At September 30, 2005, Municipal III did not have any distributable earnings.
PIMCO Municipal Income Funds III Notes to Financial Statements
September 30, 2005 |
4. Income Tax Information (continued)
At September 30, 2005, Municipal III had a capital loss carryforward of $19,523,357, ($2,344,397 of which will expire in 2012 and $17,178,960 which will expire in 2013), 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.
In accordance with U.S. Treasury regulations, Municipal III elected to defer realized capital losses arising after October 31, 2004 of $12,030,128. Such losses are treated for tax purposes as arising on October 1, 2005.
California Municipal III: | | | | |
The tax character of dividends paid was: | | | | |
| | Year ended
September 30, 2005 | | Year ended
September 30, 2004 |
Ordinary Income | | | $482,924 | | | | $365,952 | |
Tax Exempt Income | | | $23,212,863 | | | | $21,937,835 | |
At September 30, 2005, the tax character of distributable earnings of $2,145,768 was comprised entirely of tax exempt income.
At September 30, 2005, California Municipal III had a capital loss carryforward of $15,461,366 ($3,952,407 of which will expire in 2012 and $11,508,959 of which will expire in 2013), 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.
In accordance with U.S. Treasury regulations, California Municipal III elected to defer realized capital losses arising after October 31, 2004 of $9,344,818. Such losses are treated for tax purposes as arising on October 1, 2005.
New York Municipal III: | | | | |
The tax character of dividends paid was: | | | | |
| | Year ended
September 30, 2005 | | Year ended
September 30, 2004 |
Ordinary Income | | | $65,871 | | | | $36,347 | |
Tax Exempt Income | | | $6,028,366 | | | | $5,636,988 | |
At September 30, 2005, the tax character of distributable earnings of $189,610 was comprised entirely of tax exempt income.
At September 30, 2005, New York Municipal III had a capital loss carryforward of $3,540,491 ($5,578 of which will expire in 2012 and $3,534,913 of which will expire in 2013), 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.
In accordance with U.S. Treasury regulations, New York Municipal III elected to defer realized capital losses arising after October 31, 2004 of $1,903,950. Such losses are treated for tax purposes as arising on October 1, 2005.
The cost of investments for federal income tax purposes and gross unrealized appreciation and gross unrealized depreciation of investments at September 30, 2005 were:
| | Cost of
Investments | | Gross
Unrealized
Appreciation | | Gross
Unrealized
Depreciation | | Net
Unrealized
Appreciation |
Municipal III | | | $697,573,559 | | | | $47,970,769 | | | | $(837,191) | | | | $47,133,578 | |
California Municipal III | | | 459,609,559 | | | | 36,076,567 | | | | (440,453) | | | | 35,636,114 | |
New York Municipal III | | | 119,033,400 | | | | 9,903,372 | | | | (31,259) | | | | 9,872,113 | |
The difference, if any, between book and tax basis unrealized appreciation/depreciation is attributable to wash sales.
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.
32 PIMCO Municipal Income Funds III Annual Report | 9.30.05 |
PIMCO Municipal Income Funds III Notes to Financial Statements
September 30, 2005 |
5. Auction Preferred Shares (continued)
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 are accumulated daily at an annual rate set through auction procedures. Distributions of net realized capital gains, if any, are paid annually.
For the year ended September 30, 2005, the annualized dividend rates ranged from:
| | | High | | | Low | | | At September 30, 2005 |
Municipal III: | | | | | | | | |
Series A | | 2.80 | % | | 1.47 | % | | 2.51% |
Series B | | 2.80 | % | | 1.39 | % | | 2.49% |
Series C | | 2.70 | % | | 1.50 | % | | 2.20% |
Series D | | 2.75 | % | | 1.20 | % | | 2.25% |
Series E | | 2.85 | % | | 1.20 | % | | 2.25% |
California Municipal III: | | | | | | | | |
Series A | | 2.60 | % | | 0.95 | % | | 2.60% |
Series B | | 2.55 | % | | 0.80 | % | | 2.12% |
New York Municipal III: | | | | | | | | |
Series A | | 2.75 | % | | 1.15 | % | | 2.60% |
| | | | | | | | | | |
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.
Preferred Shares, which are entitled to one vote per share, generally vote separately as a class to elect two Trustees and on any matters affecting the rights of the Preferred Shares.
