<PAGE>
- --------------------------------------------------------------------------------
AEW COMMERCIAL MORTGAGE
SECURITIES FUND, INC.
- --------------------------------------------------------------------------------
OFFICERS AND DIRECTORS
Norton H. Reamer Peter M. Whitman, Jr.
Director, President Director
and Chairman
William H. Park
Mary Rudie Barneby Vice President and
Director and Assistant Treasurer
Executive Vice President
Karl O. Hartmann
John T. Bennett, Jr. Secretary
Director
Robert R. Flaherty
J. Edward Day Treasurer
Director
Harvey M. Rosen
Philip D. English Assistant Secretary
Director
William A. Humenuk
Director
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
Aldrich, Eastman & Waltch L.P.
225 Franklin Street, Boston, MA 02110
- --------------------------------------------------------------------------------
ADMINISTRATOR
The Chase Manhattan Bank, N.A.
73 Tremont Street, Boston, MA 02108-3913
- --------------------------------------------------------------------------------
CUSTODIAN
Morgan Guaranty Trust Company of New York
60 Wall Street, New York, NY 10260
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LEGAL COUNSEL
Stradley, Ronon, Stevens & Young
2600 One Commerce Square Philadelphia, PA 19103
- --------------------------------------------------------------------------------
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
160 Federal Street
Boston, MA 02110
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- --------------------------------------------------------------------------------
AEW COMMERCIAL
MORTGAGE
SECURITIES
FUND, INC.
- --------------------------------------------------------------------------------
ANNUAL REPORT
OCTOBER 31, 1995
<PAGE>
AEW COMMERCIAL MORTGAGE SECURITIES FUND, INC.
Dear Shareholder:
Enclosed please find the annual report for the AEW Commercial Mortgage
Securities Fund, Inc. (the "Fund"). This report covers the period from
inception (December 21, 1994) through October 31, 1995. Provided below is an
overview of the Fund's performance and some of the economic and market
conditions that impacted returns over the subject period.
The Fund is a non-diversified, closed-end management investment company which
was initially capitalized 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 will be BB- (Ba3) or better based on ratings from the
nationally-recognized credit ratings agencies. The Fund's portfolio currently
has a BBB average credit rating.
As of October 31, 1995, the Fund had purchased investments in Commercial
Mortgage-Backed Securities ("CMBS") with a net investment value of $82.6
million ($96.3 million face amount). Investments totaling $44.2 million in
face value were purchased since the last report dated as of April 30, 1995,
including; (i) $3 million of the BBB tranche and $2 million of the BB+ tranche
of the RTC 1995 C1 transaction, which are backed by a diverse pool of 1,125
commercial and multi-family performing loans; (ii) $14.6 million of ASW 1995
C1 Class B3 rated BB, $11.7 million of ASW 1995 C1 Class B4 rated B; (iii)
$3.3 million Asset Securities Corporation 1995 Class A4 rated BBB; (iv) $4.6
million Mortgage Capital Funding 1995-MCI Class A4 rated BBB; (v) $3.0 million
of LB Mortgage Trust 1992 M1 Class B rated BBB and; (vi) $2 million of MLMI 95
C2 Class D rated BBB. The Fund's remaining $31.7 million was invested in U.S.
Treasuries and short-term investments.
Portfolio Performance
The CMBS portion of the Fund's portfolio currently has a BB average credit
rating, a 4.92 year modified adjusted duration, and a pricing yield of 11.64%
(which is approximately 570 basis points above U.S. Treasuries and 290 basis
points above the Lehman Brothers BB Corporate Bond Index). The CMBS held by
the Fund are backed by mortgage loans secured by apartments (53%), retail
(24%), office (11%), industrial (3%), hospitality (3%) and other property
types (6%). By state, the mortgage collateral is located in Texas (21%),
Florida (10%), Indiana (4%), Illinois (4%), California (14%), and Michigan
(4%), with the remainder (43%) disbursed throughout 38 other states.
