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Table of Contents
| Chairman’s Letter to Shareholders | 4 |
| Portfolio Managers’ Comments | 5 |
| Fund Leverage and Other Information | 9 |
| Common Share Dividend and Share Price Information | 13 |
| Performance Overviews | 14 |
| Shareholder Meeting Report | 17 |
| Report of Independent Registered Public Accounting Firm | 20 |
| Portfolios of Investments | 21 |
| Statement of Assets and Liabilities | 68 |
| Statement of Operations | 69 |
| Statement of Changes in Net Assets | 70 |
| Statement of Cash Flows | 71 |
| Financial Highlights | 72 |
| Notes to Financial Statements | 78 |
| Annual Investment Management Agreement Approval Process | 89 |
| Board Members & Officers | 97 |
| Reinvest Automatically, Easily and Conveniently | 102 |
| Glossary of Terms Used in this Report | 104 |
| Other Useful Information | 107 |
Chairman’s
Letter to Shareholders
Dear Shareholders,
These are perplexing times for investors. The global economy continues to struggle. The solutions being implemented in the eurozone to deal with the debt crises of many of its member countries are not yet seen as sufficient by the financial markets. The political paralysis in the U.S. has prevented the compromises necessary to deal with the fiscal imbalance and government spending priorities. The efforts by individual consumers, governments and financial institutions to reduce their debts are increasing savings but reducing demand for the goods and services that drive employment. These developments are undermining the rebuilding of confidence by consumers, corporations and investors that is so essential to a resumption of economic growth.
Although it is painfully slow, progress is being made. In Europe, the turnover of a number of national governments reflects the realization by politicians and voters alike that leaders who practiced business as usual had to be replaced by leaders willing to face problems and accept the hard choices needed to resolve them. The recent coordinated efforts by central banks in the U.S. and Europe to provide liquidity to the largest European banks indicates that these monetary authorities are committed to facilitating a recovery in the European banking sector.
In the U.S., the failure of the congressionally appointed Debt Reduction Committee was a blow to those who hoped for a bipartisan effort to finally begin addressing the looming fiscal crisis. Nevertheless, Congress and the administration cannot ignore the issue for long. The Bush era tax cuts are scheduled to expire on December 31, 2012, and six months later the $1.2 trillion of mandatory across-the-board spending cuts under the Budget Control Act of 2011 begin to go into effect. Any legislative modification would require bipartisan support and the prospects for a bipartisan solution are unclear. The impact of these two developments would be a mixed blessing: a meaningful reduction in the annual budget deficit at the cost of slowing the economic recovery.
It is in these particularly volatile markets that professional investment management is most important. Skillful investment teams who have experienced challenging markets and remain committed to their investment disciplines are critical to the success of an investor’s long-term objectives. In fact, many long-term investment track records are built during challenging markets when managers are able to protect investors against these economic crosscurrents. Experienced investment teams know that volatile markets put a premium on companies and investment ideas that will weather the short-term volatility and that compelling values and opportunities are opened up when markets overreact to negative developments. By maintaining appropriate time horizons, diversification and relying on practiced investment teams, we believe that investors can achieve their long-term investment objectives.
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 21, 2011
Portfolio Managers’ Comments
Nuveen Premium Income Municipal Fund, Inc. (NPI)
Nuveen Premium Income Municipal Fund 2, Inc. (NPM)
Nuveen Premium Income Municipal Fund 4, Inc. (NPT)
Portfolio managers Paul Brennan and Chris Drahn discuss U.S. economic and municipal market conditions, key investment strategies and the twelve-month performance of these three national Funds. With 20 years of investment experience, including 14 years at Nuveen, Paul has managed NPI and NPM since 2006. Chris, who has 31 years of financial industry experience, assumed portfolio management responsibility for NPT from Paul in January 2011.
What factors affected the U.S. economy and municipal market during the twelve-month reporting period ended October 31, 2011?
During this period, the U.S. economy’s recovery from recession remained slow. The Federal Reserve (Fed) maintained its efforts to improve the overall economic environment by continuing to hold the benchmark fed funds rate at the record low level of zero to 0.25% that it had established in December 2008. At its November 2011 meeting (shortly after the end of this reporting period), the central bank reaffirmed its opinion that economic conditions would likely warrant keeping this rate at “exceptionally low levels” at least through mid-2013. The Fed also said that it would continue its program to extend the average maturity of its U.S. Treasury holdings by purchasing $400 billion of these securities with maturities of six to thirty years and selling an equal amount of U.S. Treasury securities with maturities of three years or less. The goals of this program, which the Fed expects to complete by the end of June 2012, are to lower longer-term interest rates, support a stronger economic recovery and help ensure that inflation remains at levels consistent with the Fed’s mandates of maximum employment and price stability.
In the third quarter of 2011, the U.S. economy, as measured by the U.S. gross domestic product (GDP), grew at an annualized rate of 2.0%, the best growth number since the fourth quarter of 2010 and the ninth consecutive quarter of positive growth. The Consumer Price Index (CPI) rose 3.5% year-over-year as of October 2011, while the core CPI (which excludes food and energy) increased 2.1%, edging just above the Fed’s unofficial objective of 2.0% or lower for this inflation measure. Unemployment numbers remained high, as October 2011 marked the seventh straight month with a national jobless number of 9.0% or higher. However, after the reporting period came to a close the U.S. unemployment rate fell to 8.6% in November 2011. While the dip was a step in the right direction, it was due partly to a number of individuals dropping out of the hunt for work. The housing market also continued to be a major weak spot. For the twelve months ended September 2011 (the most recent data available at the time this report
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.
Ratings shown are the highest rating given by one of the following national rating agencies: Standard & Poor’s Group, Moody’s Investor Services, Inc. or Fitch, Inc. Credit ratings are subject to change. AAA, AA, A and BBB are investment grade ratings; BB, B, CCC, CC, C and D are below investment grade ratings. Bonds backed by U.S. Government or agency securities are given an implied rating equal to the rating of such securities. Holdings designated N/R are not rated by a national rating agency.
was prepared), the average home price in the Standard & Poor’s/Case-Shiller Index lost 3.6% over the preceding twelve months, with 18 of the 20 major metropolitan areas reporting losses. In addition, the U.S. economic picture continued to be clouded by concerns about the European debt crisis and efforts to reduce the federal deficit.
Municipal bond prices ended this period generally unchanged versus the beginning of this reporting period, masking a sell-off that commenced in the fourth quarter of 2010, as the result of investor concerns about inflation, the federal deficit and its impact on demand for U.S. Treasuries. Adding to this situation was media coverage of the strained finances of many state and local governments, which failed to differentiate between gaps in these governments’ operating budgets and their ability to meet their debt service obligations. As a result, money flowed out of municipal mutual funds, yields rose and valuations declined.
During the second half of this reporting period (i.e., May-October 2011), municipal bond prices generally rallied as yields declined across the municipal curve. The decline in yields was due in part to the continued depressed level of municipal bond issuance. Tax-exempt volume, which had been limited in 2010 by issuers’ extensive use of taxable Build America Bonds (BABs), continued to drift lower in 2011. Even though BABs were no longer an option for issuers (the BAB program expired at the end of 2010), some borrowers had accelerated issuance into 2010 in order to take advantage of the program’s favorable terms before its termination, fulfilling their capital program borrowing needs well into 2012. This reduced the need for many borrowers to come to market with new issues during this period. Over the twelve months ended October 31, 2011, municipal bond issuance nationwide totaled $320.2 billion, a decrease of 23% compared with the issuance of the twelve-month period ended October 31, 2010. During the majority of this period, demand for municipal bonds remained very strong.
What key strategies were used to manage these Funds during this reporting period?
In an environment characterized by tighter municipal supply and relatively lower yields, we continued to take a bottom-up approach to discovering sectors and individual credits that we believed were undervalued and that had potential to perform well over the long term. During this period, all three of these Funds found value in the health care sector, where we added to our holdings at attractive prices; essential services such as water and sewer bonds; and tax-supported credits. In NPT, these tax-supported bonds included a general obligation (GO) issue for the city of Philadelphia, local school districts in California and Kansas, as well as Puerto Rican sales tax bonds. In general, the Funds focused on purchasing longer bonds in order to take advantage of more attractive yields at the longer end of the municipal yield curve. The purchase of longer bonds also helped maintain for the Funds’ duration (price sensitivity to interest rate movements) and yield curve positioning.
Cash for new purchases during this period was generated primarily by the proceeds from bond calls and maturing bonds, which we worked to redeploy to keep the Funds fully invested. In NPI and NPM, we also sold some bonds with short maturities or short call dates in advance of their maturity or call dates to take advantage of attractive
purchase candidates as they became available in the market. Selling in NPT was relatively limited.
As of October 31, 2011, all three of these Funds continued to use inverse floating rate securities. 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 10/31/11
| Fund | | | 1-Year | | 5-Year | | 10-Year |
| NPI | | | 4.18 | % | | 4.18 | % | | 5.20 | % |
| NPM | | | 4.74 | % | | 4.77 | % | | 5.65 | % |
| NPT | | | 5.13 | % | | 4.93 | % | | 5.18 | % |
| | | | | | | | | | | |
| Standard & Poor’s (S&P) National Municipal Bond Index* | | | 3.75 | % | | 4.48 | % | | 4.95 | % |
Lipper General and Insured Leveraged Municipal Debt Funds Classification Average* | | | 4.80 | % | | 4.20 | % | | 5.59 | % |
For the twelve months ended October 31, 2011, the total returns on common share net asset value (NAV) for all three of these Nuveen Funds exceeded the return for the Standard & Poor’s (S&P) National Municipal Bond Index. For this same period, NPT outperformed the Lipper General and Insured Leveraged Municipal Debt Funds Classification Average, NPM performed in line with this Lipper average and NPI lagged the Lipper return.
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 leverage was an important positive factor affecting the Funds’ performance over this period. The impact of leverage is discussed in more detail later in this report.
During this period, municipal bonds with intermediate and longer maturities tended to outperform the short maturity categories, with credits having maturities of seven years and longer generally outpacing the market. Among these Funds, NPT was the most advantageously situated in terms of duration and yield curve positioning, with an overweighting in some of the longer parts of the yield curve that performed well and an underweighting in the underperforming short end of the curve. In NPI and NPM, duration and yield curve positioning was generally a neutral factor.
Credit exposure also played a role in performance, as bonds rated A and AA typically outperformed the other credit quality categories. On the whole, bonds with higher levels of credit risk were not favored by the market during this period. The performance of the BBB category, in particular, was dragged down by poor returns in the tobacco bond sector. All of these Funds benefited from their heavier weightings in the A and AA sectors, which made up more than 55% of their portfolios.
| | |
| | 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. |
| | |
| * | Refer to Glossary of Terms Used in this Report for definitions. |
Holdings that generally made positive contributions to the Funds’ returns during this period included housing, water and sewer and health care credits. General obligation and other tax-supported bonds also generally outpaced the municipal market return for the twelve months. All three of these Funds, particularly NPT, had good exposure to the health care sector, which added to their performance. However, they tended to be somewhat underweighted in general obligation bonds, which limited their participation in the performance of this sector. On the whole, some of the best performing bonds in the Funds’ portfolios for this period were those purchased during the earlier part of this period before the market rallied, when yields were relatively higher and prices attractive.
In contrast, pre-refunded bonds, which are often backed by U.S. Treasury securities, were among the poorest performing market segments during this period. The underperformance of these bonds can be attributed primarily to their shorter effective maturities and higher credit quality. Although their allocations of pre-refunded bonds fell over the past twelve months, these three Funds continued to hold between 6% and 10% of their portfolios in pre-refunded bonds, which detracted from the Funds’ performance.
