nzf.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF
REGISTERED MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number 811-10345

Nuveen Dividend Advantage Municipal Fund 3
(Exact name of registrant as specified in charter)

Nuveen Investments
333 West Wacker Drive
Chicago, IL 60606
(Address of principal executive offices) (Zip code)

Kevin J. McCarthy
Nuveen Investments
333 West Wacker Drive
Chicago, IL 60606
(Name and address of agent for service)

Registrant's telephone number, including area code: (312) 917-7700

Date of fiscal year end: October 31

Date of reporting period: October 31, 2010

Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles.

A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget ("OMB") control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. ss. 3507.


 
 

 


ITEM 1. REPORTS TO STOCKHOLDERS.


 

 
 

 
 
NUVEEN INVESTMENTS ANNOUNCES STRATEGIC COMBINATION WITH FAF ADVISORS
 
On July 29, 2010, Nuveen Investments announced that U.S. Bancorp will receive a 9.5% stake in Nuveen Investments and cash consideration in exchange for the long-term asset business of U.S. Bancorp’s FAF Advisors. Nuveen Investments is the parent of Nuveen Asset Management (NAM), the investment adviser for the Funds included in this report.
 
FAF Advisors, which currently manages about $25 billion of long-term assets and serves as the advisor of the First American Funds, will be combined with NAM, which currently manages about $75 billion in municipal fixed income assets. Upon completion of the transaction, Nuveen Investments, which currently manages about $160 billion of assets across several high-quality affiliates, will manage a combined total of about $185 billion in institutional and retail assets.
 
This combination will not affect the investment objectives, strategies or policies of the Funds in this report. Over time, Nuveen Investments expects that the combination will provide even more ways to meet the needs of investors who work with financial advisors and consultants by enhancing the multi-boutique model of Nuveen Investments, which also includes highly respected investment teams at Hyde Park, NWQ Investment Management, Santa Barbara Asset Management, Symphony Asset Management, Tradewinds Global Investors and Winslow Capital.
 
The transaction is expected to close late in 2010, subject to customary conditions.

 
 

 
 
Chairman’s
Letter to Shareholders
 
 
Dear Shareholder,
 
Recent months have revealed the fragility and disparity of the global economic recovery. In the U.S., the rate of economic growth has slowed as various stimulus programs wind down, exposing weakness in the underlying economy. In contrast, many emerging market countries are experiencing a return to comparatively high rates of growth. Confidence in global financial markets has been undermined by concerns about high sovereign debt levels in Europe and the U.S. Until these countries can begin credible programs to reduce their budgetary deficits, market unease and hesitation will remain. On a more encouraging note, while the global recovery is expanding existing trade imbalances, policy makers in the leading economies are making a sustained effort to create a global framework through which various countries can take complimentary actions that should reduce those imbalances over time.
 
The U.S. economy is subject to unusually high levels of uncertainty as it struggles to recover from a devastating financial crisis. Unemployment remains stubbornly high, due to what appears to be both cyclical and structural forces. Federal Reserve policy makers are implementing another round of quantitative easing, a novel approach to provide support to the economy. However, the high levels of debt owed both by U.S. consumers and the U.S. government limit the Fed’s ability to engineer a stronger economic recovery.
 
The U.S. financial markets reflect the crosscurrents now impacting the U.S. economy. Today’s historically low interest rates reflect the Fed’s intervention in the financial markets and the demand for U.S. government debt by U.S. and overseas investors looking for a safe haven for investment. The continued corporate earnings recovery and recent electoral results are giving a boost to equity markets. Encouragingly, financial institutions are rebuilding their balance sheets and the financial reform legislation enacted last summer has the potential to address many of the most significant contributors to the financial crisis, although the details still have to be worked out.
 
In this difficult environment your Nuveen investment team continues to seek sustainable investment opportunities and, at the same time, remains alert for potential risks that may result from a recovery still facing many headwinds. As your representative, the Nuveen Fund Board monitors the activities of each investment team to assure that all maintain their investment disciplines. As always, I encourage you to contact your financial consultant if you have any questions about your investment in a Nuveen Fund.
 
On behalf of the other members of your Fund Board, we look forward to continuing to earn your trust in the months and years ahead.
 
Sincerely,
 
 
Robert P. Bremner
Chairman of the Board
December 22, 2010
 
Nuveen Investments 1

 
 

 
 
Portfolio Managers’ Comments
 
Nuveen Performance Plus Municipal Fund, Inc. (NPP)
Nuveen Municipal Advantage Fund, Inc. (NMA)
Nuveen Municipal Market Opportunity Fund, Inc. (NMO)
Nuveen Dividend Advantage Municipal Fund (NAD)
Nuveen Dividend Advantage Municipal Fund 2 (NXZ)
Nuveen Dividend Advantage Municipal Fund 3 (NZF)
 
Portfolio managers Tom Spalding and Paul Brennan discuss U.S. economic and municipal market conditions, key investment strategies, and the twelve-month performance of these six national Funds. A 34-year veteran of Nuveen, Tom has managed NXZ since its inception in 2001 and NPP, NMA, NMO and NAD since 2003. With 20 years of industry experience, including 12 years at Nuveen, Paul assumed portfolio management responsibility for NZF in 2006.
 
What factors affected the U.S. economy and municipal market during the twelve-month reporting period ended October 31, 2010?
 
During this reporting period, the U.S. economy remained under considerable stress, and both the Federal Reserve (Fed) and the federal government continued their efforts to improve the overall economic environment. For its part, the Fed held the benchmark fed funds rate in a target range of zero to 0.25% since cutting it to this record low level in December 2008. At its November 2010 meeting (shortly after the end of this reporting period), the central bank renewed its commitment to keeping the fed funds rate at “exceptionally low levels” for an “extended period.” The Fed also announced a second round of quantitative easing, in which it plans to purchase $600 billion in U.S. Treasury bonds by June 30, 2011. The goal of this plan is to lower long-term interest rates and thereby stimulate economic activity and create jobs. The federal government continued to focus on implementing the economic stimulus package passed in early 2009 and aimed at providing job creation, tax relief, fiscal assistance to state and local governments, and expansion of unemployment benefits and other federal social welfare programs.
 
These and other measures to ease the economic recession produced some signs of economic improvement. In the third quarter of 2010, the U.S. economy, as measured by the U.S. gross domestic product (GDP), grew at an annualized rate of 2.5%, marking the first time the economy had strung together five consecutive quarters of growth since 2007-2008. Inflation remained relatively tame, as the Consumer Price Index (CPI) rose just 1.2% year-over-year as of October 2010. The core CPI (which excludes food and energy) rose 0.6% over this period, the smallest twelve-month increase in the 53-year history of this index. Housing prices also continued to recover from their April 2009 lows, although growth rates moderated from previous periods. For the twelve months ended September
 
Certain statements in this report are forward-looking statements. Discussions of specific investments are for illustration only and are not intended as recommendations of individual investments. The forward-looking statements and other views expressed herein are those of the portfolio managers as of the date of this report. Actual future results or occurrences may differ significantly from those anticipated in any forward-looking statements, and the views expressed herein are subject to change at any time, due to numerous market and other factors. The Funds disclaim any obligation to update publicly or revise any forward-looking statements or views expressed herein.
 
Any reference to credit ratings for portfolio holdings denotes the highest rating assigned by a Nationally Recognized Statistical Rating Organization (NRSRO) such as Standard & Poor’s, Moody’s or Fitch. AAA, AA, A, and BBB ratings are investment grade; BB, B, CCC, CC, C and D ratings are below investment grade. Holdings and ratings may change over time.
 
2 Nuveen Investments

 
 

 
 
2010 (the latest information available at the time this report was prepared), the average home price in the Standard & Poor’s/Case-Shiller Index rose 0.6%. Unemployment remained persistently high, with the jobless rate hovering at or above 9.5% over the past 15 months. As of October 31, 2010, national unemployment stood at 9.6% for the third consecutive month, down from its 26-year high of 10.1% in October 2009.
 
Municipal bond prices generally rose during this period, as the combination of strong demand and tight supply of new tax-exempt issuance created favorable conditions. One reason for the decrease in new tax-exempt supply was the heavy issuance of taxable municipal debt under the Build America Bond program. Build America Bonds, which were created as part of the February 2009 economic stimulus package, currently offer municipal issuers a federal subsidy equal to 35% of a bond’s interest payments, providing issuers with an alternative to traditional tax-exempt debt that often proves to be lower in cost. For the twelve months ended October 31, 2010, taxable Build America Bonds issuance totaled $100.3 billion, accounting for 24% of new bonds issued in the municipal market.
 
Over the twelve months ended October 31, 2010, municipal bond issuance nationwide—both tax-exempt and taxable—totaled $418.0 billion, an increase of 9% compared with the twelve-month period ended October 31, 2009. However, if taxable Build America Bond issuance were removed from the equation, the supply of tax-exempt bonds alone actually fell 15%. Since interest payments from Build America Bonds represent taxable income, we do not view these bonds as good investment opportunities for the tax-exempt Nuveen municipal closed-end funds.
 