6. Subsequent Common Dividend Declarations
On October 3, 2005, the following dividends were declared to common shareholders payable November 1, 2005 to shareholders of record on October 21, 2005:
Municipal III | | | $0.0831 per common share | |
California Municipal III | | | $0.08 per common share | |
New York Municipal III | | | $0.08 per common share | |
On November 1, 2005, the following dividends were declared to common shareholders payable December 1, 2005 to shareholders of record on November 18, 2005:
Municipal III | | | $0.0831 per common share | |
California Municipal III | | | $0.08 per common share | |
New York Municipal III | | | $0.08 per common share | |
7. Legal Proceedings
On September 13, 2004, the Securities and Exchange Commission (“SEC”) announced that Allianz Global Investors Fund Management LLC (the “Investment Manager”) and certain of its affiliates (the “Affiliates”) had agreed to a settlement of charges that they and certain of their officers had, among other things, violated various antifraud provisions of the federal securities laws in connection with an alleged market-timing arrangement involving trading of shares of certain open-end investment companies (“open-end funds”) advised or distributed by these certain affiliates. In their settlement with the SEC, the Affiliates consented to the entry of an order by the SEC and, without admitting or denying the findings contained in the order, agreed to implement certain compliance and governance changes and consented to cease-and-desist orders and censures. In addition, the Affiliates agreed to pay civil money
9.30.05 | PIMCO Municipal Income Funds III Annual Report 33 |
PIMCO Municipal Income Funds III Notes to Financial Statements
September 30, 2005 |
7. Legal Proceedings (continued)
penalties in the aggregate amount of $40 million and to pay disgorgement in the amount of $10 million, for an aggregate payment of $50 million. In connection with the settlement, the Affiliates have been dismissed from the related complaint the SEC filed on May 6, 2004 in the U.S. District Court in the Southern District of New York. Neither the complaint nor the order alleges any inappropriate activity took place with respect to the Fund.
In a related action on June 1, 2004, the Attorney General of the State of New Jersey (“NJAG”) announced that it had entered into a settlement agreement with Allianz Global Investors of America L.P. (formerly, Allianz Dresdner Asset Management of America L.P.) (“AGI”), an indirect parent of the Investment Manager and the Affiliates, in connection with a complaint filed by the NJAG on February 17, 2004. In the settlement, AGI and other named affiliates neither admitted nor denied the allegations or conclusions of law, but did agree to pay New Jersey a civil fine of $15 million and $3 million for investigative costs and further potential enforcement initiatives against unrelated parties. They also undertook to implement certain governance changes. The complaint relating to the settlement contained allegations arising out of the same matters that were the subject of the SEC order regarding market-timing described above and does not allege any inappropriate activity took place with respect to the Fund.
On September 15, 2004, the SEC announced that the Affiliates had agreed to settle an enforcement action in connection with charges that they violated various antifraud and other provisions of federal securities laws as a result of, among other things, their failure to disclose to the board of trustees and shareholders of various open-end funds advised or distributed by the Affiliates material facts and conflicts of interest that arose from their use of brokerage commissions on portfolio transactions to pay for so-called “shelf space” arrangements with certain broker-dealers. In their settlement with the SEC, the Affiliates consented to the entry of an order by the SEC without admitting or denying the findings contained in the order. In connection with the settlement, the Affiliates agreed to undertake certain compliance and disclosure reforms and consented to cease-and-desist orders and censures. In addition, the Affiliates agreed to pay a civil money penalty of $5 million and to pay disgorgement of approximately $6.6 million based upon the aggregate amount of brokerage commissions alleged to have been paid by such open-end funds in connection with these shelf-space arrangements (and related interest). In a related action, the California Attorney General announced on September 15, 2004 that it had entered into an agreement with an affiliate of the Investment Manager in resolution of an investigation into matters that are similar to those discussed in the SEC order. The settlement agreement resolves matters described in a complaint filed contemporaneously by the California Attorney General in the Superior Court of the State of California alleging, among other things that this affiliate violated certain antifraud provisions of California law by failing to disclose matters related to the shelf-space arrangements described above. In the settlement agreement, the affiliate did not admit to any liability but agreed to pay $5 million in civil penalties and $4 million in recognition of the California Attorney General’s fees and costs associated with the investigation and related matters. Neither the SEC order nor the California Attorney General’s complaint alleges any inappropriate activity took place with respect to the Fund.
On April 11, 2005, the Attorney General of the State of West Virginia filed a complaint in the Circuit Court of Marshall County, West Virginia (the “West Virginia Complaint”) against the Investment Manager and certain of its Affiliates based on the same circumstances as those cited in the 2004 settlements with the SEC and NJAG involving alleged “market timing” activities described above. The West Virginia Complaint alleges, among other things, that the Investment Manager and certain of its Affiliates improperly allowed broker-dealers, hedge funds and investment advisers to engage in frequent trading of various open-end funds advised or distributed by the Affiliates in violation of the funds’ stated restrictions on “market timing.” The West Virginia Complaint also names numerous other defendants unaffiliated with the Affiliates in separate claims alleging improper market timing and/or late trading of open-end investment companies advised or distributed by such other defendants. The Investment Manager, its Affiliates and the unaffiliated mutual fund defendants removed the proceeding to federal court and are seeking to transfer the action to the Multi-District Litigation currently pending in the U.S. District Court for the District of Maryland, which is described below. The West Virginia Complaint seeks injunctive relief, civil monetary penalties, investigative costs and attorney’s fees. The West Virginia Complaint does not allege that any inappropriate activity took place with respect to the Fund.
Since February 2004, certain of the Affiliates and their employees have been named as defendants in a total of 14 lawsuits filed in one of the following: U.S. District Court in the Southern District of New York, the Central District of California and the Districts of New Jersey and Connecticut. Ten of those lawsuits concern “market timing,” and they have been transferred to and consolidated for pre-trial proceedings in a Multi-District Litigation in the U.S. District Court for the District of Maryland; the remaining four lawsuits concern “revenue sharing” with brokers offering “shelf space” and have been consolidated into a single action in the U.S. District Court for the District of Connecticut. The lawsuits have been commenced as putative class actions on behalf of investors who purchased, held or redeemed shares of affiliated funds during specified periods or as derivative actions on behalf of the funds.
