Table of Contents
PIMCO Municipal Income Funds III
Notes to Financial Statements
March 31, 2006 (unaudited)
1. Organization and Significant Accounting Policies
PIMCO Municipal Income Fund IIII (‘‘Municipal III’’), PIMCO California Municipal Income Fund III (‘‘California Municipal III’’) and PIMCO New York Municipal Income Fund III (‘‘New York Municipal III’’) collectively referred to as the ‘‘Funds’’ or ‘‘PIMCO Municipal Income Funds III’’, were organized as Massachusetts business trusts on August 20, 2002. Prior to commencing operations on October 31, 2002, the Funds had no operations other than matters relating to their organization and registration as closed-end management investment companies registered under the Investment Company Act of 1940 and the rules and regulations there under, as amended. Allianz Global Investors Fund Management LLC (the ‘‘Investment Manager’’), serves as the Funds’ 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 AG. The Fund has an unlimited amount of $0.00001 par value common stock authorized.
Municipal III invests substantially all of its assets in a portfolio of municipal bonds, the interest from which is exempt from federal income taxes. California Municipal III invests substantially all of its assets in municipal bonds which pay interest that is exempt from federal and California state income taxes. New York Municipal III invests substantially all of its assets in municipal bonds which pay interest that is exempt from federal, New York State and New York City income taxes. The Funds will seek to avoid bonds generating interest income which could potentially subject individuals to alternative minimum tax. The issuers' abilities to meet their obligations may be affected by economic and political developments in a specific state or region.
The preparation of 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 the normal course of business, the Funds enter into contracts that contain a variety of representations which provide general indemnifications. The Funds' maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Funds based upon events that have not yet been asserted. However, the Funds expect the risk of any loss to be remote.
The following is a summary of significant accounting policies consistently followed by the Funds:
(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 may be fair-valued, in good faith, pursuant to guidelines established by the Board of Trustees. The Funds' 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 bid 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. The independent pricing service uses information provided by market makers or estimates of market values obtained from yield data relating to investments or securities with similar characteristics. Exchange traded options and futures are valued at the settlement price determined by the relevant exchange. Short-term investments 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. Securities purchased on a when-issued or delayed-delivery basis are marked to market daily until settlement at the forward settlement value. The prices used by the Funds 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 Funds’ 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. Realized gains and losses on investments are determined on the identified cost basis. Interest income is recorded on an accrual basis. Original issue discounts or premiums on debt securities purchased are accreted or amortized daily to non-taxable interest income. Market discount, if any, is accreted daily to taxable income.
(c) Federal Income Taxes
The Funds 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.
28 PIMCO Municipal Income Funds III Semi-Annual Report | 3.31.06
Table of Contents
PIMCO Municipal Income Funds III
Notes to Financial Statements
March 31, 2006 (unaudited)
1. Organization and Significant Accounting Policies (continued)
(d) Dividends and Distributions — Common Stock
The Funds declare dividends from net investment income monthly to common shareholders. Distributions of net realized capital gains, if any, are paid at least annually. Each Fund records dividends and distributions to its shareholders on the ex-dividend date. The amount of dividends and distributions from net investment income and net realized capital gains are determined in accordance with federal income tax regulations, which may differ from generally accepted accounting principles. 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. 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) 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 Funds are required to pledge to the broker an amount of cash or securities, equal to the minimum ‘‘initial margin’’ requirements of the exchange. Pursuant to the contracts, the Funds agree to receive from or pay to the broker an amount of cash or securities 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 Funds as unrealized appreciation or depreciation. When the contracts are closed, the Funds record 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.
(f) Option Transactions
The Funds may purchase and write (sell) put and call options on securities for hedging purposes, risk management purposes or as part of its investment strategy. The risk associated with purchasing an option is that the Funds pay a premium whether or not the option is exercised. Additionally, the Funds bear the risk of loss of premium and 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 increased by the premiums paid. The proceeds from 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, which is subsequently adjusted to the current market value of the option written. These liabilities are reflected as options written in the Statement 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 purchased transactions, as a realized loss. If a call option written by the Funds 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 written by the Funds is exercised, the premium reduces the cost basis of the security. In writing an option, the Funds 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 Funds purchasing a security at a price different from the current market value.
(g) Residual Interest Municipal Bonds (‘‘RIBS’’)/Residual Interest Tax Exempt Bonds (‘‘RITES’’)
The Funds invest in RIBS and RITES whose interest rates bear an inverse relationship to the interest rate on another security or the value of an index. RIBS and RITES are created by dividing the income stream provided by the underlying bonds to create two securities, one short-term and one long-term. The interest rate on the short-term component is reset by an index or auction process normally every seven to 35 days. After income is paid on the short-term securities at current rates, the residual income from the underlying bond(s) goes to the long-term securities. Therefore, rising short-term interest rates result in lower income for the longer-term portion, and vice versa. The longer-term bonds may be more volatile and less liquid than other municipal bonds of comparable maturity. Investments in RIBS and RITES typically will involve greater risk than an investment in a fixed-rate bond The Funds may also invest in RIBS and RITES for the purpose of increasing their leverage.
