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
------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
Nuveen Investments
333 West Wacker Drive
Chicago, IL 60606
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(Address of principal executive offices) (Zip code)
Jessica R. Droeger
Nuveen Investments
333 West Wacker Drive
Chicago, IL 60606
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(Name and address of agent for service)
Registrant's telephone number, including area code: (312) 917-7700
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Date of fiscal year end: July 31
------------------
Date of reporting period: July 31, 2006
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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, 2006
Nuveen Investments
Municipal Exchange-Traded
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
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DEPENDABLE,
TAX-FREE INCOME BECAUSE
IT'S NOT WHAT YOU EARN,
IT'S WHAT YOU KEEP.(R)
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Photo: Timothy R. Schwertfeger
Timothy R. Schwertfeger
Chairman of the Board
Chairman's
LETTER TO SHAREHOLDERS
Once again, I am pleased to report that over the twelve- month period covered by
this report your Fund continued to provide you with attractive monthly tax-free
income. For more details about the management strategy and performance of your
Fund, please read the Portfolio Managers' Comments, the Dividend and Share Price
Information, and the Performance Overview sections of this report.
For some time, I've used these letters to remind you that municipal bonds can be
an important building block in a well balanced investment portfolio. In addition
to providing attractive tax-free monthly income, a municipal bond investment
like your Fund may help you achieve and benefit from greater portfolio
diversification. Portfolio diversification is a recognized way to try to reduce
some of the risk that comes with investing. For more information about this
important investment strategy, I encourage you to contact your personal
financial advisor.
"IN ADDITION TO PROVIDING ATTRACTIVE TAX-FREE MONTHLY INCOME, A MUNICIPAL BOND
INVESTMENT LIKE YOUR FUND MAY HELP YOU ACHIEVE AND BENEFIT FROM GREATER
PORTFOLIO DIVERSIFICATION."
We also are pleased to be able to offer you a choice concerning how you receive
your shareholder reports and other Fund information. As an alternative to mailed
copies, you can sign up to receive future Fund reports and other Fund
information by e-mail and the Internet. The inside front cover of this report
contains information on how you can sign up.
We are grateful that you have chosen us as a partner as you pursue your
financial goals, and we look forward to continuing to earn your trust in the
months and years ahead. At Nuveen Investments, our mission continues to be to
assist you and your financial advisor by offering investment services and
products that can help you to secure your financial objectives.
Sincerely,
/s/ Timothy R. Schwertfeger
Timothy R. Schwertfeger
Chairman of the Board
September 15, 2006
Nuveen Investments Arizona and Texas
Municipal Exchange-Traded Closed-End Funds
(NAZ, NFZ, NKR, NXE, NTX)
Portfolio Managers'
COMMENTS
Portfolio managers Scott Romans and Cathryn Steeves discuss 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 joined Nuveen in 2000, has managed the Arizona Funds since 2003.
Cathryn, who has been with Nuveen since 1996, assumed portfolio management
responsibility for NTX in 2004.
WHAT FACTORS AFFECTED THE U.S. ECONOMY AND MUNICIPAL MARKET DURING THE ANNUAL
REPORTING PERIOD ENDED JULY 31, 2006?
During this reporting period, we saw an increase in interest rates (and a
corresponding drop in bond prices) across virtually the entire yield curve,
although during much of the period rates at the longer end of the curve
generally remained more stable than short-term rates. Between August 1, 2005 and
July 31, 2006, the Federal Reserve announced eight increases of 0.25% each in
the fed funds rate, raising this short-term benchmark by 200 basis points from
3.25% to 5.25%. By comparison, the yield on the benchmark 10-year U.S. Treasury
note ended July 2006 at 4.98%, up 70 basis points from 12 months earlier. This
resulted in a yield curve flattening as shorter-term rates approached or
exceeded the levels of longer-term rates.
In the municipal market, the Bond Buyer 25 Revenue Bond Index, a widely followed
measure of longer-term municipal market rates, stood at 5.13% at the end of July
2006, an increase of just 27 basis points from the beginning of August 2005.
Despite rising interest rates, record energy prices, and a softening housing
market, the overall economy remained resilient. After expanding at an annual
rate of 4.2% in the third quarter of 2005, the U.S. gross domestic product (GDP)
growth rate slowed to 1.8% (annualized) in the fourth quarter of 2005, then
rebounded sharply to 5.6% (annualized) in the first quarter of 2006. In the
second quarter of 2006, GDP growth moderated to 2.9% (annualized), with the
deceleration reflecting a downturn in federal spending as well as the largest
decline in residential investment in 11 years. Despite sluggish payroll growth,
the overall jobs picture remained positive, with national unemployment at 4.8%
in July 2006, down from 5.0% in July 2005. However, the markets continued to
keep a close eye on inflation trends, with the year-over-year increase in the
Consumer Price Index registering 4.1% as of July 2006. During the first seven
months of 2006, the increase in inflation was driven mainly by higher energy and
transportation costs, rising at a rate of 4.8% (annualized), compared with 3.4%
for all of 2005.
4
Over the 12 months ended July 2006, municipal bond supply nationwide remained
strong, as $403.6 billion in new securities came to market, up 3% from the
previous 12 months. However, following record levels of municipal issuance in
calendar year 2005, we saw a drop-off in new supply during the first seven
months of 2006, when issuance totaled $205.2 billion, off 16% from the same
period in 2005. A major factor in 2006's decline in supply was the sharp
reduction in pre-refunding volume, which dropped 57% from last year's levels, as
rising interest rates made advance refundings less economically attractive. In
the month of July 2006 alone, pre-refunding volume was down 85% compared with
July 2005. Overall, demand for municipal bonds, especially those offering higher
yields, continued to be strong and broad-based, with retail investors, property
and casualty insurance companies, and hedge funds all participating in the
market.
HOW WERE THE ECONOMIC AND MARKET ENVIRONMENTS IN ARIZONA AND TEXAS DURING THIS
PERIOD?
Arizona's economy was the fastest growing in the nation in 2005, with a gross
state product growth of $8.7 billion. During this reporting period, the
government, professional and business services, and retail trade sectors served
as the main economic drivers for the state. Construction also played a major
role, although Arizona has begun to move away from industries related to the
housing boom. Job growth continued across multiple regions and industries within
the state, with the technology and aerospace sectors also continuing to perform
well. As of July 2006, Arizona's unemployment rate was 4.7%, down from 4.8% in
July 2005 but up from the five-year low of 4.1% posted in March 2006. Arizona's
population trends continued to be strong, with growth of 14.3% over the past
five years. While the retiree population continued to grow, the number of
younger workers also increased, making Arizona the 5th youngest state in the
nation. As of July 2006, Moody's issuer rating for Arizona was Aa3, while
Standard & Poor's maintained its rating of AA. For the 12 months ended July 31,
2006, municipal issuance in Arizona totaled $9.1 billion, an increase of 12%
over the previous 12 months. During the first seven months of 2006, however,
Arizona issuance declined sharply, falling 35% from that of January-July 2005,
to $3.2 billion.
With a gross state product growth of $4.3 billion, Texas ranked as the 16th
fastest growing state economy in the nation in 2005, led by government,
education and health services, and professional and business services. Although
employment by industry continued to be well diversified, Texas remained heavily
dependent on the energy and defense industries, with military bases and oil
companies representing five of the state's
5
nine largest employers. Higher energy prices have led to increased interest in
natural gas, mining as well as energy-related manufacturing and services in the
state. Population trends in Texas, with growth of more than 9% over the past
five years, remained positive, which created greater demand for consumer
services and retail industries. Texas also continued to be central to NAFTA
trade routes. Over the past 12 months, the unemployment rate for Texas remained
fairly steady, standing at 5.2% in July 2006, on par with the rate for July
2005. As of July 31, 2006, Moody's, S&P, and Fitch maintained their ratings on
Texas general obligation debt at Aa1, AA, and AA+, respectively. For the 12
months ended July 31, 2006, municipal issuance in Texas reached $34.8 billion,
an increase of 4% over the previous 12 months. Issuance during the first seven
months of 2006 declined 22% from the same period in 2005, to $18.5 billion.
However, Texas was the second largest state issuer in the nation (behind
California) for this period.
WHAT KEY STRATEGIES WERE USED TO MANAGE THE ARIZONA AND TEXAS FUNDS DURING THIS
REPORTING PERIOD?
As interest rates rose and the yield curve flattened during this 12-month
period, we continued to emphasize careful management of the Funds' underlying
portfolios in line with our established targets. This included a disciplined
approach to duration1 management and yield curve positioning. In selecting new
additions for the portfolios, we focused mainly on attractively priced, premium
coupon2 bonds maturing in 15 to 20 years for the Arizona Funds and in 20 to 25
years for NTX, depending on the differing needs of the Funds. Overall, we
believed that bonds in these parts of the curve offered strong performance
potential, better value, and attractive reward opportunities without excessive
risk.
To help maintain the Funds' durations within our preferred strategic range, we
selectively sold holdings with shorter durations, including pre-refunded bonds
with short call or maturity dates. Selling these shorter-term bonds and
reinvesting further out on the yield curve also helped to improve the Funds'
overall call protection profile. With yields rising during this period, we also
found some opportunities to sell a few of our holdings that were purchased when
yields were lower and we replaced them with similar, newer credits that yielded
comparatively more. This process allowed us to maintain the Funds' current
portfolio characteristics while strengthening their future income streams. For
example, all four Arizona Funds sold holdings of insured Arizona water bonds
that had a maturity date of 2024 and yield of 4.38% and replaced them with
insured Phoenix water
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 Premium coupon bonds are credits that are trading above their par values
because their coupons are higher than current coupon levels. Historically,
these bonds have held their value better than current coupon bonds when
interest rates rise.
6
bonds with a maturity date of 2023 and yield of 4.57%, thereby picking up 19
basis points of yield on the position.
In looking for potential purchase candidates, we kept an opportunistic eye
toward all types of issuance that we believed could add value to the Funds'
portfolios. As previously mentioned, while issuance in Arizona and Texas was up
for the 12-month period as a whole, both states saw declines in municipal supply
during the first seven months of 2006, with Arizona experiencing the sharper
drop-off. In general, however, these declines did not have a major impact on the
implementation of strategies we had planned for these Funds. Since Arizona and
Texas are relatively high-quality states, much of the new supply was highly
rated and/or insured, and the majority of our new purchases were higher-rated
credits. In Arizona, our purchases of these higher-rated bonds were based
largely on yield curve positioning.
We also continued to emphasize maintaining the Funds' weightings of bonds at the
lower end of the credit spectrum. As credit spreads continued to narrow and
municipal supply tightened in 2006, we generally found fewer interesting
lower-rated credit opportunities in the Arizona and Texas markets. However,
given Arizona's population growth and resulting infrastructure needs, the credit
markets there did offer some unique lower-rated opportunities, including higher
coupon, non-rated bonds maturing in 2030 issued for the Watson Road Community
Facilities District, which we purchased for NFZ, NKR, and NXE. Overall, the
Arizona Funds and NTX continued to have good exposure to the lower-rated credit
categories.
In NFZ, NKR, and NXE, our duration management strategies over the past 12 months
included the use of forward interest rate swaps, a type of derivative financial
instrument. As discussed in our last shareholder report, we began using this
hedging strategy in late 2004 in an effort to reduce the interest rate risk in
these Funds. The hedges were not an attempt to profit from correctly predicting
the timing and direction of interest rate movements. Instead, our sole objective
was to reduce the durations (and price sensitivity) of these Funds without
having a negative impact on their income streams or common share dividends over
the short term. We believe the hedging strategy was effective in helping to
reduce the net asset value (NAV) volatility of these Funds. The durations of NFZ
and NKR shortened over the period and we were able to remove the hedges on these
Funds in February 2006. The hedge on NXE remained in place as of July 31, 2006.
7
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 NET ASSET VALUE*
For periods ended 7/31/06
ARIZONA FUNDS 1-YEAR 5-YEAR 10-YEAR
--------------------------------------------------------------------------------
NAZ 1.84% 5.19% 5.67%
--------------------------------------------------------------------------------
NFZ 2.14% 6.89% NA
--------------------------------------------------------------------------------
NKR 2.49% NA NA
--------------------------------------------------------------------------------
NXE 3.03% NA NA
--------------------------------------------------------------------------------
TEXAS FUND
--------------------------------------------------------------------------------
NTX 2.77% 6.16% 6.35%
--------------------------------------------------------------------------------
Lehman Brothers
Municipal
Bond Index3 2.55% 4.99% 5.82%
--------------------------------------------------------------------------------
Lipper Other States
Municipal Debt
Funds Average4 2.46% 6.53% 6.69%
--------------------------------------------------------------------------------
*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.
For the 12 months ended July 31, 2006, the total returns on NAV for NXE and NTX
outperformed the return on the Lehman Brothers Municipal Bond Index, while NAZ,
NFZ and NKR trailed the index return. NXE and NTX exceeded the average return
for the Lipper Other States peer group, while NKR performed in line with this
average. NAZ and NFZ lagged this average. Shareholders should note that the
performance of the Lipper Other States category represents the overall average
of returns for funds from 10 different states with a wide variety of municipal
market conditions, making direct comparisons less meaningful.
The major factor impacting the annual performance of these Funds, especially in
relation to the return for the unleveraged Lehman Brothers Municipal Bond Index,
was the Funds' use of financial leverage. Although leverage provides
opportunities for additional income and total returns for common shareholders
when interest rates fall or remain consistently low, this benefit is reduced
when interest rates rise. With the increases in interest rates during this
period, the decline in value of the bonds in the underlying portfolios of these
Funds was exacerbated by the effects of leverage. In addition, the benefits of
leverage
3 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 indexes do not reflect any expenses.
4 The Lipper Other States Municipal Debt Funds category average is calculated
using the returns of all exchange-traded closed-end funds in this category
for each period as follows: 1 year, 46 funds; 5 years, 27 funds; and 10
years, 18 funds. Fund and Lipper returns assume reinvestment of dividends.
8
are tied in part to the short-term rates leveraged Funds pay their
MuniPreferred(R) shareholders. During periods of low short-term rates, these
Funds generally pay lower dividends to their MuniPreferred shareholders, which
can leave more earnings to support common share dividends. Conversely, when
short-term interest rates rise, as they did during this reporting period, the
Funds' borrowing costs also rise, impacting the Funds' income streams and total
returns. Despite the rise in short-term rates over this one-year period, the
Funds' leveraging strategy continued to benefit common shareholders, and we
remain convinced that, over the long term, these benefits should continue. This
is demonstrated by the five-year and ten-year return performance--both absolute
and relative to the Lehman index--of the older Funds in this report.
Other factors influencing the Funds' returns during this period included yield
curve positioning and duration management, allocations to lower-rated credits
(or credit risk), sector weightings, and pre-refunding activity.
As the yield curve continued to flatten over the course of this period, bonds in
the Lehman Brothers municipal index with maturities between two and six years
generally were the most adversely impacted, and they generally underperformed
long-intermediate bonds (those with maturities between 17 and 22 years) and
long-term bonds (those with maturities of at least 22 years). Overall, the
Arizona Funds and NTX were strategically well positioned across the yield curve
during this period. In particular, NTX had good exposure to the
long-intermediate part of the curve, but was slightly underexposed to bonds in
the longest segment.
With bonds rated BBB or lower and non-rated bonds generally outperforming other
credit quality sectors during this period, all of these Funds benefited from
their allocations of lower-quality credits. The performance of this sector was
largely the result of investor demand for the higher yields typically associated
with lower-quality bonds. Among the Arizona Funds, BBB, below investment grade
and non-rated bonds accounted for 11% of NAZ and NFZ, 12% of NXE, and 13% of NKR
as of July 31, 2006. NTX allocated 14% of its portfolio to lower-rated credit
categories that helped to boost the Fund's performance during this period. Among
the lower-rated holdings making positive contributions to the Funds' total
returns for this period were health care (including hospitals) credits and
industrial development bonds, both of which ranked among the top performing
revenue sectors in the Lehman Brothers municipal index, as well as bonds backed
by the 1998 master tobacco settlement agreement (which comprised approximately
1% of the portfolios of NAZ, NXE, and NTX). With some signs of improvement in
the airline industry, NTX's small position in American Airlines bonds also
contributed to this Fund's performance.
9
Housing bonds were also among some of the best performing credits in the Funds'
portfolios, as rising interest rates lessened the incidence and impact of
prepayments and bond calls. Both multi-family and single-family housing bonds
were positive contributors across all of these Funds.
During this period, we continued to see a number of advance refundings,5 which
benefit the Funds through price appreciation and enhanced credit quality. During
this reporting period, advance refundings totaled 7% in NFZ, NXE, and NTX; 8% in
NKR; and 9% in NAZ.
While advance refundings generally enhanced performance for this 12-month
period, the rising interest rate environment meant that the Funds' holdings of
previously pre-refunded bonds tended to underperform the general municipal
market. Among these five Funds, NAZ had the heaviest allocation of these bonds
going into this period. NAZ also was the only one of the Arizona Funds that was
not hedged during this period, when hedging had a positive impact on performance
as the value of the hedges increased as interest rates rose. In NFZ, bonds
issued for a federally guaranteed multi-family housing project that were
restructured by the Federal Housing Administration continued to have a negative
impact on the Fund's performance during this period. In addition, a bond call
affecting one of NTX's multi-family housing holdings--bonds issued by Grand
Prairie Housing Finance Corporation for the Landings of Carrier
project--detracted from this Fund's performance.
HOW WERE THE FUNDS POSITIONED IN TERMS OF CREDIT QUALITY AND BOND CALLS AS OF
JULY 31, 2006?
We continued to believe that maintaining strong credit quality was an important
requirement. As of July 31, 2006, all of these Funds continued to offer
excellent credit quality, with allocations of bonds rated AAA/U.S. guaranteed
and AA ranging from 77% in NKR and 79% in NTX to 80% in NXE, 83% in NFZ, and 84%
in NAZ.
As of July 31, 2006, potential call exposure for the period August 2006 through
the end of 2008 ranged from 4% in NKR and NXE, 6% in NAZ, and 8% in NFZ to 13%
in NTX. The number of actual bond calls in all of these Funds depends largely on
future market interest rates.
5 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.
10
Dividend and Share Price
INFORMATION
As previously noted, all of these Funds use leverage to potentially enhance
opportunities for additional income for common shareholders. During periods of
rising short-term interest rates, as was the case during this reporting period,
the Funds' borrowing costs also rise, reducing the extent of the benefits of
leveraging. 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.
These factors resulted in two monthly dividend reductions in NKR and NXE, three
in NFZ and NTX, and four in NAZ over the 12-month period ended July 31, 2006.
Due to capital gains generated by normal portfolio activity, common shareholders
of the following Funds received capital gains or net ordinary income
distributions at the end of December 2005, as follows:
LONG-TERM CAPITAL GAINS ORDINARY INCOME
(PER SHARE) (PER SHARE)
--------------------------------------------------------------------------------
NFZ $0.0764 --
--------------------------------------------------------------------------------
NKR $0.1058 --
--------------------------------------------------------------------------------
NTX -- $0.0020
--------------------------------------------------------------------------------
These distributions, which represented an important part of the total returns
for NFZ and NKR for this period, were generated by bond calls and sales of
appreciated securities. This had a slight negative impact on the earning power
per common share of these Funds and was a minor factor in the common share
dividend reductions noted above.
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, 2006, NFZ and NTX
had positive UNII balances for both financial statement and tax purposes, while
NAZ,
11
NKR and NXE had positive UNII balances for tax purposes and negative UNII
balances for financial statement purposes.
At the end of the reporting period, the Funds' share prices were trading at
premiums or discounts to their NAVs as shown in the accompanying chart:
7/31/06 12-MONTH AVERAGE
PREMIUM/DISCOUNT PREMIUM/DISCOUNT
--------------------------------------------------------------------------------
NAZ -2.91% +0.49%
--------------------------------------------------------------------------------
NFZ +7.65% +9.26%
--------------------------------------------------------------------------------
NKR +2.47% +2.64%
--------------------------------------------------------------------------------
NXE -5.59% -0.39%
--------------------------------------------------------------------------------
NTX -2.32% -2.86%
--------------------------------------------------------------------------------
12
Nuveen Arizona Premium Income Municipal Fund, Inc.
NAZ
Performance
OVERVIEW As of July 31, 2006
Pie Chart:
CREDIT QUALITY
(as a % of total investments)
AAA/U.S. Guaranteed 74%
AA 10%
A 5%
BBB 8%
BB or Lower 1%
N/R 2%
Bar Chart:
2005-2006 MONTHLY TAX-FREE DIVIDENDS PER SHARE
Aug 0.0645
Sep 0.0615
Oct 0.0615
Nov 0.0615
Dec 0.058
Jan 0.058
Feb 0.058
Mar 0.055
Apr 0.055
May 0.055
Jun 0.051
Jul 0.051
Line Chart:
SHARE PRICE PERFORMANCE
Weekly Closing Price
Past performance is not predictive of future results.
8/01/05 15.44
15.52
15.54
15.55
15.47
15.3
15.5
15.5
15.34
15.17
15.19
15.19
15.32
15.2
15.2
15.26
15.4
15.36
15.28
15.34
15.49
15.4
15.38
15.54
15.62
15.5
15.4
15.48
15.48
15.39
15.29
15.29
15.4
15.3
15.3
15.38
15.47
15.3
15.27
15.27
15.31
15.32
15.21
15.3
15.21
15.32
15.31
15.2
15.23
15.2
15.19
15.18
15.1
15
15
15.07
15
14.77
14.85
14.82
14.69
14.55
14.63
14.49
14.5
14.48
14.5
14.5
14.5
14.51
14.59
14.56
14.37
14.46
14.44
14.45
14.45
14.35
14.27
14.36
14.41
14.44
14.49
14.56
14.45
14.66
14.7
14.77
14.42
14.35
14.36
14.33
14.36
14.12
14.09
14
14.08
14.07
14.01
14.09
14.34
14.53
14.58
14.68
14.67
14.63
14.45
14.45
14.5
14.67
14.5
14.33
14.46
14.15
14.3
14.35
14.25
14.36
14.36
14.34
14.39
14.43
14.37
14.26
14.26
14.29
14.44
14.25
14.24
14.17
14.18
14.19
14.16
14.17
14.1
14.19
14.19
14.29
14.31
14.39
14.3
14.12
14.14
14.17
14.25
14.39
14.35
14.27
14.26
14.13
14.15
14.15
14.18
14.19
14.26
14.18
14.16
14.17
14.19
14.23
14.18
14.2
14.19
14.12
14.19
14.1
14.1
14.11
14.13
14.14
14.13
14.13
14.38
14.31
14.2
14.17
14.23
14.16
14.22
14.13
14.11
14.09
14.03
14.1
14.18
14.04
14.06
13.96
14.18
14.18
14.07
14.05
13.92
13.77
13.75
13.71
13.75
13.66
13.6
13.46
13.5
13.41
13.48
13.45
13.64
13.6
13.6
13.6
13.61
13.63
13.6
13.5
13.54
13.62
13.5
13.65
13.41
13.55
13.64
13.48
13.55
13.55
13.46
13.29
13.36
13.34
13.4
13.26
13.44
13.21
13.16
13.16
13.16
13.2
13.32
13.3
13.35
13.3
13.3
13.3
13.35
13.42
13.35
13.3
13.44
13.58
13.5
13.44
13.46
13.56
13.54
13.45
13.46
7/31/06 13.69
FUND SNAPSHOT
------------------------------------
Common Share Price $13.69
------------------------------------
Common Share
Net Asset Value $14.10
------------------------------------
Premium/(Discount) to NAV -2.91%
------------------------------------
Market Yield 4.47%
------------------------------------
Taxable-Equivalent Yield1 6.53%
------------------------------------
Net Assets Applicable to
Common Shares ($000) $63,024
------------------------------------
Average Effective
Maturity on Securities (Years) 15.04
------------------------------------
Leverage-Adjusted Duration 8.12
------------------------------------
AVERAGE ANNUAL TOTAL RETURN
(Inception 11/19/92)
------------------------------------
ON SHARE PRICE ON NAV
------------------------------------
1-Year -5.62% 1.84%
------------------------------------
5-Year 2.01% 5.19%
------------------------------------
10-Year 5.47% 5.67%
------------------------------------
INDUSTRIES
(as a % of total investments)
------------------------------------
Tax Obligation/Limited 27.3%
------------------------------------
Water and Sewer 16.4%
------------------------------------
U.S. Guaranteed 16.3%
------------------------------------
Education and Civic
Organizations 11.1%
------------------------------------
Utilities 9.5%
------------------------------------
Health Care 8.1%
------------------------------------
Other 11.3%
------------------------------------
1 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 31.5%. When comparing this Fund to investments that generate
qualified dividend income, the Taxable-Equivalent Yield is lower.
