|
|
Financial
|
|
|
Highlights
(Unaudited) (continued)
|
|
|
ARPS at the End of Period
|
|
MTP Shares at the End of Period (h)
|
|
VMTP Shares at the End of Period
|
|
|
|
Aggregate
Amount
Outstanding
(000)
|
|
Liquidation
Value
Per Share
|
|
Asset
Coverage
Per Share
|
|
Aggregate
Amount
Outstanding
(000)
|
|
Liquidation
Value
Per Share
|
|
Asset
Coverage
Per Share
|
|
Aggregate
Amount
Outstanding
(000)
|
|
Liquidation
Value
Per Share
|
|
Asset
Coverage
Per Share
|
|
Arizona Premium Income (NAZ)
|
|
Year Ended 2/28–2/29:
|
|
2013(g)
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
28,000
|
|
$
|
100,000
|
|
$
|
342,915
|
|
2012
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
28,000
|
|
|
100,000
|
|
|
336,672
|
|
2011(f)
|
|
|
27,875
|
|
|
25,000
|
|
|
78,144
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Year Ended 7/31:
|
|
2010
|
|
|
27,875
|
|
|
25,000
|
|
|
81,097
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
2009
|
|
|
27,875
|
|
|
25,000
|
|
|
76,798
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
2008
|
|
|
30,000
|
|
|
25,000
|
|
|
73,414
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
2007
|
|
|
30,000
|
|
|
25,000
|
|
|
77,111
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
Arizona Dividend Advantage (NFZ)
|
|
Year Ended 2/28–2/29:
|
|
2013(g)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11,100
|
|
|
10.00
|
|
|
31.57
|
|
|
—
|
|
|
—
|
|
|
—
|
|
2012
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11,100
|
|
|
10.00
|
|
|
31.04
|
|
|
—
|
|
|
—
|
|
|
—
|
|
2011(f)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11,100
|
|
|
10.00
|
|
|
28.59
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Year Ended 7/31:
|
|
2010
|
|
|
10,600
|
|
|
25,000
|
|
|
76,850
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
2009
|
|
|
10,600
|
|
|
25,000
|
|
|
71,238
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
2008
|
|
|
12,000
|
|
|
25,000
|
|
|
67,817
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
2007
|
|
|
12,000
|
|
|
25,000
|
|
|
71,748
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
(f)
|
For the seven months ended February 28, 2011.
|
(g)
|
For the six months ended August 31, 2012.
|
(h)
|
The Ending and Average Market Value Per Share for each Series of the Fund’s MTP Shares were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
|
|
|
Average
|
|
|
|
|
|
|
|
Market Value
|
|
|
Market Value
|
|
|
|
|
Series
|
|
|
Per Share
|
|
|
Per Share
|
|
Arizona Dividend Advantage (NFZ)
|
|
|
|
|
|
|
|
|
|
|
Year Ended 2/28–2/29:
|
|
|
|
|
|
|
|
|
|
|
2013(g)
|
|
|
2015
|
|
$
|
10.05
|
|
$
|
10.05
|
|
2012
|
|
|
2015
|
|
|
10.08
|
|
|
9.93
|
|
2011(f)
|
|
|
2015
|
|
|
9.63
|
|
|
9.83
|
^
|
Year Ended 7/31:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
—
|
|
|
—
|
|
|
—
|
|
2009
|
|
|
—
|
|
|
—
|
|
|
—
|
|
2008
|
|
|
—
|
|
|
—
|
|
|
—
|
|
2007
|
|
|
—
|
|
|
—
|
|
|
—
|
|
^
|
For the period October 18, 2010 (first issuance date of shares) through February 28, 2011.
|
|
|
ARPS at the End of Period
|
|
MTP Shares at the End of Period (h)
|
|
ARPS and
MTP Shares at
the End of Period
|
|
|
|
|
Aggregate
Amount
Outstanding
(000)
|
|
|
Liquidation
Value
Per Share
|
|
|
Asset
Coverage
Per Share
|
|
|
Aggregate
Amount
Outstanding
(000)
|
|
|
Liquidation
Value
Per Share
|
|
|
Asset
Coverage
Per Share
|
|
|
Asset Coverage
Per $1
Liquidation
Preference
|
|
Arizona Dividend Advantage 2 (NKR)
|
|
Year Ended 2/28–2/29:
|
|
2013(g)
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
18,725
|
|
$
|
10.00
|
|
$
|
30.49
|
|
$
|
—
|
|
2012
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
18,725
|
|
|
10.00
|
|
|
30.05
|
|
|
—
|
|
2011(f)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
18,725
|
|
|
10.00
|
|
|
28.08
|
|
|
—
|
|
Year Ended 7/31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
16,625
|
|
|
25,000
|
|
|
78,734
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
2009
|
|
|
16,625
|
|
|
25,000
|
|
|
74,367
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
2008
|
|
|
18,500
|
|
|
25,000
|
|
|
70,015
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
2007
|
|
|
18,500
|
|
|
25,000
|
|
|
73,616
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
Arizona Dividend Advantage 3 (NXE)
|
|
Year Ended 2/28–2/29:
|
|
2013(g)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
20,846
|
|
|
10.00
|
|
|
32.41
|
|
|
—
|
|
2012
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
20,846
|
|
|
10.00
|
|
|
32.02
|
|
|
—
|
|
2011(f)
|
|
|
18,400
|
|
|
25,000
|
|
|
52,544
|
|
|
19,046
|
|
|
10.00
|
|
|
21.02
|
|
|
2.10
|
|
Year Ended 7/31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
18,400
|
|
|
25,000
|
|
|
83,805
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
2009
|
|
|
18,400
|
|
|
25,000
|
|
|
78,164
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
2008
|
|
|
22,000
|
|
|
25,000
|
|
|
70,546
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
2007
|
|
|
22,000
|
|
|
25,000
|
|
|
74,490
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
(f)
|
For the seven months ended February 28, 2011.
|
(g)
|
For the six months ended August 31, 2012.
|
(h)
|
The Ending and Average Market Value Per Share for each Series of the Fund’s MTP Shares were as follows:
|
|
|
|
|
|
|
Ending
|
|
|
Average
|
|
|
|
|
|
|
|
Market Value
|
|
|
Market Value
|
|
|
|
|
Series
|
|
|
Per Share
|
|
|
Per Share
|
|
Arizona Dividend Advantage 2 (NKR)
|
|
|
|
|
|
|
|
|
|
|
Year Ended 2/28–2/29:
|
|
|
|
|
|
|
|
|
|
|
2013(g)
|
|
|
2015
|
|
$
|
10.07
|
|
$
|
10.05
|
|
2012
|
|
|
2015
|
|
|
10.05
|
|
|
9.89
|
|
2011(f)
|
|
|
2015
|
|
|
9.58
|
|
|
9.71
|
^
|
Year Ended 7/31:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
—
|
|
|
—
|
|
|
—
|
|
2009
|
|
|
—
|
|
|
—
|
|
|
—
|
|
2008
|
|
|
—
|
|
|
—
|
|
|
—
|
|
2007
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Arizona Dividend Advantage 3 (NXE)
|
|
|
|
|
|
|
|
|
|
|
Year Ended 2/28–2/29:
|
|
|
|
|
|
|
|
|
|
|
2013(g)
|
|
|
2016
|
|
|
10.21
|
|
|
10.17
|
|
2012
|
|
|
2016
|
|
|
10.17
|
|
|
10.11
|
|
2011(f)
|
|
|
2016
|
|
|
9.97
|
|
|
9.96
|
^^
|
Year Ended 7/31:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
—
|
|
|
—
|
|
|
—
|
|
2009
|
|
|
—
|
|
|
—
|
|
|
—
|
|
2008
|
|
|
—
|
|
|
—
|
|
|
—
|
|
2007
|
|
|
—
|
|
|
—
|
|
|
—
|
|
^
|
For the period October 18, 2010 (first issuance date of shares) through February 28, 2011.
|
^^
|
As of February 28, 2011 (first issuance date of shares).
|
See accompanying notes to financial statements.
|
|
|
|
Nuveen Investments
|
|
55
|
|
|
Financial
|
|
|
Highlights
(Unaudited) (continued)
|
|
|
ARPS at the End of Period
|
|
MTP Shares at the End of Period (h)
|
|
|
|
Aggregate
Amount
Outstanding
(000)
|
|
Liquidation
Value
Per Share
|
|
Asset
Coverage
Per Share
|
|
Aggregate
Amount
Outstanding
(000)
|
|
Liquidation
Value
Per Share
|
|
Asset
Coverage
Per Share
|
|
Texas Quality Income (NTX)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended 2/28–2/29:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013(g)
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
70,920
|
|
$
|
10.00
|
|
$
|
31.41
|
|
2012
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
70,920
|
|
|
10.00
|
|
|
30.90
|
|
2011(f)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
70,920
|
|
|
10.00
|
|
|
29.01
|
|
Year Ended 7/31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
65,050
|
|
|
25,000
|
|
|
79,988
|
|
|
—
|
|
|
—
|
|
|
—
|
|
2009
|
|
|
65,050
|
|
|
25,000
|
|
|
75,543
|
|
|
—
|
|
|
—
|
|
|
—
|
|
2008
|
|
|
69,000
|
|
|
25,000
|
|
|
73,084
|
|
|
—
|
|
|
—
|
|
|
—
|
|
2007
|
|
|
69,000
|
|
|
25,000
|
|
|
76,173
|
|
|
—
|
|
|
—
|
|
|
—
|
|
(f)
|
For the seven months ended February 28, 2011.
|
(g)
|
For the six months ended August 31, 2012.
|
(h)
|
The Ending and Average Market Value Per Share for each Series of the Fund’s MTP Shares were as follows:
|
|
|
|
|
|
|
Ending
|
|
|
Average
|
|
|
|
|
|
|
|
Market Value
|
|
|
Market Value
|
|
|
|
|
Series
|
|
|
Per Share
|
|
|
Per Share
|
|
Texas Quality Income (NTX)
|
|
|
|
|
|
|
|
|
|
|
Year Ended 2/28–2/29:
|
|
|
|
|
|
|
|
|
|
|
2013(g)
|
|
|
2015
|
|
$
|
10.09
|
|
$
|
10.07
|
|
2012
|
|
|
2015
|
|
|
10.05
|
|
|
9.97
|
|
2011(f)
|
|
|
2015
|
|
|
9.85
|
|
|
9.86
|
^
|
Year Ended 7/31:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
—
|
|
|
—
|
|
|
—
|
|
2009
|
|
|
—
|
|
|
—
|
|
|
—
|
|
2008
|
|
|
—
|
|
|
—
|
|
|
—
|
|
2007
|
|
|
—
|
|
|
—
|
|
|
—
|
|
^
|
For the period November 2, 2010 (first issuance date of shares) through February 28, 2011.
|
|
|
See accompanying notes to financial statements.
|
|
|
|
56
|
|
Nuveen Investments
|
|
|
Notes to
|
|
|
Financial Statements
(Unaudited)
|
1. General Information and Significant Accounting Policies
General Information
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) (each a “Fund” and collectively, the “Funds”). Common shares of Arizona Premium Income (NAZ) and Texas Quality Income (NTX) are traded on the New York Stock Exchange (“NYSE”) while Common shares of Arizona Dividend Advantage (NFZ), Arizona Dividend Advantage 2 (NKR) and Arizona Dividend Advantage 3 (NXE) are traded on the NYSE MKT (formerly known as NYSE Amex). The Funds are registered under the Investment Company Act of 1940, as amended, as closed-end registered investment companies.
