<PAGE>
---------------------------------------
13A COMMERCIAL
MORTGAGE
SECURITIES
FUND, INC.
Annual Report
October 31, 1997
---------------------------------------
<PAGE>
December 22, 1997
13A COMMERCIAL MORTGAGE SECURITIES FUND, INC.
Dear Shareholder,
Enclosed is the Annual Report for 13A Commercial Mortgage Securities Fund,
Inc. (the "Fund"). This report covers the period from November 1, 1996
through October 31, 1997. Management of the portfolio was taken over by
Clarion Partners on July 21, 1997. A discussion of the portfolio's
composition and 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 nationally recognized credit rating agencies.
As of October 31, 1997, the Fund had investments in commercial mortgage
securities with a net investment value of $107.5 million ($113.3 million face
amount) and investments in US Treasury securities and cash equivalents of
$3.9 million. Since takeover of the portfolio on July 21, 1997, the Fund
invested in eight securities totaling $44.0 million in investment value and
sold three securities totaling $27.6 million in investment value. As of
October 31, 1997, the Fund's portfolio had a BB+ average credit rating, a
5.813 year modified duration, and a pricing yield of 8.75%, which is
approximately 294 basis points over the comparable US Treasury.
The commercial mortgage securities held by the Fund are backed by mortgage
loans secured by apartments (41%), retail (19%), hotels (14%), office (10%),
industrial (5%), and other property types (11%). By state, the mortgage
collateral is located in CA (19%), TX (11%), FL (7%), NY (5%), PA (3%), MI
(3%), GA (3%) and IN (2%), with the remainder dispersed throughout 26 other
states.
For the period November 1, 1996 through October 31, 1997, the Fund generated
a gross annual total return of 14.54% (net 13.65%). The Fund's return
exceeded the benchmark index, the Lehman Brothers BB Corporate Bond Index,
which generated a gross annual total return of 11.93%. The Fund's
performance was attributable to the higher yields on commercial mortgage
securities versus corporate bonds and to the overall decline in interest
rates which resulted in an increase in bond prices.
Commercial mortgage securities new issuance volume and investor interest
remain high. As of October 31, 1997, year-to-date new issuance exceeded $31
billion, surpassing 1996 levels for the same period. We believe that the
commercial mortgage market's increasing liquidity will continue to cause
spreads to converge toward corporate levels across all rating categories.
While spreads have exhibited some year-end volatility due to technical
pressure, we expect subordinate commercial mortgage securities to outperform
comparably rated investments in 1998.
Daniel Heflin
President
2
<PAGE>
13A COMMERCIAL MORTGAGE SECURITIES FUND, INC.
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1997
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (a)
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
COMMERCIAL MORTGAGE SECURITIES (95.48%)
- ---------------------------------------------------------------------------------------------------------------------
CBM Funding Corp.,
1996-1 Class C 7.860%, 2/1/13 . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,000,000 $ 3,180,618
CBM Funding Corp.,
1996-1 Class D 8.645%, 2/1/13 . . . . . . . . . . . . . . . . . . . . . . . . . 960,000 1,040,550
CS First Boston Mortgage Securities Corp.,
1995-WF1 Class D 7.532%, 12/21/27 . . . . . . . . . . . . . . . . . . . . . . . 3,000,000 3,105,570
CS First Boston Mortgage Securities Corp.,
1995-WF1 Class E 8.384%, 12/21/27 . . . . . . . . . . . . . . . . . . . . . . . 2,000,000 2,027,482
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 5,530,064
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 8,876,441
CS First Boston Mortgage Securities Corp. & DLJ Mortgage Acceptance Corp.,
REMIC 1995-T1 Class F 8.400%, 1/25/05 (b) (c) . . . . . . . . . . . . . . . . . 9,425,049 4,194,147
DLJ Mortgage Acceptance Corp.,
1995-CF2 Class B1 7.500%, 12/17/27 (c). . . . . . . . . . . . . . . . . . . . . 2,000,000 2,071,830
DLJ Mortgage Acceptance Corp.,
1995-CF2 Class B2 8.810%, 12/17/27 (c). . . . . . . . . . . . . . . . . . . . . 2,000,000 2,192,422
DLJ Mortgage Acceptance Corp.,
1996-CF1 Class B2 8.268%, 03/13/28 (c). . . . . . . . . . . . . . . . . . . . . 1,000,000 1,080,574
EQI Financing Partnership,
1997-1 Class C 7.580%, 2/20/17 (c). . . . . . . . . . . . . . . . . . . . . . . 5,000,000 5,076,230
FFCA Secured Assets Corp.,
1996-C1 Class D 8.910%, 6/25/14 (c) . . . . . . . . . . . . . . . . . . . . . . 2,000,000 2,210,938
Federal Deposit Insurance Corp.,
REMIC Trust 1994-C1 Class IIE 8.700% 9/25/25. . . . . . . . . . . . . . . . . . 3,035,390 3,203,654
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
13A COMMERCIAL MORTGAGE SECURITIES FUND, INC.
