<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 21, 1997
REGISTRATION NOS. 333-20649
811-8033
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933 [X]
[X]
Pre-Effective Amendment No. 2
Post-Effective Amendment No. [_]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 [X]
[X]
Amendment No. 2
(Check Appropriate Box or Boxes)
----------------
SECURITY CAPITAL EMPLOYEE REIT FUND INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
11 SOUTH LASALLE STREET
CHICAGO, ILLINOIS 60603
(312) 345-5800
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE)
ANTHONY R. MANNO, JR.
SECURITY CAPITAL INVESTMENT RESEARCH INCORPORATED
11 SOUTH LASALLE STREET
CHICAGO, ILLINOIS 60603
(NAME AND ADDRESS OF AGENT FOR SERVICE)
WITH COPY TO:
JEFFREY A. KLOPF PHILIP J. NIEHOFF
SECURITY CAPITAL GROUP JEFFREY C. MAYER, BROWN &
INCORPORATED NELLESSEN PLATT
125 LINCOLN AVENUE SECURITY CAPITAL INVESTMENT 190 SOUTH LASALLE
SANTA FE, NEW MEXICO 87501 RESEARCH INCORPORATED STREET
11 SOUTH LASALLE CHICAGO, ILLINOIS
STREET 60603
CHICAGO,
ILLINOIS 60603
----------------
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: From time to time after the
effective date of this registration statement.
It is proposed that this filing will become effective (check appropriate
box):
[_] immediately upon filing pursuant to paragraph (b).
[_] on (date) pursuant to paragraph (b).
[_] 60 days after filing pursuant to paragraph (a)(1).
[_] on (date) pursuant to paragraph (a)(1) of Rule 485.
[_] 75 days after filing pursuant to paragraph (a)(2).
[_] on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
[_] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
RULE 24F-2 NOTICE
An indefinite number of shares of Common Stock of the Registrant are being
registered by this Registration Statement pursuant to Rule 24f-2 under the
Investment Company Act of 1940.
----------------
THE REGISTRANT HEREBY AMENDS THE REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO
SECTION 8(A), SHALL DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED APRIL 21, 1997
PROSPECTUS
LOGO
11 SOUTH LASALLE STREET
CHICAGO, ILLINOIS 60603
Security Capital Employee REIT Fund Incorporated ("SC-ERF") is a non-
diversified, no-load, open-end management investment company ("mutual fund")
that seeks to provide shareholders with above-average total returns, including
current income and capital appreciation, primarily through investments in real
estate securities in the United States. Long term, SC-ERF's objective is to
achieve top-quartile total returns as compared with other mutual funds that
invest primarily in the securities of publicly traded real estate investment
trusts ("REITs") in the United States, by integrating in-depth proprietary real
estate market research with sophisticated capital markets research and modeling
techniques. Security Capital Investment Research Group Incorporated ("SC
Investment Research") serves as both investment adviser and administrator to
SC-ERF.
An investment in SC-ERF should not be the sole source of investment for a
shareholder. Rather, an investment in SC-ERF should be considered as part of an
overall portfolio strategy which includes fixed income and equity securities.
SC-ERF is designed for long-term investors, including those who wish to use
shares for tax deferred retirement plans and individual retirement accounts,
and not for investors who intend to liquidate their investments after a short
period of time.
This Prospectus sets forth concisely the information a prospective investor
should know before investing in SC-ERF. A Statement of Additional Information
dated April , 1997, containing additional and more detailed information about
SC-ERF has been filed with the Securities and Exchange Commission and is hereby
incorporated by reference into this Prospectus. It is available without charge
and can be obtained by writing or calling SC-ERF's Sub-Administrator at:
Firstar Trust Company, Mutual Fund Services, P.O. Box 701, Milwaukee, Wisconsin
53201-0701; telephone number 1-800-699-4594 (toll free).
Shares of SC-ERF are being offered only to Security Capital Group
Incorporated ("Security Capital Group"), and directors, trustees and employees
of Security Capital Group and its affiliates, and members of their families.
See "Purchase of Shares."
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY
IN ANY STATE OR JURISDICTION WHERE PROHIBITED BY LAW OR TO ANY FIRM OR
INDIVIDUAL TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CON-
TRARY IS A CRIMINAL OFFENSE.
April , 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Expenses................................................................... 3
Investment Objective and Policies.......................................... 4
Real Estate Investment Trusts.............................................. 5
Investment Strategy........................................................ 5
Risk Factors............................................................... 6
Non-Diversified Status; Portfolio Turnover................................. 7
Investment Restrictions.................................................... 7
Management of SC-ERF....................................................... 8
Investment Advisory Agreement.............................................. 10
Administrator and Sub-Administrator........................................ 10
Determination of Net Asset Value........................................... 11
Purchase of Shares......................................................... 11
Redemption of Shares....................................................... 13
Dividends and Distributions................................................ 15
Taxation................................................................... 15
Organization and Description of Capital Stock.............................. 16
Custodian and Transfer and Dividend Disbursing Agent....................... 17
Reports to Shareholders.................................................... 17
Performance Information.................................................... 17
Additional Information..................................................... 17
</TABLE>
2
<PAGE>
EXPENSES
SHAREHOLDER TRANSACTION EXPENSES
Shareholder transaction expenses are direct charges which are incurred when
shareholders buy or sell shares of SC-ERF.
ANNUAL FUND OPERATING EXPENSES
SC-ERF pays for certain expenses directly out of its assets. These expenses
are related to management of SC-ERF, administration and other services. For
example, SC-ERF pays an advisory fee and an administrative fee to SC Investment
Research. SC-ERF also has other customary expenses for services such as
transfer agent fees, custodial fees paid to the bank that holds its portfolio
securities, audit fees and legal expenses. These operating expenses are
subtracted from SC-ERF's assets to calculate SC-ERF's net asset value per
share. In this manner, shareholders pay for these expenses indirectly.
The following table is provided to help shareholders understand the direct
expenses of investing in SC-ERF and the portion of SC-ERF's operating expenses
that they might expect to bear indirectly. The numbers reflected below are
based on SC-ERF's projected expenses for its current fiscal period ending
December 31, 1997, assuming that SC-ERF's average annual net assets for such
fiscal year are $250 million. The actual expenses in future years may be more
or less than the numbers in the table, depending on a number of factors,
including the actual value of SC-ERF's assets.
FEE TABLE
<TABLE>
<S> <C>
Shareholder Transaction Expenses:
Maximum sales charge on purchases and reinvested
distributions................................................ None
Redemption fee................................................ None(1)
Annual Fund Operating Expenses (as a percentage of average net
assets):
Management fees(2)............................................ 0.85%
12b-1 fees.................................................... None
Other expenses................................................ 0.29%
Total fund operating expenses(2)............................ 1.14%
</TABLE>
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(1) SC-ERF's transfer agent charges a service fee of $12.00 for each wire
redemption.
(2) SC Investment Research has committed to waive fees and/or reimburse
expenses to maintain SC-ERF's total operating expenses at no more than
1.20% of SC-ERF's average net assets for the year ending December 31, 1997.
EXAMPLE
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS
-------- -----------
<S> <C> <C>
A shareholder would bear the following expenses on a
$1,000 investment, assuming a five percent annual
return and operating expenses as outlined in the
fee table above.................................... $12.00 $36.00
</TABLE>
3
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
SC-ERF's investment objective is to provide shareholders with above-average
total returns, including current income and capital appreciation, primarily
through investments in real estate securities in the United States. Long term,
SC-ERF's objective is to achieve top-quartile total returns as compared with
other mutual funds that invest primarily in the securities of publicly traded
REITs in the United States, by integrating in-depth proprietary real estate
market research with sophisticated capital markets research and modeling
techniques. SC-ERF's investment objective is "fundamental" and cannot be
changed without approval of a majority of its outstanding voting securities.
None of SC-ERF's policies, other than its investment objective and the
investment restrictions described below under "Investment Restrictions," are
fundamental and thus may be changed by SC-ERF's Board of Directors without
shareholder approval. There can be no assurance that SC-ERF's investment
objective will be achieved.
Under normal circumstances, SC-ERF will invest at least 65% of its assets in
REITs. Such equity securities will consist of (i) common stocks, (ii) rights
or warrants to purchase common stocks, (iii) securities convertible into
common stocks where the conversion feature represents, in SC Investment
Research's view, a significant element of the securities' value, and (iv)
preferred stocks. For purposes of SC-ERF's investment policies, a "real estate
company" is one that derives at least 50% of its revenues from the ownership,
construction, financing, management or sale of commercial, industrial, or
residential real estate or that has at least 50% of its assets invested in
such real estate. SC-ERF may invest in securities issued by real estate
companies that are controlled by Security Capital Group or its affiliates.
When, in the judgment of SC Investment Research, market or general economic
conditions justify a temporary defensive position, SC-ERF will deviate from
its investment objective and invest all or any portion of its assets in high-
grade debt securities, including corporate debt securities, U.S. government
securities, and short-term money market instruments, without regard to whether
the issuer is a real estate company. SC-ERF may also at any time invest funds
awaiting investment or held as reserves to satisfy redemption requests or to
pay dividends and other distributions to shareholders in short-term money
market instruments.
SC-ERF will not invest more than 10% of its net assets in illiquid
securities. For this purpose, illiquid securities include, among others,
securities that are illiquid by virtue of the absence of a readily available
market or legal or contractual restrictions on resale. SC Investment Research
will monitor the liquidity of such restricted securities under the supervision
of SC-ERF's Board of Directors. If SC-ERF invests in securities issued by a
real estate company that is controlled by Security Capital Group or any of its
affiliates, such securities will be treated as illiquid securities. See SC-
ERF's Statement of Additional Information for further discussion of illiquid
securities.
SC-ERF may engage in short sale transactions in securities listed on one or
more national securities exchanges or on the National Association of
Securities Dealers, Inc. Automated Quotation System ("NASDAQ"). Short selling
involves the sale of borrowed securities. At the time a short sale is
effected, SC-ERF incurs an obligation to replace the security borrowed at
whatever its price may be at the time that SC-ERF purchases it for delivery to
the lender. When a short sale transaction is closed out by delivery of the
securities, any gain or loss on the transaction is taxable as a short term
capital gain or loss. Until the security is replaced, SC-ERF is required to
pay to the lender amounts equal to any dividends or interest which accrue
during the period of the loan. All short sales will be fully collateralized.
SC-ERF may also engage in short sales against the box, which involves selling
a security SC-ERF holds in its portfolio for delivery at a specified date in
the future. SC-ERF will not engage in short sales or short sales against the
box if immediately following such transaction the aggregate market value of
all securities sold short and sold short against the box would exceed 10% of
SC-ERF's net assets (taken at market value). See SC-ERF's Statement of
Additional Information for further discussion of short sales and short sales
against the box.
SC-ERF was formed on January 23, 1997. It is currently a private investment
company whose sole investor is SCERF Incorporated, an indirect, wholly-owned
subsidiary of Security Capital Group. As of February 28, 1997, SC-ERF had net
assets of $71.1 million.
4
<PAGE>
REAL ESTATE INVESTMENT TRUSTS
SC-ERF may invest without limit in shares of REITs. REITs pool investors'
funds for investment primarily in income producing real estate or real estate
related loans or interests. A REIT is not taxed on income distributed to
shareholders if it complies with several requirements relating to its
organization, ownership, assets, and income and a requirement that it
distribute to its shareholders at least 95% of its taxable income (other than
net capital gains) for each taxable year. REITs can generally be classified as
Equity REITs, Mortgage REITs and Hybrid REITs. Equity REITs, which invest the
majority of their assets directly in real property, derive their income
primarily from rents. Equity REITs can also realize capital gains by selling
properties that have appreciated in value. Mortgage REITs, which invest the
majority of their assets in real estate mortgages, derive their income
primarily from interest payments on real estate mortgages in which they are
invested. Hybrid REITs combine the characteristics of both Equity REITs and
Mortgage REITs.
INVESTMENT STRATEGY
SC-ERF intends to follow an investment strategy similar to that of Security
Capital Holdings, S.A.'s Special Opportunity Investments ("USREALTY Special
Opportunity"). USREALTY Special Opportunity is a private investment portfolio
with assets of $256.6 million (at fair market value, as of February 28, 1997)
that invests primarily in publicly traded REITs in the United States. USREALTY
Special Opportunity is advised by Security Capital (EU) Management S.A. SC
Investment Research, acting as subadviser to Security Capital (EU) Management
S.A., provides advice to USREALTY Special Opportunity with respect to
investments in publicly traded U.S. REITs, relying on the same research and
analytical tools and models that SC Investment Research will rely on in making
investments on behalf of SC-ERF. For the year ended December 31, 1996,
USREALTY Special Opportunity achieved a total return of approximately 62.5%,
after the deduction of fees and expenses. Past performance is not necessarily
indicative of future results. In addition, as a private investment portfolio,
USREALTY Special Opportunity is not subject to the same regulatory
requirements, including the diversification requirements of the Internal
Revenue Code of 1986, as amended (the "Code"). Accordingly, there can be no
assurance that SC-ERF can achieve results similar to those achieved by
USREALTY Special Opportunity.
REIT INDUSTRY OVERVIEW
SC Investment Research believes that the U.S. real estate industry has
experienced a fundamental transformation in the last five years which has
created a significant market opportunity. Direct investment of equity capital
in real estate, as was prevalent in the 1980s, has decreased while investments
in publicly traded Equity REITs has increased. The aggregate market
capitalization of Equity REITs has increased from $11.9 billion at December
31, 1990 to $132.5 billion at December 31, 1996, primarily as a result of
$48.3 billion of public offerings conducted during that period. This
increasing securitization of the U.S. real estate industry, primarily in the
form of REITs, offers significant benefits to shareholders, including enhanced
liquidity, real-time pricing and the opportunity for optimal growth and
sustainable rates of return through a more rational and disciplined approach
to capital allocation and operating management.
In addition to providing greater liquidity than direct real estate
investments, REITs have also outperformed direct real estate investments for
each of the past one, five, ten and fifteen year periods ended December 31,
1996. The following chart reflects the performance of U.S. REITs compared to
direct U.S. real estate investments and other indices.
REITS VS. OTHER INVESTMENTS
(COMPOUNDED ANNUAL TOTAL RATES OF RETURN*)
<TABLE>
<CAPTION>
THROUGH DECEMBER 31, NAREIT(1) NCREIF(2) CONSUMER
1996 EQUITY INDEX INDEX S&P 500(3) BONDS(4) PRICE INDEX
-------------------- ------------ --------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
6 months................ 26.63% 4.76% 11.68% 9.83% 2.90%
1 year.................. 37.27 8.47 22.96 2.94 3.32
5 years................. 17.14 2.38 15.18 7.22 2.83
15 years................ 15.08 N/A 16.78 11.43 3.58
20 years................ 16.13 N/A 14.55 8.36 5.14
</TABLE>
- --------
* The rates of returns for the indices shown in the table reflect past
performance and are not necessarily indicative of future results of such
indices or individual stocks contained therein, nor are such past returns
necessarily indicative of the returns that shareholders should expect to
receive from SC-ERF.
5
<PAGE>
(1) National Association of Real Estate Investment Trusts.
(2) National Counsel of Real Estate Investment Fiduciaries; Index began in
1982, data as of September 30, 1996.
(3) Assumes the reinvestment of all dividends.
(4) Merrill Lynch Government/Corporate Bond Index (Master).
SC Investment Research believes that the increasing securitization of the
U.S. real estate industry is still in its initial stages and that this trend
will continue over the next decade. SC-ERF intends to benefit from this
restructuring by investing in Equity REITs that SC Investment Research
believes could produce above-average returns.
A RESEARCH-DRIVEN PHILOSOPHY AND APPROACH
SC-ERF seeks to achieve top-quartile returns by investing primarily in
Equity REITs which have the potential to deliver above-average growth. SC
Investment Research believes that these investment opportunities can only be
identified through the integration of extensive property market research and
in-depth operating company cash flow modeling.
Property Market Research. SC-ERF is uniquely positioned to access
meaningful, proprietary real estate research collected at the market,
submarket and property level. This market research is provided by operating
professionals within the Security Capital Group affiliate company network and
assists SC Investment Research in identifying attractive growth markets and
property sectors prior to making investment decisions. Specifically, SC-ERF
endeavors to identify markets reaching a "marginal turning point." The market
research conducted by SC-ERF includes a comprehensive evaluation of real
estate supply and demand factors (such as population and economic trends,
customer and industry needs, capital flows and building permit and
construction data) on a market and submarket basis and by product type.
Specifically, primary market research evaluates normalized cash flow lease
economics (accounting for capital expenditures and other leasing costs) to
determine whether the core economy of a real estate market is expected to
improve, stabilize or decline. Only through disciplined real estate market
research does SC-ERF believe it can identify markets, and thus, real estate
operating companies, with the potential for higher than average growth
prospects.
Real Estate Operating Company Evaluation and Cash Flow Modeling. SC
Investment Research believes that analyzing the quality of a company's net
cash flow ("NCF") and its potential growth is the appropriate identifier of
above-average return opportunities. Certain REIT valuation models utilized by
SC Investment Research integrate property market research with analysis on
specific property portfolios in order to establish an independent value of the
underlying sources of a company's NCF. Additional valuation models measure and
compare the impact of certain factors, both internal and external, on NCF
growth expectations. The data from these valuation models is ultimately
compiled and reviewed in order to identify real estate operating companies
with significant potential for growth.
RISK FACTORS
RISKS OF INVESTMENT IN REAL ESTATE SECURITIES
SC-ERF will not invest in real estate directly, but only in securities
issued by real estate companies. However, SC-ERF may be subject to risks
similar to those associated with the direct ownership of real estate (in
6
<PAGE>
addition to securities markets risks) because of its policy of concentration
in the securities of companies in the real estate industry. Such risks include
declines in the value of real estate, risks related to general and local
economic conditions, possible lack of availability of mortgage funds,
overbuilding, extended vacancies of properties, increased competition,
increases in property taxes and operating expenses, changes in zoning laws,
losses due to costs resulting from the clean-up of environmental problems,
liability to third parties for damages resulting from environmental problems,
casualty or condemnation losses, limitations on rents, changes in neighborhood
values, the appeal of properties to customers and changes in interest rates.
In addition to these risks, Equity REITs may be affected by changes in the
value of the underlying property owned by the REITs, while Mortgage REITs may
be affected by the quality of any credit extended. Further, Equity and
Mortgage REITs are dependent on the management skills of the management of the
REIT and of the operators of the real estate in which the REITs are invested
and generally may not be diversified. Equity and Mortgage REITs are also
subject to heavy cash flow dependency, defaults by borrowers or customers and
self-liquidation. REITs also generate expenses that are separate and apart
from those charged by SC-ERF and therefore, shareholders will indirectly pay
the fees charged by the REITs in which SC-ERF invests. In addition, Equity and
Mortgage REITs could possibly fail to qualify for tax free pass-through of
income under the Code, or to maintain their exemptions from registration under
the Investment Company Act of 1940 (the "1940 Act"). The above factors may
also adversely affect a borrower's or a customer's ability to meet its
obligations to the REIT. In the event of a default by a borrower or customer,
the REIT may experience delays in enforcing its rights as a mortgagee or
lessor and may incur substantial costs associated with protecting its
investments.
