296
2,840 Station Casinos, Inc., Senior Subordinated Notes,
6.88%, due 3/1/16 Ba3 B+ 2,606
1,365 Station Casinos, Inc., Senior Unsecured Notes,
7.75%, due 8/15/16 Ba2 BB- 1,402
-------
10,166
HEALTHCARE (2.7%)
1,370 CDRV Investors, Inc., Senior Disc. Notes, Step-Up,
0.00%/9.63%, due 1/1/15 Caa2 B- 1,062|||
455 HCA, Inc., Senior Notes, 7.88%, due 2/1/11 Ba2 B- 437
395 MultiPlan, Inc., Senior Subordinated Notes,
10.38%, due 4/15/16 Caa1 B- 395~~~
485 Omnicare, Inc., Senior Subordinated Notes,
6.13%, due 6/1/13 Ba2 BB+ 462
170 Omnicare, Inc., Senior Subordinated Notes,
6.75%, due 12/15/13 Ba2 BB+ 167
200 Omnicare, Inc., Senior Subordinated Notes,
6.88%, due 12/15/15 Ba2 BB+ 196
1,410 Service Corp. Int'l., Senior Notes, 7.38%, due 10/1/14 B1 BB- 1,449~~~
680 Service Corp. Int'l., Senior Notes, 7.00%, due 6/15/17 B1 BB- 656~~~
660 Service Corp. Int'l., Senior Notes, 7.63%, due 10/1/18 B1 BB- 678~~~
1,000 Spheris, Inc., Senior Subordinated Notes,
11.00%, due 12/15/12 Caa1 CCC 930
350 US Oncology, Inc., Guaranteed Notes, 9.00%, due 8/15/12 B2 B- 363
1,000 Ventas Realty L.P., Guaranteed Notes, 6.75%, due 6/1/10 Ba2 BB+ 1,027
275 Ventas Realty L.P., Senior Notes, 6.50%, due 6/1/16 Ba2 BB+ 274
725 VWR International, Inc., Senior Subordinated Notes,
8.00%, due 4/15/14 Caa1 B- 745
-------
8,841
INFORMATION TECHNOLOGY (2.2%)
2,000 Flextronics Int'l., Ltd., Senior Subordinated Notes,
6.50%, due 5/15/13 Ba2 BB- 1,988
1,100 Language Line, Inc., Senior Subordinated Notes,
11.13%, due 6/15/12 B3 CCC+ 1,103
430 NXP BV, Secured Notes, 7.88%, due 10/15/14 Ba2 BB+ 436~~~
420 NXP BV, Senior Notes, 9.50%, due 10/15/15 B2 B+ 424~~~
1,980 SunGard Data Systems, Inc., Guaranteed Notes,
9.13%, due 8/15/13 Caa1 B- 2,054
1,145 Xerox Capital Trust I, Guaranteed Notes, 8.00%, due 2/1/27 Ba2 B+ 1,169
-------
7,174
10
NEUBERGER BERMAN OCTOBER 31, 2006
SCHEDULE OF INVESTMENTS INCOME OPPORTUNITY FUND INC. CONT'D
PRINCIPAL AMOUNT RATING @@ VALUE(+)
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
METALS & MINERALS (1.2%)
$1,250 Arch Western Finance Corp., Senior Notes, 6.75%, due 7/1/13 B1 BB- $ 1,206
2,105 Massey Energy Co., Guaranteed Notes, 6.88%, due 12/15/13 B2 B+ 1,973
830 Peabody Energy Corp., Senior Guaranteed Notes, Ser. B,
6.88%, due 3/15/13 Ba1 BB 843
-------
4,022
RETAIL (1.4%)
510 Autonation, Inc., Guaranteed Notes, 7.00%, due 4/15/14 Ba2 BB+ 507
1,365 Blockbuster, Inc., Senior Subordinated Notes,
9.00%, due 9/1/12 Caa2 CCC 1,229||
670 Bon-Ton Department Stores, Inc., Guaranteed Notes,
10.25%, due 3/15/14 B3 B- 679
475 Dollarama Group L.P., Guaranteed Notes, 8.88%, due 8/15/12 B2 B- 490
550 GSC Holdings Corp., Guaranteed Notes, 8.00%, due 10/1/12 B1 B+ 571||
1,455 Michaels Stores, Inc., Subordinated Notes, Step-Up,
0.00%/13.00%, due 11/1/16 Caa1 CCC 760~~~|||
510 Movie Gallery, Senior Unsecured Notes, 11.00%, due 5/1/12 Caa2 CCC- 319||
-------
4,555
SERVICE (1.9%)
895 Allied Waste North America, Inc., Senior Notes,
7.25%, due 3/15/15 B2 BB- 895
1,135 Education Management LLC, Senior Notes, 8.75%, due 6/1/14 B2 CCC+ 1,163~~~
2,300 Knowledge Learning Corp., Inc., Guaranteed Notes,
7.75%, due 2/1/15 B2 B- 2,179~~~
2,215 Monitronics Int'l., Inc., Senior Subordinated Notes,
11.75%, due 9/1/10 B3 B- 2,149
-------
6,386
TELECOMMUNICATIONS (2.0%)
975 Level 3 Financing, Inc., Senior Notes, 9.25%, due 11/1/14 B2 CCC- 981||~~~
1,650 Nordic Telephone Co. Holdings, Senior Notes,
8.88%, due 5/1/16 B2 B 1,728~~~
2,130 Qwest Corp., Notes, 8.88%, due 3/15/12 Ba2 BB 2,343
405 Windstream Corp., Senior Notes, 8.13%, due 8/1/13 Ba3 BB- 432~~~
1,240 Windstream Corp., Senior Notes, 8.63%, due 8/1/16 Ba3 BB- 1,338~~~
-------
6,822
TRANSPORTATION (6.7%)
6,575 Ford Motor Credit Co., Notes, 7.38%, due 10/28/09 B1 B 6,400
3,605 Ford Motor Credit Co., Senior Notes, 9.75%, due 9/15/10 B1 B 3,718~~~
2,965 General Motors Acceptance Corp., Notes, 6.88%, due 9/15/11 Ba1 BB 2,985
400 General Motors Acceptance Corp., Notes, 7.00%, due 2/1/12 Ba1 BB 403
4,380 General Motors Corp., Senior Debentures, 8.25%, due 7/15/23 Caa1 B- 3,887
470 Goodyear Tire & Rubber Co., Senior Notes, 9.00%, due 7/1/15 B2 B- 475
2,000 Stena AB, Senior Notes, 9.63%, due 12/1/12 Ba3 BB- 2,137
495 Stena AB, Senior Notes, 7.50%, due 11/1/13 Ba3 BB- 493
1,715 TFM SA de C.V., Senior Notes, 9.38%, due 5/1/12 B3 B- 1,831
-------
22,329
UTILITY (4.9%)
935 AES Corp., Senior Secured Notes, 9.00%, due 5/15/15 Ba3 BB- 1,006~~~
830 CMS Energy Corp., Senior Notes, 7.75%, due 8/1/10 Ba3 B+ 871
1,700 El Paso Natural Gas Co., Senior Notes, Ser. A,
7.63%, due 8/1/10 Ba1 B+ 1,755
See Notes to Schedule of Investments
11
SCHEDULE OF INVESTMENTS INCOME OPPORTUNITY FUND INC. CONT'D
PRINCIPAL AMOUNT RATING @@ VALUE(+)
(000'S OMITTED) MOODY'S S&P (000'S OMITTED)
$ 2,435 El Paso Natural Gas Co., Bonds, 8.38%, due 6/15/32 Ba1 B+ $ 2,818
3,040 Midwest Generation LLC, Secured Notes, 8.75%, due 5/1/34 Ba2 B+ 3,287
2,170 Mirant Americas Generation, Inc., Senior Unsecured Notes,
8.30%, due 5/1/11 Caa1 B- 2,197
845 NRG Energy, Inc., Senior Notes, 7.38%, due 2/1/16 B1 B- 855
980 TECO Energy, Inc., Senior Notes, 7.50%, due 6/15/10 Ba2 BB 1,027
1,710 Transcontinental Gas Pipe Line, Debentures,
7.25%, due 12/1/26 Ba1 BB- 1,770
940 TXU Corp., Senior Notes, Ser. P, 5.55%, due 11/15/14 Ba1 BB+ 896
---------
16,482
WIRELESS COMMUNICATIONS (3.2%)
570 American Cellular Corp., Senior Notes, Ser. B,
10.00%, due 8/1/11 B3 CCC 598
1,710 Centennial Cellular Operating Co. LLC, Guaranteed Notes,
10.13%, due 6/15/13 B2 CCC 1,834
1,430 Intelsat Bermuda Ltd., Guaranteed Notes, 9.25%, due 6/15/16 B2 B+ 1,527~~~
2,190 Intelsat Subsidiary Holdings Co. Ltd., Guaranteed Notes,
8.63%, due 1/15/15 B2 B+ 2,272
2,160 Nextel Communications, Inc., Senior Notes, Ser. E,
6.88%, due 10/31/13 Baa3 BBB+ 2,207
2,000 Rogers Wireless, Inc., Senior Subordinated Notes,
8.00%, due 12/15/12 B1 BB- 2,115
---------
10,553
TOTAL CORPORATE DEBT SECURITIES
(COST $160,591) 163,189
---------
FLOATING RATE CORPORATE DEBT SECURITIES (2.0%)~~
430 Bowater, Inc., Senior Floating Rate Notes, 8.39%, due 12/15/10 B2 B+ 434
900 Elan Financial PLC, Guaranteed Floating Rate Notes,
9.41%, due 11/15/06 B3 B 908
620 Paxson Communications, Secured Floating Rate Notes,
8.62%, due 1/16/07 B1 CCC+ 627~~~
3,430 Paxson Communications, Secured Floating Rate Notes,
11.62%, due 1/16/07 Caa2 CCC- 3,434~~~
195 Primedia, Inc., Senior Floating Rate Notes,
10.78%, due 11/15/06 B2 B 202
990 US Oncology, Inc., Senior Floating Rate Notes,
10.68%, due 3/15/07 B3 B- 1,012
---------
TOTAL FLOATING RATE CORPORATE DEBT SECURITIES
(COST $6,463) 6,617
---------
NUMBER OF SHARES
SHORT-TERM INVESTMENTS (7.2%)
7,183,677 Neuberger Berman Prime Money Fund Trust Class 7,184@
16,668,150 Neuberger Berman Securities Lending Quality Fund, LLC 16,668+++
---------
TOTAL SHORT-TERM INVESTMENTS (COST $23,852) 23,852#
---------
TOTAL INVESTMENTS (141.5%) (COST $405,635) 472,038##
Liabilities, less cash, receivables and other assets [(3.9%)] (12,994)
Liquidation Value of Auction Preferred Shares [(37.6)%)] (125,500)
---------
TOTAL NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS (100.0%) $ 333,544
---------
See Notes to Schedule of Investments
12
NEUBERGER BERMAN OCTOBER 31, 2006
NOTES TO SCHEDULE OF INVESTMENTS
(+) Investments in equity securities by Neuberger Berman Income Opportunity
Fund Inc. (the "Fund") are valued at the latest sale price where that price
is readily available; securities for which no sales were reported, unless
otherwise noted, are valued at the last available bid price. Securities
traded primarily on the NASDAQ Stock Market are normally valued by the Fund
at the NASDAQ Official Closing Price ("NOCP") provided by NASDAQ each
business day. The NOCP is the most recently reported price as of 4:00:02
p.m., Eastern time, unless that price is outside the range of the "inside"
bid and asked prices (i.e., the bid and asked prices that dealers quote to
each other when trading for their own accounts); in that case, NASDAQ will
adjust the price to equal the inside bid or asked price, whichever is
closer. Because of delays in reporting trades, the NOCP may not be based on
the price of the last trade to occur before the market closes. Investments
in debt securities by 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 debt securities, bid prices are
obtained from principal market makers in those securities. The Fund values
all other securities, including securities for which the necessary last
sale, asked and/or bid prices are not readily available, by methods the
Board of Directors of the Fund (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 currently
translated from the local currency into U.S. dollars using the exchange
rate as of 4:00 p.m., Eastern time. The Board has approved the use of FT
Interactive Data Corporation ("FT Interactive") to assist in determining
the fair value of the Fund's foreign equity securities when changes in the
value of a certain index suggest that the closing prices on the foreign
exchanges may no longer represent the amount that the Fund could expect to
receive for those securities. In this event, FT Interactive will provide
adjusted prices for certain foreign equity securities using a statistical
analysis of historical correlations of multiple factors. In the absence of
precise information about the market values of these foreign securities as
of the close of the New York Stock Exchange, the Board has determined on
the basis of available data that prices adjusted in this way are likely to
be closer to the prices the Fund could realize on a current sale than are
the prices of those securities established at the close of the foreign
markets in which the securities primarily trade. However, fair value prices
are necessarily estimates, and there is no assurance that such a price will
be at or close to the price at which the security next trades. 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, 2006, the cost of investments for U.S. federal income tax
purposes was $406,154,000. Gross unrealized appreciation of investments was
$68,704,000 and gross unrealized depreciation of investments was
$2,820,000, resulting in net unrealized appreciation of $65,884,000 based
on cost for U.S. federal income tax purposes.