Each Fund seeks to provide current income exempt from both regular federal and designated state income taxes by investing primarily in a portfolio of municipal obligations issued by state and local government authorities within a single state or certain U.S. territories.
Approved Fund Reorganizations
On April 18, 2012, the Funds’ Board of Directors/Trustees approved a series of reorganizations for all the Arizona Funds included in this report. The reorganizations are intended to create a single larger state Fund, which would potentially offer shareholders the following benefits:
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Lower Fund expense ratios (excluding the effects of leverage), as fixed costs are spread over a larger asset base;
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Enhanced secondary market trading, as larger Funds potentially make it easier for investors to buy and sell Fund shares;
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•
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Lower per share trading costs through reduced bid/ask spreads due to a larger common share float; and
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Increased Fund flexibility in managing the structure and cost of leverage over time.
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The approved reorganizations are as follows:
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Acquired Funds
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Acquiring Fund
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Arizona Dividend Advantage (NFZ)
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Arizona Premium Income (NAZ)
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Arizona Dividend Advantage 2 (NKR)
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Arizona Dividend Advantage 3 (NXE)
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If shareholders approve the reorganizations, and upon the closing of the reorganizations, the Acquired Funds will transfer all of their assets to the Acquiring Fund in exchange for common and preferred shares of the Acquiring Fund, and the assumption by the Acquiring Fund of the liabilities of the Acquired Funds. The Acquired Funds will then be liquidated, dissolved and terminated in accordance with their Declaration of Trust.
In addition, shareholders of the Acquired Funds will become shareholders of the Acquiring Fund. Holders of common shares will receive newly issued common shares of the Acquiring Fund, the aggregate net asset value of which will be equal to the aggregate net asset value of the common shares of the Acquired Funds held immediately prior to the reorganizations (including for this purpose fractional Acquiring Fund shares to which shareholders would be entitled). Fractional shares will be sold on the open market and shareholders will receive cash in lieu of such fractional shares. Holders of preferred shares of each Acquired Fund will receive on a one-for-one basis newly issued preferred shares of the Acquiring Fund, in exchange for preferred shares of the Acquired Funds held immediately prior to the reorganization.
In connection with the reorganizations, the Funds have accrued for certain associated costs and expenses. Such amounts are included as components of “Accrued other expenses” on the Statement of Assets and Liabilities and “Reorganization expense” on the Statement of Operations.
Significant Accounting Policies
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 (“U.S. GAAP”).
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Notes to
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Financial Statements
(Unaudited) (continued)
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Investment Valuation
Prices of municipal bonds are provided by a pricing service approved by the Funds’ Board of Directors/Trustees. These securities are generally classified as Level 2 for fair value measurement purposes. The pricing service establishes a security’s fair value using methods that may include consideration of the following: yields or prices of investments of comparable quality, type of issue, coupon, maturity and rating, market quotes or indications of value from security dealers, evaluations of anticipated cash flows or collateral, general market conditions and other information and analysis, including the obligor’s credit characteristics considered relevant. In pricing certain securities, particularly less liquid and lower quality securities, the pricing service may consider information about a security, its issuer, or market activity, provided by Nuveen Fund Advisors, Inc. (the “Adviser”), a wholly-owned subsidiary of Nuveen Investments, Inc. (“Nuveen”). These securities are generally classified as Level 2 or Level 3 depending on the priority of the significant inputs.
Certain securities may not be able to be priced by the pre-established pricing methods as described above. Such securities may be valued by the Funds’ Board of Directors/Trustees or its designee at fair value. These securities generally include, but are not limited to, restricted securities (securities which may not be publicly sold without registration under the Securities Act of 1933, as amended) for which a pricing service is unable to provide a market price; securities whose trading has been formally suspended; debt securities that have gone into default and for which there is no current market quotation; a security whose market price is not available from a pre-established pricing source; a security with respect to which an event has occurred that is likely to materially affect the value of the security after the market has closed but before the calculation of a Fund’s net asset value (as may be the case in non-U.S. markets on which the security is primarily traded) or make it difficult or impossible to obtain a reliable market quotation; and a security whose price, as provided by the pricing service, is not deemed to reflect the security’s fair value. As a general principle, the fair value of a security would appear to be the amount that the owner might reasonably expect to receive for it in a current sale. A variety of factors may be considered in determining the fair value of such securities, which may include consideration of the following: yields or prices of investments of comparable quality, type of issue, coupon, maturity and rating, market quotes or indications of value from security dealers, evaluations of anticipated cash flows or collateral, general market conditions and other information and analysis, including the obligor’s credit characteristics considered relevant. These securities are generally classified as Level 2 or Level 3 depending on the priority of the significant inputs. Regardless of the method employed to value a particular security, all valuations are subject to review by the Funds’ Board of Directors/Trustees or its designee.
Refer to Footnote 2 – Fair Value Measurements for further details on the leveling of securities held by the Funds as of the end of the reporting period.
Investment Transactions
Investment transactions are recorded on a trade date basis. Realized gains and losses from transactions are determined on the specific identification method, which is the same basis used for federal income tax purposes. Investments purchased on a when-issued/delayed delivery basis may have extended settlement periods. Any investments so purchased are subject to market fluctuation during this period. The Funds have instructed the custodian to earmark securities in the Funds’ portfolios with a current value at least equal to the amount of the when-issued/delayed delivery purchase commitments. At August 31, 2012, Arizona Premium Income (NAZ), Arizona Dividend Advantage (NFZ), Arizona Dividend Advantage 2 (NKR) and Texas Quality Income (NTX) had outstanding when issued/delayed delivery purchase commitments of $2,953,781, $829,675, $2,483,099 and $2,279,520, respectively. There were no such outstanding purchase commitments in Arizona Dividend Advantage 3 (NXE).
Investment Income
Interest income, which reflects the amortization of premiums and includes accretion of discounts for financial reporting purposes, is recorded on an accrual basis. Investment income also reflects paydown gains and losses, if any.
Income Taxes
Each Fund is a separate taxpayer for federal income tax purposes. Each Fund intends to distribute substantially all of its net investment income and net capital gains to shareholders and to otherwise comply with the requirements of Subchapter M of the Internal Revenue Code applicable to regulated investment companies. Therefore, no federal income tax provision is required. Furthermore, each Fund intends to satisfy conditions that will enable interest from municipal securities, which is exempt from regular federal and designated state income taxes, to retain such tax-exempt status when distributed to shareholders of the Funds. Net realized capital gains and ordinary income distributions paid by the Funds are subject to federal taxation.
For all open tax years and all major taxing jurisdictions, management of the Funds has concluded that there are no significant uncertain tax positions that would require recognition in the financial statements. Open tax years are those that are open for examination by taxing authorities (i.e., generally the last four tax year ends and the interim tax period since then). Furthermore, management of the Funds is also not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly change in the next twelve months.
Dividends and Distributions to Common Shareholders
Dividends from net investment income are declared monthly. Net realized capital gains and/or market discount from investment transactions, if any, are distributed to shareholders at least annually. Furthermore, capital gains are distributed only to the extent they exceed available capital loss carryforwards.
Distributions to Common shareholders of 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. GAAP.
Auction Rate Preferred Shares
Each Fund is authorized to issue Auction Rate Preferred Shares (“ARPS”). As of February 29, 2012, the Funds redeemed all of their outstanding ARPS, at liquidation value.
MuniFund Term Preferred Shares
The following Funds have issued and outstanding MuniFund Term Preferred (“MTP”) Shares, with a $10 stated (“par”) value per share. Proceeds from the issuance of MTP Shares, net of offering expenses, were used to redeem all, or a portion of, each Fund’s outstanding ARPS. Each Fund’s MTP Shares are issued in one Series. Dividends on MTP shares, which are recognized as interest expense for financial reporting purposes, are paid monthly at a fixed annual rate, subject to adjustments in certain circumstances. The MTP Shares trade on the NYSE. As of August 31, 2012, the number of MTP Shares outstanding, annual interest rate and NYSE “ticker” symbol for each Fund’s series of MTP Shares are as follows:
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Arizona Dividend Advantage (NFZ)
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Arizona Dividend Advantage 2 (NKR)
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Shares
Outstanding
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Annual
Interest Rate
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NYSE
Ticker
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Shares
Outstanding
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Annual
Interest Rate
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NYSE
Ticker
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Series 2015
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1,110,000
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2.05
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%
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NFZ Pr C
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1,872,500
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2.05
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%
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NKR Pr C
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Arizona Dividend Advantage 3 (NXE)
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Shares
Outstanding
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Annual
Interest Rate
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NYSE
Ticker
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Series 2016
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2,084,600
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2.90
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%
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NXE Pr C
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Texas Quality Income (NTX)
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Shares
Outstanding
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Annual
Interest Rate
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NYSE
Ticker
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Series 2015
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7,092,000
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2.30
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%
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NTX Pr C
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Each Fund is obligated to redeem its MTP Shares by the date as specified in its offering document (“Term Redemption Date”), unless earlier redeemed or repurchased by the Fund. MTP Shares are subject to optional and mandatory redemption in certain circumstances. MTP Shares will be subject to redemption at the option of each Fund (“Optional Redemption Date”), subject to a payment of premium for one year following the Optional Redemption Date (“Premium Expiration Date”), and at par thereafter. MTP Shares also will be subject to redemption, at the option of each Fund, at par in the event of certain changes in the credit rating of the MTP Shares. Each Fund may be obligated to redeem certain of the MTP Shares if the Fund fails to maintain certain asset coverage and leverage ratio requirements and such failures are not cured by the applicable cure date. The redemption price per share is equal to the sum of the liquidation value per share plus any accumulated but unpaid dividends. The Term Redemption Date, Optional Redemption Date and Premium Expiration Date for each Fund’s series of MTP Shares are as follows.
