UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-21157
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Nuveen Arizona Dividend Advantage Municipal Fund 3
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(Exact name of registrant as specified in charter)
Nuveen Investments
333 West Wacker Drive
Chicago, IL 60606
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(Address of principal executive offices) (Zip code)
Kevin J. McCarthy
Nuveen Investments
333 West Wacker Drive
Chicago, IL 60606
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(Name and address of agent for service)
Registrant's telephone number, including area code: (312) 917-7700
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Date of fiscal year end: July 31
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Date of reporting period: July 31, 2008
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW,
Washington, DC 20549-0609. The OMB has reviewed this collection of information
under the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
ANNUAL REPORT
July 31, 2008
Nuveen Investments
MUNICIPAL CLOSED-END FUNDS
NUVEEN ARIZONA
PREMIUM INCOME
MUNICIPAL FUND, INC.
NAZ
NUVEEN ARIZONA
DIVIDEND ADVANTAGE
MUNICIPAL FUND
NFZ
NUVEEN ARIZONA
DIVIDEND ADVANTAGE
MUNICIPAL FUND 2
NKR
NUVEEN ARIZONA
DIVIDEND ADVANTAGE
MUNICIPAL FUND 3
NXE
NUVEEN TEXAS
QUALITY INCOME
MUNICIPAL FUND
NTX
IT'S NOT WHAT YOU EARN, IT'S WHAT YOU KEEP.(R)
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Chairman's
LETTER TO SHAREHOLDERS
Photo of: Robert P. Bremner
Robert P. Bremner | Chairman of the Board
Dear Shareholders:
I'd like to use my initial letter to you to accomplish several things. First, I
want to report that after fourteen years of service on your Fund's Board,
including the last twelve as chairman, Tim Schwertfeger retired from the Board
in June. The Board has elected me to replace him as the chairman, the first time
this role has been filled by someone who is not an employee of Nuveen
Investments. Electing an independent chairman marks a significant milestone in
the management of your Fund, and it aligns us with what is now considered a
"best practice" in the fund industry. Further, it demonstrates the independence
with which your Board has always acted on your behalf.
Following Tim will not be easy. During my eleven previous years on the Nuveen
Fund Board, I found that Tim always set a very high standard by combining
insightful industry and market knowledge and sound, clear judgment. While the
Board will miss his wise counsel, I am certain we will retain the primary
commitment Tim shared with all of us - an unceasing dedication to creating and
retaining value for Nuveen Fund shareholders. This focus on value over time is a
touchstone that I and all the other Board members will continue to use when
making decisions on your behalf.
Second, I also want to report that we are very fortunate to be welcoming two new
Board members to our team. John Amboian, the current chairman and CEO of Nuveen
Investments, has agreed to replace Tim as Nuveen's representative on the Board.
John's presence will allow the independent Board members to benefit not only
from his leadership role at Nuveen but also his broad understanding of the fund
industry and Nuveen's role within it. We also are adding Terry Toth as an
independent director. A former CEO of the Northern Trust Company's asset
management group, Terry will bring extensive experience in the fund industry to
our deliberations.
Third, on behalf of the entire Board, I would like to acknowledge the effort the
whole Nuveen organization is making to resolve the auction rate preferred share
situation in a satisfactory manner. As you know, we are actively pursuing a
number of possible solutions, all with the goal of providing liquidity for
preferred shareholders while preserving the potential benefits of leverage for
common shareholders. We appreciate the patience you have shown as we've worked
through the many details involved.
Finally, I urge you to take the time to review the Portfolio Managers' Comments,
the Common Share Distribution and Share Price Information, and the Performance
Overview sections of this report. All of us are grateful that you have chosen
Nuveen Investments as a partner as you pursue your financial goals, and, on
behalf of myself and the other members of your Fund's Board, let me say we look
forward to continuing to earn your trust in the months and years ahead.
Sincerely,
/s/ Robert P. Bremner
Robert P. Bremner
Chairman of the Board
September 19, 2008
Portfolio Managers' COMMENTS
Nuveen Investments Municipal Closed-End Funds | NAZ, NFZ, NKR, NXE, NTX
Portfolio managers Scott Romans and Daniel Close review economic and municipal
market conditions at both the national and state levels, key investment
strategies, and the annual performance of these five Nuveen Funds. Scott, who
has been with Nuveen since 2000, has managed the Arizona Funds since 2003. Dan,
who joined Nuveen in 2000, assumed portfolio management responsibility for NTX
in March 2007.
WHAT FACTORS AFFECTED THE U.S. ECONOMY AND MUNICIPAL MARKET DURING THE ANNUAL
REPORTING PERIOD ENDED JULY 31, 2008?
During this period, developments in the credit markets led to increased price
volatility and tightening liquidity, causing a general flight to quality. In
September 2007, the Federal Reserve (Fed) responded to credit market volatility
by launching a series of interest rate cuts that lowered the fed funds rate by
325 basis points--from 5.25% to 2.00%--in eight months, including reductions of
125 basis points in January 2008 alone. Since April 2008, the Fed has left the
fed funds rate unchanged.
The Fed's rate-cutting actions also were a response to signs of slower growth in
the U.S. economy, as evidenced by changes in the U.S. gross domestic product
(GDP), a closely watched measure of economic performance. Although GDP expanded
at 4.8% in the third quarter of 2007, this measure fell into negative territory
(-0.2%) in the fourth quarter of 2007 before climbing 0.9% in the first quarter
of 2008 (all GDP numbers annualized). During the second quarter of 2008, GDP
grew at an annual rate of 3.3%, boosted by a surge in exports but still
reflecting a 16% decline in residential investment. The economy continued to be
strained by the troubled housing market as well as higher inflation. Driven
largely by increased energy, transportation and food prices, the Consumer Price
Index (CPI) registered a 5.6% year-over-year gain as of July 2008, including
July's 0.8%, the biggest one-month jump in 17 years. The core CPI (which
excludes food and energy prices) rose 2.5% between August 2007 and July 2008,
well above the Fed's unofficial target of 2.0% or lower. In the labor markets,
January 2008 marked the first decline in new job creation since 2003, breaking
the longest string of employment growth (52 months) in U.S. history. The
national unemployment rate for July 2008 was 5.7%, its highest level since March
2004, up from 4.7% in July 2007.
Discussions of specific investments are for illustrative purposes only and are
not intended as recommendations of individual investments. The views expressed
in this commentary represent those of the portfolio managers as of the date of
this report and are subject to change at any time, based on market conditions
and other factors. The Funds disclaim any obligation to advise shareholders of
such changes.
4
In the municipal bond market, factors related to the sub-prime mortgage crisis
had an indirect, but important, influence on performance. General concerns about
the credit markets as well as more specific concerns about municipal bond
insurers with exposure to sub-prime mortgages caused some investors to curtail
purchases. In addition, hedge funds and other non-traditional buyers of
municipal bonds began to sell holdings of longer-maturity bonds into a market
already experiencing a lack of liquidity. Combined with the Fed rate cuts, this
selling produced a sharp steepening of the municipal yield curve, as longer-term
interest rates rose and short-term interest rates declined. Between August 1,
2007, and July 31, 2008, the yield on the Bond Buyer 25 Revenue Bond Index, a
widely followed measure of longer-term municipal market rates, rose 57 basis
points to 5.20%. By comparison, the yield on the 10-year U.S. Treasury note
dropped almost 80 basis points to end the reporting period at 3.98%. In this
environment, bonds with shorter maturities generally outperformed
longer-maturity bonds, and higher quality bonds tended to outperform lower
quality credits.
Also of note in the municipal market, the U.S. Supreme Court in May 2008 ruled
that individual states could continue to offer their residents special tax
treatment on municipal bonds issued within their borders. The high court's
decision in Department of Revenue of the Commonwealth of Kentucky vs. Davis
preserved tax rules in forty-two states, allowing them to continue to exempt
from taxation the income their residents earn on in-state municipal bonds while
taxing the income earned on municipal bonds issued in other states.
Over the twelve months ended July 2008, municipal bond issuance nationwide
totaled $461.9 billion, a decrease of less than 1% from the previous twelve
months. As of July 31, 2008, insured bonds comprised 23% of new supply, compared
with the recent historical figure of approximately 50%. Despite disruptions in
the markets, new municipal issuance continued to be met with solid demand by
institutional and retail investors as well as non-traditional buyers returning
to the market over the last few months.
HOW WERE THE ECONOMIC AND MARKET ENVIRONMENTS IN ARIZONA AND TEXAS DURING THIS
PERIOD?
In the aftermath of one of the largest economic booms in the country, Arizona
began to experience one of the biggest declines. Arizona's economic growth
slowed dramatically, with state GDP falling from 6.8% in 2006 to 1.8% in 2007,
compared with the national averages of 3.4% and 2.0%, respectively. This dropped
Arizona from the third fastest-growing economy in the nation to 26th. One of the
main factors was the slowdown in
5
the construction industry, which subtracted more than one percentage point from
the state's GDP growth. Housing permits fell almost 70% from their peak levels,
delinquency rates rose and housing prices continued to drop. According to the
Standard & Poor's (S&P)/Case-Shiller home price index of 20 major metropolitan
areas, housing prices in Phoenix fell 27.9% between July 2007 and June 2008.
This decline, which ranked Phoenix third in the country behind Las Vegas and
Miami, compared with an average decrease of 15.4% nationwide. Problems in the
housing market have affected other areas of the state economy, especially
consumer spending and the retail, leisure and hospitality and business and
professional services industries. Defense contracting provided some relief, as a
number of the state's military contractors in Phoenix and Tucson recently won
sizable contracts. The health services industry also should continue to post
gains due to its non-cyclical nature. As of July 2008, Arizona's jobless rate
was 5.1%, up from 3.7% in July 2007, the highest level in more than four years
but still well below the national average. As of July 2008, Moody's issuer
rating for Arizona was Aa3 with a stable outlook, while S&P and Fitch rated the
state at AA and AA-, respectively. For the twelve months ended July 31, 2008,
municipal issuance in Arizona rose sharply to $9.8 billion, an increase of 29%
over the previous twelve months.
In contrast to Arizona, Texas was a haven of economic growth. As measured by GDP
by state, the Texas economic growth rate of 4.1% ranked 4th in the nation in
2007, up from 10th place in 2006 and well ahead of the national average growth
of 2.0%. The difference, essentially, was the energy sector, as high oil and gas
prices drove the demand for exploration, drilling, pipeline construction,
refinery expansion and the equipment needed for these endeavors. Although the
majority of growth took place in the eastern area of the state, parts of the
Panhandle and west central Texas have also profited. Many other sectors also
benefited from the expansion, including professional services, finance,
high-tech manufacturers and the biotech industry. Balancing this were layoffs
and production cutbacks at the state's auto plants and additional layoffs and
service reductions by the major airlines based in Dallas-Fort Worth and Houston,
an ongoing process that could have widespread economic repercussions for local
communities. While unemployment in Texas rose over the past twelve months, from
4.3% in July 2007 to 4.7% in July 2008, the state's growth has held the jobless
rate well below the national average. Although sales have fallen somewhat, homes
have generally held their value, and multi-family construction has risen almost
35%. The
6
S&P/Case-Shiller home price index reported that, as of June 2008, housing prices
in Dallas had declined 3.2% year over year, compared with a drop of 15.4%
nationally. As of July 31, 2008, Moody's, S&P, and Fitch maintained their
ratings on Texas-backed general obligation debt at Aa1, AA, and AA+,
respectively, with stable outlooks. For the twelve months ended July 31, 2008,
municipal issuance in Texas totaled $44.6 billion, a decrease of 6% from the
previous twelve months.
WHAT KEY STRATEGIES WERE USED TO MANAGE THE ARIZONA AND TEXAS FUNDS DURING THIS
REPORTING PERIOD?
During this twelve-month period, as the municipal market was characterized by
volatility and a steepening yield curve, we sought to capitalize on the
turbulent environment by continuing to focus on relative value, using a
fundamental approach to find undervalued sectors and individual credits with the
potential to perform well over the long term.
As periodic dislocations in the municipal market provided attractive
opportunities to selectively invest in lower-quality, higher-yielding bonds, we
used the resources of our research team to find those bonds that we believed
represented the best values. In the Arizona Funds, we added several community
facilities district (CFD) bonds, also known as "dirt deals," to each Fund. These
bonds are sold to finance schools, parks, public utilities, and other
infrastructure and provide services such as police and fire protection,
maintenance and library programs. Our focus was primarily on CFD bonds backed by
an ad valorem pledge, that is, property taxes from the local municipality that
provide a backstop if project development progresses more slowly than
anticipated. This marked the first time in a while that we found these types of
bonds at attractive rates and coupons. Also during this period, a number of
hospital offerings came to market at attractive prices, and we took advantage of
opportunities to add higher coupons and better structures to the Funds'
portfolios.
In NTX, we added general obligation bonds and lower-rated utility credits to our
portfolio. We also participated in the $1 billion North Texas Tollway Authority
issue, one of the largest deals to come to market in July 2008.
To generate cash for purchases, we selectively sold holdings with shorter
durations(1), including shorter-dated pre-refunded(2) bonds and other
high-quality short issues that we believed had limited performance potential.
Selling shorter duration bonds and reinvesting further out on the yield curve
also helped to improve the Funds' overall call protection profiles. The Arizona
Funds also sold some higher-grade bonds in the intermediate part of the yield
curve. In NTX, we took advantage of strong bids to sell
(1) Duration is a measure of a bond's price sensitivity as interest rates
change, with longer duration bonds displaying more sensitivity to these
changes than bonds with shorter durations.
(2) Advance refundings, also known as pre-refundings or refinancings, occur
when an issuer sells new bonds and uses the proceeds to fund principal and
interest payments of older existing bonds. This process often results in
lower borrowing costs for bond issuers.
7
bonds that were attractive to the retail market. In addition, some of our new
purchases were funded with proceeds from bond calls, which affected primarily
housing bonds in the Arizona Funds.
HOW DID THE FUNDS PERFORM?
Individual results for these Nuveen Arizona and Texas Funds, as well as relevant
index and peer group information, are presented in the accompanying table.
Total Returns on Common Share Net Asset Value*
For periods ended 7/31/08
Arizona Funds 1-Year 5-Year 10-Year
NAZ -2.87% 4.27% 3.95%
NFZ -4.09% 4.05% N/A
NKR -2.38% 4.58% N/A
NXE -3.48% 4.64% N/A
Texas Fund
NTX -1.04% 4.85% 4.81%
Lipper Other States
Municipal Debt Funds
Average(3) -1.16% 4.76% 4.92%
Lehman Brothers
Municipal
Bond Index(4) 2.83% 4.34% 4.91%
For the twelve months ended July 31, 2008, the total returns on common share NAV
for NTX exceeded the average return for the Lipper Other States Municipal Debt
Funds Average, while the four Arizona Funds trailed this average and all five of
these Funds underperformed the return on the national Lehman Brothers Municipal
Bond Index. Shareholders should note the Lipper Other States Municipal Debt
Funds Average and the Lehman Brothers Municipal Bond Index include bonds from
states not covered in this report, which may make direct comparisons between the
funds and these benchmarks less meaningful.
One of the factors impacting the performance of these Funds relative to that of
the unleveraged Lehman Brothers Municipal Bond Index was the use of financial
leverage. While leverage offers opportunities for additional income and total
returns for common shareholders, the benefits provided by leveraging are
influenced by the general price movements of the bonds in each Fund's portfolio.
During this period, as the yields on longer-term bonds rose and their prices
correspondingly fell, declining valuations had a
* Annualized.
Past performance is not predictive of future results. Current performance may be
higher or lower than the data shown. Returns do not reflect the deduction of
taxes that shareholders may have to pay on Fund distributions or upon the sale
of Fund shares.
For additional information, see the individual Performance Overview for your
Fund in this report.
(3) The Lipper Other State Municipal Debt Funds Average is calculated using the
returns of all closed-traded funds in this category for each period as
follows: 1 year, 46; 5 years, 46; and 10 years, 18. Fund and Lipper returns
assume reinvestment of dividends.
(4) The Lehman Brothers Municipal Bond Index is an unleveraged, unmanaged
national index comprising a broad range of investment-grade municipal
bonds. Results for the Lehman index do not reflect any expenses.
8
negative effect on performance that was magnified by the use of leverage. In
addition, the Funds' borrowing costs remained relatively high, negatively
impacting their total returns. In the turbulent market environment of the past
twelve months, the impact of any valuation change in the Funds' holdings -
whether positive or negative - was magnified by the use of leverage.
Other key factors that influenced the Funds' returns included yield curve and
duration positioning, the use of derivatives, credit exposure and sector
allocations, and holdings of bonds backed by lower-rated municipal bond
insurers.
Given the changes in the interest rate environment, bonds in the Lehman Brothers
Municipal Bond Index with maturities of less than ten years, especially those
maturing in approximately three to five years, benefited the most. As a result,
these bonds generally outperformed credits with longer maturities, with bonds
having the longest maturities (twenty-two years and longer) posting the worst
returns.
NAZ and NFZ used derivatives contracts to synthetically shorten their durations
and move them closer to our strategic duration target. However, while these
contracts did shorten durations, they also had a negative overall impact on the
total return performances of NAZ and especially NFZ, which had the larger
derivative position. As of July 31, 2008, these positions had been closed. NTX
used derivatives toward the end of the period, but these contracts were not in
place long enough to have a significant impact on the Fund's results.
Additionally, the Funds used inverse floaters(5) in an attempt to bring the
Funds' durations closer to our strategic targets. Generally, this had a negative
impact on the performance since the inverse floaters effectively increased the
Funds' exposure to longer-maturity bonds during a period when shorter maturities
were in favor in the market.
Because risk-averse investors generally sought higher quality investments as
disruptions in the financial and housing markets deepened, bonds rated AA and A
typically performed very well, while the performance of the AAA rated sector,
although positive, was hampered to a degree by concerns about bond insurers. On
the other hand, bonds rated BBB or below generally posted poor returns. As of
July 31, 2008, NAZ had allocated approximately 12% of its portfolio to bonds
rated BBB and non-rated bonds, while the remaining four Funds had allocations of
19% to 20% to the lower credit quality categories and non-rated bonds.
(5) An inverse floating rate security is a financial instrument designed to pay
long-term tax-exempt interest at a rate that varies inversely with a
short-term tax-exempt interest rate index. For the Nuveen Funds, the index
typically used is the Securities Industry and Financial Markets (SIAM)
Municipal Swap Index (previously referred to as the Bond Market Association
Index or BMA). Inverse floaters, including those inverse floating rate
securities in which the Funds invested during the reporting period, are
further defined within the Notes to Financial Statements and Glossary of
Terms Used in This Report sections of this shareholder report.
9
In general, bonds that carried any credit risk, regardless of sector, tended to
perform poorly. Revenue bonds as a whole, and especially the industrial
development and health care sectors that had ranked among the top performers in
the Lehman Brothers Municipal Bond Index over the past few years, underperformed
the general municipal market. Next to the industrial development revenue sector,
zero coupon bonds were among the worst performing categories in the municipal
market, and the Funds were negatively impacted by their holdings of zero coupon
credits. The housing sector also performed poorly, as did lower-rated bonds
backed by the 1998 master tobacco settlement agreement, which comprised less
than 1% of NAZ and NXE and just over 1% of NTX as of July 31, 2008. The
performance of NTX was also hurt by its holdings of Industrial Development Bond
(IDB) credits and specifically by bonds issued by Dallas-Fort Worth
International Airport for American Airlines, which saw a substantial decline in
value.
In addition, the performance of the Arizona Funds was negatively impacted by
their holdings of A rated auction rate securities issued by the Arizona Higher
Education Loan Authority. As the municipal auction rate market froze up in
February 2008, the low coupon rate resets that began to occur in the context of
the failed auctions as well as the illiquidity of these securities caused them
to lose significant value. At the time this report was prepared, negotiations
were continuing in an effort to resolve liquidity issues for investors and
settlement activity related to auction rate securities was ongoing. NTX also
invested in similar securities, though its exposure and also the performance
impact were relatively negligible.
Sectors of the market that generally made positive contributions to the Funds'
performances included general obligation bonds, water and sewer, electric
utilities, special tax issues and education. Pre-refunded bonds also performed
exceptionally well, due primarily to their shorter effective maturities and
higher credit quality. Among these Funds, NAZ and NTX held the heaviest
weightings of pre-refunded bonds, while NFZ had the smallest holding of these
bonds.
RECENT DEVELOPMENTS REGARDING BOND INSURANCE COMPANIES
Another factor that had an impact on the performance of these Funds was their
position in bonds backed by municipal bond insurers that experienced downgrades
in their credit ratings. During the period covered by this report, ACA, AMBAC,
FGIC,
10
MBIA, RAAI and XLCA experienced one or more rating reductions by at least one or
more rating agencies. At the time this report was prepared, at least one rating
agency has placed each of these insurers on "negative outlook" or "negative
credit watch", which may presage one or more rating reductions for such insurer
or insurers in the future. As concern increased about the balance sheets of
these insurers, prices on bonds insured by these companies--especially those
bonds with weaker underlying credits--declined, detracting from the Funds'
performance. However, on the whole, the holdings of all of our Funds continued
to be well diversified not only between insured and uninsured bonds, but also
within the insured bond category and it is important to note that municipal
bonds historically have had a very low rate of default.
RECENT DEVELOPMENTS IN THE AUCTION RATE PREFERRED SECURITIES (ARPS) MARKETS
Beginning in February 2008, more shares for sale were submitted in the regularly
scheduled auctions for the preferred shares issued by these Funds than there
were offers to buy. This meant that these auctions "failed to clear" and that
many or all auction preferred shareholders who wanted to sell their shares in
these auctions were unable to do so. This decline in liquidity in auction
preferred shares did not lower the credit quality of these shares, and auction
preferred shareholders unable to sell their shares received distributions at the
"maximum rate" applicable to failed auctions as calculated in accordance with
the pre-established terms of the auction preferred shares. At the time this
report was prepared, the Funds' managers could not predict when future auctions
might succeed in attracting sufficient buyers for the shares offered, if ever.
The Funds' managers are working diligently to refund the auction preferred
shares, and have made progress in these efforts, but at present there is no
assurance that these efforts will succeed. These developments generally do not
affect the management or investment policies of these Funds. However, one
implication of these auction failures for common shareholders is that the Funds'
cost of leverage will likely be higher, at least temporarily, than it otherwise
would have been had the auctions continued to be successful. As a result, the
Funds' future common share earnings may be lower than they otherwise would have
been.
On June 11, 2008, Nuveen announced the Fund Board's approval of plans to use
tender option bonds (TOBs), also known as floating rate securities, to refinance
a portion of the municipal funds' outstanding ARPS, whose auctions have been
failing for several months, including an initial phase of approximately $1
billion in forty-one
11
funds. On June 26, 2008, thirteen municipal funds (none of which are included in
this shareholder report) issued par redemption notices for a portion of their
auction-rate securities aggregating approximately $580 million.
On August 7, 2008, four municipal funds (none of which are included in this
shareholder report) issued par redemption notices for all outstanding shares of
their ARPS totaling $569.9 million. These redemptions were achieved through the
issuance of Variable Rate Demand Preferred shares (VRDP) in conjunction with the
proceeds from the creation of TOBs.
For current, up-to-date information, please visit the Nuveen CEF Auction Rate
Preferred Resource Center at:
http://www.nuveen.com/ResourceCenter/AuctionRatePreferred.aspx.
12
Common Share
Dividend and Share Price
INFORMATION
As previously noted, all of the Funds in this report use leverage to potentially
enhance opportunities for additional income for common shareholders. While this
strategy continued to provide incremental income, the extent of this benefit was
reduced to some degree by the borrowing costs associated with leverage, which
remained relatively high. Some of the Funds' income streams were also impacted
as the proceeds from older, higher-yielding bonds that matured or were called
were reinvested into bonds currently available in the market, which generally
offered lower yields than the maturing or called bonds. These factors resulted
in one monthly dividend reduction in NFZ, NKR and NTX over the twelve-month
period ended July 31, 2008. The dividends of NAZ and NXE remained stable
throughout this reporting period.
Due to normal portfolio activity, common shareholders of the following Funds
received capital gains distributions at the end of December 2007 as follows:
Long-Term Capital Gains
(per share)
NFZ $0.0119
NKR $0.0583
NTX $0.0559
All of the Funds in this report seek to pay stable dividends at rates that
reflect each Fund's past results and projected future performance. During
certain periods, each Fund may pay dividends at a rate that may be more or less
than the amount of net investment income actually earned by the Fund during the
period. If a Fund has cumulatively earned more than it has paid in dividends, it
holds the excess in reserve as undistributed net investment income (UNII) as
part of the Fund's NAV. Conversely, if a Fund has cumulatively paid dividends in
excess of its earnings, the excess constitutes negative UNII that is likewise
reflected in the Fund's NAV. Each Fund will, over time, pay all of its net
investment income as dividends to shareholders. As of July 31, 2008, all of the
Funds in this report had positive UNII balances for tax purposes. NAZ and NTX
had positive UNII balances and NFZ, NKR and NXE had negative UNII balances for
financial statement purposes.
13
COMMON SHARE REPURCHASES AND SHARE PRICE INFORMATION
On July 30, 2008, the Board of Directors/Trustees for each of Nuveen's 120
closed-end funds approved a program, under which each fund may repurchase up to
10% of its common shares. No common shares were repurchased during the
twelve-month reporting period.
As of July 31, 2008, the Funds' common share prices were trading at discounts to
their common share NAVs as shown in the accompanying chart:
7/31/08 Twelve-Month Average
Premium/Discount Discount
NAZ +2.69% -6.42%
NFZ +3.32% -5.69%
NKR +2.49% -2.74%
NXE +1.76% -4.48%
NTX -10.87% -8.40%
14
NAZ
Performance
OVERVIEW
Nuveen Arizona
Premium Income
Municipal Fund, Inc.
as of July 31, 2008
Pie Chart:
Credit Quality (as a % of total investments)(1)
AAA/U.S. Guaranteed 41%
AA 37%
A 10%
BBB 9%
N/R 3%
Bar Chart:
2007-2008 Monthly Tax-Free Dividends Per Common Share
Aug 0.051
Sep 0.051
Oct 0.051
Nov 0.051
Dec 0.051
Jan 0.051
Feb 0.051
Mar 0.051
Apr 0.051
May 0.051
Jun 0.051
Jul 0.051
Line Chart:
Common Share Price Performance -- Weekly Closing Price
8/01/07 13.0701
13.12
13.1
12.99
13.04
13
13
12.95
12.85
12.67
12.4499
12.18
12.44
12.7
13
12.96
12.9599
12.9
12.9
12.81
12.8001
12.78
12.85
12.85
12.9899
13
13.15
13.3
13.3
13.2201
13.2
13.29
13.29
13.18
13.06
13.1
12.96
12.86
12.83
12.96
12.91
13
13
12.8601
12.99
12.99
13.0175
12.95
13
13.09
13.01
12.91
12.9
12.81
12.7899
12.8
12.85
12.85
12.9
13.05
13.05
12.89
12.89
12.58
12.65
12.61
12.61
12.586
12.4
12.4999
12.47
12.37
12.4
12.33
12.45
12.33
12.1
12.24
12.23
12.16
12.1701
12.03
12.15
12.12
12.2
12.32
12.44
12.56
12.58
12.59
12.55
12.49
12.388
12.44
12.39
12.23
12.14
12.18
12.18
12.1999
12.44
12.306
12.36
12.37
12.4
12.35
12.5
12.59
12.84
12.9001
12.99
13.11
13.305
13.38
13.26
13.37
13.5
13.49
13.38
13.1
13.01
12.98
12.99
13
13.07
13.12
13.04
13.09
13.05
13.07
13.1
13.13
13.17
13.21
13.22
13.2401
13.12
12.72
12.62
12.69
12.69
12.63
12.61
12.66
12.69
12.62
12.48
12.32
12.22
12.51
12.5001
12.39
12.382
12.39
12.3
12.29
12.17
12.1
12.1
12.37
12.5799
12.56
12.6
12.6
12.656
12.62
12.75
12.84
12.8599
12.8
12.82
12.85
12.79
12.62
12.58
12.64
12.57
12.6
12.7
12.83
12.91
13
12.98
13.0001
13.07
12.97
12.91
12.92
12.96
12.95
13
13.02
13.1
13.15
13.1
13.1
13.1
13.19
13.16
13.13
13.14
13.2
13.26
13.25
13.13
13.05
13.02
12.89
12.87
12.86
12.86
12.86
12.92
12.99
13.012
12.94
12.94
12.92
12.9
12.82
12.7
12.73
12.67
12.52
12.43
12.49
12.51
12.5
12.43
12.48
12.45
12.48
12.47
12.53
12.61
12.77
12.9
13.08
13.14
13.27
13.18
13.01
13.07
12.976
13
12.95
13.01
13.1201
13.048
12.9975
13.05
12.96
13.05
12.9999
7/31/08 13.35
FUND SNAPSHOT
------------------------------------
Common Share Price $13.35
------------------------------------
Common Share
Net Asset Value $13.00
------------------------------------
Premium/(Discount) to NAV 2.69%
------------------------------------
Market Yield 4.58%
------------------------------------
Taxable-Equivalent Yield(2) 6.67%
------------------------------------
Net Assets Applicable to
Common Shares ($000) $58,097
------------------------------------
Average Effective
Maturity on Securities (Years) 15.37
------------------------------------
Leverage-Adjusted Duration 11.40
------------------------------------
AVERAGE ANNUAL TOTAL RETURN
(Inception 11/19/92)
------------------------------------
ON SHARE PRICE ON NAV
------------------------------------
1-Year 7.10% -2.87%
------------------------------------
5-Year 2.75% 4.27%
------------------------------------
10-Year 3.25% 3.95%
------------------------------------
INDUSTRIES
(as a % of total investments)
------------------------------------
U.S. Guaranteed 23.0%
------------------------------------
Tax Obligation/Limited 20.2%
------------------------------------
Water and Sewer 17.4%
------------------------------------
Health Care 13.3%
------------------------------------
Utilities 9.4%
------------------------------------
Education and Civic
Organizations 6.9%
------------------------------------
Housing/Single Family 6.2%
------------------------------------
Other 3.6%
------------------------------------
(1) The percentages shown in the foregoing chart may reflect the ratings on
certain bonds insured by ACA, AMBAC, FGIC, MBIA, RAAI and XLCA as of July
31, 2008. Please see the Portfolio Managers' Commentary for an expanded
discussion of the affect on the Fund of changes to the ratings of certain
bonds in the portfolio resulting from changes to the ratings of the
underlying insurers both during the period and after period end.
(2) Taxable-Equivalent Yield represents the yield that must be earned on a
fully taxable investment in order to equal the yield of the Fund on an
after-tax basis. It is based on a combined federal and state income tax
rate of 31.3%. When comparing this Fund to investments that generate
qualified dividend income, the Taxable-Equivalent Yield is lower.
15
NFZ
Performance
OVERVIEW
Nuveen Arizona
Dividend Advantage
Municipal Fund
as of July 31, 2008
Pie Chart:
Credit Quality (as a % of total investments)(1)
AAA/U.S. Guaranteed 22%
AA 41%
A 17%
BBB 12%
N/R 8%
Bar Chart:
2007-2008 Monthly Tax-Free Dividends Per Common Share(3)
Aug 0.0555
Sep 0.0555
Oct 0.0525
Nov 0.0525
Dec 0.0525
Jan 0.0525
Feb 0.0525
Mar 0.0525
Apr 0.0525
May 0.0525
Jun 0.0525
Jul 0.0525
Line Chart:
Common Share Price Performance -- Weekly Closing Price
8/01/07 13.68
13.74
13.75
13.74
13.65
13.67
13.67
13.59
13.55
13.43
13.4
13.38
13.38
13.1
13.26
13.36
13.21
13.46
13.5
13.23
13.23
13.28
13.28
13.42
13.51
13.63
13.73
14.23
14.16
14.16
13.97
13.94
13.74
13.71
13.71
13.61
13.63
13.61
13.5
13.53
13.34
13.42
13.42
13.55
13.44
13.4
13.59
13.59
13.54
13.4
13.46
13.47
13.47
13.34
13.34
13.27
13.31
13.31
13.57
13.43
13.5
13.45
13.3701
13.7
13.7
13.7
13.67
13.57
13.43
13.35
13.4
13.35
13.17
12.84
12.66
12.82
12.71
12.71
12.71
12.82
12.82
12.82
12.79
12.78
12.78
12.81
12.8
12.88
13.02
13.07
13.06
13.05
12.95
12.95
12.952
12.89
12.87
12.75
12.71
12.74
12.78
12.73
12.68
12.58
12.65
12.77
12.81
13.03
13.1
13.17
13.31
13.42
13.52
13.6
13.56
13.64
13.73
13.68
13.64
13.6899
13.52
13.5801
13.5
13.55
13.59
13.61
13.51
13.49
13.49
13.53
13.52
13.52
13.52
13.52
13.52
13.65
13.52
13.3901
13.29
13.135
13.135
13.14
13.14
13.33
13.34
13.34
13
12.95
12.92
12.92
13.04
12.7
12.78
12.7899
12.83
12.72
12.53
12.54
12.64
12.84
12.84
12.68
12.68
12.68
12.94
12.89
12.91
12.9499
12.99
12.83
12.83
12.83
12.95
12.95
12.95
13.05
13.17
13.2
13.2
13.43
13.43
13.28
13.2
13.25
13.25
13.25
13.25
13.25
13.25
13.4
13.4
13.2
13.25
13.3
13.4
13.4
13.2
13.3
13.24
13.34
13.14
13.18
13.13
13.311
13.263
13.263
13.263
13.263
13.263
13.49
13.39
13.39
13.21
13.33
13.548
13.548
13.59
13.43
13.43
13.25
13.13
13.15
13.14
13
13
12.98
12.98
12.98
12.73
12.74
12.97
13.27
13.29
13.29
13.7299
13.79
13.79
13.79
13.79
13.6
13.5
13.52
13.52
13.52
13.47
13.27
13.27
13.27
13.3
13.35
13.4
13.4
13.45
13.371
7/31/08 13.7
FUND SNAPSHOT
------------------------------------
Common Share Price $13.70
------------------------------------
Common Share
Net Asset Value $13.26
------------------------------------
Premium/(Discount) to NAV 3.32%
------------------------------------
Market Yield 4.60%
------------------------------------
Taxable-Equivalent Yield(2) 6.70%
------------------------------------
Net Assets Applicable to
Common Shares ($000) $20,552
------------------------------------
Average Effective
Maturity on Securities (Years) 17.39
------------------------------------
Leverage-Adjusted Duration 12.34
------------------------------------
AVERAGE ANNUAL TOTAL RETURN
(Inception 1/30/01)
------------------------------------
ON SHARE PRICE ON NAV
------------------------------------
1-Year 7.72% -4.09%
------------------------------------
5-Year 3.39% 4.05%
------------------------------------
Since
Inception 4.41% 4.79%
------------------------------------
INDUSTRIES
(as a % of total investments)
------------------------------------
Tax Obligation/Limited 30.8%
------------------------------------
Utilities 16.4%
------------------------------------
Housing/Single Family 11.0%
------------------------------------
Health Care 10.0%
------------------------------------
Water and Sewer 9.1%
------------------------------------
Tax Obligation/General 7.6%
------------------------------------
U.S. Guaranteed 5.6%
------------------------------------
Education and Civic
Organizations 5.3%
------------------------------------
Other 4.2%
------------------------------------
(1) The percentages shown in the foregoing chart may reflect the ratings on
certain bonds insured by ACA, AMBAC, FGIC, MBIA, RAAI and XLCA as of July
31, 2008. Please see the Portfolio Managers' Commentary for an expanded
discussion of the affect on the Fund of changes to the ratings of certain
bonds in the portfolio resulting from changes to the ratings of the
underlying insurers both during the period and after period end.
