<PAGE> 1
- -------------------------------------------
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
Fredrick D. Arenstein
Treasurer, Compliance Officer and Chief Financial
Officer
Joanne Vitale
Secretary and Director
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.
SEMI-ANNUAL REPORT
APRIL 30, 1999
(UNAUDITED)
<PAGE> 2
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
June 1999
13A COMMERCIAL MORTGAGE SECURITIES FUND, INC.
Dear Shareholder,
Enclosed is the Semi-Annual Report of the 13A Commercial Mortgage Securities
Fund, Inc. (the "Fund"). This report covers the period from November 1, 1998
through April 30, 1999. A discussion of the portfolio's performance and the
market conditions that affected performance is provided below.
The Fund is a non-diversified, closed-end management investment company that was
initially capitalized on December 21, 1994 with the sale of 10,011,100 shares of
common stock that 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 April 30, 1999, the Fund had a total investment value of $100,782,842,
including $99,548,842 in commercial mortgage backed securities (approximately
98.8% of the Fund's total investment value) and $1,234,000 in cash and cash
equivalents (approximately 1.2% of the Fund's total investment value). The
Fund's portfolio had a BB+ average credit rating, a 5.2-year modified duration
and an 8.1-year weighted average life. The weighted average spread of the Fund's
portfolio was 519 bps, which equated to a yield to maturity of 10.4%.
The credit quality of the Fund's portfolio remains high. The commercial mortgage
backed securities ("CMBS") held by the Fund are backed by mortgage loans secured
by multifamily (44%), retail (19%), hotels (14%), office (8%), industrial (3%)
and other property types (12%). The mortgage collateral is located in 50 states
with the largest concentrations in California (17%), Texas (11%), Florida (8%)
and New York (5%).
Since inception through April 30, 1999, the Fund achieved gross average
annualized returns of 11.21%. For the period November 1, 1998 through April 30,
1999, the Fund earned a gross return of 1.41%. The Fund's performance in the
first half of the 1999 fiscal year was affected by an increase in interest
rates, where yields on the 10-year US Treasury increased by 0.59% from 4.75% to
5.34%, and by spread widening in the commercial mortgage sector in the Fall of
1998. At that time, spreads widened to unprecedented levels in the face of the
global credit crunch. Today, CMBS yields remain significantly higher than that
of comparably rated corporate debt, representing excellent relative value.
Moving forward, we expect CMBS spreads to converge toward corporate levels,
generating significant returns. Spreads have begun to tighten in the face of
both increased liquidity and reduced supply. New institutional investors have
begun to enter the market and, at the same time, CMBS new issuance volume has
declined in the face of the slowdown in new mortgage originations. It is
estimated that new supply will decline from the record high of $78 billion in
1998 to $55 billion in 1999, strengthening the prospects for spread tightening.
We believe the Fund is well positioned to take advantage of the market
opportunity in the commercial mortgage sector.
Very truly yours,
Clarion Capital, LLC
2
<PAGE> 3
13A COMMERCIAL MORTGAGE SECURITIES FUND, INC.
