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 811-21333
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Nuveen Preferred and Convertible Income Fund 2
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(Exact name of registrant as specified in charter)
Nuveen Investments
333 West Wacker Drive
Chicago, IL 60606
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(Address of principal executive offices) (Zip code)
Jessica R. Droeger
Nuveen Investments
333 West Wacker Drive
Chicago, IL 60606
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(Name and address of agent for service)
Registrant's telephone number, including area code: (312) 917-7700
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Date of fiscal year end: July 31
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Date of reporting period: July 31, 2004
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW,
Washington, DC 20549-0609. The OMB has reviewed this collection of information
under the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
ANNUAL REPORT July 31, 2004
Nuveen Investments
Closed-End
Exchange-Traded
Funds
NUVEEN PREFERRED AND CONVERTIBLE INCOME FUND
JPC
NUVEEN PREFERRED AND CONVERTIBLE INCOME FUND 2
JQC
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HIGH CURRENT INCOME
FROM A PORTFOLIO OF
PREFERRED AND
CONVERTIBLE SECURITIES
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Photo of: Timothy R. Schwertfeger
Timothy R. Schwertfeger
Chairman of the Board
Chairman's
LETTER TO SHAREHOLDERS
I am very pleased to report that over the fiscal year ended July 31, 2004, your
Fund continued to provide you with attractive monthly income through a
diversified portfolio of quality preferred securities, convertible securities
and high yield debt.
In addition to regular monthly income, we believe that your Fund also may
provide an opportunity to reduce the overall risk of your entire investment
portfolio. This is because the value of your Fund's holdings may move
differently than the prices of the other investments, like common stocks, bonds
or mutual funds that you may
--------------------------------------------------------------------------------
IN ADDITION TO REGULAR MONTHLY INCOME, WE BELIEVE THAT YOUR FUND ALSO MAY
PROVIDE AN OPPORTUNITY TO REDUCE THE OVERALL RISK OF YOUR ENTIRE INVESTMENT
PORTFOLIO.
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own. Through adequate diversification, some parts of your portfolio may be going
up when others are going down. This potential counterbalancing may reduce your
overall risk over time. Your financial advisor can explain the advantages of
portfolio diversification in more detail. I urge you to contact him or her soon
for more information on this important investment strategy.
I also urge you to consider receiving future Fund reports and other Fund
information by e-mail and the Internet. Not only will you be able to receive the
information faster, but this also may help lower your Fund's expenses. Sign up
is quick and easy - see the inside front cover of this report for step-by-step
instructions.
For more than 100 years, Nuveen has specialized in offering quality investments
such as your Fund to those seeking to accumulate and preserve wealth. Our
commitment to careful research, constant surveillance and judicious trading by
seasoned portfolio managers has never been stronger. Our mission continues to be
to assist you and your financial advisor by offering the investment solutions
and services that can help you secure your long-term financial goals. We thank
you for choosing us as a partner as you work toward that objective.
Sincerely,
/s/ Timothy R. Schwertfeger
Timothy R. Schwertfeger
Chairman of the Board
September 15, 2004
Nuveen Preferred and Convertible Income Funds (JPC, JQC)
Portfolio Managers'
PERSPECTIVE
The Funds are managed by Nuveen Institutional Advisory Corp. (NIAC), and
subadvised by a team of specialists from Spectrum Asset Management, Inc.,
Froley, Revy Investment Co., Inc., and NIAC. Mark Lieb, Bernie Sussman and Phil
Jacoby lead the team at Spectrum, an affiliate of Principal CapitalSM, which
manages the preferred securities portions of the Funds' portfolios. Andrea Revy
O'Connell and Michael Revy lead the team at Froley, Revy, one of the oldest
firms specializing in convertible securities, which manages that portion of both
Fund's portfolios. Gunther Stein and Lenny Mason lead the team at NIAC, which
manages the high yield securities and other debt instruments in both Funds. Here
these managers talk about general economic conditions, Fund performance and
their management strategy for the fiscal year ended July 31, 2004.
WHAT WERE THE CONDITIONS IN THE FIXED-INCOME MARKETS GENERALLY, AND THE
PREFERRED SECURITIES, CONVERTIBLE SECURITIES AND HIGH YIELD MARKETS IN
PARTICULAR, DURING THE FISCAL YEAR ENDED JULY 31, 2004?
While the 10-year U. S. Treasury note yield of 4.45% at the end of the period
was virtually unchanged from 12 months earlier, the fiscal year was marked by
quite a bit of volatility. Prices in the U. S. Treasury market peaked on March
16, 2004, with the 10-year note yielding 3.68% as a faltering economy, slow
employment growth, Federal Reserve and concerns over terrorism combined to keep
interest rates near record lows. In early April, an unexpectedly strong
employment report brought the bond market rally to an abrupt end. As concerns
focused on the possibility that the Federal Reserve might start to raise
short-term interest rates, interest rates spiked upward along the entire yield
curve and the 10 year U. S. Treasury note reached a high yield of 4.87% on June
14, 2004.
The preferred securities market, as measured by the Merrill Lynch Preferred
Stock Hybrid Securities Index, provided a total return of 6.34% for the 12
months ending July 31, 2004, compared with a 4.84% over the same period for the
Lehman Aggregate Bond Index (a general measure of the overall bond market). New
issuance in the preferred securities market totaled $36.5 billion over the
12-month period, but the overall growth of the market was constrained by a
strong pace of redemptions as issuers called the higher-coupon preferred
securities they had issued during the 1990's. As of July 31, 2004, the hybrid
preferred securities market had outstanding issues totaling approximately $225
billion.
The convertible securities market exhibited two very different patterns over the
course of the Funds' fiscal years. During the first half of the period, from
August 2003 through mid-January 2004, convertible securities generally produced
very positive performance.
4
Coupled with a positive move in the equity market, the yield spreads between
lower-rated and higher-rated fixed-income securities tightened over this period
by as much as 25% as lower-rated securities tended to outperform more
highly-rated instruments. The combination of tighter credit quality spreads and
higher equity values helped to increase the value of the conversion feature of
many convertible securities. From July 31, 2003, to January 31, 2004, the
Merrill Lynch All U.S. Convertible Index rose 14.5%.
The second six months of the fiscal year had a distinctly different flavor for
convertible securities. The equity markets declined as a result of slowing
profit growth and credit quality spreads widened as economic uncertainty
increased. These and other factors led to a decline of -2.12% from January 31,
2004, to July 31, 2004, in the Merrill Lynch All U.S. Convertible Index. Overall
in the convertible securities market, the first six months of the Funds' years
outweighed the negative second half and left the full fiscal year returns for
the Merrill Lynch Index at 12.13%
The high yield market recorded robust returns during the twelve months ended
July 31, 2004. Strong performance was driven by improving credit fundamentals,
positive macroeconomic news and decreasing default rates. The CSFB High Yield
Index posted a return of 14.09% over the last year. All of the industries that
comprise the index registered positive returns. Lower-rated bonds posted a
twelve-month return of 21.94%, significantly outperforming the middle and upper
rating tiers due to the healthier economic environment and investors' increased
tolerance for risk. As the credit markets improved over the last year, default
rates have dropped accordingly. New issue volume has tempered slightly in
response to moderate outflows from the high yield market during the first half
of 2004. New issuances dropped 5% to $126.9 million during the last year.
Despite high petroleum prices, inflation concerns, and the threat of global
terrorism, the high yield market has been resilient and economic reports
continue to indicate a slow but steady recovery.
DURING THIS PERIOD WHAT WERE YOUR PRIMARY MANAGEMENT STRATEGIES AND FOCUSES?
Over this fiscal year, the focus of our preferred securities investing
activities was on finding and owning high quality issues that offered what we
judged to be good current yields and yields-to-call. The average credit quality
of the preferred securities within each of the
5
Funds was maintained at an A3/BBB+/A- level from Moody's, S&P and Fitch,
respectively. Given a large number of redemptions in the preferred securities
market over this period, much of our trading activity was targeted toward
replacing the income of issues that were called out of the portfolios. In
addition, we believed that higher coupon preferred securities with call dates in
2006 and 2007 were relatively more attractive than the lower, current coupon
issues available during most of the year. These higher coupon securities also
helped to keep the duration, or interest rate sensitivity, of the portfolios
lower than if we had been more focused on newer issues.
Diversification among issuers and sectors within the preferred securities market
also was an important part of our strategy. Each of the Funds now contains over
100 distinct preferred securities issuers. The weightings between $25 par
preferred stock and preferred capital securities were altered slightly over the
course of the period, depending on where we felt we could find the best relative
value.
Looking at the convertible securities allocations, we continued to focus on
owning issues that we believed would provide attractive income and offer the
potential for capital appreciation. Generally, we looked for securities with
greater equity-tracking sensitivity when we had strong views on the
attractiveness of either a sector or a specific company. As of July 31, 2004,
about 10% of both Funds' convertible securities allocations were hedged in an
effort to reduce overall risk and increase cash flow.
For the high yield portions of both Funds' portfolios, we continued to employ a
value-oriented investment management strategy, focusing on relatively
higher-quality credits with strong fundamental business models, diversified
revenue streams, and relatively low earnings volatility. We invested across a
variety of industry sectors and rating tiers, and continued to evaluate the high
yield holdings on an ongoing basis, eliminating positions with what we thought
were escalating credit issues, limited upside potential, or significant downside
risk.
6
HOW DID THE FUNDS PERFORM OVER THIS PERIOD?
Each of the Funds performed well during the fiscal year ended July 31, 2004.
Their performance, as well as the performance of several widely followed market
indexes, is shown in the nearby chart.
TOTAL RETURN ON NET ASSET VALUE
For 12 months ended July 31, 2004
JPC 13.44%
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JQC 12.25%
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Merrill Lynch Preferred Stock
Hybrid Securities Index1 6.34%
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Merrill Lynch All U.S.
Convertible Index2 12.13%
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CSFB High Yield Index3 14.09%
--------------------------------------------------
Past performance does not guarantee future results.
For more information, please see the individual Performance Overview pages in
this report.
For the 12 months ended July 31, 2004, the Funds outperformed both the Merrill
Lynch Hybrid Preferred and the Merrill Lynch Convertible indexes and
underperformed the CFSB High Yield Index. We believe this is to be expected,
given the blended nature of the Funds' portfolios. While none of these indexes
provides a comprehensive match for the Funds' overall asset allocation and
investment strategy, we think they may provide some insight into the performance
over the 12-month period of the different assets classes in which the Funds
invest.
In our preferred securities holdings, the $1000 par capital preferred securities
held by each Fund were among their best performers during the 12-month reporting
period. These issues are not part of the Merrill Lynch preferred stock index.
These $1000 par securities benefited from the general tightening of spreads in
the corporate market over the reporting period and from the strong demand for
yield from insurance companies and other institutional investors. The call
protection afforded by these securities also helped their performance during the
months when rates were falling. One of the best performers was Centaur Funding.
Centaur, a part of Vodafone, was a subordinated issue that we considered to be
very undervalued relative to the issuer's senior debt.
1 The Merrill Lynch Preferred Stock Hybrid Securities Index is an unmanaged
index of investment-grade, exchange-traded preferred stocks with
outstanding market values of at least $30 million and at least one year to
maturity.
2 The Merrill Lynch All U.S. Convertibles Index consists of approximately 575
securities with par value greater than $50 million that were issued by U.S.
companies or non-U.S. based issuers that have a significant business
presence in the U.S.
3 The CSFB High Yield Index includes approximately $375 billion of
$US-denominated high yield debt with a minimum of $75 million in par value
and at least one rating below investment-grade.
7
Within the $25 par market of listed preferred securities, one strategy that
worked well during this period was trading to take advantage of what we thought
were mispricings of the securities' embedded call options. In many cases we were
able to sell issues trading at a premium where the yield-to-call was very low,
and then were able replace these securities with other, higher coupon issues
with higher current yields and more attractive yields-to-call at the time of
investment.
At the same time, Verizon did not perform as well has we had hoped it would. The
Verizon issue was originally a series of $1000 par securities that were
repackaged into exchange-listed $25 par preferreds that were bought during the
first quarter of 2004, just before rates rose significantly. Several other
issues in both Funds that happened to be bought in February and early March when
interest rates were at their lows for the period also turned out to be
relatively weak performers over this reporting period.
Looking at the Funds' convertible securities, the biggest drivers for
convertible returns remained the growth prospects of the issuer's underlying
business and the valuation of the issuer's equity. Both Funds had positive
contributions from larger capitalization issuers like Tyco International, as
well as from much smaller issuers like Lions Gate Entertainment Corp. In both
companies, continued internal growth and opportunistic acquisitions further
improved favorable revenue trends.
On the other side, the performance of both Funds was impacted negatively by some
specific securities of issuers whose financial situations weakened over the
course of the period. One example was Delta Airlines (held in JPC). As oil
prices rose over May, June and July and negotiations with the unions became
increasingly difficult, Delta's costs far outstripped their revenues. A
significant debt load and limited pricing power in a competitive industry left
the company near the brink of filing for Chapter 11 status as of July 31, 2004.
In the high yield portions of the portfolios, strong performance in the
manufacturing, transportation and services sectors positively impacted the
performance of both Funds. Other sectors within the high yield market showed
even better performance, but the Funds did not hold significant positions in
these areas. For example, industries with many lower credit-quality companies,
such as the metals/minerals, chemicals and utilities
8
sectors, were among the top performing high yield sectors over the 12 month
period. JPC and JQC had minimal exposure to these volatile industries and
negligible exposure to distressed and CCC-rated debt generally.
WHAT ABOUT THE FUNDS' DIVIDENDS AND SHARE PRICES?
With short-term interest rates remaining near historically low levels during
this reporting period, the leveraged structures of these Funds continued to
support their dividend-paying capabilities. The extent of this benefit is tied
in part to the short-term rates the Funds pay their FundPreferred(R)
shareholders. During periods of low short-term rates, the Funds generally pay
relatively lower dividends to their FundPreferred shareholders, which can leave
more earnings to support common share dividends.
As a result, despite losing some of their higher-coupon securities to calls, JPC
and JQC made no changes in their monthly dividends over the course of the fiscal
year.
Both of these Funds seek to pay stable dividends at rates that reflect each
Fund's past results and projected future performance. During certain periods,
each Fund may pay dividends at a rate that may be more or less than the amount
of net investment income actually earned by the Fund during the period. If a
Fund has cumulatively earned more than it has paid in dividends, it holds the
excess in reserve as undistributed net investment income (UNII) as part of the
Fund's NAV. Conversely, if a Fund has cumulatively paid dividends in excess of
its earnings, the excess constitutes negative UNII that is likewise reflected in
the Fund's NAV. Each Fund will, over time, pay all of its net investment income
as dividends to shareholders. As of July 31, 2004, both JPC and JQC positive
UNII balances.
As of July 31, 2004, both Funds were trading at greater discounts to their net
asset values than their average discounts over the course of the entire 12-month
reporting period.
9
Nuveen Preferred and Convertible Income Fund
JPC
Performance
OVERVIEW As of July 31, 2004
Pie Chart:
PORTFOLIO ALLOCATION1
$25 Par (or similar) Securities 33.3%
Convertible Bonds 18.1%
Capital Preferred Securities 14.0%
Convertible Preferred Securities 13.5%
Corporate Bonds 11.7%
Capital Preferred Euro-Market
Listed Securities 5.2%
Other 4.2%
Bar Chart:
2003-2004 MONTHLY DIVIDENDS PER SHARE
Aug 0.1005
Sep 0.1005
Oct 0.1005
Nov 0.1005
Dec 0.1005
Jan 0.1005
Feb 0.1005
Mar 0.1005
Apr 0.1005
May 0.1005
Jun 0.1005
Jul 0.1005
Line Chart:
SHARE PRICE PERFORMANCE
Weekly Closing Price
Past performance is not predictive of future results.
8/1/03 14.47
14.75
14.1
14.01
14.25
14.43
14.42
14.42
14.23
14.66
14.74
14.67
14.85
14.95
14.99
14.76
14.95
15.17
15.05
15.52
15.52
15.4
15.36
15.49
15.58
15.3
15.28
15.33
15.59
15.42
15.55
15.47
15.26
15.03
14.3
13.4
14.08
12.9
13.1
13.39
13.39
13.3
13.3
12.94
13.11
13.6
13.69
13.88
13.83
7/31/04 13.95
PORTFOLIO STATISTICS
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Share Price $13.95
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Common Share
Net Asset Value $14.73
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Premium/Discount to NAV -5.30%
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Latest Dividend $.1005
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Market Yield 8.65%
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Net Assets Applicable to
Common Shares ($000) $1,474,983
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INDUSTRIES1
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Commercial Banks 26.7%
------------------------------------
Insurance 11.6%
------------------------------------
Real Estate 11.0%
------------------------------------
Diversified Financial Services 6.8%
------------------------------------
Media 5.8%
------------------------------------
Automobiles 4.5%
------------------------------------
Hotels, Restaurants & Leisure 4.1%
------------------------------------
Electric Utilities 2.5%
------------------------------------
Communications Equipment 2.0%
------------------------------------
Other 25.0%
------------------------------------
TOP FIVE ISSUERS1
(EXCLUDING REPURCHASE AGREEMENTS)
(as a % of total investments)1
------------------------------------
Wachovia Corporation 2.8%
------------------------------------
General Motors Corporation 2.2%
------------------------------------
PartnerRe Limited 1.9%
------------------------------------
Ford Motor Company 1.8%
------------------------------------
Citigroup 1.7%
------------------------------------
AVERAGE ANNUAL TOTAL RETURN
(Inception 3/26/03)
------------------------------------
ON SHARE PRICE ON NAV
------------------------------------
1-Year 4.34% 13.44%
------------------------------------
Since Inception 2.55% 10.27%
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1 Excluding common stocks sold short.
10
Nuveen Preferred and Convertible Income Fund 2
JQC
Performance
OVERVIEW As of July 31, 2004
Pie Chart:
Portfolio Allocation1
$25 Par (or similar) Securities 31.3%
Capital Preferred Securities 18.4%
Convertible Bonds 18.0%
Convertible Preferred Securities 13.8%
Corporate Bonds 11.4%
Capital Preferred Euro-Market
Listed Securities 5.3%
Other 1.8%
Bar Chart
2003-2004 MONTHLY DIVIDENDS PER SHARE
Aug 0.0975
Sep 0.0975
Oct 0.0975
Nov 0.0975
Dec 0.0975
Jan 0.0975
Feb 0.0975
Mar 0.0975
Apr 0.0975
May 0.0975
Jun 0.0975
Jul 0.0975
Line Chart:
Share Price Performance
Weekly Closing Price
Past performance is not predictive of future results.
8/1/03 14.69
14.21
14.01
13.73
13.82
14.05
13.99
13.97
13.97
14.33
14.29
14.3
14.35
14.43
14.37
14.37
14.44
14.73
14.35
14.68
14.97
14.83
14.89
14.89
14.99
14.83
14.76
14.89
14.92
14.99
15
15.02
14.91
14.9
14.03
12.99
13.53
12.55
12.82
12.97
13.11
13
13.01
12.69
12.8
13.21
13.35
13.43
13.3
7/31/04 13.54
PORTFOLIO STATISTICS
------------------------------------
Share Price $13.54
------------------------------------
Common Share
Net Asset Value $14.33
------------------------------------
Premium/Discount to NAV -5.51%
------------------------------------
Latest Dividend $.0975
------------------------------------
Market Yield 8.64%
------------------------------------
Net Assets Applicable to
Common Shares ($000) $2,021,258
------------------------------------
INDUSTRIES1
------------------------------------
Commercial Banks 29.9%
------------------------------------
Insurance 11.6%
------------------------------------
Real Estate 8.7%
------------------------------------
Media 7.0%
------------------------------------
Diversified Financial Services 5.5%
------------------------------------
Automobiles 3.5%
------------------------------------
Hotels, Restaurant & Leisure 3.3%
------------------------------------
Communications Equipment 2.1%
------------------------------------
Oil & Gas 2.1%
------------------------------------
Electric Utilities 2.0%
------------------------------------
Other 24.3%
------------------------------------
TOP FIVE ISSUERS1
(EXCLUDING REPURCHASE AGREEMENTS)
(as a % of total investments)1
------------------------------------
Wachovia Corporation 2.1%
------------------------------------
HBOS Public Limited Company 1.8%
------------------------------------
Citigroup 1.7%
------------------------------------
General Motors Corporation 1.5%
------------------------------------
INGGroep NV 1.5%
------------------------------------
AVERAGE ANNUAL TOTAL RETURN
(Inception 6/25/03)
------------------------------------
ON SHARE PRICE ON NAV
------------------------------------
1-Year 0.10% 12.25%
------------------------------------
Since Inception-1.79% 7.54%
------------------------------------
1 Excluding common stocks sold short.
11
Report of
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
THE BOARD OF TRUSTEES AND SHAREHOLDERS
NUVEEN PREFERRED AND CONVERTIBLE INCOME FUND
NUVEEN PREFERRED AND CONVERTIBLE INCOME FUND 2
We have audited the accompanying statements of assets and liabilities, including
the portfolios of investments, of Nuveen Preferred and Convertible Income Fund,
and Nuveen Preferred and Convertible Income Fund 2 as of July 31, 2004, and the
related statements of operations, changes in net assets and the financial
highlights for the periods indicated therein. These financial statements and
financial highlights are the responsibility of the Funds' 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. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements and financial highlights. Our procedures
included confirmation of investments owned as of July 31, 2004, by
correspondence with the custodian and brokers or by other appropriate auditing
procedures when replies from brokers were not received. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial positions of
Nuveen Preferred and Convertible Income Fund, and Nuveen Preferred and
Convertible Income Fund 2 at July 31, 2004, and the results of their operations,
the changes in their net assets and the financial highlights for the periods
indicated therein in conformity with U.S. generally accepted accounting
principles.
