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As filed with the Securities and Exchange Commission on June 29, 1998
Registration Nos. 333-20649
811-8033
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 8
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940
Amendment No. 10
(Check Appropriate Box or Boxes)
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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:
Jeffrey C. Nellessen Jeffrey A. Klopf
Security Capital Global Security Capital Group Incorporated
Capital Management Group 125 Lincoln Avenue
Incorporated Santa Fe, New Mexico 87501
11 South LaSalle Street
Chicago, Illinois 60603
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):
immediately upon filing pursuant to paragraph (b).
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on (date) pursuant to paragraph (b).
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60 days after filing pursuant to paragraph (a)(1).
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X on June 30, 1998 pursuant to paragraph (a)(1) of Rule 485.
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75 days after filing pursuant to paragraph (a)(2).
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on (date pursuant to paragraph (a)(2) of Rule 485.
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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
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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
PART A
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Item of Form N-1A Prospectus Caption
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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 Information
Performance
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
PART B
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Statement of Additional
Item of Form N-1A Information Caption
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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
of Securities Capital Stock
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Statement of Additional
Item of Form N-1A Information Caption
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16. Investment Advisory and Other Services Management of SC-REMFs; Portfolio
Transactions and Brokerage
17. Brokerage Allocation and Other Management of SC-REMFs; Portfolio
Practices Transactions and Brokerage
18. Capital Stock and Other Securities Organization and Description of
Capital Stock
19. Purchase, Redemption and Pricing of Distribution Plans; Determination
Securities Being Offered of Net Asset Value; Redemption of
Shares
20. Tax Status Taxation
21. Underwriters Distributor
22. Calculation of Performance Data Performance Information
23. Financial Statements Financial Statement
PART C
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Item of Form N-1A Part C Caption
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24. Financial Statements and Exhibits Financial Statements and Exhibits
25. Persons Controlled by or Under Persons Controlled by or Under
Common Control With Registrant Common 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
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PROSPECTUS
[LOGO APPEARS HERE]
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 [_______________,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.
[_______________, 1998]
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TABLE OF CONTENTS
Page
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Expenses................................................................. 2
Description of SC-ARBITRAGE.............................................. 4
Investment Objectives and Policies....................................... 4
Trading and Investment Strategies........................................ 6
Risk Factors............................................................. 8
Non-Diversified Status & Portfolio Turnover.............................. 10
Directors, Officers and Other Personnel.................................. 11
Investment Advisory Agreement............................................ 13
Administrator and Sub-Administrator...................................... 15
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.................................................. 22
Year 2000 Risks.......................................................... 23
Additional Information................................................... 23
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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 $100 million.
Fee Table
<TABLE>
<S> <C>
Shareholder Transaction Expenses:
Maximum sales charge on purchases and reinvested distributions................. None
Redemption fee(1)................................................................... None
Annual Fund Operating Expenses (after expense waivers and/or
reimbursements, as a percentage of average net assets):
Management fees(2)............................................................. 2.00%
12b-1 fees(3).................................................................. .25%
Other expenses(4).............................................................. .15%
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Total fund operating expenses.................................................. 2.40%
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</TABLE>
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(1) SC-ARBITRAGE's transfer agent charges a service fee of [$_____] for each
wire redemption. In addition, 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.
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(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
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
One Three
Year Years
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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
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.
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DESCRIPTION OF SC-ARBITRAGE
SC-ARBITRAGE is a non-diversified investment portfolio of Security Capital
ReEstate 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 to
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.
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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's 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 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.
SC-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.
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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 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,
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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. 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's 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
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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 dated. 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.
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
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<PAGE>
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 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.
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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 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
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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's 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's 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.
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
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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 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
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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.
Jeffrey C. Nellessen Vice President, Secretary and Treasurer 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.
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's 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,
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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 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.
<TABLE>
<CAPTION>
ADVISORY FEE
FUND PERFORMANCE (AS % OF AVERAGE
(NET OF FEES AND EXPENSES) 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 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's 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's Board of Directors, costs of personnel of
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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.
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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's 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, 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's Board of Directors, GCMG has caused SC-REMFs to retain
State Street Bank and Trust Company (the "Sub-Administrator") as 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 determining SC-ARBITRAGE's net asset value and preparing such figures
for publication, 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
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's average daily net assets over $1 billion. 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's 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.
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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.
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.
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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.
Initial Investment
The minimum initial investment is $250,000. Class I shares may be
purchased by check or money order drawn on a U.S. bank, savings and loan, or
credit union by wire transfer. The enclosed application must be completed and
accompanied by payment in U.S. funds to open an account. Checks must be payable
in U.S. dollars and will be accepted subject to collection at full face value.
Note that all applications to purchase shares are subject to acceptance by SC-
ARBITRAGE and are not binding until so accepted. SC-ARBITRAGE reserves the
right to decline to accept a purchase order application in whole or in part.
Mail
The following instructions should be used when mailing a check or money
order payable to "Security Capital Real Estate Arbitrage Shares," via U.S. mail
to the Distributor, a securities dealer or the Transfer Agent:
Via U.S. Mail By Overnight Courier
Boston Financial Data Services Boston Financial Data Services
Attn: Security Capital Real Estate Attn: Security Capital Real Estate
Mutual Funds Incorporated Mutual Funds Incorporated
P.O. Box 8500 66 Brooks Drive
Boston, Massachusetts 02266-8500 Braintree, Massachusetts 02184
SC-REMFs does not consider the U.S. Postal Service or other independent
delivery service to be its agents. Therefore, deposit in the mail or with such
services, or receipt at the Transfer Agent's post office box of purchase
applications does not constitute receipt by the Transfer Agent or SC-REMFs. Do
not mail letters by overnight courier to the post office box.
Please note that if your check does not clear, a service charge of [$__]
will be charged and you will be responsible for any losses suffered by SC-
ARBITRAGE as a result.
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
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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.
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 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-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).
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.
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<PAGE>
Redemptions may also be made through brokers or dealers. Such redemptions
will be effected at the net asset value next determined after receipt by SC-
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:
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. The
Transfer Agent charges a [$__] service fee for wire redemptions.
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.
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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-ARBITRAGE 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-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."
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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-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 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. A recent legislative proposal
would reduce the holding period required to qualify for the 20% maximum capital
gains rate from 18 months to 12 months. It is impossible to determine at this
time whether that legislation will be enacted or, if enacted, whether it will be
modified in any manner.
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.
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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 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's Board of Directors may, without shareholder approval,
increase or decrease the number of authorized but unissued shares of SC-REMFs'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's expenses.
All classes of each series of SC-REMFs's 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-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 June 30, 1998, SC REALTY Incorporated, a wholly-owned subsidiary of
Security Capital Group Incorporated, owned [_____%] of the issued and
outstanding shares of SC-EURO, SC-ASIA and SC-ARBITRAGE and, as of May 31, 1998,
SC REALTY Incorporated owned 95.44% 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. 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 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 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.
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's 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.
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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.
25
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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 [________, 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.
[ ________, 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.............. 14
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.................... 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................................ 22
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-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 $250 million. The actual expenses in future years may be more
or less than the numbers in the table, depending on a number of factors,
including the actual value of SC-EURO's assets.
Fee Table
Shareholder Transaction Expenses:
Maximum sales charge on purchases and reinvested distributions.. None
Redemption fee (1).............................................. None
Annual SC-EURO Operating Expenses (after expense waivers and/or
reimbursements, as a percentage of average net assets):
Management fees................................................. .85%
12b-1 fees (2).................................................. .25%
Other expenses.................................................. .35%
----
Total SC-EURO operating expenses (3)............................ 1.45%
(1) SC-EURO's transfer agent charges a service fee of [$____] for each wire
redemption. In addition, 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
<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............................. $15 $46
</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 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
4
<PAGE>
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 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.
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 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
6
<PAGE>
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 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.
8
<PAGE>
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") (Austria, Belgium, Denmark, Finland, France, Germany,
Greece, Ireland, Luxembourg, the Netherlands, Portugal, Spain, Sweden 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.
9
<PAGE>
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 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
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furnishing services to SC-EURO, including SC-REMFs's 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's 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 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
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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 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, Secretary and Treasurer 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.
GCMG
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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
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
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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's 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 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's 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's 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.
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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's 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's Board of Directors, GCMG has caused SC-REMFs to retain
State Street Bank and Trust Company (the "Sub-Administrator") as 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 determining SC-EURO's net asset value and preparing such figures for
publication, 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 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's
average daily net assets over $1 billion. 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's 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
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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 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,
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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 $250,000. Class I shares may be purchased
by check or money order drawn on a U.S. bank, savings and loan, or credit union
by wire transfer. The enclosed application must be completed and accompanied by
payment in U.S. funds to open an account. Checks must be payable in U.S.
dollars and will be accepted subject to collection at full face value. Note
that all applications to purchase shares are subject to acceptance by SC-EURO
and are not binding until so accepted. SC-EURO reserves the right to decline to
accept a purchase order application in whole or in part.
Mail
The following instructions should be used when mailing a check or money order
payable to "Security Capital European Real Estate Shares," via U.S. mail to the
Distributor, a securities dealer or the Transfer Agent:
Via U.S. Mail By Overnight Courier
Boston Financial Data Services Boston Financial Data Services
Attn: Security Capital Real Estate Attn: Security Capital Real Estate
Mutual Funds Incorporated Mutual Funds Incorporated
P.O. Box 8500 66 Brooks Drive
Boston Massachusetts, 02260-8500 Braintree, Massachusetts 02184
SC-REMFs does not consider the U.S. Postal Service or other independent
delivery service to be its agents. Therefore, deposit in the mail or with such
services, or receipt at the Transfer Agent's post office box of purchase
applications does not constitute receipt by the Transfer Agent or SC-REMFs. Do
not mail letters by overnight courier to the post office box.
Please note that if your check does not clear, a service charge of [$__] will
be charged and you will be responsible for any losses suffered by SC-EURO as a
result.
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
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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 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-
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
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).
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
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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. The
Transfer Agent charges a [$____] service fee for wire redemptions.
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 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-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,
19
<PAGE>
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.
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.
20
<PAGE>
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. A recent legislative proposal would
reduce the holding period required to qualify for the 20% maximum capital gains
rate from 18 months to 12 months. It is impossible to determine at this time
whether that legislation will be enacted or, if enacted, whether it will be
modified in any manner.
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. 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's Board of Directors may, without shareholder approval,
increase or decrease the number of authorized but unissued shares of SC-REMFs'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.
21
<PAGE>
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's expenses.
All classes of each series of SC-REMFs's 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 June 30, 1998, SC REALTY Incorporated, a wholly-owned subsidiary of
Security Capital Group Incorporated, owned [_______%] of the issued and
outstanding shares of SC-EURO, SC-ASIA and SC-ARBITRAGE and, as of May 31, 1998,
SC REALTY Incorporated owned 95.44% 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. 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.
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
22
<PAGE>
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's 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.
23
<PAGE>
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 [________, 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.
[ ________, 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.............................. 16
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................................. 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 $250 million. The actual expenses in future years may be more
or less than the numbers in the table, depending on a number of factors,
including the actual value of SC-EURO's assets.
Fee Table
<TABLE>
<S> <C>
Shareholder Transaction Expenses:
Maximum sales charge on purchases and reinvested distributions...... None
Redemption fee (1).................................................. None
Annual SC-EURO Operating Expenses (after expense waivers and/or
reimbursements, as a percentage of average net assets):
Management fees.................................................... .85%
12b-1 fees (2)..................................................... .25%
Other expenses..................................................... .50%
----
Total SC-EURO operating expenses (3)............................... 1.60%
</TABLE>
(1) SC-EURO's transfer agent charges a service fee of [$_______] for each wire
redemption. In addition, 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
2
<PAGE>
be .50% and total fund operating expenses would be 1.60% of the value of SC-
EURO's Class R average daily net assets.
3
<PAGE>
Examples
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 ........................... $16 $50
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.
4
<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.
5
<PAGE>
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 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
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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 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.
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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 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
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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 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
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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") (Austria, Belgium, Denmark, Finland, France, Germany,
Greece, Ireland, Luxembourg, the Netherlands, Portugal, Spain, Sweden 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
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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 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
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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
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's 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's
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
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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.
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.
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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, Secretary and Treasurer 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.
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
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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.
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's 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
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of printing SC-EURO's prospectus for existing shareholders and shareholder
reports, (e) costs of maintaining SC-REMFs's 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's 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 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's 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's Board of Directors, GCMG has caused SC-REMFs to retain
State Street Bank and Trust Company (the "Sub-Administrator") as 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 determining SC-EURO's net asset value and preparing such figures for
publication, 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
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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-EURO's average daily net assets over $1 billion. The Sub-
Administrator also serves as SC-REMFs'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's 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
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(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
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 $250. These minimums can be changed or waived by SC-EURO
at any time. Shareholders will be give at least 30 days notice of any increase
in the minimum dollar amount of subsequent investments.
Class R shares may be purchased by check or money order drawn on a U.S. bank,
savings and loan, or credit union by wire transfer. The enclosed application
must be completed and accompanied by payment in U.S. funds to open an account.
Checks must be payable in U.S. dollars and will be accepted subject to
collection at full face value. Note that all applications to purchase shares
are subject to acceptance by SC-EURO and are not binding until so accepted. SC-
EURO reserves the right to decline to accept a purchase order application in
whole or in part.
Mail
The following instructions should be used when mailing a check or money order
payable to "Security Capital European Real Estate Shares," via U.S. mail to the
Distributor, a securities dealer or the Transfer Agent:
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Via U.S. Mail Via Overnight Courier
Boston Financial Data Services Boston Financial Services
Attn: Security Capital Real Estate Attn: Security Capital Real Estate
Mutual Funds Incorporated Mutual Funds Incorporated
P.O. Box 8500 66 Brooks Drive
Boston, Massachusetts 02266-8500 Braintree, Massachusetts 02184
SC-REMFs does not consider the U.S. Postal Service or other independent
delivery service to be its agents. Therefore, deposit in the mail or with such
services, or receipt at the Transfer Agent's post office box of purchase
applications does not constitute receipt by the Transfer Agent or SC-REMFs. Do
not mail letters by overnight courier to the post office box.
Please note that if your check does not clear, a service charge of [$__] will
be charged and you will be responsible for any losses suffered by SC-EURO as a
result.
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
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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 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.
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Subsequent Investments
Additional investments must be at least $500 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 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-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 1-800-699-4594 (toll free) 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:
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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
66 Brooks Drive P.O. Box 8500
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. The
Transfer Agent charges a [$___] service fee for wire redemptions.
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
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.
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Other Redemption Information
Unless other instructions are given in proper form, a check for the proceeds
of a redemption will be sent to the shareholder's address of record. The
Custodian may benefit from the use of redemption proceeds until the redemption
check for such proceeds has cleared.
SC-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
23
<PAGE>
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. A recent legislative proposal would
reduce the holding period required to qualify for the 20% maximum capital gains
rate from 18 months to 12 months. It is impossible to determine at this time
whether that legislation will be enacted or, if enacted, whether it will be
modified in any manner.
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
24
<PAGE>
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's Board of Directors may, without shareholder approval,
increase or decrease the number of authorized but unissued shares of SC-REMFs'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. 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's expenses.
All classes of each series of SC-REMFs's 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 June 30, 1998, SC REALTY Incorporated, a wholly-owned subsidiary of
Security Capital Group Incorporated, owned [____%] of the issued and outstanding
shares of SC-EURO, SC-ASIA and SC-ARBITRAGE and, as of May 31, 1998, SC REALTY
Incorporated owned 95.44% 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. 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.
25
<PAGE>
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 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's 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.
26
<PAGE>
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 [_______________,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.
[_______________, 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 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.............................. 14
Redemption of Shares............................ 17
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.......................... 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)
<TABLE>
<S> <C>
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%
</TABLE>
- ------------
(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 $12.00 for each wire
redemption. After August 15, 1998 this fee will be [$___]. In addition,
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
commissions, taxes, interest and other extraordinary expenses, at no more
than 1.00% of the value of SC-US's
2
<PAGE>
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
<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.......................................... $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)/
<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 (0.15)
income (0.54)
Distributions from net realized gains --------------
(1.00)
Total distributions --------------
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 1.15%
assets/(4)(5)/
Ratio of net investment income to 4.08%
average net assets/(4)(5)/
Portfolio turnover rate/(6)/ 82.10%
Average commission rate paid per share/(6)/ $ 0.0595
(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.