What key strategies were used to manage these Funds during this reporting period?
 
As previously mentioned, the supply of tax-exempt municipal bonds declined nationally during this period, due in part to the issuance of taxable municipal bonds under the Build America Bond program. In this environment of constrained issuance of tax-exempt municipal bonds, we continued to take a bottom-up approach to discovering undervalued sectors and individual credits with the potential to perform well over the long term. In NPP, NMA, NMO, NAD and NXZ, we worked to increase our health care exposure, evaluating each opportunity in this sector on the basis of its individual merits. In general, our criteria focused on determining the top hospitals in their service areas with good management and reasonable debt levels. In NZF, we found value in several areas of the market, including health care, tax-supported sectors and other essential services such as toll roads and airports.
 
Some of this investment activity resulted from opportunities created by the provisions of the Build America Bond program. For example, tax-exempt supply was more plentiful in the health care sector because, as 501(c)(3) (non-profit) organizations, hospitals generally do not qualify for the Build America Bond program and must continue to issue bonds in the tax-exempt municipal market. Supply in the health care sector was also boosted in the early part of the period by hospitals issuing fixed rate bonds in order to refinance and retire outstanding debt that had initially been issued as variable rate debt. Bonds with proceeds earmarked for refundings, working capital and private activities also are not
 
Nuveen Investments 3

 
 

 
 
covered by the Build America Bond program, and this resulted in attractive opportunities in various other sectors of the market.
 
The impact of the Build America Bond program also was evident in the area of longer-term issuance, as municipal issuers sought to take full advantage of the attractive financing terms offered by these bonds. Approximately 70% of Build America Bonds were issued with maturities of at least 30 years. Even though this significantly reduced the availability of tax-exempt credits with longer maturities and made locating appropriate longer bonds more challenging, we continued to find good opportunities to purchase attractive longer-term bonds for these Funds.
 
Cash for new purchases during this period was generated primarily by the proceeds from called and maturing bonds, which we worked to redeploy to keep the Funds fully invested. On the whole, active selling was minimal, as the bonds in our portfolios generally offered higher yields than those available in the current marketplace.
 
As of October 31, 2010, all six of these Funds continued to use inverse floating rate securities.1 We employ inverse floaters as a form of leverage for a variety of reasons, including duration management, income enhancement and total return enhancement.
 
How did the Funds perform?
 
Individual results for these Funds, as well as relevant index and peer group information, are presented in the accompanying table.
 
Average Annual Total Returns on Common Share Net Asset Value
For periods ended 10/31/10
 
Fund
1-Year
5-Year
10-Year
NPP
12.07%
5.35%
6.60%
NMA
12.90%
5.02%
6.68%
NMO
11.71%
4.56%
5.93%
NAD
12.60%
5.19%
7.14%
NXZ
9.12%
4.97%
N/A
NZF
11.41%
5.45%
N/A
       
Standard & Poor’s (S&P) National Municipal Bond Index2
8.06%
4.98%
5.58%
       
Lipper General Leveraged Municipal Debt Funds Average3
13.81%
4.87%
6.36%
 
For the twelve months ended October 31, 2010, the total returns on common share net asset value (NAV) for all six of these Nuveen Funds exceeded the return for the Standard & Poor’s (S&P) National Municipal Bond Index. For this same period, all six Funds lagged the average return for the Lipper General Leveraged Municipal Debt Funds Average.
 
Key management factors that influenced the Funds’ returns during this period included duration and yield curve positioning, credit exposure and sector allocation. In addition, the use of structural leverage was an important positive factor affecting the Funds’ performances over this period. The impact of structural leverage is discussed in more detail on page six.

 
Past performance is not predictive of future results. Current performance may be higher or lower than the data shown. Returns do not reflect the deduction of taxes that shareholders may have to pay on Fund distributions or upon the sale of Fund shares.
 
For additional information, see the individual Performance Overview for your Fund in this report.
1
An inverse floating rate security, also known as an inverse floater, is a financial instrument designed to pay long-term interest at a rate that varies inversely with a short-term interest rate index. For the Nuveen Funds, the index typically used is the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Index, (previously referred to as the Bond Market Association Index or BMA). Inverse floaters, including those inverse floating rate securities in which the Funds invested during this reporting period, are further defined within the Notes to Financial Statements and Glossary of Terms Used in this Report sections of this report.
2
The Standard & Poor’s (S&P) National Municipal Bond Index is an unleveraged, market value-weighted index designed to measure the performance of the tax-exempt, investment-grade U.S. municipal bond market. This index does not reflect any initial or ongoing expenses and is not available for direct investment.
3
The Lipper General Leveraged Municipal Debt Funds Average is calculated using the returns of all leveraged closed-end funds in this category for each period as follows: 1-year, 46 funds; 5-year, 44 funds; and 10-year, 30 funds. Lipper returns account for the effects of management fees and assume reinvestment of dividends, but do not reflect any applicable sales charges. The Lipper average is not available for direct investment.
 
4 Nuveen Investments

 
 

 
 
During this period, municipal bonds with longer maturities generally outperformed those with shorter maturities, with bonds at the longest end of the municipal yield curve posting the strongest returns. The outperformance of longer term bonds was due in part to the decline in interest rates, particularly in the intermediate and longer segments of the curve. The scarcity of tax-exempt bonds with longer maturities also drove up the prices of these bonds. In general, the greater a Fund’s exposure to the outperforming longer part of the yield curve, the greater the positive impact on the Fund’s return. During this period, NPP, NMA, NMO and NAD all benefited from their longer durations. On the other hand, NXZ and NZF, both of which were introduced in 2001, faced the increased bond calls typically associated with a Fund’s ten-year anniversary. These Funds’ higher exposure to bonds with short call dates was reflected in their shorter durations, which detracted from their performance during this period.
 
Credit exposure also played a role in performance. The demand for municipal bonds increased during this period driven by a variety of factors, including concerns about potential tax increases, the need to rebalance portfolio allocations, and a growing appetite for higher yields and additional risk. At the same time, the supply of new tax-exempt municipal paper declined, due largely to Build America Bond issuance. As investors bid up municipal bond prices, bonds rated BBB or below generally outperformed those rated AAA. All of these Funds, especially NMA, benefited from their allocations to lower-rated bonds.
 
Holdings that generally contributed positively to the Funds’ returns during this period included industrial development revenue and health care bonds. In general, all of these Funds, particularly NMA and NAD, had strong weightings in health care, which added to their performance. Revenue bonds as a whole performed well, with transportation, housing, leasing, and special tax credits among the other sectors that outperformed the general municipal market. Zero coupon bonds and credits backed by the 1998 master tobacco settlement agreement also were among the strongest performers. As of October 31, 2010, these Funds held approximately 4% to 7% of their portfolios in lower-rated tobacco bonds.
 
In contrast, pre-refunded bonds, which are often backed by U.S. Treasury securities trailed the general municipal market during this period. While these securities continued to provide attractive tax-free income, their muted investment performance was attributed primarily to their shorter effective maturities and higher credit quality. Although allocations of pre-refunded bonds fell in most of these Funds due to bond calls during the period, NXZ continued to hold the heaviest weighting of pre-refunded bonds, which detracted from its performance. NAD held the fewest pre-refunded bonds. Among the revenue sectors, resource recovery trailed the overall municipal market by the widest margin, and water and sewer bonds turned in a relatively weaker performance. General obligation and other tax-supported bonds also struggled to keep pace with the overall municipal market return during these twelve months.
 
Nuveen Investments 5

 
 

 
 
IMPACT OF THE FUNDS’ LEVERAGE STRATEGIES ON PERFORMANCE
 
One important factor impacting the returns of most of these Funds relative to the comparative indexes was the Funds’ use of financial leverage. The Funds use leverage because their managers believe that, over time, leveraging provides opportunities for additional income and total return for common shareholders. However, use of leverage also can expose common shareholders to additional volatility. For example, as the prices of securities held by a Fund decline, the negative impact of these valuation changes on common share net asset value and common shareholder total return is magnified by the use of leverage. Conversely, leverage may enhance common share returns during periods when the prices of securities held by a Fund generally are rising. Leverage made a positive contribution to the performance of each of these Funds over this reporting period.
 
RECENT DEVELOPMENTS REGARDING THE FUNDS’ LEVERAGED CAPITAL STRUCTURE
 
Shortly after their inceptions, each of the Funds issued auction rate preferred shares (ARPS) to create financial leverage. As noted in past shareholder reports, the ARPS issued by many closed-end funds, including these Funds, have been hampered by a lack of liquidity since February 2008. Since that time, more ARPS have been submitted for sale in each of their regularly scheduled auctions than there have been offers to buy. In fact, offers to buy have been almost completely non-existent since late February 2008. This means that these auctions have “failed to clear,” and that many, or all, of the ARPS shareholders who wanted to sell their shares in these auctions were unable to do so. This lack of liquidity in ARPS did not lower the credit quality of these shares, and ARPS shareholders unable to sell their shares continued to receive distributions at the “maximum rate” applicable to failed auctions, as calculated in accordance with the pre-established terms of the ARPS. In the recent market, with short-term rates at multi-generational lows, those maximum rates also have been low.
 