PORTFOLIO OF INVESTMENTS --(CONTINUED)
OCTOBER 31, 1997
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (a)
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
COMMERCIAL MORTGAGE SECURITIES--(Continued)
- ---------------------------------------------------------------------------------------------------------------------
GMAC Commercial Mortgage Securities Inc.,
1997-C1 Class F 7.222%, 11/15/11. . . . . . . . . . . . . . . . . . . . . . . . $15,000,000 $15,015,375
GMAC Commercial Mortgage Securities Inc.,
1997-C1 Class G 7.414%, 12/15/13. . . . . . . . . . . . . . . . . . . . . . . . 10,000,000 9,563,190
J.P. Morgan Commercial Mortgage Finance Corp.,
1996-C3 Class E 8.324%, 4/25/28 . . . . . . . . . . . . . . . . . . . . . . . . 500,000 531,586
Kidder Peabody Acceptance Corp.,
REMIC 1993-M1 Class C 7.150%, 4/25/25 . . . . . . . . . . . . . . . . . . . . . 2,000,000 1,818,264
LB Mortgage Trust,
1992-M1 Class BE1 8.000%, 2/25/24 (c) . . . . . . . . . . . . . . . . . . . . . 3,000,000 3,073,263
LB Commercial Conduit Mortgage Trust,
1996-C2 Class E 7.886%, 10/25/26. . . . . . . . . . . . . . . . . . . . . . . . 1,944,050 2,036,007
Merrill Lynch Mortgage Investors, Inc.,
1994-A A1 5.915%, 02/15/19. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,092,989 1,092,989
Merrill Lynch Mortgage Investors, Inc.,
1995-C2 D 8.189%, 6/15/21 . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,532,744 1,577,528
Midland Realty Acceptance Corp.,
1996-C1 Class E 8.211%, 8/25/28 . . . . . . . . . . . . . . . . . . . . . . . . 2,784,000 2,985,651
Mortgage Capital Funding, Inc.,
1995-MC1 Class A4 8.350%, 5/25/27 . . . . . . . . . . . . . . . . . . . . . . . 4,575,500 4,883,697
NB Commercial Mortgage Pass Through FSI,
Class D 8.730%, 10/20/23 (c) . . . . . . . . . . . . . . . . . . . . . . . . . 2,385,118 2,464,378
Prudential Securities Secured Financing Corp.,
1995-MCF2 Class F 8.550%, 12/26/22 (c). . . . . . . . . . . . . . . . . . . . . 5,557,000 6,118,279
Resolution Trust Corp.,
1992-C8 Class D 8.835%, 12/25/23 (c). . . . . . . . . . . . . . . . . . . . . . 3,233,511 3,372,956
Resolution Trust Corp.,
1995-C2 Class F 7.000%, 05/25/27. . . . . . . . . . . . . . . . . . . . . . . . 3,651,298 3,544,988
Resolution Trust Corp.,
1994-C2 Class G 8.000%, 04/25/25. . . . . . . . . . . . . . . . . . . . . . . . 1,132,760 1,133,516
Resolution Trust Corp.,
1995-C1 Class D 6.900%, 2/25/27 . . . . . . . . . . . . . . . . . . . . . . . . 2,000,000 1,994,210
Resolution Trust Corp.,
1995-C1 Class E 6.900%, 2/25/27 . . . . . . . . . . . . . . . . . . . . . . . . 2,595,957 2,525,584
- ---------------------------------------------------------------------------------------------------------------------
TOTAL COMMERCIAL MORTGAGE SECURITIES
(COST $102,337,708). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107,521,981
- ---------------------------------------------------------------------------------------------------------------------
U.S GOVERNMENT SECURITY (0.92%)
- ---------------------------------------------------------------------------------------------------------------------
U.S. TREASURY NOTE (0.92%),
7.750%, 11/30/99 (COST $1,000,000) . . . . . . . . . . . . . . . . . . . . . 1,000,000 1,040,000
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
13A COMMERCIAL MORTGAGE SECURITIES FUND, INC.