13
Nuveen Arizona Dividend Advantage Municipal Fund
NFZ
Performance
OVERVIEW As of July 31, 2006
Pie Chart:
CREDIT QUALITY
(as a % of total investments)
AAA/U.S. Guaranteed 69%
AA 14%
A 6%
BBB 7%
N/R 4%
Bar Chart:
2005-2006 MONTHLY TAX-FREE DIVIDENDS PER SHARE2
Aug 0.0765
Sep 0.073
Oct 0.073
Nov 0.073
Dec 0.069
Jan 0.069
Feb 0.069
Mar 0.069
Apr 0.069
May 0.069
Jun 0.0655
Jul 0.0655
Line Chart:
SHARE PRICE PERFORMANCE
Weekly Closing Price
Past performance is not predictive of future results.
8/01/05 16.07
16.16
16.25
16.25
16.25
16.25
16.21
16.55
16.7
17.25
17.35
17.64
17.85
17.82
17.82
17.75
17.75
17.7
17.6
17.6
17.75
17.75
17.72
17.73
18.25
18.4
18.4
18.4
18.4
18.4
18.15
18
17.7
17.65
17.65
17.56
17.56
17.47
17.47
17.03
16.86
16.86
17.03
16.7
16.7
16.8
16.8
16.81
16.81
16.8
16.7
16.7
16.8
16.8
17
16.9
16.99
17.25
17.38
17.2
17.25
16.7
16.45
16.45
16.55
16.55
16.62
16.58
16.5
16.35
16.45
16.58
16.45
16.45
16.08
16.08
15.7
15.8
15.8
15.78
15.89
15.76
15.95
15.98
16.05
16.3
16.3
16.55
16.59
16.6
16.59
16.6
16.6
16.6
16.4
16.1
16.1
16.48
16.47
16.55
16.59
16.8
17
16.9
16.9
17.01
17.11
17.11
17.2
17.15
17.05
17.1
16.9
17
17.08
17.09
17
16.8
16.8
16.6
16.6
16.51
16.64
16.64
16.64
16.64
16.2
16.1
16.36
16.35
16.35
16.35
16.35
16.52
16.55
16.55
16.42
16.5
16.6
16.55
16.74
16.44
16.3
15.9
16.04
16.39
16.48
16.32
16.38
15.78
15.77
15.85
15.85
16.02
15.76
15.76
15.76
15.76
16
16
16.08
16.08
16.08
16.02
16.03
16.03
16.03
16.03
15.91
15.91
15.86
15.79
15.53
15.39
15.19
15.2
15.18
15.38
15.1
15.1
15.1
15.1
15.1
15.49
15.59
15.4
15.46
15.58
15.8
15.8
15.8
16.1
16.16
16.3
16.5
16.4
16.22
16.22
16.05
16.05
15.98
16
16
16
16.1
16.1
15.85
15.85
15.95
15.9
15.99
15.99
16.04
16.08
16.08
15.87
15.74
15.75
15.66
15.6
15.6
15.6
15.61
15.48
15.5
15.44
15.44
15.44
15.35
15.35
15.35
15.35
15.35
15.35
15.57
15.6
15.6
15.67
15.91
16.25
16.02
16.02
16.02
15.9
15.9
15.9
15.8
15.7
15.8
15.9
15.9
15.9
15.9
7/31/06 15.9
FUND SNAPSHOT
------------------------------------
Common Share Price $15.90
------------------------------------
Common Share
Net Asset Value $14.77
------------------------------------
Premium/(Discount) to NAV 7.65%
------------------------------------
Market Yield 4.94%
------------------------------------
Taxable-Equivalent Yield1 7.21%
------------------------------------
Net Assets Applicable to
Common Shares ($000) $22,862
------------------------------------
Average Effective
Maturity on Securities (Years) 14.56
------------------------------------
Leverage-Adjusted Duration 8.71
------------------------------------
AVERAGE ANNUAL TOTAL RETURN
(Inception 1/30/01)
------------------------------------
ON SHARE PRICE ON NAV
------------------------------------
1-Year 4.54% 2.14%
------------------------------------
5-Year 6.35% 6.89%
------------------------------------
Since
Inception 7.02% 6.78%
------------------------------------
INDUSTRIES
(as a % of total investments)
------------------------------------
Tax Obligation/Limited 34.5%
------------------------------------
Utilities 16.9%
------------------------------------
Tax Obligation/General 14.8%
------------------------------------
U.S. Guaranteed 9.5%
------------------------------------
Water and Sewer 7.8%
------------------------------------
Education and Civic
Organizations 5.0%
------------------------------------
Health Care 5.0%
------------------------------------
Other 6.5%
------------------------------------
1 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 31.5%. When comparing this Fund to investments that generate
qualified dividend income, the Taxable-Equivalent Yield is lower.
2 The Fund paid shareholders a capital gains distribution in December 2005 of
$0.0764 per share.
14
Nuveen Arizona Dividend Advantage Municipal Fund 2
NKR
Performance
OVERVIEW As of July 31, 2006
Pie Chart:
CREDIT QUALITY
(as a % of total investments)
AAA/U.S. Guaranteed 68%
AA 9%
A 10%
BBB 10%
N/R 3%
Bar Chart:
2005-2006 MONTHLY TAX-FREE DIVIDENDS PER SHARE2
Aug 0.072
Sep 0.072
Oct 0.072
Nov 0.072
Dec 0.0685
Jan 0.0685
Feb 0.0685
Mar 0.0685
Apr 0.0685
May 0.0685
Jun 0.0645
Jul 0.0645
Line Chart:
SHARE PRICE PERFORMANCE
Weekly Closing Price
Past performance is not predictive of future results.
8/01/05 16.12
16.31
16.15
16.39
16.39
16.39
16.2
16.16
16.09
16.5
16.45
16.77
16.77
16.77
16.75
16.6
16.37
16.45
16.4
16.33
16.33
16.25
16.17
16.14
16.25
16.25
16.25
16.44
16.44
16.24
16.52
16.69
16.77
16.55
16.55
16.55
16.55
16.39
16.27
16.15
15.86
15.86
16
15.87
15.87
15.87
15.72
15.85
15.85
15.74
15.74
15.6
15.91
16.12
16.12
16.2
16.06
16.3
16.5
16.11
16.11
16.06
15.84
15.74
15.8
15.7
15.72
15.72
15.71
15.59
16.16
16.3
16.2
16.2
16.07
16.19
16.19
16.22
16.1
16.45
16.45
16.25
16.25
15.95
15.63
15.6
15.74
15.63
15.74
15.74
15.6
15.6
15.29
15.13
14.95
14.94
14.83
15.25
15.05
14.93
15.2
15.52
15.3
14.97
15.35
15.5
15.54
15.54
15.46
15.35
15.39
15.4
15.65
15.99
15.8
15.9
15.9
15.9
15.63
15.63
15.74
15.85
15.75
15.75
15.61
15.64
15.51
15.5
15.55
15.55
15.55
15.5
15.5
15.55
15.64
15.67
15.58
15.69
15.57
15.64
15.74
15.74
15.65
15.52
15.65
15.68
15.85
15.88
15.48
15.41
15.58
15.48
15.54
15.53
15.53
15.45
15.31
15.29
15.29
15.21
15.24
15.21
15.13
15.19
15.2
15.2
15.55
15
15.1
15.15
15.14
14.92
14.95
14.99
14.99
14.93
14.94
15.2
15.4
15.15
14.95
14.95
14.95
15.06
15.06
15.25
15.25
15.16
15.3
15.3
15.3
15.22
15.33
15.35
14.96
15.16
15.35
15.27
15.18
14.96
15.3
15.2
15.2
15.45
15.5
15.5
15.35
15.05
15.05
15
14.98
15.14
15.14
15.38
15.32
15.6
15.35
15.35
15.15
15.22
15.14
15.1
14.92
14.91
14.91
14.86
14.83
14.89
15.1
15.1
14.95
14.76
14.76
14.82
14.75
14.75
14.9
14.9
14.9
15.14
15.14
15.08
15.17
15.16
15.18
15.22
15.36
15.23
15.23
15.25
15.24
15.27
15.27
7/31/06 15.37
FUND SNAPSHOT
------------------------------------
Common Share Price $15.37
------------------------------------
Common Share
Net Asset Value $15.00
------------------------------------
Premium/(Discount) to NAV 2.47%
------------------------------------
Market Yield 5.04%
------------------------------------
Taxable-Equivalent Yield1 7.36%
------------------------------------
Net Assets Applicable to
Common Shares ($000) $36,465
------------------------------------
Average Effective
Maturity on Securities (Years) 14.58
------------------------------------
Leverage-Adjusted Duration 8.55
------------------------------------
AVERAGE ANNUAL TOTAL RETURN
(Inception 3/25/02)
------------------------------------
ON SHARE PRICE ON NAV
------------------------------------
1-Year 0.82% 2.49%
------------------------------------
Since
Inception 6.63% 7.16%
------------------------------------
INDUSTRIES
(as a % of total investments)
------------------------------------
Tax Obligation/Limited 28.3%
------------------------------------
Tax Obligation/General 22.7%
------------------------------------
Health Care 10.3%
------------------------------------
U.S. Guaranteed 9.5%
------------------------------------
Water and Sewer 7.8%
------------------------------------
Education and Civic
Organizations 7.3%
------------------------------------
Housing/Multifamily 5.4%
------------------------------------
Other 8.7%
------------------------------------
1 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 31.5%. When comparing this Fund to investments that generate
qualified dividend income, the Taxable-Equivalent Yield is lower.
2 The Fund paid shareholders a capital gains distribution in December 2005 of
$0.1058 per share.
15
Nuveen Arizona Dividend Advantage Municipal Fund 3
NXE
Pie Chart:
CREDIT QUALITY
(as a % of total investments)
AAA/U.S. Guaranteed 70%
AA 10%
A 8%
BBB 8%
N/R 4%
Bar Chart:
2005-2006 MONTHLY TAX-FREE DIVIDENDS PER SHARE
Aug 0.0635
Sep 0.0635
Oct 0.0635
Nov 0.0635
Dec 0.0605
Jan 0.0605
Feb 0.0605
Mar 0.0605
Apr 0.0605
May 0.0605
Jun 0.0565
Jul 0.0565
Line Chart:
SHARE PRICE PERFORMANCE
Weekly Closing Price
Past performance is not predictive of future results.
8/01/05 14.45
14.33
14.3
14.39
14.16
14.22
14.08
14.21
14.11
14.18
14.17
14.24
14.29
14.39
14.47
14.51
14.52
14.63
14.85
14.75
15.1
15.1
14.8
15
15.1
15
15
14.81
15.1
14.95
15.01
15.26
15.05
14.7
14.6
14.63
14.63
14.63
14.63
14.68
14.75
14.8
14.65
14.78
14.78
14.78
14.78
14.89
14.87
15.13
14.8
14.73
14.66
14.66
14.53
14.6
14.98
14.99
14.8
14.9
14.9
14.72
14.95
14.86
14.99
14.95
14.7
14.74
14.4
14.35
14.5
14.3
14.15
14.18
14.17
14.48
14.49
14.5
14.5
14.5
14.5
14.62
14.67
14.4
14.52
14.42
14.55
14.6
14.61
14.94
14.98
14.98
14.97
15.02
14.82
14.91
14.91
14.95
14.95
15.01
14.95
14.73
14.76
14.9
14.9
15.05
15.05
15.05
15.02
14.95
15.05
15.05
15.11
14.8
14.71
14.44
14.44
14.45
14.5
14.43
14.42
14.5
14.41
14.16
14.12
14.25
14.15
14.33
14.35
14.36
14.2
14.2
14.32
14.45
14.25
14.27
14.29
14.29
14.47
14.47
14.56
14.4
14.45
14.44
14.4
14.58
14.65
14.45
14.62
14.36
14.24
14.05
14.05
14.43
14.43
14.44
14.26
14.5
14.5
14.5
14.36
14.23
14.34
14.23
14.4
14.4
14.25
14.2
14.18
14.3
14.38
14.48
14.92
14.79
14.3
14.6
14.6
14.95
14.7
14.58
14.35
14.33
14.48
14.19
14.19
14.04
14.05
14.2
14.5
14.5
14
14.1
14.17
14.18
14.3
14.3
14.3
14.11
13.76
13.85
13.95
13.79
13.56
13.67
13.7
13.7
13.7
13.52
13.65
13.6
13.65
13.63
13.77
14
13.75
14
13.89
13.8
13.65
13.68
13.58
13.7
13.53
13.8
13.7
13.35
13.7
13.7
13.56
13.51
13.51
13.5
13.51
13.59
13.62
13.78
13.57
13.59
13.59
13.7
13.7
13.46
13.45
13.41
13.43
13.62
13.69
13.64
13.58
13.6
13.6
13.58
13.58
7/31/06 13.52
FUND SNAPSHOT
------------------------------------
Common Share Price $13.52
------------------------------------
Common Share
Net Asset Value $14.32
------------------------------------
Premium/(Discount) to NAV -5.59%
------------------------------------
Market Yield 5.01%
------------------------------------
Taxable-Equivalent Yield1 7.31%
------------------------------------
Net Assets Applicable to
Common Shares ($000) $43,913
------------------------------------
Average Effective
Maturity on Securities (Years) 15.79
------------------------------------
Leverage-Adjusted Duration 7.76
------------------------------------
AVERAGE ANNUAL TOTAL RETURN
(Inception 9/25/02)
------------------------------------
ON SHARE PRICE ON NAV
------------------------------------
1-Year -1.80% 3.03%
------------------------------------
Since
Inception 2.76% 5.44%
------------------------------------
INDUSTRIES
(as a % of total investments)
------------------------------------
Tax Obligation/Limited 26.7%
------------------------------------
Tax Obligation/General 13.3%
------------------------------------
Health Care 11.9%
------------------------------------
Education and Civic
Organizations 10.8%
------------------------------------
Transportation 9.1%
------------------------------------
Utilities 8.2%
------------------------------------
Water and Sewer 7.5%
------------------------------------
U.S. Guaranteed 7.1%
------------------------------------
Other 5.4%
------------------------------------
1 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 31.5%. When comparing this Fund to investments that generate
qualified dividend income, the Taxable-Equivalent Yield is lower.
16
Nuveen Texas Quality Income Municipal Fund
NTX
Performance
OVERVIEW As of July 31, 2006
Pie Chart:
CREDIT QUALITY
(as a % of total investments)
AAA/U.S. Guaranteed 68%
AA 11%
A 7%
BBB 12%
BB or Lower 2%
Bar Chart:
2005-2006 MONTHLY TAX-FREE DIVIDENDS PER SHARE2
Aug 0.073
Sep 0.0695
Oct 0.0695
Nov 0.0695
Dec 0.0695
Jan 0.0695
Feb 0.0695
Mar 0.066
Apr 0.066
May 0.066
Jun 0.0635
Jul 0.0635
Line Chart:
SHARE PRICE PERFORMANCE
Weekly Closing Price
Past performance is not predictive of future results.
8/01/05 16.2
16
15.95
15.84
15.84
15.69
15.63
15.48
15.3
15.45
15.48
15.55
15.59
15.68
15.61
15.61
15.6
15.61
15.56
15.52
15.61
15.63
15.72
15.7
15.64
15.61
15.51
15.59
15.67
15.58
15.61
15.57
15.4
15.4
15.43
15.4
15.29
15.2
15.07
15.09
14.9
14.92
14.87
14.99
14.97
14.99
14.8
14.78
14.64
14.66
14.59
14.55
14.28
14.29
14.27
14.03
14.07
14.12
14.37
14.41
14.5
14.29
14.38
14.42
14.37
14.45
14.4
14.38
14.46
14.37
14.37
14.4
14.27
14.21
14.19
14.17
14.24
14.22
14.26
14.35
14.4
14.39
14.45
14.44
14.44
14.41
14.45
14.39
14.43
14.4
14.42
14.55
14.43
14.44
14.46
14.48
14.55
14.5
14.45
14.44
14.45
14.45
14.5
14.57
14.55
14.49
14.6
14.6
14.69
14.85
14.76
14.87
14.81
14.92
14.77
14.74
14.75
14.69
14.64
14.65
14.76
14.75
14.82
14.77
14.8
14.91
15.07
14.99
15.01
15.02
15.12
15.05
15.02
15
15.12
15.15
15.13
15.1
15.09
15.21
15.35
15.12
15.15
15.11
15.14
15.14
15.23
15.28
15.13
15.11
15
14.97
14.89
15.04
14.96
14.9
14.85
14.82
14.93
14.95
14.87
14.93
14.9
14.91
14.93
15.05
14.94
14.94
14.91
14.99
15.01
15.08
14.96
15.12
14.96
14.93
14.91
14.85
14.95
14.99
14.91
14.9
14.87
14.96
14.92
14.99
15
14.98
15.04
15.04
15.1
14.99
14.98
14.84
14.86
14.85
14.84
14.83
14.61
14.48
14.55
14.51
14.52
14.66
14.52
14.52
14.52
14.48
14.48
14.39
14.36
14.42
14.46
14.43
14.36
14.33
14.37
14.37
14.43
14.38
14.33
14.4
14.2
14.25
14.25
14.19
14.02
14.2
14.05
14.03
14
13.97
14.11
14.2
14.35
14.33
14.49
14.46
14.46
14.47
14.32
14.29
14.14
14.07
14.09
14.11
14.12
14.14
14.19
14.19
14.38
14.67
14.95
7/31/06 14.71
FUND SNAPSHOT
------------------------------------
Common Share Price $14.71
------------------------------------
Common Share
Net Asset Value $15.06
------------------------------------
Premium/(Discount) to NAV -2.32%
------------------------------------
Market Yield 5.18%
------------------------------------
Taxable-Equivalent Yield1 7.19%
------------------------------------
Net Assets Applicable to
Common Shares ($000) $143,009
------------------------------------
Average Effective
Maturity on Securities (Years) 16.39
------------------------------------
Leverage-Adjusted Duration 7.49
------------------------------------
AVERAGE ANNUAL TOTAL RETURN
(Inception 10/17/91)
------------------------------------
ON SHARE PRICE ON NAV
------------------------------------
1-Year -4.03% 2.77%
------------------------------------
5-Year 6.39% 6.16%
------------------------------------
10-Year 6.41% 6.35%
------------------------------------
INDUSTRIES
(as a % of total investments)
------------------------------------
Tax Obligation/General 28.2%
------------------------------------
Health Care 13.3%
------------------------------------
U.S. Guaranteed 12.5%
------------------------------------
Education and Civic
Organizations 10.0%
------------------------------------
Water and Sewer 7.4%
------------------------------------
Utilities 6.6%
------------------------------------
Transportation 4.4%
------------------------------------
Long-Term Care 4.1%
------------------------------------
Other 13.5%
------------------------------------
1 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.
2 The Fund paid shareholders a net ordinary income distribution in December
2005 of $.0020 per share.
17
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,
2006, 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 periods indicated therein.
These financial statements and financial highlights are the responsibility of
the Funds' management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. 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, 2006, by correspondence with the custodian and
brokers or by other appropriate auditing procedures where replies from brokers
were not received. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial 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, 2006, 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 periods
indicated therein in conformity with U.S. generally accepted accounting
principles.