/S/Ernst & Young LLP
Chicago, Illinois
September 15, 2004
12
Nuveen Preferred and Convertible Income Fund (JPC)
Portfolio of
INVESTMENTS July 31, 2004
MARKET
SHARES DESCRIPTION(1) VALUE
------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS - 1.1% (0.7% OF TOTAL INVESTMENTS)
BIOTECHNOLOGY - 0.3%
86,344 Genentech Inc. $ 4,203,226
------------------------------------------------------------------------------------------------------------------------------------
SPECIALTY RETAIL - 0.5%
295,141 Foot Locker Inc. 6,640,673
------------------------------------------------------------------------------------------------------------------------------------
INSURANCE - 0.3%
160,000 Genworth Financial Inc. 4,518,400
------------------------------------------------------------------------------------------------------------------------------------
Total Common Stocks (cost $12,793,240) 15,362,299
--------------------------------------------------------------------------------------------------------------------
$25 PAR (OR SIMILAR) SECURITIES - 49.1% (33.3% OF TOTAL INVESTMENTS)
AUTO COMPONENTS - 0.7%
19,800 Magna International Inc., Series B, 8.875% 500,742
401,633 Delphi Trust I, 8.250% 10,342,050
------------------------------------------------------------------------------------------------------------------------------------
AUTOMOBILES - 1.8%
331,800 Ford Motor Company, 8.000% (CORTS) 8,590,302
131,400 Ford Motor Company, Series F, 8.000% (CORTS) 3,337,560
39,400 General Motors Acceptance Corporation, 7.350% 994,062
520,000 General Motors Corporation, 7.375% 13,031,200
------------------------------------------------------------------------------------------------------------------------------------
BEVERAGES - 0.2%
126,500 Grand Metropolitan Delaware LP, 9.420% 3,215,630
------------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL BANKS - 9.7%
40,000 Abbey National plc, 7.375% 1,051,200
30,000 ABN AMRO Capital Fund Trust V, 5.900% 695,700
51,900 ASBC Capital I, 7.625% 1,380,540
65,185 BAC Capital Trust I, 7.000% 1,686,988
135,755 BAC Capital Trust II, 7.000% 3,509,267
284,700 BAC Capital Trust III, 7.000% 7,453,446
63,400 Banco Totta & Acores Finance, Series A, 8.875% 1,636,513
186,114 Banesto Holdings, Series A-144A, 10.500% 5,728,831
81,700 Bank One Capital Trust VI, 7.200% 2,124,200
22,800 Bank One Capital V, 8.000% 608,760
32,100 BankNorth Capital Trust II, 8.000% 852,576
15,100 BBVA Preferred Capital Ltd., Series B, 7.750% 397,130
22,600 BCH Capital Ltd., Series B, 9.430% 603,533
500 BNY Capital Trust IV, Series E, 6.875% 12,590
300,000 BNY Capital Trust V, Series F, 5.950% 7,161,000
80,850 BSCH Finance Ltd., Series Q, 8.625% 2,142,525
62,200 Chittenden Capital Trust I, 8.000% 1,644,568
11,000 CIT Group Incorporated, 7.750% (CORTS) 302,500
192,000 Citigroup Capital Trust IX, 6.000% 4,656,000
13
Nuveen Preferred and Convertible Income Fund (JPC) (continued)
Portfolio of INVESTMENTS July 31, 2004
MARKET
SHARES DESCRIPTION(1) VALUE
------------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL BANKS (continued)
32,500 Citigroup Capital Trust VI, 6.875% $ 819,325
49,800 Citigroup Capital Trust VII, 7.125% 1,303,764
331,300 Citigroup Capital Trust VIII, 6.950% 8,537,601
59,300 Citigroup Inc., Series H, 6.231% (a) 3,045,055
107,000 Cobank ABC, 144A, 7.000% (a) 5,692,400
77,000 Comerica Capital Trust I, 7.600% 2,032,800
125,000 Compass Capital Trust III, 7.350% 3,263,750
9,300 CSFB USA, Series 2002-10, 7.000% (SATURNS) 237,150
47,100 Espirito Santo Overseas, 8.500% 1,211,355
176,300 Fannie Mae, 5.125% (a) 7,885,018
22,500 First Union Capital II, Series II, 7.500% (CORTS) 587,250
41,500 First Union Institutional Capital II, 8.200% (CORTS) 1,165,113
292,579 Fleet Capital Trust VII, 7.200% 7,627,535
337,000 Fleet Capital Trust VIII, 7.200% 8,788,960
13,100 Goldman Sachs Group Inc., Series 2003-06, 6.000% (SATURNS) 307,850
28,900 JPM Capital Trust, 7.200% (CORTS) 740,129
51,900 JPMorgan Chase & Company, 7.125% (PCARS) 1,323,450
395,067 JPMorgan Chase Capital Trust X, 7.000% 10,311,249
47,200 JPMorgan Chase Trust, Series 2002-6, Class A, 7.125% (SATURNS) 1,208,792
14,400 KeyCorp, Series 2001-7, 7.750% (CORTS) 373,392
25,000 KeyCorp, Series B, 8.250% (CORTS) 652,500
153,200 National Commerce Capital Trust II, 7.700% 4,052,140
32,900 National Westminster Bank plc, Series A, 7.875% 839,608
18,900 PNC Capital Trust, 6.125% 453,411
19,400 Regions Finance Trust I, 8.000% 507,892
175,000 Royal Bank of Scotland Group plc, 5.750% 4,093,250
74,300 SunTrust Capital Trust IV, 7.125% 1,928,085
51,500 SunTrust Capital Trust V, 7.050% 1,335,910
66,400 USB Capital Trust III, 7.750% 1,759,600
168,000 USB Capital Trust IV, 7.350% 4,418,400
54,100 USB Capital Trust V, 7.250% 1,420,125
24,300 VNB Capital Trust I, 7.750% 643,464
15,700 Washington Mutual Capital Trust I, Series 2001-22, Class A-1, 7.650% (CORTS) 405,060
9,100 Wells Fargo Capital Trust IV, 7.000% 237,601
60,735 Wells Fargo Capital Trust V, 7.000% 1,573,644
14,700 Wells Fargo Capital Trust VI, 6.950% 379,554
225,000 Wells Fargo Capital Trust VII, 5.850% 5,247,000
79,600 Zions Capital Trust B, 8.000% 2,139,648
------------------------------------------------------------------------------------------------------------------------------------
COMPUTERS & PERIPHERALS - 0.0%
11,600 IBM Inc., 7.125% (CORTS) 298,700
13,500 IBM Inc., Series 2001-1, 7.125% (SATURNS) 350,865
14
MARKET
SHARES DESCRIPTION(1) VALUE
------------------------------------------------------------------------------------------------------------------------------------
CONSUMER FINANCE - 0.3%
95,700 Countrywide Capital III, 8.050% (PPLUS) $ 2,622,180
6,900 Household Capital Trust V, Series X, 10.000% 184,920
26,900 Household Capital Trust VI, 8.250% 716,347
39,200 Household Capital Trust VII, 7.500% 1,036,448
------------------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES - 7.9%
17,100 Bear Stearns Capital Trust III, 7.800% 450,585
33,200 Citigroup Inc., Series F, 6.365% (a) 1,728,060
94,000 Citigroup Inc., Series G, 6.213% (a) 4,839,120
67,970 Citigroup Inc., Series M, 5.864% (a) 3,423,989
1,200,200 Countrywide Capital Trust IV, 6.750% 29,944,990
10,000 Federal Home Loan Mortgage Corporation, 5.000% (a) 425,000
33,100 General Electric Capital Corporation, 6.625% 868,544
773,900 Household Finance Corporation, 6.875% 19,997,576
526,388 Lehman Brothers Holdings Capital Trust III, Series K, 6.375% 13,080,742
26,900 Merrill Lynch Capital Trust II, 8.000% 737,060
100,000 Merrill Lynch Capital Trust, 7.000% 2,593,000
113,600 Merrill Lynch Preferred Capital Trust IV, 7.120% 2,971,776
225,000 Merrill Lynch Preferred Capital Trust V, 7.280% 5,933,250
29,000 Merrill Lynch Preferred Capital Trust, 7.750% 777,200
66,100 Morgan Stanley Capital Trust II, 7.250% 1,705,380
365,739 Morgan Stanley Capital Trust III, 6.250% 8,997,179
717,800 Morgan Stanley Capital Trust IV, 6.250% 17,621,990
21,400 Morgan Stanley, 7.050% (PPLUS) 553,618
------------------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 0.4%
25,500 AT&T Wireless, Series 2002-7, 8.000% (CORTS) 668,610
29,000 BellSouth Corporation, Series 2001-3, 7.125% (SATURNS) 739,645
8,800 BellSouth Inc., 7.000% (CORTS) 221,408
15,000 BellSouth Telecommunications, 7.300% (PPLUS) 388,050
13,100 Citizens Communications, 8.375% (PPLUS) 333,657
36,350 Deutsche Telekom International Finance B.V., Series 2001-24, Class A-1, 7.875% (CORTS) 928,743
15,900 SBC Communications Inc., 7.000% 415,149
14,800 Verizon Communications, 7.625% (CORTS) 389,980
11,900 Verizon New England Inc., Series B, 7.000% 307,258
40,955 Verizon South Inc., Series F, 7.000% 1,061,963
------------------------------------------------------------------------------------------------------------------------------------
ELECTRIC UTILITIES - 1.1%
7,000 Consolidated Edison Company of New York Inc., 7.500% 187,250
10,000 Consolidated Edison Company, 7.250% 266,800
4,400 Detroit Edison Company, 7.375% 110,792
39,100 Dominion CNG Capital Trust I, 7.800% 1,021,683
22,200 DTE Energy Trust I, 7.800% 582,306
33,470 Entergy Louisiana Inc., 7.600% 881,265
43,570 Georgia Power Capital Trust V, 7.125% 1,135,434
226,900 Georgia Power Company, 5.900% 5,461,483
15
Nuveen Preferred and Convertible Income Fund (JPC) (continued)
Portfolio of INVESTMENTS July 31, 2004
MARKET
SHARES DESCRIPTION(1) VALUE
------------------------------------------------------------------------------------------------------------------------------------
ELECTRIC UTILITIES (continued)
113,432 Tennessee Valley Authority, Series D, 6.750% $ 2,777,950
124,000 Virginia Power Capital Trust, 7.375% 3,242,600
------------------------------------------------------------------------------------------------------------------------------------
FOOD PRODUCTS - 0.4%
60,000 Dairy Farmers of America Inc., 144A, 7.875% (a) 6,138,750
------------------------------------------------------------------------------------------------------------------------------------
GAS UTILITIES - 0.0%
23,000 AGL Capital Trust II, 8.000% 597,770
1,000 TransCanada Pipeline, 8.250% 25,460
------------------------------------------------------------------------------------------------------------------------------------
HEALTHCARE PROVIDERS & SERVICES - 0.5%
273,500 Aetna Incorporated, 8.500% 7,354,415
------------------------------------------------------------------------------------------------------------------------------------
INSURANCE - 11.2%
5,500 ACE Capital Trust I, Series 1999, 8.875% 142,450
514,010 Ace Ltd., Series C, 7.800% 13,677,806
52,700 AMBAC Financial Group Inc., 5.950% 1,234,234
237,760 Converium Finance, 8.250% 5,620,646
1,216,000 Delphi Financial Group Inc, 8.000% 31,312,000
41,900 Everest Re Capital Trust II, 6.200% 949,035
93,500 Everest Re Group Limited, 7.850% 2,490,840
7,200 Financial Security Assurance Holdings, 6.875% 184,320
18,000 Financial Security Assurance Holdings, 6.250% 442,800
11,000 Great-West L&A Capital Trust I, Series A, 7.250% 276,870
188,900 Hartford Capital Trust III, Series C, 7.450% 4,958,625
27,800 Hartford Life Capital Trust II, Series B, 7.625% 728,082
747,975 ING Group NV, 7.050% 19,245,397
506,518 ING Group NV, 7.200% 13,235,315
36,800 Lincoln National Capital Trust V, Series E 7.650% 972,624
1,300 MBIA Inc., 8.000% 35,685
1,550,312 PartnerRe Limited, Series C, 6.750% 38,447,738
72,000 PartnerRe Limited, 7.900% 1,904,400
79,600 PLC Capital Trust III, 7.500% 2,074,376
31,100 PLC Capital Trust IV, 7.250% 810,155
2,900 PLC Capital Trust V, 6.125% 66,410
88,800 RenaissanceRe Holdings Ltd., Series A, 8.100% 2,362,968
325,310 RenaissanceRe Holdings Ltd., Series B, 7.300% 8,571,919
13,200 Safeco Capital Trust I, 8.750% (CORTS) 384,120
21,700 Safeco Capital Trust I, 8.700% (CORTS) 573,965
4,800 Safeco Capital Trust I, Series 2001-4, 8.750% (CORTS) 125,808
33,000 Safeco Capital Trust III, 8.072% (CORTS) 891,000
10,700 Safeco Capital Trust IV, 8.375% (CORTS) 287,081
44,500 Safeco Corporation, Series 2001-7, 8.250% (SATURNS) 1,169,015
36,100 Safeco Corporation, Series 2002-5, 8.250% (SATURNS) 950,874
25,400 Torchmark Capital Trust I, 7.750% 664,718
60,600 W.R. Berkley Capital Trust, Series 2002-1, 8.125% (CBTCS) 625,089
86,700 XL Capital Ltd., Series A, 8.000% 2,348,703
235,200 XL Capital Ltd., Series B, 7.625% 6,249,264
16
MARKET
SHARES DESCRIPTION(1) VALUE
------------------------------------------------------------------------------------------------------------------------------------
MEDIA - 0.1%
37,600 Viacom Inc., 7.300% $ 983,616
------------------------------------------------------------------------------------------------------------------------------------
MULTI-UTILITIES & UNREGULATED POWER - 0.1%
49,500 Energy East Capital Trust I, 8.250% 1,292,940
------------------------------------------------------------------------------------------------------------------------------------
OIL & GAS - 0.7%
18,300 EnCana Corporation, 9.500% 467,382
372,500 Nexen Inc., 7.350% 9,554,625
------------------------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS - 0.0%
7,300 Rhone-Poulenc Overseas, Series A, 8.125% 186,515
------------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE - 13.6%
60,000 AMB Property Corporation, Series L, 6.500% 1,425,000
10,700 AvalonBay Communities, Inc., Series H, 8.700% 296,497
3,000 BRE Properties, Series B, 8.080% 78,675
347,125 CarrAmerica Realty Corporation, Series E, 7.500% 8,893,343
72,000 Developers Diversified Realty Corporation, Series H, 7.375% 1,776,960
656,785 Developers Diversified Realty Corporation, Series G, 8.000% 17,109,249
17,400 Developers Diversified Realty Corporation, Series F, 8.600% 464,580
109,081 Equity Office Properties Trust, Series G, 7.750% 2,840,469
18,700 Equity Residential Properties Trust, Series C, 9.125% 511,445
9,900 Equity Residential Properties Trust, Series D, 8.600% 273,240
610,800 Equity Residential Properties Trust, Series N, 6.480% 14,537,040
6,100 Equity Residential Properties Trust, 9.125% 162,260
708,634 Gables Residential Trust, Series D, 7.500% 18,637,074
30,900 HRPT Properties Trust, Series A, 9.875% 822,558
303,600 HRPT Properties Trust, Series B, 8.750% 8,066,652
943,483 Kimco Realty Corporation, Series F, 6.650% 23,917,294
13,693 New Plan Excel Realty Trust, Series D, 7.800% 721,450
972,775 New Plan Excel Realty Trust, Series E, 7.625% 25,087,867
32,982 Prologis Trust, Series C, 8.540% 1,959,339
13,600 Prologis Trust, Series G, 6.750% 329,120
159,400 Public Storage Inc., Series R, 8.000% 4,177,874
28,900 Public Storage Inc., Series S, 7.875% 756,891
26,500 Public Storage Inc., Series T, 7.625% 684,760
27,500 Public Storage Inc., Series U, 7.625% 714,450
32,000 Public Storage Inc., Series V, 7.500% 838,400
187,000 Regency Centers Corporation, 7.450% 4,815,250
7,000 Simon Property Group, Inc., Series G, 7.890% 370,440
1,607,345 Wachovia Preferred Funding Corporation, 7.250% 42,932,185
707,700 Weingarten Realty Trust, Preferred Securities, 6.750% 17,834,040
------------------------------------------------------------------------------------------------------------------------------------
SPECIALTY RETAIL - 0.0%
11,400 Sherwin Williams Company, Series III, 7.250% (CORTS) 291,612
------------------------------------------------------------------------------------------------------------------------------------
WIRELESS TELECOMMUNICATION SERVICES - 0.4%
17,400 AT&T Wireless Services Equity, Series 2002-B, 9.250% (SATURNS) 488,592
72,800 Telephone and Data Systems Inc., 7.600% 1,901,536
17
Nuveen Preferred and Convertible Income Fund (JPC) (continued)
Portfolio of INVESTMENTS July 31, 2004
MARKET
SHARES DESCRIPTION(1) VALUE
------------------------------------------------------------------------------------------------------------------------------------
WIRELESS TELECOMMUNICATION SERVICES (continued)
33,800 United States Cellular Corporation, 8.750% $ 934,570
100,000 United States Cellular Corporation, 7.500% 2,554,000
19,900 Verizon Communications, 7.375% (CORTS) 514,216
------------------------------------------------------------------------------------------------------------------------------------
Total $25 Par (or similar) Securities (cost $728,412,540) 723,523,521
--------------------------------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED SECURITIES - 19.8% (13.5% OF TOTAL INVESTMENTS)
AEROSPACE & DEFENSE - 0.5%
75,611 Northrop Grumman Corporation, 7.250% 7,945,204
------------------------------------------------------------------------------------------------------------------------------------
AUTOMOBILES - 0.6%
155,000 Ford Motor Company Capital Trust II, 6.500% 8,284,750
------------------------------------------------------------------------------------------------------------------------------------
CHEMICALS - 0.2%
35,000 IMC Global Inc., 7.500% 3,334,275
------------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL BANKS - 2.1%
200,000 Affiliated Managers Group Inc., 6.000% 4,632,000
164,000 Sovereign Capital Trust IV, Convertible Security, 4.375% 7,872,000
53,200 State Street Corporation, 6.750% 10,763,424
144,000 Washington Mutual Inc, Unit 1 Trust, 5.375% 7,720,992
------------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL SERVICES & SUPPLIES - 0.9%
97,375 Allied Waste Industries Inc., 6.250% 5,256,303
173,150 Cendant Corporation, 7.750% 8,544,953
------------------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS EQUIPMENT - 0.8%
6,010 Lucent Technologies Capital Trust I, 7.750% 6,591,828
80 Nortel Networks Corp, 7.000% 5,263,692
------------------------------------------------------------------------------------------------------------------------------------
CONSTRUCTION MATERIALS - 0.3%
85,800 TXI Capital Trust I, 6.500% 4,066,920
------------------------------------------------------------------------------------------------------------------------------------
CONSUMER FINANCE - 0.4%
118,000 Capital One Financial Corporation, 6.250% 6,067,560
------------------------------------------------------------------------------------------------------------------------------------
CONTAINERS & PACKAGING - 0.4%
112,500 Temple Inland Inc, 7.500% 6,535,125
------------------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES - 1.1%
217,900 Citigroup Global Markets, 2.000% 8,357,772
154,000 Gabelli Asset Management Inc., 6.950% 3,679,060
140,000 Phoenix Companies Inc., 7.000% 4,821,320
------------------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 0.4%
131,000 Alltel Corporation, 7.750% 6,563,100
------------------------------------------------------------------------------------------------------------------------------------
ELECTRIC UTILITIES - 2.5%
157,000 Cinergy Corporation, 9.500% 9,430,990
144,800 Dominion Resources Inc., 8.750% 7,754,040
344,500 DTE Energy Company, 8.750% 8,781,305
217,900 FPL Group Inc., 8.000% 12,213,295
18
MARKET
SHARES DESCRIPTION(1) VALUE
------------------------------------------------------------------------------------------------------------------------------------
ELECTRONIC EQUIPMENT & INSTRUMENTS - 0.8%
46,475 General Cable Corporation, 144A, 5.750% $ 2,898,878
175,000 Pioneer-Standard Financial Trust, 6.750% 9,165,625
------------------------------------------------------------------------------------------------------------------------------------
ENERGY EQUIPMENT & SERVICES - 0.1%
25,000 Hanover Compressor Capital Trust, 7.250% 1,200,000
------------------------------------------------------------------------------------------------------------------------------------
FOOD & STAPLES RETAILING - 0.3%
178,925 Albertsons Inc., 7.250% 4,625,211
------------------------------------------------------------------------------------------------------------------------------------
GAS UTILITIES - 0.4%
185,000 Sempra Energy, 8.500% 5,642,500
------------------------------------------------------------------------------------------------------------------------------------
HEALTHCARE PROVIDERS & SERVICES - 0.3%
41,000 Anthem Inc., 6.000% 3,922,060
------------------------------------------------------------------------------------------------------------------------------------
HOTELS, RESTAURANTS & LEISURE - 0.9%
250,000 Host Marriott Financial Trust, 6.750% 12,812,500
------------------------------------------------------------------------------------------------------------------------------------
HOUSEHOLD DURABLES - 0.3%
106,675 Newell Financial Trust I, 5.250% 4,733,703
------------------------------------------------------------------------------------------------------------------------------------
INSURANCE - 2.5%
100,000 Chubb Corporation, 7.000% 2,749,000
86,200 Hartford Financial Services Group, Inc., 7.000% 5,446,116
51,525 PMI Group Inc., 5.875% 1,357,684
98,000 Prudential Financial Capital Trust I, 6.750% 6,873,720
206,000 Reinsurance Group of America Inc., 5.750% 11,742,000
65,000 UnumProvident Corporation, 8.250% 2,180,750
256,250 XL Capital Limited, 6.500% 6,129,500
------------------------------------------------------------------------------------------------------------------------------------
MEDIA - 1.4%
508,250 Cablevision Systems Corporation, Trust I, 6.500% 9,153,583
185,000 Emmis Communications Corporation, Series A, 6.250% 8,063,225
53,375 Interpublic Group, Series A, 5.375% 2,582,816
10,000 Sinclair Broadcast Group Inc., Series D, 6.000% 416,500
------------------------------------------------------------------------------------------------------------------------------------
METALS & MINING - 0.7%
84,700 United States Steel Corporation, Series B, 7.000% 10,638,320
------------------------------------------------------------------------------------------------------------------------------------
OFFICE ELECTRONICS - 0.1%
10,150 Xerox Corporation, 144A, 7.500% 791,700
------------------------------------------------------------------------------------------------------------------------------------
OIL & GAS - 1.0%
50,000 Amerada Hess Corporation, 7.000% 3,775,000
6,725 Chesapeake Energy Corporation, 144A, 4.125% 7,464,750
68,250 Kerr-McGee Corporation, 5.500% 4,021,973
------------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE 0.6%
165,000 Equity Office Properties Trust, Series B, 5.250% 8,258,250
------------------------------------------------------------------------------------------------------------------------------------
SPECIALTY RETAIL 0.2%
53,000 United Rentals Trust I, Convertible Quarterly Income Preferred Securities, 6.500% 2,358,500
------------------------------------------------------------------------------------------------------------------------------------
Total Convertible Preferred Securities (cost $267,084,948) 293,483,772
--------------------------------------------------------------------------------------------------------------------
19
Nuveen Preferred and Convertible Income Fund (JPC) (continued)
Portfolio of INVESTMENTS July 31, 2004
MARKET
SHARES DESCRIPTION(1) VALUE
------------------------------------------------------------------------------------------------------------------------------------
CAPITAL PREFERRED - HYBRID SECURITIES - 4.1% (2.8% OF TOTAL INVESTMENTS)
COMMERCIAL BANKS - 3.2%
15 BBVA Privanza International Gibraltar, 144A, 7.764% $15,525,000
300 Union Planters Preferred Fund, Series, 144A, 7.750% 31,771,890
------------------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 0.9%
10,957 Centaur Funding Corporation, 144A, Series B, 9.080% 4/21/20 13,833,213
------------------------------------------------------------------------------------------------------------------------------------
Total Capital Preferred - Hybrid Securities (cost $56,345,872) 61,130,103
--------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT (000)/ MARKET
SHARES DESCRIPTION VALUE
------------------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE BONDS - 26.6% (18.1% OF TOTAL INVESTMENTS)
AEROSPACE & DEFENSE - 0.6%
$ 3,425 AAR Corporation, 144A, 2.875%, 2/01/24 2,971,188
2,500 EDO Corporation, Convertible Subordinate Note, 5.250%, 4/15/07 2,609,375
2,500 Mercury Computer Systems Inc., 144A, 2.000%, 5/01/24 2,615,625
------------------------------------------------------------------------------------------------------------------------------------
AIRLINES - 0.3%
3,825 Delta Air Lines Incorporated, 144A, 8.000%, 6/03/23 1,764,281
2,765 Northwest Airlines Corporation, Convertible Notes, 144A, 6.625%, 5/15/23 2,198,175
------------------------------------------------------------------------------------------------------------------------------------
AUTO COMPONENTS - 0.2%
4,865 Lear Corporation, 0.000%, 2/20/22 2,438,581
------------------------------------------------------------------------------------------------------------------------------------
AUTOMOBILES - 1.3%
2,750 Fleetwood Enterprises Inc., 144A, 5.000%, 12/15/23 3,901,563
185 General Motors Corporation, Convertible Notes, Senior Debentures Series A, 4.500%, 3/06/32 4,751,663
185 General Motors Corporation, Series B, 5.250%, 3/03/32 4,499,781
6,000 Sonic Automotive Inc, Convertible Senior Subordinated Notes, 5.250%, 5/07/09 5,932,500
------------------------------------------------------------------------------------------------------------------------------------
BIOTECHNOLOGY - 1.3%
5,115 Chiron Corporation, 2.750%, 6/30/34 5,370,750
2,850 Imclone Systems Inc., 144A, 1.375%, 5/15/24 2,828,625
4,500 Ivax Corporation, Convertible Note, 144A, 1.500%, 3/01/24 4,668,750
6,500 Ivax Corporation, Convertible Senior Subordinated Notes, 4.500%, 5/15/08 6,459,375
------------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL SERVICES & SUPPLIES - 0.5%
6,700 Bowne and Company Incorporated, 144A, 5.000%, 10/01/33 7,361,625
------------------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS EQUIPMENT - 2.0%
7,057 Ciena Corporation, 3.750%, 2/01/08 6,192,518
5,565 Converse Technology Inc., 144A, 0.000%, 5/15/23 6,385,838
8,625 Liberty Media Corporation, Senior Debentures Exchangeable for Motorola 3.500%, 1/15/31 7,492,969
2,850 Lucent Technologies Inc., 2.750%, 6/15/23 3,469,875
5,000 Skyworks Solutions Inc., 4.750%, 11/15/07 5,875,000
------------------------------------------------------------------------------------------------------------------------------------
COMPUTERS & PERIPHERALS - 0.7%
17,675 Hewlett-Packard Company, 0.000%, 10/14/17 10,273,594
------------------------------------------------------------------------------------------------------------------------------------
CONSUMER FINANCE - 0.5%
6,900 Providian Financial Corporation, Convertible Senior Notes, 3.250%, 8/15/05 6,796,500
20
PRINCIPAL
AMOUNT (000)/ MARKET
SHARES DESCRIPTION(1) VALUE
------------------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES - 0.5%
$ 4,950 Capitalsource Inc., 144A, 3.500%, 7/15/34 $ 4,801,500
