<PAGE>
PIMCO
PIMCO COMMERCIAL MORTGAGE SECURITIES TRUST, INC.
A CLOSED-END
FUND SPECIALIZING
IN INVESTMENTS
IN COMMERCIAL
MORTGAGE-BACKED
SECURITIES
JUNE 30, 1999
SEMI-ANNUAL REPORT
[GRAPHIC APPEARS HERE]
<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 $172 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 States and the world.
Pacific Investments is one of five 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 over $254
billion. PIMCO Advisors is recognized for providing consistent performance and
high-quality client service.
Its investment firms are:
Pacific Investment Management Company/Newport Beach, California
Oppenheimer Capital/New York, New York
Cadence Capital Management/Boston, Massachusetts
NFJ Investment Group/Dallas, Texas
Parametric Portfolio Associates/Seattle, Washington
PIMCO Equity Advisors/New York, New York, a division of PIMCO Advisors L.P.
Units of PIMCO Advisors Holdings L.P. trade on the New York Stock Exchange under
the ticker symbol "PA."
<PAGE>
LETTER TO OUR SHAREHOLDERS
The Fund's total return investment performance was 3.35% based on NYSE share
price for the six-month period ended June 30, 1999. This compares favorably with
the return posted by the Lehman Brothers Aggregate Bond Index, a broad market
measure of domestic fixed income performance, which declined 1.37%. In addition,
the Fund continues to perform well relative to the market, with the Fund posting
a 12.40% five-year, annualized return based on NYSE share price, versus a return
of 7.83% for the Lehman benchmark as of the end of the fiscal half year.
Treasury prices fell steadily and yields rose across the maturity spectrum as
fears of inflation dominated the fixed income marketplace during the first half
of the year. Strong economic growth in the U.S. throughout the period and signs
of recovery elsewhere in the world during the second quarter sparked concern
that the Federal Reserve would boost interest rates to keep inflation subdued.
During the first quarter, there were few signs that inflation was actually
increasing despite the economy's rapid growth, which allowed the Fed to leave
rates unchanged. The Fed was also reluctant to curtail growth in the U.S. with
many of the world's economies in or near recession. However, the Fed raised the
closely watched federal funds rate by 0.25% to 5.00% at the end of the second
quarter in a pre-emptive move to prevent a resurgence of inflation. At the same
time, the Fed dropped its bias toward tightening.
Despite concerns of accelerating domestic inflation and the consequent
unfavorable environment for fixed income securities, the Fund maintained an
uninterrupted and constant dividend. The monthly dividend per share has remained
steady at $0.09375 with total dividends declared of $0.5625 per share over the
six-month period ended June 30, 1999. These dividend pay-outs equate to an
annualized dividend yield of 8.26% based on the Fund's NYSE trading price as of
June 30, 1999.
On the following pages you will find specific details as to the Fund's portfolio
and total return investment performance in light of economic and financial
market activities.
We are optimistic that the remainder of 1999 will be a successful period 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 semi-annual
report.
Sincerely,
/s/Brent R. Harris
BRENT R. HARRIS
Chairman of the Board
August 3, 1999
1
SEMI-ANNUAL REPORT
JUNE 30, 1999
<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.
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
SEMI-ANNUAL REPORT
JUNE 30, 1999
<PAGE>
SIX MONTHS IN REVIEW
Market Review
Interest rates rose during the first quarter as continued evidence of strong
U.S. economic growth heightened concern that the Federal Reserve would increase
the fed funds rate in an effort to combat the prospect of rising inflation. The
yield on the 30-year Treasury jumped 0.53%, ending the quarter at 5.62%, near
where it was in August 1998 before turbulence in the global financial markets
sparked a flight to safety that pushed yields down below 5%.
Rates continued to rise in the second quarter with the yield on the 30-year
Treasury bond ending the period at 5.97%, after reaching a high of 6.19%. The
Fed raised the federal funds rate by 0.25% to 5.00% at the end of the six-month
period and indicated that the move had been driven mainly by a return to
normalcy in the U.S. and international financial markets after the global crisis
of 1998. The increase came as no surprise to the financial markets since Fed
officials had adopted a bias - their view on the likely next move in rates -
towards tightening at their May policy-making open market committee meeting.
However, many market pundits were surprised when the rate increase was
accompanied by a Fed announcement that they were shifting their bias back to
neutral.
[LINE GRAPH APPEARS HERE]
Treasury Yield Curves
<TABLE>
<S> <C> <C> <C> <C>
12/31/1998 09/30/1998 06/30/1999 06/30/2000 Projection
3 Mos. 4.457 4.356 4.763 5
6 Mos. 4.539 4.467 5.033 5.077
1 Yr. 4.519 5.365 5.051 5.197
2 Yrs. 4.533 4.269 5.524 5.412
3 Yrs. 4.533 4.21 5.62 5.47
5 Yrs. 4.542 4.221 5.649 5.562
10 Yrs. 4.646 4.408 5.787 5.722
</TABLE>
3
SEMI-ANNUAL REPORT
JUNE 30, 1999
<PAGE>
SIX MONTHS IN REVIEW (CONT.)
Removal of the Fed's tightening bias came amid encouraging news about inflation.
After a surprise jump in the April consumer price index, led by higher energy
prices, the CPI was unchanged in May. A decline in new home sales due to higher
borrowing costs suggested the economy might be slowing, reducing inflationary
pressure. Economic expansion kept labor markets tight, with unemployment at a
29-year low, but growth in wage costs slowed. Workers were generally willing to
accept smaller wage increases with inflation subdued and real incomes rising.
With goods inflation relatively benign, Fed tightening was aimed more at
potential asset bubbles in housing and stock markets, where price gains have
lifted consumer confidence to record highs and stimulated increases in
consumption that have fueled economic growth.
