<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 19, 1998
REGISTRATION NOS. 333-20649
811-8033
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 9
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940
Amendment No. 11
(Check Appropriate Box or Boxes)
-----------------
SECURITY CAPITAL REAL ESTATE MUTUAL FUNDS 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 GLOBAL CAPITAL MANAGEMENT GROUP INCORPORATED
11 SOUTH LASALLE STREET
CHICAGO, ILLINOIS 60603
(NAME AND ADDRESS OF AGENT FOR SERVICE)
WITH COPIES TO:
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<S> <C>
DAVID T. NOVICK JEFFREY A. KLOPF
SECURITY CAPITAL GROUP INCORPORATED SECURITY CAPITAL GROUP INCORPORATED
11 SOUTH LASALLE STREET 125 LINCOLN AVENUE
CHICAGO, ILLINOIS 60603 SANTA FE, NEW MEXICO 87501
</TABLE>
DIANE E. AMBLER
MAYER, BROWN & PLATT
2000 PENNSYLVANIA AVENUE, N.W.
WASHINGTON, D.C. 20006
It is proposed that this filing will become effective (check appropriate
box):
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<S> <C>
X immediately upon filing pursuant to paragraph (b). on (date) pursuant to paragraph (a)(1) of Rule 485.
- --- ---
on (date) pursuant to paragraph (b). 75 days after filing pursuant to paragraph (a)(2).
- --- ---
60 days after filing pursuant to paragraph (a)(1). on (date) pursuant to paragraph (a)(2) of Rule 485.
- --- ---
</TABLE>
If appropriate, check the following box:
this post-effective amendment designates a new effective
- ---
date for a previously filed post-effective amendment
Title of Securities being Registered.............................. Common Stock
<PAGE>
CROSS REFERENCE TABLE
Pursuant to Rule 495
Showing Location in Part A (Prospectus),
Part B (Statement of Additional Information), and
Part C (Other Information) of Registration Statement
Information Required by Form N-1A
<TABLE>
<CAPTION>
PART A
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<S> <C> <C>
Item of Form N-1A Prospectus Caption
----------------- ------------------
1. Cover Page Cover Page
2. Synopsis Description of SC-REMFs and SC-US
3. Condensed Financial Information Financial Highlights
4. General Description of Registrant Description of SC-REMFs and SC-US
5. Management of SC-US Management of SC-US
5A. Management's Discussion of Fund Performance Performance Information
6. Capital Stock and Other Securities Organization and Description of Capital Stock
7. Purchase of Securities Being Offered Purchase of Shares
8. Redemption or Repurchase Redemption of Shares
9. Pending Legal Proceedings Not Applicable
<CAPTION>
PART B
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<S> <C> <C>
Statement of Additional
Item of Form N-1A Information Caption
----------------- -----------------------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Organization and Description of Capital Stock
13. Investment Objectives and Policies Investment Objectives and Policies
14. Management of SC-REMFs Management of SC-REMFs
15. Control Persons and Principal Holders Organization and Description of Capital Stock
of Securities
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Statement of Additional
Item of Form N-1A Information Caption
- ----------------- -------------------
16. Investment Advisory and Other Services Management of SC-REMFs; Portfolio
Transactions and Brokerage
17. Brokerage Allocation and Other Practices Management of SC-REMFs; Portfolio
Transactions and Brokerage
18. Capital Stock and Other Securities Organization and Description of Capital Stock
19. Purchase, Redemption and Pricing of Distribution Plans; Determination of Net Asset
Securities Being Offered Value; Redemption of Shares
20. Tax Status Taxation
21. Underwriters Distributor
22. Calculation of Performance Data Performance Information
23. Financial Statements Financial Statement
<CAPTION>
PART C
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<S> <C> <C>
Item of Form N-1A Part C Caption
----------------- --------------
24. Financial Statements and Exhibits Financial Statements and Exhibits
25. Persons Controlled by or Under Persons Controlled by or Under Common
Common Control With Registrant Control with Registrant
26. Number of Holders of Securities Number of Holders of Securities
27. Indemnification Indemnification
28. Business and Other Connections of Business and Other Connections of
Investment Adviser Investment Adviser
29. Principal Underwriters Principal Underwriter
30. Location of Accounts and Records Location of Accounts and Records
31. Management Services Management Services
32. Undertakings Undertakings
33. Signatures Signatures
</TABLE>
<PAGE>
CLASS I PROSPECTUS
- ------------------
LOGO
11 SOUTH LASALLE STREET
CHICAGO, ILLINOIS 60603
Security Capital U.S. Real Estate Shares ("SC-US") is an investment
portfolio of Security Capital Real Estate Mutual Funds Incorporated ("SC-
REMFs"), an open-end management investment company organized under Maryland law.
SC-US 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-US's objective is to
achieve top-quartile total returns as compared with other mutual funds that
invest primarily in real estate securities in the United States, by integrating
in-depth proprietary real estate market research with sophisticated capital
markets research and modeling techniques. Security Capital Global Capital
Management Group Incorporated ("GCMG") serves as both investment adviser and
administrator to SC-US.
By this Prospectus, Class I shares of SC-US are being offered. Class I
shares are sold at net asset value without a sales charge to investors whose
minimum initial investment is $250,000. Class I shares are offered directly
through SC-REMFs, Security Capital Markets Group Incorporated, SC-US's
distributor ("Distributor"), and various financial intermediaries. SC-US also
offers Class R shares to investors whose minimum initial investment is $2,500.
Class R shares have different expenses than Class I shares which would affect
performance. Investors desiring to obtain information about SC-US's Class R
shares should call toll free 1-888-SECURITY or ask their sales representatives
or the Distributor. This Prospectus provides you with information specific to
the Class I shares of SC-US. It contains information you should know before you
invest in SC-US.
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
This Prospectus sets forth concisely the information a prospective investor
should know before investing in SC-US. SC-REMFs offers other investment
portfolios which are described in the prospectuses for Security Capital European
Real Estate Shares, Security Capital Asia/Pacific Real Estate Shares and
Security Capital Real Estate Arbitrage Shares. A Statement of Additional
Information dated June 30, 1998, containing additional and more detailed
information about SC-US has been filed with the Securities and Exchange
Commission (the "SEC") and is hereby incorporated by reference into this
Prospectus. It is available without charge and can be obtained by calling toll
free 1-888-SECURITY.
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 NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
August 19, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
Expenses.................................................................. 2
Financial Highlights...................................................... 4
Description of SC-US...................................................... 5
Investment Objective and Policies......................................... 5
Investment Strategy....................................................... 6
Risk Factors.............................................................. 8
Non-Diversified Status and Portfolio Turnover............................. 9
Directors, Officers and Other Personnel................................... 9
Investment Advisory Agreement............................................. 12
Administrator and Sub-Administrator....................................... 13
Distribution and Servicing Plan........................................... 13
Determination of Net Asset Value.......................................... 14
Purchase of Shares........................................................ 16
Redemption of Shares...................................................... 18
Dividends and Distributions............................................... 20
Taxation.................................................................. 20
Organization and Description of Capital Stock............................. 21
Custodian and Transfer Agent.............................................. 22
Reports to Shareholders................................................... 23
Performance Information................................................... 23
Year 2000 Risks........................................................... 23
Additional Information.................................................... 23
</TABLE>
<PAGE>
EXPENSES
SHAREHOLDER TRANSACTION EXPENSES
Shareholder transaction expenses are direct charges which are incurred
when shareholders buy or sell shares of SC-US.
ANNUAL FUND OPERATING EXPENSES
The Class I shares of SC-US pay for certain expenses attributable to
Class I shares directly out of SC-US's Class I assets. These expenses are
related to management of SC-US, administration and other services. For example,
SC-US pays an advisory fee and an administrative fee to GCMG. SC-US 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-US's Class I assets to
calculate SC-US's Class I 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-US and the portion of SC-US's operating
expenses that they might expect to bear indirectly.
FEE TABLE (1)
Shareholder Transaction Expenses:
Maximum sales charge on purchases and reinvested distributions......... None
Redemption fee (2)..................................................... None
Annual Fund Operating Expenses (after expense waivers and/or
reimbursements, as a percentage of average net assets):
Management fees........................................................ .60%
12b-1 fees (3)......................................................... .25%
Other expenses (4)..................................................... .15%
----
Total fund operating expenses (5)...................................... 1.00%
_____________
(1) SC-US's net investment income and net expenses for the period January 1,
1997 through December 16, 1997 were allocated to each class of shares based
upon the relative outstanding shares of each class as of the close of
business on December 16, 1997, and the results thereof were combined with
the results of operations for each applicable class for the period December
17, 1997 through December 31, 1997.
(2) SC-US's transfer agent charges a service fee of $12.00 for each wire
redemption through August 15, 1998. Thereafter this fee will no longer be
charged. The purchase or redemption of shares through a securities dealer
that has not entered into a sales agreement with the Distributor may be
subject to a transaction fee.
(3) SC-REMFs has adopted a Distribution and Service Plan for SC-US Class I
shares pursuant to Rule 12b-1 of the Investment Company Act of 1940, as
amended, pursuant to which SC-US pays the Distributor a fee for
distribution-related services and services related to the maintenance of
shareholder accounts at the annual rate of 0.25% of SC-US's Class I average
daily net assets. As a result, long-term Class I shareholders of SC-US may
pay more than the economic equivalent of the maximum front-end sales load
permitted by the National Association of Securities Dealers, Inc. ("NASD").
(4) Other Expenses are based upon the operating experience of SC-US since April
23, 1997, the effective date of its registration statement under the
Securities Act of 1933, as amended.
(5) From April 23, 1997 through December 16, 1997, GCMG committed to waive fees
and/or reimburse expenses to maintain SC-US's operating expenses, other than
brokerage fees and commissions, taxes, interest and other extraordinary
expenses at no more than 1.20% of SC-US's average daily net assets. Since
December 17, 1997 and for the year ending December 31, 1998, GCMG has
committed to waive fees and/or reimburse other expenses to maintain SC-US's
Class I total fund operating expenses, other than brokerage fees and
2
<PAGE>
commissions, taxes, interest and other extraordinary expenses, at no more
than 1.00% of the value of SC-US's Class I average daily net assets.
Without such waiver and/or reimbursement, SC-US's other expenses would have
been .34% of SC-US's Class I average daily net assets from April 23, 1997 to
December 16, 1997 and .32% of SC-US's Class I average daily net assets from
December 17, 1997 to December 31, 1997. Similarly, total fund operating
expenses would have been 1.19% of SC-US's Class I average daily net assets
from April 23, 1997 to December 16, 1997 and 1.17% of SC-US's Class I
average daily net assets from December 17, 1997 to December 31, 1997.
Expenses reflected in the Fee Table are expressed as a percentage of SC-US's
average daily net assets for the year ending December 31, 1997 and have been
restated to reflect current fees.
EXAMPLE
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<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <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............................................. $10 $32 $55 $122
</TABLE>
THE ACTUAL EXPENSES IN FUTURE YEARS MAY BE MORE OR LESS THAN THE NUMBERS IN
THE EXAMPLE, DEPENDING ON A NUMBER OF FACTORS, INCLUDING THE ACTUAL VALUE OF SC-
US'S ASSETS.
3
<PAGE>
SECURITY CAPITAL U.S. REAL ESTATE SHARES
The following audited financial highlights should be read in conjunction with
the financial information and notes thereto which appear in the Statement of
Additional Information.
SECURITY CAPITAL U.S. REAL ESTATE SHARES INCORPORATED - CLASS I SHARES /(1)/
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
April 23, 1997 /(2)/
through
Per Share Data: December 31, 1997
-----------------
<S> <C>
Net asset value, beginning of period $ 10.15
------------
Income from investment operations:
Net investment income 0.31
Net realized and unrealized gain
on investments 2.49
------------
Total from investment operations 2.80
------------
Less distributions:
Dividends from net investment income (0.31)
Dividends in excess of net investment income (0.15)
Distributions from net realized gains (0.54)
------------
Total distributions (1.00)
------------
Net asset value, end of period $ 11.95
Total return /(3)/ 29.92%
Supplemental data and ratios:
Net assets, end of period $116,560,328
Ratio of expenses to average net assets /(4)/(5)/ 1.15%
Ratio of net investment income to average net assets /(4)/(5)/ 4.08%
Portfolio turnover rate /(6)/ 82.10%
Average commission rate paid per share /(6)/ $ 0.0595
</TABLE>
(1) On December 16, 1997, the shares held by SC-US's existing shareholders were
split into Class R and Class I shares based on the amount then invested in
SC-US. For the year ended December 31, 1997, the Financial Highlights
ratios of net expenses to average net assets, ratios of net investment
income to average net assets and the per share income from investment
operations are presented on a basis whereby SC-US's net investment income
and net expenses for the period January 1, 1997 through December 16, 1997,
were allocated to each class of shares based upon the relative outstanding
shares of each class as of the close of business on December 16, 1997, and
the results thereof were combined with the results of operations for each
applicable class for the period December 17, 1997 through December 31,
1997.
(2) Date SC-US was effective with the SEC.
(3) Not annualized for the period April 23, 1997 through December 31, 1997.
(4) Annualized for the period April 23, 1997 through December 31, 1997.
(5) Without expense reimbursements of $30,276 for the period April 23, 1997
through December 31, 1997, $22,063 of which represents the amortization of
organizational expenses attributable to Class I shares, the ratio of
expenses to average net assets would have been 1.19% and the ratio of net
investment income to average net assets would have been 4.04%.
(6) Portfolio turnover and average commissions rate paid are calculated on the
basis of SC-US as a whole without distinguishing between the classes of
shares issued.
4
<PAGE>
DESCRIPTION OF SC-US
SC-US is a non-diversified investment portfolio of Security Capital Real
Estate Mutual Funds Incorporated ("SC-REMFs"), an open-end management investment
company organized under Maryland law. SC-REMFs is comprised of four investment
portfolios, SC-US, Security Capital European Real Estate Shares ("SC-EURO"),
Security Capital Asia/Pacific Real Estate Shares ("SC-ASIA") and Security
Capital Real Estate Arbitrage Shares ("SC-ARBITRAGE").
SC-US issues two classes of shares, one of which, Class I shares, includes
investors whose minimum initial investment is $250,000. The second class of
shares, Class R shares, which are offered to all other eligible investors,
offers different services and incurs different expenses than Class I shares,
which would affect performance. See "Purchase of Shares" and "Organization and
Description of Capital Stock." SC-US Class I shares are offered by this
prospectus.
INVESTMENT OBJECTIVE AND POLICIES
SC-US'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-US's objective is to achieve top-quartile total returns as compared with
other mutual funds that invest primarily in real estate securities in the United
States, by integrating in-depth proprietary real estate market research with
sophisticated capital markets research and modeling techniques. SC-US's
investment objective is "fundamental" and cannot be changed without approval of
a majority of its outstanding voting securities. None of SC-US's policies, other
than its investment objective and the investment restrictions described in the
Statement of Additional Information, are fundamental and thus may be changed by
SC-US's Board of Directors without shareholder approval. There can be no
assurance that SC-US's investment objective will be achieved.
REAL ESTATE SECURITIES
Under normal circumstances, SC-US will invest at least 80% of its assets in
real estate securities, including real estate investment trusts ("REITs") and
other publicly-traded real estate securities. 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 GCMG's view, a significant element of the securities' value, and
(iv) preferred stocks. For purposes of SC-US'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.
REAL ESTATE INVESTMENT TRUSTS
SC-US 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.
5
<PAGE>
ILLIQUID SECURITIES
SC-US will not invest more than 10% of its net assets in illiquid
securities, determined at the time of investment. 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. GCMG will monitor the liquidity of such restricted securities under the
supervision of SC-REMFs' Board of Directors. If SC-US invests in securities
issued by a real estate company that is controlled by Security Capital Group
Incorporated or any of its affiliates, such securities will be treated as
illiquid securities. See the Statement of Additional Information for further
discussion of illiquid securities.
DEBT SECURITIES AND MONEY MARKET INSTRUMENTS
SC-US may invest in debt securities from time to time, if GCMG believes
investing in such securities might help achieve SC-US's objective. SC-US may
invest in debt securities to the extent consistent with its investment policies,
although GCMG expects that under normal circumstances SC-US is not likely to
invest a substantial portion of its assets in debt securities.
SC-US will invest only in securities rated "investment grade" or considered
by GCMG to be of comparable quality. Investment grade securities are rated Baa
or higher by Moody's Investors Service, Inc. or BBB or higher by Standard &
Poor's. Descriptions of the securities ratings assigned by Moody's and Standard
& Poor's are described in Appendix A to the Statement of Additional Information.
When, in the judgment of GCMG, market or general economic conditions
justify a temporary defensive position, SC-US may invest 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-US may also at any time use 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.
SHORT SALES
SC-US 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-US incurs
an obligation to replace the security borrowed at whatever its price may be at
the time that SC-US 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-US 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-US will not engage in short sales if
immediately following such transaction the aggregate market value of all
securities sold short would exceed 10% of SC-US's net assets (taken at market
value). See the Statement of Additional Information for further discussion of
short sales.
INVESTMENT STRATEGY
SC-US intends to continue to follow its disciplined, research driven
investment strategy, to identify those publicly traded real estate companies
which have the potential to deliver above average cash flow growth. This
investment strategy has been deployed by SC-US since December 20, 1996, its
inception date. Through December 31, 1997, the average annual total return for
Class I shares was 28.84%, after deducting fees and expenses and allocating net
investment income and net expenses to Class I and Class R shares as described in
SC-US's audited financial statements which appear in the Statement of Additional
Information. Past performance is not necessarily indicative of future results.
FOR CURRENT RETURN INFORMATION RELATED TO SC-US, CONTACT SC-US AT TOLL FREE 1-
888-SECURITY.
SC-US's investment strategy is also similar to that of Security Capital
U.S. Realty Special Opportunity Investments Portfolio ("USREALTY Special
Opportunity"). USREALTY Special Opportunity is a private investment portfolio
with
6
<PAGE>
assets of $344.6 million (at fair market value, as of December 31, 1997) that
invests primarily in publicly traded real estate securities in the United
States. USREALTY Special Opportunity is advised by Security Capital (EU)
Management S.A. GCMG, 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. real estate securities relying on the same
research and analytical tools and models that GCMG will rely on in making
investments on behalf of SC-US. From December 31, 1995 through December 31,
1997, USREALTY Special Opportunity achieved an average annual total return of
approximately 42.61%, 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-US can achieve results similar to those achieved by
USREALTY Special Opportunity.
REAL ESTATE INDUSTRY OVERVIEW
GCMG believes that the U.S. real estate industry has experienced a
fundamental transformation in the last six and one-half 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 $8.8 billion at December 31, 1990 to $213.9
billion at December 31, 1997, in part, due to $117.1 billion of public offerings
conducted during that period. The 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.
GCMG 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-US intends to benefit from this restructuring by investing
in equity REITs that GCMG believes could produce above-average returns.
In addition to providing greater liquidity than direct real estate
investments, REITs have also generally out-performed direct real estate
investments for each of the past one-, five-, ten- and fifteen-year periods
ended December 31, 1997. The following chart reflects the performance of U.S.
REITs compared to SC-US, USREALTY Special Opportunity, an index of direct U.S.
real estate investments (NCREIF) and other indices.
REITS VS. OTHER INVESTMENTS
(AVERAGE ANNUAL TOTAL RETURN)
<TABLE>
<CAPTION>
USREALTY(1) NAREIT(2) NCREIF(3)
THROUGH DECEMBER 31, 1997 SC-US SC-US ----------- -------- -------- S&P 500 BONDS(4)
- ------------------------- ------ ----- SPECIAL EQUITY INDEX ------- -------
CLASS I CLASS R OPPORTUNITY INDEX -----
------- ------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
1 year 25.20% 25.19% 25.18% 20.26% 13.71% 33.35% 9.78%
5 years 18.28% 7.77% 20.23% 7.63%
15 years 14.99% 6.74% 17.49% 10.19%
20 years 16.02% 7.94% 16.63% 9.76%
</TABLE>
- --------------
(1) Described under "Investment Strategy."
(2) The National Association of Real Estate Investment Trusts ("NAREIT") equity
index data is based upon the last closing price of the month for all tax-
qualified REITs listed on the New York Stock Exchange, American Stock
Exchange and the NASDAQ National Market System. The data is market-
weighted.
(3) The National Counsel of Real Estate Investment Fiduciaries Property Index
total return includes appreciation (or depreciation), realized capital gain
(or loss) and income. It is computed by adding income and capital
appreciation return on a quarterly basis.
(4) Merrill Lynch Government/Corporate Bond Index (Master).
7
<PAGE>
THE INVESTMENT RESULTS FOR SC-US, USREALTY SPECIAL OPPORTUNITY AND THE
INDICES SHOWN IN THE TABLE REFLECT PAST PERFORMANCE AND ARE NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS OR THE RETURNS THAT SHAREHOLDERS SHOULD EXPECT TO
RECEIVE FROM SC-US.
The results shown represent SC-US's "total return" which assumes the
reinvestment of all capital gains and income dividends. Results presented for
the S&P 500 and the NAREIT equity index also assume the reinvestment of
dividends; however, the indices are not managed and incur no operating expenses.
This information is provided to facilitate a better understanding of SC-US and
does not provide a basis for comparison with other investments which calculate
performance differently.
A RESEARCH-DRIVEN PHILOSOPHY AND APPROACH
SC-US seeks to achieve top-quartile returns by investing primarily in
equity real estate securities which have the potential to deliver above-average
growth. GCMG 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-US 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 Incorporated affiliate company network and
assists GCMG in identifying attractive growth markets and property sectors prior
to making investment decisions. Specifically, SC-US endeavors to identify
markets reaching a "marginal turning point." The market research conducted by
SC-US 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-US 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. GCMG
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 GCMG 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-US will not invest in real estate directly, but only in securities
issued by real estate companies. However, SC-US may be subject to risks similar
to those associated with the direct ownership of real estate (in 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
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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
defaults by borrowers or customers and self-liquidation. REITs also generate
expenses that are separate and apart from those charged by SC-US and therefore,
shareholders will indirectly pay the fees charged by the REITs in which SC-US
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 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 AND PORTFOLIO TURNOVER
SC-US operates as a "non-diversified" investment company under the 1940
Act, which means SC-US 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-US
intends to conduct its operations so as to qualify as a "regulated investment
company" for purposes of the Code, which generally will relieve SC-US 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-US 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-US'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-US will not own more than 10% of the
outstanding voting securities of a single issuer. SC-US's investments in
securities issued by the U.S. Government, its agencies and instrumentalities are
not subject to these limitations. Because SC-US, as a non-diversified investment
company, may invest in a smaller number of individual issuers than a diversified
investment company, an investment in SC-US may present greater risk to an
investor than an investment in a diversified company.
SC-US anticipates that its annual portfolio turnover rate will not exceed
150%, but the turnover rate will not be a limiting factor when GCMG 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-US 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-US. High
portfolio turnover may result in the realization of net short-term capital gains
by SC-US which, when distributed to shareholders, will be taxable as ordinary
income. See "Taxation."
DIRECTORS, OFFICERS AND OTHER PERSONNEL
The overall management of the business and affairs of SC-US is vested with
the Board of Directors of SC-REMFs. The Board of Directors approves all
significant agreements between SC-REMFs and persons or companies furnishing
services to SC-US, including SC-REMFs' agreements with GCMG, or with SC-US's
administrator, its custodian and its transfer agent. The management of SC-US's
day-to-day operations is delegated to the officers of SC-REMFs, who include the
Managing Directors, GCMG and the administrator, subject always to the investment
objective and policies of SC-US and to general supervision by the Board of
Directors. Although SC-REMFs 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-REMFs' Articles of Incorporation. The Directors and
officers of SC-REMFs and certain key members of the SC-US Portfolio Management
Committee and their principal occupations are set forth below.
Anthony R. Manno Jr. Chairman of the Board of Directors, Managing
Director and President of SC-REMFs. Managing
Director and President of GCMG since January 1995,
where he is responsible for overseeing all
investment and capital allocation matters for
GCMG's public market securities activities and is
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also responsible for company and industry
analysis, market strategy and trading and
reporting. Mr. Manno was a member of the
Investment Committee of Security Capital Group
Incorporated from March 1994 to June 1996. Prior
to joining Security Capital, Mr. Manno was a
Managing Director of LaSalle Partners Limited from
March 1980 to March 1994. Mr. Manno received his
M.B.A. from the University of Chicago Graduate
School of Business, an M.A. and a B.A. from
Northwestern University and is a Certified Public
Accountant.
Robert H. Abrams Director of SC-REMFs. Director of the Program in
Real Estate at Cornell University. Founder of
Colliers ABR, Inc. (formerly Abrams Benisch Riker
Inc.), a property management firm. Mr. Abrams was
Principal of Colliers ABR, Inc. from 1978 to 1992
and since 1992, has served as a Consultant. From
1959 to 1978 Mr. Abrams was Executive Vice
President and Director of Cross and Brown Company.
Mr. Abrams also serves as Trustee Emeritus and
Presidential Counselor of his alma mater, Cornell
University. Mr. Abrams received his M.B.A. from
Harvard University and his B.A. from Cornell
University.
Stephen F. Kasbeer Director of SC-REMFs. Retired; Senior Vice
President for Administration and Treasurer of
Loyola University, Chicago from 1981 to July 1994,
where he was responsible for administration,
investment, real estate and treasurer functions.
At Loyola University, he also 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. Currently, Mr. Kasbeer serves
as a Director of Endowment Realty, Inc. and
Endowment Realty II and as a Member of the
Investment Committee of the University of San
Diego. Mr. Kasbeer also serves as Trustee,
Treasurer and Chairman of the Investment and
Finance Committees of Santa Fe Preparatory School
and as Trustee and Chairman of the Santa Fe
Preparatory School Combined Permanent Endowment
Fund Trust. Mr. Kasbeer received his J.D. from
John Marshall Law School and his M.A. and B.S.
from Northwestern University.
George F. Keane Director of SC-REMFs. Chairman of the Board of
Trigen Energy Corporation since 1994. As founding
chief executive of The Common Fund in 1971 and
Endowment Realty Investors in 1988, Mr. Keane for
many years headed an investment management service
for colleges, universities and independent schools
that managed $15 billion for 1,200 educational
institutions when he became President Emeritus of
the Common Fund in 1993. He has served as a member
of the Investment Advisory Committee of the $95
billion New York State Common Retirement Fund
since 1982. He has been a Director of the Northern
Trust of Connecticut since 1991, a Trustee of the
Nicholas Applegate Investment Trust since 1993,
and a Director of the Bramwell Funds since 1994.
He is also a Director of Universal Stainless &
Alloy Products, Global Pharmaceutical Corporation,
United Water Resources and United Properties
Group, and the Universal Bond Fund, and is an
advisor to Associated Energy Managers. Mr. Keane
also serves as a Trustee of his alma mater,
Fairfield University where he received his B.A.,
and as a Director and Chairman of the Investment
Committee of the United Negro College Fund. Mr.
Keane also holds honorary degrees from Loyola
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University, Chicago, Illinois and Lawrence
University, Appleton, Wisconsin.
John H. Gardner, Jr. Director and Managing Director of SC-REMFs.
Managing Director of GCMG Management since July,
1997. Prior thereto, Director of the REIT Manager
for Security Capital Pacific Trust ("PTR") from
February 1995 to June 1997 and Senior Vice
President of Security Capital Atlantic
Incorporated ("ATLANTIC"), PTR and the PTR REIT
Manager from September 1994 to June 1997 where he
had overall responsibility for asset management
and multifamily dispositions. Prior to joining
Security Capital, Mr. Gardner was with Copley Real
Estate Advisors as a Managing Director and
Principal responsible for portfolio management
from January 1991 to September 1994 and as a Vice
President and Principal of asset management from
December 1984 to December 1990. From July 1977 to
November 1984, Mr. Gardner was a Real Estate
Manager with the John Hancock Companies. Mr.
Gardner received his M.S. from Bentley College and
his B.S. from Stonehill College.
Kenneth D. Statz Managing Director of SC-REMFs. Managing Director
of GCMG since November 1997 where he is
responsible for the development and implementation
of portfolio investment strategy. Prior thereto,
Senior Vice President of GCMG from July 1996 to
October 1997 and Vice President from May 1995 to
June 1996. Prior to joining Security Capital, Mr.
Statz was a Vice President and Senior REIT Analyst
in the investment research department of Goldman,
Sachs & Co., from February 1993 to January 1995,
concentrating on research and underwriting for the
REIT industry. Prior thereto, Mr. Statz was a real
estate stock portfolio manager and a managing
director of Chancellor Capital Management from
August 1982 to February 1992. Mr. Statz received
his M.B.A. and B.B.A. from the University of
Wisconsin, Madison.
Kevin W. Bedell Senior Vice President of SC-REMFs. Senior Vice
President of GCMG since November 1997 and Vice
President since July 1996, where he is responsible
for directing the activities of the
industry/company securities research group and
providing in-depth proprietary research on
publicly traded companies. Prior to joining GCMG,
Mr. Bedell spent nine years with LaSalle Partners
Limited where he was Equity Vice President and
Portfolio Manager responsible for the strategic,
operational and financial management of a private
REIT with commercial real estate investments of
$800 million. Mr. Bedell received his M.B.A. from
the University of Chicago and his B.A. from Kenyon
College.
Albert D. Adriani Member SC-US Portfolio Management Committee; Vice
President of GCMG since April 1996, where he is
responsible for providing portfolio management
analysis. From January 1995 to April 1996, he was
Vice President, Security Capital (UK) Management
Limited and Security Capital U.S. Realty
Incorporated; from March 1994 to January 1995, he
was with Security Capital Markets Group. Prior
thereto, he was an investment analyst with HAL
Investments BV from July 1992 to January 1994. 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. Mr. Adriani is a
Chartered Financial Analyst.
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Jeffrey C. Nellessen Vice President, Treasurer and Assistant Secretary
of SC-REMFs. Vice President and Controller of GCMG
since March 1997. Prior thereto, from June 1988 to
March 1997, he was Controller, Manager of Client
Administration and Compliance Officer at Strong
Capital Management, Inc. Mr. Nellessen is a
Certified Public Accountant, Certified Management
Accountant and a Certified Financial Planner. He
received his B.B.A. from the University of
Wisconsin, Madison.
David T. Novick Vice President and Secretary of SC-REMFs. Vice
President of Security Capital Group Incorporated
since June 1998. Prior thereto, from September
1989 to June 1998, he was an attorney, and most
recently a Partner, with the law firm of Katten
Muchin and Zavis. Mr. Novick received his B.S.B.A.
from Boston University and his J.D. from the
University of Illinois.
GCMG
Security Capital Global Capital Management Group Incorporated ("GCMG"),
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-US under the overall supervision and
control of the Directors of SC-REMFs.
GCMG commenced operations in January 1995, and is registered as an
investment adviser with the SEC. GCMG's principal officers include Anthony R.
Manno Jr., Managing Director and President, John H. Gardner, Jr., Managing
Director, Kenneth D. Statz, Managing Director, and Kevin W. Bedell, Senior
Vice President. GCMG is an indirect wholly-owned subsidiary of Security Capital
Group Incorporated, a real estate research, investment and management company.
The SC-US Portfolio Management Committee, which is comprised of certain SC-
REMFs officers and GCMG analysts, is primarily responsible for the day-to-day
management of SC-US's portfolio.
INVESTMENT ADVISORY AGREEMENT
Pursuant to an investment advisory agreement (the "Advisory Agreement"),
GCMG furnishes a continuous investment program for SC-US's portfolio, makes the
day-to-day investment decisions for SC-US, and generally manages SC-US's
investments in accordance with the stated policies of SC-US, subject to the
general supervision of SC-REMFs' Board of Directors. GCMG also selects brokers
and dealers to execute purchase and sale orders for the portfolio transactions
of SC-US. GCMG provides persons satisfactory to the Directors of SC-REMFs to
serve as officers of SC-REMFs. Such officers, as well as certain other
employees and Directors of SC-REMFs, may be directors, officers, or employees of
GCMG.
Under the Advisory Agreement, SC-US Class I shares pay GCMG, monthly, an
annual management fee equal to .60% of SC-US's Class I average daily net asset
value. SC-US Management also has committed to waive fees and/or reimburse
expenses to maintain SC-US's Class I shares' total operating expenses, other
than brokerage fees and commissions, taxes, interest and other extraordinary
expenses at no more than 1.00% of the value of SC-US's Class I average daily net
assets for the year ending December 31, 1998.
In addition to the payments to GCMG under the Advisory Agreement described
above, SC-US Class I shares pay certain other costs of operations including (a)
administration, custodian and transfer agency fees, (b) fees of Directors who
are not affiliated with GCMG, (c) legal and auditing expenses, (d) costs of
printing and postage fees related to preparing and distributing SC-US's
prospectus and shareholder reports, (e) costs of maintaining SC-REMFs'
existence, (f) interest charges, taxes, brokerage fees and commissions, (g)
costs of stationery and supplies, (h) expenses and fees related to registration
and filing with federal and state regulatory authorities, and (i) upon the
approval of SC-REMFs'
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Board of Directors, costs of personnel of GCMG or its affiliates rendering
clerical, accounting and other office services. Each class of SC-US shares pays
for the portion SC-US's expenses attributable to its operations. Income,
realized gains and losses, unrealized appreciation and depreciation and certain
expenses not allocated to a particular class are allocated to each class based
on the net assets of that class in relation to the net assets of SC-REMFs.
ADMINISTRATOR AND SUB-ADMINISTRATOR
GCMG has also entered into a fund accounting and administration agreement
with SC-REMFs (the "Administration Agreement") under which GCMG performs certain
administrative functions for SC-US, including (i) providing office space,
telephone, office equipment and supplies for SC-REMFs; (ii) paying compensation
of SC-REMFs' officers for services rendered as such; (iii) authorizing
expenditures and approving bills for payment on behalf of SC-US; (iv)
supervising preparation of the periodic updating of SC-US's Prospectus and
Statement of Additional Information; (v) supervising preparation of semi-annual
reports to SC-US'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-US's investment portfolio and the publication of the net asset value of
SC-US's shares, earnings reports and other financial data; (vii) monitoring
relationships with organizations providing services to SC-US, including the
custodian ("Custodian"), transfer agent ("Transfer Agent") and printers; (viii)
providing trading desk facilities for SC-US; (ix) maintaining books and records
for SC-US (other than those maintained by the Custodian and Transfer Agent) and
preparing and filing of tax reports other than SC-US'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-REMFs' Board of Directors, GCMG caused SC-REMFs to retain State
Street Bank and Trust Company as sub-administrator ("Sub-Administrator") under a
sub-administration agreement ("Sub-Administration Agreement") to provide
services to SC-US.
Under the Sub-Administration Agreement, the Sub-Administrator has assumed
responsibility for performing certain of the foregoing administrative functions,
including overseeing the determination and publication of SC-US's net asset
value, maintaining certain of SC-US's books and records that are not maintained
by GCMG, or the Custodian or Transfer Agent, preparing financial information for
SC-US's income tax returns, proxy statements, semi-annual and annual
shareholders reports, and SEC filings, and responding to certain shareholder
inquiries. Under the terms of the Sub-Administration Agreement, SC-REMFs pays
the Sub-Administrator a monthly administration fee at the annual rate of .08% of
the first $750 million, .06% of the next $250 million and .04% of SC-REMFs'
average daily net assets over $1 billion, subject to an average annual minimum
fee of $75,000 per investment portfolio. The Sub-Administrator also serves as
SC-US's Custodian and Transfer Agent. See "Custodian and Transfer Agent."
Under the Administration Agreement, GCMG remains responsible for monitoring
and overseeing the performance by the Sub-Administrator of its obligations to
SC-US under the Sub-Administration Agreement, subject to the overall authority
of SC-REMFs' Board of Directors. For its services under the Administration
Agreement, GCMG receives a monthly fee from SC-REMFs at the annual rate of .02%
of the value of SC-US's average daily net assets.
DISTRIBUTION AND SERVICING PLAN
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The Board of Directors of SC-REMFs and the Class I shareholders of SC-US
have adopted a Distribution and Servicing Plan ("Plan") with respect to SC-US's
Class I shares pursuant to Rule 12b-1 under the 1940 Act. Under the Plan, SC-US
pays the Distributor a monthly fee equal to, on an annual basis, .25% of the
value of SC-US's Class I average daily net assets.
The Distributor may use the fee for services performed and expenses
incurred by the Distributor in connection with the distribution of Class I
shares and for providing certain services to Class I shareholders. The
Distributor may pay third parties in respect of these services such amount as it
may determine. SC-US understands that these third parties may also charge fees
to their clients who are beneficial owners of SC-US Class I shares in connection
with their client accounts. These fees would be in addition to any amounts
which may be received by them from the Distributor under the Plan.
The Distributor may enter into agreements ("Agreements") with institutional
shareholders of record, broker-dealers, financial institutions, depository
institutions, and other financial intermediaries as well as various brokerage
firms or other industry recognized service providers of fund supermarkets or
similar programs to provide certain distribution, shareholder servicing,
administrative and/or accounting services for their clients who are beneficial
owners of SC-US Class I shares. Such Agreements may be governed by the Plan.
The Distributor, with offices located at 11 South LaSalle Street, Chicago,
Illinois 60603, is an affiliate of GCMG. See "Distribution Plan" in the
Statement of Additional Information for a listing of the types of expenses for
which the Distributor and third parties may be compensated under the Plan. If
the fee received by the Distributor exceeds its expenses, the Distributor may
realize a profit from these arrangements. The Plan is reviewed and is subject
to approval annually by the Board of Directors.
DETERMINATION OF NET ASSET VALUE
Net asset value per share of Class I shares of SC-US, $.01 par value per
share, is 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-
US'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-
US's portfolio and other assets represented by Class I shares, subtracting
liabilities, incurred or accrued allocable to Class I shares, and dividing by
the total number of Class I shares then outstanding.
For purposes of determining the net asset value per share of Class I
shares, 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 GCMG 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
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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.
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PURCHASE OF SHARES
Class I shares are being offered to investors whose minimum initial
investment is $250,000. SC-US Class I shares may be purchased through SC-US's
Transfer Agent and various financial intermediaries that have entered into a
sales agreement with the Distributor.
Orders for shares of SC-US will become effective at the net asset value per
share next determined after the receipt of payment. All funds will be invested
in full and fractional shares. A confirmation indicating the details of each
purchase transaction will be sent to you 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. Investors must specify
that Class I shares are being purchased.
If you choose 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 of SC-US 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.
By investing in SC-US, you appoint the Transfer Agent as your 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. PLEASE NOTE THAT IT IS MORE
COMPLICATED TO REDEEM SHARES HELD IN CERTIFICATE FORM.
INITIAL INVESTMENT
The minimum initial investment is $250,000. Class I shares may be
purchased by check or money order drawn on a U.S. bank, savings and loan, or
credit union by wire transfer. The enclosed application must be completed and
accompanied by payment in U.S. funds to open an account. Checks must be payable
in U.S. dollars and will be accepted subject to collection at full face value.
Note that all applications to purchase shares are subject to acceptance by SC-US
and are not binding until so accepted. SC-US reserves the right to decline to
accept a purchase order application in whole or in part.
MAIL
The following instructions should be used when mailing a check or money
order payable to "Security Capital U.S. Real Estate Shares," via U.S. mail to
the Distributor, a securities dealer or the Transfer Agent:
VIA U.S. MAIL BY OVERNIGHT COURIER
Boston Financial Data Services Boston Financial Data Services
Attn: Security Capital Real Estate Attn: Security Capital Real Estate
Mutual Funds Incorporated Mutual Funds Incorporated
P.O. Box 8500 66 Brooks Drive
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Boston, Massachusetts 02266-8500 Braintree, Massachusetts 02184
SC-REMFs does not consider the U.S. Postal Service or other independent
delivery service 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-REMFs. Do
not mail letters by overnight courier to the post office box.
WIRE PURCHASES
Class I shares may be purchased by wire only through the Transfer Agent.
The following instructions should be used when wiring funds to the Transfer
Agent for the purchase of shares:
Wire to : State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02101
ABA Number 011000028
Credit: DDA Number 9905-378-7
Further Credit: Security Capital Real Estate Mutual Funds Incorporated
Shareholder Registration
Shareholder Fund and Account Number
PLEASE CALL TOLL FREE 1-800-409-4189 PRIOR TO WIRING ANY FUNDS IN ORDER TO
OBTAIN A CONFIRMATION NUMBER AND TO ENSURE PROMPT AND ACCURATE HANDLING OF
FUNDS. SC-US and its Transfer Agent are not responsible for the consequences of
delays resulting from the banking or Federal Reserve wire system or from
incomplete wiring instructions.
SUBSEQUENT INVESTMENTS
Additional investments must be at least $20,000 and may be made by mail,
wire or by telephone. When making an additional purchase by mail, a check
payable to "Security Capital U.S. Real Estate Shares" 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 toll free 1-800-409-4189 for complete wiring
instructions.
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You may purchase additional shares by moving money from your bank account
to your SC-US account by telephone. 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 give 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 three business days. TELEPHONE
TRANSACTIONS MAY NOT BE USED FOR INITIAL PURCHASES OF CLASS I SHARES.
SC-REMFs reserves the right to waive or modify minimum initial and
subsequent investment requirements in connection with purchases of Class I
shares of SC-US, including purchases for accounts established on behalf of the
following types of retirement plans: (i) plans qualified under Section 401(k) of
the Code; (ii) plans described in Section 403(b) of the Code; (iii) deferred
compensation plans described in Section 457 of the Code; (iv) simplified
employee pension (SEP) plans; and (v) salary reduction simplified employee
pension (SARSEP) plans.
EXCHANGE FEATURE
Class I shares of SC-US may be exchanged for Class I shares of SC-EURO, SC-
ASIA and SC-ARBITRAGE. Exchanges of Class I shares will be made at their
relative net asset values. Shares may be exchanged only if the amount being
exchanged satisfies the minimum investment required. However, you may not
exchange your investment in shares of SC-US, SC-EURO, SC-ASIA or SC-ARBITRAGE
more than four times in any twelve-month period (including the initial exchange
of your investment during that period). In addition, exchanges of SC-ARBITRAGE
Class I shares within one year of the date of purchase or exchange are subject
to a 2% redemption fee. See the Prospectus for SC-ARBITRAGE Class I shares and
the Statement of Additional Information for additional information about the
redemption fee.
REDEMPTION OF SHARES
You may request redemption of part or all of your Class I shares at any
time by telephone or by mail. The redemption of shares will be at the next
determined net asset value. See "Determination of Net Asset Value." SC-US
normally will mail the redemption proceeds to you on the next business day and,
in any event, no later than seven business days after the receipt of a
redemption request in good order. However, when a purchase has been made by
check, SC-US may hold payment on redemption proceeds until reasonably satisfied
that the check has cleared, which may take up to twelve days.
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-US
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 requests must be signed exactly as the shares are registered
including the signature of each joint owner. You must also specify the number
of shares or dollar amount to be redeemed. If the Class I 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 the
Transfer Agent together with a redemption request. The following instructions
should be used for the redemption of shares by mail, by wire and by telephone:
MAIL AND WIRE
For most redemption requests you need only furnish a written, unconditional
request to redeem your Class I shares (for a fixed dollar amount) at net asset
value to Security Capital U.S. Real Estate Shares:
18
<PAGE>
VIA U.S. MAIL BY OVERNIGHT COURIER
Boston Financial Data Services Boston Financial Data Services
Attn: Security Capital Real Estate Attn: Security Capital Real Estate
Mutual Fund Incorporated Mutual Fund Incorporated
P.O. Box 8500 66 Brooks Drive
Boston, Massachusetts 02266-8500 Braintree, Massachusetts 02184
Redemption proceeds made by written redemption request may also be wired to
a commercial bank that you have authorized on your account application.
Additional documentation may be requested from corporations, executors,
administrators, trustees, guardians, agents, or attorneys-in-fact. SC-REMFs
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 by SC-US. 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.
TELEPHONE
You may redeem shares by telephone by calling the Transfer Agent at toll
free 1-800-409-4189. In order to utilize this procedure, you must have
previously elected this option in writing, which election will be reflected in
the Transfer Agent's records and the redemption proceeds will be mailed directly
to you or transferred 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 that address, you
may call or submit a written request to the Transfer Agent. No telephone
redemptions will be allowed within 15 days of such a change. SC-US 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-US 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-US reserves the right to refuse a telephone redemption
request if so advised.
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-US or the 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.
19
<PAGE>
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-US may suspend the right of redemption during any period when (i)
trading on the NYSE is restricted or the NYSE 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-US 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-US on not less than 30
days' notice if, at the time of any redemption of Class I shares in his or her
account, the value of the remaining shares in the account falls below $250,000.
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.
A Class I shareholder who fails to satisfy minimum account balance
requirements may elect to convert Class I shares to Class R shares. Class I
shares will be converted to Class R shares at the next determined net asset
value for Class I shares and Class R shares after the receipt by the distributor
of a written conversion request. SC-US does not charge a fee to process
conversions. SC-US reserves the right to reject any conversion request in whole
or in part. The conversion feature may be modified or terminated at any time
upon notice to SC-US Class I shareholders.
DIVIDENDS AND DISTRIBUTIONS
Dividends from SC-US's investment income will be declared and distributed
quarterly. SC-US intends to distribute net realized capital gains, if any, at
least annually, although SC-US's Board of Directors may in the future determine
to retain realized capital gains and not distribute them to shareholders.
Dividends and distributions will automatically be reinvested into full and
fractional shares of SC-US based on the net asset value per share at the close
of business on the payable date unless the shareholder has elected to have
dividends or distributions paid in cash. SC-US will send shareholders a
statement reflecting each dividend and distribution. In addition, after the end
of each calendar year, SC-US will send shareholders a statement showing the
amount and tax characterization of all dividends and distributions paid during
the previous year. In accordance with the Taxpayer Relief Act of 1997, SC-US
will indicate which portion of a capital gain distribution will be taxed at a
maximum rate of 20% and which portion will be taxed at a maximum rate of 28%.
For information concerning the tax treatment of SC-US's distribution policies
for SC-US and its shareholders, see "Taxation."
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-US, including the status of distributions
under applicable state or local law.
FEDERAL INCOME TAXES
SC-US intends to qualify and elect to be taxed as a "regulated investment
company" under the Code. To the extent that SC-US distributes its taxable
income and net capital gain to its shareholders, qualification as a regulated
investment
20
<PAGE>
company relieves SC-US 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-US,
which does not include distributions received by SC-US from REITs. A
corporation's dividends-received deduction will be disallowed unless the
corporation holds shares in SC-US at least 46 days. Furthermore, the dividends-
received deduction will be disallowed to the extent a corporation's investment
in shares of SC-US is financed with indebtedness.
The excess of net long-term capital gains over the net short-term capital
losses realized and distributed by SC-US to its shareholders as capital gain
distributions is taxable to the shareholders as long-term capital gain,
irrespective of the length of time a shareholder may have held his or her stock.
Recent legislation reduced the maximum tax rate on capital gains to 20% for
assets held for more than 18 months on the date of the sale or exchange of those
assets. A notice issued by the Internal Revenue Service provides that a
regulated investment company such as SC-US may, but is not required to,
designate which portion of a capital gain distribution qualifies for the reduced
capital gain rate. Long-term capital gain distributions are not eligible for the
dividends-received deduction referred to above. Recently enacted legislation has
reduced the holding period required to qualify for the 20% maximum capital gains
rate from 18 months to 12 months.
Under current federal tax law, the amount of an ordinary income dividend or
capital gain distribution declared by SC-US 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-US
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 for 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 gain distribution with respect to shares of SC-US
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-US 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-US, or the Secretary of the Treasury notifies SC-US
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-US distributions also may be subject to state and local taxes.
Shareholders should consult their own tax advisers regarding the particular
state and local tax consequences of an investment in SC-US.
ORGANIZATION AND DESCRIPTION OF CAPITAL STOCK
21
<PAGE>
Security Capital Real Estate Mutual Funds Incorporated, formerly Security
Capital Employee REIT Fund Incorporated, was incorporated under Maryland law as
SCERF Incorporated ("SCERF"), a wholly-owned subsidiary of Security Capital
Group Incorporated, on December 20, 1996. On January 23, 1997, all the assets
and liabilities of SCERF were transferred to Security Capital Employee REIT Fund
Incorporated in a reorganization transaction. On December 16, 1997, its name
was changed to Security Capital U.S. Real Estate Shares Incorporated. On June
30, 1998, its name was changed to Security Capital Real Estate Mutual Funds
Incorporated.
SC-REMFs is authorized to issue 200,000,000 shares of stock, $.01 par value
per share. SC-REMFs' Board of Directors may, without shareholder approval,
increase or decrease the number of authorized but unissued shares of SC-REMF's
stock and reclassify and issue any unissued shares. The Board of Directors also
may create additional series of shares with different investment objectives,
policies or restrictions without shareholder approval. The Board of Directors
of SC-REMFs has authorized the creation of four investment portfolios, SC-US,
SC-EURO, SC-ASIA and SC-ARBITRAGE, three of which issue two classes of shares:
Class I shares and Class R shares. SC-ARBITRAGE issues Class I shares only.
Class I shares offer different services to shareholders and incur different
expenses than Class R shares. Each class pays its proportionate share of SC-
REMFs' expenses.
All classes of each series of SC-REMFs' shares have equal dividend,
distribution, liquidation and voting rights. There are no conversion or
preemptive rights in connection with any class of any series of SC-REMFs'
shares. All SC-REMFs shares, when duly issued, are fully paid and nonassessable.
The rights of the holders of SC-US's Class I shares may not be modified except
by the vote of a majority of the holders of all Class I shares outstanding. SC-
US's Class I shareholders have exclusive voting rights with respect to matters
relating solely to SC-US's Class I shares. SC-US's Class I shareholders vote
separately from SC-US's Class R shareholders, SC-ARBITRAGE's Class I
shareholders and SC-EURO's and SC-ASIA's Class I and Class R shareholders on
matters in which the interests of SC-US's Class I shareholders differ from the
interests of SC-US's Class R shareholders, SC-ARBITRAGE's Class I shareholders
and SC-EURO's and SC-ASIA's Class I and Class R shareholders.
SC-REMFs 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-REMFs entitled to vote at the meeting. SC-REMFs will assist shareholders
wishing to communicate with one another for the purpose of requesting such a
meeting.
As of July 31, 1998, SC REALTY Incorporated, a wholly-owned subsidiary of
Security Capital Group Incorporated, owned 92.97% of the issued and outstanding
shares of SC-US, 99.25% of the issued and outstanding shares of SC-EURO and
SC-ASIA and 99.97% of the issued and outstanding shares of SC-ARBITRAGE, which
means that SC REALTY Incorporated controls SC-US, SC-EURO, SC-ASIA and SC-
ARBITRAGE for purposes of the 1940 Act. In each case, SC REALTY owns Class I
shares only. The effect of SC REALTY Incorporated's ownership of a controlling
interest in SC-US, SC-EURO, SC-ASIA, SC-ARBITRAGE and, therefore, SC-REMFs, is
to dilute the voting power of other shareholders. SC REALTY Incorporated does
not anticipate that its initial control of SC-US, SC-EURO, SC-ASIA and SC-
ARBITRAGE will adversely effect the rights of future shareholders.
CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company, which has its principal address at 225
Franklin Street, Boston, Massachusetts 02101, has been retained to serve as SC-
US's Custodian and Transfer Agent. State Street Bank and Trust Company has no
part in deciding SC-US's investment policies or which securities are to be
purchased or sold for SC-US's portfolio.
22
<PAGE>
REPORTS TO SHAREHOLDERS
The fiscal year of SC-US ends on December 31 of each year. SC-US 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-US's independent
accountants, will be sent to shareholders each year. Please call toll free 1-
888-SECURITY for a copy of the most recent semi-annual report.
PERFORMANCE INFORMATION
From time to time, SC-US may advertise the "average annual total return" of
the Class I shares over various periods of time. This total return figure shows
the average percentage change in value of an investment in SC-US's Class I
shares 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-US's Class I
shares and assumes that any income, dividends and/or capital gains distributions
made by SC-US's Class I shares during the period are reinvested in Class I
shares of SC-US. 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-US'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-US's Class I annual total return for any one year
in the period might have been greater or less than the average for the entire
period. SC-US also may use "aggregate" total return figures for various periods,
representing the cumulative change in value of an investment in SC-US's Class I
shares for the specific period (again reflecting changes in SC-US's Class I
share price and assuming reinvestment of Class I 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-US's
performance.
YEAR 2000 RISKS
Like investment companies, financial and business organizations around the
world, SC-REMFs could be adversely affected if the computer systems used by the
SC-REMFs, other service providers and entities with computer systems that are
linked to SC-REMFs' records do not properly process and calculate date-related
information and data from and after January 1, 2000. This is commonly known as
the "Year 2000 Issue." SC-REMFs is taking steps that it believes are reasonably
designed to address the Year 2000 Issue with respect to the computer systems
that it uses and to obtain satisfactory assurances that comparable steps are
being taken by each of SC-REMFs major service providers. However, there can be
no assurance that these steps will be sufficient to avoid any adverse impact on
SC-REMFs, SC-US, SC-EURO, SC-ASIA and SC-ARBITRAGE.
ADDITIONAL INFORMATION
Any shareholder inquiries may be directed to SC-REMFs 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 of the information set forth in the
Registration Statement filed by SC-REMFs 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.
23
<PAGE>
CLASS R PROSPECTUS
- ------------------
LOGO
11 SOUTH LASALLE STREET
CHICAGO, ILLINOIS 60603
Security Capital U.S. Real Estate Shares ("SC-US") is an investment
portfolio of Security Capital Real Estate Mutual Funds ("SC-REMFs"), an open-end
management investment company organized under Maryland law. SC-US 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-US's objective is to achieve top-
quartile total returns as compared with other mutual funds that invest primarily
in real estate securities in the United States, by integrating in-depth
proprietary real estate market research with sophisticated capital markets
research and modeling techniques. Security Capital Global Capital Management
Group Incorporated ("GCMG") serves as both investment adviser and administrator
to SC-US.
By this Prospectus, Class R shares of SC-US are being offered. Class R
shares are sold at net asset value without a sales charge to investors whose
minimum initial investment is $2,500. Class R shares are offered directly
through SC-REMFs, Security Capital Markets Group Incorporated, SC-US's
distributor ("Distributor"), and various financial intermediaries. SC-US also
offers Class I shares to investors whose minimum initial investment is $250,000.
Class I shares have different expenses than Class R shares which would affect
performance. Investors desiring to obtain information about SC-US's Class I
shares should call toll free 1-888-SECURITY or ask their sales representatives
or the Distributor. This Prospectus provides you with information specific to
the Class R shares of SC-US. It contains information you should know before you
invest in SC-US.
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
This Prospectus sets forth concisely the information a prospective investor
should know before investing in SC-US. SC-REMFs offers other investment
portfolios which are described in the prospectuses for Security Capital European
Real Estate Shares, Security Capital Asia/Pacific Real Estate Shares and
Security Capital Real Estate Arbitrage Shares. A Statement of Additional
Information dated June 30, 1998, containing additional and more detailed
information about SC-US has been filed with the Securities and Exchange
Commission (the "SEC") and is hereby incorporated by reference into this
Prospectus. It is available without charge and can be obtained by calling toll
free 1-888-SECURITY.
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 NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
August 19, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Expenses................................................................ 2
Financial Highlights.................................................... 4
Description of SC-US.................................................... 5
Investment Objective and Policies....................................... 5
Investment Strategy..................................................... 6
Risk Factors............................................................ 8
Non-Diversified Status & Portfolio Turnover............................. 9
Directors, Officers and Other Personnel................................. 9
Investment Advisory Agreement........................................... 12
Administrator and Sub-Administrator..................................... 13
Distribution and Servicing Plan......................................... 14
Determination of Net Asset Value........................................ 14
Purchase of Shares...................................................... 15
Redemption of Shares.................................................... 18
Dividends and Distributions............................................. 20
Taxation................................................................ 20
Organization and Description of Capital Stock........................... 21
Custodian and Transfer Agent............................................ 22
Reports to Shareholders................................................. 22
Performance Information................................................. 22
Year 2000 Risks......................................................... 23
Additional Information.................................................. 23
</TABLE>
<PAGE>
EXPENSES
SHAREHOLDER TRANSACTION EXPENSES
Shareholder transaction expenses are direct charges which are incurred
when shareholders buy or sell shares of SC-US.
ANNUAL FUND OPERATING EXPENSES
The Class R shares of SC-US pay for certain expenses attributable to
Class R shares directly out of SC-US's Class R assets. These expenses are
related to management of SC-US, administration and other services. For example,
SC-US pays an advisory fee and an administrative fee to GCMG. SC-US 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-US's Class R assets to
calculate SC-US's Class R 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-US and the portion of SC-US's operating
expenses that they might expect to bear indirectly.
FEE TABLE (1)
Shareholder Transaction Expenses:
Maximum sales charge on purchases and reinvested distributions........ None
Redemption fee (2).................................................... None
Annual Fund Operating Expenses (after expense waivers and/or
reimbursements, as a percentage of average net assets):
Management fees....................................................... .60%
12b-1 fees (3)........................................................ .25%
Other expenses (4).................................................... .30%
----
Total fund operating expenses (5).....................................1.15%
- ------------
(1) SC-US's net investment income and net expenses for the period January 1,
1997 through December 16, 1997 were allocated to each class of shares based
upon the relative outstanding shares of each class as of the close of
business on December 16, 1997, and the results thereof were combined with
the results of operations for each applicable class for the period December
17, 1997 through December 31, 1997.
(2) SC-US's transfer agent charges a service fee of $12.00 for each wire
redemption through August 15, 1998. Thereafter this fee will no longer be
charged. The purchase or redemption of shares through a securities dealer
that has not entered into a sales agreement with the Distributor may be
subject to a transaction fee.
(3) SC-REMFs has adopted a Distribution and Service Plan for SC-US Class R
shares pursuant to Rule 12b-1 of the Investment Company Act of 1940, as
amended, pursuant to which SC-US pays the Distributor a fee for
distribution-related services and services related to the maintenance of
shareholder accounts at the annual rate of 0.25% of SC-US's Class R average
daily net assets. As a result, long-term Class R shareholders of SC-US may
pay more than the economic equivalent of the maximum front-end sales load
permitted by the National Association of Securities Dealers, Inc. ("NASD").
(4) Other Expenses are based upon the operating experience of SC-US since April
23, 1997, the effective date of its registration statement under the
Securities Act of 1933, as amended.
(5) From April 23, 1997 through December 16, 1997, GCMG committed to waive fees
and/or reimburse expenses to maintain SC-US's operating expenses, other than
brokerage fees and commissions, taxes, interest and other extraordinary
expenses at no more than 1.19% of SC-US's average daily net assets. Since
December 17, 1997 and for the year ending December 31, 1998, GCMG has
committed to waive fees and/or reimburse other expenses to maintain SC-US's
Class R total fund operating expenses, other than brokerage fees and
commissions, taxes, interest
2
<PAGE>
and other extraordinary expenses, at no more than 1.15% of the value of SC-
US's Class R average daily net assets for the year ending December 31, 1998.
Without such waiver and/or reimbursement, SC-US's other expenses would have
been .34% of SC-US's Class R average daily net assets from April 23, 1997 to
December 16, 1997 and .45% of SC-US's Class R average daily net assets from
December 17, 1997 to December 31, 1997. Similarly, total fund operating
expenses would have been 1.19% of SC-US's Class R average daily net assets
from April 23, 1997 to December 16, 1997 and 1.17% of SC-US's Class R
average daily net assets from December 17, 1997 to December 31, 1997.
Expenses reflected in the Fee Table are expressed as a percentage of SC-US's
average daily net assets for the year ending December 31, 1997 and have been
restated to reflect current fees.
EXAMPLE
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <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 $37 $63 $140
</TABLE>
THE ACTUAL EXPENSES IN FUTURE YEARS MAY BE MORE OR LESS THAN THE NUMBERS IN
THE EXAMPLE, DEPENDING ON A NUMBER OF FACTORS, INCLUDING THE ACTUAL VALUE OF
SC-US'S ASSETS.
3
<PAGE>
SECURITY CAPITAL U.S. REAL ESTATE SHARES
The following audited financial highlights should be read in conjunction with
the financial information and notes thereto which appear in the Statement of
Additional Information.
SECURITY CAPITAL U.S. REAL ESTATE SHARES INCORPORATED - CLASS R SHARES /(1)/
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
April 23, 1997 /(2)/
through
Per Share Data: December 31, 1997
--------------------
<S> <C>
Net asset value, beginning of period $ 10.15
--------
Income from investment operations:
Net investment income 0.31
Net realized and unrealized gain
on investments 2.49
--------
Total from investment operations 2.80
--------
Less distributions:
Dividends from net investment income (0.31)
Dividends in excess of net investment income (0.15)
Distributions from net realized gains (0.54)
--------
Total distributions (1.00)
--------
Net asset value, end of period $ 11.95
========
Total return /(3)/ 29.91%
Supplemental data and ratios:
Net assets, end of period $671,856
Ratio of expenses to average net assets /(4) (5)/ 1.16%
Ratio of net investment income to average net assets /(4) (5)/ 4.06%
Portfolio turnover rate /(6)/ 82.10%
Average commission rate paid per share /(6)/ $ 0.0595
</TABLE>
(1) On December 16, 1997, the shares held by SC-US's existing shareholders were
split into Class R and Class I shares based on the amount then invested in
SC-US. For the year ended December 31 1997, the Financial Highlights ratios
of net expenses to average net assets, ratios of net investment income to
average net assets and the per share income from investment operations are
presented on a basis whereby SC-US's net investment income and net expenses
for the period January 1, 1997 through December 16, 1997, were allocated to
each class of shares based upon the relative outstanding shares of each
class as of the close of business on December 16, 1997, and the results
thereof were combined with the results of operations for each applicable
class for the period December 17, 1997 through December 31, 1997.
(2) Date SC-US was effective with the SEC.
(3) Not annualized for the period April 23, 1997 through December 16, 1997.
(4) Annualized for the period April 23, 1997 through December 16, 1997.
(5) Without expense reimbursements of $167 for the period April 23, 1997
through December 31, 1997, $122 of which represents the amortization of
organizational expenses attributable to Class R shares, the ratio of
expenses to average net assets would have been 1.19% and the ratio of net
investment income to average net assets would have been 4.02%.
(6) Portfolio turnover and average commission rate paid are calculated on the
basis of SC-US as a whole without distinguishing between the classes of
shares issued.
4
<PAGE>
DESCRIPTION OF SC-US
SC-US is a non-diversified investment portfolio of Security Capital Real
Estate Mutual Funds Incorporated ("SC-REMFs"), an open-end management investment
company organized under Maryland law. SC-REMFs is comprised of four investment
portfolios, SC-US, Security Capital European Real Estate Shares ("SC-EURO"),
Security Capital Asia/Pacific Real Estate Shares ("SC-ASIA") and Security
Capital Real Estate Arbitrage Shares ("SC-ARBITRAGE").
SC-US issues two classes of shares, one of which, Class R shares is offered by
this prospectus. SC-US also issues Class I shares to investors whose minimum
initial investment is $250,000. Class R shares offer different services and
incur different expenses than Class I shares, which would affect performance.
See "Purchase of Shares" and "Organization and Description of Capital Stock."
INVESTMENT OBJECTIVE AND POLICIES
SC-US'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-US's objective is to achieve top-quartile total returns as compared with
other mutual funds that invest primarily in real estate securities in the United
States, by integrating in-depth proprietary real estate market research with
sophisticated capital markets research and modeling techniques. SC-US's
investment objective is "fundamental" and cannot be changed without approval of
a majority of its outstanding voting securities. None of SC-US's policies, other
than its investment objective and the investment restrictions described in the
Statement of Additional Information, are fundamental and thus may be changed by
SC-US's Board of Directors without shareholder approval. There can be no
assurance that SC-US's investment objective will be achieved.
REAL ESTATE SECURITIES
Under normal circumstances, SC-US will invest at least 80% of its assets in
real estate securities, including real estate investment trusts ("REITs") and
other publicly-traded real estate securities. 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 GCMG's view, a significant element of the securities' value, and
(iv) preferred stocks. For purposes of SC-US'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.
REAL ESTATE INVESTMENT TRUSTS
SC-US 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.
ILLIQUID SECURITIES
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SC-US will not invest more than 10% of its net assets in illiquid securities,
determined at the time of investment. 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. GCMG
will monitor the liquidity of such restricted securities under the supervision
of SC-REMFs' Board of Directors. If SC-US invests in securities issued by a real
estate company that is controlled by Security Capital Group Incorporated or any
of its affiliates, such securities will be treated as illiquid securities. See
the Statement of Additional Information for further discussion of illiquid
securities.
DEBT SECURITIES AND MONEY MARKET INSTRUMENTS
SC-US may invest in debt securities from time to time, if GCMG believes
investing in such securities might help achieve SC-US's objective. SC-US may
invest in debt securities to the extent consistent with its investment policies,
although GCMG expects that under normal circumstances SC-US is not likely to
invest a substantial portion of its assets in debt securities.
SC-US will invest only in securities rated "investment grade" or considered by
GCMG to be of comparable quality. Investment grade securities are rated Baa or
higher by Moody's Investors Service, Inc. or BBB or higher by Standard & Poor's.
Descriptions of the securities ratings assigned by Moody's and Standard & Poor's
are described in Appendix A to the Statement of Additional Information.
When, in the judgment of GCMG, market or general economic conditions justify a
temporary defensive position, SC-US may invest 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-US may also at any time use 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.
SHORT SALES
SC-US 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-US incurs
an obligation to replace the security borrowed at whatever its price may be at
the time that SC-US 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-US 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-US will not engage in short sales if
immediately following such transaction the aggregate market value of all
securities sold short would exceed 10% of SC-US's net assets (taken at market
value). See the Statement of Additional Information for further discussion of
short sales.
INVESTMENT STRATEGY
SC-US intends to continue to follow its disciplined, research driven
investment strategy, to identify those publicly traded real estate companies
which have the potential to deliver above average cash flow growth. This
investment strategy has been deployed by SC-US since December 20, 1996, its
inception date. Through December 31, 1997, the average annual total return for
Class R shares was 28.83%, after deducting fees and expenses and allocating net
investment income and net expense to Class I and Class R shares as described in
SC-US's audited financial statements, which appear in the Statement of
Additional Information. Past performance is not necessarily indicative of future
results. FOR CURRENT RETURN INFORMATION RELATED TO SC-US, CONTACT SC-US AT TOLL
FREE 1-888-SECURITY.
SC-US's investment strategy is also similar to that of Security Capital U.S.
Realty Special Opportunity Investments Portfolio ("USREALTY Special
Opportunity"). USREALTY Special Opportunity is a private investment portfolio
with assets of $344.6 million (at fair market value, as of December 31, 1997)
that invests primarily in publicly traded real estate securities in the United
States. USREALTY Special Opportunity is advised by Security Capital (EU)
Management
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S.A. GCMG, 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. real estate securities, relying on the same research and
analytical tools and models that GCMG will rely on in making investments on
behalf of SC-US. From December 31, 1995 through December 31, 1997, USREALTY
Special Opportunity achieved an average annual total return of approximately
42.61%, 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-US can achieve results similar to those achieved by USREALTY Special
Opportunity.
REAL ESTATE INDUSTRY OVERVIEW
GCMG believes that the U.S. real estate industry has experienced a fundamental
transformation in the last six and one-half 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 $8.8 billion at December 31, 1990 to $213.9
billion at December 31, 1997, in part, due to $117.1 billion of public offerings
conducted during that period. The 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.
GCMG 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-US intends to benefit from this restructuring by investing
in equity REITs that GCMG believes could produce above-average returns.
In addition to providing greater liquidity than direct real estate
investments, REITs have also generally out-performed direct real estate
investments for each of the past one-, five-, ten and fifteen-year periods ended
December 31, 1997. The following chart reflects the performance of U.S. REITs
compared to SC-US, USREALTY Special Opportunity, an index of direct U.S. real
estate investments (NCREIF) and other indices.
REITS VS. OTHER INVESTMENTS
(AVERAGE ANNUAL TOTAL RETURN)
<TABLE>
<CAPTION>
USREALTY(1) NAREIT(2) NCREIF(3)
THROUGH DECEMBER 31, 1997 SC-US SC-US ----------- ----------- -------- S&P 500 BONDS(4)
- ------------------------- ----- ----- SPECIAL EQUITY INDEX INDEX ------- -------
CLASS I CLASS R ------- ------------ -----
------- ------- OPPORTUNITY
-----------
<S> <C> <C> <C> <C> <C> <C> <C>
1 year 25.20% 25.19% 25.18% 20.26% 13.71% 33.35% 9.78%
5 years 18.28% 7.77% 20.23% 7.63%
15 years 14.99% 6.74% 17.49% 10.19%
20 years 16.02% 7.94% 16.63% 9.76%
</TABLE>
- ---------
(1) Described under "Investment Strategy."
(2) The National Association of Real Estate Investment Trusts ("NAREIT") equity
index data is based upon the last closing price of the month for all tax-
qualified REITs listed on the New York Stock Exchange, American Stock
Exchange and the NASDAQ National Market System. The data is market-weighted.
(3) The National Counsel of Real Estate Investment Fiduciaries Property Index
total return includes appreciation (or depreciation), realized capital gain
(or loss) and income. It is computed by adding income and capital
appreciation return on a quarterly basis.
(4) Merrill Lynch Government/Corporate Bond Index (Master).
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THE INVESTMENT RESULTS FOR SC-US, USREALTY SPECIAL OPPORTUNITY AND THE
INDICES SHOWN IN THE TABLE REFLECT PAST PERFORMANCE AND ARE NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS OR THE RETURNS THAT SHAREHOLDERS SHOULD EXPECT TO
RECEIVE FROM SC-US.
The results shown represent SC-US's "total return" which assumes the
reinvestment of all capital gains and income dividends. Results presented for
the S&P 500 and the NAREIT equity index also assume the reinvestment of
dividends; however, the indices are not managed and incur no operating expenses.
This information is provided to facilitate a better understanding of SC-US and
does not provide a basis for comparison with other investments which calculate
performance differently.
A RESEARCH-DRIVEN PHILOSOPHY AND APPROACH
SC-US seeks to achieve top-quartile returns by investing primarily in
equity real estate securities which have the potential to deliver above-average
growth. GCMG 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-US 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 Incorporated affiliate company network and
assists GCMG in identifying attractive growth markets and property sectors prior
to making investment decisions. Specifically, SC-US endeavors to identify
markets reaching a "marginal turning point." The market research conducted by
SC-US 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-US 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. GCMG
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 GCMG 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-US will not invest in real estate directly, but only in securities
issued by real estate companies. However, SC-US may be subject to risks similar
to those associated with the direct ownership of real estate (in 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
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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
defaults by borrowers or customers and self-liquidation. REITs also generate
expenses that are separate and apart from those charged by SC-US and therefore,
shareholders will indirectly pay the fees charged by the REITs in which SC-US
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 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 AND PORTFOLIO TURNOVER
SC-US operates as a "non-diversified" investment company under the 1940
Act, which means SC-US 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-US
intends to conduct its operations so as to qualify as a "regulated investment
company" for purposes of the Code, which generally will relieve SC-US 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-US 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-US'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-US will not own more than 10% of the
outstanding voting securities of a single issuer. SC-US's investments in
securities issued by the U.S. Government, its agencies and instrumentalities are
not subject to these limitations. Because SC-US, as a non-diversified investment
company, may invest in a smaller number of individual issuers than a diversified
investment company, an investment in SC-US may present greater risk to an
investor than an investment in a diversified company.
SC-US anticipates that its annual portfolio turnover rate will not exceed
150%, but the turnover rate will not be a limiting factor when GCMG 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-US 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-US. High
portfolio turnover may result in the realization of net short-term capital gains
by SC-US which, when distributed to shareholders, will be taxable as ordinary
income. See "Taxation."
DIRECTORS, OFFICERS AND OTHER PERSONNEL
The overall management of the business and affairs of SC-US is vested with
the Board of Directors of SC-REMFs. The Board of Directors approves all
significant agreements between SC-REMFs and persons or companies furnishing
services to SC-US, including SC-REMFs' agreements with GCMG, or with SC-US's
administrator, its custodian and its transfer agent. The management of SC-US's
day-to-day operations is delegated to the officers of SC-REMFs, who include the
Managing Directors, GCMG and the administrator, subject always to the investment
objective and policies of SC-US and to general supervision by the Board of
Directors. Although SC-REMFs 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-REMFs' Articles of Incorporation. The Directors and
officers of SC-REMFs and the certain key members of the SC-US Portfolio
Management Committee and their principal occupations are set forth below.
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Anthony R. Manno Jr. Chairman of the Board of Directors, Managing
Director and President of SC-REMFs. Managing
Director and President of GCMG since January
1995, where he is responsible for overseeing
all investment and capital allocation matters
for GCMG's public market securities
activities and is also responsible for
company and industry analysis, market
strategy and trading and reporting. Mr. Manno
was a member of the Investment Committee of
Security Capital Group Incorporated from
March 1994 to June 1996. Prior to joining
Security Capital, Mr. Manno was a Managing
Director of LaSalle Partners Limited from
March 1980 to March 1994. Mr. Manno received
his M.B.A. from the University of Chicago
Graduate School of Business, an M.A. and a
B.A. from Northwestern University and is a
Certified Public Accountant.
Robert H. Abrams Director of SC-REMFs. Director of the Program
in Real Estate at Cornell University. Founder
of Colliers ABR, Inc. (formerly Abrams
Benisch Riker Inc.), a property management
firm. Mr. Abrams was Principal of Colliers
ABR, Inc. from 1978 to 1992 and since 1992,
has served as a Consultant. From 1959 to 1978
Mr. Abrams was Executive Vice President and
Director of Cross and Brown Company. Mr.
Abrams also serves as Trustee Emeritus and
Presidential Counselor of his alma mater,
Cornell University. Mr. Abrams received his
M.B.A. from Harvard University and his B.A.
from Cornell University.
Stephen F. Kasbeer Director of SC-REMFs. Retired; Senior Vice
President for Administration and Treasurer of
Loyola University, Chicago from 1981 to July
1994, where he was responsible for
administration, investment, real estate and
treasurer functions. At Loyola University, he
also 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. Currently, Mr. Kasbeer
serves as a Director of Endowment Realty,
Inc. and Endowment Realty II and as a Member
of the Investment Committee of the University
of San Diego. Mr. Kasbeer also serves as
Trustee, Treasurer and Chairman of the
Investment and Finance Committees of Santa Fe
Preparatory School and as Trustee and
Chairman of the Santa Fe Preparatory School
Combined Permanent Endowment Fund Trust. Mr.
Kasbeer received his J.D. from John Marshall
Law School and his M.A. and B.S. from
Northwestern University.
George F. Keane Director of SC-REMFs. Chairman of the Board
of Trigen Energy Corporation since 1994. As
founding chief executive of The Common Fund
in 1971 and Endowment Realty Investors in
1988, Mr. Keane for many years headed an
investment management service for colleges,
universities and independent schools that
managed $15 billion for 1,200 educational
institutions when he became President
Emeritus of the Common Fund in 1993. He has
served as a member of the Investment Advisory
Committee of the $95 billion New York State
Common Retirement Fund since 1982. He has
been a Director of the Northern Trust of
Connecticut since 1991, a Trustee of the
Nicholas Applegate Investment Trust since
1993, and a Director of the Bramwell Funds
since 1994. He is also a Director of
Universal Stainless & Alloy Products, Global
Pharmaceutical Corporation, United Water
Resources and United Properties Group, and
the Universal Bond Fund, and is an advisor to
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Associated Energy Managers. Mr. Keane also serves
as a Trustee of his alma mater, Fairfield
University where he received his B.A., and as a
Director and Chairman of the Investment Committee
of the United Negro College Fund. Mr. Keane also
holds honorary degrees from Loyola University,
Chicago, Illinois and Lawrence University,
Appleton, Wisconsin.
John H. Gardner, Jr. Director and Managing Director of SC-REMFs.
Managing Director of GCMG since July, 1997. Prior
thereto, Director of the REIT Manager for Security
Capital Pacific Trust ("PTR") from February 1995
to June 1997 and Senior Vice President of Security
Capital Atlantic Incorporated ("ATLANTIC"), PTR
and the PTR REIT Manager from September 1994 to
June 1997 where he had overall responsibility for
asset management and multifamily dispositions.
Prior to joining Security Capital, Mr. Gardner was
with Copley Real Estate Advisors as a Managing
Director and Principal responsible for portfolio
management from January 1991 to September 1994 and
as a Vice President and Principal of asset
management from December 1984 to December 1990.
From July 1977 to November 1984, Mr. Gardner was a
Real Estate Manager with the John Hancock
Companies. Mr. Gardner received his M.S. from
Bentley College and his B.S. from Stonehill
College.
Kenneth D. Statz Managing Director of SC-REMFs. Managing Director
of GCMG since November 1997 where he is
responsible for the development and implementation
of portfolio investment strategy. Prior thereto,
Senior Vice President of GCMG from July 1996 to
October 1997 and Vice President from May 1995 to
June 1996. Prior to joining Security Capital, Mr.
Statz was a Vice President and Senior REIT Analyst
in the investment research department of Goldman,
Sachs & Co., from February 1993 to January 1995,
concentrating on research and underwriting for the
REIT industry. Prior thereto, Mr. Statz was a real
estate stock portfolio manager and a managing
director of Chancellor Capital Management from
August 1982 to February 1992. Mr. Statz received
his M.B.A. and B.B.A. from the University of
Wisconsin, Madison.
Kevin W. Bedell Senior Vice President of SC-REMFs. Senior Vice
President of GCMG since November 1997 and Vice
President since July 1996, where he is responsible
for directing the activities of the
industry/company securities research group and
providing in-depth proprietary research on
publicly traded companies. Prior to joining GCMG,
Mr. Bedell spent nine years with LaSalle Partners
Limited where he was Equity Vice President and
Portfolio Manager responsible for the strategic,
operational and financial management of a private
REIT with commercial real estate investments of
$800 million. Mr. Bedell received his M.B.A. from
the University of Chicago and his B.A. from Kenyon
College.
Albert D. Adriani Member, SC-US Portfolio Management Committee; Vice
President of GCMG since April 1996, where he is
responsible for providing portfolio management
analysis. From January 1995 to April 1996, he was
Vice President, Security Capital (UK) Management
Limited and Security Capital U.S. Realty
Incorporated; from March 1994 to January 1995, he
was with Security Capital Markets Group. Prior
thereto, he was an investment analyst with HAL
Investments BV from July 1992 to January
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1994. 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. Mr.
Adriani is a Chartered Financial Analyst.
Jeffrey C. Nellessen Vice President, Treasurer and Assistant Secretary
of SC-REMFs. Vice President and Controller of GCMG
since March 1997. Prior thereto, from June 1988 to
March 1997, he was Controller, Manager of Client
Administration and Compliance Officer at Strong
Capital Management, Inc. Mr. Nellessen is a
Certified Public Accountant, Management Accountant
and a Certified Financial Planner. He received his
B.B.A. from the University of Wisconsin,
Madison.
David T. Novick Vice President and Secretary of SC-REMFs. Vice
President of Security Capital Group Incorporated
since June 1998. Prior thereto, from September
1989 to June 1998, he was an attorney, and most
recently a Partner, with the law firm of Katten
Muchin and Zavis. Mr. Novick received his B.S.B.A.
from Boston University and his J.D. from the
University of Illinois.
GCMG
Security Capital Global Capital Management Group Incorporated ("GCMG"),
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-US under the overall supervision and
control of the Directors of SC-REMFs.
GCMG commenced operations in January 1995, and is registered as an
investment adviser with the SEC. GCMG's principal officers include Anthony R.
Manno Jr., Managing Director and President, John H. Gardner, Jr., Managing
Director, Kenneth D. Statz, Managing Director, and Kevin W. Bedell, Senior
Vice President. GCMG is an indirect wholly-owned subsidiary of Security Capital
Group Incorporated, a real estate research, investment and management company.
The SC-US Portfolio Management Committee, which is comprised of certain SC-
REMFs officers and GCMG analysts, is primarily responsible for the day-to-day
management of SC-US's portfolio.
INVESTMENT ADVISORY AGREEMENT
Pursuant to an investment advisory agreement (the "Advisory Agreement"),
GCMG furnishes a continuous investment program for SC-US's portfolio, makes the
day-to-day investment decisions for SC-US, and generally manages SC-US's
investments in accordance with the stated policies of SC-US, subject to the
general supervision of SC-REMFs' Board of Directors. GCMG also selects brokers
and dealers to execute purchase and sale orders for the portfolio transactions
of SC-US. GCMG provides persons satisfactory to the Directors of SC-REMFs to
serve as officers of SC-REMFs. Such officers, as well as certain other
employees and Directors of SC-REMFs, may be directors, officers, or employees of
GCMG.
Under the Advisory Agreement, SC-US Class R shares pay GCMG, monthly, an
annual management fee in an amount equal to .60% of SC-US's Class R average
daily net asset value. SC-US Management also has committed to waive fees and/or
reimburse expenses to maintain SC-US's Class R shares' total operating expenses,
other than brokerage fees and commissions, taxes, interest and other
extraordinary expenses at no more than 1.15% of the value of SC-US's Class R
average daily net assets for the year ending December 31, 1998.
In addition to the payments to GCMG under the Advisory Agreement described
above, SC-US Class R shares pay certain other costs of operations including (a)
administration, custodian and transfer agency fees, (b) fees of Directors
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who are not affiliated with GCMG, (c) legal and auditing expenses, (d) costs of
printing and postage fees related to preparing and distributing SC-US's
prospectus and shareholder reports, (e) costs of maintaining SC-REMFs'
existence, (f) interest charges, taxes, brokerage fees and commissions, (g)
costs of stationery and supplies, (h) expenses and fees related to registration
and filing with federal and state regulatory authorities, and (i) upon the
approval of SC-REMFs' Board of Directors, costs of personnel of GCMG or its
affiliates rendering clerical, accounting and other office services. Each class
of SC-US shares pays for the portion SC-US's expenses attributable to its
operations. Income, realized gains and losses, unrealized appreciation and
depreciation and certain expenses not allocated to a particular class are
allocated to each class based on the net assets of that class in relation to the
net assets of SC-REMFs.
ADMINISTRATOR AND SUB-ADMINISTRATOR
GCMG has also entered into a fund accounting and administration agreement
with SC-REMFs (the "Administration Agreement") under which GCMG performs certain
administrative functions for SC-US, including (i) providing office space,
telephone, office equipment and supplies for SC-REMFs; (ii) paying compensation
of SC-REMFs' officers for services rendered as such; (iii) authorizing
expenditures and approving bills for payment on behalf of SC-US; (iv)
supervising preparation of the periodic updating of SC-US's Prospectus and
Statement of Additional Information; (v) supervising preparation of semi-annual
reports to SC-US'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-US's investment portfolio and the publication of the net asset value of
SC-US's shares, earnings reports and other financial data; (vii) monitoring
relationships with organizations providing services to SC-US, including the
custodian ("Custodian"), transfer agent ("Transfer Agent") and printers; (viii)
providing trading desk facilities for SC-US; (ix) maintaining books and records
for SC-US (other than those maintained by the Custodian and Transfer Agent) and
preparing and filing of tax reports other than SC-US'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-REMFs' Board of Directors, GCMG caused SC-REMFs to retain State
Street Bank and Trust Company as sub-administrator ("Sub-Administrator") under a
sub-administration (Sub-Administration Agreement") to provide services to SC-
US.
Under the Sub-administration Agreement, the Sub-Administrator has assumed
responsibility for performing certain of the foregoing administrative functions,
including overseeing the determination and publication of SC-US's net asset
value, maintaining certain of SC-US's books and records that are not maintained
by GCMG, or the Custodian or Transfer Agent, preparing financial information for
SC-REMFs' income tax returns, proxy statements, semi-annual and annual
shareholders reports, and SEC filings, and responding to certain shareholder
inquiries. Under the terms of the Sub-Administration Agreement, SC-REMFs pays
the Sub-Administrator a monthly administration fee at the annual rate of .08% of
the first $750 million, .06% the next $250 million and .04% of SC-REMFs' average
daily net assets over $1 billion, subject to an average annual minimum fee of
$75,000 per investment portfolio. The Sub-Administrator also serves as SC-US's
Custodian and Transfer Agent. See "Custodian and Transfer Agent."
Under the Administration Agreement, GCMG remains responsible for monitoring
and overseeing the performance by the Sub-Administrator of its obligations to
SC-US under the Sub-Administration Agreement, subject to the overall authority
of SC-REMFs' Board of Directors. For its services under the Administration
Agreement, GCMG receives a monthly fee from SC-REMFs at the annual rate of .02%
of the value of SC-US's average daily net assets.
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DISTRIBUTION AND SERVICING PLAN
The Board of Directors of SC-REMFs and the Class R shareholders of SC-US
have adopted a Distribution and Servicing Plan ("Plan") with respect to SC-US's
Class R shares pursuant to Rule 12b-1 under the 1940 Act. Under the Plan, SC-US
pays the Distributor a monthly fee equal to, on an annual basis, .25% of the
value of SC-US's Class R average daily net assets.
The Distributor may use the fee for services performed and expenses
incurred by the Distributor in connection with the distribution of Class R
shares and for providing certain services to Class R shareholders. The
Distributor may pay third parties in respect of these services such amount as it
may determine. SC-US understands that these third parties may also charge fees
to their clients who are beneficial owners of SC-US Class R shares in connection
with their client accounts. These fees would be in addition to any amounts
which may be received by them from the Distributor under the Plan.
The Distributor may enter into agreements ("Agreements") with institutional
shareholders of record, broker-dealers, financial institutions, depository
institutions, and other financial intermediaries as well as various brokerage
firms or other industry recognized service providers of fund supermarkets or
similar programs to provide certain distribution, shareholder servicing,
administrative and/or accounting services for their clients who are beneficial
owners of SC-US Class R shares. Such Agreements may be governed by the Plan.
The Distributor, with offices located at 11 South LaSalle Street, Chicago,
Illinois 60603, is an affiliate of GCMG. See "Distribution Plan" in the
Statement of Additional Information for a listing of the types of expenses for
which the Distributor and third parties may be compensated under the Plan. If
the fee received by the Distributor exceeds its expenses, the Distributor may
realize a profit from these arrangements. The Plan is reviewed and is subject
to approval annually by the Board of Directors.
DETERMINATION OF NET ASSET VALUE
Net asset value per share of Class R shares of SC-US, $.01 par value per
share, is determined on each day the New York Stock Exchange ("NYSE") is open
for trading and on each other day on which there is a sufficient degree of
trading in SC-US's investments to affect the net asset value, as of the close of
trading on the NYSE, by adding the market value of all securities in SC-US's
portfolio and other assets represented by Class R shares, subtracting
liabilities, incurred or accrued allocable to Class R shares, and dividing by
the total number of Class R shares then outstanding.
For purposes of determining the net asset value per share of Class R
shares, readily marketable portfolio securities listed on the NYSE are valued,
except as indicated below, at the last sale price reflected on the consolidated
tape at the close of the NYSE 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 NYSE 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 GCMG 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
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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
SC-US Class R shares may be purchased through SC-US's Transfer Agent and
various financial intermediaries that have entered into a sales agreement with
the Distributor.
Orders for shares of SC-US will become effective at the net asset value
per share next determined after the receipt of payment. All funds will be
invested in full and fractional shares. A confirmation indicating the details
of each purchase transaction will be sent to you 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.
Investors must specify that Class R shares are being purchased.
If you choose 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 of SC-US 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.
By investing in SC-US, you appoint the Transfer Agent as your 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. PLEASE NOTE THAT IT IS MORE
COMPLICATED TO REDEEM SHARES HELD IN CERTIFICATE FORM.
INITIAL INVESTMENT
The minimum initial investment is $2,500. For individual retirement
account and employee benefit plans qualified under Section 401, 403(b)(7) or 457
of the Code as well as UGMA or UTMA accounts the minimum initial investment is
$1,000. For investors using the Automatic Investment Plan (described below) the
minimum initial investment is $250. These minimums can be changed or waived by
SC-US at any time. Shareholders will be give at least 30 days notice of any
increase in the minimum dollar amount of subsequent investments.
Class R shares may be purchased by check or money order drawn on a U.S.
bank, savings and loan, or credit union by wire transfer. The enclosed
application must be completed and accompanied by payment in U.S. funds to open
an account. Checks must be payable in U.S. dollars and will be accepted subject
to collection at full face value. Note that all applications to purchase shares
are subject to acceptance by SC-US and are not binding until so accepted. SC-US
reserves the right to decline to accept a purchase order application in whole or
in part.
MAIL
The following instructions should be used when mailing a check or money
order payable to "Security Capital U.S. Real Estate Shares," via U.S. mail to
the Distributor, a securities dealer or the Transfer Agent:
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VIA U.S. MAIL BY OVERNIGHT COURIER
Boston Financial Data Services Boston Financial Data Services
Attn: Security Capital Real Estate Attn: Security Capital Real Estate
Mutual Funds Incorporated Mutual Funds Incorporated
P.O. Box 8500 66 Brooks Drive
Boston, Massachusetts 02266-8500 Braintree, Massachusetts 02184
SC-REMFs does not consider the U.S. Postal Service or other independent
delivery service 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-REMFs. Do
not mail letters by overnight courier to the post office box.
WIRE PURCHASES
Class R shares may be purchased by wire only through the Transfer Agent.
The following instructions should be used when wiring funds to the Transfer
Agent for the purchase of shares:
Wire to: State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02101
ABA Number 011000028
Credit: DDA Number 9950-378-7
Further Credit: Security Capital Real Estate Mutual Funds Incorporated
Shareholder Registration
Shareholder Fund Account Number
PLEASE CALL TOLL FREE 1-800-409-4189 PRIOR TO WIRING ANY FUNDS IN ORDER TO
OBTAIN A CONFIRMATION NUMBER AND TO ENSURE PROMPT AND ACCURATE HANDLING OF
FUNDS. SC-US and its Transfer Agent are not responsible for the consequences of
delays resulting from the banking or Federal Reserve wire system or from
incomplete wiring instructions.
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AUTOMATIC INVESTMENT PLAN
The Automatic Investment Plan allows regular, systematic investments in SC-
US Class R shares from a bank checking or NOW account. SC-US will reduce the
minimum initial investment to $250 if a shareholder elects to use the Automatic
Investment Plan. To establish the Automatic Investment Plan, an investor should
complete the appropriate section in SC-US's application and an existing SC-US
shareholder should call 1-888-SECURITY (toll free) for an automatic investment
plan form. The Automatic Investment Plan can be set up with any financial
institution that is a member of the Automated Clearing House ("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-US
reserves the right to close such account. Prior to closing any account for
failure to reach the minimum initial investment, SC-US 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-US 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 $250 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-US account for any Automatic
Investment Plan purchase that does not clear due to insufficient funds or, if
prior to notifying SC-US in writing or by telephone to terminate the plan, a
shareholder closes his or her bank account or in any manner prevents 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 must be at least $250 and may be made by mail, wire
or by telephone. When making an additional purchase by mail, a check payable to
"Security Capital U.S. Real Estate Shares" 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 toll
free 1-800-409-4189 for complete wiring instructions.
You may purchase additional shares by moving money from your bank account
to your SC-US account by telephone. Only bank accounts held at domestic
financial institutions that are 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 three business days. TELEPHONE
TRANSACTIONS MAY NOT BE USED FOR INITIAL PURCHASES OF CLASS R SHARES.
EXCHANGE FEATURE
Class R shares of SC-US may be exchanged for Class R shares of SC-EURO and
SC-ASIA. Exchanges of Class R shares will be made at their relative net asset
values. Shares may be exchanged only if the amount being exchanged satisfies
the minimum investment required. However, you may not exchange your investment
in shares of SC-US, SC-EURO or SC-ASIA more than four times in any twelve-month
period (including the initial exchange of your investment during that period).
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CLASS I SHARES
SC-US also issues Class I shares which offer different services and incur
different expenses which would affect performance. Investors may call the
Distributor at toll free 1-888-SECURITY to obtain additional information.
REDEMPTION OF SHARES
You may request redemption of part or all of your Class R shares at any
time by telephone or by mail. The redemption of shares will be at the next
determined net asset value. See "Determination of Net Asset Value." SC-US
normally will mail the redemption proceeds to you on the next business day and,
in any event, no later than seven business days after the receipt of a
redemption request in good order. However, when a purchase has been made by
check, SC-US may hold payment on redemption proceeds until reasonably satisfied
that the check has cleared, which may take up to twelve days.
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-US
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 requests must be signed exactly as the shares are registered
including the signature of each joint owner. You must also specify the number of
shares or dollar amount to be redeemed. If the Class R 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 the
Transfer Agent together with a redemption request. The following instructions
should be used for the redemption of shares by mail, by wire and by telephone:
MAIL AND WIRE
For most redemption requests you need only furnish a written, unconditional
request to redeem your Class R shares (for a fixed dollar amount) at net asset
value to Security Capital U.S. Real Estate Shares:
VIA U.S. MAIL BY OVERNIGHT COURIER
Boston Financial Data Services Boston Financial Data Services
Attn: Security Capital Real Estate Attn: Security Capital Real Estate
Mutual Funds Incorporated Mutual Funds Incorporated
P.O. Box 8500 66 Brooks Drive
Boston, Massachusetts 02266-8500 Braintree, Massachusetts 02184
Redemption proceeds made by written redemption request may also be wired to
a commercial bank that you have authorized on your account application.
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Additional documentation may be requested from corporations, executors,
administrators, trustees, guardians, agents, or attorneys-in-fact. SC-REMFs
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 by SC-US. 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.
TELEPHONE
You may redeem shares by telephone by calling the Transfer Agent at toll
free 1-800-409-4189. In order to utilize this procedure, you must have
previously elected this option in writing, which election will be reflected in
the Transfer Agent's records and the redemption proceeds will be mailed directly
to you or transferred 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 that address, you
may call or submit a written request to the Transfer Agent. No telephone
redemptions will be allowed within 15 days of such a change. SC-US 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-US 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-US reserves the right to refuse a telephone redemption
request if so advised.
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-US or the 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.
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-US may suspend the right of redemption during any period when (i)
trading on the NYSE is restricted or the NYSE 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-US 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-US on not less than 30
days' notice if, at the time of any redemption of Class R shares in his or her
account, the value of the remaining shares in the account falls below $2,500
($1,000 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,
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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-US's investment income will be declared and distributed
quarterly. SC-US intends to distribute net realized capital gains, if any, at
least annually, although SC-US's Board of Directors may in the future determine
to retain realized capital gains and not distribute them to shareholders.
Dividends and distributions will automatically be reinvested into full and
fractional shares of SC-US based on the net asset value per share at the close
of business on the payable date unless the shareholder has elected to have
dividends or distributions paid in cash. SC-US will send shareholders a
statement reflecting each dividend and distribution. In addition, after the end
of each calendar year, SC-US will send shareholders a statement showing the
amount and tax characterization of all dividends and distributions paid during
the previous year. In accordance with the Taxpayer Relief Act of 1997, SC-US
will indicate which portion of a capital gain distribution will be taxed at a
maximum rate of 20% and which portion will be taxed at a maximum rate of 28%.
For information concerning the tax treatment of SC-US's distribution policies
for SC-US and its shareholders, see "Taxation."
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-US, including the status of distributions
under applicable state or local law.
FEDERAL INCOME TAXES
SC-US intends to qualify and elect to be taxed as a "regulated investment
company" under the Code. To the extent that SC-US distributes its taxable
income and net capital gain to its shareholders, qualification as a regulated
investment company relieves SC-US 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-US,
which does not include distributions received by SC-US from REITs. A
corporation's dividends-received deduction will be disallowed unless the
corporation holds shares in SC-US at least 46 days. Furthermore, the dividends-
received deduction will be disallowed to the extent a corporation's investment
in shares of SC-US is financed with indebtedness.
The excess of net long-term capital gains over the net short-term capital
losses realized and distributed by SC-US to its shareholders as capital gain
distributions is taxable to the shareholders as long-term capital gain,
irrespective of the length of time a shareholder may have held his or her stock.
Recent legislation reduced the maximum tax rate on capital gains to 20% for
assets held for more than 18 months on the date of the sale or exchange of those
assets. A notice issued by the Internal Revenue Service provides that a
regulated investment company such as SC-US may, but is not required to,
designate which portion of a capital gain distribution qualifies for the reduced
capital gain rate. Long-term capital gain distributions are not eligible for the
dividends-received deduction referred to above. Recently enacted legislation has
reduced the holding period required to qualify for the 20% maximum capital gains
rate from 18 months to 12 months.
Under current federal tax law, the amount of an ordinary income dividend or
capital gain distribution declared by SC-US during October, November or December
of a year to shareholders of record as of a specified date in such a month
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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-US
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 gain distribution with respect to shares of SC-US
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-US 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-US, or the Secretary of the Treasury notifies SC-US
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-US distributions also may be subject to state and local taxes.
Shareholders should consult their own tax advisers regarding the particular
state and local tax consequences of an investment in SC-US.
ORGANIZATION AND DESCRIPTION OF CAPITAL STOCK
Security Capital Real Estate Mutual Funds Incorporated, formerly Security
Capital Employee REIT Fund Incorporated, was incorporated under Maryland law as
SCERF Incorporated ("SCERF"), a wholly-owned subsidiary of Security Capital
Group Incorporated, on December 20, 1996. On January 23, 1997, all the assets
and liabilities of SCERF were transferred to Security Capital Employee REIT Fund
Incorporated in a reorganization transaction. On December 16, 1997, its name
was changed to Security Capital U.S. Real Estate Shares. On June 30, 1998, its
name was changed to Security Capital Real Estate Mutual Funds Incorporated.
SC-REMFs is authorized to issue 200,000,000 shares of stock, $.01 par value
per share. SC-REMFs' Board of Directors may, without shareholder approval,
increase or decrease the number of authorized but unissued shares of SC-REMF's
stock and reclassify and issue any unissued shares. The Board of Directors also
may create additional series of shares with different investment objectives,
policies or restrictions without shareholder approval. The Board of Directors
of SC-REMFs has authorized the creation of four investment portfolios; SC-US,
SC-EURO, SC-ASIA and SC-ARBITRAGE, three of which issue two classes of shares:
Class I shares and Class R shares. SC-ARBITRAGE issues Class I shares only.
Class I shares offer different services to shareholders and incur different
expenses than Class R shares. Each class pays its proportionate share of SC-
REMFs' expenses.
All classes of each series of SC-REMFs' shares have equal dividend,
distribution, liquidation and voting rights. There are no conversion or
preemptive rights in connection with any class of any series of SC-REMFs'
shares. All SC-REMFs shares, when duly issued, are fully paid and
nonassessable. The rights of the holders of SC-US's Class R shares may not be
modified except by the vote of a majority of the holders of all Class R shares
outstanding. SC-US's Class R shareholders have exclusive voting rights with
respect to matters relating solely to SC-US's Class R shares.
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SC-US's Class R shareholders vote separately from SC-US's Class I shareholders,
SC-ARBITRAGE's Class I shareholders and SC-EURO's and SC-ASIA's Class I and
Class R shareholders on matters in which the interests of SC-US's Class R
shareholders differ from the interests of SC-US's Class I shareholders, SC-
ARBITRAGE's Class I shareholders and SC-EURO's and SC-ASIA's Class I and Class R
shareholders.
SC-REMFs 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-REMFs entitled to vote at the meeting. SC-REMFs will assist shareholders
wishing to communicate with one another for the purpose of requesting such a
meeting.
As of July 31, 1998, SC REALTY Incorporated, a wholly-owned subsidiary of
Security Capital Group Incorporated, owned 92.97% of the issued and outstanding
shares of SC-US, 99.25% of the issued and outstanding shares of SC-EURO and SC-
ASIA and 99.97% of the issued and outstanding shares of SC-ARBITRAGE, which
means that SC REALTY Incorporated controls SC-US, SC-EURO, SC-ASIA and SC-
ARBITRAGE for purposes of the 1940 Act. In each case, SC REALTY owns Class I
shares only. The effect of SC REALTY Incorporated's ownership of a controlling
interest in SC-US, SC-EURO, SC-ASIA, SC-ARBITRAGE and, therefore, SC-REMFs, is
to dilute the voting power of other shareholders. SC REALTY Incorporated does
not anticipate that its initial control of SC-US, SC-EURO, SC-ASIA and SC-
ARBITRAGE will adversely effect the rights of future shareholders.
CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company, which has its principal address at 225
Franklin Street, Boston, Massachusetts 02101, has been retained to serve as SC-
US's Custodian and Transfer Agent. State Street Bank and Trust Company has no
part in deciding SC-US's investment policies or which securities are to be
purchased or sold for SC-US's portfolio.
REPORTS TO SHAREHOLDERS
The fiscal year of SC-US ends on December 31 of each year. SC-US 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-US's independent accountants, will
be sent to shareholders each year. Please call toll free 1-888-SECURITY for a
copy of the most recent semi-annual report.
PERFORMANCE INFORMATION
From time to time, SC-US may advertise the "average annual total return" of
the Class R shares over various periods of time. This total return figure shows
the average percentage change in value of an investment in SC-US's Class R
shares 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-US's Class R
shares and assumes that any income, dividends and/or capital gains distributions
made by SC-US's Class R shares during the period are reinvested in Class R
shares of SC-US. 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-US'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-US's Class R annual total return for any one year
in the period might have been greater or less than the average for the entire
period. SC-US also may use "aggregate" total return figures for various
periods, representing the cumulative change in value of an investment in SC-US's
Class R shares for the specific period (again reflecting changes in SC-US's
Class R share price and assuming reinvestment of
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Class R 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-US's
performance.
YEAR 2000 RISKS
Like investment companies, financial and business organizations around the
world, SC-REMFs could be adversely affected if the computer systems used by the
SC-REMFs, other service providers and entities with computer systems that are
linked to SC-REMFs' records do not properly process and calculate date-related
information and data from and after January 1, 2000. This is commonly known as
the "Year 2000 Issue." SC-REMFs is taking steps that it believes are reasonably
designed to address the Year 2000 Issue with respect to the computer systems
that it uses and to obtain satisfactory assurances that comparable steps are
being taken by each of SC-REMFs major service providers. However, there can be
no assurance that these steps will be sufficient to avoid any adverse impact on
SC-REMFs, SC-US, SC-EURO, SC-ASIA and SC-ARBITRAGE.
ADDITIONAL INFORMATION
Any shareholder inquiries may be directed to SC-REMFs 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 of the information set forth in the
Registration Statement filed by SC-REMFs 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.
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CLASS I PROSPECTUS
- ------------------
LOGO
11 SOUTH LASALLE STREET
CHICAGO, ILLINOIS 60603
Security Capital European Real Estate Shares ("SC-EURO") is an
investment portfolio of Security Capital Real Estate Mutual Funds Incorporated
("SC-REMFs"), an open-end management investment company organized under Maryland
law. SC-EURO seeks to provide shareholders with above-average total returns,
including current income and capital appreciation, primarily through investments
in equity securities of publicly-traded real estate companies organized
principally in European countries. Long-term, SC-EURO's objective is to achieve
top-quartile returns as compared with other mutual funds that invest in
publicly-traded real estate companies organized principally in European
countries, by integrating in-depth proprietary real estate market research with
sophisticated capital markets research and investment modeling techniques.
Security Capital Global Capital Management Group Incorporated ("GCMG") serves as
both investment adviser and administrator to SC-EURO and Security Capital Global
Capital Management Group (Europe) S.A. ("GCMG-Europe") serves as SC-EURO's
investment sub-adviser.
By this Prospectus, Class I shares of SC-EURO are being offered. Class
I shares are offered to investors whose minimum investment is $250,000. Class I
shares are offered directly through SC-REMFs, Security Capital Markets Group
Incorporated, SC-EURO's distributor ("Distributor"), and various financial
intermediaries. See "Purchase of Shares." SC-EURO also offers Class R shares to
investors whose minimum initial investment is $2,500. Class R shares have
different expenses than Class I shares which would affect performance. Investors
desiring to obtain information about SC-EURO's Class R shares should call toll
free 1-888-SECURITY or ask their sales representatives or the Distributor. This
Prospectus provides you with information specific to the Class I shares of SC-
EURO. It contains information you should know before you invest in SC-EURO.
This Prospectus sets forth concisely the information a prospective
investor should know before investing in SC-EURO. SC-REMFs offers other
investment portfolios which are described in the prospectuses for Security
Capital U.S. Real Estate Shares, Security Capital Asia/Pacific Real Estate
Shares and Security Capital Real Estate Arbitrage Shares. A Statement of
Additional Information dated June 30, 1998, containing additional and more
detailed information about SC-EURO has been filed with the Securities and
Exchange Commission (the "SEC") and is hereby incorporated by reference into
this Prospectus. It is available without charge and can be obtained by calling
toll free 1-888-SECURITY.
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 NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
August 19, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Expenses................................................................ 2
Description of SC-EURO.................................................. 4
Investment Objectives and Policies...................................... 4
Investment Strategy..................................................... 5
Other Investment Strategies............................................. 6
Risk Factors............................................................ 7
Non-Diversified Status & Portfolio Turnover............................. 10
Directors, Officers and Other Personnel................................. 10
Investment Advisory Agreement and
Investment Sub-Advisory Agreement....................................... 13
Administrator and Sub-Administrator..................................... 14
Distribution and Servicing Plan......................................... 15
Determination of Net Asset Value........................................ 15
Purchase of Shares...................................................... 16
Redemption of Shares.................................................... 18
Dividends and Distributions............................................. 19
Taxation................................................................ 20
Organization and Description of Capital Stock........................... 21
Custodian and Transfer Agent............................................ 22
Reports to Shareholders................................................. 22
Performance Information................................................. 22
Year 2000 Risks......................................................... 22
Additional Information.................................................. 22
</TABLE>
<PAGE>
EXPENSES
SHAREHOLDER TRANSACTION EXPENSES
Shareholder transaction expenses are direct charges which are incurred when
shareholders buy or sell shares of SC-EURO.
ANNUAL SC-EURO OPERATING EXPENSES
The Class I shares of SC-EURO pay for certain expenses attributable to
Class I shares directly out of SC-EURO's Class I assets. These expenses are
related to management of SC-EURO, administration and other services. For
example, SC-EURO pays an advisory fee and an administrative fee to GCMG. SC-EURO
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-EURO's Class
I assets to calculate SC-EURO's Class I 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-EURO and the portion of SC-EURO's operating expenses
that they might expect to bear indirectly. The numbers reflected below are based
on SC-EURO's projected expenses for its current fiscal period ending December
31, 1998, assuming that SC-EURO'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-EURO's assets.
FEE TABLE
Shareholder Transaction Expenses:
Maximum sales charge on purchases and reinvested distributions...... None
Redemption fee (1).................................................. None
Annual SC-EURO Operating Expenses (after expense waivers and/or
reimbursements, as a percentage of average net assets):
Management fees..................................................... .85%
12b-1 fees (2)...................................................... .25%
Other expenses...................................................... .35%
------
Total SC-EURO operating expenses (3)................................ 1.45%
________
(1) The purchase or redemption of shares through a securities dealer that has
not entered into a sales agreement with the Distributor may be subject to a
transaction fee.
(2) SC-REMFs has adopted a Distribution and Service Plan for SC-EURO Class I
shares pursuant to Rule 12b-1 of the Investment Company Act of 1940, as
amended, pursuant to which SC-EURO pays the Distributor a fee for
distribution-related services and services related to the maintenance of
shareholder accounts at the annual rate of 0.25% of SC-EURO's Class I
average daily net assets. As a result, long-term Class I shareholders of
SC-EURO may pay more than the economic equivalent of the maximum front-end
sales load permitted by the National Association of Securities Dealers,
Inc. ("NASD").
(3) GCMG has committed to waive fees and/or reimburse other expenses to
maintain SC-EURO's Class I total operating expenses, other than brokerage
fees and commissions, interest, taxes and other extraordinary expenses at
no more than 1.45% of the value of SC-EURO's average daily net assets for
Class I shares for the year ending December 31, 1998. SC-EURO estimates
that without such waiver and/or reimbursement, other expenses would be .35%
and total fund operating expenses would be 1.45% of the value of SC-EURO's
Class I average daily net assets.
2
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EXAMPLE
ONE THREE
YEAR YEARS
---- -----
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............................... $15 $46
THE ACTUAL EXPENSES IN FUTURE YEARS MAY BE MORE OR LESS THAN THE
NUMBERS IN THE EXAMPLE, DEPENDING ON A NUMBER OF FACTORS, INCLUDING THE ACTUAL
VALUE OF SC-EURO'S ASSETS.
3
<PAGE>
DESCRIPTION OF SC-EURO
SC-EURO is a non-diversified investment portfolio of Security Capital
Real Estate Mutual Funds Incorporated ("SC-REMFs"), an open-end management
investment company organized under Maryland law. SC-REMFs is comprised of four
investment portfolios, SC-EURO, Security Capital U.S. Real Estate Shares ("SC-
US"), Security Capital Asia/Pacific Real Estate Shares ("SC-ASIA") and Security
Capital Real Estate Arbitrage Shares ("SC-ARBITRAGE").
SC-EURO issues two classes of shares, one of which, Class I shares,
includes investors whose minimum initial investment is $250,000. The second
class of shares, Class R shares, which are offered to all other eligible
investors, offers different services and incurs different expenses than Class I
shares, which would affect performance. See "Purchase of Shares" and
"Organization and Description of Capital Stock." SC-EURO Class I shares are
offered by this prospectus.
INVESTMENT OBJECTIVES AND POLICIES
SC-EURO's investment objective is to provide shareholders with above-
average total returns, including current income and capital appreciation,
primarily through investments in equity securities of publicly-traded real
estate companies organized principally in European countries. Long-term, SC-
EURO's objective is to achieve top-quartile results as compared to other mutual
funds that invest in publicly-traded real estate companies organized principally
in European countries, by integrating in-depth proprietary real estate market
research with sophisticated capital markets research and investment modeling
techniques. SC-EURO's investment objective is "fundamental" and cannot be
changed without approval of a majority of its outstanding voting securities.
None of SC-EURO's policies, other than its investment objective and the
investment restrictions described in the Statement of Additional Information,
are fundamental; these non-fundamental policies may be changed by SC-EURO's
Board of Directors without shareholder approval. There can be no assurance that
SC-EURO's investment objective will be achieved.
Under normal conditions, SC-EURO will invest at least 65% of its
assets in the equity securities of publicly-traded real estate companies located
primarily in European nations, including Austria, Belgium, Denmark, Finland,
France, Germany, Ireland, Italy, the Netherlands, Norway, Portugal, Spain,
Sweden, Switzerland, and the United Kingdom. SC-EURO also may invest in the
equity securities of real estate companies located in Eastern Europe and other
European emerging market countries.
The equity securities in which SC-EURO will invest will consist of (1)
common stocks, (2) rights or warrants to purchase common stocks, (3) securities
convertible into common stocks where the conversion feature represents, in GCMG-
Europe's view, a significant element of the security's value, and (4) preferred
stocks. SC-EURO will invest only in real estate companies that derive at least
50% of their revenues from the ownership, construction, financing, management or
sale of commercial, industrial or residential real estate and hotels or that
have at least 50% of their assets invested in such real estate.
SC-EURO may, from time to time, invest in debt securities of issuers
in the real estate industry. Debt securities purchased by SC-EURO will be rated
no lower than A by Moody's Investors Service, Inc. ("Moody's") or Standard &
Poors Corporation ("S&P") or, if not so rated, believed by GCMG-Europe to be of
comparable quality and, in the aggregate, may have an average weighted maturity
of up to 30 years.
When, in the judgment of GCMG or GCMG-Europe, market or general
economic conditions justify a temporary defensive position, SC-EURO will deviate
from its investment objective and invest without limit in money market
securities, denominated in dollars or in the currency of any foreign country,
issued by entities organized in the U.S. or any foreign country, such as: short-
term (less than 12 months to maturity) and medium-term (not greater than five
years to maturity) obligations issued or guaranteed by the U.S. Government or
the government of a foreign country, their agencies or instrumentalities;
finance company and corporate commercial paper and other short-term corporate
obligations, in each case rated Baa by Moody's, or BBB or better by S&P or, if
unrated, of comparable quality as determined by GCMG; and repurchase agreements
with banks and broker-dealers with respect to such securities. For
4
<PAGE>
temporary defensive purposes, SC-EURO also may invest up to 25% of its total
assets in obligations (including certificates of deposit, time deposits and
bankers' acceptances) of banks; provided that SC-EURO will limit its investment
in time deposits for which there is a penalty for early withdrawal to 10% of its
total assets.
SC-EURO is subject to certain investment restrictions that are
fundamental and, therefore, may not be changed without shareholder approval.