</TABLE>
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's 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 assets of $344.6 million (at fair market value, as of December 31, 1997)
that invests primarily in publicly traded real
6
<PAGE>
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 ----------- --------- ---------
- ------------------------- ------- ------- Special Equity Index Index S&P 500 Bonds(4)
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 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
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<PAGE>
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's 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's 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.
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<PAGE>
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
10
<PAGE>
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 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.
11
<PAGE>
Jeffrey C. Nellessen Vice President, Secretary and Treasurer 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.
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's 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's
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's 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.
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<PAGE>
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's 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's Board of Directors, GCMG caused SC-REMFs to retain
Firstar Trust Company (the "Sub-Administrator") as sub-administrator under a
fund administration and servicing agreement (the "Sub-Administration Agreement")
to provide services to SC-US until August 15, 1998. With the approval of SC-
REMFs's Board of Directors, GCMG has caused SC-REMFs to retain State Street Bank
and Trust Company ("New Sub-Administrator") as sub-administrator under a sub-
administration agreement ("New Sub-Administration Agreement") to provide
services to SC-US thereafter.
Under the Sub-Administration Agreement and the New Sub-Administration
Agreement, the Sub-Administrator and the New Sub-Administrator, respectively,
have assumed responsibility for performing certain of the foregoing
administrative functions, including determining SC-US's net asset value and
preparing such figures for publication, 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 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 .06% of the first $200 million of SC-US's average daily net
assets, and at lower rates on SC-US's average daily net assets in excess of that
amount, subject to an annual minimum fee of $30,000. Under the terms of the New
Sub-Administration Agreement, SC-REMFs will pay the New 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's average daily net assets
over $1 billion. The Sub-Administrator also serves as SC-US's Custodian and
Transfer Agent. The New Sub-Administrator will also serve 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's 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
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
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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 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-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
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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:
Until August 15, 1998
<TABLE>
<S> <C>
Via U.S. Mail By Overnight Courier
Security Capital U.S. Real Estate Shares Security Capital U.S. Real Estate Shares
c/o Firstar Trust Company c/o Firstar Trust Company
Mutual Fund Services Mutual Fund Services
P.O. Box 701 3rd Floor
Milwaukee, Wisconsin 53201-0710 615 East Michigan Street
Milwaukee, Wisconsin 53202
<CAPTION>
After August 15,1998
<S> <C>
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
</TABLE>
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.
Please note that, until August 15, 1998, if your check does not clear, a
service charge of $20 will be charged. Thereafter, a service charge of [$__]
will be charged. At all times, you will be responsible for any losses suffered
by SC-US as a result.
15
<PAGE>
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:
Until August 15, 1998
Wire to: Firstar Bank
ABA Number 075000022
Credit: Firstar Trust Company
Account 112-952-137
Further Credit: Security Capital U.S. Real Estate Shares
(shareholder account number)
(shareholder name/registration)
After August 15, 1998
Wire to: State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02101
ABA Number 011000028
Credit: DDA Number
Further Credit: Security Capital Real Estate Mutual Funds Incorporated
Shareholder Registration
Shareholder Fund and Account Number
Until August 15, 1998, please call toll free 1-800-699-4594 prior to wiring
any funds in order to obtain a confirmation number and to ensure prompt and
accurate handling of funds. Thereafter, please call toll free 1-800-409-4189.
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 1-800-699-4594 for complete wiring instructions
until August 15, 1998, and toll free 1-800-409-4189 thereafter.
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.
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<PAGE>
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).
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:
Until August 15, 1998
<TABLE>
<S> <C>
Via U.S. Mail By Overnight Courier
Security Capital U.S. Real Estate Shares Security Capital U.S. Real Estate Shares
c/o Firstar Trust Company c/o Firstar Trust Company
Mutual Fund Services Mutual Fund Services
P.O. Box 701 3rd Floor
Milwaukee, Wisconsin 53201-0710 615 East Michigan Street
Milwaukee, Wisconsin 53202
</TABLE>
17
<PAGE>
After August 15, 1998
<TABLE>
<S> <C>
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
</TABLE>
Redemption proceeds made by written redemption request may also be wired to
a commercial bank that you have authorized on your account application. A
$12.00 service fee will be charged for wire redemptions until August 15, 1998
and a [$___] service fee will be charged thereafter.
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 1-800-699-4594, until August 15, 1998 and toll free 1-800-409-4189,
thereafter. 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 NYSE is closed, other than customary weekend
and holiday closings, or (ii) an emergency, as defined by rules adopted
18
<PAGE>
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 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.
19
<PAGE>
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. A recent legislative
proposal would reduce the holding period required to qualify for the 20% maximum
capital gains rate from 18 months to 12 months. It is impossible to determine
at this time whether that legislation will be enacted or, if enacted, whether it
will be modified in any manner.
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
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's 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
20
<PAGE>
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's expenses.
All classes of each series of SC-REMFs's 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-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 June 30, 1998, SC REALTY Incorporated, a wholly-owned subsidiary of
Security Capital Group Incorporated, owned ____% of the issued and outstanding
shares of SC-EURO, SC-ASIA and SC-ARBITRAGE and, as of May 31, 1998, SC REALTY
Incorporated owned 95.44% of the issued and outstanding shares of SC-US
(including 97.74% of the issued and outstanding Class I shares), which means
that SC REALTY Incorporated controls SC-US, SC-EURO, SC-ASIA and SC-ARBITRAGE
for purposes of the 1940 Act. 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
Firstar Trust Company, which has its principal business address at 615 East
Michigan Street, Milwaukee, Wisconsin 53202 has been retained to act as
Custodian of SC-US's investments and to serve as SC-US's transfer and dividend
disbursing agent until August 15, 1998. Thereafter, State Street Bank and Trust
Company, which has its principal address at Boston, Massachusetts 02101, has
been retained to serve as SC-US's Custodian and Transfer Agent. Neither Firstar
Trust Company nor State Street Bank and Trust Company has any 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 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
21
<PAGE>
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's 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.
22
<PAGE>
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 [_______________,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.
[_______________, 1998]
<PAGE>
TABLE OF CONTENTS
Page
----
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.............. 12
Distribution and Servicing Plan.................. 13
Determination of Net Asset Value................. 13
Purchase of Shares............................... 14
Redemption of Shares............................. 17
Dividends and Distributions...................... 18
Taxation......................................... 19
Organization and Description of Capital Stock.... 20
Custodian and Transfer Agent...................... 21
Reports to Shareholders.......................... 21
Performance Information.......................... 21
Year 2000 Risks.................................. 21
Additional Information........................... 22
<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 $12.00 for each wire
redemption. After August 15, 1998 this fee will be [$___]. In addition,
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 1.20% 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 R total fund 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. Without such waiver and/or reimbursement,
SC-US's other expenses
2
<PAGE>
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 1.30% 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
One Three Five Ten
Year Years Years 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......................................... $12 $37 $63 $140
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)/
Financial Highlights
April 23, 1997 /(2)/
through
Per Share Data: December 31, 1997
-----------------
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 1.16%
assets /(4) (5)/
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
(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 $21,167 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 1.20% 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.
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's 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 R shares was 28.83%, 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 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
6
<PAGE>
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 Special Equity Index Index S&P 500 Bonds(4)
- --------------------------- -------- -------- ------- ------------ ----- ------- --------
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).
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.
7
<PAGE>
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 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
8
<PAGE>
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's 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's 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 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.
9
<PAGE>
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
10
<PAGE>
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.
Jeffrey C. Nellessen Vice President, Secretary and Treasurer 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.
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
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<PAGE>
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's 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 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 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's
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's 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's 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.
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<PAGE>
In accordance with the terms of the Administration Agreement and with the
approval of SC-REMFs's Board of Directors, GCMG caused SC-REMFs to retain
Firstar Trust Company (the "Sub-Administrator") as sub-administrator under a
fund administration and servicing agreement (the "Sub-Administration Agreement")
to provide services to SC-US until August 15, 1998. With the approval of SC-
REMFs's Board of Directors, GCMG has caused SC-REMFs to retain State Street Bank
and Trust Company ("New Sub-Administrator") as sub-administrator under a fund
sub-administration agreement ("New Sub-Administration Agreement") to provide
services to SC-US thereafter.
Under the Sub-Administration Agreement and the New Sub-Administration
Agreement, the Sub-Administrator and the New Sub-Administrator, respectively,
have assumed responsibility for performing certain of the foregoing
administrative functions, including determining SC-US's net asset value and
preparing such figures for publication, 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'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 pay the Sub-Administrator a monthly administration fee at
the annual rate of .06% of the first $200 million of SC-US's average daily net
assets, and at lower rates on SC-US's average daily net assets in excess of that
amount, subject to an annual minimum fee of $30,000. Under the terms of the New
Sub-Administration Agreement, SC-REMFs will pay the New 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's average daily net assets
over $1 billion. The Sub-Administrator also serves as SC-US's Custodian and
Transfer Agent. The New Sub-Administrator will also serve 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's 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
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.
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<PAGE>
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 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.
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<PAGE>
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:
<TABLE>
<CAPTION>
Until August 15, 1998
<S> <C>
Via U.S. Mail By Overnight Courier
Security Capital U.S. Real Estate Shares Security Capital U.S. Real Estate Shares
c/o Firstar Trust Company c/o Firstar Trust Company
Mutual Fund Services Mutual Fund Services
P.O. Box 701 3rd Floor
Milwaukee, Wisconsin 53201-0701 615 East Michigan Street
Milwaukee, Wisconsin 53202
After August 15, 1998
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
</TABLE>
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.
Please note that, until August 15, 1998, if your check does not clear, a
service charge of $20 will be charged. Thereafter, a service fee of [$____]
will be charged. At all times, you will be responsible for any losses suffered
by SC-US as a result.
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:
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<PAGE>
Until August 15, 1998
Wire to: Firstar Bank
ABA Number 075000022
Credit: Firstar Trust Company
Account 112-952-137
Further Credit: Security Capital U.S. Real Estate Shares
(shareholder account number)
(shareholder name/account registration)
After August 15, 1998
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 Account Number
Until August 15, 1998, please call toll free 1-800-699-4594 prior to wiring
any funds in order to obtain a confirmation number and to ensure prompt and
accurate handling of Funds. Thereafter, please call toll free 1-800-409-4189.
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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<PAGE>
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 1-800-699-4594 for complete wiring instructions until August 15, 1998, and
toll free 1-800-409-4189 thereafter.
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 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-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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<PAGE>
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 1-800-699-4594 (toll free) 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:
<TABLE>
<CAPTION>
Until August 15, 1998
<S> <C>
Via U.S. Mail By Overnight Courier
Security Capital U.S. Real Estate Shares Security Capital U.S. Real Estates Shares
c/o Firstar Trust Company c/o Firstar Trust Company
Mutual Fund Services Mutual Fund Services
P.O. Box 701 3rd Floor
Milwaukee, Wisconsin 53201-0701 615 East Michigan Street
Milwaukee, Wisconsin 53202
After August 15, 1998
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
</TABLE>
Redemption proceeds made by written redemption request may also be wired to a
commercial bank that you have authorized on your account application. A $12.00
service fee will be charged for wire redemptions until August 15, 1998 and a
[$____] services fee will be charged thereafter.
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,
18
<PAGE>
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
1-800-699-4594, until August 15, 1998 and toll free 1-800-409-4189, thereafter.
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 that 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, he or she will be allowed to make
additional investments prior to the date fixed for redemption to avoid
liquidation of the account.
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<PAGE>
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. A recent legislative
proposal would reduce the holding period required to qualify for the 20% maximum
capital gains rate from 18 months to 12 months. It is impossible to determine
at this time whether that legislation will be enacted or, if enacted, whether it
will be modified in any manner.
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 six months or less, and
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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's 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's expenses.
All classes of each series of SC-REMFs's 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-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. 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.
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As of June 30, 1998, SC REALTY Incorporated, a wholly-owned subsidiary of
Security Capital Group Incorporated, owned _____% of the issued and outstanding
shares of SC-EURO, SC-ASIA and SC-ARBITRAGE and, as of May 31, 1998, SC REALTY
Incorporated owned 95.44% of the issued and outstanding shares of SC-US
(including 0% of the issued and outstanding Class R shares), which means that SC
REALTY Incorporated controls SC-US, SC-EURO, SC-ASIA and SC-ARBITRAGE for
purposes of the 1940 Act. 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
Firstar Trust Company, which has its principal business address at 615 East
Michigan Street, Milwaukee, Wisconsin 53202 has been retained to act as
Custodian of SC-US's investments and to serve as SC-US's transfer until August
15, 1998. Thereafter, 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. Neither Firstar Trust
Company nor State Street Bank and Trust Company has any 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 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.
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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's 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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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 [________, 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.
[________, 1998]
<PAGE>
TABLE OF CONTENTS
Page
----
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.................................................. 21
Performance Information.................................................. 22
Year 2000 Risks.......................................................... 22
Additional Information................................................... 22
<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 $250 million. The actual expenses in future years may be more or less than
the numbers in the table, depending on a number of factors, including the actual
value of SC-ASIA's assets.
Fee Table
Shareholder Transaction Expenses:
Maximum sales charge on purchases and reinvested distributions........ None
Redemption fee (1).................................................... None
Annual SC-ASIA Operating Expenses (after expense waivers and/or
reimbursements, as a percentage of average net assets):
Management fees..................................................... .95%
12b-1 fees (2)...................................................... .25%
Other expenses...................................................... .35%
----
Total SC-ASIA operating expenses (3)................................ 1.55%
(1) SC-ASIA's transfer agent charges a service fee of [$____] for each wire
redemption. In addition, 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.
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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................................. $16 $49
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
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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.
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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 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
5
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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 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
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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
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.
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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 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.
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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.
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
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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 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's 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
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right to call a meeting to remove a Director or to take other action described
in SC-REMFs's 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 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.
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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. 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, Secretary and Treasurer 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.
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.
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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.
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 Merill 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.
<PAGE>
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's 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-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 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's 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's 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's 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's Board of Directors, GCMG has caused SC-REMFs to retain
State Street Bank and Trust Company (the "Sub-Administrator") as 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 determining SC-ASIA's net asset value and preparing such figures
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for publication, 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's 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-ASIA's
average daily net assets over $1 billion. The Sub-Administrator also serves as
SC-ASIA'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-ASIA under the Sub- Administration Agreement, subject
to the overall authority of SC-REMFs's 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
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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 $250,000. Class I shares may be purchased by
check or money order drawn on a U.S. bank, savings and loan, or credit union by
wire transfer. The enclosed application must be completed and accompanied by
payment in U.S. funds to open an account. Checks must be payable in U.S. dollars
and will be accepted subject to collection at full face value. Note that all
applications to purchase shares are subject to acceptance by SC-ASIA and are not
binding until so accepted. SC-ASIA reserves the right to decline to accept a
purchase order application in whole or in part.
Mail
The following instructions should be used when mailing a check or money order
payable to "Security Capital Asia/Pacific Real Estate Shares," via U.S. mail to
the Distributor, a securities dealer or the Transfer Agent:
Via U.S. Mail By Overnight Courier
Boston Financial Data Services Boston Financial Data Services
Attn: Security Capital Real Estate Attn: Security Capital Real Estate
Mutual Funds Incorporated Mutual Funds Incorporated
P.O. Box 8500 66 Brooks Drive
Boston, Massachusetts 02266-8500 Braintree, Massachusetts 02184
SC-REMFs does not consider the U.S. Postal Service or other independent
delivery service to be its agents. Therefore, deposit in the mail or with such
services, or receipt at the Transfer Agent's post office box of purchase
applications does not constitute receipt by the Transfer Agent or SC-REMFs. Do
not mail letters by overnight courier to the post office box.
Please note that if your check does not clear, a service charge of [$__] will
be charged and you will be responsible for any losses suffered by SC-ASIA as a
result.
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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-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 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-
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).
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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 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. The
Transfer Agent charges a [$____] service fee for wire redemptions.
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.
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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 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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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. A recent legislative proposal would reduce
the holding period required for the 20% maximum capital gains rate from 18
months to 12 months. It is impossible to determine at this time whether that
legislation will be enacted or, if enacted, whether it will be modified in any
manner.