(2) Taxable-Equivalent Yield represents the yield that must be earned on a
fully taxable investment in order to equal the yield of the Fund on an
after-tax basis. It is based on a combined federal and state income tax
rate of 31.3%. When comparing this Fund to investments that generate
qualified dividend income, the Taxable-Equivalent Yield is lower.
(3) The Fund paid shareholders a capital gains distribution in December 2007 of
$0.0119 per share.
16
NKR
Performance
OVERVIEW
Nuveen Arizona
Dividend Advantage
Municipal Fund 2
as of July 31, 2008
Pie Chart:
Credit Quality (as a % of total investments)(1)
AAA/U.S. Guaranteed 34%
AA 36%
A 10%
BBB 12%
N/R 8%
Bar Chart:
Aug 0.0615
Sep 0.0615
Oct 0.0585
Nov 0.0585
Dec 0.0585
Jan 0.0585
Feb 0.0585
Mar 0.0585
Apr 0.0585
May 0.0585
Jun 0.0585
Jul 0.0585
Line Chart:
8/01/07 15.27
15.27
15.27
15.35
15.28
15.36
15.38
15.38
15.37
15.37
15.2
14.76
14.67
14.55
14.3
14.45
15.08
15.25
15.15
15.05
15.25
15.15
15.16
14.92
14.63
14.6
14.7
14.94
15.15
15.11
15.11
14.88
14.93
14.89
14.72
14.73
14.7
14.88
14.66
14.91
14.9799
15.16
15.16
15.16
14.73
14.66
14.63
14.6
14.6
14.62
14.62
14.52
14.41
14.18
14.22
14.26
14.26
14.26
14.25
14.38
14.38
14.38
14.1801
14.2
14.26
14.26
14.26
14.29
14.27
14.16
14.15
14.14
14.07
13.9
13.82
13.8
13.69
13.604
13.7
13.66
13.65
13.61
13.64
13.7
13.8
13.67
13.67
13.77
13.75
13.81
13.84
13.98
14.08
13.9
13.82
13.57
13.2
13.31
13.26
13.24
13.19
13.21
13.48
13.41
13.42
13.43
13.5899
13.59
13.79
13.96
14.12
14.2
14.2799
14.31
14.2
14.24
14.24
14.25
14.25
14.15
14
14.22
14.14
14.1
14.08
14.0899
13.97
14.03
13.95
14.05
14.1
14.15
14.19
14
14
14.11
14.0199
13.91
13.86
13.9299
13.71
13.73
13.74
13.79
13.75
13.6
13.49
13.33
13.36
13.21
13.37
13.37
13.4
13.45
13.51
13.4
13.26
13.26
13.2
13.55
13.5
13.358
13.409
13.5
13.6
13.55
13.6
13.5101
13.65
13.75
13.62
13.65
13.68
13.68
13.643
13.75
13.72
13.93
13.67
13.61
13.65
13.6
13.78
13.73
13.7
13.7099
13.65
13.56
13.56
13.55
13.51
13.51
13.44
13.45
13.53
13.5
13.52
13.75
13.67
13.75
13.7
13.7104
13.8
13.63
13.57
13.93
13.7501
13.72
13.73
13.78
13.7
13.7
13.91
14
14
14
14
13.91
14.03
14.07
13.81
13.85
14
13.68
13.98
13.9
13.9
13.8
13.6
13.67
13.37
13.656
13.732
14.04
14
14.04
14.04
14.04
14.02
13.92
13.72
13.73
13.45
13.45
13.45
13.5
13.59
13.16
12.87
12.99
13.1
13.42
13.49
13.48
7/31/08 14
FUND SNAPSHOT
------------------------------------
Common Share Price $14.00
------------------------------------
Common Share
Net Asset Value $13.66
------------------------------------
Premium/(Discount) to NAV 2.49%
------------------------------------
Market Yield 5.01%
------------------------------------
Taxable-Equivalent Yield(2) 7.29%
------------------------------------
Net Assets Applicable to
Common Shares ($000) $33,311
------------------------------------
Average Effective
Maturity on Securities (Years) 15.76
------------------------------------
Leverage-Adjusted Duration 10.55
------------------------------------
AVERAGE ANNUAL TOTAL RETURN
(Inception 3/25/02)
------------------------------------
ON SHARE PRICE ON NAV
------------------------------------
1-Year -3.16% -2.38%
------------------------------------
5-Year 5.37% 4.58%
------------------------------------
Since
Inception 4.70% 5.04%
------------------------------------
INDUSTRIES
(as a % of total investments)
------------------------------------
Tax Obligation/Limited 30.5%
------------------------------------
Health Care 14.4%
------------------------------------
U.S. Guaranteed 13.4%
------------------------------------
Tax Obligation/General 13.3%
------------------------------------
Water and Sewer 9.4%
------------------------------------
Housing/Multifamily 5.5%
------------------------------------
Housing/Single Family 5.2%
------------------------------------
Other 8.3%
------------------------------------
------------------------------------
(1) The percentages shown in the foregoing chart may reflect the ratings on
certain bonds insured by ACA, AMBAC, FGIC, MBIA, RAAI and XLCA as of July
31, 2008. Please see the Portfolio Managers' Commentary for an expanded
discussion of the affect on the Fund of changes to the ratings of certain
bonds in the portfolio resulting from changes to the ratings of the
underlying insurers both during the period and after period end.
(2) Taxable-Equivalent Yield represents the yield that must be earned on a
fully taxable investment in order to equal the yield of the Fund on an
after-tax basis. It is based on a combined federal and state income tax
rate of 31.3%. When comparing this Fund to investments that generate
qualified dividend income, the Taxable-Equivalent Yield is lower.
(3) The Fund paid shareholders a capital gains distribution in December 2007 of
$0.0583 per share.
17
NXE
Performance
OVERVIEW
Nuveen Arizona
Dividend Advantage
Municipal Fund 3
as of July 31, 2008
Pie Chart:
Credit Quality (as a % of total investments)(1)
AAA/U.S. Guaranteed 25%
AA 42%
A 13%
BBB 12%
N/R 8%
Bar Chart:
2007-2008 Monthly Tax-Free Dividends Per Common Share
Aug 0.0545
Sep 0.0545
Oct 0.0545
Nov 0.0545
Dec 0.0545
Jan 0.0545
Feb 0.0545
Mar 0.0545
Apr 0.0545
May 0.0545
Jun 0.0545
Jul 0.0545
Line Chart:
Common Share Price Performance -- Weekly Closing Price
8/01/07 13.52
13.7
13.41
13.41
13.45
13.49
13.43
13.43
13.2801
13.15
13.18
13.13
13.19
13.05
13
13.09
13.1301
13.38
13.38
13.28
13.25
13.25
13.33
13.15
13.17
13.18
13.33
13.35
13.59
13.8
13.76
13.55
13.51
13.55
13.5
13.3515
13.95
13.5
13.5
13.47
13.47
13.4501
13.4501
13.43
13.75
13.81
13.71
13.65
13.61
13.63
13.6
13.5
13.73
13.5275
13.44
13.44
13.44
13.39
13.45
13.35
13.36
13.37
13.2
13.25
13.25
13.23
13.23
13.2001
13.2
13.02
13.04
13.02
13.08
13.2
13.15
13.05
13.05
12.981
12.98
13
13.0499
12.94
12.9
12.89
12.8899
12.81
12.76
12.8401
12.882
12.8
13.04
13.44
13
13.12
13.1
12.82
12.83
12.9
12.78
12.517
12.32
12.49
12.55
12.5
12.56
12.63
12.95
12.93
13.15
13.192
13.41
13.3887
13.37
13.5
13.5501
13.6799
13.6799
13.6101
13.55
13.5
13.54
13.556
13.38
13.36
13.3401
13.3199
13.3284
13.41
13.49
13.49
13.53
13.56
13.43
13.52
13.5249
13.5
13.35
13.03
12.94
13
13
12.73
12.8
12.95
13.01
12.95
13.06
12.82
12.75
12.634
13.01
12.59
12.75
12.654
12.74
12.8
12.74
12.7
12.4901
12.89
12.9299
13
12.94
12.972
13.22
13.05
13.07
13.25
13.3501
13.379
13.4
13.9
13.9
13.7828
13.76
13.45
13.55
13.65
13.8
13.8
13.85
13.75
13.6901
13.74
13.7
13.5
13.25
13.13
13.1
13.18
13.15
13.15
13.25
13.12
13.15
13.15
13.13
13.15
13
13.09
13.21
13.06
13.1
13.3
13.08
13.28
13.2
13.2
13.19
13.39
13.32
13.32
13.2201
13.22
13.481
13.5
13.4
13.435
13.36
13.15
13.15
13.32
13.32
13.15
13
13.07
13.047
12.97
12.92
13.01
12.996
13.21
13.25
13.25
13.25
13.15
13.15
13.2
13.2
13.23
13.08
12.89
12.69
12.69
12.94
13.03
13.28
13.25
12.92
12.8
12.71
12.74
12.77
12.7198
7/31/08 13.3
FUND SNAPSHOT
------------------------------------
Common Share Price $13.30
------------------------------------
Common Share
Net Asset Value $13.07
------------------------------------
Premium/(Discount) to NAV 1.76%
------------------------------------
Market Yield 4.92%
------------------------------------
Taxable-Equivalent Yield(2) 7.16%
------------------------------------
Net Assets Applicable to
Common Shares ($000) $40,081
------------------------------------
Average Effective
Maturity on Securities (Years) 16.31
------------------------------------
Leverage-Adjusted Duration 12.05
------------------------------------
AVERAGE ANNUAL TOTAL RETURN
(Inception 9/25/02)
------------------------------------
ON SHARE PRICE ON NAV
------------------------------------
1-Year 3.96% -3.48%
------------------------------------
5-Year 4.35% 4.64%
------------------------------------
Since
Inception 3.21% 3.58%
------------------------------------
INDUSTRIES
(as a % of total investments)
------------------------------------
Tax Obligation/Limited 22.0%
------------------------------------
Health Care 18.1%
------------------------------------
U.S. Guaranteed 16.0%
------------------------------------
Education and Civic
Organizations 9.8%
------------------------------------
Transportation 9.2%
------------------------------------
Water and Sewer 9.2%
------------------------------------
Utilities 6.6%
------------------------------------
Housing/Single Family 5.2%
------------------------------------
Other 3.9%
------------------------------------
(1) The percentages shown in the foregoing chart may reflect the ratings on
certain bonds insured by ACA, AMBAC, FGIC, MBIA, RAAI and XLCA as of July
31, 2008. Please see the Portfolio Managers' Commentary for an expanded
discussion of the affect on the Fund of changes to the ratings of certain
bonds in the portfolio resulting from changes to the ratings of the
underlying insurers both during the period and after period end.
(2) Taxable-Equivalent Yield represents the yield that must be earned on a
fully taxable investment in order to equal the yield of the Fund on an
after-tax basis. It is based on a combined federal and state income tax
rate of 31.3%. When comparing this Fund to investments that generate
qualified dividend income, the Taxable-Equivalent Yield is lower.
18
NTX
Performance
OVERVIEW
Nuveen Texas
Quality Income
Municipal Fund
as of July 31, 2008
Pie Chart:
Credit Quality (as a % of total investments)(1),(2)
AAA/U.S. Guaranteed 45%
AA 29%
A 7%
BBB 14%
BB or Lower 4%
N/R 1%
Bar Chart:
2007-2008 Monthly Tax-Free Dividends Per Common Share(4)
Aug 0.0605
Sep 0.0605
Oct 0.057
Nov 0.057
Dec 0.057
Jan 0.057
Feb 0.057
Mar 0.057
Apr 0.057
May 0.057
Jun 0.057
Jul 0.057
Line Chart:
Common Share Price Performance -- Weekly Closing Price
8/01/07 13.97
14.07
14.09
14.0401
14.07
14.09
14.1
14.1
14.09
13.97
13.79
13.58
13.72
13.65
13.65
13.7
13.75
13.82
13.8399
13.67
13.73
13.73
13.8
13.98
14.08
14.23
14.2
14.25
14.3
14.39
14.3101
14.29
14.3
14.2399
14.13
14.18
14.06
14.01
13.85
13.76
13.7
13.74
13.74
13.71
13.66
13.7
13.6301
13.67
13.69
13.62
13.61
13.65
13.53
13.51
13.54
13.49
13.52
13.5
13.522
13.54
13.51
13.49
13.45
13.55
13.55
13.43
13.48
13.47
13.5
13.37
13.39
13.43
13.35
13.28
13.2701
13.16
13.05
13
12.9401
12.89
12.92
13
13.05
12.95
12.99
13.01
13.2
13.14
13.17
13.15
13.08
13.15
13.29
13.2901
13.15
13.16
13.2
13.2
13.15
13.08
13
12.94
13.12
13.05
12.97
12.95
13.01
13.12
13.34
13.53
13.626
13.69
13.71
13.88
13.8
13.82
13.82
13.86
13.8
13.61
13.65
13.59
13.66
13.6
13.66
13.63
13.62
13.67
13.66
13.72
13.738
13.72
13.69
13.69
13.75
13.81
13.65
13.09
13.15
13.13
13.13
13.08
13.01
13.07
13.11
13.06
12.81
12.67
12.83
12.82
12.87
12.77
12.99
12.92
13.06
12.91
12.95
12.93
12.79
12.87
12.88
12.95
12.9
12.88
12.98
12.94
13.0599
13.05
13.2
13.3455
13.36
13.304
13.26
13.29
13.27
13.35
13.25
13.2
13.12
13.25
13.21
13.2
13.28
13.3
13.348
13.35
13.38
13.34
13.34
13.46
13.39
13.42
13.43
13.53
13.38
13.38
13.38
13.44
13.34
13.34
13.26
13.3
13.36
13.45
13.46
13.38
13.42
13.48
13.41
13.51
13.47
13.47
13.47
13.453
13.4499
13.32
13.27
13.29
13.21
13.11
13.08
13.06
13.17
13.09
13.03
13.01
13
12.77
12.9
12.93
13.01
13
13.08
13
13.05
13.03
13.01
12.97
13.07
13.1
12.969
12.895
12.99
12.68
12.76
12.69
12.73
12.72
12.74
12.79
12.71
12.65
12.6
12.46
7/31/08 12.46
FUND SNAPSHOT
------------------------------------
Common Share Price $12.46
------------------------------------
Common Share
Net Asset Value $13.98
------------------------------------
Premium/(Discount) to NAV -10.87%
------------------------------------
Market Yield 5.49%
------------------------------------
Taxable-Equivalent Yield(3) 7.63%
------------------------------------
Net Assets Applicable to
Common Shares ($000) $132,713
------------------------------------
Average Effective
Maturity on Securities (Years) 14.88
------------------------------------
Leverage-Adjusted Duration 9.70
------------------------------------
AVERAGE ANNUAL TOTAL RETURN
(Inception 10/17/91)
------------------------------------
ON SHARE PRICE ON NAV
------------------------------------
1-Year -5.16% -1.04%
------------------------------------
5-Year 2.47% 4.85%
------------------------------------
10-Year 3.97% 4.81%
------------------------------------
INDUSTRIES
(as a % of total investments)(2)
------------------------------------
Tax Obligation/General 30.0%
------------------------------------
U.S. Guaranteed 18.2%
------------------------------------
Education and Civic
Organizations 10.5%
------------------------------------
Health Care 10.4%
------------------------------------
Water and Sewer 7.6%
------------------------------------
Utilities 6.9%
------------------------------------
Transportation 4.0%
------------------------------------
Other 12.4%
------------------------------------
(1) The percentages shown in the foregoing chart may reflect the ratings on
certain bonds insured by ACA, AMBAC, FGIC, MBIA, RAAI and XLCA as of July
31, 2008. Please see the Portfolio Managers' Commentary for an expanded
discussion of the affect on the Fund of changes to the ratings of certain
bonds in the portfolio resulting from changes to the ratings of the
underlying insurers both during the period and after period end.
(2) Excluding derivative transactions.
(3) Taxable-Equivalent Yield represents the yield that must be earned on a
fully taxable investment in order to equal the yield of the Fund on an
after-tax basis. It is based on a federal income tax rate of 28%. When
comparing this Fund to investments that generate qualified dividend income,
the Taxable-Equivalent Yield is lower.
(4) The Fund paid shareholders a capital gains distribution in December 2007 of
$.0559 per share.
19
Report of
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
THE BOARDS OF DIRECTORS/TRUSTEES AND SHAREHOLDERS
NUVEEN ARIZONA PREMIUM INCOME MUNICIPAL FUND, INC.
NUVEEN ARIZONA DIVIDEND ADVANTAGE MUNICIPAL FUND
NUVEEN ARIZONA DIVIDEND ADVANTAGE MUNICIPAL FUND 2
NUVEEN ARIZONA DIVIDEND ADVANTAGE MUNICIPAL FUND 3
NUVEEN TEXAS QUALITY INCOME MUNICIPAL FUND
We have audited the accompanying statements of assets and liabilities, including
the portfolios of investments, of Nuveen Arizona Premium Income Municipal Fund,
Inc., Nuveen Arizona Dividend Advantage Municipal Fund, Nuveen Arizona Dividend
Advantage Municipal Fund 2, Nuveen Arizona Dividend Advantage Municipal Fund 3
and Nuveen Texas Quality Income Municipal Fund (the "Funds"), as of July 31,
2008, and the related statements of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the five years in the period
then ended. These financial statements and financial highlights are the
responsibility of the Funds' management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. We were
not engaged to perform an audit of the Funds' internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Funds' internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of July 31, 2008, by correspondence with the custodian and
brokers or by other appropriate auditing procedures where replies from brokers
were not received. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial positions of
Nuveen Arizona Premium Income Municipal Fund, Inc., Nuveen Arizona Dividend
Advantage Municipal Fund, Nuveen Arizona Dividend Advantage Municipal Fund 2,
Nuveen Arizona Dividend Advantage Municipal Fund 3 and Nuveen Texas Quality
Income Municipal Fund at July 31, 2008, the results of their operations for the
year then ended, the changes in their net assets for each of the two years in
the period then ended, and the financial highlights for each of the five years
in the period then ended in conformity with U.S. generally accepted accounting
principles.
/s/ Ernst & Young LLP
Chicago, Illinois
September 22, 2008
20
NAZ
Nuveen Arizona Premium Income Municipal Fund, Inc.
Portfolio of INVESTMENTS
July 31, 2008
PRINCIPAL OPTIONAL CALL
AMOUNT (000) DESCRIPTION (1) PROVISIONS (2) RATINGS (3) VALUE
------------------------------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES - 1.3% (0.9% OF TOTAL INVESTMENTS)
$ 840 Puerto Rico, The Children's Trust Fund, Tobacco Settlement 5/12 at 100.00 BBB $ 775,681
Asset-Backed Refunding Bonds, Series 2002, 5.375%, 5/15/33
------------------------------------------------------------------------------------------------------------------------------------
EDUCATION AND CIVIC ORGANIZATIONS - 10.4% (6.9% OF TOTAL INVESTMENTS)
2,500 Arizona Higher Education Loan Authority, Student Loan Revenue 9/08 at 100.00 AAA 1,278,800
Bonds, Series 2007B, Adjustable Rate, 2.460%, 11/01/41 (4)
1,000 Arizona State University, System Revenue Bonds, Series 2002, 7/12 at 100.00 AA 1,016,300
5.000%, 7/01/25 - FGIC Insured
Arizona State University, System Revenue Bonds, Series 2005:
1,455 5.000%, 7/01/20 - AMBAC Insured 7/15 at 100.00 AA 1,501,269
750 5.000%, 7/01/21 - AMBAC Insured 7/15 at 100.00 AA 770,258
1,500 Tempe Industrial Development Authority, Arizona, Lease Revenue 7/13 at 100.00 AA 1,459,575
Bonds, Arizona State University Foundation Project, Series 2003,
5.000%, 7/01/34 - AMBAC Insured
------------------------------------------------------------------------------------------------------------------------------------
7,205 Total Education and Civic Organizations 6,026,202
------------------------------------------------------------------------------------------------------------------------------------
HEALTH CARE - 19.8% (13.3% OF TOTAL INVESTMENTS)
1,430 Arizona Health Facilities Authority, Hospital Revenue Bonds, 1/17 at 100.00 AA- 1,430,915
Banner Health Systems, Series 2007A, 5.000%, 1/01/25
2,050 Arizona Health Facilities Authority, Hospital Revenue Bonds, 1/18 at 100.00 AA- 1,968,636
Banner Health Systems, Series 2008A, 5.000%, 1/01/35
675 Glendale Industrial Development Authority, Arizona, Revenue 12/15 at 100.00 BBB 572,495
Bonds, John C. Lincoln Health Network, Series 2005B,
5.000%, 12/01/37
1,110 Glendale Industrial Development Authority, Arizona, Revenue 12/17 at 100.00 BBB 925,274
Bonds, John C. Lincoln Health Network, Series 2007,
5.000%, 12/01/42
2,150 Maricopa County Industrial Development Authority, Arizona, 7/14 at 100.00 A 2,120,631
Health Facility Revenue Bonds, Catholic Healthcare West,
Series 2004A, 5.375%, 7/01/23
2,800 Maricopa County Industrial Development Authority, Arizona, 7/17 at 100.00 A 2,612,260
Health Facility Revenue Bonds, Catholic Healthcare West,
Series 2007A, 5.250%, 7/01/32
385 Maricopa County, Arizona, Hospital Revenue Bonds, Sun Health 4/15 at 100.00 Baa1 384,488
Corporation, Series 2005, 5.000%, 4/01/16
515 Puerto Rico Industrial, Tourist, Educational, Medical and 11/10 at 101.00 Aa1 549,562
Environmental Control Facilities Financing Authority, Hospital
Revenue Bonds, Hospital de la Concepcion, Series 2000A,
6.375%, 11/15/15
1,055 Winslow Industrial Development Authority, Arizona, Hospital 12/08 at 101.00 N/R 972,699
Revenue Bonds, Winslow Memorial Hospital, Series 1998,
5.500%, 6/01/22
------------------------------------------------------------------------------------------------------------------------------------
12,170 Total Health Care 11,536,960
------------------------------------------------------------------------------------------------------------------------------------
HOUSING/MULTIFAMILY - 1.4% (0.9% OF TOTAL INVESTMENTS)
400 Phoenix Industrial Development Authority, Arizona, GNMA 6/11 at 102.00 Aaa 388,044
Collateralized Multifamily Housing Revenue Bonds, Campaigne
Place on Jackson, Series 2001, 5.700%, 6/20/31 (Alternative
Minimum Tax)
530 Phoenix Industrial Development Authority, Arizona, GNMA 4/15 at 100.00 Aaa 445,719
Collateralized Multifamily Housing Revenue Bonds, Park Lee
Apartments, Series 2004A, 5.050%, 10/20/44
(Alternative Minimum Tax)
------------------------------------------------------------------------------------------------------------------------------------
930 Total Housing/Multifamily 833,763
------------------------------------------------------------------------------------------------------------------------------------
21
NAZ
Nuveen Arizona Premium Income Municipal Fund, Inc. (continued)
Portfolio of INVESTMENTS July 31, 2008
PRINCIPAL OPTIONAL CALL
AMOUNT (000) DESCRIPTION (1) PROVISIONS (2) RATINGS (3) VALUE
------------------------------------------------------------------------------------------------------------------------------------
HOUSING/SINGLE FAMILY - 9.3% (6.2% OF TOTAL INVESTMENTS)
$ 955 Phoenix and Pima County Industrial Development Authority, 7/17 at 103.00 Aaa $ 949,652
Arizona, Single Family Mortgage Revenue Bonds, Series 2007-4,
5.800%, 12/01/39 (Alternative Minimum Tax)
1,685 The Industrial Development Authority of The City of Tucson, 1/17 at 103.00 Aaa 1,656,490
Arizona, Tax-Exempt Single Family Mortgage Revenue Bonds,
Series 2007A-1, 5.100%, 7/01/38
3,010 Tucson and Pima County Industrial Development Authority, 6/17 at 101.00 Aaa 2,793,310
Arizona, Joint Single Family Mortgage Revenue Bonds,
Series 2007B, 5.350%, 6/01/47 (Alternative Minimum Tax)
------------------------------------------------------------------------------------------------------------------------------------
5,650 Total Housing/Single Family 5,399,452
------------------------------------------------------------------------------------------------------------------------------------
TAX OBLIGATION/GENERAL - 2.7% (1.8% OF TOTAL INVESTMENTS)
1,200 Maricopa County Unified School District 95 Queen Creek, 7/18 at 100.00 Aaa 1,216,824
Arizona, General Obligation Bonds, Series 2008, 5.000%, 7/01/27 -
FSA Insured
330 Puerto Rico, General Obligation and Public Improvement Bonds, 7/11 at 100.00 BBB- 330,469
Series 2001A, 5.375%, 7/01/28
------------------------------------------------------------------------------------------------------------------------------------
1,530 Total Tax Obligation/General 1,547,293
------------------------------------------------------------------------------------------------------------------------------------
TAX OBLIGATION/LIMITED - 30.1% (20.2% OF TOTAL INVESTMENTS)
775 Bullhead City, Arizona, Special Assessment Bonds, Parkway No Opt. Call Baa2 782,192
District Improvements, Series 1993, 6.100%, 1/01/09
422 Estrella Mountain Ranch Community Facilities District, 7/10 at 102.00 N/R 439,108
Goodyear, Arizona, Special Assessment Lien Bonds,
Series 2001A, 7.875%, 7/01/25
1,280 Greater Arizona Development Authority, Infrastructure Revenue 8/16 at 100.00 AA 1,306,214
Bonds, Series 2006-1, 5.000%, 8/01/22 - MBIA Insured
740 Greater Arizona Development Authority, Infrastructure Revenue 8/16 at 100.00 AA 752,195
Bonds, Series 2006A, 5.000%, 8/01/23 - MBIA Insured
575 Marana Municipal Property Corporation, Arizona, Revenue Bonds, 7/13 at 100.00 AA 578,209
Series 2003, 5.000%, 7/01/28 - AMBAC Insured
1,110 Marana, Arizona, Tangerine Farms Road Improvement District 7/16 at 100.00 Baa1 968,442
Revenue Bonds, Series 2006, 4.600%, 1/01/26
3,400 Maricopa County Stadium District, Arizona, Revenue Refunding 6/12 at 100.00 Aa3 3,577,374
Bonds, Series 2002, 5.375%, 6/01/18 - AMBAC Insured
3,400 Mesa, Arizona, Street and Highway User Tax Revenue Bonds, 7/15 at 100.00 AAA 3,493,840
Series 2005, 5.000%, 7/01/24 - FSA Insured
1,200 Prescott Valley Municipal Property Corporation, Arizona, Municipal 1/13 at 100.00 AA- 1,187,136
Facilities Revenue Bonds, Series 2003, 5.000%, 1/01/27 -
FGIC Insured
265 Puerto Rico Public Buildings Authority, Guaranteed Government 7/12 at 100.00 BBB- 259,485
Facilities Revenue Refunding Bonds, Series 2002D,
5.125%, 7/01/24
1,610 San Luis Civic Improvement Corporation, Arizona, Municipal 7/15 at 100.00 A- 1,563,407
Facilities Excise Tax Revenue Bonds, Series 2005,
5.000%, 7/01/25 - XLCA Insured
1,350 Tempe, Arizona, Excise Tax Revenue Bonds, Series 2004, 7/14 at 100.00 AAA 1,419,566
5.250%, 7/01/20 - AMBAC Insured
500 Tucson, Arizona, Certificates of Participation, Series 2000, 1/09 at 100.00 AA 505,915
5.700%, 7/01/20 - MBIA Insured
645 Vistancia Community Facilities District, Arizona, Restricted General 7/15 at 100.00 Baa1 628,888
Obligation Bonds, Series 2005, 5.750%, 7/15/24
------------------------------------------------------------------------------------------------------------------------------------
17,272 Total Tax Obligation/Limited 17,461,971
------------------------------------------------------------------------------------------------------------------------------------
U.S. GUARANTEED - 34.3% (23.0% OF TOTAL INVESTMENTS) (5)
800 Arizona Health Facilities Authority, Hospital Revenue Bonds, 7/10 at 101.00 A (5) 870,648
Catholic Healthcare West, Series 1999A, 6.625%, 7/01/20
(Pre-refunded 7/01/10)
1,000 Arizona Health Facilities Authority, Hospital System Revenue 12/10 at 102.00 BBB (5) 1,118,700
Bonds, John C. Lincoln Health Network, Series 2000,
7.000%, 12/01/25 (Pre-refunded 12/01/10)
1,250 Glendale Industrial Development Authority, Arizona, Revenue 5/11 at 101.00 AAA 1,357,600
Bonds, Midwestern University, Series 2001A, 5.875%, 5/15/31
(Pre-refunded 5/15/11)
22
PRINCIPAL OPTIONAL CALL
AMOUNT (000) DESCRIPTION (1) PROVISIONS (2) RATINGS (3) VALUE
------------------------------------------------------------------------------------------------------------------------------------
U.S. GUARANTEED (5) (continued)
$ 1,250 Maricopa County Industrial Development Authority, Arizona, No Opt. Call AA (5) $ 1,504,888
Hospital Revenue Refunding Bonds, Samaritan Health Services,
Series 1990A, 7.000%, 12/01/16 - MBIA Insured (ETM)
3,000 Mesa Industrial Development Authority, Arizona, Revenue Bonds, 1/10 at 101.00 AA (5) 3,172,650
Discovery Health System, Series 1999A, 5.750%, 1/01/25
(Pre-refunded 1/01/10) - MBIA Insured
2,000 Phoenix Civic Improvement Corporation, Arizona, Junior Lien 7/10 at 101.00 AA- (5) 2,153,340
Wastewater System Revenue Bonds, Series 2000,
6.000%, 7/01/24 (Pre-refunded 7/01/10) - FGIC Insured
2,000 Phoenix Industrial Development Authority, Arizona, 9/10 at 100.00 AA (5) 2,132,280
Government Office Lease Revenue Bonds, Capitol Mall LLC,
Series 2000, 5.500%, 9/15/27 (Pre-refunded 9/15/10) -
AMBAC Insured
1,000 Puerto Rico Highway and Transportation Authority, Highway 7/10 at 101.00 BBB+ (5) 1,085,190
Revenue Bonds, Series 2000B, 6.500%, 7/01/27
(Pre-refunded 7/01/10)
735 Puerto Rico Public Buildings Authority, Guaranteed Government 7/12 at 100.00 Baa3 (5) 784,862
Facilities Revenue Refunding Bonds, Series 2002D,
5.125%, 7/01/24 (Pre-refunded 7/01/12)
1,500 Scottsdale Industrial Development Authority, Arizona, Hospital 12/11 at 101.00 BBB+ (5) 1,653,240
Revenue Bonds, Scottsdale Healthcare, Series 2001,
5.800%, 12/01/31 (Pre-refunded 12/01/11)
3,215 Tucson Industrial Development Authority, Arizona, Senior 7/10 at 101.00 A (5) 3,445,323
Living Facilities Revenue Bonds, Christian Care Project,
Series 2000A, 5.625%, 7/01/20 (Pre-refunded 7/01/10) -
RAAI Insured
600 Tucson, Arizona, Junior Lien Street and Highway User Revenue 7/10 at 100.00 AA (5) 630,714
Bonds, Series 2000E, 5.000%, 7/01/18 (Pre-refunded 7/01/10) -
FGIC Insured
------------------------------------------------------------------------------------------------------------------------------------
18,350 Total U.S. Guaranteed 19,909,435
------------------------------------------------------------------------------------------------------------------------------------
UTILITIES - 14.0% (9.4% OF TOTAL INVESTMENTS)
1,000 Arizona Power Authority, Special Obligation Power Resource No Opt. Call AA 1,104,030
Revenue Refunding Crossover Bonds, Hoover Project,
Series 2001, 5.250%, 10/01/15
465 Pima County Industrial Development Authority, Arizona, 1/09 at 100.00 Aaa 467,869
Lease Obligation Revenue Refunding Bonds, Tucson Electric
Power Company, Series 1988A, 7.250%, 7/15/10 - FSA Insured
2,170 Puerto Rico Electric Power Authority, Power Revenue Bonds, 7/15 at 100.00 A3 2,082,723
Series 2005RR, 5.000%, 7/01/27 - XLCA Insured
530 Salt River Project Agricultural Improvement and Power District, 1/13 at 100.00 Aa1 545,794
Arizona, Electric System Revenue Bonds, Series 2002B,
5.000%, 1/01/22
2,000 Salt River Project Agricultural Improvement and Power District, 1/12 at 101.00 Aa1 2,032,660
Arizona, Electric System Revenue Refunding Bonds,
Series 2002A, 5.125%, 1/01/27
Salt Verde Financial Corporation, Arizona, Senior Gas Revenue
Drivers Trust 2267, Series 2007:
1,505 11.446%, 12/01/29 (IF) No Opt. Call Aa3 1,159,693
1,095 11.011%, 12/01/37 (IF) No Opt. Call Aa3 727,955
------------------------------------------------------------------------------------------------------------------------------------
8,765 Total Utilities 8,120,724
------------------------------------------------------------------------------------------------------------------------------------
WATER AND SEWER - 25.9% (17.4% OF TOTAL INVESTMENTS)
1,005 Cottonwood, Arizona, Senior Lien Water System Revenue Bonds, 7/14 at 100.00 BBB 975,966
Municipal Property Corporation, Series 2004, 5.000%, 7/01/24 -
XLCA Insured
3,500 Glendale, Arizona, Water and Sewer Revenue Bonds, Subordinate 7/13 at 100.00 AA 3,527,160
Lien, Series 2003, 5.000%, 7/01/28 - AMBAC Insured
600 Oro Valley Municipal Property Corporation, Arizona, Senior Lien 7/13 at 100.00 AA 612,810
Water Revenue Bonds, Series 2003, 5.000%, 7/01/23 -
MBIA Insured
1,000 Phoenix Civic Improvement Corporation, Arizona, Junior Lien 7/14 at 100.00 AA 1,017,880
Wastewater System Revenue Bonds, Series 2004,
5.000%, 7/01/24 - MBIA Insured
1,500 Phoenix Civic Improvement Corporation, Arizona, Junior Lien 7/12 at 100.00 AA 1,517,475
Water System Revenue Bonds, Series 2002, 5.000%, 7/01/26 -
FGIC Insured
3,295 Phoenix Civic Improvement Corporation, Arizona, Junior Lien 7/15 at 100.00 AA 3,380,044
Water System Revenue Bonds, Series 2005, 5.000%, 7/01/23 -
MBIA Insured
1,250 Phoenix Civic Improvement Corporation, Arizona, Junior Lien No Opt. Call AA 1,368,175
Water System Revenue Refunding Bonds, Series 2001,
5.500%, 7/01/21 - FGIC Insured
23
NAZ
Nuveen Arizona Premium Income Municipal Fund, Inc. (continued)
Portfolio of INVESTMENTS July 31, 2008
PRINCIPAL OPTIONAL CALL
AMOUNT (000) DESCRIPTION (1) PROVISIONS (2) RATINGS (3) VALUE
------------------------------------------------------------------------------------------------------------------------------------
WATER AND SEWER (continued)
$ 1,430 Puerto Rico Aqueduct and Sewerage Authority, Revenue Bonds, 7/18 at 100.00 BBB- $ 1,496,252
Senior Lien Series 2008A, 6.000%, 7/01/38
Surprise Municipal Property Corporation, Arizona, Wastewater
System Revenue Bonds, Series 2007:
600 4.700%, 4/01/22 4/14 at 100.00 N/R 545,328
695 4.900%, 4/01/32 4/17 at 100.00 N/R 602,683
------------------------------------------------------------------------------------------------------------------------------------
14,875 Total Water and Sewer 15,043,773
------------------------------------------------------------------------------------------------------------------------------------
$ 87,587 Total Investments (cost $88,183,855) - 149.2% 86,655,254
=============-----------------------------------------------------------------------------------------------------------------------
Other Assets Less Liabilities - 2.4% 1,441,316
--------------------------------------------------------------------------------------------------------------------
Preferred Shares, at Liquidation Value - (51.6)% (6) (30,000,000)
--------------------------------------------------------------------------------------------------------------------
Net Assets Applicable to Common Shares - 100% $ 58,096,570
====================================================================================================================
(1) All percentages shown in the Portfolio of Investments are
based on net assets applicable to Common shares unless
otherwise noted.