3,100 Leucadia National Corporation, 144A, 3.750%, 4/15/14 3,208,500
------------------------------------------------------------------------------------------------------------------------------------
ELECTRONIC EQUIPMENT & INSTRUMENTS - 1.7%
20,750 Arrow Electronics Inc., 0.000%, 2/21/21 11,075,313
7,700 Celestica Inc., 0.000%, 8/01/20 4,263,875
8,835 Fisher Scientific International Inc., 3.250%, 3/01/24 9,464,494
------------------------------------------------------------------------------------------------------------------------------------
ENERGY EQUIPMENT & SERVICES - 0.6%
7,000 Schlumberger Limited, 2.125%, 6/01/23 7,446,250
985 Willbros Group Inc., 144A, 2.750%, 3/15/24 959,144
------------------------------------------------------------------------------------------------------------------------------------
GAS UTILITIES - 0.2%
40 Southern Union Company, Series B, 5.750%, 8/16/06 2,401,894
------------------------------------------------------------------------------------------------------------------------------------
HEALTHCARE EQUIPMENT & SUPPLIES - 0.4%
7,050 Alza Corporation, 0.000%, 7/28/20 5,419,688
------------------------------------------------------------------------------------------------------------------------------------
HEALTHCARE PROVIDERS & SERVICES - 0.4%
4,200 Province Healthcare Inc, Convertible Subordinated Notes, 4.500%, 11/20/05 4,231,500
1,145 PSS World Medical Inc., Senior Convertible Note, 144A, 2.250%, 3/15/24 1,084,888
------------------------------------------------------------------------------------------------------------------------------------
HOTELS, RESTAURANTS & LEISURE - 2.4%
9,500 Brinker International Inc., 0.000%, 10/10/21 6,424,375
10,500 Carnival Corporation, 0.000%, 10/24/21 8,465,625
6,035 Fairmont Hotels and Resorts Inc., Convertible Note, 144A, 3.750%, 12/01/23 6,170,788
2,550 Hilton Hotels Corporation, 3.375%, 4/15/23 2,744,438
5,400 Kerzner International Limited, 144A, 2.375%, 4/15/24 5,460,750
15,500 Royal Caribbean Cruises Limited, Senior Convertible Liquid Yield, 0.000%, 2/02/21 8,292,500
------------------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL CONGLOMERATES - 0.3%
3,350 Tyco International Group Limited, Convertible Notes, 144A, 3.125%, 1/15/23 5,142,250
------------------------------------------------------------------------------------------------------------------------------------
INSURANCE - 0.2%
2,300 American International Group Inc., 0.500%, 5/15/07 2,213,750
------------------------------------------------------------------------------------------------------------------------------------
IT SERVICES - 1.0%
2,090 Acxiom Corporation, 3.750%, 2/15/09 2,667,363
5,390 Digital River Inc., 144A, 1.250%, 1/01/24 5,261,988
6,435 Electronic Data Systems, Convertible Senior Notes, 144A, 3.875%, 7/15/23 6,161,513
------------------------------------------------------------------------------------------------------------------------------------
LEISURE EQUIPMENT & PRODUCTS - 0.9%
5,300 Hasbro Inc., 2.750%, 12/01/21 5,697,500
6,195 K2 Corporation, Convertible Notes, 144A, 5.000%, 6/15/10 8,401,969
------------------------------------------------------------------------------------------------------------------------------------
MEDIA - 3.9%
4,725 Citadel Broadcasting Corporation, Convertible Subordinate Note, 144A, 1.875%, 2/15/11 4,069,406
325 Comcast Corporation, 2.000%, 10/15/29 12,920,375
4,000 Echostar Communications Corporation, Convertible Subordinated Notes, 5.750%, 5/15/08 4,080,000
9,900 Liberty Media Corporation, Senior Debentures, Exchangeable for Class B, 3.250%, 3/15/31 8,798,625
5,275 Liberty Media Corporation, 0.750%, 3/30/23 5,809,094
3,200 Lions Gate Entertainment Corporation 144A, Convertible Bond, 4.875%, 12/15/10 5,068,000
21
Nuveen Preferred and Convertible Income Fund (JPC) (continued)
Portfolio of INVESTMENTS July 31, 2004
PRINCIPAL
AMOUNT (000)/ MARKET
SHARES DESCRIPTION(1) VALUE
------------------------------------------------------------------------------------------------------------------------------------
MEDIA (continued)
$ 3,425 Sinclair Broadcast Group, Convertible Step Coupon 144A Senior, 4.875%, 7/15/18 $ 3,313,688
96 Tribune Company, Exchangeable Subordinated Debentures, 2.000%, 5/15/29 8,112,000
6,100 Walt Disney Company, Convertible Senior Notes, 2.125%, 4/15/23 6,328,750
------------------------------------------------------------------------------------------------------------------------------------
OIL & GAS - 0.5%
5,065 McMoran Exploration Corporation, 144A, Notes, 6.000%, 7/02/08 6,755,444
------------------------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS - 1.5%
1,825 Alexion Pharmaceuticals Inc., 5.750%, 3/15/07 1,815,875
3,065 Connectics Corporation, 144A, 2.250%, 5/30/08 4,218,206
2,300 CV Therapeutics Inc., 144A, 2.750%, 5/16/12 2,297,125
3,400 Teva Pharmaceutical Finance, Series B, 0.250%, 2/01/24 3,391,500
3,295 Valeant Pharmaceuticals International, 144A, 3.000%, 8/16/10 3,010,806
1,940 Valeant Pharmaceuticals International, 144A, 4.000%, 11/15/13 1,767,825
6,400 Wyeth, 144A, 1.360%, 1/15/24 6,288,000
------------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE - 1.2%
2,725 Avatar Holdings Inc., 144A, 4.500%, 4/01/24 2,844,219
11,850 EOP Operating LP, Convertible Notes, 7.250%, 11/15/08 12,087,000
3,355 Trizec Hahn Corporation, 3.000%, 1/29/21 2,386,244
------------------------------------------------------------------------------------------------------------------------------------
ROAD & RAIL - 0.0%
585 Yellow Corporation, 144A, 3.375%, 11/25/23 731,981
------------------------------------------------------------------------------------------------------------------------------------
SEMICONDUCTORS & EQUIPMENT - 1.1%
4,890 ASM Lithography Holding NV, 5.750%, 10/15/06 5,489,025
4,000 FEI Company, Convertible Notes, 5.500%, 8/15/08 4,110,000
2,500 LSI Logic Corporation, 4.000%, 5/15/10 2,293,750
4,100 Teradyne Inc, Convertible Senior Notes, 3.750%, 10/15/06 4,151,250
------------------------------------------------------------------------------------------------------------------------------------
SOFTWARE - 0.8%
2,500 Computer Associates International Inc., 5.000%, 3/15/07 2,925,000
6,600 Mentor Graphics Corporation, Convertible Subordinate Notes, 6.875%, 6/15/07 6,765,000
2,275 Novell Inc., 144A, 0.500%, 7/15/24 2,132,813
------------------------------------------------------------------------------------------------------------------------------------
SPECIALTY RETAIL - 0.8%
7,500 Lowes Companies Inc., 0.861%, 10/19/21 7,275,000
6,000 TJX Companies Inc., 0.000%, 2/13/21 5,130,000
------------------------------------------------------------------------------------------------------------------------------------
TEXTILES & APPAREL - 0.3%
4,575 Reebok International Ltd., 144A, 2.000%, 5/01/24 4,483,500
------------------------------------------------------------------------------------------------------------------------------------
WIRELESS TELECOMMUNICATION SERVICES - 0.5%
2,225 NII Holdings Inc., 144A, 3.500%, 9/15/33 3,607,281
3,125 NII Holdings Inc., 144A, 2.875%, 2/01/34 3,285,156
------------------------------------------------------------------------------------------------------------------------------------
Total Convertible Bonds (cost $375,238,699) 392,061,944
--------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS - 17.3% (11.7% OF TOTAL INVESTMENTS)
AUTO COMPONENTS - 0.8%
4,100 Asbury Automotive Group Inc., 9.000%, 6/15/12 4,192,250
3,875 Keystone Automotive Operations Inc., 9.750%, 11/01/13 4,165,625
3,500 Tenneco Auto, Inc., 10.250%, 7/15/13 4,007,500
22
PRINCIPAL
AMOUNT (000)/ MARKET
SHARES DESCRIPTION(1) VALUE
------------------------------------------------------------------------------------------------------------------------------------
AUTOMOBILES - 3.1%
$ 10,000 Ford Motor Company, Debentures, 7.700%, 5/15/97 $ 9,159,670
5,590 Ford Motor Company, Debentures, 9.980%, 2/15/47 6,628,253
3,500 Ford Motor Company, 8.900%, 1/15/32 3,800,136
3,560 General Motors Corporation, Senior Debentures, 8.375%, 7/15/33 3,732,201
20,500 General Motors Acceptance Corporation, Notes, 8.000%, 11/01/31 20,874,576
------------------------------------------------------------------------------------------------------------------------------------
CHEMICALS - 0.1%
1,335 OM Group Inc., 9.250%, 12/15/11 1,371,713
------------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL SERVICES & SUPPLIES - 0.5%
4,891 Allied Waste North America, Series B, 10.000%, 8/01/09 5,184,460
1,000 Allied Waste North America, Series B, 9.250%, 9/01/12 1,118,750
1,000 Allied Waste North America, 7.875%, 4/15/13 1,051,250
------------------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS EQUIPMENT - 0.2%
2,275 Avaya Inc., 11.125%, 4/01/09 2,667,438
------------------------------------------------------------------------------------------------------------------------------------
CONSTRUCTION MATERIALS - 0.3%
2,000 K. Hovnanian Enterprises Inc., Senior Subordinate Notes, 8.875%, 4/01/12 2,195,000
2,500 Texas Industries Inc., 10.250%, 6/15/11 2,862,500
------------------------------------------------------------------------------------------------------------------------------------
CONTAINERS & PACKAGING - 0.4%
1,520 Berry Plastics Corporation, 10.750%, 7/15/12 1,702,400
2,000 Owens-Brockway Glass Containers, Guaranteed Senior Note, 8.250%, 5/15/13 2,105,000
2,000 Owens-Illinois Inc., 7.800%, 5/15/18 1,935,000
------------------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES - 0.2%
2,000 MDP Acquisitions plc, Senior Notes, 9.625%, 10/01/12 2,250,000
------------------------------------------------------------------------------------------------------------------------------------
ELECTRONIC EQUIPMENT & INSTRUMENTS - 0.1%
2,000 Fisher Scientific International Inc., 8.000%, 9/01/13 2,197,500
------------------------------------------------------------------------------------------------------------------------------------
FOOD & STAPLES RETAILING - 0.1%
2,000 Stater Brothers Holdings Inc., 144A, 8.125%, 6/15/12 2,055,000
------------------------------------------------------------------------------------------------------------------------------------
FOOD PRODUCTS - 0.7%
1,000 Dole Food Inc., 8.875%, 3/15/11 1,062,500
5,943 Dole Foods Company, 8.750%, 7/15/13 6,269,865
3,000 Seminis Vegetable Seeds Inc., 10.250%, 10/01/13 3,300,000
------------------------------------------------------------------------------------------------------------------------------------
GAS UTILITIES - 0.1%
2,000 Suburban Propane Partners LP, 6.875%, 12/15/13 1,990,000
------------------------------------------------------------------------------------------------------------------------------------
HOTELS, RESTAURANTS & LEISURE - 2.6%
2,000 Boyd Gaming Corporation, 8.750%, 4/15/12 2,170,000
2,000 Boyd Gaming Corporation, 7.750%, 12/15/12 2,070,000
2,552 Dominos Inc., 8.250%, 7/01/11 2,743,400
4,000 Intrawest Corporation, Senior Notes, 10.500%, 2/01/10 4,340,000
2,900 Intrawest Corporation, 7.500%, 10/15/13 2,900,000
3,000 Las Vegas Sands Inc., Venetian Casino Resorts, LLC Mortgage Notes, 11.000%, 6/15/10 3,435,000
2,500 Park Place Entertainment, 7.000%, 4/15/13 2,621,875
4,040 Park Place Entertainment, 7.875%, 12/15/05 4,272,300
1,600 Park Place Entertainment, 8.125%, 5/15/11 1,774,000
23
Nuveen Preferred and Convertible Income Fund (JPC) (continued)
Portfolio of INVESTMENTS July 31, 2004
PRINCIPAL
AMOUNT (000)/ MARKET
SHARES DESCRIPTION(1) VALUE
------------------------------------------------------------------------------------------------------------------------------------
HOTELS, RESTAURANTS & LEISURE (continued)
$ 7,000 PennNational Gaming Inc., Senior Subordinated Notes, 8.875%, 3/15/10 $ 7,691,250
750 Pinnacle Entertainment Inc., 8.750%, 10/01/13 750,000
2,000 Pinnacle Entertainment Inc., 8.250%, 3/15/12 1,930,000
2,000 Town Sports International Inc., 9.625%, 4/15/11 1,945,000
------------------------------------------------------------------------------------------------------------------------------------
HOUSEHOLD DURABLES - 0.9%
3,000 KB Home, 8.625%, 12/15/08 3,292,500
5,175 Technical Olympic USA Inc, Senior Subordinate Notes, 10.375%, 7/01/12 5,498,438
2,500 William Lyon Homes Inc, Unsecured Senior Note, 10.750%, 4/01/13 2,812,500
------------------------------------------------------------------------------------------------------------------------------------
IT SERVICES - 0.2%
3,500 Global Cash Access LLC, Senior Subordinate Note, 144A, 8.750%, 3/15/12 3,683,750
------------------------------------------------------------------------------------------------------------------------------------
MACHINERY - 0.6%
1,220 Terex Corporation, Senior Subordinated Notes, 10.375%, 4/01/11 1,369,450
6,095 Terex Corporation, Senior Subordinated Notes, 9.250%, 7/15/11 6,811,163
------------------------------------------------------------------------------------------------------------------------------------
MEDIA - 3.2%
4,000 Allbritton Communications Company, Series B, 7.750%, 12/15/12 3,970,000
2,000 American Media Operations Inc., Series 8.875%, 1/15/11 1,995,000
4,180 American Media Operations Inc., Series B, 10.250%, 5/01/09 4,389,000
1,000 Cablevision Systems Corporation, Series B, 8.125%, 8/15/09 1,045,000
5,000 Cablevision Systems Corporation, 7.250%, 7/15/08 5,100,000
2,750 Canwest Media Incorporated, 7.625%, 4/15/13 2,880,625
2,000 Charter Communications Operating LLC, 144A, 8.000%, 4/30/12 1,940,000
1,500 Lowes Cineplex Entertainment Corporation, 144A, 9.000%, 8/01/14 1,485,000
5,800 Mail-Well I Corporation, Senior Unsecured Note, 144A, 9.625%, 3/15/12 6,264,000
6,000 Primedia Inc, Senior Notes, 8.875%, 5/15/11 5,925,000
6,750 Vertis Inc., 9.750%, 4/01/09 7,408,125
4,000 Young Broadcasting Inc, Senior Subordinate Notes, 10.000%, 3/01/11 4,060,000
------------------------------------------------------------------------------------------------------------------------------------
MULTILINE RETAIL - 0.2%
2,000 Saks Inc., Note. 9.875%, 10/01/11 2,320,000
1,195 Saks Inc., 7.000%, 12/01/13 1,177,075
------------------------------------------------------------------------------------------------------------------------------------
OIL & GAS - 0.4%
2,400 Baytex Energy Ltd., 9.625%, 7/15/10 2,532,000
1,000 Chesapeake Energy Corporation, 9.000%, 8/15/12 1,141,250
2,000 Tesoro Petroleum Corporation, Senior Subordinate Notes, Series B, 9.625%, 11/01/08 2,210,000
250 Tesoro Petroleum Corporation, 8.000%, 4/15/08 271,250
------------------------------------------------------------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS - 0.5%
2,000 Georgia Pacific Corporation, Debentures, 7.700%, 6/15/15 2,170,000
5,000 Georgia Pacific Corporation, Notes, 8.125%, 5/15/11 5,637,500
------------------------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS - 0.1%
1,500 Quintiles Transitional Corporation, 10.000%, 10/01/13 1,548,750
------------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE - 0.8%
1,625 CB Richard Ellis Services Inc., 9.750%, 5/15/10 1,795,625
500 Forest City Enterprises, Senior Notes, 7.625%, 6/01/15 506,250
4,425 LNR Property Corporation, 7.625%, 7/15/13 4,447,125
24
PRINCIPAL
AMOUNT (000)/ MARKET
SHARES DESCRIPTION(1) VALUE
------------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE (continued)
$ 4,000 Universal City Development Partners, 11.750%, 4/01/10 $ 4,660,000
------------------------------------------------------------------------------------------------------------------------------------
ROAD & RAIL - 0.2%
3,000 Laidlaw International Inc., 10.750%, 6/15/11 3,337,500
------------------------------------------------------------------------------------------------------------------------------------
SEMICONDUCTORS & EQUIPMENT - 0.1%
2,000 Amkor Technology Inc., 7.750%, 5/15/13 1,720,000
------------------------------------------------------------------------------------------------------------------------------------
SPECIALTY RETAIL - 0.9%
1,650 Central Garden & Pet Company, 9.125%, 2/01/13 1,782,000
3,500 Saks Inc., 7.375%, 2/15/19 3,377,500
2,000 United Rentals of North America Inc., 7.750%, 11/15/13 1,945,000
5,000 Warnaco Inc, Senior Notes, 8.875%, 6/15/13 5,462,500
------------------------------------------------------------------------------------------------------------------------------------
Total Corporate Bonds (cost $247,805,249) 254,492,288
--------------------------------------------------------------------------------------------------------------------
CAPITAL PREFERRED SECURITIES - 20.5% (14.0% OF TOTAL INVESTMENTS)
COMMERCIAL BANKS - 16.9%
3,000 AB Svensk Exportkredit, 6.375%, 10/27/49 2,937,261
13,000 Abbey National Capital Trust I, 8.963%, 12/30/49 16,670,342
6,800 AgFirst Farm Credit Bank, 7.300%, 12/15/53 6,841,392
2,500 Ahmanson Capital Trust I, 8.360%, 12/01/26 2,780,448
4,850 BT Institutional Capital Trust A, 144A, 8.090%, 12/01/26 5,313,670
3,000 BT Institutional Capital Trust B, 144A, 7.750%, 12/01/26 3,216,336
3,000 Bank One Capital III, 8.750%, 9/01/30 3,897,462
1,000 BankAmerica Capital II, Series 2, 8.000%, 12/15/26 1,110,840
6,000 BankBoston Capital Trust I, Series B, 8.250%, 12/15/26 6,766,824
1,500 BanPonce Trust I, Series A, 8.327%, 2/01/27 1,632,080
13,030 Barclays Bank plc, 144A, 8.550%, 6/15/49 15,605,145
1,000 BT Capital Trust, Series B1, 7.900%, 1/15/27 1,091,460
3,000 Centura Capital Trust I, 144A, 8.845%, 6/01/27 3,383,604
18,125 Chase Capital Trust I, Series A, 7.670%, 12/01/26 19,462,263
13,500 Corestates Capital Trust I, 144A, 8.000%, 12/15/26 14,963,616
12,250 Dime Capital Trust I, Series A, 9.330%, 5/06/27 14,348,633
3,000 Farm Credit Bank of Texas, 7.561%, 11/05/49 3,040,902
1,000 First Chicago NBD Institutional Capital, 7.950%, 12/01/26 1,090,780
6,200 First Empire Capital Trust I, 8.234%, 2/01/27 6,835,041
2,000 First Midwest Bancorp Inc., 6.950%, 12/01/33 2,029,972
1,000 Great Western Financial Trust II, Series A, 8.206%, 2/01/27 1,095,826
2,400 HSBC Capital Funding LP, 144A, 9.547%, 12/31/49 2,955,214
8,000 HSBC Capital Funding LP, Debt, 10.176%, 6/30/50 11,357,872
4,000 KBC Bank Fund Trust III, 144A, 9.860%, 11/02/49 4,910,436
6,300 KeyCorp Institutional Capital Trust A, 7.826%, 12/01/26 6,785,289
20,000 M&I Capital Trust A, 7.650%, 12/01/26 21,454,440
5,000 NB Capital Trust IV, 8.250%, 4/15/27 5,636,645
1,000 North Fork Capital Trust I, Capital Securities, 8.700%, 12/15/26 1,102,310
12,000 North Fork Capital Trust II, 8.000%, 12/15/27 13,474,008
100 Reliance Capital Trust I, Series B, 8.170%, 5/01/28 110,575
5,200 Royal Bank of Scotland Group plc, 7.648%, 8/31/49 5,934,344
25
Nuveen Preferred and Convertible Income Fund (JPC) (continued)
Portfolio of INVESTMENTS July 31, 2004
PRINCIPAL
AMOUNT (000)/ MARKET
SHARES DESCRIPTION(1) VALUE
------------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL BANKS (continued)
$ 710 SocGen Real Estate Company LLC, 144A, 7.640%, 12/29/49 $ 787,011
8,000 Sparebanken Rogaland, 144A, Notes, 6.443%, 5/01/49 7,880,000
10,500 St. George Funding Company LLC, 8.485%, 6/30/17 12,048,624
8,300 UBS Preferred Funding Trust I, 8.622%, 10/29/49 9,887,375
2,000 Unicredito Italiano Capital Trust, 144A, 9.200%, 10/05/49 2,439,082
100 Wachovia Capital Trust I, Capital Securities, 144A, 7.640%, 1/15/27 106,831
2,500 Washington Mutual Capital Trust I, 8.375%, 6/01/27 2,787,065
5,000 Zions Institutional Capital Trust, Series A, 8.536%, 12/15/26 5,621,605
------------------------------------------------------------------------------------------------------------------------------------
GAS UTILITIES - 0.6%
1,200 KN Capital Trust I, Preferred Securities, 8.560%, 4/15/27 1,354,610
7,110 KN Capital Trust III, 7.630%, 4/15/28 7,554,994
------------------------------------------------------------------------------------------------------------------------------------
INSURANCE - 3.0%
18,596 Berkeley Capital Trust, 8.197%, 12/15/45 20,037,134
5,107 Safeco Capital Trust I, Capital Securities, 8.072%, 7/15/37 5,658,040
9,500 Sun Life Canada Capital Trust, Capital Securities, 8.526%, 5/06/47 10,610,807
7,250 Zurich Capital Trust I, 8.376%, 6/01/37 8,087,636
------------------------------------------------------------------------------------------------------------------------------------
Total Capital Preferred Securities (cost $310,332,652) 302,695,844
--------------------------------------------------------------------------------------------------------------------
CAPITAL PREFERRED EURO-MARKET LISTED SECURITIES - 7.6% (5.2% OF TOTAL INVESTMENTS)
COMMERCIAL BANKS - 7.4%
7,000 BNP Paribas Capital Trust, 7.200%, 12/31/49 7,240,020
27,250 C.A. Preferred Funding Trust, 7.000%, 1/30/49 27,489,037
1,500 C.A. Preferred Fund Trust II, 7.000%, 10/30/49 1,517,373
36,000 HBOS Capital Funding LP, Notes, 6.850%, 3/01/49 36,151,272
18,600 Lloyds TSB Bank plc, Subordinate Note, 6.900%, 11/22/49 18,966,959
17,750 RBS Capital Trust B, 6.800%, 12/31/49 17,860,884
------------------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES - 0.2%
2,800 Old Mutual Capital Funding, Notes, 8.000%, 6/22/53 2,792,821
------------------------------------------------------------------------------------------------------------------------------------
Total Capital Preferred Euro-Market Listed Securities (cost $115,375,021) 112,018,366
--------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS - 1.0% (0.7% OF TOTAL INVESTMENTS)
14,926 State Street Bank, 1.250%, dated 7/30/04, due 8/02/04, repurchase price $14,927,555, 14,926,000
collateralized by $13,315,000 U.S. Treasury Bonds, 6.250%, due 8/15/23, value $15,229,897
------------------------------------------------------------------------------------------------------------------------------------
Total Repurchase Agreements (cost $14,926,000) 14,926,000
--------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST $2,128,314,221) - 147.1% 2,169,694,137
====================================================================================================================
MARKET
SHARES DESCRIPTION(1) VALUE
------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS SOLD SHORT - (3.6%)
CHEMICALS - (0.2)%
(217,368) IMC Global Inc. (2,967,073)
------------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL BANKS - (0.2)%
(65,700) Affiliated Managers Group Inc. (3,016,287)
------------------------------------------------------------------------------------------------------------------------------------
CONSUMER FINANCE - (0.3)%
(60,515) Capital One Financial Corporation (4,194,900)
26
MARKET
SHARES DESCRIPTION(1) VALUE
------------------------------------------------------------------------------------------------------------------------------------
FOOD & STAPLES RETAILING (0.1)%
(52,500) Albertson's, Inc. $(1,280,475)
------------------------------------------------------------------------------------------------------------------------------------
GAS UTILITIES - (0.3)%
(91,000) Sempra Energy (3,253,250)
(95,300) Southern Union Company (1,897,423)
------------------------------------------------------------------------------------------------------------------------------------
INSURANCE - (0.9)%
(25,850) Chubb Corporation (1,777,963)
(142,950) Genworth Financial Inc. (3,250,683)
(67,725) Hartford Financial Services Group, Inc. (4,408,898)
(101,200) Hilb, Roga, and Hamilton Companies (3,399,308)
(110,607) UnumProvident Corporation (1,764,182)
------------------------------------------------------------------------------------------------------------------------------------
LEISURE EQUIPMENT & PRODUCTS - (0.1)%
(45,828) K2 Inc. (653,049)
------------------------------------------------------------------------------------------------------------------------------------
MEDIA - (0.2)%
(194,730) Cablevision Systems Corporation (3,401,933)
------------------------------------------------------------------------------------------------------------------------------------
METALS & MINING (0.8)%
(265,593) United States Steel Corporation (10,129,717)
------------------------------------------------------------------------------------------------------------------------------------
OIL & GAS - (0.5)%
(38,445) Amerada Hess Corporation (3,204,391)
(57,647) Devon Energy Corporation (4,005,890)
------------------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS SOLD SHORT (PROCEEDS $42,106,133) (52,605,422)
====================================================================================================================
OTHER ASSETS LESS LIABILITIES - 4.5% 65,894,279
====================================================================================================================
FUNDPREFERRED SHARES, AT LIQUIDATION VALUE - (48.0)% (708,000,000)
====================================================================================================================
NET ASSETS APPLICABLE TO COMMON SHARES - 100% $1,474,982,994
====================================================================================================================
(1) All percentages shown in the Portfolio of Investments
are based on net assets applicable to Common shares
unless otherwise noted.
(a) Security is eligible for the Dividends Received
Deduction.
144A 144A securities are those which are exempt from
registration under Rule 144A of the Securities Act of
1933, as amended. These securities may only be resold
in transactions exempt from registration which are
normally those transactions with qualified
institutional buyers.
(CBTCS) Corporate Backed Trust Certificates.
(CORTS) Corporate Backed Trust Securities.
(LYONS) Liquid Yield Option Notes.
(PCARS) Public Credit and Repackaged Securities.
(PPLUS) PreferredPlus Trust.
(SATURNS) Structured Asset Trust Unit Repackaging.
See accompanying notes to financial statements.