/s/ Ernst & Young LLP
Chicago, Illinois
September 21, 2006
18
Nuveen Arizona Premium Income Municipal Fund, Inc. (NAZ)
Portfolio of
INVESTMENTS July 31, 2006
PRINCIPAL OPTIONAL CALL
AMOUNT (000) DESCRIPTION (1) PROVISIONS (2) RATINGS (3) VALUE
------------------------------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES - 1.5% (1.0% OF TOTAL INVESTMENTS)
$ 900 Puerto Rico, The Children's Trust Fund, Tobacco Settlement 5/12 at 100.00 BBB $ 921,483
Asset-Backed Refunding Bonds, Series 2002, 5.375%, 5/15/33
------------------------------------------------------------------------------------------------------------------------------------
EDUCATION AND CIVIC ORGANIZATIONS - 16.2% (11.1% OF TOTAL INVESTMENTS)
1,000 Arizona State University, Certificates of Participation, 7/12 at 100.00 AAA 1,067,700
Series 2002, 5.375%, 7/01/19 - MBIA Insured
1,000 Arizona State University, System Revenue Bonds, Series 2002, 7/12 at 100.00 AAA 1,033,240
5.000%, 7/01/25 - FGIC Insured
Arizona State University, System Revenue Bonds, Series 2005:
2,455 5.000%, 7/01/20 - AMBAC Insured 7/15 at 100.00 AAA 2,580,156
1,500 5.000%, 7/01/21 - AMBAC Insured 7/15 at 100.00 AAA 1,573,065
1,250 Glendale Industrial Development Authority, Arizona, Revenue 5/11 at 101.00 A- 1,324,163
Bonds, Midwestern University, Series 2001A, 5.875%, 5/15/31
1,050 Northern Arizona University, System Revenue Bonds, 6/12 at 100.00 AAA 1,073,100
Series 2002, 5.000%, 6/01/34 - FGIC Insured
1,500 Tempe Industrial Development Authority, Arizona, Lease 7/13 at 100.00 AAA 1,540,950
Revenue Bonds, Arizona State University Foundation Project,
Series 2003, 5.000%, 7/01/34 - AMBAC Insured
------------------------------------------------------------------------------------------------------------------------------------
9,755 Total Education and Civic Organizations 10,192,374
------------------------------------------------------------------------------------------------------------------------------------
HEALTH CARE - 11.8% (8.1% OF TOTAL INVESTMENTS)
800 Arizona Health Facilities Authority, Hospital Revenue Bonds, 7/10 at 101.00 A- 881,640
Catholic Healthcare West, Series 1999A, 6.625%, 7/01/20
1,450 Arizona Health Facilities Authority, Hospital System Revenue 11/09 at 100.00 Baa3 1,510,509
Bonds, Phoenix Children's Hospital, Series 1999A,
6.125%, 11/15/22
675 Glendale Industrial Development Authority, Arizona, Revenue 12/15 at 100.00 BBB 672,408
Bonds, John C. Lincoln Health Network, Series 2005B,
5.000%, 12/01/37
550 Maricopa County Industrial Development Authority, Arizona, 5/16 at 100.00 AA 562,138
Health Facilities Revenue Bonds, Mayo Clinic, Series 2006,
5.000%, 11/15/36
2,150 Maricopa County Industrial Development Authority, Arizona, 7/14 at 100.00 A- 2,227,680
Health Facility Revenue Bonds, Catholic Healthcare West,
Series 2004A, 5.375%, 7/01/23
515 Puerto Rico Industrial, Tourist, Educational, Medical and 11/10 at 101.00 AA 564,533
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 6/08 at 101.00 N/R 1,005,615
Revenue Bonds, Winslow Memorial Hospital, Series 1998,
5.500%, 6/01/22
------------------------------------------------------------------------------------------------------------------------------------
7,195 Total Health Care 7,424,523
------------------------------------------------------------------------------------------------------------------------------------
HOUSING/MULTIFAMILY - 6.9% (4.7% OF TOTAL INVESTMENTS)
400 Phoenix Industrial Development Authority, Arizona, GNMA 6/11 at 102.00 Aaa 416,996
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 530,032
Collateralized Multifamily Housing Revenue Bonds, Park Lee
Apartments, Series 2004A, 5.050%, 10/20/44 (Alternative
Minimum Tax)
3,215 Tucson Industrial Development Authority, Arizona, Senior 7/10 at 101.00 AA 3,394,719
Living Facilities Revenue Bonds, Christian Care Project,
Series 2000A, 5.625%, 7/01/20 - RAAI Insured
------------------------------------------------------------------------------------------------------------------------------------
4,145 Total Housing/Multifamily 4,341,747
------------------------------------------------------------------------------------------------------------------------------------
19
Nuveen Arizona Premium Income Municipal Fund, Inc. (NAZ) (continued)
Portfolio of INVESTMENTS July 31, 2006
PRINCIPAL OPTIONAL CALL
AMOUNT (000) DESCRIPTION (1) PROVISIONS (2) RATINGS (3) VALUE
------------------------------------------------------------------------------------------------------------------------------------
INDUSTRIALS - 2.1% (1.5% OF TOTAL INVESTMENTS)
$ 1,345 Yavapai County Industrial Development Authority, Arizona, No Opt. Call BBB $ 1,347,461
Solid Waste Disposal Revenue Bonds, Waste Management
Inc., Series 2003B, 4.450%, 3/01/28 (Mandatory put 3/01/08)
(Alternative Minimum Tax)
------------------------------------------------------------------------------------------------------------------------------------
LONG-TERM CARE - 0.5% (0.4% OF TOTAL INVESTMENTS)
345 Mohave County Industrial Development Authority, Arizona, 11/06 at 103.00 AAA 355,830
GNMA Collateralized Healthcare Revenue Refunding Bonds,
Chris Ridge and Silver Village Projects, Series 1996,
6.375%, 11/01/31
------------------------------------------------------------------------------------------------------------------------------------
TAX OBLIGATION/GENERAL - 5.5% (3.7% OF TOTAL INVESTMENTS)
630 Maricopa County Union High School District 210 Phoenix, 7/16 at 100.00 AAA 660,347
Arizona, General Obligation Bonds, Series 2006C,
5.000%, 7/01/24 - MBIA Insured
1,525 Maricopa County Union High School District 210, Phoenix, 7/14 at 100.00 AAA 1,596,462
Arizona, General Obligation Bonds, Series 2004A,
5.000%, 7/01/21 - FSA Insured
330 Puerto Rico, General Obligation and Public Improvement 7/11 at 100.00 BBB 339,969
Bonds, Series 2001A, 5.375%, 7/01/28
750 Puerto Rico, General Obligation and Public Improvement No Opt. Call AAA 843,615
Bonds, Series 2002A, 5.500%, 7/01/19 - FGIC Insured
------------------------------------------------------------------------------------------------------------------------------------
3,235 Total Tax Obligation/General 3,440,393
------------------------------------------------------------------------------------------------------------------------------------
TAX OBLIGATION/LIMITED - 39.9% (27.3% OF TOTAL INVESTMENTS)
2,000 Arizona School Facilities Board, School Improvement Revenue 7/14 at 100.00 AAA 2,223,960
Bonds, Series 2004A, 5.750%, 7/01/18 - AMBAC Insured
Arizona Tourism and Sports Authority, Tax Revenue Bonds,
Multipurpose Stadium Facility Project, Series 2003A:
1,000 5.375%, 7/01/20 - MBIA Insured 7/13 at 100.00 Aaa 1,077,010
1,000 5.375%, 7/01/21 - MBIA Insured 7/13 at 100.00 Aaa 1,069,860
Bullhead City, Arizona, Special Assessment Bonds, Parkway
District Improvements, Series 1993:
720 6.100%, 1/01/08 1/07 at 100.00 Baa2 726,559
775 6.100%, 1/01/09 1/07 at 100.00 Baa2 781,866
482 Estrella Mountain Ranch Community Facilities District, 7/10 at 102.00 N/R 530,321
Goodyear, Arizona, Special Assessment Lien Bonds,
Series 2001A, 7.875%, 7/01/25
Greater Arizona Development Authority, Infrastructure
Revenue Bonds, Series 2006A:
740 5.000%, 8/01/23 - MBIA Insured 8/16 at 100.00 AAA 774,084
875 5.000%, 8/01/25 - MBIA Insured 8/16 at 100.00 AAA 912,424
1,280 Greater Arizona Development Authority, Infrastructure 8/16 at 100.00 AAA 1,342,118
Revenue Bonds, Series 2006, 5.000%, 8/01/22 - MBIA Insured
575 Marana Municipal Property Corporation, Arizona, Revenue 7/13 at 100.00 AAA 591,043
Bonds, Series 2003, 5.000%, 7/01/28 - AMBAC Insured
3,400 Maricopa County Stadium District, Arizona, Revenue 6/12 at 100.00 Aaa 3,634,497
Refunding 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 3,547,730
Series 2005, 5.000%, 7/01/24 - FSA Insured
2,000 Phoenix Civic Improvement Corporation, Arizona, Subordinate 7/13 at 100.00 AAA 2,081,460
Lien Excise Tax Revenue Bonds, Series 2003A, 5.000%, 7/01/21 -
MBIA Insured
1,200 Prescott Valley Municipal Property Corporation, Arizona, 1/13 at 100.00 AAA 1,232,064
Municipal Facilities Revenue Bonds, Series 2003,
5.000%, 1/01/27 - FGIC Insured
1,000 Puerto Rico Public Buildings Authority, Guaranteed 7/12 at 100.00 BBB 1,017,810
Government 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 AAA 1,672,726
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 1,444,581
5.250%, 7/01/20 - AMBAC Insured
500 Tucson, Arizona, Certificates of Participation, Series 2000, 7/08 at 100.00 AAA 515,795
5.700%, 7/01/20 - MBIA Insured
------------------------------------------------------------------------------------------------------------------------------------
23,907 Total Tax Obligation/Limited 25,175,908
------------------------------------------------------------------------------------------------------------------------------------
20
PRINCIPAL OPTIONAL CALL
AMOUNT (000) DESCRIPTION (1) PROVISIONS (2) RATINGS (3) VALUE
------------------------------------------------------------------------------------------------------------------------------------
U.S. GUARANTEED - 23.9% (16.3% OF TOTAL INVESTMENTS) (4)
$ 1,000 Arizona Health Facilities Authority, Hospital System Revenue 12/10 at 102.00 BBB (4) $ 1,140,420
Bonds, John C. Lincoln Health Network, Series 2000,
7.000%, 12/01/25 (Pre-refunded 12/01/10)
700 Arizona School Facilities Board, School Improvement Revenue 7/13 at 100.00 AAA 747,355
Bonds, Series 2003, 5.000%, 7/01/21 (Pre-refunded 7/01/13)
1,250 Maricopa County Industrial Development Authority, Arizona, No Opt. Call AAA 1,518,475
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 1/10 at 101.00 AAA 3,207,570
Bonds, 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 7/10 at 101.00 AAA 2,177,060
Lien Wastewater System Revenue Bonds, Series 2000,
6.000%, 7/01/24 (Pre-refunded 7/01/10) - FGIC Insured
Phoenix Industrial Development Authority, Arizona, Government
Office Lease Revenue Bonds, Capitol Mall LLC, Series 2000:
700 5.375%, 9/15/22 (Pre-refunded 9/15/10) - AMBAC Insured 9/10 at 100.00 AAA 742,077
2,000 5.500%, 9/15/27 (Pre-refunded 9/15/10) - AMBAC Insured 9/10 at 100.00 AAA 2,129,680
1,000 Puerto Rico Highway and Transportation Authority, Highway 7/10 at 101.00 BBB+ (4) 1,105,800
Revenue Bonds, Series 2000B, 6.500%, 7/01/27
(Pre-refunded 7/01/10)
1,500 Scottsdale Industrial Development Authority, Arizona, Hospital 12/11 at 101.00 A3 (4) 1,648,770
Revenue Bonds, Scottsdale Healthcare, Series 2001,
5.800%, 12/01/31 (Pre-refunded 12/01/11)
600 Tucson, Arizona, Junior Lien Street and Highway User 7/10 at 100.00 AAA 626,286
Revenue Bonds, Series 2000E, 5.000%, 7/01/18
(Pre-refunded 7/01/10) - FGIC Insured
------------------------------------------------------------------------------------------------------------------------------------
13,750 Total U.S. Guaranteed 15,043,493
------------------------------------------------------------------------------------------------------------------------------------
UTILITIES - 13.9% (9.5% OF TOTAL INVESTMENTS)
1,000 Arizona Power Authority, Special Obligation Power Resource No Opt. Call AA 1,088,280
Revenue Refunding Crossover Bonds, Hoover Project,
Series 2001, 5.250%, 10/01/15
1,000 Coconino County, Arizona, Pollution Control Revenue Bonds, 10/06 at 102.00 B- 1,016,370
Nevada Power Company Project, Series 1996,
6.375%, 10/01/36 (Alternative Minimum Tax)
765 Pima County Industrial Development Authority, Arizona, 1/07 at 100.50 AAA 767,861
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 AAA 2,252,937
Series 2005RR, 5.000%, 7/01/27 - XLCA Insured
530 Salt River Project Agricultural Improvement and Power 1/13 at 100.00 AA 550,230
District, Arizona, Electric System Revenue Bonds,
Series 2002B, 5.000%, 1/01/22
Salt River Project Agricultural Improvement and Power District,
Arizona, Electric System Revenue Refunding Bonds, Series 2002A:
2,000 5.125%, 1/01/27 1/12 at 101.00 Aa1 2,077,720
1,000 5.000%, 1/01/31 1/12 at 101.00 Aa1 1,027,840
------------------------------------------------------------------------------------------------------------------------------------
8,465 Total Utilities 8,781,238
------------------------------------------------------------------------------------------------------------------------------------
21
PRINCIPAL OPTIONAL CALL
AMOUNT (000) DESCRIPTION (1) PROVISIONS (2) RATINGS (3) VALUE
------------------------------------------------------------------------------------------------------------------------------------
WATER AND SEWER - 23.9% (16.4% OF TOTAL INVESTMENTS)
$ 1,825 Arizona Water Infrastructure Finance Authority, Water 10/14 at 100.00 AAA $ 1,923,021
Quality Revenue Bonds, Series 2004A, 5.000%, 10/01/19
1,005 Cottonwood, Arizona, Senior Lien Water System Revenue 7/14 at 100.00 AAA 1,041,170
Bonds, Municipal Property Corporation, Series 2004,
5.000%, 7/01/24 - XLCA Insured
3,500 Glendale, Arizona, Water and Sewer Revenue Bonds, 7/13 at 100.00 AAA 3,610,250
Subordinate Lien, Series 2003, 5.000%, 7/01/28 -
AMBAC Insured
600 Oro Valley Municipal Property Corporation, Arizona, Senior 7/13 at 100.00 AAA 622,260
Lien Water Revenue Bonds, Series 2003, 5.000%, 7/01/23 -
MBIA Insured
1,415 Phoenix Civic Improvement Corporation, Arizona, Junior Lien 7/14 at 100.00 AAA 1,471,671
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 AAA 1,546,770
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 AAA 3,445,581
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 AAA 1,416,075
Water System Revenue Refunding Bonds, Series 2001,
5.500%, 7/01/21 - FGIC Insured
------------------------------------------------------------------------------------------------------------------------------------
14,390 Total Water and Sewer 15,076,798
------------------------------------------------------------------------------------------------------------------------------------
$ 87,432 Total Investments (cost $89,045,724) - 146.1% 92,101,248
=============-----------------------------------------------------------------------------------------------------------------------
Other Assets Less Liabilities - 1.5% 922,447
--------------------------------------------------------------------------------------------------------------------
Preferred Shares, at Liquidation Value - (47.6)% (30,000,000)
--------------------------------------------------------------------------------------------------------------------
Net Assets Applicable to Common Shares - 100% $ 63,023,695
====================================================================================================================
(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 or Moody's rating. Ratings below BBB
by Standard & Poor's Group or Baa by Moody's Investor
Service, Inc. are considered to be below investment
grade.
(4) 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.
N/R Not rated.
(ETM) Escrowed to maturity.
See accompanying notes to financial statements.
22
Nuveen Arizona Dividend Advantage Municipal Fund (NFZ)
Portfolio of
INVESTMENTS July 31, 2006
PRINCIPAL OPTIONAL CALL
AMOUNT (000) DESCRIPTION (1) PROVISIONS (2) RATINGS (3) VALUE
------------------------------------------------------------------------------------------------------------------------------------
EDUCATION AND CIVIC ORGANIZATIONS - 7.2% (5.0% OF TOTAL INVESTMENTS)
$ 1,000 Puerto Rico Industrial, Tourist, Educational, Medical and 2/09 at 101.00 BBB- $ 1,015,150
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 306,216
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 9/14 at 100.00 BBB- 315,779
School Revenue Bonds, Arizona Agribusiness and Equine
Center Charter School, Series 2004A, 6.125%, 9/01/34
------------------------------------------------------------------------------------------------------------------------------------
1,605 Total Education and Civic Organizations 1,637,145
------------------------------------------------------------------------------------------------------------------------------------
HEALTH CARE - 7.1% (5.0% OF TOTAL INVESTMENTS)
365 Arizona Health Facilities Authority, Hospital Revenue Bonds, 7/10 at 101.00 A- 402,248
Catholic Healthcare West, Series 1999A, 6.625%, 7/01/20
250 Glendale Industrial Development Authority, Arizona, Revenue 12/15 at 100.00 BBB 249,040
Bonds, John C. Lincoln Health Network, Series 2005B,
5.000%, 12/01/37
200 Maricopa County Industrial Development Authority, Arizona, 5/16 at 100.00 AA 204,414
Health Facilities Revenue Bonds, Mayo Clinic, Series 2006,
5.000%, 11/15/36
750 Maricopa County Industrial Development Authority, Arizona, 7/14 at 100.00 A- 777,098
Health Facility Revenue Bonds, Catholic Healthcare West,
Series 2004A, 5.375%, 7/01/23
------------------------------------------------------------------------------------------------------------------------------------
1,565 Total Health Care 1,632,800
------------------------------------------------------------------------------------------------------------------------------------
HOUSING/MULTIFAMILY - 6.6% (4.7% OF TOTAL INVESTMENTS)
1,000 Maricopa County Industrial Development Authority, Arizona, 7/09 at 102.00 Aaa 1,017,620
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 286,685
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 205,012
Collateralized Multifamily Housing Revenue Bonds, Park Lee
Apartments, Series 2004A, 5.050%, 10/20/44 (Alternative
Minimum Tax)
------------------------------------------------------------------------------------------------------------------------------------
1,480 Total Housing/Multifamily 1,509,317
------------------------------------------------------------------------------------------------------------------------------------
HOUSING/SINGLE FAMILY - 0.3% (0.2% OF TOTAL INVESTMENTS)
65 Pima County Industrial Development Authority, Arizona, 11/10 at 101.00 AAA 66,699
FNMA/GNMA Single Family Mortgage Revenue Bonds,
Series 2001A-4, 5.050%, 5/01/17
------------------------------------------------------------------------------------------------------------------------------------
INDUSTRIALS - 2.2% (1.6% OF TOTAL INVESTMENTS)
510 Yavapai County Industrial Development Authority, Arizona, No Opt. Call BBB 510,933
Solid Waste Disposal Revenue Bonds, Waste Management
Inc., Series 2003B, 4.450%, 3/01/28 (Mandatory put 3/01/08)
(Alternative Minimum Tax)
------------------------------------------------------------------------------------------------------------------------------------
TAX OBLIGATION/GENERAL - 21.0% (14.8% OF TOTAL INVESTMENTS)
1,000 Maricopa County Unified School District 11, Peoria, Arizona, 7/15 at 100.00 AAA 1,054,770
General Obligation Bonds, Second Series 2005,
5.000%, 7/01/20 - FGIC Insured
240 Maricopa County Union High School District 210 Phoenix, 7/16 at 100.00 AAA 251,561
Arizona, General Obligation Bonds, Series 2006C,
5.000%, 7/01/24 - MBIA Insured
1,020 Tucson, Arizona, General Obligation Refunding Bonds, 7/07 at 100.00 AA 1,028,915
Series 1997, 5.000%, 7/01/19
2,340 Yuma & La Paz Counties Community College District, Arizona, 7/16 at 100.00 AAA 2,468,138
General Obligation Bonds, Series 2006, 5.000%, 7/01/21 -
MBIA Insured
------------------------------------------------------------------------------------------------------------------------------------
4,600 Total Tax Obligation/General 4,803,384
------------------------------------------------------------------------------------------------------------------------------------
23
Nuveen Arizona Dividend Advantage Municipal Fund (NFZ) (continued)
Portfolio of INVESTMENTS July 31, 2006
PRINCIPAL OPTIONAL CALL
AMOUNT (000) DESCRIPTION (1) PROVISIONS (2) RATINGS (3) VALUE
------------------------------------------------------------------------------------------------------------------------------------
TAX OBLIGATION/LIMITED - 49.0% (34.5% OF TOTAL INVESTMENTS)
$ 2,750 Arizona School Facilities Board, School Improvement Revenue 7/14 at 100.00 AAA $ 3,057,946
Bonds, Series 2004A, 5.750%, 7/01/18 - AMBAC Insured
1,000 Arizona Tourism and Sports Authority, Tax Revenue Bonds, 7/13 at 100.00 Aaa 1,069,860
Multipurpose Stadium Facility Project, Series 2003A,
5.375%, 7/01/21 - MBIA Insured
98 Centerra Community Facilities District, Goodyear, Arizona, 7/15 at 100.00 N/R 97,807
General Obligation Bonds, Series 2005, 5.500%, 7/15/29
187 Estrella Mountain Ranch Community Facilities District, 7/10 at 102.00 N/R 205,747
Goodyear, Arizona, Special Assessment Lien Bonds,
Series 2001A, 7.875%, 7/01/25
275 Greater Arizona Development Authority, Infrastructure Revenue 8/16 at 100.00 AAA 287,666
Bonds, Series 2006A, 5.000%, 8/01/23 - MBIA Insured
1,000 Greater Arizona Development Authority, Infrastructure Revenue 8/16 at 100.00 AAA 1,048,530
Bonds, Series 2006, 5.000%, 8/01/22 - MBIA Insured
1,180 Marana Municipal Property Corporation, Arizona, Revenue 7/13 at 100.00 AAA 1,223,778
Bonds, Series 2003, 5.000%, 7/01/23 - AMBAC Insured
900 Phoenix Industrial Development Authority, Arizona, Government 3/12 at 100.00 AAA 957,312
Bonds, Capitol Mall LLC II, Series 2001, 5.250%, 9/15/16 -
AMBAC Insured
680 Pinal County Industrial Development Authority, Arizona, No Opt. Call A 690,588
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 AAA 623,376
Facilities Excise Tax Revenue Bonds, Series 2005,
5.000%, 7/01/25 - XLCA Insured
1,000 Tempe, Arizona, Excise Tax Revenue Bonds, Series 2004, 7/14 at 100.00 AAA 1,070,060
5.250%, 7/01/20 - AMBAC Insured
500 Vistancia Community Facilities District, Arizona, Restricted 7/15 at 100.00 N/R 512,105
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 366,900
Assessment Revenue Bonds, Series 2005, 6.000%, 7/01/30
------------------------------------------------------------------------------------------------------------------------------------
10,525 Total Tax Obligation/Limited 11,211,675
------------------------------------------------------------------------------------------------------------------------------------
U.S. GUARANTEED - 13.5% (9.5% OF TOTAL INVESTMENTS) (4)
550 Arizona Health Facilities Authority, Hospital System Revenue 12/10 at 102.00 BBB (4) 624,750
Bonds, John C. Lincoln Health Network, Series 2000,
6.875%, 12/01/20 (Pre-refunded 12/01/10)
1,300 Maricopa County Industrial Development Authority, Arizona, 6/07 at 102.00 A (4) 1,353,716
Education Revenue Bonds, Horizon Community Learning
Center Project, Series 2000, 6.350%, 6/01/26 (Pre-refunded
6/01/07) - ACA Insured
1,000 Scottsdale Industrial Development Authority, Arizona, 12/11 at 101.00 A3 (4) 1,099,180
Hospital Revenue Bonds, Scottsdale Healthcare, Series 2001,
5.800%, 12/01/31 (Pre-refunded 12/01/11)
------------------------------------------------------------------------------------------------------------------------------------
2,850 Total U.S. Guaranteed 3,077,646
------------------------------------------------------------------------------------------------------------------------------------
UTILITIES - 23.9% (16.9% OF TOTAL INVESTMENTS)
1,500 Arizona Power Authority, Special Obligation Power Resource No Opt. Call AA 1,640,550
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 AAA 1,098,970
Series 2002, 5.250%, 7/01/17 - FGIC Insured
Puerto Rico Electric Power Authority, Power Revenue Bonds,
Series 2005RR:
1,000 5.000%, 7/01/26 - XLCA Insured 7/15 at 100.00 AAA 1,040,450
170 5.000%, 7/01/27 - XLCA Insured 7/15 at 100.00 AAA 176,497
200 Salt River Project Agricultural Improvement and Power District, 1/13 at 100.00 AA 207,634
Arizona, Electric System Revenue Bonds, Series 2002B,
5.000%, 1/01/22
235 Salt River Project Agricultural Improvement and Power District, 1/08 at 101.00 Aa1 240,109
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 1,065,500
Arizona, Electric System Revenue Refunding Bonds,
Series 2002A, 5.250%, 1/01/18
------------------------------------------------------------------------------------------------------------------------------------
5,105 Total Utilities 5,469,710
------------------------------------------------------------------------------------------------------------------------------------
24
PRINCIPAL OPTIONAL CALL
AMOUNT (000) DESCRIPTION (1) PROVISIONS (2) RATINGS (3) VALUE
------------------------------------------------------------------------------------------------------------------------------------
WATER AND SEWER - 11.1% (7.8% OF TOTAL INVESTMENTS)
$ 225 Oro Valley Municipal Property Corporation, Arizona, Senior 7/13 at 100.00 AAA $ 233,347
Lien Water Revenue Bonds, Series 2003, 5.000%, 7/01/23 -
MBIA Insured
200 Phoenix Civic Improvement Corporation, Arizona, Junior Lien 7/14 at 100.00 AAA 208,010
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 AAA 1,546,770
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 AAA 543,764
Water System Revenue Bonds, Series 2005,
5.000%, 7/01/23 - MBIA Insured
------------------------------------------------------------------------------------------------------------------------------------
2,445 Total Water and Sewer 2,531,891
------------------------------------------------------------------------------------------------------------------------------------
$ 30,750 Total Investments (cost $31,620,171) - 141.9% 32,451,200
=============-----------------------------------------------------------------------------------------------------------------------
Other Assets Less Liabilities - 10.6% 2,410,305
--------------------------------------------------------------------------------------------------------------------
Preferred Shares, at Liquidation Value - (52.5)% (12,000,000)
--------------------------------------------------------------------------------------------------------------------
Net Assets Applicable to Common Shares - 100% $ 22,861,505
====================================================================================================================
(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 or Moody's rating. Ratings below BBB
by Standard & Poor's Group or Baa by Moody's Investor
Service, Inc. are considered to be below investment
grade.