Among other things, SC-EURO will not invest more than 10% of its net assets in
illiquid securities, determined at the time of investment. 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. GCMG and GCMG-Europe will monitor the liquidity of such
restricted securities under the supervision of SC-EURO's Board of Directors. If
SC-EURO invests in securities issued by a real estate company that is controlled
by Security Capital Group Incorporated or any of its affiliates, such securities
will be treated as illiquid securities. SC-EURO also may not invest directly in
real estate. See SC-EURO's Statement of Additional Information for further
discussion of SC-EURO's fundamental investment restrictions.
INVESTMENT STRATEGY
REAL ESTATE SECURITIES INDUSTRY OUTLOOK
GCMG believes that the real estate industry throughout Europe will
experience the same fundamental transformation as experienced in the last seven
years in the U.S., which will create significant opportunities. Direct
investment of equity capital in real estate will decrease further while
investments in publicly-traded real estate operating companies are increasing.
The aggregate equity market capitalization of real estate in Europe has
increased from $25 billion at December 31, 1992 to $65 billion at December 31,
1997. This increasing securitization of the real estate industry through Europe,
primarily in the form of real estate operating companies, 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.
A RESEARCH-DRIVEN TOP DOWN AND BOTTOM UP APPROACH
SC-EURO seeks to achieve top-quartile returns by investing primarily
in European real estate operating companies which have the potential to deliver
above-average growth. GCMG believes that these investment opportunities can only
be identified through the integration of top down economic and real estate
market research and bottom up operating company cash flow modeling.
Top Down Economic and Real Estate Market Research. GCMG and GCMG-
Europe are uniquely positioned to access meaningful, proprietary economic and
real estate research collected at the country market, city sub-market and
property-specific level. Non-U.S. country market research and analysis, which is
provided to GCMG and GCMG-Europe by SC (EU) Management and other operating
professionals within the Security Capital Group Incorporated affiliate company
network, assists GCMG-Europe in identifying attractive growth in country markets
and real estate sectors. This research and analysis is instrumental to GCMG-
Europe's ability to make investment decisions for SC-EURO's portfolio and to
identify country markets reaching a "marginal turning point." This country
market research 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 country
market and city sub-market basis and by product type. Specifically, primary
country market research evaluates normalized cash flow lease economics --
accounting for capital costs -- to determine whether the core economy of a
country market is expected to improve, stabilize or decline. Only through
disciplined real estate market research does GCMG-Europe believe it can identify
country markets and/or city sub-markets, and thus, real estate operating
companies, with potential for higher than average growth prospects.
Bottom Up Real Estate Operating Company Cash Flow Modeling. GCMG and
GCMG-Europe believe that analyzing the cash flow profile -- the quality and
growth potential -- of a real estate company, both historically and
prospectively, is another fundamental step toward identifying above-average
growth opportunities. GCMG and GCMG-Europe believe that cash flow is helpful in
understanding a real estate portfolio in that such calculation reflects cash
flow from operations and the real estate's ability to support interest payments
and general operating expenses before
5
<PAGE>
the impact of certain activities, such as gains or losses from sales of real
estate and changes in accounts receivable and accounts payable. The real estate
operating valuation models utilized by GCMG-Europe integrate real estate market
research with analysis on specific real estate portfolios in order to establish
an independent value of the underlying sources of a real estate company's cash
flow. Certain models measure and compare the impact of specific factors on cash
flow growth expectations. The data from all valuation models is ultimately
integrated and reviewed in order to identify real estate operating companies
with significant potential for growth.
OTHER INVESTMENT STRATEGIES
SC-EURO also may from time to time use certain of the investment
techniques described below to achieve its objectives. Although these strategies
are regularly used by some investment companies and other institutional
investors in various markets, some of these strategies cannot at the present
time be used to a significant extent by SC-EURO in some of the markets in which
SC-EURO will invest and SC-EURO does not expect to use them extensively.
Repurchase Agreements. When SC-EURO acquires a security from a bank or a
broker-dealer, it may simultaneously enter into a repurchase agreement, wherein
the seller agrees to repurchase the security at a specified time and price. The
repurchase price is in excess of the purchase amount which reflects an agreed-
upon rate of return, and is not tied to the coupon rate on the underlying
security.
Loans of Portfolio Securities. SC-EURO may lend to broker-dealers portfolio
securities with an aggregate market value of up to one-third of its total
assets. Such loans must be secured by collateral (consisting of any combination
of cash, U.S. Government securities or irrevocable letters of credit) in an
amount at least equal (on a daily marked-to-market basis) to the current market
value of the securities loaned. SC-EURO may terminate the loans at any time and
obtain the return of the securities loaned within five business days. SC-EURO
will continue to receive any interest or dividends paid on the loaned securities
and will continue to have voting rights with respect to the securities.
Options on Securities and Stock Indices. In order to increase its return or to
hedge all or a portion of its portfolio investments, SC-EURO may write (i.e.,
sell) covered put and call options and purchase put and call options on
securities or stock indices that are traded on U.S. and foreign exchanges or in
the over-the-counter markets. An option on a security is a contract that gives
the purchaser the option, in return for the premium paid, to buy a specified
security (in the case of a call option) or to sell a specified security (in the
case of a put option) from or to the writer of the option at a designated price
during the term of the option. An option on a stock index gives the purchaser of
the option, in return for the premium paid, the right to receive from the seller
cash equal to the difference between the closing price of the index and the
exercise price of the option. SC-EURO may write a call or put option only if the
option is "covered." This means that so long as SC-EURO is obligated as the
writer of a call option, it will own the underlying securities subject to the
call, or hold a call at the same or lower exercise price, for the same exercise
period, and on the same securities as the written call. A put is covered if SC-
EURO maintains liquid assets with a value equal to the exercise price in a
segregated account or holds a put on the same underlying security at an equal or
greater exercise price. The value of the underlying securities on which options
may be written at any one time will not exceed 15% of the total assets of SC-
EURO. SC-EURO will not purchase put or call options if the aggregate premium
paid for such options would exceed 5% of its total assets at the time of
purchase.
Forward Foreign Currency Contracts. SC-EURO may enter into forward foreign
currency exchange contracts ("forward contracts") to attempt to minimize the
risk to SC-EURO from adverse changes in the relationship between the U.S. dollar
and foreign currencies. A forward contract is an obligation to purchase or sell
a specified currency for an agreed price at a future date which is individually
negotiated and privately traded by currency traders and their customers. SC-EURO
will enter into forward contracts only under two circumstances. First, when SC-
EURO enters into a contract for the purchase or sale of a security denominated
in a foreign currency, it may desire to "lock in" the U.S. dollar price of the
security in relation to another currency by entering into a forward contract to
buy the amount of foreign currency needed to settle the transaction. Second,
when GCMG believes that the currency of a particular foreign country may suffer
or enjoy a substantial movement against another currency, SC-EURO may enter into
a forward contract to sell or buy the amount of the former foreign currency (or
another currency which acts as a proxy for that currency) approximating the
value of some or all of SC-EURO's portfolio securities denominated in such
foreign currency. The second investment practice is in general referred to as
"cross-hedging." SC-EURO's forward transactions may call for the delivery of one
6
<PAGE>
foreign currency in exchange for another foreign currency and may at times not
involve currencies in which its portfolio securities are denominated.
Futures Contracts. For hedging purposes only, SC-EURO may buy and sell
financial futures contracts, stock and bond index futures contracts, and options
on any of the foregoing. A financial futures contract is an agreement between
two parties to buy or sell a specified debt security at a set price on a future
date. An index futures contract is an agreement to take or make delivery of an
amount of cash based on the difference between the value of the index at the
beginning and at the end of the contract period. A futures contract on a
foreign currency is an agreement to buy or sell a specified amount of a currency
for a set price on a future date.
When SC-EURO enters into a futures contract, it must make an initial
deposit, known as "initial margin," as a partial guarantee of its performance
under the contract. As the value of the security, index or currency fluctuates,
either party to the contract is required to make additional margin payments,
known as "variation margin," to cover any additional obligation it may have
under the contract. In addition, when SC-EURO enters into a futures contract,
it will segregate assets or "cover" its position in accordance with the 1940
Act. See "Investment Objectives and Policies --Futures Contracts" in the
Statement of Additional Information.
SC-EURO may not commit more than 5% of its total assets to initial
margin deposits on futures contracts. The value of the underlying securities on
which futures will be written at any one time may not exceed 25% of the total
assets of SC-EURO.
Depositary Receipts. SC-EURO may purchase sponsored or unsponsored American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") and Global
Depositary Receipts ("GDRs") (collectively, "Depositary Receipts"). ADRs are
Depositary Receipts typically used by a U.S. bank or trust company which
evidence ownership of underlying securities issued by a foreign corporation.
EDRs and GDRs are typically issued by foreign banks or trust companies, although
they also may be issued by U.S. banks or trust companies, and evidence ownership
of underlying securities issued by either a foreign or a United States
corporation. Generally, Depositary Receipts in registered form are designed for
use in the U.S. securities market and Depositary Receipts in bearer form are
designed for use in securities markets outside the United States. Depositary
Receipts may not necessarily be denominated in the same currency as the
underlying securities into which they may be converted.
Short Sales. SC-EURO reserves the right to engage in short sale transactions in
securities listed on one or more foreign or U.S. securities exchanges. Short
selling involves the sale of borrowed securities. At the time a short sale is
effected, SC-EURO incurs an obligation to replace the security borrowed at
whatever its price may be at the time that SC-EURO 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-EURO 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-EURO will
not engage in short sales if immediately following such transaction the
aggregate market value of all securities sold short would exceed 10% of SC-
EURO's net assets (taken at market value). See SC-EURO's Statement of Additional
Information for further discussion of short sales.
RISK FACTORS
Shareholders should understand that all investments involve risk and
there can be no guarantee against loss resulting from an investment in SC-EURO,
nor can there be an assurance that SC-EURO's investment objectives will be
attained. As with any investment in securities, the value of, and income from,
an investment in SC-EURO can decrease as well as increase depending on a variety
of factors which may affect the values and income generated by SC-EURO's
portfolio securities, including general economic conditions and market factors.
In addition to the factors which affect the value of individual securities, a
shareholder may anticipate that the value of the shares of SC-EURO will
fluctuate with movements in the broader equity and bond markets. A decline in
the stock market of any country in which SC-EURO is invested may also be
reflected in declines in the price of shares of SC-EURO. Changes in currency
valuations will also affect the price of shares of SC-EURO. History reflects
both decreases and increases in worldwide stock markets and currency valuations,
and these may reoccur unpredictably in the future. The value of debt securities
held by SC-EURO generally will vary inversely with changes in prevailing
interest rates. Additionally, investment decisions
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<PAGE>
made by GCMG-Europe will not always be profitable or prove to have been correct.
SC-EURO is intended as an investment vehicle for those investors seeking long
term capital growth and is not intended as a complete investment program.
Investment in Real Estate Securities. SC-EURO will not invest in real estate
directly, but only in securities issued by real estate companies. However, SC-
EURO may be subject to risks similar to those associated with the direct
ownership of real estate (in 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 real estate 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.
Additionally, SC-EURO could conceivably own real estate directly as a
result of a default on debt securities that it owns. If SC-EURO has rental
income or income from the disposition of such real estate, the receipt of such
income may adversely affect its ability to retain its tax status as a regulated
investment company. See "Taxation."
Foreign Securities. Investors should consider carefully the substantial risks
involved in investing in securities issued by companies and governments of
foreign nations, which are in addition to the usual risks inherent in domestic
investments. There is the possibility of expropriation, nationalization or
confiscatory taxation, taxation of income earned in foreign nations or other
taxes imposed with respect to investments in foreign nations, foreign exchange
controls (which may include suspension of the ability to transfer currency from
a given country), foreign investment controls on daily stock market movements,
default in foreign government securities, political or social instability, or
diplomatic developments which could affect investments in securities of issuers
in foreign nations. In addition, in many countries there is less publicly
available information about issuers than is available in reports about companies
In the U.S. Foreign companies are not generally subject to uniform accounting
and auditing and financial reporting standards, and auditing practices and
requirements may not be comparable to those applicable to U.S. companies. SC-
EURO may encounter difficulties or be unable to vote proxies, exercise
shareholder rights, pursue legal remedies, and obtain judgments in foreign
courts. Also, most foreign countries withhold portions of income and dividends
at the source requiring investors to reclaim taxes withheld.
Brokerage commissions, custodial services and other costs relating to
investment in European countries are generally more expensive than in the U.S.
European securities markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when assets of SC-EURO are uninvested and no return is earned
thereon. The inability of SC-EURO to make intended security purchases due to
settlement problems could cause SC-EURO to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result either in losses to SC-EURO due to subsequent declines in
value of the portfolio security or, if SC-EURO has entered into a contract to
sell the security, could result in possible liability to the purchaser.
In many foreign countries, there is less government supervision and
regulation of business and industry practices, stock exchanges, brokers and
listed companies than in the U.S. There is an increased risk, therefore, of
uninsured loss due to lost, stolen, or counterfeit stock certificates. In
addition, the foreign securities markets of many of the countries in which SC-
EURO may invest may also be smaller, less liquid, and subject to greater price
volatility than those in the U.S.
Prior governmental approval of foreign investments may be required
under certain circumstances in some developing countries, and the extent of
foreign investment in domestic companies may be subject to limitation in other
developing countries. Foreign ownership limitations also may be imposed by the
charters of individual companies in developing countries to prevent, among other
concerns, violation of foreign investment limitations.
There are special risks attendant to investment in the Western
European countries. The countries that are members of the European Economic
Community ("Common Market") (Belgium, Denmark, France, Germany, Greece, Ireland,
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Luxembourg, the Netherlands, Portugal, Spain and the United Kingdom) have
eliminated certain import tariffs and quotas and other trade barriers with
respect to one another over the past several years. GCMG believes that these
Common Market reforms are likely to improve the prospects for economic growth in
many Western European countries. Nevertheless, it is not clear what the form or
effect of such reforms will be on real estate companies in Western Europe.
Therefore it is impossible to predict their long-term impact on SC-EURO's
investments.
SC-EURO may also invest in the equity securities of real estate
companies in European emerging market countries. Investing in emerging markets
entails the risks associated with foreign investment described above. However,
these risks may be intensified in emerging markets. Emerging markets can include
every nation in the world except the United States, Canada, Japan, Australia,
New Zealand and most nations located in Western Europe. Certain emerging market
countries have historically experienced, and may continue to experience, high
rates of inflation, high interest rates, exchange rate fluctuations, large
amounts of external debt, trade difficulties and unemployment. Further, the
economies of developing countries generally are heavily dependent upon
international trade and, accordingly, have been, and may continue to be,
adversely affected by trade barriers, exchange controls and other protectionist
measures imposed or negotiated by the countries in which they trade. There are
also risks associated with the possibility of nationalization, expropriation or
confiscatory taxation, political changes, government regulations, social
instability or diplomatic developments (including war) that could adversely
affect the economies of such countries or the value of SC-EURO's investments in
those countries.
The markets of Eastern Europe are among the emerging markets in which
SC-EURO may invest. Most Eastern European nations, including Hungary, Poland,
the Czech Republic, the Slovak Republic and Romania have had centrally planned,
socialist economies since shortly after World War II. A number of their
governments, including those of Hungary, the Czech Republic and Poland are
currently implementing or considering reforms directed at political and economic
liberalization, including efforts to foster multi-party political systems,
decentralize economic planning and move toward free market economies. Any change
in the leadership or policies of Eastern European countries, or countries that
exercise a significant influence over those countries, may cause Eastern
European countries to revert from a market-oriented to a centrally planned
economy and adversely affect existing investment opportunities. Additionally,
former Communist regimes of a number of Eastern European countries expropriated
a large amount of property, the claims of which have not been entirely settled.
There can be no assurance that the SC-EURO's investment in Eastern Europe would
not also be expropriated, nationalized or otherwise confiscated.
SC-EURO usually effects currency exchange transactions on a spot
(i.e., cash) basis at the spot rate prevailing in the foreign exchange market.
However, some price spread on currency exchange (to cover service charges) will
be incurred when SC-EURO converts assets from one currency to another.
Repurchase Agreements. Under the 1940 Act, repurchase agreements are considered
to be loans collateralized by the underlying security and therefore will be
fully collateralized. However, if the seller should default on its obligation
to repurchase the underlying security, SC-EURO may experience delay or
difficulty in exercising its rights under the security and may incur a loss if
the value of the security should decline, as well as incur disposition costs in
liquidating the security.
Futures and Options. Successful use of futures contracts and related options is
subject to special risk considerations. A liquid secondary market for any future
or options contract may not be available when a futures position is sought to be
closed. In addition, there may be an imperfect correlation between movements in
the securities or foreign currency on which the futures or options contract is
based and movements in the securities or currency in SC-EURO's portfolio.
Successful use of futures or options contracts is further dependent on GCMG-
Europe's ability to correctly predict movements in the securities or foreign
currency markets and no assurance can be given that its judgment will be
correct. Successful use of options on securities or stock indices is subject to
similar risk considerations.
Depositary Receipts. Depositary Receipts may be issued pursuant to sponsored or
unsponsored programs. In sponsored programs, an issuer has made arrangements to
have its securities traded in the form of Depositary Receipts. In unsponsored
programs, the issuer may not be directly involved in the creation of the
program. Although regulatory requirements with respect to sponsored and
unsponsored programs are generally similar, in some cases it may be easier to
obtain financial information from an issuer that has participated in the
creation of a sponsored program. Accordingly, there may be less information
available regarding issuers of securities underlying unsponsored programs and
there may
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not be a correlation between such information and the market value of the
Depositary Receipts. Depositary Receipts also involve the risks of other
investments in foreign securities, as discussed above. For purposes of SC-EURO's
investment policies, SC-EURO's investment in Depositary Receipts will be deemed
to be investments in the underlying securities.
Other Risks. There are further risk considerations, including possible losses
through the holding of securities in domestic and foreign custodian banks and
depositories, described in the Statement of Additional Information.
NON-DIVERSIFIED STATUS AND PORTFOLIO TURNOVER
SC-EURO intends to operate as a "non-diversified" investment company
under the 1940 Act, which means SC-EURO 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-EURO intends to conduct its operations so as to qualify as a
"regulated investment company" for purposes of the Internal Revenue Code of
1986, as amended (the "Code"), which generally will relieve SC-EURO 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-EURO 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-EURO'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-EURO will not own more than 10% of the
outstanding voting securities of a single issuer. SC-EURO's investments in
securities issued by the U.S. Government, its agencies and instrumentalities are
not subject to these limitations. Because SC-EURO, as a non-diversified
investment company, may invest in a smaller number of individual issuers than a
diversified investment company, an investment in SC-EURO may present greater
risk to an investor than an investment in a diversified company.
SC-EURO anticipates that its annual portfolio turnover rate will not
exceed 150%, but the turnover rate will not be a limiting factor when GCMG 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-EURO 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-EURO. High
portfolio turnover may result in the realization of net short-term capital gains
by SC-EURO which, when distributed to shareholders, will be taxable as ordinary
income. See "Taxation."
DIRECTORS, OFFICERS AND OTHER PERSONNEL
BOARD OF DIRECTORS
The overall management of the business and affairs of SC-EURO is
vested with the Board of Directors of SC-REMFs. The Board of Directors approves
all significant agreements between SC-REMFs and persons or companies furnishing
services to SC-EURO, including SC REMFs' agreements with GCMG, and with its
custodian and its transfer agent. The management of SC-EURO's day-to-day
operations is delegated to the officers of SC-REMFs, who include the Managing
Directors, and GCMG, subject always to the investment objectives and policies of
SC-EURO and to general supervision by the Board of Directors. Although SC-REMFs
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-REMFs'
Articles of Incorporation. The Directors and principal officers of SC REMFs and
their principal occupations are set forth below.
Anthony R. Manno Jr. Chairman of the Board of Directors, Managing
Director and President of SC-REMFs. Managing
Director and President of GCMG since January
1995, where he is responsible for overseeing
all investment and capital allocation matters
for GCMG's public market securities
activities and is also responsible for
company and industry analysis, market
strategy and trading and reporting. Mr. Manno
was a member of the Investment Committee of
Security Capital Group Incorporated
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from March 1994 to June 1996. Prior to joining
Security Capital, Mr. Manno was a Managing
Director of LaSalle Partners Limited from March
1980 to March 1994. Mr. Manno received his M.B.A.
from the University of Chicago Graduate School of
Business, an M.A. and a B.A. from Northwestern
University and is a Certified Public Accountant.
Robert H. Abrams Director of SC-REMFs. Director of the Program in
Real Estate at Cornell University. Founder of
Colliers ABR, Inc. (formerly Abrams Benisch Riker
Inc.), a property management firm. Mr. Abrams was
Principal of Colliers ABR, Inc. from 1978 to 1992
and since 1992, has served as a Consultant. From
1959 to 1978 Mr. Abrams was Executive Vice
President and Director of Cross and Brown Company.
Mr. Abrams also serves as Trustee Emeritus and
Presidential Counselor of his alma mater, Cornell
University. Mr. Abrams received his M.B.A. from
Harvard University and his B.A. from Cornell
University.
Stephen F. Kasbeer Director of SC-REMFs. Retired; Senior Vice
President for Administration and Treasurer of
Loyola University, Chicago from 1981 to July 1994,
where he was responsible for administration,
investment, real estate and treasurer functions.
At Loyola University, he also 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. Currently, Mr. Kasbeer serves
as a Director of Endowment Realty, Inc. and
Endowment Realty II and as a Member of the
Investment Committee of the University of San
Diego. Mr. Kasbeer also serves as Trustee,
Treasurer and Chairman of the Investment and
Finance Committees of Santa Fe Preparatory School
and as Trustee and Chairman of the Santa Fe
Preparatory School Combined Permanent Endowment
Fund Trust. Mr. Kasbeer received his J.D. from
John Marshall Law School and his M.A. and B.S.
from Northwestern University.
George F. Keane Director of SC-REMFs. Chairman of the Board of
Trigen Energy Corporation since 1994. As founding
chief executive of The Common Fund in 1971 and
Endowment Realty Investors in 1988, Mr. Keane for
many years headed an investment management service
for colleges, universities and independent schools
that managed $15 billion for 1,200 educational
institutions when he became President Emeritus of
the Common Fund in 1993. He has served as a member
of the Investment Advisory Committee of the $95
billion New York State Common Retirement Fund
since 1982. He has been a Director of the Northern
Trust of Connecticut since 1991, a Trustee of the
Nicholas Applegate Investment Trust since 1993,
and a Director of the Bramwell Funds since 1994.
He is also a Director of Universal Stainless &
Alloy Products, Global Pharmaceutical Corporation,
United Water Resources and United Properties
Group, and the Universal Bond Fund, and is an
advisor to Associated Energy Managers. Mr. Keane
also serves as a Trustee of his alma mater,
Fairfield University where he received his B.A.,
and as a Director and Chairman of the Investment
Committee of the United Negro College Fund. Mr.
Keane also holds honorary degrees from Loyola
University, Chicago, Illinois and Lawrence
University, Appleton, Wisconsin.
John H. Gardner, Jr. Director and Managing Director of SC-REMFs.
Managing Director of GCMG since July, 1997. Prior
thereto, Director of the REIT Manager for Security
Capital Pacific Trust ("PTR") from February 1995
to June 1997 and Senior Vice President of Security
Capital Atlantic Incorporated ("ATLANTIC"), PTR
and the PTR REIT Manager from September 1994 to
June 1997 where he had overall responsibility for
asset management and multifamily dispositions.
Prior to joining Security Capital, Mr. Gardner was
with Copley Real Estate Advisors as a Managing
Director and
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Principal responsible for portfolio management
from January 1991 to September 1994 and as a Vice
President and Principal of asset management from
December 1984 to December 1990. From July 1977 to
November 1984, Mr. Gardner was a Real Estate
Manager with the John Hancock Companies. Mr.
Gardner received his M.S. from Bentley College and
his B.S. from Stonehill College.
Kenneth D. Statz Managing Director of SC-REMFs. Managing Director
of GCMG since November 1997 where he is
responsible for the development and implementation
of portfolio investment strategy. Prior thereto,
Senior Vice President of GCMG from July 1996 to
October 1997 and Vice President from May 1995 to
June 1996. Prior to joining Security Capital, Mr.
Statz was a Vice President and Senior REIT Analyst
in the investment research department of Goldman,
Sachs & Co., from February 1993 to January 1995,
concentrating on research and underwriting for the
REIT industry. Prior thereto, Mr. Statz was a real
estate stock portfolio manager and a managing
director of Chancellor Capital Management from
August 1982 to February 1992. Mr. Statz received
his M.B.A. and B.B.A. from the University of
Wisconsin, Madison.
Kevin W. Bedell Senior Vice President of SC-REMFs. Senior Vice
President of GCMG since November 1997 and Vice
President since July 1996, where he is responsible
for directing the activities of the
industry/company securities research group and
providing in-depth proprietary research on
publicly traded companies with office and
industrial sectors. Prior to joining GCMG, Mr.
Bedell spent nine years with LaSalle Partners
Limited where he was Equity Vice President and
Portfolio Manager responsible for the strategic,
operational and financial management of a private
REIT with commercial real estate investments of
$800 million. Mr. Bedell received his M.B.A. from
the University of Chicago and his B.A. from Kenyon
College.
Jeffrey C. Nellessen Vice President, Treasurer and Assistant Secretary
of SC-REMFs. Vice President and Controller of GCMG
since March 1997. Prior thereto, from June 1988 to
March 1997, he was Controller, Manager of Client
Administration and Compliance Officer at Strong
Capital Management, Inc. Mr. Nellessen is a
Certified Public Accountant, Certified Management
Accountant and a Certified Financial Planner. He
received his B.B.A. from the University of
Wisconsin, Madison.
David T. Novick Vice President and Secretary of SC-REMFs. Vice
President of Security Capital Group Incorporated
since June 1998. Prior thereto, from September
1989 to June 1998, he was an attorney, and most
recently a Partner, with the law firm of Katten
Muchin and Zavis. Mr. Novick received his B.S.B.A.
from Boston University and his J.D. from the
University of Illinois.
GCMG
Security Capital Global Capital Management Group Incorporated ("GCMG"),
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-EURO under the overall supervision and
control of the Directors of SC-EURO.
GCMG commenced operations in January 1995, and is registered as an
investment adviser with the SEC. GCMG's principal officers include Anthony R.
Manno, Jr., Managing Director and President, John H. Gardner, Jr., Managing
Director, Kenneth D. Statz, Managing Director and Kevin W. Bedell, Senior Vice
President. Messrs. Manno and Gardner are responsible for overseeing the
portfolio management activities of GCMG-Europe. GCMG is an indirect wholly-owned
subsidiary of Security Capital Group Incorporated, a real estate research,
investment and management company.
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GCMG-EUROPE
Security Capital Global Capital Management Group (Europe) S.A. ("GCMG-
Europe"), with offices located at Boulevard de la Woluwe 34, Brussels, Belgium,
provides portfolio management services to SC-EURO pursuant to an investment sub-
advisory agreement with GCMG. GCMG-Europe, an indirect wholly-owned subsidiary
of Security Capital Group Incorporated, was formed on May 14, 1998 under Belgian
law and is registered as an investment adviser with the SEC. The principal
officer of GCMG-Europe, who serves on the SC-EURO Portfolio Management
Committee, and his principal occupations are set forth below.
Gerios J.M. Rovers Vice President of GCMG-Europe since May 1998 where
he is responsible for trading and portfolio
management strategy. From April 1997 to May 1998,
Mr. Rovers served as Vice President of SC (EU)
Management where he was responsible for providing
research and management support services in the
area of European investments. Mr. Rovers was a
Vice President and Senior Portfolio Manager with
GIM Management, Inc. (the Netherlands) from
January 1993 to March 1997. From July 1988 to
April 1997, Mr. Rovers was associated with GIM
Algemeen Vermogensbeheer and served as an
Associate Director and Portfolio Manager of global
real estate securities on behalf of domestic and
foreign clients. Mr. Rovers graduated from the
University of Tilburg in The Netherlands.
The SC-EURO Portfolio Management Committee, which is comprised of certain
SC-REMFs and GCMG-Europe officers, is responsible for the day-to-day management
of SC-EURO's portfolio.
SC (EU) MANAGEMENT
Security Capital (EU) Management Group S.A., ("SC (EU) Management")
provides GCMG-Europe with proprietary economic and real estate research and on-
going analysis of opportunities for investment in the equity securities of
European issuers. SC (EU) Management is a corporation organized under Belgian
law and an indirect, wholly-owned subsidiary of Security Capital Group
Incorporated. The principal officer of SC (EU) Management and his principal
occupations are set forth below.
W. Joseph Houlihan Managing Director of SC (EU) Management since
April 1997 where he is responsible for providing
research and management support services in the
area of European investments. Mr. Houlihan has
over twenty years of business experience in
Europe. Prior to joining Security Capital, Mr.
Houlihan served as Executive Vice President and
Portfolio Manager of GIM Capital Management, Inc.
(The Netherlands) from August 1987 to March 1997
and as Vice President of GIM Algemeen
Vermogensbeheer, a prominent Dutch investment
management company from April 1985 to March 1997,
where he specialized in real estate investments
and was responsible for developing GIM's real
estate securities investment process and client
base. Prior to joining GIM, Mr. Houlihan served as
Director of Melchior Holland Holding BV (The
Netherlands) from February 1983 to March 1985, as
Vice President at John G. Wood and Associates, a
diversified real estate development and investment
company located in Florida and with Chase
Manhattan Bank's trust department. Mr. Houlihan is
an Advisory Director of Security Capital U.S.
Realty and a member of the Investment Property
Forum. Mr. Houlihan received his M.B.A. from the
University of Leuven, Belgium and his B.S. from
New York University.
INVESTMENT ADVISORY AGREEMENT AND
INVESTMENT SUB-ADVISORY AGREEMENT
Pursuant to an investment advisory agreement (the "Advisory Agreement"),
GCMG furnishes a continuous investment program for SC-EURO's portfolio, subject
to the general supervision of SC-REMFs' Board of
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Directors. GCMG also provides persons satisfactory to the Directors of SC-REMFs
to serve as officers of SC-REMFs. Such officers, as well as certain other
employees and Directors of SC-REMFs, may be directors, officers, or employees of
GCMG.
Under the Advisory Agreement, SC-EURO Class I shares pay GCMG, monthly, an
annual management fee in an amount equal to 0.85% of SC-EURO's Class I average
daily net asset value. Under a separate agreement GCMG has committed to waive
fees and/or reimburse expenses to maintain SC-EURO's Class I total operating
expenses, other than brokerage fees and commissions, interest, taxes and other
extraordinary expenses, at no more than 1.45% of the value of SC-EURO's Class I
average daily net assets for the year ending December 31, 1998.
In addition to the payments to GCMG under the Advisory Agreement described
above, SC-EURO Class I shares pay certain other costs of operations including
(a) administration, custodian and transfer agency fees, (b) fees of Directors
who are not affiliated with GCMG, (c) clerical, accounting and other office
costs, (d) costs of printing SC-EURO's prospectus for existing shareholders and
shareholder reports, (e) costs of maintaining SC-REMFs' existence, (f) interest
charges, taxes, brokerage fees and commissions, (g) costs of stationery and
supplies, (h) expenses and fees related to registration and filing with federal
and state regulatory authorities, and (i) upon the approval of SC-REMFs' Board
of Directors, costs of personnel of GCMG or its affiliates rendering clerical,
accounting and other office services. Each class of SC-EURO shares pays the
portion of SC-EURO expenses attributable to its operations. Income, realized
gains and losses, unrealized appreciation and depreciation and certain expenses
not allocated to a particular class are allocated to each class based on the net
assets of that class in relation to the net assets of SC-REMFs.
GCMG has entered into an investment sub-advisory agreement with GCMG-Europe
("Sub-Advisory Agreement") pursuant to which GCMG-Europe provides various
portfolio management and investment advisory services to SC-EURO. In connection
with the management of SC-EURO's portfolio, GCMG-Europe may select brokers and
dealers to execute purchase and sale orders for SC-EURO's portfolio
transactions. Under the Sub-Advisory Agreement, GCMG pays GCMG-Europe monthly,
an annual management fee in an amount equal to 0.08% of SC-EURO's average daily
net value. The fee is the sole obligation of GCMG and not SC-EURO.
SC (EU) Management provides GCMG-Europe with proprietary real estate
research and ongoing analysis of opportunities for investment in the equity
securities of European issuers. This research is analyzed by GCMG-Europe in
identifying attractive growth in country markets and real estate sectors and is
instrumental to GCMG-Europe's ability to make investment decisions for SC-EURO's
portfolio. GCMG-Europe pays the fee for the provision of such research and
analytical services. Payment of this fee is an obligation of GCMG- Europe and
not a direct obligation of SC-EURO.
ADMINISTRATOR AND SUB-ADMINISTRATOR
GCMG has also entered into a fund accounting and administration agreement
with SC-REMFs (the "Administration Agreement") under which GCMG performs certain
administrative functions for SC-EURO, including (i) providing office space,
telephone, office equipment and supplies for SC-REMFs; (ii) paying compensation
of SC-REMFs' officers for services rendered as such; (iii) authorizing
expenditures and approving bills for payment on behalf of SC-EURO; (iv)
supervising preparation of the periodic updating of SC-EURO's Prospectus and
Statement of Additional Information for existing shareholders; (v) supervising
preparation of semi-annual reports to SC-EURO'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-EURO's investment portfolio and the
publication of the net asset value of SC-EURO's shares, earnings reports and
other financial data; (vii) monitoring relationships with organizations
providing services to SC-EURO, including the custodian ("Custodian"), transfer
agent ("Transfer Agent") and printers; (viii) providing trading desk facilities
for SC-EURO; (ix) maintaining books and records for SC-EURO (other than those
maintained by the Custodian and Transfer Agent) and preparing and filing of tax
reports other than SC-EURO'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-REMFs' Board of Directors, GCMG has caused SC-REMFs to retain
State Street Bank and Trust Company as sub-administrator
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(the "Sub-Administrator") under a sub-administration agreement ("Sub-
Administration Agreement").
Under the Sub-Administration Agreement, the Sub-Administrator has assumed
responsibility for performing certain of the foregoing administrative functions,
including overseeing the determination and publication of SC-EURO's net asset
value, maintaining certain of SC-EURO's books and records that are not
maintained by GCMG, or the Custodian or the Transfer Agent, preparing financial
information for SC-EURO's income tax returns, proxy statements, semi-annual and
annual shareholders reports, and SEC filings, and responding to certain
shareholder inquiries. Under the terms of the Sub-Administration Agreement, SC-
REMFs pays the Sub-Administrator a monthly administration fee at the annual rate
of .08% of the first $750 million, .06% of the next $250 million and .04% of SC-
REMFs' average daily net assets over $1 billion, subject to an average annual
minimum fee of $75,000 per investment portfolio. The Sub-Administrator also
serves as SC-EURO's Custodian and Transfer Agent. See "Custodian and Transfer
Agent."
Under the Administration Agreement, GCMG remains responsible for monitoring
and overseeing the performance by the Sub-Administrator of its obligations to
SC-EURO under the Sub- Administration Agreement, subject to the overall
authority of SC-REMFs' Board of Directors. For its services under the
Administration Agreement, GCMG receives a monthly fee from SC-REMFs at the
annual rate of 0.02% of the value of the average daily net assets of
SC-EURO.
DISTRIBUTION AND SERVICING PLAN
The Board of Directors of SC-REMFs and SC-EURO's sole Class I shareholder
have adopted a Distribution and Servicing Plan ("Plan") with respect to SC-
EURO's Class I shares pursuant to Rule 12b-1 under the 1940 Act. Under the
Plan, SC-EURO pays the Distributor a monthly fee equal to, on an annual basis,
.25% of the value of SC-EURO's average daily net assets for Class I shares.
The Distributor may use the fee for services performed and expenses
incurred by the Distributor in connection with the distribution of Class I
shares and for providing certain services to Class I shareholders. The
Distributor may pay third parties in respect of these services such amount as it
may determine. SC-EURO understands that these third parties may also charge
fees to their clients who are beneficial owners of SC-EURO Class I shares in
connection with their client accounts. These fees would be in addition to any
amounts which may be received by them from the Distributor under the Plan.
The Distributor may enter into agreements ("Agreements") with institutional
shareholders of record, broker-dealers, financial institutions, depository
institutions, and other financial intermediaries as well as various brokerage
firms or other industry recognized service providers of fund supermarkets or
similar programs to provide certain distribution, shareholder servicing,
administrative and/or accounting services for their clients who are beneficial
owners of SC-EURO Class I shares. Such Agreements may be governed by the Plan.
The Distributor, with offices located at 11 South LaSalle Street, Chicago,
Illinois 60603, is an affiliate of GCMG. See "Distribution Plan" in the
Statement of Additional Information for a listing of the types of expenses for
which the Distributor and third parties may be compensated under the Plan. If
the fee received by the Distributor exceeds its expenses, the Distributor may
realize a profit from these arrangements. The Plan is reviewed and is subject
to approval annually by the Board of Directors.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of SC-EURO's Class I shares is determined as
of the scheduled closing time of the New York Stock Exchange ("NYSE") (generally
4:00 p.m., New York time) each day the NYSE is open for trading, by adding the
market value of all securities in SC-EURO's portfolio and other assets
represented by Class I shares, subtracting liabilities incurred or accrued
allocable to Class I shares, and dividing by the total number of SC-EURO's
Class I shares then outstanding, adjusted to the nearest whole cent. A security
listed or traded on a recognized stock
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exchange or quoted on a quotation system of a national securities association is
valued at its last sale price on the principal exchange on which the security is
traded. The value of a foreign security is determined in its national currency
as of the close of trading on the foreign exchange on which it is traded or as
of the scheduled closing time of the NYSE (generally 4:00 p.m., New York time),
if that is earlier, and that value is then converted into its U.S. dollar
equivalent at the foreign exchange rate in effect at noon, New York time, on the
day the value of the foreign security is determined. If no sale is reported at
that time, the mean between the current bid and asked price is used.
Occasionally, events which affect the values of such securities and such
exchange rates may occur between the times at which they are determined and the
close of the NYSE and will therefore not be reflected in the computation of SC-
EURO's net asset value. If events materially affecting the value of such
securities occur during such period, then these securities will be valued at
fair value as determined by the management and approved in good faith by the
Board of Directors. All other securities for which over-the-counter market
quotations are readily available are valued at the mean between the current bid
and asked price. Foreign securities that are not traded on an exchange,
securities for which market quotations are not readily available and other
assets are valued at fair value as determined by SC-EURO's management and
approved in good faith by the Board of Directors.
PURCHASE OF SHARES
Class I shares are being offered to investors whose minimum initial
investment is $250,000. SC-EURO Class I shares may be purchased through SC-
EURO's Transfer Agent and various financial intermediaries that have entered
into a sales agreement with the Distributor.
Orders for shares of SC-EURO will become effective at the net asset value
per share next determined after the receipt of payment. All funds will be
invested in full and fractional shares. A confirmation indicating the details
of each purchase transaction will be sent to you 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.
Investors must specify that Class I shares are being purchased.
If you choose 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 of SC-EURO 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.
By investing in SC-EURO you appoint the Transfer Agent as your 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. PLEASE NOTE THAT IT IS MORE
COMPLICATED TO REDEEM SHARES HELD IN CERTIFICATE FORM.
INITIAL INVESTMENT
The minimum initial investment is $250,000. Class I shares may be
purchased by check or money order drawn on a U.S. bank, savings and loan, or
credit union by wire transfer. The enclosed application must be completed and
accompanied by payment in U.S. funds to open an account. Checks must be payable
in U.S. dollars and will be accepted subject to collection at full face value.
Note that all applications to purchase shares are subject to acceptance by SC-
EURO and are not binding until so accepted. SC-EURO reserves the right to
decline to accept a purchase order application in whole or in part.
MAIL
The following instructions should be used when mailing a check or money
order payable to "Security Capital European Real Estate Shares," via U.S. mail
to the Distributor, a securities dealer or the Transfer Agent:
VIA U.S. MAIL BY OVERNIGHT COURIER
Boston Financial Data Services Boston Financial Data Services
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Attn: Security Capital Real Estate Attn: Security Capital Real Estate
Mutual Funds Incorporated Mutual Funds Incorporated
P.O. Box 8500 66 Brooks Drive
Boston Massachusetts, 02260-8500 Braintree, Massachusetts 02184
SC-REMFs does not consider the U.S. Postal Service or other independent
delivery service 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-REMFs. Do
not mail letters by overnight courier to the post office box.
WIRE PURCHASES
Class I shares may be purchased by wire only through the Transfer Agent.
The following instructions should be used when wiring funds to the Transfer
Agent for the purchase of shares:
Wire to: State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02101
ABA Number 011000028
Credit: DDA Number 9905-378-7
Further Credit: Security Capital Real Estate Mutual Funds Incorporated
Shareholder Registration
Shareholder Fund and Account Number
PLEASE CALL TOLL FREE 1-800-409-4189 PRIOR TO WIRING ANY FUNDS IN ORDER TO
OBTAIN A CONFIRMATION NUMBER AND TO ENSURE PROMPT AND ACCURATE HANDING OF FUNDS.
SC-EURO and its Transfer Agent are not responsible for the consequences of
delays resulting from the banking or Federal Reserve wire system or from
incomplete wiring instructions.
SUBSEQUENT INVESTMENTS
Additional investments must be at least $20,000 and may be made by mail,
wire or by telephone. When making an additional purchase by mail, a check
payable to "Security Capital European Real Estate Shares" 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 toll free 1-800-409-4189 for complete wiring instructions.
You may purchase additional shares by moving money from your bank account
to your SC-EURO account by telephone. 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 three business days. TELEPHONE
TRANSACTIONS MAY NOT BE USED FOR INITIAL PURCHASES OF CLASS I SHARES.
SC-REMFs reserves the right to waive or modify minimum initial and
subsequent investment requirements in connection with purchases of Class I
shares of SC-EURO, including purchases for accounts established on behalf of the
following types of retirement plans: (i) plans qualified under Section 401(k) of
the Code; (ii) plans described in Section 403(b) of the Code; (iii) deferred
compensation plans described in Section 457 of the Code; (iv) simplified
employee pension (SEP) plans; and (v) salary reduction simplified employee
pension (SARSEP) plans.
EXCHANGE FEATURE
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Class I shares of SC-EURO may be exchanged for Class I shares of SC-US, SC-
ASIA and SC-ARBITRAGE. Exchanges of Class I shares will be made at their
relative net asset values. Shares may be exchanged only if the amount being
exchanged satisfies the minimum investment required. However, you may not
exchange your investment in shares of SC-US, SC-EURO, SC-ASIA or SC-ARBITRAGE
more than four times in any twelve-month period (including the initial exchange
of your investment during that period). In addition, exchanges of SC-ARBITRAGE
Class I shares within one year of the date of purchase or exchange are subject
to a 2% redemption fee. See the Prospectus for SC-ARBITRAGE Class I shares and
the Statement of Additional Information for additional information about the
redemption fee.
REDEMPTION OF SHARES
You may request redemption of part or all of your Class I shares at any
time by telephone or by mail. The redemption of shares will be at the next
determined net asset value. See "Determination of Net Asset Value." SC-EURO
normally will mail the redemption proceeds to you on the next business day and,
in any event, no later than seven business days after the receipt of a
redemption request in good order. However, when a purchase has been made by
check, SC-EURO may hold payment on redemption proceeds until reasonably
satisfied that the check has cleared, which may take up to twelve days.
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-EURO
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 requests must be signed exactly as the shares are registered
including the signature of each joint owner. You must also specify the number of
shares or dollar amount to be redeemed. If the Class I 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 the
Transfer Agent together with a redemption request. The following instructions
should be used for the redemption of shares by mail, by wire and by telephone:
MAIL AND WIRE
For most redemption requests you need only furnish a written, unconditional
request to redeem your Class I shares (for a fixed dollar amount) at net asset
value to Security Capital Real Estate European Real Estate Shares:
VIA U.S. MAIL BY OVERNIGHT COURIER
Boston Financial Data Services Boston Financial Data Services
Attn: Security Capital Real Estate Attn: Security Capital Real Estate
Mutual Funds Incorporated Mutual Funds Incorporated
P.O. Box 8500 66 Brooks Drive
Boston Massachusetts, 02260-8500 Braintree, Massachusetts 02184
Redemption proceeds made by written redemption request may also be wired to
a commercial bank that you have authorized on your account application.
Additional documentation may be requested from corporations, executors,
administrators, trustees, guardians, agents, or attorneys-in-fact. SC-REMFs
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 by SC-EURO. 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.
TELEPHONE
You may redeem shares by telephone by calling the Transfer Agent at toll
free 1-800-409-4189. In order to utilize this procedure, you must have
previously elected this option in writing, which election will be reflected in
the Transfer
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Agent's records and the redemption proceeds will be mailed directly to you or
transferred 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 that address, you may call or
submit a written request to the Transfer Agent. No telephone redemptions will
be allowed within 15 days of such a change. SC-EURO 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-EURO 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-EURO reserves the right to refuse a telephone
redemption request if so advised.
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-EURO or the 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.
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-EURO may suspend the right of redemption during any period when (i)
trading on the NYSE is restricted or the NYSE 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-EURO 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-EURO on not less than 30
days' notice if, at the time of any redemption of Class I shares in his or her
account, the value of the remaining shares in the account falls below $250,000.
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.
A Class I shareholder who fails to satisfy minimum account balance
requirements may elect to convert Class I shares to Class R shares. Class I
shares will be converted to Class R shares at the next determined net asset
value for Class I shares and Class R shares after the receipt by the distributor
of a written conversion request. SC-EURO does not charge a fee to process
conversions. SC-EURO reserves the right to reject any conversion request in
whole or in part. The conversion feature may be modified or terminated at any
time upon notice to SC-EURO Class I shareholders.
DIVIDENDS AND DISTRIBUTIONS
Dividends from SC-EURO's investment income will be declared and distributed
quarterly. SC-EURO intends to distribute net realized capital gains, if any, at
least annually, although SC-EURO's Board of Directors may in the future
determine to retain net realized capital gains and not distribute them to
shareholders.
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Dividends and distributions will automatically be reinvested into full and
fractional shares of SC-EURO based on the net asset value per share at the close
of business on the payable date unless the shareholder has elected to have
dividends or distributions paid in cash. SC-EURO will send shareholders a
statement reflecting each dividend and distribution. In addition, after the end
of each calendar year, SC-EURO will send shareholders a statement showing the
amount and tax characterization of all dividends and distributions paid during
the previous year. In accordance with the Taxpayer Relief Act of 1997, SC-EURO
will indicate which portion of a capital gain distribution will be taxed at a
maximum rate of 20% and which portion will be taxed at a maximum rate of 28%.
For information concerning the tax treatment of SC-EURO's distribution policies
for SC-EURO and its shareholders, see "Taxation."
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-EURO, including the status of distributions
under applicable state or local law.
FEDERAL INCOME TAXES
SC-EURO intends to qualify to be taxed as a "regulated investment company"
under the Code. To the extent that SC-EURO distributes its taxable income and
net capital gains to its shareholders, qualification as a regulated investment
company relieves SC-EURO 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-EURO.
A corporation's dividends-received deduction will be disallowed unless the
corporation holds shares in SC-EURO at least 46 days. Furthermore, the
dividends-received deduction will be disallowed to the extent a corporation's
investment in shares of SC-EURO is financed with indebtedness.
The excess of net long-term capital gains over the net short-term capital
losses realized and distributed by SC-EURO 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. Recently enacted legislation has reduced
the holding period required to qualify for the 20% maximum capital gains rate
from 18 months to 12 months.
Under the current federal tax law, the amount of an income dividend or
capital gains distribution declared by SC-EURO 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-EURO
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 for 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-EURO
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.
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SC-EURO 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-EURO, or the Secretary of the Treasury notifies SC-
EURO 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 in the
Statement of Additional Information.
STATE AND LOCAL TAXES
SC-EURO 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-EURO.
ORGANIZATION AND DESCRIPTION OF CAPITAL STOCK
Security Capital Real Estate Mutual Funds Incorporated, formerly Security
Capital Employee REIT Fund Incorporated, was incorporated under Maryland law as
SCERF Incorporated ("SCERF"), a wholly-owned subsidiary of Security Capital
Group Incorporated, on December 20, 1996. On January 23, 1997, all the assets
and liabilities of SCERF were transferred to Security Capital Employee REIT Fund
Incorporated in a reorganization transaction. On December 16, 1997, its name
was changed to Security Capital U.S. Real Estate Shares Incorporated. On June
30, 1998, its name was changed to Security Capital Real Estate Mutual Funds
Incorporated.
SC-REMFs is authorized to issue 200,000,000 shares of stock, $.01 par value
per share. SC-REMFs' Board of Directors may, without shareholder approval,
increase or decrease the number of authorized but unissued shares of SC-REMFs'
stock and reclassify and issue any unissued shares. The Board of Directors also
may create additional series of shares with different investment objectives,
policies or restrictions without shareholder approval. The Board of Directors of
SC-REMFs has authorized the creation of four investment portfolios; SC-US, SC-
EURO, SC-ASIA and SC-ARBITRAGE, three of which issue two classes of shares:
Class I shares and Class R shares. SC-ARBITRAGE issues Class I shares only.
Class I shares offer different services to shareholders and incur different
expenses than Class R shares. Each class pays its proportionate share of SC-
REMFs' expenses.
All classes of each series of SC-REMFs' shares have equal dividend,
distribution, liquidation and voting rights. There are no conversion or
preemptive rights in connection with any class of any series of SC- REMFs's
shares. All SC-REMFs shares, when duly issued, are fully paid and nonassessable.
The rights of the holders of SC-EURO's Class I shares may not be modified except
by the vote of a majority of the holders of all SC-EURO's Class I shares
outstanding. SC-EURO's Class I shareholders have exclusive voting rights with
respect to matters relating solely to SC-EURO's Class I shares. SC-EURO's Class
I shareholders vote separately from SC-EURO's Class R shareholders, SC-
ARBITRAGE's Class I shareholders and SC-US's and SC-ASIA's Class I and Class R
shareholders on matters in which the interests of SC-EURO's Class I shareholders
differ from the interests of SC-EURO's Class R shareholders, SC-ARBITRAGE's
Class I shareholders and SC-US's and SC-ASIA's Class I and Class R
shareholders.
SC-REMFs 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-REMFs entitled to vote at the meeting. SC-REMFs will assist shareholders
wishing to communicate with one another for the purpose of requesting such a
meeting.
As of July 31, 1998, SC REALTY Incorporated, a wholly-owned subsidiary of
Security Capital Group Incorporated, owned 99.25% of the issued and outstanding
shares of SC-EURO and SC-ASIA, 99.97% of the issued and outstanding shares of
SC-ARBITRAGE and 92.97% of the issued and outstanding shares of SC-US, which
means that SC REALTY Incorporated controls SC-US, SC-EURO, SC-ASIA and SC-
ARBITRAGE for purposes of the 1940 Act. In each case, SC REALTY owns Class I
shares only. The effect of SC REALTY Incorporated's ownership of a controlling
interest in SC-US, SC-EURO, SC-ASIA, SC-ARBITRAGE and, therefore, SC-REMFs, is
to dilute the voting power of other shareholders. SC REALTY Incorporated does
not anticipate that its initial control of SC-US, SC-EURO, SC-ASIA and SC-
ARBITRAGE will adversely effect the rights of future shareholders.
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CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company, which has its principal business
address at 225 Franklin Street, Boston, Massachusetts 02101, has been retained
to act as Custodian of SC-EURO's investments and as SC-EURO's Transfer Agent.
State Street Bank and Trust Company has no part in deciding SC-EURO's investment
policies or which securities are to be purchased or sold for SC-EURO's
portfolio.
REPORTS TO SHAREHOLDERS
The fiscal year of SC-EURO ends on December 31 of each year. SC-EURO 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-EURO's
independent accountants, will be sent to shareholders each year. Please call
toll free 1-888-SECURITY for a copy of the most recent semi-annual report.
PERFORMANCE INFORMATION
From time to time, SC-EURO may advertise its "average annual total return"
of the Class I shares over various periods of time. This total return figure
shows the average percentage change in value of an investment in SC-EURO Class I
shares 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-EURO's Class I
shares and assumes that any income, dividends and/or capital gains distributions
made by SC-EURO during the period are reinvested in Class I shares of SC-EURO.
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-EURO'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-EURO's Class I annual total return for any one
year in the period might have been greater or less than the average for the
entire period. SC-EURO also may use "aggregate" total return figures for
various periods, representing the cumulative change in value of an investment in
SC-EURO's Class I shares for the specific period (again reflecting changes in
SC-EURO's Class I share price and assuming reinvestment of Class I 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-EURO's
performance.
YEAR 2000 RISKS
Like investment companies, financial and business organizations around the
world, SC-REMFs could be adversely affected if the computer systems used by the
SC-REMFs, other service providers and entities with computer systems that are
linked to the SC-REMFs' records do not properly process and calculate
date-related information and data from and after January 1, 2000. This is
commonly known as the "Year 2000 Issue." SC-REMFs is taking steps that it
believes are reasonably designed to address the Year 2000 Issue with respect to
the computer systems that it uses and to obtain satisfactory assurances that
comparable steps are being taken by each of SC-REMFs major service providers.
However, there can be no assurance that these steps will be sufficient to avoid
any adverse impact on SC-REMFs and SC-US, SC-EURO, SC-ASIA and
SC-ARBITRAGE.
ADDITIONAL INFORMATION
Any shareholder inquiries may be directed to SC-REMFs 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
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reference herein, does not contain all of the information set forth in the
Registration Statement filed by SC-REMFs with the SEC under the Securities Act
of 1933, as amended. 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.
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CLASS R PROSPECTUS
- ------------------
LOGO
11 SOUTH LASALLE STREET
CHICAGO, ILLINOIS 60603
Security Capital European Real Estate Shares ("SC-EURO") is an investment
portfolio of Security Capital Real Estate Mutual Funds Incorporated ("SC-
REMFs"), an open-end management investment company organized under Maryland law.
SC-EURO seeks to provide shareholders with above-average total returns,
including current income and capital appreciation, primarily through investments
in equity securities of publicly-traded real estate companies organized
principally in European countries. Long-term, SC-EURO's objective is to
achieve top-quartile returns as compared with other mutual funds that invest in
publicly-traded real estate companies organized principally in European
countries, by integrating in-depth proprietary real estate market research with
sophisticated capital markets research and investment modeling techniques.
Security Capital Global Capital Management Group Incorporated ("GCMG") serves as
both investment adviser and administrator to SC-EURO and Security Capital Global
Capital Management Group (Europe) S.A. ("GCMG-Europe") serves as SC-EURO's
investment sub-adviser.
By this Prospectus, SC-EURO is offering Class R shares. Class R shares are
sold at net asset value without a sales charge to investors whose minimum
initial investment is $2,500. Class R shares are offered directly through SC-
REMFs, Security Capital Markets Group Incorporated, SC-EURO's distributor
("Distributor"), and various financial intermediaries. SC-EURO also offers
Class I shares to investors whose minimum initial investment is $250,000. Class
I shares have different expenses than Class R shares which would affect
performance. Investors desiring to obtain information about SC-EURO's Class I
shares should call toll free 1-888-SECURITY or ask their sales representatives
or the Distributor. This Prospectus provides you with information specific to
the Class R shares of SC-EURO. It contains information you should know before
you invest in SC-EURO.
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
This Prospectus sets forth concisely the information a prospective investor
should know before investing in SC-EURO. SC-REMFs offers other investment
portfolios which are described in the prospectuses for Security Capital U.S.
Real Estate Shares, Security Capital Asia/Pacific Real Estate Shares and
Security Capital Real Estate Arbitrage Shares. A Statement of Additional
Information dated June 30, 1998, containing additional and more detailed
information about SC-EURO has been filed with the Securities and Exchange
Commission (the "SEC") and is hereby incorporated by reference into this
Prospectus. It is available without charge and can be obtained by calling toll
free 1-888-SECURITY.
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 NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
August 19, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Expenses....................................... 2
Description of SC-EURO......................... 4
Investment Objectives and Policies............. 4
Investment Strategy............................ 5
Other Investment Strategies.................... 6
Risk Factors................................... 8
Non-Diversified Status & Portfolio Turnover.... 10
Directors, Officers and Other Personnel........ 11
Investment Advisory Agreement and
Investment Sub-Advisory Agreement.............. 14
Administrator and Sub-Administrator............ 15
Distribution and Servicing Plan................ 16
Determination of Net Asset Value............... 16
Purchase of Shares............................. 17
Redemption of Shares........................... 19
Dividends and Distributions.................... 21
Taxation....................................... 21
Organization and Description of Capital Stock.. 22
Custodian and Transfer Agent................... 23
Reports to Shareholders........................ 23
Performance Information........................ 24
Year 2000 Risks................................ 24
Additional Information......................... 24
</TABLE>
<PAGE>
EXPENSES
SHAREHOLDER TRANSACTION EXPENSES
Shareholder transaction expenses are direct charges which are incurred when
shareholders buy or sell shares of SC-EURO.
ANNUAL SC-EURO OPERATING EXPENSES
The Class R shares of SC-EURO pay for certain expenses attributable to
Class R shares directly out of SC-EURO's Class R assets. These expenses are
related to management of SC-EURO, administration and other services. For
example, SC-EURO pays an advisory fee and an administrative fee to GCMG. SC-EURO
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-EURO's Class
R assets to calculate SC-EURO's Class R 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-EURO and the portion of SC-EURO's operating expenses
that they might expect to bear indirectly. The numbers reflected below are based
on SC-EURO's projected expenses for its current fiscal period ending December
31, 1998, assuming that SC-EURO'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-EURO's assets.
FEE TABLE
<TABLE>
<CAPTION>
<S> <C>
Shareholder Transaction Expenses:
Maximum sales charge on purchases and reinvested distributions................................. None
Redemption fee (1)............................................................................. None
Annual SC-EURO Operating Expenses (after expense waivers and/or reimbursements, as a
percentage of average net assets):
Management fees................................................................................ .85%
12b-1 fees (2)................................................................................. .25%
Other expenses................................................................................. .50%
-----
Total SC-EURO operating expenses (3)........................................................... 1.60%
</TABLE>
___________
(1) The purchase or redemption of shares through a securities dealer that has
not entered into a sales agreement with the Distributor may be subject to a
transaction fee.
(2) SC-REMFs has adopted a Distribution and Service Plan for SC-EURO Class R
shares pursuant to Rule 12b-1 of the Investment Company Act of 1940, as
amended, pursuant to which SC-EURO pays the Distributor a fee for
distribution-related services and services related to the maintenance of
shareholder accounts at the annual rate of 0.25% of SC-EURO's Class R
average daily net assets. As a result, long-term Class R shareholders of
SC-EURO may pay more than the economic equivalent of the maximum front-end
sales load permitted by the National Association of Securities Dealers,
Inc. ("NASD").
(3) GCMG has committed to waive fees and/or reimburse other expenses to
maintain SC-EURO's Class R total operating expenses, other than brokerage
fees and commissions, taxes, interest and other extraordinary expenses, at
no more than 1.60% of the value of SC-EURO's Class R average daily net
assets for the year ending December 31, 1998. SC-EURO estimates that
without such waiver and/or reimbursement, other expenses would be .50% and
total fund operating expenses would be 1.60% of the value of SC-EURO's
Class R average daily net assets.
2
<PAGE>
EXAMPLES
<TABLE>
<CAPTION>
ONE THREE
YEAR 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.................................... $16 $50
</TABLE>
THE ACTUAL EXPENSES IN FUTURE YEARS MAY BE MORE OR LESS THAN THE NUMBERS IN
THE EXAMPLE, DEPENDING ON A NUMBER OF FACTORS, INCLUDING THE ACTUAL VALUE OF SC-
EURO'S ASSETS.
3
<PAGE>
DESCRIPTION OF SC-EURO
SC-EURO is a non-diversified investment portfolio of Security Capital Real
Estate Mutual Funds Incorporated ("SC-REMFs"), an open-end management investment
company organized under Maryland law. SC-REMFs is comprised of four investment
portfolios, SC-EURO, Security Capital U.S. Real Estate Shares ("SC-US"),
Security Capital Asia/Pacific Real Estate Shares ("SC-ASIA") and Security
Capital Real Estate Arbitrage Shares ("SC-ARBITRAGE").
SC-EURO issues two classes of shares, one of which, Class R shares, is
offered by this prospectus. SC-EURO also issues Class I shares to investors
whose minimum initial investment is $250,000. Class R shares offer different
services and incur different expenses than Class I shares, which would affect
performance. See "Purchase of Shares" and "Organization and Description of
Capital Stock."
INVESTMENT OBJECTIVES AND POLICIES
SC-EURO's investment objective is to provide shareholders with above-
average total returns, including current income and capital appreciation,
primarily through investments in equity securities of publicly-traded real
estate companies organized principally in European countries. Long-term, SC-
EURO's objective is to achieve top-quartile results as compared to other mutual
funds that invest in publicly-traded real estate companies organized principally
in European countries, by integrating in-depth proprietary real estate market
research with sophisticated capital markets research and investment modeling
techniques. SC-EURO's investment objective is "fundamental" and cannot be
changed without approval of a majority of its outstanding voting securities.
None of SC-EURO's policies, other than its investment objective and the
investment restrictions described in the Statement of Additional Information,
are fundamental; these non-fundamental policies may be changed by SC-EURO's
Board of Directors without shareholder approval. There can be no assurance that
SC-EURO's investment objective will be achieved.
Under normal conditions, SC-EURO will invest at least 65% of its assets in
the equity securities of publicly-traded real estate companies located primarily
in European nations, including Austria, Belgium, Denmark, Finland, France,
Germany, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden,
Switzerland and the United Kingdom. SC-EURO also may invest in the equity
securities of real estate companies located in Eastern Europe and other European
emerging market countries.
The equity securities in which SC-EURO will invest will consist of (1)
common stocks, (2) rights or warrants to purchase common stocks, (3) securities
convertible into common stocks where the conversion feature represents, in GCMG-
Europe's view, a significant element of the security's value, and (4) preferred
stocks. SC-EURO will invest only in real estate companies that derive at least
50% of their revenues from the ownership, construction, financing, management or
sale of commercial, industrial or residential real estate and hotels or that
have at least 50% of their assets invested in such real estate.
SC-EURO may, from time to time, invest in debt securities of issuers in the
real estate industry. Debt securities purchased by SC-EURO will be rated no
lower than A by Moody's Investors Service, Inc. ("Moody's") or Standard & Poors
Corporation ("S&P") or, if not so rated, believed by GCMG-Europe to be of
comparable quality and, in the aggregate, may have an average weighted maturity
of up to 30 years.
When, in the judgment of GCMG or GCMG-Europe, market or general economic
conditions justify a temporary defensive position, SC-EURO will deviate from its
investment objective and invest without limit in money market securities,
denominated in dollars or in the currency of any foreign country, issued by
entities organized in the U.S. or any foreign country, such as: short-term (less
than 12 months to maturity) and medium-term (not greater than five years to
maturity) obligations issued or guaranteed by the U.S. Government or the
government of a foreign country, their agencies or instrumentalities; finance
company and corporate commercial paper and other short-term corporate
obligations, in each case rated Baa by Moody's, or BBB or better by S&P or, if
unrated, of comparable quality as
4
<PAGE>
determined by GCMG and repurchase agreements with banks and broker-dealers with
respect to such securities. For temporary defensive purposes, SC-EURO also may
invest up to 25% of its total assets in obligations (including certificates of
deposit, time deposits and bankers' acceptances) of banks; provided that SC-EURO
will limit its investment in time deposits for which there is a penalty for
early withdrawal to 10% of its total assets.
SC-EURO is subject to certain investment restrictions that are fundamental
and, therefore, may not be changed without shareholder approval. Among other
things, SC-EURO will not invest more than 10% of its net assets in illiquid
securities, determined at the time of investment. 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. GCMG and GCMG-Europe will monitor the liquidity of such restricted
securities under the supervision of SC-EURO's Board of Directors. If SC-EURO
invests in securities issued by a real estate company that is controlled by
Security Capital Group Incorporated or any of its affiliates, such securities
will be treated as illiquid securities. SC-EURO also may not invest directly in
real estate. See SC-EURO's Statement of Additional Information for further
discussion of SC-EURO's fundamental investment restrictions.
INVESTMENT STRATEGY
REAL ESTATE SECURITIES INDUSTRY OUTLOOK
GCMG believes that the real estate industry throughout Europe will
experience the same fundamental transformation as experienced in the last seven
years in the U.S., which will create significant opportunities. Direct
investment of equity capital in real estate will decrease further while
investments in publicly-traded real estate operating companies are increasing.
The aggregate equity market capitalization of real estate in Europe has
increased from $25 billion at December 31, 1992 to $65 billion at December 31,
1997. This increasing securitization of the real estate industry throughout
Europe, primarily in the form of real estate operating companies, 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.
A RESEARCH-DRIVEN TOP DOWN AND BOTTOM UP APPROACH
SC-EURO seeks to achieve top-quartile returns by investing primarily in
European real estate operating companies which have the potential to deliver
above-average growth. GCMG believes that these investment opportunities can
only be identified through the integration of top down economic and real estate
market research and bottom up operating company cash flow modeling.
Top Down Economic and Real Estate Market Research. GCMG and GCMG-Europe
are uniquely positioned to access meaningful, proprietary economic and real
estate research collected at the country market, city sub-market and property-
specific level. Non-U.S. country market research and analysis, which is
provided to GCMG and GCMG-Europe by SC (EU) Management and other operating
professionals within the Security Capital Group Incorporated affiliate company
network, assists GCMG-Europe in identifying attractive growth in country markets
and real estate sectors. This research and analysis is instrumental to GCMG-
Europe's ability to make investment decisions for SC-EURO's portfolio and to
identify country markets reaching a "marginal turning point." This country
market research 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 country
market and city sub-market basis and by product type. Specifically, primary
country market research evaluates normalized cash flow lease economics --
accounting for capital costs -- to determine whether the core economy of a
country market is expected to improve, stabilize or decline. Only through
disciplined real estate market research does GCMG-Europe believe it can identify
country markets and/or city sub-markets, and thus, real estate operating
companies, with potential for higher than average growth prospects.
5
<PAGE>
Bottom Up Real Estate Operating Company Cash Flow Modeling. GCMG and GCMG-
Europe believe that analyzing the cash flow profile -- the quality and growth
potential -- of a real estate company, both historically and prospectively, is
another fundamental step toward identifying above-average growth opportunities.
GCMG and GCMG-Europe believe that cash flow is helpful in understanding a real
estate portfolio in that such calculation reflects cash flow from operations and
the real estate's ability to support interest payments and general operating
expenses before the impact of certain activities, such as gains or losses from
sales of real estate and changes in accounts receivable and accounts payable.
The real estate operating valuation models utilized by GCMG-Europe integrate
real estate market research with analysis on specific real estate portfolios in
order to establish an independent value of the underlying sources of a real
estate company's cash flow. Certain models measure and compare the impact of
specific factors on cash flow growth expectations. The data from all valuation
models is ultimately integrated and reviewed in order to identify real estate
operating companies with significant potential for growth.
OTHER INVESTMENT STRATEGIES
SC-EURO also may from time to time use certain of the investment techniques
described below to achieve its objectives. Although these strategies are
regularly used by some investment companies and other institutional investors in
various markets, some of these strategies cannot at the present time be used to
a significant extent by SC-EURO in some of the markets in which SC-EURO will
invest and SC-EURO does not expect to use them extensively.
Repurchase Agreements. When SC-EURO acquires a security from a bank or a
broker-dealer, it may simultaneously enter into a repurchase agreement, wherein
the seller agrees to repurchase the security at a specified time and price. The
repurchase price is in excess of the purchase amount which reflects an agreed-
upon rate of return, and is not tied to the coupon rate on the underlying
security.
Loans of Portfolio Securities. SC-EURO may lend to broker-dealers portfolio
securities with an aggregate market value of up to one-third of its total
assets. Such loans must be secured by collateral (consisting of any combination
of cash, U.S. Government securities or irrevocable letters of credit) in an
amount at least equal (on a daily marked-to-market basis) to the current market
value of the securities loaned. SC-EURO may terminate the loans at any time and
obtain the return of the securities loaned within five business days. SC-EURO
will continue to receive any interest or dividends paid on the loaned securities
and will continue to have voting rights with respect to the securities.
Options on Securities and Stock Indices. In order to increase its return or to
hedge all or a portion of its portfolio investments, SC-EURO may write (i.e.,
sell) covered put and call options and purchase put and call options on
securities or stock indices that are traded on U.S. and foreign exchanges or in
the over-the-counter markets. An option on a security is a contract that gives
the purchaser the option, in return for the premium paid, to buy a specified
security (in the case of a call option) or to sell a specified security (in the
case of a put option) from or to the writer of the option at a designated price
during the term of the option. An option on a stock index gives the purchaser
of the option, in return for the premium paid, the right to receive from the
seller cash equal to the difference between the closing price of the index and
the exercise price of the option. SC-EURO may write a call or put option only
if the option is "covered." This means that so long as SC-EURO is obligated as
the writer of a call option, it will own the underlying securities subject to
the call, or hold a call at the same or lower exercise price, for the same
exercise period, and on the same securities as the written call. A put is
covered if SC-EURO maintains liquid assets with a value equal to the exercise
price in a segregated account or holds a put on the same underlying security at
an equal or greater exercise price. The value of the underlying securities on
which options may be written at any one time will not exceed 15% of the total
assets of SC-EURO. SC-EURO will not purchase put or call options if the
aggregate premium paid for such options would exceed 5% of its total assets at
the time of purchase.
Forward Foreign Currency Contracts. SC-EURO may enter into forward foreign
currency exchange contracts ("forward contracts") to attempt to minimize the
risk to SC-EURO from adverse changes in the relationship between the U.S. dollar
and foreign currencies. A forward contract is an obligation to purchase or sell
a specified currency for an agreed price at a future date which is individually
negotiated and privately traded by currency traders and their customers. SC-
EURO
6
<PAGE>
will enter into forward contracts only under two circumstances. First, when SC-
EURO enters into a contract for the purchase or sale of a security denominated
in a foreign currency, it may desire to "lock in" the U.S. dollar price of the
security in relation to another currency by entering into a forward contract to
buy the amount of foreign currency needed to settle the transaction. Second,
when GCMG believes that the currency of a particular foreign country may suffer
or enjoy a substantial movement against another currency, SC-EURO may enter into
a forward contract to sell or buy the amount of the former foreign currency (or
another currency which acts as a proxy for that currency) approximating the
value of some or all of SC-EURO's portfolio securities denominated in such
foreign currency. The second investment practice is in general referred to as
"cross-hedging." SC-EURO's forward transactions may call for the delivery of
one foreign currency in exchange for another foreign currency and may at times
not involve currencies in which its portfolio securities are denominated.
Futures Contracts. For hedging purposes only, SC-EURO may buy and sell
financial futures contracts, stock and bond index futures contracts, and options
on any of the foregoing. A financial futures contract is an agreement between
two parties to buy or sell a specified debt security at a set price on a future
date. An index futures contract is an agreement to take or make delivery of an
amount of cash based on the difference between the value of the index at the
beginning and at the end of the contract period. A futures contract on a
foreign currency is an agreement to buy or sell a specified amount of a currency
for a set price on a future date.
When SC-EURO enters into a futures contract, it must make an initial
deposit, known as "initial margin," as a partial guarantee of its performance
under the contract. As the value of the security, index or currency fluctuates,
either party to the contract is required to make additional margin payments,
known as "variation margin," to cover any additional obligation it may have
under the contract. In addition, when SC-EURO enters into a futures contract,
it will segregate assets or "cover" its position in accordance with the 1940
Act. See "Investment Objectives and Policies--Futures Contracts" in the
Statement of Additional Information.
SC-EURO may not commit more than 5% of its total assets to initial margin
deposits on futures contracts. The value of the underlying securities on which
futures will be written at any one time may not exceed 25% of the total assets
of SC-EURO.
Depositary Receipts. SC-EURO may purchase sponsored or unsponsored American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") and Global
Depositary Receipts ("GDRs") (collectively, "Depositary Receipts"). ADRs are
Depositary Receipts typically used by a U.S. bank or trust company which
evidence ownership of underlying securities issued by a foreign corporation.
EDRs and GDRs are typically issued by foreign banks or trust companies, although
they also may be issued by U.S. banks or trust companies, and evidence ownership
of underlying securities issued by either a foreign or a United States
corporation. Generally, Depositary Receipts in registered form are designed for
use in the U.S. securities market and Depositary Receipts in bearer form are
designed for use in securities markets outside the United States. Depositary
Receipts may not necessarily be denominated in the same currency as the
underlying securities into which they may be converted.
Short Sales. SC-EURO reserves the right to engage in short sale transactions in
securities listed on one or more foreign or U.S. securities exchanges. Short
selling involves the sale of borrowed securities. At the time a short sale is
effected, SC-EURO incurs an obligation to replace the security borrowed at
whatever its price may be at the time that SC-EURO 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-EURO 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-EURO
will not engage in short sales if immediately following such transaction the
aggregate market value of all securities sold short would exceed 10% of SC-
EURO's net assets (taken at market value). See SC-EURO's Statement of
Additional Information for further discussion of short sales.
7
<PAGE>
RISK FACTORS
Shareholders should understand that all investments involve risk and there
can be no guarantee against loss resulting from an investment in SC-EURO, nor
can there be an assurance that SC-EURO's investment objectives will be attained.
As with any investment in securities, the value of, and income from, an
investment in SC-EURO can decrease as well as increase depending on a variety of
factors which may affect the values and income generated by SC-EURO's portfolio
securities, including general economic conditions and market factors. In
addition to the factors which affect the value of individual securities, a
shareholder may anticipate that the value of the shares of SC-EURO will
fluctuate with movements in the broader equity and bond markets. A decline in
the stock market of any country in which SC-EURO is invested may also be
reflected in declines in the price of shares of SC-EURO. Changes in currency
valuations will also affect the price of shares of SC-EURO. History reflects
both decreases and increases in worldwide stock markets and currency valuations,
and these may reoccur unpredictably in the future. The value of debt securities
held by SC-EURO generally will vary inversely with changes in prevailing
interest rates. Additionally, investment decisions made by GCMG-Europe will not
always be profitable or prove to have been correct. SC-EURO is intended as an
investment vehicle for those investors seeking long term capital growth and is
not intended as a complete investment program.
Investment in Real Estate Securities. SC-EURO will not invest in real estate
directly, but only in securities issued by real estate companies. However, SC-
EURO may be subject to risks similar to those associated with the direct
ownership of real estate (in 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 real estate 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.
Additionally, SC-EURO could conceivably own real estate directly as a
result of a default on debt securities that it owns. If SC-EURO has rental
income or income from the disposition of such real estate, the receipt of such
income may adversely affect its ability to retain its tax status as a regulated
investment company. See "Taxation."
Foreign Securities. Investors should consider carefully the substantial risks
involved in investing in securities issued by companies and governments of
foreign nations, which are in addition to the usual risks inherent in domestic
investments. There is the possibility of expropriation, nationalization or
confiscatory taxation, taxation of income earned in foreign nations or other
taxes imposed with respect to investments in foreign nations, foreign exchange
controls (which may include suspension of the ability to transfer currency from
a given country), foreign investment controls on daily stock market movements,
default in foreign government securities, political or social instability, or
diplomatic developments which could affect investments in securities of issuers
in foreign nations. In addition, in many countries there is less publicly
available information about issuers than is available in reports about companies
in the U.S. Foreign companies are not generally subject to uniform accounting
and auditing and financial reporting standards, and auditing practices and
requirements may not be comparable to those applicable to U.S. companies. SC-
EURO may encounter difficulties or be unable to vote proxies, exercise
shareholder rights, pursue legal remedies, and obtain judgments in foreign
courts. Also, most foreign countries withhold portions of income and dividends
at the source requiring investors to reclaim taxes withheld.
Brokerage commissions, custodial services and other costs relating to
investment in European countries are generally more expensive than in the U.S.
European securities markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when assets of SC-EURO are uninvested and no return is earned
thereon. The inability of SC-EURO to make intended security purchases due to
settlement problems could cause SC-EURO to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result either in losses to
8
<PAGE>
SC-EURO due to subsequent declines in value of the portfolio security or, if SC-
EURO has entered into a contract to sell the security, could result in possible
liability to the purchaser.
In many foreign countries, there is less government supervision and
regulation of business and industry practices, stock exchanges, brokers and
listed companies than in the U.S. There is an increased risk, therefore, of
uninsured loss due to lost, stolen, or counterfeit stock certificates. In
addition, the foreign securities markets of many of the countries in which SC-
EURO may invest may also be smaller, less liquid, and subject to greater price
volatility than those in the U.S.
Prior governmental approval of foreign investments may be required under
certain circumstances in some developing countries, and the extent of foreign
investment in domestic companies may be subject to limitation in other
developing countries. Foreign ownership limitations also may be imposed by the
charters of individual companies in developing countries to prevent, among other
concerns, violation of foreign investment limitations.
There are special risks attendant to investment in the Western European
countries. The countries that are members of the European Economic Community
("Common Market") (Belgium, Denmark, France, Germany, Greece, Ireland,
Luxembourg, the Netherlands, Portugal, Spain and the United Kingdom) have
eliminated certain import tariffs and quotas and other trade barriers with
respect to one another over the past several years. GCMG believes that these
Common Market reforms are likely to improve the prospects for economic growth in
many Western European countries. Nevertheless, it is not clear what the form or
effect of such reforms will be on real estate companies in Western Europe.
Therefore it is impossible to predict their long-term impact on SC-EURO's
investments.
SC-EURO may also invest in the equity securities of real estate companies
in European emerging market countries. Investing in emerging markets entails the
risks associated with foreign investment described above. However, these risks
may be intensified in emerging markets. Emerging markets can include every
nation in the world except the United States, Canada, Japan, Australia, New
Zealand and most nations located in Western Europe. Certain emerging market
countries have historically experienced, and may continue to experience, high
rates of inflation, high interest rates, exchange rate fluctuations, large
amounts of external debt, trade difficulties and unemployment. Further, the
economies of developing countries generally are heavily dependent upon
international trade and, accordingly, have been, and may continue to be,
adversely affected by trade barriers, exchange controls and other protectionist
measures imposed or negotiated by the countries in which they trade. There are
also risks associated with the possibility of nationalization, expropriation or
confiscatory taxation, political changes, government regulation, social
instability or diplomatic developments (including war) that could adversely
affect the economies of such countries or the value of SC-EURO's investments in
those countries.
The markets of Eastern Europe are among the emerging markets in which SC-
EURO may invest. Most Eastern European nations, including Hungary, Poland, the
Czech Republic, the Slovak Republic and Romania have had centrally planned,
socialist economies since shortly after World War II. A number of their
governments, including those of Hungary, the Czech Republic and Poland are
currently implementing or considering reforms directed at political and economic
liberalization, including efforts to foster multi-party political systems,
decentralize economic planning and move toward free market economies. Any
change in the leadership or policies of Eastern European countries, or countries
that exercise a significant influence over those countries, may cause Eastern
European countries to revert from a market-oriented to a centrally planned
economy and adversely affect existing investment opportunities. Additionally,
former Communist regimes of a number of Eastern European countries expropriated
a large amount of property, the claims of which have not been entirely settled.
There can be no assurance that the SC-EURO's investment in Eastern Europe would
not also be expropriated, nationalized or otherwise confiscated.
SC-EURO usually effects currency exchange transactions on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign exchange market.
However, some price spread on currency exchange (to cover service charges) will
be incurred when SC-EURO converts assets from one currency to another.
9
<PAGE>
Repurchase Agreements. Under the 1940 Act, repurchase agreements are considered
to be loans collateralized by the underlying security and therefore will be
fully collateralized. However, if the seller should default on its obligation
to repurchase the underlying security, SC-EURO may experience delay or
difficulty in exercising its rights under the security and may incur a loss if
the value of the security should decline, as well as incur disposition costs in
liquidating the security.
Futures and Options. Successful use of futures contracts and related options is
subject to special risk considerations. A liquid secondary market for any future
or options contract may not be available when a futures position is sought to be
closed. In addition, there may be an imperfect correlation between movements in
the securities or foreign currency on which the futures or options contract is
based and movements in the securities or currency in SC-EURO's portfolio.
Successful use of futures or options contracts is further dependent on GCMG-
Europe's ability to correctly predict movements in the securities or foreign
currency markets and no assurance can be given that its judgment will be
correct. Successful use of options on securities or stock indices is subject to
similar risk considerations.
Depositary Receipts. Depositary Receipts may be issued pursuant to sponsored or
unsponsored programs. In sponsored programs, an issuer has made arrangements to
have its securities traded in the form of Depositary Receipts. In unsponsored
programs, the issuer may not be directly involved in the creation of the
program. Although regulatory requirements with respect to sponsored and
unsponsored programs are generally similar, in some cases it may be easier to
obtain financial information from an issuer that has participated in the
creation of a sponsored program. Accordingly, there may be less information
available regarding issuers of securities underlying unsponsored programs and
there may not be a correlation between such information and the market value of
the Depositary Receipts. Depositary Receipts also involve the risks of other
investments in foreign securities, as discussed above. For purposes of SC-
EURO's investment policies, SC-EURO's investment in Depositary Receipts will be
deemed to be investments in the underlying securities.
Other Risks. There are further risk considerations, including possible losses
through the holding of securities in domestic and foreign custodian banks and
depositories, described in the Statement of Additional Information.
NON-DIVERSIFIED STATUS AND PORTFOLIO TURNOVER
SC-EURO intends to operate as a "non-diversified" investment company under
the 1940 Act, which means SC-EURO 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-EURO intends to conduct its operations so as to qualify as
a "regulated investment company" for purposes of the Internal Revenue Code of
1986, as amended (the "Code"), which generally will relieve SC-EURO 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-EURO 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-EURO'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-EURO will not own more than 10% of the
outstanding voting securities of a single issuer. SC-EURO's investments in
securities issued by the U.S. Government, its agencies and instrumentalities are
not subject to these limitations. Because SC-EURO, as a non-diversified
investment company, may invest in a smaller number of individual issuers than a
diversified investment company, an investment in SC-EURO may present greater
risk to an investor than an investment in a diversified company.
SC-EURO anticipates that its annual portfolio turnover rate will not
exceed 150%, but the turnover rate will not be a limiting factor when GCMG 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-EURO 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-EURO. High
portfolio turnover may result in the
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realization of net short-term capital gains by SC-EURO which, when distributed
to shareholders, will be taxable as ordinary income. See "Taxation."
DIRECTORS, OFFICERS AND OTHER PERSONNEL
The overall management of the business and affairs of SC-EURO is vested
with the Board of Directors of SC-REMFs. The Board of Directors approves all
significant agreements between SC-REMFs and persons or companies furnishing
services to SC-EURO, including SC-REMFs' agreements with GCMG, and with its
custodian and its transfer agent. The management of SC-EURO's day-to-day
operations is delegated to the officers of SC-REMFs, who include the Managing
Directors, and GCMG, subject always to the investment objectives and policies of
SC-EURO and to general supervision by the Board of Directors. Although SC-REMFs
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-REMFs'
Articles of Incorporation. The Directors and officers of SC-REMFs and their
principal occupations are set forth below.
Anthony R. Manno Jr. Chairman of the Board of Directors, Managing
Director and President of SC-REMFs. Managing
Director and President of GCMG since January 1995,
where he is responsible for overseeing all
investment and capital allocation matters for
GCMG's public market securities activities and is
also responsible for company and industry
analysis, market strategy and trading and
reporting. Mr. Manno was a member of the
Investment Committee of Security Capital Group
Incorporated from March 1994 to June 1996. Prior
to joining Security Capital, Mr. Manno was a
Managing Director of LaSalle Partners Limited from
March 1980 to March 1994. Mr. Manno received his
M.B.A. from the University of Chicago Graduate
School of Business, an M.A. and a B.A. from
Northwestern University and is a Certified Public
Accountant.
Robert H. Abrams Director of SC-REMFs. Director of the Program in
Real Estate at Cornell University. Founder of
Colliers ABR, Inc. (formerly Abrams Benisch Riker
Inc.), a property management firm. Mr. Abrams was
Principal of Colliers ABR, Inc. from 1978 to 1992
and since 1992, has served as a Consultant. From
1959 to 1978 Mr. Abrams was Executive Vice
President and Director of Cross and Brown Company.
Mr. Abrams also serves as Trustee Emeritus and
Presidential Counselor of his alma mater, Cornell
University. Mr. Abrams received his M.B.A. from
Harvard University and his B.A. from Cornell
University.
Stephen F. Kasbeer Director of SC-REMFs. Retired; Senior Vice
President for Administration and Treasurer of
Loyola University, Chicago from 1981 to July 1994,
where he was responsible for administration,
investment, real estate and treasurer functions.
At Loyola University, he also 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. Currently, Mr. Kasbeer serves
as a Director of Endowment Realty Inc. and
Endowment Realty II and as a Member of the
Investment Committee of the University of San
Diego. Mr. Kasbeer also serves as Trustee,
Treasurer and Chairman of the Investment and
Finance Committees of Santa Fe Preparatory School
and as Trustee and Chairman of the Sante Fe
Preparatory School Combined Permanent Endowment
Fund Trust. Mr. Kasbeer received his J.D. from
John Marshall Law School and his M.A. and B.S.
from Northwestern University.
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George F. Keane Director of SC-REMFs. Chairman of the Board of
Trigen Energy Corporation since 1994. As founding
chief executive of The Common Fund in 1971 and
Endowment Realty Investors in 1988, Mr. Keane for
many years headed an investment management service
for colleges, universities and independent schools
that managed $15 billion for 1,200 educational
institutions when he became President Emeritus of
the Common Fund in 1993. He has served as a member
of the Investment Advisory Committee of the $95
billion New York State Common Retirement Fund
since 1982. He has been a Director of the Northern
Trust of Connecticut since 1991, a Trustee of the
Nicholas Applegate Investment Trust since 1993,
and a Director of the Bramwell Funds since 1994.
He is also a Director of Universal Stainless &
Alloy Products, Global Pharmaceutical Corporation,
United Water Resources and United Properties
Group, and the Universal Bond Fund, and is an
advisor to Associated Energy Managers. Mr. Keane
also serves as a Trustee of his alma mater,
Fairfield University where he received his B.A.,
and as a Director and Chairman of the Investment
Committee of the United Negro College Fund. Mr.
Keane also holds honorary degrees from Loyola
University, Chicago, Illinois and Lawrence
University, Appleton, Wisconsin.
John H. Gardner, Jr. Director and Managing Director of SC-REMFs.
Managing Director of GCMG since July, 1997. Prior
thereto, the Director of the REIT Manager for
Security Capital Pacific Trust ("PTR") from
February 1995 to June 1997 and Senior Vice
President of Security Capital Atlantic
Incorporated ("ATLANTIC"), PTR and the PTR REIT
Manager from September 1994 to June 1997 where he
had overall responsibility for asset management
and multifamily dispositions. Prior to joining
Security Capital, Mr. Gardner was with Copley Real
Estate Advisors as a Managing Director and
Principal responsible for portfolio management
from January 1991 to September 1994 and as a Vice
President and Principal of asset management from
December 1984 to December 1990. From July 1977 to
November 1984, Mr. Gardner was a Real Estate
Manager with the John Hancock Companies. Mr.
Gardner received his M.S. from Bentley College and
his B.S. from Stonehill College.
Kenneth D. Statz Managing Director of SC-REMFs. Managing Director
of GCMG since November 1997 where he is
responsible for the development and implementation
of portfolio investment strategy. Prior thereto,
Senior Vice President of GCMG from July 1996 to
October 1997 and Vice President from May 1995 to
June 1996. Prior to joining Security Capital, Mr.
Statz was a Vice President and Senior REIT Analyst
in the investment research department of Goldman,
Sachs & Co., from February 1993 to January 1995,
concentrating on research and underwriting for the
REIT industry. Prior thereto, Mr. Statz was a real
estate stock portfolio manager and a managing
director of Chancellor Capital Management from
August 1982 to February 1992. Mr. Statz received
his M.B.A. and B.B.A. from the University of
Wisconsin, Madison.
Kevin W. Bedell Senior Vice President of SC-REMFs. Senior Vice
President of GCMG since November 1997 and Vice
President since July 1996, where he is responsible
for directing the activities of the
industry/company securities research group and
providing in-depth proprietary research on
publicly traded companies with office and
industrial sectors. Prior to joining GCMG, Mr.
Bedell spent nine years with LaSalle Partners
Limited where he was Equity Vice President and
Portfolio Manager responsible for the strategic,
operational and financial management of a private
REIT with commercial real estate investments of
$800 million. Mr. Bedell
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received his M.B.A. from the University of Chicago
and his B.A. from Kenyon College.
Jeffrey C. Nellessen Vice President, Treasurer and Assistant Secretary
of SC-REMFs. Vice President and Controller of GCMG
since March 1997. Prior thereto, from June 1988 to
March 1997, he was Controller, Manager of Client
Administration and Compliance Officer at Strong
Capital Management, Inc. Mr. Nellessen is a
Certified Public Accountant, Certified Management
Accountant and a Certified Financial Planner. He
received his B.B.A. from the University of
Wisconsin, Madison.
David T. Novick Vice President and Secretary of SC-REMFs. Vice
President of Security Capital Group Incorporated
since June 1998. Prior thereto, from September
1989 to June 1998, he was an attorney, and most
recently a Partner, with the law firm of Katten
Muchin and Zavis. Mr. Novick received his B.S.B.A.
from Boston University and his J.D. from the
University of Illinois.
GCMG
Security Capital Global Capital Management Group Incorporated ("GCMG"),
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-EURO under the overall supervision and
control of the Directors of SC-EURO.
GCMG commenced operations in January 1995, and is registered as an
investment adviser with the SEC. GCMG's principal officers include Anthony R.
Manno, Jr., Managing Director and President, John H. Gardner, Jr., Managing
Director, Kenneth D. Statz, Managing Director and Kevin W. Bedell, Senior Vice
President. Messrs. Manno and Gardner are responsible for overseeing the
portfolio management activities of GCMG-Europe. GCMG is an indirect wholly-
owned subsidiary of Security Capital Group Incorporated, a real estate research,
investment and management company.
GCMG-EUROPE
Security Capital Global Capital Management Group (Europe) S.A. ("GCMG-
Europe"), with offices located at Boulevard de la Woluwe 34, Brussels, Belgium,
provides portfolio management services to SC-EURO pursuant to an investment sub-
advisory agreement with GCMG. GCMG-Europe, an indirect wholly-owned subsidiary
of Security Capital Group Incorporated, was formed on May 14, 1998 under Belgian
law and is registered as an investment adviser with the SEC. The principal
officer of GCMG-Europe, who serves on the SC-EURO Portfolio Management
Committee, and his principal occupations are set forth below.
Gerios J.M. Rovers Vice President of GCMG-Europe since May 1998 where
he is responsible for trading and portfolio
management strategy. From April 1997 to May 1998,
Mr. Rovers was Vice President of SC (EU)
Management where he was responsible for providing
research and management support services in the
area of European investments. Mr. Rovers was a
Vice President and Senior Portfolio Manager with
GIM Management, Inc. (the Netherlands) from
January 1993 to March 1997. From July 1988 to
April 1997, Mr. Rovers was associated with GIM
Algemeen Vermogensbeheer and served as an
Associate Director and Portfolio Manager of global
real estate securities on behalf of domestic and
foreign clients. Mr. Rovers graduated from the
University of Tilburg in The Netherlands.
The SC-EURO Portfolio Management Committee, which is comprised of certain
SC-REMFs and GCMG-Europe officers, is primarily responsible for the day-to-day
management of SC-EURO's portfolio.
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SC (EU) MANAGEMENT
Security Capital (EU) Management Group S.A. ("SC (EU) Management")
provides GCMG-Europe with proprietary economic and real estate research and on-
going analysis of opportunities for investment in the equity securities of
European issuers. SC (EU) Management is a corporation organized under Belgian
law and an indirect, wholly-owned subsidiary of Security Capital Group
Incorporated. The principal officer of SC (EU) Management and his principal
occupations are set forth below.
W. Joseph Houlihan Managing Director of SC (EU) Management since
April 1997 where he is responsible for providing
research and management support services in the
area of European investments. Mr. Houlihan has
over twenty years of business experience in
Europe. Prior to joining Security Capital, Mr.
Houlihan served as Executive Vice President and
Portfolio Manager of GIM Capital Management, Inc.
(The Netherlands) from August 1987 to March 1997
and as Vice President of GIM Algemeen
Vermogensbeheer, a prominent Dutch investment
management company from April 1985 to March 1997,
where he specialized in real estate investments
and was responsible for developing GIM's real
estate securities investment process and client
base. Prior to joining GIM, Mr. Houlihan served as
Director of Melchior Holland Holding BV (The
Netherlands) from February 1983 to March 1985, as
Vice President at John G. Wood and Associates, a
diversified real estate development and investment
company located in Florida and with Chase
Manhattan Bank's trust department. Mr. Houlihan is
an Advisory Director of Security Capital US Realty
and a member of the Investment Property Forum. Mr.
Houlihan received his M.B.A. from the University
of Leuven, Belgium and his B.S. from New York
University.
INVESTMENT ADVISORY AGREEMENT AND
INVESTMENT SUB-ADVISORY AGREEMENT
Pursuant to an investment advisory agreement (the "Advisory Agreement"),
GCMG furnishes a continuous investment program for SC-EURO's portfolio, subject
to the general supervision of SC-REMFs' Board of Directors. GCMG also provides
persons satisfactory to the Directors of SC-REMFs to serve as officers of SC-
REMFs. Such officers, as well as certain other employees and Directors of SC-
REMFs, may be directors, officers, or employees of GCMG.
Under the Advisory Agreement, SC-EURO Class R shares pay GCMG, monthly, an
annual management fee in an amount equal to .85% of SC-EURO's Class R average
daily net asset value. Under a separate agreement GCMG has committed to waive
fees and/or reimburse expenses to maintain SC-EURO's Class R total operating
expenses, other than brokerage fees and commissions, interest, taxes and other
extraordinary expenses, at no more than 1.60% of the value of SC-EURO's Class R
average daily net assets for the year ending December 31, 1998.
In addition to the payments to GCMG under the Advisory Agreement described
above, SC-EURO Class R shares pay certain other costs of operations including
(a) administration, custodian and transfer agency fees, (b) fees of Directors
who are not affiliated with GCMG, (c) clerical, accounting and other office
costs, (d) costs of printing SC-EURO's prospectus for existing shareholders and
shareholder reports, (e) costs of maintaining SC-REMFs' existence, (f) interest
charges, taxes, brokerage fees and commissions, (g) costs of stationery and
supplies, (h) expenses and fees related to registration and filing with federal
and state regulatory authorities, and (i) upon the approval of SC-REMFs' Board
of Directors, costs of personnel of GCMG or its affiliates rendering clerical,
accounting and other office services. Each class of SC-EURO shares pays the
portion of SC-EURO expenses attributable to its operations. Income, realized
gains and losses, unrealized appreciation and depreciation and certain expenses
not
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allocated to a particular class are allocated to each class based on the net
assets of that class in relation to the net assets of SC-REMFs.
GCMG has entered into an investment sub-advisory agreement with GCMG-Europe
("Sub-Advisory Agreement") pursuant to which GCMG-Europe provides various
portfolio management and investment advisory services to SC-EURO. In connection
with the management of SC-EURO's portfolio, GCMG-Europe may select brokers and
dealers to execute purchase and sale orders for SC-EURO's portfolio
transactions. Under the Sub-Advisory Agreement, GCMG pays GCMG-Europe monthly,
an annual management fee in an amount equal to 0.08% of SC-EURO's average daily
net asset value. The fee is the sole obligation of GCMG-Europe and not SC-
EURO.
SC (EU) Management provides GCMG-Europe with proprietary real estate
research and ongoing analysis of opportunities for investment in the equity
securities of European issuers. This research is analyzed by GCMG-Europe in
identifying attractive growth in country markets and real estate sectors and is
instrumental to GCMG-Europe's ability to make investment decisions for SC-EURO's
portfolio. GCMG-Europe pays the fee for the provision of such research and
analytical services. Payment of this fee is an obligation of GCMG-Europe and
not a direct obligation of SC-EURO.
ADMINISTRATOR AND SUB-ADMINISTRATOR
GCMG has also entered into a fund accounting and administration agreement
with SC-REMFs (the "Administration Agreement") under which GCMG performs certain
administrative functions for SC-EURO, including (i) providing office space,
telephone, office equipment and supplies for SC-REMFs; (ii) paying compensation
of SC-REMFs' officers for services rendered as such; (iii) authorizing
expenditures and approving bills for payment on behalf of SC-EURO;
(iv) supervising preparation of the periodic updating of SC-EURO's Prospectus
and Statement of Additional Information for existing shareholders;
(v) supervising preparation of semi-annual reports to SC-EURO'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-EURO's investment portfolio and the
publication of the net asset value of SC-EURO's shares, earnings reports and
other financial data; (vii) monitoring relationships with organizations
providing services to SC-EURO, including the custodian ("Custodian"), transfer
agent ("Transfer Agent") and printers; (viii) providing trading desk facilities
for SC-EURO; (ix) maintaining books and records for SC-EURO (other than those
maintained by the Custodian and Transfer Agent) and preparing and filing of tax
reports other than SC-EURO'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-REMFs' Board of Directors, GCMG has caused SC-REMFs to retain
State Street Bank and Trust Company as sub-administrator (the "Sub-
Administrator") under a sub-administration agreement ("Sub-Administration
Agreement").
Under the Sub-Administration Agreement, the Sub-Administrator has assumed
responsibility for performing certain of the foregoing administrative functions,
including overseeing the determination and publication of SC-EURO's net asset
value, maintaining certain of SC-EURO's books and records that are not
maintained by GCMG, or the Custodian or the Transfer Agent, preparing financial
information for SC-EURO's income tax returns, proxy statements, semi-annual and
annual shareholders reports, and SEC filings, and responding to certain
shareholder inquiries. Under the terms of the Sub-Administration Agreement, SC-
REMFs pays the Sub-Administrator a monthly administration fee at the annual rate
of .08% of the first $750 million, .06% of the next $250 million and .04% of SC-
REMFs' average daily net assets over $1 billion, subject to an average annual
minimum fee of $75,000 per investment portfolio. The Sub-Administrator also
serves as SC-EURO's Custodian and Transfer Agent. See "Custodian and Transfer
Agent."
Under the Administration Agreement, GCMG remains responsible for monitoring
and overseeing the performance by the Sub-Administrator of its obligations to
SC-EURO under the Sub- Administration Agreement, subject to the overall
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authority of SC-REMFs' Board of Directors. For its services under the
Administration Agreement, GCMG receives a monthly fee from SC-REMFs at the
annual rate of 0.02% of the value of the average daily net assets of
SC-EURO.
DISTRIBUTION AND SERVICING PLAN
The Board of Directors of SC-REMFs have adopted a Distribution and
Servicing Plan ("Plan") with respect to SC-EURO's Class R shares pursuant to
Rule 12b-1 under the 1940 Act. Under the Plan, SC-EURO pays the Distributor a
monthly fee equal to, on an annual basis, .25% of the value of SC-EURO's average
daily net assets for Class R shares.
The Distributor may use the fee for services performed and expenses
incurred by the Distributor in connection with the distribution of Class R
shares and for providing certain services to Class R shareholders. The
Distributor may pay third parties in respect of these services such amount as it
may determine. SC-EURO understands that these third parties may also charge
fees to their clients who are beneficial owners of SC-EURO Class R shares in
connection with their client accounts. These fees would be in addition to any
amounts which may be received by them from the Distributor under the Plan.
The Distributor may enter into agreements ("Agreements") with institutional
shareholders of record, broker-dealers, financial institutions, depository
institutions, and other financial intermediaries as well as various brokerage
firms or other industry recognized service providers of fund supermarkets or
similar programs to provide certain distribution, shareholder servicing,
administrative and/or accounting services for their clients who are beneficial
owners of SC-EURO Class R shares. Such Agreements may be governed by the Plan.
The Distributor, with offices located at 11 South La Salle Street, Chicago,
Illinois 60603, is an affiliate of GCMG. See "Distribution Plan" in the
Statement of Additional Information for a listing of the types of expenses for
which the Distributor and third parties may be compensated under the Plan. If
the fee received by the Distributor exceeds its expenses, the Distributor may
realize a profit from these arrangements. The Plan is reviewed and is subject
to approval annually by the Board of Directors.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of SC-EURO's Class R shares is determined as
of the scheduled closing time of the New York Stock Exchange ("NYSE") (generally
4:00 p.m., New York time) each day the NYSE is open for trading, by adding the
market value of all securities in SC-EURO's portfolio and other assets
represented by Class R shares, subtracting liabilities incurred or accrued
allocable to Class R shares, and dividing by the total number of SC-EURO's
Class R shares then outstanding, adjusted to the nearest whole cent. A security
listed or traded on a recognized stock exchange or quoted on a quotation system
of a national securities association is valued at its last sale price on the
principal exchange on which the security is traded. The value of a foreign
security is determined in its national currency as of the close of trading on
the foreign exchange on which it is traded or as of the scheduled closing time
of the NYSE (generally 4:00 p.m., New York time), if that is earlier, and that
value is then converted into its U.S. dollar equivalent at the foreign exchange
rate in effect at noon, New York time, on the day the value of the foreign
security is determined. If no sale is reported at that time, the mean between
the current bid and asked price is used. Occasionally, events which affect the
values of such securities and such exchange rates may occur between the times at
which they are determined and the close of the NYSE and will therefore not be
reflected in the computation of SC-EURO's net asset value. If events materially
affecting the value of such securities occur during such period, then these
securities will be valued at fair value as determined by the management and
approved in good faith by the Board of Directors. All other securities for
which over-the-counter market quotations are readily available are valued at the
mean between the current bid and asked price. Foreign securities that are not
traded on an exchange, securities for which market quotations are not readily
available and other assets are valued at fair value as determined by SC-EURO's
management and approved in good faith by the Board of Directors.
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PURCHASE OF SHARES
SC-EURO Class R shares may be purchased through SC-EURO's Transfer Agent
and various financial intermediaries that have entered into a sales agreement
with the Distributor.
Orders for shares of SC-EURO will become effective at the net asset value
per share next determined after the receipt of payment. All funds will be
invested in full and fractional shares. A confirmation indicating the details
of each purchase transaction will be sent to you 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.
Investors must specify that Class R shares are being purchased.
If you choose 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 of SC-EURO 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.
By investing in SC-EURO, you appoint the Transfer Agent as your 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. PLEASE NOTE THAT IT IS MORE
COMPLICATED TO REDEEM SHARES HELD IN CERTIFICATE FORM.
INITIAL INVESTMENT
The minimum initial investment is $2,500. For individual retirement
account and employee benefit plans qualified under Section 401, 403(b)(7) or 457
of the Code as well as UGMA or UTMA accounts the minimum initial investment is
$1,000. For investors using the Automatic Investment Plan (described below) the
minimum initial investment is $250. These minimums can be changed or waived by
SC-EURO at any time. Shareholders will be give at least 30 days notice of any
increase in the minimum dollar amount of subsequent investments.
Class R shares may be purchased by check or money order drawn on a U.S.
bank, savings and loan, or credit union by wire transfer. The enclosed
application must be completed and accompanied by payment in U.S. funds to open
an account. Checks must be payable in U.S. dollars and will be accepted subject
to collection at full face value. Note that all applications to purchase shares
are subject to acceptance by SC-EURO and are not binding until so accepted. SC-
EURO reserves the right to decline to accept a purchase order application in
whole or in part.
MAIL
The following instructions should be used when mailing a check or money
order payable to "Security Capital European Real Estate Shares," via U.S. mail
to the Distributor, a securities dealer or the Transfer Agent:
VIA U.S. MAIL VIA OVERNIGHT COURIER
Boston Financial Data Services Boston Financial Services
Attn: Security Capital Real Estate Attn: Security Capital Real Estate
Mutual Funds Incorporated Mutual Funds Incorporated
P.O. Box 8500 66 Brooks Drive
Boston, Massachusetts 02266-8500 Braintree, Massachusetts 02184
SC-REMFs does not consider the U.S. Postal Service or other independent
delivery service 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
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applications does not constitute receipt by the Transfer Agent or SC-REMFs. Do
not mail letters by overnight courier to the post office box.
WIRE PURCHASES
Class R shares may be purchased by wire only through the Transfer Agent.
The following instructions should be used when wiring funds to the Transfer
Agent for the purchase of shares:
Wire to: State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02101
ABA Number 011000028
Credit: DDA Number 9905-378-7
Further Credit: Security Capital Real Estate Mutual Funds Incorporated
Shareholder Registration
Shareholder Fund and Account Number
PLEASE CALL TOLL FREE 1-800-409-4189 PRIOR TO WIRING ANY FUNDS IN ORDER TO
OBTAIN A CONFIRMATION NUMBER AND TO ENSURE PROMPT AND ACCURATE HANDLING OF
FUNDS. SC-EURO and its Transfer Agent are not responsible for the consequences
of delays resulting from the banking or Federal Reserve wire system or from
incomplete wiring instructions.
AUTOMATIC INVESTMENT PLAN
The Automatic Investment Plan allows regular, systematic investments in SC-
EURO Class R shares from a bank checking or NOW account. SC-EURO will reduce the
minimum initial investment to $250 if a shareholder elects to use the Automatic
Investment Plan. To establish the Automatic Investment Plan, an investor should
complete the appropriate section in SC-EURO's application and an existing SC-
EURO shareholder should call toll free 1-888-SECURITY for an automatic
investment plan form. The Automatic Investment Plan can be set up with any
financial institution that is a member of the Automated Clearing House ("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-EURO reserves the right to close such account. Prior to closing any account
for failure to reach the minimum initial investment, SC-EURO 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-
EURO 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 $250 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-EURO account for any Automatic
Investment Plan purchase that does not clear due to insufficient funds or, if
prior to notifying SC-EURO in writing or by telephone to terminate the plan, a
shareholder closes his or her bank account or in any manner prevents 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
18
<PAGE>
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 must be at least $250 and may be made by mail, wire
or by telephone. When making an additional purchase by mail, a check payable to
"Security Capital European Real Estate Shares" 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 toll free 1-800-409-4189 for complete wiring
instructions.
You may purchase additional shares by moving money from your bank account
to your SC-EURO account by telephone. Only bank accounts held at domestic
financial institutions that are 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 three business days. TELEPHONE
TRANSACTIONS MAY NOT BE USED FOR INITIAL PURCHASES OF CLASS R SHARES.
EXCHANGE FEATURE
Class R shares of SC-EURO may be exchanged for Class R shares of SC-US or
SC-ASIA. Exchanges of Class R shares will be made at their relative net asset
values. Shares may be exchanged only if the amount being exchanged satisfies the
minimum investment required. However, you may not exchange your investment in
shares of SC-US, SC-EURO or SC-ASIA more than four times in any twelve-month
period (including the initial exchange of your investment during that period).
CLASS I SHARES
SC-EURO also issues Class I shares which offer different services and incur
different expenses which would affect performance. Investors may call the
Distributor at toll free 1-888-SECURITY to obtain additional information.
REDEMPTION OF SHARES
You may request redemption of part or all of your Class R shares at any
time by telephone or by mail. The redemption of shares will be at the next
determined net asset value. See "Determination of Net Asset Value." SC-EURO
normally will mail the redemption proceeds to you on the next business day and,
in any event, no later than seven business days after the receipt of a
redemption request in good order. However, when a purchase has been made by
check, SC-EURO may hold payment on redemption proceeds until it reasonably
satisfied that the check has cleared, which may take up to twelve days.
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-EURO
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 requests must be signed exactly as the shares are registered
including the signature of each joint owner. You must also specify the number of
shares or dollar amount to be redeemed. If the Class R 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 the
Transfer Agent together with a redemption request. The following instructions
should be used for the redemption of shares by mail, by wire and by telephone:
19
<PAGE>
MAIL AND WIRE
For most redemption requests you need only furnish a written, unconditional
request to redeem your Class R shares (for a fixed dollar amount) at net asset
value to Security Capital European Real Estate Shares:
VIA U.S. MAIL VIA OVERNIGHT COURIER
Boston Financial Data Services Boston Financial Services
Attn: Security Capital Real Estate Attn: Security Capital Real Estate
Mutual Funds Incorporated Mutual Funds Incorporated
P.O. Box 8500 66 Brooks Drive
Boston, Massachusetts 02266-8500 Braintree, Massachusetts 02184
Redemption proceeds made by written redemption request may also be wired to
a commercial bank that you have authorized on your account application.
Additional documentation may be requested from corporations, executors,
administrators, trustees, guardians, agents, or attorneys-in-fact. SC-REMFs 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 by SC-EURO. 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.
TELEPHONE
You may redeem shares by telephone by calling the Transfer Agent at toll
free 1-800-409-4189 June 25, 1998. In order to utilize this procedure, you must
have previously elected this option in writing, which election will be reflected
in the Transfer Agent's records and the redemption proceeds will be mailed
directly to you or transferred 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 that address,
you may call or submit a written request to the Transfer Agent. No telephone
redemptions will be allowed within 15 days of such a change. SC-EURO 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-EURO 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-EURO reserves the right to refuse a telephone
redemption request if so advised.
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-EURO or the 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.
OTHER REDEMPTION INFORMATION
20
<PAGE>
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-EURO may suspend the right of redemption during any period when (i)
trading on the NYSE is restricted or the NYSE 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-EURO 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-EURO on not less than 30
days' notice if, at the time of any redemption of Class R shares in his or her
account, the value of the remaining shares in the account falls below $2,500
($1,000 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-EURO's investment income will be declared and distributed
quarterly. SC-EURO intends to distribute net realized capital gains, if any, at
least annually, although SC-EURO's Board of Directors may in the future
determine to retain net realized capital gains and not distribute them to
shareholders.
Dividends and distributions will automatically be reinvested into full and
fractional shares of SC-EURO based on the net asset value per share at the close
of business on the payable date unless the shareholder has elected to have
dividends or distributions paid in cash. SC-EURO will send shareholders a
statement reflecting each dividend and distribution. In addition, after the end
of each calendar year, SC-EURO will send shareholders a statement showing the
amount and tax characterization of all dividends and distributions paid during
the previous year. In accordance with the Taxpayer Relief Act of 1997, SC-EURO
will indicate which portion of a capital gain distribution will be taxed at a
maximum rate of 20% and which portion will be taxed at a maximum rate of 28%.
For information concerning the tax treatment of SC-EURO's distribution policies
for SC-EURO and its shareholders, see "Taxation."
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-EURO, including the status of distributions
under applicable state or local law.
FEDERAL INCOME TAXES
SC-EURO intends to qualify to be taxed as a "regulated investment company"
under the Code. To the extent that SC-EURO distributes its taxable income and
net capital gains to its shareholders, qualification as a regulated investment
company relieves SC-EURO 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-EURO.
A corporation's dividends-received deduction will
21
<PAGE>
be disallowed unless the corporation holds shares in SC-EURO at least 46 days.
Furthermore, the dividends-received deduction will be disallowed to the extent a
corporation's investment in shares of SC-EURO is financed with indebtedness.
The excess of net long-term capital gains over the net short-term
capital losses realized and distributed by SC-EURO 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. Recently enacted legislation has reduced
the holding period required to qualify for the 20% maximum capital gains rate
from 18 months to 12 months.
Under the current federal tax law, the amount of an income dividend or
capital gains distribution declared by SC-EURO 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-EURO
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 for 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-EURO
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-EURO 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-EURO, or the Secretary of the Treasury notifies SC-
EURO 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 in the
Statement of Additional Information.
STATE AND LOCAL TAXES
SC-EURO 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-EURO.
ORGANIZATION AND DESCRIPTION OF CAPITAL STOCK
Security Capital Real Estate Mutual Funds Incorporated, formerly Security
Capital Employee REIT Fund Incorporated, was incorporated under Maryland law as
SCERF Incorporated ("SCERF"), a wholly-owned subsidiary of Security Capital
Group Incorporated, on December 20, 1996. On January 23, 1997, all the assets
and liabilities of SCERF were transferred to Security Capital Employee REIT Fund
Incorporated in a reorganization transaction. On December 16, 1997, its name was
changed to Security Capital U.S. Real Estate Shares Incorporated. On June 30,
1998, its name was changed to Security Capital Real Estate Mutual Funds
Incorporated.
22
<PAGE>
SC-REMFs is authorized to issue 200,000,000 shares of stock, $.01 par value
per share. SC-REMFs' Board of Directors may, without shareholder approval,
increase or decrease the number of authorized but unissued shares of SC-REMFs'
stock and reclassify and issue any unissued shares. The Board of Directors also
may create additional series of shares with different investment objectives,
policies or restrictions without shareholder approval. Pursuant to this
authority, the Board of Directors of SC-REMFs has authorized the creation of
four investment portfolios; SC-US, SC-EURO, SC-ASIA and SC-ARBITRAGE, three of
which issue two classes of shares: Class I shares and Class R shares. SC-
ARBITRAGE issues Class I shares only. Class I shares offer different services to
shareholders and incur different expenses than Class R shares. Each class pays
its proportionate share of SC-REMFs' expenses.