27
Nuveen Preferred and Convertible Income Fund 2 (JQC)
Portfolio of
INVESTMENTS July 31, 2004
MARKET
SHARES DESCRIPTION(1) VALUE
------------------------------------------------------------------------------------------------------------------------------------
$25 PAR (OR SIMILAR) SECURITIES - 45.9% (31.3% OF TOTAL INVESTMENTS)
AUTO COMPONENTS - 0.7%
557,500 Delphi Trust I, 8.250% $14,355,625
28,800 Magna International Inc., Series B, 8.875% 728,352
------------------------------------------------------------------------------------------------------------------------------------
BEVERAGES - 0.1%
42,500 Grand Metropolitan Delaware LP, 9.420% 1,080,350
------------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL BANKS - 14.9%
34,200 Abbey National plc, Series B, 7.375% 897,750
53,700 Abbey National plc, 7.250% 1,389,219
301,600 Abbey National plc, 7.375% 7,926,048
863,770 ABN AMRO Capital Fund Trust V, 5.900% 20,030,826
96,400 ABN AMRO Capital Fund Trust VI, 6.250% 2,391,684
111,600 ASBC Capital I, 7.625% 2,968,560
203,410 BAC Capital Trust I, 7.000% 5,264,251
560,200 BAC Capital Trust II, 7.000% 14,481,170
163,900 BAC Capital Trust III, 7.000% 4,290,902
1,150,000 Banco Santander SA, 144A, 6.410% 27,988,700
71,750 Banco Totta & Acores Finance, Series A, 8.875% 1,852,047
19,000 BancWest Capital I, 9.500% 519,650
5,200 Bank One Capital I, 8.000% 133,224
15,700 Bank One Capital II, 8.500% 423,586
167,700 Bank One Capital Trust VI, 7.200% 4,360,200
32,200 Bank One Capital V, 8.000% 859,740
51,400 BankNorth Capital Trust II, 8.000% 1,365,184
5,400 BBVA Preferred Capital Ltd., Series B, 7.750% 142,020
1,700 BCH Capital Ltd., Series B, 9.430% 45,399
27,000 BNY Capital Trust IV, Series E, 6.875% 679,860
306,984 BNY Capital Trust V, Series F, 5.950% 7,327,708
56,300 BSCH Finance Ltd., Series Q, 8.625% 1,491,950
145,800 Chittenden Capital Trust I. 8.000% 3,854,952
25,500 CIT Group Incorporated, 7.750% (CORTS) 701,250
268,800 Citigroup Capital Trust IX, 6.000% 6,518,400
30,200 Citigroup Capital Trust VI, 6.875% 761,342
186,200 Citigroup Capital Trust VII, 7.125% 4,874,716
1,006,400 Citigroup Capital Trust VIII, 6.950% 25,934,928
24,000 Citigroup Inc., Series H, 6.231% (a) 1,232,400
146,500 Cobank ABC, 144A, 7.000% (a) 7,793,800
106,200 Comerica Capital Trust I, 7.600% 2,803,680
196,300 Compass Capital Trust III, 7.350% 5,125,393
28
MARKET
SHARES DESCRIPTION(1) VALUE
------------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL BANKS (continued)
30,800 CSFB USA, Series 2002-10, 7.000% (SATURNS) $ 785,400
45,800 Espirito Santo Overseas, 8.500% 1,177,921
41,700 Fannie Mae, 5.125% (a) 1,865,033
49,000 First Union Capital II, Series II, 7.500% (CORTS) 1,278,900
16,100 First Union Institutional Capital II, Series III, 7.500% (CORTS) 426,650
22,600 First Union Institutional Capital II, 8.200% (CORTS) 634,495
18,900 Fleet Capital Trust II, 8.000% (CORTS) 512,190
4,400 Fleet Capital Trust VI, 8.800% 117,172
512,200 Fleet Capital Trust VII, 7.200% 13,353,054
430,300 Fleet Capital Trust VIII, 7.200% 11,222,224
12,300 Goldman Sachs Group Inc., Series 2003-06, 6.000% (SATURNS) 289,050
9,900 JPM Capital Trust I, Series 2001-1, Class A-1, 7.850% (CORTS) 264,231
43,200 JPM Capital Trust, 7.200% (CORTS) 1,106,352
71,965 JPMorgan Chase & Company, 7.125% (PCARS) 1,835,108
22,000 JPMorgan Chase Capital Trust IX, Series I, 7.500% 584,760
712,420 JPMorgan Chase Capital Trust X, 7.000% 18,594,162
73,600 JPMorgan Chase Trust, Series 2002-6, Class A, 7.125% (SATURNS) 1,884,896
35,000 KeyCorp, 7.500% (PCARS) 904,925
27,700 KeyCorp, Series 2001-7, 7.750% (CORTS) 718,261
33,900 KeyCorp, Series B, 8.250% (CORTS) 884,790
84,900 National Commerce Capital Trust II, 7.700% 2,245,605
63,900 National Westminster Bank PCL, Series A, 7.875% 1,630,728
21,700 ONB Capital Trust II, 8.000% 566,370
53,300 PNC Capital Trust, 6.125% 1,278,667
23,700 Regions Finance Trust I, 8.000% 620,466
305,700 Royal Bank of Scotland Group plc, 5.750% 7,150,323
139,200 SunTrust Capital Trust IV, 7.125% 3,612,240
108,900 SunTrust Capital Trust V, 7.050% 2,824,866
662,100 USB Capital Trust III, 7.750% 17,545,650
328,500 USB Capital Trust IV, 7.350% 8,639,550
288,200 USB Capital Trust V, 7.250% 7,565,250
39,100 VNB Capital Trust I, 7.750% 1,035,368
43,800 Washington Mutual Capital Trust I, Series 2001-22, Class A-1, 7.650% (CORTS) 1,130,040
40,000 Wells Fargo Capital Trust IV, 7.000% 1,044,400
420,800 Wells Fargo Capital Trust V, 7.000% 10,902,928
109,000 Wells Fargo Capital Trust VI, 6.950% 2,814,380
236,550 Wells Fargo Capital Trust VII, 5.850% 5,516,346
117,300 Zions Capital Trust B, 8.000% 3,153,024
------------------------------------------------------------------------------------------------------------------------------------
COMPUTERS & PERIPHERALS - 0.1%
16,400 IBM Inc., 7.125% (CORTS) 422,300
27,700 IBM Inc., Series 2001-1, 7.125% (SATURNS) 719,923
3,000 IBM Trust II, 7.125% (CORTS) 78,300
18,300 IBM Trust IV, 7.000% (CORTS) 477,081
29
Nuveen Preferred and Convertible Income Fund 2 (JQC) (continued)
Portfolio of INVESTMENTS July 31, 2004
MARKET
SHARES DESCRIPTION(1) VALUE
------------------------------------------------------------------------------------------------------------------------------------
CONSUMER FINANCE - 0.8%
68,400 Countrywide Capital III, 8.050% (PPLUS) $ 1,874,160
10,800 Household Capital Trust V, Series X, 10.000% 289,440
40,900 Household Capital Trust VI, 8.250% 1,089,167
98,100 Household Capital Trust VII, 7.500% 2,593,764
174,000 SLM Corporation, Series A, 6.970% (a) 9,426,450
7,500 SLM Corporation, 6.000% 180,150
------------------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES - 4.9%
112,800 Bear Stearns Capital Trust III, 7.800% 2,972,280
107,600 Bear Stearns Companies, Series G, 5.490% (a) 5,065,270
75,900 Countrywide Capital Trust II, Series II, 8.000% (CORTS) 1,990,098
666,500 Countrywide Capital Trust IV, 6.750% 16,629,175
67,100 Fannie Mae, 4.750% (a) 2,751,100
15,000 Federal Home Loan Mortgage Corporation, 5.000% (a), 5.000% 637,500
40,100 General Electric Capital Corporation, 6.625% 1,052,224
53,000 Household Finance Corporation, 6.875% 1,369,520
101,700 KeyCorp Capital Trust V, 5.875% 2,356,389
198,350 Lehman Brothers Holdings Inc., Series C, 5.940% (a) 9,600,140
106,800 Lehman Brothers Holdings Inc., Series D, 5.670% (a) 4,992,900
425,000 Lehman Brothers Holdings Inc., Series F, 6.500% (a) 11,118,000
71,500 Merrill Lynch Capital Trust II, 8.000% 1,959,100
231,000 Merrill Lynch Capital Trust, 7.000% 5,989,830
185,300 Merrill Lynch Preferred Capital Trust IV, 7.120% 4,847,448
278,400 Merrill Lynch Preferred Capital Trust V, 7.280% 7,341,408
47,800 Merrill Lynch Preferred Capital Trust, 7.750% 1,281,040
211,850 Morgan Stanley Capital Trust II, 7.250% 5,465,730
203,200 Morgan Stanley Capital Trust III, 6.250% 4,998,720
137,900 Morgan Stanley Capital Trust IV, 6.250% 3,385,445
115,080 Morgan Stanley, 7.050% (PPLUS) 2,977,120
------------------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 0.6%
55,900 AT&T Wireless, Series 2002-7, 8.000% (CORTS) 1,465,698
8,000 BellSouth Capital Funding Corporation, 7.375% 200,000
32,600 BellSouth Capital Funding, 7.100% (CORTS) 822,172
17,300 BellSouth Corporation, CABCO Trust, 9.750% 428,175
10,900 BellSouth Corporation, 7.000% (CORTS) 281,111
48,600 BellSouth Corporation, Series 2001-3, 7.125% (SATURNS) 1,239,543
30,800 BellSouth Inc., 7.000% (CORTS) 774,928
70,600 BellSouth Telecommunications, 7.300% (PPLUS) 1,826,422
57,900 Deutsche Telekom International Finance B.V., Series 2001-24, Class A-1, 7.875 (CORTS) 1,479,345
16,100 Citizens Communications, 8.375% (PPLUS) 410,067
50,000 SBC Communications Inc., 7.000% 1,305,500
26,300 Verizon Communications, 7.625% (CORTS) 693,005
50,700 Verizon New England Inc., Series B, 7.000% 1,309,074
29,900 Verizon South Inc., Series F, 7.000% 775,307
30
MARKET
SHARES DESCRIPTION(1) VALUE
------------------------------------------------------------------------------------------------------------------------------------
ELECTRIC UTILITIES - 0.7%
12,000 Consolidated Edison Company of New York Inc., 7.500% $ 321,000
5,000 Consolidated Edison Company, 7.250% 133,400
4,000 Detroit Edison Company, 7.375% 100,720
50,000 Dominion CNG Capital Trust I, 7.800% 1,306,500
30,700 Dominion Resources Capital Trust II, 8.400% 814,164
21,100 DTE Energy Trust I, 7.800% 553,453
26,200 Entergy Louisiana Inc., 7.600% 689,846
3,600 Entergy Mississippi Inc., 7.250% 92,880
3,000 Georgia Power Capital Trust V, 7.125% 78,180
130,000 Interstate Power and Light Company, 7.100% (a) 3,419,000
11,000 Mississippi Power Capital Trust II, 7.200% 287,375
32,600 Northern States Power Company, 8.000% 871,724
1,500 OGE Energy Capital Trust I, 8.375% 38,250
29,900 Southern Company Capital Trust I, 7.375% (CORTS) 755,573
10,900 Southern Company Capital Trust I, 8.190% (CORTS) 295,935
13,100 Southern Company Capital Trust VI, 7.125% 342,172
120,200 Virginia Power Capital Trust, 7.375% 3,143,230
------------------------------------------------------------------------------------------------------------------------------------
FOOD PRODUCTS - 0.4%
75,000 Dairy Farmers of America Inc., 144A, 7.875% (a) 7,673,438
------------------------------------------------------------------------------------------------------------------------------------
GAS UTILITIES - 0.1%
75,300 AGL Capital Trust II, 8.000% 1,957,047
------------------------------------------------------------------------------------------------------------------------------------
HEALTHCARE PROVIDERS & SERVICES - 0.8%
587,500 Aetna Incorporated, 8.500% 15,797,875
------------------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL CONGLOMERATES - 0.0%
33,900 Philadelphia Authority for Industrial Development, Pennsylvania, Pension, 6.550% 847,500
------------------------------------------------------------------------------------------------------------------------------------
INSURANCE - 9.9%
157,500 ACE Capital Trust I, Series 1999, 8.875% 4,079,250
1,337,883 Ace Ltd., Series C, 7.800% 35,601,067
4,900 Allstate Corporation, 7.150%, 7.150% (PCARS) 127,523
87,300 AMBAC Financial Group Inc., 5.950% 2,044,566
18,600 American General Capital Trust I, 7.875% 471,324
328,800 Converium Finance, 8.250% 7,772,832
674,601 Delphi Financial Group Inc., 8.000% 17,370,976
172,556 Everest RE Capital Trust II, 6.200% 3,908,393
85,300 EverestRe Group Limited, 7.850% 2,272,392
9,900 Financial Security Assurance Holdings, 6.875% 253,440
20,200 Great-West L&A Capital Trust I, Series A, 7.250% 508,434
284,500 Hartford Capital Trust III, Series C, 7.450% 7,468,125
40,400 Hartford Life Capital Trust II, Series B, 7.625% 1,058,076
5,000 ING Capital Funding Trust II, 9.200% 133,900
722,775 ING Group NV, 7.050% 18,597,001
584,220 ING Group NV, 7.200% 15,265,669
31
Nuveen Preferred and Convertible Income Fund 2 (JQC) (continued)
Portfolio of INVESTMENTS July 31, 2004
MARKET
SHARES DESCRIPTION(1) VALUE
------------------------------------------------------------------------------------------------------------------------------------
INSURANCE (continued)
53,400 Lincoln National Capital Trust V, Series E, 7.650% $ 1,411,362
1,402,300 Lincoln National Capital Trust VI, 6.750% 35,127,615
3,600 MBIA Inc., 8.000% 98,820
900,702 PartnerRe Limited, Series C, 6.750% 22,337,410
77,400 PartnerRe Limited, 7.900% 2,047,230
74,400 PLC Capital Trust III, 7.500% 1,938,864
67,200 PLC Capital Trust IV, 7.250% 1,750,560
13,800 PLC Capital Trust V, 6.125% 316,020
112,900 RenaissanceRe Holdings Ltd., Series A, 8.100% 3,004,269
124,700 RenaissanceRe Holdings Ltd., Series B, 7.300% 3,285,845
20,900 Safeco Capital Trust I, 8.750% (CORTS) 608,190
24,200 Safeco Capital Trust I, 8.700% (CORTS) 640,090
20,100 Safeco Capital Trust I, Series 2001-4, 8.750% (CORTS) 526,821
37,200 Safeco Capital Trust III, 8.072% (CORTS) 1,004,400
16,300 Safeco Capital Trust IV, 8.375% (CORTS) 437,329
36,800 Safeco Corporation, Series 2001-7, 8.250% (SATURNS) 966,736
36,300 Safeco Corporation, Series 2002-5, 8.250% (SATURNS) 956,142
52,300 Torchmark Capital Trust I, 7.750% 1,368,691
111,600 W.R. Berkley Capital Trust, Series 2002-1, 8.125% (CBTCS) 1,151,154
65,200 XL Capital Ltd., Series A, 8.000% 1,766,268
101,100 XL Capital Ltd., Series B, 7.625% 2,686,227
------------------------------------------------------------------------------------------------------------------------------------
MEDIA - 0.1%
48,800 Viacom Inc., 7.300% 1,276,608
------------------------------------------------------------------------------------------------------------------------------------
MULTI-UTILITIES & UNREGULATED POWER - 0.1%
85,200 Energy East Capital Trust I, 8.250% 2,225,424
------------------------------------------------------------------------------------------------------------------------------------
OIL & GAS - 0.9%
16,400 EnCana Corporation, 9.500% 418,856
685,000 Nexen Inc., 7.350% 17,570,250
------------------------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS - 0.1%
50,000 Bristol Myers Squibb Company, 6.250% (CORTS) 1,282,500
16,900 Rhone-Poulenc Overseas, Series A, 8.125% 431,795
------------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE - 10.1%
318,355 AMB Property Corporation, Series L, 6.500% 7,560,931
1,200 Archstone-Smith Trust, Series D, 8.750% 30,240
77,100 AvalonBay Communities, Inc., Series H, 8.700% 2,136,441
220,400 BRE Properties, Series B, 8.080% 5,779,990
1,166,500 CarrAmerica Realty Corporation, Series E, 7.500% 29,885,730
1,279,845 Developers Diversified Realty Corporation, Series H, 7.375% 31,586,575
104,100 Developers Diversified Realty Corporation, Series G, 8.000% 2,711,805
21,100 Duke Realty Corporation, Series K, 6.500% 508,510
98,000 Duke-Weeks Reality Corporation, 6.625% 2,364,250
25,000 Duke-Weeks Realty Corporation, Series B, 7.990% 1,363,283
32
MARKET
SHARES DESCRIPTION(1) VALUE
------------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE (continued)
5,400 Duke-Weeks Realty Corporation, Series I, 8.450% $ 142,992
137,400 Equity Office Properties Trust, Series G, 7.750% 3,577,896
3,200 Equity Residential Properties Trust, Series C, 9.125% 87,520
15,400 Equity Residential Properties Trust, Series D, 8.600% 425,040
467,489 Equity Residential Properties Trust, Series N, 6.480% 11,126,238
11,600 First Industrial Realty Trust, Inc., Series C, 8.625% 310,880
115,300 Gables Residential Trust, Series D, 7.500% 3,032,390
423,729 HRPT Properties Trust, Series A, 9.875% 11,279,666
458,600 HRPT Properties Trust, Series B, 8.750% 12,185,002
96,400 New Plan Excel Realty Trust, Series E, 7.625% 2,486,156
3,997 Prologis Trust, Series C, 8.540% 237,447
96,075 Prologis Trust, Series G, 6.750% 2,325,015
92,000 PS Business Parks Inc., 7.000% 2,152,800
6,000 Public Storage Inc., Series M, 8.750% 151,380
31,000 Public Storage Inc., Series Q, 8.600% 820,570
147,450 Public Storage Inc., Series R, 8.000% 3,864,665
50,060 Public Storage Inc., Series S, 7.875% 1,311,071
42,000 Public Storage Inc., Series T, 7.625% 1,085,280
173,800 Public Storage Inc., Series U, 7.625% 4,515,324
31,500 Public Storage Inc., Series V, 7.500% 825,300
166,100 Regency Centers Corporation, 7.450% 4,277,075
20,500 Simon Property Group, Inc., Series F, 8.750% 553,500
15,100 Simon Property Group, Inc., Series G, 7.890% 799,092
6,300 Vornado Realty Trust, Series C, 8.500% 161,910
1,987,734 Wachovia Preferred Funding Corporation, 7.250% 53,092,375
------------------------------------------------------------------------------------------------------------------------------------
SPECIALTY RETAIL - 0.0%
26,400 Sherwin Williams Company, Series III, 7.250% (CORTS) 675,312
------------------------------------------------------------------------------------------------------------------------------------
WIRELESS TELECOMMUNICATION SERVICES - 0.6%
28,000 AT&T Wireless Services Equity, Series 2002-B, 9.250% (SATURNS) 786,240
111,100 Telephone and Data Systems Inc., 7.600% 2,901,932
48,900 United States Cellular Corporation, 8.750% 1,352,085
240,000 United States Cellular Corporation, 7.500% 6,129,600
47,300 Verizon Communications, 7.375% (CORTS) 1,222,232
------------------------------------------------------------------------------------------------------------------------------------
Total $25 Par (or similar) Securities (cost $945,830,658) 930,161,606
--------------------------------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED SECURITIES - 20.2% (13.8% OF TOTAL INVESTMENT)
AEROSPACE & DEFENSE - 0.4%
77,800 Northrop Grumman Corporation, 7.250% 8,175,224
------------------------------------------------------------------------------------------------------------------------------------
AUTOMOBILES - 2.2%
278,685 Ford Motor Company Capital Trust II, 6.500% 14,895,713
1,046,200 General Motors Corporation, 6.250% 29,419,144
------------------------------------------------------------------------------------------------------------------------------------
CHEMICALS - 0.3%
60,000 IMC Global Inc., 7.500% 5,715,900
33
Nuveen Preferred and Convertible Income Fund 2 (JQC) (continued)
Portfolio of INVESTMENTS July 31, 2004
MARKET
SHARES DESCRIPTION(1) VALUE
------------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL BANKS - 1.9%
162,000 Affiliated Managers Group Inc., 6.000% $ 3,751,920
273,600 National Australia Bank Limited, 7.875% 9,004,176
45,600 Provident Financial Group Incorporated, 9.000% 1,661,208
217,375 Sovereign Capital Trust IV, Convertible Security, 4.375% 10,434,000
29,725 State Street Corporation, 6.750% 6,013,962
157,500 Washington Mutual Inc. Unit 1 Trust, 5.375% 8,444,835
------------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL SERVICES & SUPPLIES - 0.2%
100,500 Cendant Corporation, 7.750% 4,959,675
------------------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS EQUIPMENT - 1.3%
9,200 Lucent Technologies Capital Trust I, 7.750% 10,090,652
200,100 Motorola Inc., 7.000% 9,190,593
105 Nortel Networks Corp, 7.000% 6,908,596
------------------------------------------------------------------------------------------------------------------------------------
CONSTRUCTION MATERIALS - 0.5%
216,700 TXI Capital Trust I, 6.500% 10,271,580
------------------------------------------------------------------------------------------------------------------------------------
CONSUMER FINANCE - 0.1%
45,000 Capital One Financial Corporation, 6.250% 2,313,900
------------------------------------------------------------------------------------------------------------------------------------
CONTAINERS & PACKAGING - 0.4%
149,000 Temple Inland Inc., 7.500% 8,655,410
------------------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES - 0.9%
281,600 Citigroup Global Markets, 2.000% 10,801,050
309,000 Gabelli Asset Management Inc., 6.950% 7,382,010
------------------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 0.6%
245,300 Alltel Corporation, 7.750% 12,289,530
------------------------------------------------------------------------------------------------------------------------------------
ELECTRIC UTILITIES - 2.3%
260,000 Centerpoint Energy Inc., 2.000% 8,373,820
173,000 Cinergy Corporation, 9.500% 10,392,110
197,500 Dominion Resources Inc., 8.750% 10,576,125
154,500 FPL Group Inc., 8.000% 8,659,725
151,300 Public Service Enterprise Group, 10.250% 8,412,280
------------------------------------------------------------------------------------------------------------------------------------
ELECTRONIC EQUIPMENT & INSTRUMENTS - 0.7%
60,775 General Cable Corporation, 144A, 5.750% 3,790,841
182,200 Pioneer-Standard Financial Trust, 6.750% 9,542,725
------------------------------------------------------------------------------------------------------------------------------------
FOOD & STAPLES RETAILING - 0.2%
137,025 Albertsons Inc., 7.250% 3,542,096
------------------------------------------------------------------------------------------------------------------------------------
GAS UTILITIES - 0.5%
320,750 Sempra Energy, 8.500% 9,782,875
------------------------------------------------------------------------------------------------------------------------------------
HEALTHCARE EQUIPMENT & SUPPLIES - 0.6%
244,000 Baxter International Inc., 7.000% 12,553,800
------------------------------------------------------------------------------------------------------------------------------------
HEALTHCARE PROVIDERS & SERVICES - 0.4%
86,500 Anthem Inc., 6.000% 8,274,590
34
MARKET
SHARES DESCRIPTION(1) VALUE
------------------------------------------------------------------------------------------------------------------------------------
HOTELS, RESTAURANTS & LEISURE - 0.4%
157,000 Host Marriott Financial Trust, 6.750% $ 8,046,250
------------------------------------------------------------------------------------------------------------------------------------
HOUSEHOLD DURABLES - 0.4%
187,325 Newell Financial Trust I, 5.250% 8,312,547
------------------------------------------------------------------------------------------------------------------------------------
INSURANCE - 2.6%
147,000 Chubb Corporation, 7.000% 4,041,030
100,000 Genworth Financial Inc., 0.000% 2,824,000
150,000 PartnerRe Limited, 8.000% 7,605,000
140,000 PMI Group Inc., 5.875% 3,689,000
194,100 Prudential Financial Capital Trust I, 6.750% 13,614,174
167,000 Reinsurance Group of America Inc., 5.750% 9,519,000
100,000 UnumProvident Corporation, 8.250% 3,355,000
340,650 XL Capital Limited, 6.500% 8,148,348
------------------------------------------------------------------------------------------------------------------------------------
MARINE - 0.5%
222,100 Teekay Shipping Corporation, 7.250% 10,376,512
------------------------------------------------------------------------------------------------------------------------------------
MEDIA - 1.0%
374,000 Cablevision Systems Corporation, Trust I, 6.500% 6,735,740
137,000 Emmis Communications Corporation, Series A, 6.250% 5,971,145
70,350 Interpublic Group, Series A, 5.375% 3,404,237
97,500 Sinclair Broadcast Group Inc., Series D, 6.000% 4,060,875
------------------------------------------------------------------------------------------------------------------------------------
METALS & MINING - 0.2%
24,300 Phelps Dodge Corporation, 0.000% 3,541,847
------------------------------------------------------------------------------------------------------------------------------------
OIL & GAS - 1.0%
50,000 Amerada Hess Corporation, 7.000% 3,775,000
8,955 Chesapeake Energy Corporation, 144A, 4.125% 9,940,050
125,000 Kerr-McGee Corporation, 5.500% 7,366,250
------------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE - 0.6%
225,250 Equity Office Properties Trust, Series B, 5.250% 11,273,763
------------------------------------------------------------------------------------------------------------------------------------
Total Convertible Preferred Securities (cost $385,847,815) 409,879,833
--------------------------------------------------------------------------------------------------------------------
CAPITAL PREFERRED - HYBRID SECURITIES - 1.5% (1.0% OF TOTAL INVESTMENTS)
DIVERSIFIED TELECOMMUNICATION SERVICES - 1.5%
24,080 Centaur Funding Corporation, 144A, Series B, 9.080%, 4/21/20 30,401,000
------------------------------------------------------------------------------------------------------------------------------------
Total Capital Preferred - Hybrid Securities (cost $28,808,130) 30,401,000
--------------------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT (000)/ MARKET
SHARES DESCRIPTION VALUE
------------------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE BONDS - 26.4% (18.0% OF TOTAL INVESTMENTS)
AEROSPACE & DEFENSE - 0.6%
$ 4,550 AAR Corporation, 144A, 2.875%, 2/01/24 3,947,125
4,900 EDO Corporation, Convertible Subordinate Note, 5.250%, 4/15/07 5,114,375
3,250 Mercury Computer Systems Inc., 144A, 2.000%, 5/01/24 3,400,313
35
Nuveen Preferred and Convertible Income Fund 2 (JQC) (continued)
Portfolio of INVESTMENTS July 31, 2004
PRINCIPAL
AMOUNT (000)/ MARKET
SHARES DESCRIPTION(1) VALUE
------------------------------------------------------------------------------------------------------------------------------------
AIRLINES - 0.8%
$ 8,450 American Airlines Corporation, 144A, 4.250%, 9/23/23 $ 6,295,250
8,050 Continental Airlines Inc., 4.500%, 2/01/07 5,645,063
2,250 Northwest Airlines Corporation, Convertible Notes, 144A, 6.625%, 5/15/23 1,788,750
3,200 Northwest Airlines Corporation, 6.625%, 5/15/23 2,544,000
------------------------------------------------------------------------------------------------------------------------------------
AUTO COMPONENTS - 0.2%
6,440 Lear Corporation, 0.000%, 2/20/22 3,228,050
------------------------------------------------------------------------------------------------------------------------------------
AUTOMOBILES - 0.7%
3,595 Fleetwood Enterprises Inc., 144A, 5.000%, 12/15/23 5,100,406
8,700 Sonic Automotive Inc, Convertible Senior Subordinated Notes, 5.250%, 5/07/09 8,602,125
------------------------------------------------------------------------------------------------------------------------------------
BIOTECHNOLOGY - 1.3%
6,775 Chiron Corporation, 2.750%, 6/30/34 7,113,750
3,790 Imclone Systems Inc., 144A, 1.375%, 5/15/24 3,761,575
5,975 Ivax Corporation, Convertible Note, 144A, 1.500%, 3/01/24 6,199,063
8,500 Ivax Corporation, Convertible Senior Subordinated Notes, 4.500%, 5/15/08 8,446,875
------------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL SERVICES & SUPPLIES - 0.5%
8,900 Bowne and Company Incorporated, 144A, 5.000%, 10/01/33 9,778,875
------------------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS EQUIPMENT - 1.6%
3,700 Agere Systems Inc., 6.500%, 12/15/09 3,732,375
9,200 Ciena Corporation, 3.750%, 2/01/08 8,073,000
11,500 Liberty Media Corporation, Senior Debentures Exchangeable for Motorola, 3.500%, 1/15/31 9,990,625
3,775 Lucent Technologies Inc., 2.750%, 6/15/23 4,596,063
4,295 Skyworks Solutions Inc., 4.750%, 11/15/07 5,046,625
------------------------------------------------------------------------------------------------------------------------------------
COMPUTERS & PERIPHERALS - 0.4%
15,565 Hewlett-Packard Company, 0.000%, 10/14/17 9,047,156
------------------------------------------------------------------------------------------------------------------------------------
CONSTRUCTION & ENGINEERING - 0.4%
8,500 Quanta Services Incorporated, 4.000%, 7/01/07 7,841,250
------------------------------------------------------------------------------------------------------------------------------------
CONSUMER FINANCE - 0.4%
8,000 Providian Financial Corporation, Convertible Senior Notes, 3.250%, 8/15/05 7,880,000
------------------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES - 0.7%
2,650 JMH Finance Limited, 4.750%, 9/06/07 2,798,726
6,550 Capitalsource Inc., 144A, 3.500%, 7/15/34 6,353,500
4,075 Leucadia National Corporation, 144A, 3.750%, 4/15/14 4,217,625
------------------------------------------------------------------------------------------------------------------------------------
ELECTRONIC EQUIPMENT & INSTRUMENTS - 1.1%
21,000 Anixter International Inc., 0.000%, 6/28/20 7,428,750
12,750 Arrow Electronics Inc., 0.000%, 2/21/21 6,805,313
8,195 Fisher Scientific International Inc., 3.250%, 3/01/24 8,778,894
------------------------------------------------------------------------------------------------------------------------------------
ENERGY EQUIPMENT & SERVICES - 1.1%
