Exhibit (a)(10)
KIRKPATRICK & LOCKHART LLP
1800 Massachusetts Avenue, NW
Suite 200
Washington, DC 20036-1221
202.778.9000
202.778.9100 Fax
www.kl.com
September 14, 2004
BY FAX and FEDERAL EXPRESS
Mr. Stephen C. Miller
1680 38th Street, Suite 800
Boulder, Colorado 80301
Dear Mr. Miller:
This firm serves as counsel to the Neuberger Berman Real Estate Income Fund
Inc. ("Fund") and the Fund's independent Directors. In his letter to the Fund's
Board of Directors dated September 9, 2004, Stewart Horejsi stated that he would
be pleased to meet with the Board to discuss the tender offer for shares of the
Fund recently made by the Lola Brown Trust No. 1B and the Ernest Horejsi Trust
No. 1B (the "Trusts"). This letter is to advise you that the Fund's independent
Directors have established a special committee, which is available to meet with
Mr. Horejsi on Monday, September 20, at 10:30 a.m. The committee will be meeting
at the offices of Kirkpatrick & Lockhart LLP, 599 Lexington Avenue, New York.
We are also using this letter to request certain information in advance of
that meeting, which the independent Directors believe it is their responsibility
to request, obtain and analyze as part of their evaluation of the Trusts' tender
offer. As the Trusts have announced that they intend to transfer the management
contract for the Fund to certain entities affiliated with Mr. Horejsi,(1) the
Directors believe that endorsement of the tender offer would be tantamount to
endorsing a management contract with the Horejsi Advisers. Accordingly, the
Directors have asked us to request from you information of the type annually
reviewed by the Board in considering its management contracts with Neuberger
Berman Management Inc.
As you know, an investment advisory agreement may be adopted only if it is
approved by a majority of the Fund's independent Board members. Section 15(c) of
the Investment Company Act of 1940 requires the independent Board members to
request, and the adviser to provide, "such information as may reasonably be
necessary to evaluate the terms of" any advisory contract. The SEC has
recommended a similar review of other agreements between funds and their
affiliates. The SEC staff has recently placed a renewed emphasis on this area,
with particular attention to the nature and quality of the materials received
and reviewed by fund boards.
In order to ensure that the Board members will be fully informed in
considering the required matters, please provide them with a written report
containing all information reasonably necessary to enable them to fulfill their
obligations under Section 15(c) of the 1940 Act. Please make the report as
specific as possible. If the report includes Lipper Reports or similar analyses,
please provide an explanation of any symbols or codes used therein.
Please provide 10 copies of the requested information to Jennifer Gonzalez,
Esq., Kirkpatrick & Lockhart LLP, 1800 Massachusetts Avenue N.W., Washington,
D.C., 20036, no later than Friday, September 17 (a.m. delivery) for distribution
to the Board members. We understand that the following information request is
extensive. However, we assume that prior to launching an offer aimed at changing
Fund management, Mr. Horejsi and the Trusts have analyzed these issues carefully
and completely. We also note that the Horejsi Advisers manage two other
closed-end funds, and we assume that much of this information has been compiled
for use in reports to their boards of directors under Section 15(c).
I. MANAGEMENT AND SUB-ADVISORY AGREEMENTS
A. Investment Strategy and Performance Record
1. INVESTMENT STRATEGY. The Trusts' Schedule TO states that the new
managers would change the investment strategy of the Fund. Please
describe in detail the proposed new investment strategy. Describe
the material risks of that strategy and any methods the Horejsi
Advisers intend to use to offset those risks.
2. PERFORMANCE HISTORY. Provide the names(2) and performance
histories for the past 10 years (or since inception, if less than
10 years ago) for each and every other account that the Horejsi
Advisers manage or have managed in a style similar to that
planned for the Fund. Show the comparison to an appropriate
broad-based index and to a Lipper peer group that would be
appropriate for the Fund's proposed new investment program.
3. MORNINGSTAR REPORTS. Please provide copies of Morningstar reports
for the Boulder Growth and Income Fund and the Boulder Total
Return Fund (the "Boulder Funds"). Please include a key to the
symbols used in the reports.