- --------------------------------------------------------------------------------
Movements of Core CPI during the past two Years
- --------------------------------------------------------------------------------
CPI Y/YPercent Change (%)
[LINE GRAPH APPEARS HERE]
Movement of Cove CPI during the past two Years
CPI Y/Y Percent Change (%)
<TABLE>
<S> <C>
Jun-1997 2.3%
Sep-1997 2.2%
Dec-1997 1.7%
Mar-1998 1.4%
Jun-1998 1.7%
Sep-1998 1.5%
Dec-1998 1.6%
Mar-1999 1.7%
Jun-1999 2.0%
</TABLE>
- --------------------------------------------------------------------------------
Movements of GDP during the Past Two Years
- --------------------------------------------------------------------------------
Annualized Quarterly Percent Change (%)
[LINE GRAPH APPEARS HERE]
Movements of GDP during the Past Two Years
Annualized Quarterly Percent Change (%)
<TABLE>
<S> <C>
Jun-97 4%
Sep-97 4%
Dec-97 3%
Mar-98 6%
Jun-98 2%
Sep-98 4%
Dec-98 6%
Mar-99 4%
Jun-99 2%
</TABLE>
4
SEMI-ANNUAL REPORT
JUNE 30, 1999
<PAGE>
Performance
For the 6-month period ended June 30, 1999, the Fund delivered positive
investment performance of 3.35% based on its NYSE share price. This return
compared favorably to the Lehman Brothers Aggregate Bond Index which declined
1.37% over the same period. Fund performance was helped when several holdings
were upgraded by Standard & Poor's, Moody's and Fitch IBCA, three national
rating agencies.
- --------------------------------------------------------------------------------
Growth of $10,000 Net Investment in the Fund
- --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
Growth of $10,000 Net Investment in the Fund
<TABLE>
<CAPTION>
MONTH PIMCO Commercial PIMCO Commercial Lehman Brothers
Mortgage Net Asset Mortgage NYSE Aggregate Bond
Value Market Value 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
01/31/99 15,668 15,943 14,355
02/28/99 15,559 15,688 14,104
03/31/99 15,712 15,505 14,182
04/30/99 15,832 15,542 14,227
05/31/99 15,790 15,727 14,103
06/30/99 15,654 16,439 14,058
</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, 1999, 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.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Investment Performance for the Periods Ended 6/30/99
- ------------------------------------------------------------------------------------------------------------------------------
Since
Inception
6 Months 1 Year 2 Years* 3 Years* 5 Years* 9/2/93*
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fund Net Asset Value 0.81% 2.55% 6.91% 9.47% 9.81% 7.99%
Fund NYSE Market Value 3.35% 10.50% 9.15% 13.90% 12.40% 8.90%
Lehman Brothers
Aggregate Bond Index -1.37% 3.15% 6.78% 7.23% 7.83% N/A
</TABLE>
* Average annual total return
5
SEMI-ANNUAL REPORT
JUNE 30, 1999
<PAGE>
SIX MONTHS IN REVIEW (CONT.)
It is noteworthy that the Fund's NYSE share price performance was boosted
considerably as the Fund's trading premium to net asset value widened during the
six-month period, closing at 2.52%, after beginning the year with a premium to
net asset value of 0.07%. In the middle of the period, the Fund experienced a
discount to net asset value, which reached a wide of over 4% during the height
of inflation worries in May.
- --------------------------------------------------------------------------------
Premium/(Discount) to Net Asset Value
- --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
Premium/ Discount to Net Asset Value
<TABLE>
<CAPTION>
DATE PREMIUM/
(DISCOUNT)
<S> <C>
06/25/1998 -4.25%
07/02/1998 -3.44%
07/09/1998 -3.95%
07/16/1998 -3.07%
07/23/1998 -2.84%
07/30/1998 -2.08%
08/06/1998 -3.24%
08/13/1998 -3.74%
08/20/1998 -4.32%
08/27/1998 -1.39%
09/03/1998 -2.18%
09/10/1998 -3.47%
09/17/1998 -3.54%
09/24/1998 -5.57%
10/01/1998 -3.85%
10/08/1998 -12.43%
10/15/1998 -8.68%
10/22/1998 -6.00%
10/29/1998 -5.60%
11/05/1998 -3.81%
11/12/1998 -4.33%
11/19/1998 -4.36%
11/27/1998 -3.88%
12/03/1998 -3.92%
12/10/1998 -3.09%
12/17/1998 -3.74%
12/24/1998 -2.54%
12/31/1998 0.15%
01/07/1999 -2.27%
01/14/1999 -0.82%
01/21/1999 -1.41%
01/28/1999 -0.98%
02/04/1999 -0.22%
02/11/1999 -0.91%
02/18/1999 -2.06%
02/25/1999 -1.44%
03/04/1999 -2.21%
03/11/1999 -0.81%
03/18/1999 -0.86%
03/25/1999 -0.55%
04/01/1999 -2.65%
04/08/1999 -2.09%
04/15/1999 -3.60%
04/22/1999 -3.60%
04/29/1999 -3.95%
05/06/1999 -3.88%
05/13/1999 -3.88%
05/20/1999 -4.06%
05/27/1999 -2.24%
06/03/1999 -1.73%
06/10/1999 -0.02%
06/17/1999 -0.19%
06/24/1999 1.05%
</TABLE>
6
SEMI-ANNUAL REPORT
JUNE 30, 1999
<PAGE>
CMBS Issuance
CMBS issuance during the first half of 1999 totaled $34.8 billion, representing
a 19.8% decrease from mid-year 1998. The dip in issuance was directly
attributable to a slowdown in commercial-mortgage originations. The widening of
yield spreads during the third quarter of 1998 caused many originators to stop
making loans for a period of time, while others exited the market altogether. In
addition, there was a slowdown in REIT acquisition activity due to capital
constraints. The overall effect of this decline in issuance has been relatively
smaller deals involving more traditional property types as well as more single
borrower transactions.
- --------------------------------------------------------------------
Commercial Mortgage-Backed Securities Issuance (dollars in billions)
- --------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
Commercial Mortgage- Backed Securities Issuance (dollars in billions)
<TABLE>
<CAPTION>
Year 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 44.0
1998 80.0
1999 34.8
</TABLE>
7
SEMI-ANNUAL REPORT
JUNE 30, 1999
<PAGE>
SIX MONTHS IN REVIEW (CONT.)