3.31.06 | PIMCO Municipal Income Funds III Semi-Annual Report 29
Table of Contents
PIMCO Municipal Income Funds III
Notes to Financial Statements
March 31, 2006 (unaudited)
1. Organization and Significant Accounting Policies (continued)
(h) When-Issued/Delayed-Delivery Transactions
The Funds 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 Funds 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 Funds 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 Funds 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 Fund does not participate in future gains and losses with respect to the security.
(i) Custody Credits Earned on Cash Balances
The Funds benefit from an expense offset arrangement with their 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 Funds.
2. Investment Manager /Sub-Adviser
Each Fund has entered into an Investment Management Agreement (the ‘‘Agreements’’) with the Investment Manager. Subject to the supervision by each Fund's Board of Trustees, the Investment Manager is responsible for managing, either directly or through others selected by it, each Fund's investment activities, business affairs and administrative matters. Pursuant to the Agreements, the Investment Manager receives an annual fee, payable monthly, at the annual rate of 0.65% of each Fund’s average daily net assets, inclusive of net assets attributable to any preferred shares that may be outstanding. In order to reduce each Fund’s expenses, the Investment Manager has contractually agreed to waive a portion of its investment management fee for each Fund at the annual rate of 0.15% of each Fund’s average daily net assets, including net assets attributable to any preferred shares that may be outstanding, from the commencement of operations through October 31, 2007, and for a declining amount thereafter through October 31, 2009.
The Investment Manager has retained its affiliate, Pacific Investment Management Company LLC (the ‘‘Sub-Adviser’’) to manage each Fund’s investments. Subject to the supervision of the Investment Manager, the Sub-Adviser makes all investment decisions for the Funds. The Investment Manager, not the Funds, pays a portion of the fees it receives to the Sub-Adviser in return for its services, at the maximum annual rate of 0.50% of each Funds average daily net assets, inclusive of net assets attributable to any preferred shares that may be outstanding. The Sub-Adviser has contractually agreed to waive a portion of the fees it is entitled to receive from the Investment Manager, such that the Sub-Adviser will receive 0.26% of each Fund’s average daily net assets, including net assets attributable to any preferred shares that may be outstanding, from the commencement of the Funds’ operations through October 31, 2007, and will receive an increasing amount not to exceed 0.50% of each Fund’s average daily net assets, including net assets attributable to any preferred shares that may be outstanding thereafter through October 31, 2009.
3. Investments in Securities
For the six months ended March 31, 2006, purchases and sales of investments, other than short-term securities, were:
| | | | | | | | | | | | | | |
| | | Municipal III | | California
Municipal III | | New York
Municipal III |
| Purchases | | $121,933,305 | | $55,118,476 | | $8,551,780 |
| Sales | | 147,279,900 | | 39,981,469 | | 9,106,801 |
|
30 PIMCO Municipal Income Funds III Semi-Annual Report | 3.31.06
Table of Contents
PIMCO Municipal Income Funds III
Notes to Financial Statements
March 31, 2006 (unaudited)
3. Investments in Securities (continued)
a) Futures contracts outstanding at March 31, 2006:
| | | | | | | | | | | | | | | | | | |
| Fund | | Type | | Notional
Value
(000) | | Expiration
Date | | Unrealized
Appreciation
(Depreciation) |
| Municipal III | | Long: Financial Future Euro—90 day | | $ 143 | | 6/18/07 | | $(35,012) |
| | | Financial Future Euro—90 day | | 143 | | 9/17/07 | | (33,375) |
| | | Financial Future Euro—90 day | | 143 | | 12/17/07 | | (34,087) |
| | | Financial Future Euro—90 day | | 143 | | 3/17/08 | | (33,375) |
| | | U.S. Treasury Notes 5 yr. Futures | | 992 | | 6/30/06 | | (777,461) |
| | | Short: U.S. Treasury Bond Futures | | (2,122) | | 6/21/06 | | 6,168,882 |
| | | | | | | | | $5,255,572 |
| California Municipal III | | Long: Financial Future Euro—90 day | | $ 310 | | 6/18/07 | | $(64,375) |
| | | Financial Future Euro—90 day | | 310 | | 9/17/07 | | (60,300) |
