<PAGE>
PIMCO
PIMCO Commercial Mortgage Securities Trust, Inc.
[GRAPHIC APPEARS HERE]
A Closed-End
Fund Specializing
in Investments
in Commercial
Mortgage-Backed
Securities
December 31, 1998
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 $158 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 many of the largest corporations, foundations, endowments, and
governmental bodies in the United Staes and the world.
Pacific Investment is one of seven investment advisory firms which form PIMCO
Advisors Holdings L.P., the nation's third largest publicly traded investment
management concern with combined assets under management totaling nearly $244
billion. Widely recognized for providing consistent performance and high-quality
client service, the seven 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
Oppenheimer Capital/New York, New York
Parametric Portfolio Associates/Seattle, Washington
Blairlogie Capital Management/Edinburgh, Scotland
Units of PIMCO Advisors Holdings L.P. trade on the New York Stock Exchange under
the ticker symbol "PA".
<PAGE>
Letter to our Shareholders
For the fiscal year ended December 31, 1998, the Fund returned 9.86% based on
NYSE share price, outperforming the broad bond market as measured by the Lehman
Brothers Aggregate Bond Index, which posted an 8.69% return. Long-term
performance has been strong as well, with the Fund delivering a 9.85% five-year,
annualized return based on NYSE share price, versus a return of 7.27% for the
Index.
The financial markets experienced remarkable volatility worldwide during 1998 as
investors reacted to international and political discord. Many domestic and
foreign investors re-allocated their assets to safe havens during the third
quarter, searching for more secure places to invest. This heightened caution
reduced liquidity in most bond markets. Yield premiums required for holding
non-Treasury bonds doubled for some securities between mid-summer and October.
However, global markets stabilized and liquidity began to return during the
fourth quarter after the Federal Reserve cut interest rates by 0.75% and other
central banks followed suit. As confidence returned, Treasuries lost some appeal
as a safe haven. Investors shifted money to other bond market sectors and to
stocks, which surged to record highs. Yield premiums on commercial mortgage-
backed securities and corporate debt narrowed, though they remained well above
levels seen earlier in the year. Hopes of additional rate cuts in the near term
faded as the U.S. economy remained strong, reducing demand for Treasuries.
Nevertheless, yields on U.S. Treasuries decreased 0.83% to 1.16% across all
maturity ranges over the course of the year.
Despite volatility in the financial markets, the Fund maintained an
uninterrupted and constant dividend throughout the year, holding the monthly per
share rate steady at $0.09375. In addition, a special dividend of $0.10 per
share was declared at year-end from ordinary income accumulated over the year in
excess of the Fund's regular monthly distributions. These dividend pay-outs
equate to an annualized dividend yield of 8.91% based on the Fund's NYSE trading
price as of December 31, 1998.
We are optimistic that 1999 will be a successful year for Fund investors. As
always, we appreciate the trust you have placed in us, and welcome your
questions and comments regarding the Fund and this annual report.
Sincerely,
/s/ Brent R. Harris
BRENT R. HARRIS
Chairman of the Board
January 29, 1999
1
Annual Report
December 31, 1998
<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
Annual Report
December 31, 1998
<PAGE>
Year in Review
Market Review
Extreme volatility in financial markets worldwide made 1998 one of the most
difficult years in recent memory for investors. During the first quarter, the
U.S. economy grew at a 5.5% annual rate (chain weighted real GDP), employment
was strong, the housing sector was booming and businesses built up inventories
in anticipation of continued strong growth.
The economy slowed to a growth rate of 1.83% during the second quarter as export
manufacturing diminished in response to the continued economic crisis in Asia
which curtailed exports to the region. A corresponding oversupply of commodities
served to keep inflation low.
Global stock markets were badly shaken during the third quarter as investors
reacted to the news of Russia's default and ruble devaluation, and the IMF's
unwillingness to step in and buoy the Russian economy. Continued economic
declines in Asia, the near-collapse of several large hedge funds and concerns of
further currency devaluations, especially in Latin America, contributed as well.
Investors, in a massive flight to quality, sought out the safety of Treasuries,
driving interest rates to 30-year lows and the benchmark 30-year Treasury yield
down to 4.97%. This heightened caution reduced liquidity in most bond markets.
As a response to global economic and political turmoil, the Federal Reserve
dropped the fed funds rate by 0.75%. As investor confidence was restored, stock
markets rebounded and went on to close the fourth quarter at record highs.
- --------------------------------------------------------------------------------
Movements of GDP during the Past Two Years
- --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
Annualized Quarterly Percent Change (%)
DATE GDP
12/31/96 4.23%
03/31/97 4.22%
06/30/97 3.95%
09/30/97 4.19%
12/31/97 2.95%
03/31/98 5.55%
06/30/98 1.83%
09/30/98 3.86%
12/31/98 2.70%
3
Annual Report
December 31, 1998
<PAGE>
Year in Review (cont.)
Performance
For the 12-month period ended December 31, 1998, the Fund delivered strong total
return investment performance of 9.86% based on its NYSE share price. This
return compared favorably to the Lehman Brothers Aggregate Bond Index which
posted an 8.69% return. Fund performance was helped by maintaining a portfolio
duration, or sensitivity to interest rate changes, roughly half a year longer
than its comparative broad market benchmark. This positioning benefited relative
performance in a period of declining interest rates. In addition, several of the
Fund's holdings were upgraded by the S&P, Moody's and Fitch IBCA, three national
rating agencies, resulting in a boost to performance.
- --------------------------------------------------------------------------------
Growth of $10,000 Net Investment in the Fund
- --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Net NYSE Lehman Bro.
