PIMCO California Municipal Income Fund II
Table of Contents

 

 

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 811-21077

 

PIMCO California Municipal Income Fund II

(Exact name of registrant as specified in charter)

 

1633 Broadway, New York,   New York 10019
(Address of principal executive offices)   (Zip code)

 

Lawrence G. Altadonna - 1633 Broadway, New York, New York 10019

(Name and address of agent for service)

Registrant’s telephone number, including area code: 212-739-3371

Date of fiscal year end: May 31, 2012

Date of reporting period: May 31, 2012

 

 

 


Table of Contents

Item 1. REPORT TO SHAREHOLDERS

 

LOGO

 

Annual Report

 

May 31, 2012

 

 

 

PIMCO Municipal Income Fund II

PIMCO California Municipal Income Fund II

PIMCO New York Municipal Income Fund II

 

LOGO


Table of Contents

Contents

 

Letter to Shareholders     2-3     
Fund Insights/Performance & Statistics     4-6     
Schedules of Investments     7-24     
Statements of Assets and Liabilities     26     
Statements of Operations     27     
Statements of Changes in Net Assets     28-29     
Notes to Financial Statements     30-42     
Financial Highlights     43-45     
Report of Independent Registered Public Accounting Firm     46     
Tax Information/Annual Shareholder Meeting Results/Changes to Board of Trustees     47     
Privacy Policy/Proxy Voting Policies & Procedures     48     
Dividend Reinvestment Plan     49-50     
Board of Trustees     51-52     
Fund Officers     53     

 

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LOGO

Hans W. Kertess

Chairman

 

LOGO

Brian S. Shlissel

President & CEO

 

Dear Shareholder:

 

Municipal bonds recorded solid gains during the fiscal twelve-month reporting period ended May 31, 2012. These gains occurred despite significant market volatility, political uncertainty, and an increased supply of municipal securities brought to market. During the reporting period, the strengthening U.S. economy encouraged investors to shift out of cash and move into municipal bonds.

 

For the fiscal twelve-month period ended May 31, 2012:

 

 

PIMCO Municipal Income Fund II rose 26.37% on net asset value (“NAV”) and 28.70% on market price.

 

 

PIMCO California Municipal Income Fund II rose 28.85% on NAV and 19.59% on market price.

 

 

PIMCO New York Municipal Income Fund II rose 21.30% on NAV and 20.97% on market price.

 

The Fiscal Twelve-Month Period in Review

The fiscal twelve-month reporting period began with gross domestic product (“GDP”), the value of goods and services produced in the country, the broadest measure of economic activity and the principal indicator of economic performance, expanding at an annual rate of 1.3%. GDP growth accelerated to an annual rate of 1.8% between July and September 2011, and to a 3.0% rate between October and December 2011. This momentum reversed during the first quarter of 2012, as GDP growth declined to a 1.9% annual rate.

 

Throughout the twelve-month fiscal reporting period, the Federal Reserve (the “Fed”) kept its closely watched Fed Funds rate in the 0.0% to 0.25% range, where it has remained since December 2008. This held short-term U.S. Treasury yields and municipal bond yields (which tend to track Treasuries) quite low. Fed Chairman Ben Bernanke revealed that the Fed would maintain short-term interest rates in this range through late 2014. He also indicated that the Fed has not ruled out further attempts to stimulate the economy.

 

After bouncing up and down for much of the fiscal twelve-month reporting period, Treasury yields moved dramatically lower as the reporting period drew to a close. The benchmark 10-year U.S. Treasury bond, which began the fiscal period yielding 2.96%, fell to a record low 1.59% on the last day of the twelve-month period. The drop was likely a reflection of considerable market uncertainty and the extraordinary volatility that characterized much of the twelve-month period. This volatility was present both overseas, where Europe’s sovereign debt crisis seemed to wax and wane repeatedly, and in Washington, where a hyperpartisan political standoff over taxes and spending led to a downgrade of the U.S. government’s long-term credit rating by Standard & Poor’s.

 

2   PIMCO Municipal Income Funds II Annual Report   5.31.12


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Levels of new municipal issuance were low as the twelve-month fiscal reporting period began; however, as interest rates declined, new issuance accelerated as suppliers moved to lock in low interest rates. At the end of May 2012, new issuance reached $33.38 billion, a 56% increase from May 2011, according to The Bond Buyer. Issuance was particularly strong in the education, utilities, and transportation sectors.

 

Outlook

As the fiscal twelve-month period ended, Europe’s sovereign debt crisis took a turn for the worse as austerity measures appeared to waver in several countries. The President of France, an austerity advocate, was voted out of office.

 

In the U.S., future levels of federal taxes and spending remain unclear. A series of tax cuts are scheduled to

expire on December 31, 2012, and major spending reductions are planned to begin in January 2013. The prospect of higher taxes, reduced spending, or both, could have a negative impact on the economy during 2013. Consequently, there are many reasons for caution going forward.

 

For specific information on the Funds and their performance, please review the following pages. If you have any questions regarding the information provided, we encourage you to contact your financial advisor or call the Funds’ shareholder servicing agent at (800) 254-5197. In addition, a wide range of information and resources is available on our website, www.allianzinvestors.com/closedendfunds.

 

Together with Allianz Global Investors Fund Management LLC, the Funds’ investment manager, and Pacific Investment Management Company LLC (“PIMCO”), the Funds’ sub-adviser, we thank you for investing with us.

 

We remain dedicated to serving your investment needs.

 

Sincerely,

 

LOGO

Hans W. Kertess

Chairman

 

LOGO

Brian S. Shlissel

President & CEO

 

Receive this report electronically and eliminate paper mailings. To enroll, go to www.allianzinvestors.com/ edelivery.

 

5.31.12   PIMCO Municipal Income Funds II Annual Report     3   


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PIMCO Municipal Income Funds II Fund Insights

May 31, 2012 (unaudited)

 

For the fiscal year ended May 31, 2012, PIMCO Municipal Income Fund II returned 26.37% on NAV and 28.70% on market price.

 

For the fiscal year ended May 31, 2012, PIMCO California Municipal Income Fund II returned 28.85% on NAV and 19.59% on market price.

 

For the fiscal year ended May 31, 2012, PIMCO New York Municipal Income Fund II returned 21.30% on NAV and 20.97% on market price.

 

The municipal bond market generated solid results during the twelve-month reporting period. The overall municipal market (as measured by the Barclays Municipal Bond Index-the “Index”) posted positive returns during 10 of the 12 months of the period. Modestly improving fundamentals, including rising state tax revenues, as well as relatively modest new municipal issuance drove performance. In addition, investor demand was generally strong as investors looked to generate incremental yield in the low interest rate environment. While the municipal market declined in both October 2011 and March 2012, these setbacks proved to be only modest and temporary. The Index returned 10.40% during the twelve-month reporting period.

 

Each of the Funds benefited from having a preference for revenue bonds versus general obligation bonds. This contributed to results as revenue bonds outperformed general obligation bonds during the reporting period.

 

All three Funds had overweight positions to the tobacco and industrial development sectors, which positively impacted performance as both sectors outperformed the benchmark. Municipal Income II and New York Municipal Income II were also rewarded from their overweighting to the strong performing healthcare sector; California Municipal Income II’s overweighting to the special tax sector enhanced results.

 

Lower duration relative to the benchmark detracted from all three Funds’ performance, as municipal yields declined during the twelve-month period. Municipal Income II and New York Municipal Income II were adversely impacted for having an overweight to the transportation sector, as the sector lagged the benchmark. Municipal Income II’s overweighting to the weak performing education sector also detracted from results. New York Municipal Income II’s overweight positioning to the electric utility sector was not rewarded as it underperformed the benchmark. California Municipal Income II’s overweighting to the housing and water/sewer sectors detracted from results as both sectors lagged the broader market.

 

All three Funds utilized payer interest rate swaps to manage duration which detracted from performance during the period due to the falling interest rate environment. All swaps were unwound by the end of October 2011.

 

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PIMCO Municipal Income Funds II Performance & Statistics

May 31, 2012 (unaudited)

 

Municipal II:

            
Total Return(1):   Market Price      NAV  

1 Year

    28.70%         26.37%   

5 Year

    3.12%         2.57%   

Commencement of Operations (6/28/02) to 5/31/12

    5.19%         5.14%   

 

Market Price/NAV Performance:

Commencement of Operations (6/28/02) to 5/31/12

 

LOGO

Market Price/NAV:       

Market Price

    $12.54   

NAV

    $11.91   

Premium to NAV

    5.29%   

Market Price Yield(2)

    6.22%   

Leverage Ratio(3)

    36.57%   

 

Moody’s Ratings

(as a % of total investments)

 

 

LOGO

 

 

California Municipal II:

            
Total Return(1):   Market Price      NAV  

1 Year

    19.59%         28.85%   

5 Year

    0.77%         1.84%   

Commencement of Operations (6/28/02) to 5/31/12

    3.42%         2.63%   

 

Market Price/NAV Performance:

Commencement of Operations (6/28/02) to 5/31/12

 

LOGO

Market Price/NAV:        

Market Price

    $10.15   

NAV

    $8.65   

Premium to NAV

    17.34%   

Market Price Yield(2)

    6.91%   

Leverage Ratio(3)

    42.85%   

 

Moody’s Ratings

(as a % of total investments)

 

 

LOGO

 

 

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PIMCO Municipal Income Funds II Performance & Statistics

May 31, 2012 (unaudited) (continued)

 

New York Municipal II:

            
Total Return(1):   Market Price      NAV  

1 Year

    20.97%         21.30%   

5 Year

    2.56%         2.05%   

Commencement of Operations (6/28/02) to 5/31/12

    4.79%         4.54%   

 

Market Price/NAV Performance:

Commencement of Operations (6/28/02) to 5/31/12

 

LOGO

Market Price/NAV:         

Market Price

     $12.29   

NAV

     $11.37   

Premium to NAV

     8.09%   

Market Price Yield(2)

     6.47%   

Leverage Ratio(3)

     42.88%   

 

Moody’s Ratings

(as a % of total investments)

 

 

LOGO

 

 

(1) Past performance is no guarantee of future results. Total return is calculated by determining the percentage change in NAV or market price (as applicable) in the specified period. The calculation assumes that all income dividends, capital gain and return of capital distributions, if any, have been reinvested. Total return does not reflect broker commissions or sales charges in connection with the purchase or sale of Fund shares. Total return for a period of more than one year represents the average annual total return.

Performance at market price will differ from results at NAV. Although market price returns typically reflect investment results over time, during shorter periods returns at market price can also be influenced by factors such as changing views about the Funds, market conditions, supply and demand for the Funds’ shares, or changes in Funds’ dividends.

An investment in the Funds involves risk, including the loss of principal. Total return, market price, market price yield and NAV will fluctuate with changes in market conditions. This data is provided for information purposes 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 traded in the open market through a stock exchange. NAV is equal to total assets attributable to common shareholders less total liabilities divided by the number of common shares outstanding. Holdings are subject to change daily.

(2) Market Price Yield is determined by dividing the annualized current monthly dividend per common share (comprised of net investment income) by the market price per common share at May 31, 2012.

(3) Represents Floating Rate Notes Issued in tender option bond transactions and Preferred Shares that are outstanding (collectively “Leverage”), as a percentage of total managed assets. Total managed assets refer to the total assets (including assets attributable to Leverage) minus accrued liabilities (other than liabilities representing Leverage).

 

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PIMCO Municipal Income Fund II Schedule of Investments

May 31, 2012

 

Principal
Amount
(000s)
                 Value  

MUNICIPAL BONDS & NOTES – 97.9%

   
    Alabama – 1.4%    

$10,000

   

Birmingham-Baptist Medical Centers Special Care Facs. Financing Auth. Rev.,
Baptist Health Systems, Inc., 5.00%, 11/15/30, Ser. A

    $ 10,072,000   

1,235

   

Montgomery BMC Special Care Facs. Financing Auth. Rev.,
5.00%, 11/15/29, Ser. B (NPFGC)

      1,235,309   
2,000    

State Docks Department Rev., 6.00%, 10/1/40

      2,271,560   

2,650

   

Tuscaloosa Public Educational Building Auth. Rev., Stillman College Project,
5.00%, 6/1/26, Ser. A

      2,179,969   
       

 

 

 
          15,758,838   
       

 

 

 
    Arizona – 7.1%    
   

Health Facs. Auth. Rev., Banner Health,

   
3,500    

5.00%, 1/1/35, Ser. A

      3,701,845   
2,860    

5.50%, 1/1/38, Ser. D

      3,118,487   
29,700    

Pima Cnty. Industrial Dev. Auth. Rev., 5.00%, 9/1/39

      30,822,066   
   

Pinal Cnty. Electric Dist. No. 3 Rev.,

   
1,750    

5.25%, 7/1/36

      1,894,235   
3,700    

5.25%, 7/1/41

      3,976,020   
10,000    

Salt River Project Agricultural Improvement & Power Dist. Rev., 5.00%, 1/1/39, Ser. A (h)

      11,027,900   
22,400    

Salt Verde Financial Corp. Rev., 5.00%, 12/1/37

      22,855,392   
1,500    

Tucson Electric Power Co., 5.25%, 10/1/40, Ser. A

      1,576,215   
       

 

 

 
          78,972,160   
       

 

 

 
    California – 13.9%    
   

Bay Area Toll Auth. Rev., San Francisco Bay Area,

   
6,000    

5.00%, 10/1/29

      6,736,740   
1,430    

5.00%, 4/1/34, Ser. F-1

      1,578,463   
1,565    

Foothill-Eastern Transportation Corridor Agcy. Rev., 5.875%, 1/15/26 (IBC-NPFGC)

      1,597,615   
   

Golden State Tobacco Securitization Corp. Rev., Ser. A-1,

   
8,750    

5.00%, 6/1/33

      6,721,050   
7,000    

5.75%, 6/1/47

      5,605,320   
2,000    

Hayward Unified School Dist., GO, 5.00%, 8/1/33

      2,060,320   
   

Health Facs. Financing Auth. Rev.,

   
1,500    

Scripps Health, 5.00%, 11/15/36, Ser. A

      1,637,070   
   

Sutter Health,

   
6,300    

5.00%, 11/15/42, Ser. A (IBC-NPFGC)

      6,587,973   
3,000    

6.00%, 8/15/42, Ser. B

      3,544,200   
1,500    

Indian Wells Redev. Agcy., Tax Allocation, Whitewater Project,
4.75%, 9/1/34, Ser. A (AMBAC)

      1,430,535   
2,000    

Los Angeles Community College Dist., GO, 5.00%, 8/1/32, Ser. A (FGIC-NPFGC)

      2,202,720   
4,000    

Los Angeles Department of Water & Power Rev., 5.00%, 7/1/39, Ser. A-1 (AMBAC)

      4,270,800   
5,000    

Los Angeles Unified School Dist., GO, 5.00%, 7/1/30, Ser. E (AMBAC)