Credit Spreads
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 third
quarter spread widening. After rate cuts by the Federal Reserve and other
central banks, a measure of confidence returned to the markets and, depending
upon security quality rating, yield premiums on CMBS and corporate debt
narrowed, though they remained well-above levels seen earlier in the year.
During the first half of 1999, the CMBS market showed resilience in rebounding
from the crisis of the past year. Although new issuance fell, liquidity returned
to the market and spreads stabilized.
- --------------------------------------------------------------------------------
Comparative Changes in Yield Spreads Over 10-Year Treasuries*
- --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
Comparative Changes in Yield Spreads Over 10-Year Treasuries*
<TABLE>
<CAPTION>
Rating 03/31/1997 06/30/1997 09/30/1997 12/31/1997 03/31/1998 06/30/1998 09/30/1998 12/31/1998 03/31/1999 06/30/1999
- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AA (CMBS) 72 67 69 90 88 96 155 161 135 140
BBB (CMBS) 100 86 89 130 140 140 240 285 240 200
AA (Corporates) 46 40 37 50 65 67 75 68 82 89
BBB (Corporates) 85 75 72 88 105 111 162 171 150 155
</TABLE>
*7 to 10 year U.S. Treasury Bonds as of June 30, 1999
8
SEMI-ANNUAL REPORT
JUNE 30, 1999
<PAGE>
Quality Ratings
Throughout the six-month period, the portfolio's average quality has continued
to revolve around a single-A rating. We regularly scrutinize and evaluate every
portfolio holding in an effort to assure that each security retains healthy
credit characteristics and that each remains a viable holding in relation to the
portfolio and relative to the overall CMBS market. 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 the
six-month period.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Upgraded Securities during the Past Six Months
- ---------------------------------------------------------------------------------------------------
New Prior Rating % of Net
Security Description Rating Rating Service Assets
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Boston Mortgage Securities Corp.
7.369% due 1/25/2028 AAA A1 Moody's 1.6%
Merrill Lynch Mortgage
7.945% due 6/15/2021 Baa2 Baa3 Moody's 0.5%
8.372% due 4/25/2023 Aa2 Baa1 Moody's 3.5%
Structured Asset Securities Corp.
7.750% due 2/25/2028 A+ BBB Fitch 2.5%
Federal Deposit Insurance Corp.
6.156% due 11/25/2026 Aa2 A2 Moody's 0.8%
CBA Mortgage Corp.
6.670% due 12/25/2003 AA BBB Duff & Phelps 0.3%
Morgan Stanley Capital
8.240% due 12/15/2023 A2 Baa2 Moody's 1.2%
-------
10.4%
</TABLE>
- --------------------------------------------------------------------------------
Portfolio Composition By Quality Rating *
- --------------------------------------------------------------------------------
[PIE CHART APPEARS HERE]
AAA 18.7%
AA 9.8%
A 18.2%
BBB 24.3%
BB 19.2%
B 9.8%
* As rated by Standard & Poor's or the equivalent by Moody's, Duff & Phelps or
Fitch IBCA
Geographic Distribution
The geographic distribution of the Fund's investment portfolio did not change
significantly over the six-month period ended June 30, 1999. 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.
9
SEMI-ANNUAL REPORT
JUNE 30, 1999
<PAGE>
SIX MONTHS IN REVIEW (CONT.)
Sector Allocations
The Fund features its greatest sector concentrations in multi-class and
multi-family CMBS. Multi-class CMBS provide important diversification benefits
while multi-family CMBS are selected due to the traditional and stable nature of
the property type. Over the past several years, real estate fundamentals have
remained solid with all sectors performing relatively well. We do not see any
major change to these dynamics in the near term. However, we will continue to
monitor the portfolio with regard to changes in the real estate market and make
adjustments when appropriate.
- --------------------------------------------------------------------------------
Portfolio Composition By Commercial Mortgage Type
- --------------------------------------------------------------------------------
[PIE CHART APPEARS HERE]
Multi-Class * 32.4%
Multi-Family 27.4%
Healthcare 17.9%
Hospitality 8.3%
Gaming 0.2%
Retail 1.3%
Commercial Paper 2.5%
Other 10.0%
*A mix of all types of commercial properties
Secular Outlook
We have shifted our secular outlook to neutral from our previous bullish stance
and expect 30-year Treasury yields to remain within a 5% to 6.5% band over the
next three years with inflation remaining near 2%.
The 17-year bull market for bonds, during which Treasury yields plunged from
more than 15% in 1981 to below 5% in 1998, occurred largely within an
environment of economic growth, rising productivity and disinflation driven by
the spread of capitalism worldwide. There are now fewer countries left to
embrace capitalism, and we do not see other major economic, political or social
trends that will drive rates much below the bottom of our secular range.
Meanwhile, disinflationary forces such as global excess capacity and
productivity enhancements created by new technologies should limit rate
increases.
