Fixed Income SHares—Series C, M, R
Notes to Financial Statements
1. Organization and Significant Accounting Policies
Fixed Income SHares (the ‘‘Trust’’), was organized as a Massachusetts business trust on November 3, 1999. The Trust is comprised of Series C, Series M, Series R (the ‘‘Portfolios’’), and the Allianz Dresdner Daily Asset Fund. These financial statements relate to Series C, Series M and Series R. The financial statements for Allianz Dresdner Daily Asset Fund are provided separately. Allianz Global Investors Fund Management LLC (the ‘‘Investment Manager’’) serves as the Portfolios’ Investment Manager and is an indirect, wholly-owned subsidiary of Allianz Global Investors of America L.P. (‘‘Allianz Global’’). Allianz Global is an indirect, majority-owned subsidiary of Allianz SE. The Portfolios are authorized to issue an unlimited number of shares of beneficial interest at $0.001 par value.
The preparation of the financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
In July 2006, the Financial Accounting Standards Board issued Interpretation No. 48, ‘‘Accounting for Uncertainty in Income Taxes − an Interpretation of FASB Statement No. 109’’ (the ‘‘Interpretation’’). The Interpretation establishes for all entities, including pass-through entities such as the Portfolios, a minimum threshold for financial statement recognition of the benefit of positions taken in filing tax returns (including whether an entity is taxable in a particular jurisdiction), and requires certain expanded tax disclosures. The Interpretation is effective for fiscal years beginning after December 15, 2006, and is to be applied to all open tax years as of the date of effectiveness. The Portfolios’ management has recently begun to evaluate the application of the Interpretation, and is not yet in a position at this time to estimate the significance of its impact, if any, on the Portfolios’ financial statements.
In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (‘‘SFAS’’) 157, Fair Value Measurements, which clarifies the definition of fair value and requires companies to expand their disclosure about the use of fair value to measure assets and liabilities in interim and annual periods subsequent to initial recognition. Adoption of SFAS 157 requires the use of the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. At this time, the Fund is in the process of reviewing the Standard against its current valuation policies to determine future applicability.
Under the Trust’s organizational documents, the Portfolios’ officers, trustees, employees and agents are indemnified against certain liabilities that may arise out of performance of their duties to the Portfolios. Additionally, in the normal course of business, the Portfolios enter into contracts that contain a variety of representations which provide general indemnifications. The Portfolios’ maximum exposure under these arrangements is unknown as such exposure would involve claims that may be made against the Portfolio that have not yet been asserted. However, the Portfolios expect the risk of any loss to be remote.
The following is a summary of significant accounting policies followed by the Portfolios:
(a) Valuation of Investments
Portfolio securities and other financial instruments for which market quotations are readily available are stated at market value. Portfolio securities and other financial instruments for which market quotations are not readily available or if a development/event occurs that may significantly impact the value of a security are fair-valued, in good faith, pursuant to guidelines established by the Board of Trustees, including certain fixed income securities which may be valued with reference to securities whose prices are more readily available. The Portfolios’ investments are valued daily using prices supplied by an independent pricing service or dealer quotations, or are valued at the last sale price on the exchange that is the primary market for such securities, or the last quoted mean price for those securities for which the over-the-counter market is the primary market or for listed securities in which there were no sales. Independent pricing services use information provided by market makers or estimates of market values obtained from yield data relating to investments or securities with similar characteristics. The Portfolios’ investments in senior floating rate loans (‘‘Senior Loans’’) for which a secondary market exists will be valued at the mean of the last available bid and asked prices in the market for such Senior Loans, as provided by an independent pricing service. Other Senior Loans are valued at fair value pursuant to procedures approved by the Board of Trustees. Such procedures include consideration and evaluation of: (1) the creditworthiness of the borrower and any intermediate participants; (2) the term of the Senior Loan; (3) recent prices in the market for similar loans, if any; (4) recent prices in the market for loans of similar quality, coupon rate, and period until next interest rate reset and maturity; and (5) general economic and market conditions affecting the fair value of the Senior Loan. At October 31, 2006, no Senior
10.31.06 | Fixed Income SHares — Series C, M, R Annual Report 45
Fixed Income SHares—Series C, M, R
Notes to Financial Statements
1. Organization and Significant Accounting Policies (continued)
Loans were fair valued. Exchange traded options, futures and options on futures are valued at the settlement price determined by the relevant exchange. Securities purchased on a when-issued or delayed-delivery basis are marked to market daily until settlement at the forward settlement value.
Short-term securities maturing in 60 days or less are valued at amortized cost, if their original term to maturity was 60 days or less, or by amortizing their value on the 61st day prior to maturity, if the original term to maturity exceeded 60 days. The prices used by the Portfolios to value securities may differ from the value that would be realized if the securities were sold and the differences could be material to the financial statements. The Portfolios’ net asset values are determined daily as of the close of regular trading (normally, 4:00 p.m. Eastern time) on the New York Stock Exchange (‘‘NYSE’’) on each day the NYSE is open for business.
(b) Investment Transactions and Investment Income
Investment transactions are accounted for on the trade date. Securities purchased and sold on a when-issued or delayed-delivery basis may be settled a month or more after the trade date. Realized gains and losses on investments are determined on the identified cost basis. Dividend income is recorded on the ex-dividend date. Interest income adjusted for the accretion of discounts and amortization of premiums, is recorded on an accrual basis. Discounts or premiums on debt securities purchased are accreted or amortized to interest income over the lives of the respective securities using the effective interest method. Paydown gains and losses on mortgage- and asset-backed securities are recorded as adjustments to interest income in the Statements of Operations.
(c) Federal Income Taxes
The Portfolios intend to distribute all of their taxable income and to comply with the other requirements of the U.S. Internal Revenue Code of 1986, as amended, applicable to regulated investment companies. Accordingly, no provision for U.S. federal income taxes is required.
(d) Dividends and Distributions
Dividends from net investment income are declared daily and paid monthly. Distributions of net realized capital gains, if any, are declared and paid at least annually. The Portfolios record dividends and distributions to shareholders on the ex-dividend date. The amount of dividends and distributions are determined in accordance with federal income tax regulations, which may differ from generally accepted accounting principles in the United States of America. These ‘‘book-tax’’ differences are considered either temporary or permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified within the capital accounts based on their federal income tax treatment; temporary differences do not require reclassification. For the year ended October 31, 2006, permanent differences of $610,534, $1,443,573 and $280,516 are primarily attributable to the differing treatment of foreign currency transactions, swap payments and paydowns for Fish C, M and R, respectively. To the extent dividends and/or distributions exceed current and accumulated earnings and profits for federal income tax purposes, they are reported as dividends and/or distributions of paid-in capital in excess of par.
(e) Foreign Currency Translation
The Portfolios’ accounting records are maintained in U.S. dollars as follows: (1) the foreign currency market value of investments and other assets and liabilities denominated in foreign currency are translated at the prevailing exchange rate at the end of the period; and (2) purchases and sales, income and expenses are translated at the prevailing exchange rate on the respective dates of such transactions. The resulting net foreign currency gain or loss is included in the Statements of Operations.
The Portfolios do not generally isolate that portion of the results of operations arising as a result of changes in the foreign currency exchange rates from the fluctuations arising from changes in the market prices of securities. Accordingly, such foreign currency gain (loss) is included in net realized and unrealized gain (loss) on investments. However, the Portfolios do isolate the effect of fluctuations in foreign currency exchange rates when determining the gain or loss upon the sale or maturity of foreign currency denominated debt obligations pursuant to U.S. federal income tax regulations; such amount is categorized as foreign currency gain or loss for both financial reporting and income tax reporting purposes.
(f) Option Transactions
The Portfolios may purchase and write (sell) put and call options for hedging purposes, risk management purposes or as a part of its investment strategy. The risk associated with purchasing an option is that the Portfolios pay a premium whether or not the option is exercised. Additionally, the Portfolios bear the risk of loss of premium and
46 Fixed Income SHares — Series C, M, R Annual Report | 10.31.06
Fixed Income SHares—Series C, M, R
Notes to Financial Statements
1. Organization and Significant Accounting Policies (continued)
change in market value should the counterparty not perform under the contract. Put and call options purchased are accounted for in the same manner as portfolio securities. The cost of securities acquired through the exercise of call options is by the premiums paid. The proceeds from the securities sold through the exercise of put options is decreased by the premiums paid.
When an option is written, the premium received is recorded as an asset with an equal liability and is subsequently marked to market to reflect the current market value of the option written. These liabilities are reflected as options written in the Statements of Assets and Liabilities. Premiums received from writing options which expire unexercised are recorded on the expiration date as a realized gain. The difference between the premium received and the amount paid on effecting a closing purchase transaction, including brokerage commissions, is also treated as a realized gain, or if the premium is less than the amount paid for the closing purchase transactions, as a realized loss. If a call option is exercised, the premium is added to the proceeds from the sale of the underlying security in determining whether there has been a realized gain or loss. If a put option is exercised, the premium reduces the cost basis of the security. In writing an option, the Portfolios bear the market risk of an unfavorable change in the price of the security underlying the written option. Exercise of a written option could result in the Portfolios purchasing a security at a price different from the current market.
(g) Interest Rate/Credit Default Swaps
The Portfolios may enter into interest rate and credit default swap contracts (‘‘swaps’’) for investment purposes, to manage its interest rate and credit risk or to add leverage.
As a seller in the credit default swap contract, the Portfolios are required to pay the notional amount or other agreed-upon value of a referenced debt obligation to the counterparty in the event of a default by a third party, such as a U.S. or foreign corporate issuer, on the referenced debt obligation. In return, the Portfolios would receive from the counterparty a periodic stream of payments over the term of the contract provided that no event of default has occurred. If no default occurs, the Portfolios would keep the stream of payments and would have no payment obligations. Net periodic payments received by the Portfolios are included as part of realized gain (loss) and or change in unrealized appreciation/depreciation in the Statements of Operations.
The Portfolios may also purchase credit default swap contracts in order to hedge against the risk of default of debt securities held, in which case the Portfolios would function as the counterparty referenced in the preceding paragraph. As a purchaser of a credit default swap contract, the Portfolios would receive the notional amount or other agreed upon value of a referenced debt obligation from the counterparty in the event of default by a third party, such as a U.S. or foreign corporate issuer on the referenced obligation. In return, the Portfolios would make periodic payments to the counterparty over the term of the contract provided no event of default has occurred. Such periodic payments are accrued daily and recorded as realized gain (loss).
Interest rate swap agreements involve the exchange by the Portfolios with a counterparty of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. Net periodic payments received by the Portfolios are included as part of realized gain (loss) and or change in unrealized appreciation/depreciation in the Statements of Operations.
Swaps are marked to market daily based upon quotations from brokers or market makers and the change in value, if any, is recorded as unrealized appreciation or depreciation. For a credit default swap sold by the Portfolios, payment of the agreed upon amount made by the Portfolios in the event of default of the referenced debt obligation is recorded as the cost of the referenced debt obligation purchased/received. For a credit default swap purchased by the Portfolios, the agreed upon amount received by the Portfolios in the event of default of the referenced debt obligation is recorded as proceeds from sale/delivery of the referenced debt obligation and the resulting gain or loss realized on the referenced debt obligation is recorded as such by the Portfolios.
Entering into swaps involves, to varying degrees, elements of credit, market and documentation risk in excess of the amounts recognized on the Statements of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of the contractual terms in the agreements, and that there may be unfavorable changes in net interest rates.
(h) Futures Contracts
A futures contract is an agreement between two parties to buy and sell a financial instrument at a set price on a future date. Upon entering into such a contract, the Portfolio is required to pledge to the broker an amount of cash
10.31.06 | Fixed Income SHares — Series C, M, R Annual Report 47
Fixed Income SHares—Series C, M, R
Notes to Financial Statements
1. Organization and Significant Accounting Policies (continued)
or securities equal to the minimum ‘‘initial margin’’ requirements of the exchange. Pursuant to the contracts, the Portfolio agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in the value of the contracts. Such receipts or payments are known as ‘‘variation margin’’ and are recorded by the Portfolio as unrealized appreciation or depreciation. When the contracts are closed, the Portfolio records a realized gain or loss equal to the difference between the value of the contracts at the time they were opened and the value at the time they were closed. Any unrealized appreciation or depreciation recorded is simultaneously reversed. The use of futures transactions involves the risk of an imperfect correlation in the movements in the price of futures contracts, interest rates and the underlying hedged assets, and the possible inability of counterparties to meet the terms of their contracts.
(i) Forward Foreign Currency Contracts — Series C, Series R
A forward foreign currency contract is an agreement between two parties to buy and sell a currency at a set exchange rate on a future date. Series C and Series R may enter into forward foreign currency contracts for the purpose of hedging against foreign currency risk arising from the investment or anticipated investment in securities denominated in foreign currencies. These Portfolios may also enter these contracts for purposes of increasing exposure to a foreign currency or to shift exposure to foreign currency fluctuations from one country to another. The market value of a forward foreign currency contract fluctuates with changes in forward currency exchange rates. All commitments are marked to market daily at the applicable exchange rates and any resulting unrealized appreciation or depreciation is recorded. Realized gains or losses are recorded at the time the forward contract matures or by delivery of the currency. Risks may arise upon entering these contracts from the potential inability of counterparties to meet the terms of their contracts and from unanticipated movements in the value of a foreign currency relative to the U.S. dollar.
(j) Inflation-Indexed Bonds
Inflation-indexed bonds are fixed income securities whose principal value is periodically adjusted to the rate of inflation. The interest rate on these bonds is generally fixed at issuance at a rate lower than typical bonds. Over the life of an inflation-indexed bond, however, interest will be paid based on a principal value, which is adjusted for inflation. Any increase in the principal amount of an inflation-indexed bond will be considered interest income in the Statements of Operations, even though investors do not receive principal until maturity.
(k) Repurchase Agreements
The Portfolios enter into transactions with its custodian bank or securities brokerage firms whereby it purchases securities under agreements to resell at an agreed upon price and date (‘‘repurchase agreements’’). Such agreements are carried at the contract amount in the financial statements. Collateral pledged (the securities received), which consists primarily of U.S. government obligations and asset-backed securities, are held by the custodian bank until maturity of the repurchase agreement. Provisions of the repurchase agreements and the procedures adopted by the Portfolios require that the market value of the collateral, including accrued interest thereon, is sufficient in the event of default by the counterparty. If the counterparty defaults and the value of the collateral declines or if the counterparty enters an insolvency proceeding, realization of the collateral by the Portfolios may be delayed or limited.
(l) Reverse Repurchase Agreements
The Portfolios may enter into reverse repurchase agreements. In a reverse repurchase agreement, the Portfolios sell securities to a bank or broker-dealer and agrees to repurchase the securities at a mutually agreed date and price. Generally, the effect of such a transaction is that the Portfolios can recover and reinvest all or most of the cash invested in the portfolio securities involved during the term of the reverse repurchase agreement and still be entitled to the returns associated with those portfolio securities. Such transactions are advantageous if the interest cost to the Portfolios of the reverse repurchase transaction is less than the returns it obtains on investments purchased with the cash. Unless the Portfolios cover their positions in reverse repurchase agreements (by segregating liquid assets at least equal in amount to the forward purchase commitment), their obligations under the agreements will be subject to the Portfolios’ limitations on borrowings. Reverse repurchase agreements involve leverage risk and also the risk that the market value of the securities that the Portfolios are obligated to repurchase under the agreement may decline below the repurchase price. In the event the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Portfolios’ use of the proceeds of the agreement may be restricted pending determination by the other party, or its trustee or receiver, whether to enforce the Portfolios’ obligation to repurchase the securities. At October 31, 2006, the Series M had reverse repurchase agreements outstanding of $263,000,000. The weighted average daily balance of reverse repurchase agreements outstanding for the year ended October 31, 2006 was $13,150,000 at a weighted average interest rate of 5.29%.
