<PAGE>
___________________________________________
13A COMMERCIAL MORTGAGE
SECURITIES FUND, INC.
___________________________________________
OFFICERS AND DIRECTORS
Frank L. Sullivan Jr.
Chairman of the Board of Directors
Daniel Heflin
President, Director and Chief Executive Officer
William Powell
Treasurer
Joanne Vitale
Secretary, Director and Compliance Officer
Paul S. Schreiber
Assistant Secretary
E. Robert Roskind
Director
Jeffrey H. Tucker
Director
___________________________________________
INVESTMENT ADVISER
Clarion Capital, LLC
335 Madison Avenue
New York, NY 10017
___________________________________________
ADMINISTRATOR
State Street Bank and Trust Company
1776 Heritage Drive
North Quincy, MA 02171
__________________________________________
CUSTODIAN
Investors Fiduciary Trust Company
127 West 10th Street
Kansas City, MO 64105
___________________________________________
LEGAL COUNSEL
Shearman & Sterling
599 Lexington Avenue
New York, NY 10022
___________________________________________
___________________________________________
13A COMMERCIAL
MORTGAGE
SECURITIES
FUND, INC.
___________________________________________
ANNUAL REPORT
OCTOBER 31, 1998
<PAGE>
13A COMMERCIAL MORTGAGE SECURITIES FUND, INC.
c/o Clarion Capital / 335 Madison Avenue / New York, NY 10017
Tel 212-883-2536 / Fax 212-883-2836
December 1998
13A COMMERCIAL MORTGAGE SECURITIES FUND, INC.
Dear Shareholder,
Enclosed is the Annual Report for the 13A Commercial Mortgage Securities
Fund, Inc. (the "Fund"). This report covers the period from November 1, 1997
through October 31, 1998. A discussion of the portfolio's performance and
the market conditions which affected performance is provided below.
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 $100,110,995. There are
limited restrictions on the credit quality of the Fund's investments. The
weighted average credit weighting of the Fund is to be BB- or better, based
on ratings from the nationally recognized credit rating agencies.
As of October 31, 1998, the Fund had investments in commercial mortgage
backed securities with a net investment value of $96.2 million ($111.2
million original face amount) and investments in cash equivalents with a net
investment value of $7.3 million. The Fund's portfolio had a BB+ average
credit rating, a 5.1-year modified duration, a 7.9-year weighted average life
and a yield to maturity of 9.9%, approximating 530 basis points over the
10-year Treasury.
The commercial mortgage backed securities held by the Fund are backed by
mortgage loans secured by multifamily (43%), retail (18%), hotel (14%),
office (8%), industrial (5%), and other property types (12%). The mortgage
collateral is located in 50 states with the largest concentrations in
California (16%), Texas (11%), Florida (7%) and New York (5%).
For the period November 1, 1997 through October 31, 1998, the Fund generated
an annual total return of 1.55%. While the Fund benefited from a net
decrease in interest rates over this period, where yields on the 10-year US
Treasury declined by 123 basis points, it was adversely affected by the
unprecedented level of spread widening experienced in the commercial mortgage
sector, most notably from August through October. Spreads widened in the
face of the global credit crunch, as the flight to quality among investors
triggered a global sell-off of assets and a decline in prices across fixed
income markets.
Liquidity has begun to re-enter the CMBS market, albeit primarily in the
investment grade classes of securities. We expect the CMBS market as a whole
to stabilize in the first half of 1999 due largely to the reduction in new
supply caused by the slowdown in new lending that began in August. The real
estate credit underlying CMBS remains strong, with delinquencies at
historical lows. The outlook for the real estate market also remains strong,
given the slowdown in lending and the resulting curtailment of new
construction. As the market stabilizes, we expect that CMBS spreads will
converge toward corporate levels, and that the Fund, which is poised to take
advantage of this spread convergence, will benefit significantly.
Very truly yours,
Daniel Heflin
President
Clarion Capital, LLC
2
<PAGE>
13A COMMERCIAL MORTGAGE SECURITIES FUND, INC.