| | | Financial Future Euro—90 day | | 310 | | 12/17/07 | | (61,850) |
| | | Financial Future Euro—90 day | | 310 | | 3/17/08 | | (60,300) |
| | | U.S. Treasury Notes 5 yr. Futures | | 354 | | 6/30/06 | | (253,672) |
| | | Short: U.S. Treasury Bond Futures | | (1,304) | | 6/21/06 | | 3,433,539 |
| | | | | | | | | $2,933,042 |
| New York Municipal III | | Long: U.S. Treasury Notes 5 yr. Futures | | $ 147 | | 6/30/06 | | $(106,273) |
| | | Short: U.S. Treasury Bond Futures | | (339) | | 6/21/06 | | 1,067,148 |
| | | | | | | | | $960,875 |
|
(b) Transactions in options written for the six months ended March 31, 2006:
| | | | | | | | | | |
| | | Contracts | | Premiums |
| Municipal III: | | | | |
| Options outstanding, September 30, 2005 | | 2,494 | | $682,598 |
| Options written | | 2,465 | | 729,167 |
| Options expired | | (3,503) | | (1,008,208) |
| Options terminated in closing purchase transactions | | (478) | | (156,767) |
| Options outstanding, March 31, 2006 | | 978 | | $246,790 |
| | | | | |
| California Municipal III: | | | | |
| Options outstanding, September 30, 2005 | | 2,125 | | $578,422 |
| Options written | | 2,306 | | 682,392 |
| Options expired | | (2,937) | | (847,530) |
| Options terminated in closing purchase transactions | | (472) | | (155,246) |
| Options outstanding, March 31, 2006 | | 1,022 | | $258,038 |
| | | | | |
| New York Municipal III: | | | | |
| Options outstanding, September 30, 2005 | | 446 | | $121,472 |
| Options written | | 355 | | 111,534 |
| Options expired | | (615) | | (177,965) |
| Options terminated in closing purchase transactions | | (93) | | (30,640) |
| Options outstanding, March 31, 2006 | | 93 | | $24,401 |
|
3.31.06 | PIMCO Municipal Income Funds III Semi-Annual Report 31
Table of Contents
PIMCO Municipal Income Funds III
Notes to Financial Statements
March 31, 2006 (unaudited)
4. Income Tax Information
The cost of investments for federal income tax purposes and gross unrealized appreciation and gross unrealized depreciation of investments at March 31, 2006 were:
| | | | | | | | | | | | | | | | | | |
| | | Cost of
Investments | | Gross Unrealized
Appreciation | | Gross Unrealized
Depreciation | | Net Unrealized
Appreciation |
| Municipal III | | $673,708,035 | | $41,820,622 | | $1,722,769 | | $40,097,853 |
| California Municipal III | | 461,223,585 | | 30,018,981 | | 838,588 | | 29,180,393 |
| New York Municipal III | | 117,890,673 | | 8,263,262 | | 210,302 | | 8,052,960 |
|
5. Auction Preferred Shares
Municipal III has issued 2,160 shares of Preferred Shares Series A, 2,160 shares of Preferred Shares Series B, 2,160 shares of Preferred Shares Series C, 2,160 shares of Preferred Shares Series D and 2,160 shares of Preferred Shares Series E, each with a net asset and liquidation value of $25,000 per share plus accrued dividends.
California Municipal III has issued 3,700 shares of Preferred Shares Series A, 3,700 shares of Preferred Shares Series B each with a net asset and liquidation value of $25,000 per share plus accrued dividends.
New York Municipal III has issued 1,880 shares of Preferred Shares Series A with a net asset and liquidation value of $25,000 per share plus accrued dividends.
Dividends and distributions of net realized long-term capital gains, if any, are accumulated daily at an annual rate (typically re-set every seven days) through auction procedures.
For the six months ended March 31, 2006, the annualized dividend rates ranged from:
| | | | | | | | | | | | | | |
| | | High | | Low | | At March 31, 2006 |
| Municipal III: | | | | | | |
| Series A | | 4.35% | | 2.29% | | 2.75% |
| Series B | | 4.40% | | 2.40% | | 2.85% |
| Series C | | 4.45% | | 2.20% | | 2.80% |
| Series D | | 4.35% | | 2.25% | | 2.81% |
| Series E | | 4.35% | | 2.25% | | 2.90% |
| California Municipal III: | | | | | | |
| Series A | | 4.40% | | 2.16% | | 2.90% |
| Series B | | 4.45% | | 2.04% | | 3.05% |
| New York Municipal III: | | | | | | |
| Series A | | 4.35% | | 2.45% | | 2.90% |
|
The Funds are subject to certain limitations and restrictions while Preferred Shares are outstanding. Failure to comply with these limitations and restrictions could preclude the Funds from declaring any dividends or distributions to common shareholders or repurchasing common shares and/or triggering the mandatory redemption of Preferred Shares at their liquidation value.
