Pre-Effective Amendment to Registration Statement of a Closed-End Investment Company — Form N-2
Filing Table of Contents
Document/Exhibit Description Pages Size
1: N-2/A Nuveen Preferred Convertible Income Fund 137 698K
2: EX-99.D Form of Share Certificate 2 12K
3: EX-99.E Dividend Reinvestment Plan 4 15K
4: EX-99.I Deferred Compensation Plan 13 46K
5: EX-99.N Consent of Ernst & Young LLP 1 6K
6: EX-99.R.1 Code of Ethics of Nuveen Institutional 15 43K
7: EX-99.R.2 Code of Ethics of Spectrum Asset Management 17 63K
8: EX-99.S Power of Attorney 1 8K
As filed with the Securities and Exchange Commission on February 12, 2003
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1933 Act File No. 333-102903
1940 Act File No. 811-21293
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-2
(Check appropriate box or boxes)
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[X] Pre-Effective Amendment No. 1
[ ] Post-Effective Amendment No. _
and
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] Amendment No. 1
Nuveen Preferred and Convertible Income Fund
Exact Name of Registrant as Specified in Declaration of Trust
333 West Wacker Drive, Chicago, Illinois 60606
Address of Principal Executive Offices (Number, Street, City, State, Zip Code)
(800) 257-8787
Registrant's Telephone Number, including Area Code
Jessica R. Droeger
Vice President and Secretary
333 West Wacker Drive
Chicago, Illinois 60606
Name and Address (Number, Street, City, State, Zip Code) of Agent for Service
Copies of Communications to:
Stacy H. Winick Eric F. Fess Sarah E. Cogan
Bell, Boyd & Lloyd LLC Chapman and Cutler Simpson Thacher & Bartlett
70 W. Madison St. 111 W. Monroe 425 Lexington Ave.
Chicago, IL 60602 Chicago, IL 60603 New York, NY 10017
Approximate Date of Proposed Public Offering:
As soon as practicable after the effective date of this Registration Statement
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If any of the securities being registered on this form are offered on a
delayed or continuous basis in reliance on Rule 415 under the Securities Act of
1933, other than securities offered in connection with a dividend reinvestment
plan, check the following box. [ ]
It is proposed that this filing will become effective (check appropriate
box)
[ ] when declared effective pursuant to section 8(c)
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CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
[Enlarge/Download Table]
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Proposed Maximum
Title of Securities Being Amount Proposed Maximum Aggregate Offering Amount of
Registered Being Registered Offering Price Per Unit Price (1) Registration Fee (2)
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Common Shares, $0.01 par value 1,000 Shares $15.00 $15,000 $1.38
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(1) Estimated solely for the purpose of calculating the registration fee.
(2) All of which has already been paid.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such dates as the Commission, acting pursuant to said Section 8(a),
may determine.
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The information in this Prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This Prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED , 2003
PROSPECTUS
Shares
Nuveen Preferred and Convertible Income Fund
Common Shares
$15.00 per share
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Investment Objectives. The Fund is a newly organized, diversified,
closed-end management investment company.
. The Fund's primary investment objective is high current income; and
. The Fund's secondary objective is total return.
No Prior History. Because the Fund is newly organized, its common shares
have no history of public trading. Shares of closed-end investment companies
frequently trade at a discount from their net asset value. This risk may be
greater for investors who expect to sell their shares in a relatively short
period after completion of the public offering.
(continued on following page)
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Investing in common shares involves certain risks. See "Risks" beginning on
page .
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this Prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
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[Download Table]
Per Share Total/ (3)/
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Public Offering Price $15.000 $
Sales Load/(1)/ $ 0.675 $
Estimated Offering Expenses/(2)/ $ $
Proceeds to the Fund $ $
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(1)Certain underwriters that may also participate in any future offering of
preferred shares of the Fund may receive additional compensation in that
offering based on their participation in this offering. See "Underwriting."
(2)Total expenses of issuance and distribution (other than underwriting
discounts and commissions) are estimated to be $ . Nuveen Investments,
LLC has agreed to reimburse offering expenses in excess of $0.03 per share.
(3)The Fund has granted the underwriters an option to purchase up to
additional common shares at the Public Offering Price less the Sales Load,
solely to cover over-allotments, if any. If such option is exercised in
full, the total Public Offering Price, Sales Load, Estimated Offering
Expenses and Proceeds to the Fund will be $ , $ ,
$ and $ , respectively. See "Underwriting."
The underwriters expect to deliver the common shares to purchasers on or about
, 2003.
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Salomon Smith Barney Nuveen Investments
, 2003
The common shares have been approved for listing on the
Exchange, subject to notice of issuance. The trading or "ticker" symbol of the
common shares is "JPC".
Adviser and Subadvisers. Nuveen Institutional Advisory Corp. will be the
Fund's investment adviser, responsible for determining the Fund's overall
investment strategy, including allocating the portion of the Fund's assets to
be invested in preferred securities, convertible securities and other debt
instruments, and also for managing the portion of the Fund's assets allocated
to other debt instruments. Spectrum Asset Management, Inc. and Froley, Revy
Investment Company, Inc. will be the Fund's subadvisers. The Fund's assets
allocated to preferred securities will be managed by Spectrum Asset Management,
Inc. and the Fund's assets allocated to convertible securities will be managed
by Froley, Revy Investment Company, Inc.
Portfolio Contents. Under normal circumstances, the Fund:
. will invest at least 80% of its Managed Assets (as defined on page 4 of
this Prospectus) in preferred securities, convertible securities and
related instruments; and
. may invest up to 20% of its Managed Assets in other securities, including
debt instruments and common stocks acquired upon conversion of a
convertible security (such common stocks not normally to exceed 5% of the
Fund's Managed Assets).
Initially, Nuveen Institutional Advisory Corp. will allocate approximately
60%, 30% and 10% of the Fund's Managed Assets to preferred securities,
convertible securities and other debt instruments, respectively. Thereafter,
the portion of the Fund's Managed Assets invested in preferred securities,
convertible securities and other debt instruments will vary from time to time
consistent with the Fund's investment objectives, although the Fund will
normally invest at least 50% of its Managed Assets in preferred securities and
at least 20% of its Managed Assets in convertible securities (so long as the
combined total equals at least 80% of the Fund's Managed Assets). In making
allocation decisions, Nuveen Institutional Advisory Corp. will consider factors
such as interest rate levels, conditions and developing trends in the bond and
equity markets, analysis of relative valuations for preferred, convertible and
other debt instruments, and other economic and market factors, including the
overall outlook for the economy and inflation.
. The Fund will invest at least 65% of its Managed Assets in securities
that, at the time of investment, are investment grade quality, which
include split-rated securities (as defined on page 5 of this Prospectus)
and securities that are unrated but judged to be of comparable quality.
. The Fund may invest up to 35% of its Managed Assets in securities that, at
the time of investment, are not investment grade quality. The Fund will
only invest in securities that, at the time of investment, are rated B or
higher by at least one nationally recognized statistical rating
organization or that are unrated but judged to be of comparable quality,
except, however, the Fund may invest up to 5% of its Managed Assets in
securities with a highest rating of CCC or that are unrated but judged to
be of comparable quality.
The Fund intends that most or all of the preferred securities in which it
invests will be fully taxable and will not be eligible for the dividends
received deduction. There can be no assurance that the Fund will achieve its
investment objectives. See "The Fund's Investments" and "Risks."
You should read this Prospectus, which contains important information about
the Fund, before deciding whether to invest and retain it for future reference.
A Statement of Additional Information, dated , 2003, and as it may
be supplemented, containing additional information about the Fund, has been
filed with the Securities and Exchange Commission and is incorporated by
reference in its entirety into this Prospectus. You may request a free copy of
the Statement of Additional Information, the table of contents of which is on
page of this Prospectus, by calling (800) 257-8787 or by writing to the
Fund, or you may obtain a copy (and other information regarding the Fund) from
the Securities and Exchange Commission's web site (http://www.sec.gov).
The Fund's common shares do not represent a deposit or obligation of, and
are not guaranteed or endorsed by, any bank or other insured depository
institution, and are not federally insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board or any other government agency.
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You should rely only on the information contained or incorporated by
reference in this Prospectus. The Fund has not authorized anyone to provide you
with different information. The Fund is not making an offer of these securities
in any state where the offer is not permitted. You should not assume that the
information contained in this Prospectus is accurate as of any date other than
the date on the front of this Prospectus.
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TABLE OF CONTENTS
[Download Table]
Page
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Prospectus Summary........................................... 4
Summary of Fund Expenses..................................... 19
The Fund..................................................... 21
Use of Proceeds.............................................. 21
The Fund's Investments....................................... 21
Use of Leverage.............................................. 34
Hedging Transactions......................................... 36
Risks........................................................ 43
Management of the Fund....................................... 51
Net Asset Value.............................................. 54
Distributions................................................ 55
Dividend Reinvestment Plan................................... 57
Description of Shares........................................ 58
Certain Provisions in the Declaration of Trust............... 60
Repurchase of Fund Shares; Conversion to Open-End Fund....... 61
Tax Matters.................................................. 62
Underwriting................................................. 64
Custodian and Transfer Agent................................. 66
Legal Opinions............................................... 67
Table of Contents for the Statement of Additional Information 68
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Until , 2003 (25 days after the date of this Prospectus), all
dealers that buy, sell or trade the common shares, whether or not participating
in this offering, may be required to deliver a Prospectus. This is in addition
to the dealers' obligation to deliver a Prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
3
PROSPECTUS SUMMARY
This is only a summary. You should review the more detailed information
contained elsewhere in this Prospectus and in the Statement of Additional
Information to understand the offering fully.
The Fund.............. Nuveen Preferred and Convertible Income Fund (the
"Fund") is a newly organized, diversified,
closed-end management investment company.
The Offering.......... The Fund is offering common shares of
beneficial interest at $15.00 per share through a
group of underwriters (the "Underwriters") led by
Salomon Smith Barney Inc., Nuveen Investments, LLC
("Nuveen") and . The
common shares of beneficial interest are called
"Common Shares" in this Prospectus. You must
purchase at least 100 Common Shares in this
offering. The Fund has given the Underwriters an
option to purchase up to additional Common
Shares to cover orders in excess of
Common Shares. See "Underwriting." Nuveen has agreed
to pay (i) all organizational expenses and (ii)
offering costs (other than sales load) that exceed
$0.03 per Common Share.
Investment Objectives
and Policies.......... The Fund's primary investment objective is high
current income. The Fund's secondary investment
objective is total return. The Fund's investment
objectives and certain investment policies are
considered fundamental and may not be changed
without shareholder approval. The Fund cannot assure
you that it will attain its investment objectives.
See "The Fund's Investments," and "Risks".
Under normal circumstances the Fund:
. will invest at least 80% of its Managed Assets
in preferred securities, convertible securities
and related instruments. The Fund intends that
most or all of the preferred securities in
which it invests will be fully taxable and will
not be eligible for the dividends received
deduction; and
. may invest up to 20% of its Managed Assets in
other securities, including debt instruments
and common stocks acquired upon conversion of a
convertible security (such common stocks not
normally to exceed 5% of the Fund's Managed
Assets).
The Fund's average daily net assets (including assets
attributable to any FundPreferred(TM) shares (as
defined below) that may be outstanding and the
principal amount of Borrowings (as defined below))
is called "Managed Assets."
The Fund's assets allocated to preferred securities
will be managed by Spectrum Asset Management, Inc.
("Spectrum"). The Fund's assets allocated to
convertible securities will be managed by Froley,
Revy
4
Investment Company, Inc. ("Froley, Revy"). The
Fund's assets allocated to other debt instruments
will be managed by Nuveen Institutional Advisory
Corp. ("NIAC").
NIAC will be responsible for determining the Fund's
overall investment strategy, including allocating
the portion of the Fund's assets to be invested in
preferred securities, convertible securities and
other debt instruments. Initially, NIAC will
allocate approximately 60%, 30% and 10% of the
Fund's Managed Assets to preferred securities,
convertible securities, and other debt instruments,
respectively. Thereafter, the portion of the Fund's
Managed Assets invested in preferred securities,
convertible securities and other debt instruments
will vary from time to time consistent with the
Fund's investment objectives, although the Fund will
normally invest at least 50% of its Managed Assets
in preferred securities and at least 20% of its
Managed Assets in convertible securities (so long as
the combined total equals at least 80% of the Fund's
Managed Assets). See "The Fund's Investments" and
"Management of the Fund."
. The Fund will invest at least 65% of its
Managed Assets in securities that, at the time
of investment, are investment grade quality.
Initially, the Fund intends to invest
approximately 75% of its Managed Assets in
investment grade quality securities. Investment
grade quality securities are those securities
that, at the time of investment, are (i) rated
by at least one nationally recognized
statistical rating organization ("NRSRO")
within the four highest grades (Baa or BBB or
better by Moody's Investors Service, Inc.
("Moody's"), Standard & Poor's Corporation, a
division of The McGraw-Hill Companies ("S&P")
or Fitch Ratings ("Fitch")), or (ii) unrated
but judged to be of comparable quality.
Securities that, at the time of investment, are
rated below investment grade by Moody's, S&P or
Fitch, so long as at least one NRSRO rates such
securities within the four highest grades (such
securities are called "split-rated
securities"), are also included as investment
grade quality securities.
. The Fund may invest up to 35% of its Managed
Assets in securities that, at the time of
investment, are not investment grade quality.
The Fund will only invest in securities that,
at the time of investment, are rated B or
higher by at least one NRSRO or that are
unrated but judged to be of comparable quality
by the Adviser responsible for the investment,
except, however, the Fund may invest up to 5%
of its Managed Assets in securities with a
highest rating of CCC or that are unrated but
judged to be of comparable quality.
Securities of below investment grade quality are
regarded as having predominately speculative
characteristics with respect to capacity to
5
pay interest and repay principal, and are commonly
referred to as junk bonds. See "The Fund's
Investments--Investment Objectives and Policies" and
"Risks--High Yield Securities."
In addition, under normal circumstances:
. The Fund intends to invest at least 25% of its
Managed Assets in the securities of companies
principally engaged in financial services. See
"The Fund's Investments--Portfolio
Composition--Financial Services Company
Securities."
. The Fund may invest up to 10% of its Managed
Assets in securities that, at the time of
investment, are illiquid (i.e., securities that
are not readily marketable). All securities and
other instruments in which the Fund invests
will be subject to this 10% limitation to the
extent they are deemed to be illiquid.
Initially, the Fund does not intend to invest
more than 5% of its Managed Assets in illiquid
securities.
. The Fund may invest up to 35% of its Managed
Assets in securities of non-U.S. issuers. Up to
10% of the Fund's Managed Assets may be
invested in securities that are denominated in
Japanese yen, Canadian dollars, British pounds
or Euros and which may be offered, traded or
listed in markets other than U.S. markets. The
remainder of the Fund's Managed Assets that may
be invested in securities of non-U.S. issuers
will be invested in U.S. dollar denominated
securities offered, traded or listed in U.S.
markets. Initially, the Fund does not intend to
invest more than 20% of its Managed Assets in
securities of non-U.S. issuers, and does not
currently intend to invest in the non-U.S.
dollar denominated securities described above.
For a more complete discussion of the Fund's initial
portfolio composition, see "The Fund's
Investments--Initial Portfolio Composition."
The taxable preferred securities in which the Fund
intends to invest generally do not pay dividends
that qualify for the dividends received deduction
(the "Dividends Received Deduction") under Section
243 of the Internal Revenue Code of 1986, as amended
(the "Code"). The Dividends Received Deduction
generally allows corporations to deduct from their
income 70% of dividends received. Accordingly, any
corporate shareholder who otherwise would qualify
for the Dividends Received Deduction should not
assume that the distributions it receives from the
Fund will qualify for the Dividends Received
Deduction.
Proposed Use of
Leverage.............. The Fund, if market conditions are deemed favorable,
likely will use leverage by issuing preferred stock
("FundPreferred/TM/ shares"), commercial paper or
notes and/or borrowing in an aggregate amount of
approximately 33 1/3% of the Fund's capital after
such issuance and/
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or borrowing. There is no assurance that the Fund
will issue FundPreferred shares, commercial paper or
notes or engage in borrowing transactions.
Subject to market conditions and the Fund's receipt of
a AA/Aa credit rating or better from a NRSRO on
FundPreferred shares, within approximately one and
one-half to two months after completion of this
offering, the Fund intends to offer FundPreferred
shares. FundPreferred shares will have seniority
over the Common Shares. The issuance of
FundPreferred shares will leverage your investment
in Common Shares.
Any issuance of commercial paper or notes or borrowing
will have seniority over the Common Shares.
Throughout this Prospectus, commercial paper, notes
or borrowings sometimes may be collectively referred
to as "Borrowings."
There is no guarantee that the Fund's leverage
strategy will be successful. See "Risks--Leverage
Risk." FundPreferred shares will pay dividends based
on short-term rates, which will be reset frequently.
Borrowings may be at a fixed or floating rate and
generally will be based on short-term rates. So long
as the rate of return, net of applicable Fund
expenses, on the Fund's portfolio investments
exceeds the then current FundPreferred share
dividend rate or the interest rate on any
Borrowings, the investment of the proceeds of
FundPreferred shares or Borrowings will generate
more income than will be needed to pay such
dividends or interest payment. If so, the excess
will be available to pay higher dividends to holders
of Common Shares ("Common Shareholders").
Proposed Use of Hedging
Transactions.......... The Fund may use derivatives or other transactions for
purposes of hedging the portfolio's exposure to the
risk of increases in interest rates, common stock
risk, high yield credit risk and foreign currency
exchange rate risk. The specific derivative
instruments to be used, or other transactions to be
entered into, each for hedging purposes may include
(i) options and futures contracts, including options
on common stock, stock indexes, bonds and bond
indexes, stock index futures, bond index futures and
related instruments, (ii) short sales of securities
that the Fund owns or has the right to acquire
through the conversion of securities, (iii)
structured notes and similar instruments, (iv)
credit derivative instruments and (v) currency
exchange transactions. Some, but not all, of the
derivative instruments may be traded and listed on
an exchange. The positions in derivatives will be
marked-to-market daily at the closing price
established on the relevant exchange or at a fair
value. See "The Fund's Investments--Portfolio
Composition--Hedging Transactions," "Risks--Hedging
Risk" and "Risks--Counterparty Risk." Except for
investing in synthetic convertible securities, the
Fund will use derivatives or other transactions
described above solely for purposes of hedging the
Fund's portfolio risks.
7
Interest Rate
Transactions.......... In connection with the Fund's likely use of leverage
through the sale of FundPreferred shares or
Borrowings, the Fund, if market conditions are
deemed favorable, likely will enter into interest
rate swap or cap transactions to attempt to protect
itself from increasing dividend or interest expenses
on its FundPreferred Shares or Borrowings. The use
of interest rate swaps and caps is a highly
specialized activity that involves investment
techniques and risks different from those associated
with ordinary portfolio security transactions.
In an interest rate swap, the Fund would agree to pay
to the other party to the interest rate swap (which
is known as the "counterparty") a fixed rate payment
in exchange for the counterparty agreeing to pay to
the Fund a payment at a variable rate that is
expected to approximate the rate on the Fund's
variable rate payment obligation on FundPreferred
shares or any variable rate Borrowings. The payment
obligations would be based on the notional amount of
the swap.
In an interest rate cap, the Fund would pay a premium
to the counterparty to the interest rate cap and, to
the extent that a specified variable rate index
exceeds a predetermined fixed rate, would receive
from the counterparty payments of the difference
based on the notional amount of such cap. Depending
on the state of interest rates in general, the
Fund's use of interest rate swaps or caps could
enhance or harm the overall performance of the
Common Shares. To the extent there is a decline in
interest rates, the value of the interest rate swap
or cap could decline, and could result in a decline
in the net asset value of the Common Shares. In
addition, if the counterparty to an interest rate
swap or cap defaults, the Fund would not be able to
use the anticipated net receipts under the swap or
cap to offset the dividend payments on FundPreferred
shares or interest payments on Borrowings.
Depending on whether the Fund would be entitled to
receive net payments from the counterparty on the
swap or cap, which in turn would depend on the
general state of short-term interest rates at that
point in time, such a default could negatively
impact the performance of the Common Shares. In
addition, at the time an interest rate swap or cap
transaction reaches its scheduled termination date,
there is a risk that the Fund would not be able to
obtain a replacement transaction or that the terms
of the replacement would not be as favorable as on
the expiring transaction. If this occurs, it could
have a negative impact on the performance of the
Common Shares. If the Fund fails to maintain a
required 200% asset coverage of the liquidation
value of the outstanding FundPreferred shares or if
the Fund loses its expected rating on FundPreferred
shares of at least AA/Aa or fails to maintain other
covenants, the Fund may be required to redeem some
or all of the FundPreferred shares. Similarly, the
Fund could be required to prepay the principal
amount of any Borrowings. Such redemption or
prepayment would likely result in the Fund seeking
to terminate early all or a portion of any swap or
8
cap transaction. Early termination of a swap could
result in a termination payment by or to the Fund.
Early termination of a cap could result in a
termination payment to the Fund. The Fund intends to
maintain in a segregated account with its custodian
cash or liquid securities having a value at least
equal to the Fund's net payment obligations under
any swap transaction, marked-to-market daily. The
Fund will not enter into interest rate swap or cap
transactions having a notional amount that exceeds
the outstanding amount of the Fund's leverage.
See "Use of Leverage" and "Hedging Transactions" for
additional information.
Investment Adviser and
Subadvisers........... NIAC will be the Fund's investment adviser,
responsible for determining the Fund's overall
investment strategy, including allocating the
portion of the Fund's assets to be invested in
preferred securities, convertible securities and
other debt instruments, and also for managing a
portion of the Fund's assets. In making allocation
decisions, NIAC will consider factors such as
interest rate levels, conditions and developing
trends in the bond and equity markets, analysis of
relative valuations for preferred, convertible and
other debt instruments, and other economic and
market factors, including the overall outlook for
the economy and inflation.
The Fund's assets allocated to preferred securities
will be managed by Spectrum. The Fund's assets
allocated to convertible securities will be managed
by Froley, Revy. The Fund's assets allocated to
other debt instruments will be managed by NIAC.
Spectrum and Froley, Revy will sometimes
individually be referred to as a "Subadviser" and
collectively be referred to as the "Subadvisers."
NIAC, Spectrum and Froley, Revy will sometimes
individually be referred to as an "Adviser" and
collectively be referred to as the "Advisers."
NIAC, a registered instrument adviser, is a wholly
owned subsidiary of Nuveen Instruments, Inc. Founded
in 1898, Nuveen Investments, Inc. and its affiliates
had approximately $80 billion of assets under
management as of , 2003. According to
Thomson Wealth Management, Nuveen is the leading
sponsor of closed-end exchange-traded funds as
measured by the number of funds (102) and the amount
of assets under management (approximately $40
billion) as of , 2003.
Spectrum, a registered investment adviser, is an
independently managed wholly owned subsidiary of
Principal Global Investors, LLC. Founded in 1987,
Spectrum had approximately $6.2 billion in assets
under management as of January 31, 2003. Spectrum
specializes in the management of diversified
preferred security portfolios primarily for
institutional clients. Collectively, subsidiaries
and affiliates of Principal Global Investors, LLC
managed over $ billion in combined assets
worldwide as of , 2003.
9
Froley, Revy, a registered investment adviser, is an
independently managed wholly owned subsidiary of
First Republic Bank. Founded in 1975, Froley, Revy
had approximately $2 billion in assets under
management as of January 31, 2003. Froley, Revy
specializes in the management of convertible
securities. Collectively, subsidiaries and
affiliates of First Republic Bank managed over
$[4] billion in combined assets as of , 2003.
NIAC will receive an annual fee, payable monthly, in a
maximum amount equal to .90% of the Fund's Managed
Assets (as previously defined, Managed Assets
include assets attributable to any FundPreferred
shares that may be outstanding and the principal
amount of Borrowings), with lower fee levels for
assets that exceed $500 million. NIAC will pay a
portion of that fee to each of the Subadvisers based
on each Subadviser's allocated portion of Managed
Assets. The Advisers have contractually agreed to
reimburse the Fund for fees and expenses in the
amount of .32% of average daily Managed Assets of
the Fund for the first five full years of the Fund's
operations (through March 31, 2007), and for a
declining amount for an additional three years
(through March 31, 2011). For more information on
fees and expenses, including fees attributable to
Common Shares, see "Management of the Fund."
Distributions......... Subject to the discussion in the following paragraph,
commencing with the Fund's first dividend, the Fund
intends to make regular monthly cash distributions
to Common Shareholders at a level rate (stated in
terms of a fixed cents per Common Share dividend
rate) based on the projected performance of the Fund
("Level Rate Dividend Policy"). The Fund's ability
to maintain a Level Rate Dividend Policy will depend
on a number of factors, including the stability of
income received from its investments and dividends
payable on the FundPreferred shares or interest and
required principal payments on Borrowings. As
portfolio and market conditions change, the rate of
dividends on the Common Shares and the Fund's
dividend policy could change. Over time, the Fund
will distribute all of its net investment income
(after it pays accrued dividends on, or redeems or
liquidates, any outstanding FundPreferred shares, if
any, and interest and required principal payments on
Borrowings, if any). In addition, at least annually,
the Fund intends to distribute net capital gain and
taxable ordinary income, if any, to you so long as
the net capital gain and taxable ordinary income are
not necessary to pay accrued dividends on, or redeem
or liquidate, any FundPreferred shares, or pay
interest on or repay any Borrowings. Your initial
distribution is expected to be declared
approximately 45 days, and paid approximately 60 to
90 days, from the completion of this offering,
depending on market conditions. In most
circumstances, you may elect to automatically
reinvest some or all of your distributions in
additional Common Shares under the Fund's Dividend
Reinvestment Plan. See "Distributions" and "Dividend
Reinvestment Plan."
In June 2002, NIAC, on behalf of itself and certain
funds, filed an exemptive application with the
Securities and Exchange Commission
10
seeking an order under the Investment Company Act of
1940 (the "1940 Act") facilitating the
implementation of a dividend policy calling for
monthly distributions of a fixed percentage of its
net asset value ("Managed Dividend Policy"). The
application will be amended to include the Fund as a
party. If, and when, NIAC, on behalf of itself and
other parties, receives the requested relief, the
Fund may, subject to the determination of its Board
of Trustees, implement a Managed Dividend Policy.
See "Distributions."
Listing............... The Common Shares have been approved for listing on
the Exchange, subject to notice of
issuance. See "Description of Shares--Common
Shares." The trading or "ticker" symbol of the
Common Shares is "JPC". Because of this exchange
listing, the Fund may sometimes be referred to in
public communications as a "closed-end
exchange-traded fund" or "exchange-traded fund."
Custodian and Transfer
Agent................. State Street Bank and Trust Company will serve as
custodian and transfer agent for the Fund. See
"Custodian and Transfer Agent."
Market Discount from
Net Asset Value....... Shares of closed-end investment companies frequently
trade at prices lower than net asset value. This
characteristic is separate and distinct from the
risk that net asset value could decrease as a result
of investment activities and may be a greater risk
to investors expecting to sell their shares in a
relatively short period of time following the
completion of this offering. The Fund cannot predict
whether Common Shares will trade at, above or below
net asset value. Net asset value will be reduced
immediately following the offering by the sales load
and the amount of organization and offering expenses
paid by the Fund. See "Use of Proceeds," "Use of
Leverage," "Risks," "Description of Shares,"
"Repurchase of Fund Shares; Conversion to Open-End
Fund" and the Statement of Additional Information
under "Repurchase of Fund Shares; Conversion to
Open-End Fund." The Common Shares are designed
primarily for long-term investors, and you should
not view the Fund as a vehicle for trading purposes.
Special Risk
Considerations........ No Operating History. The Fund is a newly organized,
diversified, closed-end management investment
company with no history of operations.
Investment and Market Risk. An investment in the
Fund's Common Shares is subject to investment risk,
including the possible loss of the entire principal
amount that you invest. Your investment in Common
Shares represents an indirect investment in the
securities owned by the Fund, substantially all of
which are traded on a national securities exchange
or in the over-the-counter markets. The value of
these securities, like other market investments, may
move up or down, sometimes rapidly and unpredictably.
11
Your Common Shares at any point in time may be worth
less than your original investment, even after
taking into account the reinvestment of Fund
dividends and distributions. The Fund intends to
utilize leverage, which magnifies the stock market
and interest rate risks. See "Use of Leverage" and
"Risks--Investment and Market Risk."
Interest Rate Risk. Interest rate risk is the risk
that fixed-income securities such as preferred,
convertible and other debt securities will decline
in value because of changes in market interest
rates. When market interest rates rise, the market
value of such securities generally will fall. The
Fund's investment in such securities means that the
net asset value and market price of Common Shares
will tend to decline if market interest rates rise.
During periods of declining interest rates, an issuer
may exercise its option to prepay principal earlier
than scheduled, forcing the Fund to reinvest in
lower yielding securities. This is known as call or
prepayment risk. During periods of rising interest
rates, the average life of certain types of
securities may be extended because of slower than
expected principal payments. This may lock in a
below market interest rate, increase the security's
duration and reduce the value of the security. This
is known as extension risk. See "Risks--Investment
and Market Risk" and "Risks--Interest Rate Risk."
Credit Risk; Subordination. Credit risk is the risk
that a security in the Fund's portfolio will decline
in price or fail to make dividend or interest
payments when due because the issuer of the security
experiences a decline in its financial status.
Preferred and convertible securities are typically
subordinated to bonds and other debt instruments in
a company's capital structure, in terms of priority
to corporate income, and therefore will be subject
to greater credit risk than those debt instruments.
See "Risks--Credit Risk; Subordination" and
"Risks--High Yield Risk."
High Yield Risk. The Fund may invest up to 35% of
its Managed Assets in securities that, at the time
of investment, are not investment grade quality. The
Fund will only invest in securities that, at the
time of investment, are rated B or higher by at
least one NRSRO or that are unrated but judged to be
of comparable quality by the Adviser responsible for
the investment, except, however, the Fund may invest
up to 5% of its Managed Assets in securities with a
highest rating of CCC or that are unrated but judged
to be of comparable quality by the Adviser
responsible for the investment. Securities of below
investment grade quality are regarded as having
predominately speculative characteristics with
respect to capacity to pay interest and repay
principal, and are commonly referred to as junk
bonds. Issuers of high yield securities may be
highly leveraged and may not have available to them
more traditional methods of financing. The prices of
these lower grade securities are typically more
sensitive to negative developments, such as a
decline in the issuer's revenues or a general
economic
12
downturn, than are the prices of higher grade
securities. The secondary market for high yield
securities may not be as liquid as the secondary
market for more highly rated securities, a factor
which may have an adverse effect on the Fund's
ability to dispose of a particular security. See
"Risks--Credit Risk; Subordination" and "Risks--High
Yield Risk."
Convertible Security Risk. Convertible securities
generally offer lower interest or dividend yields
than non-convertible fixed-income securities of
similar credit quality because of the potential for
capital appreciation. The market values of
convertible securities tend to decline as interest
rates increase and, conversely, to increase as
interest rates decline. However, a convertible
security's market value also tends to reflect the
market price of the common stock of the issuing
company, particularly when that stock price is
greater than the convertible security's "conversion
price." The conversion price is defined as the
predetermined price at which the convertible
security could be exchanged for the underlying
common stock. As the market price of the underlying
common stock declines below the conversion price,
the price of the convertible security tends to be
increasingly influenced more by the yield of the
convertible security. Thus, it may not decline in
price to the same extent as the underlying common
stock. In the event of a liquidation of the issuing
company, holders of convertible securities would be
paid before the company's common stockholders.
Consequently, an issuer's convertible securities
generally entail less risk than its common stock.
However, convertible securities fall below debt
obligations of the same issuer in order of
preference or priority in the event of a liquidation
and are typically unrated or rated lower than such
debt obligations. See "Risks--Credit Risk;
Subordination."
Mandatory convertible securities are distinguished as
a subset of convertible securities because the
conversion is not optional and the conversion price
at maturity (or redemption) is based solely upon the
market price of the underlying common stock, which
may be significantly less than par or the price
(above or below par) paid. For these reasons, the
risks associated with investing in mandatory
convertible securities most closely resemble the
risks inherent in common stocks. Mandatory
convertible securities customarily pay a higher
coupon yield to compensate for the potential risk of
additional price volatility and loss upon
conversion. Because the market price of a mandatory
convertible security increasingly corresponds to the
market price of its underlying common stock, as the
convertible security approaches its conversion date,
there can be no assurance that the higher coupon
will compensate for a potential loss. See
"Risks--Convertible Security Risk" and
"Risks--Common Stock."
Synthetic Convertible Security Risk. Although the
Fund does not currently intend to invest in
synthetic convertible securities, it may invest up
to 10% of its Managed Assets in such securities. The
Fund may invest in synthetic convertible securities
created by third parties
13
that, similar to true convertible securities,
typically trade as a single security with a unitary
value. The Fund may also invest in synthetic
convertible securities by acquiring separate
securities, one possessing a fixed-income component
and the other possessing an equity component. The
value of a synthetic convertible security that is
comprised of separate securities may respond
differently to market fluctuations than a true
convertible security or a synthetic convertible
security traded as a single security because each
separate security comprising such a synthetic
convertible security has its own market value. In
addition, because the equity component may be
synthetically achieved by investing in warrants or
options to buy common stock at a certain exercise
price, or options on a stock index, synthetic
convertible securities are subject to the risks
associated with warrants and options. See
"Risks--Convertible Security Risk" and "Risks--Risks
of Warrants and Options." In addition, if the value
of the underlying common stock or the level of the
index involved in the equity component falls below
the exercise price of the warrant or option, the
warrant or option may lose all value. See
"Risks--Synthetic Convertible Security Risk."
The Fund will be subject to the risks of warrants and
options to the extent it invests in synthetic
convertible securities that use warrants or options
on common stocks or common stock indexes as their
equity components. Warrants and options are subject
to a number of risks associated with derivative
instruments generally and described elsewhere in
this Prospectus, such as illiquidity risks and risks
associated with investments in common stocks. They
also involve the risk of mispricing or improper
valuation, the risk of ambiguous documentation, and
the risk that changes in the value of a warrant or
option may not correlate perfectly with its
underlying common stock or common stock index.
Leverage Risk. The use of leverage through the Fund's
issuance of FundPreferred shares or Borrowings
creates an opportunity for increased Common Share
net income and returns but also creates special
risks for Common Shareholders as described below. In
addition, there is no assurance that the Fund's
leveraging strategy will be successful. The Fund
will pay (and Common Shareholders will bear) any
costs and expenses relating to the issuance and
ongoing maintenance of FundPreferred shares (for
example, distribution related expenses such as a
participation fee paid at what the Fund expects will
be an annual rate of 0.25% of FundPreferred share
liquidation preference to broker-dealers
successfully participating in FundPreferred share
auctions).
Leverage creates two major types of risks for Common
Shareholders:
. the likelihood of greater volatility of net
asset value and market price of Common Shares
because changes in the value of the Fund's
portfolio investments, including investments
purchased with the proceeds of the issuance of
FundPreferred
14
shares or Borrowings, are borne entirely by the
Common Shareholders; and
. the possibility either that Common Share income
will fall if the dividend rate on FundPreferred
shares or the interest rate on any Borrowings
rises, or that Common Share income will
fluctuate because the dividend rate on
FundPreferred shares or the interest rate on
any Borrowings varies.
See "Risks--Leverage Risk."
Concentration Risk. The Fund intends to invest at
least 25% of its Managed Assets in securities of
companies principally engaged in financial services.
This policy makes the Fund more susceptible to
adverse economic or regulatory occurrences affecting
that sector.
A company is "principally engaged" in financial
services if it has financial services-related
businesses that generate at least 50% of its
revenues. Companies in the financial services sector
include commercial banks, industrial banks, savings
institutions, finance companies, diversified
financial services companies, investment banking
firms, securities brokerage houses, investment
advisory companies, leasing companies, insurance
companies and companies providing similar services.
Concentration of investments in the financial
services sector includes the following risks:
. financial services companies may suffer a
setback if regulators change the rules under
which they operate;
. unstable interest rates can have a
disproportionate effect on the financial
services sector;
. financial services companies whose securities
the Fund may purchase may themselves have
concentrated portfolios, such as a high level
of loans to real estate developers, which makes
them vulnerable to economic conditions that
affect that sector; and
. financial services companies have been affected
by increased competition, which could adversely
affect the profitability or viability of such
companies.
See "Risks--Concentration Risk."
Non-U.S. Securities Risk. The Fund may invest up to
35% of its Managed Assets in securities of non-U.S.
issuers. Up to 10% of the Fund's Managed Assets may
be invested in securities that are denominated in
Japanese yen, Canadian dollars, British pounds or
Euros and which may be offered, traded or listed in
markets other than U.S. markets. The remainder of
the Fund's Managed Assets that may be invested in
securities of non-U.S. issuers will be invested in
U.S. dollar denominated securities offered, traded
or listed in U.S.
15
markets. Initially, the Fund does not intend to
invest more than 20% of its Managed Assets in
securities of non-U.S. issuers and does not
currently intend to invest in the non-U.S. dollar
denominated securities described above. Investments
in securities of non-U.S. issuers involve special
risks not presented by investments in securities of
U.S. issuers, including the following: less publicly
available information about non-U.S. issuers or
markets due to less rigorous disclosure or
accounting standards or regulatory practices; many
non-U.S. markets are smaller, less liquid and more
volatile; potential adverse effects of fluctuations
in currency exchange rates or controls on the value
of the Fund's investments; the economies of non-U.S.
countries may grow at slower rates than expected or
may experience a downturn or recession; the impact
of economic, political, social or diplomatic events;
possible seizure, economic withholding and other
non-U.S. taxes may decrease the Fund's return. These
risks are more pronounced to the extent that the
Fund invests a significant amount of its investments
in companies located in one region. See
"Risks--Non-U.S. Securities Risk."
Common Stock Risk. The Fund will have exposure to
common stocks by virtue of the common stock
component of the convertible securities in which the
Fund invests. The Fund also may hold common stocks
in its portfolio upon conversion of a convertible
security, such holdings not normally to exceed 5% of
the Fund's Managed Assets. In addition, in keeping
with the income focus of the Fund, the Fund expects
to sell any common stock holdings as soon as
practicable after conversion of a convertible
security. Although common stocks historically have
generated higher average returns than fixed-income
securities, common stocks also have experienced
significantly more volatility in those returns. An
adverse event, such as an unfavorable earnings
report, may depress the value of a particular common
stock held by the Fund. Also, the price of common
stocks are sensitive to general movements in the
stock market and a drop in the stock market may
depress the price of common stocks to which the Fund
has exposure.
Hedging Risk. The Fund may use derivatives or other
transactions for purposes of hedging the portfolio's
exposure to the risk of increases in interest rates,
common stock risk, high yield credit risk and
foreign currency exchange rate risk that could
result in poorer overall performance for the Fund.
The Fund's use of derivatives or other transactions
to reduce risk involves costs and will be subject to
an Adviser's ability to correctly predict changes in
interest rate relationships or other factors. No
assurance can be given that such Adviser's judgment
in this respect will be correct. In addition, no
assurance can be given that the Fund will enter into
hedging or other transactions at times or under
circumstances in which it may be advisable to do so.
See "Hedging Transactions" and "Risks--Hedging
Risk." Except for investing in synthetic convertible
securities, the Fund will use derivatives or other
transactions described above solely for purposes of
hedging the Fund's portfolio risks.
16
Interest Rate Transactions Risk. The Fund may enter
into an interest rate swap or cap transaction to
attempt to protect itself from increasing dividend
or interest expenses on its FundPreferred shares or
Borrowings resulting from increasing short-term
interest rates. A decline in interest rates may
result in a decline in the value of the swap or cap,
which may result in a decline in the net asset value
of the Fund. See "Use of Leverage" and "Hedging
Transactions."
Limited Voting Rights of Preferred
Securities. Generally, preferred security holders
(such as the Fund) have no voting rights with
respect to the issuing company unless preferred
dividends have been in arrears for a specified
number of periods at which time the preferred
security holders may elect a number of directors to
the issuer's board. Generally, once all the
arrearages have been paid, the preferred security
holders no longer have voting rights. In the case of
taxable preferred securities (as described under
"The Fund's Investments--Portfolio Composition"),
holders generally have no voting rights, except if
(i) the issuer fails to pay dividends for a
specified period of time or (ii) a declaration of
default occurs and is continuing.
Special Redemption Rights of Preferred Securities. In
certain varying circumstances, an issuer of
preferred securities may redeem the securities prior
to a specified date. For instance, for certain types
of preferred securities, a redemption may be
triggered by a change in federal income tax or
securities laws. As with call provisions, a special
redemption by the issuer may negatively impact the
return of the security held by the Fund.
See "Risks--Certain Risks Related to Preferred
Securities."
Corporate Loan Risk. The Fund may invest up to 20% of
its Managed Assets in other debt instruments,
including corporate loans. Corporate loans in which
the Fund may invest may not be rated by an NRSRO at
the time of investment, generally will not be
registered with the Securities and Exchange
Commission and generally will not be listed on a
securities exchange. In addition, the amount of
public information available with respect to
corporate loans generally will be less extensive
than that available for more widely rated,
registered and exchange-listed securities. Because
the interest rates of corporate loans reset
frequently, if the market falls, these interest
rates will be reset to lower levels, potentially
reducing the Fund's income. No active trading market
currently exists for many corporate loans in which
the Fund may invest and, thus, they are relatively
illiquid. As a result, corporate loans generally are
more difficult to value than more liquid securities
for which a trading market exists. The Fund also may
purchase a participation interest in a corporate
loan and by doing so acquire some or all of the
interest of a bank or other lending institution in a
loan to a corporate borrower. A participation
typically will result in the Fund having a
contractual relationship only with the lender, not
the borrower. The Fund will
17
have the right to receive payments of principal,
interest and any fees to which it is entitled only
from the lender selling the participation and only
upon receipt by the lender of the payments from the
borrower. See "Risks--High Yield Securities" and
"Risks--Corporate Loans."
Tax Risk. The Fund may invest in preferred
securities, convertible securities or other
securities the federal income tax treatment of which
may not be clear or may be subject to
recharacterization by the Internal Revenue Service.
It could be more difficult for the Fund to comply
with the tax requirements applicable to regulated
investment companies (see "Tax Matters") if the tax
characterization of the Fund's investments or the
tax treatment of the income from such investments
were successfully challenged by the Internal Revenue
Service.
Illiquid Securities Risk. The Fund may invest up to
10% of its Managed Assets in securities that, at the
time of investment, are illiquid. Illiquid
securities are not readily marketable and may
include some restricted securities. Illiquid
securities involve the risk that the securities will
not be able to be sold at the time desired by the
Fund or at prices approximating the value at which
the Fund is carrying the securities on its books.
Market Disruption Risk. The terrorist attacks in the
United States on September 11, 2001 had a disruptive
effect on the securities markets. The Fund cannot
predict the effects of similar events in the future
on the U.S. economy. High yield securities tend to
be more volatile than higher rated debt securities
so that these events and any actions resulting from
them may have a greater impact on the prices and
volatility of high yield debt instruments than on
higher rated debt securities.
Inflation Risk. Inflation risk is the risk that the
value of assets or income from investment will be
worth less in the future as inflation decreases the
value of money. As inflation increases, the real
value of the Common Shares and distributions can
decline. In addition, during any periods of rising
inflation, FundPreferred share dividend rates would
likely increase, which would tend to further reduce
returns to Common Shareholders.
Anti-Takeover Provisions. The Fund's Declaration of
Trust (the "Declaration") includes provisions that
could limit the ability of other entities or persons
to acquire control of the Fund or convert the Fund
to open-end status. These provisions could have the
effect of depriving the Common Shareholders of
opportunities to sell their Common Shares at a
premium over the then current market price of the
Common Shares. See "Certain Provisions in the
Declaration of Trust" and "Risks--Anti-Takeover
Provisions."
18
SUMMARY OF FUND EXPENSES
The Annual Expenses table below assumes the issuance of FundPreferred shares
in an amount equal to 33 1/3% of the Fund's capital (after their issuance), and
shows Fund expenses as a percentage of net assets attributable to Common Shares.
[Enlarge/Download Table]
Shareholder Transaction Expenses
Sales Load Paid by You (as a percentage of offering price)..................... 4.50%
Offering Expenses Borne by the Fund (as a percentage of offering price)/(1)(2)/ .20%
Dividend Reinvestment Plan Fees................................................ None/(3)/
Percentage of
Net Assets
Attributable to
Common Shares/(5)/
-----------------
Annual Expenses
Management Fees/(4)/........................................................... 1.35%
Other Expenses/(4)/............................................................ .30%
Interest Payments on Borrowed Funds/(4)/....................................... None
-------
Total Annual Expenses/(4)/..................................................... 1.65%
Fee and Expense Reimbursement (Years 1-5)...................................... (.48)%/(6)/
-------
Total Net Annual Expenses (Years 1-5)/(4)/..................................... 1.17%/(6)/
=======
--------
(1)Nuveen has agreed to pay offering costs (other than sales load) that exceed
$0.03 per Common Share.
(2)If the Fund offers FundPreferred shares, costs of that offering, estimated
to be approximately 2.20% of the total amount of the FundPreferred share
offering, will effectively be borne by the Common Shareholders and result in
a reduction of the net asset value of the Common Shares. Assuming the
issuance of FundPreferred shares in the amount equal to 33 1/3% of the
Fund's total capital (after issuance), those offering costs are estimated to
be approximately $.15 per Common Share (1.10% of the offering price).
(3)You will be charged a $2.50 service charge and pay brokerage charges if you
direct State Street Bank and Trust Company, as agent for the Common
Shareholders (the "Plan Agent") to sell your Common Shares held in a
dividend reinvestment account.
(4)In the event the Fund, as an alternative to issuing FundPreferred shares,
utilizes leverage through Borrowings in an amount equal to 33 1/3% of the
Fund's total assets (including the amount obtained from leverage), it is
estimated that, as a percentage of net assets attributable to Common Shares,
the Management Fee would be 1.35%, Other Expenses would be .30%, Interest
Payments on Borrowed Funds (assuming an interest rate of 3.75%, which
interest rate is subject to change based on prevailing market conditions)
would be 1.88%, Total Annual Expenses would be 3.53% and Total Net Annual
Expenses would be 3.05%. Based on the total net annual expenses and in
accordance with the example below, the expenses for years 1, 3, 5 and 10
would be $76, $137, $200 and $385, respectively.
19
(5)Stated as percentages of net assets attributable to Common Shares. Assuming
no issuance of FundPreferred shares or Borrowings, the Fund's expenses would
be estimated to be as follows:
[Download Table]
Percentage of
Net Assets
Attributable to
Common Shares
---------------
Annual Expenses
Management Fees........................... .90%
Other Expenses............................ .20%
Interest Payments on Borrowed Funds....... None
----
Total Annual Expenses..................... 1.10%
Fees and Expense Reimbursement (Years 1-5) (.32)%/(6)/
----
Total Net Annual Expenses (Years 1-5)..... .78%/(6)/
====
(6)The Advisers have contractually agreed to reimburse the Fund for fees and
expenses in the amount of .32% of average daily Managed Assets for the first
5 full years of the Fund's operations, .24% of average daily Managed Assets
in year 6, .16% in year 7 and .08% in year 8. Assuming the issuance of
FundPreferred shares or Borrowings in an amount equal to 33 1/3% of the
Fund's total assets (including the amount obtained from leverage) and
calculated as a percentage of net assets attributable to Common Shares,
those amounts would be .48% for the first 5 full years, .36% in year 6, .24%
in year 7 and .12% in year 8. Without the reimbursement, "Total Annual
Expenses" would be estimated to be 1.65% of average daily net assets
attributable to Common Shares (or, assuming no issuance of FundPreferred
shares or Borrowings, 1.10% of average daily net assets).
The purpose of the table above is to help you understand all fees and
expenses that you, as a Common Shareholder, would bear directly or indirectly.
The expenses shown in the table are based on estimated amounts for the Fund's
first year of operations and assume that the Fund issues approximately
20,000,000 Common Shares. See "Management of the Fund" and "Dividend
Reinvestment Plan."
The following example illustrates the expenses (including the sales load of
$45, estimated offering expenses of this offering of $2 and the estimated
FundPreferred share offering costs assuming FundPreferred shares are issued
representing 33 1/3% of the Fund's total capital (after issuance) of $10) that
you would pay on a $1,000 investment in Common Shares, assuming (1) total
annual expenses of 1.17% of net assets attributable to Common Shares in years 1
through 5, increasing to 1.65% in years 9 and 10 and (2) a 5% annual
return:/(1)/
[Download Table]
1 Year 3 Years 5 Years 10 Years/(2)/
------ ------- ------- ------------
$68 $92 $118 $212
The example should not be considered a representation of future expenses.
Actual expenses may be higher or lower.
--------
(1)The example assumes that the estimated Other Expenses set forth in the
Annual Expenses table are accurate, that fees and expenses increase as
described in note 2 below and that all dividends and distributions are
reinvested at Common Share net asset value. Actual expenses may be greater
or less than those assumed. Moreover, the Fund's actual rate of return may
be greater or less than the hypothetical 5% return shown in the example.
(2)Assumes reimbursement of fees and expenses of .24% of average daily Managed
Assets in year 6, .16% in year 7 and .08% in year 8. The Advisers have not
agreed to reimburse the Fund for any portion of its fees and expenses beyond
March 31, 2011. See footnote 6 above and "Management of the Fund--Investment
Management Agreement."