Fund Leverage
and Other Information
IMPACT OF THE FUNDS’ LEVERAGE STRATEGIES ON PERFORMANCE
One important factor impacting the returns of all these Funds relative to the comparative indexes was the Funds’ use of 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 these Funds over this reporting period.
RECENT DEVELOPMENTS REGARDING THE FUNDS’ REDEMPTION OF AUCTION RATE PREFERRED SHARES
Shortly after their respective inceptions, each of the Funds issued auction rate preferred shares (ARPS) to create structural 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 nonexistent 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 multigenerational 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 or Variable Rate MuniFund Term Preferred (VMTP) Shares, which are a floating rate form of preferred stock with a mandatory term redemption. Some funds have issued MuniFund Term Preferred (MTP) Shares, a fixed rate form of preferred stock with a mandatory redemption period of three to five years.
During 2010 and 2011, certain Nuveen leveraged closed-end funds (including NPI and NPM) 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, 33 of the funds that received demand letters (including NPI and NPM) were named in a consolidated complaint as nominal defendants in a putative shareholder derivative action captioned Martin Safier, et al. 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 February 18, 2011 (the “Complaint”). The Complaint, filed on behalf of purported holders of each fund’s common shares, also name Nuveen Fund Advisors, Inc. 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 Complaint contains 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. The Defendants filed a motion to dismiss the suit and on December 16, 2011, the court granted that motion dismissing the Complaint with prejudice.
As of October 31, 2011, each of the Funds has redeemed all of their outstanding APRS at liquidation value.
As of October 31, 2011, the Funds have issued and outstanding VMTP Shares and VRDP Shares as shown in the accompanying tables.
| Fund | | | VMTP Series | | | VMTP Shares Issued at Liquidation Value | |
| NPI | | | 2014 | | $ | 402,400,000 | |
| Fund | | | VRDP Shares Issued at Liquidation Value | |
| NPM | | $ | 489,500,000 | |
| NPT | | $ | 262,200,000 | |
(Refer to Notes to Financial Statements, Footnote 1 – General Information and Significant Accounting Policies and Footnote 4 – Fund Shares for further details on VMTP Shares and VRDP Shares.)
As of October 5, 2011, all 84 of the Nuveen closed-end municipal funds that had issued ARPS, approximately $11.0 billion, have redeemed at liquidation value all of these shares.
For up-to-date information, please visit the Nuveen CEF Auction Rate Preferred Resource Center at: http://www.nuveen.com/arps.
Regulatory Matters
During May 2011, Nuveen Securities, LLC, known as Nuveen Investments, LLC prior to April 30, 2011, entered into a settlement with the Financial Industry Regulatory Authority (FINRA) with respect to certain allegations regarding Nuveen-sponsored closed-end fund ARPS marketing brochures. As part of this settlement, Nuveen Securities, LLC neither admitted to nor denied FINRA’s allegations. Nuveen Securities, LLC is the broker-dealer subsidiary of Nuveen Investments. The settlement with FINRA concludes an investigation that followed the widespread failure of auctions for ARPS and other auction rate securities, which generally began in mid-February 2008. In the settlement, FINRA alleged that certain marketing materials provided by Nuveen Securities, LLC were false and misleading. Nuveen Securities, LLC agreed to a censure and the payment of a $3 million fine.
RISK CONSIDERATIONS
Fund shares are not guaranteed or endorsed by any bank or other insured depository institution, and are not federally insured by the Federal Deposit Insurance Corporation. Past performance is no guarantee of future results. Fund common shares are subject to a variety of risks, including:
Investment Risk. The possible loss of the entire principal amount that you invest.
Price Risk. Shares of closed-end investment companies like these Funds frequently trade at a discount to their NAV. Your common shares at any point in time may be worth less than your original investment, even after taking into account the reinvestment of Fund dividends and distributions.
Leverage Risk. Each Fund’s use of leverage creates the possibility of higher volatility for the Fund’s per share NAV, market price, distributions and returns. There is no assurance that a Fund’s leveraging strategy will be successful.
Tax Risk. The tax treatment of Fund distributions may be affected by new IRS interpretations of the Internal Revenue Code and future changes in tax laws and regulations.
Issuer Credit Risk. This is the risk that a security in a Fund’s portfolio will fail to make dividend or interest payments when due.
Interest Rate Risk. Fixed-income securities such as bonds, preferred, convertible and other debt securities will decline in value if market interest rates rise.
Reinvestment Risk. If market interest rates decline, income earned from a Fund’s portfolio may be reinvested at rates below that of the original bond that generated the income.
Call Risk or Prepayment Risk. Issuers may exercise their option to prepay principal earlier than scheduled, forcing a Fund to reinvest in lower-yielding securities.
Common Share Dividend
and Share Price Information
During the twelve-month reporting period ended October 31, 2011, NPM had two monthly dividend increases, while the monthly dividends of NPI and NPT remained stable throughout the reporting period.
Due to normal portfolio activity, common shareholders of NPM received a net ordinary income distribution of $0.0050 per share in December 2010.
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, 2011, all three of the Funds in this report had positive UNII balances for both tax and financial reporting purposes.
COMMON SHARE REPURCHASES AND SHARE PRICE INFORMATION
As of October 31, 2011, and since the inception of the Funds’ repurchase programs, NPM has cumulatively repurchased and retired common shares as shown in the accompanying table. Since the inception of the Funds’ repurchase programs, NPI and NPT have not repurchased any of their outstanding common shares.
| Fund | | | Common Shares Repurchased and Retired | | | % of Outstanding Common Shares |
| NPM | | | 422,900 | | | 0.6 | % |
During the twelve-month reporting period, NPM did not repurchase any of its outstanding common shares.
As of October 31, 2011, the Funds’ common share prices were trading at (-)discounts to their common share NAVs as shown in the accompanying table.
| Fund | | | 10/31/11 (-)Discount | | | 12-Month Average (-)Discount |
| NPI | | | (-)3.76% | | | (-)3.47 | % |
| NPM | | | (-)2.99% | | | (-)4.68 | % |
| NPT | | | (-)2.37% | | | (-)3.34 | % |
| NPI | | Nuveen Premium |
Performance | | Income Municipal |
| | Fund, Inc. |
| | | | | |
| Fund Snapshot | | | | |
| Common Share Price | | $ | 13.56 | |
| Common Share | | | | |
| Net Asset Value (NAV) | | $ | 14.09 | |
| Premium/(Discount) to NAV | | | -3.76 | % |
| Market Yield | | | 6.77 | % |
Taxable-Equivalent Yield1 | | | 9.40 | % |
| Net Assets Applicable to | | | | |
| Common Shares ($000) | | $ | 900,461 | |
| Leverage | | | | |
| Structural Leverage | | | 30.89 | % |
| Effective Leverage | | | 38.65 | % |
Average Annual Total Return
(Inception 7/18/88)
| | | On Share Price | | | On NAV |
| 1-Year | | | 1.37 | % | | 4.18 | % |
| 5-Year | | | 5.39 | % | | 4.18 | % |
| 10-Year | | | 5.85 | % | | 5.20 | % |
States3 | | | | |
| (as a % of total investments) | | | | |
| California | | | 14.4 | % |
| Texas | | | 10.1 | % |
| New York | | | 9.1 | % |
| Illinois | | | 8.0 | % |
| New Jersey | | | 4.8 | % |
| Florida | | | 4.6 | % |
| Pennsylvania | | | 4.1 | % |
| Louisiana | | | 3.2 | % |
| Alabama | | | 3.1 | % |
| Minnesota | | | 3.1 | % |
| South Carolina | | | 3.1 | % |
| Massachusetts | | | 3.1 | % |
| Washington | | | 2.6 | % |
| Wisconsin | | | 2.5 | % |
| Michigan | | | 2.4 | % |
| Nevada | | | 1.9 | % |
| Other | | | 19.9 | % |
| | | | | |
Portfolio Composition3 | | | | |
| (as a % of total investments) | | | | |
| Health Care | | | 17.3 | % |
| Tax Obligation/Limited | | | 16.9 | % |
| Transportation | | | 13.9 | % |
| Tax Obligation/General | | | 13.5 | % |
| U.S. Guaranteed | | | 13.4 | % |
| Water and Sewer | | | 6.7 | % |
| Utilities | | | 5.6 | % |
| 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 rating given by one of the following national rating agencies: Standard & Poor’s Group, Moody’s Investors Service, Inc. or Fitch, Inc. Credit ratings are subject to change. AAA, AA, A, and BBB are investment grade ratings; BB, B, CCC, CC, C and D are below-investment grade ratings. Bonds backed by U.S. Government or agency securities are given an implied rating equal to the rating of such securities. Holdings designated N/R are not rated by a national rating agency. |
| 3 | Holdings are subject to change. |
| NPM | | Nuveen Premium |
Performance | | Income Municipal |
| | Fund 2, Inc. |
| Fund Snapshot | | | | |
| Common Share Price | | $ | 14.27 | |
| Common Share | | | | |
| Net Asset Value (NAV) | | $ | 14.71 | |
| Premium/(Discount) to NAV | | | -2.99 | % |
| Market Yield | | | 6.69 | % |
Taxable-Equivalent Yield1 | | | 9.29 | % |
| Net Assets Applicable to | | | | |
| Common Shares ($000) | | $ | 1,039,723 | |
| Leverage | | | | |
| Structural Leverage | | | 32.01 | % |
| Effective Leverage | | | 38.47 | % |
Average Annual Total Return
(Inception 7/23/92)
| | | On Share Price | | | On NAV |
| 1-Year | | | 4.95 | % | | 4.74 | % |
| 5-Year | | | 6.51 | % | | 4.77 | % |
| 10-Year | | | 6.38 | % | | 5.65 | % |
States4 | | | | |
| (as a % of total investments) | | | | |
Florida2 | | | 26.6 | % |
| California | | | 8.8 | % |
| Illinois | | | 8.4 | % |
| Texas | | | 5.5 | % |
| New York | | | 4.7 | % |
| Washington | | | 4.5 | % |
| Nevada | | | 4.0 | % |
| Massachusetts | | | 3.7 | % |
| South Carolina | | | 3.6 | % |
| New Jersey | | | 3.6 | % |
| Louisiana | | | 3.3 | % |
| Michigan | | | 3.2 | % |
| Alabama | | | 2.1 | % |
| Other | | | 18.0 | % |
| | | | | |
Portfolio Composition4 | | | | |
| (as a % of total investments) | | | | |
| Tax Obligation/Limited | | | 22.7 | % |
| Health Care | | | 16.5 | % |
| Tax Obligation/General | | | 14.9 | % |
| U.S. Guaranteed | | | 12.5 | % |
| Transportation | | | 10.0 | % |
| Water and Sewer | | | 6.4 | % |
| Other | | | 17.0 | % |
| | 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 | As noted in previous shareholder reports percentage includes assets acquired in the Reorganization of Nuveen Florida Investment Quality Municipal Fund (NQF) and Nuveen Florida Quality Income Municipal Fund (NUF). |