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.
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.
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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's Board of Directors may, without shareholder approval,
increase or decrease the number of authorized but unissued shares of SC-REMFs'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's expenses.
All classes of each series of SC-REMFs's 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 June 30, 1998, SC REALTY Incorporated, a wholly-owned subsidiary of
Security Capital Group Incorporated, owned [____%] of the issued and outstanding
shares of SC-EURO, SC-ASIA and SC-ARBITRAGE and, as of May 31, 1998, SC REALTY
Incorporated owned 95.44% 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. 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.
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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's 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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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 [________, 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.
[________, 1998]
<PAGE>
TABLE OF CONTENTS
Page
----
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..................................................... 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........................................................ 22
Additional Information................................................. 23
<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 $250 million. The actual expenses in future years may be more or less than
the numbers in the table, depending on a number of factors, including the actual
value of SC-ASIA's assets.
Fee Table
Shareholder Transaction Expenses:
Maximum sales charge on purchases and reinvested distributions...... None
Redemption fee (1).................................................. None
Annual SC-ASIA Operating Expenses (after expense waivers and/or
reimbursements, as a percentage of average net assets):
Management fees.................................................... .95%
12b-1 fees (2)..................................................... .25%
Other expenses..................................................... .50%
----
Total SC-ASIA operating expenses (3)............................... 1.70%
(1) SC-ASIA's transfer agent charges a service fee of [$_______] for each wire
redemption. In addition, 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.
2
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Examples
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........................................ $17 $54
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
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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.
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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 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
5
<PAGE>
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 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
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<PAGE>
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
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.
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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 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.
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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.
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-EURO'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
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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 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's 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
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right to call a meeting to remove a Director or to take other action described
in SC-REMFs's 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 Jaunary 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 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.
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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.
Jeffrey C. Nellessen Vice President, Secretary and Treasurer 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.
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.
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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.
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.
Previously, 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.
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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's 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-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 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's 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's 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's 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's Board of Directors, GCMG has caused SC-REMFs to retain
State Street Bank and Trust Company (the "Sub-Administrator") as sub-
administrator under a sub-administration agreement ("Sub-Administration
Agreement").
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Under the Sub-Administration Agreement, the Sub-Administrator has assumed
responsibility for performing certain of the foregoing administrative functions,
including determining SC-ASIA's net asset value and preparing such figures for
publication, 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 the SC-REMFs's
assets over $1 billion. The Sub-Administrator also serves as SC-ASIA'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-ASIA under the Sub- Administration Agreement, subject to the overall
authority of SC-REMFs's 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
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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.
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 $250. These minimums can be changed or waived by SC-ASIA
at any time. Shareholders will be give at least 30 days notice of any increase
in the minimum dollar amount of subsequent investments.
Class R shares may be purchased by check or money order drawn on a U.S. bank,
savings and loan, or credit union by wire transfer. The enclosed application
must be completed and accompanied by payment in U.S. funds to open an account.
Checks must be payable in U.S. dollars and will be accepted subject to
collection at full face value. Note that all applications to purchase shares
are subject to acceptance by SC-ASIA and are not binding until so accepted.
SC-ASIA reserves the right to decline to accept a purchase order application in
whole or in part.
Mail
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The following instructions should be used when mailing a check or money order
payable to "Security Capital Real Estate Mutual Funds Incorporated, payable to
"Security Capital Asia/Pacific Real Estate Shares," via U.S. mail to the
Distributor, a securities dealer or the Transfer Agent:
Via U.S. Mail Via Overnight Courier
Boston Financial Data Services Boston Financial Data Services
Attn: Security Capital Real Estate Attn: Security Capital Real Estate
Mutual Funds Incorporated Mutual Funds Incorporated
P.O. Box 8500 66 Brooks Drive
Boston, Massachusetts 02266-8500 Braintree, Massachusetts 02184
SC-REMFs does not consider the U.S. Postal Service or other independent
delivery service to be its agents. Therefore, deposit in the mail or with such
services, or receipt at the Transfer Agent's post office box of purchase
applications does not constitute receipt by the Transfer Agent or SC-REMFs. Do
not mail letters by overnight courier to the post office box.
Please note that if your check does not clear, a service charge of [$__] will
be charged and you will be responsible for any losses suffered by SC-ASIA as a
result.
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-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.
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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 $500 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 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 1-800-699-4594 (toll free) 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.
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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
Redemption proceeds made by written redemption request may also be wired to a
commercial bank that you have authorized on your account application. The
Transfer Agent charges a [$___] service fee for wire redemptions.
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
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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
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.
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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. A recent legislative proposal would
reduce the holding period required to qualify for the 20% maximum capital gains
rate from 18 months to 12 months. It is impossible to determine at this time
whether that legislation will be enacted or, if enacted, whether it will be
modified in any manner.
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 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
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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. 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's Board of Directors may, without shareholder approval,
increase or decrease the number of authorized but unissued shares of SC-REMFs's
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's expenses.
All classes of each series of SC-REMFs's 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
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 June 30, 1998, SC REALTY Incorporated, a wholly-owned subsidiary of
Security Capital Group Incorporated, owned [______%] of the issued and
outstanding shares of SC-EURO, SC-ASIA and SC-ARBITRAGE and, as of May 31, 1998,
SC REALTY Incorporated owned 95.44% 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. 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
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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
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's 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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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
[__________________, 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 [_________, 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 [_________________].
Table of Contents
Page
----
Investment Objectives and Policies...................... 2
Investment Restrictions................................. 25
Management of SC-REMFs.................................. 29
Distribution and Servicing Plans........................ 38
Other Distribution and/or Servicing Arrangements........ 39
Determination of Net Asset Value........................ 39
Redemption of Shares.................................... 40
Portfolio Transactions and Brokerage.................... 40
Taxation................................................ 41
Organization and Description of Capital Stock........... 49
Distributor............................................. 50
Custodian and Transfer Agent............................ 50
Performance Information................................. 51
Counsel and Independent Accountants..................... 52
Financial Statements.................................... 52
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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's 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.
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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, 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 extend
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.
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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 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
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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 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
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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 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
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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 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.
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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 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.
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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.
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".
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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.
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.
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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.
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
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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-
Ivory Coast NR NR
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
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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 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.
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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's 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's 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.
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
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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.
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
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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 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
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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 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.
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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 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.
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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
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
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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 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.
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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 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.
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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 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
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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.
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
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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 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
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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-issues 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.
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.
25
<PAGE>
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.
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
26
<PAGE>
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 and sold short against the
box 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 be 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
2. Invest more than 10% of its net assets in illiquid securities.
SC-EURO and SC-ASIA may not:
27
<PAGE>
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) 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;
28
<PAGE>
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.
29
<PAGE>
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
11 South LaSalle Street the Board of January 1995, where he is responsible for overseeing
Chicago, Illinois 60603 Directors, all investment and capital allocation matters for
Managing GCMG's public market securities activities and is
Director and also responsible for company and industry analysis,
President market strategy and trading and reporting. Mr. Manno was
a member of the Investment Committee of Security
Capital 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
106 West Sibley Hall University. Founder of Colliers ABR, Inc. (formerly
Ithaca, New York 14851 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.
</TABLE>
30
<PAGE>
<TABLE>
<S> <C> <C> <C>
Stephen F. Kasbeer Director 73 Retired; Senior Vice President for Administration
8 Bonanza Trail and Treasurer of Loyola University, Chicago from
Santa Fe, New Mexico 87505 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 68 Chairman of the Board of Trigen Energy Corporation
7408 Eaton Court since 1994. As founding chief executive of The
University Park, Florida Common Fund in 1971 and Endowment Realty Investors
34201 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>
31
<PAGE>
<TABLE>
<S> <C> <C> <C>
John H. Gardner, Jr. Director and 44 Managing Director of GCMG since July, 1997. Prior
11 South LaSalle Street Managing thereto, Director of the REIT Manager for Security
Chicago, Illinois 60603 Director Capital Pacific Trust ("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
Chicago, Illinois 60603 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
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
11 South LaSalle Street President Vice President since July 1996, where he is
Chicago, Illinois 60603 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.
</TABLE>
32
<PAGE>
<TABLE>
<S> <C> <C> <C>
Jeffrey C. Nellessen Vice 36 Vice President and Controller of GCMG since
11 South LaSalle Street President, March 1997. Prior thereto, from June 1988 to March
Chicago, Illinois 60603 Secretary and 1997, he was Controller, Manager of Client
Treasurer 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.
</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.
33
<PAGE>
Compensation Table
Fiscal Year Ending December 31, 1997
Pension or
----------
Retirement
----------
Benefits Estimated
---------- ---------- Total
Aggregate Accrued as Annual -------------
------------ ---------- ---------- Compensation
Compensation Part of Benefits -------------
------------ ---------- ---------- From SC-US
From SC-US Upon -------------
------------ ---------- ---------- Paid To
Name of Person, Position SC-US Expenses Retirement Directors
- --------------------------- ------------ ---------- ---------- -------------
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.
Director /(1)/............ 0 N/A N/A 0
- ---------------------------
** "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 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.
<TABLE>
<S> <C>
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.
</TABLE>
34
<PAGE>
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.
<TABLE>
<S> <C>
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.
</TABLE>
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.
35
<PAGE>
<TABLE>
<S> <C>
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.
</TABLE>
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.
<TABLE>
<S> <C>
W. Joseph Houlihan Managing Director of SC (EU) Management since
Boulevord de La Woluwe 34 April 1997 where he is responsible for providing
Brussels, Belgium 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.
</TABLE>
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
36
<PAGE>
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's 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
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
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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's
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's 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'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.
The Advisory Agreement for SC-US was approved on November 25, 1997 by SC-
REMFs's 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's 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.
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's Board of
Directors.
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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's
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's
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
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
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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's Board of Directors, GCMG has caused SC-REMFs to retain
State Street Bank and Trust Company (the "Sub-Administrator") as sub-
administrator under a sub-administration agreement (the "Sub-Administration
Agreement"). Firstar Trust Company ("Firstar") will serve as sub-administrator
for SC-US until August 15, 1998 pursuant to a fund administration and servicing
agreement approved by the Board of Directors in April 1997 ("Firstar
Agreement"). Thereafter, State Street Bank and Trust Company will perform sub-
administration services for SC-US as well as for the other Funds.
Under the Sub-Administration Agreement and the Firstar Agreement, the Sub-
Administrator and Firstar have assumed responsibility for performing certain of
the foregoing administrative functions, including determining the net asset
value of each class of the Funds' shares and preparing such figures for
publication, 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 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's average daily net assets over $1 billion. Under the
Firstar Agreement, SC-US pays Firstar .06% of the first $200 million of each
Fund's average daily net assets, and at lower rates on the Fund's average daily
net assets in excess of that amount, subject to an annual minimum fee of
$30,000. For the period April 23, 1997 (the effective date of SC-REMFs's initial
registration statement) through December 31, 1997, Firstar earned $47,791 for
providing sub-administration services to SC-US. The Firstar also serves as the
Custodian and Transfer Agent for 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's 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's 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's 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 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.
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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 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 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 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 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 Directors shall be committed to the discretion
of the 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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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's 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's 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.
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
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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.
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
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(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 "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%. A recent legislative proposal would reduce the holding period required to
qualify for the 20% maximum capital gains rate from 18 months to 12 months. It
is impossible to determine at this time whether that legislation will be enacted
or, if enacted, whether it will be modified in any manner.
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
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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.
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
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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.
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.
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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 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
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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 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.
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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 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
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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.
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.
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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.
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.
51
<PAGE>
SC-REMFs is authorized to issue 200,000,000 shares of stock, $.01 par value
per share. SC-REMFs's 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's Articles of Incorporation and By-Laws which have been filed with the
SEC as exhibits to the registration statement of which this Statement of
Additional Information is a part.
SC-REMFs's Board of Directors may, without shareholder approval, increase or
decrease the number of authorized but unissued shares of SC-REMFs's 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 with 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's 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 June 30, 1998, SC REALTY Incorporated owned [____%] of the issued and
outstanding shares of SC-EURO, SC-ASIA and SC-ARBITRAGE and 95.44% of the issued
and outstanding shares of SC-US (including 97.74% of the issued and outstanding
Class I shares and 0% of the issued and outstanding Class R shares).
As of May 31, 1998, the following persons owned of record 5% of SC-US's
outstanding shares:
<TABLE>
<CAPTION>
Amount and Nature
Name and Address of of Beneficial
Title of Class Beneficial Owner Ownership Percent of Class
- --------------- ---------------- --------- ----------------
<S> <C> <C> <C>
Class I SC REALTY Incorporated 9,646,032.884 97.74%
3753 Howard Hughes Parkway
Las Vegas, Nevada 89109-0952
Class R Charles Schwab & Co. Inc. 161,960.243 68.14%
101 Montgomery Street
San Francisco, California 94104-4122
Class R Dennis G. Lopez 20,116.795 8.46%
117 Beekman Street, 4E
New York, New York 10038-2001
Class R Directors, Nominees and 12,340.387 5.19%
Executive Officers as a
Group*/
</TABLE>
52
<PAGE>
- ---------------
(*) Anthony R. Manno Jr., Director, Chairman of the Board and President,
beneficially owns 4,863.813 Class R shares, John H. Gardner, Jr., Director
and Managing Director, beneficially owns 2,009.568 Class R shares, Jeffrey
C. Nellessen, Vice President, Secretary and Treasurer beneficially owns
208.411 Class R shares and Kevin W. Bedell, Senior Vice President
beneficially owns 4,258.595 Class R shares.
Because SC REALTY Incorporated owns 100% of the issued an outstanding shares
of SC-EURO, SC-ASIA and SC-ARBITRAGE and 95.44% 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 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 Fund's 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.
Until August 15, 1998, Firstar Trust Company which has its principal business
at 615 East Michigan Street, Milwaukee, Wisconsin 53202 will serve as Custodian
of SC-US's investments and SC-US's Transfer Agent. Thereafter, State Street Bank
and Trust Company will serve as SC-US's Custodian and Transfer Agent.
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
53
<PAGE>
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 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.
ERV = Ending Redeemable Value of a hypothetical $1,000 investment
made at the beginning of the 1-, 5- or 10-year period at the
end of the 1-, 5- or 10-year period (or fractional portion
thereof), assuming reinvestment of all dividends and
distributions.
Yield
Quotations of yield for 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
54
<PAGE>
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., NW, Washington, DC, 20006, which will rely as to certain matters of
Maryland law on Ballard Spahr Andrews & Ingersoll.
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.
55
<PAGE>
Security Capital U.S. Real Estate Shares Incorporated
Schedule of Investments -- December 31, 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Shares Market Value
<S> <C> <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
22,200 Homestead Village, Inc.#+ 334,388
------------
17,449,950
</TABLE>
56
<PAGE>
See notes to the financial statements.
Schedule of Investments (continued)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Shares Market Value
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>
57
<PAGE>
See notes to the financial statements.
58
<PAGE>
Schedule of Investments (continued)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Principal Amount
<S> <C> <C>
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% 3,553,475
------------
NET ASSETS 100.0% $117,232,184
============
</TABLE>
* 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.
59
<PAGE>
Security Capital U.S. Real Estate Shares Incorporated
Statement of Assets and Liabilities -- December 31, 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
ASSETS:
<S> <C>
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>
See notes to the financial statements.
60
<PAGE>
Security Capital U.S. Real Estate Shares Incorporated
Statement of Operations -- December 31, 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
INVESTMENT INCOME:
<S> <C>
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
- ------------------------------------------------------------------------------------------------------------------------------
OPERATIONS:
<S> <C> <C>
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
------------------------------------------------------------
Per Share Data:
<S> <C> <C> <C>
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>
(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.
63
<PAGE>
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 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.
64
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
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 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.
65
<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:
- ------------------------------------------------------------------------------
Amount Shares
---------------------------
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 6,234
============== ===========
Period from 01/01/97 through 12/16/97:
- -------------------------------------------------------------------------------
Amount Shares
---------------------------
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
Shares issued to holders in reinvestment
of dividends -- --
Shares redeemed -- --
-------------- -----------
Net increase $ 9,926,736 987,423
============== ===========
66
<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.
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.
