UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-21338
---------
Nicholas-Applegate Convertible & Income Fund II
(Exact name of registrant as specified in charter)
1345 AVENUE OF THE AMERICAS, NEW YORK, NEW YORK 10105
-----------------------------------------------------
(Address of principal executive offices) (Zip code)
LAWRENCE G. ALTADONNA - 1345 AVENUE OF THE AMERICAS, NEW YORK, NEW YORK 10105
-----------------------------------------------------------------------------
(Name and address of agent for service)
Registrant's telephone number, including area code: 212-739-3371
Date of fiscal year end: JUNE 30
-------
Date of reporting period: JUNE 30
-------
Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW,
Washington, DC 20549-0609. The OMB has reviewed this collection of information
under the clearance requirements of 44 U.S.C. ss. 3507.
Item 1. Report to Shareholders
Annual Report
6.30.04
NICHOLAS-APPLEGATE CONVERTIBLE & INCOME FUND II
================================================================================
NCZ
- ---------------------------
LISTED
- ---------------------------
NYSE
THE NEW YORK STOCK EXCHANGE
- ---------------------------
CONTENTS
Letter to Shareholders ......................... 1
Performance and Statistics ..................... 2
Schedule of Investments ........................ 3-8
Statement of Assets and Liabilities ............ 9
Statement of Operations ........................ 10
Statement of Changes in Net Assets ............. 11
Notes to Financial Statements .................. 12-15
Financial Highlights ........................... 16
Report of Independent Registered
Public Accounting Firm ....................... 17
Privacy Policy, Proxy Voting Policies
and Procedures, Other Information ............ 18
Tax Information
Dividend Reinvestment Plan ..................... 19
Board of Trustees .............................. 20
[GRAPHIC OMITTED]
NICHOLAS-APPLEGATE CONVERTIBLE & INCOME FUND II LETTER TO SHAREHOLDERS
August 11, 2004
Dear Shareholder:
We are pleased to provide you with the initial annual report of the
Nicholas-Applegate Convertible & Income Fund II (the "Fund") for the period July
31, 2003 (commencement of operations) through June 30, 2004.
Please refer to the following page for specific Fund information. If you have
any questions regarding the information provided, please contact your financial
advisor or call our shareholder services area at 1-800-331-1710. Please note
that a wide range of information and resources can be accessed through our Web
site, www.pimcoadvisors.com.
Together with PA Fund Management LLC, the Fund's investment manager and
Nicholas-Applegate Capital Management LLC, the Fund's sub-adviser, I thank you
for investing with us. We remain dedicated to serving your investment needs.
Sincerely,
/s/ Brian S. Shlissel
Brian S. Shlissel
PRESIDENT, CHIEF EXECUTIVE OFFICER
| 6.30.04 | Nicholas-Applegate Convertible & Income Fund II Annual Report 1
NICHOLAS-APPLEGATE CONVERTIBLE & INCOME FUND II
PERFORMANCE SUMMARY AND STATISTICS
June 30, 2004 (unaudited)
- --------------------------------------------------------------------------------
SYMBOL: PRIMARY INVESTMENTS: INCEPTION DATE:
NCZ At least 50% of total assets July 31, 2003
in convertible securities.
OBJECTIVE: TOTAL NET ASSETS(1):
To provide total return $1,360.8 million
through a combination
of capital appreciation PORTFOLIO MANAGER:
and high current income. Douglas Forsyth
TOTAL RETURN(2): Market Price NAV
- --------------------------------------------------------------------------------
Commencement of Operations (7/31/03) to 6/30/04 1.88% 15.19%
COMMON SHARE PRICE PERFORMANCE: MARKET PRICE/NET ASSETVALUE:
Commencement of Operations ------------------------------------------
(7/31/03) to 6/30/04 Market Price $14.05
Net Asset Value $15.18
Dividend Yield(3) 9.88%
Discount to Net Asset Value 7.44%
[The data below represent a line chart in the printed report.]
NAV MARKET PRICE
--- ------------
7/31/03 14.3 15
14.96 15.01
14.17 15.01
14.1 15
14.4 15
14.61 15
14.7 15.01
14.73 14.39
14.84 14.61
14.59 14.3
14.75 14.7
14.87 14.56
14.9 14.73
14.76 14.7
14.97 14.87
15.11 15
14.92 14.94
14.81 14.89
15.15 14.85
15.24 15.23
15.19 15.27
15.33 15.13
15.37 15.22
15.48 15.58
15.98 15.86
16.03 15.63
16.11 15.5
15.79 15.55
15.65 15.81
15.67 15.65
15.55 15.36
15.55 15.43
15.75 15.73
15.37 15.44
15.22 15.17
15.21 15.41
15.62 15.67
15.68 15.28
15.39 14.67
15.58 14.28
15.16 14.49
14.92 13.57
14.41 13.44
14.56 13.71
14.9 14.27
14.88 14.26
14.91 14.24
14.98 13.95
15.14 13.9
6/30/04 15.18 14.05
(1) Inclusive of net assets attributable to Preferred Shares outstanding.
(2) PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Total return is
determined by subtracting the initial investment from the value at the end of
the period and dividing the remainder by the initial investment and expressing
the result as a percentage. The calculation assumes that all income dividends
and capital gain distributions have been reinvested at prices obtained under the
Fund's dividend reinvestment plan. Total return does not reflect broker
commissions or sales charges. Total return for a period of less than one year is
not annualized.
An investment in the Fund involves risk, including the loss of principal. Total
return, price, yield and net asset value will fluctuate with changes in market
conditions. This data is provided for information only and is not intended for
trading purposes. Closed-end funds, unlike open-end funds, are not continuously
offered. There is a one-time public offering and once issued, shares of
closed-end funds are sold in the open market through a stock exchange. Net asset
value is total assets applicable to common shareholders less total liabilities
divided by the number of common shares outstanding. Holdings are subject to
change daily.
(3) Dividend Yield is determined by dividing the annualized current monthly per
share dividend to common shareholders by the market price per common share at
June 30, 2004.