One continuing implication for common shareholders from the auction failures is that each Fund’s cost of leverage likely has been incrementally higher at times than it otherwise might have been had the auctions continued to be successful. As a result, each Fund’s common share earnings likely have been incrementally lower at times than they otherwise might have been.
 
As noted in past shareholder reports, the Nuveen funds’ Board of Directors/Trustees authorized several methods that can be used separately or in combination to refinance a portion of the Nuveen funds’ outstanding ARPS. Some funds have utilized tender option bonds (TOBs), also known as inverse floating rate securities, for leverage purposes. The amount of TOBs that a fund may use varies according to the composition of each fund’s portfolio. Some funds have a greater ability to use TOBs than others. Some funds have issued Variable Rate Demand Preferred (VRDP) Shares, a floating rate form of preferred stock. Some funds have issued MuniFund Term Preferred (MTP) Shares, a fixed rate form of preferred stock with a mandatory redemption period of five years.
 
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While all these efforts have reduced the total amount of outstanding ARPS issued by the Nuveen funds, the funds cannot provide any assurance on when the remaining outstanding ARPS might be redeemed.
 
During 2010, and as of the time this report was prepared, 36 Nuveen leveraged closed-end funds (including NAD, NXZ and NZF), received a demand letter from a law firm on behalf of purported holders of common shares of each such fund, alleging that Nuveen and the funds’ officers and Board of Directors/Trustees breached their fiduciary duties related to the redemption at par of the funds’ ARPS. In response, the Board established an ad hoc Demand Committee consisting of certain of its disinterested and independent Board members to investigate the claims. The Demand Committee retained independent counsel to assist it in conducting an extensive investigation. Based upon its investigation, the Demand Committee found that it was not in the best interests of each fund or its shareholders to take the actions suggested in the demand letters, and recommended that the full Board reject the demands made in the demand letters. After reviewing the findings and recommendation of the Demand Committee, the full Board of each fund unanimously adopted the Demand Committee’s recommendation.
 
Subsequently, 26 of the funds that received demand letters (including NAD, NXZ, and NZF) were named as nominal defendants in a putative shareholder derivative action complaint captioned Safier and Smith v. Nuveen Asset Management, et al. that was filed in the Circuit Court of Cook County, Illinois, Chancery Division (the “Cook County Chancery Court”) on July 27, 2010. Three additional funds were named as nominal defendants in a similar complaint captioned Curbow v. Nuveen Asset Management, et al. filed in the Cook County Chancery Court on August 12, 2010, and three additional funds were named as nominal defendants in a similar complaint captioned Beidler v. Nuveen Asset Management, et al. filed in the Cook County Chancery Court on September 21, 2010 (collectively, the “Complaints”). The Complaints, filed on behalf of purported holders of each fund’s common shares, also name Nuveen Asset Management as a defendant, together with current and former Officers and interested Director/Trustees of each of the funds (together with the nominal defendants, collectively, the “Defendants”). The Complaints contain the same basic allegations contained in the demand letters. The suits seek a declaration that the Defendants have breached their fiduciary duties, an order directing the Defendants not to redeem any ARPS at their liquidation value using fund assets, indeterminate monetary damages in favor of the funds and an award of plaintiffs’ costs and disbursements in pursuing the action. Nuveen Asset Management believes that the Complaints are without merit, and intends to defend vigorously against these charges.
 
Nuveen Investments 7

 
 

 
 
As of October 31, 2010, the amounts of ARPS redeemed by the Funds are as shown in the accompanying table.

Fund
 
Auction Rate
Preferred Shares
Redeemed
   
% of Original
Auction Rate
Preferred Shares
 
NPP
  $ 59,100,000       12.3 %
NMA
  $ 358,000,000       100.0 %
NMO
  $ 380,000,000       100.0 %
NAD
  $ 174,925,000       59.3 %
NXZ
  $ 222,000,000       100.0 %
NZF
  $ 75,050,000       24.1 %
 
MTP
 
During the current reporting period, NAD completed the issuance of $144.3 million of 2.70% Series 2015 MTP. The net proceeds from this offering was used to refinance a portion of the Fund’s outstanding ARPS at par. The newly-issued MTP shares trade on the New York Stock Exchange (NYSE) under the symbols “NAD Pr C.” MTP is a fixed-rate form of preferred stock with a mandatory redemption period, in this case, of five years. By issuing MTP, the Fund seeks to take advantage of the current historically low interest rate environment to lock in an attractive federally tax-exempt cost of leverage for a period as long as the term of the MTP. The Fund’s managers believe that issuing MTP may help the Fund mitigate the risk of a significant increase in its cost of leverage should short term interest rates rise sharply in the coming years.
 
Subsequent to the reporting period, NZF completed the issuance of $65 million of 2.80%, Series 2016 MTP. The net proceeds from this offering were used to refinance a portion of the Fund’s outstanding ARPS at par. The newly-issued MTP shares trade on the NYSE under the symbol “NZF Pr C”. Immediately following its MTP issuance, NZF noticed for redemption at par $63.625 million of its outstanding ARPS using the MTP proceeds.
 
VRDP
 
As noted in previous shareholder reports, and as of October 31, 2010, NXZ has issued and outstanding $196.0 million of VRDP.
 
During the current reporting period, NMA and NMO issued $296.8 and $350.9 million, respectively, of VRDP to redeem at par their remaining outstanding ARPS. As noted previously, VRDP is a newly-developed instrument that essentially replaces all or a portion of the ARPS used as leverage and potentially could be used to refinance all or a portion of the ARPS of other funds. VRDP shares include a liquidity feature that allows holders of VRDP to have their shares purchased by a liquidity provider in the event that sell orders have not been matched with purchase orders and successfully settled in a remarketing. VRDP is offered only to qualified institutional buyers, defined pursuant to Rule 144A under the Securities Act of 1933. VRDPs offer interest rates that are reset frequently on a regular schedule and generally reflect current short-term municipal market interest rates.
 
Refer to Notes to Financial Statements, Footnote 1 – General Information and Significant Accounting Policies and Footnote 4 – Fund Shares for further details on MTP and VRDP Shares.
 
As of October 31, 2010, 83 out of the 84 Nuveen closed-end municipal funds that had issued ARPS have redeemed at par all or a portion of these shares. These redemptions bring the total amount of Nuveen’s municipal closed-end funds’ ARPS redemptions to approximately $5.7 billion of the approximately $11.0 billion outstanding.
 
For up-to-date information, please visit the Nuveen CEF Auction Rate Preferred Resource Center at: http://www.nuveen.com/arps.
 
8 Nuveen Investments

 
 

 
 
Common Share Dividend
and Share Price Information
 
During the twelve-month reporting period ended October 31, 2010, NPP, NMA, NMO and NZF each had two monthly dividend increases and NAD and NXZ each had one monthly dividend increase.
 
Due to normal portfolio activity, common shareholders of the following Funds received capital gains and/or net ordinary income distributions at the end of December 2009 as follows:

Fund
 
Long-Term Capital Gains
(per share)
   
Short-Term Capital Gains
and/or Ordinary Income
(per share)
 
NPP
  $ 0.0136     $ 0.0004  
NMA
  $ 0.0654     $ 0.0014  
NXZ
        $ 0.0139  
NZF
  $ 0.0449     $ 0.0196  
 
All of the Funds in this report seek to pay stable dividends at rates that reflect each Fund’s past results and projected future performance. During certain periods, each Fund may pay dividends at a rate that may be more or less than the amount of net investment income actually earned by the Fund during the period. If a Fund has cumulatively earned more than it has paid in dividends, it holds the excess in reserve as undistributed net investment income (UNII) as part of the Fund’s NAV. Conversely, if a Fund has cumulatively paid dividends in excess of its earnings, the excess constitutes negative UNII that is likewise reflected in the Fund’s NAV. Each Fund will, over time, pay all of its net investment income as dividends to shareholders. As of October 31, 2010, all of the Funds in this report had positive UNII balances for both tax and financial reporting purposes.
 
COMMON SHARE REPURCHASES AND SHARE PRICE INFORMATION
 
Since the inception of the Funds’ repurchase program, the Funds have not repurchased any of their outstanding common shares.
 
As of October 31, 2010, the Funds’ common share prices were trading at (+) premiums and (-) discounts to their common share NAVs as shown in the accompanying table.