34 PIMCO Municipal Income Funds III Annual Report | 9.30.05 |
PIMCO Municipal Income Funds III Notes to Financial Statements
September 30, 2005 |
7. Legal Proceedings (continued)
The lawsuits generally relate to the same facts 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 and restitution. The Investment Manager believes that other similar lawsuits may be filed in federal or state courts naming as defendants the Investment Manager, the Affiliates, AGI, the Fund, other open- and closed-end funds advised or distributed by the Investment Manager and/or its affiliates, the boards of trustees of those funds, and/or other affiliates and their employees. 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, AGI and/or their affiliates, they and their affiliates would, in the absence of exemptive relief granted by the SEC, be barred from serving as an investment manager/sub-adviser or principal underwriter for any registered investment company, including the Fund. In connection with an inquiry from the SEC concerning the status of the New Jersey settlement described above under Section 9(a), the Investment Manager and certain of its affiliates (together, the “Applicants”) have sought exemptive relief from the SEC under Section 9(c) of the 1940 Act.
The SEC 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 SEC takes final action on their application for a permanent order. There is no assurance that the SEC will issue a permanent order. If the West Virginia Attorney General were to obtain a court injunction against the Investment Manager or the Affiliates, the Investment Manager or the Affiliates would, in turn, seek exemptive relief under Section 9(c) with respect to that matter, although there is no assurance that such exemptive relief would be granted.
A putative class action lawsuit captioned Charles Mutchka et al. v. Brent R. Harris, et al., was filed in January 2005 by and on behalf of individual shareholders of certain open-end funds that hold equity securities and that are sponsored by the Investment Manager and the Affiliates. The U.S. District court for the Central District of California dismissed the action with prejudice on June 10, 2005. The plaintiffs alleged that fund trustees, investment manager and affiliates breached fiduciary duties and duties of care by failing to ensure that the open-end funds participated in securities class action settlements for which those funds were eligible. The plaintiffs claimed as damages disgorgement of fees paid to the investment manager, compensatory damages and punitive damages.
The foregoing speaks only as of the date hereof. There may be additional litigation or regulatory developments in connection with the matters discussed above.
9.30.05 | PIMCO Municipal Income Funds III Annual Report 35 |
PIMCO Municipal Income Funds III Financial Highlights
For a share of common stock outstanding throughout each period: |
| | Municipal III |
| |
Year Ended
| | For the period
October 31, 2002*
through
September 30,
2003 |
| | September 30,
2005 | | September 30,
2004 | |
Net asset value, beginning of period | | | $14.36 | | | | $14.05 | | | | $14.33 | ** |
Investment Operations: | | | | | | | | | | | | |
Net investment income | | | 1.14 | | | | 1.18 | | | | 0.78 | |
Net realized and unrealized gain (loss) on investments, futures contracts and options written | | | 0.36 | | | | 0.22 | | | | (0.08 | ) |
Total from investment operations | | | 1.50 | | | | 1.40 | | | | 0.70 | |
Dividends on Preferred Shares from Net Investment Income: | | | (0.18 | ) | | | (0.09 | ) | | | (0.06 | ) |
Net increase in net assets applicable to common shareholders resulting from investment operations | | | 1.32 | | | | 1.31 | | | | 0.64 | |
Dividends to Common Shareholders from Net Investment Income: | | | (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 | | | | $14.36 | | | | $14.05 | |
Market price, end of period | | | $15.49 | | | | $14.30 | | | | $14.20 | |
Total Investment Return (1) | | | 15.95 | % | | | 8.10 | % | | | 0.05 | % |
RATIOS/SUPPLEMENTAL DATA: | | | | | | | | | | | | |
Net assets applicable to common shareholders, end of period (000) | | | $457,487 | | | | $445,679 | | | | $435,169 | |
Ratio of expenses to average net assets (2)(3)(5) | | | 1.03 | % | | | 1.05 | % | | | 0.99 | %(4) |
Ratio of net investment income to average net assets (2)(5) | | | 7.74 | % | | | 8.25 | % | | | 6.05 | %(4) |
Preferred shares asset coverage per share | | | $67,352 | | | | $66,261 | | | | $65,284 | |
Portfolio turnover | | | 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 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). |
(4) | Annualized. |
(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 1.27% 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. |
36 PIMCO Municipal Income Funds III Annual Report | 9.30.05 | See accompanying Notes to Financial Statements |
PIMCO Municipal Income Funds III Financial Highlights
For a share of common stock outstanding throughout each period: |
| | California Municipal III |
| |
Year Ended
| | For the period
October 31, 2002*
through
September 30,
2003 |
| | September 30, 2005 | | September 30, 2004 | |
Net asset value, beginning of period | | | $14.12 | | | | $13.43 | | | | $14.33 | ** |
Investment Operations: | | | | | | | | | | | | |
Net investment income | | | 1.14 | | | | 1.23 | | | | 0.71 | |
Net realized and unrealized gain (loss) on investments, futures contracts and options written | | | 0.65 | | | | 0.51 | | | | (0.66 | ) |
Total from investment operations | | | 1.79 | | | | 1.74 | | | | 0.05 | |