Asset Market Aggregate
MONTH Value Value Bond Index
<S> <C> <C> <C>
08/31/93 10,000 10,000 10,000
09/30/93 9,993 10,000 10,027
10/31/93 10,014 10,484 10,065
11/30/93 10,022 9,767 9,979
12/31/93 10,043 9,946 10,033
01/31/94 10,131 9,672 10,169
02/28/94 9,970 9,399 9,992
03/31/94 9,898 9,422 9,746
04/30/94 9,786 8,955 9,668
05/31/94 9,853 9,328 9,667
06/30/94 9,802 9,165 9,645
07/31/94 9,893 9,260 9,837
08/31/94 10,023 9,547 9,849
09/30/94 9,916 9,666 9,704
10/31/94 9,803 8,983 9,695
11/30/94 9,780 8,690 9,674
12/31/94 9,882 8,910 9,741
01/31/95 10,068 9,285 9,934
02/28/95 10,408 9,663 10,170
03/31/95 10,516 9,740 10,232
04/30/95 10,739 10,124 10,375
05/31/95 11,143 10,408 10,777
06/30/95 11,246 10,799 10,856
07/31/95 11,166 10,668 10,831
08/31/95 11,286 10,852 10,962
09/30/95 11,407 10,400 11,069
10/31/95 11,631 10,802 11,213
11/30/95 11,771 10,775 11,381
12/31/95 11,989 10,857 11,540
01/31/96 12,122 11,378 11,617
02/29/96 11,943 11,682 11,415
03/31/96 11,797 11,376 11,336
04/30/96 11,844 11,179 11,272
05/31/96 11,856 11,038 11,249
06/30/96 11,931 11,124 11,400
07/31/96 12,134 11,714 11,431
08/31/96 12,219 11,917 11,412
09/30/96 12,379 11,771 11,611
10/31/96 12,697 12,154 11,868
11/30/96 12,990 12,421 12,072
12/31/96 13,003 12,438 11,959
01/31/97 12,968 12,771 11,996
02/28/97 13,144 12,618 12,026
03/31/97 13,099 12,894 11,892
04/30/97 13,287 13,048 12,070
05/31/97 13,554 13,142 12,185
06/30/97 13,695 13,799 12,329
07/31/97 14,024 13,956 12,662
08/31/97 13,939 14,051 12,554
09/30/97 14,193 14,083 12,739
10/31/97 14,297 14,051 12,924
11/30/97 14,342 14,472 12,983
12/31/97 14,468 14,479 13,114
01/31/98 14,607 14,644 13,282
02/28/98 14,694 15,010 13,272
03/31/98 14,740 14,909 13,318
04/30/98 14,723 14,943 13,387
05/31/98 14,971 14,705 13,514
06/30/98 15,265 14,876 13,629
07/31/98 15,387 15,324 13,658
08/31/98 15,380 15,359 13,880
09/30/98 15,559 15,114 14,205
10/31/98 15,475 14,939 14,130
11/30/98 15,480 15,186 14,210
12/31/98 15,528 15,907 14,253
</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 December 31, 1998, 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 Fund's 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.
4
Annual Report
December 31, 1998
<PAGE>
- --------------------------------------------------------------------------------
Investment Performance for the Periods Ended 12/31/98
- --------------------------------------------------------------------------------
Since
Inception
1 Year 3 Years* 5 Years* 9/23/93*
- --------------------------------------------------------------------------------
Fund Net Asset Value 7.33% 9.00% 9.11% 8.60%
Fund NYSE Market Value 9.86% 13.58% 9.85% 9.10%
Lehman Brothers
Aggregate Bond Index 8.69% 7.29% 7.27% --
* Average annual total return
The Fund's NYSE share price performance benefited significantly from a
considerable narrowing of the Fund's trading discount during the fourth quarter.
The Fund began the year with a discount to net asset value of approximately 2%
and reached a wide of 12% during the flight to quality in October. The discount
began to narrow as markets began to settle resulting in a premium to net asset
value of 0.07% by year end.
- --------------------------------------------------------------------------------
Premium/(Discount) to Net Asset Value
- --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
31-Dec-1997 -2.09
-2.27
0.64
22-Jan-1998 -0.11
-0.89
-0.87
-1.15
12-Feb-1998 0.71
0.89
0.05
-1.03
5-Mar-1998 -0.36
0.23
0.73
-1.55
26-Mar-1998 -0.14
-2.23
-0.65
-4.57
16-Apr-1998 -2.85
-2.3
-3.36
-3.85
7-May-1998 -3.91
-3.54
28-May-1998 -4.25
-3.44
18-Jun-1998 -3.95
-3.07
9-Jul-1998 -2.84
-2.08
30-Jul-1998 -3.24
-3.74
-4.32
20-Aug-1998 -1.39
-2.18
10-Oct-1998 -3.47
-3.54
-5.57
-3.85
-12.43
22-Oct-1998 -8.68
-6
12-Nov-1998 -5.6
-3.81
-4.33
3-Dec-1998 -4.36
-3.88
-3.92
24-Dec-1998 -3.09
-3.74
-2.54
0.15
5
Annual Report
December 31, 1998
<PAGE>
Year in Review (cont.)
CMBS Issuance
CMBS issuance continued to rise, almost doubling during 1998. However, this
issuance of approximately $80 billion, while significantly higher than prior
years, was down from earlier projections of $90 billion. A factor in the busy
calendar of new issuance during the first two quarters of 1998 was investors'
strong appetite for "spread product," or securities that trade at a premium to
U.S. Treasury issues with similar durations. As the yields offered by Treasuries
continued to decline, many investors turned to corporate and less-traditional
spread products like CMBS to bolster income. This heightened demand helped to
push yields down, making it cheaper for issuers to create and offer additional
CMBS to the market. As spreads began to widen during the third quarter, most
originators decided to put slated deals on hold. In addition, some lenders began
to exit the business while others temporarily stopped making loans. We
anticipate that there may be less CMBS issuance during calendar 1999, offset by
a corresponding increase in the issuance of more traditional product types.
- --------------------------------------------------------------------------------
Commercial Mortgage-
Backed Securities Issuance
(dollars in billions)
- --------------------------------------------------------------------------------
[BAR GRAPH APPEARS HERE]
'90 5.6
'91 8.6
'92 14.4
'93 17.4
'94 20.1
'95 18.8
'96 30.2
'97 44
'98 80
6
Annual Report
December 31, 1998
<PAGE>
Credit Spreads
Credit spreads between CMBS, corporate bonds and Treasuries began the year wider
than in 1997. As noted earlier, during the third quarter of 1998, volatile
global markets initiated a flight to quality, as investors re-allocated assets,
opting for the safety and liquidity of the Treasury market. Credit spreads
widened across all sectors of the bond markets as risk premiums over Treasuries
increased dramatically to compensate investors for higher perceived risk.
Liquidity, credit and leverage are all components of risk premium. Since CMBS
are sensitive to each of these factors, it is understandable why this sector was
affected significantly by the spread widening. After rate cuts by the Federal
Reserve and other central banks, confidence returned to the markets and yield
premiums on CMBS and corporate debt narrowed, though they remained well-above
levels seen earlier in the year.
- --------------------------------------------------------------------------------
Comparative Changes in Yield Spreads Over 10-Year Treasuries
- --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
Rating A - Rated AAA - Rated AAA - Rated A - Rated
CMBS CMBS Corporates Corporates
12/31/96 70 95 35 55
3/31/97 65 85 39 57
6/30/97 63 75 35 48
9/30/97 63 78 35 58
12/31/97 78 105 47 57
3/31/98 80 105 55 80
6/30/98 85 110 56 84
9/30/98 145 190 65 119
12/31/98 136 186 62 107
* 7 to 10 year U.S. Treasury Bonds as of December 31, 1998
7
Annual Report
December 31, 1998
<PAGE>
Year in Review (cont.)