All classes of each series of SC-REMFs' shares have equal dividend,
distribution, liquidation and voting rights. There are no conversion or
preemptive rights in connection with any class of any series of SC- REMFs's
shares. All SC-REMFs shares, when duly issued, are fully paid and nonassessable.
The rights of the holders of SC-EURO's Class R shares may not be modified except
by the vote of a majority of the holders of all SC-EURO's Class R shares
outstanding. SC-EURO's Class R shareholders have exclusive voting rights with
respect to matters relating solely to SC-EURO's Class R shares. SC-EURO's Class
R shareholders vote separately from SC-EURO's Class I shareholders, SC-
ARBITRAGE's Class I shareholders and SC-US's and SC-ASIA's Class I and Class R
shareholders on matters in which the interests of SC-EURO's Class R shareholders
differ from the interests of SC-EURO's Class I shareholders, SC-ARBITRAGE's
Class I shareholders and SC-US's and SC-ASIA's Class I and Class R
shareholders.
SC-REMFs 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-REMFs entitled to vote at the meeting. SC-REMFs will assist shareholders
wishing to communicate with one another for the purpose of requesting such a
meeting.
As of July 31, 1998, SC REALTY Incorporated, a wholly-owned subsidiary of
Security Capital Group Incorporated, owned 99.25% of the issued and outstanding
shares of SC-EURO and SC-ASIA, 99.97% of the issued and outstanding shares of
SC-ARBITRAGE and 92.97% of the issued and outstanding shares of SC-US, which
means that SC REALTY Incorporated controls SC-US, SC-EURO, SC-ASIA and SC-
ARBITRAGE for purposes of the 1940 Act. In each case, SC REALTY owns Class I
shares only. The effect of SC REALTY Incorporated's ownership of a controlling
interest in SC-US, SC-EURO, SC-ASIA, SC-ARBITRAGE and, therefore, SC-REMFs, is
to dilute the voting power of other shareholders. SC REALTY Incorporated does
not anticipate that its initial control of SC-US, SC-EURO, SC-ASIA and SC-
ARBITRAGE will adversely effect the rights of future shareholders.
CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company, which has its principal business
address at 225 Franklin Street, Boston, Massachusetts 02101, has been retained
to act as Custodian of SC-EURO's investments and as SC-EURO's Transfer Agent.
State Street Bank and Trust Company has no part in deciding SC-EURO's investment
policies or which securities are to be purchased or sold for SC-EURO's
portfolio.
REPORTS TO SHAREHOLDERS
The fiscal year of SC-EURO ends on December 31 of each year. SC-EURO
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-EURO's
independent accountants, will be sent to shareholders each year. Please call
toll free 1-888-SECURITY for a copy of the most recent semi-annual report.
23
<PAGE>
PERFORMANCE INFORMATION
From time to time, SC-EURO may advertise its "average annual total return"
of the Class R shares over various periods of time. This total return figure
shows the average percentage change in value of an investment in SC-EURO Class R
shares 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-EURO's Class R
shares and assumes that any income, dividends and/or capital gains distributions
made by SC-EURO during the period are reinvested in Class R shares of SC-EURO.
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-EURO'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-EURO's Class R annual total return for any one
year in the period might have been greater or less than the average for the
entire period. SC-EURO also may use "aggregate" total return figures for various
periods, representing the cumulative change in value of an investment in SC-
EURO's Class R shares for the specific period (again reflecting changes in SC-
EURO's Class R share price and assuming reinvestment of Class R 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-EURO's
performance.
YEAR 2000 RISKS
Like investment companies, financial and business organizations around the
world, SC-REMFs could be adversely affected if the computer systems used by the
SC-REMFs, other service providers and entities with computer systems that are
linked to the SC-REMFs' records do not properly process and calculate date-
related information and data from and after January 1, 2000. This is commonly
known as the "Year 2000 Issue." SC-REMFs is taking steps that it believes are
reasonably designed to address the Year 2000 Issue with respect to the computer
systems that it uses and to obtain satisfactory assurances that comparable steps
are being taken by each of SC-REMFs major service providers. However, there can
be no assurance that these steps will be sufficient to avoid any adverse impact
on SC-REMFs and SC-US, SC-EURO, SC-ASIA and SC-ARBITRAGE.
ADDITIONAL INFORMATION
Any shareholder inquiries may be directed to SC-REMFs 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 of the information set forth in the
Registration Statement filed by SC-REMFs with the SEC under the Securities Act
of 1933, as amended. 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.
24
<PAGE>
CLASS 1 PROSPECTUS
LOGO
11 SOUTH LASALLE STREET
CHICAGO, ILLINOIS 60603
Security Capital Asia/Pacific Real Estate Shares ("SC-ASIA") is an
investment portfolio of Security Capital Real Estate Mutual Funds Incorporated
("SC-REMFs"), an open-end management investment company organized under Maryland
law. SC-ASIA seeks to provide shareholders with above-average total returns,
including current income and capital appreciation, primarily through investments
in equity securities of publicly-traded real estate companies organized
principally in countries in the Asia/Pacific region. Long-term, SC-ASIA's
objective is to achieve top-quartile returns as compared with other mutual funds
that invest in publicly-traded real estate companies organized principally in
countries in the Asia/Pacific region, by integrating in-depth proprietary real
estate market research with sophisticated capital markets research and
investment modeling techniques. Security Capital Global Capital Management
Group Incorporated ("GCMG") serves as both investment adviser and administrator
to SC-ASIA and Security Capital Global Capital Management Group (Asia)
Incorporated ("GCMG-Asia") serves as SC-ASIA's investment sub-adviser.
By this Prospectus, Class I shares of SC-ASIA are being offered. Class I
shares are offered to investors whose minimum investment is $250,000. Class I
shares are offered directly through SC-REMFs, Security Capital Markets Group
Incorporated, SC-ASIA's distributor ("Distributor"), and various financial
intermediaries. See "Purchase of Shares." SC-ASIA also offers Class R shares
to investors whose minimum initial investment is $2,500. Class R shares have
different expenses than Class I shares which would affect performance.
Investors desiring to obtain information about SC-ASIA's Class R shares should
call toll free 1-888-SECURITY or ask their sales representatives or the
Distributor. This Prospectus provides you with information specific to the
Class I shares of SC-ASIA. It contains information you should know before you
invest in SC-ASIA.
This Prospectus sets forth concisely the information a prospective investor
should know before investing in SC-ASIA. SC-REMFs offers other investment
portfolios which are described in the prospectuses for Security Capital U.S.
Real Estate Shares, Security Capital European Real Estate Shares and Security
Capital Real Estate Arbitrage Shares. A Statement of Additional Information
dated June 30, 1998, containing additional and more detailed information about
SC-ASIA has been filed with the Securities and Exchange Commission (the "SEC")
and is hereby incorporated by reference into this Prospectus. It is available
without charge and can be obtained by calling toll free 1-888-SECURITY.
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 NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
August 19, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Expenses....................................... 2
Description of SC-ASIA........................ 4
Investment Objectives and Policies............. 4
Investment Strategy............................ 5
Other Investment Strategies.................... 6
Risk Factors................................... 7
Non-Diversified Status & Portfolio Turnover.... 10
Directors, Officers and Other Personnel........ 10
Investment Advisory Agreement and
Investment Sub-Advisory Agreement.............. 13
Administrator and Sub-Administrator............ 14
Distribution and Servicing Plan................ 15
Determination of Net Asset Value............... 15
Purchase of Shares............................. 16
Redemption of Shares........................... 17
Dividends and Distributions.................... 19
Taxation....................................... 20
Organization and Description of Capital Stock.. 21
Custodian and Transfer Agent................... 21
Reports to Shareholders........................ 22
Performance Information........................ 22
Year 2000 Risks................................ 22
Additional Information......................... 22
</TABLE>
<PAGE>
EXPENSES
SHAREHOLDER TRANSACTION EXPENSES
Shareholder transaction expenses are direct charges which are incurred
when shareholders buy or sell shares of SC-ASIA.
ANNUAL SC-ASIA OPERATING EXPENSES
The Class I shares of SC-ASIA pay for certain expenses attributable to
Class I shares directly out of SC-ASIA's Class I assets. These expenses are
related to management of SC-ASIA, administration and other services. For
example, SC-ASIA pays an advisory fee and an administrative fee to GCMG. SC-
ASIA 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-ASIA's
Class I assets to calculate SC-ASIA's Class I 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-ASIA and the portion of SC-ASIA's operating
expenses that they might expect to bear indirectly. The numbers reflected below
are based on SC-ASIA's projected expenses for its current fiscal period ending
December 31, 1998, assuming that SC-ASIA'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-ASIA's assets.
FEE TABLE
<TABLE>
<CAPTION>
<S> <C>
Shareholder Transaction Expenses:
Maximum sales charge on purchases and reinvested distributions .................. None
Redemption fee (1) .............................................................. None
Annual SC-ASIA Operating Expenses (after expense waivers and/or
reimbursements, as a percentage of average net assets):
Management fees ................................................................. .95%
12b-1 fees (2) ................................................................. .25%
Other expenses ................................................................. .35%
Total SC-ASIA operating expenses (3) ........................................... 1.55%
</TABLE>
(1) The purchase or redemption of shares through a securities dealer that has
not entered into a sales agreement with the Distributor may be subject to a
transaction fee.
(2) SC-ASIA has adopted a Distribution and Service Plan for SC-ASIA Class I
shares pursuant to Rule 12b-1 of the Investment Company Act of 1940, as
amended, pursuant to which SC-ASIA pays the Distributor a fee for
distribution-related services and services related to the maintenance of
shareholder accounts at the annual rate of 0.25% of SC-ASIA's Class I
average daily net assets. As a result, long-term Class I shareholders of
SC-ASIA may pay more than the economic equivalent of the maximum front-end
sales load permitted by the National Association of Securities Dealers,
Inc. ("NASD").
(3) GCMG has committed to waive fees and/or reimburse other expenses to
maintain SC-ASIA's Class I total operating expenses, other than brokerage
fees and commissions, interest, taxes and other extraordinary expenses at
no more than 1.55% of the value of SC-ASIA's average daily net assets for
Class I shares for the year ending December 31, 1998. SC-ASIA estimates
that without such waiver and/or reimbursement, other expenses would be .35%
and total fund operating expenses would be 1.55% of the value of SC-ASIA's
Class I average daily net assets.
2
<PAGE>
EXAMPLE
<TABLE>
<CAPTION>
ONE THREE
YEAR 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 .................................. $16 $49
</TABLE>
THE ACTUAL EXPENSES IN FUTURE YEARS MAY BE MORE OR LESS THAN THE
NUMBERS IN THE EXAMPLE, DEPENDING ON A NUMBER OF FACTORS, INCLUDING THE ACTUAL
VALUE OF SC-ASIA'S ASSETS.
3
<PAGE>
DESCRIPTION OF SC-ASIA
SC-ASIA is a non-diversified investment portfolio of Security Capital
Real Estate Mutual Funds Incorporated ("SC-REMFs"), an open-end management
investment company organized under Maryland law. SC-REMFs is comprised of four
investment portfolios, SC-ASIA, Security Capital U.S. Real Estate Shares ("SC-
US"), Security Capital European Real Estate Shares ("SC-EURO") and Security
Capital Real Estate Arbitrage Shares ("SC-ARBITRAGE").
SC-ASIA issues two classes of shares, one of which, Class I shares,
includes investors whose minimum initial investment is $250,000. The second
class of shares, Class R shares, which are offered to all other eligible
investors, offers different services and incurs different expenses than Class I
shares, which would affect performance. See "Purchase of Shares" and
"Organization and Description of Capital Stock." SC-ASIA Class I shares are
offered by this prospectus.
INVESTMENT OBJECTIVES AND POLICIES
SC-ASIA's investment objective is to provide shareholders with above-
average total returns, including current income and capital appreciation,
primarily through investments in equity securities of publicly-traded real
estate companies organized principally in countries in the Asia/Pacific region.
For purposes of its investment objective, SC-ASIA considers the Asia/Pacific
region to be comprised of all the countries in the region, including Hong Kong,
Singapore, Japan, Australia, New Zealand, the Philippines, Malaysia, Indonesia,
and Thailand. Long-term, SC-ASIA's objective is to achieve top-quartile results
as compared to other mutual funds that invest in publicly-traded real estate
companies organized principally in countries in the Asia/Pacific region, by
integrating in-depth proprietary real estate market research with sophisticated
capital markets research and investment modeling techniques. SC-ASIA's
investment objective is "fundamental" and cannot be changed without approval of
a majority of its outstanding voting securities. None of SC-ASIA's policies,
other than its investment objective and the investment restrictions described in
the Statement of Additional Information, are fundamental; these non-fundamental
policies may be changed by SC-ASIA's Board of Directors without shareholder
approval. There can be no assurance that SC-ASIA's investment objective will be
achieved.
Under normal conditions, SC-ASIA will invest at least 65% of its
assets in the equity securities of publicly-traded real estate companies located
primarily in the more established markets of the Asia/Pacific region, including
Hong Kong, Singapore, Japan, Australia and New Zealand. SC-ASIA may also invest
in the equity securities of real estate companies located in the emerging
markets of the Philippines, Thailand, and Malaysia and other markets that are
open to foreign investment.
The equity securities that SC-ASIA anticipates investing in will
consist of (1) common stocks, (2) rights or warrants to purchase common stocks,
(3) securities convertible into common stocks where the conversion feature
represents, in GCMG-Asia's view, a significant element of the security's value,
and (4) preferred stocks. SC-ASIA will invest only in real estate companies
that derive at least 50% of their revenues from the ownership, construction,
financing, management or sale of commercial, industrial or residential real
estate and hotels or that have at least 50% of their assets invested in such
real estate.
SC-ASIA may, from time to time, invest in debt securities of issuers
in the real estate industry. Debt securities purchased by SC-ASIA will be rated
no lower than Baa by Moody's Investors Service, Inc. ("Moody's") or BBB Standard
& Poors Corporation ("S&P") or, if not so rated, believed by GCMG-Asia to be of
comparable quality, and, in the aggregate, may have an average weighted maturity
of up to 30 years.
When, in the judgment of GCMG or GCMG-Asia, market or general economic
conditions justify a temporary defensive position, SC-ASIA will deviate from its
investment objective and invest without limit in money market securities,
denominated in dollars or in the currency of any foreign country, issued by
entities organized in the U.S. or any foreign country, such as: short-term (less
than 12 months to maturity) and medium-term (not greater than five years to
maturity) obligations issued or guaranteed by the U.S. Government or the
government of a foreign country, their agencies or instrumentalities; finance
company and corporate commercial paper and other short-term corporate
obligations, in each case rated Prime-1 by Moody's, or A or better by S&P or, if
unrated, of comparable quality as
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determined by GCMG; and repurchase agreements with banks and broker-dealers
with respect to such securities. For temporary defensive purposes, SC-ASIA also
may invest up to 25% of its total assets in obligations (including certificates
of deposit, time deposits and bankers' acceptances) of banks; provided that SC-
ASIA will limit its investment in time deposits for which there is a penalty for
early withdrawal to 10% of its total assets.
SC-ASIA is subject to certain investment restrictions that are
fundamental and, therefore, may not be changed without shareholder approval.
Among other things, SC-ASIA will not invest more than 10% of its net assets in
illiquid securities, determined at the time of investment. 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. GCMG and GCMG-Asia will monitor the liquidity of such
restricted securities under the supervision of SC-ASIA's Board of Directors. If
SC-ASIA invests in securities issued by a real estate company that is controlled
by Security Capital Group Incorporated or any of its affiliates, such securities
will be treated as illiquid securities. SC-ASIA also may not invest directly in
real estate. See SC-ASIA's Statement of Additional Information for further
discussion of SC-ASIA's fundamental investment restrictions.
INVESTMENT STRATEGY
REAL ESTATE SECURITIES INDUSTRY OUTLOOK
GCMG believes that over the long term, the real estate industry in the
Asia/Pacific region will experience strong growth driven by high economic growth
rates based on strong demographic trends and trade expansion. The large and
young population base as well as massive urbanization trends in the emerging
Asia/Pacific region will create strong and sustainable demand for housing in
major metropolitan areas. Economic growth in the region is expected to lead to
strong demand in the commercial real estate sector as well. GCMG expects real
estate markets in the Asia/Pacific region to continue to follow the trend of
higher levels of real estate securitization into the future. The combination of
all these factors should create significant investment opportunities over the
long term.
A RESEARCH-DRIVEN TOP DOWN AND BOTTOM UP APPROACH
SC-ASIA seeks to achieve top-quartile returns by investing primarily
in Asia/Pacific real estate operating companies which have the potential to
deliver above-average growth. GCMG believes that these investment
opportunities can only be identified through the integration of top down
economic and real estate market research and bottom up operating company cash
flow modeling.
Top Down Economic and Real Estate Market Research. GCMG and GCMG-Asia
are uniquely positioned to access meaningful, proprietary economic and real
estate research collected at the country market, city sub-market and property-
specific level. Non-U.S. country market research and analysis, which is
provided to GCMG and GCMG-Asia by other operating professionals within the
Security Capital Group Incorporated affiliate company network, assists GCMG and
GCMG-Asia in identifying attractive growth in country markets and real estate
sectors. This research and analysis is instrumental to GCMG-Asia's ability to
make investment decisions for SC-ASIA's portfolio and to identify country
markets reaching a "marginal turning point." This country market research
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 country market and city
sub-market basis and by product type. Specifically, primary country market
research evaluates normalized cash flow lease economics -- accounting for
capital costs -- to determine whether the core economy of a country market is
expected to improve, stabilize or decline. Only through disciplined real estate
market research does GCMG-Asia believe it can identify country markets and/or
city sub-markets, and thus, real estate operating companies, with potential for
higher than average growth prospects.
Bottom Up Real Estate Operating Company Cash Flow Modeling. GCMG and
GCMG-Asia believe that analyzing the cash flow profile -- the quality and growth
potential -- of a real estate company, both historically and prospectively, is
another fundamental step toward identifying above-average growth opportunities.
GCMG and GCMG-Asia believe that cash flow is helpful in understanding a real
estate portfolio in that such calculation reflects cash flow from operations and
the real estate's ability to support interest payments and general operating
expenses before the impact of certain activities, such as gains or losses from
sales of real estate and changes in accounts receivable and accounts payable.
The
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real estate operating valuation models utilized by GCMG-Asia integrate real
estate market research with analysis on specific real estate portfolios in order
to establish an independent value of the underlying sources of a real estate
company's cash flow. Certain models measure and compare the impact of specific
factors on cash flow growth expectations. The data from all valuation models is
ultimately integrated and reviewed in order to identify real estate operating
companies with significant potential for growth.
OTHER INVESTMENT STRATEGIES
SC-ASIA also may from time to time use certain of the investment
techniques described below to achieve its objectives. Although these strategies
are regularly used by some investment companies and other institutional
investors in various markets, some of these strategies cannot at the present
time be used to a significant extent by SC-ASIA in some of the markets in which
SC-ASIA will invest and SC-ASIA does not expect to use them extensively.
Repurchase Agreements. When SC-ASIA acquires a security from a bank or a
broker-dealer, it may simultaneously enter into a repurchase agreement, wherein
the seller agrees to repurchase the security at a specified time and price. The
repurchase price is in excess of the purchase amount which reflects an agreed-
upon rate of return, and is not tied to the coupon rate on the underlying
security.
Loans of Portfolio Securities. SC-ASIA may lend to broker-dealers portfolio
securities with an aggregate market value of up to one-third of its total
assets. Such loans must be secured by collateral (consisting of any combination
of cash, U.S. Government securities or irrevocable letters of credit) in an
amount at least equal (on a daily marked-to-market basis) to the current market
value of the securities loaned. SC-ASIA may terminate the loans at any time and
obtain the return of the securities loaned within five business days. SC-ASIA
will continue to receive any interest or dividends paid on the loaned securities
and will continue to have voting rights with respect to the securities.
Options on Securities and Stock Indices. In order to increase its return or to
hedge all or a portion of its portfolio investments, SC-ASIA may write (i.e.,
sell) covered put and call options and purchase put and call options on
securities or stock indices that are traded on U.S. and foreign exchanges or in
the over-the-counter markets. An option on a security is a contract that gives
the purchaser the option, in return for the premium paid, to buy a specified
security (in the case of a call option) or to sell a specified security (in the
case of a put option) from or to the writer of the option at a designated price
during the term of the option. An option on a stock index gives the purchaser
of the option, in return for the premium paid, the right to receive from the
seller cash equal to the difference between the closing price of the index and
the exercise price of the option. SC-ASIA may write a call or put option only
if the option is "covered." This means that so long as SC-ASIA is obligated as
the writer of a call option, it will own the underlying securities subject to
the call, or hold a call at the same or lower exercise price, for the same
exercise period, and on the same securities as the written call. A put is
covered if SC-ASIA maintains liquid assets with a value equal to the exercise
price in a segregated account or holds a put on the same underlying security at
an equal or greater exercise price. The value of the underlying securities on
which options may be written at any one time will not exceed 15% of the total
assets of SC-ASIA. SC-ASIA will not purchase put or call options if the
aggregate premium paid for such options would exceed 5% of its total assets at
the time of purchase.
Forward Foreign Currency Contracts. SC-ASIA may enter into forward foreign
currency exchange contracts ("forward contracts") to attempt to minimize the
risk to SC-ASIA from adverse changes in the relationship between the U.S. dollar
and foreign currencies. A forward contract is an obligation to purchase or sell
a specified currency for an agreed price at a future date which is individually
negotiated and privately traded by currency traders and their customers. SC-
ASIA will enter into forward contracts only under two circumstances. First,
when SC-ASIA enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to "lock in" the U.S. dollar
price of the security in relation to another currency by entering into a forward
contract to buy the amount of foreign currency needed to settle the transaction.
Second, when GCMG believes that the currency of a particular foreign country may
suffer or enjoy a substantial movement against another currency, SC-ASIA may
enter into a forward contract to sell or buy the amount of the former foreign
currency (or another currency which acts as a proxy for that currency)
approximating the value of some or all of SC-ASIA's portfolio securities
denominated in such foreign currency. The second investment practice is in
general referred to as "cross-hedging." SC-ASIA's forward transactions may call
for the delivery of one
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foreign currency in exchange for another foreign currency and may at times not
involve currencies in which its portfolio securities are denominated.
Futures Contracts. For hedging purposes only, SC-ASIA may buy and sell
financial futures contracts, stock and bond index futures contracts, and options
on any of the foregoing. A financial futures contract is an agreement between
two parties to buy or sell a specified debt security at a set price on a future
date. An index futures contract is an agreement to take or make delivery of an
amount of cash based on the difference between the value of the index at the
beginning and at the end of the contract period. A futures contract on a
foreign currency is an agreement to buy or sell a specified amount of a currency
for a set price on a future date.
When SC-ASIA enters into a futures contract, it must make an initial
deposit, known as "initial margin," as a partial guarantee of its performance
under the contract. As the value of the security, index or currency fluctuates,
either party to the contract is required to make additional margin payments,
known as "variation margin," to cover any additional obligation it may have
under the contract. In addition, when SC-ASIA enters into a futures contract,
it will segregate assets or "cover" its position in accordance with the 1940
Act. See "Investment Objectives and Policies--Futures Contracts" in the
Statement of Additional Information.
SC-ASIA may not commit more than 5% of its total assets to initial
margin deposits on futures contracts. The value of the underlying securities on
which futures will be written at any one time may not exceed 25% of the total
assets of SC-ASIA.
Depositary Receipts. SC-ASIA may purchase sponsored or unsponsored American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") and Global
Depositary Receipts ("GDRs") (collectively, "Depositary Receipts"). ADRs are
Depositary Receipts typically used by a U.S. bank or trust company which
evidence ownership of underlying securities issued by a foreign corporation.
EDRs and GDRs are typically issued by foreign banks or trust companies, although
they also may be issued by U.S. banks or trust companies, and evidence ownership
of underlying securities issued by either a foreign or a United States
corporation. Generally, Depositary Receipts in registered form are designed for
use in the U.S. securities market and Depositary Receipts in bearer form are
designed for use in securities markets outside the United States. Depositary
Receipts may not necessarily be denominated in the same currency as the
underlying securities into which they may be converted.
Short Sales. To the extent permitted by other countries, SC-ASIA reserves the
right to engage in short sale transactions in securities listed on one or more
foreign or U.S. securities exchanges. Short selling involves the sale of
borrowed securities. At the time a short sale is effected, SC-ASIA incurs an
obligation to replace the security borrowed at whatever its price may be at the
time that SC-ASIA 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-ASIA 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-ASIA will not engage in short sales if
immediately following such transaction the aggregate market value of all
securities sold short would exceed 10% of SC-ASIA's net assets (taken at market
value). See SC-ASIA's Statement of Additional Information for further
discussion of short sales.
RISK FACTORS
Shareholders should understand that all investments involve risk and
there can be no guarantee against loss resulting from an investment in SC-ASIA,
nor can there be an assurance that SC-ASIA's investment objectives will be
attained. As with any investment in securities, the value of, and income from,
an investment in SC-ASIA can decrease as well as increase depending on a variety
of factors which may affect the values and income generated by SC-ASIA's
portfolio securities, including general economic conditions and market factors.
In addition to the factors which affect the value of individual securities, a
shareholder may anticipate that the value of the shares of SC-ASIA will
fluctuate with movements in the broader equity and bond markets. A decline in
the stock market of any country in which SC-ASIA is invested may also be
reflected in declines in the price of shares of SC-ASIA. Changes in currency
valuations will also affect the price of shares of SC-ASIA. History reflects
both decreases and increases in worldwide stock markets and currency valuations,
and these may reoccur unpredictably in the future. The value of debt securities
held by SC-ASIA
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generally will vary inversely with changes in prevailing interest rates.
Additionally, investment decisions made by GCMG-Asia will not always be
profitable or prove to have been correct. SC-ASIA is intended as an investment
vehicle for those investors seeking long term capital growth and is not intended
as a complete investment program.
Investment in Real Estate Securities. SC-ASIA will not invest in real estate
directly, but only in securities issued by real estate companies. However, SC-
ASIA may be subject to risks similar to those associated with the direct
ownership of real estate (in 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 real estate 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.
Additionally, SC-ASIA could conceivably own real estate directly as a
result of a default on debt securities that it owns. If SC-ASIA has rental
income or income from the disposition of such real estate, the receipt of such
income may adversely affect its ability to retain its tax status as a regulated
investment company. See "Taxation."
Foreign Securities. Investors should consider carefully the substantial risks
involved in investing in securities issued by companies and governments of
foreign nations, which are in addition to the usual risks inherent in domestic
investments. There is the possibility of expropriation, nationalization or
confiscatory taxation, taxation of income earned in foreign nations or other
taxes imposed with respect to investments in foreign nations, foreign exchange
controls (which may include suspension of the ability to transfer currency from
a given country), foreign investment controls on daily stock market movements,
default in foreign government securities, political or social instability, or
diplomatic developments which could affect investments in securities of issuers
in foreign nations. In addition, in many countries there is less publicly
available information about issuers than is available in reports about companies
in the U.S. Foreign companies are not generally subject to uniform accounting
and auditing and financial reporting standards, and auditing practices and
requirements may not be comparable to those applicable to U.S. companies. SC-
ASIA may encounter difficulties or be unable to vote proxies, exercise
shareholder rights, pursue legal remedies, and obtain judgments in foreign
courts. Also, most foreign countries withhold portions of income and dividends
at the source requiring investors to reclaim taxes withheld.
Brokerage commissions, custodial services and other costs relating to
investment in Asia/Pacific countries are generally more expensive than in the
U.S. Asia/Pacific securities markets also have different clearance and
settlement procedures, and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when assets of SC-ASIA are
uninvested and no return is earned thereon. The inability of SC-ASIA to make
intended security purchases due to settlement problems could cause SC-ASIA to
miss attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result either in losses to SC-ASIA
due to subsequent declines in value of the portfolio security or, if SC-ASIA has
entered into a contract to sell the security, could result in possible liability
to the purchaser.
In many foreign countries, there is less government supervision and
regulation of business and industry practices, stock exchanges, brokers and
listed companies than in the U.S. There is an increased risk, therefore, of
uninsured loss due to lost, stolen, or counterfeit stock certificates. In
addition, the foreign securities markets of many of the countries in which SC-
ASIA may invest may also be smaller, less liquid, and subject to greater price
volatility than those in the U.S.
Certain risks associated with foreign securities are heightened for
investments in countries in the Asia/Pacific region. Specifically, the
currencies of certain of these countries have experienced steady devaluations
relative to the U.S. dollar and major adjustments have been made periodically in
certain of such currencies. Moreover, recent currency devaluations in Pacific
region countries have resulted in high interest rates and sharp reductions in
economic activity, which have diminished prospects for short-term growth in
corporate earnings.
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The economies of most Asia/Pacific region countries are heavily
dependent upon international trade and, therefore, are affected by protective
trade barriers and the economic conditions of their trading partners,
principally the U.S., Japan, China and the European Community. Thus, the
enactment by the U.S. or other principal trading partners of protectionist trade
legislation or the reduction of foreign investment in Asia/Pacific economies and
general declines in the international securities markets could have a
significant adverse effect upon the securities markets of the Asia/Pacific
region countries and the value of SC-ASIA's investments in theses markets.
Also, few Asia/Pacific region countries have Western-style or fully democratic
governments. During the course of the last 25 years, governments in the region
have periodically been installed or removed as a result of military coups, while
others have periodically demonstrated repressive police state characteristics.
Such political upheaval also would negatively impact the value of SC-ASIA's
investment in Asia/Pacific countries.
On July 1, 1997, Hong Kong reverted to Chinese administration. The
long-term effects of this reversion are not known at this time. However, SC-
ASIA's investment in Hong Kong may now be subject to the same or similar risks
as any investment in China. Investments in Hong Kong may become subject to
expropriation, nationalization or confiscation, in which case SC-ASIA could lose
its entire investment in Hong Kong. In addition, the reversion of Hong Kong
also presents a risk that the Hong Kong dollar will be devalued and a loss of
investor confidence in Hong Kong's currency stock market and economy will ensue.
SC-ASIA may invest in the equity securities of real estate companies
in emerging market countries in the Asia/Pacific region. The risks associated
with foreign investment described above also may be intensified in emerging
markets. Emerging markets can include every nation in the world except the
United States, Canada, Japan, Australia, New Zealand and most nations located in
Western Europe. Certain emerging market countries have historically
experienced, and may continue to experience, high rates of inflation, high
interest rates, exchange rate fluctuations, large amounts of external debt,
trade difficulties and unemployment. Further, the economies of developing
countries generally are heavily dependent upon international trade and,
accordingly, have been, and may continue to be, adversely affected by trade
barriers, exchange controls and other protectionist measures imposed or
negotiated by the countries in which they trade. There are also risks
associated with the possibility of nationalization, expropriation or
confiscatory taxation, political changes, government regulation, social
instability or diplomatic developments (including war) that could adversely
affect the economies of such countries or the value of SC-ASIA's investments in
those countries.
SC-ASIA usually effects currency exchange transactions on a spot
(i.e., cash) basis at the spot rate prevailing in the foreign exchange market.
However, some price spread on currency exchange (to cover service charges) will
be incurred when SC-ASIA converts assets from one currency to another.
Repurchase Agreements. Under the 1940 Act, repurchase agreements are considered
to be loans collateralized by the underlying security and therefore will be
fully collateralized. However, if the seller should default on its obligation
to repurchase the underlying security, SC-ASIA may experience delay or
difficulty in exercising its rights under the security and may incur a loss if
the value of the security should decline, as well as incur disposition costs in
liquidating the security.
Futures and Options. Successful use of futures contracts and related options is
subject to special risk considerations. A liquid secondary market for any future
or options contract may not be available when a futures position is sought to be
closed. In addition, there may be an imperfect correlation between movements in
the securities or foreign currency on which the futures or options contract is
based and movements in the securities or currency in SC-ASIA's portfolio.
Successful use of futures or options contracts is further dependent on GCMG-
Asia's ability to correctly predict movements in the securities or foreign
currency markets and no assurance can be given that its judgment will be
correct. Successful use of options on securities or stock indices is subject to
similar risk considerations.
Depositary Receipts. Depositary Receipts may be issued pursuant to sponsored
or unsponsored programs. In sponsored programs, an issuer has made arrangements
to have its securities traded in the form of Depositary Receipts. In
unsponsored programs, the issuer may not be directly involved in the creation of
the program. Although regulatory requirements with respect to sponsored and
unsponsored programs are generally similar, in some cases it may be easier to
obtain financial information from an issuer that has participated in the
creation of a sponsored program. Accordingly, there may be less information
available regarding issuers of securities underlying unsponsored programs and
there may not be a correlation between such information and the market value of
the Depositary Receipts. Depositary Receipts
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also involve the risks of other investments in foreign securities, as discussed
above. For purposes of SC-ASIA's investment policies, SC-ASIA's investment in
Depositary Receipts will be deemed to be investments in the underlying
securities.
Other Risks. There are further risk considerations, including possible losses
through the holding of securities in domestic and foreign custodian banks and
depositories, described in the Statement of Additional Information.
NON-DIVERSIFIED STATUS AND PORTFOLIO TURNOVER
SC-ASIA intends to operate as a "non-diversified" investment company
under the 1940 Act, which means SC-ASIA 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-ASIA intends to conduct its operations so as to qualify as
a "regulated investment company" for purposes of the Internal Revenue Code of
1986, as amended (the "Code"), which generally will relieve SC-ASIA 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-ASIA 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-ASIA'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-ASIA will not own more than 10% of the
outstanding voting securities of a single issuer. SC-ASIA's investments in
securities issued by the U.S. Government, its agencies and instrumentalities are
not subject to these limitations. Because SC-ASIA, as a non-diversified
investment company, may invest in a smaller number of individual issuers than a
diversified investment company, an investment in SC-ASIA may present greater
risk to an investor than an investment in a diversified company.
SC-ASIA anticipates that its annual portfolio turnover rate will not
exceed 150%, but the turnover rate will not be a limiting factor when GCMG 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-ASIA 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-ASIA. High
portfolio turnover may result in the realization of net short-term capital gains
by SC-ASIA which, when distributed to shareholders, will be taxable as ordinary
income. See "Taxation."
DIRECTORS, OFFICERS AND OTHER PERSONNEL
The overall management of the business and affairs of SC-ASIA is
vested with the Board of Directors of SC-REMFs. The Board of Directors approves
all significant agreements between SC-REMFs and persons or companies furnishing
services to SC-ASIA, including SC-REMFs' agreements with GCMG, and with its
custodian and its transfer agent. The management of SC-ASIA's day-to-day
operations is delegated to the officers of SC-REMFs, who include the Managing
Directors, and GCMG, subject always to the investment objectives and policies of
SC-ASIA and to general supervision by the Board of Directors. Although SC-REMFs
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-REMFs'
Articles of Incorporation. The Directors and Officers of SC-REMFs and their
principal occupations are set forth below.
Anthony R. Manno Jr. Chairman of the Board of Directors, Managing
Director and President of SC-REMFs. Managing
Director and President of GCMG since January 1995,
where he is responsible for overseeing all
investment and capital allocation matters for
GCMG's public market securities activities and is
also responsible for company and industry
analysis, market strategy and trading and
reporting. Mr. Manno was a member of the
Investment Committee of Security Capital Group
Incorporated from March 1994 to June 1996. Prior
to joining Security Capital, Mr. Manno was a
Managing Director of LaSalle Partners Limited from
March 1980 to March 1994. Mr. Manno received his
M.B.A. from the University of Chicago Graduate
School
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of Business, an M.A. and a B.A. from Northwestern
University and is a Certified Public Accountant.
Robert H. Abrams Director of SC-REMFs. Director of the Program in
Real Estate at Cornell University. Founder of
Colliers ABR, Inc. (formerly Abrams Benisch Riker
Inc.), a property management firm. Mr. Abrams was
Principal of Colliers ABR, Inc. from 1978 to 1992
and since 1992, has served as a Consultant. From
1959 to 1978 Mr. Abrams was Executive Vice
President and Director of Cross and Brown Company.
Mr. Abrams also serves as Trustee Emeritus and
Presidential Counselor of his alma mater, Cornell
University. Mr. Abrams received his M.B.A. from
Harvard University and his B.A. from Cornell
University.
Stephen F. Kasbeer Director of SC-REMFs. Retired; Senior Vice
President for Administration and Treasurer of
Loyola University, Chicago from 1981 to July 1994,
where he was responsible for administration,
investment, real estate and treasurer functions.
At Loyola University, he also 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. Currently, Mr. Kasbeer serves
as a Director of Endowment Realty Inc. and
Endowment Realty II and as a Member of the
Investment Committee of the University of San
Diego. Mr. Kasbeer also serves as Trustee,
Treasurer and Chairman of the Investment and
Finance Committees of Santa Fe Preparatory School
and as Trustee and Chairman of the Santa Fe
Preparatory School Combined Permanent Endowment
Fund Trust. Mr. Kasbeer received his J.D. from
John Marshall Law School and his M.A. and B.S.
from Northwestern University.
George F. Keane Director of SC-REMFs. Chairman of the Board of
Trigen Energy Corporation since 1994. As founding
chief executive of The Common Fund in 1971 and
Endowment Realty Investors in 1988, Mr. Keane for
many years headed an investment management service
for colleges, universities and independent schools
that managed $15 billion for 1,200 educational
institutions when he became President Emeritus of
the Common Fund in 1993. He has served as a member
of the Investment Advisory Committee of the $95
billion New York State Common Retirement Fund
since 1982. He has been a Director of the Northern
Trust of Connecticut since 1991, a Trustee of the
Nicholas Applegate Investment Trust since 1993,
and a Director of the Bramwell Funds since 1994.
He is also a Director of Universal Stainless &
Alloy Products, Global Pharmaceutical Corporation,
United Water Resources and United Properties
Group, and the Universal Bond Fund, and is an
advisor to Associated Energy Managers. Mr. Keane
also serves as a Trustee of his alma mater,
Fairfield University where he received his B.A.,
and as a Director and Chairman of the Investment
Committee of the United Negro College Fund. Mr.
Keane also holds honorary degrees from Loyola
University, Chicago, Illinois and Lawrence
University, Appleton, Wisconsin.
John H. Gardner, Jr. Director and Managing Director of SC-REMFs.
Managing Director of GCMG since July, 1997. Prior
thereto, Director of the REIT Manager for Security
Capital Pacific Trust ("PTR") from February 1995
to June 1997 and Senior Vice President of Security
Capital Atlantic Incorporated ("ATLANTIC"), PTR
and the PTR REIT Manager from September 1994 to
June 1997 where he had overall responsibility for
asset management and multifamily dispositions.
Prior to joining Security Capital, Mr. Gardner was
with Copley Real Estate Advisors as a Managing
Director and Principal responsible for portfolio
management from January 1991 to September 1994 and
as a Vice President and Principal of asset
management from December 1984 to December 1990.
From July 1977 to November 1984, Mr. Gardner was a
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Real Estate Manager with the John Hancock
Companies. Mr. Gardner received his M.S. from
Bentley College and his B.S. in Accounting from
Stonehill College.
Kenneth D. Statz Managing Director of SC-REMFs. Managing Director
of GCMG since November 1997 where he is
responsible for the development and implementation
of portfolio investment strategy. Prior thereto,
Senior Vice President of GCMG from July 1996 to
October 1997 and Vice President from May 1995 to
June 1996. Prior to joining Security Capital, Mr.
Statz was a Vice President and Senior REIT Analyst
in the investment research department of Goldman,
Sachs & Co., from February 1993 to January 1995,
concentrating on research and underwriting for the
REIT industry. Prior thereto, Mr. Statz was a real
estate stock portfolio manager and a managing
director of Chancellor Capital Management from
August 1982 to February 1992. Mr. Statz received
his M.B.A. and B.B.A. from the University of
Wisconsin, Madison.
Kevin W. Bedell Senior Vice President of SC-REMFs. Senior Vice
President of GCMG since November 1997 and Vice
President since July 1996, where he is responsible
for directing the activities of the
industry/company securities research group and
providing in-depth proprietary research on
publicly traded companies with office and
industrial sectors. Prior to joining GCMG, Mr.
Bedell spent nine years with LaSalle Partners
Limited where he was Equity Vice President and
Portfolio Manager responsible for the strategic,
operational and financial management of a private
REIT with commercial real estate investments of
$800 million. Mr. Bedell received his M.B.A. from
the University of Chicago and his B.A. from Kenyon
College.
Jeffrey C. Nellessen Vice President, Treasurer and Assistant Secretary
of SC-REMFs. Vice President and Controller of GCMG
since March 1997. Prior thereto, from June 1988 to
March 1997, he was Controller, Manager of Client
Administration and Compliance Officer at Strong
Capital Management, Inc. Mr. Nellessen is a
Certified Public Accountant, Certified Management
Accountant and a Certified Financial Planner. He
received his B.B.A. from the University of
Wisconsin, Madison.
David T. Novick Vice President and Secretary of SC-REMFs. Vice
President of Security Capital Group Incorporated
since June 1998. Prior thereto, from September
1989 to June 1998, he was an attorney, and most
recently a Partner, with the law firm of Katten
Muchin and Zavis. Mr. Novick received his B.S.B.A.
from Boston University and his J.D. from the
University of Illinois.
GCMG
Security Capital Global Capital Management Group Incorporated
("GCMG"), 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-ASIA under the overall
supervision and control of the Directors of SC-ASIA.
GCMG commenced operations in January 1995, and is registered as an
investment adviser with the SEC. GCMG's principal officers include Anthony R.
Manno, Jr., Managing Director and President, John H. Gardner, Jr., Managing
Director, Kenneth D. Statz, Managing Director and Kevin W. Bedell, Senior Vice
President. Messrs. Manno and Gardner are responsible for overseeing the
portfolio management activities of GCMG-Asia. GCMG is an indirect wholly-owned
subsidiary of Security Capital Group Incorporated, a real estate research,
investment and management company.
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GCMG-ASIA
Security Capital Global Capital Management Group (Asia) Incorporated
("GCMG-Asia"), with offices located at Level 9, AIG Building, 1-1-3 Marunouchi,
Chiyoda-ku, Tokyo 100, Japan, provides portfolio management services to SC-ASIA
pursuant to an investment sub-advisory agreement with GCMG. GCMG-Asia, a
wholly-owned subsidiary of GCMG, was formed on May 11, 1998 under Delaware law
and is registered as an investment adviser with the SEC. The principal officers
of GCMG-Asia, who serve on the SC-ASIA Portfolio Management Committee, and their
principal occupations are set forth below.
Michelle H. Lord Vice President of GCMG-Asia since May 1998.
Previously, Vice President of GCMG from November
1997 to April 1998, where she conducted real
estate securities analysis in the Asia/Pacific
region for the firm. Prior to that, Ms. Lord was
with Security Capital Industrial Trust from
September 1996 to October 1997, where she was
responsible for research on special investment
opportunities and prior thereto, working on
special assignments under Security Capital Group
Incorporated Managing Directors from August 1995
to August 1996. Prior to joining Security Capital,
Ms. Lord was with Societe Generale Securities,
(North Pacific) in Tokyo from June 1994 to August
1994, where she was a member of the Japanese
Government Bond futures and options brokerage desk
and Merrill Lynch, Pierce, Fenner & Smith
from September 1992 to September 1993. Previously,
Ms. Lord was a currency trader with Asahi Bank in
Tokyo. Ms. Lord received her M.B.A. from the
University of Chicago Graduate School of Business
and her B.A. from Smith College.
Michael C. Montelibano Vice President of GCMG-Asia since May 1998. Vice
President of GCMG from November 1997 to April
1998, where he conducted real estate securities
analysis in the Asia/Pacific region for the firm.
Prior to that, Mr. Montelibano worked on special
assignments under Security Capital Group
Incorporated Managing Directors June 1995 to
December 1996. Prior to joining Security Capital,
Mr. Montelibano was a consultant for Ayala Land,
Incorporated in the Philippines from July 1994 to
August 1994 where he conducted financial analyses
of office and residential development projects,
and for Bank of America in Malaysia from June 1994
to July 1994 where he conducted market research
studies on retail banking. Previously, Mr.
Montelibano was a senior consultant with Andersen
Consulting from January 1990 to August 1993, 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. in Mechanical Engineering from the University
of California, San Diego.
The SC-ASIA Portfolio Management Committee, which is comprised of SC-
REMFs and GCMG-Asia officers, is responsible for the day-to-day management of
SC-ASIA's portfolio.
INVESTMENT ADVISORY AGREEMENT AND
INVESTMENT SUB-ADVISORY AGREEMENT
Pursuant to an investment advisory agreement (the "Advisory
Agreement"), GCMG furnishes a continuous investment program for SC-ASIA's
portfolio, subject to the general supervision of SC-REMFs' Board of Directors.
GCMG also provides persons satisfactory to the Directors of SC-REMFs to serve as
officers of SC-REMFs. Such officers, as well as certain other employees and
Directors of SC-REMFs, may be directors, officers, or employees of GCMG.
Under the Advisory Agreement, SC-ASIA Class I shares pay GCMG,
monthly, an annual management fee in an amount equal to .95% of SC-ASIA's Class
I average daily net asset value. Under a separate agreement GCMG has committed
to waive fees and/or reimburse expenses to maintain SC-ASIA's Class I total
operating expenses, other than
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brokerage fees and commissions, interest, taxes and other extraordinary
expenses, at no more than 1.55% of the value of SC-ASIA's Class I average daily
net assets for the year ending December 31, 1998.
In addition to the payments to GCMG under the Advisory Agreement described
above, SC-ASIA Class I shares pay certain other costs of operations including
(a) administration, custodian and transfer agency fees, (b) fees of Directors
who are not affiliated with GCMG, (c) clerical, accounting and other office
costs, (d) costs of printing SC-ASIA's prospectus for existing shareholders and
shareholder reports, (e) costs of maintaining SC REMFs' existence, (f) interest
charges, taxes, brokerage fees and commissions, (g) costs of stationery and
supplies, (h) expenses and fees related to registration and filing with federal
and state regulatory authorities, and (i) upon the approval of SC-REMFs' Board
of Directors, costs of personnel of GCMG or its affiliates rendering clerical,
accounting and other office services. Each class of SC-ASIA shares pays the
portion of SC-ASIA expenses attributable to its operations. Income, realized
gains and losses, unrealized appreciation and depreciation and certain expenses
not allocated to a particular class are allocated to each class based on the net
assets of that class in relation to the net assets of SC-REMFs.
GCMG has entered into an investment sub-advisory agreement with GCMG-Asia
("Sub-Advisory Agreement") pursuant to which GCMG-Asia provides various
portfolio management and investment advisory services to SC-ASIA. In connection
with the management of SC-ASIA's portfolio, GCMG-Asia may select brokers and
dealers to execute purchase and sale orders for SC-ASIA's portfolio
transactions. Under the Sub-Advisory Agreement, GCMG pays GCMG-Asia a monthly
management fee based on its costs (including payroll, rent and other directly
allocable costs and expenses) plus a mark-up of 10%. The fee is the sole
obligation of GCMG and not SC-ASIA.
ADMINISTRATOR AND SUB-ADMINISTRATOR
GCMG has also entered into a fund accounting and administration agreement
with SC-REMFs (the "Administration Agreement") under which GCMG performs certain
administrative functions for SC-ASIA, including (i) providing office space,
telephone, office equipment and supplies for SC-REMFs; (ii) paying compensation
of SC-REMFs' officers for services rendered as such; (iii) authorizing
expenditures and approving bills for payment on behalf of SC-ASIA; (iv)
supervising preparation of the periodic updating of SC-ASIA's Prospectus and
Statement of Additional Information for existing shareholders; (v) supervising
preparation of semi-annual reports to SC-ASIA'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-ASIA's investment portfolio and the
publication of the net asset value of SC-ASIA's shares, earnings reports and
other financial data; (vii) monitoring relationships with organizations
providing services to SC-ASIA, including the custodian ("Custodian"), transfer
agent ("Transfer Agent") and printers; (viii) providing trading desk facilities
for SC-ASIA; (ix) maintaining books and records for SC-ASIA (other than those
maintained by the Custodian and Transfer Agent) and preparing and filing of tax
reports other than SC-ASIA'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 REMFs' Board of Directors, GCMG has caused SC-REMFs to retain
State Street Bank and Trust Company as sub-administrator (the "Sub-
Administrator") under a sub-administration agreement ("Sub-Administration
Agreement").
Under the Sub-Administration Agreement, the Sub-Administrator has assumed
responsibility for performing certain of the foregoing administrative functions,
including overseeing the determination and publication of SC-ASIA's net asset
value, maintaining certain of SC-ASIA's books and records that are not
maintained by GCMG, or the Custodian or the Transfer Agent, preparing financial
information for SC-ASIA's income tax returns, proxy statements, semi-annual and
annual shareholders reports, and SEC filings, and responding to shareholder
inquiries. Under the terms of the Sub-Administration Agreement, SC-REMFs pays
the Sub-Administrator a monthly administration fee at the annual rate of .08% of
the first $750 million, .06% of the next $250 million and .04% of SC REMFs'
average daily net assets over $1 billion, subject to an anverage annual minimum
fee of $75,000 per investment portfolio. The Sub-Administrator also serves as
SC-ASIA's Custodian and Transfer Agent. See "Custodian and Transfer Agent."
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Under the Administration Agreement, GCMG remains responsible for monitoring
and overseeing the performance by the Sub-Administrator of its obligations to
SC-ASIA under the Sub- Administration Agreement, subject to the overall
authority of SC-REMFs' Board of Directors. For its services under the
Administration Agreement, GCMG receives a monthly fee from SC-REMFs at the
annual rate of 0.02% of the value of the average daily net assets of
SC-ASIA.
DISTRIBUTION AND SERVICING PLAN
The Board of Directors of SC-REMFs and SC-ASIA's sole Class I shareholder
have adopted a Distribution and Servicing Plan ("Plan") with respect to SC-
ASIA's Class I shares pursuant to Rule 12b-1 under the 1940 Act. Under the Plan,
SC-ASIA pays the Distributor a monthly fee equal to, on an annual basis, .25% of
the value of SC-ASIA's average daily net assets for Class I shares.
The Distributor may use the fee for services performed and expenses
incurred by the Distributor in connection with the distribution of Class I
shares and for providing certain services to Class I shareholders. The
Distributor may pay third parties in respect of these services such amount as it
may determine. SC-ASIA understands that these third parties may also charge fees
to their clients who are beneficial owners of SC-ASIA Class I shares in
connection with their client accounts. These fees would be in addition to any
amounts which may be received by them from the Distributor under the Plan.
The Distributor may enter into agreements ("Agreements") with institutional
shareholders of record, broker-dealers, financial institutions, depository
institutions and other financial intermediaries as well as various brokerage
firms or other industry recognized service providers of fund supermarkets or
similar programs to provide certain distribution, shareholder servicing,
administrative and/or accounting services for their clients who are beneficial
owners of SC-ASIA Class I shares. Such Agreements may be governed by the Plan.
The Distributor, with offices located at 11 South LaSalle Street, Chicago,
Illinois 60603, is an affiliate of GCMG. See "Distribution Plan" in the
Statement of Additional Information for a listing of the types of expenses for
which the Distributor and third parties may be compensated under the Plan. If
the fee received by the Distributor exceeds its expenses, the Distributor may
realize a profit from these arrangements. The Plan is reviewed and is subject to
approval annually by the Board of Directors.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of SC-ASIA's Class I shares is determined as
of the scheduled closing time of the New York Stock Exchange ("NYSE") (generally
4:00 p.m., New York time) each day the NYSE is open for trading, by adding the
market value of all securities in SC-ASIA's portfolio and other assets
represented by Class I shares, subtracting liabilities incurred or accrued
allocable to Class I shares, and dividing by the total number of SC-ASIA's Class
I shares then outstanding, adjusted to the nearest whole cent. A security listed
or traded on a recognized stock exchange or quoted on a quotation system of a
national securities association is valued at its last sale price on the
principal exchange on which the security is traded. The value of a foreign
security is determined in its national currency as of the close of trading on
the foreign exchange on which it is traded or as of the scheduled closing time
of the NYSE (generally 4:00 p.m., New York time), if that is earlier, and that
value is then converted into its U.S. dollar equivalent at the foreign exchange
rate in effect at noon, New York time, on the day the value of the foreign
security is determined. If no sale is reported at that time, the mean between
the current bid and asked price is used. Occasionally, events which affect the
values of such securities and such exchange rates may occur between the times at
which they are determined and the close of the NYSE and will therefore not be
reflected in the computation of SC-ASIA's net asset value. If events materially
affecting the value of such securities occur during such period, then these
securities will be valued at fair value as determined by the management and
approved in good faith by the Board of Directors. All other securities for which
over-the-counter market quotations are readily available are valued at the mean
between the current bid and asked price. Foreign securities that are not traded
on an exchange, securities for which market quotations are not readily available
and other assets are valued at fair value as determined by SC-ASIA's management
and approved in good faith by the Board of Directors.
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PURCHASE OF SHARES
Class I shares are being offered to investors whose minimum initial
investment is $250,000. SC-ASIA Class I shares may be purchased through SC-
ASIA's Transfer Agent and various financial intermediaries that have entered
into a sales agreement with the Distributor.
Orders for shares of SC-ASIA will become effective at the net asset value
per share next determined after the receipt of payment. All funds will be
invested in full and fractional shares. A confirmation indicating the details of
each purchase transaction will be sent to you 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.
Investors must specify that Class I shares are being purchased.
If you choose 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 of SC-ASIA 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.
By investing in SC-ASIA you appoint the Transfer Agent as your 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. PLEASE NOTE THAT IT IS MORE COMPLICATED
TO REDEEM SHARES HELD IN CERTIFICATE FORM.
INITIAL INVESTMENT
The minimum initial investment is $250,000. Class I shares may be purchased
by check or money order drawn on a U.S. bank, savings and loan, or credit union
by wire transfer. The enclosed application must be completed and accompanied by
payment in U.S. funds to open an account. Checks must be payable in U.S. dollars
and will be accepted subject to collection at full face value. Note that all
applications to purchase shares are subject to acceptance by SC-ASIA and are not
binding until so accepted. SC-ASIA reserves the right to decline to accept a
purchase order application in whole or in part.
MAIL
The following instructions should be used when mailing a check or money
order payable to "Security Capital Asia/Pacific Real Estate Shares," via U.S.
mail to the Distributor, a securities dealer or the Transfer Agent:
VIA U.S. MAIL BY OVERNIGHT COURIER
Boston Financial Data Services Boston Financial Data Services
Attn: Security Capital Real Estate Attn: Security Capital Real Estate
Mutual Funds Incorporated Mutual Funds Incorporated
P.O. Box 8500 66 Brooks Drive
Boston, Massachusetts 02266-8500 Braintree, Massachusetts 02184
SC-REMFs does not consider the U.S. Postal Service or other independent
delivery service 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-REMFs. Do
not mail letters by overnight courier to the post office box.
WIRE PURCHASES
Class I shares may be purchased by wire only through the Transfer Agent.
The following instructions should be used when wiring funds to the Transfer
Agent for the purchase of shares:
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Wire to: State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02101
ABA Number 011000028
Credit: DDA Number 9905-378-7
Further Credit: Security Capital Real Estate Mutual Funds Incorporated
Shareholder Registration
Shareholder Fund and Account Number
PLEASE CALL TOLL FREE 1-800-409-4189 PRIOR TO WIRING ANY FUNDS IN ORDER TO
OBTAIN A CONFIRMATION NUMBER AND TO ENSURE PROMPT AND ACCURATE HANDLING OF
FUNDS. SC-ASIA and its Transfer Agent are not responsible for the consequences
of delays resulting from the banking or Federal Reserve wire system or from
incomplete wiring instructions.
SUBSEQUENT INVESTMENTS
Additional investments must be at least $20,000 and may be made by mail,
wire or by telephone. When making an additional purchase by mail, a check
payable to "Security Capital Asia/Pacific Real Estate Shares" 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 toll free 1-800-409-4189 for complete wiring instructions.
You may purchase additional shares by moving money from your bank account
to your SC-ASIA account by telephone. 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 three business days. TELEPHONE
TRANSACTIONS MAY NOT BE USED FOR INITIAL PURCHASES OF CLASS I SHARES.
SC-REMFs reserves the right to waive or modify minimum initial and
subsequent investment requirements in connection with purchases of Class I
shares of SC-ASIA, including purchases for accounts established on behalf of the
following types of retirement plans: (i) plans qualified under Section 401(k) of
the Code; (ii) plans described in Section 403(b) of the Code; (iii) deferred
compensation plans described in Section 457 of the Code; (iv) simplified
employee pension (SEP) plans; and (v) salary reduction simplified employee
pension (SARSEP) plans.
EXCHANGE FEATURE
Class I shares of SC-ASIA may be exchanged for Class I shares of SC-US, SC-
EURO and SC-ARBITRAGE. Exchanges of Class I shares will be made at their
relative net asset values. Shares may be exchanged only if the amount being
exchanged satisfies the minimum investment required. However, you may not
exchange your investment in shares of SC-US, SC-EURO, SC-ARBITRAGE or SC-ASIA
more than four times in any twelve-month period (including the initial exchange
of your investment during that period). In addition, exchanges of SC-ARBITRAGE
Class I shares within one year of the date of purchase or exchange are subject
to a 2% redemption fee. See the Prospectus for SC-ARBITRAGE Class I shares and
the Statement of Additional Information for additional information about the
redemption fee.
REDEMPTION OF SHARES
You may request redemption of part or all of your Class I shares at any
time by telephone or by mail. The redemption of shares will be at the next
determined net asset value. See "Determination of Net Asset Value." SC-ASIA
normally will mail the redemption proceeds to you on the next business day and,
in any event, no later than seven business days after the receipt of a
redemption request in good order. However, when a purchase has been made by
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check, SC-ASIA may hold payment on redemption proceeds until reasonably
satisfied that the check has cleared, which may take up to twelve days.
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-ASIA
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 requests must be signed exactly as the shares are registered
including the signature of each joint owner. You must also specify the number of
shares or dollar amount to be redeemed. If the Class I 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 the
Transfer Agent together with a redemption request. The following instructions
should be used for the redemption of shares by mail, by wire and by telephone:
MAIL AND WIRE
For most redemption requests you need only furnish a written, unconditional
request to redeem your Class I shares (for a fixed dollar amount) at net asset
value to Security Capital Asia/Pacific Real Estate Shares:
VIA U.S. MAIL BY OVERNIGHT COURIER
Boston Financial Data Services Boston Financial Data Services
Attn: Security Capital Real Estate Attn: Security Capital Real Estate
Mutual Funds Incorporated Mutual Funds Incorporated
P.O. Box 8500 66 Brooks Drive
Boston, Massachusetts 02266-8500 Braintree, Massachusetts 02184
Redemption proceeds made by written redemption request may also be wired to a
commercial bank that you have authorized on your account application.
Additional documentation may be requested from corporations, executors,
administrators, trustees, guardians, agents, or attorneys-in-fact. SC-REMFs
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 by SC-ASIA. 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.
TELEPHONE
You may redeem shares by telephone by calling the Transfer Agent at toll
free 1-800-409-4189. In order to utilize this procedure, you must have
previously elected this option in writing, which election will be reflected in
the Transfer Agent's records and the redemption proceeds will be mailed directly
to you or transferred 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 that address, you
may call or submit a written request to the Transfer Agent. No telephone
redemptions will be allowed within 15 days of such a change. SC-ASIA 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-ASIA 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-ASIA reserves the right to refuse a telephone
redemption request if so advised.
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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-ASIA or the 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.
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-ASIA may suspend the right of redemption during any period when (i)
trading on the NYSE is restricted or the NYSE 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-ASIA 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-ASIA on not less than 30
days' notice if, at the time of any redemption of Class I shares in his or her
account, the value of the remaining shares in the account falls below $250,000.
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.
A Class I shareholder who fails to satisfy minimum account balance
requirements may elect to convert Class I shares to Class R shares. Class I
shares will be converted to Class R shares at the next determined net asset
value for Class I shares and Class R shares after the receipt by the distributor
of a written conversion request. SC-ASIA does not charge a fee to process
conversions. SC-ASIA reserves the right to reject any conversion request in
whole or in part. The conversion feature may be modified or terminated at any
time upon notice to SC-ASIA Class I shareholders.
DIVIDENDS AND DISTRIBUTIONS
Dividends from SC-ASIA's investment income will be declared and distributed
quarterly. SC-ASIA intends to distribute net realized capital gains, if any, at
least annually, although SC-ASIA's Board of Directors may in the future
determine to retain net realized capital gains and not distribute them to
shareholders.
Dividends and distributions will automatically be reinvested into full and
fractional shares of SC-ASIA based on the net asset value per share at the close
of business on the payable date unless the shareholder has elected to have
dividends or distributions paid in cash. SC-ASIA will send shareholders a
statement reflecting each dividend and distribution. In addition, after the
end of each calendar year, SC-ASIA will send shareholders a statement showing
the amount and tax characterization of all dividends and distributors paid
during the previous year. In accordance with the Taxpayer Relief Act of 1997,
SC-ASIA will indicate which portion of a capital gain distribution will be taxed
at a maximum rate of 20% and which portion will be taxed at a maximum rate of
28%. For information concerning the tax treatment of SC-ASIA's distribution
policies for SC-ASIA and its shareholders, see "Taxation."
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<PAGE>
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-ASIA, including the status of distributions
under applicable state or local law.
FEDERAL INCOME TAXES
SC-ASIA intends to qualify to be taxed as a "regulated investment company"
under the Code. To the extent that SC-ASIA distributes its taxable income and
net capital gains to its shareholders, qualification as a regulated investment
company relieves SC-ASIA 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-ASIA.
A corporation's dividends-received deduction will be disallowed unless the
corporation holds shares in SC-ASIA at least 46 days. Furthermore, the
dividends-received deduction will be disallowed to the extent a corporation's
investment in shares of SC-ASIA is financed with indebtedness.
The excess of net long-term capital gains over the net short-term capital
losses realized and distributed by SC-ASIA 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. Recently enacted legislation has reduced
the holding period required for the 20% maximum capital gains rate from 18
months to 12 months.
Under the current federal tax law, the amount of an income dividend or
capital gains distribution declared by SC-ASIA 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-ASIA
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 for 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-ASIA
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-ASIA 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-ASIA, or the Secretary of the Treasury notifies SC-
ASIA 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 in the
Statement of Additional Information.
20
<PAGE>
STATE AND LOCAL TAXES
SC-ASIA 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-ASIA.
ORGANIZATION AND DESCRIPTION OF CAPITAL STOCK
Security Capital Real Estate Mutual Funds Incorporated, formerly Security
Capital Employee REIT Fund Incorporated, was incorporated under Maryland law as
SCERF Incorporated ("SCERF"), a wholly-owned subsidiary of Security Capital
Group Incorporated, on December 20, 1996. On January 23, 1997, all the assets
and liabilities of SCERF were transferred to Security Capital Employee REIT Fund
Incorporated in a reorganization transaction. On December 16, 1997, its name was
changed to Security Capital U.S. Real Estate Shares Incorporated. On June 30,
1998, its name was changed to Security Capital Real Estate Mutual Funds
Incorporated.
SC-REMFs is authorized to issue 200,000,000 shares of stock, $.01 par value
per share. SC-REMFs' Board of Directors may, without shareholder approval,
increase or decrease the number of authorized but unissued shares of SC-REMFs'
stock and reclassify and issue any unissued shares. The Board of Directors also
may create additional series of shares with different investment objectives,
policies or restrictions without shareholder approval. The Board of Directors of
SC-REMFs has authorized the creation of four investment portfolios; SC-US,
SC-EURO, SC-ASIA and SC-ARBITRAGE, three of which issue two classes of shares:
Class I shares and Class R shares. SC-ARBITRAGE issues Class I shares only.
Class I shares offer different services to shareholders and incur different
expenses than Class R shares. Each class pays its proportionate share of
SC-REMFs' expenses.
All classes of each series of SC-REMFs' shares have equal dividend,
distribution, liquidation and voting rights. There are no conversion or
preemptive rights in connection with any class of any series of SC- REMFs's
shares. All SC-REMFs shares, when duly issued, are fully paid and nonassessable.
The rights of the holders of SC-ASIA's Class I shares may not be modified except
by the vote of a majority of the holders of all SC-ASIA's Class I shares
outstanding. SC-ASIA's Class I shareholders have exclusive voting rights with
respect to matters relating solely to SC-ASIA's Class I shares. SC-ASIA's Class
I shareholders vote separately from SC-ASIA's Class R shareholders, SC-
ARBITRAGE's Class I shareholders and SC-US's and SC-EURO's Class I and Class R
shareholders on matters in which the interests of SC-ASIA's Class I shareholders
differ from the interests of SC-ASIA's Class R shareholders, SC-ARBITRAGE's
Class I shareholders and SC-US's and SC-EURO's Class I and Class R shareholders.
SC-REMFs 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-REMFs entitled to vote at the meeting. SC-REMFs will assist shareholders
wishing to communicate with one another for the purpose of requesting such a
meeting.
As of July 31, 1998, SC REALTY Incorporated, a wholly-owned subsidiary of
Security Capital Group Incorporated, owned 99.25% of the issued and outstanding
shares of SC ASIA and SC EURO, 99.97% of the issued and outstanding shares of
SC-ARBITRAGE and 92.97% of the issued and outstanding shares of SC-US, which
means that SC REALTY Incorporated controls SC-US, SC-EURO, SC-ASIA and SC-
ARBITRAGE for purposes of the 1940 Act. In each case, SC REALTY owns Class I
shares only. The effect of SC REALTY Incorporated's ownership of a controlling
interest in SC-US, SC-EURO, SC-ASIA, SC-ARBITRAGE and, therefore, SC-REMFs, is
to dilute the voting power of other shareholders. SC REALTY Incorporated does
not anticipate that its initial control of SC-US, SC-EURO, SC-ASIA and SC-
ARBITRAGE will adversely effect the rights of future shareholders.
CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company, which has its principal business
address at 225 Franklin Street, Boston, Massachusetts 02101, has been retained
to act as Custodian of SC-ASIA's investments and as SC-ASIA's Transfer Agent.
21
<PAGE>
State Street Bank and Trust Company has no part in deciding SC-ASIA's investment
policies or which securities are to be purchased or sold for SC-ASIA's
portfolio.
REPORTS TO SHAREHOLDERS
The fiscal year of SC-ASIA ends on December 31 of each year. SC-ASIA 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-ASIA's independent
accountants, will be sent to shareholders each year. Please call toll free
1-888-SECURITY for a copy of the most recent semi-annual report.
PERFORMANCE INFORMATION
From time to time, SC-ASIA may advertise its "average annual total
return" of the Class I shares over various periods of time. This total return
figure shows the average percentage change in value of an investment in SC-ASIA
Class I shares 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-
ASIA's Class I shares and assumes that any income, dividends and/or capital
gains distributions made by SC-ASIA during the period are reinvested in Class I
shares of SC-ASIA. 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-ASIA'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-ASIA's Class I annual total return for any one
year in the period might have been greater or less than the average for the
entire period. SC-ASIA also may use "aggregate" total return figures for
various periods, representing the cumulative change in value of an investment in
SC-ASIA's Class I shares for the specific period (again reflecting changes in
SC-ASIA's Class I share price and assuming reinvestment of Class I 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-ASIA's
performance.
YEAR 2000 RISKS
Like investment companies, financial and business organizations around the
world, SC-REMFs could be adversely affected if the computer systems used by the
SC-REMFs, other service providers and entities with computer systems that are
linked to the SC-REMFs' records do not properly process and calculate date-
related information and data from and after January 1, 2000. This is commonly
known as the "Year 2000 Issue." SC-REMFs is taking steps that it believes are
reasonably designed to address the Year 2000 Issue with respect to the computer
systems that it uses and to obtain satisfactory assurances that comparable steps
are being taken by each of SC-REMFs major service providers. However, there can
be no assurance that these steps will be sufficient to avoid any adverse impact
on SC-REMFs and SC-US, SC-EURO, SC-ASIA and SC-ARBITRAGE.
ADDITIONAL INFORMATION
Any shareholder inquiries may be directed to SC-REMFs 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 of the information set forth in the
Registration Statement filed by SC-REMFs with the SEC under the Securities Act
of 1933, as amended. 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.
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CLASS R PROSPECTUS
LOGO
11 SOUTH LASALLE STREET
CHICAGO, ILLINOIS 60603
Security Capital Asia/Pacific Real Estate Shares ("SC-ASIA") is an
investment portfolio of Security Capital Real Estate Mutual Funds Incorporated
("SC-REMFs"), an open-end management investment company organized under Maryland
law. SC-ASIA seeks to provide shareholders with above-average total returns,
including current income and capital appreciation, primarily through investments
in equity securities of publicly-traded real estate companies organized
principally in countries in the Asia/Pacific region. Long-term, SC-ASIA's
objective is to achieve top-quartile returns as compared with other mutual funds
that invest in publicly-traded real estate companies organized principally in
countries in the Asia/Pacific region, by integrating in-depth proprietary real
estate market research with sophisticated capital markets research and
investment modeling techniques. Security Capital Global Capital Management Group
Incorporated ("GCMG") serves as both investment adviser and administrator to SC-
ASIA and Security Capital Global Capital Management Group (Asia) Incorporated
("GCMG-Asia") serves as SC-ASIA's investment sub-adviser.
By this Prospectus, SC-ASIA is offering Class R shares. Class R shares are
sold at net asset value without a sales charge to investors whose minimum
initial investment is $2,500. Class R shares are offered directly through SC-
REMFs, Security Capital Markets Group Incorporated, SC-ASIA's distributor
("Distributor"), and various financial intermediaries. SC-ASIA also offers Class
I shares to investors whose minimum initial investment is $250,000. Class I
shares have different expenses than Class R shares which would affect
performance. Investors desiring to obtain information about SC-ASIA's Class I
shares should call toll free 1-888-SECURITY or ask their sales representatives
or the Distributor. This Prospectus provides you with information specific to
the Class R shares of SC-ASIA. It contains information you should know before
you invest in SC-ASIA.
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
This Prospectus sets forth concisely the information a prospective investor
should know before investing in SC-ASIA. SC-REMFs offers other investment
portfolios which are described in the prospectuses for Security Capital U.S.
Real Estate Shares, Security Capital European Real Estate Shares and Security
Capital Real Estate Arbitrage Shares. A Statement of Additional Information
dated June 30, 1998, containing additional and more detailed information about
SC-ASIA has been filed with the Securities and Exchange Commission (the "SEC")
and is hereby incorporated by reference into this Prospectus. It is available
without charge and can be obtained by calling toll free 1-888-SECURITY.
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 NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
June 30 August 19, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Expenses....................................... 3
Description of SC-ASIA........................ 5
Investment Objectives and Policies............. 5
Investment Strategy............................ 6
Other Investment Strategies.................... 7
Risk Factors................................... 8
Non-Diversified Status & Portfolio Turnover.... 11
Directors, Officers and Other Personnel........ 11
Investment Advisory Agreement and
Investment Sub-Advisory Agreement.............. 14
Administrator and Sub-Administrator............ 15
Distribution and Servicing Plan................ 16
Determination of Net Asset Value............... 16
Purchase of Shares............................. 17
Redemption of Shares........................... 19
Dividends and Distributions.................... 21
Taxation....................................... 21
Organization and Description of Capital Stock.. 22
Custodian and Transfer Agent................... 23
Reports to Shareholders........................ 23
Performance Information........................ 23
Year 2000 Risks................................ 23
Additional Information......................... 24
</TABLE>
<PAGE>
EXPENSES
SHAREHOLDER TRANSACTION EXPENSES
Shareholder transaction expenses are direct charges which are incurred when
shareholders buy or sell shares of SC-ASIA.
ANNUAL SC-ASIA OPERATING EXPENSES
The Class R shares of SC-ASIA pay for certain expenses attributable to
Class R shares directly out of SC-ASIA's Class R assets. These expenses are
related to management of SC-ASIA, administration and other services. For
example, SC-ASIA pays an advisory fee and an administrative fee to GCMG. SC-ASIA
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-ASIA's Class
R assets to calculate SC-ASIA's Class R 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-ASIA and the portion of SC-ASIA's operating expenses
that they might expect to bear indirectly. The numbers reflected below are based
on SC-ASIA's projected expenses for its current fiscal period ending December
31, 1998, assuming that SC-ASIA'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-ASIA's assets.
FEE TABLE
<TABLE>
<S> <C>
Shareholder Transaction Expenses:
Maximum sales charge on purchases and reinvested distributions....................... None
Redemption fee (1)................................................................... None
Annual SC-ASIA Operating Expenses (after expense waivers and/or reimbursements, as a
percentage of average net assets):
Management fees...................................................................... .95%
12b-1 fees (2)....................................................................... .25%
Other expenses....................................................................... .50%
------
Total SC-ASIA operating expenses (3)................................................. 1.70%
</TABLE>
______
(1) The purchase or redemption of shares through a securities dealer that has
not entered into a sales agreement with the Distributor may be subject to a
transaction fee.
(2) SC-ASIA has adopted a Distribution and Service Plan for SC-ASIA Class R
shares pursuant to Rule 12b-1 of the Investment Company Act of 1940, as
amended, pursuant to which SC-ASIA pays the Distributor a fee for
distribution-related services and services related to the maintenance of
shareholder accounts at the annual rate of 0.25% of SC-ASIA's Class I
average daily net assets. As a result, long-term Class R shareholders of
SC-ASIA may pay more than the economic equivalent of the maximum front-end
sales load permitted by the National Association of Securities Dealers,
Inc. ("NASD").
(3) GCMG has committed to waive fees and/or reimburse other expenses to maintain
SC-ASIA's Class R expenses, other than brokerage fees and commissions,
taxes, interest and other extraordinary expenses, at no more than 1.70% of
the value of SC-ASIA's Class R average daily net assets for the year ending
December 31, 1998. SC-ASIA estimates that without such waiver and/or
reimbursement, other expenses would be .50% and total fund operating
expenses would be 1.70% of the value of SC-ASIA's Class R average daily net
assets.
3
<PAGE>
EXAMPLES
<TABLE>
<CAPTION>
ONE THREE
YEAR 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.................................. $17 $54
</TABLE>
THE ACTUAL EXPENSES IN FUTURE YEARS MAY BE MORE OR LESS THAN THE NUMBERS IN
THE EXAMPLE, DEPENDING ON A NUMBER OF FACTORS, INCLUDING THE ACTUAL VALUE OF SC-
ASIA'S ASSETS.
4
<PAGE>
DESCRIPTION OF SC-ASIA
SC-ASIA is a non-diversified investment portfolio of Security Capital Real
Estate Mutual Funds Incorporated ("SC-REMFs"), an open-end management investment
company organized under Maryland law. SC-REMFs is comprised of four investment
portfolios, SC-ASIA, Security Capital U.S. Real Estate Shares ("SC-US"),
Security Capital European Real Estate Shares ("SC-EURO") and Security Capital
Real Estate Arbitrage Shares ("SC-ARBITRAGE").
SC-ASIA issues two classes of shares, one of which, Class R shares, is
offered by this prospectus. SC-ASIA also issues Class I shares to investors
whose minimum initial investment is $250,000. Class R shares offer different
services and incur different expenses than Class I shares, which would affect
performance. See "Purchase of Shares" and "Organization and Description of
Capital Stock."
INVESTMENT OBJECTIVES AND POLICIES
SC-ASIA's investment objective is to provide shareholders with above-
average total returns, including current income and capital appreciation,
primarily through investments in equity securities of publicly-traded real
estate companies organized principally in countries in the Asia/Pacific region.
For purposes of its investment objective, SC-ASIA considers the Asia/Pacific
region to be comprised of all the countries in the region, including Hong Kong,
Singapore, Japan, Australia, New Zealand, the Philippines, Malaysia, Indonesia,
and Thailand. Long-term, SC-ASIA's objective is to achieve top-quartile results
as compared to other mutual funds that invest in publicly-traded real estate
companies organized principally in countries in the Asia/Pacific region, by
integrating in-depth proprietary real estate market research with sophisticated
capital markets research and investment modeling techniques. SC-ASIA's
investment objective is "fundamental" and cannot be changed without approval of
a majority of its outstanding voting securities. None of SC-ASIA's policies,
other than its investment objective and the investment restrictions described in
the Statement of Additional Information, are fundamental; these non-fundamental
policies may be changed by SC-ASIA's Board of Directors without shareholder
approval. There can be no assurance that SC-ASIA's investment objective will be
achieved.
Under normal conditions, SC-ASIA will invest at least 65% of its assets in
the equity securities of publicly-traded real estate companies located primarily
in the more established markets of the Asia/Pacific region, including Hong Kong,
Singapore, Japan, Australia and New Zealand. SC-ASIA may also invest in the
equity securities of real estate companies located in the emerging markets of
the Philippines, Thailand, and Malaysia and other markets that are open to
foreign investment.
The equity securities that SC-ASIA anticipates investing in will consist of
(1) common stocks, (2) rights or warrants to purchase common stocks, (3)
securities convertible into common stocks where the conversion feature
represents, in GCMG-Asia's view, a significant element of the security's value,
and (4) preferred stocks. SC-ASIA will invest only in real estate companies
that derive at least 50% of their revenues from the ownership, construction,
financing, management or sale of commercial, industrial or residential real
estate and hotels or that have at least 50% of their assets invested in such
real estate.
SC-ASIA may, from time to time, invest in debt securities of issuers in the
real estate industry. Debt securities purchased by SC-ASIA will be rated no
lower than Baa by Moody's Investors Service, Inc. ("Moody's") or BBB Standard &
Poors Corporation ("S&P") or, if not so rated, believed by GCMG-Asia to be of
comparable quality and, in the aggregate, may have an average weighted maturity
of up to 30 years.
When, in the judgment of GCMG or GCMG-Asia, market or general economic
conditions justify a temporary defensive position, SC-ASIA will deviate from its
investment objective and invest without limit in money market securities,
denominated in dollars or in the currency of any foreign country, issued by
entities organized in the U.S. or any foreign country, such as: short-term (less
than 12 months to maturity) and medium-term (not greater than five years to
maturity) obligations issued or guaranteed by the U.S. Government or the
government of a foreign country, their agencies or instrumentalities; finance
company and corporate commercial paper and other short-term corporate
obligations, in each case rated Prime-1 by Moody's, or A or better by S&P or, if
unrated, of comparable quality as
5
<PAGE>
determined by GCMG; and repurchase agreements with banks and broker-dealers with
respect to such securities. For temporary defensive purposes, SC-ASIA also may
invest up to 25% of its total assets in obligations (including certificates of
deposit, time deposits and bankers' acceptances) of banks; provided that SC-ASIA
will limit its investment in time deposits for which there is a penalty for
early withdrawal to 10% of its total assets.
SC-ASIA is subject to certain investment restrictions that are fundamental
and, therefore, may not be changed without shareholder approval. Among other
things, SC-ASIA will not invest more than 10% of its net assets in illiquid
securities, determined at the time of investment. 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. GCMG and GCMG-Asia will monitor the liquidity of such restricted
securities under the supervision of SC-ASIA's Board of Directors. If SC-ASIA
invests in securities issued by a real estate company that is controlled by
Security Capital Group Incorporated or any of its affiliates, such securities
will be treated as illiquid securities. SC-ASIA also may not invest directly in
real estate. See SC-ASIA's Statement of Additional Information for further
discussion of SC-ASIA's fundamental investment restrictions.
INVESTMENT STRATEGY
REAL ESTATE SECURITIES INDUSTRY OUTLOOK
GCMG believes that over the long term, the real estate industry in the
Asia/Pacific region will experience strong growth driven by high economic growth
rates based on strong demographic trends and trade expansion. The large and
young population base as well as massive urbanization trends in the emerging
Asia/Pacific region will create strong and sustainable demand for housing in
major metropolitan areas. Economic growth in the region is expected to lead to
strong demand in the commercial real estate sector as well. GCMG expects real
estate markets in the Asia/pacific region to continue to follow the trend of
higher levels of real estate securitization into the future. The combination of
all these factors should create significant investment opportunities over the
long term.
A RESEARCH-DRIVEN TOP DOWN AND BOTTOM UP APPROACH
SC-ASIA seeks to achieve top-quartile returns by investing primarily in
Asia/Pacific real estate operating companies which have the potential to deliver
above-average growth. GCMG believes that these investment opportunities can
only be identified through the integration of top down economic and real estate
market research and bottom up operating company cash flow modeling.
Top Down Economic and Real Estate Market Research. GCMG and GCMG-Asia are
uniquely positioned to access meaningful, proprietary economic and real estate
research collected at the country market, city sub-market and property-specific
level. Non-U.S. country market research and analysis, which is provided to GCMG
and GCMG-Asia by other operating professionals within the Security Capital Group
Incorporated affiliate company network, assists GCMG and GCMG-Asia in
identifying attractive growth in country markets and real estate sectors. This
research and analysis is instrumental to GCMG-Asia's ability to make investment
decisions for SC-ASIA's portfolio and to identify country markets reaching a
"marginal turning point." This country market research 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 country market and city sub-market basis and by
product type. Specifically, primary country market research evaluates normalized
cash flow lease economics -- accounting for capital costs -- to determine
whether the core economy of a country market is expected to improve, stabilize
or decline. Only through disciplined real estate market research does GCMG-Asia
believe it can identify country markets and/or city sub-markets, and thus, real
estate operating companies, with potential for higher than average growth
prospects.
Bottom Up Real Estate Operating Company Cash Flow Modeling. GCMG and GCMG-
Asia believe that analyzing the cash flow profile -- the quality and growth
potential -- of a real estate company, both historically and prospectively, is
another fundamental step toward identifying above-average growth opportunities.
GCMG and GCMG-Asia believe that cash flow is helpful in understanding a real
estate portfolio in that such calculation reflects cash flow from operations and
the real estate's ability to support interest payments and general operating
expenses before the impact of certain activities, such as gains or losses from
sales of real estate and changes in accounts receivable and accounts payable.
The
6
<PAGE>
real estate operating valuation models utilized by GCMG-Asia integrate real
estate market research with analysis on specific real estate portfolios in order
to establish an independent value of the underlying sources of a real estate
company's cash flow. Certain models measure and compare the impact of specific
factors on cash flow growth expectations. The data from all valuation models is
ultimately integrated and reviewed in order to identify real estate operating
companies with significant potential for growth.
OTHER INVESTMENT STRATEGIES
SC-ASIA also may from time to time use certain of the investment techniques
described below to achieve its objectives. Although these strategies are
regularly used by some investment companies and other institutional investors in
various markets, some of these strategies cannot at the present time be used to
a significant extent by SC-ASIA in some of the markets in which SC-ASIA will
invest and SC-ASIA does not expect to use them extensively.
Repurchase Agreements. When SC-ASIA acquires a security from a bank or a
broker-dealer, it may simultaneously enter into a repurchase agreement, wherein
the seller agrees to repurchase the security at a specified time and price. The
repurchase price is in excess of the purchase amount which reflects an agreed-
upon rate of return, and is not tied to the coupon rate on the underlying
security.
Loans of Portfolio Securities. SC-ASIA may lend to broker-dealers portfolio
securities with an aggregate market value of up to one-third of its total
assets. Such loans must be secured by collateral (consisting of any combination
of cash, U.S. Government securities or irrevocable letters of credit) in an
amount at least equal (on a daily marked-to-market basis) to the current market
value of the securities loaned. SC-ASIA may terminate the loans at any time and
obtain the return of the securities loaned within five business days. SC-ASIA
will continue to receive any interest or dividends paid on the loaned securities
and will continue to have voting rights with respect to the securities.
Options on Securities and Stock Indices. In order to increase its return or to
hedge all or a portion of its portfolio investments, SC-ASIA may write (i.e.,
sell) covered put and call options and purchase put and call options on
securities or stock indices that are traded on U.S. and foreign exchanges or in
the over-the-counter markets. An option on a security is a contract that gives
the purchaser the option, in return for the premium paid, to buy a specified
security (in the case of a call option) or to sell a specified security (in the
case of a put option) from or to the writer of the option at a designated price
during the term of the option. An option on a stock index gives the purchaser
of the option, in return for the premium paid, the right to receive from the
seller cash equal to the difference between the closing price of the index and
the exercise price of the option. SC-ASIA may write a call or put option only
if the option is "covered." This means that so long as SC-ASIA is obligated as
the writer of a call option, it will own the underlying securities subject to
the call, or hold a call at the same or lower exercise price, for the same
exercise period, and on the same securities as the written call. A put is
covered if SC-ASIA maintains liquid assets with a value equal to the exercise
price in a segregated account or holds a put on the same underlying security at
an equal or greater exercise price. The value of the underlying securities on
which options may be written at any one time will not exceed 15% of the total
assets of SC-ASIA. SC-ASIA will not purchase put or call options if the
aggregate premium paid for such options would exceed 5% of its total assets at
the time of purchase.
Forward Foreign Currency Contracts. SC-ASIA may enter into forward foreign
currency exchange contracts ("forward contracts") to attempt to minimize the
risk to SC-ASIA from adverse changes in the relationship between the U.S. dollar
and foreign currencies. A forward contract is an obligation to purchase or sell
a specified currency for an agreed price at a future date which is individually
negotiated and privately traded by currency traders and their customers. SC-
ASIA will enter into forward contracts only under two circumstances. First,
when SC-ASIA enters into a contract for the purchase or sale of a security
denominated in a foreign currency, it may desire to "lock in" the U.S. dollar
price of the security in relation to another currency by entering into a forward
contract to buy the amount of foreign currency needed to settle the transaction.
Second, when GCMG believes that the currency of a particular foreign country may
suffer or enjoy a substantial movement against another currency, SC-ASIA may
enter into a forward contract to sell or buy the amount of the former foreign
currency (or another currency which acts as a proxy for that currency)
approximating the value of some or all of SC-ASIA's portfolio securities
denominated in such foreign currency. The second investment practice is in
general referred to as "cross-hedging." SC-ASIA's forward transactions may call
for the delivery of one
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foreign currency in exchange for another foreign currency and may at times not
involve currencies in which its portfolio securities are denominated.
Futures Contracts. For hedging purposes only, SC-ASIA may buy and sell
financial futures contracts, stock and bond index futures contracts, and options
on any of the foregoing. A financial futures contract is an agreement between
two parties to buy or sell a specified debt security at a set price on a future
date. An index futures contract is an agreement to take or make delivery of an
amount of cash based on the difference between the value of the index at the
beginning and at the end of the contract period. A futures contract on a
foreign currency is an agreement to buy or sell a specified amount of a currency
for a set price on a future date.
When SC-ASIA enters into a futures contract, it must make an initial
deposit, known as "initial margin," as a partial guarantee of its performance
under the contract. As the value of the security, index or currency fluctuates,
either party to the contract is required to make additional margin payments,
known as "variation margin," to cover any additional obligation it may have
under the contract. In addition, when SC-ASIA enters into a futures contract,
it will segregate assets or "cover" its position in accordance with the 1940
Act. See "Investment Objectives and Policies--Futures Contracts" in the
Statement of Additional Information.
SC-ASIA may not commit more than 5% of its total assets to initial margin
deposits on futures contracts. The value of the underlying securities on which
futures will be written at any one time may not exceed 25% of the total assets
of SC-ASIA.
Depositary Receipts. SC-ASIA may purchase sponsored or unsponsored American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") and Global
Depositary Receipts ("GDRs") (collectively, "Depositary Receipts"). ADRs are
Depositary Receipts typically used by a U.S. bank or trust company which
evidence ownership of underlying securities issued by a foreign corporation.
EDRs and GDRs are typically issued by foreign banks or trust companies, although
they also may be issued by U.S. banks or trust companies, and evidence ownership
of underlying securities issued by either a foreign or a United States
corporation. Generally, Depositary Receipts in registered form are designed for
use in the U.S. securities market and Depositary Receipts in bearer form are
designed for use in securities markets outside the United States. Depositary
Receipts may not necessarily be denominated in the same currency as the
underlying securities into which they may be converted.
Short Sales. To the extent permitted by other countries, SC-ASIA reserves the
right to engage in short sale transactions in securities listed on one or more
foreign or U.S. securities exchanges. Short selling involves the sale of
borrowed securities. At the time a short sale is effected, SC-ASIA incurs an
obligation to replace the security borrowed at whatever its price may be at the
time that SC-ASIA 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-ASIA 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-ASIA will not engage in short sales if
immediately following such transaction the aggregate market value of all
securities sold short would exceed 10% of SC-ASIA's net assets (taken at market
value). See SC-ASIA's Statement of Additional Information for further
discussion of short sales.
RISK FACTORS
Shareholders should understand that all investments involve risk and there
can be no guarantee against loss resulting from an investment in SC-ASIA, nor
can there be an assurance that SC-ASIA's investment objectives will be attained.
As with any investment in securities, the value of, and income from, an
investment in SC-ASIA can decrease as well as increase depending on a variety of
factors which may affect the values and income generated by SC-ASIA's portfolio
securities, including general economic conditions and market factors. In
addition to the factors which affect the value of individual securities, a
shareholder may anticipate that the value of the shares of SC-ASIA will
fluctuate with movements in the broader equity and bond markets. A decline in
the stock market of any country in which SC-ASIA is invested may also be
reflected in declines in the price of shares of SC-ASIA. Changes in currency
valuations will also affect the price of shares of SC-ASIA. History reflects
both decreases and increases in worldwide stock markets and currency valuations,
and these may reoccur unpredictably in the future. The value of debt securities
held by SC-ASIA
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generally will vary inversely with changes in prevailing interest rates.
Additionally, investment decisions made by GCMG-Asia will not always be
profitable or prove to have been correct. SC-ASIA is intended as an investment
vehicle for those investors seeking long term capital growth and is not intended
as a complete investment program.
Investment in Real Estate Securities. SC-ASIA will not invest in real estate
directly, but only in securities issued by real estate companies. However, SC-
ASIA may be subject to risks similar to those associated with the direct
ownership of real estate (in 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 real estate 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.
Additionally, SC-ASIA could conceivably own real estate directly as a
result of a default on debt securities that it owns. If SC-ASIA has rental
income or income from the disposition of such real estate, the receipt of such
income may adversely affect its ability to retain its tax status as a regulated
investment company. See "Taxation."
Foreign Securities. Investors should consider carefully the substantial risks
involved in investing in securities issued by companies and governments of
foreign nations, which are in addition to the usual risks inherent in domestic
investments. There is the possibility of expropriation, nationalization or
confiscatory taxation, taxation of income earned in foreign nations or other
taxes imposed with respect to investments in foreign nations, foreign exchange
controls (which may include suspension of the ability to transfer currency from
a given country), foreign investment controls on daily stock market movements,
default in foreign government securities, political or social instability, or
diplomatic developments which could affect investments in securities of issuers
in foreign nations. In addition, in many countries there is less publicly
available information about issuers than is available in reports about companies
in the U.S. Foreign companies are not generally subject to uniform accounting
and auditing and financial reporting standards, and auditing practices and
requirements may not be comparable to those applicable to U.S. companies. SC-
ASIA may encounter difficulties or be unable to vote proxies, exercise
shareholder rights, pursue legal remedies, and obtain judgments in foreign
courts. Also, most foreign countries withhold portions of income and dividends
at the source requiring investors to reclaim taxes withheld.
Brokerage commissions, custodial services and other costs relating to
investment in Asia/Pacific countries are generally more expensive than in the
U.S. Asia/Pacific securities markets also have different clearance and
settlement procedures, and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Delays in
settlement could result in temporary periods when assets of SC-ASIA are
uninvested and no return is earned thereon. The inability of SC-ASIA to make
intended security purchases due to settlement problems could cause SC-ASIA to
miss attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result either in losses to SC-ASIA
due to subsequent declines in value of the portfolio security or, if SC-ASIA has
entered into a contract to sell the security, could result in possible liability
to the purchaser.
In many foreign countries, there is less government supervision and
regulation of business and industry practices, stock exchanges, brokers and
listed companies than in the U.S. There is an increased risk, therefore, of
uninsured loss due to lost, stolen, or counterfeit stock certificates. In
addition, the foreign securities markets of many of the countries in which SC-
ASIA may invest may also be smaller, less liquid, and subject to greater price
volatility than those in the U.S.
Certain risks associated with foreign securities are heightened for
investments in countries in the Asia/Pacific region. Specifically, the
currencies of certain of these countries have experience steady devaluations
relative to the U.S. dollar and major adjustments have been made periodically in
certain of such currencies. Moreover, recent currency devaluations in Pacific
region countries have resulted in high interest rates and sharp reductions in
economic activity, which have diminished prospects for short-term growth in
corporate earnings.
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The economies of most Asia/Pacific region countries are heavily dependent
upon international trade and, therefore, are affected by protective trade
barriers and the economic conditions of their trading partners, principally the
U.S., Japan, China and the European Community. Thus, the enactment by the U.S.
or other principal trading partners of protectionist trade legislation or the
reduction of foreign investment in Asia/Pacific economies and general declines
in the international securities markets could have a significant adverse effect
upon the securities markets of the Asia/Pacific region countries and the value
of SC-ASIA's investments in these markets. Also, few Asia/Pacific region
countries have Western-style or fully democratic governments. During the course
of the last 25 years, governments in the region have periodically been installed
or removed as a result of military coups, while others have periodically
demonstrated repressive police state characteristics. Such political upheaval
also would negatively impact the value of SC-ASIA's investment in Asia/Pacific
countries.
On July 1, 1997, Hong Kong reverted to Chinese administration. The long-
term effects of this reversion are not known at this time. However, SC-ASIA's
investment in Hong Kong may now be subject to the same or similar risks as any
investment in China. Investments in Hong Kong may become subject to
expropriation, nationalization or confiscation, in which case SC-ASIA could lose
its entire investment in Hong Kong. In addition, the reversion of Hong Kong
also presents a risk that the Hong Kong dollar will be devalued and a loss of
investor confidence in Hong Kong's currency stock market and economy will ensue.
SC-ASIA may invest in the equity securities of real estate companies in
emerging market countries in the Asia/Pacific region. The risks associated with
foreign investment described above, also may be intensified in emerging markets.
Emerging markets can include every nation in the world except the United States,
Canada, Japan, Australia, New Zealand and most nations located in Western
Europe. Certain emerging market countries have historically experienced, and
may continue to experience, high rates of inflation, high interest rates,
exchange rate fluctuations, large amounts of external debt, trade difficulties
and unemployment. Further, the economies of developing countries generally are
heavily dependent upon international trade and, accordingly, have been, and may
continue to be, adversely affected by trade barriers, exchange controls and
other protectionist measures imposed or negotiated by the countries in which
they trade. There are also risks associated with the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
government regulation, social instability or diplomatic developments (including
war) that could adversely affect the economies of such countries or the value of
SC-ASIA's investments in those countries.
SC-ASIA usually effects currency exchange transactions on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign exchange market.
However, some price spread on currency exchange (to cover service charges) will
be incurred when SC-ASIA converts assets from one currency to another.
Repurchase Agreements. Under the 1940 Act, repurchase agreements are considered
to be loans collateralized by the underlying security and therefore will be
fully collateralized. However, if the seller should default on its obligation
to repurchase the underlying security, SC-ASIA may experience delay or
difficulty in exercising its rights under the security and may incur a loss if
the value of the security should decline, as well as incur disposition costs in
liquidating the security.
Futures and Options. Successful use of futures contracts and related options is
subject to special risk considerations. A liquid secondary market for any future
or options contract may not be available when a futures position is sought to be
closed. In addition, there may be an imperfect correlation between movements in
the securities or foreign currency on which the futures or options contract is
based and movements in the securities or currency in SC-ASIA's portfolio.
Successful use of futures or options contracts is further dependent on GCMG-
Asia's ability to correctly predict movements in the securities or foreign
currency markets and no assurance can be given that its judgment will be
correct. Successful use of options on securities or stock indices is subject to
similar risk considerations.
Depositary Receipts. Depositary Receipts may be issued pursuant to sponsored or
unsponsored programs. In sponsored programs, an issuer has made arrangements to
have its securities traded in the form of Depositary Receipts. In unsponsored
programs, the issuer may not be directly involved in the creation of the
program. Although regulatory requirements with respect to sponsored and
unsponsored programs are generally similar, in some cases it may be easier to
obtain financial information from an issuer that has participated in the
creation of a sponsored program. Accordingly, there may be less information
available regarding issuers of securities underlying unsponsored programs and
there may not be a correlation between such information and the market value of
the Depositary Receipts. Depositary Receipts
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also involve the risks of other investments in foreign securities, as discussed
above. For purposes of SC-ASIA's investment policies, SC-ASIA's investment in
Depositary Receipts will be deemed to be investments in the underlying
securities.
Other Risks. There are further risk considerations, including possible losses
through the holding of securities in domestic and foreign custodian banks and
depositories, described in the Statement of Additional Information.
NON-DIVERSIFIED STATUS AND PORTFOLIO TURNOVER
SC-ASIA intends to operate as a "non-diversified" investment company under
the 1940 Act, which means SC-ASIA 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-ASIA intends to conduct its operations so as to qualify as a
"regulated investment company" for purposes of the Internal Revenue Code of
1986, as amended (the "Code"), which generally will relieve SC-ASIA 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-ASIA 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-ASIA'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-ASIA will not own more than 10% of the
outstanding voting securities of a single issuer. SC-ASIA's investments in
securities issued by the U.S. Government, its agencies and instrumentalities are
not subject to these limitations. Because SC-ASIA, as a non-diversified
investment company, may invest in a smaller number of individual issuers than a
diversified investment company, an investment in SC-ASIA may present greater
risk to an investor than an investment in a diversified company.
SC-ASIA anticipates that its annual portfolio turnover rate will not exceed
150%, but the turnover rate will not be a limiting factor when GCMG 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-ASIA 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-ASIA. High
portfolio turnover may result in the realization of net short-term capital gains
by SC-ASIA which, when distributed to shareholders, will be taxable as ordinary
income. See "Taxation."
DIRECTORS, OFFICERS AND OTHER PERSONNEL
The overall management of the business and affairs of SC-ASIA is vested
with the Board of Directors of SC-REMFs. The Board of Directors approves all
significant agreements between SC-REMFs and persons or companies furnishing
services to SC-ASIA, including SC-REMFs' agreements with GCMG, and with
its custodian and its transfer agent. The management of SC-ASIA's day-to-day
operations is delegated to the officers of SC-REMFs, who include the Managing
Directors, and GCMG, subject always to the investment objectives and policies of
SC-ASIA and to general supervision by the Board of Directors. Although SC-REMFs
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-REMFs'
Articles of Incorporation. The Directors and officers of SC-REMFs and their
principal occupations are set forth below.
Anthony R. Manno Jr. Chairman of the Board of Directors, Managing
Director and President of SC-REMFs. Managing
Director and President of GCMG since January 1995,
where he is responsible for overseeing all
investment and capital allocation matters for
GCMG's public market securities activities and is
also responsible for company and industry
analysis, market strategy and trading and
reporting. Mr. Manno was a member of the
Investment Committee of Security Capital Group
Incorporated from March 1994 to June 1996. Prior
to joining Security Capital, Mr. Manno was a
Managing Director of LaSalle Partners Limited from
March 1980 to March 1994. Mr. Manno received his
M.B.A. from the University of Chicago Graduate
School
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of Business, an M.A. and a B.A. from Northwestern
University and is a Certified Public Accountant.
Robert H. Abrams Director of SC-REMFs. Director of the Program in
Real Estate at Cornell University. Founder of
Colliers ABR, Inc. (formerly Abrams Benisch Riker
Inc.), a property management firm. Mr. Abrams was
Principal of Colliers ABR, Inc. from 1978 to 1992
and since 1992, has served as a Consultant. From
1959 to 1978 Mr. Abrams was Executive Vice
President and Director of Cross and Brown Company.
Mr. Abrams also serves as Trustee Emeritus and
Presidential Counselor of his alma mater, Cornell
University. Mr. Abrams received his M.B.A. from
Harvard University and his B.A. from Cornell
University.
Stephen F. Kasbeer Director of SC-REMFs. Retired; Senior Vice
President for Administration and Treasurer of
Loyola University, Chicago from 1981 to July 1994,
where he was responsible for administration,
investment, real estate and treasurer functions.
At Loyola University, he also 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. Currently, Mr. Kasbeer serves
as a Director of Endowment Realty Inc. and
Endowment Realty II and as a Member of the
Investment Committee University of San Diego. Mr.
Kasbeer also serves as Trustee, Treasurer and
Chairman of the Investment and Finance Committees
of Santa Fe Preparatory School and as Trustee and
Chairman of the Santa Fe Preparatory School
Combined Permanent Endowment Fund Trust. Mr.
Kasbeer received his J.D. from John Marshall Law
School and his M.A. and B.S. from Northwestern
University.
George F. Keane Director of SC-REMFs. Chairman of the Board of
Trigen Energy Corporation since 1994. As founding
chief executive of The Common Fund in 1971 and
Endowment Realty Investors in 1988, Mr. Keane for
many years headed an investment management service
for colleges, universities and independent schools
that managed $15 billion for 1,200 educational
institutions when he became President Emeritus of
the Common Fund in 1993. He has served as a member
of the Investment Advisory Committee of the $95
billion New York State Common Retirement Fund
since 1982. He has been a Director of the Northern
Trust of Connecticut since 1991, a Trustee of the
Nicholas Applegate Investment Trust since 1993,
and a Director of the Bramwell Funds since 1994.
He is also a Director of Universal Stainless &
Alloy Products, Global Pharmaceutical Corporation,
United Water Resources and United Properties
Group, and the Universal Bond Fund, and is an
advisor to Associated Energy Managers. Mr. Keane
also serves as a Trustee of his alma mater,
Fairfield University where he received his B.A.,
and as a Director and Chairman of the Investment
Committee of the United Negro College Fund. Mr.
Keane also holds honorary degrees from Loyola
University, Chicago, Illinois and Lawrence
University, Appleton, Wisconsin.
John H. Gardner, Jr. Director and Managing Director of SC-REMFs.
Managing Director of GCMG since July, 1997. Prior
thereto, Director of the REIT Manager for Security
Capital Pacific Trust ("PTR") from February 1995
to June 1997 and Senior Vice President of Security
Capital Atlantic Incorporated ("ATLANTIC"), PTR
and the PTR REIT Manager from September 1994 to
June 1997 where he had overall responsibility for
asset management and multifamily dispositions.
Prior to joining Security Capital, Mr. Gardner was
with Copley Real Estate Advisors as a Managing
Director and Principal responsible for portfolio
management from January 1991 to September 1994 and
as a Vice President and Principal of asset
management from December 1984 to December 1990.
From July 1977 to November 1984, Mr. Gardner was a
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Real Estate Manager with the John Hancock
Companies. Mr. Gardner received his M.S. from
Bentley College and his B.S. from Stonehill
College.
Kenneth D. Statz Managing Director of SC-REMFs. Managing Director
of GCMG since November 1997 where he is
responsible for the development and implementation
of portfolio investment strategy. Prior thereto,
Senior Vice President of GCMG from July 1996 to
October 1997 and Vice President from May 1995 to
June 1996. Prior to joining Security Capital, Mr.
Statz was a Vice President and Senior REIT Analyst
in the investment research department of Goldman,
Sachs & Co., from February 1993 to January 1995,
concentrating on research and underwriting for the
REIT industry. Prior thereto, Mr. Statz was a real
estate stock portfolio manager and a managing
director of Chancellor Capital Management from
August 1982 to February 1992. Mr. Statz received
his M.B.A. and B.B.A. from the University of
Wisconsin, Madison.
Kevin W. Bedell Senior Vice President of SC-REMFs. Senior Vice
President of GCMG since November 1997 and Vice
President since July 1996, where he is responsible
for directing the activities of the
industry/company securities research group and
providing in-depth proprietary research on
publicly traded companies with office and
industrial sectors. Prior to joining GCMG, Mr.
Bedell spent nine years with LaSalle Partners
Limited where he was Equity Vice President and
Portfolio Manager responsible for the strategic,
operational and financial management of a private
REIT with commercial real estate investments of
$800 million. Mr. Bedell received his M.B.A. from
the University of Chicago and his B.A. from Kenyon
College.
Jeffrey C. Nellessen Vice President, Treasurer and Assistant Secretary
of SC-REMFs. Vice President and Controller of GCMG
since March 1997. Prior thereto, from June 1988 to
March 1997, he was Controller, Manager of Client
Administration and Compliance Officer at Strong
Capital Management, Inc. Mr. Nellessen is a
Certified Public Accountant, Certified Management
Accountant and a Certified Financial Planner. He
received his B.B.A. from the University of
Wisconsin, Madison.
David T. Novick Vice President and Secretary of SC-REMFs. Vice
President of Security Capital Group Incorporated
since June 1998. Prior thereto, from September
1989 to June 1998, he was an attorney, and most
recently a Partner, with the law firm of Katten
Muchin and Zavis. Mr. Novick received his B.S.B.A.
from Boston University and his J.D. from the
University of Illinois.
GCMG
Security Capital Global Capital Management Group Incorporated ("GCMG"),
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-ASIA under the overall supervision and
control of the Directors of SC-ASIA.
GCMG commenced operations in January 1995, and is registered as an
investment adviser with the SEC. GCMG's principal officers include Anthony R.
Manno, Jr., Managing Director and President, John H. Gardner, Jr., Managing
Director, Kenneth D. Statz, Managing Director and Kevin W. Bedell, Senior Vice
President. Messrs. Manno and Gardener are responsible for overseeing the
portfolio management activities of GCMG-Asia. GCMG is an indirect wholly-owned
subsidiary of Security Capital Group Incorporated, a real estate research,
investment and management company.
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GCMG-ASIA
Security Capital Global Capital Management Group (Asia) Incorporated, with
offices located at Level 9, AIG Building, 1-1-3 Marunouchi, Chiyoda-ku, Tokyo
100, Japan, provides portfolio management services to SC-ASIA pursuant to an
investment sub-advisory agreement with GCMG. GCMG-Asia, a wholly-owned
subsidiary of GCMG, was formed on May 11, 1998 under Delaware law and is
registered as an investment adviser with the SEC. The principal officers of
GCMG-Asia, who serve on the SC-ASIA Portfolio Management Committee, and their
principal occupations are set forth below.
Michelle H. Lord Vice President of GCMG-Asia since May 1998.
Previously, Vice President of GCMG from November
1997 to April 1998, where she conducted real
estate securities analysis in the Asia/Pacific
region for the firm. Prior to that, Ms. Lord was
with Security Capital Industrial Trust from
September 1996 to October 1997, where she was
responsible for research on special investment
opportunities and prior thereto, working on
special assignments under Security Capital Group
Incorporated Managing Directors from August 1995
to August 1996. Prior to joining Security Capital,
Ms. Lord was with Societe Generale Securities,
(North Pacific) in Tokyo from June 1994 to August
1994, where she was a member of the Japanese
Government Bond futures and options brokerage desk
and Merrill Lynch, Pierce, Fenner & Smith from
September 1992 to September 1993. Previously, Ms.
Lord was a currency trader with Asahi Bank in
Tokyo. Ms. Lord received her M.B.A. from the
University of Chicago Graduate School of Business
and her B.A. from Smith College.
Michael C. Montelibano Vice President of GCMG-Asia since May 1998. Vice
President of GCMG from November 1997 to April
1998, where he conducted real estate securities
analysis in the Asia/Pacific region for the firm.
Prior to that, Mr. Montelibano worked on special
assignments under Security Capital Group
Incorporated Managing Directors from June 1995 to
December 1996. Prior to joining Security Capital,
Mr. Montelibano was a consultant for Ayala Land,
Incorporated in the Philippines from July 1994 to
August 1994 where he conducted financial analyses
of office and residential development projects,
and for Bank of America in Malaysia from June 1994
to July 1994 where he conducted market research
studies on retail banking. Previously, Mr.
Montelibano was a senior consultant with Andersen
Consulting from January 1990 to August 1993, 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. in Mechanical Engineering from the University
of California, San Diego.
The SC-ASIA Portfolio Management Committee, which is comprised of SC-REMFs
and GCMG-Asia officers, is responsible for the day-to-day management of SC-
ASIA's portfolio.
INVESTMENT ADVISORY AGREEMENT AND
INVESTMENT SUB-ADVISORY AGREEMENT
Pursuant to an investment advisory agreement (the "Advisory Agreement"),
GCMG furnishes a continuous investment program for SC-ASIA's portfolio, subject
to the general supervision of SC-REMFs' Board of Directors. GCMG also
provides persons satisfactory to the Directors of SC-REMFs to serve as officers
of SC-REMFs. Such officers, as well as certain other employees and Directors of
SC-REMFs, may be directors, officers, or employees of GCMG.
Under the Advisory Agreement, SC-ASIA Class R shares pay GCMG, monthly, an
annual management fee in an amount equal to .95% of SC-ASIA's Class R average
daily net asset value. Under a separate agreement GCMG has committed to waive
fees and/or reimburse expenses to maintain SC-ASIA's Class R total operating
expenses, other than
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brokerage fees and commissions, interest, taxes and other extraordinary
expenses, at no more than 1.70% of the value of SC-ASIA's Class R average daily
net assets for the year ending December 31, 1998.
In addition to the payments to GCMG under the Advisory Agreement described
above, SC-ASIA Class R shares pay certain other costs of operations including
(a) administration, custodian and transfer agency fees, (b) fees of Directors
who are not affiliated with GCMG, (c) clerical, accounting and other office
costs, (d) costs of printing SC-ASIA's prospectus for existing shareholders and
shareholder reports, (e) costs of maintaining SC-REMFs' existence, (f) interest
charges, taxes, brokerage fees and commissions, (g) costs of stationery and
supplies, (h) expenses and fees related to registration and filing with federal
and state regulatory authorities, and (i) upon the approval of SC-REMFs'
Board of Directors, costs of personnel of GCMG or its affiliates rendering
clerical, accounting and other office services. Each class of SC-ASIA shares
pays the portion of SC-ASIA expenses attributable to its operations. Income,
realized gains and losses, unrealized appreciation and depreciation and certain
expenses not allocated to a particular class are allocated to each class based
on the net assets of that class in relation to the net assets of SC-REMFs.
GCMG has entered into an investment sub-advisory agreement with GCMG-Asia
("Sub-Advisory Agreement") pursuant to which GCMG-Asia provides various
portfolio management and investment advisory services to SC-ASIA. In connection
with the management of SC-ASIA's portfolio, GCMG-Asia may select brokers and
dealers to execute purchase and sale orders for SC-ASIA's portfolio
transactions. Under the Sub-Advisory Agreement, GCMG pays GCMG-Asia a monthly
management fee based on its costs (including payroll, rent and other directly
allocable costs and expenses) plus a mark-up of 10%. The fee is the sole
obligation of GCMG and not SC-ASIA.
ADMINISTRATOR AND SUB-ADMINISTRATOR
GCMG has also entered into a fund accounting and administration agreement
with SC-REMFs (the "Administration Agreement") under which GCMG performs certain
administrative functions for SC-ASIA, including (i) providing office space,
telephone, office equipment and supplies for SC-REMFs; (ii) paying compensation
of SC-REMFs' officers for services rendered as such; (iii) authorizing
expenditures and approving bills for payment on behalf of SC-ASIA; (iv)
supervising preparation of the periodic updating of SC-ASIA's Prospectus and
Statement of Additional Information for existing shareholders; (v) supervising
preparation of semi-annual reports to SC-ASIA'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-ASIA's investment portfolio and the
publication of the net asset value of SC-ASIA's shares, earnings reports and
other financial data; (vii) monitoring relationships with organizations
providing services to SC-ASIA, including the custodian ("Custodian"), transfer
agent ("Transfer Agent") and printers; (viii) providing trading desk facilities
for SC-ASIA; (ix) maintaining books and records for SC-ASIA (other than those
maintained by the Custodian and Transfer Agent) and preparing and filing of tax
reports other than SC-ASIA'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-REMFs' Board of Directors, GCMG has caused SC-REMFs to retain
State Street Bank and Trust Company as sub-administrator (the "Sub-
Administrator") under a sub-administration agreement ("Sub-Administration
Agreement").
Under the Sub-Administration Agreement, the Sub-Administrator has assumed
responsibility for performing certain of the foregoing administrative functions,
including overseeing the determination and publication of SC-ASIA's net asset
value, maintaining certain of SC-ASIA's books and records that are not
maintained by GCMG, or the Custodian or the Transfer Agent, preparing financial
information for SC-ASIA's income tax returns, proxy statements, semi-annual and
annual shareholders reports, and SEC filings, and responding to certain
shareholder inquiries. Under the terms of the Sub-Administration Agreement, SC-
REMFs pays the Sub-Administrator a monthly administration fee at the annual rate
of .08% of the first $750 million, .06% of the next $250 million and .04% of the
SC-REMFs' assets over $1 billion, subject to an average annual minimum fee of
$75,000 per investment portfolio. The Sub-Administrator also serves as SC-ASIA's
Custodian and Transfer Agent. See "Custodian and Transfer Agent."