10
SEMI-ANNUAL REPORT
JUNE 30, 1999
<PAGE>
- --------------------------------------------------------------------------------
30 Year and 3 Month Treasury Yields
- --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
30 Years and 3 Month Treasury Yields
<TABLE>
<CAPTION>
MONTH 3 Month 30 Year
Treasury Bill Treasury
<S> <C> <C>
Jun-1979 9.045 8.920
Jul-1979 9.262 8.930
Aug-1979 9.450 8.980
Sep-1979 10.182 9.170
Oct-1979 11.472 9.850
Nov-1979 11.868 10.300
Dec-1979 12.071 10.120
Jan-1980 12.036 10.600
Feb-1980 12.814 12.130
Mar-1980 15.526 12.340
Apr-1980 14.003 11.400
May-1980 9.150 10.360
Jun-1980 6.995 9.810
Jul-1980 8.126 10.240
Aug-1980 9.259 11.000
Sep-1980 10.321 11.340
Oct-1980 11.580 11.590
Nov-1980 13.888 12.370
Dec-1980 15.661 11.980
Jan-1981 14.724 12.280
Feb-1981 14.905 12.970
Mar-1981 13.478 12.650
Apr-1981 13.635 13.650
May-1981 16.295 13.060
Jun-1981 14.557 13.300
Jul-1981 14.699 13.960
Aug-1981 15.612 14.780
Sep-1981 14.951 15.190
Oct-1981 13.873 14.360
Nov-1981 11.269 12.910
Dec-1981 10.926 13.650
Jan-1982 12.412 13.910
Feb-1982 13.780 13.830
Mar-1982 12.493 13.680
Apr-1982 12.821 13.390
May-1982 12.148 13.390
Jun-1982 12.108 13.910
Jul-1982 11.914 13.420
Aug-1982 9.006 12.500
Sep-1982 8.196 11.790
Oct-1982 7.750 11.010
Nov-1982 8.042 10.700
Dec-1982 8.013 10.430
Jan-1983 7.810 10.990
Feb-1983 8.130 10.510
Mar-1983 8.304 10.690
Apr-1983 8.252 10.380
May-1983 8.185 10.960
Jun-1983 8.820 10.980
Jul-1983 9.120 11.820
Aug-1983 9.390 11.930
Sep-1983 9.050 11.410
Oct-1983 8.710 11.790
Nov-1983 8.710 11.640
Dec-1983 8.960 11.870
Jan-1984 8.930 11.750
Feb-1984 9.030 12.170
Mar-1984 9.440 12.480
Apr-1984 9.690 12.840
May-1984 9.900 13.740
Jun-1984 9.940 13.640
Jul-1984 10.130 12.770
Aug-1984 10.490 12.510
Sep-1984 10.410 12.250
Oct-1984 9.970 11.560
Nov-1984 8.790 11.530
Dec-1984 8.160 11.530
Jan-1985 7.760 11.210
Feb-1985 8.220 11.880
Mar-1985 8.570 11.640
Apr-1985 8.000 11.460
May-1985 7.560 10.560
Jun-1985 7.010 10.440
Jul-1985 7.050 10.660
Aug-1985 7.180 10.470
Sep-1985 7.080 10.560
Oct-1985 7.170 10.250
Nov-1985 7.200 9.840
Dec-1985 7.070 9.270
Jan-1986 7.040 9.320
Feb-1986 7.030 8.280
Mar-1986 6.590 7.440
Apr-1986 6.060 7.450
May-1986 6.120 7.750
Jun-1986 6.210 7.230
Jul-1986 5.840 7.420
Aug-1986 5.570 7.200
Sep-1986 5.190 7.590
Oct-1986 5.180 7.610
Nov-1986 5.350 7.400
Dec-1986 5.490 7.490
Jan-1987 5.450 7.470
Feb-1987 5.590 7.460
Mar-1987 5.560 7.910
Apr-1987 5.760 8.440
May-1987 5.750 8.640
Jun-1987 5.690 8.490
Jul-1987 5.780 8.900
Aug-1987 6.000 9.150
Sep-1987 6.320 9.740
Oct-1987 6.400 9.030
Nov-1987 5.810 9.100
Dec-1987 5.800 8.980
Jan-1988 5.900 8.420
Feb-1988 5.690 8.340
Mar-1988 5.690 8.760
Apr-1988 5.920 9.100
May-1988 6.270 9.240
Jun-1988 6.500 8.910
Jul-1988 6.730 9.210
Aug-1988 7.020 9.300
Sep-1988 7.230 9.050
Oct-1988 7.340 8.740
Nov-1988 7.680 9.070
Dec-1988 8.090 8.990
Jan-1989 8.290 8.820
Feb-1989 8.480 9.110
Mar-1989 8.830 9.090
Apr-1989 8.700 8.930
May-1989 8.400 8.600
Jun-1989 8.220 8.040
Jul-1989 7.920 7.920
Aug-1989 7.910 8.200
Sep-1989 7.720 8.240
Oct-1989 7.590 7.910
Nov-1989 7.650 7.890
Dec-1989 7.640 7.980
Jan-1990 7.640 8.450
Feb-1990 7.760 8.540
Mar-1990 7.870 8.630
Apr-1990 7.780 8.990
May-1990 7.780 8.580
Jun-1990 7.740 8.400
Jul-1990 7.660 8.410
Aug-1990 7.440 8.980
Sep-1990 7.380 8.950
Oct-1990 7.190 8.760
Nov-1990 7.070 8.490
Dec-1990 6.810 8.250
Jan-1991 6.300 8.200
Feb-1991 5.950 8.200
Mar-1991 5.910 8.250
Apr-1991 5.670 8.180
May-1991 5.510 8.270
Jun-1991 5.600 8.410
Jul-1991 5.580 8.340
Aug-1991 5.390 8.060
Sep-1991 5.250 7.810
Oct-1991 5.030 7.910
Nov-1991 4.600 7.940
Dec-1991 4.120 7.400
Jan-1992 3.800 7.760
Feb-1992 3.840 7.790
Mar-1992 4.040 7.960
Apr-1992 3.750 8.040
May-1992 3.630 7.840
Jun-1992 3.660 7.780
Jul-1992 3.210 7.460
Aug-1992 3.130 7.410
Sep-1992 2.910 7.380
Oct-1992 2.860 7.630
Nov-1992 3.130 7.600
Dec-1992 3.220 7.400
Jan-1993 3.060 7.200
Feb-1993 2.930 6.900
Mar-1993 2.950 6.930
Apr-1993 2.870 6.930
May-1993 2.960 6.980
Jun-1993 3.070 6.670
Jul-1993 3.040 6.560
Aug-1993 3.020 6.090
Sep-1993 2.950 6.030
Oct-1993 3.020 5.970
Nov-1993 3.100 6.300
Dec-1993 3.060 6.350
Jan-1994 2.980 6.240
Feb-1994 3.250 6.660
Mar-1994 3.500 7.090
Apr-1994 3.680 7.310
May-1994 4.140 7.430
Jun-1994 4.140 7.610
Jul-1994 4.330 7.400
Aug-1994 4.480 7.450
Sep-1994 4.760 7.820
Oct-1994 4.950 7.970
Nov-1994 5.290 8.000
Dec-1994 5.600 7.880
Jan-1995 5.710 7.700
Feb-1995 5.770 7.440
Mar-1995 5.730 7.430
Apr-1995 5.650 7.340
May-1995 5.670 6.650
Jun-1995 5.470 6.620
Jul-1995 5.420 6.850
Aug-1995 5.400 6.650
Sep-1995 5.280 6.500
Oct-1995 5.490 6.330
Nov-1995 5.470 6.130
Dec-1995 5.080 5.950
Jan-1996 5.050 6.030
Feb-1996 5.030 6.470
Mar-1996 5.140 6.670
Apr-1996 5.150 6.910
May-1996 5.180 6.990
Jun-1996 5.160 6.870
Jul-1996 5.310 6.970
Aug-1996 5.280 7.120
Sep-1996 5.030 6.920
Oct-1996 5.150 6.640
Nov-1996 5.130 6.350
Dec-1996 5.170 6.640
Jan-1997 5.150 6.790
Feb-1997 5.220 6.800
Mar-1997 5.320 7.100
Apr-1997 5.230 7.140
May-1997 4.940 6.910
Jun-1997 5.170 6.740
Jul-1997 5.230 6.450
Aug-1997 5.220 6.610
Sep-1997 5.100 6.400
Oct-1997 5.200 6.150
Nov-1997 5.200 6.050
Dec-1997 5.350 5.920
Jan-1998 5.183 5.805
Feb-1998 5.308 5.919
Mar-1998 5.125 5.932
Apr-1998 4.978 5.951
May-1998 5.007 5.803
Jun-1998 5.093 5.626
Jul-1998 5.080 5.714
Aug-1998 4.830 5.256
Sep-1998 4.356 4.965
Oct-1998 4.323 5.150
Nov-1998 4.488 5.072
Dec-1998 4.457 5.092
Jan-1999 4.457 5.091
Feb-1999 4.664 5.575
Mar-1999 4.470 5.621
Apr-1999 4.530 5.661
May-1999 5.007 5.803
Jun-1999 4.763 5.969
</TABLE>
Our range-bound interest rate forecast is based on the view that forces of
deflation and inflation are roughly in balance. The global economy is safer than
last year, when Asian economies, currency devaluations and falling commodity
prices raised the specter of global deflation. Fiscal stimulus and more than 300
separate central bank easings worldwide calmed financial markets and produced
signs of recovery in Japan and several Pacific Rim countries. Global reflation
is unlikely due to excess supply and structural impediments to growth in Europe
and Japan.
Cyclical Outlook
Economic expansion will continue, though at a slower pace, as higher interest
rates reduce growth in consumer and investment spending. While the Fed may
tighten further to help cool the economy, we do not believe that the central
bank will embark on a protracted series of hikes such as last occurred in 1994.
Compared to 1994, real interest rates are higher, inflation is lower and recent
monetary stimulus has been less substantial. We expect inflation to trend upward
due to leveling off of commodity prices after recent declines, but global excess
capacity and technology-driven productivity gains will limit these increases.
Moderating growth and relatively low inflation should keep interest rates near
current levels over the next few months, making yield more important than price
movement in determining portfolio returns.
11
SEMI-ANNUAL REPORT
JUNE 30, 1999
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
For the six months For the year ended For the year ended
Selected Per Share Data: ended June 30, 1999 December 31, 1998 December 31, 1997
