<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
Jeffery H. Tucker
Director
- -------------------------------------------------------------------------------
INVESTMENT ADVISER
Clarion Partners
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.
- -------------------------------------------------------------------------------
SEMI-ANNUAL REPORT
April 30, 1998
(Unaudited)
<PAGE>
13A COMMERCIAL MORTGAGE SECURITIES FUND, INC.
c/o Clarion Partners / 335 Madison Avenue / New York, NY 10017
Tel 212-883-2536 / Fax 212-883-2836
June 22, 1998
To Shareholders of the 13A Commercial Mortgage Securities Fund, Inc.:
Enclosed is the Semi-Annual Report of the 13A Commercial Mortgage Securities
Fund, Inc. (the "Fund"). This report covers the period November 1, 1997 to
April 30, 1998. 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, generating proceeds of
$100,110,995. Management of the portfolio was taken over by Clarion Partners
on July 21, 1997.
As of April 30, 1998, the Fund had a total investment value of $108,666,440,
including $100,725,440 in commercial mortgage backed securities
(approximately 92.7% of the Fund's total investment value) and $7,941,000 in
cash and cash equivalents (approximately 7.3% of the Fund's total investment
value). The commercial mortgage securities portion of the Fund's portfolio
had a BB+ average credit rating and a yield to maturity of 8.9%, which was
approximately 323 basis points over the 10-year US Treasury.
For the period from inception (August 1997, the first full month following
takeover) through April 30, 1998, the Fund earned a gross return of 7.6%,
outperforming the Lehman Brothers BB Aggregate Index, the Fund's benchmark,
which earned a total gross return of 6.1%. The Fund outperformed the
benchmark primarily due to the higher absolute yields of commercial mortgage
securities. For the six months ended April 30, 1998, the Fund earned a total
gross return of 2.9% versus 4.9% for the Lehman Index. The Fund
underperformed the benchmark on a fiscal year basis due to the spread
widening experienced in the commercial mortgage sector at year-end 1997. For
the four months ended April 30, 1998, the Fund's gross return compared
similarly to that of the Lehman Index at 2.8%.
Very truly yours,
Clarion Partners, LLC
13A COMMERCIAL MORTGAGE SECURITIES FUND, INC.
2
<PAGE>
13A COMMERCIAL MORTGAGE SECURITIES FUND, INC.
PORTFOLIO OF INVESTMENTS
APRIL 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (a)
- --------------------------------------------------------------------------------------------------------------------------
COMMERCIAL MORTGAGE SECURITIES (92.54%)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CBM Funding Corp.,
1996-1 Class C 7.860%, 2/1/08................................................... $3,000,000 $3,167,931
CBM Funding Corp.,
1996-1 Class D 8.645%, 2/1/08................................................... 960,000 1,039,200
CS First Boston Mortgage Securities Corp.,
1995-WF1 Class D 7.532%, 12/21/27............................................... 3,000,000 3,044,064
CS First Boston Mortgage Securities Corp.,
1995-WF1 Class E 8.302%, 12/21/27............................................... 2,000,000 2,028,438
CS First Boston Mortgage Securities Corp. & DLJ Mortgage Acceptance Corp.,
REMIC 1995-T1 Class D 8.400%, 1/25/05 (b) (c)................................... 5,839,000 5,708,534
CS First Boston Mortgage Securities Corp. & DLJ Mortgage Acceptance Corp.,
REMIC 1995-T1 Class E 8.400%, 1/25/05 (b) (c)................................... 11,087,000 9,020,317
CS First Boston Mortgage Securities Corp. & DLJ Mortgage Acceptance Corp.,
REMIC 1995-T1 Class F 8.400%, 1/25/05 (b) (c)................................... 9,139,184 4,066,937
DLJ Mortgage Acceptance Corp.,
1995-CF2 Class B2 8.811%, 12/17/27 (c).......................................... 2,000,000 2,151,718
DLJ Mortgage Acceptance Corp.,
1996-CF1 Class B2 8.268%, 5/12/09 (c)........................................... 1,000,000 1,065,156
EQI Financing Partnership,
1997-1 Class C 7.580%, 2/20/17 (c).............................................. 5,000,000 5,138,475
FFCA Secured Assets Corp.,
1996-C1 Class D 8.910%, 6/25/14 (c)............................................. 2,000,000 2,194,376
Federal Deposit Insurance Corp.,
REMIC Trust 1994-C1 Class IIE 8.700% 9/25/25.................................... 3,035,390 3,172,456
GMAC Commercial Mortgage Securities Inc.,
1997-C1 Class F 7.222%, 11/15/11................................................ 15,000,000 14,503,125
GMAC Commercial Mortgage Securities Inc.,
1997-C1 Class G 7.414%, 12/15/13................................................ 10,000,000 9,315,630
J.P. Morgan Commercial Mortgage Finance Corp.,
1996-C3 Class E 8.347%, 4/25/28................................................. 500,000 527,539
Kidder Peabody Acceptance Corp.,
REMIC 1993-M1 Class C 7.150%, 4/25/25........................................... 2,000,000 1,877,188
LB Mortgage Trust,
1992-M1 Class E1 8.000%, 2/25/24 (c)............................................ 3,000,000 3,022,968
LB Commercial Conduit Mortgage Trust,
1996-C2 Class E 7.896%, 10/25/26................................................ 1,944,050 2,007,762
Merrill Lynch Mortgage Investors, Inc.,
1995-C2 D 8.173%, 6/15/21....................................................... 1,406,827 1,444,306
Midland Realty Acceptance Corp.,
1996-C1 Class E 8.200%, 8/25/28................................................. 2,784,000 2,893,620
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
13A COMMERCIAL MORTGAGE SECURITIES FUND, INC.