| 3 | Ratings shown are the highest rating given by one of the following national rating agencies: Standard & Poor’s Group, Moody’s Investors Service, Inc. or Fitch, Inc. Credit ratings are subject to change. AAA, AA, A, and BBB are investment grade ratings; BB, B, CCC, CC, C and D are below-investment grade ratings. Bonds backed by U.S. Government or agency securities are given an implied rating equal to the rating of such securities. Holdings designated N/R are not rated by a national rating agency. |
| 4 | Holdings are subject to change. |
| 5 | The Fund paid shareholders an ordinary income distribution in December 2010 of $0.0050. |
| NPT | | Nuveen Premium |
Performance | | Income Municipal |
| | Fund 4, Inc. |
| | | | | |
| Fund Snapshot | | | | |
| Common Share Price | | $ | 12.76 | |
| Common Share | | | | |
| Net Asset Value (NAV) | | $ | 13.07 | |
| Premium/(Discount) to NAV | | | -2.37 | % |
| Market Yield | | | 6.68 | % |
Taxable-Equivalent Yield1 | | | 9.28 | % |
| Net Assets Applicable to | | | | |
| Common Shares ($000) | | $ | 565,529 | |
| Leverage | | | | |
| Structural Leverage | | | 31.68 | % |
| Effective Leverage | | | 37.86 | % |
Average Annual Total Return
(Inception 2/19/93)
| | | On Share Price | | | On NAV |
| 1-Year | | | 2.63 | % | | 5.13 | % |
| 5-Year | | | 6.20 | % | | 4.93 | % |
| 10-Year | | | 5.62 | % | | 5.18 | % |
States3 | | | | |
| (as a % of total investments) | | | | |
| California | | | 14.9 | % |
| Illinois | | | 12.1 | % |
| Texas | | | 11.9 | % |
| Florida | | | 4.7 | % |
| Michigan | | | 3.9 | % |
| Louisiana | | | 3.2 | % |
| Alabama | | | 3.2 | % |
| Ohio | | | 3.1 | % |
| Colorado | | | 3.0 | % |
| Indiana | | | 2.7 | % |
| New Jersey | | | 2.6 | % |
| New York | | | 2.5 | % |
| Georgia | | | 2.5 | % |
| South Carolina | | | 2.5 | % |
| Wisconsin | | | 2.4 | % |
| Pennsylvania | | | 2.2 | % |
| Puerto Rico | | | 2.1 | % |
| Washington | | | 2.0 | % |
| Other | | | 18.5 | % |
| | | | | |
Portfolio Composition3 | | | | |
| (as a % of total investments) | | | | |
| Health Care | | | 22.9 | % |
| Tax Obligation/Limited | | | 16.7 | % |
| U.S. Guaranteed | | | 13.2 | % |
| Tax Obligation/General | | | 13.2 | % |
| Transportation | | | 7.5 | % |
| Utilities | | | 6.7 | % |
| Water and Sewer | | | 6.3 | % |
| Other | | | 13.5 | % |
| | 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 | Ratings shown are the highest rating given by one of the following national rating agencies: Standard & Poor’s Group, Moody’s Investors Service, Inc. or Fitch, Inc. Credit ratings are subject to change. AAA, AA, A, and BBB are investment grade ratings; BB, B, CCC, CC, C and D are below-investment grade ratings. Bonds backed by U.S. Government or agency securities are given an implied rating equal to the rating of such securities. Holdings designated N/R are not rated by a national rating agency. |
| 3 | Holdings are subject to change. |
| NPI | | Shareholder Meeting Report |
| NPM | | |
| NPT | | The annual meeting of shareholders was held on July 25, 2011, 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 was subsequently adjourned to August 31, 2011. |
| | | NPI | | NPM | | NPT | |
| | | | 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 P. Amboian | | | | | | | | | | | | | | | | | | | |
| For | | | 38,235,826 | | | — | | | 42,378,947 | | | — | | | 26,756,084 | | | — | |
| Withhold | | | 1,443,646 | | | — | | | 1,367,329 | | | — | | | 763,700 | | | — | |
| Total | | | 39,679,472 | | | — | | | 43,746,276 | | | — | | | 27,519,784 | | | — | |
| Robert P. Bremner | | | | | | | | | | | | | | | | | | | |
| For | | | 38,236,773 | | | — | | | 42,366,212 | | | — | | | 26,757,569 | | | — | |
| Withhold | | | 1,442,699 | | | — | | | 1,380,064 | | | — | | | 762,215 | | | — | |
| Total | | | 39,679,472 | | | — | | | 43,746,276 | | | — | | | 27,519,784 | | | — | |
| Jack B. Evans | | | | | | | | | | | | | | | | | | | |
| For | | | 38,244,919 | | | — | | | 42,395,413 | | | — | | | 26,742,926 | | | — | |
| Withhold | | | 1,434,553 | | | — | | | 1,350,863 | | | — | | | 776,858 | | | — | |
| Total | | | 39,679,472 | | | — | | | 43,746,276 | | | — | | | 27,519,784 | | | — | |
| William C. Hunter | | | | | | | | | | | | | | | | | | | |
| For | | | — | | | 4,024 | | | — | | | 3,740 | | | — | | | 2,272 | |
| Withhold | | | — | | | — | | | — | | | 300 | | | — | | | — | |
| Total | | | — | | | 4,024 | | | — | | | 4,040 | | | — | | | 2,272 | |
| David J. Kundert | | | | | | | | | | | | | | | | | | | |
| For | | | 38,237,419 | | | — | | | 42,367,726 | | | — | | | 26,752,863 | | | — | |
| Withhold | | | 1,442,053 | | | — | | | 1,378,550 | | | — | | | 766,921 | | | — | |
| Total | | | 39,679,472 | | | — | | | 43,746,276 | | | — | | | 27,519,784 | | | — | |
| William J. Schneider | | | | | | | | | | | | | | | | | | | |
| For | | | — | | | 4,024 | | | — | | | 3,740 | | | — | | | 2,272 | |
| Withhold | | | — | | | — | | | — | | | 300 | | | — | | | — | |
| Total | | | — | | | 4,024 | | | — | | | 4,040 | | | — | | | 2,272 | |
| Judith M. Stockdale | | | | | | | | | | | | | | | | | | | |
| For | | | 38,207,519 | | | — | | | 42,335,539 | | | — | | | 26,751,304 | | | — | |
| Withhold | | | 1,471,953 | | | — | | | 1,410,737 | | | — | | | 768,480 | | | — | |
| Total | | | 39,679,472 | | | — | | | 43,746,276 | | | — | | | 27,519,784 | | | — | |
| Carole E. Stone | | | | | | | | | | | | | | | | | | | |
| For | | | 38,227,748 | | | — | | | 42,330,585 | | | — | | | 26,759,481 | | | — | |
| Withhold | | | 1,451,724 | | | — | | | 1,415,691 | | | — | | | 760,303 | | | — | |
| Total | | | 39,679,472 | | | — | | | 43,746,276 | | | — | | | 27,519,784 | | | — | |
| Virginia L. Stringer | | | | | | | | | | | | | | | | | | | |
| For | | | 38,212,207 | | | — | | | 42,331,060 | | | — | | | 26,772,101 | | | — | |
| Withhold | | | 1,467,265 | | | — | | | 1,415,216 | | | — | | | 747,683 | | | — | |
| Total | | | 39,679,472 | | | — | | | 43,746,276 | | | — | | | 27,519,784 | | | — | |
| Terence J. Toth | | | | | | | | | | | | | | | | | | | |
| For | | | 38,265,664 | | | — | | | 42,378,212 | | | — | | | 26,755,135 | | | — | |
| Withhold | | | 1,413,808 | | | — | | | 1,368,064 | | | — | | | 764,649 | | | — | |
| Total | | | 39,679,472 | | | — | | | 43,746,276 | | | — | | | 27,519,784 | | | — | |
| NPI | | Shareholder Meeting Report (continued) |
| NPM | | |
| NPT | | |
| | | NPI | | NPM | | NPT | |
| | | | 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 investment policy relating to the Fund’s ability to make loans | | | | | | | | | | | | | | | | | | | |
| For | | | 29,180,533 | | | 4,024 | | | 30,638,056 | | | 4,040 | | | 19,885,284 | | | 2,272 | |
| Against | | | 1,914,591 | | | — | | | 1,965,156 | | | — | | | 1,215,633 | | | — | |
| Abstain | | | 994,827 | | | — | | | 1,017,103 | | | — | | | 730,858 | | | — | |
| Broker Non-Votes | | | 7,589,521 | | | — | | | 10,125,961 | | | — | | | 5,688,009 | | | — | |
| Total | | | 39,679,472 | | | 4,024 | | | 43,746,276 | | | 4,040 | | | 27,519,784 | | | 2,272 | |
| To approve the new fundamental investment policy relating to the Fund’s ability to make loans | | | | | | | | | | | | | | | | | | | |
| For | | | 29,034,265 | | | 4,024 | | | 30,606,336 | | | 4,040 | | | 19,747,215 | | | 2,272 | |
| Against | | | 2,042,642 | | | — | | | 2,006,594 | | | — | | | 1,320,846 | | | — | |
| Abstain | | | 1,013,044 | | | — | | | 1,007,384 | | | — | | | 763,715 | | | — | |
| Broker Non-Votes | | | 7,589,521 | | | — | | | 10,125,962 | | | — | | | 5,688,008 | | | — | |
| Total | | | 39,679,472 | | | 4,024 | | | 43,746,276 | | | 4,040 | | | 27,519,784 | | | 2,272 | |
| To approve the elimination of the Fund’s fundamental policy relating to investments in municipal securities and below investment grade securities. | | | | | | | | | | | | | | | | | | | |
| For | | | 29,106,754 | | | 4,024 | | | — | | | — | | | — | | | — | |
| Against | | | 1,993,227 | | | — | | | — | | | — | | | — | | | — | |
| Abstain | | | 989,971 | | | — | | | — | | | — | | | — | | | — | |
| Broker Non-Votes | | | 7,589,520 | | | — | | | — | | | — | | | — | | | — | |
| Total | | | 39,679,472 | | | 4,024 | | | — | | | — | | | — | | | — | |
| To approve the new fundamental policy relating to investments in municipal securities for the Fund. | | | | | | | | | | | | | | | | | | | |
| For | | | 29,256,977 | | | 4,024 | | | — | | | — | | | — | | | — | |
| Against | | | 1,870,945 | | | — | | | — | | | — | | | — | | | — | |
| Abstain | | | 962,027 | | | — | | | — | | | — | | | — | | | — | |
| Broker Non-Votes | | | 7,589,523 | | | — | | | — | | | — | | | — | | | — | |
| Total | | | 39,679,472 | | | 4,024 | | | — | | | — | | | — | | | — | |
| | | NPI | | NPM | | NPT | |
| | | 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 fundamental policy relating to investing in other investment companies. | | | | | | | | | | | | | | | | | | | |
| For | | | 29,150,431 | | | 4,024 | | | — | | | — | | | — | | | — | |
| Against | | | 1,971,081 | | | — | | | — | | | — | | | — | | | — | |
| Abstain | | | 968,436 | | | — | | | — | | | — | | | — | | | — | |
| Broker Non-Votes | | | 7,589,524 | | | — | | | — | | | — | | | — | | | — | |
| Total | | | 39,679,472 | | | 4,024 | | | — | | | — | | | — | | | — | |
| To approve the elimination of the fundamental policy relating to derivatives and short sales. | | | | | | | | | | | | | | | | | | | |
| For | | | 28,880,264 | | | 4,024 | | | — | | | — | | | — | | | — | |
| Against | | | 2,246,752 | | | — | | | — | | | — | | | — | | | — | |
| Abstain | | | 962,024 | | | — | | | — | | | — | | | — | | | — | |
| Broker Non-Votes | | | 7,590,432 | | | — | | | — | | | — | | | — | | | — | |
| Total | | | 39,679,472 | | | 4,024 | | | — | | | — | | | — | | | — | |
| To approve the elimination of the fundamental policy relating to commodities. | | | | | | | | | | | | | | | | | | | |
| For | | | 29,022,722 | | | 4,024 | | | — | | | — | | | — | | | — | |
| Against | | | 2,089,870 | | | — | | | — | | | — | | | — | | | — | |
| Abstain | | | 977,357 | | | — | | | — | | | — | | | — | | | — | |
| Broker Non-Votes | | | 7,589,523 | | | — | | | — | | | — | | | — | | | — | |
| Total | | | 39,679,472 | | | 4,024 | | | — | | | — | | | — | | | — | |
| To approve the new fundamental policy relating to commodities. | | | | | | | | | | | | | | | | | | | |
| For | | | 28,914,482 | | | 4,024 | | | — | | | — | | | — | | | — | |
| Against | | | 2,198,506 | | | — | | | — | | | — | | | — | | | — | |
| Abstain | | | 976,960 | | | — | | | — | | | — | | | — | | | — | |
| Broker Non-Votes | | | 7,589,524 | | | — | | | — | | | — | | | — | | | — | |
| Total | | | 39,679,472 | | | 4,024 | | | — | | | — | | | — | | | — | |
Report of Independent
Registered Public Accounting Firm
The Board of Directors and Shareholders
Nuveen Premium Income Municipal Fund, Inc.