@ Neuberger Berman Prime Money Fund ("Prime Money") is also managed by
Neuberger Berman Management Inc. ("Management") (see Notes A & E 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.
See Notes to Financial Statements
13
NOTES TO SCHEDULE OF INVESTMENTS CONT'D
~~~ 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 have been deemed by the investment manager to be liquid. At October 31,
2006, these securities amounted to $34,187,000 or 10.3% of net assets
applicable to common shareholders.
^^^ All or a portion of this security was purchased on a when-issued basis. At
October 31, 2006, these securities amounted to $1,485,000.
^^ All or a portion of this security is segregated as collateral for interest
rate swap contracts and/or when-issued securities.
+++ Managed by an affiliate of Management and could be deemed an affiliate of
the Fund (see Notes A & E of Notes to Financial Statements).
|| All or a portion of this security is on loan (see Note A of Notes to
Financial Statements).
~~ 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, 2006.
@@ Credit ratings are unaudited.
||| Denotes a step-up bond: a zero coupon bond that converts to a fixed rate of
interest at a designated future date.
@@@ Subsequent to October 31, 2006, the value of this security decreased
significantly. On November 1, 2006, news regarding accounting
irregularities at Le-Natures, Inc. was released to the public which
prompted Management to sell the entire position that same day. This sale
had a negative impact on net asset value per share in the amount of $0.047
for the Fund. There was no net asset value impact on the Fund as of October
31, 2006.
See Notes to Financial Statements
14
NEUBERGER BERMAN OCTOBER 31, 2006
STATEMENT OF ASSETS AND LIABILITIES
NEUBERGER BERMAN INCOME OPPORTUNITY
(000'S OMITTED EXCEPT PER SHARE AMOUNTS) FUND
ASSETS
INVESTMENTS IN SECURITIES, AT MARKET VALUE*+ (NOTES A & E)--SEE
SCHEDULE OF INVESTMENTS:
Unaffiliated issuers $448,186
- ------------------------------------------------------------------------------------------------
Affiliated issuers 23,852
================================================================================================
472,038
Cash 50
- ------------------------------------------------------------------------------------------------
Dividends and interest receivable 4,259
Receivable for securities sold 1,959
- ------------------------------------------------------------------------------------------------
Interest rate swaps, at market value (Note A) 2,367
Receivable for securities lending income (Note A) 90
- ------------------------------------------------------------------------------------------------
Prepaid expenses and other assets 14
================================================================================================
TOTAL ASSETS 480,777
================================================================================================
LIABILITIES
Payable for collateral on securities loaned (Note A) 16,668
Distributions payable--preferred shares 94
- ------------------------------------------------------------------------------------------------
Distributions payable--common shares 208
Payable for securities purchased 4,332
- ------------------------------------------------------------------------------------------------
Payable to investment manager--net (Notes A & B) 134
Payable to administrator (Note B) 96
- ------------------------------------------------------------------------------------------------
Payable for securities lending fees (Note A) 82
Accrued expenses and other payables 119
================================================================================================
TOTAL LIABILITIES 21,733
================================================================================================
AUCTION PREFERRED SHARES SERIES A & B AT LIQUIDATION VALUE
6,000 shares authorized; 5,020 shares issued and outstanding;
$.0001 par value; $25,000 liquidation value per share (Note A) 125,500
================================================================================================
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS AT VALUE $333,544
================================================================================================
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS CONSIST OF:
Paid-in capital--common shares $250,045
Distributions in excess of net investment income (337)
- ------------------------------------------------------------------------------------------------
Accumulated net realized gains (losses) on investments 15,083
Net unrealized appreciation (depreciation) in value of investments 68,753
================================================================================================
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS AT VALUE $333,544
================================================================================================
COMMON SHARES OUTSTANDING ($.0001 PAR VALUE; 999,994,000 SHARES AUTHORIZED) 17,724
================================================================================================
NET ASSET VALUE PER COMMON SHARE OUTSTANDING $ 18.82
================================================================================================
+SECURITIES ON LOAN, AT MARKET VALUE $ 15,982
================================================================================================
*COST OF INVESTMENTS:
Unaffiliated issuers $381,783
Affiliated issuers 23,852
================================================================================================
TOTAL COST OF INVESTMENTS $405,635
================================================================================================
See Notes to Financial Statements
15
NEUBERGER BERMAN FOR THE YEAR ENDED OCTOBER 31, 2006
STATEMENT OF OPERATIONS
NEUBERGER BERMAN INCOME OPPORTUNITY
(000'S OMITTED) FUND
INVESTMENT INCOME
INCOME (NOTE A):
Dividend income--unaffiliated issuers $ 9,118
Interest income--unaffiliated issuers 15,564
- ----------------------------------------------------------------------------------------------
Income from securities loaned--net (Note E) 333
Income from investments in affiliated issuers (Note E) 288
==============================================================================================
Total income 25,303
==============================================================================================
EXPENSES:
Investment management fees (Notes A & B) 2,586
Administration fees (Note B) 1,077
- ----------------------------------------------------------------------------------------------
Auction agent fees (Note B) 319
Audit fees 45
- ----------------------------------------------------------------------------------------------
Basic maintenance expense (Note B) 25
Custodian fees (Note B) 169
- ----------------------------------------------------------------------------------------------
Directors' fees and expenses 31
Insurance expense 20
- ----------------------------------------------------------------------------------------------
Legal fees 49
Shareholder reports 74
- ----------------------------------------------------------------------------------------------
Stock exchange listing fees 7
Stock transfer agent fees 35
- ----------------------------------------------------------------------------------------------
Miscellaneous 26
==============================================================================================
Total expenses 4,463
Investment management fees waived (Notes A & B) (1,082)
Expenses reduced by custodian fee expense offset and commission recapture
arrangements (Note B) (21)
==============================================================================================
Total net expenses 3,360
==============================================================================================
Net investment income 21,943
==============================================================================================
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE A)
Net realized gain (loss) on:
Sales of investment securities of unaffiliated issuers 22,260
Interest rate swap contracts 1,112
- ----------------------------------------------------------------------------------------------
Change in net unrealized appreciation (depreciation) in value of:
Unaffiliated investment securities 27,645
Interest rate swap contracts (385)
==============================================================================================
Net gain (loss) on investments 50,632
==============================================================================================
Distributions to Preferred Shareholders (5,780)
==============================================================================================
NET INCREASE (DECREASE) IN NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS
RESULTING FROM OPERATIONS $66,795
==============================================================================================
See Notes to Financial Statements
16
NEUBERGER BERMAN OCTOBER 31, 2006
STATEMENT OF CHANGES IN NET ASSETS
INCOME OPPORTUNITY FUND
-----------------------
NEUBERGER BERMAN YEAR ENDED OCTOBER 31,
(000'S OMITTED) 2006 2005
INCREASE (DECREASE) IN NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS:
FROM OPERATIONS:
Net investment income (loss) $ 21,943 $ 18,942
Net realized gain (loss) on investments 23,372 7,623
- -----------------------------------------------------------------------------------------------
Change in net unrealized appreciation (depreciation) of investments 27,260 2,515
DISTRIBUTIONS TO PREFERRED SHAREHOLDERS FROM (NOTE A):
Net investment income (4,875) (2,189)
Net realized gain on investments (905) (1,273)
- -----------------------------------------------------------------------------------------------
Tax return of capital -- (223)
Total distributions to preferred shareholders (5,780) (3,685)
===============================================================================================
Net increase (decrease) in net assets applicable to common
shareholders resulting from operations 66,795 25,395
===============================================================================================
DISTRIBUTIONS TO COMMON SHAREHOLDERS FROM (NOTE A):
Net investment income (19,661) (18,527)
Net realized gain on investments (3,653) (10,739)
- -----------------------------------------------------------------------------------------------
Tax return of capital -- (1,885)
Total distributions to common shareholders (23,314) (31,151)
===============================================================================================
NET INCREASE (DECREASE) IN NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS 43,481 (5,756)
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS:
Beginning of year 290,063 295,819
===============================================================================================
End of year $333,544 $290,063
===============================================================================================
Distributions in excess of net investment income at end of year $ (337) $ (295)
===============================================================================================
See Notes to Financial Statements
17
NOTES TO FINANCIAL STATEMENTS INCOME OPPORTUNITY FUND INC.
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
1 GENERAL: Neuberger Berman Income Opportunity Fund Inc. (the "Fund") was
organized as a Maryland corporation on April 17, 2003 as a non-diversified,
closed-end management investment company under the Investment Company Act
of 1940, as amended (the "1940 Act"). The Board of Directors of the Fund
(the "Board") may classify or re-classify any unissued shares of capital
stock into one or more classes of preferred stock without the approval of
shareholders.
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 trade date for financial reporting purposes. Dividend income is
recorded on the ex-dividend date. Non-cash dividends included in dividend
income, if any, are recorded at the fair market value of the securities
received. 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 and foreign currency 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.
As determined on October 31, 2006, permanent differences resulting
primarily from different book and tax accounting for distributions in
excess of earnings, amortization of bond premium, income recognized on
interest rate swaps and character of distributions paid were reclassified
at fiscal year-end. These reclassifications had no effect on net income,
net asset value applicable to common shareholders or net asset value per
common share of the Fund.
The tax character of distributions paid during the years ended October 31,
2006 and October 31, 2005 was as follows:
DISTRIBUTIONS PAID FROM:
ORDINARY INCOME LONG-TERM TAX RETURN
CAPITAL GAIN OF CAPITAL TOTAL
2006 2005 2006 2005 2006 2005 2006 2005
$24,535,326 $23,827,885 $4,558,553 $8,900,047 $-- $2,108,248 $29,093,879 $34,836,180
18
NEUBERGER BERMAN OCTOBER 31, 2006
As of October 31, 2006, 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
$-- $15,601,949 $68,199,397 $-- $83,801,346
The difference between book and tax basis distributable earnings is
attributable primarily to timing differences of distribution payments, wash
sales, amortization of bond premium, and income recognized on interest rate
swaps.
5 DISTRIBUTIONS TO SHAREHOLDERS: The Fund earns income, net of expenses,
daily on its investments. It is the policy of the Fund to declare quarterly
and pay monthly distributions to common shareholders. The Fund has adopted
a policy to pay common shareholders a stable monthly distribution. The
Fund's ability to satisfy its policy will depend on a number of factors,
including the stability of income received from its investments, the
availability of capital gains, distributions paid on preferred shares and
the level of expenses. In an effort to maintain a stable distribution
amount, the Fund may pay distributions consisting of net investment income,
realized gains and paid-in capital. There is no assurance that the Fund
will always be able to pay distributions of a particular size, or that
distributions will consist solely of net investment income and realized
capital gains. The composition of the Fund's distribution for the calendar
year 2006 will be reported to Fund shareholders on IRS Form 1099DIV. The
Fund may pay distributions in excess of those required by its stable
distribution policy to avoid excise tax or to satisfy the requirements of
Subchapter M of the Internal Revenue Code. Distributions to common
shareholders are recorded on the ex-date. Net realized capital gains, if
any, will be offset to the extent of any available capital loss
carryforwards. Any such offset will not reduce the level of the stable
distribution paid by the Fund. Distributions to preferred shareholders are
accrued and determined as described in Note A-7.