PORTFOLIO OF INVESTMENTS --(CONTINUED)
APRIL 30, 1998
(UNAUDITED)
<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 $ 4,801,415
NB Commercial Mortgage Pass Through FSI,
Class D 8.730%, 10/20/23 (c)................................................... 2,385,118 2,427,976
Prudential Securities Secured Financing Corp.,
1995-MCF2 Class F 8.550%, 12/26/22 (c).......................................... 5,557,000 5,911,692
Resolution Trust Corp.,
1992-C8 Class D 8.835%, 12/25/23 (c)............................................ 3,127,928 3,241,804
Resolution Trust Corp.,
1995-C2 Class F 7.000%, 5/25/27................................................. 3,479,371 3,386,134
Resolution Trust Corp.,
1994-C2 Class G 8.000%, 4/25/25................................................. 1,092,063 1,099,144
Resolution Trust Corp.,
1995-C1 Class E 6.900%, 2/25/27................................................. 2,515,485 2,467,535
- --------------------------------------------------------------------------------------------------------------------------
TOTAL COMMERCIAL MORTGAGE SECURITIES
(COST $96,746,375).............................................................. 100,725,440
- --------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENT (7.30%)
- --------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT (7.30%)
State Street Bank 4.750%, due 5/1/98
(Collateralized by $6,980,000 U.S. Treasury Bond,
7.250%, due 05/15/16) (COST $7,941,000)..................................... 7,941,000 7,941,000
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.84%)
(COST $104,687,375) (d)......................................................... 108,666,440
- --------------------------------------------------------------------------------------------------------------------------
CASH AND OTHER ASSETS, NET OF LIABILITIES (0.16%).................................... 176,301
- --------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100.00%)................................................................. $108,842,741
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) See Note A to Financial Statements.
(b) Security is deemed illiquid.
(c) 144A Security. Restricted as to public resale. Value of restricted
securities at April 30, 1998 was $43,949,953 or 40.38% of net assets.
(Cost $40,571,753).
(d) The cost for federal income tax purposes was $104,687,375. At
April 30, 1998, net unrealized appreciation for all securities based on
tax cost was $3,979,065. This consisted of aggregate gross unrealized
appreciation for all securities of $4,308,934 and aggregate gross
unrealized depreciation for all securities of $329,869.
See Notes to Financial Statements.