Nuveen Premium Income Municipal Fund 2, Inc.
Nuveen Premium Income Municipal Fund 4, Inc.
We have audited the accompanying statements of assets and liabilities, including the portfolios of investments, of Nuveen Premium Income Municipal Fund, Inc., Nuveen Premium Income Municipal Fund 2, Inc., and Nuveen Premium Income Municipal Fund 4, Inc. (the “Funds”) as of October 31, 2011, and the related statements of operations and cash flows 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, 2011, 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 Premium Income Municipal Fund, Inc., Nuveen Premium Income Municipal Fund 2, Inc., and Nuveen Premium Income Municipal Fund 4, Inc. at October 31, 2011, and the results of their operations and their cash flows 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, 2011
| | | Financial |
| | | Highlights (continued) |
| | | ARPS at the End of Period | | VMTP Shares at the End of Period | | VRDP 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 | |
| Premium Income (NPI) | | | | | | | | | | | | | | | | |
| Year Ended 10/31: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2011 | | $ | — | | $ | — | | $ | — | | $ | 402,400 | | $ | 100,000 | | $ | 323,773 | | $ | — | | $ | — | | $ | — | |
| 2010 | | | 400,650 | | | 25,000 | | | 82,664 | | | — | | | — | | | — | | | — | | | — | | | — | |
| 2009 | | | 400,650 | | | 25,000 | | | 79,620 | | | — | | | — | | | — | | | — | | | — | | | — | |
| 2008 | | | 415,450 | | | 25,000 | | | 70,540 | | | — | | | — | | | — | | | — | | | — | | | — | |
| 2007 | | | 525,000 | | | 25,000 | | | 69,820 | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Premium Income 2 (NPM) | | | | | | | | | | | | | | | | |
| Year Ended 10/31: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2011 | | | — | | | — | | | — | | | — | | | — | | | — | | | 489,500 | | | 100,000 | | | 312,405 | |
| 2010 | | | 487,525 | | | 25,000 | | | 79,299 | | | — | | | — | | | — | | | — | | | — | | | — | |
| 2009 | | | 487,525 | | | 25,000 | | | 76,452 | | | — | | | — | | | — | | | — | | | — | | | — | |
| 2008 | | | 283,550 | | | 25,000 | | | 67,109 | | | — | | | — | | | — | | | — | | | — | | | — | |
| 2007 | | | 347,000 | | | 25,000 | | | 68,647 | | | — | | | — | | | — | | | — | | | — | | | — | |
See accompanying notes to financial statements.
| | | ARPS at the End of Period | | VRDP 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 |
| Premium Income 4 (NPT) | | | | | | | | | |
| Year Ended 10/31: | | | | | | | | | | | | | | | | | | |
| 2011 | | $ | — | | $ | — | | $ | — | | $ | 262,200 | | $ | 100,000 | | $ | 315,686 |
| 2010 | | | — | | | — | | | — | | | 262,200 | | | 100,000 | | | 319,660 |
| 2009 | | | 259,050 | | | 25,000 | | | 77,481 | | | — | | | — | | | — |
| 2008 | | | 302,200 | | | 25,000 | | | 62,878 | | | — | | | — | | | — |
| 2007 | | | 338,400 | | | 25,000 | | | 67,215 | | | — | | | — | | | — |
See accompanying notes to financial statements.
| | | Notes to |
| | | Financial Statements |
1. General Information and Significant Accounting Policies
General Information
The funds covered in this report and their corresponding New York Stock Exchange (“NYSE”) symbols are Nuveen Premium Income Municipal Fund, Inc. (NPI), Nuveen Premium Income Municipal Fund 2, Inc. (NPM) and Nuveen Premium Income Municipal Fund 4, Inc. (NPT) (each a “Fund” and collectively the “Funds”). The Funds are registered under the Investment Company Act of 1940, as amended, as closed-end, registered investment companies.
Effective January 1, 2011, the Funds’ adviser, Nuveen Asset Management, a wholly-owned subsidiary of Nuveen Investments, Inc. (“Nuveen”), changed its name to Nuveen Fund Advisors, Inc. (the “Adviser”). Concurrently, the Adviser formed a wholly-owned subsidiary, Nuveen Asset Management, LLC the “Sub-Adviser”), to house its portfolio management capabilities and to serve as the Funds’ sub-adviser, and the Funds’ portfolio managers became employees of the Sub-Adviser. This allocation of responsibilities between the Adviser and the Sub-Adviser affects each of the Funds. The Adviser will compensate the Sub-Adviser for the portfolio management services it provides to the Funds from each Fund’s management fee.
Each Fund seeks to provide current income exempt from regular federal income tax by investing primarily in a portfolio of municipal obligations issued by state and local government authorities or certain U.S. territories.
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”).
Investment Valuation
Prices of municipal bonds are provided by a pricing service approved by the Funds’ Board of Directors. These securities are generally classified as Level 2 for fair value measurement purposes. When price quotes are not readily available (which is usually the case for municipal bonds) 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 the Adviser. 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 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 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 segregate assets with a current value at least equal to the amount of the when-issued/delayed delivery purchase commitments. At October 31, 2011, Premium Income (NPI), Premium Income 2 (NPM) and Premium Income 4 (NPT) had outstanding when-issued/delayed delivery purchase commitments of $2,258,784, $3,388,176 and $1,145,992, respectively.
Investment Income
Investment 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.
Professional Fees
Professional fees presented on the Statement of Operations consist of legal fees incurred in the normal course of operations, audit fees, tax consulting fees and, in some cases, workout expenditures. Workout expenditures are incurred in an attempt to protect or enhance an investment, or to pursue other claims or legal actions on behalf of Fund shareholders.
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 October 31, 2010, Premium Income 4 (NPT) redeemed all of its outstanding ARPS at liquidation value. During the fiscal year ended October 31, 2011, Premium Income (NPI) and Premium Income 2 (NPM) had issued and outstanding ARPS, $25,000 stated value per share, which approximates market value, as a means of effecting financial leverage. Each Fund’s ARPS were issued in one or more Series. The dividend rate paid by the Fund on each Series was determined every seven days, pursuant to a dutch auction process overseen by the auction agent, and was payable at the end of each rate period.
Beginning in February 2008, more shares for sale were submitted in the regularly scheduled auctions for the ARPS issued by the Funds than there were offers to buy. This meant that these auctions “failed to clear,’’ and that many ARPS shareholders who wanted to sell their shares in these auctions were unable to do so. ARPS shareholders unable to sell their shares received distributions at the “maximum rate’’ applicable to failed auctions as calculated in accordance with the pre-established terms of the ARPS. As of October 31, 2011, each Fund redeemed all of their outstanding ARPS, at liquidation value, as follows:
| | | | Premium | | | Premium | | | Premium | |
| | | | Income | | | Income 2 | | | Income 4 | |
| | | | (NPI | ) | | (NPM | ) | | (NPT | ) |
| ARPS redeemed, at liquidation value | | $ | 525,000,000 | | $ | 596,000,000 | | $ | 338,400,000 | |
During the fiscal year ended October 31, 2010, lawsuits pursuing claims made in a demand letter alleging that Premium Income’s (NPI) and Premium Income 2’s (NPM) Board of Directors breached their fiduciary duties related to the redemption at par of the Funds’ ARPS, had been filed on behalf of shareholders of the Funds, against the Adviser, the Nuveen holding company, the majority owner of the holding company, the lone interested director, and current and former officers of the Funds. Nuveen and other named defendants filed a motion to dismiss the lawsuits and on December 16, 2011, the court granted that motion dismissing the lawsuits with prejudice.
| | | Notes to |
| | | Financial Statements (continued) |
During the current reporting period, Nuveen Investments, LLC, known as Nuveen Securities, LLC, effective April 30, 2011, (“Nuveen Securities”) entered into a settlement with the Financial Industry Regulatory Authority (“FINRA”) with respect to certain allegations regarding Nuveen-sponsored closed-end fund ARPS marketing brochures. As part of this settlement, Nuveen Securities neither admitted to nor denied FINRA’s allegations. Nuveen Securities is the broker-dealer subsidiary of Nuveen.
The settlement with FINRA concludes an investigation that followed the widespread failure of auctions for ARPS and other auction rate securities, which generally began in mid-February 2008. In the settlement, FINRA alleged that certain marketing materials provided by Nuveen Securities were false and misleading. Nuveen Securities agreed to a censure and the payment of a $3 million fine.
Variable Rate MuniFund Term Preferred Shares
Premium Income (NPI) has issued and outstanding $4,024 Series 2014 Variable Rate MuniFund Term Preferred (“VMTP”) Shares, with a $100,000 liquidation value per share. Premium Income (NPI) issued its VMTP Shares in a privately negotiated offering in February 2011. Proceeds from the issuance of VMTP Shares, net of offering expenses, were used to redeem all of 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.
The Fund is obligated to redeem its VMTP Shares on March 1, 2014, 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 the Fund until March 1, 2012, subject to payment of a premium until February 29, 2012, 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.
Dividends on the 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 recorded 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. Dividends paid on VMTP Shares are recognized as a component of “Interest expense and amortization of offering costs” on the Statement of Operations.
The average liquidation value outstanding and average annualized dividend rate of VMTP Shares for the Fund during the period February 24, 2011 (issuance date of shares) through October 31, 2011 were $402,400,000 and 1.43%, respectively.
Variable Rate Demand Preferred Shares
The following Funds have issued and outstanding Variable Rate Demand Preferred (“VRDP”) Shares, with a $100,000 liquidation value per share. Premium Income 2 (NPM) and Premium Income 4 (NPT) issued their VRDP Shares in a privately negotiated offering during May 2011 and March 2010, respectively. Proceeds of each Fund’s offering were used to redeem all, or a portion of, each Fund’s outstanding ARPS. The VRDP Shares were offered to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933. As of October 31, 2011, the number of VRDP Shares outstanding and maturity date for each Fund are as follows:
| | | | Premium | | | Premium | |
| | | | Income 2 | | | Income 4 | |
| | | | (NPM | ) | | (NPT | ) |
| Series | | | 1 | | | 1 | |
| Shares Outstanding | | | 4,895 | | | 2,622 | |
| Maturity | | | May 1, 2041 | | | March 1, 2040 | |
VRDP Shares include a liquidity feature that allows VRDP shareholders to have their shares purchased by a liquidity provider with whom each Fund has contracted in the event that purchase orders for VRDP Shares in a remarketing are not sufficient in number to be matched with the sale orders in that remarketing. Each Fund is required to redeem any VRDP Shares that are still owned by the liquidity provider after six months of continuous, unsuccessful remarketing.
Dividends on the VRDP Shares (which are treated as interest payments for financial reporting purposes) are set weekly at a rate established by a remarketing agent; therefore, the market value of the VRDP Shares is expected to approximate its liquidation value. If remarketings for VRDP Shares are continuously unsuccessful for six months, the maximum rate is designed to escalate according to a specified schedule in order to enhance the remarketing agent’s ability to successfully remarket the VRDP Shares.