The Fund invests a significant portion of its assets in securities issued
by real estate companies, including real estate investment trusts
("REITs"). The distributions the Fund receives from REITs are generally
comprised of income, capital gains, and return of capital, but the REITs do
not report this information to the Fund until the following calendar year.
At October 31, 2006, the Fund estimated these amounts within the financial
statements since the information is not available from the REITs until
after the Fund's fiscal year-end. For the year ended October 31, 2006, the
character of distributions paid to shareholders is disclosed within the
Statement of Changes and is also based on these estimates. All estimates
are based upon REIT information sources available to the Fund together with
actual IRS Forms 1099DIV received to date. Based on past experience it is
probable that a portion of the Fund's distributions during the current
fiscal year will be considered tax return of capital but the actual amount
of tax return of capital, if any, is not determinable until after the
Fund's fiscal year-end. After calendar year-end, when the Fund learns the
nature of the distributions paid by REITs during that year, distributions
previously identified as income are often recharacterized as return of
capital and/or capital gain. After all applicable REITs have informed the
Fund of the actual breakdown of distributions paid to the Fund during its
fiscal year, estimates previously recorded are adjusted on the books of the
Fund to reflect actual results. As a result, the composition of the Fund's
distributions as reported herein may differ from the final composition
determined after calendar year-end and reported to Fund shareholders on IRS
Form 1099DIV.
19
NOTES TO FINANCIAL STATEMENTS INCOME OPPORTUNITY FUND INC. CONT'D
On September 28, 2006, the Fund declared two monthly distributions to
common shareholders in the amount of $0.10625 per share per month, payable
after the close of the reporting period, on November 30, 2006 and December
29, 2006, to shareholders of record on November 15, 2006 and December 15,
2006, respectively, with ex-dates of November 13, 2006 and December 13,
2006, respectively.
6 EXPENSE ALLOCATION: Certain expenses are applicable to multiple funds.
Expenses directly attributable to the Fund are charged to the Fund.
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
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.
7 REDEEMABLE PREFERRED SHARES: On June 5, 2003, the Fund re-classified 6,000
unissued shares of capital stock as Series A Auction Preferred Shares and
Series B Auction Preferred Shares ("Preferred Shares"). On September 26,
2003, the Fund issued 2,510 Series A Preferred Shares and 2,510 Series B
Preferred Shares. All Preferred Shares have a liquidation preference of
$25,000 per share plus any accumulated unpaid distributions, whether or not
earned or declared by the Fund, but excluding interest thereon
("Liquidation Value").
Except when the Fund has declared a special rate period, distributions to
preferred shareholders, which are cumulative, are accrued daily and paid
every 7 days. Distribution rates are reset every 7 days based on the
results of an auction, except during special rate periods. For the year
ended October 31, 2006, distribution rates ranged from 3.64% to 5.27% for
Series A and 3.65% to 5.20% for Series B Auction Preferred Shares. The Fund
declared distributions to preferred shareholders for the period November 1,
2006 to November 30, 2006 of $259,656 and $260,430 for Series A and Series
B Preferred Shares, respectively.
The Fund may redeem Preferred Shares, in whole or in part, on the second
business day preceding any distribution payment date at Liquidation Value.
The Fund is also subject to certain restrictions relating to the Preferred
Shares. Failure to comply with these restrictions could preclude the Fund
from declaring any distributions to common shareholders or repurchasing
common shares and/or could trigger the mandatory redemption of Preferred
Shares at Liquidation Value. The holders of Preferred Shares are entitled
to one vote per share and will vote with holders of common shares as a
single class, except that the Preferred Shares will vote separately as a
class on certain matters, as required by law or the Fund's charter. The
holders of the Preferred Shares, voting as a separate class, are entitled
at all times to elect two Directors of the Fund, and to elect a majority of
the Directors of the Fund if the Fund fails to pay distributions on
Preferred Shares for two consecutive years.
8 INTEREST RATE SWAPS: The Fund may enter into interest rate swap
transactions, with institutions that Management has determined are
creditworthy, to reduce the risk that an increase in short-term interest
rates could reduce common share net earnings as a result of leverage. Under
the terms of the interest rate swap contracts, the Fund agrees to pay the
swap counter party a fixed-rate payment in exchange for the counter party's
paying the Fund a variable-rate payment that is intended to approximate all
or a portion of the Fund's variable-rate payment obligation on the Fund's
Preferred Shares. The fixed-rate and variable-rate payment flows are netted
against each other, with the difference being paid by one party to the
other on a monthly basis. The Fund segregates cash or liquid securities
having a value at least equal to the Fund's net payment obligations under
any swap transaction, marked to market daily.
20
NEUBERGER BERMAN OCTOBER 31, 2006
Risks may arise if the counter party to a swap contract fails to comply
with the terms of its contract. The loss incurred by the failure of a
counter party is generally limited to the net interest payment to be
received by the Fund and/or the termination value at the end of the
contract. Additionally, risks may arise from movements in interest rates
unanticipated by Management.
Periodic expected interim net interest payments or receipts on the swaps
are recorded as an adjustment to unrealized gains/losses, along with the
fair value of the future periodic payment streams on the swaps. The
unrealized gains/losses associated with the periodic interim net interest
payments are reclassified to realized gains/losses in conjunction with the
actual net receipt or payment of such amounts. The reclassifications do not
impact the Fund's total net assets applicable to common shareholders or its
total net increase (decrease) in net assets applicable to common
shareholders. At October 31, 2006, the Fund had outstanding interest rate
swap contracts as follows:
RATE TYPE
--------------------------
FIXED-RATE VARIABLE-RATE ACCRUED UNREALIZED TOTAL
PAYMENTS PAYMENTS NET INTEREST APPRECIATION FAIR
SWAP NOTIONAL MADE BY RECEIVED BY RECEIVABLE (DEPRECIATION) VALUE
COUNTER PARTY AMOUNT TERMINATION DATE THE FUND THE FUND(1) (PAYABLE)
Citibank, N.A. $24,000,000 April 24, 2008 3.70% 5.32% $ 8,640 $ 481,442 $ 490,082
Citibank, N.A. 70,000,000 October 24, 2008 3.63% 5.32% 26,289 1,850,162 1,876,451
------- ---------- ----------
$34,929 $2,331,604 $2,366,533
(1) 30 day LIBOR (London Interbank Offered Rate) as of October 20, 2006.
9 SECURITY LENDING: Since 2005, a third party, eSecLending, has assisted the
Fund in conducting a bidding process to identify agents/principals that
would pay a guaranteed amount to the Fund in consideration of the Fund
entering into an exclusive securities lending arrangement.
From October 4, 2005 to October 3, 2006, the Fund lent its securities to
two principal borrowers that were selected through the bidding process.
Through another bidding process in August 2006, and pursuant to an
Exemptive Order issued by the Securities and Exchange Commission, the Fund
selected Neuberger Berman, LLC ("Neuberger"), an affiliate of the Fund, to
be its exclusive lending agent ("Neuberger Agreement") for a specified
period. Under the agreement entered into between the Fund and Neuberger,
Neuberger pays a guaranteed amount to the Fund during the term of the
arrangement.
Under the securities lending arrangements arranged through eSecLending, the
Fund receives cash collateral at the beginning of each transaction equal to
at least 102% of the prior day's market value of the loaned securities
(105% in the case of international securities). The Fund may invest all the
cash collateral in Neuberger Berman Securities Lending Quality Fund, LLC
("Quality Fund"), a fund managed by Lehman Brothers Asset Management LLC,
an affiliate of Management, as approved by the Board.
Net income from the applicable lending program represents the guaranteed
amount plus income earned on the cash collateral invested in Quality Fund
or in other investments, less cash collateral fees and other expenses
associated with the loans. For the year ended October 31, 2006, the Fund
received net income under the securities lending arrangements of
approximately $333,000, which is reflected in the Statement of Operations
under the caption "Income from securities loaned-net." For the year ended
October 31, 2006, "Income from securities loaned-net" consisted of
approximately $2,324,000 in income earned on
21
NOTES TO FINANCIAL STATEMENTS INCOME OPPORTUNITY FUND INC. CONT'D
cash collateral and guaranteed amounts (including approximately $1,756,000
of interest income earned from the Quality Fund and $6,000 in guaranteed
amounts received by Neuberger), less fees and expenses paid of
approximately $1,991,000 (including $0 retained by Neuberger).
10 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.
11 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 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 year
ended October 31, 2006, management fees waived under this Arrangement
amounted to $4,719 and are reflected in the Statement of Operations under
the caption "Investment management fees waived." For the year ended October
31, 2006, income earned under this Arrangement amounted to $287,765, and is
reflected in the Statement of Operations under the caption "Income from
investments in affiliated issuers."
12 CONCENTRATION OF RISK: Under normal market conditions, the Fund's equity
investments will be concentrated in income-producing common equity
securities, preferred securities, convertible securities and
non-convertible debt securities issued by companies deriving the majority
of their revenue from the ownership, construction, financing, management
and/or sale of commercial, industrial, and/or residential real estate. The
value of the Fund's shares may fluctuate more due to economic, legal,
cultural, geopolitical or technological developments affecting the United
States real estate industry, or a segment of the United States real estate
industry in which the Fund owns a substantial position, than would the
shares of a fund not concentrated in the real estate industry. The Fund's
debt investments will be concentrated in high-yield corporate debt
securities rated, at the time of investment, Ba or lower by Moody's
Investors Service, Inc. or BB or lower by Standard & Poor's, or if unrated
by either of those entities, determined by Management to be of comparable
quality. Due to the inherent volatility and illiquidity of the high yield
securities in which the Fund invests and the real or perceived difficulty
of issuers of those high yield securities to meet their payment obligations
during economic downturns or because of negative business developments
relating to the issuer or its industry in general, the value of the Fund's
shares may fluctuate more than would be the case if the Fund did not
concentrate in high yield securities.
13 INDEMNIFICATIONS: Like many other companies, the Fund's organizational
documents provide that its officers and directors are indemnified against
certain liabilities arising out of the performance of their duties to the
Fund. In addition, both in some of its principal service contracts and in
the normal course of its business, the Fund enters into contracts that
provide indemnifications to other parties for certain
22
NEUBERGER BERMAN OCTOBER 31, 2006
types of losses or liabilities. The Fund's maximum exposure under these
arrangements is unknown as this could involve future claims against the
Fund.
NOTE B--MANAGEMENT FEES, ADMINISTRATION FEES, AND OTHER TRANSACTIONS WITH
AFFILIATES:
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 0.60% of its average daily Managed
Assets. Managed Assets equal the total assets of the Fund, less liabilities
other than the aggregate indebtedness entered into for purposes of
leverage. For purposes of calculating Managed Assets, the Liquidation Value
of any Preferred Shares outstanding is not considered a liability.
Management has contractually agreed to waive a portion of the management
fees it is entitled to receive from the Fund at the following annual rates:
YEAR ENDED OCTOBER 31, % OF AVERAGE DAILY MANAGED ASSETS
----------------------------------------------------------
2006 - 2008 0.25
2009 0.19
2010 0.13
2011 0.07
Management has not contractually agreed to waive any portion of its fees
beyond October 31, 2011.
For the year ended October 31, 2006, such waived fees amounted to
$1,077,337.
The Fund retains Management as its administrator under an Administration
Agreement. The Fund pays Management an administration fee at the annual
rate of 0.25% of its average daily Managed Assets under this agreement.
Additionally, Management retains State Street Bank and Trust Company
("State Street") as its sub-administrator under a Sub-Administration
Agreement. Management pays State Street a fee for all services received
under the agreement.
Management and Neuberger, a member firm of the New York Stock Exchange and
sub-adviser to the Fund, are wholly-owned subsidiaries of Lehman Brothers
Holdings Inc. ("Lehman"), a publicly-owned holding company. Neuberger is
retained by Management to furnish it with investment recommendations and
research information without added cost to the Fund. Several individuals
who are officers and/or Directors of the Fund are also employees of
Neuberger and/or Management.
The Fund has entered into a commission recapture program, which enables it
to pay some of its operational expenses by recouping a portion of the
commissions it pays to a broker that is not a related party of the Fund.