4,500 Maverick Tube Corporation, Convertible Notes, 144A, 4.000%, 6/15/33 5,934,375
4,000 Maverick Tube Corporation, 4.000%, 6/15/33 5,275,000
9,250 Schlumberger Limited, 2.125%, 6/01/23 9,839,688
1,210 Willbros Group Inc., 144A, 2.750%, 3/15/24 1,178,238
36
PRINCIPAL
AMOUNT (000)/ MARKET
SHARES DESCRIPTION(1) VALUE
------------------------------------------------------------------------------------------------------------------------------------
HEALTHCARE PROVIDERS & SERVICES - 0.7%
$ 8,700 Lifepoint Hospitals Inc, Convertible Subordinate Notes, 4.500%, 6/01/09 $ 8,776,125
5,400 Province Healthcare Inc, Convertible Subordinated Notes, 4.250%, 10/10/08 5,265,000
------------------------------------------------------------------------------------------------------------------------------------
HOTELS, RESTAURANTS & LEISURE - 2.1%
10,775 Carnival Corporation. 2.000%, 4/15/21 14,007,500
8,025 Fairmont Hotels and Resorts Inc., Convertible Note, 144A, 3.750%, 12/01/23 8,205,563
3,425 Hilton Hotels Corporation, 3.375%, 4/15/23 3,686,156
7,125 Kerzner International Limited, 144A, 2.375%, 4/15/24 7,205,156
16,000 Royal Caribbean Cruises Limited, Senior Convertible Liquid Yield, 0.000%, 2/02/21 8,560,000
------------------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL CONGLOMERATES - 1.1%
7,000 Tyco International Group Limited, Convertible Notes, 144A, 3.125%, 1/15/23 10,745,000
7,200 Tyco International Group SA, 3.125%, 1/15/23 11,052,000
------------------------------------------------------------------------------------------------------------------------------------
IT SERVICES - 0.7%
7,100 Digital River Inc., 144A, 1.250%, 1/01/24 6,931,375
7,000 Electronic Data Systems, Convertible Senior Notes, 144A, 3.875%, 7/15/23 6,702,500
------------------------------------------------------------------------------------------------------------------------------------
LEISURE EQUIPMENT & PRODUCTS - 0.5%
7,000 Hasbro Inc., 2.750%, 12/01/21 7,525,000
1,165 K2 Corporation, Convertible Notes, 144A, 5.000%, 6/15/10 1,580,031
------------------------------------------------------------------------------------------------------------------------------------
MEDIA - 5.2%
6,250 Citadel Broadcasting Corporation, Convertible Subordinate Note, 144A, 1.875%, 2/15/11 5,382,813
760 Comcast Corporation, 2.000%, 10/15/29 30,213,800
9,100 Interpublic Group Companies, Convertible Subordinated Notes, 1.870%, 6/01/06 8,565,375
6,340 Lamar Advertising Company, Convertible Notes, 2.875%, 12/31/10 6,680,775
26,800 Liberty Media Corporation, Senior Debentures, Exchangeable for PCS Common, 4.000%, 11/15/29 18,994,500
15,750 Liberty Media Corporation, Senior Debentures, Exchangeable for Class B, 3.250%, 3/15/31 13,997,813
6,990 Liberty Media Corporation, 0.750%, 3/30/23 7,697,738
4,200 Lions Gate Entertainment Corporation 144A, Convertible Bond, 4.875%, 12/15/10 6,651,750
8,050 Walt Disney Company, Convertible Senior Notes, 2.125%, 4/15/23 8,351,875
------------------------------------------------------------------------------------------------------------------------------------
OFFICE ELECTRONICS - 0.4%
8,200 IOS Capital LLC, Convertible Subordinate Debentures, 144A, 5.000%, 5/01/07 8,538,250
------------------------------------------------------------------------------------------------------------------------------------
OIL & GAS - 0.7%
8,600 Kerr-McGee Corporation, 5.250%, 2/15/10 9,040,750
4,170 McMoran Exploration Corporation, 144A, Notes, 6.000%, 7/02/08 5,561,738
------------------------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS - 1.4%
2,400 Alexion Pharmaceuticals Inc., 5.750%, 3/15/07 2,388,000
1,755 Atherogenics Inc, 144A, 4.500%, 9/01/08 2,156,456
3,075 CV Therapeutics Inc, 144A, 2.750%, 5/16/12 3,071,156
8,000 Teca Pharmaceutical Finance, Series B, 0.250%, 2/01/24 7,980,000
4,350 Valeant Pharmaceuticals International, 144A, 3.000%, 8/16/10 3,974,813
2,545 Valeant Pharmaceuticals International, 144A, 4.000%, 11/15/13 2,319,131
8,500 Wyeth, 144A, 1.360%, 1/15/24 8,351,250
37
Nuveen Preferred and Convertible Income Fund 2 (JQC) (continued)
Portfolio of INVESTMENTS July 31, 2004
PRINCIPAL
AMOUNT (000)/ MARKET
SHARES DESCRIPTION(1) VALUE
------------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE - 0.9%
$ 3,625 Avatar Holdings Inc., 144A, 4.500%, 4/01/24 $ 3,783,594
10,800 EOP Operating LP, Convertible Notes, 7.250%, 11/15/08 11,016,000
4,510 Trizec Hahn Corporation, 3.000%, 1/29/21 3,207,738
------------------------------------------------------------------------------------------------------------------------------------
SEMICONDUCTORS & EQUIPMENT - 0.3%
5,500 ASM Lithography Holding NV, 5.750%, 10/15/06 6,173,750
------------------------------------------------------------------------------------------------------------------------------------
SOFTWARE - 0.7%
4,200 Computer Associates International Inc., 5.000%, 3/15/07 4,914,000
7,100 Mentor Graphics Corporation, Convertible Subordinate Notes, 6.875%, 6/15/07 7,277,500
3,025 Novell Inc., 144A, 0.500%, 7/15/24 2,835,938
------------------------------------------------------------------------------------------------------------------------------------
SPECIALTY RETAIL - 1.1%
7,820 Charming Shoppes Inc., 4.750%, 6/01/12 8,386,950
11,450 Lowes Companies Inc., 0.000%, 2/16/21 9,317,438
5,900 TJX Companies Inc., 0.000%, 2/13/21 5,044,500
------------------------------------------------------------------------------------------------------------------------------------
TEXTILES & APPAREL - 0.3%
6,025 Reebok International Ltd, 144A, 2.000%, 5/01/24 5,904,500
------------------------------------------------------------------------------------------------------------------------------------
WIRELESS TELECOMMUNICATION SERVICES - 0.5%
2,975 NII Holdings Inc., 144A, 3.500%, 9/15/33 4,823,219
4,100 NII Holdings Inc., 144A, 2.875%, 2/01/34 4,310,125
------------------------------------------------------------------------------------------------------------------------------------
Total Convertible Bonds (cost $509,842,284) 532,937,439
--------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS - 16.7% (11.4% OF TOTAL INVESTMENTS)
AUTO COMPONENTS - 0.6%
6,000 Asbury Automotive Group Inc., 9.000%, 6/15/12 6,135,000
2,000 Keystone Automotive Operations Inc., 9.750%, 11/01/13 2,150,000
4,000 Tenneco Auto, Inc., 10.250%, 7/15/13 4,580,000
------------------------------------------------------------------------------------------------------------------------------------
AUTOMOBILES - 2.3%
7,570 Ford Motor Company, Debentures, 7.700%, 5/15/97 6,933,870
17,095 Ford Motor Company, Debentures, 9.980%, 2/15/47 20,270,123
2,000 Ford Motor Company, 8.900%, 1/15/32 2,171,506
15,630 General Motors Corporation, Senior Debentures, 8.375%, 7/15/33 16,386,039
------------------------------------------------------------------------------------------------------------------------------------
CHEMICALS - 0.3%
6,500 OM Group Inc., 9.250%, 12/15/11 6,678,750
------------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL SERVICES & SUPPLIES - 0.4%
4,880 Allied Waste North America, Series B, 10.000%, 8/01/09 5,172,800
2,000 Williams Scotsman Inc., 10.000%, 8/15/08 2,180,000
------------------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS EQUIPMENT - 0.2%
3,250 Avaya Inc., 11.125%, 4/01/09 3,810,625
------------------------------------------------------------------------------------------------------------------------------------
CONSTRUCTION MATERIALS - 0.4%
4,500 K. Hovnanian Enterprises Inc, Senior Subordinate Notes, 8.875%, 4/01/12 4,938,750
2,000 Texas Industries Inc., 10.250%, 6/15/11 2,290,000
38
PRINCIPAL
AMOUNT (000)/ MARKET
SHARES DESCRIPTION(1) VALUE
------------------------------------------------------------------------------------------------------------------------------------
CONSUMER FINANCE - 0.1%
$ 1,500 Northern Rock plc, Tranche SR 21, 144A, 5.600%, 4/30/49 $ 1,475,601
------------------------------------------------------------------------------------------------------------------------------------
CONTAINERS & PACKAGING - 0.5%
2,000 Berry Plastics Corporation, 10.750%, 7/15/12 2,240,000
3,000 Owens-Brockway Glass Containers, Guaranteed Senior Note, 8.250%, 5/15/13 3,157,500
3,000 Owens-Illinois Inc., 7.500%, 5/15/10 3,060,000
2,210 United States Can Corporation, Series B, 10.875%, 7/15/10 2,276,300
------------------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES - 0.2%
3,450 MDP Acquisitions plc, Senior Notes, 9.625%, 10/01/12 3,881,250
------------------------------------------------------------------------------------------------------------------------------------
ELECTRONIC EQUIPMENT & INSTRUMENTS - 0.1%
1,500 Fisher Scientific International Inc., 8.000%, 9/01/13 1,648,125
------------------------------------------------------------------------------------------------------------------------------------
FOOD & STAPLES RETAILING - 0.2%
3,000 Stater Brothers Holdings Inc., 144A, 8.125%, 6/15/12 3,082,500
------------------------------------------------------------------------------------------------------------------------------------
FOOD PRODUCTS - 1.0%
7,610 Del Monte Corporation, 8.625%, 12/15/12 8,332,950
7,000 Dole Foods Company, 7.875%, 7/15/13 7,385,000
1,435 Dole Foods Company, 8.625%, 5/01/09 1,513,925
3,250 Seminis Vegetable Seeds Inc., 10.250%, 10/01/13 3,575,000
------------------------------------------------------------------------------------------------------------------------------------
GAS UTILITIES - 0.0%
1,000 Suburban Propane Partners LP, 6.875%, 12/15/13 995,000
------------------------------------------------------------------------------------------------------------------------------------
HEALTHCARE PROVIDERS & SERVICES - 0.2%
2,000 Service Corporation International, 7.700%, 4/15/09 2,115,000
1,000 Service Corporation International, 8.375%, 12/15/04 1,020,000
------------------------------------------------------------------------------------------------------------------------------------
HOTELS, RESTAURANTS & LEISURE - 2.3%
5,190 Aztar Corporation, 9.000%, 8/15/11 5,702,513
2,345 Boyd Gaming Corporation, 8.750%, 4/15/12 2,544,325
4,075 Boyd Gaming Corporation, 7.750%, 12/15/12 4,217,625
3,172 Dominos Inc., 8.250%, 7/01/11 3,409,900
3,500 Intrawest Corporation, Senior Notes, 10.500%, 2/01/10 3,797,500
4,100 Intrawest Corporation, 7.500%, 10/15/13 4,100,000
3,000 Las Vegas Sands Inc, Venetian Casino Resorts, LLC Mortgage Notes, 11.000%, 6/15/10 3,435,000
2,000 MGM Mirage, Inc., 6.750%, 8/01/07 2,080,000
3,500 Park Place Entertainment, 7.875%, 12/15/05 3,701,250
1,000 Park Place Entertainment, 9.375%, 2/15/07 1,098,750
1,000 Park Place Entertainment, 7.875%, 3/15/10 1,088,750
500 Penn National Gaming Inc., Series B, 11.125%, 3/01/08 548,750
4,000 PennNational Gaming Inc, Senior Subordinated Notes, 8.875%, 3/15/10 4,395,000
3,000 Pinnacle Entertainment Inc., 8.750%, 10/01/13 3,000,000
2,000 Pinnacle Entertainment Inc., 8.250%, 3/15/12 1,930,000
2,000 Tricon Golbal Restaurants Incorporated, 8.875%, 4/15/11 2,435,402
39
Nuveen Preferred and Convertible Income Fund 2 (JQC) (continued)
Portfolio of INVESTMENTS July 31, 2004
PRINCIPAL
AMOUNT (000)/ MARKET
SHARES DESCRIPTION(1) VALUE
------------------------------------------------------------------------------------------------------------------------------------
HOUSEHOLD DURABLES - 0.5%
$ 1,000 D.R. Horton, Inc., 10.500%, 4/01/05 $ 1,052,500
5,000 KB Home, 8.625%, 12/15/08 5,487,500
3,000 William Lyon Homes Inc, Unsecured Senior Note, 10.750%, 4/01/13 3,375,000
------------------------------------------------------------------------------------------------------------------------------------
INDUSTRIAL CONGLOMERATES - 0.2%
4,000 Jacuzzi Brands Inc., 9.625%, 7/01/10 4,340,000
------------------------------------------------------------------------------------------------------------------------------------
INTERNET & CATALOG RETAIL - 0.1%
2,000 R H Donnelley Finance Corp 1, 10.875%, 12/15/12 2,350,000
------------------------------------------------------------------------------------------------------------------------------------
IT SERVICES - 0.2%
4,000 Global Cash Access LLC, Senior Subordinate Note, 144A, 8.750%, 3/15/12 4,210,000
------------------------------------------------------------------------------------------------------------------------------------
MACHINERY - 0.3%
3,000 Terex Corporation, Senior Subordinated Notes, 10.375%, 4/01/11 3,367,500
3,000 Terex Corporation, Senior Subordinated Notes, 9.250%, 7/15/11 3,352,500
------------------------------------------------------------------------------------------------------------------------------------
MEDIA - 3.9%
6,900 Allbritton Communications Company, Series B, 7.750%, 12/15/12 6,848,250
2,000 AMC Entertainment Inc., 144A, 8.000%, 3/01/14 1,855,000
2,345 American Media Operations Inc., 8.875%, 1/15/11 2,339,138
6,000 American Media Operations Inc., Series B, 10.250%, 5/01/09 6,300,000
5,000 Cablevision Systems Corporation, Series B, 8.125%, 8/15/09 5,225,000
3,000 Cablevision Systems Corporation, 7.250%, 7/15/08 3,060,000
2,000 Cablevision Systems Corporation, 8.125%, 7/15/09 2,090,000
1,000 Charter Communications Operating LLC., 144A, 8.000%, 4/30/12 970,000
6,000 Cinemark USA Inc., 9.000%, 2/01/13 6,615,000
1,000 Dex Media West LLC, 8.500%, 8/15/10 1,105,000
2,250 Dex Media West LLC, 9.875%, 8/15/13 2,548,125
3,000 Lowes Cineplex Entertainment Corporation, 144A, 9.000%, 8/01/14 2,970,000
3,855 Mail-Well I Corporation, Senior Unsecured Note, 144A, 9.625%, 3/15/12 4,163,400
4,000 Media News Group Inc., 6.375%, 4/01/14 3,740,000
8,000 Primedia Inc, Senior Notes, 8.875%, 5/15/11 7,900,000
2,000 Sun Media Corporation, 7.625%, 2/15/13 2,080,000
10,000 Vertis Inc., 9.750%, 4/01/09 10,975,000
5,500 Young Broadcasting Inc., Senior Subordinate Notes, 10.000%, 3/01/11 5,582,500
1,000 Young Broadcasting Inc., 8.500%, 12/15/08 1,052,500
2,000 Young Broadcasting Inc., 8.750%, 1/15/14 1,910,000
------------------------------------------------------------------------------------------------------------------------------------
METALS & MINING - 0.1%
1,682 United States Steel Corporation, 9.750%, 5/15/10 1,879,635
------------------------------------------------------------------------------------------------------------------------------------
MULTILINE RETAIL - 0.2%
1,000 Saks Inc., Note, 9.875%, 10/01/11 1,160,000
2,000 Saks Inc., Notes, 7.500%, 12/01/10 2,085,000
------------------------------------------------------------------------------------------------------------------------------------
OIL & GAS - 0.4%
2,563 Chesapeake Energy Corporation, 9.000%, 8/15/12 2,925,024
2,000 Premcor Refining Group Inc., 7.500%, 6/15/15 2,120,000
40
PRINCIPAL
AMOUNT (000)/ MARKET
SHARES DESCRIPTION(1) VALUE
------------------------------------------------------------------------------------------------------------------------------------
OIL & GAS (continued)
$ 1,000 Tesoro Petroleum Corporation, Senior Subordinate Notes, Series B, 9.625%, 11/01/08 $ 1,105,000
1,000 Tesoro Petroleum Corporation, 8.000%, 4/15/08 1,085,000
------------------------------------------------------------------------------------------------------------------------------------
PAPER & FOREST PRODUCTS - 0.4%
2,000 Georgia Pacific Corporation, Debentures, 7.700%, 6/15/15 2,170,000
5,000 Georgia Pacific Corporation, Notes, 8.125%, 5/15/11 5,637,500
------------------------------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS - 0.2%
3,000 Quintiles Transitional Corporation, 10.000%, 10/01/13 3,097,500
------------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE - 0.2%
4,000 Universal City Development Partners, 11.750%, 4/01/10 4,660,000
------------------------------------------------------------------------------------------------------------------------------------
ROAD & RAIL - 0.2%
3,000 Laidlaw International Inc., 10.750%, 6/15/11 3,337,500
------------------------------------------------------------------------------------------------------------------------------------
SEMICONDUCTORS & EQUIPMENT - 0.1%
3,500 Amkor Technology Inc., 7.750%, 5/15/13 3,010,000
------------------------------------------------------------------------------------------------------------------------------------
SPECIALTY RETAIL - 0.7%
4,000 Saks Inc., 7.375%, 2/15/19 3,860,000
2,000 United Rentals of North America Inc., 7.750%, 11/15/13 1,945,000
8,000 Warnaco Inc., Senior Notes, 8.875%, 6/15/13 8,740,000
------------------------------------------------------------------------------------------------------------------------------------
WIRELESS TELECOMMUNICATION SERVICES - 0.2%
4,000 Nextel Communications Inc., 7.375%, 8/01/15 4,220,000
------------------------------------------------------------------------------------------------------------------------------------
Total Corporate Bonds (cost $328,927,475) 336,841,451
--------------------------------------------------------------------------------------------------------------------
CAPITAL PREFERRED SECURITIES - 27.0% (18.4% OF TOTAL INVESTMENTS)
COMMERCIAL BANKS - 20.3%
2,000 AB Svensk Exportkredit, 6.375%, 10/27/49 1,958,174
20,000 Abbey National Capital Trust I, 8.963%, 12/30/49 25,646,680
45,300 AgFirst Farm Credit Bank, 7.300%, 12/15/53 45,575,741
12,840 Bank One Capital III, 8.750%, 9/01/30 16,681,137
1,974 BankAmerica Capital II, Series 2, 8.000%, 12/15/26 2,192,798
2,600 BankAmerica Institutional Capital Trust, 7.700%, 12/31/26 2,819,604
5,000 BankAmerica Institutional Trust, Series B, 8.070%, 12/31/26 5,581,855
2,000 BankBoston Capital Trust I, Series B, 8.250%, 12/15/26 2,255,608
500 Barnett Capital I, 8.060%, 12/01/26 554,488
6,273 BT Capital Trust, Series B1, 7.900%, 1/15/27 6,846,729
2,000 BT Institutional Capital Trust B, 144A, 7.750%, 12/01/26 2,144,224
15,000 BT Institutional Capital Trust A, 144A, 8.090%, 12/01/26 16,434,030
21,000 CBA Capital Trust I, 144A, 5.805%, 12/30/49 20,881,413
900 Chase Capital Trust I, Series A, 7.670%, 12/01/26 966,402
1,000 Citigroup Capital III, 7.625%, 12/01/36 1,154,071
3,000 Compass Trust I, Series A, 8.230%, 1/15/27 3,270,420
5,000 Farm Credit Bank of Texas, 7.561%, 11/05/49 5,068,170
2,350 FBS Capital Trust I, 8.090%, 11/15/26 2,627,927
4,315 First Chicago NBD Institutional Capital Trust, Series B, 7.750%, 12/01/26 4,631,225
41
Nuveen Preferred and Convertible Income Fund 2 (JQC) (continued)
Portfolio of INVESTMENTS July 31, 2004
PRINCIPAL
AMOUNT (000)/ MARKET
SHARES DESCRIPTION(1) VALUE
------------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL BANKS (continued)
$ 6,000 First Chicago NBD Institutional Capital, 7.950%, 12/01/26 $ 6,544,680
5,750 First Empire Capital Trust I, 8.234%, 2/01/27 6,338,950
11,550 First Empire Capital Trust II, 8.277%, 6/01/27 12,890,031
4,250 First Midwest Bancorp Inc., 6.950%, 12/01/33 4,313,691
3,500 First Union Capital Trust II, Series A, 7.950%, 11/15/29 4,214,921
2,000 First Union Institutional Capital Securities I, 8.040%, 12/01/26 2,223,154
500 First Union Institutional Capital II, 7.850%, 1/01/27 544,080
8,300 Goldman Sachs Group Inc., 6.345%, 2/15/34 7,978,118
3,365 Great Western Financial Trust II, Series A, 8.206%, 2/01/27 3,687,454
16,000 HSBC Capital Funding LP, Debt, 10.176%, 6/30/50 22,715,744
12,838 HSBC Capital Funding LP, 144A, 9.547%, 12/31/49 15,807,930
2,150 JPM Capital Trust I, 7.540%, 1/15/27 2,298,109
3,000 JPM Capital Trust II, 7.950%, 2/01/27 3,309,573
19,105 KBC Bank Fund Trust III, 144A, 9.860%, 11/02/49 23,453,470
15,000 KeyCorp Institutional Capital Trust A, 7.826%, 12/01/26 16,155,450
19,335 Mellon Capital Trust I, Series A, 7.720%, 12/01/26 20,985,030
1,000 Nordbanken AB, 144A, 8.950%, 11/29/49 1,190,390
18,500 North Fork Capital Trust II, 8.000%, 12/15/27 20,772,429
500 PNC Institutional Capital Securities, 7.950%, 12/15/26 536,648
2,000 Reliance Capital Trust I, Series B, 8.170%, 5/01/28 2,211,504
1,202 Republic New York Capital II, Capital Securities, 7.530%, 12/04/26 1,280,327
6,200 Royal Bank of Scotland Group plc, 9.118%, 3/31/49 7,506,129
2,250 Royal Bank of Scotland Group plc, 7.648%, 8/31/49 2,567,745
2,000 SocGen Real Estate Company LLC, 144A, 7.640%, 12/29/49 2,216,932
4,472 St. George Funding Company LLC, 8.485%, 6/30/47 5,132,573
9,000 State Street Institutional Capital Trust, 144A, 8.035%, 3/15/27 10,015,821
23,490 Unicredito Italiano Capital Trust, 144A, 9.200%, 10/05/49 28,647,018
3,800 Union Planters Capital Trust A, 8.200%, 12/15/26 4,227,827
2,000 Zions Institutional Capital Trust, Series A, 8.536%, 12/15/26 2,248,642
500 Countrywide Capital Trust I, 8.000%, 12/15/26 532,486
------------------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES - 0.2%
4,000 Keycorp Capital III, 7.750%, 7/15/29 4,542,712
------------------------------------------------------------------------------------------------------------------------------------
GAS UTILITIES - 1.0%
18,855 KN Capital Trust III, 7.630%, 4/15/28 20,035,078
------------------------------------------------------------------------------------------------------------------------------------
INSURANCE - 5.5%
10,000 American General Capital II, 8.500%, 7/01/30 12,993,160
4,980 American General Institutional Capital, 8.125%, 3/15/46 6,189,234
612 Berkeley Capital Trust, 8.197%, 12/15/45 659,428
10,000 ING Capital Funding Trust III, 8.439%, 12/30/49 11,681,870
16,260 Safeco Capital Trust I, Capital Securities, 8.072%, 7/15/37 18,014,438
13,390 Sun Life Canada Capital Trust, Capital Securities, 8.526%, 5/06/47 14,955,653
42
PRINCIPAL
AMOUNT (000)/ MARKET
SHARES DESCRIPTION(1) VALUE
------------------------------------------------------------------------------------------------------------------------------------
INSURANCE (continued)
$ 23,513 Zurich Capital Trust I, 8.376%, 6/01/37 $26,229,596
20,000 Mangrove Bay, 144A, Class 3, 6.102%, 7/15/33 19,946,720
------------------------------------------------------------------------------------------------------------------------------------
Total Capital Preferred Securities (cost $558,262,955) 545,085,441
--------------------------------------------------------------------------------------------------------------------
CAPITAL PREFERRED EURO-MARKET LISTED SECURITIES - 7.8% (5.3% OF TOTAL INVESTMENTS)
COMMERCIAL BANKS - 6.6%
15,000 BNP Paribas Capital Trust, 7.200%, 12/31/49 15,514,349
27,500 CA Preferred Funding Trust, 7.000%, 1/30/49 27,741,230
1,500 CA Preferred Fund Trust II, 7.000%, 10/30/49 1,517,373
53,400 HBOS Capital Funding LP, Notes, 6.850%, 3/01/49 53,624,387
17,000 Lloyds TSB Bank plc, Subordinate Note, 6.900%, 11/22/49 17,335,393
18,000 RBS Capital Trust B, 6.800%, 12/31/49 18,112,446
------------------------------------------------------------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES - 1.2%
23,600 Old Mutual Capital Funding, Notes, 8.000%, 6/22/53 23,539,490
------------------------------------------------------------------------------------------------------------------------------------
Total Capital Preferred Euro-Market Listed Securities (cost $159,640,244) 157,384,668
--------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS - 1.2% (0.8% OF TOTAL INVESTMENTS)
23,463 State Street Bank, 1.250%, dated 7/30/04, due 8/02/04, repurchase price $23,465,022, 23,462,578
collateralized by $20,880,000 U.S. Treasury Bonds, 9.375%, due 2/15/06, value $23,933,700
------------------------------------------------------------------------------------------------------------------------------------
Total Repurchase Agreements (cost $23,462,578) 23,462,578
------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST $2,940,622,139) - 146.7% 2,966,154,016
====================================================================================================================
MARKET
SHARES DESCRIPTION(1) VALUE
------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS SOLD SHORT - (3.1)%
AEROSPACE & DEFENSE - (0.2)%
(72,500) Northrop Gruman Corporation (3,813,500)
------------------------------------------------------------------------------------------------------------------------------------
AUTOMOBILES - (0.3)%
(360,000) Ford Motor Company (5,299,200)
------------------------------------------------------------------------------------------------------------------------------------
CHEMICALS - (0.3)%
(372,632) IMC Global Inc. (5,086,427)
------------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL BANKS - (0.2)%
(52,500) Affiliated Managers Group Inc. (2,410,275)
(40,617) National City Corporation (1,482,521)
------------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL SERVICES & SUPPLIES - (0.0)%
(33,000) Cendant Corporation (755,040)
------------------------------------------------------------------------------------------------------------------------------------
COMMUNICATIONS EQUIPMENT - (0.2%)
(1,375,000) Lucent Technologies Inc. (4,193,750)
------------------------------------------------------------------------------------------------------------------------------------
CONSUMER FINANCE - (0.1)%
(16,152) Capital One Financial Corporation (1,119,657)
------------------------------------------------------------------------------------------------------------------------------------
HEALTHCARE EQUIPMENT & SUPPLIES - (0.3)%
(267,000) Baxter International Inc. (8,028,690)
43
Nuveen Preferred and Convertible Income Fund 2 (JQC) (continued)
Portfolio of INVESTMENTS July 31, 2004
MARKET
SHARES DESCRIPTION(1) VALUE
------------------------------------------------------------------------------------------------------------------------------------
INSURANCE - (0.4)%
(37,650) Chubb Corporation $(2,589,567)
(90,200) Genworth Financial Inc. (2,051,148)
(63,300) PMI Group Inc. (2,609,859)
(170,168) UnumProvident Corporation (2,714,180)
------------------------------------------------------------------------------------------------------------------------------------
LEISURE EQUIPMENT & PRODUCTS - (0.1)%
(71,827) K2 Inc. (1,023,535)
------------------------------------------------------------------------------------------------------------------------------------
MEDIA - (0.3)%
(349,750) Cablevision Systems Corporation (6,110,133)
------------------------------------------------------------------------------------------------------------------------------------
METALS & MINING - (0.2)%
(48,012) Phelps Dodge Corporation (3,742,055)
------------------------------------------------------------------------------------------------------------------------------------
OIL & GAS - (0.5)%
(38,445) Amerada Hess Corporation (3,204,391)
(105,581) Devon Energy Corporation (7,336,822)
------------------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS SOLD SHORT (PROCEEDS $58,176,379) (63,570,750)
====================================================================================================================
OTHER ASSETS LESS OTHER LIABILITIES - 4.1% 83,674,591
====================================================================================================================
FUNDPREFERRED SHARES, AT LIQUIDATION VALUE - (47.7%) (965,000,000)
====================================================================================================================
NET ASSETS APPLICABLE TO COMMON SHARES - 100% $2,021,257,857
====================================================================================================================
(1) All percentages shown in the Portfolio of
Investments are based on net assets applicable to
Common shares unless otherwise noted.