48 Fixed Income SHares — Series C, M, R Annual Report | 10.31.06
Fixed Income SHares—Series C, M, R
Notes to Financial Statements
1. Organization and Significant Accounting Policies (continued)
(m) When-Issued/Delayed-Delivery Transactions
The Portfolios may purchase or sell securities on a when-issued or delayed-delivery basis. The transactions involve a commitment to purchase or sell securities for a predetermined price or yield, with payment and delivery taking place beyond the customary settlement period. When delayed-delivery purchases are outstanding, the Portfolios will set aside and maintain until the settlement date in a designated account, liquid assets in an amount sufficient to meet the purchase price. When purchasing a security on a delayed-delivery basis, the Portfolios assume the rights and risks of ownership of the security, including the risk of price and yield fluctuations, and takes such fluctuations into account when determining its net asset value. The Portfolios may dispose of or renegotiate a delayed-delivery transaction after it is entered into, and may sell when-issued securities before they are delivered, which may result in a realized gain or loss. When a security on a delayed-delivery basis is sold, the Portfolios do not participate in future gains and losses with respect to the security.
(n) Stripped Mortgage Backed Securities (‘‘SMBS’’)
SMBS represent a participation in, or are secured by and payable from, mortgage loans on real property, and may be structured in classes with rights to receive varying proportions of principal and interest. SMBS include interest-only securities (IOs), which receive all of the interest, and principal-only securities (POs), which receive all of the principal. If the underlying mortgage assets experience greater than anticipated payments of principal, the Portfolio may fail to recoup some or all of its initial investment in these securities. The market value of these securities is highly sensitive to changes in interest rates.
(o) Restricted Securities
The Portfolios are permitted to invest in securities that are subject to legal or contractual restrictions on resale. These securities generally may be resold in transactions exempt from registration or to the public if the securities are registered. Disposal of these securities may involve time-consuming negotiations and expenses, and prompt sale at an acceptable price may be difficult.
(p) Short Sales
Series C, Series M and Series R entered into short sales transactions during the year ended October 31, 2006. A short sale is a transaction in which a Portfolio sells securities it does not own in anticipation of a decline in the market price of the securities. The Portfolio is obligated to deliver securities at the market price at the time the short position is closed. Possible losses from short sales may be unlimited, whereas losses from purchases cannot exceed the total amount invested.
(q) Senior Loans
The Portfolios purchase assignments of Senior Loans originated, negotiated and structured by a U.S. or foreign commercial bank, insurance company, finance company or other financial institution (the ‘‘Agent’’) for a lending syndicate of financial institutions (the ‘‘Lender’’). When purchasing an assignment, the Portfolios succeed all the rights and obligations under the loan agreement with the same rights and obligations as the assigning Lender. Assignments may, however, be arranged through private negotiations between potential assignees and potential assignors, and the rights and obligations acquired by the purchaser of an assignment may differ from, and be more limited than, those held by the assigning Lender.
2. Investment Manager/Sub-Adviser
(a) Investment Manager/Sub-Adviser
The Investment Manager serves in its capacity pursuant to an Investment Management Agreement with the Trust. Pursuant to a Portfolio Management Agreement, the Investment Manager employs the Sub-Adviser, an affiliate of the Investment Manager, to serve as sub-adviser and provide investment advisory services to the Portfolios. The Investment Manager receives no investment management or other fees from the Portfolios and at its own expense pays the fees of the Sub-Adviser. The financial statements reflect the fact that no fees or expenses are incurred by the Portfolios. It should be understood, however, that the Portfolios are an integral part of ‘‘wrap-fee’’ programs sponsored by investment advisers unaffiliated with the Portfolios, the Investment Manager or the Sub-Adviser. Typically, participants in these programs pay a ‘‘wrap fee’’ to their investment adviser. Although the Portfolios do not
10.31.06 | Fixed Income SHares — Series C, M, R Annual Report 49
Fixed Income SHares—Series C, M, R
Notes to Financial Statements
2. Investment Manager/Sub-Adviser (continued)
compensate the Investment Manager or Sub-Adviser directly for their services under the Investment Management Agreement or Portfolio Management Agreement, respectively, the Investment Manager and Sub-Adviser may benefit from their relationship with the sponsors of wrap fee programs for which the Trust is an investment option.
(b) Administrator
The Investment Manager also serves as administrator to the Portfolios pursuant to an administration agreement (‘‘Administration Agreement’’) with the Trust. The administrator’s responsibilities include providing or procuring certain administrative services to the Portfolios as well as arranging at its own expense for the provision of legal, audit, custody, transfer agency and other services required for the ordinary operation of the Portfolios, and is responsible for printing, trustees’ fees, and other costs of the Portfolios. Under the Administration Agreement, the Investment Manager has agreed to provide or procure these services, and to bear these expenses at no charge to the Portfolios.
(c) Distributor
Allianz Global Investors Distributors LLC (‘‘the Distributor’’), an affiliate of the Investment Manager, serves as the distributor of the Trust’s shares. Pursuant to a distribution agreement with the Trust, the Investment Manager on behalf of the Portfolios pays the Distributor.
3. Investment in Securities
For the year ended October 31, 2006, purchases and sales of investments, other than short-term securities were:
| | | | | | | | | | | | | | | | | | |
| | | U.S. Government Agency | | All Other |
| | | Purchases | | Sales | | Purchases | | Sales |
| Series C: | | $6,549,870,879 | | $6,564,533,443 | | $628,699,157 | | $383,818,871 |
| Series M: | | 27,670,305,043 | | 26,249,605,451 | | 177,834,232 | | 32,424,242 |
| Series R: | | 1,302,677,895 | | 1,176,785,716 | | 10,204,288 | | 4,644,100 |
|
(a) Futures contracts outstanding at October 31, 2006:
| | | | | | | | | | | | | | | | | | |
| Series C: | | Contracts | | Market Value
(000) | | Expiration
Date | | Unrealized
Appreciation
(Depreciation) |
| Long: Financial Future British Pound—90 day | | 1,389 | | $313,529 | | 12/19/07 | | $(630) |
| Financial Future Euro—90 day | | 9,908 | | 2,359,219 | | 12/17/07 | | 5,682,358 |
| Financial Future Euro—90 day | | 3,041 | | 724,404 | | 3/17/08 | | 2,387,723 |
| U.S. Treasury Bond Futures | | 61 | | 6,872 | | 12/19/06 | | 140,586 |
| U.S. Treasury Notes 10 yr. Futures | | 1 | | 108 | | 12/19/06 | | 1,281 |
| | | | | | | | | $8,211,318 |
|
| | | | | | | | | | | | | | | | | | |
| Series M: | | Contracts | | Market Value
(000) | | Expiration
Date | | Unrealized
Appreciation
(Depreciation) |
| Long: Financial Future Euro—90 day | | 9,337 | | $2,223,256 | | 12/17/07 | | $3,789,593 |
| Financial Future Euro—90 day | | 1,279 | | 304,674 | | 3/17/08 | | 1,298,829 |
| Short: U.S. Treasury Notes 5 yr. Futures | | (1,345) | | (141,982) | | 12/29/06 | | (714,033) |
| | | | | | | | | $4,374,389 |
|
50 Fixed Income SHares — Series C, M, R Annual Report | 10.31.06
Fixed Income SHares—Series C, M, R
Notes to Financial Statements
3. Investment in Securities (continued)
| | | | | | | | | | | | | | | | | | |
| Series R: | | Contracts | | Market Value
(000) | | Expiration
Date | | Unrealized
Appreciation
(Depreciation) |
| Long: Euro Bond 10 yr. Future | | 1 | | $150 | | 12/7/06 | | $534 |
| U.S. Treasury Bond Futures | | 107 | | 12,054 | | 12/19/06 | | 193,938 |
| U.S. Treasury Notes 5 yr. Futures | | 135 | | 14,251 | | 12/29/06 | | 94,072 |
| Short: U.S. Treasury Notes 10 yr. Futures | | (52) | | (5,627) | | 12/19/06 | | (52,328) |
| | | | | | | | | $236,216 |
|
(b) Transactions in options written for the year ended October 31, 2006:
| | | | | | | | | | |
| Series C: | | Contracts/Notional | | Premiums |
| Options outstanding, October 31, 2005 | | 2,776 | | $1,130,353 |
| Options written | | 70,404,610 | | 1,925,711 |
| Options terminated in closing purchase transactions | | (3,046) | | (1,139,085) |
| Options expired | | (6,402,460) | | (666,291) |
| Options outstanding, October 31, 2006 | | 64,001,880 | | $1,250,688 |
|
| | | | | | | | | | |
| Series M: | | Contracts | | Premiums |
| Options outstanding, October 31, 2005 | | 1,400 | | $290,762 |
| Options terminated in closing purchase transactions | | (1,400) | | (290,762) |
| Options outstanding, October 31, 2006 | | — | | — |
|
| | | | | | | | | | |
| Series R: | | Contracts/Notional | | Premiums |
| Options outstanding, October 31, 2005 | | 58 | | $18,260 |
| Options written | | 5,200,678 | | 169,844 |
| Options terminated in closing purchase transactions | | (244) | | (57,739) |
| Options exercised | | (220) | | (36,597) |
| Options expired | | (5,200,210) | | (64,054) |
| Options outstanding, October 31, 2006 | | 62 | | $29,714 |
|
(c) Credit default swaps contracts outstanding at October 31, 2006:
Series C:
| | | | | | | | | | | | | | | | | | |
Swap Counterparty/
Referenced Debt Issuer | | Notional Amount
Payable on
Default (000) | | Termination
Date | | Fixed Payments
Received (Paid)
by Portfolio | | Unrealized
Appreciation
(Depreciation) |
| Goldman Sachs | | | | | | | | |
| CSC Holdings | | $5,000 | | 12/20/07 | | (0.55)% | | $28,263 |
| Ford Motor Credit | | 15,000 | | 6/20/07 | | 4.65% | | 394,641 |
| International Paper | | 3,000 | | 6/20/10 | | 0.78% | | 56,576 |
| Nordstrom | | 2,200 | | 6/20/11 | | (0.18)% | | (781) |
| Southwest Airlines | | 2,000 | | 6/20/11 | | (0.29)% | | (10,859) |
| Washington Mutual | | 4,600 | | 6/20/16 | | (0.39)% | | (17,590) |
| Lehman Brothers | | | | | | | | |
| Federative Republic of Brazil | | 4,400 | | 7/20/13 | | 2.02% | | 163,341 |
| Starwood Hotels & Resorts Worldwide | | 2,700 | | 9/20/11 | | 1.01% | | (23,065) |
|
10.31.06 | Fixed Income SHares — Series C, M, R Annual Report 51
Fixed Income SHares—Series C, M, R
Notes to Financial Statements
3. Investment in Securities (continued)
| | | | | | | | | | | | | | | | | | |
Swap Counterparty/
Referenced Debt Issuer | | Notional Amount
Payable on
Default (000) | | Termination
Date | | Fixed Payments
Received (Paid)
by Portfolio | | Unrealized
Appreciation
(Depreciation) |
| Merrill Lynch | | | | | | | | |
| Apache | | $4,500 | | 6/20/10 | | 0.39% | | $40,120 |
| Canadian National Resources | | 1,800 | | 3/20/10 | | 0.32% | | 5,290 |
| Ford Motor Credit | | 1,100 | | 9/20/10 | | 3.80% | | 21,951 |
| General Electric Credit | | 1,800 | | 6/20/10 | | 0.30% | | 14,072 |
| Phelps Dodge | | 3,000 | | 6/20/10 | | 0.73% | | 36,593 |
| XTO Energy | | 1,300 | | 3/20/10 | | 0.38% | | 6,145 |
| Morgan Stanley | | | | | | | | |
| Altria Group | | 2,500 | | 12/20/10 | | 0.95% | | 69,335 |
| Conoco | | 4,700 | | 3/20/11 | | 0.23% | | 14,774 |
| Dow Jones CDX | | 41,900 | | 12/20/11 | | 0.40% | | 104,283 |
| Dow Jones CDX | | 25,200 | | 12/20/16 | | (0.65)% | | (100,980) |
| Time Warner | | 5,000 | | 9/20/10 | | 0.58% | | 63,032 |
| Walt Disney | | 1,400 | | 6/20/11 | | (0.18)% | | (2,504) |
| | | | | | | | | $862,637 |
|
Series R:
| | | | | | | | | | | | | | | | | | |
Swap Counterparty/
Referenced Debt Issuer | | Notional Amount
Payable on
Default (000) | | Termination
Date | | Fixed Payments
Received
by Portfolio | | Unrealized
Appreciation |
Goldman Sachs
Ford Motor Credit | | $500 | | 9/20/07 | | 2.30% | | $4,291 |
| GMAC | | 300 | | 6/20/11 | | 3.40% | | 23,914 |
| | | | | | | | | $28,205 |
|
(d) Interest rate swap agreements outstanding at October 31, 2006:
Series C:
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Rate Type | | |
| Swap Counterparty | | Notional
Amount
(000) | | Termination
Date | | Payments
made by
Portfolio | | Payments
received by
Portfolio | | Unrealized
Appreciation
(Depreciation) |
| Goldman Sachs | | $195,000 | | 6/15/09 | | 6 month EURIBOR | | 5.00% | | $(789,197) |
| Goldman Sachs | | 38,500 | | 12/20/16 | | 5.00% | | 3 month LIBOR | | (1,239,531) |
| Lehman Brothers | | 700,000 | | 6/21/07 | | 3 month LIBOR | | 4.00% | | (6,468,746) |
| Lehman Brothers | | 323,700 | | 12/20/08 | | 3 month LIBOR | | 5.00% | | 805,204 |
| Lehman Brothers | | 121,200 | | 12/20/13 | | 5.00% | | 3 month LIBOR | | (2,776,365) |
| Lehman Brothers | | 1,600 | | 12/20/16 | | 5.00% | | 3 month LIBOR | | (51,513) |
| Merrill Lynch | | 700 | | 12/15/24 | | 6.00% | | 3 month LIBOR | | (25,315) |
| Morgan Stanley | | 204,600 | | 12/20/08 | | 3 month LIBOR | | 5.00% | | 479,617 |
| | | | | | | | | | | $(10,065,846) |
|
52 Fixed Income SHares — Series C, M, R Annual Report | 10.31.06
Fixed Income SHares—Series C, M, R
Notes to Financial Statements
3. Investment in Securities (continued)
Series M:
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Rate Type | | |
| Swap Counterparty | | Notional
Amount
(000) | | Termination
Date | | Payments
made by
Portfolio | | Payments
received by
Portfolio | | Unrealized
Appreciation
(Depreciation) |
| Lehman Brothers | | $33,000 | | 12/20/13 | | 5.00% | | 3 month LIBOR | | $(755,941) |
| Lehman Brothers | | 14,000 | | 12/20/16 | | 3 month LIBOR | | 5.00% | | 450,738 |
| | | | | | | | | | | $(305,203) |
|
Series R:
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Rate Type | | |
| Swap Counterparty | | Notional
Amount
(000) | | Termination
Date | | Payments
made by
Portfolio | | Payments
received by
Portfolio | | Unrealized
Appreciation
(Depreciation) |
| Goldman Sachs | | $6,200 | | 12/20/08 | | 3 month LIBOR | | 5.00% | | $59,442 |
| Goldman Sachs | | €600 | | 6/17/15 | | 4.50% | | 6 month EURIBOR | | 29,537 |
| Goldman Sachs | | $3,900 | | 12/20/16 | | 5.00% | | 3 month LIBOR | | (125,563) |
| Lehman Brothers | | 1,000 | | 12/20/11 | | 5.00% | | 3 month LIBOR | | (17,635) |
| Lehman Brothers | | 800 | | 12/20/13 | | 5.00% | | 3 month LIBOR | | (18,326) |
| Lehman Brothers | | 100 | | 12/20/16 | | 5.00% | | 3 month LIBOR | | (3,219) |
| Lehman Brothers | | 9,700 | | 12/20/36 | | 5.00% | | 3 month LIBOR | | (625,944) |
| Morgan Stanley | | 500 | | 12/20/08 | | 3 month LIBOR | | 5.00% | | 4,794 |
| Morgan Stanley | | 4,500 | | 12/20/36 | | 5.00% | | 3 month LIBOR | | (290,386) |
| | | | | | | | | | | $(987,300) |
|
EURIBOR—European Union Interbank Offered Rate
LIBOR—London Interbank Offered Rate
Series C, Series M and Series R received $500,000, $250,000 and $750,000 par value, respectively, in U.S. Treasury Bills as collateral for swap contracts.