Expenses paid through this program may include costs of custodial, transfer
agency or accounting services. For the year ended October 31, 2006, the
impact of this arrangement was a reduction of expenses of $7,618.
The Fund has an expense offset arrangement in connection with its custodian
contract. For the year ended October 31, 2006, the impact of this
arrangement was a reduction of expenses of $13,045.
In connection with the settlement of each Preferred Share auction, the Fund
pays, through the auction agent, a service fee to each participating
broker-dealer based upon the aggregate liquidation preference of
23
NOTES TO FINANCIAL STATEMENTS INCOME OPPORTUNITY FUND INC. CONT'D
the Preferred Shares held by the broker-dealer's customers. For any auction
preceding a rate period of less than one year, the service fee is paid at
the annual rate of 1/4 of 1%; for any auction preceding a rate period of
one year or more, the service fee is paid at a rate agreed to by the Fund
and the broker-dealer.
In order to satisfy rating agencies' requirements, the Fund is required to
provide each rating agency a report on a monthly basis verifying that the
Fund is maintaining eligible assets having a discounted value equal to or
greater than the Preferred Shares Basic Maintenance Amount, which is a
minimum level set by each rating agency as one of the conditions to
maintain the AAA/Aaa rating on the Preferred Shares. "Discounted value"
refers to the fact that the rating agencies require the Fund, in performing
this calculation, to discount portfolio securities below their face value,
at rates determined by the rating agencies. The Fund pays a fee to State
Street for the preparation of this report, which is reflected in the
Statement of Operations under the caption "Basic maintenance expense."
NOTE C--SECURITIES TRANSACTIONS:
During the year ended October 31, 2006, there were purchase and sale
transactions (excluding short-term securities and interest rate swap
contracts) of $279,453,583 and $267,200,242, respectively.
During the year ended October 31, 2006, brokerage commissions on securities
transactions amounted to $249,527, of which Neuberger received $0, Lehman
Brothers Inc. received $43,255, and other brokers received $206,272.
NOTE D--CAPITAL:
At October 31, 2006, the common shares outstanding and the common shares of
the Fund owned by Neuberger were as follows:
COMMON SHARES COMMON SHARES
OUTSTANDING OWNED BY NEUBERGER
17,723,648 6,981
There were no transactions in common shares for the years ended October 31,
2006 and October 31, 2005.
NOTE E--INVESTMENTS IN AFFILIATES*:
INCOME FROM
INVESTMENTS
BALANCE OF BALANCE OF IN AFFILIATED
SHARES HELD GROSS GROSS SHARES HELD VALUE ISSUERS
OCTOBER 31, PURCHASES SALES AND OCTOBER 31, OCTOBER 31, INCLUDED IN
NAME OF ISSUER 2005 AND ADDITIONS REDUCTIONS 2006 2006 TOTAL INCOME
Neuberger Berman Prime Money
Fund Trust Class** 964,595 177,913,159 171,694,077 7,183,677 $ 7,183,677 $ 287,765
Neuberger Berman Securities
Lending Quality Fund, LLC*** 36,482,615 212,829,414 232,643,879 16,668,150 16,668,150 1,755,941
----------- ----------
TOTAL $23,851,827 $2,043,706
----------- ----------
* Affiliated issuers, as defined in the 1940 Act.
24
NEUBERGER BERMAN OCTOBER 31, 2006
** 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.
*** The Quality Fund, a fund managed by Lehman Brothers Asset Management LLC,
an affiliate of Management, is used to invest cash the Fund receives as
collateral for securities loans as approved by the Board. Because all
shares of the Quality Fund are held by funds in the related investment
management complex, the Quality Fund may be considered an affiliate of the
Fund.
NOTE F--RECENT ACCOUNTING PRONOUNCEMENTS:
On July 13, 2006, the Financial Accounting Standards Board ("FASB")
released FASB Interpretation No. 48 "Accounting for Uncertainty in Income
Taxes" ("FIN 48"). FIN 48 provides guidance for how uncertain tax positions
should be recognized, measured, presented and disclosed in the financial
statements. FIN 48 clarifies the accounting for income taxes, by
prescribing a minimum recognition threshold a tax position is required to
meet before being recognized in the financial statements. FIN 48 requires
that a "more-likely-than-not" threshold be met before the benefit of a tax
position may be recognized in the financial statements and prescribes how
such benefit should be measured. Adoption of FIN 48 is required for fiscal
years beginning after December 15, 2006 and is to be applied to all open
tax years as of the effective date. At this time, Management is evaluating
the implications of FIN 48 and its impact in the financial statements has
not yet been determined.
In September 2006, FASB issued FASB Statement No. 157, "Fair Value
Measurement" ("SFAS 157"), which defines fair value, establishes a
framework for measuring fair value, and expands disclosures about fair
value measurements. SFAS 157 is effective for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years.
Management believes the adoption of SFAS 157 will not have a material
impact on the Fund's financial positions or results of operations.
25
FINANCIAL HIGHLIGHTS INCOME OPPORTUNITY FUND INC.
The following table includes selected data for a share outstanding throughout
each period and other performance information derived from the Financial
Statements.
PERIOD FROM
JULY 2, 2003^
YEAR ENDED OCTOBER 31, TO OCTOBER 31,
---------------------------- --------------
2006 2005 2004 2003
COMMON SHARE NET ASSET VALUE, BEGINNING OF PERIOD $ 16.37 $ 16.69 $ 14.72 $ 14.33
------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS APPLICABLE TO COMMON
SHAREHOLDERS:
NET INVESTMENT INCOME (LOSS)~ 1.24 1.07 1.27| .25
NET GAINS OR LOSSES ON SECURITIES (BOTH REALIZED
AND UNREALIZED) 2.86 .57 2.08| .59
COMMON SHARE EQUIVALENT OF DISTRIBUTIONS TO PREFERRED
SHAREHOLDERS FROM:
NET INVESTMENT INCOME~ (.28) (.13) (.09) (.01)
NET CAPITAL GAINS~ (.05) (.07) (.01) (.00)
TAX RETURN OF CAPITAL~ -- (.01) -- (.00)
------- ------- ------- -------
TOTAL DISTRIBUTIONS TO PREFERRED SHAREHOLDERS (.33) (.21) (.10) (.01)
------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS APPLICABLE TO COMMON
SHAREHOLDERS 3.77 1.43 3.25 .83
------- ------- ------- -------
LESS DISTRIBUTIONS TO COMMON SHAREHOLDERS FROM:
NET INVESTMENT INCOME (1.11) (1.03) (1.11) (.27)
NET CAPITAL GAINS (.21) (.61) (.17) (.05)
TAX RETURN OF CAPITAL -- (.11) -- (.00)
------- ------- ------- -------
TOTAL DISTRIBUTIONS TO COMMON SHAREHOLDERS (1.32) (1.75) (1.28) (.32)
------- ------- ------- -------
LESS CAPITAL CHARGES FROM:
ISSUANCE OF COMMON SHARES -- -- -- (.03)
ISSUANCE OF PREFERRED SHARES -- -- (.00) (.09)
------- ------- ------- -------
TOTAL CAPITAL CHARGES -- -- (.00) (.12)
------- ------- ------- -------
COMMON SHARE NET ASSET VALUE, END OF PERIOD $ 18.82 $ 16.37 $ 16.69 $ 14.72
------- ------- ------- -------
COMMON SHARE MARKET VALUE, END OF PERIOD $ 17.22 $ 14.23 $ 15.07 $ 13.98
------- ------- ------- -------
TOTAL RETURN, COMMON SHARE NET ASSET VALUE+ +25.13% +10.33% +23.67% +5.11%**
TOTAL RETURN, COMMON SHARE MARKET VALUE+ +31.71% +6.22% +17.57% -4.67%**
RATIOS/SUPPLEMENTAL DATA++
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS,
END OF PERIOD (IN MILLIONS) $ 333.5 $ 290.0 $ 295.8 $ 260.8
PREFERRED SHARES, AT LIQUIDATION VALUE ($25,000 PER SHARE
LIQUIDATION PREFERENCE) (IN MILLIONS) $ 125.5 $ 125.5 $ 125.5 $ 125.5
RATIO OF GROSS EXPENSES TO AVERAGE NET ASSETS APPLICABLE
TO COMMON SHAREHOLDERS# 1.11% 1.13% 1.16%| .88%*
RATIO OF NET EXPENSES TO AVERAGE NET ASSETS APPLICABLE TO
COMMON SHAREHOLDERS+ 1.10% 1.13% 1.16%| .87%*
RATIO OF NET INVESTMENT INCOME (LOSS) EXCLUDING PREFERRED
SHARE DISTRIBUTIONS TO AVERAGE NET ASSETS APPLICABLE
TO COMMON SHAREHOLDERS 7.18% 6.49% 8.08%| 5.24%*
RATIO OF PREFERRED SHARE DISTRIBUTIONS TO AVERAGE NET
ASSETS APPLICABLE TO COMMON SHAREHOLDERS 1.89% 1.26% .62% .17%*
RATIO OF NET INVESTMENT INCOME (LOSS) INCLUDING PREFERRED
SHARE DISTRIBUTIONS TO AVERAGE NET ASSETS APPLICABLE
TO COMMON SHAREHOLDERS 5.29% 5.23% 7.46%| 5.07%*
PORTFOLIO TURNOVER RATE 61% 49% 74% 21%**
ASSET COVERAGE PER PREFERRED SHARE, END OF PERIOD@ $91,462 $82,794 $83,933 $76,957
See Notes to Financial Highlights
26
NEUBERGER BERMAN OCTOBER 31, 2006
NOTES TO FINANCIAL HIGHLIGHTS INCOME OPPORTUNITY FUND INC.
+ 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. Total return based on per share market value assumes the
purchase of common shares at the market price on the first day and sales of
common shares at the market price on the last day of the period indicated.
Distributions, if any, are assumed to be reinvested at prices obtained
under the Fund's distribution reinvestment plan. Results represent past
performance and do not guarantee future results. Current returns may be
lower or higher than the performance data quoted. Investment returns may
fluctuate and shares when sold may be worth more or less than original
cost. Total return would have been lower if Management had not waived a
portion of the investment management fee.
# The Fund is required to calculate an expense ratio without taking into
consideration any expense reductions related to expense offset
arrangements.
+++ After waiver of a portion of the investment management fee by Management.
Had Management not undertaken such action, the annualized ratios of net
expenses to average daily net assets applicable to common shareholders
would have been:
PERIOD FROM
JULY 2, 2003 TO
YEAR ENDED OCTOBER 31, OCTOBER 31,
2006 2005 2004 2003
1.45% 1.48% 1.52% 1.16%
^ The date investment operations commenced.
* Annualized.
** Not annualized.
@ Calculated by subtracting the Fund's total liabilities (excluding
accumulated unpaid distributions on Preferred Shares) from the Fund's total
assets and dividing by the number of Preferred Shares outstanding.
++ Expense ratios do not include the effect of distribution payments to
preferred shareholders. Income ratios include income earned on assets
attributable to Preferred Shares outstanding.
| Prior to November 1, 2003, the Fund recorded the accrual of the net
interest income or expense expected to be received or paid at interim
settlement dates as a net payable or receivable for swap contracts and
actual amounts paid as net interest income or expense on swap contracts. As
a result of SEC staff guidance relating to the application of FASB
Statement No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES to registered investment companies, effective November 1, 2003,
periodic expected interim net interest payments or receipts on the swaps
are recorded as an adjustment to unrealized gains/losses, along with the
fair value of the future periodic payment streams on the swaps.
Accordingly, for the year ended October 31, 2004, the per share amounts and
ratios shown decreased or increased as follows:
Net Investment Income $ .11
Net Gains or Losses on Securities (both realized and
unrealized) $(.11)
Ratio of Gross Expenses to Average Net Assets Applicable to
Common Shareholders (.71%)
Ratio of Net Expenses to Average Net Assets Applicable to
Common Shareholders (.71%)
Ratio of Net Investment Income (Loss) Excluding Preferred
Share Distributions to Average Net Assets Applicable to
Common Shareholders .71%
Ratio of Net Investment Income (Loss) Including Preferred
Share Distributions to Average Net Assets Applicable to
Common Shareholders .71%
~ Calculated based on the average number of shares outstanding during each
fiscal period.