(2) Optional Call Provisions (not covered by the report of
independent registered public accounting firm): Dates (month
and year) and prices of the earliest optional call or
redemption. There may be other call provisions at varying
prices at later dates. Certain mortgage-backed securities
may be subject to periodic principal paydowns.
(3) Ratings (not covered by the report of independent registered
public accounting firm): Using the higher of Standard &
Poor's Group ("Standard & Poor's") or Moody's Investor
Service, Inc. ("Moody's") rating. Ratings below BBB by
Standard & Poor's or Baa by Moody's are considered to be
below investment grade.
The Portfolio of Investments may reflect the ratings on
certain bonds insured by ACA, AMBAC, FGIC, MBIA, RAAI and
XLCA as of July 31, 2008. Please see the Portfolio Managers'
Commentary for an expanded discussion of the affect on the
Fund of changes to the ratings of certain bonds in the
portfolio resulting from changes to the ratings of the
underlying insurers both during the period and after period
end.
(4) Investment valued at fair value using methods determined in
good faith by, or at the discretion of, the Board of
Directors/Trustees.
(5) Backed by an escrow or trust containing sufficient U.S.
Government or U.S. Government agency securities which ensure
the timely payment of principal and interest. Such
investments are normally considered to be equivalent to AAA
rated securities.
(6) Preferred Shares, at Liquidation Value as a percentage of
total investments is (34.6)%.
N/R Not rated.
(ETM) Escrowed to maturity.
(IF) Inverse floating rate investment.
See accompanying notes to financial statements.
24
NFZ
Nuveen Arizona Dividend Advantage Municipal Fund
Portfolio of INVESTMENTS
July 31, 2008
PRINCIPAL OPTIONAL CALL
AMOUNT (000) DESCRIPTION (1) PROVISIONS (2) RATINGS (3) VALUE
------------------------------------------------------------------------------------------------------------------------------------
EDUCATION AND CIVIC ORGANIZATIONS - 8.2% (5.3% OF TOTAL INVESTMENTS)
$ 280 Arizona Higher Education Loan Authority, Student Loan Revenue 9/08 at 100.00 AAA $ 143,226
Bonds, Series 2007B, Adjustable Rate, 2.460%, 11/01/41 (4)
1,000 Puerto Rico Industrial, Tourist, Educational, Medical and 2/09 at 101.00 BBB- 949,990
Environmental Control Facilities Financing Authority, Higher
Education Revenue Bonds, Ana G. Mendez University System,
Series 1999, 5.375%, 2/01/29
300 Puerto Rico Industrial, Tourist, Educational, Medical and 9/11 at 100.00 BBB 290,472
Environmental Control Facilities Financing Authority, Higher
Education Revenue Bonds, University of the Sacred Heart, Series
2001, 5.250%, 9/01/21
305 Tucson Industrial Development Authority, Arizona, Charter School 9/14 at 100.00 BBB- 294,221
Revenue Bonds, Arizona Agribusiness and Equine Center
Charter School, Series 2004A, 6.125%, 9/01/34
------------------------------------------------------------------------------------------------------------------------------------
1,885 Total Education and Civic Organizations 1,677,909
------------------------------------------------------------------------------------------------------------------------------------
HEALTH CARE - 15.4% (10.0% OF TOTAL INVESTMENTS)
565 Arizona Health Facilities Authority, Hospital Revenue Bonds, 1/17 at 100.00 AA- 565,362
Banner Health Systems, Series 2007A, 5.000%, 1/01/25
200 Arizona Health Facilities Authority, Hospital Revenue Bonds, 1/18 at 100.00 AA- 192,062
Banner Health Systems, Series 2008A, 5.000%, 1/01/35
10 California Health Facilities Financing Authority, Health Facility 3/13 at 100.00 A 9,590
Revenue Bonds, Adventist Health System/West, Series 2003A,
5.000%, 3/01/28
250 Glendale Industrial Development Authority, Arizona, Revenue 12/15 at 100.00 BBB 212,035
Bonds, John C. Lincoln Health Network, Series 2005B,
5.000%, 12/01/37
415 Glendale Industrial Development Authority, Arizona, Revenue 12/17 at 100.00 BBB 345,936
Bonds, John C. Lincoln Health Network, Series 2007,
5.000%, 12/01/42
750 Maricopa County Industrial Development Authority, Arizona, 7/14 at 100.00 A 739,755
Health Facility Revenue Bonds, Catholic Healthcare West,
Series 2004A, 5.375%, 7/01/23
1,025 Maricopa County Industrial Development Authority, Arizona, 7/17 at 100.00 A 956,274
Health Facility Revenue Bonds, Catholic Healthcare West,
Series 2007A, 5.250%, 7/01/32
140 Maricopa County, Arizona, Hospital Revenue Bonds, Sun Health 4/15 at 100.00 Baa1 139,814
Corporation, Series 2005, 5.000%, 4/01/16
------------------------------------------------------------------------------------------------------------------------------------
3,355 Total Health Care 3,160,828
------------------------------------------------------------------------------------------------------------------------------------
HOUSING/MULTIFAMILY - 6.5% (4.2% OF TOTAL INVESTMENTS)
1,000 Maricopa County Industrial Development Authority, Arizona, 7/09 at 102.00 A2 898,720
Multifamily Housing Revenue Bonds, Whispering Palms
Apartments, Series 1999A, 5.900%, 7/01/29 - MBIA Insured
275 Phoenix Industrial Development Authority, Arizona, GNMA 6/11 at 102.00 Aaa 266,780
Collateralized Multifamily Housing Revenue Bonds, Campaigne
Place on Jackson, Series 2001, 5.700%, 6/20/31 (Alternative
Minimum Tax)
205 Phoenix Industrial Development Authority, Arizona, GNMA 4/15 at 100.00 Aaa 172,401
Collateralized Multifamily Housing Revenue Bonds, Park Lee
Apartments, Series 2004A, 5.050%, 10/20/44
(Alternative Minimum Tax)
------------------------------------------------------------------------------------------------------------------------------------
1,480 Total Housing/Multifamily 1,337,901
------------------------------------------------------------------------------------------------------------------------------------
25
NFZ
Nuveen Arizona Dividend Advantage Municipal Fund (continued)
Portfolio of INVESTMENTS July 31, 2008
PRINCIPAL OPTIONAL CALL
AMOUNT (000) DESCRIPTION (1) PROVISIONS (2) RATINGS (3) VALUE
------------------------------------------------------------------------------------------------------------------------------------
HOUSING/SINGLE FAMILY - 16.9% (11.0% OF TOTAL INVESTMENTS)
$ 635 The Industrial Development Authority of The City of Tucson, Arizona, 1/17 at 103.00 Aaa $ 624,256
Tax-Exempt Single Family Mortgage Revenue Bonds,
Series 2007A-1, 5.100%, 7/01/38
1,985 Tucson and Pima County Industrial Development Authority, 7/16 at 103.00 Aaa 1,851,605
Arizona, Joint Single Family Mortgage Revenue Bonds,
Series 2006A1, 5.350%, 1/01/38 (Alternative Minimum Tax)
1,085 Tucson and Pima County Industrial Development Authority, 6/17 at 101.00 Aaa 1,006,891
Arizona, Joint Single Family Mortgage Revenue Bonds,
Series 2007B, 5.350%, 6/01/47 (Alternative Minimum Tax)
------------------------------------------------------------------------------------------------------------------------------------
3,705 Total Housing/Single Family 3,482,752
------------------------------------------------------------------------------------------------------------------------------------
TAX OBLIGATION/GENERAL - 11.7% (7.6% OF TOTAL INVESTMENTS)
1,000 Maricopa County Unified School District 11, Peoria, Arizona, 7/15 at 100.00 AA- 1,040,250
General Obligation Bonds, Second Series 2005,
5.000%, 7/01/20 - FGIC Insured
1,340 Yuma & La Paz Counties Community College District, Arizona, 7/16 at 100.00 AA 1,371,155
General Obligation Bonds, Series 2006, 5.000%, 7/01/21 -
MBIA Insured
------------------------------------------------------------------------------------------------------------------------------------
2,340 Total Tax Obligation/General 2,411,405
------------------------------------------------------------------------------------------------------------------------------------
TAX OBLIGATION/LIMITED - 47.3% (30.8% OF TOTAL INVESTMENTS)
1,220 Arizona Tourism and Sports Authority, Tax Revenue Bonds, 7/13 at 100.00 A2 1,206,824
Multipurpose Stadium Facility Project, Series 2003A,
5.000%, 7/01/31 - MBIA Insured
94 Centerra Community Facilities District, Goodyear, Arizona, 7/15 at 100.00 N/R 82,397
General Obligation Bonds, Series 2005, 5.500%, 7/15/29
209 Estrella Mountain Ranch Community Facilities District, Arizona, 1/17 at 100.00 N/R 188,643
Special Assessment Bonds, Montecito Assessment District,
Series 2007, 5.700%, 7/01/27
164 Estrella Mountain Ranch Community Facilities District, Goodyear, 7/10 at 102.00 N/R 170,649
Arizona, Special Assessment Lien Bonds, Series 2001A,
7.875%, 7/01/25
1,000 Greater Arizona Development Authority, Infrastructure Revenue 8/16 at 100.00 AA 1,020,480
Bonds, Series 2006-1, 5.000%, 8/01/22 - MBIA Insured
275 Greater Arizona Development Authority, Infrastructure Revenue 8/16 at 100.00 AA 279,532
Bonds, Series 2006A, 5.000%, 8/01/23 - MBIA Insured
1,180 Marana Municipal Property Corporation, Arizona, Revenue Bonds, 7/13 at 100.00 AA 1,205,193
Series 2003, 5.000%, 7/01/23 - AMBAC Insured
415 Marana, Arizona, Tangerine Farms Road Improvement District 7/16 at 100.00 Baa1 362,075
Revenue Bonds, Series 2006, 4.600%, 1/01/26
150 Marley Park Community Facilities District, City of Surprise, 7/17 at 100.00 N/R 138,545
Arizona, Limited Tax General Obligation Bonds, Series 2007,
6.100%, 7/15/32
330 Palm Valley Community Facility District 3, Goodyear, Arizona, 7/16 at 100.00 N/R 277,408
General Obligation Bonds, Series 2006, 5.300%, 7/15/31
225 Palm Valley Community Facility District 3, Goodyear, Arizona, 7/17 at 100.00 N/R 200,878
Limited Tax General Obligation Bonds, Series 2007,
5.800%, 7/15/32
100 Parkway Community Facilities District 1, Prescott Valley, 7/16 at 100.00 N/R 84,132
Arizona, General Obligation Bonds, Series 2006,
5.350%, 7/15/31
900 Phoenix Industrial Development Authority, Arizona, Government 3/12 at 100.00 AA 951,543
Bonds, Capitol Mall LLC II, Series 2001, 5.250%, 9/15/16 -
AMBAC Insured
26
PRINCIPAL OPTIONAL CALL
AMOUNT (000) DESCRIPTION (1) PROVISIONS (2) RATINGS (3) VALUE
------------------------------------------------------------------------------------------------------------------------------------
TAX OBLIGATION/LIMITED (continued)
$ 680 Pinal County Industrial Development Authority, Arizona, No Opt. Call BBB- $ 628,986
Correctional Facilities Contract Revenue Bonds, Florence
West Prison LLC, Series 2002A, 5.000%, 10/01/18 - ACA Insured
600 San Luis Civic Improvement Corporation, Arizona, Municipal 7/15 at 100.00 A- 582,636
Facilities Excise Tax Revenue Bonds, Series 2005,
5.000%, 7/01/25 - XLCA Insured
350 Tartesso West Community Facility District, Buckeye, Arizona, 7/17 at 100.00 N/R 316,621
Limited Tax General Obligation Bonds, Series 2007,
5.900%, 7/15/32
1,000 Tempe, Arizona, Excise Tax Revenue Bonds, Series 2004, 7/14 at 100.00 AAA 1,051,530
5.250%, 7/01/20 - AMBAC Insured
500 Vistancia Community Facilities District, Arizona, Restricted 7/15 at 100.00 Baa1 487,510
General Obligation Bonds, Series 2005, 5.750%, 7/15/24
355 Watson Road Community Facilities District, Arizona, Special 7/16 at 100.00 N/R 306,443
Assessment Revenue Bonds, Series 2005, 6.000%, 7/01/30
225 Westpark Community Facilities District, Buckeye, Arizona, 7/16 at 100.00 N/R 188,987
General Obligation Tax Increment Bonds Series 2006,
5.250%, 7/15/31
------------------------------------------------------------------------------------------------------------------------------------
9,972 Total Tax Obligation/Limited 9,731,012
------------------------------------------------------------------------------------------------------------------------------------
U.S. GUARANTEED - 8.6% (5.6% OF TOTAL INVESTMENTS) (5)
365 Arizona Health Facilities Authority, Hospital Revenue Bonds, 7/10 at 101.00 A (5) 397,233
Catholic Healthcare West, Series 1999A, 6.625%, 7/01/20
(Pre-refunded 7/01/10)
240 Maricopa County Union High School District 210 Phoenix, 7/16 at 100.00 AA (5) 263,914
Arizona, General Obligation Bonds, Series 2006C,
5.000%, 7/01/24 (Pre-refunded 7/01/16) - MBIA Insured
1,000 Scottsdale Industrial Development Authority, Arizona, 12/11 at 101.00 BBB+ (5) 1,102,160
Hospital Revenue Bonds, Scottsdale Healthcare, Series 2001,
5.800%, 12/01/31 (Pre-refunded 12/01/11)
------------------------------------------------------------------------------------------------------------------------------------
1,605 Total U.S. Guaranteed 1,763,307
------------------------------------------------------------------------------------------------------------------------------------
UTILITIES - 25.3% (16.4% OF TOTAL INVESTMENTS)
1,500 Arizona Power Authority, Special Obligation Power Resource No Opt. Call AA 1,655,955
Revenue Refunding Crossover Bonds, Hoover Project,
Series 2001, 5.250%, 10/01/17
1,000 Mesa, Arizona, Utility System Revenue Refunding Bonds, No Opt. Call AA- 1,072,390
Series 2002, 5.250%, 7/01/17 - FGIC Insured
1,000 Puerto Rico Electric Power Authority, Power Revenue Bonds, 7/15 at 100.00 A3 961,050
Series 2005RR, 5.000%, 7/01/26 - XLCA Insured
200 Salt River Project Agricultural Improvement and Power District, 1/13 at 100.00 Aa1 205,960
Arizona, Electric System Revenue Bonds, Series 2002B,
5.000%, 1/01/22
235 Salt River Project Agricultural Improvement and Power District, 1/09 at 100.50 Aa1 237,768
Arizona, Electric System Revenue Refunding Bonds,
Series 1997A, 5.000%, 1/01/20
1,000 Salt River Project Agricultural Improvement and Power District, 1/12 at 101.00 Aa1 1,057,580
Arizona, Electric System Revenue Refunding Bonds,
Series 2002A, 5.250%, 1/01/18
------------------------------------------------------------------------------------------------------------------------------------
4,935 Total Utilities 5,190,703
------------------------------------------------------------------------------------------------------------------------------------
WATER AND SEWER - 14.0% (9.1% OF TOTAL INVESTMENTS)
225 Oro Valley Municipal Property Corporation, Arizona, Senior Lien 7/13 at 100.00 AA 229,804
Water Revenue Bonds, Series 2003, 5.000%, 7/01/23 -
MBIA Insured
1,500 Phoenix Civic Improvement Corporation, Arizona, Junior Lien 7/12 at 100.00 AA 1,517,475
Water System Revenue Bonds, Series 2002, 5.000%, 7/01/26 -
FGIC Insured
520 Phoenix Civic Improvement Corporation, Arizona, Junior Lien 7/15 at 100.00 AA 533,421
Water System Revenue Bonds, Series 2005, 5.000%, 7/01/23 -
MBIA Insured
Surprise Municipal Property Corporation, Arizona, Wastewater
System Revenue Bonds, Series 2007:
225 4.700%, 4/01/22 4/14 at 100.00 N/R 204,498
260 4.900%, 4/01/32 4/17 at 100.00 N/R 225,464
27
NFZ
Nuveen Arizona Dividend Advantage Municipal Fund (continued)
Portfolio of INVESTMENTS July 31, 2008
PRINCIPAL OPTIONAL CALL
AMOUNT (000) DESCRIPTION (1) PROVISIONS (2) RATINGS (3) VALUE
------------------------------------------------------------------------------------------------------------------------------------
WATER AND SEWER (continued)
$ 175 Yuma County Industrial Development Authority, Arizona, Exempt 12/17 at 100.00 N/R $ 159,656
Revenue Bonds, Far West Water & Sewer Inc. Refunding,
Series 2007A, 6.375%, 12/01/37 (Alternative Minimum Tax)
------------------------------------------------------------------------------------------------------------------------------------
2,905 Total Water and Sewer 2,870,318
------------------------------------------------------------------------------------------------------------------------------------
$ 32,182 Total Investments (cost $32,639,433) - 153.9% 31,626,135
=============-----------------------------------------------------------------------------------------------------------------------
Other Assets Less Liabilities - 4.5% 926,119
--------------------------------------------------------------------------------------------------------------------
Preferred Shares, at Liquidation Value - (58.4)% (6) (12,000,000)
--------------------------------------------------------------------------------------------------------------------
Net Assets Applicable to Common Shares - 100% $ 20,552,254
====================================================================================================================
(1) All percentages shown in the Portfolio of Investments are
based on net assets applicable to Common shares unless
otherwise noted.
(2) Optional Call Provisions (not covered by the report of
independent registered public accounting firm): Dates (month
and year) and prices of the earliest optional call or
redemption. There may be other call provisions at varying
prices at later dates. Certain mortgage-backed securities
may be subject to periodic principal paydowns.
(3) Ratings (not covered by the report of independent registered
public accounting firm): Using the higher of Standard &
Poor's Group ("Standard & Poor's") or Moody's Investor
Service, Inc. ("Moody's") rating. Ratings below BBB by
Standard & Poor's or Baa by Moody's are considered to be
below investment grade.
The Portfolio of Investments may reflect the ratings on
certain bonds insured by ACA, AMBAC, FGIC, MBIA, RAAI and
XLCA as of July 31, 2008. Please see the Portfolio Managers'
Commentary for an expanded discussion of the affect on the
Fund of changes to the ratings of certain bonds in the
portfolio resulting from changes to the ratings of the
underlying insurers both during the period and after period
end.
(4) Investment valued at fair value using methods determined in
good faith by, or at the discretion of, the Board of
Trustees.
(5) Backed by an escrow or trust containing sufficient U.S.
Government or U.S. Government agency securities which ensure
the timely payment of principal and interest. Such
investments are normally considered to be equivalent to AAA
rated securities.
(6) Preferred Shares, at Liquidation Value as a percentage of
total investments is (37.9)%.
N/R Not rated.
See accompanying notes to financial statements.
28
NKR
Nuveen Arizona Dividend Advantage Municipal Fund 2
Portfolio of INVESTMENTS
July 31, 2008
PRINCIPAL OPTIONAL CALL
AMOUNT (000) DESCRIPTION (1) PROVISIONS (2) RATINGS (3) VALUE
------------------------------------------------------------------------------------------------------------------------------------
EDUCATION AND CIVIC ORGANIZATIONS - 5.8% (3.8% OF TOTAL INVESTMENTS)
$ 1,130 Arizona Higher Education Loan Authority, Student Loan Revenue 9/08 at 100.00 AAA $ 578,017
Bonds, Series 2007B, Adjustable Rate, 2.460%, 11/01/41 (4)
460 Pima County Industrial Development Authority, Arizona, Charter 12/14 at 100.00 BBB- 454,535
School Revenue Bonds, Noah Webster Basic Schools Inc.,
Series 2004, 6.000%, 12/15/24
320 Puerto Rico Industrial, Tourist, Educational, Medical and 2/09 at 101.00 BBB- 320,666
Environmental Control Facilities Financing Authority, Higher
Education Revenue Bonds, Ana G. Mendez University System,
Series 1999, 5.375%, 2/01/19
480 Tucson Industrial Development Authority, Arizona, Charter School 9/14 at 100.00 BBB- 463,037
Revenue Bonds, Arizona Agribusiness and Equine Center
Charter School, Series 2004A, 6.125%, 9/01/34
University of Arizona, Certificates of Participation, Series 2002A:
65 5.500%, 6/01/18 - AMBAC Insured 6/12 at 100.00 AA 68,512
40 5.125%, 6/01/22 - AMBAC Insured 6/12 at 100.00 AAA 40,742
------------------------------------------------------------------------------------------------------------------------------------
2,495 Total Education and Civic Organizations 1,925,509
------------------------------------------------------------------------------------------------------------------------------------
HEALTH CARE - 21.7% (14.4% OF TOTAL INVESTMENTS)
845 Arizona Health Facilities Authority, Hospital Revenue Bonds, 1/17 at 100.00 AA- 845,541
Banner Health Systems, Series 2007A, 5.000%, 1/01/25
320 Arizona Health Facilities Authority, Hospital Revenue Bonds, 1/18 at 100.00 AA- 307,299
Banner Health Systems, Series 2008A, 5.000%, 1/01/35
600 Arizona Health Facilities Authority, Revenue Bonds, Blood 4/14 at 100.00 A- 590,076
Systems Inc., Series 2004, 5.000%, 4/01/20
400 Glendale Industrial Development Authority, Arizona, Revenue 12/15 at 100.00 BBB 339,256
Bonds, John C. Lincoln Health Network, Series 2005B,
5.000%, 12/01/37
655 Glendale Industrial Development Authority, Arizona, Revenue 12/17 at 100.00 BBB 545,995
Bonds, John C. Lincoln Health Network, Series 2007,
5.000%, 12/01/42
1,375 Maricopa County Industrial Development Authority, Arizona, 7/14 at 100.00 A 1,356,218
Health Facility Revenue Bonds, Catholic Healthcare West,
Series 2004A, 5.375%, 7/01/23
1,650 Maricopa County Industrial Development Authority, Arizona, 7/17 at 100.00 A 1,539,367
Health Facility Revenue Bonds, Catholic Healthcare West,
Series 2007A, 5.250%, 7/01/32
500 Maricopa County Industrial Development Authority, Arizona, 11/08 at 101.00 AA 496,260
Hospital Revenue Bonds, Mayo Clinic Hospital, Series 1998,
5.250%, 11/15/37
225 Maricopa County, Arizona, Hospital Revenue Bonds, Sun Health 4/15 at 100.00 Baa1 224,701
Corporation, Series 2005, 5.000%, 4/01/16
1,000 Yavapai County Industrial Development Authority, Arizona, 8/13 at 100.00 Baa2 998,710
Hospital Revenue Bonds, Yavapai Regional Medical Center,
Series 2003A, 6.000%, 8/01/33
------------------------------------------------------------------------------------------------------------------------------------
7,570 Total Health Care 7,243,423
------------------------------------------------------------------------------------------------------------------------------------
HOUSING/MULTIFAMILY - 8.3% (5.5% OF TOTAL INVESTMENTS)
1,000 Maricopa County Industrial Development Authority, Arizona, 10/11 at 105.00 AAA 1,022,660
GNMA Collateralized Multifamily Housing Revenue Refunding
Bonds, Pine Ridge, Cambridge Court, Cove on 44th and
Fountain Place Apartments, Series 2001A-1, 6.000%, 10/20/31
325 Phoenix Industrial Development Authority, Arizona, GNMA 4/15 at 100.00 Aaa 273,319
Collateralized Multifamily Housing Revenue Bonds, Park Lee
Apartments, Series 2004A, 5.050%, 10/20/44
(Alternative Minimum Tax)
29
NKR
Nuveen Arizona Dividend Advantage Municipal Fund 2 (continued)
Portfolio of INVESTMENTS July 31, 2008
PRINCIPAL OPTIONAL CALL
AMOUNT (000) DESCRIPTION (1) PROVISIONS (2) RATINGS (3) VALUE
------------------------------------------------------------------------------------------------------------------------------------
HOUSING/MULTIFAMILY (continued)
$ 1,425 Phoenix Industrial Development Authority, Arizona, GNMA 7/12 at 105.00 AAA $ 1,478,138
Collateralized Multifamily Housing Revenue Bonds, Summit
Apartments, Series 2002, 6.450%, 7/20/32
------------------------------------------------------------------------------------------------------------------------------------
2,750 Total Housing/Multifamily 2,774,117
------------------------------------------------------------------------------------------------------------------------------------
HOUSING/SINGLE FAMILY - 7.9% (5.2% OF TOTAL INVESTMENTS)
995 The Industrial Development Authority of The City of Tucson, 1/17 at 103.00 Aaa 978,165
Arizona, Tax-Exempt Single Family Mortgage Revenue Bonds,
Series 2007A-1, 5.100%, 7/01/38
1,775 Tucson and Pima County Industrial Development Authority, 6/17 at 101.00 Aaa 1,647,217
Arizona, Joint Single Family Mortgage Revenue Bonds,
Series 2007B, 5.350%, 6/01/47 (Alternative Minimum Tax)
------------------------------------------------------------------------------------------------------------------------------------
2,770 Total Housing/Single Family 2,625,382
------------------------------------------------------------------------------------------------------------------------------------
TAX OBLIGATION/GENERAL - 20.1% (13.3% OF TOTAL INVESTMENTS)
1,000 Maricopa County School District 6, Arizona, General Obligation No Opt. Call AAA 1,111,830
Refunding Bonds, Washington Elementary School,
Series 2002A, 5.375%, 7/01/16 - FSA Insured
1,165 Maricopa County Unified School District 69, Paradise Valley, No Opt. Call Aa3 1,263,349
Arizona, General Obligation Refunding Bonds, Series 2002A,
5.250%, 7/01/14 - FGIC Insured
1,405 Mesa, Arizona, General Obligation Bonds, Series 2002, No Opt. Call AA 1,530,860
5.375%, 7/01/15 - FGIC Insured
Phoenix, Arizona, Various Purpose General Obligation Bonds,
Series 2002B:
1,700 5.000%, 7/01/22 7/12 at 100.00 AAA 1,755,215
500 5.000%, 7/01/27 7/12 at 100.00 AAA 508,865
510 Scottsdale, Arizona, General Obligation Bonds, Series 2002, 7/11 at 100.00 AAA 521,383
5.000%, 7/01/24
------------------------------------------------------------------------------------------------------------------------------------
6,280 Total Tax Obligation/General 6,691,502
------------------------------------------------------------------------------------------------------------------------------------
TAX OBLIGATION/LIMITED - 46.1% (30.5% OF TOTAL INVESTMENTS)
Arizona State, Certificates of Participation, Series 2002A:
750 5.000%, 11/01/17 - MBIA Insured 5/12 at 100.00 AA 771,278
1,000 5.000%, 11/01/18 - MBIA Insured 5/12 at 100.00 AA 1,023,770
500 5.000%, 11/01/20 - MBIA Insured 5/12 at 100.00 AA 506,815
131 Centerra Community Facilities District, Goodyear, Arizona, 7/15 at 100.00 N/R 114,829
General Obligation Bonds, Series 2005, 5.500%, 7/15/29
345 Estrella Mountain Ranch Community Facilities District, Arizona, 1/17 at 100.00 N/R 304,307
Special Assessment Bonds, Montecito Assessment District,
Series 2007, 5.800%, 7/01/32
259 Estrella Mountain Ranch Community Facilities District, Goodyear, 7/10 at 102.00 N/R 269,500
Arizona, Special Assessment Lien Bonds, Series 2001A,
7.875%, 7/01/25
670 Goodyear Community Facilities Utility District 1, Arizona, General 7/13 at 100.00 A3 595,811
Obligation Bonds, Series 2003, 5.350%, 7/15/28 - ACA Insured
650 Marana, Arizona, Tangerine Farms Road Improvement District 7/16 at 100.00 Baa1 567,106
Revenue Bonds, Series 2006, 4.600%, 1/01/26
Maricopa County Stadium District, Arizona, Revenue Refunding
Bonds, Series 2002:
840 5.375%, 6/01/18 - AMBAC Insured 6/12 at 100.00 Aa3 883,823
2,645 5.375%, 6/01/19 - AMBAC Insured 6/12 at 100.00 Aa3 2,782,989
240 Marley Park Community Facilities District, City of Surprise, 7/17 at 100.00 N/R 221,671
Arizona, Limited Tax General Obligation Bonds, Series 2007,
6.100%, 7/15/32
530 Palm Valley Community Facility District 3, Goodyear, Arizona, 7/16 at 100.00 N/R 445,534
General Obligation Bonds, Series 2006, 5.300%, 7/15/31
350 Palm Valley Community Facility District 3, Goodyear, Arizona, 7/17 at 100.00 N/R 312,477
Limited Tax General Obligation Bonds, Series 2007,
5.800%, 7/15/32
140 Parkway Community Facilities District 1, Prescott Valley, Arizona, 7/16 at 100.00 N/R 117,785
General Obligation Bonds, Series 2006, 5.350%, 7/15/31
1,500 Phoenix Industrial Development Authority, Arizona, Government 3/12 at 100.00 AA 1,585,904
Bonds, Capitol Mall LLC II, Series 2001, 5.250%, 9/15/16 -
AMBAC Insured
30
PRINCIPAL OPTIONAL CALL
AMOUNT (000) DESCRIPTION (1) PROVISIONS (2) RATINGS (3) VALUE
------------------------------------------------------------------------------------------------------------------------------------
TAX OBLIGATION/LIMITED (continued)
$ 1,070 Pinal County Industrial Development Authority, Arizona, No Opt. Call BBB- $ 989,729
Correctional Facilities Contract Revenue Bonds, Florence
West Prison LLC, Series 2002A, 5.000%, 10/01/18 -
ACA Insured
270 Puerto Rico Public Buildings Authority, Guaranteed Government 7/12 at 100.00 BBB- 264,381
Facilities Revenue Refunding Bonds, Series 2002D,
5.125%, 7/01/24
960 San Luis Civic Improvement Corporation, Arizona, Municipal 7/15 at 100.00 A- 932,218
Facilities Excise Tax Revenue Bonds, Series 2005,
5.000%, 7/01/25 - XLCA Insured
555 Tartesso West Community Facility District, Buckeye, Arizona, 7/17 at 100.00 N/R 502,070
Limited Tax General Obligation Bonds, Series 2007,
5.900%, 7/15/32
750 Vistancia Community Facilities District, Arizona, Restricted 7/15 at 100.00 Baa1 731,265
General Obligation Bonds, Series 2005, 5.750%, 7/15/24
560 Watson Road Community Facilities District, Arizona, Special 7/16 at 100.00 N/R 483,403
Assessment Revenue Bonds, Series 2005, 6.000%, 7/01/30
350 Westpark Community Facilities District, Buckeye, Arizona, 7/16 at 100.00 N/R 293,979
General Obligation Tax Increment Bonds Series 2006,
5.250%, 7/15/31
640 Yuma Municipal Property Corporation, Arizona, Municipal 7/10 at 100.00 AA 645,261
Facilities Tax Revenue Bonds, Series 2001, 5.000%, 7/01/21 -
AMBAC Insured
------------------------------------------------------------------------------------------------------------------------------------
15,705 Total Tax Obligation/Limited 15,345,905
------------------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION - 4.2% (2.8% OF TOTAL INVESTMENTS)
470 Phoenix Civic Improvement Corporation, Arizona, Senior Lien 1/09 at 101.00 AAA 473,393
Airport Revenue Bonds, Series 1998A, 5.000%, 7/01/25 -
FSA Insured
1,000 Phoenix, Arizona, Civic Improvement Corporation, Senior Lien 7/12 at 100.00 AA- 939,460
Airport Revenue Bonds, Series 2002B, 5.250%, 7/01/27 -
FGIC Insured (Alternative Minimum Tax)
------------------------------------------------------------------------------------------------------------------------------------
1,470 Total Transportation 1,412,853
------------------------------------------------------------------------------------------------------------------------------------
U.S. GUARANTEED - 20.3% (13.4% OF TOTAL INVESTMENTS) (5)
400 Arizona Health Facilities Authority, Hospital Revenue Bonds, 7/10 at 101.00 A (5) 435,324
Catholic Healthcare West, Series 1999A, 6.625%, 7/01/20
(Pre-refunded 7/01/10)
735 Arizona Health Facilities Authority, Hospital System Revenue 2/12 at 101.00 Baa3 (5) 819,268
Bonds, Phoenix Children's Hospital, Series 2002A,
6.250%, 2/15/21 (Pre-refunded 2/15/12)
715 Arizona State University, System Revenue Bonds, Series 2002, 7/12 at 100.00 AA (5) 790,054
5.750%, 7/01/27 (Pre-refunded 7/01/12) - FGIC Insured
100 Maricopa County Unified School District 89, Dysart, Arizona, 7/14 at 100.00 AAA 110,485
General Obligation Bonds, Series 2004B, 5.250%, 7/01/20
(Pre-refunded 7/01/14) - FSA Insured
375 Maricopa County Union High School District 210 Phoenix, 7/16 at 100.00 AA (5) 412,365
Arizona, General Obligation Bonds, Series 2006C,
5.000%, 7/01/24 (Pre-refunded 7/01/16) - MBIA Insured
730 Puerto Rico Public Buildings Authority, Guaranteed Government 7/12 at 100.00 Baa3 (5) 779,523
Facilities Revenue Refunding Bonds, Series 2002D,
5.125%, 7/01/24 (Pre-refunded 7/01/12)
1,000 Scottsdale Industrial Development Authority, Arizona, Hospital 12/11 at 101.00 BBB+ (5) 1,102,160
Revenue Bonds, Scottsdale Healthcare, Series 2001,
5.800%, 12/01/31 (Pre-refunded 12/01/11)
990 Scottsdale, Arizona, General Obligation Bonds, Series 2002, 7/11 at 100.00 AAA 1,054,726
5.000%, 7/01/24 (Pre-refunded 7/01/11)
University of Arizona, Certificates of Participation, Series 2002A:
685 5.500%, 6/01/18 (Pre-refunded 6/01/12) - AMBAC Insured 6/12 at 100.00 AA (5) 746,342
460 5.125%, 6/01/22 (Pre-refunded 6/01/12) - AMBAC Insured 6/12 at 100.00 Aa3 (5) 494,992
------------------------------------------------------------------------------------------------------------------------------------
6,190 Total U.S. Guaranteed 6,745,239
------------------------------------------------------------------------------------------------------------------------------------
UTILITIES - 2.5% (1.7% OF TOTAL INVESTMENTS)
1,000 Salt Verde Financial Corporation, Arizona, Senior Gas Revenue No Opt. Call AA- 835,130
Bonds, Series 2007, 5.000%, 12/01/37
------------------------------------------------------------------------------------------------------------------------------------
31
NKR
Nuveen Arizona Dividend Advantage Municipal Fund 2 (continued)
Portfolio of INVESTMENTS July 31, 2008
PRINCIPAL OPTIONAL CALL
AMOUNT (000) DESCRIPTION (1) PROVISIONS (2) RATINGS (3) VALUE
------------------------------------------------------------------------------------------------------------------------------------
WATER AND SEWER - 14.2% (9.4% OF TOTAL INVESTMENTS)
$ 500 Maricopa County Industrial Development Authority, Arizona, 12/08 at 101.00 AA $ 491,740
Water System Improvement Revenue Bonds, Chaparral City
Water Company, Series 1997A, 5.400%, 12/01/22 -
AMBAC Insured (Alternative Minimum Tax)
360 Oro Valley Municipal Property Corporation, Arizona, Senior Lien 7/13 at 100.00 AA 367,686
Water Revenue Bonds, Series 2003, 5.000%, 7/01/23 -
MBIA Insured
765 Phoenix Civic Improvement Corporation, Arizona, Junior Lien 7/15 at 100.00 AA 784,745
Water System Revenue Bonds, Series 2005, 5.000%, 7/01/23 -
MBIA Insured
1,000 Phoenix Civic Improvement Corporation, Arizona, Junior Lien No Opt. Call AA 1,092,790
Water System Revenue Refunding Bonds, Series 2001,
5.500%, 7/01/22 - FGIC Insured
Surprise Municipal Property Corporation, Arizona, Wastewater
System Revenue Bonds, Series 2007:
350 4.700%, 4/01/22 4/14 at 100.00 N/R 318,108
410 4.900%, 4/01/32 4/17 at 100.00 N/R 355,540
1,000 Tucson, Arizona, Water System Revenue Refunding Bonds, 7/12 at 102.00 AA- 1,083,620
Series 2002, 5.500%, 7/01/18 - FGIC Insured
275 Yuma County Industrial Development Authority, Arizona, 12/17 at 100.00 N/R 250,888
Exempt Revenue Bonds, Far West Water & Sewer Inc. Refunding,
Series 2007A, 6.375%, 12/01/37 (Alternative Minimum Tax)
------------------------------------------------------------------------------------------------------------------------------------
4,660 Total Water and Sewer 4,745,117
------------------------------------------------------------------------------------------------------------------------------------
$ 50,890 Total Investments (cost $51,262,043) - 151.1% 50,344,177
=============-----------------------------------------------------------------------------------------------------------------------
Other Assets Less Liabilities - 4.4% 1,467,275
--------------------------------------------------------------------------------------------------------------------
Preferred Shares, at Liquidation Value - (55.5)% (6) (18,500,000)
--------------------------------------------------------------------------------------------------------------------
Net Assets Applicable to Common Shares - 100% $ 33,311,452
====================================================================================================================
(1) All percentages shown in the Portfolio of Investments are
based on net assets applicable to Common shares unless
otherwise noted.