6. Subsequent Common Dividend Declarations
On April 3, 2006, the following dividends were declared to common shareholders payable May 1, 2006 to shareholders of record on April 13, 2006:
| | | | | | |
| Municipal III | | $0.07 per common share |
| California Municipal III | | $0.08 per common share |
| New York Municipal III | | $0.07 per common share |
|
32 PIMCO Municipal Income Funds III Semi-Annual Report | 3.31.06
Table of Contents
PIMCO Municipal Income Funds III
Notes to Financial Statements
March 31, 2006 (unaudited)
6. Subsequent Common Dividend Declarations (continued)
On May 1, 2006 the following dividends were declared to common shareholders payable June 1, 2006 to shareholders of record on May 11, 2006:
| | | | | | |
| Municipal III | | $0.07 per common share |
| California Municipal III | | $0.08 per common share |
| New York Municipal III | | $0.07 per common share |
|
7. Legal Proceedings
In June and September 2004, the Investment Manager, certain of its affiliates (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. 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. The settling parties also agreed to make certain corporate governance changes. 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 a number of pending lawsuits concerning ‘‘market timing,’’ and ‘‘revenue sharing/shelf space/directed brokerage,’’ which allege the same or similar conduct underlying the regulatory settlements discussed above. The market timing lawsuits have been consolidated in a Multi-District Litigation in the United States District Court for the District of Maryland, and the revenue sharing/shelf space/directed brokerage lawsuits have been consolidated in the United States District Court for the District of Connecticut. Any potential resolution of these matters may include, but not be limited to, judgments or settlements for damages against the Investment Manager or its affiliates or related injunctions. The Investment Manager believes that other similar lawsuits may be filed in federal or state courts in the future.
Under Section 9(a) of the 1940 Act, if any of the various regulatory proceedings or lawsuits were to result in a court injunction against the Investment Manager, Allianz Global and/or their affiliates, they and their affiliates would, in the absence of exemptive relief granted by the Commission, be barred from serving as an investment adviser/sub-adviser or principal underwriter for any registered investment company, including the Fund. In connection with an inquiry from the Commission concerning the status of the New Jersey settlement referenced above with regard to any implications under Section 9(a), the Investment Manager and certain of its affiliates, including the Investment Adviser, (together, the ‘‘Applicants’’) have sought exemptive relief from the Commission under Section 9(c) of the 1940 Act. The Commission has granted the Applicants a temporary exemption from the provisions of Section 9(a) with respect to the New Jersey settlement until the earlier of (i) September 13, 2006 and (ii) the date on which the Commission takes final action on their application for a permanent exemptive order. There is no assurance that the Commission will issue a permanent order. If a court injunction were to be issued against the Investment Manager or the Affiliates with respect to any of the other matters referenced above, the Investment Manager or the affiliates would, in turn, seek similar exemptive relief under Section 9(c) with respect to that matter, although there is no assurance that such exemptive relief would be granted.
The Investment Manager and the Sub-Adviser believe that these matters are not likely to have a material adverse effect on the Funds or on their ability to perform their respective investment advisory activities relating to the Funds.
The foregoing speaks only as of the date hereof.