NON-DIVERSIFIED STATUS; PORTFOLIO TURNOVER
SC-ERF intends to operate as a "non-diversified" investment company under
the 1940 Act, which means SC-ERF is not limited by the 1940 Act in the
proportion of its assets that may be invested in the securities of a single
issuer. However, SC-ERF intends to conduct its operations so as to qualify as
a "regulated investment company" for purposes of the Code, which generally
will relieve SC-ERF of any liability for Federal income tax to the extent its
earnings are distributed to shareholders. See "Taxation." To qualify as a
regulated investment company, among other requirements, SC-ERF will limit its
investments so that, at the close of each quarter of the taxable year, (i) not
more than 25% of the market value of SC-ERF's total assets will be invested in
the securities of a single issuer, and (ii) with respect to 50% of the market
value of its total assets, not more than 5% of the market value of its total
assets will be invested in the securities of a single issuer and SC-ERF will
not own more than 10% of the outstanding voting securities of a single issuer.
SC-ERF's investments in securities issued by the U.S. Government, its agencies
and instrumentalities are not subject to these limitations. Because SC-ERF, as
a non-diversified investment company, may invest in a smaller number of
individual issuers than a diversified investment company, an investment in SC-
ERF may present greater risk to an investor than an investment in a
diversified company.
SC-ERF anticipates that its annual portfolio turnover rate will not exceed
150%, but the turnover rate will not be a limiting factor when SC Investment
Research deems portfolio changes appropriate. The turnover rate may vary
greatly from year to year. An annual turnover rate of 150% occurs, for
example, when all of the securities held by SC-ERF are replaced one and one-
half times in a period of one year. A higher turnover rate results in
correspondingly greater brokerage commissions and other transactional expenses
which are borne by SC-ERF. High portfolio turnover may result in the
realization of net short-term capital gains by SC-ERF which, when distributed
to shareholders, will be taxable as ordinary income. See "Taxation."
INVESTMENT RESTRICTIONS
SC-ERF has adopted certain investment restrictions, which may not be changed
without the approval of the holders of a majority of SC-ERF's outstanding
voting securities as defined below. The percentage limitations set forth
below, as well as those described elsewhere in this Prospectus, apply only at
the time an investment is made or other relevant action is taken by SC-ERF.
7
<PAGE>
In addition to other fundamental investment restrictions listed elsewhere in
this Prospectus, SC-ERF will not:
1. Make loans except through the purchase of debt obligations in
accordance with its investment objective and policies;
2. Borrow money, or pledge its assets, except that SC-ERF may borrow
money from banks for temporary or emergency purposes, including the meeting
of redemption requests which might require the untimely disposition of
securities, but not in an aggregate amount exceeding 33 1/3% of the value
of SC-ERF's total assets (including the amount borrowed) less liabilities
(not including the amount borrowed) at the time the borrowing is made.
Outstanding borrowings in excess of 5% of the value of SC-ERF's total
assets will be repaid before any subsequent investments are made;
3. Invest in illiquid securities, as defined in "Investment Objective and
Policies," if immediately after such investment more than 10% of SC-ERF's
net assets (taken at market value) would be invested in such securities;
4. Engage in short sales or short sales against the box if immediately
following such transaction the aggregate market value of all securities
sold short and sold short against the box would exceed 10% of SC-ERF's net
assets (taken at market value); or
5. Purchase or sell real estate, except that SC-ERF may purchase
securities issued by companies in the real estate industry and will, as a
matter of fundamental policy, concentrate its investments in such
securities.
The foregoing restrictions are fundamental policies for purposes of the 1940
Act and therefore may not be changed without the approval of a majority of SC-
ERF's outstanding voting securities. As used in this Prospectus, a majority of
SC-ERF's outstanding voting securities means the lesser of (a) more than 50%
of its outstanding voting securities or (b) 67% or more of the voting
securities present at a meeting at which more than 50% of the outstanding
voting securities are present or represented by proxy. SC-ERF policies and
restrictions which are not fundamental may be modified by SC-ERF's Board of
Directors without shareholder approval if, in the reasonable exercise of its
business judgment, modification is determined to be necessary or appropriate
to carry out SC-ERF's objective. However, SC-ERF will not change its
investment policies or restrictions without written notice to shareholders.
MANAGEMENT OF SC-ERF
BOARD OF DIRECTORS
The overall management of the business and affairs of SC-ERF is vested with
the Board of Directors. The Board of Directors approves all significant
agreements between SC-ERF and persons or companies furnishing services to it,
including SC-ERF's agreements with SC Investment Research, or its
administrator, custodian and transfer agent. The management of SC-ERF's day-
to-day operations is delegated to its officers, SC Investment Research and the
administrator, subject always to the investment objective and policies of SC-
ERF and to general supervision by the Board of Directors. Although SC-ERF is
not required by law to hold annual meetings, it may hold shareholder meetings
from time to time on important matters, and shareholders have the right to
call a meeting to remove a Director or to take other action described in SC-
ERF's Articles of Incorporation. The Directors and officers of SC-ERF and
their principal occupations are set forth below.
Stephen F. Kasbeer...... Director of SC-ERF; retired Senior Vice President
for Administration and Treasurer of Loyola Uni-
versity Chicago.
Anthony R. Manno, Jr....
Chairman, Managing Director and President of SC-
ERF; Managing Director and President of SC In-
vestment Research and a Managing Director of Se-
curity Capital Investment Research Incorporated.
Daniel F. Miranda.......
Managing Director of SC-ERF; Managing Director of
SC Investment Research; and a Managing Director
of Security Capital Investment Research Incorpo-
rated.
8
<PAGE>
Jeffrey C. Nellessen....
Secretary and Treasurer of SC-ERF; Vice Presi-
dent, Secretary and Treasurer of SC Investment
Research.
Kenneth D. Statz........ Vice President of SC-ERF and Senior Vice Presi-
dent of Security Capital Investment Research In-
corporated.
SC INVESTMENT RESEARCH
Security Capital Investment Research Group Incorporated ("SC Investment
Research"), with offices located at 11 South LaSalle Street, Chicago, Illinois
60603, has been retained to provide investment advice, and, in general, to
conduct the management and investment program of SC-ERF under the overall
supervision and control of the Directors of SC-ERF. SC Investment Research
intends to achieve top-quartile returns, compared with other mutual funds that
invest primarily in securities issued by U.S. real estate companies, by
integrating in-depth, proprietary property market research with sophisticated
capital markets research and modelling. There can be no assurance that SC
Investment Research will achieve this goal. SC Investment Research was formed
in December 1996, and is registered as an investment adviser with the
Securities and Exchange Commission (the "SEC"). Its principal officers are
Anthony R. Manno, Jr., Managing Director and President and Daniel F. Miranda,
Managing Director. Messrs. Manno, Miranda and Statz are responsible for the
day-to-day management of SC-ERF's portfolio. SC Investment Research is a
wholly-owned subsidiary of Security Capital Group, a real estate research,
investment and management company.
Following are the employees of SC Investment Research that are responsible
for identifying and analyzing investments on behalf of SC-ERF.
Albert D. Adriani............... Vice President of SC Investment
Research.
Kevin W. Bedell................. Vice President of SC Investment
Research where he is responsible for
researching corporate and portfolio
acquisitions.
Darcy B. Boris.................. Vice President of Security Capital
Real Estate Research Group
Incorporated where she conducts
strategic market analyses.
Mark J. Chapman................. President of Security Capital Real
Estate Research Group Incorporated
where he is director of the group
and conducts strategic market
analyses.
E. Elliott Crutchfield.......... SC Investment Research employee
responsible for research and
operations for Security Capital
Preferred Growth Incorporated.
James D. Foster................. SC Investment Research employee
responsible for conducting strategic
market and product analyses.
John Montaquila III............. SC Investment Research employee
responsible for conducting strategic
market and product analyses.
Michael C. Montelibano.......... SC Investment Research employee
responsible for conducting strategic
market and product analyses.
James A. Thompson............... Analyst with SC Investment Research.
Robert S. Underhill.............
Senior Vice President of Security
Capital Strategic Group Incorporated
where he is responsible for
researching corporate and portfolio
acquisitions.
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INVESTMENT ADVISORY AGREEMENT
Pursuant to an investment advisory agreement (the "Advisory Agreement"), SC
Investment Research furnishes a continuous investment program for SC-ERF's
portfolio, makes the day-to-day investment decisions for SC-ERF, and generally
manages SC-ERF's investments in accordance with the stated policies of SC-ERF,
subject to the general supervision of SC-ERF's Board of Directors. SC
Investment Research also selects brokers and dealers to execute purchase and
sale orders for the portfolio transactions of SC-ERF. Consistent with the
Rules of Fair Practice of the National Association of Securities Dealers,
Inc., and subject to seeking best price and execution, SC Investment Research
may consider sales of shares of SC-ERF and other subjective factors in the
selection of brokers and dealers to enter into portfolio transactions with SC-
ERF. SC Investment Research provides persons satisfactory to the Directors of
SC-ERF to serve as officers of SC-ERF. Such officers, as well as certain other
employees and Directors of SC-ERF, may be directors, officers, or employees of
SC Investment Research. Under the Advisory Agreement, SC-ERF pays SC
Investment Research a monthly management fee in an amount equal to 1/12th of
.85% of the average daily net assets of SC-ERF (approximately .85% on an
annual basis). This fee is higher than that incurred by most other investment
companies. SC Investment Research has committed to waive fees and/or reimburse
expenses to maintain SC-ERF's total operating expenses at no more than 1.20%
of SC-ERF's average net assets for the year ending December 31, 1997.
In addition to the payments to SC Investment Research under the Advisory
Agreement described above, SC-ERF pays certain other costs of its operations
including (a) custody, transfer and dividend disbursing expenses, (b) fees of
Directors who are not affiliated with SC Investment Research, (c) legal and
auditing expenses, (d) clerical, accounting and other office costs, (e) costs
of printing SC-ERF's prospectus and shareholder reports, (f) costs of
maintaining SC-ERF's existence, (g) interest charges, taxes, brokerage fees
and commissions, (h) costs of stationery and supplies, (i) expenses and fees
related to registration and filing with federal and state regulatory
authorities, and (j) upon the approval of SC-ERF's Board of Directors, costs
of personnel of the Adviser or its affiliates rendering clerical, accounting
and other office services.
The Advisory Agreement provides that SC Investment Research will reimburse
SC-ERF for its expenses (exclusive of interest, taxes, brokerage, distribution
expenditures and extraordinary expenses, all to the extent permitted by
applicable state securities laws and regulations) which in any year exceed the
limits prescribed by any state in which SC-ERF's shares are qualified for
sale. SC-ERF may not qualify its shares for sale in every state. Expense
reimbursements, if any, are accrued daily and paid monthly.
ADMINISTRATOR AND SUB-ADMINISTRATOR
SC Investment Research has also entered into a fund administration and
servicing agreement with SC-ERF (the "Administration Agreement") under which
SC Investment Research performs certain administrative functions for SC-ERF,
including (i) providing office space, telephone, office equipment and supplies
for SC-ERF; (ii) paying compensation of SC-ERF's officers for services
rendered as such; (iii) authorizing expenditures and approving bills for
payment on behalf of SC-ERF; (iv) supervising preparation of the periodic
updating of SC-ERF's Prospectus and Statement of Additional Information; (v)
supervising preparation of quarterly reports to SC-ERF's shareholders, notices
of dividends, capital gains distributions and tax credits, and attending to
routine correspondence and other communications with individual shareholders;
(vi) supervising the daily pricing of SC-ERF's investment portfolio and the
publication of the net asset value of SC-ERF's shares, earnings reports and
other financial data; (vii) monitoring relationships with organizations
providing services to SC-ERF, including the custodian ("Custodian"), transfer
agent ("Transfer Agent") and printers; (viii) providing trading desk
facilities for SC-ERF; (ix) maintaining books and records for SC-ERF (other
than those maintained by the Custodian and Transfer Agent) and preparing and
filing of tax reports other than SC-ERF's income tax returns; and (x)
providing executive, clerical and secretarial help needed to carry out these
responsibilities.
In accordance with the terms of the Administration Agreement and with the
approval of SC-ERF's Board of Directors, SC Investment Research has caused SC-
ERF to retain Firstar Trust Company (the "Sub-Administrator") as sub-
administrator under a fund administration and servicing agreement (the "Sub-
Administration Agreement").
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Under the Sub-Administration Agreement, the Sub-Administrator has assumed
responsibility for performing certain of the foregoing administrative
functions, including determining SC-ERF's net asset value and preparing such
figures for publication, maintaining certain of SC-ERF's books and records
that are not maintained by SC Investment Research, or the custodian or
transfer agent, preparing financial information for SC-ERF's income tax
returns, proxy statements, quarterly and annual shareholders reports, and SEC
filings, and responding to shareholder inquiries. Under the terms of the Sub-
Administration Agreement, SC-ERF pays the Sub-Administrator a monthly
administration fee at the annual rate of .06% of the first $200 million of SC-
ERF's average daily net assets, and at lower rates on SC-ERF's average daily
net assets in excess of that amount, subject to an annual minimum fee of
$30,000. The Sub-Administrator also serves as SC-ERF's Custodian and Transfer
Agent. See "Custodian and Transfer and Dividend Disbursing Agent."
Under the Administration Agreement, SC Investment Research remains
responsible for monitoring and overseeing the performance by the Sub-
Administrator of its obligations to SC-ERF under the Sub-Administration
Agreement, subject to the overall authority of SC-ERF's Board of Directors.
For its services under the Administration Agreement, SC Investment Research
receives a monthly fee from SC-ERF at the annual rate of .02% of SC-ERF's
average daily net assets.
DETERMINATION OF NET ASSET VALUE
Net asset value per share of common stock of SC-ERF, $.01 par value per
share ("Common Stock"), will be determined on each day the New York Stock
Exchange is open for trading and on each other day on which there is a
sufficient degree of trading in SC-ERF's investments to affect the net asset
value, as of the close of trading on the New York Stock Exchange, by adding
the market value of all securities in SC-ERF's portfolio and other assets,
subtracting liabilities, incurred or accrued, and dividing by the total number
of SC-ERF's shares then outstanding.
For purposes of determining SC-ERF's net asset value per share, readily
marketable portfolio securities listed on the New York Stock Exchange are
valued, except as indicated below, at the last sale price reflected on the
consolidated tape at the close of the New York Stock Exchange on the business
day as of which such value is being determined. If there has been no sale on
such day, the securities are valued at the mean of the closing bid and asked
prices on such day. If no bid or asked prices are quoted on such day, then the
security is valued by such method as the Directors shall determine in good
faith to reflect its fair market value. Readily marketable securities not
listed on the New York Stock Exchange but listed on other domestic or foreign
securities exchanges or admitted to trading on the NASDAQ National Market are
valued in a like manner. Portfolio securities traded on more than one
securities exchange are valued at the last sale price on the business day as
of which such value is being determined as reflected on the tape at the close
of the exchange representing the principal market for such securities.
Readily marketable securities traded in the over-the-counter market,
including listed securities whose primary market is believed by SC Investment
Research to be over-the-counter, but excluding securities admitted to trading
on the NASDAQ National Market, are valued at the mean of the current bid and
asked prices as reported by NASDAQ or, in the case of securities not quoted by
NASDAQ, the National Quotation Bureau or such other comparable sources as the
Directors deem appropriate to reflect their fair market value. Where
securities are traded on more than one exchange and also over-the-counter, the
securities will generally be valued using the quotations the Board of
Directors believes reflect most closely the value of such securities. Any
securities, or other assets, for which market quotations are not readily
available are valued in good faith in a manner determined by the Board of
Directors that best reflects the fair value of such securities or assets.
PURCHASE OF SHARES
Shares of SC-ERF are being offered only to directors, trustees and employees
of Security Capital Group and its affiliates, and members of their families.
For purposes of this Prospectus, members of the families of a director,
trustee or employee include the director's, trustee's or employee's spouse and
parents, siblings, grandparents, children and grandchildren of the employee
and his or her spouse.
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<PAGE>
Shares of SC-ERF may be purchased through any dealer which has entered into
a sales agreement with Security Capital Markets Group Incorporated, in its
capacity as principal distributor of SC-ERF's shares (the "Distributor").
Firstar Trust Company, SC-ERF's Transfer Agent, may also accept purchase
applications.
The minimum initial investment in SC-ERF is $5,000. Subsequent investments
in the amount of at least $500 may be made by mail or by wire. For individual
retirement accounts and employee benefit plans qualified under Sections 401,
403(b)(7) or 457 of the Code, the minimum initial investment is $2,000. For
investors using the Automatic Investment Plan (described below), the minimum
investment is $500. These minimums can be changed or waived by SC-ERF at any
time. A shareholder will be given at least 30 days' notice of any increase in
the minimum dollar amount of subsequent investments.
Applications will not be accepted unless they are accompanied by payment in
U.S. funds. Payment should be made by check or money order drawn on a U.S.
bank, savings and loan, or credit union or by wire transfer. Orders for shares
of SC-ERF will become effective at the net asset value per share next
determined after receipt of payment. Checks must be payable in U.S. dollars
and will be accepted subject to collection at full face value. All funds will
be invested in full and fractional shares. A confirmation indicating the
details of each purchase transaction will be sent to a shareholder promptly
following each transaction. If a purchase order is placed through a dealer,
the dealer must promptly forward the order, together with payment, to the
Transfer Agent.
By investing in SC-ERF, a shareholder appoints the Transfer Agent, as his or
her agent, to establish an open account to which all shares purchased will be
credited, together with any dividends and capital gain distributions that are
paid in additional shares. See "Dividends and Distributions." Although most
shareholders elect not to receive stock certificates, certificates for full
shares can be obtained on specific written request to the Transfer Agent. All
fractional shares will be held in book-entry form. IT IS MORE COMPLICATED TO
REDEEM SHARES HELD IN CERTIFICATE FORM.
INITIAL INVESTMENT
Shares may be purchased by completing the enclosed application and mailing
it along with a check or money order payable to "Security Capital Employee
REIT Fund Incorporated," to a securities dealer or the Transfer Agent. If
mailing to the Transfer Agent, please use the following address: Firstar Trust
Company, Mutual Fund Services, P.O. Box 701, Milwaukee, Wisconsin 53201-0701.
Overnight mail should be sent to the following address: Security Capital
Employee REIT Fund Incorporated, Firstar Trust Company, Mutual Fund Services,
Third Floor, 615 East Michigan Street, Milwaukee, Wisconsin 53202. SC-ERF does
not consider the U.S. Postal service or other independent delivery services to
be its agents. Therefore, deposit in the mail or with such services, or
receipt at the Transfer Agent's post office box, of purchase applications does
not constitute receipt by the Transfer Agent or SC-ERF. Do not mail letters by
overnight courier to the post office box.
If a shareholder chooses a securities dealer that has not entered into a
sales agreement with the Distributor, such dealer may, nevertheless, offer to
place an order for the purchase SC-ERF shares. Such dealer may charge a
transaction fee, as determined by the dealer. That fee may be avoided if
shares are purchased through a dealer who has entered into a sales agreement
with the Distributor or through the Transfer Agent.
If a shareholder's check does not clear, a service fee of $20.00 will be
charged. Such shareholder will also be responsible for any losses suffered by
SC-ERF as a result. Neither cash nor third-party checks will be accepted. All
applications to purchase shares are subject to acceptance by SC-ERF and are
not binding until so accepted. SC-ERF reserves the right to decline or accept
a purchase order application in whole or in part.
WIRE PURCHASES
Shares may be purchased by wire only through the Transfer Agent. The
following instructions should be followed when wiring funds to the Transfer
Agent for the purchase of shares:
Wire to: Firstar Bank
ABA Number 075000022
Credit: Firstar Trust Company
Account 112-952-137
Further Credit:
Security Capital Employee REIT Fund Incorporated
(shareholder account number)
(shareholder name/account registration)
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Please call 1-800-699-4594 (toll free) prior to wiring any funds to notify
the Transfer Agent that the wire is coming and to verify the proper wire
instructions so that the wire is properly applied when received. SC-ERF is not
responsible for the consequences of delays resulting from the banking or
Federal Reserve wire system.