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Arizona
Dividend
Advantage
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Arizona
Dividend
Advantage 2
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Arizona
Dividend
Advantage 3
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Texas
Quality
Income
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(NFZ
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)
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(NKR
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)
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(NXE
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)
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(NTX
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)
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Series 2015
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Series 2015
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Series 2016
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Series 2015
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Term Redemption Date
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November 1, 2015
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November 1, 2015
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March 1, 2016
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December 1, 2015
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Optional Redemption Date
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November 1, 2011
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November 1, 2011
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March 1, 2012
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December 1, 2011
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Premium Expiration Date
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October 31, 2012
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October 31, 2012
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February 28, 2013
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November 30, 2012
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The average liquidation value of all MTP Shares outstanding for each Fund during the six months ended August 31, 2012, was as follows:
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Arizona
Dividend
Advantage
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Arizona
Dividend
Advantage 2
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Arizona
Dividend
Advantage 3
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Texas
Quality
Income
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(NFZ
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)
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(NKR
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)
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(NXE
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)
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(NTX
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)
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Average liquidation value of MTP Shares outstanding
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$
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11,100,000
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$
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18,725,000
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$
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20,846,000
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$
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70,920,000
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Notes to
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Financial Statements
(Unaudited) (continued)
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For financial reporting purposes only, the liquidation value of MTP Shares is recorded as a liability on the Statement of Assets and Liabilities. Unpaid dividends on MTP Shares are recognized as a component of “Interest payable” on the Statement of Assets and Liabilities. Dividends paid on MTP Shares are recognized as a component of “Interest expense and amortization of offering costs” on the Statement of Operations.
Variable Rate MuniFund Term Preferred Shares
Arizona Premium Income (NAZ) has issued and outstanding Variable Rate MuniFund Term Preferred (“VMTP”) Shares, with a $100,000 liquidation value per share. The Fund issued its VMTP Shares in a privately negotiated offering during July 2011. Proceeds from the issuance of VMTP Shares, net of offering expenses, were used to redeem the Fund’s outstanding ARPS. The Fund’s VMTP Shares were offered to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933. As of August 31, 2012, the number of VMTP Shares outstanding, at liquidation value, for the Fund are as follows:
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Arizona
Premium
Income
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(NAZ
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)
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Series 2014
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$
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28,000,000
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The Fund is obligated to redeem its VMTP Shares by the date as specified in its offering document (“Term Redemption Date”), unless earlier redeemed or repurchased by the Fund. VMTP Shares are subject to optional and mandatory redemption in certain circumstances. The VMTP Shares are subject to redemption at the option of each Fund (“Optional Redemption Date”), subject to payment of premium for one year following the Optional Redemption Date (“Premium Expiration Date”), and at par thereafter. The Fund may be obligated to redeem certain of the VMTP Shares if the Fund fails to maintain certain asset coverage and leverage ratio requirements and such failures are not cured by the applicable cure date. The redemption price per share is equal to the sum of the liquidation value per share plus any accumulated but unpaid dividends. The Term Redemption Date, Optional Redemption Date and Premium Expiration Date for the Fund’s VMTP Shares are as follows:
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Arizona
Premium
Income
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(NAZ
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)
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Term Redemption Date
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August 1, 2014
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Optional Redemption Date
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August 1, 2012
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Premium Expiration Date
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July 31, 2012
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The average liquidation value of VMTP Shares outstanding and annualized dividend rate of VMTP Shares for the Fund during the six months ended August 31, 2012, were as follows:
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Arizona
Premium
Income
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(NAZ
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)
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Average liquidation value of VMTP Shares outstanding
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$
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28,000,000
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Annualized dividend rate
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1.22
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%
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Dividends on VMTP shares (which are treated as interest payments for financial reporting purposes) are set weekly.
For financial reporting purposes only, the liquidation value of VMTP Shares is recognized as a liability on the Statement of Assets and Liabilities. Unpaid dividends on VMTP Shares are recognized as a component of “Interest payable” on the Statement of Assets and Liabilities, when applicable. Dividends paid on VMTP Shares are recognized as a component of “Interest expense and amortization of offering costs” on the Statement of Operations.
Inverse Floating Rate Securities
Each Fund is authorized to invest in inverse floating rate securities. An inverse floating rate security is created by depositing a municipal bond, typically with a fixed interest rate, into a special purpose trust created by a broker-dealer. In turn, this trust (a) issues floating rate certificates, in face amounts equal to some fraction of the deposited bond’s par amount or market value, that typically pay short-term tax-exempt interest rates to third parties, and (b) issues to a long-term investor (such as one of the Funds) an inverse floating rate certificate (sometimes referred to as an “inverse floater”) that represents all remaining or residual interest in the trust. The income received by the inverse floater holder varies inversely with the short-term rate paid to the floating rate certificates’ holders, and in most circumstances the inverse floater holder bears substantially all of the underlying bond’s downside investment risk and also benefits disproportionately from any potential appreciation of the underlying bond’s value. The price of an inverse floating rate security will be more volatile than that of the underlying bond because the interest rate is dependent on not only the fixed coupon rate of the
underlying bond but also on the short-term interest paid on the floating rate certificates, and because the inverse floating rate security essentially bears the risk of loss of the greater face value of the underlying bond.
A Fund may purchase an inverse floating rate security in a secondary market transaction without first owning the underlying bond (referred to as an “externally-deposited inverse floater”), or instead by first selling a fixed-rate bond to a broker-dealer for deposit into the special purpose trust and receiving in turn the residual interest in the trust (referred to as a “self-deposited inverse floater”). The inverse floater held by a Fund gives the Fund the right (a) to cause the holders of the floating rate certificates to tender their notes at par, and (b) to have the broker transfer the fixed-rate bond held by the trust to the Fund, thereby collapsing the trust. An investment in an externally-deposited inverse floater is identified in the Portfolio of Investments as “(IF) – Inverse floating rate investment.” An investment in a self-deposited inverse floater is accounted for as a financing transaction. In such instances, a fixed-rate bond deposited into a special purpose trust is identified in the Portfolio of Investments as “(UB) – Underlying bond of an inverse floating rate trust reflected as a financing transaction,” with the Fund accounting for the short-term floating rate certificates issued by the trust as “Floating rate obligations” on the Statement of Assets and Liabilities. In addition, the Fund reflects in “Investment Income” the entire earnings of the underlying bond and related interest paid to the holders of the short-term floating rate certificates as a component of “Interest expense and amortization of offering costs” on the Statement of Operations.
During the six months ended August 31, 2012, each Fund invested in externally-deposited inverse floaters and/or self-deposited inverse floaters.
Each Fund may also enter into shortfall and forbearance agreements (sometimes referred to as a “recourse trust” or “credit recovery swap”) (such agreements referred to herein as “Recourse Trusts”) with a broker-dealer by which a Fund agrees to reimburse the broker-dealer, in certain circumstances, for the difference between the liquidation value of the fixed-rate bond held by the trust and the liquidation value of the floating rate certificates issued by the trust plus any shortfalls in interest cash flows. Under these agreements, a Fund’s potential exposure to losses related to or on inverse floaters may increase beyond the value of a Fund’s inverse floater investments as a Fund may potentially be liable to fulfill all amounts owed to holders of the floating rate certificates. At period end, any such shortfall is recognized as “Unrealized depreciation on Recourse Trusts” on the Statement of Assets and Liabilities.
At August 31, 2012, each Fund’s maximum exposure to externally-deposited Recourse Trusts was as follows:
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Arizona
Premium
Income
|
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Arizona
Dividend
Advantage
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Arizona
Dividend
Advantage 2
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Arizona
Dividend
Advantage 3
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Texas
Quality
Income
|
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(NAZ
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)
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(NFZ
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)
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(NKR
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)
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(NXE
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)
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(NTX
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)
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Maximum exposure to Recourse Trusts
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$
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2,145,000
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$
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1,680,000
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|
$
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1,350,000
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$
|
2,325,000
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$
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—
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The average floating rate obligations outstanding and average annual interest rate and fees related to self-deposited inverse floaters during the six months ended August 31, 2012, were as follows:
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Texas
Quality
Income
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|
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|
(NTX
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)
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Average floating rate obligations outstanding
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$
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3,960,000
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Average annual interest rate and fees
|
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|
0.41
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%
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Derivative Financial Instruments
Each Fund is authorized to invest in certain derivative instruments, including foreign currency forwards, futures, options and swap contracts. Although the Funds are authorized to invest in such derivative instruments, and may do so in the future, they did not make any such investments during the six months ended August 31, 2012.
Market and Counterparty Credit Risk
In the normal course of business each Fund may invest in financial instruments and enter into financial transactions where risk of potential loss exists due to changes in the market (market risk) or failure of the other party to the transaction to perform (counterparty credit risk). The potential loss could exceed the value of the financial assets recorded on the financial statements. Financial assets, which potentially expose each Fund to counterparty credit risk, consist principally of cash due from counterparties on forward, option and swap transactions, when applicable. The extent of each Fund’s exposure to counterparty credit risk in respect to these financial assets approximates their carrying value as recorded on the Statement of Assets and Liabilities. Futures contracts, when applicable, expose a Fund to minimal counterparty credit risk as they are exchange traded and the exchange’s clearinghouse, which is counterparty to all exchange traded futures, guarantees the futures contracts against default.
Each Fund helps manage counterparty credit risk by entering into agreements only with counterparties the Adviser believes have the financial resources to honor their obligations and by having the Adviser monitor the financial stability of the counterparties. Additionally, counterparties may be required to
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Notes to
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Financial Statements
(Unaudited) (continued)
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pledge collateral daily (based on the daily valuation of the financial asset) on behalf of each Fund with a value approximately equal to the amount of any unrealized gain above a pre-determined threshold. Reciprocally, when each Fund has an unrealized loss, 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 valuations fluctuate, either up or down, by at least the pre-determined threshold amount.
Zero Coupon Securities
Each Fund is authorized to invest in zero coupon securities. A zero coupon security does not pay a regular interest coupon to its holders during the life of the security. Income to the holder of the security comes from accretion of the difference between the original purchase price of the security at issuance and the par value of the security at maturity and is effectively paid at maturity. The market prices of zero coupon securities generally are more volatile than the market prices of securities that pay interest periodically.
Offering Costs
Costs incurred by the Funds in connection with their offerings of MTP Shares or VMTP Shares were recorded as a deferred charge, which will be amortized over the life of the shares. Each Fund’s amortized deferred charges are recognized as a component of “Interest expense and amortization of offering costs” on the Statement of Operations. Each Fund’s total offering costs incurred were as follows:
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Arizona
Dividend
Advantage
|
|
Arizona
Dividend
Advantage 2
|
|
Arizona
Dividend
Advantage 3
|
|
Texas
Quality
Income
|
|
|
|
|
(NFZ
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)
|
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(NKR
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)
|
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(NXE
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)
|
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(NTX
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)
|
MTP Shares offering costs
|
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$
|
491,500
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|
$
|
588,375
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$
|
672,690
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|
$
|
1,366,300
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|
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|
Arizona
Premium
Income
|
|
|
|
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(NAZ
|
)
|
VMTP Shares offering costs
|
|
$
|
100,000
|
|
Custodian Fee Credit
Each Fund has an arrangement with the custodian bank whereby certain custodian fees and expenses are reduced by net credits earned on each Fund’s cash on deposit with the bank. Such deposit arrangements are an alternative to overnight investments. Credits for cash balances may be offset by charges for any days on which a Fund overdraws its account at the custodian bank.