2 Nicholas-Applegate Convertible & Income Fund II Annual Report | 6.30.04 |
NICHOLAS-APPLEGATE CONVERTIBLE & INCOME FUND II SCHEDULE OF INVESTMENTS
June 30, 2004
- --------------------------------------------------------------------------------
Principal
Amount Credit Rating
(000) (Moody's/S&P)* Value
====================================================================================================================
CORPORATE BONDS & NOTES--45.4%
- --------------------------------------------------------------------------------------------------------------------
ADVERTISING--0.9%
$10,000 RH Donnelley Financial Corp., 10.875%, 12/15/12 B2/B+ $ 11,600,000
===============
AIRLINES--1.3%
20,065 Northwest Airlines Corp., 6.625%-10.00%, 2/1/09-5/15/23 Caa1/B- 17,996,200
===============
APPAREL--0.2%
1,500 Oxford Industries, Inc., 8.875%, 6/1/11
(acquired 4/26/04, cost-$1,608,659) (a) B2/B 1,582,500
1,275 Phillips-Van Heusen Corp., 8.125%, 5/1/13 B2/BB- 1,329,188
---------------
2,911,688
===============
AUTOMOTIVE--1.3%
3,725 Collins & Aikman Products Inc., 11.50%, 4/15/06 B3/B- 3,669,125
5,860 Collins & Aikman Products Inc., 10.75%, 12/31/11 B2/B- 5,889,300
6,460 HLI Operating Co Inc., 10.50%, 6/15/10 B1/B+ 7,267,500
---------------
16,825,925
===============
BUILDING & CONSTRUCTION--0.4%
5,750 US Concrete Inc., 8.375%, 4/1/14
(acquired 3/26/04, cost-$5,793,881) (a) B3/B- 5,735,625
===============
CHEMICALS--1.9%
9,985 Huntsman LLC, 11.625%, 10/15/10 B2/B 11,033,425
4,315 Lyondell Chemical Corp., 10.875%, 5/1/09 B3/B- 4,509,175
9,345 Polyone Corp., 10.625%, 5/15/10 B3/B+ 9,905,700
---------------
25,448,300
===============
COMMERCIAL SERVICES--0.9%
2,025 United Rentals North America, Inc., 7.00%, 2/15/14 B2/B+ 1,812,375
9,500 Xerox Corp., 9.75%, 1/15/09 B1/B+ 10,806,250
---------------
12,618,625
===============
CONSUMER PRODUCTS--1.0%
8,750 Central Garden & Pet Co., 9.125%, 2/1/13 B2/B+ 9,493,750
3,160 Jarden Corp., 9.75%, 5/1/12 B2/B- 3,436,500
---------------
12,930,250
===============
ELECTRONICS--1.4%
3,000 Imax Corp., 9.625%, 12/1/10
(acquired 5/13/04, cost-$2,726,470) (a) B3/B- 2,812,500
8,510 Sanmina-SCI Corp., 10.375%, 1/15/10 Ba2/BB- 9,743,950
4,500 Seitel Inc., 11.75%, 7/15/11
(acquired 6/28/04, cost-$4,395,375) (a) B3/B- 4,500,000
1,750 Stoneridge Inc., 11.50%, 5/1/12 B1/B+ 2,060,625
---------------
19,117,075
===============
ENERGY--1.1%
10,505 Reliant Resources, Inc., 9.50%, 7/15/13 B1/B 11,319,138
4,000 Sierra Pacific Resources, Inc., 8.625%, 3/15/14
(acquired 3/16/04, cost-$4,000,000) (a) B2/B- 3,900,000
---------------
15,219,138
===============
ENTERTAINMENT--0.7%
7,940 Alliance Atlantis Communications, Inc., 13.00%, 12/15/09 B1/B 8,734,000
===============
| 6.30.04 | Nicholas-Applegate Convertible & Income Fund II Annual Report 3
NICHOLAS-APPLEGATE CONVERTIBLE & INCOME FUND II SCHEDULE OF INVESTMENTS
June 30, 2004
- --------------------------------------------------------------------------------------------------------------------
Principal
Amount Credit Rating
(000) (Moody's/S&P)* Value
====================================================================================================================
FINANCIAL SERVICES--3.0%
$ 3,750 Alamosa Delaware Inc., 11.00%, 7/31/10 Caa1/CCC $ 4,087,500
4,692 Finova Group Inc., 7.50%, 11/15/09 NR/NR 2,568,810
33,980 TRAC-X North America, 10.125%, 3/25/09
(acquired 12/3/03, cost-$14,137,275) (a) (c) NR/NR 33,172,975
---------------
39,829,285
===============
FOOD SERVICES--0.9%
10,625 Pilgrim's Pride Corp., 9.25%-9.625%, 9/15/11-11/15/13 B1/BB- 11,650,625
===============
HEALTHCARE--0.6%
605 Hanger Orthopedic Group, 10.375%, 2/15/09 B2/B- 618,613
6,500 Select Medical Corp., 9.50%, 6/15/09 B2/B 6,955,000
---------------
7,573,613
===============
HOME BUILDERS--1.4%
11,500 Ryland Group, Inc., 9.125%, 6/15/11 Ba2/BB+ 12,650,000
5,000 Standard-Pacific Corp., 9.50%, 9/15/10 Ba2/BB 5,487,500
---------------
18,137,500
===============
HOTELS/GAMING--2.4%
11,080 Mandalay Resort Group, Inc., 10.25%, 8/1/07 Ba3/BB- 12,298,800
11,000 Penn National Gaming, Inc., 11.125%, 3/1/08 B2/B 12,100,000
6,688 Wynn Resorts Ltd., 12.00%, 11/1/10 B3/CCC+ 8,008,880
---------------
32,407,680
===============
LEISURE--2.0%
12,930 Bally Total Fitness Holdings Corp., 9.875%, 10/15/07, Ser. D B3/B- 11,022,825
6,500 Equinox Holdings Inc., 9.00%, 12/15/09
(acquired 2/24/04, cost-$6,781,056) (a) B3/B- 6,467,500
8,825 Royal Caribbean Cruises, Inc., 8.75%, 02/2/11 Ba2/BB+ 9,773,688
---------------
27,264,013
===============
MANUFACTURING--1.5%
10,200 Case New Holland Inc., 9.25%, 8/1/11
(acquired 9/29/03, cost-$11,210,618) (a) Ba3/BB- 10,710,000
9,000 Lyondell Chemical Co., 9.625%, 5/1/07, Ser. A B1/B+ 9,405,000
---------------
20,115,000
===============
METALS & MINING--0.7%
9,685 AK Steel Corp., 7.875%, 2/15/09 B3/B+ 9,055,475
===============
MULTI-MEDIA--3.2%
4,500 Cablevision Systems Corp., 8.00%, 4/15/12
(acquired 3/30/04, cost-$11,210,618) (a) B3/B+ 4,432,500
12,000 Charter Communications, Inc., 10.75%, 10/1/09 Ca/CCC- 10,080,000
10,000 Echostar DBS Corp., 10.375%, 10/1/07 Ba3/BB- 10,687,500
2,470 Lodgenet Entertainment Corp., 9.50%, 6/15/13 B3/B- 2,698,475
8,260 Spanish Broadcasting System., 9.625%, 11/1/09 Caa1/CCC+ 8,714,300
4,967 XM Satellite Radio Holdings, Inc., 12.00%, 6/15/10 Caa1/CCC+ 5,693,424
---------------
42,306,199
===============
4 Nicholas-Applegate Convertible & Income Fund II Annual Report | 6.30.04 |
NICHOLAS-APPLEGATE CONVERTIBLE & INCOME FUND II SCHEDULE OF INVESTMENTS
June 30, 2004
- --------------------------------------------------------------------------------------------------------------------
Principal
Amount Credit Rating
(000) (Moody's/S&P)* Value
====================================================================================================================
OIL & GAS--1.8%
$10,000 Petroleum Geo-Services ASA, 10.00%, 11/5/10 NR/NR $ 10,350,000
12,240 Sonat, Inc., 7.625%, 7/15/11 Caa1/CCC+ 10,924,200
3,000 Whiting Petroleum Corp., 7.25%, 5/1/12
(acquired 5/5/04, cost-$2,978,062) (a) B2/B- 2,970,000
---------------
24,244,200
===============
OFFICE FURNISHINGS--0.3%
3,894 Tempur-Pedic Inc., 10.25%, 8/15/10
(acquired 8/8/03, cost-$6,016,250) (b) B2/B- 4,390,485
===============
PAPER PRODUCTS--1.4%
6,175 Buckeye Technologies Inc., 9.25%, 9/15/08
(acquired 3/19/04, cost-$6,211,646) (b) Caa1/B 6,113,250
11,250 Georgia-Pacific Corp., 9.375%, 2/1/13 Ba2/BB+ 12,881,250
---------------
18,994,500
===============
PHARMACEUTICALS--0.3%
3,250 Leiner Health Products Inc., 11.00%, 6/1/12
(acquired 5/25/04, cost-$3,355,625) (a) B3/CCC+ 3,355,625
===============
RECYCLING--0.5%
5,855 Imco Recycling Inc., 10.375%, 10/15/10 B3/B- 6,323,400
===============
RETAIL--2.8%
3,400 Friendly Ice Cream Corp., 8.375%, 6/15/12
(acquired 6/17/04, cost-$3,299,494) (a) B2/B- 3,298,000
3,405 Hollywood Entertainment Corp., 9.625%, 3/15/11 B3/B- 3,915,750
7,220 Michaels Stores, Inc., 9.25%, 7/1/09 Ba1/BB+ 7,905,900
3,345 Mothers Work Inc., 11.25%, 8/1/10 B3/B+ 3,403,538
13,000 Rite Aid Corp., 11.25%, 7/1/08 Caa1/B- 14,332,500
3,400 United Auto Group Inc., 9.625%, 3/15/12 B3/B 3,723,000
---------------
36,578,688
===============
SEMI-CONDUCTORS--1.4%
12,970 Amkor Technology, Inc., 10.50%, 5/1/09 B3/CCC+ 13,618,500
4,515 Fairchild Semiconductor International, Inc., 10.50%, 2/1/09 B2/B 4,910,069
---------------
18,528,569
===============
TELECOMMUNICATIONS--7.3%
12,110 American Tower Corp., 9.375%, 2/1/09 Caa1/CCC 12,927,425
12,525 Crown Castle International, Inc., 10.75%, 8/1/11 B3/CCC 14,028,000
11,305 Millicom International Cellular, 10.00%, 12/1/13
(acquired 11/19/03, cost-$2,500,000) (a) B3/B- 11,474,575
11,625 Nextel Communications, Inc., 9.375%, 11/15/09 Ba3/BB 12,424,219
5,250 Primus Telecommunications Group, Inc., 8.00%, 1/15/14 B3/CCC 4,646,250
7,000 Primus Telecommunications Group, Inc., 12.75%, 10/15/09 Caa2/CCC 7,525,000
13,100 SBA Communications Corp., 10.25%, 2/1/09 Caa2/CCC- 13,427,500
12,200 Time Warner Telecom, Inc., 10.125%, 2/1/11 B3/CCC+ 11,102,000
11,790 Triton PCS, Inc., 9.375%, 2/1/11 B3/B- 10,080,450
---------------
97,635,419
===============
| 6.30.04 | Nicholas-Applegate Convertible & Income Fund II Annual Report 5