(a) Security is eligible for the Dividends Received
Deduction.
144A 144A securities are those which are exempt from
registration under Rule 144A of the Securities Act
of 1933, as amended. These securities may only be
resold in transactions exempt from registration
which are normally those transactions with qualified
institutional buyers.
(CBTCS) Corporate Backed Trust Certificates.
(CORTS) Corporate Backed Trust Securities.
(LYONS) Liquid Yield Option Notes.
(PCARS) Public Credit and Repackaged Securities.
(PPLUS) PreferredPlus Trust.
(SATURNS) Structured Asset Trust Unit Repackaging.
See accompanying notes to financial statements.
44
Statement of
ASSETS AND LIABILITIES July 31, 2004
PREFERRED AND PREFERRED AND
CONVERTIBLE CONVERTIBLE
INCOME INCOME 2
(JPC) (JQC)
------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Investments, at market value (cost $2,128,314,221 and $2,940,622,139, respectively) $2,169,694,137 $2,966,154,016
Cash 224,451 --
Deposits with brokers for securities sold short 40,354,164 55,628,113
Interest rate swaps, at value 5,573,214 7,377,706
Receivables:
Dividends 3,604,090 4,700,802
Interest 12,077,263 19,038,901
Investments sold 9,697,471 4,337,297
Reclaims -- 69,108
Other assets 90,745 69,751
------------------------------------------------------------------------------------------------------------------------------------
Total assets 2,241,315,535 3,057,375,694
------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Securities sold short, at value (proceeds $42,106,133 and $58,176,379, respectively) 52,605,422 63,570,750
Cash overdraft -- 1,122,967
Payable for investments purchased 4,133,837 4,333,144
Accrued expenses:
Management fees 992,067 1,319,549
Other 447,650 543,757
Dividends payable:
FundPreferred shares 134,344 166,791
Securities sold short 19,221 60,879
------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 58,332,541 71,117,837
------------------------------------------------------------------------------------------------------------------------------------
FundPreferred shares, at liquidation value 708,000,000 965,000,000
------------------------------------------------------------------------------------------------------------------------------------
Net assets applicable to Common shares $1,474,982,994 $2,021,257,857
====================================================================================================================================
Common shares outstanding 100,123,177 141,007,000
====================================================================================================================================
Net asset value per Common share outstanding (net assets applicable to
Common shares, divided by Common shares outstanding) $ 14.73 $ 14.33
====================================================================================================================================
NET ASSETS APPLICABLE TO COMMON SHARES CONSIST OF:
Common shares, $.01 par value per share $ 1,001,232 $ 1,410,070
Paid-in surplus 1,416,735,377 1,996,742,989
Undistributed (Over-distribution of) net investment income (5,581,774) (6,443,674)
Accumulated net realized gain from investments 26,374,318 2,033,260
Net unrealized appreciation (depreciation) of investments and interest rate swaps transactions 36,453,841 27,515,212
------------------------------------------------------------------------------------------------------------------------------------
Net assets applicable to Common shares $1,474,982,994 $2,021,257,857
====================================================================================================================================
Authorized shares:
Common Unlimited Unlimited
FundPreferred shares Unlimited Unlimited
====================================================================================================================================
See accompanying notes to financial statements.
45
Statement of
OPERATIONS Year Ended July 31, 2004
PREFERRED AND PREFERRED AND
CONVERTIBLE CONVERTIBLE
INCOME INCOME 2
(JPC) (JQC)
------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends (net of foreign tax withheld of $15,423 and $27,621, respectively) $ 75,590,258 $ 86,980,897
Interest 65,298,892 96,813,930
------------------------------------------------------------------------------------------------------------------------------------
Total investment income 140,889,150 183,794,827
------------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Management fees 18,870,178 25,051,089
Dividend expense on securities sold short 387,841 559,225
FundPreferred shares - auction fees 1,774,851 2,326,576
FundPreferred shares - dividend disbursing agent fees 33,428 54,454
Shareholders' servicing agent fees and expenses 10,238 14,762
Custodian's fees and expenses 477,127 653,706
Trustees' fees and expenses 59,851 76,923
Professional fees 121,316 116,396
Shareholders' reports - printing and mailing expenses 338,208 398,044
Stock exchange listing fees 48,302 45,597
Investor relations expense 300,311 369,831
Other expenses 397,116 353,479
------------------------------------------------------------------------------------------------------------------------------------
Total expenses before custodian fee credit and expense reimbursement 22,818,767 30,020,082
Custodian fee credit (14,475) (41,717)
Expense reimbursement (7,048,071) (9,520,638)
------------------------------------------------------------------------------------------------------------------------------------
Net expenses 15,756,221 20,457,727
------------------------------------------------------------------------------------------------------------------------------------
Net investment income 125,132,929 163,337,100
------------------------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) FROM INVESTMENTS
Net realized gain from investments 27,972,286 8,739,463
Net realized gain (loss) from interest rate swap transactions (2,330,892) (3,205,449)
Change in net unrealized appreciation (depreciation) of investments 39,651,341 90,207,632
Change in net unrealized appreciation (depreciation) of interest rate swap transactions 5,573,214 7,377,706
------------------------------------------------------------------------------------------------------------------------------------
Net gain from investments 70,865,949 103,119,352
------------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO FUNDPREFERRED SHAREHOLDERS
From net investment income (8,171,424) (11,296,561)
From accumulated net realized gains from investments (384,871) --
------------------------------------------------------------------------------------------------------------------------------------
Decrease in net assets applicable to Common shares from distributions to FundPreferred shareholders (8,556,295) (11,296,561)
------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets applicable to Common shares from operations $187,442,583 $255,159,891
====================================================================================================================================
See accompanying notes to financial statements.
46
Statement of
CHANGES IN NET ASSETS
PREFERRED AND PREFERRED AND
CONVERTIBLE INCOME (JPC) CONVERTIBLE INCOME 2 (JQC)
--------------------------------- --------------------------------
FOR THE FOR THE
PERIOD 3/26/03 PERIOD 6/25/03
(COMMENCEMENT (COMMENCEMENT
YEAR ENDED OF OPERATIONS) YEAR ENDED OF OPERATIONS)
7/31/04 THROUGH 7/31/03 7/31/04 THROUGH 7/31/03
------------------------------------------------------------------------------------------------------------------------------------
OPERATIONS
Net investment income $ 125,132,929 $ 30,420,215 $ 163,337,100 $ 5,416,996
Net realized gain (loss) from investments 27,972,286 6,249,317 8,739,463 (2,710,553)
Net realized gain (loss) from interest rate swap transactions (2,330,892) -- (3,205,449) --
Change in net unrealized appreciation (depreciation)
of investments 39,651,341 (8,770,714) 90,207,632 (70,070,126)
Change in net unrealized appreciation (depreciation)
of interest rate swap transactions 5,573,214 -- 7,377,706 --
Distributions to FundPreferred shareholders:
From net investment income (8,171,424) (1,781,038) (11,296,561) --
From accumulated net realized gains from investments (384,871) -- -- --
------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets applicable to Common shares
from operations 187,442,583 26,117,780 255,159,891 (67,363,683)
------------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO COMMON SHAREHOLDERS
From net investment income (121,827,639) (30,157,634) (164,952,618) --
From accumulated net realized gains from investments (4,581,333) -- (25,575) --
------------------------------------------------------------------------------------------------------------------------------------
Decrease in net assets applicable to Common shares
from distributions to Common shareholders (126,408,972) (30,157,634) (164,978,193) --
------------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS
Common shares:
Net proceeds from sale of shares (188,221) 1,430,942,591 176,684 2,017,885,896
Net proceeds from shares issued to shareholders due to
reinvestment of distributions 1,175,103 549,331 -- --
FundPreferred shares offering costs (20,355) (14,569,487) (19,723,013) --
------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets applicable to
Common shares from capital share transactions 966,527 1,416,922,435 (19,546,329) 2,017,885,896
------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets applicable to Common shares 62,000,138 1,412,882,581 70,635,369 1,950,522,213
Net assets applicable to Common shares at the beginning of year 1,412,982,856 100,275 1,950,622,488 100,275
------------------------------------------------------------------------------------------------------------------------------------
Net assets applicable to Common shares at the end of year $1,474,982,994 $1,412,982,856 $2,021,257,857 $1,950,622,488
====================================================================================================================================
Undistributed (Over-distribution of) net
investment income at the end of year $ (5,581,774) $ (234,434) $ (6,443,674) $ 5,445,706
====================================================================================================================================
See accompanying notes to financial statements.
47
Notes to
FINANCIAL STATEMENTS
1. GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES
The Funds covered in this report and their corresponding Common share New York
Stock Exchange symbols are Nuveen Preferred and Convertible Income Fund (JPC)
and Nuveen Preferred and Convertible Income Fund 2 (JQC). The Funds are
registered under the Investment Company Act of 1940, as amended, as diversified,
closed-end management investment companies.
Prior to the commencement of operations of the Funds, each Fund had no
operations other than those related to organizational matters, the initial
capital contribution of $100,275 per Fund by Nuveen Institutional Advisory Corp.
(the "Adviser"), a wholly owned subsidiary of Nuveen Investments, Inc., and the
recording of the organization expenses ($11,500 per Fund) and their
reimbursement by Nuveen Investments, LLC, also a wholly owned subsidiary of
Nuveen Investments, Inc.
Each Fund seeks to provide high current income by investing primarily in a
portfolio of preferred securities, convertible securities and, to a lesser
degree, high yield securities. Each Fund may also invest in other debt
instruments and common stocks acquired upon conversion of a convertible
security.
The following is a summary of significant accounting policies followed by the
Funds in the preparation of their financial statements in accordance with U.S.
generally accepted accounting principles.
Securities Valuation
Exchange-listed securities are generally valued at the last sales price on the
securities exchange on which such securities are primarily traded. Securities
traded on a securities exchange for which there are no transactions on a given
day or securities not listed on a securities exchange are valued at the mean of
the closing bid and asked prices. Securities traded on Nasdaq are valued at the
Nasdaq Official Closing Price. The prices of fixed-income securities are
generally provided by an independent pricing service approved by the Funds'
Board of Trustees and based on the mean between the bid and asked prices. When
price quotes are not readily available for fixed-income securities, the pricing
service establishes fair market value using a wide range of market data
including yields or prices of securities of comparable quality, type of issue,
coupon, maturity and rating, indications of value from security dealers,
evaluations of anticipated cash flows or collateral, general market conditions
and other information and analysis, including the obligor's credit
characteristics considered relevant by the pricing service. If it is determined
that market prices for a security are unavailable or inappropriate, the Board of
Trustees of the Funds, or its designee, may establish a fair value for the
security. Short-term securities are valued at amortized cost, which approximates
market value.
Securities Transactions
Securities transactions are recorded on a trade date basis. Realized gains and
losses from such transactions are determined on the specific identification
method. Securities purchased on a when-issued or delayed delivery basis may have
extended settlement periods. Any securities so purchased are subject to market
fluctuation during this period. The Funds have instructed the custodian to
segregate assets with a current value at least equal to the amount of the
when-issued and delayed delivery purchase commitments. At July 31, 2004, there
were no such outstanding purchase commitments in either of the Funds.
Investment Income
Dividend income on securities purchased and dividend expense on securities sold
short are recorded on the ex-dividend date. Interest income, which includes the
amortization of premiums and accretion of discounts for financial reporting
purposes, is recorded on an accrual basis (see Dividends and Distributions to
Common Shareholders for REIT income recognition policy).
Income Taxes
Each Fund is a separate taxpayer for federal income tax purposes. Each Fund
intends to distribute all income and capital gains to shareholders and to
otherwise comply with the requirements of Subchapter M of the Internal Revenue
Code applicable to regulated investment companies. Therefore, no federal income
tax provision is required.
48
Dividends and Distributions to Common Shareholders
Dividends to Common shareholders are declared monthly. With respect to the REIT
securities held in the Funds' Portfolio of Investments, each Fund passes through
to its shareholders, each month, substantially all REIT distributions it
receives, together with other operating income less operating expenses. REIT
distributions received by the Funds are generally comprised of investment
income, long-term and short-term capital gains, and a return of REIT capital.
The actual character of amounts received during the period is not known until
after the fiscal year-end. For the twelve months ended December 31, 2003, the
character of distributions to the Funds from the REITs was as follows:
PREFERRED PREFERRED
AND AND
CONVERTIBLE CONVERTIBLE
INCOME INCOME 2
(JPC) (JQC)
-------------------------------------------------------------------------------
Ordinary income 84.04% 77.85%
Long-term and short-term capital gains .20 .17
Return of REIT capital 15.76 21.98
===============================================================================
Each Fund applies a percentage estimate for the breakdown of income type, to its
receipts from the REITs and treats as income in the Statement of Operations only
the amount of ordinary income so calculated. Each Fund adjusts that estimated
breakdown of income type (and consequently its net investment income) as
necessary in the following calendar year when the REITs inform their
shareholders of the actual breakdown of income type.
Each Fund treats each distribution to its shareholders from the portfolio REITs
as being entirely from net investment income. The Funds will recharacterize
those distributions as being from ordinary income, long-term and short-term
capital gains, and return of capital, if necessary, in the subsequent calendar
year, based upon the income type breakdown information conveyed at that time by
the REITs whose securities are held in each Fund's portfolio. Consequently, the
financial statements may reflect an over-distribution of net investment income
that is at least partly attributable to the fact that, as of the date of the
financial statements, some of the amounts received by the Funds from the
portfolio REITs, but none of the dividends paid by the Fund to shareholders from
the portfolio REITs were treated as something other than ordinary income.
Distributions to Common shareholders are recorded on the ex-dividend date. The
amount and timing of distributions are determined in accordance with federal
income tax regulations, which may differ from U.S. generally accepted accounting
principles.
FundPreferred Shares
The Funds have issued and outstanding $25,000 stated value FundPreferred shares
as a means of effecting financial leverage. Each Fund's FundPreferred shares are
issued in more than one Series. The dividend rate on each Series may change
every seven days, as set pursuant to a dutch auction process by the auction
agent, and is payable at or near the end of each rate period. The number of
shares outstanding, by Series and in total, for each Fund is as follows:
PREFERRED PREFERRED
AND AND
CONVERTIBLE CONVERTIBLE
INCOME INCOME 2
(JPC) (JQC)
--------------------------------------------------------------------------------
Number of shares:
Series M 4,720 3,860
Series M2 -- 3,860
Series T 4,720 3,860
Series T2 -- 3,860
Series W 4,720 3,860
Series W2 -- 3,860
Series TH 4,720 3,860
Series TH2 -- 3,860
Series F 4,720 3,860
Series F2 4,720 3,860
--------------------------------------------------------------------------------
Total 28,320 38,600
================================================================================
49
Notes to
FINANCIAL STATEMENTS (continued)
Interest Rate Swap Transactions
The Funds may invest in certain derivative financial instruments. The Funds' use
of interest rate swap transactions is intended to mitigate the negative impact
that an increase in short-term interest rates could have on Common share net
earnings as a result of leverage. Interest rate swap transactions involve each
Fund's agreement with the counterparty to pay a fixed rate payment in exchange
for the counterparty paying the Fund a variable rate payment that is intended to
approximate each Fund's variable rate payment obligation on FundPreferred shares
or any variable rate borrowing. The payment obligation is based on the notional
amount of the interest rate swap contract. Interest rate swaps do not involve
the delivery of securities or other underlying assets or principal. Accordingly,
the risk of loss with respect to the swap counterparty on such transactions is
limited to the net amount of interest payments that each Fund is to receive.
Interest rate swap positions are valued daily. Although there are economic
advantages of entering into interest rate swap transactions, there are also
additional risks. The Funds help manage the credit risks associated with
interest rate swap transactions by entering into agreements only with
counterparties the Adviser believes have the financial resources to honor their
obligations and by having the Adviser continually monitor the financial
stability of the swap counterparties.
Due to recent clarification provided by the SEC to regulated investment
companies, effective with the current reporting period, the Funds changed the
way they present net interest expense on interest rate swap transactions in the
financial statements. In the July 31, 2004, financial statements net interest
expense amounts paid are included in "Net realized gain (loss) from interest
rate swap transactions". Net interest expense amounts accrued, but not yet paid,
at July 31, 2004, are included in "Change in net unrealized appreciation
(depreciation) of interest rate swap transactions". Previously, net interest
expense was presented in "Expenses" and reported as "Net interest expense on
interest rate swap transactions". This reclassification does not alter the tax
treatment of interest rate payments on swap transactions which is to include
such payments as an operating expense for tax purposes.
At July 31, 2004, Preferred and Convertible Income (JPC) had open interest rate
swap agreements as follows:
UNREALIZED
NOTIONAL TERMINATION APPRECIATION
AMOUNT FIXED RATE FLOATING RATE* DATE (DEPRECIATION)
---------------------------------------------------------------------------------------------------------
$71,000,000 1.4300% 1.4263% 1/22/05 $ 176,192
71,000,000 1.9735 1.4263 1/22/06 782,800
71,000,000 2.5670 1.4263 1/22/07 1,247,372
71,000,000 2.9935 1.4263 1/22/08 1,624,617
71,000,000 3.4060 1.4263 1/22/09 1,742,233
---------------------------------------------------------------------------------------------------------
$5,573,214
=========================================================================================================
*Based on LIBOR (London Interbank Offered Rate)
At July 31, 2004, Preferred and Convertible Income 2 (JQC) had open interest
rate swap agreements as follows:
UNREALIZED
NOTIONAL TERMINATION APPRECIATION
AMOUNT FIXED RATE FLOATING RATE* DATE (DEPRECIATION)
---------------------------------------------------------------------------------------------------------
$97,000,000 1.3605% 1.4331% 1/23/05 $ 280,626
97,000,000 2.0250 1.4331 1/23/06 1,018,521
97,000,000 2.6790 1.4331 1/23/07 1,447,845
97,000,000 3.0480 1.4331 1/23/08 2,052,676
97,000,000 3.3595 1.4331 1/23/09 2,578,038
---------------------------------------------------------------------------------------------------------
$7,377,706
=========================================================================================================
*Based on LIBOR (London Interbank Offered Rate)
50
Short Sales
The Funds are authorized to make short sales of securities if the Funds own at
least an equal amount of such securities or securities convertible into
securities of the same issuer. To secure its obligation to deliver securities
sold short, the Funds have instructed the custodian to segregate assets in an
equivalent amount of the securities sold short or securities convertible into or
exchangeable for such securities. The Fund is obligated to pay to the party to
which the securities were sold short, dividends declared on the stock by the
issuer and records such amounts as expense in the statement of operations. Short
sales are valued daily and the corresponding unrealized gains or losses are
included in "Change in net unrealized appreciation (depreciation) of
investments."