Indemnifications
Under the Funds’ organizational documents, their officers and directors/trustees are indemnified against certain liabilities arising out of the performance of their duties to the Funds. In addition, in the normal course of business, the Funds enter into contracts that provide general indemnifications to other parties. The Funds’ maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Funds that have not yet occurred. However, the Funds have not had prior claims or losses pursuant to these contracts and expect the risk of loss to be remote.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP 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. Fair Value Measurements
Fair value is defined as the price that the Funds would receive upon selling an investment or transferring a liability in an orderly transaction to an independent buyer in the principal or most advantageous market for the investment. A three-tier hierarchy is used to maximize the use of observable market data and minimize the use of unobservable inputs and to establish classification of fair value measurements for disclosure purposes.
Observable inputs reflect the assumptions market participants would use in pricing the asset or liability. Observable inputs are based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability. Unobservable inputs are based on the best information available in the circumstances. The following is a summary of the three-tiered hierarchy of valuation input levels.
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Level 1 –
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Inputs are unadjusted and prices are determined using quoted prices in active markets for identical securities.
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Level 2 –
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Prices are determined using other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).
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Level 3 –
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Prices are determined using significant unobservable inputs (including management’s assumptions in determining the fair value of investments).
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The inputs or methodologies used for valuing securities are not an indication of the risks associated with investing in those securities. The following is a summary of each Fund’s fair value measurements as of the end of the reporting period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arizona Premium Income (NAZ)
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal Bonds
|
|
$
|
—
|
|
$
|
93,002,438
|
|
$
|
1,951,904
|
|
$
|
94,954,342
|
|
Arizona Dividend Advantage (NFZ)
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal Bonds
|
|
$
|
—
|
|
$
|
34,365,393
|
|
$
|
218,613
|
|
$
|
34,584,006
|
|
Arizona Dividend Advantage 2 (NKR)
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal Bonds
|
|
$
|
—
|
|
$
|
53,981,764
|
|
$
|
882,261
|
|
$
|
54,864,025
|
|
Arizona Dividend Advantage 3 (NXE)
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal Bonds
|
|
$
|
—
|
|
$
|
65,840,792
|
|
$
|
538,725
|
|
$
|
66,379,517
|
|
Texas Quality Income (NTX)
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal Bonds
|
|
$
|
—
|
|
$
|
223,619,909
|
|
$
|
—
|
|
$
|
223,619,909
|
|
The following is a reconciliation of each Fund’s Level 3 investments held at the beginning and end of the measurement period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arizona
Premium
Income
|
|
Arizona
Dividend
Advantage
|
|
Arizona
Dividend
Advantage 2
|
|
Arizona
Dividend
Advantage 3
|
|
|
|
(NAZ
|
)
|
(NFZ
|
)
|
(NKR
|
)
|
(NXE
|
)
|
|
|
Level 3
|
|
Level 3
|
|
Level 3
|
|
Level 3
|
|
|
|
Municipal
|
|
Municipal
|
|
Municipal
|
|
Municipal
|
|
|
|
Bonds
|
|
Bonds
|
|
Bonds
|
|
Bonds
|
|
Balance at the beginning of period
|
|
$
|
1,959,607
|
|
$
|
219,476
|
|
$
|
885,742
|
|
$
|
540,851
|
|
Gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains (losses)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net change in unrealized appreciation (depreciation)
|
|
|
(7,703
|
)
|
|
(863
|
)
|
|
(3,481
|
)
|
|
(2,126
|
)
|
Purchases at cost
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Sales at proceeds
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net discounts (premiums)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Transfers in to
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Transfers out of
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance at the end of period
|
|
$
|
1,951,904
|
|
$
|
218,613
|
|
$
|
882,261
|
|
$
|
538,725
|
|
Change in net unrealized appreciation (depreciation) during the period of
Level 3 securities held as of August 31, 2012
|
|
$
|
(7,703
|
)
|
$
|
(863
|
)
|
$
|
(3,481
|
)
|
$
|
(2,126
|
)
|
|
|
Notes to
|
|
|
Financial Statements
(Unaudited) (continued)
|
The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets as of August 31, 2012, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Market
Value
|
|
Techniques
|
|
Unobservable
Inputs
|
|
Range
|
|
Arizona Premium Income (NAZ)
|
|
|
|
|
|
|
|
|
|
Municipal Bonds
|
$
|
1,951,904
|
|
Discounted Cash Flow
|
|
MMD Spread
|
|
0-6%
|
|
|
|
|
|
|
|
AAA - Rated MMD
|
|
|
|
|
|
|
|
|
|
Liquidity Discount
|
|
0-5%
|
|
Arizona Dividend Advantage (NFZ)
|
|
|
|
|
|
|
|
|
|
Municipal Bonds
|
$
|
218,613
|
|
Discounted Cash Flow
|
|
MMD Spread
|
|
0-6%
|
|
|
|
|
|
|
|
AAA - Rated MMD
|
|
|
|
|
|
|
|
|
|
Liquidity Discount
|
|
0-5%
|
|
Arizona Dividend Advantage 2 (NKR)
|
|
|
|
|
|
|
|
|
|
Municipal Bonds
|
$
|
882,261
|
|
Discounted Cash Flow
|
|
MMD Spread
|
|
0-6%
|
|
|
|
|
|
|
|
AAA - Rated MMD
|
|
|
|
|
|
|
|
|
|
Liquidity Discount
|
|
0-5%
|
|
Arizona Dividend Advantage 3 (NXE)
|
|
|
|
|
|
|
|
|
|
Municipal Bonds
|
$
|
538,725
|
|
Discounted Cash Flow
|
|
MMD Spread
|
|
0-6%
|
|
|
|
|
|
|
|
AAA - Rated MMD
|
|
|
|
|
|
|
|
|
|
Liquidity Discount
|
|
0-5%
|
|
MMD - Municipal Market Data
The Nuveen funds’ Board of Directors/Trustees is responsible for the valuation process and has delegated the oversight of the daily valuation process to the Adviser’s Valuation Committee. The Valuation Committee, pursuant to the valuation policies and procedures adopted by the Board of Directors/Trustees, is responsible for making fair value determinations, evaluating the effectiveness of the funds’ pricing policies, and reporting to the Board of Directors/Trustees. The Valuation Committee is aided in its efforts by the Adviser’s dedicated Securities Valuation Team, which is responsible for administering the daily valuation process and applying fair value methodologies as approved by the Valuation Committee. When determining the reliability of independent pricing services for investments owned by the funds, the Valuation Committee, among other things, conducts due diligence reviews of the pricing services and monitors the quality of security prices received through various testing reports conducted by the Securities Valuation Team.
The Valuation Committee will consider pricing methodologies it deems relevant and appropriate when making fair value determinations. Examples of possible methodologies include, but are not limited to, multiple of earnings; discount from market of a similar freely traded security; discounted cash-flow analysis; book value or a multiple thereof; risk premium/yield analysis; yield to maturity; and/or fundamental investment analysis. The Valuation Committee will also consider factors it deems relevant and appropriate in light of the facts and circumstances. Examples of possible factors include, but are not limited to, the type of security; the issuer’s financial statements; the purchase price of the security; the discount from market value of unrestricted securities of the same class at the time of purchase; analysts’ research and observations from financial institutions; information regarding any transactions or offers with respect to the security; the existence of merger proposals or tender offers affecting the security; the price and extent of public trading in similar securities of the issuer or comparable companies; and the existence of a shelf registration for restricted securities.
For each portfolio security that has been fair valued pursuant to the policies adopted by the Board of Directors/Trustees, the fair value price is compared against the last available and next available market quotations. The Valuation Committee reviews the results of such testing and fair valuation occurrences are reported to the Board of Directors/Trustees.
3. Derivative Instruments and Hedging Activities
The Funds record derivative instruments at fair value, with changes in fair value recognized on the Statement of Operations, when applicable. Even though the Funds’ investments in derivatives may represent economic hedges, they are not considered to be hedge transactions for financial reporting purposes. The Funds did not invest in derivative instruments during the six months ended August 31, 2012.
4. Fund Shares
Common Shares
Transactions in Common shares were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arizona Premium
Income (NAZ)
|
|
Arizona Dividend
Advantage 2 (NKR)
|
|
|
|
Six
Months
Ended
8/31/12
|
|
Year
Ended
2/29/12
|
|
Six
Months
Ended
8/31/12
|
|
Year
Ended
2/29/12
|
|
Common shares issued to shareholders due to reinvestment of distributions
|
|
|
1,983
|
|
|
—
|
|
|
179
|
|
|
—
|
|
|
|
Texas Quality
Income (NTX)
|
|
|
|
Six
Months
Ended
8/31/12
|
|
Year
Ended
2/29/12
|
|
Common shares issued to shareholders due to reinvestment of distributions
|
|
|
15,081
|
|
|
36,629
|
|
Preferred Shares
Transactions in ARPS were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arizona Premium Income (NAZ)
|
|
|
|
Six Months
Ended
8/31/12
|
|
Year
Ended
2/29/12
|
|
|
|
Shares
|
Amount
|
|
Shares
|
Amount
|
|
ARPS redeemed and/or noticed for redemption:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series TH
|
|
|
N/A
|
|
|
N/A
|
|
|
1,115
|
|
$
|
27,875,000
|
|
N/A – As of February 29, 2012, the Fund redeemed all of its outstanding ARPS at liquidation value.
Transactions in MTP shares were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arizona Dividend Advantage 3 (NXE)
|
|
|
|
Six Months
Ended
8/31/12
|
|
Year
Ended
2/29/12
|
|
|
|
Shares
|
Amount
|
|
Shares
|
Amount
|
|
MTP Shares issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 2016
|
|
|
—
|
|
$
|
—
|
|
|
180,000
|
|
$
|
1,800,000
|
|
Transactions in VMTP Shares were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arizona Premium Income (NAZ)
|
|
|
|
Six Months
Ended
8/31/12
|
|
Year
Ended
2/29/12
|
|
|
|
Shares
|
Amount
|
|
Shares
|
Amount
|
|
VMTP Shares issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 2014
|
|
|
—
|
|
$
|
—
|
|
|
280
|
|
$
|
28,000,000
|
|
|
|
Notes to
|
|
|
Financial Statements
(Unaudited) (continued)
|
5. Investment Transactions
Purchases and sales (including maturities but excluding short-term investments, where applicable) during the six months ended August 31, 2012, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arizona
Premium
Income
|
|
Arizona
Dividend
Advantage
|
|
Arizona
Dividend
Advantage 2
|
|
Arizona
Dividend
Advantage 3
|
|
Texas
Quality
Income
|
|
|
|
|
(NAZ
|
)
|
|
(NFZ
|
)
|
|
(NKR
|
)
|
|
(NXE
|
)
|
|
(NTX
|
)
|
Purchases
|
|
$
|
7,185,227
|
|
$
|
3,636,399
|
|
$
|
4,399,126
|
|
$
|
3,992,272
|
|
$
|
16,366,610
|
|
Sales and maturities
|
|
|
7,347,973
|
|
|
3,753,677
|
|
|
6,019,950
|
|
|
4,593,776
|
|
|
15,032,759
|
|
6. Income Tax Information
The following information is presented on an income tax basis. Differences between amounts for financial statement and federal income tax purposes are primarily due to timing differences in recognizing taxable market discount, timing differences in recognizing certain gains and losses on investment transactions and the treatment of investments in inverse floating rate securities reflected as financing transactions, if any. To the extent that differences arise that are permanent in nature, such amounts are reclassified within the capital accounts as detailed below. Temporary differences do not require reclassification. Temporary and permanent differences do not impact the net asset values of the Funds.