      5,379,650   

 

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PIMCO Municipal Income Fund II Schedule of Investments

May 31, 2012 (continued)

 

Principal
Amount
(000s)
                 Value  
    California (continued)    
$  2,000    

Montebello Unified School Dist., GO, 5.00%, 8/1/33 (AGM)

    $ 2,168,200   
1,750    

M-S-R Energy Auth. Rev., 6.50%, 11/1/39, Ser. B

      2,175,862   
3,145    

Municipal Finance Auth. Rev., Azusa Pacific Univ. Project, 7.75%, 4/1/31, Ser. B

      3,598,540   

650

   

Murrieta Valley Unified School Dist. Public Financing Auth., Special Tax,
4.75%, 9/1/36, Ser. A (AGC)

      662,448   
3,000    

Newport Beach Rev., Hoag Memorial Hospital Presbyterian, 5.875%, 12/1/30

      3,605,970   
500    

Peralta Community College Dist., GO, 5.00%, 8/1/39, Ser. C

      524,790   
2,000    

San Diego Cnty. Water Auth., CP, 5.00%, 5/1/38, Ser. 2008-A (AGM)

      2,147,700   
3,300    

San Marcos Unified School Dist., GO, 5.00%, 8/1/38, Ser. A

      3,616,998   

2,000

   

Santa Clara Cnty. Financing Auth. Rev., El Camino Hospital,
5.75%, 2/1/41, Ser. A (AMBAC)

      2,179,960   
   

State, GO,

   
2,925    

5.00%, 11/1/32

      3,167,746   
1,590    

5.00%, 6/1/37

      1,684,112   
5,200    

5.125%, 8/1/36

      5,640,076   
2,500    

5.25%, 3/1/38

      2,683,850   
5,945    

5.25%, 11/1/40

      6,551,093   
5,750    

5.50%, 3/1/40

      6,461,217   
9,500    

6.00%, 4/1/38

      11,111,865   
   

Statewide Communities Dev. Auth. Rev.,
California Baptist Univ.,

   
3,390    

5.75%, 11/1/17, Ser. B (a)(d)

      3,864,600   
850    

6.50%, 11/1/21

      1,018,130   
1,000    

Cottage Health, 5.00%, 11/1/40

      1,057,580   
   

Methodist Hospital Project (FHA),

   
5,500    

6.625%, 8/1/29

      6,920,320   
19,500    

6.75%, 2/1/38

      23,922,795   
5,690    

Sutter Health, 6.00%, 8/15/42, Ser. A

      6,713,233   
4,725    

Torrance Rev., Memorial Medical Center, 5.00%, 9/1/40, Ser. A

      4,982,323   
       

 

 

 
          155,811,864   
       

 

 

 
    Colorado – 1.8%    
5,800    

Aurora Rev., Children’s Hospital Assoc., 5.00%, 12/1/40

      6,213,714   
1,000    

Denver Health & Hospital Auth. Rev., 5.625%, 12/1/40

      1,088,950   
   

Health Facs. Auth. Rev., Ser. A,

   
1,000    

American Baptist Homes, 5.90%, 8/1/37

      929,560   
2,500    

Catholic Health Initiatives, 5.00%, 2/1/41

      2,702,150   
500    

Evangelical Lutheran, 6.125%, 6/1/38, (Pre-refunded @ $100, 6/1/14) (c)

      556,755   
6,045    

Sisters of Charity of Leavenworth Health System, 5.00%, 1/1/40, Ser. A

      6,489,489   
1,430    

Public Auth. for Colorado Energy Rev., 6.50%, 11/15/38

      1,807,091   
       

 

 

 
          19,787,709   
       

 

 

 

 

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PIMCO Municipal Income Fund II Schedule of Investments

May 31, 2012 (continued)

 

Principal
Amount
(000s)
                 Value  
    Connecticut – 0.3%    
$  1,250    

Harbor Point Infrastructure Improvement Dist., Tax Allocation, 7.875%, 4/1/39, Ser. A

    $ 1,411,100   
2,000    

State Health & Educational Fac. Auth. Rev., Hartford Healthcare, 5.00%, 7/1/41, Ser. A

      2,139,860   
       

 

 

 
          3,550,960   
       

 

 

 
    Florida – 3.7%    
1,000    

Brevard Cnty. Health Facs. Auth. Rev., Health First, Inc. Project, 7.00%, 4/1/39

      1,225,680   
600    

Broward Cnty. Airport System Rev., 5.375%, 10/1/29, Ser. O

      681,204   
8,500    

Broward Cnty. Water & Sewer Utility Rev., 5.25%, 10/1/34, Ser. A (h)

      9,703,940   
1,000    

Clearwater Water & Sewer Rev., 5.25%, 12/1/39, Ser. A

      1,124,220   
340    

Dev. Finance Corp. Rev., Renaissance Charter School, 6.50%, 6/15/21, Ser. A

      378,774   
3,000    

Highlands Cnty. Health Facs. Auth. Rev., Adventist Health System, 5.625%, 11/15/37, Ser. B

      3,337,650   
7,135    

Jacksonville Health Facs. Auth. Rev., Ascension Health, 5.25%, 11/15/32, Ser. A

      7,313,161   
3,000    

Leesburg Hospital Rev., Leesburg Regional Medical Center Project, 5.50%, 7/1/32

      3,001,590   
500    

Sarasota Cnty. Health Facs. Auth. Rev., 5.75%, 7/1/37

      384,720   
7,900    

State Board of Education, GO, 5.00%, 6/1/38, Ser. D (h)

      8,707,459   
5,000    

Sumter Landing Community Dev. Dist. Rev., 4.75%, 10/1/35, Ser. A (NPFGC)

      4,978,750   
       

 

 

 
          40,837,148   
       

 

 

 
    Georgia – 0.4%    
1,500    

Atlanta Airport Rev., 5.00%, 1/1/40, Ser. A

      1,626,690   

2,775

   

Medical Center Hospital Auth. Rev., Spring Harbor Green Island Project,
5.25%, 7/1/37

      2,571,038   
       

 

 

 
          4,197,728   
       

 

 

 
    Illinois – 7.6%    
10,000    

Chicago, GO, 5.00%, 1/1/34, Ser. C (h)

      10,776,200   
   

Chicago, Special Assessment, Lake Shore East,

   
2,849    

6.625%, 12/1/22

      2,981,194   
6,019    

6.75%, 12/1/32

      6,293,948   
1,250    

Chicago Motor Fuel Tax Rev., 5.00%, 1/1/38, Ser. A (AGC)

      1,311,212   
5,000    

Cicero, GO, 5.25%, 12/1/31 (NPFGC)

      5,078,200   
   

Finance Auth. Rev.,

   
2,500    

Christian Homes, Inc., 5.75%, 5/15/31, Ser. A

      2,578,950   
250    

Leafs Hockey Club Project, 6.00%, 3/1/37, Ser. A (b)(e)

      83,090   
700    

OSF Healthcare System, 7.125%, 11/15/37, Ser. A

      840,875   
2,000    

Provena Health, 6.00%, 5/1/28, Ser. A

      2,271,640   
5,000    

Univ. of Chicago, 5.50%, 7/1/37, Ser. B (h)

      5,751,950   
37,000    

Sports Facs. Auth. Rev., 5.50%, 6/15/30 (AMBAC)

      40,389,940   
   

Village of Hillside, Tax Allocation, Mannheim Redev. Project,

   
4,240    

6.55%, 1/1/20

      4,204,893   
2,900    

7.00%, 1/1/28

      2,742,472   
       

 

 

 
          85,304,564   
       

 

 

 

 

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Table of Contents

PIMCO Municipal Income Fund II Schedule of Investments

May 31, 2012 (continued)

 

Principal
Amount
(000s)
                 Value  
    Indiana – 0.5%    
$  1,500    

Finance Auth. Rev., Duke Energy Indiana, Inc., 6.00%, 8/1/39, Ser. B

    $ 1,696,950   
   

Vigo Cnty. Hospital Auth. Rev., Union Hospital, Inc.,

   
990    

5.80%, 9/1/47 (a)(d)

      999,227   
1,900    

7.50%, 9/1/22

      2,443,267   
       

 

 

 
          5,139,444   
       

 

 

 
    Iowa – 4.2%    
   

Finance Auth. Rev., Deerfield Retirement Community, Inc., Ser. A,

   
250    

5.50%, 11/15/27

      211,582   
1,075    

5.50%, 11/15/37

      846,466   
4,500    

Edgewater LLC Project, 6.75%, 11/15/42

      4,358,835   
46,000    

Tobacco Settlement Auth. Rev., 5.60%, 6/1/34, Ser. B

      41,739,020   
       

 

 

 
          47,155,903   
       

 

 

 
    Kansas – 0.1%    
500    

Dev. Finance Auth. Rev., Adventist Health, 5.75%, 11/15/38

      570,345   
850    

Manhattan Rev., Meadowlark Hills Retirement, 5.00%, 5/15/36, Ser. A

      811,172   
       

 

 

 
          1,381,517   
       

 

 

 
    Kentucky – 0.3%    
   

Economic Dev. Finance Auth. Rev.,

   
2,500    

Catholic Healthcare Partners, 5.25%, 10/1/30

      2,527,100   
1,000    

Owensboro Medical Healthcare Systems, 6.375%, 6/1/40, Ser. A

      1,158,820   
       

 

 

 
          3,685,920   
       

 

 

 
    Louisiana – 3.8%    
   

Local Gov’t Environmental Facs. & Community Dev. Auth. Rev.,

   
450    

Westlake Chemical Corp., 6.50%, 11/1/35, Ser. A-2

      509,360   
   

Woman’s Hospital Foundation, Ser. A,

   
750    

5.875%, 10/1/40

      834,630   
1,000    

6.00%, 10/1/44

      1,117,810   
   

Public Facs. Auth. Rev., Ochsner Clinic Foundation Project,

   
3,300    

5.50%, 5/15/47, Ser. B

      3,415,170   
2,000    

6.50%, 5/15/37

      2,288,640   
33,395    

Tobacco Settlement Financing Corp. Rev., 5.875%, 5/15/39, Ser. 2001-B

      34,202,157   
       

 

 

 
          42,367,767   
       

 

 

 
    Maryland – 0.9%    
   

Health & Higher Educational Facs. Auth. Rev.,

   
1,000    

Adventist Healthcare, 5.75%, 1/1/25, Ser. A

      1,022,350   
1,400    

Charlestown Community, 6.25%, 1/1/41

      1,573,670   
1,010    

King Farm Presbyterian Community, 5.30%, 1/1/37, Ser. A

      866,610   
2,380    

Medstar Health, 5.00%, 8/15/41

      2,574,779   
4,050    

Washington Cnty. Hospital, 6.00%, 1/1/43

      4,319,609   
       

 

 

 
          10,357,018   
       

 

 

 

 

10   PIMCO Municipal Income Funds II Annual Report   5.31.12


Table of Contents

PIMCO Municipal Income Fund II Schedule of Investments

May 31, 2012 (continued)

 

Principal
Amount
(000s)
                 Value  
    Massachusetts – 0.9%    
   

Dev. Finance Agcy. Rev.,

   
   

Adventcare Project,

   
$  4,610    

6.75%, 10/15/37, Ser. A

    $ 4,721,562   
580    

7.625%, 10/15/37

      632,838   
1,000    

Foxborough Regional Charter School, 7.00%, 7/1/42, Ser. A

      1,097,350   
2,900    

State College Building Auth. Rev., 5.50%, 5/1/39, Ser. A

      3,287,179   
       

 

 

 
          9,738,929   
       

 

 

 
    Michigan – 2.2%    
1,000    

Detroit, GO, 5.25%, 11/1/35

      1,068,560   
5,000    

Detroit Water Supply System Rev., 5.25%, 7/1/41, Ser. A

      5,212,300   
800    

Public Educational Facs. Auth. Rev., Bradford Academy, 6.50%, 9/1/37 (a)(d)

      519,576   
3,000    

Royal Oak Hospital Finance Auth. Rev., William Beaumont Hospital, 8.25%, 9/1/39

      3,862,230   
   

State Hospital Finance Auth. Rev., Oakwood Group, Ser. A
(Pre-refunded @ $100, 9/1/39) (c),

   
3,000    

5.75%, 4/1/32

      3,136,200   
1,925    

6.00%, 4/1/22

      2,016,341   
11,510    

Tobacco Settlement Finance Auth. Rev., 6.00%, 6/1/48, Ser. A

      9,067,923   
       

 

 

 
          24,883,130   
       

 

 

 
    Minnesota – 0.6%    
150    

Duluth Housing & Redev. Auth. Rev., 5.875%, 11/1/40, Ser. A

      150,829   
1,500    

Minneapolis Rev., Providence Project, 5.75%, 10/1/37, Ser. A

      1,499,865   
   

North Oaks Rev., Presbyterian Homes North Oaks,

   
2,640    

6.00%, 10/1/33

      2,773,135   
1,530    

6.125%, 10/1/39

      1,611,626   
500    

Oronoco Rev., Wedum Shorewood Campus Project, 5.40%, 6/1/41

      480,895   
400    

St. Louis Park Rev., Nicollett Health Services, 5.75%, 7/1/39

      444,036   
       

 

 

 
          6,960,386   
       

 

 

 
    Mississippi – 0.0%    
270    

Dev. Bank Special Obligation Rev., Capital Projects and Equipment Acquisition,
5.00%, 7/1/24, Ser. A-2 (AMBAC)

      270,232   
       

 

 

 
    Missouri – 0.1%    
715    

Lee’s Summit, Tax Allocation, Summit Fair Project, 5.625%, 10/1/23

      751,465   
       

 

 

 
    Nevada – 0.9%    
10,000    

Clark Cnty., GO, 4.75%, 11/1/35 (FGIC-NPFGC) (h)

      10,433,700   
       

 

 

 
    New Hampshire – 0.2%    
2,000    

Business Finance Auth. Rev., Elliot Hospital, 6.125%, 10/1/39, Ser. A

      2,154,160   
360    

Health & Education Facs. Auth. Rev., Catholic Medical Center, 6.125%, 7/1/32, Ser. A

      363,989   
       

 

 

 
          2,518,149   
       

 

 

 
    New Jersey – 5.6%    
950    

Burlington Cnty. Bridge Commission Rev., The Evergreens Project, 5.625%, 1/1/38

      964,231   

 

5.31.12   PIMCO Municipal Income Funds II Annual Report     11   


Table of Contents

PIMCO Municipal Income Fund II Schedule of Investments

May 31, 2012 (continued)

 

Principal
Amount
(000s)
                 Value  
    New Jersey (continued)    
   

