<PAGE>
- --------------------------------------------------------------------------------
AEW COMMERCIAL MORTGAGE
SECURITIES FUND, INC.
- --------------------------------------------------------------------------------
OFFICERS AND DIRECTORS
Norton H. Reamer Peter M. Whitman, Jr.
Director, President Director
and Chairman
Mary Rudie Barneby William H. Park
Director and Vice President and
Executive Vice President Assistant Treasurer
John T. Bennett, Jr. Karl O. Hartmann
Director Secretary
J. Edward Day Robert R. Flaherty
Director Treasurer
Philip D. English Harvey M. Rosen
Director Assistant Secretary
William A. Humenuk
Director
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
Aldrich, Eastman & Waltch L.P.
225 Franklin Street
Boston, MA 02110
- --------------------------------------------------------------------------------
ADMINISTRATOR
UAM Fund Services, Inc.
211 Congress Street
Boston, MA 02110
- --------------------------------------------------------------------------------
CUSTODIAN
The Bank of New York
60 Wall Street
New York, NY 10260
- --------------------------------------------------------------------------------
LEGAL COUNSEL
Stradley, Ronon, Stevens & Young LLP
2600 One Commerce Square
Philadelphia, PA 19103
- --------------------------------------------------------------------------------
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
160 Federal Street
Boston, MA 02110
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AEW COMMERCIAL MORTGAGE SECURITIES FUND, INC.
- --------------------------------------------------------------------------------
SEMI-ANNUAL REPORT
APRIL 30, 1996
<PAGE>
May 15, 1996
AEW COMMERCIAL MORTGAGE SECURITIES FUND, INC.
Dear Shareholder,
The AEW Commercial Mortgage Securities Fund, Inc. (the "Fund") is a non-
diversified, closed-end management investment company which was initially
capitalized on December 21, 1994 with the sale of 10,011,100 shares of common
stock which generated proceeds of $100,111,000. There are limited restrictions
on the credit quality of the Fund's investments. The weighted average credit
quality of the Fund is to be BB-(Ba3) or better based on ratings from the
nationally recognized credit rating agencies. The Fund's portfolio currently
has an average credit rating of BBB-.
As of April 30, 1996, the Fund had a total market value of $117.3 million
($133.5 million face amount). Of that amount, investments in Commercial
Mortgage Backed Securities ("CMBS") totaled a market value of $100.4 million
($116.1 million face amount). An amount of $0.97 million was invested during
the quarter in $1.0 million face amount of CBM Funding Corp 96-1, Class C
rated BBB. An additional $2.3 million was invested in Treasury securities with
a face amount of $2.1 million to minimize cash exposure of the Fund.
The CMBS portion of the Fund's portfolio currently has a BB average credit
rating, a 5.03 year modified adjusted duration, and a pricing yield of 11.23%
(which is approximately 485 basis points above Treasuries and 229 basis points
above the Lehman Brothers BB Corporate Bond Index). The CMBS held by the Fund
are backed by mortgage loans secured by apartments (47%), retail (25%), office
(10%), hospitality (8%), industrial (4%) and other property types (6%). By
state, the mortgage collateral is located in Texas (18%), California (17%),
Florida (9%), New York (7%), Indiana (4%), Illinois (4%), Ohio (4%), and
Michigan (4%), with the remainder (33%) disbursed throughout 44 other states.
For the period from inception (December 21, 1994) through April 30, 1996, the
Fund generated an average annual total return of 13.17% after fees. This was
below our benchmark, the Lehman Brothers BB Corporate Bond Index, which
generated a return of 15.97% during a similar period. (The return for the
benchmark has been calculated excluding the partial period December 21 through
December 31, 1994.) For the six month period ended April 30, 1996, the Fund
had a return of 2.26% compared to 3.21% for the Index. The performance since
inception lags the benchmark by 280 basis points due to the high percentage of
U.S. Treasury bond holdings during the investment phase and a tightening in
the corporate bond market during the first calendar quarter of 1996. For the
12 month period ended March 31, 1996, the Fund had a return of 12.76% compared
to 14.86% for the Index. For the period from inception through March 31, 1996,
the Fund's average annualized return was 18.54% compared to 22.22% for the
Index.