67
<PAGE>
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
68
<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
Incorporated ("SCERF"), a Maryland corporation. On January 23, 1997, all of the
assets and liabilities of SCERF were transferred to the Fund in a reorganization
(the "Reorganization") accounted for as a pooling of interests. The
Reorganization was a taxable event to SCERF and a capital gain of $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.
69
<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
70
<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.
71
<PAGE>
CI: The rating "CI" is reserved for income bonds on which on 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
72
<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 rate in the
"AAA" and "AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated "F=1+."
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.
C: 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.
73
<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 Incorporated ("Group") Maryland No entity controls Group
SC REALTY Incorporated ("SC REALTY") Nevada Ownership by Group of 100% of voting
securities
Security Capital Preferred Growth Incorporated Maryland Ownership by SC REALTY of 12.86% of
("SCPG") voting securities
Harbor Capital Incorporated Delaware Ownership by SCPG of 100% of voting
securities
Security Capital U.S. Realty Incorporated Luxembourg Ownership by SC Realty of 32.88% of
("U.S. Realty") outstanding voting securities
East Mixed-Use Realty Investors Trust Maryland Ownership by U.S. Realty of 50% of voting
securities
West Mixed-Use Realty Investors Trust Maryland Ownership by U.S. Realty of 50% of voting
securities
Midwest Mixed-Use Realty Investors Trust Maryland Ownership by U.S. Realty of 50% of voting
securities
Security Capital Investment Research Group Delaware Ownership by Group of 100% of voting
Incorporated ("Investment Research") securities
Security Capital U.S. Real Estate Maryland Ownership by SC REALTY of 96.42% of
Shares Incorporated voting securities
Security Capital EuroPacific Real Estate Maryland Ownership by SC REALTY of 100% of voting
Shares Incorporated securities
Security Capital Global Realty Incorporated Luxembourg Ownership by SC REALTY of 34.6% of voting
securities
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
City & West End Properties S.A. Luxembourg Ownership by Security Capital Global Realty
of 96% of voting securities
City & West End Property Investments SARL Luxembourg Ownership by City & West End Properties S.A.
of 100% of voting securities
City & West End Services Limited United Kingdom Ownership by City & West End Property
Investments SARL of 100% of voting securities
City & West End Developments Limited United Kingdom Ownership by City & West End Property
Investments SARL of 100% of voting securities
City & West End Management Limited United Kingdom Ownership by City & West 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 Investments SARL Luxembourg Ownership by Akeler S.A. 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 ("Belmont One") Delaware Ownership by Belmont of 100% of voting
securities
Belmont Two Corporation ("Belmont Two") Delaware Ownership by Belmont of 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 Holdings Incorporated Maryland Ownership by Group of 100% of voting
securities
SCGPB Incorporated British Virgin Ownership by Security Capital BVI Holdings
Islands of 100% of voting securities
Security Capital Global Capital Management Delaware Ownership by Investment Research of 100% of voting
Group Incorporated securities
Security Capital Global Capital Management Delaware Ownership by Security Capital Global Capital
Group (Asia) Incorporated Management Group Incorporated of 100%
voting securities
Security Capital Global Strategic Group Maryland Ownership by Investmnent Research of 100% of voting
Incorporated securities
Security Capital Real Estate Research Group Maryland Ownership by Investment Research of 100% of voting
Incorporated securities
Security Capital Financial Services Delaware Ownership by Group of 100% of voting
Group Incorporated ("Financial Services") securities
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 Group Incorporated Delaware Ownership by Financial Services of 100% of
voting securities
</TABLE>
2
<PAGE>
<TABLE>
<S> <C> <C>
Strategic Hotel Capital Incorporated Delaware Ownership by Group of 49.65% of voting
securities
Strategic Hotel Funding LLC Delaware Ownership by Group of 100% of voting
securities
ES Philadelphia Airport Joint Venture Pennsylvania Ownership by Strategic 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 Mexicana, S.A. de C.V. Mexico Ownership by Propanmer 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 Hotel, L.L.C. Delaware Ownership by Strategic 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 Limited Partnership Delaware Ownership by Group of 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 Incorporated Delaware Ownership by Group of 49.65% of voting
securities
Security Capital (EU) Management Holdings Luxembourg Ownership by Group of 100% of voting
S.A. securities
Security Capital (EU) Management Group S.A. Belgium Ownership by Security Capital (EU) Holdings
S.A. of 100% of voting securities
Security Capital Global Management S.A. Luxembourg Ownership by Security Capital (EU)
Management Holdings S.A. of 100% of voting
securities
Security Capital (EU) Management S.A. Luxembourg Ownership by Security Capital (EU)
Management Holdings S.A. of 100% of voting
securities
Security Capital (UK) Management Limited United Kingdom Ownership by Security Capital (EU)
Management Holdings S.A. of 100% of voting
securities
Security Capital (EU) Holdings S.A. Luxembourg Ownership by Security Capital (EU)
Management Holdings S.A. of 100% of voting
securities
Security Capital U.S. Realty Management United Kingdom Ownership by Security Capital (UK)
Limited Management Limited of 100% of voting
securities
Security Capital Global Realty Management United Kingdom Ownership by Security Capital (UK)
Limited Management Limited of 100% of voting
securities
Security Capital International Limited United Kingdom Ownership by Security Capital (UK)
Management Limited of 100% of voting
securities
Security Capital Global Capital Management Belgium Ownership by Security Capital (EU)
Group (Europe) S.A. Management Holdings S.A. of 100% of voting
securities
CarrAmerica Realty Corporation Maryland Ownership by U.S. Realty 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 Limited Partnership Delaware Sole general 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, LLC Maryland Ownership by Urban Growth 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 Trust/McCaffrey Delaware Sole general partnership interest owned by
Developments, L.P. City 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 Developments LLC Delaware Ownership by CCRT/McCaffrey Developments L.P.
of 100% of voting securities
Parking Services International Incorporated Maryland Ownership by US Realty of 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 Incorporated Delaware Ownership by US Realty of 100% of voting
securities
CWS Management Services Incorporated Delaware Ownership by US Realty 100% of voting
shares
Security Capital Industrial Trust ("SCI") Maryland Ownership by SC REALTY of 44.1% of
voting securities
International Industrial Investments Inc. Maryland Ownership by SCI of 100% of voting securities
Security Capital Logistar International Delaware Ownership by SCI of 100% of voting securities
Incorporated
Security Capital Logistar Management Delaware Ownership by SCI of 100% of voting securities
Services Incorporated
Logistar - Netherlands I SARL Luxembourg Ownership by SCI of 100% of voting securities
Logistar France SARL I Luxembourg Ownership by SCI of 100% of voting securities
Logistar SARL Luxembourg Ownership by SCI of 100% of voting securities
Logistar BV Luxembourg Ownership by SCI of 100% of voting securities
Security Capital Logistar International Luxembourg Ownership by SCI of 100% of voting securities
Fund SCA
</TABLE>
5
<PAGE>
<TABLE>
<S> <C> <C>
SCI Logistar Management SARL Luxembourg Ownership by SCI of 100% of voting securities
Logistar Germany SARL Luxembourg Ownership by SCI of 100% of voting securities
Logistar Italy SARL Luxembourg Ownership by SCI of 100% of voting securities
Logistar Belgium SARL Luxembourg Ownership by SCI of 100% of voting securities
Logistar Netherlands II SARL Luxembourg Ownership by SCI of 100% of voting securities
Logistar U.K. SARL Luxembourg Ownership by SCI of 100% of voting securities
Logistar Poland SARL Luxembourg Ownership by SCI of 100% of voting securities
Logistar Spain SARL Luxembourg Ownership by SCI of 100% of voting securities
Logistar France SAS Netherlands Ownership by SCI of 100% of voting securities
Logistar France SARL Netherlands Ownership by SCI of 100% of voting securities
Logistar Netherlands SARL Netherlands Ownership by SCI of 100% of voting securities
Logistar Czech Republic SARL Netherlands Ownership by SCI of 100% of voting securities
Logistar France BV Netherlands Ownership by SCI of 100% of voting securities
Logistar Spain BV Netherlands Ownership by SCI of 100% of voting securities
CS Integrated LLC ("CSI") Delaware Ownership by SCI of 100% of voting securities
Enterprise Refrigerated Services LLC Delaware Ownership by CSI of 100% of voting securities
CS Integrated Retail Services LLC Delaware Ownership by CSI of 100% of voting securities
CS Integrated-Texas Limited Partnership Delaware Ownership by CSI of 100% of voting securities
CS Integrated Investment Management LLC Delaware Ownership by CSI of 100% of voting securities
CS Integrated Investments Southwest LLC Delaware Ownership by CSI of 100% of voting securities
SCI Logistics Services Incorporated Delaware Ownership by SCI of 95% of 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 SCI
Red Mountain Joint Venture Texas Sole general partnership interest owned
by SCI
SCI Limited Partnership-I Delaware Sole general partnership interest owned
by SCI
SCI Limited Partnership-II Delaware Sole general partnership interest owned
by SCI
SCI Limited Partnership-III Delaware Sole general partnership interest owned
by SCI
SCI Limited Partnership-IV Delaware Sole general partnership interest owned by
SCI IV, Inc.
SCI IV, Inc. Delaware Ownership by SCI of 100% of voting
securities
Security Capital Industrial Management Delaware Ownership by SCI of 100% of voting
Incorporated securities
SCI--Alabama (1) Incorporated Maryland Ownership by SCI of 100% of voting
securities
SCI--Alabama (2) Incorporated Maryland Ownership by SCI of 100% of voting
securities
Security Capital Alabama Industrial Trust Alabama Ownership of 100% of voting securities
by SCI--Alabama (1) Incorporated
and SCI--Alabama (2) Incorporated
SCI--North Carolina (1) Incorporated Maryland Ownership by SCI of 100% of voting
securities
</TABLE>
6
<PAGE>
<TABLE>
<S> <C> <C>
SCI--North Carolina (2) Incorporated Maryland Ownership by SCI of 100% of voting
securities
SCI--North Carolina Limited Partnership Delaware Sole general partnership interest owned
by SCI--North Carolina (1)
Incorporated
SCI Houston Holdings Inc. Delaware Ownership by SCI of 100% of voting
securities
Frigoscandia SA Luxembourg Ownership by SCI of 100% of preferred
securities
Frigo Sari Luxembourg Ownership by SCI of 100% of preferred
securities
SCI Mexico Industrial Trust Maryland Ownership of SCI 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 Incorporated Delaware Ownership by SCI of 100% of voting
securities
SCI-DS Mexico Incorporated Maryland Ownership by SCI Development Services
100% of voting securities
Security Capital Atlantic Incorporated Maryland Ownership by SC REALTY of 49% of
("Atlantic") voting securities
SCG Realty Services Atlantic Incorporated Delaware Ownership by Atlantic of 100% of
voting securities
SCA Florida Holdings (1) Incorporated Florida Ownership by Atlantic of 100% of
voting securities
Atlantic Development Services Delaware Ownership by SCA of 100% of preferred stock
Atlantic-Tennessee Limited Partnership Delaware Ownership by SCA (3) and SCA (4)of 100% of
voting securities
SCA Tennessee (3) Incorporated Maryland Ownership by SCA of 100% of voting
securities
SCA Tennessee (4) Incorporated Maryland Ownership by SCA of 100% of voting
securities
Atlantic--Alabama (3) Incorporated Delaware Ownership by Atlantic of 100% of
voting securities
Atlantic--Alabama (4) Incorporated Delaware Ownership by Atlantic of 100% of
voting securities
Atlantic Alabama Multifamily Trust Alabama Ownership of 100% of voting securities
by Atlantic--Alabama (3)
Incorporated and Atlantic--Alabama
(4) Incorporated
Atlantic--Alabama (5) Incorporated Delaware Ownership by Atlantic of 100% of voting
securities
Atlantic--Alabama (6) Incorporated Delaware Ownership by Atlantic of 100% of voting
securities
SCA Florida Holdings (2) Incorporated Delaware Ownership by Atlantic of 100% of voting
securities
</TABLE>
7
<PAGE>
<TABLE>
<S> <C> <C>
SCA Alabama Multifamily Trust Alabama Ownership by Atlantic-Alabama (5)
Incorporated and Atlantic-Alabama (6)
Incorporated of 100% of voting securities
SCA--South Carolina (1) Incorporated Maryland Ownership by Atlantic of 100% of
voting securities
SCA--North Carolina (1) Incorporated Maryland Ownership by Atlantic of 100% of
voting securities
SCA North Carolina (2) Incorporated Maryland Ownership by Atlantic of 100% of
voting securities
SCA North Carolina Limited Partnership Delaware Sole general partnership interest owned
by SCA--North Carolina (1) Incorporated
SCA--Indiana Limited Partnership Delaware Sole general partnership interest owned
by SCA--North Carolina (1) Incorporated
SCA--Tennessee Limited Partnership Delaware Sole general partnership interest owned
by SCA--Tennessee (1) Incorporated
SCA--Tennessee (1) Incorporated Delaware Ownership by Atlantic of 100% of
voting securities
SCA--Tennessee (2) Incorporated Delaware Ownership by Atlantic of 100% of
voting securities
Security Capital Atlantic Multifamily Inc. Delaware Ownership by Atlantic of 100% of
voting securities
Security Capital Pacific Trust ("PTR") Maryland Ownership by SC REALTY of 36.0% of
voting securities
SCG Realty Services Incorporated Delaware Ownership by PTR of 100% of voting
securities
SCP Nevada Holdings 1 Incorporated Nevada Ownership by PTR of 100% of voting
securities
SCP Utah Holdings 1 Incorporated Utah Ownership by PTR of 100% of voting
securities
SCP Utah Holdings 2 Incorporated Utah Ownership by PTR of 100% of voting
securities
SCP Utah Holdings 4 Incorporated Utah Ownership by PTR of 100% of voting
securities
SCP Utah Holdings 5 Incorporated Utah Ownership by PTR of 100% of voting
securities
PTR Multifamily Holdings Incorporated Delaware Ownership by PTR of 100% of voting
securities
Spectrum Apartment Locators Inc. Delaware Ownership by PTR of 100% of voting
securities
Las Flores Development Company Texas Ownership by PTR of 100% of voting
securities
PTR Holdings (Texas) Incorporated Texas Ownership by PTR of 100% of voting
securities
PTR-California Holdings (1) Incorporated Maryland Ownership by PTR of 100% of voting
securities
Archstone Financial Services, Inc. Delaware Ownership by PTR of 100% of voting
securities
PTR-California Holdings (2) Incorporated Maryland Ownership by PTR of 100% of voting
securities
</TABLE>
8
<PAGE>
<TABLE>
<S> <C> <C>
PTR-California Holdings (3) Incorporated Delaware Ownership by PTR of 100% of voting
securities
PTR-New Mexico (1) Incorporated Delaware Ownership by PTR of 100% of voting
securities
PTR Development Services Delaware Ownership by PTR of 100% of preferred stock
Homestead Village Incorporated Maryland Ownership by SC REALTY (including its
subsidiaries) of 56.5% of voting
securities
KC Homestead Village Redevelopment Missouri Ownership by Homestead Village
Corporation Incorporated of 100% of voting
securities
Missouri Homestead Village Incorporated Maryland Ownership by Homestead Village
Incorporated of 100% of voting
securities
Atlantic Homestead Village Limited Delaware Sole general partnership interest owned
Partnership by Atlantic Homestead Village (1)
Incorporated
Atlantic Homestead Village (1) Incorporated Maryland Ownership by Homestead Village
Incorporated of 100% of voting
securities
Atlantic Homestead Village (2) Incorporated Maryland Ownership by Homestead Village
Incorporated of 100% of voting
securities
PTR Homestead Village (1) Incorporated Maryland Ownership by Homestead Village
Incorporated of 100% of voting
securities
PTR Homestead Village (2) Incorporated Maryland Ownership by Homestead Village
Incorporated of 100% of voting
securities
Homestead Alabama Incorporated Alabama Ownership by Homestead Village of 100% of
voting securities
BTW Incorporated Delaware Ownership by Homestead Village
Incorporated of 100% of voting
securities
Homestead Village Management Incorporated Delaware Ownership by Homestead Village
Incorporated of 100% of voting
securities
PTR Homestead Village Limited Partnership Delaware Sole general 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
</TABLE>
9
<PAGE>
Item 26. Number of Holders of Securities.