Quality Ratings
Portfolio average quality has revolved around a single-A rating throughout the
year. Every portfolio holding is subject to careful scrutiny on a regular basis.
This helps to assure that the credit held retains the same characteristics as
the credit purchased and that it still makes sense for the Fund. We also focus
our security selection process on the potential that a particular bond may be
upgraded in the future. As highlighted below, this strategy was rewarded over
the course of 1998.
- --------------------------------------------------------------------------------
Upgraded Securities during the Past 12 Months
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
New Prior Rating % of Net
Security Description Rating Rating Service Assets
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aetna Commercial Trust
7.100% due 12/26/30 A/AA BBB+/A S&P/Fitch IBCA 0.7
Blackrock Capital Financial
8.263% due 11/16/26 A+ BBB Fitch IBCA 1.3
Carolina First SBL Trust
7.860% due 03/18/27 A BBB Fitch IBCA 0.8
First Boston Mortgage Securities Corp.
7.458% due 11/25/27 A+ A Fitch IBCA 0.7
7.513% due 01/25/28 A1 A2 Moody's 1.6
Morgan Stanley
6.878% due 02/15/05 BBB BBB- Fitch IBCA 1.3
8.240% due 12/15/23 A+ A- Fitch IBCA 1.2
Nomura Asset Securities Corp.
7.423% due 07/07/03 A- BBB+ Fitch IBCA 2.2
SC Commercial
7.050% due 11/28/13 AA AA- Fitch IBCA 3.3
------
13.1
</TABLE>
- --------------------------------------------------------------------------------
Portfolio Composition
By Quality Rating*
- --------------------------------------------------------------------------------
[PIE CHART APPEARS HERE]
AAA 17.7%
AA 8.3%
A 16.5%
BAA 30.8%
BA 18.0%
B 8.7%
* As rated by Standard & Poor's or the equivalent by Moody's, Duff & Phelps
or Fitch IBCA
8
Annual Report
December 31, 1998
<PAGE>
Yield Comparison
It is interesting to note how CMBS traded relative to traditional residential
mortgage-backed securities. The difference between yields on CMBS and those
available on GNMAs and FNMAs remained narrow through July. Not surprisingly,
this trend reversed in the third quarter as liquidity tightened and credit
spreads in general widened. The fourth quarter saw considerable improvement, but
the familiarity to investors of high quality GNMA and FNMA securities overcame
the lower comparative yields and greater prepayment risk associated with these
instruments.
Geographic Distribution
The geographic distribution of the Fund's investment portfolio did not change
significantly over 1998. While loans on properties in nearly every state are
held in the portfolio, the three largest contributors, California, Texas and
Florida remained unchanged. This is consistent with the Fund's low turnover rate
which limits significant shifts in portfolio composition. It also reflects the
overall diversity of CMBS issuance which is closely linked to commercial
development.
Criime Mae
One significant event that impacted the CMBS market occurred in early October
when Criime Mae, a leveraged buyer of below investment grade securities, filed
for bankruptcy protection under Chapter 11. The bankruptcy filing was
precipitated by the financial turmoil in the third quarter which caused spreads
to widen. In this environment, Criime Mae, due to their leveraged position, did
not have enough capital to put up as security for their loans. Their actions
caused further uncertainty in the market because Criime Mae is the servicer on
several CMBS transactions, meaning that they are responsible for collecting
periodic mortgage payments and forwarding them to bond holders. Many
transactions were immediately put on watch by the rating agencies pending
further investigation. By year-end, the market had settled and most of the
transactions had been removed from the rating agency watch list.
Fortunately, the Fund had minimal exposure to the crisis since the Fund only
held three positions totaling approximately 2% of net asset value for which
Criime Mae was the servicer, all of which continued to make scheduled payments.
9
Annual Report
December 31, 1998
<PAGE>
Year in Review (cont.)
Outlook
Robust consumer spending, financed by the lowest levels of saving since the
Great Depression, has largely shielded the U.S. economy from the effects of
worldwide overcapacity and reduced demand, especially from Asia. We anticipate
that consumption will decline, however, as consumer confidence begins to erode
amid weaker employment growth.
Reduced demand worldwide, import competition and lack of pricing power should
reduce growth in corporate profits as well as employment. As consumers become
less confident about their jobs, they will save more and spend less. Eroding
corporate earnings could signal potential weakness in the stock market and deter
consumers from dipping into savings to finance consumption.
As the consumer retrenches, the economy will slow sharply, absorbing the full
impact of weaker investment spending and a widening trade deficit. With real
interest rates high, the Federal Reserve has room to ease and will do so, but
more interest rate cuts will not encourage enough consumption to prevent the
economy from slowing. Similarly, corporations burdened with overcapacity will
not boost spending even though monetary easing lowers borrowing costs.
We expect that inflation will trend lower as real wage growth turns down along
with corporate profits. Manufacturers have little pricing power in the face of
import competition and reduced demand. As wage pressures abate, service sector
prices should also weaken. Reduced demand from Asia has pushed down commodity
prices. While oil prices may not fall much further, the effects of lower
commodity prices overall will continue to work their way through the economy and
reduce inflation.