4. INTERNAL STANDARDS. What techniques and standards (whether
prepared by the Horejsi Advisers or an outside party) are used
internally by the Horejsi Advisers to measure or evaluate the
performance or the risk levels of accounts or portfolio managers?
Please summarize the techniques and standards, show how the
Boulder Funds and any accounts described in answer to Question 2,
above, perform, and show their risk levels. If this technique is
used to measure or evaluate the performance or risk levels of any
other account of the Horejsi Advisers having similar investment
guidelines, please show how the Boulder Funds compare and discuss
the reasons for any long-term differences between the performance
or risk level of either Boulder Fund and other accounts of the
Horejsi Advisers in the same category. (In responding to this
question, it is not necessary to name the other accounts.)
5. LIPPER PEER GROUPS. Please provide performance information for
the past one-, five-, and ten-year periods for a peer group
selected by Lipper for each Boulder Fund.
B. Nature of Services
1. STAFFING. Identify the intended portfolio manager(s) and the
investment assistants and researchers assigned to that portfolio
manager (if a person is assigned to a portfolio manager less than
full-time, indicate the percentage of that person's time assigned
to the manager). As to each portfolio manager, state the total
amount of assets (Fund and non-Fund) for which the manager is
responsible, as of a recent date.
2. PORTFOLIO MANAGER COMPENSATION. (a) Describe in detail the basis
upon which portfolio managers and assistants are compensated,
including a description of current or planned "incentive"
programs and any formula used to determine compensation. (b) Is
the compensation arrangement sufficient to attract and retain the
highest quality employees? (c) Where a substantial portion of the
manager's compensation is tied to performance, describe the
oversight mechanisms used to prevent a manager with lagging
performance from taking undue risks.
C. Brokerage and Trading Issues
1. BEST EXECUTION. Comment on the quality of execution that you
believe the Boulder Funds and the Horejsi Advisers' other clients
have received and that you believe the Fund would receive if the
Horejsi Advisers were to manage it. Describe the basis for your
belief, including reliance on outside consultants and other
objective information.
2. BROKER SELECTION PROCESS. (a) Describe the Horejsi Advisers'
process for selecting brokers for client trades and identify the
individuals who participate in the selection. (b) Please indicate
whether there are target or suggested amounts for any broker,
either on a Fund-by-Fund basis or complex-wide, and the factors
used in establishing such amounts.
3. USE OF ECNs. As you know, a number of electronic order execution
systems have grown up in the last few years. Please describe the
manner in which, and the extent to which, they are used in
executing portfolio transactions.
4. BROKERAGE FOR RESEARCH. (a) Do the Horejsi Advisers permit
portfolio managers to direct Fund portfolio brokerage to reward
particular brokers for investment ideas? If so, please describe
the policy under which this takes place, including any limits on
the amount of brokerage that can be so directed. (b) Please
describe the material terms of each formal arrangement for
obtaining research in return for the Funds' brokerage. Identify
each broker or dealer involved and describe the benefits and
services received by any of the Horejsi Advisers, the benefits
derived by the Fund(s) from the service, the
amount of business transacted with each broker during a recent
twelve month period, the commission rate paid, the percent of the
commission devoted to payment for the service, and the person(s)
who determined that they be used. If the product or service has a
retail cash price, please include that. (c) In light of the
extensive public discussion recently about eliminating the use of
"soft dollars" by registered investment companies, please
quantify, to the extent possible, the impact on management fees
if the Horejsi Advisers had to provide the research now obtained
using soft dollars (assuming this research is even available on a
"hard dollar" basis).
5. BROKERAGE FOR FUND SERVICES. (a) We understand that certain
Fund-related services (E.G., custodial, transfer agency or
accounting services) may be paid for with brokerage dollars.
Please indicate whether or not the Horejsi Advisers use this
technique, or intend to use it in their management of the Fund.
(b) If so, comment on whether or not the quality of execution of
any trades involving payment of fund expenses was at least as
good as it was for trades not involving such arrangements and
describe your basis for this conclusion.