--------------------------------------------------------------
(unaudited)
<S> <C> <C> <C>
Net asset value, beginning of period $ 13.74 $ 13.97 $ 13.71
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income 0.57 1.24 1.20
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.46) (0.25) 0.29
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.11 0.99 1.49
- ---------------------------------------------------------------------------------------------------------------------------
Less dividends from net investment income (0.56) (1.22) (1.23)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 13.29 $ 13.74 $ 13.97
===========================================================================================================================
Per share market value, end of period $ 13.63 $ 13.75 $ 13.69
===========================================================================================================================
Total investment return
- ---------------------------------------------------------------------------------------------------------------------------
Per share market value (a) 3.35% 9.86% 16.40%
- ---------------------------------------------------------------------------------------------------------------------------
Per share net asset value (b) 0.81% 7.33% 11.27%
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets
- ---------------------------------------------------------------------------------------------------------------------------
Operating expenses (excluding interest expense) 0.97%* 0.99% 0.97%
- ---------------------------------------------------------------------------------------------------------------------------
Total operating expenses 3.06%* 3.61% 3.69%
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income 8.30%* 8.81% 8.63%
- ---------------------------------------------------------------------------------------------------------------------------
Supplemental data
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (amounts in thousands) $ 146,254 $ 151,222 $ 153,803
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 0.02% 7.92% 8.74%
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
For the year ended For the year ended For the year ended
Selected Per Share Data: December 31, 1996 December 31, 1995 December 31, 1994
--------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period $ 13.84 $ 12.41 $ 13.76
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income 1.23 1.16 1.16
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.13) 1.40 (1.38)
- ---------------------------------------------------------------------------------------------------------------------------
Total from investment operations 1.10 2.56 (0.22)
- ---------------------------------------------------------------------------------------------------------------------------
Less dividends from net investment income (1.23) (1.13) (1.13)
- ---------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 13.71 $ 13.84 $ 12.41
===========================================================================================================================
Per share market value, end of period $ 12.88 $ 12.38 $ 11.13
===========================================================================================================================
Total investment return
- ---------------------------------------------------------------------------------------------------------------------------
Per share market value (a) 14.57% 21.86% (10.42%)
- ---------------------------------------------------------------------------------------------------------------------------
Per share net asset value (b) 8.45% 21.33% (1.61%)
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets
- ---------------------------------------------------------------------------------------------------------------------------
Operating expenses (excluding interest expense) 0.99% 1.04% 1.03%
- ---------------------------------------------------------------------------------------------------------------------------
Total operating expenses 3.60% 3.94% 2.71%
- ---------------------------------------------------------------------------------------------------------------------------
Net investment income 9.08% 8.93% 8.84%
- ---------------------------------------------------------------------------------------------------------------------------
Supplemental data
- ---------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (amounts in thousands) $ 150,929 $ 152,375 $ 136,595
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 35.98% 47.79% 45.71%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized
(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
Semi-Annual Report
June 30, 1999
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
Amounts in thousands, except per share and share amounts June 30,1999
------------
(unaudited)
Assets:
Investments in securities, at market value
(Identified cost: $211,302) $ 205,549
- --------------------------------------------------------------------------
Cash 104
- --------------------------------------------------------------------------
Interest receivable 1,966
- --------------------------------------------------------------------------
Paydown receivable 588
- --------------------------------------------------------------------------
Other assets 128
- --------------------------------------------------------------------------
Total assets $ 208,335
==========================================================================
Liabilities:
Reverse repurchase agreements $ 58,342
- --------------------------------------------------------------------------
Payable for investments purchased 2,449
- --------------------------------------------------------------------------
Dividends payable 1,032
- --------------------------------------------------------------------------
Accrued investment manager's fee 185
- --------------------------------------------------------------------------
Accrued administrator's fee 26
- --------------------------------------------------------------------------
Accrued trustees' fee 29
- --------------------------------------------------------------------------
Other liabilities 18
- --------------------------------------------------------------------------
Total liabilities $ 62,081
==========================================================================
Net assets applicable to outstanding stock $ 146,254
==========================================================================
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 299
- --------------------------------------------------------------------------
Accumulated net realized (loss) from investments (1,226)
- --------------------------------------------------------------------------
Net unrealized (depreciation) of investments (5,753)
- --------------------------------------------------------------------------
$ 146,254
==========================================================================
Net asset value per share outstanding $ 13.29
==========================================================================
STATEMENT OF OPERATIONS