NICHOLAS-APPLEGATE CONVERTIBLE & INCOME FUND II SCHEDULE OF INVESTMENTS
June 30, 2004
- --------------------------------------------------------------------------------------------------------------------
Principal
Amount Credit Rating
(000) (Moody's/S&P)* Value
====================================================================================================================
TEXTILES--0.8%
$ 4,625 Interface Inc., 9.50%, 11/15/05
(acquired 1/26/04, cost-$4,625,000) (a) Caa3/CCC $ 4,601,875
5,625 Interface, Inc., 10.375%, 2/01/10 Caa1/B- 6,271,875
---------------
10,873,750
===============
UTILITIES--1.0%
12,000 AES CORP., 9.50%, 6/1/09 B2/B- 12,825,000
===============
WASTE MANAGEMENT--1.0%
12,000 Allied Waste, Inc., 10.00%, 8/1/09, Ser. B B3/B+ 12,675,000
===============
Total Corporate Bonds & Notes (cost-$606,581,929) 603,900,852
===============
- --------------------------------------------------------------------------------------------------------------------
CONVERTIBLE BONDS & NOTES--27.5%
- --------------------------------------------------------------------------------------------------------------------
AIRLINES--0.9%
16,300 Continental Airlines Inc., 4.50%, 2/1/07 Caa2/CCC+ 11,756,375
===============
AEROSPACE--2.5%
14,425 GenCorp Inc., 5.75%, 4/15/07 B3/B 15,290,500
14,300 L-3 Communications Holdings, Inc., 4.00%, 9/15/11 Ba3/BB- 17,910,750
---------------
33,201,250
===============
AUTOMOTIVE--0.2%
2,450 Sonic Automotive Inc., 5.25%, 5/7/09 B3/B+ 2,385,688
===============
BUSINESS SERVICES--0.4%
5,125 Bowne & Co., Inc., 5.00%, 10/1/33 Caa1/B- 5,823,281
===============
COMMERCIAL SERVICES--1.1%
14,040 Quebecor World Color Press, Inc., 6.00%, 10/1/07 Ba1/BB+ 14,461,200
===============
DIVERSIFIED MANUFACTURING--1.3%
10,625 Tyco International Group SA, 3.125%, 1/15/23 Baa3/BBB 17,252,344
===============
ELECTRONICS--2.4%
7,500 Agilent Technologies Inc., 3.00%, 12/1/21 Ba2/BB 7,931,250
7,900 Artesyn Technologies, Inc., 5.50%, 8/15/10 NR/NR 11,277,250
12,300 Cymer, Inc., 3.50%, 2/15/09 NR/B- 12,576,750
---------------
31,785,250
===============
INTERNET--2.2%
13,116 E*Trade Group Inc., 6.00%, 2/1/07 NR/B- 13,493,085
6,140 Symantec Corp., 3.00%, 11/1/06 NR/B 15,795,150
---------------
29,288,235
===============
PHARMACEUTICALS--0.5%
2,290 Ligand Pharmaceutical Inc., 6.00%, 11/16/07 NR/NR 6,609,513
===============
MULTI-MEDIA--2.9%
14,500 Charter Communications, Inc., 5.75%, 10/15/05 Ca/CCC- 13,901,875
12,000 Echostar Communications Corp., 5.75%, 5/15/08 B2/B 12,405,000
13,000 Liberty Media Corp., 3.25%, 3/15/31 Baa3/BBB- 11,700,000
---------------
38,006,875
===============
OIL & GAS--0.9%
7,585 St. Mary Land & Exploration Corp., 5.75%, 3/15/22 NR/NR 11,946,375
===============
REAL ESTATE--1.0%
13,000 EOP Operating LP, 7.25%, 11/15/08 Baa1/BBB+ 13,308,750
===============
6 Nicholas-Applegate Convertible & Income Fund II Annual Report | 6.30.04 |
NICHOLAS-APPLEGATE CONVERTIBLE & INCOME FUND II SCHEDULE OF INVESTMENTS
June 30, 2004
- --------------------------------------------------------------------------------------------------------------------
Principal
Amount Credit Rating
(000) (Moody's/S&P)* Value
====================================================================================================================
RETAIL--3.6%
$10,500 Gap, Inc., 5.75%, 3/15/09 Ba2/BB+ $ 16,380,000
5,200 Guitar Center, Inc., 4.00%, 7/15/13 B1/B+ 7,436,000
12,500 J.C.Penney Corp., 5.00%, 10/15/08 B1/BB- 16,781,250
6,350 The Pep Boys Inc., 4.25%, 6/1/07 B1/BB- 7,794,625
---------------
48,391,875
===============
SEMI-CONDUCTORS--1.0%
14,300 Amkor Technology, Inc., 5.00%, 3/15/07 B3/CCC+ 13,406,250
===============
SOFTWARE--3.9%
9,350 Acxiom Corp, 3.75%, 2/15/09 Ba3/BB- 13,101,688
10,300 Computer Associates International, Inc., 5.00%, 3/15/07 Baa1/BBB- 12,772,000
11,500 HNC Software, Inc., 5.25%, 9/1/08 NR/NR 12,103,750
12,500 Network Associates, Inc., 5.25%, 8/15/06 NR/NR 13,406,250
---------------
51,383,688
===============
TELECOMMUNICATIONS--2.7%
14,250 American Tower Corp., 5.00%, 2/15/10 Caa1/CCC 14,071,875
9,500 Crown Castle International, Inc., 4.00%, 7/15/10 NR/CCC 15,188,125
7,040 Nortel Networks Corp., 4.25%, 9/1/08 B3/B- 6,776,000
---------------
36,036,000
===============
Total Convertible Bonds & Notes (cost-$344,216,264) 365,042,949
===============
- --------------------------------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK-- 25.3%
- --------------------------------------------------------------------------------------------------------------------
Shares
(000)
------ AEROSPACE--1.0%
130 Northrop Grumman Corp., 7.25%, 11/16/04 NR/NR 13,821,600
===============
AUTOMOTIVE--2.3%
260 Ford Motor Co Capital Trust II., 6.50%, 1/15/32 Baa2/BB 14,237,600
534 General Motors Corp., Ser. C, 6.25%, 7/15/33 Baa1/BBB 15,512,732
---------------
29,750,332
===============
BANKING--0.9%
231 Washington Mutual, Inc., 5.375%, 5/3/41 Baa1/BBB 12,443,970
===============
COMMERCIAL SERVICES--3.1%
287 Cendant Corp., 7.75%, 8/17/04 WR/BBB 14,566,110
310 United Rentals, Inc., 6.50%, 8/1/28 B3/B 13,640,000
167 Xerox Corp., 7.50%, 11/27/21
(acquired 8/1/03, cost-$11,007,759) (a) B3/B- 13,560,038
---------------
41,766,148
===============
FINANCIAL SERVICES--2.3%
293 Capital One Financial Corp., 6.25%, 5/17/05 Baa3/BB+ 14,787,747
225 Prudential Financial, Inc., 6.75%, 11/15/04 A3/A- 15,734,250
---------------
30,521,997
===============
HEALTHCARE--1.2%
158 Anthem, Inc., 6.00%, 11/15/04 NR/BBB- 16,176,825
===============
INSURANCE--2.1%
472 Platinum Underwriters Holdings, Ltd., 7.00%, 11/16/05 NR/NR 14,383,800
520 XL Capital Ltd., 6.50%, 5/15/07 A2/A 13,202,800
---------------
27,586,600
===============
| 6.30.04 | Nicholas-Applegate Convertible & Income Fund II Annual Report 7
NICHOLAS-APPLEGATE CONVERTIBLE & INCOME FUND II SCHEDULE OF INVESTMENTS
June 30, 2004
- --------------------------------------------------------------------------------------------------------------------
Shares Credit Rating
(000) (Moody's/S&P)* Value
====================================================================================================================
METALS & MINING--2.5%
190 Arch Coal, 5.00%, 12/31/49 B2/B+ $ 18,092,261
129 U.S. Steel Corp. 7%, 6/15/06 Ser B NR/B- 15,120,694
----------------
33,212,955
================
MULTI-MEDIA--0.8%
518 Equity Securities Trust I, 6.50%, 11/15/04 NR/NR 10,773,183
================
OIL & GAS--2.4%
209 Amerada Hess Corp., 7.00%, 12/1/06 Ba3/BB 15,120,315
211 Chesapeake Energy Corp., 6.00%, 12/31/49 B3/B- 16,393,624
----------------
31,513,939
================
RETAIL--0.2%
100 Albertson's Inc., 7.25%, 5/16/07 Baa2/BBB 2,769,000
================
TELECOMMUNICATIONS--2.3%
23 Corning, Inc., 7.00%, 8/16/05 B1/BB- 15,288,735
1,567 Sprint Corp. (FON Group), 7.125%, 8/17/04 NR/NR 14,790,120
----------------
30,078,855
================
UTILITIES--4.2%
132 AES Trust III, 6.75%, 10/15/29 Caa2/CCC+ 5,539,300
303 FPL Group Inc., 8.00%, 2/16/06 NR/A- 16,599,209
565 PMI Group, Inc., 5.875%, 11/15/06 A1/A 15,594,000
392 TXU Corp., 8.75%, 11/16/05 NR/NR 18,665,630
----------------
56,398,139
================
Total Convertible Preferred Stock (cost-$301,233,929) 336,813,543
================
- --------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES--1.8%
- --------------------------------------------------------------------------------------------------------------------
Principal
Amount
(000)
--------- United States Treasury Notes,
$22,000 9.375%-10.75%, 8/15/05-2/15/06, (cost-$24,411,776) 24,261,964
================
TOTAL INVESTMENTS (cost-$1,276,443,898+)--100% $1,330,019,308
================
- --------------------------------------------------------------------------------
NOTES TO SCHEDULE OF INVESTMENTS:
* UNAUDITED
+ The cost basis of portfolio securities for federal income tax purposes is
$1,282,325,008. Aggregate gross unrealized appreciation for securities in
which there is an excess of value over tax cost is $76,852,069; aggregate
gross unrealized depreciation for securities in which there is an excess of
tax cost over value is $29,157,769; net unrealized appreciation for federal
income tax purposes is $47,694,300.
(a) 144A Security -- Security exempt from registration under Rule 144A of the