Economic Dev. Auth., Special Assessment, Kapkowski Road Landfill Project,

   
$  4,000    

5.75%, 10/1/21

    $ 4,304,400   
11,405    

5.75%, 4/1/31

      12,323,103   
   

Economic Dev. Auth. Rev.,

   
525    

Arbor Glen, 6.00%, 5/15/28, Ser. A

      503,170   
2,000    

MSU Student Housing Project, 5.875%, 6/1/42

      2,209,640   
   

Health Care Facs. Financing Auth. Rev.,

   
1,500    

AHS Hospital Corp., 6.00%, 7/1/37

      1,779,030   
1,500    

St. Peters Univ. Hospital, 5.75%, 7/1/37

      1,594,515   
2,000    

State Turnpike Auth. Rev., 5.25%, 1/1/40, Ser. E

      2,255,120   
   

Tobacco Settlement Financing Corp. Rev., Ser. 1-A,

   
3,300    

4.75%, 6/1/34

      2,549,316   
22,805    

5.00%, 6/1/41

      17,755,289   
15,000    

Transportation Trust Fund Auth. Rev., 5.00%, 6/15/42, Ser. B

      16,569,750   
       

 

 

 
          62,807,564   
       

 

 

 
    New Mexico – 0.2%    
2,000    

Farmington Pollution Control Rev., 5.90%, 6/1/40, Ser. D

      2,179,140   
       

 

 

 
    New York – 12.6%    
1,200    

Erie Cnty. Industrial Dev. Agcy. Rev., Orchard Park, Inc. Project, 6.00%, 11/15/36, Ser. A

      1,200,408   
29,500    

Hudson Yards Infrastructure Corp. Rev., 5.25%, 2/15/47, Ser. A

      32,342,620   
   

Liberty Dev. Corp. Rev.,

   
1,000    

5.125%, 1/15/44

      1,095,120   
2,500    

5.625%, 7/15/47

      2,762,475   
1,250    

Bank of America Tower at One Bryant Park Project, 6.375%, 7/15/49

      1,409,862   
   

Goldman Sachs Headquarters,

   
1,505    

5.25%, 10/1/35

      1,678,526   
10,000    

5.25%, 10/1/35 (h)

      11,153,000   
3,880    

Metropolitan Transportation Auth. Rev., 5.00%, 11/15/36, Ser. D

      4,291,940   
1,100    

Nassau Cnty. Industrial Dev. Agcy. Rev., Amsterdam at Harborside, 6.70%, 1/1/43, Ser. A

      776,259   
2,830    

New York City Municipal Water Finance Auth. Water & Sewer Rev.,

   
   

5.00%, 6/15/37, Ser. D (h)

      3,110,623   
   

Second Generation Resolutions,

   
4,000    

4.75%, 6/15/35, Ser. DD (h)

      4,314,720   
2,000    

5.00%, 6/15/39, Ser. GG-1

      2,191,980   
   

New York Liberty Dev. Corp. Rev.,

   
10,000    

1 World Trade Center Project, 5.00%, 12/15/41

      11,103,600   
54,000    

4 World Trade Center Project, 5.75%, 11/15/51

      61,827,840   
1,750    

State Dormitory Auth. Rev., The New School, 5.50%, 7/1/40

      1,940,978   
       

 

 

 
          141,199,951   
       

 

 

 

 

12   PIMCO Municipal Income Funds II Annual Report   5.31.12


Table of Contents

PIMCO Municipal Income Fund II Schedule of Investments

May 31, 2012 (continued)

 

Principal
Amount
(000s)
                 Value  
    North Carolina – 0.1%    
   

Medical Care Commission Rev.,

   
$     550    

Salemtowne, 5.10%, 10/1/30

    $ 555,907   
1,000    

Village at Brookwood, 5.25%, 1/1/32

      963,260   
       

 

 

 
          1,519,167   
       

 

 

 
    North Dakota – 0.4%    
3,710    

Stark Cnty. Healthcare Rev., Benedictine Living Communities, 6.75%, 1/1/33

      4,013,033   
       

 

 

 
    Ohio – 2.0%    
   

Buckeye Tobacco Settlement Financing Auth. Rev., Ser. A-2,

   
1,865    

5.75%, 6/1/34

      1,426,072   
3,570    

5.875%, 6/1/30

      2,832,902   
500    

5.875%, 6/1/47

      380,350   
3,900    

Hamilton Cnty. Sales Tax Rev., 5.00%, 12/1/30, Ser. A

      4,189,458   
1,000    

Higher Educational Fac. Commission Rev., Univ. Hospital Health Systems,
6.75%, 1/15/39, Ser. 2009-A

      1,094,780   
7,500    

Lorain Cnty. Hospital Rev., Catholic Healthcare,
5.375%, 10/1/30 (Pre-refunded @ $100, 10/1/12) (c)

      7,625,700   
1,000    

Montgomery Cnty. Rev., Miami Valley Hospital, 6.25%, 11/15/39, Ser. A

      1,074,560   
3,000    

State Rev., Cleveland Clinic Health System, 5.50%, 1/1/39, Ser. B

      3,355,080   
       

 

 

 
          21,978,902   
       

 

 

 
    Oregon – 0.2%    
1,000    

Clackamas Cnty. Hospital Fac. Auth. Rev., Legacy Health System, 5.50%, 7/15/35, Ser. A

      1,108,310   
1,155    

State Department of Administrative Services, CP, 5.25%, 5/1/39, Ser. A

      1,274,277   
       

 

 

 
          2,382,587   
       

 

 

 
    Pennsylvania – 4.6%    
   

Cumberland Cnty. Municipal Auth. Rev., Messiah Village Project, Ser. A,

   
750    

5.625%, 7/1/28

      781,027   
670    

6.00%, 7/1/35

      701,832   
3,250    

Harrisburg Auth. Rev., Harrisburg Univ. of Science, 6.00%, 9/1/36, Ser. B

      2,674,457   
   

Higher Educational Facs. Auth. Rev.,

   
850    

Edinboro Univ. Foundation, 6.00%, 7/1/43

      939,709   
400    

Thomas Jefferson Univ., 5.00%, 3/1/40

      432,176   
500    

Luzerne Cnty. Industrial Dev. Auth. Rev., Pennsylvania American Water Co., 5.50%, 12/1/39

      552,205   
3,750    

Montgomery Cnty. Higher Education & Health Auth. Rev., Abington Memorial Hospital,
5.125%, 6/1/32, Ser. A

      3,793,875   
8,500    

Montgomery Cnty. Industrial Dev. Auth. Rev., New Regional Medical Center,
5.375%, 8/1/38 (FHA)

      9,544,905   
17,000    

Philadelphia, GO, 5.25%, 12/15/32, Ser. A (AGM)

      18,743,350   
11,015    

Philadelphia Hospitals & Higher Education Facs. Auth. Rev., Temple Univ. Hospital,
6.625%, 11/15/23, Ser. A

      11,036,149   
500    

Philadelphia Water & Sewer Rev., 5.25%, 1/1/36, Ser. A

      542,105   
1,000    

Westmoreland Cnty. Industrial Dev. Auth. Rev., Excela Health Project, 5.125%, 7/1/30

      1,059,230   
       

 

 

 
          50,801,020   
       

 

 

 

 

5.31.12   PIMCO Municipal Income Funds II Annual Report     13   


Table of Contents

PIMCO Municipal Income Fund II Schedule of Investments

May 31, 2012 (continued)

 

Principal
Amount
(000s)
                 Value  
    Puerto Rico – 0.5%    
$  5,000    

Sales Tax Financing Corp. Rev., 5.25%, 8/1/41, Ser. C

    $ 5,337,750   
       

 

 

 
    Rhode Island – 5.1%    
56,200    

Tobacco Settlement Financing Corp. Rev., 6.25%, 6/1/42, Ser. A

      57,446,516   
       

 

 

 
    South Carolina – 1.4%    
1,000    

Greenwood Cnty. Rev., Self Regional Healthcare, 5.375%, 10/1/39

      1,080,540   
13,850    

Jobs-Economic Dev. Auth. Rev., Bon Secours Health System, 5.625%, 11/15/30, Ser. B

      14,098,884   
       

 

 

 
          15,179,424   
       

 

 

 
    Tennessee – 1.2%    
1,750    

Claiborne Cnty. Industrial Dev. Board Rev., Lincoln Memorial Univ. Project, 6.625%, 10/1/39

      1,950,778   
1,000    

Johnson City Health & Educational Facs. Board Rev., Mountain States Health Alliance, 6.00%, 7/1/38, Ser. A

      1,130,890   
500    

Sullivan Cnty. Health Educational & Housing Facs. Board Rev.,
Wellmont Health Systems Project, 5.25%, 9/1/36, Ser. C

      518,390   
   

Tennessee Energy Acquisition Corp. Rev., Ser. C,

   
3,000    

5.00%, 2/1/23

      3,239,130   
6,000    

5.00%, 2/1/27

      6,325,620   
       

 

 

 
          13,164,808   
       

 

 

 
    Texas – 11.0%    
130    

Aubrey Independent School Dist., GO, 5.50%, 2/15/33 (PSF-GTD)

      137,929   
6,500    

Brazos Cnty. Health Facs. Dev. Corp. Rev., 5.375%, 1/1/32

      6,605,235   
2,500    

Dallas Rev., Dallas Civic Center, 5.25%, 8/15/38 (AGC)

      2,749,300   
   

Harris Cnty. Cultural Education Facs. Finance Corp. Rev.,
Texas Children’s Hospital Project,

   
3,750    

5.25%, 10/1/29

      4,292,850   
12,700    

5.50%, 10/1/39

      14,371,320   
700    

HFDC of Central Texas, Inc. Rev., Village at Gleannloch Farms, 5.50%, 2/15/37, Ser. A

      572,432   
   

North Harris Cnty. Regional Water Auth. Rev.,

   
10,300    

5.25%, 12/15/33

      11,343,699   
10,300    

5.50%, 12/15/38

      11,391,491   
   

North Texas Tollway Auth. Rev.,

   
5,750    

5.00%, 1/1/38

      6,211,322   
1,300    

5.50%, 9/1/41, Ser. A

      1,521,572   
5,000    

5.625%, 1/1/33, Ser. B

      5,496,350   
1,200    

5.75%, 1/1/33, Ser. F

      1,313,952   
2,000    

Sabine River Auth. Pollution Control Rev., TXU Energy, 5.20%, 5/1/28, Ser. C (b)

      202,700   
250    

San Juan Higher Education Finance Auth. Rev., 6.70%, 8/15/40, Ser. A

      289,180   
   

State, Mobility Fund, GO, (h),

   
10,025    

4.75%, 4/1/35, Ser. A

      10,766,148   
17,500    

4.75%, 4/1/36 (b)

      18,946,200   
1,000    

State Public Finance Auth. Rev., Charter School Finance Corp., 5.875%, 12/1/36, Ser. A

      1,071,230   

 

14   PIMCO Municipal Income Funds II Annual Report   5.31.12


Table of Contents

PIMCO Municipal Income Fund II Schedule of Investments

May 31, 2012 (continued)

 

Principal
Amount
(000s)
                 Value  
    Texas (continued)    
$  3,000    

Tarrant Cnty. Cultural Education Facs. Finance Corp. Rev.,
Baylor Health Care Systems Project, 6.25%, 11/15/29

    $ 3,618,150   
15,300    

Texas Municipal Gas Acquisition & Supply Corp. I Rev., 6.25%, 12/15/26, Ser. D

      18,666,153   
1,920    

Texas Private Activity Bond Surface Transportation Corp. Rev., 7.00%, 6/30/40

      2,287,546   
1,000    

Wise Cnty. Rev., Parker Cnty. Junior College Dist., 8.00%, 8/15/34

      1,134,330   
       

 

 

 
          122,989,089   
       

 

 

 
    Virginia – 0.3%    
1,000    

Fairfax Cnty. Industrial Dev. Auth. Rev., Inova Health Systems, 5.50%, 5/15/35, Ser. A

      1,134,860   
2,050    

James City Cnty. Economic Dev. Auth. Rev., United Methodist Homes,
5.50%, 7/1/37, Ser. A

      1,656,051   
       

 

 

 
          2,790,911   
       

 

 

 
    Washington – 1.5%    
   

Health Care Facs. Auth. Rev.,

   
1,300    

Multicare Health Systems, 6.00%, 8/15/39, Ser. B (AGC)

      1,454,180   
1,000    

Seattle Cancer Care Alliance, 7.375%, 3/1/38

      1,231,430   
13,000    

Virginia Mason Medical Center, 6.125%, 8/15/37, Ser. A

      13,893,360   
       

 

 

 
          16,578,970   
       

 

 

 
    West Virginia – 0.2%    
2,000    

Hospital Finance Auth. Rev., Highland Hospital, 9.125%, 10/1/41

      2,372,120   
       

 

 

 
    Wisconsin – 0.1%    
   

Health & Educational Facs. Auth. Rev.,

   
90    

Froedert & Community Health, 5.375%, 10/1/30

      90,820   
1,000    

Prohealth Care, Inc., 6.625%, 2/15/39

      1,179,770   
       

 

 

 
          1,270,590   
       

 

 

 
   

Total Municipal Bonds & Notes (cost-$1,003,224,941)

      1,093,876,073   
       

 

 

 
       

VARIABLE RATE NOTES (g) – 2.1%

   
    California – 0.5%    
5,000    

Health Facs. Financing Auth. Rev., 9.40%, 11/15/36, Ser. 3193 (a)(d)(f)

      6,103,500   
       

 

 

 
    Florida – 0.2%    

1,830

   

Highlands Cnty. Health Facs. Auth. Rev., Adventist Health System,
5.00%, 11/15/31, Ser. C

      1,923,165   
       

 

 

 
    Illinois – 0.6%    
6,000    

Chicago, GO, 11.56%, 1/1/34, Ser. 3190 (a)(d)(f)

      7,148,700   
       

 

 

 
    Texas – 0.6%    
5,365    

State, GO, 8.88%, 4/1/37, Ser. 3197 (a)(d)(f)

      6,394,544   
       

 

 

 

 

5.31.12   PIMCO Municipal Income Funds II Annual Report     15   


Table of Contents

PIMCO Municipal Income Fund II Schedule of Investments

May 31, 2012 (continued)

 

Principal
Amount
(000s)
                 Value  
    West Virginia – 0.2%    
$2,000    

Economic Dev. Auth. Rev., Appalachian Power, 5.375%, 12/1/38, Ser. A

    $ 2,175,280   
       

 

 

 
   

Total Variable Rate Notes (cost-$20,296,307)

      23,745,189   
       

 

 

 
   

Total Investments (cost-$1,023,521,248) – 100.0%

    $ 1,117,621,262   
       

 

 

 

 

16   PIMCO Municipal Income Funds II Annual Report   5.31.12


Table of Contents

PIMCO California Municipal Income Fund II Schedule of Investments

May 31, 2012

 