3.31.06 | PIMCO Municipal Income Funds III Semi-Annual Report 33
Table of Contents
PIMCO Municipal Income Fund III
Financial Highlights
For a share of common stock outstanding throughout each period:
| | | | | | | | | | | | | | | | | | |
| | | Six Months
ended
March 31, 2006
(unaudited) | |
Year Ended | | For the period
October 31, 2002*
through
September 30, 2003 |
| | | September 30, 2005 | | September 30, 2004 | |
| Net asset value, beginning of period | | | $14.68 | | | | $14.36 | | | | $14.05 | | | | $14.33 | ** |
| Investment Operations: | | | | | | | | | | | | | | | | |
| Net investment income | | | 0.56 | | | | 1.14 | | | | 1.18 | | | | 0.78 | |
Net realized and change in unrealized gain (loss) on investments,
futures contracts and options written | | | 0.03 | | | | 0.36 | | | | 0.22 | | | | (0.08 | ) |
| Total from investment operations | | | 0.59 | | | | 1.50 | | | | 1.40 | | | | 0.70 | |
Dividends on Preferred Shares from
Net Investment Income: | | | (0.12 | ) | | | (0.18 | ) | | | (0.09 | ) | | | (0.06 | ) |
| Net increase in net assets applicable to common shareholders resulting from investment operations | | | 0.47 | | | | 1.32 | | | | 1.31 | | | | 0.64 | |
| Dividends to Common Shareholders from Net Investment Income: | | | (0.47 | ) | | | (1.00 | ) | | | (1.00 | ) | | | (0.79 | ) |
| Capital Share Transactions: | | | | | | | | | | | | | | | | |
| Common stock offering costs charged to paid-in capital in excess of par | | | — | | | | — | | | | — | | | | (0.03 | ) |
Preferred shares offering costs/
underwriting discounts charged to paid-in capital in excess of par | | | — | | | | — | | | | — | | | | (0.10 | ) |
| Total capital share transactions | | | — | | | | — | | | | — | | | | (0.13 | ) |
| Net asset value, end of period | | | $14.68 | | | | $14.68 | | | | $14.36 | | | | $14.05 | |
| Market price, end of period | | | $14.73 | | | | $15.49 | | | | $14.30 | | | | $14.20 | |
| Total Investment Return (1) | | | (1.80 | )% | | | 15.95 | % | | | 8.10 | % | | | 0.05 | % |
| RATIOS/SUPPLEMENTAL DATA: | | | | | | | | | | | | | | | | |
| Net assets applicable to common shareholders, end of period (000) | | | $458,765 | | | | $457,487 | | | | $445,679 | | | | $435,169 | |
Ratio of expenses to average net
assets (2)(3)(5) | | | 1.04 | %(4) | | | 1.03 | % | | | 1.05 | % | | | 0.99 | %(4) |
| Ratio of net investment income to average net assets (2)(5) | | | 7.76 | %(4) | | | 7.74 | % | | | 8.25 | % | | | 6.05 | %(4) |
| Preferred shares asset coverage per share | | | $67,468 | | | | $67,352 | | | | $66,261 | | | | $65,284 | |
| Portfolio turnover | | | 17 | % | | | 9 | % | | | 20 | % | | | 62 | % |
|
| | |
| * | | Commencement of operations. |
| | |
| ** | | Initial public offering price of $15.00 per share less underwriting discount of $0.675 per share. |
| | |
| (1) | | Total investment return is calculated assuming a purchase of a share of common stock at the current market price on the first day of each period and a sale of a share of common stock at the current market price on the last day of each period reported. Dividends and distributions are assumed, for purposes of this calculation, to be reinvested at prices obtained under the Fund's dividend reinvestment plan. Total investment return does not reflect brokerage commissions or sales charges. Total investment return for a period of less than one year is not annualized. |
| | |
| (2) | | Calculated on the basis of income and expenses applicable to both common and preferred shares relative to the average net assets of common shareholders. |
| | |
| (3) | | Inclusive of expenses offset by custody credits earned on cash balances at the custodian bank. (See note 1(i) in Notes to Financial Statements). |
| | |
| (5) | | During the periods indicated above, the Investment manager waived a portion of its investment management fee. If such a waiver had not been in effect, the ratio of expenses to average net assets and the ratio of net investment income to average net assets would have been 1.28% (annualized) and 7.52% (annualized), respectively for the six months ended March 31, 2006, 1.27% and 7.50% respectively for the year ended September 30, 2005, 1.29% and 8.01%, respectively for the year ended September 30, 2004 and 1.22% (annualized) and 5.82% (annualized), respectively for the period October 31, 2002 (commencement of operations) through September 30, 2003. |
34 PIMCO Municipal Income Funds III Semi-Annual Report | 3.31.06| See accompanying Notes to Financial Statements
Table of Contents
PIMCO California Municipal Income Fund III
Financial Highlights
For a share of common stock outstanding throughout each period:
| | | | | | | | | | | | | | | | | | |
| | | Six Months
ended
March 31, 2006
(unaudited) | | Year Ended | | For the period
October 31, 2002*
through
September 30,