Securities Act of 1933. These securities may be resold in transactions
exempt from registration, typically to qualified institutional investors.
(b) Private Placement. Restricted as to resale and may not have a readily
available market.
(c) Credit-linked trust certificate.
GLOSSARY:
NR -- Not Rated
WR -- Withdrawn Rating
================================================================================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
8 Nicholas-Applegate Convertible & Income Fund II Annual Report | 6.30.04 |
NICHOLAS-APPLEGATE CONVERTIBLE & INCOME FUND II
STATEMENT OF ASSETS AND LIABILITIES
June 30, 2004
================================================================================
ASSETS:
Investments, at value (cost-$1,276,443,898) $1,330,019,308
- -------------------------------------------------------------- ---------------
Cash 21,218,140
- -------------------------------------------------------------- ---------------
Interest and dividends receivable 21,016,659
- -------------------------------------------------------------- ---------------
Receivable for investments sold 9,474,168
- -------------------------------------------------------------- ---------------
Interest rate cap premium paid 4,936,375
- -------------------------------------------------------------- ---------------
Unrealized appreciation on interest rate cap 2,019,747
- -------------------------------------------------------------- ---------------
Prepaid expenses 56,371
- -------------------------------------------------------------- ---------------
Total Assets 1,388,740,768
============================================================== ===============
LIABILITIES:
Payable for investments purchased 20,396,269
- -------------------------------------------------------------- ---------------
Dividends payable to common and preferred shareholders 6,595,703
- -------------------------------------------------------------- ---------------
Investment management fees payable 776,016
- -------------------------------------------------------------- ---------------
Accrued expenses 189,559
- -------------------------------------------------------------- ---------------
Total Liabilities 27,957,547
- -------------------------------------------------------------- ---------------
PREFERRED SHARES ($0.00001 PAR VALUE; $25,000 NET ASSET AND
LIQUIDATION VALUE PER SHARE APPLICABLE TO 20,200 SHARES
ISSUED AND OUTSTANDING) 505,000,000
- -------------------------------------------------------------- ---------------
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS $ 855,783,221
============================================================== ===============
COMPOSITION OF NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS:
Common Stock:
Par value ($0.00001 per share applicable to 56,364,367 shares
issued and outstanding) $ 564
- -------------------------------------------------------------- ---------------
Paid-in-capital in excess of par 800,497,381
- -------------------------------------------------------------- ---------------
Undistributed net investment income 2,968,466
- -------------------------------------------------------------- ---------------
Net realized gain on investments (3,278,347)
- -------------------------------------------------------------- ---------------
Net unrealized appreciation of investments and
interest rate cap 55,595,157
- -------------------------------------------------------------- ---------------
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS $ 855,783,221
============================================================== ===============
NET ASSET VALUE PER COMMON SHARE $ 15.18
============================================================== ===============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
| 6.30.04 | Nicholas-Applegate Convertible & Income Fund II Annual Report 9
NICHOLAS-APPLEGATE CONVERTIBLE & INCOME FUND II STATEMENT OF OPERATIONS
For the period July 31, 2003* through June 30, 2004
================================================================================
INVESTMENT INCOME:
Interest $ 60,544,192
- -------------------------------------------------------------- -------------
Dividends 18,189,590
- -------------------------------------------------------------- -------------
Total Investment Income 78,733,782
============================================================== =============
EXPENSES:
Investment management fees 8,129,447
- -------------------------------------------------------------- -------------
Auction agent fees and commissions 974,523
- -------------------------------------------------------------- -------------
Custodian and accounting agent fees 161,888
- -------------------------------------------------------------- -------------
Shareholder reports 71,920
- -------------------------------------------------------------- -------------
Audit and tax services 67,352
- -------------------------------------------------------------- -------------
Trustees' fees and expenses 40,352
- -------------------------------------------------------------- -------------
Organizational expenses 25,000
- -------------------------------------------------------------- -------------
New York Stock Exchange listing fees 24,966
- -------------------------------------------------------------- -------------
Transfer agent fees 24,632
- -------------------------------------------------------------- -------------
Legal fees 20,256
- -------------------------------------------------------------- -------------
Insurance expense 8,177
- -------------------------------------------------------------- -------------
Investor relations 6,840
- -------------------------------------------------------------- -------------
Miscellaneous 2,080
- -------------------------------------------------------------- -------------
Total expenses 9,557,433
- -------------------------------------------------------------- -------------
NET INVESTMENT INCOME 69,176,349
============================================================== =============
REALIZED AND UNREALIZED GAIN:
Net realized gain on investments 6,708,496
- -------------------------------------------------------------- -------------
Net unrealized appreciation of investments and interest rate cap 55,595,157
- -------------------------------------------------------------- -------------
Net realized and unrealized gain 62,303,653
- -------------------------------------------------------------- -------------
NET INCREASE IN NET ASSETS RESULTING FROM INVESTMENT OPERATIONS 131,480,002
============================================================== =============
DIVIDENDS ON PREFERRED SHARES FROM NET INVESTMENT INCOME (4,538,086)
- -------------------------------------------------------------- -------------
NET INCREASE IN NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS
RESULTING FROM INVESTMENT OPERATIONS $126,941,916
============================================================== =============
* Commencement of operations
10 Nicholas-Applegate Convertible & Income Fund II Annual Report | 6.30.04 |
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
NICHOLAS-APPLEGATE
CONVERTIBLE & INCOME FUND II STATEMENT OF CHANGES IN NET ASSETS
APPLICABLE TO COMMON SHAREHOLDERS
For the period July 31, 2003* through June 30, 2004
================================================================================
INVESTMENT OPERATIONS:
Net investment income $ 69,176,349
- -------------------------------------------------------------- -------------
Net realized gain on investments 6,708,496
- -------------------------------------------------------------- -------------
Net unrealized appreciation on investments and interest rate cap 55,595,157
- -------------------------------------------------------------- -------------
Net increase in net assets resulting from investment operations 131,480,002
============================================================== =============
DIVIDENDS ON PREFERRED SHARES FROM NET INVESTMENT INCOME (4,538,086)
============================================================== =============
Net increase in net assets applicable to common shareholders
resulting from investment operations 126,941,916