6. OTHER DIRECTED BROKERAGE. Other than the soft dollar and directed
brokerage arrangements described in response to questions 4 and
5, have the Horejsi Advisers requested or instructed the broker
for a Boulder Fund trade to pay a portion of the commission or
mark-up to any other person or entity? If so, who has benefited
from such practices? What benefits accrued to the Boulder Fund
from these practices?
7. SOFT DOLLARS ON PRINCIPAL TRADES. As you know, the SEC issued two
years ago a new interpretation of Section 28(e), under which the
safe harbor provided by that section would apply to certain
principal trades. Please indicate whether the Horejsi Advisers
have paid soft dollars pursuant to this new interpretation, or
plan to do so.
8. OTHER COMPENSATION FOR PORTFOLIO TRANSACTIONS. Indicate whether
the Horejsi Advisers have, with respect to either Boulder Fund,
received other compensation not mentioned above, including any
payment for order flow, or if they plan to do so with the Fund.
If so, describe the arrangements and quantify the benefit
obtained by the Horejsi Advisers.
9. INTENDED IMPROVEMENTS. Please describe any plans to improve
quality of execution in the coming year, including the stated
goals of such plans, i.e., what does management consider to be
"success" in this regard?
10. TRADE ALLOCATION. Please provide copies of the Horejsi Advisers'
written policies for allocation of both IPOs and trades in the
secondary markets. Comment on whether you believe that the
Horejsi Advisers' clients are fairly served by such trade
allocation procedures, including the Horejsi Advisers' basis for
this belief.
11. ACTUAL AND POTENTIAL CONFLICTS. Describe any conflicts that any
Horejsi Adviser has experienced or anticipates it will experience
in managing the Fund or either Boulder Fund in view of its
discretionary authority over other accounts.
D. Compensation
1. PROPOSED NEW FEES. The Trusts' Schedule TO dated September 10,
2004 states that a new advisory contract with the Horejsi
Advisers would likely involve a fee increase, as occurred with
other Funds taken over by the Horejsi entities. (a) Please
provide details of the proposed increase. (b) Provide a detailed
justification for any increase. (c) Show management fee and
expense ratio information for the Lipper peer group in which the
Fund would reside under its proposed new investment strategy,
including the name of the group, the number of funds included,
the 25th and 75th percentile points, as well as the mean and the
median for the group.
2. EXPECTED PROFITABILITY. Provide a table showing the Horejsi
Advisers' expected profitability on the fees it expects to charge
the Fund as a percentage of the Horejsi Advisers' anticipated
income from the Fund for a 12-month period, including profit
derived from your affiliated administrator.
3. SUPPORTING SCHEDULES. Please provide the following supporting
schedules for the information in question 1:
(a) The advisory and administration fee revenues expected to be
received by the Horejsi Advisers from the Fund during the
period, as well as any other significant income expected to
be derived by the Horejsi Advisers and their affiliates,
including Fund Administrative Services LLC, from their
relationship with the Fund.
(b) The expenses expected to be borne by the Horejsi Advisers
and their affiliates in performing services for the Fund
during the same period. These expenses should be itemized as
precisely as possible and all assumptions and allocation
methods should be described.
4. ALLOCATION METHODOLOGY. (a) Please explain the methods used by
the Horejsi Advisers to allocate their costs between the Fund and
the Horejsi Adviser's other clients and provide data to support
the allocation. (b) Please explain the methods used by the each
Horejsi Adviser to allocate complex-wide expenses among the
individual Funds. Describe any independent, third party review of
this allocation methodology and furnish a copy of any report or
comments received from independent reviewers.
5. ECONOMIES OF SCALE. Describe any economies of scale which are
expected by the Horejsi Advisers or any of their affiliates in
the management, administration, or servicing of the Fund together
with the Boulder Funds. To what extent would such economies of
scale be a function of the assets in a single fund and to what
extent would they be a function of the assets under management in
the Horejsi-controlled Funds as a whole? If the Funds are not
realizing economies of scale, please explain the reasons and
describe any ways in which you believe the Funds might reasonably
realize such economies.