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1998
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (a)
- ---------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL MORTGAGE SECURITIES ( 92.79%) (b)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CBM Funding Corp.,
1996-1 Class C 7.860%, 2/1/08..................................................... $ 3,000,000 $ 3,026,346
CBM Funding Corp.,
1996-1 Class D 8.645%, 2/1/08 .................................................... 960,000 974,835
CS First Boston Mortgage Securities Corp.,
1995-WF1 Class D 7.532%, 12/21/27................................................. 3,000,000 2,986,689
CS First Boston Mortgage Securities Corp.,
1995-WF1 Class E 8.268%, 12/21/27................................................. 2,000,000 1,990,448
CS First Boston Mortgage Securities Corp. & DLJ Mortgage Acceptance Corp.,
REMIC 1995-T1 Class D 8.400%, 1/25/05 (c)......................................... 5,839,000 5,477,689
CS First Boston Mortgage Securities Corp. & DLJ Mortgage Acceptance Corp.,
REMIC 1995-T1 Class E 8.400%, 1/25/05 (c)......................................... 11,087,000 9,509,752
CS First Boston Mortgage Securities Corp. & DLJ Mortgage Acceptance Corp.,
REMIC 1995-T1 Class F 8.400%, 1/25/05 (c)......................................... 9,139,184 3,815,609
DLJ Commercial Mortgage Corp.,
1998-CF1 Class B4 7.60%, 1/15/13 (c)............................................. 2,100,000 1,711,637
DLJ Mortgage Acceptance Corp.,
1995-CF2 Class B2 8.8154%, 12/17/27 (c)........................................... 2,000,000 2,079,310
DLJ Mortgage Acceptance Corp.,
1996-CF1 Class B2 8.2668%, 5/12/09 (c)............................................ 1,000,000 1,014,830
EQI Financing Partnership,
1997-1 Class C 7.580%, 2/20/17 (c)................................................ 5,000,000 4,859,125
FFCA Secured Assets Corp.,
1996-C1 Class D 8.910%, 6/25/14 (c)............................................... 2,000,000 1,985,626
Federal Deposit Insurance Corp.,
REMIC Trust 1994-C1 Class IIE 8.700%, 9/25/25..................................... 3,035,390 3,167,487
GMAC Commercial Mortgage Securities Inc.,
1997-C1 Class F 7.222%, 11/15/11.................................................. 15,000,000 13,620,540
GMAC Commercial Mortgage Securities Inc.,
1997-C1 Class G 7.414%, 12/15/13 (c).............................................. 10,000,000 8,034,400
J.P. Morgan Commercial Mortgage Finance Corp.,
1996-C3 Class E 8.3242%, 4/25/28.................................................. 500,000 503,481
Kidder Peabody Acceptance Corp.,
REMIC 1993-M1 Class C 7.150%, 4/25/25............................................. 2,000,000 1,955,616
LB Mortgage Trust,
1992-M1 Class BE1 7.502%, 2/25/24 (c)............................................. 3,000,000 2,985,000
LB Commercial Conduit Mortgage Trust,
1996-C2 Class E 7.9042%, 10/25/26................................................. 1,944,050 1,873,341
Merrill Lynch Mortgage Investors, Inc.,
1995-C2 D 7.8630%, 6/15/21........................................................ 1,235,714 1,255,601
Midland Realty Acceptance Corp.,
1996-C1 Class E 8.1873%, 8/25/28.................................................. 2,784,000 2,779,757
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
13A COMMERCIAL MORTGAGE SECURITIES FUND, INC.