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Under the Administration Agreement, GCMG remains responsible for monitoring
and overseeing the performance by the Sub-Administrator of its obligations to
SC-ASIA under the Sub- Administration Agreement, subject to the overall
authority of SC-REMFs' Board of Directors. For its services under the
Administration Agreement, GCMG receives a monthly fee from SC-REMFs at the
annual rate of 0.02% of the value of the average daily net assets of SC-
ASIA.
DISTRIBUTION AND SERVICING PLAN
The Board of Directors of SC-REMFs have adopted a Distribution and
Servicing Plan ("Plan") with respect to SC-ASIA's Class R shares pursuant to
Rule 12b-1 under the 1940 Act. Under the Plan, SC-ASIA pays the Distributor a
monthly fee equal to, on an annual basis, .25% of the value of SC-ASIA's average
daily net assets for Class R shares.
The Distributor may use the fee for services performed and expenses
incurred by the Distributor in connection with the distribution of Class R
shares and for providing certain services to Class R shareholders. The
Distributor may pay third parties in respect of these services such amount as it
may determine. SC-ASIA understands that these third parties may also charge
fees to their clients who are beneficial owners of SC-ASIA Class R shares in
connection with their client accounts. These fees would be in addition to any
amounts which may be received by them from the Distributor under the Plan.
The Distributor may enter into agreements ("Agreements") with institutional
shareholders of record, broker-dealers, financial institutions, depository
institutions and other financial intermediaries as well as various brokerage
firms or other industry recognized service providers of fund supermarkets or
similar programs to provide certain distribution, shareholder servicing,
administrative and/or accounting services for their clients who are beneficial
owners of SC-ASIA Class R shares. Such Agreements may be governed by the Plan.
The Distributor, with offices located at 11 South LaSalle Street, Chicago,
Illinois 60603, is an affiliate of GCMG. See "Distribution Plan" in the
Statement of Additional Information for a listing of the types of expenses for
which the Distributor and third parties may be compensated under the Plan. If
the fee received by the Distributor exceeds its expenses, the Distributor may
realize a profit from these arrangements. The Plan is reviewed and is subject
to approval annually by the Board of Directors.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of SC-ASIA's Class R shares is determined as
of the scheduled closing time of the New York Stock Exchange ("NYSE") (generally
4:00 p.m., New York time) each day the NYSE is open for trading, by adding the
market value of all securities in SC-ASIA's portfolio and other assets
represented by Class R shares, subtracting liabilities incurred or accrued
allocable to Class R shares, and dividing by the total number of SC-ASIA's
Class R shares then outstanding, adjusted to the nearest whole cent. A security
listed or traded on a recognized stock exchange or quoted on a quotation system
of a national securities association is valued at its last sale price on the
principal exchange on which the security is traded. The value of a foreign
security is determined in its national currency as of the close of trading on
the foreign exchange on which it is traded or as of the scheduled closing time
of the NYSE (generally 4:00 p.m., New York time), if that is earlier, and that
value is then converted into its U.S. dollar equivalent at the foreign exchange
rate in effect at noon, New York time, on the day the value of the foreign
security is determined. If no sale is reported at that time, the mean between
the current bid and asked price is used. Occasionally, events which affect the
values of such securities and such exchange rates may occur between the times at
which they are determined and the close of the NYSE and will therefore not be
reflected in the computation of SC-ASIA's net asset value. If events materially
affecting the value of such securities occur during such period, then these
securities will be valued at fair value as determined by the management and
approved in good faith by the Board of Directors. All other securities for
which over-the-counter market quotations are readily available are valued at the
mean between the current bid and asked price. Foreign securities that are not
traded on an exchange, securities for which market quotations are not readily
available and other assets are valued at fair value as determined by SC-ASIA's
management and approved in good faith by the Board of Directors.
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PURCHASE OF SHARES
SC-ASIA Class R shares may be purchased through SC-ASIA's Transfer Agent
and various financial intermediaries that have entered into a sales agreement
with the Distributor.
Orders for shares of SC-ASIA will become effective at the net asset value
per share next determined after the receipt of payment. All funds will be
invested in full and fractional shares. A confirmation indicating the details
of each purchase transaction will be sent to you 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.
Investors must specify that Class R shares are being purchased.
If you choose 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 of SC-ASIA 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.
By investing in SC-ASIA, you appoint the Transfer Agent as your 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. PLEASE NOTE THAT IS MORE
COMPLICATED TO REDEEM SHARES HELD IN CERTIFICATE FORM.
INITIAL INVESTMENT
The minimum initial investment is $2,500. For individual retirement
account and employee benefit plans qualified under Section 401, 403(b)(7) or 457
of the Code as well as UGMA or UTMA accounts the minimum initial investment is
$1,000. For investors using the Automatic Investment Plan (described below) the
minimum initial investment is $250. These minimums can be changed or waived by
SC-ASIA at any time. Shareholders will be give at least 30 days notice of any
increase in the minimum dollar amount of subsequent investments.
Class R shares may be purchased by check or money order drawn on a U.S.
bank, savings and loan, or credit union by wire transfer. The enclosed
application must be completed and accompanied by payment in U.S. funds to open
an account. Checks must be payable in U.S. dollars and will be accepted subject
to collection at full face value. Note that all applications to purchase shares
are subject to acceptance by SC-ASIA and are not binding until so accepted. SC-
ASIA reserves the right to decline to accept a purchase order application in
whole or in part.
MAIL
The following instructions should be used when mailing a check or money
order payable to "Security Capital Real Estate Mutual Funds Incorporated,
payable to "Security Capital Asia/Pacific Real Estate Shares," via U.S. mail to
the Distributor, a securities dealer or the Transfer Agent:
VIA U.S. MAIL VIA OVERNIGHT COURIER
Boston Financial Data Services Boston Financial Data Services
Attn: Security Capital Real Estate Attn: Security Capital Real Estate
Mutual Funds Incorporated Mutual Funds Incorporated
P.O. Box 8500 66 Brooks Drive
Boston, Massachusetts Braintree, Massachusetts 02184
02266-8500
SC-REMFs does not consider the U.S. Postal Service or other
independent delivery service 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-
REMFs. Do not mail letters by overnight courier to the post office box.
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WIRE PURCHASES
Class R shares may be purchased by wire only through the Transfer
Agent. The following instructions should be used when wiring funds to the
Transfer Agent for the purchase of shares:
Wire to: State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02101
ABA Number 011000028
Credit: DDA Number 9905-378-7
Further Credit: Security Capital Real Estate Mutual Funds Incorporated
Shareholder Registration
Shareholder Fund and Account Number
PLEASE CALL 1-800-409-4189 PRIOR TO WIRING ANY FUNDS IN ORDER TO
OBTAIN A CONFIRMATION NUMBER AND TO ENSURE PROMPT AND ACCURATE HANDLING OF
FUNDS. SC-ASIA and its Transfer Agent are not responsible for the consequences
of delays resulting from the banking or Federal Reserve wire system or from
incomplete wiring instructions.
AUTOMATIC INVESTMENT PLAN
The Automatic Investment Plan allows regular, systematic investments
in SC-ASIA Class R shares from a bank checking or NOW account. SC-ASIA will
reduce the minimum initial investment to $250 if a shareholder elects to use the
Automatic Investment Plan. To establish the Automatic Investment Plan, an
investor should complete the appropriate section in SC-ASIA's application and an
existing SC-ASIA shareholder should call toll free 1-888-SECURITY for an
automatic investment plan form. The Automatic Investment Plan can be set up
with any financial institution that is a member of the Automated Clearing House
("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-ASIA reserves the right to close such account. Prior to closing
any account for failure to reach the minimum initial investment, SC-ASIA 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-ASIA 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 $250 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-ASIA account for any Automatic
Investment Plan purchase that does not clear due to insufficient funds or, if
prior to notifying SC-ASIA 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 must be at least $250 and may be made by mail,
wire or by telephone. When making an additional purchase by mail, a check
payable to "Security Capital Asia/Pacific Real Estate Shares" along with the
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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 toll free 1-800-409-4189 for complete wiring instructions.
You may purchase additional shares by moving money from your bank
account to your SC-ASIA account by telephone. Only bank accounts held at
domestic financial institutions that are 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 give 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 three business days. TELEPHONE TRANSACTIONS MAY
NOT BE USED FOR INITIAL PURCHASES OF CLASS R SHARES.
EXCHANGE FEATURE
Class R shares of SC-ASIA may be exchanged for Class R shares of SC-US
and SC-ASIA. Exchanges of Class R shares will be made at their relative net
asset values. Shares may be exchanged only if the amount being exchanged
satisfies the minimum investment required. However, you may not exchange your
investment in shares of SC-US, SC-EURO or SC-ASIA more than four times in any
twelve-month period (including the initial exchange of your investment during
that period).
CLASS I SHARES
SC-ASIA also issues Class I shares which offer different services and
incur different expenses which would affect performance. Investors may call the
Distributor at toll free 1-888-SECURITY to obtain additional information.
REDEMPTION OF SHARES
You may request redemption of part or all of your Class R shares at
any time by telephone or by mail. The redemption of shares will be at the next
determined net asset value. See "Determination of Net Asset Value." SC-ASIA
normally will mail the redemption proceeds to you on the next business day and,
in any event, no later than seven business days after the receipt of a
redemption request in good order. However, when a purchase has been made by
check, SC-ASIA may hold payment on redemption proceeds until reasonably
satisfied that the check has cleared, which may take up to twelve days.
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-ASIA 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 requests must be signed exactly as the shares are
registered including the signature of each joint owner. You must also specify
the number of shares or dollar amount to be redeemed. If the Class R 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 the Transfer Agent together with a redemption request. The
following instructions should be used for the redemption of shares by mail, by
wire and by telephone:
MAIL AND WIRE
For most redemption requests you need only furnish a written,
unconditional request to redeem your Class R shares (for a fixed dollar amount)
at net asset value to Security Capital Asia/Pacific Real Estate Shares:
VIA U.S. MAIL VIA OVERNIGHT COURIER
Boston Financial Data Services Boston Financial Data Services
Attn: Security Capital Real Estate Attn: Security Capital Real Estate
Mutual Funds Incorporated Mutual Funds Incorporated
P.O. Box 8500 66 Brooks Drive
Boston, Massachusetts 02266-8500 Braintree, Massachusetts 02184
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Redemption proceeds made by written redemption request may also be
wired to a commercial bank that you have authorized on your account application.
Additional documentation may be requested from corporations,
executors, administrators, trustees, guardians, agents, or attorneys-in-fact.
SC-REMFs 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 by SC-ASIA. 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.
TELEPHONE
You may redeem shares by telephone by calling the Transfer Agent at
toll free 1-800-409-4189. In order to utilize this procedure, you must have
previously elected this option in writing, which election will be reflected in
the Transfer Agent's records and the redemption proceeds will be mailed directly
to you or transferred 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 that address, you
may call or submit a written request to the Transfer Agent. No telephone
redemptions will be allowed within 15 days of such a change. SC-ASIA 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-ASIA 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-ASIA reserves the right to refuse a telephone
redemption request if so advised.
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-ASIA or the 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.
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-ASIA may suspend the right of redemption during any period when (i)
trading on the NYSE is restricted or the NYSE 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-ASIA 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-ASIA on not less than
30 days' notice if, at the time of any redemption of Class R shares in his or
her account, the value of the remaining shares in the account falls below
$2,500 ($1,000 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
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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-ASIA's investment income will be declared and
distributed quarterly. SC-ASIA intends to distribute net realized capital
gains, if any, at least annually, although SC-ASIA's Board of Directors may in
the future determine to retain net realized capital gains and not distribute
them to shareholders.
Dividends and distributions will automatically be reinvested into full
and fractional shares of SC-ASIA based on the net asset value per share at the
close of business on the payable date unless the shareholder has elected to have
dividends or distributions paid in cash. SC-ASIA will send shareholders a
statement reflecting each dividend and distribution. In addition, after the end
of each calendar year, SC-ASIA will send shareholders a statement showing the
amount and tax characterization of all dividends and distributions paid during
the previous year. In accordance with the Taxpayer Relief Act of 1997, SC-ASIA
will indicate which portion of a capital gain distribution will be taxed at a
maximum rate of 20% and which portion will be taxed at a maximum rate of 28%.
For information concerning the tax treatment of SC-ASIA's distribution policies
for SC-ASIA and its shareholders, see "Taxation."
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-ASIA, including the status of distributions
under applicable state or local law.
FEDERAL INCOME TAXES
SC-ASIA intends to qualify to be taxed as a "regulated investment
company" under the Code. To the extent that SC-ASIA distributes its taxable
income and net capital gains to its shareholders, qualification as a regulated
investment company relieves SC-ASIA 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-ASIA.
A corporation's dividends-received deduction will be disallowed unless the
corporation holds shares in SC-ASIA at least 46 days. Furthermore, the
dividends-received deduction will be disallowed to the extent a corporation's
investment in shares of SC-ASIA is financed with indebtedness.
The excess of net long-term capital gains over the net short-term
capital losses realized and distributed by SC-ASIA 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. Recently enacted legislation has reduced
the holding period required to qualify for the 20% maximum capital gains rate
from 18 months to 12 months.
Under the current federal tax law, the amount of an income dividend or
capital gains distribution declared by SC-ASIA 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-ASIA 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
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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-
ASIA 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-ASIA 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-ASIA, or the Secretary of the Treasury notifies SC-
ASIA 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 in the
Statement of Additional Information.
STATE AND LOCAL TAXES
SC-ASIA 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-ASIA.
ORGANIZATION AND DESCRIPTION OF CAPITAL STOCK
Security Capital Real Estate Mutual Funds Incorporated, formerly
Security Capital Employee REIT Fund Incorporated, was incorporated under
Maryland law as SCERF Incorporated ("SCERF"), a wholly-owned subsidiary of
Security Capital Group Incorporated, on December 20, 1996. On January 23, 1997,
all the assets and liabilities of SCERF were transferred to Security Capital
Employee REIT Fund Incorporated in a reorganization transaction. On December
16, 1997, its name was changed to Security Capital U.S. Real Estate Shares
Incorporated. On June 30, 1998, its name was changed to Security Capital Real
Estate Mutual Funds Incorporated.
SC-REMFs is authorized to issue 200,000,000 shares of stock, $.01 par
value per share. SC-REMFs' Board of Directors may, without shareholder approval,
increase or decrease the number of authorized but unissued shares of SC-REMFs'
stock and reclassify and issue any unissued shares of SC-REMFs. The Board of
Directors also may create additional series of shares with different investment
objectives, policies or restrictions without shareholder approval. The Board of
Directors of SC-REMFs has authorized the creation of four investment portfolios;
SC-US, SC-EURO, SC-ASIA and SC-ARBITRAGE, three of which issue two classes of
shares: Class I shares and Class R shares. SC-ARBITRAGE issues Class I shares
only. Class I shares offer different services to shareholders and incur
different expenses than Class R shares. Each class pays its proportionate share
of SC-REMFs' expenses.
All classes of each series of SC-REMFs' shares have equal dividend,
distribution, liquidation and voting rights. There are no conversion or
preemptive rights in connection with any class of any series of SC- REMFs's
shares. All SC-REMFs shares, when duly issued, are fully paid and nonassessable.
The rights of the holders of SC-ASIA's Class R shares may not be modified except
by the vote of a majority of the holders of all SC-ASIA's Class R shares
outstanding. SC-ASIA's Class R shareholders have exclusive voting rights with
respect to matters relating solely to SC-ASIA's Class R shares. SC-ASIA's Class
R shareholders vote separately from SC-ASIA's Class I shareholders, SC-
ARBITRAGE's Class I shareholders and SC-US's and SC-EURO's Class I and Class R
shareholders on matters in which the interests of SC-ASIA's Class R shareholders
differ from the interests of SC-ASIA's Class I shareholders, SC-ARBITRAGE's
Class I shareholders and SC-US's and SC-EURO's Class I and Class R
shareholders.
SC-REMFs 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
22
<PAGE>
SC-REMFs entitled to vote at the meeting. SC-REMFs will assist shareholders
wishing to communicate with one another for the purpose of requesting such a
meeting.
As of July 31, 1998, SC REALTY Incorporated, a wholly-owned subsidiary
of Security Capital Group Incorporated, owned 99.25% of the issued and
outstanding shares of SC-ASIA and SC-EURO, 99.97% of the issued and outstanding
shares of SC-ARBITRAGE and 92.97% of the issued and outstanding shares of SC-US,
which means that SC REALTY Incorporated controls SC-US, SC-EURO, SC-ASIA and SC-
ARBITRAGE for purposes of the 1940 Act. In each case, SC REALTY owns Class I
shares only. The effect of SC REALTY Incorporated's ownership of a controlling
interest in SC-US, SC-EURO, SC-ASIA, SC-ARBITRAGE and, therefore, SC-REMFs, is
to dilute the voting power of other shareholders. SC REALTY Incorporated does
not anticipate that its initial control of SC-US, SC-EURO, SC-ASIA and SC-
ARBITRAGE will adversely effect the rights of future shareholders.
CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company, which has its principal business
address at 225 Franklin Street, Boston, Massachusetts 02101, has been retained
to act as Custodian of SC-ASIA's investments and as SC-ASIA's Transfer Agent.
State Street Bank and Trust Company has no part in deciding SC-ASIA's investment
policies or which securities are to be purchased or sold for SC-ASIA's
portfolio.
REPORTS TO SHAREHOLDERS
The fiscal year of SC-ASIA ends on December 31 of each year. SC-ASIA
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-ASIA's
independent accountants, will be sent to shareholders each year. Please call
toll free 1-888-SECURITY for a copy of the most recent semi-annual report.
PERFORMANCE INFORMATION
From time to time, SC-ASIA may advertise its "average annual total
return" of the Class R shares over various periods of time. This total return
figure shows the average percentage change in value of an investment in SC-ASIA
Class R shares 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-
ASIA's Class R shares and assumes that any income, dividends and/or capital
gains distributions made by SC-ASIA during the period are reinvested in Class R
shares of SC-ASIA. 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-ASIA'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-ASIA's Class R annual total return for any one
year in the period might have been greater or less than the average for the
entire period. SC-ASIA also may use "aggregate" total return figures for
various periods, representing the cumulative change in value of an investment in
SC-ASIA's Class R shares for the specific period (again reflecting changes in
SC-ASIA's Class R share price and assuming reinvestment of Class R 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-ASIA's performance.
YEAR 2000 RISKS
23
<PAGE>
Like investment companies, financial and business organizations around
the world, SC-REMFs could be adversely affected if the computer systems used by
the SC-REMFs, other service providers and entities with computer systems that
are linked to the SC-REMFs' records do not properly process and calculate date-
related information and data from and after January 1, 2000. This is commonly
known as the "Year 2000 Issue." SC-REMFs is taking steps that it believes are
reasonably designed to address the Year 2000 Issue with respect to the computer
systems that it uses and to obtain satisfactory assurances that comparable steps
are being taken by each of SC-REMFs major service providers. However, there can
be no assurance that these steps will be sufficient to avoid any adverse impact
on SC-REMFs and SC-US, SC-EURO, SC-ASIA and SC-ARBITRAGE.
ADDITIONAL INFORMATION
Any shareholder inquiries may be directed to SC-REMFs 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 of the information set
forth in the Registration Statement filed by SC-REMFs with the SEC under the
Securities Act of 1933, as amended. 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.
24
<PAGE>
PROSPECTUS
- ----------
LOGO
11 SOUTH LASALLE STREET
CHICAGO, ILLINOIS 60603
Security Capital Real Estate Arbitrage Shares ("SC-ARBITRAGE") is an
investment portfolio of Security Capital Real Estate Mutual Funds Incorporated
("SC-REMFs"), an open-end management investment company organized under Maryland
law. SC-ARBITRAGE seeks to provide shareholders with maximum returns by
engaging in various arbitrage transactions in real estate securities in the
United States. Security Capital Global Capital Management Group Incorporated
("GCMG") serves as both investment adviser and administrator to SC-ARBITRAGE.
By this Prospectus, Class I shares of SC-ARBITRAGE are being offered.
Class I shares are offered to investors whose minimum investment is $250,000.
Class I shares are offered directly through Security Capital Markets Group
Incorporated, SC-ARBITRAGE's distributor ("Distributor"), SC-REMFs and various
financial intermediaries. See "Purchase of Shares." This Prospectus provides
you with information specific to the Class I shares of SC-ARBITRAGE. It contains
information you should know before you invest in SC-ARBITRAGE.
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
This Prospectus sets forth concisely the information a prospective investor
should know before investing in SC-ARBITRAGE. SC-REMFs offers other investment
portfolios which are described in the prospectuses for Security Capital U.S.
Real Estate Shares, Security Capital European Real Estate Shares, and Security
Capital Asia/Pacific Real Estate Shares. A Statement of Additional Information
dated June 30, 1998, containing additional and more detailed information about
SC-ARBITRAGE has been filed with the Securities and Exchange Commission (the
"SEC") and is hereby incorporated by reference into this Prospectus. It is
available without charge and can be obtained by calling toll free 1-888-
SECURITY.
The Board of Directors of SC-REMFs believes that the unrestrained growth of
SC-ARBITRAGE could impair investment flexibility and, therefore, would not be in
the best interests of SC-ARBITRAGE's shareholders. Accordingly, SC-ARBITRAGE
will cease offering shares to new investors for a period of at least six months
when total assets reach $100 million. The imposition of this limitation will
not affect existing shareholders of record, who will be permitted to continue to
invest in SC-ARBITRAGE and to reinvest dividends and capital gain distributions.
After SC-ARBITRAGE has been closed to new investors for a period of at least six
months, the Board of Directors will evaluate whether to re-open SC-ARBITRAGE to
new investors.
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 NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
August 19, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Expenses........................................ 2
Description of SC-ARBITRAGE..................... 4
Investment Objectives and Policies.............. 4
Trading and Investment Strategies............... 5
Risk Factors.................................... 8
Non-Diversified Status & Portfolio Turnover..... 10
Directors, Officers and Other Personnel......... 10
Investment Advisory Agreement................... 13
Administrator and Sub-Administrator............. 14
Distribution and Servicing Plan................. 15
Determination of Net Asset Value................ 16
Purchase of Shares.............................. 16
Redemption of Shares............................ 18
Dividends and Distributions..................... 20
Taxation........................................ 20
Organization and Description of Capital Stock... 21
Custodian and Transfer Agent.................... 22
Reports to Shareholders......................... 22
Performance Information......................... 23
Year 2000 Risks................................. 23
Additional Information.......................... 23
</TABLE>
<PAGE>
EXPENSES
SHAREHOLDER TRANSACTION EXPENSES
Shareholder transaction expenses are direct charges which are incurred
when shareholders buy or sell shares of SC-ARBITRAGE.
ANNUAL FUND OPERATING EXPENSES
The Class I shares of SC-ARBITRAGE pay for certain expenses
attributable to Class I shares directly out of SC-ARBITRAGE's Class I assets.
These expenses are related to management of SC-ARBITRAGE, administration and
other services. For example, SC-ARBITRAGE pays an advisory fee and an
administrative fee to GCMG. SC-ARBITRAGE 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-ARBITRAGE's Class I assets to calculate SC-
ARBITRAGE's Class I 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-ARBITRAGE and the portion of SC-ARBITRAGE's
operating expenses that they might expect to bear indirectly. The numbers
reflected below are based on SC-ARBITRAGE's projected expenses for its current
fiscal period ending December 31, 1998, assuming that SC-ARBITRAGE's average
annual net assets for such fiscal year are $100 million.
FEE TABLE
<TABLE>
<S> <C>
Shareholder Transaction Expenses:
Maximum sales charge on purchases and reinvested distributions None
Redemption fee (1) 2.00%
Annual Fund Operating Expenses (after expense waivers and/or
reimbursements, as a percentage of average net assets):
Management fees(2) 2.00%
12b-1 fees(3) .25%
Other expenses (4) .15%
Total fund operating expenses 2.40%
</TABLE>
- ------------
(1) Class I shares redeemed within 1 year of the date of purchase will be
subject to a redemption fee equal to 2.0% of the redemption proceeds. See
"Redemption of Shares, Redemption Fee." The purchase or redemption of shares
through a securities dealer that has not entered into a sales agreement with
the Distributor may be subject to a transaction fee.
(2) The management fee is a "fulcrum fee" that will be applied to SC-ARBITRAGE's
net assets in accordance with SEC regulations. After the first three full
months of operations, SC-ARBITRAGE will pay a monthly advisory fee to GCMG
which varies between an annual rate of 0.50% and 3.50% of SC-ARBITRAGE's
average daily net assets based on the SC-ARBITRAGE's investment performance
for the prior twelve-month period relative to the percentage change in
Wilshire Real Estate Index ("Index") for the same period (the "Index
Return"). Until SC-ARBITRAGE completes twelve full calendar months of
operations, the performance adjustment, which is 10% of the difference
between the investment performance of SC-ARBITRAGE and the investment record
of the Index, will be measured from the date of inception. The advisory fee
is structured so that it will equal the 2.00% base fee if SC-ARBITRAGE's
investment performance for the preceding twelve months (net of fees and
expenses, including the advisory fee) equals the Index Return.
(3) SC-REMFs has adopted a Distribution and Service Plan for SC-ARBITRAGE
Class I shares pursuant to Rule 12b-1 of the Investment Company Act of 1940,
as amended, pursuant to which SC-REMFs pays the Distributor a fee for
2
<PAGE>
distribution-related services and services related to the maintenance of
shareholder accounts at the annual rate of 0.25% of SC-ARBITRAGE's Class I
average daily net assets. As a result, long-term Class I shareholders of SC-
ARBITRAGE may pay more than the economic equivalent of the maximum front-end
sales load permitted by the National Association of Securities Dealers, Inc.
("NASD").
(4) Other expenses are based on estimated amounts for the current fiscal year.
EXAMPLE
<TABLE>
<CAPTION>
ONE THREE
YEAR YEARS
---- -----
<S> <C> <C>
A shareholder would bear the following expenses on
a $1,000 investment, assuming: a five percent annual
return, operating expenses as outlined in the fee
table above and redemption at the end of each period $22 $67
</TABLE>
THE ACTUAL EXPENSES IN FUTURE YEARS MAY BE MORE OR LESS THAN THE NUMBERS IN
THE EXAMPLE, DEPENDING ON A NUMBER OF FACTORS, INCLUDING THE ACTUAL VALUE OF SC-
ARBITRAGE'S ASSETS.
3
<PAGE>
DESCRIPTION OF SC-ARBITRAGE
SC-ARBITRAGE is a non-diversified investment portfolio of Security Capital
Real Estate Mutual Funds Incorporated ("SC-REMFs"), an open-end management
investment company organized under Maryland law. SC-REMFs is comprised of four
investment portfolios, SC-ARBITRAGE, Security Capital U.S. Real Estate Shares
("SC-US"), Security Capital European Real Estate Shares ("SC-EURO") and Security
Capital Asia/Pacific Real Estate Shares ("SC-ASIA").
SC-ARBITRAGE issues one class of shares, Class I shares, which are offered
investors whose minimum initial investment is $250,000. See "Purchase of Shares"
and "Organization and Description of Capital Stock."
INVESTMENT OBJECTIVE AND POLICIES
SC-ARBITRAGE's investment objective is to provide shareholders with maximum
returns by engaging in various arbitrage transactions in real estate securities
in the United States. SC-ARBITRAGE's investment objective is " fundamental" and
cannot be changed without approval of a majority of its outstanding voting
securities. None of SC-ARBITRAGE's policies, other than its investment objective
and the investment restrictions described in the Statement of Additional
Information, are fundamental and thus may be changed by SC-ARBITRAGE's Board of
Directors without shareholder approval. There can be no assurance that SC-
ARBITRAGE's investment objective will be achieved.
REAL ESTATE SECURITIES
Under normal circumstances, SC-ARBITRAGE will invest at least 65% of its
assets in real estate securities, including real estate investment trusts
("REITs") and other publicly-traded real estate securities. 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 GCMG's view, a significant element of the
securities' value, and (iv) preferred stocks. For purposes of SC-ARBITRAGE'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.
REAL ESTATE INVESTMENT TRUSTS
SC-ARBITRAGE 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.
ILLIQUID SECURITIES
SC-ARBITRAGE will not invest more than 10% of its net assets in illiquid
securities, determined at the time of investment. 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. GCMG will monitor the liquidity of such restricted securities under the
supervision of SC-REMFs' Board of Directors. If SC-ARBITRAGE invests in
securities issued by a real estate company that is controlled by Security
Capital Group Incorporated or any of its
4
<PAGE>
affiliates, such securities will be treated as illiquid securities. See the
Statement of Additional Information for further discussion of illiquid
securities.
CONVERTIBLE SECURITIES, WARRANTS AND EQUITY-LINKED SECURITIES
SC-ARBITRAGE may invest in convertible securities, preferred stocks, warrants
and other securities exchangeable under certain circumstances for shares of
common stock. Warrants are instruments giving holders the right but not the
obligation, to buy shares of a company at a given price during a specified
period.
SC-ARBITRAGE also may invest in equity-linked securities, which are securities
that are convertible into, or the value of which is based upon the value of,
equity securities upon certain terms and conditions. The amount received by an
investor at maturity of such securities is not fixed but is based on the price
of the underlying common stock. The advantage of using equity-linked securities
over traditional equity and debt securities is that the former are income
producing vehicles that may provide a higher income than the dividend income on
the underlying securities while allowing some participation in the capital
appreciation of the underlying equity securities. Another advantage of using
equity-linked securities is that they may be used for hedging to reduce the risk
of investing in the generally more volatile underlying equity securities. The
return on equity-linked securities depends on the creditworthiness of the
issuer. See Risk Factors.
DEBT SECURITIES AND MONEY MARKET INSTRUMENTS
SC-ARBITRAGE may invest in debt securities from time to time, if GCMG
believes investing in such securities might help achieve SC-ARBITRAGE's
objective. SC-ARBITRAGE may invest in debt securities to the extent consistent
with its investment policies, although GCMG expects that under normal
circumstances SC-ARBITRAGE is not likely to invest a substantial portion of its
assets in debt securities.
SC-ARBITRAGE may invest in lower-quality, high-yielding debt securities.
Lower-rated debt securities (commonly called "junk bonds") are considered to be
of poor standing and predominantly speculative. Securities in the lowest rating
categories may have extremely poor prospects of attaining any real investment
standing, and some of those securities in which SC-ARBITRAGE may invest may be
in default. The rating services' descriptions of securities in the lower rating
categories, including their speculative characteristics, are set forth in
Appendix A to the Statement of Additional Information.
C-ARBITRAGE will not necessarily dispose of a security when its debt rating
is reduced below its rating at the time of purchase, although GCMG will monitor
the investment to determine whether continued investment in the security will
assist in meeting SC-ARBITRAGE's investment objective. If a security's rating is
reduced below investment grade, an investment in that security may entail the
risks of lower-rated securities described below. See Risk Factors.
When, in the judgment of GCMG, market or general economic conditions justify
a temporary defensive position, SC-ARBITRAGE 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-ARBITRAGE 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.
TRADING AND INVESTMENT STRATEGIES
ARBITRAGE TRANSACTIONS
SC-ARBITRAGE seeks to achieve maximum returns by engaging in mergers and
acquisitions ("M&A"), liquidity and event arbitrage transactions. An arbitrage
transaction involves the simultaneous purchase and short sale of the same or
related securities in order to exploit a perceived pricing inefficiency. SC-
ARBITRAGE's arbitrage transactions will focus primarily on real estate
securities which are undergoing mergers, acquisitions, liquidity events and
structured events, including restructurings, spin-offs and liquidations
("Structured Events"). GCMG relies on a dynamic integration
5
<PAGE>
of quantitative analysis in combination with GCMG's in-depth, proprietary
research to identify unique arbitrage and other short-term opportunities for SC-
ARBITRAGE's portfolio .
. MERGERS AND ACQUISITIONS ARBITRAGE. SC-ARBITRAGE will engage in
arbitrage transactions generally involving the purchase of the
securities of a real estate company that is being acquired and short
sales of the securities of the acquiror. M&A arbitrage involves
purchasing the shares of an announced acquisition target at a discount
from the expected value of such shares upon completion of the
acquisition. In an M&A arbitrage transaction, SC-ARBITRAGE typically
will obtain a long position in the acquiree company and a short position
in the acquiror. SC-ARBITRAGE will purchase its position in the acquiree
company in anticipation of an increase in the value of the acquiree
company's securities upon the exchange of the acquiree company's
securities for those of the acquiror. The size of the discount, or
spread, and whether the potential reward justifies the potential risk,
are a function of a number of factors, including the status of
negotiations between the two companies, the complexity of the
transaction, the number of required regulatory approvals and the
possibility of competing offers for the target company.
. LIQUIDITY ARBITRAGE. SC-ARBITRAGE will engage in liquidity arbitrage
transactions, involving the purchase and subsequent sale of blocks of
real estate securities. Liquidity arbitrage generally involves the
purchase and subsequent sale of real estate securities that are the
subject of institutional block trading. Specifically, SC-ARBITRAGE
intends to purchase securities that are subject to "selling pressure"
and will sell securities short, which are being subject to "buying
pressure." GCMG's valuation methodologies facilitate liquidity arbitrage
by SC-ARBITRAGE enabling SC-ARBITRAGE to respond quickly to block
opportunities as they arise.
. EVENT ARBITRAGE. SC-ARBITRAGE will engage in event arbitrage
transactions in the securities of real estate companies which are
undergoing a Structured Event. In event arbitrage transactions, SC-
ARBITRAGE purchases or sells short the securities of companies
undergoing a Structured Event at a discount, or premium in the case of a
short sale, from the value GCMG expects the security to realize upon the
consummation of the Structured Event. The spread in an event arbitrage
transaction, and whether the potential reward justifies the potential
risk, are a function of a number of factors, including the complexity of
the transaction, the number of required regulatory approvals and the
possibility a company will undergo a different type of Structured Event,
and most importantly the valuation conclusion of GCMG.
SC-ARBITRAGE will generally own more shares long than it will sell short.
Each particular arbitrage event will be evaluated to determine the net
position the fund wishes to establish in light of GCMG's valuation conclusions.
SHORT SALES
SC-ARBITRAGE 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") to effect
arbitrage transactions. Short selling involves the sale of borrowed securities.
At the time a short sale is effected, SC-ARBITRAGE incurs an obligation to
replace the security borrowed at whatever its price may be at the time that SC-
ARBITRAGE 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-ARBITRAGE is required to pay to the lender amounts equal to any dividends or
interest which accrue during the period of the loan. SC-ARBITRAGE generally will
engage in short sales only to effect arbitrage transactions. All short sales
will be fully collateralized. SC-ARBITRAGE will not engage in short sales if
immediately following such transaction the aggregate market value of all
securities sold short would exceed 100% of SC-ARBITRAGE's net assets (taken at
market value). See the Statement of Additional Information for further
discussion of short sales.
BORROWING AND LEVERAGE
SC-ARBITRAGE may borrow money in order to invest in additional portfolio
securities and engage in liquidity arbitrage transactions. This practice, known
as "leverage," increases SC-ARBITRAGE's market exposure and its risk.
6
<PAGE>
When SC-ARBITRAGE has borrowed money for leverage and its investments increase
or decrease in value, SC-ARBITRAGE's net asset value will normally increase or
decrease more than if it had not borrowed money. The interest SC-ARBITRAGE must
pay on borrowed money will reduce the amount of any potential gains or increase
any losses. SC-ARBITRAGE generally will not employ leverage in the absence of
liquidity arbitrage opportunities. The amount of money borrowed by SC-ARBITRAGE
for leverage may generally not exceed one-third of SC-ARBITRAGE's assets
(including the amount borrowed), determined at the time of investment.
SC-ARBITRAGE may at times borrow money by means of reverse repurchase
agreements. Reverse repurchase agreements generally involve the sale by SC-
ARBITRAGE of securities held by it and an agreement to repurchase the securities
at an agreed-upon price, date, and interest payment. The investment by SC-
ARBITRAGE of the proceeds of a reverse repurchase agreement is the speculative
leverage component of the transaction. SC-ARBITRAGE will enter into a reverse
repurchase agreement only if the interest income from investment of the proceeds
is expected to be greater than the interest expense of the transaction and the
proceeds are invested for a period no longer than the term of the agreement.
SECURITIES LOANS AND REPURCHASE AGREEMENTS
SC-ARBITRAGE may lend portfolio securities to broker-dealers and may enter
into repurchase agreements with brokers, dealers or banks that meet the credit
guidelines of SC-REMFs' Board of Directors. These transactions must be fully
collateralized at all times.
In a repurchase agreement, SC-ARBITRAGE buys a security from a seller that has
agreed to repurchase it at a mutually agreed upon date and price, reflecting the
interest rate effective for the term of the agreement. The term of these
agreements is generally from overnight to one week and never exceeds one year.
SC-ARBITRAGE always receives securities as collateral with a market value at
least equal to the purchase price, including accrued interest, and this value is
maintained during the term of the agreement.
OPTIONS AND FUTURES
SC-ARBITRAGE may buy and sell call and put options to hedge against changes in
net asset value or to attempt to realize a greater current return. Through the
purchase and sale of futures contracts and related options, SC-ARBITRAGE may at
times seek to hedge against fluctuations in net asset value and to attempt to
increase its investment return. SC-ARBITRAGE also may write a call or put option
in return for a premium, which is retained by SC-ARBITRAGE whether or not the
option is exercised.
SC-ARBITRAGE's ability to engage in options and futures strategies will depend
on the availability of liquid markets in such instruments. It is difficult to
predict the amount of trading interest that may exist in various types of
options or futures contracts. Therefore, there is no assurance that SC-ARBITRAGE
will be able to utilize these instruments effectively for the purposes stated
above. Options and futures transactions involve certain risks which are
described below and in the Statement of Additional Information.
Transactions in options and futures contracts involve brokerage costs and may
require SC-ARBITRAGE to segregate assets to cover its outstanding positions. For
more information, see the Statement of Additional Information.
INDEX FUTURES AND OPTIONS
SC-ARBITRAGE may buy and sell index futures contracts ("index futures") and
options on index futures and on indices (or may purchase investments whose
values are based on the value from time to time of one or more securities
indices) for hedging purposes. An index future is a contract to buy or sell
units of a particular bond or stock index at an agreed price on a specified
future date. Depending on the change in value of the index between the time when
SC-ARBITRAGE enters into and terminates an index futures or option transaction,
SC-ARBITRAGE realizes a gain or loss. SC-ARBITRAGE may also buy and sell index
futures and options to increase its investment return.
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RISK FACTORS
REAL ESTATE SECURITIES
SC-ARBITRAGE will not invest in real estate directly, but only in
securities issued by real estate companies. However, SC-ARBITRAGE may be
subject to risks similar to those associated with the direct ownership of real
estate (in 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
defaults by borrowers or customers and self-liquidation. REITs also generate
expenses that are separate and apart from those charged by SC-ARBITRAGE and
therefore, shareholders will indirectly pay the fees charged by the REITs in
which SC-ARBITRAGE invests. In addition, equity and mortgage REITs could
possibly fail to qualify for tax free pass-through of income under the Internal
Revenue Code of 1986, as amended (the "Code"), or to maintain their exemptions
from registration under 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.
ARBITRAGE TRANSACTIONS
An arbitrage transaction generally involves the simultaneous purchase
and short sale of the same or related securities in order to exploit a perceived
pricing inefficiency. The arbitrage transactions in which SC-ARBITRAGE will
engage involve unique risks. In connection with M&A arbitrage, SC-ARBITRAGE is
subject to the risk that certain proposed mergers, acquisitions or
reorganizations may be delayed, renegotiated or terminated, in which case
anticipated price movements may not occur and losses may be realized.
Similarly, if event arbitrage transactions, including spin-offs, liquidations
and restructurings, do not materialize in a manner consistent with GCMG's
expectations, SC-ARBITRAGE is subject to the risk that the value of these
investments will decline. In addition, liquidity arbitrage transactions involve
the risk that the price of securities purchased in block trades will decrease or
the price of securities sold short in block trades will increase, in which case
SC-ARBITRAGE would incur a loss.
DEBT SECURITIES
Like those of other fixed-income securities, the values of lower-rated
securities fluctuate in response to changes in interest rates. In addition, the
lower ratings of such securities reflect a greater possibility that adverse
changes in the financial condition of the issuer, or in general economic
conditions, or both, or an unanticipated rise in interest rates, may impair the
ability of the issuer to make payments of interest and principal. Changes by
recognized rating services in their ratings of any fixed-income security and in
the ability or perceived inability of an issuer to make payments of interest and
principal may also affect the value of these investments. See Appendix A to the
Statement of Additional Information.
EQUITY-LINKED SECURITIES
Equity-linked securities are convertible into, or based upon the value
of, underlying equity securities. Trading prices of the underlying common stock
will be influenced by the issuer's operational results, by complex, interrelated
political, economic, financial or other factors affecting the capital markets,
the stock exchanges on which the underlying common stock is traded and the
market segment of which the issuer is a part. In addition, it is not possible
to predict
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how equity-linked securities will trade in the secondary market which is fairly
developed and liquid. The market for such securities may be shallow, however,
and high volume trades may be possible only with discounting. In addition to the
foregoing risks, the return on such securities depends on the creditworthiness
of the issuer of the securities, which may be the issuer of the underlying
securities or a third party investment banker or other lender. The
creditworthiness of such third party issuer of equity-linked securities may, and
often does, exceed the creditworthiness of the issuer of the underlying
securities.
SHORT SALES
A short sale is a transaction in which SC-ARBITRAGE sells securities
it does not own, but has borrowed, in anticipation of a decline in the market
value of the securities. A short sale against the box is a transaction in which
SC-ARBITRAGE sells securities it owns or has the right to acquire, also in
anticipation of a decline in market value. An increase in the value of
securities sold short or sold short against the box by SC-ARBITRAGE will result
in a loss to SC-ARBITRAGE, and there can be no assurance that SC-ARBITRAGE will
be able to limit the amount of its loss on a short position by closing out the
position at any particular time or at an acceptable price.
BORROWING AND LEVERAGE
SC-ARBITRAGE may borrow money to invest in additional portfolio
securities in connection with liquidity arbitrage transactions. The interest
SC-ARBITRAGE must pay on borrowed money will reduce the amount of any potential
gains or increase any losses. Successful use of leverage depends on GCMG's
ability to predict market movements correctly. SC-ARBITRAGE may at times borrow
money by means of reverse repurchase agreements, which will increase SC-
ARBITRAGE's overall investment exposure and may result in losses if interest
rates rise during the term of such an agreement. Additionally, if the purchaser
of securities under a reverse repurchase agreement files for bankruptcy or
becomes insolvent, the buyer or its trustee or receiver may receive an extension
of time to determine whether to enforce the SC-ARBITRAGE's repurchase
obligation, and SC-ARBITRAGE's use of proceeds under the agreement may
effectively be restricted pending such decision.
SECURITIES LOANS AND REPURCHASE AGREEMENTS
A repurchase agreement may be viewed as a fully collateralized loan of
money by SC-ARBITRAGE to the seller. If the seller defaults and the value of
the collateral declines, SC-ARBITRAGE might incur a loss. If bankruptcy
proceedings are commenced with respect to the seller, SC-ARBITRAGE's realization
of gain upon the collateral may be delayed or limited. Repurchase agreements
with durations or maturities over seven days in length are considered to be
illiquid securities.
RISKS RELATED TO OPTIONS AND FUTURES STRATEGIES
Options and futures transactions involve costs and may result in
losses. Certain risks arise because of the possibility of imperfect
correlations between movements in the prices of futures and options and
movements in the prices of the underlying security or index of the securities
held by SC-ARBITRAGE that are the subject of a hedge. The successful use by SC-
ARBITRAGE of the strategies described above further depends on the ability of
GCMG to forecast market movements correctly. Other risks arise from SC-
ARBITRAGE's potential inability to close out futures or options positions.
Although SC-ARBITRAGE will enter into options and futures transactions only if
GCMG believes that a liquid secondary market exists for such option or futures
contract, there can be no assurance that SC-ARBITRAGE will be able to effect
closing transactions at any particular time or at an acceptable price. Certain
provisions of the Code may limit SC-ARBITRAGE's ability to engage in options and
futures transactions.
SC-ARBITRAGE expects that its options and futures transactions
generally will be conducted on recognized exchanges. SC-ARBITRAGE may in
certain instances purchase and sell options in the over-the-counter markets. SC-
ARBITRAGE's ability to terminate options in the over-the-counter markets may be
more limited than for exchange-traded options, and such transactions also
involve the risk that securities dealers participating in such transactions
would be unable to meet their obligations to SC-ARBITRAGE. SC-ARBITRAGE will,
however, engage in over-the-counter transactions only when appropriate exchange-
traded transactions are unavailable and when, in the
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opinion of GCMG, the pricing mechanism and liquidity of the over-the-counter
markets are satisfactory and the participants are responsible parties likely to
meet their obligations.
SC-ARBITRAGE will not purchase futures or options on futures or sell
futures if, as a result, the sum of the initial margin deposits on SC-
ARBITRAGE's existing futures positions and premiums paid for outstanding options
on futures contracts would exceed 5% of SC-ARBITRAGE's assets. (For options
that are "in-the-money" at the time of purchase, the amount by which the option
is "in-the-money" is excluded from this calculation.)
NON-DIVERSIFIED STATUS AND PORTFOLIO TURNOVER
SC-ARBITRAGE operates as a "non-diversified" investment company under
the 1940 Act, which means SC-ARBITRAGE 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-ARBITRAGE intends to conduct its operations so as to
qualify as a "regulated investment company" for purposes of the Code, which
generally will relieve SC-ARBITRAGE 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-
ARBITRAGE 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-ARBITRAGE'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-ARBITRAGE will not own more than 10% of the outstanding
voting securities of a single issuer. SC-ARBITRAGE's investments in securities
issued by the U.S. Government, its agencies and instrumentalities are not
subject to these limitations. Because SC-ARBITRAGE, as a non-diversified
investment company, may invest in a smaller number of individual issuers than a
diversified investment company, an investment in SC-ARBITRAGE may present
greater risk to an investor than an investment in a diversified company.
SC-ARBITRAGE anticipates that its annual portfolio turnover rate will
not exceed 400%, but the turnover rate will not be a limiting factor when GCMG
deems portfolio changes appropriate. The turnover rate may vary greatly from
year to year. An annual turnover rate of 400% occurs, for example, when all of
the securities held by SC-ARBITRAGE are replaced four times in a period of one
year. Arbitrage investments, especially M&A arbitrage, are typically
characterized by a high turnover rate because a short period of time (i.e., two
to six months) typically elapses between the announcement of a merger or
acquisition and its completion. Similarly, the institutional block trading that
characterizes liquidity arbitrage involves the acquisition of short-term
positions. In contrast, event arbitrage does not involve as high a turnover
rate because Structured Events generally require a longer period of time (i.e.,
more than six months) to complete. A higher turnover rate results in
correspondingly greater brokerage commissions and other transactional expenses
which are borne by SC-ARBITRAGE. High portfolio turnover may result in the
realization of net short-term capital gains by SC-ARBITRAGE which, when
distributed to shareholders, will be taxable as ordinary income. See
"Taxation."
DIRECTORS, OFFICERS AND OTHER PERSONNEL
The overall management of the business and affairs of SC-ARBITRAGE is
vested with the Board of Directors of SC-REMFs. The Board of Directors approves
all significant agreements between SC-REMFs and persons or companies furnishing
services to SC-ARBITRAGE, including SC-REMFs' agreements with GCMG, or with SC-
ARBITRAGE's administrator, its custodian and its transfer agent. The management
of SC-ARBITRAGE's day-to-day operations is delegated to the officers of SC-
REMFs, who include the Managing Directors, GCMG and the administrator, subject
always to the investment objective and policies of SC-ARBITRAGE and to general
supervision by the Board of Directors. Although SC-REMFs 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-REMFs' Articles of
Incorporation. The Directors and Officers of SC-REMFs and certain key members of
SC-ARBITRAGE's Portfolio Management Committee and their principal occupations
are set forth below.
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Anthony R. Manno Jr. Chairman of the Board of Directors, Managing
Director and President of SC-REMFs. Managing
Director and President of GCMG since January
1995, where he is responsible for overseeing all
investment and capital allocation matters for
GCMG's public market securities activities and is
also responsible for company and industry
analysis, market strategy and trading and
reporting. Mr. Manno was a member of the
Investment Committee of Security Capital Group
Incorporated from March 1994 to June 1996. Prior
to joining Security Capital, Mr. Manno was a
Managing Director of LaSalle Partners Limited
from March 1980 to March 1994. Mr. Manno received
his M.B.A. from the University of Chicago
Graduate School of Business, an M.A. and a B.A.
from Northwestern University and is a Certified
Public Accountant.
Robert H. Abrams Director of SC-REMFs. Director of the Program in
Real Estate at Cornell University. Founder of
Colliers ABR, Inc. (formerly Abrams Benisch Riker
Inc.), a property management firm. Mr. Abrams was
Principal of Colliers ABR, Inc. from 1978 to 1992
and since 1992, has served as a Consultant. From
1959 to 1978 Mr. Abrams was Executive Vice
President and Director of Cross and Brown
Company. Mr. Abrams also serves as Trustee
Emeritus and Presidential Counselor of his alma
mater, Cornell University. Mr. Abrams received
his M.B.A. from Harvard University and his B.A.
from Cornell University.
Stephen F. Kasbeer Director of SC-REMFs. Retired; Senior Vice
President for Administration and Treasurer of
Loyola University, Chicago from 1981 to July
1994, where he was responsible for
administration, investment, real estate and
treasurer functions. At Loyola University, he
also 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.
Currently, Mr. Kasbeer serves as a Director of
Endowment Realty, Inc. and Endowment Realty II
and as a Member of the Investment Committee of
the University of San Diego. Mr. Kasbeer also
serves as Trustee, Treasurer and Chairman of the
Investment and Finance Committees of Santa Fe
Preparatory School and as Trustee and Chairman of
the Santa Fe Preparatory School Combined
Permanent Endowment Fund Trust. Mr. Kasbeer
received his J.D. from John Marshall Law School
and his M.A. and B.S. from Northwestern
University.
George F. Keane Director of SC-REMFs. Chairman of the Board of
Trigen Energy Corporation since 1994. As founding
chief executive of The Common Fund in 1971 and
Endowment Realty Investors in 1988, Mr. Keane for
many years headed an investment management
service for colleges, universities and
independent schools that managed $15 billion for
1,200 educational institutions when he became
President Emeritus of the Common Fund in 1993. He
has served as a member of the Investment Advisory
Committee of the $95 billion New York State
Common Retirement Fund since 1982. He has been a
Director of the Northern Trust of Connecticut
since 1991, a Trustee of the Nicholas Applegate
Investment Trust since 1993, and a Director of
the Bramwell Funds since 1994. He is also a
Director of Universal Stainless & Alloy Products,
Global Pharmaceutical Corporation, United Water
Resources and United Properties Group, and the
Universal Bond Fund, and is an advisor to
Associated Energy Managers. Mr. Keane also serves
as a Trustee of his alma mater, Fairfield
University where he received his B.A., and as a
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Director and Chairman of the Investment Committee
of the United Negro College Fund. Mr. Keane also
holds honorary degrees from Loyola University,
Chicago, Illinois and Lawrence University,
Appleton, Wisconsin.
John H. Gardner, Jr. Director and Managing Director of SC-REMFs.
Managing Director of GCMG since July, 1997. Prior
thereto, Director of the REIT Manager for
Security Capital Pacific Trust ("PTR") from
February 1995 to June 1997 and Senior Vice
President of Security Capital Atlantic
Incorporated ("ATLANTIC"), PTR and the PTR REIT
Manager from September 1994 to June 1997 where he
had overall responsibility for asset management
and multifamily dispositions. Prior to joining
Security Capital, Mr. Gardner was with Copley
Real Estate Advisors as a Managing Director and
Principal responsible for portfolio management
from January 1991 to September 1994 and as a Vice
President and Principal of asset management from
December 1984 to December 1990. From July 1977 to
November 1984, Mr. Gardner was a Real Estate
Manager with the John Hancock Companies. Mr.
Gardner received his M.S. from Bentley College
and his B.S. from Stonehill College.
Kenneth D. Statz Managing Director of SC-REMFs. Managing Director
of GCMG since November 1997 where he is
responsible for the development and
implementation of portfolio investment strategy.
Prior thereto, Senior Vice President of GCMG from
July 1996 to October 1997 and Vice President from
May 1995 to June 1996. Prior to joining Security
Capital, Mr. Statz was a Vice President and
Senior REIT Analyst in the investment research
department of Goldman, Sachs & Co., from February
1993 to January 1995, concentrating on research
and underwriting for the REIT industry. Prior
thereto, Mr. Statz was a real estate stock
portfolio manager and a managing director of
Chancellor Capital Management from August 1982 to
February 1992. Mr. Statz received his M.B.A. and
B.B.A. from the University of Wisconsin, Madison.
Kevin W. Bedell Senior Vice President of SC-REMFs. Senior Vice
President of GCMG since November 1997 and Vice
President since July 1996, where he is
responsible for directing the activities of the
industry/company securities research group and
providing in-depth proprietary research on
publicly traded companies with office and
industrial sectors. Prior to joining GCMG, Mr.
Bedell spent nine years with LaSalle Partners
Limited where he was Equity Vice President and
Portfolio Manager responsible for the strategic,
operational and financial management of a private
REIT with commercial real estate investments of
$800 million. Mr. Bedell received his M.B.A. from
the University of Chicago and his B.A. from
Kenyon College.
Albert D. Adriani Member, SC-ARBITRAGE Portfolio Management
Committee; Vice President of GCMG since April
1996, where he is responsible for providing
portfolio management analysis. From January 1995
to April 1996, he was Vice President, Security
Capital (UK) Management Limited and Security
Capital U.S. Realty Incorporated; from March 1994
to January 1995, he was with Security Capital
Markets Group. Prior thereto, he was an
investment analyst with HAL Investments BV from
July 1992 to January 1994. 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. Mr. Adriani is a Chartered
Financial Analyst.
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Jeffrey C. Nellessen Vice President, Treasurer and Assistant Secretary
of SC-REMFs. Vice President and Controller of
GCMG since March 1997. Prior thereto, from June
1988 to March 1997, he was Controller, Manager of
Client Administration and Compliance Officer at
Strong Capital Management, Inc. Mr. Nellessen is
a Certified Public Accountant, Certified
Management Accountant and a Certified Financial
Planner. He received his B.B.A. from the
University of Wisconsin, Madison.
David T. Novick Vice President and Secretary of SC-REMFs. Vice
President of Security Capital Group Incorporated
since June 1998. Prior thereto, from September
1989 to June 1998, he was an attorney, and most
recently a Partner, with the law firm of Katten
Muchin and Zavis. Mr. Novick received his
B.S.B.A. from Boston University and J.D. from the
University of Illinois.
GCMG
Security Capital Global Capital Management Group Incorporated ("GCMG"),
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-ARBITRAGE under the overall supervision
and control of the Directors of SC-REMFs.
GCMG commenced operations in January 1995, and is registered as an
investment adviser with the SEC. GCMG's principal officers include Anthony R.
Manno Jr., Managing Director and President, John H. Gardner, Jr., Managing
Director, Kenneth D. Statz, Managing Director and Kevin W. Bedell, Senior Vice
President. GCMG is an indirect wholly-owned subsidiary of Security Capital
Group Incorporated, a real estate research, investment and management company.
The SC-ARBITRAGE Portfolio Management Committee, which is comprised of
certain SC-REMFs officers and GCMG analysts, is primarily responsible for the
day-to-day management of SC-ARBITRAGE's portfolio.
INVESTMENT ADVISORY AGREEMENT
Pursuant to an investment advisory agreement (the "Advisory Agreement"),
GCMG furnishes a continuous investment program for SC-ARBITRAGE's portfolio,
makes the day-to-day investment decisions for SC-ARBITRAGE, and generally
manages SC-ARBITRAGE's investments in accordance with the stated policies of SC-
ARBITRAGE, subject to the general supervision of SC-REMFs' Board of Directors.
GCMG also selects brokers and dealers to execute purchase and sale orders for
the portfolio transactions of SC-ARBITRAGE. GCMG provides persons satisfactory
to the Directors of SC-REMFs to serve as officers of SC-REMFs. Such officers, as
well as certain other employees and Directors of SC-ARBITRAGE, may be directors,
officers, or employees of GCMG.
Under the Advisory Agreement, SC-ARBITRAGE's Class I shares pay GCMG,
monthly, an annual management fee in an amount equal to 2.00% of SC-ARBITRAGE's
Class I average daily net asset value during the first three full months of
operations. Thereafter, SC-ARBITRAGE Class I shares will pay GCMG an annual
investment advisory fee which increases or decreases from a "fulcrum fee" or
base fee of 2.00% of SC-ARBITRAGE's Class I average daily net assets ("Base
Fee") based on the total return investment performance of SC-ARBITRAGE for the
prior twelve-month period. Until SC-ARBITRAGE completes twelve full months of
operations, the performance adjustment will be measured from the date of
inception relative to the percentage change in the Wilshire Real Estate Index
(the "Index") for the same period (the "Index Return"). A general description
of the Index is included in the Statement of Additional Information.
The advisory fee will be paid monthly, at an annual rate which varies
between 0.50% and 3.50% of SC-ARBITRAGE's average net assets. The advisory fee
is structured so that it will be 2.00% of SC-ARBITRAGE's average net assets if
SC-ARBITRAGE's investment performance for the preceding twelve months (net of
all fees and
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expenses, including the advisory fee) equals the Index Return. The advisory fee
increases or decreases from the Base Fee of 2.00% by 10 percent of the
difference between SC-ARBITRAGE's investment performance during the preceding
twelve months and the Index Return during that period, up to the maximum fee of
3.50% or down to the minimum fee of 0.50%. The following table shows examples of
the advisory fees which would be applicable at the stated levels of SC-
ARBITRAGE's performance relative to the Index Return for a particular twelve-
month period.
ADVISORY FEE
FUND PERFORMANCE (AS % OF AVERAGE
(NET OF FEES AND EXPENSES) DAILY NET ASSETS)*
Index Return + 15% 3.50%
Index Return + 10 3.00
Index Return + 5 2.50
Index Return + 3 2.30
Index Return + 1 2.10
Index Return 2.00
Index Return - 1 1.90
Index Return - 3 1.70
Index Return - 5 1.50
Index Return - 10 1.00
Index Return - 15 0.50
* The advisory fee increases or decreases from a Base Fee of 2.00%.
The Base Fee of 2.00% is higher than the fees paid by most other investment
companies and, accordingly, the fee paid by SC-ARBITRAGE may exceed the advisory
fees paid by most other investment companies, even if the investment performance
of SC-ARBITRAGE is less than the Index Return. Also, GCMG may receive the
maximum fee even if SC-ARBITRAGE's absolute performance is negative and may
receive the minimum fee in instances where SC-ARBITRAGE experiences significant
positive performance.
In addition to the payments to GCMG under the Advisory Agreement described
above, SC-ARBITRAGE's Class I shares pay certain other costs of operations
including (a) administration, custodian and transfer agency fees, (b) fees of
Directors who are not affiliated with GCMG, (c) legal and auditing expenses, (d)
costs of printing and postage fees related to preparing and distributing SC-
ARBITRAGE's prospectus and shareholder reports, (e) costs of maintaining SC
REMFs' existence, (f) interest charges, taxes, brokerage fees and commissions,
(g) costs of stationery and supplies, (h) expenses and fees related to
registration and filing with federal and state regulatory authorities, and (i)
upon the approval of SC-REMFs' Board of Directors, costs of personnel of GCMG or
its affiliates rendering clerical, accounting and other office services. Each
class of SC-ARBITRAGE shares pays for the portion SC-ARBITRAGE's expenses
attributable to its operations. Income, realized gains and losses, unrealized
appreciation and depreciation and certain expenses not allocated to a particular
class are allocated to each class based on the net assets of that class in
relation to the net assets of SC-REMFs.
ADMINISTRATOR AND SUB-ADMINISTRATOR
GCMG has also entered into a fund accounting and administration agreement
with SC-REMFs (the "Administration Agreement") under which GCMG performs certain
administrative functions for SC-ARBITRAGE, including (i) providing office space,
telephone, office equipment and supplies for SC-REMFs; (ii) paying compensation
of SC REMFs' officers for services rendered as such; (iii) authorizing
expenditures and approving bills for payment on behalf of SC-ARBITRAGE; (iv)
supervising preparation of the periodic updating of SC-ARBITRAGE's Prospectus
and Statement of Additional Information; (v) supervising preparation of semi-
annual reports to SC-ARBITRAGE'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-ARBITRAGE's investment portfolio and the publication of the net
asset value of SC-ARBITRAGE's shares,
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earnings reports and other financial data; (vii) monitoring relationships with
organizations providing services to SC-ARBITRAGE, including the custodian
("Custodian"), transfer agent ("Transfer Agent") and printers; (viii) providing
trading desk facilities for SC-ARBITRAGE; (ix) maintaining books and records for
SC-ARBITRAGE (other than those maintained by the Custodian and Transfer Agent)
and preparing and filing of tax reports other than SC-ARBITRAGE'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-REMFs' Board of Directors, GCMG has caused SC-REMFs to retain
State Street Bank and Trust Company as sub-administrator(the "Sub-
Administrator") under a sub-administration 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 overseeing the determination and publication of SC-ARBITRAGE's net
asset value, maintaining certain of SC-ARBITRAGE's books and records that are
not maintained by GCMG, or the Custodian or Transfer Agent, preparing financial
information for SC-ARBITRAGE's income tax returns, proxy statements, semi-annual
and annual shareholders reports, and SEC filings, and responding to certain
shareholder inquiries. Under the terms of the Sub-Administration Agreement, SC-
REMFs pays the Sub-Administrator a monthly administration fee at the annual rate
of .08% of the first $750 million, .06% of the next $250 million and .04% of SC-
REMFs' average daily net assets over $1 billion, subject to an average annual
minimum fee of $75,000 per investment portfolio. The Sub-Administrator also
serves as SC-ARBITRAGE's Custodian and Transfer Agent. See "Custodian and
Transfer Agent."
Under the Administration Agreement, GCMG remains responsible for monitoring
and overseeing the performance by the Sub-Administrator of its obligations to
SC-ARBITRAGE under the Sub-Administration Agreement, subject to the overall
authority of SC-REMFs' Board of Directors. For its services under the
Administration Agreement, GCMG receives a monthly fee from SC-REMFs at the
annual rate of .02% of the value of SC-ARBITRAGE's average daily net
assets.
DISTRIBUTION AND SERVICING PLAN
The Board of Directors of SC-REMFs has adopted a Distribution and Servicing
Plan ("Plan") with respect to SC-ARBITRAGE's Class I shares pursuant to Rule
12b-1 under the 1940 Act. Under the Plan, SC-ARBITRAGE pays the Distributor a
monthly fee equal to, on an annual basis, .25% of the value of SC-ARBITRAGE's
Class I average daily net assets.
The Distributor may use the fee for services performed and expenses
incurred by the Distributor in connection with the distribution of Class I
shares and for providing certain services to Class I shareholders. The
Distributor may pay third parties in respect of these services such amount as it
may determine. SC-ARBITRAGE understands that these third parties may also charge
fees to their clients who are beneficial owners of SC-ARBITRAGE Class I shares
in connection with their client accounts. These fees would be in addition to any
amounts which may be received by them from the Distributor under the Plan.
The Distributor may enter into agreements ("Agreements") with institutional
shareholders of record, broker-dealers, financial institutions, depository
institutions, and other financial intermediaries as well as various brokerage
firms or other industry recognized service providers of fund supermarkets or
similar programs to provide certain distribution, shareholder servicing,
administrative and/or accounting services for their clients who are beneficial
owners of SC-ARBITRAGE Class I shares. Such Agreements may be governed by the
Plan.
The Distributor, with offices located at 11 South LaSalle Street, Chicago,
Illinois 60603, is an affiliate of GCMG. See "Distribution Plan" in the
Statement of Additional Information for a listing of the types of expenses for
which the Distributor and third parties may be compensated under the Plan. If
the fee received by the Distributor exceeds its expenses, the Distributor may
realize a profit from these arrangements. The Plan is reviewed and is subject
to approval annually by the Board of Directors.
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DETERMINATION OF NET ASSET VALUE
Net asset value per share of Class I shares of SC-ARBITRAGE, $.01 par value
per share, is determined on each day the New York Stock Exchange ("NYSE") is
open for trading and on each other day on which there is a sufficient degree of
trading in SC-ARBITRAGE's investments to affect the net asset value, as of the
close of trading on the NYSE, by adding the market value of all securities in
SC-ARBITRAGE's portfolio and other assets represented by Class I shares,
subtracting liabilities, incurred or accrued allocable to Class I shares, and
dividing by the total number of Class I shares then outstanding.
For purposes of determining the net asset value per share of Class I
shares, readily marketable portfolio securities listed on the NYSE are valued,
except as indicated below, at the last sale price reflected on the consolidated
tape at the close of the NYSE 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 NYSE 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 GCMG 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
Class I shares are being offered to investors whose minimum initial
investment is $250,000. SC-ARBITRAGE Class I shares may be purchased through SC-
ARBITRAGE's Transfer Agent and various financial intermediaries that have
entered into a sales agreement with the Distributor.
Orders for shares of SC-ARBITRAGE will become effective at the net asset
value per share next determined after the receipt of payment. All funds will be
invested in full and fractional shares. A confirmation indicating the details of
each purchase transaction will be sent to you 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.
Investors must specify that Class I shares are being purchased.
If you choose 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 of SC-ARBITRAGE 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.
By investing in SC-ARBITRAGE, you appoint the Transfer Agent as your 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. PLEASE NOTE THAT IT IS MORE COMPLICATED
TO REDEEM SHARES HELD IN CERTIFICATE FORM.
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INITIAL INVESTMENT
The minimum initial investment is $250,000. Class I shares may be purchased
by check or money order drawn on a U.S. bank, savings and loan, or credit union
by wire transfer. The enclosed application must be completed and accompanied by
payment in U.S. funds to open an account. Checks must be payable in U.S. dollars
and will be accepted subject to collection at full face value. Note that all
applications to purchase shares are subject to acceptance by SC-ARBITRAGE and
are not binding until so accepted. SC-ARBITRAGE reserves the right to decline to
accept a purchase order application in whole or in part.
MAIL
The following instructions should be used when mailing a check or money
order payable to "Security Capital Real Estate Arbitrage Shares," via U.S. mail
to the Distributor, a securities dealer or the Transfer Agent:
VIA U.S. MAIL BY OVERNIGHT COURIER
Boston Financial Data Services Boston Financial Data Services
Attn: Security Capital Real Estate Attn: Security Capital Real Estate
Mutual Funds Incorporated Mutual Funds Incorporated
P.O. Box 8500 66 Brooks Drive
Boston, Massachusetts 02266-8500 Braintree, Massachusetts 02184
SC-REMFs does not consider the U.S. Postal Service or other independent
delivery service 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-REMFs. Do
not mail letters by overnight courier to the post office box.
WIRE PURCHASES
Class I shares may be purchased by wire only through the Transfer Agent.
The following instructions should be used when wiring funds to the Transfer
Agent for the purchase of shares:
Wire to: State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02101
ABA Number 011000028
Credit: DDA Number 9905-378-7
Further Credit: Security Capital Real Estate Mutual Funds Incorporated
Shareholder Registration
Shareholder Fund and Account Number
PLEASE CALL TOLL FREE 1-800-409-4189 PRIOR TO WIRING ANY FUNDS IN ORDER TO
OBTAIN A CONFIRMATION NUMBER AND TO ENSURE PROMPT AND ACCURATE HANDLING OF
FUNDS. SC-ARBITRAGE and its Transfer Agent are not responsible for the
consequences of delays resulting from the banking or Federal Reserve wire system
or from incomplete wiring instructions.
SUBSEQUENT INVESTMENTS
Additional investments must be at least $20,000 and may be made by mail,
wire or by telephone. When making an additional purchase by mail, a check
payable to "Security Capital Real Estate Arbitrage Shares" 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 toll free 1-800-409-4189 for complete wiring instructions.
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You may purchase additional shares by moving money from your bank account
to your SC-ARBITRAGE account by telephone. 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 three business days. TELEPHONE
TRANSACTIONS MAY NOT BE USED FOR INITIAL PURCHASES OF CLASS I SHARES.
SC-REMFs reserves the right to waive or modify minimum initial and
subsequent investment requirements in connection with purchases of Class I
shares of SC-ARBITRAGE, including purchases for accounts established on behalf
of the following types of retirement plans: (i) plans qualified under Section
401(k) of the Code; (ii) plans described in Section 403(b) of the Code; (iii)
deferred compensation plans described in Section 457 of the Code; (iv)
simplified employee pension (SEP) plans; and (v) salary reduction simplified
employee pension (SARSEP) plans.
EXCHANGE FEATURE
Class I shares of SC-ARBITRAGE may be exchanged for Class I shares of SC-
US, SC-EURO and SC-ASIA. Exchanges of Class I shares will be made at their
relative net asset values. Shares may be exchanged only if the amount being
exchanged satisfies the minimum investment required. However, you may not
exchange your investment in shares of SC-US, SC-EURO, SC-ASIA or SC-ARBITRAGE
more than four times in any twelve-month period (including the initial exchange
of your investment during that period). In addition, exchanges of SC-ARBITRAGE
Class I shares within one year of the date of purchase or exchange are subject
to a 2% redemption fee. See "Redemption of Shares, Redemption Fee."
REDEMPTION OF SHARES
You may request redemption of part or all of your Class I shares at any
time by telephone or by mail. The redemption of shares will be at the next
determined net asset value. See "Determination of Net Asset Value." SC-ARBITRAGE
normally will mail the redemption proceeds to you on the next business day and,
in any event, no later than seven business days after the receipt of a
redemption request in good order. However, when a purchase has been made by
check, SC-ARBITRAGE may hold payment on redemption proceeds until reasonably
satisfied that the check has cleared, which may take up to twelve days.
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-
ARBITRAGE 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 requests must be signed exactly as the shares are registered
including the signature of each joint owner. You must also specify the number of
shares or dollar amount to be redeemed. If the Class I 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 the
Transfer Agent together with a redemption request. The following instructions
should be used for the redemption of shares by mail, by wire and by telephone:
REDEMPTION FEE
The Board of Directors of SC-REMFs believes that SC-ARBITRAGE Class I
shares should be considered a long-term investment and should not be used as a
short-term trading vehicle. Therefore, to discourage short-term investing, SC-
ARBITRAGE applies a 2% redemption fee to sales and exchanges of Class I shares
held less than one year. The redemption fee will be assessed and retained by SC-
ARBITRAGE for the benefit of the remaining shareholders, indirectly helping to
offset the tax costs long term investors incur when SC-ARBITRAGE is forced to
realize capital gains as a result of short-term investor activity.
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A redemption fee will not be applied to (a) a redemption of any Class I
shares of SC-ARBITRAGE outstanding for one year or more; (b) a redemption of
Class I shares purchased through the reinvestment of dividends or capital gains
distributions paid by SC-ARBITRAGE ("Reinvestment Shares"); (c) a redemption of
shares by SC-ARBITRAGE upon the exercise of its right to liquidate accounts
falling below the minimum account size by reason of shareholder redemptions; or
(d) a redemption of shares due to the death of all registered shareholders of an
account with more than one registered shareholder (i.e. joint tenant account).
In determining whether a redemption fee is payable, it will be assumed that
redemption is made first of Reinvestment Shares; second of Class I shares held
for one year or more; and third of Class I shares that are held the longest and
are subject to the redemption fee.
MAIL AND WIRE
For most redemption requests you need only furnish a written, unconditional
request to redeem your Class I shares (for a fixed dollar amount) at net asset
value to Security Capital Real Estate Arbitrage Shares:
VIA U.S. MAIL BY OVERNIGHT COURIER
Boston Financial Data Services Boston Financial Data Services
Attn: Security Capital Real Estate Attn: Security Capital Real Estate
Mutual Funds Incorporated Mutual Funds Incorporated
P.O. Box 8500 66 Brooks Drive
Boston, Massachusetts 02266-8500 Braintree, Massachusetts 02184
Redemption proceeds made by written redemption request may also be wired to
a commercial bank that you have authorized on your account application.
Additional documentation may be requested from corporations, executors,
administrators, trustees, guardians, agents, or attorneys-in-fact. SC-REMFs 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 by SC-ARBITRAGE. 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.
TELEPHONE
You may redeem shares by telephone by calling the Transfer Agent at toll
free 1-800-409-4189. In order to utilize this procedure, you must have
previously elected this option in writing, which election will be reflected in
the Transfer Agent's records and the redemption proceeds will be mailed directly
to you or transferred 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 that address, you
may call or submit a written request to the Transfer Agent. No telephone
redemptions will be allowed within 15 days of such a change. SC-ARBITRAGE
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-ARBITRAGE 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-ARBITRAGE reserves the right to refuse a
telephone redemption request if so advised.
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-ARBITRAGE or the Transfer Agent
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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.
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-ARBITRAGE may suspend the right of redemption during any period when (i)
trading on the NYSE is restricted or the NYSE 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-ARBITRAGE 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-ARBITRAGE on not less than
30 days' notice if, at the time of any redemption of Class I shares in his or
her account, the value of the remaining shares in the account falls below
$250,000. 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-ARBITRAGE's investment income will be declared and
distributed annually. SC-ARBITRAGE intends to distribute net realized capital
gains, if any, at least annually, although SC-ARBITRAGE's Board of Directors may
in the future determine to retain realized capital gains and not distribute them
to shareholders.
Dividends and distributions will automatically be reinvested into full and
fractional shares of SC-ARBITRAGE based on the net asset value per share at the
close of business on the payable date unless the shareholder has elected to have
dividends or distributions paid in cash. SC-ARBITRAGE will send shareholders a
statement reflecting each dividend and distribution. In addition, after the end
of each calendar year, SC-ARBITRAGE will send shareholders a statement showing
the amount and tax characterization of the distributions paid during the
previous year. In accordance with the Taxpayer Relief Act of 1997, SC-ARBITRAGE
will indicate which portion of a capital gain distribution will be taxed at a
maximum rate of 28% and which portion will be taxed at a maximum rate of 28%.
For information concerning the tax treatment of SC-ARBITRAGE's distribution
policies for SC-ARBITRAGE and its shareholders, see "Taxation."
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-ARBITRAGE, including the status of
distributions under applicable state or local law.
FEDERAL INCOME TAXES
SC-ARBITRAGE intends to qualify and elect to be taxed as a "regulated
investment company" under the Code. To the extent that SC-ARBITRAGE distributes
its taxable income and net capital gain to its shareholders, qualification as a
regulated investment company relieves SC-ARBITRAGE 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
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eligible for the deduction is limited to the amount of qualifying dividends
received by SC-ARBITRAGE, which does not include distributions received by SC-
ARBITRAGE from REITs. A corporation's dividends-received deduction will be
disallowed unless the corporation holds shares in SC-ARBITRAGE at least 46 days.
Furthermore, the dividends-received deduction will be disallowed to the extent a
corporation's investment in shares of SC-ARBITRAGE is financed with
indebtedness.
The excess of net long-term capital gains over the net short-term capital
losses realized and distributed by SC-ARBITRAGE to its shareholders as capital
gain distributions is taxable to the shareholders as long-term capital gain,
irrespective of the length of time a shareholder may have held his or her stock.
Recent legislation reduced the maximum tax rate on capital gains to 20% for
assets held for more than 18 months on the date of the sale or exchange of those
assets. A notice issued by the Internal Revenue Service provides that a
regulated investment company such as SC-ARBITRAGE may, but is not required to,
designate which portion of a capital gain distribution qualifies for the reduced
capital gain rate. Long-term capital gain distributions are not eligible for the
dividends-received deduction referred to above. Recently enacted legislation has
reduced the holding period required to qualify for the 20% maximum capital gains
rate from 18 months to 12 months.
Under current federal tax law, the amount of an ordinary income dividend or
capital gain distribution declared by SC-ARBITRAGE 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-
ARBITRAGE 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 for 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 gain distribution with respect to shares of SC-
ARBITRAGE 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-ARBITRAGE 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-ARBITRAGE, or the Secretary of the Treasury notifies
SC-ARBITRAGE 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-ARBITRAGE distributions also may be subject to state and local taxes.
Shareholders should consult their own tax advisers regarding the particular
state and local tax consequences of an investment in SC-ARBITRAGE.
ORGANIZATION AND DESCRIPTION OF CAPITAL STOCK
Security Capital Real Estate Mutual Funds Incorporated, formerly Security
Capital Employee REIT Fund Incorporated, was incorporated under Maryland law as
SCERF Incorporated ("SCERF"), a wholly-owned subsidiary
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of Security Capital Group Incorporated, on December 20, 1996. On January 23,
1997, all the assets and liabilities of SCERF were transferred to Security
Capital Employee REIT Fund Incorporated in a reorganization transaction. On
December 16, 1997, its name was changed to Security Capital U.S. Real Estate
Shares Incorporated. On June 30, 1998, its name was changed to Security Capital
Real Estate Mutual Funds Incorporated.
SC-REMFs is authorized to issue 200,000,000 shares of stock, $.01 par value
per share. SC-REMFs' Board of Directors may, without shareholder approval,
increase or decrease the number of authorized but unissued shares of SC-REMFs'
stock and reclassify and issue any unissued shares. The Board of Directors also
may create additional series of shares with different investment objectives,
policies or restrictions without shareholder approval. The Board of Directors of
SC-REMFs has authorized the creation of four investment portfolios; SC-US, SC-
EURO, SC-ASIA and SC-ARBITRAGE, three of which issue two classes of shares:
Class I shares and Class R shares. SC-ARBITRAGE issues Class I shares only.
Class I shares offer different services to shareholders and incur different
expenses than Class R shares. Each class pays its proportionate share of SC-
REMFs' expenses.
All classes of each series of SC-REMFs' shares have equal dividend,
distribution, liquidation and voting rights. There are no conversion or
preemptive rights in connection with any class of any series of SC-REMFs'
shares. All SC-REMFs shares, when duly issued, are fully paid and nonassessable.
The rights of the holders of SC-ARBITRAGE's Class I shares may not be modified
except by the vote of a majority of the holders of all Class I shares
outstanding. SC-ARBITRAGE's Class I shareholders have exclusive voting rights
with respect to matters relating solely to SC-ARBITRAGE's Class I shares. SC-
ARBITRAGE's Class I shareholders vote separately from SC-US's, SC-EURO's, and
SC-ASIA's Class I and Class R shareholders on matters in which the interests of
SC-ARBITRAGE's Class I shareholders differ from the interests of SC-US's, SC-
EURO's, and SC-ASIA's Class I and Class R shareholders.
SC-REMFs 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-REMFs entitled to vote at the meeting. SC-REMFs will assist shareholders
wishing to communicate with one another for the purpose of requesting such a
meeting.
As of July 31, 1998, SC REALTY Incorporated, a wholly-owned subsidiary of
Security Capital Group Incorporated, owned 99.97% of the issued and outstanding
shares of SC-ARBITRAGE, 99.25% of the issued and outstanding shares of SC-EURO
and SC-ASIA and 92.97% of the issued and outstanding shares of SC-US, which
means that SC REALTY Incorporated controls SC-US, SC-EURO, SC-ASIA and SC-
ARBITRAGE for purposes of the 1940 Act. In each case, SC REALTY owns Class I
shares only. The effect of SC REALTY Incorporated's ownership of a controlling
interest in SC-US, SC-EURO, SC-ASIA, SC-ARBITRAGE and, therefore, SC-REMFs, is
to dilute the voting power of other shareholders. SC REALTY Incorporated does
not anticipate that its initial control of SC-US, SC-EURO, SC-ASIA and SC-
ARBITRAGE will adversely effect the rights of future shareholders.
CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company, which has its principal business
address at 225 Franklin Street, Boston, Massachusetts 02101, has been retained
to act as Custodian of SC-ARBITRAGE's investments and as SC-ARBITRAGE's Transfer
Agent. State Street Bank and Trust Company has no part in deciding SC-
ARBITRAGE's investment policies or which securities are to be purchased or sold
for SC-ARBITRAGE's portfolio.
REPORTS TO SHAREHOLDERS
The fiscal year of SC-ARBITRAGE ends on December 31 of each year. SC-
ARBITRAGE 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-
ARBITRAGE's independent accountants, will be sent to shareholders each year.
Please call toll free 1-888-SECURITY for a copy of the most recent semi-annual
report.
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PERFORMANCE INFORMATION
From time to time, SC-ARBITRAGE may advertise the "average annual total
return" of the Class I shares over various periods of time. This total return
figure shows the average percentage change in value of an investment in SC-
ARBITRAGE's Class I shares 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-ARBITRAGE's Class I shares and assumes that any income, dividends
and/or capital gains distributions made by SC-ARBITRAGE's Class I shares during
the period are reinvested in Class I shares of SC-ARBITRAGE. 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-ARBITRAGE'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-
ARBITRAGE's Class I annual total return for any one year in the period might
have been greater or less than the average for the entire period. SC-ARBITRAGE
also may use "aggregate" total return figures for various periods, representing
the cumulative change in value of an investment in SC-ARBITRAGE's Class I shares
for the specific period (again reflecting changes in SC-ARBITRAGE's Class I
share price and assuming reinvestment of Class I 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-
ARBITRAGE's performance.
YEAR 2000 RISKS
Like investment companies, financial and business organizations around the
world, SC-REMFs could be adversely affected if the computer systems used by the
SC-REMFs, other service providers and entities with computer systems that are
linked to SC-REMFs' records do not properly process and calculate date-related
information and data from and after January 1, 2000. This is commonly known as
the "Year 2000 Issue." SC-REMFs is taking steps that it believes are reasonably
designed to address the Year 2000 Issue with respect to the computer systems
that it uses and to obtain satisfactory assurances that comparable steps are
being taken by each of SC-REMFs major service providers. However, there can be
no assurance that these steps will be sufficient to avoid any adverse impact on
SC-REMFs, SC-US, SC-EURO, SC-ASIA and SC-ARBITRAGE.
ADDITIONAL INFORMATION
Any shareholder inquiries may be directed to SC-ARBITRAGE 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 of the information set forth in the
Registration Statement filed by SC-ARBITRAGE 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.
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LOGO
11 SOUTH LASALLE STREET
CHICAGO, ILLINOIS 60603
STATEMENT OF ADDITIONAL INFORMATION
SECURITY CAPITAL REAL ESTATE MUTUAL FUNDS INCORPORATED
SECURITY CAPITAL U.S. REAL ESTATE SHARES
SECURITY CAPITAL EUROPEAN REAL ESTATE SHARES
SECURITY CAPITAL ASIA/PACIFIC REAL ESTATE SHARES
SECURITY CAPITAL REAL ESTATE ARBITRAGE SHARES
AUGUST 19, 1998
Security Capital Real Estate Mutual Funds Incorporated ("SC-REMFs") is an
open-end management investment company organized under Maryland law with four
investment portfolios ("Funds"): Security Capital U.S. Real Estate Shares ("SC-
US"), Security Capital European Real Estate Shares ("SC-EURO"), Security
Capital Asia/Pacific Real Estate Shares ("SC-ASIA") and Security Capital Real
Estate Arbitrage Shares ("SC-ARBITRAGE"). Security Capital Global Capital
Management Group Incorporated ("GCMG ") serves as both investment adviser and
administrator to the Funds. Security Capital Global Capital Management Group
(Europe) S.A. ("GCMG-Europe") serves as investment sub-adviser to SC-EURO and
Security Capital Global Capital Management Group (Asia) Incorporated ("GCMG-
Asia") serves as investment sub-adviser to SC-ASIA.
This Statement of Additional Information is not a prospectus and is
authorized for distribution only when preceded or accompanied by the prospectus
of SC-US, SC-EURO, SC-ASIA, and/or SC-ARBITRAGE dated June 30, 1998 (each, a
"Prospectus"). This Statement of Additional Information contains additional and
more detailed information than that set forth in a Prospectus and should be read
in conjunction with the applicable Prospectus, additional copies of which may be
obtained without charge by writing or calling toll free 1-888-SECURITY.
Table of Contents
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Page
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Investment Objectives and Policies..................... 2
Investment Restrictions................................ 26
Management of SC-REMFs................................. 29
Distribution and Servicing Plans....................... 38
Other Distribution and/or Servicing Arrangements....... 39
Determination of Net Asset Value....................... 40
Redemption of Shares................................... 40
Portfolio Transactions and Brokerage................... 41
Taxation............................................... 42
Organization and Description of Capital Stock.......... 50
Distributor............................................ 51
Custodian and Transfer and Dividend Disbursing Agent... 52
Performance Information................................ 52
Counsel and Independent Accountants.................... 53
Financial Statements................................... 53
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INVESTMENT OBJECTIVES AND POLICIES
The following discussion of the investment objectives and policies of the
Funds supplements, and should be read in conjunction with, the information
regarding each Fund's investment objectives and policies set forth in the Fund's
Prospectus. This discussion includes supplemental information regarding
investments and investment strategies that the Funds may use and the risks they
entail. Certain of these may not be available to all Funds. Except as otherwise
provided below under "Investment Restrictions," the Funds' investment policies
are not fundamental and may be changed by SC-REMFs' Board of Directors without
the approval of the shareholders; however, a Fund will not change its investment
policies without written notice to shareholders.
ILLIQUID SECURITIES
A Fund will not invest in illiquid securities if immediately after such
investment more than 10% of the Fund's 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.
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.
GCMG will monitor the liquidity of restricted securities in the Funds'
portfolios under the supervision of the Board of Directors. In reaching
liquidity decisions, GCMG 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).
CONVERTIBLE SECURITIES
Each Fund may invest in convertible securities, that is, bonds, notes
debentures, preferred stocks and other securities which are convertible into
common stock. Investments in convertible securities can provide an opportunity
for capital appreciation and/or income through interest and dividend payments by
virtue of their conversion or exchange features.
The convertible securities in which a Fund may invest are either fixed
income or zero coupon debt securities which may be converted or exchanged at a
stated or determinable exchange ratio into underlying shares of common stock.
The exchange ratio for any particular convertible security may be adjusted from
time to time due to stock splits, dividends,
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spin-offs, other corporate distributions or scheduled changes in the exchange
ratio. Convertible debt securities and convertible preferred stocks, until
converted, have general characteristics similar to both debt and equity
securities. Although to a lesser extent than with debt securities generally, the
market value of convertible securities tends to decline as interest rates
increase and, conversely, tends to increase as interest rates decline. In
addition, because of the conversion or exchange feature, the market value of
convertible securities typically changes as the market value of the underlying
common stocks changes, and, therefore, also tends to follow movements in the
general market for equity securities. A unique feature of convertible
securities is that as the market price of the underlying common stock declines,
convertible securities tend to trade increasingly on a yield basis, and so may
not experience market value declines to the same extent as the underlying common
stock. When the market price of the underlying common stock increases, the
prices of the convertible securities tend to rise as a reflection of the value
of the underlying common stock, although typically not as much as the underlying
common stock. While no securities investments are without risk, investments in
convertible securities generally entail less risk than investments in common
stock of the same issuer. As debt securities, convertible securities are
investments which provide for a stream of income (or in the case of zero coupon
securities, accretion of income) with generally higher yields than common
stocks. Of course, like all debt securities, there can be no assurance of income
or principal payments because the issuers of the convertible securities may
default on their obligations. Convertible securities generally offer lower
yields than non-convertible securities of similar quality because of their
conversion or exchange features.
Convertible securities generally are subordinated to other similar but non-
convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock, of the
same issuer. However, because of the subordination feature, convertible bonds
and convertible preferred stock typically have lower ratings than similar non-
convertible securities.
Convertible securities may be issued as fixed income obligations that pay
current income or as zero coupon notes and bonds, including Liquid Yield Option
Notes ("LYONs"(TM)). Zero coupon securities pay no cash income and are sold at
substantial discounts from their value at maturity. When held to maturity, their
entire income, which consists of accretion of discount, comes from the
difference between the issue price and their value at maturity. Zero coupon
convertible securities generally are expected to be less volatile than the
underlying common stocks as they usually are issued with shorter maturities (15
years or less) and are issued with options and/or redemption features
exercisable by the holder of the obligation entitling the holder to redeem the
obligation and receive a defined cash payment.
ZERO COUPON BONDS
Each Fund may invest in zero coupon securities, which are debt obligations
that do not entitle the holder to any periodic payment of interest prior to
maturity or that specify a future date when the securities begin to pay current
interest. Zero coupon securities are issued and traded at a discount from their
face amount or par value. This discount varies depending on prevailing interest
rates, the time remaining until cash payments begin, the liquidity of the
security, and the perceived credit quality of the issuer.
The discount on zero coupon securities ("original issue discount") must be
taken into income ratably by a Fund prior to the receipt of any actual payments.
Because the Fund must distribute substantially all of its net income to its
shareholders each year for income and excise tax purposes, the Fund may have to
dispose of portfolio securities under disadvantageous circumstances to generate
cash, or may be required to borrow, to satisfy its corresponding Fund's
distribution requirements.
The market prices of zero coupon securities generally are more volatile
than the prices of securities that pay interest periodically. Zero coupon
securities are likely to respond to changes in interest rates to a greater
degree than other types of debt securities having a similar maturity and credit
quality.
LOWER-RATED DEBT SECURITIES
SC-ARBITRAGE may purchase lower-rated debt securities, sometimes referred
to as "junk bonds" (those rated BB or lower by Standard & Poor's ("S&P") or Ba
or lower by Moody's Investor Service, Inc. ("Moody's")). See Appendix A for a
description of these ratings. SC-ARBITRAGE does not intend, under current
circumstances, to
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purchase such securities if, as a result, more than 35% of the Fund's assets
would be invested in securities rated below BB or Ba.
The lower ratings of certain securities that may be held by SC-ARBITRAGE
reflect a greater possibility that adverse changes in the financial condition of
the issuer, or in general economic conditions, or both, or an unanticipated rise
in interest rates, may impair the ability of the issuer to make payments of
interest and principal. The inability (or perceived inability) of issuers to
make timely payment of interest and principal would likely make the values of
securities held by the Fund more volatile and could limit the Fund's ability to
sell its securities at prices approximately the values the Fund had placed on
such securities. It is possible that legislation may be adopted in the future
limiting the ability of certain financial institutions to purchase lower rated
securities; such legislation may adversely affect the liquidity of such
securities. In the absence of a liquid trading market for securities held by it,
the Fund may be unable at times to establish the fair market value of such
securities. The rating assigned to a security by Moody's or S&P does not reflect
an assessment of the volatility of the security's market value or of the
liquidity of an investment in the security.
Like those of other fixed-income securities, the values of lower-rated
securities fluctuate in response to changes in interest rates. Thus, a decrease
in interest rates generally will result in an increase in the value of the
Fund's fixed-income securities. Conversely, during periods of rising interest
rates, the value of the Fund's fixed-income securities generally will decline.
In addition, the values of such securities are also affected by changes in
general economic conditions and business conditions affecting the specific
industries of their issuers. Changes by recognized rating services in their
ratings of any fixed-income security and in the ability of an issuer to make
payments of interest and principal may also affect the value of these
investments. Changes in the value of portfolio securities generally will not
affect cash income derived from such securities, but will affect the fund's net
asset value. SC-ARBITRAGE will not necessarily dispose of a security when its
rating is reduced below its rating at the time of purchase, although GCMG will
monitor the investment to determine whether continued investment in the security
will assist in meeting the Fund's investment objective.
Issuers of lower-rated securities are often highly leveraged, so that their
ability to service their debt obligations during an economic downturn or during
sustained periods of rising interest rates may be impaired. In addition, such
issuers may not have more traditional methods of financing available to them,
and may be unable to repay debt at maturity by refinancing. The risk of loss due
to default in payment of interest or principal by such issuers is significantly
greater because such securities frequently are unsecured and subordinated to the
prior payment of senior indebtedness. Certain of the lower-rated securities in
which SC-ARBITRAGE may invest are issued to raise funds in connection with the
acquisition of a company, in so-called "leveraged buy-out" transactions. The
highly leveraged capital structure of such issuers may make them especially
vulnerable to adverse changes in economic conditions.
Under adverse market or economic conditions or in the event of adverse
changes in the financial condition of the issuer, a SC-ARBITRAGE could find it
more difficult to sell lower-rated securities when GCMG believes it advisable to
do so or may be able to sell such securities only at prices lower than if such
securities were more widely held. In many cases, such securities may be
purchased in private placements and, accordingly, will be subject to
restrictions on resale as a matter of contract or under securities laws. Under
such circumstances, it may also be more difficult to determine the fair value of
such securities for purposes of computing SC-ARBITRAGE's net asset value. In
order to enforce its rights in the event of a default under such securities, SC-
ARBITRAGE may be required to take possession of and manage assets securing the
issuer's obligations on such securities, which may increase the Fund's operating
expenses and adversely affect the Fund's net asset value. The Fund may also be
limited in its ability to enforce its rights and may incur greater costs in
enforcing its rights in the event an issuer becomes the subject of bankruptcy
proceedings.
Certain securities held by SC-ARBITRAGE may permit the issuer at its option
to "call," or redeem, its securities. If an issuer were to redeem securities
held by SC-ARBITRAGE during a time of declining interest rates, the Fund may not
be able to reinvest the proceeds in securities providing the same investment
return as the securities redeemed.
EQUITY-LINKED SECURITIES
SC-ARBITRAGE may invest in equity-linked securities, including, among
others, PERCS, ELKS, or LYONs, which are securities that are convertible into,
or the value of which is based upon the value of, equity securities upon certain
terms and conditions. The amount received by an investor at maturity of such
securities is not fixed but is based
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on the price of the underlying common stock. It is not possible to predict how
equity-linked securities will trade in the secondary market or whether such
market will be liquid or illiquid. The following are three examples of equity-
linked securities. The Fund may invest in the securities described below or
other similar equity-linked securities. There are certain risks of loss of
principal in connection with investing in equity-linked securities, as described
in the following examples of certain equity-linked securities.
Preferred Equity Redemption Cumulative Stock ("PERCS") convert into common
stock within three years regardless of the price at which the common stock
trades. If the common stock is trading at a price that is at or below the cap,
the Fund receives one share of common stock for each PERCS share. If the common
stock is trading at a price that is above the cap, the Fund receives less than
one share, with the conversion ratio adjusted so that the market value of the
common stock received by the Fund equals the cap. Accordingly, the Fund is
subject to the risk that if the price of the common stock is above the cap price
at the maturity of the PERCS, the Fund will lose the amount of the difference
between the price of the common stock and the cap. Such a loss could
substantially reduce the Fund's initial investment in the PERCS and any
dividends that were paid on the PERCS. PERCS also present risks based on payment
expectations. If a PERCS issuer redeems the PERCS, the Fund may have to replace
the PERCS with a lower yielding security, resulting in a decreased return for
investors.
The principal amount that Equity-Linked Securities ("ELKS") holder receive
at maturity is based on the price of the underlying common stock. If the common
stock is trading at a price that is at or below the cap, the Fund receives for
each ELKS share an amount equal to the average price of the common stock. If the
common stock is trading at a price that is above the cap, the Fund receives the
cap amount. Accordingly, the Fund is subject to the risk that if the price of
the common stock is above the cap price at the maturity of the ELKS, the Fund
will lose the amount of the difference between the price of the common stock and
cap. Such a loss could substantially reduce the Fund's initial investment in the
ELKS and any dividends that were paid on the ELKS. An additional risk is that
the issuer may "reopen" the issue of ELKS and issue additional ELKS at a later
time or issue additional debt securities or other securities with terms similar
to those of the ELKS, and such issuances may affect the trading value of the
ELKS.
The principal amount that LYONs holders receive for LYONs, other than the
lower-than-market yield at maturity, is based on the price of underlying common
stock. If the common stock is trading at a price that is at or below the
purchase price of the LYONs plus accrued original issue discount, the Fund
receives only the lower-than-market yield, assuming the LYONs are not in
default. If the common stock is trading at a price that is above the purchase
price of the LYONs plus accrued original issue discount, the Fund will receive
an amount above the lower-than-market yield on the LYONs, based on how well the
underlying common stock performs. LYONs also present risks based on payment
expectations. If a LYONs issuer redeems the LYONs, the Fund may have to replace
the LYONs with a lower yielding security, resulting in a decreased return for
investors.
FOREIGN SECURITIES
SC-EURO and SC-ASIA invest primarily in the securities of foreign issuers.
Political, Social and Economic Risks
Investing in securities of non-U.S. companies may entail additional risks
due to the potential political, social and economic instability of certain
countries and the risks of expropriation, nationalization, confiscation or the
imposition of restrictions on foreign investment; convertibility of currencies
into U.S. dollars and on repatriation of capital invested. In the event of such
expropriation, nationalization or other confiscation by any country, SC-EURO or
SC-ASIA could lose its entire investment in any such country.
Religious, Political, or Ethnic Instability
Certain countries in which SC-EURO or SC-ASIA may invest may have groups
that advocate radical religious or revolutionary philosophies or support ethnic
independence. Any disturbance on the part of such individuals could carry the
potential for widespread destruction or confiscation of property owned by
individuals and entities foreign to such country and could cause the loss of a
Fund's investment in those countries. Instability may also result from, among
other things: (i) authoritarian governments or military involvement in political
and economic decision-making, including
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changes in government through extra-constitutional means; (ii) popular unrest
associated with demands for improved political, economic and social conditions;
and (iii) hostile relations with neighboring or other countries. Such
political, social and economic instability could disrupt the principal financial
markets in which SC-EURO or SC-ASIA invests and adversely affect the value of
the Fund's assets.
Foreign Investment Restrictions
Certain countries prohibit or impose substantial restrictions on
investments in their capital markets, particularly their equity markets, by
foreign entities such as SC-EURO or SC-ASIA. These restrictions or controls may
at times limit or preclude investment in certain securities and may increase the
cost and expenses of SC-EURO or SC-ASIA. For example, certain countries require
prior governmental approval before investments by foreign persons may be made,
or may limit the amount of investment by foreign persons in a particular company
or limit the investment by foreign persons to only a specific class of
securities of a company that may have less advantageous terms than securities of
the company available for purchase by nationals. Moreover, the national policies
of certain countries may restrict investment opportunities in issuers or
industries deemed sensitive to national interests. In addition, some countries
require governmental approval for the repatriation of investment income, capital
or the proceeds of securities sales by foreign investors. In addition, if there
is a deterioration in a country's balance of payments or for other reasons, a
country may impose restrictions on foreign capital remittances abroad. SC-EURO
or SC-ASIA could be adversely affected by delays in, or a refusal to grant, any
required governmental approval for repatriation, as well as by the application
to it of other restrictions on investments.
Non-Uniform Corporate Disclosure Standards and Governmental Regulation
Foreign companies are subject to accounting, auditing and financial
standards and requirements that differ, in some cases significantly, from those
applicable to U.S. companies. In particular, the assets, liabilities and profits
appearing on the financial statements of such a company may not reflect its
financial position or results of operations in the way they would be reflected
had such financial statements been prepared in accordance with U.S. generally
accepted accounting principles. Most of the foreign securities held by SC-EURO
or SC-ASIA will not be registered with the SEC or regulators of any foreign
country, nor will the issuers thereof be subject to the SEC's reporting
requirements. Thus, there will be less available information concerning foreign
issuers of securities held by the Fund than is available concerning U.S.
issuers. In instances where the financial statements of an issuer are not deemed
to reflect accurately the financial situation of the issuer, GCMG will take
appropriate steps to evaluate the proposed investment, which may include on-site
inspection of the issuer, interviews with its management and consultations with
accountants, bankers and other specialists. There is substantially less publicly
available information about foreign companies than there are reports and ratings
published about U.S. companies and the U.S. government. In addition, where
public information is available, it may be less reliable than such information
regarding U.S. issuers. Issuers of securities in foreign jurisdictions are
generally not subject to the same degree of regulation as are U.S. issuers with
respect to such matters as restrictions on market manipulation, insider trading
rules, shareholder proxy requirements and timely disclosure of information.
Currency Fluctuations
Because SC-EURO and SC-ASIA under normal circumstances each will invest a
substantial portion of its total assets in the securities of foreign issuers
which are denominated in foreign currencies, the strength or weakness of the
U.S. dollar against such foreign currencies will account for part of SC-EURO's
or SC-ASIA's investment performance. A decline in the value of any particular
currency against the U.S. dollar will cause a decline in the U.S. dollar value
of a Fund's holdings of securities and cash denominated in such currency and,
therefore, will cause an overall decline in the Fund's net asset value and any
net investment income and capital gains derived from such securities to be
distributed in U.S. dollars to shareholders in the Fund. Moreover, if the value
of the foreign currencies in which a Fund receives its income falls relative to
the U.S. dollar between receipt of the income and the making of the Fund
distributions, the Fund may be required to liquidate securities in order to make
distributions if the Fund has insufficient cash in U.S. dollars to meet
distribution requirements.
The rate of exchange between the U.S. dollar and other currencies is
determined by several factors including the supply and demand for particular
currencies, central bank efforts to support particular currencies, the relative
movement
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of interest rates, the pace of business activity in the other countries, and the
United States, and other economic and financial conditions affecting the world
economy.
Although each Fund values its assets daily in terms of U.S. dollars, SC-
EURO and SC-ASIA do not intend to convert their holdings of foreign currencies
into U.S. dollars on a daily basis. Each Fund will do so, from time to time, and
investors should be aware of the costs of currency conversion. Although foreign
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the difference ("spread") between the prices at which they buy and sell
various currencies. Thus, a dealer may offer to sell a foreign currency to a
Fund at one rate, while offering a lesser rate of exchange should a Fund desire
to sell that currency to the dealer.
Adverse Market Characteristics
Securities of many foreign issuers may be less liquid and their prices more
volatile than securities of comparable U.S. issuers. In addition, foreign
securities markets and brokers generally are subject to less governmental
supervision and regulation than in the United States, and foreign securities
transactions usually are subject to fixed commissions, which generally are
higher than negotiated commissions on U.S. transactions. In addition, foreign
securities transactions may be subject to difficulties associated with the
settlement of such transactions. Delays in settlement could result in temporary
periods when assets of SC-EURO or SC-ASIA are uninvested and no return is earned
thereon. The inability of SC-EURO or SC-ASIA to make intended security purchases
due to settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of a security due to settlement problems
either could result in losses to SC-EURO or SC-ASIA due to subsequent declines
in value of that security or, if a Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser. The Manager will
consider such difficulties when determining the allocation of each Fund's
assets, although the Manager does not believe that such difficulties will have a
material adverse effect on a Fund's trading activities.
SC-EURO and SC-ASIA may use foreign custodians, which may involve risks in
addition to those related to the use of U.S. custodians. Such risks include
uncertainties relating to determining and monitoring the foreign custodian's
financial strength, reputation and standing; maintaining appropriate safeguards
concerning the Fund's investments; and possible difficulties in obtaining and
enforcing judgments against such custodians.
Withholding Taxes
SC-EURO's or SC-ASIA's net investment income from foreign issuers may be
subject to withholding taxes by the foreign issuer's country, thereby reducing
the Fund's net investment income or delaying the receipt of income when those
taxes may be recaptured. See "Taxes."
Concentration
Because SC-EURO and SC-ASIA each invest a significant portion of its assets
in securities of issuers located in a particular region of the world, the Fund
may be subject to greater risks and may experience greater volatility than a
Fund that is more broadly diversified geographically.
There are special risks attendant to investment in the Western European
countries. The countries that are members of the European Economic Community
("Common Market") (Belgium, Denmark, France, Germany, Greece, Ireland,
Luxembourg, the Netherlands, Portugal, Spain and the United Kingdom) have
eliminated certain import tariffs and quotas and other trade barriers with
respect to one another over the past several years. GCMG and GCMG-Europe believe
that these Common Market reforms are likely to improve the prospects for
economic growth in many Western European countries. In addition, these reforms
could benefit real estate operating companies domiciled in Western European
countries by expanding their markets. Nevertheless, it is not clear what the
form or effect of such reforms will be on real estate companies in Western
Europe. Therefore it is impossible to predict their long-term impact on SC-
EURO's investments.
A great deal of interest currently surrounds opportunities created by the
reunification of East and West Germany. Following reunification, the Federal
Republic of Germany has remained a firm and reliable member of the EC and
numerous other international alliances and organizations. To reduce inflation
caused by the reunification of East and
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West Germany, Germany has adopted a tight monetary policy which has led to
weakened exports and a reduced domestic demand for goods and services. However,
in the long-term, reunification could prove to be an engine for domestic and
international growth.
Portugal is a genuinely emerging market which has experienced rapid growth
since the mid-1980's, except for a brief period of stagnation over 1990-91.
Portugal's government remains committed to privatization of the financial system
away from one dependent upon the banking system to a more balanced structure
appropriate for the requirements of a modern economy. Inflation continues to be
about three times the EC average.
Eastern European Countries
Investment by SC-EURO in Eastern European countries involves a high degree
of risk and special considerations not typically associated with investing in
the United States securities market, and should be considered highly
speculative. Such risks include: (1) delays in settling portfolio transactions
and risk of loss arising out of the system of share registration and custody;
(2) the risk that it may be impossible or more difficult than in other countries
to obtain and/or enforce a judgment; (3) pervasiveness of corruption and crime
in the economic system; (4) currency exchange rate volatility and the lack of
available currency hedging instruments; (5) higher rates of inflation (including
the risk of social unrest associated with periods of hyper-inflation) and high
unemployment; (6) controls on foreign investment and local practices disfavoring
foreign investors and limitations on repatriation of invested capital, profits
and dividends, and on a Fund's ability to exchange local currencies for U.S.
dollars; (7) political instability and social unrest and violence; (8) the risk
that the governments of Russian and Eastern European countries may decide not to
continue to support the economic reform programs implemented recently and could
follow radically different political and/or economic policies to the detriment
of investors, including non-market-oriented policies such as the support of
certain industries at the expense of other sectors or investors, or a return to
the centrally planned economy that existed when such countries had a communist
form of government; (9) the financial condition of companies in these countries,
including large amounts of inter-company debt which may create a payments crisis
on a national scale; (10) dependency on exports and the corresponding importance
of international trade; (11) the risk that the tax system in these countries
will not be reformed to prevent inconsistent, retroactive and/or exorbitant
taxation; and (12) the underdeveloped nature of the securities markets.
Japan
SC-ASIA will invest in companies located in Japan. Japan's economic growth
has declined significantly since 1990. The general government position has
deteriorated as a result of weakening economic growth and stimulative measures
taken to support economic activity and to restore financial stability. Although
the decline in interest rates and fiscal stimulation packages have helped to
contain recessionary forces, uncertainties remain. Japan is also heavily
dependent upon international trade, so its economy is especially sensitive to
trade barriers and disputes. Japan has had difficult relations with its trading
partners, particularly the United States, where the trade imbalance is the
greatest. It is possible that trade sanctions and other protectionist measures
could impact Japan adversely in both the short and the long term.
The common stocks of many Japanese companies trade at high price-earnings
ratios. Differences in accounting methods make it difficult to compare the
earnings of Japanese companies with those of companies in other countries,
especially in the U.S. In general, however, reported net income in Japan is
understated relative to U.S. accounting standards and this is one reason why
price-earnings ratios of the stocks of Japanese companies have tended
historically to be higher than those for U.S. stocks. In addition, Japanese
companies have tended to have higher growth rates than U.S. companies and
Japanese interest rates have generally been lower than in the U.S., both of
which factors tend to result in lower discount rates and higher price-earnings
ratios in Japan than in the U.S.
The Japanese securities markets are less regulated than those in the United
States. Evidence has emerged from time to time of distortion of market prices to
serve political or other purposes. Shareholders' rights are not always equally
enforced. In addition, Japan's banking industry is undergoing problems related
to bad loans and declining values in real estate.
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Pacific Region Countries
Certain of the risks associated with foreign securities are heightened for
investments in Pacific region countries. For example, some of the currencies of
Pacific region countries have experienced steady devaluations relative to the
U.S. dollar, and major adjustments have been made periodically in certain of
such currencies. Certain countries, such as India, face serious exchange
constraints. Many of the Asia/Pacific region countries may be subject to a
greater degree of social, political and economic instability than is the case in
the United States. Such instability may result from, among other things, the
following (i) authoritarian governments or military involvement in political and
economic decision making, and changes in government through extra-constitutional
means; (ii) popular unrest associated with demands for improved political,
economic and social conditions; (iii) internal insurgencies; (iv) hostile
relations with neighboring countries; and (v) ethnic, religious and racial
disaffection. Such social, political and economic instability could
significantly disrupt the principal financial markets in which a Fund invests
and adversely affect the value of SC-ASIA's assets. In addition, there may be
the possibility of asset expropriations or future confiscatory levels of
taxation affecting the Funds.
In China, India, Indonesia, Malaysia, the Philippines, South Korea and
Thailand, government regulation or a company's charter may limit the maximum
foreign aggregate ownership of equity in any one company. South Korea generally
prohibits foreign investment in non-denominated debt securities and Sri Lanka
prohibits foreign investment in government debt securities. In the Philippines,
SC-ASIA may generally invest in "B" shares of Philippine issuers engaged in
partly nationalized business activities, the market prices, liquidity and rights
of which may vary from shares owned by nationals. Similarly, in China, SC-ASIA
may only invest in "B" shares of securities traded on The Shanghai Securities
Exchange and The Shenzhen Stock Exchange, currently the two officially
recognized securities exchanges in China. "B" shares traded on The Shanghai
Securities Exchange are settled in U.S. dollars, and those traded on The
Shenzhen Stock Exchange are generally settled in Hong Kong dollars.
If, because of restrictions on repatriation or conversion, SC-ASIA were
unable to distribute substantially all of its net investment income and net
capital gains within applicable time periods, SC-ASIA could be subject to
federal income and excise taxes that would not otherwise be incurred and could
cease to qualify for the favorable tax treatment afforded to regulated
investment companies ("RICs") under the Internal Revenue Code of 1986, as
amended ("Code"). In such case, it would become subject to federal income tax on
all of its income and net capital gains. See "Taxation".
Several of the Asia/Pacific region countries have or in the past have had
hostile relationships with neighboring nations or have experienced internal
insurgency. Thailand has experienced border conflicts with Laos and Cambodia,
and India is engaged in border disputes with several of its neighbors, including
China and Pakistan. An uneasy truce exists between North Korea and South Korea,
and the recurrence of hostilities remains possible. Reunification of North Korea
and South Korea could have a detrimental effect on the economy of South Korea.
Also, China continues to claim sovereignty over Taiwan and recently has
conducted military maneuvers near Taiwan.
The economies of most of the Asia/Pacific region countries are heavily
dependent upon international trade and are accordingly affected by protective
trade barriers and the economic conditions of their trading partners,
principally the United States, Japan, China and the European Community. The
enactment by the United States or other principal trading partners of
protectionist trade legislation, reduction of foreign investment in the local
economies and general declines in the international securities markets could
have a significant adverse effect upon the securities markets of the
Asia/Pacific region countries. In addition, the economies of some of the
Asia/Pacific region countries, Australia and Indonesia, for example, are
vulnerable to weakness in world prices for their commodity exports, including
crude oil.
Few of the Asia/Pacific region countries have Western-style or fully
democratic governments. Some governments in the region are authoritarian in
nature and influenced by security forces. For example, during the course of the
last 25 years, governments in the region have been installed or removed as a
result of military coups, while others have periodically demonstrated repressive
police state characteristics. In several Asia/Pacific region countries, the
leadership ability of the government has suffered as a result of recent
corruption scandals. Disparities of wealth, among other factors, have also led
to social unrest in some of the Asia/Pacific region countries; accompanied, in
certain cases, by violence and labor unrest. Ethnic, religious and/or racial
disaffection, as evidenced in Indonesia, for example, have created social,
economic and political problems. Such problems also have occurred in other
regions.
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Starting in mid-1997, some Pacific region countries began to experience
currency devaluations that resulted in high interest rate levels and sharp
reductions in economic activity. While the currency crisis diminished prospects
for short-term corporate earnings growth, GCMG and GCMG-Asia believe that high
interest rate levels may force governments and corporations to restructure the
financial sector in a manner that may facilitate a return to high levels of
long-term economic activity.