TELEPHONE PURCHASES
Additional shares may be purchased by moving money from a shareholder's bank
account to his or her SC-ERF account. Only bank accounts held at domestic
financial institutions that are Automated Clearing House ("ACH") members can
be used for telephone transactions. In order for shares to be purchased at the
net asset value determined as of the close of regular trading on a given date,
the Transfer Agent must receive both the purchase order and payment by
Electronic Funds Transfer through the ACH System before the close of regular
trading on such date. Most transfers are completed within 3 business days.
Telephone transactions may not be used for initial purchases of shares.
AUTOMATIC INVESTMENT PLAN
The Automatic Investment Plan allows regular, systematic investments in SC-
ERF from a bank checking or NOW account. SC-ERF will reduce the minimum
initial investment to $500 if a shareholder elects to use the Automatic
Investment Plan. To establish the Automatic Investment Plan, the appropriate
section in SC-ERF's application must be completed. The Automatic Investment
Plan can be set up with any financial institution that is a member of the ACH.
Under certain circumstances (such as discontinuation of the Automatic
Investment Plan before the minimum initial investment is reached, or, after
reaching the minimum initial investment, the account balance is reduced to
less than $500), SC-ERF reserves the right to close such account. Prior to
closing any account for failure to reach the minimum initial investment, SC-
ERF will give a shareholder written notice and 60 days in which to reinstate
the Automatic Investment Plan or otherwise reach the minimum initial
investment. A shareholder should consider his or her financial ability to
continue in the Automatic Investment Plan until the minimum initial investment
amount is met because SC-ERF has the right to close such account for failure
to reach the minimum initial investment. Such closing may occur in periods of
declining share prices.
Under the Automatic Investment Plan, a shareholder may choose to make
investments on the day of his or her choosing (or the next business day
thereafter) in amounts of $500 or more. There is no service fee for
participating in the Automatic Investment Plan. However, a service fee of
$20.00 will be deducted from a shareholder's SC-ERF account for any Automatic
Investment Plan purchase that does not clear due to insufficient funds or, if
prior to notifying SC-ERF in writing or by telephone to terminate the plan, a
shareholder closes his or her bank account or in any manner prevent withdrawal
of funds from the designated bank checking or NOW account.
The Automatic Investment Plan is a method of using dollar cost averaging
which is an investment strategy that involves investing a fixed amount of
money at a regular time interval. However, a program of regular investment
cannot ensure a profit or protect against a loss from declining markets. By
always investing the same amount, a shareholder will be purchasing more shares
when the price is low and fewer shares when the price is high. Since such a
program involves continuous investment regardless of fluctuating share values,
a shareholder should consider his or her financial ability to continue the
program through periods of low share price levels.
SUBSEQUENT INVESTMENTS
Additional investments in SC-ERF of at least $500 may be made by mail or by
wire. When an additional purchase is made by mail, a check payable to
"Security Capital Employee REIT Fund Incorporated" along with the Additional
Investment Form provided on the lower portion of a shareholder's account
statement must be enclosed. To make an additional purchase by wire, a
shareholder may call 1-800-699-4594 (toll free) for complete wiring
instructions.
REDEMPTION OF SHARES
A shareholder may request redemption of part or all of his or her shares at
any time at the next determined net asset value. See "Determination of Net
Asset Value." SC-ERF normally will mail the redemption proceeds to the
shareholder on the next business day and, in any event, no later than seven
business days after receipt of a redemption request in good order. However,
when a purchase has been made by check, SC-ERF may hold payment on redemption
proceeds until it is reasonably satisfied that the check has cleared, which
may take up to twelve days.
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<PAGE>
Redemptions may also be made through brokers or dealers. Such redemptions
will be effected at the net asset value next determined after receipt by SC-
ERF of the broker or dealer's instruction to redeem shares. In addition, some
brokers or dealers may charge a fee in connection with such redemptions. See
"Determination of Net Asset Value."
REDEMPTION BY TELEPHONE
Shares may also be redeemed by calling the Transfer Agent at 1-800-699-4594
(toll free). In order to utilize this procedure, a shareholder must have
previously elected this option in writing, which election will be reflected in
the records of the Transfer Agent, and the redemption proceeds must be mailed
directly to such shareholder or transmitted to a predesignated account. To
change the designated account, a written request with signature(s) guaranteed
must be sent to the Transfer Agent. See "--Signature Guarantees" below. To
change the address, the Transfer Agent may be called or a written request must
be sent to the Transfer Agent. No telephone redemptions will be allowed within
15 days of such a change. SC-ERF reserves the right to limit the number of
telephone redemptions by a shareholder. Once made, telephone redemption
requests may not be modified or canceled.
The Transfer Agent will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. Such procedures may
include requiring some form of personal identification prior to acting upon
telephone instructions, providing written confirmations of all such
transactions, and/or tape recording all telephone instructions. Assuming
procedures such as the above have been followed, SC-ERF will not be liable for
any loss, cost, or expense for acting upon a shareholder's telephone
instructions or for any unauthorized telephone redemption. SC-ERF reserves the
right to refuse a telephone redemption request if so advised.
REDEMPTION BY MAIL
For most redemption requests, a shareholder need only furnish a written,
unconditional request to redeem his or her shares (or a fixed dollar amount)
at net asset value to SC-ERF's Transfer Agent: Firstar Trust Company, Mutual
Fund Services, P.O. Box 701, Milwaukee, Wisconsin 53201-0701. Overnight mail
should be sent to Security Capital Employee REIT Fund Incorporated, Firstar
Trust Company, Mutual Fund Services, Third Floor, 615 East Michigan Street,
Milwaukee, Wisconsin 53202. Requests for redemption must be signed exactly as
the shares are registered, including the signature of each joint owner. A
shareholder must also specify the number of shares or dollar amount to be
redeemed. If the shares to be redeemed were issued in certificate form, the
certificate must be endorsed for transfer (or be accompanied by a duly
executed stock power) and must be submitted to Firstar Trust Company together
with a redemption request. Redemption proceeds made by written redemption
request may also be wired to a commercial bank that you have authorized on
your account application. The Transfer Agent charges a $12.00 service fee for
wire redemptions. Additional documentation may be requested from corporations,
executors, administrators, trustees, guardians, agents, or attorneys-in-fact.
SC-ERF does not consider the U.S. Postal Service or other independent delivery
services to be its agents. Therefore, deposit in the mail or with such
services, or receipt at the Transfer Agent's post office box, of redemption
requests does not constitute receipt by the Transfer Agent or SC-ERF. Do not
mail letters by overnight courier to the post office box. Any written
redemption requests received within 15 days after an address change must be
accompanied by a signature guarantee.
SIGNATURE GUARANTEES
Signature guarantees are required for: (i) redemption requests to be mailed
or wired to a person other than the registered owner(s) of the shares; (ii)
redemption requests to be mailed or wired to other than the address of record;
(iii) any redemption request if a change of address request has been received
by SC-ERF or Transfer Agent within the last 15 days and (iv) any redemption
request involving $100,000 or more. A signature guarantee may be obtained from
any eligible guarantor institution, as defined by the SEC. These institutions
include banks, savings associations, credit unions, brokerage firms and
others.
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OTHER REDEMPTION INFORMATION
Unless other instructions are given in proper form, a check for the proceeds
of a redemption will be sent to the shareholder's address of record. The
Custodian may benefit from the use of redemption proceeds until the redemption
check for such proceeds has cleared.
SC-ERF may suspend the right of redemption during any period when (i)
trading on the New York Stock Exchange is restricted or that Exchange is
closed, other than customary weekend and holiday closings, or (ii) an
emergency, as defined by rules adopted by the SEC, exists making disposal of
portfolio securities or determination of the value of the net assets of SC-ERF
not reasonably practicable.
The proceeds of redemption may be more or less than the amount invested and,
therefore, a redemption may result in a gain or loss for federal income tax
purposes.
A shareholder's account may be terminated by SC-ERF on not less than 30
days' notice if, at the time of any redemption of shares in his or her
account, the value of the remaining shares in the account falls below $5,000
($2,000 in the case of individual retirement accounts and employee benefit
plans qualified under Sections 401, 403(b)(7) or 457 of the Code). Upon any
such termination, a check for the redemption proceeds will be sent to the
account of record within seven business days of the redemption. However, if a
shareholder is affected by the exercise of this right, he or she will be
allowed to make additional investments prior to the date fixed for redemption
to avoid liquidation of the account.
DIVIDENDS AND DISTRIBUTIONS
Dividends from SC-ERF's investment income will be declared and distributed
quarterly. SC-ERF intends to distribute net realized capital gains, if any, at
least annually although SC-ERF's Board of Directors may in the future
determine to retain realized capital gains and not distribute them to
shareholders. For information concerning the tax treatment of SC-ERF's
distribution policies for SC-ERF and its shareholders, see "Taxation."
Distributions will automatically be paid in full and fractional shares of
SC-ERF based on the net asset value per share at the close of business on the
payable date unless the shareholder has elected to have distributions paid in
cash.
TAXATION
The following discussion is intended for general information only.
Shareholders should consult with their own tax advisers as to the tax
consequences of an investment in SC-ERF, including the status of distributions
under applicable state or local law.
FEDERAL INCOME TAXES
SC-ERF intends to qualify to be taxed as a "regulated investment company"
under the Code. To the extent that SC-ERF distributes its taxable income and
net capital gain to its shareholders, qualification as a regulated investment
company relieves SC-ERF of federal income and excise taxes on that part of its
taxable income including net capital gains which it pays out to its
shareholders. Dividends out of net ordinary income and distributions of net
short-term capital gains are taxable to the recipient shareholders as ordinary
income. In the case of corporate shareholders, such dividends may be eligible
for the dividends-received deduction, except that the amount eligible for the
deduction is limited to the amount of qualifying dividends received by SC-ERF,
which does not include distributions received by SC-ERF from REITs. A
corporation's dividends-received deduction will be disallowed unless the
corporation holds shares in SC-ERF at least 46 days. Furthermore, the
dividends-received deduction will be disallowed to the extent a corporation's
investment in shares of SC-ERF is financed with indebtedness.
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<PAGE>
The excess of net long-term capital gains over the net short-term capital
losses realized and distributed by SC-ERF to its shareholders as capital gains
distributions is taxable to the shareholders as long-term capital gains,
irrespective of the length of time a shareholder may have held his or her
stock. Long-term capital gains distributions are not eligible for the
dividends-received deduction referred to above.
Under the current federal tax law, the amount of an income dividend or
capital gains distribution declared by SC-ERF during October, November or
December of a year to shareholders of record as of a specified date in such a
month that is paid during January of the following year is includable in the
prior year's taxable income of shareholders that are calendar year taxpayers.
Any dividend or distribution received by a shareholder on shares of SC-ERF
will have the effect of reducing the net asset value of such shares by the
amount of such dividend or distribution. Furthermore, a dividend or
distribution made shortly after the purchase of such shares by a shareholder,
although in effect a return of capital to that particular shareholder, would
be taxable to him or her as described above. If a shareholder held shares six
months or less and during that period received a distribution taxable to such
shareholder as long-term capital gain, any loss realized on the sale of such
shares during such six-month period would be a long-term capital loss to the
extent of such distribution.
A dividend or capital gains distribution with respect to shares of SC-ERF
held by a tax-deferred or qualified plan, such as an individual retirement
account, 403(b)(7) retirement plan or corporate pension or profit-sharing
plan, will not be taxable to the plan, except to the extent the shares are
debt-financed within the meaning of Section 514 of the Code. Distributions
from such plans will be taxable to individual participants under applicable
tax rules without regard to the character of the income earned by the
qualified plan.
SC-ERF will be required to withhold 31% of any payments made to a
shareholder if the shareholder has not provided a certified taxpayer
identification number to SC-ERF, or the Secretary of the Treasury notifies SC-
ERF that the shareholder has not reported all interest and dividend income
required to be shown on the shareholder's Federal income tax return. Any
amounts withheld may be credited against the shareholder's U.S. federal income
tax liability.
Further information relating to tax consequences is contained elsewhere in
this Prospectus and in the Statement of Additional Information.
STATE AND LOCAL TAXES
SC-ERF distributions also may be subject to state and local taxes.
Shareholders should consult their own tax advisers regarding the particular
tax consequences of an investment in SC-ERF.
ORGANIZATION AND DESCRIPTION OF CAPITAL STOCK
SC-ERF was incorporated on January 23, 1997 as a Maryland corporation and is
authorized to issue 50,000,000 shares of Common Stock, $.01 par value per
share. SC-ERF's Board of Directors may, without shareholder approval, increase
or decrease the number of authorized but unissued shares of SC-ERF's Common
Stock. Each of SC-ERF's shares has equal dividend, distribution, liquidation
and voting rights. There are no conversion or preemptive rights in connection
with any shares of SC-ERF. All shares of SC-ERF when duly issued will be fully
paid and nonassessable. The rights of the holders of shares of Common Stock
may not be modified except by the vote of a majority of the shares
outstanding. The Board of Directors is authorized to reclassify and issue any
unissued shares of SC-ERF without shareholder approval. Accordingly, in the
future, the Directors may create additional series of shares with different
investment objectives, policies or restrictions. Any issuance of shares of
another class would be governed by Maryland law.
SC-ERF is not required to hold regular annual shareholders' meetings. A
shareholders' meeting shall, however, be called by the secretary upon the
written request of the holders of not less than 10% of the outstanding shares
of SC-ERF. SC-ERF will assist shareholders wishing to communicate with one
another for the purpose of requesting such a meeting.
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CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
Firstar Trust Company, which has its principal business address at 615 East
Michigan Street, Milwaukee, Wisconsin 53202 has been retained to act as
Custodian of SC-ERF's investments and to serve as SC-ERF's transfer and
dividend disbursing agent. Firstar Trust Company does not have any part in
deciding SC-ERF's investment policies or which securities are to be purchased
or sold for SC-ERF's portfolio.
REPORTS TO SHAREHOLDERS
The fiscal year of SC-ERF ends on December 31 of each year. SC-ERF will send
to its shareholders, at least semi-annually, reports showing the investments
and other information (including unaudited financial statements). An annual
report, containing financial statements audited by SC-ERF's independent
accountants, will be sent to shareholders each year.
PERFORMANCE INFORMATION
From time to time, SC-ERF may advertise its "average annual total return"
over various periods of time. This total return figure shows the average
percentage change in value of an investment in SC-ERF from the beginning date
of the measuring period to the ending date of the measuring period. The figure
reflects changes in the price of SC-ERF's shares and assumes that any income,
dividends and/or capital gains distributions made by SC-ERF during the period
are reinvested in shares of SC-ERF. Figures will be given for recent one-,
five- and ten-year periods (when applicable), and may be given for other
periods as well (such as from commencement of SC-ERF's operations, or on a
year-by-year basis). When considering "average" total return figures for
periods longer than one year, investors should note that SC-ERF's annual total
return for any one year in the period might have been greater or less than the
average for the entire period. SC-ERF also may use "aggregate" total return
figures for various periods, representing the cumulative change in value of an
investment in SC-ERF for the specific period (again reflecting changes in SC-
ERF's share price and assuming reinvestment of dividends and distributions).
Aggregate total returns may be shown by means of schedules, charts or graphs,
and may indicate subtotals of the various components of total return (that is,
the change in value of initial investment, income dividends and capital gains
distributions).
It is important to note that total return figures are based on historical
earnings and are not intended to indicate future performance. The Statement of
Additional Information further describes the methods used to determine SC-
ERF's performance.
ADDITIONAL INFORMATION
Any shareholder inquiries may be directed to SC-ERF at the address or
telephone number listed on the cover page of this Prospectus. This Prospectus,
including the Statement of Additional Information which is incorporated by
reference herein, does not contain all the information set forth in the
Registration Statement filed by SC-ERF with the SEC under the Securities Act
of 1933. Copies of the Registration Statement may be obtained at a reasonable
charge from the SEC or may be examined, without charge, at the offices of the
SEC in Washington, D.C. or may be obtained from the SEC's worldwide web site
at http://www.sec.gov.
17
<PAGE>
LOGO
11 SOUTH LASALLE STREET
CHICAGO, ILLINOIS 60603
STATEMENT OF ADDITIONAL INFORMATION
April , 1997
Security Capital Employee REIT Fund Incorporated ("SC-ERF") is a non-
diversified, no-load, open-end management investment company ("mutual fund")
that seeks to provide shareholders with above-average total returns, including
current income and capital appreciation, primarily through investments in real
estate securities in the United States. Long term, SC-ERF's objective is to
achieve top-quartile total returns as compared with other mutual funds that
invest primarily in the securities of publicly traded real estate investment
trusts ("REITs") in the United States, by integrating in-depth proprietary
real estate market research with sophisticated capital markets research and
modeling techniques. Security Capital Investment Research Group Incorporated
(SC Investment Research) serves as both investment adviser and administrator
to SC-ERF.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS
AUTHORIZED FOR DISTRIBUTION ONLY WHEN PRECEDED OR ACCOMPANIED BY SC-ERF'S
PROSPECTUS DATED APRIL , 1997 (THE "PROSPECTUS"). THIS STATEMENT OF
ADDITIONAL INFORMATION CONTAINS ADDITIONAL AND MORE DETAILED INFORMATION THAN
THAT SET FORTH IN THE PROSPECTUS AND SHOULD BE READ IN CONJUNCTION WITH THE
PROSPECTUS, ADDITIONAL COPIES OF WHICH MAY BE OBTAINED WITHOUT CHARGE BY
WRITING OR CALLING SC-ERF'S SUB-ADMINISTRATOR AT: FIRSTAR TRUST COMPANY,
MUTUAL FUND SERVICES, P.O. BOX 701, MILWAUKEE, WISCONSIN 53201-0701; TELEPHONE
NUMBER 1-800-699-4594 (TOLL FREE).
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies.................................... 2
Investment Restrictions.............................................. 4
Management of SC-ERF................................................. 4
Determination of Net Asset Value..................................... 11
Redemption of Shares................................................. 12
Portfolio Transactions and Brokerage................................. 12
Taxation............................................................. 13
Organization and Description of Capital Stock........................ 16
Distributor.......................................................... 17
Custodian and Transfer and Dividend Disbursing Agent................. 17
Performance Information.............................................. 17
Counsel and Independent Accountants.................................. 18
Financial Statements................................................. 19
</TABLE>
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The following discussion of SC-ERF's investment objective and policies
supplements, and should be read in conjunction with, the information regarding
SC-ERF's investment objective and policies set forth in the Prospectus. Except
as otherwise provided below under "Investment Restrictions," SC-ERF's
investment policies are not fundamental and may be changed by SC-ERF's Board
of Directors without the approval of the shareholders; however, SC-ERF will
not change its investment policies without written notice to shareholders.
ILLIQUID SECURITIES
SC-ERF will not invest in illiquid securities if immediately after such
investment more than 10% of SC-ERF net assets (taken at market value) would be
invested in such securities. For this purpose, illiquid securities include,
among others, securities that are illiquid by virtue of the absence of a
readily available market or legal or contractual restrictions on resale.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the "Securities
Act"), and securities which are otherwise not readily marketable. Securities
which have not been registered under the Securities Act are referred to as
private placements or restricted securities and are purchased directly from
the issuer or in the secondary market. Mutual funds do not typically hold a
significant amount of these restricted or other illiquid securities because of
the potential for delays on resale and uncertainty in valuation. Limitations
on resale may have an adverse effect on the marketability of portfolio
securities and a mutual fund might be unable to dispose of restricted or other
illiquid securities promptly or at reasonable prices and might thereby
experience difficulty satisfying redemptions within seven business days. A
mutual fund might also have to register such restricted securities in order to
dispose of them, resulting in additional expense and delay. Adverse market
conditions could impede such a public offering of securities.