At August 31, 2012, the cost and unrealized appreciation (depreciation) of investments, as determined on a federal income tax basis, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arizona
Premium
Income
|
|
Arizona
Dividend
Advantage
|
|
Arizona
Dividend
Advantage 2
|
|
Arizona
Dividend
Advantage 3
|
|
Texas
Quality
Income
|
|
|
|
|
(NAZ
|
)
|
|
(NFZ
|
)
|
|
(NKR
|
)
|
|
(NXE
|
)
|
|
(NTX
|
)
|
Cost of investments
|
|
$
|
87,571,596
|
|
$
|
31,790,742
|
|
$
|
50,750,924
|
|
$
|
61,738,625
|
|
$
|
202,692,729
|
|
Gross unrealized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appreciation
|
|
$
|
10,295,951
|
|
$
|
2,992,358
|
|
$
|
4,599,685
|
|
$
|
5,065,605
|
|
$
|
20,276,618
|
|
Depreciation
|
|
|
(2,913,205
|
)
|
|
(199,094
|
)
|
|
(486,584
|
)
|
|
(424,713
|
)
|
|
(3,309,454
|
)
|
Net unrealized appreciation (depreciation) of investments
|
|
$
|
7,382,746
|
|
$
|
2,793,264
|
|
$
|
4,113,101
|
|
$
|
4,640,892
|
|
$
|
16,967,164
|
|
Permanent differences, primarily due to expiration of capital loss carryforwards, federal taxes paid, taxable market discount, nondeductible offering costs and distribution character reclassifications, resulted in reclassifications among the Funds’ components of Common share net assets at February 29, 2012, the Funds’ last tax year end, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arizona
Premium
Income
|
|
Arizona
Dividend
Advantage
|
|
Arizona
Dividend
Advantage 2
|
|
Arizona
Dividend
Advantage 3
|
|
Texas
Quality
Income
|
|
|
|
|
(NAZ
|
)
|
|
(NFZ
|
)
|
|
(NKR
|
)
|
|
(NXE
|
)
|
|
(NTX
|
)
|
Paid-in surplus
|
|
$
|
(1,463,538
|
)
|
$
|
(96,700
|
)
|
$
|
(120,807
|
)
|
$
|
(133,481
|
)
|
$
|
(256,188
|
)
|
Undistributed (Over-distribution of) net investment income
|
|
|
19,513
|
|
|
96,700
|
|
|
119,157
|
|
|
131,166
|
|
|
263,630
|
|
Accumulated net realized gain (loss)
|
|
|
1,444,025
|
|
|
—
|
|
|
1,650
|
|
|
2,315
|
|
|
(7,442
|
)
|
The tax components of undistributed net tax-exempt income, net ordinary income and net long-term capital gains at February 29, 2012, the Funds’ last tax year end, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arizona
Premium
Income
|
|
Arizona
Dividend
Advantage
|
|
Arizona
Dividend
Advantage 2
|
|
Arizona
Dividend
Advantage 3
|
|
Texas
Quality
Income
|
|
|
|
|
(NAZ
|
)
|
|
(NFZ
|
)
|
|
(NKR
|
)
|
|
(NXE
|
)
|
|
(NTX
|
)
|
Undistributed net tax-exempt income *
|
|
$
|
1,409,529
|
|
$
|
279,569
|
|
$
|
478,398
|
|
$
|
564,544
|
|
$
|
1,813,987
|
|
Undistributed net ordinary income **
|
|
|
—
|
|
|
686
|
|
|
—
|
|
|
—
|
|
|
24,171
|
|
Undistributed net long-term capital gains
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
*
|
Undistributed net tax-exempt income (on a tax basis) has not been reduced for the dividend declared on February 1, 2012, paid on March 1, 2012.
|
**
|
Net ordinary income consists of taxable market discount income and net short-term capital gains, if any.
|
The tax character of distributions paid during the Funds’ last tax year ended February 29, 2012, was designated for purposes of the dividends paid deduction as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arizona
Premium
Income
|
|
Arizona
Dividend
Advantage
|
|
Arizona
Dividend
Advantage 2
|
|
Arizona
Dividend
Advantage 3
|
|
Texas
Quality
Income
|
|
|
|
|
(NAZ
|
)
|
|
(NFZ
|
)
|
|
(NKR
|
)
|
|
(NXE
|
)
|
|
(NTX
|
)
|
Distributions from net tax-exempt income
|
|
$
|
3,597,007
|
|
$
|
1,425,938
|
|
$
|
2,345,251
|
|
$
|
2,882,011
|
|
$
|
9,840,206
|
|
Distributions from net ordinary income**
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
351
|
|
Distributions from net long-term capital gains
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
247,718
|
|
**
|
Net ordinary income consists of taxable market discount income and net short-term capital gains, if any.
|
At February 29, 2012, the Funds’ last tax year end, the following Funds had unused capital loss carryforwards available for federal income tax purposes to be applied against future capital gains, if any. If not applied, the carryforwards will expire as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arizona
Premium
Income
|
|
Arizona
Dividend
Advantage
|
|
Arizona
Dividend
Advantage 2
|
|
Arizona
Dividend
Advantage 3
|
|
|
|
|
(NAZ
|
)
|
|
(NFZ
|
)
|
|
(NKR
|
)
|
|
(NXE
|
)
|
Expiration:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28, 2014
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
208,948
|
|
February 29, 2016
|
|
|
562,384
|
|
|
122,620
|
|
|
—
|
|
|
363,937
|
|
February 28, 2017
|
|
|
323,876
|
|
|
210,308
|
|
|
68,614
|
|
|
258,905
|
|
February 28, 2018
|
|
|
43,720
|
|
|
318,004
|
|
|
223,857
|
|
|
108,356
|
|
Total
|
|
$
|
929,980
|
|
$
|
650,932
|
|
$
|
292,471
|
|
$
|
940,146
|
|
During the Funds’ last tax year ended February 29, 2012, the following Funds utilized capital loss carryforwards as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arizona
Premium
Income
|
|
Arizona
Dividend
Advantage
|
|
Arizona
Dividend
Advantage 2
|
|
Arizona
Dividend
Advantage 3
|
|
|
|
|
(NAZ
|
)
|
|
(NFZ
|
)
|
|
(NKR
|
)
|
|
(NXE
|
)
|
Utilized capital loss carryforwards
|
|
$
|
109,799
|
|
$
|
53,319
|
|
$
|
308,747
|
|
$
|
138,567
|
|
At February 29, 2012, the Funds’ last tax year end, $1,443,828 of Arizona Premium Income’s (NAZ) capital loss carryforward expired.
Under the Regulated Investment Company Modernization Act of 2010, capital losses incurred by the Fund after December 31, 2010 will not be subject to expiration. During the Funds’ last tax year ended February 29, 2012, there were no post-enactment capital losses generated.
The Funds have elected to defer losses incurred from November 1, 2011 through February 29, 2012, the Funds’ last tax year end, in accordance with federal income tax rules. These losses are treated as having arisen on the first day of the current fiscal year. The following Fund has elected to defer losses as follows:
|
|
|
|
|
|
|
|
Texas
|
|
|
|
|
Quality
|
|
|
|
|
Income
|
|
|
|
|
(NTX
|
)
|
Post-October capital losses
|
|
$
|
1,722,730
|
|
Late-year ordinary losses
|
|
|
—
|
|
7. Management Fees and Other Transactions with Affiliates
Each Fund’s management fee consists of two components – a fund-level fee, based only on the amount of assets within the Fund, and a complex-level fee, based on the aggregate amount of all eligible fund assets managed by the Adviser. This pricing structure enables Fund shareholders to benefit from growth in the assets within their Fund as well as from growth in the amount of complex-wide assets managed by the Adviser.
|
|
Notes to
|
|
|
Financial Statements
(Unaudited) (continued)
|
The annual fund-level fee for each Fund, payable monthly, is calculated according to the following schedule:
|
|
|
|
|
|
|
Arizona Premium Income (NAZ)
|
|
|
|
Texas Quality Income (NTX)
|
Average Daily Managed Assets*
|
|
|
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 managed assets over $5 billion
|
|
|
.3750
|
|
|
|
|
|
|
|
|
|
Arizona Dividend Advantage (NFZ)
|
|
|
|
Arizona Dividend Advantage 2 (NKR)
|
|
|
|
Arizona Dividend Advantage 3 (NXE)
|
Average Daily Managed Assets*
|
|
|
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 managed assets over $2 billion
|
|
|
.3750
|
|
The annual complex-level fee for each Fund, payable monthly, is calculated according to the following schedule:
|
|
|
|
|
Complex-Level Managed Asset Breakpoint Level*
|
|
|
Effective Rate at Breakpoint Level
|
$55 billion
|
|
|
.2000
|
%
|
$56 billion
|
|
|
.1996
|
|
$57 billion
|
|
|
.1989
|
|
$60 billion
|
|
|
.1961
|
|
$63 billion
|
|
|
.1931
|
|
$66 billion
|
|
|
.1900
|
|
$71 billion
|
|
|
.1851
|
|
$76 billion
|
|
|
.1806
|
|
$80 billion
|
|
|
.1773
|
|
$91 billion
|
|
|
.1691
|
|
$125 billion
|
|
|
.1599
|
|
$200 billion
|
|
|
.1505
|
|
$250 billion
|
|
|
.1469
|
|
$300 billion
|
|
|
.1445
|
|
*
|
For the fund-level and complex-level fees, managed assets include closed-end fund assets managed by the Adviser that are attributable to financial leverage. For these purposes, financial leverage includes the funds’ use of preferred stock and borrowings and certain investments in the residual interest certificates (also called inverse floating rate securities) in tender option bond (TOB) trusts, including the portion of assets held by a TOB trust that has been effectively financed by the trust’s issuance of floating rate securities, subject to an agreement by the Adviser as to certain funds to limit the amount of such assets for determining managed assets in certain circumstances. The complex-level fee is calculated based upon the aggregate daily managed assets of all Nuveen Funds that constitute “eligible assets.” Eligible assets do not include assets attributable to investments in other Nuveen Funds and assets in excess of $2 billion added to the Nuveen Fund complex in connection with the Adviser’s assumption of the management of the former First American Funds effective January 1, 2011. As of August 31, 2012, the complex-level fee rate for these Funds was .1702%.
|
The management fee compensates the Adviser for overall investment advisory and administrative services and general office facilities. The Adviser is responsible for each Fund’s overall strategy and asset allocation decisions. The Adviser has entered into sub-advisory agreements with Nuveen Asset Management, LLC (the “Sub-Adviser”), a wholly-owned subsidiary of the Adviser, under which the Sub-Adviser manages the investment portfolios of the Funds. The Sub-Adviser is compensated for its services to the Funds from the management fees paid to the Adviser.