2003 |
| | | September 30, 2005 | | September 30, 2004 | |
| Net asset value, beginning of period | | | $14.80 | | | | $14.12 | | | | $13.43 | | | | $14.33 | ** |
| Investment Operations: | | | | | | | | | | | | | |
| Net investment income | | | 0.55 | | | | 1.14 | | | | 1.23 | | | | 0.71 | |
Net realized and change in unrealized gain (loss) on investments,
futures contracts and options written | | | (0.08 | ) | | | 0.65 | | | | 0.51 | | | | (0.66 | ) |
| Total from investment operations | | | 0.47 | | | | 1.79 | | | | 1.74 | | | | 0.05 | |
| Dividends on Preferred Shares from Net Investment Income: | | | (0.11 | ) | | | (0.15 | ) | | | (0.09 | ) | | | (0.06 | ) |
| Net increase (decrease) in net assets applicable to common shareholders resulting from investment operations | | | 0.36 | | | | 1.64 | | | | 1.65 | | | | (0.01 | ) |
| Dividends to Common Shareholders from Net Investment Income: | | | (0.48 | ) | | | (0.96 | ) | | | (0.96 | ) | | | (0.76 | ) |
| Capital Share Transactions: | | | | | | | | | | | | | |
| Common stock offering costs charged to paid-in capital in excess of par | | | — | | | | — | | | | — | | | | (0.03 | ) |
| Preferred shares offering costs/ underwriting discounts charged to paid-in capital in excess of par | | | — | | | | — | | | | — | | | | (0.10 | ) |
| Total capital share transactions | | | — | | | | — | | | | — | | | | (0.13 | ) |
| Net asset value, end of period | | | $14.68 | | | | $14.80 | | | | $14.12 | | | | $13.43 | |
| Market price, end of period | | | $15.90 | | | | $15.11 | | | | $13.74 | | | | $13.62 | |
| Total Investment Return (1) | | | 8.69 | % | | | 17.48 | % | | | 8.22 | % | | | (4.10 | )% |
| RATIOS/SUPPLEMENTAL DATA: | | | | | | | | | | | | | | | | |
| Net assets applicable to common shareholders, end of period (000) | | | $314,182 | | | | $315,963 | | | | $300,860 | | | | $285,279 | |
Ratio of expenses to average net
assets (2)(3)(5) | | | 1.05 | %(4) | | | 1.05 | % | | | 1.08 | % | | | 1.01 | %(4) |
| Ratio of net investment income to average net assets (2)(5) | | | 7.65 | %(4) | | | 7.82 | % | | | 8.79 | % | | | 5.63 | %(4) |
| Preferred shares asset coverage per share | | | $67,450 | | | | $67,692 | | | | $65,650 | | | | $63,539 | |
| Portfolio turnover | | | 8 | % | | | 8 | % | | | 39 | % | | | 123 | % |
|
| | |
| * | | Commencement of operations. |
| | |
| ** | | Initial public offering price of $15.00 per share less underwriting discount of $0.675 per share. |
| | |
| (1) | | Total investment return is calculated assuming a purchase of a share of common stock at the current market price on the first day of each period and a sale of a share of common stock at the current market price on the last day of each period reported. Dividends and distributions are assumed, for purposes of this calculation, to be reinvested at prices obtained under the Fund's dividend reinvestment plan. Total investment return does not reflect brokerage commissions or sales charges. Total investment return for a period of less than one year is not annualized. |
| | |
| (2) | | Calculated on the basis of income and expenses applicable to both common and preferred shares relative to the average net assets of common shareholders. |
| | |
| (3) | | Inclusive of expenses offset by custody credits earned on cash balances at the custodian bank. (See note 1(i) in Notes to Financial Statements). |
| | |
| (5) | | During the periods indicated above, the Investment manager waived a portion of its investment management fee. If such a waiver had not been in effect, the ratio of expenses to average net assets and the ratio of net investment income to average net assets would have been 1.29% (annualized) and 7.41% (annualized), respectively for the six months ended March 31, 2006, 1.29% and 7.58% respectively for the year ended September 30, 2005, 1.32% and 8.55%, respectively for the year ended September 30, 2004 and 1.24% (annualized) and 5.40% (annualized), respectively for the period October 31, 2002 (commencement of operations) through September 30, 2003. |
See accompanying Notes to Financial Statements | 3.31.06 | PIMCO Municipal Income Funds III Semi-Annual Report 35
Table of Contents
PIMCO New York Municipal Income Fund III
Financial Highlights
For a share of common stock outstanding throughout each period:
| | | | | | | | | | | | | | | | | | |
| | | Six Months
ended
March 31, 2006
(unaudited) | |
Year Ended | | For the period
October 31, 2002*
through
September 30, 2003 |
| | | September 30, 2005 | | September 30, 2004 | |
| Net asset value, beginning of period | | | $15.03 | | | | $14.41 | | | | $14.14 | | | | $14.33 | ** |
| Investment Operations: | | | | | | | | | | | | | | | | |
| Net investment income | | | 0.53 | | | | 1.13 | | | | 1.19 | | | | 0.70 | |
Net realized and change in unrealized gain (loss) on investments,