China assumed sovereignty over Hong Kong in July 1997. Although China has
committed by treaty to preserve the economic and social freedoms enjoyed in Hong
Kong for fifty years after regaining control of Hong Kong, the continuation of
the current form of the economic system in Hong Kong after the reversion will
depend on the actions of the government of China. In addition, such reversion
has increased sensitivity in Hong Kong to political developments and statements
by public figures in China. Business confidence in Hong Kong, therefore, can be
significantly affected by such developments and statements, which in turn can
affect markets and business performance.
In addition, the Chinese sovereignty over Hong Kong also presents a risk
that the Hong Kong dollar will be devaluated and a risk of possible loss of
investor confidence in the Hong Kong markets and dollar. However, factors exist
that are likely to mitigate this risk. First, China has stated its intention to
implement a "one country, two systems" policy, which would preserve monetary
sovereignty and leave control in the hands of the Hong Kong Monetary Authority
("HKMA").
Second, fixed rate parity with the U.S. dollar is seen as critical to
maintaining investors confidence in the transition to Chinese rule and,
therefore, it is anticipated that, in the event international investors lose
confidence in Hong Kong dollar assets, the HKMA would intervene to support the
currency, though such intervention cannot be assured. Third, Hong Kong's and
China's sizable combined foreign exchange reserve may be used to support the
value of the Hong Kong dollar, provided that China does not appropriate such
reserves for other uses, which is not anticipated, but cannot be assured.
Finally, China would be likely to experience significant adverse political and
economic consequences if confidence in the Hong Kong dollar and the territory
assets were to be endangered.
Emerging Markets
SC-EURO and SC-ASIA may invest in securities of issuers in emerging
markets. Most emerging securities markets may have substantially less volume and
are subject to less government supervision than U.S. securities markets.
Securities of many issuers in emerging markets may be less liquid and more
volatile than securities of comparable domestic issuers. In addition, there is
less regulation of securities exchanges, securities dealers, and listed and
unlisted companies in emerging markets than in the U.S.
Emerging markets also have different clearance and settlement procedures,
and in certain markets there have been times when settlements have been unable
to keep pace with the volume of securities transactions. Delays in settlement
could result in temporary periods when a portion of the assets of SC-EURO or SC-
ASIA is uninvested and no cash is earned thereon. The inability of a Fund to
make intended security purchases due to settlement problems could cause the Fund
to miss attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result either in losses to the Fund
due to subsequent declines in value of the portfolio security or, if the Fund
has entered into a contract to sell the security, could result in possible
liability to the purchaser. Costs associated with transactions in foreign
securities are generally higher than costs associated with transactions in U.S.
securities. Such transactions also involve additional costs for the purchase or
sale of foreign currency.
Foreign investment in certain emerging market debt obligations is
restricted or controlled to varying degrees. These restrictions or controls may
at times limit or preclude foreign investment in certain emerging markets debt
obligations and increase the costs and expenses to SC-EURO or SC-ASIA. Certain
emerging markets require prior governmental approval of investments by foreign
persons, limit the amount of investment by foreign persons in a particular
company, limit the investment by foreign persons only to a specific class of
securities of a company that may have less advantageous rights than the classes
available for purchase by domiciliaries of the countries and/or impose
additional taxes on foreign investors. Certain emerging markets may also
restrict investment opportunities in issuers in industries deemed important to
national interest.
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Certain emerging markets may require governmental approval for the
repatriation of investment income, capital or the proceeds of sates of
securities by foreign investors. In addition, if a deterioration occurs in an
emerging market's balance of payments or for other reasons, a country could
impose temporary restrictions on foreign capital remittances. SC-EURO or SC-ASIA
could be adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by the application
of any restrictions on investments.
In the course of investment in emerging market debt obligations, SC-EURO
and SC-ASIA will be exposed to the direct or indirect consequences of political,
social and economic changes in one or more emerging markets. Political changes
in emerging market countries may affect the willingness of an emerging market
country governmental issuer to make or provide for timely payments of its
obligations.
The country's economic status, as reflected, among other things, in its
inflation rate, the amount of its external debt and its gross domestic product,
also affects its ability to honor its obligations. While GCMG-Europe and GCMG-
Asia manage the assets of SC-EURO and SC-ASIA, respectively, in a manner that
will seek to minimize the exposure to such risks, and will further reduce risk
by owning the bonds of many issuers, there can be no assurance that adverse
political, social or economic changes will not cause a Fund to suffer a loss of
value in respect of the securities in a Fund's portfolio.
The risk also exists that an emergency situation may arise in one or more
emerging markets as a result of which trading of securities may cease or may be
substantially curtailed and prices for a Fund's securities in such markets may
not be readily available. SC-REMFs may suspend redemption of Fund shares for any
period during which an emergency exists, as determined by the SEC. Accordingly
if SC-EURO or SC-ASIA believes that appropriate circumstances exist, SC-REMFs
will promptly apply to the SEC for a determination that an emergency is present.
During the period commencing from a Fund's identification of such condition
until the date of the SEC action, the Fund's securities in the affected markets
will be valued at fair value determined in good faith by or under the direction
of SC-REMFs Board of Directors.
Volume and liquidity in most foreign bond markets are less than in the U.S.
and securities of many foreign companies are less liquid and more volatile than
securities of comparable U.S. companies. Fixed commissions on foreign securities
exchanges are generally higher than negotiated commissions on U.S. exchanges,
although each Fund endeavors to achieve the most favorable net results on its
portfolio transactions. There is generally less government supervision and
regulation of business and industry practices, securities exchanges, brokers,
dealers and listed companies than in the U.S., mail service between the U.S. and
foreign countries may be slower or less reliable than within the U.S., thus
increasing the risk of delayed settlements of portfolio transactions or loss of
certificates for portfolio securities. In addition, with respect to certain
emerging markets, there is the possibility of expropriation or confiscatory
taxation, political or social instability, or diplomatic developments which
could affect the Fund's investments in those countries. Moreover, individual
emerging market economies may differ favorably or unfavorably from the U.S.
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments
position. The chart below sets forth the risk ratings of selected emerging
market countries, sovereign debt securities.
Sovereign Risk Ratings for Selected Emerging Market Countries as of 2/l/98
(Source: J.P. Morgan Securities, Inc., Emerging Markets Research)
Country Moody's Standard & Poor's
Chile Baal A-
Turkey Ba3 B+
Mexico Ba2 BB
Czech Republic Baal A
Hungary Baa3 BBB-
Colombia Baa3 BBB-
Venezuela Ba2 B
Morocco NR NR
Argentina Bi BB-
Brazil Bl B+
Poland Baa3 BBB-
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Ivory Coast NR NR
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SC-EURO or SC-ASIA may have limited legal recourse in the event of a
default with respect to certain debt obligations it holds. If the issuer of a
fixed-income security owned by a Fund defaults, the Fund may incur additional
expenses to seek recovery. Debt obligations issued by emerging market country
governments differ from debt obligations of private entities; remedies from
defaults on debt obligations issued by emerging market governments, unlike those
on private debt, must be pursued in the courts of the defaulting party itself.
SC-EURO or SC-ASIA's ability to enforce its rights against private issuers may
be limited. The ability to attach assets to enforce a judgment may be limited.
Legal recourse is therefore somewhat diminished. Bankruptcy, moratorium and
other similar laws applicable to private issuers of debt obligations may be
substantially different from those of other countries. The political context,
expressed as an emerging market governmental issuer's willingness to meet the
terms of the debt obligation, for example, is of considerable importance. In
addition, no assurance can be given that the holders of commercial bank debt may
not contest payments to the holders of debt obligations in the event of default
under commercial bank loan agreements. With four exceptions, (Panama, Cuba,
Costa Rica and Yugoslavia), no sovereign emerging markets borrower has defaulted
on an external bond issue since World War II.
Income from securities held by SC-EURO or SC-ASIA could be reduced by a
withholding tax on the source or other taxes imposed by the emerging market
countries in which the Fund makes its investments. SC-EURO or SC-ASIA's net
asset value may also be affected by changes in the rates or methods of taxation
applicable to the Fund or to entities in which the Fund has invested. GCMG and
GCMG-Europe or GCMG-Asia, as appropriate, will consider the cost of any taxes in
determining whether to acquire any particular investments, but can provide no
assurance that the taxes will not be subject to change.
Many emerging markets have experienced substantial, and in some periods
extremely high rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have adverse
effects on the economies and securities markets of certain emerging market
countries. In an attempt to control inflation, wage and price controls have
been imposed in certain countries. In recent years, certain of these countries
have begun to control inflation through prudent economic policies.
Emerging market governmental issuers are among the largest debtors to
commercial banks, foreign governments, international financial organizations and
other financial institutions. Certain emerging market governmental issuers have
not been able to make payments of interest on or principal of debt obligations
as those payments have come due. Obligations arising from past restructuring
agreements may affect the economic performance and political and social
stability of those issuers.
Governments of many emerging market countries have exercised and continue
to exercise substantial influence over many aspects of the private sector
through the ownership or control of many companies, including some of the
largest in any given country. As a result, government actions in the future
could have a significant effect on economic conditions in emerging markets,
which in turn, may adversely affect companies in the private sector, general
market conditions and prices and yields of certain of the securities in a Fund's
portfolio. Expropriation, confiscatory taxation, nationalization, political,
economic or social instability or other similar developments have occurred
frequently over the history of certain emerging markets and could adversely
affect a Fund's assets should these conditions recur.
The ability of emerging market country governmental issuers to make timely
payments on their obligations is likely to be influenced strongly by the
issuer's balance of payments, including export performance, and its access to
international credits and investments. An emerging market whose exports are
concentrated in a few commodities could be vulnerable to a decline in the
international prices of one or more of those commodities. Increased
protectionism on the part of an emerging market's trading partners could also
adversely affect the country's exports and diminish its trade account surplus,
if any. To the extent that emerging markets receive payment for its exports in
currencies other than dollars or non-emerging market currencies, its ability to
make debt payments denominated in dollars or non-emerging market currencies
could be affected.
To the extent that an emerging market country cannot generate a trade
surplus, it must depend on continuing loans from foreign governments,
multilateral organizations or private commercial banks, aid payments from
foreign governments and on inflows of foreign investment. The access of
emerging markets to these forms of external funding may not be certain, and a
withdrawal of external funding could adversely affect the capacity of emerging
market country
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governmental issuers to make payments on their obligations. In addition, the
cost of servicing emerging market debt obligations can be affected by a change
in international interest rates since the majority of these obligations carry
interest rates that are adjusted periodically based upon international rates.
Another factor bearing on the ability of emerging market countries to repay
debt obligations is the level of international reserves of the country.
Fluctuations in the level of these reserves affect the amount of foreign
exchange readily available for external debt payments and thus could have a
bearing on the capacity of emerging market countries to make payments on these
debt obligations.
INVESTMENT FUNDS
Some emerging market countries have laws and regulations that currently
preclude direct investment in the securities of their companies. However,
indirect investment in the securities of companies listed and traded on the
stock exchanges in these countries is permitted by certain emerging market
countries through investment funds that have been specifically authorized. SC-
EURO and SC-ASIA may invest in these Investment Funds subject to the provisions
of the 1940 Act, as applicable and other applicable laws.
FOREIGN CURRENCY TRANSACTIONS
SC-EURO and SC-ASIA endeavor to buy and sell foreign currencies on as
favorable a basis as practicable. Some price spread on currency exchange (to
cover service charges) may be incurred, particularly when SC-EURO and SC-ASIA
change investments from one country to another or when proceeds of the sale of
shares in U.S. dollars are used for the purchase of securities in foreign
countries. Also, some countries may adopt policies which would prevent SC-EURO
and SC-ASIA from transferring cash out of the country or withhold portions of
interest and dividends at the source. There is the possibility of
cessation of trading on national exchanges, expropriation, nationalization
or confiscatory taxation, withholding and other foreign taxes on income or other
amounts, foreign exchange controls (which may include suspension of the ability
to transfer currency from a given country), default in foreign government
securities, political or social instability, or diplomatic developments
which could affect investments in securities of issuers in foreign nations.
SC-EURO and SC-ASIA may be affected either unfavorably or favorably by
fluctuations in the relative rates of exchange between the currencies of
different nations, by exchange control regulations and by indigenous economic
and political developments. Some countries in which SC-EURO and SC-ASIA may
invest may also have fixed or managed currencies that are not free-floating
against the U.S. dollar. Further, certain currencies have experienced a steady
devaluation relative to the U.S. dollar. Any devaluations in the currencies in
which SC-EURO's and SC-ASIA's portfolio securities are denominated may have a
detrimental impact on SC-EURO and SC-ASIA. SC-REMFs' management endeavors to
avoid unfavorable consequences and to take advantage of favorable developments
in particular nations where from time to time it places SC-EURO's and SC-ASIA's
investments.
The exercise of this flexible policy may include decisions to purchase
securities with substantial risk characteristics and other decisions such as
changing the emphasis on investments from one nation to another and from one
type of security to another. Some of these decisions may later prove profitable
and others may not. No assurance can be given that profits, if any, will exceed
losses.
SC-REMFs' Board of Directors considers at least annually the likelihood of
the imposition by any foreign government of exchange control restrictions which
would affect the liquidity of SC-EURO's and SC-ASIA's assets maintained with
custodians in foreign countries, as well as the degree of risk from political
acts of foreign governments to which such assets may be exposed. The Board also
considers the degree of risk involved through the holding of portfolio
securities in domestic and foreign securities depositories. However, in the
absence of willful misfeasance, bad faith or gross negligence on the part of
GCMG, any losses resulting from the holding of SC-EURO's and SC-ASIA's portfolio
securities in foreign countries and/or with securities depositories will be at
the risk of the shareholders. No assurance can be given that SC-EURO's and SC-
ASIA's appraisal of the risks will always be correct or that such exchange
control restrictions or political acts of foreign governments might not
occur.
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PRIVATIZATIONS
The governments of some foreign countries have been engaged in programs of
selling part or all of their stakes in government owned or controlled
enterprises ("Privatizations"). GCMG, GCMG-Europe and GCMG-Asia believe that
privatizations may offer opportunities for significant capital appreciation and
intends to invest assets of SC-EURO and SC-ASIA in privatizations in appropriate
circumstances. In certain foreign countries, the ability of foreign entities
such as the Funds to participate in privatizations may be limited by local law,
or the terms on which the Funds may be permitted to participate may be less
advantageous that those for local investors. There can be no assurance that
foreign governments will continue to sell companies currently owned or
controlled by them or that privatization programs will be successful.
BRADY BONDS
SC-EURO and SC-ASIA may invest in Brady Bonds, which are securities created
through the exchange of existing commercial bank loans to public and private
entities in certain emerging markets for new bonds in connection with debt
restructurings under a debt restructuring plans introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan
debt restructurings have been implemented to date in Argentina, Brazil,
Bulgaria, Costa Rica, Dominican Republic, Ecuador, Jordan, Mexico, Morocco,
Nigeria, the Philippines, Poland and Uruguay.
Brady Bonds have been issued only recently, and for that reason do not have
a long payment history. Brady Bonds may be collateralized or uncollateralized,
are issued in various currencies (but primarily the U.S. dollar) and are
actively traded in over-the-counter secondary markets.
Dollar-denominated, collateralized Brady Bonds, which may be fixed-rate
bonds or floating-rate bonds, are generally collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Interest payments on many Brady Bonds generally are collateralized by
cash or securities in an amount that, in the case of fixed rate bonds, is equal
to at least one year of rolling interest payments or, in the case of floating
rate bonds, initially is equal to at least one year's rolling interest payments
based on the applicable interest rate at that time and is adjusted at regular
intervals thereafter. Brady Bonds are often viewed as having three or four
valuation components: the collateralized interest payments; the uncollateralized
interest payments; and any uncollateralized repayment of principal at maturity
(these uncollateralized amounts constitute the "residual risk"). In light of
the residual risk of Brady Bonds and the history of defaults of countries
issuing Brady Bonds, with respect to commercial bank loans by public and private
entities, investment in Brady Bonds may be viewed as speculative.
SOVEREIGN DEBT
SC-EURO and SC-ASIA also may invest in sovereign debt. Investment in
sovereign debt can involve a high degree of risk. The governmental entity that
controls the repayment of sovereign debt may not be able or willing to repay the
principal and/or interest when due in accordance with the terms of such debt. A
governmental entity's willingness or ability to repay principal and interest due
in a timely manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt
service burden to the economy as a whole, the governmental entity's policy
towards the International Monetary Fund, and the political constraints to which
a governmental entity may be subject. Governmental entities may also be
dependent on expected disbursements from foreign governments, multilateral
agencies and others abroad to reduce principal and interest arrearages on their
debt. The commitment on the part of these governments, agencies and others to
make such disbursements may be conditioned on a governmental entity's
implementation of economic reforms and/or economic performance and the timely
service of such debtor's obligations. Failure to implement such reforms,
achieve such levels of economic performance or repay principal or interest when
due may result in the cancellation of such parties' commitments to lend funds to
the governmental entity, which may further impair such debtor's ability or
willingness to service its debts in a timely manner. Consequently, governmental
entities may default on their sovereign debt. Holders of sovereign debt
(including SC-EURO and SC-ASIA) may be requested to participate in the
rescheduling of such debt and to extend further loans to governmental entities.
There is no bankruptcy proceeding by which sovereign debt on which governmental
entities have defaulted may be collected in whole or in part.
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DEPOSITORY RECEIPTS
SC-EURO and SC-ASIA may hold securities of foreign issuers in the form of
American Depository Receipts ("ADRs"), American Depository Shares ("ADSs"),
Global Depository Receipts ("GDRs") and European Depository Receipts ("EDRs") or
other securities convertible into securities of eligible issuers. These
securities may not necessarily be denominated in the same currency as the
securities for which they may be exchanged. ADRs and ADSs are typically issued
by an American bank or trust company that evidences ownership of underlying
securities issued by a foreign corporation. EDRs, which are sometimes referred
to as Continental Depository Receipts ("CDRs"), are receipts issued in Europe,
typically by foreign banks and trust companies that evidence ownership of either
foreign or domestic securities. Generally, ADRs and ADSs in registered form are
designed for use in U.S. securities markets and EDRs in bearer form are designed
for use in European securities markets. For purposes of SC-EURO's and SC-ASIA's
respective investment policies, their investments in ADRs, ADSs, GDRs and EDRs
will be deemed to be investments in the equity securities representing
securities of foreign issuers into which they may be converted.
ADR facilities may be established as either "unsponsored" or "sponsored".
While ADRs issued under these two types of facilities are in some respects
similar, there are distinctions between them relating to the rights and
obligations of ADR holders and the practices of market participants. A
depository may establish an unsponsored facility without participation by (or
even necessarily the acquiescence of) the issuer of the deposited securities,
although typically the depository requests a letter of non-objection from such
issuer prior to the establishment of the facility. Holders of unsponsored ADRs
generally bear all the costs of such facilities. The depository usually charges
fees upon the deposit and withdrawal of the deposited securities, the conversion
of dividends into U.S. dollars, the disposition of non-cash distributions, and
the performance of other services. The depository of an unsponsored facility
frequently is under no obligation to distribute shareholder communications
received from the issuer of the deposited securities or to pass through voting
rights to ADR holders with respect to the deposited securities. Sponsored ADR
facilities are created in generally the same manner as unsponsored facilities,
except that the issuer of the deposited securities enters into a deposit
agreement with the depository. The deposit agreement sets out the rights and
responsibilities of the issuer, the depository and the ADR holders. With
sponsored facilities, the issuer of the deposited securities generally will bear
some of the costs relating to the facility (such as dividend payment fees of the
depository), although ADR holders continue to bear certain other costs (such as
deposit and withdrawal fees). Under the terms of most sponsored arrangements,
depositories agree to distribute notices of shareholder meetings and voting
instructions, and to provide shareholder communications and other information to
the ADR holders at the request of the issuer of the deposited securities. SC-
EURO and SC-ASIA may invest in both sponsored and unsponsored ADRs.
SAMURAI AND YANKEE BONDS
SC-ASIA may invest in yen-denominated bonds sold in Japan by non-Japanese
issuers ("Samurai bonds"), and SC-EURO and SC-ASIA both may invest in the U.S.
dollar-denominated bonds sold in the United States by non-U.S. issuers ("Yankee
bonds"). It is the policy of each Fund to invest in Samurai or Yankee bond
issues, as appropriate, only after taking into account considerations of quality
and liquidity, as well as yield.
EURODOLLARS AND YANKEE DOLLARS
SC-EURO and SC-ASIA may also invest in obligations of foreign branches of
U.S. banks (denominated in Eurodollars) and U.S. branches of foreign banks
("Yankee dollars") as well as foreign branches of foreign banks. These
investments involve risks that are different from investments in securities of
U.S. banks, including potential unfavorable political and economic developments,
different tax provisions, seizure of foreign deposits, currency controls,
interest limitations or other governmental restrictions which might affect
payment of principal or interest.
STRATEGIC TRANSACTIONS AND DERIVATIVES
Each Fund, other than SC-US, may, but is not required to, utilize various
investment strategies as described below to hedge various market risks (such as
interest rates, currency exchange rates, and broad or specific equity or fixed-
income market movements), to manage the effective maturity or duration of fixed-
income securities in a Fund's portfolio, or to enhance potential gain. These
strategies may be executed through the use of derivative contracts. Such
strategies are generally accepted as a part of modern portfolio management and
are regularly utilized by many mutual
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funds and other institutional investors. Techniques and instruments may change
over time as new instruments and strategies are developed or regulatory changes
occur.
In the course of pursuing these investment strategies, SC-EURO, SC-ASIA and
SC-ARBITRAGE may purchase and sell exchange-listed and over-the-counter put and
call options on securities, equity and fixed-income indices and other financial
instruments, purchase and sell financial futures contracts and options thereon,
enter into various interest rate transactions such as swaps, caps, floors or
collars, and enter into various currency transactions such as currency forward
contracts, currency futures contracts, currency swaps or options on currencies
or currency futures (collectively, all the above are called "Strategic
Transactions"). Strategic Transactions may be used without limit to attempt to
protect against possible changes in the market value of securities held in or to
be purchased for a Fund's portfolio resulting from securities markets or
currency exchange rate fluctuations, to protect a Fund's unrealized gains in the
value of its portfolio securities in each Fund's portfolio, to facilitate the
sale of such securities for investment purposes, to manage the effective
maturity or duration of fixed-income securities in a Fund's portfolio, or to
establish a position in the derivatives markets as a temporary substitute for
purchasing or selling particular securities. Any or all of these investment
techniques may be used at any time and in any combination and there is no
particular strategy that dictates the use of one technique rather than another,
as use of any Strategic Transaction is a function of numerous variables
including market conditions. The ability of a Fund to utilize these Strategic
Transactions successfully will depend on GCMG 's, GCMG-Europe's or GCMG-Asia's
ability to predict pertinent market movements, which cannot be assured. Each
Fund will comply with applicable regulatory requirements when implementing these
strategies, techniques and instruments. Strategic Transactions involving
financial futures and options thereon will be purchased, sold or entered into
only for bona fide hedging, risk management or portfolio management purposes and
not to create leveraged exposure in a Fund.
Strategic Transactions, including derivative contracts, have risks
associated with them including possible default by the other party to the
transaction, illiquidity and, to the extent GCMG 's, GCMG-Europe's or GCMG-
Asia's view as to certain market movements is incorrect, the risk that the use
of such Strategic Transactions could result in losses greater than if they had
not been used. Use of put and call options may result in losses to a Fund,
force the sale or purchase of portfolio securities at inopportune times or for
prices higher than (in the case of put options) or lower than (in the case of
call options) current market values, limit the amount of appreciation a Fund can
realize on its investments or cause a Fund to hold a security it might otherwise
sell. The use of currency transactions can result in a Fund incurring losses as
a result of a number of factors including the imposition of exchange controls,
suspension of settlements, or the inability to deliver or receive a specified
currency. The use of options and futures transactions entails certain other
risks. In particular, the variable degree of correlation between price movements
of futures contracts and price movements in the related portfolio position of a
Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Fund's position. In addition, futures
and options markets may not be liquid in all circumstances and certain over-the-
counter options may have no markets. As a result, in certain markets, a Fund
might not be able to close out a transaction without incurring substantial
losses, if at all. Although the use of futures and options transactions for
hedging should tend to minimize the risk of loss due to a decline in the value
of the hedged position, at the same time they tend to limit any potential gain
which might result from an increase in value of such position. Finally, the
daily variation margin requirements for futures contracts would create a greater
ongoing potential financial risk than would purchases of options, where the
exposure is limited to the cost of the initial premium. Losses resulting from
the use of Strategic Transactions would reduce net asset value, and possibly
income, and such losses can be greater than if the Strategic Transactions had
not been utilized.
General Characteristics of Options
Put options and call options typically have similar structural
characteristics and operational mechanics regardless of the underlying
instrument on which they are purchased or sold. Thus, the following general
discussion relates to each of the particular types of options discussed in
greater detail below. In addition, many Strategic Transactions involving
options require segregation of Fund assets in special accounts, as described
below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
For instance, a Fund's purchase of a put option on a security might be designed
to protect its holdings in the underlying instrument (or, in some cases, a
similar instrument) against a substantial decline in the market value by giving
the Fund
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the right to sell such instrument at the option exercise price. A call option,
upon payment of a premium, gives the purchaser of the option the right to buy,
and the seller the obligation to sell, the underlying instrument at the exercise
price. A Fund's purchase of a call option on a security, financial future,
index, currency or other instrument might be intended to protect a Fund against
an increase in the price of the underlying instrument that it intends to
purchase in the future by fixing the price at which it may purchase such
instrument. An American style put or call option may be exercised at any time
during the option period while a European style put or call option may be
exercised only upon expiration or during a fixed period prior thereto. Each
Fund is authorized to purchase and sell exchange listed options and over-the-
counter options ("OTC options"). Exchange listed options are issued by a
regulated intermediary such as the Options Clearing Corporation ("OCC"), which
guarantees the performance of the obligations of the parties to such options.
The discussion below uses the OCC as an example, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
A Fund's ability to close out its position as a purchaser or seller of an
OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent
that the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. Each
Fund will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Fund to require the Counterparty
to sell the option back to the Fund at a formula price within seven days. Each
Fund expects generally to enter into OTC options that have cash settlement
provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with a Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, GCMG, GCMG-Europe and/or GCMG-Asia must assess the
creditworthiness of each such counterparty or any guarantor or credit
enhancement of the counterparty's credit to determine the likelihood that the
terms of the OTC option will be satisfied. Each Fund will engage in OTC option
transactions only with U.S. government securities dealers recognized by the
Federal Reserve Bank of New York as "primary dealers", or broker dealers,
domestic or foreign banks or other financial institutions which have received
(or the guarantors of the obligation of which have received) a short-term credit
rating of A-1 from S&P or P-1 from Moody's or an equivalent rating from any
other nationally recognized statistical rating organization ("NRSRO") or, in the
case of OTC currency transactions, are determined to be of equivalent credit
quality by GCMG. The staff of the SEC currently takes the position that OTC
options purchased
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by a Fund, and portfolio securities "covering" the amount of a Fund's obligation
pursuant to an OTC option sold by it (the cost of the sell-back plus the in-the-
money amount, if any) are illiquid, and are subject to the Funds' limitation on
investing no more than 10% of its assets in illiquid securities.
If a Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
SC-EURO, SC-ASIA, and SC-ARBITRAGE may purchase and sell call options on
securities including U.S. Treasury and agency securities, mortgage-backed
securities, corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments that are traded on U.S. and foreign
securities exchanges and in the over-the-counter markets, and on securities
indices, currencies and futures contracts. All calls sold by a Fund must be
"covered" (i.e., the Fund must own the securities or futures contract subject to
the call) or must meet the asset segregation requirements described below as
long as the call is outstanding. Even though a Fund will receive the option
premium to help protect it against loss, a call sold by a Fund exposes the Fund
during the term of the option to possible loss of opportunity to realize
appreciation in the market price of the underlying security or instrument and
may require the Fund to hold a security or instrument which it might otherwise
have sold.
SC-EURO, SC-ASIA, and SC-ARBITRAGE may purchase and sell put options on
securities including U.S. Treasury and agency securities, mortgage-backed
securities, foreign sovereign debt, corporate debt securities, equity securities
(including convertible securities) and Eurodollar instruments (whether or not it
holds the above securities in its portfolio), and on securities indices,
currencies and futures contracts other than futures on individual corporate debt
and individual equity securities. Each Fund will not sell put options if, as a
result, more than 50% of the Fund's assets would be required to be segregated to
cover its potential obligations under such put options other than those with
respect to futures and options thereon. In selling put options, there is a risk
that the Fund may be required to buy the underlying security at a
disadvantageous price above the market price.
General Characteristics of Futures
SC-EURO, SC-ASIA, and SC-ARBITRAGE may enter into financial futures
contracts or purchase or sell put and call options on such futures as a hedge
against anticipated interest rate, currency or equity market changes, for
duration management and for risk management purposes. Futures are generally
bought and sold on the commodities exchanges where they are listed with payment
of initial and variation margin as described below. The sale of a futures
contract creates a firm obligation by a Fund, as seller, to deliver to the buyer
the specific type of financial instrument called for in the contract at a
specific future time for a specified price (or, with respect to index futures
and Eurodollar instruments, the net cash amount). Options on futures contracts
are similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such
position.
SC-EURO, SC-ASIA, and SC-ARBITRAGE Fund's use of financial futures and
options thereon will in all cases be consistent with applicable regulatory
requirements and in particular the rules and regulations of the Commodity
Futures Trading Commission and will be entered into only for bona fide hedging,
risk management (including duration management) or other portfolio management
purposes. Typically, maintaining a futures contract or setting an option
thereon requires a Fund to deposit with a financial intermediary as security for
its obligations an amount of cash or other specified assets (initial margin)
which initially is typically 1% to 10% of the face amount of the contract (but
may be higher in some circumstances). Additional cash or assets (variation
margin) may be required to be deposited thereafter on a daily basis as the mark
to market value of the contract fluctuates. The purchase of an option on
financial futures involves payment of a premium for the option without any
further obligation on the part of the Fund. If a Fund exercises an option on a
futures contract it will be obligated to post initial margin (and potential
subsequent variation margin) for the resulting futures position just as it would
for any position. Futures contracts and options thereon are generally settled
by entering into an offsetting transaction but there can be no assurance that
the position can be offset prior to settlement at an advantageous price, nor
that delivery will occur.
No Fund will enter into a futures contract or related option (except for
closing transactions) if, immediately thereafter, the sum of the amount of its
initial margin and premiums on open futures contracts and options thereon would
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exceed 5% of a Fund's total assets (taken at current value); however, in the
case of an option that is in-the-money at the time of the purchase, the in-the-
money amount may be excluded in calculating the 5% limitation. The segregation
requirements with respect to futures contracts and options thereon are described
below.
Options on Securities Indices and Other Financial Indices
SC-EURO, SC-ASIA, and SC-ARBITRAGE also may purchase and sell call and put
options on securities indices and other financial indices and in so doing can
achieve many of the same objectives it would achieve through the sale or
purchase of options on individual securities or other instruments. Options on
securities indices and other financial indices are similar to options on a
security or other instrument except that, rather than settling by physical
delivery of the underlying instrument, they settle by cash settlement, i.e., an
option on an index gives the holder the right to receive, upon exercise of the
option, an amount of cash if the closing level of the index upon which the
option is based exceeds, in the case of a call, or is less than, in the case of
a put, the exercise price of the option (except if, in the case of an OTC
option, physical delivery is specified). This amount of cash is equal to the
excess of the closing price of the index over the exercise price of the option,
which also may be multiplied by a formula value. The seller of the option is
obligated, in return for the premium received, to make delivery of this amount.
The gain or loss on an option on an index depends on price movements in the
instruments making up the market, market segment, industry or other composite on
which the underlying index is based, rather than price movements in individual
securities, as is the case with respect to options on securities.
Currency Transactions
SC-EURO and SC-ASIA may engage in currency transactions with counterparties
in order to hedge the value of portfolio holdings denominated in particular
currencies against fluctuations in relative value. Currency transactions
include forward currency contracts, exchange listed currency futures, exchange
listed and OTC options on currencies, and currency swaps. A forward currency
contract involves a privately negotiated obligation to purchase or sell (with
delivery generally required) a specific currency at a future date, which may be
any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. A currency swap is an
agreement to exchange cash flows based on the notional difference among two or
more currencies and operates similarly to an interest rate swap, which is
described below. A Fund may enter into currency transactions with
counterparties which have received (or the guarantors of the obligations of
which have received) a credit rating of A-1 or P-1 by S&P or Moody's,
respectively, or that have an equivalent rating from a NRSRO or are determined
to be of equivalent credit quality by GCMG, GCMG-Europe and/or GCMG-Asia.
SC-EURO's and SC-ASIA's dealings in currency transactions such as futures,
options, options on futures and swaps will be limited to hedging involving
either specific transactions or portfolio positions except as described below.
Transaction hedging is entering into a currency transaction with respect to
specific assets or liabilities of the Fund, which will generally arise in
connection with the purchase or sale of its portfolio securities or the receipt
of income therefrom. Position hedging is entering into a currency transaction
with respect to portfolio security positions denominated or generally quoted in
that currency.
No Fund will enter into a transaction to hedge currency exposure to an
extent greater, after netting all transactions intended wholly or partially to
offset other transactions, than the aggregate market value (at the time of
entering into the transaction) of the securities held in its portfolio that are
denominated or generally quoted in or currently convertible into such currency,
other than with respect to forward currency contracts entered into for non-
hedging purposes, or to proxy hedging or cross hedging as described below.
SC-EURO and SC-ASIA may also cross-hedge currencies by entering into
transactions to purchase or sell one or more currencies that are expected to
decline in value relative to other currencies to which the Fund has or in which
the Fund expects to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, SC-EURO and SC-ASIA may also
engage in proxy hedging. Proxy hedging is often used when the currency to which
the Fund's portfolio is exposed is difficult to hedge or to hedge against the
dollar. Proxy hedging entails entering into a commitment or option to sell a
currency. Changes in value are generally considered to be correlated to
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a currency or currencies in which some or all of a Fund's portfolio securities
are or are expected to be denominated, in exchange for U.S. dollars. The amount
of the commitment or option would not exceed the value of the Fund's securities
denominated in correlated currencies. For example, if GCMG-Europe considers
that the Austrian schilling is correlated to the German Deutsche mark (the "D-
mark"), SC-EURO holds securities denominated in schillings and GCMG-Europe
believes that the value of schillings will decline against the U.S. dollar,
GCMG-Europe may enter into a commitment or option to sell D-marks and buy
dollars. Currency hedging involves some of the same risks and considerations as
other transactions with similar instruments. Currency transactions can result
in losses to a Fund if the currency being hedged fluctuates in value to a degree
or in a direction that is not anticipated. Further, there is the risk that the
perceived correlation between various currencies may not be present or may not
be present during the particular time that a Fund is engaging in proxy hedging.
If a Fund enters into a currency hedging transaction, the Fund will comply with
the asset segregation requirements described below.
Risks of Currency Transactions
Currency transactions are subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be negatively affected by
government exchange controls, blockages, and manipulations or exchange
restrictions imposed by governments. These can result in losses to a Fund if it
is unable to deliver or receive currency or funds in settlement of obligations
and could also cause hedges it has entered into to be rendered useless,
resulting in full currency exposure as well as incurring transaction costs.
Buyers and sellers of currency futures are subject to the same risks that apply
to the use of futures generally. Further, settlement of a currency futures
contract for the purchase of most currencies must occur at a bank based in the
issuing nation. Trading options on currency futures is relatively new, and the
ability to establish and close out positions on such options is subject to the
maintenance of a liquid market which may not always be available. Currency
exchange rates may fluctuate based on factors extrinsic to that country's
economy.
Combined Transactions
SC-EURO, SC-ASIA, and SC-ARBITRAGE may enter into multiple transactions,
including multiple options transactions, multiple futures transactions, multiple
currency transactions (including forward currency contracts in the case of SC-
EURO and SC-ASIA) and multiple interest rate transactions and any combination of
futures, options, currency and interest rate transactions ("combined"
transactions), instead of a single Strategic Transaction, as part of a single or
combined strategy when, in the opinion of GCMG, GCMG-Europe or GCMG-Asia, it is
in the best interests of the Fund to do so. A combined transaction will usually
contain elements of risk that are present in each of its component transactions.
Although combined transactions are normally entered into based on the Adviser's
judgment that the combined strategies will reduce risk or otherwise more
effectively achieve the desired portfolio management goal, it is possible that
the combination will instead increase such risks or hinder achievement of the
portfolio management objective.
Swaps, Caps, Floors and Collars
Among the Strategic Transactions into which SC-EURO, SC-ASIA, and SC-
ARBITRAGE may enter are interest rate, currency and index swaps and the purchase
or sale of related caps, floors and collars. Each Fund expects to enter into
these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique or to protect against any
increase in the price of securities the Fund anticipates purchasing at a later
date. SC-EURO, SC-ASIA, and SC-ARBITRAGE intend to use these transactions as
hedges and not as speculative investments and will not sell interest rate caps
or floors where it does not own securities or other instruments providing the
income stream the Fund may be obligated to pay. Interest rate swaps involve the
exchange by a Fund with another party of their respective commitments to pay or
receive interest, e.g., an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal. A currency swap is an
agreement to exchange cash flows on a notional amount of two or more currencies
based on the relative value differential among them and an index swap is an
agreement to swap cash flows on a notional amount based on changes in the values
of the reference indices. The purchase of a cap entitles the purchaser to
receive payments on a notional principal amount from the party selling such cap
to the extent that a specified index exceeds a predetermined interest rate or
amount. The purchase of a floor entitles the purchaser to receive payments on a
notional
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principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar
is a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
A Fund will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, GCMG ,
GCMG-Europe or GCMG-Asia and the Funds believe such obligations do not
constitute senior securities under the 1940 Act and, accordingly, will not treat
them as being subject to its borrowing restrictions. No Fund will enter into
any swap, cap, floor or collar transaction unless, at the time of entering into
such transaction, the unsecured long-term debt of the counterparty, combined
with any credit enhancements, is rated at least A by S&P or Moody's or has an
equivalent rating from an NRSRO or is determined to be of equivalent credit
quality by GCMG. If there is a default by the counterparty, a Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
Eurodollar Instruments
SC-EURO and SC-ASIA may invest in Eurodollar instruments. Eurodollar
instruments are U.S. dollar-denominated futures contracts or options thereon
which are linked to the London Interbank Offered Rate ("LIBOR"), although
foreign currency-denominated instruments are available from time to time.
Eurodollar futures contracts enable purchasers to obtain a fixed rate for the
lending of funds and sellers to obtain a fixed rate for borrowings. A Fund might
use Eurodollar futures contracts and options thereon to hedge against changes in
LIBOR, to which many interest rate swaps and fixed income instruments are
linked.
Risks of Strategic Transactions Outside the U.S.
When conducted outside the U.S., Strategic Transactions may not be
regulated as rigorously as in the U.S., may not involve a clearing mechanism and
related guarantees, and are subject to the risk of governmental actions
affecting trading in, or the prices of, foreign securities, currencies and other
instruments. The value of such positions also could be adversely affected by:
(i) other complex foreign political, legal and economic factors, (ii) lesser
availability than in the U.S. of data on which to make trading decisions, (iii)
delays in the Fund's ability to act upon economic events occurring in foreign
markets during non-business hours in the U.S., (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
U.S., and (v) lower trading volume and liquidity.
Warrants
SC-EURO, SC-ASIA, and SC-ARBITRAGE may invest in warrants. The holder of a
warrant has the right, until the warrant expires, to purchase a given number of
shares of a particular issuer at a specified price. Such investments can
provide a greater potential for profit or loss than an equivalent investment in
the underlying security. Prices of warrants do not necessarily move, however, in
tandem with the prices of the underlying securities and are, therefore,
considered speculative investments. Warrants pay no dividends and confer no
rights other than a purchase option. Thus, if a warrant held by a Fund were not
exercised by the date of its expiration, the Fund would lose the entire purchase
price of the warrant.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS
Many Strategic Transactions, in addition to other requirements, require
that a Fund segregate cash or liquid high grade assets with its custodian to the
extent Fund obligations are not otherwise "covered" through ownership of the
underlying security, financial instrument or currency. In general, either the
full amount of any obligation by a Fund to pay or deliver securities or assets
must be covered at all times by the securities, instruments or currency required
to be delivered, or, subject to any regulatory restrictions, an amount of cash
or liquid assets at least equal to the current amount of the obligation must be
segregated with the custodian. The segregated assets cannot be sold or
transferred unless
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equivalent assets are substituted in their place or it is no longer necessary to
segregate them. For example, a call option written by a Fund will require the
Fund to hold the securities subject to the call (or securities convertible into
the needed securities without additional consideration) or to segregate cash or
liquid assets sufficient to purchase and deliver the securities if the call is
exercised. A call option sold by a Fund on an index will require the Fund to
own portfolio securities which correlate with the index or to segregate cash or
liquid assets equal to the excess of the index value over the exercise price on
a current basis. A put option written by a Fund requires the Fund to segregate
cash or liquid assets equal to the exercise price.
Except when a Fund enters into a forward contract for the purchase or sale
of a security denominated in a particular currency, which requires no
segregation, a currency contract which obligates the Fund to buy or sell
currency will generally require the Fund to hold an amount of that currency or
liquid assets denominated in that currency equal to the Fund's obligations or to
segregate cash or liquid assets equal to the amount of the Fund's obligation.
OTC options entered into by a Fund, including those on securities,
currency, financial instruments or indices and OCC issued and exchange listed
index options, will generally provide for cash settlement. As a result, when
the Fund sells these instruments it will only segregate an amount of cash or
liquid assets equal to its accrued net obligations, as there is no requirement
for payment or delivery of amounts in excess of the net amount. These amounts
will equal 100% of the exercise price in the case of a non cash-settled put, the
same as an OCC guaranteed listed option sold by the Fund, or the in the money
amount plus any sell-back formula amount in the case of a cash-settled put or
call. In addition, when a Fund sells a call option on an index at a time when
the in-the-money amount exceeds the exercise price, the Fund will segregate,
until the option expires or is closed out, cash or cash equivalents equal in
value to such excess. OCC issued and exchange listed options sold by the Fund
other than those above generally settle with physical delivery, or with an
election of either physical delivery or cash settlement and the Fund will
segregate an amount of cash or liquid assets equal to the full value of the
option. OTC options settling with physical delivery, or with an election of
either physical delivery or cash settlement will be treated the same as other
options settling with physical delivery.
In the case of a futures contract or an option thereon, a Fund must deposit
initial margin and possible daily variation margin in addition to segregating
cash or liquid assets sufficient to meet its obligation to purchase or provide
securities or currencies, or to pay the amount owed at the expiration of an
index-based futures contract. Such liquid assets may consist of cash, cash
equivalents, liquid debt or equity securities or other acceptable assets.
With respect to swaps, a Fund will accrue the net amount of the excess, if
any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid assets having a value
equal to the accrued excess. Caps, floors and collars require segregation of
assets with a value equal to the Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. Each Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, a Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating cash or liquid assets if a
Fund held a futures or forward contract, it could purchase a put option on the
same futures or forward contract with a strike price as high or higher than the
price of the contract held. Other Strategic Transactions may also be offset in
combinations. If the offsetting transaction terminates at the time of or after
the primary transaction no segregation is required, but if it terminates prior
to such time, cash or liquid assets equal to any remaining obligation would need
to be segregated.
INVESTMENT COMPANY SECURITIES
Securities of other investment companies may be acquired by the Funds to
the extent permitted under the 1940 Act. Investment companies incur certain
expenses such as management, custodian, and transfer agency fees, and,
therefore, any investment by the Fund in shares of other investment companies
may be subject to such duplicate expenses.
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REPURCHASE AGREEMENTS
SC-ARBITRAGE, SC-EURO and SC-ASIA may enter into repurchase agreements with
brokers, dealers or banks that meet the credit guidelines approved by the Board
of Directors. In a repurchase agreement, a Fund buys a security from a seller
that has agreed to repurchase the same security at a mutually agreed upon date
and price. The resale price normally is in excess of the purchase price,
reflecting an agreed upon interest rate. This interest rate is effective for
the period of time the Fund is invested in the agreement and is not related to
the coupon rate on the underlying security. A repurchase agreement may also be
viewed as a fully collateralized loan of money by a Fund to the seller. The
period of these repurchase agreements will usually be short, from overnight to
one week, and at no time will a Fund invest in repurchase agreements for more
than thirteen months. The securities which are subject to repurchase
agreements, however, may have maturity dates in excess of thirteen months from
the effective date of the repurchase agreement. A Fund will always receive
securities as collateral whose market value is, and during the entire term of
the agreement remains, at least equal to 100% of the dollar amount invested by
the Fund in each agreement plus accrued interest, and a Fund will make payment
for such securities only upon physical delivery or upon evidence of book entry
transfer to the account of the Funds' custodian. If the seller defaults, a Fund
might incur a loss if the value of the collateral securing the repurchase
agreement declines and might incur disposition costs in connection with
liquidating the collateral. In addition, if bankruptcy proceedings are
commenced with respect to the seller of the security, realization upon disposal
of the collateral by a Fund may be delayed or limited.
LEVERAGE
SC-ARBITRAGE may leverage its portfolio in connection with liquidity
arbitrage transactions and SC-EURO and SC-ASIA may use leverage to increase
their holdings of portfolio securities. Leverage creates an opportunity for
increased net income but, at the same time, creates special risk considerations.
For example, leveraging may exaggerate changes in the net asset value of SC-
ARBITRAGE shares and in the yield on the Fund's portfolio. Although the
principal of such borrowings will be fixed, SC-ARBITRAGE's assets may change in
value during the time the borrowing is outstanding. Since any decline in value
of SC-ARBITRAGE's investments will be borne entirely by the Fund's shareholders
(and not by those persons providing the leverage to the Fund), the effect of
leverage in a declining market would be a greater decrease in net asset value
than if the Fund were not so leveraged. Leveraging will create interest
expenses for SC-ARBITRAGE, which can exceed the investment return from the
borrowed funds. To the extent the investment return derived from securities
purchased with borrowed funds exceeds the interest SC-ARBITRAGE will have to
pay, SC-ARBITRAGE's investment return will be greater than if leveraging were
not used. Conversely, if the investment return from the assets retained with
borrowed funds is not sufficient to cover the cost of leveraging, the investment
return of the Fund will be less than if leveraging were not used.
REVERSE REPURCHASE AGREEMENTS
In connection with their leveraging activities, SC-ARBITRAGE, SC-EURO and
SC-ASIA may enter into reverse repurchase agreements, in which a Fund sells
securities and agrees to repurchase them at a mutually agreed date and price. A
reverse repurchase agreement may be viewed as a borrowing by a Fund, secured by
the security which is the subject of the agreement. In addition to the general
risks involved in leveraging, reverse repurchase agreements involve the risk
that, in the event of the bankruptcy or insolvency of a Fund's counterparty, the
Fund would be unable to recover the security which is the subject of the
agreement, that the amount of cash or other property transferred by the
counterparty to the Fund under the agreement prior to such insolvency or
bankruptcy is less than the value of the security subject to the agreement, or
that the Fund may be delayed or prevented, due to such insolvency or bankruptcy,
from using such cash or property or may be required to return it to the
counterparty or its trustee or receiver.
SECURITIES LENDING
SC-ARBITRAGE, SC-EURO and SC-ASIA may lend portfolio securities, provided:
(1) the loan is secured continuously by collateral consisting of U.S. Government
securities, cash, or cash equivalents adjusted daily to have market value at
least equal to the current market value of the securities loaned; (2) a Fund may
at any time call the loan and regain the securities loaned within 5 business
days; (3) the Fund will receive any interest or dividends paid on the loaned
securities; and (4) the aggregate market value of securities of the Fund loaned
will not at any time exceed
24
<PAGE>
one-third (or such other limit as the Board of Directors may establish) of the
total assets of the Fund. In addition, it is anticipated that SC-ARBITRAGE may
share with the borrower some of the income received on the collateral for the
loan or that it will be paid a premium for the loan.
Before the Fund enters into a loan, GCMG considers relevant facts and
circumstances, including the creditworthiness of the borrower. The risks in
lending portfolio securities, as with other extensions of credit, consist of
possible delay in recovery of the securities or possible loss of rights in the
collateral should the borrower fail financially. Although voting rights or
rights to consent with respect to the loaned securities pass to the borrower,
the Fund retains the right to call the loans at any time on reasonable notice,
and it will do so in order that the securities may be voted by the Fund if the
holders of such securities are asked to vote upon or consent to matters
materially affecting the investment. SC-ARBITRAGE will not lend portfolio
securities to borrowers affiliated with the Fund.
WHEN-ISSUED SECURITIES
Each Fund may from time to time purchase securities on a "when-issued" or
"forward delivery" basis for payments and delivery at a later date. The price
of such securities, which may be expressed in yield terms, is fixed at the time
the commitment to purchase is made, but delivery and payment for the when-issued
or forward delivery securities takes place at a later date. During the period
between purchase and settlement, no payment is made by a Fund to the issuer and
no interest accrues to the Fund. To the extent that assets of a Fund are held
in cash pending the settlement of a purchase of securities, the Fund would earn
no income; however, it is the Fund's intention to be fully invested to the
extent practicable and subject to the policies stated above.
While when-issued or forward delivery securities may be sold prior to the
settlement date, a Fund intends to purchase such securities with the purpose of
actually acquiring them unless a sale appears desirable for investment reasons.
At the time a Fund makes the commitment to purchase a security on a when-issued
or forward delivery basis, it will record the transaction and reflect the value
of the security in determining its net asset value. At the time of settlement,
the market value of the when-issued or forward delivery securities may be more
or less than the purchase price. A Fund does not believe that its net asset
value or income will be adversely affected by its purchase of securities on a
when issued or forward delivery basis. A Fund will establish a segregated
account with the Funds' custodian in which it will maintain cash or liquid
assets equal in value of commitments for when-issued or forward delivery
securities. Such segregated securities either will mature or, if necessary, be
sold on or before the settlement date. A Fund will not enter into such
transactions for leverage purposes.
SHORT SALES
SC-US, SC-ARBITRAGE, SC-EURO, and SC-ASIA, to the extent permitted by other
countries, may engage in short sales. SC-US, SC-EURO and SC-ASIA will not
engage in a short sale if immediately after such transaction the aggregate
market value of all securities sold short would exceed 10% of a Fund's net
assets (taken at market value). SC-ARBITRAGE will not engage in short sales if
immediately after such transaction, the aggregate market value of all securities
sold short would exceed 100% of SC-ARBITRAGE's net assets (taken at market
value).
The Funds 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, a Fund incurs an obligation to replace the security borrowed
at whatever its price may be at the time that the Fund 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, the Fund 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, a Fund also may be required to
pay a premium, which would increase the cost of the security sold. Until a Fund
replaces a borrowed security in connection with a short sale, the Fund will: (a)
maintain daily a segregated account containing cash or liquid 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.
25
<PAGE>
Since short selling can result in profits when stock prices generally
decline, the Funds 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, the Funds 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 the Funds maintain short positions in securities rising with the market,
the net asset value of the Funds 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.
INVESTMENT RESTRICTIONS
The Funds are subject to certain investment restrictions which are deemed
fundamental policies of the Fund. Such fundamental policies are those which
cannot be changed without the approval of the holders of a majority of a Fund's
outstanding shares which means the vote of (i) 67% or more of a Fund's shares
present at a meeting, if the holders of more than 50% of the outstanding shares
of a Fund are present or represented by proxy, or (ii) more than 50% of the
Fund's outstanding shares, whichever is less.
SC-US may not:
1. Make loans except through the purchase of debt obligations in
accordance with its investment objective and policies;
2. Borrow money, except that SC-US 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-US'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-US'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-US'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-US's net assets
(taken at market value); or
5. Purchase or sell real estate, except that SC-US 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.
6. Pledge, hypothecate, mortgage or otherwise encumber its assets, except
to secure permitted borrowings;
7. Participate on a joint or joint and several basis in any securities
trading account;
8. Invest in companies for the purpose of exercising control;
9. Purchase a security if, as a result (unless the security is acquired
pursuant to a plan of reorganization or an offer of exchange), SC-US would own
any securities of an open-end investment company or more than 3% of the value of
SC-US'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
10. (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-US's total assets; or (d) act as
an underwriter of securities, except that SC-US may acquire restricted
securities under circumstances in which, if such securities were sold, SC-US
might be deemed to be an underwriter for purposes of the Securities Act.
26
<PAGE>
SC-ARBITRAGE may not:
1. Borrow money, except that SC-ARBITRAGE may borrow money from banks for
temporary or emergency purposes, including the meeting of redemption requests
which might require the untimely disposition of securities, or in connection
with otherwise permissible leverage activities, but not in an aggregate amount
exceeding 33 1/3% (one-third) of the value of SC-ARBITRAGE's total assets
(including the amount borrowed) less liabilities (not including the amount
borrowed) at the time the borrowing is made. If at any time SC-ARBITRAGE's
borrowings exceed this limitation due to a decline in SC-ARBITRAGE's assets,
such borrowings will be reduced within three days to the extent necessary to
comply with this limitation;
2. Engage in short sales if immediately following such transaction the
aggregate market value of all securities sold short would exceed 100% of SC-
ARBITRAGE's net assets (taken at market value);
3. With respect to 50% of its total assets, invest in the securities of
any one issuer (other than the U.S. Government and its agencies and
instrumentalities), if immediately after and as a result of such investment more
than 5% of the total assets of SC-ARBITRAGE would be invested in such issuer
(the remaining 50% of its total assets may be invested without restriction
except to the extent other investment restrictions may be applicable);
4. Pledge, hypothecate, mortgage, or otherwise encumber its assets,
except to secure permitted borrowings including reverse repurchase agreements,
short sales, financial options and other hedging activities;
5. Make loans in excess of 33 1/3% of SC-ARBITRAGE's total assets;
6. Purchase or sell real estate, except that SC-ARBITRAGE 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;
7. Participate on a joint or joint and several basis in any securities
trading account;
8. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Fund from making any otherwise
permissible borrowings, mortgages or pledges, or entering into permissible
reverse repurchase agreements, and options and futures transactions;
9. Make short sales or purchases on margin, although it may obtain short-
term credit necessary for the clearance of purchases and sales of its portfolio
securities and except as required in connection with permissible options,
futures, short selling and leverage activities as described elsewhere in the
Prospectus and this Statement;
10. Purchase a security if, as a result (unless the security is acquired
pursuant to a plan of reorganization or an offer of exchange), SC-ARBITRAGE
would own any securities of an open-end investment company or more than 3% of
the value of SC-ARBITRAGE'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
11. (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-ARBITRAGE's total assets; or (d)
act as an underwriter of securities, except that SC-ARBITRAGE may acquire
restricted securities under circumstances in which, if such securities were
sold, SC-ARBITRAGE might beB deemed to be an underwriter for purposes of the
Securities Act.
In addition, SC-ARBITRAGE has adopted non-fundamental investment
limitations as stated below. Such limitations may be changed without
shareholder approval.
1. Make loans except (i) by purchasing bonds, debentures or similar
obligations (including repurchase agreements, subject to the limitations as
described in the respective Prospectuses) that are publicly distributed, and
(ii) by lending its portfolio securities to banks, brokers, dealers and other
financial institutions so long as such loans are not inconsistent with the 1940
Act or the Rules and Regulations or interpretations of the Commission
thereunder; or
27
<PAGE>
2. Invest more than 10% of its net assets in illiquid securities.
SC-EURO and SC-ASIA may not:
1. Invest directly in real estate or interests in real estate
(although it may purchase securities secured by real estate or interests
therein, or issued by companies or investment trusts which invest in real estate
or interests therein); invest in interests (other than publicly issued
debentures or equity stock interests) in oil, gas or other mineral exploration
or development programs; or purchase or sell commodity contracts (except
futures contracts as described in the Prospectus);
2. Act as an underwriter or issue senior securities;
3. Issue senior securities or borrow money, except that a Fund may borrow
money from banks in an amount not exceeding 33- 1/3% of the value of a Fund's
total assets (not including the amount borrowed), except for temporary or
emergency purposes and to secure borrowings. If at any time a Fund's borrowings
exceed this limitation due to a decline in a Fund's assets, such borrowings will
be reduced within three days to the extent necessary to comply with this
limitation. Arrangements with respect to margin for futures contracts are not
deemed to be a pledge of assets;
4. Pledge, hypothecate, mortgage or otherwise encumber its assets, except
to secure permitted borrowings;
5. Participate on a joint or a joint and several basis in any trading
account in securities;
6. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (except this shall not prevent a
Fund from purchasing or selling options or futures contracts or from investing
in securities or other instruments backed by physical commodities);
7. Lend any security or make any other loan if, as a result, more than
33 1/3% of its total assets would be lent to other parties, but this limitation
does not apply to purchases of debt securities or repurchase agreements;
8. Underwrite securities issued by others, except to the extent that a
Fund may be considered an underwriter within the meaning of the Securities Act
in the disposition of restricted securities;
9. Write or acquire options or interests in oil, gas or other mineral
exploration or development programs; or
10. Invest for the purpose of exercising control over management of any
company.
In addition, the Funds have adopted non-fundamental investment limitations
as stated below. Such limitations may be changed without shareholder approval.
SC-EURO and SC-ASIA may not:
1. Purchase securities on margin except that the Funds may enter into
option transactions and futures contracts as described in their Prospectuses,
and as specified above in fundamental investment limitation number (1) above;
2. Purchase or retain securities of an issuer if the officers and
Directors of SC-REMFs, GCMG or the Fund's sub-adviser owning more than 1/2 of
1% of such securities, together own more than 5% of such securities;
3. Invest more than 10% of its net assets in illiquid securities,
including securities of foreign companies that are not listed on a foreign
securities exchange or a recognized U.S. exchange;
4. Invest its assets in securities of any investment company, except as
permitted by the 1940 Act or the rules, regulations, interpretations or orders
of the SEC and its staff thereunder; or
5. Make loans except (i) by purchasing bonds, debentures or similar
obligations (including repurchase agreements, subject to the limitations as
described in the respective Prospectuses) that are publicly distributed, and
(ii)
28
<PAGE>
by lending its portfolio securities to banks, brokers, dealers and other
financial institutions so long as such loans are not inconsistent with the 1940
Act or the Rules and Regulations or interpretations of the SEC thereunder;
If a percentage restriction is met at the time of investment, a later
increase or decrease in the percentage due to a change in value of portfolio
securities or the amount of assets will not be considered a violation of any of
the foregoing restrictions. The investment restrictions do not preclude a Fund
from purchasing the securities of any issuer pursuant to the exercise of
subscription rights distributed to the Fund by the issuer, unless such purchase
would result in a violation of a fundamental investment restriction listed
above.
MANAGEMENT OF SC-REMFS
The directors and officers of SC-REMFs and their principal occupations
during the past five years are set forth below. Directors deemed to be
"interested persons" of SC-REMFs for purposes of the 1940 Act are indicated by
an asterisk.
<TABLE>
<CAPTION>
PRINCIPAL
OCCUPATIONS DURING
NAME AND ADDRESS OFFICE AGE THE PAST FIVE YEARS
<S> <C> <C> <C>
Anthony R. Manno Jr.* Chairman of 46 Managing Director and President of GCMG since January 1995,
11 South LaSalle Street the where he is responsible for overseeing all investment and capital
Chicago, Illinois 60603 Board of allocation matters for GCMG's public market securities
Directors, activities and is also responsible for company and industry
Managing analysis, market strategy and trading and reporting. Mr. Manno
Director and was a member of the Investment Committee of Security Capital
President from March 1994 to June 1996. Prior to joining Security
Capital Group Incorporated, Mr. Manno was a Managing
Director of LaSalle Partners Limited from March 1980 to March
1994. Mr. Manno received his M.B.A. from the University of
Chicago Graduate School of Business, an M.A. and a B.A.
from Northwestern University and is a Certified Public
Accountant.
Robert H. Abrams Director 65 Director of the Program in Real Estate at Cornell University.
106 West Sibley Hall Founder of Colliers ABR, Inc. (formerly Abrams Benisch Riker
Ithaca, New York 14851 Inc.), a property management firm. Mr. Abrams was Principal
of Colliers ABR, Inc. from 1978 to 1992 and since 1992, has
served as a Consultant. From 1959 to 1978 Mr. Abrams was
Executive Vice President and Director of Cross and Brown
Company. Mr. Abrams also serves as Trustee Emeritus and
Presidential Counselor of his alma mater, Cornell University.
Mr. Abrams received his M.B.A. from Harvard University and
his B.A. from Cornell University.
</TABLE>
29
<PAGE>
<TABLE>
<S> <C> <C> <C>
Stephen F. Kasbeer Director 73 Retired; Senior Vice President for Administration and Treasurer
8 Bonanza Trail of Loyola University, Chicago from 1981 to July 1994, where he
Santa Fe, New Mexico 87505 was responsible for administration, investment, real estate and
treasurer functions. At Loyola University, he also 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. Currently, Mr.
Kasbeer serves as a Director of Endowment Realty, Inc. and
Endowment Realty II and as a Member of the Investment
Committee of the University of San Diego. Mr. Kasbeer also
serves as Trustee, Treasurer and Chairman of the Investment and
Finance Committees of Santa Fe Preparatory School and as
Trustee and Chairman of the Santa Fe Preparatory School
Combined Permanent Endowment Fund Trust. Mr. Kasbeer
received his J.D. from John Marshall Law School and his M.A.
and B.S. from Northwestern University.
George F. Keane Director 68 Chairman of the Board of Trigen Energy Corporation since
7408 Eaton Court 1994. As founding chief executive of The Common Fund in
University Park, Florida 34201 1971 and Endowment Realty Investors in 1988, Mr. Keane for
many years headed an investment management service for
colleges, universities and independent schools that managed $15
billion for 1,200 educational institutions when he became
President Emeritus of the Common Fund in 1993. He has served
as a member of the Investment Advisory Committee of the $95
billion New York State Common Retirement Fund since 1982.
He has been a Director of the Northern Trust of Connecticut
since 1991, a Trustee of the Nicholas Applegate Investment
Trust since 1993, and a Director of the Bramwell Funds since
1994. He is also a Director of Universal Stainless & Alloy
Products, Global Pharmaceutical Corporation, United Water
Resources and United Properties Group, and the Universal Bond
Fund, and is an advisor to Associated Energy Managers. Mr.
Keane also serves as a Trustee of his alma mater, Fairfield
University where he received his B.A., and as a Director and
Chairman of the Investment Committee of the United Negro
College Fund. Mr. Keane also holds honorary degrees from
Loyola University, Chicago, Illinois and Lawrence University,
Appleton, Wisconsin.
</TABLE>
30
<PAGE>
<TABLE>
<S> <C> <C> <C>
John H. Gardner, Jr.* Director and 44 Managing Director of GCMG since July, 1997. Prior thereto,
11 South LaSalle Street Managing Director of the REIT Manager for Security Capital Pacific Trust
Chicago, Illinois 60603 Director ("PTR") from February 1995 to June 1997 and Senior Vice
President of Security Capital Group Incorporated Atlantic
Incorporated ("ATLANTIC"), PTR and the PTR REIT Manager
from September 1994 to June 1997 where he had overall
responsibility for asset management and multifamily
dispositions. Prior to joining Security Capital Group
Incorporated, Mr. Gardner was with Copley Real Estate
Advisors as a Managing Director and Principal responsible for
portfolio management from January 1991 to September 1994
and as a Vice President and Principal of asset management from
December 1984 to December 1990. From July 1977 to
November 1984, Mr. Gardner was a Real Estate Manager with
the John Hancock Companies. Mr. Gardner received his M.S.
from Bentley College and his B.S. from Stonehill College.
Kenneth D. Statz Managing 39 Managing Director of GCMG since November 1997 where he
11 South LaSalle Street Director is responsible for the development and implementation of
Chicago, Illinois 60603 portfolio investment strategy. Prior thereto, Senior Vice
President of GCMG from July 1996 to October 1997 and Vice
President from May 1995 to June 1996. Prior to joining
Security Capital Group Incorporated, Mr. Statz was a Vice
President and Senior REIT Analyst in the investment research
department of Goldman, Sachs & Co., from February 1993 to
January 1995, concentrating on research and underwriting for
the REIT industry. Prior thereto, Mr. Statz was a real estate
stock portfolio manager and a managing director of Chancellor
Capital Management from August 1982 to February 1992. Mr.
Statz received his M.B.A. and B.B.A. from the University of
Wisconsin, Madison.
Kevin W. Bedell Senior Vice 42 Senior Vice President of GCMG since November 1997 and Vice
11 South LaSalle Street President President since July 1996, where he is responsible for directing
Chicago, Illinois 60603 the activities of the industry/company securities research group
and providing in-depth proprietary research on publicly traded
companies with office and industrial sectors. Prior to joining
GCMG, Mr. Bedell spent nine years with LaSalle Partners
Limited where he was Equity Vice President and Portfolio
Manager responsible for the strategic, operational and financial
management of a private REIT with commercial real estate
investments of $800 million. Mr. Bedell received his M.B.A.
from the University of Chicago and his B.A. from Kenyon
College.
Jeffrey C. Nellessen Vice 36 Vice President and Controller of GCMG since March 1997.
11 South LaSalle Street President, Prior thereto, from June 1988 to March 1997, he was Controller,
Chicago, Illinois 60603 Treasurer and Manager of Client Administration and Compliance Officer at
Assistant Strong Capital Management, Inc. Mr. Nellessen is a Certified
Secretary Public Accountant, Certified Management Accountant and a
Certified Financial Planner. He received his B.B.A. from the
University of Wisconsin, Madison.
</TABLE>
31
<PAGE>
<TABLE>
<S> <C> <C> <C>
David T. Novick Vice President 33 Vice President of Security Capital Group Incorporated since
11 South LaSalle Street and Secretary June 1998. Prior thereto, from September 1989 to June 1998,
Chicago, Illinois 60603 he was an attorney, and most recently a Partner, with the law
firm of Katten Muchin and Zavis. Mr. Novick received his
B.S.B.A. from Boston University and his J.D. from the
University of Illinois.
</TABLE>
COMPENSATION OF DIRECTORS AND CERTAIN OFFICERS
The Directors of SC-REMFs who are interested persons of SC-REMFs, under the
1940 Act, (which includes persons who are employees of GCMG or officers or
employees of any of its affiliates) receive no remuneration from SC-REMFs. Each
of the other Directors is paid an annual retainer of $28,000, 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
and is reimbursed for the expenses of attendance at such meetings. The following
table sets forth information regarding compensation earned by the Directors by
SC-REMFs for the fiscal year ending December 31, 1997.
COMPENSATION TABLE
FISCAL YEAR ENDING DECEMBER 31, 1997
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT
BENEFITS ESTIMATED
AGGREGATE ACCRUED AS ANNUAL TOTAL
COMPENSATION PART OF BENEFITS COMPENSATION
FROM SC-US UPON FROM SC-US
NAME OF PERSON, POSITION SC-US EXPENSES RETIREMENT PAID TO DIRECTORS
------------------------ ----- -------- ---------- -----------------
<S> <C> <C> <C> <C>
George F. Keane
Director............................ $ 3,333 N/A N/A $ 3,333
Stephen F. Kasbeer
Director............................ $13,500 N/A N/A $13,500
Robert H. Abrams
Director............................ 0 N/A N/A 0
**Anthony R. Manno Jr.
Chairman, Managing Director and
President........................... 0 N/A N/A 0
**John H. Gardner, Jr. /(1)/
Director............................ 0 N/A N/A 0
</TABLE>
___________
** "Interested person," as defined in the 1940 Act, of SC-REMFs.
(1) Elected to serve by the Board of Directors on March 11, 1998.
GCMG
Security Capital Global Capital Management Group Incorporated, a Maryland
corporation is a registered investment adviser, which commenced operations in
January 1995 under Delaware law and specializes in the management of real estate
securities portfolios. GCMG is an indirect wholly-owned subsidiary of Security
Capital Group Incorporated.
The following GCMG analyst assists in the management of the SC-US's and SC-
ARBITRAGE's investment portfolios.
32
<PAGE>
Albert D. Adriani Member, SC-US and SC-ARBITRAGE Portfolio
Management Committees; Vice President of GCMG
since April 1996, where he is responsible for
providing portfolio management analysis. From
January 1995 to April 1996, he was Vice
President, Security Capital (UK) Management
Limited and Security Capital U.S. Realty
Incorporated; from March 1994 to January 1995,
he was with Security Capital Markets Group
Incorporated. Prior thereto, he was an
investment analyst with HAL Investments BV from
July 1992 to January 1994. 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. Mr. Adriani is a
Chartered Financial Analyst.
GCMG-ASIA
Security Capital Global Capital Management Group (Asia) Incorporated, with
offices located at Level 9, AIG Building, 1-1-3, Marunouchi, Chiyoda-ku, Tokyo
100, Japan, provides portfolio management services to SC-ASIA pursuant to an
investment sub-advisory agreement with GCMG. GCMG-Asia, a wholly-owned
subsidiary of GCMG was formed on May 11, 1998 under Delaware law and is
registered as an investment adviser with the SEC. The principal officers of
GCMG-Asia, who serve on the SC-ASIA Portfolio Management Committee, and their
principal occupations are set forth below.
Michelle H. Lord Vice President of GCMG-Asia since May 1998.
Previously Vice President of GCMG from November
1997 to April 1998, where she conducted of real
estate securities analysis in the Asia/Pacific
region for the firm. Prior to that, Ms. Lord was
with Security Capital Industrial Trust from
September 1996 to October 1997, where she was
responsible for research on special investment
opportunities and prior thereto, working on
special assignments under Security Capital Group
Incorporated Managing Directors from August 1995
to August 1996. Prior to joining Security
Capital Group Incorporated, Ms. Lord was with
Societe Generale Securities, (North Pacific) in
Tokyo from June 1994 to August 1994, where she
was a member of the Japanese Government Bond
futures and options brokerage desk and Merrill
Lynch, Pierce, Fenner & Smith from September
1992 to September 1993. Previously, Ms. Lord was
a currency trader with Asahi Bank in Tokyo. Ms.
Lord received her M.B.A. from the University of
Chicago Graduate School of Business and her B.A.
from Smith College.
Michael C. Montelibano Vice President of GCMG-Asia since May 1998. Vice
President of GCMG from November 1997 to April
1998, where he conducted real estate securities
analysis in the Asia/Pacific region for the
firm. Prior to that, Mr. Montelibano was working
on special assignments under Security Capital
Group Incorporated Managing Directors from June
1995 to December 1996. Prior to joining Security
Capital Group Incorporated, Mr. Montelibano was
a consultant for Ayala Land, Incorporated in the
Philippines from July 1994 to August 1994, where
he conducted financial analyses of office and
residential development projects, and for Bank
of America in Malaysia from June 1994 to July
1994, where he conducted market research studies
on retail banking. Previously, Mr. Montelibano
was a senior consultant with Andersen Consulting
from January 1990 to August 1993, 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. in Mechanical Engineering from the
University of California, San Diego.
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GCMG-EUROPE
Security Capital Global Capital Management Group (Europe) S.A., with
offices located at Boulevord de la Woluwe 34, Brussels, Belgium, provides
portfolio management services to SC-EURO pursuant to an investment sub-advisory
agreement with GCMG. GCMG-Europe was formed on May 14, 1998 under Belgian law
and is registered as an investment adviser with the SEC. GCMG-Europe is a
wholly-owned subsidiary of Security Capital (EU) Management Group S.A., a
Belgian corporation, which is wholly-owned by Security Capital Group
Incorporated. The principal officer of GCMG-Europe, who serves on the SC-EURO
Portfolio Management Committee, and his principal occupations are set forth
below.
Gerios J.M. Rovers Vice President of GCMG-Europe since May 1998,
where he is responsible for trading and
portfolio management strategy. From April 1997
to May 1998, Mr. Rovers was Vice President of SC
(EU) Management from April 1997 to May 1998,
where he was responsible for providing research
and management support services in the area of
European investments. Mr. Rovers was a Vice
President and Senior Portfolio Manager with GIM
Capital Management, Inc. (the Netherlands) from
January 1993 to March 1997. From July 1988 to
April 1997, Mr. Rovers was associated with GIM
Algemeen Vermogensbeheer and served as an
Associate Director and a Portfolio Manager of
global real estate securities on behalf of
domestic and foreign clients. Mr. Rovers
graduated from the University of Tilburg in The
Netherlands.
SC (EU) MANAGEMENT
Security Capital (EU) Management Group S.A. provides GCMG-Europe with
proprietary economic and real estate research and on-going analysis of
opportunities for investment in the equity securities of European issuers. SC
(EU) Management is a corporation organized on March 24, 1997, under Belgian law
and is a wholly-owned subsidiary of Security Capital (EU) Management Group S.A.,
a Belgian corporation, which is wholly-owned by Security Capital Group
Incorporated. The principal officer of SC (EU) Management and his principal
occupation are listed below.
W. Joseph Houlihan Managing Director of SC (EU) Management since
Boulevord de La Woluwe 34 April 1997 where he is responsible for
Brussels, Belgium providing research and management support
services in the area of European investments.
Mr. Houlihan has over twenty years of business
experience in Europe. Prior to joining Security
Capital, Mr. Houlihan served as Executive Vice
President and Portfolio Manager of GIM Capital
Management, Inc. (The Netherlands) from August
1987 to March 1997 and as Vice President of GIM
Algemeen Vermogensbeheer, a prominent Dutch
investment management company from April 1985 to
March 1997, where he specialized in real estate
investments and was responsible for developing
GIM's real estate securities investment process
and client base. Prior to joining GIM, Mr.
Houlihan served as Director of Melchior Holland
Holding BV (The Netherlands) from February 1983
to March 1985, as Vice President at John G. Wood
and Associates, a diversified real estate
development and investment company located in
Florida and with Chase Manhattan Bank's trust
department. Mr. Houlihan is an Advisory Director
of Security Capital US Realty and a member of
the Investment Property Forum. Mr. Houlihan
received his M.B.A. from the University of
Leuven, Belgium and his B.S. from New York
University.
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INVESTMENT ADVISORY AGREEMENTS
Certain other clients of GCMG may have investment objectives and policies
similar to those of the Funds. GCMG may, from time to time, make recommendations
which result in the purchase or sale of a particular security by its other
clients simultaneously with a Fund. In addition, SC-ARBITRAGE's investment
strategy may cause SC-ARBITRAGE to take positions in certain real estate
securities that differ from the positions taken by other clients of GCMG. 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 GCMG to allocate advisory
recommendations and the placing of orders in a manner which is deemed equitable
by GCMG to the accounts involved, including the Funds. When two or more of the
clients of GCMG (including the Funds) are purchasing or selling the same
security on a given day through the same broker-dealer, such transactions may be
averaged as to price.
Pursuant to an investment advisory agreement with SC-REMFs with respect to
each Fund (the "Advisory Agreement"), GCMG furnishes a continuous investment
program and makes the day-to-day investment decisions for the Funds, executes
the purchase and sale orders for the portfolio transactions of the Funds and
generally manages the Funds' investments in accordance with their stated
policies, subject to the general supervision of SC-REMFs' Board of
Directors.
Under the Advisory Agreement for SC-US, which is dated December 16, 1997,
each class of SC-US shares pays GCMG, monthly, an annual management fee in an
amount equal to .60% of the average daily net asset value of that class of SC-
US's shares. Under a separate agreement, GCMG has agreed to waive advisory fees
and/or reimburse expenses to maintain the total operating expenses, other than
brokerage fees and commissions, interest, taxes and other extraordinary expenses
of SC-US's Class I shares at 1.00% of the value of SC-US's Class I average daily
net assets and SC-US's Class R shares at 1.15% of the value of SC-US's Class R
average daily net assets, for the year ending December 31, 1998. For the period
April 23, 1997 (the effective date of SC-US's initial registration statement)
through December 31, 1997, GCMG earned $607,727, net of waivers of $30,443 for
providing investment management services to SC-US.
Under the Advisory Agreement for SC-ARBITRAGE, dated June 30, 1998, SC-
ARBITRAGE's Class I shares pay GCMG, monthly, an annual management fee in an
amount equal to 2.00% of the average daily net asset value of SC-ARBITRAGE's
Class I shares. After the first three full months of SC-ARBITRAGE's operations,
SC-ARBITRAGE's Class I shares will pay GCMG a monthly "fulcrum fee" or base fee
("Base Fee") of 2.00% of SC-ARBITRAGE's Class I average daily net assets that
will increase or decrease based on the investment performance of SC-ARBITRAGE
for the prior twelve-month period relative to the investment record of the
Wilshire Real Estate Index ("WAREIT") (the "Index") for the same period (the
"Index Return"). The performance adjustment will be measured from the date of
inception until the Fund has completed twelve full months of operations.
The management fee will be paid at an annual rate which varies between
0.50% and 3.50% of SC-ARBITRAGE's Class I average net assets. The management fee
is structured so that it will be 2.00% of SC-ARBITRAGE's Class I average net
assets if SC-ARBITRAGE's investment performance for the preceding twelve months
(net of all fees and expenses, including the management fee) equals the Index
Return. The management fee increases or decreases from the Base Fee of 2.00% by
10 percent of the difference between SC-ARBITRAGE's investment performance
during the preceding twelve months and the Index Return during that period, up
to the maximum fee of 3.50% or down to the minimum fee of 0.50%.
GCMG believes that the WAREIT Index is the real estate securities market
index that is most representative of SC-ARBITRAGE's portfolio. The WAREIT is a
market capitalization-weighted index comprised of publicly-traded real estate
investment trusts ("REITs"). No health care REITs are included. The Index is
rebalanced monthly and reconstituted quarterly. The Index was developed with a
base value of 100 as of December 29, 1989.
Under the Advisory Agreement for SC-EURO, dated June 30, 1998, each class
of SC-EURO's shares pays GCMG, monthly, an annual management fee in an amount
equal to .85% of the average daily net asset value of that class of SC-EURO's
shares. Under a separate agreement, SC-US Management has agreed to waive
advisory fees and/or reimburse expenses to maintain the total operating
expenses, other than brokerage fees and commissions, interest, taxes and other
extraordinary expenses of SC-EURO's Class I shares at 1.45% of the value of SC-
EURO's Class I average
35
<PAGE>
daily net assets and SC-EURO's Class R shares at 1.60% of the value of SC-EURO's
Class R average daily net assets, for the year ending December 31, 1998.
Under the Advisory Agreement for SC-ASIA, dated June 30, 1998, each class
of SC-ASIA's shares pays GCMG, monthly, an annual management fee in an amount
equal to .95% of the average daily net asset value of that class of SC-ASIA's
shares. Under a separate agreement, GCMG has agreed to waive advisory fees
and/or reimburse expenses to maintain the total operating expenses, other than
brokerage fees and commissions, interest, taxes and other extraordinary expenses
of SC-ASIA's Class I shares at 1.55% of the value of SC-ASIA's Class I average
daily net assets and SC-ASIA's Class R shares at 1.70% of the value of SC-ASIA's
Class R average daily net assets, for the year ending December 31, 1998.
GCMG provides the Funds with such personnel as SC-REMFs 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 GCMG is not required to furnish under the
Advisory Agreement. The personnel rendering these services, who may act as
officers of SC-REMFs, may be employees of GCMG or its affiliates. The cost to
SC-REMFs of these services must be agreed to by SC-REMFs and is intended to be
no higher than the actual cost to GCMG or its affiliates of providing the
services. SC-REMFs does not pay for services performed by officers of GCMG or
its affiliates. SC-REMFs may from time to time hire its own employees or
contract to have services performed by third parties, and the management of SC-
US intends to do so whenever it appears advantageous to SC-REMFs.
In addition to the payments to GCMG under the Advisory Agreement described
above, each class of a Fund's shares pays for certain other costs of its
operations including: (a) administration, custodian and transfer agency fees,
(b) fees of Directors who are not affiliated with GCMG , (c) legal and auditing
expenses, (d) costs of printing and postage fees relating to preparing each
Fund's prospectus and shareholder reports, (e) costs of maintaining SC-REMFs'
existence, (f) interest charges, taxes, brokerage fees and commissions, (g)
costs of stationery and supplies, (h) expenses and fees related to registration
and filing with federal and state regulatory authorities, (i) distribution fees,
and (j) upon the approval of SC-REMFs' Board of Directors, costs of personnel of
GCMG or its affiliates rendering clerical, accounting and other office services.
Each class of a Fund's shares pays for the portion of SC-REMFs' expenses
attributable to its operations. Income, realized gains and losses, unrealized
appreciation and depreciation and certain expenses not allocated to a particular
class are allocated to each class based on the net assets of that class in
relation to the net assets of SC-REMFs.
The Advisory Agreement for SC-US was approved on November 25, 1997 by SC-
REMFs' Directors, including a majority of the Directors who are not interested
persons (as defined in the 1940 Act) of SC-REMFs or GCMG ("non-interested
Directors"), and by SC-US's shareholders on December 12, 1997. It continues in
effect until December 16, 1999.
The Advisory Agreements for SC-ARBITRAGE and SC-EURO were approved on June
24, 1998 by SC-REMFs' Directors including a majority of the non-interested
Directors. The Advisory Agreements for SC-ARBITRAGE and SC-EURO continue in
effect until June 30, 2000. Each Advisory Agreement will continue in effect,
provided that its continuance is specifically approved prior to its initial
expiration 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 for each Fund is terminable without penalty by the
Fund on sixty days' written notice when authorized either by majority vote of
its outstanding voting securities or by a vote of a majority of the Directors,
or by GCMG 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 GCMG , or
of reckless disregard of its obligations thereunder, GCMG shall not be liable
for any action or failure to act in accordance with its duties thereunder.
36
<PAGE>
INVESTMENT SUB-ADVISORY AGREEMENTS WITH GCMG-EUROPE AND GCMG-ASIA
GCMG has retained GCMG-Europe and GCMG-Asia as investment sub-advisers
(each, a "Sub-Adviser"), to manage the day-to-day investment of SC-EURO's and
SC-ASIA's portfolios in accordance with each Fund's investment policies, subject
to the general supervision of GCMG and the overall authority of SC-REMFs' Board
of Directors.
GCMG has entered into an investment sub-advisory agreement with GCMG-Europe
and CGMG-Asia ("Sub-Advisory Agreement") pursuant to which GCMG-Europe and GCMG-
Asia provide various portfolio management and investment advisory services to
SC-EURO and SC-ASIA, respectively. In connection with the management of SC-
EURO's and SC-ASIA's portfolios, GCMG-Europe and GCMG-Asia may select brokers
and dealers to execute purchase and sale orders for portfolio transactions.
Under the Sub-Advisory Agreement for SC-EURO, GCMG pays GCMG-Europe monthly, an
annual management fee in an amount equal to .08% of SC-EURO's average daily net
asset value. Under the Sub-Advisory Agreement for SC-ASIA, GCMB pays GCMG-Asia
monthly, an annual management fee based on its costs (including payroll, rent
and other directly allocable costs and expenses) plus a mark-up of 10%. These
fees are the sole obligations of GCMG and not SC-EURO or SC-ASIA.
Each Sub-Advisory Agreement was approved on June 24, 1998 by SC-REMFs'
Directors, including a majority of the Directors who are not interested persons
(as defined in the 1940 Act) of SC-REMFs, GCMG or a Sub-Adviser. Each Sub-
Advisory Agreement continues in effect until June 30, 2000 and will continue in
effect from year to year thereafter, provided that its continuance is
specifically approved prior to the initial expiration of the Sub-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 Sub-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.
Each Sub-Advisory Agreement is terminable without penalty by GCMG or the
Sub-Adviser on sixty days' written notice, and will automatically terminate in
the event of its assignment. The Sub-Advisory Agreement provides that in the
absence of willful misfeasance, bad faith or gross negligence on the part of
GCMG or the Sub-Adviser, or of reckless disregard of its obligations thereunder,
the Sub-Adviser shall not be liable for any action or failure to act in
accordance with its duties thereunder.
Certain other clients of a Sub-Adviser may have investment objectives and
policies similar to those of SC-EURO and SC-ASIA. A Sub-Adviser may, from time
to time, make recommendations which result in the purchase or sale of a
particular security by its other clients simultaneously with a Fund. 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 each Sub-Adviser to allocate
advisory recommendations and the placing of orders in a manner which is deemed
equitable by the Sub-Adviser to the accounts involved, including a Fund. When
two or more of the clients of a Sub-Adviser 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 (EU) Management provides GCMG-Europe with proprietary real estate
research and ongoing analysis of opportunities for investment in the equity
securities of European issuers. This research is analyzed by GCMG-Europe in
identifying attractive growth in country markets and real estate sectors and is
instrumental to GCMG-Europe's ability to make investment decisions for SC-EURO's
portfolio. GCMG-Europe pays the fee for the provision of such research and
analytical services. Payment of this fee is an obligation of GCMG-Europe and not
a direct obligation of SC-EURO.
ADMINISTRATOR AND SUB-ADMINISTRATOR
SC-REMFs has also entered into a fund administration and accounting
agreement with GCMG (the "Administration Agreement") under which GCMG performs
certain administrative functions for the Funds, including (i) providing office
space, telephone, office equipment and supplies; (ii) paying compensation of SC-
REMFs' officers for services rendered as such; (iii) authorizing expenditures
and approving bills for payment on behalf of SC-REMFs; (iv) supervising
preparation of the periodic updating of the Funds' prospectuses and statements
of additional information; (v) supervising preparation of semi-annual reports to
the Funds' shareholders, notices of dividends, capital gains distributions and
tax credits, and attending to routine correspondence and other communications
with individual
37
<PAGE>
shareholders; (vi) supervising the daily pricing of each Fund's investment
portfolio and the publication of the net asset value of the Funds' shares,
earnings reports and other financial data; (vii) monitoring relationships with
organizations providing services to SC-REMFs, including the Funds' custodian
(the "Custodian"), transfer agent (the "Transfer Agent") and printers; (viii)
providing trading desk facilities for the Funds; (ix) maintaining books and
records for the Funds (other than those maintained by the Custodian and Transfer
Agent) and preparing and filing of tax reports other than the Funds' 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-REMFs' Board of Directors, GCMG has caused SC-REMFs to retain
State Street Bank and Trust Company as sub-administrator (the "Sub-
Administrator") under a sub-administration 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 overseeing the determination and publication of the net asset value of
each class of the Funds' shares, maintaining certain of the Funds' books and
records that are not maintained by GCMG as investment adviser, or by the
Custodian or Transfer Agent, preparing financial information for the Funds'
income tax returns, proxy statements, semi-annual and annual shareholders
reports, and SEC filings, and responding to certain shareholder inquiries. Under
the terms of the Sub-Administration Agreement, SC-REMFs pays the Sub-
Administrator a monthly administration fee at the annual rate of .08% of the
first $750 million, .06% of the next $250 million and .04% of SC-REMFs' average
daily net assets over $1 billion, subject to an average annual minimum fee of
$75,000 per investment portfolio. For the period April 23, 1997 (the effective
date of SC-REMFs' initial registration statement) through December 31, 1997,
Firstar Trust Company, the prior sub-administrator, earned $47,791 for providing
sub-administration services to SC-US. The Sub-Administrator also serves as the
Funds' Custodian and Transfer Agent. See "Funds' Custodian and Transfer Agent."
Under the Administration Agreement, GCMG remains responsible for monitoring
and overseeing the performance by the Sub-Administrator of its obligations to
the Funds under the Sub-Administration Agreement, subject to the overall
authority of SC-REMFs' Board of Directors. For its services under the
Administration Agreement, GCMG receives a monthly fee from each Fund at the
annual rate of .02% of the value of each Fund's average daily net assets. For
the period April 23, 1997 (the effective date of SC-REMFs' initial registration
statement) through December 31, 1997, GCMG earned $15,930 for providing services
to SC-US under the Administration Agreement.
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
GCMG, or of reckless disregard of its obligations thereunder, GCMG shall not be
liable for any action or failure to act in accordance with its duties
thereunder.
DISTRIBUTION AND SERVICING PLANS
As described in the Prospectuses, SC-REMFs' Board of Directors has
adopted a Distribution and Servicing Plan with respect to each class of shares
("Plans"), pursuant to Rule 12b-1 under the 1940 Act. See "Distribution and
Servicing Plan" in each Prospectus. The Plans are implemented by a Distribution
and Servicing Agreement that SC-REMFs has entered into with the Distributor. The
Plans and the Agreement have been approved by a vote of the Board of Directors,
including a majority of the Directors who are not interested persons of SC-REMFs
and have no direct or indirect financial interest in the operation of the Plan
("Disinterested Directors"), cast in person at a
38
<PAGE>
meeting called for the purposes of voting on the Plan. The annual compensation
payable by SC-US to Security Capital Markets Group Incorporated ("Distributor")
under each Plan is an amount equal to .25% (on an annual basis) of the value of
the average daily net assets of the class of shares to which the Plan relates.
Under the Plans, the Funds are authorized to pay a distribution fee for
distribution activities in connection with the sale of shares and a service fee
for services provided which are necessary for the maintenance of shareholder
accounts. To the extent such fee exceeds the expenses of these distribution and
shareholder servicing activities, the Distributor may retain such excess as
compensation for its services and may realize a profit from these arrangements.
The Plans are compensation plans which provide for the payment of a
specified distribution and service fee without regard to the distribution and
service expenses actually incurred by the Distributor. If the Plans were to be
terminated by the Board of Directors and no successor Plans were to be adopted,
the Directors would cease to make distribution and service payments to the
Distributor and the Distributor would be unable to recover the amount of any of
its unreimbursed distribution expenditures. However, the Distributor does not
intend to incur distribution and service expenses at a rate that materially
exceeds the rate of compensation received under the Plans. The Distributor also
may pay third parties in respect of these services such amount as it may
determine. The Funds understand that these third parties may also charge fees to
their clients who are beneficial owners of Fund shares in connection with their
client accounts. These fees would be in addition to any amounts which may be
received by them from the Distributor under the Plans.
The types of expenses for which the Distributor and third parties may be
compensated under the Plans include compensation paid to and expenses incurred
by their officers, employees and sales representatives, allocable overhead,
telephone and travel expenses, the printing of prospectuses and reports for
other than existing shareholders, preparation and distribution of sales
literature, advertising of any type and all other expenses incurred in
connection with activities primarily intended to result in the sale of shares.
Additional types of expenses covered by the Plans include responding to
shareholder inquiries and providing shareholders with information on their
investments. For the period December 16, 1997 through December 31, 1997, the
Distributor earned $12,396 for providing services under the Class I Plan and $67
for providing services under the Class R Plan.
Under the Plans, the Distributor will provide to the Board of Directors for
its review, and the Board will review at least quarterly, a written report of
the services provided and amounts expended by the Distributor under the Plans
and the purposes for which such services were performed and expenditures were
made.
The Plans for SC-US's Class I shares and Class R shares were approved by
the Board of Directors, including the Disinterested Directors, on November 25,
1997 and by SC-US's Class I and Class R shareholders on December 12, 1997. The
Plans for SC-EURO's and SC-ASIA's Class I and Class R shares and SC-ARBITRAGE's
Class I shares were approved by the Board of Directors, including the
Disinterested Directors, on June 24, 1998. The Plans remain in effect from year
to year, provided such continuance is approved annually by a vote of the Board
of Directors, including a majority of the Disinterested Directors. The Plans may
not be amended to increase materially the amount to be spent for the services
described therein as to a Fund's Class I or Class R shares without approval of a
majority of the outstanding class of shares. All material amendments of the Plan
must also be approved by the Board of Directors in the manner described above.
The Plans may be terminated at any time without payment of any penalty by a vote
of a majority of the Disinterested Directors or by a vote of a majority of the
outstanding class of shares. So long as a Plan is in effect, the selection and
nomination of Disinterested Directors shall be committed to the discretion of
the Disinterested Directors. The Board of Directors has determined that in their
judgment there is a reasonable likelihood that the Plans will benefit SC-US, SC-
ARBITRAGE, SC-EURO, SC-ASIA and their shareholders.
OTHER DISTRIBUTION AND/OR SERVICING ARRANGEMENTS
The Distributor may enter into agreements ("Agreements") with institutional
shareholders of record, broker-dealers, financial institutions, depository
institutions, and other financial intermediaries as well as various brokerage
firms or other industry-recognized service providers of fund supermarkets or
similar programs ("Institutions"), to provide certain distribution, shareholder
servicing, administrative and/or accounting services for their clients
("Customers") who are beneficial owners of Fund shares. Such Agreements with
respect to all classes of shares may be governed by a Plan.
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<PAGE>
An Institution with which the Distributor has entered into an Agreement may
charge a Customer one or more of the following types of fees, as agreed upon by
the Institution and the Customer, with respect to the cash management or other
services provided by the institution: (i) account fees (a fixed amount per month
or per year); (ii) transaction fees (a fixed amount per transaction processed);
(iii) compensation balance requirements (a minimum dollar amount a Customer must
maintain in order to obtain the services offered); or (iv) account maintenance
fees (a periodic charge based upon the percentage of assets in the account or of
the dividend paid on those assets). Services provided by an Institution to
Customers are in addition to, and not duplicative of, the services provided
under the Plan and SC-US's administration arrangements. A Customer of an
Institution should read the relevant Prospectus and this Statement of Additional
Information in conjunction with the Agreement and other literature describing
the services and related fees that would be provided by the Institution to its
Customer prior to any purchase of Fund shares. Prospectuses are available from
the Distributor upon request.
DETERMINATION OF NET ASSET VALUE
Net asset value per share for each class of shares is determined by SC-US,
SC-ARBITRAGE, SC-EURO, and SC-ASIA 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-US, SC-ARBITRAGE, SC-EURO and/or SC-ASIA to
affect materially a 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 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.
Net asset value per share for each class is determined by adding the market
value of all securities in a Fund's portfolio and other assets represented by a
class, subtracting liabilities incurred or accrued that are allocable to the
class, and dividing by the total number of shares of that class then
outstanding. Because of the differences in operating expenses incurred by each
class, the per share net asset value of each class will differ.
For purposes of determining a Fund's net asset value per share for each
class, 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-REMFs' Board
of Directors and taken at their value used in determining a Fund'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-REMFs' Board of Directors believes that
economic conditions exist which would make such a practice detrimental to the
best interests of the Funds. 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-REMFs will not distribute in kind
portfolio securities that are not readily marketable.
Class I shares of SC-ARBITRAGE redeemed within twelve months from the date
of purchase are subject to a redemption fee equal to 2.0% of the redemption
proceeds. The redemption fee directly affects the amount a shareholder receives
upon an exchange or redemption of Class I shares. It is intended to encourage
long-term investment in SC-ARBITRAGE and to avoid transaction and other expenses
caused by early redemptions. The redemption fee is not a deferred sales charge,
is not a commission paid to GCMG, the Distributor or any of their affiliates and
does not benefit GCMG or the Distributor in any way. SC-ARBITRAGE reserves the
right to waive or modify this fee or the terms
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thereof at any time. In determining whether a redemption fee is payable, it will
be assumed that redemption is made first of Class I shares purchased through the
reinvestment of dividends or capital gains distributions paid by SC-ARBITRAGE
("Reinvestment Shares"); second of Class I shares held for one year or more; and
third of Class I shares that are held for less than one year.
A redemption fee will not be applied to (a) a redemption of any Class I
shares of SC-ARBITRAGE outstanding for one year or more; (b) a redemption of
Reinvestment Shares; (c) a redemption of shares by SC-ARBITRAGE upon the
exercise of its right to liquidate accounts falling below the minimum account
size by reason of shareholder redemptions; or (d) a redemption of shares due to
the death of all registered shareholders of an account with more than one
registered shareholder (i.e. joint tenant account).
SC-US, SC-ARBITRAGE, SC-EURO and SC-ASIA have elected to be governed by
Rule 18f-1 under the 1940 Act, which obligates the Funds 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 a Fund at the beginning of such
period. Although redemptions in excess of this limitation would normally be paid
in cash, SC-US, SC-ARBITRAGE, SC-EURO and SC-ASIA reserve 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 detrimental to the
existing shareholders of a Fund as determined by the board of directors. In such
circumstances, the securities distributed would be valued as set forth in the
Prospectus. Should a Fund 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 the Funds and negotiation of its brokerage commission rates are
made by GCMG . Transactions on U.S. stock exchanges involve the payment by the
Funds 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 the Funds usually includes an undisclosed dealer commission or
mark-up. In certain instances, the Funds may make purchases of underwritten
issues at prices which include underwriting fees.
In selecting a broker to execute each particular transaction, GCMG 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 a Fund on a continuing basis.
Accordingly, the cost of the brokerage commissions to a Fund 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,
GCMG shall not be deemed to have acted unlawfully or to have breached any duty
solely by reason of it having caused a Fund to pay a broker that provides
research services to GCMG 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 GCMG 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 GCMG 's ongoing responsibilities with respect to a
Fund. Research and investment information is provided by these and other brokers
at no cost to GCMG and is available for the benefit of other accounts advised by
GCMG and its affiliates, and not all of the information will be used in
connection with the Funds. While this information may be useful in varying
degrees and may tend to reduce GCMG 's expenses, it is not possible to estimate
its value and in the opinion of GCMG it does not reduce GCMG 's expenses in a
determinable amount. The extent to which GCMG makes use of statistical, research
and other services furnished by brokers is considered by GCMG in the allocation
of brokerage business but there is no formula by which such business is
allocated. GCMG does so in accordance with its judgment of the best interests of
the Funds and their shareholders. GCMG may also take into account payments made
by brokers effecting transactions for the Funds to other persons on behalf of
the Funds for services provided to them for which it would be obligated to pay
(such as custodial and professional fees). In addition, consistent with the
Conduct Rules of the National Association of Securities Dealers, Inc., and
subject to seeking best price and execution, GCMG may consider sales of shares
of the Funds as a factor in the selection of brokers and dealers to enter into
portfolio transactions with the Funds.
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TAXATION
TAXATION OF THE FUNDS
The Funds each intend 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, a Fund 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) diversify its holdings so that, at the end of each
quarter of the taxable year, (i) at least 50% of the market value of the Fund'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 the Fund'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 (c) 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, each Fund 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. The Funds each
intend to distribute to their shareholders, at least annually, substantially all
of their 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, each Fund 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 a Fund in October,
November or December with a record date in such a month and paid by the Fund
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, each Fund intends to make its
distributions in accordance with the calendar year distribution requirement.
DISTRIBUTIONS
Dividends paid out of a Fund's investment company taxable income will be
taxable to a U.S. shareholder as ordinary income. Because a portion of a Fund's
income may consist of dividends paid by U.S. corporations, a portion of the
dividends paid by the Fund may be eligible for the corporate dividends-received
deduction. Dividends paid by a Fund attributable to dividends received by the
Fund from REITs, 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 a
Fund'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 the Fund 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 Taxpayer Relief Act of 1997 (the "Taxpayer Relief Act") made certain
changes to the Code with respect to taxation of long-term capital gains earned
by taxpayers other than a corporation. In general the maximum tax rate for
individual taxpayers on net long-term capital gains (i.e., the excess of net
long-term capital gain over net short-term capital loss) is lowered to 20% for
most assets held for more than 18 months at the time of disposition. Capital
gains on the disposition of assets held for more than one year and up to 18
months at the time of disposition will be taxed as
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"mid-term gain" at a maximum rate of 28%. A lower rate of 18% will apply after
December 31, 2000 for assets held for more than 5 years. However, the 18% rate
applies only to assets acquired after December 31, 2000 unless the taxpayer
elects to treat an asset held prior to such date as sold for fair market value
on January 1, 2001. In the case of individuals whose ordinary income is taxed at
a 15% rate, the 20% rate for assets held for more than 18 months is reduced to
10% and the 18% rate for assets held for more than 5 years is reduced to 8%.
According to a notice recently issued by the Internal Revenue Service, regulated
investment companies such as the Funds are entitled to (but are not required to)
designate which portion of a capital gain distribution will be taxed at a
maximum rate of 20% and which portion will be taxed at a maximum rate of 28%. If
a Fund does not make such a designation, the capital gain will be taxed at a
maximum rate of 28%. Recently enacted legislation has reduced the holding period
required to qualify for the 20% maximum capital gains rate from 18 months to 12
months.
The portion of a Fund distribution classified as a return of capital
generally is not taxable to the Fund 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, the Funds may not be
able to determine how much of their annual distributions for a particular year
are taxable to shareholders until after the traditional January 31 deadline for
issuing Form 1099-DIV ("Form 1099"). The Funds 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 the Funds to send the
Form 1099 in February.
SALE OF SHARES
Upon the sale or other disposition of shares of the Funds, a shareholder
may realize a capital gain or loss which will be long-term, mid-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 a Fund's 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
The Funds may invest in 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 a Fund'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 companies, such as the Funds,
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. GCMG
does not intend on behalf of SC-US, SC-ARBITRAGE and SC-ASIA to invest in REITs,
a substantial portion of the assets of which consists of residual interests in
REMICs.
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BACKUP WITHHOLDING
Except as described below, the Funds are required to withhold U.S.
federal income tax at the rate of 31% of all taxable distributions payable to
shareholders who fail to provide the Fund 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
a Fund is "effectively connected" with a U.S. trade or business carried on by
the shareholder.
Income Not Effectively Connected.
If the income from a Fund 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. withholding 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 a
Fund which are designated as undistributed capital gains will not be subject to
U.S. withholding 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% withholding 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. withholding tax. In the case of a foreign shareholder who is a nonresident
alien individual, a Fund 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 a Fund 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 time during the shorter of the period during which the
foreign shareholder held shares of a Fund and the five year period ending on the
date of the disposition of those shares, the Fund was a "U.S. real property
holding corporation" (and, if the shares of the Fund are regularly traded on an
established securities market, the foreign shareholder held more than 5% of the
shares of the Fund), 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. 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.
The Funds do not expect to be treated as U.S. real property corporations under
these rules, but no assurances can be given.
Income Effectively Connected.
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If the income from a Fund 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 the Fund which are designated as undistributed capital gains and any
gains realized upon the sale or exchange of shares of the Fund 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 the Funds.
SPECIAL TAX CONSIDERATIONS
The following discussion relates to the particular Federal income tax
consequences of certain investment strategies of the Funds. A Fund that
utilizes options, short sale and futures investment strategies will be somewhat
limited by the requirements for its continued qualification as a regulated
investment company under the Code, in particular the Distribution Requirement,
the Short-Short Gain Test and the Asset Diversification Requirement.
Straddles
The options transactions that a Fund enters into may result in
"straddles" for Federal income tax purposes. The straddle rules of the Code may
affect the character of gains and losses realized by the Fund. In addition,
losses realized by the Fund on positions that are part of a straddle may be
deferred under the straddle rules, rather than being taken into account in
calculating the investment company taxable income and net capital gain of the
Fund for the taxable year in which such losses are realized. Losses realized
prior to October 31 of any year may be similarly deferred under the straddle
rules in determining the "required distribution" that the Fund must make in
order to avoid Federal excise tax. Furthermore, in determining its investment
company taxable income and ordinary income, the Fund may be required to
capitalize, rather than deduct currently, any interest expense on indebtedness
incurred or continued to purchase or carry any positions that are part of a
straddle. The tax consequences to Funds holding straddle positions may be
further affected by various elections provided under the Code and Treasury
regulations, but at the present time the Funds are uncertain as to which (if
any) of these elections they will make.
Because only a few regulations implementing the straddle rules have
been promulgated by the U.S. Treasury, the tax consequences to a Fund of
engaging in options transactions are not entirely clear. Nevertheless, it is
evident that application of the straddle rules may substantially increase or
decrease the amount which must be distributed to shareholders in satisfaction of
the Distribution Requirement (or to avoid Federal excise tax liability) for any
taxable year in comparison to a fund that did not engage in options
transactions. For purposes of the Short-Short Gain Test, current Treasury
regulations provide that (except to the extent that the short sale rules
discussed below would otherwise apply) the straddle rules will have no effect on
the holding period of any straddle position. However, the U.S. Treasury has
announced that it is continuing to study the application of the straddle rules
for this purpose.
Options and Section 1256 Contracts
The writer of a covered put or call option generally does not
recognize income upon receipt of the option premium. If the option expires
unexercised or is closed on an exchange, the writer generally recognizes short-
term capital gain. If the option is exercised, the premium is included in the
consideration received by the writer in determining the capital gain or loss
recognized in the resultant sale. However, options transactions that the Funds
enter into, as well as futures transactions and transactions in forward foreign
currency contracts that are traded in the interbank market entered into by SC-
EURO or SC-ASIA, will be subject to special tax treatment as "Section 1256
contracts." Section 1256 contracts are treated as if they are sold for their
fair market value on the last business day of the taxable year (i.e., marked-to-
market), regardless of whether a taxpayer's obligations (or rights) under such
contracts have terminated (by delivery, exercise, entering into a closing
transaction or otherwise) as of such
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date. Any gain or loss recognized as a consequence of the year-end marking-to-
market of Section 1256 contracts is combined (after application of the straddle
rules that are described above) with any other gain or loss that was previously
recognized upon the termination of Section 1256 contracts during that taxable
year. The net amount of such gain or loss for the entire taxable year is
treated as 60% long-term capital gain or loss and 40% short-term capital gain or
loss, except in the case of marked-to-market forward foreign currency contracts
for which such gain or loss may be treated as ordinary income or loss. See
"Foreign Currency Transactions" below. Such short-term capital gain (and, in
the case of marked-to-market forward foreign currency contracts, such ordinary
income) would be included in determining the investment company taxable income
of a Fund for purposes of the Distribution Requirement, even if it were wholly
attributable to the year-end marking-to-market of Section 1256 contracts that
the Fund continued to hold. Investors should also note that Section 1256
contracts will be treated as having been sold on October 31 in calculating the
"required distribution" that a Fund must make to avoid Federal excise tax
liability.
A Fund may elect not to have the year-end marking-to-market rule apply
to Section 1256 contracts that are part of a "mixed straddle" with other
investments of the Fund that are not Section 1256 contracts (the "Mixed Straddle
Election"). It is unclear under present law how certain gain that a Fund may
derive from trading in Section 1256 contracts for which a Mixed Straddle
Election is not made will be treated for purposes of the "Short-Short Gain
Test."
Foreign Currency Transactions
In general, gains from "foreign currencies" and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stock, securities or foreign currencies will be
qualifying income for purposes of determining whether SC-EURO and SC-ASIA
qualify as regulated investment companies. It is currently unclear, however,
who will be treated as the issuer of a foreign currency instrument or how
foreign currency options, futures or forward foreign currency contracts will be
valued for purposes of the Asset Diversification Requirement.
Under Code Section 988 special rules are provided for certain
transactions in a foreign currency other than the taxpayer's functional currency
(i.e., unless certain special rules apply, currencies other than the U.S.
dollar). In general, foreign currency gains or losses from certain forward
contracts, from futures contracts that are not "regulated futures contracts",
and from unlisted options will be treated as ordinary income or loss. In
certain circumstances where the transaction is not undertaken as part of a
straddle, SC-EURO or SC-ASIA may elect capital gain or loss treatment for such
transactions. Alternatively, a Fund may elect ordinary income or loss treatment
for transactions in futures contracts and options on foreign currency that would
otherwise produce capital gain or loss. In general, gains or losses from a
foreign currency transaction subject to Code Section 988 will increase or
decrease the amount of the Fund's investment company taxable income available to
be distributed to shareholders as ordinary income, rather than increasing or
decreasing the amount of the Fund's net capital gain. Additionally, if losses
from a foreign currency transaction subject to Code Section 988 exceed other
investment company taxable income during a taxable year, the Fund will not be
able to make any ordinary dividend distributions, and any distributions made
before the losses were realized but in the same taxable year would be accreted
as a return of capital to shareholders, thereby reducing each shareholder's
basis in his shares.
Conversion Transactions
All or a portion of the capital gain from the disposition or other
termination of any position that was part of a "conversion transaction" will
generally be accreted as ordinary income. A conversion transaction is a
transaction, generally consisting of two or more positions taken with regard to
the same or similar property, where substantially all of the taxpayer's return
is attributable to the time value of the taxpayer's net investment in the
transaction. A transaction, however, is not a conversion transaction unless it
also satisfies one of the following four criteria: (1) the transaction consists
of the acquisition of property by the taxpayer and a substantially
contemporaneous agreement to sell the same or substantially identical property
in the future; (2) the transaction is a straddle, within the meaning of Section
1092 (treating stock as personal property); (3) the transaction is one that was
marketed or sold to the
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taxpayer on the basis that it would have the economic characteristics of a loan
but the interest-like return would be taxed as capital gain; or (4) the
transaction is described as a conversion transaction in regulations to be
promulgated on a prospective basis by the Secretary of the Treasury.
Subject to regulations to be promulgated by the Secretary of the
Treasury, the amount of gain accreted as ordinary income generally shall not
exceed the amount of interest that would have accrued on a Fund's net investment
in the conversion transaction for the relevant period at a yield equal to 120%
of the applicable federal rate as defined in Section 1274(d). Thus, to the
extent that a Fund recognizes income from conversion transactions, shareholders
will be taxed on all or a part of this income at ordinary rates.
Constructive Sales of Certain Appreciated Financial Positions
The recently enacted Taxpayer Relief Act added new Code Section 1259
which provides for constructive sale treatment for appreciated financial
positions. Code Section 1259 provides that if there is a "constructive sale" of
an "appreciated financial position," the taxpayer recognizes gain as if such
position were sold, assigned or otherwise terminated at its fair market value on
the date of such constructive sale. The holding period of such position is
deemed to begin on the date of such constructive sale and any gain or loss
subsequently realized with respect to such position is to be adjusted for any
gain taken into account by reason of the earlier constructive sale of such
position.
An appreciated financial position for this purpose means an interest,
including a futures or forward contract, short sale, or option with respect to
any stock, debt instrument or partnership interest if there would be gain if
such position were sold, assigned or otherwise terminated at its fair market
value. A forward contract for this purpose means a contract to deliver a
substantially fixed amount of property for a substantially fixed price. An
offsetting notional principal contract for this purpose means, with respect to
any property, an agreement which includes a requirement to pay or provide credit
for all or substantially all of the investment yield (including appreciation) on
such property for a specified period and a right to be reimbursed for or receive
credit for all or substantially all of any decline in the value of such
property. An appreciated financial position, however, does not include any
position which is marked to market for federal income tax purposes, nor does it
include any position with respect to debt if (1) the debt unconditionally
entitles the holder to receive a specified principal amount, (2) the interest
payments (or other similar amounts) with respect to such debt are based on a
fixed rate or certain variable rates or consist of a specified portion of
interest payments on a pool of mortgages, which portion does not vary during the
period the debt is outstanding, and (3) the debt is not convertible directly or
indirectly into stock of the issuer or of any related person.
A taxpayer is treated as having made a constructive sale of an
appreciated financial position if the taxpayer or a related person (1) enters
into a short sale of the same or substantially identical property, (2) enters
into an offsetting notional principal contract with respect to the same or
substantially identical property, (3) enters into a futures or forward contract
to deliver the same or substantially identical property, (4) in the case of an
appreciated financial position that is a short sale, a notional principal
contract or a futures or forward contract with respect to any property, acquires
the same or substantially identical property, or (5) to the extent provided in
regulations, enters into one or more transactions or acquires one or more
positions that have substantially the same effect as a transaction described in
the preceding clauses (1) through (4). A person is related to another person
with respect to a transaction if the relationship is described in Code Section
267(b) or Code Section 707(b) and such transaction is entered into with a view
toward avoiding the purposes of Code Section 1259. A constructive sale,
however, does not include any contract for sale of any stock, debt instrument or
partnership interest for which there is not a market on an established
securities market or otherwise if the contract settles within one year after the
date the contract was entered into. Also, a transaction which would otherwise
be treated as a constructive sale in a taxable year is disregarded if (1) the
transaction is closed before the end of the 30th day after the close of such
taxable year, (2) the taxpayer holds the appreciated financial position
throughout the 60 day period beginning on the date such transaction is closed
and (3) at no time during such 60 day period is the taxpayer's risk of loss with
respect to such position reduced by reason of the taxpayer (x) having an option
to sell, having a contractual obligation to sell, or having made and not closed
a short sale of, substantially identical property, (y) being the grantor of an
option to buy substantially identical property or (z) under regulations, having
diminished his risk of loss by holding one or
47
<PAGE>
more positions with respect to substantially similar or related property. This
exception to constructive sale treatment applies even if the transaction which
is closed is reestablished by a substantially similar transaction (which would
also be a constructive sale of the position) entered into during the 60 day
period beginning on the date the first transaction is closed, provided that the
conditions in clauses (1) through (3) in the preceding sentence are satisfied
with respect to the substantially similar transaction.
In general, Code Section 1259 applies to any constructive sale after
June 8, 1997. However, if before June 9, 1997 the taxpayer entered into any
transaction which is a constructive sale of any appreciated financial position
and before the close of the 30 day period beginning on the date of the enactment
of the Taxpayer Relief Act or before such later date as may be specified by the
Secretary of the Treasury, such transaction and position are clearly identified
in the taxpayer's records as offsetting, such transaction and position shall not
be taken into account in determining whether any other constructive sale after
June 8, 1997 has occurred. This transition rule ceases to apply as of the date
such transaction is closed or the taxpayer ceases to hold such position.