PORTFOLIO OF INVESTMENTS --(CONTINUED)
OCTOBER 31, 1997
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (a)
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENT (2.53%)
- ---------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT (2.53%)
State Street Bank 4.750%, due 11/3/97
(Collateralized by $2,360,000 U.S. Treasury Bond,
8.125%, due 8/15/19) (COST $2,852,000). . . . . . . . . . . . . . . . . . $ 2,852,000 $ 2,852,000
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (98.93%)
(COST $106,189,708) (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111,413,981
- ---------------------------------------------------------------------------------------------------------------------
CASH AND OTHER ASSETS, NET OF LIABILITIES (1.07%). . . . . . . . . . . . . . . . . . 1,200,121
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS (100.00%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $112,614,102
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</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 October 31, 1997 was $46,261,522 or 41.08% of net assets.
(Cost $42,822,906).
(d) The cost for federal income tax purposes was $106,189,708. At,
October 31, 1997, net unrealized appreciation for all securities based
on tax cost was $5,224,273. This consisted of aggregate gross unrealized
appreciation for all securities of $5,275,661 and aggregate gross
unrealized depreciation for all securities of $51,388.
See Notes to Financial Statements.
5
<PAGE>
13A COMMERCIAL MORTGAGE SECURITIES FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
- ------------------------------------------------------------------------------------------------------------
ASSETS
Investments, at Cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 106,189,708
-------------
-------------
Investments, at Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 111,413,981
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,900,593
Interest Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,705,155
Paydown Receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78,329
- ------------------------------------------------------------------------------------------------------------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117,098,058
- ------------------------------------------------------------------------------------------------------------
LIABILITIES
Dividends Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 683,670
Payable for Securities Purchased. . . . . . . . . . . . . . . . . . . . . . . . . . . 3,564,061
Other Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236,225
- ------------------------------------------------------------------------------------------------------------
Total Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,483,956
- ------------------------------------------------------------------------------------------------------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 112,614,102
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Paid in Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105,319,146
Dividends Paid in Excess of Net Investment Income . . . . . . . . . . . . . . . . . (609,128)
Accumulated Net Realized Gains. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,679,811
Unrealized Appreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,224,273
- ------------------------------------------------------------------------------------------------------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 112,614,102
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
INSTITUTIONAL CLASS SHARES
Shares Issued and Outstanding ($0.01 par value)(Authorized 15,000,000) . . . . . . . . 11,658,400
Net Asset Value, Offering and Redemption Price Per Share . . . . . . . . . . . . . . . $ 9.66
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
13A COMMERCIAL MORTGAGE SECURITIES FUND, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31, 1997
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,315,418
- --------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 717,100
Less: Fee Waived. . . . . . . . . . . . . . . . . . . . . . . . (99,132) 617,968
---------
Administrative Fees-Note C
Basic Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . 148,284
Less: Fee Waived. . . . . . . . . . . . . . . . . . . . . . . . (16,331) 131,953
---------
Insurance Expenses. . . . . . . . . . . . . . . . . . . . . . . . 60,087
Custodian Fees-Note D . . . . . . . . . . . . . . . . . . . . . . 13,003
Audit Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,750
Legal Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,888
Directors' Fees-Note F. . . . . . . . . . . . . . . . . . . . . . 7,357
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 642
- --------------------------------------------------------------------------------------------------------------
Expenses before Expenses Paid Indirectly. . . . . . . . . . . . . 868,648
Expenses Paid Indirectly. . . . . . . . . . . . . . . . . . . . . (1,911)
- --------------------------------------------------------------------------------------------------------------
Net Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . 866,737
- --------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME. . . . . . . . . . . . . . . . . . . . . . . . . 9,448,681