(4) 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.
N/R Not rated.
See accompanying notes to financial statements.
25
Nuveen Arizona Dividend Advantage Municipal Fund 2 (NKR)
Portfolio of
INVESTMENTS July 31, 2006
PRINCIPAL OPTIONAL CALL
AMOUNT (000) DESCRIPTION (1) PROVISIONS (2) RATINGS (3) VALUE
------------------------------------------------------------------------------------------------------------------------------------
EDUCATION AND CIVIC ORGANIZATIONS - 10.8% (7.3% OF TOTAL INVESTMENTS)
$ 1,250 Glendale Industrial Development Authority, Arizona, Revenue 5/11 at 101.00 A- $ 1,324,163
Bonds, Midwestern University, Series 2001A, 5.875%, 5/15/31
460 Pima County Industrial Development Authority, Arizona, Charter 12/14 at 100.00 BBB- 480,088
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- 326,525
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 9/14 at 100.00 BBB- 496,963
School Revenue Bonds, Arizona Agribusiness and Equine
Center Charter School, Series 2004A, 6.125%, 9/01/34
University of Arizona, Certificates of Participation, Series 2002A:
750 5.500%, 6/01/18 - AMBAC Insured 6/12 at 100.00 AAA 805,350
500 5.125%, 6/01/22 - AMBAC Insured 6/12 at 100.00 AAA 522,890
------------------------------------------------------------------------------------------------------------------------------------
3,760 Total Education and Civic Organizations 3,955,979
------------------------------------------------------------------------------------------------------------------------------------
HEALTH CARE - 15.3% (10.3% OF TOTAL INVESTMENTS)
400 Arizona Health Facilities Authority, Hospital Revenue Bonds, 7/10 at 101.00 A- 440,820
Catholic Healthcare West, Series 1999A, 6.625%, 7/01/20
735 Arizona Health Facilities Authority, Hospital System Revenue 2/12 at 101.00 Baa3 796,520
Bonds, Phoenix Children's Hospital, Series 2002A,
6.250%, 2/15/21
600 Arizona Health Facilities Authority, Revenue Bonds, Blood 4/14 at 100.00 A- 610,200
Systems Inc., Series 2004, 5.000%, 4/01/20
400 Glendale Industrial Development Authority, Arizona, Revenue 12/15 at 100.00 BBB 398,464
Bonds, John C. Lincoln Health Network, Series 2005B,
5.000%, 12/01/37
320 Maricopa County Industrial Development Authority, Arizona, 5/16 at 100.00 AA 327,062
Health Facilities Revenue Bonds, Mayo Clinic, Series 2006,
5.000%, 11/15/36
1,375 Maricopa County Industrial Development Authority, Arizona, 7/14 at 100.00 A- 1,424,679
Health Facility Revenue Bonds, Catholic Healthcare West,
Series 2004A, 5.375%, 7/01/23
500 Maricopa County Industrial Development Authority, Arizona, 5/08 at 101.00 AA 513,655
Hospital Revenue Bonds, Mayo Clinic Hospital, Series 1998,
5.250%, 11/15/37
1,000 Yavapai County Industrial Development Authority, Arizona, 8/13 at 100.00 Baa2 1,064,830
Hospital Revenue Bonds, Yavapai Regional Medical Center,
Series 2003A, 6.000%, 8/01/33
------------------------------------------------------------------------------------------------------------------------------------
5,330 Total Health Care 5,576,230
------------------------------------------------------------------------------------------------------------------------------------
HOUSING/MULTIFAMILY - 8.0% (5.4% OF TOTAL INVESTMENTS)
1,000 Maricopa County Industrial Development Authority, Arizona, 10/11 at 105.00 AAA 1,057,420
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 325,020
Collateralized Multifamily Housing Revenue Bonds, Park Lee
Apartments, Series 2004A, 5.050%, 10/20/44
(Alternative Minimum Tax)
1,425 Phoenix Industrial Development Authority, Arizona, GNMA 7/12 at 105.00 AAA 1,531,348
Collateralized Multifamily Housing Revenue Bonds,
Summit Apartments, Series 2002, 6.450%, 7/20/32
------------------------------------------------------------------------------------------------------------------------------------
2,750 Total Housing/Multifamily 2,913,788
------------------------------------------------------------------------------------------------------------------------------------
HOUSING/SINGLE FAMILY - 0.1% (0.1% OF TOTAL INVESTMENTS)
30 Pima County Industrial Development Authority, Arizona, 11/10 at 101.00 AAA 30,700
FNMA/GNMA Single Family Mortgage Revenue Bonds,
Series 2001A-1, 5.350%, 11/01/24 (Alternative Minimum Tax)
------------------------------------------------------------------------------------------------------------------------------------
26
PRINCIPAL OPTIONAL CALL
AMOUNT (000) DESCRIPTION (1) PROVISIONS (2) RATINGS (3) VALUE
------------------------------------------------------------------------------------------------------------------------------------
INDUSTRIALS - 2.2% (1.4% OF TOTAL INVESTMENTS)
$ 810 Yavapai County Industrial Development Authority, Arizona, No Opt. Call BBB $ 811,482
Solid Waste Disposal Revenue Bonds, Waste Management
Inc., Series 2003B, 4.450%, 3/01/28 (Mandatory put 3/01/08)
(Alternative Minimum Tax)
------------------------------------------------------------------------------------------------------------------------------------
TAX OBLIGATION/GENERAL - 33.7% (22.7% OF TOTAL INVESTMENTS)
1,725 Chandler, Arizona, General Obligation Bonds, Series 2002, 7/12 at 100.00 AAA 1,810,853
5.000%, 7/01/17
Maricopa County School District 6, Arizona, General Obligation
Refunding Bonds, Washington Elementary School, Series 2002A:
1,000 5.375%, 7/01/15 - FSA Insured No Opt. Call AAA 1,104,210
1,000 5.375%, 7/01/16 - FSA Insured No Opt. Call AAA 1,104,720
1,165 Maricopa County Unified School District 69, Paradise Valley, No Opt. Call AAA 1,268,301
Arizona, General Obligation Refunding Bonds, Series 2002A,
5.250%, 7/01/14 - FGIC Insured
375 Maricopa County Union High School District 210 Phoenix, 7/16 at 100.00 AAA 393,064
Arizona, General Obligation Bonds, Series 2006C,
5.000%, 7/01/24 - MBIA Insured
1,000 Mesa, Arizona, General Obligation Bonds, Series 2000, No Opt. Call AAA 1,116,920
6.500%, 7/01/11 - FGIC Insured
1,405 Mesa, Arizona, General Obligation Bonds, Series 2002, No Opt. Call AAA 1,545,879
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 AA+ 1,773,967
500 5.000%, 7/01/27 7/12 at 100.00 AA+ 514,020
1,000 Pinal County Unified School District 43, Apache Junction, No Opt. Call AAA 1,131,330
Arizona, General Obligation Refunding Bonds, Series 2001,
5.750%, 7/01/15 - FGIC Insured
510 Scottsdale, Arizona, General Obligation Bonds, Series 2002, 7/11 at 100.00 AAA 529,773
5.000%, 7/01/24
------------------------------------------------------------------------------------------------------------------------------------
11,380 Total Tax Obligation/General 12,293,037
------------------------------------------------------------------------------------------------------------------------------------
TAX OBLIGATION/LIMITED - 42.0% (28.3% OF TOTAL INVESTMENTS)
Arizona State, Certificates of Participation, Series 2002A:
750 5.000%, 11/01/17 - MBIA Insured 5/12 at 100.00 AAA 784,808
1,000 5.000%, 11/01/18 - MBIA Insured 5/12 at 100.00 AAA 1,045,890
500 5.000%, 11/01/20 - MBIA Insured 5/12 at 100.00 AAA 519,230
138 Centerra Community Facilities District, Goodyear, Arizona, 7/15 at 100.00 N/R 137,728
General Obligation Bonds, Series 2005, 5.500%, 7/15/29
296 Estrella Mountain Ranch Community Facilities District, 7/10 at 102.00 N/R 325,674
Goodyear, Arizona, Special Assessment Lien Bonds,
Series 2001A, 7.875%, 7/01/25
670 Goodyear Community Facilities Utility District 1, Arizona, 7/13 at 100.00 A 689,484
General Obligation Bonds, Series 2003, 5.350%, 7/15/28 -
ACA Insured
435 Greater Arizona Development Authority, Infrastructure Revenue 8/16 at 100.00 AAA 455,036
Bonds, Series 2006A, 5.000%, 8/01/23 - MBIA Insured
870 Maricopa County Public Finance Corporation, Arizona, Lease 7/11 at 100.00 Aaa 932,101
Revenue Bonds, Series 2001, 5.500%, 7/01/15 - AMBAC Insured
Maricopa County Stadium District, Arizona, Revenue Refunding
Bonds, Series 2002:
840 5.375%, 6/01/18 - AMBAC Insured 6/12 at 100.00 Aaa 897,935
2,645 5.375%, 6/01/19 - AMBAC Insured 6/12 at 100.00 Aaa 2,827,424
1,500 Phoenix Industrial Development Authority, Arizona, Government 3/12 at 100.00 AAA 1,595,520
Bonds, Capitol Mall LLC II, Series 2001, 5.250%, 9/15/16 -
AMBAC Insured
1,070 Pinal County Industrial Development Authority, Arizona, No Opt. Call A 1,086,660
Correctional Facilities Contract Revenue Bonds, Florence
West Prison LLC, Series 2002A, 5.000%, 10/01/18 -
ACA Insured
1,000 Puerto Rico Public Buildings Authority, Guaranteed Government 7/12 at 100.00 BBB 1,017,810
Facilities Revenue Refunding Bonds, Series 2002D,
5.125%, 7/01/24
960 San Luis Civic Improvement Corporation, Arizona, Municipal 7/15 at 100.00 AAA 997,402
Facilities Excise Tax Revenue Bonds, Series 2005,
5.000%, 7/01/25 - XLCA Insured
750 Vistancia Community Facilities District, Arizona, Restricted 7/15 at 100.00 N/R 768,158
General Obligation Bonds, Series 2005, 5.750%, 7/15/24
27
Nuveen Arizona Dividend Advantage Municipal Fund 2 (NKR) (continued)
Portfolio of INVESTMENTS July 31, 2006
PRINCIPAL OPTIONAL CALL
AMOUNT (000) DESCRIPTION (1) PROVISIONS (2) RATINGS (3) VALUE
------------------------------------------------------------------------------------------------------------------------------------
TAX OBLIGATION/LIMITED (continued)
$ 560 Watson Road Community Facilities District, Arizona, Special 7/16 at 100.00 N/R $ 578,771
Assessment Revenue Bonds, Series 2005, 6.000%, 7/01/30
640 Yuma Municipal Property Corporation, Arizona, Municipal 7/10 at 100.00 AAA 659,226
Facilities Tax Revenue Bonds, Series 2001, 5.000%, 7/01/21 -
AMBAC Insured
------------------------------------------------------------------------------------------------------------------------------------
14,624 Total Tax Obligation/Limited 15,318,857
------------------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION - 5.6% (3.8% OF TOTAL INVESTMENTS)
1,000 Phoenix Civic Improvement Corporation, Arizona, Senior Lien 7/08 at 101.00 AAA 1,019,800
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 AAA 1,031,210
Airport Revenue Bonds, Series 2002B, 5.250%, 7/01/27 -
FGIC Insured (Alternative Minimum Tax)
------------------------------------------------------------------------------------------------------------------------------------
2,000 Total Transportation 2,051,010
------------------------------------------------------------------------------------------------------------------------------------
U.S. GUARANTEED - 14.2% (9.5% OF TOTAL INVESTMENTS) (4)
715 Arizona State University, System Revenue Bonds, Series 2002, 7/12 at 100.00 AAA 787,236
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 109,009
General Obligation Bonds, Series 2004B, 5.250%, 7/01/20
(Pre-refunded 7/01/14) - FSA Insured
1,000 Mesa, Arizona, Street and Highway User Tax Revenue Bonds, 7/14 at 100.00 AAA 1,081,650
Series 2004, 5.125%, 7/01/23 (Pre-refunded 7/01/14) -
FSA Insured
1,000 Mesa, Arizona, Utility System Revenue Bonds, Series 2002, 7/11 at 100.00 AAA 1,054,010
5.000%, 7/01/20 (Pre-refunded 7/01/11) - FGIC Insured
1,000 Scottsdale Industrial Development Authority, Arizona, Hospital 12/11 at 101.00 A3 (4) 1,099,180
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 1,043,925
5.000%, 7/01/24 (Pre-refunded 7/01/11)
------------------------------------------------------------------------------------------------------------------------------------
4,805 Total U.S. Guaranteed 5,175,010
------------------------------------------------------------------------------------------------------------------------------------
UTILITIES - 5.0% (3.4% OF TOTAL INVESTMENTS)
1,115 Arizona Power Authority, Special Obligation Power Resource No Opt. Call AA 1,213,432
Revenue Refunding Crossover Bonds, Hoover Project,
Series 2001, 5.250%, 10/01/15
270 Puerto Rico Electric Power Authority, Power Revenue Bonds, 7/15 at 100.00 AAA 280,319
Series 2005RR, 5.000%, 7/01/27 - XLCA Insured
320 Salt River Project Agricultural Improvement and Power District, 1/13 at 100.00 AA 332,214
Arizona, Electric System Revenue Bonds, Series 2002B,
5.000%, 1/01/22
------------------------------------------------------------------------------------------------------------------------------------
1,705 Total Utilities 1,825,965
------------------------------------------------------------------------------------------------------------------------------------
28
PRINCIPAL OPTIONAL CALL
AMOUNT (000) DESCRIPTION (1) PROVISIONS (2) RATINGS (3) VALUE
------------------------------------------------------------------------------------------------------------------------------------
WATER AND SEWER - 11.7% (7.8% OF TOTAL INVESTMENTS)
$ 500 Maricopa County Industrial Development Authority, Arizona, 12/07 at 102.00 AAA $ 516,730
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 7/13 at 100.00 AAA 373,356
Lien Water Revenue Bonds, Series 2003, 5.000%, 7/01/23 -
MBIA Insured
320 Phoenix Civic Improvement Corporation, Arizona, Junior Lien 7/14 at 100.00 AAA 332,816
Wastewater System Revenue Bonds, Series 2004,
5.000%, 7/01/24 - MBIA Insured
765 Phoenix Civic Improvement Corporation, Arizona, Junior Lien 7/15 at 100.00 AAA 799,960
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 AAA 1,135,380
Water System Revenue Refunding Bonds, Series 2001,
5.500%, 7/01/22 - FGIC Insured
1,000 Tucson, Arizona, Water System Revenue Refunding Bonds, 7/12 at 102.00 AAA 1,092,730
Series 2002, 5.500%, 7/01/18 - FGIC Insured
------------------------------------------------------------------------------------------------------------------------------------
3,945 Total Water and Sewer 4,250,972
------------------------------------------------------------------------------------------------------------------------------------
$ 51,139 Total Investments (cost $52,113,142) - 148.6% 54,203,030
=============-----------------------------------------------------------------------------------------------------------------------
Other Assets Less Liabilities - 2.1% 762,035
--------------------------------------------------------------------------------------------------------------------
Preferred Shares, at Liquidation Value - (50.7)% (18,500,000)
--------------------------------------------------------------------------------------------------------------------
Net Assets Applicable to Common Shares - 100% $ 36,465,065
====================================================================================================================
(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 or Moody's rating. Ratings below BBB
by Standard & Poor's Group or Baa by Moody's Investor
Service, Inc. are considered to be below investment
grade.
(4) 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.
N/R Not rated.
See accompanying notes to financial statements.
29
Nuveen Arizona Dividend Advantage Municipal Fund 3 (NXE)
Portfolio of
INVESTMENTS July 31, 2006
PRINCIPAL OPTIONAL CALL
AMOUNT (000) DESCRIPTION (1) PROVISIONS (2) RATINGS (3) VALUE
------------------------------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES - 1.2% (1.0% OF TOTAL INVESTMENTS)
$ 575 Puerto Rico, The Children's Trust Fund, Tobacco Settlement 5/12 at 100.00 BBB $ 588,725
Asset-Backed Refunding Bonds, Series 2002, 5.375%, 5/15/33
------------------------------------------------------------------------------------------------------------------------------------
EDUCATION AND CIVIC ORGANIZATIONS - 16.2% (10.8% OF TOTAL INVESTMENTS)
1,250 Arizona State University, System Revenue Bonds, Series 2005, 7/15 at 100.00 AAA 1,313,725
5.000%, 7/01/20 - AMBAC Insured
1,000 Arizona Student Loan Acquisition Authority, Student Loan 11/09 at 102.00 Aaa 1,054,540
Revenue Refunding Bonds, Senior Series 1999A-1,
5.750%, 5/01/15 (Alternative Minimum Tax)
1,130 Energy Management Services LLC, Arizona State University, 7/12 at 100.00 AAA 1,200,365
Energy Conservation Revenue Bonds, Main Campus Project,
Series 2002, 5.250%, 7/01/18 - MBIA Insured
270 Glendale Industrial Development Authority, Arizona, Revenue 5/08 at 101.00 A- 276,094
Bonds, Midwestern University, Series 1998A, 5.375%, 5/15/28
540 Pima County Industrial Development Authority, Arizona, 12/14 at 100.00 BBB- 563,582
Charter 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- 584,967
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 AAA 2,100,740
5.125%, 6/01/20 - AMBAC Insured
------------------------------------------------------------------------------------------------------------------------------------
6,755 Total Education and Civic Organizations 7,094,013
------------------------------------------------------------------------------------------------------------------------------------
HEALTH CARE - 17.7% (11.9% OF TOTAL INVESTMENTS)
300 Arizona Health Facilities Authority, Hospital Revenue Bonds, 7/10 at 101.00 A- 330,615
Catholic Healthcare West, Series 1999A, 6.625%, 7/01/20
Arizona Health Facilities Authority, Hospital System Revenue
Bonds, Phoenix Children's Hospital, Series 1999A:
350 6.125%, 11/15/22 11/09 at 100.00 Baa3 364,606
520 6.250%, 11/15/29 11/09 at 100.00 Baa3 542,724
625 Arizona Health Facilities Authority, Revenue Bonds, Blood 4/14 at 100.00 A- 635,625
Systems Inc., Series 2004, 5.000%, 4/01/20
475 Glendale Industrial Development Authority, Arizona, Revenue 12/15 at 100.00 BBB 473,176
Bonds, John C. Lincoln Health Network, Series 2005B,
5.000%, 12/01/37
390 Maricopa County Industrial Development Authority, Arizona, 5/16 at 100.00 AA 398,607
Health Facilities Revenue Bonds, Mayo Clinic, Series 2006,
5.000%, 11/15/36
1,825 Maricopa County Industrial Development Authority, Arizona, 7/14 at 100.00 A- 1,890,937
Health Facility Revenue Bonds, Catholic Healthcare West,
Series 2004A, 5.375%, 7/01/23
2,000 Maricopa County Industrial Development Authority, Arizona, 5/08 at 101.00 AA 2,054,620
Hospital Revenue Bonds, Mayo Clinic Hospital, Series 1998,
5.250%, 11/15/37
1,000 Yavapai County Industrial Development Authority, Arizona, 8/13 at 100.00 Baa2 1,064,830
Hospital Revenue Bonds, Yavapai Regional Medical Center,
Series 2003A, 6.000%, 8/01/33
------------------------------------------------------------------------------------------------------------------------------------
7,485 Total Health Care 7,755,740
------------------------------------------------------------------------------------------------------------------------------------
30
PRINCIPAL OPTIONAL CALL
AMOUNT (000) DESCRIPTION (1) PROVISIONS (2) RATINGS (3) VALUE
------------------------------------------------------------------------------------------------------------------------------------
HOUSING/MULTIFAMILY - 4.5% (3.0% OF TOTAL INVESTMENTS)
$ 1,545 Phoenix Industrial Development Authority, Arizona, GNMA 6/11 at 102.00 Aaa $ 1,610,508
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 380,023
Collateralized Multifamily Housing Revenue Bonds, Park Lee
Apartments, Series 2004A, 5.050%, 10/20/44 (Alternative
Minimum Tax)
------------------------------------------------------------------------------------------------------------------------------------
1,925 Total Housing/Multifamily 1,990,531
------------------------------------------------------------------------------------------------------------------------------------
INDUSTRIALS - 2.2% (1.4% OF TOTAL INVESTMENTS)
945 Yavapai County Industrial Development Authority, Arizona, 3/28 at 100.00 BBB 946,729
Solid Waste Disposal Revenue Bonds, Waste Management
Inc., Series 2003B, 4.450%, 3/01/28 (Mandatory put 3/01/08)
(Alternative Minimum Tax)
------------------------------------------------------------------------------------------------------------------------------------
TAX OBLIGATION/GENERAL - 19.8% (13.3% OF TOTAL INVESTMENTS)
660 Chandler, Arizona, General Obligation Bonds, Series 2002, 7/12 at 100.00 AAA 692,498
5.000%, 7/01/18
2,250 DC Ranch Community Facilities District, Scottsdale, Arizona, 7/13 at 100.00 Aaa 2,322,608
General Obligation Bonds, Series 2002, 5.000%, 7/15/27 -
AMBAC Insured
1,930 Glendale, Arizona, General Obligation Refunding Bonds, 7/11 at 100.00 AA 2,009,632
Series 2002, 5.000%, 7/01/19
1,000 Maricopa County Unified School District 11, Peoria, Arizona, No Opt. Call AAA 1,075,510
General Obligation Refunding Bonds, Series 2002,
5.000%, 7/01/15 - FSA Insured
445 Maricopa County Union High School District 210 Phoenix, 7/16 at 100.00 AAA 466,436
Arizona, General Obligation Bonds, Series 2006C,
5.000%, 7/01/24 - MBIA Insured
1,575 Maricopa County Union High School District 210, Phoenix, 7/14 at 100.00 AAA 1,653,104
Arizona, General Obligation Bonds, Series 2004A,
5.000%, 7/01/20 - FSA Insured
440 Tucson, Arizona, General Obligation Bonds, Series 2001B, 7/11 at 100.00 AA 457,952
5.000%, 7/01/20
------------------------------------------------------------------------------------------------------------------------------------
8,300 Total Tax Obligation/General 8,677,740
------------------------------------------------------------------------------------------------------------------------------------
TAX OBLIGATION/LIMITED - 39.7% (26.7% OF TOTAL INVESTMENTS)
3,000 Arizona State Transportation Board, Highway Revenue 7/12 at 102.00 AAA 3,235,588
Refunding Bonds, Series 2002A, 5.250%, 7/01/18
2,660 Arizona Tourism and Sports Authority, Tax Revenue Bonds, 7/13 at 100.00 Aaa 2,864,847
Multipurpose Stadium Facility Project, Series 2003A,
5.375%, 7/01/20 - MBIA Insured
158 Centerra Community Facilities District, Goodyear, Arizona, 7/15 at 100.00 N/R 157,689
General Obligation Bonds, Series 2005, 5.500%, 7/15/29
346 Estrella Mountain Ranch Community Facilities District, 7/10 at 102.00 N/R 380,687
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 A 823,264
General Obligation Bonds, Series 2003, 5.350%, 7/15/28 -
ACA Insured
525 Greater Arizona Development Authority, Infrastructure Revenue 8/16 at 100.00 AAA 549,181
Bonds, Series 2006A, 5.000%, 8/01/23 - MBIA Insured
2,000 Mohave County, Arizona, Certificates of Participation, 7/14 at 100.00 AAA 2,139,420
Series 2004, 5.250%, 7/01/19 - AMBAC Insured
1,250 Pinal County Industrial Development Authority, Arizona, No Opt. Call A 1,269,463
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 AAA 1,174,025
Facilities Excise Tax Revenue Bonds, Series 2005,
5.000%, 7/01/25 - XLCA Insured
2,770 Tempe, Arizona, Excise Tax Revenue Refunding Bonds, 7/13 at 100.00 AAA 2,878,307
Series 2003, 5.000%, 7/01/22
31
Nuveen Arizona Dividend Advantage Municipal Fund 3 (NXE) (continued)
Portfolio of INVESTMENTS July 31, 2006
PRINCIPAL OPTIONAL CALL
AMOUNT (000) DESCRIPTION (1) PROVISIONS (2) RATINGS (3) VALUE
------------------------------------------------------------------------------------------------------------------------------------
TAX OBLIGATION/LIMITED (continued)
$ 1,250 Vistancia Community Facilities District, Arizona, Restricted 7/15 at 100.00 N/R $ 1,280,263
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 687,291
Assessment Revenue Bonds, Series 2005, 6.000%, 7/01/30
------------------------------------------------------------------------------------------------------------------------------------
16,554 Total Tax Obligation/Limited 17,440,025
------------------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION - 13.6% (9.1% 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 AAA 1,084,230
2,300 5.250%, 7/01/21 - FGIC Insured (Alternative Minimum Tax) 7/12 at 100.00 AAA 2,381,995
2,450 Tucson Airport Authority Inc., Arizona, Revenue Refunding 6/11 at 100.00 AAA 2,497,726
Bonds, Series 2001B, 5.000%, 6/01/20 - AMBAC Insured
(Alternative Minimum Tax)
------------------------------------------------------------------------------------------------------------------------------------
5,750 Total Transportation 5,963,951
------------------------------------------------------------------------------------------------------------------------------------
U.S. GUARANTEED - 10.6% (7.1% OF TOTAL INVESTMENTS) (4)
1,000 Arizona Health Facilities Authority, Hospital System Revenue 12/10 at 102.00 BBB (4) 1,135,910