- -------------------------------------------------------------- -------------
DIVIDENDS AND DISTRIBUTIONS TO COMMON SHAREHOLDERS FROM:
Net investment income (69,866,227)
- -------------------------------------------------------------- -------------
Net realized gains (1,815,413)
- -------------------------------------------------------------- -------------
Total dividends and distributions to common shareholders (71,681,640)
============================================================== =============
CAPITAL SHARE TRANSACTIONS:
Net proceeds from the sale of common stock 805,781,250
- -------------------------------------------------------------- -------------
Preferred shares underwriting discount charged to paid-in
capital in excess of par (5,050,000)
- -------------------------------------------------------------- -------------
Common stock and preferred shares offering costs charged to
paid-in capital in excess of par (1,977,092)
- -------------------------------------------------------------- -------------
Reinvestment of dividends and distributions 1,668,784
- -------------------------------------------------------------- -------------
Net increase from capital share transactions 800,422,942
- -------------------------------------------------------------- -------------
Total increase in net assets applicable to common shareholders 855,683,218
============================================================== =============
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS:
Beginning of period 100,003
- -------------------------------------------------------------- -------------
End of period (including undistributed
net investment income of $2,968,466) $855,783,221
============================================================== =============
COMMON SHARES ISSUED AND REINVESTED:
Issued 56,250,000
- -------------------------------------------------------------- -------------
Issued in reinvestment of dividends and distributions 107,386
- -------------------------------------------------------------- -------------
NET INCREASE 56,357,386
============================================================== =============
* Commencement of operations
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
| 6.30.04 | Nicholas-Applegate Convertible & Income Fund II Annual Report 11
NICHOLAS-APPLEGATE CONVERTIBLE & INCOME FUND II NOTES TO FINANCIAL STATEMENTS
June 30, 2004
================================================================================
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Nicholas-Applegate Convertible & Income Fund II (the "Fund") was organized as a
Massachusetts business trust on April 22, 2003. Prior to commencing operations
on July 31, 2003, the Fund had no operations other than matters relating to its
organization and registration as a diversified, closed-end management investment
company under the Investment Company Act of 1940, as amended, and the sale and
issuance of 6,981 shares of beneficial interest at an aggregate purchase price
of $100,003 to Allianz Dresdner Asset Management of America, L.P. ("ADAM"). PA
Fund Management LLC (the "Investment Manager"), formerly PIMCO Advisors Fund
Management LLC. serves as the Fund's investment manager and is an indirect
wholly-owned subsidiary of ADAM. ADAM is an indirect, majority-owned subsidiary
of Allianz AG. The Fund has an unlimited amount of $0.00001 par value common
stock authorized.
The Fund's investment objective is to provide total return through a combination
of capital appreciation and high current income. The Fund attempts to achieve
this objective by investing in a portfolio of convertible securities and
non-convertible income-producing securities.
The Fund issued 55,000,000 shares of common stock in its initial public
offering. An additional 1,250,000 shares were issued in connection with the
exercise of the underwriters' over-allotment option. These shares were all
issued at $15.00 per share before an underwriting discount of $0.675 per share.
Common offering costs of $1,382,275 (representing $0.025 per share) were offset
against the proceeds of the offering and have been charged to paid-in capital in
excess of par. The Investment Manager agreed to pay all common offering costs
(other than the sales load) and organizational expenses exceeding $0.03 per
share. Because aggregate offering costs and organizational expenses were less
than $0.03 per common share, organizational expenses of $25,000 were expensed in
the current period. In addition, the underwriters commission and offering costs
associated with the issuance of Preferred Shares in the amounts of $5,050,000
and $594,817, respectively, have been charged to paid-in-capital in excess of
par.
The preparation of the financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
and disclosures in the financial statements. Actual results could differ from
these estimates.
In the normal course of business, the Fund enters into contracts that contain a
variety of representations which provide general indemnifications. The Fund's
maximum exposure under these arrangements is unknown as this would involve
future claims that may be made against the Fund that have not yet been asserted.
However, the Fund expects the risk of any loss to be remote.
The following is a summary of significant accounting policies followed by the
Fund.
(A) VALUATION OF INVESTMENTS
Portfolio securities and other financial instruments for which market quotations
are readily available are stated at market value. The Fund's investments are
valued daily by an independent pricing service approved by the Board of
Trustees, 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 for listed securities in which there were no sales. Prices obtained from
an independent pricing service use information provided by market makers or
estimates of market value obtained from yield data relating to investments or
securities with similar characteristics. Short-term investments maturing in 60
days or less are valued at amortized cost, if their original 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 for which market
quotations are not readily available or if a development/event occurs that may
significantly impact the value of the security, may be fair valued pursuant to
guidelines established by the Board of Trustees. The prices used by the Fund to
value securities may differ from the value that would be realized if the
securities were sold. The Fund's net asset value is determined daily at the
close of regular trading (normally, 4:00 p.m. Eastern time) on the New York
Stock Exchange.
(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. Discounts or premiums on debt securities
purchased are accreted or amortized to interest income over the lives of the
respective securities using the effective interest method. Dividend income is
recorded on the ex-dividend date.
(C) FEDERAL INCOME TAXES
The Fund intends to comply with the requirements of the Internal Revenue Code of
1986, as amended, applicable to regulated investment companies. Accordingly, no
provision for U.S. federal income taxes is required. In addition, by
distributing substantially all of its ordinary income and long-term capital
gains, if any, during each calendar year, the Fund intends not to be subject to
U.S. federal excise tax.
12 Nicholas-Applegate Convertible & Income Fund II Annual Report | 6.30.04 |
NICHOLAS-APPLEGATE CONVERTIBLE & INCOME FUND II NOTES TO FINANCIAL STATEMENTS
June 30, 2004
================================================================================
(D) DIVIDENDS AND DISTRIBUTIONS--COMMON STOCK
The Fund declares dividends from net investment income monthly to common
shareholders. Distributions of net realized capital gains, if any, are paid at
least annually. The 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 these 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) CREDIT-LINKED TRUST CERTIFICATES
Credit-linked trust certificates are investments in a limited purpose trust or
other vehicle formed under state law which, in turn, invests in a basket of
derivative instruments, such as credit default swaps, interest rate swaps and
other securities, in order to provide exposure to the high yield or another
fixed income market.