10.31.06 | Fixed Income SHares — Series C, M, R Annual Report 53
Fixed Income SHares—Series C, M, R
Notes to Financial Statements
3. Investment in Securities (continued)
(e) Forward foreign currency contracts outstanding at October 31, 2006:
| | | | | | | | | | | | | | |
Series C:
| | U.S. $ Value
Origination
Date | | U.S. $ Value
October 31, 2006 | | Unrealized
Appreciation
(Depreciation) |
| Purchased: | | | | | | |
| 547,000 Brazilian Real settling 12/13/06 | | $246,645 | | $253,680 | | $7,035 |
| 1,676,560 Brazilian Real settling 1/18/07 | | 763,513 | | 772,231 | | 8,718 |
| 11,000,000 Chilean Peso settling 11/8/06 | | 204,854 | | 211,473 | | 6,619 |
| 400,455,000 Chilean Peso settling 12/18/06 | | 744,553 | | 762,645 | | 18,092 |
| 18,480,000 Euro settling 11/20/06 | | 23,623,871 | | 23,614,041 | | (9,830) |
| 25,496,000 Indian Rupee settling 2/26/07 | | 543,046 | | 561,951 | | 18,905 |
| 8,190,000 Indian Rupee settling 3/20/07 | | 176,509 | | 180,327 | | 3,818 |
| 11,738,327,000 Japanese Yen settling 11/15/06 | | 103,143,956 | | 100,414,951 | | (2,729,005) |
| 8,600,000 Mexican Peso settling 12/4/06 | | 782,472 | | 797,809 | | 15,337 |
| 3,035,000 Mexican Peso settling 1/16/07 | | 273,628 | | 280,917 | | 7,289 |
| 2,929,000 Polish Zloty settling 11/24/06 | | 949,850 | | 965,911 | | 16,061 |
| 1,851,542 Russian Ruble settling 12/13/06 | | 69,333 | | 69,377 | | 44 |
| 3,376,458 Russian Ruble settling 1/17/07 | | 126,673 | | 126,649 | | (24) |
| 23,088,000 Russian Ruble settling 3/15/07 | | 868,469 | | 866,609 | | (1,860) |
| 1,245,000 Singapore Dollar settling 11/27/06 | | 786,397 | | 800,593 | | 14,196 |
| 155,000 Singapore Dollar settling 5/21/07 | | 98,676 | | 100,243 | | 1,567 |
| 2,596,750 South African Rand settling 11/2/06 | | 416,421 | | 351,696 | | (64,725) |
| 2,596,750 South African Rand settling 5/16/07 | | 339,420 | | 344,788 | | 5,368 |
| 197,700,000 South Korean Won settling 12/26/06 | | 207,952 | | 210,121 | | 2,169 |
| 108,905,000 South Korean Won settling 2/26/07 | | 113,751 | | 115,960 | | 2,209 |
| 661,014,000 South Korean Won settling 3/21/07 | | 694,051 | | 704,358 | | 10,307 |
| 3,003,000 Taiwan Dollar settling 11/24/06 | | 90,670 | | 90,452 | | (218) |
| 3,104,000 Taiwan Dollar settling 2/26/07 | | 96,909 | | 94,189 | | (2,720) |
| Sold: | | | | | | |
| 2,714,000 British Pound Sterling settling 11/30/06 | | 5,081,571 | | 5,177,689 | | (96,118) |
| 1,200,000 Canadian Dollar settling 11/30/06 | | 1,054,185 | | 1,071,936 | | (17,751) |
| 150,530,000 Euro settling 12/8/06 | | 191,887,844 | | 192,530,020 | | (642,176) |
| 404,127,000 Japanese Yen settling 11/15/06 | | 3,394,756 | | 3,457,085 | | (62,329) |
| 2,596,750 South African Rand settling 11/2/06 | | 346,233 | | 351,696 | | (5,463) |
| | | | | | | $(3,494,485) |
|
| | | | | | | | | | | | | | |
Series R:
| | U.S. $ Value
Origination
Date | | U.S. $ Value
October 31, 2006 | | Unrealized
Depreciation |
| Purchased: | | | | | | |
| 542,552,000 Japanese Yen settling 11/15/06 | | $4,769,801 | | $4,641,235 | | $(128,566) |
| Sold: | | | | | | |
| 18,737,000 Euro settling 12/8/06 | | 23,860,936 | | 23,964,890 | | (103,954) |
| 56,474,000 Japanese Yen settling 11/15/06 | | 474,394 | | 483,104 | | (8,710) |
| | | | | | | $(241,230) |
|
54 Fixed Income SHares — Series C, M, R Annual Report | 10.31.06
Fixed Income SHares—Series C, M, R
Notes to Financial Statements
3. Investment in Securities (continued)
(f) Short sales outstanding at October 31, 2006 were:
Series C:
| | | | | | | | | | | | | | | | | | | | | | |
| Type | | Coupon | | Maturity | | Par | | Proceeds | | Value |
| Government National Mortgage Association | | 5.50% | | 11/1/36 | | $3,100,000 | | $3,063,188 | | $3,087,408 |
|
Series R:
| | | | | | | | | | | | | | | | | | | | | | |
| Type | | Coupon | | Maturity | | Par | | Proceeds | | Value |
| U.S. Treasury Note | | 4.875% | | 8/15/16 | | $1,200,000 | | $1,208,200 | | $1,225,313 |
|
(f) Open reverse repurchase agreements at October 31, 2006:
Series M:
| | | | | | | | | | | | | | | | | | | | | | |
| Counterparty | | Rate | | Trade
Date | | Maturity
Date | | Principal &
Interest | | Par |
| Lehman Securities | | 5.29% | | 10/12/06 | | 11/22/06 | | $263,772,928 | | $263,000,000 |
|
Collateral for open reverse repurchase agreements at October 31, 2006 as reflected in the schedule of investments:
Series M:
| | | | | | | | | | | | | | | | | | | | | | |
| Counterparty | | Description | | Rate | | Maturity
Date | | Par | | Value |
| Lehman Securities | | Fannie Mae | | 5.00% | | 10/1/35 | | $281,930,821 | | $272,376,493 |
|
4. Income Tax Information
Series C:
The tax character of dividends and distributions paid were:
| | | | | | | | | | |
| | | Year Ended
October 31, 2006 | | Year Ended
October 31, 2005 |
| Ordinary Income | | $69,030,360 | | $44,473,202 |
| Long-Term Capital Gains | | — | | 9,789,824 |
|
At October 31, 2006, the tax character of distributable earnings of $27,469,023 was comprised of $18,471,208 of ordinary income and $9,024,815 of long-term capital gains.
During the fiscal year ended October 31, 2006, Series C utilized its entire capital loss carryforward of $7,260,009 from the prior year.
Series M:
The tax character of dividends and distributions paid were:
| | | | | | | | | | |
| | | Year Ended
October 31, 2006 | | Year Ended
October 31, 2005 |
| Ordinary Income | | $60,921,854 | | $52,355,698 |
| Long-Term Capital Gains | | — | | 1,130,743 |
|
At October 31, 2006, the tax character of distributable earnings of $437,999 was comprised entirely of ordinary income.
At October 31, 2006, Series M had a capital loss carryforward of $2,526,079 ($2,036,836 of which will expire in 2013 and $489,243 of which will expire in 2014), available as a reduction, to the extent provided in the regulations, of any future net realized capital gains. To the extent that these losses are used to offset future realized capital gains, such gains will not be distributed.
10.31.06 | Fixed Income SHares — Series C, M, R Annual Report 55
Fixed Income SHares—Series C, M, R
Notes to Financial Statements
4. Income Tax Information (continued)
Series R:
The tax character of dividends and distributions paid were:
| | | | | | | | | | |
| | | Year Ended
October 31, 2006 | | Year Ended
October 31, 2005 |
| Ordinary Income | | $8,195,315 | | $3,845,448 |
| Long-Term Capital Gains | | — | | 9,380 |
|
At October 31, 2006, the tax character of distributable earnings of $35,906 was comprised of entirely of ordinary income.
At October 31, 2006, Series R had a capital loss carryforward of $2,434,762 ($771,954 of which will expire in 2013 and $1,662,808 of which will expire in 2014), available as a reduction, to the extent provided in the regulations, of any future net realized capital gains. To the extent that these losses are used to offset future realized capital gains, such gains will not be distributed.
The cost of investments for federal income tax purposes and gross unrealized appreciation and gross unrealized depreciation of investments at October 31, 2006 were:
| | | | | | | | | | | | | | | | | | |
| | | Cost of Investments | | Gross Unrealized
Appreciation | | Gross Unrealized
Depreciation | | Net Unrealized
Appreciation
(Depreciation) |
| Series C | | $1,700,004,353 | | $22,610,316 | | $8,447,404 | | $14,162,912 |
| Series M | | 3,716,728,095 | | 21,304,327 | | 6,133,102 | | 15,171,225 |
| Series R | | 318,721,768 | | 292,823 | | 4,085,432 | | (3,792,609) |
|
The primary difference between book and tax appreciation (depreciation) on investments was attributable to wash sales. In addition, Series C, M and R have appreciation (depreciation) on foreign currency and derivatives, for tax purposes, of $(4,435,788), $(199,306) and $(979,289), respectively. The primary difference between book and tax appreciation (depreciation) on foreign currency and derivatives relates to different tax treatment for futures, forwards, options and swaps.
5. Legal Proceedings
In June and September 2004, the Investment Manager, certain of its affiliates (including Allianz Global Investors Distributors LLC and PEA Capital LLC) and Allianz Global, agreed to settle, without admitting or denying the allegations, claims brought by the Securities and Exchange Commission (the ‘‘Commission’’), the New Jersey Attorney General and the California Attorney General alleging violations of federal and state securities laws with respect to certain open-end funds for which the Investment Manager serves as investment adviser. Two settlements (with the Commission and New Jersey) related to an alleged ‘‘market timing’’ arrangement in certain open-end funds sub-advised by PEA Capital LLC. Two settlements (with the Commission and California) related to the alleged use of cash and fund portfolio commissions to finance ‘‘shelf-space’’ arrangements with broker-dealers for open-end funds. The Investment Manager and its affiliates agreed to pay a total of $68 million to settle the claims related to market timing and $20.6 million to settle the claims related to shelf space. In addition to monetary payments, the settling parties agreed to undertake certain corporate governance, compliance and disclosure reforms related to market timing, brokerage commissions, revenue sharing and shelf space arrangements, and consented to cease and desist orders and censures. The settling parties did not admit or deny the findings in these settlements. None of the settlements allege that any inappropriate activity took place with respect to the Funds.
Since February 2004, the Investment Manager and certain of its affiliates and their employees have been named as defendants in fifteen lawsuits filed in various jurisdictions. Eleven of those lawsuits concern market timing and have been transferred to and consolidated for pre-trial proceedings in a multi-district litigation proceeding in the U.S. District Court for the District of Maryland; the other four lawsuits concern revenue sharing and have been consolidated into a single action in the U.S. District Court for the District of Connecticut. The lawsuits generally relate to the same allegations that are the subject of the regulatory proceedings discussed above. The lawsuits seek, among other things, unspecified compensatory damages plus interest and, in some cases, punitive damages, the rescission of investment advisory contracts, the return of fees paid under those contracts, restitution, and waiver of or return of certain sales charges paid by open-end fund shareholders.
56 Fixed Income SHares — Series C, M, R Annual Report | 10.31.06
Fixed Income SHares—Series C, M, R
Notes to Financial Statements
5. Legal Proceedings (continued)
The Investment Manager and the Sub-Adviser believe that these matters are not likely to have a material adverse effect on the Portfolios or on their ability to perform their respective investment advisory activities relating to the Portfolios.
The foregoing speaks only as of the date hereof.
10.31.06 | Fixed Income SHares — Series C, M, R Annual Report 57
Fixed Income SHares—Series C, M, R
Report of Independent Registered
Public Accounting Firm
To the Shareholders and the Board of Trustees of Fixed Income Shares — Series C, M, R
In our opinion, the accompanying statements of assets and liabilities, including the schedules of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Fixed Income SHares: Series C, Fixed Income SHares: Series M and Fixed Income SHares: Series R (each a portfolio of Fixed Income SHares, hereafter referred to as the ‘‘Funds’’) at October 31, 2006, the results of each of their operations for the year then ended, the changes in each of their net assets for each of the two years in the period then ended and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as ‘‘financial statements’’) are the responsibility of the Funds’ management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at October 31, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Kansas City, MO
December 22, 2006
58 Fixed Income SHares—Series C, M, R Annual Report | 10.31.06
Fixed Income SHares—Series C, M, R
Matters Relating to the Trustees Consideration of the Investment Management and Portfolio Management Agreements
The Investment Company Act of 1940 requires that both the full Board of Trustees (the ‘‘Trustees’’) and a majority of the non-interested (‘‘independent’’) Trustees, voting separately, approve the Trust’s Investment Advisory Agreement (the ‘‘Advisory Agreement’’) with the Investment Manager and a Portfolio Management Agreement (the ‘‘Sub-Advisory Agreement’’ and together with the Advisory Agreement the ‘‘Agreements’’) with the Sub-Adviser, as it pertains to Series C, Series M and Series R (collectively, the ‘‘Portfolios’’) of the Trust. The Trustees met on June 20 and 21, 2006 (the ‘‘contract review meeting’’) for the specific purpose of considering whether to approve the Advisory Agreement and the Sub-Advisory Agreement. The independent Trustees were assisted in their evaluation of the Agreements by independent legal counsel, from whom they received separate legal advice and with whom they met separately from Fund management during the contract review meeting.
Based on their evaluation of factors that they deemed to be material, including those factors described below, the Board of Trustees, including a majority of the independent Trustees, concluded that the Fund’s Advisory Agreement and the Sub-Advisory Agreement should be approved for a one-year period commencing July 1, 2006.
In connection with their deliberations regarding the continuation of the Agreements, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. As described below, the Trustees considered the nature, quality, and extent of the various investment management, administrative and other services performed by the Investment Manager and the Sub-Adviser under the Agreements.