The Funds pay no compensation directly to those of its directors/trustees who are affiliated with the Adviser or to its officers, all of whom receive remuneration for their services to the Funds from the Adviser or its affiliates. The Board of Directors/Trustees has adopted a deferred compensation plan for independent directors/trustees that enables directors/trustees to elect to defer receipt of all or a portion of the annual compensation they are entitled to receive from certain Nuveen-advised funds. Under the plan, deferred amounts are treated as though equal dollar amounts had been invested in shares of select Nuveen-advised funds.
For the first ten years of Arizona Dividend Advantage 2’s (NKR) operations, the Adviser has agreed to reimburse the Fund, as a percentage of average daily managed assets, for fees and expenses in the amounts and for the time periods set forth below:
|
|
|
|
|
Year Ending
|
|
Year Ending
|
|
|
March 31,
|
|
March 31,
|
|
|
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.
8. New Accounting Pronouncement
Financial Accounting Standards Board (“FASB”) Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities
In December 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-11 (“ASU No. 2011-11”) to enhance disclosures about financial instruments and derivative instruments that are subject to offsetting (“netting”) on the Statement of Assets and Liabilities. This information will enable users of the entity’s financial statements to evaluate the effect or potential effect of netting arrangements on the entity’s financial position. ASU No. 2011-11 is effective prospectively during interim or annual periods beginning on or after January 1, 2013. At this time, management is evaluating the implications of this guidance and the impact it will have to the financial statements amounts and footnote disclosures, if any.
Annual Investment Management
Agreement Approval Process
(Unaudited)
The Board of Trustees or Directors (as the case may be) (each, a “
Board
” and each Trustee or Director, a “
Board Member
”) of the Funds, including the Board Members who are not parties to the Funds’ advisory or sub-advisory agreements or “interested persons” of any such parties (the “
Independent Board Members
”), is responsible for approving the advisory agreements (each, an “
Investment Management Agreement
”) between each Fund and Nuveen Fund Advisors, Inc. (the “
Advisor
”) and the sub-advisory agreements (each a “
Sub-Advisory Agreement
”) between the Advisor and Nuveen Asset Management, LLC (the “
Sub-Advisor
”) (the Investment Management Agreements and the Sub-Advisory Agreements are referred to collectively as the “
Advisory Agreements
”) and their periodic continuation. Pursuant to the Investment Company Act of 1940, as amended (the “
1940 Act
”), the Board is required to consider the continuation of the Advisory Agreements on an annual basis. Accordingly, at an in-person meeting held on May 21-23, 2012 (the “
May Meeting
”), the Board, including a majority of the Independent Board Members, considered and approved the continuation of the Advisory Agreements for the Funds for an additional one-year period.
In preparation for its considerations at the May Meeting, the Board requested and received extensive materials prepared in connection with the review of the Advisory Agreements. The materials provided a broad range of information regarding the Funds, the Advisor and the Sub-Advisor (the Advisor and the Sub-Advisor are collectively, the “
Fund Advisers
” and each, a “
Fund Adviser
”). As described in more detail below, the information provided included, among other things, a review of Fund performance, including Fund investment performance assessments against peer groups and appropriate benchmarks, a comparison of Fund fees and expenses relative to peers, a description and assessment of shareholder service levels for the Funds, a summary of the performance of certain service providers, a review of product initiatives and shareholder communications and an analysis of the Advisor’s profitability with comparisons to comparable peers in the managed fund business. As part of its annual review, the Board also held a separate meeting on April 18-19, 2012, to review the Funds’ investment performance and consider an analysis provided by the Advisor of the Sub-Advisor which generally evaluated the Sub-Advisor’s investment team, investment mandate, organizational structure and history, investment philosophy and process, performance of the applicable Fund, and significant changes to the foregoing. As a result of its review of the materials and discussions, the Board presented the Advisor with questions and the Advisor responded.
The materials and information prepared in connection with the annual review of the Advisory Agreements supplement the information and analysis provided to the Board during the year. In this regard, throughout the year, the Board, acting directly or through its committees, regularly reviews the performance and various services provided by the Advisor and the Sub-Advisor. The Board meets at least quarterly as well as at other times as the need arises. At its quarterly meetings, the Board reviews reports by the Advisor which include, among other things, Fund performance, a review of the investment teams and reports on compliance, regulatory matters and risk management. The Board also meets with key investment personnel managing the Fund portfolios during the year. In October 2011, the Board also created two new standing committees (the Open-end Fund Committee and the Closed-end Fund Committee) to assist the full Board in monitoring and gaining a deeper insight into the distinctive issues and business practices of open-end and closed-end funds.
In addition, the Board continues its program of seeking to have the Board Members or a subset thereof visit each sub-advisor to the Nuveen funds at least once over a multiple year rotation, meeting with key investment and business personnel. In this regard, the Board visited with the Sub-Advisor’s municipal team in Minneapolis in September 2011, and with the Sub-Advisor’s municipal team in Chicago in November 2011. Further, an ad hoc committee of the Board visited the then-current transfer agents of the Nuveen funds in 2011 and the audit committee of the Board visited the various pricing agents for the Nuveen funds in January 2012. The Board considers factors and information that are relevant to its annual consideration of the renewal of the Advisory Agreements at the meetings held throughout the year. Accordingly, the Board considers the information provided and knowledge gained at these meetings when performing its annual review of the Advisory Agreements. The Independent Board Members are assisted throughout the process by independent legal counsel who provided materials describing applicable law and the duties of directors or trustees in reviewing advisory contracts and met with the Independent Board Members in executive sessions without management present. In addition, it is important to recognize that the management arrangements for the Nuveen funds are the result of many years of review and discussion between the Independent Board Members and fund management and that the Board Members’ conclusions may be based, in part, on their consideration of fee arrangements and other factors developed in previous years.
The Board considered all factors it believed relevant with respect to each Fund, including among other factors: (a) the nature, extent and quality of the services provided by the Fund Advisers, (b) the investment performance of the Fund and Fund Advisers, (c) the advisory fees and costs of the services to be provided to the Fund and the profitability of the Fund Advisers, (d) the extent of any economies of scale, (e) any benefits derived by the Fund Advisers from the relationship with the Fund and (f) other factors. Each Board Member may have accorded different weight to the various factors in reaching his or her
Annual Investment Management Agreement
Approval Process
(Unaudited) (continued)
conclusions with respect to a Fund’s Advisory Agreements. The Independent Board Members did not identify any single factor as all important or controlling. The Independent Board Members’ considerations were instead based on a comprehensive consideration of all the information presented. The principal factors considered by the Board and its conclusions are described below.
A. Nature, Extent and Quality of Services
In considering renewal of the Advisory Agreements, the Independent Board Members considered the nature, extent and quality of the Fund Adviser’s services, including advisory services and the resulting Fund performance and administrative services. The Independent Board Members further considered the overall reputation and capabilities of the Advisor and its affiliates, the commitment of the Advisor to provide high quality service to the Funds, their overall confidence in the Advisor’s integrity and the Advisor’s responsiveness to questions and concerns raised by them. The Independent Board Members 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 to the Funds; the performance record of the applicable Fund (as described in further detail below); and any initiatives Nuveen had taken for the applicable fund product line.
In considering advisory services, the Board recognized that the Advisor provides various oversight, administrative, compliance and other services for the Funds and the Sub-Advisor generally provides the portfolio investment management services to the Funds. In reviewing the portfolio management services provided to each Fund, the Board reviewed the materials provided by the Nuveen Investment Services Oversight Team analyzing, among other things, the Sub-Advisor’s investment team and changes thereto, organization and history, assets under management, Fund objectives and mandate, the investment team’s philosophy and strategies in managing the Fund, developments affecting the Sub-Advisor or Fund and Fund performance. The Independent Board Members also reviewed portfolio manager compensation arrangements to evaluate each Fund Adviser’s ability to attract and retain high quality investment personnel, preserve stability, and reward performance but not provide an inappropriate incentive to take undue risks. In addition, the Board considered the Advisor’s execution of its oversight responsibilities over the Sub-Advisor. Given the importance of compliance, the Independent Board Members also considered Nuveen’s compliance program, including the report of the chief compliance officer regarding the Funds’ compliance policies and procedures; the resources dedicated to compliance; and the record of compliance with the policies and procedures.
In addition to advisory services, the Board considered the quality and extent of administrative and other non-investment advisory services the Advisor and its affiliates provide to the Funds, including product management, investment services (such as oversight of investment policies and procedures, risk management, and pricing), fund
administration, oversight of service providers, shareholder services and communications, administration of Board relations, regulatory and portfolio compliance, legal support, managing leverage and promoting an orderly secondary market for common shares. The Board further recognized Nuveen’s additional investments in personnel, including in compliance and risk management.
In reviewing the services provided, the Board also reviewed materials describing various notable initiatives and projects the Advisor performed in connection with the closed-end fund product line. These initiatives included completion of the refinancing of auction rate preferred securities; efforts to eliminate product overlap with fund mergers; elimination of the insurance mandate on several funds; ongoing services to manage leverage that has become increasingly complex; continued secondary market offerings, share repurchases and other support initiatives for certain funds; and continued communications efforts with shareholders, fund analysts and financial advisers. With respect to the latter, the Independent Board Members noted Nuveen’s continued commitment to supporting the secondary market for the common shares of its closed-end funds through a comprehensive secondary market communication program designed to raise investor and analyst awareness and understanding of closed-end funds. Nuveen’s support services included, among other things: continuing communications concerning the refinancing efforts related to auction rate preferred securities; supporting and promoting munifund term preferred shares (MTP) including by launching a microsite dedicated to MTP shares; sponsoring and participating in conferences; communicating with closed-end fund analysts covering the Nuveen funds throughout the year; providing marketing and product updates for the closed-end funds; and maintaining and enhancing a closed-end fund website.
Based on their review, the Independent Board Members found that, overall, the nature, extent and quality of services provided to the respective Funds under each applicable Advisory Agreement were satisfactory.
B. The Investment Performance of the Funds and Fund Advisers
The Board, including the Independent Board Members, reviewed and considered the performance history of each Fund over various time periods. The Board reviewed, among other things, each Fund’s historic investment performance as well as information comparing the Fund’s performance information with that of other funds (the “
Performance Peer Group
”) based on data compiled by Nuveen that was provided by an independent provider of mutual fund data and with recognized and/or customized benchmarks (
i.e
., benchmarks derived from multiple recognized benchmarks).