For the period from inception (December 21, 1994) through October 31, 1995,
the Fund generated a return of 15.69% after fees. This was below our
benchmark, the Lehman Brothers BB Corporate Bond Index (the "Index"), which
generated a return of 18.04%. (Returns for the Index have been calculated
excluding the partial period December 21 through December 31, 1994.) The
performance since inception lags the benchmark by 235 basis points due to the
high percentage of U.S. Treasury bond holdings during the Fund's initial
investment phase.
1
<PAGE>
The CMBS Market
The continued growth in demand for investment-grade CMBS caused pricing yield
spreads on certificates rated AAA through AA to tighten by approximately 20
basis points during the year. In our view, this was partially due to the
relaxation of NAIC risk-based capital standards and a more general thirst for
yield. While spread tightening in the AAA and AA rated sector has continued
throughout 1995, the recently increasing demand from insurance companies for A
and BBB rated CMBS caused a tightening of approximately 15 to 20 basis points
in this sector of the credit spectrum. For at least two of the largest CMBS
transactions completed in September, spreads tightened dramatically as
insurers entered bidding wars in an effort to purchase the entire A, BBB, and
BBB- rated tranches. With most insurance companies reluctant to purchase
below-investment grade CMBS, pricing of high-yield CMBS remained unchanged.
Aldrich, Eastman & Waltch, L.P.
/s/ Clifford M. Brown
Clifford M. Brown
Director
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.
Without the Adviser's temporary fee waiver, 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
October 31, 1995
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)+
- -------------------------------------------------------------------------------
<S> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS (71.3%)
- -------------------------------------------------------------------------------
FINANCIAL SERVICES (71.3%)
#*++American Southwest Financial Securities Corp.,
1995-C1 Class B3 9.872%, 6/17/05 (acquired 8/2/95, Cost
$13,021)................................................ $14,600 $ 13,108
#*++American Southwest Financial Securities Corp.,
1995-C1 Class B4 9.872%, 6/17/05 (acquired 8/2/95, Cost
$9,061)................................................. 11,700 9,133
#*++Asset Securitization Corp.,
1995-D1 Class A4 7.59%, 7/11/25 (acquired 8/4/95, Cost
$3,031)................................................. 3,326 3,146
#*++Bellaire Finance Corp.,
REMIC Class D 9.90%, 2/1/08 (acquired 1/24/95, Cost
$2,998)................................................. 3,000 3,120
#*++Bellaire Finance Corp.,
REMIC Class E 12.74%, 2/1/08 (acquired 1/24/95, Cost
$1,798)................................................. 1,738 1,808
#*++CS First Boston Mortgage Securities Corp. & DLJ Mortgage
Acceptance Corp., REMIC 1995-TI Class D 8.37%, 2/25/10
(acquired 2/23/95, Cost $4,580)......................... 5,839 4,938
#*++CS First Boston Mortgage Securities Corp. & DLJ Mortgage
Acceptance Corp., REMIC 1995-TI Class E 8.37%, 2/25/10
(acquired 2/23/95, Cost $7,676)......................... 11,087 8,293
#*++CS First Boston Mortgage Securities Corp. & DLJ Mortgage
Acceptance Corp., REMIC 1995-TI Class F 8.37%, 2/25/10
(acquired 2/23/95, Cost $3,959)......................... 9,425 3,969
++Federal Deposit Insurance Corp.,
REMIC Trust 1994-C1 Class IIE 8.70%, 9/25/25............ 3,035 3,117
++Kidder Peabody Acceptance Corp.,
REMIC 1993-M1 Class C 7.15%, 4/25/25.................... 2,000 1,844
++LB Mortgage Trust,
1992-M1 Class B 8.00%, 2/25/24.......................... 3,000 2,996
#*++Lennar Central Partners, L.P.,
1994-1, Class E 10.92%, 9/15/04 (acquired 1/20/95, Cost
$4,795)................................................. 5,000 5,025
#*++Lennar U.S. Partners, L.P.,
1995-1 Class D 8.05%, 5/15/03 (acquired 4/18/95, Cost
$3,978)................................................. 4,000 4,014
#*++Lennar U.S. Partners, L.P.,
1995-1 Class E 9.75%, 5/15/05 (acquired 4/18/95, Cost
$1,989)................................................. 2,000 2,004
#*++Lennar U.S. Partners, L.P.,
1995-1 Class F 11.70%, 5/15/05 (acquired 4/18/95, Cost
$3,979)................................................. 4,000 4,030
++Merrill Lynch Mortgage Investors, Inc.,
1995-C2 Class D 8.15%, 6/15/21.......................... 1,999 2,031
++Mortgage Capital Funding, Inc.,
1995-MC1 Class A4 8.35%, 5/25/27........................ 4,576 4,713
++Resolution Trust Corp.,
1995-C1 Class D 6.90%, 2/25/27.......................... 2,000 1,863
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
AEW COMMERCIAL MORTGAGE SECURITIES FUND, INC.