27
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Neuberger Berman Income Opportunity Fund Inc.
We have audited the accompanying statement of assets and liabilities of
Neuberger Berman Income Opportunity Fund Inc. (the "Fund"), including the
schedule of investments, as of October 31, 2006, and the related statement of
operations for the year then ended, the statement of changes in net assets for
each of the two years in the period then ended, and the financial highlights for
each of the periods indicated therein. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
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 Fund'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 Fund's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of October 31, 2006, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from
brokers were not received. 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
Neuberger Berman Income Opportunity Fund Inc. at October 31, 2006, the results
of its operations for the year then ended, the changes in its net assets for
each of the two years in the period then ended, and its financial highlights for
each of the periods indicated therein, in conformity with U.S. generally
accepted accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
December 9, 2006
28
NEUBERGER BERMAN OCTOBER 31, 2006
DISTRIBUTION REINVESTMENT PLAN
The Bank of New York ("Plan Agent") will act as Plan Agent for shareholders who
have not elected in writing to receive dividends and distributions in cash (each
a "Participant"), will open an account for each Participant under the
Distribution Reinvestment Plan ("Plan") in the same name as their then current
Shares are registered, and will put the Plan into effect for each Participant as
of the first record date for a dividend or capital gains distribution.
Whenever the Fund declares a dividend or distribution with respect to the common
stock of the Fund ("Shares"), each Participant will receive such dividends and
distributions in additional Shares, including fractional Shares acquired by the
Plan Agent and credited to each Participant's account. If on the payment date
for a cash dividend or distribution, the net asset value is equal to or less
than the market price per Share plus estimated brokerage commissions, the Plan
Agent shall automatically receive such Shares, including fractions, for each
Participant's account. Except in the circumstances described in the next
paragraph, the number of additional Shares to be credited to each Participant's
account shall be determined by dividing the dollar amount of the dividend or
distribution payable on their Shares by the greater of the net asset value per
Share determined as of the date of purchase or 95% of the then current market
price per Share on the payment date.
Should the net asset value per Share exceed the market price per Share plus
estimated brokerage commissions on the payment date for a cash dividend or
distribution, the Plan Agent or a broker-dealer selected by the Plan Agent shall
endeavor, for a purchase period lasting until the last business day before the
next date on which the Shares trade on an "ex-dividend" basis, but in no event,
except as provided below, more than 30 days after the payment date, to apply the
amount of such dividend or distribution on each Participant's Shares (less their
PRO RATA share of brokerage commissions incurred with respect to the Plan
Agent's open-market purchases in connection with the reinvestment of such
dividend or distribution) to purchase Shares on the open market for each
Participant's account. No such purchases may be made more than 30 days after the
payment date for such dividend or distribution except where temporary
curtailment or suspension of purchase is necessary to comply with applicable
provisions of federal securities laws. If, at the close of business on any day
during the purchase period the net asset value per Share equals or is less than
the market price per Share plus estimated brokerage commissions, the Plan Agent
will not make any further open-market purchases in connection with the
reinvestment of such dividend or distribution. If the Plan Agent is unable to
invest the full dividend or distribution amount through open-market purchases
during the purchase period, the Plan Agent shall request that, with respect to
the uninvested portion of such dividend or distribution amount, the Fund issue
new Shares at the close of business on the earlier of the last day of the
purchase period or the first day during the purchase period on which the net
asset value per Share equals or is less than the market price per Share, plus
estimated brokerage commissions, such Shares to be issued in accordance with the
terms specified in the third paragraph hereof. These newly issued Shares will be
valued at the then-current market price per Share at the time such Shares are to
be issued.
For purposes of making the reinvestment purchase comparison under the Plan, (a)
the market price of the Shares on a particular date shall be the last sales
price on the New York Stock Exchange (or if the Shares are not listed on the New
York Stock Exchange, such other exchange on which the Shares are principally
traded) on that date, or, if there is no sale on such Exchange (or if not so
listed, in the over-the-counter market) on that date, then the mean between the
closing bid and asked quotations for such Shares on such Exchange on such date
and (b) the net asset value per Share on a particular date shall be the net
asset value per Share most recently calculated by or on behalf of the Fund. All
dividends, distributions and other payments (whether made in cash or Shares)
shall be made net of any applicable withholding tax.
Open-market purchases provided for above may be made on any securities exchange
where the Fund's Shares are traded, in the over-the-counter market or in
negotiated transactions and may be on such terms as to price, delivery and
otherwise as the Plan Agent shall determine. Each Participant's uninvested funds
held by the Plan Agent will not bear interest, and it is understood that, in any
event, the Plan Agent shall have no liability in connection with any inability
to purchase Shares within 30 days after the initial date of such purchase as
herein provided, or with the timing of any purchases effected. The Plan Agent
shall have no responsibility as to the value of the Shares acquired for each
Participant's account. For the purpose of cash investments, the Plan Agent may
commingle each Participant's funds with those of other shareholders of the Fund
for whom the Plan Agent similarly acts as agent, and the average price
(including brokerage commissions) of all Shares purchased by the Plan Agent as
Plan Agent shall be the price per Share allocable to each Participant in
connection therewith.
29
DISTRIBUTION REINVESTMENT PLAN CONT'D
The Plan Agent may hold each Participant's Shares acquired pursuant to the Plan
together with the Shares of other shareholders of the Fund acquired pursuant to
the Plan in noncertificated form in the Plan Agent's name or that of the Plan
Agent's nominee. The Plan Agent will forward to each Participant any proxy
solicitation material and will vote any Shares so held for each Participant only
in accordance with the instructions set forth on proxies returned by the
Participant to the Fund.
The Plan Agent will confirm to each Participant each acquisition made for their
account as soon as practicable but not later than 60 days after the date
thereof. Although each Participant may from time to time have an undivided
fractional interest (computed to three decimal places) in a Share, no
certificates for a fractional Share will be issued. However, dividends and
distributions on fractional Shares will be credited to each Participant's
account. In the event of termination of a Participant's account under the Plan,
the Plan Agent will adjust for any such undivided fractional interest in cash at
the market value of the Shares at the time of termination, less the PRO RATA
expense of any sale required to make such an adjustment.
Any Share dividends or split Shares distributed by the Fund on Shares held by
the Plan Agent for Participants will be credited to their accounts. In the event
that the Fund makes available to its shareholders rights to purchase additional
Shares or other securities, the Shares held for each Participant under the Plan
will be added to other Shares held by the Participant in calculating the number
of rights to be issued to each Participant.
The Plan Agent's service fee for handling capital gains distributions or income
dividends will be paid by the Fund. Participants will be charged their PRO RATA
share of brokerage commissions on all open-market purchases.
Each Participant may terminate their account under the Plan by notifying the
Plan Agent in writing. Such termination will be effective immediately if the
Participant's notice is received by the Plan Agent not less than ten days prior
to any dividend or distribution record date, otherwise such termination will be
effective the first trading day after the payment date for such dividend or
distribution with respect to any subsequent dividend or distribution. The Plan
may be terminated by the Plan Agent or the Fund upon notice in writing mailed to
each Participant at least 30 days prior to any record date for the payment of
any dividend or distribution by the Fund.
These terms and conditions may be amended or supplemented by the Plan Agent or
the Fund at any time or times but, except when necessary or appropriate to
comply with applicable law or the rules or policies of the Securities and
Exchange Commission or any other regulatory authority, only by mailing to each
Participant appropriate written notice at least 30 days prior to the effective
date thereof. The amendment or supplement shall be deemed to be accepted by each
Participant unless, prior to the effective date thereof, the Plan Agent receives
written notice of the termination of their account under the Plan. Any such
amendment may include an appointment by the Plan Agent in its place and stead of
a successor Plan Agent under these terms and conditions, with full power and
authority to perform all or any of the acts to be performed by the Plan Agent
under these terms and conditions. Upon any such appointment of any Plan Agent
for the purpose of receiving dividends and distributions, the Fund will be
authorized to pay to such successor Plan Agent, for each Participant's account,
all dividends and distributions payable on Shares held in their name or under
the Plan for retention or application by such successor Plan Agent as provided
in these terms and conditions.
The Plan Agent shall at all times act in good faith and agrees to use its best
efforts within reasonable limits to ensure the accuracy of all services
performed under this Agreement and to comply with applicable law, but assumes no
responsibility and shall not be liable for loss or damage due to errors unless
such error is caused by the Plan Agent's negligence, bad faith, or willful
misconduct or that of its employees.
These terms and conditions shall be governed by the laws of the State of
Maryland.
30
NEUBERGER BERMAN OCTOBER 31, 2006
DIRECTORY
INVESTMENT MANAGER AND ADMINISTRATOR
Neuberger Berman Management Inc.
605 Third Avenue, 2nd Floor
New York, NY 10158-0180
877.461.1899 or 212.476.8800
SUB-ADVISER
Neuberger Berman, LLC
605 Third Avenue
New York, NY 10158-3698
CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
STOCK TRANSFER AGENT
The Bank of New York
101 Barclay Street, 11-E
New York, NY 10286
LEGAL COUNSEL
Kirkpatrick & Lockhart Nicholson Graham LLP
1601 K Street, NW
Washington, DC 20006
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Ernst & Young LLP
200 Clarendon Street
Boston, MA 02116
31
DIRECTORS AND OFFICERS
The following tables set forth information concerning the directors and officers
of the Fund. All persons named as directors and officers also serve in similar
capacities for other funds administered or managed by Management and Neuberger.
The Fund's Statement of Additional Information includes additional information
about Fund directors as of the time of the Fund's most recent public offering
and is available upon request, without charge, by calling (877) 461-1899.
INFORMATION ABOUT THE BOARD OF DIRECTORS
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
OVERSEEN BY
NAME, AGE, ADDRESS(1) AND LENGTH OF TIME FUND OTHER DIRECTORSHIPS HELD OUTSIDE
POSITION(2) WITH FUND SERVED PRINCIPAL OCCUPATION(S)(4) DIRECTOR(5) FUND COMPLEX BY FUND DIRECTOR
- --------------------------------------------------------------------------------------------------------------------------
CLASS I
INDEPENDENT FUND DIRECTORS
Faith Colish (71) Since the Counsel, Carter Ledyard & 56 Advisory Director, ABA
Director Inception of Milburn LLP (law firm) Retirement Funds
the Fund(3) since October 2002; (formerly, American Bar
formerly, Attorney-at-Law Retirement Association
and President, Faith (ABRA)) since 1997
Colish, A Professional (not-for-profit membership
Corporation, 1980 to 2002. association).
Cornelius T. Ryan (75) Since the Founding General Partner, 56 None.
Director Inception of Oxford Partners and Oxford
the Fund(3) Bioscience Partners
(venture capital
investing) and President,
Oxford Venture Corporation
since 1981.
Peter P. Trapp (62) Since the Regional Manager for 56 None.
Director Inception of Mid-Southern Region, Ford
the Fund(3) Motor Credit Company since
September 1997; formerly,
President, Ford Life
Insurance Company, April
1995 to August 1997.
32
NEUBERGER BERMAN OCTOBER 31, 2006
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
OVERSEEN BY
NAME, AGE, ADDRESS(1) AND LENGTH OF TIME FUND OTHER DIRECTORSHIPS HELD OUTSIDE
POSITION(2) WITH FUND SERVED PRINCIPAL OCCUPATION(S)(4) DIRECTOR(5) FUND COMPLEX BY FUND DIRECTOR
- --------------------------------------------------------------------------------------------------------------------------
FUND DIRECTOR WHO IS AN "INTERESTED PERSON"
Peter E. Sundman* (47) Since the Executive Vice President, 56 Director and Vice President,
Chief Executive Officer, Inception of Neuberger Berman Inc. Neuberger & Berman Agency, Inc.
Director and Chairman the Fund(3) (holding company) since since 2000; formerly, Director,
of the Board 1999; Head of Neuberger Neuberger Berman Inc. (holding
Berman Inc.'s Mutual Funds company), October 1999 to March
Business (since 1999) and 2003; Trustee, Frost Valley
Institutional Business YMCA; Trustee, College of
(1999 to October 2005); Wooster.
responsible for Managed
Accounts Business and
intermediary distribution
since October 1999;
President and Director,
Management since 1999;
Managing Director,
Neuberger since 2005;
formerly, Executive Vice
President, Neuberger, 1999
to December 2005;
formerly, Principal,
Neuberger, 1997 to 1999;
formerly, Senior Vice
President, Management,
1996 to 1999.