Similar to an investment in a bond, investments in these credit-linked trust
certificates represent the right to receive periodic income payments (in the
form of distributions) and payment of principal at the end of the term of the
certificate. However, these payments are conditioned on the trust's receipt of
payments from, and the trust's potential obligations to, the counterparties to
the derivative instruments and other securities in which the trust invests.
(F) INTEREST RATE CAPS
In an interest rate cap, one party pays a fee while the other party pays the
excess, if any, of a floating rate over a specified fixed rate. Interest rate
caps are intended to manage the Fund's exposure to changes in short-term
interest rates and hedge the Auction Preferred Shares. Owning interest rate caps
reduces the Fund's duration, making it less sensitive to changes in interest
rates from a market value perspective. The effect on income involves protection
from rising short-term rates, which the Fund experiences primarily in the form
of leverage. The Fund is exposed to credit loss in the event of non-performance
by the other party to the interest rate cap.
(G) CONCENTRATION OF RISK
It is the Fund's policy to invest the majority of its assets in convertible
securities. Although convertible securities do derive part of their value from
that of the securities into which they are convertible, they are not considered
derivative financial instruments. However, certain of the Fund's investments
include features which render them more sensitive to price changes in their
underlying securities. Consequently, the Fund is exposed to greater downside
risk than traditional convertible securities, but still less than that of the
underlying common stock.
2. INVESTMENT MANAGER AND SUB-ADVISER
The Fund has entered into an Investment Management Agreement (the "Agreement")
with the Investment Manager to serve as the Fund's Investment Manager. Subject
to the supervision of the Fund's Board of Trustees, the Investment Manager is
responsible for managing, either directly or through others selected by it, the
Fund's investment activities and its business affairs and administrative
matters. Pursuant to the Agreement, the Fund pays the Investment Manager an
annual fee, payable monthly, at the annual rate of 0.70% of the Fund's average
daily total managed assets. Total managed assets refer to the total assets of
the Fund (including assets attributable to any Preferred Shares or other forms
of leverage that may be outstanding) minus accrued liabilities (other than
liabilities representing leverage). The Investment Manager has retained its
affiliate, Nicholas-Applegate Capital Management LLC (the "Sub-Adviser"), to
manage the Fund's investments. Subject to the supervision of the Investment
Manager, the Sub-Advisor makes all the Fund's investment decisions.
3. INVESTMENT IN SECURITIES
For the period ended June 30, 2004, purchases and sales of investments, other
than short-term securities, were $2,196,549,767 and $929,844,396, respectively.
(a) Interest rate cap agreements outstanding at June 30, 2004:
Counter- Notional Termination Payments received Unrealized
party Amount Date Premium by Fund Appreciation
- --------------------------------------------------------------------------------
UBS AG $505,000,000 1/15/2006 $4,936,375 1 month LIBOR-BBA $2,019,747
over 2% strike price
| 6.30.04 | Nicholas-Applegate Convertible & Income Fund II Annual Report 13
NICHOLAS-APPLEGATE CONVERTIBLE & INCOME FUND II NOTES TO FINANCIAL STATEMENTS
June 30, 2004
================================================================================
4. INCOME TAX INFORMATION
The tax character of dividends and distributions paid for the period July 31,
2003 (commencement of operations) through June 30, 2004 of $76,219,726 was
comprised entirely of ordinary income.
At June 30, 2004 the tax character of distributable earnings of $4,442,368 was
comprised entirely of ordinary income.
5. AUCTION PREFERRED SHARES
The Fund has issued 4,040 shares of Preferred Shares Series A, 4,040 shares of
Preferred Shares Series B, 4,040 shares of Preferred Shares Series C, 4,040
shares of Preferred Shares Series D, and 4,040 shares of Preferred Shares Series
E each 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 period ended June 30, 2004, the annualized dividend rate ranged from:
High Low At 6/30/04
- --------------------------------------------------------------------------------
Series A 1.55% 1.05% 1.55%
Series B 1.62% 1.03% 1.62%
Series C 1.49% 0.95% 1.35%
Series D 1.49% 1.04% 1.49%
Series E 1.55% 1.00% 1.55%
The Fund is subject to certain limitations and restrictions while preferred
shares are outstanding. Failure to comply with these limitations and
restrictions could preclude the Fund from declaring any dividends or
distributions to common shareholders or repurchasing common shares and/or could
trigger the mandatory redemption of Preferred Shares at their liquidation value.
Preferred Shares, which are entitled to one vote per share, generally vote with
the common stock but 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 July 1, 2004, a dividend of $0.115625 per share was declared to common
shareholders payable August 2, 2004 to shareholders of record on July 16, 2004.
On August 2, 2004, a dividend of $0.115625 per share was declared to common
shareholders payable September 1, 2004 to shareholders of record on August 13,
2004.
7. LEGAL PROCEEDINGS
On May 6, 2004, the Securities & Exchange Commission (the "Commission") filed a
complaint in the U.S. District Court in the Southern District of New York
alleging that the Investment Manager, certain of its affiliates and 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 advised by
the Investment Manager. The complaint seeks injunctive relief, disgorgement plus
pre-judgment interest, monetary penalties, and an order permanently enjoining
the defendants from serving as investment advisers, principal underwriters,
officers, directors, or members of any advisory boards to any registered
investment companies. The Investment Manager and its applicable affiliates are
in settlement discussions with the Commission staff with respect to the
Commission's complaint discussed above.
The above complaint does not allege that any inappropriate activity took place
with respect to the Fund and the Fund is not named in the complaint.
On June 1, 2004, the Attorney General of the State of New Jersey announced that
it had entered into a settlement agreement (the "New Jersey Settlement") with
ADAM and certain other affiliates of the Investment Manager, in connection with
the complaint filed by the New Jersey Attorney General on February 17, 2004. In
the New Jersey Settlement, ADAM 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 New
Jersey Settlement alleged, among other things, that ADAM and the other
affiliates had failed to disclose that they improperly allowed certain hedge
funds to engage in "market timing" in certain open-end investment companies
advised or sub-advised by the Investment
14 Nicholas-Applegate Convertible & Income Fund II Annual Report | 6.30.04 |
NICHOLAS-APPLEGATE CONVERTIBLE & INCOME FUND II NOTES TO FINANCIAL STATEMENTS
June 30, 2004
================================================================================
Manager and certain of its affiliates. The complaint sought injunctive relief,
civil monetary penalties, restitution and disgorgement of profits.
In November 2003, the Commission settled an enforcement action against an
unaffiliated broker-dealer relating to the undisclosed receipt of fees from
certain mutual fund companies in return for preferred marketing of their funds
and announced that it would be investigating mutual funds and their distributors
generally with respect to compensation arrangements (sometimes called "revenue
sharing") relating to the sale of mutual fund shares. In that connection, the
Investment Manager, the Sub-Adviser and certain of their affiliates are under
investigation by the Commission relating to revenue-sharing arrangements and the
use of brokerage commissions to recognize brokers effecting sales of series of
open-end investment companies advised by the Investment Manager, Sub-Adviser and
certain of their affiliates. In addition, the Attorney General of the State of
California has publicly announced an investigation into these funds' brokerage
recognition and revenue-sharing arrangements. Settlement discussions with the
Commission staff and the California Attorney General with respect to these
matters are in process, and it is possible that in connection with any
settlements, payments will be made to the funds involved.