4
<PAGE>
13A COMMERCIAL MORTGAGE SECURITIES FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments, at Cost......................................................... $104,687,375
------------
------------
Investments, at Value........................................................ $108,666,440
Interest Receivable.......................................................... 1,139,091
Paydown Receivable........................................................... 90,845
Due from Clarion Partners - Note B........................................... 22,987
Prepaid Expenses............................................................. 13,438
- ---------------------------------------------------------------------------------------------------------
Total Assets...................................................................... 109,932,801
- ---------------------------------------------------------------------------------------------------------
LIABILITIES
Dividends Payable............................................................ 672,477
Payable to Custodian......................................................... 166,471
Accrued Advisory Fee - Note B................................................ 187,023
Other Liabilities............................................................ 64,089
- ---------------------------------------------------------------------------------------------------------
Total Liabilities.......................................................... 1,090,060
- ---------------------------------------------------------------------------------------------------------
NET ASSETS........................................................................ $108,842,741
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital.............................................................. 109,344,735
Dividends Paid in Excess of Net Investment Income............................ (4,580,141)
Accumulated Net Realized Gains............................................... 99,082
Unrealized Appreciation...................................................... 3,979,065
----------------------------------------------------------------------------------------------------
NET ASSETS........................................................................ $108,842,741
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
INSTITUTIONAL CLASS SHARES
Shares Issued and Outstanding ($0.01 par value)(Authorized 15,000,000)....... 12,088,695
Net Asset Value, Offering and Redemption Price Per Share..................... $ 9.00
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
13A COMMERCIAL MORTGAGE SECURITIES FUND, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
APRIL 30, 1998
- ----------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Interest................................................. $4,515,072
-----------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees - Note B
Basic Fee............................................. $355,348
Less: Fee Waived...................................... (51,037) 304,311
Administrative Fees - Note C............................. ------- 30,000
Insurance Expenses....................................... 32,233
Custodian Fees - Note D.................................. 36,410
Audit Fees............................................... 8,722
Legal Fees............................................... 10,876
Transfer Agent Fees...................................... 8,180
Directors' Fees - Note F................................ 2,579
Other.................................................... 371
- ----------------------------------------------------------------------------------------------
Net Expenses.......................................... 433,682
- ----------------------------------------------------------------------------------------------
NET INVESTMENT INCOME......................................... 4,081,390
- ----------------------------------------------------------------------------------------------
NET REALIZED GAIN ON INVESTMENTS.............................. 99,082
NET CHANGE IN UNREALIZED APPRECIATION/
(DEPRECIATION) ON INVESTMENTS.............................. (1,245,208)
- ----------------------------------------------------------------------------------------------
NET LOSS ON INVESTMENTS....................................... (1,146,126)
- ----------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.......... $2,935,264
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
13A COMMERCIAL MORTGAGE SECURITIES FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR
APRIL 30, 1998 ENDED
(UNAUDITED) OCTOBER 31, 1997
- -------------------------------------------------------------------------------------------------------
<S><C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income. . . . . . . . . . . . . . . . . . . $ 4,081,390 $ 9,448,681
Net Realized Gain. . . . . . . . . . . . . . . . . . . . . 99,082 2,679,811
Net Change in Unrealized Appreciation/(Depreciation) . . . (1,245,208) 2,004,048
- -------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations . . 2,935,264 14,132,540
- -------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
- -------------------------------------------------------------------------------------------------------
Net Investment Income. . . . . . . . . . . . . . . . . . . (4,081,390) (9,359,144)
In Excess of Net Investment Income . . . . . . . . . . . . (3,971,013) --
Net Realized Gain. . . . . . . . . . . . . . . . . . . . . (2,679,811) --
Return of Capital. . . . . . . . . . . . . . . . . . . . . -- --
- -------------------------------------------------------------------------------------------------------
Total Distributions. . . . . . . . . . . . . . . . . . . (10,732,214) (9,359,144)
- -------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS: (1)
Issued - Regular . . . . . . . . . . . . . . . . . . . . . -- --
- In Lieu of Cash Distributions. . . . . . . . . . . . 4,025,589 8,123
- -------------------------------------------------------------------------------------------------------
Net Increase from Capital Share Transactions . . . . . . 4,025,589 8,123
- -------------------------------------------------------------------------------------------------------
Total Increase (Decrease). . . . . . . . . . . . . . . . . (3,771,361) 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 $4,580,141 and
$609,128, respectively). . . . . . . . . . . . . . . . . $108,842,741 $112,614,102
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
(1) Shares Issued and Redeemed:
Shares Issued. . . . . . . . . . . . . . . . . . . . . . -- --
In Lieu of Cash Distribution . . . . . . . . . . . . . . 430,295 825
- -------------------------------------------------------------------------------------------------------
430,295 825
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
13A COMMERCIAL MORTGAGE SECURITIES FUND, INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
APRIL 30, 1998
- ---------------------------------------------------------------------------------
<S><C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase in net assets from operations . . . . . . . . $ 2,935,264
Adjustment to reconcile net increase in net assets
from operations to net cash provided by operating
activities:
Purchase of investment securities. . . . . . . . . . . . (3,564,061)
Proceeds from sale of investment securities. . . . . . . 5,086,797
Net increase in short-term securities. . . . . . . . . . (5,089,000)
Principal paydowns . . . . . . . . . . . . . . . . . . . 1,603,618
Decrease in interest receivable. . . . . . . . . . . . . 566,064
Increase in accrued expenses . . . . . . . . . . . . . . 181,358
Unrealized depreciation on investments . . . . . . . . . 1,245,208
Net realized gain on investments . . . . . . . . . . . . (99,082)
Increase in other assets . . . . . . . . . . . . . . . . (48,941)
- ---------------------------------------------------------------------------------
Net Cash Provided by Operating Activities. . . . . . . 2,817,225
- ---------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:*
Cash Distributions Paid. . . . . . . . . . . . . . . . . . (6,717,818)
- ---------------------------------------------------------------------------------
Net Cash Used for Financing Activities . . . . . . . . (6,717,818)
- ---------------------------------------------------------------------------------
Net Decrease in Cash . . . . . . . . . . . . . . . . . . (3,900,593)
CASH AT BEGINNING OF PERIOD. . . . . . . . . . . . . . . . . 3,900,593
- ---------------------------------------------------------------------------------
CASH AT END OF PERIOD. . . . . . . . . . . . . . . . . . . . $ --
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
</TABLE>
* Non-cash financing activities not included herein consist of reinvestment of
dividends of $4,025,589.