If SC-ERF invests in securities issued by a real estate company that is
controlled by Security Capital Group Incorporated ("Security Capital Group")
or any of its affiliates (a "Security Capital controlled real estate
company"), SC-ERF may be considered an affiliate of the issuer of such
securities and therefore an underwriter as such term is defined in the
Securities Act. SC-ERF's ability to resell such securities without
registration may, therefore, be limited. In addition, because SC-ERF is an
affiliate of Security Capital Group, SC-ERF's purchases and sales of
securities issued by a Security Capital controlled real estate company may be
netted against sales and purchases by Security Capital and any of its other
affiliates of securities of the same issuer during the six months preceding or
following SC-ERF's "opposite way" transactions for purposes of Section 16 of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). If such
netting results in a profit to Security Capital Group or any of its affiliates
(including SC-ERF), Security Capital or its affiliates, as the case may be,
will be required to disgorge such "profits" to the issuer of such securities.
Depending upon the timing of purchases and sales of securities of such an
issuer by Security Capital Group and its affiliates, in order to avoid
Security Capital Group or its affiliates (including SC-ERF) having to disgorge
"profits" to the issuer of such securities, SC-ERF may not be able to purchase
or sell securities of a Security Capital controlled real estate company, even
when it might otherwise be advantageous for SC-ERF to do so. As a result, SC-
ERF will treat such securities as illiquid securities.
In recent years, a large institutional market has developed for certain
securities that are not registered under the Securities Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be
readily resold or on an issuer's ability to honor a demand for repayment. The
fact that there are contractual or legal restrictions on resale to the general
public or to certain institutions may not be indicative of the liquidity of
such investments. The Securities and Exchange Commission (the "SEC") has
adopted Rule 144A which allows a broader institutional trading market for
securities otherwise subject to restriction on resale to the general public.
Rule 144A establishes a "safe harbor" from the registration requirements of
the Securities Act of resales of certain securities to qualified institutional
buyers.
2
<PAGE>
SC Investment Research will monitor the liquidity of restricted securities
in SC-ERF's portfolio under the supervision of the Board of Directors. In
reaching liquidity decisions, SC Investment Research will consider, among
other factors, the following: (1) the frequency of trades and quotes for the
security; (2) the number of dealers wishing to purchase or sell the security
and the number of other potential purchasers; (3) dealer undertakings to make
a market in the security; and (4) the nature of the security and the nature of
the marketplace trades (e.g., the time needed to dispose of the security, the
method of soliciting offers and the mechanics of the transfer).
SHORT SALES AND SHORT SALES AGAINST THE BOX
SC-ERF will not engage in a short sale or a short sale against the box if
immediately after such transaction the aggregate market value of all
securities sold short and sold short against the box would exceed 10% of
SC-ERF's net assets (taken at market value).
Short Sales
SC-ERF may seek to realize gains through short sale transactions in
securities listed on one or more national securities exchanges or on the
National Association of Securities Dealers, Inc. Automated Quotation System.
Short selling involves the sale of borrowed securities. At the time a short
sale is effected, SC-ERF incurs an obligation to replace the security borrowed
at whatever its price may be at the time that SC-ERF purchases it for delivery
to the lender. When a short sale transaction is closed out by delivery of the
securities, any gain or loss on the transaction is taxable as a short term
capital gain or loss. Until the security is replaced, SC-ERF is required to
pay to the lender amounts equal to any dividends or interest which accrue
during the period of the loan. To borrow the security, SC-ERF also may be
required to pay a premium, which would increase the cost of the security sold.
Until SC-ERF replaces a borrowed security in connection with a short sale, SC-
ERF will: (a) maintain daily a segregated account containing cash or U.S.
government securities, at such a level that (i) the amount deposited in the
segregated account plus the amount deposited with the broker as collateral
will equal the current value of the security sold short and (ii) the amount
deposited in the segregated account plus the amount deposited with the broker
as collateral will not be less than the market value of the security at the
time it was sold short; or (b) otherwise cover its short position.
Since short selling can result in profits when stock prices generally
decline, SC-ERF in this manner, can, to a certain extent, hedge the market
risk to the value of its other investments and protect its equity in a
declining market. However, SC-ERF could, at any given time, suffer both a loss
on the purchase or retention of one security, if that security should decline
in value, and a loss on a short sale of another security, if the security sold
short should increase in value. Moreover, to the extent that in a generally
rising market SC-ERF maintains short positions in securities rising with the
market, the net asset value of SC-ERF would be expected to increase to a
lesser extent than the net asset value of an investment company that does not
engage in short sales.
Short Sales Against the Box
When SC Investment Research believes that the price of a particular security
in SC-ERF's portfolio may decline, it may sell the security short against the
box which involves selling the security for delivery at a specified date in
the future. If, for example, SC-ERF bought 100 shares of XYZ REIT at $40 per
share in January and the price appreciates to $50 in March, SC-ERF might "sell
short" the 100 shares at $50 for delivery the following July. Thereafter, if
the price of the stock declines to $45, it will realize the full $1,000 gain
rather than the $500 gain it would have received had it sold the stock in the
market. On the other hand, if the price appreciates to $55 per share, SC-ERF
would be required to sell at $50 and thus receive a $1,000 gain rather than
the $1,500 gain it would have received had it sold the stock in the market.
SC-ERF may also be required to pay a premium for short sales against the box
which would partially offset its gain.
3
<PAGE>
INVESTMENT RESTRICTIONS
SC-ERF is subject to certain investment restrictions, in addition to those
listed in the Prospectus, which are deemed fundamental policies of SC-ERF.
Such fundamental policies are those which cannot be changed without the
approval of the holders of a majority of SC-ERF's outstanding shares which
means the vote of (i) 67% or more of SC-ERF's shares present at a meeting, if
the holders of more than 50% of the outstanding shares of SC-ERF are present
or represented by proxy, or (ii) more than 50% of SC-ERF's outstanding shares,
whichever is less.
SC-ERF may not:
1. Pledge, hypothecate, mortgage or otherwise encumber its assets, except
to secure permitted borrowings;
2. Participate on a joint or joint and several basis in any securities
trading account;
3. Invest in companies for the purpose of exercising control;
4. Purchase a security if, as a result (unless the security is acquired
pursuant to a plan of reorganization or an offer of exchange), SC-ERF would
own any securities of an open-end investment company or more than 3% of the
value of SC-ERF's total assets would be invested in securities of any
closed-end investment company or more than 10% of such value in closed-end
investment companies in general; or
5. (a) purchase or sell commodities or commodity contracts; (b) invest in
interests in oil, gas, or other mineral exploration or development
programs; (c) purchase securities on margin, except for such short-term
credits as may be necessary for the clearance of transactions and except
for borrowings in an amount not exceeding 33 1/3% of the value of SC-ERF's
total assets; or (d) act as an underwriter of securities, except that SC-
ERF may acquire restricted securities under circumstances in which, if such
securities were sold, SC-ERF might be deemed to be an underwriter for
purposes of the Securities Act.
MANAGEMENT OF SC-ERF
The directors and officers of SC-ERF and their principal occupations during
the past five years are set forth below.
<TABLE>
<CAPTION>
PRINCIPAL
OCCUPATIONS DURING
NAME AND ADDRESS OFFICE THE PAST FIVE YEARS
---------------- ------ -------------------
<S> <C> <C>
Stephen F. Kasbeer............ Director Retired; Senior Vice President for
8 Bonanza Trail Administration and Treasurer of
Santa Fe, New Mexico 87505 Loyola University Chicago from 1981
to July 1994, where he was
responsible for administration,
investment, real estate and
treasurer functions, served as Chief
Investment Officer, was Chairman of
the Operations Committee, was a
member of the Investment and Finance
Committees of the Board of Trustees
and was President and a Director of
the Loyola Management Company.
Anthony R. Manno, Jr.......... Chairman, Mr. Manno has served as Managing
11 South LaSalle Street Managing Director and President of SC
Chicago, Illinois 60603 Director and Investment Research since December
President 1996 and as a Managing Director of
Security Capital Investment Research
Incorporated since January 1995,
where he is responsible for
overseeing all
</TABLE>
4
<PAGE>
<TABLE>
<S> <C> <C>
investment and capital allocation
recommendations for Security Capital
Investment Research's public market
securities activities and also
responsible for company and industry
analysis, market strategy and
trading and reporting. Mr. Manno
served as a member of the Security
Capital Group Incorporated
Investment Committee from March 1994
to June 1996. From March 1980 to
March 1994, Mr. Manno served as a
Managing Director of LaSalle
Partners Limited, a real estate
investment firm, where he was
responsible
for the firm's Finance Group and
where he served as a member of the
firm's Investment Committee. Mr.
Manno received his M.B.A. from the
University of Chicago Graduate
School of Business, an M.A. and B.A.
in Economics from Northwestern
University and is a Certified Public
Accountant.
Daniel F. Miranda....... Managing Director Mr. Miranda has served as Managing
11 South LaSalle Street Director of SC Investment Research
Chicago, Illinois 60603 since December 1996 and as a
Managing Director of Security
Capital Investment Research
Incorporated since September 1996,
where he is responsible for
operating oversight of Security
Capital Investment Research's public
market securities activities and
various private U.S. real estate
operating companies. Mr. Miranda has
served as a
member of the Security Capital
Investment Research Investment
Committee from September 1996 to the
present. From September 1991 to
September 1996, Mr. Miranda was a
managing director of GE Capital
Finance, where he was responsible
for national real estate services
(from September 1994 to September
1996) and a $1.2 billion real estate
portfolio in the 14-state Midwest
region (from September 1991 to
September 1994) and where he also
served as a member of its Senior
Management Committee. Mr. Miranda
received his J.D. from Columbia
University and an A.B. from the
University of California at
Berkeley.
Jeffrey C. Nellessen.... Secretary and Treasurer Mr. Nellessen has served as Vice
11 South LaSalle Street President, Secretary and Treasurer
Chicago, Illinois 60603 of SC Investment Research since
March 1997, where he is responsible
for compliance, financial control
</TABLE>
5
<PAGE>
<TABLE>
<S> <C> <C>
and accounting coordination for
public securities activities.
Previously, Mr. Nellessen was
associated with Strong Capital
Management. During his eight-year
tenure at Strong Capital, Mr.
Nellessen served as controller,
manager of client administration for
various separate accounts and hedge
funds, and compliance officer. Prior
to joining Strong Capital, Mr.
Nellessen was a senior auditor at
Arthur Andersen LLP. Mr. Nellessen
is a Certified Public Accountant,
Certified Management Accountant and
Certified Financial Planner. He
received his B.A. from the
University of Wisconsin, Madison.
Kenneth D. Statz.............. Vice Mr. Statz has served as Senior Vice
11 South LaSalle Street President President of Security Capital
Chicago, Illinois 60603 Investment Research Incorporated
since July 1996 (Vice President from
March 1995 to June 1996), where he
is responsible for the development
and implementation of portfolio
investment strategy. From February
1993 to January 1995, Mr. Statz was
a Vice President in
the investment research department
of Goldman, Sachs & Co.,
concentrating on research and
underwriting for the REIT industry.
From August 1982 to February 1992,
Mr. Statz was a REIT portfolio
manager and a managing director of
Chancellor Capital Management. Mr.
Statz received his M.B.A. and B.B.A.
from the University of Wisconsin,
Madison.
</TABLE>
COMPENSATION OF DIRECTORS AND CERTAIN OFFICERS
The Directors of SC-ERF who are interested persons, as defined in the
Investment Company Act of 1940, as amended (the "1940 Act"), of SC-ERF (which
includes persons who are employees of SC Investment Research or officers or
employees of any of its affiliates) receive no remuneration from SC-ERF. Each
of the other Directors is paid an annual retainer of $14,000, an additional
annual retainer of $1,000 for each committee of the Board of Directors for
which he or she serves as chairperson, and a fee of $1,000 for each meeting
attended (other than telephonically) and is reimbursed for the expenses of
attendance at such meetings. The following table sets forth information
regarding estimated compensation of Directors by SC-ERF for the fiscal year
ending December 31, 1997.
COMPENSATION TABLE(1)
FISCAL YEAR ENDING DECEMBER 31, 1997
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT
BENEFITS ESTIMATED
ACCRUED AS ANNUAL TOTAL
AGGREGATE PART OF BENEFITS COMPENSATION
COMPENSATION SC-ERF UPON FROM SC-ERF
NAME OF PERSON, POSITION FROM SC-ERF EXPENSES RETIREMENT PAID TO DIRECTORS
- ------------------------ ------------ ---------- ---------- -----------------
<S> <C> <C> <C> <C>
Stephen F. Kasbeer
Director............... $14,500 N/A N/A $14,500
**Anthony R. Manno, Jr.
Chairman, Managing
Director and President. 0 N/A N/A 0
</TABLE>
6
<PAGE>
- --------
**"Interested person," as defined in the 1940 Act, of SC-ERF.
(1) For the period January 1, 1997 to December 31, 1997.
SC INVESTMENT RESEARCH
Security Capital Investment Research Group Incorporated, a registered
investment adviser, was formed in December 1996 and specializes in the
management of real estate securities portfolios. SC Investment Research is a
wholly-owned subsidiary of Security Capital Group, a privately-held Maryland
corporation.
Following are the employees of SC Investment Research that are responsible
for identifying and analyzing investments on behalf of SC-ERF.
Albert D. Adriani.................. Vice President of SC Investment
Research. Previously, Mr. Adriani
was with Security Capital Markets
Group Incorporated in the United
States, where he provided capital
markets services to affiliates of
the firm. Prior to joining Security
Capital Markets Group, Mr. Adriani
was an investment analyst with HAL
Investments and a real estate
analyst with Prudential Property,
where he appraised the internal
portfolio. Mr. Adriani received his
M.B.A. from the University of
Chicago Graduate School of Business
and his B.A. from the University of
Chicago.
Kevin W. Bedell.................... Vice President of SC Investment
Research, where he is responsible
for researching corporate and
portfolio acquisitions. Prior to
joining SC Investment Research, Mr.
Bedell was equity vice president and
portfolio manager for the LaSalle
Street Fund, Inc., where he was
responsible for the strategic,
operational and financial management
of a private REIT with commercial
real estate investments of $600-800
million. Previously, Mr. Bedell was
equity vice president and vice
president for financial management
of LaSalle Partners' commingled
fund. Mr. Bedell received his M.B.A.
from the University of Chicago and
his B.A. from Kenyon College.
Darcy B. Boris..................... Vice President of Security Capital
Real Estate Research Group
Incorporated, where she conducts
strategic market analyses for
affiliates of the firm. Prior to
joining Real Estate Research Group,
Ms. Boris was with Security Capital
Markets Group Incorporated, where
she provided capital markets
services to affiliates of the firm.
Prior to joining Security Capital
Markets Group, Ms. Boris was
associated with Summerhill
Development Company, the multifamily
development subsidiary of Marcus &
Millichap, Incorporated, where she
managed the development of
multifamily housing. Previously, she
was an analyst for its property
investment subsidiary. Ms. Boris
received her M.B.A. from the
University of California at Berkeley
and her B.A. from Stanford
University.
7
<PAGE>
Mark J. Chapman.................... President of Security Capital Real
Estate Research Group Incorporated,
where he is director of the group
and conducts strategic market
analyses for affiliates of the firm.
Previously, Mr. Chapman was a Vice
President of Security Capital
Pacific Trust with asset management
responsibilities in five major
markets. Prior to joining Security
Capital Pacific Trust, Mr. Chapman
was a Vice President at Copley Real
Estate Advisors, Inc., where he
directed asset management for Copley
assets located from Connecticut to
Virginia, valued in excess of $1.5
billion. Previously, Mr. Chapman was
a director of asset management for
Liberty Real Estate responsible for
multifamily, office and retail
assets east of the Mississippi
River. Mr. Chapman received his B.S.
from Marquette University.
E. Elliott Crutchfield............. SC Investment Research employee
responsible for research and
operations for Security Capital
Preferred Growth Incorporated.
Previously, Mr. Crutchfield was in
the Management Development Program
with Security Capital Group, working
in six-month rotational assignments
with Managing Directors of the firm.
Prior to joining Security Capital
Group, Mr. Crutchfield was a
relationship manager in the
commercial real estate division of
NationsBank Corporation, where he
participated in the financing of new
development projects and the
structuring and underwriting of
various REIT credit facilities. Mr.
Crutchfield received his M.B.A. from
The Wharton School at the University
of Pennsylvania and his B.A. from
Davidson College.
James D. Foster.................... SC Investment Research employee
responsible for conducting strategic
market and product analyses for
affiliates of the firm. Prior to
joining SC Investment Research, Mr.
Foster was an account manager with
the government securities clearance
division of the Bank of New York.
Previously, Mr. Foster was employed
by the National Basketball
Association and the New York
Yankees. Mr. Foster received his
M.B.A. from the University of
Chicago Graduate School of Business
and his B.A. from Tufts University.
John Montaquila III................ SC Investment Research employee
responsible for conducting strategic
market and product analyses for
affiliates of the firm. Previously,
Mr. Montaquila was in the Management
Development Program with Security
Capital Group, working in six-month
rotational assignments with Managing
Directors of the firm. Prior to
joining Security Capital Group, Mr.
Montaquila was a vice president in
the investment
8
<PAGE>
real estate division of The Boston
Financial Group. Mr. Montaquila
received his M. M. from J.L. Kellogg
Graduate School of Management at
Northwestern University and his B.S.
from The Wharton School, University
of Pennsylvania.
Michael C. Montelibano............. SC Investment Research employee
responsible for conducting strategic
market and product analyses for
affiliates of the firm. Previously,
Mr. Montelibano was in the
Management Development Program with
Security Capital Group, working in
six-month rotational assignments
with Managing Directors of the firm.
Prior to joining Security Capital
Group, Mr. Montelibano was a
consultant for Ayala Land,
Incorporated, in the Philippines,
where he conducted financial
analyses of office and residential
development projects and was a
consultant for Bank of America in
Malaysia, where he conducted market
research studies on retail banking.
Previously, Mr. Montelibano was a
senior consultant with Andersen
Consulting, where he focused on the
telecommunications and financial
sectors. Mr. Montelibano received
his M.B.A. from the University of
California, Berkeley, and his B.S.
from the University of California,
San Diego.
James A. Thompson.................. Analyst with SC Investment Research.
Previously, Mr. Thompson was with
Security Capital Industrial Trust,
where he managed the acquisition
analyst team. Prior to joining
Security Capital Industrial Trust,
Mr. Thompson was a corporate
financial analyst with Continental
Bank. Mr. Thompson received his
B.B.A. from Gonzaga University.
Robert S. Underhill................ Senior Vice President of Security
Capital Strategic Group
Incorporated, where he is
responsible for researching
corporate and portfolio
acquisitions. Prior to joining
Security Capital Strategic Group
Incorporated, Mr. Underhill was a
senior vice president of LaSalle
Partners Limited, where he was
responsible for the investment
management of a $3.5 billion
portfolio of office and retail
properties. Previously, Mr.
Underhill was responsible for
directing LaSalle Partners corporate
services' activity in Europe. Mr.
Underhill received his M.B.A. from
Northwestern University and his B.A.
from Colby College.