Aldrich, Eastman & Waltch, L.P.
LOGO
Clifford M. Brown
Director
1
<PAGE>
DEFINITION OF COMPARATIVE INDEX
Lehman Brothers BB Corporate Bond Index--includes all fixed-rate issues with a
maximum quality rating of Ba1 or lower by Moody's Investors Service
("Moody's") and a minimum of $100 million in outstanding principal. If a
Moody's rating is unavailable, the issues must be rated BB+ or lower by
Standard & Poor's Corporation or by another rating service. The bonds must
have at least one year to maturity and be non-callable.
Comparisons of performance assume reinvestment of dividends.
Please note that one cannot invest in an unmanaged index.
The investment results presented in the Adviser's letter represent past
performance and should not be construed as a guarantee of future results. If
the Adviser did not have temporary fee waivers, total returns for the Fund
would have been lower. The investment return and principal value of an
investment will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost.
2
<PAGE>
AEW COMMERCIAL MORTGAGE SECURITIES FUND, INC.
FINANCIAL STATEMENTS
STATEMENT OF NET ASSETS
April 30, 1996 (Unaudited)
The accompanying notes are an integral part of the financial statements.
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)+
- -----------------------------------------------------------------------
<S> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS (84.8%)
- -----------------------------------------------------------------------
FINANCIAL SERVICES (84.8%)
#(S)++American Southwest Financial Securities Corp.,
1995-C1 Class B3 9.872%, 6/17/05 (acquired 8/2/95,
Cost $13,021)........................................$14,600.$ 12,944
#(S)++American Southwest Financial Securities Corp.,
1995-C1 Class B4 9.872%, 6/17/05 (acquired 8/2/95,
Cost $9,061)..........................................11,700 9,060
#(S)++Asset Securitization Corp.,
1995-D1 Class A4 7.59%, 8/11/27 (acquired 8/4/95,
Cost $3,031).......................................... 3,326 3,003
#(S)++Bellaire Finance Corp.,
REMIC Class D 9.90%, 2/1/08 (acquired 1/24/95, Cost
$2,998)............................................... 3,000 3,135
#(S)++Bellaire Finance Corp.,
REMIC Class E 12.74%, 2/1/08 (acquired 1/24/95, Cost
$1,678)............................................... 1,688 1,764
#(S)++CBM Funding Corp.,
1996-1 Class C 7.86%, 2/1/13 (acquired 1/16/96-
4/5/96, Cost $3,032).................................. 3,000 2,894
#(S)++CBM Funding Corp.,
1996-1 Class D 8.645%, 2/1/08 (acquired 1/16/96,
Cost $989)............................................ 960 926
++CS First Boston Mortgage Securities Corp.,
1995-WF1 Class D 7.532%, 12/21/27................... 3,000 2,847
#(S)++CS First Boston Mortgage Securities Corp. & DLJ
Mortgage Acceptance Corp.,
REMIC 1995-T1 Class D 8.37%, 2/25/10 (acquired
2/23/95, Cost $4,580)................................. 5,839 4,832
#(S)++CS First Boston Mortgage Securities Corp. & DLJ
Mortgage Acceptance Corp.,
REMIC 1995-T1 Class E 8.37%, 2/25/10 (acquired
2/23/95, Cost $7,676).................................11,087 8,142
#(S)++CS First Boston Mortgage Securities Corp. & DLJ
Mortgage Acceptance Corp.,
REMIC 1995-T1 Class F 8.37%, 2/25/10 (acquired
2/23/95, Cost $3,959)................................. 9,425 4,000
#(S)++DLJ Mortgage Acceptance Corp.,