Bonds, John C. Lincoln Health Network, Series 2000,
6.875%, 12/01/20 (Pre-refunded 12/01/10)
200 Arizona School Facilities Board, School Improvement Revenue 7/12 at 100.00 AAA 214,956
Bonds, Series 2002, 5.250%, 7/01/20 (Pre-refunded 7/01/12)
1,760 Arizona State University, System Revenue Bonds, Series 2002, 7/12 at 100.00 AAA 1,937,813
5.750%, 7/01/27 (Pre-refunded 7/01/12) - FGIC Insured
1,250 Scottsdale Industrial Development Authority, Arizona, 12/11 at 101.00 A3 (4) 1,373,975
Hospital Revenue Bonds, Scottsdale Healthcare, Series 2001,
5.800%, 12/01/31 (Pre-refunded 12/01/11)
------------------------------------------------------------------------------------------------------------------------------------
4,210 Total U.S. Guaranteed 4,662,654
------------------------------------------------------------------------------------------------------------------------------------
UTILITIES - 12.3% (8.2% OF TOTAL INVESTMENTS)
1,250 Maricopa County Pollution Control Corporation, Arizona, 11/12 at 100.00 AAA 1,280,100
Revenue Bonds, Arizona Public Service Company - Palo Verde
Project, Series 2002A, 5.050%, 5/01/29 - AMBAC Insured
Puerto Rico Electric Power Authority, Power Revenue Bonds,
Series 2005RR:
1,660 5.000%, 7/01/26 - XLCA Insured 7/15 at 100.00 AAA 1,727,147
935 5.000%, 7/01/27 - XLCA Insured 7/15 at 100.00 AAA 970,736
Salt River Project Agricultural Improvement and Power District,
Arizona, Electric System Revenue Bonds, Series 2002B:
360 5.000%, 1/01/22 1/13 at 100.00 AA 373,741
1,000 5.000%, 1/01/31 1/13 at 100.00 AA 1,027,840
------------------------------------------------------------------------------------------------------------------------------------
5,205 Total Utilities 5,379,564
------------------------------------------------------------------------------------------------------------------------------------
WATER AND SEWER - 11.2% (7.5% OF TOTAL INVESTMENTS)
405 Oro Valley Municipal Property Corporation, Arizona, Senior 7/13 at 100.00 AAA 420,025
Lien Water Revenue Bonds, Series 2003, 5.000%, 7/01/23 -
MBIA Insured
380 Phoenix Civic Improvement Corporation, Arizona, Junior Lien 7/14 at 100.00 AAA 395,219
Wastewater System Revenue Bonds, Series 2004,
5.000%, 7/01/24 - MBIA Insured
1,000 Phoenix Civic Improvement Corporation, Arizona, Junior Lien 7/11 at 100.00 AAA 1,043,830
Wastewater System Revenue Refunding Bonds, Series 2001,
5.125%, 7/01/21 - FGIC Insured
32
PRINCIPAL OPTIONAL CALL
AMOUNT (000) DESCRIPTION (1) PROVISIONS (2) RATINGS (3) VALUE
------------------------------------------------------------------------------------------------------------------------------------
WATER AND SEWER (continued)
$ 2,000 Phoenix Civic Improvement Corporation, Arizona, Junior Lien 7/12 at 100.00 AAA $ 2,098,480
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 AAA 962,044
Water System Revenue Bonds, Series 2005, 5.000%, 7/01/23 -
MBIA Insured
------------------------------------------------------------------------------------------------------------------------------------
4,705 Total Water and Sewer 4,919,598
------------------------------------------------------------------------------------------------------------------------------------
$ 62,409 Total Investments (cost $64,070,644) - 149.0% 65,419,270
=============-----------------------------------------------------------------------------------------------------------------------
Other Assets Less Liabilities - 1.1% 494,200
--------------------------------------------------------------------------------------------------------------------
Preferred Shares, at Liquidation Value - (50.1)% (22,000,000)
--------------------------------------------------------------------------------------------------------------------
Net Assets Applicable to Common Shares - 100% $ 43,913,470
====================================================================================================================
FORWARD SWAPS OUTSTANDING AT JULY 31, 2006:
FIXED RATE FLOATING RATE
PAID FIXED RATE RECEIVED FLOATING RATE UNREALIZED
NOTIONAL BY THE FUND PAYMENT BY THE FUND PAYMENT EFFECTIVE TERMINATION APPRECIATION
COUNTERPARTY AMOUNT (ANNUALIZED) FREQUENCY BASED ON FREQUENCY DATE (5) DATE (DEPRECIATION)
------------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs $500,000 4.013% Quarterly BMA Quarterly 9/14/06 9/14/26 $17,459
Merrill Lynch 900,000 4.021 Quarterly BMA Quarterly 9/21/06 9/21/26 30,639
------------------------------------------------------------------------------------------------------------------------------------
$48,098
====================================================================================================================================
BMA - The daily arithmetic average of the weekly BMA (Bond Market
Association) Municipal Swap Index.
(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 or Moody's rating. Ratings below BBB
by Standard & Poor's Group or Baa by Moody's Investor
Service, Inc. are considered to be below investment
grade.
(4) 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.
(5) Effective date represents the date on which both the
Fund and counterparty commence interest payment
accruals on each forward swap contract.
N/R Not rated.
See accompanying notes to financial statements.
33
Nuveen Texas Quality Income Municipal Fund (NTX)
Portfolio of
INVESTMENTS July 31, 2006
PRINCIPAL OPTIONAL CALL
AMOUNT (000) DESCRIPTION (1) PROVISIONS (2) RATINGS (3) VALUE
------------------------------------------------------------------------------------------------------------------------------------
CONSUMER STAPLES - 2.0% (1.4% OF TOTAL INVESTMENTS)
$ 2,695 Puerto Rico, The Children's Trust Fund, Tobacco Settlement 5/12 at 100.00 BBB $ 2,759,330
Asset-Backed Refunding Bonds, Series 2002, 5.375%, 5/15/33
------------------------------------------------------------------------------------------------------------------------------------
EDUCATION AND CIVIC ORGANIZATIONS - 14.5% (10.0% OF TOTAL INVESTMENTS)
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 1,198,759
1,230 5.000%, 5/15/28 5/15 at 100.00 AA 1,259,348
1,290 5.000%, 5/15/29 5/15 at 100.00 AA 1,319,838
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 Aaa 1,790,079
1,795 5.000%, 5/01/19 - FGIC Insured 5/13 at 100.00 Aaa 1,872,634
1,885 5.000%, 5/01/20 - FGIC Insured 5/13 at 100.00 Aaa 1,962,040
1,665 Texas State University System, Financing Revenue Bonds, 9/14 at 100.00 AAA 1,722,742
Series 2004, 5.000%, 3/15/24 - FSA Insured
2,000 Texas State University System, Financing Revenue Refunding 3/12 at 100.00 AAA 2,074,520
Bonds, Series 2002, 5.000%, 3/15/20 - FSA Insured
2,330 Universal City Education Facilities Corporation, Texas, Revenue 3/11 at 102.00 A- 2,431,402
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 5,147,300
Series 2001, 5.000%, 4/15/24 - FSA Insured
------------------------------------------------------------------------------------------------------------------------------------
20,075 Total Education and Civic Organizations 20,778,662
------------------------------------------------------------------------------------------------------------------------------------
ENERGY - 2.2% (1.5% OF TOTAL INVESTMENTS)
3,000 Gulf Coast Waste Disposal Authority, Texas, Waste Disposal 4/08 at 102.00 BBB- 3,049,860
Revenue Bonds, Valero Energy Corporation Project,
Series 1998, 5.600%, 4/01/32 (Alternative Minimum Tax)
------------------------------------------------------------------------------------------------------------------------------------
HEALTH CARE - 19.3% (13.3% OF TOTAL INVESTMENTS)
3,500 Abilene Health Facilities Development Corporation, Texas, 9/06 at 101.00 AAA 3,576,230
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 AA 1,825,968
1,835 5.250%, 7/01/21 - RAAI Insured 7/14 at 100.00 AA 1,916,419
Gregg County Health Facilities Development Corporation, Texas,
Hospital Revenue Bonds, Good Shepherd Medical Center Project,
Series 2000:
2,000 6.875%, 10/01/20 - RAAI Insured 10/10 at 101.00 AA 2,219,620
3,250 6.375%, 10/01/25 - RAAI Insured 10/10 at 101.00 AA 3,545,392
5,750 Midland County Hospital District, Texas, Hospital Revenue No Opt. Call BBB 4,299,850
Bonds, Series 1992, 0.000%, 6/01/11
2,000 North Central Texas Health Facilities Development Corporation, 5/11 at 100.00 AA- 2,026,940
Hospital Revenue Bonds, Baylor Healthcare System,
Series 2001A, 5.125%, 5/15/29
1,760 Parker County Hospital District, Texas, Hospital Revenue Bonds, 8/09 at 102.00 BB- 1,837,862
Campbell Health System, Series 1999, 6.250%, 8/15/19
2,000 Richardson Hospital Authority, Texas, Revenue Bonds, 12/13 at 100.00 BBB 2,130,420
Richardson Regional Medical Center, Series 2004,
5.875%, 12/01/24
1,050 Tarrant County Health Facilities Development Corporation, 11/08 at 101.00 A+ 1,075,924
Texas, Hospital Revenue Bonds, Adventist Health System -
Sunbelt Obligated Group, Series 1998, 5.375%, 11/15/20
34
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 $ 2,163,720
Texas, Hospital Revenue Bonds, Shannon Health System
Project, Series 2001, 6.750%, 5/15/21
1,000 Tyler Health Facilities Development Corporation, Texas, Hospital 7/12 at 100.00 Baa1 1,051,410
Revenue Bonds, Mother Frances Hospital Regional Healthcare
Center, Series 2001, 6.000%, 7/01/31
------------------------------------------------------------------------------------------------------------------------------------
27,890 Total Health Care 27,669,755
------------------------------------------------------------------------------------------------------------------------------------
HOUSING/MULTIFAMILY - 3.5% (2.4% 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 Aaa 2,041,620
750 6.050%, 8/01/36 - MBIA Insured 8/11 at 102.00 Aaa 765,578
2,064 Houston Housing Finance Corporation, Texas, GNMA 9/11 at 105.00 Aaa 2,172,236
Collateralized Mortgage Multifamily Housing Revenue Bonds,
RRG Apartments Project, Series 2001, 6.250%, 9/20/35
------------------------------------------------------------------------------------------------------------------------------------
4,814 Total Housing/Multifamily 4,979,434
------------------------------------------------------------------------------------------------------------------------------------
HOUSING/SINGLE FAMILY - 4.1% (2.8% OF TOTAL INVESTMENTS)
2,608 El Paso Housing Finance Corporation, Texas, GNMA 4/11 at 106.75 AAA 2,746,097
Collateralized Single Family Mortgage Revenue Bonds,
Series 2001A-3, 6.180%, 4/01/33
135 Galveston Property Finance Authority Inc., Texas, Single Family 9/06 at 100.00 A3 135,389
Mortgage Revenue Bonds, Series 1991A, 8.500%, 9/01/11
2,900 Texas Department of Housing and Community Affairs, Single 3/12 at 100.00 AAA 2,972,906
Family Mortgage Bonds, Series 2002B, 5.550%, 9/01/33 -
MBIA Insured (Alternative Minimum Tax)
55 Victoria Housing Finance Corporation, Texas, FNMA Single No Opt. Call Aaa 57,010
Family Mortgage Revenue Refunding Bonds, Series 1995,
8.125%, 1/01/11
------------------------------------------------------------------------------------------------------------------------------------
5,698 Total Housing/Single Family 5,911,402
------------------------------------------------------------------------------------------------------------------------------------
LONG-TERM CARE - 5.9% (4.1% OF TOTAL INVESTMENTS)
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 11/08 at 101.00 A- 3,448,960
5,000 5.250%, 11/15/28 11/08 at 101.00 A- 5,057,900
------------------------------------------------------------------------------------------------------------------------------------
8,400 Total Long-Term Care 8,506,860
------------------------------------------------------------------------------------------------------------------------------------
MATERIALS - 4.4% (3.0% OF TOTAL INVESTMENTS)
3,000 Cass County Industrial Development Corporation, Texas, 3/10 at 101.00 BBB 3,210,390
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 Solid 10/06 at 102.00 A 3,064,560
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 6,274,950
------------------------------------------------------------------------------------------------------------------------------------
TAX OBLIGATION/GENERAL - 41.0% (28.2% OF TOTAL INVESTMENTS)
1,260 Bexar County, Texas, Combined Tax and Revenue Certificates 6/14 at 100.00 AA 1,315,314
of Obligation, Series 2004, 5.000%, 6/15/19
1,190 Canutillo Independent School District, El Paso County, Texas, 8/15 at 100.00 AAA 1,239,599
General Obligation Bonds, Series 2006A, 5.000%, 8/15/22
4,130 Coppell Independent School District, Dallas County, Texas, 8/09 at 75.34 AAA 2,741,535
Unlimited Tax School Building and Refunding Bonds,
Series 1992, 0.000%, 8/15/14 - MBIA Insured
1,275 Copperas Cove, Texas, Certificates of Obligation, Series 2003, 8/12 at 100.00 AAA 1,316,323
5.000%, 8/15/23 - MBIA Insured
2,305 Corpus Christi, Texas, Combination Tax and Municipal Hotel 9/12 at 100.00 AAA 2,469,416
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 2,670,255
Obligation Bonds, Series 2005, 5.000%, 7/15/25
2,110 Duncanville Independent School District, Dallas County, Texas, 2/15 at 100.00 AAA 2,185,538
General Obligation Bonds, Series 2005, 5.000%, 2/15/26
35
Nuveen Texas Quality Income Municipal Fund (NTX) (continued)
Portfolio of INVESTMENTS July 31, 2006
PRINCIPAL OPTIONAL CALL
AMOUNT (000) DESCRIPTION (1) PROVISIONS (2) RATINGS (3) VALUE
------------------------------------------------------------------------------------------------------------------------------------
TAX OBLIGATION/GENERAL (continued)
$ 1,750 El Paso County, Texas, Certificates of Obligation, Series 2001, No Opt. Call AAA $ 1,870,610
5.000%, 2/15/21 - FSA Insured
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 AAA 1,359,992
1,320 5.000%, 10/01/27 - FGIC Insured 10/12 at 100.00 AAA 1,346,928
3,615 Frisco, Texas, General Obligation Bonds, Series 2006, 2/16 at 100.00 AAA 3,746,767
5.000%, 2/15/26 (WI/DD, Settling 8/10/06) - 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 AAA 2,602,400
2,235 5.000%, 2/15/21 - AMBAC Insured 2/13 at 100.00 AAA 2,315,572
5,000 Houston, Texas, General Obligation Bonds, Series 2005E, 3/15 at 100.00 AAA 5,206,900
5.000%, 3/01/23 - AMBAC Insured
1,500 Judson Independent School District, Bexar County, Texas, 2/11 at 100.00 Aaa 1,565,220
General Obligation Refunding Bonds, Series 2002,
5.250%, 2/01/21
5,220 Leander Independent School District, Williamson and Travis 8/09 at 46.74 AAA 2,127,307
Counties, Texas, Unlimited Tax School Building and Refunding
Bonds, Series 2000, 0.000%, 8/15/21
1,000 Mansfield Independent School District, Tarrant County, Texas, 2/14 at 100.00 AAA 1,042,360
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 1,052,097
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 5,655,519
General Obligation Bonds, Series 2005, 5.000%, 2/15/34
1,545 Montgomery County, Texas, General Obligation Refunding 9/07 at 72.39 AAA 1,069,094
Bonds, Series 1997, 0.000%, 3/01/14 - MBIA Insured
925 Northside Independent School District, Bexar County, Texas, 8/10 at 100.00 AAA 988,362
Unlimited Tax School Building and Refunding Bonds,
Series 2000, 5.875%, 8/15/25
1,255 Pasadena, Texas, Certificates of Obligation, Series 2002, 4/11 at 100.00 AAA 1,291,219
5.125%, 4/01/24 - FGIC Insured
500 Puerto Rico, General Obligation and Public Improvement Bonds, No Opt. Call BBB 543,550
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 1,158,785
1,165 5.000%, 8/15/23 - FSA Insured 8/15 at 100.00 AAA 1,213,557
1,440 South Texas Community College District, General Obligation 8/12 at 100.00 AAA 1,548,043
Bonds, Series 2002, 5.500%, 8/15/17 - AMBAC Insured
1,250 Southside Independent School District, Bexar County, Texas, 8/14 at 100.00 Aaa 1,299,863
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 1,208,332
Series 2004, 5.250%, 2/15/25
2,000 Texas, General Obligation Bonds, Water Financial Assistance 8/11 at 100.00 Aa1 2,095,660
Program, Series 2001, 5.250%, 8/01/23
1,500 Texas, General Obligation Refunding Bonds, Public Finance 10/12 at 100.00 Aa1 1,571,565
Authority, Series 2002, 5.000%, 10/01/18
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 435,900
1,000 0.000%, 8/15/24 8/13 at 54.88 AAA 389,240
------------------------------------------------------------------------------------------------------------------------------------
62,690 Total Tax Obligation/General 58,642,822
------------------------------------------------------------------------------------------------------------------------------------
TAX OBLIGATION/LIMITED - 3.6% (2.4% OF TOTAL INVESTMENTS)
2,250 Harris County-Houston Sports Authority, Texas, Senior Lien 11/11 at 100.00 AAA 2,350,012
Revenue Bonds, Series 2001G, 5.250%, 11/15/22 -
MBIA Insured
2,685 San Antonio, Texas, Hotel Occupancy Tax Revenue Bonds, 8/06 at 102.00 AAA 2,742,244
Henry B. Gonzalez Convention Center Project, Series 1996,
5.700%, 8/15/26 - FGIC Insured
------------------------------------------------------------------------------------------------------------------------------------
4,935 Total Tax Obligation/Limited 5,092,256
------------------------------------------------------------------------------------------------------------------------------------
36
PRINCIPAL OPTIONAL CALL
AMOUNT (000) DESCRIPTION (1) PROVISIONS (2) RATINGS (3) VALUE
------------------------------------------------------------------------------------------------------------------------------------
TRANSPORTATION - 6.4% (4.4% OF TOTAL INVESTMENTS)
$ 1,000 Austin, Texas, Airport System Prior Lien Revenue Bonds, 11/13 at 100.00 AAA $ 1,065,210
Series 2003, 5.250%, 11/15/16 - MBIA Insured
3,260 Central Texas Regional Mobility Authority, Travis and 1/15 at 100.00 AAA 3,376,512
Williamson 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+ 2,561,286
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 2,100,760
Bonds, Series 2000A, 5.625%, 7/01/30 - FSA Insured
(Alternative Minimum Tax)
------------------------------------------------------------------------------------------------------------------------------------
8,860 Total Transportation 9,103,768
------------------------------------------------------------------------------------------------------------------------------------
U.S. GUARANTEED - 18.1% (12.5% OF TOTAL INVESTMENTS) (4)
2,000 Harris County Health Facilities Development Corporation, Texas, 6/11 at 101.00 A+ (4) 2,236,360
Hospital Revenue Bonds, Memorial Hermann Healthcare
System, Series 2001A, 6.375%, 6/01/29 (Pre-refunded 6/01/11)
1,500 Harris County Health Facilities Development Corporation, Texas, 8/11 at 100.00 AAA 1,611,645
Revenue Bonds, St. Luke's Episcopal Hospital, Series 2001A,
5.500%, 2/15/21 (Pre-refunded 8/15/11)
1,000 North Central Texas Health Facilities Development Corporation, No Opt. Call AAA 1,143,680
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 1,158,399
Unlimited Tax School Building and Refunding Bonds,
Series 2000, 5.875%, 8/15/25 (Pre-refunded 8/15/10)
2,500 Retama Development Corporation, Texas, Special Facilities 12/17 at 100.00 AAA 3,135,300
Revenue Bonds, Retama Park Racetrack, Series 1993,
8.750%, 12/15/18 (Pre-refunded 12/15/17) (5)
1,750 San Antonio, Texas, Electric and Gas System Revenue Refunding 2/12 at 100.00 AAA 1,878,643
Bonds, Series 2002, 5.375%, 2/01/20 (Pre-refunded 2/01/12)
3,500 Tarrant County Health Facilities Development Corporation, 11/10 at 101.00 A+ (4) 3,906,385
Texas, Hospital Revenue Bonds, Adventist Health System -
Sunbelt Obligated Group, Series 2000, 6.625%, 11/15/20
(Pre-refunded 11/15/10)
2,000 Tarrant County Health Facilities Development Corporation, 1/08 at 105.00 AAA 2,157,640
Texas, Tax-Exempt Mortgage Revenue Bonds, South Central
Nursing Homes Inc., Series 1997A, 6.000%, 1/01/37
(Pre-refunded 1/01/08) - MBIA Insured
1,165 Texas Department of Housing, Single Family Mortgage Revenue 9/06 at 102.00 AAA 1,190,467
Bonds, Series 1996E, 6.000%, 9/01/17 (Pre-refunded 9/01/06) -
MBIA Insured
1,795 United Independent School District, Webb County, Texas, 8/12 at 100.00 AAA 1,941,723
Unlimited Tax School Building Bonds, Series 2000,
5.375%, 8/15/18 (Pre-refunded 8/15/12)
5,290 Weslaco Independent School District, Hidalgo County, Texas, 2/10 at 100.00 Aaa 5,584,177
General Obligation School Building Bonds, Series 2000,
5.500%, 2/15/25 (Pre-refunded 2/15/10)
------------------------------------------------------------------------------------------------------------------------------------
23,575 Total U.S. Guaranteed 25,944,419
------------------------------------------------------------------------------------------------------------------------------------
UTILITIES - 9.6% (6.6% OF TOTAL INVESTMENTS)
2,560 Brazos River Authority, Texas, Pollution Control Revenue 4/13 at 101.00 Baa2 2,984,960
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- 2,460,600
Energy Inc., Series 1999A, 5.375%, 4/01/19
5,000 Brownsville, Texas, Utility System Priority Revenue Bonds, 9/15 at 100.00 AAA 5,163,800
Series 2005A, 5.000%, 9/01/27 - AMBAC Insured
2,000 Harris County Health Facilities Development Corporation, 2/10 at 100.00 AAA 2,098,580
Texas, Thermal Utility Revenue Bonds, TECO Project,
Series 2000, 5.750%, 2/15/15 - AMBAC Insured
(Alternative Minimum Tax)
1,000 Matagorda County Navigation District 1, Texas, Revenue Bonds, 5/09 at 101.00 BBB- 1,030,220
Reliant Energy Inc., Series 1999B, 5.950%, 5/01/30
(Alternative Minimum Tax)
------------------------------------------------------------------------------------------------------------------------------------
12,960 Total Utilities 13,738,160
------------------------------------------------------------------------------------------------------------------------------------
37
Nuveen Texas Quality Income Municipal Fund (NTX) (continued)
Portfolio of INVESTMENTS July 31, 2006
PRINCIPAL OPTIONAL CALL
AMOUNT (000) DESCRIPTION (1) PROVISIONS (2) RATINGS (3) VALUE
------------------------------------------------------------------------------------------------------------------------------------
WATER AND SEWER - 10.8% (7.4% 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 AAA $ 1,049,300
1,030 5.000%, 12/15/21 - FGIC Insured 12/14 at 100.00 AAA 1,072,467
3,000 Houston, Texas, First Lien Combined Utility System Revenue 5/14 at 100.00 AAA 3,186,750
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 3,742,235
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 AAA 1,743,571
1,760 5.000%, 8/15/23 - AMBAC Insured 8/14 at 100.00 AAA 1,822,973
1,260 Rowlett, Rockwall and Dallas Counties, Texas, Waterworks 3/14 at 100.00 AAA 1,303,735
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 1,559,985
Fund Revenue Bonds, Series 1999A, 5.500%, 7/15/21
------------------------------------------------------------------------------------------------------------------------------------
14,735 Total Water and Sewer 15,481,016
------------------------------------------------------------------------------------------------------------------------------------
$ 206,327 Total Investments (cost $200,103,411) - 145.4% 207,932,694
=============-----------------------------------------------------------------------------------------------------------------------
Other Assets Less Liabilities - 2.8% 4,076,667
--------------------------------------------------------------------------------------------------------------------
Preferred Shares, at Liquidation Value - (48.2)% (69,000,000)
--------------------------------------------------------------------------------------------------------------------
Net Assets Applicable to Common Shares - 100% $ 143,009,361
====================================================================================================================
(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 or Moody's rating. Ratings below BBB
by Standard & Poor's Group or Baa by Moody's Investor
Service, Inc. are considered to be below investment
grade.