futures contracts and options written | | | (0.10 | ) | | | 0.61 | | | | 0.12 | | | | 0.08 | |
| Total from investment operations | | | 0.43 | | | | 1.74 | | | | 1.31 | | | | 0.78 | |
Dividends on Preferred Shares from
Net Investment Income: | | | (0.12 | ) | | | (0.16 | ) | | | (0.08 | ) | | | (0.06 | ) |
| Net increase in net assets applicable to common shareholders resulting from investment operations | | | 0.31 | | | | 1.58 | | | | 1.23 | | | | 0.72 | |
| Dividends to Common Shareholders from Net Investment Income: | | | (0.46 | ) | | | (0.96 | ) | | | (0.96 | ) | | | (0.76 | ) |
| Capital Share Transactions: | | | | | | | | | | | | | | | | |
| Common stock offering costs charged to paid-in capital in excess of par | | | — | | | | — | | | | — | | | | (0.03 | ) |
Preferred shares offering costs/
underwriting discounts charged to paid-in capital in excess of par | | | — | | | | — | | | | — | | | | (0.12 | ) |
| Total capital share transactions | | | — | | | | — | | | | — | | | | (0.15 | ) |
| Net asset value, end of period | | | $14.88 | | | | $15.03 | | | | $14.41 | | | | $14.14 | |
| Market price, end of period | | | $15.08 | | | | $16.04 | | | | $14.30 | | | | $13.68 | |
| Total Investment Return (1) | | | (3.07 | )% | | | 19.65 | % | | | 11.93 | % | | | (3.77 | )% |
| RATIOS/SUPPLEMENTAL DATA: | | | | | | | | | | | | | | | | |
| Net assets applicable to common shareholders, end of period (000) | | | $81,531 | | | | $82,043 | | | | $78,465 | | | | $76,975 | |
Ratio of expenses to average net
assets (2)(3)(5) | | | 1.24 | %(4) | | | 1.24 | % | | | 1.19 | % | | | 1.14 | %(4) |
| Ratio of net investment income to average net assets (2)(5) | | | 7.23 | %(4) | | | 7.54 | % | | | 8.23 | % | | | 5.47 | %(4) |
Preferred shares asset coverage
per share | | | $68,354 | | | | $68,627 | | | | $66,732 | | | | $65,942 | |
| Portfolio turnover | | | 7 | % | | | 5 | % | | | 16 | % | | | 217 | % |
|
| | |
| * | | Commencement of operations. |
| | |
| ** | | Initial public offering price of $15.00 per share less underwriting discount of $0.675 per share. |
| | |
| (1) | | Total investment return is calculated assuming a purchase of a share of common stock at the current market price on the first day of each period and a sale of a share of common stock at the current market price on the last day of each period reported. Dividends and distributions are assumed, for purposes of this calculation, to be reinvested at prices obtained under the Fund's dividend reinvestment plan. Total investment return does not reflect brokerage commissions or sales charges. Total investment return for a period of less than one year is not annualized. |
| | |
| (2) | | Calculated on the basis of income and expenses applicable to both common and preferred shares relative to the average net assets of common shareholders. |
| | |
| (3) | | Inclusive of expenses offset by custody credits earned on cash balances at the custodian bank. (See note 1(i) in Notes to Financial Statements). |
| | |
| (5) | | During the periods indicated above, the Investment manager waived a portion of its investment management fee. If such a waiver had not been in effect, the ratio of expenses to average net assets and the ratio of net investment income to average net assets would have been 1.48% (annualized) and 6.99% (annualized), respectively for the six months ended March 31, 2006, 1.48% and 7.30% respectively for the year ended September 30, 2005, 1.43% and 7.99%, respectively for the year ended September 30, 2004 and 1.37% (annualized) and 5.24% (annualized), respectively for the period October 31, 2002 (commencement of operations) through September 30, 2003. |
36 PIMCO Municipal Income Funds III Semi-Annual Report | 3.31.06| See accompanying Notes to Financial Statements
Table of Contents
PIMCO Municipal Income Funds III
Annual Shareholder Meetings Results (unaudited)
The Funds held their annual meetings of shareholders on December 28, 2005. Common/Preferred shareholders of each fund voted to re-elect Paul Belica and David C. Flattum as Class III Trustees to serve until 2008.
The resulting vote count is indicated below:
| | | | | | | | | | |
| | | Affirmative | | Withheld
Authority |
| Municipal III | | | | |
| Re-election of Paul Belica | | 27,731,732 | | 344,878 |
| Re-election of David C. Flattum | | 27,821,572 | | 255,038 |
| California Municipal III | | | | |
| Re-election of Paul Belica | | 18,872,467 | | 172,225 |
| Re-election of David C. Flattum | | 18,909,604 | | 135,088 |
| New York Municipal III | | | | |
| Re-election of Paul Belica | | 4,966,231 | | 68,806 |
| Re-election of David C. Flattum | | 4,978,452 | | 56,585 |
|
Messrs. Robert E Connor, Jack J. Dalessandro*, Hans W. Kertess* and R. Peter Sullivan III continue to serve as Trustees of the Funds.