10
Annual Report
December 31, 1998
<PAGE>
- --------------------------------------------------------------------------------
Treasury Yield Curves
- --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Yield
Projection
12/31/1997 12/31/1998 6/30/1998 12/31/1999
<S> <C> <C> <C> <C>
3 Mos. 5.342 5.093 4.457 4.25
6 Mos. 5.435 5.233 4.539 4.26
1 Yr. 5.476 5.365 4.519 4.275
2 Yrs. 5.642 5.475 4.533 4.285
5 Yrs. 5.705 5.465 4.542 4.299
10 Yrs. 5.741 5.446 4.646 4.348
30 Yrs. 5.924 5.626 5.092 5
</TABLE>
- --------------------------------------------------------------------------------
30 Year and 3 Month Treasury Yields
- --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
30 Year 3 Month
MONTHLY Treasury Treasury Bill
Jan-78 6.448 8.18
Feb-78 6.457 8.25
Mar-78 6.318 8.23
Apr-78 6.306 8.339
May-78 6.43 8.43
Jun-78 6.707 8.5
Jul-78 7.074 8.65
Aug-78 7.036 8.47
Sep-78 7.836 8.47
Oct-78 8.132 8.67
Nov-78 8.787 8.75
Dec-78 9.122 8.88
Jan-79 9.351 8.94
Feb-79 9.265 9
Mar-79 9.45 9.03
Apr-79 9.493 9.08
May-79 9.579 9.19
Jun-79 9.045 8.92
Jul-79 9.262 8.93
Aug-79 9.45 8.98
Sep-79 10.182 9.17
Oct-79 11.47 9.85
Nov-79 11.868 10.3
Dec-79 12.071 10.12
Jan-80 12.036 10.6
Feb-80 12.814 12.13
Mar-80 15.526 12.34
Apr-80 14.003 11.4
May-80 9.15 10.36
Jun-80 6.995 9.81
Jul-80 8.126 10.24
Aug-80 10.182 9.17
Sep-80 10.321 11.34
Oct-80 11.58 11.59
Nov-80 13.888 12.37
Dec-80 15.661 11.98
Jan-81 14.724 12.28
Feb-81 14.905 12.97
Mar-81 13.478 12.65
Apr-81 13.635 13.65
May-81 16.295 13.06
Jun-81 14.557 13.3
Jul-81 14.699 13.96
Aug-81 15.612 14.78
Sep-81 14.951 15.19
Oct-81 13.873 14.36
Nov-81 11.269 12.91
Dec-81 10.926 13.65
Jan-82 12.412 13.91
Feb-82 13.78 13.83
Mar-82 12.493 13.68
Apr-82 12.821 13.39
May-82 12.148 13.39
Jun-82 12.108 13.91
Jul-82 11.914 13.42
Aug-82 9.006 12.5
Sep-82 8.196 11.79
Oct-82 7.75 11.01
Nov-82 8.042 10.7
Dec-82 8.013 10.43
Jan-83 7.81 10.99
Feb-83 8.13 10.51
Mar-83 8.304 10.69
Apr-83 8.252 10.38
May-83 8.185 10.96
Jun-83 8.82 10.98
Jul-83 9.12 11.82
Aug-83 9.39 11.93
Sep-83 9.05 11.41
Oct-83 8.71 11.79
Nov-83 10.926 11.64
Dec-83 8.96 11.87
Jan-84 8.93 11.75
Feb-84 9.03 12.17
Mar-84 9.44 12.48
Apr-84 9.69 12.84
May-84 9.9 13.74
Jun-84 9.94 13.64
Jul-84 10.13 12.77
Aug-84 10.49 12.51
Sep-84 10.41 12.25
Oct-84 9.97 11.56
Nov-84 8.79 11.53
Dec-84 8.16 11.53
Jan-85 7.76 11.21
Feb-85 8.22 11.88
Mar-85 8.57 11.64
Apr-85 8 11.46
May-85 7.56 10.56
Jun-85 7.01 10.44
Jul-85 7.05 10.66
Aug-85 7.18 10.47
Sep-85 7.08 10.56
Oct-85 7.17 10.25
Nov-85 7.2 9.84
Dec-85 7.07 9.27
Jan-86 7.04 9.32
Feb-86 7.03 8.28
Mar-86 6.59 7.44
Apr-86 6.06 7.45
May-86 6.12 7.75
Jun-86 6.21 7.23
Jul-86 5.84 7.42
Aug-86 5.57 7.2
Sep-86 5.19 7.59
Oct-86 5.18 7.61
Nov-86 5.35 7.4
Dec-86 5.49 7.49
Jan-87 5.45 7.47
Feb-87 5.59 7.46
Mar-87 5.56 7.91
Apr-87 5.76 8.44
May-87 5.75 8.64
Jun-87 5.69 8.49
Jul-87 5.78 8.9
Aug-87 6 9.15
Sep-87 6.32 9.74
Oct-87 6.4 9.03
Nov-87 5.81 9.1
Dec-87 5.8 8.98
Jan-88 5.9 8.42
Feb-88 5.69 8.34
Mar-88 5.69 8.76
Apr-88 5.92 9.1
May-88 6.27 9.24
Jun-88 6.5 8.91
Jul-88 6.73 9.21
Aug-88 7.02 9.3
Sep-88 7.23 9.05
Oct-88 7.34 8.74
Nov-88 7.68 9.07
Dec-88 8.09 8.99
Jan-89 8.29 8.82
Feb-89 8.48 9.11
Mar-89 8.83 9.09
Apr-89 8.7 8.93
May-89 8.4 8.6
Jun-89 8.22 8.04
Jul-89 7.92 7.92
Aug-89 7.91 8.2
Sep-89 7.72 8.24
Oct-89 7.59 7.91
Nov-89 7.65 7.89
Dec-89 7.64 7.98
Jan-90 7.64 8.45
Feb-90 7.76 8.54
Mar-90 7.87 8.63
Apr-90 7.78 8.99
May-90 7.78 8.58
Jun-90 7.74 8.4
Jul-90 7.66 8.41
Aug-90 7.44 8.98
Sep-90 7.38 8.95
Oct-90 7.19 8.76
Nov-90 7.07 8.49
Dec-90 6.809 8.25
Jan-91 6.299 8.2
Feb-91 5.95 8.2
Mar-91 5.91 8.25
Apr-91 5.669 8.18
May-91 5.509 8.27
Jun-91 5.599 8.41
Jul-91 5.58 8.34
Aug-91 5.389 8.06
Sep-91 5.25 7.81
Oct-91 5.03 7.91
Nov-91 4.599 7.94
Dec-91 4.12 7.4
Jan-92 3.8 7.76
Feb-92 3.84 7.79
Mar-92 4.04 7.96
Apr-92 3.75 8.04
May-92 3.63 7.84
Jun-92 3.66 7.78
Jul-92 3.21 7.46
Aug-92 3.13 7.41
Sep-92 2.91 7.38
Oct-92 2.86 7.63
Nov-92 3.13 7.6
Dec-92 3.22 7.4
Jan-93 3.06 7.2
Feb-93 2.93 6.9
Mar-93 2.95 6.93
Apr-93 2.87 6.93
May-93 2.96 6.98
Jun-93 3.07 6.67
Jul-93 3.04 6.56
Aug-93 3.02 6.09
Sep-93 2.95 6.03
Oct-93 3.02 5.97
Nov-93 3.1 6.3
Dec-93 3.06 6.35
Jan-94 2.98 6.24
Feb-94 3.25 6.66
Mar-94 3.5 7.09
Apr-94 3.68 7.31
May-94 4.14 7.43
Jun-94 4.14 7.61
Jul-94 4.33 7.4
Aug-94 4.48 7.45
Sep-94 4.76 7.82
Oct-94 4.95 7.97
Nov-94 5.29 8
Dec-94 5.6 7.88
Jan-95 5.71 7.7
Feb-95 5.77 7.44
Mar-95 5.73 7.43
Apr-95 5.65 7.34
May-95 5.67 6.65
Jun-95 5.47 6.62
Jul-95 5.42 6.85
Aug-95 5.4 6.65
Sep-95 5.28 6.5
Oct-95 5.49 6.33
Nov-95 5.47 6.13
Dec-95 5.08 5.95
Jan-96 5.05 6.03
Feb-96 5.03 6.47
Mar-96 5.14 6.67
Apr-96 5.15 6.91
May-96 5.18 6.99
Jun-96 5.16 6.87
Jul-96 5.31 6.97
Aug-96 5.28 7.12
Sep-96 5.03 6.92
Oct-96 5.15 6.64
Nov-96 5.13 6.35
Dec-96 5.17 6.64
Jan-97 5.15 6.79
Feb-97 5.22 6.8
Mar-97 5.32 7.1
Apr-97 5.23 7.14
May-97 4.94 6.91
Jun-97 5.17 6.74
Jul-97 5.23 6.45
Aug-97 5.22 6.61
Sep-97 5.1 6.4
Oct-97 5.2 6.15
Nov-97 5.2 6.05
Dec-97 5.35 5.92
Jan-98 5.183 5.805
Feb-98 5.308 5.919
Mar-98 5.125 5.932
Apr-98 4.978 5.951
May-98 5.007 5.803
Jun-98 5.093 5.626
Jul-98 5.08 5.714
Aug-98 4.83 5.256
Sep-98 4.356 4.965
Oct-98 4.323 5.15
Nov-98 4.488 5.072
Dec-98 4.457 5.092
11
Annual Report
December 31, 1998
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
For the year ended For the year ended For the year ended