Dividends and Distributions On Preferred Shares from Net Investment Income: | | | (0.15 | ) | | | (0.09 | ) | | | (0.06 | ) |
Net increase (decrease) in net assets applicable to common shareholders resulting from investment operations | | | 1.64 | | | | 1.65 | | | | (0.01 | ) |
Dividends to Common Shareholders from:
Net Investment Income | | | (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 | | | $14.80 | | | | $14.12 | | | | $13.43 | |
Market price, end of period | | | $15.11 | | | | $13.74 | | | | $13.62 | |
Total Investment Return (1) | | | 17.48 | % | | | 8.22 | % | | | (4.10 | )% |
RATIOS/SUPPLEMENTAL DATA: | | | | | | | | | | | | |
Net assets applicable to common shareholders, end of period (000) | | | $315,963 | | | | $300,860 | | | | $285,279 | |
Ratio of expenses to average net assets (2)(3)(5) | | | 1.05 | % | | | 1.08 | % | | | 1.01 | %(4) |
Ratio of net investment income to average net assets (2)(5) | | | 7.82 | % | | | 8.79 | % | | | 5.63 | %(4) |
Preferred shares asset coverage per share | | | $67,692 | | | | $65,650 | | | | $63,539 | |
Portfolio turnover | | | 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 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% 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 | 9.30.05 | PIMCO Municipal Income Funds III Annual Report 37 |
PIMCO Municipal Income Fund III Financial Highlights
For a share of common stock outstanding throughout each period: |
| | New York Municipal III |
| |
Year Ended
| | For the period
October 31, 2002*
through
September 30,
2003 |
| | September 30,
2005 | | September 30,
2004 | |
Net asset value, beginning of period | | | $14.41 | | | | $14.14 | | | | $14.33 | ** |
Investment Operations: | | | | | | | | | | | | |
Net investment income | | | 1.13 | | | | 1.19 | | | | 0.70 | |
Net realized and unrealized gain on investments, futures contracts and options written | | | 0.61 | | | | 0.12 | | | | 0.08 | |
Total from investment operations | | | 1.74 | | | | 1.31 | | | | 0.78 | |
Dividends On Preferred Shares from Net Investment Income: | | | (0.16 | ) | | | (0.08 | ) | | | (0.06 | ) |
Net increase in net assets applicable to common shareholders resulting from investment operations | | | 1.58 | | | | 1.23 | | | | 0.72 | |
Dividends to Common Shareholders : from Net Investment Income: | | | (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 | | | $15.03 | | | | $14.41 | | | | $14.14 | |
Market price, end of period | | | $16.04 | | | | $14.30 | | | | $13.68 | |
Total Investment Return (1) | | | 19.65 | % | | | 11.93 | % | | | (3.77 | )% |
RATIOS/SUPPLEMENTAL DATA: | | | | | | | | | | | | |
Net assets applicable to common shareholders, end of period (000) | | | $82,043 | | | | $78,465 | | | | $76,975 | |
Ratio of expenses to average net assets (2)(3)(5) | | | 1.24 | % | | | 1.19 | % | | | 1.14 | %(4) |
Ratio of net investment income to average net assets (2)(5) | | | 7.54 | % | | | 8.23 | % | | | 5.47 | %(4) |
Preferred shares asset coverage per share | | | $68,627 | | | | $66,732 | | | | $65,942 | |
Portfolio turnover | | | 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 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% 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. |
38 PIMCO Municipal Income Funds III Annual Report | 9.30.05 | See accompanying Notes to Financial Statements |
PIMCO Municipal Income Fund III Report of Independent Registered Public Accounting Firm |
To the Shareholders and the Board of
Trustees of PIMCO Municipal Income Fund III, PIMCO California Municipal Income Fund III and
PIMCO New York Municipal Income Fund III
In our opinion, the accompanying statements of assets and liabilities, including the schedules of investments, and the related statements of operations, of changes in net assets applicable to common shareholders and the financial highlights present fairly, in all material respects, the financial position of PIMCO Municipal Income Fund III, PIMCO California Municipal Income Fund III and PIMCO New York Municipal Income Fund III (collectively hereafter referred to as the "Funds") at September 30, 2005, the results of each of their operations for the year ended, the changes in each of their net assets applicable to common shareholders for each of the two years in the period then ended and the financial highlights for each of the two years in the period then ended and for the period October 31, 2002 (commencement of operations) through September 30, 2003, 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). Those 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 September 30, 2005 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
November 18, 2005
9.30.05 | PIMCO Municipal Income Funds III Annual Report 39 |
PIMCO Municipal Income Funds III | | Matters Relating to the Trustees Consideration of the Investment Management and Portfolio Management Agreements (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, annually approve the continuation of the Funds’ Investment Management Agreements with the Investment Manager and Portfolio Management Agreements between the Investment Manager and the Sub-Adviser (together, the “Agreements”). The Trustees consider matters bearing on the Funds and its investment management arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the Trustees met on June 15 and 16, 2005 (the “contract review meeting”) for the specific purpose of considering whether to approve the continuation of the Agreements. 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 the Funds’ 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, unanimously concluded that the Agreements should be continued for an additional one-year period.