Fund
10/31/10
(+)Premium/(-)Discount
 
12-Month Average
(+)Premium/(-)Discount
NPP
-1.90%
 
-3.05%
NMA
+0.88%
 
+0.64%
NMO
+2.68%
 
+1.06%
NAD
-1.91%
 
-2.35%
NXZ
-0.61%
 
-0.68%
NZF
-1.09%
 
-2.11%
 
Nuveen Investments 9

 
 

 
 
NPP
                   Nuveen Performance
Performance
                   Plus Municipal
OVERVIEW
                   Fund, Inc.
 
as of October 31, 2010

 
 
Fund Snapshot
     
Common Share Price
  $ 15.00  
Common Share
Net Asset Value (NAV)
  $ 15.29  
Premium/(Discount) to NAV
    -1.90 %
Market Yield
    6.28 %
Taxable-Equivalent Yield1
    8.72 %
Net Assets Applicable to Common Shares ($000)
  $ 916,152  
Average Effective Maturity on Securities (Years)
    16.70  
Leverage-Adjusted Duration
    9.62  

Average Annual Total Return
(Inception 6/22/89)
           
   
On Share Price
   
On NAV
 
1-Year
    18.65 %     12.07 %
5-Year
    6.83 %     5.35 %
10-Year
    8.56 %     6.60 %

States4
(as a % of total investments)
     
Illinois
    17.3 %
California
    12.1 %
Colorado
    6.4 %
Texas
    4.8 %
Florida
    4.7 %
New Jersey
    4.4 %
Ohio
    4.1 %
Nevada
    3.5 %
Washington
    3.3 %
Michigan
    3.1 %
New York
    2.9 %
Massachusetts
    2.9 %
Indiana
    2.5 %
Pennsylvania
    2.3 %
Puerto Rico
    2.1 %
Louisiana
    2.1 %
South Carolina
    1.8 %
Minnesota
    1.8 %
Iowa
    1.7 %
Arizona
    1.5 %
Other
    14.7 %

Portfolio Composition4
(as a % of total investments)
     
Tax Obligation/Limited
    17.3 %
Transportation
    16.5 %
U.S. Guaranteed
    14.8 %
Health Care
    13.5 %
Tax Obligation/General
    13.4 %
Utilities
    8.0 %
Consumer Staples
    6.4 %
Other
    10.1 %
 
 
Refer to the Glossary of Terms Used in this Report for further definition of the terms used within this Fund’s Performance Overview page.
1
Taxable-Equivalent Yield represents the yield that must be earned on a fully taxable investment in order to equal the yield of the Fund on an after-tax basis. It is based on a federal income tax rate of 28%. When comparing this Fund to investments that generate qualified dividend income, the Taxable-Equivalent Yield is lower.
2
The Fund paid shareholders a capital gain and net ordinary income distribution in December 2009 of $0.0140 per share.
3
Ratings shown are the highest of Standard & Poor’s Group, Moody’s Investor Service, Inc. or Fitch, Inc. AAA includes bonds with an implied AAA rating since they are backed by U.S. Government or agency securities. AAA, AA, A and BBB ratings are investment grade; BB, B, CCC, CC, C and D ratings are below-investment grade. Holdings designated N/R are not rated by any of these national rating agencies.
4
Holdings are subject to change.
 
10 Nuveen Investments

 
 

 
 
NMA
                   Nuveen Municipal
Performance
                   Advantage
OVERVIEW
                   Fund, Inc.
 
as of October 31, 2010
 
 
Fund Snapshot
     
Common Share Price
  $ 14.92  
Common Share
Net Asset Value (NAV)
  $ 14.79  
Premium/(Discount) to NAV
    0.88 %
Market Yield
    6.64 %
Taxable-Equivalent Yield1
    9.22 %
Net Assets Applicable to Common Shares ($000)
  $ 642,364  
Average Effective Maturity on Securities (Years)
    18.96  
Leverage-Adjusted Duration
    9.17  

Average Annual Total Return
(Inception 12/19/89)
           
   
On Share Price
   
On NAV
 
1-Year
    19.58 %     12.90 %
5-Year
    6.06 %     5.02 %
10-Year
    8.34 %     6.68 %

States4
(as a % of total investments)
     
California
    12.9 %
Illinois
    10.8 %
Texas
    10.0 %
Louisiana
    8.7 %
Colorado
    6.3 %
Washington
    6.2 %
Puerto Rico
    4.7 %
Ohio
    4.0 %
Pennsylvania
    3.0 %
Florida
    2.9 %
New York
    2.5 %
Tennessee
    2.5 %
Nevada
    2.4 %
New Jersey
    2.1 %
South Carolina
    2.0 %
North Carolina
    1.8 %
Michigan
    1.6 %
Oklahoma
    1.6 %
Other
    14.0 %

Portfolio Composition4
(as a % of total investments)
     
Health Care
    20.9 %
Utilities
    14.7 %
Tax Obligation/Limited
    14.1 %
U.S. Guaranteed
    12.4 %
Tax Obligation/General
    12.1 %
Transportation
    10.2 %
Consumer Staples
    6.1 %
Other
    9.5 %

 
Refer to the Glossary of Terms Used in this Report for further definition of the terms used within this Fund’s Performance Overview page.
1
Taxable-Equivalent Yield represents the yield that must be earned on a fully taxable investment in order to equal the yield of the Fund on an after-tax basis. It is based on a federal income tax rate of 28%. When comparing this Fund to investments that generate qualified dividend income, the Taxable-Equivalent Yield is lower.
2
The Fund paid shareholders a capital gain and net ordinary income distribution in December 2009 of $0.0668 per share.
3
Ratings shown are the highest of Standard & Poor’s Group, Moody’s Investor Service, Inc. or Fitch, Inc. AAA includes bonds with an implied AAA rating since they are backed by U.S. Government or agency securities. AAA, AA, A and BBB ratings are investment grade; BB, B, CCC, CC, C and D ratings are below-investment grade. Holdings designated N/R are not rated by any of these national rating agencies.
4
Holdings are subject to change.
 
Nuveen Investments 11

 
 

 

NMO
                   Nuveen Municipal
Performance
                   Market Opportunity
OVERVIEW
                   Fund, Inc.
 
as of October 31, 2010
 
 
Fund Snapshot
     
Common Share Price
  $ 14.55  
Common Share
Net Asset Value (NAV)
  $ 14.17  
Premium/(Discount) to NAV
    2.68 %
Market Yield
    6.72 %
Taxable-Equivalent Yield1
    9.33 %
Net Assets Applicable to Common Shares ($000)
  $ 648,017  
Average Effective Maturity on Securities (Years)
    19.81  
Leverage-Adjusted Duration
    10.90  

Average Annual Total Return
(Inception 3/21/90)
           
   
On Share Price
   
On NAV
 
1-Year
    17.03 %     11.71 %
5-Year
    6.76 %     4.56 %
10-Year
    7.66 %     5.93 %

States3
(as a % of total investments)
     
California
    13.6 %
Illinois
    10.0 %
Texas
    6.5 %
Washington
    5.9 %
Colorado
    5.5 %
Ohio
    5.3 %
Puerto Rico
    5.0 %
Pennsylvania
    4.7 %
South Carolina
    4.0 %
Nevada
    3.8 %
North Carolina
    3.8 %
New York
    3.2 %
New Jersey
    2.7 %
North Dakota
    2.4 %
Louisiana
    2.1 %
Alaska
    1.9 %
Michigan
    1.9 %
Indiana
    1.8 %
Virginia
    1.7 %
Other
    14.2 %

Portfolio Composition3
(as a % of total investments)
     
Health Care
    18.2 %
Transportation
    17.3 %
Tax Obligation/General
    15.5 %
Tax Obligation/Limited
    13.6 %
Utilities
    7.8 %
U.S. Guaranteed
    7.6 %
Consumer Staples
    7.3 %
Other
    12.7 %

 
Refer to the Glossary of Terms Used in this Report for further definition of the terms used within this Fund’s Performance Overview page.
1
Taxable-Equivalent Yield represents the yield that must be earned on a fully taxable investment in order to equal the yield of the Fund on an after-tax basis. It is based on a federal income tax rate of 28%. When comparing this Fund to investments that generate qualified dividend income, the Taxable-Equivalent Yield is lower.
2
Ratings shown are the highest of Standard & Poor’s Group, Moody’s Investor Service, Inc. or Fitch, Inc. AAA includes bonds with an implied AAA rating since they are backed by U.S. Government or agency securities. AAA, AA, A and BBB ratings are investment grade; BB, B, CCC, CC, C and D ratings are below-investment grade. Holdings designated N/R are not rated by any of these national rating agencies.
3
Holdings are subject to change.
 