Selected Per Share Data: December 31, 1998 December 31, 1997 December 31, 1996
------------------ ------------------ ------------------
<S> <C> <C> <C>
Net asset value, beginning of year $ 13.97 $ 13.71 $ 13.84
- ------------------------------------------------------------------- ------------------ ------------------ ------------------
Net investment income 1.24 1.20 1.23
- ------------------------------------------------------------------- ------------------ ------------------ ------------------
Net realized and unrealized gain (loss) on investments (0.25) 0.29 (0.13)
- ------------------------------------------------------------------- ------------------ ------------------ ------------------
Total from investment operations 0.99 1.49 1.10
- ------------------------------------------------------------------- ------------------ ------------------ ------------------
Less dividends from net investment income (1.22) (1.23) (1.23)
- ------------------------------------------------------------------- ------------------ ------------------ ------------------
Net asset value, end of year $ 13.74 $ 13.97 $ 13.71
=================================================================== ================== ================== ==================
Per share market value, end of year $ 13.75 $ 13.69 $ 12.88
=================================================================== ================== ================== ==================
Total investment return
Per share market value (a) 9.86% 16.40% 14.57%
- ------------------------------------------------------------------- ------------------ ------------------ ------------------
Per share net asset value (b) 7.33% 11.27% 8.45%
- ------------------------------------------------------------------- ------------------ ------------------ ------------------
Ratios to average net assets
Operating expenses (excluding interest expense) 0.99% 0.97% 0.99%
- ------------------------------------------------------------------- ------------------ ------------------ ------------------
Total operating expenses 3.61% 3.69% 3.60%
- ------------------------------------------------------------------- ------------------ ------------------ ------------------
Net investment income 8.81% 8.63% 9.08%
- ------------------------------------------------------------------- ------------------ ------------------ ------------------
Supplemental data
Net assets, end of year (amounts in thousands) $ 151,222 $ 153,803 $ 150,929
- ------------------------------------------------------------------- ------------------ ------------------ ------------------
Portfolio turnover rate 7.92% 8.74% 35.98%
- ------------------------------------------------------------------- ------------------ ------------------ ------------------
<CAPTION>
For the year ended For the year ended
Selected Per Share Data: December 31, 1995 December 31, 1994
- ------------------------------------------------------------------- ------------------ ------------------
<S> <C> <C>
Net asset value, beginning of year 12.41 $ 13.76
- ------------------------------------------------------------------- ------------------ ------------------
Net investment income 1.16 1.16
- ------------------------------------------------------------------- ------------------ ------------------
Net realized and unrealized gain (loss) on investments 1.40 (1.38)
- ------------------------------------------------------------------- ------------------ ------------------
Total from investment operations 2.56 (0.22)
- ------------------------------------------------------------------- ------------------ ------------------
Less dividends from net investment income (1.13) (1.13)
- ------------------------------------------------------------------- ------------------ ------------------
Net asset value, end of year $ 13.84 $ 12.41
=================================================================== ================== ==================
Per share market value, end of year $ 12.38 $ 11.13
=================================================================== ================== ==================
Total investment return
Per share market value (a) 21.86% (10.42%)
- ------------------------------------------------------------------- ------------------ ------------------
Per share net asset value (b) 21.33% (1.61%)
- ------------------------------------------------------------------- ------------------ ------------------
Ratios to average net assets
Operating expenses (excluding interest expense) 1.04% 1.03%
- ------------------------------------------------------------------- ------------------ ------------------
Total operating expenses 3.94% 2.71%
- ------------------------------------------------------------------- ------------------ ------------------
Net investment income 8.93% 8.84%
- ------------------------------------------------------------------- ------------------ ------------------
Supplemental data
Net assets, end of year (amounts in thousands) $ 152,375 $ 136,595
- ------------------------------------------------------------------- ------------------ ------------------
Portfolio turnover rate 47.79% 45.71%
- ------------------------------------------------------------------- ------------------ ------------------
</TABLE>
(a) 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.
(b) 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.
