<PAGE>
P I M C O
A CLOSED-END FUND SPECIALIZING IN INVESTMENTS IN COMMERCIAL MORTGAGE-BACKED
SECURITIES
[THREE PHOTOGRAPHS APPEAR HERE]
PIMCO Commercial Mortgage Securities Trust, Inc.
June 30, 1997
Semi-Annual Report
<PAGE>
Pacific Investment Management Company is responsible for the management and
administration of the PIMCO Commercial Mortgage Securities Trust, Inc. (the
"Fund"). Founded in 1971, Pacific Investment currently manages more than $99
billion on behalf of mutual fund and institutional clients located around the
world. Renowned for its fixed income management expertise, Pacific Investment
manages assets for approximately 30% of the 200 largest U.S. pension funds.
Pacific Investment is one of six investment advisory firms which form PIMCO
Advisors L.P., the nation's fourth largest publicly traded investment management
concern with combined assets under management in excess of $119 billion. Widely
recognized for providing consistent performance and high-quality client service,
the six affiliated firms are:
Pacific Investment Management Company/Newport Beach, California
Columbus Circle Investors/Stamford, Connecticut
Cadence Capital Management/Boston, Massachusetts
NFJ Investment Group/Dallas, Texas
Parametric Portfolio Associates/Seattle, Washington
Blairlogie Capital Management/Edinburgh, Scotland
Units of PIMCO Advisors L.P. trade on the New York Stock Exchange under the
ticker symbol "PA".
<PAGE>
Letter to our
Shareholders
I am pleased to report that the Fund weathered the up-and-down first half of
1997 in good fashion, delivering strong relative investment performance and
consistent dividend income to investors. The Fund has paid a quarterly dividend
of $0.28125 per share ($1.125 annually) since early 1994. In addition, a special
dividend of $0.05 per share was paid in June and December of 1996. I believe
that this consistency of return is attributable to the sound fundamental
investment process employed by the Fund's investment manager, Pacific Investment
Management, which emphasizes careful research by a seasoned investment team. I
have also been gratified to observe that trading has been active in the Fund's
shares, helping to shrink the Fund's trading discount to its lowest level in
more than three years, at just over one percent.
In the following pages, a conversation with the Fund's portfolio manager,
Benjamin Trosky, will highlight some of the specific items that boosted Fund
performance and created a favorable environment for commercial mortgage-backed
securities. Please take the time to review his comments and the portfolio
information presented later in the report. As always, we welcome your questions
and comments regarding the Fund.
Sincerely,
/s/ Brent R. Harris
Brent R. Harris
Chairman of the Board
August 8, 1997
1
<PAGE>
About the Fund
Launched in September 1993, PIMCO Commercial Mortgage Securities Trust, Inc. is
unique in that it is the only closed-end fund that invests primarily in
commercial mortgage-backed securities. Commercial mortgage-backed securities
are fixed income instruments representing an interest in mortgage loans on
commercial real estate properties, such as office buildings, shopping malls,
hotels, apartment buildings, nursing homes, and industrial properties.
The Fund's primary investment objective is to achieve high current income.
Pacific Investment Management Company believes that yields on commercial
mortgage-backed securities are, and will continue to be for the foreseeable
future, higher than yields on corporate debt securities of comparable credit
ratings and maturities. Capital gain from the disposition of investments is a
secondary objective of the Fund.
Unlike an open-end fund, whose shares are bought and sold at their net asset
value ("NAV"), shares of most closed-end funds, including the Fund, are listed
on a stock exchange where they trade at market value. Closing market prices for
the Fund's shares are published in the New York Stock Exchange Composite
Transaction Section of newspapers each day. The Fund's NYSE trading symbol is
"PCM". Comparative NAV and market price information about the Fund is published
each Monday in The Wall Street Journal and each Saturday in The New York Times
and Barron's in a table titled "Closed-End Funds."
The Fund's Dividend Reinvestment Plan (the "Plan") provides automatic
reinvestment of dividend and capital gains distributions in additional shares of
the Fund. If your shares are registered in your own name, you are already
enrolled in the Plan unless you have elected otherwise. Shareholders whose
shares are held in the name of a broker or nominee should contact their broker
or nominee to request participation in the Plan. All distributions to
shareholders who elect not to participate in the Plan will be paid by check
mailed directly to the record holder of shares. For a copy of the Plan Brochure,
please call 800-213-3606.
The Fund issues a quarterly press release summarizing investment performance and
portfolio statistics. Should you wish to receive a copy, please call 800-213-
3606 to be placed on the Fund's mailing list.
2
<PAGE>
Questions & Answers with Ben Trosky
Benjamin Trosky, a PIMCO Managing Director and fixed income portfolio manager,
has managed the PIMCO Commercial Mortgage Securities Trust, Inc. since its
inception in September of 1993. Ben is a Chartered Financial Analyst with over
17 years of investment experience, the past seven of which have been spent at
PIMCO as head of the firm's credit research team. In addition to his work on the
Fund, Ben oversees the use of commercial mortgage-backed securities and high
yield bonds in PIMCO's privately managed and mutual fund portfolios. The
following questions and answers are from a recent conversation with Ben.
The first six months of 1997 was an up and down period for bonds. What were the
primary factors driving bond market performance?
The first two quarters of 1997 were distinctly different for the fixed income
markets. After beginning the year on a strong note supported by a favorable
inflation outlook, bonds tumbled in the wake of strong economic growth and the
warnings of Federal Reserve Chairman, Alan Greenspan, that the Fed would not
hesitate to tighten short-term interest rates, even absent signs of current
inflation. As strong growth statistics continued to pour in, the Fed followed
through on its warning and boosted short-term rates in late March.
The second quarter saw inflation remain restrained, and as investors grew
confident that economic growth was slowing, buyers returned to the market
pushing bond prices higher and yields down. The Producer Price Index actually
fell during the period led by lower commodity prices, signaling a likelihood
that future finished goods prices would not surge higher. This outlook was
supported by only modest increases in wage and benefit costs, the other major
component of finished good prices.