12 Nuveen Investments

 
 

 
 
NAD
                   Nuveen Dividend
Performance
                   Advantage
OVERVIEW
                   Municipal Fund
 
as of October 31, 2010
 
 
Fund Snapshot
     
Common Share Price
  $ 14.40  
Common Share
Net Asset Value (NAV)
  $ 14.68  
Premium/(Discount) to NAV
    -1.91 %
Market Yield
    6.33 %
Taxable-Equivalent Yield1
    8.79 %
Net Assets Applicable to Common Shares ($000)
  $ 576,895  
Average Effective Maturity on Securities (Years)
    17.56  
Leverage-Adjusted Duration
    9.97  

Average Annual Total Return
(Inception 5/26/99)
           
   
On Share Price
   
On NAV
 
1-Year
    19.17 %     12.60 %
5-Year
    6.05 %     5.19 %
10-Year
    7.90 %     7.14 %

States3
(as a % of total municipal bonds)
     
Illinois
    21.4 %
Washington
    7.5 %
Florida
    7.2 %
New York
    5.3 %
California
    5.1 %
Wisconsin
    5.0 %
Louisiana
    4.7 %
New Jersey
    4.5 %
Texas
    4.2 %
Puerto Rico
    3.9 %
Colorado
    3.8 %
Nevada
    3.4 %
Michigan
    3.0 %
Indiana
    2.9 %
Ohio
    2.8 %
Pennsylvania
    2.3 %
Other
    13.0 %

Portfolio Composition3
(as a % of total investments)
     
Health Care
    21.5 %
Tax Obligation/Limited
    20.8 %
Tax Obligation/General
    16.0 %
Transportation
    13.0 %
Consumer Staples
    6.0 %
Education and Civic Organizations
    4.8 %
U.S. Guaranteed
    4.6 %
Investment Companies
    0.1 %
Other
    13.2 %

 
Refer to the Glossary of Terms Used in this Report for further definition of the terms used within this Fund’s Performance Overview page.
1
Taxable-Equivalent Yield represents the yield that must be earned on a fully taxable investment in order to equal the yield of the Fund on an after-tax basis. It is based on a federal income tax rate of 28%. When comparing this Fund to investments that generate qualified dividend income, the Taxable-Equivalent Yield is lower.
2
Ratings shown are the highest of Standard & Poor’s Group, Moody’s Investor Service, Inc. or Fitch, Inc. AAA includes bonds with an implied AAA rating since they are backed by U.S. Government or agency securities. AAA, AA, A and BBB ratings are investment grade; BB, B, CCC, CC, C and D ratings are below-investment grade. Holdings designated N/R are not rated by any of these national rating agencies.
3
Holdings are subject to change.
 
Nuveen Investments 13

 
 

 

NXZ
                   Nuveen Dividend
Performance
                   Advantage
OVERVIEW
                   Municipal Fund 2
 
as of October 31, 2010
 
 
Fund Snapshot
     
Common Share Price
  $ 14.67  
Common Share
Net Asset Value (NAV)
  $ 14.76  
Premium/(Discount) to NAV
    -0.61 %
Market Yield
    6.54 %
Taxable-Equivalent Yield1
    9.08 %
Net Assets Applicable to Common Shares ($000)
  $ 434,764  
Average Effective Maturity on Securities (Years)
    15.42  
Leverage-Adjusted Duration
    6.69  

Average Annual Total Return
(Inception 3/27/01)
           
   
On Share Price
   
On NAV
 
1-Year
    10.89 %     9.12 %
5-Year
    5.07 %     4.97 %
Since Inception
    6.33 %     6.82 %

States4
     
(as a % of total investments)
     
Texas
    17.9 %
Illinois
    11.2 %
California
    8.9 %
Michigan
    8.5 %
Colorado
    6.2 %
New York
    5.9 %
New Mexico
    3.7 %
Louisiana
    3.6 %
Minnesota
    3.1 %
Alabama
    3.0 %
Florida
    2.9 %
Washington
    2.8 %
Kansas
    2.7 %
Pennsylvania
    2.1 %
Oregon
    2.1 %
Indiana
    1.7 %
Other
    13.7 %

Portfolio Composition4
     
(as a % of total investments)
     
U.S. Guaranteed
    31.5 %
Tax Obligation/Limited
    20.6 %
Health Care
    14.0 %
Transportation
    10.7 %
Consumer Staples
    7.2 %
Tax Obligation/General
    4.5 %
Other
    11.5 %

 
Refer to the Glossary of Terms Used in this Report for further definition of the terms used within this Fund’s Performance Overview page.
1
Taxable-Equivalent Yield represents the yield that must be earned on a fully taxable investment in order to equal the yield of the Fund on an after-tax basis. It is based on a federal income tax rate of 28%. When comparing this Fund to investments that generate qualified dividend income, the Taxable-Equivalent Yield is lower.
2
The Fund paid shareholders a net ordinary income distribution in December 2009 of $0.0139 per share.
3
Ratings shown are the highest of Standard & Poor’s Group, Moody’s Investor Service, Inc. or Fitch, Inc. AAA includes bonds with an implied AAA rating since they are backed by U.S. Government or agency securities. AAA, AA, A and BBB ratings are investment grade; BB, B, CCC, CC, C and D ratings are below-investment grade. Holdings designated N/R are not rated by any of these national rating agencies.
4
Holdings are subject to change.
 
14 Nuveen Investments

 
 

 
 
NZF
                   Nuveen Dividend
Performance
                   Advantage
OVERVIEW
                   Municipal Fund 3
 
as of October 31, 2010
 
 
Fund Snapshot
     
Common Share Price
  $ 14.58  
Common Share
Net Asset Value (NAV)
  $ 14.74  
Premium/(Discount) to NAV
    -1.09 %
Market Yield
    6.75 %
Taxable-Equivalent Yield1
    9.38 %
Net Assets Applicable to Common Shares ($000)
  $ 595,413  
Average Effective Maturity on Securities (Years)
    14.96  
Leverage-Adjusted Duration
    5.93  

Average Annual Total Return
(Inception 9/25/01)
           
   
On Share Price
   
On NAV
 
1-Year
    17.04 %     11.41 %
5-Year
    6.79 %     5.45 %
Since Inception
    6.26 %     6.63 %

States4
(as a % of total municipal bonds)
     
Texas
    14.7 %
Illinois
    12.0 %
Washington
    10.5 %
California
    7.3 %
Michigan
    6.4 %
Colorado
    4.1 %
Indiana
    3.9 %
Iowa
    3.6 %
New Jersey
    3.2 %
Louisiana
    3.1 %
New York
    3.1 %
Wisconsin
    3.0 %
Kentucky
    2.3 %
Massachusetts
    2.0 %
Missouri
    2.0 %
Nevada
    1.8 %
Maryland
    1.7 %
Georgia
    1.5 %
Other
    13.8 %

Portfolio Composition4
(as a % of total investments)
     
U.S. Guaranteed
    23.7 %
Transportation
    17.8 %
Health Care
    15.8 %
Tax Obligation/General
    8.2 %
Tax Obligation/Limited
    8.0 %
Utilities
    4.8 %
Water and Sewer
    4.6 %
Consumer Staples
    4.1 %
Investment Companies
    0.4 %
Other
    12.6 %

 
Refer to the Glossary of Terms Used in this Report for further definition of the terms used within this Fund’s Performance Overview page.
1
Taxable-Equivalent Yield represents the yield that must be earned on a fully taxable investment in order to equal the yield of the Fund on an after-tax basis. It is based on a federal income tax rate of 28%. When comparing this Fund to investments that generate qualified dividend income, the Taxable-Equivalent Yield is lower.
2
The Fund paid shareholders a capital gain and net ordinary income distribution in December 2009 of $0.0645 per share.
3
Ratings shown are the highest of Standard & Poor’s Group, Moody’s Investor Service, Inc. or Fitch, Inc. AAA includes bonds with an implied AAA rating since they are backed by U.S. Government or agency securities. AAA, AA, A and BBB ratings are investment grade; BB, B, CCC, CC, C and D ratings are below-investment grade. Holdings designated N/R are not rated by any of these national rating agencies.
4
Holdings are subject to change.
 
Nuveen Investments 15

 
 

 

NPP
 
Shareholder Meeting Report
NMA
NMO
 
 
The annual meeting of shareholders was held on July 27, 2010 in the Lobby Conference Room, 333 West Wacker Drive, Chicago, IL  60606; at this meeting the shareholders were asked to vote on the election of Board Members, the elimination of Fundamental Investment Policies and the approval of new Fundamental Investment Policies. The meeting for NPP was subsequently adjourned to September 9, 2010.

     
NPP
     
NMA
     
NMO
 
   
Common and
Preferred
shares voting
together
as a class
 
 
Preferred
shares voting
together
as a class
 
Common and
Preferred
shares voting
together
as a class
 
Preferred
shares voting
together
as a class
 
Common and Preferred
shares voting
together
as a class
 
Preferred
shares voting
together
as a class
To approve the elimination of the Fund’s fundamental policy relating to investments in municipal securities and below investment grade securities.
                       
For
 
28,384,032
 
1,716
 
 
 
21,192,999
 
2,764
Against
 
1,588,179
 
1,176
 
 
 
1,339,168
 
Abstain
 
830,467
 
17
 
 
 
617,855
 
Broker Non-Votes
 
7,606,326
 
4,947
 
 
 
7,967,266
 
Total
 
38,409,004
 
7,856
 
 
 
31,117,288
 
2,764
To approve the new fundamental policy relating to investments in municipal securities for the Fund.
                       
For
 
28,527,693
 
1,720
 
 
 
21,280,072
 
2,764
Against
 
1,370,126
 
1,160
 
 
 
1,189,246
 
Abstain
 
904,859
 
29
 
 
 
680,706
 
Broker Non-Votes
 
7,606,326
 
4,947
 
 
 
7,967,264
 
Total
 
38,409,004
 
7,856
 
 
 
31,117,288
 
2,764
To approve the elimination of the fundamental policy relating to investing in other investment companies.
                       