INVESTMENT ADVISORY AGREEMENT
Certain other clients of SC Investment Research may have investment
objectives and policies similar to those of SC-ERF. SC Investment Research may,
from time to time, make recommendations which result in the purchase or sale of
a particular security by its other clients simultaneously with SC-ERF. If
transactions on behalf of more than one client during the same period increase
the demand for securities being sold, there may be an adverse effect on the
price of such securities. It is the policy of SC Investment Research to
allocate advisory
9
<PAGE>
recommendations and the placing of orders in a manner which is deemed
equitable by SC Investment Research to the accounts involved, including SC-
ERF. When two or more of the clients of SC Investment Research (including SC-
ERF) are purchasing or selling the same security on a given day through the
same broker-dealer, such transactions may be averaged as to price.
SC Investment Research's advice to SC-ERF with respect to purchases or sales
of securities issued by a Security Capital controlled real estate company may
be affected by sales or purchases by Security Capital Group or its affiliates
of securities issued by the same issuer. Because SC-ERF is an affiliate of
Security Capital Group, SC-ERF's purchases and sales of securities issued by
such an issuer may be netted against sales and purchases by Security Capital
Group and any of its other affiliates of securities of such issuer during the
six months preceding or following SC-ERF's "opposite way" transactions for
purposes of Section 16 of the Exchange Act. If such netting results in a
profit to Security Capital Group or any of is affiliates (including SC-ERF),
Security Capital Group or its affiliates, as the case may be, will be required
to disgorge such "profits" to the issuer of such securities. As a result, SC
Investment Research's recommendations to SC-ERF may be affected by SC
Investment Research's desire to avoid SC-ERF or Security Capital Group or any
of its other affiliates having to disgorge profits to such issuer.
Pursuant to an investment advisory agreement (the "Advisory Agreement"), SC
Investment Research furnishes a continuous investment program for SC-ERF's
portfolio, makes the day-to-day investment decisions for SC-ERF, executes the
purchase and sale orders for the portfolio transactions of SC-ERF and
generally manages SC-ERF's investments in accordance with the stated policies
of SC-ERF, subject to the general supervision of SC-ERF's Board of Directors.
Under the Advisory Agreement, SC-ERF will pay SC Investment Research a
monthly management fee in an amount equal to 1/12th of .85% of the average
daily value of the net assets of SC-ERF (approximately .85% on an annual
basis). SC Investment Research has committed to waive fees and/or reimburse
expenses to maintain SC-ERF's total operating expenses at no more than 1.20%
of SC-ERF's average net assets for the year ending December 31, 1997. Expense
reimbursements, if any, are accrued daily and paid monthly.
SC Investment Research also provides SC-ERF with such personnel as SC-ERF
may from time to time request for the performance of clerical, accounting and
other office services, such as coordinating matters with the administrator,
the transfer agent and the custodian, which SC Investment Research is not
required to furnish under the Advisory Agreement. The personnel rendering
these services, who may act as officers of SC-ERF, may be employees of SC
Investment Research or its affiliates. The cost to SC-ERF of these services
must be agreed to by SC-ERF and is intended to be no higher than the actual
cost to SC Investment Research or its affiliates of providing the services.
SC-ERF does not pay for services performed by officers of SC Investment
Research or its affiliates. SC-ERF may from time to time hire its own
employees or contract to have services performed by third parties, and the
management of SC-ERF intends to do so whenever it appears advantageous to SC-
ERF.
The Advisory Agreement was approved on April 11, 1997 by SC-ERF's Directors,
including a majority of the Directors who are not interested persons (as
defined in the 1940 Act) of SC-ERF or SC Investment Research and by the sole
initial shareholder of SC-ERF on April 11, 1997. The Advisory Agreement
continues in effect until April 11, 1999 and will continue in effect from year
to year thereafter, provided that its continuance is specifically approved
prior to the initial expiration of the Advisory Agreement or annually
thereafter, as the case may be, by the Directors or by a vote of the
shareholders, and in either case by a majority of the Directors who are not
parties to the Advisory Agreement or interested persons of any such party, by
vote cast in person at a meeting called for the purpose of voting on such
approval.
The Advisory Agreement is terminable without penalty by SC-ERF on sixty
days' written notice when authorized either by majority vote of its
outstanding voting securities or by a vote of a majority of its Directors, or
by SC Investment Research on sixty days' written notice, and will
automatically terminate in the event of its assignment. The Advisory Agreement
provides that in the absence of willful misfeasance, bad faith or gross
negligence on the part of SC Investment Research, or of reckless disregard of
its obligations thereunder, SC Investment Research shall not be liable for any
action or failure to act in accordance with its duties thereunder.
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ADMINISTRATOR AND SUB-ADMINISTRATOR
SC-ERF has also entered into a fund administration and servicing agreement
with SC Investment Research (the "Administration Agreement") under which SC
Investment Research performs certain administrative functions for SC-ERF,
including (i) providing office space, telephone, office equipment and supplies
for the Fund; (ii) paying compensation of SC-ERF's officers for services
rendered as such; (iii) authorizing expenditures and approving bills for
payment on behalf of SC-ERF; (iv) supervising preparation of the periodic
updating of SC-ERF's Prospectus and Statement of Additional Information; (v)
supervising preparation of quarterly reports to SC-ERF's shareholders, notices
of dividends, capital gains distributions and tax credits, and attending to
routine correspondence and other communications with individual shareholders;
(vi) supervising the daily pricing of SC-ERF's investment portfolio and the
publication of the net asset value of SC-ERF's shares, earnings reports and
other financial data; (vii) monitoring relationships with organizations
providing services to SC-ERF, including SC-ERF's custodian (the "Custodian"),
transfer agent (the "Transfer Agent") and printers; (viii) providing trading
desk facilities for SC-ERF; (ix) maintaining books and records for SC-ERF
(other than those maintained by the Custodian and Transfer Agent) and
preparing and filing of tax reports other than SC-ERF's income tax returns;
and (x) providing executive, clerical and secretarial help needed to carry out
these responsibilities.
In accordance with the terms of the Administration Agreement and with the
approval of SC-ERF's Board of Directors, SC Investment Research has caused SC-
ERF to retain Firstar Trust Company (the "Sub-Administrator") as sub-
administrator under a fund administration and servicing agreement (the "Sub-
Administration Agreement").
Under the Sub-Administration Agreement, the Sub-Administrator has assumed
responsibility for performing certain of the foregoing administrative
functions, including determining SC-ERF's net asset value and preparing such
figures for publication, maintaining certain of SC-ERF's books and records
that are not maintained by the Adviser, Custodian or Transfer Agent, preparing
financial information for SC-ERF's income tax returns, proxy statements,
quarterly and annual shareholders reports, and SEC filings, and responding to
shareholder inquiries. Under the terms of the Sub-Administration Agreement,
SC-ERF pays the Sub-Administrator a monthly administration fee at the annual
rate of .06% of the first $200 million of SC-ERF's average daily net assets,
and at lower rates on SC-ERF's average daily net assets in excess of that
amount, subject to an annual minimum fee of $30,000. The Sub-Administrator
also serves as the Custodian and Transfer Agent. See "Custodian and Transfer
and Dividend Disbursing Agent."
Under the Administration Agreement, SC Investment Research remains
responsible for monitoring and overseeing the performance by the Sub-
Administrator of its obligations to SC-ERF under the Sub-Administration
Agreement, subject to the overall authority of SC-ERF's Board of Directors.
For its services under the Administration Agreement, SC Investment Research
receives a monthly fee from SC-ERF at the annual rate of .02% of SC-ERF's
average daily net assets.
The Administration Agreement is terminable by either party on sixty days'
written notice to the other. The Administration Agreement provides that in the
absence of willful misfeasance, bad faith or gross negligence on the part of
SC Investment Research, or of reckless disregard of its obligations
thereunder, SC Investment Research shall not be liable for any action or
failure to act in accordance with its duties thereunder.
DETERMINATION OF NET ASSET VALUE
Net asset value per share will be determined by SC-ERF on each day the New
York Stock Exchange is open for trading, and on any other day during which
there is a sufficient degree of trading in the investments of SC-ERF to affect
materially the Fund's net asset value. The New York Stock Exchange is closed
on Saturdays, Sundays, and on New Year's Day, Presidents' Day (the third
Monday in February), Good Friday, Memorial Day (the last Monday in May),
Independence Day, Labor Day (the first Monday in September), Thanksgiving Day
and Christmas Day (collectively, the "Holidays"). When any Holiday falls on a
Saturday, the Exchange is closed
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<PAGE>
the preceding Friday, and when any Holiday falls on a Sunday, the Exchange is
closed the following Monday. No redemptions will be made on Martin Luther King
Day (the third Monday in January), Columbus Day (the second Monday in October)
and Veteran's Day, nor on any of the Holidays.
For purposes of determining SC-ERF's net asset value per share, all assets
and liabilities initially expressed in foreign currencies will be converted
into U.S. dollars at the mean of the bid and asked prices of such currencies
against the U.S. dollar last quoted by a major bank which is a regular
participant in the institutional foreign exchange markets or on the basis of a
pricing service which takes into account the quotes provided by a number of
such major banks.
REDEMPTION OF SHARES
Payment of the redemption price for shares redeemed may be made either in
cash or in portfolio securities (selected in the discretion of SC-ERF's Board
of Directors and taken at their value used in determining SC-ERF's net asset
value per share as described in the Prospectus under "Determination of Net
Asset Value"), or partly in cash and partly in portfolio securities. However,
payments will be made wholly in cash unless SC-ERF's Board of Directors
believes that economic conditions exist which would make such a practice
detrimental to the best interests of SC-ERF. If payment for shares redeemed is
made wholly or partly in portfolio securities, brokerage costs may be incurred
by the investor in converting the securities to cash. SC-ERF will not
distribute in kind portfolio securities that are not readily marketable.
SC-ERF has elected to be governed by Rule 18f-1 under the 1940 Act, which
obligates SC-ERF to redeem shares in cash, with respect to any one shareholder
during any 90-day period, up to the lesser of $250,000 or 1% of the net assets
of SC-ERF at the beginning of such period. Although redemptions in excess of
this limitation would normally be paid in cash, SC-ERF reserves the right to
make payments in whole or in part in securities or other assets in case of an
emergency, or if the payment of redemption in cash would be deterimental to
the existing shareholders of SC-ERF as determined by the board of directors.
In such circumstances, the securities distributed would be valued as set forth
in the Prospectus. Should SC-ERF distribute securities, a shareholder may
incur brokerage fees or other transaction costs in converting the securities
to cash.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the supervision of the Directors, decisions to buy and sell
securities for SC-ERF and negotiation of its brokerage commission rates are
made by SC Investment Research. Transactions on U.S. stock exchanges involve
the payment by SC-ERF of negotiated brokerage commissions. There is generally
no stated commission in the case of securities traded in the over-the-counter
market but the price paid by SC-ERF usually includes an undisclosed dealer
commission or mark-up. In certain instances, SC-ERF may make purchases of
underwritten issues at prices which include underwriting fees.
In selecting a broker to execute each particular transaction, SC Investment
Research will take the following into consideration: the best net price
available; the reliability, integrity and financial condition of the broker;
the size and difficulty in executing the order; and the value of the expected
contribution of the broker to the investment performance of SC-ERF on a
continuing basis. Accordingly, the cost of the brokerage commissions to SC-ERF
in any transaction may be greater than that available from other brokers if
the difference is reasonably justified by other aspects of the portfolio
execution services offered. Subject to such policies and procedures as the
Directors may determine, SC Investment Research shall not be deemed to have
acted unlawfully or to have breached any duty solely by reason of it having
caused SC-ERF to pay a broker that provides research services to SC Investment
Research an amount of commission for effecting a portfolio investment
transaction in excess of the amount of commission another broker would have
charged for effecting that transaction, if SC Investment Research determines
in good faith that such amount of commission was reasonable in relation to the
value of the research service provided by such broker viewed in terms of
either that particular transaction or SC Investment
12
<PAGE>
Research's ongoing responsibilities with respect to SC-ERF. Research and
investment information is provided by these and other brokers at no cost to SC
Investment Research and is available for the benefit of other accounts advised
by SC Investment Research and its affiliates, and not all of the information
will be used in connection with SC-ERF. While this information may be useful
in varying degrees and may tend to reduce SC Investment Research's expenses,
it is not possible to estimate its value and in the opinion of SC Investment
Research it does not reduce SC Investment Research's expenses in a
determinable amount. The extent to which SC Investment Research makes use of
statistical, research and other services furnished by brokers is considered by
SC Investment Research in the allocation of brokerage business but there is no
formula by which such business is allocated. SC Investment Research does so in
accordance with its judgment of the best interests of SC-ERF and its
shareholders. SC Investment Research may also take into account payments made
by brokers effecting transactions for SC-ERF to other persons on behalf of SC-
ERF for services provided to it for which it would be obligated to pay (such
as custodial and professional fees). In addition, consistent with the Rules of
Fair Practice of the National Association of Securities Dealers, Inc., and
subject to seeking best price and execution, SC Investment Research may
consider sales of shares of SC-ERF as a factor in the selection of brokers and
dealers to enter into portfolio transactions with SC-ERF.
TAXATION
TAXATION OF SC-ERF
SC-ERF intends to qualify annually and to elect to be treated as a regulated
investment company under the Internal Revenue Code of 1986, as amended (the
"Code").
To qualify as a regulated investment company, SC-ERF must, among other
things: (a) derive in each taxable year at least 90% of its gross income from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of stock, securities or foreign currencies or
other income derived with respect to its business of investing in such stock,
securities or currencies; (b) derive less than 30% of its gross income from
the sale or other disposition of certain assets (namely, (i) stock or
securities, (ii) options, futures, and forward contracts (other than those on
foreign currencies), and (iii) foreign currencies (including options, futures,
and forward contracts on such currencies) not directly related to SC-ERF's
principal business of investing in stock or securities (or options and futures
with respect to stocks or securities)) held less than 3 months; (c) diversify
its holdings so that, at the end of each quarter of the taxable year, (i) at
least 50% of the market value of SC-ERF's assets is represented by cash and
cash items (including receivables), U.S. Government securities, the securities
of other regulated investment companies and other securities, with such other
securities of any one issuer limited for the purposes of this calculation to
an amount not greater than 5% of the value of SC-ERF's total assets and not
greater than 10% of the outstanding voting securities of such issuer, and (ii)
not more than 25% of the value of its total assets is invested in the
securities of any one issuer (other than U.S. Government securities or the
securities of other regulated investment companies); and (d) distribute at
least 90% of its investment company taxable income (which includes, among
other items, dividends, interest and net short-term capital gains in excess of
net long-term capital losses) each taxable year.
As a regulated investment company, SC-ERF generally will not be subject to
U.S. federal income tax on its investment company taxable income and net
capital gains (the excess of net long-term capital gains over net short-term
capital losses), if any, that it distributes to shareholders. SC-ERF intends
to distribute to its shareholders, at least annually, substantially all of its
investment company taxable income and net capital gains. Amounts not
distributed on a timely basis in accordance with a calendar year distribution
requirement are subject to a nondeductible 4% excise tax. To prevent
imposition of the excise tax, SC-ERF must distribute during each calendar year
an amount equal to the sum of (1) at least 98% of its ordinary income (not
taking into account any capital gains or losses) for the calendar year, (2) at
least 98% of its capital gains in excess of its capital losses (adjusted for
certain ordinary losses) for the one-year period ending on October 31 of the
calendar year, and (3) any ordinary income and capital gains for previous
years that was not distributed during those years. A distribution will be
treated as paid on December 31 of the current calendar year if it is declared
by SC-ERF in
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<PAGE>
October, November or December with a record date in such a month and paid by
SC-ERF during January of the following calendar year. Such distributions will
be taxable to shareholders in the calendar year in which the distributions are
declared, rather than the calendar year in which the distributions are
received. To prevent application of the excise tax, SC-ERF intends to make its
distributions in accordance with the calendar year distribution requirement.
DISTRIBUTIONS
Dividends paid out of SC-ERF's investment company taxable income will be
taxable to a U.S. shareholder as ordinary income. Because a portion of SC-
ERF's income may consist of dividends paid by U.S. corporations, a portion of
the dividends paid by SC-ERF may be eligible for the corporate dividends-
received deduction. Dividends paid by SC-ERF attributable to dividends
received by SC-ERF from REITs or corporations exempt from federal income tax
under Section 501 of the Code, however, are not eligible for such deduction.
Distributions of net capital gains, if any, designated as capital gain
dividends are taxable as long-term capital gains, regardless of how long the
shareholder has held SC-ERF's shares, and are not eligible for the dividends-
received deduction. Shareholders receiving distributions in the form of
additional shares, rather than cash, generally will have taxable income from
the receipt of, and a cost basis in, each such share equal to the net asset
value of a share of SC-ERF on the reinvestment date. Shareholders will be
notified annually as to the U.S. federal tax status of distributions, and
shareholders receiving distributions in the form of additional shares will
receive a report as to the net asset value of those shares.
The portion of a SC-ERF distribution classified as a return of capital
generally is not taxable to SC-ERF shareholders, but it will reduce their tax
basis in their shares, which in turn would effect the amount of gain or loss
shareholders would realize on the sale or redemption of their shares. If a
return of capital distribution exceeds a shareholder's tax basis in his
shares, the excess is generally taxed as capital gain to the shareholder
assuming the shares are a capital asset.
REITs do not provide complete information about the taxability of their
distributions (i.e., how much of their distributions represent a return of
capital) until after the calendar year ends. As a result, SC-ERF may not be
able to determine how much of SC-ERF's annual distributions for a particular
year are taxable to shareholders until after the traditional January 31
deadline for issuing Form 1099-DIV ("Form 1099"). SC-ERF in such circumstance
may send to shareholders amended Form 1099s after January 31 or may request
permission from the Internal Revenue Service for an extension permitting SC-
ERF to send the Form 1099 in February.
SALE OF SHARES
Upon the sale or other disposition of shares of SC-ERF, a shareholder may
realize a capital gain or loss which will be long-term or short-term,
generally depending upon the shareholder's holding period for the shares. Any
loss realized on a sale or exchange will be disallowed to the extent the
shares disposed of are replaced within a period of 61 days beginning 30 days
before and ending 30 days after disposition of the shares. In such a case, the
basis of the shares acquired will be adjusted to reflect the disallowed loss.
Any loss realized by a shareholder on a disposition of SC-ERF shares held by
the shareholder for six months or less will be treated as a long-term capital
loss to the extent of any distributions of net capital gains received by the
shareholder with respect to such shares.
INVESTMENTS IN REAL ESTATE INVESTMENT TRUSTS
SC-ERF may invest in real estate investment trusts ("REITs") that hold
residual interests in real estate mortgage investment conduits ("REMICs").
Under Treasury regulations that have not yet been issued, but may apply
retroactively, a portion of SC-ERF's income from a REIT that is attributable
to the REIT's residual interest in a REMIC (referred to in the Code as an
"excess inclusion") will be subject to federal income tax in all events. These
regulations are also expected to provide that excess inclusion income of a
regulated investment company,
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<PAGE>
such as SC-ERF, will be allocated to shareholders of the regulated investment
company in proportion to the dividends received by such shareholders, with the
same consequences as if the shareholders held the related REMIC residual
interest directly. In general, excess inclusion income allocated to
shareholders (i) cannot be offset by net operating losses (subject to a
limited exception for certain thrift institutions), (ii) will constitute
unrelated business taxable income to entities (including a qualified pension
plan, an individual retirement account, a 401(k) plan, a Keogh plan or other
tax-exempt entity) subject to tax on unrelated business income, thereby
potentially requiring such an entity that is allocated excess inclusion
income, and otherwise might not be required to file a tax return, to file a
tax return and pay tax on such income, and (iii) in the case of a foreign
shareholder, will not qualify for any reduction in U.S. federal withholding
tax. In addition, if at any time during any taxable year a "disqualified
organization" (as defined in the Code) is a record holder of a share in a
regulated investment company, then the regulated investment company will be
subject to a tax equal to that portion of its excess inclusion income for the
taxable year that is allocable to the disqualified organization, multiplied by
the highest federal income tax rate imposed on corporations. SC Investment
Research does not intend on behalf of SC-ERF to invest in REITs, a substantial
portion of the assets of which consists of residual interests in REMICs.