Subject to certain conditions, VRDP Shares may be redeemed, in whole or in part, at any time at the option of each Fund. Each Fund may also redeem certain of the VRDP Shares if the Fund fails to maintain certain asset coverage 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 average liquidation value outstanding and annualized dividend rate of VRDP Shares for each Fund during the fiscal year ended October 31, 2011, were as follows:
| | | | Premium | | | Premium | |
| | | | Income 2 | | | Income 4 | |
| | | | (NPM | ) | | (NPT | ) |
| Average liquidation Value outstanding | | $ | 489,500,000 | | $ | 262,200,000 | |
| Annualized dividend rate | | | 0.32 | % | | 0.40 | % |
| * | For the period May 5, 2011 (issuance date of shares) through October 31, 2011. |
For financial reporting purposes only, the liquidation value of VRDP Shares is recognized as a liability on the Statement of Assets and Liabilities. Unpaid dividends on VRDP Shares are recognized as a component of “Interest payable” on the Statement of Assets and Liabilities. Dividends paid on the VRDP Shares are recognized as a component of “Interest expense and amortization of offering costs” on the Statement of Operations. In addition to interest expense, each Fund also pays a per annum liquidity fee to the liquidity provider as well as a remarketing fee, which are recognized as components of “Fees on VRDP Shares” 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 recognizes the 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 fiscal year ended October 31, 2011, 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 October 31, 2011, each Fund’s maximum exposure to externally-deposited Recourse Trusts was as follows:
| | | | Premium | | | Premium | | | Premium | |
| | | | Income | | | Income 2 | | | Income 4 | |
| | | | (NPI | ) | | (NPM | ) | | (NPT | ) |
| Maximum exposure to Recourse Trusts | | $ | 4,885,000 | | $ | 3,715,000 | | $ | 12,000,000 | |
| | | Notes to |
| | | Financial Statements (continued) |
The average floating rate obligations outstanding and average annual interest rate and fees related to self-deposited inverse floaters during the fiscal year ended October 31, 2011, were as follows:
| | | | Premium | | | Premium | | | Premium | |
| | | | Income | | | Income 2 | | | Income 4 | |
| | | | (NPI | ) | | (NPM | ) | | (NPT | ) |
| Average floating rate obligations outstanding | | $ | 116,430,055 | | $ | 102,434,000 | | $ | 59,703,000 | |
| Average annual interest rate and fees | | | 0.58 | % | | 0.63 | % | | 0.52 | % |
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 financial instruments, and may do so in the future, they did not make any such investments during the fiscal year ended October 31, 2011.
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 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. Tax-exempt income to the holder of the security comes from accretion of the difference between the original purchase price of the security at issuance and the par value of the security at maturity and is effectively paid at maturity. 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 Premium Income (NPI) in connection with its offering of VMTP Shares ($1,710,000) were recorded as a deferred charge which are being amortized over the life of the shares. Costs incurred by Premium Income 2 (NPM) and Premium Income 4 (NPT) in connection with their offerings of VRDP Shares ($1,920,000 and $1,921,000, respectively) were recorded as deferred charges, which are being 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.
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 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 three-tier hierarchy of inputs is summarized in the three broad levels listed below:
| | Level 1 – | Quoted prices in active markets for identical securities. |
| | Level 2 – | Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.). |
| | Level 3 – | Significant unobservable inputs (including management’s assumptions in determining the fair value of investments). |
The inputs or methodologies used for valuing securities are not an indication of the risk associated with investing in those securities. The following is a summary of each Fund’s fair value measurements as of October 31, 2011:
| Premium Income (NPI) | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Investments: | | | | | | | | | | | | | |
| Municipal Bonds | | $ | — | | $ | 1,373,656,866 | | $ | 318,630 | | $ | 1,373,975,496 | |
| Short-Term Investments | | | — | | | 17,580,000 | | | — | | | 17,580,000 | |
| Total | | $ | — | | $ | 1,391,236,866 | | $ | 318,630 | | $ | 1,391,555,496 | |
| Premium Income 2 (NPM) | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Investments: | | | | | | | | | | | | | |
| Municipal Bonds | | $ | — | | $ | 1,596,219,019 | | $ | 133,380 | | $ | 1,596,352,399 | |
| Premium Income 4 (NPT) | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Investments: | | | | | | | | | | | | | |
| Municipal Bonds | | $ | — | | $ | 871,444,214 | | $ | 137,826 | | $ | 871,582,040 | |
The following is a reconciliation of the Funds’ Level 3 investments held at the beginning and end of the measurement period:
| | | | Premium Income (NPI) Level 3 Municipal Bonds | | | Premium Income 2 (NPM) Level 3 Municipal Bonds | | | Premium Income 4 (NPT) Level 3 Municipal Bonds | |
| Balance at the beginning of year | | $ | 223,779 | | $ | 686,550 | | $ | 96,798 | |
| Gains (losses): | | | | | | | | | | |
| Net realized gains (losses) | | | (34,880 | ) | | (25,300 | ) | | (27,538 | ) |
| Net change in unrealized appreciation (depreciation) | | | 129,731 | | | (139,448 | ) | | 68,566 | |
| Purchases at cost | | | — | | | — | | | — | |
| Sales at proceeds | | | — | | | (122,628 | ) | | — | |
| Net discounts (premiums) | | | — | | | — | | | — | |
| Transfers in to | | | — | | | — | | | — | |
| Transfers out of | | | — | | | (265,794 | ) | | — | |
| Balance at the end of year | | $ | 318,630 | | $ | 133,380 | | $ | 137,826 | |
| Change in net unrealized appreciation (depreciation) during the year of Level 3 securities held as of October 31, 2011 | | $ | 129,731 | | $ | 65,005 | | $ | 68,566 | |
During the fiscal year ended October 31, 2011, the Funds recognized no significant transfers to or from Level 1 or Level 2. Transfers in and/or out of Level 3 are shown using end of period values.
| | | Notes to |
| | | Financial Statements (continued) |
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 fiscal year ended October 31, 2011.
4. Fund Shares
Common Shares
Transactions in Common shares were as follows:
| | | Premium Income (NPI) | | Premium Income 2 (NPM) | | Premium Income 4 (NPT) | |
| | | | Year Ended | | | Year Ended | | | Year Ended | | | Year Ended | | | Year Ended | | | Year Ended | |
| | | | 10/31/11 | | | 10/31/10 | | | 10/31/11 | | | 10/31/10 | | | 10/31/11 | | | 10/31/10 | |
| Common shares: | | | | | | | | | | | | | | | | | | | |
| Issued to shareholders due to reinvestment of distributions | | | 27,784 | | | 98,680 | | | — | | | — | | | 18,014 | | | 27,038 | |
| Repurchased and retired | | | — | | | — | | | — | | | (122,900 | ) | | — | | | — | |
| Weighted average Common share: | | | | | | | | | | | | | | | | | | | |
| Price per share repurchased and retired | | | — | | | — | | | — | | $ | 12.90 | | | — | | | — | |
| Discount per share repurchased and retired | | | — | | | — | | | — | | | 8.42 | % | | — | | | — | |
Preferred Shares
Transactions in ARPS were as follows:
| | | Premium Income (NPI) | | Premium Income 2 (NPM) | |
| | | Year Ended 10/31/11 | | Year Ended 10/31/10 | | Year Ended 10/31/11 | | Year Ended 10/31/10 | |
| | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | |
| ARPS redeemed: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Series M | | | 2,900 | | $ | 72,500,000 | | | — | | $ | — | | | 1,600 | | $ | 40,000,000 | | | — | | $ | — | |
| Series M2 | | | 1,526 | | | 38,150,000 | | | — | | | — | | | 1,379 | | | 34,475,000 | | | — | | | — | |
| Series T | | | 2,900 | | | 72,500,000 | | | — | | | — | | | 2,401 | | | 60,025,000 | | | — | | | — | |
| Series T2 | | | — | | | — | | | — | | | — | | | 2,683 | | | 67,075,000 | | | — | | | — | |
| Series W | | | 2,900 | | | 72,500,000 | | | — | | | — | | | 1,600 | | | 40,000,000 | | | — | | | — | |
| Series TH | | | 2,901 | | | 72,525,000 | | | — | | | — | | | 2,401 | | | 60,025,000 | | | — | | | — | |
| Series TH2 | | | — | | | — | | | — | | | — | | | 1,379 | | | 34,475,000 | | | — | | | — | |
| Series F | | | 2,899 | | | 72,475,000 | | | — | | | — | | | 1,601 | | | 40,025,000 | | | — | | | — | |
| Series F2 | | | — | | | — | | | — | | | — | | | 1,504 | | | 37,600,000 | | | — | | | — | |
| Series F3 | | | — | | | — | | | — | | | — | | | 1,915 | | | 47,875,000 | | | — | | | — | |
| Series F4 | | | — | | | — | | | — | | | — | | | 1,038 | | | 25,950,000 | | | — | | | — | |
| Total | | | 16,026 | | $ | 400,650,000 | | | — | | $ | — | | | 19,501 | | $ | 487,525,000 | | | — | | $ | — | |
| | | Premium Income 4 (NPT) | |
| | | Year Ended 10/31/11 | | Year Ended 10/31/10 | |
| | | | Shares | | | Amount | | | Shares | | | Amount | |
| ARPS redeemed: | | | | | | | | | | | | | |
| Series M | | | N/A | | | N/A | | | (1,680 | ) | $ | (42,000,000 | ) |
| Series T | | | N/A | | | N/A | | | (1,528 | ) | | (38,200,000 | ) |
| Series T2 | | | N/A | | | N/A | | | (1,014 | ) | | (25,350,000 | ) |
| Series W | | | N/A | | | N/A | | | (1,283 | ) | | (32,075,000 | ) |
| Series W2 | | | N/A | | | N/A | | | (423 | ) | | (10,575,000 | ) |
| Series TH | | | N/A | | | N/A | | | (2,047 | ) | | (51,175,000 | ) |
| Series F | | | N/A | | | N/A | | | (1,374 | ) | | (34,350,000 | ) |
| Series F2 | | | N/A | | | N/A | | | (1,013 | ) | | (25,325,000 | ) |
| Total | | | N/A | | | N/A | | | (10,362 | ) | $ | (259,050,000 | ) |
N/A – As of October 31, 2010, the Fund redeemed all of its outstanding ARPS at liquidation value.