PORTFOLIO OF INVESTMENTS --(CONTINUED)
OCTOBER 31, 1998
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (a)
- ---------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL MORTGAGE SECURITIES--(CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage Capital Funding, Inc.,
1995-MC1 Class A4 8.350%, 5/25/27................................................. $ 4,575,500 $ 4,593,582
Nationslink Funding Corp.,
98-1, F 7.05%, 2/20/08 (c)........................................................ 5,000,000 4,008,050
NB Commercial Mortgage Pass Through FSI,
Class D 8.730%, 10/20/23 (c)..................................................... 2,385,118 2,477,541
Prudential Securities Secured Financing Corp.,
1995-MCF2 Class F 8.5214%, 12/26/22 (c)........................................... 5,557,000 5,411,668
Resolution Trust Corp.,
1995-C2 Class F 7.000%, 5/25/27................................................... 3,326,502 3,136,607
Resolution Trust Corp.,
1994-C2 Class G 8.000%, 4/25/25................................................... 1,062,661 1,031,046
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL COMMERCIAL MORTGAGE SECURITIES
(COST $97,735,180) 96,265,613
- ---------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENT (7.02%)
- ---------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT (7.02%)
State Street Bank 4.250%, due 11/1/98
(Collateralized by $6,035,000 U.S. Treasury Note,
6.875%, due 08/15/25) (COST $7,284,000)................................... 7,284,000 7,284,000
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.81%)
(COST $105,019,180) (d)........................................................... 103,549,613
- ---------------------------------------------------------------------------------------------------------------------------------
CASH AND OTHER ASSETS, NET OF LIABILITIES (0.19%)................................... 193,202
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100.00%)................................................................ $ 103,742,815
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) See Note A to Financial Statements.
(b) All commercial mortgage securities are deemed illiquid due to market
conditions at October 31, 1998.
(c) 144A Security. Restricted as to public resale. Value of restricted
securities at October 31, 1998 was $53,370,237 or 51.44% of net assets.
(Cost $53,471,268)
(d) The cost for federal income tax purposes was $105,019,180. At, October
31, 1998, net unrealized depreciation for all securities based on tax
cost was $1,469,567. This consisted of aggregate gross unrealized
appreciation for all securities of $3,301,034 and aggregate gross
unrealized depreciation for all securities of $4,770,601.
See Notes to Financial Statements.
4
<PAGE>
13A COMMERCIAL MORTGAGE SECURITIES FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1998
<TABLE>
- --------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Investments, at Cost.................................................... $ 105,019,180
==============
Investments, at Value................................................... $ 103,549,613
Cash.................................................................... 320
Interest Receivable..................................................... 1,004,066
Paydown Receivable...................................................... 27,144
Prepaid Expenses........................................................ 7,353
- --------------------------------------------------------------------------------------------------
Total Assets.............................................................. 104,588,496
- --------------------------------------------------------------------------------------------------
LIABILITIES
Dividends Payable....................................................... 650,398
Accrued Advisory Fee - Note B........................................... 109,465
Other Liabilities....................................................... 85,818
- --------------------------------------------------------------------------------------------------
Total Liabilities................................................. 845,681
- --------------------------------------------------------------------------------------------------
NET ASSETS................................................................ $ 103,742,815
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital......................................................... 105,862,780
Dividends Paid in Excess of Net Investment Income....................... (650,398)
Unrealized Depreciation................................................. (1,469,567)
- --------------------------------------------------------------------------------------------------
NET ASSETS................................................................ $ 103,742,815
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
INSTITUTIONAL CLASS SHARES
Shares Issued and Outstanding ($0.01 par value) (Authorized 15,000,000). 12,089,189
Net Asset Value Per Share............................................... $ 8.58
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
13A COMMERCIAL MORTGAGE SECURITIES FUND, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR
ENDED
OCTOBER 31, 1998
- ----------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Interest.................................................. $ 9,069,980
- ----------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees - Note B
Basic Fee............................................... $717,106
Less: Fee Waived........................................ (138,497) 578,609
--------
Administrative Fees - Note C.............................. 60,000
Insurance Expenses........................................ 17,065
Custodian Fees - Note D................................... 73,432
Audit Fees................................................ 17,588
Legal Fees................................................ 114,013
Transfer Agent Fees....................................... 16,495