Principal
Amount
(000s)
                 Value  

CALIFORNIA MUNICIPAL BONDS & NOTES – 86.8%

 
$  2,000    

Alhambra Rev., Atherton Baptist Homes, 7.625%, 1/1/40, Ser. A

    $ 2,210,700   
20,000    

Bay Area Toll Auth. Rev., San Francisco Bay Area, 5.00%, 4/1/39, Ser. F-1 (h)

      21,808,800   
   

Chabot-Las Positas Community College Dist., GO, Ser. C (AMBAC),

   
17,305    

zero coupon, 8/1/36

      4,710,421   
5,000    

zero coupon, 8/1/37

      1,267,700   
15,000    

zero coupon, 8/1/43

      2,667,750   
1,000    

Chula Vista Rev., San Diego Gas & Electric, 5.875%, 2/15/34, Ser. B

      1,169,740   
300    

City & Cnty. of San Francisco, Capital Improvement Projects, CP, 5.25%, 4/1/31, Ser. A

      331,794   
1,410    

Community College Financing Auth. Rev., 5.00%, 8/1/27, Ser. A (AMBAC)

      1,426,243   
9,360    

Coronado Community Dev. Agcy., Tax Allocation, 4.875%, 9/1/35 (AMBAC)

      9,466,891   
   

Corona-Norco Unified School Dist. Public Financing Auth., Special Tax, Ser. A,

   
1,000    

6.00%, 9/1/25

      1,003,550   
4,150    

6.10%, 9/1/32

      4,158,798   
25,000    

Desert Community College Dist., GO, zero coupon, 8/1/46, Ser. C (AGM)

      3,582,250   
3,000    

Dinuba Financing Auth. Rev., Public Works Projects, 5.10%, 8/1/32 (NPFGC)

      3,068,760   
8,300    

El Dorado Irrigation Dist. & El Dorado Cnty. Water Agcy., CP, 5.75%, 8/1/39, Ser. A (AGC)

      9,002,761   
1,500    

Foothill-Eastern Transportation Corridor Agcy. Rev., 5.875%, 1/15/27 (IBC-NPFGC)

      1,531,260   
1,440    

Fremont Community Facs. Dist. No. 1, Special Tax, Pacific Commons, 5.30%, 9/1/30

      1,445,400   
   

Golden State Tobacco Securitization Corp. Rev.,

   
13,885    

5.00%, 6/1/45 (AMBAC-TCRS)

      14,084,805   
1,500    

5.00%, 6/1/45, Ser. A

      1,521,585   
6,000    

5.00%, 6/1/45, Ser. A (FGIC-TCRS)

      6,086,340   
8,500    

5.125%, 6/1/47, Ser. A-1

      6,148,900   
29,415    

5.75%, 6/1/47, Ser. A-1

      23,554,355   
   

Health Facs. Financing Auth. Rev., 

   
   

Adventist Health System, Ser. A,

   
500    

5.00%, 3/1/33

      504,665   
250    

5.75%, 9/1/39

      278,408   
3,000    

Catholic Healthcare West, 6.00%, 7/1/39, Ser. A

      3,488,640   
1,200    

Children’s Hospital of Los Angeles, 5.25%, 7/1/38 (AGM)

      1,252,884   
500    

Children’s Hospital of Orange Cnty., 6.50%, 11/1/38, Ser. A

      598,170   
3,700    

Stanford Hospital, 5.25%, 11/15/40, Ser. A-2

      4,181,888   
   

Sutter Health,

   
1,000    

5.00%, 8/15/35, Ser. D

      1,096,400   
4,220    

5.00%, 11/15/42, Ser. A (IBC-NPFGC)

      4,412,896   
12,195    

5.25%, 11/15/46, Ser. A (h)

      12,840,237   
4,500    

Imperial Irrigation Dist. Rev., 5.00%, 11/1/41, Ser. B

      4,858,380   
175    

Infrastructure & Economic Dev. Bank Rev., 5.25%, 2/1/38

      184,606   
515    

Irvine Unified School Dist., Special Tax, 6.70%, 9/1/35

      573,113   
500    

Lancaster Redev. Agcy. Rev., Capital Improvements Projects, 5.90%, 12/1/35

      504,310   

 

5.31.12   PIMCO Municipal Income Funds II Annual Report     17   


Table of Contents

PIMCO California Municipal Income Fund II Schedule of Investments

May 31, 2012 (continued)

 

Principal
Amount
(000s)
                 Value  
$  1,000    

Lancaster Redev. Agcy., Tax Allocation, 6.875%, 8/1/39

    $ 1,114,720   
7,500    

Long Beach Bond Finance Auth. Rev., Long Beach Natural Gas, 5.50%, 11/15/37, Ser. A

      8,372,925   
10,000    

Long Beach Unified School Dist., GO, 5.25%, 8/1/33, Ser. A (h)

      11,267,300   
4,895    

Los Angeles, Equipment & Real Property Project, CP, 5.00%, 2/1/27, Ser. T (NPFGC)

      4,898,916   
15,000    

Los Angeles Department of Water & Power Rev., 4.75%, 7/1/30, Ser. A-2 (AGM) (h)

      15,932,400   
11,000    

Los Angeles Unified School Dist., GO, 5.00%, 1/1/34, Ser. I

      12,214,620   
10,000    

Manteca Redev. Agcy., Tax Allocation, 5.00%, 10/1/36 (AMBAC)

      9,435,400   
5,330    

Manteca Unified School Dist. No. 89-2, Special Tax, 5.00%, 9/1/29, Ser. C (NPFGC)

      5,345,297   
4,000    

Merced Cnty., Juvenile Justice Correctional Fac., CP, 5.00%, 6/1/32 (AMBAC)

      4,005,120   
5,000    

Metropolitan Water Dist. of Southern California Rev., 5.00%, 7/1/37, Ser. A (h)

      5,459,800   
3,200    

M-S-R Energy Auth. Rev., 6.50%, 11/1/39, Ser. B

      3,978,720   
1,240    

Municipal Finance Auth. Rev., Azusa Pacific Univ. Project, 7.75%, 4/1/31, Ser. B

      1,418,820   
5,000    

Oakland Unified School Dist., Alameda Cnty., GO, 6.125%, 8/1/29, Ser. A

      5,618,800   
4,750    

Palomar Pomerado Health, CP, 6.75%, 11/1/39

      5,243,478   
10,000    

Placentia-Yorba Linda Unified School Dist., CP, 5.00%, 10/1/32 (FGIC-NPFGC)

      10,307,700   
1,500    

Pollution Control Financing Auth. Rev., American Water Capital Corp. Project,
5.25%, 8/1/40 (a)(d)

      1,532,520   
   

Poway Unified School Dist., GO,

   
27,000    

zero coupon, 8/1/40

      6,293,160   
16,000    

zero coupon, 8/1/46

      2,698,080   
3,000    

Riverside, CP, 5.00%, 9/1/33 (AMBAC)

      3,010,500   
2,000    

Roseville Redev. Agcy., Tax Allocation, 5.00%, 9/1/32, Ser. B (NPFGC)

      2,012,120   
   

San Diego Public Facs. Financing Auth. Rev.,

   
11,000    

5.00%, 8/1/32 (Pre-refunded @ $100, 8/1/12) (NPFGC) (c)

      11,082,610   
4,000    

5.25%, 8/1/38, Ser. A

      4,454,680   
1,000    

5.25%, 5/15/39, Ser. A

      1,124,740   
1,500    

Fire & Life Safety Facs. Project, 5.00%, 4/1/32, Ser. B (NPFGC)

      1,500,735   
2,800    

San Diego Regional Building Auth. Rev., Cnty. Operations Center & Annex,
5.375%, 2/1/36, Ser. A

      3,117,968   
2,800    

San Diego Unified School Dist., GO, 4.75%, 7/1/27, Ser. D-2 (AGM)

      2,999,024   
1,000    

San Jose Hotel Tax Rev., Convention Center Expansion, 6.50%, 5/1/36

      1,167,750   
1,300    

San Marcos Unified School Dist., GO, 5.00%, 8/1/38, Ser. A

      1,424,878   
1,260    

Santa Cruz Cnty., CP, 5.25%, 8/1/32

      1,289,169   
1,500    

Santa Cruz Cnty. Redev. Agcy., Tax Allocation, Live Oak/Soquel Community,
7.00%, 9/1/36, Ser. A

      1,785,060   
   

State, GO,

   
2,500    

5.00%, 9/1/31

      2,699,600   
10,000    

6.00%, 4/1/38

      11,696,700   
   

State Public Works Board Rev.,

   
3,000    

5.75%, 10/1/30, Ser. G-1

      3,409,680   
2,000    

California State Univ., 6.00%, 11/1/34, Ser. J

      2,260,940   

 

18   PIMCO Municipal Income Funds II Annual Report   5.31.12


Table of Contents

PIMCO California Municipal Income Fund II Schedule of Investments

May 31, 2012 (continued)

 

Principal
Amount
(000s)
                 Value  
$  2,000    

Judicial Council Projects, 5.00%, 12/1/29, Ser. D

    $ 2,143,560   
7,915    

Regents Univ., 5.00%, 3/1/33, Ser. A

      8,518,519   
   

Statewide Communities Dev. Auth. Rev.,

   
   

Bentley School,

   
10,620    

zero coupon, 7/1/50 (b)

      464,731   
3,760    

7.00%, 7/1/40, Ser. A

      4,063,470   
   

Catholic Healthcare West,

   
1,520    

5.50%, 7/1/31, Ser. D

      1,674,219   
1,520    

5.50%, 7/1/31, Ser. E

      1,674,219   
   

Huntington Park Charter School Project, Ser. A,

   
250    

5.15%, 7/1/30

      222,440   
1,250    

5.25%, 7/1/42

      1,063,500   
500    

International School of the Peninsula Project, 5.00%, 11/1/29

      429,010   
2,770    

Kaiser Permanente, 5.50%, 11/1/32, Ser. A

      2,792,853   
1,000    

Lancer Student Housing Project, 7.50%, 6/1/42

      1,110,470   
9,700    

Los Angeles Jewish Home, 5.50%, 11/15/33 (CA Mtg. Ins.)

      9,865,191   
   

Methodist Hospital Project (FHA),

   
2,400    

6.625%, 8/1/29

      3,019,776   
8,800    

6.75%, 2/1/38

      10,795,928   
3,700    

St. Joseph Health System, 5.75%, 7/1/47, Ser. A (FGIC)

      4,081,507   
5,600    

Sutter Health, 6.00%, 8/15/42, Ser. A

      6,607,048   
4,500    

Univ. of California Irvine E. Campus, 5.375%, 5/15/38

      4,804,245   
1,365    

Windrush School, 5.50%, 7/1/37 (b)(e)

      941,850   
1,800    

Tobacco Securitization Agcy. Rev., Stanislaus Cnty., 5.875%, 6/1/43, Ser. A

      1,715,112   
3,100    

Torrance Rev., Memorial Medical Center, 5.00%, 9/1/40, Ser. A

      3,268,826   
1,000    

Tustin Unified School Dist., Special Tax, 6.00%, 9/1/40, Ser. 2006-1

      1,042,080   
   

Univ. of California Rev.,

   
5,000    

4.75%, 5/15/35, Ser. G (FGIC-NPFGC) (h)

      5,190,000   
5,650    

4.75%, 5/15/38, Ser. B

      5,735,767   
       

 

 

 
   

Total California Municipal Bonds & Notes (cost-$361,369,438)

      406,421,651   
       

 

 

 
       

CALIFORNIA VARIABLE RATE NOTES (a)(d)(g) – 6.7%

   
6,035    

Desert Community College Dist., GO, 9.40%, 8/1/32, Ser. 3016-1 (AGC) (f)

      6,805,488   
3,000    

JP Morgan Chase Putters/Drivers Trust Rev. (f),

   
   

11.657%, 11/15/19, Ser. 4039 (b)(i)

   
   

(acquisition cost-$3,572,400; purchased 1/19/12)

      3,799,890   
7,500    

7.997%, 5/15/40, Ser. 3838

      8,995,425   
4,000    

Los Angeles Community College Dist., GO, 13.72%, 8/1/33, Ser. 3096 (f)

      5,344,240   
5,000    

San Diego Community College Dist., GO, 8.40%, 2/1/17 (f)

      6,615,250   
       

 

 

 
   

Total California Variable Rate Notes (cost-$25,877,548)

      31,560,293   
       

 

 

 

 

5.31.12   PIMCO Municipal Income Funds II Annual Report     19   


Table of Contents

PIMCO California Municipal Income Fund II Schedule of Investments

May 31, 2012 (continued)

 

Principal
Amount
(000s)
                 Value  

OTHER MUNICIPAL BONDS & NOTES – 6.5%

   
    Arizona – 1.8%    
$  8,000    

Salt Verde Financial Corp. Rev., 5.00%, 12/1/37

    $ 8,162,640   
       

 

 

 
    New Jersey – 0.7%    
   

Tobacco Settlement Financing Corp. Rev., Ser. 1-A,

   
1,300    

4.75%, 6/1/34

      1,004,276   
3,000    

5.00%, 6/1/41

      2,335,710   
       

 

 

 
          3,339,986   
       

 

 

 
    New York – 0.3%    
1,250    

Liberty Dev. Corp. Rev., Goldman Sachs Headquarters, 5.25%, 10/1/35

      1,394,125   
       

 

 

 
    Ohio – 0.4%    
2,250    

Buckeye Tobacco Settlement Financing Auth. Rev., 5.875%, 6/1/47, Ser. A-2

      1,711,575   
       

 

 

 
    Puerto Rico – 0.9%    
   

Sales Tax Financing Corp. Rev.,

   
1,600    

5.00%, 8/1/40, Ser. A (AGM) (h)

      1,687,264   
2,500    

5.25%, 8/1/43, Ser. A-1

      2,662,450   
       

 

 

 
          4,349,714   
       

 

 

 
    Rhode Island – 2.4%    
11,000    

Tobacco Settlement Financing Corp. Rev., 6.25%, 6/1/42, Ser. A

      11,243,980   
       

 

 

 
   

Total Other Municipal Bonds & Notes (cost-$26,687,691)

      30,202,020   
       

 

 

 
   

Total Investments (cost-$413,934,677) – 100.0%

    $ 468,183,964   
       

 

 

 

 

20   PIMCO Municipal Income Funds II Annual Report   5.31.12


Table of Contents

PIMCO New York Municipal Income Fund II Schedule of Investments

May 31, 2012

 

Principal
Amount
(000s)
                 Value  

NEW YORK MUNICIPAL BONDS & NOTES – 90.7%

   
$1,000    

Chautauqua Cnty. Industrial Dev. Agcy. Rev., Dunkirk Power Project, 5.875%, 4/1/42

    $ 1,101,750   
2,400    

Erie Cnty. Industrial Dev. Agcy. Rev., Orchard Park, Inc. Project, 6.00%, 11/15/36, Ser. A