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 their contract review meeting, the Trustees received and relied upon materials provided by the Investment Manager which included, among other items: (i) information provided by Lipper Inc. on the total return investment performance (based on net assets) of each 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 Funds’ management fees and other expenses and the management fees and other expenses of comparable funds identified by Lipper, (iii) 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, (iv) an estimate of the profitability to the Investment Manager from its relationship with the Funds for the twelve months ended March 31, 2005, (vi) descriptions of various functions performed by the Investment Manager and the Sub-Adviser for the Funds, such as compliance monitoring and portfolio trading practices, and (vii) 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 Funds.
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.
As part of their review, the Trustees examined the Investment Manager’s and the Sub-Adviser’s abilities to provide high quality investment management and other services to the Funds. The Trustees considered the investment philosophy and research and decision-making processes of the Sub-Adviser; the experience of key advisory personnel of the Sub-Adviser responsible for portfolio management of the Funds; the ability of the Investment Manager and Sub-Adviser to attract and retain capable personnel; the capability and integrity of the senior management and staff of the Investment Manager and Sub-Adviser; and the level of skill required to manage the Funds. In addition, the Trustees reviewed the quality of the Investment Manager’s and Sub-Adviser’s services with respect to regulatory compliance and compliance with the investment policies of the Funds; the nature and quality of certain administrative services the Investment Manager is responsible for providing to the Funds; and conditions that might affect the Investment Manager’s or Sub-Adviser’s ability to provide high quality services to the Funds in the future under the Agreements, including each organization’s respective business reputation, financial condition and operational stability. Based on the foregoing, the Trustees concluded that the Sub-Adviser’s investment process, research capabilities and philosophy were well suited to the Funds given their investment objectives and policies, and that the Investment Manager and Sub-Adviser would be able to meet any reasonably foreseeable obligations under the Agreements.
40 PIMCO Municipal Income Funds III Annual Report | 9.30.05 |
PIMCO Municipal Income Funds III | | Matters Relating to the Trustees Consideration of the Investment Management and Portfolio Management Agreements (unaudited) |
Based on information provided by Lipper Inc., the Trustees also reviewed the Funds’ total return investment performance as well as the performance of comparable funds identified by Lipper Inc. In the course of their deliberations, the Trustees took into account information provided by the 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 Funds’ 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 investment performance.
In assessing the reasonableness of the Funds’ fees under the Agreements, the Trustees considered, among other information, the Funds’ management fee and the total expense ratio as a percentage of average net assets attributable to common shares and the management fee and total expense ratios of comparable funds identified by Lipper Inc.
The Trustees also considered the management fees charged by the Sub-Adviser to other clients, including institutional separate accounts with investment strategies similar to those of the Funds. They noted that the management fees paid by the Funds are generally higher than the fees paid by these clients of the Sub-Adviser, but that the administrative burden for the Investment Manager and the Sub-Adviser with respect to the Funds are also relatively higher, due in part to the more extensive regulatory regime to which the Funds are subject in comparison to institutional separate accounts. The Trustees noted that the management fee paid by the Funds are generally higher than the fees paid by the open-end Funds but were advised that there are additional portfolio management challenges in managing the Funds such as the use of leverage and meeting a regular dividend. The Trustees noted that PIMCO Municipal Income Fund III’s performance was average for the one-year and year-to-date periods ended May 31, 2005 in total return. The Trustees also noted that PIMCO Municipal Income Fund III’s expense ratio (after taking into account waivers) was below the median and average for its peer group. The Trustees noted that PIMCO California Municipal Income Fund III significantly outperformed its peer group for the one-year and year-to-date periods ended May 31, 2005 in total return. The Trustees also noted that PIMCO California Municipal Income Fund III’s expense ratio was below the average and slightly above the median expense ratio for its peer group. The Trustees noted that PIMCO New York Municipal Income Fund III significantly outperformed its peer group for the one-year and year-to-date periods ended May 31, 2005 in total return. The Trustees also noted that PIMCO New York Municipal Income Fund III’s expense ratio was just above the average and median for its peer group.
The Trustees also took into account that the Funds have preferred shares outstanding, which increases the amount of fees received by the Investment Manager and Sub-Adviser under the Agreements (because the fees are calculated based on the Funds’ total managed assets, including assets attributable to preferred shares and other forms of leverage outstanding). In this regard, the Trustees took into account that the Investment Manager and Sub-Adviser have a financial incentive for the Funds to continue to have preferred shares outstanding, which may create a conflict of interest between the Investment Manager and Sub-Adviser, on one hand, and the Funds’ common shareholders, on the other. In this regard, the Trustees considered information provided by the Sub-Adviser indicating that the Funds’ use of leverage through preferred shares continues to be appropriate and in the interests of the Fund’s common shareholders.
Based on a profitability analysis provided by the Investment Manager, the Trustees also considered the estimated profitability of the Investment Manager from its relationship with the Funds and determined that such profitability was not excessive.
The Trustees also took into account that, as a closed-end investment companies, the Funds do not currently intend to raise additional assets, so the assets of the Funds will grow (if at all) only through the investment performance of the Funds. Therefore, the Trustees did not consider potential economies of scale as a principal factor in assessing the fee rates payable under the Agreements.