BACKUP WITHHOLDING
Except as described below, SC-ERF is required to withhold U.S. federal
income tax at the rate of 31% of all taxable distributions payable to
shareholders who fail to provide SC-ERF with their correct taxpayer
identification number or to make required certifications, or who have been
notified by the IRS that they are subject to backup withholding. Corporate
shareholders and certain other shareholders specified in the Code generally
are exempt from such backup withholding. Backup withholding is not an
additional tax. Any amounts withheld may be credited against the shareholder's
U.S. federal income tax liability.
FOREIGN SHAREHOLDERS
U.S. taxation of a shareholder who, as to the United States, is a
nonresident alien individual, a foreign trust or estate, a foreign corporation
or foreign partnership ("foreign shareholder") depends on whether the income
of SC-ERF is "effectively connected" with a U.S. trade or business carried on
by the shareholder.
Income Not Effectively Connected. If the income from SC-ERF is not
"effectively connected" with a U.S. trade or business carried on by the
foreign shareholder, distributions of investment company taxable income will
be subject to a U.S. tax of 30% (or lower treaty rate, except in the case of
any excess inclusion income allocated to the shareholder (see "Taxation--
Investments in Real Estate Investment Trusts," above)), which tax is generally
withheld from such distributions.
Distributions of capital gain dividends and any amounts retained by SC-ERF
which are designated as undistributed capital gains will not be subject to
U.S. tax at the rate of 30% (or lower treaty rate) unless the foreign
shareholder is a nonresident alien individual and is physically present in the
United States for more than 182 days during the taxable year and meets certain
other requirements. However, this 30% tax on capital gains of nonresident
alien individuals who are physically present in the United States for more
than the 182-day period only applies in exceptional cases because any
individual present in the United States for more than 182 days during the
taxable year is generally treated as a resident for U.S. income tax purposes;
in that case, he or she would be subject to U.S. income tax on his or her
worldwide income at the graduated rates applicable to U.S. citizens, rather
than the 30% U.S. tax. In the case of a foreign shareholder who is a
nonresident alien individual, SC-ERF may be required to withhold U.S. income
tax at a rate of 31% of distributions of net capital gains unless the foreign
shareholder certifies his or her non-U.S. status under penalties of perjury or
otherwise establishes an exemption. See "Taxation--Backup Withholding," above.
If a foreign shareholder is a nonresident alien individual, any gain such
shareholder realizes upon the sale or exchange of such shareholder's shares of
SC-ERF in the United States will ordinarily be exempt from U.S. tax unless (i)
the gain is U.S. source income and such shareholder is physically present in
the United States for more than 182 days during the taxable year and meets
certain other requirements, or is otherwise considered to be a resident alien
of the United States, or (ii) at any
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<PAGE>
time during the shorter of the period during which the foreign shareholder
held shares of SC-ERF and the five year period ending on the date of the
disposition of those shares, SC-ERF was a "U.S. real property holding
corporation" (and, if the shares of SC-ERF are regularly traded on an
established securities market, the foreign shareholder held more than 5% of
the shares of SC-ERF), in which event the gain would be taxed in the same
manner as for a U.S. shareholder as discussed above and a 10% U.S. withholding
tax would be imposed on the amount realized on the disposition of such shares
to be credited against the foreign shareholder's U.S. income tax liability on
such disposition. A corporation is a "U.S. real property holding corporation"
if the fair market value of its U.S. real property interests equals or exceeds
50% of the fair market value of such interests plus its interests in real
property located outside the United States plus any other assets used or held
for use in a business. In the case of SC-ERF, U.S. real property interests
include interests in stock in U.S. real property holding corporations (other
than stock of a REIT controlled by U.S. persons and holdings of 5% or less in
the stock of publicly traded U.S. real property holding corporations) and
certain participating debt securities.
Income Effectively Connected. If the income from SC-ERF is "effectively
connected" with a U.S. trade or business carried on by a foreign shareholder,
then distributions of investment company taxable income and capital gain
dividends, any amounts retained by SC-ERF which are designated as
undistributed capital gains and any gains realized upon the sale or exchange
of shares of SC-ERF will be subject to U.S. income tax at the graduated rates
applicable to U.S. citizens, residents and domestic corporations. Foreign
corporate shareholders may also be subject to the branch profits tax imposed
by the Code.
The tax consequences to a foreign shareholder entitled to claim the benefits
of an applicable tax treaty may differ from those described herein. Foreign
shareholders are advised to consult their own tax advisers with respect to the
particular tax consequences to them of an investment in SC-ERF.
OTHER TAXATION
SC-ERF shareholders may be subject to state, local and foreign taxes on
their SC-ERF distributions. Shareholders are advised to consult their own tax
advisers with respect to the particular tax consequences to them of an
investment in SC-ERF.
ORGANIZATION AND DESCRIPTION OF CAPITAL STOCK
SC-ERF was incorporated on January 23, 1997 as a Maryland corporation and is
authorized to issue 50,000,000 shares of common stock, $.01 par value per
share (the "Common Stock"). SC-ERF's shares have no preemptive, conversion,
exchange or redemption rights. Each share has equal voting, dividend,
distribution and liquidation rights. All shares of SC-ERF, when duly issued,
will be fully paid and nonassessable. Shareholders are entitled to one vote
per share. All voting rights for the election of Directors are noncumulative,
which means that the holders of more than 50% of the shares can elect 100% of
the Directors then nominated for election if they choose to do so and, in such
event, the holders of the remaining shares will not be able to elect any
Directors. The foregoing description is subject to the provisions contained in
SC-ERF's Articles of Incorporation and By-Laws which have been filed with the
SEC as exhibits to the registration statement of which this Statement of
Additional Information is a part.
The Board of Directors is authorized to reclassify and issue any unissued
shares of SC-ERF without shareholder approval. Accordingly, in the future, the
Directors may create additional series of shares with different investment
objectives, policies or restrictions. Any issuance of shares of another class
would be governed by Maryland law.
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At April 18, 1997, there were 8,427,004 shares of Common Stock outstanding.
At such date the Directors and officers as a group beneficially owned,
directly or indirectly, including the power to vote or to dispose of, less
than 1% of the outstanding shares of SC-ERF. Also as of that date, the
following persons owned of record 5% or more of SC-ERF's shares:
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
NAME OF SHAREHOLDER SHARES OWNED SHARES OWNED
------------------- ------------ -------------
<S> <C> <C>
SCERF Incorporated
(a Maryland corporation)
3753 Howard Hughes Parkway
Las Vegas, Nevada 89109........................ 8,427,004 100%
</TABLE>
DISTRIBUTOR
Security Capital Markets Group Incorporated, an affiliate of SC Investment
Research, serves without charge as the Distributor of shares of SC-ERF.
Security Capital Markets Group Incorporated is not obligated to sell any
specific amount of shares and will sell shares, as agent for SC-ERF, on a best
efforts continuous basis only against orders to purchase shares.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
Firstar Trust Company which has its principal business at 615 East Michigan
Street, Milwaukee, Wisconsin 53202 has been retained to act as Custodian of
SC-ERF's investments and as SC-ERF's transfer and dividend disbursing agent.
Firstar Trust Company does not determine the investment policies of SC-ERF or
decide which securities SC-ERF will buy or sell.
PERFORMANCE INFORMATION
From time to time, SC-ERF may quote SC-ERF's total return in advertisements
or in reports and other communications to shareholders. SC-ERF's performance
will vary from time to time depending upon market conditions, the composition
of its portfolio and its operating expenses. Consequently, any given
performance quotation should not be considered representative of SC-ERF's
performance for any specified period in the future. In addition, because
performance will fluctuate, it may not provide a basis for comparing an
investment in SC-ERF with certain bank deposits or other investments that pay
a fixed yield for a stated period of time. Investors comparing SC-ERF's
performance with that of other mutual funds should give consideration to the
quality and maturity of the respective investment companies' portfolio
securities.
AVERAGE ANNUAL TOTAL RETURN
SC-ERF's "average annual total return" figures described in the Prospectus
are computed according to a formula. The formula can be expressed as follows:
P(1 + T)n = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV
=
Ending Redeemable Value of a hypothetical $1,000 investment made
at the beginning of a 1-, 5-, or 10-year period at the end of a 1-
, 5-, or 10-year period (or fractional portion thereof), assuming
reinvestment of all dividends and distributions.
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AGGREGATE TOTAL RETURNS
SC-ERF's aggregate total return figures described in the Prospectus
represent the cumulative change in the value of an investment in SC-ERF for
the specified period and are computed by the following formula.
ERV-P
Aggregate Total -----
Return = P
Where:
P = a hypothetical initial payment of $1,000.
ERV
= Ending Redeemable Value of a hypothetical $1,000 investment made
at the beginning of the 1-, 5- or 10-year period at the end of the
1-, 5- or 10-year period (or fractional portion thereof), assuming
reinvestment of all dividends and distributions.
YIELD
Quotations of yield for SC-ERF will be based on all investment income per
share earned during a particular 30-day period (including dividends and
interest), less expenses accrued during the period ("net investment income")
and are computed by dividing net investment income by the maximum offering
price per share on the last day of the period, according to the following
formula:
a-b
Yield = 2[( + 1)/6/-1]
cd
Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends
d = the maximum offering price per share on the last day of the
period.
In reports or other communications to shareholders of SC-ERF or in
advertising materials, SC-ERF may compare its performance with that of (i)
other mutual funds listed in the rankings prepared by Lipper Analytical
Services, Inc., publications such as Barron's, Business Week, Forbes, Fortune,
Institutional Investor, Kiplinger's Personal Finance, Money, Morningstar
Mutual Fund Values, The New York Times, The Wall Street Journal and USA Today
or other industry or financial publications or (ii) the Standard and Poor's
Index of 500 Stocks, the Dow Jones Industrial Average and other relevant
indices and industry publications. SC-ERF may also compare the historical
volatility of its portfolio to the volatility of such indices during the same
time periods. (Volatility is a generally accepted barometer of the market risk
associated with a portfolio of securities and is generally measured in
comparison to the stock market as a whole--the beta--or in absolute terms--the
standard deviation.)
COUNSEL AND INDEPENDENT ACCOUNTANTS
Legal matters in connection with the issuance of the shares of SC-ERF
offered hereby will be passed upon by Mayer, Brown & Platt, 190 South LaSalle
Street, Chicago, Illinois 60603, which will rely as to certain matters of
Maryland law on an opinion of Ballard Spahr Andrews & Ingersoll.
Arthur Andersen LLP have been appointed as independent accountants for SC-
ERF.
18
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Unitholders and Board of Directors of
Security Capital Employee REIT Fund Incorporated:
We have audited the accompanying balance sheet of Security Capital Employee
REIT Fund Incorporated (a Maryland corporation), including the schedule of
investments, as of February 28, 1997, and the related statements of operations
and changes in net assets and the financial highlights for the period from
December 20, 1996 (inception date), to February 28, 1997. 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.
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 February 28, 1997, by correspondence with 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
Security Capital Employee REIT Fund Incorporated as of February 28, 1997, the
results of its operations, the changes in its net assets and its financial
highlights for the period from December 20, 1996 (inception date), to February
28, 1997, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois,
March 20, 1997
19
<PAGE>
SECURITY CAPITAL EMPLOYEE REIT FUND INCORPORATED
SCHEDULE OF INVESTMENTS
FEBRUARY 28, 1997
<TABLE>
<CAPTION>
NUMBER OF
INVESTMENT IN SECURITIES (99.7%) COMMON SHARES MARKET VALUE
- -------------------------------- ------------- ------------
<S> <C> <C>
REAL ESTATE INVESTMENT TRUSTS (99.7%)
Beacon Properties Corp............................. 277,400 $ 9,847,700
Public Storage Inc................................. 288,500 7,753,438
Spieker Properties Inc............................. 165,500 6,020,063
Prentiss Properties Trust SBI...................... 173,500 4,684,500
Apartment Investment & Management Co. Class A...... 154,067 4,467,943
Essex Property Trust Inc........................... 123,700 3,711,000
Wellsford Residential Property Trust SBI........... 126,300 3,694,275
Macerich Co........................................ 133,000 3,674,125
Charles E. Smith Residential Realty Inc............ 114,100 3,223,325
Pacific Gulf Properties Inc........................ 140,700 3,200,925
Kimco Realty Corp.................................. 87,000 2,925,375
Weingarten Realty Investors SBI.................... 67,500 2,894,063
Urban Shopping Centers Inc......................... 90,200 2,830,025
Western Investment Real Estate Trust............... 199,600 2,569,850
RFS Hotel Investors Inc............................ 139,000 2,363,000
Koger Equity Inc................................... 125,000 2,234,375
Taubman Centers Inc................................ 127,100 1,668,188
Associated Estates Realty Corp..................... 65,700 1,543,950
AMLI Residential Properties Trust SBI.............. 44,200 1,049,748
-----------
TOTAL INVESTMENT IN SECURITIES (99.7%)
(Cost $69,136,574) (a).......................... 70,355,868
-----------
OTHER ASSETS LESS LIABILITIES (0.3%)............. 776,632
-----------
Net Assets (100.0%)............................ $71,132,500
===========
</TABLE>
- --------
(a) At February 28, 1997, the net unrealized gain on investments based on cost
of $1,219,294 was as follows:
<TABLE>
<S> <C>
Aggregate gross unrealized gain for all investments for
which there is an excess of market value over cost........ $2,126,418
Aggregate gross unrealized loss for all investments for
which there is an excess of cost over market value........ (907,124)
----------
Net unrealized gain on investments......................... $1,219,294
==========
</TABLE>
Purchases and sales of securities for the period from December 20, 1996
(inception date), to February 28, 1997, other than short-term securities,
aggregated $69,864,454 and $727,880 respectively.
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
SECURITY CAPITAL EMPLOYEE REIT FUND INCORPORATED
BALANCE SHEET
FEBRUARY 28, 1997
<TABLE>
<S> <C>
ASSETS
Investment in securities, at market value (cost $69,136,574; see
Schedule of Investments and Note 1)............................. $70,355,868
Cash............................................................. 662,224
Receivable for fund units sold................................... 1,523,197
Dividends receivable............................................. 114,408
Organizational expenses.......................................... 100,000
-----------
TOTAL ASSETS................................................... 72,755,697
===========
LIABILITIES AND CAPITAL
Payable for investments purchased................................ 1,523,197
Payable to investment advisor.................................... 100,000
-----------
TOTAL LIABILITIES.............................................. 1,623,197
-----------
Paid-in capital (Note 1)......................................... 69,499,133
Accumulated undistributed net investment income.................. 366,658
Accumulated undistributed net realized gain on investments....... 47,415
Net unrealized gain on investments............................... 1,219,294
-----------
TOTAL CAPITAL (equivalent to $10.54 per share based on
6,748,899 units outstanding--50,000,000 units authorized)..... 71,132,500
-----------
TOTAL LIABILITIES AND CAPITAL.................................. $72,755,697
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
SECURITY CAPITAL EMPLOYEE REIT FUND INCORPORATED
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM DECEMBER 20, 1996 (INCEPTION DATE), TO FEBRUARY 28, 1997
<TABLE>
<S> <C>
INVESTMENT INCOME
Dividends......................................................... $ 366,658
----------
Total investment income......................................... 366,658
----------
Total expenses (Note 2)......................................... --
----------
Net investment income........................................... 366,658
----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments.................................. 47,415
Change in net unrealized gain on investments...................... 1,219,294
----------
NET GAIN ON INVESTMENTS......................................... 1,266,709
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................ $1,633,367
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE>
SECURITY CAPITAL EMPLOYEE REIT FUND INCORPORATED
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD FROM DECEMBER 20, 1996 (INCEPTION DATE), TO FEBRUARY 28, 1997
<TABLE>
<S> <C>
FROM OPERATIONS
Net investment income............................................ $ 366,658
Net realized gain on investments................................. 47,415
Change in net unrealized gain on investments..................... 1,219,294
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........... 1,633,367
-----------
FROM UNIT TRANSACTIONS
Proceeds from units sold......................................... 69,499,133
-----------
INCREASE IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS....... 69,499,133
-----------
NET INCREASE IN NET ASSETS..................................... 71,132,500
NET ASSETS
Beginning of period.............................................. --
-----------
End of period.................................................... $71,132,500
===========
ANALYSIS OF CHANGES IN UNITS OF BENEFICIAL INTEREST
Units sold....................................................... 6,748,899
-----------
NET INCREASE IN FUND UNITS OUTSTANDING......................... 6,748,899
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE>
SECURITY CAPITAL EMPLOYEE REIT FUND INCORPORATED
FINANCIAL HIGHLIGHTS
FOR THE PERIOD FROM DECEMBER 20, 1996 (INCEPTION DATE), TO FEBRUARY 28, 1997
<TABLE>
<S> <C>
NET ASSET VALUE, SHARES SOLD AT INCEPTION DATE..................... $ 10.00
-----------
INCREASE FROM INVESTMENT OPERATIONS
Net investment income............................................ 0.05
Net realized and unrealized gains on investments................. 0.49
-----------
TOTAL INCREASE FROM INVESTMENT OPERATIONS...................... 0.54
-----------
NET ASSET VALUE, END OF PERIOD..................................... $ 10.54
===========
Ratio of net operating expenses to average net assets* (Note 2).... 0.00%
Ratio of net investment income to average net assets*.............. 3.58%
Average Commission Rate Paid....................................... $ 0.06
Portfolio Turnover Rate*........................................... 1.35%
Net assets, end of period.......................................... $71,132,500
</TABLE>
- --------
*Annualized
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
SECURITY CAPITAL EMPLOYEE REIT FUND INCORPORATED
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 1997
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Security Capital Employee REIT Fund Incorporated (the "Fund") is a Maryland
corporation, originally formed on December 20, 1996, as SCERF Incorporated
(SCERF), a Maryland corporation. On January 23, 1997, all of the assets and
liabilities of SCERF were transferred to the Fund in a reorganization (the
"Reorganization") accounted for as a pooling of interests. The Reorganization
was a taxable event to SCERF and a capital gain of approximately $1 million
was realized for tax purposes. As a result, at January 23, 1997, the tax basis
of securities held was approximately $1 million higher than their basis for
financial reporting purposes. This capital gain will be included in the
consolidated income tax return of the sole shareholder of SCERF and will not
affect the Fund's tax status for 1997. This will result in a lower required
capital gain distribution for the Fund for calendar year 1997.
The Fund intends to register under the Investment Company Act of 1940 (the
"1940 Act") as a no-load, non-diversified, open-end management investment
company. The investment objective of the Fund is to provide unitholders with
above-average total returns, including current income and capital
appreciation, primarily through investments in real estate securities in the
United States. The Fund has selected December 31 as its year end for both
financial reporting and federal income tax purposes.
The Fund's financial statements have been prepared in conformity with
generally accepted accounting principles that require the Fund, among other
things, to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
The following is a summary of significant accounting policies consistently
followed by the Fund, which are in conformity with those generally accepted in
the investment company industry.