FINANCIAL STATEMENTS
STATEMENT OF NET ASSETS--(CONTINUED)
October 31, 1995
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)+
- -------------------------------------------------------------------------------
<S> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS--(CONTINUED)
- -------------------------------------------------------------------------------
++Resolution Trust Corp.,
1995-C1 Class E 6.90%, 2/25/27............................. $ 2,952 $ 2,415
#*++SKW II Real Estate, L.P.,
Class D 9.30%, 4/15/05 (acquired 4/20/95, Cost $1,000)..... 1,000 1,003
- -------------------------------------------------------------------------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(COST $80,437).............................................. 82,570
- -------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES (26.0%)
- -------------------------------------------------------------------------------
U.S. TREASURY NOTES (26.0%)
7.375%, 11/15/97............................................ 500 516
7.75%, 11/30/99............................................. 19,850 21,224
7.875%, 11/15/04............................................ 7,440 8,370
- -------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT SECURITIES
(COST $27,860).............................................. 30,110
- -------------------------------------------------------------------------------
SHORT-TERM INVESTMENT (1.4%)
- -------------------------------------------------------------------------------
REPURCHASE AGREEMENT (1.4%)
J.P. Morgan Securities, Inc. 5.35%, dated 10/31/95, due
11/1/95, to be repurchased at $1,615, collateralized by
$1,463 United States Treasury Bonds, 7.25%, due 5/15/16,
valued at $1,648 (COST $1,615)............................ 1,615 1,615
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS (98.7%)
(COST $109,912)............................................. 114,295
- -------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.3%)
- -------------------------------------------------------------------------------
Cash........................................................ 1
Interest Receivable......................................... 1,668
Receivable for Investments Sold............................. 16
Other Assets................................................ 51
Payable for Investment Advisory Fees........................ (201)
Payable for Audit Fees...................................... (17)
Payable for Administrative Fees............................. (11)
Payable for Custodian Fees.................................. (4)
Payable for Directors' Fees................................. (1)
Other Liabilities........................................... (1)
--------
1,501
- -------------------------------------------------------------------------------
</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)
October 31, 1995
<TABLE>
<CAPTION>
(000)
- -------------------------------------------------------------------------------
<S> <C>
NET ASSETS (100%)
Applicable to 10,704,341 outstanding $0.01 par value shares
(15,000,000 shares authorized)...................................... $115,796
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE............................................. $ 10.82