- --------------------------------------------------------------------------------------------------------------
NET REALIZED GAIN ON INVESTMENTS . . . . . . . . . . . . . . . . . . . 2,679,811
NET CHANGE IN UNREALIZED APPRECIATION/
DEPRECIATION ON INVESTMENTS . . . . . . . . . . . . . . . . . . . . 2,004,048
- --------------------------------------------------------------------------------------------------------------
NET GAIN ON INVESTMENTS. . . . . . . . . . . . . . . . . . . . . . . . 4,683,859
- --------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS . . . . . . . . . $ 14,132,540
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
13A COMMERCIAL MORTGAGE SECURITIES FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
OCTOBER 31, 1997 OCTOBER 31, 1996
---------------- ----------------
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income . . . . . . . . . . . . . . . . . . . . . $ 9,448,681 $ 10,644,473
Net Realized Gain . . . . . . . . . . . . . . . . . . . . . . . 2,679,811 1,785,464
Net Change in Unrealized Appreciation/Depreciation. . . . . . . 2,004,048 (1,162,645)
- --------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations. . . . . 14,132,540 11,267,292
- --------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS:
- --------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . . . . . . . (9,359,144) (11,113,241)
In Excess of Net Investment Income. . . . . . . . . . . . . . . - (698,665)
Net Realized Gain . . . . . . . . . . . . . . . . . . . . . . . - (5,291,133)
Return of Capital . . . . . . . . . . . . . . . . . . . . . . . - (12,173,155)
- --------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . . . . . (9,359,144) (29,276,194)
- --------------------------------------------------------------------------------------------------------------
CAPITAL Share Transactions: (1)
Issued - Regular. . . . . . . . . . . . . . . . . . . . . . . . - -
- In Lieu of Cash Distributions . . . . . . . . . . . . . . . . 8,123 10,045,229
- --------------------------------------------------------------------------------------------------------------
Net Increase from Capital Share Transactions. . . . . . . . . . 8,123 10,045,229
- --------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) . . . . . . . . . . . . . . . . . . . 4,781,519 (7,963,673)
Net Assets:
Beginning of Year . . . . . . . . . . . . . . . . . . . . . . . 107,832,583 115,796,256
- --------------------------------------------------------------------------------------------------------------
End of Year (including distributions in
excess of net investment income of $609,128 and
$698,665, respectively) . . . . . . . . . . . . . . . . . . . . $112,614,102 $107,832,583
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
(1) Shares Issued and Redeemed:
Shares Issued . . . . . . . . . . . . . . . . . . . . . . . . . - -
In Lieu of Cash Distribution. . . . . . . . . . . . . . . . . . 825 953,234
- --------------------------------------------------------------------------------------------------------------
825 953,234
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
13A COMMERCIAL MORTGAGE SECURITIES FUND, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR
ENDED
OCTOBER 31, 1997
- -----------------------------------------------------------------------------------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase in net assets from operations. . . . . . . . . . . . . . . . $ 14,132,540
Adjustment to reconcile net increase in net assets from operations
to net cash used in operating activities:
Amortization of premiums and discounts. . . . . . . . . . . . . . . . (56,732)
Purchase of investment securities . . . . . . . . . . . . . . . . . . (51,259,482)
Proceeds from sale of investment securities . . . . . . . . . . . . . 43,860,108
Net increase in short-term securities . . . . . . . . . . . . . . . . (1,936,000)
Principal paydowns. . . . . . . . . . . . . . . . . . . . . . . . . . 13,915,348
Increase in interest receivable . . . . . . . . . . . . . . . . . . . (728,424)
Increase in accrued expenses. . . . . . . . . . . . . . . . . . . . . 39,239
Unrealized appreciation on investments. . . . . . . . . . . . . . . . (2,004,048)
Net realized gain on investments. . . . . . . . . . . . . . . . . . . (2,679,811)
Increase in other assets. . . . . . . . . . . . . . . . . . . . . . . (16,159)
- -----------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities . . . . . . . . . . . . . . 13,266,579
- -----------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES*:
Cash Distributions Paid . . . . . . . . . . . . . . . . . . . . . . . (9,366,015)
- -----------------------------------------------------------------------------------------------
Net Cash Used for Financing Activities. . . . . . . . . . . . . . . . (9,366,015)
- -----------------------------------------------------------------------------------------------
Net Increase in Cash. . . . . . . . . . . . . . . . . . . . . . . . . 3,900,564
CASH AT BEGINNING OF YEAR. . . . . . . . . . . . . . . . . . . . . . . . . 29
- -----------------------------------------------------------------------------------------------
CASH AT END OF YEAR. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,900,593
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>
* Non-cash financing activities not included herein consist of reinvestment
of dividends of $8,123.