CLASS II**
INDEPENDENT FUND DIRECTORS
John Cannon (76) Since the Consultant; formerly, 56 Independent Trustee or Director
Director Inception of Chairman, CDC Investment of three series of Oppenheimer
the Fund(3) Advisers (registered Funds: Limited Term New York
investment adviser), 1993 Municipal Fund, Rochester Fund
to January 1999; formerly, Municipals, and Oppenheimer
President and Chief Convertible Securities Fund
Executive Officer, AMA since 1992.
Investment Advisors, an
affiliate of the American
Medical Association.
C. Anne Harvey (69) Since the President, C.A. Harvey 56 Formerly, President, Board of
Director Inception of Associates since October Associates to The National
the Fund(3) 2001; formerly, Director, Rehabilitation Hospital's Board
AARP, 1978 to December of Directors, 2001 to 2002;
2001. formerly, Member, Individual
Investors Advisory Committee to
the New York Stock Exchange
Board of Directors, 1998 to June
2002.
33
DIRECTORS AND OFFICERS CONT'D
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
OVERSEEN BY
NAME, AGE, ADDRESS(1) AND LENGTH OF TIME FUND OTHER DIRECTORSHIPS HELD OUTSIDE
POSITION(2) WITH FUND SERVED PRINCIPAL OCCUPATION(S)(4) DIRECTOR(5) FUND COMPLEX BY FUND DIRECTOR
- --------------------------------------------------------------------------------------------------------------------------
Tom D. Seip (56) Since the General Partner, Seip 56 Director, H&R Block, Inc.
Director Inception of Investments LP (a private (financial services company)
the Fund(3) investment partnership); since May 2001; Director,
formerly, President and America One Foundation since
CEO, Westaff, Inc. 1998; formerly, Director,
(temporary staffing), May Forward Management, Inc. (asset
2001 to January 2002; management company), 1999 to
formerly, Senior Executive 2006; formerly Director, E-Bay
at the Charles Schwab Zoological Society, 1999 to
Corporation, 1983 to 1999, 2003; formerly, Director,
including Chief Executive General Magic (voice recognition
Officer, Charles Schwab software), 2001 to 2002;
Investment Management, formerly, Director, E-Finance
Inc. and Trustee, Schwab Corporation (credit decisioning
Family of Funds and Schwab services), 1999 to 2003;
Investments, 1997 to 1998, formerly, Director,
and Executive Vice Save-Daily.com (micro investing
President-Retail services), 1999 to 2003.
Brokerage, Charles Schwab
Investment Management,
1994 to 1997.
FUND DIRECTOR WHO IS AN "INTERESTED PERSON"
Jack L. Rivkin* (66) Since 2002(3) Executive Vice President 56 Director, Dale Carnegie and
President and Director and Chief Investment Associates, Inc. (private
Officer, Neuberger Berman company) since 1998; Director,
Inc. (holding company) Solbright, Inc. (private
since 2002 and 2003, company) since 1998.
respectively; Managing
Director and Chief
Investment Officer,
Neuberger since December
2005 and 2003,
respectively; formerly,
Executive Vice President,
Neuberger, December 2002
to 2005; Director and
Chairman, Management since
December 2002; formerly,
Executive Vice President,
Citigroup Investments,
Inc., September 1995 to
February 2002; formerly,
Executive Vice President,
Citigroup Inc., September
1995 to February 2002.
34
NEUBERGER BERMAN OCTOBER 31, 2006
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
OVERSEEN BY
NAME, AGE, ADDRESS(1) AND LENGTH OF TIME FUND OTHER DIRECTORSHIPS HELD OUTSIDE
POSITION(2) WITH FUND SERVED PRINCIPAL OCCUPATION(S)(4) DIRECTOR(5) FUND COMPLEX BY FUND DIRECTOR
- --------------------------------------------------------------------------------------------------------------------------
CLASS III
INDEPENDENT FUND DIRECTORS
Robert A. Kavesh (79) Since the Marcus Nadler Professor 56 Director, The Caring Community
Director Inception of Emeritus of Finance and (not-for-profit); formerly,
the Fund(3) Economics, New York Director, DEL Laboratories, Inc.
University Stern School of (cosmetics and pharmaceuticals),
Business; formerly, 1978 to 2004; formerly,
Executive Director, Apple Bank for
Secretary-Treasurer, Savings, 1979 to 1990; formerly,
American Finance Director, Western Pacific
Association, 1961 to 1979. Industries, Inc., 1972 to 1986
(public company).
Howard A. Mileaf (69) Since the Retired; formerly, Vice 56 Director, Webfinancial
Director Inception of President and General Corporation (holding company)
the Fund(3) Counsel, WHX Corporation since December 2002; formerly,
(holding company), 1993 to Director WHX Corporation
2001. (holding company), January 2002
to June 2005; formerly,
Director, State Theatre of New
Jersey (not-for-profit theater),
2000 to 2005; formerly,
Director, Kevlin Corporation
(manufacturer of microwave and
other products).
Edward I. O'Brien (78) Since the Formerly, Member, 56 Director, Legg Mason, Inc.
Director Inception of Investment Policy (financial services holding
the Committee, Edward Jones, company) since 1993; formerly,
Fund(3) 1993 to 2001; President, Director, Boston Financial Group
Securities Industry (real estate and tax shelters),
Association ("SIA") 1993 to 1999.
(securities industry's
representative in
government relations and
regulatory matters at the
federal and state levels),
1974 to 1992; Adviser to
SIA, November 1992 to
November 1993.
35
DIRECTORS AND OFFICERS CONT'D
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
OVERSEEN BY
NAME, AGE, ADDRESS(1) AND LENGTH OF TIME FUND OTHER DIRECTORSHIPS HELD OUTSIDE
POSITION(2) WITH FUND SERVED PRINCIPAL OCCUPATION(S)(4) DIRECTOR(5) FUND COMPLEX BY FUND DIRECTOR
- --------------------------------------------------------------------------------------------------------------------------
William E. Rulon (74) Since the Retired; formerly, Senior 56 Formerly, Director, Pro-Kids
Director Inception of Vice President, Foodmaker, Golf and Learning Academy (teach
the Fund(3) Inc. (operator and golf and computer usage to "at
franchiser of restaurants) risk" children), 1998 to 2006;
until January 1997. formerly, Director, Prandium,
Inc. (restaurants), March 2001
to July 2002.
Candace L. Straight (59) Since the Private investor and 56 Director, Montpelier Re
Director Inception of consultant specializing in (reinsurance company) since
the Fund(3) the insurance industry; 2006; Director, National
formerly, Advisory Atlantic Holdings Corporation
Director, Securitas (property and casualty insurance
Capital LLC (a global company) since 2004; Director,
private equity investment The Proformance Insurance
firm dedicated to making Company (personal lines property
investments in the and casualty insurance company)
insurance sector), 1998 to since March 2004; formerly,
December 2003. Director, Providence Washington
Insurance Company (property and
casualty insurance company),
December 1998 to March 2006;
formerly, Director, Summit
Global Partners (insurance
brokerage firm), 2000 to 2005.
(1) The business address of each listed person is 605 Third Avenue, New York,
New York 10158.
(2) The Board of Directors shall at times be divided as equally as possible
into three classes of Directors designated Class I, Class II, and Class
III. The terms of office of Class I, Class II, and Class III Directors
shall expire at the annual meeting of shareholders held in 2009, 2007, and
2008, respectively, and at each third annual meeting of stockholders
thereafter.
(3) The Director has served since the Fund's inception except for Mr. Rivkin
who has served as a Director since December 2002 for the Funds with an
inception date of 2002. The inception date of Neuberger Berman Intermediate
Municipal Fund Inc., Neuberger Berman California Intermediate Municipal
Fund Inc., Neuberger Berman New York Intermediate Municipal Fund Inc., and
Neuberger Berman Real Estate Income Fund Inc. is 2002. The inception date
of Neuberger Berman Realty Income Fund Inc., Neuberger Berman Real Estate
Securities Income Fund Inc. and Neuberger Berman Income Opportunity Fund
Inc. is 2003. The inception date of Neuberger Berman Dividend Advantage
Fund Inc. is 2004.
(4) Except as otherwise indicated, each individual has held the positions shown
for at least the last five years.
(5) For funds organized in a master-feeder structure, we count the master fund
and its associated feeder funds as a single portfolio.
* Indicates a Fund Director who is an "interested person" within the meaning
of the 1940 Act. Mr. Sundman and Mr. Rivkin are interested persons of the
Fund by virtue of the fact that they are officers and/or directors of
Management and Neuberger.
** Barry Hirsch was elected as a Class II Director at the annual shareholder
meeting on April 19, 2006. Mr. Hirsch passed away in July 2006. In August
2006, C. Anne Harvey, formerly a Class I Director of the Fund, was
appointed as a Class II Director of the Fund.
36
NEUBERGER BERMAN OCTOBER 31, 2006
INFORMATION ABOUT THE OFFICERS OF THE FUND
POSITION AND
NAME, AGE, AND ADDRESS(1) LENGTH OF TIME SERVED PRINCIPAL OCCUPATION(S)(2)
- --------------------------------------------------------------------------------------------
Andrew B. Allard (45) Anti-Money Laundering Senior Vice President, Neuberger since
Compliance Officer 2006; Deputy General Counsel, Neuberger
since inception(3) since 2004; formerly, Vice President,
Neuberger, 2000 to 2006; formerly,
Associate General Counsel, Neuberger,
1999 to 2004; Anti-Money Laundering
Compliance Officer, 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) and one registered
investment company for which Lehman
Brothers Asset Management Inc. acts as
investment adviser (since 2006).
Michael J. Bradler (36) Assistant Treasurer Vice President, Neuberger since 2006;
since 2005 Employee, Management since 1997;
Assistant Treasurer, fifteen registered
investment companies for which
Management acts as investment manager
and administrator (fifteen since 2005)
and one registered investment company
for which Lehman Brothers Asset
Management Inc. acts as investment
adviser (since 2006).
Claudia A. Brandon (50) Secretary since the Vice President-Mutual Fund Board
Fund's inception(3) Relations, Management since 2000 and
Assistant Secretary since 2004; Vice
President, Neuberger since 2002 and
Employee since 1999; Secretary, fifteen
registered investment companies for
which Management acts as investment
manager and administrator (three since
1985, four since 2002, three since 2003,
four since 2004 and one since 2005) and
one registered investment company for
which Lehman Brothers Asset Management
Inc. acts as investment adviser (since
2006).
37
INFORMATION ABOUT THE OFFICERS OF THE FUND CONT'D
POSITION AND
NAME, AGE, AND ADDRESS(1) LENGTH OF TIME SERVED PRINCIPAL OCCUPATION(S)(2)
- --------------------------------------------------------------------------------------------
Robert Conti (50) Vice President since Senior Vice President, Neuberger since
the Fund's 2003; formerly, Vice President,
inception(3) Neuberger, 1999 to 2003; Senior Vice
President, Management since 2000; 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) and one registered
investment company for which Lehman
Brothers Asset Management Inc. acts as
investment adviser (since 2006).
Brian J. Gaffney (53) Vice President since Managing Director, Neuberger since 1999;
the Fund's Senior Vice President, Management since
inception(3) 2000; 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) and one
registered investment company for which
Lehman Brothers Asset Management Inc.
acts as investment adviser (since 2006).
Maxine L. Gerson (56) Chief Legal Officer Senior Vice President, Neuberger since
since 2005 (only for 2002; Deputy General Counsel and
purposes of sections Assistant Secretary, Neuberger since
307 and 406 of the 2001; formerly, Vice President,
Sarbanes-Oxley Act of Neuberger, 2001 to 2002; formerly,
2002) Associate General Counsel, Neuberger,
2001; formerly, Counsel, Neuberger,
2000; Secretary and General Counsel,
Management since 2004; Chief Legal
Officer (only for purposes of sections
307 and 406 of the Sarbanes-Oxley Act of
2002), fifteen registered investment
companies for which Management acts as
investment manager and administrator
(fifteen since 2005) and one registered
investment company for which Lehman
Brothers Asset Management Inc. acts as
investment adviser (since 2006).