      2,400,816   
9,000    

Hudson Yards Infrastructure Corp. Rev., 5.75%, 2/15/47, Ser. A

      10,411,200   
   

Liberty Dev. Corp. Rev.,

   
1,400    

5.625%, 7/15/47

      1,546,986   
1,300    

Bank of America Tower at One Bryant Park Project, 6.375%, 7/15/49

      1,466,257   
   

Goldman Sachs Headquarters,

   
4,120    

5.25%, 10/1/35 (h)

      4,595,036   
3,000    

5.25%, 10/1/35

      3,345,900   
3,500    

5.50%, 10/1/37

      4,101,930   
500    

Long Island Power Auth. Rev., 5.00%, 9/1/34, Ser. A (AMBAC)

      520,480   
   

Metropolitan Transportation Auth. Rev.,

   
2,000    

5.00%, 11/15/34, Ser. B

      2,224,160   
7,300    

5.25%, 11/15/31, Ser. E

      7,438,846   
7,000    

5.35%, 7/1/31, Ser. B

      7,022,610   
5,000    

5.50%, 11/15/39, Ser. A

      5,541,950   

7,000

   

Monroe Cnty. Industrial Dev. Corp. Rev., Unity Hospital Rochester Project,
5.50%, 8/15/40 (FHA) (h)

      8,046,920   
2,870    

Mortgage Agcy. Rev., 4.75%, 10/1/27, Ser. 128

      2,932,681   
2,400    

Nassau Cnty. Industrial Dev. Agcy. Rev., Amsterdam at Harborside, 6.70%, 1/1/43, Ser. A

      1,693,656   
   

New York City, GO, Ser. I,

   
375    

5.00%, 3/1/33

      384,938   
3,625    

5.00%, 3/1/33 (Pre-refunded @ $100, 3/1/13) (c)

      3,751,476   
1,500    

New York City Health & Hospital Corp. Rev., 5.00%, 2/15/30, Ser. A

      1,671,960   
   

New York City Industrial Dev. Agcy. Rev.,

   
975    

Eger Harbor Project, 4.95%, 11/20/32, Ser. A (GNMA)

      998,975   
1,415    

Liberty Interactive Corp., 5.00%, 9/1/35

      1,456,205   
1,500    

Pilot Queens Baseball Stadium, 6.50%, 1/1/46 (AGC)

      1,643,100   
1,135    

Staten Island Univ. Hospital Project, 6.45%, 7/1/32, Ser. C
(Pre-refunded @ $101, 7/1/12) (c)

      1,151,412   
1,500    

United Jewish Appeal Federation Project, 5.00%, 7/1/27, Ser. A

      1,581,780   
   

Yankee Stadium,

   
750    

5.00%, 3/1/31 (FGIC)

      779,527   
1,900    

5.00%, 3/1/36 (NPFGC)

      1,955,366   
4,900    

7.00%, 3/1/49 (AGC)

      5,773,082   
   

New York City Municipal Water Finance Auth. Water & Sewer Rev.,

   
1,000    

5.25%, 6/15/40, Ser. EE

      1,127,430   
500    

Second Generation Resolutions, 5.00%, 6/15/39, Ser. GG-1

      547,995   
   

New York City Transitional Finance Auth. Rev.,

   
3,745    

5.00%, 11/1/27, Ser. B

      3,807,429   
2,255    

5.00%, 11/1/27, Ser. B (Pre-refunded @ $100, 11/1/12) (c)

      2,298,657   

 

5.31.12   PIMCO Municipal Income Funds II Annual Report     21   


Table of Contents

PIMCO New York Municipal Income Fund II Schedule of Investments

May 31, 2012 (continued)

 

 

Principal
Amount
(000s)
                 Value  
$5,000    

5.25%, 1/15/39, Ser. S-3

    $ 5,496,750   
   

New York Liberty Dev. Corp. Rev.,

   
3,000    

1 World Trade Center Project, 5.00%, 12/15/41

      3,331,080   
6,000    

4 World Trade Center Project, 5.75%, 11/15/51

      6,869,760   
1,000    

Onondaga Cnty. Rev., Syracuse Univ. Project, 5.00%, 12/1/36

      1,131,440   
   

Port Auth. of New York & New Jersey Rev.,

   
3,600    

5.00%, 4/15/32, Ser. 125 (AGM)

      3,646,188   
1,400    

JFK International Air Terminal, 6.00%, 12/1/36

      1,593,382   
   

State Dormitory Auth. Rev.,

   
3,000    

5.00%, 3/15/38, Ser. A

      3,338,130   
7,490    

5.50%, 5/15/31, Ser. A (AMBAC)

      9,432,007   
2,600    

Catholic Health of Long Island, 5.10%, 7/1/34

      2,695,056   
1,500    

Fordham Univ., 5.50%, 7/1/36, Ser. A

      1,700,250   
1,320    

Long Island Univ., 5.25%, 9/1/28 (Radian)

      1,321,505   
   

Memorial Sloan-Kettering Cancer Center,

   
2,750    

5.00%, 7/1/35, Ser. 1

      2,948,385   
2,000    

5.00%, 7/1/36, Ser. A-1

      2,177,620   
2,000    

Mount Sinai Hospital, 5.00%, 7/1/31, Ser. A

      2,160,340   
2,100    

New York Univ., 5.00%, 7/1/38, Ser. A

      2,288,916   
1,000    

New York Univ. Hospital Center, 5.625%, 7/1/37, Ser. B

      1,086,810   
600    

North Shore-Long Island Jewish Health System, 5.50%, 5/1/37, Ser. A

      678,132   
5,000    

Rochester General Hospital, 5.00%, 12/1/35 (Radian)

      5,076,650   
   

Teachers College,

   
4,270    

5.00%, 7/1/32 (NPFGC)

      4,285,457   
3,000    

5.50%, 3/1/39

      3,291,180   
1,000    

The New School, 5.50%, 7/1/40

      1,109,130   
3,000    

Yeshiva Univ., 5.125%, 7/1/34 (AMBAC)

      3,121,560   
5,000    

State Environmental Facs. Corp. Rev., 5.125%, 6/15/38, Ser. A

      5,621,500   
1,000    

State Thruway Auth. Rev., 4.75%, 1/1/29, Ser. G (AGM)

      1,075,030   
6,000    

State Urban Dev. Corp. Rev., 5.00%, 3/15/36, Ser. B-1 (h)

      6,726,840   
5,000    

Triborough Bridge & Tunnel Auth. Rev., 5.25%, 11/15/34, Ser. A-2 (h)

      5,720,800   
3,435    

Troy Rev., Rensselaer Polytechnic Institute, 5.125%, 9/1/40, Ser. A

      3,726,357   
1,815    

Ulster Cnty. Industrial Dev. Agcy. Rev., 6.00%, 9/15/37, Ser. A (b)

      1,284,621   

2,000

   

Warren & Washington Cntys. Industrial Dev. Agcy. Rev., Glens Falls Hospital Project,
5.00%, 12/1/35, Ser. A (AGM)

      2,020,840   
1,490    

Westchester Cnty. Healthcare Corp. Rev., 6.125%, 11/1/37, Ser. C-2

      1,720,980   

1,000

   

Yonkers Economic Dev. Corp. Rev., Charter School of Educational Excellence Project,
6.00%, 10/15/30, Ser. A

      1,024,320   
600    

Yonkers Industrial Dev. Agcy. Rev., Sarah Lawrence College Project, 6.00%, 6/1/41, Ser. A

      673,308   
       

 

 

 
   

Total New York Municipal Bonds & Notes (cost-$175,800,814)

      191,694,834   
       

 

 

 

 

22   PIMCO Municipal Income Funds II Annual Report   5.31.12


Table of Contents

PIMCO New York Municipal Income Fund II Schedule of Investments

May 31, 2012 (continued)

 

Principal
Amount
(000s)
                 Value  

OTHER MUNICIPAL BONDS & NOTES – 6.4%

   
    Florida – 0.5%    
$1,000    

Clearwater Rev., 5.25%, 12/1/39, Ser. A

    $ 1,124,220   
       

 

 

 
    Louisiana – 0.5%    
1,000    

East Baton Rouge Sewerage Commission Rev., 5.25%, 2/1/39, Ser. A

      1,111,200   
       

 

 

 
    Ohio – 0.5%    
1,435    

Buckeye Tobacco Settlement Financing Auth. Rev., 5.875%, 6/1/47, Ser. A-2

      1,091,605   
       

 

 

 
    Puerto Rico – 4.4%    
5,675    

Children’s Trust Fund Rev., 5.625%, 5/15/43

      5,675,170   
   

Sales Tax Financing Corp. Rev.,

   
2,000    

5.00%, 8/1/40, Ser. A (AGM) (h)

      2,109,080   
1,300    

5.25%, 8/1/43, Ser. A-1

      1,384,474   
       

 

 

 
          9,168,724   
       

 

 

 
    U. S. Virgin Islands – 0.5%    
1,000    

Public Finance Auth. Rev., 6.00%, 10/1/39, Ser. A

      1,109,720   
       

 

 

 
   

Total Other Municipal Bonds & Notes (cost-$12,786,255)

      13,605,469   
       

 

 

 
       

NEW YORK VARIABLE RATE NOTES (a)(d)(f)(g) – 2.9%

   
5,000    

JPMorgan Chase Putters/Drivers Trust Rev.,

   
   

7.944%, 7/1/33, Ser. 3382 (cost-$4,881,420)

      6,148,500   
       

 

 

 
   

Total Investments (cost-$193,468,489) – 100.0%

    $ 211,448,803   
       

 

 

 

 

5.31.12   PIMCO Municipal Income Funds II Annual Report     23   


Table of Contents

PIMCO Municipal Income Funds II Notes to Schedule of Investments

May 31, 2012 (continued)

 

(a)   Private Placement – Restricted as to resale and may not have a readily available market. Securities with an aggregate value of $25,030,147, $33,092,813 and $6,148,500, representing 2.2%, 7.1% and 2.9% of total investments in Municipal II, California Municipal II and New York Municipal II, respectively.  
(b)   Illiquid.  
(c)   Pre-refunded bonds are collateralized by U.S. Government or other eligible securities which are held in escrow and used to pay principal and interest and retire the bonds at the earliest refunding date (payment date) and/or whose interest rates vary with changes in a designated base rate (such as the prime interest rate).  
(d)   144A – Exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, typically only to qualified institutional buyers. Unless otherwise indicated, these securities are not considered to be illiquid.  
(e)   In default.  
(f)   Inverse Floater – The interest rate shown bears an inverse relationship to the interest rate on another security or the value of an index. The interest rate disclosed reflects the rate in effect on May 31, 2012.  
(g)   Variable Rate Notes – Instruments whose interest rates change on specified date (such as a coupon date or interest payment date) and/or whose interest rates vary with changes in a designated base rate (such as the prime interest rate). The interest rate disclosed reflects the rate in effect on May 31, 2012.  
(h)   Residual Interest Bonds held in Trust – Securities represent underlying bonds transferred to a separate securitization trust established in a tender option bond transaction in which each Fund acquired the residual interest certificates. These securities serve as collateral in a financing transaction.  
(i)   Restricted security in California Municipal II. The aggregate acquisition cost of such security is $3,572,400; the aggregate market value is $3,799,890, representing 0.8% of total investments.  

 

 

Glossary:

 

AGC     -      insured by Assured Guaranty Corp.
AGM     -      insured by Assured Guaranty Municipal Corp.
AMBAC     -      insured by American Municipal Bond Assurance Corp.
CA Mtg. Ins.     -      insured by California Mortgage Insurance
CP     -      Certificates of Participation
FGIC     -      insured by Financial Guaranty Insurance Co.
FHA     -      insured by Federal Housing Administration
GNMA     -      insured by Government National Mortgage Association
GO     -      General Obligation Bond
GTD     -      Guaranteed
IBC     -      Insurance Bond Certificate
NPFGC     -      insured by National Public Finance Guarantee Corp.
PSF     -      Public School Fund
Radian     -      insured by Radian Guaranty, Inc.
TCRS     -      Temporary Custodian Receipts

 

24   PIMCO Municipal Income Funds II Annual Report   5.31.12   See accompanying Notes to Financial Statements


Table of Contents

 

 

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Table of Contents

PIMCO Municipal Income Funds II Statements of Assets and Liabilities

May 31, 2012

 

 
        Municipal II         California
Municipal II
        New York
Municipal II
 
     
Assets:                  

Investments, at value (cost-$1,023,521,248, $413,934,677 and $193,468,489, respectively)

      $1,117,621,262          $468,183,964          $211,448,803   

Cash

      7,186,443          4,143,905          3,392,262   

Interest receivable

      18,397,942          7,086,749          2,811,581   

Deposits with brokers for futures contracts collateral

      296,000                   56,000   

Prepaid expenses and other assets

      50,990          46,004          22,458   

Total Assets

      1,143,552,637          479,460,622          217,731,104   
     
Liabilities:                  

Payable for Floating Rate Notes issued

      49,317,277          41,398,801          13,851,894   

Dividends payable to common and preferred shareholders

      3,951,630          1,973,038          722,124   

Investment management fees payable

      551,683          221,123          102,698   

Interest payable

      96,095          74,064          19,328   

Payable for variation margin on futures contracts

      62,500                   12,500   

Accrued expenses and other liabilities

      412,714          223,959          355,267   

Total Liabilities

      54,391,899          43,890,985          15,063,811   

Preferred Shares ($0.00001 par value and $25,000 liquidation preference per share applicable to an aggregate of 14,680, 6,520 and 3,160 shares issued and outstanding, respectively)

      367,000,000          163,000,000          79,000,000   
Net Assets Applicable to Common Shareholders       $722,160,738          $272,569,637          $123,667,293   
     
Composition of Net Assets Applicable to Common Shareholders:                  

Common Shares:

                 

Par value ($0.00001 per share)

      $606          $315          $109   

Paid-in-capital in excess of par

      856,375,736          429,075,240          153,029,967   

Undistributed (dividends in excess of) net investment income

      20,835,879          (1,973,038)          2,232,908   

Accumulated net realized loss

      (248,942,869)          (208,784,598)          (49,534,140)   

Net unrealized appreciation of investments and futures contracts

      93,891,386          54,251,718          17,938,449   
Net Assets Applicable to Common Shareholders       $722,160,738          $272,569,637          $123,667,293   

Common Shares Issued and Outstanding

      60,638,843          31,496,802          10,879,509   
Net Asset Value Per Common Share       $11.91          $8.65          $11.37   

 

26   PIMCO Municipal Income Funds II Annual Report   5.31.12   See accompanying Notes to Financial Statements


Table of Contents

PIMCO Municipal Income Funds II Statements of Operations

Year ended May 31, 2012

 

 
        Municipal II         California
Municipal II
        New York
Municipal II
 
     
Investment Income:                  

Interest

      $61,342,394          $26,029,180          $10,777,008   
     
Expenses:                  