Movements of U.S. Treasury Yields, Core PPI and Core CPI during the Past Twelve
Months
<TABLE>
<CAPTION>
Measurement Period YOY % CHG MONTH END YOY % CHG
(Fiscal Year Covered) PPI TOTAL 30 YEAR YIELD CORE CPI
- --------------------- ---------- ------------- ---------
<S> <C> <C> <C>
Measurement Pt- 100 100 100
FYE 6/96 2.66 6.87 2.67
FYE 7/96 2.58 6.97 2.72
FYE 8/96 2.90 7.12 2.59
FYE 9/96 2.96 6.92 2.65
FYE 10/96 3.19 6.64 2.52
FYE 11/96 3.03 6.35 2.64
FYE 12/96 2.93 6.64 2.63
FYE 1/97 2.47 6.79 2.50
FYE 2/97 2.24 6.80 2.50
FYE 3/97 1.53 7.10 2.49
FYE 4/97 0.69 6.96 2.61
FYE 5/97 0.23 6.91 2.54
FYE 6/97 0.00 6.78 2.48
</TABLE>
* Excluding food and energy prices
3
<PAGE>
How did these factors influence valuations in the CMBS market?
Continued economic expansion has provided a solid fundamental underpinning to
commercial real estate assets, and thus the creditworthiness of CMBS. The
combination of solid credit fundamentals, reasonable prepayment protection when
compared to residential mortgages and above average yield spreads has attracted
significant investor interest in the sector. Increased money flows into CMBS
have pushed yield spreads narrower versus Treasuries, resulting in continued
outperformance relative to most other fixed income asset classes.
- --------------------------------------------------------------------------------
Growth of $10,000 Net Investment in the Fund
- --------------------------------------------------------------------------------
PERFORMANCE GRAPH APPEARS HERE
<TABLE>
<CAPTION>
Lehman Brothers
Measurement Period Net Asset NYSE Market Aggregate
(Month) Value Value Bond Index
- ------------------- ---------- ----------- ---------------
<S> <C> <C> <C>
Measurement Pt- 8/31/93 $10,000.00 $10,000.00 $10,000.00
9/30/93 $ 9,992.83 $10,000.00 $10,027.47
10/31/93 $10,014.34 $10,483.87 $10,064.94
11/30/93 $10,021.51 $ 9,767.03 $ 9,979.32
12/31/93 $10,043.01 $ 9,946.24 $10,033.40
1/31/94 $10,130.60 $ 9,672.49 $10,168.87
2/28/94 $ 9,970.02 $ 9,398.74 $ 9,992.20
3/31/94 $ 9,897.95 $ 9,421.55 $ 9,745.85
4/30/94 $ 9,786.15 $ 8,955.14 $ 9,668.03
5/31/94 $ 9,853.23 $ 9,328.27 $ 9,666.67
6/30/94 $ 9,801.99 $ 9,165.02 $ 9,645.31
7/31/94 $ 9,893.38 $ 9,260.49 $ 9,836.90
8/31/94 $10,022.86 $ 9,546.90 $ 9,849.10
9/30/94 $ 9,916.23 $ 9,666.23 $ 9,704.14
10/31/94 $ 9,802.94 $ 8,982.76 $ 9,695.50
11/30/94 $ 9,779.58 $ 8,689.85 $ 9,673.96
12/31/94 $ 9,881.78 $ 8,909.53 $ 9,740.76
1/31/95 $10,067.91 $ 9,284.94 $ 9,933.54
2/28/95 $10,407.85 $ 9,663.40 $10,169.72
3/31/95 $10,515.93 $ 9,739.69 $10,232.11
4/30/95 $10,738.74 $10,124.15 $10,375.04
5/31/95 $11,143.49 $10,408.25 $10,776.52
6/30/95 $11,245.64 $10,798.55 $10,855.53
7/31/95 $11,165.64 $10,667.50 $10,831.28
8/31/95 $11,285.96 $10,852.34 $10,962.00
9/30/95 $11,407.12 $10,400.16 $11,068.65
10/31/95 $11,630.98 $10,802.22 $11,212.59
11/30/95 $11,770.92 $10,775.22 $11,380.61
12/31/95 $11,989.26 $10,856.85 $11,540.33
1/31/96 $12,122.44 $11,377.76 $11,616.96
2/29/96 $11,942.57 $11,681.53 $11,415.03
3/31/96 $11,796.58 $11,375.59 $11,335.68
4/30/96 $11,844.11 $11,179.46 $11,271.94
5/31/96 $11,856.36 $11,038.30 $11,249.05
6/30/96 $11,931.47 $11,123.65 $11,400.11
7/31/96 $12,133.56 $11,714.24 $11,431.31
8/31/96 $12,219.16 $11,917.21 $11,412.15
9/30/96 $12,378.91 $11,771.16 $11,611.03
10/31/96 $12,697.17 $12,153.72 $11,868.23
11/30/96 $12,989.67 $12,420.51 $12,071.51
12/31/96 $13,002.57 $12,438.43 $11,959.28
1/31/97 $12,968.19 $12,770.52 $11,995.90
2/28/97 $13,143.66 $12.618.49 $12,025.74
3/31/97 $13,099.19 $12,894.14 $11,892.47
4/30/97 $13,286.77 $13,048.37 $12,070.50
5/31/97 $13,553.63 $13,141.58 $12,184.60
6/30/97 $13,694.71 $13,798.66 $12,329.22
</TABLE>
The line graph depicts the value of a net $10,000 investment made at the Fund's
inception on September 2, 1993 and held through June 30, 1997, compared to the
Lehman Brothers Aggregate Bond Index, an unmanaged market index. Investment
performance assumes the reinvestment of dividends and capital gains
distributions, if any. The PCM NYSE Market Value performance does not reflect
the effect of sales loads or broker commissions. The performance data quoted
represents past performance. Investment return and share value will fluctuate so
that Fund shares, when sold, may be worth more or less than their original cost.