<TABLE>
<CAPTION>
TITLE OF CLASS NUMBER OF RECORD
HOLDERS
Shares of Beneficial Interest at May 31, 1998
----------------------------- ---------------
<S> <C>
Security Capital U.S. Real Estate Shares
Class I Shares 9,868,760.342
Class R Shares 237,700.925
Security Capital Real Estate Arbitrage Shares
Class I Shares 0
Class R Shares 0
Security Capital European Real Estate Shares
Class I Shares 0
Class R Shares 0
Security Capital Asia/Pacific Real Estate Shares
Class I Shares 0
Class R Shares 0
</TABLE>
Item 27. Indemnification.
Reference is made to Article Eighth of the Registrant's Articles of
Incorporation, incorporated by reference to SC- REMFs'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.
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.
10
<PAGE>
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 President None
Gerard de Gunzburg***/ Senior Vice President None
Donald E. Suter**/ Managing Director None
Robert H. Fippinger*/ Vice President None
Alison C. Hefele**/ Senior Vice President None
Garett C. House**/ Vice President None
Gerald R. Morgan, Jr.*/ Assistant Controller None
Jayson C. Cyr****/ 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
60609.
***/ 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.
(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's Investment Adviser and Administrator, Security Capital Global Capital
Management Group Incorporated, 11 S. LaSalle Street, Chicago, Illinois 60603.
The remainder of such records are maintained by [_], the Funds'
Sub-Administrator, [_].
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.
11
<PAGE>
(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 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 26th day
of June, 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 26th
day of June, 1998.
<TABLE>
<CAPTION>
Signature Capacity Date
------------------ ----------------------- ----------
<S> <C> <C>
/s/ Anthony R. Manno Jr. Chairman, Managing June 26, 1998
----------------------------------- Director and President
Anthony R. Manno Jr.
/s/ Jeffrey C. Nellessen Principal Financial Officer June 26, 1998
-----------------------------------
Jeffrey C. Nellessen
/s/ Jeffrey C. Nellessen Comptroller June 26, 1998
-----------------------------------
Jeffrey C. Nellessen
Director June 26, 1998
-----------------------------------
Stephen F. Kasbeer
/s/ Anthony R. Manno Jr. Director June 26, 1998
-----------------------------------
Anthony R. Manno Jr.
Director June 26, 1998
-----------------------------------
George F. Keane
</TABLE>
13
<PAGE>
<TABLE>
<S> <C> <C>
/s/ Robert H. Abrams Director June 26, 1998
-----------------------------------
Robert H. Abrams
/s/ John H. Gardner, Jr. Director June 26, 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) Form of Articles of Amendment dated June 30, 1998.
1(c) Form of 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.
</TABLE>
15
<PAGE>
<TABLE>
<S> <C>
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.
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 Securities and Exchange Commission on December 17,
1997.
16
<PAGE>
EXHIBIT 1(a)
SECURITY CAPITAL EMPLOYEE REIT FUND INCORPORATED
------------------------------------------------
ARTICLES OF AMENDMENT
December 16, 1997
11:00 a.m.
THIS IS TO CERTIFY THAT:
FIRST: The charter of Security Capital Employee REIT Fund Incorporated, a
-----
Maryland corporation (the "Corporation"), is hereby amended by deleting existing
Article Second in its entirety and substituting in lieu thereof the following
new article:
"SECOND: The name of the corporation (which is hereinafter called the
"Corporation") is:
Security Capital U.S. Real Estate Shares Incorporated
SECOND: The amendment to the charter of the Corporation as set forth above
------
has been duly advised and approved by the Board of Directors of the Corporation
pursuant to Section 2-605 (a)(4) of the Maryland General Corporation Law.
THIRD: The undersigned President acknowledges these Articles of Amendment
-----
to be the corporate act of the Corporation and as to all matters or facts
required to be verified under oath, the undersigned President acknowledges that
to the best of his knowledge, information and belief, these matters and facts
are true in all material respects and that this statement is made under the
penalties for perjury.
IN WITNESS WHEREOF, the Corporation has caused these Articles to be signed
in its name and on its behalf by its President and attested to by its Secretary
on this 4th day of December 1997.
ATTEST: SECURITY CAPITAL EMPLOYEE REIT
FUND INCORPORATED
/s/ Jeffrey C. Nellessen By:/s/ Anthony R. Manno Jr.
- ------------------------ ------------------------
Jeffrey C. Nellessen Anthony R. Manno Jr.
Secretary President
I.D. NO# D4596367
ACKN. NO. - 118C3118276
SECURITY CAPITAL U.S. REAL ESTATE
SHARES INCORPORATED
STATE OF MARYLAND
-----------------
I hereby certify that this is a true and complete copy of the 2 page document on
file in this office. DATED: June 17, 1998
STATE DEPARTMENT OF ASSESSMENT AND TAXATION
12/16/97 AT 11:19 A.M.
BY: /s/ Darla D. Simms , Custodian
-------------------
This stamp replaces our previous certification system. Effective: 6/95
<PAGE>
EXHIBIT 1(b)
SECURITY CAPITAL U.S. REAL ESTATE SHARES INCORPORATED
-----------------------------------------------------
ARTICLES OF AMENDMENT
THIS IS TO CERTIFY THAT:
FIRST: The charter of Security Capital U.S. Real Estate Shares
-----
Incorporated, a Maryland corporation (the "Corporation"), is hereby amended by
deleting existing Article SECOND in its entirety and substituting in lieu
thereof a new article to read as follows:
"SECOND: The name of the corporation (which is hereinafter called the
------
"Corporation") is:
Security Capital Real Estate Mutual Funds Incorporated."
SECOND: The amendment to the charter of the Corporation as set forth above
------
has been duly approved by the Board of Directors of the Corporation as required
by Section 2-605(a)(4) of the Maryland General Corporation Law.
THIRD: These Articles of Amendment shall become effective on June 30, 1998
-----
at 9:00 a.m., e.d.t.
FOURTH: The undersigned President acknowledges these Articles of Amendment
------
to be the corporate act of the Corporation and as to all matters or facts
required to be verified under oath, the undersigned President acknowledges that
to the best of his knowledge, information and belief, these matters and facts
are true in all material respects and that this statement is made under the
penalties for perjury.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused these Articles to be signed
in its name and on its behalf by its President and attested to by its Secretary
on this _____ day of __________, 1998.
ATTEST: SECURITY CAPITAL U.S. REAL
ESTATE SHARES INCORPORATED
__________________________ By:_____________________(SEAL)
Jeffrey C. Nellessen Anthony R. Manno Jr.
Vice President, Secretary Chairman of the Board and
Treasurer President
-2-
<PAGE>
EXHIBIT 1(c)
SECURITY CAPITAL REAL ESTATE MUTUAL FUNDS INCORPORATED
------------------------------------------------------
ARTICLES SUPPLEMENTARY
Security Capital Real Estate Mutual Funds Incorporated, a Maryland
corporation (the "Corporation"), registered as an open-end company under the
Investment Company Act of 1940 (the "1940 Act"), hereby certifies to the State
Department of Assessments and Taxation of Maryland, pursuant to Section 2-208.1
of the Maryland General Corporation Law, that:
FIRST: The total number of shares of stock that the Corporation has
-----
authority to issue is hereby increased by the Board of Directors in accordance
with Section 2-105(c) of the Maryland General Corporation Law to 200,000,000.
Under a power contained in Article Fifth of the charter of the Corporation, the
Board of Directors of the Corporation, by resolutions duly adopted, classified
and designated 50,000,000 shares of the newly authorized shares of stock of the
Corporation as Security Capital Real Estate Arbitrage Shares, $.01 par value per
share (the "Arbitrage Shares"), 50,000,000 shares of the newly authorized
shares of stock of the Corporation as Security Capital European Real Estate
Shares, $.01 par value per share (the "European Shares"), and 50,000,000 shares
of the newly authorized shares of stock of the Corporation as Security Capital
Asia/Pacific Real Estate Shares, $.01 par value per share (the "Asia/Pacific
Shares").
SECOND: The total number of shares of stock which the Corporation
------
had authority to issue immediately prior to these Articles Supplementary was
50,000,000, all of which are common shares, $.01 par value per share, having an
aggregate par value of $500,000.
THIRD: The total number of shares of stock which the Corporation has
-----
authority to issue pursuant to these Articles Supplementary is 200,000,000,
consisting of 50,000,000 common shares, $.01 par value per share, 50,000,000
Security Capital Real Estate Arbitrage Shares, $.01 par value per share,
50,000,000 Security Capital European Real Estate Shares, $.01 par value per
share, and 50,000,000 Security Capital Asia/Pacific Real Estate Shares, $.01 par
value per share, having an aggregate par value of $2,000,000.
FOURTH: The preferences, conversion and other rights, voting powers,
------
restrictions, limitations as to dividends and other distributions,
qualifications and terms and conditions of
-1-
<PAGE>
redemption of the Arbitrage Shares, which upon any restatement of the charter of
the Corporation shall become part of Article Fifth of the charter (with any
necessary or appropriate changes to the enumeration or lettering thereof), are
set forth below:
SECURITY CAPITAL REAL ESTATE ARBITRAGE SHARES
1. Voting.
------
a. The holders of Arbitrage Shares shall be entitled to one vote
per share on all matters to be voted upon by stockholders of the Corporation.
b. All holders of Arbitrage Shares shall vote as a single class
except with respect to any matter which affects only one or more classes of
shares, in which case only the holders of the shares of the class or classes
affected shall be entitled to vote.
c. None of the holders of Arbitrage Shares shall have cumulative
voting rights.
2. Dividends and Distributions.
---------------------------
The holders of Arbitrage Shares shall be entitled to dividends if, as
and when authorized by the Board of Directors.
3. Liquidation. On dissolution and liquidation of the Corporation,
-----------
whether voluntary or involuntary, the holders of Arbitrage Shares shall be
entitled to receive, together with holders of all other shares of stock of the
Corporation, pro rata, any remaining assets of the Corporation. The Board of
Directors may distribute in kind to the holders of the shares of such remaining
assets of the Corporation or may sell, transfer or otherwise dispose of all or
any part of such remaining assets to any other corporation, trust or entity and
receive payment therefor in cash, stock or obligations of such other
corporation, trust or entity or any combination thereof, and may sell all or any
part of the consideration so received and may distribute the consideration
received or any balance or proceeds thereof to holders of the shares. The
voluntary sale, conveyance, lease, exchange or transfer of all or substantially
all the property or assets of the Corporation (unless in connection therewith
the dissolution or liquidation of the Corporation is specifically approved), or
the merger or consolidation of the Corporation into or with any other
corporation, or the merger of any other corporation into the Corporation, or any
purchase or redemption of shares of stock of the Corporation of any class, shall
not be
-2-
<PAGE>
deemed to be a dissolution or liquidation of the Corporation for the purpose of
this Section 3.
4. Redemption.
----------
(a) Each holder of Arbitrage Shares may require the Corporation to
redeem all or any Arbitrage Shares owned by that holder, upon request to the
Corporation or its designated agent, at the net asset value of the shares of
Arbitrage Shares next determined following receipt of the request in a form
approved by the Corporation and accompanied by surrender of the certificate or
certificates for the shares, if any. The Board of Directors may establish
procedures for redemption of Arbitrage Shares. The right of a holder of
Arbitrage Shares redeemed by the Corporation to receive dividends thereon and
all other rights with respect to the shares shall terminate at the time as of
which the redemption price has been determined, except the right to receive the
redemption price and any dividend or distribution to which that holder had
become entitled as the record stockholder on the record date for that dividend.
(b) Except as provided in the next sentence of this paragraph (b),
Arbitrage Shares hereafter issued which are redeemed, exchanged, or otherwise
acquired by the Corporation shall return to the status of authorized and
unissued shares of such class. Upon the redemption, exchange, or other
acquisition by the Corporation of all outstanding Arbitrage Shares hereafter
issued, such shares shall return to the status of authorized and unissued shares
without designation as to class and all provisions of the charter relating to
such class (including, without limitation, any articles supplementary or other
provision of the charter establishing or fixing the rights and preferences of
such class), shall cease to be of further effect and shall cease to be a part of
the charter.
(c) The determination as to any of the following matters made by or
pursuant to the direction of the Board of Directors consistent with the charter
and in the absence of willful misfeasance, bad faith, gross negligence or
reckless disregard of duties shall be final and conclusive and shall be binding
upon the Corporation and every holder of Arbitrage Shares. The amount of the
obligations, liabilities and expenses of each class of the Corporation; the
amount of the net income of each class of the Corporation for any period and the
amount of assets at any time legally available for the payment of dividends or
other distributions on each class; the amount of paid-in surplus, other surplus,
annual or other net profits or net assets in excess of capital or undivided
profits of each class; the amount, purpose, time of creation, increase or
decrease,
-3-
<PAGE>
alteration or cancellation of any reserves or charges and the propriety thereof
(whether or not any obligation or liability for which such reserves or charges
shall have been created shall have been paid or discharged); the market value,
or any sale, bid or asked price to be applied in determining the market value,
of any security owned or held by the Corporation; the fair value of any other
asset owned by the Corporation; the number of shares of each class of the
Corporation issued or issuable; any matter relating to the acquisition, holding
and disposition of securities and other assets by the Corporation; and any
question as to whether any transaction constitutes a purchase of securities on
margin, a short sale of securities, or an underwriting of the sale of, or
participation in any underwriting or selling group in connection with the public
distribution of any securities.
(d) Payment for Arbitrage Shares redeemed by the Corporation shall be
made by the Corporation within seven business days of such surrender out of the
funds legally available therefor, provided that the Corporation may suspend the
right of the stockholders to redeem Arbitrage Shares and may postpone the right
of those holders to receive payment for any shares when permitted or required to
do so by applicable statutes or regulations. Payment of the aggregate price of
shares surrendered for redemption may be made in cash or, at the option of the
Corporation, wholly or partly in such portfolio securities of the Corporation as
the Corporation shall select.
5. Preemptive Rights. No stockholder shall be entitled to any
-----------------
preemptive right other than as the Board of Directors may specifically
establish.
6. Charges and Expenses. The Arbitrage Shares may be subject to such
--------------------
charges and expenses (including by way of example, but not by way of limitation,
redemption fees, administration plans, service plans, or other plans or
arrangements, however designated) as may be adopted from time to time by the
Board of Directors in accordance, to the extent applicable, with the 1940 Act
which charges and expenses may differ within a class or from those applicable to
another class, and all of the charges and expenses to which a class is subject
shall be borne by such class and shall be appropriately reflected (in the manner
determined by the Board of Directors in the resolution or resolutions providing
for the issuance of such class or otherwise) in determining the net asset value
and the amounts payable with respect to dividends and distributions on and
redemptions or liquidations of, such class. Subject to compliance with the
requirements of the 1940 Act, the Board of Directors shall have the authority to
provide that Arbitrage Shares shall be convertible (automatically, optionally or
-4-
<PAGE>
otherwise) into shares of one or more other classes in accordance with such
requirements and procedures as may be established by the Board of Directors.
FIFTH: The preferences, conversion and other rights, voting powers,
-----
restrictions, limitations as to dividends and other distributions,
qualifications and terms and conditions of redemption of the European Shares,
which upon any restatement of the charter of the Corporation shall become part
of Article Fifth of charter (with any necessary or appropriate changes to the
enumeration or lettering thereof), are set forth below:
SECURITY CAPITAL EUROPEAN REAL ESTATE SHARES
1. Voting.
------
a. The holders of European Shares shall be entitled to one
vote per share on all matters to be voted upon by stockholders of the
Corporation.
b. All holders of European Shares shall vote as a single
class except with respect to any matter which affects only one or more classes
of shares, in which case only the holders of the shares of the class or classes
affected shall be entitled to vote.
c. None of the holders of European Shares shall have
cumulative voting rights.
2. Dividends and Distributions.
---------------------------
The holders of European Shares shall be entitled to dividends if, as
and when authorized by the Board of Directors.