The Board reviewed reports, including a comprehensive analysis of the Funds’ performance and the applicable investment team. In this regard, the Board reviewed each Fund’s total return information compared to its Performance Peer Group for the quarter,
Annual Investment Management Agreement
Approval Process
(Unaudited) (continued)
one-, three- and five-year periods ending December 31, 2011, as well as performance information reflecting the first quarter of 2012. In addition, the Board reviewed each Fund’s total return information compared to recognized and/or customized benchmarks for the quarter, one- and three-year periods ending December 31, 2011, as well as performance information reflecting the first quarter of 2012.
The Independent Board Members also reviewed historic premium and discount levels, including a summary of actions taken to address or discuss other developments affecting the secondary market discounts of various funds. This information supplemented the fund performance information provided to the Board at each of its quarterly meetings.
In reviewing performance comparison information, the Independent Board Members recognized that the usefulness of the comparisons of the performance of certain funds with the performance of their respective Performance Peer Group may be limited because the Performance Peer Group may not adequately represent the objectives and strategies of the applicable funds or may be limited in size or number. In this regard, the Independent Board Members noted that the Performance Peer Group of each Fund was classified as having significant differences from the respective Fund based on various considerations such as special fund objectives, potential investable universe and the composition of the peer set (
e.g
., the number and size of competing funds and number of competing managers). The Independent Board Members also noted that the investment experience of a particular shareholder in the Nuveen funds will vary depending on when such shareholder invests in the applicable fund, the class held (if multiple classes are offered in a fund) and the performance of the fund (or respective class) during that shareholder’s investment period. In addition, although the performance below reflects the performance results for the time periods ending as of the most recent calendar year end (unless otherwise indicated), the Board also recognized that selecting a different ending time period may derive different results. Furthermore, while the Board is cognizant of the relevant performance of a fund’s peer set and/or benchmark(s), the Board evaluated fund performance in light of the respective fund’s investment objectives, investment parameters and guidelines and recognized that the objectives, investment parameters and guidelines of peers and/or benchmarks may differ to some extent, thereby resulting in differences in performance results. Nevertheless, with respect to any Nuveen funds that the Board considers to have underperformed their peers and/or benchmarks from time to time, the Board monitors such funds closely and considers any steps necessary or appropriate to address such issues.
As noted above, each Fund had significant differences from its respective Performance Peer Group. Therefore, the Independent Board Members considered the Funds’ performance compared to their benchmarks. In this regard, the Independent Board Members noted that each Fund outperformed its respective benchmark in the one- and three-year periods.
Based on their review, the Independent Board Members determined that each Fund’s investment performance had been satisfactory.
C.
|
Fees, Expenses and Profitability
|
|
1.
Fees and Expenses
The Board evaluated the management fees and expenses of each Fund reviewing, among other things, such Fund’s gross management fees, net management fees and net expense ratios in absolute terms as well as compared to the fee and expenses of a comparable universe of funds provided by an independent fund data provider (the “
Peer Universe
”) and any expense limitations.
The Independent Board Members further reviewed the methodology regarding the construction of the applicable Peer Universe. In reviewing the comparisons of fee and expense information, the Independent Board Members took into account that in certain instances various factors such as: the limited size and particular composition of the Peer Universe (including the inclusion of other Nuveen funds in the peer set); expense anomalies; changes in the funds comprising the Peer Universe from year to year; levels of reimbursement or fee waivers; the timing of information used; the differences in the type and use of leverage; and differences in the states reflected in the Peer Universe may impact the comparative data, thereby limiting somewhat the ability to make a meaningful comparison with peers.
In reviewing the fee schedule for a Fund, the Independent Board Members also considered the fund-level and complex-wide breakpoint schedules (described in further detail below) and any fee waivers and reimbursements provided by Nuveen (applicable, in particular, for certain closed-end funds launched since 1999). In reviewing fees and expenses (excluding leverage costs and leveraged assets), the Board considered the expenses and fees to be higher if they were over 10 basis points higher, slightly higher if they were approximately 6 to 10 basis points higher, in line if they were within approximately 5 basis points higher than the peer average and below if they were below the peer average of the Peer Universe. In reviewing the reports, the Board noted that the overwhelming majority of the Nuveen funds were at, close to or below their peer set average based on the net total expense ratio.
The Independent Board Members noted that the Nuveen Arizona Dividend Advantage Municipal Fund 3 had a net expense ratio that was slightly higher than its peer average, but a net management fee below its peer average, while the other Funds each had net management fees and net expense ratios (including fee waivers and expense reimbursements) below or in line with their peer averages.
Based on their review of the fee and expense information provided, the
Independent Board Members determined that each Fund’s management fees were reasonable in light of the nature, extent and quality of services provided to the Fund.
|
Annual Investment Management Agreement
Approval Process
(Unaudited) (continued)
|
2.
Comparisons with the Fees of Other Clients
The Independent Board Members further reviewed information regarding the nature of services and range of fees offered by the Advisor to other clients, including municipal separately managed accounts and passively managed exchange traded funds (ETFs) sub-advised by the Advisor. In evaluating the comparisons of fees, the Independent Board Members noted that the fee rates charged to the Funds and other clients vary, among other things, because of the different services involved and the additional regulatory and compliance requirements associated with registered investment companies, such as the Funds. Accordingly, the Independent Board Members considered the differences in the product types, including, but not limited to, the services provided, the structure and operations, product distribution and costs thereof, portfolio investment policies, investor profiles, account sizes and regulatory requirements. The Independent Board Members noted, in particular, that the range of services provided to the Funds (as discussed above) is much more extensive than that provided to separately managed accounts. Given the inherent differences in the various products, particularly the extensive services provided to the Funds, the Independent Board Members believe such facts justify the different levels of fees.
In considering the fees of the Sub-Advisor, the Independent Board Members also considered the pricing schedule or fees that the Sub-Advisor charges for similar investment management services for other Nuveen funds, funds of other sponsors (if any), and other clients (such as retail and/or institutional managed accounts).
3.
Profitability of Fund Advisers
In conjunction with its review of fees, the Independent Board Members also considered the profitability of Nuveen for its advisory activities and its financial condition. The Independent Board Members reviewed the revenues and expenses of Nuveen’s advisory activities for the last two calendar years, the allocation methodology used in preparing the profitability data and an analysis of the key drivers behind the changes in revenues and expenses that impacted profitability in 2011. The Independent Board Members noted this information supplemented the profitability information requested and received during the year to help keep them apprised of developments affecting profitability (such as changes in fee waivers and expense reimbursement commitments). In this regard, the Independent Board Members noted that they have an Independent Board Member serve as a point person to review and keep them apprised of changes to the profitability analysis and/or methodologies during the year. The Independent Board Members also considered Nuveen’s revenues for advisory activities, expenses, and profit margin compared to that of various unaffiliated management firms with comparable assets under management (based on asset size and asset composition).
|
|
In reviewing profitability, the Independent Board Members recognized the Advisor’s continued investment in its business to enhance its services, including capital improvements to investment technology, updated compliance systems, and additional personnel in compliance, risk management, and product development as well as its ability to allocate resources to various areas of the Advisor as the need arises. In addition, in evaluating profitability, the Independent Board Members also recognized the subjective nature of determining profitability which may be affected by numerous factors including the allocation of expenses. Further, the Independent Board Members recognized the difficulties in making comparisons as the profitability of other advisers generally is not publicly available and the profitability information that is available for certain advisers or management firms may not be representative of the industry and may be affected by, among other things, the adviser’s particular business mix, capital costs, types of funds managed and expense allocations.
Notwithstanding the foregoing, the Independent Board Members reviewed Nuveen’s methodology and assumptions for allocating expenses across product lines to determine profitability. In reviewing profitability, the Independent Board Members recognized Nuveen’s investment in its fund business. Based on their review, the Independent Board Members concluded that the Advisor’s level of profitability for its advisory activities was reasonable in light of the services provided.
With respect to sub-advisers affiliated with Nuveen, including the Sub-Advisor, the Independent Board Members reviewed the sub-adviser’s revenues, expenses and profitability margins (pre- and post-tax) for its advisory activities and the methodology used for allocating expenses among the internal sub-advisers. Based on their review, the Independent Board Members were satisfied that the Sub-Advisor’s level of profitability was reasonable in light of the services provided.
In evaluating the reasonableness of the compensation, the Independent Board Members also considered other amounts paid to a Fund Adviser by the Funds as well as any indirect benefits (such as soft dollar arrangements, if any) the Fund Adviser and its affiliates receive, or are expected to receive, that are directly attributable to the management of the Funds, if any. See Section E below for additional information on indirect benefits a Fund Adviser may receive as a result of its relationship with the Funds. Based on their review of the overall fee arrangements of each Fund, the Independent Board Members determined that the advisory fees and expenses of the respective Fund were reasonable.
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D.
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Economies of Scale and Whether Fee Levels Reflect These Economies of Scale
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With respect to economies of scale, the Independent Board Members have recognized the potential benefits resulting from the costs of a fund being spread over a larger asset base, although economies of scale are difficult to measure and predict with precision,
Annual Investment Management Agreement
Approval Process
(Unaudited) (continued)
particularly on a fund-by-fund basis. One method to help ensure the shareholders share in these benefits is to include breakpoints in the advisory fee schedule. Generally, management fees for funds in the Nuveen complex are comprised of a fund-level component and a complex-level component, subject to certain exceptions. Accordingly, the Independent Board Members reviewed and considered the applicable fund-level breakpoints in the advisory fee schedules that reduce advisory fees as asset levels increase. Further, the Independent Board Members noted that although closed-end funds may from time-to-time make additional share offerings, the growth of their assets will occur primarily through the appreciation of such funds’ investment portfolio.
In addition to fund-level advisory fee breakpoints, the Board also considered the Funds’ complex-wide fee arrangement. Pursuant to the complex-wide fee arrangement, the fees of the funds in the Nuveen complex are generally reduced as the assets in the fund complex reach certain levels. The complex-wide fee arrangement seeks to provide the benefits of economies of scale to fund shareholders when total fund complex assets increase, even if assets of a particular fund are unchanged or have decreased. The approach reflects the notion that some of Nuveen’s costs are attributable to services provided to all its funds in the complex and therefore all funds benefit if these costs are spread over a larger asset base. In addition, with the acquisition of the funds previously advised by FAF Advisors, Inc., the Board noted that a portion of such funds’ assets at the time of acquisition were deemed eligible to be included in the complex-wide fee calculation in order to deliver fee savings to shareholders in the combined complex and such funds were subject to differing complex-level fee rates.
Based on their review, the Independent Board Members concluded that the breakpoint schedules and complex-wide fee arrangement were acceptable and reflect economies of scale to be shared with shareholders when assets under management increase.
In evaluating fees, the Independent Board Members received and considered information regarding potential “fall out” or ancillary benefits the respective Fund Adviser or its affiliates may receive as a result of its relationship with each Fund. In this regard, the Independent Board Members considered any revenues received by affiliates of the Advisor for serving as co-manager in initial public offerings of new closed-end funds as well as revenues received in connection with secondary offerings.