For
 
28,255,942
 
1,711
 
 
 
21,148,091
 
2,764
Against
 
1,571,658
 
1,169
 
 
 
1,289,569
 
Abstain
 
975,078
 
29
 
 
 
712,365
 
Broker Non-Votes
 
7,606,326
 
4,947
 
 
 
7,967,263
 
Total
 
38,409,004
 
7,856
 
 
 
31,117,288
 
2,764
To approve the elimination of the fundamental policy relating to derivatives and short sales.
                       
For
 
28,143,153
 
1,711
 
 
 
21,125,070
 
2,764
Against
 
1,729,919
 
1,177
 
 
 
1,399,712
 
Abstain
 
929,606
 
21
 
 
 
625,241
 
Broker Non-Votes
 
7,606,326
 
4,947
 
 
 
7,967,265
 
Total
 
38,409,004
 
7,856
 
 
 
31,117,288
 
2,764
To approve the elimination of the fundamental policy relating to commodities.
                       
For
 
28,151,297
 
1,711
 
 
 
21,120,466
 
2,764
Against
 
1,686,090
 
1,166
 
 
 
1,307,098
 
Abstain
 
965,291
 
32
 
 
 
722,461
 
Broker Non-Votes
 
7,606,326
 
4,947
 
 
 
7,967,263
 
Total
 
38,409,004
 
7,856
 
 
 
31,117,288
 
2,764
To approve the new fundamental policy relating to commodities.
                       
For
 
28,177,145
 
1,714
 
 
 
21,089,983
 
2,764
Against
 
1,632,444
 
1,163
 
 
 
1,325,419
 
Abstain
 
993,089
 
32
 
 
 
734,623
 
Broker Non-Votes
 
7,606,326
 
4,947
 
 
 
7,967,263
 
Total
 
38,409,004
 
7,856
 
 
 
31,117,288
 
2,764
 
16 Nuveen Investments

 
 

 

    NPP   NMA   NMO
   
Common and
Preferred
shares voting
together
as a class
 
 
Preferred
shares voting
together
as a class
 
Common and
Preferred
shares voting
together
as a class
 
Preferred
shares voting
together
as a class
 
Common and Preferred
shares voting
together
as a class
 
Preferred
shares voting
together
as a class
Approval of the Board Members was reached as follows:
                       
John Amboian
                       
For
 
37,295,583
 
 
31,707,829
 
 
30,007,058
 
Withhold
 
1,113,421
 
 
686,750
 
 
1,110,230
 
Total
 
38,409,004
 
 
32,394,579
 
 
31,117,288
 
Robert P. Bremner
                       
For
 
37,297,224
 
 
31,588,697
 
 
29,986,898
 
Withhold
 
1,111,780
 
 
805,882
 
 
1,130,390
 
Total
 
38,409,004
 
 
32,394,579
 
 
31,117,288
 
Jack B. Evans
                       
For
 
37,327,664
 
 
31,573,835
 
 
30,016,956
 
Withhold
 
1,081,340
 
 
820,744
 
 
1,100,332
 
Total
 
38,409,004
 
 
32,394,579
 
 
31,117,288
 
William C. Hunter
                       
For
 
 
5,593
 
 
2,018
 
 
2,464
Withhold
 
 
2,263
 
 
200
 
 
300
Total
 
 
7,856
 
 
2,218
 
 
2,764
David J. Kundert
                       
For
 
37,306,638
 
 
31,581,694
 
 
29,978,064
 
Withhold
 
1,102,366
 
 
812,885
 
 
1,139,224
 
Total
 
38,409,004
 
 
32,394,579
 
 
31,117,288
 
William J. Schneider
                       
For
 
 
5,593
 
 
2,018
 
 
2,464
Withhold
 
 
2,263
 
 
200
 
 
300
Total
 
 
7,856
 
 
2,218
 
 
2,764
Judith M. Stockdale
                       
For
 
37,239,033
 
 
31,503,609
 
 
29,994,859
 
Withhold
 
1,169,971
 
 
890,970
 
 
1,122,429
 
Total
 
38,409,004
 
 
32,394,579
 
 
31,117,288
 
Carole E. Stone
                       
For
 
37,277,344
 
 
31,558,979
 
 
30,004,299
 
Withhold
 
1,131,660
 
 
835,600
 
 
1,112,989
 
Total
 
38,409,004
 
 
32,394,579
 
 
31,117,288
 
Terence J. Toth
                       
For
 
37,300,708
 
 
31,680,928
 
 
30,024,683
 
Withhold
 
1,108,296
 
 
713,651
 
 
1,092,605
 
Total
 
38,409,004
 
 
32,394,579
 
 
31,117,288
 
 
Nuveen Investments 17

 
 

 
 
NAD
                   Shareholder Meeting Report (continued)
NXZ
 
NZF
 

    NAD   NXZ   NZF
   
Common and
Preferred
shares voting
together
as a class
 
Preferred
shares voting
together
as a class
 
Common and
Preferred
shares voting
together
as a class
 
Preferred
shares voting
together
as a class
 
Common and
Preferred
shares voting
together
as a class
 
Preferred
shares voting
together
as a class
To approve the elimination of the Fund’s fundamental policy relating to investments in municipal securities and below investment grade securities.
                       
For
 
 
 
 
 
 
Against
 
 
 
 
 
 
Abstain
 
 
 
 
 
 
Broker Non-Votes
 
 
 
 
 
 
Total
 
 
 
 
 
 
To approve the new fundamental policy relating to investments in municipal securities for the Fund.
                       
For
 
 
 
 
 
 
Against
 
 
 
 
 
 
Abstain
 
 
 
 
 
 
Broker Non-Votes
 
 
 
 
 
 
Total
 
 
 
 
 
 
To approve the elimination of the fundamental policy relating to investing in other investment companies.
                       
For
 
 
 
 
 
 
Against
 
 
 
 
 
 
Abstain
 
 
 
 
 
 
Broker Non-Votes
 
 
 
 
 
 
Total
 
 
 
 
 
 
To approve the elimination of the fundamental policy relating to derivatives and short sales.
                       
For
 
 
 
 
 
 
Against
 
 
 
 
 
 
Abstain
 
 
 
 
 
 
Broker Non-Votes
 
 
 
 
 
 
Total
 
 
 
 
 
 
To approve the elimination of the fundamental policy relating to commodities.
                       
For
 
 
 
 
 
 
Against
 
 
 
 
 
 
Abstain
 
 
 
 
 
 
Broker Non-Votes
 
 
 
 
 
 
Total
 
 
 
 
 
 
To approve the new fundamental policy relating to commodities.
                       
For
 
 
 
 
 
 
Against
 
 
 
 
 
 
Abstain
 
 
 
 
 
 
Broker Non-Votes
 
 
 
 
 
 
Total
 
 
 
 
 
 
 
18 Nuveen Investments

 
 

 

     
NAD
     
NXZ
     
NZF
 
   
Common and
Preferred
shares voting
together
as a class
 
Preferred
shares voting
together
as a class
 
Common and
Preferred
shares voting
together
as a class
 
Preferred
shares voting
together
as a class
 
Common and
Preferred
shares voting
together
as a class
 
Preferred
shares voting
together
as a class
Approval of the Board Members was
                       
reached as follows:
                       
John Amboian
                       
For
 
 
 
 
 
 
Withhold
 
 
 
 
 
 
Total
 
 
 
 
 
 
Robert P. Bremner
                       
For
 
 
 
 
 
 
Withhold
 
 
 
 
 
 
Total
 
 
 
 
 
 
Jack B. Evans
                       
For
 
 
 
 
 
 
Withhold
 
 
 
 
 
 
Total
 
 
 
 
 
 
William C. Hunter
                       
For
 
 
9,340,366
 
 
980
 
 
4,264
Withhold
 
 
2,427,527
 
 
890
 
 
1,486
Total
 
 
11,767,893
 
 
1,870
 
 
5,750
David J. Kundert
                       
For
 
 
 
 
 
 
Withhold
 
 
 
 
 
 
Total
 
 
 
 
 
 
William J. Schneider
                       
For
 
 
9,340,366
 
 
980
 
 
4,264
Withhold
 
 
2,427,527
 
 
890
 
 
1,486
Total
 
 
11,767,893
 
 
1,870
 
 
5,750
Judith M. Stockdale
                       
For
 
43,921,868
 
 
26,365,545
 
 
34,915,348
 
Withhold
 
3,305,705
 
 
569,455
 
 
782,960
 
Total
 
47,227,573
 
 
26,935,000
 
 
35,698,308
 
Carole E. Stone
                       
For
 
43,983,468
 
 
26,368,565
 
 
34,946,092
 
Withhold
 
3,244,105
 
 
566,435
 
 
752,216
 
Total
 
47,227,573
 
 
26,935,000
 
 
35,698,308
 
Terence J. Toth
                       
For
 
 
 
 
 
 
Withhold
 
 
 
 
 
 
Total
 
 
 
 
 
 
 
Nuveen Investments 19

 
 

 
 