20
THE FUND
The Fund is a newly organized, diversified, closed-end management investment
company registered under the 1940 Act. The Fund was organized as a
Massachusetts business trust on January 27, 2003, pursuant to a Declaration
governed by the laws of the Commonwealth of Massachusetts. As a newly organized
entity, the Fund has no operating history. The Fund's principal office is
located at 333 West Wacker Drive, Chicago, Illinois 60606, and its telephone
number is (800) 257-8787.
USE OF PROCEEDS
The net proceeds of the offering of Common Shares will be approximately
$ ($ if the Underwriters exercise the over-allotment
option in full) after payment of the estimated organization and offering costs.
Nuveen has agreed to pay (i) all organizational expenses and (ii) offering
costs (other than sales load) that exceed $0.03 per Common Share. The Fund will
invest the net proceeds of the offering in accordance with the Fund's
investment objectives and policies as stated below. It is presently anticipated
that the Fund will be able to invest substantially all of the net proceeds in
preferred, convertible and other debt instruments that meet those investment
objectives and policies within approximately two to three months after the
completion of the offering. Pending such investment, it is anticipated that the
proceeds will be invested in short-term or long-term securities issued by the
U.S. Government or its agencies or instrumentalities or in high quality,
short-term money market instruments.
THE FUND'S INVESTMENTS
Investment Objectives and Policies
The Fund's primary investment objective is high current income. The Fund's
secondary objective is total return. There can be no assurance that the Fund's
investment objectives will be achieved.
Under normal circumstances, the Fund:
. will invest at least 80% of its Managed Assets in preferred securities,
convertible securities and related instruments; and
. may invest up to 20% of its Managed Assets in other securities, including
debt instruments and common stocks acquired upon conversion of a
convertible security (such common stocks not normally to exceed 5% of the
Fund's Managed Assets).
NIAC will be responsible for determining the Fund's overall investment
strategy, including allocating the portion of the Fund's assets to be invested
in preferred securities, convertible securities and other debt instruments. See
"Management of the Fund."
The Fund's assets allocated to preferred securities will be managed by
Spectrum. The Fund's assets allocated to convertible securities will be managed
by Froley, Revy. The Fund's assets allocated to other debt instruments will be
managed by NIAC.
21
Under normal circumstances, portfolio allocations will conform to the
following guidelines:
[Download Table]
Minimum % of Maximum % of
Type of Investment Managed Assets Managed Assets
------------------ -------------- --------------
Preferred Securities.. 50 80
Convertible Securities 20 50
Other Debt Instruments 0 20
Initially, NIAC will allocate approximately 60%, 30% and 10% of the Fund's
Managed Assets to preferred securities, convertible securities and other debt
instruments, respectively. Thereafter, the portion of the Fund's Managed Assets
invested in preferred securities, convertible securities and other debt
instruments will vary from time to time consistent with the Fund's investment
objectives, although the Fund will normally invest at least 50% of its Managed
Assets in preferred securities and at least 20% of its Managed Assets in
convertible securities (so long as the combined total equals at least 80% of
the Fund's Managed Assets). Convertible preferred securities will be regarded
as convertible securities for purposes of these limits. In making allocation
decisions, NIAC will consider factors such as interest rate levels, conditions
and developing trends in the bond and equity markets, analysis of relative
valuations for preferred, convertible and other debt instruments and other
economic and market factors, including the overall outlook for the economy and
inflation.
The Fund will invest at least 65% of its Managed Assets in securities that,
at the time of investment, are investment grade quality. Investment grade
quality securities are those securities that, at the time of investment, are
(i) rated by at least one of the NRSROs within the four highest grades (Baa or
BBB or better by Moody's, S&P or Fitch) or (ii) unrated but judged to be of
comparable quality by the Adviser responsible for the investment. Investment
grade quality securities also include split-rated securities. Initially, the
Fund intends to invest approximately 75% of its Managed Assets in investment
grade quality securities. The Fund may invest up to 35% of its Managed Assets
in securities that, at the time of investment, are not investment grade
quality. The Fund will only invest in securities that, at the time of
investment, are rated B or higher by at least one NRSRO or that are unrated but
judged to be of comparable quality by the Adviser responsible for the
investment, except, however, the Fund may invest up to 5% of its Managed Assets
in securities with a highest rating of CCC or that are unrated but judged to be
of comparable quality by the Adviser responsible for the investment. Securities
of below investment grade quality are commonly referred to as junk bonds and
are regarded as having predominately speculative characteristics with respect
to capacity to pay interest and repay principal. See "Risks--High Yield
Securities". See Appendix A in the Statement of Additional Information for a
description of security ratings.
The Fund may invest up to 10% of its Managed Assets in securities that, at
the time of investment, are illiquid (i.e., securities that are not readily
marketable). Initially, the Fund does not intend to invest more than 5% of its
Managed Assets in illiquid securities. In addition, the Fund may invest up to
35% of its Managed Assets in securities of non-U.S. issuers. Up to 10% of the
Fund's Managed Assets may be invested in securities that are denominated in
Japanese yen, Canadian dollars, British pounds or Euros and which may be
offered, traded or listed in markets other than U.S. markets. The remainder of
the Fund's Managed Assets that may be invested in securities of non-U.S.
issuers will be invested in U.S. dollar denominated securities offered, traded
or listed in U.S. markets. Initially, the Fund does not intend to invest more
than 20% of its Managed Assets in securities of non-U.S. issuers and does not
currently intend to invest in the non-U.S. dollar denominated securities
described above.
22
For a more complete discussion of the Fund's initial portfolio composition,
see "--Initial Portfolio Composition."
The Fund cannot change its investment objectives without the approval of the
holders of a "majority of the outstanding" Common Shares and FundPreferred
shares voting together as a single class, and of the holders of a "majority of
the outstanding" FundPreferred shares voting as a separate class. When used
with respect to particular shares of the Fund, a "majority of the outstanding"
shares means (i) 67% or more of the shares present at a meeting, if the holders
of more than 50% of the shares are present or represented by proxy, or (ii)
more than 50% of the shares, whichever is less. See "Description of
Shares--FundPreferred Shares--Voting Rights" and the Statement of Additional
Information under "Description of Shares--FundPreferred Shares--Voting Rights"
for additional information with respect to the voting rights of holders of
FundPreferred shares.
Investment Philosophy and Process
Nuveen Institutional Advisory Corp. (NIAC)
Asset Allocation Philosophy. NIAC is responsible for the overall strategy
and asset allocation decisions among the three primary asset classes in which
the Fund invests - preferred securities, convertible securities and other debt
instruments. The goal of the allocation decision is to effectively capture the
diversification benefits provided by the low return-correlation across these
asset classes and provide the potential for high income generation, an
opportunity to participate in rising equity markets and some protection against
risks associated with rising interest rates. NIAC believes that the opportunity
will exist from time to time to enhance the Fund's total return by
over-weighting or under-weighting these asset classes as the relative
attractiveness of the asset classes changes.
Asset Allocation Process. In determining the Fund's asset allocation, NIAC
will periodically consult with the Fund's Subadvisers and other investment
manager affiliates of NIAC. NIAC will consider factors such as interest rate
levels, market conditions and developing trends in the bond and equity markets,
analysis of relative valuations for preferred securities, convertible
securities and other debt instruments, and other economic and market factors,
including the overall outlook for the economy and inflation.
Investment Philosophy. NIAC is responsible for managing the other debt
instruments in which the Fund may invest. NIAC believes that managing risk,
particularly in a volatile asset class such as high yield debt, is of paramount
importance. NIAC believes that a combination of fundamental credit analysis and
valuation information that is available from the equity markets provide a means
of identifying superior investment candidates. Additionally, NIAC focuses
primarily on liquid securities to help ensure that exit strategies remain
available under different market conditions.
Investment Process. NIAC begins with a quantitative screening of the
universe to identify investment candidates with favorable capital structures,
and then factors in valuation and other equity market indicators. NIAC then
screens this universe of securities for liquidity constraints and relative
value opportunities to determine investment candidates. Subsequently, the
investment team performs rigorous fundamental analysis to identify investments
with sound industry fundamentals, cash flow sufficiency and asset quality. The
final portfolio is constructed using proprietary risk factors and monitoring
systems to ensure proper diversification.
Spectrum Asset Management, Inc. (Spectrum)
Investment Philosophy. Spectrum's investment philosophy with respect to
preferred securities is centered on several underlying tenets held by the firm:
23
High levels of current income are the primary return contributor to the
total return potential of preferred securities.
Investing in the subordinated preferred securities of stronger,
solidly-rated issuers is potentially more advantageous than owning the
senior debt of weaker, potentially deteriorating issuers.
Investment grade quality preferred securities over time present an
attractive risk/return opportunity.
Diversifying across a large number of different industries and issuers
helps insulate an overall portfolio of preferred securities from events
that affect any particular company or sector.
Inefficiencies in the preferred securities market, particularly in the
pricing and trading of securities, can create opportunities to enhance
portfolio value.
Investment Process. Spectrum's investment process begins with macroeconomic
and fundamental credit analysis to identify sectors, industries and companies
that are potential investments. In its fundamental analysis, Spectrum employs a
value-oriented style that considers the relative attractiveness of the security
to other preferred securities and to the same issuer's senior debt. In
addition, Spectrum evaluates the structural features of each security as well
as its liquidity. In its investment decisions, Spectrum also considers the
contribution of sectors and individual securities to the overall goal of
achieving a well-diversified portfolio.
Froley, Revy Investment Company, Inc. (Froley, Revy)
Investment Philosophy. Froley, Revy's investment philosophy with respect to
convertible securities is centered on the belief that convertible securities
are a total return vehicle that afford the opportunity to earn common
stock-like returns with substantially reduced risk relative to equities, while
providing some current income. The firm believes that focusing on the
mid-market sector of the convertible securities market (i.e., securities that
have both common stock-like and bond-like investment qualities) while investing
opportunistically in the bond-like and equity-like areas of the convertible
securities market may enhance total return potential. In addition, the firm
believes that because of the hybrid nature of convertible securities, research
that emphasizes both fundamental credit analysis and equity valuation analysis
can help identify investment opportunities with the greatest potential for
enhancing a portfolio's overall total return.
Investment Process. Froley, Revy's investment process begins with screening
the universe of convertible securities on certain valuation and structural
parameters, including price, yield, premium, calls, equity sensitivity and
other factors. On this pool of potential investments, Froley, Revy then
conducts credit (bond) analysis and valuation (equity) analysis to identify the
most attractive candidates within the universe. Additional inputs into the
sector and security selection decisions are top down, macroeconomic analysis of
economic, interest rate and other trends and the analysis of the structural
characteristics of the individual securities.
Froley, Revy monitors all securities and sectors on an on-going basis to
identify those that fall outside the intended investment range. Positions in
securities that have increased in value and common stock-like qualities may be
reduced to normal position weights or sold entirely based on the fundamental
outlook for the underlying equity. In addition, significant declines from
purchase prices trigger a fundamental review of the holding to determine
whether or not to take action.
Portfolio Composition
The Fund's portfolio will be composed principally of the following
investments. A more detailed description of the Fund's investment policies and
restrictions and more detailed information about the Fund's portfolio
investments are contained in the Statement of Additional Information.
24
Preferred Securities. Preferred securities generally pay fixed or
adjustable rate dividends to investors, and have a "preference" over common
stock in the payment of dividends and the liquidation of a company's assets.
This means that a company must pay dividends on preferred stock before paying
any dividends on its common stock. Preferred stockholders usually have no right
to vote for corporate directors or on other matters. The Fund intends that all
of the preferred securities in which it will invest will be investment grade
quality at the time of investment. The average call protection of the Fund's
portfolio allocated to preferred securities is expected to be approximately
three to four years.
The Fund intends to invest at least 25% of its Managed Assets in the
securities of companies principally engaged in financial services, which are
prominent issuers of preferred securities, and is subject to the risks of such
concentration. See "--Financial Service Company Securities."
Taxable Preferred Securities. The Fund intends that most or all of the
preferred securities in which it invests will be fully taxable and will not
qualify for the Dividends Received Deduction. Pursuant to the Dividends
Received Deduction, corporations may generally deduct 70% of the dividend
income they receive. Corporate shareholders of a regulated investment company
like the Fund generally are permitted to claim a deduction with respect to that
portion of their distributions attributable to amounts received by the
regulated investment company that qualify for the Dividends Received Deduction.
Taxable preferred securities that are not eligible for the Dividends Received
Deduction (often referred to as "hybrid" preferred securities) typically offer
additional yield spread versus other types of preferred securities due to this
lack of special tax treatment.
Taxable preferred securities are a comparatively new asset class. Taxable
preferred securities are typically issued by corporations, generally in the
form of interest-bearing notes or preferred securities, or by an affiliated
business trust of a corporation, generally in the form of beneficial interests
in subordinated debentures or similarly structured securities. The taxable
preferred securities market consists of both fixed and adjustable coupon rate
securities that are either perpetual in nature or have stated maturity dates.
The taxable preferred securities market is divided into the "$25 par" and the
"institutional" segments. The $25 par segment is typified by securities that
are listed on the New York Stock Exchange, which trade and are quoted "flat",
i.e., without accrued dividend income, and which are typically callable at the
issuer's option at par value five years after their original issuance date. The
institutional segment is typified by $1,000 par value securities that are not
exchange-listed, which trade and are quoted on an "accrued income" basis, and
which typically have a minimum of 10 years of call protection (at premium
prices) from the date of their original issuance.
Taxable preferred securities are typically junior and fully subordinated
liabilities of an issuer or the beneficiary of a guarantee that is junior and
fully subordinated to the other liabilities of the guarantor. In addition,
taxable preferred securities typically permit an issuer to defer the payment of
income for eighteen months or more without triggering an event of default.
Generally, the deferral period is five years or more. Because of their
subordinated position in the capital structure of an issuer, the ability to
defer payments for extended periods of time without adverse consequence to the
issuer, and certain other features (such as restrictions on common dividend
payments by the issuer or ultimate guarantor when cumulative payments on the
taxable preferred securities have not been made), these taxable preferred
securities are often treated as close substitutes for traditional preferred
securities, both by issuers and investors. Taxable preferred securities have
many of the key characteristics of equity due to their subordinated position in
an issuer's capital structure and because their quality and value are
25
heavily dependent on the profitability of the issuer rather than on any legal
claims to specific assets or cash flows.
Taxable preferred securities include, but are not limited to:/(1)/
. trust originated preferred securities ("TOPRS(R)");
. monthly income preferred securities ("MIPS(R)");
. quarterly income bond securities ("QUIBS(R)");
. quarterly income debt securities ("QUIDS(R)");
. quarterly income preferred securities ("QUIPS/SM/");
. corporate trust securities ("CORTS(R)");
. public income notes ("PINES(R)"); and
. other trust preferred securities.
--------
(1)TOPRS is a registered service mark owned by Merrill Lynch & Co., Inc. MIPS
and QUIDS are registered service marks and QUIPS is a service mark owned by
Goldman, Sachs & Co. QUIBS is a registered service mark owned by Morgan
Stanley Dean Witter & Co. CORTS and PINES are registered service marks owned
by Salomon Smith Barney Inc.
Taxable preferred securities are typically issued with a final maturity
date, although some are perpetual in nature. In certain instances, a final
maturity date may be extended and/or the final payment of principal may be
deferred at the issuer's option for a specified time without any adverse
consequence to the issuer. No redemption can typically take place unless all
cumulative payment obligations have been met, although issuers may be able to
engage in open-market repurchases without regard to any cumulative dividends
payable. A portion of the portfolio may include investments in non-cumulative
preferred securities, whereby the issuer does not have an obligation to make up
any arrearages to its shareholders. Should an issuer default on its obligations
under such a security, the amount of dividends the Fund pays may be adversely
affected.
Many taxable preferred securities are issued by trusts or other special
purpose entities established by operating companies and are not a direct
obligation of an operating company. At the time a trust or special purpose
entity sells its preferred securities to investors, the trust or special
purpose entity purchases debt of the operating company (with terms comparable
to those of the trust or special purpose entity securities), which enables the
operating company to deduct for tax purposes the interest paid on the debt held
by the trust or special purpose entity. The trust or special purpose entity is
generally required to be treated as transparent for federal income tax purposes
such that the holders of the taxable preferred securities are treated as owning
beneficial interests in the underlying debt of the operating company.
Accordingly, payments on the taxable preferred securities are treated as
interest rather than dividends for federal income tax purposes and, as such,
are not eligible for the Dividends Received Deduction. The trust or special
purpose entity in turn would be a holder of the operating company's debt and
would have priority with respect to the operating company's earnings and
profits over the operating company's common shareholders, but would typically
be subordinated to other classes of the operating company's debt. Typically a
taxable preferred share has a rating that is slightly below that of its
corresponding operating company's senior debt securities.
26
Convertible Securities. Convertible securities are bonds, debentures,
notes, preferred securities or other securities that may be converted or
exchanged (by the holder or the issuer) into shares of the underlying common
stock (or cash or securities of equivalent value) at a stated exchange ratio or
predetermined price (the "conversion price"). Convertible securities have
general characteristics similar to both debt securities and common stocks. The
interest paid on convertible securities may be fixed or floating rate. Such
floating rate convertible securities may specify an interest rate or rates that
are conditioned upon changes to the market price of the underlying common
stock. Convertible securities also may be issued in zero coupon form with an
original issue discount. See "Risks-Convertible Security Risk." Although to a
lesser extent than with debt securities, the market value of convertible
securities tends to decline as interest rates increase and, conversely, tends
to increase as interest rates decline. In addition, because of the conversion
feature, the market value of convertible securities tends to vary with
fluctuations in the market value of the underlying common stocks and,
therefore, will also react to the variations in the general market for common
stocks. Depending upon the relationship of the conversion price to the market
value of the underlying common stock, a convertible security may trade more
like common stocks than a debt instrument.
Mandatory convertible securities are distinguished as a subset of
convertible securities because they may be called for conversion by the issuer
after a particular date and under certain circumstances (including at a
specified price) established upon its issuance. If a mandatory convertible
security is called for conversion, the Fund will be required to either convert
it into the underlying common stock or sell it to a third party.
Convertible securities are investments that typically provide for a stable
stream of income with generally higher yields than common stocks. There can be
no assurance of current income because the issuers of the convertible
securities may default on their obligations. The convertible securities in
which the Fund may invest may be below investment grade quality. See "--High
Yield Securities."
Convertible securities generally offer lower interest or dividend yields
than non-convertible securities of similar credit quality because of the
potential for capital appreciation. A convertible security, in addition to
providing current income, offers the potential for capital appreciation through
the conversion feature, which enables the holder to benefit from increases in
the market price of the underlying common stock.
Synthetic Convertible Securities. Although the Fund does not currently
intend to invest in synthetic convertible securities, it may invest up to 10%
of its Managed Assets in such securities. Synthetic convertible securities
possess the two principal characteristics of a true convertible security, i.e.,
a fixed-income security ("fixed-income component") and the right to acquire an
equity security ("equity component"). If the Fund invests in synthetic
convertible securities, it is expected that the Fund will invest in such
synthetic convertible securities that are created by third parties, typically
investment banks or other financial institutions. Synthetic convertible
securities created by other parties typically trade as a single security with a
unitary value, similar to a true convertible security. The Fund may also invest
in synthetic convertible securities by acquiring separate securities, one
possessing a fixed-income component and the other possessing an equity
component. The fixed-income component is achieved by investing in
non-convertible, fixed-income securities such as bonds, debenture, notes,
preferred stocks and money market instruments. The equity component is achieved
by investing in warrants or options to buy common stock at a certain exercise
price, or options on a stock index. The fixed-income and equity components of
such a synthetic convertible security may be issued separately by different
issuers
27
and at different times. Unlike a true convertible security or a synthetic
convertible security created by third parties, each of which is a single
security having a unitary market value, a synthetic convertible security that
is comprised of two or more separate securities will have a "market value" that
is the sum of the values of its fixed-income component and its equity
component. For this reason, the value of such a synthetic convertible security
may respond differently to market fluctuations than would a true convertible
security or synthetic convertible security created by a third party. The Fund's
holdings of synthetic convertible securities, including those created by third
parties, are considered convertible securities for purposes of the Fund's
policy to invest at least 80% of its Managed Assets in preferred securities and
convertible securities and the maximum and minimum allocations to preferred
securities and convertible securities set forth in "--Investment Objectives and
Policies" above.
Warrants and Options on Securities and Indexes. In connection with its
investments in synthetic convertible securities, the Fund may purchase
warrants, call options on common stock and call options on common stock
indexes. A warrant is a certificate that gives the holder of the warrant the
right to buy, at a specified time or specified times, from the issuer of the
warrant, the common stock of the issuer at a specified price. A call option is
a contract that gives the holder of the option, in return for a premium, the
right to buy from the writer of the option the common stock underlying the
option (or the cash value of the common stock index) at a specified exercise
price at any time during the term of the option.
Other Debt Instruments. The Fund may invest in other debt instruments
including, but not limited to, corporate bonds, notes and debentures and other
similar types of corporate debt instruments, including corporate loans. The
form of such other debt instruments may include zero coupon bonds,
payment-in-kind securities and structured notes. The debt instruments in which
the Fund may invest may be below investment grade quality. See "--High Yield
Securities." The Fund may invest up to 20% of its Managed Assets in these types
of other debt securities, as described in more detail below.
Corporate Bonds. Corporate bonds generally are used by corporations as well
as governments and other issuers to borrow money from investors. The issuer
pays the investor a fixed or variable rate of interest and normally must repay
the amount borrowed on or before maturity. Corporate bonds are perpetual in
that they have no maturity date.
Corporate Loans. The Fund may invest up to 20% of its Managed Assets in
other debt instruments, including corporate loans. The Fund may invest in loans
made by banks or other financial institutions to corporate issuers or
participating interests in such loans. Corporate loans generally bear interest
at rates set at a margin above a generally recognized base lending rate that
may fluctuate on a day-to-day basis, in the case of the prime rate of a U.S.
bank. Consequently, the value of corporate loans held by the Fund may be
expected to fluctuate significantly less than the value of other fixed rate
high yield instruments as a result of changes in the interest rate environment.
On the other hand, the secondary dealer market for certain corporate loans may
not be as well developed as the secondary dealer market for high yield debt
and, therefore, presents increased market risk relating to liquidity and
pricing concerns. By purchasing a participation interest in a loan, the Fund
acquires some or all of the interest of a bank or other financial institution
in a loan to a corporate borrower. Purchasing a participation in a corporate
loan typically will result in the Fund having a contractual relationship with
the lender, not the borrower. The Fund would have the right to receive payments
of principal, interest and any fees to which it is entitled only from the
lender selling the participation and only upon receipt by the lender of the
payments from the borrower. If the Fund only acquires a participation in a loan
made by a third party, the Fund may not be able to control the exercise of any
remedies that the lender would have under the corporate loan.
28
Zero Coupon Bonds and Payment-In-Kind Securities. A zero coupon bond is a
bond that does not pay interest for its life. Payment-in-kind securities
("PIKs") are debt obligations that pay "interest" in the form of other debt
obligations, instead of in cash. Each of these instruments is normally issued
and traded at a deep discount from face value. Zero-coupon bonds and PIKs allow
an issuer to avoid or delay the need to generate cash to meet current interest
payments and, as a result, may involve greater credit risk than bonds that pay
interest currently or in cash. The Fund would be required to distribute the
income on any of these instruments as it accrues, even though the Fund will not
receive all of the income on a current basis or in cash. Thus, the Fund may
have to sell other investments, including when it may not be advisable to do
so, to make income distributions to its shareholders.
Structured Notes. The Fund may utilize structured notes and similar
instruments for investment purposes and also for hedging purposes. Structured
notes are privately negotiated debt obligations where the principal and/or
interest is determined by reference to the performance of a benchmark asset,
market or interest rate (an "embedded index"), such as selected securities, an
index of securities or specified interest rates or the differential performance
of two assets or markets. The term of such structured instruments normally
provide that their principal and/or interest payments are to be adjusted
upwards or downwards (but not ordinarily below zero) to reflect changes in the
embedded index while the structured instruments are outstanding. As a result,
the interest and/or principal payments that may be made on a structured product
may vary widely, depending on a variety of factors, including the volatility of
the embedded index and the effect of changes in the embedded index on principal
and/or interest payments. The rate of return on structured notes may be
determined by applying a multiplier to the performance or differential
performance of the referenced index(es) or other asset(s). Application of a
multiplier involves leverage that will serve to magnify the potential for gain
and the risk of loss.
No Inverse Floaters. The Fund will not invest in inverse floating rate
securities, which are securities that pay interest at rates that vary inversely
with changes in prevailing interest rates and which represent a leveraged
investment in an underlying security.
High Yield Securities. The Fund may invest up to 35% of its Managed Assets
in securities that, at the time of investment, are not investment grade
quality. The Fund will only invest in securities that, at the time of
investment, are rated B or higher by at least one NRSRO or that are unrated but
judged to be of comparable quality by the Adviser responsible for the
investment, except, however, the Fund may invest up to 5% of its Managed Assets
in securities with a highest rating of CCC or that are unrated but judged to be
of comparable quality by the Adviser responsible for the investment. Below
investment grade quality securities are regarded as having predominately
speculative characteristics with respect to capacity to pay interest and repay
principal, and are commonly referred to as junk bonds. Issuers of high yield
securities may be highly leveraged and may not have available to them more
traditional methods of financing. The prices of these lower grade securities
typically are more sensitive to negative developments, such as a decline in the
issuer's revenues or a general economic downturn, than the prices of higher
grade securities. The secondary market for high yield securities may not be as
liquid as the secondary market for more highly rated securities, a factor which
may have an adverse effect on the Fund's ability to dispose of a particular
security. There are fewer dealers in the market for high yield securities than
for investment grade obligations. The prices quoted by different dealers may
vary significantly and the spread between the bid and ask price is generally
much larger than for higher quality instruments. Under adverse market or
economic conditions, the secondary market for high yield securities could
contract further, independent of any specific adverse changes in the condition
of a
29
particular issuer, and these instruments may become illiquid. As a result, the
Fund could find it more difficult to sell these securities or may be able to
sell the securities only at prices lower than if such securities were widely
traded. Prices realized upon the sale of such lower rated or unrated
securities, under these circumstances, may be less than the prices used in
calculating the Fund's net asset value.
Non-U.S. Securities. The Fund may invest up to 35% of its Managed Assets in
securities of non-U.S. issuers. Up to 10% of the Fund's Managed Assets may be
invested in securities that are denominated in Japanese yen, Canadian dollars,
British pounds or Euros and which may be offered, traded or listed in markets
other than U.S. markets. The remainder of the Fund's Managed Assets that may be
invested in securities of non-U.S. issuers will be invested in U.S. dollar
denominated securities offered, traded or listed in U.S. markets. Initially,
the Fund does not intend to invest more than 20% of its Managed Assets in
securities of non-U.S. issuers and does not currently intend to invest in the
non-U.S. dollar denominated securities described above. The Fund may invest in
any region of the world and invest in companies operating in developed
countries such as Canada, Japan, Australia, New Zealand and most Western
European countries. The Fund does not intend to invest in companies based in
emerging markets such as the Far East, Latin America and Eastern Europe. The
World Bank and other international agencies define emerging markets based on
such factors as trade initiatives, per capita income and level of
industrialization. For purposes of the 35% limitation described above, non-U.S.
securities include securities represented by American Depository Receipts.
Financial Services Company Securities. The Fund intends to invest at least
25% of its Managed Assets in securities issued by companies "principally
engaged" in financial services. A company is "principally engaged" in financial
services if it has financial services-related businesses that generate at least
50% of its revenues. Companies in the financial services sector include
commercial banks, industrial banks, savings institutions, finance companies,
diversified financial services companies, investment banking firms, securities
brokerage houses, investment advisory companies, leasing companies, insurance
companies and companies providing similar services.
Common Stocks. The Fund does not intend to purchase common stock as part of
its investment strategy. The Fund will have exposure to common stock risks by
virtue of the common stock component of the convertible securities in which the
Fund invests. The Fund also may hold common stocks in its portfolio upon
conversion of a convertible security, such holdings not normally to exceed 5%
of its Managed Assets. In addition, in keeping with the income focus of the
Fund, the Fund expects to sell any common stock holdings as soon as practicable
after conversion of a convertible security. Common stock generally represents
an ownership interest in an issuer. Although common stock historically has
generated higher average returns than fixed-income securities, common stock
also has experienced significantly more volatility in those returns. An adverse
event, such as an unfavorable earnings report, may depress the value of a
particular common stock held by the Fund. Also, prices of common stocks are
sensitive to general movements in the stock market. A drop in the stock market
may depress the price of common stocks held by the Fund.
Hedging Transactions. The Fund may use derivatives or other transactions
for the purpose of hedging the portfolio's exposure to the risk of increases in
interest rates, common stock risk, high yield credit risk and foreign currency
exchange rate risk. The specific derivative instruments to be used, or other
transactions to be entered into, each for hedging purposes may include
(i) options and futures contracts, including options on common stock, stock
indexes, bonds and bond indexes, stock index futures, bond index futures and
related instruments, (ii) short sales of securities that the Fund owns or
30
has the right to acquire through the conversion of securities, (iii) structured
notes and similar instruments, (iv) credit derivative instruments and
(v) currency exchange transactions. Some, but not all, of the derivative
instruments may be traded and listed on an exchange. The positions in
derivatives will be marked-to-market daily at the closing price established on
the exchange or at a fair value. Except for investing in synthetic convertible
securities, the Fund will use derivatives or other transactions described in
this paragraph solely for purposes of hedging the Fund's portfolio risks. See
"Risks--Hedging Risk," "Risks--Counterparty Risk," "--Synthetic Convertible
Securities" and "Other Investment Policies and Techniques" in the Fund's
Statement of Additional Information for further information on hedging
transactions.
Illiquid Securities. The Fund may invest up to 10% of its Managed Assets in
securities that, at the time of investment, are illiquid (i.e., securities that
are not readily marketable), however, initially, the Fund does not intend to
invest more than 5% of its Managed Assets in such securities. All securities in
which the Fund invests will be subject to the 10% limitation referred to above
to the extent they are deemed to be illiquid. For this purpose, illiquid
securities may include, but are not limited to, restricted securities
(securities the disposition of which is restricted under the federal securities
laws), securities that may only be resold pursuant to Rule 144A under the
Securities Act of 1933, as amended (the "Securities Act"), that are deemed to
be illiquid, and repurchase agreements with maturities in excess of seven days.
The Board of Trustees or its delegate has the ultimate authority to determine,
to the extent permissible under the federal securities laws, which securities
are liquid or illiquid for purposes of this 10% limitation. The Board of
Trustees has delegated to the Advisers the day-to-day determination of the
illiquidity of any security held by the Fund, although it has retained
oversight and ultimate responsibility for such determinations. Although no
definitive liquidity criteria are used, the Board of Trustees has directed the
Advisers to look for such factors as (i) the nature of the market for a
security (including the institutional private resale market; the frequency of
trades and quotes for the security; the number of dealers willing to purchase
or sell the security; the amount of time normally needed to dispose of the
security; and the method of soliciting offers and the mechanics of transfer),
(ii) the terms of certain securities or other instruments allowing for the
disposition to a third party or the issuer thereof (e.g., certain repurchase
obligations and demand instruments), and (iii) other relevant factors.
Restricted securities may be sold only in privately negotiated transactions
or in a public offering with respect to which a registration statement is in
effect under the Securities Act. Where registration is required, the Fund may
be obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time the
Fund may be permitted to sell a security under an effective registration
statement. If, during such a period, adverse market conditions were to develop,
the Fund might obtain a less favorable price than that which prevailed when it
decided to sell. Illiquid securities will be priced at fair value as determined
in good faith by the Board of Trustees or its delegate. If, through the
appreciation of illiquid securities or the depreciation of liquid securities,
the Fund should be in a position where more than 10% of the value of its
Managed Assets is invested in illiquid securities, including restricted
securities that are not readily marketable, the Fund will take such steps as
are deemed advisable, if any, to protect liquidity.
Short-Term/Long-Term Debt Securities; Defensive Position; Invest-Up
Period. Upon an Adviser's recommendation and during temporary defensive
periods or in order to keep the Fund's cash fully invested, including the
period during which the net proceeds of the offering of Common Shares or
FundPreferred shares are being invested, the Fund may deviate from its
investment objectives and invest all or any portion of its Managed Assets in
investment grade debt securities. In such a case, the Fund may not pursue or
achieve its investment objectives. In addition, during the temporary periods
31
when the net proceeds of the offering of Common Shares or FundPreferred shares
are being invested, the Fund may invest all or a portion of its assets in debt
securities of long-term maturities issued by the U.S. Government or its
agencies or instrumentalities.
When-Issued and Delayed Delivery Transactions. The Fund may buy and sell
securities on a when-issued or delayed delivery basis, making payment or taking
delivery at a later date, normally within 15 to 45 days of the trade date. This
type of transaction may involve an element of risk because no interest accrues
on the securities prior to settlement and, because securities are subject to
market fluctuations, the value of the securities at time of delivery may be
less (or more) than cost. A separate account of the Fund will be established
with its custodian consisting of cash equivalents or liquid securities having a
market value at all times at least equal to the amount of the commitment.
Other Investment Companies. The Fund may invest up to 10% of its Managed
Assets in securities of other open- or closed-end investment companies that
invest primarily in securities of the types in which the Fund may invest
directly, or short-term debt securities. The Fund generally expects to invest
in other investment companies either during periods when it has large amounts
of uninvested cash, such as the period shortly after the Fund receives the
proceeds of the offering of its Common Shares or FundPreferred shares, or
during periods when there is a shortage of attractive securities of the types
in which the Fund may invest in directly available in the market. As an
investor in an investment company, the Fund will bear its ratable share of that
investment company's expenses, and would remain subject to payment of the
Fund's advisory and administrative fees with respect to assets so invested.
Common Shareholders would therefore be subject to duplicative expenses to the
extent the Fund invests in other investment companies. The Advisers will take
expenses into account when evaluating the investment merits of an investment in
the investment company relative to available securities of the types in which
the Fund may invest directly. In addition, the securities of other investment
companies also may be leveraged and therefore will be subject to the same
leverage risks described herein. As described in the section entitled "Risks,"
the net asset value and market value of leveraged shares will be more volatile
and the yield to shareholders will tend to fluctuate more than the yield
generated by unleveraged shares.
Initial Portfolio Composition. If current market conditions persist, the
Fund expects that its initial portfolio of preferred securities, convertible
securities and other debt instruments will be comprised of securities with the
following ratings, or in unrated securities judged by the Adviser responsible
for the investment to be of comparable credit quality: 11% in AA or better, 33%
in A, 33% in Baa/BBB, 16% in Ba/BB and 7% in B. Initially, the Fund intends to
invest approximately 75% of its Managed Assets in investment grade quality
securities. Initially, the Fund does not intend to invest more than 5% of its
Managed Assets in illiquid securities or more than 20% of its Managed Assets in
securities of non-U.S. issuers. In addition, the Fund does not currently intend
to invest in the non-U.S. dollar denominated securities described in this
Prospectus. The Fund also intends that all of the preferred securities in which
it will invest will be investment grade quality at the time of investment. The
Fund's intentions may change over time based on market and other conditions
beyond the Fund's control and there can be no assurance that the parameters of
the initial portfolio composition as described above will be achieved.
Lending of Portfolio Securities. The Fund may lend its portfolio securities
to broker-dealers and banks. Any such loan must be continuously secured by
collateral in cash or cash equivalents maintained on a current basis in an
amount at least equal to the market value of the securities loaned by the Fund.
The Fund would continue to receive the equivalent of the interest or dividends
paid by the issuer on the securities loaned, and would also receive an
additional return that may be in the form of a fixed fee or a
32
percentage of the collateral. The Fund may pay reasonable fees to persons
unaffiliated with the Fund for services in arranging these loans. The Fund
would have the right to call the loan and obtain the securities loaned at any
time on notice of not more than five business days. The Fund would not have the
right to vote the securities during the existence of the loan but would call
the loan to permit voting of the securities, if, in an Adviser's judgment, a
material event requiring a shareholder vote would otherwise occur before the
loan was repaid. In the event of bankruptcy or other default of the borrower,
the Fund could experience both delays in liquidating the loan collateral or
recovering the loaned securities and losses, including (a) possible decline in
the value of the collateral or in the value of the securities loaned during the
period while the Fund seeks to enforce its rights thereto, (b) possible
subnormal levels of income and lack of access to income during this period, and
(c) expenses of enforcing its rights.
Portfolio Turnover. The Fund may engage in portfolio trading when
considered appropriate, but short-term trading will not be used as the primary
means of achieving the Fund's investment objectives. Although the Fund cannot
accurately predict its annual portfolio turnover rate, it is not expected to
exceed 75% under normal circumstances. However, there are no limits on the rate
of portfolio turnover, and investments may be sold without regard to length of
time held when, in the opinion of an Adviser, investment considerations warrant
such action. A higher portfolio turnover rate results in correspondingly
greater brokerage commissions and other transactional expenses that are borne
by the Fund. High portfolio turnover may result in the realization of net
short-term capital gains by the Fund which, when distributed to shareholders,
will be taxable as ordinary income. See "Tax Matters."
33
USE OF LEVERAGE
The Fund, if market conditions are deemed favorable, likely will use
leverage by issuing FundPreferred shares, commercial paper or notes and/or
borrowing in an aggregate amount of approximately 33 1/3% of the Fund's capital
after such issuance and/or borrowing.
The Fund intends to apply for ratings for the FundPreferred shares from an
NRSRO (most likely Moody's, S&P and/or Fitch). The Fund presently anticipates
that any FundPreferred shares that it intends to issue initially would be given
ratings of at least AA/Aa by such NRSROs as Moody's ("Aa"), S&P ("AA") or Fitch
("AA").
Subject to market conditions and the Fund's receipt of at least a AA/Aa
credit rating on FundPreferred shares, within approximately one and one-half to
two months after the completion of the offering of the Common Shares, the Fund
intends to offer FundPreferred shares representing approximately 33 1/3% of the
Fund's capital immediately after their issuance. FundPreferred shares will have
seniority over the Common Shares. The issuance of FundPreferred shares will
leverage the Common Shares. Any Borrowings would also leverage, and have
seniority over, the Common Shares. There is no assurance that the Fund's
leveraging strategy will be successful.
Changes in the value of the Fund's portfolio securities, including costs
attributable to FundPreferred shares or Borrowings, will be borne entirely by
the Common Shareholders. If there is a net decrease (or increase) in the value
of the Fund's investment portfolio, the leverage will decrease (or increase)
the net asset value per Common Share to a greater extent than if the Fund were
not leveraged. During periods in which the Fund uses leverage, the fees paid to
NIAC (and to the Subadvisers) for advisory services will be higher than if the
Fund did not use leverage because the fees paid will be calculated on the basis
of the Fund's Managed Assets.
Under the 1940 Act, the Fund is not permitted to issue its own preferred
shares unless immediately after the issuance the value of the Fund's asset
coverage is at least 200% of the liquidation value of the outstanding preferred
shares (i.e., such liquidation value may not exceed 50% of the Fund's asset
coverage less liabilities other than borrowings). In addition, the Fund is not
permitted to declare any cash dividend or other distribution on its Common
Shares unless, at the time of such declaration, the value of the Fund's asset
coverage less liabilities other than borrowings is at least 200% of such
liquidation value. If FundPreferred shares are issued, the Fund intends, to the
extent possible, to purchase or redeem FundPreferred shares from time to time
to the extent necessary in order to maintain coverage of any FundPreferred
shares of at least 200%. If FundPreferred shares are outstanding, two of the
Fund's trustees will be elected by the holders of FundPreferred shares, voting
separately as a class. The remaining trustees of the Fund will be elected by
holders of Common Shares and FundPreferred shares voting together as a single
class. In the event the Fund failed to pay dividends on FundPreferred shares
for two years, FundPreferred shares would be entitled to elect a majority of
the trustees of the Fund. The failure to pay dividends or make distributions
could result in the Fund ceasing to qualify as a regulated investment company
under the Code, which could have a material adverse effect on the value of the
Common Shares.
Under the 1940 Act, the Fund generally is not permitted to issue commercial
paper or notes or borrow unless immediately after the borrowing or commercial
paper or note issuance the value of the Fund's total assets less liabilities
other than the principal amount represented by commercial paper,
34
notes or borrowings, is at least 300% of such principal amount. In addition,
the Fund is not permitted to declare any cash dividend or other distribution on
its Common Shares unless, at the time of such declaration, the value of the
Fund's total assets, less liabilities other than the principal amount
represented by commercial paper, notes or borrowings, is at least 300% of such
principal amount. If the Fund borrows, the Fund intends, to the extent
possible, to prepay all or a portion of the principal amount of any outstanding
commercial paper, notes or borrowing to the extent necessary in order to
maintain the required asset coverage. Failure to maintain certain asset
coverage requirements could result in an event of default and entitle the debt
holders to elect a majority of the Board of Trustees.
The Fund may be subject to certain restrictions imposed by either guidelines
of one or more NRSROs that may issue ratings for FundPreferred shares or, if
the Fund borrows from a lender, by the lender. These guidelines may impose
asset coverage or portfolio composition requirements that are more stringent
than those imposed on the Fund by the 1940 Act. It is not anticipated that
these covenants or guidelines will impede an Adviser from managing the Fund's
portfolio in accordance with the Fund's investment objectives and policies. In
addition to other considerations, to the extent that the Fund believes that the
covenants and guidelines required by the NRSROs would impede its ability to
meet its investment objectives, or if the Fund is unable to obtain the rating
on FundPreferred shares (expected to be at least AA/Aa), the Fund will not
issue FundPreferred shares.
Assuming that FundPreferred shares or Borrowings will represent in the
aggregate approximately 33 1/3% of the Fund's capital and pay dividends or
interest or a payment rate set by an interest rate transaction at an annual
average rate of 3.75%, the income generated by the Fund's portfolio (net of
estimated expenses) must exceed 1.25% in order to cover such dividend payments
or interest or payment rates and other expenses specifically related to
FundPreferred shares or Borrowings. Of course, these numbers are merely
estimates, used for illustration. Actual FundPreferred share dividend rates,
interest or payment rates may vary frequently and may be significantly higher
or lower than the rate estimated above.
The following table is furnished in response to requirements of the
Securities and Exchange Commission. It is designed to illustrate the effect of
leverage on Common Share total return, assuming investment portfolio total
returns (comprised of income and changes in the value of investments held in
the Fund's portfolio net of expenses) of -10%, -5%, 0%, 5% and 10%. These
assumed investment portfolio returns are hypothetical figures and are not
necessarily indicative of the investment portfolio returns expected to be
experienced by the Fund. The table further reflects the issuance of
FundPreferred shares or Borrowings representing approximately 33 1/3% of the
Fund's total capital, and the Fund's currently projected annual FundPreferred
share dividend rate, borrowing interest rate or payment rate set by an interest
rate transaction of 3.75%. See "Risks--Leverage Risk."
[Enlarge/Download Table]
Assumed Portfolio Total Return (Net of Expenses) (10.00)% (5.00)% 0.00 % 5.00% 10.00%
Common Share Total Return....................... (16.88)% (9.38)% (1.88)% 5.63% 13.13%
Common Share total return is comprised of two elements -- the Common Share
dividends paid by the Fund (the amount of which is largely determined by the
net investment income of the Fund after paying dividends on FundPreferred
shares) and gains or losses on the value of the securities the Fund owns. As
required by the Securities and Exchange Commission rules, the table assumes
that the Fund is more likely to suffer capital losses than to enjoy capital
appreciation.
35
Unless and until the Fund issues FundPreferred shares or, alternatively,
uses leverage through Borrowings, the Common Shares will not be leveraged and
this section will not apply.
HEDGING TRANSACTIONS
The Fund may use derivatives or other transactions for the purpose of
hedging a portion of its portfolio holdings or in connection with the Fund's
anticipated use of leverage through its sale of FundPreferred shares or
Borrowings.
Portfolio Hedging Transactions. The Fund may use derivatives or other
transactions for purposes of hedging the portfolio's exposure to the risk of
increases in interest rates, common stock risk, high yield credit risk and
foreign currency exchange rate risk. The specific derivative instruments to be
used, or other transactions to be entered into, each for hedging purposes may
include (i) options and futures contracts, including options on common stock,
stock indexes, bonds and bond indexes, stock index futures, bond index futures
and related instruments, (ii) short sales of securities that the Fund owns or
has the right to acquire through the conversion of securities, (iii) structured
notes and similar instruments, (iv) credit derivative instruments and (v)
currency exchange transactions. Some, but not all, of the derivative
instruments may be traded and listed on an exchange. The positions in
derivatives will be marked-to-market daily at the closing price established on
the relevant exchange or at a fair value. Except for investing in synthetic
convertible securities, the Fund will use derivatives or other transactions
described in this paragraph solely for purposes of hedging the Fund's portfolio
risks. See "The Fund's Investments--Portfolio Composition--Synthetic
Convertible Securities."
There may be an imperfect correlation between changes in the value of the
Fund's portfolio holdings and hedging positions entered into by the Fund, which
may prevent the Fund from achieving the intended hedge or expose the Fund to
risk of loss. In addition, the Fund's success in using hedging instruments is
subject to an Adviser's ability to predict correctly changes in the
relationships of such hedge instruments to the Fund's portfolio holdings, and
there can be no assurance that an Adviser's judgment in this respect will be
accurate. Consequently, the use of hedging transactions might result in a
poorer overall performance for the Fund, whether or not adjusted for risk, than
if the Fund had not hedged its portfolio holdings. In addition, there can be no
assurance that the Fund will enter into hedging or other transactions at times
or under circumstances in which it which it would be advisable to do so. See
"Risks--Hedging Risks."
Options on Securities. In order to hedge against adverse market shifts, the
Fund may purchase put and call options on stock, bonds or other securities. In
addition, the Fund may seek to hedge a portion of its portfolio investments
through writing (i.e., selling) covered put and call options. A put option
embodies the right of its purchaser to compel the writer of the option to
purchase from the option holder an underlying security or its equivalent at a
specified price at any time during the option period. In contrast, a call
option gives the purchaser the right to buy the underlying security covered by
the option or its equivalent from the writer of the option at the stated
exercise price.
As a holder of a put option, the Fund will have the right to sell the
securities underlying the option and as the holder of a call option, the Fund
will have the right to purchase the securities underlying the option, in each
case at their exercise price at any time prior to the option's expiration date.
The Fund may choose to exercise the options it holds, permit them to expire or
terminate them prior to their
36
expiration by entering into closing sale transactions. In entering into a
closing sale transaction, the Fund would sell an option of the same series as
the one it has purchased. The ability of the Fund to enter into a closing sale
transaction with respect to options purchased and to enter into a closing
purchase transaction with respect to options sold depends on the existence of a
liquid secondary market. There can be no assurance that a closing purchase or
sale transaction can be effected when the Fund so desires. The Fund's ability
to terminate option positions established in the over-the-counter market may be
more limited than in the case of exchange-traded options and may also involve
the risk that securities dealers participating in such transactions would fail
to meet their obligations to the Fund.
In purchasing a put option, the Fund will seek to benefit from a decline in
the market price of the underlying security, while in purchasing a call option,
the Fund will seek to benefit from an increase in the market price of the
underlying security. If an option purchased is not sold or exercised when it
has remaining value, or if the market price of the underlying security remains
equal to or greater than the exercise price, in the case of a put, or remains
equal to or below the exercise price, in the case of a call, during the life of
the option, the option will expire worthless. For the purchase of an option to
be profitable, the market price of the underlying security must decline
sufficiently below the exercise price, in the case of a put, and must increase
sufficiently above the exercise price, in the case of a call, to cover the
premium and transaction costs. Because option premiums paid by the Fund are
small in relation to the market value of the instruments underlying the
options, buying options can result in additional amounts of leverage to the
Fund. The leverage caused by trading in options could cause the Fund's net
asset value to be subject to more frequent and wider fluctuation than would be
the case if the Fund did not invest in options.
The Fund will receive a premium when it writes put and call options, which
increases the Fund's return on the underlying security in the event the option
expires unexercised or is closed out at a profit. By writing a call, the Fund
will limit its opportunity to profit from an increase in the market value of
the underlying security above the exercise price of the option for as long as
the Fund's obligation as the writer of the option continues. Upon the exercise
of a put option written by the Fund, the Fund may suffer an economic loss equal
to the difference between the price at which the Fund is required to purchase
the underlying security and its market value at the time of the option
exercise, less the premium received for writing the option. Upon the exercise
of a call option written by the Fund, the Fund may suffer an economic loss
equal to an amount not less than the excess of the security's market value at
the time of the option exercise over the Fund's acquisition cost of the
security, less the sum of the premium received for writing the option and the
difference, if any, between the call price paid to the Fund and the Fund's
acquisition cost of the security. Thus, in some periods the Fund might receive
less total return and in other periods greater total return from its hedged
positions than it would have received from its underlying securities unhedged.
Options on Stock and Bond Indexes. The Fund may purchase put and call
options on domestic stock and bond indexes to hedge against risks of
market-wide price movements affecting its assets. In addition, the Fund may
write covered put and call options on stock and bond indexes. A stock or bond
index measures the movement of a certain group of stocks or bonds by assigning
relative values to the stocks or bonds included in the index. Options on a
stock or bond index are similar to options on securities. Because no underlying
security can be delivered, however, the option represents the holder's right to
obtain from the writer, in cash, a fixed multiple of the amount by which the
exercise price exceeds (in the case of a put) or is less than (in the case of a
call) the closing value of the underlying index on the exercise date. The
advisability of using stock or bond index options to hedge against the
37
risk of market-wide movements will depend on the extent of diversification of
the Fund's investments and the sensitivity of its investments to factors
influencing the underlying index. The effectiveness of purchasing or writing
stock or bond index options as a hedging technique will depend upon the extent
to which price movements in the Fund's investments correlate with price
movements in the stock or bond index selected. In addition, successful use by
the Fund of options on stock or bond indexes will be subject to the ability of
an Adviser to predict correctly changes in the relationship of the underlying
index to the Fund's portfolio holdings. No assurance can be given that the
Adviser's judgment in this respect will be correct.