In connection with the contract review meeting, the Trustees received and relied upon materials provided by the Investment Manager which included, among other items: (i) information regarding the investment performance and management fees of comparable portfolios of other clients of the Sub-Adviser, including institutional separate account and other clients, (ii) an estimate of the profitability to the Investment Manager from its relationship with the Portfolios for the twelve months ended December 31, 2005, (iii) descriptions of various functions performed by the Investment Manager and the Sub-Adviser for the Portfolios, such as compliance monitoring and portfolio trading practices, and (iv) information regarding the overall organization of the Investment Manager and the Sub-Adviser, including information regarding senior management, portfolio managers and other personnel providing investment management, administrative and other services to the Portfolios.
The Trustees’ conclusions as to the continuation of the Agreements were based on a comprehensive consideration of all information provided to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors.
In determining to approve the Advisory Agreement and the Sub-Advisory Agreement, the Trustees met with the relevant investment advisory personnel from the Investment Manager and the Sub-Adviser and considered information relating to personnel providing services under the applicable agreement. The information considered included the education and experience of the personnel providing services, including the education and experience of the investment professionals expected to be on the team of investment professionals managing their portion of the Portfolios. The Trustees also took into account the time and attention that had been devoted by senior management to the Portfolios and the other funds in the complex. The Trustees evaluated the level of skill required to manage the Portfolios and concluded that the human resources devoted by the Investment Manager and the Sub-Adviser to the Portfolios were appropriate to fulfill effectively the duties of the Investment Manager and Sub-Adviser under the applicable agreement. The Trustees also considered the business reputation of the Investment Manager and Sub-Adviser since their inception, their significant financial resources, the Investment Manager’s and Sub-Adviser’s experience in managing the Trust, including their professional liability insurance coverage and the Investment Manager’s assets under management and concluded that they would be able to meet any reasonably foreseeable obligations under the applicable agreements.
The Trustees received information concerning the investment philosophy and investment process applied by the Investment Manager and Sub-Adviser in managing the Portfolios, as described in the Prospectuses. In this connection, the Trustees considered the Investment Manager’s and Sub-Adviser’s in-house research capabilities, including their ongoing forecasting of industry, sector and overall market movements, interest rates and the development of their ongoing outlook on the global economy, as well as other resources available to the Investment Manager’s and Sub-Adviser’s personnel, including research services available to the Investment Manager and Sub-Adviser as a result of securities transactions effected for the Portfolios and other investment advisory clients. The Trustees concluded that the Investment Manager’s and Sub-Adviser’s investment process, research capabilities and philosophy were well suited to the Portfolios, given each Portfolio’s investment objectives and policies.
10.31.06 | Fixed Income SHares — Series C, M, R Annual Report 59
Fixed Income SHares—Series C, M, R
Matters Relating to the Trustees Consideration of the Investment Management and Portfolio Management Agreements
The Trustees considered the scope of the services provided by the Investment Manager and Sub-Adviser to the Portfolios under the Advisory Agreement and Sub-Advisory Agreement, respectively, relative to services provided by third parties to other mutual funds and relative to services provided by the Investment Manager and Sub-Adviser to their other advisory clients. The Trustees noted that the Investment Manager’s and Sub-Adviser’s required standard of care was comparable to that found in most mutual fund investment advisory agreements. The Trustees also considered the tools and procedures used to assure the Portfolios’ compliance with applicable regulations and policies including the appointment of a Chief Compliance Officer and the adoption of enhanced compliance policies and procedures. The Trustees apprised themselves and took account of past claims made by regulators and others against affiliates of the Investment Manager and the steps taken to address those claims. The Trustees concluded that the scope of the Investment Manager’s and Sub-Adviser’s services to the Portfolios, as described above, was consistent with the Portfolios’ operational requirements, including, in addition to the applicable investment objectives, compliance with the Portfolios’ investment restrictions, tax and reporting requirements and related shareholder services.
The Trustees also evaluated the procedures of the Investment Manager and Sub-Adviser designed to fulfill their fiduciary duty to the Portfolios with respect to possible conflicts of interest, including their codes of ethics, the procedures by which the Investment Manager and Sub-Adviser allocate trades among their various investment advisory clients, the integrity of the systems in place to ensure compliance with the foregoing and the record of the Investment Manager and Sub-Adviser in these matters. The Trustees also confirmed information concerning standards of the Investment Manager and Sub-Adviser with respect to the execution of the Portfolios’ transactions. The information considered by the Trustees included information regarding the Investment Manager and the Sub-Adviser, their personnel, policies and practices included in each of their respective Forms ADV.
The Trustees also considered the performance of the Portfolios compared with similar accounts managed by the Sub-Adviser. In the course of their deliberations, the Trustees took into account information provided by the Investment Manager in connection with the contract review meeting, as well as during investment review meetings conducted with portfolio management personnel during the course of the year regarding the Portfolios’ performance. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the Agreements, that they were satisfied with the Investment Manager’s and Sub-Adviser’s responses and efforts relating to the investment performance of the Portfolios.
In re-approving the agreements, the Trustees also gave substantial consideration to the fact that, with respect to the Portfolios, no fees are payable under either the Advisory Agreement with the Investment Manager or the Portfolio Management Agreement between the Investment Manager and the Sub-Adviser. The Trustees did consider, however, the amounts paid to the Investment Manager and the Sub-Adviser from the ‘‘wrap fee’’ paid by the sponsors of the wrap programs to the Investment Manager’s affiliate, Allianz Global Investors Managed Accounts LLC, as well as the fees ‘‘imputed’’ to the Investment Manager and the Sub-Adviser, as disclosed in the Portfolios’ Prospectus. Because the Portfolios did not pay fees directly, the Trustees did not consider the extent to which economies of scale would be realized due to the Portfolios’ growth of assets, whether fee levels reflect economies of scale for the Portfolios’ shareholders or comparisons of fees paid by the Portfolios with fees paid to other investment advisers or by other clients of the Investment Manager or the Sub-Adviser.
The Trustees also considered the profitability to the Investment Manager of the relationship of the Investment Manager and its affiliates to the Portfolios, and determined that such profitability was not excessive. The Trustees considered the costs of the services provided under the Agreements, as well as the fees and profits, if any, expected to be realized by the Investment Manager, the Sub-Adviser and their affiliates from their relationship with the Portfolios.
The Trustees considered the fact that the Investment Manager and the Sub-Adviser may benefit from their relationship with the sponsors of wrap programs for which the Portfolios are an investment options. Such benefits include the receipt by their affiliates of fees paid by the sponsor of the wrap program based on assets under management of the wrap program. The Trustees also took into account so-called ‘‘fallout benefits’’ to the Investment Manager and the Sub-Adviser, such as reputational value derived from serving as investment adviser and the fact that the Investment Manager and the Sub-Adviser will receive services from brokers who execute portfolio transactions for the Portfolios.
Based on the foregoing, the Trustees decided to continue to engage the Investment Manager and Sub-Adviser to serve as investment advisors for the Portfolios.
60 Fixed Income SHares — Series C, M, R Annual Report | 10.31.06
Fixed Income SHares—Series C, M, R
Tax Information
Tax Information:
Subchapter M of the Internal Revenue Code of 1986, as amended, requires the Funds to advise shareholders within 60 days of the Funds’ tax year-end (October 31, 2006) as to the federal tax status of dividends and distributions received by shareholders during such tax period. Accordingly, please note that substantially all dividends paid from net investment income from the Funds during the tax period ended October 31, 2006 were federally exempt interest dividends. However, the Funds invested in municipal bonds containing market discount, whose accretion is taxable. Accordingly, during the tax year ended October 31, 2006, per share dividends were comprised entirely of ordinary income of:
| | | | | | |
| Series C | | $0.71694 |
| Series M | | $0.57746 |
| Series R | | $0.54509 |
|
Pursuant to the Jobs and Growth Tax Relief Reconciliation Act of 2003, Series C designates qualified dividend income of $259,973.
There were no ordinary dividends paid by the Funds during the year ended October 31, 2006 that qualified for the Dividends Received Deduction to corporate shareholders.
Since the Portfolios’ tax year is not the calendar year, another notification will be sent with respect to calendar year 2006. In January 2007, shareholders will be advised on IRS Form 1099 DIV as to the federal tax status of the dividends and distributions received during calendar 2006. The amount that will be reported will be the amount to use on your 2006 federal income tax return and may differ from the amount which must be reported in connection with each Portfolio’s tax year ended October 31, 2006. Shareholders are advised to consult their tax advisers as to the federal, state and local tax status of the dividend income received from the Portfolios. In January 2007, an allocation of interest income by state will be provided which may be of value in reducing a shareholder’s state and local tax liability, if any.
10.31.06 | Fixed Income SHares — Series C, M, R Annual Report 61
Fixed Income SHares Annual Report
Privacy Policy, Proxy Voting Policies &
Procedures
Privacy Policy:
Our Commitment to You
We consider customer privacy to be a fundamental aspect of our relationship with clients. We are committed to maintaining the confidentiality, integrity, and security of our current, prospective and former clients’ personal information. To ensure clients privacy, we have developed policies designed to protect this confidentiality, while allowing client needs to be served.
Obtaining Personal Information
In the course of providing you with products and services, we and certain service providers to the Funds, such as the Funds’ investment adviser, may obtain non-public personal information about you. This information may come from sources such as account applications and other forms, from other written, electronic or verbal correspondence, from your transactions, from your brokerage or financial advisory firm, financial adviser or consultant, and/or from information captured on our internet web sites.
Respecting Your Privacy
As a matter of policy, we do not disclose any personal or account information provided by you or gathered by us to non-affiliated third parties, except as required or permitted by law or as necessary for such third parties to perform their agreements with respect to the Funds. As is common in the industry, non-affiliated companies may from time to time be used to provide certain services, such as preparing and mailing prospectuses, reports, account statements and other information, conducting research on client satisfaction, and gathering shareholder proxies. We may also retain non-affiliated companies to market our products and enter in joint marketing agreements with other companies. These companies may have access to your personal and account information, but are permitted to use the information solely to provide the specific service or as otherwise permitted by law. In most cases you will be clients of a third party, but we may also provide your personal and account information to your respective brokerage or financial advisory firm.
Sharing Information with Third Parties
We do reserve the right to disclose or report personal information to non-affiliated third parties in limited circumstances where we believe in good faith that disclosure is required under law, to cooperate with regulators or law enforcement authorities, to protect our rights or property, or upon reasonable request by any mutual fund in which you have chosen to invest. In addition, we may disclose information about a shareholder’s accounts to a non-affiliated third party with the consent or upon the request of the shareholder.
Sharing Information with Affiliates
We may share client information with our affiliates in connection with servicing your account or to provide you with information about products and services that we or our affiliates believe may be of interest to you. The information we share may include, for example, your participation in our mutual funds or other investment programs sponsored by us or our affiliates, your ownership of certain types of accounts (such as IRAs), or other data about your accounts. Our affiliates, in turn, are not permitted to share your information with non-affiliated entities, except as required or permitted by law.
Procedures to Safeguard Private Information
We take seriously the obligation to safeguard shareholder non-public personal information. In addition to this policy, we have also implemented procedures that are designed to restrict access to your non-public personal information only to internal personnel who need to know that information in order to provide products or services to you. In order to guard your non-public personal information, physical, electronic and procedural safeguards are in place.
62 Fixed Income SHares — Series C, M, R Annual Report | 10.31.06
Fixed Income SHares—Series C, M, R
Board of Trustees
| | | | | | |
Name, Date of Birth, Position(s) Held with Funds, Length of Service, Other Trusteeships/Directorships Held by Trustee; Number
of Portfolios in Fund Complex/Outside Fund
Complexes CurrentlyOverseen by Trustee | | Principal Occupation(s) During Past 5 Years: |
The address of each trustee is 1345 Avenue of
the Americas, New York, NY 10105 | | |
Robert E. Connor
Date of Birth: 9/17/34
Trustee since: 2000
Term of office: Perpetual
Trustee/Director of 24 funds in Fund Complex
Trustee/Director of no funds outside of Fund Complex | | Corporate Affairs Consultant. Formerly, Senior Vice President, Corporate Office, Smith Barney Inc. |
Paul Belica
Date of Birth: 9/27/21
Trustee since: 2002
Term of office: Perpetual
Trustee/Director of 24 funds in Fund Complex
Trustee/Director of no funds outside of Fund Complex | | Retired. Formerly Director, Student Loan Finance Corp., Education Loans, Inc., Goal Funding, Inc., Goal Funding II, Inc. and Surety Loan Fund, Inc.; formerly, Manager of Stratigos Fund LLC, Whistler Fund LLC, Xanthus Fund LLC & Wynstone Fund LLC. |
John J. Dalessandro II
Date of Birth: 7/26/37
Trustee since: 2005
Term of office: Perpetual
Trustee/Director of 24 funds in Fund Complex
Trustee/Director of no funds outside of Fund complex | | Retired. Formerly, President and Director, J.J. Dalessandro II Ltd., registered broker-dealer and member of the New York Stock Exchange. |
Hans W. Kertess
Date of Birth: 7/12/39
Chairman of the Board of Trustees since:
Dec 2006
Trustee since: 2005
Term of office: Perpetual
Trustee/Director of 24 Funds in Fund Complex;
Trustee/Director of no funds outside of Fund Complex | | President, H. Kertess & Co., a financial advisory company; formerly, Managing Director, Royal Bank of Canada Capital Markets. |
John C. Maney
Date of Birth: 8/3/59
Term of Office: Perpetual
Trustee of 24 Funds
Trustee of no funds outside of Fund Complex | | Chief Financial Officer of Allianz Global Investors Fund Management LLC; Managing Director and Chief Financial Officer of AGIFM and Allianz Global Investors of America L.P. since January 2005 and Chief Operating Officer of Allianz Global Investors of America since November 2006. Executive Vice President and Chief Financial Officer since 2001. Chief Financial Officer of PIMCO, Oppenheimer Capital LLC, AGID, NFJ Investment Group and a number of other affiliated entities. Chief Financial Officer and Executive Vice President of Allianz Global Investors Distributors LLC. Formerly, Executive Vice President and Chief Financial Officer of Apria Healthcare Group, Inc. (1998-2001). |
William B. Ogden IV
Date of Birth: 1/11/45
Trustee since: 2006
Term of office: Perpetual
Trustee/Director of 24 Funds in Fund Complex;
Trustee/Director of no funds outside of Fund Complex | | Asset Management Industry Consultant; formerly, Managing Director, Investment Banking Division of Citigroup Global Markets Inc. |
R. Peter Sullivan III
Date of Birth: 9/4/41
Trustee since: 2004
Term of office: Perpetual
Trustee/Director of 24 funds in Fund Complex
Trustee/Director of no funds outside of Fund Complex | | Retired. Formerly, Managing Partner, Bear Wagner Specialists LLC, specialist firm on the New York Stock Exchange. |
|
10.31.06 | Fixed Income SHares — Series C, M, R Annual Report 63
Fixed Income SHares—Series C, M, R
Principal Officers
| | | | | | |
| Name, Date of Birth, Position(s) Held with Funds. | | Principal Occupation(s) During Past 5 Years: |
Brian S. Shlissel
Date of Birth: 11/14/64
President & Chief Executive Officer since: 2002 | | Executive Vice President, Allianz Global Investors Fund Management LLC; President and Chief Executive Officer of 32 funds in the Fund Complex; Treasurer; Principal Financial and Accounting Officer of 35 funds in the Fund Complex; Trustee of 8 funds in the Fund Complex. |
Lawrence G. Altadonna
Date of Birth: 3/10/66
Treasurer, Principal/Financial and Accounting Officer since: 2002 | | Senior Vice President, Allianz Global Investors Fund Management LLC; Treasurer, Principal Financial and Accounting officer of 32 funds in the Fund Complex; Assistant Treasurer of 35 funds in the Fund Complex. |
Thomas J. Fuccillo
Date of Birth: 3/22/68
Vice President, Secretary & Chief Legal Officer since: 2004 | | Senior Vice President, Senior Counsel, Allianz Global Investors of America L.P., Vice President, Secretary and Chief Legal Officer of 67 funds in the Fund Complex. Formerly, Vice President and Associate General Counsel, Neuberger Berman LLC (1991-2004). |
Youse E. Guia
Date of Birth: 9/3/72
Chief Compliance Officer since: 2004 | | Senior Vice President, Group Compliance Manager, Allianz Global Investors of America L.P., Chief Compliance Officer of 67 funds in the Fund Complex. Formerly, Vice President, Group Compliance Manager, Allianz Global Investors of America L.P. (2002-2004), Audit Manager, Pricewaterhouse Coopers LLP (1996-2002). |
Kathleen A. Chapman
Date of Birth: 11/11/54
Assistant Secretary since: 2006 | | Assistant Secretary of 67 funds in the Fund Complex; Manager – IIG Advisory Law, Morgan Stanley (2004-2005); Paralegal and Assistant Corporate Secretary, Prudential Financial, Inc. (formerly American Skandia, inc.) (1996-2004). |
William V. Healey
Date of Birth: 7/28/53
Assistant Secretary since: 2006 | | Executive Vice President, Chief Legal Officer, Allianz Global Investors of America L.P., Allianz Global Investors Fund Management and Allianz Global Investors Distributors LLC. Assistant Secretary of 67 funds in the Fund Complex; formerly, Chief Legal Officer, Vice President and Associate General Counsel of Prudential Insurance Company of America (1998-2005). |
Richard H. Kirk
Date of Birth: 4/6/61
Assistant Secretary since: 2006 | | Senior Vice President, Associate General Counsel, Allianz Global Investors of America L.P. (since 2004). Senior Vice President, Associate General Counsel, Allianz Global Investors Distributors LLC. Assistant Secretary of 67 funds in the Fund Complex; formerly, Vice President, Counsel, Prudential Financial, Inc./American Skandia; Associate General Counsel, Friedman, Billings, Ramsey, Inc. |
Lagan Srivastava
Date of Birth: 9/20/77
Assistant Secretary since: 2006 | | Assistant Secretary of 67 funds in the Fund Complex; formerly, Research Assistant, Dechert LLP (2004-2005); Research Assistant Swidler Berlin Shereff Friedman LLP (2002-2004). |
|
Officers hold office at the pleasure of the Board and until their successors are appointed and qualified or until their earlier resignation or removal.