Directors' Fees - Note F................................. 5,200
Other..................................................... 607
- ----------------------------------------------------------------------------------------------------
Net Expenses.............................................. 883,009
- ----------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME....................................... 8,186,971
- ----------------------------------------------------------------------------------------------------
NET REALIZED GAIN ON INVESTMENTS............................ 426,252
NET CHANGE IN UNREALIZED APPRECIATION/
(DEPRECIATION) ON INVESTMENTS............................ (6,693,840)
- ----------------------------------------------------------------------------------------------------
NET LOSS ON INVESTMENTS..................................... (6,267,588)
- ----------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $ 1,919,383
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
13A COMMERCIAL MORTGAGE SECURITIES FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
OCTOBER 31, 1998 OCTOBER 31, 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income.................................................... $ 8,186,971 $ 9,448,681
Net Realized Gain........................................................ 426,252 2,679,811
Net Change in Unrealized Appreciation/(Depreciation)..................... (6,693,840) 2,004,048
- -------------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations................... 1,919,383 14,132,540
- -------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
- -------------------------------------------------------------------------------------------------------------------------------
Net Investment Income.................................................... (8,186,971) (9,359,144)
In Excess of Net Investment Income....................................... (41,270) -
Net Realized Gain........................................................ (3,106,063) -
Return of Capital........................................................ (3,486,411) -
- -------------------------------------------------------------------------------------------------------------------------------
Total Distributions................................................. (14,820,715) (9,359,144)
- -------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
Issued - Regular......................................................... - -
- In Lieu of Cash Distributions................................... 4,030,045 8,123
- -------------------------------------------------------------------------------------------------------------------------------
Net Increase from Capital Share Transactions........................... 4,030,045 8,123
- -------------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease)................................................ (8,871,287) 4,781,519
Net Assets:
Beginning of Year........................................................ 112,614,102 107,832,583
- -------------------------------------------------------------------------------------------------------------------------------
End of Year (including distributions in
excess of net investment income of $650,398 and
$609,128, respectively).................................................. $103,742,815 $112,614,102
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
(1) Shares Issued and Redeemed:
Shares Issued.......................................................... - -
In Lieu of Cash Distribution........................................... 430,789 825
- -------------------------------------------------------------------------------------------------------------------------------
430,789 825
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
13A COMMERCIAL MORTGAGE SECURITIES FUND, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR
ENDED
OCTOBER 31, 1998
- -----------------------------------------------------------------------------------------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase in net assets from operations............................... $ 1,919,383
Adjustment to reconcile net increase in net assets from operations
to net cash provided by operating activities:
Purchase of investment securities....................................... (10,212,897)
Proceeds from sale of investment securities............................. 11,703,560
Net increase in short-term securities................................... (4,432,000)
Principal paydowns...................................................... 1,025,241
Decrease in interest receivable......................................... 701,089
Decrease in accrued expenses............................................ (40,942)
Unrealized depreciation on investments.................................. 6,693,840
Net realized gain on investments........................................ (426,252)
Increase in other assets................................................ (7,353)
- -----------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 6,923,669
- -----------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:*
Cash Distributions Paid.................................................. (10,823,942)
- -----------------------------------------------------------------------------------------------------
Net Cash Used for Financing Activities................................ (10,823,942)
- -----------------------------------------------------------------------------------------------------
Net Decrease in Cash.................................................... (3,900,273)
CASH AT BEGINNING OF YEAR................................................. 3,900,593
- -----------------------------------------------------------------------------------------------------
CASH AT END OF YEAR....................................................... $ 320
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
* Non-cash financing activities not included herein consist of reinvestment of
dividends of $4,030,045.
See Notes to Financial Statements.