PORTFOLIO OF INVESTMENTS
APRIL 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (a)
------ ---------
<S> <C> <C>
COMMERCIAL MORTGAGE SECURITIES (98.81%)
Bear Stearns Commercial Mortgage Securities,
1999 Class C-1 6.530%, 10/14/13 ................................................... $ 3,000,000 $ 2,712,708
CBM Funding Corp.,
1996-1 Class C 7.860%, 2/1/08 ..................................................... 3,000,000 3,032,406
CBM Funding Corp.,
1996-1 Class D 8.645%, 2/1/08 ..................................................... 960,000 956,488
CS First Boston Mortgage Securities Corp.,
1995-WF1 Class D 7.532%, 12/21/27 ................................................. 3,000,000 2,989,020
CS First Boston Mortgage Securities Corp.,
1995-WF1 Class E 8.268%, 12/21/27 ................................................. 2,000,000 1,864,430
CS First Boston Mortgage Securities Corp. & DLJ Mortgage Acceptance Corp.,
REMIC 1995-T1 Class D 8.400%, 1/25/05 (c) ......................................... 5,839,000 5,128,896
CS First Boston Mortgage Securities Corp. & DLJ Mortgage Acceptance Corp.,
REMIC 1995-T1 Class E 8.400%, 1/25/05 (c) ......................................... 11,087,000 8,701,233
CS First Boston Mortgage Securities Corp. & DLJ Mortgage Acceptance Corp.,
REMIC 1995-T1 Class F 8.400%, 1/25/05 (b) (c) ..................................... 9,139,185 4,125,483
Chase Commercial Mortgage Securities Corp.,
1997-2 6.600%, 8/19/12 ........................................................... 5,800,000 4,118,273
DLJ Commercial Mortgage Corp.,
1998-CF1 Class B4 7.600%, 1/15/13 (c) ............................................ 2,100,000 1,564,076
DLJ Mortgage Acceptance Corp.,
1995-CF2 Class B2 8.8154%, 12/17/27 (c) ........................................... 2,000,000 2,042,912
DLJ Commercial Mortgage Corp.,
1999-CG1 7.486%, 2/10/09 .......................................................... 5,000,000 4,956,245
DLJ Mortgage Acceptance Corp.,
1996-CF1 Class B2 8.2668%, 5/12/09 (c) ............................................ 1,000,000 983,560
EQI Financing Partnership,
1997-1 Class C 7.580%, 2/20/17 (c) ................................................ 5,000,000 4,808,805
FFCA Secured Assets Corp.,
1996-C1 Class D 8.910%, 6/25/14 (c) ............................................... 2,000,000 1,879,320
Federal Deposit Insurance Corp.,
REMIC Trust 1994-C1 Class IIE 8.700%, 9/25/25 ..................................... 3,035,390 3,111,685
First Union Commercial Mortgage Trust,
6.794%, 6/15/13 ................................................................... 2,014,000 1,913,276
First Union - Lehman Brothers,
CMO 7.120%, 11/18/12 .............................................................. 1,000,000 871,518
GMAC Commercial Mortgage Securities Inc.,
1997-C1 Class G 7.414%, 12/15/13 (c) .............................................. 10,000,000 7,368,110
J.P. Morgan Commercial Mortgage Finance Corp.,
1996-C3 Class E 8.3242%, 4/25/28 .................................................. 500,000 496,605
Kidder Peabody Acceptance Corp.,
REMIC 1993-M1 Class C 7.150%, 4/25/25 ............................................. 2,000,000 1,918,912
</TABLE>
See Notes to Financial Statements
3
<PAGE> 4
13A COMMERCIAL MORTGAGE SECURITIES FUND, INC.
PORTFOLIO OF INVESTMENTS --(CONTINUED)
APRIL 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (a)
------ ---------
<S> <C> <C>
COMMERCIAL MORTGAGE SECURITIES--(Continued)
LB Mortgage Trust,
1992-M1 Class BE1 7.502%, 2/25/24 ..................................... $ 3,000,000 $ 2,996,130
LB Commercial Conduit Mortgage Trust,
1996-C2 Class E 7.9042%, 10/25/26 ..................................... 1,944,050 1,858,529
LB Commercial Conduit Mortgage Trust,
7.000%, 11/18/12 ...................................................... 1,000,000 877,332
Merrill Lynch Mortgage Investors, Inc.,
1995-C2 D 7.863%, 6/15/21 ............................................. 1,087,225 1,090,828
Midland Realty Acceptance Corp.,
1996-C1 Class E 8.1873%, 8/25/28 ...................................... 2,784,000 2,696,724
Morgan Stanley Capital,
1997-HF1 Class F 6.860%, 2/15/10 ...................................... 3,100,000 2,382,090
Morgan Stanley Capital,
1999-WF1 6.610%, 8/15/10 .............................................. 2,000,000 1,816,586
Mortgage Capital Funding, Inc.,
1995-MC1 Class A4 8.350%, 5/25/27 ..................................... 4,575,500 4,575,500
Nationslink Funding Corp.,
98-1, F 7.050%, 2/20/08 (c) ........................................... 5,000,000 3,861,865
NB Commercial Mortgage Pass Through FSI,
Class D 8.730%, 10/20/23 (c) ......................................... 2,385,116 2,431,234
Prudential Securities Secured Financing Corp.,
1995-MCF2 Class F 8.5214%, 12/26/22 (c) ............................... 5,557,000 5,362,738
Resolution Trust Corp.,
1995-C2 Class F 7.000%, 5/25/27 ....................................... 3,218,401 3,044,668
Resolution Trust Corp.,
1994-C2 Class G 8.000%, 4/25/25 ....................................... 1,041,320 1,010,657
--------- ---------
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $102,648,722) .................................................. 99,548,842
---------
</TABLE>
See Notes to Financial Statements
4
<PAGE> 5
13A COMMERCIAL MORTGAGE SECURITIES FUND, INC.