64 Fixed Income SHares — Series C, M, R Annual Report | 10.31.06
Trustees and Principal Officers
Robert E. Connor
Trustee
Paul Belica
Trustee
John J. Dalessandro II
Trustee
Hans W. Kertess
Trustee, Chairman of the Board of Trustees
John C. Maney
Trustee
William B. Ogden IV
Trustee
R. Peter Sullivan III
Trustee
Brian S. Shlissel
President & Chief Executive Officer
Lawrence G. Altadonna
Treasurer, Principal Financial & Accounting Officer
Thomas J. Fuccillo
Vice President, Secretary & Chief Legal Officer
Youse E. Guia
Chief Compliance Officer
Kathleen Chapman
Assistant Secretary
William Healey
Assistant Secretary
Richard Kirk
Assistant Secretary
Lagan Srivastava
Assistant Secretary
Investment Manager/Administrator
Allianz Global Investors Fund Management LLC
1345 Avenue of the Americas
New York, NY 10105
Sub-Adviser
Pacific Investment Management Company LLC
840 Newport Center Drive
Newport Beach, CA 92660
Distributor
Allianz Global Investors Distributors LLC
2187 Atlantic Street
Stamford, CT 06902
Custodian & Accounting Agent
State Street Bank & Trust Co.
801 Pennsylvania
Kansas City, MO 64105-1307
Transfer Agent, Dividend Paying Agent and Registrar
Boston Financial Data Services
330 West 9th Street
Kansas City, MO 64105
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP
1055 Broadway
Kansas City, MO 64105
Legal Counsel
Ropes & Gray LLP
One International Place
Boston, MA 02210-2624
Allianz Dresdner Daily Asset Fund
Annual Report
October 31, 2006
This material is authorized for use only when preceded or accompanied by the current Fund’s prospectus.
This report, including the financial information herein, is transmitted to the shareholders of Allianz Dresdner Daily Asset Fund for their information. It is not a prospectus, circular or representation intended for use in the purchase of shares of the Fund or any securities mentioned in this report.
Fixed Income SHares — Allianz Dresdner Daily Asset Fund — Letter to Shareholders
December 12, 2006
Dear Shareholder:
We are pleased to provide you with the annual report for Allianz Dresdner Daily Asset Fund (‘‘the Fund’’) for the fiscal year ended October 31, 2006.
At the beginning of the fiscal year the fed funds rate stood at 4.25% and Alan Greenspan was the Chairman of the Federal Reserve Board. At the close of the fiscal year, Ben Bernanke had replaced Mr. Greenspan and the fed funds rate was 5.25%, where it remains today. After a rough start we believe Mr. Bernanke has done a good job. He appears to have properly anticipated the resilience of the U.S. economy and correctly stayed vigilant on inflation. As of this writing, investors and traders have had a different call. Thus far, the new chairman has been right.
We have remained very cautious in our approach to investing. At October 31, 2006 in excess of 80% of the securities in the Fund were in floating rate securities more than 60% being fed funds floaters which reset daily. Since the Fund is a securities lending investment vehicle, we are very aware that there is a cost for the cash in the Fund. Consequently, we can not afford to lag that cost.
In retrospect, 2006 was a very good year for the Fund. The Fund grew from roughly $548 million to more than $2 billion.
We look forward to continued growth and outstanding performance in 2007.
| | | | | | | | | | |
Charles H. Dedekind
Portfolio Manager
Dresdner Advisors LLC | | John Bilello
Portfolio Manager
Dresdner Advisors LLC | | |
|
Allianz Dresdner Daily Asset Fund
Performance & Statistics
Primary Investments:
Money Market Instruments
Inception Date:
3/24/04
Net Assets:
$2,059.1 million
Portfolio Managers:
John Bilello and Charles Dedekind
Performance quoted represents past performance. Past performance is no guarantee of future results. Current performance may be lower or higher than performance shown. Total return for a period of less than one year is not annualized. Returns shown do not reflect the deduction of taxes that a shareholder would pay on distributions or the redemption of shares.
Money market funds are not insured or guaranteed by the FDIC or any other government agency, and although these funds seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in money market funds.
Asset Allocation (% of investments)
The 7-day yield quotation more closely reflects the current earning of the Fund than the total return quotation.
Expense Example: Please refer to the ‘‘Important Information about the Fund’’ pages herein for an explanation of the information presented in the following Expense Example.
| | | | | | | | | | | | | | | | | | |
| | | Beginning
Account Value
May 1, 2006 | | Ending Account
Value
October 31, 2006 | | Annualized
Expense Ratio
based on the Period
May 1, 2006 through
October 31, 2006 | | Expenses Paid
during the
Period**
May 1, 2006
through
October 31, 2006 |
| Actual | | $1,000 | | $1,026.70 | | 0.05% | | $0.26 |
| Hypothetical | | $1,000 | | $1,024.95 | | 0.05% | | $0.26 |
|
| |
| ** | Expenses are equal to the Fund’s annualized expense ratio of 0.05%; multiplied by the average account value over the period, multiplied by 184/365 (to reflect the # of days in the period). |
Allianz Dresdner Daily Asset Fund
Important Fund Information
Proxy Voting — since the Fund invests exclusively in non-voting securities, the Fund does not have proxy voting policies and procedures.
Form N-Q — The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (‘‘SEC’’) for the first and third quarters of its fiscal year on Form N-Q. The Fund’s Form N-Q is available on the SEC’s website at www.sec.gov and may be reviewed and copied at the SEC’s Public Reference Room in Washington, DC. Information on the operation of the Public Reference Room may be obtained by calling (800) SEC-0330.
The following disclosure provides important information regarding the Fund’s Expense Example, which appears on the Fund’s Performance & Statistics page in this Annual Report. Please refer to this information when reviewing the Expense Example for the Fund.
Shareholder Expense Example:
As a Shareholder of the Fund you incur two types of costs: (1) transaction costs, and (2) ongoing costs, including Management fees and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (May 1, 2006 to October 31, 2006).
Actual Expenses:
The first line of the expense table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by number in the first line under the heading entitled ‘‘Expenses Paid During Period’’ to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes:
The second line of the table provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account value and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing cost only and do not reflect any transaction costs. Therefore, the second line of the table is useful in comparing ongoing costs only and will not help you determine the relative total costs of owning different funds.
Allianz Dresdner Daily Asset Fund
Schedule of Investments
| | | | | | | | | | |
| Principal Amount (000) | | | | Value |
CORPORATE BONDS & NOTES–71.4% |
| $1,500 | | Bank of America Corp., 5.57%, 12/6/06, Ser. 33, FRN | | $ | 1,500,901 | |
| | | Barclays Bank PLC, FRN, | | | | |
| 50,000 | | 5.266%, 11/6/06 | | | 49,995,657 | |
| 25,000 | | 5.276%, 11/6/06 | | | 24,997,516 | |
| 60,000 | | Beta Finance, Inc., 5.412%, 11/1/06, FRN (a) | | | 60,015,089 | |
| 23,000 | | BMW US Capital LLC, 5.32%, 11/15/06, FRN (a) | | | 23,000,000 | |
| 10,000 | | BNP Paribas, 5.31%, 11/27/06, FRN (a) | | | 10,001,025 | |
| 50,000 | | Calyon NY, 5.262%, 11/3/06, FRN | | | 49,984,061 | |
| 77,000 | | CC USA, Inc., 5.412%, 11/1/06, FRN (a) | | | 77,019,357 | |
| 30,000 | | Cheyne Finance LLC, 5.342%, 11/1/06, FRN (a) | | | 29,997,353 | |
| | | CIT Group, Inc., FRN, | | | | |
| 41,785 | | 5.63%, 11/20/06 | | | 41,834,027 | |
| 1,734 | | 5.638%, 11/24/06 | | | 1,738,558 | |
| 15,515 | | Countrywide Financial Corp., 5.53%, 1/11/07, Ser. A, FRN | | | 15,522,446 | |
| 55,000 | | Credit Suisse First Boston Corp., 5.342%, 1/12/07, FRN | | | 54,994,402 | |
| 25,000 | | Deutsche Bank NY, 5.443%, 11/1/06, FRN | | | 25,003,811 | |
| 60,000 | | Dorada Finance, Inc., 5.413%, 11/1/06, FRN (a) | | | 60,015,425 | |
| | | Goldman Sachs Group, Inc., Ser. B, FRN, | | | | |
| 3,300 | | 5.467%, 12/29/06 | | | 3,301,366 | |
| 1,000 | | 5.497%, 1/2/07 | | | 1,000,887 | |
| | | | Harrier Finance Funding LLC, FRN | | | | |
| 10,000 | | 5.33%, 11/13/06 | | | 10,001,533 | |
| 50,000 | | 5.418%, 11/1/06 | | | 50,013,430 | |
| 2,000 | | Household Finance Corp., 5.59%, 11/9/06, FRN | | | 2,000,827 | |
| 1,700 | | HSBC Finance Corp., 5.44%, 12/1/06, FRN | | | 1,700,279 | |
| | | | K2 USA LLC, FRN | | | | |
| 20,000 | | 5.32%, 11/27/06 | | | 20,003,877 | |
| 25,000 | | 5.353%, 11/1/06 | | | 24,997,780 | |
| 25,000 | | 5.373%, 11/1/06 | | | 25,000,176 | |
| | | Lehman Brothers Holdings, Inc., FRN, | | | | |
| 40,000 | | 5.37%, 11/27/06 | | | 40,000,000 | |
| 15,000 | | 5.463%, 11/1/06, Ser. H | | | 15,008,343 | |
| | | | Links Finance LLC, FRN | | | | |
| 20,000 | | 5.353%, 11/1/06 | | | 19,999,041 | |
| 15,000 | | 5.358%, 11/1/06 | | | 14,999,424 | |
| 35,000 | | 5.368%, 11/1/06 | | | 34,999,902 | |
| 30,000 | | Macquarie Bank Ltd., 5.33%, 11/21/06, FRN (a) | | | 30,000,000 | |
| | | Merrill Lynch & Co., Inc., FRN, | | | | |
| 80,000 | | 5.363%, 11/1/06 | | | 79,998,909 | |
| 20,000 | | 5.443%, 11/1/06, Ser. C | | | 20,010,430 | |
|
Allianz Dresdner Daily Asset Fund
Schedule of Investments
| | | | | | | | | | |
| Principal Amount (000) | | | | Value |
CORPORATE BONDS & NOTES (continued) |
| | | Morgan Stanley, FRN, | | | | |
| $10,000 | | 5.342%, 11/3/06 | | $ | 10,000,000 | |
| 20,000 | | 5.483%, 11/1/06, Ser. F | | | 20,004,225 | |
| 1,410 | | 5.505%, 1/29/07 | | | 1,411,494 | |
| 90,000 | | Natexis Banques Populaires, 5.368%, 11/1/06, FRN | | | 90,000,000 | |
| 14,000 | | Northern Rock PLC, 5.362%, 11/3/06, FRN (a) | | | 14,000,000 | |
| 50,000 | | Sedna Finance, Inc., 5.334%, 1/16/07, FRN (a) | | | 49,992,829 | |
| | | | Sigma Finance, Inc., FRN | | | | |
| 45,000 | | 5.353%, 11/1/06 | | | 44,996,725 | |
| 45,000 | | 5.408%, 11/1/06 | | | 45,007,252 | |
| 3,000 | | Societe Generale, 5.265%, 11/21/06, FRN | | | 2,998,819 | |
| 80,000 | | Tango Finance Corp., 5.353%, 11/1/06, FRN (a) | | | 79,998,411 | |
| | | Toyota Motor Credit Corp., FRN, | | | | |
| 50,000 | | 5.29%, 7/19/07 | | | 50,000,000 | |
| 45,500 | | 5.35%, 11/1/06 | | | 45,498,490 | |
| 4,500 | | 5.405%, 11/1/06, Ser. B | | | 4,501,578 | |
| 25,000 | | Unicredito Italiano Bank, 5.33%, 11/9/06, FRN | | | 25,000,000 | |
| | | Wachovia Corp., FRN, | | | | |
| 53,000 | | 5.363%, 11/1/06 | | | 53,000,000 | |
| 13,300 | | 5.423%, 11/1/06, Ser. E | | | 13,300,934 | |
| 2,159 | | 5.454%, 1/22/07 | | | 2,160,328 | |
| | | Total Corporate Bonds & Notes (cost–$1,470,526,917) | | | 1,470,526,917 | |
MASTER NOTES–12.1% |
| 95,000 | | Bank of America Corp., 5.382%, 11/1/06, FRN | | | 95,000,000 | |
| 60,000 | | Bear Stearns Co., Inc., 5.432%, 11/1/06, FRN | | | 60,000,000 | |
| 95,000 | | Citigroup Global Markets, Inc., 5.382%, 11/1/06, FRN | | | 95,000,000 | |
| | | Total Master Notes (cost–$250,000,000) | | | 250,000,000 | |
COMMERCIAL PAPER–7.8% |
| 50,000 | | Lakeside Funding LLC, 5.32%, 11/8/06 (a) | | | 50,000,000 | |
| 50,000 | | Morgan Stanley, 5.372%, 3/13/07 | | | 50,000,000 | |
| 60,000 | | Ormond Quay Funding LLC, 5.275%, 1/19/07 | | | 59,996,521 | |
| | | Total Commercial Paper (cost–$159,996,521) | | | 159,996,521 | |
PROMISSORY NOTES–3.6% |
| | | Goldman Sachs Group, Inc., | | | | |
| 55,000 | | 5.422%, 1/23/07 | | | 55,000,000 | |
| 20,000 | | 5.422%, 3/20/07 | | | 20,000,000 | |
| | | Total Promissory Notes (cost–$75,000,000) | | | 75,000,000 | |
|
Allianz Dresdner Daily Asset Fund
Schedule of Investments
| | | | | | | | | | |
| Principal Amount (000) | | | | Value |
TIME DEPOSIT–2.7% |
| $56,240 | | Sun Trust Bank, 5.27%, 11/1/06 (cost–$56,240,176) | | $ | 56,240,176 | |
ASSET-BACKED SECURITIES–2.3% |
| 10,000 | | Cheyne High Grade ABS CDO Ltd., 5.466%, 11/10/06, FRN (a) | | | 10,000,000 | |
| 25,000 | | Holmes Financing PLC, 5.29%, 11/15/06, FRN | | | 25,000,000 | |
| 12,000 | | Permanent Financing PLC, 5.29%, 11/10/06, FRN (a) | | | 12,000,000 | |
| | | Total Asset-Backed Securities (cost–$47,000,000) | | | 47,000,000 | |
| | | Total Investments (cost–$2,058,763,614)–99.9% | | | 2,058,763,614 | |
| | | Other assets less liabilities–0.1% | | | 342,978 | |
| | | Net Assets–100.0% | | $ | 2,059,106,592 | |
|
Notes to Schedule of Investments:
| | |
| (a) | | 144A Security–Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, typically only to qualified institutional buyers. Unless otherwise indicated, these securities are not considered to be illiquid. |
Glossary:
| |
| ABS–Asset-Backed Security |
| |
| CDO–Collateralized Debt Obligation |
| |
| FRN–Floating Rate Note, maturity date shown is date of next rate change and the interest rate disclosed reflects the rate in effect on October 31, 2006. |
Allianz Dresdner Daily Asset Fund
Statement of Assets and Liabilities
| | | | | | |
| Assets: | | | | |
| Investments, at value (cost–$2,058,763,614) | | | $2,058,763,614 | |
| Receivable for Fund shares sold | | | 13,964,236 | |
| Interest receivable | | | 9,546,898 | |
| Prepaid expenses | | | 29,112 | |
| Total Assets | | | 2,082,303,860 | |
| Liabilities: | | | | |
| Payable for Fund shares repurchased | | | 13,964,236 | |