Of course, the proof is in the numbers, and I am pleased to report
that the Fund performed well in the first half of 1997. Measured either by its
New York Stock Exchange share price or the net asset value of its investment
portfolio, the Fund's returns were significantly ahead of the broad fixed income
market as measured by the Lehman Brothers Aggregate Bond Index. Share price
performance has been particularly strong over the past six months as the Fund's
trading discount has narrowed considerably from 6.1% at the end of 1996 to 1.2%
on June 30.
<TABLE>
<CAPTION>
Investment Performance For the Periods Ended 6/30/97
Since
Inception
6 months 1 Year 3 Years* 9/2/93*
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fund Net Asset Value 5.32% 14.78% 11.79% 8.56%
Fund NYSE Market Value 10.94% 24.05% 14.61% 8.78%
Lehman Brothers Aggregate
Bond Index 3.09% 8.15% 8.53% 5.61%
</TABLE>
* Average annual total return
4
<PAGE>
Can you talk about some specific recent success stories that contributed to the
Fund's strong investment performance?
One of our original premises when we conceived the idea for the Fund in 1993,
was that the rating agencies were evaluating many CMBS issues using more
stringent standards than for corporate bonds receiving equivalent ratings. At
that time we believed that our skills and experience evaluating both mortgage
securities and corporate credits would allow us to identify securities with
underlying credit fundamentals that might justify future upgrades. Over the
nearly four years since the Fund was created, this premise has been proved right
as evidenced by a number of ratings upgrades.
Since the beginning of the year, six different portfolio holdings were
upgraded. The most significant upgrade was an increase from BB to BBB on a
Lennar Series 94-01 holding. Because a number of investors are prohibited from
purchasing below investment grade securities (BB or lower), an upgrade to an
investment grade rating (BBB or higher) is especially significant. As of the end
of June, for example, the average yield spread gain in moving from BB to BBB was
approximately 1%.
We frequently receive calls from investors who want to know how rising or
falling interest rates impact the Fund, particularly its yield. Since 1997's
first half featured periods of both, explain how rate changes affect the Fund.
As a fixed income vehicle, CMBS are sensitive to changes in interest rates both
up and down. During periods of falling interest rates, CMBS prices increase and
they tend to outperform residential mortgage-backed securities due to better
prepayment protection. Unlike a residential mortgage which can be prepaid by a
homeowner at any time without penalty, many commercial mortgages carry
significant financial penalties for early payment. Conversely, rising interest
rates have the opposite effect on CMBS values, and securities prices typically
decline as interest rates increase.
5
<PAGE>
How would your response change if either dramatically lower or higher rates
prevailed for a longer period of time?
As noted in my prior response, while CMBS often offer reasonable prepayment
protection compared to residential mortgages, they do experience periodic
maturities and regular monthly or quarterly retirement of a portion of their
principal balance. Prolonged periods of low interest rates result in the Fund
reinvesting these principal proceeds at lower rates and can thus, over time,
lower the Fund's ability to generate income. Likewise, periods of higher
interest rates provide an opportunity to reinvest at higher rates which can
boost the Fund's income.
Comparative Changes in Yield Spreads Over 7- to 10-Year Treasuries
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Measurement Period RATING RATING
(Spreads in basis points) AA BBB
- ------------------------- ------ ------
<S> <C> <C>
CMBS
6/30/96 105 165
9/30/96 85 140
12/31/96 80 115
3/31/97 72 100
6/30/97 67 86
CORPORATE BONDS
6/30/96 40 90
9/30/96 46 93
12/31/96 40 88
3/31/97 46 85
6/30/97 40 75
</TABLE>
The business press has focused attention on how the long running economic
expansion has helped drive yield spreads on corporate bonds to historically
narrow levels. How have narrowing yield spreads similarly affected CMBS?
Yield spreads offered by CMBS have indeed continued to narrow. While yield
premiums versus corporate bonds remain positive, the spread between CMBS and
comparably rated corporate bonds are at the narrowest levels we have seen since
the Fund's inception. Given the superior collateral protection offered by CMBS,
we continue to view the sector as offering attractive relative value for income
investors, although the process of identifying favorably priced issues has grown
more challenging.
[BAR GRAPH APPEARS HERE]
CMBS AND CORPORATE BONDS
EXCESS YIELD OVER U.S. TREASURIES*
<TABLE>
<CAPTION>
RATING
---------------------------------------------
Measurement Period AAA AA A BBB BB B
- ------------------- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
CMBS
6/30/97 0.63% 0.67% 0.75% 0.86% 1.85% 4.75%
CORPORATE BONDS
6/30/97 0.35% 0.40% 0.48% 0.75% 1.80% 3.40%
</TABLE>
- ---------------
* 7 to 10 year U.S. Treasury Notes as of June 30, 1997.
6
<PAGE>
Has this changed the types or quality of securities you have added or may add to
the Fund's investment portfolio?
The short answer is no. We continue to review new and existing CMBS issues
employing fundamental credit analysis, an understanding of the commercial
mortgage market and sensitivity to national and regional growth and supply
factors. As shown below, issuance is on a path to match its 1996 level, creating
ample supply of new product to replace maturing securities and grow the CMBS
market. With regard to the Fund's quality composition and sector allocations,
both are little changed from December 1996 levels.
Commercial Mortgage-Backed Securities Issuance
(dollars in billions)
[BAR GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Measurement Period
(Fiscal Year Covered) Issuance
- ------------------- --------
<S> <C>
1990 $ 5.6
1991 $ 8.6
1992 $14.4
1993 $17.4
1994 $20.1
1995 $18.8
1996 $30.2
1997 $15.5 First 6 months
</TABLE>
Portfolio Composition
By Commercial Mortgage Type
<TABLE>
<S> <C>
Multi-Family 32.6%
- ---------------------------
Multi-Class* 32.3%
- ---------------------------
Healthcare 14.6%
- ---------------------------
Hospitality 12.1%
- ---------------------------
Mobile
Home Parks 3.3%
- ---------------------------
Gaming 2.1%
- ---------------------------
Retail 1.1%
- ---------------------------
Other 1.9%
- ---------------------------
</TABLE>
* A mix of all types of commercial properties
Portfolio Composition
By Quality Rating*
<TABLE>
<S> <C>
BBB 38.9%
- ---------------------------
AAA 17.8%
- ---------------------------
A 13.4%
- ---------------------------
BB 12.6%
- ---------------------------
AA 9.1%
- ---------------------------
B 8.2%
- ---------------------------
</TABLE>
* As rated by Standard & Poor's or the equivalent by Moody's, Duff & Phelps or
Fitch
7
<PAGE>
What is your outlook for the economy and interest rates in 1997's second half?