(2) Optional Call Provisions (not covered by the report of
independent registered public accounting firm): Dates (month
and year) and prices of the earliest optional call or
redemption. There may be other call provisions at varying
prices at later dates. Certain mortgage-backed securities
may be subject to periodic principal paydowns.
(3) Ratings (not covered by the report of independent registered
public accounting firm): Using the higher of Standard &
Poor's Group ("Standard & Poor's") or Moody's Investor
Service, Inc. ("Moody's") rating. Ratings below BBB by
Standard & Poor's or Baa by Moody's are considered to be
below investment grade.
The Portfolio of Investments may reflect the ratings on
certain bonds insured by ACA, AMBAC, FGIC, MBIA, RAAI and
XLCA as of July 31, 2008. Please see the Portfolio Managers'
Commentary for an expanded discussion of the affect on the
Fund of changes to the ratings of certain bonds in the
portfolio resulting from changes to the ratings of the
underlying insurers both during the period and after period
end.
(4) Investment valued at fair value using methods determined in
good faith by, or at the discretion of, the Board of
Trustees.
(5) Backed by an escrow or trust containing sufficient U.S.
Government or U.S. Government agency securities which ensure
the timely payment of principal and interest. Such
investments are normally considered to be equivalent to AAA
rated securities.
(6) Preferred Shares, at Liquidation Value as a percentage of
total investments is (36.7)%.
N/R Not rated.
See accompanying notes to financial statements.
32
NXE
Nuveen Arizona Dividend Advantage Municipal Fund 3
Portfolio of INVESTMENTS
July 31, 2008
PRINCIPAL OPTIONAL CALL
AMOUNT (000) DESCRIPTION (1) PROVISIONS (2) RATINGS (3) VALUE
------------------------------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES - 1.2% (0.8% OF TOTAL INVESTMENTS)
$ 535 Puerto Rico, The Children's Trust Fund, Tobacco Settlement 5/12 at 100.00 BBB $ 494,035
Asset-Backed Refunding Bonds, Series 2002, 5.375%, 5/15/33
------------------------------------------------------------------------------------------------------------------------------------
EDUCATION AND CIVIC ORGANIZATIONS - 14.8% (9.8% OF TOTAL INVESTMENTS)
690 Arizona Higher Education Loan Authority, Student Loan Revenue 9/08 at 100.00 AAA 352,949
Bonds, Series 2007B, Adjustable Rate, 2.460%, 11/01/41 (4)
1,250 Arizona State University, System Revenue Bonds, Series 2005, 7/15 at 100.00 AA 1,289,750
5.000%, 7/01/20 - AMBAC Insured
1,130 Energy Management Services LLC, Arizona State University, Energy 7/12 at 100.00 AA 1,183,833
Conservation Revenue Bonds, Main Campus Project, Series 2002,
5.250%, 7/01/18 - MBIA Insured
540 Pima County Industrial Development Authority, Arizona, Charter 12/14 at 100.00 BBB- 533,585
School Revenue Bonds, Noah Webster Basic Schools Inc.,
Series 2004, 6.000%, 12/15/24
565 Tucson Industrial Development Authority, Arizona, Charter 9/14 at 100.00 BBB- 545,033
School Revenue Bonds, Arizona Agribusiness and Equine Center
Charter School, Series 2004A, 6.125%, 9/01/34
2,000 University of Arizona, Certificates of Participation, Series 2002B, 6/12 at 100.00 AA 2,046,620
5.125%, 6/01/20 - AMBAC Insured
------------------------------------------------------------------------------------------------------------------------------------
6,175 Total Education and Civic Organizations 5,951,770
------------------------------------------------------------------------------------------------------------------------------------
HEALTH CARE - 27.3% (18.1% OF TOTAL INVESTMENTS)
1,015 Arizona Health Facilities Authority, Hospital Revenue Bonds, 1/17 at 100.00 AA- 1,015,650
Banner Health Systems, Series 2007A, 5.000%, 1/01/25
1,390 Arizona Health Facilities Authority, Hospital Revenue Bonds, 1/18 at 100.00 AA- 1,334,831
Banner Health Systems, Series 2008A, 5.000%, 1/01/35
625 Arizona Health Facilities Authority, Revenue Bonds, Blood 4/14 at 100.00 A- 614,663
Systems Inc., Series 2004, 5.000%, 4/01/20
475 Glendale Industrial Development Authority, Arizona, Revenue 12/15 at 100.00 BBB 402,867
Bonds, John C. Lincoln Health Network, Series 2005B,
5.000%, 12/01/37
785 Glendale Industrial Development Authority, Arizona, Revenue 12/17 at 100.00 BBB 654,360
Bonds, John C. Lincoln Health Network, Series 2007,
5.000%, 12/01/42
1,825 Maricopa County Industrial Development Authority, Arizona, 7/14 at 100.00 A 1,800,071
Health Facility Revenue Bonds, Catholic Healthcare West,
Series 2004A, 5.375%, 7/01/23
1,985 Maricopa County Industrial Development Authority, Arizona, 7/17 at 100.00 A 1,851,906
Health Facility Revenue Bonds, Catholic Healthcare West,
Series 2007A, 5.250%, 7/01/32
2,000 Maricopa County Industrial Development Authority, Arizona, 11/08 at 101.00 AA 1,985,040
Hospital Revenue Bonds, Mayo Clinic Hospital, Series 1998,
5.250%, 11/15/37
270 Maricopa County, Arizona, Hospital Revenue Bonds, Sun Health 4/15 at 100.00 Baa1 269,641
Corporation, Series 2005, 5.000%, 4/01/16
1,000 Yavapai County Industrial Development Authority, Arizona, 8/13 at 100.00 Baa2 998,710
Hospital Revenue Bonds, Yavapai Regional Medical Center,
Series 2003A, 6.000%, 8/01/33
------------------------------------------------------------------------------------------------------------------------------------
11,370 Total Health Care 10,927,739
------------------------------------------------------------------------------------------------------------------------------------
33
NXE
Nuveen Arizona Dividend Advantage Municipal Fund 3 (continued)
Portfolio of INVESTMENTS July 31, 2008
PRINCIPAL OPTIONAL CALL
AMOUNT (000) DESCRIPTION (1) PROVISIONS (2) RATINGS (3) VALUE
------------------------------------------------------------------------------------------------------------------------------------
HOUSING/MULTIFAMILY - 4.7% (3.1% OF TOTAL INVESTMENTS)
$ 1,545 Phoenix Industrial Development Authority, Arizona, GNMA 6/11 at 102.00 Aaa $ 1,557,885
Collateralized Multifamily Housing Revenue Bonds, Campaigne
Place on Jackson, Series 2001, 5.600%, 6/20/21 (Alternative
Minimum Tax)
380 Phoenix Industrial Development Authority, Arizona, GNMA 4/15 at 100.00 Aaa 319,572
Collateralized Multifamily Housing Revenue Bonds, Park
Lee Apartments, Series 2004A, 5.050%, 10/20/44
(Alternative Minimum Tax)
------------------------------------------------------------------------------------------------------------------------------------
1,925 Total Housing/Multifamily 1,877,457
------------------------------------------------------------------------------------------------------------------------------------
HOUSING/SINGLE FAMILY - 7.8% (5.2% OF TOTAL INVESTMENTS)
1,170 The Industrial Development Authority of The City of Tucson, 1/17 at 103.00 Aaa 1,150,204
Arizona, Tax-Exempt Single Family Mortgage Revenue Bonds,
Series 2007A-1, 5.100%, 7/01/38
2,130 Tucson and Pima County Industrial Development Authority, 6/17 at 101.00 Aaa 1,976,661
Arizona, Joint Single Family Mortgage Revenue Bonds,
Series 2007B, 5.350%, 6/01/47 (Alternative Minimum Tax)
------------------------------------------------------------------------------------------------------------------------------------
3,300 Total Housing/Single Family 3,126,865
------------------------------------------------------------------------------------------------------------------------------------
TAX OBLIGATION/LIMITED - 33.2% (22.0% OF TOTAL INVESTMENTS)
150 Centerra Community Facilities District, Goodyear, Arizona, 7/15 at 100.00 N/R 131,484
General Obligation Bonds, Series 2005, 5.500%, 7/15/29
2,250 DC Ranch Community Facilities District, Scottsdale, Arizona, 7/13 at 100.00 Aa3 2,193,458
General Obligation Bonds, Series 2002, 5.000%, 7/15/27 -
AMBAC Insured
Estrella Mountain Ranch Community Facilities District, Arizona,
Special Assessment Bonds, Montecito Assessment District, Series 2007:
254 5.700%, 7/01/27 1/17 at 100.00 N/R 229,260
155 5.800%, 7/01/32 1/17 at 100.00 N/R 136,718
303 Estrella Mountain Ranch Community Facilities District, 7/10 at 102.00 N/R 315,284
Goodyear, Arizona, Special Assessment Lien Bonds,
Series 2001A, 7.875%, 7/01/25
800 Goodyear Community Facilities Utility District 1, Arizona, 7/13 at 100.00 A3 711,416
General Obligation Bonds, Series 2003, 5.350%, 7/15/28 -
ACA Insured
525 Greater Arizona Development Authority, Infrastructure Revenue 8/16 at 100.00 AA 533,652
Bonds, Series 2006A, 5.000%, 8/01/23 - MBIA Insured
785 Marana, Arizona, Tangerine Farms Road Improvement District 7/16 at 100.00 Baa1 684,889
Revenue Bonds, Series 2006, 4.600%, 1/01/26
290 Marley Park Community Facilities District, City of Surprise, 7/17 at 100.00 N/R 267,853
Arizona, Limited Tax General Obligation Bonds, Series 2007,
6.100%, 7/15/32
2,000 Mohave County, Arizona, Certificates of Participation, 7/14 at 100.00 AA 2,052,520
Series 2004, 5.250%, 7/01/19 - AMBAC Insured
640 Palm Valley Community Facility District 3, Goodyear, Arizona, 7/16 at 100.00 N/R 538,003
General Obligation Bonds, Series 2006, 5.300%, 7/15/31
425 Palm Valley Community Facility District 3, Goodyear, Arizona, 7/17 at 100.00 N/R 379,436
Limited Tax General Obligation Bonds, Series 2007,
5.800%, 7/15/32
160 Parkway Community Facilities District 1, Prescott Valley, 7/16 at 100.00 N/R 134,611
Arizona, General Obligation Bonds, Series 2006,
5.350%, 7/15/31
1,250 Pinal County Industrial Development Authority, Arizona, No Opt. Call BBB- 1,156,225
Correctional Facilities Contract Revenue Bonds, Florence
West Prison LLC, Series 2002A, 5.000%, 10/01/18 -
ACA Insured
1,130 San Luis Civic Improvement Corporation, Arizona, Municipal 7/15 at 100.00 A- 1,097,298
Facilities Excise Tax Revenue Bonds, Series 2005,
5.000%, 7/01/25 - XLCA Insured
665 Tartesso West Community Facility District, Buckeye, Arizona, 7/17 at 100.00 N/R 601,579
Limited Tax General Obligation Bonds, Series 2007,
5.900%, 7/15/32
1,250 Vistancia Community Facilities District, Arizona, Restricted 7/15 at 100.00 Baa1 1,218,775
General Obligation Bonds, Series 2005, 5.750%, 7/15/24
665 Watson Road Community Facilities District, Arizona, Special 7/16 at 100.00 N/R 574,041
Assessment Revenue Bonds, Series 2005, 6.000%, 7/01/30
34
PRINCIPAL OPTIONAL CALL
AMOUNT (000) DESCRIPTION (1) PROVISIONS (2) RATINGS (3) VALUE
------------------------------------------------------------------------------------------------------------------------------------
TAX OBLIGATION/LIMITED (continued)
$ 425 Westpark Community Facilities District, Buckeye, Arizona, 7/16 at 100.00 N/R $ 356,975
General Obligation Tax Increment Bonds Series 2006,
5.250%, 7/15/31
------------------------------------------------------------------------------------------------------------------------------------
14,122 Total Tax Obligation/Limited 13,313,477
------------------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION - 13.9% (9.2% OF TOTAL INVESTMENTS)
Phoenix, Arizona, Civic Improvement Corporation, Senior Lien
Airport Revenue Bonds, Series 2002B:
1,000 5.750%, 7/01/16 - FGIC Insured (Alternative Minimum Tax) 7/12 at 100.00 AA- 1,019,390
2,300 5.250%, 7/01/21 - FGIC Insured (Alternative Minimum Tax) 7/12 at 100.00 AA- 2,215,314
2,450 Tucson Airport Authority Inc., Arizona, Revenue Refunding 6/11 at 100.00 AA 2,346,145
Bonds, Series 2001B, 5.000%, 6/01/20 - AMBAC Insured
(Alternative Minimum Tax)
------------------------------------------------------------------------------------------------------------------------------------
5,750 Total Transportation 5,580,849
------------------------------------------------------------------------------------------------------------------------------------
U.S. GUARANTEED - 24.1% (16.0% OF TOTAL INVESTMENTS) (5)
300 Arizona Health Facilities Authority, Hospital Revenue Bonds, 7/10 at 101.00 A (5) 326,493
Catholic Healthcare West, Series 1999A, 6.625%, 7/01/20
(Pre-refunded 7/01/10)
1,000 Arizona Health Facilities Authority, Hospital System Revenue 12/10 at 102.00 BBB (5) 1,116,010
Bonds, John C. Lincoln Health Network, Series 2000,
6.875%, 12/01/20 (Pre-refunded 12/01/10)
Arizona Health Facilities Authority, Hospital System Revenue
Bonds, Phoenix Children's Hospital, Series 1999A:
350 6.125%, 11/15/22 (Pre-refunded 11/15/09) 11/09 at 100.00 Baa3 (5) 367,952
520 6.250%, 11/15/29 (Pre-refunded 11/15/09) 11/09 at 100.00 Baa3 (5) 547,492
660 Chandler, Arizona, General Obligation Bonds, Series 2002, 7/12 at 100.00 AAA 711,335
5.000%, 7/01/18 (Pre-refunded 7/01/12)
1,575 Maricopa County Union High School District 210, Phoenix, 7/14 at 100.00 AAA 1,719,128
Arizona, General Obligation Bonds, Series 2004A,
5.000%, 7/01/20 (Pre-refunded 7/01/14) - FSA Insured
1,250 Scottsdale Industrial Development Authority, Arizona, 12/11 at 101.00 BBB+ (5) 1,377,700
Hospital Revenue Bonds, Scottsdale Healthcare, Series 2001,
5.800%, 12/01/31 (Pre-refunded 12/01/11)
2,770 Tempe, Arizona, Excise Tax Revenue Refunding Bonds, 7/13 at 100.00 AAA 3,008,881
Series 2003, 5.000%, 7/01/22 (Pre-refunded 7/01/13)
440 Tucson, Arizona, General Obligation Bonds, Series 2001B, 7/11 at 100.00 AA (5) 468,640
5.000%, 7/01/20 (Pre-refunded 7/01/11)
------------------------------------------------------------------------------------------------------------------------------------
8,865 Total U.S. Guaranteed 9,643,631
------------------------------------------------------------------------------------------------------------------------------------
UTILITIES - 9.9% (6.6% OF TOTAL INVESTMENTS)
1,250 Maricopa County Pollution Control Corporation, Arizona, 11/12 at 100.00 AA 1,119,288
Revenue Bonds, Arizona Public Service Company - Palo Verde
Project, Series 2002A, 5.050%, 5/01/29 - AMBAC Insured
1,660 Puerto Rico Electric Power Authority, Power Revenue Bonds, 7/15 at 100.00 A3 1,595,343
Series 2005RR, 5.000%, 7/01/26 - XLCA Insured
270 Salt River Project Agricultural Improvement and Power 1/13 at 100.00 Aa1 278,046
District, Arizona, Electric System Revenue Bonds, Series 2002B,
5.000%, 1/01/22
1,165 Salt Verde Financial Corporation, Arizona, Senior Gas No Opt. Call AA- 972,926
Revenue Bonds, Series 2007, 5.000%, 12/01/37
------------------------------------------------------------------------------------------------------------------------------------
4,345 Total Utilities 3,965,603
------------------------------------------------------------------------------------------------------------------------------------
WATER AND SEWER - 13.9% (9.2% OF TOTAL INVESTMENTS)
405 Oro Valley Municipal Property Corporation, Arizona, Senior Lien 7/13 at 100.00 AA 413,647
Water Revenue Bonds, Series 2003, 5.000%, 7/01/23 -
MBIA Insured
1,000 Phoenix Civic Improvement Corporation, Arizona, Junior Lien 7/11 at 100.00 AA- 1,018,920
Wastewater System Revenue Refunding Bonds, Series 2001,
5.125%, 7/01/21 - FGIC Insured
2,000 Phoenix Civic Improvement Corporation, Arizona, Junior Lien 7/12 at 100.00 AA 2,074,340
Water System Revenue Bonds, Series 2002, 5.000%, 7/01/18 -
FGIC Insured
920 Phoenix Civic Improvement Corporation, Arizona, Junior Lien 7/15 at 100.00 AA 943,745
Water System Revenue Bonds, Series 2005, 5.000%, 7/01/23 -
MBIA Insured
35
NXE
Nuveen Arizona Dividend Advantage Municipal Fund 3 (continued)
Portfolio of INVESTMENTS July 31, 2008
PRINCIPAL OPTIONAL CALL
AMOUNT (000) DESCRIPTION (1) PROVISIONS (2) RATINGS (3) VALUE
------------------------------------------------------------------------------------------------------------------------------------
WATER AND SEWER (continued)
Surprise Municipal Property Corporation, Arizona, Wastewater
System Revenue Bonds, Series 2007:
$ 425 4.700%, 4/01/22 4/14 at 100.00 N/R $ 386,274
490 4.900%, 4/01/32 4/17 at 100.00 N/R 424,913
330 Yuma County Industrial Development Authority, Arizona, Exempt 12/17 at 100.00 N/R 301,066
Revenue Bonds, Far West Water & Sewer Inc. Refunding,
Series 2007A, 6.375%, 12/01/37 (Alternative Minimum Tax)
------------------------------------------------------------------------------------------------------------------------------------
5,570 Total Water and Sewer 5,562,905
------------------------------------------------------------------------------------------------------------------------------------
$ 61,957 Total Investments (cost $62,482,549) - 150.8% 60,444,331
=============-----------------------------------------------------------------------------------------------------------------------
Other Assets Less Liabilities - 4.1% 1,636,239
--------------------------------------------------------------------------------------------------------------------
Preferred Shares, at Liquidation Value - (54.9)% (6) (22,000,000)
--------------------------------------------------------------------------------------------------------------------
Net Assets Applicable to Common Shares - 100% $ 40,080,570
====================================================================================================================
(1) All percentages shown in the Portfolio of Investments are
based on net assets applicable to Common shares unless
otherwise noted.
(2) Optional Call Provisions (not covered by the report of
independent registered public accounting firm): Dates (month
and year) and prices of the earliest optional call or
redemption. There may be other call provisions at varying
prices at later dates. Certain mortgage-backed securities
may be subject to periodic principal paydowns.
(3) Ratings (not covered by the report of independent registered
public accounting firm): Using the higher of Standard &
Poor's Group ("Standard & Poor's") or Moody's Investor
Service, Inc. ("Moody's") rating. Ratings below BBB by
Standard & Poor's or Baa by Moody's are considered to be
below investment grade.
The Portfolio of Investments may reflect the ratings on
certain bonds insured by ACA, AMBAC, FGIC, MBIA, RAAI and
XLCA as of July 31, 2008. Please see the Portfolio Managers'
Commentary for an expanded discussion of the affect on the
Fund of changes to the ratings of certain bonds in the
portfolio resulting from changes to the ratings of the
underlying insurers both during the period and after period
end.
(4) Investment valued at fair value using methods determined in
good faith by, or at the discretion of, the Board of
Trustees.
(5) Backed by an escrow or trust containing sufficient U.S.
Government or U.S. Government agency securities which ensure
the timely payment of principal and interest. Such
investments are normally considered to be equivalent to AAA
rated securities.
(6) Preferred Shares, at Liquidation Value as a percentage of
total investments is (36.4)%.
N/R Not rated.
See accompanying notes to financial statements.
36
NTX
Nuveen Texas Quality Income Municipal Fund
Portfolio of INVESTMENTS
July 31, 2008
PRINCIPAL OPTIONAL CALL
AMOUNT (000) DESCRIPTION (1) PROVISIONS (2) RATINGS (3) VALUE
------------------------------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES - 1.8% (1.2% OF TOTAL INVESTMENTS)
$ 2,515 Puerto Rico, The Children's Trust Fund, Tobacco Settlement 5/12 at 100.00 BBB $ 2,322,426
Asset-Backed Refunding Bonds, Series 2002, 5.375%, 5/15/33
------------------------------------------------------------------------------------------------------------------------------------
EDUCATION AND CIVIC ORGANIZATIONS - 15.6% (10.5% OF TOTAL INVESTMENTS)
1,000 Central Texas Higher Education Authority Inc., Texas, Student 9/09 at 100.00 A2 544,376
Loan Revenue Bonds, Auction Rate Coupon, 3.735%, 12/01/37
(Alternative Minimum Tax) (4)
Red River Education Finance Corporation, Texas, Revenue Bonds,
Hockaday School, Series 2005:
1,170 5.000%, 5/15/27 5/15 at 100.00 AA 1,176,599
1,230 5.000%, 5/15/28 5/15 at 100.00 AA 1,234,822
1,290 5.000%, 5/15/29 5/15 at 100.00 AA 1,292,116
Texas Public Finance Authority, Revenue Bonds, Texas Southern
University Financing System, Series 2003:
1,710 5.000%, 5/01/18 - FGIC Insured 5/13 at 100.00 Ba3 1,688,334
1,795 5.000%, 5/01/19 - FGIC Insured 5/13 at 100.00 Ba3 1,750,287
1,885 5.000%, 5/01/20 - FGIC Insured 5/13 at 100.00 Ba3 1,817,178
1,665 Texas State University System, Financing Revenue Bonds, 9/14 at 100.00 AAA 1,700,098
Series 2004, 5.000%, 3/15/24 - FSA Insured
2,000 Texas State University System, Financing Revenue Refunding 3/12 at 100.00 AAA 2,056,680
Bonds, Series 2002, 5.000%, 3/15/20 - FSA Insured
2,330 Universal City Education Facilities Corporation, Texas, 3/11 at 102.00 A- 2,371,497
Revenue Bonds, Wayland Baptist University Project,
Series 2001, 5.625%, 3/01/26
5,000 University of North Texas, Financing System Revenue Bonds, 4/12 at 100.00 AAA 5,075,600
Series 2001, 5.000%, 4/15/24 - FSA Insured
------------------------------------------------------------------------------------------------------------------------------------
21,075 Total Education and Civic Organizations 20,707,587
------------------------------------------------------------------------------------------------------------------------------------
ENERGY - 2.0% (1.3% OF TOTAL INVESTMENTS)
3,000 Gulf Coast Waste Disposal Authority, Texas, Waste Disposal 10/08 at 102.00 BBB 2,650,410
Revenue Bonds, Valero Energy Corporation Project,
Series 1998, 5.600%, 4/01/32 (Alternative Minimum Tax)
------------------------------------------------------------------------------------------------------------------------------------
HEALTH CARE - 15.6% (10.4% OF TOTAL INVESTMENTS)
3,500 Abilene Health Facilities Development Corporation, Texas, 9/08 at 100.00 AA 3,501,925
Hospital Revenue Refunding and Improvement Bonds, Hendrick
Medical Center Project, Series 1995C, 6.150%, 9/01/25 -
MBIA Insured
Brazoria County Health Facilities Development Corporation,
Texas, Revenue Bonds, Brazosport Memorial Hospital, Series 2004:
1,745 5.250%, 7/01/20 - RAAI Insured 7/14 at 100.00 A 1,717,621
1,835 5.250%, 7/01/21 - RAAI Insured 7/14 at 100.00 A 1,794,538
4,140 Midland County Hospital District, Texas, Hospital Revenue No Opt. Call BBB 3,556,840
Bonds, Series 1992, 0.000%, 6/01/11
2,000 North Central Texas Health Facilities Development Corporation, 5/11 at 100.00 Aa2 1,978,420
Hospital Revenue Bonds, Baylor Healthcare System,
Series 2001A, 5.125%, 5/15/29
2,000 Richardson Hospital Authority, Texas, Revenue Bonds, 12/13 at 100.00 Baa2 1,962,800
Richardson Regional Medical Center, Series 2004,
5.875%, 12/01/24
2,500 Tarrant County Cultural & Educational Facilities Financing 11/17 at 100.00 AA- 2,344,400
Corporation, Texas, Revenue Bonds, Tarrant County Health
Resources, Series 2007B, 5.000%, 11/15/42
37
NTX
Nuveen Texas Quality Income Municipal Fund (continued)
Portfolio of INVESTMENTS July 31, 2008
PRINCIPAL OPTIONAL CALL
AMOUNT (000) DESCRIPTION (1) PROVISIONS (2) RATINGS (3) VALUE
------------------------------------------------------------------------------------------------------------------------------------
HEALTH CARE (continued)
$ 2,000 Tom Green County Health Facilities Development Corporation, 5/11 at 101.00 Baa3 $ 2,071,360
Texas, Hospital Revenue Bonds, Shannon Health System
Project, Series 2001, 6.750%, 5/15/21
2,000 Tyler Health Facilities Development Corporation, Texas, Hospital 7/17 at 100.00 BBB+ 1,749,980
Revenue Bonds, Mother Frances Hospital Regional Healthcare
Center, Series 2007, 5.000%, 7/01/33
------------------------------------------------------------------------------------------------------------------------------------
21,720 Total Health Care 20,677,884
------------------------------------------------------------------------------------------------------------------------------------
HOUSING/MULTIFAMILY - 1.9% (1.3% OF TOTAL INVESTMENTS)
Bexar County Housing Finance Corporation, Texas, Insured
Multifamily Housing Revenue Bonds, Waters at Northern Hills
Apartments Project, Series 2001A:
2,000 6.000%, 8/01/31 - MBIA Insured 8/11 at 102.00 A2 1,809,880
750 6.050%, 8/01/36 - MBIA Insured 8/11 at 102.00 A2 673,560
------------------------------------------------------------------------------------------------------------------------------------
2,750 Total Housing/Multifamily 2,483,440
------------------------------------------------------------------------------------------------------------------------------------
HOUSING/SINGLE FAMILY - 3.5% (2.4% OF TOTAL INVESTMENTS)
1,922 El Paso Housing Finance Corporation, Texas, GNMA Collateralized 4/11 at 106.75 AAA 2,000,298
Single Family Mortgage Revenue Bonds, Series 2001A-3,
6.180%, 4/01/33
55 Galveston Property Finance Authority Inc., Texas, Single Family 9/08 at 100.00 Caa1 53,898
Mortgage Revenue Bonds, Series 1991A, 8.500%, 9/01/11
2,825 Texas Department of Housing and Community Affairs, Single 3/12 at 100.00 AAA 2,650,641
Family Mortgage Bonds, Series 2002B, 5.550%, 9/01/33 -
MBIA Insured (Alternative Minimum Tax)
------------------------------------------------------------------------------------------------------------------------------------
4,802 Total Housing/Single Family 4,704,837
------------------------------------------------------------------------------------------------------------------------------------
LONG-TERM CARE - 1.1% (0.7% OF TOTAL INVESTMENTS)
Bexar County, Texas, Health Facilities Development Corporation
Revenue Bonds, Army Retirement Residence, Series 2007:
1,000 5.000%, 7/01/27 7/17 at 100.00 BBB 891,910
600 5.000%, 7/01/37 7/17 at 100.00 BBB 501,606
------------------------------------------------------------------------------------------------------------------------------------
1,600 Total Long-Term Care 1,393,516
------------------------------------------------------------------------------------------------------------------------------------
MATERIALS - 4.5% (3.0% OF TOTAL INVESTMENTS)
3,000 Cass County Industrial Development Corporation, Texas, 3/10 at 101.00 BBB 3,000,180
Environmental Improvement Revenue Bonds, International
Paper Company, Series 2000A, 6.600%, 3/15/24
(Alternative Minimum Tax)
3,000 Guadalupe-Blanco River Authority, Texas, Sewage and 10/08 at 100.00 A 3,001,830
Solid Waste Disposal Facility Bonds, E.I. DuPont de Nemours
and Company Project, Series 1996, 6.400%, 4/01/26
(Alternative Minimum Tax)
------------------------------------------------------------------------------------------------------------------------------------
6,000 Total Materials 6,002,010
------------------------------------------------------------------------------------------------------------------------------------
TAX OBLIGATION/GENERAL - 44.9% (30.0% OF TOTAL INVESTMENTS)
1,260 Bexar County, Texas, Combined Tax and Revenue Certificates 6/14 at 100.00 AA+ 1,314,041
of Obligation, Series 2004, 5.000%, 6/15/19
2,500 Borger Independent School District, Hutchison County, Texas, 2/16 at 100.00 AAA 2,488,825
General Obligation Bonds, Series 2006, 5.000%, 2/15/36
1,190 Canutillo Independent School District, El Paso County, Texas, 8/15 at 100.00 AAA 1,228,437
General Obligation Bonds, Series 2006A, 5.000%, 8/15/22
1,275 Copperas Cove, Texas, Certificates of Obligation, Series 2003, 8/12 at 100.00 AA 1,295,923
5.000%, 8/15/23 - MBIA Insured (8)
2,305 Corpus Christi, Texas, Combination Tax and Municipal Hotel 9/12 at 100.00 AAA 2,434,864
Occupancy Tax Revenue Certificates of Obligation, Series 2002,
5.500%, 9/01/21 - FSA Insured
2,595 Denton County, Texas, Permanent Improvement General 7/12 at 100.00 AA+ 2,643,371
Obligation Bonds, Series 2005, 5.000%, 7/15/25
1,750 El Paso County, Texas, Certificates of Obligation, Series 2001, No Opt. Call AAA 1,860,583
5.000%, 2/15/21 - FSA Insured
38
PRINCIPAL OPTIONAL CALL
AMOUNT (000) DESCRIPTION (1) PROVISIONS (2) RATINGS (3) VALUE
------------------------------------------------------------------------------------------------------------------------------------
TAX OBLIGATION/GENERAL (continued)
Fort Bend County Municipal Utility District 25, Texas, General
Obligation Bonds, Series 2005:
$ 1,330 5.000%, 10/01/26 - FGIC Insured 10/12 at 100.00 BBB $ 1,297,362
1,320 5.000%, 10/01/27 - FGIC Insured 10/12 at 100.00 BBB 1,281,878
3,615 Frisco, Texas, General Obligation Bonds, Series 2006, 2/16 at 100.00 AA 3,653,355
5.000%, 2/15/26 - FGIC Insured
Houston Community College, Texas, Limited Tax General
Obligation Bonds, Series 2003:
2,500 5.000%, 2/15/20 - AMBAC Insured 2/13 at 100.00 AA 2,565,725
2,235 5.000%, 2/15/21 - AMBAC Insured 2/13 at 100.00 AA 2,285,444
5,000 Houston, Texas, General Obligation Bonds, Series 2005E, 3/15 at 100.00 AA 5,118,000
5.000%, 3/01/23 - AMBAC Insured
100 Judson Independent School District, Bexar County, Texas, 2/11 at 100.00 Aaa 104,069
General Obligation Refunding Bonds, Series 2002,
5.250%, 2/01/21
4,900 Leander Independent School District, Williamson and 8/14 at 17.78 AAA 584,864
Travis Counties, Texas, General Obligation Bonds,
Series 2006, 0.000%, 8/15/45
5,220 Leander Independent School District, Williamson and 8/09 at 46.74 AAA 2,365,234
Travis Counties, Texas, Unlimited Tax School Building and
Refunding Bonds, Series 2000, 0.000%, 8/15/21
1,000 Mansfield Independent School District, Tarrant County, 2/14 at 100.00 AAA 1,038,600
Texas, General Obligation Bonds, Series 2004, 5.000%, 2/15/20
1,010 Mercedes Independent School District, Hidalgo County, Texas, 8/15 at 100.00 AAA 1,031,604
General Obligation Bonds, Series 2005, 5.000%, 8/15/23
5,515 Midlothian Independent School District, Ellis County, Texas, 2/15 at 100.00 Aaa 5,507,002
General Obligation Bonds, Series 2005, 5.000%, 2/15/34
925 Northside Independent School District, Bexar County, Texas, 8/10 at 100.00 AAA 967,670
Unlimited Tax School Building and Refunding Bonds,
Series 2000, 5.875%, 8/15/25
500 Puerto Rico, General Obligation and Public Improvement No Opt. Call AAA 498,740
Bonds, Series 2001A, 5.500%, 7/01/29
Roma Independent School District, Texas, General Obligation
Bonds, Series 2005:
1,110 5.000%, 8/15/22 8/15 at 100.00 AAA 1,145,853
1,165 5.000%, 8/15/23 - FSA Insured 8/15 at 100.00 AAA 1,196,956
1,250 Southside Independent School District, Bexar County, Texas, 8/14 at 100.00 Aaa 1,285,363
General Obligation Bonds, Series 2004A, 5.000%, 8/15/22
1,140 Sunnyvale School District, Texas, General Obligation Bonds, 2/14 at 100.00 AAA 1,177,369
Series 2004, 5.250%, 2/15/25
5,000 Texas State, General Obligation Bonds, Transportation Commission 4/17 at 100.00 Aa1 5,062,800
Mobility Fund, Series 2006A, 5.000%, 4/01/33
1,000 Texas State, General Obligation Bonds, Transportation Commission 4/18 at 100.00 Aa1 1,018,360
Mobility Fund, Series 2008, 5.000%, 4/01/30
1,110 Texas State, General Obligation Bonds, Water Utility, 8/11 at 100.00 Aa1 1,156,831
Series 2001, 5.250%, 8/01/23
1,500 Texas, General Obligation Refunding Bonds, Public Finance 10/12 at 100.00 Aa1 1,567,800
Authority, Series 2002, 5.000%, 10/01/18
3,025 Victoria Independent School District, Victoria County, Texas, 2/17 at 100.00 AAA 3,029,114
General Obligation Bonds, Series 2007, 5.000%, 2/15/32
West Texas Independent School District, McLennan and Hill
Counties, General Obligation Refunding Bonds, Series 1998:
1,000 0.000%, 8/15/22 8/13 at 61.20 AAA 474,630
1,000 0.000%, 8/15/24 8/13 at 54.88 AAA 422,450
White Settlement Independent School District, Tarrant County,
Texas, General Obligation Bonds, Series 2006:
1,500 0.000%, 8/15/43 8/15 at 23.11 AAA 201,225
1,500 0.000%, 8/15/44 8/15 at 21.88 AAA 189,420
425 0.000%, 8/15/45 8/15 at 20.76 AAA
------------------------------------------------------------------------------------------------------------------------------------
69,770 Total Tax Obligation/General 59,544,380
------------------------------------------------------------------------------------------------------------------------------------
39
NTX
Nuveen Texas Quality Income Municipal Fund (continued)
Portfolio of INVESTMENTS July 31, 2008
PRINCIPAL OPTIONAL CALL
AMOUNT (000) DESCRIPTION (1) PROVISIONS (2) RATINGS (3) VALUE
------------------------------------------------------------------------------------------------------------------------------------
TAX OBLIGATION/LIMITED - 3.7% (2.5% OF TOTAL INVESTMENTS)
$ 2,670 Dallas Area Rapid Transit, Texas, Senior Lien Sales Tax Revenue 12/16 at 100.00 AAA $ 2,650,829
Bonds, Series 2007, Drivers 1771, 9.135%, 12/01/36 -
AMBAC Insured (IF)
2,250 Harris County-Houston Sports Authority, Texas, Senior Lien 11/11 at 100.00 AA 2,283,705
Revenue Bonds, Series 2001G, 5.250%, 11/15/22 - MBIA Insured
------------------------------------------------------------------------------------------------------------------------------------
4,920 Total Tax Obligation/Limited 4,934,534
------------------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION - 5.9% (4.0% OF TOTAL INVESTMENTS)
1,000 Austin, Texas, Airport System Prior Lien Revenue Bonds, 11/13 at 100.00 AA 1,051,980
Series 2003, 5.250%, 11/15/16 - MBIA Insured
3,260 Central Texas Regional Mobility Authority, Travis and Williamson 1/15 at 100.00 BBB- 3,091,784
Counties, Toll Road Revenue Bonds, Series 2005,
5.000%, 1/01/22 - FGIC Insured
2,600 Dallas-Ft. Worth International Airport Facility Improvement 11/09 at 101.00 CCC+ 1,200,914
Corporation, Texas, Revenue Bonds, American Airlines Inc.,
Series 1999, 6.375%, 5/01/35 (Alternative Minimum Tax)
2,000 Houston, Texas, Subordinate Lien Airport System Revenue 7/10 at 100.00 AAA 2,005,460
Bonds, Series 2000A, 5.625%, 7/01/30 - FSA Insured
(Alternative Minimum Tax)
500 North Texas Thruway Authority, Second Tier System Revenue 1/18 at 100.00 A3 482,795
Refunding Bonds, Series 2008, 5.750%, 1/01/38