It is possible that a Fund may enter into some transactions which
could constitute constructive sales of certain appreciated investments held by
the Fund, which could have the affect of accelerating gain recognition with
respect to such investments.
Passive Foreign Investment Companies
SC-EURO and SC-ASIA may invest in stocks of foreign companies that are
classified under the Code as passive foreign investment companies ("PFICs"). In
general, a foreign company is classified as a PFIC if at least one-half of its
assets constitute investment-type assets or 75% or more of its gross income is
investment-type income. Under the PFIC rules, an "excess distribution" received
with respect to PFIC stock is treated as having been realized ratably over the
period during which SC-EURO or SC-ASIA held the PFIC stock. SC-EURO or SC-ASIA
itself will be subject to tax on the portion, if any, of the excess distribution
that is allocated to SC-EURO's or SC-ASIA's holding period in prior taxable
years (and an interest factor will be added to the tax, as if the tax had
actually been payable in such prior taxable years) even though SC-EURO and SC-
ASIA distribute the corresponding income to shareholders. Excess distributions
include any gain from the sale of PFIC stock as well as certain distributions
from a PFIC. All excess distributions are taxable as ordinary income.
SC-EURO and SC-ASIA may be able to elect alternative tax treatment
with respect to PFIC stock. Under one such election, SC-EURO and SC-ASIA
generally would be required to include in their gross income their share of the
earnings of a PFIC on a current basis, regardless of whether any distributions
are received from the PFIC. If this election is made, the special rules,
discussed above, relating to the taxation of excess distributions, would not
apply. In addition, other elections may become available that would affect the
tax treatment of PFIC stock held by SC-EURO or SC-ASIA. SC-EURO's or SC-ASIA's
intention to qualify annually as a regulated investment company may limit its
elections with respect to PFIC stock.
Because the application of the PFIC rules may affect, among other
things, the character of gains, the amount of gain or loss and the timing of the
recognition of income with respect to PFIC stock, as well as subject SC-EURO or
SC-ASIA itself to tax on certain income from PFIC stock, the amount that must be
distributed to shareholders, and which will be taxed to shareholders as ordinary
income or long-term capital gains, may be increased or decreased substantially
as compared to a mutual fund that does not invest in PFIC stock.
The Taxpayer Relief Act enacted a rule which permits taxpayers to
elect to mark to market interests in a PFIC each year if stock in the PFIC is
regularly traded on a national securities exchange which is registered with the
Securities and Exchange Commission or the national market system established
pursuant to section 11A of the Securities and Exchange Act of 1934, as amended.
The Internal Revenue Service has the authority to write regulations to include
other exchanges and to apply the mark to market rules to options and interests
in foreign corporations that are comparable to regulated investment companies.
Any gain or loss recognized under these rules will be ordinary income rather
than capital gain. It is uncertain at this time whether the Funds will make the
mark to market election permitted under these rules.
48
<PAGE>
The Internal Revenue Service previously had issued proposed
regulations that would permit SC-EURO and SC-ASIA to elect (in lieu of paying
deferred tax or making a QEF election) to mark-to-market annually any PFIC
shares that they owned and to include any gains (but not losses) that it was
deemed to realize as ordinary income. The Funds generally would not be subject
to deferred Federal income tax on any gains that they were deemed to realize as
a consequence of making a mark-to-market election, but such gains would be taken
into account by the Funds for purposes of satisfying the Distribution
Requirement and the excise tax distribution requirement. The proposed
regulations indicate that they would apply only prospectively, to taxable years
ending after their promulgation as final regulations. It is unclear how the
proposed regulations will be modified following the enactment of the rules in
the Taxpayer Relief Act of 1997.
FOREIGN INCOME TAX
Investment income received by SC-EURO or SC-ASIA from sources within
foreign countries may be subject to foreign income taxes withheld at the source.
The U.S. has entered into tax treaties with many foreign countries which entitle
SC-EURO and SC-ASIA to a reduced rate of, or exemption from, taxes on such
income. It is impossible to determine the effective rate of foreign tax in
advance since the amount of SC-EURO's or SC-ASIA's assets to be invested in
various countries is not known.
If more than 50% of the value of SC-EURO's or SC-ASIA's total assets
at the close of each taxable year consists of the stock or securities of foreign
corporations, SC-EURO or SC-ASIA may elect to "pass through" to SC-EURO's or SC-
ASIA's shareholders the amount of foreign income taxes paid by SC-EURO or SC-
ASIA (the "Foreign Tax Election"). Pursuant to the Foreign Tax Election,
shareholders will be required (i) to include in gross income, even though not
actually received, their respective pro-rata shares of the foreign income taxes
paid by SC-EURO or SC-ASIA that are attributable to any distributions they
receive; and (ii) either to deduct their pro-rata share of foreign taxes in
computing their taxable income, or to use it (subject to various Code
limitations) as a foreign tax credit against federal income tax (but not both).
No deduction for foreign taxes may be claimed by a non-corporate shareholder who
does not itemize deductions or who is subject to alternative minimum tax.
Generally, a credit for foreign taxes is subject to the limitation
that it may not exceed the shareholder's U.S. tax (determined without regard to
the availability of the credit) attributable to the shareholder's foreign source
taxable income. In determining the source and character of distributions
received from SC-EURO or SC-ASIA for this purpose, shareholders will be required
to allocate SC-EURO or SC-ASIA distributions according to the source of the
income realized by SC-EURO or SC-ASIA. SC-EURO's or SC-ASIA's gains from the
sale of stock and securities and certain currency fluctuation gains and losses
will generally be treated as derived from U.S. sources. In addition, the
limitation on the foreign tax credit is applied separately to foreign source
"passive" income, such as dividend income. Moreover, shareholders will not be
entitled to credit or deduct their allocable share of foreign taxes imposed on
SC-EURO or SC-Asia if they have not held their shares in SC-EURO or SC-Asia for
16 days or more during the 30 day period beginning 15 days before shares in SC-
EURO or SC-Asia become ex-dividend. The holding period will be extended if the
shareholder's risk of loss with respect to such shares is reduced by reason of
holding an offsetting position. Because of these limitations, shareholders may
be unable to claim a credit for the full amount of their proportionate shares of
the foreign income taxes paid by SC-EURO or SC-ASIA.
OTHER TAXATION
Shareholders of the Funds may be subject to state, local and foreign
taxes on their Fund distributions. Shareholders are advised to consult their
own tax advisers with respect to the particular state and local tax consequences
to them of an investment in a Fund.
THE FOREGOING IS ONLY A SUMMARY OF CERTAIN MATERIAL TAX CONSEQUENCES
AFFECTING THE FUNDS AND THEIR SHAREHOLDERS. SHAREHOLDERS ARE ADVISED TO CONSULT
THEIR OWN TAX ADVISORS WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO THEM
OF AN INVESTMENT IN THE PORTFOLIO.
49
<PAGE>
ORGANIZATION AND DESCRIPTION OF CAPITAL STOCK
Security Capital Real Estate Mutual Funds Incorporated, formerly
Security Capital Employee REIT Fund Incorporated, was incorporated under
Maryland law as SCERF Incorporated ("SCERF"), a wholly-owned subsidiary of
Security Capital Group Incorporated, on December 20, 1996. On January 23,
1997, all the assets and liabilities of SCERF were transferred to Security
Capital Employee REIT Fund Incorporated in a reorganization transaction. On
December 16, 1997, its name was changed to Security Capital U.S. Real Estate
Shares Incorporated. On June 30, 1998, its name was changed to Security Capital
Real Estate Mutual Funds Incorporated.
SC-REMFs is authorized to issue 200,000,000 shares of stock, $.01 par
value per share. SC-REMFs' shares have no preemptive, conversion, exchange or
redemption rights. Each share of each series has equal voting, dividend,
distribution and liquidation rights. All shares of SC-REMFs, when duly issued,
are 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-REMFs' 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.
SC-REMFs' Board of Directors may, without shareholder approval,
increase or decrease the number of authorized but unissued shares of SC-REMFs'
stock and reclassify and issue any unissued shares of SC-REMFs. The Board of
Directors also may create additional series of shares with different investment
objectives, policies or restrictions without shareholder approval. The Board of
Directors of SC-REMFs has authorized the creation of four investment portfolios;
SC-US, SC-ARBITRAGE, SC-EURO and SC-ASIA, three of which have two classes of
shares: Class I shares and Class R shares. SC-ARBITRAGE issues Class I shares
only. Class I shares are offered to investors whose initial minimum investment
is $250,000 and Class R shares are available for purchase by all other eligible
investors. Class I shares and Class R shares offer different services to
shareholders and incur different expenses. Each class pays its proportionate
share of SC-REMFs' expenses.
SC-REMFs 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-REMFs entitled to vote at the meeting. SC-REMFs will assist
shareholders wishing to communicate with one another for the purpose of
requesting such a meeting.
As of July 31, 1998, SC REALTY Incorporated owned 92.97% of the issued
and outstanding shares of SC-US, 99.25% of the issued and outstanding shares of
SC-EURO and SC-ASIA and 99.97% of the issued and outstanding shares of SC-
ARBITRAGE. In each case SC REALTY owns Class I shares only.
As of July 31, 1998, the following persons owned of record 5% of each
Fund's outstanding shares:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE
TITLE OF CLASS BENEFICIAL OWNER OF BENEFICIAL PERCENT OF CLASS
- -------------- ----------------- OWNERSHIP ----------------
---------
<S> <C> <C> <C>
SC-US Class I SC REALTY Incorporated 10,105,964.216 95.45%
3753 Howard Hughes Parkway
Las Vegas, Nevada 89109-0952
SC-US Class R Charles Schwab & Co. Inc. 189,972.577 70.63%
101 Montgomery Street
San Francisco, California 94104-4122
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE
TITLE OF CLASS BENEFICIAL OWNER OF BENEFICIAL PERCENT OF CLASS
- -------------- ----------------- OWNERSHIP ----------------
---------
<S> <C> <C> <C>
SC-US Class R Dennis G. Lopez 20,302.374 7.55%
117 Beekman Street, 4E
New York, New York 10038-2001
SC-EURO Class I SC REALTY Incorporated 2,310,671.776 99.25%
3753 Howard Hughes Parkway
Las Vegas, Nevada 89109-0952
SC-ASIA Class I SC REALTY Incorporated 100,750 99.25%
3753 Howard Hughes Parkway
Las Vegas, Nevada 89109-0952
SC-ARBITRAGE SC REALTY Incorporated 100,750 99.97%
Class I 3753 Howard Hughes Parkway
Las Vegas, Nevada 89109-0952
</TABLE>
Because SC REALTY Incorporated owns 99.25% of the issued and
outstanding shares of SC-EURO, and SC-ASIA, 99.97% of the issued and outstanding
shares of SC-ARBITRAGE and 92.97% of the issued and outstanding shares of SC-US,
SC REALTY Incorporated controls the Funds for purposes of the 1940 Act. The
effect of SC REALTY Incorporated's ownership of a controlling interest in the
Funds and, therefore, SC-REMFs, is to dilute the voting power of other
shareholders. SC REALTY Incorporated does not anticipate that its initial
control of the Funds will adversely effect the rights of future
shareholders.
DISTRIBUTOR
Security Capital Markets Group Incorporated ("SCMGI"), an affiliate of
GCMG , serves as the distributor of SC-US's Class I shares and Class R shares
pursuant to a Distribution and Servicing Agreement dated December 16, 1997
51
<PAGE>
which was approved by the Board of Directors, including a majority of the
Disinterested Directors on November 25, 1997. SCMGI also serves as the
distributor of SC-EURO's and SC-ASIA's Class I and Class R shares and SC-
ARBITRAGE's Class I shares pursuant to a Distribution and Servicing Agreement
dated June 30, 1998. See "Distribution and Servicing Plans." The Distributor
is not obligated to sell any specific amount of shares and will sell shares, as
agent, on a best efforts continuous basis only against orders to purchase
shares.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, which has its principal business
address at 225 Franklin Street, Boston, Massachusetts 02101, has been retained
to act as Custodian of the Funds' investments and as the Funds' Transfer Agent.
State Street Bank and Trust Company has no part in deciding the Funds'
investment policies or which securities are to be purchased or sold for the
Funds' portfolio.
PERFORMANCE INFORMATION
From time to time, a Fund may quote its total return in advertisements
or in reports and other communications to shareholders. A Fund'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 a Fund'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 a Fund with
certain bank deposits or other investments that pay a fixed yield for a stated
period of time. Investors comparing a Fund'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
A Fund'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 or at the
end of a 1-, 5-, or 10-year period (or fractional portion
thereof), assuming reinvestment of all dividends and
distributions.
AGGREGATE TOTAL RETURNS
A Fund's aggregate total return figures described in the Prospectus represent
the cumulative change in the value of an investment in a Fund for the specified
period and is computed by the following formula.
Aggregate Total Return = (ERV-P)
-------
P
Where: P = a hypothetical initial payment of $1,000.
52
<PAGE>
ERV = Ending Redeemable Value of a hypothetical $1,000 investment made
at the beginning of the 1-, 5- or 10-year period or 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 a Fund 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:
Yield = 2[(a-b + 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 a Fund or in
advertising materials, a Fund 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. A Fund 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-REMFs
offered hereby will be passed upon by Mayer, Brown & Platt, 2000 Pennsylvania
Ave., N.W., Washington, D.C. 20006, which will rely as to certain matters of
Maryland law on Ballard Spahr Andrews & Ingersoll, LLP, 300 East Lombard Street,
Baltimore, Maryland 21202.
Arthur Andersen LLP has been appointed as independent accountants for SC-
REMFs.
FINANCIAL STATEMENTS
The audited Financial Statements of Security Capital U.S. Real Estate Shares
Incorporated for the period January 1, 1997 through December 31, 1997, are
included herein.
53
<PAGE>
SECURITY CAPITAL U.S. REAL ESTATE SHARES INCORPORATED
SCHEDULE OF INVESTMENTS -- DECEMBER 31, 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Market Value
<S> <C>
COMMON STOCK -- REAL ESTATE INVESTMENT TRUSTS
(REITs) -- 96.7%
Office Properties -- 26.9%
589,240 Equity office Properties Trust $ 18,597,878
140,000 Prentiss Properties Trust 3,911,250
67,900 Crescent Real Estate Equities Company 2,673,563
80,300 Boston Properties, Inc. 2,654,919
65,000 Cornerstone Properties, Inc. 1,247,187
52,500 Cadillac Fairview Corporation # 1,233,750
28,400 Mack-Cali Realty Corporation 1,164,400
------------
31,482,947
Multifamily -- 20.8%
187,700 Apartment Investment & Management Company 6,897,975
150,000 Essex Property Trust, Inc. 5,250,000
145,100 Charles E. Smith Residential Realty, Inc. 5,151,050
95,300 Equity Residential Properties Trust 4,818,606
57,000 Bay Apartment Communities, Inc. 2,223,000
------------
24,340,631
Hotel -- 14.9%
312,500 Innkeepers USA Trust 4,843,750
115,000 FelCor Suite Hotels, Inc. 4,082,500
40,000 ITT Corporation # 3,315,000
125,000 WHG Resorts & Casinos Inc. # 2,781,250
61,000 Capstar Hotel Company # 2,093,062
</TABLE>
54
<PAGE>
<TABLE>
<S> <C>
22,200 Homestead Village, Inc. # + 334,388
------------
17,449,950
</TABLE>
See notes to the financial statements.
SCHEDULE OF INVESTMENTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Market Value
<S> <C> <C>
Storage -- 10.9%
323,200 Public Storage, Inc. $ 9,494,000
100,500 Storage Trust Realty 2,644,406
23,200 Shurgard Storage Centers, Inc. 672,800
-----------
12,811,206
Regional Malls -- 8.0%
136,000 Urban Shopping Centers, Inc. 4,743,000
164,100 The Macerich Company 4,676,850
-----------
9,419,850
Industrial -- 7.4%
163,000 Pacific Gulf Properties, Inc. 3,871,250
91,500 Liberty Property Trust 2,613,469
110,000 Catellus Development Corporation # 2,200,000
-----------
8,684,719
Shopping Centers -- 5.5%
125,000 Developers Diversified Realty Corporation 4,781,250
46,500 Kimco Realty Corporation 1,639,125
-----------
6,420,375
Factory Outlets -- 2.3%
70,000 Chelsea GCA Realty, Inc. 2,673,125
Total Common Stock-- Real Estate Investment
-----------
Trusts (REITs) (Cost $100,097,665) 113,282,803
</TABLE>
55
<PAGE>
See notes to the financial statements.
56
<PAGE>
SCHEDULE OF INVESTMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Principal Amount
SHORT-TERM INVESTMENTS -- 0.3%
Variable Rate Demand Notes* -- 0.3%
$135,576 Warner-Lambert Co., 5.4890% $ 135,576
134,756 Johnson Controls, Inc. 5.3276% 134,756
120,436 General Mills, Inc., 5.3277% 120,436
5,138 Pitney Bowes, Inc., 5.3276% 5,138
------------
Total Short-Term Investments
(Cost $395,906) 395,906
------------
Total Investments-- 97.0% 113,678,709
(Cost $100,493,571)
Other Assets in Excess of
Liabilities -- 3.0% 3,553,47
------------
NET ASSETS 100.0% $117,232,184
============
57
<PAGE>
* Variable rate demand notes are considered short-term obligations and are
payable on demand. Interest rates change periodically on specified dates.
The rates listed are as of December 31, 1997.
# Non-income producing security.
+ An affiliate of the Fund.
See notes to the financial statements.
58
<PAGE>
SECURITY CAPITAL U.S. REAL ESTATE SHARES INCORPORATED
STATEMENT OF ASSETS AND LIABILITIES -- DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at market value
(cost $100,493,571) $113,678,709
Deferred organization costs 95,914
Receivable for investment securities sold 3,564,588
Dividends receivable 505,998
Interest receivable 18,954
Other assets 21,560
------------
Total Assets 117,885,723
------------
LIABILITIES:
Payable for investment securities purchased 479,854
Payable to investment adviser 64,882
Accrued expenses and other liabilities 108,803
------------
Total Liabilities 653,539
------------
NET ASSETS $117,232,184
------------
NET ASSETS CONSIST OF:
Capital stock $101,731,755
Accumulated undistributed net realized
gain on investments 2,315,291
Net unrealized appreciation on investments 13,185,138
------------
Total Net Assets $117,232,184
============
CLASS I:
Net assets $116,560,328
Shares outstanding (50,000,000 shares
of $0.01 par value authorized) 9,755,880
Net asset value and redemption price
per share $11.95
============
CLASS R:
Net assets $671,856
Shares outstanding (50,000,000 shares
of $0.01 par value authorized) 56,234
Net asset value and redemption
price per share $11.95
============
</TABLE>
59
<PAGE>
SECURITY CAPITAL U.S. REAL ESTATE SHARES INCORPORATED
STATEMENT OF ASSETS AND LIABILITIES -- DECEMBER 31, 1997
See notes to the financial statements.
60
<PAGE>
SECURITY CAPITAL U.S. REAL ESTATE SHARES INCORPORATED
STATEMENT OF OPERATIONS -- DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividend income $ 4,729,653
Interest income 141,838
-----------
Total investment income 4,871,491
-----------
EXPENSES:
Investment advisory fee 652,224
Administration fee 65,044
Shareholder servicing and accounting costs 43,220
Custody fees 19,550
Federal and state registration 39,320
Professional fees 47,419
Reports to shareholders 10,140
Directors' fees and expenses 17,940
Amortization of organization costs 22,185
Distribution Expense-- Class I 12,396
Distribution Expense-- Class R 67
Other 2,640
-----------
Total expenses before reimbursement 932,145
Less: Reimbursement from Adviser-- Class I (30,276)
Less: Reimbursement from Adviser-- Class R (167)
-----------
Net expenses 901,702
-----------
NET INVESTMENT INCOME: 3,969,789
===========
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 8,063,795
Change in unrealized appreciation on investments 12,889,384
-----------
Net realized and unrealized gain on investments 20,953,179
-----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS $24,922,968
===========
</TABLE>
See notes to the financial statements.
61
<PAGE>
SECURITY CAPITAL U.S. REAL ESTATE SHARES INCORPORATED
STATEMENTS OF CHANGES IN NET ASSETS -- DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year December 20, 1996(1)
ended through
December 31, 1997 December 31, 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Net investment income $3,969,789 $24,188
Net realized gain on investments 8,063,795 0
Change in unrealized appreciation
on investments 12,889,384 295,754
-----------------------------------------------
Net increase in net assets resulting
from operations 24,922,968 319,942
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 92,737,305 9,926,736
Shares issued to holders in reinvestment --
of dividends 2,632,946
Cost of shares redeemed (3,558,444) --
-----------------------------------------------
Net increase in net assets from capital 91,811,807 9,926,736
share transactions
DISTRIBUTIONS TO SHAREHOLDERS: (2)
From net investment income (3,626,176) --
DISTRIBUTIONS TO CLASS R
SHAREHOLDERS: (2)
From net investment income (2,006) --
From net realized gains (31,388) --
-----------------------------------------------
(33,394) --
DISTRIBUTIONS TO CLASS I
SHAREHOLDERS: (2)
From net investment income (372,583) --
From net realized gains (5,717,116) --
-----------------------------------------------
Subtotal (6,089,699) --
TOTAL INCREASE IN NET ASSETS 106,985,506 10,246,678
NET ASSETS:
Beginning of period 10,246,678 --
-----------------------------------------------
End of period (including undistributed
net investment income of $0 and
$24,188, respectively) $117,232,184 $10,246,678
===============================================
</TABLE>
(1) Inception date.
(2) On December 16, 1997, the Fund's existing shareholders were split into
Class R and Class I shares based on the amount then invested in the Fund.
Distributions to shareholders from net investment income reflect activity
for the Fund for the period January 1, 1997 through December 16, 1997 and
for each respective class of shares for the period December 17, 1997
through December 31, 1997.
See notes to the financial statements.
62
<PAGE>
SECURITY CAPITAL U.S. REAL ESTATE SHARES INCORPORATED
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended
December 31, 1997 (2) December 20, 1996 (1)
------------------------------------
through
Class I Class R December 31, 1996
------------------------------------------------------------
<S> <C> <C> <C>
Per Share Data:
Net asset value, beginning of period $ 10.38 $ 10.38 $ 10.00
------------------------------------------------------------
Income from investment operations:
Net investment income 0.46(3) 0.46(3) 0.02
Net realized and unrealized gain
on investments 2.11 2.11 0.36
------------------------------------------------------------
Total from investment operations 2.57 2.57 0.38
------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.46) (0.46) --
Distributions from net realized gains (0.54) (0.54) --
------------------------------------------------------------
Total distributions (1.00) (1.00) --
------------------------------------------------------------
Net asset value, end of period $ 11.95 $ 11.95 $ 10.38
============================================================
Total return (4) 25.20% 25.19% 3.77%
Supplemental data and ratios:
Net assets, end of period $116,560,328 $671,856 $10,246,678
Ratio of expenses to average net assets (6) 0.94% 0.95% 0.00%
Ratio of net investment income to
average net assets (5)(6) 4.08% 4.07% 19.71%
Portfolio turnover rate (7) 104.17% 104.17% 0.00%
Average commission rate paid per share (7) $ 0.0574 $ 0.0574 $ 0.0601
</TABLE>
63
<PAGE>
(1) Inception date.
(2) On December 16, 1997, the Fund's existing shareholders were split into
Class R and Class I shares based on the amount then invested in the Fund.
For the year ended December 31, 1997, the Financial Highlights ratios of
net expenses to average net assets, ratios of net investment income to
average net assets and the per share income from investment operations are
presented on a basis whereby the Fund's net investment income and net
expenses for the period January 1, 1997 through December 16, 1997, were
allocated to each class of shares based upon the relative outstanding
shares of each class as of the close of business on December 16, 1997, and
the results thereof combined with the results of operations for each
applicable class for the period December 17, 1997 through December 31,
1997.
(3) Net investment income per share represents net investment income divided by
the average shares outstanding throughout the period.
(4) Not annualized for the period December 20, 1996 through December 31, 1996.
(5) Annualized for the period December 20, 1996 through December 31, 1996.
(6) Without expense reimbursements of $30,443 for the year ended December 31,
1997, the ratio of expenses to average net assets would have been 0.97% and
0.98% for Class I and Class R, respectively, and the ratio of net
investment income to average net assets would have been 4.05% and 4.04% for
Class I and Class R, respectively.
(7) Portfolio turnover and average commission rate paid are calculated on the
basis of the Fund as a whole without distinguishing between the classes of
shares issued.
See notes to the financial statements.
SECURITY CAPITAL U.S. REAL ESTATE SHARES INCORPORATED
NOTES TO THE FINANCIAL STATEMENTS -- DECEMBER 31, 1997
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Security Capital U.S. Real Estate Shares Incorporated (the "Fund") is a Maryland
corporation, originally formed on December 20, 1996. The Fund is registered as
a non-diversified, no-load, open-end management investment company under the
Investment Company Act of 1940 (the "1940 Act"). The investment objective of
the Fund 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, the Fund's objective is to
achieve top-quartile total returns as compared with other mutual funds that
invest primarily in real estate securities in the United States, by integrating
in-depth proprietary real estate market research with sophisticated capital
markets research and modeling techniques.
The following is a summary of significant accounting policies consistently
followed by the Fund.
a) Investment Valuation -- Each day, securities are valued at the last sales
price from the principal exchange on which they are traded. Securities that
have not traded on the valuation date, or securities for which sales 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 determined by, or under the direction of, the Board
of Directors. Temporary cash
64
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
investments (those with remaining maturities of 60 days or less) are valued at
amortized costs, which approximates market value.
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
shareholders, 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.
b) Federal Income Taxes -- No provision for federal income taxes has been made
since the Fund has complied to date with the provisions of the Internal Revenue
Code available to regulated investment companies and intends to continue to so
comply in future years and to distribute investment company net taxable income
and net capital gains to shareholders.
c) Distributions to Shareholders -- Dividends from net investment income are
declared and paid quarterly. The Fund intends to distribute net realized
capital gains, if any, at least annually, although the Fund's Board of Directors
may in the future determine to retain realized capital gains and not distribute
them to shareholders.
Distributions will automatically be paid in full and fractional shares of the
Fund 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.
The characterization of shareholder distributions 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 a 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.
d) Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and 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.
e) Other -- Investment and shareholder transactions are recorded on trade
date. The Fund determines the gain or loss realized from the investment
transactions, using the specific
65
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
identification method for both financial reporting and federal income tax
purposes, by comparing the original cost of the security lot sold with the net
sales proceeds. 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. Dividend income is recognized on the
ex-dividend date or as soon as information is available to the Fund, and
interest income is recognized on an accrual basis. Generally accepted accounting
principles require that permanent financial reporting and tax differences be
reclassified to capital stock.
66
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
2. CAPITAL SHARE TRANSACTIONS
On December 16, 1997, the Fund's existing shareholders were split into Class R
and Class I shares based on the amount then invested in the Fund. Transactions
in shares of the Fund were as follows:
Period from 12/17/97 through 12/31/97:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Amount Shares
<S> <C>
Class I Shares:
Reclassification of previous class $ 121,005,617 9,836,172
Shares sold -- --
Shares issued to holders in reinvestment of dividends 65,206 5,443
Shares redeemed (1,069,973) (85,735)
------------- ---------
Net increase $ 120,000,850 9,755,880
------------- ---------
Class R Shares:
Reclassification of previous class $ 658,057 53,492
Shares sold 2,500 208
Shares issued to holders in reinvestment of dividends 30,360 2,534
Shares redeemed -- --
Net increase $ 690,917 56,234
============= =========
</TABLE>
Period from 01/01/97 through 12/16/97:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Amount Shares
<S> <C> <C>
Previous Class:
Reclassification to Class I shares $(121,005,617) (9,836,172)
Reclassification to Class R shares (658,057) (53,492)
Shares sold 92,734,805 8,890,183
Shares issued to holders in reinvestment of dividends 2,537,380 236,042
Shares redeemed (2,488,471) (223,984)
------------- ----------
Net (decrease) $(28,879,960) (987,423)
============= ==========
Period from 12/20/96 through 12/31/96:
Shares sold $ 9,926,736 987,423
</TABLE>
67
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Shares issued to holders in reinvestment of dividends -- --
Shares redeemed
------------- --------
Net increase $ 9,926,736 987,423
============= ========
</TABLE>
68
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
3. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of investments by the Fund for the year ended
December 31, 1997, were $177,958,403 and $95,319,551, respectively.
At December 31, 1997, gross unrealized appreciation and depreciation of
investments for tax purposes were as follows:
Appreciation $ 13,065,970
(Depreciation) (482,022)
--------------
Net appreciation on investments $ 12,583,948
==============
At December 31, 1997, the cost of investments for federal income tax purposes
was $101,094,761.
4. INVESTMENT ADVISORY AND OTHER AGREEMENTS
The Fund has entered into an Investment Advisory Agreement with Security Capital
Global Capital Management Group Incorporated ("GCMG"), formerly Security Capital
Investment Research Group Incorporated. Pursuant to its advisory agreement with
the Fund, the Investment Adviser is entitled to receive a fee, calculated daily
and payable monthly, at the annual rate of 0.60% as applied to the Fund's daily
net assets.
GCMG voluntarily agrees to reimburse its management fee and other expenses to
the extent that total operating expenses (exclusive of interest, taxes,
brokerage commissions and other costs incurred in connection with the purchase
or sale of portfolio securities, and extraordinary items) exceed the annual rate
of 1.00% and 1.15% of the net assets of the Class I and Class R Shares,
respectively, computed on a daily basis, for the period December 17, 1997
through December 31, 1997. GCMG had voluntarily agreed to reimburse its
management fee and other expenses to the extent the above mentioned total
operating expenses exceeded the annual rate of 1.20% of the net assets of the
Fund for the period April 15, 1997 through December 16, 1997.
GCMG also serves as the Fund's administrator. GCMG intends to charge the Fund an
administrative fee calculated daily and payable monthly, at the annual rate of
0.02% of the Fund's average daily net assets.
Firstar Trust Company, a subsidiary of Firstar Corporation, a publicly held bank
holding company, serves as custodian, transfer agent, sub-administrator and
accounting services agent for the Fund. Sub-administration fees will be
calculated daily and payable monthly, at an annual rate of 0.06% of the first
$200 million of the Fund's average daily net assets. Custodian, transfer agent
fees and accounting services will be charged by Firstar according to contractual
fee schedules agreed to by the Fund. All such expenses incurred through April
15, 1997 have been paid by GCMG, which does not intend to seek reimbursement
from the Fund.
69
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
5. DISTRIBUTION AND SERVICING PLANS
The Fund has adopted plans with respect to the Class I and Class R shares
pursuant to Rule 12b-1 under the 1940 Act ("Plans"). Under the Plans, the Fund
pays to Security Capital Markets Group Incorporated in its capacity as principal
distributor of the Fund's shares (the "Distributor"), a monthly fee equal to, on
an annual basis, 0.25% of the value of each Class' average daily net assets.
The Distributor may use the fee for services performed and expenses incurred by
the Distributor in connection with the distribution of each Class' respective
shares and for providing certain services to each Class' respective
shareholders. The Distributor may pay third parties in respect of these services
such amount as it may determine. The Fund has made no payments pursuant to the
Plans for the year ended December 31, 1997.
70
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
6. FORMATION AND RE-ORGANIZATION
The Fund, formerly Security Capital Employee REIT Fund Incorporated, is a
Maryland corporation, originally formed on December 20, 1996, as SCERF
("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 $1,002,746 was realized for
tax 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. As of December 31, 1997, $443,485 of the
capital gain was realized for book purposes. As a result, at December 31, 1997,
the tax basis of securities held was $559,261 higher than their basis for
financial reporting purposes.
The costs incurred in connection with the organization, initial registration and
public offering of shares, aggregating $118,099, have been paid by the Adviser.
The Fund will reimburse the Adviser. These costs are being amortized over the
period of benefit, but not to exceed sixty months from the Fund's commencement
of operations. The Adviser has voluntarily agreed to absorb the amortization
expenses in the Fund's first year. The amortization as of December 31, 1997 of
$22,185 will be reimbursed to the Fund.
71
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
To the board of directors and shareholders of
Security Capital U.S. Real Estate Shares Incorporated:
We have audited the accompanying statement of assets and liabilities of Security
Capital U.S. Real Estate Shares Incorporated (a Maryland corporation), including
the schedule of investments, as of December 31, 1997, and the related statement
of operations for the year then ended and the statement of changes in net assets
and financial highlights for the year then ended and the period from December
20, 1996 (date of inception) to December 31, 1996. These financial statements
and financial highlights are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1997, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Security Capital U.S. Real Estate Shares Incorporated as of December 31, 1997,
the results of its operations for the year then ended and the changes in its net
assets and financial highlights for the year then ended and the period from
December 20, 1996 (date of inception) to December 31, 1996, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 2, 1998
72
<PAGE>
APPENDIX A
DESCRIPTION OF SECURITIES RATINGS
This Appendix describes ratings applied to corporate bonds by Standard & Poor's
("S&P"), Moody's Investors Service, Inc. ("Moody's") and Fitch Investor
Services, Inc. ("Fitch").
S&P'S RATINGS
AAA: Debt rated `AAA' has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated `AA' has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A: Debt rated `A' has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB: Debt rated `BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
Debt rated `BB,' `B,' `CCC,' and `C' is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. `BB' indicates the least degree of speculation and `C' the highest.
While such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties of major exposures to adverse
markets.
BB: Debt rated `BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The `BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied `BBB-' rating.
B: Debt rated `B' has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The `B' rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
`BB' or `BB-' rating.
CCC: Debt rated `CCC' has a currently identifiable vulnerability to default,
and is dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The `CCC' rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied `B' or `B-' rating.
CC: The rating `CC' typically is applied to debt subordinated to senior debt
that is assigned an actual or implied `CCC' rating.
C: The rating `C' typically is applied to debt subordinated to senior debt
that is assigned an actual or implied `CCC-' rating. The `C' rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
73
<PAGE>
CI: The rating `CI' is reserved for income bonds on which interest is being
paid.
D: Debt rated `D' is in payment default. The `D' rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The `D' rating will also be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized. The ratings from `AA' to `CCC' may be modified by the addition of a
plus or minus to show relative standing within the major rating categories.
MOODY'S RATINGS
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess may favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are Ba are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
FITCH RATINGS
74
<PAGE>
AAA: Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
AA: Bonds considered to be investment grade and of very high credit quality.
The obligor`s ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated `AAA.' Because bonds rated in the
`AAA' and `AA' categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated `F1+.'
A: Bonds considered to be investment grade and of high credit quality. The
obligor`s ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB: Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have adverse impact on these bonds, and therefore
impair timely payment. The likelihood that the rating of these bonds will fall
below investment grade is higher than for bonds with higher ratings.
BB: Bonds are considered to be speculative. The obligor`s ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified which
could assist the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issues.
CCC: Bonds have certain identifiable characteristics that, if not remedied,
may lead to default. The ability to meet obligations requires an advantageous
business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable.
C: Bonds are in imminent default in payment of interest or principal.
DDD, DD, and D: Bonds in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. `DDD'
represents the highest potential for recovery on these bonds, and `D' represents
the lowest potential for recovery.
Note: Fitch ratings (other than `AAA,' `DDD,' `DD,' or `D' categories) may be
modified by the addition of a plus (+) or minus (-) sign to show relative
position of a credit within the rating category.
75
<PAGE>
SECURITY CAPITAL REAL ESTATE MUTUAL FUNDS INCORPORATED
FORM N-1A
PART C -- OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements.
All required financial statements are included in Item 23.
(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 Real
Estate Mutual Funds 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 Nevada Ownership by Group of 100%
("SC REALTY") of voting securities
Security Capital Preferred Maryland Ownership by SC REALTY of
Growth Incorporated ("SCPG") 12.86% of voting
securities
Harbor Capital Incorporated Delaware Ownership by SCPG of 100%
of voting securities
Security Capital U.S. Luxembourg Ownership by SC Realty of
Realty Incorporated 32.88% of outstanding
("U.S. Realty") voting securities
East Mixed-Use Realty Maryland Ownership by U.S. Realty
Investors Trust of 50% of voting
securities
West Mixed-Use Realty Maryland Ownership by U.S. Realty
Investors Trust of 50% of voting
securities
Midwest Mixed-Use Realty Maryland Ownership by U.S. Realty
Investors Trust of 50% of voting
securities
Security Capital Delaware Ownership by Group of 100%
Investment Research Group of voting securities
Incorporated ("Investment
Research")
Security Capital U.S. Real Maryland Ownership by SC REALTY of
Estate Shares Incorporated 96.42% of voting
securities
Security Capital Maryland Ownership by SC REALTY of
EuroPacific Real Estate 100% of voting securities
Shares Incorporated
Security Capital Global Luxembourg Ownership by SC REALTY of
Realty Incorporated 34.6% of voting securities
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
City & West End Properties Luxembourg Ownership by Security
S.A. Capital Global Realty of
96% of voting securities
City & West End Property Luxembourg Ownership by City & West
Investments SARL End Properties S.A. of
100% of voting securities
City & West End Services United Kingdom Ownership by City & West
Limited End Property Investments
SARL of 100% of voting
securities
City & West End United Kingdom Ownership by City & West
Developments Limited End Property Investments
SARL of 100% of voting
securities
City & West End Management United Kingdom Ownership by City & West
Limited End Property Investments
SARL of 100% of voting
securities
Akeler S.A. Luxembourg Ownership by Security
Capital Global Realty of
62.5% of voting securities
Akeler Property Luxembourg Ownership by Akeler S.A.
Investments SARL of 100% of voting
securities
Akeler Services Limited United Kingdom Ownership by Akeler
Property Investments SARL
of 100% of voting
securities
Akeler Developments Limited United Kingdom Ownership by Akeler
Property Investments SARL
of 100% of voting
securities
Akeler Management Limited United Kingdom Ownership by Akeler
Property Investments SARL
of 100% of voting
securities
Belmont Corp. ("Belmont") Delaware Ownership by Group 100% of
voting securities
Belmont One Corporation Delaware Ownership by Belmont of
("Belmont One") 100% of voting securities
Belmont Two Corporation Delaware Ownership by Belmont of
("Belmont Two") 100% of voting securities
Belmont Village L.P. Delaware Ownership by Belmont One
of 1% general partnership
interest and ownership by
Belmont Two of 99% limited
partnership interest
Security Capital BVI Maryland Ownership by Group of 100%
Holdings Incorporated of voting securities
SCGPB Incorporated British Virgin Islands Ownership by Security
Capital BVI Holdings of
100% of voting securities
Security Capital Global Delaware Ownership by Investment
Capital Management Group Research of 100% of voting
Incorporated securities
Security Capital Global Delaware Ownership by Security
Capital Management Group Capital Global Capital
(Asia) Incorporated Management Group
Incorporated of 100%
voting securities
Security Capital Global Maryland Ownership by Investment
Strategic Group Research of 100% of voting
Incorporated securities
Security Capital Real Maryland Ownership by Investment
Estate Research Group Research 100% of voting
Incorporated securities
Security Capital Delaware Ownership by Group of 100%
Financial Services of voting securities
Group Incorporated
("Financial Services")
SC Group Incorporated Texas Ownership by Financial
Services of 100% of voting
securities
Coast Services Incorporated Maryland Ownership by SC Group
Incorporated of 100% of
voting securities
Security Capital Markets Delaware Ownership by Financial
Group Incorporated Services of 100% of voting
securities
</TABLE>
2
<PAGE>
<TABLE>
<S> <C> <C>
Strategic Hotel Capital Delaware Ownership by Group of
Incorporated 49.65% of voting
securities
Strategic Hotel Funding LLC Delaware Ownership by Group of
100% of voting securities
ES Philadelphia Airport Pennsylvania Ownership by Strategic
Joint Venture Hotel Funding LLC of 90%
of voting securities
GH Inn LLC Illinois Ownership by Strategic
Hotel Funding LLC of 50%
of voting securities
Imobilaris National Mexico Ownership by Propanmer
Mexicana, S.A. de C.V. South DC CU. of 99.99% of
voting securities
Padres Place Hotel Ventura Louisiana Ownership by Strategic
Hotel Funding LLC of 1% of
voting securities
Propanmex S.A. de C.V. Mexico Ownership by SHC Mexico
Holdings Incorporated of
99.99% of voting
securities
SHC Burbank LLC Delaware Ownership by Strategic
Hotel Funding LLC of 100%
of voting securities
SHC Mortgage Incorporated Delaware Ownership by Strategic
Hotel Funding LLC of 100%
of voting securities
SHC Paris - 1 LLC Delaware Ownership by Strategic
Hotel Funding LLC of 100%
of voting securities
SHC Paris - 2 LLC Delaware Ownership by Strategic
Hotel Funding LLC of 100%
of voting securities
SHC Paris - 3 LLC Delaware Ownership by Strategic
Hotel Funding LLC of 100%
of voting securities
SHC Paris - 4 LLC Delaware Ownership by Strategic
Hotel Funding LLC of 100%
of voting securities
SHCI Santa Monica Beach Delaware Ownership by Strategic
Hotel, L.L.C. Hotel Funding, LLC of 100%
of voting securities
SHC Paris - 5 LLC Delaware Ownership by Strategic
Hotel Funding LLC of 100%
of voting securities
SHC Paris - 6 LLC Delaware Ownership by Strategic
Hotel Funding LLC of 100%
of voting securities
SHC Phoenix I LLC Delaware Ownership by Strategic
Hotel Funding LLC of 60.5%
of voting securities
SHC Phoenix II LLC Delaware Ownership by Strategic
Hotel Funding LLC of 39.5%
of voting securities
SHC Rancho LLC Delaware Ownership by Strategic
Hotel Funding LLC of 99%
of voting securities
SHC San Francisco LLC Delaware Ownership by Strategic
Hotel Capital L.P. of
100% of voting securities
SHC Santa Clara LLC Delaware Ownership by Strategic
Hotel Funding LLC of 99%
of voting securities
SHC Westward Look LLC Delaware Ownership by Strategic
Hotel Funding LLC of 100%
of voting securities
Strategic Hotel Capital Delaware Ownership by Group of
Limited Partnership 100% of voting securities
SHC Holdings LLC Delaware Ownership by Group of
49.65% of voting
securities
</TABLE>
3
<PAGE>
<TABLE>
<S> <C> <C>
SHC Philadelphia LLC Delaware Ownership by Group of
49.65% of voting
securities
SHC Santa Clara LLC Delaware Ownership by Group of
49.65% of voting
securities
SHC Laguna Niguel LLC Delaware Ownership by Group of
49.65% of voting
securities
SHC Capitol LLC Delaware Ownership by Group of
49.65% of voting
securities
Westport Inn LLC Delaware Ownership by Group of
49.65% of voting
securities
Westport Plaza LLC Delaware Ownership by Group of
49.65% of voting
securities
SHC Mexico Holdings Delaware Ownership by Group of
Incorporated 49.65% of voting
securities
Security Capital (EU) Luxembourg Ownership by Group of
Management Holdings 100% of voting
S.A. securities
Security Capital (EU) Belgium Ownership by Security
Management Group S.A. Capital (EU) Holdings S.A.
of 100% of voting
securities
Security Capital Global Luxembourg Ownership by Security
Management S.A. Capital (EU) Management
Holdings S.A. of 100% of
voting securities
Security Capital (EU) Luxembourg Ownership by Security
Management S.A. Capital (EU) Management
Holdings S.A. of 100% of
voting securities
Security Capital (UK) United Kingdom Ownership by Security
Management Limited Capital (EU) Management
Holdings S.A. of 100% of
voting securities
Security Capital (EU) Luxembourg Ownership by Security
Holdings S.A. Capital (EU) Management
Holdings S.A. of 100% of
voting securities
Security Capital U.S. United Kingdom Ownership by Security
Realty Management Limited Capital (UK) Management
Limited of 100% of voting
securities
Security Capital Global United Kingdom Ownership by Security
Realty Management Limited Capital (UK) Management
Limited of 100% of voting
securities
Security Capital United Kingdom Ownership by Security
International Limited Capital (UK) Management
Limited of 100% of voting
securities
Security Capital Global Belgium Ownership by Security
Capital Management Group Capital (EU) Management
(Europe) S.A. Holdings S.A. of 100% of
voting securities
CarrAmerica Realty Maryland Ownership by U.S. Realty
Corporation of 44.1% of voting
securities
Storage USA, Inc. Tennessee Ownership by U.S. Realty
of 38.3% of voting
securities
Regency Realty Corporation Florida Ownership by U.S. Realty
of 47% of voting
securities
</TABLE>
4
<PAGE>
<TABLE>
<S> <C> <C>
Pacific Retail Trust Maryland Ownership by U.S. Realty
of 74.2% of voting
securities
UGPT - Skypark, Inc. Delaware Ownership by Urban Growth
Property Trust of 99% of
voting securities
Urban Growth Property Trust Maryland Ownership by US Realty of
100% of voting securities
Urban Growth Property Delaware Sole general partnership
Limited Partnership interest owned by Urban
Growth Property Trust
LWP Associates LLC Maryland Ownership by Urban Growth
Property Trust of 50% of
voting securities
Van Wells Realty Company, Maryland Ownership by Urban Growth
LLC Property Trust of 50% of
voting securities
City Center Retail Trust Maryland Ownership by U.S. Realty
of 99% of voting
securities
City Center Retail Delaware Sole general partnership
Trust/McCaffrey interest owned by City
Developments, L.P. Center Retail Trust
CCRT I Incorporated Delaware Ownership by City Center
Retail Trust of 100% of
voting securities
CCRT II Incorporated Delaware Ownership by City Center
Retail Trust of 100% of
voting securities
CCRT McCaffrey Delaware Ownership by
Developments LLC CCRT/McCaffrey
Developments L.P. of 100%
of voting securities
Parking Services Maryland Ownership by US Realty of
International Incorporated 9.4% of voting securities
NPC-1 Incorporated Maryland Ownership by Parking
Services International
Incorporated of 100% of
voting securities
CWS Communities Trust Maryland Ownership by US Realty of
100% of voting securities
CWS Communities L.P. Delaware Sole general partnership
interest owned by CWS
Communities Trust
CWS Communities Delaware Ownership by US Realty of
Incorporated 100% of voting securities
CWS Management Services Delaware Ownership by US Realty
Incorporated 100% of voting shares
ProLogis Trust ("PLD") Maryland Ownership by SC REALTY
of 40.55% of voting
securities
International Industrial Maryland Ownership by PLD of 100%
Investments Inc. of voting securities
Security Capital Logistar Delaware Ownership by PLD of 100%
International Incorporated of voting securities
Security Capital Logistar Delaware Ownership by PLD of 100%
Management Services of voting securities
Incorporated
Logistar - Netherlands I Luxembourg Ownership by PLD of 100%
SARL of voting securities
Logistar France SARL I Luxembourg Ownership by PLD of 100%
of voting securities
Logistar SARL Luxembourg Ownership by PLD of 100%
of voting securities
</TABLE>
5
<PAGE>
<TABLE>
<S> <C> <C>
Logistar BV Luxembourg Ownership by PLD of 100%
of voting securities
Security Capital Logistar Luxembourg Ownership by PLD of 100%
International Fund SCA of voting securities
SCI Logistar Management Luxembourg Ownership by PLD of 100%
SARL of voting securities
Logistar Germany SARL Luxembourg Ownership by PLD of 100%
of voting securities
Logistar Italy SARL Luxembourg Ownership by PLD of 100%
of voting securities
Logistar Belgium SARL Luxembourg Ownership by PLD of 100%
of voting securities
Logistar Netherlands II Luxembourg Ownership by PLD of 100%
SARL of voting securities
Logistar U.K. SARL Luxembourg Ownership by PLD of 100%
of voting securities
Logistar Poland SARL Luxembourg Ownership by PLD of 100%
of voting securities
Logistar Spain SARL Luxembourg Ownership by PLD of 100%
of voting securities
Logistar France SAS Netherlands Ownership by PLD of 100%
of voting securities
Logistar France SARL Netherlands Ownership by PLD of 100%
of voting securities
Logistar Netherlands SARL Netherlands Ownership by PLD of 100%
of voting securities
Logistar Czech Republic Netherlands Ownership by PLD of 100%
SARL of voting securities
Logistar France BV Netherlands Ownership by PLD of 100%
of voting securities
Logistar Spain BV Netherlands Ownership by PLD of 100%
of voting securities
CS Integrated LLC ("CSI") Delaware Ownership by PLD of 100%
of voting securities
Enterprise Refrigerated Delaware Ownership by CSI of 100%
Services LLC of voting securities
CS Integrated Retail Delaware Ownership by CSI of 100%
Services LLC of voting securities
CS Integrated-Texas Delaware Ownership by CSI of 100%
Limited Partnership of voting securities
CS Integrated Investment Delaware Ownership by CSI of 100%
Management LLC of voting securities
CS Integrated Investments Delaware Ownership by CSI of 100%
Southwest LLC of voting securities
SCI Logistics Services Delaware Ownership by PLD of 95% of
Incorporated voting securities
SCI Logistics Holdings LLC Delaware Ownership by CSI of 100%
of voting securities
1440 Goodyear Partners Texas Sole general partnership
interest owned by PLD
Red Mountain Joint Venture Texas Sole general partnership
interest owned by PLD
SCI Limited Partnership-I Delaware Sole general partnership
interest owned by PLD
</TABLE>
6
<PAGE>
<TABLE>
<S> <C> <C>
SCI Limited Partnership-II Delaware Sole general partnership
interest owned by PLD
SCI Limited Partnership-III Delaware Sole general partnership
interest owned by PLD
SCI Limited Partnership-IV Delaware Sole general partnership
interest owned by
SCI IV, Inc.
SCI IV, Inc. Delaware Ownership by PLD of 100%
of voting securities
Security Capital Delaware Ownership by PLD of 100%
Industrial Management of voting securities
Incorporated
SCI--Alabama (1) Maryland Ownership by PLD of 100%
Incorporated of voting securities
SCI--Alabama (2) Maryland Ownership by PLD of 100%
Incorporated of voting securities
Security Capital Alabama Alabama Ownership of 100% of
Industrial Trust voting securities by
SCI--Alabama (1)
Incorporated and
SCI--Alabama (2)
Incorporated
SCI--North Carolina (1) Maryland Ownership by PLD of 100%
Incorporated of voting securities
SCI--North Carolina (2) Maryland Ownership by PLD of 100%
Incorporated of voting securities
SCI--North Carolina Limited Delaware Sole general partnership
Partnership interest owned by
SCI--North Carolina (1)
Incorporated
SCI Houston Holdings Inc. Delaware Ownership by PLD of 100%
of voting securities
Frigoscandia SA Luxembourg Ownership by PLD of 100%
of preferred securities
Frigo Sari Luxembourg
Ownership by PLD of 100%
of preferred securities
SCI Mexico Industrial Trust Maryland Ownership of PLD of 100%
non-voting preferred
securities
SCI De Mexico SA DE CV Mexico Ownership by SCI-DS Mexico
of 100% of voting
securities
SCI Development Services Delaware Ownership by PLD of 100%
Incorporated of voting securities
SCI-DS Mexico Incorporated Maryland Ownership by SCI
Development Services 100%
of voting securities
Archstone Communities Trust Maryland Ownership by SC REALTY of
("ASN") 38.18% of voting securities
SCG Realty Services Delaware Ownership by ASN of 100%
Atlantic Incorporated of voting securities
SCA Florida Holdings (1) Florida Ownership by ASN of 100%
Incorporated of voting securities
Atlantic Development Delaware Ownership by SCA of 100%
Services of preferred stock
Atlantic-Tennessee Limited Delaware Ownership by SCA (3) and
Partnership SCA (4) of 100% of voting
securities
</TABLE>
7
<PAGE>
<TABLE>
<S> <C> <C>
SCA Tennessee (3) Maryland Ownership by SCA of 100%
Incorporated of voting securities
SCA Tennessee (4) Maryland Ownership by SCA of 100%
Incorporated of voting securities
Atlantic--Alabama (3) Delaware Ownership by ASN of 100%
Incorporated of voting securities
Atlantic--Alabama (4) Delaware Ownership by ASN of 100%
Incorporated of voting securities
Atlantic Alabama Alabama Ownership of 100% of
Multifamily Trust voting securities by
Atlantic--Alabama (3)
Incorporated and
Atlantic--Alabama (4)
Incorporated
Atlantic--Alabama (5) Delaware Ownership by ASN of 100%
Incorporated of voting securities
Atlantic--Alabama (6) Delaware Ownership by ASN of 100%
Incorporated of voting securities
SCA Florida Holdings (2) Delaware Ownership by ASN of 100%
Incorporated of voting securities
SCA Alabama Multifamily Alabama Ownership by
Trust Atlantic-Alabama (5)
Incorporated and
Atlantic-Alabama (6)
Incorporated of 100% of
voting securities
SCA--South Carolina (1) Maryland Ownership by ASN of 100%
Incorporated of voting securities
SCA--North Carolina (1) Maryland Ownership by ASN of 100%
Incorporated of voting securities
SCA North Carolina (2) Maryland Ownership by ASN of 100%
Incorporated of voting securities
SCA North Carolina Limited Delaware Sole general partnership
Partnership interest owned by
SCA--North Carolina (1)
Incorporated
SCA--Indiana Limited Delaware Sole general partnership
Partnership interest owned by
SCA--North Carolina (1)
Incorporated
SCA--Tennessee Limited Delaware Sole general partnership
Partnership interest owned by
SCA--Tennessee (1)
Incorporated
SCA--Tennessee (1) Delaware Ownership by ASN of 100%
Incorporated of voting securities
SCA--Tennessee (2) Delaware Ownership by ASN of 100%
Incorporated of voting securities
Security Capital Atlantic Delaware Ownership by ASN
Multifamily Inc. of 100% of voting
securities
SCG Realty Services Delaware Ownership by ASN of 100%
Incorporated of voting securities
SCP Nevada Holdings 1 Nevada Ownership by ASN of 100%
Incorporated of voting securities
SCP Utah Holdings 1 Utah Ownership by ASN of 100%
Incorporated of voting securities
</TABLE>
9
<PAGE>
<TABLE>
<S> <C> <C>
SCP Utah Holdings 2 Utah Ownership by ASN of 100%
Incorporated of voting securities
SCP Utah Holdings 4 Utah Ownership by ASN of 100%
Incorporated of voting securities
SCP Utah Holdings 5 Utah Ownership by ASN of 100%
Incorporated of voting securities
PTR Multifamily Holdings Delaware Ownership by ASN of 100%
Incorporated of voting securities
Spectrum Apartment Delaware Ownership by ASN of 100%
Locators Inc. of voting securities
Las Flores Development Texas Ownership by ASN of 100%
Company of voting securities
PTR Holdings (Texas) Texas Ownership by ASN of 100%
Incorporated of voting securities
PTR-California Holdings Maryland Ownership by ASN of 100%
(1) Incorporated of voting securities
Archstone Financial Delaware Ownership by ASN of 100%
Services, Inc. of voting securities
PTR-California Holdings Maryland Ownership by ASN of 100%
(2) Incorporated of voting securities
PTR-California Holdings Delaware Ownership by ASN of 100%
(3) Incorporated of voting securities
PTR-New Mexico (1) Delaware Ownership by ASN of 100%
Incorporated of voting securities
PTR Development Services Delaware Ownership by ASN of 100%
of preferred stock
Homestead Village Maryland Ownership by SC REALTY
Incorporated (including its
subsidiaries) of 56.5% of
voting securities
KC Homestead Village Missouri Ownership by Homestead
Redevelopment Village Incorporated of
Corporation 100% of voting securities
Missouri Homestead Village Maryland Ownership by Homestead
Incorporated Village Incorporated of
100% of voting securities
Atlantic Homestead Village Delaware Sole general partnership
Limited Partnership interest owned by
Atlantic Homestead
Village (1) Incorporated
Atlantic Homestead Village Maryland Ownership by Homestead
(1) Incorporated Village Incorporated of
100% of voting securities
Atlantic Homestead Village Maryland Ownership by Homestead
(2) Incorporated Village Incorporated of
100% of voting securities
PTR Homestead Village (1) Maryland Ownership by Homestead
Incorporated Village Incorporated of
100% of voting securities
</TABLE>
<PAGE>
PTR Homestead Village (2) Maryland Ownership by Homestead
Incorporated Village
Incorporated of 100% of
voting
securities
Homestead Alabama Alabama Ownership by Homestead
Incorporated Village of 100% of voting
securities
BTW Incorporated Delaware Ownership by Homestead
Village
Incorporated of 100% of
voting
securities
Homestead Village Delaware Ownership by Homestead
Management Incorporated Village
Incorporated of 100% of
voting
securities
PTR Homestead Village Delaware Sole general partnership
Limited Partnership interest owned
by PTR Homestead Village
(1) Incorporated
BTW II Incorporated Delaware Ownership by Homestead
Village Incorporated of
100% of voting securities
BTW III Incorporated Delaware Ownership by Homestead
Village Incorporated of
100% of voting securities
HVI Trust Maryland Ownership by Homestead
Village Incorporated of
100% of voting securities
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
TITLE OF CLASS NUMBER OF RECORD
HOLDERS
Shares of Beneficial Interest at July 31, 1998
----------------------------- ----------------
<S> <C>
Security Capital U.S. Real
Estate Shares
Class I Shares 10,105,964.216
Class R Shares 268,966.239
Security Capital Real
Estate Arbitrage Shares
Class I Shares 100,750
Class R Shares 0
Security Capital European
Real Estate Shares
Class I Shares 100,750
Class R Shares 0
Security Capital
Asia/Pacific Real Estate
Shares
Class I Shares 100,750
Class R Shares 0
</TABLE>
ITEM 27. INDEMNIFICATION.
10
<PAGE>
Reference is made to Article Eighth of the Registrant's Articles of
Incorporation, incorporated by reference to SC-REMFs' Registration Statement on
Form N-1A (File Nos. 333-20649 and 811-8033), filed with the Securities and
Exchange Commission on January 29, 1997.
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.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Security Capital Global Capital Management Group Incorporated ("GCMG"), 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 Funds' 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>
Lucinda G. Marker*/ President None
K. Scott Canon**/ Director and Senior Vice President None
Jeffrey A. Klopf*/ Director, Secretary and Senior Vice None
President
Gerard de Gunzburg***/ Senior Vice President None
Mary R. McCarthy***/ Senior Vice President None
Garett C. House**/ Senior Vice President None
Donald E. Suter**/ Managing Director None
Robert H. Fippinger*/ Vice President None
Joanna L. Rupp**/ Vice President None
Mark P. Peppercorn*****/ Vice President None
George W. Ahl***/ Vice President None
Nansie J. Bernard**/ Vice President None
Leanne L. Gallagher**/ Vice President None
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITIONS AND OFFICES POSITIONS AND OFFICES
BUSINESS ADDRESS WITH UNDERWRITER WITH REGISTRANT
---------------- ---------------- ---------------
<S> <C> <C>
F. Karie A. Katz**/ Vice President None
James C. Swain****/ Assistant Controller None
</TABLE>
*/ Principal business address is 125 Lincoln Avenue, Santa Fe, New
Mexico, 87501.
**/ Principal business address is 11 South LaSalle Street, Chicago,
Illinois 60603.
***/ Principal business address is 399 Park Avenue, 23rd Floor, New York,
NY 10022.
****/ Principal business address is 7777 Market Center Avenue, El Paso,
Texas 79912.
*****/ Principal business address is 4410 Rosewood Drive, Pleasanton,
California 94588
(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-
REMFs' Investment Adviser and Administrator, Security Capital Global Capital
Management Group Incorporated, 11. South LaSalle Street, Chicago, Illinois
60603. The remainder of such records are maintained by State Street Bank & Trust
Company, the Funds' Sub-Administrator, 225 Franklin Street, Boston,
Massachusetts 02101.
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 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.
(b) 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.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets the
requirements of Securities Act Rule 485(b) for effectiveness of this amendment
to its Registration Statement and 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 19th day of
August, 1998.
SECURITY CAPITAL REAL ESTATE
MUTUAL FUNDS INCORPORATED
By: /s/ Anthony R. Manno Jr.
-----------------------------------------
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 Real Estate Mutual Funds Incorporated
has been signed below by the following persons in the capacities and on the 19th
day of August, 1998.
<TABLE>
<CAPTION>
Signature Capacity Date
- ----------------------------------- --------------------------------- ------------------------
<S> <C> <C>
Chairman, Managing Director and August 19, 1998
/s/ Anthony R. Manno Jr. President
-------------------------
Anthony R. Manno Jr.
/s/ Jeffrey C. Nellessen Principal Financial Officer August 19, 1998
-------------------------
Jeffrey C. Nellessen
/s/ Jeffrey C. Nellessen Comptroller August 19, 1998
-------------------------
Jeffrey C. Nellessen
/s/ Stephen F. Kasbeer Director August 19, 1998
-------------------------
Stephen F. Kasbeer
/s/ Anthony R. Manno Jr. Director August 19, 1998
-------------------------
Anthony R. Manno Jr.
Director August 19, 1998
-------------------------
George F. Keane
</TABLE>
13
<PAGE>
<TABLE>
<S> <C> <C>
Director August 19, 1998
------------------------
Robert H. Abrams
/s/ John H. Gardner, Jr. Director August 19, 1998
------------------------
John H. Gardner, Jr.
</TABLE>
14
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------ ------------------------------------------
<S> <C>
1* Articles of Incorporation.
1(a)**** Articles of Amendment dated December 16, 1997.
1(b)**** Articles of Amendment dated June 30, 1998.
1(c)**** Articles Supplementary dated June 30, 1998.
2(a)* By-Laws.
2(b)*** Amended By-Laws.
5(a) Form of Investment Advisory Agreement (SC-US).
5(b) Form of Investment Advisory Agreement (SC-EURO).
5(c) Form of Investment Advisory Agreement (SC-ASIA).
5(d) Form of Investment Advisory Agreement (SC-ARBITRAGE).
5(e) Form of Sponsorship Agreement (SC-US).
5(f) Form of Sponsorship Agreement (SC-EURO).
5(g) Form of Sponsorship Agreement (SC-ASIA).
5(h) Form of Sub-Advisory Agreement (SC-EURO).
5(i) Form of Sub-Advisory Agreement (SC-ASIA).
6(a) Form of Distribution and Servicing Agreement (SC-US).
6(b) Form of Distribution and Servicing Agreement (SC-EURO,
SC-ASIA, SC-ARBITRAGE).
6(c) Form of Sales and Services Agreement.
8(a) Form of Custodian Agreement.
9(a) Form of Transfer Agency and Service Agreement.
9(b) Form of Fund Accounting and Administration Agreement.
9(c) Form of Sub-Administration Agreement.
10(a)** Opinion and Consent of Mayer, Brown & Platt regarding
the legality of the securities being issued.
11(a) Consent of Mayer, Brown & Platt.
11(b) Consent of Ballard Spahr Andrews & Ingersoll.
11(c) Consent of Independent Public Accountants.
</TABLE>
15
<PAGE>
<TABLE>
<S> <C>
15(a)*** Rule 12b-1 Distribution and Service Plan for Class I
Shares (SC-US).
15(b)*** Rule 12b-1 Distribution and Service Plan for Class R
Shares (SC-US).
15(c)**** Rule 12b-1 Distribution and Service Plan (SC-EURO).
15(d)**** Rule 12b-1 Distribution and Service Plan (SC-ASIA).
15(e)**** Rule 12b-1 Distribution and Service Plan (SC-
ARBITRAGE).
17 Financial Data Schedule.
18 Rule 18f-3 Multiple Class Plan.
</TABLE>
__________
*Incorporated herein by reference to Registrant's registration statement on
Form N-1A (File Nos. 333-20649 and 811-8033) filed with the Securities and
Exchange Commission on January 29, 1997.
**Incorporated herein by reference to Pre-Effective Amendment No. 2 to
Registrant's registration statement on Form N-1A (file Nos. 333-20649 and 811-
8033) filed with the Securities and Exchange Commission on April 21, 1997.
***Incorporated herein by reference to Post-Effective Amendment No. 4 to
Registrant's registration statement on Form N-1A (File Nos. 333-20649 and 811-
8033) filed with the Securities and Exchange Commission on December 17,
1997.
****Incorporated herein by reference to Post-Effective Amendment No. 8 to
Registrant's registration statement on Form N-1A (File Nos. 333-20649 and 811-
8033) filed with Securities and Exchange Commission on June 29, 1998.
16
<PAGE>
EXHIBIT 5(a)
INVESTMENT ADVISORY AGREEMENT
Security Capital U.S. Real Estate Shares Incorporated
Amended and Restated December __, 1997
Security Capital (US) Management Group Incorporated
11 South LaSalle Street, Second Floor
Chicago, Illinois 60603
Dear Sirs:
We, the undersigned Security Capital U.S. Real Estate Shares Incorporated,
herewith confirm our agreement with you as follows:
1. We are an open-end, non-diversified management investment company.
Our Directors are authorized to reclassify and issue any unissued shares to any
number of additional classes or series (portfolios), each having its own
investment objective, policies and restrictions, without shareholder approval,
all as more fully described in our prospectus and statement of additional
information.
We propose to engage in the business of investing and reinvesting our
assets in securities of the type and in accordance with the limitations
specified in our Articles of Incorporation, By-Laws and any representations made
in our prospectus and statement of additional information, all in such manner
and to such extent as may from time to time be authorized by our Board of
Directors. We enclose copies of the documents listed above and will from time
to time furnish you with any amendments thereof.
<PAGE>
2. (a) We hereby employ you to manage the investment and reinvestment of
our assets as above specified and, without limiting the generality of the
foregoing, to provide management, investment, advisory and other services
specified below.
(b) You will make decisions with respect to all purchases and sales of
our portfolio securities. To carry out such decisions, you are hereby
authorized, as our agent and attorney-in-fact, for our account and at our risk
and in our name, to place orders for the investment and reinvestment of our
assets. In all purchases, sales and other transactions in our portfolio
securities you are authorized to exercise full discretion and act for us in the
same manner and with the same force and effect as we might or could do with
respect to such purchases, sales or other transactions, as well as with respect
to all other things necessary or incidental to the furtherance or conduct of
such purchases, sales or other transactions.
(c) You will report to our Board of Directors at each meeting thereof
all changes in our portfolio since the prior report, and will also keep us in
touch with important developments affecting our portfolio and on your own
initiative will furnish us from time to time with such information as you may
believe appropriate for this purpose, whether concerning the individual issuers
whose securities are included in our portfolio, the industries in which they
engage, or the conditions prevailing in the economy generally. You will also
furnish us with such statistical and analytical information with respect to our
portfolio securities as you may believe appropriate or as we reasonably may
request. In making such purchases and sales of our portfolio securities, you
will bear in mind the policies set from time to time by our Board of Directors
as well as the limitations imposed by our Articles of Incorporation, the
Investment
-2-
<PAGE>
Company Act of 1940 (the "Act") and the Securities Act of 1933, and of the
Internal Revenue Code of 1986, as amended, in respect of regulated investment
companies.
(d) It is understood that you will from time to time employ or
associate with yourselves such persons as you believe to be particularly fitted
to assist you in the execution of your duties hereunder, the cost of performance
of such duties to be borne and paid by you. No obligation may be incurred on
our behalf in any such respect. During the continuance of this Agreement at our
request you will provide us persons satisfactory to our Board of Directors to
serve as our officers.
3. We propose to retain the services of an administrator, which shall be
a firm acceptable to you, to administer all aspects of our operations except
those which are your responsibility pursuant to this Agreement. We will bear
the cost of and pay the fee of the administrator. Our initial Administrator
will be Security Capital (US) Management Group Incorporated.
4. It is further agreed that you shall pay the fees and expenses
associated with the printing and mailing of our prospectus and statement of
additional information, and any other sales literature, to parties other than
existing shareholders. We hereby confirm that, subject to the foregoing, we
shall be responsible and hereby assume the obligation for payment of all our
other expenses, including: (a) payment of the fee payable to you under
paragraph 6 hereof; (b) charges and expenses of our administrator, custodian,
transfer, and dividend disbursing agent; (c) fees of directors who are not your
affiliated persons; (d) legal and auditing expenses; (e) compensation of our
officers, Directors and employees who do not devote any part of their time to
your affairs or the affairs of your affiliates other than us; (f) costs of
printing our prospectuses
-3-
<PAGE>
and stockholder reports; (g) costs of proxy solicitation; (h) costs of
maintenance of corporate existence; (i) interest charges, taxes, brokerage fees
and commissions; (j) costs of stationery and supplies; (k) expenses and fees
related to registration and filing with the Securities and Exchange Commission
and with state regulatory authorities; and (l) upon the approval of the Board of
Directors, costs of your personnel or your affiliates rendering clerical,
accounting and other office services.
5. We shall expect of you, and you will give us the benefit of, your best
judgment and efforts in rendering these services to us, and we agree as an
inducement to your undertaking these services that you shall not be liable
hereunder for any mistake of judgment or in any event whatsoever, except for
lack of good faith, provided that nothing herein shall be deemed to protect, or
purport to protect, you against any liability to us or to our security holders
to which you would otherwise be subject by reason of willful misfeasance, bad
faith or gross negligence in the performance of your duties hereunder, or by
reason of your reckless disregard of your obligations and duties hereunder.
6. In consideration of the foregoing we will pay you a monthly fee at an
annualized rate of .60 of 1% of the average daily net assets of each class of
shares. Such fee shall be payable in arrears on the last day of each calendar
month for services performed hereunder during such month. If this Agreement
terminates prior to the end of a month, such fee shall be prorated according to
the proportion which such portion of the month bears to the full month.
7. This Agreement shall become effective on the date it is approved by
the vote of a majority of the Company's outstanding voting securities, as
defined in the Act, and shall continue in effect until the second anniversary of
the date hereof and may be continued for
-4-
<PAGE>
successive twelve-month periods (computed from each January 1) with respect to
each portfolio provided that such continuance is specifically approved at least
annually by the Board of Directors or by majority vote of the holders of the
outstanding voting securities of such portfolio (as defined in the Act), and, in
either case, by a majority of the Board of Directors who are not interested
persons, as defined in the Act, of any party to this Agreement (other than as
Directors of our corporation), provided further, however, that if the
continuation of this Agreement is not approved, you may continue to render the
services described herein in the manner and to the extent permitted by the Act
and the rules and regulations thereunder. Upon the effectiveness of this
Agreement, it shall supersede all previous agreements between us covering the
subject matter hereof. This Agreement may be terminated at any time, without the
payment of any penalty, by vote of a majority of the outstanding voting
securities (as so defined) or by a vote of a majority of the Board of Directors
on 60 days' written notice to you, or by you on 60 days' written notice to us.
8. This Agreement may not be transferred, assigned, sold or in any manner
hypothecated or pledged by you and this Agreement shall terminate automatically
in the event of any such transfer, assignment, sale, hypothecation or pledge by
you. The terms "transfer", "assignment" and "sale" as used in this paragraph
shall have the meanings ascribed thereto by governing law and any interpretation
thereof contained in rules or regulations promulgated by the Securities and
Exchange Commission thereunder.
9. Except to the extent necessary to perform your obligations hereunder,
nothing herein shall be deemed to limit or restrict your right, or the right of
any of your officers, directors or employees, who may also be a Director,
officer or employee of ours, or persons otherwise
-5-
<PAGE>
affiliated with us (within the meaning of the Act) to engage in any other
business or to devote time and attention to the management or other aspects of
any other business, whether of a similar or dissimilar nature, or to render
services of any kind to any other trust, corporation, firm, individual or
association.
10. This Agreement shall be construed in accordance with the laws of the
State of Illinois, provided, however, that nothing herein shall be construed as
being inconsistent with the Act.
If the foregoing is in accordance with your understanding, will you kindly
so indicate by signing and returning to us the enclosed copy hereof.
Very truly yours,
Security Capital U.S. Real Estate Shares
Incorporated
By:
-------------------------------------
Anthony R. Manno Jr.
President
Agreed to and accepted as
of the date first set forth above
By:
-------------------------------
-6-
<PAGE>
EXHIBIT 5(b)
INVESTMENT ADVISORY AGREEMENT
Security Capital Real Estate Mutual Funds Incorporated
Security Capital European Real Estate Shares
June __, 1998
Security Capital Global Capital Management Group Incorporated
11 South LaSalle Street, Second Floor
Chicago, Illinois 60603
Dear Sirs:
We, the undersigned Security Capital Real Estate Mutual Funds Incorporated
("Fund"), herewith confirm our agreement with you as follows:
1. We are an open-end management investment company. Our Directors are
authorized to reclassify and issue any unissued shares to any number of
additional classes or series (portfolios), each having its own investment
objective, policies and restrictions, without shareholder approval, all as more
fully described in our prospectus and statement of additional information.
We engage in the business of investing and reinvesting our assets in
securities in accordance with the limitations specified in our Articles of
Incorporation, By-Laws and any representations made in our prospectus and
statement of additional information, all in such manner and to such extent as
may from time to time be authorized by our Board of Directors. We enclose copies
of the documents listed above and will from time to time furnish you with any
amendments thereof.
<PAGE>
2. (a) We hereby employ you to manage the investment and reinvestment of
Security Capital European Real Estate Shares, a portfolio of the Fund
("Portfolio") as above specified and, without limiting the generality of the
foregoing, to provide management, investment, advisory and other services
specified below.
(b) You will make decisions with respect to all purchases and sales of
the portfolio securities of the Portfolio. To carry out such decisions, you are
hereby authorized, as our agent and attorney-in-fact, for our account and at our
risk and in our name, to place orders for the investment and reinvestment of the
Portfolio's assets. In all purchases, sales and other transactions in our
portfolio securities you are authorized to exercise full discretion and act for
us in the same manner and with the same force and effect as we might or could do
with respect to such purchases, sales or other transactions, as well as with
respect to all other things necessary or incidental to the furtherance or
conduct of such purchases, sales or other transactions.
(c) You will report to our Board of Directors at each meeting thereof
all changes in the Portfolio since the prior report, and will also keep us in
touch with important developments affecting the Portfolio and on your own
initiative will furnish us from time to time with such information as you may
believe appropriate for this purpose, whether concerning the individual issuers
whose securities are included in the Portfolio, the industries in which they
engage, or the conditions prevailing in the economy generally. You will also
furnish us with such statistical and analytical information with respect to the
Portfolio's securities as you may believe appropriate or as we reasonably may
request. In making such purchases and sales of portfolio securities, you will
bear in mind the policies set from time to time by our Board of Directors as
well as the limitations imposed by our Articles of Incorporation, the Investment
-2-
<PAGE>
Company Act of 1940 (the "Act") and the Securities Act of 1933, and the Internal
Revenue Code of 1986, as amended, in respect of regulated investment companies.
(d) It is understood that you will from time to time employ or
associate with yourselves such persons as you believe to be particularly fitted
to assist you in the execution of your duties hereunder, the cost of performance
of such duties to be borne and paid by you. No obligation may be incurred on
our behalf in any such respect. During the continuance of this Agreement at our
request you will provide us persons satisfactory to our Board of Directors to
serve as our officers.
(e) Subject to our ability to obtain the required initial and periodic
approvals under Section 15(c) the 1940 Act, you may retain an investment sub-
adviser, at your own cost and expense, for the purpose of executing your duties
hereunder. Your retention of an investment sub-adviser shall in no way reduce
your responsibilities under this Agreement and you shall be responsible to us
for all acts or omissions of such investment sub-adviser in connection with the
performance of your duties hereunder.
3. We propose to retain the services of an administrator, which shall be
a firm acceptable to you, to administer all aspects of our operations except
those which are your responsibility pursuant to this Agreement. We will bear
the cost of and pay the fee of the administrator. Our initial Administrator
will be Security Capital Global Capital Management Group Incorporated.
4. It is further agreed that you shall pay the fees and expenses
associated with the printing and mailing of the Fund's prospectus and statement
of additional information, and any other sales literature, to parties other than
existing shareholders. We hereby confirm that, subject
-3-
<PAGE>
to the foregoing, we shall be responsible and hereby assume the obligation for
payment of all our other expenses, including: (a) payment of the fee payable to
you under paragraph 6 hereof; (b) charges and expenses of our administrator,
custodian, transfer, and dividend disbursing agent; (c) fees of directors who
are not your affiliated persons; (d) legal and auditing expenses; (e)
compensation of our officers, Directors and employees who do not devote any part
of their time to your affairs or the affairs of your affiliates other than us;
(f) costs of printing our prospectuses and stockholder reports; (g) costs of
proxy solicitation; (h) costs of maintenance of corporate existence; (i)
interest charges, taxes, brokerage fees and commissions; (j) costs of stationery
and supplies; (k) expenses and fees related to registration and filing with the
Securities and Exchange Commission and with state regulatory authorities; and
(l) upon the approval of the Board of Directors, costs of your personnel or your
affiliates rendering clerical, accounting and other office services.
5. We shall expect of you, and you will give us the benefit of, your best
judgment and efforts in rendering these services to us, and we agree as an
inducement to your undertaking these services that you shall not be liable
hereunder for any mistake of judgment or in any event whatsoever, except for
lack of good faith, provided that nothing herein shall be deemed to protect, or
purport to protect, you against any liability to us or to our security holders
to which you would otherwise be subject by reason of willful misfeasance, bad
faith or gross negligence in the performance of your duties hereunder, or by
reason of your reckless disregard of your obligations and duties hereunder.
6. In consideration of the foregoing we will pay you a monthly fee at an
annualized rate of .85 of 1% of the average daily net asset value of each class
of the Portfolio's shares. Such
-4-
<PAGE>
fee shall be payable in arrears on the last day of each calendar month for
services performed hereunder during such month. If this Agreement terminates
prior to the end of a month, such fee shall be prorated according to the
proportion which such portion of the month bears to the full month.
7. This Agreement shall become effective on the date hereof, shall
continue in effect until the second anniversary of the date hereof, and may be
continued for successive twelve-month periods with respect to the Portfolio
provided that such continuance is specifically approved at least annually by the
Board of Directors or by majority vote of the holders of the outstanding voting
securities of the Portfolio (as defined in the Act), and, in either case, by a
majority of the Board of Directors who are not interested persons, as defined in
the Act, of any party to this Agreement (other than as Directors of our
corporation); provided further, however, that if the continuation of this
Agreement is not approved, you may continue to render the services described
herein in the manner and to the extent permitted by the Act and the rules and
regulations thereunder. Upon the effectiveness of this Agreement, it shall
supersede all previous agreements between us covering the subject matter hereof.
This Agreement may be terminated at any time, without the payment of any
penalty, by vote of a majority of the outstanding voting securities (as so
defined) or by a vote of a majority of the Board of Directors on 60 days'
written notice to you, or by you on 60 days' written notice to us.
8. This Agreement may not be transferred, assigned, sold or in any manner
hypothecated or pledged by you and this Agreement shall terminate automatically
in the event of any such transfer, assignment, sale, hypothecation or pledge by
you. The terms "transfer", "assignment" and "sale" as used in this paragraph
shall have the meanings ascribed thereto by
-5-
<PAGE>
governing law and any interpretation thereof contained in rules or regulations
promulgated by the Securities and Exchange Commission thereunder.
9. Except to the extent necessary to perform your obligations hereunder,
nothing herein shall be deemed to limit or restrict your right, or the right of
any of your officers, directors or employees, who may also be a Director,
officer or employee of ours, or persons otherwise affiliated with us (within the
meaning of the Act) to engage in any other business or to devote time and
attention to the management or other aspects of any other business, whether of a
similar or dissimilar nature, or to render services of any kind to any other
trust, corporation, firm, individual or association.
10. This Agreement shall be construed in accordance with the laws of the
State of Illinois, provided, however, that nothing herein shall be construed as
being inconsistent with the Act.
If the foregoing is in accordance with your understanding, will you kindly
so indicate by signing and returning to us the enclosed copy hereof.
Very truly yours,
Security Capital Real Estate Mutual Funds Incorporated
By:
----------------------------------------------------
Anthony R. Manno Jr., President
Agreed to and accepted as of the date first set forth above
Security Capital Global Capital Management Group Incorporated
By:
----------------------------
Name:
Title:
-6-
<PAGE>
EXHIBIT 5(c)
Security Capital Real Estate Mutual Funds Incorporated
Security Capital Asia/Pacific Real Estate Shares
June __, 1998
Security Capital Global Capital Management Group Incorporated
11 South LaSalle Street, Second Floor
Chicago, Illinois 60603
Dear Sirs:
We, the undersigned Security Capital Real Estate Mutual Funds Incorporated
("Fund"), herewith confirm our agreement with you as follows:
1. We are an open-end management investment company. Our Directors are
authorized to reclassify and issue any unissued shares to any number of
additional classes or series (portfolios), each having its own investment
objective, policies and restrictions, without shareholder approval, all as more
fully described in our prospectus and statement of additional information.
We engage in the business of investing and reinvesting our assets in
securities in accordance with the limitations specified in our Articles of
Incorporation, By-Laws and any representations made in our prospectus and
statement of additional information, all in such manner and to such extent as
may from time to time be authorized by our Board of Directors. We enclose copies
of the documents listed above and will from time to time furnish you with any
amendments thereof.
<PAGE>
2. (a) We hereby employ you to manage the investment and reinvestment of
Security Capital Asia/Pacific Real Estate Shares, a portfolio of the Fund
("Portfolio") as above specified and, without limiting the generality of the
foregoing, to provide management, investment, advisory and other services
specified below.
(b) You will make decisions with respect to all purchases and sales
of the portfolio securities of the Portfolio. To carry out such decisions, you
are hereby authorized, as our agent and attorney-in-fact, for our account and at
our risk and in our name, to place orders for the investment and reinvestment of
the Portfolio's assets. In all purchases, sales and other transactions in our
portfolio securities you are authorized to exercise full discretion and act for
us in the same manner and with the same force and effect as we might or could do
with respect to such purchases, sales or other transactions, as well as with
respect to all other things necessary or incidental to the furtherance or
conduct of such purchases, sales or other transactions.
(c) You will report to our Board of Directors at each meeting thereof
all changes in the Portfolio since the prior report, and will also keep us in
touch with important developments affecting the Portfolio and on your own
initiative will furnish us from time to time with such information as you may
believe appropriate for this purpose, whether concerning the individual issuers
whose securities are included in the Portfolio, the industries in which they
engage, or the conditions prevailing in the economy generally. You will also
furnish us with such statistical and analytical information with respect to the
Portfolio's securities as you may believe appropriate or as we reasonably may
request. In making such purchases and sales of portfolio securities, you will
bear in mind the policies set from time to time by our Board of Directors as
well as the limitations imposed by our Articles of Incorporation, the Investment
- 2 -
<PAGE>
Company Act of 1940 (the "Act") and the Securities Act of 1933, and the Internal
Revenue Code of 1986, as amended, in respect of regulated investment companies.
(d) It is understood that you will from time to time employ or
associate with yourselves such persons as you believe to be particularly fitted
to assist you in the execution of your duties hereunder, the cost of performance
of such duties to be borne and paid by you. No obligation may be incurred on
our behalf in any such respect. During the continuance of this Agreement at our
request you will provide us persons satisfactory to our Board of Directors to
serve as our officers.
(e) Subject to our ability to obtain the required initial and
periodic approvals under Section 15(c) the 1940 Act, you may retain an
investment sub-adviser, at your own cost and expense, for the purpose of
executing your duties hereunder. Your retention of an investment sub-adviser
shall in no way reduce your responsibilities under this Agreement and you shall
be responsible to us for all acts or omissions of such investment sub-adviser in
connection with the performance of your duties hereunder.
3. We propose to retain the services of an administrator, which shall be
a firm acceptable to you, to administer all aspects of our operations except
those which are your responsibility pursuant to this Agreement. We will bear
the cost of and pay the fee of the administrator. Our initial Administrator
will be Security Capital Global Capital Management Group Incorporated.
4. It is further agreed that you shall pay the fees and expenses
associated with the printing and mailing of the Fund's prospectus and statement
of additional information, and any other sales literature, to parties other than
existing shareholders. We hereby confirm that, subject
- 3 -
<PAGE>
to the foregoing, we shall be responsible and hereby assume the obligation for
payment of all our other expenses, including: (a) payment of the fee payable to
you under paragraph 6 hereof; (b) charges and expenses of our administrator,
custodian, transfer, and dividend disbursing agent; (c) fees of directors who
are not your affiliated persons; (d) legal and auditing expenses; (e)
compensation of our officers, Directors and employees who do not devote any part
of their time to your affairs or the affairs of your affiliates other than us;
(f) costs of printing our prospectuses and stockholder reports; (g) costs of
proxy solicitation; (h) costs of maintenance of corporate existence; (i)
interest charges, taxes, brokerage fees and commissions; (j) costs of stationery
and supplies; (k) expenses and fees related to registration and filing with the
Securities and Exchange Commission and with state regulatory authorities; and
(l) upon the approval of the Board of Directors, costs of your personnel or your
affiliates rendering clerical, accounting and other office services.
5. We shall expect of you, and you will give us the benefit of, your best
judgment and efforts in rendering these services to us, and we agree as an
inducement to your undertaking these services that you shall not be liable
hereunder for any mistake of judgment or in any event whatsoever, except for
lack of good faith, provided that nothing herein shall be deemed to protect, or
purport to protect, you against any liability to us or to our security holders
to which you would otherwise be subject by reason of willful misfeasance, bad
faith or gross negligence in the performance of your duties hereunder, or by
reason of your reckless disregard of your obligations and duties hereunder.
6. In consideration of the foregoing we will pay you a monthly fee at an
annualized rate of .95 of 1% of the average daily net asset value of each class
of the Portfolio's shares. Such
- 4 -
<PAGE>
fee shall be payable in arrears on the last day of each calendar month for
services performed hereunder during such month. If this Agreement terminates
prior to the end of a month, such fee shall be prorated according to the
proportion which such portion of the month bears to the full month.
7. This Agreement shall become effective on the date hereof, shall
continue in effect until the second anniversary of the date hereof, and may be
continued for successive twelve-month periods with respect to the Portfolio
provided that such continuance is specifically approved at least annually by the
Board of Directors or by majority vote of the holders of the outstanding voting
securities of the Portfolio (as defined in the Act), and, in either case, by a
majority of the Board of Directors who are not interested persons, as defined in
the Act, of any party to this Agreement (other than as Directors of our
corporation); provided further, however, that if the continuation of this
Agreement is not approved, you may continue to render the services described
herein in the manner and to the extent permitted by the Act and the rules and
regulations thereunder. Upon the effectiveness of this Agreement, it shall
supersede all previous agreements between us covering the subject matter hereof.
This Agreement may be terminated at any time, without the payment of any
penalty, by vote of a majority of the outstanding voting securities (as so
defined) or by a vote of a majority of the Board of Directors on 60 days'
written notice to you, or by you on 60 days' written notice to us.
8. This Agreement may not be transferred, assigned, sold or in any manner
hypothecated or pledged by you and this Agreement shall terminate automatically
in the event of any such transfer, assignment, sale, hypothecation or pledge by
you. The terms "transfer", "assignment" and "sale" as used in this paragraph
shall have the meanings ascribed thereto by
- 5 -
<PAGE>
governing law and any interpretation thereof contained in rules or regulations
promulgated by the Securities and Exchange Commission thereunder.
9. Except to the extent necessary to perform your obligations hereunder,
nothing herein shall be deemed to limit or restrict your right, or the right of
any of your officers, directors or employees, who may also be a Director,
officer or employee of ours, or persons otherwise affiliated with us (within the
meaning of the Act) to engage in any other business or to devote time and
attention to the management or other aspects of any other business, whether of a
similar or dissimilar nature, or to render services of any kind to any other
trust, corporation, firm, individual or association.
10. This Agreement shall be construed in accordance with the laws of the
State of Illinois, provided, however, that nothing herein shall be construed as
being inconsistent with the Act.
If the foregoing is in accordance with your understanding, will you kindly
so indicate by signing and returning to us the enclosed copy hereof.
Very truly yours,
Security Capital Real Estate Mutual Funds Incorporated
By: _________________________________________________
Anthony R. Manno Jr., President
Agreed to and accepted as of the date first set forth above
Security Capital Global Capital Management Group Incorporated
By: _______________________________________
Name:
Title:
- 6 -
<PAGE>
EXHIBIT 5(d)
INVESTMENT ADVISORY AGREEMENT
Security Capital Real Estate Mutual Funds Incorporated
Security Capital Real Estate Arbitrage Shares
June __, 1998
Security Capital Global Capital Management Group Incorporated
11 South LaSalle Street, Second Floor
Chicago, Illinois 60603
Dear Sirs:
We, the undersigned Security Capital Real Estate Mutual Funds Incorporated
("Fund"), herewith confirm our agreement with you as follows:
1. We are an open-end management investment company. Our Directors are
authorized to reclassify and issue any unissued shares to any number of
additional classes or series (portfolios), each having its own investment
objective, policies and restrictions, without shareholder approval, all as more
fully described in our prospectus and statement of additional information.
We engage in the business of investing and reinvesting our assets in
securities in accordance with the limitations specified in our Articles of
Incorporation, By-Laws and any representations made in our prospectus and
statement of additional information, all in such manner and to such extent as
may from time to time be authorized by our Board of Directors. We enclose copies
of the documents listed above and will from time to time furnish you with any
amendments thereof.
<PAGE>
2. (a) We hereby employ you to manage the investment and reinvestment of
Security Capital Real Estate Arbitrage Shares, a portfolio of the Fund
("Portfolio") as above specified and, without limiting the generality of the
foregoing, to provide management, investment, advisory and other services
specified below.
(b) You will make decisions with respect to all purchases and sales
of the portfolio securities of the Portfolio. To carry out such decisions, you
are hereby authorized, as our agent and attorney-in-fact, for our account and at
our risk and in our name, to place orders for the investment and reinvestment of
the Portfolio's assets. In all purchases, sales and other transactions in our
portfolio securities you are authorized to exercise full discretion and act for
us in the same manner and with the same force and effect as we might or could do
with respect to such purchases, sales or other transactions, as well as with
respect to all other things necessary or incidental to the furtherance or
conduct of such purchases, sales or other transactions.
(c) You will report to our Board of Directors at each meeting thereof
all changes in the Portfolio since the prior report, and will also keep us in
touch with important developments affecting the Portfolio and on your own
initiative will furnish us from time to time with such information as you may
believe appropriate for this purpose, whether concerning the individual issuers
whose securities are included in the Portfolio, the industries in which they
engage, or the conditions prevailing in the economy generally. You will also
furnish us with such statistical and analytical information with respect to the
Portfolio's securities as you may believe appropriate or as we reasonably may
request. In making such purchases and sales of portfolio securities, you will
bear in mind the policies set from time to time by our Board of Directors as
well as the limitations imposed by our Articles of Incorporation, the Investment
- 2 -
<PAGE>
Company Act of 1940 (the "Act") and the Securities Act of 1933, and the Internal
Revenue Code of 1986, as amended, in respect of regulated investment companies.
(d) It is understood that you will from time to time employ or
associate with yourselves such persons as you believe to be particularly fitted
to assist you in the execution of your duties hereunder, the cost of performance
of such duties to be borne and paid by you. No obligation may be incurred on
our behalf in any such respect. During the continuance of this Agreement at our
request you will provide us persons satisfactory to our Board of Directors to
serve as our officers.
(e) Subject to our ability to obtain the required initial and
periodic approvals under Section 15(c) the 1940 Act, you may retain an
investment sub-adviser, at your own cost and expense, for the purpose of
executing your duties hereunder. Your retention of an investment sub-adviser
shall in no way reduce your responsibilities under this Agreement and you shall
be responsible to us for all acts or omissions of such investment sub-adviser in
connection with the performance of your duties hereunder.
3. We propose to retain the services of an administrator, which shall be
a firm acceptable to you, to administer all aspects of our operations except
those which are your responsibility pursuant to this Agreement. We will bear
the cost of and pay the fee of the administrator. Our initial Administrator
will be Security Capital Global Capital Management Group Incorporated.
4. It is further agreed that you shall pay the fees and expenses
associated with the printing and mailing of the Fund's prospectus and statement
of additional information, and any other sales literature, to parties other than
existing shareholders. We hereby confirm that, subject
- 3 -
<PAGE>
to the foregoing, we shall be responsible and hereby assume the obligation for
payment of all our other expenses, including: (a) payment of the fee payable to
you under paragraph 6 hereof; (b) charges and expenses of our administrator,
custodian, transfer, and dividend disbursing agent; (c) fees of directors who
are not your affiliated persons; (d) legal and auditing expenses; (e)
compensation of our officers, Directors and employees who do not devote any part
of their time to your affairs or the affairs of your affiliates other than us;
(f) costs of printing our prospectuses and stockholder reports; (g) costs of
proxy solicitation; (h) costs of maintenance of corporate existence; (i)
interest charges, taxes, brokerage fees and commissions; (j) costs of stationery
and supplies; (k) expenses and fees related to registration and filing with the
Securities and Exchange Commission and with state regulatory authorities; and
(l) upon the approval of the Board of Directors, costs of your personnel or your
affiliates rendering clerical, accounting and other office services.
5. We shall expect of you, and you will give us the benefit of, your best
judgment and efforts in rendering these services to us, and we agree as an
inducement to your undertaking these services that you shall not be liable
hereunder for any mistake of judgment or in any event whatsoever, except for
lack of good faith, provided that nothing herein shall be deemed to protect, or
purport to protect, you against any liability to us or to our security holders
to which you would otherwise be subject by reason of willful misfeasance, bad
faith or gross negligence in the performance of your duties hereunder, or by
reason of your reckless disregard of your obligations and duties hereunder.
6. In consideration of the foregoing we will pay you a monthly fee as set
forth on Schedule A hereto. Such fee shall be payable in arrears on the last
day of each calendar month
- 4 -
<PAGE>
for services performed hereunder during such month. If this Agreement terminates
prior to the end of a month, such fee shall be prorated according to the
proportion which such portion of the month bears to the full month.
7. This Agreement shall become effective on the date hereof, shall
continue in effect until the second anniversary of the date hereof, and may be
continued for successive twelve-month periods with respect to the Portfolio
provided that such continuance is specifically approved at least annually by the
Board of Directors or by majority vote of the holders of the outstanding voting
securities of the Portfolio (as defined in the Act), and, in either case, by a
majority of the Board of Directors who are not interested persons, as defined in
the Act, of any party to this Agreement (other than as Directors of our
corporation); provided further, however, that if the continuation of this
Agreement is not approved, you may continue to render the services described
herein in the manner and to the extent permitted by the Act and the rules and
regulations thereunder. Upon the effectiveness of this Agreement, it shall
supersede all previous agreements between us covering the subject matter hereof.
This Agreement may be terminated at any time, without the payment of any
penalty, by vote of a majority of the outstanding voting securities (as so
defined) or by a vote of a majority of the Board of Directors on 60 days'
written notice to you, or by you on 60 days' written notice to us.
8. This Agreement may not be transferred, assigned, sold or in any manner
hypothecated or pledged by you and this Agreement shall terminate automatically
in the event of any such transfer, assignment, sale, hypothecation or pledge by
you. The terms "transfer", "assignment" and "sale" as used in this paragraph
shall have the meanings ascribed thereto by
- 5 -
<PAGE>
governing law and any interpretation thereof contained in rules or regulations
promulgated by the Securities and Exchange Commission thereunder.
9. Except to the extent necessary to perform your obligations hereunder,
nothing herein shall be deemed to limit or restrict your right, or the right of
any of your officers, directors or employees, who may also be a Director,
officer or employee of ours, or persons otherwise affiliated with us (within the
meaning of the Act) to engage in any other business or to devote time and
attention to the management or other aspects of any other business, whether of a
similar or dissimilar nature, or to render services of any kind to any other
trust, corporation, firm, individual or association.
10. This Agreement shall be construed in accordance with the laws of the
State of Illinois, provided, however, that nothing herein shall be construed as
being inconsistent with the Act.
If the foregoing is in accordance with your understanding, will you kindly
so indicate by signing and returning to us the enclosed copy hereof.
Very truly yours,
Security Capital Real Estate Mutual Funds Incorporated
By: __________________________________________________
Anthony R. Manno Jr., President
Agreed to and accepted as of the date first set forth above
Security Capital Global Capital Management Group Incorporated
By: ______________________________________
Name:
Title:
- 6 -
<PAGE>
SCHEDULE A
The advisory fee payable pursuant to paragraph 6 hereunder shall be:
a. During the first three months of the Portfolio's operations, an amount
equal to 2.00% of the average daily net asset value of each class of the
Portfolio's shares; and
b. Thereafter, an amount equal to 2.00% of the average daily net asset value
of each class of the Portfolio's shares, adjusted to reflect the investment
performance of the Portfolio for the prior twelve month period relative to
the investment record of the Wilshire Real Estate Index ("Index") for the
same period ("Index Return"). Until the Portfolio has completed twelve
full months of operations, the performance adjustment is measured from the
date of inception.
The advisory fee shall increase or decrease from 2.00% by 10% of the difference
between the investment performance of the Portfolio and the Index Return during
the preceding twelve month period, up to the maximum fee of 3.50% or down to the
minimum fee of 0.50%. The following table reflects the advisory fees that apply
at the stated levels of the Portfolio's performance relative to the Index
Return.
<TABLE>
<CAPTION>
FUND PERFORMANCE ADVISORY FEE
(NET OF FEES AND EXPENSES) (AS % OF AVERAGE DAILY NET ASSETS)
-------------------------- ----------------------------------
<S> <C>
Index Return + 15% 3.50%
Index Return + 10 3.00
Index Return + 5 2.50
Index Return + 3 2.30
Index Return + 1 2.10
Index Return 2.00
Index Return - 1 1.90
Index Return - 3 1.70
Index Return - 5 1.50
Index Return - 10 1.00
Index Return - 15 0.50
</TABLE>
The "investment performance of the Portfolio" for a specified period shall mean
the sum of: (1) the change in the Portfolio's net asset value during such
period; (2) the value of its cash distributions per share accumulated to the end
of such period; and (3) the value of capital gains taxes per share paid or
payable on the undistributed realized long-term capital gains accumulated to the
end of such period.
The "investment record of the Index" for a specified period shall mean the sum
of: (1) the change in the level of the Index during such period; and (2) the
value, computed consistently with the Index, of cash distributions made by
companies whose securities comprise the Index
- 7 -
<PAGE>
accumulated to the end of such period, expressed as a percentage of the Index
level at the beginning of such period. Cash distributions on the securities
which comprise the Index shall be treated as reinvested in the Index at least as
frequently as the end of each calendar quarter following the payment of the
dividend.
- 8 -
<PAGE>
EXHIBIT 5(e)
SPONSORSHIP AGREEMENT
---------------------
SPONSORSHIP AGREEMENT (the "Agreement"), dated as of ______, 1997 by and
between Security Capital (US) Management Group Incorporated, a Delaware
corporation ("SC (US) Management") and Security Capital U.S. Real Estate Shares
Incorporated, a Maryland corporation ("Fund").
WHEREAS, the Fund is an open-end investment company registered under the
Investment Company Act of 1940, as amended (the "Act"); and
WHEREAS, SC (US) Management serves as investment adviser to the Fund
pursuant to an Amended and Restated Investment Advisory Agreement dated December
__, 1997 ("Advisory Agreement"), pursuant to which each class of the Fund's
shares pays SC (US) Management a monthly management fee in an amount equal to
1/12 of .60% of the average daily net assets of that class (approximately .60%
on an annual basis) ("Advisory Fee"); and
WHEREAS, the Fund and the Sponsor desire to enter into an agreement
pursuant to which the Sponsor shall waive the Advisory Fee and/or reimburse the
Fund for operating expenses on the terms and conditions hereto set forth;
NOW THEREFORE, in consideration of the mutual covenants and agreements
herein set forth, the parties covenant and agree as follows:
1. Duties of Sponsor. SC (US) Management hereby agrees that from the date
-----------------
hereof through December 31, 1998, SC (US) Management shall waive the Advisory
Fee and/or reimburse the Fund to the extent necessary to maintain the total
operating expenses (excluding brokerage fees and commissions, interest, taxes
and other extraordinary expenses) of: (i) Class I shares of the Fund at 1.00% of
the average daily net assets of the Class I shares; and (ii) Class R shares of
the Fund at 1.15% of the average daily net assets of the Class R shares.
2. Annual Review. The Sponsor will review its undertaking to waive the
-------------
Advisory Fee and/or reimburse the Fund as set forth in Paragraph 1 on an annual
basis. There is no assurance the Sponsor will continue to waive the Advisory Fee
and/or reimburse expenses beyond the specified period. The Sponsor shall notify
the Fund promptly of its annual determination with respect to the undertaking
hereunder.
3. Severability. If any provision of this Agreement shall be found to be
------------
invalid by a court decision, statute, rule or otherwise, the reminder of this
Agreement shall not be affected thereby.
4. Notice. Any notices under this Agreement shall be in writing addressed and
------
delivered personally (or by telecopy) or mailed postage-paid, to the other party
at such address as such other party may designate in accordance with this
paragraph for the receipt of such notice. Until
<PAGE>
further notice to the other party, it is agreed that the address of the SC (US)
Management and the Fund shall be 11 South LaSalle Street, Second Floor, Chicago,
Illinois 60603.
5. Miscellaneous. Each party agrees to perform such further actions and
-------------
execute such further documents as are necessary to effectuate the purposes
hereof. This Agreement shall be construed and enforced and interpreted in
accordance with and governed by the laws of the State of Illinois without
reference to principles of conflicts of law. The captions in this Agreement are
included for convenience only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. This
Agreement may be executed in any number of counterparts, each of which shall be
deemed to be an original, but such counterparts shall, together, constitute only
one instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, all as of the day and year first above written.
SECURITY CAPITAL U.S. REAL ESTATE SHARES
INCORPORATED
By: ____________________________________________
SECURITY CAPITAL (US) MANAGEMENT GROUP
INCORPORATED
By: ____________________________________________
<PAGE>
EXHIBIT 5(f)
SPONSORSHIP AGREEMENT
---------------------
SPONSORSHIP AGREEMENT (the "Agreement"), dated as of ______, 1998 by and
between Security Capital Global Capital Management Group Incorporated, a
Delaware corporation ("SCGCMG") and Security Capital Real Estate Mutual Funds
Incorporated, a Maryland corporation ("Fund").
WHEREAS, the Fund is an open-end investment company registered under the
Investment Company Act of 1940, as amended (the "Act") and Security Capital
European Real Estate Shares is an investment portfolio of the Fund ("Portfolio")
that issues Class I shares and Class R shares; and
WHEREAS, SCGCMG serves as investment adviser to the Portfolio pursuant to
an Investment Advisory Agreement with the Fund dated _____, 1998 ("Advisory
Agreement"), pursuant to which each class of the Portfolio's shares pays SCGCMG
a monthly management fee in an amount equal to .85% of the average daily net
asset value of that class of shares ("Advisory Fee"); and
WHEREAS, the Fund and the SCGCMG desire to enter into an agreement pursuant
to which the SCGCMG shall waive the Advisory Fee and/or reimburse the Fund for
operating expenses relating to each class of the Portfolio's shares on the terms
and conditions hereto set forth;
NOW THEREFORE, in consideration of the mutual covenants and agreements
herein set forth, the parties covenant and agree as follows:
1. Duties of SCGCMG. SCGCMG hereby agrees that from the date hereof through
----------------
December 31, 1998, SCGCMG shall waive the Advisory Fee and/or reimburse the Fund
to the extent necessary to maintain the total operating expenses (excluding
brokerage fees and commissions, interest, taxes and other extraordinary
expenses) of: (i) Class I shares of the Portfolio at 1.45% of the average daily
net asset value of the Class I shares; and (ii) Class R shares of the Portfolio
at 1.60% of the average daily net asset value of the Class R shares.
2. Annual Review. SCGCMG will review its undertaking to waive the Advisory Fee
-------------
and/or reimburse the Fund with respect to the Portfolio as set forth in
Paragraph 1 on an annual basis. There is no assurance SCGCMG will continue to
waive the Advisory Fee and/or reimburse expenses beyond the specified period.
SCGCMG shall notify the Fund promptly of its annual determination with respect
to the undertaking hereunder.
3. Severability. If any provision of this Agreement shall be found to be
------------
invalid by a court decision, statute, rule or otherwise, the reminder of this
Agreement shall not be affected thereby.
<PAGE>
4. Notice. Any notices under this Agreement shall be in writing addressed and
------
delivered personally (or by telecopy) or mailed postage-paid, to the other party
at such address as such other party may designate in accordance with this
paragraph for the receipt of such notice. Until further notice to the other
party, it is agreed that the address of SCGCMG and the Fund shall be 11 South
LaSalle Street, Second Floor, Chicago, Illinois 60603.
5. Miscellaneous. Each party agrees to perform such further actions and
-------------
execute such further documents as are necessary to effectuate the purposes
hereof. This Agreement shall be construed and enforced and interpreted in
accordance with and governed by the laws of the State of Illinois without
reference to principles of conflicts of law. The captions in this Agreement are
included for convenience only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. This
Agreement may be executed in any number of counterparts, each of which shall be
deemed to be an original, but such counterparts shall, together, constitute only
one instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, all as of the day and year first above written.
SECURITY CAPITAL REAL ESTATE MUTUAL
FUNDS INCORPORATED
By:
-----------------------------------
SECURITY CAPITAL GLOBAL CAPITAL
MANAGEMENT GROUP INCORPORATED
By:
-----------------------------------
<PAGE>
Exhibit 5(g)
SPONSORSHIP AGREEMENT
---------------------
SPONSORSHIP AGREEMENT (the "Agreement"), dated as of ______, 1998 by and
between Security Capital Global Capital Management Group Incorporated, a
Delaware corporation ("SCGCMG") and Security Capital Real Estate Mutual Funds
Incorporated, a Maryland corporation ("Fund").
WHEREAS, the Fund is an open-end investment company registered under the
Investment Company Act of 1940, as amended (the "Act") and Security Capital
Asia/Pacific Real Estate Shares is an investment portfolio of the Fund
("Portfolio") that issues Class I shares and Class R shares; and
WHEREAS, SCGCMG serves as investment adviser to the Portfolio pursuant to
an Investment Advisory Agreement with the Fund dated _____, 1998 ("Advisory
Agreement"), pursuant to which each class of the Portfolio's shares pays SCGCMG
a monthly management fee in an amount equal to .95% of the average daily net
asset value of that class of shares ("Advisory Fee"); and
WHEREAS, the Fund and the SCGCMG desire to enter into an agreement pursuant
to which the SCGCMG shall waive the Advisory Fee and/or reimburse the Fund for
operating expenses relating to each class of the Portfolio's shares on the terms
and conditions hereto set forth;
NOW THEREFORE, in consideration of the mutual covenants and agreements
herein set forth, the parties covenant and agree as follows:
1. Duties of SCGCMG. SCGCMG hereby agrees that from the date hereof through
----------------
December 31, 1998, SCGCMG shall waive the Advisory Fee and/or reimburse the Fund
to the extent necessary to maintain the total operating expenses (excluding
brokerage fees and commissions, interest, taxes and other extraordinary
expenses) of: (i) Class I shares of the Portfolio at 1.55% of the average daily
net asset value of the Class I shares; and (ii) Class R shares of the Portfolio
at 1.70% of the average daily net asset value of the Class R shares.
2. Annual Review. SCGCMG will review its undertaking to waive the Advisory Fee
-------------
and/or reimburse the Fund with respect to the Portfolio as set forth in
Paragraph 1 on an annual basis. There is no assurance SCGCMG will continue to
waive the Advisory Fee and/or reimburse expenses beyond the specified period.
SCGCMG shall notify the Fund promptly of its annual determination with respect
to the undertaking hereunder.
3. Severability. If any provision of this Agreement shall be found to be
------------
invalid by a court decision, statute, rule or otherwise, the reminder of this
Agreement shall not be affected thereby.
<PAGE>
4. Notice. Any notices under this Agreement shall be in writing addressed and
------
delivered personally (or by telecopy) or mailed postage-paid, to the other party
at such address as such other party may designate in accordance with this
paragraph for the receipt of such notice. Until further notice to the other
party, it is agreed that the address of SCGCMG and the Fund shall be 11 South
LaSalle Street, Second Floor, Chicago, Illinois 60603.
5. Miscellaneous. Each party agrees to perform such further actions and
-------------
execute such further documents as are necessary to effectuate the purposes
hereof. This Agreement shall be construed and enforced and interpreted in
accordance with and governed by the laws of the State of Illinois without
reference to principles of conflicts of law. The captions in this Agreement are
included for convenience only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. This
Agreement may be executed in any number of counterparts, each of which shall be
deemed to be an original, but such counterparts shall, together, constitute only
one instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, all as of the day and year first above written.
SECURITY CAPITAL REAL ESTATE MUTUAL
FUNDS INCORPORATED
By:
----------------------------------------
SECURITY CAPITAL GLOBAL CAPITAL
MANAGEMENT GROUP INCORPORATED
By:
----------------------------------------
<PAGE>
Exhibit 5(i)
SUB-ADVISORY AGREEMENT
THIS AGREEMENT is made as of the _____ day of __________________, 1998 by
and among SECURITY CAPITAL GLOBAL CAPITAL MANAGEMENT GROUP INCORPORATED, a
Delaware corporation (the "Adviser"), and SECURITY CAPITAL GLOBAL CAPITAL
MANAGEMENT GROUP (ASIA) INCORPORATED, a Delaware corporation (the "Sub-
Adviser").
WHEREAS, the Adviser is the investment adviser to Security Capital Real
Estate Mutual Funds Incorporated ("Fund"), which is an open-end, management
investment company with non-diversified investment portfolios, registered under
the Investment Company Act of 1940, as amended (the 1940 Act"); and
WHEREAS, the Adviser wishes to retain the Sub-Adviser for purposes of
rendering advisory services to Security Capital Asia/Pacific Real Estate Shares
("SC-ASIA") and the Adviser in connection with the Adviser's responsibilities to
the Fund on the terms and conditions hereinafter set forth.
NOW THEREFORE, in consideration of the mutual covenants herein contained
and other good and valuable consideration, the receipt whereof is hereby
acknowledged, the parties hereto agree as follows:
1. APPOINTMENT OF SUB-ADVISER
The Fund hereby appoints the Sub-Adviser to act as SC-ASIA's Sub-Adviser
under the supervision of the Adviser and the Fund's Board of Directors, and the
Sub-Adviser hereby accepts such appointment, subject to the terms and conditions
contained herein.
2. DUTIES OF SUB-ADVISER
In carrying out its obligations under Section 1 hereof and under the
supervision of the Adviser and the Fund's Board of Directors, the Sub-Adviser
shall:
(a) provide SC-ASIA with such executive, administrative and clerical
services as are deemed advisable by the Adviser and the Fund's Board of
Directors;
(b) determine which issuers and securities shall be represented in SC-
ASIA's portfolio in accordance with the SC-ASIA's investment objectives and
policies and regularly report thereon to Adviser and the Fund's Board of
Directors;
<PAGE>
(c) formulate and implement continuing programs for the purchases and
sales of the securities of such issuers for SC-ASIA's portfolio in
accordance with SC-ASIA's investment objectives and policies and regularly
report thereon to the Adviser and the Fund's Board of Directors;
(d) take, on behalf of SC-ASIA, all actions which appear to SC-ASIA to
be necessary to carry into effect such purchase and sale programs as
aforesaid, including the placing of orders for the purchase and sale of
securities of SC-ASIA;
(e) obtain and evaluate pertinent information about significant
developments and economic, statistical and financial data, domestic,
foreign or otherwise, whether affecting the economy generally or SC-ASIA,
and whether concerning the individual issuers whose securities are included
in SC-ASIA's portfolio or the activities in which they engage, or with
respect to securities which the Adviser considers desirable for inclusion
in the SC-ASIA's portfolio; and
(f) provide recommendations, in accordance with procedures and methods
established by the Fund's Board of Directors, of the fair value of
securities held by SC-ASIA for which market quotations are not readily
available for purposes of facilitating the calculation of SC-ASIA's net
asset value.