1995-CF2 Class B1 7.50%, 12/17/27 (acquired
12/11/95, Cost $2,016)................................ 2,000 1,901
#(S)++DLJ Mortgage Acceptance Corp.,
1995-CF2 Class B2 8.81%, 12/17/27 (acquired
12/11/95, Cost $2,008)................................ 2,000 1,929
++Federal Deposit Insurance Corp.,
REMIC Trust 1994-C1 Class IIE 8.70%, 9/25/25........ 3,035 3,025
++Kidder Peabody Acceptance Corp.,
REMIC 1993-M1 Class C 7.15%, 4/25/25................ 2,000 1,779
#(S)++LB Mortgage Trust,
1992-M1 Class B 8.00%, 2/25/24 (acquired 8/22/95,
Cost $2,933).......................................... 3,000 2,921
#(S)++Lennar Central Partners, L.P.,
1994-1 Class E 10.92%, 9/15/04 (acquired 1/20/95,
Cost $4,795).......................................... 5,000 5,000
#(S)++Lennar U.S. Partners, L.P.,
1995-1 Class D 8.05%, 5/15/03 (acquired 4/18/95,
Cost $3,978).......................................... 4,000 4,015
</TABLE>
3
<PAGE>
AEW COMMERCIAL MORTGAGE SECURITIES FUND, INC.
FINANCIAL STATEMENTS
STATEMENT OF NET ASSETS--(CONTINUED)
April 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)+
--------------------------------------------
<S> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS--
(CONTINUED)
--------------------------------------------
#(S)++Lennar U.S.
Partners, L.P.,
1995-1 Class E 9.75%,
5/15/05 (acquired
4/18/95, Cost $1,989)......$2,000 $ 2,008
#(S)++Lennar U.S.
Partners, L.P.,
1995-1 Class F 11.70%,
5/15/05 (acquired
4/18/95, Cost $3,979)...... 4,000 4,015
++Merrill Lynch Mortgage
Investors, Inc.,
1995-C2 Class D 8.15%,
6/15/21.................. 1,939 1,937
++Mortgage Capital
Funding, Inc.,
1995-MC1 Class A4 8.35%,
5/25/27.................. 4,576 4,538
#(S)++Prudential
Securities Secured
Financing Corp.,
1995-MC2 Class F 8.567%,
12/26/22 (acquired
12/20/95, Cost $5,464)..... 5,557 5,126
#(S)++Resolution Trust
Corp.,
1992-C8 Class D 8.835%,
12/25/23 (acquired
11/22/95, Cost $3,737)..... 3,521 3,547
++Resolution Trust Corp.,
1995-C1 Class D 6.90%,
2/25/27.................. 2,000 1,847
++Resolution Trust Corp.,
1995-C1 Class E 6.90%,
2/25/27.................. 2,843 2,292
#(S)++SKW II Real Estate,
L.P.,
Class D 9.30%, 4/15/05
(acquired 4/20/95, Cost
$1,000).................... 1,000 1,002
--------------------------------------------
TOTAL COLLATERALIZED
MORTGAGE OBLIGATIONS
(COST $100,495)........... 100,429
--------------------------------------------
U.S. GOVERNMENT SECURITIES (13.6%)
--------------------------------------------
U.S. TREASURY NOTES (13.6%)
7.375%, 11/15/97.......... 1,000 1,021
7.75%, 11/30/99........... 5,150 5,377
7.875%, 11/15/04.......... 9,040 9,725
--------------------------------------------
TOTAL U.S. GOVERNMENT
SECURITIES
(COST $15,471)............ 16,123
--------------------------------------------
SHORT-TERM INVESTMENT (0.6%)
--------------------------------------------
REPURCHASE AGREEMENT (0.6%)
J.P. Morgan Securities,
Inc. 5.05%, dated
4/30/96, due 5/1/96, to
be repurchased at $703,
collateralized by $634
U.S. Treasury Bonds
8.125%, 8/15/19, valued
at $718 (COST $703)....... 703 703
--------------------------------------------
TOTAL INVESTMENTS (99.0%)
(COST $116,669)........... 117,255
--------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
AEW COMMERCIAL MORTGAGE SECURITIES FUND, INC.