PORTFOLIO OF INVESTMENTS --(CONTINUED)
APRIL 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE (a)
------ ---------
<S> <C> <C>
SHORT-TERM INVESTMENT (1.22%)
Repurchase Agreement (7.02%)
State Street Bank 4.000%, due 5/1/99
(Collateralized by $1,155,000 U.S. Treasury Note,
7.500%, due 11/15/01) (COST $1,234,000)......................... $ 1,234,000 $ 1,234,000
------------ -------------
TOTAL INVESTMENTS (100.03%)
(COST $103,882,722) (d)................................................ 100,782,842
-------------
CASH AND OTHER ASSETS, NET OF LIABILITIES (-0.03%)......................... (30,688)
-------------
NET ASSETS (100.00%)....................................................... $ 100,752,154
=============
</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, 1999 was $48,258,232 or 47.90% of net assets.
(Cost $50,538,279)
(d) The cost for federal income tax purposes was $103,882,722. At, April
30, 1999, net unrealized depreciation for all securities based on tax
cost was $3,099,880. This consisted of aggregate gross unrealized
appreciation for all securities of $2,076,262 and aggregate gross
unrealized depreciation for all securities of $5,176,142.
See Notes to Financial Statements
5
<PAGE> 6
13A COMMERCIAL MORTGAGE SECURITIES FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investments, at Cost...................................................... $ 103,882,722
=================
Investments, at Value..................................................... $ 100,782,842
Interest Receivable....................................................... 1,259,953
Prepaid Expenses.......................................................... 399
-----------------
Total Assets.................................................................... 102,043,194
-----------------
LIABILITIES
Dividends Payable......................................................... 686,964
Accrued Advisory Fee - Note B............................................. 144,554
Payable to Custodian...................................................... 336,868
Other Liabilities......................................................... 122,654
-----------------
Total Liabilities....................................................... 1,291,040
-----------------
NET ASSETS...................................................................... $ 100,752,154
=================
NET ASSETS CONSIST OF:
Paid in Capital .......................................................... 105,869,077
Dividends Paid in Excess of Net Investment Income........................ (559,580)
Accumulated Net Realized Loss............................................. (1,457,463)
Unrealized Depreciation...................................................... (3,099,880)
-----------------
NET ASSETS...................................................................... $ 100,752,154
=================
INSTITUTIONAL CLASS SHARES
Shares Issued and Outstanding ($0.01 par value)(Authorized 15,000,000) 12,089,938
Net Asset Value Per Share.................................................... $ 8.33
=================
</TABLE>
See Notes to Financial Statements
6
<PAGE> 7
13A COMMERCIAL MORTGAGE SECURITIES FUND, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
APRIL 30, 1999
--------------
<S> <C> <C>
INVESTMENT INCOME
Interest ................................................................ $ 4,517,236
-----------
EXPENSES
Investment Advisory Fees - Note B
Basic Fee ............................................................ $ 329,091
Less: Fee Waived ..................................................... (67,017) 262,074
---------
Administrative Fees - Note C ............................................ 30,000
Insurance Expenses ...................................................... (19,836)
Custodian Fees - Note D ................................................. 36,006
Audit Fees .............................................................. 9,918
Legal Fees .............................................................. 84,301
Transfer Agent Fees ..................................................... 9,918
Directors' Fees - Note F ............................................... 2,579
-----------
Net Expenses ......................................................... 414,960
-----------
NET INVESTMENT INCOME ....................................................... 4,102,276
-----------
NET REALIZED LOSS ON INVESTMENTS ............................................ (1,457,463)
NET CHANGE IN UNREALIZED
(DEPRECIATION) ON INVESTMENTS ............................................ (1,630,313)
-----------
NET LOSS ON INVESTMENTS ..................................................... (3,087,776)