For the six months
Amounts in thousands ended June 30,1999
------------------
(unaudited)
Interest income $ 8,567
- --------------------------------------------------------------------------
Expenses:
Interest expense 1,580
- --------------------------------------------------------------------------
Investment manager fee 520
- --------------------------------------------------------------------------
Administration fee 72
- --------------------------------------------------------------------------
Custodian, accounting and transfer agent fee 33
- --------------------------------------------------------------------------
Directors' fee 44
- --------------------------------------------------------------------------
Proxy expense 9
- --------------------------------------------------------------------------
Legal fee 2
- --------------------------------------------------------------------------
Audit fee 7
- --------------------------------------------------------------------------
Other expenses 41
- --------------------------------------------------------------------------
Total expenses 2,308
- --------------------------------------------------------------------------
Net investment income $ 6,259
==========================================================================
Net realized and unrealized (loss):
Net realized (loss) on investments (4)
- --------------------------------------------------------------------------
Unrealized (depreciation) on investments (5,031)
- --------------------------------------------------------------------------
Net (loss) on investments $ (5,035)
- --------------------------------------------------------------------------
Net increase in net assets resulting from operations $ 1,224
==========================================================================
13
Semi-Annual Report
June 30, 1999
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the six months For the year ended
Amounts in thousands ended June 30, 1999 December 31, 1998
-----------------------------------------
(unaudited)
Increase (Decrease) in Net Assets from:
<S> <C> <C>
Operations:
Net investment income $ 6,259 $ 13,664
- ----------------------------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (4) 785
- ----------------------------------------------------------------------------------------------------------------------------
Unrealized (depreciation) on investments (5,031) (3,546)
- ----------------------------------------------------------------------------------------------------------------------------
Net increase resulting from operations 1,224 10,903
- ----------------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders from:
From net investment income (6,192) (13,484)
- ----------------------------------------------------------------------------------------------------------------------------
Total (Decrease) in Net Assets (4,968) (2,581)
============================================================================================================================
Net Assets:
Beginning of period 151,222 153,803
- ----------------------------------------------------------------------------------------------------------------------------
End of period * $ 146,254 $ 151,222
- ----------------------------------------------------------------------------------------------------------------------------
* Including undistributed net investment income of: $ 299 $ 232
- ----------------------------------------------------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS
For the six months
Amounts in thousands ended June, 30 1999
-------------------
(unaudited)
Net increase in net assets resulting from operations $ 1,224
============================================================================================================================
Adjustments to reconcile to net cash provided from operating activities:
Decrease in interest receivable 530
- ----------------------------------------------------------------------------------------------------------------------------
Amortization of premium and discount, net (511)
- ----------------------------------------------------------------------------------------------------------------------------
Decrease in accrued expenses (143)
- ----------------------------------------------------------------------------------------------------------------------------
Increase in other assets 5
- ----------------------------------------------------------------------------------------------------------------------------
Net loss on investments 5,035
- ----------------------------------------------------------------------------------------------------------------------------
Total adjustments 4,916
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided from operating activities 6,140
- ----------------------------------------------------------------------------------------------------------------------------
Investing activities:
Purchase of long-term portfolio investments (8,541)
- ----------------------------------------------------------------------------------------------------------------------------
Proceeds from disposition of long-term portfolio investments 14,499
- ----------------------------------------------------------------------------------------------------------------------------
Proceeds from disposition of short-term portfolio investments, net (3,060)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 2,898
- ----------------------------------------------------------------------------------------------------------------------------
Financing activities*:
Cash dividends paid (7,292)
- ----------------------------------------------------------------------------------------------------------------------------
Net decrease in reverse repurchase agreements (1,648)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (8,940)
- ----------------------------------------------------------------------------------------------------------------------------
Net increase in cash: 98
- ----------------------------------------------------------------------------------------------------------------------------
Cash at beginning of period 6
- ----------------------------------------------------------------------------------------------------------------------------
Cash at end of period $ 104
============================================================================================================================
</TABLE>
* Cash paid for interest for the six months ended June 30,1999, amounted to
$719.
14
SEMI-ANNUAL REPORT
June 30, 1999
<PAGE>
SCHEDULE OF INVESTMENTS
<TABLE>
<CAPTION>
Principal
Amount Value
(000s) (000s)
- ---------------------------------------------------------------------------------------------------------
COMMERCIAL MORTGAGE-BACKED SECURITIES 122.9%
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Multi-Class 45.5%
Aetna Commercial Trust
7.100% due 12/26/2030 $ 1,000 $ 988
Asset Securitization Corp.
7.384% due 08/13/2029 1,500 1,415
Blackrock Capital Financial
8.298% due 11/16/2026 (b)(c) 336 334
8.480% due 09/25/2028 (c) 3,000 2,655
CBA Mortgage Corp.