See Notes to Financial Statements.
8
<PAGE>
13A COMMERCIAL MORTGAGE SECURITIES FUND, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SIX MONTHS YEAR YEAR DECEMBER 21,
ENDED ENDED ENDED 1994 (2) TO
PER SHARE OPERATING PERFORMANCE APRIL 30, 1998 OCTOBER 31, OCTOBER 31, OCTOBER 31,
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD (UNAUDITED) 1997 (1) 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S><C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . $ 9.66 $ 9.25 $ 10.82 $ 10.00
- --------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income. . . . . . . . . . . . . . 0.34 0.81 0.93 0.75
Net Realized and Unrealized Gain . . . . . . . . (0.11) 0.40 0.06 0.78
- --------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations . . . . . . 0.23 1.21 0.99 1.53
- --------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income. . . . . . . . . . . . . . (0.34) (0.80) (0.98) (0.71)
In Excess of Net Investment Income . . . . . . . (0.33) -- (0.06) --
Net Realized Gain. . . . . . . . . . . . . . . . (0.22) -- (0.48) --
Return of Capital. . . . . . . . . . . . . . . . -- -- (1.04) --
- --------------------------------------------------------------------------------------------------------------------------------
Total Distributions. . . . . . . . . . . . . (0.89) (0.80) (2.56) (0.71)
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . $ 9.00 $ 9.66 $ 9.25 $ 10.82
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN
Net Asset Value (3) (4). . . . . . . . . . . . . 2.58% 13.65% 10.26% 15.69%
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands). . . . . . . $108,843 $112,614 $107,833 $115,796
Ratio of Net Expenses to Average Net Assets. . . . 0.79% (5) 0.79% 0.80% 0.80% (5)
Ratio of Net Investment Income to Average
Net Assets . . . . . . . . . . . . . . . . . . . 7.39% (5) 8.56% 9.03% 8.30% (5)
Ratio of Voluntary Waived Fees and Expenses
Assumed by the Adviser to Average Net Assets . . 0.09% (5) 0.10% 0.08% 0.05% (5)
Portfolio Turnover Rate. . . . . . . . . . . . . . 0% 42% 25% 72%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Effective July 21, 1997, Clarion Partners became the investment adviser to
the Fund.
(2) Commencement of Operations.
(3) 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.
(4) Total return would have been lower had certain fees not been waived during
the periods.
(5) Annualized.
See Notes to Financial Statements.
9
<PAGE>
13A COMMERCIAL MORTGAGE SECURITIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
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 are stated on the basis of valuations provided by
brokers and/or pricing services which use 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 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. 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, 1998, prices of securities, whose total value represented 93% of
net assets, were available only from principal market makers. 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 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 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 (UNAUDITED) (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.
On January 29, 1998, the Fund made a distribution to shareholders which
was in excess of its fiscal year-to-date net income. This distribution
in excess may represent a non-taxable return of capital for the fiscal
year 1998. The determination as to whether this is a return of capital
or a distribution of net income will be made by the fiscal year end.
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.
Discounts and premiums on securities purchased are amortized using the
effective yield basis over their respective lives.
B. ADVISORY SERVICES: Clarion Partners 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 will waive 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 six months ended April 30, 1998, the Fund
made purchases of $0 and sales of $4,054,141 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' FEES: Each Director, who is not an officer or affiliated
person, receives $1,500 per annum plus $250 per meeting attended.
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 April 30, 1998, 99.9% of total shares outstanding were held by
one record shareholder.
11
<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 to 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 of 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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