(4) 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.
(5) The issuer has received a proposed 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 that it
is formally determined that the interest on the bonds
should be treated as taxable.
WI/DD Purchased on a when-issued or delayed delivery basis.
(ETM) Escrowed to maturity.
See accompanying notes to financial statements.
38
Statement of
ASSETS AND LIABILITIES July 31, 2006
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 $89,045,724,
$31,620,171, $52,113,142, $64,070,644 and
$200,103,411, respectively) $92,101,248 $32,451,200 $54,203,030 $65,419,270 $207,932,694
Cash 354,358 631,591 -- 49,053 --
Receivables:
Interest 634,943 251,451 438,380 437,044 3,238,060
Investments sold -- 1,545,829 422,854 -- 7,938,060
Unrealized appreciation on forward swaps -- -- -- 48,098 --
Other assets 9,961 5,870 97 2,642 16,649
------------------------------------------------------------------------------------------------------------------------------------
Total assets 93,100,510 34,885,941 55,064,361 65,956,107 219,125,463
------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Cash overdraft -- -- 62,662 -- 937,571
Payable for investments purchased -- -- -- -- 5,993,817
Accrued expenses:
Management fees 50,155 11,438 15,699 17,720 113,649
Other 17,622 6,193 12,319 10,785 39,943
Preferred share dividends payable 9,038 6,805 8,616 14,132 31,122
------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 76,815 24,436 99,296 42,637 7,116,102
------------------------------------------------------------------------------------------------------------------------------------
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 $63,023,695 $22,861,505 $36,465,065 $43,913,470 $143,009,361
====================================================================================================================================
Common shares outstanding 4,468,210 1,547,644 2,430,496 3,067,531 9,495,144
====================================================================================================================================
Net asset value per Common share outstanding
(net assets applicable to Common shares,
divided by Common shares outstanding) $ 14.10 $ 14.77 $ 15.00 $ 14.32 $ 15.06
====================================================================================================================================
NET ASSETS APPLICABLE TO COMMON SHARES CONSIST OF:
------------------------------------------------------------------------------------------------------------------------------------
Common shares, $.01 par value per share $ 44,682 $ 15,476 $ 24,305 $ 30,675 $ 94,951
Paid-in surplus 62,143,653 21,891,330 34,438,571 43,247,056 134,624,791
Undistributed (Over-distribution of) net
investment income (115,641) 4,540 (45,252) (93,467) 236,581
Accumulated net realized gain (loss)
from investments and
derivative transactions (2,104,523) 119,130 (42,447) (667,518) 223,755
Net unrealized appreciation
(depreciation) of investments
and derivative transactions 3,055,524 831,029 2,089,888 1,396,724 7,829,283
------------------------------------------------------------------------------------------------------------------------------------
Net assets applicable to Common shares $63,023,695 $22,861,505 $36,465,065 $43,913,470 $143,009,361
====================================================================================================================================
Authorized shares:
Common 200,000,000 Unlimited Unlimited Unlimited Unlimited
Preferred 1,000,000 Unlimited Unlimited Unlimited Unlimited
====================================================================================================================================
See accompanying notes to financial statements.
39
Statement of
OPERATIONS Year Ended July 31, 2006
ARIZONA ARIZONA ARIZONA ARIZONA TEXAS
PREMIUM DIVIDEND DIVIDEND DIVIDEND QUALITY
INCOME ADVANTAGE ADVANTAGE 2 ADVANTAGE 3 INCOME
(NAZ) (NFZ) (NKR) (NXE) (NTX)
------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME $ 4,478,362 $1,656,401 $ 2,642,814 $ 3,049,929 $10,851,828
------------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Management fees 598,886 224,921 354,100 423,305 1,353,846
Preferred shares - auction fees 74,424 29,769 45,894 54,577 171,565
Preferred shares - dividend disbursing agent fees 10,000 10,000 10,000 10,000 20,000
Shareholders' servicing agent fees and expenses 5,574 458 330 332 14,761
Custodian's fees and expenses 26,979 13,542 20,436 24,386 65,971
Directors'/Trustees' fees and expenses 2,028 944 1,215 1,325 4,559
Professional fees 12,887 10,666 11,252 11,806 17,298
Shareholders' reports - printing and mailing expenses 6,590 7,746 10,570 11,397 27,020
Stock exchange listing fees 10,106 132 206 261 10,104
Investor relations expense 10,540 6,165 8,303 9,373 24,408
Other expenses 10,356 10,128 11,142 11,587 16,458
------------------------------------------------------------------------------------------------------------------------------------
Total expenses before custodian fee credit and expense
reimbursement 768,370 314,471 473,448 558,349 1,725,990
Custodian fee credit (11,833) (5,003) (4,028) (2,533) (23,368)
Expense reimbursement -- (96,891) (166,172) (211,893) --
------------------------------------------------------------------------------------------------------------------------------------
Net expenses 756,537 212,577 303,248 343,923 1,702,622
------------------------------------------------------------------------------------------------------------------------------------
Net investment income 3,721,825 1,443,824 2,339,566 2,706,006 9,149,206
------------------------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) from investments 118,668 129,877 124,725 111,246 1,401,122
Net realized gain (loss) from forward swaps -- 45,960 89,291 143,857 --
Change in net unrealized appreciation
(depreciation)
of investments (1,870,680) (781,653) (1,063,447) (1,013,672) (4,517,912)
Change in net unrealized appreciation
(depreciation) of forward swaps -- (25,345) (50,556) (30,567) --
------------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) (1,752,012) (631,161) (899,987) (789,136) (3,116,790)
------------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO PREFERRED SHAREHOLDERS
From net investment income (787,320) (305,984) (485,176) (597,775) (2,071,629)
From accumulated net realized gains -- (14,818) (34,003) -- --
------------------------------------------------------------------------------------------------------------------------------------
Decrease in net assets applicable to Common shares
from distributions to Preferred shareholders (787,320) (320,802) (519,179) (597,775) (2,071,629)
------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets applicable to
Common shares from operations $ 1,182,493 $ 491,861 $ 920,400 $ 1,319,095 $ 3,960,787
====================================================================================================================================
See accompanying notes to financial statements.
40
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
7/31/06 7/31/05 7/31/06 7/31/05 7/31/06 7/31/05
------------------------------------------------------------------------------------------------------------------------------------
OPERATIONS
Net investment income $ 3,721,825 $ 3,821,484 $ 1,443,824 $ 1,497,128 $ 2,339,566 $ 2,346,916
Net realized gain (loss)
from investments 118,668 769,058 129,877 205,471 124,725 357,503
Net realized gain (loss) from
forward swaps -- -- 45,960 (129,087) 89,291 (323,226)
Change in net unrealized
appreciation (depreciation)
of investments (1,870,680) 1,754,362 (781,653) 620,243 (1,063,447) 1,331,714
Change in net unrealized
appreciation (depreciation)
of forward swaps -- -- (25,345) 25,345 (50,556) 50,556
Distributions to Preferred
shareholders:
From net investment income (787,320) (405,070) (305,984) (157,504) (485,176) (262,016)
From accumulated net realized gains -- -- (14,818) (4,003) (34,003) (19,342)
------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
applicable to Common shares
from operations 1,182,493 5,939,834 491,861 2,057,593 920,400 3,482,105
------------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO COMMON SHAREHOLDERS
From net investment income (3,081,682) (3,762,499) (1,299,911) (1,418,195) (2,009,891) (2,092,582)
From accumulated net realized gains -- -- (118,137) (67,355) (256,786) (288,186)
------------------------------------------------------------------------------------------------------------------------------------
Decrease in net assets applicable to
Common shares from distributions
to Common shareholders (3,081,682) (3,762,499) (1,418,048) (1,485,550) (2,266,677) (2,380,768)
------------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS
Net proceeds from Common shares
issued to shareholders due to
reinvestment of distributions 100,418 213,665 35,014 27,860 106,998 60,045
------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
applicable to Common shares
from capital share transactions 100,418 213,665 35,014 27,860 106,998 60,045
------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease)
in net assets applicable
to Common shares (1,798,771) 2,391,000 (891,173) 599,903 (1,239,279) 1,161,382
Net assets applicable to Common
shares at the beginning of year 64,822,466 62,431,466 23,752,678 23,152,775 37,704,344 36,542,962
------------------------------------------------------------------------------------------------------------------------------------
Net assets applicable to Common
shares at the end of year $63,023,695 $64,822,466 $22,861,505 $23,752,678 $36,465,065 $37,704,344
====================================================================================================================================
Undistributed (Over-distribution of)
net investment income
at the end of year $ (115,641) $ 31,548 $ 4,540 $ 166,611 $ (45,252) $ 110,277
====================================================================================================================================
See accompanying notes to financial statements.
41
Statement of
CHANGES IN NET ASSETS (continued)
ARIZONA TEXAS
DIVIDEND ADVANTAGE 3 (NXE) QUALITY INCOME (NTX)
----------------------------- ----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
7/31/06 7/31/05 7/31/06 7/31/05
------------------------------------------------------------------------------------------------------------------------------------
OPERATIONS
Net investment income $ 2,706,006 $ 2,735,161 $ 9,149,206 $ 9,447,714
Net realized gain (loss) from investments 111,246 (44,805) 1,401,122 1,544,028
Net realized gain (loss) from
forward swaps 143,857 (530,167) -- --
Change in net unrealized appreciation
(depreciation) of investments (1,013,672) 2,365,824 (4,517,912) 2,354,555
Change in net unrealized appreciation
(depreciation) of forward swaps (30,567) 78,665 -- --
Distributions to Preferred shareholders:
From net investment income (597,775) (313,291) (2,071,629) (1,225,414)
From accumulated net realized gains -- -- -- --
------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
applicable to Common shares
from operations 1,319,095 4,291,387 3,960,787 12,120,883
------------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO COMMON SHAREHOLDERS
From net investment income (2,239,245) (2,444,592) (7,757,330) (8,881,918)
From accumulated net realized gains -- -- -- --
------------------------------------------------------------------------------------------------------------------------------------
Decrease in net assets applicable to
Common shares from distributions
to Common shareholders (2,239,245) (2,444,592) (7,757,330) (8,881,918)
------------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS
Net proceeds from Common shares
issued to shareholders due to
reinvestment of distributions 4,304 -- 88,073 245,790
------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
applicable to Common shares
from capital share transactions 4,304 -- 88,073 245,790
------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets
applicable to Common shares (915,846) 1,846,795 (3,708,470) 3,484,755
Net assets applicable to Common
shares at the beginning of year 44,829,316 42,982,521 146,717,831 143,233,076
------------------------------------------------------------------------------------------------------------------------------------
Net assets applicable to Common
shares at the end of year $43,913,470 $44,829,316 $143,009,361 $146,717,831
====================================================================================================================================
Undistributed (Over-distribution of)
net investment income
at the end of year $ (93,467) $ 37,547 $ 236,581 $ 942,985
====================================================================================================================================
See accompanying notes to financial statements.
42
Notes to
FINANCIAL STATEMENTS
1. GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES
The state funds (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). 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, if any, 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 establishes 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. If the
pricing service is unable to supply a price for a municipal bond or a forward
swap contract, each Fund may use a market price or fair market value quote
provided by a major broker/dealer in such investments. If it is determined that
the market price or fair market value for an investment is unavailable or
inappropriate, the Board of Directors/Trustees of the Funds, or its designee,
may establish a fair value for the investment. Temporary investments in
securities that have variable rate and demand features qualifying them as
short-term investments are valued at amortized cost, which approximates market
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 or 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, 2006, Texas
Quality Income (NTX) had an outstanding when-issued/delayed delivery purchase
commitment of $3,759,046. There were no such outstanding purchase commitments in
any of the other 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.
43
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 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, if any, to retain such tax-exempt status when distributed to
shareholders of the Funds. All monthly tax-exempt income dividends paid during
the fiscal year ended July 31, 2006, have been designated Exempt Interest
Dividends. Net realized capital gains and ordinary income distributions paid by
the Funds are subject to federal taxation.
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 not less frequently than 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.
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
=========================================================================================================
Forward Swap Transactions
The Funds are authorized to invest in certain derivative financial instruments.
The Funds' use of forward interest rate swap transactions is intended to
mitigate the negative impact that an increase in long-term interest rates could
have on Common share net asset value. Forward interest rate swap transactions
involve each Fund's agreement with the counterparty to pay, in the future, a
fixed rate payment in exchange for the counterparty paying the Fund a variable
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 would increase or decrease
in value based primarily on the extent to which long-term interest rates for
bonds having a maturity of the swaps' termination date were to increase or
decrease. The Funds may close out a contract prior to the effective date, at
which point a realized gain or loss would be 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 minimize 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.
44
Custodian Fee Credit
Each Fund has an arrangement with the custodian bank whereby certain custodian
fees and expenses are reduced by credits earned on each Fund's cash on deposit
with the bank. Such deposit arrangements are an alternative to overnight
investments.
Indemnifications
Under the Funds' organizational documents, 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
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
7/31/06 7/31/05 7/31/06 7/31/05 7/31/06 7/31/05
---------------------------------------------------------------------------------------------------------------
Common shares issued to
shareholders due to
reinvestment of distributions 6,761 13,619 2,135 1,750 6,848 3,770
===============================================================================================================
ARIZONA DIVIDEND TEXAS QUALITY
ADVANTAGE 3 (NXE) INCOME (NTX)
------------------------ ------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
7/31/06 7/31/05 7/31/06 7/31/05
---------------------------------------------------------------------------------------------------------------
Common shares issued to
shareholders due to
reinvestment of distributions 288 -- 5,523 15,430
===============================================================================================================
3. INVESTMENT TRANSACTIONS
Purchases and sales (including maturities but excluding short-term investments
and derivative transactions) during the fiscal year ended July 31, 2006, 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 $20,788,098 $ 8,420,390 $6,052,030 $7,842,804 $27,161,557
Sales and maturities 20,953,737 10,197,260 6,292,636 8,576,880 28,829,395
=========================================================================================================
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 the treatment of paydown gains and losses, timing differences
in recognizing taxable market discount and timing differences in recognizing
certain gains and losses on investment transactions. 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, based on
their Federal tax basis treatment and have no impact on the net asset value of
the Funds. Temporary differences do not require reclassification.
At July 31, 2006, 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 $89,022,714 $31,616,846 $52,223,986 $64,128,048 $200,028,206
=========================================================================================================
45
Notes to
FINANCIAL STATEMENTS (continued)
Gross unrealized appreciation and gross unrealized depreciation of investments
at July 31, 2006, 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 $3,170,003 $856,249 $2,132,813 $1,382,551 $8,459,702
Depreciation (91,469) (21,895) (153,769) (91,329) (555,214)
---------------------------------------------------------------------------------------------------------
Net unrealized appreciation
(depreciation)
of investments $3,078,534 $834,354 $1,979,044 $1,291,222 $7,904,488
=========================================================================================================
The tax components of undistributed net tax-exempt income, net ordinary income
and net long-term capital gains at July 31, 2006, 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 * $98,264 $106,365 $118,647 $91,940 $795,438
Undistributed net ordinary income ** -- 3,027 -- -- --
Undistributed net long-term capital gains -- 119,130 69,876 -- 223,755
=========================================================================================================
* Undistributed net tax-exempt income (on a tax basis) has not been reduced
for the dividend declared on July 3, 2006, paid on August 1, 2006.
** 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 tax years ended July 31, 2006
and July 31, 2005, 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
2006 (NAZ) (NFZ) (NKR) (NXE) (NTX)
-----------------------------------------------------------------------------------------------------------------
Distributions from net tax-exempt income $3,923,547 $1,618,663 $2,507,532 $2,850,308 $9,881,946
Distributions from net ordinary income ** -- -- -- -- 22,028
Distributions from net long-term capital gains *** -- 132,955 290,789 -- --
=================================================================================================================
ARIZONA ARIZONA ARIZONA ARIZONA TEXAS
PREMIUM DIVIDEND DIVIDEND DIVIDEND QUALITY
INCOME ADVANTAGE ADVANTAGE 2 ADVANTAGE 3 INCOME
2005 (NAZ) (NFZ) (NKR) (NXE) (NTX)
-----------------------------------------------------------------------------------------------------------------
Distributions from net tax-exempt income $4,217,354 $1,573,643 $2,351,896 $2,764,463 $10,161,664
Distributions from net ordinary income ** -- -- -- -- --
Distributions from net long-term capital gains -- 71,358 307,825 -- --
=================================================================================================================
** Net ordinary income consists of taxable market discount income and net
short-term capital gains, if any.
*** 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 the
earnings and profits of the Funds related to net capital gain to zero for
the tax year ended July 31, 2006.
46
At July 31, 2006, 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
PREMIUM DIVIDEND
INCOME ADVANTAGE 3
(NAZ) (NXE)
--------------------------------------------------------------------------------
Expiration year:
2011 $ 477,877 $ --
2012 1,553,627 205,820
2013 -- 160,902
2014 -- 218,127
--------------------------------------------------------------------------------
Total $2,031,504 $584,849
================================================================================
The following Funds have elected to defer net realized losses from investments
incurred from November 1, 2005 through July 31, 2006 ("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
PREMIUM DIVIDEND
INCOME ADVANTAGE 3
(NAZ) (NXE)
--------------------------------------------------------------------------------
$73,017 $23,223
================================================================================
5. MANAGEMENT FEE 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
Investments, Inc., ("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 TOPREFERRED 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 TOPREFERRED 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
================================================================================
47
Notes to
FINANCIAL STATEMENTS (continued)
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 table below. As
of July 31, 2006, the complex-level fee rate was .1875%.
COMPLEX-LEVEL ASSETS(1) COMPLEX-LEVEL FEE RATE
--------------------------------------------------------------------------------
For the first $55 billion .2000%
For the next $1 billion .1800
For the next $1 billion .1600
For the next $3 billion .1425
For the next $3 billion .1325
For the next $3 billion .1250
For the next $5 billion .1200
For the next $5 billion .1175
For the next $15 billion .1150
For Managed Assets over $91 billion (2) .1400
================================================================================
(1) The complex-level fee component of the management fee for the funds is
calculated based upon the aggregate Managed Assets ("Managed Assets" means
the average daily net assets of each fund including assets attributable to
all types of leverage used by the Nuveen funds) of Nuveen-sponsored funds
in the U.S.
(2) With respect to the complex-wide Managed Assets over $91 billion, the fee
rate or rates that will apply to such assets will be determined at a later
date. In the unlikely event that complex-wide Managed Assets reach $91
billion prior to a determination of the complex-level fee rate or rates to
be applied to Managed Assets in excess of $91 billion, the complex-level
fee rate for such complex-wide Managed Assets shall be .1400% until such
time as a different rate or rates is determined.
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.
49
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.
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.
49
Notes to
FINANCIAL STATEMENTS (continued)
6. NEW ACCOUNTING PRONOUNCEMENT
Financial Accounting Standards Board Interpretation No. 48
On July 13, 2006, the Financial Accounting Standards Board (FASB) released FASB
Interpretation No. 48 Accounting for Uncertainty in Income Taxes (FIN 48). FIN
48 provides guidance for how uncertain tax positions should be recognized,
measured, presented and disclosed in the financial statements. FIN 48 requires
the evaluation of tax positions taken or expected to be taken in the course of
preparing the Fund's tax returns to determine whether the tax positions are
"more-likely-than-not" of being sustained by the applicable tax authority. Tax
positions not deemed to meet the more-likely-than-not threshold would be
recorded as a tax benefit or expense in the current year. Adoption of FIN 48 is
required for fiscal years beginning after December 15, 2006 and is to be applied
to all open tax years as of the effective date. At this time, management is
evaluating the implications of FIN 48 and does not expect the adoption of FIN 48
will have a significant impact on the net assets or results of operations of the
Funds.