In addition to the above, the Independent Board Members considered whether the Fund Advisers received any benefits from soft dollar arrangements whereby a portion of the commissions paid by a Fund for brokerage may be used to acquire research that may be useful to the Fund Adviser in managing the assets of the Funds and other clients. The Independent Board Members recognized that each Fund Adviser has the authority to pay a higher commission in return for brokerage and research services if it
determines in good faith that the commission paid is reasonable in relation to the value of the brokerage and research services provided and may benefit from such soft dollar arrangements. Similarly, the Board recognized that the research received pursuant to soft dollar arrangements by a Fund Adviser may also benefit a Fund and shareholders to the extent the research enhances the ability of the Fund Adviser to manage the Fund. The Independent Board Members noted that the Fund Advisers’ profitability may be somewhat lower if they did not receive the research services pursuant to the soft dollar arrangements and had to acquire such services directly.
Based on their review, the Independent Board Members concluded that any indirect benefits received by a Fund Adviser as a result of its relationship with the Funds were reasonable and within acceptable parameters.
The Independent Board Members did not identify any single factor discussed previously as all-important or controlling. The Board Members, including the Independent Board Members, unanimously concluded that the terms of each Advisory Agreement are fair and reasonable, that the respective Fund Adviser’s fees are reasonable in light of the services provided to each Fund and that the Advisory Agreements be renewed.
Reinvest Automatically,
Easily and Conveniently
Nuveen makes reinvesting easy. A phone call is all it takes to set up your reinvestment account.
Nuveen Closed-End Funds Automatic Reinvestment Plan
Your Nuveen Closed-End Fund allows you to conveniently reinvest distributions in additional Fund shares.
By choosing to reinvest, you’ll be able to invest money regularly and automatically, and watch your investment grow through the power of compounding. Just like distributions in cash, there may be times when income or capital gains taxes may be payable on 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 distributions, the date of investment, the shares acquired and the price per share, and the total number of shares you own.
How shares are purchased
The shares you acquire by reinvesting will either be purchased on the open market or newly issued by the Fund. If the shares are trading at or above net asset value at the time of valuation, the Fund will issue new shares at the greater of the net asset value or 95% of the then-current market price. If the shares are trading at less than net asset value, shares for your account will be purchased on the open market. If the Plan Agent begins purchasing Fund shares on the open market while shares are trading below net asset value, but the Fund’s shares subsequently trade at or above their net asset value before the Plan Agent is able to complete its purchases, the Plan Agent may cease open-market purchases and may invest the uninvested portion of the distribution in newly-issued Fund shares at a price equal to the greater of the shares’ net asset value or 95% of the shares’ market value on the last business day immediately prior to the purchase date. Distributions received to purchase shares in the open market will normally be invested shortly after the distribution payment date. No interest will be paid on 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 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.
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 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.
Glossary of Terms
Used in this Report
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Auction Rate Bond:
An auction rate bond is a security whose interest payments are adjusted periodically through an auction process, which process typically also serves as a means for buying and selling the bond. Auctions that fail to attract enough buyers for all the shares offered for sale are deemed to have “failed,” with current holders receiving a formula-based interest rate until the next scheduled auction.
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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.
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Average Effective Maturity:
The market-value-weighted average of the effective maturity dates of the individual securities including cash. In the case of a bond that has been advance-refunded to a call date, the effective maturity is the date on which the bond is scheduled to be redeemed using the proceeds of an escrow account. In most other cases the effective maturity is the stated maturity date of the security.
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Effective Leverage:
Effective leverage is a Fund’s effective economic leverage, and includes both regulatory leverage (see below) and the leverage effects of certain derivative investments in the Fund’s portfolio. Currently, the leverage effects of Tender Option Bond (TOB) inverse floater holdings are included in effective leverage values, in addition to any regulatory leverage.
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Inverse Floating Rate Securities:
Inverse floating rate securities, also known as inverse floaters or tender option bonds (TOBs), are created by depositing a municipal bond, typically with a fixed interest rate, into a special purpose trust created by a broker-dealer. This trust, in turn, (a) issues floating rate certificates typically paying short-term tax-exempt interest rates to third parties in amounts equal to some fraction of the deposited bond’s par amount or market value, and (b) issues an inverse floating rate certificate (sometimes referred to as an “inverse floater”) to an investor (such as a Fund) interested in gaining investment exposure to a long-term municipal bond. The income received by the holder of the inverse floater varies inversely with the short-term rate paid to the floating rate certificates’ holders, and in most circumstances the holder of the inverse floater bears substantially all of the underlying bond’s downside investment risk. The holder of the inverse floater typically also benefits disproportionately from any potential appreciation of the underlying bond’s value. Hence, an inverse floater essentially represents an investment in the underlying bond on a leveraged basis.
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Leverage:
Using borrowed money to invest in securities or other assets, seeking to increase the return of an investment or portfolio.
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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.
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Lipper Other States Municipal Debt Funds Classification Average:
Calculated using the returns of all closed-end funds in this category. Lipper returns account for the effects of management fees and assume reinvestment of distributions, but do not reflect any applicable sales charges.
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Market Yield (also known as Dividend Yield or Current Yield):
An investment’s current annualized dividend divided by its current market price.
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Net Asset Value (NAV):
The net market value of all securities held in a portfolio.
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Net Asset Value (NAV) Per Share:
The market value of one share of a mutual fund or closed-end fund. For a Fund, the NAV is calculated daily by taking the Fund’s total assets (securities, cash, and accrued earnings), subtracting the Fund’s liabilities, and dividing by the number of shares outstanding.
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Pre-Refunding:
Pre-Refunding, also known as advanced refundings or refinancings, is a procedure used by state and local governments to refinance municipal bonds to lower interest expenses. The issuer sells new bonds with a lower yield and uses the proceeds to buy U.S. Treasury securities, the interest from which is used to make payments on the higher-yielding bonds. Because of this collateral, pre-refunding generally raises a bond’s credit rating and thus its value.
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Regulatory Leverage:
Regulatory leverage consists of preferred shares issued by or borrowings of a Fund. Both of these are part of a Fund’s capital structure. Regulatory leverage is sometimes referred to as “’40 Act Leverage” and is subject to asset coverage limits set in the Investment Company Act of 1940.
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S&P Arizona and Texas Municipal Bond Indexes:
An unleveraged, market value-weighted indexes designed to measure the performance of the tax-exempt, investment-grade municipal bond markets in Arizona and Texas, respectively. Index returns assume reinvestment of distributions, but do not reflect any applicable sales charges or management fees.
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S&P Municipal Bond Index:
An unleveraged, market value-weighted index designed to measure the performance of the tax-exempt, investment-grade U.S. municipal bond market. Index returns assume reinvestment of distributions, but do not reflect any applicable sales charges or management fees.
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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.
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Glossary of Terms
Used in this Report
(continued)
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Zero Coupon Bond:
A zero coupon bond does not pay a regular interest coupon to its holders during the life of the bond. Income to the holder of the bond comes from accretion of the difference between the original purchase price of the bond at issuance and the par value of the bond at maturity and is effectively paid at maturity. The market prices of zero coupon bonds generally are more volatile than the market prices of bonds that pay interest periodically.
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Notes
Notes
Additional Fund Information
Board of
Directors/Trustees
John P. Amboian
Robert P. Bremner
Jack B. Evans
William C. Hunter
David J. Kundert
William J. Schneider
Judith M. Stockdale
Carole E. Stone
Virginia L. Stringer
Terence J. Toth
Fund Manager
Nuveen Fund Advisors, Inc.
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
Quarterly Portfolio of Investments and Proxy Voting Information
You may obtain (i) each Fund’s quarterly portfolio of investments, (ii) information regarding how each Fund voted proxies relating to portfolio securities held during the most recent twelve-month period ended June 30, and (iii) a description of the policies and procedures that each Fund used to determine how to vote proxies relating to portfolio securities without charge, upon request, by calling Nuveen Investments toll-free at (800) 257-8787 or on Nuveen’s website at www.nuveen.com.
You may also obtain this and other Fund information directly from the Securities and Exchange Commission (SEC). The SEC may charge a copying fee for this information. Visit the SEC on-line at http://www.sec.gov or in person at the SEC’s Public Reference Room in Washington, D.C. Call the SEC at (202) 942-8090 for room hours and operation. You may also request Fund information by sending an e-mail request to publicinfo@sec.gov or by writing to the SEC’s Public References Section at 100 F Street NE, Washington, D.C. 20549.
CEO Certification Disclosure
Each Fund’s Chief Executive Officer (CEO) has submitted to the New York Stock Exchange (NYSE) the annual CEO certification as required by Section 303A.12(a) of the NYSE Listed Company Manual.
Each Fund has filed with the SEC the certification of its Chief Executive Officer and Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act.
Common Share Information
Each Fund intends to repurchase its own common stock in the future at such times and in such amounts as is deemed advisable. During the period covered by this report, the Funds repurchased shares of their common stock as shown in the accompanying table.
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Common Shares
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Fund
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Repurchased
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NAZ
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NFZ
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—
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NKR
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NXE
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—
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NTX
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—
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Any future repurchases will be reported to shareholders in the next annual or semiannual report.
Nuveen Investments:
Serving Investors for Generations
Since 1898, financial advisors and their clients have relied on Nuveen Investments to provide dependable investment solutions through continued adherence to proven, long-term investing principles. Today, we offer a range of high quality equity and fixed-income solutions designed to be integral components of a well-diversified core portfolio.
Focused on meeting investor needs.
Nuveen Investments provides high-quality investment services designed to help secure the long-term goals of institutional and individual investors as well as the consultants and financial advisors who serve them. Nuveen Investments markets a wide range of specialized investment solutions which provide investors access to capabilities of its high-quality boutique investment affiliates—Nuveen Asset Management, Symphony Asset Management, NWQ Investment Management Company, Santa Barbara Asset Management, Tradewinds Global Investors, Winslow Capital Management and Gresham Investment Management. In total, Nuveen Investments managed $212 billion as of June 30, 2012.
Find out how we can help you.
To learn more about how the products and services of Nuveen Investments may be able to help you meet your financial goals, talk to your financial advisor, or call us at
(800) 257-8787.
Please read the information provided carefully before you invest. Investors should consider the investment objective and policies, risk considerations, charges and expenses of any investment carefully. Where applicable, be sure to obtain a prospectus, which contains this and other relevant information. To obtain a prospectus, please contact your securities representative or
Nuveen Investments, 333 W. Wacker Dr., Chicago, IL 60606.
Please read the prospectus carefully before you invest or send money.
Learn more about Nuveen Funds at:
www.nuveen.com/cef
Distributed by
Nuveen Securities, LLC
333 West Wacker Drive
Chicago, IL 60606
www.nuveen.com/cef
ESA-D-0812D