Looking forward, we expect the U.S. economy to grow at a healthy rate into next
year while inflation remains very mild, near 2%. Some key points behind our
growth outlook are:
. Consumption should advance steadily after the second quarter's pause,
supported by a strong labor market, high consumer confidence and financial
wealth gains.
. Business investment in high-tech should remain rapid as firms must adopt new
technologies to remain competitive.
. The manufacturing side of the economy retains considerable momentum, and a
pullback in business inventories is unlikely with inventory to sales ratios
already low.
Considerations supporting our inflation forecast include:
. High labor force participation will continue to counteract tightness in the
job market.
. A significant portion of job creation is in the less-skilled service
industries where employees have little wage bargaining power.
. Employers continue to substitute capital and technology for workers, and to
move production to lower-cost areas.
. While U.S. inflation is low, it is currently above most other developed
nations. This, together with a strong U.S. dollar, should exert downward
pressure on prices as domestic firms struggle to compete with cheaper
imports.
Overall, we expect the positive inflation fundamentals described above to cause
a broad decline in U.S. Treasury and other bond yields in the coming quarters,
even as the economy remains on a steady growth path.
Finally, what might your outlook mean for CMBS and the Fund's investors?
PIMCO's economic outlook bodes well for real estate fundamentals and the
creditworthiness of CMBS. While spreads have narrowed considerably over the past
several years, this asset class continues to offer attractive relative value
when compared to alternatives with similar credit ratings and prepayment
protection.
8
<PAGE>
Financial
Highlights
<TABLE>
<CAPTION>
From commencement
For the six months ended For the year ended For the year ended For the year ended of operations through
June 30, 1997 December 31, 1996 December 31, 1995 December 31, 1994 December 31, 1993 (a)
(unaudited)
<S> <C> <C> <C> <C> <C>
Selected per share data:
Net asset value, beginning
of period $ 13.71 $ 13.84 $ 12.41 $ 13.76 $ 13.95
--------------------------------------------------------------------------------------------------
Net investment income 0.59 1.23 1.16 1.16 0.20
Net realized and unrealized
gain (loss) on investments 0.12 (0.13) 1.40 (1.38) (0.14)
--------------------------------------------------------------------------------------------------
Total from investment operations 0.71 1.10 2.56 (0.22) 0.06
Less dividends from net
investment income (0.56) (1.23) (1.13) (1.13) (0.25)
--------------------------------------------------------------------------------------------------
Net asset value, end of period $ 13.86 $ 13.71 $ 13.84 $ 12.41 $ 13.76
==================================================================================================
Per share market value,
end of period $ 13.69 $ 12.88 $ 12.38 $ 11.13 $ 13.63
==================================================================================================
Total investment return
Per share market value (b) 10.94% 14.57% 21.86% (10.42%) (1.62%)*
Per share net asset value (c) 5.32% 8.45% 21.33% (1.61%) 1.30%*
Ratios to average net assets
Operating expenses
(excluding interest expense) 0.97%* 0.99% 1.04% 1.03% 1.00%*
Total operating expenses 3.64%* 3.60% 3.94% 2.71% 1.11%*
Net investment income 8.71%* 9.08% 8.93% 8.84% 5.59%*
Supplemental data
Net assets, end of period
($ in thousands) $ 152,516 $ 150,929 $ 152,375 $ 136,595 $ 151,407
Portfolio turnover rate 2.39% 35.98% 47.79% 45.71% 17.43%
</TABLE>
* Annualized
(a) Commencement of operations, September 2, 1993.
(b) Total investment return on market value is the combination of reinvested
dividend income, reinvested capital gains distributions, if any, and
changes in market price per share. Total investment returns exclude the
effects of sales loads.
(c) Total investment return on net asset value is the combination of reinvested
dividend income, reinvested capital gains distributions, if any, and
changes in net asset value per share.