| |
| * Preferred Shares Trustee |
3.31.06 | PIMCO Municipal Income Funds III Semi-Annual Report 37
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38 PIMCO Municipal Income Funds III Semi-Annual Report | 3.31.06
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3.31.06 | PIMCO Municipal Income Funds III Semi-Annual Report 39
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40 PIMCO Municipal Income Funds III Semi-Annual Report | 3.31.06
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Trustees and Principal Officers
Robert E. Connor
Trustee, Chairman of the Board of Trustees
Paul Belica
Trustee
John J. Dalessandro II
Trustee
David C. Flattum
Trustee
Hans W. Kertess
Trustee
R. Peter Sullivan III
Trustee
Brian S. Shlissel
President & Chief Executive Officer
Lawrence G. Altadonna
Treasurer, Principal Financial & Accounting Officer
Thomas J. Fuccillo
Secretary & Chief Legal Officer
Youse Guia
Chief Compliance Officer
Investment Manager
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
Custodian & Accounting Agent
State Street Bank & Trust Co.
801 Pennsylvania
Kansas City, MO 64105-1307
Transfer Agent, Dividend Paying Agent and Registrar
PFPC Inc.
P.O. Box 43027
Providence, RI 02940-3027
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP
300 Madison Avenue
New York, NY 10017
Legal Counsel
Ropes & Gray LLP
One International Place
Boston, MA 02210-2624
This report, including the financial information herein, is transmitted to the shareholders of PIMCO Municipal Income Fund III, PIMCO California Municipal Income Fund III and PIMCO New York Municipal Income Fund III for their information. It is not a prospectus, circular or representation intended for use in the purchase of shares of the Funds or any securities mentioned in this report.
The financial information included herein is taken from the records of the Funds without examination by an independent registered public accounting firm, who did not express an opinion hereon.
Notice is hereby given in accordance with Section 23 (c) of the Investment Company Act of 1940, as amended, that from time to time each Fund may purchase shares of its common stock in the open market.
The Funds file their complete schedules of portfolio holdings with the Securities and Exchange Commission (the "SEC") for the first and third quarters of their fiscal year on Form N-Q. The Funds’ Forms 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 located in Washington, DC. Information on the operation of the Public Reference Room may be obtained by calling (800) SEC-0330. The information on Form N-Q is also available on the Funds’ website at www.allianzinvestors.com/closedendfunds.
A description of the policies and procedures that the Funds have adopted to determine how to vote proxies relating to portfolio securities and information about how the Funds voted proxies relating to portfolio securities held during the twelve months ended June 30, 2005 is available (i) without charge, upon request by calling the Funds’ shareholder agent at (800) 331-1710; (ii) on the Funds’ website at www.allianzinvestors.com/closedendfunds: and (iii) on the Securities and Exchange Commission’s website at www.sec.gov.
Information on the Funds is available at www.allianzinvestors.com/closedendfunds or by calling the Funds’ shareholder servicing agent at (800) 331-1710.
Table of Contents
ITEM 2. CODE OF ETHICS
Not required in this filing.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT
Not required in this filing.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Not required in this filing.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANT
Not required in this filing.
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 Not required in this filing.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES
Not required in this filing.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED COMPANIES.
TOTAL NUMBER
OF SHARES PURCHASED MAXIMUM NUMBER OF
TOTAL NUMBER AVERAGE AS PART OF PUBLICLY SHARES THAT MAY YET BE
OF SHARES PRICE PAID ANNOUNCED PLANS OR PURCHASED UNDER THE PLANS
PERIOD PURCHASED PER SHARE PROGRAMS OR PROGRAMS
October 2005 N/A 14.73 10,169 N/A
November 2005 N/A 14.49 10,224 N/A
December 2005 N/A 14.50 9,926 N/A
December 2005 N/A 14.934 9,549 N/A
February 2006 N/A 14.877 8,897 N/A
March 2006 N/A 14.906 8,942 N/A
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
(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.
(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 99.302 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.
PIMCO California Municipal Income Fund III
By /s/ Brian S. Shlissel
- ------------------------
Brian S. Shlissel, President & Chief Executive Officer
Date: June 7, 2006
By /s/ Lawrence G. Altadonna
- ----------------------------
Lawrence G. Altadonna, Treasurer, Principal Financial & Accounting Officer
Date: June 7, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By /s/ Brian S. Shlissel
- ------------------------
Brian S. Shlissel, President & Chief Executive Officer
Date: June 7, 2006
By /s/ Lawrence G. Altadonna
- ----------------------------
Lawrence G. Altadonna, Treasurer, Principal Financial & Accounting Officer
Date: June 7, 2006