38
NEUBERGER BERMAN OCTOBER 31, 2006
POSITION AND
NAME, AGE, AND ADDRESS(1) LENGTH OF TIME SERVED PRINCIPAL OCCUPATION(S)(2)
- --------------------------------------------------------------------------------------------
Sheila R. James (41) Assistant Secretary Employee, Neuberger since 1999;
since the Fund's Assistant Secretary, fifteen registered
inception(3) investment companies for which
Management acts as investment manager
and administrator (seven since 2002,
three since 2003, four since 2004 and
one since 2005) and one registered
investment company for which Lehman
Brothers Asset Management Inc. acts as
investment adviser (since 2006).
Kevin Lyons (51) Assistant Secretary Employee, Neuberger since 1999;
since 2003(4) 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) and one
registered investment company for which
Lehman Brothers Asset Management Inc.
acts as investment adviser (since 2006).
John M. McGovern (36) Treasurer and Vice President, Neuberger since 2004;
Principal Financial Employee, Management since 1993;
and Accounting Treasurer and Principal Financial and
Officer since 2005; Accounting Officer, fifteen registered
prior thereto, investment companies for which
Assistant Treasurer Management acts as investment manager
since the Fund's and administrator (fifteen since 2005)
inception(3) and one registered investment company
for which Lehman Brothers Asset
Management Inc. acts as investment
adviser (since 2006); formerly,
Assistant Treasurer, fifteen registered
investment companies for which
Management acts as investment manager
and administrator, 2002 to 2005.
Frank Rosato (35) Assistant Treasurer Vice President, Neuberger since 2006;
since 2005 Employee, Management since 1995;
Assistant Treasurer, fifteen registered
investment companies for which
Management acts as investment manager
and administrator (fifteen since 2005)
and one registered investment company
for which Lehman Brothers Asset
Management Inc. acts as investment
adviser (since 2006).
39
INFORMATION ABOUT THE OFFICERS OF THE FUND CONT'D
POSITION AND
NAME, AGE, AND ADDRESS(1) LENGTH OF TIME SERVED PRINCIPAL OCCUPATION(S)(2)
- --------------------------------------------------------------------------------------------
Frederic B. Soule (60) Vice President since Senior Vice President, Neuberger since
the Fund's 2003; formerly, Vice President,
inception(3) Neuberger, 1999 to 2003; 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) and
one registered investment company for
which Lehman Brothers Asset Management
Inc. acts as investment adviser (since
2006).
Chamaine Williams (35) Chief Compliance Vice President, Lehman Brothers Inc.
Officer since 2005 since 2003; Chief Compliance Officer,
fifteen registered investment companies
for which Management acts as investment
manager and administrator (fifteen since
2005) and one registered investment
company for which Lehman Brothers Asset
Management Inc. acts as investment
adviser (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.), 1997 to 2003.
- ----------
(1) The business address of each listed person is 605 Third Avenue, New York,
New York 10158.
(2) Except as otherwise indicated, each individual has held the positions shown
for at least the last five years.
(3) The officer has served since the Fund's inception. The inception date of
Neuberger Berman Intermediate Municipal Fund Inc., Neuberger Berman
California Intermediate Municipal Fund Inc., Neuberger Berman New York
Intermediate Municipal Fund Inc., and Neuberger Berman Real Estate Income
Fund Inc. is 2002. The inception date of Neuberger Berman Realty Income
Fund Inc., Neuberger Berman Real Estate Securities Income Fund Inc. and
Neuberger Berman Income Opportunity Fund Inc. is 2003. The inception date
of Neuberger Berman Dividend Advantage Fund Inc. is 2004.
(4) For Neuberger Berman Dividend Advantage Fund Inc., the officer has served
since the Fund's inception in May.
40
NEUBERGER BERMAN OCTOBER 31, 2006
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund 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 Fund voted
proxies relating to portfolio securities during the most recent 12-month period
ended June 30 is also 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 Management's website at www.nb.com.
QUARTERLY PORTFOLIO SCHEDULE
The Fund files a complete schedule of portfolio holdings with the Securities and
Exchange Commission for the first and third quarters of each fiscal year on Form
N-Q. The Fund'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).
MARYLAND ANTI-TAKEOVER STATUTES
By resolution of the Board of Directors, the Fund has opted into the Maryland
Control Share Acquisition Act and the Maryland Business Combination Act. In
general, the Maryland Control Share Acquisition Act provides that "control
shares" of a Maryland corporation acquired in a control share acquisition may
not be voted except to the extent approved by shareholders at a special meeting
by a vote of two-thirds of the votes entitled to be cast on the matter
(excluding shares owned by the acquiror and by officers or directors who are
employees of the corporation). "Control shares" are voting shares of stock
which, if aggregated with all other shares of stock owned by the acquiror or in
respect of which the acquiror is able to exercise or direct the exercise of
voting power (except solely by virtue of a revocable proxy), would entitle the
acquiror to exercise voting power in electing directors within certain
statutorily-defined ranges (one-tenth but less than one-third, one-third but
less than a majority, and more than a majority of the voting power). In general,
the Maryland Business Combination Act prohibits an interested shareholder (a
shareholder that holds 10% or more of the voting power of the outstanding stock
of the corporation) of a Maryland corporation from engaging in a business
combination (generally defined to include a merger, consolidation, share
exchange, sale of a substantial amount of assets, a transfer of the
corporation's securities and similar transactions to or with the interested
shareholder or an entity affiliated with the interested shareholder) with the
corporation for a period of five years after the most recent date on which the
interested shareholder became an interested shareholder. The Fund is not aware
of any shareholder that holds control shares or that is an interested
shareholder under the statutes.
41
NOTICE TO SHAREHOLDERS
The Fund hereby designates $4,558,553 as a capital gain distribution.
42
NEUBERGER BERMAN OCTOBER 31, 2006
BOARD CONSIDERATION OF THE MANAGEMENT AND SUB-ADVISORY AGREEMENTS
At a meeting held on September 27, 2006, the Board of Directors ("Board") of
Neuberger Berman Income Opportunity Fund Inc. ("Fund"), including the Directors
who are not "interested persons" of the Fund ("Independent Fund Directors"),
approved continuance of the Management and Sub-Advisory Agreements
("Agreements") for the Fund.
In evaluating the Agreements, the Board, including the Independent Fund
Directors, reviewed materials furnished by Neuberger Berman Management Inc.
("Management") and Neuberger Berman, LLC ("Neuberger") in response to questions
submitted by counsel to the Independent Fund Directors, and met with senior
representatives of Management and Neuberger regarding their personnel and
operations. The Independent Fund Directors were advised by counsel that is
experienced in Investment Company Act of 1940 matters and that is independent of
Management and Neuberger. The Independent Fund Directors received a memorandum
from independent counsel discussing the legal standards for their consideration
of the proposed continuance of the Agreements. They met with such counsel
separately from representatives of Management to discuss the annual contract
review. The annual contract review extends over two regular meetings of the
Board to ensure that Management and Neuberger have time to respond to any
questions the Independent Fund Directors may have on their initial review of the
report and that the Independent Fund Directors have time to consider those
responses. In addition, during this process, the Board held a separate meeting
devoted to reviewing and discussing Fund performance.
The Board considered the following factors, among others, in connection with its
approval of the continuance of the Agreements: (1) the nature, extent, and
quality of the services provided by Management and Neuberger; (2) the
performance of the Fund compared to a peer group of investment companies; (3)
the costs of the services provided and profits historically realized by
Management and its affiliates from the relationship with the Fund; (4) the
extent to which economies of scale might be realized as the Fund grows; and (5)
whether fee levels reflect those potential economies of scale for the benefit of
investors in the Fund. In their deliberations, the Board members did not
identify any particular information that was all-important or controlling, and
each Director may have attributed different weights to the various factors.
The Board evaluated the terms of the Agreements and whether the Agreements were
in the best interests of the Fund and its shareholders. The Board considered the
nature, extent and quality of the services provided under the Agreements and the
overall fairness of the Agreements to the Fund.
With respect to the nature, extent and quality of the services provided, the
Board considered the performance of the Fund and the degree of risk undertaken
by the portfolio managers. The Board considered the experience and staffing of
portfolio management and the investment research personnel of Management and
Neuberger dedicated to performing services for the Fund. The Board noted that
Management also provides certain administrative services, including fund
accounting and compliance oversight. The Board also considered Management's and
Neuberger's policies and practices regarding brokerage and allocation of
portfolio transactions for the Fund. The Board considered the quality of
brokerage execution provided by Management and its affiliates. The Board's
Portfolio Transactions and Pricing Committee from time to time reviews the
quality of the brokerage services that Neuberger and Lehman Brothers Inc.
provide, and has reviewed studies by an independent firm engaged to review and
evaluate the quality of brokerage execution received by the Fund. The Board also
reviewed whether Management and Neuberger used brokers to execute Fund
transactions that provide research and other services to Management and
Neuberger, and the types of benefits potentially derived by Management,
Neuberger, the Fund and by other clients of Management and Neuberger from such
services. In addition, the Board noted the positive compliance history of
Management and Neuberger, as each firm has been free of significant compliance
problems.
With respect to the performance of the Fund, the Board considered the
performance of the Fund on both a market return and net asset value basis
relative to a peer group of investment companies pursuing broadly similar
strategies. The Board also considered the performance in relation to the degree
of risk undertaken by the portfolio managers. The Board noted the difficulty of
constructing an appropriate peer group.
43
BOARD CONSIDERATION OF THE MANAGEMENT AND SUB-ADVISORY AGREEMENTS CONT'D
With respect to the overall fairness of the Agreements, the Board considered the
fee structure of the Agreements as compared to a peer group of comparable funds
and any fall-out benefits likely to accrue to Management or Neuberger or their
affiliates. The Board also considered the profitability of Management and its
affiliates from their association with the Fund.
The Board reviewed a comparison of the Fund's management fee and overall expense
ratio to a peer group of comparable funds. The Board considered the mean and
median of the management fees and expense ratios of the peer group. With regard
to the sub-advisory fee paid to Neuberger, the Board noted that this fee is
reflective of an "at cost" basis and there is no profit to Neuberger with regard
to these fees. The Board considered the Fund's overall expenses in relation to
the overall expenses of the peer group mean and median. In addition, the Board
considered the contractual waiver of a portion of the management fee undertaken
by Management.
The Board considered whether there were other funds that were sub-advised by
Management or its affiliates or separate accounts managed by Management with
similar investment objectives, policies and strategies as the Fund. The Board
noted that there were no comparable sub-advised funds or separate accounts.
The Board also evaluated any actual or anticipated economies of scale in
relation to the services Management provides to the Fund. The Board considered
that the Fund was a closed-end fund that is not continuously offering shares and
that, without daily inflows and outflows of capital, there were not at this time
significant economies of scale to be realized by Management in managing the
Fund's assets.
In concluding that the benefits accruing to Management and its affiliates by
virtue of their relationship to the Fund were reasonable in comparison with the
costs of providing the investment advisory services and the benefits accruing to
the Fund, the Board reviewed specific data as to Management's profit on the Fund
for a recent period and the trend in profit or loss over time. The Board also
carefully examined Management's cost allocation methodology and had an
independent consultant review the methodology. It also reviewed an analysis from
an independent data service on investment management profitability margins. The
Board recognized that Management should be entitled to earn a reasonable level
of profits for services it provides to the Fund and, based on its review,
concluded it was satisfied that Management's level of profitability from its
relationship with the Fund was not excessive.
CONCLUSIONS
In approving the Agreements, the Board concluded that the terms of each
Agreement are fair and reasonable and that approval of the Agreements is in the
best interest of the Fund and its shareholders. In reaching this determination,
the Board considered that Management and Neuberger could be expected to provide
a high level of service to the Fund; that the performance of the Fund was
satisfactory over time; that the Fund's fee structure appeared to the Board to
be reasonable given the nature and quality of services expected to be provided;
and that the benefits accruing to Management and its affiliates by virtue of
their relationship to the Fund were reasonable in comparison with the costs of
providing the investment advisory services and the benefits accruing to the
Fund.
44
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.