See Notes to Financial Statements
9
<PAGE>
Financial
Statements
<TABLE>
<CAPTION>
Statement of Assets and Liabilities
June 30, 1997
Amounts in thousands, except per share amounts (unaudited)
Assets:
<S> <C>
Investments in securities, at market value $ 220,636
(Identified cost: $219,811)
Interest receivable 1,868
Paydown receivable 14
Deferred organizational expense 7
Other assets 19
--------------
Total assets $ 222,544
--------------
Liabilities:
Reverse repurchase agreements $ 68,624
Dividends payable 1,032
Accrued investment manager's fee 272
Accrued administrator's fee 38
Accrued trustees' fee 10
Other liabilities 52
--------------
Total liabilities $ 70,028
--------------
Net assets applicable to outstanding capital stock $ 152,516
==============
Net assets consist of:
Capital stock - authorized 300 million shares,
$.001 par value; outstanding 11,007,169 shares 11
Additional paid-in capital 152,922
Undistributed net investment income 535
Accumulated net realized loss from investments (1,777)
Net unrealized appreciation of investments 825
--------------
$ 152,516
==============
Net asset value per share outstanding $ 13.86
==============
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations
For the six months
ended June 30, 1997
$ in thousands (unaudited)
<S> <C>
Interest income $ 9,212
Expenses:
Interest expense 1,991
Investment manager fee 544
Administration fee 75
Custodian and portfolio accounting fee 26
Directors' fee 20
Audit fee 7
Organization expenses 3
Other expenses 48
--------------
Total expenses 2,714
--------------
Net investment income $ 6,498
Net realized and unrealized gain
Net realized gain on investments 414
Unrealized appreciation on investments 866
--------------
Net gain on investments $ 1,280
--------------
Net increase in assets resulting from operations $ 7,778
==============
</TABLE>
See Notes to Financial Statements
10
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
For the six months For the year ended
ended June 30, 1997 December 31, 1996
$ in thousands (unaudited)
<S> <C> <C>
Increase (decrease) in net assets from:
Operations
Net investment income $ 6,498 $ 13,489
Net realized gain (loss)
on investments 414 (584)
Unrealized appreciation
(depreciation) on investments 866 (867)
----------------------------------
Net increase
resulting from operations 7,778 12,038
Distributions to Shareholders from:
Net investment income (6,191) (13,484)
----------------------------------
Total increase (decrease)
in net assets 1,587 (1,446)
==================================
Net assets
Beginning of period 150,929 152,375
----------------------------------
End of period* $ 152,516 $ 150,929
==================================
*Including undistributed net
investment income of: $ 535 $ 229
----------------------------------
</TABLE>
Statement of Cash Flows
<TABLE>
<CAPTION>
For the six months ended
June 30, 1997
$ in thousands (unaudited)
<S> <C>
Net increase in net assets resulting from operations $ 7,778
Adjustments to reconcile to net cash
provided from operating activities
Decrease in interest receivable 161
Amortization of premium and discount, net (511)
Decrease in accrued expenses (3)
Increase in other assets (12)
Net gain on investments (1,280)
-----------------
Total adjustments (1,645)
-----------------
Net cash provided from operating activities 6,133
-----------------
Investing activities
Purchase of long-term portfolio investments (18,551)
Proceeds from disposition of long-term
portfolio investments 16,665
Proceeds from disposition of short-term
portfolio investments, net 2,946
-----------------
Net cash provided by investing activities 1,060
-----------------
Financing activities*
Cash dividends paid (6,742)
Net decrease in reverse repurchase agreements (1,225)
-----------------
Net cash used in financing activities (7,967)
-----------------
Net increase in cash (774)
Cash at beginning of period 774
-----------------
Cash at end of period $ 0
=================
</TABLE>
* Cash paid for interest for the period ended June 30, 1997, amounted to
$4,225.
See Notes to Financial Statements
11
<PAGE>
Schedule of
Investments
June 30, 1997
(unaudited)
<TABLE>
<CAPTION>
Principal
Amount Value
(000s) (000s)
Commercial Mortgage-Backed Securities 142.0%
Multi-Family 47.2%
<S> <C> <C> <C>
Donaldson, Lufkin & Jenrette
7.350% due 12/18/03 (c) $ 3,000 $ 3,021
Federal Housing Authority
8.360% due 01/01/12 1,431 1,481
7.977% due 04/25/15 2,540 2,549
8.350% due 04/01/16 1,494 1,529
6.430% due 12/01/19 2,784 2,744
7.430% due 12/20/20 1,194 1,186
9.125% due 01/01/21 99 101
7.430% due 07/01/21 1,677 1,689
7.439% due 08/01/21 971 977
7.484% due 02/25/23 2,087 2,124
7.430% due 03/29/23 375 370
8.250% due 02/01/28 2,604 2,649
8.875% due 06/01/35 5,970 6,096
Federal National Mortgage Assoc.
7.900% due 12/01/15 (b)(c) 874 600
7.900% due 12/25/15 (b)(c) 1,608 1,442
9.375% due 04/01/16 2,012 2,098
7.875% due 11/01/18 972 971
5.974% due 01/01/19 (b) 1,444 1,423
Government National Mortgage Assoc.
9.500% due 09/15/30 4,318 4,410
8.625% due 10/15/34 3,478 3,552
JHM Acceptance Corp.
8.960% due 04/01/19 560 568
Kidder Peabody Mortgage
8.880% due 08/01/03 (c) 4,987 5,198
Merrill Lynch Mortgage
8.129% due 04/25/23 (b) 5,000 5,136
Multi-Family Capital Access One, Inc.
7.400% due 01/15/24 2,092 2,086
Nationsbanc
8.066% due 05/25/28 (b)(c) 2,000 1,558
Resolution Trust Corp.
9.000% due 03/25/17 2,053 2,078
7.650% due 01/25/20 (b) 1,000 1,006
7.131% due 09/25/20 (b) 930 595
8.361% due 06/25/21 (b)(c) 1,737 1,685
7.570% due 09/25/21 (b) 2,100 2,105
8.000% due 09/25/21 913 914
7.700% due 07/25/24 2,929 2,926
Structured Asset Securities Corp.
7.050% due 11/25/02 6,000 5,121
----------
71,988
----------
Multi-Class 46.7%
Aetna Commercial Trust
7.100% due 12/26/30 1,000 992
Asset Securitization Corp.
7.384% due 08/13/29 1,500 1,480
Blackrock Capital Financial
7.063% due 05/01/02 (b)(c) 1,750 1,746
8.227% due 11/16/26 (b)(c) 2,000 2,032
Carolina First SBL Trust
7.888% due 03/18/27 (b)(c) 2,000 2,012
CBA Mortgage Corp.
7.760% due 12/25/03 (b) 1,000 1,003
Federal Deposit Insurance Corp.
6.938% due 11/25/26 (b) 1,260 1,286
First Boston Mortgage Securities Corp.
7.556% due 09/25/06 (b) 976 974
7.458% due 11/25/27 (b) 1,000 992
8.012% due 11/25/27 (b) 1,500 1,512
7.588% due 01/25/28 (b)(c) 1,332 987
7.624% due 01/25/28 (b) 2,500 2,362
Lennar Corp.
9.890% due 09/15/04 (c) 598 600
Matterhorn Capital Corp.
7.850% due 01/20/06 (c) 2,000 2,028
Merrill Lynch Mortgage
8.206% due 06/15/21 (b) 1,257 1,282
7.120% due 06/18/29 2,000 1,953
Morgan Stanley
7.287% due 02/15/05 (b)(c) 2,000 2,035
8.240% due 12/15/23 (b)(c) 1,801 1,838
Mortgage Capital Funding, Inc.