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ........................ $ 1,014,500
===========
</TABLE>
See Notes to Financial Statements
7
<PAGE> 8
13A COMMERCIAL MORTGAGE SECURITIES FUND, INC.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR
APRIL 30, 1999 ENDED
(UNAUDITED) OCTOBER 31, 1998
----------- ----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income .................................................. $ 4,102,276 $ 8,186,971
Net Realized Gain/(Loss) ............................................... (1,457,463) 426,252
Net Change in Unrealized Depreciation .................................. (1,630,313) (6,693,840)
------------- -------------
Net Increase in Net Assets Resulting from Operations .................. 1,014,500 1,919,383
------------- -------------
DISTRIBUTIONS:
Net Investment Income ................................................... (4,011,458) (8,186,971)
In Excess of Net Investment Income ...................................... -- (41,270)
Net Realized Gain ....................................................... -- (3,106,063)
Return of Capital ....................................................... -- (3,486,411)
------------- -------------
Total Distributions ................................................. (4,011,458) (14,820,715)
------------- -------------
CAPITAL SHARE TRANSACTIONS: (1)
Issued - Regular ........................................................ -- --
- In Lieu of Cash Distributions ................................... 6,297 4,030,045
------------- -------------
Net Increase from Capital Share Transactions .......................... 6,297 4,030,045
------------- -------------
Total Decrease .......................................................... (2,990,661) (8,871,287)
Net Assets:
Beginning of Year ....................................................... 103,742,815 112,614,102
------------- -------------
End of Year (including distributions in
excess of net investment income of $559,580 and
$650,398, respectively) ................................................ $ 100,752,154 $ 103,742,815
============= =============
(1) Shares Issued and Redeemed:
Shares Issued .......................................................... -- --
------------- -------------
In Lieu of Cash Distribution ........................................... 749 430,789
------------- -------------
749 430,789
============= =============
</TABLE>
See Notes to Financial Statements
8
<PAGE> 9
13A COMMERCIAL MORTGAGE SECURITIES FUND, INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
APRIL 30, 1999
--------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase in net assets from operations ........................................................ $ 1,014,500
------------
Adjustment to reconcile net increase in net assets from operations
to net cash provided by operating activities:
Purchase of investment securities ............................................................... (23,218,659)
Proceeds from sale of investment securities ..................................................... 16,562,893
Net decrease in short-term securities ........................................................... 6,050,000
Principal paydowns .............................................................................. 284,761
Increase in interest receivable ................................................................. (255,887)
Increase in accrued expenses .................................................................... 408,793
Unrealized depreciation on investments .......................................................... 1,630,313
Net realized loss on investments ................................................................ 1,457,463
Decrease in other assets ........................................................................ 34,098
------------
Net Cash Provided by Operating Activities ..................................................... 3,968,275
------------
CASH FLOWS FROM FINANCING ACTIVITIES:*
Cash Distributions Paid ........................................................................... (3,968,595)
------------
Net Cash Used for Financing Activities ........................................................ (3,968,595)
------------
Net Decrease in Cash ............................................................................ (320)
CASH AT BEGINNING OF PERIOD .......................................................................... 320
------------
CASH AT END OF PERIOD ................................................................................ $ 0
============
</TABLE>
* Non-cash financing activities not included herein consist of reinvestment of
dividends of $6,297.