FINANCIAL STATEMENTS
STATEMENT OF NET ASSETS--(CONTINUED)
April 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
VALUE
(000)+
- --------------------------------------------------------------------------------
<S> <C>
OTHER ASSETS AND LIABILITIES (1.0%)
- --------------------------------------------------------------------------------
Interest Receivable.................................................. $ 1,357
Other Assets......................................................... 17
Payable for Investment Advisory Fees................................. (172)
Payable for Administrative Fees...................................... (13)
Payable for Directors' Fees.......................................... (1)
Other Liabilities.................................................... (16)
--------
1,172
- --------------------------------------------------------------------------------
NET ASSETS (100%)
Applicable to 11,566,487 outstanding $0.01 par value shares
(15,000,000 shares authorized)...................................... $118,427
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE............................................. $ 10.24
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
+ See Note A to Financial Statements.
# 144A Security. Certain conditions for public sale may exist.
(S) Restricted as to public resale. Value of restricted securities at April 30,
1996 was approximately $82,164 or 69.4% of net assets. (Cost $81,924)
++Security is deemed illiquid.
REMIC--Real Estate Mortgage Investment Conduit.
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
AEW COMMERCIAL MORTGAGE SECURITIES FUND, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
APRIL 30, 1996
(In Thousands) (UNAUDITED)
- -------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Interest..................................................... $ 5,745
- -------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee................................................... $ 385
Less: Fee Waived............................................ (37) 348
-----
Administrative Fees--Note C.................................. 68
Insurance.................................................... 34
Directors' Fees--Note E...................................... 2
Other Expenses............................................... 23
- -------------------------------------------------------------------------------
Net Expenses................................................ 475
- -------------------------------------------------------------------------------
NET INVESTMENT INCOME......................................... 5,270
- -------------------------------------------------------------------------------
NET REALIZED GAIN ON INVESTMENTS.............................. 1,158
NET CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) ON
INVESTMENTS.................................................. (3,797)
- -------------------------------------------------------------------------------
NET LOSS ON INVESTMENTS....................................... (2,639)
- -------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.......... $ 2,631
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
AEW COMMERCIAL MORTGAGE SECURITIES FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS
DECEMBER 21, ENDED
1994** TO APRIL 30,
OCTOBER 31, 1996
(In Thousands) 1995 (UNAUDITED)
- --------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income................................ $ 7,768 $ 5,270
Net Realized Gain.................................... 3,534 1,158
Net Change in Unrealized Appreciation (Depreciation) 4,383 (3,797)
- --------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from
Operations......................................... 15,685 2,631
- --------------------------------------------------------------------------------
DISTRIBUTIONS:
Net Investment Income................................ (7,328) (5,555)
Net Realized Gain.................................... -- (3,561)
- --------------------------------------------------------------------------------
Total Distributions................................. (7,328) (9,116)
- --------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
Issued--Regular...................................... 100,111 --
--In Lieu of Cash Distributions.................... 7,328 9,116
- --------------------------------------------------------------------------------
Net Increase from Capital Share Transactions........ 107,439 9,116
- --------------------------------------------------------------------------------
Total Increase...................................... 115,796 2,631
Net Assets:
Beginning of Period.................................. -- 115,796
- --------------------------------------------------------------------------------
End of Period (2).................................... $115,796 $118,427
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1)Shares Issued and Redeemed:
Shares Issued......................................... 10,011 --
In Lieu of Cash Distributions......................... 693 862
-------- --------
10,704 862
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(2)Net Assets Consist of:
Paid in Capital....................................... $107,439 $116,555
Undistributed Net Investment Income................... 440 155
Accumulated Net Realized Gain......................... 3,534 1,131
Unrealized Appreciation............................... 4,383 586
-------- --------
$115,796 $118,427