7.531% due 07/20/27 1,000 1,017
NB Commercial Mortgage
8.031% due 10/20/23 (c) 500 506
8.730% due 10/20/23 (c) 1,000 1,021
Nomura Asset Securities Corp.
8.225% due 07/07/03 (b)(c) 3,260 3,405
9.747% due 09/11/19 (b) 3,000 3,393
Prudential Securities Secured Financing
7.610% due 12/26/22 1,000 973
Resolution Trust Corp.
9.250% due 06/25/23 5,539 5,611
7.150% due 06/25/23 345 345
8.835% due 12/25/23 1,600 1,664
9.450% due 05/25/24 4,842 4,927
9.500% due 05/25/24 1,609 1,614
9.200% due 06/25/24 971 971
8.150% due 06/25/24 61 61
8.000% due 07/25/24 1,664 1,667
7.100% due 12/25/24 (b) 955 950
7.150% due 03/25/25 734 733
8.500% due 03/25/25 413 411
8.000% due 04/25/25 4,373 4,428
8.000% due 06/25/26 2,351 2,309
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Principal
Amount Value
(000s) (000s)
--------------------------
<S> <C> <C> <C>
6.900% due 02/25/27 (b) $ 2,107 $ 1,814
6.900% due 02/25/27 (b) 354 338
7.000% due 05/25/27 2,116 2,028
Structured Asset Securities Corp.
7.750% due 02/25/28 3,841 3,896
---------
71,196
---------
Healthcare 21.1%
Daiwa Mortgage Acceptance Corp.
8.377% due 09/25/06 (b)(c) 4,407 3,334
LTC
9.300% due 06/15/26 (c) 4,000 4,145
Nomura Asset Securities Corp.
6.680% due 12/15/01 (b)(c) 12,100 11,566
Red Mountain Funding Corp.
9.150% due 11/28/27 (c) 3,200 3,190
SC Commercial
7.050% due 11/28/13 (c) 5,000 4,909
7.800% due 11/28/13 (c) 5,000 5,055
---------
32,199
---------
Hospitality 17.5%
Cooper Hotel
7.500% due 07/15/13 (c) 8,847 8,956
Franchise Mortgage Acceptance Corp.
7.981% due 11/15/18 (c) 2,300 2,254
German American Capital Corp.
8.535% due 10/10/02 (c) 2,000 2,047
HMH Properties, Inc.
9.500% due 05/15/05 (c) 3,000 3,120
Hotel First
8.520% due 08/05/08 (c) 2,799 2,990
J.Q. Hammons Hotels
8.875% due 02/15/04 1,100 1,117
Starwood
8.788% due 08/16/97 (b)(c) 6,200 6,200
---------
26,684
---------
Mobile Home Parks 4.9%
First Boston Mortgage Securities Corp.
7.388% due 04/25/11 (b) 4,000 4,040
Manufacturers Hanover Corp.
7.464% due 12/16/25 (b)(c) 875 875
8.144% due 12/16/25 (b)(c) 2,624 2,493
---------
7,408
---------
Gaming 3.1%
Griffin Gaming
8.570% due 06/30/00 (b) 2,500 2,575
Riviera Holdings Corp.
11.000% due 12/31/02 2,000 2,115
---------
4,690
Retail 1.5%
American Southwest Financial
5.100% due 06/02/99 (c) 688 675
Conseco Commercial Mortgage
9.700% due 07/15/04 570 571
Trizec Finance Limited
10.875% due 10/15/05 1,005 1,131
---------
2,377
---------
Total Commercial Mortgage-Backed Securities 216,542
---------
(Cost $215,715)
Sovereign Issues 1.3%
United Mexican States
7.562% due 08/06/01 (b) 2,000 2,003
---------
Total Sovereign Issues 2,003
---------
(Cost $2,005)
Short-Term Instruments 1.4%
Discount Notes 0.5%
General Motors Acceptance Corp.
5.700% due 07/08/97 800 799
Repurchase Agreements 0.9%
State Street Bank
5.000% due 07/01/97 1,292 1,292
---------
(Dated 06/30/97. Collateralized by
U.S. Treasury Bond 8.500% due
02/15/20 valued at $1,318,759.
Repurchase proceeds are $1,292,179.)
Total Short-Term Instruments 2,091
(Cost $2,091) ---------
TOTAL INVESTMENTS (a) 144.7% 220,636
(Cost $219,811)
OTHER ASSETS AND LIABILITIES (NET) (44.7%) (68,120)
---------
NET ASSETS 100.0% $ 152,516
=========
</TABLE>
Notes to Schedule of Investments
(a) The identified cost of investments owned as of June 30, 1997 was the same
for federal income tax and financial statement purposes.
(b) Variable rate security. The rate shown is as of June 30, 1997.
(c) Securities purchased under Rule 144A of the 1933 Securities Act and, unless
registered under the Act or exempted from registration, may only be sold to
qualified institutional investors.
See Notes to Financial Statements
13
<PAGE>
Notes to
Financial
Statements
June 30, 1997
(unaudited)
1. General Information
The PIMCO Commercial Mortgage Securities Trust, Inc. commenced operations on
September 2, 1993. The Fund is registered under the Investment Company Act of
1940, as amended, as a closed-end, non-diversified, investment management
company organized as a Maryland corporation. The stock exchange symbol of the
Fund is PCM. Shares are traded on the New York Stock Exchange.
2. Significant Accounting Policies
The following is a summary of significant accounting policies followed in
preparation of the Fund's financial statements. The policies are in conformity
with generally accepted accounting principles.