Since February, 2004, the Investment Manager, Sub-Adviser, certain of their
affiliates, other investment companies advised or sub-advised by the Investment
Manager or the Sub-Adviser and their affiliates, and various other affiliates of
the foregoing have been named as defendants in one or more of 14 lawsuits filed
in 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 the U.S. District Court for the
District of Maryland; four of those lawsuits concern "revenue sharing" and have
been consolidated into a single action in the U.S. District Court for the
District of Connecticut. The lawsuits have been commenced as putative class
actions on behalf of investors who purchased, held or redeemed shares of the
applicable investment companies advised or sub-advised by the Investment
Manager, Sub-Adviser and certain of their affiliates during specified periods or
as derivative actions on behalf of such investment companies. 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 Fund, the Investment Adviser and the Sub-Adviser
believe that other similar lawsuits may be filed in federal or state courts
naming them and/or their affiliates and employees.
Under Section 9(a) of the Investment Company Act, if any of the various
regulatory proceedings or lawsuits were to result in a court injunction against
the Investment Manager, Sub-Adviser, ADAM and/or certain other 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 for any
registered investment company, including the Fund. ADAM and certain of its
subsidiaries have responded to an inquiry from the Commission concerning the
status of the New Jersey Settlement under Section 9(a). The Investment Manager,
ADAM and other relevant affiliates have determined that all those entities and
their affiliates (including the Investment Manager and Sub-Adviser) will seek
exemptive relief from the Commission under Section 9(c) of the Investment
Company Act, although there is no assurance that such exemptive relief will be
granted.
In addition, it is possible that these matters and/or other developments
resulting from these matters could lead to a decrease in the market price of the
Fund's shares or other adverse consequences to the Fund and its shareholders.
However, the Investment Manager and the Sub-Adviser believe that these matters
are not likely to have a material adverse effect on the Fund or on the
Investment Manager's or Sub-Adviser's ability to perform its respective
investment advisory services relating to the Fund.
8. FUND CORPORATE CHANGES
On July 29, 2004, Stephen Treadway resigned as the Fund's Chairman.
| 6.30.04 | Nicholas-Applegate Convertible & Income Fund II Annual Report 15
NICHOLAS-APPLEGATE CONVERTIBLE & INCOME FUND II FINANCIAL HIGHLIGHTS
For a share of common stock outstanding for the period July 31, 2003* through
June 30, 2004
================================================================================
Net asset value, beginning of period $ 14.33**
- ------------------------------------------------------------------ -----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 1.23
- ------------------------------------------------------------------ -----------
Net realized and unrealized gain on investments 1.10
- ------------------------------------------------------------------ -----------
Total from investment operations 2.33
- ------------------------------------------------------------------ -----------
DIVIDENDS ON PREFERRED SHARES FROM NET INVESTMENT INCOME (0.08)
- ------------------------------------------------------------------ -----------
Net increase in net assets applicable to common shareholders
resulting from investment operations 2.25
- ------------------------------------------------------------------ -----------
DIVIDENDS AND DISTRIBUTIONS TO COMMON SHAREHOLDERS FROM:
Net investment income (1.24)
- ------------------------------------------------------------------ -----------
Net realized gains (0.03)
- ------------------------------------------------------------------ -----------
Total dividends and distributions to common shareholders (1.27)
- ------------------------------------------------------------------ -----------
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 $ 15.18
- ------------------------------------------------------------------ -----------
Market price, end of period $ 14.05
- ------------------------------------------------------------------ -----------
TOTAL INVESTMENT RETURN (1) 1.88%
- ------------------------------------------------------------------ -----------
RATIOS/SUPPLEMENTAL DATA:
Net assets applicable to common shareholders, end of period (000) $855,783
- ------------------------------------------------------------------ -----------
Ratio of expenses to average net assets (2)(3) 1.23%
- ------------------------------------------------------------------ -----------
Ratio of net investment income to average net assets (2)(3) 8.87%
- ------------------------------------------------------------------ -----------
Preferred shares asset coverage per share $ 67,359
- ------------------------------------------------------------------ -----------
Portfolio turnover 73%
- ------------------------------------------------------------------ -----------
* 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 common stock at
the current market price on the first day of the period and a sale at the
current market price on the last day of the 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) Annualized
16 Nicholas-Applegate Convertible & Income Fund II Annual Report | 6.30.04 |
NICHOLAS-APPLEGATE REPORT OF INDEPENDENT REGISTERED
CONVERTIBLE & INCOME FUND II PUBLIC ACCOUNTING FIRM
================================================================================
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
NICHOLAS-APPLEGATE CONVERTIBLE & INCOME FUND II
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets applicable to common shareholders and the financial
highlights present fairly, in all material respects, the financial position of
Nicholas-Applegate Convertible & Income Fund II (the "Fund") at June 30, 2004,
and the results of its operations, the changes in its net assets applicable to
common shareholders and the financial highlights for the period July 31, 2003
(commencement of operations) through June 30, 2004, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these financial statements in accordance
with auditing standards of the Public Company Accounting Oversight Board (United
States), which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit, which included confirmation of securities at June 30, 2004 by
correspondence with the custodian and brokers, provides a reasonable basis for
our opinion.
PRICEWATERHOUSECOOPERS LLP
NEW YORK, NEW YORK
AUGUST 20, 2004
| 6.30.04 | Nicholas-Applegate Convertible & Income Fund II Annual Report 17
NICHOLAS-APPLEGATE PRIVACY POLICY, PROXY VOTING
CONVERTIBLE & INCOME FUND II POLICIES AND PROCEDURES, OTHER INFORMATION
(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 AND PROCEDURES:
A description of the policies and procedures that the Fund has adopted to
determine how to vote proxies relating to portfolio securities is available (i)
without charge, upon request, by calling the Fund at (800) 331-1710 (ii) on the
Fund's website at www.pimcoadvisors.com, and (iii) on the Securities and
Exchange Commission's website at www.sec.gov. The Fund did not vote any proxies
relating to portfolio securities during the period July 31, 2003 (commencement
of operations) through June 30, 2004.
================================================================================
OTHER INFORMATION:
Since July 31, 2003, there have been no: (i) material changes in the Fund's
investment objectives or policies; (ii) changes to the Fund's charter or
by-laws; (iii) material changes in the principal risk factors associated with
investment in the Fund; or (iv) change in the person primarily responsible for
the day-to-day management of the Fund's portfolio.
18 Nicholas-Applegate Convertible & Income Fund II Annual Report | 6.30.04 |
NICHOLAS-APPLEGATE CONVERTIBLE & INCOME FUND II DIVIDEND REINVESTMENT PLAN
(unaudited)
================================================================================
Pursuant to the Fund's 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 Fund's dividend disbursement agent.
Unless you (or your broker or nominee) elects 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 Fund 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 Fund. 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 Fund 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 Fund
reserves 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
Fund's transfer agent, PFPC Inc., P.O. Box 43027, Providence, RI 02940-3027,
telephone number 1-800-331-1710.
| 6.30.04 | Nicholas-Applegate Convertible & Income Fund II Annual Report 19
NICHOLAS-APPLEGATE CONVERTIBLE & INCOME FUND II BOARD OF TRUSTEES
(unaudited)
================================================================================
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
- --------------------------------------------------------------------------------
PAUL BELICA Director, Student Loan Finance Corp.,
1345 Avenue of the Americas Education Loans, Inc., Goal Funding I,
New York, NY 10105 Inc., Goal Funding II, Inc., and Surety
Age: 82 Loan Funding, Inc.; Formerly, senior
TRUSTEE SINCE: 2003 executive and member of the board of
TERM OF OFFICE: EXPECTED TO STAND Smith Barney, Harris Upham & Co.; and
FOR RE-ELECTION AT 2004 ANNUAL the CEO of five State of New York
MEETING OF SHAREHOLDERS. agencies.
TRUSTEE OF 20 FUNDS IN FUND COMPLEX
TRUSTEE OF NO FUNDS OUTSIDE OF
FUND COMPLEX
ROBERT E. CONNOR Corporate Affairs Consultant; Formerly,
1345 Avenue of the Americas Senior Vice President, Corporate Office,
New York, NY 10105 Smith Barney, Inc.