When the Fund writes an option on a stock or bond index, it will establish a
segregated account with its custodian in which the Fund will deposit liquid
securities in an amount equal to the market value of the option, and will
maintain the account while the option is open.
Stock and Bond Index Futures Contracts. The Fund may purchase and sell
stock index futures as a hedge against movements in the equity markets. Stock
and bond index futures contracts are agreements in which one party agrees to
deliver to the other an amount of cash equal to a specific dollar amount times
the difference between the value of a specific stock or bond index at the close
of the last trading day of the contract and the price at which the agreement is
made. No physical delivery of securities is made.
For example, if an Adviser expects general stock or bond market prices to
decline, it might sell a futures contract on a particular stock or bond index.
If that index does in fact decline, the value of some or all of the securities
in the fund's portfolio may also be expected to decline, but that decrease
would be offset in part by the increase in the value of the Fund's position in
such futures contract. If, on the other hand, an Adviser expects general stock
or bond market prices to rise, it might purchase a stock or bond index futures
contract as a hedge against an increase in prices of particular securities it
wants ultimately to buy. If in fact the stock or bond index does rise, the
price of the particular securities intended to be purchased may also increase,
but that increase would be offset in part by the increase in the value of the
Fund's futures contract resulting from the increase in the index.
Under regulations of the Commodity Futures Trading Commission currently in
effect, which may change from time to time, with respect to futures contracts
purchased by the Fund, the Fund will set aside in a segregated account liquid
securities with a value at least equal to the value of instruments underlying
such futures contracts less the amount of initial margin on deposit for such
contracts. The current view of the staff of the Securities and Exchange
Commission is that the Fund's long and short positions in futures contracts
must be collateralized with cash or certain liquid assets held in a segregated
account or "covered" in order to counter the impact of any potential leveraging.
There are several risks associated with the use of futures contracts and
futures options. A purchase or sale of a futures contract may result in losses
in excess of the amount invested in the futures contract. While the Fund may
enter into futures contracts and options on futures contracts for hedging
purposes, the use of futures contracts and options on futures contracts might
result in a poorer overall performance for the Fund than if it had not engaged
in any such transactions. There may be an imperfect correlation between the
Fund's portfolio holdings and futures contracts or options on futures contracts
entered into by the Fund, which may prevent the Fund from achieving the
intended hedge or expose the Fund to risk of loss. The degree of imperfection
of correlation depends on circumstances such as: variations in speculative
market demand for futures, futures options and the related securities,
38
including technical influences in futures and futures options trading and
differences between the securities markets and the securities underlying the
standard contracts available for trading. Further, the Fund's use of futures
contracts and options on futures contracts to reduce risk involves costs and
will be subject to an Adviser's ability to predict correctly changes in
interest rate relationships or other factors.
Short Sales. The Fund may make short sales of securities if, at all times
when a short position is open, the Fund owns at least an equal amount of such
securities or securities convertible into or exchangeable for, without payment
of any further consideration, securities of the same issue as, and equal in
amount to, the securities sold short. This technique is called selling short
"against the box."
In a short sale, the Fund will not deliver from its portfolio the securities
sold and will not receive immediately the proceeds from the short sale.
Instead, the Fund will borrow the securities sold short from a broker-dealer
through which the short sale is executed and the broker-dealer will deliver
such securities, on behalf of the Fund, to the purchaser of such securities.
Such broker-dealer will be entitled to retain the proceeds from the short sale
until the Fund delivers to such broker-dealer the securities sold short. In
addition, the Fund will be required to pay the broker-dealer the amount of any
dividends paid on shares sold short. Finally, to secure its obligation to
deliver to such broker-dealer the securities sold short, the Fund must deposit
and continuously maintain in a separate account with its custodian an
equivalent amount of the securities sold short or securities convertible into
or exchangeable for such securities without the payment of additional
consideration. The Fund is said to have a short position in the securities sold
until it delivers to the broker-dealer the securities sold, at which time the
Fund will receive the proceeds of the sale. Because the Fund ordinarily will
want to continue to hold securities in its portfolio that are sold short, the
Fund will normally close out a short position by purchasing on the open market
and delivering to the broker-dealer an equal amount of the securities sold
short, rather than by delivering portfolio securities.
Short sales may protect the Fund against the risk of losses in the value of
its portfolio securities because any unrealized losses with respect to such
portfolio securities should be wholly or partially offset by a corresponding
gain in the short position. However, any potential gain in such portfolio
securities should be wholly or partially offset by a corresponding loss in the
short position. The extent to which such gains or losses are offset will depend
upon the amount of securities sold short relative to the amount the Fund owns,
either directly or indirectly, and, in the case where the Fund owns convertible
securities, changes in the conversion premium. The Fund will incur transaction
costs in connection with short sales.
In addition to enabling the Fund to hedge against market risk, short sales
may afford the Fund an opportunity to earn additional current income to the
extent the Fund is able to enter into arrangements with broker-dealers through
which the short sales are executed to receive income with respect to the
proceeds of the short sales during the period the Fund's short positions remain
open.
The Code imposes constructive sale treatment for federal income tax purposes
on certain hedging strategies with respect to appreciated financial positions.
Under these rules, taxpayers will recognize gain, but not loss, with respect to
securities if they enter into short sales or "offsetting notional principal
contracts" (as defined by the Code) with respect to, or futures or forward
contracts to deliver, the same or substantially identical property, or if they
enter into such transactions and then acquire the same or substantially
identical property. The Secretary of the Treasury is authorized to promulgate
regulations
39
that will treat as constructive sales certain transactions that have
substantially the same effect as these transactions. See "Tax Matters."
Structured Notes. The Fund may utilize structured notes and similar
instruments for hedging purposes. Structured notes are privately negotiated
debt obligations where the principal and/or interest is determined by reference
to the performance of a benchmark asset, market or interest rate (an "embedded
index"), such as selected securities, an index of securities or specified
interest rates or the differential performance of two assets or markets. The
terms of such structured instruments normally provide that their principal
and/or interest payments are to be adjusted upwards or downwards (but not
ordinarily below zero) to reflect changes in the embedded index while the
structured instruments are outstanding. As a result, the interest and/or
principal payments that may be made on a structured product may vary widely,
depending on a variety of factors, including the volatility of the embedded
index and the effect of changes in the embedded index on principal and/or
interest payments. The rate of return on structured notes may be determined by
applying a multiplier to the performance or differential performance of the
referenced index(es) or other asset(s). Application of a multiplier involves
leverage that will serve to magnify the potential for gain and the risk of loss.
Credit Derivative Instruments. The Fund may purchase credit derivative
instruments for the purpose of hedging the Fund's credit risk exposure to
certain issuers of securities that the Fund owns. For example, the Fund may
enter into credit swap default contracts for hedging purposes where the Fund
would be the buyer of such a contract. The Fund would be entitled to receive
the par (or other agreed-upon) value of a referenced debt obligation from the
counterparty to the contract in the event of a default by a third party, such
as a U.S. or foreign corporate issuer, on the debt obligation. In return, the
Fund would pay to the counterparty a periodic stream of payments over the term
of the contract provided that no event of default has occurred. If no default
occurs, the Fund would have spent the stream of payments and received no
benefit from the contract.
Currency Exchange Transactions. The Fund may enter into currency exchange
transactions to hedge the Fund's exposure to foreign currency exchange rate
risk in the event the Fund invests in non-U.S. denominated securities of
non-U.S. issuers as described in this Prospectus. The Fund's currency
transactions will be limited to portfolio hedging involving portfolio
positions. Portfolio hedging is the use of a forward contract with respect to a
portfolio security position denominated or quoted in a particular currency. A
forward contract is an agreement to purchase or sell a specified currency at a
specified future date (or within a specified time period) and price set at the
time of the contract. Forward contracts are usually entered into with banks,
foreign exchange dealers or broker-dealers, are not exchange-traded, and are
usually for less than one year, but may be renewed.
At the maturity of a forward contract to deliver a particular currency, the
Fund may either sell the portfolio security related to such contract and make
delivery of the currency, or it may retain the security and either acquire the
currency on the spot market or terminate its contractual obligation to deliver
the currency by purchasing an offsetting contract with the same currency trader
obligating it to purchase on the same maturity date the same amount of the
currency.
It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of a forward contract. Accordingly, it
may be necessary for the Fund to purchase additional
40
currency on the spot market (and bear the expense of such purchase) if the
market value of the security is less than the amount of currency that the Fund
is obligated to deliver and if a decision is made to sell the security and make
delivery of the currency. Conversely, it may be necessary to sell on the spot
market some of the currency received upon the sale of the portfolio security if
its market value exceeds the amount of currency the Fund is obligated to
deliver.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been movement in forward contract prices. If the Fund engages in an offsetting
transaction, it may subsequently enter into a new forward contract to sell the
currency. Should forward prices decline during the period between the Fund's
entering into a forward contract for the sale of a currency and the date it
enters into an offsetting contract for the purchase of the currency, the Fund
will realize a gain to the extent the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should
forward prices increase, the Fund will suffer a loss to the extent the price of
the currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell. A default on the contract would deprive the Fund of unrealized
profits or force the Fund to cover its commitments for purchase or sale of
currency, if any, at the current market price.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the
currency at a price above the devaluation level it anticipates. The cost to the
Fund of engaging in currency exchange transactions varies with such factors as
the currency involved, the length of the contract period, and prevailing market
conditions. Since currency exchange transactions are usually conducted on a
principal basis, no fees or commissions are involved.
The Fund also may invest in relatively new instruments without a significant
trading history. See "Other Investment Policies and Techniques" in the Fund's
Statement of Additional Information for further information on hedging
transactions.
Interest Rate Transactions. In connection with the Fund's likely use of
leverage through its sale of FundPreferred shares or Borrowings, the Fund, if
market conditions are deemed favorable, likely will enter into interest rate
swap or cap transactions to attempt to protect itself from increasing dividend
or interest expenses on its FundPreferred shares or Borrowings. Interest rate
swaps involve the Fund's agreement with the swap counterparty to pay a fixed
rate payment in exchange for the counterparty agreeing to pay the Fund a
payment at a variable rate that is expected to approximate the rate on the
Fund's variable rate payment obligation on FundPreferred shares or any variable
rate Borrowings. The payment obligations would be based on the notional amount
of the swap.
The Fund may use an interest rate cap, which would require it to pay a
premium to the cap counterparty and would entitle it, to the extent that a
specified variable rate index exceeds a predetermined fixed rate, to receive
from the counterparty payment of the difference based on the notional amount of
such cap. The Fund would use interest rate swaps or caps only with the intent
to reduce or eliminate the risk that an increase in short-term interest rates
could have on Common Share net earnings as a result of leverage.
41
The Fund will usually enter into swaps or caps on a net basis; that is, the
two payment streams will be netted out in a cash settlement on the payment date
or dates specified in the instrument, with the Fund receiving or paying, as the
case may be, only the net amount of the two payments. The Fund intends to
maintain in a segregated account with its custodian cash or liquid securities
having a value at least equal to the Fund's net payment obligations under any
swap transaction, marked-to-market daily.
The use of interest rate swaps and caps is a highly specialized activity
that involves investment techniques and risks different from those associated
with ordinary portfolio security transactions. Depending on the state of
interest rates in general, the Fund's use of interest rate swaps or caps could
enhance or harm the overall performance of the Common Shares. To the extent
there is a decline in interest rates, the value of the interest rate swap or
cap could decline, and could result in a decline in the net asset value of the
Common Shares. In addition, if short-term interest rates are lower than the
Fund's fixed rate of payment on the interest rate swap, the swap will reduce
Common Share net earnings. If, on the other hand, short-term interest rates are
higher than the fixed rate of payment on the interest rate swap, the swap will
enhance Common Share net earnings. Buying interest rate caps could enhance the
performance of the Common Shares by providing a maximum leverage expense.
Buying interest rate caps could also decrease the net earnings of the Common
Shares in the event that the premium paid by the Fund to the counterparty
exceeds the additional amount the Fund would have been required to pay had it
not entered into the cap agreement. The Fund has no current intention of
selling an interest rate swap or cap. The Fund will not enter into interest
rate swap or cap transactions in an aggregate notional amount that exceeds the
outstanding amount of the Fund's leverage.
Interest rate swaps and caps do not involve the delivery of securities or
other underlying assets or principal. Accordingly, the risk of loss with
respect to interest rate swaps is limited to the net amount of interest
payments that the Fund is contractually obligated to make. If the counterparty
defaults, the Fund would not be able to use the anticipated net receipts under
the swap or cap to offset the dividend payments on FundPreferred shares or
interest payments on Borrowings. Depending on whether the Fund would be
entitled to receive net payments from the counterparty on the swap or cap,
which in turn would depend on the general state of short-term interest rates at
that point in time, such a default could negatively impact the performance of
the Common Shares.
Although this will not guarantee that the counterparty does not default, the
Fund will not enter into an interest rate swap or cap transaction with any
counterparty that NIAC believes does not have the financial resources to honor
its obligation under the interest rate swap or cap transaction. Further, NIAC
will continually monitor the financial stability of a counterparty to an
interest rate swap or cap transaction in an effort to proactively protect the
Fund's investments.
In addition, at the time the interest rate swap or cap transaction reaches
its scheduled termination date, there is a risk that the Fund will not be able
to obtain a replacement transaction or that the terms of the replacement will
not be as favorable as on the expiring transaction. If this occurs, it could
have a negative impact on the performance of the Common Shares.
The Fund may choose or be required to redeem some or all FundPreferred
shares or prepay any Borrowings. This redemption would likely result in the
Fund seeking to terminate early all or a portion of any swap or cap
transaction. Such early termination of a swap could result in a termination
payment by or to the Fund. An early termination of a cap could result in a
termination payment to the Fund.
42
RISKS
The Fund is a diversified, closed-end management investment company designed
primarily as a long-term investment and not as a trading vehicle. The Fund is
not intended to be a complete investment program and, due to the uncertainty
inherent in all investments, there can be no assurance that the Fund will
achieve its investment objectives. Your Common Shares at any point in time may
be worth less than your original investment, even after taking into account the
reinvestment of Fund dividends and distributions.
No Operating History
The Fund is a newly organized, diversified, closed-end management investment
company and has no operating history.
Investment and Market Risk
An investment in the Fund's Common Shares is subject to investment risk,
including the possible loss of the entire principal amount that you invest.
Your investment in Common Shares represents an indirect investment in the
securities owned by the Fund, substantially all of which are traded on a
national securities exchange or in the over-the-counter markets. The value of
these securities, like other market investments, may move up or down, sometimes
rapidly and unpredictably.
Your Common Shares at any point in time may be worth less than your original
investment, even after taking into account the reinvestment of Fund dividends
and distributions. The Fund intends to utilize leverage, which magnifies the
stock market and interest rate risks. See "Use of Leverage."
Interest Rate Risk
Interest rate risk is the risk that fixed-income securities such as
preferred, convertible and debt securities will decline in value because of
changes in market interest rates. When market interest rates rise, the market
value of such securities generally will fall. The Fund's investment in such
securities means that the net asset value and market price of Common Shares
will tend to decline if market interest rates rise.
During periods of declining interest rates, the issuer of a security may
exercise its option to prepay principal earlier than scheduled, forcing the
Fund to reinvest in lower yielding securities. This is known as call or
prepayment risk. Preferred and debt securities frequently have call features
that allow the issuer to repurchase the security prior to its stated maturity.
An issuer may redeem an obligation if the issuer can refinance the debt at a
lower cost due to declining interest rates or an improvement in the credit
standing of the issuer. During periods of rising interest rates, the average
life of certain types of securities may be extended because of slower than
expected principal payments. This may lock in a below market interest rate,
increase the security's duration and reduce the value of the security. This is
known as extension risk. Market interest rates for investment grade
fixed-income securities have recently declined significantly below the recent
historical average rates for such securities. This decline may have increased
the risk that these rates will rise in the future (which would cause the value
of the Fund's net assets to decline) and the degree to which asset values may
decline in such event; however, historical interest rate levels are not
necessarily predictive of future interest rate levels.
43
Credit Risk; Subordination
Credit risk is the risk that a security in the Fund's portfolio will decline
in price or fail to make dividend or interest payments when due because the
issuer of the security experiences a decline in its financial status. Such
credit risk is generally greater for issuers of high yield securities. The Fund
may also invest in split-rated securities. Split-rated securities are those
securities that, at the time of investment, are rated below investment grade by
Moody's, S&P or Fitch, so long as at least one NRSRO rates such securities
within the four highest grades (i.e., investment grade quality). This means
that a split-rated security may be regarded by one NRSRO (but by definition not
by all NRSROs) as having predominately speculative characteristics with respect
to the issuer's capacity to pay interest and repay principal, and accordingly
subject to a greater risk of default. The prices of split-rated securities, in
the view of one but not all NRSROs, may be more sensitive to negative
developments, than securities without a split-rating such as a decline in the
issuer's revenues or a general economic downturn.
Preferred securities and convertible securities are typically subordinated
to bonds and other debt instruments in a company's capital structure, in terms
of priority to corporate income, and therefore will be subject to greater
credit risk than those debt instruments.
High Yield Risk
The Fund may invest up to 35% of its Managed Assets in securities that, at
the time of investment, are not investment grade quality. The Fund will only
invest in securities that, at the time of investment, are rated B or higher by
at least one NRSRO or that are unrated but judged to be of comparable quality
by the Adviser responsible for the investment, except, however, the Fund may
invest up to 5% of its Managed Assets in securities with a highest rating of
CCC or that are unrated but judged to be of comparable quality by the Adviser
responsible for the investment. Securities of below investment grade quality
are regarded as having predominately speculative characteristics with respect
to capacity to pay interest and repay principal, and are commonly referred to
as junk bonds. Issuers of high yield securities may be highly leveraged and may
not have available to them more traditional methods of financing. The prices of
these lower grade securities are typically more sensitive to negative
developments, such as a decline in the issuer's revenues or a general economic
downturn, than are the prices of higher grade securities. The secondary market
for high yield securities may not be as liquid as the secondary market for more
highly rated securities, a factor which may have an adverse effect on the
Fund's ability to dispose of a particular security. There are fewer dealers in
the market for high yield securities than for investment grade obligations. The
prices quoted by different dealers may vary significantly and the spread
between the bid and ask price is generally much larger than for higher quality
instruments. Under adverse market or economic conditions, the secondary market
for high yield securities could contract further, independent of any specific
adverse changes in the condition of a particular issuer, and these instruments
may become illiquid. As a result, the Fund could find it more difficult to sell
these securities or may be able to sell the securities only at prices lower
than if such securities were widely traded. Prices realized upon the sale of
such lower rated or unrated securities, under these circumstances, may be less
than the prices used in calculating the Fund's net asset value.
Convertible Security Risk
Convertible securities generally offer lower interest or dividend yields
than non-convertible fixed-income securities of similar credit quality because
of the potential for capital appreciation. The market
44
values of convertible securities tend to decline as interest rates increase
and, conversely, to increase as interest rates decline. However, a convertible
security's market value also tends to reflect the market price of the common
stock of the issuing company, particularly when the stock price is greater than
the convertible security's conversion price. The conversion price is defined as
the predetermined price at which the convertible security could be exchanged
for the underlying common stock. As the market price of the underlying common
stock declines below the conversion price, the price of the convertible
security tends to be increasingly influenced more by the yield of the
convertible security. Thus, it may not decline in price to the same extent as
the underlying common stock, and convertible securities generally have less
potential for gain or loss than common stocks. However, mandatory convertible
securities (as discussed below) generally do not limit the potential for loss
to the same extent as securities convertible at the option of the holder. In
the event of a liquidation of the issuing company, holders of convertible
securities would be paid before the company's common stockholders.
Consequently, an issuer's convertible securities generally entail less risk
than its common stock. However, convertible securities fall below debt
obligations of the same issuer in order of preference or priority in the event
of a liquidation and are typically unrated or rated lower than such debt
obligations. See "--Credit Risk; Subordination." In addition, contingent
payment convertible securities allow the issuer to claim deductions based on
its nonconvertible cost of debt, which generally will result in deductions in
excess of the actual cash payments made on the securities (and accordingly,
holders will recognize income in amounts in excess of the cash payments
received).
Mandatory convertible securities are distinguished as a subset of
convertible securities because the conversion is not optional and the
conversion price at maturity (or redemption) is based solely upon the market
price of the underlying common stock, which may be significantly less than par
or the price (above or below par) paid. For these reasons, the risks associated
with investing in mandatory convertible securities most closely resemble the
risks inherent in common stocks. Mandatory convertible securities customarily
pay a higher coupon yield to compensate for the potential risk of additional
price volatility and loss upon conversion. Because the market price of a
mandatory convertible security increasingly corresponds to the market price of
its underlying common stocks as the convertible security approaches its
conversion date, there can be no assurance that the higher coupon will
compensate for the potential loss. See"--Common Stock Risk" below.
Synthetic Convertible Security Risk
Although the Fund does not currently intend to invest in synthetic
convertible securities, the Fund may invest up to 10% of its Managed Assets in
such securities. The Fund may invest in synthetic convertible securities
created by third parties that, similar to true convertible securities,
typically trade as a single security with a unitary value. The Fund may also
invest in synthetic convertible securities by acquiring separate securities,
one possessing a fixed-income component and the other possessing an equity
component. The value of a synthetic convertible security comprised of separate
securities, may respond differently to market fluctuations than a true
convertible security or a synthetic convertible security traded as a single
security because each separate security comprising such a synthetic convertible
security has its own market value. In addition, because the equity component
may be synthetically achieved by investing in warrants or options to buy common
stock at a certain exercise price, or options on a stock index, synthetic
convertible securities are subject to the risks associated with warrants and
options. See "--Convertible Security Risk" and "--Risks of Warrants and
Options." In addition, if the value of the underlying common stock or the level
of the index involved in the convertible component falls below the exercise
price of the warrant or option, the warrant or option may lose all value.
45
The Fund will be subject to the risks of warrants and options to the extent
it invests in synthetic convertible securities that use warrants or options on
common stocks or common stock indexes as their convertible components. The
Fund's investments in warrants and options involve risks different from, and
possibly greater than, the risks associated with investing directly in
convertible securities. Warrants and options are subject to a number of risks
associated with derivative instruments generally and described elsewhere in
this Prospectus such as illiquidity risks and risks associated with investments
in common stock risk. They also involve the risk of mispricing or improper
valuation, the risk of ambiguous documentation, and the risk that changes in
the value of the warrant or option may not correlate perfectly with the
underlying common stock or common stock index.
Market Discount From Net Asset Value
Shares of closed-end investment companies frequently trade at a discount
from their net asset value. This characteristic is a risk separate and distinct
from the risk that the Fund's net asset value could decrease as a result of its
investment activities and may be greater for investors expecting to sell their
shares in a relatively short period following completion of this offering. The
net asset value of the Common Shares will be reduced immediately following the
offering as a result of the payment of certain offering costs. Whether
investors will realize gains or losses upon the sale of the Common Shares will
depend not upon the Fund's net asset value but entirely upon whether the market
price of the Common Shares at the time of sale is above or below the investor's
purchase price for the Common Shares. Because the market price of the Common
Shares will be determined by factors such as relative supply of and demand for
the Common Shares in the market, general market and economic conditions, and
other factors beyond the control of the Fund, the Fund cannot predict whether
the Common Shares will trade at, below or above net asset value or at, below or
above the initial public offering price.
Leverage Risk
Utilization of leverage is a speculative investment technique and involves
certain risks to the holders of Common Shares. These include higher volatility
of the net asset value of the Common Shares, the likelihood of potentially more
volatility in the market value of the Common Shares and the possibility either
that the Common Share income will fall if the dividend rate on FundPreferred
shares or the interest rate on any Borrowings rises, or that Common Share
income will fluctuate because the dividend rate on FundPreferred shares or the
interest rate of Borrowings varies.
So long as the Fund is able to realize a higher net return on its investment
portfolio than the then current cost of any leverage together with other
related expenses, the effect of the leverage will be to cause holders of Common
Shares to realize higher net return than if the Fund were not so leveraged. On
the other hand, to the extent that the then current cost of any leverage,
together with other related expenses, approaches the net return on the Fund's
investment portfolio, the benefit of leverage to holders of Common Shares will
be reduced, and if the then current cost of any leverage were to exceed the net
return on the Fund's portfolio, the Fund's leveraged capital structure would
result in a lower rate of return to Common Shareholders than if the Fund were
not so leveraged. There can be no assurance that the Fund's leverage strategy
will be successful. The Fund will pay (and Common Shareholders will bear) any
costs and expenses relating to the issuance and ongoing maintenance of
FundPreferred shares (for example, distribution related expenses such as a
participation fee paid at what it expects will be an annual rate of 0.25% of
FundPreferred share liquidation preference to broker-dealers successfully
participating in FundPreferred share auctions).
Any decline in the net asset value of the Fund's investments will be borne
entirely by Common Shareholders. Therefore, if the market value of the Fund's
portfolio declines, the leverage will result in a
46
greater decrease in net asset value to Common Shareholders than if the Fund
were not leveraged. Such greater net asset value decrease also will tend to
cause a greater decline in the market price for the Common Shares. To the
extent that the Fund is required or elects to redeem any FundPreferred shares
or prepay any Borrowings, the Fund may need to liquidate investments to fund
such redemptions or prepayments. Liquidation at times of adverse economic
conditions may result in capital loss and reduce returns to Common Shareholders.
In addition, such redemption or prepayment would likely result in the Fund
seeking to terminate early all or a portion of any interest rate swap or cap
transaction. Early termination of an interest rate swap could result in a
termination payment by or to the Fund. An early termination of a cap could
result in a termination payment to the Fund. See "Hedging Transactions."
Concentration Risk
The Fund intends to invest at least 25% of its Managed Assets in securities
of companies principally engaged in financial services. This policy makes the
Fund more susceptible to adverse economic or regulatory occurrences affecting
that sector.
Concentration of investments in the financial services sector includes the
following risks:
. regulatory actions--financial services companies may suffer a setback if
regulators change the rules under which they operate;
. changes in interest rates--unstable interest rates can have a
disproportionate effect on the financial services sector;
. concentration of loans--financial services companies whose securities the
Fund may purchase may themselves have concentrated portfolios, such as a
high level of loans to real estate developers, which makes them vulnerable
to economic conditions that affect that sector; and
. competition--financial services companies have been affected by increased
competition, which could adversely affect the profitability or viability
of such companies.
Non-U.S. Securities Risk
The Fund may invest up to 35% of its Managed Assets in securities of
non-U.S. issuers. Up to 10% of the Fund's Managed Assets may be invested in
securities that are denominated in Japanese yen, Canadian dollars, British
pounds or Euros and which may be offered, traded or listed in markets other
than U.S. markets. The remainder of the Fund's Managed Assets that may be
invested in securities of non-U.S. issuers will be invested in U.S. dollar
denominated securities offered, traded or listed in U.S. markets. Initially,
the Fund does not intend to invest more than 20% of its Managed Assets in
securities of non-U.S. issuers and does not currently intend to invest in the
non-U.S. dollar denominated securities described above. Investments in
securities of non-U.S. issuers involve special risks not presented by
investments in securities of U.S. issuers, including the following: (i) less
publicly available information about non-U.S. issuers or markets may be
available due to less rigorous disclosure or accounting standards or regulatory
practices; (ii) many non-U.S. markets are smaller, less liquid and more
volatile meaning that in a changing market, an Adviser may not be able to sell
the Fund's portfolio securities at times, in amounts and at prices it considers
reasonable; (iii) potential adverse effects of fluctuations in currency
exchange rates or controls on the value of the Fund's investments; (iv) the
economies of non-U.S. countries may grow at slower rates than expected or may
experience a downturn or recession; (v) the impact of economic, political,
social or diplomatic events; (vi) certain non-U.S. countries may
47
impose restrictions on the ability of non-U.S. issuers to make payments of
principal and interest to investors located outside the U.S., due to blockage
of foreign currency exchanges or otherwise; and (vii) withholding and other
non-U.S. taxes may decrease the Fund's return. Although an Adviser may hedge
the Fund's exposure to certain of these risks, including the foreign currency
exchange rate risk, there can be no assurance that the Fund will enter into
hedging transactions at any time or at times or under circumstances in which it
might be advisable to do so.
Economies and social and political climate in individual countries may
differ unfavorably from the United States. Non-U.S. economies may have less
favorable rates of growth of gross domestic product, rates of inflation,
currency valuation, capital reinvestment, resource self-sufficiency and balance
of payments positions. Many countries have experienced substantial, and in some
cases extremely high, rates of inflation for many years. Unanticipated
political and social developments may also affect the values of the Fund's
investments and the availability to the Fund of additional investments in such
countries.
Common Stock Risk
The Fund may have exposure to common stocks by virtue of the common stock
component of the convertible securities in which the Fund invests. The Fund
also may hold common stocks in its portfolio upon conversion of a convertible
security, such holdings not normally to exceed 5% of the Fund's Managed Assets.
In addition, in keeping with the income focus of the Fund, the Fund expects to
sell any common stock holdings as soon as practicable after conversion of a
convertible security. Although common stocks historically have generated higher
average returns than fixed-income securities, common stocks also have
experienced significantly more volatility in those returns. An adverse event,
such as an unfavorable earnings report, may depress the value of common stock
held by the Fund. Also, the price of common stock is sensitive to general
movements in the stock market. A drop in the stock market may depress the price
of common stocks to which the Fund has exposure.
Hedging Risk
The Fund may use derivatives or other transactions for purposes of hedging
the portfolio's exposure to the risk of increases in interest rates, common
stock risk, high yield credit risk and foreign currency exchange rate risk that
could result in poorer overall performance for the Fund. There may be an
imperfect correlation between the Fund's portfolio holdings and such
derivatives, which may prevent the Fund from achieving the intended
consequences of the applicable transaction or expose the Fund to risk of loss.
Further, the Fund's use of derivatives or other transactions to reduce risk
involves costs and will be subject to an Adviser's ability to predict correctly
changes in interest rate relationships or other factors. No assurance can be
given that the Adviser's judgment in this respect will be correct. In addition,
no assurance can be given that the Fund will enter into hedging transactions at
times or under circumstances in which it would be advisable to do so. See
"Hedging Transactions" and "Other Investment Policies and Techniques" in the
Fund's Statement of Additional Information. Except for investing in synthetic
convertible securities, the Fund will use derivatives or other transactions
described above solely for purposes of hedging the Fund's portfolio risks.
Counterparty Risk
The Fund may be subject to credit risk with respect to the counterparties to
certain derivative agreements entered into by the Fund. If a counterparty
becomes bankrupt or otherwise fails to perform its obligations under a
derivative contract due to financial difficulties, the Fund may experience
significant delays in obtaining any recovery under the derivative contract in a
bankruptcy or other reorganization proceeding. The Fund may obtain only a
limited recovery or may obtain no recovery in such circumstances.
48
Interest Rate Transactions Risk
The Fund may enter into an interest rate swap or cap transaction to attempt
to protect itself from increasing dividend or interest expenses on its
FundPreferred shares or Borrowings resulting from increasing short-term
interest rates. A decline in interest rates may result in a decline in the
value of the swap or cap, which may result in a decline in the net asset value
of the Fund. See "Use of Leverage," "Hedging Transactions" and "Other
Investment Policies and Techniques" in the Fund's Statement of Additional
Information.
Certain Risks Related to Preferred Securities
Limited Voting Rights. Generally, preferred security holders (such as the
Fund) have no voting rights with respect to the issuing company unless
preferred dividends have been in arrears for a specified number of periods, at
which time the preferred security holders may elect a number of directors to
the issuer's board. Generally, once all the arrearages have been paid, the
preferred security holders no longer have voting rights. In the case of certain
taxable preferred securities, holders generally have no voting rights, except
(i) if the issuer fails to pay dividends for a specified period of time or (ii)
if a declaration of default occurs and is continuing. In such an event, rights
of preferred security holders generally would include the right to appoint and
authorize a trustee to enforce the trust or special purpose entity's rights as
a creditor under the agreement with its operating company.
Special Redemption Rights. In certain varying circumstances, an issuer of
preferred securities may redeem the securities prior to a specified date. For
instance, for certain types of preferred securities, a redemption may be
triggered by a change in federal income tax or securities laws. As with call
provisions, a redemption by the issuer may negatively impact the return of the
security held by the Fund.
New Types of Securities
From time to time, preferred securities and convertible securities have
been, and may in the future be, offered having features other than those
described herein. The Fund reserves the right to invest in these securities if
the Adviser responsible for the investment believes that doing so would be
consistent with the Fund's investment objectives and policies. Because the
market for these instruments would be new, the Fund may have difficulty
disposing of them at a suitable price and time. In addition to limited
liquidity, these instruments may present other risks, such as high price
volatility.
Corporate Loan Risk
The Fund may invest up to 20% of its Managed Assets in other debt
instruments, including corporate loans. Corporate loans in which the Fund may
invest may not be rated by an NRSRO at the time of investment, generally will
not be registered with the Securities and Exchange Commission and generally
will not be listed on a securities exchange. In addition, the amount of public
information available with respect to corporate loans generally will be less
extensive than that available for more widely rated, registered and
exchange-listed securities. Because the interest rates of corporate loans reset
frequently, if market interest rates fall, the loans' interest rates will be
reset to lower levels, potentially reducing the Fund's income. No active
trading market currently exists for many corporate loans in which the Fund may
invest and, thus, they are relatively illiquid. As a result, corporate loans
generally are more difficult to value than more liquid securities for which a
trading market exists.
49
The Fund also may purchase a participation interest in a corporate loan and
by doing so acquire some or all of the interest of a bank or other lending
institution in a loan to a corporate borrower. A participation typically will
result in the Fund having a contractual relationship only with the lender, not
the borrower. The Fund will have the right to receive payments of principal,
interest and any fees to which it is entitled only from the lender selling the
participation and only upon receipt by the lender of the payments from the
borrower. If the Fund only acquires a participation in the loan made by a third
party, the Fund may not be able to control the exercise of any remedies that
the lender would have under the corporate loan. Such third party participation
arrangements are designed to give corporate loan investors preferential
treatment over high yield investors in the event of a deterioration in the
credit quality of the issuer. Even when these arrangements exist, however,
there can be no assurance that the principal and interest owed on the corporate
loan will be repaid in full.
Illiquid Securities Risk
The Fund may invest up to 10% of its Managed Assets in securities that, at
the time of investment, are illiquid. Illiquid securities are securities that
are not readily marketable and may include some restricted securities, which
are securities that may not be resold to the public without an effective
registration statement under the Securities Act of 1933 or, if they are
unregistered, may be sold only in a privately negotiated transaction or
pursuant to an exemption from registration. Illiquid securities involve the
risk that the securities will not be able to be sold at the time desired by the
Fund or at prices approximating the value at which the Fund is carrying the
securities on its books.
Market Disruption Risk
The terrorist attacks in the United States on September 11, 2001 had a
disruptive effect on the securities markets. The Fund cannot predict the
effects of similar events in the future on the U.S. economy. High yield
securities tend to be more volatile than higher rated debt securities so that
these events and any actions resulting from them may have a greater impact on
the prices and volatility of high yield debt instruments than on higher rated
debt securities.
Inflation Risk
Inflation risk is the risk that the value of assets or income from
investment will be worth less in the future as inflation decreases the value of
money. As inflation increases, the real value of the Common Shares and
distributions can decline. In addition, during any periods of rising inflation,
FundPreferred share dividend rates would likely increase, which would tend to
further reduce returns to Common Shareholders.
Certain Affiliations
Certain broker-dealers may be considered to be affiliated persons of the
Fund, NIAC, Spectrum, Froley, Revy and/or Nuveen. Absent an exemption from the
Securities and Exchange Commission or other regulatory relief, the Fund is
generally precluded from effecting certain principal transactions with
affiliated brokers, and its ability to purchase securities being underwritten
by an affiliated broker or a syndicate including an affiliated broker, or to
utilize affiliated brokers for agency transactions, is subject to restrictions.
This could limit the Fund's ability to engage in securities transactions and
take advantage of market opportunities. In addition, unless and until the
underwriting syndicate is broken in
50
connection with the initial public offering of the Common Shares, the Fund will
be precluded from effecting principal transactions with brokers who are members
of the syndicate.
Anti-Takeover Provisions
The Fund's Declaration includes provisions that could limit the ability of
other entities or persons to acquire control of the Fund or convert the Fund to
open-end status. These provisions could have the effect of depriving the Common
Shareholders of opportunities to sell their Common Shares at a premium over the
then current market price of the Common Shares. See "Certain Provisions in the
Declaration of Trust."
MANAGEMENT OF THE FUND
Trustees and Officers
The Board of Trustees is responsible for the management of the Fund,
including supervision of the duties performed by the Advisers. The names and
business addresses of the trustees and officers of the Fund and their principal
occupations and other affiliations during the past five years are set forth
under "Management of the Fund" in the Statement of Additional Information.
Investment Adviser and Subadvisers
NIAC will be responsible for determining the Fund's overall investment
strategy, including portfolio allocations, and the use of leverage, hedging and
interest rate transactions. NIAC also is responsible for the selection of the
Subadvisers and ongoing monitoring of the Subadvisers, managing the Fund's
business affairs and providing certain clerical, bookkeeping and other
administrative services.
NIAC, 333 West Wacker Drive, Chicago, Illinois 60606, is the investment
adviser to the Fund and is responsible for managing the Fund's Managed Assets
allocated to other debt invstruments. NIAC and its affiliate Nuveen Advisory
Corp. serves as investment adviser to investment portfolios with approximately
$50 billion in assets under management as of December 31, 2002. See the
Statement of Additional Information under "Investment Advisers."
NIAC, a registered invesment adviser, is a wholly owned subsidiary of Nuveen
Investments, Inc. Founded in 1898, Nuveen Investments, Inc. and its affiliates
had approximately $80 billion of assets under management as of ,
2003. Nuveen Investments, Inc. is a publicly-traded company and a
majority-owned subsidiary of The St. Paul Companies, Inc., a publicly-traded
company that is principally engaged in providing property-liability insurance
through subsidiaries.
Deepak Gulrajani, Gunther Stein and Lenny Mason are the portfolio managers
at NIAC responsible for investing the portion of the Fund's assets allocated to
other debt instruments. Mr. Gulrajani is a Vice President of NIAC. He also is
the Director, Fixed-Income Strategies, and a Principal of Symphony Asset
Management, LLC ("Symphony"), a wholly owned subsidiary of Nuveen Investments,
Inc. Prior to joining Symphony in , Mr. Gulrajani was the Director of
Fixed-Income Strategies at Barclays Global Investors. Mr. Stein is a Vice
President of NIAC. He also has been lead portfolio manager for high yield
strategies at Symphony since 1999. Prior to joining Symphony, Mr. Stein was a
high yield portfolio
51
manager at Wells Fargo. Mr. Mason is a Vice President of NIAC. He also is a
high yield portfolio manager at Symphony. Prior to joining Symphony in
, Mr. Mason was a Managing Director of FleetBoston's Technology and
Communications Group.
Spectrum, 4 High Ridge Park, Stamford, Connecticut 06905, is a Subadviser to
the Fund and is responsible for managing the Fund's Managed Assets allocated to
preferred securities. Spectrum specializes in the management of diversified
preferred security portfolios for institutional investors, including Fortune
500 companies, pension funds, insurance companies and foundations. Spectrum, a
registered investment adviser, commenced operations in 1987 and had
approximately $6.2 billion in assets under management as of January 31, 2003.
Spectrum is an independently managed wholly owned subsidiary of Principal
Global Investors, LLC, which is part of Principal Financial Group Inc., a
publicly traded, diversified, insurance and financial services company.
Collectively, subsidiaries and affiliates of Principal Global Investors, LLC
managed over $ billion in combined assets worldwide as of ,
2003.
A team of Spectrum professionals led by Mark A. Lieb, Bernard M. Sussman and
L. Phillip Jacoby, IV is responsible for investing the portion of the Fund's
assets allocated to preferred securities. Mr. Lieb is an Executive Director and
the Chief Financial Officer of Spectrum. Mr. Sussman is an Executive Director
and the Chief Investment Officer of Spectrum and is Chairman of Spectrum's
Investment Committee. Mr. Jacoby is a Senior Vice President of Spectrum. As a
subsidiary of Principal Global Investors, LLC, Spectrum also can take advantage
of Principal's extensive staff of internal credit analysts. See "The Fund's
Investments--Investment Philosophy and Process."
Spectrum may act as broker for the Fund in connection with the purchase or
sale of preferred securities by or to the Fund if and to the extent permitted
by procedures adopted from time to time by the Board of Trustees of the Fund.
The Board of Trustees, including a majority of the trustees who are not
"interested" trustees, has determined that portfolio transactions for the Fund
may be executed through Spectrum if, in the judgment of NIAC and Spectrum, the
use of Spectrum is likely to result in prices and execution at least as
favorable to the Fund as would be available from other qualified brokers and
if, in such transactions, Spectrum charges the Fund commission rates at least
as favorable to the Fund as those charged by Spectrum to comparable
unaffiliated customers in similar transactions. The Board of Trustees also has
adopted procedures that are reasonably designed to provide that any commission,
fee or other remuneration paid to Spectrum is consistent with the foregoing
standard. The Fund will not effect principal transactions with Spectrum. In
executing transactions through Spectrum, the Fund will be subject to, and
intends to comply with, Section 17(e) of the 1940 Act and the rules thereunder.
See "Portfolio Transactions and Brokerage" in the Statement of Additional
Information.
Froley, Revy, 10900 Wilshire Boulevard, Los Angeles, California 90024, is a
Subadviser to the Fund and is responsible for managing the Fund's Managed
Assets allocated to convertible securities. Froley, Revy specializes in the
management of convertible securities. Froley, Revy, a registered investment
adviser, commenced operations in 1975 and had approximately $2 billion in
assets under management as of January 31, 2003.
Froley, Revy is an independently managed wholly owned subsidiary of First
Republic Bank, which is a publicly-traded commercial bank and wealth management
firm. First Republic Bank had $[4] billion in assets as of , 2003.
52
Andrea Revy O'Connell and Michael Revy are the portfolio managers at Froley,
Revy responsible for investing the portion of the Fund's assets allocated to
convertible securities. Ms. O'Connell is President and Chief Executive Officer
of Froley, Revy and has been a Managing Director and a Principal of Froley,
Revy since 1994. She has received a Chartered Financial Analyst and a Chartered
Investment Counselor designation. Mr. Revy is a Senior Portfolio Manager and a
Managing Director of Froley, Revy and is responsible for the development and
co-management of Froley, Revy's convertible arbitrage product. Prior to joining
Froley, Revy in 2002, Mr. Revy worked for Lehman Brothers for six years in that
firm's convertible bond group.
Investment Management Agreement
Pursuant to an investment management agreement between NIAC and the Fund,
the Fund has agreed to pay for the services and facilities provided by NIAC an
annual management fee, payable on a monthly basis, according to the following
schedule:
[Download Table]
Management
Average Daily Managed Assets// Fee
------------------------------ ----------
Up to $500 million............ .9000%
$500 million to $1 billion.... .8750%
$1 billion to $1.5 billion.... .8500%
$1.5 billion to $2.0 billion.. .8250%
Over $2.0 billion............. .8000%
If the Fund utilizes leverage through the issuance of FundPreferred shares
in an amount equal to 33 1/3% of the Fund's total assets (including the amount
obtained from leverage), the management fee calculated as a percentage of net
assets attributable to Common Shares would be as follows:
[Download Table]
Management
Net Assets Attributable to Common Shares Fee
---------------------------------------- ----------
Up to $500 million................ 1.3500%
$500 million to $1 billion........ 1.3125%
$1 billion to $1.5 billion........ 1.2750%
$1.5 billion to $2.0 billion...... 1.2375%
Over $2.0 billion................. 1.2000%
Pursuant to investment sub-advisory agreements between NIAC and each of the
Subadvisers, each Subadviser will receive from NIAC a management fee equal to
40% of the management fee payable by the Fund to NIAC (net of the
reimbursements described below) with respect to that Subadviser's allocation of
Managed Assets up to the first $500 million of the average daily Managed Assets
of the Fund allocated to that Subadviser and 35% thereafter.
In addition to the fee of NIAC, the Fund pays all other costs and expenses
of its operations, including compensation of its trustees (other than those
affiliated with NIAC), custodian, transfer agency and dividend disbursing
expenses, legal fees, expenses of independent auditors, expenses of
repurchasing shares, expenses of issuing any FundPreferred shares, expenses of
preparing, printing and distributing shareholder reports, notices, proxy
statements and reports to governmental agencies, and taxes, if any.
53
For the first eight full years of the Fund's operation, the Advisers have
contractually agreed to reimburse the Fund for fees and expenses in the
amounts, and for the time periods, set forth below:
[Download Table]
Percentage Percentage
Reimbursed Reimbursed
Year Ending (as a percentage of (as a percentage of
March 31, Managed Assets) Year Ending March 31, Managed Assets)
----------- ------------------- --------------------- -------------------
2003/(1)/ .32% 2008 .32%
2004 .32% 2009 .24%
2005 .32% 2010 .16%
2006 .32% 2011 .08%
2007 .32%
--------
(1)From the commencement of operations.
The Advisers have not agreed to reimburse the Fund for any portion of its
fees and expenses beyond March 31, 2011.
NET ASSET VALUE
The Fund will determine the net asset value of its shares daily, as of the
close of regular session trading on the New York Stock Exchange (normally 4:00
p.m. eastern time). Net asset value is computed by dividing the value of all
assets of the Fund (including accrued interest and dividends), less all
liabilities (including accrued expenses and dividends declared but unpaid), by
the total number of shares outstanding. Any swap transaction that the Fund
enters into may, depending on the applicable interest rate environment, have a
positive or negative value for purposes of calculating net asset value. Any cap
transaction that the Fund enters into may, depending on the applicable interest
rate environment, have no value or a positive value. In addition, accrued
payments to the Fund under such transactions will be assets of the Fund and
accrued payments by the Fund will be liabilities of the Fund.
For purposes of determining the net asset value of the Fund, readily
marketable portfolio securities listed on the New York Stock Exchange are
valued, except as indicated below, at the last sale price reflected on the
consolidated tape at the close of the New York Stock Exchange on the business
day as of which such value is being determined. If there has been no sale on
such day, the securities are valued at the mean of the closing bid and asked
prices on such day. If no bid or asked prices are quoted on such day, then the
security is valued by such method as the Board of Trustees shall determine in
good faith to reflect its fair market value. Readily marketable securities not
listed on the New York Stock Exchange but listed on other domestic exchanges or
admitted to trading on the National Association of Securities Dealers Automated
Quotations, Inc. ("NASDAQ") National List are valued in a like manner.
Portfolio securities traded on more than one securities exchange are valued at
the last sale price on the business day as of which such value is being
determined as reflected on the tape at the close of the exchange representing
the principal market for such securities.
Readily marketable securities traded in the over-the-counter market,
including listed securities whose primary market is believed by the investment
adviser to be over-the-counter, but excluding securities admitted to trading on
the NASDAQ National List, are valued at the mean of the current bid and asked
prices as reported by NASDAQ or, in the case of securities not quoted by
NASDAQ, the National Quotation Bureau or such other comparable source as the
Trustees deem appropriate to reflect
54
their fair market value. However, certain fixed-income securities may be valued
on the basis of prices provided by a pricing service when such prices are
believed by the Board of Trustees to reflect the fair market value of such
securities. The prices provided by a pricing service take into account
institutional size trading in similar groups of securities and any developments
related to specific securities. Where securities are traded on more than one
exchange and also over-the-counter, the securities will generally be valued
using the quotations the Board of Trustees believes reflect most closely the
value of such securities.
DISTRIBUTIONS
Subject to the determination of the Board of Trustees to implement a Managed
Dividend Policy, as discussed below, commencing with the first dividend, the
Fund intends to make regular monthly cash distributions to Common Shareholders
at a level rate (stated in terms of a fixed cents per Common Share dividend
rate) that reflects the past and projected performance of the Fund.
Distributions can only be made from net investment income after paying any
accrued dividends to FundPreferred shareholders, if any, and interest and
required principal payments on Borrowings, if any. The Fund's ability to
maintain a Level Rate Dividend Policy will depend on a number of factors,
including the stability of income received from its investments and dividends
payable on the FundPreferred shares, if any, and interest and required
principal payments on Borrowings, if any. The net investment income of the Fund
consists of all income (other than net capital gain) less all expenses of the
Fund. Expenses of the Fund are accrued each day. Over time, all the net
investment income of the Fund will be distributed. At least annually, the Fund
also intends to distribute net capital gain and ordinary taxable income, if
any, after paying any accrued dividends or making any redemption or liquidation
payments to FundPreferred shareholders or making interest and required
principal payments on Borrowings, if any. Initial distributions to Common
Shareholders are expected to be declared approximately 45 days, and paid
approximately 60 to 90 days, from the completion of this offering, depending on
market conditions. Although it does not now intend to do so, the Board of
Trustees may change the Fund's dividend policy and the amount or timing of the
distributions, based on a number of factors, including the amount of the Fund's
undistributed net investment income and historical and projected net investment
income and the amount of the expenses and dividend rates on the outstanding
FundPreferred shares.
To permit the Fund to maintain a more stable monthly distribution, the Fund
will initially distribute less than the entire amount of net investment income
earned in a particular period. The undistributed net investment income would be
available to supplement future distributions. As a result, the distributions
paid by the Fund for any particular monthly period may be more or less than the
amount of net investment income actually earned by the Fund during the period.