Additionally, the Trustees considered so-called “fall-out benefits” to the Investment Manager and Sub-Adviser, such as reputational value derived from serving as investment manager and sub-adviser to the Funds.
After reviewing these and other factors described herein, the Trustees concluded, within the context of their overall conclusions regarding the Agreements, that the fees payable under the Agreements represent reasonable compensation in light of the nature and quality of the services being provided by the Investment Manager and Sub-Adviser to the Funds.
9.30.05 | PIMCO Municipal Income Funds III Annual Report 41 |
PIMCO Municipal Income Funds III Privacy Policy/Proxy Voting Policies & Procedures (unaudited)
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. 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 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
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. 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. We may also provide your personal and account information to your brokerage or financial advisory firm and/or to your financial adviser or consultant.
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 you or your accounts to a non-affiliated third party at your request or if you consent in writing to the disclosure.
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 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, 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.
Implementation of Procedures
We take seriously the obligation to safeguard your non-public personal information. We have implemented procedures designed to restrict access to your non-public personal information to our personnel who need to know that information to provide products or services to you. To guard your non-public personal information, physical, electronic, and procedural safeguards are in place.
Proxy Voting Policies & Procedures: |
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' transfer agent at (800) 331-1710; (ii) on the Funds' website at www.allianzinvestors.com; and (iii) on the Securities and Exchange Commission's website at www. sec.gov.
42 PIMCO Municipal Income Funds III Annual Report | 9.30.05 |
PIMCO Municipal Income Funds III Tax Information (unaudited)
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 (September 30, 2005) 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 September 30, 2005 were federally exempt interest dividends. The Funds, however, invested in municipal bonds containing market discount, the accretion on which, is taxable. Accordingly, the percentage of dividends paid from net investment income during the tax period which are taxable were:
Municipal III | 2.26% |
California Municipal III | 2.04% |
New York Municipal III | 1.08% |
Since the Funds' fiscal year is not the calendar year, another notification will be sent with respect to calendar year 2005. In January 2006, shareholders will be advised on IRS Form 1099 DIV as to the federal tax status of the dividends and distributions received during calendar 2005. The amount that will be reported will be the amount to use on your 2005 federal income tax return and may differ from the amount which must be reported in connection with each Funds' tax year ended September 30, 2005. Shareholders are advised to consult their tax advisers as to the federal, state and local tax status of the income received from the Funds. In January 2006, 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.
9.30.05 | PIMCO Municipal Income Funds III Annual Report 43 |
PIMCO Municipal Income Fund III Dividend Reinvestment Plan (unaudited) |
Pursuant to the Funds’ Dividend Reinvestment Plan (the “Plan”), all Common Shareholders whose shares are registered in their own names will have all dividends, including any capital gain dividends, reinvested automatically in additional Common Shares by PFPC Inc., as agent for the Common Shareholders (the “Plan Agent”), unless the shareholder elects to receive cash. An election to receive cash may be revoked or reinstated at the option of the shareholder. In the case of record shareholders such as banks, brokers or other nominees that hold Common Shares for others who are the beneficial owners, the Plan Agent will administer the Plan on the basis of the number of Common Shares certified from time to time by the record shareholder as representing the total amount registered in such shareholder’s name and held for the account of beneficial owners who are to participate in the Plan. Shareholders whose shares are held in the name of a bank, broker or nominee should contact the bank, broker or nominee for details. All distributions to investors who elect not to participate in the Plan (or whose broker or nominee elects not to participate on the investor’s behalf), will be paid cash by check mailed, in the case of direct shareholder, to the record holder by PFPC Inc., as the Funds’ dividend disbursement agent.
Unless you (or your broker or nominee) elect not to participate in the Plan, the number of Common Shares you will receive will be determined as follows:
(1) | If Common Shares are trading at or above net asset value on the payment date, the Funds will issue new shares at the greater of (i) the net asset value per Common Share on the payment date or (ii) 95% of the market price per Common Share on the payment date; or |
(2) | If Common Shares are trading below net asset value (minus estimated brokerage commissions that would be incurred upon the purchase of Common Shares on the open market) on the payment date, the Plan Agent will receive the dividend or distribution in cash and will purchase Common Shares in the open market, on the New York Stock Exchange or elsewhere, for the participants’ accounts. It is possible that the market price for the Common Shares may increase before the Plan Agent has completed its purchases. Therefore, the average purchase price per share paid by the Plan Agent may exceed the market price on the payment date, resulting in the purchase of fewer shares than if the dividend or distribution had been paid in Common Shares issued by the Funds. The Plan Agent will use all dividends and distributions received in cash to purchase Common Shares in the open market on or shortly after the payment date, but in no event later than the ex-dividend date for the next distribution. Interest will not be paid on any uninvested cash payments. |
You may withdraw from the Plan at any time by giving notice to the Plan Agent. If you withdraw or the Plan is terminated, you will receive a certificate for each whole share in your account under the Plan and you will receive a cash payment for any fraction of a share in your account. If you wish, the Plan Agent will sell your shares and send you the proceeds, minus brokerage commissions.