A. Security Valuation--Security transactions are recorded on trade date.
Each day, securities are valued at the last sale price from the principal
exchange on which they are traded. Securities that have not traded on the
date of valuation, or securities for which sale prices are not generally
reported, are valued at the mean between the last bid and asked prices.
Securities for which market quotations are not readily available are valued
at their fair values as determined by, or under the direction of, the Board
of Directors (the "Directors"). Temporary cash investments are valued at
cost plus accrued interest, which approximates fair value. Dividend income
is recorded on the ex-dividend date and interest income is recorded on the
accrual basis.
Because the Fund may invest a substantial portion of its assets in Real
Estate Investment Trusts ("REITs"), the Fund may be subject to certain
risks associated with direct investments in REITs. REITs may be affected by
changes in the value of their underlying properties and by defaults by
borrowers and tenants. REITs depend generally on their ability to generate
cash flow to make distributions to unitholders, and certain REITs have
self-liquidation provisions by which mortgages held may be paid in full and
distributions of capital returns may be made at any time. In addition, the
performance of a REIT may be affected by its failure to qualify for tax-
free pass-through of income under the Internal Revenue Code or its failure
to maintain exemption from registration under the Investment Company Act of
1940.
B. Gains and Losses--Gains and losses from sales of investments are
calculated using the specific identification method for both financial
reporting and federal income tax purposes. It is the Fund's practice to
first select for sale those securities that have the highest cost and also
qualify for long-term capital gain or loss treatment for tax purposes.
C. Federal Income Taxes--It is the policy of the Fund to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute all of its taxable income and net
realized capital gains, if any, to its unitholders. Therefore, no federal
income tax provision is required.
25
<PAGE>
The characterization of distributions to unitholders for financial
reporting purposes is determined in accordance with income tax rules.
Therefore, the source of the Fund's distributions may be shown in the
accompanying financial statements as either from or in excess of net
investment income or net realized gain on investment transactions, or from
paid-in capital, depending on the type of book/tax differences that may
exist.
A portion of the dividend income recorded by the Fund is from
distributions by publicly traded REITs and such distributions for tax
purposes may consist of capital gains and return of capital. The actual
return of capital and capital gains portions of such distributions will be
determined by formal notifications from the REITs subsequent to the
calendar year-end. Distributions received from the REITs that are
determined to be a return of capital are recorded by the Fund as reduction
of the cost basis of the securities held. The character of such
distributions, for tax purposes, is determined by the Fund based on
estimates and information received by the Fund from the REITs. The effect
of return of capital distributions for dividends earned in 1996 was
immaterial.
D. Fund Units--The Fund records sales and repurchases of its fund units
at net asset value on the trade date. Security Capital Markets Group
Incorporated, a wholly owned subsidiary of Security Capital Group
Incorporated, acts as distributor for the Fund. The Fund pays no fee for
this service. Dividends and distributions to unitholders are recorded as of
the ex-dividend date. There were no dividends or distributions to
unitholders during the period covered by these financial statements.
NOTE 2. INVESTMENT ADVISER
Security Capital Investment Research Group Incorporated ("SCIRG"), the
Fund's investment adviser, manages the Fund's portfolio and is a wholly owned
subsidiary of Security Capital Group Incorporated. SCIRG intends to charge the
Fund a management fee once its registration under the 1940 act becomes
effective. No management fee will be charged prior to that time. Management
fees will be calculated daily at the annual rate of .85 of 1% of the Fund's
average daily net assets.
SCIRG also serves as the Fund's administrator. SCIRG intends to charge the
Fund an administration fee once its registration under the 1940 act becomes
effective. No administration fee will be charged prior to that time.
Administration fees will be calculated daily at the annual rate of .02 of 1%
of average daily net assets.
SCIRG has agreed not to impose a portion of its management fee and to assume
other operating expenses for the Fund to the extent necessary to limit the
Fund's expenses to 1.20% of average daily net assets.
In addition, under the management agreement, certain other services and
costs, including transfer agent and unitholder services, custody, accounting,
regulatory reporting, insurance premiums and sub-administration, are to be
paid by the Fund. Once the Fund's filing under the 1940 Act becomes effective,
Firstar Trust Company ("Firstar") will serve as transfer agent, custodian and
sub-administrator of the Fund and charge the fund a fee for providing those
services. Sub-administration fees will be calculated daily at the annual rate
of .06 of 1% of the first $200 million of the Fund's average daily net assets.
Custodian and transfer agent fees will be charged by Firstar according to
contractual fee schedules agreed to by the Fund. All such expenses incurred as
of the dates covered by these financial statements have been paid by SCIR
which does not intend to seek reimbursement from the Fund.
During the period December 20, 1996 (inception date), to February 28, 1997,
SCIR paid organizational expenses on behalf of the Fund of approximately
$100,000 and intends to seek reimbursement from the Fund for these expenses.
The Fund intends to amortize these expenses over a period of 60 months. The
Adviser, at its discretion, may reimburse the Fund for such expenses in the
future.
All but one of the officers and directors of the Fund are also officers of
the Adviser. No fees or expenses were paid by the Fund to the nonaffiliated
director during the period covered by these financial statements.
NOTE 3. FUND UNITS
Units of the Fund are currently being offered only to SC Realty
Incorporated, a subsidiary of Security Capital Group Incorporated. The Fund,
when its registration under the 1940 Act becomes effective, intends to offer
its units to directors and employees of Security Capital Group Incorporated
and its affiliates. The Fund intends to offer its units to the general public
at some undetermined point in the future.
26
<PAGE>
SECURITY CAPITAL EMPLOYEE REIT FUND INCORPORATED
Form N-1A
Part C -- Other Information
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a)Financial Statements.
To be filed by amendment.
(b)Exhibits:
A list of exhibits filed herewith is contained on the Exhibit Index
which immediately precedes such exhibits and is incorporated herein by
reference.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Following is a list of entities that for purposes of the Investment Company
Act of 1940 are controlled by or under common control with Security Capital
Employee REIT Fund Incorporated:
<TABLE>
<CAPTION>
JURISDICTION
OF
NAME ORGANIZATION BASIS OF CONTROL
---- ------------ ----------------
<S> <C> <C>
Security Capital Group Maryland No entity controls Group
Incorporated ("Group")
SC Realty Incorporated ("SC Nevada Ownership by Group of 100% of
Realty") voting securities
SCERF Incorporated Maryland Ownership by SC Realty of 100% of
voting securities
Security Capital Employee Maryland Ownership by SCERF Incorporated
REIT Fund Incorporated of 100% of voting securities
Security Capital Preferred Maryland Ownership by SC Realty of 100% of
Growth Incorporated voting securities
Security Capital Management Delaware Ownership by Group of 100% of
Incorporated voting securities
Security Capital Investment Delaware Ownership by Group of 100% of
Incorporated voting securities
Belmont Corporation Delaware Ownership by Group of 100% of
voting securities
Security Capital Pacific Delaware Ownership by Security Capital
Incorporated Investment Incorporated of 100%
of voting securities
Security Capital Industrial Delaware Ownership by Security Capital
Incorporated Investment Incorporated of 100%
of voting securities
Security Capital (Atlantic) Nevada Ownership by Security Capital
Incorporated Investment Incorporated of 100%
of voting securities
SCI Client Services Delaware Ownership by Group of 100% of
Incorporated voting securities
SCG Realty Services Texas Ownership by Group of 100% of
Incorporated voting securities
SCG Realty Services Atlantic Delaware Ownership by Group of 100% of
Incorporated voting securities
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
JURISDICTION
OF
NAME ORGANIZATION BASIS OF CONTROL
---- ------------ ----------------
<S> <C> <C>
Security Capital Delaware Ownership by Group of 100% of
Investment Research voting securities
Incorporated
("Investment Research")
Security Capital Delaware Ownership by Investment Research
Investment Research of 100% of voting securities
Group Incorporated
Security Capital Maryland Ownership by Investment Research
Strategic Group of 100% of voting securities
Incorporated
Security Capital Real Maryland Ownership by Investment Research
Estate Research Group of 100% of voting securities
Incorporated
SC Group Incorporated Texas Ownership by Group of 100% of
voting securities
Security Capital Markets Delaware Ownership by Group of 100% of
Group Incorporated voting securities
Strategic Hotel Capital Delaware Ownership by Group of 51% of
Incorporated voting securities
Security Capital (EU) Luxembourg Ownership by Group of 100% of
Management S.A. voting securities
Security Capital (UK) United Kingdom Ownership by Security Capital
Management Limited (EU) Management S.A. of 100% of
voting securities
Security Capital US Realty Luxembourg Ownership by Group of 40% of
S.A. ("US Realty") voting securities
CarrAmerica Realty Maryland Ownership by US Realty of 39.5%
Corporation of voting securities
Storage USA, Inc. Tennessee Ownership by US Realty of 36.7%
of voting securities
Regency Realty Florida Ownership by US Realty of 43.4%
Corporation of voting securities
Pacific Retail Trust Maryland Ownership by US Realty of 67.6%
of voting securities
Urban Growth Property Delaware Ownership by US Realty of 100% of
Incorporated voting securities
City Center Retail Trust Maryland Ownership by US Realty of 100% of
voting securities
National Parking Company Maryland Ownership by US Realty of 100% of
voting securities
Security Capital Industrial Maryland Ownership by SC Realty of 44.1%
Trust of voting securities
Security Capital Delaware Ownership by SCI of 100% of
Industrial Management voting securities
Incorporated ("SCI")
1440 Goodyear Partners Texas Sole general Partnership interest
owned by SCI
Red Mountain Joint Texas Sole general Partnership interest
Venture owned by SCI
SCI Limited Partnership-I Delaware Sole general Partnership interest
owned by SCI
SCI Limited Partnership- Delaware Sole general Partnership interest
II owned by SCI
SCI Limited Partnership- Delaware Sole general Partnership interest
III owned by SCI
</TABLE>
C-2
<PAGE>
<TABLE>
<CAPTION>
JURISDICTION
OF
NAME ORGANIZATION BASIS OF CONTROL
---- ------------ ----------------
<S> <C> <C>
SCI Limited Partnership-IV Delaware Sole general Partnership interest
owned by SCI IV, Inc.
SCI IV, Inc. Delaware Ownership by SCI of 100% of
voting securities
SCI--Alabama (1) Maryland Ownership by SCI of 100% of
Incorporated voting securities
SCI--Alabama (2) Maryland Ownership by SCI of 100% of
Incorporated voting securities
Security Capital Alabama Alabama Ownership of 100% of voting
Industrial Trust securities by SCI--Alabama (1)
Incorporated and SCI--Alabama
(2) Incorporated
SCI--North Carolina (1) Maryland Ownership by SCI of 100% of
Incorporated voting securities
SCI--North Carolina (2) Maryland Ownership by SCI of 100% of
Incorporated voting securities
SCI--North Carolina Limited Delaware Sole general partnership interest
Partnership owned by SCI--North Carolina (1)
Incorporated
SCI Houston Holdings Inc. Delaware Ownership by SCI of 100% of
voting securities
SCI Client Services of Colorado Ownership by SCI Client Services
Colorado Incorporated of 80.0% of voting
securities
SCI Mexico Industrial Trust Maryland Ownership by SCI of 100% of
voting securities
Security Capital Atlantic Maryland Ownership by SC Realty of 51.4%
Incorporated ("Atlantic") of voting securities
Security Capital Atlantic Delaware Ownership by Atlantic of 100% of
Management Incorporated voting securities
SCA Florida Holdings (1) Florida Ownership by Atlantic of 100% of
Incorporated voting securities
Atlantic--Alabama (1) Maryland Ownership by Atlantic of 100% of
Incorporated voting securities
Atlantic--Alabama (2) Maryland Ownership by Atlantic of 100% of
Incorporated voting securities
Security Capital Alabama Alabama Ownership by Atlantic--Alabama
Multifamily Trust (1) Incorporated and Atlantic--
Alabama (2) Incorporated of 100%
of voting securities
Atlantic--Alabama (3) Delaware Ownership by Atlantic of 100% of
Incorporated voting securities
Atlantic--Alabama (4) Delaware Ownership by Atlantic of 100% of
Incorporated voting securities
Atlantic Alabama Alabama Ownership of 100% of voting
Multifamily Trust securities by Atlantic--Alabama
(3) Incorporated and Atlantic--
Alabama (4) Incorporated
Atlantic--Alabama (5) Delaware Ownership by Atlantic of 100% of
Incorporated voting securities
</TABLE>
C-3
<PAGE>
<TABLE>
<CAPTION>
JURISDICTION
OF
NAME ORGANIZATION BASIS OF CONTROL
---- ------------ ----------------
<S> <C> <C>
Atlantic--Alabama (6) Delaware Ownership by Atlantic of 100% of
Incorporated voting securities
SCA--Alabama Multifamily Alabama Ownership of 100% of voting
Trust securities by Atlantic--Alabama
(5) Incorporated and Atlantic--
Alabama (6) Incorporated
SCA--South Carolina (1) Maryland Ownership by Atlantic of 100% of
Incorporated voting securities
SCA--North Carolina (1) Maryland Ownership by Atlantic of 100% of
Incorporated voting securities
SCA North Carolina (2) Maryland Ownership by Atlantic of 100% of
Incorporated voting securities
SCA North Carolina Limited Delaware Sole general partnership interest
Partnership owned by SCA--North Carolina (1)
Incorporated
SCA--Tennessee Limited Delaware Sole general partnership interest
Partnership owned by SCA--Tennessee (1)
Incorporated
SCA--Tennessee (1) Delaware Ownership by Atlantic of 100% of
Incorporated voting securities
SCA--Tennessee (2) Delaware Ownership by Atlantic of 100% of
Incorporated voting securities
Security Capital Atlantic Delaware Ownership by Atlantic of 100% of
Multifamily Inc. voting securities
Security Capital Pacific Maryland Ownership by SC Realty of 36.0%
Trust ("PTR") of voting securities
Security Capital Pacific Delaware Ownership by PTR of 100% of
Management Incorporated voting securities
SCP Nevada Holdings 1 Nevada Ownership by PTR of 100% of
Incorporated voting securities
SCP Utah Holdings 1 Utah Ownership by PTR of 100% of
Incorporated voting securities
SCP Utah Holdings 2 Utah Ownership by PTR of 100% of
Incorporated voting securities
SCP Utah Holdings 3 Utah Ownership by PTR of 100% of
Incorporated voting securities
Las Flores Development Texas Ownership by PTR of 100% of
Company voting securities
PTR Holdings (Texas) Texas Ownership by PTR of 100% of
Incorporated voting securities
PTR Multifamily Delaware Ownership by PTR of 100% of
Incorporated voting securities
PTR-California Holdings (1) Maryland Ownership by PTR of 100% of
Incorporated voting securities
PTR-California Holdings (2) Maryland Ownership by PTR of 100% of
Incorporated voting securities
PTR-New Mexico (1) Delaware Ownership by PTR of 100% of
Incorporated voting securities
PTR-New Mexico (2) Delaware Ownership by PTR of 100% of
Incorporated voting securities
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
JURISDICTION
OF
NAME ORGANIZATION BASIS OF CONTROL
---- ------------ ----------------
<S> <C> <C>
Homestead Village Maryland Ownership by SC Realty (including
Incorporated its subsidiaries) of 56.5% of
voting securities
KC Homestead Village Missouri Ownership by Homestead Village
Redevelopment Corporation Incorporated of 100% of voting
securities
Missouri Homestead Village Maryland Ownership by Homestead Village
Incorporated Incorporated of 100% of voting
securities
Atlantic Homestead Village Delaware Sole general partnership interest
Limited Partnership owned by Atlantic Homestead
Village (1) Incorporated
Atlantic Homestead Village Maryland Ownership by Homestead Village
(1) Incorporated Incorporated of 100% of voting
securities
Atlantic Homestead Village Maryland Ownership by Homestead Village
(2) Incorporated Incorporated of 100% of voting
securities
PTR Homestead Village (1) Maryland Ownership by Homestead Village
Incorporated Incorporated of 100% of voting
securities
PTR Homestead Village (2) Maryland Ownership by Homestead Village
Incorporated Incorporated of 100% of voting
securities
PTR Homestead Village Delaware Sole general partnership interest
Limited Partnership owned by PTR Homestead Village
(1) Incorporated
Homestead Alabama Alabama Ownership by Homestead Village
Incorporated Incorporated of 100% of voting
securities
</TABLE>
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of March 28, 1997, there was one holder of record of SC-ERF's common
stock, $.01 par value per share.
ITEM 27. INDEMNIFICATION.
Reference is made to Article Eighth of the Registrant's Articles of
Incorporation (filed herewith as Exhibit 1.)
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant by the Registrant pursuant to its Articles of Incorporation, its
By-Laws or otherwise, the Registrant is aware that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act and, therefore, is unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by directors, officers
or controlling persons of the Registrant in connection with the successful
defense of any act, suit or proceeding) is asserted by such directors,
officers or controlling persons in connection with shares being registered,
the Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issues.
C-5
<PAGE>
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Security Capital Investment Research Group Incorporated ("SC Investment
Research"), 11 South LaSalle Street, Chicago, Illinois 60603, provides
investment advisory services to institutional investors.
For information as to any other business, vocation or employment of a
substantial nature in which each Director or officer of the Registrant's
investment adviser has been engaged for his own account or in the capacity of
Director, officer, employee, partner or trustee, reference is made to
Prospectus and Statement of Additional Information contained in this
registration statement.
ITEM 29. PRINCIPAL UNDERWRITER.
(a) Security Capital Markets Group Incorporated ("SCMG"), the principal
distributor for the Registrant's securities, does not currently act as
principal underwriter or distributor for any other investment company.
(b) The table below sets forth certain information as to SCMG's Directors,
Officers and Control Persons:
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITIONS AND OFFICES POSITIONS AND OFFICES
BUSINESS ADDRESS WITH UNDERWRITER WITH REGISTRANT
- ------------------------ --------------------------------------------- ---------------------
<S> <C> <C>
K. Scott Cannon......... Director and Vice President None
Jeffrey A. Klopf........ Director, Secretary and Senior Vice President None
James H. Polk, III...... Director and President None
Gerard de Gunzburg...... Senior Vice President None
Donald E. Suter......... Senior Vice President None
Robert H. Fippinger..... Vice President None
Alison C. Hefele........ Vice President None
Garett C. House......... Vice President None
Lucinda G. Marker....... Assistant Secretary None
Gerald R. Morgan, Jr.... Assistant Controller None
Jayson C. Cyr........... Assistant Controller None
</TABLE>
(c) Not Applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
Certain of the records described in Section 31(a) of the 1940 Act and the
Rules 17 CFR 270.31a-1 to 31a-3 promulgated thereunder, are maintained by SC-
ERF's Investment Adviser and Administrator, Security Capital Investment
Research Group Incorporated, 11 S. LaSalle Street, Chicago, Illinois 60603.
The remainder of such records are maintained by Firstar Trust Company, SC-
ERF's Sub-Administrator, 615 East Michigan Street, Milwaukee, Wisconsin 53202.
ITEM 31. MANAGEMENT SERVICES.
There are no management-related service contracts not discussed in Part A or
Part B.
ITEM 32. UNDERTAKINGS.
(a) Registrant hereby undertakes to file an amendment to this Registration
Statement with certified financial statements showing the initial capital
received before accepting subscriptions from any person in excess of 25 if
Registrant proposes to raise its initial capital pursuant to Section 14(a)(3)
of the 1940 Act.
(b) Registrant hereby undertakes to file a post-effective amendment with
four to six months from the effective date of this Registration Statement
under the Securities Act of 1933. Registrant understands that such post-
effective amendment will contain reasonably current financial statements which
need not be certified by independent public accountants.