Undistributed net investment income will be added to the Fund's net asset value
and, correspondingly, distributions from undistributed net investment income
will be deducted from the Fund's net asset value.
In June 2002, NIAC, on behalf of itself and certain funds, has filed an
exemptive application with the Securities and Exchange Commission seeking an
order under the 1940 Act facilitating the implementation of the Managed
Dividend Policy. The application will be amended to include the Fund as a
party. If, and when, NIAC, on behalf of itself and other parties, receives the
requested relief, the Fund may, subject to the determination of its Board of
Trustees, implement a Managed Dividend Policy.
Under a Managed Dividend Policy, the Fund would intend to distribute a
monthly fixed percentage of net asset value to Common Shareholders. As with the
Level Dividend Rate Policy, distributions would
55
be made only after paying any accrued dividends or making any redemption or
liquidation payments to FundPreferred shares, if any, and interest and required
principal payments on Borrowings, if any. Under a Managed Dividend Policy, if,
for any monthly distribution, net investment income and net realized capital
gain were less than the amount of the distribution, the difference would be
distributed from the Fund's assets. The Fund's final distribution for each
calendar year would include any remaining net investment income and net
realized capital gain undistributed during the year. If, for any calendar year,
the total distributions exceeded net investment income and net realized capital
gain (the "Excess"), the Excess, distributed from the Fund's assets, would
generally be treated as a tax-free return of capital up to the amount of the
Common Shareholder's tax basis in Common Shares, with any amounts exceeding
such basis treated as gain from the sale of Common Shares. The Excess, however,
would be treated as ordinary dividend income to the extent of the Fund's
current and accumulated earnings and profits. Pursuant to the requirements of
the 1940 Act and other applicable laws, a notice would accompany each monthly
distribution with respect to the estimated source of the distribution made.
In the event the Fund distributed the Excess, such distribution would
decrease the Fund's total assets and, therefore, have the likely effect of
increasing the Fund's expense ratio. There is a risk that the Fund would not
eventually realize capital gains in an amount corresponding to a distribution
of the Excess. In addition, in order to make such distributions, the Fund may
have to sell a portion of its investment portfolio at a time when independent
investment judgment might not dictate such action.
There is no guarantee that the Fund will receive an exemptive order
facilitating the implementation of a Managed Dividend Policy or, if received,
that the Board of Trustees will determine to implement a Managed Dividend
Policy. The Board of Trustees reserves the right to change the dividend policy
from time to time.
56
DIVIDEND REINVESTMENT PLAN
If your Common Shares are registered directly with the Fund or if you hold
your Common Shares with a brokerage firm that participates in the Fund's
Dividend Reinvestment Plan, you may elect to have all dividends, including any
capital gain dividends, on your Common Shares automatically reinvested by the
Plan Agent, in additional Common Shares under the Dividend Reinvestment Plan
(the "Plan"). You may elect to participate in the Plan by completing the
Dividend Reinvestment Plan Application Form. If you do not participate, you
will receive all distributions in cash paid by check mailed directly to you by
State Street Bank and Trust Company, as dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you
will receive will be determined as follows:
(1) If the Common Shares are trading at or above net asset value at the
time of valuation, the Fund will issue new shares at a price equal to the
greater of (i) net asset value per Common Share on that date or (ii) 95% of
the market price on that date.
(2) If Common Shares are trading below net asset value at the time of
valuation, the Plan Agent will receive the dividend or distribution in cash
and will purchase Common Shares in the open market, on the
Exchange or elsewhere, for the participants' accounts. It is possible that
the market price for the Common Shares may increase before the Plan Agent
has completed its purchases. Therefore, the average purchase price per share
paid by the Plan Agent may exceed the market price at the time of valuation,
resulting in the purchase of fewer shares than if the dividend or
distribution had been paid in Common Shares issued by the Fund. The Plan
Agent will use all dividends and distributions received in cash to purchase
Common Shares in the open market within 30 days of the valuation date.
Interest will not be paid on any uninvested cash payments.
You may withdraw from the Plan at any time by giving written notice to the
Plan Agent. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan and you will
receive a cash payment for any fraction of a share in your account. If you
wish, the Plan Agent will sell your shares and send you the proceeds, minus
brokerage commissions and a $2.50 service fee.
The Plan Agent maintains all shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. Common Shares in your account will be held by the
Plan Agent in non-certificated form. Any proxy you receive will include all
Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or
distributions in Common Shares. However, all participants will pay a pro rata
share of brokerage commissions incurred by the Plan Agent when it makes open
market purchases.
Automatically reinvesting dividends and distributions does not mean that you
do not have to pay income taxes due upon receiving dividends and distributions.
If you hold your Common Shares with a brokerage firm that does not
participate in the Plan, you will not be able to participate in the Plan and
any dividend reinvestment may be effected on different terms than those
described above. Consult your financial advisor for more information.
The Fund reserves the right to amend or terminate the Plan if in the
judgment of the Board of Trustees the change is warranted. There is no direct
service charge to participants in the Plan; however, the Fund reserves the
right to amend the Plan to include a service charge payable by the
participants. Additional information about the Plan may be obtained from State
Street Bank and Trust Company, Attn: Equiserve Nuveen Investments, P.O. Box
43071, Providence, Rhode Island 02940-3071, (800) 257-8787.
57
DESCRIPTION OF SHARES
Common Shares
The Declaration authorizes the issuance of an unlimited number of Common
Shares. The Common Shares being offered have a par value of $0.01 per share
and, subject to the rights of holders of FundPreferred shares if issued, have
equal rights to the payment of dividends and the distribution of assets upon
liquidation. The Common Shares being offered will, when issued, be fully paid
and, subject to matters discussed in "Certain Provisions in the Declaration of
Trust," non-assessable, and will have no preemptive or conversion rights or
rights to cumulative voting. At any time when FundPreferred shares are
outstanding, Common Shareholders will not be entitled to receive any cash
distributions from the Fund unless all accrued dividends on FundPreferred
shares have been paid, and unless asset coverage (as defined in the 1940 Act)
with respect to FundPreferred shares would be at least 200% after giving effect
to the distributions. See "--FundPreferred Shares" below.
The Common Shares have been approved for listing on the
Exchange, subject to notice of issuance. The Fund intends to hold annual
meetings of shareholders so long as the Common Shares are listed on a national
securities exchange and such meetings are required as a condition to such
listing.
The Fund's net asset value per share generally increases when interest rates
decline, and decreases when interest rates rise, and these changes are likely
to be greater because the Fund, if market conditions are deemed favorable,
likely will to have a leveraged capital structure. Net asset value will be
reduced immediately following the offering by the amount of the sales load and
offering expenses paid by the Fund. Nuveen has agreed to pay (i) all
organizational expenses and (ii) offering costs (other than sales load) that
exceed $0.03 per Common Share. See "Use of Proceeds."
Unlike open-end funds, closed-end funds like the Fund do not continuously
offer shares and do not provide daily redemptions. Rather, if a shareholder
determines to buy additional Common Shares or sell shares already held, the
shareholder may conveniently do so by trading on the exchange through a broker
or otherwise. Shares of closed-end investment companies may frequently trade on
an exchange at prices lower than net asset value. Shares of closed-end
investment companies like the Fund have during some periods traded at prices
higher than net asset value and during other periods have traded at prices
lower than net asset value. Because the market value of the Common Shares may
be influenced by such factors as dividend levels (which are in turn affected by
expenses), call protection, dividend stability, portfolio credit quality, net
asset value, relative demand for and supply of such shares in the market,
general market and economic conditions, and other factors beyond the control of
the Fund, the Fund cannot assure you that Common Shares will trade at a price
equal to or higher than net asset value in the future. The Common Shares are
designed primarily for long-term investors, and investors in the Common Shares
should not view the Fund as a vehicle for trading purposes. See "Use of
Leverage" and the Statement of Additional Information under "Repurchase of Fund
Shares; Conversion to Open-End Fund."
FundPreferred Shares
The Declaration authorizes the issuance of an unlimited number of
FundPreferred shares in one or more classes or series, with rights as
determined by the Board of Trustees, by action of the Board of Trustees without
the approval of the Common Shareholders.
58
The Fund's Board of Trustees has indicated its intention to authorize an
offering of FundPreferred shares (representing approximately 33 1/3% of the
Fund's capital immediately after the time the FundPreferred shares are issued)
within approximately [one and one-half to two] months after completion of the
offering of Common Shares. Any such decision is subject to market conditions
and to the Board's continuing belief that leveraging the Fund's capital
structure through the issuance of FundPreferred shares is likely to achieve the
benefits to the Common Shareholders described in this Prospectus. Although the
terms of the FundPreferred shares will be determined by the Board of Trustees
(subject to applicable law and the Fund's Declaration) if and when it
authorizes a FundPreferred shares offering, the Board has determined that the
FundPreferred shares, at least initially, would likely pay cumulative dividends
at rates determined over relatively shorter-term periods (such as 7 days), by
providing for the periodic redetermination of the dividend rate through an
auction or remarketing procedure. The Board of Trustees has indicated that the
preference on distribution, liquidation preference, voting rights and
redemption provisions of the FundPreferred shares will likely be as stated
below.
Limited Issuance of FundPreferred Shares. Under the 1940 Act, the Fund can
issue FundPreferred shares with an aggregate liquidation value of up to
one-half of the value of the Fund's total net assets, measured immediately
after issuance of the FundPreferred shares. "Liquidation value" means the
original purchase price of the shares being liquidated plus any accrued and
unpaid dividends. In addition, the Fund is not permitted to declare any cash
dividend or other distribution on its Common Shares unless the liquidation
value of the FundPreferred shares is less than one-half of the value of the
Fund's total net assets (determined after deducting the amount of such dividend
or distribution) immediately after the distribution. If the Fund sells all the
Common Shares and FundPreferred shares discussed in this Prospectus, the
liquidation value of the FundPreferred shares is expected to be approximately
33 1/3% of the value of the Fund's total net assets. The Fund intends to
purchase or redeem FundPreferred shares, if necessary, to keep that fraction
below one-half.
Distribution Preference. The FundPreferred shares have complete priority
over the Common Shares as to distribution of assets.
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Fund, holders of
FundPreferred shares will be entitled to receive a preferential liquidating
distribution (expected to equal the original purchase price per share plus
accumulated and unpaid dividends thereon, whether or not earned or declared)
before any distribution of assets is made to holders of Common Shares.
Voting Rights. FundPreferred shares are required to be voting shares and to
have equal voting rights with Common Shares. Except as otherwise indicated in
this Prospectus or the Statement of Additional Information and except as
otherwise required by applicable law, holders of FundPreferred shares will vote
together with Common Shareholders as a single class.
Holders of FundPreferred shares, voting as a separate class, will be
entitled to elect two of the Fund's trustees (following the establishment of
the Fund by an initial trustee, the Declaration provides for a total of no less
than two and no more than twelve trustees). The remaining trustees will be
elected by Common Shareholders and holders of FundPreferred shares, voting
together as a single class. In the unlikely event that two full years of
accrued dividends are unpaid on the FundPreferred shares, the holders of all
outstanding FundPreferred shares, voting as a separate class, will be entitled
to elect a
59
majority of the Fund's trustees until all dividends in arrears have been paid
or declared and set apart for payment. In order for the Fund to take certain
actions or enter into certain transactions, a separate class vote of holders of
FundPreferred shares will be required, in addition to the single class vote of
the holders of FundPreferred shares and Common Shares. See the Statement of
Additional Information under "Description of Shares--FundPreferred
Shares--Voting Rights."
Redemption, Purchase and Sale of FundPreferred Shares. The terms of the
FundPreferred shares provide that they may be redeemed by the issuer at certain
times, in whole or in part, at the original purchase price per share plus
accumulated dividends. Any redemption or purchase of FundPreferred shares by
the Fund will reduce the leverage applicable to Common Shares, while any
issuance of shares by the Fund will increase such leverage. See "Use of
Leverage."
The discussion above describes the Board of Trustees' present intention with
respect to a possible offering of FundPreferred shares. If the Board of
Trustees determines to authorize such an offering, the terms of the
FundPreferred shares may be the same as, or different from, the terms described
above, subject to applicable law and the Fund's Declaration.
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST
Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the Fund. However, the
Declaration contains an express disclaimer of shareholder liability for debts
or obligations of the Fund and requires that notice of such limited liability
be given in each agreement, obligation or instrument entered into or executed
by the Fund or the trustees. The Declaration further provides for
indemnification out of the assets and property of the Fund for all loss and
expense of any shareholder held personally liable for the obligations of the
Fund. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the Fund would be
unable to meet its obligations. The Fund believes that the likelihood of such
circumstances is remote.
The Declaration includes provisions that could limit the ability of other
entities or persons to acquire control of the Fund or to convert the Fund to
open-end status. Specifically, the Declaration requires a vote by holders of at
least two-thirds of the Common Shares and FundPreferred shares, voting together
as a single class, except as described below, to authorize (1) a conversion of
the Fund from a closed-end to an open-end investment company, (2) a merger or
consolidation of the Fund, or a series or class of the Fund, with any
corporation, association, trust or other organization or a reorganization of
the Fund, or a series or class of the Fund, (3) a sale, lease or transfer of
all or substantially all of the Fund's assets (other than in the regular course
of the Fund's investment activities), (4) in certain circumstances, a
termination of the Fund, or a series or class of the Fund, or (5) a removal of
trustees by shareholders, and then only for cause, unless, with respect to (1)
through (4), such transaction has already been authorized by the affirmative
vote of two-thirds of the total number of trustees fixed in accordance with the
Declaration or the By-laws, in which case the affirmative vote of the holders
of at least a majority of the Fund's Common Shares and FundPreferred shares
outstanding at the time, voting together as a single class, is required,
provided, however, that where only a particular class or series is affected
(or, in the case of removing a trustee, when the trustee has been elected by
only one class), only the required vote by the applicable class or series will
be required. Approval of shareholders is not required, however, for any
transaction, whether deemed a
60
merger, consolidation, reorganization or otherwise whereby the Fund issues
shares in connection with the acquisition of assets (including those subject to
liabilities) from any other investment company or similar entity. In the case
of the conversion of the Fund to an open-end investment company, or in the case
of any of the foregoing transactions constituting a plan of reorganization
which adversely affects the holders of FundPreferred shares, the action in
question will also require the affirmative vote of the holders of at least
two-thirds of the FundPreferred shares outstanding at the time, voting as a
separate class, or, if such action has been authorized by the affirmative vote
of two-thirds of the total number of trustees fixed in accordance with the
Declaration or the By-laws, the affirmative vote of the holders of at least a
majority of the FundPreferred shares outstanding at the time, voting as a
separate class. None of the foregoing provisions may be amended except by the
vote of at least two-thirds of the Common Shares and FundPreferred shares,
voting together as a single class. The votes required to approve the conversion
of the Fund from a closed-end to an open-end investment company or to approve
transactions constituting a plan of reorganization which adversely affects the
holders of FundPreferred shares are higher than those required by the 1940 Act.
The Board of Trustees believes that the provisions of the Declaration relating
to such higher votes are in the best interest of the Fund and its shareholders.
See the Statement of Additional Information under "Certain Provisions in the
Declaration of Trust."
The provisions of the Declaration described above could have the effect of
depriving the Common Shareholders of opportunities to sell their Common Shares
at a premium over the then current market price of the Common Shares by
discouraging a third party from seeking to obtain control of the Fund in a
tender offer or similar transaction. The overall effect of these provisions is
to render more difficult the accomplishment of a merger or the assumption of
control by a third party. They provide, however, the advantage of potentially
requiring persons seeking control of the Fund to negotiate with its management
regarding the price to be paid and facilitating the continuity of the Fund's
investment objectives and policies. The Board of Trustees of the Fund has
considered the foregoing anti-takeover provisions and concluded that they are
in the best interests of the Fund and its Common Shareholders.
Reference should be made to the Declaration on file with the Securities and
Exchange Commission for the full text of these provisions.
REPURCHASE OF FUND SHARES; CONVERSION TO OPEN-END FUND
The Fund is a closed-end investment company and as such its shareholders
will not have the right to cause the Fund to redeem their shares. Instead, the
Common Shares will trade in the open market at a price that will be a function
of several factors, including dividend levels (which are in turn affected by
expenses), net asset value, call protection, dividend stability, portfolio
credit quality, relative demand for and supply of such shares in the market,
general market and economic conditions and other factors. Because shares of
closed-end investment companies may frequently trade at prices lower than net
asset value, the Fund's Board of Trustees has currently determined that, at
least annually, it will consider action that might be taken to reduce or
eliminate any material discount from net asset value in respect of Common
Shares, which may include the repurchase of such shares in the open market or
in private transactions, the making of a tender offer for such shares at net
asset value, or the conversion of the Fund to an open-end investment company.
The Fund cannot assure you that its Board of Trustees will decide to take any
of these actions, or that share repurchases or tender offers will actually
reduce market discount.
61
If the Fund converted to an open-end investment company, it would be
required to redeem all FundPreferred shares then outstanding (requiring in turn
that it liquidate a portion of its investment portfolio), and the Common Shares
would no longer be listed on the Exchange. In contrast to a
closed-end investment company, shareholders of an open-end investment company
may require the company to redeem their shares at any time (except in certain
circumstances as authorized by or under the 1940 Act) at their net asset value,
less any redemption charge that is in effect at the time of redemption. See the
Statement of Additional Information under "Repurchase of Fund Shares;
Conversion to Open-End Fund" for a discussion of the voting requirements
applicable to the conversion of the Fund to an open-end investment company.
Before deciding whether to take any action if the Common Shares trade below
net asset value, the Board would consider all relevant factors, including the
extent and duration of the discount, the liquidity of the Fund's portfolio, the
impact of any action that might be taken on the Fund or its shareholders, and
market considerations. Based on these considerations, even if the Fund's shares
should trade at a discount, the Board of Trustees may determine that, in the
interest of the Fund and its shareholders, no action should be taken. See the
Statement of Additional Information under "Repurchase of Fund Shares;
Conversion to Open-End Fund" for a further discussion of possible action to
reduce or eliminate such discount to net asset value.
TAX MATTERS
The following discussion of federal income tax matters is based on the
advice of Bell, Boyd & Lloyd LLC, special counsel to the Fund.
The discussions below and in the Statement of Additional Information provide
general tax information related to an investment in the Common Shares. Because
tax laws are complex and often change, you should consult your tax advisor
about the tax consequences of an investment in the Fund. The following tax
discussion assumes that you are a U.S. shareholder and that you hold the Common
Shares as a capital asset.
Dividends paid to you out of the Fund's "investment company taxable income"
(which includes dividends the Fund receives, interest income, and net
short-term capital gain) will be taxable to you as ordinary income to the
extent of the Fund's earnings and profits. Distributions of net capital gain
(the excess of net long-term capital gain over net short-term capital loss), if
any, are taxable to you as long-term capital gains, regardless of how long you
have held the Common Shares. A distribution of an amount in excess of the
Fund's earnings and profits is treated as a non-taxable return of capital that
reduces your tax basis in your Common Shares; any such distributions in excess
of your basis are treated as gain from a sale of your shares. The tax treatment
of your dividends and distributions will be the same regardless of whether they
were paid to you in cash or reinvested in additional Common Shares.
Because the Fund does not intend to invest its assets in securities a
significant portion of which would qualify for the Dividends Received
Deduction, any corporate shareholder who otherwise would qualify for the
Dividends Received Deduction should not assume that dividends paid to it out of
the Fund generally will qualify for the Dividends Received Deduction. To the
extent that the Fund holds common stocks that pay dividends, a portion of the
distributions from the Fund may qualify for the Dividends Received Deduction.
62
A distribution will be treated as paid to you on December 31 of the current
calendar year if it is declared by the Fund in October, November or December
with a record date in such a month and paid during January of the following
year.
Each year, we will notify you of the tax status of dividends and other
distributions.
If you sell Common Shares, you may realize a capital gain or loss which will
be long-term or short-term, depending on your holding period for the shares.
We may be required to withhold U.S. federal income tax from all taxable
distributions payable if you:
. fail to provide us with your correct taxpayer identification number;
. fail to make required certifications; or
. have been notified by the Internal Revenue Service that you are subject to
backup withholding.
The withholding percentage is 30% for 2003, and will decrease to 29% in 2004
and 2005 and 28% thereafter until 2011, when the percentage will revert to 31%
unless amended by Congress. This withholding is not an additional tax. Any
amounts withheld may be credited against your U.S. federal income tax liability.
Federal tax law imposes an alternative minimum tax with respect to
individuals and corporations. Under current law, it is not expected that you
will be subject to alternative minimum tax as a result of your investment in
the Fund.
The Fund intends to elect to be treated and to qualify as a regulated
investment company under the Code. If the Fund so qualifies and distributes
each year to its shareholders at least 90% of its investment company taxable
income, the Fund will not be required to pay federal income taxes on any income
it distributes to shareholders. If the Fund distributes less than an amount
equal to the sum of 98% of its ordinary income and 98% of its capital gain net
income and such amounts from previous years that were not distributed, then the
Fund will be subject to a 4% excise tax on the undistributed amounts. Fund
distributions also may be subject to state and local taxes. You should consult
with your own tax advisor regarding the particular consequences to you of
investing in the Fund.
The Fund may invest in preferred or convertible securities or other
securities the federal income tax treatment of which is uncertain or subject to
recharacterization by the Internal Revenue Service. To the extent the tax
treatment of such securities or their income differs from the tax treatment
expected by the Fund, it could affect the timing or character of income
recognized by the Fund, requiring the Fund to purchase or sell securities, or
otherwise change its portfolio, in order to comply with the tax rules
applicable to regulated investment companies under the Code.
The Bush Administration has announced a proposal to reduce or eliminate
taxes on dividends; however, many details of the proposal (including how the
proposal would apply to dividends paid by a regulated investment company) have
not been specified. Prospects for this, or any other dividend tax reduction or
elimination proposal, are unclear. There is no guarantee any proposal will
become law. Accordingly, it is not possible to evaluate how this, or any other,
proposal might affect the taxation of dividends to the Common Shareholders.
63
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof, each Underwriter named below has severally agreed to
purchase, and the Fund has agreed to sell to such Underwriter, the number of
Common Shares set forth opposite the name of such Underwriter.
[Download Table]
Number of
Underwriters Shares
------------ ----------
Salomon Smith Barney Inc...............................................
Nuveen Investments, LLC................................................
----------
Total...............................................................
==========
The underwriting agreement provides that the obligations of the several
Underwriters to purchase the Common Shares included in this offering are
subject to approval of certain legal matters by counsel and to certain other
conditions. The Underwriters are obligated to purchase all the Common Shares
(other than those covered by the over-allotment option described below) if they
purchase any of the Common Shares. The representatives have advised the Fund
that the Underwriters do not intend to confirm any sales to any accounts over
which they exercise discretionary authority.
The Underwriters, for whom Salomon Smith Barney Inc., Nuveen Investments,
LLC and are acting as representatives, propose
to offer some of the Common Shares directly to the public at the public
offering price set forth on the cover page of this Prospectus and some of the
Common Shares to certain dealers at the public offering price less a concession
not in excess of $0.45 per Common Share. The sales load the Fund will pay of
$0.675 per share is equal to 4.5% of the initial offering price. The
Underwriters may allow, and such dealers may reallow, a concession not in
excess of $ per Common Share on sales to certain other dealers. If all of
the Common Shares are not sold at the initial offering price, the
representatives may change the public offering price and other selling terms.
Investors must pay for any Common Shares purchased on or before ,
2003. In connection with this offering, Nuveen may perform clearing services
without charge for brokers and dealers for whom it regularly provides clearing
services that are participating in the offering as members of the selling group.
The Fund has granted to the Underwriters an option, exercisable for 45 days
from the date of this Prospectus, to purchase up to additional Common
Shares at the public offering price less the sales load. The Underwriters may
exercise such option solely for the purpose of covering over-allotments, if
any, in connection with this offering. To the extent such option is exercised,
each Underwriter will be obligated, subject to certain conditions, to purchase
a number of additional Common Shares approximately proportionate to such
Underwriter's initial purchase commitment.
The Fund and the Advisers have each agreed that, for a period of 180 days
from the date of this Prospectus, they will not, without the prior written
consent of Salomon Smith Barney Inc. on behalf of the Underwriters, dispose of
or hedge any Common Shares or any securities convertible into or exchangeable
for Common Shares. Salomon Smith Barney Inc. in its sole discretion may release
any of the securities subject to these agreements at any time without notice.
Prior to the offering, there has been no public market for the Common
Shares. Consequently, the initial public offering price for the Common Shares
was determined by negotiation among the Fund, NIAC and the representatives.
There can be no assurance, however, that the price at which the Common Shares
will sell in the public market after this offering will not be lower than the
price at which they are
64
sold by the Underwriters or that an active trading market in the Common Shares
will develop and continue after this offering. The Common Shares have been
approved for listing on the Exchange, subject to official notice
of issuance.
The Fund and the Advisers have each agreed to indemnify the several
Underwriters or contribute to losses arising out of certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
Nuveen has agreed to pay (i) all organizational expenses and (ii) offering
costs (other than sales load) that exceed $0.03 per share.
Certain Underwriters participating in the Common Share offering may be
invited, some period of time after completion of this offering, to participate
in the offering of the FundPreferred shares and will receive compensation for
their participation in that FundPreferred share offering. The number of Common
Shares purchased by each Underwriter in this offering may be a factor in
determining (i) whether that Underwriter is selected to participate in the
offering of the FundPreferred shares, (ii) the number of FundPreferred shares
allocated to that Underwriter in that offering, and (iii) the amount of certain
additional FundPreferred share underwriting compensation available to that
Underwriter. The offering costs associated with the issuance of FundPreferred
shares are currently estimated to be approximately % of the total amount of
the FundPreferred share offering. These costs will effectively be borne by the
Common Shareholders.
In connection with the requirements for listing the Fund's Common Shares on
the Exchange, the Underwriters have undertaken to sell lots of
100 or more Common Shares to a minimum of beneficial owners in the United
States. The minimum investment requirement is 100 Common Shares.
Certain Underwriters may make a market in the Common Shares after trading in
the Common Shares has commenced on the Exchange. No Underwriter
is, however, obligated to conduct market-making activities and any such
activities may be discontinued at any time without notice, at the sole
discretion of the Underwriter. No assurance can be given as to the liquidity
of, or the trading market for, the Common Shares as a result of any
market-making activities undertaken by any Underwriter. This Prospectus is to
be used by any Underwriter in connection with the offering and, during the
period in which a prospectus must be delivered, with offers and sales of the
Common Shares in market-making transactions in the over-the-counter market at
negotiated prices related to prevailing market prices at the time of the sale.
The Underwriters have advised the Fund that, pursuant to Regulation M under
the Securities Exchange Act of 1934, as amended, certain persons participating
in the offering may engage in transactions, including stabilizing bids,
covering transactions or the imposition of penalty bids, which may have the
effect of stabilizing or maintaining the market price of the Common Shares on
the Exchange at a level above that which might otherwise prevail in the open
market. A "stabilizing bid" is a bid for or purchase of the Common Shares on
behalf of an Underwriter for the purpose of fixing or maintaining the price of
the Common Shares. A "covering transaction" is a bid for or purchase of the
Common Shares on behalf of an Underwriter to reduce a short position incurred
by the Underwriters in connection with the offering. A "penalty bid" is a
contractual arrangement whereby if, during a specified period after the
issuance of the Common Shares, the Underwriters purchase Common Shares in the
open market for the account of the underwriting
65
syndicate and the Common Shares purchased can be traced to a particular
Underwriter or member of the selling group, the underwriting syndicate may
require the Underwriter or selling group member in question to purchase the
Common Shares in question at the cost price to the syndicate or may recover
from (or decline to pay to) the Underwriter or selling group member in question
any or all compensation (including, with respect to a representative, the
applicable syndicate management fee) applicable to the Common Shares in
question. As a result, an Underwriter or selling group member and, in turn,
brokers may lose the fees that they otherwise would have earned from a sale of
the Common Shares if their customer resells the Common Shares while the penalty
bid is in effect. The Underwriters are not required to engage in any of these
activities, and any such activities, if commenced, may be discontinued at any
time.
The underwriting agreement provides that it may be terminated in the
absolute discretion of the representatives without liability on the part of the
Underwriters to the Fund or the Advisers if, prior to the delivery of and
payment for the Common Shares, (i) trading in the Fund's Common Shares shall
have been suspended by the Securities and Exchange Commission or the
Exchange or trading in securities generally on the
Exchange shall have been suspended or limited or minimum prices
for trading in securities generally shall have been established on the
Exchange, (ii) a commercial banking moratorium shall have been
declared by either federal or New York state authorities or (iii) there shall
have occurred any outbreak or escalation of hostilities, declaration by the
United States of a national emergency or war, or other calamity or crisis the
effect of which on financial markets in the United States is such as to make
it, in the sole judgment of the representatives, impracticable or inadvisable
to proceed with the offering or delivery of the Common Shares as contemplated
by the Prospectus (exclusive of any supplement thereto).
The Fund anticipates that from time to time certain of the Underwriters may
act as brokers or dealers in connection with the execution of the Fund's
portfolio transactions after they have ceased to be Underwriters and, subject
to certain restrictions, may act as brokers while they are Underwriters.
Prior to the public offering of Common Shares, NIAC purchased Common Shares
from the Fund in an amount satisfying the net worth requirements of Section
14(a) of the 1940 Act. As of the date of this Prospectus, NIAC owned 100% of
the outstanding Common Shares. NIAC may be deemed to control the Fund until
such time as it owns less than 25% of the outstanding Common Shares, which is
expected to occur as of the completion of the offering of Common Shares.
Nuveen, 333 West Wacker Drive, Chicago, Illinois 60606, one of the
representatives of the Underwriters, is the parent company of NIAC.
The principal business address of Salomon Smith Barney Inc. is 388 Greenwich
Street, New York, New York, 10013.
CUSTODIAN AND TRANSFER AGENT
The custodian of the assets of the Fund is State Street Bank and Trust
Company, One Federal Street, Boston, Massachusetts 02110. The Custodian
performs custodial, fund accounting and portfolio accounting services. The
Fund's transfer, shareholder services and dividend paying agent is also State
Street Bank and Trust Company, 225 Franklin Street, Boston, Massachusetts 02110.
66
LEGAL OPINIONS
Certain legal matters in connection with the Common Shares will be passed
upon for the Fund by Bell, Boyd & Lloyd LLC, Chicago, Illinois, and for the
Underwriters by Simpson Thacher & Bartlett, New York, New York. Bell, Boyd &
Lloyd LLC and Simpson Thacher & Bartlett may rely as to certain matters of
Massachusetts law on the opinion of Bingham McCutchen LLP, Boston,
Massachusetts.
67
TABLE OF CONTENTS FOR THE
STATEMENT OF ADDITIONAL INFORMATION
[Download Table]
Page
----
Use of Proceeds............................................ 3
Investment Objectives...................................... 3
Investment Policies and Techniques......................... 6
Other Investment Policies and Techniques................... 9
Management of the Fund..................................... 15
Investment Advisers........................................ 20
Portfolio Transactions and Brokerage....................... 24
Distributions.............................................. 26
Description of Shares...................................... 26
Certain Provisions in the Declaration of Trust............. 30
Repurchase of Fund Shares; Conversion to Open-End Fund..... 32
Tax Matters................................................ 34
Performance Related and Comparative Information............ 38
Experts.................................................... 41
Custodian.................................................. 41
Additional Information..................................... 41
Report of Independent Auditors............................. 42
Financial Statements....................................... 43
Appendix A--Ratings of Investments......................... A-1
Appendix B--Performance Related and Comparative Information B-1
68
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Shares
Nuveen Preferred and Convertible
Income Fund
Common Shares
--------
PROSPECTUS
, 2003
--------
Salomon Smith Barney
Nuveen Investments
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
FRH-XXX-0203
The information in this Statement of Additional Information is not complete and
may be changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
Statement of Additional Information is not an offer to sell these securities and
it is not soliciting an offer to buy these securities in any state where the
offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED FEBRUARY ___, 2003
NUVEEN PREFERRED AND CONVERTIBLE INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
Nuveen Preferred and Convertible Income Fund (the "Fund") is a newly
organized, diversified, closed-end management investment company.
This Statement of Additional Information relating to common shares of the
Fund ("Common Shares") does not constitute a prospectus, but should be read in
conjunction with the Fund's Prospectus relating thereto dated ___________, 2003,
(the "Prospectus"). This Statement of Additional Information does not include
all information that a prospective investor should consider before purchasing
Common Shares. Investors should obtain and read the Fund's Prospectus prior to
purchasing such shares. A copy of the Fund's Prospectus may be obtained without
charge by calling (800) 257-8787. You may also obtain a copy of the Fund's
Prospectus on the Securities and Exchange Commission's web site
(http://www.sec.gov). Capitalized terms used but not defined in this Statement
of Additional Information have the meanings ascribed to them in the Prospectus.
TABLE OF CONTENTS
[Download Table]
Page
----
Use of Proceeds.............................................................. 3
Investment Objectives.........................................................3
Investment Policies and Techniques............................................6
Other Investment Policies and Techniques......................................9
Management of the Fund.......................................................15
Investment Advisers..........................................................20
Portfolio Transactions and Brokerage.........................................24
Distributions ...............................................................26
Description of Shares........................................................26
Certain Provisions in the Declaration of Trust...............................30
Repurchase of Fund Shares; Conversion to Open-End Fund.......................32
Tax Matters..................................................................34
Performance Related and Comparative Information..............................38
Experts......................................................................41
Custodian....................................................................41
Additional Information.......................................................41
Report of Independent Auditors...............................................42
Financial Statements.........................................................43
Ratings of Investments (Appendix A)........................................ A-1
Performance Related and Comparative Information (Appendix B)............... B-1
This Statement of Additional Information is dated ___________, 2003.
2
USE OF PROCEEDS
The net proceeds of the offering of Common Shares of the Fund will be
approximately: $___________ ($___________ if the Underwriters exercise the
over-allotment option in full) after payment of organization and offering costs.
For the Fund, Nuveen has agreed to pay (i) all organizational expenses and
(ii) offering costs (other than sales load) that exceed $0.03 per Common Share.
Pending investment in preferred, convertible and other debt instruments
that meet the Fund's investment objectives and policies, the net proceeds of the
offering will be invested in U.S. government securities or high quality,
short-term money market instruments.
INVESTMENT OBJECTIVES
The Fund's primary objective is high current income. The Fund's secondary
objective is total return. There can be no assurance that the Fund's investment
objectives will be achieved.
The Fund cannot change its investment objectives without the approval of
the holders of a "majority of the outstanding" Common Shares and FundPreferred
shares voting together as a single class, and of the holders of a "majority of
the outstanding" FundPreferred shares voting as a separate class. When used with
respect to particular shares of the Fund, a "majority of the outstanding" shares
means (i) 67% or more of the shares present at a meeting, if the holders of more
than 50% of the shares are present or represented by proxy, or (ii) more than
50% of the shares, whichever is less. See "Description of Shares--FundPreferred
Shares--Voting Rights" in the Fund's Prospectus and "Description of
Shares--FundPreferred Shares--Voting Rights" in this Statement of Additional
Information for additional information with respect to the voting rights of
holders of FundPreferred shares.
INVESTMENT RESTRICTIONS
Except as described below, the Fund, as a fundamental policy, may not,
without the approval of the holders of a majority of the outstanding Common
Shares and, if issued, FundPreferred shares voting together as a single class,
and of the holders of a majority of the outstanding FundPreferred shares voting
as a separate class:
(1) Issue senior securities, as defined in the Investment Company Act
of 1940, other than (i) preferred shares which immediately after issuance
will have asset coverage of at least 200%, (ii) indebtedness which
immediately after issuance will have asset coverage of at least 300%, or
(iii) the borrowings permitted by investment restriction (2) set forth
below;
3
(2) Borrow money, except as permitted by the Investment
Company Act of 1940;
(3) Act as underwriter of another issuer's securities, except
to the extent that the Fund may be deemed to be an underwriter within
the meaning of the Securities Act of 1933 in connection with the
purchase and sale of portfolio securities [or acting as an agent or one
of a group of co-agents in originating corporate loans];
(4) Invest more than 25% of its total assets in securities of
issuers in any one industry other than the financial services industry;
provided, however, that such limitation shall not apply to obligations
issued or guaranteed by the United States Government or by its agencies
or instrumentalities;
(5) Purchase or sell real estate, except pursuant to the
exercise by the Fund of its rights under loan agreements, and this
shall not prevent the Fund from investing in securities of companies
that deal in real estate or are engaged in the real estate business,
including real estate investment trusts, and securities secured by real
estate or interests therein and the Fund may hold and sell real estate
or mortgages on real estate acquired through default, liquidation, or
other distributions of an interest in real estate as a result of the
Fund's ownership of such securities;
(6) Purchase or sell physical commodities unless acquired as a
result of ownership of securities or other instruments (but this shall
not prevent the Fund from exercising rights under loan agreements,
purchasing or selling options, futures contracts, derivative
instruments or from investing in securities or other instruments backed
by physical commodities);
(7) Make loans of funds or other assets, other than by
obtaining interests in corporate loans, entering into repurchase
agreements, lending portfolio securities and through the purchase of
debt securities in accordance with its investment objectives, policies
and limitations; and
(8) With respect to 75% of the value of the Fund's total
assets, purchase any securities (other than obligations issued or
guaranteed by the United States Government or by its agencies or
instrumentalities), if as a result more than 5% of the Fund's total
assets would then be invested in securities of a single issuer or if as
a result the Fund would hold more than 10% of the outstanding voting
securities of any single issuer.
For purposes of the foregoing and "Description of Shares--
FundPreferred Shares--Voting Rights" below, "majority of the outstanding," when
used with respect to particular shares of the Fund, means (i) 67% or more of the
shares present at a meeting, if the holders of more than 50% of the shares are
present or represented by proxy, or (ii) more than 50% of the shares, whichever
is less.
For the purpose of applying the limitation set forth in subparagraph
(8) above, an issuer shall be deemed the sole issuer of a security when its
assets and revenues are separate from other governmental entities and its
securities are backed only by its assets and revenues. Similarly, in the case of
a non-governmental issuer, such as an industrial corporation or a privately
owned or operated hospital, if the security is backed only by the assets and
revenues of the non-governmental issuer, then such non-governmental issuer would
be deemed to be the sole issuer. Where a security is also backed by the
enforceable obligation of a superior or unrelated governmental or other entity
(other than a bond insurer), it shall also be included in the
4
computation of securities owned that are issued by such governmental or other
entity. Where a security is guaranteed by a governmental entity or some other
facility, such as a bank guarantee or letter of credit, such a guarantee or
letter of credit would be considered a separate security and would be treated as
an issue of such government, other entity or bank. When a municipal bond is
insured by bond insurance, it shall not be considered a security that is issued
or guaranteed by the insurer; instead, the issuer of such municipal bond will be
determined in accordance with the principles set forth above.
Under the Investment Company Act of 1940, the Fund may invest only up
to 10% of its Managed Assets in the aggregate in shares of other investment
companies and only up to 5% of its Managed Assets in any one investment company,
provided the investment does not represent more than 3% of the voting stock of
the acquired investment company at the time such shares are purchased. As a
stockholder in any investment company, the Fund will bear its ratable share of
that investment company's expenses, and will remain subject to payment of the
Fund's management, advisory and administrative fees with respect to assets so
invested. Holders of Common Shares would therefore be subject to duplicative
expenses to the extent the Fund invests in other investment companies. In
addition, the securities of other investment companies may also be leveraged and
will therefore be subject to the same leverage risks described herein. As
described in the Prospectus in the section entitled "Risks", the net asset value
and market value of leveraged shares will be more volatile and the yield to
shareholders will tend to fluctuate more than the yield generated by unleveraged
shares.
In addition to the foregoing fundamental investment policies, the Fund
is also subject to the following non-fundamental restrictions and policies,
which may be changed by the Board of Trustees. The Fund may not:
(1) Sell securities short, except that the Fund may make short
sales of securities if, at all times when a short position is open, the
Fund owns at least an equal amount of such securities or securities
convertible into or exchangeable for, without payment of any further
consideration, securities of the same issue as, and equal in amount to,
the securities sold short, and provided that transactions in options,
futures contracts, options on futures contracts, or other derivative
instruments are not deemed to constitute selling securities short.
(2) Purchase securities of open-end or closed-end investment
companies except in compliance with the Investment Company Act of 1940
or any exemptive relief obtained thereunder.
(3) Purchase securities of companies for the purpose of
exercising control, except to the extent that exercise by the Fund of
its rights under loan agreements would be deemed to constitute such
control.
The restrictions and other limitations set forth above will apply only
at the time of purchase of securities and will not be considered violated unless
an excess or deficiency occurs or exists immediately after and as a result of an
acquisition of securities.
The Fund intends to apply for ratings for its FundPreferred shares
from a nationally recognized statistical rating organization ("NRSRO")
(typically, Moody's, S&P or Fitch). In order to obtain and maintain the required
ratings, the Fund may be required to comply with investment quality,
diversification and other guidelines established by the NRSRO. Such guidelines
will likely be more restrictive than the restrictions set forth above. The Fund
may also be subject to certain restrictions and guidelines imposed by
5
lenders if the Fund engages in Borrowings. The Fund does not anticipate that
such guidelines would have a material adverse effect on its Common Shareholders
or the Fund's ability to achieve its investment objectives. The Fund presently
anticipates that any FundPreferred shares that it intends to issue initially
would be given at least a AA/Aa rating by such NRSRO -- Moody's ("Aa"), S&P
("AA") or Fitch ("AA") -- but no assurance can be given that such ratings will
be obtained. NRSROs receive fees in connection with their ratings issuances.
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Fund's
investment objectives, policies, and techniques that are described in the Fund's
Prospectus.
The Fund's primary investment objective is high current income. The Fund's
secondary objective is total return. There can be no assurance that the Fund's
investment objectives will be achieved.
Under normal circumstances, the Fund:
. will invest at least 80% of its Managed Assets in preferred
securities, convertible securities and related instruments; and
. may invest up to 20% of its Managed Assets in other securities,
including debt instruments and common stocks acquired upon conversion
of a convertible security (such common stocks not normally to exceed
5% of the Fund's Managed Assets).
NIAC will be responsible for determining the Fund's overall investment
strategy, including allocating the portion of the Fund's assets to be invested
in preferred securities, convertible securities and other debt instruments. The
Fund's assets allocated to preferred securities will be managed by Spectrum. The
Fund's assets allocated to convertible securities will be managed by Froley,
Revy. The Fund's assets allocated to other debt instruments will be managed by
NIAC. Initially, NIAC will allocate approximately 60%, 30% and 10% of the Fund's
Managed Assets to preferred securities, convertible securities and other debt
instruments, respectively. Thereafter, the portion of the Fund's Managed Assets
invested in preferred securities, convertible securities and other debt
instruments will vary from time to time consistent with the Fund's investment
objectives, although the Fund will normally invest at least 50% of its Managed
Assets in preferred securities and at least 20% of its Managed Assets in
convertible securities (so long as the combined total equals at least 80% of the
Fund's Managed Assets). Convertible preferred securities will be regarded as
convertible securities for purposes of these limits. In making allocation
decisions, NIAC will consider factors such as interest rate levels, conditions
and developing trends in the bond and equity markets, analysis of relative
valuations for preferred, convertible and other debt instruments, and other
economic and market factors, including the overall outlook for the economy and
inflation.
The Fund will invest at least 65% of its Managed Assets in securities that,
at the time of investment, are investment grade quality. Investment grade
quality securities are those securities that, at the time of investment, are (i)
rated by at least one of the NRSROs within the four highest grades (Baa or BBB
or better by Moody's, S&P or Fitch) or (ii) unrated but judged to be of
comparable quality by the Adviser responsible for the investment. Investment
grade quality securities also include split-rated securities. Initially, the
Fund intends to invest approximately 75% of its Managed Assets in investment
grade quality securities. The Fund may invest up to 35% of its Managed Assets in
securities that, at the time of investment, are not investment grade quality.
The Fund will only invest in securities that, at the time of investment, are
rated B or higher by at least one NRSRO or that are unrated but judged to be of
comparable quality by the Adviser responsible for the investment, except,
however, the Fund may invest up to 5% of its Managed Assets in securities with a
highest rating of CCC or that are unrated but judged to be of comparable quality
by the Adviser responsible for the investment.
The Fund may invest up to 10% of its Managed Assets in securities that, at
the time of investment, are illiquid (i.e., securities that are not readily
marketable). All securities and other instruments in which the Fund invests
will be subject to this 10% limitation to the extent they are deemed to be
illiquid. Initially, the Fund does not intend to invest more than 5% of its
Managed Assets in illiquid securities. In addition, the Fund may invest up to
35% of its Managed Assets in securities of non-U.S. issuers. Up to 10% of the
Fund's Managed Assets may be invested in securities that are denominated in
Japanese yen, Canadian dollars, British pounds or Euros and which may be
offered, traded or listed in markets other than U.S. markets. The remainder of
the Fund's Managed Assets that may be invested in securities of non-U.S. issuers
will be invested in U.S. dollar denominated securities offered, traded or listed
in U.S. markets. Initially, the Fund does not intend to invest more than 20% of
its Managed Assets in securities of non-U.S. issuers and does not currently
intend to invest in the non-U.S. dollar denominated securities described above.
INVESTMENT PHILOSOPHY AND PROCESS
Nuveen Institutional Advisory Corp. (NIAC)
Asset Allocation Philosophy. NIAC is responsible for the overall strategy
and asset allocation decisions among the three primary asset classes in which
the Fund invests - taxable preferred securities, convertible securities and
other debt instruments. The goal of the allocation decision is to effectively
capture the diversification benefits provided by the low-correlation across
these asset classes and provide the potential for high income generation, an
opportunity to participate in rising equity markets and some protection against
risks associated with rising interest rates. NIAC believes that the opportunity
will exist from time to time to enhance the Fund's total return by
over-weighting or under-weighting these asset classes as the relative
attractiveness of the asset classes changes.
Asset Allocation Process. In determining the Fund's asset allocation, NIAC
will periodically consult with the Fund's Subadvisers and other investment
manager affiliates of NIAC. NIAC will consider factors such as interest rate
levels, conditions and developing trends in the bond and equity markets,
analysis of relative valuations for preferred, convertible and other debt
instruments, and other economic and market factors, including the overall
outlook for the economy and inflation.
Debt Instrument Investment Philosophy. NIAC is responsible for managing the
other debt instruments in which the Fund may invest. NIAC believes that managing
risk, particularly in a volatile asset class such as high yield debt, is of
paramount importance. NIAC believes that a combination of fundamental credit
analysis and valuation information that is available from the equity markets
provide a means of identifying superior investment candidates. Additionally,
NIAC focuses on liquid securities to ensure that exit strategies remain viable
throughout market cycles.
Debt Instrument Investment Process. NIAC begins with a quantitative
screening of the universe to identify investment candidates with favorable
capital structures, factor valuation and other equity market indicators. This
universe of securities is then screened for liquidity constraints and relative
value opportunities to determine investment candidates. Subsequently, the
investment team performs rigorous fundamental analysis to ensure sound industry
fundamentals, cash flow sufficiency and asset quality. The final portfolio is
constructed using proprietary risk factor and monitoring systems to ensure
proper diversification.
Spectrum Asset Management, Inc. (Spectrum)
Investment Philosophy. Spectrum's investment philosophy with respect to
preferred securities is centered on several underlying tenets held by the firm:
.. High levels of current income are the primary return contributor to the
total return potential of preferred securities.
.. Investing in the subordinated preferred securities of strong, highly-rated
issuers is potentially more advantageous than owing the senior debt of
weaker, potentially deteriorating issuers.
.. Investment grade-quality preferred securities present a very attractive
risk/return opportunity.
.. Diversifying across a large number of different industries and issuers
helps insulate an overall portfolio from events that affect any particular
company or sector.
.. Inefficiencies in the preferred securities market, particularly in the
pricing and trading of securities, can create opportunities to enhance
portfolio value.
Investment Process. Spectrum's investment process begins with macroeconomic
and fundamental credit analysis to identify sectors, industries and companies
that are potential investments. In its fundamental analysis, Spectrum employs a
value-oriented style that considers the relative attractiveness of the security
to other preferred securities and to the same issuer's senior debt. In addition,
Spectrum evaluates the structural features of each security as well as its
liquidity. In its investment decision, Spectrum also considers the contribution
of sectors and individual securities to the overall goal of achieving a
well-diversified portfolio.
Froley, Revy Investment Company, Inc. (Froley, Revy)
Investment Philosophy. Froley, Revy's investment philosophy with respect to
convertible securities is centered on the belief that convertible securities are
a total return vehicle that afford the opportunity to earn equity-like returns
with substantially reduced risk relative to equities, while providing some
current income. The firm believes that focusing on the mid-market sector of the
convertibles market while investing opportunistically in the bond-like and
equity-like areas of the convertible securities market maximizes total return
potential. In addition, the firm believes that because of the hybrid nature of
the asset class, research that emphasizes both fundamental credit analysis and
equity valuation analysis can successfully identify investment opportunities
with the greatest potential for enhancing a portfolio's overall total return.
Investment Process. Froley, Revy's investment process begins with screening
the universe of convertible securities on certain valuation and structural
parameters, including price, yield, premium, calls, equity sensitivity and other
factors. On this pool of potential investments, Froley, Revy then conducts
credit (bond) analysis and valuation (equity) analysis to identify the most
attractive candidates within the universe. Additional inputs into the sector and
security selection decision are top down, macroeconomic analysis of economic,
interest rate and other trends and the analysis of the structural
characteristics of the individual securities.