8
<PAGE>
13A COMMERCIAL MORTGAGE SECURITIES FUND, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR YEAR YEAR DECEMBER 21,
ENDED ENDED ENDED 1994 (2) TO
PER SHARE OPERATING PERFORMANCE OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 1998 1997 (1) 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD....................... $9.66 $9.25 $10.82 $10.00
- -------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income.................................... .68 0.81 0.93 0.75
Net Realized and Unrealized Gain (Loss).................. (.52) 0.40 0.06 0.78
- -------------------------------------------------------------------------------------------------------------------
Total from Investment Operations....................... .16 1.21 0.99 1.53
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income.................................... (.68) (0.80) (0.98) (0.71)
In Excess of Net Investment Income....................... - - (0.06) -
Net Realized Gain........................................ (.27) - (0.48) -
Return of Capital........................................ (.29) - (1.04) -
- -------------------------------------------------------------------------------------------------------------------
Total Distributions.................................... (1.24) (0.80) (2.56) (0.71)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD............................. $8.58 $9.66 $9.25 $10.82
- -------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN
Net Asset Value (3) (4).................................. 1.55% 13.65% 10.26% 15.69%(5)
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands)...................... $103,743 $112,614 $107,833 $115,796
Ratio of Net Expenses to Average Net Assets................ 0.80% 0.79% 0.80% 0.80%(6)
Ratio of Net Investment Income to Average Net Assets....... 7.42% 8.56% 9.03% 8.30%(6)
Ratio of Voluntary Waived Fees and Expenses
Assumed by the Adviser to Average Net Assets............. 0.13% 0.10% 0.08% 0.05%(6)
Portfolio Turnover Rate.................................... 6% 42% 25% 72%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Effective July 21, 1997, Clarion Capital became the investment adviser to
the Fund.
(2) Commencement of Operations.
(4) 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 at net asset value. The Fund's shares were issued in a
private placement and are not traded, therefore market value total
investment return is not calculated.
(4) Total return would have been lower had certain fees not been waived during
the periods.
(5) Not annualized.
(6) Annualized.
See Notes to Financial Statements.
9
<PAGE>
13A COMMERCIAL MORTGAGE SECURITIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS
13A Commercial Mortgage Securities Fund, Inc., (the "Fund") is registered under
the Investment Company Act of 1940, as amended, as a non-diversified, closed-end
management investment company. The objective of the 13A Commercial Mortgage
Securities Fund, Inc. is to provide high current income by investing primarily
in commercial mortgage-backed securities.
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. 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 securities' and other fixed
income securities' valuations are based on information with respect to
transactions in such securities, quotations from dealers, market
transactions in comparable securities and various relationships between
securities. 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 commercial mortgage securities for which no quotations are
readily available is determined in good faith at fair value using methods
approved by the Board of Directors. 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.
3. REPURCHASE AGREEMENTS: In connection with transactions involving
repurchase agreements, the Fund's custodian 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 monitored 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. DISTRIBUTIONS TO SHAREHOLDERS: The Fund will distribute
substantially all of its net investment income monthly. Any realized
net capital gains will be distributed annually. All distributions are
recorded on the ex-dividend date. Under the Fund's Automatic Dividend
Reinvestment Plan, all dividends and capital gain distributions are
automatically reinvested in additional shares at net asset value.
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 distributions in shares on the Fund's
common stock.
10
<PAGE>
13A COMMERCIAL MORTGAGE SECURITIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 of distributions.
5. 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.
6. OTHER: Security transactions are accounted for on the 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 an accrual basis.
B. ADVISORY SERVICES: Clarion Capital provides investment advisory services to
the Fund at a fee calculated at an annual rate of 0.65% of the Fund's average
monthly net assets. The Adviser has waived its fee to the extent necessary to
limit the Fund's total expenses to 0.80% of average net assets.
C. ADMINISTRATION SERVICES: The Fund engages State Street Bank and Trust
Company (the "Bank") to provide limited administration services in accordance
with the administration agreement.
D. CUSTODIAN: Investors Fiduciary Trust Company serves as custodian for the
Fund's assets held in accordance with the custodian agreement.
E. PURCHASES AND SALES: For the year ended October 31, 1998, the Fund made
purchases of $6,648,836 and sales of $10,670,905 of investment securities other
than long-term U.S. Government and short-term securities. There were $0
purchases and $1,032,656 in sales of long-term U.S. Government securities during
the period.
F. DIRECTORS AND LEGAL FEES: Each Director, who is not an officer or
affiliated person, receives $1,500 per annum plus $250 per meeting attended.