Repurchase Agreements
In connection with transactions in repurchase agreements, it is each Fund's
policy that its custodian take possession of the underlying collateral
securities, the fair value of which exceeds the principal amount of the
repurchase transaction, including accrued interest, at all times. If the seller
defaults, and the fair value of the collateral declines, realization of the
collateral may be delayed or limited.
Organization and Offering Costs
Nuveen Investments, LLC has agreed to reimburse all organization expenses
(approximately $11,500 per Fund) and pay all Common share offering costs (other
than the sales load) that exceed $.03 per Common share. Preferred and
Convertible Income's (JPC) and Preferred and Convertible Income 2's (JQC) share
of Common share offering costs ($1,745,630 and $1,762,420, respectively) were
recorded as reductions of the proceeds from the sale of Common shares.
Costs incurred by Preferred and Convertible Income (JPC) and Preferred and
Convertible Income 2 (JQC) in connection with their offering of FundPreferred
shares ($14,589,842 and $19,723,013, respectively) were recorded as reductions
to paid-in surplus.
Custodian Fee Credit
Each Fund has an arrangement with the custodian bank whereby certain custodian
fees and expenses are reduced by credits earned on each Fund's cash on deposit
with the bank. Such deposit arrangements are an alternative to overnight
investments.
Indemnifications
Under the Funds' organizational documents, its Officers and Trustees are
indemnified against certain liabilities arising out of the performance of their
duties to the Funds. In addition, in the normal course of business, the Funds
enter into contracts that provide general indemnifications to other parties. The
Funds' maximum exposure under these arrangements is unknown as this would
involve future claims that may be made against the Funds that have not yet
occurred. However, the Funds have not had prior claims or losses pursuant to
these contracts and expect the risk of loss to be remote.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of increases and
decreases in net assets applicable to Common shares from operations during the
reporting period. Actual results may differ from those estimates.
51
Notes to
FINANCIAL STATEMENTS (continued)
2. FUND SHARES
Transactions in Common and FundPreferred shares were as follows:
PREFERRED AND PREFERRED AND
CONVERTIBLE INCOME (JPC) CONVERTIBLE INCOME 2 (JQC)
------------------------ ---------------------------
FOR THE FOR THE
PERIOD 3/26/03 PERIOD 6/25/03
YEAR (COMMENCEMENT YEAR (COMMENCEMENT
ENDED OF OPERATIONS) ENDED OF OPERATIONS)
7/31/04 THROUGH 7/31/03 7/31/04 THROUGH 7/31/03
------------------------------------------------------------------------------------------------------------------
Common shares:
Shares sold -- 100,000,000 -- 141,000,000
Shares issued to
shareholders due to
reinvestment of
distributions 79,185 36,992 -- --
------------------------------------------------------------------------------------------------------------------
79,185 100,036,992 -- 141,000,000
==================================================================================================================
FundPreferred shares sold -- 28,320 38,600 --
==================================================================================================================
3. SECURITIES TRANSACTIONS
Purchases and sales (including maturities and transactions in securities sold
short but excluding short-term investments) of investment securities and U.S.
Government and agency obligations during the fiscal year ended July 31, 2004,
were as follows:
PREFERRED PREFERRED
AND AND
CONVERTIBLE CONVERTIBLE
INCOME INCOME 2
(JPC) (JQC)
-------------------------------------------------------------------------------------------------------------
Purchases:
Investment securities $594,408,592 $1,997,286,051
U.S. Government and agency obligations 8,554,453 117,118,079
Sales and maturities:
Investment securities 630,779,939 824,377,651
U.S. Government and agency obligations 8,682,109 269,123,165
=============================================================================================================
4. INCOME TAX INFORMATION
The following information is presented on an income tax basis based on the
information currently available to the Funds. Differences between amounts for
financial statement and federal income tax purposes are primarily due to the
recognition of income on certain securities, which are treated as debt
securities for income tax purposes and equity securities for financial statement
purposes, and timing differences in recognizing certain gains and losses on
security transactions.
At July 31, 2004, the cost of investments were as follows:
PREFERRED PREFERRED
AND AND
CONVERTIBLE CONVERTIBLE
INCOME INCOME 2
(JPC) (JQC)
-------------------------------------------------------------------------------------------------------------
Cost of investments (net of proceeds received on securities sold short) $2,088,456,348 $2,885,601,052
=============================================================================================================
52
Gross unrealized appreciation and gross unrealized depreciation of investments
at July 31, 2004, were as follows:
PREFERRED PREFERRED
AND AND
CONVERTIBLE CONVERTIBLE
INCOME INCOME 2
(JPC) (JQC)
-----------------------------------------------------------------------------------------------------------
Gross unrealized:
Appreciation $ 85,171,412 $ 90,452,184
Depreciation (56,539,045) (73,469,970)
-----------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments $ 28,632,367 $ 16,982,214
===========================================================================================================
The tax components of undistributed net ordinary income and net realized gains
at July 31, 2004, were as follows:
PREFERRED PREFERRED
AND AND
CONVERTIBLE CONVERTIBLE
INCOME INCOME 2
(JPC) (JQC)
---------------------------------------------------------------------------------------------------------
Undistributed net ordinary income * $37,328,510 $25,056,810
Undistributed net long-term capital gains 7,550,253 2,962,769
=========================================================================================================
* Net ordinary income consists of net taxable income derived from dividends,
interest, and net short-term capital gains, if any.
The tax character of distributions paid during the fiscal years ended July 31,
2004 and July 31, 2003, was designated for purposes of the dividends paid
deduction as follows:
PREFERRED PREFERRED
AND AND
CONVERTIBLE CONVERTIBLE
INCOME INCOME 2
2004 (JPC) (JQC)
---------------------------------------------------------------------------------------------------------
Distributions from net ordinary income * $134,895,598 $162,336,998
Distributions from net long-term capital gains -- 22,781
=========================================================================================================
PREFERRED PREFERRED
AND AND
CONVERTIBLE CONVERTIBLE
INCOME INCOME 2
2003 (JPC) (JQC)
---------------------------------------------------------------------------------------------------------
Distributions from net ordinary income * $21,811,614 $ --
Distributions from net long-term capital gains -- --
=========================================================================================================
* Net ordinary income consists of net taxable income derived from dividends,
interest, and net short-term capital gains, if any.
Calculation of certain of the amounts presented above (namely, undistributed net
ordinary income for tax purposes) involves the application of complex aspects of
the Internal Revenue Code to certain securities held by the Funds. In
calculating the amount of taxable income derived from these securities,
management made assumptions as to the correct tax treatment of certain of those
securities and made estimates about the tax characteristics of income received
from those securities, based on information currently available to the Funds.
The use of these assumptions and estimates will not affect the qualification of
the Funds as regulated investment companies under Subchapter M of the Internal
Revenue Code, nor is it expected that these assumptions and estimates will be
used in computing taxable income for purposes of preparing the federal and state
income and excise tax returns.
5. MANAGEMENT FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Under the Funds' investment management agreements with the Adviser, each Fund
paid through July 31, 2004, an annual management fee, payable monthly, at the
rates set forth below, which were based upon each Fund's average daily managed
assets. "Managed Assets" means the average daily net assets of each Fund
including assets attributable to leverage as follows:
AVERAGE DAILY MANAGED ASSETS MANAGEMENT FEE RATE
--------------------------------------------------------------------------------
For the first $500 million .9000%
For the next $500 million .8750
For the next $500 million .8500
For the next $500 million .8250
For Managed Assets over $2 billion .8000
================================================================================
53
Notes to
FINANCIAL STATEMENTS (continued)
The management fee compensates the Adviser for overall investment advisory and
administrative services and general office facilities. The Adviser has entered
into Sub-Advisory Agreements with Spectrum Asset Management, Inc. ("Spectrum"),
and Froley, Revy Investment Co., Inc. (Froley, Revy). Spectrum manages the
portion of the Fund's investment portfolio allocated to preferred securities
while Froley, Revy manages the portion of the investment portfolio allocated to
convertible securities. Spectrum and Froley, Revy are compensated for their
services to the Funds from the management fee paid to the Adviser. Spectrum also
receives compensation on certain portfolio transactions for providing brokerage
services to the Funds. The Adviser is responsible for the overall strategy and
asset allocation decisions as well as managing the portion of the investment
portfolio allocated to other debt securities.
The Funds pay no compensation directly to those of its Trustees who are
affiliated with the Adviser or to its officers, all of whom receive remuneration
for their services to the Funds from the Adviser or its affiliates. The Board of
Trustees has adopted a deferred compensation plan for independent Trustees that
enables Trustees to elect to defer receipt of all or a portion of the annual
compensation they are entitled to receive from certain Nuveen advised Funds.
Under the plan, deferred amounts are treated as though equal dollar amounts had
been invested in shares of select Nuveen advised Funds.
As approved by the Board of Trustees, a complex-wide management fee structure
has been adopted by all funds sponsored by the Adviser and its affiliates
effective August 1, 2004. This structure separates each fund's management fee
into two components - a complex-level component, based on the aggregate amount
of all fund assets managed by the Adviser and its affiliates, and a specific
fund-level component, based only on the amount of assets managed within each
individual fund. This pricing structure enables Nuveen fund shareholders to
benefit from growth in the assets within each individual fund as well as from
growth in the amount of complex-wide assets managed by the Adviser and its
affiliates. Under no circumstances will this pricing structure result in a fund
paying management fees at a rate higher than would otherwise have been
applicable had the complex-wide management fee structure not been implemented.
As a consequence of this new management fee structure, the funds' effective
management fees were reduced by approximately .004% starting August 1, 2004.
The complex-level fee schedule for all funds in the Nuveen fund complex is as
follows:
COMPLEX-LEVEL
COMPLEX-LEVEL ASSETS (1) FEE RATE
--------------------------------------------------------------------------------
For the first $55 billion .2000%
For the next $1 billion .1800
For the next $1 billion .1600
For the next $3 billion .1425
For the next $3 billion .1325
For the next $3 billion .1250
For the next $5 billion .1200
For the next $5 billion .1175
For the next $15 billion .1150
For Managed Assets over $91 billion (2) .1400
================================================================================
(1) The complex-level fee component of the management fee for the funds is
calculated based upon the aggregate Managed Assets (which includes assets
attributable to leverage used in the Nuveen fund complex) of all funds
sponsored by the Adviser or by its affiliates.
(2) With respect to the complex-wide Managed Assets over $91 billion, the funds
(via their Board of Directors/Trustees) and the Adviser intend that the
parties will meet, prior to the time when complex-wide Managed Assets reach
that level, to consider and negotiate the fee rate or rates that will apply
to such assets. The parties agree that, in the unlikely event that
complex-wide Managed Assets reach $91 billion prior to the parties reaching
an agreement as to the complex-level fee rate or rates to be applied to
Managed Assets in excess of $91 billion, the complex-level fee rate for
such complex-wide Managed Assets shall be .1400% until such time as the
parties agree to a different rate or rates.
54
For each of the Funds, the fund-level fee, which is additive to the
complex-level fee, is based upon the average daily Managed Assets of each Fund
as follows:
FUND-LEVEL
AVERAGE DAILY MANAGED ASSETS FEE RATE
--------------------------------------------------------------------------------
For the first $500 million .7000%
For the next $500 million .6750
For the next $500 million .6500
For the next $500 million .6250
For Managed Assets over $2 billion .6000
================================================================================
For the first eight years of Preferred and Convertible Income's (JPC)
operations, the Adviser has agreed to reimburse the Fund, as a percentage of
average daily Managed Assets, for fees and expenses in the amounts and for the
time periods set forth below:
YEAR ENDING YEAR ENDING
MARCH 31, MARCH 31,
--------------------------------------------------------------------------------
2003* .32% 2008 .32%
2004 .32 2009 .24
2005 .32 2010 .16
2006 .32 2011 .08
2007 .32
================================================================================
*From the commencement of operations.
The Adviser has not agreed to reimburse Preferred and Convertible Income (JPC)
for any portion of its fees and expenses beyond March 31, 2011.
For the first eight years of Preferred and Convertible Income 2's (JQC)
operations, the Adviser has agreed to reimburse the Fund, as a percentage of
average daily Managed Assets, for fees and expenses in the amounts and for the
time periods set forth below:
YEAR ENDING YEAR ENDING
JUNE 30, JUNE 30,
--------------------------------------------------------------------------------
2003* .32% 2008 .32%
2004 .32 2009 .24
2005 .32 2010 .16
2006 .32 2011 .08
2007 .32
================================================================================
*From the commencement of operations.
The Adviser has not agreed to reimburse Preferred and Convertible Income 2 (JQC)
for any portion of its fees and expenses beyond June 30, 2011.
6. SUBSEQUENT EVENTS
Distributions to Common Shareholders
The Funds declared Common share dividend distributions from their net investment
income which were paid September 1, 2004, to shareholders of record on August
15, 2004, as follows:
PREFERRED PREFERRED
AND AND
CONVERTIBLE CONVERTIBLE
INCOME INCOME 2
(JPC) (JQC)
--------------------------------------------------------------------------------
Dividend per share $.1005 $.0975
================================================================================
Change in Fiscal Year End
The Board of Trustees of the Funds approved a change in the Funds' fiscal year
end from July 31 to December 31 upon completion of the Funds' July 31, 2004
fiscal year.
55
Financial
HIGHLIGHTS
Selected data for a Common share outstanding throughout each period:
Investment Operations Less Distributions
---------------------------------------------------------------- ------------------------------
Distributions Distributions
from Net from Net
Beginning Net Investment Capital Investment Capital
Common Realized/ Income to Gains to Income to Gains to
Share Net Unrealized FundPreferred FundPreferred Common Common
Net Asset Investment Investment Share- Share- Share- Share-
Value Income(a) Gain (Loss) holders+ holders+ Total holders holders Total
====================================================================================================================================
PREFERRED AND CONVERTIBLE
INCOME (JPC)
------------------------------------------------------------------------------------------------------------------------------------
Year Ended 7/31:
2004 $14.12 $1.25 $ .71 $(.08) $ -- $1.88 $(1.22) $(.05) $(1.27)
2003(b) 14.33 .30 (.02) (.02) -- .26 (.30) -- (.30)
PREFERRED AND CONVERTIBLE
INCOME 2 (JQC)
------------------------------------------------------------------------------------------------------------------------------------
Year Ended 7/31:
2004 13.83 1.16 .73 (.08) -- 1.81 (1.17) -- (1.17)
2003(c) 14.33 .04 (.53) -- -- (.49) -- -- --
====================================================================================================================================
Total Returns
---------------------
Based
Offering on
Costs and Ending Common
FundPreferred Common Based Share
Share Share Ending on Net
Underwriting Net Asset Market Market Asset
Discounts Value Value Value** Value**
===============================================================================================
PREFERRED AND CONVERTIBLE
INCOME (JPC)
-----------------------------------------------------------------------------------------------
Year Ended 7/31:
2004 $ -- $14.73 $13.95 4.34% 13.44%
2003(b) (.17) 14.12 14.57 (.89) .58
PREFERRED AND CONVERTIBLE
INCOME 2 (JQC)
-----------------------------------------------------------------------------------------------
Year Ended 7/31:
2004 (.14) 14.33 13.54 .10 12.25
2003(c) (.01) 13.83 14.69 (2.07) (3.49)
===============================================================================================
Ratios/Supplemental Data
---------------------------------------------------------------------------------------------------
Before Credit/Reimbursement After Credit/Reimbursement***
--------------------------------- -----------------------------
Ratio of Net Ratio of Net
Ratio of Investment Ratio of Investment
Ending Expenses Income to Expenses Income to
Net to Average Average to Average Average
Assets Net Assets Net Assets Net Assets Net Assets
Applicable Applicable Applicable Applicable Applicable Portfolio
to Common to Common to Common to Common to Common Turnover
Shares (000) Shares++ Shares++ Shares++ Shares++ Rate
================================================================================================================================
PREFERRED AND CONVERTIBLE
INCOME (JPC)
--------------------------------------------------------------------------------------------------------------------------------
Year Ended 7/31:
2004 $1,474,983 1.53% 7.90% 1.05% 8.37% 19%
2003(b) 1,412,983 1.29* 5.67* .87* 6.09* 21
PREFERRED AND CONVERTIBLE
INCOME 2 (JQC)
--------------------------------------------------------------------------------------------------------------------------------
Year Ended 7/31:
2004 2,021,258 1.47 7.51 1.00 7.98 27
2003(c) 1,950,622 .97* 2.86* .65* 3.18* 5
================================================================================================================================
FundPreferred Shares at End of Period
----------------------------------------
Aggregate Liquidation
Amount and Market Asset
Outstanding Value Coverage
(000) Per Share Per Share
=======================================================================
PREFERRED AND CONVERTIBLE
INCOME (JPC)
-----------------------------------------------------------------------
Year Ended 7/31:
2004 $708,000 $25,000 $77,083
2003(b) 708,000 25,000 74,893
PREFERRED AND CONVERTIBLE
INCOME 2 (JQC)
-----------------------------------------------------------------------
Year Ended 7/31:
2004 965,000 25,000 77,364
2003(c) -- -- --
=======================================================================
* Annualized.
** Total Investment Return on Market Value is the combination of reinvested
dividend income, reinvested capital gains distributions, if any, and
changes in stock price per share. Total Return on Common Share Net Asset
Value is the combination of reinvested dividend income at net asset value,
reinvested capital gains distributions at net asset value, if any, and
changes in Common share net asset value per share. Total returns are not
annualized.
*** After custodian fee credit and expense reimbursement, where applicable.
+ The amounts shown are based on Common share equivalents.
++ o Ratios do not reflect the effect of dividend payments to FundPreferred
shareholders.
o Income ratios reflect income earned on assets attributable to
FundPreferred shares.
o Each ratio includes the effect of the dividend expense on securities
sold short as follows:
Ratio of
Dividend
Expense on
Securities
Sold Short to
Average Net
Assets Applicable
to Common Shares
------------------
PREFERRED AND CONVERTIBLE INCOME (JPC)
2004 .03%
2003(b) --
PREFERRED AND CONVERTIBLE INCOME 2 (JQC)
2004 .03
2003(c) --
(a) Per share Net Investment Income is calculated using the average daily
shares method.
(b) For the period March 26, 2003 (commencement of operations) through July 31,
2003.
(c) For the period June 25, 2003 (commencement of operations) through July 31,
2003.
See accompanying notes to financial statements.
56-57 SPREAD
Board Members
AND OFFICERS
The management of the Funds, including general supervision of the duties
performed for the Funds by the Adviser, is the responsibility of the Board
Members of the Funds. The number of board members of the Funds is currently set
at seven. None of the board members who are not "interested" persons of the
Funds has ever been a director or employee of, or consultant to, Nuveen or its
affiliates. The names and business addresses of the board members and officers
of the Funds, their principal occupations and other affiliations during the past
five years, the number of portfolios each oversees and other directorships they
hold are set forth below.
NUMBER OF
PORTFOLIOS IN
POSITION(S) YEAR FIRST PRINCIPAL OCCUPATION(S) FUND COMPLEX
NAME, BIRTHDATE HELD WITH ELECTED OR INCLUDING OTHER DIRECTORSHIPS OVERSEEN BY
AND ADDRESS THE FUNDS APPOINTED(2) DURING PAST 5 YEARS BOARD MEMBER
------------------------------------------------------------------------------------------------------------------------------------
BOARD MEMBER WHO IS AN INTERESTED PERSON OF THE FUNDS:
------------------------------------------------------------------------------------------------------------------------------------
Timothy R. Schwertfeger (1) Chairman of 1994 Chairman and Director (since 1996) of Nuveen Investments, 145
3/28/49 the Board Inc. and Nuveen Investments, LLC; Director (since 1992) and
333 W. Wacker Drive and Trustee Chairman (since 1996) of Nuveen Advisory Corp. and Nuveen
Chicago, IL 60606 Institutional Advisory Corp.; Chairman and Director (since
1997) of Nuveen Asset Management, Inc.; Director (since
1996) of Institutional Capital Corporation; Chairman and
Director (since 1999) of Rittenhouse Asset Management, Inc.;
Chairman of Nuveen Investments Advisers Inc. (since 2002).
BOARD MEMBERS WHO ARE NOT INTERESTED PERSONS OF THE FUNDS:
------------------------------------------------------------------------------------------------------------------------------------
Robert P. Bremner Board member 1997 Private Investor and Management Consultant. 145
8/22/40
333 W. Wacker Drive
Chicago, IL 60606
------------------------------------------------------------------------------------------------------------------------------------
Lawrence H. Brown Board member 1993 Retired (1989) as Senior Vice President of The Northern 145
7/29/34 Trust Company; Director, Community Advisory Board for
333 W. Wacker Drive Highland Park and Highwood, United Way of the North
Chicago, IL 60606 Shore (since 2002).
------------------------------------------------------------------------------------------------------------------------------------
Jack B. Evans Board member 1999 President, The Hall-Perrine Foundation, a private philanthropic 145
10/22/48 corporation (since 1996); Director and Vice Chairman, United
333 W. Wacker Drive Fire & Casualty Company; formerly Director, Federal Reserve
Chicago, IL 60606 Bank of Chicago; formerly, President and Chief Operating
Officer, SCI Financial Group, Inc., a regional financial
services firm.
------------------------------------------------------------------------------------------------------------------------------------
William C. Hunter Board member 2004 Dean and Distinguished Professor of Finance, School of 145
3/6/48 Business at the University of Connecticut (since 2003);
333 W. Wacker Drive previously Senior Vice President and Director of Research
Chicago, IL 60606 at the Federal Reserve Bank of Chicago (1995-2003);
Director, Credit Research Center at Georgetown University;
Director of Xerox Corporation (since 2004).
58
NUMBER OF
PORTFOLIOS IN
POSITION(S) YEAR FIRST PRINCIPAL OCCUPATION(S) FUND COMPLEX
NAME, BIRTHDATE HELD WITH ELECTED OR INCLUDING OTHER DIRECTORSHIPS OVERSEEN BY
AND ADDRESS THE FUNDS APPOINTED(2) DURING PAST 5 YEARS BOARD MEMBER
------------------------------------------------------------------------------------------------------------------------------------
BOARD MEMBERS WHO ARE NOT INTERESTED PERSONS OF THE FUNDS (CONTINUED):
------------------------------------------------------------------------------------------------------------------------------------
William J. Schneider Board member 1997 Senior Partner and Chief Operating Officer, Miller-Valentine 145
9/24/44 Group, Vice President, Miller-Valentine Realty, a construction
333 W. Wacker Drive company; Chair, Miami Valley Hospital; Chair, Dayton
Chicago, IL 60606 Development Coalition; formerly, Member, Community
Advisory Board, National City Bank, Dayton, Ohio and
Business Advisory Council, Cleveland Federal Reserve Bank.
------------------------------------------------------------------------------------------------------------------------------------
Judith M. Stockdale Board member 1997 Executive Director, Gaylord and Dorothy Donnelley 145
12/29/47 Foundation (since 1994); prior thereto, Executive Director,
333 W. Wacker Drive Great Lakes Protection Fund (from 1990 to 1994)
Chicago, IL 60606
NUMBER OF
PORTFOLIOS
IN FUND
POSITION(S) YEAR FIRST COMPLEX
NAME, BIRTHDATE HELD WITH ELECTED OR PRINCIPAL OCCUPATION(S) OVERSEEN BY
AND ADDRESS THE FUNDS APPOINTED(3) DURING PAST 5 YEARS OFFICER
------------------------------------------------------------------------------------------------------------------------------------
OFFICERS OF THE FUNDS:
------------------------------------------------------------------------------------------------------------------------------------
Gifford R. Zimmerman Chief 1988 Managing Director (since 2002), Assistant Secretary and 145
9/9/56 Administrative Associate General Counsel, formerly, Vice President and
333 W. Wacker Drive Officer Assistant General Counsel of Nuveen Investments, LLC;
Chicago, IL 60606 Managing Director (since 2002), General Counsel and
Assistant Secretary, formerly, Vice President of Nuveen
Advisory Corp. and Nuveen Institutional Advisory Corp.;
Managing Director (since 2002), Assistant Secretary and
Associate General Counsel, formerly, Vice President (since
2000), of Nuveen Asset Management, Inc. Assistant
Secretary of Nuveen Investments, Inc. (since 1994); Assistant
Secretary of NWQ Investment Management Company, LLC
(since 2002); Vice President and Assistant Secretary of
Nuveen Investments Advisers Inc. (since 2002); Managing
Director, Associate General Counsel and Assistant Secretary
of Rittenhouse Asset Management, Inc. (since 2003);
Chartered Financial Analyst.
------------------------------------------------------------------------------------------------------------------------------------
Michael T. Atkinson Vice President 2000 Vice President (since 2002), formerly, Assistant Vice 145
2/3/66 and Assistant President (since 2000), previously, Associate of Nuveen
333 W. Wacker Drive Secretary Investments, LLC.
Chicago, IL 60606
59
Board Members
AND OFFICERS (CONTINUED)
NUMBER OF
PORTFOLIOS
IN FUND
POSITION(S) YEAR FIRST COMPLEX
NAME, BIRTHDATE HELD WITH ELECTED OR PRINCIPAL OCCUPATION(S) OVERSEEN BY
AND ADDRESS THE FUNDS APPOINTED(3) DURING PAST 5 YEARS OFFICER
------------------------------------------------------------------------------------------------------------------------------------
OFFICERS OF THE FUNDS (CONTINUED):
------------------------------------------------------------------------------------------------------------------------------------
Peter H. D'Arrigo Vice President 1999 Vice President of Nuveen Investments, LLC (since 1999), 145
11/28/67 and Treasurer prior thereto, Assistant Vice President (since 1997); Vice
333 W. Wacker Drive President and Treasurer of Nuveen Investments, Inc. (since
Chicago, IL 60606 1999); Vice President and Treasurer of Nuveen Advisory Corp.
and Nuveen Institutional Advisory Corp (since 1999); Vice
President and Treasurer of Nuveen Asset Management, Inc.