12
Annual Report
December 31, 1998
<PAGE>
Statement of Assets and Liabilities
Amounts in thousands, except per share amounts December 31, 1998
Assets:
Investments in securities, at market value
(Identified cost: $211,809) $ 211,087
- ------------------------------------------------------------ -----------------
Cash 6
- ------------------------------------------------------------ -----------------
Interest receivable 2,496
- ------------------------------------------------------------ -----------------
Paydown receivable 24
- ------------------------------------------------------------ -----------------
Other assets 55
- ------------------------------------------------------------ -----------------
Total assets $ 213,668
============================================================ =================
Liabilities:
Reverse repurchase agreements $ 59,990
- ------------------------------------------------------------ -----------------
Dividends payable 2,133
- ------------------------------------------------------------ -----------------
Accrued investment manager's fee 255
- ------------------------------------------------------------ -----------------
Accrued administrator's fee 35
- ------------------------------------------------------------ -----------------
Accrued trustees' fee 5
- ------------------------------------------------------------ -----------------
Other liabilities 28
- ------------------------------------------------------------ -----------------
Total liabilities $ 62,446
============================================================ =================
Net assets applicable to outstanding stock $ 151,222
============================================================ =================
Net Assets consist of:
Capital stock - authorized 300 million shares,
$.001 par value; outstanding 11,007,169 shares $ 11
- ------------------------------------------------------------ -----------------
Additional paid-in capital 152,923
- ------------------------------------------------------------ -----------------
Undistributed net investment income 232
- ------------------------------------------------------------ -----------------
Accumulated net realized loss from investments (1,222)
- ------------------------------------------------------------ -----------------
Net unrealized depreciation of investments (722)
- ------------------------------------------------------------ -----------------
$ 151,222
============================================================ =================
Net asset value per share outstanding $ 13.74
============================================================ =================
13
Annual Report
December 31, 1998
<PAGE>
Statement of Operations
For the year ended
Amounts in thousands December 31, 1998
------------------
Interest income $ 19,267
=========================================================== ==================
Expenses:
Interest expense 4,062
- ----------------------------------------------------------- ------------------
Investment manager fee 1,137
- ----------------------------------------------------------- ------------------
Administration fee 157
- ----------------------------------------------------------- ------------------
Custodian, accounting and transfer agent fee 67
- ----------------------------------------------------------- ------------------
Directors' fee 50
- ----------------------------------------------------------- ------------------
Proxy expense 19
- ----------------------------------------------------------- ------------------
Legal fee 5
- ----------------------------------------------------------- ------------------
Audit fee 15
- ----------------------------------------------------------- ------------------
Organization expenses 4
- ----------------------------------------------------------- ------------------
Other expenses 87
- ----------------------------------------------------------- ------------------
Total expenses 5,603
- ----------------------------------------------------------- ------------------
Net investment income $ 13,664
=========================================================== ==================
Net realized and unrealized gain (loss):
Net realized gain on investments 785
- ----------------------------------------------------------- ------------------
Unrealized (depreciation) on investments (3,546)
- ----------------------------------------------------------- ------------------
Net (loss) on investments $ (2,761)
- ----------------------------------------------------------- ------------------
Net increase in assets resulting from operations $ 10,903
=========================================================== ==================
14
Annual Report
December 31, 1998
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
For the year ended For the year ended
Amounts in thousands December 31, 1998 December 31, 1997
------------------ ------------------
Increase (Decrease) in Net Assets from:
<S> <C> <C>
Operations:
Net investment income $ 13,664 $ 13,116
- ---------------------------------------------------------------- ------------------ ------------------
Net realized gain on investments 785 376
- ---------------------------------------------------------------- ------------------ ------------------
Unrealized appreciation (depreciation) on investments (3,546) 2,865
- ---------------------------------------------------------------- ------------------ ------------------
Net increase resulting from operations 10,903 16,357
================================================================ ================== ==================
Distributions to Shareholders from:
From net investment income (13,484) (13,483)
- ---------------------------------------------------------------- ------------------ ------------------
Total Increase (Decrease) in Net Assets (2,581) 2,874
================================================================ ================== ==================
Net Assets
Beginning of year 153,803 150,929
- ---------------------------------------------------------------- ------------------ ------------------
End of year* $ 151,222 $ 153,803
- ---------------------------------------------------------------- ------------------ ------------------
*Including undistributed (overdistributed) net investment
income of: $ 232 $ (210)
- ---------------------------------------------------------------- ------------------ ------------------
</TABLE>
15
Annual Report
December 31, 1998
<PAGE>
Annual Report
December 31, 1998
Statement of Cash Flows
<TABLE>
<CAPTION>
For the year ended
Amounts in thousands December 31, 1998
-----------------
Net increase in net assets resulting from operations $ 10,903
- --------------------------------------------------------------------------- -----------------
<S> <C>
Adjustments to reconcile to net cash provided from operating activities:
Increase in interest receivable (413)
- --------------------------------------------------------------------------- -----------------
Amortization of premium and discount, net (1,064)
- --------------------------------------------------------------------------- -----------------
Decrease in accrued expenses (62)
- --------------------------------------------------------------------------- -----------------
Increase in other assets 6
- --------------------------------------------------------------------------- -----------------
Net loss on investments 2,761
- --------------------------------------------------------------------------- -----------------
Total adjustments 1,228
- --------------------------------------------------------------------------- -----------------
Net cash provided from operating activities 12,131
- --------------------------------------------------------------------------- -----------------
Investing activities:
Purchase of long-term portfolio investments (35,755)
- --------------------------------------------------------------------------- -----------------
Proceeds from disposition of long-term portfolio investments 45,049
- --------------------------------------------------------------------------- -----------------
Proceeds from disposition of short-term portfolio investments, net 6,764
- --------------------------------------------------------------------------- -----------------
Net cash provided by investing activities 16,058
- --------------------------------------------------------------------------- -----------------
Financing activities*:
Cash dividends paid (13,484)
- --------------------------------------------------------------------------- -----------------
Net decrease in reverse repurchase agreements (14,699)
- --------------------------------------------------------------------------- -----------------
Net cash used in financing activities (28,183)
- --------------------------------------------------------------------------- -----------------
Net increase in cash: 6
- --------------------------------------------------------------------------- -----------------
Cash at beginning of year 0
- --------------------------------------------------------------------------- -----------------
Cash at end of year $ 6
- --------------------------------------------------------------------------- -----------------
</TABLE>
* Cash paid for interest for the period ended December 31, 1998, amounted to
$3,538.
16
Annual Report
December 31, 1998
<PAGE>
Schedule of Investments
Principal
Amount Value
(000s) (000s)
- --------------------------------------------------------------------------------
COMMERCIAL MORTGAGE-BACKED SECURITIES 125.0%
- --------------------------------------------------------------------------------
Multi-Class 47.0%
Aetna Commercial Trust
7.100% due 12/26/30 $1,000 $1,019
Asset Securitization Corp.
7.384% due 08/13/29 1,500 1,504
Blackrock Capital Financial
8.263% due 11/16/26 (b)(c) 2,000 2,004
8.480% due 09/25/28 (c) 3,000 2,640
Carolina First SBL Trust
7.860% due 03/18/27 (b)(c) 1,283 1,284
CBA Mortgage Corp.
7.760% due 12/25/03 (b) 1,000 993
Federal Deposit Insurance Corp.
6.470% due 11/25/26 (b) 1,260 1,248
First Boston Mortgage Securities Corp.