3. Liquidation. On dissolution and liquidation of the
-----------
Corporation, whether voluntary or involuntary, the holders of European Shares
shall be entitled to receive, together with holders of all other shares of stock
of the Corporation, pro rata, any remaining assets of the Corporation. The Board
of Directors may distribute in kind to the holders of the shares of such
remaining assets of the Corporation or may sell, transfer or otherwise dispose
of all or any part of such remaining assets to any other corporation, trust or
entity and receive payment therefor in cash, stock or obligations of such other
corporation, trust or entity or any combination thereof, and may sell all or any
part of the consideration so received and may distribute the consideration
received or any balance or proceeds thereof to holders of the shares. The
voluntary sale, conveyance, lease, exchange or transfer of all or substantially
all the property or assets of the Corporation (unless in connection therewith
the
-5-
<PAGE>
dissolution or liquidation of the Corporation is specifically approved), or the
merger or consolidation of the Corporation into or with any other corporation,
or the merger of any other corporation into the Corporation, or any purchase or
redemption of shares of stock of the Corporation of any class, shall not be
deemed to be a dissolution or liquidation of the Corporation for the purpose of
this Section 3.
4. Redemption.
----------
(a) Each holder of European Shares may require the
Corporation to redeem all or any European Shares owned by that holder, upon
request to the Corporation or its designated agent, at the net asset value of
the shares of European Shares next determined following receipt of the request
in a form approved by the Corporation and accompanied by surrender of the
certificate or certificates for the shares, if any. The Board of Directors may
establish procedures for redemption of European Shares. The right of a holder of
European Shares redeemed by the Corporation to receive dividends thereon and all
other rights with respect to the shares shall terminate at the time as of which
the redemption price has been determined, except the right to receive the
redemption price and any dividend or distribution to which that holder had
become entitled as the record stockholder on the record date for that dividend.
(b) Except as provided in the next sentence of this
paragraph (b), European Shares hereafter issued which are redeemed, exchanged,
or otherwise acquired by the Corporation shall return to the status of
authorized and unissued shares of such class. Upon the redemption, exchange, or
other acquisition by the Corporation of all outstanding European Shares
hereafter issued, such shares shall return to the status of authorized and
unissued shares without designation as to class and all provisions of the
charter relating to such class (including, without limitation, any articles
supplementary or other provision of the charter establishing or fixing the
rights and preferences of such class), shall cease to be of further effect and
shall cease to be a part of the charter.
(c) The determination as to any of the following matters
made by or pursuant to the direction of the Board of Directors consistent with
the charter and in the absence of willful misfeasance, bad faith, gross
negligence or reckless disregard of duties shall be final and conclusive and
shall be binding upon the Corporation and every holder of European Shares. The
amount of the obligations, liabilities and expenses of each class of the
Corporation; the amount of the net income of each class of the Corporation for
any period and the amount of assets at any time legally available for the
payment of dividends or
-6-
<PAGE>
other distributions on each class; the amount of paid-in surplus, other surplus,
annual or other net profits or net assets in excess of capital or undivided
profits of each class; the amount, purpose, time of creation, increase or
decrease, alteration or cancellation of any reserves or charges and the
propriety thereof (whether or not any obligation or liability for which such
reserves or charges shall have been created shall have been paid or discharged);
the market value, or any sale, bid or asked price to be applied in determining
the market value, of any security owned or held by the Corporation; the fair
value of any other asset owned by the Corporation; the number of shares of each
class of the Corporation issued or issuable; any matter relating to the
acquisition, holding and disposition of securities and other assets by the
Corporation; and any question as to whether any transaction constitutes a
purchase of securities on margin, a short sale of securities, or an underwriting
of the sale of, or participation in any underwriting or selling group in
connection with the public distribution of any securities.
(d) Payment for European Shares redeemed by the Corporation
shall be made by the Corporation within seven business days of such surrender
out of the funds legally available therefor, provided that the Corporation may
suspend the right of the stockholders to redeem European Shares and may postpone
the right of those holders to receive payment for any shares when permitted or
required to do so by applicable statutes or regulations. Payment of the
aggregate price of shares surrendered for redemption may be made in cash or, at
the option of the Corporation, wholly or partly in such portfolio securities of
the Corporation as the Corporation shall select.
5. Preemptive Rights. No stockholder shall be entitled to any
-----------------
preemptive right other than as the Board of Directors may specifically
establish.
6. Charges and Expenses. The European Shares may be subject to
--------------------
such charges and expenses (including by way of example, but not by way of
limitation, redemption fees, administration plans, service plans, or other plans
or arrangements, however designated) as may be adopted from time to time by the
Board of Directors in accordance, to the extent applicable, with the 1940 Act
which charges and expenses may differ within a class or from those applicable to
another class, and all of the charges and expenses to which a class is subject
shall be borne by such class and shall be appropriately reflected (in the manner
determined by the Board of Directors in the resolution or resolutions providing
for the issuance of such class or otherwise) in determining the net asset value
and the amounts payable with respect to dividends and distributions on and
redemptions or liquidations of, such class. Subject to
-7-
<PAGE>
compliance with the requirements of the 1940 Act, the Board of Directors shall
have the authority to provide that European Shares shall be convertible
(automatically, optionally or otherwise) into shares of one or more other
classes in accordance with such requirements and procedures as may be
established by the Board of Directors.
SIXTH: The preferences, conversion and other rights, voting powers,
-----
restrictions, limitations as to dividends and other distributions,
qualifications and terms and conditions of redemption of the Asia/Pacific
Shares, which upon any restatement of the charter of the Corporation shall
become part of Article Fifth of the charter (with any necessary or appropriate
changes to the enumeration or lettering thereof), are set forth below:
SECURITY CAPITAL ASIA/PACIFIC REAL ESTATE SHARES
1. Voting.
------
a. The holders of Asia/Pacific Shares shall be entitled to
one vote per share on all matters to be voted upon by stockholders of the
Corporation.
b. All holders of Asia/Pacific Shares shall vote as a single
class except with respect to any matter which affects only one or more classes
of shares, in which case only the holders of the shares of the class or classes
affected shall be entitled to vote.
c. None of the holders of Asia/Pacific Shares shall have
cumulative voting rights.
2. Dividends and Distributions.
---------------------------
The holders of Asia/Pacific Shares shall be entitled to dividends if,
as and when authorized by the Board of Directors.
3. Liquidation. On dissolution and liquidation of the
-----------
Corporation, whether voluntary or involuntary, the holders of Asia/Pacific
Shares shall be entitled to receive, together with holders of all other shares
of stock of the Corporation, pro rata, any remaining assets of the Corporation.
The Board of Directors may distribute in kind to the holders of the shares of
such remaining assets of the Corporation or may sell, transfer or otherwise
dispose of all or any part of such remaining assets to any other corporation,
trust or entity and receive payment therefor in cash, stock or obligations of
such other corporation, trust or entity or any combination thereof, and may sell
all or any part of the consideration so received and may distribute the
consideration received or any balance or proceeds thereof to
-8-
<PAGE>
holders of the shares. The voluntary sale, conveyance, lease, exchange or
transfer of all or substantially all the property or assets of the Corporation
(unless in connection therewith the dissolution or liquidation of the
Corporation is specifically approved), or the merger or consolidation of the
Corporation into or with any other corporation, or the merger of any other
corporation into the Corporation, or any purchase or redemption of shares of
stock of the Corporation of any class, shall not be deemed to be a dissolution
or liquidation of the Corporation for the purpose of this Section 3.
4. Redemption.
----------
(a) Each holder of Asia/Pacific Shares may require the
Corporation to redeem all or any Asia/Pacific Shares owned by that holder, upon
request to the Corporation or its designated agent, at the net asset value of
the shares of Asia/Pacific Shares next determined following receipt of the
request in a form approved by the Corporation and accompanied by surrender of
the certificate or certificates for the shares, if any. The Board of Directors
may establish procedures for redemption of Asia/Pacific Shares. The right of a
holder of Asia/Pacific Shares redeemed by the Corporation to receive dividends
thereon and all other rights with respect to the shares shall terminate at the
time as of which the redemption price has been determined, except the right to
receive the redemption price and any dividend or distribution to which that
holder had become entitled as the record stockholder on the record date for that
dividend.
(b) Except as provided in the next sentence of this
paragraph (b), Asia/Pacific Shares hereafter issued which are redeemed,
exchanged, or otherwise acquired by the Corporation shall return to the status
of authorized and unissued shares of such class. Upon the redemption, exchange,
or other acquisition by the Corporation of all outstanding Asia/Pacific Shares
hereafter issued, such shares shall return to the status of authorized and
unissued shares without designation as to class and all provisions of the
charter relating to such class (including, without limitation, any articles
supplementary or other provision of the charter establishing or fixing the
rights and preferences of such class), shall cease to be of further effect and
shall cease to be a part of the charter.
(c) The determination as to any of the following matters
made by or pursuant to the direction of the Board of Directors consistent with
the charter and in the absence of willful misfeasance, bad faith, gross
negligence or reckless disregard of duties shall be final and conclusive and
shall be binding upon the Corporation and every holder of Asia/Pacific
-9-
<PAGE>
Shares. The amount of the obligations, liabilities and expenses of each class of
the Corporation; the amount of the net income of each class of the Corporation
for any period and the amount of assets at any time legally available for the
payment of dividends or other distributions on each class; the amount of paid-in
surplus, other surplus, annual or other net profits or net assets in excess of
capital or undivided profits of each class; the amount, purpose, time of
creation, increase or decrease, alteration or cancellation of any reserves or
charges and the propriety thereof (whether or not any obligation or liability
for which such reserves or charges shall have been created shall have been paid
or discharged); the market value, or any sale, bid or asked price to be applied
in determining the market value, of any security owned or held by the
Corporation; the fair value of any other asset owned by the Corporation; the
number of shares of each class of the Corporation issued or issuable; any matter
relating to the acquisition, holding and disposition of securities and other
assets by the Corporation; and any question as to whether any transaction
constitutes a purchase of securities on margin, a short sale of securities, or
an underwriting of the sale of, or participation in any underwriting or selling
group in connection with the public distribution of any securities.
(d) Payment for Asia/Pacific Shares redeemed by the
Corporation shall be made by the Corporation within seven business days of such
surrender out of the funds legally available therefor, provided that the
Corporation may suspend the right of the stockholders to redeem Asia/Pacific
Shares and may postpone the right of those holders to receive payment for any
shares when permitted or required to do so by applicable statutes or
regulations. Payment of the aggregate price of shares surrendered for redemption
may be made in cash or, at the option of the Corporation, wholly or partly in
such portfolio securities of the Corporation as the Corporation shall select.
5. Preemptive Rights. No stockholder shall be entitled to any
-----------------
preemptive right other than as the Board of Directors may specifically
establish.
6. Charges and Expenses. The Asia/Pacific Shares may be subject to
--------------------
such charges and expenses (including by way of example, but not by way of
limitation, redemption fees, administration plans, service plans, or other plans
or arrangements, however designated) as may be adopted from time to time by the
Board of Directors in accordance, to the extent applicable, with the 1940 Act
which charges and expenses may differ within a class or from those applicable to
another class, and all of the charges and expenses to which a class is subject
shall be borne by such class and shall be appropriately reflected
-10-
<PAGE>
(in the manner determined by the Board of Directors in the resolution or
resolutions providing for the issuance of such class or otherwise) in
determining the net asset value and the amounts payable with respect to
dividends and distributions on and redemptions or liquidations of, such class.
Subject to compliance with the requirements of the 1940 Act, the Board of
Directors shall have the authority to provide that Asia/Pacific Shares shall be
convertible (automatically, optionally or otherwise) into shares of one or more
other classes in accordance with such requirements and procedures as may be
established by the Board of Directors.
SEVENTH: These Articles Supplementary have been approved by the Board
-------
of Directors in the manner and by the vote required by law.
EIGHTH: These Articles Supplementary shall become effective on June
------
30, 1998 at 9:00 a.m., e.d.t.
NINTH: The undersigned President of the Corporation acknowledges
-----
these Articles Supplementary to be the corporate act of the Corporation and, as
to all matters or facts required to be verified under oath, the undersigned
President acknowledges that to the best of his knowledge, information and
belief, these matters and facts are true in all material respects and that this
statement is made under the penalties for perjury.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-11-
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused these Articles
Supplementary to be signed in its name and on its behalf by its President and
attested to by its Secretary on this _____ day of ____________, 1998.
ATTEST: SECURITY CAPITAL REAL ESTATE MUTUAL
FUNDS INCORPORATED
By: (SEAL)
- ------------------------- -------------------------
Jeffrey C. Nellessen Anthony Manno Jr.
Vice President, Chairman of the Board and
Secretary and Treasurer President
-12-
<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(h)
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 (EUROPE) S.A., a Belgian 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 European Real Estate Shares
("SC-EURO") 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-EURO'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-EURO 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-
EURO's portfolio in accordance with the SC-EURO'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-EURO's portfolio in
accordance with SC-EURO'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-EURO, all actions which appear to SC-EURO 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-EURO;
(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-EURO,
and whether concerning the individual issuers whose securities are included
in SC-EURO's portfolio or the activities in which they engage, or with
respect to securities which the Adviser considers desirable for inclusion
in the SC-EURO'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-EURO for which market quotations are not readily
available for purposes of facilitating the calculation of SC-EURO'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-EURO, 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-EURO'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-EURO on a continuing basis. Accordingly, the price to SC-EURO
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-EURO 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-Adviser determines in good faith that such amount of
commission was reasonable in relation to
2
<PAGE>
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-EURO. The Sub-Adviser is further
authorized to allocate the orders placed by it on behalf of SC-EURO to such
broker-dealers who also provide research or statistical material or other
services to SC-EURO 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-
EURO as a factor in the selection of broker-dealers to execute portfolio
transactions for SC-EURO. 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-EURO 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-EURO 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-EURO 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-EURO's order. If SCMG is participating in an underwriting or
selling group, SC-EURO 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-EURO'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-EURO
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 U.S. federal and state law and
Belgian law.
6. COMPENSATION
As consideration for the services provided under this Agreement, the
Adviser will pay the Sub-Adviser a management fee in an amount equal to .08% of
SC-EURO's average daily net asset value.
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-EURO 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-EURO 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-EURO 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-EURO if a majority of the outstanding voting
securities of SC-EURO 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-EURO 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
shall be Boulevard de la Woluwe 34, Brussels, Belgium, and of 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 (EUROPE) S.A.
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 of SC-ASIA and SC-ASIA's shareholders as
required by the 1940 Act.
<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 availiabe 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 the Sub-
Adviser's costs, which include the items enumerated below, plus 10% mark-up,
computed in the following manner:
[TO COME]
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 (iii) 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 *[Name of Fund] a *[business trust/corporation]
organized and existing under the laws of *[jurisdiction] with its principal
place of business at *[address] (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 *[#]6
series, *[Names of Portfolios] (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 *[Trustees/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 applicable
Portfolio(s) the foreign banking institutions and
<PAGE>
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
2
<PAGE>
representing the same aggregate face amount 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 or obligations issued by
the United States government, its agencies or instrumentalities,
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
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;
3
<PAGE>
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 *[trust/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.
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
4
<PAGE>
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 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
5
<PAGE>
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 *[trust/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 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:
6
<PAGE>
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
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
7
<PAGE>
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 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 and/or
securities, 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
8
<PAGE>
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 *[trust/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.
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.
9
<PAGE>
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 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
10
<PAGE>
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.
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).
11
<PAGE>
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.
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
12
<PAGE>
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.
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.
13
<PAGE>
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;
(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;
14
<PAGE>
(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 *[trust/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;
(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;
15
<PAGE>
(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 *[trust/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 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
16
<PAGE>
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
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, require the Foreign Sub-Custodian
to exercise reasonable care in the performance of its duties and, to the extent
possible, 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. At the Fund's
election, 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
17
<PAGE>
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 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
18
<PAGE>
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. 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.
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
---------------------------------------------
19
<PAGE>
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.
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 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
20
<PAGE>
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.
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 (who may be 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, 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
21
<PAGE>
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.
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 under
Section 2.8 hereof in the absence of receipt of an initial
22
<PAGE>
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 *[Declaration of Trust/Articles of
Incorporation/other governing documents], 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.
23
<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 *[Declaration of
Trust/Articles of Incorporation/other governing documents]. 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 *[Names of Portfolios] 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.
24
<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: *[Fund Name]
*[address]
Attention: [contact]
Telephone: *
Telecopy: *
To the Custodian: State Street Bank and Trust Company
*[address]
North Quincy, Massachusetts 02171
Attention: [unit head]
Telephone: 617-985-*
Telecopy: 617-*
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.