The Plan Agent maintains all shareholders’ accounts in the Plan and gives written confirmation of all transactions in the accounts, including information you may need for tax records. The Plan Agent will also furnish each person who buys Common Shares with written instructions detailing the procedures for electing not to participate in the Plan and to instead receive distributions in cash. Common Shares in your account will be held by the Plan Agent in non-certificated form. Any proxy you receive will include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or distributions in Common Shares. However, all participants will pay a pro rata share of brokerage commissions incurred by the Plan Agent when it makes open market purchases.
Automatically reinvested dividends and distributions are taxed in the same manner as cash dividends and distributions.
The Funds and the Plan Agent reserve the right to amend or terminate the Plan. There is no direct service charge to participants in the Plan; however, the Funds reserve the right to amend the Plan to include a service charge payable by the participants. Additional information about the Plan may be obtained from the Funds’ transfer agent, PFPC Inc., P.O. Box 43027, Providence, RI 02940-3027, telephone number (800) 331-1710.
44 PIMCO Municipal Income Funds III Annual Report | 9.30.05 |
PIMCO Municipal Income Fund III Board of Trustees (unaudited)
Name, Age, Position(s) Held With Funds,
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 | | Corporate Affairs Consultant; Formerly, Senior Vice President,
Corporate Office, Smith Barney Inc. |
Chairman of the Board of Trustees since: 2004
Trustee since: 2002 | | |
Term of office: Expected to stand for re-election at 2006 annual meeting of shareholders. | | |
Trustee/Director of 24 funds in Fund Complex | | |
Trustee/Director of no funds outside of Fund
Complex | | |
| | |
Paul Belica
Date of Birth: 9/27/21
Trustee since: 2002 | | Director, Student Loan Finance Corp., Education Loans, Inc., Goal Funding I, Goal Funding II, Inc. and Surety Loan Funding, Inc.; Formerly senior executive and member of the Board of Smith Barney, Harris Upham & Co. and CEO of five State of New York Agencies Inc. |
Term of office: Expected to stand for re-election at 2005 annual meeting of shareholders. |
Trustee/Director of 20 funds in Fund Complex | | |
Trustee/Director of no funds outside of Fund Complex | | |
| | |
John J. Dalessandro II
Date of Birth: 7/26/37
Trustee since: 2002 | | Formerly, President and Director, J.J. Dalessandro II Ltd, registered broker-dealer and member of the New York Stock Exchange. |
Term of office: Expected to stand for re-election at 2007 annual meeting of shareholders. | | |
Trustee of 23 funds in Fund Complex
Trustee of no funds outside of Fund complex | | |
| | |
David C. Flattum†
Date of Birth: 8/27/64
Trustee since: 2004 | | Managing Director, Chief Operating Officer, General Counsel and member of Management Board, Allianz Global Investors of America, L.P.; Formerly, Partner, Latham & Watkins LLP (1998-2001). |
Term of office: Expected to stand for election at 2005 annual meeting of shareholders. | | |
Trustee of 54 funds in Fund Complex
Trustee of no funds outside of Fund Complex | | |
| | |
Hans W. Kertess
Date of Birth: 7/12/39
Trustee since: 2002 | | President, H Kertess & Co., L.P. Formerly, Managing Director, Royal Bank of Canada Capital Markets. |
Term of office: Expected to stand for re-election at 2006 annual meeting of shareholders. | | |
Trustee of 23 Funds in Fund Complex;
Trustee of no funds outside of Fund Complex | | |
| | |
R. Peter Sullivan III
Date of Birth: 9/4/41
Trustee since: 2002 | | Formerly, Managing Partner, Bear Wagner Specialists LLC (formerly, Wagner Stott Mercator LLC), specialist firm on the New York Stock Exchange. |
Term of office: Expected to stand for re-election at 2007 annual meeting of shareholders. | | |
Trustee of 19 funds in Fund Complex
Trustee of no funds outside of Fund Complex | | |
| |
† | Mr. Flattum is an “interested person” of the Fund due to his affiliation with Allianz Global Investors of America L.P. and the Manager. In addition to Mr. Flattum’s positions with affiliated persons of the funds set forth in the trade above, he holds the following positions with affiliated persons: Director, PIMCO Global Advisors (Resources) Limited; Managing Director, Allianz Dresdner Asset Management U.S. Equities LLC, Allianz Hedge Fund Partners Holdings L.P., Allianz Pac-Life Partners LLC, PA Holdings LLC; Director and Chief Executive Officer, Oppenheimer Group, Inc. |
Further information about Funds’ Trustees is available in the Funds’ Statement of Additional Information, dated August 26, 2003, which can be obtained upon request, without charge, by calling the Funds’ transfer agent at (800) 331-1710.
9.30.05 | PIMCO Municipal Income Funds III Annual Report 45 |
PIMCO Municipal Income Fund III Principal Officers (unaudited)
Name, Age, 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 31 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 31 funds in the Fund Complex. |
|
Mark McCray
Date of Birth: 4/11/66
Vice President since: 2000 | | Executive Vice President and portfolio manager responsible for the firm’s Municipal Bond Funds. He joined PIMCO in 2000, from Goldman, Sachs & Co. in New York, where he was Vice President and co-head of municipal bond trading, with primary responsibility for the firm’s proprietary municipal trading. Mr. McCray has seventeen years of investment experience and holds a bachelor’s degree from Temple University and an MBA from The Wharton School of the University of Pennsylvania, with concentrations in finance, accounting, and strategic management. |
Newton B. Schott, Jr.