Age: 69
TRUSTEE SINCE: 2003
TERM OF OFFICE: EXPECTED TO STAND
FOR RE-ELECTION AT 2004 ANNUAL
MEETING OF SHAREHOLDERS.
TRUSTEE/DIRECTOR OF 20 FUNDS IN
FUND COMPLEX
TRUSTEE OF NO FUNDS OUTSIDE OF
FUND COMPLEX
JOHN J. DALESSANDRO II Formerly, President and Director, J.J.
1345 Avenue of the Americas Dalessandro II Ltd. registered broker-
New York, NY 10105 dealer and member of the New York Stock
Age: 66 Exchange.
TRUSTEE SINCE: 2003
TERM OF OFFICE: EXPECTED TO STAND
FOR RE-ELECTION AT 2005 ANNUAL
MEETING OF SHAREHOLDERS.
TRUSTEE OF 15 FUNDS IN FUND COMPLEX
TRUSTEE OF NO FUNDS OUTSIDE OF
FUND COMPLEX
HANS W. KERTESS President, H Kertess & Co.; Formerly,
1345 Avenue of the Americas Managing Director, Royal Bank of Canada
New York, NY 10105 Capital Markets.
Age: 64
TRUSTEE SINCE: 2004
TERM OF OFFICE: EXPECTED TO STAND
FOR RE-ELECTION AT 2006 ANNUAL
MEETING OF SHAREHOLDERS.
TRUSTEE OF 15 FUNDS IN FUND COMPLEX
TRUSTEE OF NO FUNDS OUTSIDE OF
FUND COMPLEX
20 Nicholas-Applegate Convertible & Income Fund II Annual Report | 6.30.04 |
TRUSTEES AND PRINCIPAL OFFICERS
Paul Belica
Trustee
Robert E. Connor
Trustee
John J. Dalessandro II
Trustee
Hans W. Kertess
Trustee
Brian S. Shlissel
President & Chief Executive Officer
Newton B. Schott, Jr.
Vice President & Secretary
Douglas Forsyth
Vice President
Lawrence G. Altadonna
Treasurer, Principal Financial & Accounting Officer
Jennifer A. Patula
Assistant Secretary
INVESTMENT MANAGER
PA Fund Management LLC
1345 Avenue of the Americas
New York, NY 10105
SUB-ADVISER
Nicholas-Applegate Capital Management LLC
600 West Broadway, 30th Fl
San Diego, California 92101
TRANSFER AGENT, DIVIDEND PAYING AGENT AND REGISTRAR
PFPC Inc.
P.O. Box 43027
Providence, RI 02940-3027
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, NY 10036
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 Nicholas Applegate Convertible & Income Fund II for their
information. It is not a prospectus, circular or representation intended for use
in the purchase of shares of the Fund or any securities mentioned in this
report.
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940, as amended, that from time to time the Fund may purchase
shares of its common stock in the open market.
Information on the Fund is available at www.pimcoadvisors.com or by calling
1-800-331-1710.
[GRAPHIC OMITTED]
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; the registrant's
Principal Financial Officer also serves as the Principal Accounting
Officer. The registrant undertakes to provide a copy of such code of
ethics to any person upon request, without charge, by calling
1-800-331-1710.
(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 $0 in 2003 and $68,750 in 2004.
b) Audit-Related Fees. The aggregate fees billed in the Reporting
Periods for assurance and related services by the principal
accountant that are reasonably related to the performance of the
audit registrant's financial statements and are not reported under
paragraph (e) of this Item were $0 in 2003 and $21,000 in 2004.
These services consist of accounting consultations, agreed upon
procedure reports (inclusive of annual review of basic maintenance
testing associated with the Preferred Shares) and attestation
reports.
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 $0 in 2003 and
$2,600 in 2004. These services consisted of review or preparation of
U.S. federal, state, local and excise tax returns and/or
calculations.
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)1)Audit Committee Pre-Approval Policies and Procedures. The
Registrant's Audit Committee has established policies and procedures
for pre-approval of all audit and permissible non-
audit services by the Auditor for the Registrant, as well as the
Auditor's engagements for non-audit services to the when the
engagement relates directly to the operations and financial
reporting of the Registrant. The Registrant's policy is stated
below.
NICHOLAS-APPLEGATE CONVERTIBLE & INCOME FUND II (THE "FUND")
AUDIT OVERSIGHT COMMITTEE POLICY FOR PRE-APPROVAL OF SERVICES PROVIDED BY
THE INDEPENDENT ACCOUNTANTS
The Fund's Audit Oversight Committee ("Committee") is charged with the oversight
of the Funds' financial reporting policies and practices and their internal
controls. As part of this responsibility, the Committee must pre-approve any
independent accounting firm's engagement to render audit and/or permissible
non-audit services, as required by law. In evaluating a
proposed engagement by the independent accountants, the Committee will assess
the effect that the engagement might reasonably be expected to have on the
accountant's independence. The Committee's evaluation will be based on:
a review of the nature of the professional services expected to provided,
the fees to be charged in connection with the services expected to be
provided,
a review of the safeguards put into place by the accounting firm to
safeguard independence, and
periodic meetings with the accounting firm.
POLICY FOR AUDIT AND NON-AUDIT SERVICES TO BE PROVIDED TO THE FUND
On an annual basis, the Fund's Committee will review and pre-approve the scope
of the audit of the Fund and proposed audit fees and permitted non-audit
(including audit-related) services that may be performed by the
Fund 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
Fund will also require the separate written pre-approval of the President of
the Fund, who will confirm, independently, that the accounting firms'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 $75,000. 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 PA Fund Management LLC (Formerly, PIMCO Advisors 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 $4,053,640.
h) Auditor Independence. The Registrant's Audit Oversight Committee has
considered whether the provision of non-audit services that were
rendered to the Adviser which were not pre-approved is compatible with
maintaining the Auditor's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANT
Disclosure requirement not currently effective.
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, Nicholas Applegate Capital Management LLC ("the
Sub-Adviser"). The Proxy Voting Policies and Procedures of the Sub-Adviser are
included as an Exhibit 99.PROXYPOL hereto.
ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED COMPANIES
The registrant or any affiliated purchaser did not purchase shares or other
units, of any class of the registrant's equity securities that is registered by
the registrant pursuant to Section 12 of the Exchange Act (15 V.S.C. 781).
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In January 2004, the Registrant's Board of Trustees adopted a Nominating
Committee Charter governing the affairs of the Nominating Committee of the
Board, which is posted on the PIMCO Advisors website at www.pimcoadvisors.com.
Appendix B to the Nominating Committee Charter includes "Procedures for
Shareholders to Submit Nominee Candidates," which sets forth the procedures by
which shareholders may recommend nominees to the Registrant's Board of Trustees.
Among other requirements, the procedures provide that the recommending
shareholder must submit any recommendation in writing to the Registrant to the
attention of the Registrant's Secretary, at the address of the principal
executive offices of the Registrant and that such submission must be received at
such offices not less than 45 days nor more than 75 days prior to the date of
the Board or shareholder meeting at which the nominee would be elected. Any
recommendation must include certain biographical and other information regarding
the candidate and the recommending shareholder, and must include a written and
signed consent of the candidate to be named as a nominee and to serve as a
Trustee if elected. The foregoing description of the requirements is only a
summary and is qualified in its entirety by reference to Appendix B of the
Nominating Committee Charter.
ITEM 10. 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 11. 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 99.906CERT - Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit 99.PROXYPOL - 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.
Nicholas-Applegate Convertible & Income Fund II
By /s/ Brian S. Shlissel
- ------------------------
Brian S. Shlissel, President & Chief Executive Officer
Date: September 3, 2004
By /s/ Lawrence G. Altadonna
- ----------------------------
Lawrence G. Altadonna, Treasurer, Principal Financial & Accounting Officer
Date: September 3, 2004
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: September 3, 2004
By /s/ Lawrence G. Altadonna
- ----------------------------
Lawrence G. Altadonna, Treasurer, Principal Financial & Accounting Officer
Date: September 3, 2004