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
+ See Note A to Financial Statements
# 144A Security. Certain conditions for public sale may exist.
* Restricted as to public resale. Value of restricted securities at October
31, 1995 was approximately $63,591, or 54.9% of net assets. (Cost $61,865)
++ 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>
PERIOD FROM
DECEMBER 21, 1994**
(In Thousands) TO OCTOBER 31, 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
Interest................................................. $ 8,517
EXPENSES
Investment Advisory Fees--Note B
Basic Fee............................................... $ 608
Less: Fee Waived........................................ (50) 558
--------
Administrative Fees--Note C.............................. 107
Custodian Fees........................................... 21
Audit Fees............................................... 17
Legal Fees............................................... 5
Directors' Fees--Note E.................................. 5
Other Expenses........................................... 36
- --------------------------------------------------------------------------------
Net Expenses............................................ 749
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME..................................... 7,768
- --------------------------------------------------------------------------------
NET REALIZED GAIN ON INVESTMENTS.......................... 3,534
NET CHANGE IN UNREALIZED APPRECIATION ON INVESTMENTS...... 4,383
- --------------------------------------------------------------------------------
NET GAIN ON INVESTMENTS................................... 7,917
- --------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS...... $15,685
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
** Commencement of Operations
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
DECEMBER 21, 1994**
(In Thousands) TO OCTOBER 31, 1995
- --------------------------------------------------------------------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income..................................... $ 7,768
Net Realized Gain......................................... 3,534
Net Change in Unrealized Appreciation..................... 4,383
- --------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations..... 15,685
- --------------------------------------------------------------------------------
DISTRIBUTIONS:
Net Investment Income..................................... (7,328)
- --------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
Issued--Regular........................................... 100,111
--In Lieu of Cash Distributions......................... 7,328
- --------------------------------------------------------------------------------
Net Increase from Capital Share Transactions............. 107,439
- --------------------------------------------------------------------------------
Total Increase........................................... 115,796
Net Assets:
Beginning of Period....................................... --
- --------------------------------------------------------------------------------
End of Period (2)......................................... $115,796
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1)Shares Issued and Redeemed:
Shares Issued.............................................. 10,011
In Lieu of Cash Distributions.............................. 693
--------
10,704
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(2)Net Assets Consist of:
Paid in Capital............................................ $107,439
Undistributed Net Investment Income........................ 440
Accumulated Net Realized Gain.............................. 3,534
Unrealized Appreciation.................................... 4,383
--------
$115,796
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</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>
PERIOD FROM
DECEMBER 21, 1994**
(In Thousands) TO OCTOBER 31, 1995
- --------------------------------------------------------------------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Proceeds from Sales of Investments........................ $ 76,193
Purchases of Investments.................................. (180,585)
Net Increase in Short-Term Investments.................... (1,615)
Interest Income Received.................................. 6,462
Operating Expenses Paid................................... (565)
- --------------------------------------------------------------------------------
Net Cash Used for Operating Activities.................... (100,110)
- --------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Fund Shares Sold.......................................... 100,111
- --------------------------------------------------------------------------------
Net Cash Provided by Financing Activities................. 100,111
- --------------------------------------------------------------------------------
Net Increase in Cash...................................... 1
CASH AT BEGINNING OF PERIOD................................ --
- --------------------------------------------------------------------------------
CASH AT END OF PERIOD...................................... $1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
RECONCILIATION OF NET DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS TO NET CASH USED FOR OPERATING ACTIVITIES:
- --------------------------------------------------------------------------------
Net Increase in Net Assets Resulting From Operations...... $ 15,685
Net (Purchases) Sales of Investments...................... (105,991)
Net Realized Gain on Investments.......................... (3,534)
Change in Unrealized Appreciation......................... (4,383)
Net Increase in Receivables Pertaining to Investing and
Operating Activities..................................... (1,735)
Net Increase in Payables Pertaining to Investing and
Operating Activities..................................... 235
(Accretion)/Amortization and Other Non-Cash Income........ (387)
- --------------------------------------------------------------------------------
Net Cash Used for Operating Activities.................... $(100,110)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
** Commencement of Operations
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
AEW COMMERCIAL MORTGAGE SECURITIES FUND, INC.