25
<PAGE>
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 [ ] The Custodian is not authorized to release the Fund's name,
address, and share positions.
26
<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 *[date].
*[Fund Name] Fund signature attested to By:
By:_________________________ By:_________________________________
Name:_______________________ Name:_______________________________
Title:______________________ Title: *[secretary/ass't secretary]
------------------------------
State Street Bank and Trust Company Signature attested to By:
By:_________________________ By:_________________________________
Name: Ronald E. Logue Name: *[attorney's name]
----------------------- -------------------------------
Title: Executive Vice President Title: *[attorney's title]
------------------------- ------------------------------
27
<PAGE>
SCHEDULE A
STATE STREET
GLOBAL CUSTODY NETWORK
SUBCUSTODIAN AND NON-MANDATORY DEPOSITORIES
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
Argentina Citibank, N.A. --
Australia Westpac Banking Corporation --
Austria Erste Bank der Oesterreichischen --
Sparkasen AG
Bahrain British Bank of the Middle East --
(as delegate of The Hongkong and
Shanghai Banking Corporation Limited)
Bangladesh Standard Chartered Bank --
Belgium Generale Bank --
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
28
<PAGE>
SCHEDULE A
STATE STREET
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
Croatia Privredana banka Zagreb d.d --
Cyprus Barclays Bank Plc., --
Cyprus Offshore Banking Unit
Czech Ceskoslovenska Obchodni --
Republic Banka, A.S.
Denmark Den Danske Bank --
Ecuador Citibank, N.A. --
Egypt National Bank of Egypt --
Estonia Hansabank --
Finland Merita Bank Ltd. --
France Banque Paribas --
Germany Dresdner Bank AG --
Ghana Barclays Bank of Ghana Limited --
Greece National Bank of Greece S.A Bank of Greece
Hong Kong Standard Chartered Bank --
Hungary Citibank Budapest Rt. --
Iceland Icebank Limited
29
<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 Limited
Japan The Daiwa Bank Limited; Japan Securities Depository
The Fuji Bank, Limited Center
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)
Lithuania Vilniaus Bankas AB --
30
<PAGE>
SCHEDULE A
STATE STREET
GLOBAL CUSTODY NETWORK
SUBCUSTODIANS AND NON-MANDATORY DEPOSITORIES
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
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.
Portugal Banco Comercial Portugues --
31
<PAGE>
SCHEDULE A
STATE STREET
GLOBAL CUSTODY NETWORK
SUBCUSTODIAN AND NON-MANDATORY DEPOSITORIES
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
Romania ING Bank, N.V. --
Russia Credit Suisse First Boston, Zurich --
via Credit Suisse First Boston
AO, Moscow
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 --
Sri Lanka The Hongkong and Shanghai --
Banking Corporation Limited
Swaziland Standard Bank Swaziland Limited --
Sweden Skandinaviska Enskilda Banken --
Switzerland Union Bank of Switzerland --
Taiwan - Central Trust of China --
R.O.C.
Thailand Standard Chartered Bank --
Trinidad & Republic Bank Limited --
Tobago
32
<PAGE>
SCHEDULE A
STATE STREET
GLOBAL CUSTODY NETWORK
SUBCUSTODIAN AND NON-MANDATORY DEPOSITORIES
COUNTRY SUBCUSTODIAN NON-MANDATORY DEPOSITORIES
Tunisia Banque Internationale Arabe --
de Tunisie
Turkey Citibank, N.A. --
Ottoman Bank
United State Street Bank and Trust Company, --
Kingdom 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)
Cedel (Cedel Bank, societe anonyme)
INTERSETTLE (for EASDAQ Securities)
33
<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 Depots et
de Virements de Titres S.A.
Banque Nationale de Belgique
Brazil Caixa de Liquidacao de Sao Paulo, (Calispa)
Bolsa de Valores de Rio de Janeiro
All SSB clients presently use Calispa
Financeira Central de Custodia e de Liquidacao
de Titulos
Banco Central do Brasil,
Systema Especial de Liquidacao e
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.
34
<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
Saturne System
Germany Deutsche Borse Clearing AG
Greece The Central Securities Depository S.A.
(Apothetirion Titlon A.E.)
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 entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
35
<PAGE>
SCHEDULE B
STATE STREET
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
COUNTRY MANDATORY DEPOSITORIES
India The National Securities Depository Limited
Indonesia Bank of Indonesia
Ireland The Central Bank of Ireland
Securities Settlement Office
Israel The Clearing House of the
Tel Aviv Stock Exchange
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 Custodian and Clearing Center of
Financial Instruments for Lebanon
and the Middle East (MIDCLEAR) S.A.L.
The Central Bank of Lebanon
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
36
<PAGE>
SCHEDULE B
STATE STREET
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
COUNTRY MANDATORY DEPOSITORIES
Lithuania The Central Securities Depository of
Lithuania
Malaysia The Malaysian Central Depository Sdn. Bhd.
Bank Negara Malaysia,
Malaysia (cont.) 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)
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
Peru Caja de Valores y Liquidaciones S.A.
(CAVALI)
Philippines The Philippines Central Depository Inc.
The Book-Entry-System of Bangko
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
37
<PAGE>
SCHEDULE B
STATE STREET
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
COUNTRY MANDATORY DEPOSITORIES
Sentral ng Pilipinas (the central bank)
The Registry of Scripless Securities 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
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,
Anotaciones en Cuenta
38
<PAGE>
SCHEDULE B
STATE STREET
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
COUNTRY MANDATORY DEPOSITORIES
Sri Lanka Central Depository System
(Pvt) Limited
Sweden Vardepapperscentralen
(the Swedish Central Securities Depository)
Switzerland Schweizerische Effekten - Giro AG
Taiwan - R.O.C. The Taiwan Securities Central
Depository Company, Ltd.
Thailand Thailand Securities Depository
Company Limited
Tunisia STICODEVAM
Central Bank of Tunisia
Tunisian Treasury
Turkey Takas ve Saklama Bankasi A.S.
(TAKASBANK)
Central Bank of Turkey
United Kingdom The Bank of England,
The Central Gilts Office;
The Central Moneymarkets Office
Uruguay Central Bank of Uruguay
Venezuela The Central Bank of Venezuela
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
39
<PAGE>
SCHEDULE B
STATE STREET
GLOBAL CUSTODY NETWORK
MANDATORY* DEPOSITORIES
COUNTRY MANDATORY DEPOSITORIES
Zambia Lusaka Central Depository
* Mandatory depositories include entities for which use is mandatory as a matter
of law or effectively mandatory as a matter of market practice.
40
<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.
41
<PAGE>
EXHIBIT 9(a)
TRANSFER AGENCY AND SERVICE AGREEMENT
between
(Name of Mutual Fund, Trust or Company)
and
STATE STREET BANK AND TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
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.................. 5
6. Wire Transfer Operating Guidelines.......................... 6
7. Data Access and Proprietary Information..................... 7
8. Indemnification............................................. 9
9. Standard of Care............................................ 10
10. Year 2000................................................... 10
11. Confidentiality............................................. 11
12. Covenants of the Fund and the Bank.......................... 11
13. Termination of Agreement.................................... 12
14. Assignment and Third Party Beneficiaries................... 12
15. Subcontractors............................................. 13
16. Miscellaneous.............................................. 13
17. Additional Funds........................................... 13
</TABLE>
<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
-------------------------------------
AGREEMENT made as of the ____ day of __________, 199__, by and between
_______________, a corporation, having its principal office and place of
business at ___________________ (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, 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 _____ series, such
series shall be 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, $___ 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:
<PAGE>
(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;
(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) Prepare and transmit payments for dividends and
distributions declared by the Fund on behalf of the
applicable Portfolio;
(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.
2
<PAGE>
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:
(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 and filing U.S. Treasury Department Forms 1099 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.
(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 Fund 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"). (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 NSCC's Networking and Fund/SERV rules for those
broker-dealers; (iii) maintain Shareholder accounts on TA2000 System
through Networking.
3
<PAGE>
(e) Responsibility Schedule. Procedures as to who shall provide certain of
these services in Section 1 may be established from time to time by
agreement between the Fund and the Bank per the attached service
responsibility schedule ("Schedule 1.2(e)"). 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.
2. Third Party Administrators for Defined Contribution Plans
---------------------------------------------------------
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)").
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;
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
Perform all services under Section 1 as transfer agent of the
---------
Funds and not as a record-keeper for the Plans.
Transactions identified under Section 2 of this Agreement shall
---------
be deemed exception services ("Exception Services") when such
transactions:
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;
Involve the provision of information to the Bank after the
commencement of the nightly processing cycle of the TA2000
System; or
(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
4
<PAGE>
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.
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.
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.
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.
5. Representations and Warranties of the Fund
------------------------------------------
The Fund represents and warrants to the Bank that:
5
<PAGE>
5.1 It is a corporation duly organized and existing and in good standing
under the laws of _______________.
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
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 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
6
<PAGE>
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 notification 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.
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
7
<PAGE>
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 the data acquired hereunder
from being retransmitted to any other computer facility or other
location, except with the prior written consent of the Bank;
(e) Allow the Fund shall have access only to those authorized
transactions agreed upon by the parties;
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.
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.
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.
8
<PAGE>
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.
7.4 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 subcontractors required
to be taken pursuant to this Agreement, provided that such
actions are taken in good faith and without negligence or
willful misconduct;
(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 subcontractors on: (i)
any information, records, documents, data, stock certificates or
services, which are received by the Bank or its agents or
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
9
<PAGE>
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;
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;
The negotiation and processing of checks made payable to
prospective or existing Shareholders tendered to the Bank for
the purchase of Shares, such checks are commonly known as "third
party checks";
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
----------------
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.
-----------
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
10
<PAGE>
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 Company, other than request 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 Company and to secure instructions from an
authorized officer of the Company as to such inspection. The Bank
expressly reserves the right, however, to exhibit the Shareholder
records to any person whenever it is advised by 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.
11
<PAGE>
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 Fund 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 one hundred twenty
(120) days written notice to the other.
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 three (3) months' fees.
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 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
12
<PAGE>
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
--------------
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
Securities Exchange Act of 1934, as amended, (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.
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 or transmission failure or damage reasonably beyond
its control, or other 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 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.
16.6 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
13
<PAGE>
waiver of any succeeding breach of the same or of any other covenant or
condition.
16.7. 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.
16.8 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.
16.9 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.
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.
14
<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.
BY:
-----------------------------
ATTEST:
- -----------------------------
STATE STREET BANK AND TRUST
COMPANY
BY:
-----------------------------
ATTEST:
- -----------------------------
15
<PAGE>
SCHEDULE A
[Fund List]
STATE STREET BANK AND TRUST
COMPANY
BY: BY:
----------------------------- -----------------------------
16
<PAGE>
SCHEDULE 1.2(E)
STATE STREET BANK & TRUST COMPANY
FUND SERVICE RESPONSIBILITIES*
Dated ____________
Service Performed Responsibility
- ----------------- --------------
Bank Fund
---- ----
1. Receives orders for the purchase
of Shares.
2. Issue Shares and hold Shares in
Shareholders accounts.
3. Receive redemption requests.
4. Effect transactions 1-3 above
directly with broker-dealers.
5. Pay over monies to redeeming
Shareholders.
6. Effect transfers of Shares.
7. Prepare and transmit dividends
and distributions.
8. Issue Replacement Certificates.
9. Reporting of abandoned property.
10. Maintain records of account.
11. Maintain and keep a current and
accurate control book for each
issue of securities.
12. Mail proxies.
13. Mail Shareholder reports.
14. Mail prospectuses to current
Shareholders.
17
<PAGE>
SCHEDULE 1.2(e)
STATE STREET BANK & TRUST COMPANY
FUND SERVICE RESPONSIBILITIES*
Dated ____________
Service Performed Responsibility
- ----------------- --------------
Bank Fund
---- ----
15. Withhold taxes on U.S. resident
and non-resident alien accounts.
16. Prepare and file U.S. Treasury
Department forms.
17. Prepare and mail account and
confirmation statements for
Shareholders.
18. Provide Shareholder account
information.
19. Blue Sky reporting.
* Such services are more fully described in Section 1.2 of the Agreement.
STATE STREET BANK AND TRUST
COMPANY
BY: BY:
------------------------------ -----------------------------
Executive Vice President
18
<PAGE>
SCHEDULE 2.1
THIRD PARTY ADMINISTRATOR(S) PROCEDURES
Dated ____________
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
19
<PAGE>
prospectuses, proxy materials, reports, and other information provided by
each Fund for delivery to its shareholders.
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.
STATE STREET BANK AND TRUST
COMPANY
BY: BY:
------------------------------ -----------------------------
20
<PAGE>
SCHEDULE 3.1
FEES
Dated ____________
STATE STREET BANK AND TRUST
COMPANY
BY: BY:
------------------------------ -----------------------------
21
<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 four series of shares ("Series"), Security Capital U.S. Real Estate
Shares, Security Capital European Real Estate Shares, Security Capital
Asia/Pacific Real Estate Shares and Security Capital Real Estate Arbitrage
Shares, each with two classes, which may be purchased by retail investors and
institutional investors and which may offer different services to shareholders
and incur different expenses; 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
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, the
Administrator shall so notify the Fund in writing whereupon such Series shall be
subject to
<PAGE>
the provisions of this Agreement to the same extent as all other 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 in writing by
the Fund and the Administrator at the time of the addition of such new Series.
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.
3. 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 class or 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.
4. 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 and the Fund may together retain a sub-administrator to
assist the Administrator in the execution of its duties hereunder. The
retention of a sub-administrator by the Administrator and the Fund shall in no
way affect the responsibilities of the Administrator hereunder. The
compensation of a sub-administrator retained by the Administrator and the Fund
may be paid by the Administrator and/or 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.
-9-
<PAGE>
EXHIBIT 9(c)
ADMINISTRATION AGREEMENT
Agreement dated as of __________, 1998 by and between State Street Bank and
Trust Company, a Massachusetts tust company (the "Administrator"), and Security
Capital Real Estate Mutual Funds (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");
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 (each an "Investment Fund") 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 individuals 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 3la-l(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 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 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 Internal Revenue Code mandatory
qualification requirements, the requirements of the 1940 Act and
Company 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;
4
<PAGE>
p. File annual and semi-annual shareholder reports with the appropriate
regulatory agencies; review text of "President's letters" to
shareholders and "Management's Discussion of Company Performance"
(which shall also be subject to review by the Company's legal
counsel):
q. Prepare 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 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 (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; cost 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
5
<PAGE>
any amendments thereto and shareholder reports; cost of typesetting and printing
of prospectuses; cost of preparation of 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 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 its own legal counsel or 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 thereunder
unless solely caused by or resulting from the gross negligence or willful
misconduct of the Administrator, its officers or employees. 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 its total annual compensation earned
and fees paid hereunder during the preceding twelve months 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.
6
<PAGE>
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 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 Administrators shall be deemed
7
<PAGE>
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 from the effective date and shall
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, 11 South LaSalle St., Chicago, Illinois 60603
Attn: ___________, fax:___________; if to the Administrator: State Street Bank
and Trust Company, 1776 Heritage Drive, AFB-4, North Quincy, Massachusetts
02171, Attn: Fund Administration Legal Department, fax: 617-537-2578.
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.
8
<PAGE>
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.
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.
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
By:
----------------------------------------
Name:
----------------------------------------
Title:
----------------------------------------
STATE STREET BANK AND TRUST COMPANY
By:
----------------------------------------
Name: Kathleen Cuocolo
----------------------------------------
Title: Senior Vice President
----------------------------------------
10
<PAGE>
SECURITY CAPITAL REAL ESTATE MUTUAL FUNDS
ADMINISTRATION AGREEMENT
SCHEDULE A
Listing of Investment Funds and Authorized Shares
Investment Fund Authorized Shares
Security Capital U.S. Real Estate Shares (Class I and R)
Security Capital European Real Estate Shares (Class I and R)
Security Capital Asia/Pacific Real Estate Shares (Class I and R)
Security Capital Real Estate Arbitrage Shares (Class I)
11
<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. 8 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.