Froley, Revy monitors all securities and sectors on an on-going basis to
identify those that fall outside the intended investment range. Positions in
securities that have increased in value and equity sensitivity are reduced to
normal position weights or sold entirely based on the fundamental outlook for
the underlying equity. In addition, significant declines from purchase price
trigger a fundamental review of the holding to determine whether or not to
take action.
PORTFOLIO COMPOSITION
Under normal circumstances, the Fund will invest at least 80% of its
Managed Assets in preferred securities, convertible securities and related
instruments. The Fund will notify shareholders at least 60 days prior to any
change in the 80% policy.
6
Preferred Securities. The Fund intends that most or all of the preferred
securities in which it invests will be fully taxable and will not qualify for
the Dividends Received Deduction. Preferred securities generally pay fixed or
adjustable rate dividends to investors, and have a "preference" over common
stock in the payment of dividends and the liquidation of a company's assets.
This means that a company must pay dividends on preferred stock before paying
any dividends on its common stock. In order to be payable, distributions on
preferred securities must be declared by the issuer's board of directors. Income
payments on typical preferred securities currently outstanding are cumulative,
causing dividends and distributions to accrue even if not declared by the board
of directors or otherwise made payable. There is no assurance that dividends or
distributions on the preferred securities in which the Fund invests will be
declared or otherwise made payable.
Preferred stockholders usually have no right to vote for corporate
directors or on other matters.
Shares of preferred securities have a liquidation value that generally
equals the original purchase price at the date of issuance. The market value of
preferred securities may be affected by favorable and unfavorable changes
impacting companies in the utilities and financial services sectors, which are
prominent issuers of preferred securities, and by actual and anticipated changes
in tax laws, such as changes in corporate income tax rates and in the Dividends
Received Deduction.
Because the claim on an issuer's earnings represented by preferred
securities may become onerous when interest rates fall below the rate payable on
such securities, the issuer may redeem the securities. Thus, in declining
interest rate environments in particular, the Fund's holdings of higher
rate-paying fixed rate preferred securities may be reduced and the Fund would be
unable to acquire securities paying comparable rates with the redemption
proceeds.
The Fund intends that all of the preferred securities in which it will
invest will be investment grade quality at the time of investment. The average
call protection of the Fund's portfolio allocated to preferred securities is
expected to be approximately three to four years.
Additional Information on Taxable Preferred Securities. See "The Fund's
Investments - Portfolio Composition - Preferred Securities" in the Fund's
Prospectus for a general description of taxable preferred securities.
Taxable preferred securities are treated in a similar fashion to
traditional preferred securities by several regulatory agencies, including the
Federal Reserve Bank, and by credit rating agencies, for various purposes, such
as the assignment of minimum capital ratios, over-collateralization rates and
diversification limits.
Convertible Securities. Convertible securities are bonds, debentures,
notes, preferred securities or other securities that may be converted or
exchanged (by the holder or the issuer) into shares of the underlying common
stock (or cash or securities of equivalent value) at a stated exchange ratio or
predetermined price (the "conversion price"). Convertible securities have
general characteristics similar to both debt securities and common stocks. The
interest paid on convertible securities may be fixed or floating rate.
Convertible securities also may be issued in zero coupon form with an original
issue discount. See "Other Investment Policies and Techniques-Zero Coupon and
Payment-In-Kind Securities". Although to a lesser extent than with debt
securities, the market value of convertible securities tends to decline as
interest rates increase and, conversely, tends to increase as interest rates
decline. In addition, because of the conversion feature, the market value of
convertible securities tends to vary with fluctuations in the market value of
the underlying common stocks and, therefore, will also react to the variations
in the general market for common stocks. Depending upon the relationship of the
conversion price to the market value of the underlying common stock, a
convertible security may trade more like common stocks than a debt instrument.
Mandatory convertible securities are distinguished as a subset of
convertible securities because they may be called for conversion by the issuer
after a particular date and under certain circumstances (including at a
specified price) established upon its issuance. If a mandatory convertible
security is called for conversion, the Fund will be required to either convert
it into the underlying common stock or sell it to a third party, which may have
an adverse effect on the Fund's ability to achieve its investment objective.
A convertible security generally entitles the holder to receive interest
paid or accrued until the convertible security matures or is redeemed, converted
or exchanged. Convertible securities rank senior to common stock in a
corporation's capital structure and, therefore, generally entail less risk than
the corporation's common stock, although the extent to which such risk is
reduced depends in large measure upon the degree to which the convertible
security sells above its value as a debt obligation. Before conversion,
convertible securities have characteristics similar to non-convertible debt
obligations and can provide for a stable stream of income with generally higher
yields than common stocks. However, convertible securities fall below debt
obligations of the same issuer in order of preference or priority in the event
of a liquidation, and are typically unrated or rated lower than such debt
obligations. In addition, contingent payment convertible securities allow the
issuer to claim deductions based on its nonconvertible cost of debt which
generally will result in deductions in excess of the actual cash payments made
on the securities (and accordingly, holders will recognize income in amounts in
excess of the cash payments received). There can be no assurance of current
income because the issuers of the convertible securities may default on their
obligations. The convertible securities in which the Fund may invest may be
below investment grade quality. See "--High Yield Securities" below.
Convertible securities generally offer lower interest or dividend yields
than non-convertible securities of similar credit quality because of the
potential for capital appreciation. A convertible security, in addition to
providing current income, offers the potential for capital appreciation through
the conversion feature, which enables the holder to benefit from increases in
the market price of the underlying common stock. The common stock underlying
convertible securities may be issued by a different entity than the issuer of
the convertible securities.
The value of convertible securities is influenced by both the yield of
non-convertible securities of comparable issuers and by the value of the
underlying common stock. The value of a convertible security viewed without
regard to its conversion feature (i.e., strictly on the basis of its yield) is
sometimes referred to as its "investment value." The investment value of the
convertible security typically will fluctuate based on the credit quality of the
issuer and will fluctuate inversely with changes in prevailing interest rates.
However, at the same time, the convertible security will be influenced by its
"conversion value," which is the market value of the underlying common stock
that would be obtained if the convertible security were converted. Conversion
value fluctuates directly with the price of the underlying common stock, and
will therefore be subject to risks relating to the activities of the issuer
and/or general market and economic conditions. Depending upon the relationship
of the conversion price to the market value of the underlying security, a
convertible security may trade more like an equity security than a debt
instrument.
If, because of a low price of the common stock, the conversion value is
substantially below the investment value of the convertible security, the price
of the convertible security is governed principally by its investment value. If
the conversion value of a convertible security increases to a point that
approximates or exceeds its investment value, the value of the security will be
principally influenced by its conversion value. A convertible security will sell
at a premium over its conversion value to the extent investors place value on
the right to acquire the underlying common stock while holding a fixed-income
security.
Mandatory convertible securities are distinguished as a subset of
convertible securities because the conversion is not optional and the conversion
price at maturity (or redemption) is based solely upon the market price of the
underlying common stock, which may be significantly less than par or the price
(above or below par) paid. For these reasons, the risks associated with the
investing in mandatory convertible securities most closely resemble the risks
inherent in common stocks. Mandatory convertible securities customarily pay a
higher coupon yield to compensate for the potential risk of additional price
volatility and loss upon redemption. Since the correlation of common stock risk
increases as the security approaches its redemption date, there can be no
assurance that the higher coupon will compensate for the potential loss.
Synthetic Convertible Securities. Although the Fund does not currently
intend to invest in synthetic convertible securities, the Fund may invest up to
10% of its Managed Assets in such securities. Synthetic convertible securities
possess the two principal characteristics of a true convertible security, i.e.,
a fixed-income security ("fixed-income component") and the right to acquire an
equity security ("convertible component"). If the Fund invests in synthetic
convertible securities, it is expected that the Fund will invest in such
synthetic convertible securities that are created by third parties, typically
investment banks or other financial institutions. Synthetic convertible
securities created by third parties typically trade as a single security with a
unitary value, similar to a true convertible security. The Fund may also invest
in synthetic convertible securities by acquiring separate securities, one
possessing a fixed-income component and the other possessing an equity
component. The fixed-income component is achieved by investing in
non-convertible, fixed-income securities such as bonds, debentures, notes,
preferred stocks and money market instruments. The equity component is achieved
by investing in warrants or options to buy common stock at a certain exercise
price, or options on a stock index. Unlike a true convertible security or a
synthetic convertible security created by third parties, each of which is a
single security having a unitary market value, a synthetic convertible security
that is comprised of two or more separate securities will have a "market value"
that is the sum of the values of its fixed-income component and its equity
component. For this reason, the value of a synthetic convertible security
comprised of separate securities may respond differently to market fluctuations
than would a true convertible security or synthetic convertible security created
by a third party. More flexibility is possible in the assembly of a synthetic
convertible security than in the purchase of a convertible security. Although
synthetic convertible securities may be selected where the two components are
issued by a single issuer, thus making the synthetic convertible security
similar to the true convertible security, the character of a synthetic
convertible security allows the combination of components representing distinct
issuers, when an Adviser believes that such a combination would better promote
the Fund's investment objective. A synthetic convertible security also is a more
flexible investment in that its two components may be purchased separately. For
example, the Fund may purchase a warrant for inclusion in a synthetic
convertible security but temporarily hold short-term investments while
postponing the purchase of a corresponding bond pending development of more
favorable market conditions.
A holder of a synthetic convertible security faces the risk of a decline in
the price of the security or the level of the index involved in the equity
component, causing a decline in the value of the call option or warrant
purchased to create the synthetic convertible security. Should the price of the
stock fall below the exercise price and remain there throughout the exercise
period, the entire amount paid for the call option or warrant would be lost.
Because a synthetic convertible security includes the fixed-income component as
well, the holder of a synthetic convertible security also faces the risk that
interest rates will rise, causing a decline in the value of the fixed-income
instrument. Convertible structured notes are fixed-income debentures linked to
equity, which have the attributes of a convertible security; however, the
investment bank that issued the convertible note, rather than the issuer of the
underlying common stock into which the note is convertible, assumes the credit
risk associated with the investment. The Fund's holdings of synthetic
convertible securities, including those created by third parties, are considered
convertible securities for purposes of the Fund's policy to invest at least 80%
of its Managed Assets in preferred securities and convertible securities.
Warrants to Purchase Securities
The Fund may invest in warrants to purchase debt securities or equity
securities in connection with its investments in synthetic convertible
securities. A warrant to purchase equity securities is a right to purchase
common stock at a specific price (usually at a premium above the market value of
the underlying common stock at time of issuance) during a specified period of
time. Such a warrant may have a life ranging from less than a year to twenty
years or longer, but the warrant becomes worthless unless it is exercised or
sole before expiration. In addition, if the market price of the common stock
does not exceed an equity security warrant's exercise price during the life of
the warrant, the warrant will expire worthless. Equity security warrants have no
voting rights, pay no dividends and have no rights with respect to the assets of
the corporation issuing them. The percentage increase or decrease in the value
of an equity security warrant may be greater than the percentage increase or
decrease in the value of the underlying common stock.
Debt obligations with warrants attached to purchase equity securities have
many characteristics of convertible securities and their prices may, to some
degree, reflect the performance of the underlying stock. Debt obligations also
may be issued with warrants attached to purchase additional debt securities at
the same coupon rate. A decline in interest rates would permit the Fund to buy
additional bonds at the favorable rate or to sell such warrants at a profit. If
interest rates rise, these warrants would generally expire with no value.
Options on Securities and Indexes
In connection with its investments in synthetic convertible securities, the
Fund may purchase call options on common stocks and call options on common stock
indexes. The Fund may purchase call options on common stocks or stock indexes in
standardized contracts traded on domestic or other securities exchanges, boards
of trade, or similar entities, or quoted on NASDAQ or on an over-the-counter
market.
A call option on a security (or an index) is a contract that gives the
holder of the option, in return for a premium, the right to buy from the writer
of the option the security underlying the option (or the cash value of the
common stock index) at a specified exercise price at any time during the term of
the option. The writer of an option on a security has the obligation upon
exercise of the option to deliver the underlying security upon payment of the
exercise price. Upon exercise, the writer of an option on an index is obligated
to pay the difference between the cash value of the index and the exercise price
multiplied by the specified multiplier for the index option. (An index is
designed to reflect features of a particular securities market, a specific group
of financial instruments or securities, or certain economic indicators.)
If an option purchased by the Fund expires unexercised, the Fund realizes a
capital loss equal to the premium paid. Prior to the earlier of exercise or
expiration, an exchange-traded option may be closed out by an offsetting
purchase or sale of an option of the same series (type, exchange, underlying
security or index, exercise price, and expiration). There can be no assurance,
however, that a closing purchase or sale transaction can be effected when the
Fund desires.
The Fund may sell call options it has previously purchased, which could
result in a net gain or loss depending on whether the amount realized on the
sale is more or less than the premium and other transaction costs paid on the
call option which is sold. The principal factors affecting the market value of a
call option include supply and demand, interest rates, the current market price
of the underlying security or index in relation to the exercise price of the
option, the volatility of the underlying security or index, and the time
remaining until the expiration date.
The premium paid for a call option purchased by the Fund is an asset of the
Fund. The value of an option purchased is marked to market daily and is valued
at the closing price on the exchange on which it is traded or, if not traded on
an exchange or no closing price is available, at the mean between the last bid
and asked prices.
There are several risks associated with transactions in options on
securities and on indexes. For example, there are significant differences
between the securities and options markets that could result in an imperfect
correlation between these markets, causing a given transaction not to achieve
its objectives. A decision as to whether, when and how to use options involves
the exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events.
If a call option purchased by the Fund is not sold when it has remaining
value, and if the market price of the underlying security remains less than or
equal to the exercise price, the Fund will lose its entire investment in the
option.
There can be no assurance that a liquid market will exist when the Fund
seeks to close out an option position. If the Fund were unable to close out an
option that it had purchased on a security, it would have to exercise the option
in order to realize any profit or the option may expire worthless.
If trading were suspended in an option purchased by the Fund, the Fund
would not be able to close out the option. If restrictions on exercise were
imposed, the Fund might be unable to exercise an option it has purchased.
Temporary Investments and Defensive Position. Upon NIAC's recommendation
and for temporary defensive purposes or to keep cash on hand fully invested,
including the period during which the net proceeds of the offering are being
invested, the Fund may invest up to 100% of its net assets in cash equivalents
and investment grade fixed-income securities. In such a case, the Fund may not
pursue or achieve its investment objectives. These investments are defined to
include, without limitation, the following:
7
(1) U.S. government securities, including bills, notes and
bonds differing as to maturity and rates of interest that are either
issued or guaranteed by the U.S. Treasury or by U.S. government
agencies or instrumentalities. U.S. government agency securities
include securities issued by (a) the Federal Housing Administration,
Farmers Home Administration, Export-Import Bank of the United States,
Small Business Administration, and the Government National Mortgage
Association, whose securities are supported by the full faith and
credit of the United States; (b) the Federal Home Loan Banks, Federal
Intermediate Credit Banks, and the Tennessee Valley Authority, whose
securities are supported by the right of the agency to borrow from the
U.S. Treasury; (c) the Federal National Mortgage Association, whose
securities are supported by the discretionary authority of the U.S.
government to purchase certain obligations of the agency or
instrumentality; and (d) the Student Loan Marketing Association, whose
securities are supported only by its credit. While the U.S. government
provides financial support to such U.S. government-sponsored agencies
or instrumentalities, no assurance can be given that it always will do
so since it is not so obligated by law. The U.S. government, its
agencies, and instrumentalities do not guarantee the market value of
their securities. Consequently, the value of such securities may
fluctuate.
(2) Certificates of Deposit issued against funds deposited in
a bank or a savings and loan association. Such certificates are for a
definite period of time, earn a specified rate of return, and are
normally negotiable. The issuer of a certificate of deposit agrees to
pay the amount deposited plus interest to the bearer of the certificate
on the date specified thereon. Under current FDIC regulations, the
maximum insurance payable as to any one certificate of deposit is
$100,000; therefore, certificates of deposit purchased by the Fund may
not be fully insured.
(3) Repurchase agreements, which involve purchases of debt
securities. At the time the Fund purchases securities pursuant to a
repurchase agreement, it simultaneously agrees to resell and redeliver
such securities to the seller, who also simultaneously agrees to buy
back the securities at a fixed price and time. This assures a
predetermined yield for the Fund during its holding period, since the
resale price is always greater than the purchase price and reflects an
agreed-upon market rate. Such actions afford an opportunity for the
Fund to invest temporarily available cash. The Fund may enter into
repurchase agreements only with respect to obligations of the U.S.
government, its agencies or instrumentalities; certificates of deposit;
or bankers' acceptances in which the Fund may invest. Repurchase
agreements may be considered loans to the seller, collateralized by the
underlying securities. The risk to the Fund is limited to the ability
of the seller to pay the agreed-upon sum on the repurchase date; in the
event of default, the repurchase agreement provides that the Fund is
entitled to sell the underlying collateral. If the seller defaults
under a repurchase agreement when the value of the underlying
collateral is less than the repurchase price, the Fund could incur a
loss of both principal and interest. The Fund's investment adviser
monitors the value of the collateral at the time the action is entered
into and at all times during the term of the repurchase agreement. The
investment adviser does so in an effort to determine that the value of
the collateral always equals or exceeds the agreed-upon repurchase
price to be paid to the Fund. If the seller were to be subject to a
federal bankruptcy proceeding, the ability of
8
the Fund to liquidate the collateral could be delayed or impaired
because of certain provisions of the bankruptcy laws.
(4) Commercial paper, which consists of short-term unsecured
promissory notes, including variable rate master demand notes issued by
corporations to finance their current operations. Master demand notes
are direct lending arrangements between the Fund and a corporation.
There is no secondary market for such notes. However, they are
redeemable by the Fund at any time. An Adviser will consider the
financial condition of the corporation (e.g., earning power, cash flow,
and other liquidity measures) and will continuously monitor the
corporation's ability to meet all of its financial obligations, because
the Fund's liquidity might be impaired if the corporation were unable
to pay principal and interest on demand. Investments in commercial
paper will be limited to commercial paper rated in the highest
categories by a NRSRO and which mature within one year of the date of
purchase or carry a variable or floating rate of interest.
OTHER INVESTMENT POLICIES AND TECHNIQUES
NON-U.S. SECURITIES
The Fund may invest up to 35% of its Managed Assets in securities of
non-U.S. issuers. Up to 10% of the Fund's Managed Assets may be invested in
securities that are denominated in Japanese yen, Canadian dollars, British
pounds or Euros and which may be offered, traded or listed in markets other than
U.S. markets. The remainder of the Fund's Managed Assets that may be invested in
securities of non-U.S. issuers will be invested in U.S. dollar denominated
securities offered, traded or listed in U.S. markets. Initially, the Fund does
not intend to invest more than 20% of its Managed Assets in securities of
non-U.S. issuers, and does not currently intend to invest in the non-U.S. dollar
denominated securities described above. For this purpose, securities of non-U.S.
issuers include American Depository Receipts (ADRs), Global Depositary Receipts
(GDRs) or other securities representing underlying shares of non-U.S. issuers.
Positions in those securities are not necessarily denominated in the same
currency as the common stocks into which they may be converted. ADRs are
receipts typically issued by an American bank or trust company evidencing
ownership of the underlying securities. GDRs are U.S. dollar-denominated
receipts evidencing ownership of non-U.S. securities. Generally, ADRs, in
registered form, are designed for the U.S. securities markets and GDRs, in
bearer form, are designed for use in non-U.S. securities markets. The Fund may
invest in sponsored or unsponsored ADRs. In the case of an unsponsored ADR, the
Fund is likely to bear its proportionate share of the expenses of the depository
and it may have greater difficulty in receiving shareholder communications than
it would have with a sponsored ADR.
Investors should understand and consider carefully the risks involved in
investing in securities of non-U.S. issuers. Investing in securities of non-U.S.
issuers involves certain considerations comprising both risks and opportunities
not typically associated with investing in securities of U.S. issuers. These
considerations include: (i) less information about non-U.S. issuers or markets
may be available due to less rigorous disclosure or accounting standards or
regulatory practices; (ii) many non-U.S. markets are smaller, less liquid and
more volatile meaning that in a changing market, an Adviser may not be able to
sell the Fund's portfolio securities at times, in amounts and at prices it
considers reasonable; (iii) potential adverse effects of fluctuations in
currency exchange rates or controls on the value of the Fund's investments; (iv)
the economies of non-U.S. countries may grow at slower rates than expected or
may experience a downturn or recession; (v) economic, political and social
developments may adversely affect the securities markets; (vi) withholding and
other non-U.S. taxes may decrease the Fund's return; and (vii) possible seizure,
expropriation or nationalization of the company or its assets. These risks are
more pronounced to the extent that the Fund invests a significant amount of its
investments in issuers located in one region. Although an Adviser may hedge the
Fund's exposure to certain of these risks, including the foreign currency
exchange rate risk, there can be no assurance that the Fund will enter into
hedging transactions at any time or at times or under circumstances in which it
might be advisable to do so.
Although the Fund intends to invest in companies and government
securities of countries having stable political environments, there is the
possibility of expropriation or confiscatory taxation, seizure or
nationalization of non-U.S. bank deposits or other assets,
9
establishment of exchange controls, the adoption of non-U.S. government
restrictions, or other adverse political, social or diplomatic developments that
could affect investment in non-U.S. issuers.
Debt Obligations of Non-U.S. Governments. An investment in debt obligations
of non-U.S. governments and their political subdivisions (sovereign debt)
involves special risks that are not present in corporate debt obligations. The
non-U.S. issuer of the sovereign debt or the non-U.S. governmental authorities
that control the repayment of the debt may be unable or unwilling to repay
principal or interest when due, and the Fund may have limited recourse in the
event of a default. During periods of economic uncertainty, the market prices of
sovereign debt may be more volatile than prices of debt obligations of U.S.
issuers. In the past, certain non-U.S. countries have encountered difficulties
in servicing their debt obligations, withheld payments of principal and interest
and declared moratoria on the payment of principal and interest on their
sovereign debt.
A sovereign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its non-U.S. currency reserves, the availability
of sufficient non-U.S. currency, the relative size of the debt service burden,
the sovereign debtor's policy toward its principal international lenders and
local political constraints. Sovereign debtors may also be dependent on expected
disbursements from non-U.S. governments, multilateral agencies and other
entities to reduce principal and interest arrearages on their debt. The failure
of a sovereign debtor to implement economic reforms, achieve specified levels of
economic performance or repay principal or interest when due may result in the
cancellation of third-party commitments to lend funds to the sovereign debtor,
which may further impair such debtor's ability or willingness to service its
debts.
Eurodollar Instruments and Yankee Bonds. The Fund may invest in Eurodollar
instruments and Yankee bonds. Yankee bonds are U.S. dollar denominated bonds
typically issued in the U.S. by non-U.S. governments and their agencies and
non-U.S. banks and corporations. The Fund may also invest in Eurodollar
Certificates of Deposit ("ECDs") and Yankee Certificates of Deposit ("Yankee
CDs"). ECDs are U.S. dollar denominated certificates of deposit issued by
non-U.S. branches of domestic banks and Yankee CDs are U.S. dollar denominated
certificates of deposit issued by a U.S. branch of a non-U.S. bank and held in
the U.S. These investments involve risks that are different from investments in
securities issued by U.S. issuers, including potential unfavorable political and
economic developments, non-U.S. withholding or other taxes, seizure of non-U.S.
deposits, currency controls, interest limitations or other governmental
restrictions which might affect payment of principal or interest.
BONDS
The Fund may invest in a wide variety of bonds and related debt obligations
of varying maturities issued by U.S. and foreign corporations (including banks)
and other business entities, as well as governments and other issuers to borrow
money from investors. Bonds are fixed or variable rate debt obligations,
including bills, notes, debentures, money market instruments and similar
instruments and securities. Bonds generally are used by corporations,
governments and other issuers to borrow money from investors. The issuer pays
the investor a fixed or variable rate of interest and normally must repay the
amount borrowed on or before maturity. Certain bonds are "perpetual" in that
they have no maturity date. The Fund may invest up to 35% of its Managed Assets
in securities of foreign issuers, including corporate debt securities of foreign
issuers in accordance with the Fund's investment objective and policies as
described in the Prospectus. See "Non-U.S. Securities" above. The Fund may also
invest without limit in corporate bonds that are below investment grade quality.
See "--High Yield Securities" below.
The Fund's investments in bonds are subject to a number of risks described
in the Prospectus and elaborated upon elsewhere in this section of the Statement
of Additional Information, including interest rate risk, credit risk, high yield
risk, issuer risk, foreign (non-U.S.) investment risk, inflation risk, liquidity
risk, smaller company risk and management risk.
STRUCTURED NOTES
The Fund may invest in "structured" notes, which are privately negotiated
debt obligations where the principal and/or interest is determined by reference
to the performance of a benchmark asset, market or interest rate (an "embedded
index"), such as selected securities, an index of securities or specified
interest rates, or the differential performance of two assets or markets, such
as indexes reflecting bonds. Structured notes may be issued by corporations,
including banks, as well as by governmental agencies. Structured notes
frequently are assembled in the form of medium-term notes, but a variety of
forms are available and may be used in particular circumstances. The terms of
such structured notes normally provide that their principal and/or interest
payments are to be adjusted upwards or downwards (but ordinarily not below zero)
to reflect changes in the embedded index while the structured notes are
outstanding. As a result, the interest and/or principal payments that may be
made on a structured product may vary widely, depending on a variety of factors,
including the volatility of the embedded index and the effect of changes in the
embedded index on principal and/or interest payments. The rate of return on
structured notes may be determined by applying a multiplier to the performance
or differential performance of the referenced index(es) or other asset(s).
Application of a multiplier involves leverage that will serve to magnify the
potential for gain and the risk of loss.
An Adviser may utilize structured notes for investment purposes and also
for risk management purposes, such as to reduce the duration and interest rate
sensitivity of the Fund's portfolio. While structured notes may offer the
potential for a favorable rate of return from time to time, they also entail
certain risks. Structured notes may be less liquid than other debt securities,
and the price of structured notes may be more volatile. In some cases, depending
on the terms of the embedded index, a structured note may provide that the
principal and/or interest payments may be adjusted below zero. Structured notes
also may involve significant credit risk and risk of default by the
counterparty. Although structured notes are not necessarily illiquid, NIAC
believes that currently most structured notes are illiquid. Like other
sophisticated strategies, the Fund's use of structured notes may not work as
intended. If the value of the embedded index changes in a manner other than that
expected by an Adviser, principal and/or interest payments received on the
structured notes may be substantially less than expected. Also, if an Adviser
uses structured notes to reduce the duration of the Fund's portfolio, this may
limit the Fund's return when having a longer duration would be beneficial (for
instance, when interest rates decline).
NO INVERSE FLOATERS
The Fund will not invest in inverse floating rate securities, which are
securities that pay interest at rates that vary inversely with changes in
prevailing interest rates and which represent a leveraged investment in an
underlying security.
HIGH YIELD SECURITIES
As described under "The Fund's Investments" in the Prospectus, currently,
the Fund may not invest in inverse floating rate securities, which are
securities that pay interest at rates that vary inversely with changes in
prevailing interest rates and which represent a leveraged investment in an
underlying security. Non-investment grade quality securities are sometimes
referred to as "high yield" securities or "junk bonds." Investment grade quality
securities include split-rated securities and securities that are unrated but
judged to be of comparable quality by the Adviser responsible for the
investment.
Investments in high yield securities generally provide greater income and
increased opportunity for capital appreciation than investments in higher
quality securities, but they also typically entail greater price volatility and
principal and income risk, including the possibility of issuer default and
bankruptcy. High yield securities are regarded as predominately speculative with
respect to the issuer's continuing ability to meet principal and interest
payments. Issuers of high yield securities may be highly leveraged and may not
have available to them more traditional methods of financing. Securities in the
lowest investment grade category also may be considered to possess some
speculative characteristics by certain rating agencies. In addition, analysis of
the creditworthiness of issuers of high yield securities may be more complex
than for issuers of higher quality securities.
High yield securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment grade securities. A
projection of an economic downturn or of a period of rising interest rates, for
example, could cause a decline in high yield security prices because the advent
of a recession could lessen the ability of an issuer to make principal and
interest payments on its debt obligations. If an issuer of high yield securities
defaults, in addition to risking payment of all or a portion of interest and
principal, the Fund may incur additional expenses to seek recovery. In the case
of high yield securities structured as zero-coupon or payment-in-kind
securities, their market prices will normally be affected to a greater extent by
interest rate changes, and therefore tend to be more volatile than securities
which pay interest currently and in cash. Each Adviser seeks to reduce these
risks through diversification, credit analysis and attention to current
developments and trends in both the economy and financial markets.
The secondary market for high yield securities may not be as liquid as the
secondary market for more highly rated securities, a factor which may have an
adverse effect on the Fund's ability to dispose of a particular security. There
are fewer dealers in the market for high yield securities than for investment
grade obligations. The prices quoted by different dealers may vary significantly
and the spread between the bid and ask price is generally much larger than for
higher quality instruments. Under adverse market or economic conditions, the
secondary market for high yield securities could contract further, independent
of any specific adverse changes in the condition of a particular issuer, and
these instruments may become illiquid. As a result, the Fund could find it more
difficult to sell these securities or may be able to sell the securities only at
prices lower than if such securities were widely traded. Prices realized upon
the sale of such lower rated or unrated securities, under these circumstances,
may be less than the prices used in calculating the Fund's net asset value.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of high yield
securities, especially in a thinly traded market. When secondary markets for
high yield securities are less liquid than the market for investment grade
securities, it may be more difficult to value the securities because such
valuation may require more research, and elements of judgment may play a greater
role in the valuation because there is less reliable, objective data available.
During periods of thin trading in these markets, the spread between bid and
asked prices is likely to increase significantly and the Fund may have greater
difficulty selling its portfolio securities. The Fund will be more dependent on
an Adviser's research and analysis when investing in high yield securities. Each
Adviser seeks to minimize the risks of investing in all securities through
in-depth credit analysis and attention to current developments in interest rates
and market conditions.
A general description of the ratings of securities by Moody's and S&P is
set forth in Appendix A to the Prospectus. The ratings of Moody's and S&P
represent their opinions as to the quality of the securities they rate. It
should be emphasized, however, that ratings are general and are not absolute
standards of quality. Consequently, in the case of debt obligations, certain
debt obligations with the same maturity, coupon and rating may have different
yields while debt obligations with the same maturity and coupon with different
ratings may have the same yield. For these reasons, the use of credit ratings as
the sole method of evaluating high yield securities can involve certain risks.
For example, credit ratings evaluate the safety of principal and interest
payments, not the market value risk of high yield securities. Also, credit
rating agencies may fail to change credit ratings in a timely fashion to reflect
events since the security was last rated. The Advisers do not rely solely on
credit ratings when selecting securities for the Fund, and develop their own
independent analysis of issuer credit quality.
The Fund's credit quality policies apply only at the time a security is
purchased, and the Fund is not required to dispose of a security in the event
that a rating agency or an Adviser downgrades its assessment of the credit
characteristics of a particular issue. In determining whether to retain or sell
such a security, an Adviser may consider such factors as an Adviser's assessment
of the credit quality of the issuer of such security, the price at which such
security could be sold and the rating, if any, assigned to such security by
other rating agencies. However, analysis of the creditworthiness of issuers of
high yield securities may be more complex than for issuers of higher quality
debt securities.
COMMON STOCK
The Fund does not intend to purchase common stock as part of its investment
strategy. The Fund will have exposure to common stock risks by virtue of the
common stock component of the convertible securities in which the Fund invests.
The Fund may also hold common stocks in its portfolio upon conversion of a
convertible security, such holdings not normally to exceed 5% of the Fund's
Managed Assets. In addition, in keeping with the income focus of the Fund, the
Fund expects to sell any common stock holdings as soon as practicable after
conversion of a convertible security. Common stock generally represents an
ownership interest in an issuer. Although common stock historically has
generated higher average returns than debt securities, common stock also has
experienced significantly more volatility in those returns. An adverse event,
such as an unfavorable earnings report, may depress the value of a particular
common stock held by the Fund. Also, prices of common stocks are sensitive to
general movements in the stock market. A drop in the stock market may depress
the price of common stocks held by the Fund.
SPLIT-RATED SECURITIES
Split-rated securities are those securities that, at the time of
investment, are rated below investment grade by Moody's, S&P or Fitch, so long
as at least one NRSRO rates such securities within the four highest grades
(i.e., investment grade quality). This means that a split-rated security may be
regarded by one NRSRO (but by definition not by all NRSROs or by an Adviser) as
having predominately speculative characteristics with respect to the issuer's
capacity to pay interest and repay principal, and accordingly subject to a
greater risk of default. The prices of split-rated securities, in the view of
one but not all NRSROs, may be more sensitive than securities without a
split-rating to negative developments, such as a decline in the issuer's
revenues or a general economic downturn.
CORPORATE LOANS
The Fund may invest up to 20% of its Managed Assets in other debt
instruments including Corporate loans. Corporate loans, as with the other types
of securities in which the Fund may invest, are counted for purposes of various
other limitations described in this Statement of Additional Information,
including the limitation on investing no more than 10% of the Fund's Managed
Assets in illiquid securities, to the extent such corporate loans are deemed to
be illiquid.
Corporate loans, like most other debt obligations, are subject to the risk
of default. Default in the payment of interest or principal on a corporate loan
results in a reduction in income to the Fund, a reduction in the value of the
corporate loan and a decrease in the Fund's net asset value. This decrease in
the Fund's net asset value would be magnified by the Fund's use of leverage. The
risk of default increases in the event of an economic downturn or a substantial
increase in interest rates. An increased risk of default could result in a
decline in the value of corporate loans and in the Fund's net asset value.
The Fund may acquire corporate loans of borrowers that are experiencing, or
are more likely to experience, financial difficulty, including corporate loans
of borrowers that have filed for bankruptcy protection. Borrowers may have
corporate loans or other outstanding debt obligations that are rated below
investment grade or that are unrated but of comparable quality to such
securities. Debt securities rated below investment grade are viewed by the
rating agencies as speculative and are commonly known as junk bonds.
Corporate loans may not be rated at the time that the Fund purchases them.
If a corporate loan is rated at the time of purchase, the Adviser responsible
for the investment may consider the rating when evaluating the corporate loan
but the Adviser responsible for the investment may not view ratings as a
determinative factor in investment decisions. As a result, the Fund is more
dependent on an Adviser's credit analysis abilities. Because of the protective
terms of most corporate loans, it is possible that the Fund is more likely to
recover more of its investment in a defaulted corporate loan than would be the
case for most other types of defaulted debt securities. The values of corporate
loans of borrowers that have filed for bankruptcy protection or that are
experiencing payment difficulty will reflect, among other things, the assessment
of the Adviser responsible for the investment of the likelihood that the Fund
ultimately will receive repayment of the principal amount of such corporate
loans, the likely duration, if any, of a lapse in the scheduled payment of
interest and repayment of principal and prevailing interest rates.
In the case of collateralized corporate loans, there is no assurance that
sale of the collateral would raise enough cash to satisfy the borrower's payment
obligation or that the collateral can or will be liquidated. In the event of
bankruptcy, liquidation may not occur and the court may not give lenders the
full benefit of their senior positions. If the terms of a corporate loan do not
require the borrower to pledge additional collateral in the event of a decline
in the value of the original collateral, the Fund will be exposed to the risk
that the value of the collateral will not at all times equal or exceed the
amount of the borrower's obligations under the corporate loan. To the extent
that a corporate loan is collateralized by stock in the borrower or its
subsidiaries, such stock may lose all of its value in the event of bankruptcy of
the borrower. Uncollateralized corporate loans involve a greater risk of loss.
Some corporate loans in which the Fund may invest are subject to the risk that a
court, pursuant to fraudulent conveyance or other similar laws, could
subordinate such corporate loans to presently existing or future indebtedness of
the borrower or take other action detrimental to the holders of corporate loans,
such as the Fund, including, under certain circumstances, invalidating such
corporate loans. Lenders commonly have certain obligations pursuant to the loan
agreement, which may include the obligation to make additional loans or release
collateral in certain circumstances.
Information about most corporate loans is less readily available and
reliable than is the case for many other types of securities. In addition, there
is no minimum rating or other independent evaluation of a borrower or its
securities limiting the Fund's investments. The Adviser responsible for the
investment may rely exclusively or primarily on its own evaluation of borrower
credit quality in selecting corporate loans for purchase. As a result, the Fund
is particularly dependent on the analytical abilities of the Adviser responsible
for the investment.
No active trading market currently exists for many corporate loans.
Corporate loans are thus relatively illiquid. Liquidity relates to the ability
of the Fund to sell an investment in a timely manner at a price approximately
equal to its value on the Fund's books. The illiquidity of corporate loans may
impair the Fund's ability to realize the full value of its assets in the event
of a voluntary or involuntary liquidation of such assets. Because of the lack of
an active trading market, illiquid securities are also difficult to value and
prices provided by external pricing services may not reflect the true fair value
of the securities. However, many corporate loans are of a large principal amount
and are held by a large number of financial institutions. It is possible that
this should enhance their liquidity. In addition, in recent years the number of
institutional investors purchasing corporate loans has increased. The risks of
illiquidity are particularly important when the Fund's operations require cash,
and may in certain circumstances require that the Fund borrow to meet short-term
cash requirements. To the extent that a secondary market does exist for certain
corporate loans, the market may be subject to irregular trading activity, wide
bid/ask spreads and extended trade settlement periods. The market for corporate
loans could be disrupted in the event of an economic downturn or a substantial
increase or decrease in interest rates. This could result in increased
volatility in the market and in the Fund's net asset value and market price per
share.
If legislation or state or federal regulators impose additional
requirements or restrictions on the ability of financial institutions to make
loans that are considered highly leveraged transactions, the availability of
corporate loans for investment by the Fund may be adversely affected. In
addition, such requirements or restrictions could reduce or eliminate sources of
financing for certain borrowers. This would increase the risk of default. If
legislation or federal or state regulators require financial institutions to
dispose of corporate loans that are considered highly leveraged transactions or
subject such corporate loans to increased regulatory scrutiny, financial
institutions may determine to sell such corporate loans. Such sales could result
in prices that, in the opinion of the Adviser, do not represent fair value. If
the Fund attempts to sell a corporate loan at a time when a financial
institution is engaging in such a sale, the price the Fund could get for the
corporate loan may be adversely affected.
Some corporate loans are subject to the risk that a court, pursuant to
fraudulent conveyance or other similar laws, could subordinate the corporate
loans to presently existing or future indebtedness of the borrower or take other
action detrimental to lenders. Such court action could under certain
circumstances include invalidation of corporate loans. Any lender, which could
include the Fund, is subject to the risk that a court could find the lender
liable for damages in a claim by a borrower arising under the common laws of
tort or contracts or anti-fraud provisions of certain securities laws for
actions taken or omitted to be taken by the lenders under the relevant terms of
a loan agreement or in connection with actions with respect to the collateral
underlying in the corporate loan.
The Fund may purchase participations in corporate loans. By purchasing a
participation interest in a loan, the Fund acquires some or all of the interest
of a bank or other financial institution in a loan to a corporate borrower.
Under a participation, the Fund generally will have rights that are more limited
than the rights of lenders or of persons who acquire a corporate loan by
assignment. In a participation, the Fund typically has a contractual
relationship with the lender selling the participation, but not with the
borrower. As a result, the Fund assumes the credit risk of the lender selling
the participation in addition to the credit risk of the borrower. In the event
of insolvency of the lender selling the participation, the Fund may be treated
as a general creditor of the lender and may not have a senior claim to the
lenders' interest in the corporate loan. A lender selling a participation and
other persons interpositioned between the lender and the Fund with respect to
participations will likely conduct their principal business activities in the
banking, finance and financial services industries.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may buy and sell securities on a when-issued or delayed delivery
basis, making payment or taking delivery at a later date, normally within 15-45
days of the trade date. On such transactions the payment obligation and the
interest rate are fixed at the time the buyer enters into the commitment.
Beginning on the date the Fund enters into a commitment to purchase securities
on a when-issued or delayed delivery basis, the Fund is required under rules of
the Commission to maintain in a separate account liquid assets, consisting of
cash, cash equivalents or liquid securities having a market value at all times
of at least equal to the amount of the commitment. Income generated by any such
assets which provide taxable income for federal income tax purposes is
includable in the taxable income of the Fund. The Fund may enter into contracts
to purchase securities on a forward basis (i.e., where settlement will occur
more than 60 days from the date of the transaction) only to the extent that the
Fund specifically collateralizes such obligations with a security that is
expected to be called or mature within sixty days before or after the settlement
date of the forward transaction. The commitment to purchase securities on a
when-issued, delayed delivery or forward basis may involve an element of risk
because no interest accrues on the bonds prior to settlement and at the time of
delivery the market value may be less than cost.
REPURCHASE AGREEMENTS
As temporary investments, the Fund may invest in repurchase agreements. A
repurchase agreement is a contractual agreement whereby the seller of securities
(U.S. Government securities or municipal bonds) agrees to repurchase the same
security at a specified price on a future date agreed upon by the parties. The
agreed-upon repurchase price determines the yield during the Fund's holding
period. Repurchase agreements are considered to be loans collateralized by the
underlying security that is the subject of the repurchase contract. Income
generated from transactions in repurchase agreements will be taxable. See "Tax
Matters" for information relating to the allocation of taxable income between
Common Shares and FundPreferred shares, if any. The Fund will only enter into
repurchase agreements with registered securities dealers or domestic banks that,
in the opinion of an Adviser, present minimal credit risk. The risk to the Fund
is limited to the ability of the issuer to pay the agreed-upon repurchase price
on the delivery date; however, although the value of the underlying collateral
at the time the transaction is entered into always equals or exceeds the
agreed-upon repurchase price, if the value of the collateral declines there is a
risk of loss of both principal and interest. In the event of default, the
collateral may be sold but the Fund might incur a loss if the value of the
collateral declines, and might incur disposition costs or experience delays in
connection with liquidating the collateral. In addition, if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization upon the collateral by the Fund may be delayed or limited. The
Adviser responsible for the investment will monitor the value of the collateral
at the time the transaction is entered into and at all times subsequent during
the term of the repurchase agreement in an effort to determine that such value
always equals or exceeds the agreed-upon repurchase price. In the event the
value of the collateral declines below the repurchase price, Spectrum will
demand additional collateral from the issuer to increase the value of the
collateral to at least that of the repurchase price, including interest.
ZERO COUPON BONDS AND PAYMENT-IN-KIND SECURITIES
Zero-coupon securities are debt obligations that do not entitle the holder to
any periodic payments of interest either for the entire life of the obligation
or for an initial period after the issuance of the obligations. When held to its
maturity, its return comes from the difference between the purchase price and
its maturity value. Payment-in-kind securities ("PIKs") pay dividends or
interest in the form of additional securities of the issuer, rather than in
cash. Each of these instruments is typically issued and traded at a deep
discount from its face amount. The amount of the discount varies depending on
such factors as the time remaining until maturity of the securities, prevailing
interest rates, the liquidity of the security and the perceived credit quality
of the issuer. The market prices of zero-coupon bonds and PIKs generally are
more volatile than the market prices of debt instruments that pay interest
currently and in cash and are likely to respond to changes in interest rates to
a greater degree than do other types of securities having similar maturities and
credit quality. In order to satisfy a requirement for qualification as a
"regulated investment company" under the Internal Revenue Code of 1986, as
amended (the "Code"), an investment company, such as the Fund, must distribute
each year at least 90% of its net investment income, including the original
issue discount accrued on zero-coupon bonds and PIKs. Because the Fund will not
on a current basis receive cash payments from the issuer of these securities in
respect of any accrued original issue discount, in some years the Fund may have
to distribute cash obtained from selling other portfolio holdings of the Fund in
order to avoid unfavorable tax consequences. In some circumstances, such sales
might be necessary in order to satisfy cash distribution requirements even
though investment considerations might otherwise make it undesirable for the
Fund to sell securities at such time. Under many market conditions, investments
in zero-coupon bonds and PIKs may be illiquid, making it difficult for the Fund
to dispose of them or determine their current value.
LENDING OF PORTFOLIO SECURITIES
The Fund may lend its portfolio securities to broker-dealers and banks. Any
such loan must be continuously secured by collateral in cash or cash equivalents
maintained on a current basis in an amount at least equal to the market value of
the securities loaned by the Fund. The Fund would continue to receive the
equivalent of the interest or dividends paid by the issuer on the securities
loaned, and would also receive an additional return that may be in the form of a
fixed fee or a percentage of the collateral. The Fund may pay reasonable fees to
persons unaffiliated with the Fund for services in arranging these loans. The
Fund would have the right to call the loan and obtain the securities loaned at
any time on notice of not more than five business days. The Fund would not have
the right to vote the securities during the existence of the loan but would call
the loan to permit voting of the securities, if, in an Adviser's judgment, a
material event requiring a shareholder vote would otherwise occur before the
loan was repaid. In the event of bankruptcy or other default of the borrower,
the Fund could experience both delays in liquidating the loan collateral or
recovering the loaned securities and losses, including (a) possible decline in
the value of the collateral or in the value of the securities loaned during the
period while the Fund seeks to enforce its rights thereto, (b) possible
subnormal levels of income and lack of access to income during this period, and
(c) expenses of enforcing its rights.
PORTFOLIO TRADING AND TURNOVER RATE
Portfolio trading may be undertaken to accomplish the investment objectives
of the Fund in relation to actual and anticipated movements in interest rates.
In addition, a security may be sold and another of comparable quality purchased
at approximately the same time to take advantage of what an Adviser believes to
be a temporary price disparity between the two securities. Temporary price
disparities between two comparable securities may result from supply and demand
imbalances where, for example, a temporary oversupply of certain securities may
cause a temporarily low price for such securities, as compared with other
securities of like quality and characteristics.
The Fund may also engage to a limited extent in short-term trading
consistent with its investment objectives. Securities may be sold in
anticipation of a market decline (a rise in interest rates) or purchased in
anticipation of a market rise (a decline in interest rates) and later sold, but
the Fund will not engage in trading solely to recognize a gain. Subject to the
foregoing, the Fund will attempt to achieve its investment objectives by prudent
selection of preferred securities with a view to holding them for investment.
While there can be no assurance thereof, the Fund anticipates that its annual
portfolio turnover rate will generally not exceed 75%. However, the rate of
turnover will not be a limiting factor when the Fund deems it desirable to sell
or purchase securities. Therefore, depending upon market conditions, the annual
portfolio turnover rate of the Fund may exceed 75% in particular years.
HEDGING TRANSACTIONS
As a non-fundamental policy that can be changed by the Board of Trustees,
the use of derivatives and other transactions for purposes of hedging the
portfolio will be restricted to reducing the portfolio's exposure to the risk of
increases in interest rates, common stock risk, high yield credit risk and
foreign currency exchange risk. The specific derivative instruments to be used,
or other transactions to be entered into, for hedging purposes may include (i)
options and futures contracts, including options on common stock, stock indexes,
bonds and bond indexes, stock index futures, bond index futures and related
instruments, (ii) short sales of securities that the Fund owns or has the right
to acquire through the conversion of securities, (iii) structured notes and
similar instruments, (iv) credit derivative instruments, and (v) currency
exchange transactions. Some, but not all, of the derivative instruments may be
traded and listed on an exchange. The positions in derivatives will be
marked-to-market daily at the closing price established on the relevant exchange
or at a fair value. Except for investing in synthetic convertible securities,
the Fund will use derivatives or other transactions described in this paragraph
solely for purposes of hedging the Fund's portfolio risks.
10
There may be an imperfect correlation between changes in the value of
the Fund's portfolio holdings and hedging positions entered into by the Fund,
which may prevent the Fund from achieving the intended hedge or expose the Fund
to risk of loss. In addition, the Fund's success in using hedging instruments is
subject to an Adviser's ability to predict correctly changes in the
relationships of such hedge instruments to the Fund's portfolio holdings, and
there can be no assurance that an Adviser's judgment in this respect will be
accurate. Consequently, the use of hedging transactions might result in a poorer
overall performance for the Fund, whether or not adjusted for risk, than if the
Fund had not hedged its portfolio holdings. In addition, there can be no
assurance that the Fund will enter into hedging or other transactions at times
or under circumstances in which it would be advisable to do so. See
"Risks--Hedging Risks."
Options on Securities. In order to hedge against adverse market shifts,
the Fund may purchase put and call options on stock, bonds or other securities.
In addition, the Fund may seek to hedge a portion of its portfolio investments
through writing (i.e., selling) covered put and call options. A put option
embodies the right of its purchaser to compel the writer of the option to
purchase from the option holder an underlying security or its equivalent at a
specified price at any time during the option period. In contrast, a call option
gives the purchaser the right to buy the underlying security covered by the
option or its equivalent from the writer of the option at the stated exercise
price.
As a holder of a put option, the Fund will have the right to sell the
securities underlying the option and as the holder of a call option, the Fund
will have the right to purchase the securities underlying the option, in each
case at their exercise price at any time prior to the option's expiration date.
The Fund may choose to exercise the options it holds, permit them to expire or
terminate them prior to their expiration by entering into closing sale
transactions. In entering into a closing sale transaction, the Fund would sell
an option of the same series as the one it has purchased. The ability of the
Fund to enter into a closing sale transaction with respect to options purchased
and to enter into a closing purchase transaction with respect to options sold
depends on the existence of a liquid secondary market. There can be no assurance
that a closing purchase or sale transaction can be effected when the Fund so
desires. The Fund's ability to terminate option positions established in the
over-the-counter market may be more limited than in the case of exchange-traded
options and may also involve the risk that securities dealers participating in
such transactions would fail to meet their obligations to the Fund.
In purchasing a put option, the Fund will seek to benefit from a
decline in the market price of the underlying security, while in purchasing a
call option, the Fund will seek to benefit from an increase in the market price
of the underlying security. If an option purchased is not sold or exercised when
it has remaining value, or if the market price of the underlying security
remains equal to or greater than the exercise price, in the case of a put, or
remains equal to or below the exercise price, in the case of a call, during the
life of the option, the option will expire worthless. For the purchase of an
option to be profitable, the market price of the underlying security must
decline sufficiently below the exercise price, in the case of a put, and must
increase sufficiently above the exercise price, in the case of a call, to cover
the premium and transaction costs. Because option premiums paid by the Fund are
small in relation to the market value of the instruments underlying the options,
buying options can result in additional amounts of leverage to the Fund. The
leverage caused by trading in options could cause the Fund's net asset value to
be subject to more frequent and wider fluctuation than would be the case if the
Fund did not invest in options.
The Fund will receive a premium when it writes put and call options,
which increases the Fund's return on the underlying security in the event the
option expires unexercised or is closed out at a profit. By writing a call, the
Fund will limit its opportunity to profit from an increase in the market value
of the underlying security above the exercise price of the option for as long as
the Fund's obligation as the writer of the option continues. Upon the exercise
of a put option written by the Fund, the Fund may suffer an economic loss equal
to the difference between the price at which the Fund is required to purchase
the underlying security and its market value at the time of the option exercise,
less the premium received for writing the option. Upon the exercise of a call
option written by the Fund, the Fund may suffer an economic loss equal to an
amount not less than the excess of the security's market value at the time of
the option exercise over the Fund's acquisition cost of the security, less the
sum of the premium received for writing the option and the difference, if any,
between the call price paid to the Fund and the Fund's acquisition cost of the
security. Thus, in some periods the Fund might receive less total return and in
other periods greater total return from its hedged positions than it would have
received from its underlying securities unhedged.
Options on Stock and Bond Indexes. The Fund may purchase put and call
options on domestic stock and bond indexes to hedge against risks of market-wide
price movements affecting its assets. In addition, the Fund may write covered
put and call options on stock and bond indexes. A stock or bond index measures
the movement of a certain group of stocks or bonds by assigning relative values
to the stocks or bonds included in the index. Options on a stock or bond index
are similar to options on securities. Because no underlying security can be
delivered, however, the option represents the holder's right to obtain from the
writer, in cash, a fixed multiple of the amount by which the exercise price
exceeds (in the case of a put) or is less than (in the case of a call) the
closing value of the underlying index on the exercise date. The advisability of
using stock or bond index options to hedge against the risk of market-wide
movements will depend on the extent of diversification of the Fund's investments
and the sensitivity of its investments to factors influencing the underlying
index. The effectiveness of purchasing or writing stock or bond index options as
a hedging technique will depend upon the extent to which price movements in the
Fund's investments correlate with price movements in the stock or bond index
selected. In addition, successful use by the Fund of options on stock or bond
indexes will be subject to the ability of an Adviser to predict correctly
changes in the relationship of the underlying index to the Fund's portfolio
holdings. No assurance can be given that the Adviser's judgment in this respect
will be correct.
When the Fund writes an option on a stock or bond index, it will
establish a segregated account with its custodian in which the Fund will deposit
liquid securities in an amount equal to the market value of the option, and will
maintain the account while the option is open.
Stock and Bond Index Futures Contracts. The Fund may purchase and sell
stock index futures as a hedge against movements in the equity markets. Stock
and bond index futures contracts are agreements in which one party agrees to
deliver to the other an amount of cash equal to a specific dollar amount times
the difference between the value of a specific stock or bond index at the close
of the last trading day of the contract and the price at which the agreement is
made. No physical delivery of securities is made.
For example, if an Adviser expects general stock or bond market prices
to decline, it might sell a futures contract on a particular stock or bond
index. If that index does in fact decline, the value of some or all of the
securities in the fund's portfolio may also be expected to decline, but that
decrease would be offset in part by the increase in the value of the Fund's
position in such futures contract. If, on the other hand, an Adviser expects
general stock or bond market prices to rise, it might purchase a stock or bond
index futures contract as a hedge against an increase in prices of particular
securities it wants ultimately to buy. If in fact the stock or bond index does
rise, the price of the particular securities intended to be purchased may also
increase, but that increase would be offset in part by the increase in the value
of the Fund's futures contract resulting from the increase in the index. The
Fund may purchase futures contracts on a stock or bond index to enable an
Adviser to gain immediate exposure to the underlying securities market pending
the investment in individual securities of the portion of the Fund's portfolio
allocated to that Adviser.
Under regulations of the Commodity Futures Trading Commission ("CFTC")
currently in effect, which may change from time to time, with respect to futures
contracts purchased by the Fund, the Fund will set aside in a segregated account
liquid securities with a value at least equal to the value of instruments
underlying such futures contracts less the amount of initial margin on deposit
for such contracts. The current view of the staff of the Securities and Exchange
Commission is that the Fund's long and short positions in futures contracts must
be collateralized with cash or certain liquid assets held in a segregated
account or "covered" in order to counter the impact of any potential leveraging.
Parties to a futures contract must make "initial margin" deposits to
secure performance of the contract. There are also requirements to make
"variation margin" deposits from time to time as the value of the futures
contract fluctuates. The Fund is not a commodity pool and, in compliance with
CFTC regulations currently in effect, may enter into any futures contracts and
related options for "bona fide hedging" purposes and, in addition, for other
purposes, provided that aggregate initial margin and premiums required to
establish positions other than those considered by the CFTC to be "bona fide
hedging" will not exceed 0.5% of the Fund's Managed Assets, after taking into
account unrealized profits and unrealized losses on any such contracts. The Fund
reserves the right to engage in transactions involving futures and options
thereon to the extent allowed by CFTC regulations in effect from time to time
and in accordance with the Fund's policies. In addition, certain provisions of
the Code may limit the extent to which the Fund may enter into futures contracts
or engage in options transactions. See "Tax Matters."
11
The potential loss related to the purchase of an option on a futures
contract is limited to the premium paid for the option (plus transaction costs).
With respect to options purchased by the Fund, there are no daily cash
payments made by the Fund to reflect changes in the value of the underlying
contract; however, the value of the option does change daily and that change
would be reflected in the net asset value of the Fund.
Risks Associated with Futures Contracts and Options on Futures
Contracts. There are several risks associated with the use of futures contracts
and futures options. A purchase or sale of a futures contract may result in
losses in excess of the amount invested in the futures contract. While the Fund
may enter into futures contracts and options on futures contracts for hedging
purposes, the use of futures contracts and options on futures contracts might
result in a poorer overall performance for the Fund than if it had not engaged
in any such transactions. If, for example, the Fund had insufficient cash, it
might have to sell a portion of its underlying portfolio of securities in order
to meet daily variation margin requirements on its futures contracts or options
on futures contracts at a time when it might be disadvantageous to do so. There
may be an imperfect correlation between the Fund's portfolio holdings and
futures contracts or options on futures contracts entered into by the Fund,
which may prevent the Fund from achieving the intended hedge or expose the Fund
to risk of loss. The degree of imperfection of correlation depends on
circumstances such as: variations in speculative market demand for futures,
futures options and the related securities, including technical influences in
futures and futures options trading and differences between the securities
markets and the securities underlying the standard contracts available for
trading. Futures prices are affected by many factors, such as current and
anticipated short-term interest rates, changes in volatility of the underlying
instrument and the time remaining until the expiration of the contract. Further,
the Fund's use of futures contracts and options on futures contracts to reduce
risk involves costs and will be subject to an Adviser's ability to predict
correctly changes in interest rate relationships or other factors. A decision as
to whether, when and how to use futures contracts involves the exercise of skill
and judgment, and even a well-conceived transaction may be unsuccessful to some
degree because of market behavior or unexpected stock price or interest rate
trends. No assurance can be given that Spectrum's judgment in this respect will
be correct.
Futures exchanges may limit the amount of fluctuation permitted in
certain futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached in a futures
contract subject to the limit, no more trades may be made on that day at a price
beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses because the
limit may work to prevent the liquidation of unfavorable positions. For example,
futures prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures contracts to
substantial losses. Stock index futures contracts are not normally subject to
such daily price change limitations.
The Fund may invest in other options. An option is an instrument that
gives the holder of the instrument the right, but not the obligation, to buy or
sell a predetermined number of specific securities (i.e. preferred stocks,
common stocks or bonds) at a stated price within the expiration period of the
instrument, which is generally less than 12 months from its issuance. If the
right is not exercised after a specified period but prior to the expiration, the
option expires. Both put and call options may be used by the Fund.
Short Sales. The Fund may make short sales of securities if, at all
times when a short position is open, the Fund owns at least an equal amount of
such securities or securities convertible into or exchangeable for, without
payment of any further consideration, securities of the same issue as, and equal
in amount to, the securities sold short. This technique is called selling short
"against the box."
In a short sale against the box, the Fund will not deliver from its
portfolio the securities sold and will not receive immediately the proceeds from
the short sale. Instead, the Fund will borrow the securities sold short from a
broker-dealer through which the short sale is executed and the broker-dealer
will deliver such securities, on behalf of the Fund, to the purchaser of such
securities. Such broker-dealer will be entitled to retain the proceeds from the
short sale until the Fund delivers to such broker-dealer the securities sold
short. In addition, the Fund will be required to pay the broker-dealer the
amount of any dividends paid on shares sold short. Finally, to secure its
obligation to deliver to such broker-dealer the securities sold short, the Fund
must deposit and continuously maintain in a separate account with its custodian
an equivalent amount of the securities sold short or securities convertible into
or exchangeable for such securities without the payment of additional
consideration. The Fund is said to have a short position in the securities sold
until it delivers to the broker-dealer the securities sold, at which time the
Fund will receive the proceeds of the sale. Because the Fund ordinarily will
want to continue to hold securities in its portfolio that are sold short, the
Fund will normally close out a short position by purchasing on the open market
and delivering to the broker-dealer an equal amount of the securities sold
short, rather than by delivering portfolio securities.
Short sales may protect the Fund against the risk of losses in the
value of its portfolio securities because any unrealized losses with respect to
such portfolio securities should be wholly or partially offset by a
corresponding gain in the short position. However, any potential gain in such
portfolio securities should be wholly or partially offset by a corresponding
loss in the short position. The extent to which such gains or losses are offset
will depend upon the amount of securities sold short relative to the amount the
Fund owns, either directly or indirectly, and, in the case where the Fund owns
convertible securities, changes in the conversion premium. The Fund will incur
transaction costs in connection with short sales.
In addition to enabling the Fund to hedge against market risk, short
sales may afford the Fund an opportunity to earn additional current income to
the extent the Fund is able to enter into arrangements with broker-dealers
through which the short sales are executed to receive income with respect to the
proceeds of the short sales during the period the Fund's short positions remain
open.
The Code imposes constructive sale treatment for federal income tax
purposes on certain hedging strategies with respect to appreciated financial
positions. Under these rules, taxpayers will recognize gain, but not loss, with
respect to securities if they enter into short sales or "offsetting notional
principal contracts" (as defined by the Code) with respect to, or futures or
forward contracts to deliver, the same or substantially identical property, or
if they enter into such transactions and then acquire the same or substantially
identical property. The Secretary of the Treasury is authorized to promulgate
regulations that will treat as constructive sales certain transactions that have
substantially the same effect as these transactions. See "Tax Matters."
Structured Notes. The Fund may utilize structured notes and similar
instruments for hedging purposes. Structured notes are privately negotiated debt
obligations where the principal and/or interest is determined by reference to
the performance of a benchmark asset, market or interest rate (an "embedded
index"), such as selected securities, an index of securities or specified
interest rates or the differential performance of two assets or markets. The
terms of such structured instruments normally provide that their principal
and/or interest payments are to be adjusted upwards or downwards (but not
ordinarily below zero) to reflect changes in the embedded index while the
structured instruments are outstanding. As a result, the interest and/or
principal payments that may be made on a structured product may vary widely,
depending on a variety of factors, including the volatility of the embedded
index and the effect of changes in the embedded index on principal and/or
interest payments. The rate of return on structured notes may be determined by
applying a multiplier to the performance or differential performance of the
referenced index(es) or other asset(s). Application of a multiplier involves
leverage that will serve to magnify the potential for gain and the risk of loss.
Credit Derivative Instruments. The Fund may purchase credit derivative
instruments for purposes of hedging the Fund's credit risk exposure to certain
issuers of securities that the Fund owns. For example, the Fund may enter into
credit swap default contracts for hedging purposes where the Fund would be the
buyer of such a default contract. The Fund would be entitled to receive the par
(or other agreed-upon) value of a referenced debt obligation from the
counterparty to the contract in the event of a default by a third party, such as
a U.S. or foreign corporate issuer, on the debt obligation. In return, the Fund
would pay to the counterparty a periodic stream of payments over the term of the
contract provided that no event of default has occurred. If no default occurs,
the Fund would have spent the stream of payments and received no benefit from
the contract.
Currency Exchange Transactions. The Fund may enter into currency
exchange transactions to hedge the Fund's exposure to foreign currency exchange
rate risk in the event the Fund invests in non-U.S. dollar denominated
securities of non-U.S. issuers as described in this Statement of Additional
Information. The Fund's currency transactions will be limited to portfolio
hedging involving portfolio positions. Portfolio hedging is the use of a forward
contract with respect to a portfolio security position denominated or quoted in
a particular currency. A forward contract is an agreement to purchase or sell a
specified currency at a specified future date (or within a specified time
period) and price set at the time of the contract. Forward contracts are usually
entered into with banks, foreign exchange dealers or broker-dealers, are not
exchange-traded, and are usually for less than one year, but may be renewed.
At the maturity of a forward contract to deliver a particular currency,
the Fund may either sell the portfolio security related to such contract and
make delivery of the currency, or it may retain the security and either acquire
the currency on the spot market or terminate its contractual obligation to
deliver the currency by purchasing an offsetting contract with the same currency
trader obligating it to purchase on the same maturity date the same amount of
the currency.
It is impossible to forecast with absolute precision the market value
of portfolio securities at the expiration of a forward contract. Accordingly, it
may be necessary for the Fund to purchase additional currency on the spot market
(and bear the expense of such purchase) if the market value of the security is
less than the amount of currency that the Fund is obligated to deliver and if a
decision is made to sell the security and make delivery of the currency.
Conversely, it may be necessary to sell on the spot market some of the currency
received upon the sale of the portfolio security if its market value exceeds the
amount of currency the Fund is obligated to deliver.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there has
been movement in forward contract prices. If the Fund engages in an offsetting
transaction, it may subsequently enter into a new forward contract to sell the
currency. Should forward prices decline during the period between the Fund's
entering into a forward contract for the sale of a currency and the date it
enters into an offsetting contract for the purchase of the currency, the Fund
will realize a gain to the extent the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, the Fund will suffer a loss to the extent the price of the
currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell. A default on the contract would deprive the Fund of unrealized
profits or force the Fund to cover its commitments for purchase or sale of
currency, if any, at the current market price.
Hedging against a decline in the value of a currency does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Such transactions also preclude the
opportunity for gain if the value of the hedged currency should rise. Moreover,
it may not be possible for the Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to sell the currency
at a price above the devaluation level it anticipates. The cost to the Fund of
engaging in currency exchange transactions varies with such factors as the
currency involved, the length of the contract period, and prevailing market
conditions. Since currency exchange transactions are usually conducted on a
principal basis, no fees or commissions are involved.
12
In the future, the Fund may invest in relatively new instruments
without a significant trading history. As a result, there can be no assurance
that an active secondary market will develop or continue to exist.
INTEREST RATE TRANSACTIONS
In connection with the Fund's likely use of leverage through its sale
of FundPreferred shares or Borrowings, the Fund, if market conditions are deemed
favorable, likely will enter into interest rate swap or cap transactions to
attempt to protect itself from increasing dividend or interest expenses on its
FundPreferred shares or Borrowings. Interest rate swaps involve the Fund's
agreement with the swap counterparty to pay a fixed rate payment in exchange for
the counterparty agreeing to pay the Fund a payment at a variable rate that is
expected to approximate the rate on the Fund's variable rate payment obligation
on FundPreferred shares or any variable rate Borrowings. The payment obligations
would be based on the notional amount of the swap. The Fund may use an interest
rate cap, which would require it to pay a premium to the cap counterparty and
would entitle it, to the extent that a specified variable rate index exceeds a
predetermined fixed rate, to receive from the counterparty payment of the
difference based on the notional amount. The Fund would use interest rate swaps
or caps only with the intent to reduce or eliminate the risk that an increase in
short-term interest rates could have on Common Share net earnings as a result of
leverage.
The Fund will usually enter into swaps or caps on a net basis; that is,
the two payment streams will be netted out in a cash settlement on the payment
date or dates specified in the instrument, with the Fund receiving or paying, as
the case may be, only the net amount of the two payments. The Fund intends to
maintain in a segregated account with its custodian cash or liquid securities
having a value at least equal to the Fund's net payment obligations under any
swap transaction, marked-to-market daily.
The use of interest rate swaps and caps is a highly specialized
activity that involves investment techniques and risks different from those
associated with ordinary portfolio security transactions. Depending on the state
of interest rates in general, the Fund's use of interest rate swaps or caps
could enhance or harm the overall performance on the Common Shares. To the
extent there is a decline in interest rates, the value of the interest rate swap
or cap could decline, and could result in a decline in the net asset value of
the Common Shares. In addition, if short-term interest rates are lower than the
Fund's fixed rate of payment on the interest rate swap, the swap will reduce
Common Share net earnings. If, on the other hand, short-term interest rates are
higher than the fixed rate of payment on the interest rate swap, the swap will
enhance Common Share net earnings. Buying interest rate caps could enhance the
performance of the Common Shares by providing a maximum leverage expense. Buying
interest rate caps could also decrease the net earnings of the Common Shares in
the event that the premium paid by the Fund to the counterparty exceeds the
additional amount the Fund would have been required to pay had it not entered
into the cap agreement. The Fund has no current intention of selling an interest
rate swap or cap. The Fund will not enter into interest rate swap or cap
transactions in an aggregate notional amount that exceeds the outstanding amount
of the Fund's leverage.
Interest rate swaps and caps do not involve the delivery of securities
or other underlying assets or principal. Accordingly, the risk of loss with
respect to interest rate swaps is limited to
13
the net amount of interest payments that the Fund is contractually obligated to
make. If the counterparty defaults, the Fund would not be able to use the
anticipated net receipts under the swap or cap to offset the dividend payments
on the FundPreferred shares or interest payments on Borrowings. Depending on
whether the Fund would be entitled to receive net payments from the counterparty
on the swap or cap, which in turn would depend on the general state of
short-term interest rates at that point in time, such a default could negatively
impact the performance of the Common Shares. Although this will not guarantee
that the counterparty does not default, the Fund will not enter into an interest
rate swap or cap transaction with any counter-party that NIAC believes does not
have the financial resources to honor its obligation under the interest rate
swap or cap transaction. Further, NIAC will continually monitor the financial
stability of a counterparty to an interest rate swap or cap transaction in an
effort to proactively protect the Fund's investments. In addition, at the time
the interest rate swap or cap transaction reaches its scheduled termination
date, there is a risk that the Fund would not be able to obtain a replacement
transaction or that the terms of the replacement would not be as favorable as on
the expiring transaction. If this occurs, it could have a negative impact on the
performance of the Fund's Common Shares.
The Fund may choose or be required to redeem some or all of the
FundPreferred shares or prepay any Borrowings. This redemption would likely
result in the Fund seeking to terminate early all or a portion of any swap or
cap transaction. Such early termination of a swap could result in termination
payment by or to the Fund. An early termination of a cap could result in a
termination payment to the Fund.
14
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The management of the Fund, including general supervision of the duties
performed for the Fund under the Management Agreement, is the responsibility of
the Board of Trustees of the Fund. The number of trustees of the Fund is
currently set at seven. None of the trustees who are not "interested persons" of
the Fund has ever been a director or employee of, or consultant to, Nuveen,
Spectrum or Froley, Revy or their affiliates. The Board of Trustees serve
indefinite terms of unlimited duration provided that a majority of Trustees
always has been elected by shareholders. The names and business addresses of the
trustees and officers of the Fund, 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.
[Enlarge/Download Table]
Positions and Offices Principal Occupations, Including Number of Portfolios
with the Fund and Year First Other Directorships Held, During in Fund Complex
Name and Address Birthdate Elected or Appointed Past Five Years Overseen by Trustee
---------------- --------- -------------------- --------------- -------------------
Trustee who is an "interested person" of the Fund:
Timothy R. Schwertfeger* 03/28/49 Chairman of the Board Chairman and Director (since 1996) 141
333 West Wacker Drive and Trustee, 2002 of Nuveen Investments, Inc.,
Chicago, IL 60606 Nuveen Investments, LLC, Nuveen
Advisory Corp. and Nuveen Institutional
Advisory Corp.
_______________________________
* Mr. Schwertfeger is an "interested person" of the Fund, as defined in the
Investment Company Act of 1940, because he is an officer and director of
Nuveen Investments, Inc., Nuveen Investments, LLC and NIAC.
15
[Enlarge/Download Table]
Positions and Offices Principal Occupations, Including Number of Portfolios
with the Fund and Year First Other Directorships Held, During in Fund Complex
Name and Address Birthdate Elected or Appointed Past Five Years Overseen by Trustee
---------------- --------- -------------------- --------------- -------------------
Chairman and Director (since 1997)
of Nuveen Asset Management Inc.;
Director (since 1996) of Institutional
Capital Corporation; Chairman and
Director (since 1999) of Rittenhouse
Financial Services Inc.; Chief
Executive Officer (since 1999) of
Nuveen Senior Loan Asset Management Inc.
Trustees who are not "interested persons" of the Fund:
James E. Bacon 2/27/31 Trustee, 2002 Treasurer, Cathedral of St. John the Devine 19
114 W. 47th St. (New York City) (since 1997); formerly,
New York, NY 10036 Director of Lone Star Industries, Inc.
(1992-1999); previously, Director and
Executive Vice President of U.S. Trust
Corporation and Trustee of United States
Trust Company of New York.
William E. Bennett 10/16/46 Trustee, 2002 Private Investor; previously, 19
55 W. Monroe President and Chief Executive
Chicago, IL 60606 Officer, Draper & Kramer, Inc.,
a private company that handles
mortgage banking, real estate
development, pension advisory
and real estate management
(1995 - 1998).
Jack B. Evans 10/22/48 Trustee, 2002 President, The Hall-Perrine 19
115 Third Street, S.E. Foundation, a private philanthropic
Cedar Rapids, IA 52401 corporation (since 1996); Director,
Alliant Energy; Director and Vice
Chairman, United Fire & Casualty
Company; Director, Federal Reserve
Bank of Chicago; formerly, President and
Chief Operating Officer, SCI
Financial Group, Inc., a regional
financial services firm.
William L. Kissick 7/29/32 Trustee, 2002 Professor Emeritus, School of Medicine 19
50 Johnson's Point and the Wharton School of Management and
Branford, CT 06405 former Chairman, Leonard Davis
Institute of Health Economics,
University of Pennsylvania; Adjunct Professor,
Health Policy and Management, Yale University.
Thomas E. Leafstrand 11/11/31 Trustee, 2002 Retired; previously, Vice President 19
412 W. Franklin in charge of Municipal Underwriting
Wheaton, IL 60187 and Dealer Sales at The Northern
Trust Company.
Sheila W. Wellington 2/24/32 Trustee, 2002 President (since 1993) of Catalyst (a 19
250 Park Avenue not-for-profit organization focusing
New York, NY 10003 on women's leadership development in
business and the professions).
** As a result of his ownership of securities issued by , the
parent company of , one of the principal underwriters
of the Fund, the Fund believes that may be deemed to be an interested
person for as long as serves as principal
underwriter to the Fund and, therefore, for purposes of this offering he is
being treated as an interested person. owns less than 1% of such
securities outstanding and has abstained from voting on any items involving the
appointment of as principal underwriter to the Fund.
16
[Enlarge/Download Table]
Positions and Offices Principal Occupations, Including Number of Portfolios
with the Fund and Year First Directorships Held, During in Fund Complex
Name and Address Birthdate Elected or Appointed Past Five Years Overseen by Officer
---------------- --------- -------------------- --------------- -------------------
Officers of the Fund:
Gifford R. Zimmerman 9/9/56 Chief Administrative Managing Director (since 2002), Assistant 141
333 West Wacker Drive Officer, 2002 Secretary and Associate General Counsel,
Chicago, IL 60606 formerly, Vice President and Assistant General
Counsel of Nuveen Investments, LLC; 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,
formerly, Vice President (since 1999) of Nuveen
Senior Loan Asset Management Inc.; Managing
` Director (since 2002), Assistant Secretary and
Associate General Counsel, formerly, Vice President
(since 2000), of Nuveen Asset Management Inc.; Vice
President and Assistant Secretary of Nuveen
Investment, Inc. (since 1994); Chartered Financial
Analyst.
Michael T. Atkinson 2/3/66 Vice President and Vice President (since January 2002), 141
333 West Wacker Drive Assistant Secretary, formerly Assistant Vice President
Chicago, IL 60606 2002 (since 2000), previously, Associate
of Nuveen Investments, LLC.
Peter H. D'Arrigo 11/28/67 Vice President and Vice President of Nuveen Investments, LLC 141
333 West Wacker Drive Treasurer, 2002 (since 1999), prior thereto, Assistant
Chicago, IL 60606 Vice President (from 1997); Vice
President and Treasurer (since 1999)
of Nuveen Senior Loan Asset Management
Inc.; Chartered Financial Analyst.
Susan M. DeSanto 9/8/54 Vice President, 2002 Vice President of Nuveen Advisory 141
333 West Wacker Drive Corp. (since 2001); previously, Vice
Chicago, IL 60606 President of Van Kampen Investment
Advisory Corp. (since 1998); prior
thereto, Assistant Vice President of
Van Kampen Investment Advisory Corp.
(since 1994).
Jessica R. Droeger 9/24/64 Vice President and Vice President (since January 2002) 141
333 West Wacker Drive Secretary, 2002 and Assistant General Counsel (since
Chicago, IL 60606 1998); formerly, Assistant Vice
President (since 1998), of Nuveen Investments,
LLC; Vice President (since May 2002), formerly
Assistant Vice President and Assistant
Secretary (since 1998), of Nuveen Advisory
Corp. and Nuveen Institutional Advisory Corp.
Lorna C. Ferguson 10/24/45 Vice President, 2002 Vice President of Nuveen Investments, LLC; 141
333 West Wacker Drive Vice President (since 1998) of Nuveen Advisory
Chicago, IL 60606 Corp. and Nuveen Institutional Advisory Corp.
William M. Fitzgerald 3/2/64 Vice President, 2002 Managing Director (since 2002) of Nuveen 141
333 West Wacker Drive Investments, LLC; Managing Director (since
Chicago, IL 60606 2001), formerly, Vice President of Nuveen
Advisory Corp. and Nuveen Institutional
Advisory Corp. (since 1995); Chartered
Financial Analyst.
Stephen D. Foy 5/31/54 Vice President and Vice President of Nuveen Investments, LLC 141
333 West Wacker Drive Controller, 2002 and (since 1998) Nuveen Investments, Inc.;
Chicago, IL 60606 Vice President (since 1999) of Nuveen Senior
Loan Asset Management Inc.; Certified Public
Accountant.
David J. Lamb 3/22/63 Vice President, 2002 Vice President (since 2000) of 141
333 West Wacker Drive Nuveen Investments, LLC, previously
Chicago, IL 60606 Assistant Vice President (since
1999); prior thereto, Associate
of Nuveen Investments, LLC; Certified
Public Accountant.
Tina M. Lazar 8/27/61 Vice President, 2002 Vice President (since 1999), previously 141
333 West Wacker Drive Assistant Vice President (since 1993)
Chicago, IL 60606 of Nuveen Investments, LLC.
Larry W. Martin 7/27/51 Vice President and Vice President, Assistant Secretary 141
333 West Wacker Drive Assistant Secretary, and Assistant General Counsel of
Chicago, IL 60606 2002 Nuveen Investments, LLC; Vice President and
Assistant Secretary of Nuveen Advisory
Corp. and Nuveen Institutional Advisory Corp.
17
[Enlarge/Download Table]
Positions and Offices Principal Occupations, Including Number of Portfolios
with the Fund and Year First Directorships Held, During in Fund Complex
Name and Address Birthdate Elected or Appointed Past Five Years Overseen by Officer
---------------- --------- -------------------- --------------- -------------------
Assistant Secretary of Nuveen Investments,
Inc. and (since 1997) of Nuveen Asset
Management Inc.; Vice President and
Assistant Secretary (since 1999) of Nuveen
Senior Loan Asset Management Inc.
Edward F. Neild, IV 7/7/65 Vice President, 2002 Managing Director (since 2002) 141
333 W. Wacker Drive of Nuveen Investments, LLC;
Chicago, IL 60606 Managing Director (since 1997), formerly
Vice President (since 1996) of Nuveen
Advisory Corp. and Nuveen Institutional
Advisory Corp.; Chartered Financial
Analyst.
The Board of Trustees has five standing committees: the executive
committee, the audit committee, the nominating and governance committee, the
dividend committee and the valuation committee. Because the Fund is newly
organized, none of the committees have met during the Fund's last fiscal year.
The executive committee met once prior to the commencement of the Fund's
operations.
William L. Kissick and Timothy R. Schwertfeger, Chair, serve as members
of the executive committee of the Board of Trustees of the Fund. The executive
committee, which meets between regular meetings of the Board of Trustees, is
authorized to exercise all of the powers of the Board of Trustees.
The audit committee monitors the accounting and reporting policies and
practices of the Funds, the quality and integrity of the financial statements of
the Funds, compliance by the Funds with legal and regulatory requirements and
the independence and performance of the external and internal auditors. The
members of the audit committee are James E. Bacon, William E. Bennett, Chair,
Jack B. Evans, William L. Kissick and Thomas E. Leafstrand.
The nominating and governance committee is responsible for Board
selection and tenure; selection and review of committees; and Board education
and operations. In addition, the committee monitors performance of legal counsel
and other service providers; periodically reviews and makes recommendations
about any appropriate changes to trustee compensation; and has the resources and
authority to discharge its responsibilities--including retaining special counsel
and other experts or consultants at the expense of the Fund. In the event of a
vacancy on the Board, the nominating and governance committee receives
suggestions from various sources as to suitable candidates. Suggestions should
be sent in writing to Lorna Ferguson, Vice President for Board Relations, Nuveen
Investments, LLC, 333 West Wacker Drive, Chicago, IL 60606. The nominating and
governance committee sets appropriate standards and requirements for nominations
for new trustees and reserves the right to interview all candidates and to make
18
the final selection of any new trustees. The members of the nominating and
governance committee are James E. Bacon, William E. Bennett, Jack B. Evans,
Chair, William L. Kissick, Thomas E. Leafstrand and Sheila W. Wellington.
The dividend committee is authorized to declare distributions on the
Fund's shares including, but not limited to, regular and special dividends,
capital gains and ordinary income distributions. The members of the dividend
committee are Timothy R. Schwertfeger, Chair, William E. Bennett and Thomas E.
Leafstrand.
The valuation committee oversees the Fund's pricing procedures
including, but not limited to, the review and approval of fair value pricing
determinations made by Nuveen's Valuation Group. The members of the valuation
committee are James E. Bacon, William E. Bennett and Thomas E. Leafstrand,
Chair.
The trustees of the Fund are also trustees of Nuveen open-end
funds and Nuveen closed-end funds managed by NIAC. Mr. Schwertfeger also is
a director or trustee, as the case may be, of _____ Nuveen open-end and ____
closed-end funds advised by Nuveen Advisory Corp. None of the independent
trustees, nor any of their immediate family members, has ever been a director,
officer, or employee of, or a consultant to, NIAC, Nuveen or their affiliates.
In addition, none of the independent trustees owns beneficially or of record,
any security of NIAC, Nuveen or any person (other than a registered investment
company) directly or indirectly controlling, controlled by or under common
control with NIAC or Nuveen.
The Common Shareholders of the Fund will elect trustees at the next
annual meeting of Common Shareholders, unless any FundPreferred shares are
outstanding at that time, in which event holders of FundPreferred shares,
voting as a separate class, will elect two trustees, and the remaining trustees
shall be elected by Common Shareholders and holders of FundPreferred shares,
voting together as a single class. Holders of FundPreferred shares will be
entitled to elect a majority of the Fund's trustees under certain circumstances.
See "Description of Shares - FundPreferred Shares - Voting Rights." The
following table sets forth the dollar range of equity securities beneficially
owned by each trustee as of December 31, 2002:
[Enlarge/Download Table]
Aggregate Dollar Range of Equity Securities in All
Dollar Range of Equity Securities Registered Investment Companies Overseen by Trustee
Name of Trustee in the Fund in Family of Investment Companies
--------------- ----------- ------------------------------
Timothy R. Schwertfeger $0 Over $100,000
James E. Bacon $0 $50,001 - $100,000
William E. Bennett $0 $10,001 - $50,000
Jack B. Evans $0 Over $100,000
William L. Kissick $0 $50,001 - $100,000
Thomas E. Leafstrand $0 Over $100,000
Sheila W. Wellington $0 Over $100,000
No trustee who is not an interested person of the Fund owns
beneficially or of record, any security of NIAC, Nuveen, Spectrum, Froley, Revy,
Salomon Smith Barney Inc. or any person (other than a registered investment
company) directly or indirectly controlling, controlled by or under common
control with NIAC, Nuveen, Spectrum, Froley, Revy or Salomon Smith Barney Inc.
The following table sets forth estimated compensation to be paid by the
Fund projected during the Fund's first full fiscal year after commencement of
operation. The Fund does not have a retirement or pension plan. The officers and
trustees affiliated with Nuveen serve without any compensation from the Fund.
The Fund has a deferred compensation plan (the "Plan") that
19
permits any trustee who is not an "interested person" of the Fund to elect to
defer receipt of all or a portion of his or her compensation as a trustee. The
deferred compensation of a participating trustee is credited to a book reserve
account of the Fund when the compensation would otherwise have been paid to the
trustee. The value of the trustee's deferral account at any time is equal to the
value that the account would have had if contributions to the account had been
invested and reinvested in shares of one or more of the eligible Nuveen funds.
At the time for commencing distributions from a trustee's deferral account, the
trustee may elect to receive distributions in a lump sum or over a period of
five years. The Fund will not be liable for any other fund's obligations to make
distributions under the Plan.
[Enlarge/Download Table]
Estimated Aggregate Total Compensation from Amount of Total Compensation
Name of Trustee Compensation from Fund* Fund and Fund Complex** That Has Been Deferred
--------------- ----------------------- ----------------------- ----------------------------
Timothy R. Schwertfeger $ 0 $ 0 $ 0
James E. Bacon
William E. Bennett
Jack B. Evans
William L. Kissick
Thomas E. Leafstrand
Sheila W. Wellington
____________________________
* Based on the estimated compensation to be earned by the independent trustees
for the period from inception through the end of the Fund's first full fiscal
year for services to the Fund.
**Based on the compensation paid to the trustees for the one year period ending
12/31/02 for services to the open-end and closed-end funds advised by NIAC.
The Fund has no employees. Its officers are compensated by NIAC or
Nuveen Investments, Inc.
INVESTMENT ADVISERS
NIAC, 333 West Wacker Drive, Chicago, Illinois 60606, will be
responsible for determining the Fund's overall investment strategy, including
portfolio allocations, and the use of leverage, hedging and interest rate
transactions. NIAC also is responsible for selection of the Fund's Subadvisers
and ongoing monitoring of the Subadvisers, managing the Fund's business affairs
and providing day-to-day administrative services to the Fund. For additional
information regarding the management services performed by NIAC, see "Management
of the Fund" in the Fund's Prospectus.
NIAC serves as the investment adviser to the Fund and is responsible
for managing the Fund's Managed Assets allocated to other fixed-income
securities.
NIAC, a registered investment adviser, is a wholly owned subsidiary of
Nuveen Investments, Inc. Founded in 1898, Nuveen Investments, Inc. brings over a
century of expertise to the municipal bond market. According to data from
Thomson Wealth Management, Nuveen Investments, Inc. is the leading sponsor of
exchange-traded funds as measured by number of funds (102) and fund assets under
20
management (approximately $40 billion) as of ___________, 2003. Overall, Nuveen
Investments, Inc. and its affiliates had approximately $80 billion in assets
under management as of December 31, 2002. Nuveen Investments, Inc. is a
publicly-traded company that is approximately 77% owned by The St. Paul
Companies, Inc. ("St. Paul"). St. Paul is a publicly-traded company located in
St. Paul, Minnesota, and is principally engaged in providing property-liability
insurance through subsidiaries.
Deepak Gulrajani, Gunther Stein and Lenny Mason are the portfolio
managers for NIAC responsible for investing the Fund's assets allocated to other
debt instruments. Mr. Gulrajani is a Vice President of NIAC. He also is the
Director, Fixed Income Strategies, and a Principal of Symphony Asset Management,
LLC ("Symphony"), a wholly owned subsidiary of Nuveen Investments, Inc. Prior to
joining Symphony in ____, Mr. Gulrajani was the Director of Fixed Income
Strategies at Barclays Global Investors. Mr. Stein is a Vice President of NIAC.
He also has been lead portfolio manager for high yield strategies at Symphony
since 1999. Prior to joining Symphony in ____, Mr. Stein was a high yield
portfolio manager at Wells Fargo. Mr. Mason is a Vice President of NIAC. He
also is a high yield portfolio manager at Symphony. Prior to joining Symphony
in ____, Mr. Mason was a Managing Director in FleetBoston's Technology and
Communications Group.
Nuveen Investments, Inc., through Nuveen Investments, LLC, provides
high-quality investment services that are essential to building balanced core
investment portfolios. Nuveen Investments, LLC serves financial advisors, and
their high-net-worth clients, as well as a growing number of institutional
clients. Nuveen Investments, Inc. today markets its capabilities under four
distinct brands: Nuveen, NWQ, Rittenhouse and Symphony. In total, the Company
and its affiliates had over $80 billion of assets under management as of
__________, 2003. Nuveen Investments, Inc. is listed on The New York Stock
Exchange and trades under the symbol "JNC."
Spectrum, 4 High Ridge Park, Stamford, Connecticut 06905, is a
Subadviser to the Fund and is responsible for managing the Fund's Managed Assets
allocated to preferred securities. As one of the leading managers of preferred
securities in the U.S., Spectrum specializes in the management of diversified
preferred security portfolios for institutional investors, including Fortune 500
companies, pension funds, insurance companies and foundations. Spectrum also
serves as a sub-adviser for a large offshore fund. Spectrum commenced operations
in 1987 and had approximately $6.2 billion in assets under management as of
January 31, 2003.
Spectrum is an independently managed wholly owned subsidiary of
Principal Global Investors, LLC, which is part of Principal Financial Group
Inc., a publicly traded, diversified, insurance and financial services company.
Collectively, subsidiaries and affiliates of Principal Global Investors, LLC
managed over $__ billion in combined assets worldwide as of __________, 2003. As
a subsidiary of Principal Global Investors, LLC, Spectrum also can take
advantage of Principal's extensive staff of internal credit analysts.
A team of Spectrum professionals led by Mark A. Lieb, Bernard M.
Sussman and L. Phillip Jacoby, IV is responsible for investing the portion of
the Fund's assets allocated to preferred securities.
Mr. Lieb is an Executive Director and the Chief Financial Officer of
Spectrum. Mr. Lieb is responsible for business development of Spectrum. Prior to
founding Spectrum in 1987, Mr. Lieb was a founder, director and partner of DBL
Preferred Management, Inc., a wholly owned corporate cash management subsidiary
of Drexel Burnham Lambert, Inc. Mr. Lieb was instrumental in the formation and
continual development of all aspects of DBL Preferred Management, Inc.,
including the daily management of preferred stock portfolio for institutional
clients, general hedging strategies, and market strategies employed by the firm.
Mr. Lieb's prior employment included the development of the preferred stock
trading desk at Mosley Hallgarten & Estabrook. Mr. Lieb has a B.A. in economics
from Central Connecticut State College and an M.B.A. in finance from the
University of Hartford.
Mr. Sussman is an Executive Director and the Chief Investment Officer
of Spectrum and is Chairman of Spectrum's Investment Committee. Prior to joining
Spectrum in 1995, Mr. Sussman was employed by Goldman Sachs & Co. for nearly 18
years. A general partner and head of the Preferred Stock Department, he was in
charge of sales, trading and underwriting for all preferred products and was
instrumental in the development of the hybrid (MIPS) market. Mr. Sussman was a
limited partner at Goldman Sachs from December 1994 through November 1996. He
has a B.S. in industrial relations and an M.B.A. in finance from Cornell
University.
Mr. Jacoby is a Senior Vice President of Spectrum. He joined Spectrum
in 1995 as a Portfolio Manager. Previously, Mr. Jacoby worked as a senior
investment officer at USL Capital Corporation (a subsidiary of Ford Motor
Corporation) and was a co-manager of a $600 million preferred stock portfolio.
Mr. Jacoby has a B.S. in finance from Boston University.
Froley, Revy, 10900 Wilshire Boulevard, Los Angeles, California 90024,
is a Subadviser to the Fund and is responsible for managing the Fund's Managed
Assets allocated to convertible securities. Froley, Revy specializes in the
management of convertible securities. Froley, Revy commenced operations in 1975
and had approximately $2 billion in assets under management as of
January 31, 2003.
Froley, Revy is an independently managed wholly owned subsidiary of
First Republic Bank, which is a publicly-traded commercial bank and wealth
management firm. First Republic Bank had $[4] billion assets as of ___________,
2003.
Andrea Revy O,Connell and Michael Revy are the portfolio managers at
Froley, Revy responsible for investing the portion of the Fund's assets
allocated to convertible securities. Ms. O'Connell is President and Chief
Executive Officer of Froley and has been Managing Director and a Principal of
Froley since 1994. She has received a Chartered Financial Analyst and a
Chartered Investment Counselor designation. Mr. Revy is a Senior Portfolio
Manager and a Managing Director of Froley, Revy and is responsible for the
development and co-management of Froley, Revy's convertible arbitrage product.
Prior to joining Froley, Revy in 2002, Mr. Revy worked for Lehman Brothers for
six years in that firm's convertible bond group.
21
Pursuant to an investment management agreement between NIAC and the
Fund, the Fund has agreed to pay for the services and facilities provided by
NIAC an annual management fee, payable on a monthly basis, according to the
following schedule:
Average Daily Managed Assets Management
Fee
---
Up to $500 million.................................................. .9000%
$500 million to $1 billion.......................................... .8750%
$1 billion to $1.5 billion.......................................... .8500%
$1.5 billion to $2.0 billion........................................ .8250%
Over $2.0 billion................................................... .8000%
If the Fund utilizes leverage through the issuance of FundPreferred
shares in an amount equal to 33 1/3% of the Fund's total assets (including the
amount obtained from leverage). The management fee calculated as a percentage of
net assets attributable to Common Shares would be as follows:
Net Assets Attributable to Common Shares Management
---------------------------------------- Fee
---
Up to $500 million ....................................................1.350%
$500 million to $1 billion ............................................1.313%
$1 billion to $1.5 billion ............................................1.275%
$1.5 billion to $2.0 billion ..........................................1.238%
Over $2.0 billion .....................................................1.200%
Pursuant to investment subadvisory agreements between NIAC and each of
the Subadvisers, each Subadviser will receive from NIAC a management fee equal
to 40% of the management fee payable by the Fund to NIAC (net of the
reimbursements described below) with respect to the Subadviser's allocation of
Managed Assets up to the first $500 million of the average daily Managed Assets
of the Fund allocated to that Subadviser and 35% thereafter.
In addition to the fee of NIAC, the Fund pays all other costs and
expenses of its operations, including compensation of its trustees (other than
those affiliated with NIAC), custodian, transfer agency and dividend disbursing
expenses, legal fees, expenses of independent auditors, expenses of repurchasing
shares, expenses of issuing any FundPreferred shares, expenses of preparing,
printing and distributing shareholder reports, notices, proxy statements and
reports to governmental agencies, and taxes, if any. All fees and expenses are
accrued daily and deducted before payment of dividends to investors.
For the first eight full years of the Fund's operation, the Advisers
have contractually agreed to reimburse the Fund for fees and expenses
in the amounts, and for the time periods, set forth below:
[Download Table]
Percentage Percentage
Reimbursed Reimbursed
(as a percentage (as a percentage
Year Ending of Managed Year Ending of Managed
March 31 Assets) March 31 Assets)
------------ ------------ ------------ ------------
0.32% 2008 0.32%
2003(1) 0.32% 2009 0.24%
2004 0.32% 2010 0.16%
2005 0.32% 2011 0.08%
2006 0.32%
2007 0.32%
22
_______________
(1) From the commencement of operations.
Reducing Fund expenses in this manner will tend to increase the amount
of income available for the Common Shareholders. The Advisers have not agreed to
reimburse the Fund for any portion of its fees and expenses beyond ,
2011.
Unless earlier terminated as described below, the Fund's investment
management agreement with NIAC and the Fund's investment sub-advisory agreements
(the "management agreements") will remain in effect until March 31, ____. The
management agreements continue in effect from year to year so long as such
continuation is approved at least annually by (1) the Board of Trustees or the
vote of a majority of the outstanding voting securities of the Fund, and (2) a
majority of the trustees who are not interested persons of any party to the
investment management agreement, cast in person at a meeting called for the
purpose of voting on such approval. The investment management agreement may be
terminated at any time, without penalty, by either the Fund or NIAC upon 60 days
written notice, and is automatically terminated in the event of its assignment
as defined in the 1940 Act. The investment sub-advisory agreements may be
terminated at any time, without penalty, by the Fund, NIAC or the Subadviser
upon 60 days written notice, and is automatically terminated in the event of its
assignment as defined in the 1940 Act.
The management agreements have been approved by a majority of the
independent trustees of the Fund and the sole shareholder of the Fund. The
independent trustees have determined that the terms of the Fund's management
agreements are fair and reasonable and that the agreements are in the Fund's
best interests. The independent trustees believe that the management agreements
will enable the Fund to obtain high quality investment management services at a
cost that they deem appropriate, reasonable, and in the best interests of the
Fund and its shareholders. In making such determination, the independent
trustees met independently from the interested trustee of the Fund and any
officers of NIAC, Spectrum, Froley, Revy and their affiliates. The independent
trustees also relied upon the assistance of counsel to the independent trustees.
In evaluating the investment management agreement between the Fund and
NIAC, the independent trustees reviewed materials furnished by NIAC at the
[annual] advisory contract renewal meeting held in , 2003, including
information regarding NIAC, its affiliates and its personnel, operations and
financial condition. In evaluating the investment sub-advisory agreements, the
independent trustees reviewed materials previously furnished by Spectrum in May,
2002, including information regarding Spectrum, its affiliates and its
personnel, operations and financial condition. The independent trustees also
reviewed materials furnished by Froley, Revy, including information regarding
Froley, Revy, its affiliates and its personnel, operations and financial
condition. The independent trustees also reviewed, among other things, the
nature and quality of services to be provided by NIAC, Spectrum and Froley,
Revy, the proposed fees to be charged by NIAC, Spectrum and Froley, Revy for
investment management services, the profitability to NIAC, Spectrum and Froley,
Revy of its relationships with the Fund, fall-out benefits to NIAC, Spectrum and
Froley, Revy from that relationship, economies of scale achieved by NIAC,
Spectrum and Froley, Revy, the experience of the investment advisory and other
personnel providing services to the Fund, the historical quality of the services
provided by NIAC, Spectrum and Froley, Revy and comparative fees and expense
ratios of investment companies with similar objectives and strategies managed by
other investment advisers, and other factors that the independent trustees
deemed relevant. The independent trustees discussed with representatives of
NIAC, Spectrum and Froley, Revy the Fund's operations and each of NIAC's,
Spectrum's and Froley, Revy's ability to provide advisory and other services to
the Fund.
23
The Fund, NIAC, Nuveen, Spectrum, Froley, Revy, Salomon Smith Barney
Inc. and other related entities have adopted codes of ethics which essentially
prohibit certain of their personnel, including the Fund's portfolio managers,
from engaging in personal investments which compete or interfere with, or
attempt to take advantage of a client's, including the Fund's, anticipated or
actual portfolio transactions, and are designed to assure that the interests of
clients, including Fund shareholders, are placed before the interests of
personnel in connection with personal investment transactions. Text-only
versions of the codes of ethics of the Fund, NIAC, Nuveen, Spectrum, and Froley,
Revy can be viewed online or downloaded from the EDGAR Database on the SEC's
internet web site at www.sec.gov. You may also review and copy those documents
by visiting the SEC's Public Reference Room in Washington, DC. Information on
the operation of the Public Reference Room may be obtained by calling the SEC at
202-942-8090. In addition, copies of those codes of ethics may be obtained,
after mailing the appropriate duplicating fee, by writing to the SEC's Public
Reference Section, 450 5th Street, N.W., Washington, DC 20549-0102 or by e-mail
request at publicinfo@sec.gov.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the supervision of the Board of Trustees, each Adviser,
with respect to the securities for which it is responsible, is responsible for
decisions to buy and sell securities for the Fund and the negotiation of
brokerage commissions to be paid. Transactions on stock exchanges involve the
payment by the Fund of brokerage commissions. There generally is no stated
commission in the case of securities traded in the over-the-counter market but
the price paid by the Fund usually includes an undisclosed dealer commission or
mark-up. In certain instances, the Fund may make purchases of underwritten
issues at prices which include underwriting fees.