| Dividends payable | | | 8,856,515 | |
| Investment management fees payable | | | 58,750 | |
| Accrued expenses | | | 317,767 | |
| Total Liabilities | | | 23,197,268 | |
| Net Assets | | | $2,059,106,592 | |
| Net Assets Consist of: | | | | |
Paid-in-capital (no par value, unlimited number of shares authorized;
2,059,131,367 shares outstanding) | | | $2,059,131,367 | |
| Accumulated net realized loss on investments | | | (24,775 | ) |
| Net Assets | | | $2,059,106,592 | |
| Net Asset Value Per Share | | | $1.00 | |
|
Allianz Dresdner Daily Asset Fund
Statement of Operations
| | | | | | |
| Investment Income: | | | | |
| Interest | | | $67,304,899 | |
| Expenses: | | | | |
| Administration fees | | | 393,837 | |
| Investment advisory fees | | | 229,739 | |
| Custodian and accounting agent fees | | | 124,500 | |
| Registration fees | | | 38,159 | |
| Trustees’ fees and expenses | | | 29,520 | |
| Insurance expense | | | 23,797 | |
| Audit and tax service fees | | | 20,066 | |
| Transfer agent fees | | | 18,557 | |
| Legal fees | | | 17,470 | |
| Shareholder communications | | | 4,639 | |
| Miscellaneous expense | | | 917 | |
| Total expenses | | | 901,201 | |
| Less: investment advisory fees waived | | | (203,816 | ) |
| custody credits earned on cash balances | | | (1,605 | ) |
| Net expenses | | | 695,780 | |
| Net investment income | | | 66,609,119 | |
| Net realized loss on investments | | | (24,775 | ) |
| Net Increase in Net Assets Resulting from Investment Operations | | | $66,584,344 | |
|
Allianz Dresdner Daily Asset Fund
Statement of Changes in Net Assets
| | | | | | | | | | |
| | | Year ended
October 31, 2006 | | Year ended
October 31, 2005 |
| Investment Operations: | | | | | | | | |
| Net investment income | | | $66,609,119 | | | | $16,796,080 | |
| Net realized gain (loss) on investments | | | (24,775 | ) | | | 2,428 | |
| Net increase in net assets resulting from investment operations | | | 66,584,344 | | | | 16,798,508 | |
| Dividends and Distributions to Shareholders from: | | | | | | | | |
| Net investment income | | | (66,609,119 | ) | | | (16,796,080 | ) |
| Net realized gains | | | (2,428 | ) | | | (1,097 | ) |
| Total dividends and distributions to shareholders | | | (66,611,547 | ) | | | (16,797,177 | ) |
| Capital Share Transactions: | | | | | | | | |
| Net proceeds from the sale of shares | | | 6,992,743,695 | | | | 1,972,732,267 | |
| Cost of shares redeemed | | | (5,482,193,749 | ) | | | (1,629,273,559 | ) |
| Net increase in net assets from capital share transactions | | | 1,510,549,946 | | | | 343,458,708 | |
| Total increase in net assets | | | 1,510,522,743 | | | | 343,460,039 | |
| Net Assets: | | | | | | | | |
| Beginning of year | | | 548,583,849 | | | | 205,123,810 | |
| End of year | | | $2,059,106,592 | | | | $548,583,849 | |
| Shares Issued and Redeemed: | | | | | | | | |
| Issued | | | 6,992,743,695 | | | | 1,972,732,267 | |
| Redeemed | | | (5,482,193,749 | ) | | | (1,629,273,559 | ) |
| Net increase | | | 1,510,549,946 | | | | 343,458,708 | |
|
Allianz Dresdner Daily Asset Fund Financial Highlights
| | | | | | | | | | | | | | |
| | | Year ended | | For the Period
March 24, 2004*
through
October 31, 2004 |
| | | October 31, 2006 | | October 31, 2005 |
| Net asset value, beginning of period | | | $1.00 | | | | $1.00 | | | | $1.00 | |
| Investment Operations: | | | | | | | | | | | | |
| Net investment income | | | 0.05 | | | | 0.03 | | | | 0.01 | |
| Net realized gain (loss) on investments | | | (0.00) | ** | | | 0.00 | ** | | | 0.00 | ** |
| Total from investment operations | | | 0.05 | | | | 0.03 | | | | 0.01 | |
| Dividends and Distributions to Shareholders from: | | | | | | | | | | | | |
| Net investment income | | | (0.05 | ) | | | (0.03 | ) | | | (0.01 | ) |
| Net realized gain | | | (0.00) | ** | | | (0.00) | ** | | | (0.00) | ** |
| Total dividends and distributions to shareholders | | | (0.05 | ) | | | (0.03 | ) | | | (0.01 | ) |
| Net asset value, end of period | | | $1.00 | | | | $1.00 | | | | $1.00 | |
| Total Return (1) | | | 4.97 | % | | | 2.97 | % | | | 0.79 | % |
| RATIOS/SUPPLEMENTAL DATA: | | | | | | | | | | | | |
| Net assets, end of period (000’s) | | | $2,059,107 | | | | $548,584 | | | | $205,124 | |
| Ratio of expenses to average net assets (2)(3). | | | 0.05 | % | | | 0.05 | % | | | 0.05 | %(4) |
| Ratio of net investment income to average net assets (3) | | | 5.07 | % | | | 3.06 | % | | | 1.30 | %(4) |
|
| | |
| * | | Commencement of operations. |
| | |
| ** | | Less than $0.005 per share. |
| | |
| (1) | | Assumes reinvestment of all dividends and distributions. Total return for a period of less than one year is not annualized. |
| | |
| (2) | | Inclusive of expenses offset by custody credits earned on cash balances at the custodian bank (See (1)(F) in Notes to Financial Statements). |
| | |
| (3) | | During the periods indicated above, the Investment Adviser waived all or a portion of its fee and assumed a portion of the Fund’s operating expenses. If such waivers and assumptions had not been in effect, the ratios of expenses to average net assets and the ratios of net investment income to average net assets would have been 0.07% and 5.05%, respectively, for the year ended October 31, 2006; 0.08% and 3.03%, respectively, for the year ended October 31, 2005; and 0.09% (annualized) and 1.26% (annualized), respectively for the period March 24, 2004 (commencement of operations) through October 31, 2004. |
Allianz Dresdner Daily Asset Fund
Notes to Financial Statements
1. Organization and Significant Accounting Policies
Allianz Dresdner Daily Asset Fund (the ‘‘Fund’’) is one of four separate funds which comprise Fixed Income SHares (the ‘‘Trust’’). The Trust was organized as a Massachusetts business trust on November 3, 1999 and, in addition to the Fund, is comprised of Series C, Series M and Series R (the ‘‘Portfolios’’). The Fund commenced operations on March 24, 2004. These financial statements relate to the Fund. The financial statements for the Portfolios are provided separately. The Fund is registered under the Investment Company Act of 1940 (‘‘1940 Act’’), as an open-end investment company. The Fund is authorized to issue an unlimited number of shares of beneficial interest at no par value.
The preparation of the financial statements, in accordance with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from these estimates.
In July 2006, the Financial Accounting Standards Board issued Interpretation No. 48, ‘‘Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109’’ (the ‘‘Interpretation’’). The Interpretation establishes for all entities, including pass-through entities such as the Fund, a minimum threshold for financial statement recognition of the benefit of positions taken in filing tax returns (including whether an entity is taxable in a particular jurisdiction), and requires certain expanded tax disclosures. The Interpretation is effective for fiscal years beginning after December 15, 2006, and is to be applied to all open tax years as of the date of effectiveness. Fund management has recently begun to evaluate the application of the Interpretation, and is not in a position at this time to estimate the significance of its impact, if any, on the Fund’s financial statements.
In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (‘‘SFAS’’) 157, Fair Value Measurements, which clarifies the definition of fair value and requires companies to expand their disclosure about the use of fair value to measure assets and liabilities in interim and annual periods subsequent to initial recognition. Adoption of SFAS 157 requires the use of the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. At this time, the Fund is in the process of reviewing the Standard against its current valuation policies to determine future applicability.
Under the Trust’s organizational documents, the Fund’s officers, trustees, employees and agents are indemnified against certain liabilities that may arise out of performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts that contain a variety of representations which provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown as such exposure would involve claims that may be made against the Fund that have not yet been asserted. However, the Fund expects the risk of any loss to be remote.
The following is a summary of significant accounting policies followed by the Fund:
(a) Valuation of Investments
The Fund values its investments on the basis of amortized cost which approximates market value. The amortized cost method involves valuing a security at cost on the date of purchase and thereafter assuming a constant dollar amortization to maturity of the difference between the principal amount due at maturity and the initial cost of the security. The use of amortized cost is subject to compliance with the Fund’s amortized cost procedures and certain conditions under Rule 2a-7 of the 1940 Act.
(b) Investment Transactions and Investment Income
Investment transactions are accounted for on the trade date. Realized gains and losses on investments are determined on the identified cost basis. Interest income, adjusted for the accretion of discounts and amortization of premiums, is recorded on an accrual basis.
(c) Federal Income Taxes
The Fund intends to distribute all of its taxable income and comply with the other requirements of the U.S. Internal Revenue Code of 1986, as amended, applicable to regulated investment companies. Accordingly, no provision for U.S. federal income taxes is required.
Allianz Dresdner Daily Asset Fund
Notes to Financial Statements
1. Organization and Significant Accounting Policies (continued)
(d) Dividends and Distributions
Dividends from net investment income are declared daily and paid monthly. Distributions from net realized capital gains, if any, are declared and paid annually. The Fund records dividends and distributions to shareholders on the ex-dividend date. The amount of dividends and distributions are determined in accordance with federal income tax regulations, which may differ from accounting principles generally accepted in the United States of America. These ‘‘book-tax’’ differences are considered either temporary or permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified within the capital accounts based on their federal income tax treatment; temporary differences do not require reclassification.
(e) Repurchase Agreements
The Fund enters into transactions with its custodian bank or securities brokerage firms whereby it purchases securities under agreements to resell at an agreed upon price and date (‘‘repurchase agreements’’). Such agreements are carried at the contract amount in the financial statements. Collateral pledged (the securities received), which consists primarily of U.S. government obligations and asset-backed securities, are held by the custodian bank until maturity of the repurchase agreement. Provisions of the repurchase agreements and the procedures adopted by the Fund require that the market value of the collateral, including accrued interest thereon, is sufficient in the event of default by the counterparty. If the counterparty defaults and the value of the collateral declines or if the counterparty enters an insolvency proceeding, realization of the collateral by the Fund may be delayed or limited.
(f) Custody Credits Earned on Cash Balances
The Fund benefits from an expense offset arrangement with its custodian bank whereby uninvested cash balances earn credits which reduce monthly custodian and accounting agent expenses. Had these cash balances been invested in income producing securities, they would have generated income for the Fund.
2. Investment Adviser, Administrator and Distributor
(a) Investment Adviser
Dresdner Advisors LLC (‘‘Dresdner Advisors’’ or the ‘‘Investment Adviser’’), a wholly-owned subsidiary of Dresdner Bank AG, serves as the Fund’s investment adviser. Subject to the supervision of the Board of Trustees, the Investment Adviser is responsible for managing the Fund’s investment activities. Pursuant to an investment advisory agreement with the Fund, the Investment Adviser receives an annual fee, payable monthly, at the annual rate of 0.0175% of the Fund’s average daily net assets. The Investment Adviser has agreed to waive its investment advisory fee and/or pay all or a portion of the Fund’s other operating expenses so that the Fund’s net operating expenses do not exceed 0.053% (net of any expense offset) of the Fund’s average daily net assets.
(b) Administrator
Allianz Global Investors Fund Management LLC (‘‘the Administrator’’), an affiliate of the Investment Adviser and an indirect wholly-owned subsidiary of Allianz Global Investors of America L.P., (‘‘Allianz Global’’), serves as the Fund’s administrator and is responsible for managing the Fund’s business affairs and administrative matters. Pursuant to an administration agreement with the Fund, the Administrator receives an annual fee, payable monthly, at an annual rate of 0.03% of the Fund’s average daily net assets.
(c) Distributor
Allianz Global Investors Distributors LLC (the ‘‘Distributor’’), an indirect wholly-owned subsidiary of Allianz Global, serves as the distributor of the Fund’s shares. Pursuant to a distribution agreement with the Trust, the Investment Adviser on behalf of the Fund pays the Distributor.