See Notes to Financial Statements.
9
<PAGE>
13A COMMERCIAL MORTGAGE SECURITIES FUND, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED DECEMBER 21,
PER SHARE OPERATING PERFORMANCE OCTOBER 31, OCTOBER 31, 1994** TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 1997++ 1996 OCTOBER 31, 1995
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . . . . . . . $ 9.25 $ 10.82 $ 10.00
- --------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . .81 0.93 0.75
Net Realized and Unrealized Gain. . . . . . . . . . . . . .40 0.06 0.78
- --------------------------------------------------------------------------------------------------------------
Total from Investment Operations . . . . . . . . . . . . 1.21 0.99 1.53
- --------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income . . . . . . . . . . . . . . . . . . (.80) (0.98) (0.71)
In Excess of Net Investment Income. . . . . . . . . . . . - (0.06) -
Net Realized Gain . . . . . . . . . . . . . . . . . . . . - (0.48) -
Return of Capital . . . . . . . . . . . . . . . . . . . . - (1.04) -
- --------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . . . (.80) (2.56) (0.71)
- --------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . . . . . . . $ 9.66 $ 9.25 $ 10.82
- --------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN
Net Asset Value (1)+. . . . . . . . . . . . . . . . . . 13.65% 10.26% 15.69%
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands). . . . . . . . . . . . $112,614 $107,833 $115,796
Ratio of Net Expenses to Average Net Assets. . . . . . . . . 0.79% 0.80% 0.80%*
Ratio of Net Investment Income to Average Net Assets . . . . 8.56% 9.03% 8.30%*
Ratio of Voluntary Waived Fees and Expenses
Assumed by the Adviser to Average Net Assets. . . . . . 0.10% 0.08% 0.05%*
Portfolio Turnover Rate. . . . . . . . . . . . . . . . . . . 42% 25% 72%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized.
** Commencement of Operations.
+ Total return would have been lower had certain fees not been waived
during the periods.
++ Effective July 21, 1997, Clarion Partners became the investment adviser to
the Fund.
(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.
See Notes to Financial Statements.
10
<PAGE>
13A COMMERCIAL MORTGAGE SECURITIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS
13A Commercial Mortgage Securities Fund, Inc. (formerly AEW 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 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 October 31, 1997, prices of securities, whose
total value represented 95% 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 coll
ateral 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.
11
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13A COMMERCIAL MORTGAGE SECURITIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 the 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 of the Fund's
common stock.
The amount and character of income and capital gain distributions to
be paid are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing book and
tax treatments 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 and
acquisition of these securities may involve time consuming
negotiations and due diligence, 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: Effective July 21, 1997, Clarion Partners provided
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.
For the period November 1, 1996 to December 9, 1996, Aldrich, Eastman &
Waltch, L.P. (the previous adviser) provided investment advisory services to
the Fund at a fee calculated at an annual rate of 0.65% of average net assets
and voluntarily agreed to waive a portion of its advisory fees and to assume
expenses, if necessary, in order to keep the Fund's total expenses from
exceeding 0.80% of average daily net assets.
On December 10, 1996 Aldrich, Eastman & Waltch, L.P. consolidated its
operations with Copley Real Estate Advisors, Inc., a wholly owned subsidiary
of New England Investment Companies, L.P. (NEIC) to form AEW Capital
Management, L.P. AEW Capital Management, Inc., a wholly owned subsidiary of
NEIC, is the general partner and NEIC is the sole limited partner of AEW
Capital Management, L.P. For the period from December 10, 1996 to July 20,
1997, AEW Capital Management, L.P. provided investment advisory services to
the Fund under the same terms and conditions as the previous contract.
C. ADMINISTRATION SERVICES: Effective September 15, 1997 the Fund engaged
State Street Bank and Trust Company (the "Bank") to provide administration
services. Under this agreement, the Bank is entitled to receive annual fees,
computed daily and payable monthly, at the rate of .05% of the first $150
million in net assets, .03% of the next $150 million and .01% thereafter.