C-6
<PAGE>
(c) Registrant hereby undertakes to furnish each person to whom a prospectus
is delivered with a copy of the Registrant's latest Annual Report to
Shareholders upon request and without charge.
(d) The Registrant hereby undertakes to promptly call a meeting of
shareholders for the purpose of voting upon the question of removal of any
director or directors when requested in writing to do so by the record holders
of not less than 10 percent of the Registrant's outstanding shares and to
assist its shareholders in accordance with the requirements of Section 16(c)
of the Investment Company Act of 1940 relating to shareholder communications.
C-7
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE
INVESTMENT COMPANY ACT OF 1940, THE REGISTRANT HAS DULY CAUSED THIS AMENDED
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED, IN THE CITY OF CHICAGO, AND STATE OF ILLINOIS ON
THE 21ST DAY OF APRIL, 1997.
Security Capital Employee REIT Fund
Incorporated
/s/ Anthony R. Manno, Jr.
By __________________________________
Anthony R. Manno, Jr.
Chairman, Managing Director and
President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDED
REGISTRATION STATEMENT OF SECURITY CAPITAL EMPLOYEE REIT FUND INCORPORATED HAS
BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE 21ST
DAY OF APRIL, 1997.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
--------- --------
<S> <C>
/s/ Anthony R. Manno, Jr. Chairman, Managing Director and President
___________________________________________
Anthony R. Manno, Jr.
/s/ Stephen F. Kasbeer Director
___________________________________________
Stephen F. Kasbeer
/s/ Daniel F. Miranda Managing Director
___________________________________________
Daniel F. Miranda
</TABLE>
C-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- ---------------------------------------------------------------------
<C> <S>
1* Articles of Incorporation.
2* By-Laws.
5* Investment Advisory Contract.
6 Distribution Agreement.
8* Custodian Agreement.
9(a)* Transfer Agent Services Agreement.
9(b)* Administration and Servicing Agreement.
9(c)* Accounting Services Agreement.
10(a) Opinion and Consent of Mayer, Brown & Platt regarding the legality of
the securities being issued.
11(a) Consent of Arthur Andersen LLP.
11(b) Consent of Mayer, Brown & Platt (included in Exhibit 10(a)).
17 Financial Data Schedule.
</TABLE>
- --------
* Previously filed.
C-9
<PAGE>
Exhibit 6
GENERAL DISTRIBUTOR'S AGREEMENT
BETWEEN
SECURITY CAPITAL EMPLOYEE REIT FUND INCORPORATED
AND
SECURITY CAPITAL MARKETS GROUP INCORPORATED
Date: April __, 1997
SECURITY CAPITAL MARKETS GROUP INCORPORATED
Dear Sirs:
Security Capital Employee REIT Fund Incorporated, a Maryland corporation
(the "Fund"), is registered as an investment company under the Investment
Company Act of 1940 (the "1940 Act"), and an indefinite number of one or more
classes of its shares of common stock ("Shares") have been registered under the
Securities Act of 1933 (the "1933 Act") to be offered for sale to the public in
a continuous public offering in accordance with the terms and conditions set
forth in the Prospectus and Statement of Additional Information ("SAI") included
in the Fund's Registration Statement as it may be amended from time to time (the
"current Prospectus and/or SAI").
In this connection, the Fund desires that your firm (the "General
Distributor") act in a principal capacity as General Distributor for the sale
and distribution of Shares which have been registered as described above and of
any additional Shares which may become registered during the term of this
Agreement. You have advised the Fund that you are willing to act as such
General Distributor, and it is accordingly agreed by and between us as follows:
1. Appointment of the Distributor. The Fund hereby appoints you as the
sole General Distributor, pursuant to the aforesaid continuous public offering
of its Shares, and the Fund further agrees from and after the date of this
Agreement, that it will not, without your consent, sell or agree to sell any
Shares otherwise than through you, except (a) the Fund may itself sell Shares
without sales charge as an investment to the officers, trustees or directors and
bona fide present and former full-time employees of the Fund, the Fund's
Investment Adviser and affiliates thereof, and to other investors who are
identified in the current Prospectus and/or SAI as having the privilege to buy
Shares at net asset value; (b) the Fund may issue Shares in connection with a
merger, consolidation or acquisition of assets on such basis as may be
authorized or permitted under the 1940 Act; and (c) the Fund may issue Shares
for the reinvestment of dividends and other distributions of the Fund or of any
other fund if permitted by the current Prospectus and/or SAI; provided that in
no event as to any of the foregoing exceptions shall Shares be issued and sold
at less than the then-existing net asset value.
<PAGE>
2. Sale of Shares. You hereby accept such appointment and agree to use
your best efforts to sell Shares, provided, however, that when requested by the
Fund at any time because of market or other economic considerations or abnormal
circumstances of any kind, or when agreed to by mutual consent of the Fund and
the General Distributor, you will suspend such efforts. The Fund may also
withdraw the offering of Shares at any time when required by the provisions of
any statute, order, rule or regulation of any governmental body having
jurisdiction. It is understood that you do not undertake to sell all or any
specific number of Shares.
3. Sales Charge. Shares shall be sold by you at net asset value plus a
front-end sales charge not in excess of 8.5% of the offering price, but which
front-end sales charge shall be proportionately reduced or eliminated for larger
sales and under other circumstances, in each case, on the basis set forth in the
Fund's current Prospectus and/or SAI. The redemption proceeds of Shares offered
and sold at net asset value with or without a front-end sales charge may be
subject to a redemption fee ("Redemption Fee") under the circumstances described
in the current Prospectus and/or SAI. You may reallow such portion of the
front-end sales charge to dealers or cause payment (which may exceed the front-
end sales charge, if any) of commissions to brokers through which sales are
made, as you may determine, and you may pay such amounts to dealers and brokers
on sales of Shares from your own resources (such dealers and brokers shall
collectively include all domestic or foreign institutions eligible to offer and
sell the Shares), and in the event the Fund has more than one class of Shares
outstanding, then you may impose a front-end sales charge and/or a Redemption
Fee on Shares of one class that is different from the charges imposed on Shares
of the Fund's other class(es), in each case, as set forth in the current
Prospectus and/or SAI, provided the front-end sales charge and Redemption Fee to
the ultimate purchaser do not exceed the respective levels set forth for such
category of purchaser in the Fund's current Prospectus and/or SAI.
4. Purchase of Shares.
(a) As General Distributor, you shall have the right to accept or
reject orders for the purchase of Shares at your discretion. Any
consideration which you may receive in connection with a rejected
purchase order will be returned promptly.
(b) You agree promptly to issue or to cause the duly appointed
transfer or shareholder servicing agent of the Fund to issue as
your agent confirmations of all accepted purchase orders and to
transmit a copy of such confirmations to the Fund. The net asset
value of all Shares which are the subject of such confirmations,
computed in accordance with the applicable rules under the 1940
Act, shall be a responsibility of the General Distributor to the
Fund to forward promptly after receipt of payment from the
originating dealer or broker (or investor, in the case of direct
purchases). In no event shall the General Distributor forward
such
<PAGE>
payment to the Fund later than permitted by applicable rules of
the National Association of Securities Dealers, Inc.
(c) If the originating dealer or broker shall fail to make timely
settlement of its purchase order in accordance with applicable
rules of the National Association of Securities Dealers, Inc., or
if a direct purchaser shall fail, at the Fund's direction, to
make good payment for Shares in a timely manner, you shall cancel
such purchase order. You agree promptly to reimburse the Fund
for losses suffered by it that are attributable to errors on your
part in relation to the effective date of accepted purchase
orders, limited to the amount that such losses exceed
contemporaneous gains realized by the fund for either of such
reasons with respect to other purchase orders.
(d) In the case of a canceled purchase for the account of a directly
purchasing shareholder, the Fund agrees that if such investor
fails to make you whole for any loss you pay to the Fund on such
canceled purchase order, the Fund will reimburse you for such
loss to the extent of the aggregate redemption proceeds of any
other Shares of the Fund owned by such investor, on your demand
that the Fund exercise its right to claim such redemption
proceeds. The Fund shall register or cause to be registered all
Shares sold by you pursuant to the provisions hereof in such
names and amounts as you may request from time to time and the
Fund shall issue or cause to be issued certificates evidencing
such Shares for delivery by you or pursuant to your direction if
and to the extent that the shareholder account in question
contemplates the issuance of such certificates. All Shares when
so issued and paid for, shall be fully paid and non-assessable by
the Fund (which shall not prevent the imposition of any
Redemption Fee that may apply) to the extent set forth in the
current Prospectus and/or SAI.
5. Repurchase of Shares.
(a) In connection with the repurchase of Shares, you are appointed
and shall act as agent of the Fund. You are authorized, for so
long as you act as General Distributor of the Fund, to arrange
for the repurchase, from authorized dealers, certificated or
uncertificated Shares of the Fund on the basis of orders received
from each dealer ("authorized dealer") with which you have a
dealer agreement for the sale of Shares and permitting resales of
Shares by you, provided that such authorized dealer, at the time
of placing such resale order, shall represent (i) if such Shares
are represented by certificate(s), that certificate(s) for the
Shares to be repurchased have been delivered to it by the
registered owner with a request for the redemption of such Shares
executed in the manner and
<PAGE>
with the signature guarantee required by the then-currently
effective prospectus of the Fund, or (ii) if such Shares are
uncertificated, that the registered owner(s) has delivered to the
dealer a request for the redemption of such Shares executed in
the manner and with the signature guarantee required by the then-
currently effective prospectus of the Fund.
(b) You shall (a) have the right in your discretion to accept or
reject orders for the repurchase of Shares; (b) promptly transmit
confirmations of all accepted repurchase orders; and (c) transmit
a copy of such confirmation to the Fund, or, if so directed, to
any duly appointed transfer or shareholder servicing agent of the
Fund. In your discretion, you may accept repurchase requests
made by a financially responsible dealer which provides you with
indemnification in form satisfactory to you in consideration of
your acceptance of such dealer's request in lieu of the written
redemption request of the owner of the account; you agree that
the Fund shall be a third party beneficiary of such
indemnification.
(c) Upon receipt by the Fund or its duly appointed transfer or
shareholder servicing agent of any certificate(s) (if any has
been issued) for repurchased Shares and a written redemption
request of the registered owner(s) of such Shares executed in the
manner and bearing the signature guarantee required by the then-
currently effective Prospectus or SAI of the Fund, the Fund will
pay or cause its duly appointed transfer or shareholder servicing
agent promptly to pay to the originating authorized dealer the
redemption price of the repurchased Shares (other than
repurchased Shares subject to the provisions of part (d) of
Section 5 of this Agreement) next determined after your receipt
of the dealer's repurchase order.
(d) Notwithstanding the provisions of part (c) of Section 5 of this
Agreement, repurchase orders received from an authorized dealer
after the determination of the Fund's redemption price on a
regular business day will receive that day's redemption price if
the request to the dealer by its customer to arrange such
repurchase prior to the determination of the Fund's redemption
price that day complies with the requirements governing such
requests as stated in the current Prospectus and/or SAI.
(e) You will make every reasonable effort and take all reasonably
available measures to assure the accurate performance of all
services to be performed by you hereunder within the requirements
of any statute, rule or regulation pertaining to the redemption
of Shares of a regulated investment company and any requirements
set forth in the then-current Prospectus and/or SAI of the Fund.
You shall correct any error or omission made by you in the
performance of your duties hereunder of
<PAGE>
which you shall have received notice in writing and any necessary
substantiating data; and you shall hold the Fund harmless from
the effect of any errors or omissions which might cause an over-
or under-redemption of the Fund's Shares and/or an excess or non-
payment of dividends, capital gains distributions, or other
distributions.
(f) In the event an authorized dealer initiating a repurchase order
shall fail to make delivery or otherwise settle such order in
accordance with the rules, at the Fund's direction, of the
National Association of Securities Dealers, Inc., you shall
cancel such repurchase order. In the event that any cancellation
of a Share repurchase order or any error in the timing of the
acceptance of a Share repurchase order shall result in a gain or
loss to the Fund, you agree promptly to reimburse the Fund for
any amount by which any loss shall exceed then existing gains so
arising.
6. 1933 Act Registration. The Fund has delivered to you a copy of its
most recent draft of the Prospectus and SAI. The Fund agrees that it will use
its best efforts to complete such registration and, when such registration is
declared effective, to continue the effectiveness of the Registration Statement
under the 1933 Act. The Fund further agrees to prepare and file any amendments
to its Registration Statement as may be necessary and any supplemental data in
order to comply with the 1933 Act. The Fund will furnish you with a reasonable
number of copies of the Prospectus and SAI and any amendments thereto for use in
connection with the sale of Shares.
7. 1940 Act Registration. The Fund is currently in the process of
registering under the 1940 Act as an investment company, and, when such
registration is declared effective, it will use its best efforts to maintain
such registration and to comply with the requirements of the 1940 Act.
8. State Blue Sky Qualification. At your request, the Fund will take
such steps as may be necessary and feasible to qualify Shares for sale in
states, territories or dependencies of the United States, the District of
Columbia, the Commonwealth of Puerto Rico and in foreign countries, in
accordance with the laws thereof, and to renew or extend any such qualification;
provided, however, that the Fund shall not be required to qualify Shares or to
maintain the qualification of Shares in any jurisdiction where it shall deem
such qualification disadvantageous to the Fund.
9. Duties of Distributor. You agree that:
(a) Neither you nor any of your officers will take any long or short
position in the Shares, but this provision shall not prevent you
or your officers from acquiring Shares for investment purposes
only; and
<PAGE>
(b) You shall furnish to the Fund any pertinent information required
to be inserted with respect to you as General Distributor within
the purview of the Securities Act of 1933 in any reports or
registration required to be filed with any governmental
authority; and
(c) You will not make any representations inconsistent with the
information contained in the current Prospectus and/or SAI; and
(d) You shall maintain such records as may be reasonably required for
the Fund or its transfer or shareholder servicing agent to
respond to shareholder requests or complaints, and to permit the
Fund to maintain proper accounting records, and you shall make
such records available to the Fund and its transfer agent or
shareholder servicing agent upon request; and
(e) In performing under this Agreement, you shall comply with all
requirements of the Fund's current Prospectus and/or SAI and all
applicable laws, rules and regulations with respect to the
purchase, sale and distribution of Shares.
(f) You shall be responsible to reimburse the Fund for losses
suffered by it that are caused by reason of your willful
misfeasance, bad faith or gross negligence in the performance of
your duties under this Agreement.
10. Allocation of Costs. The Fund shall pay the cost of composition and
printing of sufficient copies of its Prospectus and SAI as shall be required for
periodic distribution to its shareholders and the expense of registering Shares
for sale under federal securities laws.
11. Duration. This Agreement shall take effect on the date first written
above, and shall supersede any and all prior General Distributor's Agreements by
and among the Fund and you. Unless earlier terminated pursuant to paragraph 12
hereof, this Agreement shall remain in effect for two years from the date of
execution hereof. This Agreement shall continue in effect from year to year
thereafter, provided that such continuance shall be specifically approved at
least annually: (a) by the Fund's Board of Directors or by vote of a majority of
the voting securities of the Fund; and (b) by the vote of a majority of the
Directors, who are not parties to this Agreement or "interested persons" (as
defined in the 1940 Act) of any such person, cast in person at a meeting called
for the purpose of voting on such approval.
12. Termination. This Agreement may be terminated (a) by the General
Distributor at any time without penalty by giving sixty days' written notice
(which notice may be waived by the Fund); (b) by the Fund at any time without
penalty upon sixty days' written notice to the General Distributor (which notice
may be waived by the General Distributor); or (c) by mutual consent of the Fund
and the General Distributor, provided that such termination by the Fund shall be
directed or approved by the Board of Directors of the Fund or by the vote of the
<PAGE>
holders of a "majority" of the outstanding voting securities of the Fund. In the
event this Agreement is terminated by the Fund, the General Distributor shall be
entitled to be paid the Redemption Fee under paragraph 3 hereof on the
redemption proceeds of Shares sold prior to the effective date of such
termination.
13. Assignment. This Agreement may not be amended or changed except in
writing and shall be binding upon and shall enure to the benefit of the parties
hereto and their respective successors; however, this Agreement shall not be
assigned by either party and shall automatically terminate upon assignment.
14. Disclaimer of Shareholder Liability. The General Distributor
understands and agrees that the obligations of the Fund under this Agreement are
not binding upon any Director or shareholder of the Fund personally, but bind
only the Fund and the Fund's property; the General Distributor represents that
it has notice of the provisions of the Articles of Incorporation of the Fund
disclaiming Director and shareholder liability for acts or obligations of the
Fund.
15. Section Headings. The heading of each section is for descriptive
purposes only, and such headings are not to be construed or interpreted as part
of this Agreement.
<PAGE>
If the foregoing is in accordance with your understanding, so indicate by
signing in the space provided below.
SECURITY CAPITAL EMPLOYEE REIT
FUND INCORPORATED
By:______________________________
Anthony R. Manno, Jr.
President
Accepted:
SECURITY CAPITAL MARKETS GROUP INCORPORATED
By:__________________________
<PAGE>
Exhibit 10(a)
[Letterhead of Mayer, Brown & Platt]
April 18, 1997
Security Capital Employee
REIT Fund Incorporated
11 South LaSalle Street
Chicago, Illinois 60603
Re: Security Capital Employee REIT Fund Incorporated
Registration Statement on Form N-1A
------------------------------------------------
Dear Sirs:
We have represented, Security Capital Employee REIT Fund Incorporated, a
Maryland corporation (the "Company"), in connection with the offering of
50,000,000 shares of common stock, $.01 par value per share, of the Company (the
"Shares").
In connection with our representation, we have examined the corporate
records of the Company, including its Articles of Incorporation, its By-Laws,
and other corporate records and documents and have made such other examinations
as we consider necessary to render this opinion. Based upon the foregoing, it
is our opinion that:
1. the Company is a corporation duly organized and validly existing in
good standing under the laws of the State of Maryland; and
2. the Shares, when paid for, will be legally issued and outstanding,
fully paid and non-assessable.
We consent to the filing of this opinion as an exhibit to the registration
statement referred to above and to all references to this firm in such
registration statement.
Very truly yours,
Mayer, Brown & Platt
<PAGE>
Exhibit 11(a)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the use of our report
dated March 20, 1997, and to all references to our Firm included in or made a
part of this Registration Statement on Form N-1A of Security Capital Employee
REIT Fund Incorporated.
ARTHUR ANDERSEN LLP
Chicago, Illinois
April 17, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> DEC-20-1996
<PERIOD-END> FEB-28-1997
<INVESTMENTS-AT-COST> 69,136,574
<INVESTMENTS-AT-VALUE> 70,355,868
<RECEIVABLES> 1,637,605
<ASSETS-OTHER> 762,224
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 72,755,697
<PAYABLE-FOR-SECURITIES> 1,523,197
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 100,000
<TOTAL-LIABILITIES> 1,623,197
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 69,499,133
<SHARES-COMMON-STOCK> 6,748,899
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 366,658
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 47,415
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,219,294
<NET-ASSETS> 71,132,500
<DIVIDEND-INCOME> 366,658
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 366,658
<REALIZED-GAINS-CURRENT> 47,415
<APPREC-INCREASE-CURRENT> 1,219,294
<NET-CHANGE-FROM-OPS> 1,633,367
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6,748,899
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 71,132,500
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 57,500,468
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .05
<PER-SHARE-GAIN-APPREC> .49
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.54
<EXPENSE-RATIO> 3.58<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1> Annualized
</FN>
</TABLE>