7.556% due 09/25/06 (b) 976 989
7.458% due 11/25/27 1,000 1,006
8.012% due 11/25/27 1,500 1,505
7.466% due 01/25/28 (b)(c) 1,308 1,289
7.513% due 01/25/28 (b) 2,500 2,422
General Motors Acceptance Corp.
7.153% due 05/18/28 (b) 1,500 1,200
GMAC Commercial Mortgage Securities, Inc.
6.500% due 05/15/31 2,000 1,631
Green Tree Financial Corp.
8.000% due 07/15/18 3,087 3,019
Matterhorn Capital Corp.
7.850% due 01/20/06 (c) 783 782
Merrill Lynch Mortgage
8.144% due 06/15/21 (b) 869 870
7.120% due 06/18/29 2,000 1,918
Morgan Stanley
6.878% due 02/15/05 (b)(c) 2,000 1,999
6.850% due 02/15/20 1,000 957
8.240% due 12/15/23 (b)(c) 1,802 1,800
7.695% due 10/03/30 (c) 2,000 1,688
Mortgage Capital Funding, Inc.
7.531% due 07/20/27 1,000 1,016
NB Commercial Mortgage
8.031% due 10/20/23 (c) 500 524
8.730% due 10/20/23 (c) 1,000 1,097
Nomura Asset Securities Corp.
7.423% due 07/07/03 (b)(c) 3,260 3,260
9.771% due 09/11/19 (b) 3,000 3,328
Prudential Securities Secured Financing
7.610% due 12/26/22 1,000 957
Resolution Trust Corp.
9.250% due 06/25/23 4,432 4,424
8.835% due 12/25/23 1,600 1,655
9.450% due 05/25/24 4,842 4,844
9.500% due 05/25/24 612 613
9.200% due 06/25/24 414 414
8.000% due 07/25/24 1,137 1,133
7.100% due 12/25/24 (b) 229 230
8.000% due 04/25/25 4,330 4,341
8.000% due 06/25/26 2,196 2,196
6.900% due 02/25/27 (b) 1,802 1,696
7.000% due 05/25/27 1,900 1,840
Structured Asset Securities Corp.
7.750% due 02/25/28 3,841 3,761
---------
71,096
Multi-Family 40.3%
Chase Commercial Mortgage Securities Corp.
6.900% due 11/19/06 1,500 1,362
Donaldson, Lufkin & Jenrette
7.350% due 12/18/03 (c) 3,000 3,023
Federal Housing Administration
8.360% due 01/01/12 1,183 1,231
7.977% due 04/25/15 729 753
7.750% due 01/01/16 408 429
6.875% due 12/01/16 755 776
7.625% due 12/01/16 485 507
6.430% due 12/01/19 2,698 2,701
7.430% due 12/20/20 1,162 1,200
7.430% due 07/01/21 819 835
7.439% due 08/01/21 697 728
7.484% due 02/25/23 1,303 1,334
7.430% due 03/29/23 366 374
6.875% due 11/01/23 1,965 1,938
8.250% due 02/01/28 2,576 2,624
7.750% due 05/01/28 965 965
9.325% due 06/01/35 5,943 6,078
Federal National Mortgage Assn
7.887% due 12/25/15 (b)(c) 1,608 1,503
7.900% due 12/01/15 (b)(c) 874 785
9.375% due 04/01/16 1,630 1,693
7.875% due 11/01/18 473 473
6.113% due 01/01/19 (b) 1,388 1,389
Government National Mortgage Assn
9.500% due 09/15/30 4,289 4,391
8.625% due 10/15/34 3,460 3,542
Merrill Lynch Mortgage
8.333% due 04/25/23 (b) 5,000 5,048
Merrill Lynch Mortgage Investors, Inc.
9.384% due 11/25/20 2,500 2,526
Multi-Family Capital Access One, Inc.
7.400% due 01/15/24 1,858 1,882
NationsBanc Mortgage Capital Corp.
8.048% due 05/25/28 (b)(c) 2,000 1,623
Resolution Trust Corp.
9.000% due 03/25/17 1,487 1,487
7.025% due 01/25/20 (b) 723 721
6.672% due 09/25/20 (b) 535 460
7.250% due 09/25/21 (b) 1,155 1,152
Structured Asset Securities Corp.
7.050% due 11/25/02 6,000 5,449
---------
60,982
Healthcare 23.6%
Daiwa Mortgage Acceptance Corp.
8.566% due 09/25/06 (b)(c) 2,124 2,054
Federal Housing Administration
7.500% due 12/31/31 1,582 1,646
LTC Commercial Corp.
9.300% due 06/15/26 (c) 4,000 4,065
Nomura Asset Securities Corp.
6.680% due 12/15/01 (c) 12,100 11,860
Red Mountain Funding Corp.
7.072% due 01/15/19 (c) 2,000 1,663
7.471% due 01/15/19 (c) 1,000 832
8.926% due 01/15/19 (c) 1,000 730
9.150% due 11/28/27 (c) 3,200 2,890
SC Commercial
7.050% due 11/28/13 (c) 5,000 5,003
7.800% due 11/28/13 (c) 5,000 5,035
---------
35,778
17
Annual Report
December 31, 1998
<PAGE>
Schedule of Investments (cont.)
<TABLE>
<CAPTION>
Principal
Amount Value
(000s) (000s)
- ---------------------------------------------------------------------------------
<S> <C> <C>
Hospitality 11.8%
Cooper Hotel
7.500% due 07/15/13 (c) $ 8,208 $ 8,647
Federal Housing Administration
7.500% due 09/01/34 764 787
Franchise Mortgage Acceptance Corp.
7.981% due 11/15/18 (c) 2,300 2,381
German American Capital Corp.
8.535% due 10/10/02 (c) 2,000 1,981
Hotel First
8.520% due 08/05/08 (c) 2,698 2,986
J.Q. Hammons Hotels
8.875% due 02/15/04 1,100 1,023
---------
17,805
Retail 2.0%
American Southwest Financial
5.500% due 06/02/99 (c) 267 267
Trizec Finance Limited
10.875% due 10/15/05 2,505 2,749
---------
3,016
Gaming 0.3%
Riviera Holdings Corp.
10.000% due 08/15/04 500 430
---------
Total Commercial Mortgage-Backed Securities 189,107
=========
(Cost $189,571)
- ---------------------------------------------------------------------------------
CORPORATE BONDS & NOTES 11.3%
- ---------------------------------------------------------------------------------
Utilities 2.0%
Calpine Corp.
8.750% due 07/15/07 1,680 1,705
Flag Limited
8.250% due 01/30/08 1,400 1,372
---------
3,077
Industrials 6.6%
Building Materials Corp.