6.670% due 12/25/2003 (b) 415 403
Federal Deposit Insurance Corp.
6.156% due 11/25/2026 (b) 1,260 1,218
First Boston Mortgage Securities Corp.
7.555% due 09/25/2006 (b) 976 968
7.458% due 11/25/2027 1,000 996
8.012% due 11/25/2027 1,500 1,500
7.164% due 01/25/2028 (b)(c) 1,302 1,259
7.369% due 01/25/2028 (b) 2,500 2,364
General Motors Acceptance Corp.
7.153% due 05/18/2028(b) 1,500 1,060
GMAC Commercial Mortgage Securities, Inc.
6.500% due 05/15/2031 2,000 1,658
Green Tree Financial Corp.
8.000% due 07/15/2018 3,087 2,947
JP Morgan Commercial Mortgage Finance Corp.
8.585% due 11/25/2027 (c) 2,284 1,912
Matterhorn Capital Corp.
7.850% due 01/20/2006 (c) 783 785
Merrill Lynch Mortgage
7.945% due 06/15/2021 (b) 774 758
7.120% due 06/18/2029 2,000 1,845
Morgan Stanley Capital
6.590% due 02/15/2005 (b)(c) 2,000 1,973
6.850% due 02/15/2020 (c) 1,000 732
8.240% due 12/15/2023 (b)(c) 1,726 1,722
7.695% due 10/03/2030 (c) 2,000 1,626
Mortgage Capital Funding, Inc.
7.531% due 07/20/2027 1,000 977
NationsLink Funding Corp.
7.100% due 01/20/2009 2,000 1,903
7.105% due 01/20/2013 (c) 2,500 1,858
NB Commercial Mortgage
8.031% due 10/20/2023 (c) 500 503
8.730% due 10/20/2023 (c) 1,000 1,015
Nomura Asset Securities Corp.
7.042% due 07/07/2003 (b)(c) 3,260 3,258
9.771% due 09/11/2019 (b) 3,000 3,257
Prudential Securities Secured Financing
7.610% due 12/26/2022 1,000 946
Resolution Trust Corp.
9.250% due 06/25/2023 1,376 1,368
8.835% due 12/25/2023 1,600 1,614
9.450% due 05/25/2024 4,842 4,806
9.500% due 05/25/2024 278 276
9.200% due 06/25/2024 28 27
8.000% due 04/25/2025 1,551 1,537
8.000% due 04/25/2025 1,821 1,816
8.000% due 06/25/2026 2,161 2,140
7.000% due 05/25/2027 1,841 1,773
6.900% due 02/25/2027 (b) 1,798 1,645
Structured Asset Securities Corp.
7.375% due 09/25/2024 1,000 995
7.750% due 02/25/2028 3,841 3,711
----------
66,543
Multi-Family 38.5%
Chase Commercial Mortgage Securities Corp.
6.900% due 11/19/2006 1,500 1,305
Donaldson, Lufkin & Jenrette
7.350% due 12/18/2003 3,000 2,996
Federal Housing Administration
8.360% due 01/01/2012 1,041 1,049
7.750% due 01/01/2016 402 402
6.875% due 12/01/2016 755 702
7.625% due 12/01/2016 485 480
6.430% due 12/01/2019 2,672 2,638
7.430% due 12/20/2020 1,157 1,154
7.430% due 07/01/2021 819 819
7.439% due 08/01/2021 616 627
7.484% due 02/25/2023 973 965
6.875% due 11/01/2023 1,962 1,862
8.250% due 02/01/2028 2,566 2,574
7.750% due 05/01/2028 959 944
9.325% due 06/01/2035 5,933 5,999
Federal National Mortgage Association
3.203% due 12/25/2015 (b)(c) 874 553
7.884% due 12/25/2015 (b)(c) 1,608 1,339
9.375% due 04/01/2016 1,587 1,633
7.875% due 11/01/2018 299 299
5.905% due 01/01/2019 (b) 1,356 1,325
Government National Mortgage Association
9.500% due 09/15/2030 4,278 4,329
8.625% due 10/15/2034 3,453 3,522
Merrill Lynch Mortgage
8.372% due 04/25/2023 (b) 5,000 5,050
Merrill Lynch Mortgage Investors, Inc.
9.361% due 11/25/2020 (c) 2,500 2,506
Multi-Family Capital Access One, Inc.
7.400% due 01/15/2024 1,773 1,759
NationsBanc Mortgage Capital Corp.
8.048% due 05/25/2028 (b)(c) 2,000 1,546
Resolution Trust Corp.
9.000% due 03/25/2017 1,375 1,363
6.653% due 09/25/2020 (b) 375 333
7.250% due 09/25/2021 (b) 837 826
Structured Asset Securities Corp.
7.050% due 11/25/2002 6,000 5,379
----------
56,278
Healthcare 25.2%
Daiwa Mortgage Acceptance Corp.
6.744% due 09/25/2006 (b)(c) 1,122 1,123
Federal Housing Administration
7.500% due 12/31/2031 1,578 1,592
Gardenview Care
7.250% due 07/30/2039 2,500 2,449
LTC Commercial Corp.
9.300% due 06/15/2026 (c) 4,000 4,028
Nomura Asset Securities Corp.
6.680% due 12/15/2001 (c) 12,100 11,796
Red Mountain Funding Corp.
7.072% due 01/15/2019 (c) 2,000 1,769
7.471% due 01/15/2019 (c) 1,000 750
8.926% due 01/15/2019 (c) 1,000 679
9.150% due 11/28/2027 (c) 3,200 2,736
SC Commercial
7.050% due 11/28/2013 (c) 5,000 4,970
7.800% due 11/28/2013 (c) 5,000 4,981
----------
36,873
Hospitality 11.6%
Cooper Hotel
7.500% due 07/15/2013 (c) 7,969 8,083
Federal Housing Administration
7.500% due 09/01/2034 762 745
Franchise Mortgage Acceptance Corp.
7.981% due 11/15/2018 (c) 2,300 2,375
German American Capital Corp.