------------------------------------------------------------------------------------------------------------------------------------
9,360 Total Transportation 7,832,933
------------------------------------------------------------------------------------------------------------------------------------
U.S. GUARANTEED - 27.2% (18.2% OF TOTAL INVESTMENTS) (5)
Bell County Health Facilities Development Corporation, Texas,
Retirement Facility Revenue Bonds, Buckner Retirement Services
Inc. Obligated Group, Series 1998:
3,400 5.250%, 11/15/19 (Pre-refunded 11/15/08) 11/08 at 101.00 AAA 3,466,844
5,000 11/15/28 (Pre-refunded 11/15/08) 11/08 at 101.00 AAA 5,098,300
3,835 Coppell Independent School District, Dallas County, Texas, 8/09 at 75.34 AAA 2,803,538
Unlimited Tax School Building and Refunding Bonds,
Series 1992, 0.000%, 8/15/14 (Pre-refunded 8/15/09) -
MBIA Insured
295 Coppell Independent School District, Dallas County, Texas, 8/09 at 75.34 Aa3 (5) 217,120
Unlimited Tax School Building and Refunding Bonds,
Series 1992, 0.000%, 8/15/14 (Pre-refunded 8/15/09) -
MBIA Insured
Gregg County Health Facilities Development Corporation, Texas,
Hospital Revenue Bonds, Good Shepherd Medical Center Project,
Series 2000:
2,000 6.875%, 10/01/20 (Pre-refunded 10/01/10) - RAAI Insured 10/10 at 101.00 AA (5) 2,209,460
3,250 6.375%, 10/01/25 (Pre-refunded 10/01/10) - RAAI Insured 10/10 at 101.00 AA (5) 3,556,605
500 Harris County Health Facilities Development Corporation, 8/11 at 100.00 AAA 536,870
Texas, Revenue Bonds, St. Luke's Episcopal Hospital,
Series 2001A, 5.500%, 2/15/21 (Pre-refunded 8/15/11)
1,400 Judson Independent School District, Bexar County, Texas, 2/11 at 100.00 Aaa 1,487,878
General Obligation Refunding Bonds, Series 2002,
5.250%, 2/01/21 (Pre-refunded 2/01/11)
1,000 North Central Texas Health Facilities Development No Opt. Call Aaa 1,123,560
Corporation, Hospital Revenue Bonds, Presbyterian
Healthcare System, Series 1996B, 5.750%, 6/01/26 -
MBIA Insured (ETM)
1,075 Northside Independent School District, Bexar County, Texas, 8/10 at 100.00 AAA 1,151,884
Unlimited Tax School Building and Refunding Bonds,
Series 2000, 5.875%, 8/15/25 (Pre-refunded 8/15/10)
1,760 Parker County Hospital District, Texas, Hospital Revenue 8/09 at 102.00 BB- (5) 1,875,386
Bonds, Campbell Health System, Series 1999, 6.250%, 8/15/19
(Pre-refunded 8/15/09)
2,500 Retama Development Corporation, Texas, Special Facilities 12/17 at 100.00 AAA 3,140,100
Revenue Bonds, Retama Park Racetrack, Series 1993,
8.750%, 12/15/18 (Pre-refunded 12/15/17) (6)
1,750 San Antonio, Texas, Electric and Gas System Revenue 2/12 at 100.00 AAA 1,879,763
Refunding Bonds, Series 2002, 5.375%, 2/01/20
(Pre-refunded 2/01/12)
1,440 South Texas Community College District, General Obligation 8/12 at 100.00 AA (5) 1,578,254
Bonds, Series 2002, 5.500%, 8/15/17 (Pre-refunded 8/15/12) -
AMBAC Insured
1,050 Tarrant County Health Facilities Development Corporation, 11/08 at 101.00 AAA 1,071,294
Texas, Hospital Revenue Bonds, Adventist Health System -
Sunbelt Obligated Group, Series 1998, 5.375%, 11/15/20
(Pre-refunded 11/15/08)
40
PRINCIPAL OPTIONAL CALL
AMOUNT (000) DESCRIPTION (1) PROVISIONS (2) RATINGS (3) VALUE
------------------------------------------------------------------------------------------------------------------------------------
U.S. GUARANTEED (5) (continued)
$ 3,500 Tarrant County Health Facilities Development Corporation, 11/10 at 101.00 A+ (5) $ 3,858,750
Texas, Hospital Revenue Bonds, Adventist Health System -
Sunbelt Obligated Group, Series 2000, 6.625%, 11/15/20
(Pre-refunded 11/15/10)
1,000 Tyler Health Facilities Development Corporation, Texas, 7/12 at 100.00 Baa1 (5) 1,107,520
Hospital Revenue Bonds, Mother Frances Hospital Regional
Healthcare Center, Series 2001, 6.000%, 7/01/31
(Pre-refunded 7/01/12)
------------------------------------------------------------------------------------------------------------------------------------
34,755 Total U.S. Guaranteed 36,163,126
------------------------------------------------------------------------------------------------------------------------------------
UTILITIES - 10.3% (6.9% OF TOTAL INVESTMENTS)
2,560 Brazos River Authority, Texas, Pollution Control Revenue 4/13 at 101.00 Caa1 2,341,734
Refunding Bonds, TXU Electric Company, Series 1999C,
7.700%, 3/01/32 (Alternative Minimum Tax)
2,400 Brazos River Authority, Texas, Revenue Bonds, Reliant 4/09 at 101.00 BBB- 2,230,104
Energy Inc., Series 1999A, 5.375%, 4/01/19
200 Brazos River Authority, Texas, Revenue Refunding Bonds, 11/08 at 102.00 AA 204,324
Houston Industries Inc., Series 1998C, 5.125%, 5/01/19 -
AMBAC Insured
5,000 Brownsville, Texas, Utility System Priority Revenue Bonds, 9/15 at 100.00 AA 4,987,600
Series 2005A, 5.000%, 9/01/27 - AMBAC Insured
2,000 Harris County Health Facilities Development Corporation, 2/10 at 100.00 AA 2,028,220
Texas, Thermal Utility Revenue Bonds, TECO Project,
Series 2000, 5.750%, 2/15/15 - AMBAC Insured
(Alternative Minimum Tax)
1,000 Lower Colorado River Authority, Texas, Revenue Bonds, 5/15 at 100.00 A1 1,033,340
Series 2008, 5.750%, 5/15/37
1,000 Matagorda County Navigation District 1, Texas, Revenue 5/09 at 101.00 BBB- 892,650
Bonds, Reliant Energy Inc., Series 1999B, 5.950%, 5/01/30
(Alternative Minimum Tax)
------------------------------------------------------------------------------------------------------------------------------------
14,160 Total Utilities 13,717,972
------------------------------------------------------------------------------------------------------------------------------------
WATER AND SEWER - 11.4% (7.6% OF TOTAL INVESTMENTS)
Coastal Water Authority, Texas, Contract Revenue Bonds,
Houston Water Projects, Series 2004:
1,005 5.000%, 12/15/20 - FGIC Insured 12/14 at 100.00 N/R 1,009,402
1,030 5.000%, 12/15/21 - FGIC Insured 12/14 at 100.00 N/R 1,028,053
3,000 Houston, Texas, First Lien Combined Utility System Revenue 5/14 at 100.00 AA 3,043,080
Bonds, Series 2004A, 5.250%, 5/15/23 - FGIC Insured
3,500 Houston, Texas, Junior Lien Water and Sewerage System 12/11 at 100.00 AAA 3,743,530
Revenue Refunding Bonds, Series 2001A, 5.500%, 12/01/17 -
FSA Insured
Irving, Texas, Subordinate Lien Waterworks and Sewerage
Revenue Bonds, Series 2004:
1,680 5.000%, 8/15/22 - AMBAC Insured 8/14 at 100.00 AA 1,719,497
1,760 5.000%, 8/15/23 - AMBAC Insured 8/14 at 100.00 AA 1,793,933
1,260 Rowlett, Rockwall and Dallas Counties, Texas, Waterworks 3/14 at 100.00 AA 1,278,938
and Sewerage System Revenue Bonds, Series 2004A,
5.000%, 3/01/22 - MBIA Insured
1,500 Texas Water Development Board, Senior Lien State Revolving 7/09 at 100.00 AAA 1,532,190
Fund Revenue Bonds, Series 1999A, 5.500%, 7/15/21
------------------------------------------------------------------------------------------------------------------------------------
14,735 Total Water and Sewer 15,148,623
------------------------------------------------------------------------------------------------------------------------------------
$ 211,162 Total Investments (cost $200,099,938) - 149.4% 198,283,678
=============-----------------------------------------------------------------------------------------------------------------------
Other Assets Less Liabilities - 2.6% 3,429,523
--------------------------------------------------------------------------------------------------------------------
Preferred Shares, at Liquidation Value - (52.0)% (7) (69,000,000)
--------------------------------------------------------------------------------------------------------------------
Net Assets Applicable to Common Shares - 100% $132,713,201
====================================================================================================================
41
NTX
Nuveen Texas Quality Income Municipal Fund (continued)
Portfolio of INVESTMENTS July 31, 2008
FUTURES CONTRACTS OUTSTANDING AT JULY 31, 2008:
UNREALIZED
CONTRACT NUMBER OF CONTRACT VALUE AT APPRECIATION
TYPE POSITION CONTRACTS EXPIRATION JULY 31, 2008 (DEPRECIATION)
------------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds Long 39 9/08 $4,504,500 $80,805
====================================================================================================================================
(1) All percentages shown in the Portfolio of Investments are
based on net assets applicable to Common shares unless
otherwise noted.
(2) Optional Call Provisions (not covered by the report of
independent registered public accounting firm): Dates (month
and year) and prices of the earliest optional call or
redemption. There may be other call provisions at varying
prices at later dates. Certain mortgage-backed securities
may be subject to periodic principal paydowns.
(3) Ratings (not covered by the report of independent registered
public accounting firm): Using the higher of Standard &
Poor's Group ("Standard & Poor's") or Moody's Investor
Service, Inc. ("Moody's") rating. Ratings below BBB by
Standard & Poor's or Baa by Moody's are considered to be
below investment grade.
The Portfolio of Investments may reflect the ratings on
certain bonds insured by ACA, AMBAC, FGIC, MBIA, RAAI and
XLCA as of July 31, 2008. Please see the Portfolio Managers'
Commentary for an expanded discussion of the affect on the
Fund of changes to the ratings of certain bonds in the
portfolio resulting from changes to the ratings of the
underlying insurers both during the period and after period
end.
(4) Investment valued at fair value using methods determined in
good faith by, or at the discretion of, the Board of
Trustees.
(5) Backed by an escrow or trust containing sufficient U.S.
Government or U.S. Government agency securities which ensure
the timely payment of principal and interest. Such
investments are normally considered to be equivalent to AAA
rated securities.
(6) The issuer has received a formal adverse determination from
the Internal Revenue Service (the "IRS") regarding the
tax-exempt status of the bonds' coupon payments. The Fund
will continue to treat coupon payments as tax-exempt income
until such time it is formally determined that the interest
on the bonds should be treated as taxable.
(7) Preferred Shares, at Liquidation Value as a percentage of
total investments is (34.8)%.
(8) Portion of investment, with an aggregate market value of
$81,313, has been pledged to collateralize the net payment
obligations under futures contracts.
N/R Not rated.
(ETM) Escrowed to maturity.
(IF) Inverse floating rate investment.
See accompanying notes to financial statements.
42
Statement of
ASSETS & LIABILITIES
July 31, 2008
ARIZONA ARIZONA ARIZONA ARIZONA TEXAS
PREMIUM DIVIDEND DIVIDEND DIVIDEND QUALITY
INCOME ADVANTAGE ADVANTAGE 2 ADVANTAGE 3 INCOME
(NAZ) (NFZ) (NKR) (NXE) (NTX)
------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Investments, at value (cost $88,183,855, $32,639,433,
$51,262,043, $62,482,549 and $200,099,938,
respectively) $86,655,254 $31,626,135 $50,344,177 $60,444,331 $198,283,678
Cash 1,055,365 758,674 1,208,096 1,403,649 391,598
Receivables:
Interest 660,205 264,380 419,876 437,404 3,158,341
Investments sold 20,000 -- -- -- 510,813
Variation margin on futures contracts -- -- -- -- 26,203
Other assets 9,680 5,906 7,634 2,687 16,360
------------------------------------------------------------------------------------------------------------------------------------
Total assets 88,400,504 32,655,095 51,979,783 62,288,071 202,386,993
------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Accrued expenses:
Management fees 47,935 13,596 19,336 21,107 108,824
Other 26,185 9,918 14,508 16,711 50,637
Common share dividends payable 209,222 77,023 132,750 163,212 474,421
Preferred share dividends payable 20,592 2,304 1,737 6,471 39,910
------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 303,934 102,841 168,331 207,501 673,792
------------------------------------------------------------------------------------------------------------------------------------
Preferred shares, at liquidation value 30,000,000 12,000,000 18,500,000 22,000,000 69,000,000
------------------------------------------------------------------------------------------------------------------------------------
Net assets applicable to Common shares $58,096,570 $20,552,254 $33,311,452 $40,080,570 $132,713,201
====================================================================================================================================
Common shares outstanding 4,468,210 1,549,939 2,439,158 3,067,630 9,495,144
====================================================================================================================================
Net asset value per Common share outstanding
(net assets applicable to Common shares,
divided by Common shares outstanding) $ 13.00 $ 13.26 $ 13.66 $ 13.07 $ 13.98
====================================================================================================================================
NET ASSETS APPLICABLE TO COMMON SHARES CONSIST OF:
------------------------------------------------------------------------------------------------------------------------------------
Common shares, $.01 par value per share $ 44,682 $ 15,499 $ 24,392 $ 30,676 $ 94,951
Paid-in surplus 62,143,653 21,926,440 34,569,832 43,248,456 134,624,791
Undistributed (Over-distribution of)
net investment income 92,116 (27,658) (41,642) (109,985) 126,138
Accumulated net realized gain (loss)
from investments and
derivative transactions (2,655,280) (348,729) (323,264) (1,050,359) (397,224)
Net unrealized appreciation
(depreciation) of investments
and derivative transactions (1,528,601) (1,013,298) (917,866) (2,038,218) (1,735,455)
------------------------------------------------------------------------------------------------------------------------------------
Net assets applicable to Common shares $58,096,570 $20,552,254 $33,311,452 $40,080,570 $132,713,201
====================================================================================================================================
Authorized shares:
Common 200,000,000 Unlimited Unlimited Unlimited Unlimited
Preferred 1,000,000 Unlimited Unlimited Unlimited Unlimited
====================================================================================================================================
See accompanying notes to financial statements.
43
Statement of
OPERATIONS
Year Ended July 31, 2008
ARIZONA ARIZONA ARIZONA ARIZONA TEXAS
PREMIUM DIVIDEND DIVIDEND DIVIDEND QUALITY
INCOME ADVANTAGE ADVANTAGE 2 ADVANTAGE 3 INCOME
(NAZ) (NFZ) (NKR) (NXE) (NTX)
------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME $ 4,783,927 $1,685,802 $2,744,104 $ 3,238,078 $10,702,158
------------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Management fees 578,945 214,881 340,689 409,472 1,308,128
Preferred shares - auction fees 75,189 30,075 46,366 55,137 172,934
Preferred shares - dividend disbursing agent fees 10,000 10,000 10,000 10,000 20,000
Shareholders' servicing agent fees and expenses 4,070 559 382 374 10,743
Interest expense on floating rate obligations 88,349 31,957 53,766 67,086 69,396
Custodian's fees and expenses 23,708 20,668 25,847 26,247 52,324
Directors'/Trustees' fees and expenses 2,291 950 1,130 1,590 5,028
Professional fees 16,031 9,843 10,967 11,513 19,186
Shareholders' reports - printing and mailing expenses 23,424 10,743 15,048 17,846 41,043
Stock exchange listing fees 9,407 179 287 362 9,404
Investor relations expense 11,027 4,153 6,368 7,712 24,398
Other expenses 14,133 11,764 12,224 12,659 17,027
------------------------------------------------------------------------------------------------------------------------------------
Total expenses before custodian
fee credit and expense reimbursement 856,574 345,772 523,074 619,998 1,749,611
Custodian fee credit (12,233) (5,391) (6,255) (3,742) (12,510)
Expense reimbursement -- (59,370) (125,321) (163,389) --
------------------------------------------------------------------------------------------------------------------------------------
Net expenses 844,341 281,011 391,498 452,867 1,737,101
------------------------------------------------------------------------------------------------------------------------------------
Net investment income 3,939,586 1,404,791 2,352,606 2,785,211 8,965,057
------------------------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) from:
Investments (695,247) (246,231) (210,967) (469,351) (359,565)
Futures (46,730) (144,540) -- -- (19,596)
Change in net unrealized appreciation
(depreciation) of:
Investments (3,907,909) (1,551,069) (2,351,438) (3,032,163) (7,706,392)
Futures -- 42,042 -- -- 80,805
------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (4,649,886) (1,899,798) (2,562,405) (3,501,514) (8,004,748)
------------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO PREFERRED SHAREHOLDERS
From net investment income (992,215) (381,010) (574,591) (748,495) (2,207,108)
From accumulated net realized gains -- (6,331) (47,034) -- (186,315)
------------------------------------------------------------------------------------------------------------------------------------
Decrease in net assets applicable to Common shares
from distributions to Preferred Shareholders (992,215) (387,341) (621,625) (748,495) (2,393,423)
------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets applicable to
Common shares from operations $ (1,702,515) $ (882,348) $ (831,424) $(1,464,798) $(1,433,114)
====================================================================================================================================
See accompanying notes to financial statements.
44
Statement of
CHANGES in NET ASSETS
ARIZONA ARIZONA ARIZONA
PREMIUM INCOME (NAZ) DIVIDEND ADVANTAGE (NFZ) DIVIDEND ADVANTAGE 2 (NKR)
----------------------------- ---------------------------- ----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
7/31/08 7/31/07 7/31/08 7/31/07 7/31/08 7/31/07
------------------------------------------------------------------------------------------------------------------------------------
OPERATIONS
Net investment income $ 3,939,586 $ 3,728,433 $ 1,404,791 $ 1,413,692 $ 2,352,606 $ 2,350,259
Net realized gain (loss) from:
Investments (695,247) 189,070 (246,231) 66,786 (210,967) 241,754
Forward swaps -- -- -- -- -- --
Futures (46,730) -- (144,540) -- -- --
Change in net unrealized
appreciation (depreciation) of:
Investments (3,907,909) (676,216) (1,551,069) (293,258) (2,351,438) (656,316)
Forward swaps -- -- -- -- -- --
Futures -- -- 42,042 (42,042) -- --
Distributions to
Preferred Shareholders:
From net investment income (992,215) (996,807) (381,010) (378,572) (574,591) (593,932)
From accumulated net
realized gains -- -- (6,331) (24,096) (47,034) (24,790)
------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease)
in net assets applicable
to Common shares
from operations (1,702,515) 2,244,480 (882,348) 742,510 (831,424) 1,316,975
------------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO COMMON SHAREHOLDERS
From net investment income (2,734,545) (2,734,545) (985,763) (1,105,248) (1,726,396) (1,803,414)
From accumulated net
realized gains -- -- (18,444) (95,091) (142,165) (98,537)
------------------------------------------------------------------------------------------------------------------------------------
Decrease in net assets applicable to
Common shares from distributions
to Common Shareholders (2,734,545) (2,734,545) (1,004,207) (1,200,339) (1,868,561) (1,901,951)
------------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS
Net proceeds from Common shares
issued to shareholders due to
reinvestment of distributions -- -- -- 35,133 35,757 95,591
------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets
applicable to Common shares
from capital share transactions -- -- -- 35,133 35,757 95,591
------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease)
in net assets
applicable to Common shares (4,437,060) (490,065) (1,886,555) (422,696) (2,664,228) (489,385)
Net assets applicable to
Common shares at the
beginning of year 62,533,630 63,023,695 22,438,809 22,861,505 35,975,680 36,465,065
------------------------------------------------------------------------------------------------------------------------------------
Net assets applicable to Common
shares at the end of year $58,096,570 $62,533,630 $20,552,254 $22,438,809 $33,311,452 $35,975,680
====================================================================================================================================
Undistributed (Over-distribution of)
net investment income
at the end of year $ 92,116 $ (120,660) $ (27,658) $ (65,588) $ (41,642) $ (93,093)
====================================================================================================================================
See accompanying notes to financial statements.
45
Statement of
CHANGES in NET ASSETS (continued)
ARIZONA TEXAS
DIVIDEND ADVANTAGE 3 (NXE) QUALITY INCOME (NTX)
---------------------------- ----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
7/31/08 7/31/07 7/31/08 7/31/07
------------------------------------------------------------------------------------------------------------------------------------
OPERATIONS
Net investment income $ 2,785,211 $ 2,758,019 $ 8,965,057 $ 9,028,772
Net realized gain (loss) from:
Investments (469,351) 75,705 (359,565) 896,242
Forward swaps -- 10,344 -- --
Futures -- -- (19,596) --
Change in net unrealized appreciation (depreciation) of:
Investments (3,032,163) (354,681) (7,706,392) (1,939,151)
Forward swaps -- (48,098) -- --
Futures -- -- 80,805 --
Distributions to Preferred Shareholders:
From net investment income (748,495) (755,446) (2,207,108) (2,392,641)
From accumulated net realized gains -- -- (186,315) (97,712)
------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
applicable to Common shares
from operations (1,464,798) 1,685,843 (1,433,114) 5,495,510
------------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO COMMON SHAREHOLDERS
From net investment income (2,006,230) (2,049,116) (6,561,144) (6,921,959)
From accumulated net realized gains -- -- (530,779) (344,674)
------------------------------------------------------------------------------------------------------------------------------------
Decrease in net assets applicable to
Common shares from distributions
to Common Shareholders (2,006,230) (2,049,116) (7,091,923) (7,266,633)
------------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS
Net proceeds from Common shares
issued to shareholders due to
reinvestment of distributions -- 1,401 -- --
------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets
applicable to Common shares
from capital share transactions -- 1,401 -- --
------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
applicable to Common shares (3,471,028) (361,872) (8,525,037) (1,771,123)
Net assets applicable to Common
shares at the beginning of year 43,551,598 43,913,470 141,238,238 143,009,361
------------------------------------------------------------------------------------------------------------------------------------
Net assets applicable to Common
shares at the end of year $40,080,570 $43,551,598 $132,713,201 $141,238,238
====================================================================================================================================
Undistributed (Over-distribution of)
net investment income
at the end of year $ (109,985) $ (140,010) $ 126,138 $ (62,971)
====================================================================================================================================
See accompanying notes to financial statements.
46
Notes to
FINANCIAL STATEMENTS
1. GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES
The funds covered in this report and their corresponding Common share stock
exchange symbols are Nuveen Arizona Premium Income Municipal Fund, Inc. (NAZ),
Nuveen Arizona Dividend Advantage Municipal Fund (NFZ), Nuveen Arizona Dividend
Advantage Municipal Fund 2 (NKR), Nuveen Arizona Dividend Advantage Municipal
Fund 3 (NXE) and Nuveen Texas Quality Income Municipal Fund (NTX) (collectively,
the "Funds"). Common shares of Arizona Premium Income (NAZ) and Texas Quality
Income (NTX) are traded on the New York Stock Exchange while Common shares of
Arizona Dividend Advantage (NFZ), Arizona Dividend Advantage 2 (NKR) and Arizona
Dividend Advantage 3 (NXE) are traded on the American Stock Exchange. The Funds
are registered under the Investment Company Act of 1940, as amended, as
closed-end management investment companies.
Each Fund seeks to provide current income exempt from both regular federal and
designated state income taxes by investing primarily in a diversified portfolio
of municipal obligations issued by state and local government authorities within
a single state or certain U.S. territories.
The following is a summary of significant accounting policies followed by the
Funds in the preparation of their financial statements in accordance with U.S.
generally accepted accounting principles.
Investment Valuation
The prices of municipal bonds in each Fund's investment portfolio are provided
by a pricing service approved by the Fund's Board of Directors/Trustees. When
market price quotes are not readily available (which is usually the case for
municipal securities), the pricing service may establish fair value based on
yields or prices of municipal bonds of comparable quality, type of issue,
coupon, maturity and rating, indications of value from securities dealers,
evaluations of anticipated cash flows or collateral and general market
conditions. Prices of forward swap contracts are also provided by an independent
pricing service approved by each Fund's Board of Directors/Trustees. Futures
contracts are valued using the closing settlement price, or, in the absence of
such a price, at the mean of the bid and asked prices. If the pricing service is
unable to supply a price for an investment or derivative instrument, each Fund
may use market quotes provided by major broker/dealers in such investments. If
it is determined that the market price for an investment or derivative
instrument is unavailable or inappropriate, the Board of Directors/Trustees of
the Funds, or its designee, may establish fair value in accordance with
procedures established in good faith by the Board of Directors/Trustees.
Temporary investments in securities that have variable rate and demand features
qualifying them as short-term investments are valued at amortized cost, which
approximates value.
Investment Transactions
Investment transactions are recorded on a trade date basis. Realized gains and
losses from transactions are determined on the specific identification method.
Investments purchased on a when-issued/delayed delivery basis may have extended
settlement periods. Any investments so purchased are subject to market
fluctuation during this period. The Funds have instructed the custodian to
segregate assets with a current value at least equal to the amount of the
when-issued/delayed delivery purchase commitments. At July 31, 2008, there were
no such outstanding purchase commitments in any of the Funds.
Investment Income
Interest income, which includes the amortization of premiums and accretion of
discounts for financial reporting purposes, is recorded on an accrual basis.
Investment income also includes paydown gains and losses, if any.
47
Notes to
FINANCIAL STATEMENTS (continued)
Income Taxes
Each Fund is a separate taxpayer for federal income tax purposes. Each Fund
intends to distribute substantially all of its net investment income and net
capital gains to shareholders and to otherwise comply with the requirements of
Subchapter M of the Internal Revenue Code applicable to regulated investment
companies. Therefore, no federal income tax provision is required. Furthermore,
each Fund intends to satisfy conditions which will enable interest from
municipal securities, which is exempt from regular federal and designated state
income taxes, to retain such tax-exempt status when distributed to shareholders
of the Funds. Net realized capital gains and ordinary income distributions paid
by the Funds are subject to federal taxation.
Effective January 31, 2008, the Funds adopted Financial Accounting Standards
Board (FASB) Interpretation No. 48 "Accounting for Uncertainty in Income Taxes"
(FIN 48). FIN 48 provides guidance for how uncertain tax positions should be
recognized, measured, presented and disclosed in the financial statements. FIN
48 requires the affirmative evaluation of tax positions taken or expected to be
taken in the course of preparing the Funds' tax returns to determine whether it
is "more-likely-than-not" (i.e., a greater than 50-percent likelihood) of being
sustained by the applicable tax authority. Tax positions not deemed to meet the
more-likely-than-not threshold may result in a tax expense in the current year.
Implementation of FIN 48 required management of the Funds to analyze all open
tax years, as defined by the statute of limitations, for all major
jurisdictions, which includes federal and certain states. Open tax years are
those that are open for examination by taxing authorities (i.e., generally, the
last four tax year ends and the interim tax period since then). The Funds have
no examinations in progress.
For all open tax years and all major taxing jurisdictions through the end of the
reporting period, management of the Funds has reviewed all tax positions taken
or expected to be taken in the preparation of the Funds' tax returns and
concluded the adoption of FIN 48 resulted in no impact to the Funds' net assets
or results of operations as of and during the fiscal year ended July 31, 2008.
The Funds are also not aware of any tax positions for which it is reasonably
possible that the total amounts of unrecognized tax benefits will significantly
change in the next twelve months.
Dividends and Distributions to Common Shareholders
Dividends from tax-exempt net investment income are declared monthly. Net
realized capital gains and/or market discount from investment transactions, if
any, are distributed to shareholders at least annually. Furthermore, capital
gains are distributed only to the extent they exceed available capital loss
carryforwards.
Distributions to Common shareholders of tax-exempt net investment income, net
realized capital gains and/or market discount, if any, are recorded on the
ex-dividend date. The amount and timing of distributions are determined in
accordance with federal income tax regulations, which may differ from U.S.
generally accepted accounting principles.
48
Preferred Shares
The Funds have issued and outstanding Preferred shares, $25,000 stated value per
share, as a means of effecting financial leverage. Each Fund's Preferred shares
are issued in one or more Series. The dividend rate paid by the Funds on each
Series is determined every seven days, pursuant to a dutch auction process
overseen by the auction agent, and is payable at the end of each rate period.
The number of Preferred shares outstanding, by Series and in total, for each
Fund is as follows:
ARIZONA ARIZONA ARIZONA ARIZONA TEXAS
PREMIUM DIVIDEND DIVIDEND DIVIDEND QUALITY
INCOME ADVANTAGE ADVANTAGE 2 ADVANTAGE 3 INCOME
(NAZ) (NFZ) (NKR) (NXE) (NTX)
-------------------------------------------------------------------------------------------------------------------
Number of shares:
Series M -- -- -- 880 760
Series T -- 480 -- -- --
Series W -- -- 740 -- --
Series TH 1,200 -- -- -- 2,000
-------------------------------------------------------------------------------------------------------------------
Total 1,200 480 740 880 2,760
===================================================================================================================
Beginning in February 2008, more shares for sale were submitted in the regularly
scheduled auctions for the Preferred shares issued by the Funds than there were
offers to buy. This meant that these auctions "failed to clear," and that many
Preferred shareholders who wanted to sell their shares in these auctions were
unable to do so. Preferred shareholders unable to sell their shares received
distributions at the "maximum rate" applicable to failed auctions as calculated
in accordance with the pre-established terms of the Preferred shares.
These developments generally do not affect the management or investment policies
of the Funds. However, one implication of these auction failures for Common
shareholders is that the Funds' cost of leverage will likely be higher, at least
temporarily, than it otherwise would have been had the auctions continued to be
successful. As a result, the Funds' future Common share earnings may be lower
than they otherwise would have been.
On June 11, 2008, Nuveen Investments, Inc. ("Nuveen") announced the Fund Board's
approval of plans to use tender option bonds (TOBs), also known as floating rate
securities, to refinance a portion of the municipal funds' outstanding
auction-rate preferred securities, whose auctions have been failing for several
months, including an initial phase of approximately $1 billion in forty-one
funds. On June 26, 2008, thirteen municipal funds (none of which are included in
this shareholder report) issued par redemption notices for a portion of their
auction-rate securities aggregating approximately $580 million.