Report of Independent
Registered Public Accounting Firm
 
The Board of Directors/Trustees and Shareholders
Nuveen Performance Plus Municipal Fund, Inc.
Nuveen Municipal Advantage Fund, Inc.
Nuveen Municipal Market Opportunity Fund, Inc.
Nuveen Dividend Advantage Municipal Fund
Nuveen Dividend Advantage Municipal Fund 2
Nuveen Dividend Advantage Municipal Fund 3
 
We have audited the accompanying statements of assets and liabilities, including the portfolios of investments, of Nuveen Performance Plus Municipal Fund, Inc., Nuveen Municipal Advantage Fund, Inc., Nuveen Municipal Market Opportunity Fund, Inc., Nuveen Dividend Advantage Municipal Fund, Nuveen Dividend Advantage Municipal Fund 2 and Nuveen Dividend Advantage Municipal Fund 3 (the “Funds”) as of October 31, 2010, and the related statements of operations and cash flows (Nuveen Municipal Advantage Fund, Inc., Nuveen Municipal Market Opportunity Fund, Inc., Nuveen Dividend Advantage Municipal Fund, Nuveen Dividend Advantage Municipal Fund 2 and Nuveen Dividend Advantage Municipal Fund 3 only) for the year then ended, the statements of changes in net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Funds’ management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Funds’ internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Funds’ internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of October 31, 2010, by correspondence with the custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial positions of Nuveen Performance Plus Municipal Fund, Inc., Nuveen Municipal Advantage Fund, Inc., Nuveen Municipal Market Opportunity Fund, Inc., Nuveen Dividend Advantage Municipal Fund, Nuveen Dividend Advantage Municipal Fund 2 and Nuveen Dividend Advantage Municipal Fund 3 at October 31, 2010, the results of their operations and cash flows (Nuveen Municipal Advantage Fund, Inc., Nuveen Municipal Market Opportunity Fund, Inc., Nuveen Dividend Advantage Municipal Fund, Nuveen Dividend Advantage Municipal Fund 2 and Nuveen Dividend Advantage Municipal Fund 3 only) for the year then ended, the changes in their net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended in conformity with U.S. generally accepted accounting principles.
 
 
Chicago, Illinois
December 28, 2010

20 Nuveen Investments

 
 

 
 
 
Nuveen Performance Plus Municipal Fund, Inc.
NPP
 
Portfolio of Investments
October 31, 2010
 
 
Principal
   
Optional Call
       
 
Amount (000)
 
Description (1)
Provisions (2)
Ratings (3)
 
Value
 
     
Alabama – 0.1% (0.1% of Total Investments)
         
     
Jefferson County, Alabama, Sewer Revenue Refunding Warrants, Series 1997A:
         
$
1,435
 
5.625%, 2/01/22 – FGIC Insured
12/10 at 100.00
Caa3
$
592,712
 
 
1,505
 
5.375%, 2/01/27 – FGIC Insured
12/10 at 100.00
Caa3
 
605,206
 
 
2,940
 
Total Alabama
     
1,197,918
 
     
Alaska – 0.2% (0.1% of Total Investments)
         
 
2,465
 
Northern Tobacco Securitization Corporation, Alaska, Tobacco Settlement Asset-Backed Bonds, Series 2006A, 5.000%, 6/01/46
6/14 at 100.00
Baa3
 
1,732,476
 
     
Arizona – 2.2% (1.5% of Total Investments)
         
 
1,000
 
Arizona State Transportation Board, Highway Revenue Bonds, Series 2002B, 5.250%, 7/01/22 (Pre-refunded 7/01/12)
7/12 at 100.00
AAA
 
1,080,830
 
 
7,780
 
Phoenix Civic Improvement Corporation, Arizona, Junior Lien Airport Revenue Bonds, Series 2010A, 5.000%, 7/01/40
No Opt. Call
A+
 
7,971,388
 
     
Phoenix, Arizona, Civic Improvement Corporation, Senior Lien Airport Revenue Bonds, Series 2002B:
         
 
5,365
 
    5.750%, 7/01/15 – FGIC Insured (Alternative Minimum Tax)
7/12 at 100.00
AA–
 
5,665,386
 
 
5,055
 
    5.750%, 7/01/16 – FGIC Insured (Alternative Minimum Tax)
7/12 at 100.00
AA–
 
5,305,627
 
 
19,200
 
Total Arizona
     
20,023,231
 
     
Arkansas – 0.5% (0.4% of Total Investments)
         
 
5,080
 
Independence County, Arkansas, Hydroelectric Power Revenue Bonds, Series 2003, 5.350%, 5/01/28 – ACA Insured
5/13 at 100.00
N/R
 
3,846,881
 
 
1,000
 
Washington County, Arkansas, Hospital Revenue Bonds, Washington Regional Medical Center, Series 2005A, 5.000%, 2/01/35
2/15 at 100.00
Baa1
 
1,003,720
 
 
6,080
 
Total Arkansas
     
4,850,601
 
     
California – 18.0% (12.1% of Total Investments)
         
 
3,500
 
Alameda Corridor Transportation Authority, California, Subordinate Lien Revenue Bonds, Series 2004A, 0.000%, 10/01/25 – AMBAC Insured
10/17 at 100.00
A–
 
2,935,170
 
 
11,000
 
Anaheim Public Finance Authority, California, Subordinate Lease Revenue Bonds, Public Improvement Project, Series 1997C, 0.000%, 9/01/20 – AGM Insured
No Opt. Call
AA+
 
6,969,160
 
     
California Department of Water Resources, Power Supply Revenue Bonds, Series 2002A:
         
 
4,000
 
6.000%, 5/01/15 (Pre-refunded 5/01/12)
5/12 at 101.00
Aaa
 
4,375,160
 
 
3,175
 
5.375%, 5/01/22 (Pre-refunded 5/01/12)
5/12 at 101.00
Aaa
 
3,443,002
 
 
3,365
 
California Health Facilities Financing Authority, Health Facility Revenue Bonds, Adventist Health System/West, Series 2003A, 5.000%, 3/01/33
3/13 at 100.00
A
 
3,320,212
 
     
California Health Facilities Financing Authority, Revenue Bonds, Kaiser Permanante System, Series 2006:
         
 
5,000
 
5.000%, 4/01/37
4/16 at 100.00
A+
 
4,963,550
 
 
7,000
 
5.250%, 4/01/39
4/16 at 100.00
A+
 
7,068,670
 
 
2,380
 
California Infrastructure Economic Development Bank, Revenue Bonds, J. David Gladstone Institutes, Series 2001, 5.250%, 10/01/34
10/11 at 101.00
A–
 
2,363,864
 
 
2,330
 
California Municipal Finance Authority, Revenue Bonds, Eisenhower Medical Center, Series 2010A, 5.750%, 7/01/40
7/20 at 100.00
Baa1
 
2,367,793
 
 
3,700
 
California Pollution Control Financing Authority, Revenue Bonds, Pacific Gas and Electric Company, Series 2004C, 4.750%, 12/01/23 – FGIC Insured (Alternative Minimum Tax)
6/17 at 100.00
A3
 
3,707,733
 
 
5,000
 
California, General Obligation Bonds, Series 2005, 5.000%, 3/01/31
3/16 at 100.00
A1
 
5,070,950
 
 
6,435
 
California, General Obligation Refunding Bonds, Series 2002, 6.000%,
4/01/16 – AMBAC Insured
No Opt. Call
A1
 
7,656,556
 
 
16,000
 
California, Various Purpose General Obligation Bonds, Series 2007, 5.000%, 6/01/37
6/17 at 100.00
A1
 
16,057,120
 
 
5,000
 
Coast Community College District, Orange County, California, General Obligation Bonds, Series 2006C, 0.000%, 8/01/32 – AGM Insured
8/18 at 100.00
AA+
 
4,349,450
 
 
7,240
 
Desert Community College District, Riverside County, California, General Obligation Bonds, Election 2004 Series 2007C, 0.000%, 8/01/28 – AGM Insured
8/17 at 56.01
AA+
 
2,614,292
 
 
Nuveen Investments 21

 
 

 

 
 
Nuveen Performance Plus Municipal Fund, Inc. (continued)
NPP
 
Portfolio of Investments October 31, 2010

 
Principal
   
Optional Call
       
 
Amount (000)
 
Description (1)
Provisions (2)
Ratings (3)
 
Value
 
     
California (continued)
         
$
10,000
 
Golden State Tobacco Securitization Corporation, California, Tobacco Settlement Asset-Backed Bonds, Series 2003A-1, 6.750%, 6/01/39 (Pre-refunded 6/01/13)
6/13 at 100.00
AAA
$
11,551,900
 
 
1,500
 
Golden State Tobacco Securitization Corporation, California, Tobacco Settlement Asset-Backed Bonds, Series 2007A-1, 5.125%, 6/01/47
6/17 at 100.00
BBB
 
1,081,065
 
 
10,000
 
Golden State Tobacco Securitization Corporation, California, Tobacco Settlement Asset-Backed Bonds, Series 2007A-2, 0.000%, 6/01/37
6/22 at 100.00
Baa3
 