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
** Commencement of Operations
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
AEW COMMERCIAL MORTGAGE SECURITIES FUND, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
APRIL 30, 1996
(In Thousands) (UNAUDITED)
- -------------------------------------------------------------------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Proceeds from Sales of Investments............................ $ 16,153
Purchases of Investments...................................... (22,565)
Net Decrease in Short-Term Investments........................ 912
Interest Income Received...................................... 5,973
Operating Expenses Paid....................................... (474)
- -------------------------------------------------------------------------------
Net Cash Used for Operating Activities....................... (1)
- -------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Fund Shares Sold.............................................. --
- -------------------------------------------------------------------------------
Net Cash Provided by Financing Activities..................... --
- -------------------------------------------------------------------------------
Net Decrease in Cash.......................................... (1)
CASH AT BEGINNING OF PERIOD.................................... 1
- -------------------------------------------------------------------------------
CASH AT END OF PERIOD.......................................... $ --
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
RECONCILIATION OF NET DECREASE IN NET ASSETS RESULTING FROM OP-
ERATIONS TO NET CASH USED FOR OPERATING ACTIVITIES:
- -------------------------------------------------------------------------------
Net Increase in Net Assets Resulting From Operations.......... $ 2,631
Net Purchases (Sales) of Investments.......................... (5,516)
Net Realized Gain on Investments.............................. (1,158)
Change in Unrealized Appreciation (Depreciation).............. 3,797
Net Increase in Receivables Pertaining to Investing and Oper-
ating Activities............................................. 361
Net Decrease in Payables Pertaining to Investing and Operating
Activities................................................... (32)
(Accretion)/Amortization and Other Non-Cash Income............ (84)
- -------------------------------------------------------------------------------
Net Cash Used for Operating Activities........................ $ (1)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
AEW COMMERCIAL MORTGAGE SECURITIES FUND, INC.
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA & RATIOS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
SIX MONTHS
DECEMBER 21, ENDED
1994** TO APRIL 30,
OCTOBER 31, 1996
1995 (UNAUDITED)
- --------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.................. $ 10.00 $ 10.82
- --------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income+............................... 0.75 0.47
Net Realized and Unrealized Gain (Loss).............. 0.78 (0.22)
- --------------------------------------------------------------------------------
Total From Investment Operations.................... 1.53 0.25
- --------------------------------------------------------------------------------
DISTRIBUTIONS:
Net Investment Income................................ (0.71) (0.50)
Net Realized Gain.................................... -- (0.33)
- --------------------------------------------------------------------------------
Total Distributions................................. (0.71) (0.83)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD........................ $ 10.82 $ 10.24
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:
Net Asset Value (1)++................................ 15.69% 2.26%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)................. $115,796 $118,427
Ratio of Net Expenses to Average Net Assets+.......... 0.80%* 0.80%*
Ratio of Net Investment Income to Average Net Assets+. 8.30%* 8.89%*
Portfolio Turnover Rate............................... 72% 14%
- --------------------------------------------------------------------------------
</TABLE>
* Annualized
** Commencement of Operations
+ Net of voluntarily waived fees of $.005 and $.003 per share for the period
ended October 31, 1995 and the six months ended April 30, 1996,
respectively.
++ Total return would have been lower had certain fees not been waived during
the period.
(1) Total investment return based on per share net asset value reflects the
effects of changes in net asset value on the performance of the Fund
during the period, and assumes dividends and distributions, if any, were
reinvested. The Fund's shares are issued in a private placement and are
not traded, therefore market value total investment return is not
calculated.
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
AEW COMMERCIAL MORTGAGE SECURITIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
AEW Commercial Mortgage Securities Fund, Inc. (the "Fund") was organized on
December 15, 1994 and is registered under the Investment Company Act of 1940,
as amended, as a non-diversified, closed-end management investment company.
The Fund began operations on December 21, 1994.
The Fund's common stock is not registered under the Securities Act of 1933.
The Fund may be converted at any time to an open-end investment company by an
amendment to its Articles of Incorporation.