See Notes to Financial Statements
9
<PAGE> 10
13A COMMERCIAL MORTGAGE SECURITIES FUND, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
SIX MONTHS YEAR YEAR
ENDED ENDED ENDED
PER SHARE OPERATING PERFORMANCE APRIL 30, 1999 OCTOBER 31, OCTOBER 31,
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD (UNAUDITED) 1998 1997 (1)
- ---------------------------------------------- ----------- ---- --------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ............... $ 8.58 $ 9.66 $ 9.25
----------- ----------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income ........................... 0.34 0.68 0.81
Net Realized and Unrealized Gain (Loss) ......... (0.26) (0.52) 0.40
----------- ----------- -----------
Total from Investment Operations ............ 0.08 0.16 1.21
----------- ----------- -----------
DISTRIBUTIONS
Net Investment Income ........................... (0.33) (0.68) (0.80)
In Excess of Net Investment Income .............. -- -- --
Net Realized Gain ............................... -- (0.27) --
Return of Capital ............................... -- (0.29) --
----------- ------------ -----------
Total Distributions ......................... (0.33) (1.24) (0.80)
----------- ----------- -----------
NET ASSET VALUE, END OF PERIOD ..................... $ 8.33 $ 8.58 $ 9.66
----------- ----------- -----------
TOTAL INVESTMENT RETURN
Net Asset Value (3) (4) ....................... 0.99%(5) 1.55% 13.65%
=========== =========== ===========
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands) .............. $ 100,752 $ 103,743 $ 112,614
Ratio of Net Expenses to Average Net Assets ........ 0.80%(6) 0.80% 0.79%
Ratio of Net Investment Income to Average Net Assets 8.10%(6) 7.42% 8.56%
Ratio of Voluntary Waived Fees and Expenses
Assumed by the Adviser to Average Net Assets .. 0.15%(6) 0.13% 0.10%
Portfolio Turnover Rate ............................ 17%(5) 6% 42%
----------- ----------- -----------
<CAPTION>
YEAR DECEMBER 21,
ENDED 1994 (2) TO
PER SHARE OPERATING PERFORMANCE OCTOBER 31, OCTOBER 31,
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 1996 1995
- ---------------------------------------------- ---- ----
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ............... $ 10.82 $ 10.00
----------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net Investment Income ........................... 0.93 0.75
Net Realized and Unrealized Gain (Loss) ......... 0.06 0.78
----------- -----------
Total from Investment Operations ............ 0.99 1.53
----------- -----------
DISTRIBUTIONS
Net Investment Income ........................... (0.98) (0.71)
In Excess of Net Investment Income .............. (0.06) --
Net Realized Gain ............................... (0.48) --
Return of Capital ............................... (1.04) --
----------- -----------
Total Distributions ......................... (2.56) (0.71)
----------- -----------
NET ASSET VALUE, END OF PERIOD ..................... $ 9.25 $ 10.82
----------- -----------
TOTAL INVESTMENT RETURN
Net Asset Value (3) (4) ....................... 10.26% 15.69%(5)
=========== ===========
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (Thousands) .............. $ 107,833 $ 115,796
Ratio of Net Expenses to Average Net Assets ........ 0.80% 0.80%(6)
Ratio of Net Investment Income to Average Net Assets 9.03% 8.30%(6)
Ratio of Voluntary Waived Fees and Expenses
Assumed by the Adviser to Average Net Assets .. 0.08% 0.05%(6)
Portfolio Turnover Rate ............................ 25% 72%(5)
----------- -----------
</TABLE>
(1) Effective July 21, 1997, Clarion Capital 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 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
10
<PAGE> 11
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. See Note I.
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 of the Fund's
common stock.
11
<PAGE> 12
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.
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 six months ended April 30, 1999, the
Fund made purchases of $23,218,659 and sales of $16,562,893 of
investment securities other than long-term U.S. Government and
short-term securities. There were $0 purchases and $0 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.
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, 1999, 99.9% of total shares outstanding were
held by one record shareholder.
I. SUBSEQUENT EVENT: On June 9, 1999, the shareholders of the Fund
approved a proposal to convert the Fund from a closed-end fund to an
open-end fund. The Fund intends to file Form N-1A with the Securities
and Exchange Commission to effect this conversion. On the same date,
the shareholders approved amendments to the Articles of Incorporation
to permit the issuance of redeemable shares and to increase the
authorized capital of the Fund to 250,000,000 shares.
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<PAGE> 13
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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