(since 2002) and of Nuveen Investments Advisers Inc. (since
2002); Assistant Treasurer of NWQ Investment Management
Company, LLC (since 2002); Vice President and Treasurer of
Nuveen Rittenhouse Asset Management, Inc. (since 2003);
Chartered Financial Analyst.
------------------------------------------------------------------------------------------------------------------------------------
Jessica R. Droeger Vice President 2000 Vice President (since 2002) and Assistant General Counsel 145
9/24/64 and Secretary (since 1998); formerly, Assistant Vice President (since 1998)
333 W. Wacker Drive of Nuveen Investments, LLC; Vice President (since 2002)
Chicago, IL 60606 and Assistant Secretary (since 1998), formerly Assistant
Vice President of Nuveen Advisory Corp. and Nuveen
Institutional Advisory Corp.
------------------------------------------------------------------------------------------------------------------------------------
Lorna C. Ferguson Vice President 1998 Managing Director (since 2004) formerly, Vice President of 145
10/24/45 Nuveen Investments, LLC; Managing Director (since 2004)
333 W. Wacker Drive formerly, Vice President (since 1998) of Nuveen Advisory
Chicago, IL 60606 Corp. and Nuveen Institutional Advisory Corp.
------------------------------------------------------------------------------------------------------------------------------------
William M. Fitzgerald Vice President 1995 Managing Director (since 2002) of Nuveen Investments, 145
3/2/64 LLC; Managing Director (since 2001), formerly Vice President
333 W. Wacker Drive of Nuveen Advisory Corp. and Nuveen Institutional Advisory
Chicago, IL 60606 Corp. (since 1995); Managing Director of Nuveen Asset
Management, Inc. (since 2001); Vice President of Nuveen
Investment Advisers Inc. (since 2002); Chartered Financial Analyst.
------------------------------------------------------------------------------------------------------------------------------------
Stephen D. Foy Vice President 1998 Vice President (since 1993) and Funds Controller (since 1998) 145
5/31/54 and Controller of Nuveen Investments, LLC and Vice President and Funds
333 W. Wacker Drive Controller (since 1998) of Nuveen Investments, Inc.;
Chicago, IL 60606 Certified Public Accountant.
60
NUMBER OF
PORTFOLIOS
IN FUND
POSITION(S) YEAR FIRST COMPLEX
NAME, BIRTHDATE HELD WITH ELECTED OR PRINCIPAL OCCUPATION(S) OVERSEEN BY
AND ADDRESS THE FUNDS APPOINTED(3) DURING PAST 5 YEARS OFFICER
------------------------------------------------------------------------------------------------------------------------------------
OFFICERS OF THE FUNDS (CONTINUED):
------------------------------------------------------------------------------------------------------------------------------------
David J. Lamb Vice President 2000 Vice President (since 2000) of Nuveen Investments, 145
3/22/63 LLC, previously Assistant Vice President (since 1999);
333 W. Wacker Drive prior thereto, Associate of Nuveen Investments, LLC;
Chicago, IL 60606 Certified Public Accountant.
------------------------------------------------------------------------------------------------------------------------------------
Tina M. Lazar Vice President 2002 Vice President (since 1999), previously, Assistant Vice 145
8/27/61 President (since 1993) of Nuveen Investments, LLC.
333 W. Wacker Drive
Chicago, IL 60606
------------------------------------------------------------------------------------------------------------------------------------
Larry W. Martin Vice President 1988 Vice President, Assistant Secretary and Assistant General 145
7/27/51 and Assistant Counsel of Nuveen Investments, LLC; Vice President and
333 W. Wacker Drive Secretary Assistant Secretary of Nuveen Advisory Corp. and Nuveen
Chicago, IL 60606 Institutional Advisory Corp.; Assistant Secretary of Nuveen
Investments, Inc. and (since 1997) Nuveen Asset Management,
Inc.; Vice President (since 2000), Assistant Secretary and
Assistant General Counsel (since 1998) of Rittenhouse Asset
Management, Inc.; Vice President and Assistant Secretary of
Nuveen Investments Advisers Inc. (since 2002); Assistant
Secretary of NWQ Investment Management Company, LLC
(since 2002).
------------------------------------------------------------------------------------------------------------------------------------
Edward F. Neild, IV Vice President 1996 Managing Director (since 2002) of Nuveen Investments, LLC; 145
7/7/65 Managing Director (since 1997), formerly Vice President
333 W. Wacker Drive (since 1996) of Nuveen Advisory Corp. and Nuveen Institutional
Chicago, IL 60606 Advisory Corp.; Managing Director of Nuveen Asset Management,
Inc. (since 1999). Chartered Financial Analyst.
(1) Mr. Schwertfeger is an "interested person" of the Funds, as defined in the
Investment Company Act of 1940, because he is an officer and board member
of the Adviser.
(2) Board members serve an indefinite term until his/her successor is elected.
The year first elected or appointed represents the year in which the board
member was first elected or appointed to any fund in the Nuveen Complex.
(3) Officers serve one year terms through July of each year. The year first
elected or appointed represents the year in which the Officer was first
elected or appointed to any fund in the Nuveen Complex.
61
Reinvest Automatically
EASILY AND CONVENIENTLY
SIDEBAR TEXT: NUVEEN MAKES REINVESTING EASY. A PHONE CALL IS ALL IT TAKES TO SET
UP YOUR REINVESTMENT ACCOUNT.
NUVEEN CLOSED-END EXCHANGE-TRADED FUNDS
DIVIDEND REINVESTMENT PLAN
Your Nuveen Closed-End Exchange-Traded Fund allows you to conveniently reinvest
dividends and/or capital gains distributions in additional fund shares.
By choosing to reinvest, you'll be able to invest money regularly and
automatically, and watch your investment grow through the power of compounding.
It is important to note that an automatic reinvestment plan does not ensure a
profit, nor does it protect you against loss in a declining market.
EASY AND CONVENIENT
To make recordkeeping easy and convenient, each month you'll receive a statement
showing your total dividends and distributions, the date of investment, the
shares acquired and the price per share, and the total number of shares you own.
HOW SHARES ARE PURCHASED
The shares you acquire by reinvesting will either be purchased on the open
market or newly issued by the Fund. If the shares are trading at or above net
asset value at the time of valuation, the Fund will issue new shares at the
greater of the net asset value or 95% of the then-current market price. If the
shares are trading at less than net asset value, shares for your account will be
purchased on the open market. Dividends and distributions received to purchase
shares in the open market will normally be invested shortly after the dividend
payment date. No interest will be paid on dividends and distributions awaiting
reinvestment. Because the market price of the shares may increase before
purchases are completed, the average purchase price per share may exceed the
market price at the time of valuation, resulting in the acquisition of fewer
shares than if the dividend or distribution had been paid in shares issued by
the Fund. A pro rata portion of any applicable brokerage commissions on open
market purchases will be paid by Plan participants. These commissions usually
will be lower than those charged on individual transactions.
FLEXIBLE
You may change your distribution option or withdraw from the Plan at any time,
should your needs or situation change. Should you withdraw, you can receive a
certificate for all whole shares credited to your reinvestment account and cash
payment for fractional shares, or cash payment for all reinvestment account
shares, less brokerage commissions and a $2.50 service fee.
You can reinvest whether your shares are registered in your name, or in the name
of a brokerage firm, bank, or other nominee. Ask your investment advisor if his
or her firm will participate on your behalf. Participants whose shares are
registered in the name of one firm may not be able to transfer the shares to
another firm and continue to participate in the Plan.
The Fund reserves the right to amend or terminate the Plan at any time. Although
the Fund reserves the right to amend the Plan to include a service charge
payable by the participants, there is no direct service charge to participants
in the Plan at this time.
CALL TODAY TO START REINVESTING DIVIDENDS AND/OR DISTRIBUTIONS
For more information on the Nuveen Automatic Reinvestment Plan or to enroll in
or withdraw from the Plan, speak with your financial advisor or call us at (800)
257-8787.
62
Other Useful
INFORMATION
QUARTERLY PORTFOLIO OF INVESTMENTS AND PROXY VOTING INFORMATION
Each Fund's quarterly portfolio of investments and information regarding how the
Funds voted proxies relating to portfolio securities held during the most recent
12-month period ended June 30, 2004, are available without charge, upon request,
by calling Nuveen Investments toll-free at (800) 257-8787 or on Nuveen's website
at www.nuveen.com.
You may also obtain this and other Fund information directly from the Securities
and Exchange Commission ("SEC"). The SEC may charge a copying fee for this
information. Visit the SEC on-line at http://www.sec.gov or in person at the
SEC's Public Reference Room in Washington, D.C. Call the SEC at 1-202-942-8090
for room hours and operation. You may also request Fund information by sending
an e-mail request to publicinfo@sec.gov or by writing to the SEC's Public
Reference Section at 450 Fifth Street NW, Washington, D.C. 20549.
GLOSSARY OF TERMS USED IN THIS REPORT
AVERAGE ANNUAL TOTAL RETURN: This is a commonly used method to express an
investment's performance over a particular, usually multi-year time period. It
expresses the return (including change in NAV and reinvested dividends) that
would have been necessary on an annual basis to equal the investment's actual
performance over the time period being considered.
NET ASSET VALUE (NAV): A fund's NAV is calculated by subtracting the liabilities
of the fund from its total assets and then dividing the remainder by the number
of shares outstanding. Fund NAVs are calculated at the end of each business day.
UNAUDITED INFORMATION
The Nuveen Preferred and Convertible Income Fund and Nuveen Preferred and
Convertible Income Fund 2 designates 8% and 8% respectively, of dividends
declared from net investment income as dividends qualifying for the 70%
dividends received deduction for corporations and 8% and 8% respectively, as
qualified dividend income for individuals under the Jobs and Growth Tax Relief
Reconciliation Act of 2003.
BOARD OF TRUSTEES
Robert P. Bremner
Lawrence H. Brown
Jack B. Evans
William C. Hunter
William J. Schneider
Timothy R. Schwertfeger
Judith M. Stockdale
FUND MANAGER
Nuveen Institutional
Advisory Corp.
333 West Wacker Drive
Chicago, IL 60606
CUSTODIAN
State Street Bank & Trust
Boston, MA
TRANSFER AGENT AND
SHAREHOLDER SERVICES
State Street Bank & Trust
Nuveen Funds
P.O. Box 43071
Providence, RI 02940-3071
(800) 257-8787
LEGAL COUNSEL
Chapman and Cutler LLP
Chicago, IL
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Ernst & Young LLP
Chicago, IL
Each Fund intends to repurchase shares of its own common or
preferred stock in the future at such times and in such amounts as is deemed
advisable. No shares were repurchased during the fiscal year ended July 31,
2004. Any future repurchases will be reported to shareholders in the next annual
or semiannual report.
63
Nuveen Investments:
SERVING Investors
For GENERATIONS
Photo of: 2 women looking at a photo album.
Since 1898, financial advisors and their clients have relied on Nuveen
Investments to provide dependable investment solutions. For the past century,
Nuveen Investments has adhered to the belief that the best approach to investing
is to apply conservative risk-management principles to help minimize volatility.
Building on this tradition, we today offer a range of high quality equity and
fixed-income solutions that are integral to a well-diversified core portfolio.
Our clients have come to appreciate this diversity, as well as our continued
adherence to proven, long-term investing principles.
WE OFFER MANY DIFFERENT INVESTING SOLUTIONS FOR OUR CLIENTS' DIFFERENT NEEDS.
Managing $100 billion in assets, Nuveen Investments offers access to a number of
different asset classes and investing solutions through a variety of products.
Nuveen Investments markets its capabilities under four distinct brands: Nuveen,
a leader in tax-free investments; NWQ, a leader in value-style equities;
Rittenhouse, a leader in growth-style equities; and Symphony, a leading
institutional manager of market-neutral alternative investment portfolios.
FIND OUT HOW WE CAN HELP YOU REACH YOUR FINANCIAL GOALS.
To learn more about the products and services Nuveen Investments offers, talk to
your financial advisor, or call us at (800) 257-8787. Please read the
information carefully before you invest.
Be sure to obtain a prospectus, where applicable. Investors should consider the
investment objective and policies, risk considerations, charges and expenses of
the Fund carefully before investing. The prospectus contains this and other
information relevant to an investment in the Fund. For a prospectus, please
contact your securities representative or Nuveen Investments, 333 W. Wacker Dr.,
Chicago, IL 60606. Please read the prospectus carefully before you invest or
send money.
Learn more
about Nuveen Funds at
WWW.NUVEEN.COM/ETF
o Share prices
o Fund details
o Daily financial news
o Investor education
o Interactive planning tools
Logo: NUVEEN Investments
EAN-E-0704D
ITEM 2. CODE OF ETHICS.
As of the end of the period covered by this report, the registrant has 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. The registrant has posted such code of
ethics on its website at www.nuveen.com/etf.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The registrant's board of directors determined that the registrant had at least
one "audit committee financial expert" (as defined in Item 3 of Form N-CSR)
serving on its Audit Committee. The registrant's audit committee financial
expert was William E. Bennett, who was "independent" for purposes of Item 3 of
Form N-CSR.
Although Mr. Bennett served as the audit committee financial expert during the
reporting period, he unexpectedly resigned from the Board effective April 30,
2004. Since that time, the Audit Committee determined that Jack B. Evans, the
Chairman of the Audit Committee, qualifies as an audit committee financial
expert and recommended to the full Board that he be designated as such. On July
26, 2004, the full Board voted to so designate Mr. Evans. Accordingly for this
reporting period, the registrant did not have a designated "audit committee
financial expert" from April 30, 2004 to July 26, 2004. Mr. Evans, who is
independent for purposes of Item 3 of Form N-CSR, served as the registrant's
audit committee financial expert from July 26, 2004 to the end of the reporting
period on July 31, 2004.
Mr. Bennett was formerly Executive Vice President and Chief Credit Officer of
First Chicago Corporation and its principal subsidiary, The First National Bank
of Chicago. As part of his role as Chief Credit Officer, Mr. Bennett set policy
as to accrual of assets/loans; designated performing/non-performing assets; set
the level of reserves against the credit portfolo; and determined the carrying
value of credit related assets and exposure. Among other things, Mr. Bennett was
also responsible for the oversight of the internal analysis function including
setting ground rules for the review and preparation of financial analysis and
financial statements for use in making credit and risk decisions for clients.
Mr. Bennett has significant experience reviewing, analyzing and evaluating
financial statements of domestic and international companies in a variety of
industries with complex accounting issues.
Mr. Evans was formerly President and Chief Operating Office of SCI Financial
Group, Inc., a full service registered broker-dealer and registered investment
adviser ("SCI"). As part of his role as President and Chief Operating Officer,
Mr. Evans actively supervised the Chief Financial Officer (the "CFO") and
actively supervised the CFO's preparation of financial statements and other
filings with various regulatory authorities. In such capacity, Mr. Evans was
actively involved in the preparation of SCI's financial statements and the
resolution of issues raised in connection therewith. Mr. Evans has also served
on the audit committee of various reporting companies. At such companies, Mr.
Evans was involved in the oversight of audits, audit plans, and the preparation
of financial statements. Mr. Evans also formerly chaired the audit committee of
the Federal Reserve Bank of Chicago.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
NUVEEN PREFERRED AND CONVERTIBLE INCOME FUND 2
The following tables show the amount of fees that Ernst & Young LLP, the Fund's
auditor, billed to the Fund during the Fund's last two full fiscal years. For
engagements with Ernst & Young LLP entered into on or after May 6, 2003, the
Audit Committee approved in advance all audit services and non-audit services
that Ernst & Young LLP provided to the Fund, except for those non-audit services
that were subject to the pre-approval exception under Rule 2-01 of Regulation
S-X (the "pre-approval exception"). The pre-approval exception for services
provided directly to the Fund waives the pre-approval requirement for services
other than audit, review or attest services if: (A) the aggregate amount of all
such services provided constitutes no more than 5% of the total amount of
revenues paid by the Fund during the fiscal year in which the services are
provided; (B) the Fund did not recognize the services as non-audit services at
the time of the engagement; and (C) the services are promptly brought to the
Audit Committee's attention, and the Committee (or its delegate) approves the
services before the audit is completed.
The Audit Committee has delegated certain pre-approval responsibilities to its
Chairman (or, in his absence, any other member of the Audit Committee).
SERVICES THAT THE FUND'S AUDITOR BILLED TO THE FUND
AUDIT FEES BILLED AUDIT-RELATED FEES TAX FEES ALL OTHER FEES
FISCAL YEAR ENDED TO FUND BILLED TO FUND BILLED TO FUND BILLED TO FUND
------------------------------------------------------------------------------------------------------------------------------------
July 31, 2004 $ 21,861 $ 0 $ 10,296 $ 2,600
------------------------------------------------------------------------------------------------------------------------------------
Percentage approved N/A 0% 0% 0%
pursuant to
pre-approval
exception
------------------------------------------------------------------------------------------------------------------------------------
July 31, 2003 $ 6,300 $ 0 $ 0 $ 0
------------------------------------------------------------------------------------------------------------------------------------
Percentage approved N/A 0% 0% 0%
pursuant to
pre-approval
exception
------------------------------------------------------------------------------------------------------------------------------------
The above "Tax Fees" were billed for professional services for tax advice, tax
compliance and tax planning.
SERVICES THAT THE FUND'S AUDITOR BILLED TO THE
ADVISER AND AFFILIATED FUND SERVICE PROVIDERS
The following tables show the amount of fees billed by Ernst & Young LLP to
Nuveen Institutional Advisory Corp. ("NIAC" or the "Adviser"), and any entity
controlling, controlled by or under common control with NIAC ("Control
Affiliate") that provides ongoing services to the Fund ("Affiliated Fund Service
Provider"), for engagements directly related to the Fund's operations and
financial reporting, during the Fund's last two full fiscal years.
The table also shows the percentage of fees subject to the pre-approval
exception. The pre-approval exception for services provided to the Adviser and
any Affiliated Fund Service Provider (other than audit, review or attest
services) waives the pre-approval requirement if: (A) the aggregate amount of
all such services provided constitutes no more than 5% of the total amount of
revenues paid to Ernst & Young LLP by the Fund, the Adviser and Affiliated Fund
Service Providers during the fiscal year in which the services are provided that
would have to be pre-approved by the Audit Committee; (B) the Fund did not
recognize the services as non-audit services at the time of the engagement; and
(C) the services are promptly brought to the Audit Committee's attention, and
the Committee (or its delegate) approves the services before the Fund's audit is
completed.
FISCAL YEAR ENDED AUDIT-RELATED FEES TAX FEES BILLED TO ALL OTHER FEES
BILLED TO ADVISER AND ADVISER AND BILLED TO ADVISER
AFFILIATED FUND AFFILIATED FUND AND AFFILIATED FUND
SERVICE PROVIDERS SERVICE PROVIDERS SERVICE PROVIDERS
------------------------------------------------------------------------------------------------------------------------------------
July 31, 2004 $ 0 $ 0 $ 0
------------------------------------------------------------------------------------------------------------------------------------
Percentage approved 0% 0% 0%
pursuant to
pre-approval
exception
------------------------------------------------------------------------------------------------------------------------------------
July 31, 2003 $ 0 $ 0 $ 0
------------------------------------------------------------------------------------------------------------------------------------
Percentage approved N/A N/A N/A
pursuant to
pre-approval
exception
------------------------------------------------------------------------------------------------------------------------------------
NON-AUDIT SERVICES
The following table shows the amount of fees that Ernst & Young LLP billed
during the Fund's last two full fiscal years for non-audit services. For
engagements entered into on or after May 6, 2003, the Audit Committee is
required to pre-approve non-audit services that Ernst & Young LLP provides to
the Adviser and any Affiliated Fund Services Provider, if the engagement related
directly to the Fund's operations and financial reporting (except for those
subject to the de minimis exception described above). The Audit Committee
requested and received information from Ernst & Young LLP about any non-audit
services that Ernst & Young LLP rendered during the Fund's last fiscal year to
the Adviser and any Affiliated Fund Service Provider. The Committee considered
this information in evaluating Ernst & Young LLP independence.
FISCAL YEAR ENDED TOTAL NON-AUDIT FEES
BILLED TO ADVISER AND
AFFILIATED FUND SERVICE TOTAL NON-AUDIT FEES
PROVIDERS (ENGAGEMENTS BILLED TO ADVISER AND
RELATED DIRECTLY TO THE AFFILIATED FUND SERVICE
TOTAL NON-AUDIT FEES OPERATIONS AND FINANCIAL PROVIDERS (ALL OTHER
BILLED TO FUND REPORTING OF THE FUND) ENGAGEMENTS) TOTAL
------------------------------------------------------------------------------------------------------------------------------------
July 31, 2004 $ 12,896 $ 0 $ 0 $ 12,896
July 31, 2003 $ 0 $ 0 $ 0 $ 0
Audit Committee Pre-Approval Policies and Procedures. Generally, the audit
committee must approve (i) all non-audit services to be performed for the Fund
by the Fund's independent accountants and (ii) all audit and non-audit services
to be performed by the Fund's independent accountants for the Affiliated Fund
Service Providers with respect to operations and financial reporting of the
Fund. Regarding tax and research projects conducted by the independent
accountants for the Fund and Affiliated Fund Service Providers (with respect to
operations and financial reports of the Fund) such engagements will be (i)
pre-approved by the audit committee if they are expected to be for amounts
greater than $10,000; (ii) reported to the audit committee chairman for his
verbal approval prior to engagement if they are expected to be for amounts under
$10,000 but greater than $5,000; and (iii) reported to the audit committee at
the next audit committee meeting if they are expected to be for an amount under
$5,000.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable at this time.
ITEM 6. SCHEDULE OF INVESTMENTS.
See Item 1.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
In the rare event that a municipal issuer held by the Fund were to issue a proxy
or that the Fund were to receive a proxy issued by a cash management security,
the Adviser would either engage an independent third party to determine how the
proxy should be voted or vote the proxy with the consent, or based on the
instructions, of the Fund's Board of Directors or Trustees or its
representative. In the case of a conflict of interest, the proxy would be
submitted to the applicable Fund's Board to determine how the proxy should be
voted. A member of the Adviser's legal department would oversee the
administration of the voting, and ensure that records were maintained in
accordance with Rule 204-2(c)(2) under the Investment Advisers Act of 1940 (17
CFR 275.204-2(c)(2)), reports were filed with the SEC on Form N-PX, and the
results were provided to the Board of Directors or Trustees and made available
to shareholders as required by applicable rules.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable at this time.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
In the event of a vacancy on the Board, the nominating and governance committee
receives suggestions from various sources, including shareholders, as to
suitable candidates. Suggestions should be sent in writing to Lorna Ferguson,
Vice President for Board Relations, Nuveen Investments, 333 West Wacker Drive,
Chicago, IL 60606. The nominating and governance committee sets appropriate
standards and requirements for nominations for new directors and reserves the
right to interview all candidates and to make the final selection of any new
directors.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers,
or persons performing similar functions, have concluded that the
registrant's disclosure controls and procedures (as defined in Rule
30a-3(c) under the Investment Company Act of 1940, as amended (the
"1940 Act") (17 CFR 270.30a-3(c))) are effective, as of a date within
90 days of the filing date of this report that includes the disclosure
required by this paragraph, based on their evaluation of the controls
and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR
270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")(17 CFR
240.13a-15(b) or 240.15d-15(b)).
(b) There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940 Act
(17 CFR 270.30a-3(d)) that occurred during the registrant's last
fiscal half-year (the registrant's second fiscal half-year in the case
of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting.
ITEM 12. EXHIBITS.
File the exhibits listed below as part of this Form. Letter or number the
exhibits in the sequence indicated.
(a)(1) Any code of ethics, or amendment thereto, that is the subject of the
disclosure required by Item 2, to the extent that the registrant intends to
satisfy the Item 2 requirements through filing of an exhibit: Not applicable
because posted on registrant's website at www.nuveen.com/etf.
(a)(2) A separate certification for each principal executive officer and
principal financial officer of the registrant as required by Rule 30a-2(a) under
the 1940 Act (17 CFR 270.30a-2(a)) in the exact form set forth below: Ex-99.CERT
Attached hereto.
(a)(3) Any written solicitation to purchase securities under Rule 23c-1 under
the 1940 Act (17 CFR 270.23c-1) sent or given during the period covered by the
report by or on behalf of the registrant to 10 or more persons. Not applicable.
(b) If the report is filed under Section 13(a) or 15(d) of the Exchange Act,
provide the certifications required by Rule 30a-2(b) under the 1940 Act (17 CFR
270.30a-2(b)); Rule 13a-14(b) or Rule 15d-14(b) under the Exchange Act (17 CFR
240.13a-14(b) or 240.15d-14(b)), and Section 1350 of Chapter 63 of Title 18 of
the United States Code (18 U.S.C. 1350) as an exhibit. A certification furnished
pursuant to this paragraph will not be deemed "filed" for purposes of Section 18
of the Exchange Act (15 U.S.C. 78r), or otherwise subject to the liability of
that section. Such certification 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 it by
reference. Ex-99.906 CERT attached hereto.
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.
(Registrant) Nuveen Preferred and Convertible Income Fund 2
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By (Signature and Title)* /s/ Jessica R. Droeger
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Jessica R. Droeger
Vice President and Secretary
Date: October 12, 2004
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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 (Signature and Title)* /s/ Gifford R. Zimmerman
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Gifford R. Zimmerman
Chief Administrative Officer
(Principal Executive Officer)
Date: October 12, 2004
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By (Signature and Title)* /s/ Stephen D. Foy
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Stephen D. Foy
Vice President and Controller
(Principal Financial Officer)
Date: October 12, 2004
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* Print the name and title of each signing officer under his or her signature.