Security valuation. It is the policy of the Fund to value portfolio
securities at market value. Market value is determined on the basis of last
reported sales prices, or if no sales are reported, as is the case for most
securities traded over-the-counter, the mean between representative bid and
asked quotations. Certain fixed income securities for which daily market
quotations are not readily available may be valued, pursuant to guidelines
established by the Board of Directors, with reference to fixed income securities
whose prices are more readily obtainable and whose durations are comparable to
the securities being valued. Short-term investments having a maturity of sixty
days or less are valued at amortized cost. Subject to the foregoing, other
securities for which market quotations are not readily available are valued at
fair value as determined in good faith by the Board of Directors.
Securities transactions and investment income. Securities transactions are
recorded as of the trade date. Securities purchased or sold on a when-issued or
delayed-delivery basis may be settled a month or more after the trade date.
Securities purchased on a when-issued basis are subject to market value
fluctuations during this period. On the commitment date of such purchases, the
Fund designates specific assets with a value at least equal to the commitment,
to be utilized to settle the commitment. The proceeds to be received from
delayed-delivery sales are included in the Fund's net assets on the date the
commitment is executed. Accordingly, any fluctuation in the value of such assets
is excluded from the Fund's net asset value while the commitment is in effect.
Realized gains and losses from securities sold are recorded on the identified
cost basis. Dividend income is recorded on the ex-dividend date. Interest income
is recorded on the accrual basis and includes the accretion of discounts and
amortization of premiums.
Dividends and distributions to shareholders. The Fund intends to distribute
all its net investment income monthly. Distributions, if any, of net realized
short- or long-term capital gains will be distributed no less frequently than
once each year. Income and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to the accounting for
paydown gains and losses on mortgage-backed securities.
Federal income taxes. The Fund intends to qualify as a regulated investment
company and distribute all of its taxable income and net realized gains, if any,
to shareholders. Accordingly, no provision for Federal income taxes has been
made.
Reverse repurchase agreements. Reverse repurchase agreements involve the sale
of a portfolio-eligible security by the Fund, coupled with an agreement to
repurchase the security at a specified date and price. Reverse repurchase
agreements involve the risk that the market value of securities retained by the
Fund may decline below the repurchase price of the securities sold by the Fund
which it is obligated to repurchase. Reverse repurchase agreements are
considered to be borrowings by the Fund, and are subject to the Fund's overall
restriction on borrowing under which it must maintain asset coverage of at least
300%.
3. Investment Manager Fee, Administration Fee, and Directors' Fee
Investment Manager Fee. Pacific Investment Management Company serves as
investment manager to the Fund, pursuant to an investment management agreement.
Pacific Investment receives a quarterly fee from the Fund at an annual rate of
0.725% based on average weekly net assets of the Fund.
14
<PAGE>
Administration Fee. Pacific Investment also provides administrative services
to the Fund and receives from the Fund a quarterly administrative fee at the
annual rate of 0.10% of the Fund's average weekly net assets.
Directors' Fee. Each unaffiliated Director receives an annual retainer of
$6,000, plus $1,000 for each Board of Directors meeting attended, plus
reimbursement of related expenses.
4. Organization
The Fund assumed all costs in connection with its organization and offering of
shares, including the fees and expenses of registering and qualifying its shares
for distribution under federal and state securities regulations. Expenses
incurred in connection with the organization and offering of shares of the Fund
were $30,500 and are being amortized over a five year period.
5. Securities Transactions
Cost of purchases and proceeds from sales of securities (excluding U.S.
Government securities and short-term investments) for the period ended June 30,
1997, were $14,554,242 and $5,089,909, respectively. Purchases and sales of U.S.
Government securities were $1,500,769 and $0, respectively.
6. Federal Income Tax Matters
At June 30, 1997, the net unrealized depreciation of investments based on cost
for federal income tax purposes was as follows ($ in thousand):
<TABLE>
<S> <C>
Aggregate gross unrealized appreciation $ 4,049
Aggregate gross unrealized depreciation (3,224)
---------
Net unrealized appreciation $ 825
=========
</TABLE>
The accumulated net realized loss on sales of investments for federal income tax
purposes at December 31, 1996, amounting to $2,191,779, is available to offset
future taxable gains. If not applied, $67,350, $1,207,135, $229,745 and
$687,549 of the loss will expire in 1998, 1999, 2003 and 2004, respectively.
7. Borrowings under Reverse Repurchase Agreements
The average amount of borrowings outstanding during the six months ended June
30, 1997 was $68,755,028 at a weighted average interest rate of 5.79%. On June
30, 1997, securities valued at $75,056,727 were pledged as collateral for
reverse repurchase agreements.
The Fund is authorized to borrow funds and utilize leverage in amounts not
exceeding thirty-three and one-third percent of its total assets. The Fund's
ability to leverage creates an opportunity for increased net income, but at the
same time poses special risks. If the income from the securities purchased with
borrowed funds is not sufficient to cover the cost of borrowing, the net income
of the Fund will be less than if borrowing had not been used, reducing the
amount available for distribution to shareholders.
15
<PAGE>
Dividend
Reinvestment
Plan
What is the Dividend Reinvestment Plan for PIMCO Commercial Mortgage Securities
Trust, Inc.?
The Dividend Reinvestment Plan offers shareholders in the Fund an efficient and
simple way to reinvest dividends and capital gains distributions, if any, in
shares of the Fund. Each month the Fund will distribute to shareholders
substantially all of its net investment income. The Fund expects to distribute
at least annually any net realized long-term or short-term capital gains.
Investors Fiduciary Trust Company ("IFTC") acts as Plan Agent for shareholders
in administering the Plan.
Who can participate in the Plan?
All shareholders in the Fund may participate in the Plan by
following the instructions for enrollment provided later in this section.
What does the Plan offer?
The Plan offers shareholders a simple and convenient means to reinvest dividends
and capital gains distributions in additional shares of the Fund.
How is the reinvestment of income dividends and capital gains
distributions accomplished?
If you are a participant in the Plan, your dividends and capital gains
distributions will be reinvested automatically for you, increasing your holding
in the Fund. If the Fund declares a dividend or capital gains distribution
payable either in cash or in shares of the Fund, you will automatically receive
shares of the Fund. If the market price of shares is equal to or exceeds the
net asset value per share on the Valuation Date (as defined below), Plan
participants will be issued shares valued at the net asset value most recently
determined or, if net asset value is less than 95% of the then current market
price, then at 95% of the market price.