3. BROKER-DEALER RELATIONSHIPS
In circumstances when the Sub-Adviser is responsible for decisions to buy
and sell securities for SC-ASIA, broker-dealer selection, and negotiation of its
brokerage commission rates, the Sub-Adviser's primary consideration in effecting
a security transaction will be execution of orders at the most favorable price
on an overall basis. In performing this function, the Sub-Adviser shall comply
with applicable policies established by the Board of Directors and shall provide
the Adviser and the Board of Directors with such reports as the Adviser and the
Board of Directors may require in order to monitor SC-ASIA's portfolio
transaction activities. In selecting a broker-dealer to execute each particular
transaction, the Sub-Adviser will take the following into consideration: the
best net price available; the reliability, integrity and financial condition of
the broker-dealer; the size of and difficulty in executing the order; and the
value of the expected contribution of the broker-dealer to the investment
performance of SC-ASIA on a continuing basis. Accordingly, the price to SC-ASIA
in any transaction may be less favorable than that available from another
broker-dealer if the difference is reasonably justified by other aspects of the
portfolio execution services offered. Subject to such policies as the Board of
Directors may determine, the Sub-Adviser shall not be deemed to have acted
unlawfully or to have breached any duty created by this Agreement or otherwise
solely by reason of its having caused SC-ASIA to pay a broker-dealer that
provides brokerage and research services to the Sub-Adviser an amount of
commission for effecting a portfolio investment transaction in excess of the
amount of commission another broker-dealer would have charged for effecting that
transaction, if the Sub-
2
<PAGE>
Adviser determines in good faith that such amount of commission was reasonable
in relation to the value of the brokerage and research services provided by such
broker-dealer, viewed in terms of either that particular transaction or the Sub-
Adviser's overall responsibilities with respect to SC-ASIA. The Sub-Adviser is
further authorized to allocate the orders placed by it on behalf of SC-ASIA to
such broker-dealers who also provide research or statistical material or other
services to SC-ASIA or the Sub-Adviser. Such allocation shall be in such amounts
and proportions as the Sub-Adviser shall determine and the Sub-Adviser will
report on said allocation regularly to the Adviser and Board of Directors of the
Fund, indicating the brokers to whom such allocations have been made and the
basis therefor.
Consistent with the Conduct Rules of the National Association of Securities
Dealers, Inc., and subject to seeking the most favorable price and execution
available and such other policies as the Board of Directors may determine, the
Sub-Adviser may consider services in connection with the sale of shares of SC-
ASIA as a factor in the selection of broker-dealers to execute portfolio
transactions for SC-ASIA. Subject to the policies established by the Board of
Directors and the supervision of the Adviser, and in compliance with applicable
law, the Adviser may direct Security Capital Markets Group Incorporated ("SCMG")
to execute portfolio transactions for SC-ASIA on an agency basis. The
commissions paid to SCMG must be, as required by Rule 17e-1 under the 1940 Act,
"reasonable and fair compared to the commission, fee or other remuneration
received or to be received by other brokers in connection with comparable
transactions involving similar securities during a comparable period of time."
If the purchase or sale of securities consistent with the investment policies of
SC-ASIA or one or more other accounts of the Sub-Adviser is considered at or
about the same time, transactions in such securities will be allocated among the
accounts in a manner deemed equitable by the Sub-Adviser. SCMG and the Sub-
Adviser may combine such transactions, in accordance with applicable laws and
regulations, in order to obtain the best net price and most favorable execution.
SC-ASIA will not deal with the Sub-Adviser, the Adviser or SCMG in any
transaction in which the Sub-Adviser or SCMG acts as a principal with respect to
any part of SC-ASIA's order. If SCMG is participating in an underwriting or
selling group, SC-ASIA may not buy portfolio securities from the group except in
accordance with policies established by the Board of Directors in compliance
with rules of the Securities and Exchange Commission.
4. CONTROL BY FUND'S BOARD OF DIRECTORS
Any recommendations concerning SC-ASIA's investment program proposed by the
Sub-Adviser to the Adviser and to the Fund pursuant to this Agreement, as well
as any other activities undertaken by the Sub-Adviser on behalf of SC-ASIA
pursuant hereto, shall at all times be subject to any applicable directives of
the Board of Directors of the Fund.
5. COMPLIANCE WITH APPLICABLE REQUIREMENTS
In carrying out its obligations under this Agreement, the Sub-Adviser shall
at all times conform to:
3
<PAGE>
(a) all applicable provisions of the 1940 Act and any rules and
regulations adopted thereunder, as amended;
(b) the provisions of the Fund's Registration Statement on Form N-1A
under the Securities Act of 1933 and the 1940 Act;
(c) the provisions of the Fund's Articles of Incorporation, as amended
from time to time;
(d) the provisions of the Fund's Bylaws, as amended from time to time;
and
(e) any other applicable provisions of federal and state law.
6. COMPENSATION
As consideration for the services provided under this Agreement, the
Adviser will pay the Sub-Adviser the compensation specified in Schedule A
hereto.
7. EXPENSES
The Sub-Adviser, at its own expense, will furnish (i) all necessary
investment and management facilities, including salaries of personnel required
for it to execute its duties faithfully, and (ii) administrative facilities,
including bookkeeping, clerical personnel and equipment necessary for the
efficient conduct of the investment affairs of SC-ASIA under the supervision of
the Adviser and the Fund's Board of Directors.
8. BOOKS AND RECORDS
The Sub-Adviser will maintain and, at its own expense, make available to
U.S. and foreign regulatory authorities, all accounts, books and records with
respect to SC-ASIA in connection with the Sub-Adviser's provision of services
under this Agreement as are required of an investment adviser of a registered
investment company pursuant to the 1940 Act and the Investment Advisers Act of
1940 ("the "Investment Advisers Act") and the rules thereunder.
9. SUPPLEMENTAL AND OTHER ARRANGEMENTS
The Sub-Adviser may enter into arrangements with other persons affiliated
with the Sub-Adviser to better enable it to fulfill its obligations under this
Agreement.
The services of the Sub-Adviser to SC-ASIA are not to be deemed to be
exclusive, the Sub-Adviser and any person controlling, controlled by or under
common control with the Sub-Adviser being free to render investment advisory and
other services to any other person or entity.
4
<PAGE>
10. CONFLICTS OF INTEREST
It is understood that directors, officers, agents and shareholders of the
Fund are or may be interested persons of the Adviser or the Sub-Adviser within
the meaning of Section 2(a)(19) of the 1940 Act; that directors, officers,
agents and shareholders of the Adviser or the Sub-Adviser are or may be
interested persons of the Fund; that the Adviser or the Sub-Adviser may be an
interested person of the Fund within the meaning of Section 2(a)(19) of the 1940
Act; and that the existence of any such common interests shall not affect the
validity hereof or of any transactions hereunder except as otherwise provided in
the Articles of Incorporation or Bylaws of the Fund, the Adviser and/or the Sub-
Adviser, respectively, or by specific provision of applicable law.
11. REGULATION
The Sub-Adviser shall submit to all regulatory and administrative bodies
having jurisdiction over the services provided pursuant to this Agreement any
information, reports or other material which any such body by reason of this
Agreement may request or require pursuant to applicable laws and regulations.
12. PROVISION OF CERTAIN INFORMATION BY SUB-ADVISER
The Sub-Adviser will promptly notify the Adviser in writing of the
occurrence of any of the following events:
(a) the Sub-Adviser fails to be registered as an investment adviser
under the Investment Advisers Act or under the laws of any jurisdiction in
which the Sub-Adviser is required to be registered as an investment adviser
in order to perform its obligations under this Agreement;
(b) the Sub-Adviser is served or otherwise receives notice of any
action, suit, proceeding, inquiry or investigation, at law or in equity,
before or by any court, public board or body, involving the affairs of the
trust; and
(c) the directors, managing directors or officers of, or the advisory
personnel employed by, the Sub-Adviser changes.
13. AMENDMENTS TO THE AGREEMENT
This Agreement may be amended by the parties only if such amendment is
specifically approved by the vote of a majority of the Fund's Directors who are
not interested persons of the Adviser or the Sub-Adviser within the meaning of
Section 2(a)(19) of the 1940 Act, cast in person at a meeting called for the
purpose of voting on such approval. Any required shareholder approval shall be
effective with respect to SC-ASIA if a majority of the outstanding voting
securities of SC-ASIA vote to approve the amendment.
5
<PAGE>
14. TERM
This Agreement shall become effective at 12:01 a.m. on the date hereof and
shall remain in force and effect, subject to Section 16 hereof, for two years
from the date hereof.
15. RENEWAL
Following the expiration of its initial two-year term, this Agreement shall
continue in force and effect from year to year, provided that such continuance
is specifically approved at least annually: (a) either (i) by the Fund's Board
of Directors or (ii) by the vote of a majority of the outstanding voting
securities of SC-ASIA within the meaning of Section 2(a)(42) of the 1940 Act;
and (b) by the affirmative vote of a majority of the Directors who are not
"interested persons" of the Adviser or the Sub-Adviser within the meaning of
Section 2(a)(19) of the 1940 Act, by votes cast in person at a meeting
specifically called for such purpose.
16. TERMINATION
This Agreement may be terminated at any time, without the payment of any
penalty, by vote of the Fund's Board of Directors or by vote of a majority of
the outstanding voting securities of the Fund within the meaning of Section
2(a)(42) of the 1940 Act, on sixty (60) days' written notice to the Adviser and
the Sub-Adviser. This Agreement may be terminated at any time, without the
payment of any penalty, by the Adviser or the Sub-Adviser on sixty (60) days'
written notice to the other party and to the Fund. The notice provided for
herein may be waived by any person to whom such notice is required. This
Agreement shall automatically terminate in the event of its assignment within
the meaning of Section 2 (a) (4) of the 1940 Act.
17. LIABILITY OF SUB-ADVISER
In the performance of its duties hereunder, the Sub-Adviser shall be
obligated to exercise care and diligence and to act in good faith and to use its
best efforts within reasonable limits to ensure the accuracy of all services
performed under this Agreement, but the Sub-Adviser shall not be liable for any
act or omission which does not constitute willful misfeasance, bad faith or
gross negligence on the part of the Sub-Adviser or its officers, directors or
employees, or reckless disregard by the Sub-Adviser of its duties under this
Agreement.
18. NOTICES
Any notices under this Agreement shall be in writing, addressed and
delivered or mailed postage paid to the other party at such address as such
other party may designate for the receipt of such notice. Until further notice
to the other parties hereto, it is agreed that the address of the Sub-Adviser
and the Adviser shall be 11 South LaSalle Street, Chicago, Illinois 60603.
6
<PAGE>
19. QUESTIONS AND INTERPRETATION
Any question of interpretation of any term or provision of this Agreement
having a counterpart in or otherwise derived from a term or provision of the
1940 Act shall be resolved by reference to such term or provision of the 1940
Act and to interpretations thereof, if any, by the United States Courts or in
the absence of any controlling decision of any such court, by rules, regulations
or orders of the SEC issued pursuant to said Act. In addition, where the effect
of a requirement of the 1940 Act reflected in any provision of this Agreement is
revised by rule, regulation or order of the SEC, such provision shall be deemed
to incorporate the effect of such rule, regulation or order. Otherwise the
provisions of this Agreement shall be interpreted in accordance with the laws of
Illinois.
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in duplicate by their respective officers on the day and year first
above written.
Attest: SECURITY CAPITAL GLOBAL CAPITAL
MANAGEMENT GROUP INCORPORATED
By:
- ------------------------------ ---------------------------------
Title:
Attest: SECURITY CAPITAL GLOBAL CAPITAL
MANAGEMENT GROUP (ASIA)
INCORPORATED
By:
- ------------------------------ ---------------------------------
Title:
8
<PAGE>
SCHEDULE A
COMPENSATION
The compensation payable to the Sub-Adviser hereunder shall be 100% of the
Sub-Adviser's actual costs, which include the items enumerated below, plus 10%
mark-up.
Components of Cost
. Payroll and related expenses
. Professional fees
. Office/Occupancy expenses
. Travel Expenses
The compensation set forth in this Schedule A shall remain in force only so
long as SC-ASIA is the Sub-Adviser's sole client. At such time as the Sub-
Adviser is engaged to provide services to another client, the Sub-Adviser's
compensation shall be reset by mutual agreement of the parties hereto with the
approval of the Board of Directors and the shareholders of SC-ASIA as required
by the 1940 Act.
9
<PAGE>
Exhibit 6(a)
DISTRIBUTION AND SERVICING AGREEMENT
This Distribution and Servicing Agreement, made this ___ day of
___________, 1997, by and between Security Capital U.S. Real Estate Shares
Incorporated, a Maryland corporation ("Fund") and Security Capital Markets Group
Incorporated, a _______ corporation, (the "Distributor")
WHEREAS, the Fund is registered with the Securities and Exchange Commission
as an open-end investment company under the Investment Company Act of 1940, as
amended (the "1940 Act"), and has registered shares of Class I, Class I and
Class R common stock for sale to the public under the Securities Act of 1933
(the "1933 Act") and various state securities laws; and
WHEREAS, the Fund wishes to retain the Distributor as the principal
underwriter in connection with the offering and sale of Class I and Class R
shares of the Fund ("Shares") and to furnish certain other services to the
Fund's Class I and Class R shareholders as specified in this Agreement; and
WHEREAS, this Agreement has been approved by separate votes of the Fund's
Board of Directors and of its disinterested directors in conformity with Section
15 of, and paragraph (b)(2) of Rule 12b-1 under, the 1940 Act; and
WHEREAS, the Distributor is willing to act as principal underwriter and to
furnish such services on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed as follows:
1. (a) The Fund hereby appoints the Distributor as principal
underwriter in connection with the offering and sale of the Fund's Class I and
Class R shares. The Distributor, as exclusive agent for the Fund, and subject to
applicable federal and state law and the Articles of Incorporation and By-Laws
of the Fund, shall: (1) provide services to the Fund primarily intended to
result in the sale of the Shares; (2) solicit orders for the purchase of the
Shares subject to such terms and conditions as the Fund may specify; and (3)
accept orders for the purchase of the Shares on behalf of the Fund
(collectively, "Distribution Services"). The Distributor shall comply with all
applicable federal and state laws and offer the Shares of the Fund on an agency
or "best efforts" basis under which the Fund shall issue only such Shares as are
actually sold. The Distributor shall have the right to use any list of
shareholders of the Fund or the Fund or any other list of investors which it
obtains in connection with its provision of services under this Agreement;
provided, however, that the Distributor shall not sell or knowingly provide such
list or lists to any unaffiliated person without the consent of the Fund's Board
of Directors.
<PAGE>
(b) The Distributor shall provide ongoing shareholder liaison
services, including responding to shareholder inquiries, providing shareholders
with information on their investments, and any other services now or hereafter
deemed to be appropriate subjects for the payments of "service fees" under Rule
2830 of the Conduct Rules of the National Association of Securities Dealers,
Inc. (collectively, "Shareholder Services").
2. The Distributor may enter into dealer agreements with registered and
qualified securities dealers it may select for the performance of Distribution
and Shareholder Services, and may enter into agreements with qualified dealers
and other qualified entities to perform record keeping and sub-accounting
services, the form of such agreements to be as mutually agreed upon and approved
by the Fund and the Distributor. In making such arrangements, the Distributor
shall act only as principal and not as agent for the Fund. No such dealer or
other entity is authorized to act as agent for the Fund in connection with the
offering or sale of Shares to the public or otherwise.
3. The public offering price of the Shares of the Fund shall be the net
asset value per share of the outstanding Shares of the Fund. The Fund or its
administrator shall furnish the Distributor with a statement of each computation
of public offering price and of the details entering into such computation.
4. As compensation for providing Distribution Services under this
Agreement, the Distributor shall receive from the Fund a distribution fee and a
service fee at the rates and under the terms and conditions of the Distribution
and Service Plan for Class I Shares and the Distribution and Service Plan for
Class R Shares (each, a "Plan") adopted by the Fund, as such Plans are in effect
from time to time, and subject to any further limitations on such fees as the
Fund's Board of Directors may impose. The Distributor may reallow any or all of
the distribution fee and service fee that it has received under this Agreement
to such dealers or sub-accountants as it may from time to time determine.
5. As used in this Agreement, the term "Registration Statement" shall
mean the registration statement most recently filed by the Fund with the
Securities and Exchange Commission and effective under the 1940 Act and 1933
Act, as such Registration Statement is amended by any amendments thereto at the
time in effect, and the terms "Prospectus" and "Statement of Additional
Information" shall mean, respectively, the form of prospectus and statement of
additional information with respect to the Fund filed by the Fund as part of the
Registration Statement, or as they may be amended from time to time.
6. The Distributor shall print and distribute to prospective investors
Prospectuses, and shall print and distribute, upon request, to prospective
investors Statements of Additional Information, and may print and distribute
such other sales literature, reports, forms and advertisements in connection
with the sale of the Shares as comply with the applicable provisions of federal
and state law. In connection with such sales and offers of sale, the Distributor
and any dealer or subaccountant shall give only such information and make only
such statements or representations as are contained in the Prospectus, Statement
of Additional Information, or in information furnished in writing to the
Distributor by the Fund, and the Fund shall not be responsible
2
<PAGE>
in any way for any other information, statements or representations given or
made by the Distributor, any dealer or sub-accountant, or their representatives
or agents. Except as specifically provided in this Agreement, the Fund shall
bear none of the expenses of the Distributor in connection with its offer and
sale of the Shares.
7. The Fund agrees at its own expense to register the Shares with the
Securities and Exchange Commission, state and other regulatory bodies, and to
prepare and file from time to time such Prospectuses, Statements of Additional
Information, amendments, reports and other documents as may be necessary to
maintain the Registration Statement. The Fund shall bear all expenses related to
preparing and typesetting such Prospectuses, Statements of Additional
Information, and other materials required by law and such other expenses,
including printing and mailing expenses, related to such Fund's communications
with persons who are shareholders of the Fund.
8. The Fund agrees to indemnify, defend and hold the Distributor, its
several officers and directors, and any person who controls the Distributor
within the meaning of Section 15 of the 1933 Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Distributor, its
officers or directors, or any such controlling person may incur, under the 1933
Act or under common law or otherwise, arising out of or based upon any alleged
untrue statement of a material fact contained in the Registration Statement or
arising out of or based upon any alleged omission to state a material fact
required to be stated or necessary to make the Registration Statement not
misleading, provided that in no event shall anything contained in this Agreement
be construed so as to protect the Distributor against any liability to the Fund
or its shareholders to which the Distributor would otherwise be subject by
reason of willful misfeasance, bad faith, or gross negligence in the performance
of its duties, or by reason of its reckless disregard of its obligations and
duties under this Agreement, and further provided that the Fund shall not
indemnify the Distributor for conduct set forth in paragraph 9.
9. The Distributor agrees to indemnify, defend and hold the Fund, its
several officers and directors, and any person who controls the Fund within the
meaning of Section 15 of the 1933 Act, free and harmless from and against any
and all claims, demands, liabilities and expenses (including the cost of
investigating or defending such claims, demands or liabilities and any counsel
fees incurred in connection therewith) which the Fund, its officers or
directors, or any such controlling person may incur, under the 1933 Act or under
common law or otherwise, on account of any wrongful act of the Distributor or
any of its employees or arising out of or based upon any alleged untrue
statement of a material fact contained in information furnished in writing by
the Distributor to the Fund for use in the Registration Statement or arising out
of or based upon any alleged omission to state a material fact in connection
with such information required to be stated in the Registration Statement or
necessary to make such information not misleading. As used in this paragraph,
the term "employee" shall not include a corporate entity under contract to
provide services to the Fund or the Fund, or any employee of such a corporate
entity, unless such person is otherwise an employee of the Fund.
3
<PAGE>
10. The Fund reserves the right at any time to withdraw all offerings of
the Shares of the Fund by written notice to the Distributor at its principal
office.
11. The Fund shall not issue certificates representing Shares unless
requested by a shareholder. If such request is transmitted through the
Distributor, the Fund will cause certificates evidencing the Shares owned to be
issued in such names and denominations as the Distributor shall from time to
time direct, provided that no certificates shall be issued for fractional
Shares.
12. The Distributor may at its sole discretion, directly or through
dealers, repurchase Shares offered for sale by the shareholders or dealers.
Repurchase of Shares by the Distributor shall be at the net asset value next
determined after a repurchase order has been received. The Distributor will
receive no commission or other remuneration for repurchasing Shares. At the end
of each business day, the Distributor shall notify by facsimile or in writing,
the Fund and the Fund's transfer agent, of the orders for repurchase of Shares
received by the Distributor since the last such report, the amount to be paid
for such Shares, and the identity of the shareholders or dealers offering Shares
for repurchase. Upon such notice, the Fund shall pay the Distributor such
amounts as are required by the Distributor for the repurchase of such Shares in
cash or in the form of a credit against moneys due the Fund from the Distributor
as proceeds from the sale of Shares. The Fund reserves the right to suspend such
repurchase right upon written notice to the Distributor. The Distributor further
agrees to act as agent for the Fund to receive and transmit promptly to the
Fund's transfer agent shareholder and dealer requests for redemption of Shares.
13. The Distributor is an independent contractor and shall be agent for
the Fund only in respect to the sale and redemption of the Shares.
14. The services of the Distributor to the Fund under this Agreement are
not to be deemed exclusive, and the Distributor shall be free to render similar
services or other services to others so long as its services hereunder are not
impaired thereby.
15. The Distributor shall prepare reports for the Fund's Board of
Directors on a quarterly basis showing such information concerning expenditures
related to this Agreement as from time to time shall be reasonably requested by
the Board of Directors.
16. As used in this Agreement, the terms "assignment", "interested
person", and "majority of the outstanding voting securities" shall have the
meanings given to them by Section 2(a) of the 1940 Act, subject to such
exemptions as may be granted by the Securities and Exchange Commission by any
rule, regulation or order.
17. This Agreement will become effective with respect to the Fund on the
date first written above and, unless sooner terminated as provided herein, will
continue in effect for one year from the above written date. Thereafter, if not
terminated, this Agreement shall continue in effect with respect to the Fund for
successive annual periods ending on the same date of each year, provided that
such continuance is specifically approved at least annually (i) by the Fund's
Board of Directors or (ii) by a vote of a majority of the outstanding Class I
and Class R voting securities of
4
<PAGE>
the Fund (as defined in the 1940 Act), provided that in either event the
continuance is also approved by a majority of the Fund's Directors who are not
interested persons (as defined in the 1940 Act) of any party to this Agreement,
by vote cast in person at a meeting called for the purpose of voting on such
approval.
18. This Agreement is terminable with respect to the Fund or in its
entirety without penalty, on not less than 60 days notice to the other party,
by: (i) the Fund's Board of Directors by a vote of the Directors who are not
interested persons of the Fund within the meaning of Section 2(a)(19) of the
1940 Act, and have no direct or indirect financial interest in the operation of
the Plans or in any agreement related to the Plans, including this Agreement;
(ii), by vote of a majority of the outstanding Class I and Class R voting
securities of the Fund (as defined in the 1940 Act); (iii) by the Distributor,
or (iv) upon the mutual written consent of the Distributor and the Fund. This
Agreement will also automatically and immediately terminate in the event of its
assignment.
19. No provision of this Agreement may be changed, waived, discharged or
terminated orally, except by an instrument in writing signed by the party
against which enforcement of the change, waiver, discharge or termination is
sought.
IN WITNESS WHEREOF, the parties hereto caused this Agreement to be executed
by their officers thereunto duly authorized.
Attest: SECURITY CAPITAL U.S. REAL ESTATE
SHARES INCORPORATED
By: By:
------------------------------- -----------------------------------
Attest: SECURITY CAPITAL MARKETS GROUP
INCORPORATED
By: By:
------------------------------- -----------------------------------
5
<PAGE>
EXHIBIT 6(b)
DISTRIBUTION AND SERVICING AGREEMENT
This Distribution and Servicing Agreement is made this ___ day of
___________, 1998, by and between Security Capital Real Estate Mutual Funds
Incorporated, a Maryland corporation ("Fund") and Security Capital Markets Group
Incorporated, a Delaware corporation, (the "Distributor").
WHEREAS, the Fund is registered with the Securities and Exchange
Commission as an open-end investment company under the Investment Company Act of
1940, as amended (the "1940 Act"), and issues registered shares of the classes
of common stock ("Classes") of its investment portfolios ("Series"), as set
forth on Schedule A hereto, for sale to the public under the Securities Act of
1933 (the "1933 Act") and various state securities laws; and
WHEREAS, the Fund may suspend the sales of shares of any one or more Series
or Classes at any time and may resume the sales of any such Series or Class(es)
at a later date; and
WHEREAS, the Fund has retained the Distributor as the principal underwriter
in connection with the offering and sale of the Class I and Class R shares of
Security Capital U.S. Real Estate Shares; and
WHEREAS, the Fund wishes to retain the Distributor as the principal
underwriter in connection with the offering and sale of all Classes of the
Series' shares ("Shares"), as may now or hereinafter be established, and to
furnish certain other services to the Series' shareholders as specified in this
Agreement; and
WHEREAS, this Agreement has been approved by separate votes of the Fund's
Board of Directors and of its disinterested directors in conformity with Section
15 of, and paragraph (b)(2) of Rule 12b-1 under, the 1940 Act; and
WHEREAS, the Distributor is willing to act as principal underwriter and to
furnish such services on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed as follows:
1. (a) The Fund hereby appoints the Distributor as principal underwriter in
connection with the offering and sale of the Shares. The Distributor,
as exclusive agent for the Fund, and subject to applicable federal and
state law and the Articles of Incorporation and By-Laws of the Fund,
shall: (1) provide services to the Fund primarily intended to result
in the sale of the Shares; (2) solicit orders for the purchase of the
Shares subject to such terms and conditions as the Fund may specify;
and (3) accept orders for the purchase of the Shares on behalf of the
Fund (collectively, "Distribution
<PAGE>
Services"). The appointment of the Distributor hereunder shall not
preclude the Fund from selling the Shares directly to the public.
The Distributor shall comply with all applicable federal and state
laws and offer the Shares of the Fund on an agency or "best efforts"
basis under which the Fund shall issue only such Shares as are
actually sold. The Distributor shall have the right to use any list
of shareholders of the Fund or the Fund or any other list of investors
which it obtains in connection with its provision of services under
this Agreement; provided, however, that the Distributor shall not sell
or knowingly provide such list or lists to any unaffiliated person
without the consent of the Fund's Board of Directors.
(b) The Distributor shall provide to the Series' shareholders ongoing
shareholder liaison services, including responding to shareholder
inquiries, providing shareholders with information on their
investments, recordkeeping, sub-accounting services and any other
services now or hereafter deemed to be appropriate subjects for the
payments of "service fees" under Rule 2830 of the Conduct Rules of the
National Association of Securities Dealers, Inc. (collectively,
"Shareholder Services").
2. The Distributor accepts such appointment. The Distributor shall offer the
Fund's shares only on the terms set forth in the Fund's Registration
Statement, Prospectus or Statement of Additional Information.
3. As used in this Agreement, the term "Registration Statement" shall mean the
registration statement most recently filed by the Fund with the Securities
and Exchange Commission and effective under the 1940 Act and 1933 Act, as
such Registration Statement is amended by any amendments thereto at the
time in effect, and the terms "Prospectus" and "Statement of Additional
Information" shall mean, respectively, the form of prospectus and statement
of additional information with respect to the Fund filed by the Fund as
part of the Registration Statement, or as they may be amended from time to
time.
4. The Distributor may enter into dealer agreements with registered and
qualified securities dealers and other financial intermediaries it may
select for the performance of Distribution Services and Shareholder
Services, the form of such agreements to be as mutually agreed upon and
approved by the Fund and the Distributor. In making such arrangements, the
Distributor shall act only as principal and not as agent for the Fund. No
such dealer or other financial intermediary is authorized to act as agent
for the Fund in connection with the provision of Distribution Services,
Shareholder Services or otherwise.
5. As compensation for providing Distribution Services and Shareholder
Services under this Agreement, with respect to the Shares, the Distributor
shall receive from the Fund a distribution fee and a service fee at the
rates and under the terms and conditions of the Distribution Services and
Service Plans (each, a "Plan") adopted by the Fund with respect to each
Series, as such Plans
2
<PAGE>
are in effect from time to time, and subject to any further limitations on
such fees as the Fund's Board of Directors may impose. The Distributor may
reallow any or all of the distribution fee and service fee that it has
received under this Agreement to such dealers, financial intermediaries or
sub-accountants as it may from time to time determine.
6. Allocation of Expenses.
(a) The Fund will pay (or will enter into arrangements providing that
persons other than the Fund will pay) for all expenses of the offering
of its shares incurred in connection with:
(1) The registration of the Fund or the registration or qualification
of the Fund's shares for offer or sale under the federal
securities laws and the securities laws of any state or other
jurisdiction in which the Distributor may arrange for the sale of
the Fund's shares; and
(2) The printing and distribution of the Fund's prospectuses to
existing shareholders as may be required under the federal
securities laws and the applicable securities laws of any state or
other jurisdiction; and
(3) The preparation, printing and distribution of any proxy
statements, notices and reports, and the performance of any acts
required to be performed by the Fund by and under the federal
securities laws and the applicable securities laws of any state or
other jurisdiction; and
(4) The issuance of the Fund's shares, including any share issue and
transfer taxes.
(b) The Distributor will pay from its own resources (or will enter into
arrangements providing that persons other than the Distributor or the
Fund shall pay), or promptly reimburse the Fund, for all expenses in
connection with:
(1) The printing and distribution of the Fund's prospectuses utilized
in connection with the provision of Distribution Services;
(2) The preparation, printing and distribution of advertising and
sales literature for use in the offering of the Fund's shares and
printing and distribution of reports to shareholders used as sales
literature;
3
<PAGE>
(3) The qualification of the Distributor as a distributor or broker or
dealer under any applicable federal or state securities laws;
(4) Any investment program of the Fund, including the reinvestment of
dividends and capital gains distributions, to the extent such
expenses exceed the Fund's normal costs of issuing its shares; and
(5) All other expenses in connection with the provision of
Distribution Services and Shareholder Services which have not been
herein specifically allocated to the Fund.
7. Duties of the Distributor.
(a) The Distributor shall devote reasonable time and effort to effect sales
of the Fund's shares, but it shall not be obligated to sell any
specific number of shares.
(b) The Distributor shall use its best efforts in all respects duly to
conform with the requirements of all federal and state laws and
regulations and the regulations of the NASD, in providing Distribution
Services and Shareholder Services. Neither the Distributor nor any
other person is authorized by the Fund to give any information or to
make any representations, other than those contained in the Fund's then
current registration statement or related prospectus and any sales
literature authorized by responsible officers of the Distributor.
(c) The Distributor shall act as an independent contractor and nothing
herein contained shall constitute the Distributor, its agents or
representatives, or any employees thereof as employees of the Fund in
connection with the sale of the Fund's shares.
The Distributor is responsible for its own conduct and the employment,
control and conduct of its agents and employees and for injury to such
agents or employees or to others through its agents or employees. The
Distributor assumes full responsibility for its agents and employees
under applicable statutes and agrees to pay all employer taxes
thereunder.
8. Sale and Redemption of the Fund's Shares.
(a) Orders for the purchase and redemption of the Fund's shares (and
payment for the Fund's shares, in the case of a purchase) shall be
transmitted directly from the Purchaser to the Fund or its agent.
(b) The Fund shall have the right to suspend the redemption of the Fund's
shares pursuant to the conditions set forth in the Fund's then current
registration statement or related prospectus. The Fund shall also have
the right to suspend the sale of the Fund's shares at any time.
4
<PAGE>
(c) The Fund will give the Distributor prompt notice of any such suspension
and shall promptly furnish such other information in connection with
the sale and redemption of the Fund's shares as the Distributor
reasonably requests.
(d) The Fund (or its agent) will make appropriate book entries upon receipt
by the Fund (or its agent) of orders and payments for the Fund's shares
or requests for redemption thereof, and will issue and redeem the
Fund's shares and confirm such transactions in accordance with
applicable laws and regulations.
9. Indemnification.
The Fund agrees to indemnify, defend and hold the Distributor, its several
officers and directors, and any person who controls the Distributor within
the meaning of Section 15 of the 1933 Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including
the cost of investigating or defending such claims, demands or liabilities
and any counsel fees incurred in connection therewith) which the
Distributor, its officers or directors, or any such controlling person may
incur, under the 1933 Act or under common law or otherwise, arising out of
or based upon any alleged untrue statement of a material fact contained in
the Registration Statement or arising out of or based upon any alleged
omission to state a material fact required to be stated or necessary to
make the Registration Statement not misleading, provided that in no event
shall anything contained in this Agreement be construed so as to protect
the Distributor against any liability to the Fund or its shareholders to
which the Distributor would otherwise be subject by reason of willful
misfeasance, bad faith, or gross negligence in the performance of its
duties, or by reason of its reckless disregard of its obligations and
duties under this Agreement.
The Distributor agrees to indemnify, defend and hold the Fund, its several
officers and directors, and any person who controls the Fund within the
meaning of Section 15 of the 1933 Act, free and harmless from and against
any and all claims, demands, liabilities and expenses (including the cost
of investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Fund, its officers
or directors, or any such controlling person may incur, under the 1933 Act
or under common law or otherwise, on account of any wrongful act of the
Distributor or any of its employees or arising out of or based upon any
alleged untrue statement of a material fact contained in information
furnished in writing by the Distributor to the Fund for use in the
Registration Statement or arising out of or based upon any alleged omission
to state a material fact in connection with such information required to be
stated in the Registration Statement or necessary to make such information
not misleading. As used in this paragraph, the term "employee" shall not
include a corporate entity under contract to provide services to the Fund
or the Fund, or any employee of such a corporate entity, unless such person
is otherwise an employee of the Fund.
10. The Fund shall not issue certificates representing Shares unless requested
by a shareholder. If such request is transmitted through the Distributor,
the Fund will cause certificates
5
<PAGE>
evidencing the Shares owned to be issued in such names and denominations as
the Distributor shall from time to time direct, provided that no
certificates shall be issued for fractional Shares.
11. The Distributor may at its sole discretion, directly or through dealers,
repurchase Shares offered for sale by shareholders, dealers or financial
intermediaries. Any repurchase of Shares by the Distributor shall be at
the net asset value next determined after a repurchase order has been
received. The Distributor will receive no commission or other remuneration
for repurchasing Shares. At the end of each business day, the Distributor
shall notify by facsimile or in writing, the Fund and the Fund's transfer
agent, of the orders for repurchase of Shares received by the Distributor
since the last such report, the amount to be paid for such Shares, and the
identity of the shareholders or dealers offering Shares for repurchase.
Upon such notice, the Fund shall pay the Distributor such amounts as are
required by the Distributor for the repurchase of such Shares in cash or in
the form of a credit against moneys due the Fund from the Distributor as
proceeds from the sale of Shares. The Fund reserves the right to suspend
such repurchase right upon written notice to the Distributor. The
Distributor further agrees to act as agent for the Fund to receive and
transmit promptly to the Fund's transfer agent shareholder and dealer
requests for redemption of Shares.
12. The services of the Distributor to the Fund under this Agreement are not to
be deemed exclusive, and the Distributor shall be free to render similar
services or other services to others so long as its services hereunder are
not impaired thereby.
13. The Distributor shall prepare reports for the Fund's Board of Directors on
a quarterly basis showing such information concerning expenditures related
to this Agreement as from time to time shall be reasonably requested by the
Board of Directors.
14. As used in this Agreement, the terms "assignment," "interested person," and
"majority of the outstanding voting securities" shall have the meanings
given to them by Section 2(a) of the 1940 Act, subject to such exemptions
as may be granted by the Securities and Exchange Commission by any rule,
regulation or order.
15. This Agreement will become effective with respect to the Fund on the date
first written above and, unless sooner terminated as provided herein, will
continue in effect for one year from the above written date. Thereafter,
if not terminated, this Agreement shall continue in effect with respect to
the Fund for successive annual periods ending on the same date of each
year, provided that such continuance is specifically approved at least
annually (i) by the Fund's Board of Directors or (ii) by a vote of a
majority of the outstanding voting securities (as defined in the 1940 Act)
of each Series, or a Class thereof, provided that in either event the
continuance is also approved by a majority of the Fund's Directors who are
not interested persons (as defined in the 1940 Act) of any party to this
Agreement, by vote cast in person at a meeting called for the purpose of
voting on such approval.
6
<PAGE>
16. This Agreement is terminable with respect to a Series, or a Class thereof,
or in its entirety, without penalty, on not less than 60 days notice to the
other party, by: (i) the Fund's Board of Directors by a vote of the
Directors who are not interested persons of the Fund within the meaning of
Section 2(a)(19) of the 1940 Act, and have no direct or indirect financial
interest in the operation of the Plans or in any agreement related to the
Plans, including this Agreement; (ii) by vote of a majority of the
outstanding voting securities (as defined in the 1940 Act) of a Series or a
Class thereof; (iii) by the Distributor; or (iv) upon the mutual written
consent of the Distributor and the Fund. This Agreement will also
automatically and immediately terminate in the event of its assignment.
17. No provision of this Agreement may be changed, waived, discharged or
terminated except by an instrument in writing signed by the party against
which enforcement of the change, waiver, discharge or termination is
sought.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers thereunto duly authorized.
Attest: SECURITY CAPITAL REAL ESTATE MUTUAL
FUNDS INCORPORATED
By: By:
----------------------------- ------------------------------
Attest: SECURITY CAPITAL MARKETS GROUP
INCORPORATED
By: By:
----------------------------- ------------------------------
7
<PAGE>
SCHEDULE A
Series of Security Capital Real Estate Mutual Funds Incorporated
----------------------------------------------------------------
Security Capital U.S. Real Estate Shares/1/
Security Capital European Real Estate Shares ("SC-EURO")
Security Capital Asia/ Pacific Real Estate Shares ("SC-ARBITRAGE")
Security Capital Real Estate Arbitrage Shares ("SC-ASIA")
Security Capital Real Estate Mutual Funds Incorporated Classes of Shares
------------------------------------------------------------------------
Class I Shares: Class I shares of SC-EURO, SC-ARBITRAGE and SC-ASIA are sold
at net asset value to investors whose minimum initial
purchase of the shares of that Series is $250,000.
Class R Shares: Class R shares of SC-EURO and SC-ASIA are sold at net asset
value to investors whose minimum initial purchase of the
shares of that Series is $2,500.
- --------------------
/1/ Distribution Services and Shareholder Services are provided by the
Distributor pursuant to a Distribution and Servicing Agreement dated as of
December 17, 1997.
8
<PAGE>
EXHIBIT 6(c)
SALES AND SERVICES AGREEMENT
This Agreement is made as of April ___, 1998, between Security Capital
Markets Group Incorporated, a Delaware corporation located at 11 South LaSalle
Street, Chicago, Illinois 60603, ("Security Capital Markets Group"), and
Preferred Capital Markets, Inc., a California corporation located at 220
Montgomery Street, Suite 777, San Francisco, California, 94104 ("Dealer").
WHEREAS, Security Capital Markets Group has been appointed distributor
by Security Capital Real Estate Mutual Funds Incorporated, a Maryland
corporation (the "Fund"), to sell shares of beneficial interest of each series
of the Fund (the "Shares") and has been retained to furnish certain
distribution, administrative and shareholder services to each series pursuant to
a Distribution and Services Agreement dated as of April 21, 1998 (the
"Distribution Agreement");
WHEREAS, pursuant to the Distribution Agreement, Security Capital
Markets Group is authorized to enter into agreements with broker-dealers for the
sale of Shares (the "Sales") at their net asset value (the "NAV") and for the
provision of certain administrative and shareholder services (the "Services").
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the parties agree as follows:
ARTICLE 1. SALES AND SERVICES
Section 1.1 The Dealer agrees to sell or arrange for the sale of
-----------
Shares of the Series listed on Appendix A (the "Series"), which may be updated
from time to time by Security Capital Markets Group. The Dealer agrees to
provide, or arrange for the provision of, orders to Security Capital Markets
Group pursuant to a separate administrative services agreement with the Dealer
or another entity.
Section 1.2 The Dealer also agrees to provide, or arrange for the
-----------
provision of, Services to the Series. Such Services shall include, but are not
limited to, administering periodic investment and periodic withdrawal programs;
researching and providing historical account activity information for
shareholders requesting it: preparing and mailing account and confirmation
statements to account holders: preparing and mailing tax forms to account
holders: serving as custodian for retirement plans investing in the Series:
dealing appropriately with abandoned accounts: collating and reporting the
number of Shares attributable to each state for blue sky registration and
reporting purposes; identifying and reporting transactions exempt from blue sky
registration requirements; and providing ongoing shareholder services for the
duration of the shareholders' investment in each Series, which may include
updates on performance, total return, other related statistical information, and
a continual analysis of the suitability of the
<PAGE>
investment in each Series.
Section 1.3 Dealer acknowledges that Security Capital Markets Group
-----------
or the Fund may suspend the sales of Shares at its own discretion.
Section 1.4 Nothing in this Agreement modifies the Fund's or
-----------
Series' right to suspend redemptions or delay the payment of redemption proceeds
as permitted by law.
ARTICLE 2. EXPENSES
Section 2.1 Dealer agrees it shall bear all of its own expenses
-----------
incurred in the provision of the Sales and Services under this Agreement.
ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF SECURITY CAPITAL MARKETS GROUP
Security Capital Markets Group represents and warrants to Dealer that the
following are true and will remain true throughout the term of this Agreement:
(a) Security Capital Markets Group is a corporation duly organized and
existing and in good standing under the laws of the State of Delaware.
(b) The current Prospectus ("Prospectus") and Statement of Additional
Information ("SAI") of the Series comply in all material respects with
applicable requirements of the Securities Act of 1933, as amended (the "1933
Act") and the Investment Company Act of 1940 (the "1940 Act") and do not contain
an untrue statement of material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances in which they were made, not misleading.
(c) As of the date hereof, to the extent required by law, each of the
Fund and/or Series and each Series' Shares are qualified for sale in all states
in the United States.
(d) Security Capital Markets Group is authorized to enter into and
perform this Agreement on behalf of each Series, and the performance of its
obligations hereunder does not and will not violate or conflict with any
governing documents or agreements of Fund with respect to the Series or any
applicable law.
ARTICLE 4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF DEALER
Dealer represents, warrants and covenants to Security Capital Markets Group that
the following are true and will remain true throughout the term of this
Agreement:
(a) Dealer is a corporation duly organized and existing in good
standing under the laws of the State of California.
2
<PAGE>
(b) It has full power and authority under applicable law, and has
taken all action necessary, to enter into and perform this Agreement, and the
performance of its obligations hereunder does not and will not violate or
conflict with any governing document or agreements of Dealer or any applicable
law.
(c) It has all requisite licenses and authority to carry on its
business in California and in all other jurisdictions in which it conducts
business.
(d) The arrangements provided for in this Agreement will be disclosed
to shareholders and potential shareholders.
(e) The Dealer is registered as a broker-dealer under the Securities
Exchange Act of 1934, as amended, is a member of the National Association of
Securities Dealers, Inc. ("NASD") and complies with all NASD rules,
interpretations and notices.
(f) In case of any requests or demands for the inspection of
shareholder records of a Series by any governmental agency or otherwise
pertaining to any aspect of the Sales or Services covered by this Agreement, the
Dealer will notify Security Capital Markets Group and secure instructions from
an authorized officer of Security Capital Markets Group as to such inspection.
(g) Dealer will comply with all federal and state laws applicable to
its provision of the Sales and Services under this Agreement.
(h) Dealer will not offer or sell Shares in any jurisdiction in which
they have not been approved for offer and sale.
(i) The Dealer will sell Shares at their NAV.
(j) Dealer has provided Security Capital Markets Group with
resolutions or an incumbency certificate authorizing execution of this
Agreement.
ARTICLE 5. INDEMNIFICATION
Section 5.1 Dealer agrees to indemnify and hold harmless Security
-----------
Capital Markets Group, the Fund, each Series, and their respective directors,
trustees, officers, employees, representatives, designees, agents and each
person, if any who controls Security Capital Markets Group within the meaning of
the 1933 Act (collectively, the "Security Capital Indemnitees"), against any
losses, lawsuits, claims, damages or liabilities, including legal fees
(collectively, "Loss") to which a Security Capital Indemnitee may become subject
insofar as such Loss arises out of: (i) Dealer's failure to comply with the
terms of this Agreement or falsity of or breach of any representation, warranty
or covenant made by Dealer; (ii) Dealer's lack of good faith in performing its
obligations hereunder; (iii) Dealer's negligence or misconduct or that of its
employees, agents or contractors in connection herewith; and Dealer will
reimburse the Security
3
<PAGE>
Capital Indemnities for any legal or other expenses incurred by them in
connection with investigating or defending such Loss; provided, however, that
-----------------
Dealer will not be liable for indemnification hereunder of any Security Capital
Indemnitee to the extent that any Loss results from the negligence or misconduct
of such Security Capital Indemnitee.
Section 5.2 Security Capital Markets Group agrees to indemnify and
-----------
hold harmless Dealer and its directors, officers, employees, representatives,
designees, agents and each person, if any, who controls Dealer within the
meaning of the 1933 Act (collectively, "Dealer Indemnitees") against any Loss to
which a Dealer Indemnitee may become subject insofar as such Loss arises out of:
(i) Security Capital Markets Group's failure to comply with the terms of this
Agreement or falsity of or breach of any representation, warranty or covenant
made by Security Capital Markets Group; (ii) Security Capital Markets Group's
lack of good faith in performing its obligations hereunder; (iii) Security
Capital Markets Group's negligence or misconduct or that of its employees,
agents or contractors in connection herewith; or (iv) any action of Dealer upon
instructions believed in good faith by it to have been executed by a duly
authorized officer or representative of Security Capital Markets Group, the
Fund, or the Series; and Security Capital Markets Group will reimburse Dealer
Indemnitees for any legal or other expenses incurred by them in connection with
investigating or defending such Loss; provided, however, that Security Capital
-----------------
Markets Group will not be liable for indemnification hereunder of any Dealer
Indemnitee to the extent that any Loss results from the negligence or misconduct
of such Dealer Indemnitee.
Section 5.3 Promptly after receipt by any indemnitee under this
-----------
Article 5 of notice of the commencement of a claim or action that may be covered
hereunder ("Claim"), the indemnitee shall notify either Dealer or Security
Capital Markets Group whichever is the indemnitor, of the commencement thereof.
As a condition to indemnification hereunder, the indemnitee shall provide the
indemnitor with complete details, documents and pleadings concerning any Claim.
The indemnitor will be entitled to participate with the indemnitee in the
defense or settlement of any Claim at the indemnitor's expense. The indemnitee
may defend any Claim with counsel of its choice, if the indemnitor shall consent
to such counsel (which consent shall not be unreasonably withheld). After notice
from the indemnitor to the indemnitee of the indemnitor's recommendation to
settle any Claim if the claimant agrees to such settlement but the indemnitee
refuses to agree to such settlement, then the indemnitee shall be responsible
for all Loss thereafter in excess of the amount of such settlement.
ARTICLE 6. REPRESENTATIONS CONCERNING SECURITY CAPITAL MARKETS GROUP, THE
FUND OR THE SERIES; MATERIALS
Section 6.1 Dealer and its affiliates, representatives, designees
-----------
and agents will not make representations concerning Security Capital Markets
Group, the Fund or Series, or their respective affiliates, representatives,
designees, or agents, or the Shares, except those contained in the Prospectus or
SAI of the Series, in financial and other statements furnished by Security
Capital Markets Group or the Series to Dealer, in current sales literature
furnished by Security Capital Markets Group or the Series to Dealer. Neither
Security Capital Markets Group, the Fund, nor any Series shall be responsible in
any way for any information provided or statements
4
<PAGE>
or representations made by Dealer or its employees, representatives or agents
other than the information, statements and representations described in this
Section 6.1.
Section 6.2 Except for the use of each of the Series' Prospectus
-----------
and SAI and other materials provided by Security Capital Markets Group to
Dealer, Dealer shall not use, nor shall it allow its employees, representatives
or agents to use, the name or logo of Security Capital Markets Group, the Fund,
any Series, or any of their respective affiliates, or any products or services
sponsored, managed, advised, administered or distributed by Security Capital
Markets Group, the Fund or any Series, or any of their respective affiliates,
for advertising trade or other commercial or noncommercial purposes without the
express prior written consent of Security Capital Markets Group.
Section 6.3 All materials created by Dealer that mentions Security
-----------
Capital Markets Group, the Fund, any Series, any of their respective affiliates
or any products or services sponsored, managed, advised, administered or
distributed by Security Capital Markets Group, the Fund, any Series, or any of
their respective affiliates, shall be submitted to Security Capital Markets
Group for review at least five (5) business days in advance of the date of its
intended use.
Section 6.4 Security Capital Markets Group and Dealer agree that
-----------
all non-public books, records, information and data pertaining to the business
of the other that are exchanged or received pursuant to the negotiation or the
carrying out of this Agreement shall remain confidential, and shall not be
voluntarily, disclosed by either party without the prior written consent of the
other party, except as may be required by law or by such party to carry out this
Agreement or an order of any court, governmental agency or regulatory body.
ARTICLE 7. ASSIGNMENT
Section 7.1 Neither this Agreement nor any rights or obligations
-----------
hereunder may be assigned by any party without the prior written consent of the
other parties.
Section 7.2 This Agreement shall inure to the benefit of and be
-----------
binding upon the parties and their respective permitted successors and permitted
assigns.
ARTICLE 8. TERM AND TERMINATION OF AGREEMENT
Section 8.1 This Agreement shall become effective on the date first
-----------
set forth above and shall continue in effect until terminated as set forth
below.
Section 8.2 This Agreement may be terminated by either party hereto
-----------
at any time upon at least sixty (60) days written notice. Sections 4(f) and 6.4
and Article 5 shall continue in full force and effect after termination of this
Agreement.
5
<PAGE>
ARTICLE 9. ENTIRE AGREEMENT
This Agreement and the Schedule and Appendix attached hereto set forth
the entire agreement and understanding of the parties relating to the subject
matter hereof, and supersede all prior agreements, arrangements and
understandings, written or oral, among the parties.
ARTICLE 10. AMENDMENTS; WAIVERS
This Agreement may be amended, modified, superseded, canceled, renewed
or extended, and the terms or covenants hereof may be waived, only by a written
instrument executed by all of the parties affected thereby, or in the case of a
waiver, by the party waiving compliance; provided, however, that Security
-----------------
Capital Markets Group may from time to time update Appendix A hereto, to add a
new Series, delete an inactive or terminated Series, or reflect the change of
name of a Series. The failure of any party at any time or times to require
performance of any provision hereof shall in no manner affect the right of such
party at a later time to enforce the same. No waiver by any party of the breach
of any term or covenant contained in this Agreement, whether by conduct or
otherwise, in any one or more instances, shall be deemed to be, or construed as,
a further or continuing waiver of any such breach, or a waiver of the breach of
any other term or covenant contained in this Agreement.
ARTICLE 11. NOTICES
All notices required or permitted under this Agreement shall be in
writing and shall be sent by personal delivery or registered or certified mail,
postage prepaid, or by telecopier confirmed in writing within three (3) business
days as follows:
(A) IF TO SECURITY CAPITAL MARKETS GROUP:
Attention: Jeanne Sullivan
cc: Pamela Silberman
telecopier: (312) 345-5888
(B) IF TO DEALER:
Attention: Angela Hines
cc: Daniel Hines
telecopier: (415) 781-7640
6
<PAGE>
Such addresses may be changed from time to time by any party by
providing written notice in the manner set forth above. All notices shall be
effective upon delivery or when deposited in the mail addressed as set forth
above.
ARTICLE 12. GOVERNING LAW; CONSENT TO JURISDICTION
Section 12.1 This Agreement shall be governed by, and construed and
------------
enforced in accordance with, the laws of the State of Delaware, without giving
effect to conflicts of law principles thereof which might refer such
interpretations to the laws of a different state or jurisdiction.
Section 12.2 Each party hereto: (1) consents to the subject matter
------------
and in personam Jurisdiction and venue in the United States District Court for
the District of Delaware: (i) waives the right to contest the subject matter and
in personam jurisdiction and venue in the United States District Court for the
District of Delaware on any ground; and (ii) agrees that service of process
upon it can be made by certified or registered mail, return receipt requested,
to his or its address referred to in Article 11 hereof and agrees promptly to
notify the other party hereto of any change of such address and agrees that
service to such address shall be deemed to constitute sufficient service of
process under both the federal and state rules of civil procedure wherever the
case is filed. In the event it is determined that the United States District
Court for the District of Delaware should lack subject matter jurisdiction for
any reason, the parties consent to the subject matter and in personam
jurisdiction and venue in the Superior Court of the State of Delaware, County of
Kent.
ARTICLE 13. LEGAL RELATIONSHIP OF PARTIES
The parties hereto agree that they are independent contractors and not
partners or co-venturers or employees of each other. Nothing herein shall be
construed to make Dealer an agent of Security Capital Markets Group, the Fund or
any Series.
ARTICLE 14. CAPTIONS
The paragraph headings contained herein are for reference purposes
only and shall not in any way affect the meaning or interpretation of this
Agreement.
7
<PAGE>
ARTICLE 15. SEVERABILITY; CONFLICTS
If any provision or portion of this Agreement shall be determined to
be invalid or unenforceable for any reason, the remaining provisions and
portions of this Agreement shall be unaffected thereby and shall remain in full
force and effect to the fullest extent permitted by law. If there is any
conflict between the provisions in this Agreement and those of the Prospectus
and SAI of any Series, the Prospectus and SAI shall govern.
ARTICLE 16. COUNTERPARTS
This Agreement may be executed in two or more counterparts, each of
which shall be deemed to be an original, but all of which together shall
constitute one and the same Agreement.
PREFERRED CAPITAL MARKETS, INC.
By:
-----------------------
Name:
Title:
SECURITY CAPITAL MARKETS GROUP INCORPORATED
By:
-----------------------
Name: Donald E. Suter
Title: Managing Director
8
<PAGE>
APPENDIX A
Security Capital U.S. Real Estate Shares, consisting of the following series:
Class R Shares
Class I Shares
9
<PAGE>
Exhibit 8(a)
Custodian Agreement
-------------------
This Agreement between Security Capital Real Estate Mutual Funds
Incorporated, a corporation organized and existing under the laws of the State
of Maryland with its principal place of business at 11 South LaSalle Street,
Chicago, Illinois 60603 (the "FUND"), and State Street Bank and Trust Company,
a Massachusetts trust company with its principal place of business at 225
Franklin Street, Boston, Massachusetts 02110 (the "CUSTODIAN"),
Witnesseth:
Whereas, the Fund is authorized to issue shares in separate series, with
each such series representing interests in a separate portfolio of securities
and other assets; and
Whereas, the Fund intends that this Agreement be applicable to each of the
series and classes listed on Appendix A attached hereto (such series together
with all other series subsequently established by the Fund and made subject to
this Agreement in accordance with Section 18, be referred to herein as the
"PORTFOLIO(S)");
Now Therefore, in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
Section 1. Employment of Custodian and Property to be Held by It
-----------------------------------------------------
The Fund hereby employs the Custodian as the custodian of the assets of the
Portfolios of the Fund, including securities which the Fund, on behalf of the
applicable Portfolio desires to be held in places within the United States
("DOMESTIC SECURITIES") and securities it desires to be held outside the United
States ("FOREIGN SECURITIES"). The Fund on behalf of the Portfolio(s) agrees to
deliver to the Custodian all securities and cash of the Portfolios, and all
payments of income, payments of principal or capital distributions received by
it with respect to all securities owned by the Portfolio(s) from time to time,
and the cash consideration received by it for such new or treasury shares of
beneficial interest of the Fund representing interests in the Portfolios
("SHARES") as may be issued or sold from time to time. The Custodian shall not
be responsible for any property of a Portfolio held or received by the Portfolio
and not delivered to the Custodian.
Upon receipt of "PROPER INSTRUCTIONS" (as such term is defined in Section 6
hereof), the Custodian shall on behalf of the applicable Portfolio(s) from time
to time employ one or more sub-custodians located in the United States, but only
in accordance with an applicable vote by the Board of Directors of the Fund (the
"BOARD") on behalf of the applicable Portfolio(s), and provided that the
Custodian shall have no more or less responsibility or liability to the Fund on
account of any actions or omissions of any sub-custodian so employed than any
such sub-custodian has to the Custodian. The Custodian may employ as sub-
custodian for the Fund's foreign securities on behalf of the
<PAGE>
applicable Portfolio(s) the foreign banking institutions and foreign securities
depositories designated in Schedules A and B hereto but only in accordance with
the applicable provisions of Sections 3 and 4.
Section 2. Duties of the Custodian with Respect to Property of the Fund Held By
--------------------------------------------------------------------
the Custodian in the United States
----------------------------------
Section 2.1 Holding Securities. The Custodian shall hold and physically
------------------
segregate for the account of each Portfolio all non-cash property, to be held by
it in the United States including all domestic securities owned by such
Portfolio, other than (a) securities which are maintained pursuant to Section
2.8 in a clearing agency which acts as a securities depository or in a book-
entry system authorized by the U.S. Department of the Treasury (each, a "U.S.
SECURITIES SYSTEM") and (b) commercial paper of an issuer for which State Street
Bank and Trust Company acts as issuing and paying agent ("DIRECT PAPER") which
is deposited and/or maintained in the Direct Paper System of the Custodian (the
"DIRECT PAPER SYSTEM") pursuant to Section 2.9.
Section 2.2 Delivery of Securities. The Custodian shall release and
----------------------
deliver domestic securities owned by a Portfolio held by the Custodian or in a
U.S. Securities System account of the Custodian or in the Custodian's Direct
Paper book entry system account ("DIRECT PAPER SYSTEM ACCOUNT") only upon
receipt of Proper Instructions on behalf of the applicable Portfolio, which may
be continuing instructions when deemed appropriate by the parties, and only in
the following cases:
1) Upon sale of such securities for the account of the Portfolio and
receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Portfolio;
3) In the case of a sale effected through a U.S. Securities System, in
accordance with the provisions of Section 2.8 hereof;
4) To the depository agent in connection with tender or other similar
offers for securities of the Portfolio;
5) To the issuer thereof or its agent when such securities are called,
redeemed, retired or otherwise become payable; provided that, in any
such case, the cash or other consideration is to be delivered to the
Custodian;
6) To the issuer thereof, or its agent, for transfer into the name of the
Portfolio or into the name of any nominee or nominees of the Custodian
or into the name or nominee name of any agent appointed pursuant to
Section 2.7 or into the name or nominee name of any sub-custodian
appointed pursuant to Section 1; or for exchange for a different
number of bonds, certificates or other evidence representing the same
aggregate face amount
<PAGE>
or number of units; provided that, in any such case, the new
--------
securities are to be delivered to the Custodian;
7) Upon the sale of such securities for the account of the Portfolio, to
the broker or its clearing agent, against a receipt, for examination
in accordance with "street delivery" custom; provided that in any such
case, the Custodian shall have no responsibility or liability for any
loss arising from the delivery of such securities prior to receiving
payment for such securities except as may arise from the Custodian's
own negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of the
securities of the issuer of such securities, or pursuant to provisions
for conversion contained in such securities, or pursuant to any
deposit agreement; provided that, in any such case, the new securities
and cash, if any, are to be delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the surrender
thereof in the exercise of such warrants, rights or similar securities
or the surrender of interim receipts or temporary securities for
definitive securities; provided that, in any such case, the new
securities and cash, if any, are to be delivered to the Custodian;
10) For delivery in connection with any loans of securities made by the
Portfolio, but only against receipt of adequate collateral as agreed
--- ----
upon from time to time by the Custodian and the Fund on behalf of the
Portfolio, which may be in the form of cash, obligations issued by the
United States government, its agencies or instrumentalities,
irrevocable letters of credit or other collateral acceptable to the
lending agent, except that in connection with any loans for which
collateral is to be credited to the Custodian's account in the book-
entry system authorized by the U.S. Department of the Treasury, the
Custodian will not be held liable or responsible for the delivery of
securities owned by the Portfolio prior to the receipt of such
collateral;
11) For delivery as security in connection with any borrowing by the Fund
on behalf of the Portfolio requiring a pledge of assets by the Fund on
behalf of the Portfolio, but only against receipt of amounts borrowed;
--------
12) For delivery in accordance with the provisions of any agreement among
the Fund on behalf of the Portfolio, the Custodian and a broker-dealer
registered under the Securities Exchange Act of 1934 (the "EXCHANGE
ACT") and a member of The National Association of Securities Dealers,
Inc. ("NASD"), relating to compliance with the rules of The Options
<PAGE>
Clearing Corporation and of any registered national securities
exchange, or of any similar organization or organizations, regarding
escrow or other arrangements in connection with transactions by the
Portfolio of the Fund;
13) For delivery in accordance with the provisions of any agreement among
the Fund on behalf of the Portfolio, the Custodian, and a Futures
Commission Merchant registered under the Commodity Exchange Act,
relating to compliance with the rules of the Commodity Futures Trading
Commission and/or any Contract Market, or any similar organization or
organizations, regarding account deposits in connection with
transactions by the Portfolio of the Fund;
14) Upon receipt of instructions from the transfer agent for the Fund (the
"TRANSFER AGENT") for delivery to such Transfer Agent or to the
holders of Shares in connection with distributions in kind, as may be
described from time to time in the currently effective prospectus and
statement of additional information of the Fund related to the
Portfolio (the "PROSPECTUS"), in satisfaction of requests by holders
of Shares for repurchase or redemption; and
15) For any other proper purpose, but only upon receipt of, in addition to
--- ----
Proper Instructions from the Fund on behalf of the applicable
Portfolio, a copy of a resolution of the Board or of the Executive
Committee thereof signed by an officer of the Fund and certified by
the Secretary or an Assistant Secretary thereof (a "CERTIFIED
RESOLUTION"), specifying the securities of the Portfolio to be
delivered, setting forth the purpose for which such delivery is to be
made, declaring such purpose to be a proper corporate purpose, and
naming the person or persons to whom delivery of such securities shall
be made.
Section 2.3 Registration of Securities. Domestic securities held by the
--------------------------
Custodian (other than bearer securities) shall be registered in the name of the
Portfolio or in the name of any nominee of the Fund on behalf of the Portfolio
or of any nominee of the Custodian which nominee shall be assigned exclusively
to the Portfolio, unless the Fund has authorized in writing the appointment of a
------
nominee to be used in common with other registered investment companies having
the same investment adviser as the Portfolio, or in the name or nominee name of
any agent appointed pursuant to Section 2.7 or in the name or nominee name of
any sub-custodian appointed pursuant to Section 1. All securities accepted by
the Custodian on behalf of the Portfolio under the terms of this Agreement shall
be in "street name" or other good delivery form. If, however, the Fund directs
the Custodian to maintain securities in "street name", the Custodian shall
utilize its best efforts only to timely collect income due the Fund on such
securities and to notify the Fund on a best efforts basis only of relevant
corporate actions including, without limitation, pendency of calls, maturities,
tender or exchange offers, class action settlements and proofs of claims.
<PAGE>
Section 2.4 Bank Accounts. The Custodian shall open and maintain a
-------------
separate bank account or accounts in the United States in the name of each
Portfolio of the Fund, subject only to draft or order by the Custodian acting
pursuant to the terms of this Agreement, and shall hold in such account or
accounts, subject to the provisions hereof, all cash received by it from or for
the account of the Portfolio, other than cash maintained by the Portfolio in a
bank account established and used in accordance with Rule 17f-3 under the
Investment Company Act of 1940, as amended (the "1940 ACT"). Funds held by the
Custodian for a Portfolio may be deposited by it to its credit as Custodian in
the Banking Department of the Custodian or in such other banks or trust
companies as it may in its discretion deem necessary or desirable; provided,
--------
however, that every such bank or trust company shall be qualified to act as a
custodian under the 1940 Act and that each such bank or trust company and the
funds to be deposited with each such bank or trust company shall on behalf of
each applicable Portfolio be approved by vote of a majority of the Board. Such
funds shall be deposited by the Custodian in its capacity as Custodian and shall
be withdrawable by the Custodian only in that capacity.
Section 2.5 Collection of Income. Subject to the provisions of Section
--------------------
2.3, the Custodian shall collect on a timely basis all income and other payments
with respect to registered domestic securities held hereunder to which each
Portfolio shall be entitled either by law or pursuant to custom in the
securities business, and shall collect on a timely basis all income and other
payments with respect to bearer domestic securities if, on the date of payment
by the issuer, such securities are held by the Custodian or its agent thereof
and shall credit such income, as collected, to such Portfolio's custodian
account. Without limiting the generality of the foregoing, the Custodian shall
detach and present for payment all coupons and other income items requiring
presentation as and when they become due and shall collect interest when due on
securities held hereunder. Income due each Portfolio on securities loaned
pursuant to the provisions of Section 2.2 (10) shall be the responsibility of
the Fund. The Custodian will have no duty or responsibility in connection
therewith, other than to provide the Fund with such information or data as may
be necessary to assist the Fund in arranging for the timely delivery to the
Custodian of the income to which the Portfolio is properly entitled.
Section 2.6 Payment of Fund Monies. Upon receipt of Proper Instructions
----------------------
on behalf of the applicable Portfolio, which may be continuing instructions when
deemed appropriate by the parties, the Custodian shall pay out monies of a
Portfolio in the following cases only:
1) Upon the purchase of domestic securities, options, futures contracts
or options on futures contracts for the account of the Portfolio but
only (a) against the delivery of such securities or evidence of title
to such options, futures contracts or options on futures contracts to
the Custodian (or any bank, banking firm or trust company doing
business in the United States or abroad which is qualified under the
1940 Act to act as a custodian and has been designated by the
Custodian as its agent for this purpose) registered in the name of the
Portfolio or in the name of a nominee of the
<PAGE>
Custodian referred to in Section 2.3 hereof or in proper form for
transfer; (b) in the case of a purchase effected through a U.S.
Securities System, in accordance with the conditions set forth in
Section 2.8 hereof; (c) in the case of a purchase involving the Direct
Paper System, in accordance with the conditions set forth in Section
2.9; (d) in the case of repurchase agreements entered into between the
Fund on behalf of the Portfolio and the Custodian, or another bank, or
a broker-dealer which is a member of NASD, (i) against delivery of the
securities either in certificate form or through an entry crediting
the Custodian's account at the Federal Reserve Bank with such
securities or (ii) against delivery of the receipt evidencing purchase
by the Portfolio of securities owned by the Custodian along with
written evidence of the agreement by the Custodian to repurchase such
securities from the Portfolio or (e) for transfer to a time deposit
account of the Fund in any bank, whether domestic or foreign; such
transfer may be effected prior to receipt of a confirmation from a
broker and/or the applicable bank pursuant to Proper Instructions from
the Fund as defined herein;
2) In connection with conversion, exchange or surrender of securities
owned by the Portfolio as set forth in Section 2.2 hereof;
3) For the redemption or repurchase of Shares issued as set forth in
Section 5 hereof;
4) For the payment of any expense or liability incurred by the Portfolio,
including but not limited to the following payments for the account of
the Portfolio: interest, taxes, management, accounting, transfer
agent and legal fees, and operating expenses of the Fund whether or
not such expenses are to be in whole or part capitalized or treated as
deferred expenses;
5) For the payment of any dividends on Shares declared pursuant to the
governing documents of the Fund;
6) For payment of the amount of dividends received in respect of
securities sold short;
7) For any other proper purpose, but only upon receipt of, in addition to
--- ----
Proper Instructions from the Fund on behalf of the Portfolio, a copy
of a Certified Resolution specifying the amount of such payment,
setting forth the purpose for which such payment is to be made,
declaring such purpose to be a proper corporate purpose, and naming
the person or persons to whom such payment is to be made.
Section 2.7 Appointment of Agents. The Custodian may at any time or times
---------------------
in its discretion appoint (and may at any time remove) any other bank or trust
company which is itself qualified under the 1940 Act to act as a custodian, as
its agent to
<PAGE>
carry out such of the provisions of this Section 2 as the Custodian may from
time to time direct; provided, however, that the appointment of any agent shall
--------
not relieve the Custodian of its responsibilities or liabilities hereunder.
Section 2.8 Deposit of Fund Assets in U.S. Securities Systems. The
-------------------------------------------------
Custodian may deposit and/or maintain securities owned by a Portfolio in a
clearing agency registered with the United States Securities and Exchange
Commission (the "SEC") under Section 17A of the Exchange Act , which acts as a
securities depository, or in the book-entry system authorized by the U.S.
Department of the Treasury and certain federal agencies, collectively referred
to herein as "U.S. SECURITIES SYSTEM" in accordance with applicable Federal
Reserve Board and SEC rules and regulations, if any, and subject to the
following provisions:
1) The Custodian may keep securities of the Portfolio in a U.S.
Securities System provided that such securities are represented in an
account of the Custodian in the U.S. Securities System (the "U.S.
SECURITIES SYSTEM ACCOUNT") which account shall not include any assets
of the Custodian other than assets held as a fiduciary, custodian or
otherwise for customers;
2) The records of the Custodian with respect to securities of the
Portfolio which are maintained in a U.S. Securities System shall
identify by book-entry those securities belonging to the Portfolio;
3) The Custodian shall pay for securities purchased for the account of
the Portfolio upon (i) receipt of advice from the U.S. Securities
System that such securities have been transferred to the U.S.
Securities System Account, and (ii) the making of an entry on the
records of the Custodian to reflect such payment and transfer for the
account of the Portfolio. The Custodian shall transfer securities
sold for the account of the Portfolio upon (i) receipt of advice from
the U.S. Securities System that payment for such securities has been
transferred to the U.S. Securities System Account, and (ii) the making
of an entry on the records of the Custodian to reflect such transfer
and payment for the account of the Portfolio. Copies of all advices
from the U.S. Securities System of transfers of securities for the
account of the Portfolio shall identify the Portfolio, be maintained
for the Portfolio by the Custodian and be provided to the Fund at its
request. Upon request, the Custodian shall furnish the Fund on behalf
of the Portfolio confirmation of each transfer to or from the account
of the Portfolio in the form of a written advice or notice and shall
furnish to the Fund on behalf of the Portfolio copies of daily
transaction sheets reflecting each day's transactions in the U.S.
Securities System for the account of the Portfolio;
4) The Custodian shall provide the Fund with any report obtained by the
Custodian on the U.S. Securities System's accounting system, internal
<PAGE>
accounting control and procedures for safeguarding securities
deposited in the U.S. Securities System;
5) The Custodian shall have received from the Fund on behalf of the
Portfolio the initial or annual certificate, as the case may be,
required by Section 15 hereof;
6) Anything to the contrary in this Agreement notwithstanding, the
Custodian shall be liable to the Fund for the benefit of the Portfolio
for any loss or damage to the Portfolio resulting from use of the U.S.
Securities System by reason of any negligence, misfeasance or
misconduct of the Custodian or any of its agents or of any of its or
their employees or from failure of the Custodian or any such agent to
enforce effectively such rights as it may have against the U.S.
Securities System; at the election of the Fund, it shall be entitled
to be subrogated to the rights of the Custodian with respect to any
claim against the U.S. Securities System or any other person which the
Custodian may have as a consequence of any such loss or damage if and
to the extent that the Portfolio has not been made whole for any such
loss or damage.
Section 2.9 Fund Assets Held in the Custodian's Direct Paper System. The
-------------------------------------------------------
Custodian may deposit and/or maintain securities owned by a Portfolio in the
Direct Paper System of the Custodian subject to the following provisions:
1) No transaction relating to securities in the Direct Paper System will
be effected in the absence of Proper Instructions from the Fund on
behalf of the Portfolio;
2) The Custodian may keep securities of the Portfolio in the Direct Paper
System only if such securities are represented in the Direct Paper
System Account, which account shall not include any assets of the
Custodian other than assets held as a fiduciary, custodian or
otherwise for customers;
3) The records of the Custodian with respect to securities of the
Portfolio which are maintained in the Direct Paper System shall
identify by book-entry those securities belonging to the Portfolio;
4) The Custodian shall pay for securities purchased for the account of
the Portfolio upon the making of an entry on the records of the
Custodian to reflect such payment and transfer of securities to the
account of the Portfolio. The Custodian shall transfer securities
sold for the account of the Portfolio upon the making of an entry on
the records of the Custodian to reflect such transfer and receipt of
payment for the account of the Portfolio;
5) The Custodian shall furnish the Fund on behalf of the Portfolio
confirmation of each transfer to or from the account of the Portfolio,
in the
<PAGE>
form of a written advice or notice, of Direct Paper on the next
business day following such transfer and shall furnish to the Fund on
behalf of the Portfolio copies of daily transaction sheets reflecting
each day's transaction in the Direct Paper System for the account of
the Portfolio;
6) The Custodian shall provide the Fund on behalf of the Portfolio with
any report on its system of internal accounting control as the Fund
may reasonably request from time to time.
Section 2.10 Segregated Account. The Custodian shall upon receipt of
------------------
Proper Instructions on behalf of each applicable Portfolio establish and
maintain a segregated account or accounts for and on behalf of each such
Portfolio, into which account or accounts may be transferred cash, securities,
irrevocable letters of credit or other permissible collateral, including
securities maintained in an account by the Custodian pursuant to Section 2.8
hereof, (i) in accordance with the provisions of any agreement among the Fund on
behalf of the Portfolio, the Custodian and a broker-dealer registered under the
Exchange Act and a member of the NASD (or any futures commission merchant
registered under the Commodity Exchange Act), relating to compliance with the
rules of The Options Clearing Corporation and of any registered national
securities exchange (or the Commodity Futures Trading Commission or any
registered contract market), or of any similar organization or organizations,
regarding escrow or other arrangements in connection with transactions by the
Portfolio, (ii) for purposes of segregating cash or government securities in
connection with options purchased, sold or written by the Portfolio or commodity
futures contracts or options thereon purchased or sold by the Portfolio, (iii)
for the purposes of compliance by the Portfolio with the procedures required by
Investment Company Act Release No. 10666, or any subsequent release or releases
of the SEC relating to the maintenance of segregated accounts by registered
investment companies and (iv) for other proper trust purposes, but only, in the
--------
case of clause (iv), upon receipt of, in addition to Proper Instructions from
the Fund on behalf of the applicable Portfolio, a copy of a Certified Resolution
setting forth the purpose or purposes of such segregated account and declaring
such purpose(s) to be a proper corporate purpose.
Section 2.11 Ownership Certificates for Tax Purposes. The Custodian shall
---------------------------------------
execute ownership and other certificates and affidavits for all federal and
state tax purposes in connection with receipt of income or other payments with
respect to domestic securities of each Portfolio held by it and in connection
with transfers of securities.
Section 2.12 Proxies. The Custodian shall, with respect to the domestic
-------
securities held hereunder, cause to be promptly executed by the registered
holder of such securities, if the securities are registered otherwise than in
the name of the Portfolio or a nominee of the Portfolio, all proxies, without
indication of the manner in which such proxies are to be voted, and shall
promptly deliver to the Portfolio such proxies, all proxy soliciting materials
and all notices relating to such securities.
<PAGE>
Section 2.13 Communications Relating to Portfolio Securities. Subject to
-----------------------------------------------
the provisions of Section 2.3, the Custodian shall transmit promptly to the Fund
for each Portfolio all written information (including, without limitation,
pendency of calls and maturities of domestic securities and expirations of
rights in connection therewith and notices of exercise of call and put options
written by the Fund on behalf of the Portfolio and the maturity of futures
contracts purchased or sold by the Portfolio) received by the Custodian from
issuers of the securities being held for the Portfolio. With respect to tender
or exchange offers, the Custodian shall transmit promptly to the Portfolio all
written information received by the Custodian from issuers of the securities
whose tender or exchange is sought and from the party (or his agents) making the
tender or exchange offer. If the Portfolio desires to take action with respect
to any tender offer, exchange offer or any other similar transaction, the
Portfolio shall notify the Custodian at least three business days prior to the
date on which the Custodian is to take such action.
Section 3. The Custodian as Foreign Custody Manager of the Portfolios
----------------------------------------------------------
Section 3.1 Definitions. The following capitalized terms shall have the
-----------
indicated meanings:
"COUNTRY RISK" means all factors reasonably related to the systemic risk of
holding Foreign Assets in a particular country including, but not limited to,
such country's political environment; economic and financial infrastructure
(including any Mandatory Securities Depositories operating in the country);
prevailing or developing custody and settlement practices; and laws and
regulations applicable to the safekeeping and recovery of Foreign Assets held in
custody in that country.
"ELIGIBLE FOREIGN CUSTODIAN" has the meaning set forth in section (a)(1) of Rule
17f-5, including a majority-owned or indirect subsidiary of a U.S. Bank (as
defined in Rule 17f-5), a bank holding company meeting the requirements of an
Eligible Foreign Custodian (as set forth in Rule 17f-5 or by other appropriate
action of the U.S. Securities and Exchange Commission (the "SEC")), or a foreign
branch of a Bank (as defined in Section 2(a)(5) of the 1940 Act) meeting the
requirements of a custodian under Section 17(f) of the 1940 Act, except that the
term does not include Mandatory Securities Depositories.
"FOREIGN ASSETS" means any of the Portfolios' investments (including foreign
currencies) for which the primary market is outside the United States and such
cash and cash equivalents as are reasonably necessary to effect the Portfolios'
transactions in such investments.
"FOREIGN CUSTODY MANAGER" has the meaning set forth in section (a)(2) of Rule
17f-5.
"MANDATORY SECURITIES DEPOSITORY" means a foreign securities depository or
clearing agency that, either as a legal or practical matter, must be used if the
Fund, on the Portfolios' behalf, determines to place Foreign Assets in a country
outside the United States (i) because required by law or regulation; (ii)
because securities cannot be withdrawn from such foreign securities depository
or clearing agency; or (iii) because
<PAGE>
maintaining or effecting trades in securities outside the foreign securities
depository or clearing agency is not consistent with prevailing or developing
custodial or market practices.
Section 3.2 Delegation to the Custodian as Foreign Custody Manager. The
------------------------------------------------------
Fund, by resolution adopted by the Board, hereby delegates to the Custodian with
respect to the Portfolios, subject to Section (b) of Rule 17f-5, the
responsibilities set forth in this Section 3 with respect to Foreign Assets of
the Portfolios held outside the United States, and the Custodian hereby accepts
such delegation, as Foreign Custody Manager with respect to the Portfolios.
Section 3.3 Countries Covered. The Foreign Custody Manager shall be
-----------------
responsible for performing the delegated responsibilities defined below only
with respect to the countries and custody arrangements for each such country
listed on Schedule A to this Agreement, which list of countries may be amended
from time to time by the Fund with the Agreement of the Foreign Custody Manager.
The Foreign Custody Manager shall list on Schedule A the Eligible Foreign
Custodians selected by the Foreign Custody Manager to maintain the assets of the
Portfolios, which list of Eligible Foreign Custodians may be amended from time
to time in the sole discretion of the Foreign Custody Manager. Mandatory
Securities Depositories are listed on Schedule B to this Contract, which
Schedule B may be amended from time to time by the Foreign Custody Manager. The
Foreign Custody Manager will provide amended versions of Schedules A and B in
accordance with Section 3.7 hereof.
Upon the receipt by the Foreign Custody Manager of Proper Instructions to
open an account or to place or maintain Foreign Assets in a country listed on
Schedule A, and the fulfillment by the Fund on behalf of the Portfolios of the
applicable account opening requirements for such country, the Foreign Custody
Manager shall be deemed to have been delegated by the Board on behalf of the
Portfolios responsibility as Foreign Custody Manager with respect to that
country and to have accepted such delegation. Following the receipt of Proper
Instructions directing the Foreign Custody Manager to close the account of a
Portfolio with the Eligible Foreign Custodian selected by the Foreign Custody
Manager in a designated country, the delegation by the Board on behalf of the
Portfolios to the Custodian as Foreign Custody Manager for that country shall be
deemed to have been withdrawn and the Custodian shall immediately cease to be
the Foreign Custody Manager of the Portfolios with respect to that country.
The Foreign Custody Manager may withdraw its acceptance of delegated
responsibilities with respect to a designated country upon written notice to the
Fund. Thirty days (or such longer period as to which the parties agree in
writing) after receipt of any such notice by the Fund, the Custodian shall have
no further responsibility as Foreign Custody Manager to the Fund with respect to
the country as to which the Custodian's acceptance of delegation is withdrawn.
<PAGE>
Section 3.4 Scope of Delegated Responsibilities.
-----------------------------------
3.4.1. Selection of Eligible Foreign Custodians. Subject to the
----------------------------------------
provisions of this Section 3, the Portfolios' Foreign Custody Manager may place
and maintain the Foreign Assets in the care of the Eligible Foreign Custodian
selected by the Foreign Custody Manager in each country listed on Schedule A, as
amended from time to time. In performing its delegated responsibilities as
Foreign Custody Manager to place or maintain Foreign Assets with an Eligible
Foreign Custodian, the Foreign Custody Manager shall determine that the Foreign
Assets will be subject to reasonable care, based on the standards applicable to
custodians in the country in which the Foreign Assets will be held by that
Eligible Foreign Custodian, after considering all factors relevant to the
safekeeping of such assets, including, without limitation the factors specified
in Rule 17f-5(c)(1).
3.4.2. Contracts With Eligible Foreign Custodians. The Foreign Custody
------------------------------------------
Manager shall determine that the contract (or the rules or established practices
or procedures in the case of an Eligible Foreign Custodian that is a foreign
securities depository or clearing agency) governing the foreign custody
arrangements with each Eligible Foreign Custodian selected by the Foreign
Custody Manager will satisfy the requirements of Rule 17f-5(c)(2).
3.4.3. Monitoring. In each case in which the Foreign Custody Manager
----------
maintains Foreign Assets with an Eligible Foreign Custodian selected by the
Foreign Custody Manager, the Foreign Custody Manager shall establish a system to
monitor (i) the appropriateness of maintaining the Foreign Assets with such
Eligible Foreign Custodian and (ii) the contract governing the custody
arrangements established by the Foreign Custody Manager with the Eligible
Foreign Custodian (or the rules or established practices and procedures in the
case of an Eligible Foreign Custodian selected by the Foreign Custody Manager
which is a foreign securities depository or clearing agency that is not a
Mandatory Securities Depository). In the event the Foreign Custody Manager
determines that the custody arrangements with an Eligible Foreign Custodian it
has selected are no longer appropriate, the Foreign Custody Manager shall notify
the Board in accordance with Section 3.7 hereunder.
Section 3.5 Guidelines for the Exercise of Delegated Authority. For
--------------------------------------------------
purposes of this Section 3, the Board shall be deemed to have considered and
determined to accept such Country Risk as is incurred by placing and maintaining
the Foreign Assets in each country for which the Custodian is serving as Foreign
Custody Manager of the Portfolios. The Fund, on behalf of the Portfolios, and
the Board shall be deemed to be monitoring on a continuing basis such Country
Risk to the extent that the Board considers necessary or appropriate. The Fund
and the Custodian each expressly acknowledge that the Foreign Custody Manager
shall not be delegated any responsibilities under this Section 3 with respect to
Mandatory Securities Depositories.
<PAGE>
Section 3.6 Standard of Care as Foreign Custody Manager of the Portfolios.
-------------------------------------------------------------
In performing the responsibilities delegated to it, the Foreign Custody Manager
agrees to exercise reasonable care, prudence and diligence such as a person
having responsibility for the safekeeping of assets of management investment
companies registered under the 1940 Act would exercise.
Section 3.7 Reporting Requirements. The Foreign Custody Manager shall
----------------------
report the withdrawal of the Foreign Assets from an Eligible Foreign Custodian
and the placement of such Foreign Assets with another Eligible Foreign Custodian
by providing to the Board amended Schedules A or B at the end of the calendar
quarter in which an amendment to either Schedule has occurred. The Foreign
Custody Manager shall make written reports notifying the Board of any other
material change in the foreign custody arrangements of the Portfolios described
in this Section 3 after the occurrence of the material change.
Section 3.8 Representations with Respect to Rule 17f-5. The Foreign
------------------------------------------
Custody Manager represents to the Fund that it is a U.S. Bank as defined in
section (a)(7) of Rule 17f-5. The Fund represents to the Custodian that the
Board has determined that it is reasonable for the Board to rely on the
Custodian to perform the responsibilities delegated pursuant to this Agreement
to the Custodian as the Foreign Custody Manager of the Portfolios.
Section 3.9 Effective Date and Termination of the Custodian as Foreign
----------------------------------------------------------
Custody Manager. The Board's delegation to the Custodian as Foreign Custody
- ---------------
Manager of the Portfolios shall be effective as of the date of execution of this
Agreement and shall remain in effect until terminated at any time, without
penalty, by written notice from the terminating party to the non-terminating
party. Termination will become effective thirty (30) days after receipt by the
non-terminating party of such notice. The provisions of Section 3.3 hereof
shall govern the delegation to and termination of the Custodian as Foreign
Custody Manager of the Portfolios with respect to designated countries.
Section 4. Duties of the Custodian with Respect to Property of the Portfolios
------------------------------------------------------------------
Held Outside of the United States
---------------------------------
Section 4.1 Definitions. Capitalized terms in this Section 4 shall have
-----------
the following meanings:
"FOREIGN SECURITIES SYSTEM" means either a clearing agency or a securities
depository listed on Schedule A hereto or a Mandatory Securities Depository
listed on Schedule B hereto.
"FOREIGN SUB-CUSTODIAN" means a foreign banking institution serving as an
Eligible Foreign Custodian.
<PAGE>
Section 4.2 Holding Securities. The Custodian shall identify on its books
------------------
as belonging to the Portfolios the foreign securities held by each Foreign Sub-
Custodian or Foreign Securities System. The Custodian may hold foreign
securities for all of its customers, including the Portfolios, with any Foreign
Sub-Custodian in an account that is identified as belonging to the Custodian for
the benefit of its customers, provided however, that (i) the records of the
----------------
Custodian with respect to foreign securities of the Portfolios which are
maintained in such account shall identify those securities as belonging to the
Portfolios and (ii), to the extent permitted and customary in the market in
which the account is maintained, the Custodian shall require that securities so
held by the Foreign Sub-Custodian be held separately from any assets of such
Foreign Sub-Custodian or of other customers of such Foreign Sub-Custodian.
Section 4.3 Foreign Securities Systems. Foreign securities shall be
--------------------------
maintained in a Foreign Securities System in a designated country only through
arrangements implemented by the Foreign Sub-Custodian in such country pursuant
to the terms of this Agreement.
Section 4.4 Transactions in Foreign Custody Account.
---------------------------------------
4.4.1. Delivery of Foreign Securities. The Custodian or a Foreign Sub-
------------------------------
Custodian shall release and deliver foreign securities of the Portfolios held by
such Foreign Sub-Custodian, or in a Foreign Securities System account, only upon
receipt of Proper Instructions, which may be continuing instructions when deemed
appropriate by the parties, and only in the following cases:
(i) upon the sale of such foreign securities for the Portfolios in
accordance with commercially reasonable market practice in the
country where such foreign securities are held or traded, including,
without limitation: (A) delivery against expectation of receiving
later payment; or (B) in the case of a sale effected through a
Foreign Securities System in accordance with the rules governing the
operation of the Foreign Securities System;
(ii) in connection with any repurchase agreement related to foreign
securities;
(iii) to the depository agent in connection with tender or other similar
offers for foreign securities of the Portfolios;
(iv) to the issuer thereof or its agent when such foreign securities are
called, redeemed, retired or otherwise become payable;
(v) to the issuer thereof, or its agent, for transfer into the name of
the Custodian (or the name of the respective Foreign Sub-Custodian
or of any nominee of the Custodian or such Foreign Sub-Custodian) or
for exchange for a different number of bonds, certificates or other
evidence representing the same aggregate face amount or number of
units;
<PAGE>
(vi) to brokers, clearing banks or other clearing agents for examination
or trade execution in accordance with market custom; provided that
--------
in any such case the Foreign Sub-Custodian shall have no
responsibility or liability for any loss arising from the delivery
of such securities prior to receiving payment for such securities
except as may arise from the Foreign Sub-Custodian's own negligence
or willful misconduct;
(vii) for exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of
the securities of the issuer of such securities, or pursuant to
provisions for conversion contained in such securities, or pursuant
to any deposit agreement;
(viii) in the case of warrants, rights or similar foreign securities, the
surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or temporary
securities for definitive securities;
(ix) for delivery as security in connection with any borrowing by the
Portfolios requiring a pledge of assets by the Portfolios;
(x) in connection with trading in options and futures contracts,
including delivery as original margin and variation margin;
(xi) in connection with the lending of foreign securities; and
(xii) for any other proper purpose, but only upon receipt of, in addition
--- ----
to Proper Instructions, a copy of a Certified Resolution specifying
the foreign securities to be delivered, setting forth the purpose
for which such delivery is to be made, declaring such purpose to be
a proper corporate purpose, and naming the person or persons to whom
delivery of such securities shall be made.
4.4.2. Payment of Portfolio Monies. Upon receipt of Proper Instructions,
---------------------------
which may be continuing instructions when deemed appropriate by the parties, the
Custodian shall pay out, or direct the respective Foreign Sub-Custodian or the
respective Foreign Securities System to pay out, monies of a Portfolio in the
following cases only:
(i) upon the purchase of foreign securities for the Portfolio, unless
otherwise directed by Proper Instructions, by (A) delivering money to
the seller thereof or to a dealer therefor (or an agent for such
seller or dealer) against expectation of receiving later delivery of
such foreign securities; or (B) in the case of a purchase effected
through a Foreign Securities System, in accordance with the rules
governing the operation of such Foreign Securities System;
<PAGE>
(ii) in connection with the conversion, exchange or surrender of foreign
securities of the Portfolio;
(iii) for the payment of any expense or liability of the Portfolio,
including but not limited to the following payments: interest,
taxes, investment advisory fees, transfer agency fees, fees under
this Agreement, legal fees, accounting fees, and other operating
expenses;
(iv) for the purchase or sale of foreign exchange or foreign exchange
contracts for the Portfolio, including transactions executed with or
through the Custodian or its Foreign Sub-Custodians;
(v) in connection with trading in options and futures contracts,
including delivery as original margin and variation margin;
(vii) in connection with the borrowing or lending of foreign securities;
and
(viii) for any other proper purpose, but only upon receipt of, in addition
--- ----
to Proper Instructions, a copy of a Certified Resolution specifying
the amount of such payment, setting forth the purpose for which such
payment is to be made, declaring such purpose to be a proper
corporate purpose, and naming the person or persons to whom such
payment is to be made.
4.4.3. Market Conditions. Notwithstanding any provision of this Agreement
-----------------
to the contrary, settlement and payment for Foreign Assets received for the
account of the Portfolios and delivery of Foreign Assets maintained for the
account of the Portfolios may be effected in accordance with the customary
established securities trading or processing practices and procedures in the
country or market in which the transaction occurs, including, without
limitation, delivering Foreign Assets to the purchaser thereof or to a dealer
therefor (or an agent for such purchaser or dealer) with the expectation of
receiving later payment for such Foreign Assets from such purchaser or dealer.
The Custodian shall provide to the Board the information with respect to
custody and settlement practices in countries in which the Custodian employs a
Foreign Sub-Custodian, including without limitation information relating to
Foreign Securities Systems, described on Schedule C hereto at the time or times
set forth on such Schedule. The Custodian may revise Schedule C from time to
time, provided that no such revision shall result in the Board being provided
with substantively less information than had been previously provided hereunder.
Section 4.5 Registration of Foreign Securities. The foreign securities
----------------------------------
maintained in the custody of a Foreign Sub-Custodian (other than bearer
securities) shall be registered in the name of the applicable Portfolio or in
the name of the Custodian or in the name of any Foreign Sub-Custodian or in the
name of any nominee of the foregoing, and the Fund on behalf of such Portfolio
agrees to hold any such nominee harmless from any liability as a holder of
record of such foreign securities. The Custodian or a Foreign Sub-Custodian
shall not be obligated to accept securities on behalf of a Portfolio under
<PAGE>
the terms of this Agreement unless the form of such securities and the manner in
which they are delivered are in accordance with reasonable market practice.
Section 4.6 Bank Accounts. The Custodian shall identify on its books as
-------------
belonging to the Fund cash (including cash denominated in foreign currencies)
deposited with the Custodian. Where the Custodian is unable to maintain, or
market practice does not facilitate the maintenance of, cash on the books of the
Custodian, a bank account or bank accounts opened and maintained outside the
United States on behalf of a Portfolio with a Foreign Sub-Custodian shall be
subject only to draft or order by the Custodian or such Foreign Sub-Custodian,
acting pursuant to the terms of this Agreement to hold cash received by or from
or for the account of the Portfolio.
Section 4.7 Collection of Income. The Custodian shall use reasonable
--------------------
commercial efforts to collect all income and other payments with respect to the
Foreign Assets held hereunder to which the Portfolios shall be entitled and
shall credit such income, as collected, to the applicable Portfolio. In the
event that extraordinary measures are required to collect such income, the Fund
and the Custodian shall consult as to such measures and as to the compensation
and expenses of the Custodian relating to such measures.
Section 4.8 Shareholder Rights. With respect to the foreign securities
------------------
held pursuant to this Agreement, the Custodian will use reasonable commercial
efforts to facilitate the exercise of voting and other shareholder rights,
subject always to the laws, regulations and practical constraints that may exist
in the country where such securities are issued. The Fund acknowledges that
local conditions, including lack of regulation, onerous procedural obligations,
lack of notice and other factors may have the effect of severely limiting the
ability of the Fund to exercise shareholder rights.
Section 4.9 Communications Relating to Foreign Securities. The Custodian
---------------------------------------------
shall transmit promptly to the Fund written information (including, without
limitation, pendency of calls and maturities of foreign securities and
expirations of rights in connection therewith) received by the Custodian via the
Foreign Sub-Custodians from issuers of the foreign securities being held for the
account of the Portfolios. With respect to tender or exchange offers, the
Custodian shall transmit promptly to the Fund written information so received by
the Custodian from issuers of the foreign securities whose tender or exchange is
sought or from the party (or its agents) making the tender or exchange offer.
The Custodian shall not be liable for any untimely exercise of any tender,
exchange or other right or power in connection with foreign securities or other
property of the Portfolios at any time held by it unless (i) the Custodian or
the respective Foreign Sub-Custodian is in actual possession of such foreign
securities or property and (ii) the Custodian receives Proper Instructions with
regard to the exercise of any such right or power, and both (i) and (ii) occur
at least three business days prior to the date on which the Custodian is to take
action to exercise such right or power
<PAGE>
Section 4.10 Liability of Foreign Sub-Custodians and Foreign Securities
----------------------------------------------------------
Systems. Each agreement pursuant to which the Custodian employs as a Foreign
- -------
Sub-Custodian shall, to the extent possible in a foreign market, require the
Foreign Sub-Custodian to exercise reasonable care in the performance of its
duties and, to the extent possible in a foreign market, to indemnify, and hold
harmless, the Custodian from and against any loss, damage, cost, expense,
liability or claim arising out of or in connection with the Foreign Sub-
Custodian's performance of such obligations. The Portfolios shall be entitled
to be subrogated to the rights of the Custodian with respect to any claims
against a Foreign Sub-Custodian as a consequence of any such loss, damage, cost,
expense, liability or claim if and to the extent that the Portfolios have not
been made whole for any such loss, damage, cost, expense, liability or claim.
Section 4.11 Tax Law. The Custodian shall have no responsibility or
-------
liability for any obligations now or hereafter imposed on the Fund, the
Portfolios or the Custodian as custodian of the Portfolios by the tax law of the
United States or of any state or political subdivision thereof. It shall be the
responsibility of the Fund to notify the Custodian of the obligations imposed on
the Fund with respect to the Portfolios or the Custodian as custodian of the
Portfolios by the tax law of countries other than those mentioned in the above
sentence, including responsibility for withholding and other taxes, assessments
or other governmental charges, certifications and governmental reporting. The
sole responsibility of the Custodian with regard to such tax law shall be to use
reasonable efforts to assist the Fund with respect to any claim for exemption or
refund under the tax law of countries for which the Fund has provided such
information.
Section 4.12 Conflict. If the Custodian is delegated the responsibilities
--------
of Foreign Custody Manager pursuant to the terms of Section 3 hereof, in the
event of any conflict between the provisions of Sections 3 and 4 hereof, the
provisions of Section 3 shall prevail.
Section 5. Payments for Sales or Repurchases or Redemptions of Shares
----------------------------------------------------------
The Custodian shall receive from the distributor for the Shares or from the
Transfer Agent and deposit into the account of the appropriate Portfolio such
payments as are received for Shares thereof issued or sold from time to time by
the Fund. The Custodian will provide timely notification to the Fund on behalf
of each such Portfolio and the Transfer Agent of any receipt by it of payments
for Shares of such Portfolio.
From such funds as may be available for the purpose, the Custodian shall,
upon receipt of instructions from the Transfer Agent, make funds available for
payment to holders of Shares who have delivered to the Transfer Agent a request
for redemption or repurchase of their Shares. In connection with the redemption
or repurchase of Shares, the Custodian is authorized upon receipt of
instructions from the Transfer Agent to wire funds to or through a commercial
bank designated by the redeeming shareholders. In connection with the
redemption or repurchase of Shares, the Custodian shall honor checks drawn on
the Custodian by a holder of Shares, which checks have been furnished by the
Fund to the holder of Shares, when presented to the Custodian in accordance with
<PAGE>
such procedures and controls as are mutually agreed upon from time to time
between the Fund and the Custodian.
Section 6. Proper Instructions
-------------------
Proper Instructions as used throughout this Agreement means a writing
signed or initialed by one or more person or persons as the Board shall have
from time to time authorized. Each such writing shall set forth the specific
transaction or type of transaction involved, including a specific statement of
the purpose for which such action is requested. Oral instructions will be
considered Proper Instructions if the Custodian reasonably believes them to have
been given by a person authorized to give such instructions with respect to the
transaction involved. The Fund shall cause all oral instructions to be
confirmed in writing. Upon receipt of a certificate of the Secretary or an
Assistant Secretary as to the authorization by the Board accompanied by a
detailed description of procedures approved by the Board, Proper Instructions
may include communications effected directly between electro-mechanical or
electronic devices provided that the Board and the Custodian are satisfied that
such procedures afford adequate safeguards for the Portfolios' assets. For
purposes of this Section, Proper Instructions shall include instructions
received by the Custodian pursuant to any three - party agreement which requires
a segregated asset account in accordance with Section 2.10.
Section 7. Actions Permitted without Express Authority
-------------------------------------------
The Custodian may in its discretion, without express authority from the
Fund on behalf of each applicable Portfolio:
1) make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under this
Agreement, provided that all such payments shall be accounted for to
--------
the Fund on behalf of the Portfolio;
2) surrender securities in temporary form for securities in definitive
form;
3) endorse for collection, in the name of the Portfolio, checks, drafts
and other negotiable instruments; and
4) in general, attend to all non-discretionary details in connection with
the sale, exchange, substitution, purchase, transfer and other
dealings with the securities and property of the Portfolio except as
otherwise directed by the Board.
<PAGE>
Section 8. Evidence of Authority
---------------------
The Custodian shall be protected in acting upon any instructions, notice,
request, consent, certificate or other instrument or paper believed by it to be
genuine and to have been properly executed by or on behalf of the Fund. The
Custodian may receive and accept a copy of a Certified Resolution as conclusive
evidence (a) of the authority of any person to act in accordance with such
resolution or (b) of any determination or of any action by the Board as
described in such resolution, and such resolution may be considered as in full
force and effect until receipt by the Custodian of written notice to the
contrary.
Section 9. Duties of Custodian with Respect to the Books of Account and
------------------------------------------------------------
Calculation of Net Asset Value and Net Income
---------------------------------------------
The Custodian shall cooperate with and supply necessary information to the
entity or entities appointed by the Board to keep the books of account of each
Portfolio and/or compute the net asset value per Share of the outstanding Shares
or, if directed in writing to do so by the Fund on behalf of the Portfolio,
shall itself keep such books of account and/or compute such net asset value per
Share. If so directed, the Custodian shall also calculate daily the net income
of the Portfolio as described in the Prospectus and shall advise the Fund and
the Transfer Agent daily of the total amounts of such net income and, if
instructed in writing by an officer of the Fund to do so, shall advise the
Transfer Agent periodically of the division of such net income among its various
components. The calculations of the net asset value per Share and the daily
income of each Portfolio shall be made at the time or times described from time
to time in the Prospectus.
For so long as the Custodian acts as fund accountant pursuant to this
Section 9, the Custodian shall for each valuation date obtain prices from
pricing sources approved by the Board and apply those prices to the Portfolios'
positions in a manner consistent with the Fund's prospectus and statement of
additional information as may be amended from time to time and as communicated
to the Custodian by the Fund or the investment advisor. For those securities
where market quotations are not readily available, the Board shall approve, in
good faith, the method for determining the fair value for such securities and
shall communicate such method to the Custodian.
For so long as the Custodian acts as fund accountant pursuant to this
Section 9, the Custodian shall determine gains and losses on securities sales
and identify them as to short- or long-term status, account for periodic
distributions of gains or losses to shareholders and maintain undistributed gain
or loss balances as of each valuation date.
For so long as the Custodian acts as fund accountant pursuant to this
Section 9, the Custodian shall maintain accounting records for each of the
Portfolios to support the tax report required for IRS-defined regulated
investment companies; maintain tax lot details for each of the Portfolios;
calculate taxable gain/loss on securities sales using the tax lot relief method
designated by the Fund on behalf of the Portfolios; and provide the necessary
financial information to support the taxable components of income and capital
gains distributions to the transfer agent to support tax reporting to the
shareholders.
<PAGE>
Section 10. Records
-------
The Custodian shall with respect to each Portfolio create and maintain all
records relating to its activities and obligations under this Agreement in such
manner as will meet the obligations of the Fund under the 1940 Act, with
particular attention to Section 31 thereof and Rules 31a-1 and 31a-2 thereunder.
All such records shall be the property of the Fund and shall at all times during
the regular business hours of the Custodian be open for inspection by duly
authorized officers, employees or agents of the Fund and employees and agents of
the SEC. The Custodian shall, at the Fund's request, supply the Fund with a
tabulation of securities owned by each Portfolio and held by the Custodian and
shall, when requested to do so by the Fund and for such compensation as shall be
agreed upon between the Fund and the Custodian, include certificate numbers in
such tabulations.
Section 11. Opinion of Fund's Independent Accountant
----------------------------------------
The Custodian shall take all reasonable action, as the Fund on behalf of
each applicable Portfolio may from time to time request, to obtain from year to
year favorable opinions from the Fund's independent accountants with respect to
its activities hereunder in connection with the preparation of the Fund's Form
N-1A, and Form N-SAR or other annual reports to the SEC and with respect to any
other requirements thereof.
Section 12. Reports to Fund by Independent Public Accountants
-------------------------------------------------
The Custodian shall provide the Fund, on behalf of each of the Portfolios
at such times as the Fund may reasonably require, with reports by independent
public accountants on the accounting system, internal accounting control and
procedures for safeguarding securities, futures contracts and options on futures
contracts, including securities deposited and/or maintained in a Federal Reserve
Bank, a U.S. Securities System or a Foreign Securities System, relating to the
services provided by the Custodian under this Agreement; such reports, shall be
of sufficient scope and in sufficient detail, as may reasonably be required by
the Fund to provide reasonable assurance that any material inadequacies would be
disclosed by such examination, and, if there are no such inadequacies, the
reports shall so state.
Section 13. Compensation of Custodian
-------------------------
The Custodian shall be entitled to reasonable compensation for its services
and expenses as Custodian, as agreed upon from time to time between the Fund on
behalf of each applicable Portfolio and the Custodian.
<PAGE>
Section 14. Responsibility of Custodian
---------------------------
So long as and to the extent that it is in the exercise of reasonable care,
the Custodian shall not be responsible for the title, validity or genuineness of
any property or evidence of title thereto received by it or delivered by it
pursuant to this Agreement and shall be held harmless in acting upon any notice,
request, consent, certificate or other instrument reasonably believed by it to
be genuine and to be signed by the proper party or parties, including any
futures commission merchant acting pursuant to the terms of a three-party
futures or options agreement. The Custodian shall be held to the exercise of
reasonable care in carrying out the provisions of this Agreement, but shall be
kept indemnified by and shall be without liability to the Fund for any action
taken or omitted by it in good faith without negligence. It shall be entitled
to rely on and may act upon advice of counsel for the Fund on all matters, and
shall be without liability for any action reasonably taken or omitted pursuant
to such advice. The Custodian shall be without liability to the Fund and the
Portfolios for any loss, liability, claim or expense resulting from or caused by
anything which is (A) part of Country Risk (as defined in Section 3 hereof),
including without limitation nationalization, expropriation, currency
restrictions, or acts of war, revolution, riots or terrorism, or (B) part of the
"prevailing country risk" of the Portfolios, as such term is used in SEC Release
Nos. IC-22658; IS-1080 (May 12, 1997) or as such term or other similar terms are
now or in the future interpreted by the SEC or by the staff of the Division of
Investment Management thereof.
Except as may arise from the Custodian's own negligence or willful
misconduct or the negligence or willful misconduct of a sub-custodian or agent,
the Custodian shall be without liability to the Fund for any loss, liability,
claim or expense resulting from or caused by; (i) events or circumstances beyond
the reasonable control of the Custodian or any sub-custodian or Securities
System or any agent or nominee of any of the foregoing, including, without
limitation, the interruption, suspension or restriction of trading on or the
closure of any securities market, power or other mechanical or technological
failures or interruptions with respect to equipment properly maintained by the
Custodian, computer viruses or communications disruptions work stoppages,
natural disasters, or other similar events or acts; (ii) errors by the Fund or
the Investment Advisor in their instructions to the Custodian provided such
instructions have been in accordance with this Agreement; (iii) the insolvency
of or acts or omissions by a Securities System; (iv) any delay or failure of any
broker, agent or intermediary, central bank or other commercially prevalent
payment or clearing system to deliver to the Custodian's sub-custodian or agent
securities purchased or in the remittance or payment made in connection with
securities sold; (v) any delay or failure of any company, corporation, or other
body in charge of registering or transferring securities in the name of the
Custodian, the Fund, the Custodian's sub-custodians, nominees or agents or any
consequential losses arising out of such delay or failure to transfer such
securities including non-receipt of bonus, dividends and rights and other
accretions or benefits; (vi) delays or inability to perform its duties due to
any disorder in market infrastructure with respect to any particular security or
Securities System; and (vii) any provision of any present or future law or
regulation or order of the United States of America, or any state thereof, or
any other country, or political subdivision thereof or of any court of competent
jurisdiction.
<PAGE>
The Custodian shall maintain a fully functional disaster recovery plan and
procedures including provisions for emergency use of electronic data processing
equipment, which is reasonable in light of the services provided. The Custodian
shall, at no additional expense to the Fund or any Portfolio thereof, take
reasonable steps to minimize service interruptions. The Custodian shall have no
liability with respect to the loss of data or service interruptions caused by
equipment failure with respect to equipment properly maintained by the
Custodian, provided it maintains such plans and procedures.
The Custodian shall be liable for the acts or omissions of a Foreign Sub-
Custodian (as defined in Section 4 hereof) to the same extent as set forth with
respect to sub-custodians generally in this Agreement.
If the Fund on behalf of a Portfolio requires the Custodian to take any
action with respect to securities, which action involves the payment of money or
which action may, in the opinion of the Custodian, result in the Custodian or
its nominee assigned to the Fund or the Portfolio being liable for the payment
of money or incurring liability of some other form, the Fund on behalf of the
Portfolio, as a prerequisite to requiring the Custodian to take such action,
shall provide indemnity to the Custodian in an amount and form satisfactory to
it.
If the Fund requires the Custodian, its affiliates, subsidiaries or agents,
to advance cash or securities for any purpose (including but not limited to
securities settlements, foreign exchange contracts and assumed settlement) or in
the event that the Custodian or its nominee shall incur or be assessed any
taxes, charges, expenses, assessments, claims or liabilities in connection with
the performance of this Agreement, except such as may arise from its or its
nominee's own negligent action, negligent failure to act or willful misconduct,
any property at any time held for the account of the applicable Portfolio shall
be security therefor and should the Fund fail to repay the Custodian promptly,
the Custodian shall be entitled to utilize available cash and to dispose of such
Portfolio's assets to the extent necessary to obtain reimbursement.
In no event shall the Custodian be liable for indirect, special or
consequential damages.
Section 15. Effective Period, Termination and Amendment
-------------------------------------------
This Agreement shall become effective as of its execution, shall continue
in full force and effect until terminated as hereinafter provided, may be
amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than sixty (60) days after the date of such delivery or mailing; provided,
--------
however that the Custodian shall not with respect to a Portfolio act
<PAGE>
under Section 2.8 hereof in the absence of receipt of an initial certificate of
the Secretary or an Assistant Secretary that the Board has approved the initial
use of a particular Securities System by such Portfolio, as required by Rule
17f-4 under the 1940 Act and that the Custodian shall not with respect to a
Portfolio act under Section 2.9 hereof in the absence of receipt of an initial
certificate of the Secretary or an Assistant Secretary that the Board has
approved the initial use of the Direct Paper System by such Portfolio; provided
--------
further, however, that the Fund shall not amend or terminate this Agreement in
- -------
contravention of any applicable federal or state regulations, or any provision
of the Fund's Articles of Incorporation, and further provided, that the Fund on
behalf of one or more of the Portfolios may at any time by action of its Board
(i) substitute another bank or trust company for the Custodian by giving notice
as described above to the Custodian, or (ii) immediately terminate this
Agreement in the event of the appointment of a conservator or receiver for the
Custodian by the Comptroller of the Currency or upon the happening of a like
event at the direction of an appropriate regulatory agency or court of competent
jurisdiction.
Upon termination of the Agreement, the Fund on behalf of each applicable
Portfolio shall pay to the Custodian such compensation as may be due as of the
date of such termination and shall likewise reimburse the Custodian for its
costs, expenses and disbursements.
Section 16. Successor Custodian
-------------------
If a successor custodian for one or more Portfolios shall be appointed by
the Board, the Custodian shall, upon termination, deliver to such successor
custodian at the office of the Custodian, duly endorsed and in the form for
transfer, all securities of each applicable Portfolio then held by it hereunder
and shall transfer to an account of the successor custodian all of the
securities of each such Portfolio held in a Securities System.
If no such successor custodian shall be appointed, the Custodian shall, in
like manner, upon receipt of a Certified Resolution, deliver at the office of
the Custodian and transfer such securities, funds and other properties in
accordance with such resolution.
In the event that no written order designating a successor custodian or
Certified Resolution shall have been delivered to the Custodian on or before the
date when such termination shall become effective, then the Custodian shall have
the right to deliver to a bank or trust company, which is a "bank" as defined in
the 1940 Act, doing business in Boston, Massachusetts, or New York, New York, of
its own selection, having an aggregate capital, surplus, and undivided profits,
as shown by its last published report, of not less than $25,000,000, all
securities, funds and other properties held by the Custodian on behalf of each
applicable Portfolio and all instruments held by the Custodian relative thereto
and all other property held by it under this Agreement on behalf of each
applicable Portfolio, and to transfer to an account of such successor custodian
all of the securities of each such Portfolio held in any Securities System.
Thereafter, such bank or trust company shall be the successor of the Custodian
under this Agreement.
<PAGE>
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the Certified Resolution to appoint a successor
custodian, the Custodian shall be entitled to fair compensation for its services
during such period as the Custodian retains possession of such securities, funds
and other properties and the provisions of this Agreement relating to the duties
and obligations of the Custodian shall remain in full force and effect.
Section 17. Interpretive and Additional Provisions
--------------------------------------
In connection with the operation of this Agreement, the Custodian and the
Fund on behalf of each of the Portfolios, may from time to time agree on such
provisions interpretive of or in addition to the provisions of this Agreement as
may in their joint opinion be consistent with the general tenor of this
Agreement. Any such interpretive or additional provisions shall be in a
writing signed by both parties and shall be annexed hereto, provided that no
--------
such interpretive or additional provisions shall contravene any applicable
federal or state regulations or any provision of the Fund's Articles of
Incorporation. No interpretive or additional provisions made as provided in the
preceding sentence shall be deemed to be an amendment of this Agreement.
Section 18. Additional Funds
----------------
In the event that the Fund establishes one or more series of Shares in
addition to each of the series and classes listed on Appendix A attached hereto
with respect to which it desires to have the Custodian render services as
custodian under the terms hereof, it shall so notify the Custodian in writing,
and if the Custodian agrees in writing to provide such services, such series of
Shares shall become a Portfolio hereunder.
Section 19. Massachusetts Law to Apply
--------------------------
This Agreement shall be construed and the provisions thereof interpreted
under and in accordance with laws of The Commonwealth of Massachusetts.
Section 20. Prior Agreements
----------------
This Agreement supersedes and terminates, as of the date hereof, all prior
---------
Agreements between the Fund on behalf of each of the Portfolios and the
Custodian relating to the custody of the Fund's assets.
<PAGE>
Section 21. Notices.
-------
Any notice, instruction or other instrument required to be given hereunder
may be delivered in person to the offices of the parties as set forth herein
during normal business hours or delivered prepaid registered mail or by telex,
cable or telecopy to the parties at the following addresses or such other
addresses as may be notified by any party from time to time.