Investment management fees

      6,705,489          2,682,060          1,265,620   

Auction agent fees and commissions

      583,338          276,151          131,949   

Interest expense

      537,671          507,554          112,159   

Custodian and accounting agent fees

      156,851          112,661          70,800   

Trustees’ fees and expenses

      108,733          41,114          22,091   

Shareholder communications

      89,706          39,316          37,561   

Legal fees

      57,392          5,728          7,892   

New York Stock Exchange listing fees

      47,492          24,662          20,825   

Transfer agent fees

      40,647          37,057          36,508   

Audit and tax services

      33,446          40,741          50,452   

Insurance expense

      23,457          9,368          4,767   

Miscellaneous

      14,159          11,372          11,765   

Total Expenses

      8,398,381          3,787,784          1,772,389   

Less: investment management fees waived

      (475,390)          (190,052)          (89,611)   

custody credits earned on cash balances

      (2,844)          (675)          (1,085)   

Net Expenses

      7,920,147          3,597,057          1,681,693   
     
Net Investment Income       53,422,247          22,432,123          9,095,315   
     
Realized and Change In Unrealized Gain (Loss):                  

Net realized gain (loss) on:

                 

Investments

      4,711,143          5,244,410          166,834   

Futures contracts

      (682,246)          224,084          (139,728)   

Swaps

      (18,499,216)          (11,575,152)          (3,804,214)   

Net change in unrealized appreciation/depreciation of:

                 

Investments

      110,588,532          43,257,024          16,155,681   

Futures contracts

      (203,238)                   (40,648)   

Swaps

      6,850,035          4,176,010          1,153,882   

Net realized and change in unrealized gain on investments, futures contracts and swaps

      102,765,010          41,326,376          13,491,807   

Net Increase in Net Assets Resulting from Investment Operations

      156,187,257          63,758,499          22,587,122   

Dividends on Preferred Shares from Net Investment Income

      (844,983)          (383,285)          (181,888)   

Net Increase in Net Assets Applicable to Common Shareholders Resulting from Investment Operations

      $155,342,274          $63,375,214          $22,405,234   

 

See accompanying Notes to Financial Statements   5.31.12   PIMCO Municipal Income Funds II Annual Report     27   


Table of Contents

PIMCO Municipal Income Funds II Statements of Changes in Net Assets

 Applicable to Common Shareholders

 

        Municipal II  
        Year ended
May 31, 2012
        Year ended
May 31, 2011
 
Investment Operations:            

Net investment income

      $53,422,247          $54,597,730   

Net realized gain (loss) on investments, futures contracts and swaps

      (14,470,319)          7,846,166   

Net change in unrealized appreciation/depreciation of investments, futures contracts and swaps

      117,235,329          (52,677,814)   

Net increase in net assets resulting from investment operations

      156,187,257          9,766,082   
Dividends on Preferred Shares from Net Investment Income       (844,983)          (1,520,460)   

Net increase (decrease) in net assets applicable to common shareholders resulting from investment operations

      155,342,274          8,245,622   
   
Dividends to Common Shareholders from:            

Net investment income

      (47,201,725)          (46,931,445)   

Return of capital

                 
   
Common Share Transactions:            

Reinvestment of dividends

      3,220,671          3,896,483   

Total increase (decrease) in net assets applicable to common shareholders

      111,361,220          (34,789,340)   
   
Net Assets Applicable to Common Shareholders:            

Beginning of year

      610,799,518          645,588,858   

End of year (including undistributed (dividends in excess of) net investment income of $20,835,879 and $15,462,847; $(1,973,038) and $(1,965,053); $2,232,908 and $1,959,285; respectively)

      $722,160,738          $610,799,518   
   
Common Shares Issued in Reinvestment of Dividends       295,661          373,938   

 

28   PIMCO Municipal Income Funds II Annual Report   5.31.12   See accompanying Notes to Financial Statements


Table of Contents

PIMCO Municipal Income Funds II Statements of Changes in Net Assets

 Applicable to Common Shareholders (continued)

 

   
California Municipal II         New York Municipal II  
Year ended
May 31, 2012
        Year ended
May 31, 2011
        Year ended
May 31, 2012
        Year ended
May 31, 2011
 
                   
  $22,432,123          $23,136,186          $9,095,315          $9,489,719   
  (6,106,658)          62,159          (3,777,108)          (1,115,356)   
       
  47,433,034          (21,991,348)          17,268,915          (8,091,130)   
  63,758,499          1,206,997          22,587,122          283,233   
  (383,285)          (689,435)          (181,888)          (329,688)   
       
  63,375,214          517,562          22,405,234          (46,455)   
       
                   
  (22,056,823)          (23,452,319)          (8,629,270)          (8,576,979)   
  (1,522,981)                              
       
                   
  1,288,406          1,604,973          635,052          718,710   
  41,083,816          (21,329,784)          14,411,016          (7,904,724)   
       
                   
  231,485,821          252,815,605          109,256,277          117,161,001   
       
  $272,569,637          $231,485,821          $123,667,293          $109,256,277   
       
  142,977          183,513          58,575          67,458   

 

See accompanying Notes to Financial Statements   5.31.12   PIMCO Municipal Income Funds II Annual Report     29   


Table of Contents

PIMCO Municipal Income Funds II Notes to Financial Statements

May 31, 2012

 

1. Organization and Significant Accounting Policies

PIMCO Municipal Income Fund II (‘‘Municipal II’’), PIMCO California Municipal Income Fund II (‘‘California Municipal II’’) and PIMCO New York Municipal Income Fund II (‘‘New York Municipal II’’), each a “Fund” and collectively referred to as the ‘‘Funds’’ or ‘‘PIMCO Municipal Income Funds II’’, were organized as Massachusetts business trusts on March 29, 2002. Prior to commencing operations on June 28, 2002, the Funds had no operations other than matters relating to their organization and registration as non-diversified, closed-end management investment companies registered under the Investment Company Act of 1940 and the rules and regulations thereunder, as amended. Allianz Global Investors Fund Management LLC (the “Investment Manager”) serves as the Funds’ investment manager and is an indirect, wholly-owned subsidiary of Allianz Asset Management of America L.P. (“AAM”), formerly Allianz Global Investors of America L.P. prior to December 31, 2011. AAM is an indirect, wholly-owned subsidiary of Allianz SE, a publicly traded European insurance and financial services company. Each Fund has authorized an unlimited amount of common shares with $0.00001 par value.

 

Under normal market conditions, Municipal II invests substantially all of its assets in a portfolio of municipal bonds, the interest from which is exempt from federal income taxes. Under normal market conditions, California Municipal II invests substantially all of its assets in municipal bonds which pay interest that is exempt from federal and California state income taxes. Under normal market conditions, New York Municipal II invests substantially all of its assets in municipal bonds which pay interest that is exempt from federal, New York State and New York City income taxes. There can be no assurance that the Funds will meet their stated objectives. The Funds will generally seek to avoid investing in bonds generating interest income which could potentially subject individuals to alternative minimum tax. The issuers’ abilities to meet their obligations may be affected by economic and political developments in a specific state or region.

 

The preparation of 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 each Fund’s financial statements. Actual results could differ from those estimates.

 

In the normal course of business, the Funds enter into contracts that contain a variety of representations that provide general indemnifications. The Funds’ maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Funds that have not yet occurred.

 

In May 2011, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) to develop common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with Generally Accepted Accounting Principles (“GAAP”) and International Financial Reporting Standards (“IFRSs”). FASB concluded that the amendments in this ASU will improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with GAAP and IFRSs. The ASU is effective prospectively for interim or annual periods beginning on or after December 15, 2011. The Funds’ management is evaluating the implications of this change.

 

In December 2011, the FASB issued ASU No. 2011-11, “Disclosures About Offsetting Assets and Liabilities,” which requires enhanced disclosures that will enable users to evaluate the effect or potential effect of netting arrangements on an entity’s financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments. The amendments are effective for fiscal years beginning on or after January 1, 2013. The Funds are currently evaluating the effect that the guidance may have on their financial statements.

 

The following is a summary of significant accounting policies consistently followed by the Funds:

 

(a) Valuation of Investments

Portfolio securities and other financial instruments for which market quotations are readily available are stated at market value. Market value is generally determined on the basis of last reported sales prices, or if no sales are reported, on the basis of quotes obtained from a quotation reporting system, established market makers, or independent pricing services.

 

Portfolio securities and other financial instruments for which market quotations are not readily available, or for which a development/event occurs that may significantly impact the value of a security, are fair-valued, in good faith, pursuant to procedures established by the Board of Trustees, or persons acting at their discretion pursuant to procedures established

 

30   PIMCO Municipal Income Funds II Annual Report   5.31.12


Table of Contents

PIMCO Municipal Income Funds II Notes to Financial Statements

May 31, 2012

 

1. Organization and Significant Accounting Policies (continued)

 

by the Board of Trustees. The Funds’ investments are valued daily using prices supplied by an independent pricing service or dealer quotations, or by using the last sale price on the exchange that is the primary market for such securities, or the mean between the last quoted bid and ask price. Independent pricing services use information provided by market makers or estimates of market values obtained from yield data relating to investments or securities with similar characteristics. Exchange-traded futures are valued at the price determined by the relevant exchange. Short-term securities maturing in 60 days or less are valued at amortized cost, if their original term to maturity was 60 days or less, or by amortizing their value on the 61st day prior to maturity, if the original term to maturity exceeded 60 days.

 

The prices used by the Funds to value securities may differ from the value that would be realized if the securities were sold and these differences could be material to the Funds’ financial statements. Each Fund’s net asset value (“NAV”) is normally determined as of the close of regular trading (normally, 4:00 p.m. Eastern time) on the New York Stock Exchange (“NYSE”) on each day the NYSE is open for business.

 

(b) Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e. the “exit price”) in an orderly transaction between market participants. The three levels of the fair value hierarchy are described below:

 

   

Level 1 — quoted prices in active markets for identical investments that the Funds have the ability to access

   

Level 2 — valuations based on other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.) or quotes from inactive exchanges

   

Level 3 — valuations based on significant unobservable inputs (including the Funds' own assumptions in determining the fair value of investments)

 

An investment asset’s or liability’s level within the fair value hierarchy is based on the lowest level input, individually or in aggregate, that is significant to fair value measurement. The objective of fair value measurement remains the same even when there is a significant decrease in the volume and level of activity for an asset or liability and regardless of the valuation techniques used.

 

The valuation techniques used by the Funds to measure fair value during the year ended May 31, 2012 maximized the use of observable inputs and minimized the use of unobservable inputs.

 

The inputs or methodology used for valuing securities is not necessarily an indication of the risk associated with investing in those securities. The following are certain inputs and techniques that the Funds generally use to evaluate how to classify each major category of assets and liabilities for Level 2 and Level 3, in accordance with GAAP.

 

Municipal Bonds & Notes and Variable Rate Notes — Municipal bonds & notes and variable rate notes are valued by independent pricing services based on pricing models that take into account, among other factors, information received from market makers and broker-dealers, current trades, bid-want lists, offerings, market movements, the callability of the bond, state of issuance, benchmark yield curves, and bond or note insurance. To the extent that these inputs are observable, the values of municipal bonds & notes and variable rate notes are categorized as Level 2. To the extent that these inputs are unobservable, the values are categorized as Level 3.

 

The Funds’ policy is to recognize transfers between levels at the end of the reporting period.

 

5.31.12   PIMCO Municipal Income Funds II Annual Report     31   


Table of Contents

PIMCO Municipal Income Funds II Notes to Financial Statements

May 31, 2012

 

1. Organization and Significant Accounting Policies (continued)

 

 

A summary of the inputs used at May 31, 2012 in valuing each Fund’s assets and liabilities is listed below (refer to the Schedules of Investments and Note 5(a) for more detailed information on Investments in Securities and Other Financial Instruments):

 

Municipal II:        
     Level 1 –
Quoted Prices
    Level 2 –
Other Significant
Observable
Inputs
    Level 3 –
Significant
Unobservable
Inputs
    Value at
5/31/12
 
Investments in Securities – Assets        

Municipal Bonds & Notes

        —      $ 1,093,876,073             $ 1,093,876,073   

Variable Rate Notes

           23,745,189               23,745,189   
   
Total Investments in Securities – Assets          $ 1,117,621,262             $ 1,117,621,262   
   
Other Financial Instruments* – Liabilities        

Interest Rate Contracts

    $(203,238)                    $ (203,238
   
Total Investments     $(203,238)      $ 1,117,621,262             $ 1,117,418,024   
   
California Municipal II:        
     Level 1 –
Quoted Prices
    Level 2 –
Other Significant
Observable
Inputs
    Level 3 –
Significant
Unobservable
Inputs
    Value at
5/31/12
 
Investments in Securities – Assets        

California Municipal Bonds & Notes

           $405,479,801      $ 941,850        $406,421,651   

California Variable Rate Notes

           31,560,293               31,560,293   

Other Municipal Bonds & Notes

           30,202,020               30,202,020   
   
Total Investments            $467,242,114      $ 941,850        $468,183,964   
   
New York Municipal II:        
     Level 1 –
Quoted Prices
    Level 2 –
Other Significant
Observable
Inputs
    Level 3 –
Significant
Unobservable
Inputs
    Value at
5/31/12
 
Investments in Securities – Assets        

New York Municipal Bonds & Notes

           $191,694,834               $191,694,834   

Other Municipal Bonds & Notes

           13,605,469               13,605,469   

New York Variable Rate Notes

           6,148,500               6,148,500   
   

Total Investments in Securities – Assets

           $211,448,803               $211,448,803   
   

Other Financial Instruments* – Liabilities

       

Interest Rate Contracts

    $(40,648)                      $        (40,648
   
Total Investments     $(40,648)        $211,448,803               $211,408,155   
   

 

There were no significant transfers between Levels 1 and 2 during the year ended May 31, 2012.

 

*   Other financial instruments are futures contracts not reflected in the Schedules of Investments which are valued at the unrealized appreciation (depreciation) of the instrument.  

 

32   PIMCO Municipal Income Funds II Annual Report   5.31.12


Table of Contents

PIMCO Municipal Income Funds II Notes to Financial Statements

May 31, 2012

 

1. Organization and Significant Accounting Policies (continued)

 

 

A rollforward of fair value measurements using significant unobservable inputs (Level 3) for the year ended May 31, 2012, was as follows:

 

California Municipal II:                  
     Beginning
Balance
5/31/11
    Purchases     Sales     Accrued
Discounts
(Premiums)
    Net
Realized
Gain (Loss)
   

Net Change
in Unrealized
Appreciation/

Depreciation

    Transfers
into
Level 3**
    Transfers
out of
Level 3
    Ending
Balance
5/31/12
 

Investments in Securities –
Assets

                 

California Municipal Bonds & Notes

                                            $ 941,850             $ 941,850   
   
Total Investments                                             $ 941,850             $ 941,850   
   

 

**   Transferred out of Level 2 into Level 3 because sufficient observable inputs were not available.  

 

The net change in unrealized appreciation/depreciation of Level 3 investments which California Municipal II held at May 31, 2012, was $(41,291). Net change in unrealized appreciation/depreciation is reflected on the Statements of Operations.