Allianz Dresdner Daily Asset Fund
Notes to Financial Statements
3. Capital Stock
The following schedule details shareholders owning 5% or more of the Fund and the percentage held by such shareholder at October 31, 2006:
| | | | | | |
| | | Ownership Percentage |
| Miami Dade County | | 22.08% |
| Allianz OCC Value Fund | | 15.38 |
| Allianz RCM Global Technology Fund | | 6.38 |
|
Investment activity by these shareholders could have a material impact on the Fund.
4. Income Tax Information
The tax character of dividends and distributions paid for the years ended October 31, 2006 and October 31, 2005 of $66,611,547 and $16,797,177, respectively was comprised entirely from ordinary income.
The cost basis of portfolio securities for federal income tax purposes is $2,058,763,614.
At October 31, 2006, the Fund had a capital loss carryforwarded of $24,775 of which will expire in 2014, available as a reduction, to the extent provided in the regulations of any future net realized capital gains. To the extent that these losses are used to offset future realized capital gains, such gains will not be distributed.
5. Legal Proceedings
In June and September 2004, the Administrator, certain of its affiliates (including the Distributor and PEA Capital LLC) and Allianz Global, agreed to settle, without admitting or denying the allegations, claims brought by the Securities and Exchange Commission (the ‘‘Commission’’), the New Jersey Attorney General and the California Attorney General alleging violations of federal and state securities laws with respect to certain open-end funds for which the Administrator serves as investment adviser. Two settlements (with the Commission and New Jersey) related to an alleged ‘‘market timing’’ arrangement in certain open-end funds sub-advised by PEA Capital. Two settlements (with the Commission and California) related to the alleged use of cash and fund portfolio commissions to finance ‘‘shelf-space’’ arrangements with broker-dealers for open-end funds. The Administrator and its affiliates agreed to pay a total of $68 million to settle the claims related to market timing and $20.6 million to settle the claims related to shelf space. In addition to monetary payments, the settling parties agreed to undertake certain corporate governance, compliance and disclosure reforms related to market timing, brokerage commissions, revenue sharing and shelf space arrangements, and consented to cease and desist orders and censures. The settling parties did not admit or deny the findings in the settlements. None of the settlements allege that any inappropriate activity took place with respect to the Fund.
Since February 2004, the Administrator and certain of its affiliates and their employees have been named as defendants in fifteen lawsuits filed in various jurisdictions. Eleven of those lawsuits concern market timing and have been transferred to the consolidated for pre-trial proceedings in a multi-district litigation proceeding in the U.S. District Court for the District of Maryland; the four other lawsuits concern revenue sharing and have been consolidated into a single action in the U.S. District Court for the District of Connecticut. The lawsuits generally relate to the same allegations that are the subject of the regulatory proceedings discussed above. The lawsuits seek, among other things, unspecified compensatory damages plus interest and, in some cases, punitive damages, the rescission of investment advisory contracts, the return of fees paid under those contracts, restitution, and waiver of or return of certain sales charges paid by the open-end fund shareholders
The Administrator believes that these matters are not likely to have a material adverse effect on the Fund or on its ability to perform its administration services relating to the Fund.
The foregoing speaks only as of the date hereof.
Allianz Dresdner Daily Asset Fund
Report of Independent Registered
Public Accounting Firm
To the Board of Trustees of Fixed Income SHares and Shareholders of
Allianz Dresdner Daily Asset Fund
In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Fixed Income SHares: Allianz Dresdner Daily Asset Fund (a fund of Fixed Income Shares, hereafter referred to as the ‘‘Fund’’) at October 31, 2006, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as ‘‘financial statements’’) are the responsibility of the Fund’s management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States), which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit, which included confirmation of securities at October 31, 2006 by correspondence with the custodian and brokers, provides a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Kansas City, MO
December 22, 2006
Allianz Dresdner Daily Asset Fund
Tax Information (unaudited)
Tax Information (unaudited)
Subchapter M of the Internal Revenue Code of 1986, as amended, requires the Fund to advise shareholders within 60 days of the Fund’s fiscal year-end (October 31, 2006) as to the federal tax status of dividends and distributions received by shareholders during such tax year. Accordingly, during the tax year ended October 31, 2006, per share dividends of $0.0486 were comprised entirely from ordinary income.
Since the Fund’s tax year is not the calendar year, another notification will be sent with respect to calendar year 2006. In January 2007, shareholders will be advised on IRS Form 1099 DIV as to the federal tax status of the dividends and distributions received during calendar year 2006. The amount that will be reported, will be the amount to be used on your 2006 federal income tax return and may differ from the amount which must be reported in connection with the Fund’s tax year ended October 31, 2006. Shareholders are advised to consult with their tax advisors as to the federal, state and local tax status of the income received by the Fund.
Allianz Dresdner Daily Asset Fund
Matters Relating to the Trustees
Consideration of the Investment
Management and Portfolio Management Agreements October 31, 2006
(unaudited)
The Investment Company Act of 1940 requires that both the full Board of Trustees (the ‘‘Trustees’’) and a majority of the non-interested (‘‘independent’’) Trustees, voting separately, approve the Trust’s Investment Advisory Agreement (the ‘‘Advisory Agreement’’) with the Investment Adviser as it pertains to the Fund. The Trustees met on June 20 and 21, 2006 (the ‘‘contract review meeting’’) for the specific purpose of considering whether to approve the Advisory Agreement. The independent Trustees were assisted in their evaluation of the Advisory Agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from Fund management during the contract review meeting.
Based on their evaluation of factors that they deemed to be material, including those factors described below, the Board of Trustees, including a majority of the independent Trustees, concluded that the Fund’s Advisory Agreement should be approved for a year period commencing July 1, 2006.
In connection with their deliberations regarding the continuation of the Advisory Agreement, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. As described below, the Trustees considered the nature, quality, and extent of the various investment management, administrative and other services performed by the Investment Adviser under the Advisory Agreement.
In connection with the contract review meeting, the Trustees received and relied upon materials provided by the Investment Adviser which included, among other items: (i) information provided by Lipper Inc. on the total return investment performance (based on net assets) of the Fund for various time periods and the investment performance of a group of funds with substantially similar investment classifications/objectives, (ii) information provided by Lipper Inc. on the Fund’s management fees and other expenses and the management fees and other expenses of comparable funds identified by Lipper, (iii) an estimate of the profitability to the Investment Adviser from its relationship with the Fund for the twelve months ended December 31, 2005, (iv) descriptions of various functions performed by the Investment Adviser for the Fund, such as compliance monitoring and portfolio trading practices, and (v) information regarding the overall organization of the Investment Adviser, including information regarding senior management, portfolio managers and other personnel providing investment management, administrative and other services to the Fund.
The Trustees’ conclusions as to the continuation of the Advisory Agreement were based on a comprehensive consideration of all information provided to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors.
In determining to approve the Advisory Agreement, the Trustees met with the relevant investment advisory personnel from the Investment Adviser and considered information relating to personnel providing services under the Advisory Agreement. The information considered included the education and experience of the personnel providing services, including the education and experience of the investment professionals expected to be on the team of investment professionals managing the Fund. The Trustees also took into account the time and attention that had been devoted by senior management to the Fund and the other funds in the complex. The Trustees evaluated the level of skill required to manage the Fund and concluded that the human resources devoted by the Investment Adviser to the Fund were appropriate to fulfill effectively the duties of the Investment Adviser under the Advisory Agreement. The Trustees also considered the business reputation of the Investment Adviser its their inception, its significant financial resources, the Investment Adviser’s experience in managing the Fund, including its professional liability insurance coverage and the Investment Adviser’s assets under and concluded that its would be able to meet any reasonably foreseeable obligations under the Advisory Agreement.
The Trustees received information concerning the investment philosophy and investment process applied by the Investment Adviser in managing the Fund, as described in the Prospectus. In this connection, the Trustees considered the Investment Adviser’s in-house research capabilities, including its ongoing forecasting of industry, sector and overall market movements, interest rates and the development of it ongoing outlook on the global economy, as well as other resources available to the Investment Adviser’s personnel, including research services available to the Investment Adviser as a result of securities transactions effected for the Fund and other investment advisory clients. The Trustees concluded that the Investment Adviser’s investment process, research capabilities and philosophy were well suited to the Fund, given the Fund’s investment objective and policies.
Allianz Dresdner Daily Asset Fund
Matters Relating to the Trustees
Consideration of the Investment
Management and Portfolio Management Agreements October 31, 2006
(unaudited)
The Trustees noted that the Investment Adviser does not have other advisory clients. The Trustees noted that the Investment Adviser’s required standard of care was comparable to that found in most mutual fund investment advisory agreements. The Trustees also considered the tools and procedures used to assure the Fund’s compliance with applicable regulations and policies, including the appointment of a Chief Compliance Officer, and the adoption of enhanced compliance policies and procedures. The Trustees apprised themselves and took account of past claims made by regulators and others against affiliates of the Investment Adviser and the steps taken to address those claims. The Trustees concluded that the scope of the Investment Adviser’s services to the Fund, as described above, was consistent with the Fund’s operational requirements, including, in addition to the applicable investment objectives, compliance with the Fund’s investment restrictions, tax and reporting requirements and related shareholder services.
The Trustees also evaluated the procedures of the Investment Adviser designed to fulfill its fiduciary duty to the Fund with respect to possible conflicts of interest, including its codes of ethics), the integrity of the systems in place to ensure compliance with the foregoing and the record of the Investment Adviser in these matters. The Trustees also received information concerning standards of the Investment Adviser with respect to the execution of the Fund’s transactions. The information considered by the Trustees included information regarding the Investment Adviser, its personnel, policies and practices included in the Form ADV.
The Trustees considered the information provided by Lipper Inc. regarding the performance of the Fund and similar money market funds. The Trustees noted that for the one-year period ended April 30, 2006, the Fund ranked first in the Lipper universe. In the course of their deliberations, the Trustees took into account information provided by the Investment Adviser in connection with the contract review meeting, as well as during investment review meetings conducted with portfolio management personnel during the course of the year regarding the Fund’s performance. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the Advisory Agreement, that they were satisfied with the Investment Adviser’s responses and efforts relating to the investment performance of the Fund.
The Trustees also considered that the Investment Adviser received a monthly investment advisory fee from the Fund but that the Investment Adviser has contractually agreed to waive, reduce or reimburse the fee as set forth in the Prospectus.
The Trustees also considered the profitability to the Investment Adviser of the relationship of the Investment Adviser and its affiliates to the Fund and determined that such profitability was not excessive. The Trustees considered the costs of the services provided under the Advisory Agreement, as well as the fees and profits, if any, expected to be realized by the Investment Adviser and its affiliates from their relationship with the Fund.
The Trustees also took into account so-called ‘‘fallout benefits’’ to the Investment Adviser, such as reputational value derived from serving as investment adviser and the fact that the Investment Adviser will receive services from brokers who execute portfolio transactions for the Fund.
Based on the foregoing, the Trustees decided to continue to engage the Investment Adviser to serve as investment adviser for the Fund.
Allianz Dresdner Daily Asset Fund
Board of Trustees (unaudited)
| | | | | | |
| Name, Date of Birth, Position(s) Held with Fund, Length of Service, Other Trusteeships/ Directorships Held by Trustee; Number of Portfolios in Fund Complex/Outside Fund Complexes Currently Overseen by Trustee | | Principal Occupation(s) During Past 5 Years: |
| The address of each trustee is 1345 Avenue of the Americas, New York, NY 10105 | | |
Robert E. Connor
Date of Birth: 9/17/34
Trustee since: 2004
Term of office: Perpetual
Trustee/Director of 24 funds in Fund Complex
Trustee/Director of no funds outside of Fund
Complex | | Corporate Affairs Consultant; Formerly, Senior Vice President,
Corporate Office, Smith Barney Inc. |
Paul Belica
Date of Birth: 9/27/21
Trustee since: 2004
Term of office: Perpetual
Trustee/Director of 24 funds in Fund Complex
Trustee/Director of no funds outside of Fund
Complex | | Retired. Formerly Director, Student Loan Finance Corp., Education Loan, Inc., Goal Funding, Inc., Goal Funding II, Inc. and Surety Loan Fund, Inc.; fomerly, Manager of Stratigos Fund LLC, Whisrler Fund LLC, Xanthus Fund LLC & Wynstone Fund LLC. |
John J. Dalessandro II
Date of Birth: 7/26/37
Trustee since: 2005
Term of office: Perpetual
Trustee of 24 funds in Fund Complex
Trustee of no funds outside of Fund Complex | | Retired. Formerly, President and Director, J.J. Dalessandro II Ltd., registered broker-deal and member of the New York Stock Exchange. |
Hans W. Kertess
Date of Birth: 7/12/39
Chairman of the Board of Trustees since: Dec. 2006
Trustee since: 2005
Term of office: Perpetual
Trustee of 24 funds in Fund Complex
Trustee of no funds outside of Fund Complex | | President, H Kertess & Co., a financial advisory company, formerly, Managing Director, Royal Bank of Canada Capital Markets. |
John C. Maney†
Date of Birth: 8/3/59
Term of office: Perpetual
Trustee of 24 funds in Fund Complex
Trustee of no funds outside of Fund Complex | | Chief Financial officer of Allianz Global Investors Fund Management LLC, Managing Director and Chief Financial Officer of AGIFM and Allianz Global Investors of America L.P. since January 2005 and Chief Operating Officer of Allianz Global Investors of America since November 2006. Executive Vice President and Chief Financial Officer since 2001. Chief Financial Officer of PIMCO, Oppenheimer Capital LLC, AGID, NFJ Investment Group and a number of other affiliated entities. Chief Financial Officer and Executive Vice President of Allianz Global Investors Distributors LLC. Formerly, Executive Vice President and Chief Financial Officer of Apria Healthcare Group, Inc. (1996-2001). |
William B. Ogden, IV
Date of Birth: 1/11/45
Trustee since: 2006
Term of office: Perpetual
Trustee/Director of 24 Funds in Fund Complex;
Trustee/Director of no funds ouside of Fund Complex | | Asset Management Industry Consultant; formerly Managing Director, Investment Banking Division of Citigroup Global Markets Inc. |
R. Peter Sullivan III
Date of Birth: 9/4/41
Trustee since: 2005
Term of office: Perpetual
Trustee of 24 funds in Fund Complex
Trustee of no funds outside of Fund Complex | | Retired. Formerly, Managing Partner, Bear Wagner Specialists LLC, specialist firm on the New York Stock Exchange. |
|
| |
| † | Mr. Maney is an ‘‘interested person’’ of the Fund to his affiliation with Allianz Global Investors of America L.P. and the Administrator. |
Further information about the Fund’s Trustees is available in the Fund’s Statement of Additional Information dated March 1, 2006, which can be obtained upon request, without charge, by calling the Fund’s transfer agent at (800)-331-1710.