8.535% due 10/10/2002 (c) 2,000 1,938
Hotel First
8.520% due 08/05/2008 (c) 2,661 2,817
J.Q. Hammons Hotels
8.875% due 02/15/2004 1,100 1,020
----------
16,978
</TABLE>
15
SEMI-ANNUAL REPORT
June 30, 1999
<PAGE>
SCHEDULE OF INVESTMENTS (CONT.)
<TABLE>
<CAPTION>
Principal
Amount Value
(000s) (000s)
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Retail 1.8%
Trizec Finance Limited
10.875% due 10/15/2005 $ 2,505 $ 2,621
Gaming 0.3%
Riviera Holdings Corp.
10.000% due 08/15/2004 500 468
--------------
Total Commercial Mortgage-Backed Securities 179,761
(Cost $184,516) ==============
- ------------------------------------------------------------------------------------------------
CORPORATE BONDS & NOTES 12.4%
- ------------------------------------------------------------------------------------------------
Banking & Finance 3.7%
Forest City Enterprises
8.500% due 03/15/2008 4,000 3,860
Mercury Finance Co.
10.000% due 03/23/2001 (c) 1,602 1,540
--------------
5,400
Industrials 6.7%
Building Materials Corp.
8.000% due 10/15/2007 3,000 2,820
Chattem, Inc.
8.875% due 04/01/2008 500 490
Container Corp. of America
11.250% due 05/01/2004 1,500 1,568
Grupo Televisa SA
11.375% due 05/15/2003 750 769
Holmes Products Corp.
9.875% due 11/15/2007 1,000 975
Stater Brothers Holdings
11.000% due 03/01/2001 1,500 1,530
Synthetic Industries, Inc.
9.250% due 02/15/2007 500 515
US Air, Inc.
9.330% due 01/01/2006 1,074 1,072
--------------
9,739
Utilities 2.0%
Calpine Corp.
8.750% due 07/15/2007 1,680 1,647
Flag Limited
8.250% due 01/30/2008 1,400 1,309
--------------
3,080 2,956
--------------
Total Corporate Bonds & Notes 18,095
(Cost $18,797) ==============
- ------------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES 1.3%
- ------------------------------------------------------------------------------------------------
Airplanes Pass Through Trust
10.875% due 03/15/2019 2,000 1,906
--------------
Total Asset-Backed Securities 1,906
(Cost $2,202) ==============
- ------------------------------------------------------------------------------------------------
SHORT-TERM INSTRUMENTS 3.9%
- ------------------------------------------------------------------------------------------------
Commercial Paper 3.5%
Ameritech Corp.
4.920%due 07/07/1999 1,300 1,299
BellSouth Telecommunications, Inc.
5.090% due 07/14/1999 800 799
Emerson Electric Co.
4.930% due 07/08/1999 100 100
Federal Home Loan Mortgage Corp.
4.860% due 08/05/1999 1,000 995
5.040% due 11/30/1999 700 684
United Parcel Service
4.950% due 07/08/1999 400 400
Wisconsin Electric Power & Light
5.240% due 07/13/1999 900 898
--------------
5,175
==============
Repurchase Agreement 0.4%
State Street Bank
4.000% due 07/01/1999 612 612
(Dated 06/30/1999. Collateralized by --------------
U.S. Treasury Note 5.750% 06/30/2000
valued at $625,000. Repurchase
proceeds are $612,068.)
Total Short-term Instruments(a) 140.5% 5,787
(Cost $5,787) ==============
Total Investments (a) 140.5% $ 205,549
(Cost $211,302)
Other Assets and Liabilities (Net) (40.5%) (59,295)
--------------
Net Assets 100.0% $ 146,254
==============
</TABLE>
Notes to Schedule of Investments:
(a) The identified cost of investments owned as of June 30, 1999, was the same
for federal income tax and financial statement purposes.
(b) Variable rate security. The rate shown is as of June 30, 1999.
(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.
16
SEMI-ANNUAL REPORT
June 30, 1999
<PAGE>
NOTES TO FINANCIAL STATEMENTS (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.
17
Semi-Annual Report
June 30, 1999
<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 June 30,
1999, were $10,985,928 and $44,932, respectively.
18
SEMI-ANNUAL REPORT
June 30, 1999
<PAGE>
5. Federal Income Tax Matters
At June 30, 1999, the net unrealized depreciation of investments based on cost
for federal income tax purposes was as follows:
Aggregate gross unrealized appreciation $ 1,984,709
Aggregate gross unrealized depreciation (7,737,355)
----------------
Net unrealized depreciation $ (5,752,646)
================
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 period ended June 30,
1999 was $58,085,560 at a weighted average interest rate of 5.44%. On June 30,
1999, securities valued at $60,033,280 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
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 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.
19
SEMI-ANNUAL REPORT
JUNE 30, 1999
<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
20
SEMI-ANNUAL REPORT
JUNE 30, 1999
<PAGE>
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.
21
SEMI-ANNUAL REPORT
JUNE 30, 1999
<PAGE>
DIVIDEND REINVESTMENT PLAN (CONT.)
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.
22
SEMI-ANNUAL REPORT
JUNE 30, 1999
<PAGE>
PROXY VOTING RESULTS
A special meeting of the funds shareholders was held on May 25, 1999. The result
of votes taken among shareholders on proposals are listed below.
1. To elect as Directors the following two nominees.
# of % of
Shares Voted Shares Voted
-------------------------------
Vern O. Curtis
Affirmative 9,955,438 98.830%
Withheld 117,838 1.170%
Total 10,073,276 100.000%
Thomas P. Kemp
Affirmative 9,991,368 99.187%
Withheld 81,916 0.813%
Total 10,073,276 100.000%
2. To ratify the selection of Ernst & Young LLP as independent public
accountants of the Fund for its fiscal year ending December 31, 1999:
# of % of
Shares Voted Shares Voted
-------------------------------
Affirmative 9,990,119 99.174%
Against 26,662 0.265%
Abstain 56,495 0.561%
Total 10,073,276 100.000%
23
SEMI-ANNUAL REPORT
JUNE 30, 1999
<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
1775 Eye Street, N.W.
Washington, D.C. 20006-2401
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.