If the market price is less than the net asset value on the Valuation Date,
the Plan Agent will buy shares in the open market, on the New York Stock
Exchange ("NYSE") or elsewhere, for the participants' accounts. If, following
the commencement of the purchase and before the Plan Agent has completed its
purchases, the market price exceeds the net asset value, the average per share
purchase price paid by the Plan Agent may exceed the net asset value, resulting
in the acquisition of fewer shares than if the dividend or capital gains
distribution had been paid in shares issued by the Fund at net asset value.
Additionally, if the market price exceeds the net asset value before the Plan
Agent has completed its purchases, the Plan Agent is permitted to cease
purchasing shares and the Fund may issue the remaining shares at a price equal
to the greater of net asset value or 95% of the then current market price. In a
case where the Plan Agent has terminated open market purchases and the Fund has
issued the remaining shares, the number of shares received by the participant
will be based on the weighted average of prices paid for shares purchased in the
open market and the price at which the Fund issues the remaining shares. The
Plan Agent will apply all cash received to purchase shares as soon as
practicable after the payment date of the dividend or capital gains
distribution, but in no event later than 30 days after that date, except when
necessary to comply with applicable provisions of the federal securities laws.
The Valuation Date is the dividend or capital gains distribution payment date
or, if that date is not a NYSE trading day, the immediately preceding trading
day. All reinvestments are in full and fractional shares, carried to three
decimal places.
16
<PAGE>
Is there a cost to participate?
There is no direct charge to participants for reinvesting dividends and capital
gains distributions, since the Plan Agent's fees are paid by the Fund. There are
no brokerage charges for shares issued directly by the Fund. Whenever shares are
purchased on the NYSE or elsewhere in connection with the reinvestment of
dividends or capital gains distributions, each participant will pay a pro rata
portion of brokerage commissions. Brokerage charges for purchasing shares
through the Plan are expected to be less than the usual brokerage charges for
individual transactions, because the Plan Agent will purchase shares for all
participants in blocks, resulting in lower commissions for each individual
participant.
What are the tax implications for participants?
You will receive tax information annually for your personal records to help you
prepare your federal income tax return. The automatic reinvestment of dividends
and capital gains distributions does not affect the tax characterization of the
dividends and capital gains. Other questions should be directed to your tax
adviser.
How do participating shareholders benefit?
You will build holdings in the Fund easily and automatically at reduced costs.
You will receive a detailed account statement from the Plan Agent, showing
total dividends and distributions, dates of investments, shares acquired and
price per share, and total shares of record held by you and by the Plan Agent
for you. The proxy you receive in connection with the Fund's shareholder
meetings will include shares purchased for you by the Plan Agent according to
the Plan.
As long as you participate in the Plan, shares acquired through the Plan will
be held for you in safekeeping in non-certificated form by IFTC, the Plan Agent.
This convenience provides added protection against loss, theft or inadvertent
destruction of certificates.
Whom should I contact for additional information?
If you hold shares in your own name, please address all notices, correspondence,
questions or other communications regarding the Plan to:
PIMCO Commercial Mortgage Securities Trust, Inc.
c/o Investors Fiduciary Trust Company
P.O. Box 419338
Kansas City, MO 64141
Telephone: 800-213-3606
If your shares are not held in your name, you should contact your brokerage
firm, bank or other nominee for more information.
How do I enroll in the Plan?
If you hold shares of the Fund in your own name, you are already enrolled in
this Plan. Your reinvestments will begin with the first dividend after you
purchase your shares. If your shares are held in the name of a brokerage firm,
bank, or other nominee, you should contact your nominee to see if it will
participate in the Plan on your behalf. If your nominee is unable to participate
in the Plan on your behalf, you may want to request that your shares be
registered in your name so that you can participate in the Plan.
17
<PAGE>
Dividend
Reinvestment
Plan - (cont.)
Once enrolled in the Plan, may I withdraw from it?
You may withdraw from the Plan without penalty at any time by providing written
notice to IFTC. Elections to withdraw from the Plan will be effective for
distributions with a Record Date of at least ten days after such elections are
received by the Plan Agent.
If you withdraw, you will receive, without charge, a share certificate issued
in your name for all full shares accumulated in your account from dividend and
capital gains distributions, plus a check for any fractional shares based on
market price.
Experience under the Plan may indicate that changes are desirable.
Accordingly, either the Fund or the Plan Agent may amend or terminate the Plan.
Participants will receive written notice at least 30 days before the effective
date of any amendment. In the case of termination, participants will receive
written notice at least 30 days before the record date of any dividend or
capital gains distribution by the Fund.
18
<PAGE>
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<PAGE>
(This Page Intentionally Left Blank)
<PAGE>
Board of
Directors
and Other
Information
Directors and Officers
Brent R. Harris, Chairman of the Board
Guilford C. Babcock, Director
Vern O. Curtis, Director
Thomas P. Kemp, Director
William J. Popejoy, Director
R. Wesley Burns, President
Garlin G. Flynn, Secretary
John P. Hardaway, Treasurer
Investment Manager and Administrator
Pacific Investment Management Company
840 Newport Center Drive, Suite 360
Newport Beach, California 92660
Transfer Agent and Custodian
Investors Fiduciary Trust Company
127 West 10th Street
Kansas City, Missouri 64105
Legal Counsel
Dechert Price & Rhoads
1500 K Street N.W.
Washington, D.C. 20005
Independent Auditors
Ernst & Young LLP
One Kansas City Place
1200 Main Street
Kansas City, Missouri 64105
<PAGE>
PIMCO Commercial Mortgage Securities Trust, Inc.
This report, including the financial statements herein, is provided to the
shareholders of PIMCO Commercial Mortgage Securities Trust, Inc. for their
information. This is not a prospectus, circular or representation intended for
use in the purchase of shares of the Fund or any securities mentioned in this
report.