Inverse Floating Rate Securities
Each Fund is authorized to invest in inverse floating rate securities. An
inverse floating rate security is created by depositing a municipal bond,
typically with a fixed interest rate, into a special purpose trust created by a
broker-dealer. In turn, this trust (a) issues floating rate certificates, in
face amounts equal to some fraction of the deposited bond's par amount or market
value, that typically pay short-term tax-exempt interest rates to third parties,
and (b) issues to a long-term investor (such as one of the Funds) an inverse
floating rate certificate (sometimes referred to as an "inverse floater") that
represents all remaining or residual interest in the trust. The income received
by the inverse floater holder varies inversely with the short-term rate paid to
the floating rate certificates' holders, and in most circumstances the inverse
floater holder bears substantially all of the underlying bond's downside
investment risk and also benefits disproportionately from any potential
appreciation of the underlying bond's value. The price of an inverse floating
rate security will be more volatile than that of the underlying bond because the
interest rate is dependent on not only the fixed coupon rate of the underlying
bond but also on the short-term interest paid on the floating rate certificates,
and because the inverse floating rate security essentially bears the risk of
loss of the greater face value of the underlying bond.
A Fund may purchase an inverse floating rate security in a secondary market
transaction without first owning the underlying bond (referred to as an
"externally-deposited inverse floater"), or instead by first selling a
fixed-rate bond to a broker-dealer for deposit into the special purpose trust
and receiving in turn the residual interest in the trust (referred to as a
"self-deposited inverse floater"). A Fund may also enter into shortfall and
forbearance agreements (sometimes referred to as a "recourse trust" or "credit
recovery swap") with a broker-dealer by which a Fund agrees to reimburse the
broker-dealer, in certain circumstances, for the difference between the
liquidation value of the fixed-rate bond held by the trust and the liquidation
value of the floating rate certificates, as well as any shortfalls in interest
cash flows. The inverse floater held by a Fund gives the Fund the right (a) to
cause the holders of the floating rate certificates to tender their notes at
par, and (b) to have the broker transfer the fixed-rate bond held by the trust
to the Fund, thereby collapsing the trust. An investment in an
externally-deposited inverse floater is identified in the Portfolio of
Investments as an "Inverse floating rate investment". An investment in a
self-deposited inverse floater, recourse trust or credit recovery swap is
accounted for as a financing transaction in accordance with Statement of
Financial Accounting Standards (SFAS) No. 140 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities". In such
instances, a fixed-
49
Notes to
FINANCIAL STATEMENTS (continued)
rate bond deposited into a special purpose trust is identified in the Portfolio
of Investments as an "Underlying bond of an inverse floating rate trust", with
the Fund accounting for the short-term floating rate certificates issued by the
trust as "Floating rate obligations" on the Statement of Assets and Liabilities.
In addition, the Fund reflects in Investment Income the entire earnings of the
underlying bond and accounts for the related interest paid to the holders of the
short-term floating rate certificates as "Interest expense on floating rate
obligations" on the Statement of Operations.
During the fiscal year ended July 31, 2008, each Fund invested in externally
deposited inverse floaters and/or self-deposited inverse floaters.
The average floating rate obligations outstanding and average annual interest
rate and fees related to self-deposited inverse floaters during the fiscal year
ended July 31, 2008, were as follows:
ARIZONA ARIZONA ARIZONA ARIZONA TEXAS
PREMIUM DIVIDEND DIVIDEND DIVIDEND QUALITY
INCOME ADVANTAGE ADVANTAGE 2 ADVANTAGE 3 INCOME
(NAZ) (NFZ) (NKR) (NXE) (NTX)
-------------------------------------------------------------------------------------------------------------------
Average floating rate obligations $2,598,616 $940,434 $1,581,967 $1,973,615 $2,258,811
Average annual interest rate and fees 3.40% 3.40% 3.40% 3.40% 3.07%
===================================================================================================================
Forward Swap Transactions
Each Fund is authorized to invest in forward interest rate swap transactions.
Each Fund's use of forward interest rate swap transactions is intended to help
the Fund manage its overall interest rate sensitivity, either shorter or longer,
generally to more closely align the Fund's interest rate sensitivity with that
of the broader municipal market. Forward interest rate swap transactions involve
each Fund's agreement with a counterparty to pay, in the future, a fixed or
variable rate payment in exchange for the counterparty paying the Fund a
variable or fixed rate payment, the accruals for which would begin at a
specified date in the future (the "effective date"). The amount of the payment
obligation is based on the notional amount of the forward swap contract and the
termination date of the swap (which is akin to a bond's maturity). The value of
the Fund's swap commitment would increase or decrease based primarily on the
extent to which long-term interest rates for bonds having a maturity of the
swap's termination date increases or decreases. The Funds may terminate a swap
contract prior to the effective date, at which point a realized gain or loss is
recognized. When a forward swap is terminated, it ordinarily does not involve
the delivery of securities or other underlying assets or principal, but rather
is settled in cash on a net basis. Each Fund intends, but is not obligated, to
terminate its forward swaps before the effective date. Accordingly, the risk of
loss with respect to the swap counterparty on such transactions is limited to
the credit risk associated with a counterparty failing to honor its commitment
to pay any realized gain to the Fund upon termination. To reduce such credit
risk, all counterparties are required to pledge collateral daily (based on the
daily valuation of each swap) on behalf of each Fund with a value approximately
equal to the amount of any unrealized gain above a pre-determined threshold.
Reciprocally, when any of the Funds have an unrealized loss on a swap contract,
the Funds have instructed the custodian to pledge assets of the Funds as
collateral with a value approximately equal to the amount of the unrealized loss
above a pre-determined threshold. Collateral pledges are monitored and
subsequently adjusted if and when the swap valuations fluctuate, either up or
down, by at least the predetermined threshold amount. None of the Funds invested
in forward interest rate swap transactions during the fiscal year ended July 31,
2008.
Futures Contracts
Each Fund is authorized to invest in futures contracts. Upon entering into a
futures contract, a Fund is required to deposit with the broker an amount of
cash or liquid securities equal to a specified percentage of the contract
amount. This is known as the "initial margin." Subsequent payments ("variation
margin") are made or received by a Fund each day, depending on the daily
fluctuation of the value of the contract.
50
During the period the futures contract is open, changes in the value of the
contract are recognized as an unrealized gain or loss by "marking-to-market" on
a daily basis to reflect the changes in market value of the contract. When the
contract is closed or expired, a Fund records a realized gain or loss equal to
the difference between the value of the contract on the closing date and value
of the contract when originally entered into. Cash held by the broker to cover
initial margin requirements on open futures contracts, if any, is recognized on
the Statement of Assets and Liabilities. Additionally, the Statement of Assets
and Liabilities reflects a receivable or payable for the variation margin when
applicable. Arizona Premium Income (NAZ), Arizona Dividend Advantage (NFZ) and
Texas Quality Income (NTX) were the only Funds to invest in futures contracts
during the fiscal year ended July 31, 2008.
Risks of investments in futures contracts include the possible adverse movement
of the securities or indices underlying the contracts, the possibility that
there may not be a liquid secondary market for the contracts and/or that a
change in the value of the contract may not correlate with a change in the value
of the underlying securities or indices.
Zero Coupon Securities
Each Fund is authorized to invest in zero coupon securities. A zero coupon
security does not pay a regular interest coupon to its holders during the life
of the security. Tax-exempt income to the holder of the security comes from
accretion of the difference between the original purchase price of the security
at issuance and the par value of the security at maturity and is effectively
paid at maturity. Such securities are included in the Portfolios of Investments
with a 0.000% coupon rate in their description. The market prices of zero coupon
securities generally are more volatile than the market prices of securities that
pay interest periodically.
Custodian Fee Credit
Each Fund has an arrangement with the custodian bank whereby certain custodian
fees and expenses are reduced by net credits earned on each Fund's cash on
deposit with the bank. Such deposit arrangements are an alternative to overnight
investments. Credits for cash balances may be offset by charges for any days on
which a Fund overdraws its account at the custodian bank.
Indemnifications
Under the Funds' organizational documents, their Officers and Directors/Trustees
are indemnified against certain liabilities arising out of the performance of
their duties to the Funds. In addition, in the normal course of business, the
Funds enter into contracts that provide general indemnifications to other
parties. The Funds' maximum exposure under these arrangements is unknown as this
would involve future claims that may be made against the Funds that have not yet
occurred. However, the Funds have not had prior claims or losses pursuant to
these contracts and expect the risk of loss to be remote.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of increases and
decreases in net assets applicable to Common shares from operations during the
reporting period. Actual results may differ from those estimates.
2. FUND SHARES
Common Share Repurchases
On July 30, 2008, the Board of Directors/Trustees for each of Nuveen's 120
closed-end funds approved a program under which each fund may repurchase up to
10% of its common shares. No common shares were repurchased during the fiscal
year ended July 31, 2008.
Transactions in Common shares were as follows:
ARIZONA PREMIUM ARIZONA DIVIDEND ARIZONA DIVIDEND
INCOME (NAZ) ADVANTAGE (NFZ) ADVANTAGE 2 (NKR)
------------------------ ----------------------- -----------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
7/31/08 7/31/07 7/31/08 7/31/07 7/31/08 7/31/07
------------------------------------------------------------------------------------------------------------------------
Common shares issued to shareholders
due to reinvestment of distributions -- -- -- 2,295 2,471 6,191
========================================================================================================================
ARIZONA DIVIDEND TEXAS QUALITY
ADVANTAGE 3 (NXE) INCOME (NTX)
----------------------- -----------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
7/31/08 7/31/07 7/31/08 7/31/07
------------------------------------------------------------------------------------------------------------------------
Common shares issued to shareholders
due to reinvestment of distributions -- 99 -- --
========================================================================================================================
51
Notes to
FINANCIAL STATEMENTS (continued)
3. INVESTMENT TRANSACTIONS
Purchases and sales (including maturities but excluding short-term investments
and derivative transactions) during the fiscal year ended July 31, 2008, were as
follows:
ARIZONA ARIZONA ARIZONA ARIZONA TEXAS
PREMIUM DIVIDEND DIVIDEND DIVIDEND QUALITY
INCOME ADVANTAGE ADVANTAGE 2 ADVANTAGE 3 INCOME
(NAZ) (NFZ) (NKR) (NXE) (NTX)
-------------------------------------------------------------------------------------------------------------------------
Purchases $19,654,957 $3,402,658 $8,219,082 $10,301,402 $17,325,754
Sales and maturities 24,671,251 5,396,686 11,916,631 15,022,833 22,958,697
=========================================================================================================================
4. INCOME TAX INFORMATION
The following information is presented on an income tax basis. Differences
between amounts for financial statement and federal income tax purposes are
primarily due to timing differences in recognizing taxable market discount,
timing differences in recognizing certain gains and losses on investment
transactions and the treatment of investments in inverse floating rate
transactions subject to SFAS No.140. To the extent that differences arise that
are permanent in nature, such amounts are reclassified within the capital
accounts on the Statement of Assets and Liabilities presented in the annual
report, based on their federal tax basis treatment; temporary differences do not
require reclassification. Temporary and permanent differences do not impact the
net asset values of the Funds.
At July 31, 2008, the cost of investments was as follows:
ARIZONA ARIZONA ARIZONA ARIZONA TEXAS
PREMIUM DIVIDEND DIVIDEND DIVIDEND QUALITY
INCOME ADVANTAGE ADVANTAGE 2 ADVANTAGE 3 INCOME
(NAZ) (NFZ) (NKR) (NXE) (NTX)
--------------------------------------------------------------------------------------------------------------------------
Cost of investments $88,152,884 $32,634,132 $51,259,409 $62,478,470 $200,014,625
==========================================================================================================================
Gross unrealized appreciation and gross unrealized depreciation of investments
at July 31, 2008, were as follows:
ARIZONA ARIZONA ARIZONA ARIZONA TEXAS
PREMIUM DIVIDEND DIVIDEND DIVIDEND QUALITY
INCOME ADVANTAGE ADVANTAGE 2 ADVANTAGE 3 INCOME
(NAZ) (NFZ) (NKR) (NXE) (NTX)
--------------------------------------------------------------------------------------------------------------------------
Gross unrealized:
Appreciation $ 2,244,257 $ 486,986 $ 1,264,572 $ 763,538 $ 4,793,655
Depreciation (3,741,887) (1,494,983) (2,179,804) (2,797,677) (6,524,602)
--------------------------------------------------------------------------------------------------------------------------
Net unrealized appreciation (depreciation)
of investments $(1,497,630) $(1,007,997) $ (915,232) $(2,034,139) $(1,730,947)
==========================================================================================================================
52
The tax components of undistributed net tax-exempt income, net ordinary income
and net long-term capital gains at July 31, 2008, the Funds' tax year end, were
as follows:
ARIZONA ARIZONA ARIZONA ARIZONA TEXAS
PREMIUM DIVIDEND DIVIDEND DIVIDEND QUALITY
INCOME ADVANTAGE ADVANTAGE 2 ADVANTAGE 3 INCOME
(NAZ) (NFZ) (NKR) (NXE) (NTX)
-------------------------------------------------------------------------------------------------------------------------
Undistributed net tax-exempt income * $309,613 $50,716 $100,150 $59,592 $619,240
Undistributed net ordinary income ** -- -- -- -- 2,718
Undistributed net long-term capital gains -- -- -- -- --
=========================================================================================================================
* Undistributed net tax-exempt income (on a tax basis) has not been reduced
for the dividend declared on July 1, 2008, paid on August 1, 2008.
** Net ordinary income consists of taxable market discount income and net
short-term capital gains, if any.
The tax character of distributions paid during the Funds' tax years ended July
31, 2008 and July 31, 2007, was designated for purposes of the dividends paid
deduction as follows:
ARIZONA ARIZONA ARIZONA ARIZONA TEXAS
PREMIUM DIVIDEND DIVIDEND DIVIDEND QUALITY
INCOME ADVANTAGE ADVANTAGE 2 ADVANTAGE 3 INCOME
2008 (NAZ) (NFZ) (NKR) (NXE) (NTX)
-------------------------------------------------------------------------------------------------------------------------
Distributions from net tax-exempt income*** $3,718,906 $1,375,879 $2,317,202 $2,750,182 $8,786,039
Distributions from net ordinary income** -- -- -- -- 439
Distributions from net long-term capital gains**** -- 24,687 189,057 -- 716,654
=========================================================================================================================
ARIZONA ARIZONA ARIZONA ARIZONA TEXAS
PREMIUM DIVIDEND DIVIDEND DIVIDEND QUALITY
INCOME ADVANTAGE ADVANTAGE 2 ADVANTAGE 3 INCOME
2007 (NAZ) (NFZ) (NKR) (NXE) (NTX)
-------------------------------------------------------------------------------------------------------------------------
Distributions from net tax-exempt income $3,727,652 $1,496,276 $2,402,229 $2,822,896 $9,349,744
Distributions from net ordinary income** -- 3,027 -- -- --
Distributions from net long-term capital gains -- 119,187 123,327 -- 442,386
=========================================================================================================================
** Net ordinary income consists of taxable market discount income and net
short-term capital gains, if any.
*** The Funds hereby designate these amounts paid during the fiscal year ended
July 31, 2008, as Exempt Interest Dividends.
**** The Funds designated as a long-term capital gain dividend, pursuant to the
Internal Revenue Code Section 852(b)(3), the amount necessary to reduce
earnings and profits of the Funds related to net capital gain to zero for
the tax year ended July 31, 2008.
At July 31, 2008, the Funds' tax year end, the following Funds had unused
capital loss carryforwards available for federal income tax purposes to be
applied against future capital gains, if any. If not applied, the carryforwards
will expire as follows:
ARIZONA ARIZONA ARIZONA ARIZONA
PREMIUM DIVIDEND DIVIDEND DIVIDEND
INCOME ADVANTAGE ADVANTAGE 2 ADVANTAGE 3
(NAZ) (NFZ) (NKR) (NXE)
-------------------------------------------------------------------------------------------------------------------------
Expiration:
July 31, 2011 $ 359,724 $ -- $ -- $ --
July 31, 2012 1,553,627 -- -- 158,487
July 31, 2013 -- -- -- 160,902
July 31, 2014 -- -- -- 218,127
July 31, 2016 562,384 246,571 212,903 363,937
-------------------------------------------------------------------------------------------------------------------------
Total $2,475,735 $246,571 $212,903 $901,453
=========================================================================================================================
The Funds have elected to defer net realized losses from investments incurred
from November 1, 2007 through July 31, 2008, the Funds' tax year end,
("post-October losses") in accordance with federal income tax regulations.
Post-October losses are treated as having arisen on the first day of the
following fiscal year:
ARIZONA ARIZONA ARIZONA ARIZONA TEXAS
PREMIUM DIVIDEND DIVIDEND DIVIDEND QUALITY
INCOME ADVANTAGE ADVANTAGE 2 ADVANTAGE 3 INCOME
(NAZ) (NFZ) (NKR) (NXE) (NTX)
-------------------------------------------------------------------------------------------------------------------------
Post-October capital losses $179,544 $102,159 $110,362 $148,906 $316,420
=========================================================================================================================
53
Notes to
FINANCIAL STATEMENTS (continued)
5. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Each Fund's management fee is separated into two components - a complex-level
component, based on the aggregate amount of all fund assets managed by Nuveen
Asset Management (the "Adviser"), a wholly owned subsidiary of Nuveen, and a
specific fund-level component, based only on the amount of assets within each
individual Fund. This pricing structure enables Nuveen fund shareholders to
benefit from growth in the assets within each individual fund as well as from
growth in the amount of complex-wide assets managed by the Adviser.
The annual fund-level fee, payable monthly, for each Fund is based upon the
average daily net assets (including net assets attributable to Preferred shares)
of each Fund as follows:
AVERAGE DAILY NET ASSETS ARIZONA PREMIUM INCOME (NAZ)
(INCLUDING NET ASSETS TEXAS QUALITY INCOME (NTX)
ATTRIBUTABLE TO PREFERRED SHARES) FUND-LEVEL FEE RATE
--------------------------------------------------------------------------------
For the first $125 million .4500%
For the next $125 million .4375
For the next $250 million .4250
For the next $500 million .4125
For the next $1 billion .4000
For the next $3 billion .3875
For net assets over $5 billion .3750
================================================================================
ARIZONA DIVIDEND ADVANTAGE (NFZ)
AVERAGE DAILY NET ASSETS ARIZONA DIVIDEND ADVANTAGE 2 (NKR)
(INCLUDING NET ASSETS ARIZONA DIVIDEND ADVANTAGE 3 (NXE)
ATTRIBUTABLE TO PREFERRED SHARES) FUND-LEVEL FEE RATE
--------------------------------------------------------------------------------
For the first $125 million .4500%
For the next $125 million .4375
For the next $250 million .4250
For the next $500 million .4125
For the next $1 billion .4000
For net assets over $2 billion .3750
================================================================================
The annual complex-level fee, payable monthly, which is additive to the
fund-level fee, for all Nuveen sponsored funds in the U.S., is based on the
aggregate amount of total fund assets managed as stated in the tables below. As
of July 31, 2008, the complex-level fee rate was .1878%.
54
Effective August 20, 2007, the complex-level fee schedule is as follows:
COMPLEX-LEVEL ASSET BREAKPOINT LEVEL (1) EFFECTIVE RATE AT BREAKPOINT LEVEL
--------------------------------------------------------------------------------
$55 billion .2000%
$56 billion .1996
$57 billion .1989
$60 billion .1961
$63 billion .1931
$66 billion .1900
$71 billion .1851
$76 billion .1806
$80 billion .1773
$91 billion .1691
$125 billion .1599
$200 billion .1505
$250 billion .1469
$300 billion .1445
================================================================================
Prior to August 20, 2007, the complex-level fee schedule was as follows:
COMPLEX-LEVEL ASSET BREAKPOINT LEVEL (1) EFFECTIVE RATE AT BREAKPOINT LEVEL
--------------------------------------------------------------------------------
$55 billion .2000%
$56 billion .1996
$57 billion .1989
$60 billion .1961
$63 billion .1931
$66 billion .1900
$71 billion .1851
$76 billion .1806
$80 billion .1773
$91 billion .1698
$125 billion .1617
$200 billion .1536
$250 billion .1509
$300 billion .1490
================================================================================
(1) The complex-level fee component of the management fee for the funds is
calculated based upon the aggregate Managed Assets ("Managed Assets" means
the average daily net assets of each fund including assets attributable to
preferred stock issued by or borrowings by the Nuveen funds) of
Nuveen-sponsored funds in the U.S.
The management fee compensates the Adviser for overall investment advisory and
administrative services and general office facilities. The Funds pay no
compensation directly to those of its Directors/Trustees who are affiliated with
the Adviser or to its Officers, all of whom receive remuneration for their
services to the Funds from the Adviser or its affiliates. The Board of
Directors/Trustees has adopted a deferred compensation plan for independent
Directors/Trustees that enables Directors/Trustees to elect to defer receipt of
all or a portion of the annual compensation they are entitled to receive from
certain Nuveen advised funds. Under the plan, deferred amounts are treated as
though equal dollar amounts had been invested in shares of select Nuveen advised
funds.
For the first ten years of Arizona Dividend Advantage's (NFZ) operations, the
Adviser has agreed to reimburse the Fund, as a percentage of average daily net
assets (including net assets attributable to Preferred shares), for fees and
expenses in the amounts and for the time periods set forth below:
YEAR ENDING YEAR ENDING
JANUARY 31, JANUARY 31,
--------------------------------------------------------------------------------
2001* .30% 2007 .25%
2002 .30 2008 .20
2003 .30 2009 .15
2004 .30 2010 .10
2005 .30 2011 .05
2006 .30
================================================================================
* From the commencement of operations.
The Adviser has not agreed to reimburse Arizona Dividend Advantage (NFZ) for any
portion of its fees and expenses beyond January 31, 2011.
55
Notes to
FINANCIAL STATEMENTS (continued)
For the first ten years of Arizona Dividend Advantage 2's (NKR) operations, the
Adviser has agreed to reimburse the Fund, as a percentage of average daily net
assets (including net assets attributable to Preferred shares), for fees and
expenses in the amounts and for the time periods set forth below:
YEAR ENDING YEAR ENDING
MARCH 31, MARCH 31,
--------------------------------------------------------------------------------
2002* .30% 2008 .25%
2003 .30 2009 .20
2004 .30 2010 .15
2005 .30 2011 .10
2006 .30 2012 .05
2007 .30
================================================================================
* From the commencement of operations.
The Adviser has not agreed to reimburse Arizona Dividend Advantage 2 (NKR) for
any portion of its fees and expenses beyond March 31, 2012.
For the first eight years of Arizona Dividend Advantage 3's (NXE) operations,
the Adviser has agreed to reimburse the Fund, as a percentage of average daily
net assets (including net assets attributable to Preferred shares), for fees and
expenses in the amounts and for the time periods set forth below:
YEAR ENDING YEAR ENDING
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------------------------------------------------------
2002* .32% 2007 .32%
2003 .32 2008 .24
2004 .32 2009 .16
2005 .32 2010 .08
2006 .32
================================================================================
* From the commencement of operations.
The Adviser has not agreed to reimburse Arizona Dividend Advantage 3 (NXE) for
any portion of its fees and expenses beyond September 30, 2010.
Agreement and Plan of Merger
On June 20, 2007, Nuveen announced that it had entered into a definitive
Agreement and Plan of Merger ("Merger Agreement") with Windy City Investments,
Inc. ("Windy City"), a corporation formed by investors led by Madison Dearborn
Partners, LLC ("Madison Dearborn"), pursuant to which Windy City would acquire
Nuveen. Madison Dearborn is a private equity investment firm based in Chicago,
Illinois. The merger was consummated on November 13, 2007.
The consummation of the merger was deemed to be an "assignment" (as that term is
defined in the Investment Company Act of 1940) of the investment management
agreement between each Fund and the Adviser, and resulted in the automatic
termination of each Fund's agreement. The Board of Directors/Trustees of each
Fund considered and approved a new investment management agreement with the
Adviser on the same terms as the previous agreements. Each new ongoing
agreement, was approved by the shareholders of each Fund and took effect on
November 13, 2007.
56
The investors led by Madison Dearborn includes an affiliate of Merrill Lynch. As
a result, Merrill Lynch is an indirect "affiliated person" (as that term is
defined in the Investment Company Act of 1940) of each Fund. Certain conflicts
of interest may arise as a result of such indirect affiliation. For example, the
Funds are generally prohibited from entering into principal transactions with
Merrill Lynch and its affiliates. The Adviser does not believe that any such
prohibitions or limitations as a result of Merrill Lynch's affiliation will
significantly impact the ability of the Funds to pursue their investment
objectives and policies.
6. NEW ACCOUNTING PRONOUNCEMENTS
Financial Accounting Standards Board Statement of Financial Accounting
Standards No. 157
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." This
standard establishes a single authoritative definition of fair value, sets out a
framework for measuring fair value and requires additional disclosures about
fair value measurements. SFAS No. 157 applies to fair value measurements already
required or permitted by existing standards. SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. The changes to current generally
accepted accounting principles from the application of this standard relate to
the definition of fair value, the methods used to measure fair value, and the
expanded disclosures about fair value measurements. As of July 31, 2008,
management does not believe the adoption of SFAS No. 157 will impact the
financial statement amounts; however, additional disclosures may be required
about the inputs used to develop the measurements and the effect of certain of
the measurements included within the Statement of Operations for the period.
Financial Accounting Standards Board Statement of Financial Accounting
Standards No. 161
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities." This standard is intended to enhance
financial statement disclosures for derivative instruments and hedging
activities and enable investors to understand: a) how and why a fund uses
derivative instruments, b) how derivative instruments and related hedge items
are accounted for, and c) how derivative instruments and related hedge items
affect a fund's financial position, results of operations and cash flows. SFAS
No. 161 is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. As of July 31, 2008,
management does not believe the adoption of SFAS No. 161 will impact the
financial statement amounts; however, additional footnote disclosures may be
required about the use of derivative instruments and hedging items.
7. SUBSEQUENT EVENTS
Distributions to Common Shareholders
The Funds declared Common share dividend distributions from their tax-exempt net
investment income which were paid on September 2, 2008, to shareholders of
record on August 15, 2008, as follows:
ARIZONA ARIZONA ARIZONA ARIZONA TEXAS
PREMIUM DIVIDEND DIVIDEND DIVIDEND QUALITY
INCOME ADVANTAGE ADVANTAGE 2 ADVANTAGE 3 INCOME
(NAZ) (NFZ) (NKR) (NXE) (NTX)
------------------------------------------------------------------------------------------------------------------
Dividend per share $.0510 $.0525 $.0585 $.0545 $.0570
==================================================================================================================
57
Financial
HIGHLIGHTS
Selected data for a Common share outstanding throughout each period:
Investment Operations Less Distributions
-------------------------------------------------------------------- ---------------------------------
Distributions Distributions
from Net from Net
Beginning Investment Capital Investment Capital
Common Net Income to Gains to Income to Gains to
Share Net Realized/ Preferred Preferred Common Common
Net Asset Investment Unrealized Share- Share- Share- Share-
Value Income Gain (Loss) holders+ holders+ Total holders holders Total
====================================================================================================================================
ARIZONA PREMIUM INCOME (NAZ)
------------------------------------------------------------------------------------------------------------------------------------
Year Ended 7/31:
2008 $14.00 $ .88 $(1.05) $(.22) $ -- $ (.39) $(.61) $ -- $(.61)
2007 14.10 .83 (.10) (.22) -- .51 (.61) -- (.61)
2006 14.53 .83 (.39) (.18) -- .26 (.69) -- (.69)
2005 14.04 .86 .56 (.09) -- 1.33 (.84) -- (.84)
2004 13.66 .92 .43 (.05) -- 1.30 (.92) -- (.92)
ARIZONA DIVIDEND ADVANTAGE (NFZ)
------------------------------------------------------------------------------------------------------------------------------------
Year Ended 7/31:
2008 14.48 .91 (1.23) (.25) --* (.57) (.64) (.01) (.65)
2007 14.77 .91 (.17) (.24) (.02) .48 (.71) (.06) (.77)
2006 15.37 .93 (.40) (.20) (.01) .32 (.84) (.08) (.92)
2005 15.00 .97 .46 (.10) -- 1.33 (.92) (.04) (.96)
2004 14.45 .99 .57 (.06) -- 1.50 (.91) (.04) (.95)
====================================================================================================================================
Total Returns
----------------------
Offering Based
Costs and Ending on
Preferred Common Based Common
Share Share Ending on Share Net
Underwriting Asset Market Market Asset
Discounts Value Value Value** Value**
===================================================================================
ARIZONA PREMIUM INCOME (NAZ)
-----------------------------------------------------------------------------------
Year Ended 7/31:
2008 $ -- $13.00 $13.35 7.10% (2.87)%
2007 -- 14.00 13.07 (.22) 3.62
2006 -- 14.10 13.69 (5.62) 1.84
2005 -- 14.53 15.22 5.17 9.69
2004 -- 14.04 15.27 7.97 9.66
ARIZONA DIVIDEND ADVANTAGE (NFZ)
-----------------------------------------------------------------------------------
Year Ended 7/31:
2008 -- 13.26 13.70 7.72 (4.09)
2007 -- 14.48 13.35 (11.63) 3.24
2006 -- 14.77 15.90 4.54 2.14
2005 -- 15.37 16.08 10.88 9.04
2004 -- 15.00 15.40 7.05 10.56
===================================================================================
Ratios/Supplemental Data
----------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets Ratios to Average Net Assets
Applicable to Common Shares Applicable to Common Shares
Before Credit/Reimbursement After Credit/Reimbursement***
----------------------------------------- -----------------------------------------
Ending
Net
Assets
Applicable Expenses Expenses Net Expenses Expenses Net Portfolio
to Common Including Excluding Investment Including Excluding Investment Turnover
Shares (000) Interest++(a) Interest++(a) Income++ Interest++(a) Interest++(a) Income++ Rate
================================================================================================================================
ARIZONA PREMIUM INCOME (NAZ)
--------------------------------------------------------------------------------------------------------------------------------
Year Ended 7/31:
2008 $58,097 1.40% 1.26% 6.42% 1.38% 1.24% 6.44% 21%
2007 62,534 1.32 1.24 5.81 1.30 1.21 5.84 13
2006 63,024 1.21 1.21 5.83 1.19 1.19 5.84 22
2005 64,822 1.20 1.20 5.91 1.19 1.19 5.92 17
2004 62,431 1.22 1.22 6.49 1.21 1.21 6.50 26
ARIZONA DIVIDEND ADVANTAGE (NFZ)
--------------------------------------------------------------------------------------------------------------------------------
Year Ended 7/31:
2008 20,552 1.58 1.44 6.14 1.29 1.14 6.44 10
2007 22,439 1.48 1.38 5.74 1.10 1.00 6.12 19
2006 22,862 1.36 1.36 5.79 .92 .92 6.23 24
2005 23,753 1.34 1.34 5.82 .87 .87 6.28 18
2004 23,153 1.30 1.30 6.10 .83 .83 6.57 24
================================================================================================================================
Preferred Shares at End of Period
--------------------------------------
Aggregate Liquidation
Amount and Market Asset
Outstanding Value Coverage
(000) Per Share Per Share
====================================================
ARIZONA PREMIUM INCOME (NAZ)
----------------------------------------------------
Year Ended 7/31:
2008 $30,000 $25,000 $73,414
2007 30,000 25,000 77,111
2006 30,000 25,000 77,520
2005 30,000 25,000 79,019
2004 30,000 25,000 77,026
ARIZONA DIVIDEND ADVANTAGE (NFZ)
----------------------------------------------------
Year Ended 7/31:
2008 12,000 25,000 67,817
2007 12,000 25,000 71,748
2006 12,000 25,000 72,628
2005 12,000 25,000 74,485
2004 12,000 25,000 73,235
====================================================
* Rounds to less than $.01 per share.
** Total Return Based on Market Value is the combination of changes in the
market price per share and the effect of reinvested dividend income and
reinvested capital gains distributions, if any, at the average price paid
per share at the time of reinvestment. The last dividend declared in the
period, which is typically paid on the first business day of the following
month, is assumed to be reinvested at the ending market price. The actual
reinvestment for the last dividend declared in the period may take place
over several days, and in some instances may not be based on the market
price, so the actual reinvestment price may be different from the price
used in the calculation. Total returns are not annualized.
Total Return Based on Common Share Net Asset Value is the combination of
changes in Common share net asset value, reinvested dividend income at net
asset value and reinvested capital gains distributions at net asset value,
if any. The last dividend declared in the period, which is typically paid
on the first business day of the following month, is assumed to be
reinvested at the ending net asset value. The actual reinvest price for the
last dividend declared in the period may often be based on the Fund's
market price (and not its net asset value), and therefore may be different
from the price used in the calculation. Total returns are not annualized.
*** After custodian fee credit and expense reimbursement, where applicable.
+ The amounts shown are based on Common share equivalents.
++ Ratios do not reflect the effect of dividend payments to Preferred
shareholders; income ratios reflect income earned on assets attributable to
Preferred shares.
(a) Interest expense arises from the application of SFAS No. 140 to certain
inverse floating rate transactions entered into by the Fund as more fully
described in Footnote 1 - Inverse Floating Rate Securities.
See accompanying notes to financial statements.
58-59 spread
Financial
HIGHLIGHTS (continued)
Selected data for a Common share outstanding throughout each period:
Investment Operations Less Distributions
-------------------------------------------------------------------- ---------------------------------
Distributions Distributions
from Net from Net
Beginning Investment Capital Investment Capital
Common Net Income to Gains to Income to Gains to
Share Net Realized/ Preferred Preferred Common Common
Net Asset Investment Unrealized Share- Share- Share- Share-
Value Income Gain (Loss) holders+ holders+ Total holders holders Total
====================================================================================================================================
ARIZONA DIVIDEND ADVANTAGE 2 (NKR)
------------------------------------------------------------------------------------------------------------------------------------
Year Ended 7/31:
2008 $14.76 $.96 $(1.03) $(.24) $(.02) $(.33) $(.71) $(.06) $(.77)
2007 15.00 .97 (.18) (.24) (.01) .54 (.74) (.04) (.78)
2006 15.56 .96 (.37) (.20) (.01) .38 (.83) (.11) (.94)
2005 15.10 .97 .59 (.11) (.01) 1.44 (.86) (.12) (.98)
2004 14.57 .96 .53 (.06) -- 1.43 (.86) (.04) (.90)
ARIZONA DIVIDEND ADVANTAGE 3 (NXE)
------------------------------------------------------------------------------------------------------------------------------------
Year Ended 7/31:
2008 14.20 .91 (1.15) (.24) -- (.48) (.65) -- (.65)
2007 14.32 .90 (.10) (.25) -- .55 (.67) -- (.67)
2006 14.62 .88 (.26) (.19) -- .43 (.73) -- (.73)
2005 14.01 .89 .62 (.10) -- 1.41 (.80) -- (.80)
2004 13.45 .89 .54 (.06) -- 1.37 (.80) -- (.80)
====================================================================================================================================
Total Returns
----------------------
Offering Based
Costs and Ending on
Preferred Common Based Common
Share Share Ending on Share Net
Underwriting Asset Market Market Asset
Discounts Value Value Value* Value*
======================================================================================
ARIZONA DIVIDEND ADVANTAGE 2 (NKR)
--------------------------------------------------------------------------------------
Year Ended 7/31:
2008 $ -- $13.66 $14.00 (3.16)% (2.38)%
2007 -- 14.76 15.27 4.52 3.59
2006 -- 15.00 15.37 .82 2.49
2005 -- 15.56 16.19 16.30 9.74
2004 -- 15.10 14.82 9.46 9.98
ARIZONA DIVIDEND ADVANTAGE 3 (NXE)
--------------------------------------------------------------------------------------
Year Ended 7/31:
2008 -- 13.07 13.30 3.96 (3.48)
2007 -- 14.20 13.44 4.21 3.81
2006 -- 14.32 13.52 (1.80) 3.03
2005 -- 14.62 14.48 15.11 10.21
2004 (.01) 14.01 13.30 1.01 10.25
======================================================================================
Ratios/Supplemental Data
----------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets Ratios to Average Net Assets
Applicable to Common Shares Applicable to Common Shares
Before Credit/Reimbursement After Credit/Reimbursement***
----------------------------------------- -----------------------------------------
Ending
Net
Assets
Applicable Expenses Expenses Net Expenses Expenses Net Portfolio
to Common Including Excluding Investment Including Excluding Investment Turnover
Shares (000) Interest++(a) Interest++(a) Income++ Interest++(a) Interest++(a) Income++ Rate
===================================================================================================================================
ARIZONA DIVIDEND ADVANTAGE 2 (NKR)
-----------------------------------------------------------------------------------------------------------------------------------
Year Ended 7/31:
2008 $33,311 1.49% 1.34% 6.32% 1.11% .96% 6.70% 15%
2007 35,976 1.39 1.29 5.92 .93 .83 6.38 14
2006 36,465 1.28 1.28 5.88 .82 .82 6.34 11
2005 37,704 1.27 1.27 5.76 .82 .82 6.22 11
2004 36,543 1.27 1.27 5.83 .80 .80 6.30 14
ARIZONA DIVIDEND ADVANTAGE 3 (NXE)
-----------------------------------------------------------------------------------------------------------------------------------
Year Ended 7/31:
2008 40,081 1.46 1.30 6.17 1.07 .91 6.56 16
2007 43,552 1.36 1.26 5.69 .85 .75 6.19 15
2006 43,913 1.26 1.26 5.63 .78 .78 6.12 12
2005 44,829 1.25 1.25 5.63 .76 .76 6.12 15
2004 42,983 1.25 1.25 5.80 .76 .76 6.29 22
===================================================================================================================================
Preferred Shares at End of Period
--------------------------------------
Aggregate Liquidation
Amount and Market Asset
Outstanding Value Coverage
(000) Per Share Per Share
====================================================
ARIZONA DIVIDEND ADVANTAGE 2 (NKR)
----------------------------------------------------
Year Ended 7/31:
2008 $18,500 $25,000 $70,015
2007 18,500 25,000 73,616
2006 18,500 25,000 74,277
2005 18,500 25,000 75,952
2004 18,500 25,000 74,382
ARIZONA DIVIDEND ADVANTAGE 3 (NXE)
----------------------------------------------------
Year Ended 7/31:
2008 22,000 25,000 70,546
2007 22,000 25,000 74,490
2006 22,000 25,000 74,902
2005 22,000 25,000 75,942
2004 22,000 25,000 73,844
====================================================
* Total Return Based on Market Value is the combination of changes in the
market price per share and the effect of reinvested dividend income and
reinvested capital gains distributions, if any, at the average price paid
per share at the time of reinvestment. The last dividend declared in the
period, which is typically paid on the first business day of the following
month, is assumed to be reinvested at the ending market price. The actual
reinvestment for the last dividend declared in the period may take place
over several days, and in some instances may not be based on the market
price, so the actual reinvestment price may be different from the price
used in the calculation. Total returns are not annualized.
Total Return Based on Common Share Net Asset Value is the combination of
changes in Common share net asset value, reinvested dividend income at net
asset value and reinvested capital gains distributions at net asset value,
if any. The last dividend declared in the period, which is typically paid
on the first business day of the following month, is assumed to be
reinvested at the ending net asset value. The actual reinvest price for the
last dividend declared in the period may often be based on the Fund's
market price (and not its net asset value), and therefore may be different
from the price used in the calculation. Total returns are not annualized.
** After custodian fee credit and expense reimbursement, where applicable.
+ The amounts shown are based on Common share equivalents.
++ Ratios do not reflect the effect of dividend payments to Preferred
shareholders; income ratios reflect income earned on assets attributable to
Preferred shares.
(a) Interest expense arises from the application of SFAS No. 140 to certain
inverse floating rate transactions entered into by the Fund as more fully
described in Footnote 1 - Inverse Floating Rate Securities.
See accompanying notes to financial statements.
60-61 spread
Financial
HIGHLIGHTS (continued)
Selected data for a Common share outstanding throughout each period:
Investment Operations Less Distributions
-------------------------------------------------------------------- ---------------------------------
Distributions Distributions
from Net from Net
Beginning Investment Capital Investment Capital
Common Net Income to Gains to Income to Gains to
Share Net Realized/ Preferred Preferred Common Common
Net Asset Investment Unrealized Share- Share- Share- Share-
Value Income Gain (Loss) holders+ holders+ Total holders holders Total
====================================================================================================================================
TEXAS QUALITY
INCOME (NTX)
------------------------------------------------------------------------------------------------------------------------------------
Year Ended 7/31:
2008 $14.87 $ .94 $(.83) $(.23) $(.02) $ (.14) $(.69) $(.06) $(.75)
2007 15.06 .95 (.11) (.25) (.01) .58 (.73) (.04) (.77)
2006 15.46 .96 (.32) (.22) -- .42 (.82) -- (.82)
2005 15.12 1.00 .41 (.13) -- 1.28 (.94) -- (.94)
2004 14.57 1.03 .55 (.07) -- 1.51 (.96) -- (.96)
====================================================================================================================================
Total Returns
----------------------
Offering Based
Costs and Ending on
Preferred Common Based Common
Share Share Ending on Share Net
Underwriting Asset Market Market Asset
Discounts Value Value Value* Value*
=====================================================================================
TEXAS QUALITY INCOME (NTX)
-------------------------------------------------------------------------------------
Year Ended 7/31:
2008 $ -- $13.98 $12.46 (5.16)% (1.04)%
2007 -- 14.87 13.89 (.52) 3.82
2006 -- 15.06 14.71 (4.03) 2.77
2005 -- 15.46 16.19 17.83 8.61
2004 -- 15.12 14.59 5.87 10.51
=====================================================================================
Ratios/Supplemental Data
----------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets Ratios to Average Net Assets
Applicable to Common Shares Applicable to Common Shares
Before Credit/Reimbursement After Credit/Reimbursement***
----------------------------------------- -----------------------------------------
Ending
Net
Assets
Applicable Expenses Expenses Net Expenses Expenses Net Portfolio
to Common Including Excluding Investment Including Excluding Investment Turnover
Shares (000) Interest++(a) Interest++(a) Income++ Interest++(a) Interest++(a) Income++ Rate
==================================================================================================================================
TEXAS QUALITY INCOME (NTX)
----------------------------------------------------------------------------------------------------------------------------------
Year Ended 7/31:
2008 $132,713 1.26% 1.21% 6.46% 1.25% 1.20% 6.47% 8%
2007 141,238 1.24 1.18 6.24 1.22 1.16 6.26 9
2006 143,009 1.19 1.19 6.31 1.18 1.18 6.33 13
2005 146,718 1.18 1.18 6.42 1.16 1.16 6.44 14
2004 143,233 1.18 1.18 6.77 1.18 1.18 6.77 16
==================================================================================================================================
Preferred Shares at End of Period
--------------------------------------
Aggregate Liquidation
Amount and Market Asset
Outstanding Value Coverage
(000) Per Share Per Share
====================================================
TEXAS QUALITY INCOME (NTX)
----------------------------------------------------
Year Ended 7/31:
2008 $69,000 $25,000 $73,084
2007 69,000 25,000 76,173
2006 69,000 25,000 76,815
2005 69,000 25,000 78,159
2004 69,000 25,000 76,896
====================================================
* Total Return Based on Market Value is the combination of changes in the
market price per share and the effect of reinvested dividend income and
reinvested capital gains distributions, if any, at the average price paid
per share at the time of reinvestment. The last dividend declared in the
period, which is typically paid on the first business day of the following
month, is assumed to be reinvested at the ending market price. The actual
reinvestment for the last dividend declared in the period may take place
over several days, and in some instances may not be based on the market
price, so the actual reinvestment price may be different from the price
used in the calculation. Total returns are not annualized.
Total Return Based on Common Share Net Asset Value is the combination of
changes in Common share net asset value, reinvested dividend income at net
asset value and reinvested capital gains distributions at net asset value,
if any. The last dividend declared in the period, which is typically paid
on the first business day of the following month, is assumed to be
reinvested at the ending net asset value. The actual reinvest price for the
last dividend declared in the period may often be based on the Fund's
market price (and not its net asset value), and therefore may be different
from the price used in the calculation. Total returns are not annualized.
** After custodian fee credit and expense reimbursement, where applicable.
+ The amounts shown are based on Common share equivalents.
++ Ratios do not reflect the effect of dividend payments to Preferred
shareholders; income ratios reflect income earned on assets attributable to
Preferred shares.
(a) Interest expense arises from the application of SFAS No. 140 to certain
inverse floating rate transactions entered into by the Fund as more fully
described in Footnote 1 - Inverse Floating Rate Securities.
See accompanying notes to financial statements.
62-63 spread
Board Members & Officers
The management of the Funds, including general supervision of the duties
performed for the Funds by the Adviser, is the responsibility of the Board
Members of the Funds. The number of board members of the Fund is currently set
at nine. None of the board members who are not "interested" persons of the Funds
(referred to herein as "independent board members") has ever been a director or
employee of, or consultant to, Nuveen or its affiliates. The names and business
addresses of the board members and officers of the Funds, their principal
occupations and other affiliations during the past five years, the number of
portfolios each oversees and other directorships they hold are set forth below.
NAME, POSITION(S) HELD YEAR FIRST NUMBER PRINCIPAL
BIRTHDATE WITH THE FUNDS ELECTED OR OF PORTFOLIOS OCCUPATION(S)
& ADDRESS APPOINTED IN FUND COMPLEX INCLUDING OTHER
AND TERM(1) OVERSEEN BY DIRECTORSHIPS
BOARD MEMBER DURING PAST 5 YEARS
INDEPENDENT BOARD MEMBERS:
[] ROBERT P. BREMNER Private Investor and Management Consultant.
8/22/40 Chairman of 1997
333 W. Wacker Drive the Board CLASS III 186
Chicago, IL 60606 and Board member
[] JACK B. EVANS President, The Hall-Perrine Foundation, a
10/22/48 1999 private philanthropic corporation (since
333 W. Wacker Drive Board member CLASS III 186 1996); Director and Vice Chairman, United
Chicago, IL 60606 Fire Group, a publicly held company; Member
of the Board of Regents for the State of
Iowa University System; Director, Gazette
Companies; Life Trustee of Coe College and
Iowa College Foundation; Member of the
Advisory Council of the Department of
Finance in the Tippie College of Business,
University of Iowa; formerly, Director,
Alliant Energy; formerly, Director, Federal
Reserve Bank of Chicago; formerly, President
and Chief Operating Officer, SCI Financial
Group, Inc., a regional financial services
firm.
[] WILLIAM C. HUNTER Dean, Tippie College of Business, University
3/6/48 2004 of Iowa (since July 2006); formerly, Dean
333 W. Wacker Drive Board member ANNUAL 186 and Distinguished Professor of Finance,
Chicago, IL 60606 School of Business at the University of
Connecticut (2003-2006); previously, Senior
Vice President and Director of Research at
the Federal Reserve Bank of Chicago
(1995-2003); Director (since 1997), Credit
Research Center at Georgetown University;
Director (since 2004) of Xerox Corporation;
Director (since 2005), Beta Gamma Sigma
International Honor Society; Director, SS&C
Technologies, Inc. (May 2005-October 2005).
[] DAVID J. KUNDERT Director, Northwestern Mutual Wealth
10/28/42 2005 Management Company; Retired (since 2004) as
333 W. Wacker Drive Board member CLASS II 186 Chairman, JPMorgan Fleming Asset Management,
Chicago, IL 60606 President and CEO, Banc One Investment
Advisors Corporation, and President, One
Group Mutual Funds; prior thereto, Executive
Vice President, Banc One Corporation and
Chairman and CEO, Banc One Investment
Management Group; Member, Board of Regents,
Luther College; member of the Wisconsin Bar
Association; member of Board of Directors,
Friends of Boerner Botanical Gardens; member
of Investment Committee, Greater Milwaukee
Foundation.
[] WILLIAM J. SCHNEIDER Chairman, formerly, Senior Partner and Chief
9/24/44 1997 Operating Officer (retired, 2004) of
333 W. Wacker Drive Board member ANNUAL 186 Miller-Valentine Partners Ltd., a real
Chicago, IL 60606 estate investment company; Director, Dayton
Development Coalition; formerly, member,
Business Advisory Council, Cleveland Federal
Reserve Bank.
64
NAME, POSITION(S) HELD YEAR FIRST NUMBER PRINCIPAL
BIRTHDATE WITH THE FUNDS ELECTED OR OF PORTFOLIOS OCCUPATION(S)
& ADDRESS APPOINTED IN FUND COMPLEX INCLUDING OTHER
AND TERM(1) OVERSEEN BY DIRECTORSHIPS
BOARD MEMBER DURING PAST 5 YEARS
INDEPENDENT BOARD MEMBERS:
[] JUDITH M. STOCKDALE Executive Director, Gaylord and Dorothy
12/29/47 1997 Donnelley Foundation (since 1994); prior
333 W. Wacker Drive Board member CLASS I 186 thereto, Executive Director, Great Lakes
Chicago, IL 60606 Protection Fund (from 1990 to 1994).
[] CAROLE E. STONE Director, Chicago Board Options Exchange
6/28/47 2007 (since 2006); Commissioner, New York State
333 W. Wacker Drive Board member CLASS I 186 Commission on Public Authority Reform (since
Chicago, IL 60606 2005); formerly, Chair New York Racing
Association Oversight Board (2005-2007);
formerly, Director, New York State Division
of the Budget (2000-2004), Chair, Public
Authorities Control Board (2000-2004) and
Director, Local Government Assistance
Corporation (2000-2004).
[] TERENCE J. TOTH(2)
9/29/59 2008 Private Investor (since 2007); CEO and
333 W. Wacker Drive Board Member CLASS II 186 President, Northern Trust Investments
Chicago, IL 60606 (2004-2007); Executive Vice President,
Quantitative Management & Securities Lending
(2007-2004); prior thereto, various
positions with Northern Trust Company (since
1994); Member: Goodman Theatre Board (Since
2004); Chicago Fellowship Boards (since
2005), University of Illinois Leadership
Council Board (since 2007) and Catalyst
Schools of Chicago Board (since 2008);
formerly Member: Northern Trust Mutual Funds
Board (2005-2007), Northern Trust Japan
Board (2004-2007), Northern Trust Securities
Inc. Board (2003-2007) and Northern Trust
Hong Kong Board (1997-2004).
INTERESTED BOARD MEMBER:
[] JOHN P. AMBOIAN(2)(3) Chief Executive Officer (since July 2007)
6/14/61 2008 and Director (since 1999) of Nuveen
333 W. Wacker Drive Board Member CLASS II 186 Investments, Inc.; Chief Executive Officer
Chicago, IL 60606 (since 2007) of Nuveen Asset Management,
Rittenhouse Asset Management, Nuveen
Investments Advisors, Inc. formerly,
President (1999-2004) of Nuveen Advisory
Corp. and Nuveen Institutional Advisory
Corp.(4)
OFFICERS OF THE FUND:
[] GIFFORD R. ZIMMERMAN Managing Director (since 2002), Assistant
9/9/56 Chief Secretary and Associate General Counsel,
333 W. Wacker Drive Administrative 1988 186 formerly, Vice President and Assistant
Chicago, IL 60606 Officer General Counsel, of Nuveen Investments, LLC;
Managing Director (since 2002), Associate
General Counsel and Assistant Secretary, of
Nuveen Asset Management; Vice President and
Assistant Secretary of NWQ Investment
Management Company, LLC. (since 2002),
Nuveen Investments Advisers Inc. (since
2002), Symphony Asset Management LLC, and
NWQ Investment Management Company, LLC
(since 2003), Tradewinds Global Investors,
LLC, and Santa Barbara Asset Management, LLC
(since 2006), Nuveen HydePark Group LLC and
Richards & Tierney, Inc. (since 2007);
Managing Director, Associate General Counsel
and Assistant Secretary of Rittenhouse Asset
Management, Inc. (since 2003); Managing
Director (since 2004) and Assistant
Secretary (since 1994) of Nuveen
Investments, Inc.; formerly, Managing
Director (2002-2004), General Counsel
(1998-2004) and Assistant Secretary of
Nuveen Advisory Corp. and Nuveen
Institutional Advisory Corp.(4); Chartered
Financial Analyst.
[] WILLIAM ADAMS IV Executive Vice President, U.S. Structured
6/9/55 Products of Nuveen Investments, LLC, (since
333 W. Wacker Drive Vice President 2007 120 1999), prior thereto, Managing Director of
Chicago, IL 60606 Structured Investments.
65
NAME, POSITION(S) HELD YEAR FIRST NUMBER PRINCIPAL
BIRTHDATE WITH THE FUNDS ELECTED OR OF PORTFOLIOS OCCUPATION(S)
AND ADDRESS APPOINTED(5) IN FUND COMPLEX DURING PAST 5 YEARS
OVERSEEN
BY OFFICER
OFFICERS OF THE FUND:
[] CEDRIC H. ANTOSIEWICZ Managing Director, (since 2004) previously,
1/11/62 Vice President (1993-2004) of Nuveen
333 W. Wacker Drive Vice President 2007 120 Investments, LLC.
Chicago, IL 60606
[] MICHAEL T. ATKINSON Vice President (since 2002) of
2/3/66 Vice President Nuveen Investments, LLC.
333 W. Wacker Drive and Assistant 2000 186
Chicago, IL 60606 Secretary
[] LORNA C. FERGUSON Managing Director (since 2004), formerly,
10/24/45 Vice President of Nuveen Investments, LLC,
333 W. Wacker Drive Vice President 1998 186 Managing Director (2004) formerly, Vice
Chicago, IL 60606 President (1998-2004) of Nuveen Advisory
Corp. and Nuveen Institutional Advisory
Corp.(4); Managing Director (since 2005) of
Nuveen Asset Management.
[] STEPHEN D. FOY Vice President (since 1993) and Funds
5/31/54 Vice President Controller (since 1998) of Nuveen
333 W. Wacker Drive and Controller 1998 186 Investments, LLC; formerly, Vice President
Chicago, IL 60606 and Funds Controller (1998-2004) of Nuveen
Investments, Inc.; Certified Public
Accountant.
[] WALTER M. KELLY Senior Vice President (since 2008), Vice
2/24/70 Chief Compliance President (2006-2008) formerly, Assistant
333 W. Wacker Drive Officer and 2003 186 Vice President and Assistant General Counsel
Chicago, IL 60606 Vice President (2003-2006) of Nuveen Investments, LLC; Vice
President (since 2006) and Assistant
Secretary (since 2008) of Nuveen Asset
Management.
[] DAVID J. LAMB Vice President (since 2000) of Nuveen
3/22/63 Investments, LLC; Certified Public
333 W. Wacker Drive Vice President 2000 186 Accountant.
Chicago, IL 60606
[] TINA M. LAZAR Vice President of Nuveen Investments, LLC
8/27/61 (since 1999).
333 W. Wacker Drive Vice President 2002 186
Chicago, IL 60606
[] LARRY W. MARTIN Vice President, Assistant Secretary and
7/27/51 Vice President Assistant General Counsel of Nuveen
333 W. Wacker Drive and Assistant 1988 186 Investments, LLC; Vice President (since
Chicago, IL 60606 Secretary 2005) and Assistant Secretary of Nuveen
Investments, Inc.; Vice President (since
2005) and Assistant Secretary (since 1997)
of Nuveen Asset Management; Vice President
(since 2000), Assistant Secretary and
Assistant General Counsel (since 1998) of
Rittenhouse Asset Management, Inc.; Vice
President and Assistant Secretary of Nuveen
Investments Advisers Inc. (since 2002); NWQ
Investment Management Company, LLC (since
2002), Symphony Asset Management LLC (since
2003), Tradewinds Global Investors, LLC,
Santa Barbara Asset Management LLC (since
2006) and of Nuveen HydePark Group, LLC and
Richards &Tierney, Inc. (since 2007);
formerly, Vice President and Assistant
Secretary of Nuveen Advisory Corp. and
Nuveen Institutional Advisory Corp.(4)
66
NAME, POSITION(S) HELD YEAR FIRST NUMBER PRINCIPAL
BIRTHDATE WITH THE FUNDS ELECTED OR OF PORTFOLIOS OCCUPATION(S)
AND ADDRESS APPOINTED(5) IN FUND COMPLEX DURING PAST 5 YEARS
OVERSEEN
BY OFFICER
OFFICERS OF THE FUND:
[] KEVIN J. MCCARTHY Managing Director (since 2008), formerly,
3/26/66 Vice President Vice President (2007-2008), Nuveen
333 W. Wacker Drive and Secretary 2007 186 Investments, LLC; Vice President, and
Chicago, IL 60606 Assistant Secretary, Nuveen Asset
Management, Rittenhouse Asset Management,
Inc., Nuveen Investment Advisers Inc.,
Nuveen Investment Institutional Services
Group LLC, NWQ Investment Management
Company, LLC, Tradewinds Global Investors
LLC, NWQHoldings, LLC, Symphony Asset
Management LLC, Santa Barbara Asset
Management LLC, Nuveen HydePark Group, LLC
and Richards &Tierney, Inc. (since 2007);
Managing Director (since 2008), formerly,
Vice President (2007-2008) and Assistant
General Counsel, Nuveen Investments, Inc.
prior thereto, Partner, Bell, Boyd & Lloyd
LLP (1997-2007).
[] JOHN V. MILLER Managing Director (since 2007), formerly,
4/10/67 Vice President Vice President (2002-2007) of Nuveen
333 W. Wacker Drive 2007 186 Investments, LLC; Chartered Financial
Chicago, IL 60606 Analyst.
[] CHRISTOPHER M. ROHRBACHER Vice President, Nuveen Investments, LLC
8/1/71 Vice President (since 2008); Vice President and Assistant
333 W. Wacker Drive and Assistant 2008 186 Secretary, Nuveen Asset Management (since
Chicago, IL 60606 Secretary 2008); Vice President and Assistant General
Counsel, Nuveen Investment, Inc. (since
2008); prior thereto, Associate, Skadden,
Arps, Slate Meagher & Flom LLP (2002-2008).
[] JAMES F. RUANE Vice President, Nuveen Investments since
7/3/62 Vice President 2007; prior thereto, Partner, Deloitte &
333 W. Wacker Drive and Assistant 2007 186 Touche USA LLP (since 2005), formerly,
Chicago, IL 60606 Secretary senior tax manager (since 2002); Certified
Public Accountant.
[] MARK L. WINGET Vice President, Nuveen Investments, LLC
12/21/68 Vice President (since 2008); Vice President and Assistant
333 W. Wacker Drive and Assistant 2008 186 Secretary, Nuveen Asset Management (since
Chicago, IL 60606 Secretary 2008); Vice President and Assistant General
Counsel, Nuveen Investments Inc. (since
2008); prior thereto, Counsel, Vedder Price
P.C. (1997-2007).
(1) Board Members serve three year terms, except for two board members who are
elected by the holders of Preferred Shares. The Board of Trustees is
divided into three classes, Class I, Class II, and Class III, with each
being elected to serve until the third succeeding annual shareholders'
meeting subsequent to its election or thereafter in each case when its
respective successors are duly elected or appointed, except two board
members are elected by the holders of Preferred Shares to serve until the
next annual shareholders' meeting subsequent to its election or thereafter
in each case when its respective successors are duly elected or appointed.
The first year elected or appointed represents the year in which the board
member was first elected or appointed to any fund in the Nuveen Complex.
(2) Mr. Amboian and Mr. Toth were appointed to the Board of Trustees of certain
Nuveen Funds, effective July 1, 2008, and were subsequently elected to the
Boards of the remaining Nuveen Funds on July 28, 2008. In connection with
the appointment of Mr. Amboian as trustee, Timothy R. Schwertfeger, an
interested trustee, resigned from the Board of Trustees, effective July 1,
2008.
(3) Mr. Amboian is an interested trustee because of his position with Nuveen
Investments, Inc. and certain of its subsidiaries, which are affiliates of
the Nuveen Funds.
(4) Nuveen Advisory Corp. and Nuveen Institutional Advisory Corp. were
reorganized into Nuveen Asset Management, effective January 1, 2005.
(5) Officers serve one year terms through July of each year. The year first
elected or appointed represents the year in which the Officer was first
elected or appointed to any fund in the Nuveen Complex.
67
Annual Investment
Management Agreement
APPROVAL PROCESS
The Investment Company Act of 1940, as amended (the "1940 Act"), provides, in
substance, that each investment advisory agreement between a fund and its
investment adviser will continue in effect from year to year only if its
continuance is approved at least annually by the fund's board members, including
by a vote of a majority of the board members who are not parties to the advisory
agreement or "interested persons" of any parties (the "Independent Board
Members"), cast in person at a meeting called for the purpose of considering
such approval. In connection with such approvals, the fund's board members must
request and evaluate, and the investment adviser is required to furnish, such
information as may be reasonably necessary to evaluate the terms of the advisory
agreement. Accordingly, at a meeting held on May 28-29, 2008 (the "May
Meeting"), the Boards of Trustees or Directors (as the case may be)(each, a
"Board" and each Trustee or Director, a "Board Member") of the Funds, including
a majority of the Independent Board Members, considered and approved the
continuation of the advisory agreement (each, an "Advisory Agreement") between
each Fund and Nuveen Asset Management ("NAM") for an additional one-year period.
In preparation for their considerations at the May Meeting, the Board also held
a separate meeting on April 23, 2008 (the "April Meeting"). Accordingly, the
factors considered and determinations made regarding the renewals by the
Independent Board Members include those made at the April Meeting.
In addition, in evaluating the Advisory Agreements, as described in further
detail below, the Independent Board Members reviewed a broad range of
information relating to the Funds and NAM, including absolute performance, fee
and expense information for the Funds as well as comparative performance, fee
and expense information for a comparable peer group of funds, the performance
information of recognized benchmarks (as applicable), the profitability of
Nuveen for its advisory activities (which includes its wholly owned
subsidiaries), and other information regarding the organization, personnel, and
services provided by NAM. The Independent Board Members also met quarterly as
well as at other times as the need arose during the year and took into account
the information provided at such meetings and the knowledge gained therefrom.
Prior to approving the renewal of the Advisory Agreements, the Independent Board
Members reviewed the foregoing information with their independent legal counsel
and with management, reviewed materials from independent legal counsel
describing applicable law and their duties in reviewing advisory contracts, and
met with independent legal counsel in private sessions without management
present. The Independent Board Members considered the legal advice provided by
independent legal counsel and relied upon their knowledge of NAM, its services
and the Funds resulting from their meetings and other interactions throughout
the year and their own business judgment in determining the factors to be
considered in evaluating the Advisory Agreements. Each Board Member may have
accorded different weight to the various factors in reaching his or her
conclusions with respect to a Fund's Advisory Agreement. The Independent Board
Members did not identify any single factor as all-important or controlling. The
Independent Board Members' considerations were instead based on a comprehensive
consideration of all the information presented. The principal factors considered
by the Board and its conclusions are described below.
68
A. NATURE, EXTENT AND QUALITY OF SERVICES
In considering renewal of the Advisory Agreements, the Independent Board Members
considered the nature, extent and quality of NAM's services, including advisory
services and administrative services. The Independent Board Members reviewed
materials outlining, among other things, NAM's organization and business; the
types of services that NAM or its affiliates provide and are expected to provide
to the Funds; the performance record of the applicable Fund (as described in
further detail below); and any initiatives Nuveen had taken for the applicable
fund product line. With respect to personnel, the Independent Board Members
evaluated the background, experience and track record of NAM's investment
personnel. In this regard, the Independent Board Members considered the
additional investment in personnel to support Nuveen fund advisory activities,
including in operations, product management and marketing as well as related
fund support functions, including sales, executive, finance, human resources and
information technology. The Independent Board Members also reviewed information
regarding portfolio manager compensation arrangements to evaluate NAM's ability
to attract and retain high quality investment personnel.
In evaluating the services of NAM, the Independent Board Members also considered
NAM's ability to supervise the Funds' other service providers and given the
importance of compliance, NAM's compliance program. Among other things, the
Independent Board Members considered the report of the chief compliance officer
regarding the Funds' compliance policies and procedures.
In addition to advisory services, the Independent Board Members considered the
quality of administrative services provided by NAM and its affiliates including
product management, fund administration, oversight of service providers,
shareholder services, administration of Board relations, regulatory and
portfolio compliance and legal support.
In addition to the foregoing services, the Independent Board Members also noted
the additional services that NAM or its affiliates provide to closed-end funds,
including, in particular, its secondary market support activities and the costs
of such activities. The Independent Board Members recognized Nuveen's continued
commitment to supporting the secondary market for the common shares of its
closed-end funds through a variety of programs designed to raise investor and
analyst awareness and understanding of closed-end funds. These efforts include
maintaining an investor relations program to timely provide information and
education to financial advisers and investors; providing advertising and
marketing for the closed-end funds; maintaining its closed-end fund website; and
providing educational seminars. With respect to closed-end funds that utilize
leverage through the issuance of auction rate preferred securities ("ARPS"), the
Board has recognized the unprecedented market conditions in the auction rate
market industry with the failure of the auction process. The Independent Board
Members noted Nuveen's efforts and the resources and personnel employed to
analyze the situation, explore potential alternatives and develop and implement
solutions that serve the interests of the affected funds and all of their
respective shareholders. The Independent Board Members further noted Nuveen's
commitment and efforts to keep investors and financial advisers informed as to
its progress in addressing the ARPS situation through, among other things,
conference calls, press releases, and information posted on its website as well
as its refinancing activities. The Independent Board Members also noted Nuveen's
continued support for holders of preferred shares of its closed-end funds by,
among other things, seeking distribution for preferred shares with new market
participants, managing relations with remarketing agents and the broker
community, maintaining the leverage and risk management of leverage and
maintaining systems necessary to test compliance with rating agency criteria.
69
ANNUAL INVESTMENT MANAGEMENT AGREEMENT
APPROVAL PROCESS (continued)
Based on their review, the Independent Board Members found that, overall, the
nature, extent and quality of services provided (and expected to be provided) to
the respective Funds under the Advisory Agreements were satisfactory.
B. THE INVESTMENT PERFORMANCE OF THE FUNDS AND NAM
The Board considered the investment performance of each Fund, including the
Fund's historic performance as well as its performance compared to funds with
similar investment objectives (the "Performance Peer Group") based on data
provided by an independent third party (as described below). The Independent
Board Members also reviewed portfolio level performance (which does not reflect
fund level fees, expenses and leverage), as described in further detail below.
In evaluating the performance information, the Board considered whether the Fund
has operated within its investment objectives and parameters and the impact that
the investment mandates may have had on performance. In addition, in comparing a
Fund's performance with that of its Performance Peer Group, the Independent
Board Members took into account that the closest Performance Peer Group in
certain instances may not adequately reflect the respective fund's investment
objectives and strategies thereby hindering a meaningful comparison of the
fund's performance with that of the Performance Peer Group.
The Independent Board Members also recognized that certain funds lack comparable
peers in which case their performance is measured against a more general
municipal category for various states. The closed-end municipal funds that do
not have corresponding state-specific Performance Peer Groups are from states
other than New York, California, Florida, New Jersey, Michigan, and
Pennsylvania.
The Independent Board Members reviewed performance information including, among
other things, total return information compared with the Fund's Performance Peer
Group and recognized benchmarks for the one-, three- and five-year periods (as
applicable) ending December 31, 2007 and with the Performance Peer Group for the
quarter and same yearly periods ending March 31, 2008 (as applicable). The
Independent Board Members also reviewed the Fund's portfolio level performance
(which does not reflect fund level fees and expenses (and leverage for
closed-end funds)) compared to recognized benchmarks for the one- three, and
five-year periods ending December 31, 2007 (as applicable). The analysis was
used to assess the efficacy of investment decisions against appropriate measures
of risk and total return, within specific market segments. This information
supplemented the Fund performance information provided to the Board at each of
its quarterly meetings. Based on their review, the Independent Board Members
determined that each Fund's investment performance over time had been
satisfactory.
C. FEES, EXPENSES AND PROFITABILITY
1. FEES AND EXPENSES
The Board evaluated the management fees and expenses of each Fund
reviewing, among other things, such Fund's gross management fees
(which take into account breakpoints), net management fees (which take
into account fee waivers or reimbursements) and total expense ratios
(before and after expense reimbursements and/or waivers) in absolute
terms as well as compared to the gross management fees, net management
fees (after waivers and/or reimbursements) and total expense ratios
(before and after waivers) of a comparable universe of unaffiliated
funds based on data provided by an independent data provider (the
"Peer Universe") and/or a more focused subset of funds therein (the
"Peer Group"). The
70
Independent Board Members further reviewed data regarding the
construction of Peer Groups as well as the methods of measurement for
the fee and expense analysis and the performance analysis. In
reviewing the comparisons of fee and expense information, the
Independent Board Members took into account that in certain instances
various factors such as the size of the Fund relative to peers, the
size and particular composition of the Peer Group, the investment
objectives of the peers, expense anomalies, and the timing of
information used may impact the comparative data, thereby limiting the
ability to make a meaningful comparison. The Independent Board Members
also considered, among other things, the differences in the use of
leverage and the differences in the use of insurance as well as the
states reflected in a respective Peer Group for the state municipal
funds (such as the use of a general "other states" category for
closed-end state funds (other than New York and California)). In
reviewing the fee schedule for a Fund, the Independent Board Members
also considered the fund-level and complex-wide breakpoint schedules
(described in further detail below) and any fee waivers and
reimbursements provided by Nuveen (applicable, in particular, for
certain closed-end funds launched since 1999). Based on their review
of the fee and expense information provided, the Independent Board
Members determined that each Fund's management fees and net total
expense ratio were reasonable in light of the nature, extent and
quality of services provided to the Fund.
2. COMPARISONS WITH THE FEES OF OTHER CLIENTS
The Independent Board Members further reviewed information regarding
the nature of services and fee rates offered by NAM to other clients.
Such other clients include NAM's municipal separately managed
accounts. In evaluating the comparisons of fees, the Independent Board
Members noted that the fee rates charged to the Funds and other
clients vary, among other things, because of the different services
involved and the additional regulatory and compliance requirements
associated with registered investment companies, such as the Funds.
Accordingly, the Independent Board Members considered the differences
in the product types, including, but not limited to, the services
provided, the structure and operations, product distribution and costs
thereof, portfolio investment policies, investor profiles, account
sizes and regulatory requirements. The Independent Board Members
noted, in particular, that the range of services provided to the Funds
(as discussed above) is much more extensive than that provided to
separately managed accounts. Given the inherent differences in the
products, particularly the extensive services provided to the Funds,
the Independent Board Members believe such facts justify the different
levels of fees.