A. SIGNIFICANT ACCOUNTING POLICIES: The following significant accounting
policies are in conformity with generally accepted accounting principles for
investment companies. Such policies are consistently followed by the Fund in
the preparation of its financial statements. Generally accepted accounting
principles may require management to make estimates and assumptions that
affect the reported amounts and disclosures in the financial statements.
Actual results may differ from those estimates.
1. SECURITY VALUATION: Commercial mortgage-backed securities and other
fixed income securities are stated on the basis of valuations provided by
brokers and/or a pricing service which uses information with respect to
transactions in such securities, quotations from dealers, market
transactions in comparable securities and various relationships between
securities in determining value. Short-term investments that have remaining
maturities of sixty days or less at time of purchase are valued at
amortized cost, if it approximates market value.
The value of collateralized mortgage obligations for which no quotations
are readily available are determined in good faith at fair value using
methods approved by the Board of Directors. Quotations obtained from one or
more principal market makers are used to value the securities and are
reviewed by the investment adviser based on factors including yield,
duration, weighted average life and spread in relation to treasury
securities. At April 30, 1996, prices of securities, whose total value
represented 85% of net assets, were available only from a principal market
maker. These prices may differ from the value that would have been used had
a broader market for the securities existed and the differences could be
material to the financial statements.
2. FEDERAL INCOME TAXES: It is the Fund's intention to continue to qualify
as a regulated investment company under Subchapter M of the Internal
Revenue Code and to distribute all of its taxable income. Accordingly, no
provision for Federal income taxes is required in the financial statements.
At April 30, 1996, the Fund's cost of investments for Federal income tax
purposes was approximately $116,669,000. Net unrealized appreciation for
Federal income tax purposes aggregated approximately $586,000, of which
$1,914,000 related to appreciated securities and $1,328,000 related to
depreciated securities.
3. REPURCHASE AGREEMENTS: In connection with transactions in repurchase
agreements, the Fund's custodian bank takes possession of the underlying
securities, the value of which exceeds the principal amount of the
repurchase transaction, including accrued interest. To the extent that any
repurchase transaction exceeds one business day, the value of the
collateral is marked-to-market on a daily basis to determine the adequacy
of the collateral. In the event of default on the obligation to repurchase,
the Fund has the right to liquidate the collateral and apply the proceeds
in satisfaction of the obligation. In the event of default or bankruptcy by
the other party to the agreement, realization and/or retention of the
collateral or proceeds may be subject to legal proceedings.
10
<PAGE>
AEW COMMERCIAL MORTGAGE SECURITIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
4. RESTRICTED SECURITIES: The Fund is permitted to invest in privately
placed restricted securities. These securities may be resold in
transactions exempt from registration. Disposal of these securities may
involve time consuming negotiations and expense and prompt sale at an
acceptable price may be difficult.
5. DISTRIBUTIONS TO SHAREHOLDERS: The Fund will normally distribute
substantially all of its net investment income monthly. Any realized net
capital gains will be distributed annually. All distributions are recorded
on ex-dividend date. Under the Fund's Automatic Dividend Reinvestment Plan,
all dividends and capital gains distributions are automatically reinvested
in additional shares. Shareholders who do not elect to participate in such
Plan will receive their dividends and distributions in cash unless the
Board of Directors elects to pay such distribution in shares of the Fund's
common stock.
The amount and character of income and capital gain distributions to be
paid are determined in accordance with Federal income tax regulations which
may differ from generally accepted accounting principles. These differences
are primarily due to differing book and tax treatments in the timing of the
recognition of gains or losses on investments.
6. OTHER: Security transactions are accounted for on trade date, the date
the trade was executed. Costs used in determining realized gains and losses
on the sale of investment securities are based on the specific
identification method. Interest income is recognized on the accrual basis.
Discounts and premiums on securities purchased are amortized over their
respective lives. Certain expenses are apportioned among the Fund and the
portfolios of the UAM Funds, Inc. and the UAM Funds Trust (collectively the
"UAM Funds"), affiliated open-end management investment companies, based on
their relative net assets.