June 29, 1998
<PAGE>
[LETTERHEAD OF BALLARD SPAHR ANDREWS & INGERSOLL, LLP APPEARS HERE]
June 26, 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 Gentlmen:
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
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
June 26, 1998
<PAGE>
EXHIBIT 15(c)
DISTRIBUTION AND SERVICE PLAN
FOR SECURITY CAPITAL EUROPEAN REAL ESTATE SHARES
CLASS I AND CLASS R SHARES
This Plan is adopted by Security Capital Real Estate Mutual Funds Incorporated
(the "Company"), pursuant to Rule 12b-1 under the Investment Company Act of
1940, as amended (the "Act"), to provide for payment by the Company of certain
expenses in connection with the distribution of the Class I and Class R shares
of Security Capital European Real Estate Shares ("Series"), the provision of
personal services to the Series' Class I and Class R shareholders and/or the
maintenance of their Class I and Class R shareholder accounts. Payments under
the Plan are to be made to Security Capital Markets Group Incorporated ("SCMGI")
which serves as the principal underwriter for the Series Class I and Class R
shares under the terms of the Distribution and Servicing Agreement pursuant to
which SCMGI offers and sells the shares of the Series.
DISTRIBUTION FEE AND SERVICE FEE
The annual compensation payable by the Company to SCMGI is an amount equal to
.25 of 1% on an annual basis of the average net assets of the Series' Class I
and Class R shares as either (1) a "distribution fee" to finance the
distribution of the Series' Class I and Class R shares, or (2) a "service fee"
to finance shareholder servicing by SCMGI, its affiliated companies and
financial intermediaries who may sell Class I and Class R shares and to
encourage and foster the maintenance of Class I and Class R shareholder
accounts, or as a combination of the two fees. The amounts shall be payable to
SCMGI monthly or at such other intervals as the board of directors may determine
to compensate SCMGI for services provided hereunder. The amount of the
distribution fee and service fee payable to SCMGI hereunder is not related
directly to expenses incurred by SCMGI on behalf of the Series' and the Company
is not obligated to reimburse SCMGI for such expenses.
NASD DEFINITION
For purposes of this Plan, the "distribution fee" may be considered as a sales
charge that is deducted from the Class I net assets of the Series and does not
include the service fee. The "service fee" shall be considered a payment made
by the Company for personal service and/or maintenance of the Series' Class I
and Class R shareholder accounts, as such is now defined by the National
Association of Securities Dealers Regulation, Inc. ("NASD"), provided, however,
if the NASD adopts a definition of "service fee" for purposes of Rule 2830 of
the NASD Conduct Rules that differs from the definition of "service fee" as
presently used, or if the NASD adopts a related definition intended to define
the same concept, the definition of "service fee" as used herein shall be
automatically amended to conform to the NASD definition.
QUARTERLY REPORTS
SCMGI shall provide to the board of directors of the Company and the board of
directors shall review at least quarterly a written report of the amounts so
expended of the distribution fee and/or service fee paid under this Plan and the
purposes for which such expenditures were made.
<PAGE>
APPROVAL OF PLAN
Because the Series has no shareholders, this Plan shall become effective when it
has been approved by a vote of the board of directors of the Company and of the
directors who are not interested persons of the Company and have no direct or
indirect financial interest in the operation of the Plan or any agreement
related to this Plan (other than as directors or shareholders of the Company)
("independent directors") cast in person at a meeting called for the purposes of
voting on such Plan.
CONTINUANCE
This Plan shall continue in effect for a period of one (1) year and thereafter
from year to year only so long as such continuance is approved by the directors,
including the independent directors, as specified hereinabove for the adoption
of the Plan by the directors and independent directors.
DIRECTOR CONTINUATION
In considering whether to adopt, continue or implement this Plan, the directors
shall have a duty to request and evaluate, and SCMGI shall have a duty to
furnish, such information as may be reasonably necessary to an informed
determination of whether this Plan should be adopted, implemented or continued.
TERMINATION
This Plan may be terminated at any time with respect to the Series or a Class
thereof, by a vote of a majority of the independent directors of the Company or
by a vote of the majority of the outstanding Class I and/or Class R voting
securities of the Series without penalty. The distribution fee and service fee
will be paid by the Company to SCMGI unless and until this Plan is terminated or
not renewed, in which event the Company shall pay SCMGI for services provided on
a pro-rata basis up through the date of termination. Any expenses incurred by
SCMGI on behalf of the Company in excess of the distribution fee and service fee
payable hereunder through the date of termination are the sole responsibility
and liability of SCMGI, and are not obligations of the Company.
AMENDMENTS
This Plan may not be amended to increase materially the amount to be spent for
distribution of Class I and/or Class R shares, personal service and/or
maintenance of shareholder accounts without approval of the Series' Class I
and/or Class R shareholders, and all material amendments of this Plan must be
approved in the manner prescribed for the adoption of the Plan as provided
hereinabove.
DIRECTORS
While this Plan is in effect, the selection and nomination of the directors who
are not interested persons of the Company shall be committed to the discretion
of the directors who are not interested persons of the Company.
RECORDS
Copies of this Plan, the Distribution Agreement and reports made pursuant to
this Plan shall be preserved as provided in Rule 12b-1(f) under the Act.
2
<PAGE>
EXHIBIT 15(d)
DISTRIBUTION AND SERVICE PLAN
FOR SECURITY CAPITAL ASIA/PACIFIC REAL ESTATE SHARES
CLASS I AND CLASS R SHARES
This Plan is adopted by Security Capital Real Estate Mutual Funds Incorporated
(the "Company"), pursuant to Rule 12b-1 under the Investment Company Act of
1940, as amended (the "Act"), to provide for payment by the Company of certain
expenses in connection with the distribution of the Class I and Class R shares
of Security Capital Asia/Pacific Real Estate Shares ("Series"), the provision of
personal services to the Series' Class I and Class R shareholders and/or the
maintenance of their Class I and Class R shareholder accounts. Payments under
the Plan are to be made to Security Capital Markets Group Incorporated ("SCMGI")
which serves as the principal underwriter for the Series Class I and Class R
shares under the terms of the Distribution and Servicing Agreement pursuant to
which SCMGI offers and sells the shares of the Series.
DISTRIBUTION FEE AND SERVICE FEE
The annual compensation payable by the Company to SCMGI is an amount equal to
.25 of 1% on an annual basis of the average net assets of the Series' Class I
and Class R shares as either (1) a "distribution fee" to finance the
distribution of the Series' Class I and Class R shares, or (2) a "service fee"
to finance shareholder servicing by SCMGI, its affiliated companies and
financial intermediaries who may sell Class I and Class R shares and to
encourage and foster the maintenance of Class I and Class R shareholder
accounts, or as a combination of the two fees. The amounts shall be payable to
SCMGI monthly or at such other intervals as the board of directors may determine
to compensate SCMGI for services provided hereunder. The amount of the
distribution fee and service fee payable to SCMGI hereunder is not related
directly to expenses incurred by SCMGI on behalf of the Series' and the Company
is not obligated to reimburse SCMGI for such expenses.
NASD DEFINITION
For purposes of this Plan, the "distribution fee" may be considered as a sales
charge that is deducted from the Class I net assets of the Series and does not
include the service fee. The "service fee" shall be considered a payment made
by the Company for personal service and/or maintenance of the Series' Class I
and Class R shareholder accounts, as such is now defined by the National
Association of Securities Dealers Regulation, Inc. ("NASD"), provided, however,
if the NASD adopts a definition of "service fee" for purposes of Rule 2830 of
the NASD Conduct Rules that differs from the definition of "service fee" as
presently used, or if the NASD adopts a related definition intended to define
the same concept, the definition of "service fee" as used herein shall be
automatically amended to conform to the NASD definition.
QUARTERLY REPORTS
SCMGI shall provide to the board of directors of the Company and the board of
directors shall review at least quarterly a written report of the amounts so
expended of the distribution fee and/or service fee paid under this Plan and the
purposes for which such expenditures were made.
<PAGE>
APPROVAL OF PLAN
Because the Series has no shareholders, this Plan shall become effective when it
has been approved by a vote of the board of directors of the Company and of the
directors who are not interested persons of the Company and have no direct or
indirect financial interest in the operation of the Plan or any agreement
related to this Plan (other than as directors or shareholders of the Company)
("independent directors") cast in person at a meeting called for the purposes of
voting on such Plan.
CONTINUANCE
This Plan shall continue in effect for a period of one (1) year and thereafter
from year to year only so long as such continuance is approved by the directors,
including the independent directors, as specified hereinabove for the adoption
of the Plan by the directors and independent directors.
DIRECTOR CONTINUATION
In considering whether to adopt, continue or implement this Plan, the directors
shall have a duty to request and evaluate, and SCMGI shall have a duty to
furnish, such information as may be reasonably necessary to an informed
determination of whether this Plan should be adopted, implemented or continued.
TERMINATION
This Plan may be terminated at any time with respect to the Series or a Class
thereof, by a vote of a majority of the independent directors of the Company or
by a vote of the majority of the outstanding Class I and/or Class R voting
securities of the Series without penalty. The distribution fee and service fee
will be paid by the Company to SCMGI unless and until this Plan is terminated or
not renewed, in which event the Company shall pay SCMGI for services provided on
a pro-rata basis up through the date of termination. Any expenses incurred by
SCMGI on behalf of the Company in excess of the distribution fee and service fee
payable hereunder through the date of termination are the sole responsibility
and liability of SCMGI, and are not obligations of the Company.
AMENDMENTS
This Plan may not be amended to increase materially the amount to be spent for
distribution of Class I and/or Class R shares, personal service and/or
maintenance of shareholder accounts without approval of the Series' Class I
and/or Class R shareholders, and all material amendments of this Plan must be
approved in the manner prescribed for the adoption of the Plan as provided
hereinabove.
DIRECTORS
While this Plan is in effect, the selection and nomination of the directors who
are not interested persons of the Company shall be committed to the discretion
of the directors who are not interested persons of the Company.
RECORDS
Copies of this Plan, the Distribution Agreement and reports made pursuant to
this Plan shall be preserved as provided in Rule 12b-1(f) under the Act.
2
<PAGE>
EXHIBIT 15(e)
DISTRIBUTION AND SERVICE PLAN
FOR SECURITY CAPITAL REAL ESTATE ARBITRAGE SHARES
CLASS I SHARES
This Plan is adopted by Security Capital Real Estate Mutual Funds Incorporated
(the "Company"), pursuant to Rule 12b-1 under the Investment Company Act of
1940, as amended (the "Act"), to provide for payment by the Company of certain
expenses in connection with the distribution of the Class I shares of Security
Capital Real Estate Arbitrage Shares ("Series"), the provision of personal
services to the Series' Class I shareholders and/or the maintenance of their
Class I shareholder accounts. Payments under the Plan are to be made to
Security Capital Markets Group Incorporated ("SCMGI") which serves as the
principal underwriter for the Series Class I shares under the terms of the
Distribution and Servicing Agreement pursuant to which SCMGI offers and sells
the shares of the Series.
DISTRIBUTION FEE AND SERVICE FEE
The annual compensation payable by the Company to SCMGI is an amount equal to
.25 of 1% on an annual basis of the average net assets of the Series' Class I
shares as either (1) a "distribution fee" to finance the distribution of the
Series' Class I shares, or (2) a "service fee" to finance shareholder servicing
by SCMGI, its affiliated companies and financial intermediaries who may sell
Class I shares and to encourage and foster the maintenance of Class I
shareholder accounts, or as a combination of the two fees. The amounts shall be
payable to SCMGI monthly or at such other intervals as the board of directors
may determine to compensate SCMGI for services provided hereunder. The amount
of the distribution fee and service fee payable to SCMGI hereunder is not
related directly to expenses incurred by SCMGI on behalf of the Series' and the
Company is not obligated to reimburse SCMGI for such expenses.
NASD DEFINITION
For purposes of this Plan, the "distribution fee" may be considered as a sales
charge that is deducted from the Class I net assets of the Series and does not
include the service fee. The "service fee" shall be considered a payment made
by the Company for personal service and/or maintenance of the Series' Class I
shareholder accounts, as such is now defined by the National Association of
Securities Dealers Regulation, Inc. ("NASD"), provided, however, if the NASD
adopts a definition of "service fee" for purposes of Rule 2830 of the NASD
Conduct Rules that differs from the definition of "service fee" as presently
used, or if the NASD adopts a related definition intended to define the same
concept, the definition of "service fee" as used herein shall be automatically
amended to conform to the NASD definition.
QUARTERLY REPORTS
SCMGI shall provide to the board of directors of the Company and the board of
directors shall review at least quarterly a written report of the amounts so
expended of the distribution fee and/or service fee paid under this Plan and the
purposes for which such expenditures were made.
<PAGE>
APPROVAL OF PLAN
Because the Series has no shareholders, this Plan shall become effective when it
has been approved by a vote of the board of directors of the Company and of the
directors who are not interested persons of the Company and have no direct or
indirect financial interest in the operation of the Plan or any agreement
related to this Plan (other than as directors or shareholders of the Company)
("independent directors") cast in person at a meeting called for the purposes of
voting on such Plan.
CONTINUANCE
This Plan shall continue in effect for a period of one (1) year and thereafter
from year to year only so long as such continuance is approved by the directors,
including the independent directors, as specified hereinabove for the adoption
of the Plan by the directors and independent directors.
DIRECTOR CONTINUATION
In considering whether to adopt, continue or implement this Plan, the directors
shall have a duty to request and evaluate, and SCMGI shall have a duty to
furnish, such information as may be reasonably necessary to an informed
determination of whether this Plan should be adopted, implemented or continued.
TERMINATION
This Plan may be terminated at any time with respect to the Series by a vote of
a majority of the independent directors of the Company or by a vote of the
majority of the outstanding Class I voting securities of the Series without
penalty. The distribution fee and service fee will be paid by the Company to
SCMGI unless and until this Plan is terminated or not renewed, in which event
the Company shall pay SCMGI for services provided on a pro-rata basis up through
the date of termination. Any expenses incurred by SCMGI on behalf of the
Company in excess of the distribution fee and service fee payable hereunder
through the date of termination are the sole responsibility and liability of
SCMGI, and are not obligations of the Company.
AMENDMENTS
This Plan may not be amended to increase materially the amount to be spent for
distribution of Class I shares, personal service and/or maintenance of
shareholder accounts without approval of the Series' Class I shareholders, and
all material amendments of this Plan must be approved in the manner prescribed
for the adoption of the Plan as provided hereinabove.
DIRECTORS
While this Plan is in effect, the selection and nomination of the directors who
are not interested persons of the Company shall be committed to the discretion
of the directors who are not interested persons of the Company.
RECORDS
Copies of this Plan, the Distribution Agreement and reports made pursuant to
this Plan shall be preserved as provided in Rule 12b-1(f) under the Act.
2
<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 Shares ("SC-
ARBITRAGE") (each, a "Series"). This Plan shall take effect upon the
effectiveness of 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.
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 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
<PAGE>
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
state regulatory authorities; and
(9) costs of personnel rendering clerical accounting and other services.
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.
<PAGE>
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
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
June 24, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 011
<NAME> SECURITY CAPITAL US REAL ESTATE INC. -- R CLASS
</SERIES>
<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
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<GROSS-ADVISORY-FEES> 652,224
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 932,145
<AVERAGE-NET-ASSETS> 526,000
<PER-SHARE-NAV-BEGIN> 10.38
<PER-SHARE-NII> 0.46
<PER-SHARE-GAIN-APPREC> 2.11
<PER-SHARE-DIVIDEND> (0.46)
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<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 012
<NAME> SECURITY CAPITAL US REAL ESTATE INC. -- I CLASS
</SERIES>
<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> 9,755,880
<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> 3,978,815
<DISTRIBUTIONS-OF-GAINS> 5,717,116
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 8,776,671
<NUMBER-OF-SHARES-REDEEMED> 309,713
<SHARES-REINVESTED> 240,503
<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
<GROSS-EXPENSE> 932,145
<AVERAGE-NET-ASSETS> 95,349,149
<PER-SHARE-NAV-BEGIN> 10.38
<PER-SHARE-NII> 0.46
<PER-SHARE-GAIN-APPREC> 2.11
<PER-SHARE-DIVIDEND> (0.46)
<PER-SHARE-DISTRIBUTIONS> (0.54)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.95
<EXPENSE-RATIO> 0.94
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