6. FEES AND EXPENSES OF OTHER ACCOUNTS. Provide information about
the rates of compensation paid to the Horejsi Advisers, and
overall expense ratios, for other accounts managed by them that
are comparable to the Fund, including pension plans, separate
accounts and sub-advised funds. To the extent that the Fund would
be charged for additional services that the other accounts are
not, or vice-versa, please identify these additional services and
the portion of the fees associated with the additional services.
In light of the controversy about whether mutual funds are
charged fees that are higher than comparable pension plan
accounts, please add whatever discussion is necessary to
highlight areas where the data may not be comparable.
7. POTENTIAL FEE REDUCTIONS. In light of the fiduciary duties of an
investment adviser under Section 36(b) of the 1940 Act, please
discuss your views on the advantages and/or disadvantages of a
"fulcrum" fee or other performance-based compensation.
8. BALANCE SHEETS. Provide copies of the Horejsi Advisers' balance
sheets as of a recent date, and indicate if there have been any
material changes subsequent to that date.
II. COMPLIANCE
1. COMPLIANCE SYSTEMS. (a) Describe how the Horejsi Advisers would
monitor and assure compliance with the Fund's investment limitations,
the investment constraints in the 1940 Act, and the relevant
limitations of the Internal Revenue Code. (b) Please comment
specifically on the plans to hire or designate a Chief Compliance
Officer for the Boulder Funds and their progress in implementing Rule
38a-1 and Rule 206(4)-7.
2. REGULATORY EXAMS. Discuss any SEC or IRS staff examination or
investigation of the Boulder Funds' books and records during the past
year, as well as any examination or investigation of the Horejsi
Advisers, as it relates to the business or operations of the Boulder
Funds, by the SEC, the IRS, or any state securities administrator.
Indicate whether, to your knowledge, any such examination or
investigation revealed any deficiency relevant to the operation of a
Fund, or to the Horejsi Advisers as providers of services to
registered investment companies. Supply copies of regulatory exit or
deficiency letters and other comments and your responses thereto.
3. OTHER REGULATORY PROBLEMS. Describe compliance or administrative
problems, if any, during the past year and describe procedures that
have been implemented to mitigate or eliminate such problems.
4. SHAREHOLDER LETTERS, E-MAILS, AND CALLS. Analyze the number and types
of shareholder letters, calls or e-mails received, or meetings with
institutional shareholders, which described problems or
dissatisfaction with any Boulder Fund, and describe the policies
followed and actions taken in response. What patterns or themes, if
any, emerge from these communications?
III. CUSTODY AND TRANSFER AGENCY SERVICES
1. ADEQUACY OF CUSTODY AND TRANSFER AGENCY SERVICES. Assuming that the
Fund under control of the Trusts would use the same custodian and
transfer agent as the Boulder Funds, comment on the adequacy of the
services provided to each Boulder Fund by its custodian and transfer
agent.
2. COSTS OF CUSTODY AND TRANSFER AGENCY SERVICES. (a) What annual
transfer agency and custodial costs do you anticipate for the Fund?
(b) How do the Boulder Funds' custodial and transfer agency costs
compare to costs of comparable funds?
3. OBJECTIVE PERFORMANCE MEASURES. Please indicate whether the Horejsi
Advisers or the administrator use any objective measures of the
quality of service provided by the transfer agent (e.g., error rates,
phone call abandonment rates, etc.). If so, please provide each of
those rates for a recent one-year period, and for the same period in
the prior year. If the measures have deteriorated, please indicate
what steps the Horejsi Advisers or the administrator have taken, or
are planning to take, to obtain improved service levels.
* * * * *
Thank you for your assistance. If you have any questions concerning the
foregoing or anticipate difficulty in obtaining the information requested,
please contact me as soon as possible at 202-778-9042, or Jennifer Gonzalez of
this firm at 202-778-9286.
Sincerely,
/s/ Arthur C. Delibert
Arthur C. Delibert
cc: Fund Directors
FOOTNOTES:
(1) Those entities are Boulder Investment Advisers, LLC and Stewart West Indies
Trading Company, Ltd. doing business as Steward Investment Advisers.
Together with Mr. Horejsi, those entities are referred to herein as the
"Horejsi Advisers."
(2) In light of the Privacy Act, please provide just a reference number for
accounts other than public funds.