B. ADVISORY SERVICES: Under the terms of an investment advisory agreement,
Aldrich, Eastman & Waltch, L.P. (the "Adviser"), provides investment advisory
services to the Fund for a fee calculated at an annual rate of 0.65% of
average daily net assets. The Adviser has voluntarily agreed to waive a
portion of its advisory fees and to assume expenses, if necessary, in order to
keep the Fund's total annual operating expenses from exceeding 0.80% of
average daily net assets. United Asset Management Corporation ("UAM") is a
limited partner of the Adviser.
C. ADMINISTRATIVE SERVICES: Effective April 15, 1996, UAM Fund Services, Inc.
(the "Administrator"), a wholly-owned subsidiary of UAM, provides and oversees
administrative, fund accounting, dividend disbursing and transfer agent
services to the Fund and the UAM Funds under an Administration Agreement (the
"Agreement"). Pursuant to the Agreement, the Adminstrator is entitled to
receive annual fees, computed daily and payable monthly, of 0.19% of the first
$200 million of the combined aggregate net assets; plus 0.11% of the next $800
million of the combined aggregate net assets; plus 0.07% of the next $2
billion of the combined aggregate net assets; plus 0.05% of the combined
aggregate net assets in excess of $3 billion. The fees are allocated among the
Fund and the portfolios of the UAM Funds on the basis of their relative net
assets and are subject to a graduated minimum fee schedule per portfolio which
rises from $2,000 per month, upon inception of a portfolio, to $70,000
annually after two years. In addition, the Administrator receives a Fund-
specific fee of 0.04% of average daily net assets for the Fund. Also effective
April 15, 1996, the Administrator has entered into a Mutual Funds Service
Agreement with Chase Global Funds Services Company ("CGFSC"), a wholly-owned
subsidiary of The Chase Manhattan Bank, N.A., under which CGFSC agrees to
provide certain services, including but not limited to, administration, fund
accounting, dividend disbursing and transfer agent services. Pursuant to the
Mutual Funds Service Agreement, the Administrator pays CGFSC a monthly fee.
11
<PAGE>
AEW COMMERCIAL MORTGAGE SECURITIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
Prior to April 15, 1996, CGFSC served as the administrator to the Fund and the
UAM Funds. For its services as administrator CGFSC received annual fees,
computed daily and payable monthly, based on the combined aggregate average
daily net assets of the Fund and the UAM Funds, as follows: 0.20% of the first
$200 million of the combined aggregate net assets; plus 0.12% of the next $800
million of the combined aggregate net assets; plus 0.08% of the combined
aggregate net assets in excess of $1 billion but less than $3 billion; plus
0.06% of the combined aggregate net assets in excess of $3 billion.
For the period April 15, 1995 to April 30, 1996, UAM Fund Services, Inc.
earned $6,866 from the Fund as Administrator.
D. PURCHASES AND SALES: For the period ended April 30, 1996, the Fund made
purchases of approximately $20,246,000 and sales of approximately $296,000 of
investment securities other than long-term U.S. Government and Agency and
short-term securities. Purchases and sales of long-term U.S. Government and
Agency securities totaled approximately $2,319,000 and $15,841,000,
respectively.
E. DIRECTORS' FEES: Each director, who is not an officer or affiliated person,
receives $2,000 per meeting attended, which is allocated proportionally among
the Fund and the active portfolios of the UAM Funds, plus a quarterly retainer
of $150 for the Fund and each active portfolio of the UAM Funds, and
reimbursement of expenses incurred in attending Board meetings.
F. REPURCHASE OF SHARES: The Fund may periodically make a tender offer to
repurchase its outstanding shares of common stock at a price equal to the net
asset value at the time of repurchase. The Fund may elect to make such tender
offer to all shareholders not earlier than two years after another such offer.
G. OTHER: At April 30, 1996, 99.9% of the total shares outstanding were held
by one record shareholder.
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