Transactions for VMTP Shares were as follows:
| | | Premium Income (NPI) |
| | | Year Ended | | Year Ended |
| | | 10/31/11 | | 10/31/10 |
| | | Shares | | Amount | | Shares | | Amount |
| VMTP Shares issued: | | | | | | | | | | | | |
| Series 2014 | | | 4,024 | | $ | 402,400,000 | | | — | | $ | — |
Transactions in VRDP Shares were as follows:
| | | Premium Income 2 (NPM) | | Premium Income 4 (NPT) | |
| | | Year Ended 10/31/11 | | Year Ended 10/31/10 | | Year Ended 10/31/11 | | Year Ended 10/31/10 | |
| | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | |
| VRDP Shares issued: | | | | | | | | | | | | | | | | | | | | | | | | | |
| Series 1 | | | 4,895 | | $ | 489,500,000 | | | — | | $ | — | | | — | | $ | — | | | 2,622 | | $ | 262,200,000 | |
5. Investment Transactions
Purchases and sales (including maturities but excluding short-term investments and derivative transactions, where applicable) during the fiscal year ended October 31, 2011, were as follows:
| | | Premium Income (NPI | ) | Premium Income 2 (NPM | ) | Premium Income 4 (NPT | ) |
| Purchases | | $ | 126,514,179 | | $ | 132,334,416 | | $ | 91,762,234 | |
| Sales and maturities | | | 145,427,249 | | | 146,425,500 | | | 89,169,386 | |
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 October 31, 2011, the cost and unrealized appreciation (depreciation) of investments, as determined on a federal income tax basis, were as follows:
| | | | Premium | | | Premium | | | Premium | |
| | | | Income | | | Income 2 | | | Income 4 | |
| | | | (NPI | ) | | (NPM | ) | | (NPT | ) |
| Cost of investments | | $ | 1,262,633,317 | | $ | 1,438,016,103 | | $ | 788,961,285 | |
| Gross unrealized: | | | | | | | | | | |
| Appreciation | | $ | 71,153,625 | | $ | 82,188,596 | | $ | 40,767,075 | |
| Depreciation | | | (54,291,349 | ) | | (26,251,049 | ) | | (17,801,132 | ) |
| Net unrealized appreciation (depreciation) of investments | | $ | 16,862,276 | | $ | 55,937,547 | | $ | 22,965,943 | |
Permanent differences, primarily due to federal taxes paid, non-deductible offering costs, expiring capital loss carryforwards, taxable market discount and distribution character reclassifications, resulted in reclassifications among the Funds’ components of Common share net assets at October 31, 2011, the Funds’ tax year end, as follows:
| | | | Premium | | | Premium | | | Premium | |
| | | | Income | | | Income 2 | | | Income 4 | |
| | | | (NPI | ) | | (NPM | ) | | (NPT | ) |
| Paid-in-surplus | | $ | (4,530,046 | ) | $ | (31,547 | ) | $ | (23,680,944 | ) |
| Undistributed (Over-distribution of) net investment income | | | 362,843 | | | 9,780 | | | (24,153 | ) |
| Accumulated net realized gain (loss) | | | 4,167,203 | | | 21,767 | | | 23,705,097 | |
| | | Notes to |
| | | Financial Statements (continued) |
The tax components of undistributed net tax-exempt income, net ordinary income and net long-term capital gains at October 31, 2011, the Funds’ tax year end, were as follows:
| | | | Premium | | | Premium | | | Premium | |
| | | | Income | | | Income 2 | | | Income 4 | |
| | | | (NPI | ) | | (NPM | ) | | (NPT | ) |
| Undistributed net tax-exempt income * | | $ | 17,607,955 | | $ | 21,033,809 | | $ | 10,722,593 | |
| Undistributed net ordinary income ** | | | 14,288 | | | 7,726 | | | 21,997 | |
| Undistributed net long-term capital gains | | | — | | | — | | | — | |
| * | Undistributed net tax-exempt income (on a tax basis) has not been reduced for the dividend declared on October 3, 2011, paid on November 1, 2011. |
| ** | Net ordinary income consists of taxable market discount income and net short-term capital gains, if any. |
The tax character of distributions paid during the Funds’ tax years ended October 31, 2011 and October 31, 2010, was designated for purposes of the dividends paid deduction as follows:
| | | | | | | | | | | |
| | | | Premium | | | Premium | | | Premium | |
| | | | Income | | | Income 2 | | | Income 4 | |
| 2011 | | | (NPI | ) | | (NPM | ) | | (NPT | ) |
| Distributions from net tax-exempt income *** | | $ | 62,787,473 | | $ | 65,953,092 | | $ | 37,916,463 | |
| Distributions from net ordinary income ** | | | — | | | 360,050 | | | — | |
| Distributions from net long-term capital gains **** | | | — | | | — | | | — | |
| | | | | | | | | | | |
| | | | Premium | | | Premium | | | Premium | |
| | | | Income | | | Income 2 | | | Income 4 | |
| 2010 | | | (NPI | ) | | (NPM | ) | | (NPT | ) |
| Distributions from net tax-exempt income | | $ | 57,621,620 | | $ | 66,446,729 | | $ | 36,749,122 | |
| Distributions from net ordinary income ** | | | — | | | — | | | — | |
| Distributions from net long-term capital gains | | | — | | | — | | | — | |
| ** | Net ordinary income consists of taxable market discount income and net short-term capital gains, if any. |
| *** | The Funds hereby designate these amounts paid during the fiscal year ended October 31, 2011, as Exempt Interest Dividends. |
| **** | The Funds designated as a long-term capital gain dividend, pursuant to the Internal Revenue Code Section 852 (b) (3), the amount necessary to reduce earnings and profits of the Funds related to net capital gain to zero for the tax year ended October 31, 2011. |
At October 31, 2011, the Funds’ tax year end, the 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:
| | | | Premium | | | Premium | | | Premium | |
| | | | Income | | | Income 2 | | | Income 4 | |
| | | | (NPI | ) | | (NPM | ) | | (NPT | ) |
| Expiration: | | | | | | | | | | |
| October 31, 2013 | | | — | | | — | | | 6,161,830 | |
| October 31, 2014 | | | 4,614,516 | | | — | | | 806,337 | |
| October 31, 2015 | | | — | | | 9,711,914 | | | — | |
| October 31, 2016 | | | 11,536,998 | | | 18,051,540 | | | 7,113,122 | |
| October 31, 2017 | | | 11,817,772 | | | 488,931 | | | — | |
| Total | | $ | 27,969,286 | | $ | 28,252,385 | | $ | 14,081,289 | |
During the Funds’ tax year ended October 31, 2011, the Funds utilized capital loss carryforwards as follows:
| | | | Premium | | | Premium | | | Premium | |
| | | | Income | | | Income 2 | | | Income 4 | |
| | | | (NPI | ) | | (NPM | ) | | (NPT | ) |
| Utilized capital loss carryforwards | | $ | 1,041,192 | | $ | 2,405,050 | | $ | 1,137,800 | |
During the Funds’ tax year ended October 31, 2011, the following Funds had capital loss carryforwards expire as follows:
| | | | Premium | | | Premium | |
| | | | Income | | | Income 4 | |
| | | | (NPI | ) | | (NPT | ) |
| Expired capital loss carryforward | | $ | 4,143,892 | | $ | 23,654,803 | |
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 respective Fund as well as from growth in the amount of complex-wide assets managed by the Adviser.
The annual fund-level fee for each Fund, payable monthly, is calculated according to the following schedule:
| 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 | |
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 October 31, 2011, the complex-level fee rate for these Funds was .1759%. |
| | | Notes to |
| | | Financial Statements (continued) |
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 the Sub-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 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 has adopted a deferred compensation plan for independent directors that enables directors 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.
8. New Accounting Pronouncements
On May 12, 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04 (“ASU No. 2011-04”) modifying Topic 820, Fair Value Measurements and Disclosures. At the same time, the International Accounting Standards Board (“IASB”) issued International Financial Reporting Standard (“IFRS”) 13, Fair Value Measurement. The objective of the FASB and IASB is convergence of their guidance on fair value measurements and disclosures. Specifically, ASU No. 2011-04 requires reporting entities to disclose i) the amounts of any transfers between Level 1 and Level 2 and the reasons for the transfers and ii) for Level 3 fair value measurements, a) quantitative information about significant unobservable inputs used, b) a description of the valuation processes used by the reporting entity and c) a narrative description of the sensitivity of the fair value measurement to changes in unobservable inputs if a change in those inputs might result in a significantly higher or lower fair value measurement. The effective date of ASU No. 2011-04 is for interim and annual periods beginning after December 15, 2011. At this time, management is evaluating the implications of this guidance and the impact it will have on the financial statement amounts and footnote disclosures, if any.
Annual Investment Management
Agreement Approval Process (Unaudited)
The Board of Directors (each, a “Board” and each 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 generally required to consider the continuation of advisory agreements and sub-advisory agreements on an annual basis. Accordingly, at an in-person meeting held on May 23-25, 2011 (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 their 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 their annual review, the Board also held a separate meeting on April 19-20, 2011, 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 their 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 review of the Advisory Agreements at the May Meeting supplemented the information provided to the Board
Annual Investment Management Agreement
Approval Process (Unaudited) (continued)
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, since the internal restructuring described in Section A below, 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 compliance reports. The Board also meets with key investment personnel managing the Fund portfolios during the year. In addition, the Board continues its program of seeking to visit each sub-advisor to the Nuveen funds at least once over a multiple year rotation, meeting with key investment and business personnel. The Board also met with State Street Bank & Trust Company, the Funds’ accountant and custodian, in 2010. The Board considers factors and information that are relevant to its consideration of the renewal of the Advisory Agreements at these meetings held throughout the year. Accordingly, the Board considered the information provided and knowledge gained at these meetings when performing its review at the May Meeting 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.
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 Funds 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 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 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 provides the portfolio investment management services to the Funds. The Board recognized that Nuveen engaged in an internal restructuring in 2010 pursuant to which portfolio management services the Advisor had provided directly to the Funds were transferred to the Sub-Advisor, a newly-organized, wholly-owned subsidiary of the Advisor consisting of largely the same investment personnel. Accordingly, 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 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.
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, administration of Board relations, regulatory and portfolio compliance, legal support, managing leverage and promoting an orderly secondary market for common shares.
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 continued activities to refinance auction rate preferred securities; ongoing services to manage leverage that has become increasingly complex; continued secondary market offerings and share repurchases 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 in support of refinancing efforts related to auction rate preferred securities; participating in conferences; communicating continually with closed-end fund analysts covering the Nuveen funds; providing marketing for the closed-end funds; share purchases; and maintaining and enhancing a closed-end fund website.
Annual Investment Management Agreement
Approval Process (Unaudited) (continued)
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 provided by an independent provider of mutual fund data and with recognized and/or customized 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, one-, three- and five-year periods ending December 31, 2010 and for the same periods ending March 31, 2011. 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, 2010 and for the same periods ending March 31, 2011. 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. 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) and the performance of the fund (or respective class) during that shareholder’s investment period. With respect to any Nuveen funds that 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.
In considering the results of the comparisons, the Independent Board Members observed, among other things, that (a) the Nuveen Premium Income Municipal Fund, Inc. (the “Premium Income Fund”) and the Nuveen Premium Income Municipal Fund 2, Inc. (the “Premium Income Fund 2”) each had demonstrated generally favorable performance in comparison to peers, performing in the first or second quartile over various periods and (b) the Nuveen Premium Income Municipal Fund 4, Inc. (the
“Premium Income Fund 4”) had demonstrated satisfactory performance compared to peers, performing in the second or third quartile over various 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 based on data provided by an independent fund data provider (the “Peer Universe”) and in certain cases, to a more focused subset of funds in the Peer Universe (the “Peer Group”) and any expense limitations. The Independent Board Members further reviewed the methodology regarding the construction of the applicable Peer Universe and Peer Group (if any). 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 asset level of a fund relative to peers; the limited size and particular composition of the Peer Universe or Peer Group; the investment objectives of the peers; expense anomalies; changes in the funds comprising the Peer Universe or Peer Group from year to year; levels of reimbursement; the timing of information used; and the differences in the type and use of leverage may impact the comparative data thereby limiting 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, the Board considered the expenses and fees to be higher if they were over 10 basis points higher, slightly higher if they were 6 to 10 basis points higher, in line if they were within 5 basis points higher than the peer average and below if they were below the peer average of the Peer Group (if available) or Peer Universe if there was no separate Peer Group. The Independent Board Members noted that the Premium Income Fund and the Premium Income Fund 4 had higher net management fees than their peer average and a slightly higher or higher net expense ratio compared to their peer average, while the Premium Income Fund 2 had net management fees higher than its peer average but a net expense ratio in line with its peer average. 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 fee rates 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 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. |
| | 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 (which incorporated Nuveen’s wholly-owned affiliated sub-advisers) and its financial condition. The Independent Board Members reviewed the revenues and expenses of Nuveen’s advisory activities for the last two years, 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 2010. 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 similar amounts of assets under management and relatively comparable asset composition prepared by Nuveen. In reviewing profitability, the Independent Board Members recognized the subjective nature of determining profitability which may be affected by numerous factors including the allocation of expenses. Further, the Independent Board Members |
| | recognized the difficulties in making comparisons as the profitability of other advisers generally is not publicly available and the profitability information that is available for certain advisers or management firms may not be representative of the industry and may be affected by, among other things, the adviser’s particular business mix, capital costs, types of funds managed and expense allocations. Notwithstanding the foregoing, the Independent Board Members reviewed Nuveen’s methodology and assumptions for allocating expenses across product lines to determine profitability. In reviewing profitability, the Independent Board Members recognized 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. 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. |
D. Economies of Scale and Whether Fee Levels Reflect These Economies of Scale
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, 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
Annual Investment Management Agreement
Approval Process (Unaudited) (continued)
provided to all its funds in the complex and therefore all funds benefit if these costs are spread over a larger asset base.