For the period September 15, 1997 to October 31, 1997, the Fund owed the Bank
fees totaling $7,500.
12
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13A COMMERCIAL MORTGAGE SECURITIES FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
For the period December 19, 1996 to September 14, 1997, Reich & Tang Asset
Management L.P., a wholly owned subsidiary of NEIC, provided administrative
and other services to the Fund. Pursuant to that agreement, Reich & Tang
Asset Management L.P. was entitled to receive annual fees, computed daily and
payable monthly, of 0.15% of the Fund's average daily net assets. For this
period, the fee paid to Reich & Tang Asset Management L.P. was $123,343, of
which $16,331 was voluntarily waived.
Prior to December 19, 1996, UAM Fund Services, Inc., served as the
administrator to the Fund. For its services as administrator UAM Fund
Services, Inc. received annual fees computed daily and payable monthly, of
0.19% of the first $200 million of the combined aggregate net assets of the
Fund and the UAM Funds; plus 0.11% of the next $800 million of the combined
aggregate net assets; plus 0.07% of the next $2 billion of the combined
aggregate net assets; plus 0.05% of the combined aggregate net assets in
excess of $3 billion. The fees were allocated among the Fund and the
portfolios of the UAM Funds on the basis of their relative net assets and
were subject to a graduated minimum fee schedule per portfolio which rose
from $2,000 per month, upon inception of a portfolio, to $70,000 annually
after two years. For portfolios with more than one class of shares, the
minimum annual fee increased to $90,000. In addition, the Administrator
received a Fund-specific monthly fee of 0.04% of average daily net assets of
the Fund. UAM Fund Services entered into a Mutual Funds Service Agreement
with Chase Global Fund Services Company ("CGFSC"), an affiliate of The Chase
Manhattan Bank, under which CGFSC agreed to provide certain services,
including but not limited to, administration, fund accounting, dividend
disbursing and transfer agent services. Pursuant to the Mutual Funds Service
Agreement, the Administrator paid CGFSC a monthly fee. For the period
November 1, 1996 to December 18, 1996, UAM Fund Services, Inc. earned $17,441
from the Fund as Administrator of which $11,750 was paid to CGFSC for their
services.
D. CUSTODIAN: Effective March 1, 1997, Investors Fiduciary Trust Company
became custodian for the Fund's assets held in accordance with the custodian
agreement. Prior to March 1, 1997, The Chase Manhattan Bank, an affiliate of
CGFSC acted as the Fund's custodian. Included in the Statement of Operations
under the caption "Custody Fees" are expense offsets of $1,911.
E. PURCHASES AND SALES: For the year ended October 31, 1997, the Fund made
purchases of $51,259,482 and sales of $43,860,108 of investment securities
other than long-term U.S. Government and short-term securities. There were
no purchases or 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. Prior to
the election of the new directors on December 19, 1996, each director
received $2,000 per meeting attended, which was allocated proportionately
among the Fund and the active portfolios of UAM Funds, plus a quarterly
retainer of $150 for the Fund and each active portfolio of the UAM Funds, and
reimbursement of expenses incurred in attending Board meetings.
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, 1997, 99.9% of total shares outstanding were held
by one record shareholder.
13
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INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders
13A Commercial Mortgage Securities Fund, Inc.
(formerly AEW 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. (formerly AEW Commercial Mortgage Securities Fund, Inc.) as of
October 31, 1997, and the related statement of operations, the statement of
changes in net assets, the statement of cash flows, and the financial
highlights for the year 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 audit. The statement of changes in net
assets and 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 audit 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, 1997, by correspondence with the custodian
and brokers. 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 audit provides
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, 1997, the results
of its operations and its cash flows, the changes in its net assets and the
financial highlights for the year then ended, in conformity with generally
accepted accounting principles.
New York, New York
December 5, 1997
14
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13A COMMERCIAL MORTGAGE
SECURITIES FUND, INC.
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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
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INVESTMENT ADVISER
Clarion Partners
335 Madison Avenue
New York, NY 10017
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ADMINISTRATOR
State Street Bank and Trust Company
1776 Heritage Drive
North Quincy, MA 02171
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CUSTODIAN
Investors Fiduciary Trust Company
127 West 10th Street
Kansas City, MO 64105
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LEGAL COUNSEL
Shearman & Sterling
599 Lexington Avenue
New York, NY 10022
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