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 1, 2006, to shareholders of
record on August 15, 2006, 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 $.0655 $.0645 $.0565 $.0635
=========================================================================================================
50
Financial
HIGHLIGHTS
51
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:
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)
2003 14.25 .97 (.57) (.07) -- .33 (.92) -- (.92)
2002 14.77 1.07 (.57) (.09) (.01) .40 (.88) (.04) (.92)
ARIZONA DIVIDEND
ADVANTAGE (NFZ)
------------------------------------------------------------------------------------------------------------------------------------
Year Ended 7/31:
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)
2003 14.81 1.00 (.38) (.07) (.01) .54 (.88) (.04) (.92)
2002 14.37 1.04 .36 (.11) -- 1.29 (.84) (.01) (.85)
ARIZONA DIVIDEND
ADVANTAGE 2 (NKR)
------------------------------------------------------------------------------------------------------------------------------------
Year Ended 7/31:
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)
2003 14.88 .96 (.31) (.08) -- .57 (.86) (.01) (.87)
2002(a) 14.33 .24 .71 (.02) -- .93 (.22) -- (.22)
ARIZONA DIVIDEND
ADVANTAGE 3 (NXE)
------------------------------------------------------------------------------------------------------------------------------------
Year Ended 7/31:
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)
2003(b) 14.33 .66 (.67) (.05) -- (.06) (.61) -- (.61)
TEXAS QUALITY
INCOME (NTX)
------------------------------------------------------------------------------------------------------------------------------------
Year Ended 7/31:
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)
2003 15.14 1.05 (.58) (.08) -- .39 (.95) (.01) (.96)
2002 15.16 1.11 (.02) (.10) (.02) .97 (.92) (.07) (.99)
====================================================================================================================================
Total Returns
---------------------
Based
Offering on
Costs and Ending Common
Preferred Common Based Share
Share Share Ending on Net
Underwriting Net Asset Market Market Asset
Discounts Value Value Value** Value**
========================================================================================
ARIZONA PREMIUM
INCOME (NAZ)
----------------------------------------------------------------------------------------
Year Ended 7/31:
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
2003 -- 13.66 15.00 (5.98) 2.21
2002 -- 14.25 16.90 9.63 2.88
ARIZONA DIVIDEND
ADVANTAGE (NFZ)
----------------------------------------------------------------------------------------
Year Ended 7/31:
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
2003 .02 14.45 15.30 3.06 3.67
2002 -- 14.81 15.75 6.38 9.32
ARIZONA DIVIDEND
ADVANTAGE 2 (NKR)
----------------------------------------------------------------------------------------
Year Ended 7/31:
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
2003 (.01) 14.57 14.40 (3.53) 3.67
2002(a) (.16) 14.88 15.80 6.81 5.38
ARIZONA DIVIDEND
ADVANTAGE 3 (NXE)
----------------------------------------------------------------------------------------
Year Ended 7/31:
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
2003(b) (.21) 13.45 13.97 (2.76) (2.05)
TEXAS QUALITY
INCOME (NTX)
----------------------------------------------------------------------------------------
Year Ended 7/31:
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
2003 -- 14.57 14.71 4.14 2.54
2002 -- 15.14 15.07 9.29 6.61
========================================================================================
Ratios/Supplemental Data
---------------------------------------------------------------------------------------------
Before Credit/Reimbursement After Credit/Reimbursement***
----------------------------- -----------------------------
Ratio of Net Ratio of Net
Ratio of Investment Ratio of Investment
Ending Expenses Income to Expenses Income to
Net to Average Average to Average Average
Assets Net Assets Net Assets Net Assets Net Assets
Applicable Applicable Applicable Applicable Applicable Portfolio
to Common to Common to Common to Common to Common Turnover
Shares (000) Shares++ Shares++ Shares++ Shares++ Rate
============================================================================================================================
ARIZONA PREMIUM
INCOME (NAZ)
----------------------------------------------------------------------------------------------------------------------------
Year Ended 7/31:
2006 $63,024 1.21% 5.83% 1.19% 5.84% 22%
2005 64,822 1.20 5.91 1.19 5.92 17
2004 62,431 1.22 6.49 1.21 6.50 26
2003 60,547 1.25 6.81 1.24 6.82 17
2002 62,876 1.28 7.45 1.26 7.47 19
ARIZONA DIVIDEND
ADVANTAGE (NFZ)
----------------------------------------------------------------------------------------------------------------------------
Year Ended 7/31:
2006 22,862 1.36 5.79 .92 6.23 24
2005 23,753 1.34 5.82 .87 6.28 18
2004 23,153 1.30 6.10 .83 6.57 24
2003 22,290 1.35 6.11 .91 6.55 20
2002 22,791 1.41 6.72 .93 7.20 40
ARIZONA DIVIDEND
ADVANTAGE 2 (NKR)
----------------------------------------------------------------------------------------------------------------------------
Year Ended 7/31:
2006 36,465 1.28 5.88 .82 6.34 11
2005 37,704 1.27 5.76 .82 6.22 11
2004 36,543 1.27 5.83 .80 6.30 14
2003 35,237 1.27 5.78 .82 6.23 4
2002(a) 35,913 1.19* 4.43* .77* 4.85* 1
ARIZONA DIVIDEND
ADVANTAGE 3 (NXE)
----------------------------------------------------------------------------------------------------------------------------
Year Ended 7/31:
2006 43,913 1.26 5.63 .78 6.12 12
2005 44,829 1.25 5.63 .76 6.12 15
2004 42,983 1.25 5.80 .76 6.29 22
2003(b) 41,247 1.19* 5.05* .73* 5.52* 16
TEXAS QUALITY
INCOME (NTX)
----------------------------------------------------------------------------------------------------------------------------
Year Ended 7/31:
2006 143,009 1.19 6.31 1.18 6.33 13
2005 146,718 1.18 6.42 1.16 6.44 14
2004 143,233 1.18 6.77 1.18 6.77 16
2003 137,975 1.20 6.93 1.19 6.94 12
2002 143,305 1.23 7.40 1.22 7.42 22
============================================================================================================================
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:
2006 $30,000 $25,000 $77,520
2005 30,000 25,000 79,019
2004 30,000 25,000 77,026
2003 30,000 25,000 75,456
2002 30,000 25,000 77,397
ARIZONA DIVIDEND
ADVANTAGE (NFZ)
---------------------------------------------------------------------
Year Ended 7/31:
2006 12,000 25,000 72,628
2005 12,000 25,000 74,485
2004 12,000 25,000 73,235
2003 12,000 25,000 71,438
2002 12,000 25,000 72,480
ARIZONA DIVIDEND
ADVANTAGE 2 (NKR)
---------------------------------------------------------------------
Year Ended 7/31:
2006 18,500 25,000 74,277
2005 18,500 25,000 75,952
2004 18,500 25,000 74,382
2003 18,500 25,000 72,618
2002(a) 18,500 25,000 73,531
ARIZONA DIVIDEND
ADVANTAGE 3 (NXE)
---------------------------------------------------------------------
Year Ended 7/31:
2006 22,000 25,000 74,902
2005 22,000 25,000 75,942
2004 22,000 25,000 73,844
2003(b) 22,000 25,000 71,872
TEXAS QUALITY
INCOME (NTX)
---------------------------------------------------------------------
Year Ended 7/31:
2006 69,000 25,000 76,815
2005 69,000 25,000 78,159
2004 69,000 25,000 76,896
2003 69,000 25,000 74,991
2002 69,000 25,000 76,922
=====================================================================
* Annualized.
** Total Return 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. Total Return 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. 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) For the period March 25, 2002 (commencement of operations) through July 31,
2002.
(b) For the period September 25, 2002 (commencement of operations) through July
31, 2003.
See accompanying notes to financial statements.
52-53 spread
Board Members
AND OFFICERS
The management of the Funds, including general supervision of the duties
performed for the Funds by the Adviser, is the responsibility of the Board
Members of the Funds. The number of board members of the Fund is currently set
at nine. None of the board members who are not "interested" persons of the Funds
has ever been a director or employee of, or consultant to, Nuveen or its
affiliates. The names and business addresses of the board members and officers
of the Funds, their principal occupations and other affiliations during the past
five years, the number of portfolios each oversees and other directorships they
hold are set forth below.
NUMBER OF
PORTFOLIOS IN
POSITION(S) YEAR FIRST PRINCIPAL OCCUPATION(S) FUND COMPLEX
NAME, BIRTHDATE HELD WITH ELECTED OR INCLUDING OTHER DIRECTORSHIPS OVERSEEN BY
AND ADDRESS THE FUNDS APPOINTED(2) DURING PAST 5 YEARS BOARD MEMBER
------------------------------------------------------------------------------------------------------------------------------------
BOARD MEMBER WHO IS AN INTERESTED PERSON OF THE FUNDS:
------------------------------------------------------------------------------------------------------------------------------------
Timothy R. Schwertfeger(1) Chairman of 1994 Chairman (since 1996) and Director of Nuveen Investments, 167
3/28/49 the Board Inc., Nuveen Investments, LLC, Nuveen Advisory Corp. and
333 W. Wacker Drive and Board Nuveen Institutional Advisory Corp.(3); formerly, Director
Chicago, IL 60606 Member (1996-2006) of Institutional Capital Corporation; Chairman
and Director (since 1997) of Nuveen Asset Management;
Chairman and Director of Rittenhouse Asset Management,
Inc. (since 1999); Chairman of Nuveen Investments
Advisers Inc. (since 2002).
BOARD MEMBERS WHO ARE NOT INTERESTED PERSONS OF THE FUNDS:
------------------------------------------------------------------------------------------------------------------------------------
Robert P. Bremner Lead Independent 1997 Private Investor and Management Consultant. 167
8/22/40 Board member
333 W. Wacker Drive
Chicago, IL 60606
------------------------------------------------------------------------------------------------------------------------------------
Lawrence H. Brown Board member 1993 Retired (since 1989) as Senior Vice President of The 167
7/29/34 Northern Trust Company; Director (since 2002) Community
333 W. Wacker Drive Advisory Board for Highland Park and Highwood, United
Chicago, IL 60606 Way of the North Shore.
------------------------------------------------------------------------------------------------------------------------------------
Jack B. Evans Board member 1999 President, The Hall-Perrine Foundation, a private philanthropic 167
10/22/48 corporation (since 1996); Director and Vice Chairman, United
333 W. Wacker Drive Fire Group, a publicly held company; Adjunct Faculty Member,
Chicago, IL 60606 University of Iowa; Director, Gazette Companies; Life Trustee
of Coe College and Iowa College Foundation; 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 Board member 2004 Dean, Tippie College of Business, University of Iowa (since 167
3/6/48 June 2006); formerly, Dean and Distinguished Professor of Finance,
333 W. Wacker Drive School of Business at the University of Connecticut (2003-2006);
Chicago, IL 60606 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, SS&C Technologies, Inc. (May 2005 - October 2005).
------------------------------------------------------------------------------------------------------------------------------------
David J. Kundert Board member 2005 Retired (since 2004) as Chairman, JPMorgan Fleming Asset 165
10/28/42 Management, President and CEO, Banc One Investment
333 W. Wacker Drive Advisors Corporation, and President, One Group Mutual
Chicago, IL 60606 Funds; prior thereto, Executive Vice President, Banc One
Corporation and Chairman and CEO, Banc One Investment
Management Group; Board of Regents, Luther College;
member of the Wisconsin Bar Association; member of Board
of Directors, Friends of Boerner Botanical Gardens.
54
NUMBER OF
PORTFOLIOS IN
POSITION(S) YEAR FIRST PRINCIPAL OCCUPATION(S) FUND COMPLEX
NAME, BIRTHDATE HELD WITH ELECTED OR INCLUDING OTHER DIRECTORSHIPS OVERSEEN BY
AND ADDRESS THE FUNDS APPOINTED(2) DURING PAST 5 YEARS BOARD MEMBER
------------------------------------------------------------------------------------------------------------------------------------
BOARD MEMBERS WHO ARE NOT INTERESTED PERSONS OF THE FUNDS (CONTINUED):
------------------------------------------------------------------------------------------------------------------------------------
William J. Schneider Board member 1997 Chairman of Miller-Valentine Partners Ltd., a real estate 167
9/24/44 investment company; formerly, Senior Partner and Chief
333 W. Wacker Drive Operating Officer (retired, 2004) of Miller-Valentine
Chicago, IL 60606 Group; formerly, Vice President, Miller-Valentine Realty;
Board Member, Chair of the Finance Committee and
member of the Audit Committee of Premier Health Partners,
the not-for-profit company of Miami Valley Hospital; Vice
President, Dayton Philharmonic Orchestra Association; Board
Member, Regional Leaders Forum, which promotes cooperation
on economic development issues; Director, Dayton Development
Coalition; formerly, Member, Community Advisory Board,
National City Bank, Dayton, Ohio and Business Advisory
Council, Cleveland Federal Reserve Bank.
------------------------------------------------------------------------------------------------------------------------------------
Judith M. Stockdale Board member 1997 Executive Director, Gaylord and Dorothy Donnelley 167
12/29/47 Foundation (since 1994); prior thereto, Executive Director,
333 W. Wacker Drive Great Lakes Protection Fund (from 1990 to 1994).
Chicago, IL 60606
------------------------------------------------------------------------------------------------------------------------------------
Eugene S. Sunshine Board member 2005 Senior Vice President for Business and Finance, 167
1/22/50 Northwestern University (since 1997); Director (since 2003),
333 W. Wacker Drive Chicago Board Options Exchange; formerly, Director
Chicago, IL 60606 National Mentor Holdings, a privately-held, national provider
of home and community-based services; Chairman
(since 1997), Board of Directors, Rubicon, a pure
captive insurance company owned by Northwestern
University; Director (since 1997), Evanston
Chamber of Commerce and Evanston Inventure, a
business development organization.
NUMBER OF
PORTFOLIOS IN
POSITION(S) YEAR FIRST FUND COMPLEX
NAME, BIRTHDATE HELD WITH ELECTED OR PRINCIPAL OCCUPATION(S) OVERSEEN BY
AND ADDRESS THE FUNDS APPOINTED(4) DURING PAST 5 YEARS OFFICER
------------------------------------------------------------------------------------------------------------------------------------
OFFICERS OF THE FUND:
------------------------------------------------------------------------------------------------------------------------------------
Gifford R. Zimmerman Chief 1988 Managing Director (since 2002), Assistant Secretary and 167
9/9/56 Administrative Associate General Counsel, formerly, Vice President and
333 W. Wacker Drive Officer Assistant General Counsel, of Nuveen Investments, LLC;
Chicago, IL 60606 Managing Director (2002-2004), General Counsel (1998-2004)
and Assistant Secretary, formerly, Vice President of Nuveen
Advisory Corp. and Nuveen Institutional Advisory Corp.(3);
Managing Director (since 2002) and Assistant Secretary and
Associate General Counsel, formerly, Vice President (since
1997), of Nuveen Asset Management; Managing Director (since
2004) and Assistant Secretary (since 1994) of Nuveen
Investments, Inc.; Assistant Secretary of NWQ Investment
Management Company, LLC. (since 2002); Vice President and
Assistant Secretary of Nuveen Investments Advisers Inc.
(since 2002); Managing Director, Associate General Counsel
and Assistant Secretary of Rittenhouse Asset Management,
Inc. and Symphony Asset Management LLC (since 2003);
Assistant Secretary of Tradewinds NWQ Global Investors, LLC
(since 2006); Chartered Financial Analyst.
55
Board Members
AND OFFICERS (CONTINUED)
NUMBER OF
PORTFOLIOS IN
POSITION(S) YEAR FIRST FUND COMPLEX
NAME, BIRTHDATE HELD WITH ELECTED OR PRINCIPAL OCCUPATION(S) OVERSEEN BY
AND ADDRESS THE FUNDS APPOINTED(4) DURING PAST 5 YEARS OFFICER
------------------------------------------------------------------------------------------------------------------------------------
OFFICERS OF THE FUNDS (CONTINUED):
------------------------------------------------------------------------------------------------------------------------------------
Julia L. Antonatos Vice President 2004 Managing Director (since 2005), formerly Vice President 167
9/22/63 (since 2002); formerly, Assistant Vice President (since 2000)
333 W. Wacker Drive of Nuveen Investments, LLC; Chartered Financial Analyst.
Chicago, IL 60606
------------------------------------------------------------------------------------------------------------------------------------
Michael T. Atkinson Vice President 2000 Vice President (since 2002), formerly, Assistant Vice 167
2/3/66 and Assistant President (since 2000) of Nuveen Investments, LLC.
333 W. Wacker Drive Secretary
Chicago, IL 60606
------------------------------------------------------------------------------------------------------------------------------------
Peter H. D'Arrigo Vice President 1999 Vice President and Treasurer of Nuveen Investments, LLC 167
11/28/67 and of Nuveen Investments, Inc. (since 1999); Vice President
333 W. Wacker Drive and Treasurer of Nuveen Asset Management (since 2002)
Chicago, IL 60606 and of Nuveen Investments Advisers Inc. (since 2002); Assistant
Treasurer of NWQ Investment Management Company, LLC.
(since 2002); Vice President and Treasurer of Nuveen
Rittenhouse Asset Management, Inc. and Symphony Asset
Management LLC (since 2003); Treasurer, Tradewinds NWQ
Global Investors, LLC (since 2006); formerly, Vice President and
Treasurer (1999-2004) of Nuveen Advisory Corp. and Nuveen
Institutional Advisory Corp.(3); Chartered Financial Analyst.
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John N. Desmond Vice President 2005 Vice President, Director of Investment Operations, Nuveen 167
8/24/61 Investments, LLC (since January 2005); formerly, Director,
333 W. Wacker Drive Business Manager, Deutsche Asset Management (2003-2004),
Chicago, IL 60606 Director, Business Development and Transformation, Deutsche
Trust Bank Japan (2002-2003); previously, Senior Vice
President, Head of Investment Operations and Systems, Scudder
Investments Japan, (2000-2002), Senior Vice President, Head of
Plan Administration and Participant Services, Scudder Investments
(1995-2002).
------------------------------------------------------------------------------------------------------------------------------------
Jessica R. Droeger Vice President 1998 Vice President (since 2002), Assistant Secretary and 167
9/24/64 and Secretary Assistant General Counsel (since 1998) formerly, Assistant
333 W. Wacker Drive Vice President (since 1998) of Nuveen Investments, LLC;
Chicago, IL 60606 Vice President (2002-2004) and Assistant Secretary (1998-2004)
formerly, Assistant Vice President of Nuveen Advisory Corp.
and Nuveen Institutional Advisory Corp.(3); Vice President
and Assistant Secretary (since 2005) of Nuveen Asset
Management.
------------------------------------------------------------------------------------------------------------------------------------
Lorna C. Ferguson Vice President 1998 Managing Director (since 2004), formerly, Vice President of 167
10/24/45 Nuveen Investments, LLC, Managing Director (2004) formerly,
333 W. Wacker Drive Vice President (1998-2004) of Nuveen Advisory Corp. and
Chicago, IL 60606 Nuveen Institutional Advisory Corp.(3); Managing Director
(since 2005) of Nuveen Asset Management.
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William M. Fitzgerald Vice President 1995 Managing Director (since 2002), formerly, Vice President of 167
3/2/64 Nuveen Investments; Managing Director (1997-2004) of
333 W. Wacker Drive Nuveen Advisory Corp. and Nuveen Institutional Advisory
Chicago, IL 60606 Corp.(3); Managing Director (since 2001) of Nuveen Asset
Management; Vice President (since 2002) of Nuveen
Investments Advisers Inc.; Chartered Financial Analyst.
56
NUMBER OF
PORTFOLIOS IN
POSITION(S) YEAR FIRST FUND COMPLEX
NAME, BIRTHDATE HELD WITH ELECTED OR PRINCIPAL OCCUPATION(S) OVERSEEN BY
AND ADDRESS THE FUNDS APPOINTED(4) DURING PAST 5 YEARS OFFICER
------------------------------------------------------------------------------------------------------------------------------------
OFFICERS OF THE FUNDS (CONTINUED):
------------------------------------------------------------------------------------------------------------------------------------
Stephen D. Foy Vice President 1998 Vice President (since 1993) and Funds Controller (since 1998) 167
5/31/54 and Controller of Nuveen Investments, LLC; formerly, Vice President and
333 W. Wacker Drive Funds Controller (1998-2004) of Nuveen Investments, Inc.;
Chicago, IL 60606 Certified Public Accountant.
------------------------------------------------------------------------------------------------------------------------------------
David J. Lamb Vice President 2000 Vice President (since 2000) of Nuveen Investments, 167
3/22/63 LLC; Certified Public Accountant.
333 W. Wacker Drive
Chicago, IL 60606
------------------------------------------------------------------------------------------------------------------------------------
Tina M. Lazar Vice President 2002 Vice President of Nuveen Investments, LLC (since 1999). 167
8/27/61
333 W. Wacker Drive
Chicago, IL 60606
------------------------------------------------------------------------------------------------------------------------------------
Larry W. Martin Vice President 1988 Vice President, Assistant Secretary and Assistant General 167
7/27/51 and Assistant Counsel of Nuveen Investments, LLC; formerly, Vice President
333 W. Wacker Drive Secretary and Assistant Secretary of Nuveen Advisory Corp. and Nuveen
Chicago, IL 60606 Institutional Advisory Corp.(3); Vice President (since 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); Assistant Secretary of NWQ Investment
Management Company, LLC (since 2002), Symphony Asset
Management LLC (since 2003) and Tradewinds NWQ Global
Investors, LLC (since 2006).
(1) Mr. Schwertfeger is an "interested person" of the Funds, as defined in the
Investment Company Act of 1940, because he is an officer and board member
of the Adviser.
(2) Board members serve an indefinite term until his/her successor is elected.
The year first elected or appointed represents the year in which the board
member was first elected or appointed to any fund in the Nuveen Complex.
(3) Nuveen Advisory Corp. and Nuveen Institutional Advisory Corp. were
reorganized into Nuveen Asset Management, effective January 1, 2005.
(4) 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.
57
ANNUAL INVESTMENT
MANAGEMENT AGREEMENT
APPROVAL PROCESS
The Board of Trustees is responsible for overseeing the performance of the
investment adviser to the Funds and determining whether to continue the advisory
arrangements. At a meeting held on May 23-25, 2006 (the "May Meeting"), the
Board of Trustees of the Funds, including the independent Trustees, unanimously
approved the continuance of the Investment Management Agreement between each
Fund and NAM (the "Fund Adviser").
THE APPROVAL PROCESS
During the course of the year, the Board received a wide variety of materials
relating to the services provided by the Fund Adviser and the performance of
each Fund. To assist the Board in its evaluation of the advisory contract with
the Fund Adviser at the May Meeting, the independent Trustees received extensive
materials in advance of their meeting which outlined, among other things:
o the nature, extent and quality of services provided by the Fund
Adviser;
o the organization and business operations of the Fund Adviser,
including the responsibilities of various departments and key
personnel;
o the Fund's past performance, the Fund's performance compared to funds
of similar investment objectives compiled by an independent third
party and to customized benchmarks;
o the profitability of the Fund Adviser and certain industry
profitability analyses for unaffiliated advisers;
o the expenses of the Fund Adviser in providing the various services;
o the advisory fees (gross and net management fees) and total expense
ratios of the Fund, including comparisons of such fees and expenses
with those of comparable, unaffiliated funds based on information and
data provided by Lipper (the "Peer Universe") as well as compared to a
subset of funds within the Peer Universe (the "Peer Group") to the
respective Fund (as applicable);
o the advisory fees the Fund Adviser assesses to other types of
investment products or clients;
o the soft dollar practices of the Fund Adviser, if any; and
o from independent legal counsel, a legal memorandum describing, among
other things, the duties of the Trustees under the Investment Company
Act of 1940 (the "1940 Act") as well as the general principles of
relevant state law in reviewing and approving advisory contracts; the
requirements of the 1940 Act in such matters; an adviser's fiduciary
duty with respect to advisory agreements and compensation; the
standards used by courts in determining whether investment company
boards of directors have fulfilled their duties; and factors to be
considered by the Board in voting on advisory agreements.