6,602,300
 
 
5,000
 
Los Angeles Community College District, California, General Obligation Bonds, Series 2007C, 5.000%, 8/01/32 – FGIC Insured
8/17 at 100.00
Aa1
 
5,246,350
 
 
5,500
 
Los Angeles Department of Water and Power, California, Waterworks Revenue Bonds, Series 2003A, 5.125%, 7/01/40 – FGIC Insured
7/12 at 100.00
AA
 
5,583,380
 
 
3,300
 
M-S-R Energy Authority, California, Gas Revenue Bonds, Citigroup Prepay Contracts, Series 2009B, 6.500%, 11/01/39
No Opt. Call
A
 
3,872,319
 
 
1,000
 
Mt. Diablo Hospital District, California, Insured Hospital Revenue Bonds, Series 1993A, 5.125%, 12/01/23 – AMBAC Insured (ETM)
12/10 at 100.00
N/R (4)
 
1,135,280
 
 
13,450
 
Ontario Redevelopment Financing Authority, San Bernardino County, California, Revenue Refunding Bonds, Redevelopment Project 1, Series 1995, 7.200%, 8/01/17 – NPFG Insured
No Opt. Call
A
 
15,464,676
 
 
2,325
 
Palmdale Community Redevelopment Agency, California, Restructured Single Family Mortgage Revenue Bonds, Series 1986D, 8.000%, 4/01/16 (Alternative Minimum Tax) (ETM)
No Opt. Call
AAA
 
2,999,645
 
 
4,795
 
Palomar Pomerado Health, California, General Obligation Bonds, Election of 2004, Series 2007A, 5.000%, 8/01/32 – NPFG Insured
No Opt. Call
A+
 
4,866,014
 
 
1,830
 
San Diego Public Facilities Financing Authority, California, Water Utility Revenue Bonds, Tender Option Bond Trust 3504, 19.188%, 2/01/33 (IF)
8/19 at 100.00
Aa2
 
2,501,024
 
 
2,000
 
San Francisco Airports Commission, California, Revenue Refunding Bonds, San Francisco International Airport, Second Series 2001, Issue 27B, 5.125%, 5/01/26 – FGIC Insured
5/11 at 100.00
A1
 
2,012,540
 
     
San Joaquin Hills Transportation Corridor Agency, Orange County, California, Toll Road Revenue Refunding Bonds, Series 1997A:
         
 
7,210
 
0.000%, 1/15/23 – NPFG Insured
No Opt. Call
A
 
2,964,247
 
 
3,000
 
0.000%, 1/15/35 – NPFG Insured
No Opt. Call
A
 
469,410
 
 
2,875
 
Tobacco Securitization Authority of Northern California, Tobacco Settlement Asset-Backed Bonds, Series 2005A-1, 4.750%, 6/01/23
6/15 at 100.00
BBB
 
2,715,783
 
 
5,245
 
Vacaville Unified School District, California, General Obligation Bonds, Series 2005, 5.000%, 8/01/30 – NPFG Insured
8/15 at 100.00
A+
 
5,373,817
 
 
12,380
 
Walnut Valley Unified School District, Los Angeles County, California, General Obligation Refunding Bonds, Series 1997A, 7.200%, 2/01/16 – NPFG Insured
8/11 at 103.00
AA–
 
13,346,383
 
 
176,535
 
Total California
     
165,048,815
 
     
Colorado – 9.5% (6.4% of Total Investments)
         
 
5,240
 
Adams 12 Five Star Schools, Adams County, Colorado, General Obligation Bonds, Series 2005, 5.000%, 12/15/24 – AGM Insured
12/15 at 100.00
AA+
 
5,679,007
 
 
3,000
 
Colorado Educational and Cultural Facilities Authority, Charter School Revenue Bonds, Peak-to-Peak Charter School, Series 2004, 5.250%, 8/15/34 – SYNCORA GTY Insured
8/14 at 100.00
A
 
3,019,740
 
 
10,000
 
Colorado Health Facilities Authority, Health Facilities Revenue Bonds, Sisters of Charity of Leavenworth Health Services Corporation, Series 2010A, 5.000%, 1/01/40
No Opt. Call
AA
 
10,220,800
 
 
7,660
 
Colorado Health Facilities Authority, Revenue Refunding and Improvement Bonds, Boulder Community Hospital, Series 1994B, 5.875%, 10/01/23 – NPFG Insured
12/10 at 100.00
A2
 
7,667,507
 
 
5,860
 
Colorado Health Facilities Authority, Revenue Refunding Bonds, Catholic Health Initiatives, Series 2001, 5.250%, 9/01/21 (Pre-refunded 9/01/11)
9/11 at 100.00
Aa2 (4)
 
6,099,147
 
 
4,500
 
Denver City and County, Colorado, Airport System Revenue Refunding Bonds, Series 2001A, 5.500%, 11/15/16 – FGIC Insured (Alternative Minimum Tax)
11/11 at 100.00
A+
 
4,684,995
 
 
20,000
 
Denver Convention Center Hotel Authority, Colorado, Senior Revenue Bonds, Convention Center Hotel, Series 2003A, 5.000%, 12/01/33 (Pre-refunded 12/01/13) – SYNCORA GTY Insured
12/13 at 100.00
N/R (4)
 
22,322,200
 
 
13,055
 
E-470 Public Highway Authority, Colorado, Senior Revenue Bonds, Series 1997B, 0.000%,9/01/21 – NPFG Insured
No Opt. Call
A
 
7,071,632
 
 
22 Nuveen Investments
 
 

 
 

 

 
Principal
   
Optional Call
       
 
Amount (000)
 
Description (1)
Provisions (2)
Ratings (3)
 
Value
 
     
Colorado (continued)
         
     
E-470 Public Highway Authority, Colorado, Senior Revenue Bonds, Series 2000B:
         
$
16,200
 
0.000%, 9/01/32 – NPFG Insured
No Opt. Call
A
$
3,857,382
 
 
33,120
 
0.000%, 9/01/33 – NPFG Insured
No Opt. Call
A
 
7,319,851
 
 
18,500
 
E-470 Public Highway Authority, Colorado, Toll Revenue Bonds, Series 2004A, 0.000%, 3/01/36 – NPFG Insured
No Opt. Call
A
 
3,349,055
 
 
755
 
Jefferson County School District R1, Colorado, General Obligation Bonds, Series 2004, 5.000%, 12/15/22 (Pre-refunded 12/15/14) – AGM Insured (UB)
12/14 at 100.00
AA+ (4)
 
877,348
 
 
3,750
 
Regional Transportation District, Colorado, Denver Transit Partners Eagle P3 Project Private Activity Bonds, Series 2010, 6.000%, 1/15/41
7/20 at 100.00
Baa3
 
3,967,350
 
 
1,330
 
University of Colorado Hospital Authority, Revenue Bonds, Series 1999A, 5.000%, 11/15/29 – AMBAC Insured
11/10 at 100.00
A3
 
1,327,540
 
 
142,970
 
Total Colorado
     
87,463,554
 
     
District of Columbia – 1.0% (0.7% of Total Investments)
         
 
4,545
 
District of Columbia Tobacco Settlement Corporation, Tobacco Settlement Asset-Backed Bonds, Series 2001, 6.250%, 5/15/24
5/11 at 101.00
BBB
 
4,563,362
 
 
5,000
 
Washington Convention Center Authority, District of Columbia, Senior Lien Dedicated Tax Revenue Bonds, Series 2007A, 4.500%, 10/01/30 – AMBAC Insured
10/16 at 100.00
A1
 
5,000,350
 
 
9,545
 
Total District of Columbia
     
9,563,712
 
     
Florida – 7.0% (4.7% of Total Investments)
         
 
1,700
 
Beacon Tradeport Community Development District, Miami-Dade County, Florida, Special Assessment Bonds, Commercial Project, Series 2002A, 5.625%, 5/01/32 – RAAI Insured
5/12 at 102.00
N/R
 
1,704,012
 
     
Broward County Housing Finance Authority, Florida, Multifamily Housing Revenue Bonds, Venice Homes Apartments, Series 2001A:
         
 
1,545
 
5.700%, 1/01/32 – AGM Insured (Alternative Minimum Tax)
7/11 at 100.00
AA+
 
1,552,138
 
 
1,805
 
5.800%, 1/01/36 – AGM Insured (Alternative Minimum Tax)
7/11 at 100.00
AA+
 
1,813,682
 
 
5,300
 
Escambia County Health Facilities Authority, Florida, Revenue Bonds, Ascension Health Credit Group, Series 2003A, 5.250%, 11/15/14
No Opt. Call
Aa1
 
6,077,086
 
 
1,995
 
Florida Housing Finance Corporation, Homeowner Mortgage Revenue Bonds, Series 2000-11, 5.850%, 1/01/22 – AGM Insured (Alternative Minimum Tax)
1/11 at 100.00
AA+
 
1,997,574
 
 
4,170
 
Florida Housing Finance Corporation, Homeowner Mortgage Revenue Bonds, Series 2006-2, 4.950%, 7/01/37 (Alternative Minimum Tax)
1/16 at 100.00
AA+
 
4,230,507