 

(c) Investment Transactions and Investment Income

Investment transactions are accounted for on the trade date. Realized gains and losses on investments are determined on an identified cost basis. Interest income adjusted for the accretion of discount and amortization of premium is recorded on an accrual basis. Discounts or premiums on debt securities purchased are accreted or amortized, respectively, to interest income over the lives of the respective securities.

 

(d) Federal Income Taxes

The Funds intend to distribute all of their taxable income and to comply with the other requirements of Subchapter M of the U.S. Internal Revenue Code of 1986, as amended, applicable to regulated investment companies. Accordingly, no provision for U.S. federal income taxes is required.

 

Accounting for uncertainty in income taxes establishes for all entities, including pass-through entities such as the Funds, a minimum threshold for financial statement recognition of the benefit of positions taken in filing tax returns (including whether an entity is taxable in a particular jurisdiction), and requires certain expanded tax disclosures. The Funds’ management has determined that its evaluation has resulted in no material impact to the Funds’ financial statements at May 31, 2012. The Funds’ federal tax returns for the prior three years remain subject to examination by the Internal Revenue Service.

 

(e) Dividends and Distributions — Common Shares

The Funds declare dividends from net investment income monthly to common shareholders. Distributions of net realized capital gains, if any, are paid at least annually. The Funds record dividends and distributions to their respective 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 GAAP. 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 distributions exceed current and accumulated earnings and profits for federal income tax purposes, they are reported as taxable overdistributions and/or return of capital.

 

(f) Inverse Floating Rate Transactions — Residual Interest Municipal Bonds (“RIBs”)/Residual Interest Tax Exempt Bonds (“RITEs”)

The Funds invest in RIBs and RITEs (“Inverse Floaters”), whose interest rates bear an inverse relationship to the interest rate on another security or the value of an index. In inverse floating rate transactions, the Funds sell a fixed rate

 

5.31.12   PIMCO Municipal Income Funds II Annual Report     33   


Table of Contents

PIMCO Municipal Income Funds II Notes to Financial Statements

May 31, 2012

 

1. Organization and Significant Accounting Policies (continued)

 

municipal bond (“Fixed Rate Bond”) to a broker who places the Fixed Rate Bond in a special purpose trust (“Trust”) from which floating rate bonds (“Floating Rate Notes”) and Inverse Floaters are issued. The Funds simultaneously or within a short period of time, purchase the Inverse Floaters from the broker. The Inverse Floaters held by the Funds provide the Funds with the right to: (1) cause the holders of the Floating Rate Notes to tender their notes at par, and (2) cause the broker to transfer the Fixed-Rate Bond held by the Trust to the Funds, thereby collapsing the Trust. The Funds account for the transaction described above as a secured borrowing by including the Fixed Rate Bond in their Schedules of Investments, and account for the Floating Rate Notes as a liability under the caption “Payable for Floating Rate Notes issued” in the Funds’ Statements of Assets and Liabilities. The Floating Rate Notes have interest rates that generally reset weekly and their holders have the option to tender their notes to the broker for redemption at par at each reset date.

 

The Funds may also invest in Inverse Floaters without transferring a fixed rate municipal bond into a Trust, which are not accounted for as secured borrowings. The Funds may also invest in Inverse Floaters for the purpose of increasing leverage.

 

The Inverse Floaters are created by dividing the income stream provided by the underlying bonds to create two securities, one short-term and one long-term. The interest rate on the short-term component is reset by an index or auction process typically every 7 to 35 days. After income is paid on the short-term securities at current rates, the residual income from the underlying bond(s) goes to the long-term securities. Therefore, rising short-term rates result in lower income for the long-term component and vice versa. The longer-term bonds may be more volatile and less liquid than other municipal bonds of comparable maturity. Investments in Inverse Floaters typically will involve greater risk than in an investment in Fixed Rate Bonds.

 

The Funds’ restrictions on borrowings do not apply to the secured borrowings deemed to have occurred for accounting purposes. Inverse Floaters held by the Funds are exempt from registration under Rule 144A of the Securities Act of 1933.

 

In addition to general market risks, the Funds’ investments in Inverse Floaters may involve greater risk and volatility than an investment in a fixed rate bond, and the value of Inverse Floaters may decrease significantly when market interest rates increase. Inverse Floaters have varying degrees of liquidity, and the market for these securities may be volatile. These securities tend to underperform the market for fixed rate bonds in a rising interest rate environment, but tend to outperform the market for fixed rate bonds when interest rates decline or remain relatively stable. Although volatile, Inverse Floaters typically offer the potential for yields exceeding the yields available on fixed rate bonds with comparable credit quality, coupon, call provisions and maturity. Trusts in which Inverse Floaters may be held could be terminated due to market, credit or other events beyond the Funds’ control, which could require the Funds to reduce leverage and dispose of portfolio investments at inopportune times and prices.

 

(g) Restricted Securities

The Funds are permitted to invest in securities that are subject to legal or contractual restrictions on resale. These securities generally may be resold in transactions exempt from registration or to the public if the securities are registered. Disposal of these securities may involve time-consuming negotiations and expenses, and prompt sale at an acceptable price may be difficult.

 

(h) Custody Credits on Cash Balances

The Funds benefit from an expense offset arrangement with their custodian bank, whereby uninvested cash balances earn credits that reduce monthly custodian and accounting agent fees. Had these cash balances been invested in income-producing securities, they would have generated income for the Funds. Cash overdraft charges, if any, are included in custodian and accounting agent fees.

 

(i) Interest Expense

Interest expense primarily relates to the Funds’ participation in Floating Rate Notes held by third parties in conjunction with Inverse Floater transactions.

 

34   PIMCO Municipal Income Funds II Annual Report   5.31.12


Table of Contents

PIMCO Municipal Income Funds II Notes to Financial Statements

May 31, 2012

 

2. Principal Risks

 

In the normal course of business, the Funds trade financial instruments and enter into financial transactions where risk of potential loss exists due to, among other things, changes in the market (market risk) or failure of the other party to a transaction to perform (counterparty risk). The Funds are also exposed to other risks such as, but not limited to, interest rate, credit and leverage risks.

 

Interest rate risk is the risk that fixed income securities will decline in value because of changes in interest rates. As nominal interest rates rise, the values of certain fixed income securities held by the Funds are likely to decrease. A nominal interest rate can be described as the sum of a real interest rate and an expected inflation rate. Fixed income securities with longer durations tend to be more sensitive to changes in interest rates, usually making them more volatile than securities with shorter durations. Duration is used primarily as a measure of the sensitivity of a fixed income security’s market price to interest rate (i.e. yield) movements.

 

Variable and floating rate securities generally are less sensitive to interest rate changes but may decline in value if their interest rates do not rise as much, or as quickly, as interest rates in general. Conversely, floating rate securities will not generally increase in value if interest rates decline. Inverse floating rate securities may decrease in value if interest rates increase. Inverse floating rate securities may also exhibit greater price volatility than a fixed rate obligation with similar credit quality. When the Funds hold variable or floating rate securities, a decrease (or, in the case of inverse floating rate securities, an increase) in market interest rates will adversely affect the income received from such securities and the NAV of the Funds’ shares.

 

The Funds are exposed to credit risk, which is the risk of losing money if the issuer or guarantor of a fixed income security is unable or unwilling, or is perceived (whether by market participants, rating agencies, pricing services or otherwise) as unable or unwilling, to make timely principal and/or interest payments, or to otherwise honor its obligations. Securities are subject to varying degrees of credit risk, which are often reflected in credit ratings.

 

The market values of securities may decline due to general market conditions which are not specifically related to a particular company, such as real or perceived adverse economic conditions, changes in the general outlook for corporate earnings, changes in interest or currency rates or adverse investor sentiment. They may also decline due to factors that affect a particular industry or industries, such as labor shortages or increased production costs and competitive conditions within an industry. Equity securities and equity-related investments generally have greater market price volatility than fixed income securities.

 

The Funds are exposed to counterparty risk, or the risk that an institution or other entity with which the Funds have unsettled or open transactions will default. The potential loss to the Funds could exceed the value of the financial assets recorded in the Funds’ financial statements. Financial assets, which potentially expose the Funds to counterparty risk, consist principally of cash due from counterparties and investments. The Funds’ sub-adviser, Pacific Investment Management Company LLC (the “Sub-Adviser”), an affiliate of the Investment Manager, seeks to minimize the Funds' counterparty risk by performing reviews of each counterparty and by minimizing concentration of counterparty risk by undertaking transactions with multiple customers and counterparties on recognized and reputable exchanges. Delivery of securities sold is only made once the Funds have received payment. Payment is made on a purchase once the securities have been delivered by the counterparty. The trade will fail if either party fails to meet its obligation.

 

The Funds are exposed to risks associated with leverage. Leverage causes the value of the Funds’ shares to be more volatile than if the Funds did not use leverage. This is because leverage tends to exaggerate the effect of any increase or decrease in the value of the Funds’ portfolio securities. The Funds may engage in transactions or purchase instruments that give rise to forms of leverage. In addition, to the extent the Funds employ leverage, interest costs may not be recovered by any appreciation of the securities purchased with the leverage proceeds and could exceed the Funds' investment returns, resulting in greater losses.

 

The Funds are party to International Swaps and Derivatives Association, Inc. Master Agreements (“ISDA Master Agreements”) with select counterparties that govern transactions and over-the-counter derivatives entered into by the Funds and those counterparties. The ISDA Master Agreements contain provisions for general obligations, representations,

 

5.31.12   PIMCO Municipal Income Funds II Annual Report     35   


Table of Contents

PIMCO Municipal Income Funds II Notes to Financial Statements

May 31, 2012

 

2. Principal Risks (continued)

 

agreements, collateral and events of default or termination. Events of termination include conditions that may entitle counterparties to elect to terminate early and cause settlement of all outstanding transactions under the applicable ISDA Master Agreement. Any election to terminate early could be material to the financial statements of the Funds.

 

3. Financial Derivative Instruments

Disclosure about derivatives and hedging activities requires qualitative disclosure regarding objectives and strategies for using derivatives, quantitative disclosure about fair value amounts of gains and losses on derivatives, and disclosure about credit-risk-related contingent features in derivative agreements. The disclosure requirements distinguish between derivatives, which are accounted for as “hedges”, and those that do not qualify for such accounting. Although the Funds sometimes use derivatives for hedging purposes, the Funds reflect derivatives at fair value and recognize changes in fair value through the Funds’ Statements of Operations, and such derivatives do not qualify for hedge accounting treatment.

 

(a) Futures Contracts

The Funds use futures contracts to manage their exposure to movements in interest rates. A futures contract is an agreement between two parties to buy and sell a financial instrument at a set price on a future date. Upon entering into such a contract, the Funds are required to pledge to the broker an amount of cash or securities equal to the minimum “initial margin” requirements of the exchange. Pursuant to the contracts, the Funds agree to receive from or pay to the broker an amount of cash or securities equal to the daily fluctuation in the value of the contracts. Such receipts or payments are known as “variation margin” and are recorded by the Funds as unrealized appreciation or depreciation. When the contracts are closed, the Funds record a realized gain or loss equal to the difference between the value of the contracts at the time they were opened and the value at the time they were closed. Any unrealized appreciation or depreciation recorded is simultaneously reversed. The use of futures transactions involves various risks, including the risk of an imperfect correlation in the movements in the price of futures contracts, interest rates, and possibly inability or unwillingness of counterparties to meet the terms of their contracts.

 

(b) Swap Agreements

Swap agreements are bilaterally negotiated agreements between the Funds and a counterparty to exchange or swap investment cash flows, assets, foreign currencies or market-linked returns at specified, future intervals. Swap agreements are privately negotiated in the over-the-counter market (“OTC swaps”) and may be executed in a multilateral or other trade facility platform, such as a registered commodities exchange (“centrally cleared swaps”). The Funds enter into credit default, cross-currency, interest rate, total return, variance and other forms of swap agreements in order to manage their exposure to credit, currency and interest rate risk. In connection with these agreements, securities may be identified as collateral in accordance with the terms of the respective swap agreements to provide assets of value and recourse in the event of default or bankruptcy/insolvency.

 

OTC swap payments received or made at the beginning of the measurement period are reflected as such on the Funds’ Statements of Assets and Liabilities and represent payments made or received upon entering into the swap agreement to compensate for differences between the stated terms of the swap agreement and prevailing market conditions (credit spreads, currency exchange rates, interest rates, and other relevant factors). These upfront payments are recorded as realized gains or losses on the Funds' Statements of Operations upon termination or maturity of the swap. A liquidation payment received or made at the termination of the swap is recorded as realized gain or loss on the Funds' Statements of Operations. Net periodic payments received or paid by the Funds are included as part of realized gains or losses on the Funds' Statements of Operations. Changes in market value, if any, are reflected as a component of net changes in unrealized appreciation/depreciation on the Funds’ Statements of Operations. Daily changes in valuation of centrally cleared swaps, if any, are recorded as a receivable or payable for variation margin on centrally cleared swaps on the Funds’ Statements of Assets and Liabilities.

 

Entering into these agreements involves, to varying degrees, elements of credit, legal, market and documentation risk in excess of the amounts recognized on the Funds’ Statements of Assets and Liabilities. Such risks include the possibility that there will be no liquid market for these agreements, that the counterparties to the agreements may default on their

 

36   PIMCO Municipal Income Funds II Annual Report   5.31.12


Table of Contents

PIMCO Municipal Income Funds II Notes to Financial Statements

May 31, 2012

 

3. Financial Derivative Instruments (continued)

 

obligation to perform or disagree as to the meaning of contractual terms in the agreements and that there may be unfavorable changes in interest rates.

 

Interest Rate Swap Agreements — Interest rate swap agreements involve the exchange by the Funds with a counterparty of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments, with respect to the notional amount of principal. Certain forms of interest rate swap agreements may include: (i) interest rate caps, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates exceed a specified rate, or “cap”, (ii) interest rate floors, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates fall below a specified rate, or “floor”, (iii) interest rate collars, under which a party sells a cap and purchases a floor or vice versa in an attempt to protect itself against interest rate movements exceeding given minimum or maximum levels, (iv) callable interest rate swaps, under which the counterparty may terminate the swap transaction in whole at zero cost by a predetermined date and time prior to the maturity date, (v) spreadlocks, which allow the interest rate swap users to lock in the forward differential (or spread) between the interest rate swap rate and a specified benchmark, or (vi) basis swaps, under which two parties can exchange variable interest rates based on different money markets.

At May 31, 2012 there were no open interest rate swap agreements held by the Funds.

 

The following is a summary of the fair valuation of the Funds’ derivatives categorized by risk exposure.