[NEUBERGER BERMAN LOGO]
A LEHMAN BROTHERS COMPANY
NEUBERGER BERMAN MANAGEMENT INC.
605 Third Avenue, 2nd Floor
New York, NY 10158-0180
INTERNAL SALES & SERVICES
877.461.1899
www.nb.com
[GRAPHIC] D0502 12/06
ITEM 2. CODE OF ETHICS
The Board of Directors ("Board") of Neuberger Berman Income Opportunity Fund
Inc. ("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 Registrant's Form
N-CSR filed on July 10, 2006. 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 two audit committee financial
experts serving on its audit committee. The Registrant's audit committee
financial experts are John Cannon and Howard Mileaf. Mr. Cannon and Mr. Mileaf
are independent directors as defined by Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Ernst & Young, LLP ("E&Y") serves as independent registered public accounting
firm to the Registrant.
(a) Audit Fees
----------
The aggregate fees billed for professional services rendered by E&Y for the
audit of the annual financial statements or services that are normally provided
by E&Y in connection with statutory and regulatory filings or engagements were
$31,250 and $33,500 for the fiscal years ended 2005 and 2006, respectively.
(b) Audit-Related Fees
------------------
The aggregate fees billed to the Registrant for assurance and related services
by E&Y 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
$6,000 and $6,250 for the fiscal years ended 2005 and 2006, respectively. The
nature of the services provided involved agreed upon procedures relating to the
Preferred Shares. The Audit Committee approved 0% and 0% of these services
provided by E&Y for the fiscal years ended 2005 and 2006, 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
assurance and related services by E&Y 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 years ended 2005 and
2006, respectively.
(c) Tax Fees
--------
The aggregate fees billed to the Registrant for professional services rendered
by E&Y for tax compliance, tax advice, and tax planning were $8,700 and $9,500
for the fiscal years ended 2005 and 2006, 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 E&Y for the fiscal
years ended 2005 and 2006, 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 E&Y 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 years
ended 2005 and 2006, respectively.
(d) All Other Fees
--------------
The aggregate fees billed to the Registrant for products and services provided
by E&Y, other than services reported in AUDIT FEES, AUDIT-RELATED FEES, and TAX
FEES were $0 and $0 for the fiscal years ended 2005 and 2006, respectively.
The fees billed to other entities in the investment company complex for products
and services provided by E&Y, 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 years ended 2005 and
2006, 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 each member 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 E&Y for services rendered to the Registrant were
$14,700 and $15,750 for the fiscal years ended 2005 and 2006, respectively.
Non-audit fees billed by E&Y 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
$160,650 and $126,000 for the fiscal years ended 2005 and 2006, 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 E&Y's
independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS
The Board has established a separately-designated standing audit committee
established in accordance with Section 3(a)(58)(A) of the Securities Exchange
Act of 1934, as amended ("Exchange Act"). Its members are John Cannon, Howard A.
Mileaf, Cornelius T. Ryan (Chairman), Tom D. Seip, and Peter P. Trapp.
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
The Board has delegated to Neuberger Berman, LLC ("Neuberger Berman") the
responsibility to vote proxies related to the securities held in the
Registrant's portfolio. Under this authority, Neuberger Berman is required by
the Board to vote proxies related to portfolio securities in the best interests
of the Registrant and its stockholders. The Board permits Neuberger Berman to
contract with a third party to obtain proxy voting and related services,
including research of current issues.
Neuberger Berman has implemented written Proxy Voting Policies and Procedures
("Proxy Voting Policy") that are designed to reasonably ensure that Neuberger
Berman votes proxies prudently and in the best interest of its advisory clients
for whom Neuberger Berman has voting authority, including the Registrant. The
Proxy Voting Policy also describes how Neuberger Berman addresses any conflicts
that may arise between its interests and those of its clients with respect to
proxy voting.
Neuberger Berman's Proxy Committee is responsible for developing, authorizing,
implementing and updating the Proxy Voting Policy, overseeing the proxy voting
process and engaging and overseeing any independent third-party vendors as
voting delegate to review, monitor and/or vote proxies. In order to apply the
Proxy Voting Policy noted above in a timely and consistent manner, Neuberger
Berman utilizes Institutional Shareholder Services Inc. ("ISS") to vote proxies
in accordance with Neuberger Berman's voting guidelines.
Neuberger Berman's guidelines adopt the voting recommendations of ISS. Neuberger
Berman retains final authority and fiduciary responsibility for proxy voting.
Neuberger Berman believes that this process is reasonably designed to address
material conflicts of interest that may arise between Neuberger Berman and a
client as to how proxies are voted.
In the event that an investment professional at Neuberger Berman believes that
it is in the best interests of a client or clients to vote proxies in a manner
inconsistent with Neuberger Berman's proxy voting guidelines or in a manner
inconsistent with ISS recommendations, the Proxy Committee will review
information submitted by the investment professional to determine that there is
no material conflict of interest between Neuberger Berman and the client with
respect to the voting of the proxy in that manner.
If the Proxy Committee determines that the voting of a proxy as recommended by
the investment professional presents a material conflict of interest between
Neuberger Berman and the client or clients with respect to the voting of the
proxy, the Proxy Committee shall: (i) take no further action, in which case ISS
shall vote such proxy in accordance with the proxy voting guidelines or as ISS
recommends; (ii) disclose such conflict to the client or clients and obtain
written direction from the client as to how to vote the proxy; (iii) suggest
that the client or clients engage another party to determine how to vote the
proxy; or (iv) engage another independent third party to determine how to vote
the proxy.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES
(a)(1) The following Portfolio Managers have day-to-day management
responsibility of the Registrant's portfolio as of the date of the filing of
this report.
ANN H. BENJAMIN is a Vice President of Neuberger Berman Management Inc.
("NB Management") and Managing Director of Neuberger Berman. She has been
part of the Registrant's management team since 2005. Ms. Benjamin also
manages high yield portfolios for Lehman Brothers Asset Management LLC and
its predecessor, an affiliate of Neuberger Berman. She has managed money
for Lehman Brothers Asset Management LLC since 1977.
STEVEN BROWN is a Vice President of NB Management and a Managing Director
of Neuberger Berman. He has been a Portfolio Manager with the firm since
2002 and has been part of the Registrant's management team since its
inception. From 1997 to 2002, Mr. Brown was a co-portfolio manager at an
investment firm specializing in securities of REITs.
THOMAS P. O'REILLY is a Vice President of NB Management and Managing
Director of Neuberger Berman. He has been part of the Registrant's
management team since 2005. Mr. O'Reilly also manages high yield
portfolios for Lehman Brothers Asset Management LLC and its predecessor,
an affiliate of Neuberger Berman. He has managed money for Lehman Brothers
Asset Management LLC since 1977.
(a)(2) The table below describes the other accounts for which each Portfolio
Manager has day-to-day management responsibility as of October 31, 2006.
NUMBER OF
TOTAL ACCOUNTS ASSETS MANAGED FOR
NUMBER ASSETS MANAGED FOR WHICH ADVISORY FEE
OF MANAGED WHICH ADVISORY IS
ACCOUNTS ($ FEE IS PERFORMANCE-BASED
TYPE OF ACCOUNT MANAGED MILLIONS) PERFORMANCE-BASED ($ MILLIONS)
ANN H. BENJAMIN
Registered
Investment
Companies* 5 653 0 0
Other Pooled
Investment Vehicles 1 60 0 0
Other Accounts** 37 4,158 2 162
STEVEN R. BROWN
Registered
Investment
Companies* 6 2,214 0 0
Other Pooled
Investment Vehicles 0 0 0 0
Other Accounts** 135 55.5 0 0
THOMAS P. O'REILLY
Registered
Investment
Companies* 5 653 0 0
Other Pooled
Investment Vehicles 1 60 0 0
Other Accounts** 37 4,158 2 162
*Registered Investment Companies include: Mutual Funds.
**Other Accounts include: Institutional Separate Accounts, Sub-Advised, and
Managed Accounts (WRAP).
Conflicts of Interest
- ---------------------
Actual or apparent conflicts of interest may arise when a Portfolio Manager has
day-to-day management responsibilities with respect to more than one fund or
other account. The management of multiple funds and accounts (including
proprietary accounts) may give rise to potential conflicts of interest if the
funds and accounts have different or similar objectives, benchmarks, time
horizons, and fees as the Portfolio Manager must allocate his time and
investment ideas across multiple funds and accounts. The Portfolio Manager may
execute transactions for another fund or account that may adversely impact the
value of securities held by the Registrant. Moreover, if a Portfolio Manager
identifies a limited investment opportunity that may be suitable for more than
one fund or other account, the Registrant may not be able to take full advantage
of that opportunity. Securities selected for funds or accounts other than the
Registrant may outperform the securities selected for the Registrant. NB
Management, Neuberger Berman and the Registrant have adopted certain compliance
procedures which are designed to address these types of conflicts. However,
there is no guarantee that such procedures will detect each and every situation
in which a conflict arises.
(a)(3) Compensation (as of October 31, 2006)
-------------------------------------
A portion of the compensation paid to each Portfolio Manager is determined by
comparisons to pre-determined peer groups and benchmarks, as opposed to a system
dependent on a percent of management fees. The Portfolio Managers are paid a
base salary that is not dependent on performance. Each Portfolio Manager also
has a "target bonus," which is set each year and can be increased or decreased
prior to payment based in part on performance measured against the relevant peer
group and benchmark. Performance is measured on a three-year rolling average in
order to emphasize longer-term performance. There is also a subjective component
to determining the bonus, which consists of the following factors: (i) the
individual's willingness to work with the marketing and sales groups; (ii) his
or her effectiveness in building a franchise; and (iii) client servicing. Senior
management determines this component in appropriate cases. There are additional
components that comprise the Portfolio Managers' compensation packages,
including: (i) whether the manager was a partner/principal of Neuberger Berman
prior to Neuberger Berman Inc.'s initial public offering; (ii) for more recent
hires, incentives that may have been negotiated at the time the Portfolio
Manager joined the Neuberger Berman complex; and (iii) the total amount of
assets for which the Portfolio Manager is responsible.
NB Management's Portfolio Managers have always had a degree of independence that
they would not get at other firms that have, for example, investment committees.
NB Management believes that its Portfolio Managers are retained not only through
compensation and opportunities for advancement, but also by a collegial and
stable money management environment.
In addition, there are additional stock and option award programs available.
NB Management believes the measurement versus the peer groups on a three-year
rolling average basis creates a meaningful disincentive to try and beat the peer
group and benchmark in any given year by taking undue risks in portfolio
management. The incentive is to be a solid performer over the longer-term, not
necessarily to be a short-term winner in any given year.
(a)(4) Ownership of Securities
-----------------------
Set forth below is the dollar range of equity securities beneficially owned by
each Portfolio Manager in the Registrant as of October 31, 2006.
-------------------------------------------------
DOLLAR RANGE OF EQUITY
PORTFOLIO MANAGER SECURITIES OWNED IN THE
REGISTRANT
-------------------------------------------------
ANN H. BENJAMIN A
-------------------------------------------------
STEVEN R. BROWN A
-------------------------------------------------
THOMAS P. O'REILLY A
-------------------------------------------------
A = None E = $100,001-$500,000
B = $1-$10,000 F = $500,001-$1,000,000
C = $10,001 - $50,000 G = $1,000,001 or More
D = $50,001-$100,000
(b) Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS
No reportable purchases for the period covered by this report.
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 on
Form N-CSR and Form N-Q 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 second fiscal quarter of the period
covered by this report 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 811-21334 (filed July 10,
2006).
(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 filed
herewith.
(a)(3) Not applicable to the Registrant.
(b) The certifications required by Rule 30a-2(b) of the Act and Section 906
of the Sarbanes-Oxley Act are filed herewith.
The certifications provided pursuant to Rule 30a-2(b) of the Act and Section 906
of the Sarbanes-Oxley Act are not deemed "filed" for purposes of Section 18 of
the 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 Opportunity Fund Inc.
By: /s/ Peter E. Sundman
--------------------
Peter E. Sundman
Chief Executive Officer
Date: January 4, 2007
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 4, 2007
By: /s/ John M. McGovern
--------------------
John M. McGovern
Treasurer and Principal Financial
and Accounting Officer
Date: January 4, 2007