Based on their review, the Independent Board Members concluded that the breakpoint schedules and complex-wide fee arrangement were acceptable and reflect economies of scale to be shared with shareholders when assets under management increase.
E. Indirect Benefits
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 agent at Nuveen’s trading desk and as co-manager in initial public offerings of new closed-end funds.
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. Nevertheless, the Independent Board Members noted that commissions are generally not paid in connection with municipal securities transactions typically executed on a principal basis.
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.
F. Other Considerations
The Independent Board Members did not identify any single factor discussed previously as all-important or controlling. The Board Members, including the Independent Board Members, unanimously concluded that the terms of 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.
Board Members & Officers(Unaudited)
| | | The management of the Funds, including general supervision of the duties performed for the Funds by the Adviser, is the responsibility of the board members of the Funds. The number of board members of the Funds is currently set at ten. None of the board members who are not “interested” persons of the Funds (referred to herein as “independent board members”) has ever been a director or employee of, or consultant to, Nuveen or its affiliates. The names and business addresses of the board members and officers of the Funds, their principal occupations and other affiliations during the past five years, the number of portfolios each oversees and other directorships they hold are set forth below. |
| | Name, Birthdate & Address | | Position(s) Held with the Funds | | Year First Elected or Appointed and Term(1) | | Principal Occupation(s) including other Directorships During Past 5 Years | | Number of Portfolios in Fund Complex Overseen by Board Member |
| | | | | | | |
| Independent Board Members: | | | | | | |
| ■ | ROBERT P. BREMNER(2) 8/22/40 333 W. Wacker Drive Chicago, IL 60606 | | Chairman of the Board and Board Member | | 1996 Class III | | Private Investor and Management Consultant; Treasurer and Director, Humanities Council of Washington, D.C.; Board Member, Independent Directors Council affiliated with the Investment Company Institute. | | 241 |
| | | | | | | | | | |
| ■ | JACK B. EVANS 10/22/48 333 W. Wacker Drive Chicago, IL 60606 | | Board Member | | 1999 Class III | | President, The Hall-Perrine Foundation, a private philanthropic corporation (since 1996); Director and Chairman, United Fire Group, a publicly held company; member of the Board of Regents for the State of Iowa University System; Director, Source Media Group; Life Trustee of Coe College and the Iowa College Foundation; formerly, Director, Alliant Energy; formerly, Director, Federal Reserve Bank of Chicago; formerly, President and Chief Operating Officer, SCI Financial Group, Inc., a regional financial services firm. | | 241 |
| | | | | | | | | | |
■ | WILLIAM C. HUNTER 3/6/48 333 W. Wacker Drive Chicago, IL 60606 | | Board Member | | 2004 Class I | | Dean, Tippie College of Business, University of Iowa (since 2006); Director (since 2004) of Xerox Corporation; Director (since 2005), Beta Gamma Sigma International Honor Society; Director of Wellmark, Inc. (since 2009); formerly, Dean and Distinguished Professor of Finance, School of Business at the University of Connecticut (2003-2006); previously, Senior Vice President and Director of Research at the Federal Reserve Bank of Chicago (1995-2003); formerly, Director (1997-2007), Credit Research Center at Georgetown University. | | 241 |
| | | | | | | | | | |
| ■ | DAVID J. KUNDERT(2) 10/28/42 333 W. Wacker Drive Chicago, IL 60606 | | Board Member | | 2005 Class II | | Director, Northwestern Mutual Wealth Management Company; retired (since 2004) as Chairman, JPMorgan Fleming Asset Management, President and CEO, Banc One Investment Advisors Corporation, and President, One Group Mutual Funds; prior thereto, Executive Vice President, Banc One Corporation and Chairman and CEO, Banc One Investment Management Group; Member, Board of Regents, Luther College;member of the Wisconsin Bar Association; member of Board of Directors, Friends of Boerner Botanical Gardens; member of Board of Directors and Chair of Investment Committee, Greater Milwaukee Foundation. | | 241 |
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| ■ | WILLIAM J. SCHNEIDER(2) 9/24/44 333 W. Wacker Drive Chicago, IL 60606 | | Board Member | | 1996 Class III | | Chairman of Miller-Valentine Partners Ltd., a real estate investment company; formerly, Senior Partner and Chief Operating Officer (retired 2004) of Miller-Valentine Group; member, University of Dayton Business School Advisory Council;member, Mid-America Health System Board; formerly, member and chair, Dayton Philharmonic Orchestra Association; formerly, member, Business Advisory Council,Cleveland Federal Reserve Bank. | | 241 |
Board Members & Officers (Unaudited) (continued)
| | Name, Birthdate & Address | | Position(s) Held with the Funds | | Year First Elected or Appointed and Term(1) | | Principal Occupation(s) Including other Directorships During Past 5 Years | | Number of Portfolios in Fund Complex Overseen by Board Member |
| | | | | | | |
| Independent Board Members: | | | | | | |
| ■ | JUDITH M. STOCKDALE 12/29/47 333 W. Wacker Drive Chicago, IL 60606 | | Board Member | | 1997 Class I | | Executive Director, Gaylord and Dorothy Donnelley Foundation (since 1994); prior thereto, Executive Director, Great Lakes Protection Fund (1990-1994). | | 241 |
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| ■ | CAROLE E. STONE(2) 6/28/47 333 W. Wacker Drive Chicago, IL 60606 | | Board Member | | 2007 Class I | | Director, Chicago Board Options Exchange (since 2006); Director, C2 Options Exchange, Incorporated (since 2009); formerly, Commissioner, New York State Commission on Public Authority Reform (2005-2010); formerly, Chair, New York Racing Association Oversight Board (2005-2007). | | 241 |
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| ■ | VIRGINIA L. STRINGER 8/16/44 333 W. Wacker Drive Chicago, IL 60606 | | Board Member | | 2011 | | Board Member, Mutual Fund Directors Forum; Member, Governing Board, Investment Company Institute’s Independent Directors Council; governance consultant and non-profit board member; former Owner and President, Strategic Management Resources, Inc. a management consulting firm; previously, held several executive positions in general management, marketing and human resources at IBM and The Pillsbury Company; Independent Director, First American Fund Complex (1987-2010) and Chair (1997-2010). | | 241 |
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| ■ | TERENCE J. TOTH(2) 9/29/59 333 W. Wacker Drive Chicago, IL 60606 | | Board Member | | 2008 Class II | | Director, Legal & General Investment Management America, Inc. (since 2008); Managing Partner, Promus Capital (since 2008); formerly, CEO and President, Northern Trust Global Investments (2004-2007); Executive Vice President, Quantitative Management & Securities Lending (2000-2004); prior thereto, various positions with Northern Trust Company (since 1994); member: Goodman Theatre Board (since 2004), Chicago Fellowship Board (since 2005) and Catalyst Schools of Chicago Board (since 2008); formerly, member: Northern Trust Mutual Funds Board (2005-2007), Northern Trust Global Investments Board (2004-2007), Northern Trust Japan Board (2004-2007), Northern Trust Securities Inc. Board (2003-2007) and Northern Trust Hong Kong Board (1997-2004). | | 241 |
| | | | | | | | |
| Interested Board Member: | | | | | | | |
| ■ | JOHN P. AMBOIAN(3) 6/14/61 333 W. Wacker Drive Chicago, IL 60606 | | Board Member | | 2008 Class II | | Chief Executive Officer and Chairman (since 2007) and Director (since 1999) of Nuveen Investments, Inc., formerly, President (1999-2007); Chief Executive Officer (since 2007) of Nuveen Investments Advisers, Inc.; Director (since 1998) formerly, Chief Executive Officer (2007-2010) of Nuveen Fund Advisors, Inc. | | 241 |
| | Name, Birthdate and Address | | Position(s) Held with the Funds | | Year First Elected or Appointed(4) | | Principal Occupation(s) During Past 5 Years | | Number of Portfolios in Fund Complex Overseen by Officer |
| | | | | | | | | |
| Officers of the Funds: | | | | | | | | |
| ■ | GIFFORD R. ZIMMERMAN 9/9/56 333 W. Wacker Drive Chicago, IL 60606 | | Chief Administrative Officer | | 1988 | | Managing Director (since 2002), Assistant Secretary and Associate General Counsel of Nuveen Securities, LLC; Managing Director (since 2004) and Assistant Secretary (since 1994) of Nuveen Investments, Inc.; Managing Director (since 2002), Assistant Secretary (since 1997) and Co-General Counsel (since 2011) of Nuveen Fund Advisors, Inc.; Managing Director, Assistant Secretary and Associate General Counsel of Nuveen Asset Management, LLC (since 2011); Managing Director, Associate General Counsel and Assistant Secretary, of Symphony Asset Management LLC (since 2003); Vice President and Assistant Secretary of NWQ Investment Management Company, LLC (since 2002), Nuveen Investments Advisers Inc. (since 2002), Tradewinds Global Investors LLC, and Santa Barbara Asset Management, LLC (since 2006), Nuveen HydePark Group LLC and Nuveen Investment Solutions, Inc. (since 2007) and of Winslow Capital Management Inc. (since 2010); Chief Administrative Officer and Chief Compliance Officer (since 2010) of Nuveen Commodities Asset Management, LLC; Chartered Financial Analyst. Senior Executive Vice President, Global Structured Products (since 2010),formerly, Executive Vice President (1999-2010) of Nuveen Securities, | | 241 |
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| ■ | WILLIAM ADAMS IV 6/9/55 333 W. Wacker Drive Chicago, IL 60606 | | Vice President | | 2007 | | LLC; Co-President of Nuveen Fund Advisors, Inc. (since 2011); formerly,Managing Director (2010-2011) of Nuveen Commodities Asset Management, LLC. | | 133 |
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| ■ | CEDRIC H. ANTOSIEWICZ 1/11/62 333 W. Wacker Drive Chicago, IL 60606 | | Vice President | | 2007 | | Managing Director of Nuveen Securities, LLC. | | 133 |
| | | | | | | | | | |
| ■ | MARGO L. COOK 4/11/64 333 W. Wacker Drive Chicago, IL 60606 | | Vice President | | 2009 | | Executive Vice President (since 2008) of Nuveen Investments, Inc.and of Nuveen Fund Advisors, Inc. (since 2011); Managing Director-Investment Services of Nuveen Commodities Asset Management, LLC (since August 2011), previously, Head of Institutional Asset Management (2007-2008) of Bear Stearns Asset Management; Head of Institutional Asset Management (1986-2007)of Bank of NY Mellon; Chartered Financial Analyst. | | 241 |
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| ■ | LORNA C. FERGUSON 10/24/45 333 W. Wacker Drive Chicago, IL 60606 | | Vice President | | 1998 | | Managing Director (since 2005) of Nuveen Fund Advisors, Inc. and Nuveen Securities, LLC (since 2004). | | 241 |
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| ■ | STEPHEN D. FOY 5/31/54 333 W. Wacker Drive Chicago, IL 60606 | | Vice President and Controller | | 1998 | | Senior Vice President (since 2010), formerly, Vice President (2005-2010)and Funds Controller of Nuveen Securities, LLC; Vice President of Nuveen Fund Advisors, Inc.; Chief Financial Officer of Nuveen Commodities Asset Management, LLC; (since 2010) Certified Public Accountant. | | 241 |
Board Members & Officers (Unaudited) (continued)
| | Name, Birthdate and Address | | Position(s) Held with the Funds | | Year First Elected or Appointed(4) | | Principal Occupation(s) During Past 5 Years | | Number of Portfolios in Fund Complex Overseen by Officer | |
| | | | | | |
| Officers of the Funds: | | | | | |