At the May Meeting, the Fund Adviser made a presentation to and responded to
questions from the Board. After the presentations and after reviewing the
written materials, the independent Trustees met privately with their legal
counsel to review the Board's duties in reviewing advisory contracts and
consider the renewal of the advisory contracts. It is with this background that
the Trustees con sidered the advisory contract with the Fund Adviser. The
independent Trustees, in consultation with independent counsel, reviewed the
factors set out in judicial decisions and SEC directives relating to the renewal
of advisory contracts. As outlined in more detail below, the Trustees considered
all factors they believed relevant with respect to each Fund, including the
following: (a) the nature, extent and quality of the services to be provided by
the Fund Adviser; (b) the investment performance of the Fund and the Fund
Adviser; (c) the costs of the services to be provided and profitability of the
Fund Adviser and its affiliates; (d) the extent to which economies of scale
would be realized as the Fund grows; and (e) whether fee levels reflect these
economies of scale for the benefit of Fund investors.
A. NATURE, EXTENT AND QUALITY OF SERVICES
In reviewing the Fund Adviser, the Trustees considered the nature, extent and
quality of the Fund Adviser's services. The Trustees reviewed materials
outlining, among other things, the Fund Adviser's organization and business; the
types of services that the Fund Adviser 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 and enhancements
Nuveen has taken for its municipal fund product line. In connection with their
continued service as Trustees, the Trustees also have a good understanding of
the Fund Adviser's organization, operations and personnel. In this regard, the
Trustees are familiar with and have evaluated the professional experience,
qualifications and credentials of the Fund Adviser's personnel. The Trustees
further reviewed materials describing, among other things, the teams and
58
personnel involved in the investment, research, risk-management and operational
processes involved in managing municipal funds and their respective functions.
Given the Trustees' experience with the Funds and Fund Adviser, the Trustees
recognized the demonstrated history of care and depth of experience of the
respective personnel in managing these Funds. In this regard, the Trustees
considered the continued quality of the Fund Adviser's investment process in
making portfolio management decisions as well as additional refinements and
improvements adopted to the portfolio management processes noted below. With
respect to the services provided to municipal funds, including the Funds, the
Trustees noted that the Fund Adviser continues to make refinements to its
portfolio management process including, among other things, the increased use of
derivatives to enhance management of risk, additional analytical software for
research staff and improved municipal pricing processes.
In addition to advisory services, the independent Trustees considered the
quality of any administrative or non-advisory services provided. The Fund
Adviser provides the Funds with such administrative and other services
(exclusive of, and in addition to, any such services provided by others for the
Funds) and officers and other personnel as are necessary for the operations of
the respective Fund. In connection with the review of the Investment Management
Agreement, the Trustees considered the extent and quality of these other
services which include, among other things, providing: product management (e.g.,
product positioning, performance benchmarking, risk management); fund
administration (e.g., daily net asset value pricing and reconciliation, tax
reporting, fulfilling regulatory filing requirements); oversight of third party
service providers; administration of board relations (e.g., organizing board
meetings and preparing related materials); compliance (e.g., monitoring
compliance with investment policies and guidelines and regulatory requirements);
and legal support (e.g., helping prepare and file registration statements,
amendments thereto, proxy statements and responding to regulatory requests
and/or inquiries). As the Funds operate in a highly regulated industry and given
the importance of compliance, the Trustees considered, in particular, the
additions of experienced personnel to the compliance teams and the enhancements
to technology and related systems to support the compliance activities for the
Funds (including a new reporting system for quarterly portfolio holdings).
In addition to the foregoing, the Trustees also noted the additional services
that the Fund Adviser or its affiliates provide to closed-end funds, including,
in particular, secondary market support activities. The Trustees recognized
Nuveen's continued commitment to supporting the secondary market for the common
shares of its closed-end funds through a variety of initiatives designed to
raise investor and analyst awareness and understanding of closed-end funds.
These efforts include providing advertising and other media relations programs,
continued contact with analysts, maintaining and enhancing its website for
closed-end funds, and targeted advisor communication programs. With respect to
funds that utilize leverage through the issuance of preferred shares, the
Trustees noted Nuveen's continued support for the preferred shares by
maintaining, among other things, an in-house preferred trading desk; designating
a product manager whose responsibilities include creating and disseminating
product information and managing relations in connection with the preferred
share auction; and maintaining systems necessary to test compliance with rating
agency requirements.
Based on their review, the Trustees found that, overall, the nature, extent and
quality of services provided (and expected to be provided) to the respective
Funds under the Investment Management Agreement were of a high level and were
satisfactory.
B. THE INVESTMENT PERFORMANCE OF THE FUND AND FUND ADVISER
The Board considered the investment performance for each Fund, including the
Fund's historic performance as well as its performance compared to funds with
similar investment objectives identified by an independent third party (the
"Performance Peer Group") and portfolio level performance against customized
benchmarks, as described below. In evaluating the performance information, in
certain instances, the Trustees noted that the closest Performance Peer Group
for a Fund still may not adequately reflect such Fund's investment objectives,
strategies and portfolio duration, thereby limiting the usefulness of the
comparisons of such Fund's performance with that of the Performance Peer Group.
With respect to state specific municipal funds, the Trustees recognized that
certain state municipal funds do not have a corresponding state specific
Performance Peer Group in which case their performance is measured against a
more general municipal category for various states. The closed-end state
municipal funds that do not have corresponding state-specific Performance Peer
Groups are from Arizona, Connecticut, Georgia, Maryland, Massachusetts,
Missouri, North Carolina, Ohio, Texas, and Virginia. Further, due to a lack of
state-specific unleveraged categories, certain unleveraged state municipal funds
are included in their leveraged state category (such as, the Nuveen California
Select Tax-Free Income Fund, Nuveen California Municipal Value Fund, Nuveen New
York Select Tax-Free Income Fund and Nuveen New York Municipal Value Fund).
In reviewing performance, the Trustees reviewed performance information
including, among other things, total return information compared with the Fund's
Performance Peer Group for the one-, three- and five-year periods (as
applicable) ending December 31, 2005. The Trustees also reviewed the Fund's
portfolio level performance (which does not reflect fund level fees and
expenses) compared to customized portfolio-level benchmarks for the one- and
three-year periods ending December 31, 2005 (as applicable). This analysis is
designed to assess the efficacy of investment decisions against appropriate
measures of risk and total return, within specific market segments. This
information supplements the Fund performance information provided to the Board
at each of their quarterly meetings. Based on their review, the Trustees
determined that the respective Fund's absolute and relative investment
performance over time had been satisfactory
C. FEES, EXPENSES AND PROFITABILITY
1. FEES AND EXPENSES
In evaluating the management fees and expenses of a Fund, the Board
reviewed, among other things, the Fund's advisory fees (net and gross
management fees) and total expense ratios (before and after expense
reimbursements and/or waivers) in absolute terms as well as comparisons to
the gross management fees (before waivers), net management fees (after
waivers) and total expense ratios (before and after waivers) of comparable
funds in the Peer Universe and the Peer Group. The Trustees 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 certain cases, due to the small number of peers in the Peer Universe,
the Peer Universe and Peer Group
59
ANNUAL INVESTMENT MANAGEMENT
AGREEMENT APPROVAL PROCESS (continued)
may be the same. Further, the Trustees recognized that in certain cases the
closest Peer Universe and/or Peer Group did not adequately reflect the
Fund's investment objectives and strategies limiting the usefulness of
comparisons. In reviewing comparisons, the Trustees also considered the
size of the Peer Universe and/or Peer Group, the composition of the Peer
Group (including differences in the use of leverage and insurance) as well
as differing levels of fee waivers and/or expense reimbursements. In this
regard, the Trustees 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
funds launched since 1999). Based on their review of the fee and expense
information provided, the Trustees determined that each Fund's net total
expense ratio was within an acceptable range compared to peers.
2. COMPARISONS WITH THE FEES OF OTHER CLIENTS
The Trustees further reviewed data comparing the advisory fees of the Fund
Adviser with fees the Fund Adviser charges to other clients, including
municipal managed accounts. In general, the fees charged for separate
accounts are somewhat lower than the fees assessed to the Funds. The
Trustees recognized that the differences in fees are attributable to a
variety of factors, including the differences in services provided, product
distribution, portfolio investment policies, investor profiles, account
sizes and regulatory requirements. The Trustees noted, in particular, that
the range of services provided to the Funds is more extensive than that
provided to managed separate accounts. As described in further detail
above, such additional services include, but are not limited to, providing:
product management, fund administration, oversight of third party service
providers, administration of board relations, and legal support. Funds
further operate in a highly regulated industry requiring extensive
compliance functions compared to the other investment products. In addition
to the costs of the additional services, administrative costs may also be
greater for funds as the average account size for separate accounts is
notably larger than the retail accounts of funds. Given the differences in
the product structures, particularly the extensive services provided to
closed-end municipal funds, the Trustees believe such facts justify the
different levels of fees.
3. PROFITABILITY OF FUND ADVISER
In conjunction with its review of fees, the Trustees also considered the
profitability of Nuveen Investments for advisory activities (which
incorporated Nuveen's wholly-owned affiliated sub-advisers). The Trustees
reviewed data comparing Nuveen's profitability with other fund sponsors
prepared by three independent third party service providers as well as
comparisons of the revenues, expenses and profits margins of various
unaffiliated management firms with similar amounts of assets under
management prepared by Nuveen. The Trustees further reviewed the 2005
Annual Report for Nuveen Investments. In considering profitability, the
Trustees recognized the inherent limitations in determining profitability
as well as the difficulties in comparing the profitability of other
unaffiliated advisers. Profitability may be affected by numerous factors,
including the methodology for allocating expenses, the adviser's business
mix, the types of funds managed, the adviser's capital structure and cost
of capital. Further, individual fund or product line profitability of other
sponsors is generally not publicly available. Accordingly, the
profitability information that is publicly available from various
investment advisory or management firms may not be representative of the
industry.
Notwithstanding the foregoing, in reviewing profitability, the Trustees reviewed
Nuveen's methodology and assumptions for allocating expenses across product
lines to determine profitability. In this regard, the methods of allocation used
appeared reasonable. The Trustees also, to the extent available, compared
Nuveen's profitability margins (including pre- and post-marketing profit
margins) with the profitability of various unaffiliated management firms. The
Trustees noted that Nuveen's profitability is enhanced due to its efficient
internal business model. The Trustees also recognized that while a number of
factors affect profitability, Nuveen's profitability may change as fee waivers
and/or expense reimbursement commitments of Nuveen to various funds in the
Nuveen complex expire. To keep apprised of profitability and developments that
may affect profitability, the Trustees have requested profitability analysis be
provided periodically during the year. Based on their review, the Trustees were
satisfied that the Fund Adviser's level of profitability was reasonable in light
of the services provided.
In evaluating the reasonableness of the compensation, the Trustees also
considered any other revenues paid to the Fund Adviser as well as any indirect
benefits (such as soft dollar arrangements, if any) the Fund Adviser and its
affiliates are expected to receive that are directly attributable to their
management of the Funds, if any. See Section E below for additional information.
Based on their review of the overall fee arrangements of the applicable Fund,
the Trustees determined that the advisory fees and expenses of the respective
Fund were reasonable.
60
D. ECONOMIES OF SCALE AND WHETHER FEE LEVELS REFLECT THESE ECONOMIES OF SCALE
With respect to economies of scale, the Trustees recognized the potential
benefits resulting from the costs of a fund being spread over a larger asset
base as a fund grows. To help ensure the shareholders share in these benefits,
the Trustees have reviewed and considered the breakpoints in the advisory fee
schedules that reduce advisory fees as the applicable Fund's assets grow. In
addition to advisory fee breakpoints as assets in a respective Fund rise, after
lengthy discussions with management, the Board also approved a complex-wide fee
arrangement that was introduced on August 1, 2004. 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 Trustees considered, among
other things, the historic and expected fee savings to shareholders as assets
grow, the amount of fee reductions at various asset levels, and that the
arrangement would extend to all funds in the Nuveen complex. The Trustees noted
that 2005 was the first full year to reflect the fee reductions from the complex
wide fee arrangement. The Trustees also considered the impact, if any, the
complex-wide fee arrangement may have on the level of services provided. Based
on their review, the Trustees concluded that the breakpoint schedule and
complex-wide fee arrangement currently was acceptable and desirable in providing
benefits from economies of scale to shareholders.
E. INDIRECT BENEFITS
In evaluating fees, the Trustees also considered any indirect benefits or
profits the Fund Adviser or its affiliates may receive as a result of its
relationship with each Fund. In this regard, the Trustees considered revenues
received by affiliates of the Fund Adviser 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 Trustees considered whether the Fund Adviser
received any benefits from soft dollar arrangements. With respect to NAM, the
Trustees noted that NAM does not currently have any soft dollar arrangements and
does not pay excess brokerage commissions (or spreads on principal transactions)
in order to receive research services; however, the Fund Adviser may from time
to time receive and have access to research generally provided to institutional
clients.
The Trustees did not identify any single factor discussed previously as
all-important or controlling. The Trustees, including a majority of independent
Trustees, concluded that the terms of the Investment Management Agreements were
fair and reasonable, that the Fund Adviser's fees are reasonable in light of the
services provided to each Fund, and that the renewal of the Investment
Management Agreements should be approved.
61
Reinvest Automatically
EASILY AND CONVENIENTLY
Sidebar text: NUVEEN MAKES REINVESTING EASY. A PHONE CALL IS ALL IT TAKES TO SET
UP YOUR REINVESTMENT ACCOUNT.
NUVEEN EXCHANGE-TRADED CLOSED-END FUNDS
DIVIDEND REINVESTMENT PLAN
Your Nuveen Exchange-Traded 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
then-current market price. If the shares are trading at less than net asset
value, shares for your account will be purchased on the open market. Dividends
and distributions received to purchase shares in the open market will normally
be invested shortly after the dividend payment date. No interest will be paid on
dividends and distributions awaiting reinvestment. Because the market price of
the shares may increase before purchases are completed, the average purchase
price per share may exceed the market price at the time of valuation, resulting
in the acquisition of fewer shares than if the dividend or distribution had been
paid in shares issued by the Fund. A pro rata portion of any applicable
brokerage commissions on open market purchases will be paid by Plan
participants. These commissions usually will be lower than those charged on
individual transactions.
FLEXIBLE
You may change your distribution option or withdraw from the Plan at any time,
should your needs or situation change. Should you withdraw, you can receive a
certificate for all whole shares credited to your reinvestment account and cash
payment for fractional shares, or cash payment for all reinvestment account
shares, less brokerage commissions and a $2.50 service fee.
You can reinvest whether your shares are registered in your name, or in the name
of a brokerage firm, bank, or other nominee. Ask your investment advisor if his
or her firm will participate on your behalf. Participants whose shares are
registered in the name of one firm may not be able to transfer the shares to
another firm and continue to participate in the Plan.
The Fund reserves the right to amend or terminate the Plan at any time. Although
the Fund reserves the right to amend the Plan to include a service charge
payable by the participants, there is no direct service charge to participants
in the Plan at this time.
CALL TODAY TO START REINVESTING DIVIDENDS AND/OR DISTRIBUTIONS
For more information on the Nuveen Automatic Reinvestment Plan or to enroll in
or withdraw from the Plan, speak with your financial advisor or call us at (800)
257-8787.
62
Other Useful
INFORMATION
QUARTERLY PORTFOLIO OF INVESTMENTS AND PROXY VOTING INFORMATION
Each Fund's (i) quarterly portfolio of investments, (ii) information regarding
how the Funds voted proxies relating to portfolio securities held during the
12-month period ended June 30, 2006, and (iii) a description of the policies and
procedures that the Funds used to determine how to vote proxies relating to
portfolio securities are available without charge, upon request, by calling
Nuveen Investments toll-free at (800) 257-8787 or on Nuveen's website at
www.nuveen.com.
You may also obtain this and other Fund information directly from the Securities
and Exchange Commission ("SEC"). The SEC may charge a copying fee for this
information. Visit the SEC on-line at http://www.sec.gov or in person at the
SEC's Public Reference Room in Washington, D.C. Call the SEC at 1-202-942-8090
for room hours and operation. You may also request Fund information by sending
an e-mail request to publicinfo@sec.gov or by writing to the SEC's Public
References Section at 450 Fifth Street NW, Washington, D.C. 20549.
CEO CERTIFICATION DISCLOSURE
Each Fund's Chief Executive Officer has submitted to the New York Stock Exchange
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.
GLOSSARY OF TERMS USED IN THIS REPORT
AVERAGE ANNUAL TOTAL RETURN: This is a commonly used method to express an
investment's performance over a particular, usually multi-year time period. It
expresses the return that would have been necessary each year to equal the
investment's actual cumulative performance (including change in 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 all the maturities of the bonds in a
Fund's portfolio, computed by weighting each maturity date (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.
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 MuniPreferred 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.
BOARD OF TRUSTEES
Robert P. Bremner
Lawrence H. Brown
Jack B. Evans
William C. Hunter
David J. Kundert
William J. Schneider
Timothy R. Schwertfeger
Judith M. Stockdale
Eugene S. Sunshine
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 shares of its own common or preferred stock in
the future at such times and in such amounts as is deemed advisable. No shares
were repurchased during the period covered by this report. Any future
repurchases will be reported to shareholders in the next annual or semiannual
report.
63
Photo of: 2 women looking at a photo album.
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.
Managing more than $145 billion in assets, Nuveen Investments offers access to a
number of different asset classes and investing solutions through a variety of
products. Nuveen Investments markets its capabilities under four distinct
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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
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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
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EAN-A-0706D
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 Investor 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, Chairman of the Audit Committee, 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, 2006 $ 7,696 $ 0 $ 452 $ 2,900
--------------------------------------------------------------------------------------------------------------------------
Percentage approved 0% 0% 0% 0%
pursuant to
pre-approval
exception
--------------------------------------------------------------------------------------------------------------------------
July 31, 2005 $ 7,234 $ 0 $ 597 $ 2,700
--------------------------------------------------------------------------------------------------------------------------
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
other than "Audit Fees", "Audit Related Fees", and "Tax Fees".
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 (1) SERVICE PROVIDERS
--------------------------------------------------------------------------------------------------
July 31, 2006 $ 0 $ 2,200 $ 0
--------------------------------------------------------------------------------------------------
Percentage approved 0% 0% 0%
pursuant to
pre-approval
exception
--------------------------------------------------------------------------------------------------
July 31, 2005 $ 0 $ 2,200 $ 0
--------------------------------------------------------------------------------------------------
Percentage approved 0% 0% 0%
pursuant to
pre-approval
exception
--------------------------------------------------------------------------------------------------
(1) The amounts reported for the Fund under the column heading "Tax Fees"
represents amounts billed to the Adviser exclusively for the preparation
for the Fund's tax return, the cost of which is borne by the Adviser. In
the aggregate, for all Nuveen funds for which Ernst & Young LLP serves as
independent registered public accounting firm, these fees amounted to
$275,000 in 2006 and $282,575 in 2005.
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 FEE OPERATIONS AND FINANCIAL PROVIDERS (ALL OTHER
BILLED TO FUND REPORTING OF THE FUND) ENGAGEMENTS) TOTAL
--------------------------------------------------------------------------------------------------------------------
July 31, 2006 $ 3,352 $ 2,200 $ 0 $ 5,552
July 31, 2005 $ 3,297 $ 2,200 $ 0 $ 5,497
"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, Lawrence H. Brown, Jack B.
Evans, William J. Schneider and Eugene S. Sunshine.
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 $6.14 billion
Other Pooled Investment Vehicles 0 $0
Other Accounts 4 $.25 million
* Assets are as of July 31, 2006. 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, including
these three elements, 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 30, 2006, the S&P/Investortools Municipal Bond index was
comprised of 47,346 securities with an aggregate current market value of $879
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. Each portfolio manager is eligible to receive
bonus compensation in the form of equity-based awards issued in securities
issued by Nuveen Investments, Inc. The amount of such compensation is dependent
upon the same factors articulated for cash bonus awards but also factors in his
long-term potential with the firm.
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 the July 31, 2006, 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
RANGE OF SECURITIES
EQUITY BENEFICIALLY
SECURITIES OWNED IN
BENEFICIALLY THE
OWNED IN REMAINDER
FUND OF NUVEEN
FUNDS
MANAGED BY
NAM'S
MUNICIPAL
NAME OF PORTFOLIO INVESTMENT
MANAGER FUND TEAM
-------------------------------------------------------------------------------------------------------------------------
Scott R. Romans Nuveen Arizona Dividend Advantage Municipal Fund 3 $0 $10,000-$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. Currently, he manages
investments for 29 Nuveen-sponsored investment companies.
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.
During this reporting period, the registrant's Board of Trustees implemented a
change to the procedures by which shareholders may recommend nominees to the
registrant's board of trustees by amending the registrant's by-laws to include a
provision specifying the date by which shareholder nominations for election as
trustee at a subsequent meeting must be submitted to the registrant.
Shareholders must deliver or mail notice to the registrant not less than
forty-five days nor more than sixty days prior to the first anniversary date of
the date on which the registrant first mailed its proxy materials for the prior
year's annual meeting; provided, however, if and only if the annual meeting is
not scheduled to be held within a period that commences thirty days before the
first anniversary date of the annual meeting for the preceding year and ends
thirty days after such anniversary date (an annual meeting date outside such
period being referred to as an "Other Annual Meeting Date" hereafter), the
shareholder notice must be given no later than the close of business on the date
forty-five days prior to such Other Annual Meeting Date or the tenth business
day following the date such Other Annual Meeting Date is first publicly
announced or disclosed. The shareholder's notice must be in writing and set
forth the name, age, date of birth, business address, residence address and
nationality of the person(s) being nominated and the class or series, number of
all shares of the registrant owned of record or beneficially be each such
person(s), any other information regarding such person required by Item 401 of
Regulation S-K or Item 22 of Rule 14a-101 (Schedule 14A) under the Securities
Exchange Act of 1934, as amended, any other information regarding the person(s)
to be nominated that would be required to be disclosed in a proxy statement or
other filings required to be made in connection with solicitation of proxies for
election of trustees, and whether such shareholder believes any nominee is or
will be an "interested person" (as that term is defined in the Investment
Company Act of 1940, as amended) of the registrant or sufficient information to
enable the registrant to make that determination and the written and signed
consent of the person(s) to be nominated.
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
-----------------------------------------------------------
By (Signature and Title)* /s/ Jessica R. Droeger
----------------------------------------------
Jessica R. Droeger
Vice President and Secretary
Date: October 6, 2006
-------------------------------------------------------------------
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
----------------------------------------------
Gifford R. Zimmerman
Chief Administrative Officer
(principal executive officer)
Date: October 6, 2006
-------------------------------------------------------------------
By (Signature and Title)* /s/ Stephen D. Foy
----------------------------------------------
Stephen D. Foy
Vice President and Controller
(principal financial officer)
Date: October 6, 2006
-------------------------------------------------------------------
* Print the name and title of each signing officer under his or her signature.