Date of Birth: 7/14/42
Vice President since: 2002 | | Managing Director, Chief Administrative Officer, General Counsel and Secretary, Allianz Global Investors Distributors LLC; Managing Director, Chief Legal Officer and Secretary, Allianz Global Investors Fund Management LLC; Vice President of 63 funds in the Fund Complex; Secretary of 33 funds in the Fund Complex. |
Thomas J. Fuccillo
Date of Birth: 3/22/68
Secretary since: 2004 | | Vice President, Senior Fund Attorney, Allianz Global Investors of America L.P., Secretary of 32 funds in the Fund Complex. |
Youse 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 63 funds in the Fund Complex. |
Jennifer Patula
Date of Birth: 5/8/78
Assistant Secretary since: 2004 | | Assistant Secretary of 32 funds in the Fund Complex. |
Officers hold office at the pleasure of the Board and until their successors are appointed and qualified or until their earlier resignation or removal.
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48 PIMCO Municipal Income Funds III Annual Report | 9.30.05 |
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
Newton B. Schott, Jr.
Vice President
Mark V. McCray
Vice President
Lawrence G. Altadonna
Treasurer, Principal Financial & Accounting Officer
Thomas J. Fuccillo
Secretary
Youse Guia
Chief Compliance Officer
Jennifer A. Patula
Assistant Secretary
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.
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 ("SEC") for the first and third quarters of its fiscal year on Form N-Q. The Funds' Forms N-Q are 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 information on the Form N-Q is also available on the Fund's website at www.allianzinvestors.com.
On January 24, 2005, the Funds submitted a CEO annual certification to the New York Stock Exchange ("NYSE") on which each Funds' principal executive officer certified that he was not aware, as of that date, of any violation by the Funds of the NYSE's Corporate Governance listing standards. In addition, as required by Section 302 of the Sarbanes-Oxley Act of 2002 and related SEC rules, each Fund's principal executive and principal financial officer made quarterly certifications, included in filings with the SEC on Forms N-CSR and N-Q relating to, among other things, the Funds' disclosure controls and procedures and internal control over financial reporting, as applicable.
Information on the Funds is available at www.allianzinvestors.com or by calling the Funds' transfer agent (800) 331-1710.
ITEM 2. CODE OF ETHICS
(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 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.
(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.
(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
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
$34,906 in 2004 and $40,210 in 2005.
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 $16,268 in 2004 and $9,564 in 2005. These services consist
of accounting consultations, agreed upon procedure reports (inclusive
of annual review of basic maintenance testing associated with the
Preferred Shares), attestation reports and comfort letters.
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 $8,000 in 2004 and
$8,500 in 2005. These services consisted of review or preparation of
U. S. federal, state, local and excise tax returns.
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.
e) 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.
PIMCO Municipal Income Funds III (THE "FUNDS")
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 be
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 $75,000. 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:
(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;
(2) Such services were not recognized by the Fund at the time of the
engagement for such services to be non-audit services; and
(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.
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.
f) Not applicable
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 2004 Reporting Period was $2,828,813 and the 2005 Reporting Period was
$3,231,387.
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
The Fund has a separately designated standing audit committee established
in accordance with Section 3 (a) (58) (A) of the Securities Exchange Act of
1934. The audit committee of the Fund is comprised of Robert E. Connor, Paul
Belica, John J. Dalessandro II, Hans W. Kertess and R. Peter Sullivan III.
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
The registrant has delegated the voting of proxies relating to its voting
securities to its sub-adviser, Pacific Investment Management Co. (the
"Sub-Adviser"). The Proxy voting Policies and Procedures of the Sub-Adviser are
included as an Exhibit 99 PROXYPOL hereto.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES
Not effective at the time of 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 2004 N/A N/A N/A N/A
November 2004 N/A 14.51 18,052 N/A
December 2004 N/A N/A N/A N/A
January 2005 N/A N/A N/A N/A
February 2005 N/A 14.71 16,800 N/A
March 2005 N/A N/A N/A N/A
April 2005 N/A N/A N/A N/A
May 2005 N/A 14.67 15,902 N/A
June 2005 N/A 14.68 17,425 N/A
July 2005 N/A 14.75 17,172 N/A
August 2005 N/A 14.71 17,333 N/A
September 2005 N/A 14.95 16,944 N/A
PIMCO MUNICIPAL INCOME FUND III
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.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
(c) Exhibit 99.Proxy - Proxy Voting Policies and Procedures
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 Municipal Income Fund III
By /s/ Brian S. Shlissel
- ------------------------
Brian S. Shlissel, President & Chief Executive Officer
Date: December 5, 2005
By /s/ Lawrence G. Altadonna
- ----------------------------
Lawrence G. Altadonna, Treasurer, Principal Financial & Accounting Officer
Date: December 5, 2005
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: December 5, 2005
By /s/ Lawrence G. Altadonna
- ----------------------------
Lawrence G. Altadonna, Treasurer, Principal Financial & Accounting Officer
Date: December 5, 2005