NIAC
NIAC, with respect to the securities for which it is responsible, is
responsible for decisions to buy and sell securities for the Fund and for the
placement of the Fund's securities business, the negotiation of the prices to be
paid for principal trades and the allocation of its transactions among various
dealer firms. Portfolio securities will normally be purchased directly from an
underwriter or in the over-the-counter market from the principal dealers in such
securities, unless it appears that a better price or execution may be obtained
through other means. Portfolio securities will not be purchased from Nuveen or
its affiliates except in compliance with the 1940 Act.
With respect to interests in corporate loans, the Fund generally will
engage in privately negotiated transactions for purchase or sale in which NIAC
will negotiate on behalf of the Fund, although a more developed market may exist
for certain corporate loans. The Fund may be required to pay fees, or forgo a
portion of interest and any fees payable to the Fund, to the lender selling
participations or assignments to the Fund. NIAC will determine the Lenders from
whom the Fund will purchase assignments and participations by considering their
professional ability, level of service, relationship with the borrower,
financial condition, credit standards and quality of management. Although the
Fund intends generally to hold interests in corporate loans until maturity or
prepayment of the corporate loan, the illiquidity of many corporate loans may
restrict the ability of NIAC to locate in a timely manner persons willing to
purchase the Fund's interests in corporate loans at a fair price should the Fund
desire to sell such interests. See "Risks" in the Prospectus.
The Fund expects that substantially all other portfolio transactions
will be effected on a principal (as opposed to an agency) basis and,
accordingly, does not expect to pay any brokerage commissions. Purchases from
underwriters will include a commission or concession paid by the issuer to the
underwriter, and purchases from dealers will include the spread between the bid
and ask price. It is the policy of NIAC to seek the best execution under the
circumstances of each trade. NIAC evaluates price as the primary consideration,
with the financial condition, reputation and responsiveness of the dealer
considered secondary in determining best execution. Given the best execution
obtainable, it will be NIAC's practice to select dealers which, in addition,
furnish research information (primarily credit analyses of issuers and general
economic reports) and statistical and other services to NIAC. It is not possible
to place a dollar value on information and statistical and other services
received from dealers. Since it is only supplementary to NIAC's own research
efforts, the receipt of research information is not expected to reduce
significantly NIAC's expenses. While NIAC will be primarily responsible for the
placement of the business of the Fund, the policies and practices of NIAC in
this regard must be consistent with the foregoing and will, at all times, be
subject to review by the Board of Trustees of the Fund.
NIAC may manage other investment accounts and investment companies for
other clients which have investment objectives similar to those of the Fund.
Subject to applicable laws and regulations, NIAC seeks to allocate portfolio
transactions equitably whenever concurrent decisions are made to purchase or
sell assets or securities by the Fund and another advisory account. In making
such allocations the main factors to be considered will be the respective
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment and the size of
investment commitments generally held. While this procedure could have a
detrimental effect on the price or amount of the securities available to the
Fund from time to time, it is the opinion of the Board of Trustees that the
benefits available from NIAC's organization will outweigh any disadvantage that
may arise from exposure to simultaneous transactions.
Spectrum
In selecting a broker to execute each particular transaction for which
it is responsible, Spectrum will take the following into consideration: the best
net price available; the reliability, integrity and financial condition of the
broker; the size and difficulty in executing the order; and the value of the
expected contribution of the broker to the investment performance of a Fund on a
continuing basis.
Spectrum may act as broker for the Fund in connection with the purchase
or sale of securities by or to the Fund if and to the extent permitted by
procedures adopted from time to time by the Board of Trustees of the Fund. The
Board of Trustees, including a majority of the trustees who are not "interested"
trustees, has determined that portfolio transactions for the Fund may be
executed through Spectrum if, in the judgment of NIAC and Spectrum, the use of
Spectrum is likely to result in prices and execution at least as favorable to
the Fund as would be available from other qualified brokers and if, in such
transactions, Spectrum charges the Fund commission rates at least as favorable
to the Fund as those charged by Spectrum to comparable unaffiliated customers in
similar transactions. The Board of Trustees also has adopted procedures that are
reasonably designed to provide that any commission, fee or other remuneration
paid to Spectrum is consistent with the foregoing standard. The Fund will not
effect principal transactions with Spectrum. In executing transactions through
Spectrum, the
24
Fund will be subject to, and intends to comply with, Section 17(e) of the 1940
Act and the rules thereunder.
The cost of the brokerage commissions to the Fund in any transaction
(other than those effected by Spectrum) may be greater than that available from
other brokers if the difference is reasonably justified by other aspects of the
portfolio execution services offered. Subject to such policies and procedures as
the trustees may determine, Spectrum shall not be deemed to have acted
unlawfully or to have breached any duty solely by reason of having caused the
Fund to pay a broker (other than Spectrum) that provides research services an
amount of commission for effecting a portfolio investment transaction in excess
of the amount of commission another broker would have charged for effecting that
transaction if Spectrum determines in good faith that such amount of commission
was reasonable in relation to the value of the research service provided by such
broker viewed in terms of either that particular transaction or Spectrum's
ongoing responsibilities with respect to the Fund. Research and investment
information may be provided by these and other brokers at no cost to Spectrum
and is available for the benefit of other accounts advised by Spectrum and its
affiliates, and not all of the information will be used in connection with the
Fund. Although this information may be useful in varying degrees and may tend to
reduce Spectrum's expenses, it is not possible to estimate its value and in the
opinion of Spectrum it does not reduce expenses in a determinable amount. The
extent to which Spectrum makes use of statistical, research and other services
furnished by brokers is considered by Spectrum in the allocation of brokerage
business but there is no formula by which such business is allocated. Spectrum
does so in accordance with its judgement of the best interests of the Fund and
its shareholders. Spectrum may also take into account payments made by brokers
effecting transactions for the Fund to other persons on behalf of the Fund for
services provided to them for which they would be obligated to pay (such as
custodial and professional fees). In addition, consistent with the Conduct Rules
of the National Association of Securities Dealers, Inc., and subject to seeking
best price and execution, Spectrum may consider sales of shares of the Fund as a
fact in the selection of brokers and dealers to enter into portfolio
transactions with the Fund.
Certain other clients of Spectrum may have investment objectives and
policies similar to those of the Fund. Spectrum may, from time to time, make
recommendations that result in the purchase or sale of a particular security by
their other clients simultaneously with the Fund. If transactions on behalf of
more than one client during the same period increase the demand for securities
being sold, there may be an adverse effect on the price of such securities. It
is the policy of Spectrum to allocate advisory recommendations and the placing
of orders in a manner that each deems equitable to the accounts involved,
including the Fund. When two or more of the clients of Spectrum (including the
Fund) are purchasing or selling the same security on a given day through the
same broker-dealer, such transactions may be averaged as to price.
Froley, Revy
It is the policy of Froley, Revy to secure the execution of orders on its
portfolio transactions in an effective manner at the most favorable price.
Pursuant to its agreement with the Fund, Froley, Revy determines, subject to the
general supervision of the Board of Trustees and in accordance with the Fund's
investment objectives, policies and restrictions, which securities are to be
purchased and sold and which brokers are to be eligible to execute its portfolio
transaction. It is not the policy of Froley, Revy to deal solely with one
broker, but it is Froley, Revy's intention to place portfolio transactions with
those brokers which provide the most favorable combination of price, execution
and services to the Fund. Research services are a factor in selection of
brokers, but payment in excess of brokerage commissions charged by other brokers
is made in recognition of research services. The reasonableness of brokerage
commissions is evaluated by comparison to fees charged by other brokers where
the execution and services are comparable.
25
DISTRIBUTIONS
Level Rate Dividend Policy
Subject to the determination of the Board of Trustees to implement a
Managed Dividend Policy, as discussed below, commencing with the Fund's first
dividend, the Fund intends to make regular monthly cash distributions to Common
Shareholders at a level rate based on the projected performance of the Fund,
which rate may be adjusted from time to time. The Fund's ability to maintain a
Level Rate Dividend Policy will depend on a number of factors, including the
stability of income received from its investments and dividends payable on Fund
Preferred Shares, if any, and interest and required principal payments on
Borrowings, if any. Over time, all the net investment income of the Fund will be
distributed. At least annually, the Fund intends to distribute all of its net
capital gain and ordinary taxable income after paying any accrued dividends on,
or redeeming or liquidating, any FundPreferred shares, if any, or making
interest and required principal payments on Borrowings, if any. Initial
distributions to Common Shareholders are expected to be declared approximately
45 days, and paid approximately 60 to 90 days, from the commencement of this
offering, depending upon market conditions. The net income of the Fund consists
of all income (other than net capital gain) less all expenses of the
Fund. Expenses of the Fund are accrued each day. In addition, the Fund currently
expects that a portion of its distributions will consist of amounts in excess of
investment company taxable income and net capital gain. These amounts would be
considered a return of capital and thus would reduce the basis in a
shareholder's Common Shares; any amounts in excess of such basis would be
treated as a gain from the sale of such shares.
To permit the Fund to maintain a more stable monthly distribution, the
Fund will initially distribute less than the entire amount of net investment
income earned in a particular period. The undistributed net investment income
would be available to supplement future distributions. As a result, the
distributions paid by the Fund for any particular monthly period may be more or
less than the amount of net investment income actually earned by the Fund during
the period. Undistributed net investment income will be added to the Fund's net
asset value and, correspondingly, distributions from undistributed net
investment income will be deducted from the Fund's net asset value.
Managed Dividend Policy
In June 2002, NIAC, on behalf of itself and certain funds, filed an
exemptive application with the Securities and Exchange Commission seeking an
order under the 1940 Act facilitating the implementation of the Managed Dividend
Policy. The application will be amended to include the Fund as a party. If, and
when, NIAC, on behalf of itself and other parties, receives the requested
relief, the Fund may, subject to the determination of its Board of Trustees,
implement a Managed Dividend Policy.
Under a Managed Dividend Policy, the Fund would intend to distribute a
monthly fixed amount to Common Shareholders. As with the Level Dividend Rate
Policy, distributions would be made only after paying any accrued dividends or
making any redemption or liquidation payments with respect to Fund Preferred
Shares, if any, and interest and required principal payments on Borrowings, if
any. Under a Managed Dividend Policy, if for any monthly distribution, net
investment income and net realized capital gain were less than the amount of the
distribution, the difference would be distributed from the Fund's assets. The
Fund's final distribution for each calendar year would include any remaining net
investment income undistributed during the year, as well as all net capital gain
realized during the year. If, for any calendar year, the total distributions
exceeded net investment income and net realized capital gain (the "Excess"), the
Excess, distributed from the Fund's assets, would generally be treated as a
tax-free return of capital up to the amount of the Common Shareholder's tax
basis in Common Shares, with any amounts exceeding such basis treated as gain
from the sale of Common Shares. The Excess, however, would be treated as
ordinary dividend income to the extent of the Fund's current and accumulated
earnings and profits. Pursuant to the requirements of the 1940 Act and other
applicable laws, a notice would accompany each monthly distribution with respect
to the estimated source of the distribution made.
In the event the Fund distributed the Excess, such distribution would
decrease the Fund's total assets and, therefore, have the likely effect of
increasing the Fund's expense ratio. There is a risk that the Fund would not
eventually realize capital gains in an amount corresponding to a distribution of
the Excess. In addition, in order to make such distributions, the Fund may have
to sell a portion of its investment portfolio at a time when independent
investment judgment might not dictate such action.
There is no guarantee that the Fund will receive an exemptive order
facilitating the implementation of a Managed Dividend Policy or, if received,
that the Board of Trustees will determine to implement a Managed Dividend
Policy. The Board of Trustees reserves the right to change the dividend policy
from time to time.
As described in the Fund's Prospectus, initial distributions to Common
Shareholders are expected to be declared approximately 45 days, and paid
approximately 60 to 90 days, from the completion of the offering of the Common
Shares, depending on market conditions. To permit the Fund to maintain a more
stable monthly distribution, the Fund will initially (prior to its first
distribution), and may from time to time thereafter, distribute less than the
entire amount of net investment income earned in a particular period. Such
undistributed net investment income would be available to supplement future
distributions, including distributions that might otherwise have been reduced by
a decrease in the Fund's monthly net income due to fluctuations in investment
income or expenses, or due to an increase in the dividend rate on the Fund's
outstanding FundPreferred shares. As a result, the distributions paid by the
Fund for any particular period may be more or less than the amount of net
investment income actually earned by the Fund during such period. Undistributed
net investment income will be added to the Fund's net asset value and,
correspondingly, distributions from undistributed net investment income will be
deducted from the Fund's net asset value.
For tax purposes, the Fund is currently required to allocate net
capital gain and other taxable income, if any, between Common Shares and
FundPreferred shares in proportion to total dividends paid to each class for the
year in which such net capital gain or other taxable income is realized. For
information relating to the impact of the issuance of FundPreferred shares on
the distributions made by a Fund to Common Shareholders, see the Fund's
Prospectus under "Use of Leverage."
While any FundPreferred shares are outstanding, the Fund may not
declare any cash dividend or other distribution on its Common Shares unless at
the time of such declaration (1) all accumulated dividends on the FundPreferred
shares have been paid and (2) the net asset value of the Fund's portfolio
(determined after deducting the amount of such dividend or other distribution)
is at least 200% of the liquidation value of any outstanding FundPreferred
shares. This latter limitation on the Fund's ability to make distributions on
its Common Shares could under certain circumstances impair the ability of the
Fund to maintain its qualification for taxation as a regulated investment
company. See "Tax Matters."
DESCRIPTION OF SHARES
COMMON SHARES
The Fund's Declaration of Trust (the "Declaration") authorizes the
issuance of an unlimited number of Common Shares. The Common Shares being
offered have a par value of $0.01 per share and, subject to the rights of
holders of FundPreferred shares if issued, have equal rights as to the payment
of dividends and the distribution of assets upon liquidation of the Fund. The
Common Shares being offered will, when issued, be fully paid and, subject to
matters discussed in "Certain Provisions in the Declaration of Trust,"
non-assessable, and will have no pre-emptive or conversion rights or rights to
cumulative voting. At any time when the Fund's FundPreferred
26
shares are outstanding, Common Shareholders will not be entitled to receive any
cash distributions from the Fund unless all accrued dividends on FundPreferred
shares have been paid, and unless asset coverage (as defined in the 1940 Act)
with respect to FundPreferred shares would be at least 200% after giving effect
to such distributions. See "FundPreferred Shares" below.
The Common Shares have been approved for listing on the
Exchange, subject to notice of issuance. The Fund intends to hold annual
meetings of shareholders so long as the Common Shares are listed on a national
securities exchange and such meetings are required as a condition to such
listing.
Shares of closed-end investment companies may frequently trade at
prices lower than net asset value. Shares of closed-end investment companies
like the Fund have during some periods traded at prices higher than net asset
value and during other periods have traded at prices lower than net asset value.
There can be no assurance that Common Shares or shares of other municipal funds
will trade at a price higher than net asset value in the future. Net asset value
will be reduced immediately following the offering after payment of the sales
load and organization and offering expenses. Net asset value generally increases
when interest rates decline, and decreases when interest rates rise, and these
changes are likely to be greater in the case of a fund having a leveraged
capital structure. Whether investors will realize gains or losses upon the sale
of Common Shares will not depend upon a Fund's net asset value but will depend
entirely upon whether the market price of the Common Shares at the time of sale
is above or below the original purchase price for the shares. Since the market
price of the Fund's Common Shares will be determined by factors beyond the
control of the Fund, the Fund cannot predict whether the Common Shares will
trade at, below, or above net asset value or at, below or above the initial
public offering price. Accordingly, the Common Shares are designed primarily for
long-term investors, and investors in the Common Shares should not view the Fund
as a vehicle for trading purposes. See "Repurchase of Fund Shares; Conversion to
Open-End Fund" and the Fund's Prospectus under "Use of Leverage" and "The Fund's
Investments."
FUNDPREFERRED SHARES
The Declaration authorizes the issuance of an unlimited number of
FundPreferred shares in one or more classes or series, with rights as determined
by the Board of Trustees of the Fund, by action of the Board of Trustees without
the approval of the Common Shareholders. The Fund's Board of Trustees has
indicated its intention to authorize an offering of FundPreferred shares
(representing approximately 33 1/3% of the Fund's capital immediately after the
time the FundPreferred shares are issued) within approximately one and one-half
to two months after completion of the offering of Common Shares, subject to
market conditions and to the Board's continuing belief that leveraging the
Fund's capital structure through the issuance of FundPreferred shares is likely
to achieve the benefits to the Common Shareholders described in this Statement
of Additional Information. Although the terms of the FundPreferred shares,
including their dividend rate, voting rights, liquidation preference and
redemption provisions, will be determined by the Board of Trustees (subject to
applicable law and the Fund's Declaration) if and when it authorizes a
FundPreferred shares offering, the Board has stated that the initial series of
FundPreferred shares would likely pay cumulative dividends at relatively
shorter-term periods (such as 7 days); by providing for the periodic
redetermination of the
27
dividend rate through an auction or remarketing procedure. The Board of Trustees
of the Fund has indicated that the liquidation preference, preference on
distribution, voting rights and redemption provisions of the FundPreferred
shares will be as stated below.
Limited Issuance of FundPreferred Shares. Under the 1940 Act, the Fund
could issue FundPreferred shares with an aggregate liquidation value of up to
one-half of the value of the Fund's total net assets, measured immediately after
issuance of the FundPreferred shares. "Liquidation value" means the original
purchase price of the shares being liquidated plus any accrued and unpaid
dividends. In addition, the Fund is not permitted to declare any cash dividend
or other distribution on its Common Shares unless the liquidation value of the
FundPreferred shares is less than one-half of the value of the Fund's total net
assets (determined after deducting the amount of such dividend or distribution)
immediately after the distribution. If the Fund sells all the Common Shares and
FundPreferred shares discussed in this Prospectus, the liquidation value of the
FundPreferred shares is expected to be approximately 33% of the value of the
Fund's total net assets. The Fund intends to purchase or redeem FundPreferred
shares, if necessary, to keep that fraction below one-half.
Distribution Preference. The FundPreferred shares have complete
priority over the Common Shares as to distribution of assets.
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Fund, holders of
FundPreferred shares will be entitled to receive a preferential liquidating
distribution (expected to equal the original purchase price per share plus
accumulated and unpaid dividends thereon, whether or not earned or declared)
before any distribution of assets is made to holders of Common Shares. After
payment of the full amount of the liquidating distribution to which they are
entitled, holders of FundPreferred shares will not be entitled to any further
participation in any distribution of assets by the Fund. A consolidation or
merger of the Fund with or into any Massachusetts business trust or corporation
or a sale of all or substantially all of the assets of the Fund shall not be
deemed to be a liquidation, dissolution or winding up of the Fund.
Voting Rights. In connection with any issuance of FundPreferred
shares, the Fund must comply with Section 18(i) of the 1940 Act, which requires,
among other things, that FundPreferred shares be voting shares and have equal
voting rights with Common Shares. Except as otherwise indicated in this
Statement of Additional Information and except as otherwise required by
applicable law, holders of FundPreferred shares will vote together with Common
Shareholders as a single class.
In connection with the election of the Fund's trustees, holders of
FundPreferred shares, voting as a separate class, will be entitled to elect two
of the Fund's trustees, and the remaining trustees shall be elected by Common
Shareholders and holders of FundPreferred shares, voting together as a single
class. In addition, if at any time dividends on the Fund's outstanding
FundPreferred shares shall be unpaid in an amount equal to two full years'
dividends thereon, the holders of all outstanding FundPreferred shares, voting
as a separate class, will be entitled to elect a majority of the Fund's trustees
until all dividends in arrears have been paid or declared and set apart for
payment.
28
The affirmative vote of the holders of a majority of the Fund's
outstanding FundPreferred shares of any class or series, as the case may be,
voting as a separate class, will be required to, among other things, (1) take
certain actions which would affect the preferences, rights, or powers of such
class or series or (2) authorize or issue any class or series ranking prior to
the FundPreferred shares. Except as may otherwise be required by law, (1) the
affirmative vote of the holders of at least two-thirds of the Fund's
FundPreferred shares outstanding at the time, voting as a separate class, will
be required to approve any conversion of the Fund from a closed-end to an
open-end investment company and (2) the affirmative vote of the holders of at
least two-thirds of the outstanding FundPreferred shares, voting as a separate
class, shall be required to approve any plan of reorganization (as such term is
used in the 1940 Act) adversely affecting such shares, provided however, that
such separate class vote shall be a majority vote if the action in question has
previously been approved, adopted or authorized by the affirmative vote of
two-thirds of the total number of trustees fixed in accordance with the
Declaration or the By-laws. The affirmative vote of the holders of a majority of
the outstanding FundPreferred shares, voting as a separate class, shall be
required to approve any action not described in the preceding sentence requiring
a vote of security holders under Section 13(a) of the 1940 Act including, among
other things, changes in a Fund's investment objectives or changes in the
investment restrictions described as fundamental policies under "Investment
Objectives and Policies--Investment Restrictions." The class or series vote of
holders of FundPreferred shares described above shall in each case be in
addition to any separate vote of the requisite percentage of Common Shares and
FundPreferred shares necessary to authorize the action in question.
The foregoing voting provisions will not apply with respect to the
Fund's FundPreferred shares if, at or prior to the time when a vote is
required, such shares shall have been (1) redeemed or (2) called for redemption
and sufficient funds shall have been deposited in trust to effect such
redemption.
Redemption, Purchase and Sale of FundPreferred Shares by the Fund. The
terms of the FundPreferred shares may provide that they are redeemable at
certain times, in whole or in part, at the original purchase price per share
plus accumulated dividends, that the Fund may tender for or purchase
FundPreferred shares and that the Fund may subsequently resell any shares so
tendered for or purchased. Any redemption or purchase of FundPreferred shares
by the Fund will reduce the leverage applicable to Common Shares, while any
resale of shares by the Fund will increase such leverage.
BORROWINGS
The Declaration authorizes the Fund, without prior approval of the
Common Shareholders, to borrow money. In this connection, the Fund may issue
notes or other evidence of indebtedness (including bank borrowings or commercial
paper) ("Borrowings") and may secure any such borrowings by mortgaging, pledging
or otherwise subjecting as security the Fund's assets. In connection with such
borrowing, the Fund may be required to maintain average balances with the lender
or to pay a commitment or other fee to maintain a line of credit. Any such
requirements will increase the cost of borrowing over the stated interest rate.
Limitations on Borrowings. Under the requirements of the 1940 Act, the
Fund, immediately after any Borrowings, must have an asset coverage of at least
300%. With respect
29
to any Borrowings, asset coverage means the ratio which the value of the total
assets of the Fund, less all liabilities and indebtedness not represented by
senior securities (as defined in the 1940 Act), bears to the aggregate amount of
such Borrowings represented by senior securities issued by the Fund. Certain
types of Borrowings may result in the Fund being subject to covenants in credit
agreements relating to asset coverages or portfolio composition or otherwise. In
addition, the Fund may be subject to certain restrictions imposed by guidelines
of one or more NRSROs which may issue ratings for commercial paper or notes
issued by the Fund. Such restrictions may be more stringent than those imposed
by the 1940 Act.
Distribution Preference. The rights of lenders to the Fund to receive
interest on and repayment of principal of any such Borrowings will be senior to
those of the Common Shareholders, and the terms of any such Borrowings may
contain provisions which limit certain activities of the Fund, including the
payment of dividends to Common Shareholders in certain circumstances.
Voting Rights. The 1940 Act does (in certain circumstances) grant to
the lenders to the Fund certain voting rights in the event of default in the
payment of interest on or repayment of principal. In the event that such
provisions would impair the Fund's status as a regulated investment company
under the Code, the Fund, subject to its ability to liquidate its relatively
illiquid portfolio, intends to repay the Borrowings. Any Borrowings will likely
be ranked senior or equal to all other existing and future borrowings of the
Fund.
The discussion above describes the Fund's Board of Trustees' present
intention with respect to an offering of FundPreferred shares or Borrowings.
The terms of the FundPreferred shares and, if authorized by the Board of
Trustees, the terms of any Borrowings may be the same as, or different from,
the terms described above, subject to applicable law and the Fund's Declaration.
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST
Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of the Fund.
However, the Declaration contains an express disclaimer of shareholder
liability for debts or obligations of the Fund and requires that notice of such
limited liability be given in each agreement, obligation or instrument entered
into or executed by the Fund or the trustees. The Declaration further provides
for indemnification out of the assets and property of the Fund for all loss and
expense of any shareholder held personally liable for the obligations of the
Fund. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the Fund would be
unable to meet its obligations. The Fund believes that the likelihood of such
circumstances is remote.
The Declaration includes provisions that could limit the ability of other
entities or persons to acquire control of the Fund or to convert the Fund to
open-end status. Specifically, the Declaration requires a vote by holders of at
least two-thirds of the Common Shares and FundPreferred shares, voting together
as a single class, except as described below, to authorize (1) a conversion of
the Fund from a closed-end to an open-end investment company, (2) a merger or
consolidation of the Fund, or a series or class of the Fund, with any
corporation, association, trust or other organization or a reorganization of the
Fund, or a series or class of the Fund, (3) a sale, lease or transfer of all or
substantially all of the Fund's assets (other than in the
30
regular course of the Fund's investment activities), (4) in certain
circumstances, a termination of the Fund, or a series or class of the Fund or
(5) removal of trustees by shareholders, and then only for cause, unless, with
respect to (1) through (4), such transaction has already been authorized by the
affirmative vote of two-thirds of the total number of trustees fixed in
accordance with the Declaration or the By-laws, in which case the affirmative
vote of the holders of at least a majority of the Fund's Common Shares and
FundPreferred shares outstanding at the time, voting together as a single class,
is required, provided, however, that where only a particular class or series is
affected (or, in the case of removing a trustee, when the trustee has been
elected by only one class), the required vote by only the applicable class or
series will be required. Approval of shareholders is not required, however, for
any transaction, whether deemed a merger, consolidation, reorganization or
otherwise whereby the Fund issues shares in connection with the acquisition of
assets (including those subject to liabilities) from any other investment
company or similar entity. None of the foregoing provisions may be amended
except by the vote of at least two-thirds of the Common Shares and FundPreferred
shares, voting together as a single class. In the case of the conversion of the
Fund to an open-end investment company, or in the case of any of the foregoing
transactions constituting a plan of reorganization which adversely affects the
holders of FundPreferred shares, the action in question will also require the
affirmative vote of the holders of at least two-thirds of the Fund's
FundPreferred shares outstanding at the time, voting as a separate class, or, if
such action has been authorized by the affirmative vote of two-thirds of the
total number of trustees fixed in accordance with the Declaration or the Bylaws,
the affirmative vote of the holders of at least a majority of the Fund's
FundPreferred shares outstanding at the time, voting as a separate class. The
votes required to approve the conversion of the Fund from a closed-end to an
open-end investment company or to approve transactions constituting a plan of
reorganization which adversely affects the holders of FundPreferred shares are
higher than those required by the 1940 Act. The Board of Trustees believes that
the provisions of the Declaration relating to such higher votes are in the best
interest of the Fund and its shareholders.
The provisions of the Declaration described above could have the
effect of depriving the Common Shareholders of opportunities to sell their
Common Shares at a premium over market value by discouraging a third party from
seeking to obtain control of the Fund in a tender offer or similar transaction.
The overall effect of these provisions is to render more difficult the
accomplishment of a merger or the assumption of control by a third party. They
provide, however, the advantage of potentially requiring persons seeking
control of a Fund to negotiate with its management regarding the price to be
paid and facilitating the continuity of the Fund's investment objectives and
policies. The Board of Trustees of the Fund has considered the foregoing
anti-takeover provisions and concluded that they are in the best interests of
the Fund and its Common Shareholders.
Reference should be made to the Declaration on file with the
Commission for the full text of these provisions.
The Declaration provides that the obligations of the Fund are not
binding upon the trustees of the Fund individually, but only upon the assets
and property of the Fund, and that the trustees shall not be liable for errors
of judgment or mistakes of fact or law. Nothing in the Declaration, however,
protects a trustee against any liability to which he would otherwise be
31
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office.
REPURCHASE OF FUND SHARES; CONVERSION TO OPEN-END FUND
The Fund is a closed-end investment company and as such its
shareholders will not have the right to cause the Fund to redeem their shares.
Instead, the Fund's Common Shares will trade in the open market at a price that
will be a function of several factors, including dividend levels (which are in
turn affected by expenses), net asset value, call protection, price, dividend
stability, relative demand for and supply of such shares in the market, general
market and economic conditions and other factors. Because shares of a
closed-end investment company may frequently trade at prices lower than net
asset value, the Fund's Board of Trustees has currently determined that, at
least annually, it will consider action that might be taken to reduce or
eliminate any material discount from net asset value in respect of Common
Shares, which may include the repurchase of such shares in the open market or
in private transactions, the making of a tender offer for such shares at net
asset value, or the conversion of the Fund to an open-end investment company.
There can be no assurance, however, that the Board of Trustees will decide to
take any of these actions, or that share repurchases or tender offers, if
undertaken, will reduce market discount.
Notwithstanding the foregoing, at any time when the Fund's
FundPreferred shares are outstanding, the Fund may not purchase, redeem or
otherwise acquire any of its Common Shares unless (1) all accrued
FundPreferred shares dividends have been paid and (2) at the time of such
purchase, redemption or acquisition, the net asset value of the Fund's portfolio
(determined after deducting the acquisition price of the Common Shares) is at
least 200% of the liquidation value of the outstanding FundPreferred shares
(expected to equal the original purchase price per share plus any accrued and
unpaid dividends thereon). The staff of the Commission currently requires that
any tender offer made by a closed-end investment company for its shares must be
at a price equal to the net asset value of such shares on the close of business
on the last day of the tender offer. Any service fees incurred in connection
with any tender offer made by the Fund will be borne by the Fund and will not
reduce the stated consideration to be paid to tendering shareholders.
Subject to its investment limitations, the Fund may borrow to finance
the repurchase of shares or to make a tender offer. Interest on any borrowings
to finance share repurchase transactions or the accumulation of cash by the
Fund in anticipation of share repurchases or tenders will reduce the Fund's net
income. Any share repurchase, tender offer or borrowing that might be approved
by the Board of Trustees would have to comply with the Securities Exchange Act
of 1934, as amended, and the 1940 Act and the rules and regulations thereunder.
Although the decision to take action in response to a discount from
net asset value will be made by the Board of the Fund at the time it considers
such issue, it is the Board's present policy, which may be changed by the
Board, not to authorize repurchases of Common Shares or a tender offer for such
shares if (1) such transactions, if consummated, would (a) result in the
delisting of the Common Shares from the Exchange, or (b) impair
the Fund's status as a regulated investment company under the Code (which would
make the Fund a taxable entity, causing the Fund's income to be taxed at the
corporate level in addition to the taxation of
32
shareholders who receive dividends from the Fund) or as a registered closed-end
investment company under the 1940 Act; (2) the Fund would not be able to
liquidate portfolio securities in an orderly manner and consistent with the
Fund's investment objectives and policies in order to repurchase shares; or (3)
there is, in the Board's judgment, any (a) material legal action or proceeding
instituted or threatened challenging such transactions or otherwise materially
adversely affecting the Fund, (b) general suspension of or limitation on prices
for trading securities on the Exchange, (c) declaration of a
banking moratorium by Federal or state authorities or any suspension of payment
by United States or state banks in which the Fund invests, (d) material
limitation affecting the Fund or the issuers of its portfolio securities by
Federal or state authorities on the extension of credit by lending institutions
or on the exchange of non-U.S. currency, (e) commencement of war, armed
hostilities or other international or national calamity directly or indirectly
involving the United States, or (f) other event or condition which would have a
material adverse effect (including any adverse tax effect) on the Fund or its
shareholders if shares were repurchased. The Board of Trustees of the Fund may
in the future modify these conditions in light of experience.
Conversion to an open-end company would require the approval of the
holders of at least two-thirds of the Fund's Common Shares and FundPreferred
shares outstanding at the time, voting together as a single class, and of the
holders of at least two-thirds of the Fund's FundPreferred shares outstanding
at the time, voting as a separate class, provided however, that such separate
class vote shall be a majority vote if the action in question has previously
been approved, adopted or authorized by the affirmative vote of two-thirds of
the total number of trustees fixed in accordance with the Declaration or
By-laws. See the Prospectus under "Certain Provisions in the Declaration of
Trust" for a discussion of voting requirements applicable to conversion of the
Fund to an open-end company. If the Fund converted to an open-end company, it
would be required to redeem all FundPreferred shares then outstanding, and the
Fund's Common Shares would no longer be listed on the Exchange.
Shareholders of an open-end investment company may require the company to
redeem their shares on any business day (except in certain circumstances as
authorized by or under the 1940 Act) at their net asset value, less such
redemption charge, if any, as might be in effect at the time of redemption. In
order to avoid maintaining large cash positions or liquidating favorable
investments to meet redemptions, open-end companies typically engage in a
continuous offering of their shares. Open-end companies are thus subject to
periodic asset in-flows and out-flows that can complicate portfolio management.
The Board of Trustees of the Fund may at any time propose conversion of the
Fund to an open-end company depending upon their judgment as to the
advisability of such action in light of circumstances then prevailing.
The repurchase by the Fund of its shares at prices below net asset
value will result in an increase in the net asset value of those shares that
remain outstanding. However, there can be no assurance that share repurchases
or tenders at or below net asset value will result in the Fund's shares trading
at a price equal to their net asset value. Nevertheless, the fact that the
Fund's shares may be the subject of repurchase or tender offers at net asset
value from time to time, or that the Fund may be converted to an open-end
company, may reduce any spread between market price and net asset value that
might otherwise exist.
In addition, a purchase by the Fund of its Common Shares will decrease
the Fund's total assets which would likely have the effect of increasing the
Fund's expense ratio. Any purchase
33
by the Fund of its Common Shares at a time when FundPreferred shares are
outstanding will increase the leverage applicable to the outstanding Common
Shares then remaining. See the Fund's Prospectus under "Risks--Concentration
Risk" and "Risks--Leverage Risk."
Before deciding whether to take any action if the Fund's Common Shares
trade below net asset value, the Board of the Fund would consider all relevant
factors, including the extent and duration of the discount, the liquidity of
the Fund's portfolio, the impact of any action that might be taken on the Fund
or its shareholders and market considerations. Based on these considerations,
even if the Fund's shares should trade at a discount, the Board of Trustees may
determine that, in the interest of the Fund and its shareholders, no action
should be taken.
TAX MATTERS
FEDERAL INCOME TAX MATTERS
The following discussion of federal income tax matters is based upon
the advice of Bell, Boyd & Lloyd LLC, special counsel to the Fund.
Set forth below is a discussion of certain U.S. federal income tax
issues concerning the Fund and the purchase, ownership and disposition of Fund
shares. This discussion does not purport to be complete or to deal with all
aspects of federal income taxation that may be relevant to shareholders in
light of their particular circumstances. Unless otherwise noted, this
discussion assumes you are a U.S. shareholder and that you hold your shares as
a capital asset. This discussion is based upon present provisions of the Code,
the regulations promulgated thereunder, and judicial and administrative ruling
authorities, all of which are subject to change, which change may be
retroactive. Prospective investors should consult their own tax advisors with
regard to the federal tax consequences of the purchase, ownership, or
disposition of Fund shares, as well as the tax consequences arising under the
laws of any state, non-U.S. country, or other taxing jurisdiction.
The Fund intends to elect to be treated and to qualify annually as a
regulated investment company under the Code.
To qualify for the favorable U.S. federal income tax treatment
generally accorded to regulated investment companies, the Fund must, among
other things, (a) derive in each taxable year at least 90% of its gross income
from dividends, interest, payments with respect to securities loans and gains
from the sale or other disposition of stock, securities or foreign currencies
or other income derived with respect to its business of investing in such
stock, securities or currencies; (b) diversify its holdings so that, at the end
of each quarter of the taxable year, (i) at least 50% of the market value of
the Fund's assets is represented by cash and cash items (including
receivables), U.S. Government securities, the securities of other regulated
investment companies and other securities, with such other securities of any
one issuer limited for the purposes of this calculation to an amount not
greater than 5% of the value of the Fund's total assets and not greater than
10% of the outstanding voting securities of such issuer, and (ii) not more than
25% of the value of its total assets is invested in the securities (other than
U.S. Government securities or the securities of other regulated investment
companies) of a single issuer, or two or more issuers which the Fund controls
and are engaged in the same, similar or
34
related trades or businesses; and (c) distribute at least 90% of its investment
company taxable income (as that term is defined in the Code, but without regard
to the deduction for dividends paid).
As a regulated investment company, the Fund generally will not be subject
to U.S. federal income tax on its investment company taxable income and net
capital gain (the excess of net long-term capital gain over net short-term
capital loss), if any, that it distributes to shareholders. The Fund may retain
for investment its net capital gain. However, if the Fund retains any net
capital gain or any investment company taxable income, it will be subject to tax
at regular corporate rates on the amount retained. If the Fund retains any net
capital gain, it may designate the retained amount as undistributed capital
gains in a notice to its shareholders who, if subject to federal income tax on
long-term capital gains, (i) will be required to include in income for federal
income tax purposes, as long-term capital gain, their share of such
undistributed amount, and (ii) will be entitled to credit their proportionate
shares of the tax paid by the Fund on such undistributed amount against their
federal income tax liabilities, if any, and to claim refunds to the extent the
credit exceeds such liabilities. For federal income tax purposes, the tax basis
of shares owned by a shareholder of the Fund will be increased by an amount
equal under current law to the difference between the amount of undistributed
capital gains included in the shareholder's gross income and the tax deemed paid
by the shareholder under clause (ii) of the preceding sentence. The Fund intends
to distribute to its shareholders, at least annually, substantially all of its
investment company taxable income and net capital gain.
Amounts not distributed on a timely basis in accordance with a calendar
year distribution requirement are subject to a nondeductible 4% excise tax. To
prevent imposition of the excise tax, the Fund must distribute during each
calendar year an amount equal to the sum of (1) at least 98% of its ordinary
income (not taking into account any capital gains or losses) for the calendar
year, (2) at least 98% of its capital gains in excess of its capital losses
(adjusted for certain ordinary losses) for the one-year period ending October 31
of the calendar year, and (3) any ordinary income and capital gains for previous
years that were not distributed during those years and on which the Fund paid no
federal income tax. To prevent application of the excise tax, the Fund intends
to make its distributions in accordance with the calendar year distribution
requirement. A distribution will be treated as paid on December 31 of the
current calendar year if it is declared by the Fund in October, November or
December with a record date in such a month and paid by the Fund during January
of the following calendar year. Such distributions will be taxable to
shareholders in the calendar year in which the distributions are declared,
rather than the calendar year in which the distributions are received.
If the Fund failed to qualify as a regulated investment company or
failed to satisfy the 90% distribution requirement in any taxable year, the
Fund would be taxed as an ordinary corporation on its taxable income (even if
such income were distributed to its shareholders) and all distributions out of
earnings and profits would be taxed to shareholders as ordinary income.
DISTRIBUTIONS
Dividends paid out of the Fund's investment company taxable income
will be taxable to a shareholder as ordinary income to the extent of the Fund's
earnings and profits, whether paid in cash or reinvested in additional shares.
Because Spectrum does not intend to invest with a view to maximizing the portion
of the Fund's distributions qualifying for the Dividends Received Deduction, any
corporate shareholder who otherwise would qualify for the Dividends Received
Deduction should assume that dividends paid to it out of the Fund generally will
not qualify for the Dividends Received Deduction.
Distributions of net capital gain (the excess of net long-term capital
gain over net short-term capital loss), if any, designated as capital gain
dividends are taxable to a shareholder as long-term capital gains, regardless
of how long the shareholder has held Fund shares. Shareholders receiving
distributions in the form of additional shares, rather than cash, generally
will have a cost basis in each such share equal to the net asset value of a
share of the Fund on the reinvestment date. A distribution of an amount in
excess of the Fund's current and accumulated earnings and profits will be
treated by a shareholder as a return of capital which is applied against and
reduces the shareholder's basis in his or her shares. To the extent that the
amount of
35
any such distribution exceeds the shareholder's basis in his or her shares, the
excess will be treated by the shareholder as gain from a sale or exchange of the
shares.
The Internal Revenue Service's position in a published revenue ruling
indicates that the Fund is required to designate distributions paid with
respect to its Common Shares and its FundPreferred Shares as consisting of a
portion of each type of income distributed by the Fund. The portion of each
type of income deemed received by the holders of each class of shares will be
equal to the portion of total Fund dividends received by such class. Thus, the
Fund will designate dividends paid as capital gain dividends in a manner that
allocates such dividends between the holders of the Common Shares and the
holders of FundPreferred Shares, in proportion to the total dividends paid to
each such class during or with respect to the taxable year, or otherwise as
required by applicable law.
Shareholders will be notified annually as to the U.S. federal tax
status of distributions, and shareholders receiving distributions in the form
of additional shares will receive a report as to the net asset value of those
shares.
SALE OR EXCHANGE OF FUND SHARES
Upon the sale or other disposition of shares of the Fund, which a
shareholder holds as a capital asset, such a shareholder may realize a capital
gain or loss which will be long-term or short-term, depending upon the
shareholder's holding period for the shares. Generally, a shareholder's gain or
loss will be a long-term gain or loss if the shares have been held for more
than one year.
Any loss realized on a sale or exchange will be disallowed to the
extent that shares disposed of are replaced (including through reinvestment of
dividends) within a period of 61 days beginning 30 days before and ending 30
days after disposition of shares. In such a case, the basis of the shares
acquired will be adjusted to reflect the disallowed loss. Any loss realized by
a shareholder on a disposition of Fund shares held by the shareholder for six
months or less will be treated as a long-term capital loss to the extent of any
distributions of net capital gain received by the shareholder with respect to
such shares.
NATURE OF FUND'S INVESTMENTS
Certain of the Fund's investment practices are subject to special and
complex federal income tax provisions that may, among other things, (i)
disallow, suspend or otherwise limit the allowance of certain losses or
deductions, (ii) convert lower taxed long-term capital gain into higher taxed
short-term capital or ordinary income, (iii) convert an ordinary loss or a
deduction into a capital loss (the deductibility of which is more limited), (iv)
cause the Fund to recognize income or gain without a corresponding receipt of
cash, (v) adversely affect the time as to when a purchase or sale of stock or
securities is deemed to occur and (vi) adversely alter the characterization of
certain complex financial transactions. The Fund may make certain tax elections
in order to mitigate the effect of these provisions.
FUTURES CONTRACTS AND OPTIONS
The Fund's transactions in futures contracts and options will be
subject to special provisions of the Code that, among other things, may affect
the character of gains and losses realized by the Fund (i.e., may affect
whether gains or losses are ordinary or capital), may accelerate recognition of
income to the Fund and may defer Fund losses. These rules could, therefore,
affect the character, amount and timing of distributions to shareholders. These
provisions also (a) will require the Fund to mark-to-market certain types of
the positions in its portfolio (i.e., treat them as if they were closed out),
and (b) may cause the Fund to recognize income without receiving cash with
which to make distributions in amounts necessary to satisfy the 90%
distribution requirement for qualifying to be taxed as a regulated investment
company and the 98% distribution requirement for avoiding excise taxes. The
Fund will monitor its transactions, will make the appropriate tax elections and
will make the appropriate entries in its books and records when it acquires any
futures contract, option or hedged investment in order to
36
mitigate the effect of these rules and prevent disqualification of the Fund
from being taxed as a regulated investment company.
RECOGNITION OF INCOME IN THE ABSENCE OF CASH
Investments by the Fund in zero coupon or other discount securities
will result in income to the Fund equal to a portion of the excess of the face
value of the securities over their issue price (the "original issue discount")
each year that the securities are held, even though the Fund receives no cash
interest payments. In other circumstances, whether pursuant to the terms of a
security or as a result of other factors outside the control of the Fund, the
Fund may recognize income without receiving a commensurate amount of cash. Such
income is included in determining the amount of income which the Fund must
distribute to maintain its status as a regulated investment company and to avoid
the payment of federal income tax and the 4% excise tax. Because such income may
not be matched by a corresponding cash distribution to the Fund, the Fund may be
required to borrow money or dispose of other securities to be able to make
distributions to its shareholders.
The Code imposes constructive sale treatment for federal income tax
purposes on certain hedging strategies with respect to appreciated financial
positions. Under these rules, taxpayers will recognize gain, but not loss, with
respect to securities if they enter into short sales or "offsetting notional
principal contracts" (as defined by the Code) with respect to, or futures or
forward contracts to deliver, the same or substantially identical property, or
if they enter into such transactions and then acquire the same or substantially
identical property. The Secretary of the Treasury is authorized to promulgate
regulations that will treat as constructive sales certain transactions that have
substantially the same effect as these transactions.
INVESTMENTS IN SECURITIES OF UNCERTAIN TAX CHARACTER
The Fund may invest in preferred securities, convertible securities or
other securities the federal income tax treatment of which is uncertain or
subject to recharacterization by the Internal Revenue Service. To the extent
the tax treatment of such securities or income differs from the tax treatment
expected by the Fund, it could affect the timing or character of income
recognized by the Fund, requiring the Fund to purchase or sell securities, or
otherwise change its portfolio, in order to comply with the tax rules applicable
to regulated investment companies under the Code.
BACKUP WITHHOLDING
The Fund may be required to withhold U.S. federal income tax from all
taxable distributions and redemption proceeds payable to shareholders who fail
to provide the Fund with their correct taxpayer identification number or to
make required certifications, or who have been notified by the Internal Revenue
Service that they are subject to backup withholding. The withholding percentage
is 30% for 2003, and will decrease to 29% in 2004 and 2005, and 28%
thereafter until 2011, when the percentage will revert to 31% unless amended by
Congress. Corporate shareholders and certain other shareholders specified in
the Code generally are exempt from such backup withholding. This withholding is
not an additional tax. Any amounts withheld may be credited against the
shareholder's U.S. federal income tax liability.
NON-U.S. SHAREHOLDERS
U.S. taxation of a shareholder who, as to the United States, is a
nonresident alien individual, a foreign trust or estate, a foreign corporation
or foreign partnership (a "non-U.S. shareholder") depends on whether the income
of the Fund is "effectively connected" with a U.S. trade or business carried on
by the shareholder.
Income Not Effectively Connected. If the income from the Fund is not
"effectively connected" with a U.S. trade or business carried on by the
non-U.S. shareholder, distributions of
37
investment company taxable income will be subject to a U.S. tax of 30% (or
lower treaty rate), which tax is generally withheld from such distributions.
Capital gain dividends and any amounts retained by the Fund which are
designated as undistributed capital gains will not be subject to U.S. federal
withholding tax at the rate of 30% (or lower treaty rate) unless the non-U.S.
shareholder is a nonresident alien individual and is physically present in the
United States for more than 182 days during the taxable year and meets certain
other requirements. However, this 30% tax on capital gains of nonresident alien
individuals who are physically present in the United States for more than the
182 day period only applies in exceptional cases because any individual present
in the United States for more than 182 days during the taxable year is generally
treated as a resident for U.S. income tax purposes; in that case, he or she
would be subject to U.S. income tax on his or her worldwide income at the
graduated rates applicable to U.S. citizens, rather than the 30% U.S. federal
withholding tax. In the case of a non-U.S. shareholder who is a nonresident
alien individual, the Fund may be required to withhold U.S. income tax from
distributions of net capital gain unless the non-U.S. shareholder certifies his
or her non-U.S. status under penalties of perjury or otherwise establishes an
exemption. See "Tax Matters--Backup Withholding," above. Any gain a non-U.S.
shareholder realizes upon the sale or exchange of such shareholder's shares of
the Fund in the United States will ordinarily be exempt from U.S. tax unless, in
the case of a non-U.S. shareholder that is a nonresident alien individual, the
gain is U.S. source income and such shareholder is physically present in the
United States for more than 182 days during the taxable year and meets certain
other requirements, or is otherwise considered to be a resident alien of the
United States.
Income Effectively Connected. If the income from the Fund is
"effectively connected" with a U.S. trade or business carried on by a non-U.S.
shareholder, then distributions of investment company taxable income and
capital gain dividends, any amounts retained by the Fund which are designated
as undistributed capital gains and any gains realized upon the sale or exchange
of shares of the Fund will be subject to U.S. income tax at the graduated rates
applicable to U.S. citizens, residents and domestic corporations. Non-U.S.
corporate shareholders may also be subject to the branch profits tax imposed by
the Code.
The tax consequences to a non-U.S. shareholder entitled to claim the
benefits of an applicable tax treaty may differ from those described herein.
Non-U.S. shareholders are advised to consult their own tax advisors with respect
to the particular tax consequences to them of an investment in the Fund.
BUSH DIVIDEND PROPOSAL
The Bush Administration has announced a proposal to reduce or eliminate
taxes on dividends; however, many details of the proposal (including how the
proposal would apply to dividends paid by a regulated investment company) have
not been specified. Prospects for this, or any other dividend tax reduction or
elimination proposal, are unclear. There is no guarantee any proposal will
become law. Accordingly, it is not possible to evaluate how this, or any other,
proposal might affect the taxation of dividends to the Common Shareholders.
OTHER TAXES
Fund shareholders may be subject to state, local and foreign taxes on
their Fund distributions. Shareholders are advised to consult their own tax
advisors with respect to the particular tax consequences to them of an
investment in the Fund.