Legal fees of $114,013 were paid to a law firm in which a partner is an officer
of the Fund.
G. 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.
H. OTHER: At October 31, 1998, 99.9% of total shares outstanding were held by
one record shareholder.
11
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders
13A Commercial Mortgage Securities Fund, Inc.
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of 13A Commercial Mortgage Securities Fund, Inc.
as of October 31, 1998, and the related statements of operations and cash flows
for the year then ended, the statement of changes in net assets, and the
financial highlights for the each of the two years in the period then ended.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits. The
financial highlights for periods ended prior to November 1, 1996 were audited by
other auditors whose report thereon dated December 9, 1996 expressed an
unqualified opinion with respect thereto.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1998, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of 13A
Commercial Mortgage Securities Fund, Inc. as of October 31, 1998, the results of
its operations and its cash flows, the changes in its net assets and the
financial highlights for the periods indicated, in conformity with generally
accepted accounting principles.
McGladrey & Pullen, LLP
New York, New York
November 19, 1998
12
<PAGE>
13A COMMERCIAL MORTGAGE SECURITIES FUND, INC.
AUTOMATIC DIVIDEND REINVESTMENT PLAN
Pursuant to the Fund's Automatic Dividend Reinvestment Plan (the "Plan"),
shareholders may elect to have all distributions automatically reinvested in
shares of the Fund. Otherwise, shareholders will receive their distributions in
cash. In the case of any distribution, the Board of Directors may elect to pay
such distribution in shares of the Fund's Common Stock.
Shareholders who elect in writing to participate in the Plan will have all
distributions automatically reinvested by Boston EquiServe (the "Plan Agent"),
in shares of the Fund's common stock pursuant to the Plan. If no written
election is made, all distributions will be paid in cash by check in U.S.
dollars mailed directly to the shareholder by the Plan Agent, as dividend paying
agent.
If a shareholder's written election to participate in the Plan is received
by the Plan Agent before the record date for a distribution, the Plan will go
into effect for the shareholder with that payment.
The Plan Agent serves as agent for the shareholders in administering the
Plan. If the Directors of the Fund declare a dividend, participants in the Plan
will receive the equivalent in shares of Common Stock in the Fund valued at net
asset value determined at the time of purchase (generally the payable date of
the dividend). The Fund will not issue shares under the Plan at below net asset
value. Since no trading market for the shares exists and the shares have not
been listed on an exchange, any cash dividend or distribution will be issued by
the Fund to shareholders in the Plan at a price equal to net asset value.
The Plan Agent maintains all shareholder accounts in the Plan and furnishes
written confirmations of all transactions in the account, including information
needed by shareholders for personal and tax records. Shares in the account of
each Plan participant are held by the Plan Agent in non-certificated form in the
name of the participant, and each shareholder's proxy will include those shares
purchased pursuant to the Plan.
In the case of shareholders, such as banks, brokers or nominees, that hold
shares for others who are the beneficial owners, the Plan Agent administers the
Plan on the basis of the number of shares certified from time to time by the
shareholder as representing the total amount registered in the shareholders name
and held for the account of beneficial owners who are participants in the Plan.
There is no charge to participants for reinvesting dividends or capital
gains distributions. The Plan Agent's fees for the handling of reinvestment of
dividends and distributions will be paid by the Fund. There will be no
brokerage charges with respect to shares issued directly by the Fund as a result
of dividends or capital gains either payable in shares or in cash.
The automatic reinvestment of dividends and distributions will not relieve
participants of any U.S. income tax that may be payable on such dividends or
distributions.
The Fund reserves the right to amend or to terminate the Plan as applied to
any dividend or distribution paid subsequent to notice of the change sent to
members of the Plan at least 90 days before the effective date thereof. The
Plan also may be amended or terminated by the Plan Agent by at lease 90 days'
written notice to all shareholders of the Fund. All correspondence concerning
the Plan should be directed to the Plan Agent at Boston EquiServe, P.O. Box
8200, Boston, Massachusetts 02266-8200.
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