8.000% due 10/15/07 (c) 3,000 2,985
Chattem, Inc.
8.875% due 04/01/08 500 518
Container Corp. of America
11.250% due 05/01/04 1,500 1,568
Grupo Televisa SA
11.375% due 05/15/03 750 743
Holmes Products Corp.
9.875% due 11/15/07 1,000 950
Stater Brothers Holdings
11.000% due 03/01/01 1,500 1,489
Synthetic Industries, Inc.
9.250% due 02/15/07 500 515
US Air, Inc.
9.330% due 01/01/06 1,099 1,163
---------
9,931
Banking & Finance 2.7%
Forest City Enterprises
8.500% due 03/15/08 4,000 4,030
---------
Total Corporate Bonds & Notes 17,038
(Cost $17,331) =========
- ---------------------------------------------------------------------------------
ASSET-BACKED SECURITIES 1.5%
- ---------------------------------------------------------------------------------
Airplanes Pass Through Trust
10.875% due 03/15/19 2,000 2,255
---------
Total Asset-Backed Securities 2,255
(Cost $2,220) ---------
- ---------------------------------------------------------------------------------
SHORT-TERM INSTRUMENTS 1.8%
- ---------------------------------------------------------------------------------
Commercial Paper 1.7%
General Electric Capital Corp.
5.600% due 01/07/99 1,300 1,299
5.510% due 01/25/99 300 299
General Motors Acceptance Corp.
5.600% due 01/13/99 900 899
---------
2,497
Repurchase Agreement 0.1%
State Street Bank
4.000% due 01/04/99 190 190
(Dated 12/31/98. Collateralized by
U.S. Treasury Note 6.500% due 08/31/01
valued at $197,488. Repurchase
proceeds are $190,084.)
---------
Total Short-Term Instruments 2,687
(Cost $2,687) =========
Total Investments (a) 139.6% $ 211,087
(Cost $211,809)
Other Assets and Liabilities (Net) (39.6%) (59,865)
---------
Net Assets 100.0% $ 151,222
=========
</TABLE>
Notes to Schedule of Investments:
(a) The identified cost of investments owned as of December 31, 1998, was the
same for federal income tax and financial statement purposes.
(b) Variable rate security. The rate shown is as of December 31, 1998.
(c) Securities purchased under Rule 144A of the 1933 Securities Act and, unless
registered under the Act or exempt from registration, may only be sold to
qualified institutional investors.
18
Annual Report
December 31,1995
<PAGE>
Notes to Financial Statements
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, at 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.
19
Annual Report
December 31, 1998
<PAGE>
Notes to Financial Statements (cont.)
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%.
Repurchase Agreements. The Fund may engage in repurchase transactions. Under the
terms of a typical repurchase agreement, the Fund takes possession of an
underlying debt obligation subject to an obligation of the seller to repurchase,
and the Fund to resell, the obligation at an agreed-upon price and time. The
market value of the collateral must be equal at all times to the total amount of
the repurchase obligations, including interest. Generally, in the event of
counterparty default, the Fund has the right to use the collateral to offset
losses incurred.
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.
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. Securities Transactions
Cost of purchases and proceeds from sales of securities (excluding U.S.
Government securities and short-term investments) for the period ended December
31, 1998, were $35,754,512 and $17,418,939, respectively.
20
Annual Report
December 31, 1998
<PAGE>
5. Federal Income Tax Matters
At December 31, 1998, the net unrealized depreciation of investments based on
cost for federal income tax purposes was as follows:
Aggregate gross unrealized appreciation $ 3,909,330
Aggregate gross unrealized depreciation (4,630,926)
-------------------
Net unrealized depreciation $ (721,596)
-------------------
The accumulated net realized loss on sales of investments for federal income tax
purposes at December 31, 1998, amounting to $1,221,935, is available to offset
future taxable gains. If not applied, $304,640, $229,745, and $687,549 of the
loss will expire in 1999, 2003, and 2004, respectively.
6. Borrowings under Reverse Repurchase Agreements
The average amount of borrowings outstanding during the year ended December 31,
1998 was $68,268,976 at a weighted average interest rate of 5.94%. On December
31, 1998, securities valued at $67,178,279 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.
7. Impact of Year 2000 Problem (unaudited)
Many of the services provided to the Fund depend on the smooth functioning of
computer systems. Many systems in use today cannot distinguish between the year
1900 and the year 2000. Should any of the service systems fail to process
information properly, that could have an adverse impact on the Funds' operations
and services provided to shareholders. The Adviser, Distributor, Shareholder
Servicing and Transfer Agent, Custodian, and certain other service providers to
the Funds have reported that each is working toward mitigating the risks
associated with the so-called "year 2000 problem." However, there can be no
assurance that the problem will be corrected in all respects and that the Fund
operations and services provided to shareholders will not be adversely affected,
nor can there be any assurance that the year 2000 problem will not have an
adverse effect on the entities whose securities are held by the Fund or on
domestic or global markets or economies, generally.
21
Annual Report
December 31, 1998
<PAGE>
Report of Independent Auditors
The Shareholders and Board of Directors
PIMCO Commercial Mortgage Securities Trust, Inc.
We have audited the accompanying statement of assets and liabilities of PIMCO
Commercial Mortgage Securities Trust, Inc. (the Fund), including the schedule of
investments, as of December 31, 1998, and the related statements of operations
and cash flows for the year then ended, the statements of changes in net assets
for each of the two years in the period then ended, and the financial highlights
for each of the five years in the period then ended. These financial statements
and financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of December 31, 1998, by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Fund at December 31, 1998, the results of its operations, its cash flows,
changes in its net assets and financial highlights for the periods indicated
above in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Kansas City, Missouri
February 3, 1999
22
Annual Report
December 31, 1998
<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
23
Annual Report
December 31, 1998
<PAGE>
Dividend Reinvestment Plan (cont.)
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.
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.
24
Annual Report
December 31, 1998
<PAGE>
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.
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.
25
Annual Report
December 31, 1998
<PAGE>
Board of Directors
and Other
Information
Directors and Officers
Brent R. Harris, Chairman of the Board and Director
R. Wesley Burns, President and Director
Guilford C. Babcock, Director
Vern O. Curtis, Director
Thomas P. Kemp, Sr., Director
William J. Popejoy, Director
Garlin G. Flynn, Secretary
John P. Hardaway, Treasurer
Investment Manager and Administrator
Pacific Investment Management Company
840 Newport Center Drive, Suite 300
Newport Beach, California 92660
Transfer Agent and Custodian
Investors Fiduciary Trust Company
801 Pennsylvania
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.