PERFORMANCE RELATED AND COMPARATIVE INFORMATION
The Fund may quote certain performance-related information and may
compare certain aspects of its portfolio and structure to other substantially
similar closed-end funds. In reports or other communications to shareholders of
the Fund or in advertising materials, the Fund may compare its performance with
that of (i) other investment companies listed in the rankings prepared by
Lipper, Inc. ("Lipper"), Morningstar Inc. or other independent services;
38
publications such as Barrons, Business Week, Forbes, Fortune, Institutional
Investor, Kiplinger's Personal Finance, Money, Morningstar Mutual Fund Values,
The New York Times, The Wall Street Journal and USA Today; or other industry or
financial publications or (ii) the Standard and Poor's Index of 500 Stocks, the
Dow Jones Industrial Average, Dow Jones Utility Index, the Merril Lynch Hybrid
Preferred Securities Index, the Lehman Brothers Aggregate Bond Index, the Lehman
Brothers Government Bond Index, the NAREIT Equity REIT Index, the Lehman
Brothers High Yield Index, the Lehman Brothers Credit Index and other relevant
indices and industry publications. The Fund may also compare the historical
volatility of its portfolio to the volatility of such indices during the same
time periods. (Volatility is a generally accepted barometer of the market risk
associated with a portfolio of securities and is generally measured in
comparison to the stock market as a whole - the beta - or in absolute terms -
the standard deviation.) Comparison of the Fund to an alternative investment
should be made with consideration of differences in features and expected
performance. The Fund may obtain data from sources or reporting services, such
as Bloomberg Financial ("Bloomberg") and Lipper, that the Fund believes to be
generally accurate.
From time to time, the Fund may quote the Fund's total return,
aggregate total return or yield in advertisements or in reports and other
communications to shareholders. The Fund's performance will vary depending upon
market conditions, the composition of its portfolio and its operating expenses.
Consequently any given performance quotation should not be considered
representative of the Fund's performance in the future. In addition, because
performance will fluctuate, it may not provide a basis for comparing an
investment in the Fund with certain bank deposits or other investments that pay
a fixed yield for a stated period of time. Investments comparing the Fund's
performance with that of other investment companies should give consideration
to the quality and maturity of the respective investment companies' portfolio
securities.
The Fund's "average annual total return" is computed according to a
formula prescribed by the Commission. The formula can be expressed as follows:
Average Annual Total Return will be computed as follows:
ERV = P(1+T)/n/
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1-, 5-, or 10-year periods at the end
of the 1-, 5-, or 10-year periods (or fractional portion).
39
The Funds may also quote after-tax total returns to show the impact
of assumed federal income taxes on an investment in a Fund. A Fund's total
return "after taxes on distributions" shows the effect of taxable
distributions, but not any taxable gain or loss, on an investment in shares of
the Fund for a specified period of time. A Fund's total return "after taxes on
distributions and sale of Fund shares" shows the effect of both taxable
distributions and any taxable gain or loss realized by the shareholder upon the
sale of fund shares at the end of a specified period. To determine these
figures, all income, short-term capital gain distributions, and long-term
capital gains distributions are assumed to have been taxed at the highest
marginal individualized federal tax rate then in effect. Those maximum tax
rates are applied to distributions prior to reinvestment and the after-tax
portion is assumed to have been reinvested in the Fund. State and local taxes
are ignored.
Actual after-tax returns depend on a shareholder's tax situation and
may differ from those shown. After-tax returns reflect past tax effects and are
not predictive of future tax effects.
Average Annual Total Return (After Taxes on Distributions) will be
computed as follows:
ATV/D/ = P(1+T)/n/
Where: P = a hypothetical initial investment of $1,000
T = average annual total return (after taxes on distributions)
n = number of years
ATV/D/ = ending value of a hypothetical $1,000 investment
made at the beginning of the period, at the end of
the period (or fractional portion thereof), after
taxes on fund distributions but not after taxes on
redemptions.
Average Annual Total Return (After Taxes on Distributions and Sale of
Fund Shares) will be computed as follows:
ATV/DR/ = P(1+T)/n/
Where: P = a hypothetical initial investment of $1,000
T = average annual total return (after taxes on
distributions and redemption)
n = number of years
ATV/DR/ = ending value of a hypothetical $1,000 investment
made at the beginning periods, at the end of the
periods (or fractional portion thereof), after taxes
on fund distributions and redemptions.
Quotations of yield for the Fund will be based on all investment income
per share earned during a particular 30-day period (including dividends and
interest), less expenses accrued during the period ("net investment income") and
are computed by dividing net investment income by the maximum offering price per
share on the last day of the period, according to the following formula:
40
Yield = 2 [( a-b/cd +1)/6/ - 1]
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends
d = the maximum offering price per share on the last day of
the period
Past performance is not indicative of future results. At the time
Common Shareholders sell their shares, they may be worth more or less than their
original investment. See Appendix B for additional performance related and
comparative information.
EXPERTS
The Financial Statements of the Fund as of , 2003, appearing
in this Statement of Additional Information have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and is included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing. Ernst & Young LLP
provides accounting and auditing services to the Fund. The principal business
address of Ernst & Young LLP is 233 South Wacker Drive, Chicago, Illinois 60606.
CUSTODIAN
The custodian of the assets of the Fund is State Street Bank and Trust
Company, One Federal Street, Boston, Massachusetts 02101. The custodian
performs custodial, fund accounting and portfolio accounting services.
ADDITIONAL INFORMATION
A Registration Statement on Form N-2, including amendments thereto,
relating to the shares of the Fund offered hereby, has been filed by the Fund
with the Commission, Washington, D.C. The Fund's Prospectus and this Statement
of Additional Information do not contain all of the information set forth in the
Registration Statement, including any exhibits and schedules thereto. For
further information with respect to the Fund and the shares offered hereby,
reference is made to the Fund's Registration Statement. Statements contained in
the Fund's Prospectus and this Statement of Additional Information as to the
contents of any contract or other document referred to are not necessarily
complete and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. Copies of the
Registration Statement may be inspected without charge at the Commission's
principal office in Washington, D.C., and copies of all or any part thereof may
be obtained from the Commission upon the payment of certain fees prescribed by
the Commission.
41
REPORT OF INDEPENDENT AUDITORS
42
NUVEEN PREFERRED AND CONVERTIBLE INCOME FUND
FINANCIAL STATEMENTS
Nuveen Preferred and Convertible Income Fund
Statement of Assets and Liabilities
, 2003
[Download Table]
Assets:
==========
43
NUVEEN PREFERRED AND CONVERTIBLE INCOME FUND
Statement of Operations
Period from , 2003 (date of organization) through , 2003
44
APPENDIX A
Ratings of Investments
Standard & Poor's Corporation --A brief description of the applicable
Standard & Poor's Corporation, a division of The McGraw-Hill Companies
("Standard & Poor's" or "S&P") rating symbols and their meanings (as published
by S&P) follows:
A Standard & Poor's issue credit rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations, or a specific financial program
(including ratings on medium term note programs and commercial paper programs).
It takes into consideration the creditworthiness of guarantors, insurers, or
other forms of credit enhancement on the obligation. The issue credit rating is
not a recommendation to purchase, sell, or hold a financial obligation, inasmuch
as it does not comment as to market price or suitability for a particular
investor.
Issue credit ratings are based on current information furnished by the
obligors or obtained by Standard & Poor's from other sources it considers
reliable. Standard & Poor's does not perform an audit in connection with any
credit rating and may, on occasion, rely on unaudited financial information.
Credit ratings may be changed, suspended, or withdrawn as a result of changes
in, or unavailability of, such information, or based on other circumstances.
Issue credit ratings can be either long-term or short-term. Short-term
ratings are generally assigned to those obligations considered short-term in the
relevant market. In the U.S., for example, that means obligations with an
original maturity of no more than 365 days - including commercial paper.
Short-term ratings are also used to indicate the creditworthiness of an
obligor with respect to put features on long-term obligations. The result is a
dual rating, in which the short-term ratings address the put feature, in
addition to the usual long-term rating. Medium-term notes are assigned long-term
ratings.
LONG-TERM ISSUE CREDIT RATINGS
Issue credit ratings are based in varying degrees, on the following
considerations:
1. Likelihood of payment - capacity and willingness of the
obligor to meet its financial commitment on an obligation
in accordance with the terms of the obligation;
2. Nature of and provisions of the obligation; and
3. Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization, or
other arrangement under the laws of bankruptcy and other
laws affecting creditors' rights. The issue ratings
definitions are expressed in terms of default risk. As
such, they pertain to senior obligations of an entity.
Junior obligations are typically rated lower than senior
obligations, to reflect the lower priority in bankruptcy,
as noted above.
A-1
AAA
An obligation rated 'AAA' has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation is extremely strong.
AA
An obligation rated 'AA' differs from the highest-rated
obligations only in small degree. The obligor's capacity to meet its
financial commitment on the obligation is very strong.
A
An obligation rated 'A' is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions
than obligations in higher-rated categories. However, the obligor's
capacity to meet its financial commitment on the obligation is still
strong.
BBB
An obligation rated 'BBB' exhibits adequate protection
parameters. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the
obligor to meet its financial commitment on the obligation.
BB, B, CCC, CC, And C
Obligations rated 'BB', 'B', 'CCC', 'CC', and 'C' are regarded
as having significant speculative characteristics. 'BB' indicates the
least degree of speculation and 'C' the highest. While such obligations
will likely have some quality and protective characteristics, these may
be outweighed by large uncertainties or major exposures to adverse
conditions.
BB
An obligation rated 'BB' is less vulnerable to nonpayment
than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or economic
conditions, which could lead to the obligor's inadequate capacity to
meet its financial commitment on the obligation.
B
An obligation rated 'B' is more vulnerable to nonpayment than
obligations rated 'BB', but the obligor currently has the capacity to
meet its financial commitment on the obligation. Adverse business,
financial, or economic conditions will likely impair the obligor's
capacity or willingness to meet its financial commitment on the
obligation.
CCC
A-2
An obligation rated 'CCC' is currently vulnerable to
nonpayment and is dependent upon favorable business, financial, and
economic conditions for the obligor to meet its financial commitment on
the obligation. In the event of adverse business, financial, or
economic conditions, the obligor is not likely to have the capacity to
meet its financial commitment on the obligation.
CC
An obligation rated 'CC' is currently highly vulnerable to
nonpayment.
C
The 'C' rating may be used to cover a situation where a
bankruptcy petition has been filed or similar action has been taken,
but payments on this obligation are being continued.
D
An obligation rated 'D' is in payment default. The 'D' rating
category is used when payments on an obligation are not made on the
date due even if the applicable grace period has not expired, unless
Standard & Poor's believes that such payments will be made during such
grace period. The 'D' rating also will be used upon the filing of a
bankruptcy petition or the taking of a similar action if payments on an
obligation are jeopardized.
Plus (+) or minus (-). The ratings from 'AA' to 'CCC' may be
modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
C
The 'c' subscript is used to provide additional information to
investors that the bank may terminate its obligation to purchase
tendered bonds if the long-term credit rating of the issuer is below an
investment-grade level and/or the issuer's bonds are deemed taxable.
p
The letter 'p' indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project
financed by the debt being rated and indicates that payment of debt
service requirements is largely or entirely dependent upon the
successful, timely completion of the project. This rating, however,
while addressing credit quality subsequent to completion of the
project, makes no comment on the likelihood of or the risk of default
upon failure of such completion. The investor should exercise his own
judgment with respect to such likelihood and risk.
*
A-3
Continuance of the ratings is contingent upon Standard &
Poor's receipt of an executed copy of the escrow agreement or closing
documentation confirming investments and cash flows.
r
The 'r' highlights derivative, hybrid, and certain other
obligations that Standard & Poor's believes may experience high
volatility or high variability in expected returns as a result of
noncredit risks. Examples of such obligations are securities with
principal or interest return indexed to equities, commodities, or
currencies; certain swaps and options; and interest-only and
principal-only mortgage securities. The absence of an 'r' symbol should
not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
N.R.
Not rated.
Debt obligations of issuers outside the United States and its
territories are rated on the same basis as domestic corporate and
municipal issues. The ratings measure the creditworthiness of the
obligor but do not take into account currency exchange and related
uncertainties.
Bond Investment Quality Standards
Under present commercial bank regulations issued by the
Comptroller of the Currency, bonds rated in the top four categories
('AAA', 'AA', 'A', 'BBB', commonly known as investment-grade ratings)
generally are regarded as eligible for bank investment. Also, the laws
of various states governing legal investments impose certain rating or
other standards for obligations eligible for investment by savings
banks, trust companies, insurance companies, and fiduciaries in
general.
Short-Term Issue Credit Ratings
Notes
A Standard & Poor's note ratings reflects the liquidity
factors and market access risks unique to notes. Notes due in three
years or less will likely receive a note rating. Notes maturing beyond
three years will most likely receive a long-term debt rating. The
following criteria will be used in making that assessment:
. Amortization schedule -- the larger the final
maturity relative to other maturities, the more
likely it will be treated as a note; and
. Source of payment -- the more dependent the issue is
on the market for its refinancing, the more likely
it will be treated as a note.
Note rating symbols are as follows:
A-4
SP-1
Strong capacity to pay principal and interest. An issue determined to
possess a very strong capacity to pay debt service is given a plus (+)
designation.
SP-2
Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.
SP-3
Speculative capacity to pay principal and interest.
A note rating is not a recommendation to purchase, sell, or hold a
security inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.
Commercial Paper
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Ratings are graded into several categories, ranging from 'A-1' for the
highest quality obligations to 'D' for the lowest. These categories are as
follows:
A-1
A short-term obligation rated 'A-1' is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is extremely strong.
A-2
A short-term obligation rated 'A-2' is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
A-3
A short-term obligation rated 'A-3' exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
A-5
B
A short-term obligation rated 'B' is regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
C
A short-term obligation rated 'C' is currently vulnerable to nonpayment
and is dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation.
D
A short-term obligation rated 'D' is in payment default. The 'D' rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The 'D'
rating also will be used upon the filing of a bankruptcy petition or the taking
of a similar action if payments on an obligation are jeopardized.
A commercial rating is not a recommendation to purchase, sell, or hold
a security inasmuch as it does not comment as to market price or suitability for
a particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.
A-6
Moody's Investors Service, Inc.-- A brief description of the applicable
Moody's Investors Service, Inc. ("Moody's") rating symbols and their meanings
(as published by Moody's) follows:
Municipal Bonds
Aaa
Bonds which are rated 'Aaa' are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa
Bonds which are rated 'Aa' are judged to be of high quality by all
standards. Together with the 'Aaa' group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in 'Aaa' securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in 'Aaa'
securities.
A
Bonds which are rated 'A' possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa
Bonds which are rated 'Baa' are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba
Bonds which are rated 'Ba' are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B
A-7
Bonds which are rated 'B' generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa
Bonds which are rated 'Caa' are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca
Bonds which are rated 'Ca' represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C
Bonds which are rated 'C' are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
#(hatchmark): Represents issues that are secured by escrowed funds held
in cash, held in trust, invested and reinvested in direct, non-callable,
non-prepayable United States government obligations or non-callable,
non-prepayable obligations unconditionally guaranteed by the U.S. Government,
Resolution Funding Corporation debt obligations.
Con. (...): Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. The parenthetical rating denotes probable credit stature upon
completion of construction or elimination of the basis of the condition.
(P): When applied to forward delivery bonds, indicates the rating is
provisional pending delivery of the bonds. The rating may be revised prior to
delivery if changes occur in the legal documents or the underlying credit
quality of the bonds.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic
rating classification from Aa through Caa. The modifier 1 indicates that the
issue ranks in the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that the issue ranks
in the lower end of its generic rating category.
Short-Term Loans
MIG 1/VMIG 1
This designation denotes superior credit quality. Excellent protection
is afforded by established cash flows, highly reliable liquidity support, or
demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2
This designation denotes strong credit quality. Margins of protection
are ample, although not as large as in the preceding group.
A-8
MIG 3/VMIG 3
This designation denotes acceptable credit quality. Liquidity and
cash-flow protection may be narrow, and market access for refinancing is likely
to be less well-established.
SG
This designation denotes speculative-grade credit quality. Debt
instruments in this category may lack sufficient margins of protection.
Commercial Paper
Issuers (or supporting institutions) rated Prime-1 have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will normally be evidenced by the following characteristics:
-- Leading market positions in well-established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structures with moderate reliance on
debt and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
-- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers (or supporting institutions) rated Prime-2 have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation than is the case for Prime-2 securities. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained.
Issuers (or supporting institutions) rated Prime-3 have an acceptable
ability for repayment of senior short-term debt obligations. The effect of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
A-9
Fitch Ratings --A brief description of the applicable Fitch Ratings
("Fitch") ratings symbols and meanings (as published by Fitch) follows:
Long-Term Credit Ratings
Investment Grade
AAA
Highest credit quality. 'AAA' ratings denote the lowest expectation of
credit risk. They are assigned only in case of exceptionally strong capacity for
timely payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
AA
Very high credit quality. 'AA' ratings denote a very low expectation of
credit risk. They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
A
High credit quality. 'A' ratings denote a low expectation of credit
risk. The capacity for timely payment of financial commitments is considered
strong. This capacity may, nevertheless, be more vulnerable to changes in
circumstances or in economic conditions than is the case for higher ratings.
BBB
Good credit quality. 'BBB' ratings indicate that there is currently a
low expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.
Speculative Grade
BB
Speculative. 'BB' ratings indicate that there is a possibility of
credit risk developing, particularly as the result of adverse economic change
over time; however, business or financial alternatives may be available to allow
financial commitments to be met. Securities rated in this category are not
investment grade.
B
Highly speculative. 'B' ratings indicate that significant credit risk
is present, but a limited margin of safety remains. Financial commitments are
currently being met; however, capacity for continued payment is contingent upon
a sustained, favorable business and economic environment.
A-10
CCC, CC, C
High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon sustained, favorable business or
economic developments. A 'CC' rating indicates that default of some kind appears
probable. 'C' ratings signal imminent default.
DDD, DD, and D Default
The ratings of obligations in this category are based on their
prospects for achieving partial or full recovery in a reorganization or
liquidation of the obligor. While expected recovery values are highly
speculative and cannot be estimated with any precision, the following serve as
general guidelines. 'DDD' obligations have the highest potential for recovery,
around 90%-100% of outstanding amounts and accrued interest. `DD' indicates
potential recoveries in the range of 50%-90%, and 'D' the lowest recovery
potential, i.e., below 50%. Entities rated in this category have defaulted on
some or all of their obligations. Entities rated 'DDD' have the highest prospect
for resumption of performance or continued operation with or without a formal
reorganization process. Entities rated 'DD' and 'D' are generally undergoing a
formal reorganization or liquidation process; those rated 'DD' are likely to
satisfy a higher portion of their outstanding obligations, while entities rated
'D' have a poor prospect for repaying all obligations.
Short-Term Credit Ratings
A short-term rating has a time horizon of less than 12 months for most
obligations, or up to three years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to meet financial commitments
in a timely manner.
F1
Highest credit quality. Indicates the strongest capacity for timely
payment of financial commitments; may have an added "+" to denote any
exceptionally strong credit feature.
F2
Good credit quality. A satisfactory capacity for timely payment of
financial commitments, but the margin of safety is not as great as in the case
of the higher ratings.
F3
Fair credit quality. The capacity for timely payment of financial
commitments is adequate; however, near-term adverse changes could result in a
reduction to non-investment grade. B Speculative. Minimal capacity for timely
payment of financial commitments, plus vulnerability to near-term adverse
changes in financial and economic conditions.
B
Speculative Minimal capacity for timely payment of financial
commitments, plus vulnerability to near-term adverse changes in financial and
economic conditions.
C
A-11
High default risk. Default is a real possibility. Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable business and
economic environment.
D
Default. Denotes actual or imminent payment default.
Notes to Long-term and Short-term ratings:
"+" or "-" may be appended to a rating to denote relative status within major
rating categories. Such suffixes are not added to the 'AAA' Long-term rating
category, to categories below 'CCC', or to Short-term ratings other than 'F1'.
'NR' indicates that Fitch Ratings does not rate the issuer or issue in
question.
'Withdrawn': A rating is withdrawn when Fitch Ratings deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
Rating Watch: Ratings are placed on Rating Watch to notify investors that
there is a reasonable probability of a rating change and the likely direction of
such change. These are designated as "Positive", indicating a potential upgrade,
"Negative", for a potential downgrade, or "Evolving", if ratings may be raised,
lowered or maintained. Rating Watch is typically resolved over a relatively
short period.
A Rating Outlook indicates the direction a rating is likely to move over a
one to two year period. Outlooks may be positive, stable, or negative. A
positive or negative Rating Outlook does not imply a rating change is
inevitable. Similarly, ratings for which outlooks are `stable' could be
downgraded before an outlook moves to positive or negative if circumstances
warrant such an action. Occasionally, Fitch Ratings may be unable to identify
the fundamental trend. In these cases, the Rating Outlook may be described as
evolving.
A-12
APPENDIX B
PERFORMANCE RELATED AND COMPARATIVE INFORMATION
The Fund is subadvised by Spectrum and Froley, Revy.
As of October 31, 2002, investment-grade quality taxable preferred securities
offered attractive market yields when compared with other fixed-income
investments. The Fund anticipates that substantially all of its portfolio will
be invested in taxable investment-grade quality preferred securities.
[Bar Chart Appears Here]
Attractive Current Yield from a Quality Investment
As of 10/31/02 Yield
Lehman Aggregate Bond Index 4.39%
Lehman Government Index 3.08%
Lehman U.S. Credit Bond Index 5.51%
Taxable Preferred Securities 7.29%
Source: Merrill Lynch, Lehman Brothers, Bloomberg
All yields shown are as of October 31, 2002. Preferred securities are
represented by the Merrill Lynch Preferred Stock Hybrid Securities Index, 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. The Lehman Brothers Aggregate Bond Index is an unmanaged index that
includes all investment-grade, publicly issued, fixed-rate, dollar-denominated,
nonconvertible debt issues and commercial mortgage backed securities with
maturities of at least one year and outstanding par values of $150 million or
more. The Lehman Brothers U.S. Credit Index is an unmanaged index that includes
all publicly-issued, fixed rate, non-convertible, investment grade,
dollar-denominated SEC-registered corporate debt having at least one year to
maturity and an outstanding par value of $100 million. The Lehman Brothers
Government Bond Index is an unmanaged index that includes all public obligations
of the U.S. Treasury and all publicly-issued debt of U.S. Government agencies
and quasi-federal corporations, and corporate debt guaranteed by the U.S.
Government, excluding foreign-targeted issues. It is not possible to invest
directly in any of these indexes. The Fund differs from the Merrill Lynch
Preferred Stock Hybrid Securities Index in several important respects. The
Merrill Lynch index consists only of exchange-traded preferred securities, while
the Fund may invest in over-the-counter preferred securities. The Fund expects
to employ leverage, although there is no assurance leverage will be employed.
Unlike an index, the Fund will charge management fees and expenses. The yields
shown here are for comparison purposes only, and none of these yields is
intended to be predictive of the future yields of these asset classes or of the
Fund.
Historically, investment-grade quality taxable preferred securities have shown
low return correlations with a number of asset classes commonly found in
individual investors' portfolios. Nuveen believes that adding a low correlation
investment to an investor's portfolio has the potential to enhance the capital
preservation of the investor's portfolio over time.
[Bar Chart Appears Here]
Low Correlations May Help Preserve Capital by Reducing Overall Portfolio Risk
October 1997 through October 2002
5 years
Corporate Bonds 0.44
Government Bonds 0.42
REITS 0.24
S&P 500 -0.11
Taxable Preferred Securities 1.00
Source: Merrill Lynch, Lehman Brothers, NAREIT, Ibbotson Associates
Correlation coefficients are based on monthly return data from October 1997
through October 2002. Past correlations are not necessarily predictive of future
correlations between any of these asset classes and the Fund. Taxable preferred
securities are represented by the Merrill Lynch Preferred Stock Hybrid
Securities Index, 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. Corporate Bonds are represented by the Lehman
Brothers Aggregate Bond Index, an unmanaged index that includes all
investment-grade, publicly issued, fixed-rate, dollar-denominated,
nonconvertible debt issues and commercial mortgage backed securities with
maturities of at least one year and outstanding par values of $150 million or
more. Government Bonds are represented by the Lehman Brothers Government Bond
Index, an unmanaged index that includes all public obligations of the U.S.
Treasury and all publicly-issued debt of U.S. Government agencies and
quasi-federal corporations, and corporate debt guaranteed by the U.S.
Government, excluding foreign-targeted issues. REITs are represented by the
NAREIT Equity REIT Index, an unmanaged index of publicly-traded U.S.
tax-qualified REITs that have 75% or more of their invested book assets in the
equity ownership of real estate. The S&P 500 is an unmanaged index of 500
large-capitalization, publicly-traded common stocks representing various
industries. It is not possible to invest directly in any of these indexes.
The Fund's managers will seek attractive yields by investing only in securities
that, at the time of investment are investment-grade quality. Spectrum believes
there is a potential advantage in seeking higher yields by investing in the
subordinated preferred securities of strong, highly rated issuers rather than
the senior debt of the same companies.
Preferred Securities May Offer Attractive Yields Relative to the Yields on Bonds
Issued by the Same Company
[Enlarge/Download Table]
Same Same
Company's Company's
(as of 10/31/02) Preferred Preferred 10-Year 10-Year Yield
Security Security Rating Security Yield Rating Bond Yield Pick-up
------------------------------------------------------------------------------------------------
Citigroup Aa2 7.27% Aa1 4.99% 2.28%
Financial Security Assurance Aa2 7.38% Aa2 5.03% 2.35%
Harris Bankcorp A1 7.42% AA- 5.29% 2.13%
Hartford Financial Services A3 7.89% A2 5.37% 2.52%
HRPT Properties Trust Baa3 9.80% Baa2 5.92% 3.88%
National Australia Bank A2 7.85% A1 4.80% 3.05%
US Bancorp A1 7.43% Aa3 4.83% 2.60%
------------------------------------------------------------------------------------------------
Source: Bloomberg
This table is for illustrative purposes only, and is designed to highlight one
of the criteria the Fund's managers may use when evaluating securities for the
Fund. The Fund managers will use other criteria as well when selecting the
Fund's investments. There can be no assurance the Fund will or will not invest
in the securities of any of the companies shown here. Yields on these securities
do not represent yield on the Fund's Common Shares. This is not a recommendation
to purchase any of these securities.
This type of preferred security, relatively rare before 1995, has grown to a
total outstanding amount of approximately $187 billion as of September 30, 2002.
[Line Graph Appears Here]
$billions
2Q 91 0
4Q 91 0.575
2Q 92 0.8
4Q 92 1.1956
2Q 93 3.4944
4Q 93 5.7522
2Q 94 7.4007
4Q 94 10.1853
2Q 95 14.8693
4Q 95 22.824
2Q 96 31.329
4Q 96 36
2Q 97 85.4577
4Q 97 94.1
2Q 98 116.5
4Q 98 133
2Q 99 144
4Q 99 153.5
2Q 00 156.9
4Q 00 164.0
2Q 01 166.0
4Q 01 178
1Q 02 180
2Q 02 182
3Q 02 187
Source: Merrill Lynch, Lehman Brothers, Bloomberg
This graph tracks the cumulative par value of the outstanding amount of U.S.
dollar denominated non-dividend received deduction preferred securities, the
asset class in which the Fund intends to invest primarily all of its assets. It
is derived from quarterly issuance data supplied to Spectrum Asset Management by
Merrill Lynch and Lehman Brothers, and then corroborated by Spectrum using data
retrieved through Bloomberg.
The Fund's managers believe that income-producing closed-end exchange-traded
funds may be a valuable addition to the portfolios of suitable investors. The
Fund shares a number of features found in many income-oriented closed-end
exchange-traded funds, including:
.. Monthly dividends
.. Enhanced income potential through leverage
.. Exchange-listing and liquidity
.. Ability to remain fully invested at all times
.. Widespread price visibility
.. Convenient intra-day trading
.. Professional management
.. Dividend reinvestment
.. Low minimum investment
For Which Accounts is this Fund Appropriate?
While this Fund may be appropriate for a wide range of investors and accounts,
it may be particularly attractive for investors with:
.. tax-deferred or tax-advantaged accounts such as retirement plans
.. taxable accounts with relatively low current taxable income
.. accounts that now contain individual preferred securities
Who Might Be Interested?
The features and objectives of this Fund might be especially appealing to those:
.. Already investing in taxable preferred securities
.. Looking for high current income potential from an investment-grade quality
fund
.. Seeking additional diversification within their portfolios
.. Interested in trading convenience and flexibility
.. Reassured by the experience of Nuveen and Spectrum
Nuveen believes investors can take advantage of several benefits by purchasing
shares during the initial public offering, including:
- Known price - $15 per share
- The same price for all shares in an order - no matter what the order size, all
orders are filled at the same $15 per share (100 per share minimum)
The combination of taxable preferred and convertible securities is designed
primarily to provide investors attractive current income. In addition, the
Fund's convertible securities allocation offers investors the potential for some
additional total return when the stock markets recover.
B-1
Nuveen Preferred and Convertible Income Fund Common Shares
-------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
-------------------------------------------
, 2003
PART C - OTHER INFORMATION
Item 24: Financial Statements and Exhibits
1. Financial Statements:
Registrant has not conducted any business as of the date of this filing,
other than in connection with its organization. Financial Statements indicating
that the Registrant has met the net worth requirements of Section 14(a) of the
1940 Act are filed with this Pre-effective Amendment to the Registration
Statement.
2. Exhibits:
a. Declaration of Trust dated January 27, 2003. Filed on January 31, 2003 as
Exhibit a to Registrant's Registration Statement on Form N-2 (File
No. 333-102903) and incorporated herein by reference.*
b. By-laws of Registrant. Filed on January 31, 2003 as Exhibit b to
Registrant's Registration Statement on Form N-2 (File No. 333-102903) and
incorporated herein by reference.*
c. None.
d. Form of Share Certificate.
e. Terms and Conditions of the Dividend Reinvestment Plan.
f. None.
g.1 Investment Management Agreement between Registrant and Nuveen Institutional
Advisory Corp. dated , 2003.**
g.2 Investment Sub-Advisory Agreement between Nuveen Institutional Advisory
Corp. and Spectrum Asset Management, Inc. dated , 2003.**
g.3 Investment Sub-Advisory Agreement between Nuveen Institutional Advisory
Corp. and Froley, Revy Investment Company, Inc. dated , 2003.**
h.1 Form of Underwriting Agreement.**
h.2 Form of Salomon Smith Barney Inc. Master Selected Dealer Agreement.**
h.3 Form of Nuveen Master Selected Dealer Agreement.**
h.4 Form of Master Agreement Among Underwriters.**
h.5 Form of Dealer Letter Agreement.**
i. Nuveen Open-End and Closed-End Funds Deferred Compensation Plan for
Independent Directors and Trustees.
j. Master Custodian Agreement between Registrant and State Street Bank & Trust
Company dated , 2003.**
k.1 Shareholder Transfer Agency Agreement between Registrant and State Street
Bank & Trust Company dated , 2003.**
k.2 Expense Reimbursement Agreement between Registrant and Nuveen Institutional
Advisory Corp. dated , 2003.**
C-1
l.1 Opinion and consent of Bell, Boyd & Lloyd LLC.**
l.2 Opinion and consent of Bingham McCutchen LLP.**
m. None.
n. Consent of Ernst & Young LLP.
o. None.
p. Subscription Agreement of Nuveen Institutional Advisory Corp. dated
, 2003.**
q. None.
r.1 Code of Ethics of Nuveen Institutional Advisory Corp.
r.2 Code of Ethics of Spectrum Asset Management, Inc.
r.3 Code of Ethics of Froley, Revy Investment Company, Inc.**
s. Power of Attorney.
-------------------
* Previously filed.
** To be filed by amendment.
Item 25: Marketing Arrangements
Sections 2, 3 and 5(n) of the Form of Underwriting Agreement to be filed as
Exhibit h.1 to this Registration Statement.
See the Introductory Paragraph and Sections 2 and 3(d) of the Form of Salomon
Smith Barney Inc. Master Selected Dealer Agreement to be filed as Exhibit h.2 to
this Registration Statement and the Introductory Paragraph and Sections 2 and 3
of the Form of Nuveen Master Selected Dealer Agreement to be filed as Exhibit
h.3 to this Registration Statement.
See Introductory Paragraph and Sections 1.2, 3.1, 3.2, 3.4-3.8, 4.1, 4.2,
5.1-5.4, 6.1, 10.9 and 10.10 of the Form of Master Agreement Among Underwriters
to be filed as Exhibit h.4 to this Registration Statement.
See Paragraph e of the Form of Dealer Letter Agreement between Nuveen and the
Underwriters filed as Exhibit h.5 to this Registration Statement.
Item 26: Other Expenses of Issuance and Distribution
[Download Table]
Securities and Exchange Commission fees $ 1.38
National Association of Securities Dealers, Inc. fees 501.50
Printing and engraving expenses *
Legal Fees *
Exchange listing fees *
Blue Sky filing fees and expenses *
Miscellaneous expenses *
-----------
Total $ *
===========
C-2
------------
* To be completed by amendment. Nuveen Institutional Advisory Corp., Spectrum
Asset Management, Inc. and Froley, Revy Investment Company, Inc. have
contractually agreed to reimburse the Fund for fees and expenses in the amount
of .32% of average daily Managed Assets of the Fund for the first five full
years of the Fund's operations, .24% of average daily Managed Assets in year
six, .16% in year 7 and .08% in year 8. Without the reimbursement, "Total Annual
Expenses" would be estimated to be 1.65% of average daily net assets
attributable to Common Shares. Nuveen has agreed to pay (i) all organizational
expenses and (ii) offering costs (other than sales load) that exceed $0.03 per
Common Share (.20% of offering price).
Item 27: Persons Controlled by or under Common Control with Registrant
Not applicable.
Item 28: Number of Holders of Securities
At February 12, 2003
[Download Table]
Number of
Title of Class Record Holders
-------------- --------------
Common Shares, $0.01 par value 0
Item 29: Indemnification
Section 4 of Article XII of the Registrant's Declaration of Trust provides
as follows:
Subject to the exceptions and limitations contained in this Section 4,
every person who is, or has been, a Trustee, officer, employee or agent of the
Trust, including persons who serve at the request of the Trust as directors,
trustees, officers, employees or agents of another organization in which the
Trust has an interest as a shareholder, creditor or otherwise (hereinafter
referred to as a "Covered Person"), shall be indemnified by the Trust to the
fullest extent permitted by law against liability and against all expenses
reasonably incurred or paid by him in connection with any claim, action, suit or
proceeding in which he becomes involved as a party or otherwise by virtue of his
being or having been such a Trustee, director, officer, employee or agent and
against amounts paid or incurred by him in settlement thereof.
No indemnification shall be provided hereunder to a Covered Person:
(a) against any liability to the Trust or its Shareholders by reason of a final
adjudication by the court or other body before which the proceeding was
brought that he engaged in willful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in the conduct of his office;
(b) with respect to any matter as to which he shall have been finally
adjudicated not to have acted in good faith in the reasonable belief that
his action was in the best interests of the Trust; or
C-3
(c) in the event of a settlement or other disposition not involving a final
adjudication (as provided in paragraph (a) or (b)) and resulting in a
payment by a Covered Person, unless there has been either a determination
that such Covered Person did not engage in willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the
conduct of his office by the court or other body approving the settlement
or other disposition or a reasonable determination, based on a review of
readily available facts (as opposed to a full trial-type inquiry), that he
did not engage in such conduct:
(i) by a vote of a majority of the Disinterested Trustees acting on
the matter (provided that a majority of the Disinterested Trustees
then in office act on the matter); or
(ii) by written opinion of independent legal counsel.
The rights of indemnification herein provided may be insured against by
policies maintained by the Trust, shall be severable, shall not affect any other
rights to which any Covered Person may now or hereafter be entitled, shall
continue as to a person who has ceased to be such a Covered Person and shall
inure to the benefit of the heirs, executors and administrators of such a
person. Nothing contained herein shall affect any rights to indemnification to
which Trust personnel other than Covered Persons may be entitled by contract or
otherwise under law.
Expenses of preparation and presentation of a defense to any claim, action,
suit or proceeding subject to a claim for indemnification under this Section 4
shall be advanced by the Trust prior to final disposition thereof upon receipt
of an undertaking by or on behalf of the recipient to repay such amount if it is
ultimately determined that he is not entitled to indemnification under this
Section 4, provided that either:
(a) such undertaking is secured by a surety bond or some other appropriate
security or the Trust shall be insured against losses arising out of any
such advances; or
(b) a majority of the Disinterested Trustees acting on the matter
(provided that a majority of the Disinterested Trustees then in office act
on the matter) or independent legal counsel in a written opinion shall
determine, based upon a review of the readily available facts (as opposed
to a full trial-type inquiry), that there is reason to believe that the
recipient ultimately will be found entitled to indemnification.
As used in this Section 4, a "Disinterested Trustee" is one (x) who is not
an Interested Person of the Trust (including anyone, as such Disinterested
Trustee, who has been exempted from being an Interested Person by any rule,
regulation or order of the Commission), and (y) against whom none of such
actions, suits or other proceedings or another action, suit or other proceeding
on the same or similar grounds is then or has been pending.
C-4
As used in this Section 4, the words "claim," "action," "suit" or
"proceeding" shall apply to all claims, actions, suits, proceedings (civil,
criminal, administrative or other, including appeals), actual or threatened; and
the words "liability" and "expenses" shall include without limitation,
attorneys' fees, costs, judgments, amounts paid in settlement, fines, penalties
and other liabilities.
The trustees and officers of the Registrant are covered by Investment Trust
Directors and officers and Errors and Omission policies in the aggregate amount
of $50,000,000 against liability and expenses of claims of wrongful acts arising
out of their position with the Registrant, except for matters which involve
willful acts, bad faith, gross negligence and willful disregard of duty (i.e.,
where the insured did not act in good faith for a purpose he or she reasonably
believed to be in the best interest of Registrant or where he or she had
reasonable cause to believe this conduct was unlawful). The policy has a
$500,000 deductible, which does not apply to individual trustees or officers.
Section 8 of the Underwriting Agreement to be filed as Exhibit h.1 to this
Registration Statement provides for each of the parties thereto, including the
Registrant and the Underwriters, to indemnify the others, their trustees,
directors, certain of their officers, trustees, directors and persons who
control them against certain liabilities in connection with the offering
described herein, including liabilities under the federal securities laws.
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
Item 30: Business and Other Connections of Investment Adviser
Nuveen Institutional Advisory Corp. serves as investment adviser to the
following open-end and closed-end management type investment companies: Nuveen
Investment Trust, Nuveen Investment Trust II, Nuveen Investment Trust III,
Nuveen Floating Rate Fund, Nuveen Senior Income Fund, Nuveen Select Tax-Free
Income Portfolio, Nuveen Select Tax-Free Income Portfolio 2, Nuveen California
Select Tax-Free Income, Nuveen New York Select Tax-Free Income Portfolio, Nuveen
Real Estate Income Fund, Nuveen Select Tax-Free Income Portfolio 3, Nuveen
Quality Preferred Income Fund, Nuveen Quality Preferred Income Fund 2 and
Nuveen Quality Preferred Income Fund 3.
C-5
Nuveen Institutional Advisory Corp. has no other clients or business at the
present time. For a description of other business, profession, vocation or
employment of a substantial nature in which any director or officer of the
investment adviser who serve as officers or Trustees of the Registrant has
engaged during the last two years for his or her account or in the capacity of
director, officer, employee, partner or trustee, see the descriptions under
"Management of the Fund" in Part B of this Registration Statement. Such
information for the remaining senior officers of NIAC appears below:
[Enlarge/Download Table]
Other Business Profession, Vocation or
Name and Position with NIAC Employment During Past Two Years
--------------------------- --------------------------------------
John P. Amboian, President.................... President, formerly Executive Vice President
of The John Nuveen Company, Nuveen Investments,
Nuveen Advisory Corp., Nuveen Asset Management, Inc.
and Nuveen Senior Loan Asset Management, Inc. and
Executive Vice President and Director of Rittenhouse
Financial Services, Inc.
Alan G. Berkshire, Senior Vice President,
Secretary and General Counsel................. Senior Vice President and General Counsel (since
1997) and Secretary (since 1998) of The John
Nuveen Company, Nuveen Investments, and Nuveen
Advisory Corp., Senior Vice President and Secretary
(since 1999) of Nuveen Senior Loan Management Inc.,
prior thereto, Partner in the law firm of
Kirkland & Ellis.
Margaret E. Wilson, Senior Vice President,
Finance....................................... Senior Vice President, Finance of the John Nuveen
Company, Nuveen Investments and Nuveen Advisory Corp.
and Senior Vice President and Controller of Nuveen
Senior Loan Asset Management, Inc.; formerly CFO of
Sara Lee Corp., Bakery Division.
Deepak Gulrajani, Vice President ............. Director, Fixed Income Strategies and a Principal of
Symphony Asset Management, LLC ("Symphony"), a
wholly-owned subsidiary of Nuveen Investments, Inc.
Prior to joining Symphony, Mr. Gulrajani was the Director
of Fixed Income Strategies at Barclays Global Investors.
Gunther Stein, Vice President ................ Lead portfolio manager for high yield strategies at
Symphony since 1999. Prior to joining Symphony, Mr. Stein
was a High Yield Portfolio Manager at Wells Fargo.
Lenny Mason, Vice President .................. High yield portfolio manager at Symphony. Prior to joining
Symphony, Mr. Mason was a Managing Director in FleetBoston's
Technology & Communications Group.
Spectrum Asset Management, Inc. serves as an investment adviser to a
non-U.S. fund and offers separate account management for certain institutions
and high net worth individuals. Spectrum also is a registered broker-dealer. See
"Management of the Fund" in Part B of the Registration Statement.
Set forth below is a list of each director and officer of Spectrum Asset
Management, Inc., indicating each business profession, vocation or employment of
a substantial nature in which such person has been, at any time during the past
two fiscal years, engaged for his or her own account or in the capacity of
director, officer, partner or trustee.
[Enlarge/Download Table]
Other Business Profession, Vocation or Employment
Name and Position with Spectrum During Past Two Fiscal Years
------------------------------- -------------------------------------------------
Fernando Diaz, Vice President Vice President of Spectrum since February 2000. Previously,
head of preferred trading at both Spear, Leeds & Kellog and
Pershing, a division of DLJ.
Nancy K. Dray, Legal and Compliance --
Officer
Ralph C. Eucher, Director President of Princor Financial Services Corporation since
May 1999. Senior Vice President of Principal Life Insurance
Company since August 2002.
Dennis P. Francis, Director Chief Executive Officer of Principal Global Investors since
September 1998. Senior Vice President of Principal Life
Insurance Company since 1998. Senior Vice President of
Principal Financial Group, Inc. since 2001.
Richard W. Hibbs, Director Executive Vice President Marketing for Principal Global
Investors since September 1998. Vice President of Principal
Life Insurance Company since September 1998.
Timothy Howald, Director Chief Financial Officer of Principal Global Investors since
November 1998. Vice President of Principal Life Insurance
Company since November 1998.
Patrick G. Hurley, Senior Vice President --
and Chief Information Officer
L. Philip Jacoby, IV, Senior Vice --
President and Portfolio Manager
Mark A. Lieb, Executive Director and --
Chief Financial Officer
Jim McCaughan, Director Global Head of Asset Management for Principal Global Investors
since April 2002. Executive Vice President of Principal Life
Insurance Company since April 2002. Senior Vice President of
Principal Financial Group, Inc. since April 2002. Previously
Chief Executive Officer of Credit Suisse Asset Management
Americas.
Jean M. Orlando, Vice President and --
Controller
Gloria Reeg, Director Global Head of Fixed Income for Principal Global Investors
since February 2002. Vice President of Principal Life Insurance
Company since February 2002. Previously the Managing Director
of Global Consulting for Frank Russell Company.
Bernard M. Sussman, Executive Director --
and Chief Investment Officer
Albano Tunnera, Assistant Vice President --
and Operations Manager
Joseph J. Urciuoli, Vice President and --
Director of Research
Froley, Revy Investment Company, Inc. serves as an investment adviser to ______.
See "Management of the Fund" in Part B of the Registration Statement.
Set forth below is a list of each director and officer of Froley, Revy
Investment Company, Inc., indicating each business profession, vocation or
employment of a substantial nature in which such person has been, at any time
during the past two fiscal years, engaged for his or her own account or in the
capacity of director, officer, partner or trustee.
[Download Table]
Other Business Profession, Vocation
or Employment During Past Two
Name and Position with Froley, Revy Fiscal Years
----------------------------------- -----------------------------------
George Froley, III, Chairman and --
Managing Director
K. Andrea O'Connell, President, Chief --
Executive Officer, Managing Director
and Assistant Secretary
Michael Revy, Managing Director Director, Staub Holding. Private
banker with Wechsler & Co. until
2002.
James Barry, Managing Director --
Ravi Malik, Managing Director --
Warren Chun, First Vice President --
Mike Opre, Vice President --
Monica Erickson, Vice President --
Steve Wachtel, Vice President --
David Epstein, Vice President --
Kim Nicholas, Vice President and --
Secretary
Melinda Gordon, Managing Director --
Melissa Shanahan, Vice President --
John Padden, Vice President --
Ed Hackney, Vice President --
Lily Yu, First Vice President --
Ted Heigel, Vice President --
Item 31: Location of Accounts and Records
Nuveen Institutional Advisory Corp., 333 West Wacker Drive, Chicago,
Illinois 60606, maintains the Declaration of Trust, By-Laws, minutes of trustees
and shareholders meetings and contracts of the Registrant and all advisory
material of the investment adviser.
Spectrum Asset Management, Inc., 4 High Ridge Park, Stamford, CT 06905,
maintains certain advisory material of the subadviser.
Froley, Revy Investment Company, Inc., 10900 Wilshire Boulevard, Los
Angeles, CA 90024, maintains certain of its advisory material.
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02110, maintains all general and subsidiary ledgers, journals,
trial balances, records of all portfolio purchases and sales, and all other
required records not maintained by Nuveen Institutional Advisory Corp.
Item 32: Management Services
Not applicable.
C-6
Item 33: Undertakings
1. Registrant undertakes to suspend the offering of its shares until it
amends its prospectus if (1) subsequent to the effective date of its
Registration Statement, the net asset value declines more than 10 percent from
its net asset value as of the effective date of the Registration Statement, or
(2) the net asset value increases to an amount greater than its net proceeds as
stated in the prospectus.
2. Not applicable.
3. Not applicable.
4. Not applicable.
5. The Registrant undertakes that:
a. For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of a registration statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the Registrant under Rule 497(h) under the
Securities Act of 1933 shall be deemed to be part of the Registration
Statement as of the time it was declared effective.
b. For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of the securities at that
time shall be deemed to be the initial bona fide offering thereof.
6. The Registrant undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business days of receipt
of a written or oral request, any Statement of Additional Information.
C-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in this City of Chicago, and State of Illinois, on the 12th day of
February, 2003.
NUVEEN PREFERRED AND CONVERTIBLE INCOME FUND
/s/ Jessica R. Droeger
________________________________________
Jessica R. Droeger, Vice President and
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
[Enlarge/Download Table]
Signature Title Date
--------- ----- ----
/s/ Stephen D. Foy Vice President and Controller February 12, 2003
---------------------- (Principal Financial and
Stephen D. Foy Accounting Officer)
/s/ Gifford R. Zimmerman Chief Administrative Officer February 12, 2003
------------------------
Gifford R. Zimmerman
Timothy R. Schwartfeger* Chairman of the Board and By: /s/ Jessica R. Droeger
Trustee ------------------------
Jessica R. Droeger
Attorney-In-Fact
February 12, 2003
*An original power of attorney authorizing Jessica R. Droeger and Gifford
R. Zimmerman, among others, to execute this Registration Statement, and
Amendments thereto, for the trustee of the Registrant on whose behalf this
Registration Statement is filed, has been executed and filed as an exhibit.
INDEX TO EXHIBITS
a. Declaration of Trust dated January 27, 2003.*
b. By-laws of Registrant.*
c. None.
d. Form of Share Certificate.
e. Terms and Conditions of the Dividend Reinvestment Plan.
f. None.
g.1 Investment Management Agreement between Registrant and Nuveen Institutional
Advisory Corp. dated , 2003.**
g.2 Investment Sub-Advisory Agreement between Nuveen Institutional Advisory
Corp. and Spectrum Asset Management, Inc. dated , 2003.**
g.3 Investment Sub-Advisory Agreement between Nuveen Institutional Advisory
Corp. and Froley, Revy Investment Company, Inc. dated , 2003.**
h.1 Form of Underwriting Agreement.**
h.2 Form of Salomon Smith Barney Inc. Master Selected Dealer Agreement.**
h.3 Form of Nuveen Master Selected Dealer Agreement.**
h.4 Form of Master Agreement Among Underwriters.**
h.5 Form of Dealer Letter Agreement.**
i. Nuveen Open-End and Closed-End Funds Deferred Compensation Plan for
Independent Directors and Trustees.
j. Master Custodian Agreement between Registrant and State Street Bank & Trust
Company dated , 2003.**
k.1 Shareholder Transfer Agency Agreement between Registrant and State Street
Bank & Trust Company dated , 2003.**
k.2 Expense Reimbursement Agreement between Registrant and Nuveen Institutional
Advisory Corp. dated , 2003.**
l.1 Opinion and consent of Bell, Boyd & Lloyd LLC.**
l.2 Opinion and consent of Bingham McCutchen LLP.**
m. None.
n. Consent of Ernst & Young LLP.
o. None.
p. Subscription Agreement of Nuveen Institutional Advisory Corp. dated
, 2003.**
q. None.
r.1 Code of Ethics of Nuveen Institutional Advisory Corp.
r.2 Code of Ethics of Spectrum Asset Management, Inc.
r.3 Code of Ethics of Froley, Revy Investment Company, Inc.**
s. Power of Attorney.
------------------
* Previously filed.
** To be filed by amendment
Dates Referenced Herein and Documents Incorporated by Reference
3 Subsequent Filings that Reference this Filing
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