 

The effect of derivatives on the Funds’ Statements of Assets and Liabilities at May 31, 2012:

 

Municipal II:  
Location   Interest Rate
Contracts
 
Liability derivatives:  

Payable for variation margin on futures contracts*

  $ (62,500
 

 

 

 

 

New York Municipal II:  
Location   Interest Rate
Contracts
 
Liability derivatives:  

Payable for variation margin on futures contracts*

  $ (12,500
 

 

 

 

 

*   Included in the net unrealized depreciation of $203,238 and $40,648 on futures contracts, for Municipal II and New York Municipal II, respectively, as reported in section 5(a) of the Notes to Financial Statements.  

 

The effect of derivatives on the Statements of Operations for the year ended May 31, 2012:

 

Municipal II:  
Location   Interest Rate
Contracts
 
Net realized loss on:  

Futures contracts

  $ (682,246

Swaps

    (18,499,216
 

 

 

 
Total net realized loss   $ (19,181,462
 

 

 

 
Net change in unrealized appreciation/depreciation of:  

Futures contracts

  $ (203,238

Swaps

    6,850,035   
 

 

 

 
Total net change in unrealized appreciation/depreciation   $ 6,646,797   
 

 

 

 

 

5.31.12   PIMCO Municipal Income Funds II Annual Report     37   


Table of Contents

PIMCO Municipal Income Funds II Notes to Financial Statements

May 31, 2012

 

3. Financial Derivative Instruments (continued)

 

California Municipal II:  
Location   Interest Rate
Contracts
 
Net realized gain (loss) on:  

Futures contracts

  $ 224,084   

Swaps

    (11,575,152
 

 

 

 
Total net realized gain (loss)   $ (11,351,068
 

 

 

 
Net change in unrealized appreciation/depreciation of:  

Swaps

  $ 4,176,010   
 

 

 

 

 

New York Municipal II:  
Location   Interest Rate
Contracts
 
Net realized loss on:  

Futures contracts

  $ (139,728

Swaps

    (3,804,214
 

 

 

 
Total net realized loss   $ (3,943,942
 

 

 

 
Net change in unrealized appreciation/depreciation of:  

Futures contracts

  $ (40,648

Swaps

    1,153,882   
 

 

 

 
Total net change in unrealized appreciation/depreciation   $ 1,113,234   
 

 

 

 

 

The average volume of derivative activity (measured at each fiscal quarter-end) during the year ended May 31, 2012:

 

     Futures
Contracts
Short  (1)
    Interest Rate
Swap
Agreements  (2)
 

Municipal II

    (20   $ 23,640   

California Municipal II

           15,980   

New York Municipal II

    (4     4,860   

 

(1)   

Number of contracts

 
(2)   

Notional amount (in thousands)

 

 

4. Investment Manager/Sub-Adviser

Each Fund has an Investment Management Agreement (each an ‘‘Agreement’’) with the Investment Manager. Subject to the supervision of the Funds’ Board of Trustees, the Investment Manager is responsible for managing, either directly or through others selected by it, the Funds’ investment activities, business affairs and administrative matters. Pursuant to each Agreement, the Investment Manager receives an annual fee, payable monthly, at an annual rate of 0.65% of each Fund’s average daily net assets inclusive of net assets attributable to any Preferred Shares that were outstanding. The Investment Manager has voluntarily agreed to waive a portion of its fee for each Fund at the annual rate of 0.05% of each Fund’s average daily net assets, inclusive of net assets attributable to any Preferred Shares that were outstanding, for the period from July 1, 2011 through June 30, 2012. For the year ended May 31, 2012, each Fund paid investment management fees at an annualized effective rate of 0.60% of each Fund’s average daily net assets, inclusive of net assets attributable to any Preferred Shares that were outstanding.

 

The Investment Manager has retained the Sub-Adviser to manage the Funds’ investments. Subject to the supervision of the Investment Manager, the Sub-Adviser is responsible for making all of the Funds’ investment decisions. The Investment Manager, and not the Funds, pays a portion of the fees it receives as Investment Manager to the Sub-Adviser in return for its services.

 

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Table of Contents

PIMCO Municipal Income Funds II Notes to Financial Statements

May 31, 2012

 

5. Investments in Securities

 

 

For the year ended May 31, 2012, purchases and sales of investments, other than short-term securities and U.S. government obligations, were as follows:

 

     Purchases     Sales  

Municipal II

  $ 277,223,281      $ 335,035,595   

California Municipal II

    114,295,595        136,932,913   

New York Municipal II

    35,900,722        41,602,114   

 

(a) Futures contracts outstanding at May 31, 2012:

 

Municipal II:

       
     Type   Contracts     Market
Value
(000s)
    Expiration
Date
    Unrealized
Depreciation
 
Short:   30-Year U.S. Treasury Bond Futures     (100   $ (14,972     9/19/12      $ (203,238
         

 

 

 

New York Municipal II:

       
     Type   Contracts     Market
Value
(000s)
    Expiration
Date
    Unrealized
Depreciation
 
Short:   30-Year U.S. Treasury Bond Futures     (20   $ (2,994     9/19/12      $ (40,648
         

 

 

 

 

At May 31, 2012 Municipal II and New York Municipal II pledged $296,000 and $56,000, respectively, in cash as collateral for futures contracts.

 

(b) Floating Rate Notes:

 

The weighted average daily balance of Floating Rate Notes outstanding during the year ended May 31, 2012 for Municipal II, California Municipal II and New York Municipal II was $67,992,836, $44,418,877 and $13,851,894 at a weighted average interest rate, including fees, of 0.79%, 1.13% and 0.81%, respectively.

 

6. Income Tax Information

For the year ended May 31, 2012, the tax character of dividends paid by the Funds was:

 

    

Ordinary

Income

Distributions

   

Tax

Exempt

Income

    Return of
Capital
 

Municipal II

  $ 465,597      $ 47,581,111          

California Municipal II

    705,738        21,734,370      $ 1,522,981   

New York Municipal II

    51,714        8,759,444          

 

For the year ended May 31, 2011, the tax character of dividends paid by the Funds was:

 

    

Ordinary

Income

   

Tax

Exempt

Income

 

Municipal II

  $ 429,923      $ 48,021,982   

California Municipal II

    2,182,891        21,958,863   

New York Municipal II

    623,161        8,283,506   

 

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Table of Contents

PIMCO Municipal Income Funds II Notes to Financial Statements

May 31, 2012

 

6. Income Tax Information (continued)

 

 

At May 31, 2012, the components of distributable earnings was:

 

    

Tax

Exempt

Income

   

Capital Loss
Carryforwards(1)

    Post-October Capital  Loss(2)  
      Short-Term     Long-Term  

Municipal II

  $ 20,835,879      $ 250,645,615                 

California Municipal II

           208,408,327                 

New York Municipal II

    2,232,908        49,401,699      $ 115,788          

 

(1)   

Capital loss carryforwards available as a reduction, to the extent provided in the regulations, of any future net realized gains. To the extent that these losses are used to offset future realized capital gains, such gains will not be disbursed.

 
(2)   

Capital losses realized during the period November 1, 2011 through May 31, 2012 which the Funds elected to defer to the following taxable year pursuant to income tax regulations.

 

 

Under the Regulated Investment Company Modernization Act of 2010 (the “Act”), the Funds will be permitted to carry forward capital losses incurred in taxable years beginning after December 22, 2010, for an unlimited period. However, any losses incurred in those future taxable years will be required to be utilized prior to the losses incurred in pre-enactment taxable years. As a result of this, pre-enactment capital loss carryforwards may be more likely to expire unused. Additionally, post-enactment capital losses that are carried forward will retain their character as either short-term or long-term capital losses rather than being considered all short-term capital losses.

 

At May 31, 2012, the Funds had capital loss carryforward amounts as follows:

 

                                        No Expiration(3)  
     2013     2014     2015     2016     2017     2018     Short-Term     Long-Term  

Municipal II

  $ 49,108,685      $ 4,473,237      $ 7,912,932             $ 7,955,461      $ 164,801,603      $ 16,393,697          

California Municipal II

    16,328,922               5,531,398      $ 4,849,597        18,401,113        157,995,404        5,301,893          

New York Municipal II

    5,755,677               51,848        1,171,157        2,961,908        34,379,048        4,277,271      $ 804,790   

 

(3)   

Carryforward amounts are subject to the provisions of the Act.

 

 

For the year ended May 31, 2012, the Funds had capital loss carryforwards which were utilized and/or expired as follows:

 

     Expired  

Municipal II

      

California Municipal II

  $ 2,776,153   

New York Municipal II

    172,581   

 

For the year ended May 31, 2012, permanent “book-tax” adjustments were as follows:

 

    

Undistributed

(Distributions in

Excess of) Net

Investments

Income

   

Accumulated

Net Realized Gain

(Loss)

   

Paid-In

Capital In

Excess

of Par

 

Municipal II (a)

  $ (2,507   $ 2,507          

California Municipal II (b)

           2,776,153      $ (2,776,153

New York Municipal II (a)(b)

    (10,534     183,115        (172,581

 

These permanent “book-tax” differences were primarily attributable to:

 

(a)   Differing treatment of Inverse Floaters  
(b)   Expiring Capital Loss Carryforwards  

 

Net investment income, net realized gains or losses and net assets were not affected by these adjustments.

 

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Table of Contents

PIMCO Municipal Income Funds II Notes to Financial Statements

May 31, 2012

 

6. Income Tax Information (continued)

 

 

The cost basis of investments for federal income tax purposes and gross unrealized appreciation and gross unrealized depreciation of investments at May 31, 2012 were:

 

     Cost of
Investments
    Gross
Unrealized
Appreciation
    Gross
Unrealized
Depreciation
    Net
Unrealized
Appreciation
 

Municipal II

  $ 972,449,002      $ 106,278,678      $ 10,684,546      $ 95,594,132   

California Municipal II

    372,797,023        54,571,513        696,067        53,875,446   

New York Municipal II

    179,401,438        19,195,032        1,273,235        17,921,797   

 

Differences between book and tax cost basis were primarily attributable to Inverse Floater transactions.

 

7. Auction-Rate Preferred Shares

Municipal II has 2,936 shares of Preferred Shares Series A, 2,936 shares of Preferred Shares Series B, 2,936 shares of Preferred Shares Series C, 2,936 shares of Preferred Shares Series D and 2,936 shares of Preferred Shares Series E outstanding, each with a liquidation preference value of $25,000 per share plus any accumulated, unpaid dividends.

 

California Municipal II has 1,304 shares of Preferred Shares Series A, 1,304 shares of Preferred Shares Series B, 1,304 shares of Preferred Shares Series C, 1,304 shares of Preferred Shares Series D and 1,304 shares of Preferred Shares Series E outstanding, each with a liquidation preference value of $25,000 per share plus any accumulated, unpaid dividends.

 

New York Municipal II has 1,580 shares of Preferred Shares Series A and 1,580 shares of Preferred Shares Series B outstanding, each with a liquidation preference value of $25,000 per share plus any accumulated, unpaid dividends.

 

Dividends are accumulated daily at an annual rate (typically re-set every seven days) through auction procedures (or through default procedures in the event of auction failure). Distributions of net realized capital gains, if any, are paid annually.

 

For the year ended May 31, 2012, the annualized dividend rates for each Fund ranged from:

 

     High     Low     At
May 31, 2012
 

Municipal II:

     

Series A

    0.381     0.107     0.320

Series B

    0.381     0.107     0.289

Series C

    0.396     0.107     0.289

Series D

    0.396     0.107     0.320

Series E

    0.396     0.107     0.320

California Municipal II:

     

Series A

    0.381     0.107     0.320

Series B

    0.381     0.107     0.289

Series C

    0.396     0.110     0.289

Series D

    0.396     0.107     0.320

Series E

    0.396     0.107     0.320

New York Municipal II:

     

Series A

    0.396     0.107     0.289

Series B

    0.396     0.107     0.320

 

5.31.12   PIMCO Municipal Income Funds II Annual Report     41   


Table of Contents

PIMCO Municipal Income Funds II Notes to Financial Statements

May 31, 2012

 

7. Auction-Rate Preferred Shares (continued)

 

 

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 or paying any dividends or distributions to common shareholders or repurchasing common shares and/or could trigger the mandatory redemption of Preferred Shares at their liquidation preference value plus any accumulated, unpaid dividends.

 

Preferred shareholders, who are entitled to one vote per share, generally vote together with the common shareholders but vote separately as a class to elect two Trustees and on any matters affecting the rights of the Preferred Shares.

 

Since mid-February 2008, holders of auction-rate preferred shares (“ARPS”) issued by the Funds have been directly impacted by an unprecedented lack of liquidity, which has similarly affected ARPS holders in many of the nation’s closed-end funds. Since then, regularly scheduled auctions for ARPS issued by the Funds have consistently “failed” because of insufficient demand (bids to buy shares) to meet the supply (shares offered for sale) at each auction. In a failed auction, ARPS holders cannot sell all, and may not be able to sell any, of their shares tendered for sale. While repeated auction failures have affected the liquidity for ARPS, they do not constitute a default or automatically alter the credit quality of the ARPS, and the ARPS holders have continued to receive dividends at the defined “maximum rate” equal to the higher of the 30-day “AA” Composite Commercial Paper Rate multiplied by 110% or the Taxable Equivalent of the Short-Term Municipal Obligations Rate-defined as 90% of the quotient of (A) the per annum rate expressed on an interest equivalent basis equal to the Kenny S&P 30-day High Grade Index divided by (B) 1.00 minus the Marginal Tax Rate (expressed as a decimal) multiplied by 110% (which is a function of short-term interest rates and typically higher than the rate that would have otherwise been set through a successful auction). If the Funds' ARPS auctions continue to fail and the “maximum rate” payable on the ARPS rises as a result of changes in short-term interest rates, returns for the Funds' common shareholders could be adversely affected.

 

8. Subsequent Events

On June 1, 2012, the following dividends were declared to common shareholders payable July 2, 2012 to shareholders of record on June 11, 2012:

 

Municipal II

     $0.065 per common share

California Municipal II

     $0.0625 per common share

New York Municipal II

     $0.06625 per common share

 

On July 2, 2012, the following dividends were declared to common shareholders payable August 1, 2012 to shareholders of record on July 12, 2012:

 

Municipal II

     $0.065 per common share

California Municipal II

     $0.0625 per common share

New York Municipal II

     $0.06625 per common share

 

On July 12, 2012, Moody’s Investors Service downgraded its rating of each series of each of the Funds’ Preferred Shares from Aaa to Aa2.

 

There were no other events that require recognition or disclosure. In preparing these financial statements the Funds’ management has evaluated events and transactions for potential recognition or disclosure through the date the financial statements were issued.

 

42   PIMCO Municipal Income Funds II Annual Report   5.31.12


Table of Contents

PIMCO Municipal Income Fund II Financial Highlights

For a common share outstanding throughout each year: