UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-21705
-----------------------
Nuveen Tax-Advantage Floating Rate Fund
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
Nuveen Investments
333 West Wacker Drive
Chicago, IL 60606
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Jessica R. Droeger
Nuveen Investments
333 West Wacker Drive
Chicago, IL 60606
- --------------------------------------------------------------------------------
(Name and address of agent for service)
Registrant's telephone number, including area code: (312) 917-7700
---------------------
Date of fiscal year end: July 31
-------------------
Date of reporting period: July 31, 2006
-----------------------
Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW,
Washington, DC 20549-0609. The OMB has reviewed this collection of information
under the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
ANNUAL REPORT JULY 31, 2006
NUVEEN INVESTMENTS
EXCHANGE-TRADED
CLOSED-END
FUNDS
NUVEEN
TAX-ADVANTAGED
FLOATING RATE
FUND
JFP
OPPORTUNITIES FOR
TAX-ADVANTAGED MONTHLY
INCOME FROM A PORTFOLIO
CONSISTING PREDOMINANTLY
OF ADJUSTABLE RATE
PREFERRED SECURITIES
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<Table>
WWW.INVESTORDELIVERY.COM OR WWW.NUVEEN.COM/ACCOUNTACCESS
if you get your Nuveen Fund if you get your Nuveen Fund
dividends and statements from dividends and statements directly
your financial advisor or from Nuveen.
brokerage account.
(Be sure to have the address
sheet that accompanied this
report handy. You'll need it to
complete the enrollment process.)
</Table>
NUVEEN LOGO
(TIMOTHY SCHWERTFEGER PHOTO)
Timothy R. Schwertfeger
Chairman of the Board
CHAIRMAN'S
LETTER TO SHAREHOLDERS
Dear Shareholder:
I am very pleased to report that over the twelve-month period covered by
this report, your Fund continued to provide you with attractive monthly
distributions from a portfolio that over time will primarily be composed
of preferred stocks issued by Middle Market Banks. For more information on
your Fund's performance, please read the Portfolio Managers' Comments, the
Distribution and Share Price Information, and the Performance Overview
sections of this report.
Portfolio diversification is a recognized way to try to reduce some of the
risk that comes with investing. Since one part of your portfolio may be
going up when another is going down, portfolio diversification may help
smooth your investment returns over time. In addition to providing regular
monthly income, an investment like your Fund may help you achieve and
benefit from greater portfolio diversification. Your financial advisor can
explain these potential advantages in more detail. I urge you to contact
him or her soon for more information on this important investment
strategy.
"IN ADDITION TO PROVIDING REGULAR MONTHLY INCOME, AN INVESTMENT LIKE YOUR FUND
MAY HELP YOU ACHIEVE AND BENEFIT FROM GREATER PORTFOLIO DIVERSIFICATION."
At Nuveen Investments, our mission continues to be to assist you and your
financial advisor by offering investment services and products that can
help you to secure your financial objectives. We are grateful that you
have chosen us as a partner as you pursue your financial goals, and we
look forward to continuing to earn your trust in the months and years
ahead.
Sincerely,
(TIMOTHY SCHWERTFEGER SIG)
Timothy R. Schwertfeger
Chairman of the Board
September 12, 2006
Nuveen Investments Exchange-Traded Closed-End Funds (JFP)
PORTFOLIO MANAGERS'
COMMENTS
The Nuveen Tax-Advantaged Floating Rate Fund features portfolio management by a
team of specialists at Spectrum Asset Management, Inc., an affiliate of
Principal Capital(SM). Mark Lieb, Bernie Sussman and Phil Jacoby, who have more
than 70 years of combined experience in the securities markets, lead the team.
Here Mark, Bernie and Phil talk about their management strategy and the
performance of the Fund for the twelve-month period ended July 31, 2006.
WHAT WERE THE GENERAL ECONOMIC CONDITIONS AND TRENDS IN THE SECURITIES MARKET
OVER THE COURSE OF THE PAST 12-MONTH PERIOD?
The general economic conditions during the period were favorable, but tempered
by the Federal Reserve Bank's continued interest rate tightening campaign as the
risks of sustained inflation remained more of a concern than a moderating
economy. As a result, the U.S. yield curve flattened dramatically on the
short-term of the curve (about 250 bps) and further, it shifted upwards on the
long end (about 60 bps) which together was a welcomed response to the Fed's
desire to cool growth to a more moderate path and in doing so, to cool inflation
risk. This set up a very constructive environment for floating rate securities
and general spread tightening in the Dividends-received Deduction (DRD) and
Qualified Dividend Income (QDI) preferred securities market. The higher rates on
LIBOR (London Interbank Offered Rate) during the period fostered higher income
for the Fund's Middle Market Bank floating rate securities, as well.
WHAT WERE THE BASIC STRATEGIES AND TACTICS YOU USED TO MANAGE THE FUND DURING
THIS ANNUAL PERIOD?
The Fund's primary investment objective is to provide an attractive level of
after-tax current income by investing primarily in adjustable rate securities
that are eligible to pay dividends eligible for treatment as "qualified dividend
income". To achieve this objective, we continued to employ the basic strategies
and tactics during this reporting period that we've been using since the Fund's
inception in March 2005. In particular, during this twelve-month period, we
continued to focus on achieving sound credit quality for the Fund. We also
continued our push to increase the Fund's concentration in the Middle Market
Bank sector. Trading in the Non-Middle Market Banking sector to foster
tax-advantaged income and short-term capital gains was also a tactic we
continued to use over the twelve-month period. We purchased more than $52
million of Middle Market Banking preferred stock during this twelve-month period
and we are now two-thirds of the way to our objective of having 60% of the
Fund's assets invested in this sector. This leaves about $56 million available
to allocate to the Middle Market Banking Sector.
4
HOW DID THE FUND PERFORM?
Fund performance results, as well as the performance of a comparative benchmark,
are shown in the accompanying table.
TOTAL RETURNS ON NET ASSET VALUE
For the twelve-months ended July 31, 2006
<Table>
JFP 8.28%
- --------------------------------------------------------------------------------------------
Merrill Lynch Adjustable
Rate Preferred Index(1) 6.68%
- --------------------------------------------------------------------------------------------
</Table>
Past performance does not guarantee future results. Current performance may be
higher or lower than the data shown.
Returns do not reflect the deduction of taxes that a shareholder may have to pay
on Fund distributions or upon the sale of Fund shares. See the Performance
Overview Page for additional information.
The Fund outperformed the Merrill Lynch index for the twelve-month period. We
funded nine more transactions in the Middle Market Banking Sector which brings
the percentage of assets invested in this high income sector to 40%. We also
reduced the risk in the fixed income and hedged portion of the Fund as these
sectors were a source of funds for the Middle Market Bank fundings. As a result,
the Fund realized over $200,000 of short-term capital gains from the trading
activity during the period. Increasing the Fund's concentration in LIBOR
floating rate Dividend Received Deduction (DRD) paper of large U.S. banks and
brokers also helped improve the unrealized gains in the portfolio.
While waiting for attractive Middle Market Bank transactions in which to invest,
we invested a small portion of the Fund into high income (premium priced) Yankee
Bank capital securities with less than 5-year durations.
- --------------------------------------------------------------------------------
1 The Merrill Lynch Adjustable Rate Preferred Index is an unmanaged index
composed of dollar-denominated investment-grade preferred securities,
predominantly from larger issuers. The Fund may invest a substantial portion
of its assets in below-investment-grade securities, often from smaller
issuers.
- --------------------------------------------------------------------------------
One of the factors that constrained the Fund's income performance was the
slower-than-anticipated invest up process into the adjustable rate preferred
stock of Middle Market Banks. During the 2006 fiscal period, the combination of
the flattening yield curve and wider credit spreads (caused by some moderate
insurance company selling) caused prices to decline in this sector, though
income was still sufficient to generate positive total returns for the Fund.
Importantly, we switched out of some Yankee Bank capital securities in order to
fund individual Middle Market Bank transactions during the current period.
5
Although the market experienced some increase in the availability of attractive
Middle Market Bank offerings, the pace of such offerings continued to be
tempered by several factors such as:
- The Federal Reserve's extension to 2009 from 2007 of the effective date
for new capital rules that will likely make traditional forms of
financing less attractive to banks and bank holding companies, and make
the issuance of non-cumulative preferred stock a more efficient financing
option.
- The longer-than-expected learning curve for many potential issuers
concerning the features and benefits of this relatively new type of core
capital security.
- Concerns among some potential issuers that rising shorter-term rates
could unacceptably increase their financing expenses if they were to
issue adjustable rate preferred stock.
The Fund is deliberately but steadily finding attractive Middle Market Bank
securities, despite the impediments enumerated above. In the meantime, the Fund
is fully invested in attractive, generally higher-quality securities of larger
issuers that have been generating solid income and return.
6
DISTRIBUTION AND SHARE PRICE
INFORMATION
In addition to owning preferred stocks in its portfolio, the Fund has issued its
own preferred shares, called FundPreferred(TM). FundPreferred provides a degree
of financial leverage that can enhance the Fund's returns and supplement the
income available to pay common shareholder distributions, but also can increase
share price volatility. This leveraging strategy provided incremental income and
helped enhance common shareholder distributions over this reporting period. It
is the Fund's policy to seek to pay dividends that are relatively stable from
month to month, and that reflect the Fund's past results and projected future
performance. Over the course of this reporting period, the Fund experienced one
monthly distribution increase from $0.0655 per share to $0.0720 per share.
During certain periods, the 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.
As of July 31, 2006, the Fund's fiscal year end, the Fund had a negative UNII
balance for financial statement purposes and a positive UNII balance for tax
purposes.
As of July 31, 2006, the Fund was trading at a share price discount of -8.85% to
its net asset value per share. This compares with an average share price
discount of -10.12% for the entire twelve-month reporting period.
7
Nuveen Tax-Advantaged Floating Rate Fund
JFP
PERFORMANCE
OVERVIEW As of July 31, 2006
<Table>
<Caption>
PORTFOLIO ALLOCATION
(as a % of total investments)
- -------------------------------------------------------------------------------------
Preferred Securities* 99.2%
- -------------------------------------------------------------------------------------
Short-Term Investments 0.8%
- -------------------------------------------------------------------------------------
</Table>
* 39.6% of the Preferred Securities are invested in Middle Market Banks.
Bar Chart:
2005-2006 MONTHLY DISTRIBUTIONS PER SHARE
<Table>
Aug 0.0655
Sep 0.0655
Oct 0.0655
Nov 0.0655
Dec 0.0655
Jan 0.0655
Feb 0.0655
Mar 0.0655
Apr 0.0655
May 0.0655
Jun 0.0720
Jul 0.0720
</Table>
Line Chart:
SHARE PRICE PERFORMANCE
Weekly Closing Price
Past performance is not predictive of future results.
<Table>
8/1/2005 13.34
13.42
13.43
13.48
13.50
13.95
14.00
13.97
13.90
13.95
13.96
13.51
13.48
13.55
13.47
13.50
13.45
13.50
13.40
13.50
13.51
13.60
13.69
13.72
13.69
13.95
13.89
13.75
13.71
13.60
13.68
13.43
13.30
13.44
13.30
13.31
13.04
12.87
13.00
13.06
13.04
13.21
13.05
13.03
13.09
13.14
13.04
13.11
13.15
13.02
13.00
12.88
12.75
12.61
12.49
12.48
12.50
12.49
12.49
12.49
12.52
12.50
12.52
12.64
12.51
12.66
12.64
12.65
12.65
12.80
12.76
12.77
13.03
12.96
12.68
12.48
12.40
12.41
12.48
12.40
12.38
12.26
12.14
12.10
12.14
12.15
12.18
12.29
12.20
12.25
12.19
12.17
12.24
12.24
12.14
12.02
12.05
12.01
12.05
12.00
12.03
12.10
12.11
12.10
12.32
12.28
12.34
12.34
12.40
12.48
12.50
12.46
12.37
12.47
12.51
12.53
12.51
12.56
12.55
12.65
12.65
12.68
12.60
12.59
12.62
12.64
12.60
12.74
12.68
12.63
12.64
12.76
12.74
12.76
12.80
12.80
12.76
12.81
12.91
12.97
12.94
12.96
12.90
12.90
12.93
13.00
12.86
12.91
12.96
12.93
12.86
12.78
12.82
12.91
12.94
12.88
12.95
12.96
12.91
12.99
13.03
12.85
12.82
12.80
12.82
12.82
12.76
12.80
12.86
12.91
12.95
12.91
12.95
12.99
12.93
12.90
12.84
12.84
12.78
12.69
12.80
12.68
12.77
12.79
12.75
12.72
12.70
12.68
12.69
12.69
12.60
12.56
12.61
12.64
12.68
12.62
12.64
12.60
12.57
12.55
12.48
12.46
12.42
12.45
12.43
12.39
12.43
12.43
12.46
12.47
12.45
12.46
12.52
12.66
12.69
12.77
12.71
12.67
12.65
12.65
12.57
12.70
12.65
12.64
12.63
12.63
12.68
12.74
12.80
12.84
12.78
12.89
12.90
12.92
12.86
12.85
12.90
12.91
12.92
12.93
12.93
12.88
12.97
13.06
13.00
13.12
13.19
13.16
13.18
13.23
13.23
13.26
13.23
7/31/2006 13.18
</Table>
FUND SNAPSHOT
<Table>
- -----------------------------------------------------------------------------------
Common Share Price $13.18
- -----------------------------------------------------------------------------------
Common Share
Net Asset Value $14.46
- -----------------------------------------------------------------------------------
Premium/(Discount) to NAV -8.85%
- -----------------------------------------------------------------------------------
Market Yield(1) 6.56%
- -----------------------------------------------------------------------------------
Net Assets Applicable to
Common Shares ($000) $200,354
- -----------------------------------------------------------------------------------
</Table>
AVERAGE ANNUAL TOTAL RETURN
(Inception 3/28/05)
<Table>
<Caption>
- -----------------------------------------------------------------------------------
ON SHARE PRICE ON NAV
- -----------------------------------------------------------------------------------
1-Year 4.52% 8.28%
- -----------------------------------------------------------------------------------
Since
Inception -3.85% 6.03%
- -----------------------------------------------------------------------------------
</Table>
INDUSTRIES
(as a % of total investments)
<Table>
- -----------------------------------------------------------------------------------
Commercial Banks 61.5%
- -----------------------------------------------------------------------------------
Capital Markets 15.2%
- -----------------------------------------------------------------------------------
Insurance 11.1%
- -----------------------------------------------------------------------------------
U.S. Agency 6.7%
- -----------------------------------------------------------------------------------
Consumer Finance 3.0%
- -----------------------------------------------------------------------------------
Thrifts & Mortgage Finance 1.8%
- -----------------------------------------------------------------------------------
Short-Term Investments 0.7%
- -----------------------------------------------------------------------------------
</Table>
1 Market Yield is based on the Fund's current annualized monthly distribution
divided by the Fund's current market price. The Fund's monthly distributions
to its shareholders may be comprised of ordinary income and net realized
short-term capital gains.
8
Report of
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
THE BOARD OF TRUSTEES AND SHAREHOLDERS
NUVEEN TAX-ADVANTAGED FLOATING RATE FUND
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Nuveen Tax-Advantaged Floating Rate Fund (the
"Fund"), as of July 31, 2006, and the related statement of operations for the
year then ended, the statement of changes in net assets for the year then ended
and for the period from March 28, 2005 through July 31, 2005, and the financial
highlights for the year then ended and for the period from March 28, 2005
through July 31, 2005. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. We were
not engaged to perform an audit of the Fund's internal control over financial
reporting. Our audit 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 Fund's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of July 31, 2006, by correspondence with the custodian and
brokers. 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 position of Nuveen
Tax-Advantaged Floating Rate Fund at July 31, 2006, the results of its
operations for the year then ended, the changes in its net assets for the year
then ended and for the period from March 28, 2005 through July 31, 2005, and the
financial highlights for the year then ended and for the period from March 28,
2005 through July 31, 2005 in conformity with U.S. generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
September 21, 2006
9
Nuveen Tax-Advantaged Floating Rate Fund (JFP)
Portfolio of
INVESTMENTS July 31, 2006
<Table>
<Caption>
PRINCIPAL
AMOUNT
(000)/SHARES DESCRIPTION (1) COUPON RATINGS (2) VALUE
- -------------------------------------------------------------------------------------------------------------------------------
PREFERRED SECURITIES - 136.4% (99.2% OF TOTAL INVESTMENTS)
CAPITAL MARKETS - 20.8%
322,163 Goldman Sachs Group Inc., (3) 5.914%(5) A2 $ 8,376,238
335,000 Lehman Brothers Holdings Inc., Series G, (3) 6.150%(5) A- 8,445,350
155,000 Merrill Lynch & Co., Inc., Series H, (3) 5.991%(5) A2 3,935,450
288,300 Merrill Lynch & Co., Inc., (3) 5.880%(5) A2 7,386,246
200,000 Morgan Stanley, Series 2006A 6.198%(5) A2 5,187,500
80 Richmond County Capital Corporation, 144A Series B 8.250% N/R 7,655,020
35,600 UBS Preferred Funding Trust IV 6.085%(5) AA- 908,512
- -------------------------------------------------------------------------------------------------------------------------------
Total Capital Markets 41,894,316
----------------------------------------------------------------------------------------------------------------
COMMERCIAL BANKS - 84.5%
9,000 ABN AMRO North America Capital Funding, Series 6.968% A2 9,424,688
144A, (3)
105,578 Banco Santander 6.410% A2 2,626,781
14,422 Barclays Bank PLC 6.625% Aa3 365,165
5,000 Barclays Bank PLC (4) 6.278% Aa3 4,596,600
1,000 Barnett Capital III 6.062%(5) Aa3 979,915
7,000 City National Bancshares Corporation, Series F, 8.533% N/R 7,248,938
144A (MMB)
20,000 Cobank ABC, 144A, (3) 7.000% N/R 1,037,440
1,000 CoreStates Capital Trust III, Series 144A 5.740%(5) A1 974,696
10,000 FBOP Corporation, Series 2005A, 144A (MMB) 8.050%(5) N/R 10,027,500
7,000 First Tennessee Bank, 144A, (3) 6.330%(5) A3 7,192,063
10,000 Heartland Bank, Series A (MMB) 9.430%(5) N/R 10,355,625
110,400 HSBC Holdings PLC, Series A 6.200% A1 2,660,640
423,900 HSBC USA Inc., (3) 6.257%(5) A 10,915,422
1,000 J.P. Morgan Chase Capital XIII, Floating Rate 6.430%(5) A1 1,002,599
Capital Securities, Series M
5,000 MidCarolina Financial Corporation, Series 144A 8.342% N/R 5,266,875
(MMB)
10,000 Pedcor Bancorp, Series A (MMB) 9.230%(5) N/R 10,349,375
5,000 Pedcor Financial Bancorp. (MMB) 9.205%(5) N/R 5,149,688
5,000 Regent Bancorp Inc., Series A (MMB) 8.481% N/R 5,177,813
10,000 River Valley Bancorp, Series A (MMB) 9.364%(5) N/R 10,375,000
10,000 Rogers Bancshares Inc., 144A Series A (MMB) 9.346%(5) N/R 10,358,750
6,500 SG Preferred Capital II LLC, (3) 6.302% A1 6,755,531
10,000 Shorebank Corporation, Series 144A (MMB) 9.289%(5) N/R 10,375,000
5,000 Sleepy Hollow Bank, 144A Series A (MMB) 9.281%(5) N/R 5,190,625
1,000 St. George Funding Company LLC, 144A 8.485% A3 1,073,626
1,000 SunTrust Capital Trust I, Series A 5.841%(5) A1 986,005
1,000 Swedbank ForeningsSparbanken AB, 144A 9.000% A2 1,102,141
3,500 Truman Bancorp Inc. (MMB) 9.455%(5) N/R 3,623,375
235,000 U.S. Bancorp, Series 2006B 6.100%(5) A1 6,102,668
10,000 Vineyard National Bancorp, 144A Series C (MMB) 9.298%(5) N/R 10,368,750
8,000 Washington Mutual Preferred Funding Delaware, 6.534% BBB 7,786,960
Series A-1, 144A
- -------------------------------------------------------------------------------------------------------------------------------
Total Commercial Banks 169,450,254
----------------------------------------------------------------------------------------------------------------
CONSUMER FINANCE - 4.1%
79,500 SLM Corporation, (3) 6.000%(5) BBB+ 8,208,375
- -------------------------------------------------------------------------------------------------------------------------------
INSURANCE - 15.2%
386,500 Aegon N.V. 6.375% A- 9,434,465
146,200 MetLife Inc., Series B, (3) 6.500% BBB 3,682,778
1,200 Oil Insurance Limited, 144A 7.550% Baa1 1,210,546
320,000 Prudential PLC 6.500% A- 7,904,000
2,000 Twin Reefs Trust Pass Through to XL Financial 6.345%(5) Aa2 2,000,120
Assurance Ltd. Preferred Stock Series B
6,000 Zurich RegCaPS Funding Trust VI, Series 144A, (3) 5.872%(5) Baa2 6,163,125
- -------------------------------------------------------------------------------------------------------------------------------
Total Insurance 30,395,034
----------------------------------------------------------------------------------------------------------------
</Table>
10
<Table>
<Caption>
PRINCIPAL
AMOUNT
(000)/SHARES DESCRIPTION (1) COUPON RATINGS (2) VALUE
- -------------------------------------------------------------------------------------------------------------------------------
THRIFTS & MORTGAGE FINANCE - 2.6%
5,000 RMG Capital Corporation (MMB) 9.450%(5) N/R $ 5,179,375
- -------------------------------------------------------------------------------------------------------------------------------
U.S. AGENCY - 9.2%
100,100 Fannie Mae, (3) 6.749%(5) AA- 5,038,033
125,000 Fannie Mae, (3) 5.396%(5) AA- 6,343,750
19,600 Federal Home Loan Mortgage Corporation, (3) 6.140% Aa3 963,928
15,400 Federal Home Loan Mortgage Corporation, (3) 5.190%(5) AA- 658,350
71,000 Federal Home Loan Mortgage Corporation, (3) 5.100% AA- 2,899,910
58,200 Federal Home Loan Mortgage Corporation, (3) 4.590%(5) AA- 2,441,490
- -------------------------------------------------------------------------------------------------------------------------------
Total U.S. Agency 18,345,461
----------------------------------------------------------------------------------------------------------------
TOTAL PREFERRED SECURITIES (COST $271,961,842) 273,472,815
================================================================================================================
<Caption>
PRINCIPAL
AMOUNT (000) DESCRIPTION (1) COUPON MATURITY VALUE
- -------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS - 1.1% (0.8% OF TOTAL INVESTMENTS)
$ 2,107 Repurchase Agreement with State Street Bank, dated 4.910% 8/01/06 $ 2,107,077
7/31/06, repurchase price $2,107,364,
collateralized by $1,745,000 U.S. Treasury Bonds,
6.875%, due 8/15/25, value $2,155,075
========== ----------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS (COST $2,107,077) 2,107,077
================================================================================================================
TOTAL INVESTMENTS (COST $274,068,919) - 137.5% 275,579,892
================================================================================================================
OTHER ASSETS LESS LIABILITIES - 1.4% 2,774,415
================================================================================================================
FUNDPREFERRED SHARES, AT LIQUIDATION VALUE - (38.9)% (78,000,000)
================================================================================================================
NET ASSETS APPLICABLE TO COMMON SHARES - 100% $ 200,354,307
================================================================================================================
</Table>
INTEREST RATE SWAPS OUTSTANDING AT JULY 31, 2006:
<Table>
<Caption>
FIXED RATE
PAID FIXED RATE FLOATING RATE FLOATING RATE UNREALIZED
NOTIONAL BY THE FUND PAYMENT RECEIVED BY PAYMENT TERMINATION APPRECIATION
COUNTERPARTY AMOUNT (ANNUALIZED) FREQUENCY THE FUND (6) FREQUENCY DATE (DEPRECIATION)
-------------------------------------------------------------------------------------------------------------------------
Goldman Sachs $7,000,000 4.563% Semi-Annually 5.500% Quarterly 9/29/10 $ 142,780
Goldman Sachs 1,500,000 5.278 Semi-Annually 5.283 Quarterly 12/09/35 80,053
Goldman Sachs 8,700,000 5.788 Semi-Annually 5.238 Quarterly 6/02/36 (179,060)
JPMorgan 5,000,000 4.592 Semi-Annually 5.171 Quarterly 8/17/10 94,256
JPMorgan 5,000,000 4.511 Semi-Annually 5.227 Quarterly 8/31/10 108,437
JPMorgan 1,300,000 4.962 Semi-Annually 5.490 Quarterly 7/27/35 112,103
Morgan Stanley 3,000,000 4.590 Semi-Annually 5.507 Quarterly 7/15/15 197,721
Morgan Stanley 6,500,000 4.850 Semi-Annually 5.500 Quarterly 7/14/35 742,183
Morgan Stanley 4,000,000 4.880 Semi-Annually 5.507 Quarterly 7/15/35 439,604
Morgan Stanley 1,750,000 4.900 Semi-Annually 5.498 Quarterly 7/18/35 187,287
Morgan Stanley 1,700,000 4.930 Semi-Annually 5.520 Quarterly 7/21/35 174,644
Morgan Stanley 1,800,000 5.835 Semi-Annually 5.171 Quarterly 5/19/36 (49,952)
-------------------------------------------------------------------------------------------------------------------------
$ 2,050,056
=========================================================================================================================
</Table>
<Table>
(1) All percentages shown in the Portfolio of Investments are based on net assets applicable
to Common shares unless otherwise noted.
(2) Ratings (not covered by the report of independent registered public accounting firm):
Using the higher of Standard & Poor's or Moody's rating. Ratings below BBB by Standard &
Poor's Group or Baa by Moody's Investor Service, Inc. are considered to be below
investment grade.
(3) Investment is eligible for the Dividends Received Deduction (not covered by the report of
independent registered public accounting firm).
(4) Investment valued at fair value using methods determined in good faith by, or at the
discretion of, the Board of Trustees.
(5) Security has a floating rate coupon which is periodically reset based on a fixed
percentage rate above a predetermined index or benchmark. The coupon rate disclosed is
that in effect at the end of the reporting period.
(6) Based on USD-LIBOR (United States Dollar - London Inter-Bank Offered Rate)
N/R Not rated.
144A Investment is exempt from registration under Rule 144A of the Securities Act of 1933, as
amended. These investments may only be resold in transactions exempt from registration
which are normally those transactions with qualified institutional buyers.
(MMB) Middle Market Bank.
</Table>
See accompanying notes to financial statements.
11
Statement of
ASSETS AND LIABILITIES July 31, 2006
<Table>
- ---------------------------------------------------------------------------
ASSETS
Investments, at value (cost $274,068,919) $275,579,892
Cash 281,690
Unrealized appreciation on interest rate swaps 2,279,068
Receivables:
Dividends 453,660
Interest 211,142
Other assets 12,527
- ---------------------------------------------------------------------------
Total assets 278,817,979
- ---------------------------------------------------------------------------
LIABILITIES
Unrealized depreciation on interest rate swaps 229,012
Accrued expenses:
Management fees 143,564
Other 52,622
FundPreferred share dividends payable 38,474
- ---------------------------------------------------------------------------
Total liabilities 463,672
- ---------------------------------------------------------------------------
FundPreferred shares, at liquidation value 78,000,000
- ---------------------------------------------------------------------------
Net assets applicable to Common shares $200,354,307
- ---------------------------------------------------------------------------
Common shares outstanding 13,851,500
- ---------------------------------------------------------------------------
Net asset value per Common share outstanding (net assets
applicable to
Common shares, divided by Common shares outstanding) $ 14.46
- ---------------------------------------------------------------------------
NET ASSETS APPLICABLE TO COMMON SHARES CONSIST OF:
- ---------------------------------------------------------------------------
Common shares, $.01 par value per share $ 138,515
Paid-in surplus 196,283,913
Undistributed (Over-distribution of) net investment income (11,571)
Accumulated net realized gain (loss) from investments and
derivative transactions 382,421
Net unrealized appreciation (depreciation) of investments
and derivative transactions 3,561,029
- ---------------------------------------------------------------------------
Net assets applicable to Common shares $200,354,307
- ---------------------------------------------------------------------------
Authorized shares:
Common Unlimited
FundPreferred Unlimited
- ---------------------------------------------------------------------------
</Table>
See accompanying notes to financial statements.
12
Statement of
OPERATIONS Year Ended July 31, 2006
<Table>
- -----------------------------------------------------------------------------
INVESTMENT INCOME
Dividends $ 14,563,638
Interest 2,696,668
- -----------------------------------------------------------------------------
Total investment income 17,260,306
- -----------------------------------------------------------------------------
EXPENSES
Management fees 2,450,288
FundPreferred shares - auction fees 193,539
FundPreferred shares - dividend disbursing agent fees 6,454
Shareholders' servicing agent fees and expenses 188
Custodian's fees and expenses 79,603
Trustees' fees and expenses 5,319
Professional fees 22,605
Shareholders' reports - printing and mailing expenses 43,045
Stock exchange listing fees 5,705
Investor relations expense 33,305
Other expenses 14,897
- -----------------------------------------------------------------------------
Total expenses before custodian fee credit and expense
reimbursement 2,854,948
Custodian fee credit (4,153)
Expense reimbursement (821,618)
- -----------------------------------------------------------------------------
Net expenses 2,029,177
- -----------------------------------------------------------------------------
Net investment income 15,231,129
- -----------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) from investments (710,382)
Net realized gain (loss) from interest rate swaps 1,078,190
Change in net unrealized appreciation (depreciation) of
investments 1,602,977
Change in net unrealized appreciation (depreciation) of
interest rate swaps 1,696,446
- -----------------------------------------------------------------------------
Net realized and unrealized gain (loss) 3,667,231
- -----------------------------------------------------------------------------
DISTRIBUTIONS TO FUNDPREFERRED SHAREHOLDERS
From net investment income (3,128,299)
- -----------------------------------------------------------------------------
Net increase (decrease) in net assets applicable to Common
shares from operations $ 15,770,061
- -----------------------------------------------------------------------------
</Table>
See accompanying notes to financial statements.
13
Statement of
CHANGES IN NET ASSETS
<Table>
<Caption>
FOR THE PERIOD
3/28/05
(COMMENCEMENT
OF OPERATIONS)
YEAR ENDED THROUGH
7/31/06 7/31/05
- -----------------------------------------------------------------------------------
OPERATIONS
Net investment income $ 15,231,129 $ 2,100,016
Net realized gain (loss) from investments (710,382) 16,702
Net realized gain (loss) from interest rate swaps 1,078,190 8,000
Change in net unrealized appreciation
(depreciation) of investments 1,602,977 (92,004)
Change in net unrealized appreciation
(depreciation) of interest rate swaps 1,696,446 353,610
Distributions to FundPreferred shareholders from
net investment income (3,128,299) (426,009)
- -----------------------------------------------------------------------------------
Net increase (decrease) in net assets applicable
to Common shares from operations 15,770,061 1,960,315
- -----------------------------------------------------------------------------------
DISTRIBUTIONS TO COMMON SHAREHOLDERS
From net investment income (11,067,348) (2,721,198)
- -----------------------------------------------------------------------------------
Decrease in net assets applicable to Common shares
from distributions to Common shareholders (11,067,348) (2,721,198)
- -----------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS
Common shares:
Net proceeds from sale of shares and offering
cost adjustments 25,050 197,181,325
Net proceeds from shares issued to shareholders
due to reinvestment of distributions -- 134,336
FundPreferred shares offering costs and
adjustments (18,509) (1,010,000)
- -----------------------------------------------------------------------------------
Net increase (decrease) in net assets applicable
to Common shares from capital share transactions 6,541 196,305,661
- -----------------------------------------------------------------------------------
Net increase (decrease) in net assets applicable
to Common shares 4,709,254 195,544,778
Net assets applicable to Common shares at the
beginning of period 195,645,053 100,275
- -----------------------------------------------------------------------------------
Net assets applicable to Common shares at the end
of period $200,354,307 $ 195,645,053
- -----------------------------------------------------------------------------------
Undistributed (Over-distribution of) net
investment income at the end of period $ (11,571) $ (1,047,053)
- -----------------------------------------------------------------------------------
</Table>
See accompanying notes to financial statements.
14
Notes to
FINANCIAL STATEMENTS
1. GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES
Nuveen Tax-Advantaged Floating Rate Fund (the "Fund") is a diversified,
closed-end management investment company registered under the Investment Company
Act of 1940, as amended. The Fund's Common shares are listed on the New York
Stock Exchange and trade under the ticker symbol "JFP". The Fund was organized
as a Massachusetts business trust on December 29, 2004.
Prior to the commencement of operations, the Fund had no operations other than
those related to organizational matters, the initial capital contribution of
$100,275 by Nuveen Asset Management (the "Adviser"), a wholly owned subsidiary
of Nuveen Investments, Inc. ("Nuveen"), the recording of the organization
expenses ($13,500) and their reimbursement by Nuveen Investments, LLC, also a
wholly owned subsidiary of Nuveen.
The Fund's primary investment objective is to provide an attractive level of
after-tax current income. The Fund's secondary investment objective is capital
preservation. The Fund intends to pursue its investment objectives by investing
primarily in adjustable rate securities that are eligible to pay dividends
consisting primarily of tax-advantaged dividend income.
The Fund expects that substantially all of its portfolio of investments will be
comprised of securities issued by banking companies and other financial
institutions which may make the Fund more susceptible to adverse economic or
regulatory occurrences affecting these institutions. The Fund's concentration of
investments in these institutions includes the risk that banking companies and
other financial institutions may themselves have concentrated portfolios,
changes in interest rates or competition could affect their profitability, and
there could be increased costs or setbacks due to changes in the regulatory and
financial reporting requirements under which they operate.
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements in accordance with U.S.
generally accepted accounting principles.
Investment Valuation
The prices of preferred stocks issued by middle market and major banking
companies and other securities in the Fund's investment portfolio are generally
provided by one or more independent pricing services approved by the Fund's
Board of Trustees. The pricing services typically value exchange-listed
securities at the last sales price on that day; and value securities traded in
the over-the-counter market at the mean of the last bona fide bid and bona fide
ask prices when current quotations are readily available. The pricing services
may value preferred stocks issued by middle market and major banking companies
and other securities for which current quotations are not readily available at
fair value using a wide range of market data and other information and analysis,
including the obligor's credit characteristics considered relevant by such
pricing service to determine valuations. The Board of Trustees of the Fund has
approved procedures which permit the Adviser to determine the fair value of
investments for which the applicable pricing service or services is not
providing a price, using market data and other factors such as the obligor's
credit characteristics. The Fund may engage an independent appraiser to
periodically provide an independent determination of fair value of the preferred
stocks issued by middle market banks. Short-term investments are valued at
amortized cost, which approximates market value.
The preferred stocks issued by middle market and major banking companies in
which the Fund invests are generally not listed on an organized exchange and the
secondary market for such investments may be less liquid relative to markets for
other securities. Consequently, the value of preferred stocks issued by middle
market and major banking companies, determined as described above, may differ
significantly from the value that would have been determined had there been an
active market for that preferred stock.
Investment Transactions
Investment transactions are recorded on a trade date basis. Realized gains and
losses from investment transactions are determined on the specific
identification method. Investments purchased on a when-issued or delayed
delivery basis may have extended settlement periods. Any investments so
purchased are subject to market fluctuation during this period. The Fund
maintains liquid assets with a current value at least equal to the amount of the
when-issued/delayed delivery purchase commitments. At July 31, 2006, the Fund
had no such outstanding purchase commitments.
Investment Income
Dividend income is recorded on the ex-dividend date or, for foreign securities,
when information is available. Interest income, which includes the amortization
of premiums and accretion of discounts for financial reporting purposes, is
recorded on an accrual basis.
15
Notes to
FINANCIAL STATEMENTS (continued)
Federal Income Taxes
The Fund intends to distribute substantially all net investment income and net
capital gains to shareholders and to otherwise comply with the requirements of
Subchapter M of the Internal Revenue Code applicable to regulated investment
companies. Therefore, no federal income tax provision is required.
Dividends and Distributions to Common Shareholders
Distributions to Common shareholders are recorded on the ex-dividend date. The
amount and timing of distributions are determined in accordance with federal
income tax regulations, which may differ from U.S. generally accepted accounting
principles.
The Fund declares monthly distributions to Common shareholders from its net
investment income and net short-term capital gains. Net realized long-term
capital gains from investment transactions, if any, are distributed to
shareholders not less frequently than annually. Furthermore, long-term capital
gains are distributed only to the extent they exceed available capital loss
carryforwards.
FundPreferred Shares
Effective May 27, 2005, the Fund issued 3,120 Series Th FundPreferred shares,
$25,000 stated value per share, as a means of effecting financial leverage. The
dividend rate paid by the Fund is determined every seven days, pursuant to a
dutch auction process overseen by the auction agent, and is payable at the end
of each rate period.
Interest Rate Swap Transactions
The Fund is authorized to invest in certain derivative financial instruments.
The Fund's use of interest rate swap transactions is intended to synthetically
convert certain Fund positions in fixed-rate securities effectively into
adjustable rate instruments and thereby shorten the average interest rate reset
time and duration of the Fund's portfolio of investments. Interest rate swap
transactions involve the Fund's agreement with the counterparty to pay a
semiannual fixed rate payment in exchange for the counterparty paying the Fund a
quarterly variable rate payment. The payment obligations are based on the
notional amount of the interest rate swap contract. Interest rate swaps do not
involve the delivery of securities or other underlying assets or principal.
Accordingly, the risk of loss with respect to the swap counterparty on such
transactions is limited to the net amount of interest payments that the Fund is
to receive. Interest rate swap positions are valued daily. The Fund accrues for
the interim incoming and outgoing payments on interest rate swap contracts on a
daily basis, and for the interim changes in the market value of the Fund's
contractual rights and obligations under the contracts, with the net amount
recorded within net unrealized appreciation (depreciation) of investments of
interest rate swaps on the Statement of Assets and Liabilities. Once periodic
payments are settled in cash, the net amount is recorded as net realized gain
(loss) from interest rate swaps, in addition to net realized gain (loss)
recorded upon the termination of interest rate swap contracts on the Statement
of Operations. For tax purposes, periodic payments are treated as ordinary
income or expense. Although there are economic advantages of entering into
interest rate swap transactions, there are also additional risks. The Fund helps
manage the credit risks associated with interest rate swap transactions by
entering into agreements only with counterparties the Adviser believes have the
financial resources to honor their obligations and by having the Adviser
continually monitor the financial stability of the swap counterparties. In
addition, all counterparties are required to pledge collateral daily (based on
the daily valuation of each swap) on behalf of the Fund with a value
approximately equal to the amount of any unrealized gain above a pre-determined
threshold. Reciprocally, when the Fund has an unrealized loss on a swap
contract, the Fund has instructed the custodian to pledge assets of the Fund 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 interest rate swap valuations fluctuate,
either up or down, by at least the pre-determined threshold amount.
Organization, Offering Costs and Fund Structuring Fee
Nuveen Investments, LLC agreed to reimburse all organization expenses
(approximately $13,500) and pay all Common share offering costs (other than the
sales load and fund structuring fee) that exceeded $.03 per Common share. The
Fund's share of Common share offering costs ($390,000) and fund structuring fee
($590,000) were recorded as reductions of the proceeds from the sale of Common
shares.
Costs incurred by the Fund in connection with its offering of FundPreferred
shares ($1,028,509) were recorded as a reduction to paid-in surplus.
16
Repurchase Agreements
In connection with transactions in repurchase agreements, it is the Fund's
policy that its custodian take possession of the underlying collateral
securities, the fair value of which exceeds the principal amount of the
repurchase transaction, including accrued interest, at all times. If the seller
defaults, and the fair value of the collateral declines, realization of the
collateral may be delayed or limited.
Custodian Fee Credit
The Fund has an arrangement with the custodian bank whereby certain custodian
fees and expenses are reduced by credits earned on the Fund's cash on deposit
with the bank. Such deposit arrangements are an alternative to overnight
investments.
Indemnifications
Under the Fund's organizational documents, its Officers and Trustees are
indemnified against certain liabilities arising out of the performance of their
duties to the Fund. In addition, in the normal course of business, the Fund
enters into contracts that provide general indemnifications to other parties.
The Fund's maximum exposure under these arrangements is unknown as this would
involve future claims that may be made against the Fund that have not yet
occurred. However, the Fund has not had prior claims or losses pursuant to these
contracts and expects the risk of loss to be remote.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of increases and
decreases in net assets applicable to Common shares from operations during the
reporting period. Actual results may differ from those estimates.
2. FUND SHARES
Transactions in Common and FundPreferred shares were as follows:
<Table>
<Caption>
FOR THE PERIOD
3/28/05
(COMMENCEMENT
YEAR OF OPERATIONS)
ENDED THROUGH
7/31/06 7/31/05
- -----------------------------------------------------------------------------------
Common shares:
Shares sold -- 13,835,000
Shares issued to shareholders due to
reinvestment of distributions -- 9,500
- -----------------------------------------------------------------------------------
-- 13,844,500
- -----------------------------------------------------------------------------------
FundPreferred shares sold -- 3,120
- -----------------------------------------------------------------------------------
</Table>
3. INVESTMENT TRANSACTIONS
Purchases and sales (excluding short-term investments and derivative
transactions) during the fiscal year ended July 31, 2006, aggregated
$113,316,658 and $102,144,828, respectively.
4. INCOME TAX INFORMATION
The following information is presented on an income tax basis. Differences
between amounts for financial statement and federal income tax purposes are
primarily due to the recognition of premium amortization on debt securities, and
timing differences in recognizing certain gains and losses on investment
transactions. To the extent that differences arise that are reclassified within
the capital accounts on the Statement of Assets and Liabilities, based on their
Federal tax basis treatment and have no impact on the net asset value of the
Fund. Temporary differences do not require reclassification. The fiscal year end
of the Fund is July 31, 2006, and the tax year end is June 30, 2006. Certain
income tax information below, including the cost of investments and unrealized
appreciation (depreciation) of investments are as of July 31, 2006, while other
income tax information, including undistributed net ordinary income,
undistributed net long-term capital gains, distributions from net ordinary
income and distributions from net long-term capital gains are as of June 30,
2006. Reporting certain income tax information as of the Fund's fiscal year end
and other as of the Fund's tax year end results from reporting requirements
under U.S. generally accepted accounting principles, as compared with amounts
reflected in the Fund's income tax return.
At July 31, 2006, the Fund's fiscal year end, the cost of investments owned was
$274,082,970.
The net unrealized appreciation of investments at July 31, 2006, the Fund's
fiscal year end, aggregated $1,496,922, of which $3,654,476 related to
appreciated securities and $2,157,554 related to depreciated securities.
The tax components of undistributed net ordinary income and net long-term
capital gains at June 30, 2006, the Fund's last tax year end, were as follows:
<Table>
- ---------------------------------------------------------------
Undistributed net ordinary income * $1,559,288
Undistributed net long-term capital
gains --
- ---------------------------------------------------------------
</Table>
* Net ordinary income consists of net taxable income derived from dividends,
interest, and net short-term capital gains, if any.
17
Notes to
FINANCIAL STATEMENTS (continued)
The tax character of distributions paid during the Fund's last tax years ended
June 30, 2006 and June 30, 2005, was designated for purposes of the dividends
paid deduction as follows:
<Table>
<Caption>
2006
- ------------------------------------------------------------------------------
Distributions from net ordinary income * $13,943,288
Distributions from net long-term capital gains --
- ------------------------------------------------------------------------------
</Table>
<Table>
<Caption>
2005
- ------------------------------------------------------------------------------
Distributions from net ordinary income * $1,078,688
Distributions from net long-term capital gains --
- ------------------------------------------------------------------------------
</Table>
* Net ordinary income consists of net taxable income derived from dividends,
interest, and net short-term capital gains, if any.
The Fund has elected to defer net realized losses from investments incurred from
November 1, 2005 through June 30, 2006, the Fund's last tax year end,
("post-October losses") in accordance with Federal income tax regulations. The
following post-October losses of $139,221 were treated as having arisen on the
first day of the following tax year.
5. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
The Fund's management fee is separated into two components - a complex-level
component, based on the aggregate amount of all fund assets managed by Nuveen
Asset Management (the "Adviser"), a wholly owned subsidiary of Nuveen
Investments, Inc. ("Nuveen"), and a specific fund-level component, based only on
the amount of assets within the Fund. This pricing structure enables Nuveen fund
shareholders to benefit from growth in the assets within each individual fund as
well as from growth in the amount of complex-wide assets managed by the Adviser.
The annual fund-level fee, payable monthly, is based upon the average daily
Managed Assets of the Fund as follows:
<Table>
<Caption>
AVERAGE DAILY MANAGED ASSETS FUND-LEVEL FEE RATE
- ------------------------------------------------------------------------------
For the first $500 million .7000%
For the next $500 million .6750
For the next $500 million .6500
For the next $500 million .6250
For Managed Assets over $2 billion .6000
- ------------------------------------------------------------------------------
</Table>
The annual complex-level fee, payable monthly, which is additive to the
fund-level fee, for all Nuveen sponsored funds in the U.S., is based on the
aggregate amount of total fund assets managed as stated in the table below. As
of July 31, 2006, the complex-level fee rate was .1875%.
<Table>
<Caption>
COMPLEX-LEVEL ASSETS(1) COMPLEX-LEVEL FEE RATE
- ------------------------------------------------------------------------------
For the first $55 billion .2000%
For the next $1 billion .1800
For the next $1 billion .1600
For the next $3 billion .1425
For the next $3 billion .1325
For the next $3 billion .1250
For the next $5 billion .1200
For the next $5 billion .1175
For the next $15 billion .1150
For Managed Assets over $91 billion (2) .1400
- ------------------------------------------------------------------------------
</Table>
(1) The complex-level fee component of the management fee for the funds is
calculated based upon the aggregate Managed Assets ("Managed Assets" means
the average daily net assets of each fund including assets attributable to
all types of leverage used by the Nuveen funds) of Nuveen-sponsored funds in
the U.S.
18
(2) With respect to the complex-wide Managed Assets over $91 billion, the fee
rate or rates that will apply to such assets will be determined at a later
date. In the unlikely event that complex-wide Managed Assets reach $91
billion prior to a determination of the complex-level fee rate or rates to
be applied to Managed Assets in excess of $91 billion, the complex-level fee
rate for such complex-wide Managed Assets shall be .1400% until such time as
a different rate or rates is determined.
The management fee compensates the Adviser for overall investment advisory and
administrative services and general office facilities. The Adviser has entered
into a Sub-Advisory Agreement with Spectrum Asset Management, Inc. ("Spectrum"),
under which Spectrum manages the investment portfolio of the Fund. Spectrum is
compensated for its services to the Fund from the management fee paid to the
Adviser. Spectrum also receives compensation on certain portfolio transactions
for providing brokerage services to the Fund.
The Fund pays no compensation directly to those of its Trustees who are
affiliated with the Adviser or to its Officers, all of whom receive remuneration
for their services to the Fund from the Adviser or its affiliates. The Board of
Trustees has adopted a deferred compensation plan for independent Trustees that
enables Trustees to elect to defer receipt of all or a portion of the annual
compensation they are entitled to receive from certain Nuveen advised Funds.
Under the plan, deferred amounts are treated as though equal dollar amounts had
been invested in shares of select Nuveen advised Funds.
For the first eight years of the Fund's operations, the Adviser has agreed to
reimburse the Fund, as a percentage of average daily Managed Assets, for fees
and expenses in the amounts and for the time periods set forth below:
<Table>
<Caption>
YEAR ENDING YEAR ENDING
MARCH 31, MARCH 31,
- -------------------------------------------------------------------------------
2005 * .30% 2010 .30%
2006 .30 2011 .22
2007 .30 2012 .14
2008 .30 2013 .07
2009 .30
- -------------------------------------------------------------------------------
</Table>
* From the commencement of operations.
The Adviser has not agreed to reimburse the Fund for any portion of its fees and
expenses beyond March 31, 2013.
6. NEW ACCOUNTING PRONOUNCEMENT
Financial Accounting Standards Board Interpretation No. 48
On July 13, 2006, the Financial Accounting Standards Board (FASB) released FASB
Interpretation No. 48 Accounting for Uncertainty in Income Taxes (FIN 48). FIN
48 provides guidance for how uncertain tax positions should be recognized,
measured, presented and disclosed in the financial statements. FIN 48 requires
the evaluation of tax positions taken or expected to be taken in the course of
preparing the Fund's tax returns to determine whether the tax positions are
"more-likely-than-not" of being sustained by the applicable tax authority. Tax
positions not deemed to meet the more-likely-than-not threshold would be
recorded as a tax benefit or expense in the current year. Adoption of FIN 48 is
required for fiscal years beginning after December 15, 2006 and is to be applied
to all open tax years as of the effective date. At this time, management is
evaluating the implications of FIN 48 and does not expect the adoption of FIN 48
will have a significant impact on the net assets or results of operations of the
Funds.
7. SUBSEQUENT EVENT
Distributions to Common Shareholders
The Fund declared a $.0720 Common share dividend distribution from its net
investment income and net short-term capital gains which was paid on September
1, 2006, to shareholders of record on August 15, 2006.
19
Financial
HIGHLIGHTS
Selected data for a Common share outstanding throughout each period:
<Table>
<Caption>
Investment Operations Less Distributions
--------------------------------------------------------------- -----------------------------
Distributions
from Net Distributions Net
Beginning Investment from Capital Investment Capital
Common Net Income to Gains to Income to Gains to
Share Net Realized/ FundPreferred FundPreferred Common Common
Net Asset Investment Unrealized Share- Share- Share- Share-
Value Income(a) Gain holders+ holders+ Total holders holders Total
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended 7/31:
2006 $ 14.12 $ 1.10 $ .27 $ (.23) $ -- $1.14 $ (.80) $ -- $(.80)
2005(b) 14.33 .15 .02 (.03) -- .14 (.20) -- (.20)
- -----------------------------------------------------------------------------------------------------------------------------------
<Caption>
Offering
Costs, Fund
Structuring
Fee and Ending
FundPreferred Common
Share Share Ending
Underwriting Net Asset Market
Discounts Value Value
- --------------------- -----------------------------------
Year Ended 7/31:
2006 $ -- $ 14.46 $ 13.18
2005(b) (.15) 14.12 13.42
- ---------------------
</Table>
* Annualized.
** Total Return on Market Value is the combination of changes in the market
price per share and the effect of reinvested dividend income and
reinvested capital gains distributions, if any, at the average price paid
per share at the time of reinvestment. Total Return on Common Share Net
Asset Value is the combination of changes in Common share net asset value,
reinvested dividend income at net asset value and reinvested capital gains
distributions at net asset value, if any. Total returns are not
annualized.
*** After custodian fee credit and expense reimbursement.
+ The amounts shown are based on Common share equivalents.
++ Ratios do not reflect the effect of dividend payments to FundPreferred
shareholders; income ratios reflect income earned on assets attributable
to FundPreferred shares.
(a) Per share Net Investment Income is calculated using the average daily
shares method.
(b) For the period March 28, 2005 (commencement of operations) through July
31, 2005.
20
<Table>
<Caption>
Ratios/Supplemental Data
----------------------------------------------------------------------------------------
Total Returns Before Credit/Reimbursement After Credit/Reimbursement***
----------------- ---------------------------- ------------------------------
Ratio of Net Ratio of Net
Based Ratio of Investment Ratio of Investment
on Expenses Income to Expenses Income to
Common Ending to Average Average to Average Average
Based Share Net Assets Net Assets Net Assets Net Assets Net Assets
on Net Applicable Applicable Applicable Applicable Applicable Portfolio
Market Asset to Common to Common to Common to Common to Common Turnover
Value** Value** Shares (000) Shares++ Shares++ Shares++ Shares++ Rate
- -----------------------------------------------------------------------------------------------------------------
4.52% 8.28% $ 200,354 1.45% 7.29% 1.03% 7.71% 38%
(9.24) (.08) 195,645 1.26* 2.88* .90* 3.25* 19
- -----------------------------------------------------------------------------------------------------------------
<Caption>
FundPreferred Shares at End of Period
---------------------------------------
Aggregate Liquidation
Amount and Market Asset
Outstanding Value Coverage
(000) Per Share Per Share
- --- ---------------------------------------
$ 78,000 $ 25,000 $ 89,216
78,000 25,000 87,707
- ---
</Table>
See accompanying notes to financial statements.
21
Board Members
AND OFFICERS
The management of the Funds, including general supervision of the duties
performed for the Funds by the Adviser, is the responsibility of the Board
Members of the Funds. The number of board members of the Fund is currently set
at nine. None of the board members who are not "interested" persons of the Funds
has ever been a director or employee of, or consultant to, Nuveen or its
affiliates. The names and business addresses of the board members and officers
of the Funds, their principal occupations and other affiliations during the past
five years, the number of portfolios each oversees and other directorships they
hold are set forth below.
<Table>
<Caption>
NUMBER OF PORTFOLIOS
PRINCIPAL OCCUPATION(S) IN FUND COMPLEX
NAME, BIRTHDATE POSITION(S) HELD YEAR FIRST ELECTED INCLUDING OTHER DIRECTORSHIPS OVERSEEN BY
AND ADDRESS WITH THE FUNDS OR APPOINTED(2) DURING PAST 5 YEARS BOARD MEMBER
- -------------------------------------------------------------------------------------------------------------------------------
BOARD MEMBER WHO IS AN INTERESTED PERSON OF THE FUNDS:
- -------------------------------------------------------------------------------------------------------------------------------
Timothy R. Chairman of 1994 Chairman (since 1996) and Director 167
Schwertfeger(1) the Board of Nuveen Investments, Inc., Nuveen
3/28/49 and Board Member Investments, LLC, Nuveen Advisory
333 W. Wacker Drive Corp. and Nuveen Institutional
Chicago, IL 60606 Advisory Corp.(3); formerly,
Director (1996-2006) of
Institutional Capital Corporation;
Chairman and Director (since 1997)
of Nuveen Asset Management;
Chairman and Director of
Rittenhouse Asset Management, Inc.
(since 1999); Chairman of Nuveen
Investments Advisers Inc. (since
2002).
BOARD MEMBERS WHO ARE NOT INTERESTED PERSONS OF THE FUNDS:
- -------------------------------------------------------------------------------------------------------------------------------
Robert P. Bremner Lead Independent 1997 Private Investor and Management 167
8/22/40 Board member Consultant.
333 W. Wacker Drive
Chicago, IL 60606
- -------------------------------------------------------------------------------------------------------------------------------
Lawrence H. Brown Board member 1993 Retired (since 1989) as Senior Vice 167
7/29/34 President of The Northern Trust
333 W. Wacker Drive Company; Director (since 2002)
Chicago, IL 60606 Community Advisory Board for
Highland Park and Highwood, United
Way of the North Shore.
- -------------------------------------------------------------------------------------------------------------------------------
Jack B. Evans Board member 1999 President, The Hall-Perrine 167
10/22/48 Foundation, a private philanthropic
333 W. Wacker Drive corporation (since 1996); Director
Chicago, IL 60606 and Vice Chairman, United Fire
Group, a publicly held company;
Adjunct Faculty Member, University
of Iowa; Director, Gazette
Companies; Life Trustee of Coe
College and Iowa College
Foundation; formerly, Director,
Alliant Energy; formerly, Director,
Federal Reserve Bank of Chicago;
formerly, President and Chief
Operating Officer, SCI Financial
Group, Inc., a regional financial
services firm.
- -------------------------------------------------------------------------------------------------------------------------------
William C. Hunter Board member 2004 Dean, Tippie College of Business, 167
3/6/48 University of Iowa (since June
333 W. Wacker Drive 2006); formerly, Dean and
Chicago, IL 60606 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);
Director (since 1997), Credit
Research Center at Georgetown
University; Director (since 2004)
of Xerox Corporation; Director,
SS&C Technologies, Inc. (May 2005-
October 2005).
- -------------------------------------------------------------------------------------------------------------------------------
David J. Kundert Board member 2005 Retired (since 2004) as Chairman, 165
10/28/42 JPMorgan Fleming Asset Management,
333 W. Wacker Drive President and CEO, Banc One
Chicago, IL 60606 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; Board of Regents, Luther
College; member of the Wisconsin
Bar Association; member of Board of
Directors, Friends of Boerner
Botanical Gardens.
</Table>
22
<Table>
<Caption>
NUMBER OF PORTFOLIOS
PRINCIPAL OCCUPATION(S) IN FUND COMPLEX
NAME, BIRTHDATE POSITION(S) HELD YEAR FIRST ELECTED INCLUDING OTHER DIRECTORSHIPS OVERSEEN BY
AND ADDRESS WITH THE FUNDS OR APPOINTED(2) DURING PAST 5 YEARS BOARD MEMBER
- -------------------------------------------------------------------------------------------------------------------------------
BOARD MEMBERS WHO ARE NOT INTERESTED PERSONS OF THE FUNDS (CONTINUED):
- -------------------------------------------------------------------------------------------------------------------------------
William J. Schneider Board member 1997 Chairman of Miller-Valentine 167
9/24/44 Partners Ltd., a real estate
333 W. Wacker Drive investment company; formerly,
Chicago, IL 60606 Senior Partner and Chief Operating
Officer (retired, 2004), of
Miller-Valentine Group; formerly,
Vice President, Miller-Valentine
Realty; Board Member, Chair of the
Finance Committee and member of the
Audit Committee of Premier Health
Partners, the not-for-profit
company of Miami Valley Hospital;
Vice President, Dayton Philharmonic
Orchestra Association; Board
Member, Regional Leaders Forum,
which promotes cooperation on
economic development issues;
Director, Dayton Development
Coalition; formerly, Member,
Community Advisory Board, National
City Bank, Dayton, Ohio and
Business Advisory Council,
Cleveland Federal Reserve Bank.
- -------------------------------------------------------------------------------------------------------------------------------
Judith M. Stockdale Board member 1997 Executive Director, Gaylord and 167
12/29/47 Dorothy Donnelley Foundation (since
333 W. Wacker Drive 1994); prior thereto, Executive
Chicago, IL 60606 Director, Great Lakes Protection
Fund (from 1990 to 1994).
- -------------------------------------------------------------------------------------------------------------------------------
Eugene S. Sunshine Board member 2005 Senior Vice President for Business 167
1/22/50 and Finance, Northwestern
333 W. Wacker Drive University (since 1997); Director
Chicago, IL 60606 (since 2003), Chicago Board Options
Exchange; formerly, Director (2003-
2006), National Mentor Holdings, a
privately-held, national provider
of home and community-based
services; Chairman (since 1997),
Board of Directors, Rubicon, a pure
captive insurance company owned by
Northwestern University; Director
(since 1997), Evanston Chamber of
Commerce and Evanston Inventure, a
business development organization.
<Caption>
NUMBER OF PORTFOLIOS
NAME, BIRTHDATE POSITION(S) HELD YEAR FIRST ELECTED PRINCIPAL OCCUPATION(S) IN FUND COMPLEX
AND ADDRESS WITH THE FUNDS OR APPOINTED(4) DURING PAST 5 YEARS OVERSEEN BY OFFICER
- -------------------------------------------------------------------------------------------------------------------------------
OFFICERS OF THE FUNDS:
- -------------------------------------------------------------------------------------------------------------------------------
Gifford R. Zimmerman Chief 1988 Managing Director (since 2002), 167
9/9/56 Administrative Assistant Secretary and Associate
333 W. Wacker Drive Officer General Counsel, formerly, Vice
Chicago, IL 60606 President and Assistant General
Counsel, of Nuveen Investments,
LLC; Managing Director (2002-2004),
General Counsel (1998-2004) and
Assistant Secretary, formerly, Vice
President of Nuveen Advisory Corp.
and Nuveen Institutional Advisory
Corp.(3); Managing Director (since
2002) and Assistant Secretary and
Associate General Counsel,
formerly, Vice President (since
1997), of Nuveen Asset Management;
Managing Director (since 2004) and
Assistant Secretary (since 1994) of
Nuveen Investments, Inc.; Assistant
Secretary of NWQ Investment
Management Company, LLC. (since
2002); Vice President and Assistant
Secretary of Nuveen Investments
Advisers Inc. (since 2002);
Managing Director, Associate
General Counsel and Assistant
Secretary of Rittenhouse Asset
Management, Inc. and Symphony Asset
Management LLC (since 2003);
Assistant Secretary of Tradewinds
NWQ Global Investors, LLC, (since
2006); Chartered Financial Analyst.
</Table>
23
Board Members
AND OFFICERS (CONTINUED)
<Table>
<Caption>
NUMBER OF PORTFOLIOS
NAME, BIRTHDATE POSITION(S) HELD YEAR FIRST ELECTED PRINCIPAL OCCUPATION(S) IN FUND COMPLEX
AND ADDRESS WITH THE FUNDS OR APPOINTED(4) DURING PAST 5 YEARS OVERSEEN BY OFFICER
- -------------------------------------------------------------------------------------------------------------------------------
OFFICERS OF THE FUND (CONTINUED):
- -------------------------------------------------------------------------------------------------------------------------------
Julia L. Antonatos Vice President 2004 Managing Director (since 2005), 167
9/22/63 formerly Vice President (since
333 W. Wacker Drive 2002); formerly, Assistant Vice
Chicago, IL 60606 President (since 2000) of Nuveen
Investments, LLC; Chartered
Financial Analyst.
- -------------------------------------------------------------------------------------------------------------------------------
Michael T. Atkinson Vice President 2000 Vice President (since 2002), 167
2/3/66 and Assistant formerly, Assistant Vice President
333 W. Wacker Drive Secretary (since 2000) of Nuveen Investments,
Chicago, IL 60606 LLC.
- -------------------------------------------------------------------------------------------------------------------------------
Peter H. D'Arrigo Vice President 1999 Vice President and Treasurer of 167
11/28/67 Nuveen Investments, LLC and of
333 W. Wacker Drive Nuveen Investments, Inc. (since
Chicago, IL 60606 1999); Vice President and Treasurer
of Nuveen Asset Management (since
2002) and of Nuveen Investments
Advisers Inc. (since 2002);
Assistant Treasurer of NWQ
Investment Management Company, LLC.
(since 2002); Vice President and
Treasurer of Nuveen Rittenhouse
Asset Management, Inc. and Symphony
Asset Management LLC (since 2003);
Treasurer, Tradewinds NWQ Global
Investors, LLC (since 2006);
formerly, Vice President and
Treasurer (1999-2004) of Nuveen
Advisory Corp. and Nuveen
Institutional Advisory Corp.(3);
Chartered Financial Analyst.
- -------------------------------------------------------------------------------------------------------------------------------
John N. Desmond Vice President 2005 Vice President, Director of 167
8/24/61 Investment Operations, Nuveen
333 W. Wacker Drive Investments, LLC (since January
Chicago, IL 60606 2005); formerly, Director, Business
Manager, Deutsche Asset Management
(2003- 2004), Director, Business
Development and Transformation,
Deutsche Trust Bank Japan
(2002-2003); previously, Senior
Vice President, Head of Investment
Operations and Systems, Scudder
Investments Japan, (2000-2002),
Senior Vice President, Head of Plan
Administration and Participant
Services, Scudder Investments
(1995-2002).
- -------------------------------------------------------------------------------------------------------------------------------
Jessica R. Droeger Vice President 1998 Vice President (since 2002), 167
9/24/64 and Secretary Assistant Secretary and Assistant
333 W. Wacker Drive General Counsel (since 1998)
Chicago, IL 60606 formerly, Assistant Vice President
(since 1998) of Nuveen Investments,
LLC; Vice President (2002-2004) and
Assistant Secretary (1998-2004)
formerly, Assistant Vice President
of Nuveen Advisory Corp. and Nuveen
Institutional Advisory Corp.(3);
Vice President and Assistant
Secretary (since 2005) of Nuveen
Asset Management.
- -------------------------------------------------------------------------------------------------------------------------------
Lorna C. Ferguson Vice President 1998 Managing Director (since 2004), 167
10/24/45 formerly, Vice President of Nuveen
333 W. Wacker Drive Investments, LLC, Managing Director
Chicago, IL 60606 (2004) formerly, Vice President
(1998-2004) of Nuveen Advisory
Corp. and Nuveen Institutional
Advisory Corp.(3); Managing
Director (since 2005) of Nuveen
Asset Management.
- -------------------------------------------------------------------------------------------------------------------------------
William M. Fitzgerald Vice President 1995 Managing Director (since 2002), 167
3/2/64 333 formerly, Vice President of Nuveen
W. Wacker Drive Investments; Managing Director
Chicago, IL 60606 (1997-2004) of Nuveen Advisory
Corp. and Nuveen Institutional
Advisory Corp.(3); Managing
Director (since 2001) of Nuveen
Asset Management; Vice President
(since 2002) of Nuveen Investments
Advisers Inc.; Chartered Financial
Analyst.
</Table>
24
<Table>
<Caption>
NUMBER OF PORTFOLIOS
NAME, BIRTHDATE POSITION(S) HELD YEAR FIRST ELECTED PRINCIPAL OCCUPATION(S) IN FUND COMPLEX
AND ADDRESS WITH THE FUNDS OR APPOINTED(4) DURING PAST 5 YEARS OVERSEEN BY OFFICER
- -------------------------------------------------------------------------------------------------------------------------------
OFFICERS OF THE FUND (CONTINUED):
- -------------------------------------------------------------------------------------------------------------------------------
Stephen D. Foy Vice President 1998 Vice President (since 1993) and 167
5/31/54 and Controller Funds Controller (since 1998) of
333 W. Wacker Drive Nuveen Investments, LLC; formerly,
Chicago, IL 60606 Vice President and Funds Controller
(1998-2004) of Nuveen Investments,
Inc.; Certified Public Accountant.
- -------------------------------------------------------------------------------------------------------------------------------
David J. Lamb Vice President 2000 Vice President (since 2000) of 167
3/22/63 Nuveen Investments, LLC; Certified
333 W. Wacker Drive Public Accountant.
Chicago, IL 60606
- -------------------------------------------------------------------------------------------------------------------------------
Tina M. Lazar Vice President 2002 Vice President of Nuveen 167
8/27/61 Investments, LLC (since 1999).
333 W. Wacker Drive
Chicago, IL 60606
- -------------------------------------------------------------------------------------------------------------------------------
Larry W. Martin Vice President 1988 Vice President, Assistant Secretary 167
7/27/51 and Assistant and Assistant General Counsel of
333 W. Wacker Drive Secretary Nuveen Investments, LLC; formerly,
Chicago, IL 60606 Vice President and Assistant
Secretary of Nuveen Advisory Corp.
and Nuveen Institutional Advisory
Corp.(3); Vice President (since
2005) and Assistant Secretary of
Nuveen Investments, Inc.; Vice
President (since 2005) and
Assistant Secretary (since 1997) of
Nuveen Asset Management; Vice
President (since 2000), Assistant
Secretary and Assistant General
Counsel (since 1998) of Rittenhouse
Asset Management, Inc.; Vice
President and Assistant Secretary
of Nuveen Investments Advisers Inc.
(since 2002); Assistant Secretary
of NWQ Investment Management
Company, LLC (since 2002), Symphony
Asset Management LLC (since 2003)
and Tradewinds NWQ Global
Investors, LLC (since 2006).
</Table>
(1) Mr. Schwertfeger is an "interested person" of the Funds, as defined in the
Investment Company Act of 1940, because he is an officer and board member of
the Adviser.
(2) Board members serve an indefinite term until his/her successor is elected.
The year first elected or appointed represents the year in which the board
member was first elected or appointed to any fund in the Nuveen Complex.
(3) Nuveen Advisory Corp. and Nuveen Institutional Advisory Corp. were
reorganized into Nuveen Asset Management, effective January 1, 2005.
(4) Officers serve one year terms through July of each year. The year first
elected or appointed represents the year in which the Officer was first
elected or appointed to any fund in the Nuveen Complex.
25
Annual Investment
MANAGEMENT AGREEMENT APPROVAL PROCESS
The Board of Trustees is responsible for overseeing the performance of the
investment adviser to the Fund and determining whether to continue the advisory
arrangements. At a meeting held on May 23-25, 2006 (the "May Meeting"), the
Board of Trustees of the Fund, including the independent Trustees, unanimously
approved the continuance of the Investment Management Agreement between the Fund
and NAM and the Sub-Advisory Agreement between NAM and Spectrum (the
"Sub-Adviser"). NAM and the Sub-Adviser are each a "Fund Adviser."
THE APPROVAL PROCESS
During the course of the year, the Board received a wide variety of materials
relating to the services provided by the Fund Advisers and the performance of
the Fund. To assist the Board in its evaluation of the advisory contract with a
Fund Adviser at the May Meeting, the independent Trustees received extensive
materials in advance of their meeting which outlined, among other things:
- the nature, extent and quality of services provided by the Fund Adviser;
- the organization and business operations of the Fund Adviser, including
the responsibilities of various departments and key personnel;
- the Fund's past performance, the Fund's performance compared to funds of
similar investment objectives compiled by an independent third party and
with recognized and/or customized benchmarks (as appropriate);
- the profitability of the Fund Adviser and certain industry profitability
analyses for unaffiliated advisers;
- the expenses of the Fund Adviser in providing the various services;
- the advisory fees (gross and net management fees) and total expense ratios
of the Fund, including comparisons of such fees and expenses with those of
comparable, unaffiliated funds based on information and data provided by
Lipper (the "Peer Universe") as well as compared to a subset of funds
within the Peer Universe (the "Peer Group") to the Fund (as applicable);
- the advisory fees the Fund Adviser assesses to other types of investment
products or clients;
- the soft dollar practices of the Fund Adviser, if any; and
- from independent legal counsel, a legal memorandum describing, among other
things, the duties of the Trustees under the Investment Company Act of
1940 (the "1940 Act") as well as the general principles of relevant state
law in reviewing and approving advisory contracts; the requirements of the
1940 Act in such matters; an adviser's fiduciary duty with respect to
advisory agreements and compensation; the standards used by courts in
determining whether investment company boards of directors have fulfilled
their duties; and factors to be considered by the Board in voting on
advisory agreements.
At the May Meeting, NAM made a presentation to and responded to questions from
the Board. After the presentations and after reviewing the written materials,
the independent Trustees met privately with their legal counsel to review the
Board's duties in reviewing advisory contracts and consider the renewal of the
advisory contracts. It is with this background that the Trustees considered each
advisory contract (which includes the Sub-Advisory Agreement) with the
respective Fund Adviser. The independent Trustees, in consultation with
independent counsel, reviewed the factors set out in judicial decisions and SEC
directives relating to the renewal of advisory contracts. As outlined in more
detail below, the Trustees considered all factors they believed relevant with
respect to the Fund, including the following: (a) the nature, extent and quality
of the services to be provided by the Fund Adviser; (b) the investment
performance of the Fund and the Fund Adviser; (c) the costs of the services to
be provided and profitability of the Fund Adviser and its affiliates; (d) the
extent to which economies of scale would be realized as the Fund grows; and (e)
whether fee levels reflect these economies of scale for the benefit of Fund
investors.
A. NATURE, EXTENT AND QUALITY OF SERVICES
In reviewing the Fund Advisers, the Trustees considered the nature, extent and
quality of the respective Fund Adviser's services. The Trustees reviewed
materials outlining, among other things, the Fund Adviser's organization and
business; the types of services that the Fund Adviser or its affiliates provide
and are expected to provide to the Fund; the performance record of the Fund (as
described in further detail below); and any initiatives Nuveen has taken for its
fund product line. In connection with their continued service as Trustees, the
Trustees also have a good understanding of each Fund Adviser's organization,
operations and personnel. In this regard, the Trustees are familiar with and
have evaluated the professional experience, qualifications and credentials of
the Fund Adviser's personnel. With respect to the Sub-Adviser, the Trustees also
received and reviewed an evaluation of the Sub-Adviser from NAM. Such evaluation
outlined, among other things, the Sub-Adviser's organizational history, client
base,
26
product mix, investment team and any changes thereto, investment process and any
changes to its investment strategy, the Fund's investment objectives and
performance (as applicable). The Trustees noted that NAM recommended the renewal
of the Sub-Advisory Agreement and considered the basis for such recommendation
and any qualifications in connection therewith. Given the Trustees' experience
with the Fund (including any other Nuveen funds advised by a Fund Adviser) and
each Fund Adviser, the Trustees recognized and considered the quality of their
investment processes in making portfolio management decisions as well as any
refinements or improvements thereto. In this regard, the Trustees considered the
continued quality of the Fund Adviser's investment process in making portfolio
management decisions as well as any additional refinements and improvements
adopted to the portfolio management processes.
In addition to advisory services, the independent Trustees considered the
quality of any administrative or non-advisory services provided. With respect to
the Sub-Adviser, the independent Trustees noted that the Sub-Advisory Agreement
was essentially an agreement for portfolio management services only and the
Sub-Adviser was not expected to supply other significant administrative services
to the Fund.
With respect to NAM, NAM provides the Fund with such administrative and other
services (exclusive of, and in addition to, any such services provided by others
for the Fund) and officers and other personnel as are necessary for the
operations of the Fund. In connection with the review of the Investment
Management Agreement, the Trustees considered the extent and quality of these
other services which include, among other things, providing: product management
(e.g., product positioning, performance benchmarking, risk management); fund
administration (e.g., daily net asset value pricing and reconciliation, tax
reporting, fulfilling regulatory filing requirements); oversight of third party
service providers; administration of board relations (e.g., organizing board
meetings and preparing related materials); compliance (e.g., monitoring
compliance with investment policies and guidelines and regulatory requirements);
and legal support (e.g., helping prepare and file registration statements,
amendments thereto, proxy statements and responding to regulatory requests
and/or inquiries). As the Fund operates in a highly regulated industry and given
the importance of compliance, the Trustees considered, in particular, the
additions of experienced personnel to the compliance teams and the enhancements
to technology and related systems to support the compliance activities for the
Fund (including a new reporting system for quarterly portfolio holdings). In
addition to the above, because the Fund utilizes a Sub-Adviser, the Trustees
also considered NAM's ability and procedures to monitor the Sub-Adviser's
performance, business practices and compliance policies and procedures. In this
regard, the Trustees noted the enhancements in the investment oversight process,
including increased site visits and departments participating in investment
oversight.
In addition to the foregoing, the Trustees also noted the additional services
that the Fund Adviser or its affiliates provide to closed-end funds, including,
in particular, secondary market support activities. The Trustees recognized
Nuveen's continued commitment to supporting the secondary market for the common
shares of its closed-end funds through a variety of initiatives designed to
raise investor and analyst awareness and understanding of closed-end funds.
These efforts include providing advertising and other media relations programs,
continued contact with analysts, maintaining and enhancing its website for
closed-end funds, and targeted advisor communication programs. With respect to
Funds that utilize leverage through the issuance of preferred shares, the
Trustees noted Nuveen's continued support for the preferred shares by
maintaining, among other things, an in-house preferred trading desk; designating
a product manager whose responsibilities include creating and disseminating
product information and managing relations in connection with the preferred
share auction; and maintaining systems necessary to test compliance with rating
agency requirements.
Based on their review, the Trustees found that, overall, the nature, extent and
quality of services provided (and expected to be provided) to the Fund under the
Investment Management Agreement or Sub-Advisory Agreement, as applicable, were
of a high level and were satisfactory.
B. THE INVESTMENT PERFORMANCE OF THE FUND AND FUND ADVISERS
The Board considered the investment performance for the Fund, including the
Fund's historic performance as well as its performance compared to funds with
similar investment objectives identified by an independent third party (the
"Performance Peer Group") and recognized and/or customized benchmarks (as
applicable). In evaluating the performance information, in certain instances,
the Trustees noted that the closest Performance Peer Group for the Fund still
may not adequately reflect the Fund's investment objectives, strategies and
portfolio duration, thereby limiting the usefulness of the comparisons of the
Fund's performance with that of the Performance Peer Group (such as, the Nuveen
Diversified Dividend and Income Fund, Nuveen Preferred and Convertible Income
Fund, Nuveen Preferred and Convertible Income Fund 2, Nuveen Tax-Advantaged
Floating Rate Fund, and Nuveen Real Estate Income Fund).
In reviewing performance, the Trustees reviewed performance information
including, among other things, total return information compared with the Fund's
Performance Peer Group as well as recognized and/or customized benchmarks (as
appropriate) for the one-, three- and five-year periods (as applicable) ending
December 31, 2005. This information supplements the Fund performance information
provided to the Board at each of their quarterly meetings. Based on their
review, the Trustees determined that the Fund's absolute and relative investment
performance over time had been satisfactory.
C. FEES, EXPENSES AND PROFITABILITY
1. FEES AND EXPENSES
In evaluating the management fees and expenses of the Fund, the Board
reviewed, among other things, the Fund's advisory fees (net and gross
management fees) and total expense ratios (before and after expense
reimbursements and/or waivers) in absolute terms as well as comparisons to
the gross management fees (before waivers), net management fees (after
waivers) and total expense ratios (before and after waivers) of comparable
funds in the Peer Universe and the Peer Group. The Trustees reviewed data
regarding the construction of Peer Groups as well as the methods of
measurement for the fee and expense
27
Annual Investment
MANAGEMENT AGREEMENT APPROVAL PROCESS (continued)
analysis and the performance analysis. In certain cases, due to the small
number of peers in the Peer Universe, the Peer Universe and the Peer Group
may be the same. Further, the Trustees recognized that in certain cases the
closest Peer Universe and/or Peer Group may not adequately reflect the Fund's
investment objectives and strategies limiting the usefulness of comparisons.
In reviewing comparisons, the Trustees also considered the size of the Peer
Universe and/or Peer Group, the composition of the Peer Group (including
differences in the use of leverage) as well as differing levels of fee
waivers and/or expense reimbursements. In this regard, the Trustees
considered the fund-level and complex-wide breakpoint schedules (described in
further detail below) and any fee waivers and reimbursements provided by
Nuveen (applicable, in particular, for certain funds launched since 1999).
Based on their review of the fee and expense information provided, the
Trustees determined that the Fund's net total expense ratio was within an
acceptable range compared to peers.
2. COMPARISONS WITH THE FEES OF OTHER CLIENTS
The Trustees further reviewed data comparing the advisory fees of NAM with
fees NAM charges to other clients (such as separate managed accounts and
funds that are not offered by Nuveen Investments but are sub-advised by one
of Nuveen's investment management teams). In general, the advisory fees
charged for separate accounts are somewhat lower than the advisory fees
assessed to the Fund. The Trustees recognized that the differences in fees
are attributable to a variety of factors, including the differences in
services provided, product distribution, portfolio investment policies,
investor profiles, account sizes and regulatory requirements. The Trustees
noted, in particular, that the range of services provided to the Fund is more
extensive than that provided to managed separate accounts. As described in
further detail above, such additional services include, but are not limited
to, providing: product management, fund administration, oversight of third
party service providers, administration of board relations, and legal
support. Funds further operate in a highly regulated industry requiring
extensive compliance functions compared to the other investment products. In
addition to the costs of the additional services, administrative costs may
also be greater for funds as the average account size for separate accounts
is notably larger than the retail accounts of funds. Given the differences in
the product structures, particularly the extensive services provided to
closed-end funds, the Trustees believe such facts justify the different
levels of fees.
In considering the advisory fees of the Sub-Adviser, the Trustees also
considered the pricing schedule that the Sub-Adviser charges for similar
investment management services for other sponsors or clients.
3. PROFITABILITY OF FUND ADVISERS
In conjunction with its review of fees, the Trustees also considered the
profitability of Nuveen Investments for advisory activities (which
incorporated Nuveen's wholly-owned affiliated sub-advisers). The Trustees
reviewed data comparing Nuveen's profitability with other fund sponsors
prepared by three independent third party service providers as well as
comparisons of the revenues, expenses and profits margins of various
unaffiliated management firms with similar amounts of assets under management
prepared by Nuveen. The Trustees further reviewed the 2005 Annual Report for
Nuveen Investments. In considering profitability, the Trustees recognized the
inherent limitations in determining profitability as well as the difficulties
in comparing the profitability of other unaffiliated advisers. Profitability
may be affected by numerous factors, including the methodology for allocating
expenses, the adviser's business mix, the types of funds managed, the
adviser's capital structure and cost of capital. Further, individual fund or
product line profitability of other sponsors is generally not publicly
available. Accordingly, the profitability information that is publicly
available from various investment advisory or management firms may not be
representative of the industry.
Notwithstanding the foregoing, in reviewing profitability, the Trustees reviewed
Nuveen's methodology and assumptions for allocating expenses across product
lines to determine profitability. In this regard, the methods of allocation used
appeared reasonable. The Trustees also, to the extent available, compared
Nuveen's profitability margins (including pre- and post-marketing profit
margins) with the profitability of various unaffiliated management firms. The
Trustees noted that Nuveen's profitability is enhanced due to its efficient
internal business model. The Trustees also recognized that while a number of
factors affect profitability, Nuveen's profitability may change as fee waivers
and/or expense reimbursement commitments of Nuveen to various funds in the
Nuveen complex expire. To keep apprised of profitability and developments that
may affect profitability, the Trustees have requested profitability analysis be
provided periodically during the year. The Trustees also considered the
Sub-Adviser's revenues from serving as a Sub-Adviser to the Fund, expenses
(including the basis for allocating expenses) and profitability margins (pre-
and post-tax).
Based on their review, the Trustees were satisfied that the respective Fund
Adviser's level of profitability was reasonable in light of the services
provided.
28
In evaluating the reasonableness of the compensation, the Trustees also
considered any other revenues paid to a Fund Adviser as well as any indirect
benefits (such as soft dollar arrangements, if any) the Fund Adviser and its
affiliates are expected to receive that are directly attributable to their
management of the Fund, if any. See Section E below for additional information.
Based on their review of the overall fee arrangements of the Fund, the Trustees
determined that the advisory fees and expenses of the Fund were reasonable.
D. ECONOMIES OF SCALE AND WHETHER FEE LEVELS REFLECT THESE ECONOMIES OF SCALE
With respect to economies of scale, the Trustees recognized the potential
benefits resulting from the costs of a fund being spread over a larger asset
base as a fund grows. To help ensure the shareholders share in these benefits,
the Trustees have reviewed and considered the breakpoints in the advisory fee
schedules that reduce advisory fees as the Fund's assets grow. In addition to
advisory fee breakpoints as assets in the Fund rise, after lengthy discussions
with management, the Board also approved a complex-wide fee arrangement that was
introduced on August 1, 2004. Pursuant to the complex-wide fee arrangement, the
fees of the funds in the Nuveen complex, including the Fund, are reduced as the
assets in the fund complex reach certain levels. In evaluating the complex-wide
fee arrangement, the Trustees considered, among other things, the historic and
expected fee savings to shareholders as assets grow, the amount of fee
reductions at various asset levels, and that the arrangement would extend to all
funds in the Nuveen complex. The Trustees noted that 2005 was the first full
year to reflect the fee reductions from the complex wide fee arrangement. The
Trustees also considered the impact, if any, the complex-wide fee arrangement
may have on the level of services provided. Based on their review, the Trustees
concluded that the breakpoint schedule and complex-wide fee arrangement
currently was acceptable and desirable in providing benefits from economies of
scale to shareholders.
E. INDIRECT BENEFITS
In evaluating fees, the Trustees also considered any indirect benefits or
profits the Fund Adviser or its affiliates may receive as a result of its
relationship with the Fund. In this regard, the Trustees considered revenues
received by affiliates of the Fund Adviser for serving as agent at Nuveen's
preferred trading desk and for serving as a co-manager in the initial public
offering of new closed-end exchange traded funds.
In addition to the above, the Trustees considered whether the Fund Adviser
received any benefits from soft dollar arrangements. With respect to NAM, the
Trustees noted that NAM does not currently have any soft dollar arrangements and
does not pay excess brokerage commissions (or spreads on principal transactions)
in order to receive research services; however, NAM may from time to time
receive and have access to research generally provided to institutional clients.
The Trustees also considered the soft dollar arrangements, if any, of the
Sub-Adviser. With respect to Spectrum, such Sub-Adviser does not currently use
soft dollar arrangements.
The Trustees did not identify any single factor discussed previously as
all-important or controlling. The Trustees, including a majority of independent
Trustees, concluded that the terms of the Investment Management Agreement and
Sub-Advisory Agreement were fair and reasonable, that the respective Fund
Adviser's fees are reasonable in light of the services provided to the Fund, and
that the renewal of the Investment Management Agreement and Sub-Advisory
Agreement should be approved.
29
Reinvest Automatically
EASILY AND CONVENIENTLY
NUVEEN EXCHANGE-TRADED CLOSED-END FUNDS
DIVIDEND REINVESTMENT PLAN
Your Nuveen Exchange-Traded Closed-End Fund allows you to conveniently reinvest
dividends and/or capital gains distributions in additional fund shares
By choosing to reinvest, you'll be able to invest money regularly and
automatically, and watch your investment grow through the power of compounding.
It is important to note that an automatic reinvestment plan does not ensure a
profit, nor does it protect you against loss in a declining market.
EASY AND CONVENIENT
To make recordkeeping easy and convenient, each month you'll receive a statement
showing your total dividends and distributions, the date of investment, the
shares acquired and the price per share, and the total number of shares you own.
HOW SHARES ARE PURCHASED
NUVEEN MAKES REINVESTING EASY. A PHONE CALL IS ALL IT TAKES TO
SET UP YOUR REINVESTMENT ACCOUNT.
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. Dividends and distributions received to purchase
shares in the open market will normally be invested shortly after the dividend
payment date. No interest will be paid on dividends and distributions awaiting
reinvestment. Because the market price of the shares may increase before
purchases are completed, the average purchase price per share may exceed the
market price at the time of valuation, resulting in the acquisition of fewer
shares than if the dividend or distribution had been paid in shares issued by
the Fund. A pro rata portion of any applicable brokerage commissions on open
market purchases will be paid by Plan participants. These commissions usually
will be lower than those charged on individual transactions.
FLEXIBLE
You may change your distribution option or withdraw from the Plan at any time,
should your needs or situation change. Should you withdraw, you can receive a
certificate for all whole shares credited to your reinvestment account and cash
payment for fractional shares, or cash payment for all reinvestment account
shares, less brokerage commissions and a $2.50 service fee.
You can reinvest whether your shares are registered in your name, or in the name
of a brokerage firm, bank, or other nominee. Ask your investment advisor if his
or her firm will participate on your behalf. Participants whose shares are
registered in the name of one firm may not be able to transfer the shares to
another firm and continue to participate in the Plan.
The Fund reserves the right to amend or terminate the Plan at any time. Although
the Fund reserves the right to amend the Plan to include a service charge
payable by the participants, there is no direct service charge to participants
in the Plan at this time.
CALL TODAY TO START REINVESTING DIVIDENDS AND/OR DISTRIBUTIONS
For more information on the Nuveen Automatic Reinvestment Plan or to enroll in
or withdraw from the Plan, speak with your financial advisor or call us at (800)
257-8787.
30
AUTOMATIC DIVIDEND
REINVESTMENT PLAN
NOTICE OF AMENDMENT TO THE TERMS AND CONDITIONS
The Fund is amending the terms and conditions of its Automatic Dividend
Reinvestment Plan (the "Plan") as further described below effective with the
close of business on December 1, 2006. THESE CHANGES ARE INTENDED TO ENABLE PLAN
PARTICIPANTS UNDER CERTAIN CIRCUMSTANCES TO REINVEST FUND DISTRIBUTIONS AT A
LOWER AGGREGATE COST THAN IS POSSIBLE UNDER THE EXISTING PLAN. Shareholders who
do not wish to continue as participants under the amended Plan may withdraw from
the Plan by notifying the Plan Agent prior to the effective date of the
amendments. Participants should refer to their Plan document for notification
instructions, or may simply call Nuveen at (800) 257-8787.
Fund shareholders who elect to participate in the Plan are able to have Fund
distributions consisting of income dividends, realized capital gains and returns
of capital automatically reinvested in additional Fund shares. Under the Plan's
existing terms, the Plan Agent purchases Fund shares in the open market if the
Fund's shares are trading at a discount to their net asset value on the payable
date for the distribution. If the Fund's shares are trading at or above their
net asset value on the payable date for the distribution, the Plan Agent
purchases newly-issued Fund shares directly from the Fund at a price equal to
the greater of the shares' net asset value or 95% of the shares' market value.
Under the Plan's amended terms, 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. This change will permit Plan
participants under these circumstances to reinvest Fund distributions at a lower
aggregate cost than is possible under the existing Plan.
31
Notes
32
Notes
33
Notes
34
OTHER USEFUL
INFORMATION
QUARTERLY PORTFOLIO OF INVESTMENTS AND PROXY VOTING INFORMATION
The Fund's (i) quarterly portfolio of investments, (ii) information regarding
how the Funds voted proxies relating to portfolio securities held during the
most recent 12-month period ended June 30, 2006, and (iii) a description of the
policies and procedures that the Fund used to determine how to vote proxies
relating to portfolio securities are available without charge, upon request, by
calling Nuveen Investments toll-free at (800) 257-8787 or on Nuveen's website at
www.nuveen.com.
You may also obtain this and other Fund information directly from the Securities
and Exchange Commission ("SEC"). The SEC may charge a copying fee for this
information. Visit the SEC on-line at http://www.sec.gov or in person at the
SEC's Public Reference Room in Washington, D.C. Call the SEC at 1-202-942-8090
for room hours and operation. You may also request Fund information by sending
an e-mail request to publicinfo@sec.gov or by writing to the SEC's Public
Reference Section at 450 Fifth Street NW, Washington, D.C. 20549.
CEO CERTIFICATION DISCLOSURE
The Fund's Chief Executive Officer has submitted to the New York Stock Exchange
the annual CEO certification as required by Section 303A.12(a) of the NYSE
Listed Company Manual.
The Fund has filed with the Securities and Exchange Commission the certification
of its Chief Executive Officer and Chief Financial Officer required by Section
302 of the Sarbanes-Oxley Act.
DISTRIBUTION INFORMATION
The Fund designates 90% of dividends declared from net investment income as
dividends qualifying for the 70% dividends received deduction for corporations
and 100% as qualified dividend income for individuals under the Jobs and Growth
Tax Relief Reconciliation Act of 2003.
GLOSSARY OF TERMS USED IN THIS REPORT
AVERAGE ANNUAL TOTAL RETURN: This is a commonly used method to express an
investment's performance over a particular, usually multi-year time period. It
expresses the return that would have been necessary each year to equal the
investment's actual cumulative performance (including change in NAV or market
price and reinvested dividends and capital gains distributions, if any) over the
time period being considered.
MARKET YIELD: Market yield is based on the Fund's current annualized monthly
distribution divided by the Fund's current market price. The Fund's monthly
distributions to its shareholders may be comprised of ordinary income, net
realized capital gains and, if at the end of the calendar year the Funds'
cumulative net ordinary income and net realized gains are less than the amount
of the Fund's distributions, a tax return of capital.
NET ASSET VALUE (NAV): A Fund's common share NAV per share is calculated by
subtracting the liabilities of the Fund (including any MuniPreferred shares
issued in order to leverage the Fund) from its total assets and then dividing
the remainder by the number of shares outstanding. Fund NAVs are calculated at
the end of each business day.
BOARD OF TRUSTEES
Robert P. Bremner
Lawrence H. Brown
Jack B. Evans
William C. Hunter
David J. Kundert
William J. Schneider
Timothy R. Schwertfeger
Judith M. Stockdale
Eugene S. Sunshine
FUND MANAGER
Nuveen Asset Management
333 West Wacker Drive
Chicago, IL 60606
CUSTODIAN
State Street Bank & Trust Company
Boston, MA
TRANSFER AGENT AND
SHAREHOLDER SERVICES
State Street Bank & Trust Company
Nuveen Funds
P.O. Box 43071
Providence, RI 02940-3071
(800) 257-8787
LEGAL COUNSEL
Chapman and Cutler LLP
Chicago, IL
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Ernst & Young LLP
Chicago, IL
35
(back cover photo)
NUVEEN INVESTMENTS:
SERVING INVESTORS
FOR GENERATIONS
Since 1898, financial advisors and their clients have relied on Nuveen
Investments to provide dependable investment solutions. For the past
century, Nuveen Investments has adhered to the belief that the best
approach to investing is to apply conservative risk-management principles
to help minimize volatility.
Building on this tradition, we today offer a range of high quality equity
and fixed-income solutions that are integral to a well-diversified core
portfolio. Our clients have come to appreciate this diversity, as well as
our continued adherence to proven, long-term investing principles.
WE OFFER MANY DIFFERENT INVESTING SOLUTIONS FOR OUR CLIENTS' DIFFERENT
NEEDS.
Managing more than $149 billion in assets, Nuveen Investments offers
access to a number of different asset classes and investing solutions
through a variety of products. Nuveen Investments markets its
capabilities under six distinct brands: Nuveen, a leader in fixed-income
investments; NWQ, a leader in value-style equities; Rittenhouse, a leader
in growth-style equities; Symphony, a leading institutional manager of
market-neutral alternative investment portfolios; Santa Barbara, a leader
in growth equities; and Tradewinds NWQ, a leader in global equities.
FIND OUT HOW WE CAN HELP YOU REACH YOUR FINANCIAL GOALS.
To learn more about the products and services Nuveen Investments offers,
talk to your financial advisor, or call us at (800) 257-8787. Please read
the information provided carefully before you invest.
Be sure to obtain a prospectus, where applicable. Investors should
consider the investment objective and policies, risk considerations,
charges and expenses of the Fund carefully before investing. The
prospectus contains this and other information relevant to an investment
in the Fund. For a prospectus, please contact your securities
representative or Nuveen Investments, 333 W. Wacker Dr., Chicago, IL
60606. Please read the prospectus carefully before you invest or send
money.
- Share prices
- Fund details
- Daily financial news
- Investor education
- Interactive planning tools
LEARN MORE
ABOUT NUVEEN FUNDS AT
WWW.NUVEEN.COM/CEF
EAN-D-0706D
NUVEEN LOGO
ITEM 2. CODE OF ETHICS.
As of the end of the period covered by this report, the registrant has adopted a
code of ethics that applies to the registrant's principal executive officer,
principal financial officer, principal accounting officer or controller, or
persons performing similar functions. [There were no amendments to or waivers
from the Code during the period covered by this report.] The registrant has
posted the code of ethics on its website at www.nuveen.com/etf. (To view the
code, click on the Investor Resources drop down menu box, click on Fund
Governance and then click on Code of Conduct.)
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The registrant's Board of Directors or Trustees determined that the registrant
has at least one "audit committee financial expert" (as defined in Item 3 of
Form N-CSR) serving on its Audit Committee. The registrant's audit committee
financial expert is Jack B. Evans, Chairman of the Audit Committee, who is
"independent" for purposes of Item 3 of Form N-CSR.
Mr. Evans was formerly President and Chief Operating Officer of SCI Financial
Group, Inc., a full service registered broker-dealer and registered investment
adviser ("SCI"). As part of his role as President and Chief Operating Officer,
Mr. Evans actively supervised the Chief Financial Officer (the "CFO") and
actively supervised the CFO's preparation of financial statements and other
filings with various regulatory authorities. In such capacity, Mr. Evans was
actively involved in the preparation of SCI's financial statements and the
resolution of issues raised in connection therewith. Mr. Evans has also served
on the audit committee of various reporting companies. At such companies, Mr.
Evans was involved in the oversight of audits, audit plans, and the preparation
of financial statements. Mr. Evans also formerly chaired the audit committee of
the Federal Reserve Bank of Chicago.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Nuveen Tax-Advantage Floating Rate Fund
The following tables show the amount of fees that Ernst & Young LLP, the Fund's
auditor, billed to the Fund during the Fund's last two full fiscal years. For
engagements with Ernst & Young LLP the Audit Committee approved in advance all
audit services and non-audit services that Ernst & Young LLP provided to the
Fund, except for those non-audit services that were subject to the pre-approval
exception under Rule 2-01 of Regulation S-X (the "pre-approval exception"). The
pre-approval exception for services provided directly to the Fund waives the
pre-approval requirement for services other than audit, review or attest
services if: (A) the aggregate amount of all such services provided constitutes
no more than 5% of the total amount of revenues paid by the Fund to its
accountant during the fiscal year in which the services are provided; (B) the
Fund did not recognize the services as non-audit services at the time of the
engagement; and (C) the services are promptly brought to the Audit Committee's
attention, and the Committee (or its delegate) approves the services before the
audit is completed.
The Audit Committee has delegated certain pre-approval responsibilities to its
Chairman (or, in his absence, any other member of the Audit Committee).
SERVICES THAT THE FUND'S AUDITOR BILLED TO THE FUND
<Table>
<Caption>
AUDIT FEES BILLED AUDIT-RELATED FEES TAX FEES ALL OTHER FEES
FISCAL YEAR ENDED TO FUND (1) BILLED TO FUND (2) BILLED TO FUND (3) BILLED TO FUND (4)
==============================================================================================================================
July 31, 2006 $ 21,500 $ 0 $ 800 $ 1,550
- ------------------------------------------------------------------------------------------------------------------------------
Percentage approved 0% 0% 0% 0%
pursuant to
pre-approval
exception
- ------------------------------------------------------------------------------------------------------------------------------
July 31, 2005 $ 37,000 $ 0 $ 0 $ 0
- ------------------------------------------------------------------------------------------------------------------------------
Percentage approved 0% 0% 0% 0%
pursuant to
pre-approval
exception
- ------------------------------------------------------------------------------------------------------------------------------
</Table>
(1) "Audit Fees" are the aggregate fees billed for professional services for the
audit of the Fund's annual financial statements and services provided in
connection with statutory and regulatory filings or engagements.
(2) "Audit Related Fees" are the aggregate fees billed for assurance and related
services reasonably related to the performance of the audit or review of
financial statements and are not reported under "Audit Fees".
(3) "Tax Fees" are the aggregate fees billed for professional services for tax
advice, tax compliance, and tax planning.
(4) "All Other Fees" are the aggregate fees billed for products and services
other than "Audit Fees", "Audit Related Fees", and "Tax Fees".
SERVICES THAT THE FUND'S AUDITOR BILLED TO THE
ADVISER AND AFFILIATED FUND SERVICE PROVIDERS
The following tables show the amount of fees billed by Ernst & Young LLP to
Nuveen Asset Management ("NAM" or the "Adviser"), and any entity controlling,
controlled by or under common control with NAM ("Control Affiliate") that
provides ongoing services to the Fund ("Affiliated Fund Service Provider"), for
engagements directly related to the Fund's operations and financial reporting,
during the Fund's last two full fiscal years.
The tables also show the percentage of fees subject to the pre-approval
exception. The pre-approval exception for services provided to the Adviser and
any Affiliated Fund Service Provider (other than audit, review or attest
services) waives the pre-approval requirement if: (A) the aggregate amount of
all such services provided constitutes no more than 5% of the total amount of
revenues paid to Ernst & Young LLP by the Fund, the Adviser and Affiliated Fund
Service Providers during the fiscal year in which the services are provided that
would have to be pre-approved by the Audit Committee; (B) the Fund did not
recognize the services as non-audit services at the time of the engagement; and
(C) the services are promptly brought to the Audit Committee's attention, and
the Committee (or its delegate) approves the services before the Fund's audit is
completed.
<Table>
<Caption>
FISCAL YEAR ENDED AUDIT-RELATED FEES TAX FEES BILLED TO ALL OTHER FEES
BILLED TO ADVISER AND ADVISER AND BILLED TO ADVISER
AFFILIATED FUND AFFILIATED FUND AND AFFILIATED FUND
SERVICE PROVIDERS SERVICE PROVIDERS (1) SERVICE PROVIDERS
=============================================================================================================================
July 31, 2006 $ 0 $ 4,950 $ 0
- -----------------------------------------------------------------------------------------------------------------------------
Percentage approved 0% 0% 0%
pursuant to
pre-approval
exception
- -----------------------------------------------------------------------------------------------------------------------------
July 31, 2005 $ 0 $ 0 $ 0
- -----------------------------------------------------------------------------------------------------------------------------
Percentage approved 0% 0% 0%
pursuant to
pre-approval
exception
- -----------------------------------------------------------------------------------------------------------------------------
</Table>
(1) The amounts reported for the Fund under the column heading "Tax Fees"
represents amounts billed to the Adviser exclusively for the preparation for the
Fund's tax return, the cost of which is borne by the Adviser. In the aggregate,
for all Nuveen funds for which Ernst & Young LLP serves as independent
registered public accounting firm, these fees amounted to $275,000 in 2006 and
$282,575 in 2005.
NON-AUDIT SERVICES
The following table shows the amount of fees that Ernst & Young LLP billed
during the Fund's last two full fiscal years for non-audit services. The Audit
Committee is required to pre-approve non-audit services that Ernst & Young LLP
provides to the Adviser and any Affiliated Fund Services Provider, if the
engagement related directly to the Fund's operations and financial reporting
(except for those subject to the de minimis exception described above). The
Audit Committee requested and received information from Ernst & Young LLP about
any non-audit services that Ernst & Young LLP rendered during the Fund's last
fiscal year to the Adviser and any Affiliated Fund Service Provider. The
Committee considered this information in evaluating Ernst & Young LLP's
independence.
<Table>
<Caption>
FISCAL YEAR ENDED TOTAL NON-AUDIT FEES
BILLED TO ADVISER AND
AFFILIATED FUND SERVICE TOTAL NON-AUDIT FEES
PROVIDERS (ENGAGEMENTS BILLED TO ADVISER AND
RELATED DIRECTLY TO THE AFFILIATED FUND SERVICE
TOTAL NON-AUDIT FEES OPERATIONS AND FINANCIAL PROVIDERS (ALL OTHER
BILLED TO FUND REPORTING OF THE FUND) ENGAGEMENTS) TOTAL
================================================================================================================================
July 31, 2006 $ 2,350 $ 4,950 $ 0 $ 7,300
July 31, 2005 $ 0 $ 0 $ 0 $ 0
</Table>
"Non-Audit Fees billed to Adviser" for both fiscal year ends represent "Tax
Fees" billed to Adviser in their respective amounts from the previous table.
Audit Committee Pre-Approval Policies and Procedures. Generally, the Audit
Committee must approve (i) all non-audit services to be performed for the Fund
by the Fund's independent accountants and (ii) all audit and non-audit services
to be performed by the Fund's independent accountants for the Affiliated Fund
Service Providers with respect to operations and financial reporting of the
Fund. Regarding tax and research projects conducted by the independent
accountants for the Fund and Affiliated Fund Service Providers (with respect to
operations and financial reports of the Fund) such engagements will be (i)
pre-approved by the Audit Committee if they are expected to be for amounts
greater than $10,000; (ii) reported to the Audit Committee chairman for his
verbal approval prior to engagement if they are expected to be for amounts under
$10,000 but greater than $5,000; and (iii) reported to the Audit Committee at
the next Audit Committee meeting if they are expected to be for an amount under
$5,000.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
The registrant's Board of Directors or Trustees has a separately designated
Audit Committee established in accordance with Section 3(a)(58)(A) of the
Securities Exchange Act of 1934, as amended (15 U.S.C. 78c(a)(58)(A)). The
members of the audit committee are Robert P. Bremner, Lawrence H. Brown, Jack B.
Evans, William J. Schneider and Eugene S. Sunshine.
ITEM 6. SCHEDULE OF INVESTMENTS.
See Portfolio of Investments in Item 1.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The Adviser has engaged Spectrum Asset Management, Inc. ("Spectrum" or
"Sub-Adviser") as Sub-Adviser to provide discretionary investment advisory
services. As part of these services, the Adviser has also delegated to the
Sub-Adviser the full responsibility for proxy voting and related duties in
accordance with the Sub-Adviser's policy and procedures. The Adviser
periodically will monitor the Sub-Adviser's voting to ensure that they are
carrying out their duties. The Sub-Adviser's proxy voting policies and
procedures are summarized as follows:
Spectrum has adopted a Policy on Proxy Voting for Investment Advisory Clients
(the "Voting Policy"), which provides that Spectrum aims to ensure that, when
delegated proxy voting authority by a client, Spectrum acts (1) solely in the
interest of the client in providing for ultimate long-term stockholder value,
and (2) without undue influence from individuals or groups who may have an
economic interest in the outcome of a proxy vote. Spectrum relies on the
custodian bank to deliver proxies to Spectrum for voting.
Spectrum has selected Institutional Shareholder Services, Inc. ("ISS") to assist
with Spectrum's proxy voting responsibilities. Spectrum generally follows ISS
standard proxy voting guidelines which embody the positions and factors Spectrum
considers important in casting proxy votes. In connection with each proxy vote,
ISS prepares a written analysis and recommendation based on its guidelines. In
order to avoid any conflict of interest for ISS, the CCO will require ISS to
deliver additional information or certify that ISS has adopted policies and
procedures to detect and mitigate such conflicts of interest in issuing voting
recommendations. Spectrum also may obtain voting recommendations from two proxy
voting services as an additional check on the independence of ISS' voting
recommendations.
Spectrum may, on any particular proxy vote, diverge from ISS' guidelines or
recommendations. In such a case, Spectrum's Voting Policy requires that: (i) the
requesting party document the reason for the request; (ii) the approval of the
Chief Investment Officer; (iii) notification to appropriate compliance
personnel; (iv) a determination that the decision is not influenced by any
conflict of interest; and (v) a written record of the process.
When Spectrum determines not to follow ISS' guidelines or recommendations,
Spectrum classifies proxy voting issues into three broad categories: (1) Routine
Administrative Items; (2) Special Interest Issues; and (3) Issues having the
Potential for Significant Economic Impact, and casts proxy votes in accordance
with the philosophy and decision guidelines developed for that category in the
Voting Policy.
- Routine Administrative Items. Spectrum is willing to defer to
management on matters of a routine administrative nature. Examples of
issues on which Spectrum will normally defer to management's
recommendation include selection of auditors, increasing the
authorized number of common shares and the election of unopposed
directors.
- Special Interest Issues. In general, Spectrum will abstain from voting
on shareholder social, political, environmental proposals because
their long-term impact on share value cannot be calculated with any
reasonable degree of confidence.
- Issues Having the Potential for Significant Economic Impact. Spectrum
is not willing to defer to management on proposals which have the
potential for major economic impact on the corporation and value of
its shares and believes such issues should be carefully analyzed and
decided by shareholders. Examples of such issues are classification of
board of directors' cumulative voting and supermajority provisions,
defensive strategies (e.g., greenmail prevention), business
combinations and restructurings and executive and director
compensation.
Conflicts of Interest. There may be a material conflict of interest when
Spectrum votes, on behalf of a client, a proxy that is solicited by an
affiliated person of Spectrum or another Spectrum client. To avoid such
conflicts, Spectrum has established procedures under its Voting Policy to seek
to ensure that voting decisions are based on a client's best interests and are
not the product of a material conflict. In addition to employee monitoring for
potential conflicts, the CCO reviews Spectrum's and its affiliates' material
business relationships and personal and financial relationships of senior
personnel of Spectrum and its affiliates to monitor for conflicts of interest.
If a conflict of interest is identified, Spectrum considers both financial and
non-financial materiality to determine if a conflict of interest is material. If
a material conflict of interest is found to exist, the CCO discloses the
conflict to affected clients and obtains consent from each client in the manner
in which Spectrum proposed to vote.
Spectrum clients can obtain a copy of the Voting Policy or information on how
Spectrum voted their proxies by calling Spectrum's Compliance Department at
(203) 322-0189.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
The Adviser has engaged Spectrum Asset Management, Inc. (the "Sub-Adviser") as
sub-adviser to provide discretionary investment advisory services. The
following section provides information on the portfolio managers of the
Sub-Adviser.
A. PORTFOLIO MANAGER BIOGRAPHIES:
MARK A. LIEB - Mr. Lieb is Chief Financial Officer and is responsible for
business development. Prior to founding Spectrum in 1987, Mr. Lieb was a
Founder, Director and Partner of DBL Preferred Management, Inc., a wholly owned
corporate cash management subsidiary of Drexel Burnham Lambert, Inc. Mr. Lieb
was instrumental in the formation and development of all aspects of DBL
Preferred Management, Inc., including the daily management of preferred stock
portfolios for institutional clients, hedging strategies, and marketing
strategies. Mr. Lieb's prior employment included the development of the
preferred stock trading desk at Mosley Hallgarten & Estabrook. BA Economics,
Central Connecticut State College; MBA Finance, University of Hartford.
L. PHILLIP JACOBY, IV - Managing Director and Portfolio Manager. Mr. Jacoby
joined Spectrum in 1995. From 1989-1995, Mr. Jacoby was a Senior Investment
Officer at USL Capital Corporation (a subsidiary of Ford Motor Corporation) and
was co-portfolio manager of a $600 million preferred stock portfolio. Mr.
Jacoby was a trader and portfolio manager at Northern Trust Company (1982-1983)
and Vice President of Institutional Sales, E.F. Hutton (1983-1987). BS Business
Administration & Finance, Boston University. NASD Series 55 "Equity Trader
Limited Representative".
BERNARD M. SUSSMAN - Mr. Sussman is Chief Investment Officer and Chairman of
Spectrum's Investment Committee. Prior to joining Spectrum in 1995, Mr. Sussman
was with Goldman Sachs & Co. for nearly 18 years. A General Partner and head of
the Preferred Stock Department, he was in charge of sales, trading and
underwriting for all preferred products and was instrumental in the development
of the hybrid (MIPS) market. He was a Limited Partner at Goldman Sachs from
December 1994 through November 1996. BS Industrial Relations and MBA Finance,
Cornell University. NASD Series 55 "Equity Trader Limited Representative".
B. OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGERS
Type of Account Number of
Portfolio Manager Managed Accounts Assets*
- --------------------- ---------------------------------------------------------------
Phillip Jacoby Separately Managed accounts 32 $2,482,964,695
Pooled Accounts 16 $2,254,008,805
Registered Investment Vehicles 10 $7,981,784,022
Mark Lieb Separately Managed accounts 41 $2,491,238,774
Pooled Accounts 16 $2,254,008,805
Registered Investment Vehicles 10 $7,981,784,022
Bernard Sussman Separately Managed accounts 37 $2,488,012,550
Pooled Accounts 16 $2,254,008,805
Registered Investment Vehicles 10 $7,981,784,022
* Assets are as of July 31, 2006. None of the assets in these accounts are
subject to an advisory fee based on performance
C. POTENTIAL MATERIAL CONFLICTS OF INTEREST
There are no material conflicts of interest to report.
D. FUND MANAGER COMPENSATION
All employees of Spectrum Asset Management are paid a base salary and
discretionary bonus. The bonus is paid quarterly and may represent a
significant proportion of an individual's total annual compensation.
Discretionary bonuses are determined by management after consideration of
several factors including but not necessarily limited to:
- Changes in overall firm assets under management (employees have no
direct incentive to increase assets)
- Portfolio performance relative to benchmarks
- Contribution to client servicing
- Compliance with firm and/or regulatory policies and procedures
- Work ethic
- Seniority and length of service
- Contribution to overall functioning of organization
E. OWNERSHIP OF JFP SECURITIES AS OF JULY 31, 2006
DOLLAR RANGE OF EQUITY SECURITIES BENEFICIALLY OWNED
NAME OF PORTFOLIO MANAGER IN FUND
- -----------------------------------------------------------------------------------
Phillip Jacoby $0
- -----------------------------------------------------------------------------------
Mark Lieb $10,001 - $50,000
- -----------------------------------------------------------------------------------
Bernard Sussman $10,001 - $50,000
- -----------------------------------------------------------------------------------
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During this reporting period, the registrant's Board of Trustees implemented a
change to the procedures by which shareholders may recommend nominees to the
registrant's board of trustees by amending the registrant's by-laws to include a
provision specifying the date by which shareholder nominations for election as
trustee at a subsequent meeting must be submitted to the registrant.
Shareholders must deliver or mail notice to the registrant not less than
forty-five days nor more than sixty days prior to the first anniversary date of
the date on which the registrant first mailed its proxy materials for the prior
year's annual meeting; provided, however, if and only if the annual meeting is
not scheduled to be held within a period that commences thirty days before the
first anniversary date of the annual meeting for the preceding year and ends
thirty days after such anniversary date (an annual meeting date outside such
period being referred to as an "Other Annual Meeting Date" hereafter), the
shareholder notice must be given no later than the close of business on the date
forty-five days prior to such Other Annual Meeting Date or the tenth business
day following the date such Other Annual Meeting Date is first publicly
announced or disclosed. The shareholder's notice must be in writing and set
forth the name, age, date of birth, business address, residence address and
nationality of the person(s) being nominated and the class or series, number of
all shares of the registrant owned of record or beneficially be each such
person(s), any other information regarding such person required by Item 401 of
Regulation S-K or Item 22 of Rule 14a-101 (Schedule 14A) under the Securities
Exchange Act of 1934, as amended, any other information regarding the person(s)
to be nominated that would be required to be disclosed in a proxy statement or
other filings required to be made in connection with solicitation of proxies for
election of trustees, and whether such shareholder believes any nominee is or
will be an "interested person" (as that term is defined in the Investment
Company Act of 1940, as amended) of the registrant or sufficient information to
enable the registrant to make that determination and the written and signed
consent of the person(s) to be nominated.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial
officers, or persons performing similar functions, have concluded
that the registrant's disclosure controls and procedures (as defined
in Rule 30a-3(c) under the Investment Company Act of 1940, as
amended (the "1940 Act") (17 CFR 270.30a-3(c))) are effective, as of
a date within 90 days of the filing date of this report that
includes the disclosure required by this paragraph, based on their
evaluation of the controls and procedures required by Rule 30a-3(b)
under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or
15d-15(b) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") (17 CFR 240.13a-15(b) or 240.15d-15(b)).
(b) There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940 Act
(17 CFR 270.30a-3(d)) that occurred during the second fiscal quarter
of the period covered by this report that has materially affected,
or is reasonably likely to materially affect, the registrant's
internal control over financial reporting.
ITEM 12. EXHIBITS.
File the exhibits listed below as part of this Form. Letter or number the
exhibits in the sequence indicated.
(a)(1) Any code of ethics, or amendment thereto, that is the subject of the
disclosure required by Item 2, to the extent that the registrant intends to
satisfy the Item 2 requirements through filing of an exhibit: Not applicable
because the code is posted on registrant's website at www.nuveen.com/etf and
there were no amendments during the period covered by this report. (To view the
code, click on the Investor Resources drop down menu box, click on Fund
Governance and then Code of Conduct.)
(a)(2) A separate certification for each principal executive officer and
principal financial officer of the registrant as required by Rule 30a-2(a) under
the 1940 Act (17 CFR 270.30a-2(a)) in the exact form set forth below: Ex-99.CERT
Attached hereto.
(a)(3) Any written solicitation to purchase securities under Rule 23c-1 under
the 1940 Act (17 CFR 270.23c-1) sent or given during the period covered by the
report by or on behalf of the registrant to 10 or more persons. Not applicable.
(b) If the report is filed under Section 13(a) or 15(d) of the Exchange Act,
provide the certifications required by Rule 30a-2(b) under the 1940 Act (17 CFR
270.30a-2(b)); Rule 13a-14(b) or Rule 15d-14(b) under the Exchange Act (17 CFR
240.13a-14(b) or 240.15d-14(b)), and Section 1350 of Chapter 63 of Title 18 of
the United States Code (18 U.S.C. 1350) as an exhibit. A certification furnished
pursuant to this paragraph will not be deemed "filed" for purposes of Section 18
of the Exchange Act (15 U.S.C. 78r), or otherwise subject to the liability of
that section. Such certification will not be deemed to be incorporated by
reference into any filing under the Securities Act of 1933 or the Exchange Act,
except to the extent that the registrant specifically incorporates it by
reference. Ex-99.906 CERT attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) Nuveen Tax-Advantage Floating Rate Fund
-------------------------------------------------------
By (Signature and Title)* /s/ Jessica R. Droeger
------------------------------------------
Jessica R. Droeger
Vice President and Secretary
Date: October 6, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ Gifford R. Zimmerman
------------------------------------------
Gifford R. Zimmerman
Chief Administrative Officer
(principal executive officer)
Date: October 6, 2006
By (Signature and Title)* /s/ Stephen D. Foy
------------------------------------------
Stephen D. Foy
Vice President and Controller
(principal financial officer)
Date: October 6, 2006
* Print the name and title of each signing officer under his or her signature.