To the Fund: Security Capital Real Estate
Mutual Funds Incorporated
11 South LaSalle Street
Chicago, Illinois 60603
Attention: John H. Gardner, Jr., Managing Director
Telephone: 312-345-5843
Telecopy: 312-345-0818
Copy to: David Novick, Esq., Chief
Compliance Officer
To the Custodian: State Street Bank and Trust Company
150 Newport Avenue
North Quincy, Massachusetts 02171
Attention: Nick Bonos, Unit Head
Telephone: 617-985-3413
Telecopy: 617-985-4867
Such notice, instruction or other instrument shall be deemed to have been
served in the case of a registered letter at the expiration of five business
days after posting, in the case of cable twenty-four hours after dispatch and,
in the case of telex, immediately on dispatch and if delivered outside normal
business hours it shall be deemed to have been received at the next time after
delivery when normal business hours commence and in the case of cable, telex or
telecopy on the business day after the receipt thereof. Evidence that the
notice was properly addressed, stamped and put into the post shall be conclusive
evidence of posting.
Section 22. Reproduction of Documents
-------------------------
This Agreement and all schedules, exhibits, attachments and amendments
hereto may be reproduced by any photographic, photostatic, microfilm, micro-
card, miniature photographic or other similar process. The parties hereto
all/each agree that any such reproduction shall be admissible in evidence as the
original itself in any judicial or administrative proceeding, whether or not the
original is in existence and whether or not such reproduction was made by a
party in the regular course of business, and that any enlargement, facsimile or
further reproduction of such reproduction shall likewise be admissible in
evidence.
<PAGE>
Section 22A. Year 2000
---------
The Custodian will take reasonable steps to ensure that its products (and
those of its third-party suppliers) reflect the available state of the art
technology to offer products that are Year 2000 compliant, including, but not
limited to, century recognition of dates, calculations that correctly compute
same century and multi- century formulas and date values, and interface values
that reflect the date issues arising between now and the next one hundred years.
If any changes are required, the Custodian will make the changes to its products
at no cost to the Fund and in a commercially reasonable time frame and will
require third-party suppliers to do likewise.
Section 23. Shareholder Communications Election
-----------------------------------
SEC Rule 14b-2 requires banks which hold securities for the account of
customers to respond to requests by issuers of securities for the names,
addresses and holdings of beneficial owners of securities of that issuer held by
the bank unless the beneficial owner has expressly objected to disclosure of
this information. In order to comply with the rule, the Custodian needs the
Fund to indicate whether it authorizes the Custodian to provide the Fund's name,
address, and share position to requesting companies whose securities the Fund
owns. If the Fund tells the Custodian "no", the Custodian will not provide this
information to requesting companies. If the Fund tells the Custodian "yes" or
does not check either "yes" or "no" below, the Custodian is required by the rule
to treat the Fund as consenting to disclosure of this information for all
securities owned by the Fund or any funds or accounts established by the Fund.
For the Fund's protection, the Rule prohibits the requesting company from using
the Fund's name and address for any purpose other than corporate communications.
Please indicate below whether the Fund consents or objects by checking one of
the alternatives below.
YES [ ] The Custodian is authorized to release the Fund's name, address,
and share positions.
NO [X] The Custodian is not authorized to release the Fund's name,
address, and share positions.
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of June 30, 1998.
Security Capital Real Estate Signature attested to By:
Mutual Funds Incorporated
By: By:
----------------------------- --------------------------
Name: Name:
--------------------------- ------------------------
Title: Title:
-------------------------- -----------------------
State Street Bank and Trust Company Signature attested to By:
By: By:
----------------------------- --------------------------
Name: Ronald E. Logue Name: Marc L. Parsons
--------------------------- ------------------------
Title: Executive Vice President Title: Associate Counsel
-------------------------- -----------------------
<PAGE>
APPENDIX A
Security Capital U.S. Real Estate Shares - Class I *
Security Capital U.S. Real Estate Shares - Class R *
Security Capital European Real Estate Shares - Class I
Security Capital European Real Estate Shares - Class R
Security Capital Asia/Pacific Real Estate Shares - Class I
Security Capital Asia/Pacific Real Estate Shares - Class R
Security Capital Real Estate Arbitrage Shares - Class I
* Services and fees relating thereto commencing August 10, 1998
<PAGE>
SCHEDULE A
STATE STREET
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
Argentina Citibank, N.A. --
Australia Westpac Banking Corporation --
Austria Erste Bank der Oesterreichischen --
Sparkassen AG
Bahrain British Bank of the Middle East --
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)
Bangladesh Standard Chartered Bank --
Belgium Generale de Banque --
Bermuda The Bank of Bermuda Limited --
Bolivia Banco Boliviano Americano S.A. --
Botswana Barclays Bank of Botswana Limited --
Brazil Citibank, N.A. --
Bulgaria ING Bank N.V. --
Canada Canada Trustco Mortgage Company --
Chile Citibank, N.A. --
People's The Hongkong and Shanghai --
Republic Banking Corporation Limited,
of China Shanghai and Shenzhen branches
Colombia Cititrust Colombia S.A. --
Sociedad Fiduciaria
<PAGE>
SCHEDULE A
STATE STREET
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
Croatia Privredna Banka Zagreb d.d --
Cyprus Barclays Bank Plc. --
Cyprus Offshore Banking Unit
Czech Republic Ceskoslovenska Obchodni --
Banka, A.S.
Denmark Den Danske Bank --
Ecuador Citibank, N.A. --
Egypt National Bank of Egypt --
Estonia Hansabank --
Finland Merita Bank Limited --
France Banque Paribas --
Germany Dresdner Bank AG --
Ghana Barclays Bank of Ghana Limited --
Greece National Bank of Greece S.A. The Bank of Greece,
System for Monitoring
Transactions in
Securities in
Book-Entry Form
Hong Kong Standard Chartered Bank --
Hungary Citibank Budapest Rt. --
Iceland Icebank Ltd. --
<PAGE>
SCHEDULE A
STATE STREET
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
India Deutsche Bank AG --
The Hongkong and Shanghai
Banking Corporation Limited
Indonesia Standard Chartered Bank --
Ireland Bank of Ireland --
Israel Bank Hapoalim B.M. --
Italy Banque Paribas --
Ivory Coast Societe Generale de Banques --
en Cote d'Ivoire
Jamaica Scotiabank Jamaica Trust and Merchant --
Bank Ltd.
Japan The Daiwa Bank, Limited Japan Securities
Depository Center
The Fuji Bank, Limited
Jordan British Bank of the Middle East --
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)
Kenya Barclays Bank of Kenya Limited --
Republic The Hongkong and Shanghai Banking --
of Korea Corporation Limited
Latvia JSC Hansabank-Latvija --
Lebanon British Bank of the Middle East --
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)
<PAGE>
SCHEDULE A
STATE STREET
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
Lithuania Vilniaus Bankas AB --
Malaysia Standard Chartered Bank --
Malaysia Berhad
Mauritius The Hongkong and Shanghai --
Banking Corporation Limited
Mexico Citibank Mexico, S.A. --
Morocco Banque Commerciale du Maroc --
Namibia (via) Standard Bank of South Africa --
The MeesPierson N.V. --
Netherlands
New Zealand ANZ Banking Group --
(New Zealand) Limited
Norway Christiania Bank og --
Kreditkasse
Oman British Bank of the Middle East --
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)
Pakistan Deutsche Bank AG --
Peru Citibank, N.A. --
Philippines Standard Chartered Bank --
Poland Citibank (Poland) S.A. --
Bank Polska Kasa Opieki S.A.
<PAGE>
SCHEDULE A
STATE STREET
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
Portugal Banco Comercial Portugues --
Romania ING Bank N.V. --
Russia Credit Suisse First Boston AO, Moscow --
(as delegate of Credit Suisse
First Boston, Zurich)
Singapore The Development Bank --
of Singapore Limited
Slovak Ceskoslovenska Obchodna --
Republic Banka, A.S.
Slovenia Banka Creditanstalt d.d. --
South Africa Standard Bank of South Africa Limited --
Spain Banco Santander, S.A. --
Sri Lanka The Hongkong and Shanghai --
Banking Corporation Limited
Swaziland Standard Bank Swaziland Limited --
Sweden Skandinaviska Enskilda Banken --
Switzerland UBS AG --
Taiwan Central Trust of China --
- - R.O.C.
Thailand Standard Chartered Bank --
Trinidad & Republic Bank Limited --
Tobago
<PAGE>
SCHEDULE A
STATE STREET
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
Tunisia Banque Internationale Arabe de Tunisie --
Turkey Citibank, N.A. --
Ottoman Bank
Ukraine ING Bank, Ukraine --
United Kingdom State Street Bank and Trust Company, --
London Branch
Uruguay Citibank, N.A. --
Venezuela Citibank, N.A. --
Zambia Barclays Bank of Zambia Limited --
Zimbabwe Barclays Bank of Zimbabwe Limited --
Euroclear (The Euroclear System)/State Street London Limited
Cedel, S.A. (Cedel Bank, societe anonyme)/State Street London Limited
INTERSETTLE (for EASDAQ Securities)
<PAGE>
SCHEDULE B
STATE STREET
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
COUNTRY MANDATORY DEPOSITORIES
Argentina Caja de Valores S.A.
Australia Austraclear Limited
Reserve Bank Information and
Transfer System
Austria Oesterreichische Kontrollbank AG
(Wertpapiersammelbank Division)
Belgium Caisse Interprofessionnelle de Depot et
de Virement de Titres S.A.
Banque Nationale de Belgique
Brazil Companhia Brasileira de Liquidacao e
Custodia (CBLC)
Bolsa de Valores de Rio de Janeiro
All SSB clients presently use CBLC
Central de Custodia e de Liquidacao
Financeira
de Titulos
Banco Central do Brasil,
Sistema Especial de Liquidacao de
Custodia
Bulgaria Central Depository AD
Bulgarian National Bank
Canada The Canadian Depository
for Securities Limited
People's Republic Shanghai Securities Central Clearing and
of China Registration Corporation
Shenzhen Securities Central Clearing
Co., Ltd.
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE>
SCHEDULE B
STATE STREET
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
COUNTRY MANDATORY DEPOSITORIES
Croatia Ministry of Finance
National Bank of Croatia
Czech Republic Stredisko cennych papiru
Czech National Bank
Denmark Vaerdipapircentralen (the Danish
Securities Center)
Egypt Misr Company for Clearing, Settlement,
and Central Depository
Estonia Eesti Vaartpaberite Keskdepositoorium
Finland The Finnish Central Securities
Depository
France Societe Interprofessionnelle
pour la Compensation des
Valeurs Mobilieres (SICOVAM)
Germany Deutsche Borse Clearing AG
Greece The Central Securities Depository
(Apothetirion Titlon AE)
Hong Kong The Central Clearing and
Settlement System
Central Money Markets Unit
Hungary The Central Depository and Clearing
House (Budapest) Ltd. (KELER)
[Mandatory for Gov't Bonds only;
SSB does not use for other securities]
* Mandatory depositories include entitties for which use is mandatory of law or
effectively mandatory as a matter of market practice.
<PAGE>
SCHEDULE B
STATE STREET
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
COUNTRY MANDATORY DEPOSITORIES
India The National Securities Depository Limited
Indonesia Bank Indonesia
Ireland Central Bank of Ireland
Securities Settlement Office
Israel The Tel Aviv Stock Exchange Clearing
House Ltd.
Bank of Israel
Italy Monte Titoli S.p.A.
Banca d'Italia
Jamaica The Jamaican Central Securities Depository
Japan Bank of Japan Net System
Kenya Central Bank of Kenya
Republic of Korea Korea Securities Depository Corporation
Latvia The Latvian Central Depository
Lebanon The Custodian and Clearing Center of
Financial Instruments for Lebanon
and the Middle East (MIDCLEAR) S.A.L.
The Central Bank of Lebanon
Lithuania The Central Securities Depository of
Lithuania
* Mandatory depositories include entitites for which use is mandatory as a
matter of law or effectively mandatory as a matter of market practice.
<PAGE>
SCHEDULE B
STATE STREET
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
COUNTRY MANDATORY DEPOSITORIES
Malaysia The Malaysian Central Depository Sdn. Bhd.
Bank Negara Malaysia,
Scripless Securities Trading and Safekeeping
System
Mauritius The Central Depository & Settlement
Co. Ltd.
Mexico S.D. INDEVAL, S.A. de C.V.
(Instituto para el Deposito de
Valores)
Morocco Maroclear
(pending publication of enabling legislation
in the Moroccan government Gazette)
The Netherlands Nederlands Centraal Instituut voor
Giraal Effectenverkeer B.V. (NECIGEF)
De Nederlandsche Bank N.V.
New Zealand New Zealand Central Securities
Depository Limited
Norway Verdipapirsentralen (the Norwegian
Registry of Securities)
Oman Muscat Securities Market
Pakistan Central Depository Company of Pakistan
Limited
Peru Caja de Valores y Liquidaciones S.A.
(CAVALI)
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE>
SCHEDULE B
STATE STREET
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
COUNTRY MANDATORY DEPOSITORIES
Philippines The Philippines Central Depository, Inc.
The Registry of Scripless Securities
(ROSS) of the Bureau of the Treasury
Poland The National Depository of Securities
(Krajowy Depozyt Papierow Wartos'ciowych)
Central Treasury Bills Registrar
Portugal Central de Valores Mobiliarios (Central)
Romania National Securities Clearing, Settlement and
Depository Co.
Bucharest Stock Exchange Registry Division
Singapore The Central Depository (Pte)
Limited
Monetary Authority of Singapore
Slovak Republic Stredisko Cennych Papierov
National Bank of Slovakia
Slovenia Klirinsko Depotna Druzba d.d.
South Africa The Central Depository Limited
Spain Servicio de Compensacion y
Liquidacion de Valores, S.A.
Banco de Espana,
Central de Anotaciones en Cuenta
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE>
SCHEDULE B
STATE STREET
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
COUNTRY MANDATORY DEPOSITORIES
Sri Lanka Central Depository System
(Pvt) Limited
Sweden Vardepapperscentralen AB
(the Swedish Central Securities Depository)
Switzerland Schweizerische Effekten - Giro AG
INTERSETTLE
Taiwan - R.O.C. The Taiwan Securities Central
Depository Co., Ltd.
Thailand Thailand Securities Depository
Company Limited
Tunisia Societe Tunisienne Interprofessionelle de
Compensation et de Depot de
Valeurs Mobilieres
Central Bank of Tunisia
Tunisian Treasury
Turkey Takas ve Saklama Bankasi A.S.
(TAKASBANK)
Central Bank of Turkey
Ukraine The National Bank of Ukraine
United Kingdom The Bank of England,
The Central Gilts Office and
The Central Moneymarkets Office
Uruguay Central Bank of Uruguay
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE>
SCHEDULE B
STATE STREET
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
COUNTRY MANDATORY DEPOSITORIES
Venezuela Central Bank of Venezuela
Zambia Lusaka Central Depository Limited
Bank of Zambia
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
<PAGE>
SCHEDULE C
MARKET INFORMATION
PUBLICATION/TYPE OF INFORMATION BRIEF DESCRIPTION
- ------------------------------- -----------------
(FREQUENCY)
The Guide to Custody in World
- -----------------------------
Markets
- -------
(annually): An overview of safekeeping and settlement
practices and procedures in each market in
which State Street Bank and Trust Company
offers custodial services.
The Depository Review (annually): Information relating to the operating history
- --------------------- and structure of depositories located in the
markets in which State Street Bank and Trust
Company offers custodial services, including
transnational depositories.
legal opinions (annually): With respect to each market in which State
Street Bank and Trust Company offers
custodial services, opinions relating to
whether local law restricts (i) access of a
fund's independent public accountants to
books and records of a Foreign Sub-Custodian
or Foreign Securities System, (ii) the Fund's
ability to recover in the event of bankruptcy
or insolvency of a Foreign Sub-Custodian or
Foreign Securities System, (iii) the Fund's
ability to recover in the event of a loss by
a Foreign Sub-Custodian or Foreign Securities
System, and (iv) the ability of a foreign
investor to convert cash and cash equivalents
to U.S. dollars.
Network Bulletins (weekly): Developments of interest to investors in the
markets in which State Street Bank and Trust
Company offers custodial services.
Foreign Custody Advisories (as
necessary): With respect to markets in which State Street
Bank and Trust Company offers custodial
services which exhibit special custody risks,
developments which may impact State Street's
ability to deliver expected levels of
service.
<PAGE>
STATE STREET BANK AND TRUST COMPANY
GLOBAL CUSTODY AND ACCOUNTING FEE SCHEDULE
FOR
SECURITY CAPITAL
I. GLOBAL CUSTODY
Maintain custody of fund assets. Settle portfolio purchases and sales.
Report buy and sell fails. Determine and collect portfolio income. Make
cash disbursements and report cash transactions in local and base currency.
Withhold foreign taxes. File foreign tax reclaims. Monitor corporate
actions. Report portfolio positions.
A. COUNTRY GROUPING
----------------
<TABLE>
<CAPTION>
Group A Group B Group C Group D Group E Group F
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
USA Austria Australia Denmark Indonesia Argentina
- ---------------------------------------------------------------------------------------
Canada Belgium Finland Malaysia Bangladesh
- ---------------------------------------------------------------------------------------
Euroclear Hong Kong France Philippines Brazil
- ---------------------------------------------------------------------------------------
Germany Netherlands Ireland Portugal Chile
- ---------------------------------------------------------------------------------------
Japan New Zealand Italy South Korea China
- ---------------------------------------------------------------------------------------
Singapore Luxembourg Spain Columbia
- ---------------------------------------------------------------------------------------
Switzerland Mexico Sri Lanka Cypress
- ---------------------------------------------------------------------------------------
Norway Sweden Greece
- ---------------------------------------------------------------------------------------
Thailand Taiwan Hungary
- ---------------------------------------------------------------------------------------
U.K. India
- ---------------------------------------------------------------------------------------
Israel
- ---------------------------------------------------------------------------------------
Pakistan
- ---------------------------------------------------------------------------------------
Peru
- ---------------------------------------------------------------------------------------
Turkey
- ---------------------------------------------------------------------------------------
Uruguay
- ---------------------------------------------------------------------------------------
Venezuela
- ---------------------------------------------------------------------------------------
</TABLE>
B. TRANSACTION CHARGES
-------------------
<TABLE>
<CAPTION>
Group A Group B Group C Group D Group E Group F
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
State Street Bank $25 $50 $60 $70 $150
Repos or Euros - $ 7.00
- ----------------------------------------------------------------------------------------------
DTC or Fed Book
Entry - $12.00
- ----------------------------------------------------------------------------------------------
All other - $25.00
- ----------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
C. HOLDING CHARGES IN BASIS POINTS (ANNUAL FEE)
--------------------------------------------
<TABLE>
<CAPTION>
Group A Group B Group C Group D Group E Group F
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1.5 5.0 6.0 10.0 25.0 40.0
- ----------------------------------------------------------------------------------------------
</TABLE>
II. MULTICURRENCY ACCOUNTING
Maintain investment ledgers in local and base currency, provide selected
portfolio transactions, position and income reports. Maintain general
ledger and capital stock accounts in compliance with GAAP (FAS 52).
Prepare daily trial balance. Calculate net asset value daily. Provide
selected general ledger reports in multicurrency detail. Securities yield
or market value quotations will be provided to State Street via State
Street's Automated Pricing System (See Section III) or by the fund.
Portfolios with U.S. Holdings Only $3,000 per month/portfolio
Global Portfolios $4,000 per $4,000 per month/portfolio
month/portfolio
III. NAVIGATOR AUTOMATED PRICING
<TABLE>
<CAPTION>
<S> <C>
Monthly Base Charge $375.00
Monthly Quote Charge:
Municipal Bonds via Kenny/S&P or Muller Data $ 16.00
Corporate, Municipal, Convertible, Government Bonds
and Adjustable Rate Preferred Stocks Via IDSI $ 13.00
Government, Corporate Bonds via Kenny/S&P or Muller $ 11.00
Government, Corporate and Convertible
Bonds via Merrill Lynch $ 11.00
Foreign Bonds via Extel $ 10.00
Options, Futures and Private Placements $ 6.00
Listed Equities (including International) and OTC Equities $ 6.00
</TABLE>
For billing purposes, the monthly quote charge will be based on the average
number of positions in the portfolio at month end.
<PAGE>
IV. SPECIAL SERVICES
Fees for activities of a non-recurring nature such as fund consolidations
or reorganizations, extraordinary security shipments and the preparation of
special reports will be subject to negotiation. Fees for SEC yield
calculation, fund administration activities, self directed securities
lending transactions, SaFiRe financial reporting, multiple class and
core/feeder accounting, and other special items will be negotiated
separately.
V. OUT-OF-POCKET EXPENSES
A billing for the recovery of applicable out-of-pocket expenses will be
made as of the end of each month. Out-of-pocket expenses include, but are
not limited to the following:
- - Telephone -Transfer Fees
- - Wire Charges ($5.25 in and $5 out) - Price Waterhouse Audit Letter
- - Postage and Insurance - Federal Reserve Fee for Return
- - Courier Service Check items over $2,500
- - Duplicating ($4.25 each)
- - Legal Fees - GNMA Transfer ($15 each)
- - Supplies Related to Fund Records - PTC Deposit/Withdrawal for same
- - Rush Transfer ($8 each) day turnaround ($50 each)
- - Items held in Street name over record - Subcustodian charges
date at request of trader ($50 each)
VI. PAYMENT
The above fees will be charged against the fund's custodian checking
account five (5) days after the invoice is mailed to the fund's offices.
FUND NAME STATE STREET BANK & TRUST COMPANY
By By
--------------- ---------------
Title Title
--------------- ---------------
Date Date
--------------- ---------------
<PAGE>
CONFIDENTIAL COMMUNICATION
as of June 30, 1998
Pamela Silberman
Security Capital Real Estate Mutual Funds Incorporated
11 South LaSalle Street
Chicago, Illinois 60603
Re: SECURITY CAPITAL REAL ESTATE MUTUAL FUNDS INCORPORATED (the "Fund");
delegation to State Street Bank and Trust Company pursuant to revised
rule 17f-5 promulgated under the Investment Company Act of 1940, as
amended ("Rule 17f-5")
Dear Ms. Silberman:
Pursuant to the terms set forth the custodian contract (the "Agreement")
between State Street Bank and Trust Company (the "Custodian") and the Fund, the
Custodian has agreed to accept delegation as Foreign Custody Manager (as such
term is described in Rule 17f-5) of the Fund. The Custodian is in the process
of reconsidering certain of the terms upon which it has agreed to accept such
delegation. If at any time prior to termination of the Agreement the Custodian,
as a matter of standard business practice, accepts delegation as Foreign Custody
Manager for its U.S. mutual fund clients on terms materially different than set
forth in the Agreement, the Custodian hereby agrees to negotiate with the Fund
in good faith with respect thereto.
Very truly yours,
Ronald E. Logue
Executive Vice President
<PAGE>
Exhibit 9(a)
TRANSFER AGENCY AND SERVICE AGREEMENT
between
SECURITY CAPITAL REAL ESTATE MUTUAL FUNDS INCOPORPORATED
and
STATE STREET BANK AND TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
1. Terms of Appointment; Duties of the Bank............................. 1
2. Third Party Administrators for Defined Contribution Plans............ 4
3. Fees and Expenses.................................................... 5
4. Representations and Warranties of the Bank........................... 5
5. Representations and Warranties of the Fund........................... 6
6. Wire Transfer Operating Guidelines................................... 6
7. Data Access and Proprietary Information.............................. 8
8. Indemnification...................................................... 9
9. Standard of Care..................................................... 10
10. Year 2000............................................................ 11
11. Confidentiality...................................................... 11
12. Covenants of the Fund and the Bank................................... 12
13. Termination of Agreement............................................. 12
14. Assignment and Third Party Beneficiaries............................. 12
15. Subcontractors....................................................... 13
16. Miscellaneous........................................................ 13
17. Additional Funds..................................................... 15
<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
-------------------------------------
AGREEMENT made as of the 30th day of June, 1998, by and between Security Capital
Real Estate Mutual Funds Incorporated, a Maryland corporation, having its
principal office and place of business at 11 South LaSalle Street, Chicago,
Illinois 60603 (the "Fund"), and STATE STREET BANK AND TRUST COMPANY, a
Massachusetts trust company having its principal office and place of business at
225 Franklin Street, Boston, Massachusetts 02110 (the "Bank").
WHEREAS, the Fund is authorized to issue shares in separate series and classes,
with each such series representing interests in a separate portfolio of
securities and other assets; and
WHEREAS, the Fund intends to initially offer shares in several series and
classes named in the attached Schedule A, which may be amended by the parties
from time to time (each such series, together with all other series subsequently
established by the Fund and made subject to this Agreement in accordance with
Article 13, being herein referred to as a "Portfolio", and collectively as the
"Portfolios");
WHEREAS, the Fund on behalf of the Portfolios desires to appoint the Bank as its
transfer agent, dividend disbursing agent, custodian of certain retirement plans
and agent in connection with certain other activities, and the Bank desires to
accept such appointment;
NOW, THEREFORE, in consideration of the mutual covenants herein contained, the
parties hereto agree as follows:
l. Terms of Appointment; Duties of the Bank
----------------------------------------
1.1 Transfer Agency Services. Subject to the terms and conditions set forth
in this Agreement, the Fund, on behalf of the Portfolios, hereby employs
and appoints the Bank to act as, and the Bank agrees to act as its
transfer agent for the Fund's authorized and issued shares of its common
stock, $.01 par value, ("Shares"), dividend disbursing agent, custodian of
certain retirement plans and agent in connection with any accumulation,
open-account or similar plans provided to the shareholders of each of the
respective Portfolios of the Fund ("Shareholders") and set out in the
currently effective prospectus and statement of additional information
("prospectus") of the Fund on behalf of the applicable Portfolio,
including without limitation any periodic investment plan or periodic
withdrawal program. The Bank agrees that it will perform the following
services:
(a) In accordance with procedures established from time to time by
agreement between the Fund on behalf of each of the Portfolios, as
applicable and the Bank, the Bank shall:
(i) Receive for acceptance, orders for the purchase of Shares, and
promptly deliver payment and appropriate documentation thereof
to the Custodian of the Fund authorized pursuant to the
Articles of Incorporation of the Fund (the "Custodian");
(ii) Pursuant to purchase orders, issue the appropriate number of
Shares and hold such Shares in the appropriate Shareholder
account;
<PAGE>
(iii) Receive for acceptance redemption requests and redemption
directions and deliver the appropriate documentation thereof
to the Custodian;
(iv) In respect to the transactions in items (i), (ii) and (iii)
above, the Bank shall execute transactions directly with
broker-dealers authorized by the Fund;
(v) At the appropriate time as and when it receives monies paid to
it by the Custodian with respect to any redemption, pay over
or cause to be paid over in the appropriate manner such monies
as instructed by the redeeming Shareholders;
(vi) Effect transfers of Shares by the registered owners thereof
upon receipt of appropriate instructions;
(vii) As dividend disbursing agent only, prepare and transmit
payments for dividends and distributions declared by the Fund
on behalf of the applicable Portfolio including the crediting
of shareholder accounts in the case of dividend reinvestment
plans;
(viii) Issue replacement certificates for those certificates alleged
to have been lost, stolen or destroyed upon receipt by the
Bank of indemnification satisfactory to the Bank and
protecting the Bank and the Fund, and the Bank at its option,
may issue replacement certificates in place of mutilated stock
certificates upon presentation thereof and without such
indemnity;
(ix) Maintain records of account for and advise the Fund and its
Shareholders as to the foregoing and
(x) Record the issuance of shares of the Fund and maintain
pursuant to SEC Rule 17Ad-10(e) a record of the total number
of shares of the Fund which are authorized, based upon data
provided to it by the Fund, and issued and outstanding. The
Bank shall also provide the Fund on a regular basis with the
total number of shares which are authorized and issued and
outstanding and shall have no obligation, when recording the
issuance of shares, to monitor the issuance of such shares or
to take cognizance of any laws relating to the issue or sale
of such shares, which functions shall be the sole
responsibility of the Fund.
1.2 Additional Services. In addition to, and neither in lieu nor in
contravention of, the services set forth in the above paragraph, the Bank
shall perform the following services:
2
<PAGE>
(a) Other Customary Services. (i) Perform the customary services of a
transfer agent, dividend disbursing agent, custodian of certain
retirement plans and, as relevant, agent in connection with
accumulation, open-account or similar plans (including without
limitation any periodic investment plan or periodic withdrawal
program), including but not limited to: maintaining all Shareholder
accounts, preparing Shareholder meeting lists, mailing Shareholder
proxies, Shareholder reports and prospectuses to current Shareholders,
withholding taxes on U.S. resident and non-resident alien accounts,
preparing, mailing and filing U.S. Treasury Department Forms 1099,
average cost statements and other appropriate forms required with
respect to dividends and distributions by federal authorities for all
Shareholders, preparing and mailing confirmation forms and statements
of account to Shareholders for all purchases and redemptions of Shares
and other confirmable transactions in Shareholder accounts, preparing
and mailing activity statements for Shareholders, and providing
Shareholder account information. Such U.S. Treasury Department Forms
1099 and other appropriate forms hereunder will provide annual notices
to shareholders of dividends and distributions.
(b) Control Book (also known as "Super Sheet"). Maintain a daily record
and produce a daily report for each Fund of all transactions and
receipts and disbursements of money and securities and deliver a copy
of such report for each Portfolio for each business day to the Fund no
later than 9:00 AM, or such earlier time as the Fund may reasonably
require, on the next business day;
(c) "Blue Sky" Reporting. The Fund shall (i) identify to the Bank in
writing those transactions and assets to be treated as exempt from
blue sky reporting for each State and (ii) verify the establishment of
transactions for each State on the system prior to activation and
thereafter monitor the daily activity for each State. The
responsibility of the Bank for the Fund's blue sky State registration
status is solely limited to the initial establishment of transactions
subject to blue sky compliance by the Fund and providing a system
which will enable the Fund to monitor the total number of Shares sold
in each State;
(d) National Securities Clearing Corporation (the "NSCC"). The Bank shall
(i) accept and effectuate the registration and maintenance of accounts
through Networking and the purchase, redemption, transfer and exchange
of shares in such accounts through Fund/SERV (networking and Fund/SERV
being programs operated by the NSCC on behalf of NSCC's participants,
including the Fund), in accordance with, instructions transmitted to
and received by the Bank by transmission from NSCC on behalf of
broker-dealers and banks which have been established by, or in
accordance with the instructions of authorized persons, as hereinafter
defined on the dealer file maintained by the Bank; (ii) issue
instructions to Fund's banks for the settlement of transactions
between the Fund and NSCC (acting on behalf of its broker-dealer and
bank participants); (iii) provide account and transaction information
from affected Fund's records on DST Systems, Inc. computer system
TA2000 ("TA2000 System") in accordance with
3
<PAGE>
NSCC's Networking and Fund/SERV rules for those broker-dealers; and
(iv) maintain Shareholder accounts on TA2000 System through
Networking.
(e) New Procedures. New procedures as to who shall provide certain of
these services in Section 1 may be established in writing from time
to time by agreement between the Fund and the Bank. The Bank may at
times perform only a portion of these services and the Fund or its
agent may perform these services on the Fund's behalf.
(f) Other Service Providers. The Bank acknowledges that the Fund may
contract with other service providers to furnish services to the Fund
and its shareholders and shall cooperate with such other service
providers in connection with the performance of its duties hereunder.
2. Third Party Administrators for Defined Contribution Plans
---------------------------------------------------------
2.1 The Fund may decide to make available to certain of its customers, a
qualified plan program (the "Program") pursuant to which the customers
("Employers") may adopt certain plans of deferred compensation ("Plan or
Plans") for the benefit of the individual Plan participant (the "Plan
Participant"), such Plan(s) being qualified under Section 401(a) of the
Internal Revenue Code of 1986, as amended ("Code") and administered by
third party administrators which may be plan administrators as defined in
the Employee Retirement Income Security Act of 1974, as amended (the
"TPA(s)").
2.2 In accordance with the procedures established in the initial Schedule 2.1
entitled "Third Party Administrator Procedures", as may be amended by the
Bank and the Fund from time to time ("Schedule 2.1"), the Bank shall:
(a) Treat Shareholder accounts established by the Plans in the name of
the Trustees, Plans or TPAs as the case may be as omnibus accounts;
(b) Maintain omnibus accounts on its records in the name of the TPA or
its designee as the Trustee for the benefit of the Plan; and
(c) Perform all services under Section 1 as transfer agent of the Funds
---------
and not as a record-keeper for the Plans.
2.3 Transactions identified under Section 2 of this Agreement shall be deemed
---------
exception services ("Exception Services") when such transactions:
(a) Require the Bank to use methods and procedures other than those
usually employed by the Bank to perform services under Section 1 of
---------
this Agreement;
(b) Involve the provision of information to the Bank after the
commencement of the nightly processing cycle of the TA2000 System; or
4
<PAGE>
(c) Require more manual intervention by the Bank, either in the entry of
data or in the modification or amendment of reports generated by the
TA2000 System than is usually required by non-retirement plan and
pre-nightly transactions.
3. Fees and Expenses
-----------------
3.1 Fee Schedule. For the performance by the Bank pursuant to this Agreement,
the Fund agrees to pay the Bank an annual maintenance fee for each
Shareholder account as set forth in the attached fee schedule ("Schedule
3.1"). Such fees and out-of-pocket expenses and advances identified under
Section 3.2 below may be changed from time to time subject to mutual
-----------
written agreement between the Fund and the Bank.
3.2 Out-of-Pocket Expenses. In addition to the fee paid under Section 3.1
above, the Fund agrees to reimburse the Bank for out-of-pocket expenses,
including but not limited to confirmation production, postage, forms,
telephone, microfilm, microfiche, mailing and tabulating proxies, records
storage, or advances incurred by the Bank for the items set out in
Schedule 3.1 attached hereto. In addition, any other expenses incurred by
the Bank at the request or with the consent of the Fund, will be
reimbursed by the Fund.
3.3 Postage. Postage for mailing of dividends, proxies, Fund reports and other
mailings to all shareholder accounts shall be advanced to the Bank by the
Fund at least seven (7) days prior to the mailing date of such materials.
3.4 Invoices. The Fund agrees to pay all fees and reimbursable expenses within
thirty (30) days following the receipt of the respective billing notice,
except for any fees or expenses which are subject to good faith dispute.
In the event of such a dispute, the Fund may only withhold that portion of
the fee or expense subject to the good faith dispute. The Fund shall
notify the Bank in writing within twenty-one (21) calendar days following
the receipt of each billing notice if the Fund is disputing any amounts in
good faith. If the Fund does not provide such notice of dispute within the
required time, the billing notice will be deemed accepted by the Fund.
4. Representations and Warranties of the Bank
------------------------------------------
The Bank represents and warrants to the Fund that:
4.1 It is a trust company duly organized and existing and in good standing
under the laws of The Commonwealth of Massachusetts.
4.2 It is duly qualified to carry on its business in The Commonwealth of
Massachusetts.
4.3 It is empowered under applicable laws and by its Charter and By-Laws to
enter into and perform this Agreement.
4.4 All requisite corporate proceedings have been taken to authorize it to
enter into and perform this Agreement.
5
<PAGE>
4.5 It has and will continue to have access to the necessary facilities,
equipment and personnel to perform its duties and obligations under this
Agreement.
4.6 It is registered as a transfer agent under Section 17A(c)(2) of the
Securities Exchange Act of 1934, as amended ("Exchange Act").
5. Representations and Warranties of the Fund
------------------------------------------
The Fund represents and warrants to the Bank that:
5.1 It is a corporation duly organized and existing and in good standing under
the laws of Maryland.
5.2 It is empowered under applicable laws and by its Articles of Incorporation
and By-Laws to enter into and perform this Agreement.
5.3 All corporate proceedings required by said Articles of Incorporation and
By-Laws have been taken to authorize it to enter into and perform this
Agreement.
5.4 It is an open-end and diversified management investment company registered
under the Investment Company Act of 1940, as amended.
5.5 A registration statement under the Securities Act of 1933, as amended is
currently effective and will remain effective, and appropriate state
securities law filings have been made and will continue to be made, with
respect to all Shares of the Fund being offered for sale.
6. Wire Transfer Operating Guidelines/Articles 4A of the Uniform Commercial
------------------------------------------------------------------------
Code
------
6.1 The Bank is authorized to promptly debit the appropriate Fund account(s)
upon the receipt of a payment order in compliance with the selected
security procedure (the "Security Procedure") chosen for funds transfer
and in the amount of money that the Bank has been instructed to transfer.
The Bank shall execute payment orders in compliance with the Security
Procedure and with the Fund instructions on the execution date provided
that such payment order is received by the customary deadline (currently
3:00 p.m. Eastern time) for processing such a request, unless the payment
order specifies a later time. All payment orders and communications
received after this the customary deadline will be deemed to have been
received the next business day.
6.2 The Fund acknowledges that the Security Procedure it has designated on the
Fund Selection Form was selected by the Fund from security procedures
offered by the Bank. The Fund shall restrict access to confidential
information relating to the Security Procedure to authorized persons as
communicated to the Bank in writing. The Fund must notify the Bank
immediately if it has reason to believe unauthorized persons may have
obtained access to such information or of any change in the Fund's
authorized
6
<PAGE>
personnel. The Bank shall verify the authenticity of all Fund instructions
according to the Security Procedure.
6.3 The Bank shall process all payment orders on the basis of the account
number contained in the payment order. In the event of a discrepancy
between any name indicated on the payment order and the account number,
the account number shall take precedence and govern.
6.4 The Bank reserves the right to decline to process or delay the processing
of a payment order which (a) is in excess of the collected balance in the
account to be charged at the time of the Bank's receipt of such payment
order; (b) if initiating such payment order would cause the Bank, in the
Bank's sole judgement, to exceed any volume, aggregate dollar, network,
time, credit or similar limits which are applicable to the Bank; or (c) if
the Bank, in good faith, is unable to satisfy itself that the transaction
has been properly authorized.
6.5 The Bank shall use reasonable efforts to act on all authorized requests to
cancel or amend payment orders received in compliance with the Security
Procedure provided that such requests are received in a timely manner
affording the Bank reasonable opportunity to act. However, the Bank
assumes no liability if the request for amendment or cancellation cannot
be satisfied.
6.6 The Bank shall assume no responsibility for failure to detect any
erroneous payment order provided that the Bank complies with the payment
order instructions as received and the Bank complies with the Security
Procedure. The Security Procedure is established for the purpose of
authenticating payment orders only and not for the detection of errors in
payment orders.
6.7 The Bank shall assume no responsibility for lost interest with respect to
the refundable amount of any unauthorized payment order, unless the Bank
is notified of the unauthorized payment order within thirty (30) days of
confirmation by the Bank of the acceptance of such payment order. In no
event (including failure to execute a payment order) shall the Bank be
liable for special, indirect or consequential damages, even if advised of
the possibility of such damages.
6.8 When the Fund initiates or receives Automated Clearing House credit and
debit entries pursuant to these guidelines and the rules of the National
Automated Clearing House Association and the New England Clearing House
Association, the Bank will act as an Originating Depository Financial
Institution and/or receiving depository Financial Institution, as the case
may be, with respect to such entries. Credits given by the Bank with
respect to an ACH credit entry are provisional until the Bank receives
final settlement for such entry from the Federal Reserve Bank. If the
Bank does not receive such final settlement, the Fund agrees that the Bank
shall receive a refund of the amount credited to the Fund in connection
with such entry, and the party making payment to the Fund via such entry
shall not be deemed to have paid the amount of the entry.
7
<PAGE>
6.9 Confirmation of Bank's execution of payment orders shall ordinarily be
provided within twenty four (24) hours, notice of which may be delivered
through the Bank's proprietary information systems, or by facsimile or
call-back. Fund must report any objections to the execution of an order
within thirty (30) days.
7. Data Access and Proprietary Information
---------------------------------------
7.1 The Fund acknowledges that the data bases, computer programs, screen
formats, report formats, interactive design techniques, and documentation
manuals furnished to the Fund by the Bank as part of the Fund's ability to
access certain Fund-related data ("Customer Data") maintained by the Bank
on data bases under the control and ownership of the Bank or other third
party ("Data Access Services") constitute copyrighted, trade secret, or
other proprietary information (collectively, "Proprietary Information") of
substantial value to the Bank or other third party. In no event shall
Proprietary Information be deemed Customer Data. The Fund agrees to
treat all Proprietary Information as proprietary to the Bank and further
agrees that it shall not divulge any Proprietary Information to any person
or organization except as may be provided hereunder. Without limiting the
foregoing, the Fund agrees for itself and its employees and agents to:
(a) Access Customer Data solely from locations as may be designated in
writing by the Bank and solely in accordance with the Bank's
applicable user documentation;
(b) Refrain from copying or duplicating in any way the Proprietary
Information;
(c) Refrain from obtaining unauthorized access to any portion of the
Proprietary Information, and if such access is inadvertently
obtained, to inform in a timely manner of such fact and dispose of
such information in accordance with the Bank's instructions;
(d) Refrain from causing or allowing information transmitted from the
Bank's computer to the Fund's or its affiliates' terminal to be
retransmitted to any other computer terminal or other device except
as expressly permitted by the Bank (such permission not to be
unreasonably withheld);
(e) Allow the Fund to have access only to those authorized transactions
agreed upon by the parties;
(f) Honor all reasonable written requests made by the Bank to protect at
the Bank's expense the rights of the Bank in Proprietary Information
at common law, under federal copyright law and under other federal or
state law.
7.2 Neither Proprietary Information or Customer Data shall include all or any
portion of any of the foregoing items that: (i) are or become publicly
available without breach of this Agreement; (ii) are released for general
disclosure by a written release by the Bank; or (iii) are already in the
possession of the receiving party at the time or receipt without
obligation of confidentiality or breach of this Agreement.
8
<PAGE>
7.3 The parties acknowledge that their obligation to protect the other's
Proprietary Information or Customer Data is essential to the business
interest of the Bank and the other party and that the disclosure of such
Proprietary Information or Customer Data in breach of this Agreement would
cause the other party immediate, substantial and irreparable harm, the
value of which would be extremely difficult to determine. Accordingly, the
parties agree that, in addition to any other remedies that may be
available in law, equity, or otherwise for the disclosure or use of the
Proprietary Information or Customer Data in breach of this Agreement, the
party whose Proprietary Information or Customer Data is disclosed shall be
entitled to seek and obtain a temporary restraining order, injunctive
relief, or other equitable relief against the continuance of such breach.
7.4 If the Fund notifies the Bank that any of the Data Access Services do not
operate in material compliance with the most recently issued user
documentation for such services, the Bank shall endeavor in a timely
manner to correct such failure. Organizations from which the Bank may
obtain certain data included in the Data Access Services are solely
responsible for the contents of such data and the Fund agrees to make no
claim against the Bank arising out of the contents of such third-party
data, including, but not limited to, the accuracy thereof. DATA ACCESS
SERVICES AND ALL COMPUTER PROGRAMS AND SOFTWARE SPECIFICATIONS USED IN
CONNECTION THEREWITH ARE PROVIDED ON AN AS IS, AS AVAILABLE BASIS. THE
BANK EXPRESSLY DISCLAIMS ALL WARRANTIES EXCEPT THOSE EXPRESSLY STATED
HEREIN INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
7.5 If the transactions available to the Fund include the ability to originate
electronic instructions to the Bank in order to (i) effect the transfer or
movement of cash or Shares or (ii) transmit Shareholder information or
other information, then in such event the Bank shall be entitled to rely
on the validity and authenticity of such instruction without undertaking
any further inquiry as long as such instruction is undertaken in
conformity with security procedures established by the Bank from time to
time.
7.6 Each party shall take reasonable efforts to advise its employees of their
obligations pursuant to this Section 7. The obligations of this Section
---------
shall survive any earlier termination of this Agreement.
8. Indemnification
---------------
8.1 The Bank shall not be responsible for, and the Fund shall indemnify and
hold the Bank harmless from and against, any and all losses, damages,
costs, charges, counsel fees, payments, expenses and liability arising out
of or attributable to:
(a) All actions of the Bank or its agent or affiliated subcontractors
required to be taken pursuant to this Agreement, provided that such
actions are taken in good faith and without negligence or willful
misconduct;
9
<PAGE>
(b) The Fund's lack of good faith, negligence or willful misconduct which
arise out of the breach of any representation or warranty of the Fund
hereunder;
(c) The reliance upon, and any subsequent use of or action taken or
omitted, by the Bank, or its agents or affiliated subcontractors on:
(i) any information, records, documents, data, stock certificates or
services, which are received by the Bank or its agents or affiliated
subcontractors by machine readable input, facsimile, CRT data entry,
electronic instructions or other similar means authorized by the
Fund, and which have been prepared, maintained or performed by the
Fund or any other person or firm on behalf of the Fund including but
not limited to any previous transfer agent or registrar; (ii) any
instructions or requests of the Fund or any of its officers; (iii)
any instructions or opinions of legal counsel with respect to any
matter arising in connection with the services to be performed by the
Bank under this Agreement which are provided to the Bank after
consultation with such legal counsel; or (iv) any paper or document,
reasonably believed to be genuine, authentic, or signed by the proper
person or persons;
(d) The offer or sale of Shares in violation of federal or state
securities laws or regulations requiring that such Shares be
registered or in violation of any stop order or other determination
or ruling by any federal or any state agency with respect to the
offer or sale of such Shares;
(e) The negotiation and processing of any checks including without
limitation for deposit into the Fund's demand deposit account
maintained by the Bank;
(f) Upon the Fund's request entering into any agreements required by the
National Securities Clearing Corporation (the "NSCC") required by the
NSCC for the transmission of Fund or Shareholder data through the
NSCC clearing systems;
8.2 In order that the indemnification provisions contained in this Section 8
---------
shall apply, upon the assertion of a claim for which the Fund may be
required to indemnify the Bank, the Bank shall promptly notify the Fund of
such assertion, and shall keep the Fund advised with respect to all
developments concerning such claim. The Fund shall have the option to
participate with the Bank in the defense of such claim or to defend
against said claim in its own name or in the name of the Bank. The Bank
shall in no case confess any claim or make any compromise in any case in
which the Fund may be required to indemnify the Bank except with the
Fund's prior written consent.
9. Standard of Care
----------------
9.1 The Bank shall at all times act in good faith and agrees to use its best
efforts within reasonable limits to insure the accuracy of all services
performed under this Agreement, but assumes no responsibility and shall
not be liable for loss or damage due to errors unless said errors are
caused by its negligence, bad faith, or willful misconduct or that of its
employees, except as provided in Section 9.2 below.
-----------
10
<PAGE>
9.2 In the case of Exception Services as defined in Section 2.3 herein, the
-----------
Bank shall be held to a standard of gross negligence and encoding and
payment processing errors shall not be deemed negligence.
10. Year 2000
---------
The Bank will take reasonable steps to ensure that its products (and those
of its third-party suppliers) reflect the available technology to offer
products that are Year 2000 ready, including, but not limited to, century
recognition of dates, calculations that correctly compute same century and
multi century formulas and date values, and interface values that reflect
the date issues arising between now and the next one-hundred years, and if
any changes are required, the Bank will make the changes to its products
at a price to be agreed upon by the parties and in a commercially
reasonable time frame and will require third-party suppliers to do
likewise.
11. Confidentiality
---------------
11.1 The Bank and the Fund agree that they will not, at any time during the
term of this Agreement or after its termination, reveal, divulge, or make
known to any person, firm, corporations or other business organization,
any customers' lists, trade secrets, cost figures and projections, profit
figures and projections, or any other secret or confidential information
whatsoever, whether of the Bank or of the Fund, used or gained by the Bank
or the Fund during performance under this Agreement. The Fund and the
Bank further covenant and agree to retain all such knowledge and
information acquired during and after the term of this Agreement
respecting such lists, trade secrets, or any secret or confidential
information whatsoever in trust for the sole benefit of the Bank or the
Fund and their successors and assigns. In the event of breach of the
foregoing by either party, the remedies provided by Section 7.3 shall be
-----------
available to the party whose confidential information is disclosed. The
above prohibition of disclosure shall not apply to the extent that the
Bank must disclose such data to its sub-contractor or Fund agent for
purposes of providing services under this Agreement.
11.2 In the event of any requests or demands for the inspection of the
Shareholder records of the Fund, the Bank will endeavor to notify the Fund
and to secure instructions from an authorized officer of the Fund as to
such inspection. The Bank reserves the right, however, to exhibit the
Shareholder records to any person whenever it is advised by its counsel
that it may be held liable for the failure to exhibit the Shareholder
records to such person.
11.3 In the event that any requests or demands are made for the inspection of
the Shareholder records of the Fund, other than requests for records of
----------------------------------
Shareholders pursuant to standard subpoenas from state or federal
-----------------------------------------------------------------
government authorities (i.e., divorce and criminal actions), the Bank will
-----------------------------------------------------------
endeavor to notify the Fund and to secure instructions from an authorized
officer of the Fund as to such inspection. The Bank expressly reserves
the right, however, to exhibit the Shareholder records to any person
whenever it is advised by
11
<PAGE>
counsel that it may be held liable for the failure to exhibit the
Shareholder records to such person.
12. Covenants of the Fund and the Bank
----------------------------------
12.1 The Fund shall promptly furnish to the Bank the following:
(a) A certified copy of the resolution of the Board of Directors of the
Fund authorizing the appointment of the Bank and the execution and
delivery of this Agreement; and
(b) A copy of the Articles of Incorporation and By-Laws of the Fund and
all amendments thereto.
12.2 The Bank hereby agrees to establish and maintain facilities and procedures
reasonably acceptable to the Fund for safekeeping of stock certificates,
check forms and facsimile signature imprinting devices, if any; and for
the preparation or use, and for keeping account of, such certificates,
forms and devices.
12.3 The Bank shall keep records relating to the services to be performed
hereunder, in the form and manner as it may deem advisable. To the extent
required by Section 31 of the Investment Company Act of 1940, as amended,
and the Rules thereunder, the Bank agrees that all such records prepared
or maintained by the Bank relating to the services to be performed by the
Bank hereunder are the property of the Fund and will be preserved,
maintained and made available in accordance with such Section and Rules,
and will be surrendered promptly to the Fund on and in accordance with its
request.
13. Termination of Agreement
------------------------
13.1 This Agreement may be terminated by either party upon ninety (90) days
written notice to the other.
13.2 Should the Fund exercise its right to terminate, all out-of-pocket
expenses associated with the movement of records and material will be
borne by the Fund. Additionally, the Bank reserves the right to charge for
any other reasonable expenses associated with such termination and a
charge equivalent to the average of one (1) month's fees.
13.3 Upon termination of this Agreement, each party shall return to the other
party all copies of confidential or proprietary materials or information
received from such other party hereunder, other than materials or
information required to be retained by such party under applicable laws or
regulations.
14. Assignment and Third Party Beneficiaries
----------------------------------------
14.1 Except as provided in Section 15.1 below, neither this Agreement nor any
------------
rights or obligations hereunder may be assigned by either party without
the written consent of the
12
<PAGE>
other party. Any attempt to do so in violation of this Section shall be
void. Unless specifically stated to the contrary in any written consent
to an assignment, no assignment will release or discharge the assignor
from any duty or responsibility under this Agreement.
14.2 Except as explicitly stated elsewhere in this Agreement, nothing under
this Agreement shall be construed to give any rights or benefits in this
Agreement to anyone other than the Bank and the Fund, and the duties and
responsibilities undertaken pursuant to this Agreement shall be for the
sole and exclusive benefit of the Bank and the Fund. This Agreement shall
inure to the benefit of and be binding upon the parties and their
respective permitted successors and assigns.
14.3 This Agreement does not constitute an agreement for a partnership or joint
venture between the Bank and the Fund. Other than as provided in Section
-------
15.1, neither party shall make any commitments with third parties that are
---
binding on the other party without the other party's prior written
consent.
15. Subcontractors
--------------
15.1 The Bank may, without further consent on the part of the Fund, subcontract
for the performance hereof with (i) Boston Financial Data Services, Inc.,
a Massachusetts corporation ("BFDS") which is duly registered as a
transfer agent pursuant to Section 17A(c)(2) of the Exchange Act, (ii) a
BFDS subsidiary duly registered as a transfer agent or (iii) a BFDS
affiliate duly registered as a transfer agent; provided, however, that the
Bank shall be fully responsible to the Fund for the acts and omissions of
BFDS or its subsidiary or affiliate as it is for its own acts and
omissions.
15.2 Nothing herein shall impose any duty upon the Bank in connection with or
make the Bank liable for the actions or omissions to act of unaffiliated
third parties such as by way of example and not limitation, Airborne
Services, Federal Express, United Parcel Service, the U.S. mails, the NSCC
and telecommunication companies, provided, if the Bank selected such
company, the Bank shall have exercised due care in selecting the same.
16. Miscellaneous
-------------
16.1 Amendment. This Agreement may be amended or modified by a written
agreement executed by both parties and authorized or approved by a
resolution of the Board of Directors of the Fund.
16.2 Massachusetts Law to Apply. This Agreement shall be construed and the
provisions thereof interpreted under and in accordance with the laws of
The Commonwealth of Massachusetts.
16.3 Force Majeure. In the event either party is unable to perform its
obligations under the terms of this Agreement because of acts of God,
strikes, equipment properly maintained by the Bank or transmission failure
or damage reasonably beyond its control, or other
13
<PAGE>
causes reasonably beyond its control, such party shall not be liable for
damages to the other for any damages resulting from such failure to
perform or otherwise from such causes.
16.4 Consequential Damages. Neither party to this Agreement shall be liable to
the other party for consequential damages under any provision of this
Agreement or for any consequential damages arising out of any act or
failure to act hereunder.
16.5 Survival. All provisions regarding indemnification, warranty, liability,
and limits thereon, and confidentiality and/or protection of proprietary
rights and trade secrets shall survive the termination of this Agreement.
16.6 Severability. If any provision or provisions of this Agreement shall be
held invalid, unlawful, or unenforceable, the validity, legality, and
enforceability of the remaining provisions shall not in any way be
affected or impaired.
16.7 Priorities Clause. In the event of any conflict, discrepancy or ambiguity
between the terms and conditions contained in this Agreement and any
Schedules or attachments hereto, the terms and conditions contained in
this Agreement shall take precedence.
16.8 Waiver. No waiver by either party or any breach or default of any of the
covenants or conditions herein contained and performed by the other party
shall be construed as a waiver of any succeeding breach of the same or of
any other covenant or condition.
16.9 Merger of Agreement. This Agreement constitutes the entire agreement
between the parties hereto and supersedes any prior agreement with respect
to the subject matter hereof whether oral or written.
16.10 Counterparts. This Agreement may be executed by the parties hereto on any
number of counterparts, and all of said counterparts taken together shall
be deemed to constitute one and the same instrument.
16.11 Reproduction of Documents. This Agreement and all schedules, exhibits,
attachments and amendments hereto may be reproduced by any photographic,
photostatic, microfilm, micro-card, miniature photographic or other
similar process. The parties hereto each agree that any such reproduction
shall be admissible in evidence as the original itself in any judicial or
administrative proceeding, whether or not the original is in existence and
whether or not such reproduction was made by a party in the regular course
of business, and that any enlargement, facsimile or further reproduction
shall likewise be admissible in evidence.
16.12 Notices. All notices and other communications as required or permitted
hereunder shall be in writing and sent by facsimile or first class mail,
postage prepaid, addressed as follows or to such other address or
addresses of which the respective party shall have notified the other.
14
<PAGE>
(a) If to the Bank, to:
State Street Bank and Trust Company
c/o Boston Financial Data Services, Inc.
Two Heritage Drive
Quincy, Massachusetts 02171
Attention: Legal Department
Facsimile: (617) 774-2287
(b) If to the Fund, to:
Security Capital Real Estate Mutual Funds Incorporated
11 South LaSalle Street
Chicago, Illinois 60603
Attention: John H. Gardner, Jr.
Managing Director
Telephone: (312) 345-5843
Facsimile: (312) 345-0818
Copies to: David Novick, Esq.
Chief Compliance Officer
17. Additional Funds. In the event that the Fund establishes one or more series
of Shares in addition to the attached Schedule A with respect to which it
desires to have the Bank render services as transfer agent under the terms
hereof, it shall so notify the Bank in writing, and if the Bank agrees in
writing to provide such services, such series of Shares shall become a
Portfolio hereunder.
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
in their names and on their behalf by and through their duly authorized
officers, as of the day and year first above written.
SECURITY CAPITAL REAL ESTATE
MUTUAL FUNDS INCOPORPORATED
BY:
----------------------------------------------
John H. Gardner, Jr.
Managing Director
ATTEST:
- -----------------------------
STATE STREET BANK AND TRUST
COMPANY
BY:
----------------------------------------------
Executive Vice President
ATTEST:
- -----------------------------
16
<PAGE>
SCHEDULE A
Dated June 30, 1998
Security Capital U.S. Real Estate Shares - Class I Shares*
Security Capital U.S. Real Estate Shares - Class R Shares*
Security Capital European Real Estate Shares - Class I Shares
Security Capital European Real Estate Shares - Class R Shares
Security Capital Asia/Pacific Real Estate Shares - Class I Shares
Security Capital Asia/Pacific Real Estate Shares - Class R Shares
Security Capital Real Estate Arbitrage Shares - Class I Shares
*services and fees relating thereto commencing August 10, 1998
SECURITY CAPITAL REAL ESTATE STATE STREET BANK AND
MUTUAL FUNDS INCORPORATED BANK AND TRUST COMPANY
BY: BY:
------------------------------ ------------------------------
<PAGE>
SCHEDULE 2.1
THIRD PARTY ADMINISTRATOR(S) PROCEDURES
Dated June 30, 1998
1. On each Business Day, the TPA(s) shall receive, on behalf of and as agent
of the Fund(s), Instructions (as hereinafter defined) from the Plan.
Instructions shall mean as to each Fund (i) orders by the Plan for the
purchases of Shares, and (ii) requests by the Plan for the redemption of
Shares; in each case based on the Plan's receipt of purchase orders and
redemption requests by Participants in proper form by the time required by
the term of the Plan, but not later than the time of day at which the net
asset value of a Fund is calculated, as described from time to time in that
Fund's prospectus. Each Business Day on which the TPA receives
Instructions shall be a "Trade Date".
2. The TPA(s) shall communicate the TPA(s)'s acceptance of such Instructions,
to the applicable Plan.
3. On the next succeeding Business Day following the Trade Date on which it
accepted Instructions for the purchase and redemption of Shares, (TD+1),
the TPA(s) shall notify the Bank of the net amount of such purchases or
redemptions, as the case may be, for each of the Plans. In the case of net
purchases by any Plan, the TPA(s) shall instruct the Trustees of such Plan
to transmit the aggregate purchase price for Shares by wire transfer to the
Bank on (TD+1). In the case of net redemptions by any Plan, the TPA(s)
shall instruct the Fund's custodian to transmit the aggregate redemption
proceeds for Shares by wire transfer to the Trustees of such Plan on
(TD+1). The times at which such notification and transmission shall occur
on (TD+1) shall be as mutually agreed upon by each Fund, the TPA(s), and
the Bank.
4. The TPA(s) shall maintain separate records for each Plan, which record
shall reflect Shares purchased and redeemed, including the date and price
for all transactions, and Share balances. The TPA(s) shall maintain on
behalf of each of the Plans a single master account with the Bank and such
account shall be in the name of that Plan, the TPA(s), or the nominee of
either thereof as the record owner of Shares owned by such Plan.
5. The TPA(s) shall maintain records of all proceeds of redemptions of Shares
and all other distributions not reinvested in Shares.
6. The TPA(s) shall prepare, and transmit to each of the Plans, periodic
account statements showing the total number of Shares owned by that Plan as
of the statement closing date, purchases and redemptions of Shares by the
Plan during the period covered by the statement, and the dividends and
other distributions paid to the Plan on Shares during the statement period
(whether paid in cash or reinvested in Shares).
7. The TPA(s) shall, at the request and expense of each Fund, transmit to the
Plans prospectuses, proxy materials, reports, and other information
provided by each Fund for delivery to its shareholders.
<PAGE>
8. The TPA(s) shall, at the request of each Fund, prepare and transmit to each
Fund or any agent designated by it such periodic reports covering Shares of
each Plan as each Fund shall reasonably conclude are necessary to enable
the Fund to comply with state Blue Sky requirements.
9. The TPA(s) shall transmit to the Plans confirmation of purchase orders and
redemption requests placed by the Plans; and
10. The TPA(s) shall, with respect to Shares, maintain account balance
information for the Plan(s) and daily and monthly purchase summaries
expressed in Shares and dollar amounts.
11. Plan sponsors may request, or the law may require, that prospectuses, proxy
materials, periodic reports and other materials relating to each Fund be
furnished to Participants in which event the Bank or each Fund shall mail
or cause to be mailed such materials to Participants. With respect to any
such mailing, the TPA(s) shall, at the request of the Bank or each Fund,
provide at the TPA(s)'s expense complete and accurate set of mailing labels
with the name and address of each Participant having an interest through
the Plans in Shares.
SECURITY CAPITAL REAL ESTATE STATE STREET BANK AND
MUTUAL FUNDS INCORPORATED BANK AND TRUST COMPANY
BY: BY:
----------------------------- -------------------------------
2
<PAGE>
SCHEDULE 3.1
Fee Information for Services as
Plan, Transfer and Dividend Disbursing Agent
SECURITY CAPITAL
Dated June 30, 1998
- --------------------------------------------------------------------------------
ANNUAL ACCOUNT SERVICE FEES
- --------------------------------------------------------------------------------
Daily Dividend Fund $ 14.00
Non-Daily Dividend Fund $ 12.00
Closed Account Fee $ 1.80
Minimum (per Fund/Class)
1st Fund $40,000
2nd & 3rd Fund $30,000
4th & 5th Fund $20,000
5th Fund+ $15,000
Each class is considered a fund and will be billed accordingly.
Fees are billable on a monthly basis at the rate of 1/12 of the annual fee. A
charge is made for an account in the month that an account opens or closes.
Account service fees are the higher of: open account charges plus closed
account charges or the fund minimum.
- --------------------------------------------------------------------------------
ACTIVITY BASED FEES
- --------------------------------------------------------------------------------
New Account Set-up $ 5.00/each
Manual Transactions $ 1.50/each
Telephone Calls $ 2.50/each
Correspondence $ 1.50/each
Research Requests $ 1.50/each
- --------------------------------------------------------------------------------
BANKING SERVICES
- --------------------------------------------------------------------------------
Checkwriting Setup $ 5.00
Checkwriting (per draft) $ 1.00
ACH $ .35
- --------------------------------------------------------------------------------
OTHER FEES
- --------------------------------------------------------------------------------
Investor Processing $ 1.80/Investor
12b-1 Commissions $ 1.20/account
- --------------------------------------------------------------------------------
CONVERSION FEES
- --------------------------------------------------------------------------------
Per Account Fee $ 1.00
Minimum (per complex) $25,000
- --------------------------------------------------------------------------------
IRA CUSTODIAL FEES
- --------------------------------------------------------------------------------
Annual Maintenance $ 10.00/account
<PAGE>
- --------------------------------------------------------------------------------
OUT-OF-POCKET EXPENSES BILLED AS INCURRED
- --------------------------------------------------------------------------------
Out-of-Pocket expenses include but are not limited to: confirmation statements,
average cost statements, investor statements, postage, forms, audio response,
telephone, records retention, customized programming / enhancements, federal
wire, transcripts, microfilm, microfiche, and expenses incurred at the specific
direction of the fund.
THESE FEES WILL BE SUBJECT TO AN ANNUAL COST OF LIVING ADJUSTMENT BASED ON
REGIONAL CONSUMER PRICE INDEX.
SECURITY CAPITAL REAL ESTATE STATE STREET BANK AND
MUTUAL FUNDS INCORPORATED BANK AND TRUST COMPANY
BY: BY:
------------------------------ -------------------------------
2
<PAGE>
Exhibit 9(b)
FUND ACCOUNTING AND ADMINISTRATION AGREEMENT
Amended and Restated June __, 1998
THIS AGREEMENT made as of June __, 1998 by and between Security Capital
Real Estate Mutual Funds Incorporated, a Maryland corporation (the "Fund"), and
Security Capital Global Capital Management Group Incorporated, a Delaware
corporation (the "Administrator").
W I T N E S S E T H:
WHEREAS, the Fund is an open-end, management investment company that issues
shares in several series and classes (collectively "Series") as set forth on
Schedule 1 thereto; and
WHEREAS, the Fund wishes to retain the Administrator to provide certain
fund accounting and administration services with respect to the Series and the
Administrator is willing to furnish such services;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:
1. Appointment. The Fund hereby appoints the Administrator to provide
-----------
fund accounting and administration services to the Series, subject to the
supervision of the Board of Directors of the Fund (the "Board of Directors"),
for the period and on the terms set forth in this Agreement. The Administrator
accepts such appointment and agrees to furnish the services herein set forth in
return for the compensation as provided in Paragraph 4 of this Agreement. In
the event that the Fund establishes one or more additional series or classes
with respect to which it decides to retain the Administrator to act as
administrator hereunder, the Fund shall notify the Administrator in writing. If
the Administrator is willing to render such services to a new series or class,
<PAGE>
the Administrator shall so notify the Fund in writing whereupon such series
or class shall added to Schedule 1 thereto shall be subject to the provisions of
this Agreement to the same extent as the Fund and the Series, except to the
extent that said provisions (including those relating to the compensation
payable by the Fund) may be modified with respect to such series or class in
writing by the Fund and the Administrator at the time of the addition of such
new series or class.
2. Delivery of Documents. The Fund has furnished the Administrator with
---------------------
copies, properly certified or authenticated, of each of the following:
(a) Resolutions of the Fund's Board of Directors authorizing the
appointment of the Administrator to provide certain fund accounting and
administration services to the Fund and approving this Agreement;
(b) The Fund's Articles of Incorporation ("Charter");
(c) The Fund's By-Laws ("By-Laws");
(d) The most recent draft of the Fund's Registration Statement on Form
N-1A and when completed, the Fund will provide its most recent Prospectus and
Statement of Additional Information and all amendments and supplements thereto
(such Prospectus and Statement of Additional Information and supplements
thereto, as presently in effect and as from time to time hereafter amended and
supplemented, herein called the "Prospectus").
The Fund will timely furnish the Administrator from time to time with
copies, properly certified or authenticated, of all amendments of or supplements
to the foregoing, if any.
2. Services and Duties. Subject to the supervision and control of
-------------------
the Fund's Board of Directors, the Administrator agrees to assist in supervising
aspects of the Fund's administrative operations, including but not limited to
the performance of the following specific services for the Fund:
(a) Provide office facilities (which may be in the offices of the
Administrator or a corporate affiliate of them, but shall be in such location as
the Fund shall reasonably approve) and the services of a principal financial
officer to be appointed by the Fund;
(b) Furnish statistical and research data, clerical services, and
stationery and office supplies;
(c) Keep and maintain all financial accounts and records (other than
those required to be maintained by the Fund's Custodian and Transfer Agent)
including without
-2-
<PAGE>
limit those required under Section 31 (a) and Rule 31a-1 under the Investment
Company Act of 1940 (the "1940 Act");
(d) Compute, and transmit to the NASD service for the publication of
fund prices, the Fund's net asset value, net income and net capital gain (loss)
in accordance with the Fund's Prospectus and resolutions of its Board of
Directors;
(e) Compile data for, and prepare required reports and notices to
shareholders of record including, without limitation, proxy statements,
Semiannual and Annual Reports to shareholders;
(f) Compile data for, prepare for execution and file all reports or
other documents, including tax returns, required by Federal, state and other
applicable laws and regulations, including those required by applicable Federal
and state tax laws (other than those required to be filed by the Fund's
Custodian or Transfer Agent);
(g) Assist in developing and monitoring compliance procedures for the
Fund and any Series thereof, including, without limitation, procedures to
monitor compliance with applicable law and regulations, the Fund's investment
objectives, policies and restrictions, its continued qualification as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code");
(h) Determine, together with the Fund's Board of Directors, the
jurisdictions in which the Fund's shares shall be registered or qualified for
sale and, in connection therewith, the Administrator shall be responsible for
the registration for sale and maintenance of the registrations of shares for
sale under the securities laws of any state. Payment of share registration fees
for qualifying or continuing the qualification of Fund shares or the Fund as a
dealer or broker, if applicable, shall be made by the Fund;
(i) Provide financial data requested by the Fund and its outside
counsel;
(j) Perform such other duties related to the administration of the
Fund's operations as reasonably requested by the Board of Directors, from time
to time;
(k) Assist in the monitoring of regulatory and legislative
developments which may affect the Fund and, in response to such developments,
counsel and assist the Fund in
-3-
<PAGE>
routine regulatory examinations or investigations of the Fund, and work with
outside counsel to the Fund in connection with regulatory matters or litigation.
In performing its duties as administrator of the Fund, the
Administrator (a) will act in accordance with the Fund's Charter, By-Laws,
Prospectus, Statement of Additional Information and the instructions and
directions of the Fund's Board of Directors and will conform to, and comply
with, the requirements of the 1940 Act and all other applicable Federal or state
laws and regulations, and (b) will consult with outside legal counsel to the
Fund, as necessary or appropriate.
The Administrator will preserve for the periods prescribed by Rule
31a-2 under the 1940 Act the records required to be maintained by Rule 31a-1
under said Act in connection with the services required to be performed
hereunder. The Administrator further agrees that all such records which it
maintains for the Fund are the property of the Fund and further agrees to
surrender promptly to the Fund any of such records upon the Fund's request.
3. Fees; Expenses; Expense Reimbursement. For the services rendered
-------------------------------------
pursuant to this Agreement for the Fund, the Administrator shall be entitled to
a fee based on the average net assets of each class of shares issued by the Fund
determined at the annual rate set forth in Exhibit A hereto and applied to the
average daily net assets of each class of the Fund's shares. Such fees are to
be computed daily and paid monthly on the first business day of the following
month. Upon any termination of this Agreement before the end of any month, the
fee for such part of the month shall be prorated according to the proportion
which such period bears to the full monthly period and shall be payable upon the
date of termination of this Agreement.
For the purpose of determining fees payable to the Administrator, the value
of the Fund's net assets shall be computed as required by its Prospectus,
generally accepted accounting principles and resolutions of the Fund's Board of
Directors.
The Administrator will from time to time employ or associate with
themselves such sub-administrator or such person or persons as they may believe
to be fitted to assist them in the performance of this Agreement. Such person
or persons may be officers and employees who are employed by both the
Administrator and the Fund. The compensation of such person or persons for such
employment shall be paid by the Administrator, if such person is retained solely
by the Administrator, and no obligation may be incurred on behalf of the Fund in
such respect.
-4-
<PAGE>
The Administrator or the Fund may retain a sub-administrator to assist the
Administrator in the execution of its duties hereunder. The retention of a sub-
administrator by the Administrator or the Fund shall in no way affect the
responsibilities of the Administrator hereunder. The compensation of a sub-
administrator retained by the Administrator or the Fund may be paid either by
the Adminstrator or by the Fund.
The Administrator will bear all expenses in connection with the performance
of its services under this Agreement except as otherwise expressly provided
herein. Other expenses to be incurred in the operation of the Fund, including
taxes, interest, brokerage fees and commissions, if any, salaries and fees of
officers and directors who are not officers, directors shareholders or employees
of the Administrator, or the Fund's investment advisor or distributor for the
Fund, Securities and Exchange Commission fees and state Blue Sky qualification
fees, advisory and administration fees, charges of custodians, transfer and
divided disbursing agents' fees, certain insurance premiums including fidelity
bond premiums, outside auditing and legal expenses, costs of maintenance of
corporate existence, typesetting and printing of prospectuses for regulatory
purposes and for distribution to current shareholders of the Fund, costs of
shareholders' reports and corporate meetings and any extraordinary expenses,
will be borne by the Fund, provided, however, that, except as provided in any
distribution plan adopted by the Fund, the Fund will not bear, directly or
indirectly, the cost of any activity which is primarily intended to result in
the distribution of shares of the Fund, and further provided that the
Administrator may utilize one or more independent pricing services, approved
from time to time by the Board of Directors of the Fund, to obtain securities
prices in connection with determining the net asset value of each class of the
Fund's shares and the Fund will reimburse the Administrator for its share of the
cost of such services based upon its actual use of the services.
If in any fiscal year the Fund's aggregate expenses (as defined under the
securities regulations of any state having jurisdiction over the Fund) exceed
the expense limitations of any such state, the Administrator agrees to reimburse
the Fund for a portion of any such excess expense in an amount equal to the
proportion that the fee otherwise payable to the Administrator bear to the total
amount of investment advisory and administration fees otherwise payable by the
Fund. The expense reimbursement obligation of the Administrator is limited to
the amount of its fees hereunder for such fiscal year, provided, however, that
notwithstanding the foregoing, the
-5-
<PAGE>
Administrator shall reimburse the Fund for a portion of any such excess expenses
in an amount equal to the proportion that the fees otherwise payable to the
Administrator bear to the total amount of investment advisory and administration
fees otherwise payable by the Fund regardless of the amount of fees paid to the
Administrator during such fiscal year to the extent that the securities
regulations of any state having jurisdiction over the Fund so require. Such
expense reimbursement, if any, will be estimated on a daily basis, reconciled
and paid on a monthly basis.
5. Proprietary and Confidential Information. The Administrator agrees on
----------------------------------------
behalf of itself and its employees to treat confidentially and as proprietary
information of the Fund all records and other information relative to the Fund's
prior, present or potential shareholders, and not to use such records and
information for any purpose other than performance of their responsibilities and
duties hereunder, except after prior notification to and approval in writing by
the Fund, which approval shall not be unreasonably withheld and may not be
withheld where the Administrator may be exposed to Civil or Criminal contempt
proceedings for failure to comply, when requested to divulge such information by
duly constituted authorities, or when so requested by the Fund.
6. Limitation of Liability. The Administrator shall not be liable for any
-----------------------
error of judgement or mistake of law or for any loss or expense suffered by the
Fund, in connection with the matters to which this Agreement relates, except for
a loss or expense resulting from willful misfeasance, bad faith or gross
negligence on its part in the performance of its duties or from reckless
disregard by it of its obligations and duties under this Agreement. Any person,
even though also an officer, director, partner, employee or agent of the
Administrator, who may be or become an officer, director, employee or agent of
the Fund, shall be deemed when rendering services to the Fund or acting on any
business of the Fund (other than services or business in connection with the
Administrator's duties hereunder) to be rendering such services to or acting
solely for the Fund and not as an officer, director, partner, employee or agent
or one under the control or direction of the Administrator even though paid by
them.
7. Terms. This Agreement shall become effective on the date first
-----
hereinabove written and, unless sooner terminated as provided herein, shall
continue in effect from year to year thereafter, provided such continuance is
specifically approved at least annually (i) by the Fund's Board of Directors or
(ii) by a vote of a majority (as defined in the 1940 Act) of the
-6-
<PAGE>
outstanding voting securities of the Fund, provided that in either event the
continuance is also approved by the majority of the Fund's Board of Directors
who are not interested persons (as defined in the 1940 Act) of any party to this
Agreement, by vote cast in person at a meeting called for the purpose of voting
on such approval. This Agreement is terminable, without penalty, by the Fund's
Board of Directors, by vote of a majority (as defined in the 1940 Act) of the
outstanding voting securities of such Fund, or by the Administrator, on not less
than sixty days' notice. This agreement shall automatically terminate upon its
assignment by the Administrator without the prior written consent of the Fund,
provided, however, that no such assignment shall release the Administrator from
its obligations under this Agreement.
8. Governing Law. This Agreement shall be governed by Illinois law.
-------------
9. Amendments. No provision of this Agreement may be changed,
----------
discharged, or terminated orally, but only by an instrument in writing signed by
the party against which enforcement of the change, discharge or termination is
sought.
10. Miscellaneous. The parties to this Agreement acknowledge and agree
-------------
that all liabilities arising, directly or indirectly, under this Agreement, of
any and every nature whatsoever, including without limitation, liabilities
arising in connection with any agreement of the Fund set forth herein to
indemnify any party to this Agreement or any other person, shall be satisfied
out of the assets of the Fund and that no director, officer or shareholder of
the Fund shall be personally liable for any of the foregoing liabilities.
If a change or discharge is sought against the Fund, the instrument must be
signed by the Administrator.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below as of the date indicated below.
-7-
<PAGE>
SECURITY CAPITAL REAL ESTATE
MUTUAL FUNDS INCORPORATED
ATTEST: By:
--------------------------- -----------------------------------
(Title)
SECURITY CAPITAL GLOBAL CAPITAL
MANAGEMENT GROUP INCORPORATED
ATTEST: By:
--------------------------- -----------------------------------
(Title)
EFFECTIVE AS OF:
-8-
<PAGE>
EXHIBIT A
FUND ACCOUNTING AND FUND ADMINISTRATION
FEE SCHEDULE
FOR
SECURITY CAPITAL U.S. REAL ESTATE SHARES INCORPORATED
Annual Rate: .02% (2 basis points) of the average daily net assets of the Fund
billed monthly.
SCHEDULE 1
SECURITY CAPITAL REAL ESTATE MUTUAL FUNDS INCORPORATED
The following Series of Security Capital Real Estate Mutual Funds Incorporated
are subject to this Agreement:
Security Capital U.S. Real Estate Shares-Class I shares
Security Capital U.S. Real Estate Shares-Class R shares
Security Capital European Real Estate Shares-Class I shares
Security Capital European Real Estate Shares-Class R shares
Security Capital Asia/Pacific Real Estate Shares-Class I shares
Security Capital Asia/Pacific Real Estate Shares-Class R shares
Security Capital Real Estate Arbitrage Shares-Class I shares
-9-
<PAGE>
Exhibit 9(c)
SUB-ADMINISTRATION AGREEMENT
Agreement dated as of June 30, 1998, by and between State Street Bank
and Trust Company, a Massachusetts trust company (the "Administrator"), and
Security Capital Real Estate Mutual Funds Incorporated (the "Company").
WHEREAS, the Company is registered as an open-end, management
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act");
WHEREAS, the Company intends initially to offer several series and
classes of shares (each an "Investment Fund") as identified on Schedule A to
this Agreement as may be amended from time to time; and
WHEREAS, the Company desires to retain the Administrator to furnish
certain administrative services to the Company, and the Administrator is willing
to furnish such services, on the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the parties hereto agree as follows:
1. APPOINTMENT OF ADMINISTRATOR
The Company hereby appoints the Administrator to act as administrator
with respect to the Company for purposes of providing certain administrative
services for the period and on the terms set forth in this Agreement. The
Administrator accepts such appointment and agrees to render the services stated
herein.
The Company will initially consist of the portfolio(s) and/or
class(es) of shares listed in Schedule A to this Agreement. In the event that
the Company establishes one or more additional Investment Funds with respect to
which it wishes to retain the Administrator to act as administrator hereunder,
the Company shall notify the Administrator in writing. Upon written acceptance
by the Administrator, such Investment Fund shall become subject to the
provisions of this Agreement to the same extent as the existing Investment
Funds, except to the extent that such provisions (including those relating to
the compensation and expenses payable by the Company and its Investment Funds)
may be modified with respect to each additional Investment Fund in writing by
the Company and the Administrator at the time of the addition of the Investment
Fund.
2. DELIVERY OF DOCUMENTS
The Company will promptly deliver to the Administrator copies of each
of the following documents and all future amendments and supplements, if any:
a. The Company's Articles of Incorporation and by-laws;
<PAGE>
b. The Company's currently effective registration statement under
the Securities Act of 1933, as amended (the "1933 Act"), and the
1940 Act and the Company's Prospectus(es) and Statement(s) of
Additional Information relating to all Investment Funds and all
amendments and supplements thereto as in effect from time to
time;
c. Certified copies of the resolutions of the Board of Directors of
the Company (the "Board") authorizing (1) the Company to enter
into this Agreement and (2) certain officers on behalf of the
Company to (a) give instructions to the Administrator pursuant to
this Agreement and (b) sign checks and pay expenses;
d. A copy of the investment advisory agreement between the Company
and its investment adviser; and
e. Such other certificates, documents or opinions which the
Administrator may, in its reasonable discretion, deem necessary
or appropriate in the proper performance of its duties.
3. REPRESENTATIONS AND WARRANTIES OF THE ADMINISTRATOR
The Administrator represents and warrants to the Company that:
a. It is a Massachusetts trust company, duly organized and existing
under the laws of The Commonwealth of Massachusetts;
b. It has the corporate power and authority to carry on its business
in The Commonwealth of Massachusetts;
c. All requisite corporate proceedings have been taken to authorize
it to enter into and perform this Agreement;
d. No legal or administrative proceedings have been instituted or
threatened which would impair the Administrator's ability to
perform its duties and obligations under this Agreement; and
e. Its entrance into this Agreement shall not cause a material
breach or be in material conflict with any other agreement or
obligation of the Administrator or any law or regulation
applicable to it.
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Administrator that:
a. It is a corporation, duly organized, existing and in good
standing under the laws of the State of Maryland;
2
<PAGE>
b. It has the corporate power and authority under applicable laws
and by its charter and by-laws to enter into and perform this
Agreement;
c. All requisite proceedings have been taken to authorize it to
enter into and perform this Agreement;
d. It is an investment company properly registered under the 1940
Act;
e. A registration statement under the 1933 Act and the 1940 Act has
been filed and will be effective and remain effective during the
term of this Agreement. The Company also warrants to the
Administrator that as of the effective date of this Agreement,
all necessary filings under the securities laws of the states in
which the Company offers or sells its shares have been made;
f. No legal or administrative proceedings have been instituted or
threatened which would impair the Company's ability to perform
its duties and obligations under this Agreement;
g. Its entrance into this Agreement will not cause a material breach
or be in material conflict with any other agreement or obligation
of the Company or any law or regulation applicable to it; and
h. As of the close of business on the date of this Agreement, the
Company is authorized to issue shares of capital stock, and it
will initially offer shares, in the authorized amounts as set
forth in Schedule A to this Agreement.
5. ADMINISTRATION SERVICES
The Administrator shall provide the following services, in each case, subject
to the control, supervision and direction of the Company and the review and
comment by the Company's auditors and legal counsel and in accordance with
procedures which may be established from time to time between the Company and
the Administrator:
a. Oversee the determination and publication of the Company's net
asset value in accordance with the Company's policy as adopted
from time to time by the Board;
b. Oversee the maintenance by the Company's custodian of certain
books and records of the Company as required under Rule 31a-1(b)
of the 1940 Act;
c. Prepare the Company's federal, state and local income tax returns
for review by the Company's independent accountants and filing by
the Company's treasurer;
d. Review the calculation, submit for approval by officers of the
Company and arrange for payment of the Company's expenses;
3
<PAGE>
e. Prepare for review and approval by officers of the Company
financial information for the Company's semi-annual and annual
reports and other communications required or otherwise to be sent
to Company shareholders, and arrange for the printing and
dissemination of such reports and communications to shareholders;
f. Prepare for review by an officer of and legal counsel for the
Company the Company's periodic financial reports required to be
filed with the Securities and Exchange Commission ("SEC") on Form
N-SAR and financial information required by Form N-1A and such
other reports, forms or filings as may be mutually agreed upon;
g. Prepare reports relating to the business and affairs of the
Company as may be mutually agreed upon and not otherwise prepared
by the Company's investment adviser, custodian, legal counsel or
independent accountants;
h. Make such reports and recommendations to the Board concerning the
performance of the independent accountants as the Board may
reasonably request;
i. Make such reports and recommendations to the Board concerning the
performance and fees of the Company's custodian and transfer and
dividend disbursing agent ("Transfer Agent") as the Board may
reasonably request or deems appropriate;
j. Oversee and review calculations of fees paid to the Company's
investment adviser, custodian, Administrator and Transfer Agent;
k. Consult with the Company's officers, independent accountants,
legal counsel, custodian and Transfer Agent in establishing the
accounting policies of the Company;
l. Respond to, or refer to the Company's officers or Transfer Agent,
shareholder inquiries relating to the Company;
m. Provide periodic testing of portfolios to assist the Company's
investment adviser in complying with mandatory qualification
requirements of Subchapter M of the Internal Revenue Code, the
requirements of the 1940 Act and the Company's prospectus
limitations as may be mutually agreed upon;
n. Review and provide assistance on shareholder communications;
o. Maintain copies of the Company's charter and by-laws;
p. File annual and semi-annual shareholder reports with the
appropriate regulatory agencies; review text of "President's
letters" to shareholders and "Management's
4
<PAGE>
Discussion of Company Performance" (which shall also be subject
to review by the Company's legal counsel);
q. Prepare and file Rule 24f-2 notices.
r. Perform Blue Sky services pursuant to the specific instructions
of the Company and as detailed in Schedule B to this Agreement.
The Administrator shall provide the office facilities and the personnel required
by it to perform the services contemplated herein.
6. FEES; EXPENSES; EXPENSE REIMBURSEMENT
The Administrator shall receive from the Company such compensation for
the Administrator's services provided pursuant to this Agreement as may be
agreed to from time to time in a written fee schedule approved by the parties
and initially set forth in the Fee Schedule to this Agreement. The fees are
accrued daily and billed monthly and shall be due and payable upon receipt of
the invoice. Upon the termination of this Agreement before the end of any month,
the fee for the part of the month before such termination shall be prorated
according to the proportion which such part bears to the full monthly period and
shall be payable upon the date of termination of this Agreement. In addition,
the Company shall reimburse the Administrator for its reasonable out-of-pocket
costs incurred in connection with this Agreement.
The Company agrees promptly to reimburse the Administrator for any
equipment and supplies specially ordered by or for the Company through the
Administrator and for any other expenses not contemplated by this Agreement that
the Administrator may incur on the Company's behalf at the Company's request or
with the Company's consent.
The Company will bear all expenses that are incurred in its operation
and not specifically assumed by the Administrator. Expenses to be borne by the
Company, include, but are not limited to: organizational expenses; cost of
services of independent accountants and outside legal and tax counsel retained
by the Company (including such counsel's review of the Company's registration
statement, proxy materials, federal and state tax qualification as a regulated
investment company and other reports and materials prepared by the Administrator
under this Agreement); cost of any services contracted for by the Company
directly from parties other than the Administrator; cost of trading operations
and brokerage fees, commissions and transfer taxes in connection with the
purchase and sale of securities for the Company; investment advisory fees;
taxes, insurance premiums and other fees and expenses applicable to its
operation; costs incidental to any meetings of shareholders including, but not
limited to, legal and accounting fees, proxy filing fees and the costs of
preparation, printing and mailing of any proxy materials; costs incidental to
Board meetings, including fees and expenses of Board members; the salary and
expenses of any officer, director\trustee or employee of the Company; costs
incidental to the preparation, printing and distribution of the Company's
registration statements and any amendments thereto and shareholder reports; cost
of typesetting and printing of prospectuses; cost of preparation and filing of
the Company's tax returns, Form N-1A or N-2 and Form N-SAR, and all notices,
registrations and amendments associated with applicable federal and state tax
and securities laws; all applicable registration fees and filing fees required
under federal and state securities laws; fidelity bond and
5
<PAGE>
directors' and officers' liability insurance; and cost of independent pricing
services used in computing the Company's net asset value.
The Administrator is authorized to and may employ or associate with
such person or persons as the Administrator may deem desirable to assist it in
performing its duties under this Agreement; provided, however, that the
compensation of such person or persons shall be paid by the Administrator and
that the Administrator shall be as fully responsible to the Company for the acts
and omissions of any such person or persons as it is for its own acts and
omissions.
7. INSTRUCTIONS AND ADVICE
At any time, the Administrator may apply to any officer of the Company
for instructions and may consult with outside counsel for the Company or the
independent accountants for the Company at the expense of the Company, with
respect to any matter arising in connection with the services to be performed by
the Administrator under this Agreement. The Administrator shall not be liable,
and shall be indemnified by the Company, for any action taken or omitted by it
in good faith in reliance upon any such instructions or advice or upon any paper
or document believed by it to be genuine and to have been signed by the proper
person or persons. The Administrator shall not be held to have notice of any
change of authority of any person until receipt of written notice thereof from
the Company. Nothing in this paragraph shall be construed as imposing upon the
Administrator any obligation to seek such instructions or advice, or to act in
accordance with such advice when received.
8. LIMITATION OF LIABILITY AND INDEMNIFICATION
The Administrator shall be responsible for the performance of only
such duties as are set forth in this Agreement and, except as otherwise provided
under Section 6, shall have no responsibility for the actions or activities of
any other party, including other service providers. The Administrator shall have
no liability for any error of judgment or mistake of law or for any loss or
damage resulting from the performance or nonperformance of its duties hereunder
unless solely caused by or resulting from the negligence of the Administrator
its officers or employees or the breach of any representation or warranty of the
Administrator hereunder. The Administrator shall not be liable for any special,
indirect, incidental, or consequential damages of any kind whatsoever
(including, without limitation, attorneys' fees) under any provision of this
Agreement or for any such damages arising out of any act or failure to act
hereunder. In any event, the Administrator's liability under this Agreement
shall be limited to the greater of two times its total annual compensation
earned and fees paid hereunder during the preceding twelve months or one hundred
thousand dollars ($100,000) for any liability or loss suffered by the Company
including, but not limited to, any liability relating to qualification of the
Company as a regulated investment company or any liability relating to the
Company's compliance with any federal or state tax or securities statute,
regulation or ruling.
The Administrator shall not be responsible or liable for any failure
or delay in performance of its obligations under this Agreement arising out of
or caused, directly or indirectly, by circumstances beyond its control,
including without limitation, work stoppage, power or other mechanical failure,
computer virus, natural disaster, governmental action or communication
disruption.
The Administrator shall maintain a fully functional disaster recovery
plan and procedures including provisions for emergency use of electronic data
processing equipment, which is commercially
6
<PAGE>
reasonable in light of the services provided. The Administrator shall, at no
additional expense to the Company, take commercially reasonable steps to
minimize service interruptions. The Administrator shall have no liability with
respect to the loss of data or service interruptions caused by equipment
failure, provided it maintains such plan and procedures.
The Company shall indemnify and hold the Administrator harmless from
all loss, cost, damage and expense, including reasonable fees and expenses for
counsel, incurred by the Administrator resulting from any claim, demand, action
or suit in connection with the Administrator's acceptance of this Agreement, any
action or omission by it in the performance of its duties hereunder, or as a
result of acting upon any instructions reasonably believed by it to have been
duly authorized by the Company, provided that this indemnification shall not
apply to actions or omissions of the Administrator, its officers or employees in
cases of its or their own gross negligence or willful misconduct.
The indemnification contained herein shall survive the termination of this
Agreement.
9. CONFIDENTIALITY
The Administrator agrees that, except as otherwise required by law or
in connection with any required disclosure to a banking or other regulatory
authority, it will keep confidential all records and information in its
possession relating to the Company or its shareholders or shareholder accounts
and will not disclose the same to any person except at the request or with the
written consent of the Company.
10. COMPLIANCE WITH GOVERNMENTAL RULES AND REGULATIONS; RECORDS
The Company assumes full responsibility for complying with all
securities, tax, commodities and other laws, rules and regulations applicable to
it.
In compliance with the requirements of Rule 31a-3 under the 1940 Act,
the Administrator agrees that all records which it maintains for the Company
shall at all times remain the property of the Company, shall be readily
accessible during normal business hours, and shall be promptly surrendered upon
the termination of the Agreement or otherwise on written request. The
Administrator further agrees that all records which it maintains for the Company
pursuant to Rule 31a-1 under the 1940 Act will be preserved for the periods
prescribed by Rule 31a-2 under the 1940 Act unless any such records are earlier
surrendered as provided above. Records shall be surrendered in usable machine-
readable form.
11. SERVICES NOT EXCLUSIVE
The services of the Administrator to the Company are not to be deemed
exclusive, and the Administrator shall be free to render similar services to
others. The Administrator shall be deemed to be an independent contractor and
shall, unless otherwise expressly provided herein or authorized by the Company
from time to time, have no authority to act or represent the Company in any way
or otherwise be deemed an agent of the Company.
12. TERM, TERMINATION AND AMENDMENT
This Agreement shall become effective on the date of its execution and
shall remain in full force and effect and effect for an initial term of two
years from the effective date and shall
7
<PAGE>
automatically continue in full force and effect after such initial term unless
either party terminates this Agreement by written notice to the other party at
least sixty (60) days prior to the expiration of the initial term. Either party
may terminate this Agreement at any time after the initial term upon at least
sixty (60) days' prior written notice to the other party. Termination of this
Agreement with respect to any given Investment Fund shall in no way affect the
continued validity of this Agreement with respect to any other Investment Fund.
Upon termination of this Agreement, the Company shall pay to the Administrator
such compensation and any reimbursable expenses as may be due under the terms
hereof as of the date of such termination, including reasonable out-of-pocket
expenses associated with such termination. This Agreement may be modified or
amended from time to time by mutual written agreement of the parties hereto.
13. NOTICES
Any notice or other communication authorized or required by this
Agreement to be given to either party shall be in writing and deemed to have
been given when delivered in person or by confirmed facsimile, or posted by
certified mail, return receipt requested, to the following address (or such
other address as a party may specify by written notice to the other): if to the
Company: Security Capital Real Estate Mutual Funds Incorporated, 11 South
LaSalle St., Chicago, Illinois 60603 Attn: John H. Gardner, Managing Director;
cc: David Novick, Esq., Chief Compliance Officer; fax:312-345-0818; if to the
Administrator: State Street Bank and Trust Company, 1776 Heritage Drive, AFB-4,
North Quincy, Massachusetts 02171, Attn: Joseph McBrien, Vice President and
Counsel; fax: 617-985-4867.
14. NON-ASSIGNABILITY
This Agreement shall not be assigned by either party hereto without
the prior consent in writing of the other party, except that the Administrator
may assign this Agreement to a successor of all or a substantial portion of its
business, or to a party controlling, controlled by or under common control with
the Administrator.
15. SUCCESSORS
This Agreement shall be binding on and shall inure to the benefit of
the Company and the Administrator and their respective successors and permitted
assigns.
16. ENTIRE AGREEMENT
This Agreement contains the entire understanding between the parties
hereto with respect to the subject matter hereof and supersedes all previous
representations, warranties or commitments regarding the services to be
performed hereunder whether oral or in writing.
17. WAIVER
The failure of a party to insist upon strict adherence to any term of
this Agreement on any occasion shall not be considered a waiver nor shall it
deprive such party of the right thereafter to insist upon strict adherence to
that term or any term of this Agreement. Any waiver must be in writing signed by
the waiving party.
8
<PAGE>
18. SEVERABILITY
If any provision of this Agreement is invalid or unenforceable, the
balance of the Agreement shall remain in effect, and if any provision is
inapplicable to any person or circumstance it shall nevertheless remain
applicable to all other persons and circumstances.
19. GOVERNING LAW
This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with the laws of The Commonwealth of
Massachusetts.
20. REPRODUCTION OF DOCUMENTS
This Agreement and all schedules, exhibits, attachments and amendments
hereto may be reproduced by any photographic, photostatic, microfilm, micro-
card, miniature photographic or other similar process. The parties hereto
all/each agree that any such reproduction shall be admissible in evidence as the
original itself in any judicial or administrative proceeding, whether or not the
original is in existence and whether or not such reproduction was made by a
party in the regular course of business, and that any enlargement, facsimile or
further reproduction of such reproduction shall likewise be admissible in
evidence.
21. YEAR 2000
The Administrator will take reasonable steps to ensure that its
products (and those of its third-party suppliers) reflect the available state of
the art technology to offer products that are Year 2000 compliant, including but
not limited to, century recognition of dates, calculations that correctly
compute same century and multi-century formulas and date values, and interface
values that reflect the date issues arising between now and the next one hundred
years. If any changes are required, the Administrator will make the changes to
its products at no cost to the Company and in a commercially reasonable time
frame and will require third-party suppliers to do likewise.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their officers designated below as of the date first written
above.
SECURITY CAPITAL REAL ESTATE MUTUAL FUNDS INCORPORATED
By:
-----------------------------
Name:
-----------------------------
Title:
-----------------------------
STATE STREET BANK AND TRUST COMPANY
By:
----------------------------
Name: Kathleen C. Cuocolo
----------------------------
Title: Senior Vice President
----------------------------
10
<PAGE>
SECURITY CAPITAL REAL ESTATE MUTUAL FUNDS INCORPORATED
ADMINISTRATION AGREEMENT
SCHEDULE A
Listing of Investment Funds and Authorized Shares
<TABLE>
<CAPTION>
Investment Fund Authorized Shares
<S> <C>
Security Capital U.S. Real Estate Shares(1) (Class I and Class R) 50,000,000
Security Capital European Real Estate Shares (Class I and Class R) 50,000,000
Security Capital Asia/Pacific Real Estate Shares (Class I and Class R) 50,000,000
Security Capital Real Estate Arbitrage Shares (Class I) 50,000,000
</TABLE>
- ------------------------------
/1/ Services and fees related thereto to commence August 10, 1998.
11
<PAGE>
SECURITY CAPITAL REAL ESTATE MUTUAL FUNDS INCORPORATED
ADMINISTRATION AGREEMENT
SCHEDULE B
NOTICE FILING WITH
STATE SECURITIES ADMINISTRATORS
AT THE SPECIFIC DIRECTION OF THE COMPANY, THE ADMINISTRATOR WILL PREPARE
REQUIRED DOCUMENTATION AND MAKE NOTICE FILINGS IN ACCORDANCE WITH THE SECURITIES
LAWS OF EACH JURISDICTION IN WHICH COMPANY SHARES ARE TO BE OFFERED OR SOLD
PURSUANT TO INSTRUCTIONS GIVEN TO THE ADMINISTRATOR BY THE COMPANY.
THE COMPANY SHALL BE SOLELY RESPONSIBLE FOR THE DETERMINATION (I) OF THOSE
JURISDICTIONS IN WHICH NOTICE FILINGS ARE TO BE SUBMITTED AND (II) THE NUMBER OF
COMPANY SHARES TO BE PERMITTED TO BE SOLD IN EACH SUCH JURISDICTION. IN THE
EVENT THAT THE ADMINISTRATOR BECOMES AWARE OF (A) THE SALE OF COMPANY SHARES IN
A JURISDICTION IN WHICH NO NOTICE FILING HAS BEEN MADE OR (B) THE SALE OF
COMPANY SHARES IN EXCESS OF THE NUMBER OF COMPANY SHARES PERMITTED TO BE SOLD IN
SUCH JURISDICTION, THE ADMINISTRATOR SHALL REPORT SUCH INFORMATION TO THE
COMPANY, AND IT SHALL BE THE COMPANY'S RESPONSIBILITY TO DETERMINE APPROPRIATE
CORRECTIVE ACTION AND INSTRUCT THE ADMINISTRATOR WITH RESPECT THERETO.
The Blue Sky services to be provided by the Administrator shall consist of the
following:
1. Filing of Company's Initial Notice Filings, as directed by the
Company;
2. Filing of Company's renewals and amendments as required;
3. Filing of amendments to the Company's registration statement where
required;
4. Filing Company sales reports where required;
5. Payment at the expense of the Company of all Company Notice Filing
fees;
6. Filing the Prospectuses and Statements of Additional Information and
any amendments or supplements thereto where required;
7. Filing of annual reports and proxy statements where required;
8. Quarterly provide to the Company and the Company's Transfer Agent a
registration period sales report; and
9. The performance of such additional services as the Administrator and
the Company may agree upon in writing.
Unless otherwise specified in writing by the Administrator, Blue Sky services by
the Administrator shall not include determining the availability of exemptions
under a jurisdiction's blue sky law. Any such determination shall be made by
the Company or its legal counsel. In connection with the services described
herein, the Company shall issue in favor of the Administrator a power of
attorney to submit
12
<PAGE>
Notice Filings on behalf of the Company, which power of
attorney shall be substantially in the form of Exhibit I attached hereto.
13
<PAGE>
EXHIBIT I
LIMITED POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, as of __________________, 1998 that Security
Capital Real Estate Mutual Funds Incorporated with principal offices at 11 South
LaSalle Street, Chicago, Illinois 60603 (the "Company") makes, constitutes, and
appoints STATE STREET BANK AND TRUST COMPANY (the "Administrator") with
principal offices at 225 Franklin Street, Boston, Massachusetts its lawful
attorney-in-fact for it to do as if it were itself acting, the following:
1. REGISTRATION OF TRUST SHARES. The power to register shares of the
Company in each jurisdiction in which Company shares are offered or sold
and in connection therewith the power to prepare, execute, and deliver and
file any and all Company applications, including without limitation,
applications to register shares, consents, including consents to service of
process, reports, including without limitation, all periodic reports,
claims for exemption, or other documents and instruments now or hereafter
required or appropriate in the judgment of the Administrator in connection
with the registration of Company shares.
2. AUTHORIZED SIGNERS. Pursuant to this Limited Power of Attorney, individuals
holding the titles of Officer, Blue Sky Manager, or Senior Blue Sky
Administrator at the Administrator shall have authority to act on behalf of
the Company with respect to item 1 above.
The execution of this limited power of attorney shall be deemed coupled with an
interest and shall be revocable only upon receipt by the Administrator of such
termination of authority. Nothing herein shall be construed to constitute the
appointment of the Administrator as or otherwise authorize the Administrator to
act as an officer, director or employee of the Company.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed in its
name and on its behalf by and through its duly authorized officer, as of the
date first written above.
SECURITY CAPITAL REAL ESTATE MUTUAL FUNDS INCORPORATED
By:
- ----------------------
Name:
- ----------------------
Title:
- ----------------------
14
<PAGE>
STATE STREET BANK AND TRUST COMPANY
SECURITY CAPITAL
FUND ADMINISTRATION FEE SCHEDULE
COMPLEX FEE SCHEDULE FOR UP TO 10 PORTFOLIOS
I. FUND ADMINISTRATION SERVICES
<TABLE>
<CAPTION>
Annual Fee
Average Complex Assets Expressed in Basis Points: 1/100 of 1%
---------------------- --------------------------------------
Administration
--------------
<S> <C>
First $750 million 8
Next $250 million 6
Thereafter 4
Minimum/Fund
1st Fund $90,000
2nd Fund $80,000
3rd Fund $70,000
4th Fund $60,000
5th Fund $50,000
</TABLE>
Administration services include Treasurer's office support, financial reporting,
daily and monthly SEC and IRS compliance as appropriate, tax reporting, and Blue
Sky compliance support.
II. MULTIPLE CLASSES OF SHARES
An additional $2,500 annual fee will be applied for each class of shares,
excluding the initial class of shares, if more than one class of shares
is operational in a fund.
III. BLUE SKY ADMINISTRATION SERVICES
A base blue sky fee of $5,000 per fund.
IV. LEVERAGE
An additional $10,000 annual fee will be applied if a fund engages in
leverage transactions other than temporary borrowing.
<PAGE>
V. OUT OF POCKET EXPENSES - INCLUDE BY MAY NOT BE LIMITED TO:
- Printing for shareholder reports and SEC filings
- Legal fees, audit fees and other professional fees
- Postage, telephone, fax, and photocopying
- Supplies related to Fund records
- Travel and lodging for Board and Operations meetings
- Preparation of financials other than Annual, Semi-Annual, and
Quarterly Board Reporting - $3,000 per financial report
VI. SPECIAL ARRANGEMENTS
Fees for activities of a non-recurring nature such as fund consolidations
or reorganization, and/or preparation of special reports will be subject to
negotiation.
VII. TERM OF THE CONTRACT
The parties agree that this fee schedule shall remain in effect through
December 31, 1999, and from year to year thereafter until it is revised as a
result of negotiations initiated by either party.
SECURITY CAPITAL STATE STREET BANK
By: By:
------------------ ------------------
Title: Title:
--------------- ---------------
Date: Date:
---------------- ----------------
<PAGE>
Exhibit 11(a)
CONSENT OF
----------
MAYER, BROWN & PLATT
--------------------
We hereby consent to the reference to our firm under the caption "Counsel
and Independent Accountants" in the statement of additional information
comprising a part of Post-Effective Amendment No. 9 to the Form N-1A
Registration Statement of Security Capital Real Estate Mutual Funds
Incorporated, File Nos. 333-20649 and 811-8033.
/s/ Mayer, Brown & Platt
MAYER, BROWN & PLATT
Washington, D.C.
August 19, 1998
<PAGE>
Exhibit 11(b)
Law Offices
BALLARD SPAHR ANDREWS & INGERSOLL, LLP
300 East Lombard Street, 19th Floor
Baltimore, Maryland 21202-3268
410-528-5600
Fax: 410-528-5650
[email protected]
August 19, 1998
Security Capital Real Estate Mutual Funds Incorporated
11 South LaSalle Street
Chicago, Illinois 60603
Re: Security Capital Real Estate Mutual Funds Incorporated
Registration Statement on Form N-1A
(Registration Nos. 333-20649 and 811-8033)
------------------------------------------------------
Ladies and Gentlemen:
We hereby consent to the use of the name of our firm in the above-
referenced Registration Statement under the caption "Counsel and Independent
Accountants." In giving this consent, we do not admit that we are within the
category of persons whose consent is required by Section 7 of the Securities Act
of 1933, as amended.
Very truly yours,
/s/ Ballard Spahr Andrews & Ingersoll, LLP
<PAGE>
Exhibit 11(c)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the use of our reports
dated February 2, 1998 and to all references to our Firm included in or made a
part of this registration statement on Form N-1A of Security Capital Real Estate
Mutual Funds Incorporated.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Chicago, Illinois
August 17, 1998
<PAGE>
Exhibit 18
SECURITY CAPITAL REAL ESTATE MUTUAL FUNDS INCORPORATED
MULTIPLE CLASS PLAN PURSUANT TO RULE 18F-3
Security Capital Real Estate Mutual Funds Incorporated ("Fund") hereby
adopts this Multiple Class Plan pursuant to Rule 18f-3 under the Investment
Company Act of 1940, as amended ("1940 Act") on behalf of its operating series,
Security Capital U.S. Real Estate Shares ("SC-US"), Security Capital European
Real Estate Shares ("SC-EURO"), Security Capital Asia/Pacific Real Estate Shares
("SC-ASIA") and Security Capital Real Estate Arbitrage Shares ("SC-ARBITRAGE")
(each, a "Series"). This Plan shall take effect upon the effectiveness of Post-
Effective Amendment No. 9 to the Fund's Registration Statement on Form N-1A with
respect to each Series.
A. GENERAL DESCRIPTION OF CLASSES THAT ARE OFFERED:
------------------------------------------------
1. Class R Shares. Class R shares of SC-US, SC-EURO and SC-ASIA are sold
to the general public without an initial or a deferred sales charge.
Class R shares of SC-US, SC-EURO and SC-ASIA are subject to a distribution
fee and service fee equal, in the aggregate, to .25 of 1% on an annual basis of
the average daily net assets of the Class R shares of a Series paid pursuant to
a distribution and service plan adopted pursuant to Rule 12b-1 under the 1940
Act.
Class R shares of a Series are available for purchase only by investors
whose minimum initial investment is $2,500 in the Series. Subsequent
investments must be at least $500.
2. Class I Shares. Class I shares of each Series are sold to the general
public without an initial or a deferred sales charge.
Class I shares of each Series are subject to a distribution fee and service
fee equal, in the aggregate, to .25 of 1% on an annual basis of the average
daily net assets of the Class I shares of the Fund paid pursuant to a
distribution and service plan adopted pursuant to Rule 12b-1 under the 1940 Act.
Class I shares of a Series are available for purchase only by investors
whose minimum initial investment in the Series is $250,000. Subsequent
investments must be at least $20,000.
Class I shares of SC-ARBITRAGE redeemed within twelve months of the date of
purchase are subject to a redemption fee of 2.0%. A redemption fee is not
applied to (a) a redemption of any Class I shares of SC-ARBITRAGE outstanding
one year or more; (b) a redemption of Class I shares purchased through the
reinvestment of dividends or capital gains distributions paid by SC-ARBITRAGE
("Reinvestment Shares"); (c) a redemption of Class I
<PAGE>
shares by SC-ARBITRAGE upon the exercise of its right to liquidate accounts
falling below the minimum account size by reason of shareholder redemptions; or
(d) a redemption of shares due to the death of all registered shareholders of an
account with more than one registered shareholder (i.e., joint tenant account).
In determining whether a redemption fee is payable, it will be assumed that
redemption is made first of Reinvestment Shares; second of Class I shares that
have been held for more than one year; and third of Class I shares that have
been held the longest that are subject to the redemption fee. The Fund reserves
the right to waive or modify the redemption fee or the terms thereof at any
time.
The Fund reserves the right to waive or modify minimum initial and
subsequent investment requirements in connection with purchases of Class I
shares of a Series, including for accounts established on behalf of the
following types of retirement plans: (i) plans qualified under Section 401(k) of
the Code; (ii) plans described in Section 403(b) of the Code; (iii) deferred
compensation plans described in Section 457 of the Code; (iv) simplified
employee pension (SEP) plans; and (v) salary reduction simplified employee
pension (SARSEP) plans.
B. EXPENSE ALLOCATIONS OF EACH CLASS:
----------------------------------
Certain expenses may be attributable to a particular Class of shares.
Income, realized gains and losses, unrealized appreciation and depreciation and
certain expenses not allocated to a particular Class shall be allocated to each
Class based on the net assets of that Class in relation to the net assets of the
Fund.
Each Class may pay a different amount of the following expenses:
(1) administration and transfer agency fees;
(2) fees of directors who are not affiliated with the Fund's investment
adviser;
(3) legal and auditing expenses;
(4) printing and postage fees that are related to preparing and
distributing the Fund's prospectus, proxy statements and shareholder
reports;
(5) costs of maintaining the Fund's existence;
(6) interest charges and taxes;
(7) costs of stationery and supplies;
(8) expenses and fees related to registration and filing with federal and
sate regulatory authorities; and
(9) costs of personnel rendering clerical accounting and other services.
<PAGE>
C. CONVERSION FEATURE:
-------------------
Class I shares of SC-US, SC-EURO and SC-ASIA may be converted to Class R
shares of that Series, at the election of a shareholder, in the event applicable
minimum account balance requirements are not satisfied, as disclosed in the
Series' then current prospectus for Class I shares. No other conversions are
permissible.
This conversion feature may be modified or terminated by the Fund.
D. EXCHANGE FEATURE:
----------------
Shares of each Class of a Series may be exchanged for shares of the
corresponding Class of any other Series of the Fund.
All exchanges hereunder shall be effected on the basis of the relative net
asset values of the Classes without the imposition of any sales load, fee or
other charge.
This exchange feature may be modified or terminated by the Fund.
E . CLASS DESIGNATION:
------------------
Subject to approval by the Board of Directors, the Fund may alter the
nomenclature for the designations of one or more of its classes of shares.
F. ADDITIONAL INFORMATION:
-----------------------
This Multiple Class Plan is qualified by and subject to the terms of the
then current prospectus for each Class; provided, however, that none of the
terms set forth in any such prospectus shall be inconsistent with the terms of
the Class contained in this Plan. The prospectus for each Class contains
additional information about the Classes and each Series' multiple class
structure.
G. DATE OF EFFECTIVENESS:
----------------------
This Multiple Class Plan shall become effective upon the effectiveness of
Post-Effective Amendment No. 9 to the Fund's Registration Statement on Form N-1A
with respect to each Series, provided that it shall not become effective unless
such action has first been approved by the vote of a majority of the Board and
by vote of a majority of those Directors of the Fund who are not interested
persons of the Fund.
By Action of the Board of Directors
August __, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 010
<NAME> SECURITY CAPITAL US REAL ESTATE INC. - R CLASS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 100,493,571
<INVESTMENTS-AT-VALUE> 113,678,709
<RECEIVABLES> 4,089,540
<ASSETS-OTHER> 117,474
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 117,885,723
<PAYABLE-FOR-SECURITIES> 479,854
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 173,685
<TOTAL-LIABILITIES> 653,539
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 101,731,755
<SHARES-COMMON-STOCK> 56,234
<SHARES-COMMON-PRIOR> 987
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,315,291
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 13,185,138
<NET-ASSETS> 117,232,184
<DIVIDEND-INCOME> 4,729,653
<INTEREST-INCOME> 141,838
<OTHER-INCOME> 0
<EXPENSES-NET> 901,702
<NET-INVESTMENT-INCOME> 3,969,789
<REALIZED-GAINS-CURRENT> 8,063,795
<APPREC-INCREASE-CURRENT> 12,889,384
<NET-CHANGE-FROM-OPS> 24,922,968
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 21,950
<DISTRIBUTIONS-OF-GAINS> 31,388
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 113,720
<NUMBER-OF-SHARES-REDEEMED> 6
<SHARES-REINVESTED> 3,516
<NET-CHANGE-IN-ASSETS> 106,985,506
<ACCUMULATED-NII-PRIOR> 24
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 652,224
<INTEREST-EXPENSE> 0
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
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<NUMBER> 020
<NAME> SECURITY CAPITAL US REAL ESTATE INC. - I CLASS
<S> <C>
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