3. PROFITABILITY OF NUVEEN
In conjunction with its review of fees, the Independent Board Members
also considered the profitability of Nuveen for its advisory
activities (which incorporated Nuveen's wholly-owned affiliated
sub-advisers) and its financial condition. The Independent Board
Members reviewed the revenues and expenses of Nuveen's advisory
activities for the last two years and the allocation methodology used
in preparing the profitability data. The Independent Board Members
noted this information supplemented the profitability information
requested and received during the year to help keep them apprised of
developments affecting profitability (such as changes in fee waivers
and expense reimbursement commitments). In this regard, the
Independent Board Members noted that they had also appointed an
Independent Board Member as a point person to review and keep them
apprised of changes to the profitability analysis and/or methodologies
during the year. The Independent Board Members considered Nuveen's
profitability compared with other fund sponsors prepared by two
independent third party service providers as well as comparisons of
the revenues, expenses and profit margins of various unaffiliated
management firms with similar amounts of assets under management
prepared by Nuveen.
71
ANNUAL INVESTMENT MANAGEMENT AGREEMENT
APPROVAL PROCESS (continued)
In reviewing profitability, the Independent Board Members recognized
the subjective nature of determining profitability which may be
affected by numerous factors including the allocation of expenses.
Further, the Independent Board Members recognized the difficulties in
making comparisons as the profitability of other advisers generally is
not publicly available and the profitability information that is
available for certain advisers or management firms may not be
representative of the industry and may be affected by, among other
things, the adviser's particular business mix, capital costs, types of
funds managed and expense allocations.
Notwithstanding the foregoing, the Independent Board Members reviewed Nuveen's
methodology and assumptions for allocating expenses across product lines to
determine profitability. In reviewing profitability, the Independent Board
Members recognized Nuveeninvestment in its fund business.
Based on its review, the Independent Board Members concluded that Nuveen's level
of profitability for its advisory activities was reasonable in light of the
services provided.
In evaluating the reasonableness of the compensation, the Independent Board
Members also considered other amounts paid to NAM by the Funds as well as any
indirect benefits (such as soft dollar arrangements, if any) NAM and its
affiliates receive, or are expected to receive, that are directly attributable
to the management of the Funds, if any. See Section E below for additional
information on indirect benefits NAM may receive as a result of its relationship
with the Funds. Based on their review of the overall fee arrangements of each
Fund, the Independent Board Members determined that the advisory fees and
expenses of the respective Fund were reasonable.
D. ECONOMIES OF SCALE AND WHETHER FEE LEVELS REFLECT THESE ECONOMIES OF SCALE
With respect to economies of scale, the Independent Board Members recognized the
potential benefits resulting from the costs of a fund being spread over a larger
asset base. The Independent Board Members therefore considered whether the Funds
have appropriately benefited from any economies of scale and whether there is
potential realization of any further economies of scale. In considering
economies of scale, the Independent Board Members have recognized that economies
of scale are difficult to measure and predict with precision, particularly on a
fund-by-fund basis. Notwithstanding the foregoing, one method to help ensure the
shareholders share in these benefits is to include breakpoints in the advisory
fee schedule. Accordingly, the Independent Board Members reviewed and considered
the fund-level breakpoints in the advisory fee schedules that reduce advisory
fees. In this regard, given that the Funds are closed-end funds, the Independent
Board Members recognized that although the Funds may from time to time make
additional share offerings, the growth in their assets will occur primarily
through appreciation of each Fund's investment portfolio.
In addition to fund-level advisory fee breakpoints, the Board also considered
the Funds' complex-wide fee arrangement. Pursuant to the complex-wide fee
arrangement, the fees of the funds in the Nuveen complex, including the Funds,
are reduced as the assets in the fund complex reach certain levels. In
evaluating the complex-wide fee arrangement, the Independent Board Members
recognized that the complex-wide fee schedule was recently revised in 2007 to
provide for additional fee savings to shareholders and considered the amended
schedule. The Independent Board Members further considered that the complex-wide
fee arrangement seeks to provide the benefits of economies of scale to fund
shareholders when total fund
72
complex assets increase, even if assets of a particular fund are unchanged or
have decreased. The approach reflects the notion that some of Nuveen's costs are
attributable to services provided to all its funds in the complex and therefore
all funds benefit if these costs are spread over a larger asset base. Based on
their review, the Independent Board Members concluded that the breakpoint
schedule and complex-wide fee arrangement were acceptable and desirable in
providing benefits from economies of scale to shareholders.
E. INDIRECT BENEFITS
In evaluating fees, the Independent Board Members received and considered
information regarding potential "fall out" or ancillary benefits NAM or its
affiliates may receive as a result of its relationship with each Fund. In this
regard, the Independent Board Members considered revenues received by affiliates
of NAM for serving as agent at Nuveen's preferred trading desk and for serving
as a co-manager in the initial public offering of new closed-end exchange traded
funds.
In addition to the above, the Independent Board Members considered whether NAM
received any benefits from soft dollar arrangements whereby a portion of the
commissions paid by a Fund for brokerage may be used to acquire research that
may be useful to NAM in managing the assets of the Funds and other clients. The
Independent Board Members noted that NAM does not currently have any soft dollar
arrangements; however, to the extent certain bona fide agency transactions that
occur on markets that traditionally trade on a principal basis and riskless
principal transactions are considered as generating "commissions," NAM intends
to comply with the applicable safe harbor provisions.
Based on their review, the Independent Board Members concluded that any indirect
benefits received by NAM as a result of its relationship with the Funds were
reasonable and within acceptable parameters.
F. OTHER CONSIDERATIONS
The Independent Board Members did not identify any single factor discussed
previously as all-important or controlling. The Board Members, including the
Independent Board Members, unanimously concluded that the terms of the Advisory
Agreements are fair and reasonable, that NAM's fees are reasonable in light of
the services provided to each Fund and that the Advisory Agreements be renewed.
73
Reinvest Automatically
EASILY and CONVENIENTLY
NUVEEN MAKES REINVESTING EASY. A PHONE CALL IS ALL IT TAKES TO SET UP YOUR
REINVESTMENT ACCOUNT.
NUVEEN CLOSED-END FUNDS DIVIDEND REINVESTMENT PLAN
Your Nuveen Closed-End Fund allows you to conveniently reinvest dividends and/or
capital gains distributions in additional Fund shares.
By choosing to reinvest, you'll be able to invest money regularly and
automatically, and watch your investment grow through the power of tax-free
compounding. Just like dividends or distributions in cash, there may be times
when income or capital gains taxes may be payable on dividends or distributions
that are reinvested.
It is important to note that an automatic reinvestment plan does not ensure a
profit, nor does it protect you against loss in a declining market.
EASY AND CONVENIENT
To make recordkeeping easy and convenient, each month you'll receive a statement
showing your total dividends and distributions, the date of investment, the
shares acquired and the price per share, and the total number of shares you own.
HOW SHARES ARE PURCHASED
The shares you acquire by reinvesting will either be purchased on the open
market or newly issued by the Fund. If the shares are trading at or above net
asset value at the time of valuation, the Fund will issue new shares at the
greater of the net asset value or 95% of the then-current market price. If the
shares are trading at less than net asset value, shares for your account will be
purchased on the open market. If the Plan Agent begins purchasing Fund shares on
the open market while shares are trading below net asset value, but the Fund's
shares subsequently trade at or above their net asset value before the Plan
Agent is able to complete its purchases, the Plan Agent may cease open-market
purchases and may invest the uninvested portion of the distribution in
newly-issued Fund shares at a price equal to the greater of the shares' net
asset value or 95% of the shares' market value on the last business day
immediately prior to the purchase date. Dividends and distributions received to
purchase shares in the open market will normally be invested shortly after the
dividend payment date. No interest will be paid on dividends and distributions
awaiting reinvestment. Because the market price of the shares may increase
before purchases are completed, the average purchase price per share may exceed
the market price at the time of valuation, resulting in the acquisition of fewer
shares than if the dividend or distribution had been paid in shares issued by
the Fund. A pro rata portion of any applicable brokerage commissions on open
market purchases will be paid by Plan participants. These commissions usually
will be lower than those charged on individual transactions.
74
FLEXIBLE
You may change your distribution option or withdraw from the Plan at any time,
should your needs or situation change. Should you withdraw, you can receive a
certificate for all whole shares credited to your reinvestment account and cash
payment for fractional shares, or cash payment for all reinvestment account
shares, less brokerage commissions and a $2.50 service fee.
You can reinvest whether your shares are registered in your name, or in the name
of a brokerage firm, bank, or other nominee. Ask your investment advisor if his
or her firm will participate on your behalf. Participants whose shares are
registered in the name of one firm may not be able to transfer the shares to
another firm and continue to participate in the Plan.
The Fund reserves the right to amend or terminate the Plan at any time. Although
the Fund reserves the right to amend the Plan to include a service charge
payable by the participants, there is no direct service charge to participants
in the Plan at this time.
CALL TODAY TO START REINVESTING DIVIDENDS AND/OR DISTRIBUTIONS
For more information on the Nuveen Automatic Reinvestment Plan or to enroll in
or withdraw from the Plan, speak with your financial advisor or call us at (800)
257-8787.
75
Glossary of
TERMS USED in this REPORT
[] AUCTION RATE BOND: An auction rate bond is a security whose interest
payments are adjusted periodically through an auction process, which
process typically also serves as a means for buying and selling the bond.
Auctions that fail to attract enough buyers for all the shares offered for
sale are deemed to have "failed", with current holders receiving a
formula-based interest rate until the next scheduled auction.
[] AVERAGE ANNUAL TOTAL RETURN: This is a commonly used method to express an
investment's performance over a particular, usually multi-year time period.
It expresses the return that would have been necessary each year to equal
the investment's actual cumulative performance (including change in common
share NAV or market price and reinvested dividends and capital gains
distributions, if any) over the time period being considered.
[] AVERAGE EFFECTIVE MATURITY: The average of the number of years to maturity
of the bonds in a Fund's portfolio, computed by weighting each bond's time
to maturity (the date the security comes due) by the market value of the
security. This figure does not account for the likelihood of prepayments or
the exercise of call provisions unless an escrow account has been
established to redeem the bond before maturity. The market value weighting
for an investment in an inverse floating rate security is the value of the
portfolio's residual interest in the inverse floating rate trust, and does
not include the value of the floating rate securities issued by the trust.
[] INVERSE FLOATERS: Inverse floating rate securities are created by
depositing a municipal bond, typically with a fixed interest rate, into a
special purpose trust created by a broker-dealer. This trust, in turn, (a)
issues floating rate certificates typically paying short-term tax-exempt
interest rates to third parties in amounts equal to some fraction of the
deposited bond's par amount or market value, and (b) issues an inverse
floating rate certificate (sometimes referred to as an "inverse floater")
to an investor (such as a Fund) interested in gaining investment exposure
to a long-term municipal bond. The income received by the holder of the
inverse floater varies inversely with the short-term rate paid to the
floating rate certificates' holders, and in most circumstances the holder
of the inverse floater bears substantially all of the underlying bond's
downside investment risk. The holder of the inverse floater typically also
benefits disproportionately from any potential appreciation of the
underlying bond's value. Hence, an inverse floater essentially represents
an investment in the underlying bond on a leveraged basis.
[] LEVERAGE-ADJUSTED DURATION: Duration is a measure of the expected period
over which a bond's principal and interest will be paid, and consequently
is a measure of the sensitivity of a bond's or bond Fund's value to changes
when market interest rates change. Generally, the longer a bond's or Fund's
duration, the more the price of the bond or Fund will change as interest
rates change. Leverage-adjusted duration takes into account the leveraging
process for a Fund and therefore is longer than the duration of the Fund's
portfolio of bonds.
[] MARKET YIELD (ALSO KNOWN AS DIVIDEND YIELD OR CURRENT YIELD): An
investment's current annualized dividend divided by its current market
price.
[] NET ASSET VALUE (NAV): A Fund's common share NAV per share is calculated by
subtracting the liabilities of the Fund (including any Preferred shares
issued in order to leverage the Fund) from its total assets and then
dividing the remainder by the number of shares outstanding. Fund NAVs are
calculated at the end of each business day.
[] TAXABLE-EQUIVALENT YIELD: The yield necessary from a fully taxable
investment to equal, on an after-tax basis, the yield of a municipal bond
investment.
[] ZERO COUPON BOND: A zero coupon bond does not pay a regular interest coupon
to its holders during the life of the bond. Tax-exempt income to the holder
of the bond comes from accretion of the difference between the original
purchase price of the bond at issuance and the par value of the bond at
maturity and is effectively paid at maturity. The market prices of zero
coupon bonds generally are more volatile than the market prices of bonds
that pay interest periodically.
76
NOTES
77
NOTES
78
Other Useful INFORMATION
QUARTERLY PORTFOLIO OF INVESTMENTS AND PROXY VOTING INFORMATION
You may obtain (i) each Fund's quarterly portfolio of investments, (ii)
information regarding how the Funds voted proxies relating to portfolio
securities held during the twelve-month period ended June 30, 2008, and (iii) a
description of the policies and procedures that the Funds used to determine how
to vote proxies relating to portfolio securities without charge, upon request,
by calling Nuveen Investments toll-free at (800) 257-8787 or on Nuveen's website
at www.nuveen.com.
You may also obtain this and other Fund information directly from the Securities
and Exchange Commission ("SEC"). The SEC may charge a copying fee for this
information. Visit the SEC on-line at http://www.sec.gov or in person at the
SEC's Public Reference Room in Washington, D.C. Call the SEC at (202) 942-8090
for room hours and operation. You may also request Fund information by sending
an e-mail request to publicinfo@sec.gov or by writing to the SEC's Public
References Section at 100 F Street NE, Washington, D.C. 20549.
CEO CERTIFICATION DISCLOSURE
Each Fund's Chief Executive Officer has submitted to the New York Stock Exchange
(NYSE) the annual CEO certification as required by Section 303A.12(a) of the
NYSE Listed Company Manual.
Each Fund has filed with the Securities and Exchange Commission the
certification of its Chief Executive Officer and Chief Financial Officer
required by Section 302 of the Sarbanes-Oxley Act.
BOARD OF TRUSTEES
John P. Amboian
Robert P. Bremner
Jack B. Evans
William C. Hunter
David J. Kundert
William J. Schneider
Judith M. Stockdale
Carole E. Stone
Terence J. Toth
FUND MANAGER
Nuveen Asset Management
333 West Wacker Drive
Chicago, IL 60606
CUSTODIAN
State Street Bank & Trust Company
Boston, MA
TRANSFER AGENT AND
SHAREHOLDER SERVICES
State Street Bank & Trust Company
Nuveen Funds
P.O. Box 43071
Providence, RI 02940-3071
(800) 257-8787
LEGAL COUNSEL
Chapman and Cutler LLP
Chicago, IL
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Ernst & Young LLP
Chicago, IL
Each Fund intends to repurchase or redeem shares of its own common or preferred
stock in the future at such times and in such amounts as is deemed advisable. No
common or preferred shares were repurchased or redeemed during the period
covered by this report. Any future repurchases or redemptions will be reported
to shareholders in the next annual or semi-annual report.
79
Nuveen Investments:
-------------------
SERVING INVESTORS FOR GENERATIONS
Since 1898, financial advisors and their clients have relied on Nuveen
Investments to provide dependable investment solutions. For the past century,
Nuveen Investments has adhered to the belief that the best approach to investing
is to apply conservative risk-management principles to help minimize volatility.
Building on this tradition, we today offer a range of high quality equity and
fixed-income solutions that are integral to a well-diversified core portfolio.
Our clients have come to appreciate this diversity, as well as our continued
adherence to proven, long-term investing principles.
We offer many different investing solutions for our clients' different needs.
Nuveen Investments is a global investment management firm that seeks to help
secure the long-term goals of institutions and high net worth investors as well
as the consultants and financial advisors who serve them. Nuveen Investments
markets its growing range of specialized investment solutions under the
high-quality brands of HydePark, NWQ, Nuveen, Rittenhouse, Santa Barbara,
Symphony and Tradewinds. In total, the Company managed $152 billion of assets on
June 30, 2008.
Find out how we can help you reach your financial goals.
To learn more about the products and services Nuveen Investments offers, talk to
your financial advisor, or call us at (800) 257-8787. Please read the
information provided carefully before you invest. Be sure to obtain a
prospectus, where applicable. Investors should consider the investment objective
and policies, risk considerations, charges and expenses of the Fund carefully
before investing. The prospectus contains this and other information relevant to
an investment in the Fund. For a prospectus, please contact your securities
representative or Nuveen Investments, 333 W. Wacker Dr., Chicago, IL 60606.
Please read the prospectus carefully before you invest or send money.
Learn more about Nuveen Funds at: www.nuveen.com/etf
Share prices
Fund details
Daily financial news
Investor education
Interactive planning tools
EAN-A-0708D
ITEM 2. CODE OF ETHICS.
As of the end of the period covered by this report, the registrant has adopted a
code of ethics that applies to the registrant's principal executive officer,
principal financial officer, principal accounting officer or controller, or
persons performing similar functions. There were no amendments to or waivers
from the Code during the period covered by this report. The registrant has
posted the code of ethics on its website at www.nuveen.com/etf. (To view the
code, click on the Shareholder Resources drop down menu box, click on Fund
Governance and then click on Code of Conduct.)
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The registrant's Board of Directors or Trustees determined that the registrant
has at least one "audit committee financial expert" (as defined in Item 3 of
Form N-CSR) serving on its Audit Committee. The registrant's audit committee
financial expert is Jack B. Evans, who is "independent" for purposes of Item 3
of Form N-CSR.
Mr. Evans was formerly President and Chief Operating Officer of SCI Financial
Group, Inc., a full service registered broker-dealer and registered investment
adviser ("SCI"). As part of his role as President and Chief Operating Officer,
Mr. Evans actively supervised the Chief Financial Officer (the "CFO") and
actively supervised the CFO's preparation of financial statements and other
filings with various regulatory authorities. In such capacity, Mr. Evans was
actively involved in the preparation of SCI's financial statements and the
resolution of issues raised in connection therewith. Mr. Evans has also served
on the audit committee of various reporting companies. At such companies, Mr.
Evans was involved in the oversight of audits, audit plans, and the preparation
of financial statements. Mr. Evans also formerly chaired the audit committee of
the Federal Reserve Bank of Chicago.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Nuveen Arizona Dividend Advantage Municipal Fund 3
The following tables show the amount of fees that Ernst & Young LLP, the Fund's
auditor, billed to the Fund during the Fund's last two full fiscal years. For
engagements with Ernst & Young LLP the Audit Committee approved in advance all
audit services and non-audit services that Ernst & Young LLP provided to the
Fund, except for those non-audit services that were subject to the pre-approval
exception under Rule 2-01 of Regulation S-X (the "pre-approval exception"). The
pre-approval exception for services provided directly to the Fund waives the
pre-approval requirement for services other than audit, review or attest
services if: (A) the aggregate amount of all such services provided constitutes
no more than 5% of the total amount of revenues paid by the Fund to its
accountant during the fiscal year in which the services are provided; (B) the
Fund did not recognize the services as non-audit services at the time of the
engagement; and (C) the services are promptly brought to the Audit Committee's
attention, and the Committee (or its delegate) approves the services before the
audit is completed.
The Audit Committee has delegated certain pre-approval responsibilities to its
Chairman (or, in his absence, any other member of the Audit Committee).
SERVICES THAT THE FUND'S AUDITOR BILLED TO THE FUND
AUDIT FEES BILLED AUDIT-RELATED FEES TAX FEES ALL OTHER FEES
FISCAL YEAR ENDED TO FUND (1) BILLED TO FUND (2) BILLED TO FUND (3) BILLED TO FUND (4)
-------------------------------------------------------------------------------------------------------------------------------
July 31, 2008 $ 9,182 $ 0 $ 500 $ 800
-------------------------------------------------------------------------------------------------------------------------------
Percentage approved 0% 0% 0% 0%
pursuant to
pre-approval
exception
-------------------------------------------------------------------------------------------------------------------------------
July 31, 2007 $ 8,113 $ 0 $ 0 1,500
-------------------------------------------------------------------------------------------------------------------------------
Percentage approved 0% 0% 0% 0%
pursuant to
pre-approval
exception
-------------------------------------------------------------------------------------------------------------------------------
(1) "Audit Fees" are the aggregate fees billed for professional services for
the audit of the Fund's annual financial statements and services provided
in connection with statutory and regulatory filings or engagements.
(2) "Audit Related Fees" are the aggregate fees billed for assurance and
related services reasonably related to the performance of the audit or
review of financial statements and are not reported under "Audit Fees".
(3) "Tax Fees" are the aggregate fees billed for professional services for tax
advice, tax compliance, and tax planning.
(4) "All Other Fees" are the aggregate fees billed for products and services
for agreed upon procedures engagements performed for leveraged funds.
SERVICES THAT THE FUND'S AUDITOR BILLED TO THE
ADVISER AND AFFILIATED FUND SERVICE PROVIDERS
The following tables show the amount of fees billed by Ernst & Young LLP to
Nuveen Asset Management ("NAM" or the "Adviser"), and any entity controlling,
controlled by or under common control with NAM ("Control Affiliate") that
provides ongoing services to the Fund ("Affiliated Fund Service Provider"), for
engagements directly related to the Fund's operations and financial reporting,
during the Fund's last two full fiscal years.
The tables also show the percentage of fees subject to the pre-approval
exception. The pre-approval exception for services provided to the Adviser and
any Affiliated Fund Service Provider (other than audit, review or attest
services) waives the pre-approval requirement if: (A) the aggregate amount of
all such services provided constitutes no more than 5% of the total amount of
revenues paid to Ernst & Young LLP by the Fund, the Adviser and Affiliated Fund
Service Providers during the fiscal year in which the services are provided that
would have to be pre-approved by the Audit Committee; (B) the Fund did not
recognize the services as non-audit services at the time of the engagement; and
(C) the services are promptly brought to the Audit Committee's attention, and
the Committee (or its delegate) approves the services before the Fund's audit is
completed.
FISCAL YEAR ENDED AUDIT-RELATED FEES TAX FEES BILLED TO ALL OTHER FEES
BILLED TO ADVISER AND ADVISER AND BILLED TO ADVISER
AFFILIATED FUND AFFILIATED FUND AND AFFILIATED FUND
SERVICE PROVIDERS SERVICE PROVIDERS SERVICE PROVIDERS
--------------------------------------------------------------------------------------------------------------
July 31, 2008 $ 0 $ 0 $ 0
--------------------------------------------------------------------------------------------------------------
Percentage approved 0% 0% 0%
pursuant to
pre-approval
exception
--------------------------------------------------------------------------------------------------------------
July 31, 2007 $ 0 $ 0 $ 0
--------------------------------------------------------------------------------------------------------------
Percentage approved 0% 0% 0%
pursuant to
pre-approval
exception
--------------------------------------------------------------------------------------------------------------
NON-AUDIT SERVICES
The following table shows the amount of fees that Ernst & Young LLP billed
during the Fund's last two full fiscal years for non-audit services. The Audit
Committee is required to pre-approve non-audit services that Ernst & Young LLP
provides to the Adviser and any Affiliated Fund Services Provider, if the
engagement related directly to the Fund's operations and financial reporting
(except for those subject to the de minimis exception described above). The
Audit Committee requested and received information from Ernst & Young LLP about
any non-audit services that Ernst & Young LLP rendered during the Fund's last
fiscal year to the Adviser and any Affiliated Fund Service Provider. The
Committee considered this information in evaluating Ernst & Young LLP's
independence.
FISCAL YEAR ENDED TOTAL NON-AUDIT FEES
BILLED TO ADVISER AND
AFFILIATED FUND SERVICE TOTAL NON-AUDIT FEES
PROVIDERS (ENGAGEMENTS BILLED TO ADVISER AND
RELATED DIRECTLY TO THE AFFILIATED FUND SERVICE
TOTAL NON-AUDIT FEES OPERATIONS AND FINANCIAL PROVIDERS (ALL OTHER
BILLED TO FUND REPORTING OF THE FUND) ENGAGEMENTS) TOTAL
---------------------------------------------------------------------------------------------------------------------
July 31, 2008 $ 1,300 $ 0 $ 0 $ 1,300
July 31, 2007 $ 1,500 $ 0 $ 0 $ 1,500
"Non-Audit Fees billed to Adviser" for both fiscal year ends represent "Tax
Fees" billed to Adviser in their respective amounts from the previous table.
Audit Committee Pre-Approval Policies and Procedures. Generally, the Audit
Committee must approve (i) all non-audit services to be performed for the Fund
by the Fund's independent accountants and (ii) all audit and non-audit services
to be performed by the Fund's independent accountants for the Affiliated Fund
Service Providers with respect to operations and financial reporting of the
Fund. Regarding tax and research projects conducted by the independent
accountants for the Fund and Affiliated Fund Service Providers (with respect to
operations and financial reports of the Fund) such engagements will be (i)
pre-approved by the Audit Committee if they are expected to be for amounts
greater than $10,000; (ii) reported to the Audit Committee chairman for his
verbal approval prior to engagement if they are expected to be for amounts under
$10,000 but greater than $5,000; and (iii) reported to the Audit Committee at
the next Audit Committee meeting if they are expected to be for an amount under
$5,000.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
The registrant's Board of Directors or Trustees has a separately designated
Audit Committee established in accordance with Section 3(a)(58)(A) of the
Securities Exchange Act of 1934, as amended (15 U.S.C. 78c(a)(58)(A)). The
members of the audit committee are Robert P. Bremner, Jack B. Evans,
William J. Schneider and David J. Kundert.
ITEM 6. SCHEDULE OF INVESTMENTS.
See Portfolio of Investments in Item 1.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The registrant invests its assets primarily in municipal bonds and cash
management securities. On rare occasions the registrant may acquire, directly or
through a special purpose vehicle, equity securities of a municipal bond issuer
whose bonds the registrant already owns when such bonds have deteriorated or are
expected shortly to deteriorate significantly in credit quality. The purpose of
acquiring equity securities generally will be to acquire control of the
municipal bond issuer and to seek to prevent the credit deterioration or
facilitate the liquidation or other workout of the distressed issuer's credit
problem. In the course of exercising control of a distressed municipal issuer,
NAM may pursue the registrant's interests in a variety of ways, which may entail
negotiating and executing consents, agreements and other arrangements, and
otherwise influencing the management of the issuer. NAM does not consider such
activities proxy voting for purposes of Rule 206(4)-6 under the 1940 Act, but
nevertheless provides reports to the registrant's Board of Trustees on its
control activities on a quarterly basis.
In the rare event that a municipal issuer were to issue a proxy or that the
registrant were to receive a proxy issued by a cash management security, NAM
would either engage an independent third party to determine how the proxy should
be voted or vote the proxy with the consent, or based on the instructions, of
the registrant's Board of Trustees or its representative. A member of NAM's
legal department would oversee the administration of the voting, and ensure that
records were maintained in accordance with Rule 206(4)-6, reports were filed
with the SEC on Form N-PX, and the results provided to the registrant's Board of
Trustees and made available to shareholders as required by applicable rules.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
THE PORTFOLIO MANAGER
The following individual has primary responsibility for the day-to-day
implementation of the registrant's investment strategies:
NAME FUND
Scott R. Romans Nuveen Arizona Dividend Advantage Municipal Fund 3
Other Accounts Managed. In addition to managing the registrant, the portfolio
manager is also primarily responsible for the day-to-day portfolio management of
the following accounts:
TYPE OF ACCOUNT NUMBER OF
PORTFOLIO MANAGER MANAGED ACCOUNTS ASSETS*
--------------------------------------------------------------------------------
Scott R. Romans Registered Investment Company 28 $5.843 billion
Other Pooled Investment Vehicles 0 $0
Other Accounts 3 $.320 million
* Assets are as of July 31, 2008. None of the assets in these accounts are
subject to an advisory fee based on performance.
Compensation. Each portfolio manager's compensation consists of three basic
elements--base salary, cash bonus and long-term incentive compensation. The
compensation strategy is to annually compare overall compensation to the market
in order to create a compensation structure that is competitive and consistent
with similar financial services companies. As discussed below, several factors
are considered in determining each portfolio manager's total compensation. In
any year these factors may include, among others, the effectiveness of the
investment strategies recommended by the portfolio manager's investment team,
the investment performance of the accounts managed by the portfolio manager, and
the overall performance of Nuveen Investments, Inc. (the parent company of NAM).
Although investment performance is a factor in determining the portfolio
manager's compensation, it is not necessarily a decisive factor. The portfolio
manager's performance is evaluated in part by comparing manager's performance
against a specified investment benchmark. This fund-specific benchmark is a
customized subset (limited to bonds in each Fund's specific state and with
certain maturity parameters) of the S&P/Investortools Municipal Bond index, an
index comprised of bonds held by managed municipal bond fund customers of
Standard & Poor's Securities Pricing, Inc. that are priced daily and whose fund
holdings aggregate at least $2 million. As of August 31, 2008, the
S&P/Investortools Municipal Bond index was comprised of 52,711 securities with
an aggregate current market value of $1,041 billion.
Base salary. Each portfolio manager is paid a base salary that is set at a level
determined by NAM in accordance with its overall compensation strategy discussed
above. NAM is not under any current contractual obligation to increase a
portfolio manager's base salary.
Cash bonus. Each portfolio manager is also eligible to receive an annual cash
bonus. The level of this bonus is based upon evaluations and determinations made
by each portfolio manager's supervisors, along with reviews submitted by his
peers. These reviews and evaluations often take into account a number of
factors, including the effectiveness of the investment strategies recommended to
the NAM's investment team, the performance of the accounts for which he serves
as portfolio manager relative to any benchmarks established for those accounts,
his effectiveness in communicating investment performance to stockholders and
their representatives, and his contribution to the NAM's investment process and
to the execution of investment strategies. The cash bonus component is also
impacted by the overall performance of Nuveen Investments, Inc. in achieving its
business objectives.
Long-term incentive compensation. In connection with the acquisition of Nuveen
Investments, Inc., by a group of investors lead by Madison Dearborn Partners in
November 2007, certain employees, including portfolio managers, received profit
interests in Nuveen's parent. These profit interests entitle the holders to
participate in the appreciation in the value of Nuveen beyond the issue date and
vest over five to seven years, or earlier in the case of a liquidity event.
Material Conflicts of Interest. Each portfolio manager's simultaneous management
of the registrant and the other accounts noted above may present actual or
apparent conflicts of interest with respect to the allocation and aggregation of
securities orders placed on behalf of the Registrant and the other account. NAM,
however, believes that such potential conflicts are mitigated by the fact that
the NAM has adopted several policies that address potential conflicts of
interest, including best execution and trade allocation policies that are
designed to ensure (1) that portfolio management is seeking the best price for
portfolio securities under the circumstances, (2) fair and equitable allocation
of investment opportunities among accounts over time and (3) compliance with
applicable regulatory requirements. All accounts are to be treated in a
non-preferential manner, such that allocations are not based upon account
performance, fee structure or preference of the portfolio manager. In addition,
NAM has adopted a Code of Conduct that sets forth policies regarding conflicts
of interest.
Beneficial Ownership of Securities. As of July 31, 2008, the portfolio manager
beneficially owned the following dollar range of equity securities issued by the
Registrant and other Nuveen Funds managed by NAM's municipal investment team.
DOLLAR RANGE OF
DOLLAR EQUITY SECURITIES
RANGE OF BENEFICIALLY OWNED
EQUITY IN THE REMAINDER
SECURITIES OF NUVEEN FUNDS
BENEFICIALLY MANAGED BY
NAME OF PORTFOLIO OWNED IN NAM'S MUNICIPAL
MANAGER FUND FUND INVESTMENT TEAM
-----------------------------------------------------------------------------------------------------------
Scott R. Romans Nuveen Arizona Dividend Advantage Municipal Fund 3 $0 $10,001--$50,000
PORTFOLIO MANAGER BIO:
Scott R. Romans, PhD, joined Nuveen Investments in 2000 as a senior analyst in
the education sector. In 2003, he was assigned management responsibility for
several closed- and open-ended municipal bond funds most of which are state
funds covering California and other western states. He has been Vice President
of NAM since 2004, Portfolio Manager since 2003, and was, formerly, Assistant
Vice President (2003-2004) and Senior Analyst (2000-2003). Currently, he manages
investments for 29 Nuveen-sponsored investment companies. He holds an
undergraduate degree from the University of Pennsylvania and an MA and PhD from
the University of Chicago.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which shareholders may
recommend nominees to the registrants Board implemented after the registrant
last provided disclosure in response to this item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers,
or persons performing similar functions, have concluded that the
registrant's disclosure controls and procedures (as defined in Rule
30a-3(c) under the Investment Company Act of 1940, as amended (the
"1940 Act") (17 CFR 270.30a-3(c))) are effective, as of a date within
90 days of the filing date of this report that includes the disclosure
required by this paragraph, based on their evaluation of the controls
and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR
270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")
(17 CFR 240.13a-15(b) or 240.15d-15(b)).
(b) There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940 Act
(17 CFR 270.30a-3(d)) that occurred during the second fiscal quarter
of the period covered by this report that has materially affected, or
is reasonably likely to materially affect, the registrant's internal
control over financial reporting.
ITEM 12. EXHIBITS.
File the exhibits listed below as part of this Form. Letter or number the
exhibits in the sequence indicated.
(a)(1) Any code of ethics, or amendment thereto, that is the subject of the
disclosure required by Item 2, to the extent that the registrant intends to
satisfy the Item 2 requirements through filing of an exhibit: Not applicable
because the code is posted on registrant's website at www.nuveen.com/etf and
there were no amendments during the period covered by this report. (To view the
code, click on the Investor Resources drop down menu box, click on Fund
Governance and then Code of Conduct.)
(a)(2) A separate certification for each principal executive officer and
principal financial officer of the registrant as required by Rule 30a-2(a) under
the 1940 Act (17 CFR 270.30a-2(a)) in the exact form set forth below: Ex-99.CERT
Attached hereto.
(a)(3) Any written solicitation to purchase securities under Rule 23c-1 under
the 1940 Act (17 CFR 270.23c-1) sent or given during the period covered by the
report by or on behalf of the registrant to 10 or more persons. Not applicable.
(b) If the report is filed under Section 13(a) or 15(d) of the Exchange Act,
provide the certifications required by Rule 30a-2(b) under the 1940 Act (17 CFR
270.30a-2(b)); Rule 13a-14(b) or Rule 15d-14(b) under the Exchange Act (17 CFR
240.13a-14(b) or 240.15d-14(b)), and Section 1350 of Chapter 63 of Title 18 of
the United States Code (18 U.S.C. 1350) as an exhibit. A certification furnished
pursuant to this paragraph will not be deemed "filed" for purposes of Section 18
of the Exchange Act (15 U.S.C. 78r), or otherwise subject to the liability of
that section. Such certification will not be deemed to be incorporated by
reference into any filing under the Securities Act of 1933 or the Exchange Act,
except to the extent that the registrant specifically incorporates it by
reference. Ex-99.906 CERT attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) Nuveen Arizona Dividend Advantage Municipal Fund 3
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By (Signature and Title) /s/ Kevin J. McCarthy
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Kevin J. McCarthy
Vice President and Secretary
Date: October 8, 2008
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Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title) /s/ Gifford R. Zimmerman
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Gifford R. Zimmerman
Chief Administrative Officer
(principal executive officer)
Date: October 8, 2008
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By (Signature and Title) /s/ Stephen D. Foy
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Stephen D. Foy
Vice President and Controller
(principal financial officer)
Date: October 8, 2008
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