| ■ | SCOTT S. GRACE 8/20/70 333 W. Wacker Drive Chicago, IL 60606 | | Vice President and Treasurer | | 2009 | | Managing Director, Corporate Finance & Development, Treasurer (since 2009) of Nuveen Securities, LLC; Managing Director and Treasurer (since 2009) of Nuveen Fund Advisors, Inc., Nuveen Investment Solutions, Inc., Nuveen Investments Advisers, Inc., Nuveen Investments Holdings Inc. and (since 2011) Nuveen Asset Management, LLC; Vice President and Treasurer of NWQ Investment Management Company,LLC, Tradewinds Global Investors, LLC, Symphony Asset Management LLC and Winslow Capital Management, Inc.; Vice President of Santa Barbara Asset Management, LLC; formerly, Treasurer (2006-2009), Senior Vice President (2008-2009), previously, Vice President (2006-2008) of Janus Capital Group, Inc.; formerly, Senior Associate in Morgan Stanley’s Global Financial Services Group (2000-2003); Chartered Accountant Designation. | | 241 | |
| | | | | | | | | | | |
| ■ | WALTER M. KELLY 2/24/70 333 W. Wacker Drive Chicago, IL 60606 | | Chief Compliance Officer and Vice President | | 2003 | | Senior Vice President (since 2008) and Assistant Secretary (since 2003) of Nuveen Fund Advisors, Inc. | | 241 | |
| | | | | | | | | | | |
| ■ | TINA M. LAZAR 8/27/61 333 W. Wacker Drive Chicago, IL 60606 | | Vice President | | 2002 | | Senior Vice President (since 2010), formerly, Vice President (2005-2010) of Nuveen Fund Advisors, Inc. | | 241 | |
| | | | | | | | | | | |
| ■ | LARRY W. MARTIN 7/27/51 333 W. Wacker Drive Chicago, IL 60606 | | Vice President and Assistant Secretary | | 1997 | | Senior Vice President (since 2010), formerly, Vice President (1993-2010),Assistant Secretary and Assistant General Counsel of Nuveen Securities,LLC; Senior Vice President (since 2011) of Nuveen Asset Management,LLC: Senior Vice President (since 2010), formerly, Vice President (2005-2010), and Assistant Secretary of Nuveen Investments, Inc.;Senior Vice President (since 2010), formerly Vice President (2005-2010),and Assistant Secretary (since 1997) of Nuveen Fund Advisors, Inc., Vice President and Assistant Secretary of Nuveen Investments Advisers Inc. (since 2002), NWQ Investment Management Company, LLC, Symphony Asset Management, LLC (since 2003), Tradewinds Global Investors, LLC,Santa Barbara Asset Management LLC (since 2006), Nuveen HydePark Group, LLC and Nuveen Investment Solutions, Inc. (since 2007), and of Winslow Capital Management, Inc. (since 2010); Vice President and Assistant Secretary of Nuveen Commodities Asset Management, LLC (since 2010). | | 241 | |
| | | | | | | | | | | |
| ■ | KEVIN J. MCCARTHY 3/26/66 333 W. Wacker Drive Chicago, IL 60606 | | Vice President and Secretary | | 2007 | | Managing Director (since 2008), formerly, Vice President (2007-2008), Nuveen Securities, LLC; Managing Director (since 2008), Assistant Secretary (since 2007) and Co-General Counsel (since 2011) of Nuveen Fund Advisors, Inc.; Managing Director, Assistant Secretary and Associate General Counsel (since 2011) of Nuveen Asset Management, LLC; Managing Director (since 2008), and Assistant Secretary, Nuveen Investment Holdings, Inc.; Vice President (since 2007) and Assistant Secretary of Nuveen Investments Advisers Inc., NWQ Investment Management Company, LLC, Tradewinds Global Investors LLC, NWQ Holdings, LLC, Symphony Asset Management LLC, Santa Barbara Asset Management, LLC, Nuveen HydePark Group, LLC, Nuveen Investment Solutions, Inc. (since 2007) and of Winslow Capital Management, Inc. (since 2010); Vice President and Secretary (since 2010) of Nuveen Commodities Asset Management, LLC; prior thereto, Partner, Bell, Boyd & Lloyd LLP (1997-2007). | | 241 | |
| | Name, Birthdate and Address | | Position(s) Held with the Funds | | Year First Elected or Appointed(4) | | Principal Occupation(s) During Past 5 Years | | Number of Portfolios in Fund Complex Overseen by Officer |
| | | | | | |
| Officers of the Funds: | | | | | |
| ■ | KATHLEEN L. PRUDHOMME | | | | | | |
| | 3/30/53 901 Marquette Avenue Minneapolis, MN 55402 | | Vice President and Assistant Secretary | | 2011 | | Managing Director, Assistant Secretary and Co-General Counsel (since 2011)of Nuveen Fund Advisors, Inc.; Managing Director, Assistant Secretary and Associate General Counsel (since 2011) of Nuveen Asset Management, LLC;Managing Director and Assistant Secretary (since 2011) of Nuveen Securities, LLC; formerly, Deputy General Counsel, FAF Advisors, Inc. (2004-2010). | | 241 |
| (1) | Board Members serve a one year term to serve until the next annual meeting or until their successors shall have been duly elected and qualified. The year first elected or appointed represents the year in which the board member was first elected or appointed to any fund in the Nuveen Complex. |
| (2) | Also serves as a trustee of the Nuveen Diversified Commodity Fund, an exchange-traded commodity pool managed by Nuveen Commodities Asset Management, LLC, an affiliate of the Adviser. |
| (3) | Mr. Amboian is an interested trustee because of his position with Nuveen Investments, Inc. and certain of its subsidiaries, which are affiliates of the Nuveen Funds. |
| (4) | Officers serve one year terms through August of each year. The year first elected or appointed represents the year in which the Officer was first elected or appointed to any fund in the Nuveen Complex. |
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
| ■ | Auction Rate Bond: An auction rate bond is a security whose interest payments are adjusted periodically through an auction process, which process typically also serves as a means for buying and selling the bond. Auctions that fail to attract enough buyers for all the shares offered for sale are deemed to have “failed,” with current holders receiving a formula-based interest rate until the next scheduled auction. |
| | |
| ■ | Average Annual Total Return: This is a commonly used method to express an investment’s performance over a particular, usually multi-year time period. It expresses the return that would have been necessary each year to equal the investment’s actual cumulative performance (including change in NAV or market price and reinvested dividends and capital gains distributions, if any) over the time period being considered. |
| | |
| ■ | 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. |
| | |
| ■ | Effective Leverage: Effective leverage is a Fund’s effective economic leverage, and includes both structural leverage 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 structural leverage. |
| | |
| ■ | Inverse Floaters: Inverse floating rate securities, also known as inverse floaters, are created by depositing a municipal bond, typically with a fixed interest rate, into a special purpose trust created by a broker-dealer. This trust, in turn, (a) issues floating rate certificates typically paying short-term tax-exempt interest rates to third parties in amounts equal to some fraction of the deposited bond’s par amount or market value, and (b) issues an inverse floating rate certificate (sometimes referred to as an “inverse floater”) to an investor (such as a Fund) interested in gaining investment exposure to a long-term municipal bond. The income received by the holder of the inverse floater varies inversely with the short-term rate paid to the floating rate certificates’ holders, and in most circumstances the holder of the inverse floater bears substantially all of the underlying bond’s downside investment risk. The holder of the inverse floater typically also benefits disproportionately from any potential appreciation of the underlying bond’s value. Hence, an inverse floater essentially represents an investment in the underlying bond on a leveraged basis. |
| | |
| ■ | Leverage: Using borrowed money to invest in securities or other assets. |
| ■ | 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. |
| | |
| ■ | Lipper General and Insured Leveraged Municipal Debt Funds Classification Average: Calculated using the returns of all closed-end funds in this category for each period as follows: 1-year, 23 funds; 5-year, 22 funds; and 10-year, 13 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. |
| | |
| ■ | Market Yield (also known as Dividend Yield or Current Yield): An investment’s current annualized dividend divided by its current market price. |
| | |
| ■ | Net Asset Value (NAV): The net market value of all securities held in a portfolio. |
| | |
| ■ | 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. |
| | |
| ■ | 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. |
| | |
| ■ | Standard & Poor’s (S&P) National 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. The index returns assume reinvestment of dividends but do not reflect any applicable sales charges. You cannot invest directly in an index. |
| | |
| ■ | Structural Leverage: Structural Leverage consists of preferred shares or debt issued by the Fund. Both of these are part of a Fund’s capital structure. Structural leverage is sometimes referred to as “‘40 Act Leverage” and is subject to asset coverage limits set in the Investment Company Act of 1940. |
| | |
| ■ | Taxable-Equivalent Yield: The yield necessary from a fully taxable investment to equal, on an after-tax basis, the yield of a municipal bond investment. |
| | |
| ■ | Zero Coupon Bond: A zero coupon bond does not pay a regular interest coupon to its holders during the life of the bond. Tax-exempt income to the holder of the bond comes from accretion of the difference between the original purchase price of the bond at issuance and the par value of the bond at maturity and is effectively paid at maturity. The market prices of zero coupon bonds generally are more volatile than the market prices of bonds that pay interest periodically. |
Notes
Other Useful Information
Board of Directors
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 the Funds 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 the Funds used to determine how to vote proxies relating to portfolio securities without charge, upon request, by calling Nuveen Investments toll-free at (800) 257-8787 or on Nuveen’s website at www.nuveen.com.
You may also obtain this and other Fund information directly from the Securities and Exchange Commission (SEC). The SEC may charge a copying fee for this information. Visit the SEC on-line at http://www.sec.gov or in person at the SEC’s Public Reference Room in Washington, D.C. Call the SEC at (202) 942-8090 for room hours and operation. You may also request Fund information by sending an e-mail request to publicinfo@sec.gov or by writing to the SEC’s Public References Section at 100 F Street NE, Washington, D.C. 20549.
CEO Certification Disclosure
Each Fund’s Chief Executive Officer (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 and Preferred Share Information
Each Fund intends to repurchase and/or redeem shares of its own common and/or auction rate preferred 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 and/or redeemed shares of their common and/or auction rate preferred stock as shown in the accompanying table.
| | | | | Auction Rate |
| | | Common Shares | | Preferred Shares |
| Fund | | Repurchased | | Redeemed |
| NPI | | — | | 16,026 |
| NPM | | — | | 19,501 |
| NPT | | — | | — |
Any future repurchases will be reported to shareholders in the next annual or semi-annual 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 is a global investment management firm that seeks to help secure the long-term goals of institutions and high net worth investors as well as the consultants and financial advisors who serve them. We market our growing range of specialized investment solutions under the high-quality brands of NWQ, Nuveen Asset Management, Santa Barbara, Symphony, Tradewinds and Winslow Capital. In total, Nuveen Investments managed approximately $207 billion of assets as of October 31, 2011.
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
EAN-E-1011D