Allianz Dresdner Daily Asset Fund
Principal Officer (unaudited)
| | | | | | |
| Name, Date of Birth, Position(s) Held with Fund | | Principal Occupation(s) During Past 5 Years: |
Brian S. Shlissel
Date of Birth: 11/14/64
President & Chief Executive Officer since: 2002 | | Executive Vice President, Allianz Global Investors Fund Management LLC; President and Chief Executive Officer of 32 funds in the Fund Complex; Treasurer; Principal Financial and Accounting Officer of 35 funds in the Fund Complex; Trustee of 8 funds in the Fund Complex. |
Lawrence G. Altadonna
Date of Birth: 3/10/66
Treasurer, Principal/Financial and Accounting Officer since: 2002 | | Senior Vice President, Allianz Global Investors Fund Mangement LLC; Treasurer, Principal Financial and Accounting officer of 24 funds in the Fund Complex; Assistant Treasurer of 35 funds in the Fund Complex |
Thomas J. Fuccillo
Date of Birth: 3/22/68
Secretary since: 2004
Chief Legal Officer since: 2005 | | Senior Vice President, Senior Counsel, Allianz Global Investors of America L.P., Vice President, Secretary and Chief Legal Officer of 24 funds in the Fund Complex. Secretary & Chief Legal Officer of 12 funds in the Fund Complex; Formerly, Vice President and Associate General Counsel, Nueberger Berman LLC (1991-2004). |
Youse E. Guia
Date of Birth: 9/3/72
Chief Compliance Officer since: 2004 | | Senior Vice President, Group Compliance Manager, Allianz Global Investors of America L.P., Chief Compliance Officer of 67 funds in the Fund Complex. Formerly, Vice President, Group Compliance Manager, Allianz Global Investor of America L.P. (2002-2004), Audit Manager, PricewaterhouseCoopers LLP (1996-2002). |
Kathleen A. Chapman
Date of Birth: 11/11/54
Assistant Secretary since 2006 | | Assistant Secretary of 67 funds in the fund Complex; Manager — IIG Advosry Law, Morgan Stanley (2004-2005); Paralegal and Assistant Corporate Secretary, Prudential Financial, Inc. (formerly American Skandia, Inc.) (1996-2004). |
William V. Healey
Date of Birth: 7/28/53
Assistant Secretary since: 2006 | | Executive Vice President, Chief Legal Office, Allianz Global Investors of America LP, Allianz Global Investors Fund Management and Allianz Global Investors Distributors LLC. Assistant Secretary of 67 funds in the Fund Complex; formerly, Chief Legal Officer, Vice President and Associate General Counsel of Prudential Insurance Company of America (1998-2005). |
Richard H. Kirk
Date of Birth: 4/6/61
Assiatant Secretary since: 2006 | | Senior Vice President, Associate General Counsel, Allianz Global Investors of America L.P. (since 2004), Senior Vice President, Associate General Counsel, Allianz Global Investors Distributors LLC. Assistant Secretary of 67 funds in the Fund Complex, formerly, Vice President, Counsel Prudential Finanical, Inc./ American Skandia, Associate General counsel, Friedman, Billings, Ramsey, Inc. |
Lagan Srivastava
Date of Birth: 9/20/77
Assistant Secretary sinc: 2006 | | Assistant Secretary of 67 funds in the Fund Complexl formerly, Research Assistant, Dechert LLP (2004-2005); Research Assistant Swidler Berlin Shereff Friedman LLP (2002-2004). |
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Officers hold office at the pleasure of the Board and until their successors are appointed and qualified or until their earlier resignationor removal.
Trustees and Principal Officers
Robert E. Connor
Trustee
Paul Belica
Trustee
John J. Dalessandro II
Trustee
Hans W. Kertess
Trustee, Chairman of the Board of Trustees
William B. Ogden
Trustee
R. Peter Sullivan III
Trustee
Brian S. Shlissel
President & Chief Executive Officer
Lawrence G. Altadonna
Treasurer
Thomas J. Fuccillo
Vice President, Secretary & Chief Legal Officer
Youse E. Guia
Chief Compliance Officer
Investment Adviser
Dresdner Advisors LLC
1301 Avenue of the Americas
New York, NY 10019
Administrator
Allianz Global Investors Fund Management LLC
1345 Avenue of the Americas
New York, NY 10105
Distributor
Allianz Global Investors Distributors LLC
2187 Atlantic Street
Stamford, CT 06902
Custodian and Accounting Agent
State Street Bank & Trust Co.
801 Pennsylvania
Kansas City, MO 64105
Transfer Agent, Dividend Paying Agent and Registrar
Boston Financial Data Services
330 West 9th Street
Kansas City, MO 64105
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP
1055 Broadway
Kansas City, MO 64105
Legal Counsel
Ropes & Gray LLP
One International Place
Boston, MA 02110
ITEM 2. CODE OF ETHICS
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| (a) | As of the end of the period covered by this report, the registrant has adopted a code of ethics (the ‘‘Section 406 Standards for Investment Companies — Ethical Standards for Principal Executive and Financial Officers’’) that applies to the registrant’s Principal Executive Officer and Principal Financial Officer; the registrant’s Principal Financial Officer also serves as the Principal Accounting Officer. The registrant undertakes to provide a copy of such code of ethics to any person upon request, without charge, by calling 1-800-331-1710. The Investment Manager’s code of ethics are included as an exhibit Exhibit 99.CODEETH hereto. |
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| (b) | During the period covered by this report, there were not any amendments to a provision of the code of ethics adopted in 2(a) above. |
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| (c) | During the period covered by this report, there were not any waivers or implicit waivers to a provision of the code of ethics adopted in 2(a) above. |
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT
The registrant’s Board has determined that Mr. Paul Belica, a member of the Board’s Audit Oversight Committee is an ‘‘audit committee financial expert,’’ and that he is ‘‘independent,’’ for purposes of this Item.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES
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| a) | Audit fees. The aggregate fees billed for each of the last two fiscal years (the ‘‘Reporting Periods’’) for professional services rendered by the Registrant’s principal accountant (the ‘‘Auditor’’) for the audit of the Registrant’s annual financial statements, or services that are normally provided by the Auditor in connection with the statutory and regulatory filings or engagements for the Reporting Periods, were $80,000. in 2005 and $110,000 in 2006. |
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| b) | Audit-Related Fees. The aggregate fees billed in the Reporting Periods for assurance and related services by the principal accountant that are reasonably related to the performance of the audit registrant’s financial statements and are not reported under paragraph (e) of this Item were $0 in 2005 and $0 in 2006. |
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| c) | Tax Fees. The aggregate fees billed in the Reporting Periods for professional services rendered by the Auditor for tax compliance, tax service and tax planning (‘‘Tax Services’’) were $12,500 in 2005 and $29,500 in 2006. These services consisted of review or preparation of U.S. federal, state, local and excise tax returns. |
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| d) | All Other Fees. There were no other fees billed in the Reporting Periods for products and services provided by the Auditor to the Registrant. |
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| e) | 1. Audit Committee Pre-Approval Policies and Procedures. The Registrant’s Audit Committee has established policies and procedures for pre-approval of all audit and permissible non-audit services by the Auditor for the Registrant, as well as the Auditor’s engagements related directly to the operations and financial reporting of the Registrant. The Registrant’s policy is stated below. |
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| | Fixed Income SHares: Series C, Series M, Series R and Allianz Dresdner Daily Asset Fund (THE ‘‘TRUST’’) |
AUDIT OVERSIGHT COMMITTEE POLICY FOR PRE-APPROVAL OF SERVICES PROVIDED BY THE INDEPENDENT ACCOUNTANTS
The Funds’ Audit Oversight Committee (‘‘Committee’’) is charged with the oversight of the Funds’ financial reporting policies and practices and their internal controls. As part of this responsibility, the Committee must pre-approve any independent accounting firm’s engagement to render audit and/or permissible non-audit services, as required by law. In evaluating a proposed engagement by the independent accountants, the Committee will assess the effect that the engagement might reasonably be expected to have on the accountant’s independence. The Committee’s evaluation will be based on:
a review of the nature of the professional services expected to provided,
the fees to be charged in connection with the services expected to be provided,
a review of the safeguards put into place by the accounting firm to safeguard independence, and
periodic meetings with the accounting firm.
POLICY FOR AUDIT AND NON-AUDIT SERVICES TO BE PROVIDED TO THE FUNDS
On an annual basis, the Funds’ Committee will review and pre-approve the scope of the audits of the Funds and proposed audit fees and permitted non-audit (including audit-related) services that may be performed by the Funds’ independent accountants. At least annually, the Committee will receive a report of all audit and non-audit services that were rendered in the previous calendar year pursuant to this Policy. In addition to the Committee’s pre-approval of services pursuant to this Policy, the engagement of the independent accounting firm for any permitted non-audit service provided to the Funds will also require the separate written pre-approval of the President of the Funds, who will confirm, independently, that the accounting firm’s engagement will not adversely affect the firm’s independence. All non-audit services performed by the independent accounting firm will be disclosed, as required, in filings with the Securities and Exchange Commission.
AUDIT SERVICES
The categories of audit services and related fees to be reviewed and pre-approved annually by the Committee are:
Annual Fund financial statement audits
Seed audits (related to new product filings, as required)
SEC and regulatory filings and consents
Semiannual financial statement reviews
AUDIT-RELATED SERVICES
The following categories of audit-related services are considered to be consistent with the role of the Fund’s independent accountants and services falling under one of these categories will be pre-approved by the Committee on an annual basis if the Committee deems those services to be consistent with the accounting firm’s independence:
Accounting consultations
Fund merger support services
Agreed upon procedure reports (inclusive of quarterly review of Basic Maintenance testing
associated with issuance of Preferred Shares and semiannual report review)
Other attestation reports
Comfort letters
Other internal control reports
Individual audit-related services that fall within one of these categories and are not presented to the Committee as part of the annual pre-approval process described above, may be pre-approved, if deemed consistent with the accounting firm’s independence, by the Committee Chair (or any other Committee member who is a disinterested trustee under the Investment Company Act to whom this responsibility has been delegated) so long as the estimated fee for those services does not exceed $100,000. Any such pre-approval shall be reported to the full Committee at its next regularly scheduled meeting.
TAX SERVICES
The following categories of tax services are considered to be consistent with the role of the Funds’ independent accountants and services falling under one of these categories will be pre-approved by the Committee on an annual basis if the Committee deems those services to be consistent with the accounting firm’s independence:
Tax compliance services related to the filing or amendment of the following:
Federal, state and local income tax compliance; and, sales and use tax compliance
Timely RIC qualification reviews
Tax distribution analysis and planning
Tax authority examination services
Tax appeals support services
Accounting methods studies
Fund merger support service
Other tax consulting services and related projects
Individual tax services that fall within one of these categories and are not presented to the Committee as part of the annual pre-approval process described above, may be pre-approved, if deemed consistent with the accounting firm’s independence, by the Committee Chairman (or any other Committee member who is a disinterested trustee under the Investment Company Act to whom this responsibility has been delegated) so long as the estimated fee for those services does not exceed $100,000. Any such pre-approval shall be reported to the full Committee at its next regularly scheduled meeting.
PROSCRIBED SERVICES
The Funds’ independent accountants will not render services in the following categories of non-audit services:
Bookkeeping or other services related to the accounting records or financial statements of the Funds
Financial information systems design and implementation
Appraisal or valuation services, fairness opinions, or contribution-in-kind reports
Actuarial services
Internal audit outsourcing services
Management functions or human resources
Broker or dealer, investment adviser or investment banking services
Legal services and expert services unrelated to the audit
Any other service that the Public Company Accounting Oversight Board determines, by regulation, is impermissible
PRE-APPROVAL OF NON-AUDIT SERVICES PROVIDED TO OTHER ENTITIES WITHIN THE FUND COMPLEX
The Committee will pre-approve annually any permitted non-audit services to be provided to Allianz Global Investors Fund Management LLC (Formerly, PA Fund Management LLC) or any other investment manager to the Funds (but not including any sub-adviser whose role is primarily portfolio management and is sub-contracted by the investment manager) (the ‘‘Investment Manager’’) and any entity controlling, controlled by, or under common control with the Investment Manager that provides ongoing services to the Funds (including affiliated sub-advisers to the Funds), provided, in each case, that the engagement relates directly to the operations and financial reporting of the Funds (such entities, including the Investment Manager, shall be referred to herein as the ‘‘Accounting Affiliates’’). Individual projects that are not presented to the Committee as part of the annual pre-approval process, may be pre-approved, if deemed consistent with the accounting firm’s independence, by the Committee Chairman (or any other Committee member who is a disinterested trustee under the Investment Company Act to whom this responsibility has been delegated) so long as the estimated fee for those services does not exceed $100,000. Any such pre-approval shall be reported to the full Committee at its next regularly scheduled meeting.
Although the Committee will not pre-approve all services provided to the Investment Manager and its affiliates, the Committee will receive an annual report from the Funds’ independent accounting firm showing the aggregate fees for all services provided to the Investment Manager and its affiliates.
DE MINIMUS EXCEPTION TO REQUIREMENT OF PRE-APPROVAL OF NON-AUDIT SERVICES
With respect to the provision of permitted non-audit services to a Fund or Accounting Affiliates, the pre-approval requirement is waived if:
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| (1) | The aggregate amount of all such permitted non-audit services provided constitutes no more than (i) with respect to such services provided to the Fund, five percent (5%) of the total amount of revenues paid by the Fund to its independent accountant during the fiscal year in which the services are provided, and (ii) with respect to such services provided to Accounting Affiliates, five percent (5%) of the total amount of revenues paid to the Fund’s independent accountant by the Fund and the Accounting Affiliates during the fiscal year in which the services are provided; |
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| (2) | Such services were not recognized by the Fund at the time of the engagement for such services to be non-audit services; and |
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| (3) | Such services are promptly brought to the attention of the Committee and approved prior to the completion of the audit by the Committee or by the Committee Chairman (or any other Committee member who is a disinterested trustee under the Investment Company Act to whom this Committee Chairman or other delegate shall be reported to the full Committee at its next regularly scheduled meeting. |
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| e) | 2. No services were approved pursuant to the procedures contained in paragraph (C) (7) (i) (C) of Rule 2-01 of Registration S-X. |
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| g) | Non-audit fees. The aggregate non-audit fees billed by the Auditor for services rendered to the Registrant, and rendered to the Adviser, for the 2005 Reporting Period was $3,257,987 and the 2006 Reporting Period was $2,228,248. |
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| h) | Auditor Independence. The Registrant’s Audit Oversight Committee has considered whether the provision of non-audit services that were rendered to the Adviser which were not pre-approved is compatible with maintaining the Auditor’s independence. |
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANT
Disclosure not required for open-end investment management companies.
ITEM 6. SCHEDULE OF INVESTMENTS Schedule of Investments is included as part of the report to shareholders filed under Item 1 of this form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES
Disclosure not required for open-end investment management companies
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT OMPANIES
Disclosure not required for open-end investment management companies.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED COMPANIES
Disclosure not required for open-end investment management companies
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There have been no material changes to the procedures by which shareholders may recommend nominees to the Fund’s Board of Trustees since the Fund last provided disclosure in response to this item.
ITEM 11. CONTROLS AND PROCEDURES
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| (a) | The registrant’s President and Chief Executive Officer and Principal Financial Officer have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a-2(c) under the Investment Company Act of 1940, as amended are effective based on their evaluation of these controls and procedures as of a date within 90 days of the filing date of this document. |
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| (b) | There were no significant changes in the registrant’s internal controls or in factors that could affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
ITEM 12. EXHIBITS
(a) (1) Exhibit 99.CODE ETH – Code of Ethics
(a) (2) Exhibit 99 Cert. – Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(b) Exhibit 99.906 Cert. – Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Signature
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) Fixed Income SHares
By /s/ Brian S. Shlissel
President and Chief Executive Officer
Date January 8, 2007
By /s/ Lawrence G. Altadonna
Treasurer, Principal Financial & Accounting Officer
Date January 8, 2007
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 /s/ Brian S. Shlissel
President and Chief Executive Officer
Date January 8, 2007
By /s/ Lawrence G. Altadonna
Treasurer, Principal Financial & Accounting Officer
Date January 8, 2007