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA & RATIOS
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 21, 1994**
TO
OCTOBER 31, 1995
- --------------------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 10.00
- --------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income...................................... 0.75+
Net Realized and Unrealized Gain........................... 0.78
- --------------------------------------------------------------------------------
Total From Investment Operations.......................... 1.53
- --------------------------------------------------------------------------------
DISTRIBUTIONS:
Net Investment Income...................................... (0.71)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.............................. $ 10.82
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN:
Net Asset Value (1)........................................ 15.69%++
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (Thousands)....................... $115,796
Ratio of Net Expenses to Average Net Assets................. 0.80%*+
Ratio of Net Investment Income to Average Net Assets........ 8.30%*+
Portfolio Turnover Rate..................................... 72%
- --------------------------------------------------------------------------------
</TABLE>
* Annualized
** Commencement of Operations
+ Net of voluntarily waived fees of $.005 per share for the period ended
October 31, 1995.
++ 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
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.
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 October 31, 1995, prices of securities, whose total value
represented 71% 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 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 October 31, 1995, the Fund's cost for Federal income tax purposes was
$109,913,000. Net unrealized appreciation for Federal income tax purposes
aggregated $4,382,000, of which $4,466,000 related to appreciated
securities and $84,000 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.
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.
10
<PAGE>
AEW COMMERCIAL MORTGAGE SECURITIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. DISTRIBUTIONS TO SHAREHOLDERS: Any distributions from net investment
income are declared and paid 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 gains 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 determined 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. Additionally, 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. ("AEW" or the "Adviser") provides investment
advisory services to the Fund for a fee calculated at an annual rate of 0.65%
of the Fund's average daily net assets. The Adviser has voluntarily agreed to
waive a portion of its advisory fees 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 September 1, 1995, The Chase Manhattan
Bank, N.A., through its affiliate Chase Global Funds Services Company
("CGFSC") (the "Administrator"), formerly Mutual Funds Service Company
("MFSC"), provides 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 Administrator is
entitled to receive 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. 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 Fund is charged certain out of pocket expenses by the
Administrator. Prior to September 1, 1995, MFSC was an affiliate of the United
States Trust Company of New York and provided administrative services to the
Fund and the UAM Funds under the same terms, conditions and fees as stated
above.
D. PURCHASES AND SALES. During the period from December 21, 1994 to October
31, 1995, the Fund made purchases of $77,377,000 and sales of $110,000 of
investment securities other than U.S. Government and
11
<PAGE>
AEW COMMERCIAL MORTGAGE SECURITIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Agency and short-term securities. Purchases and sales of long-term U.S.
Government and Agency securities totaled $103,208,000 and $76,099,000,
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 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 October 31, 1995, 99.9% of the total shares outstanding were
held by one record shareholder.
12
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of
AEW Commercial Mortgage Securities Fund, Inc.
In our opinion, the accompanying statement of net assets and the related
statements of operations, of changes in net assets, and of cash flows and the
financial highlights present fairly, in all material respects, the financial
position of the AEW Commercial Mortgage Securities Fund, Inc. (the "Fund"), at
October 31, 1995, and the results of its operations, the changes in its net
assets, the cash flows and the financial highlights for the period December
21, 1994 (commencement of operations) through October 31, 1995, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our
audit of these financial statements in accordance with generally accepted
auditing standards, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit, which included confirmation of securities at October 31, 1995 by
correspondence with the custodian, provides a reasonable basis for the opinion
expressed above.
As explained in Note A, the financial statements include securities valued at
$82,570,000 (71 percent of net assets), whose values have been determined in
good faith at fair value using procedures approved by the Board of Directors.
We have reviewed the procedures approved by the Board of Directors in valuing
such securities and have inspected underlying documentation, and, in the
circumstances, we believe the procedures are reasonable and the documentation
appropriate. However, because of the inherent uncertainty of valuation, these
values may differ significantly from what would have been used had a broader
market for the securities existed and the differences could be material to the
financial statements.
Price Waterhouse LLP
Boston, Massachusetts
December 14, 1995
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