<PAGE>
- --------------------------------------------------------------------------------
SECURITY CAPITAL
ASIA/PACIFIC
REAL ESTATE SHARES
- --------------------------------------------------------------------------------
SEMIANNUAL REPORT
JUNE 30, 1998
[LOGO]
SECURITY CAPITAL
REAL ESTATE MUTUAL FUNDS INCORPORATED
<PAGE>
SECURITY CAPITAL ASIA/PACIFIC REAL ESTATE SHARES
SCHEDULE OF INVESTMENTS - JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
<S> <C> <C>
SHORT-TERM INVESTMENTS - 99.2%
U.S. GOVERNMENT SECURITIES - 99.2%
$ 1,003,000 United States Treasury Bills, 4.40%, 07/30/98 $ 999,445
-----------
Total Short-term Investments 999,445
(Cost $999,445) -----------
Total Investments - 99.2%
(Cost $999,445) 999,445
Other Assets in Excess of Liabilities - 0.8% 8,135
-----------
NET ASSETS 100.0% $ 1,007,580
-----------
-----------
</TABLE>
2
SEE NOTES TO THE FINANCIAL STATEMENTS.
<PAGE>
SECURITY CAPITAL ASIA/PACIFIC REAL ESTATE SHARES
STATEMENT OF ASSETS AND LIABILITIES - JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at market value (cost $999,445) $ 999,445
Cash 2,708
Deferred organization costs 174,904
Receivable for fund shares sold 5,000
Receivable from investment adviser 918
-----------
Total Assets 1,182,975
-----------
LIABILITIES:
Payable to investment adviser 27
Payable to investment adviser (organization costs) 175,000
Accrued expenses and other liabilities 368
-----------
Total Liabilities 175,395
-----------
NET ASSETS $ 1,007,580
-----------
-----------
NET ASSETS CONSIST OF:
Capital Stock $ 1,007,500
Undistributed net investment income 80
Accumulated undistributed net realized
gain on investments -
Net unrealized appreciation on investments -
-----------
Total Net Assets $ 1,007,580
-----------
-----------
CLASS I:
Net assets $ 1,007,580
Shares outstanding (50,000,000 shares
of $0.01 par value authorized) 100,750
Net asset value and redemption price
per share $ 10.00
-----------
-----------
</TABLE>
3
SEE NOTES TO THE FINANCIAL STATEMENTS.
<PAGE>
SECURITY CAPITAL ASIA/PACIFIC REAL ESTATE SHARES
STATEMENT OF OPERATIONS - JUNE 30, 1998 (UNAUDITED)*
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividend income $ -
Interest income 123
-----------
Total investment income 123
-----------
EXPENSES:
Investment advisory fee 26
Administration fee 1
Sub-Administration fee 183
Shareholder servicing and accounting costs 56
Custody fees 34
Federal and state registration 470
Professional fees 58
Reports to shareholders 30
Amortization of organization costs 96
Distribution Expense 7
-----------
Total expenses before reimbursement 961
Less: Reimbursement from Adviser (918)
-----------
Net expenses 43
-----------
NET INVESTMENT INCOME 80
-----------
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments -
Change in unrealized appreciation on investments -
-----------
Net realized and unrealized gain on investments -
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 80
-----------
-----------
</TABLE>
* Fund commenced operations on June 30, 1998.
4
SEE NOTES TO THE FINANCIAL STATEMENTS.
<PAGE>
SECURITY CAPITAL ASIA/PACIFIC REAL ESTATE SHARES
STATEMENT OF CHANGES IN NET ASSETS - JUNE 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Period
ended
June 30, 1998*
- --------------------------------------------------------------------------------
<S> <C>
OPERATIONS:
Net investment income $ 80
Net realized gain on investments -
Change in unrealized appreciation on investments -
--------------
Net increase in net assets resulting from operations 80
CAPITAL SHARE TRANSACTIONS:
Proceed from shares sold 1,007,500
Shares issued to holders in reinvestment of dividends -
Cost of shares redeemed -
--------------
Net increase in net assets from capital share transactions 1,007,500
TOTAL INCREASE IN NET ASSETS 1,007,580
NET ASSETS:
Beginning of period -
--------------
--------------
End of period (including undistributed net investment
income of $80) $ 1,007,580
--------------
--------------
</TABLE>
* Fund commenced operations on June 30, 1998.
5
SEE NOTES TO THE FINANCIAL STATEMENTS.
<PAGE>
SECURITY CAPITAL ASIA/PACIFIC REAL ESTATE SHARES
FINANCIAL STATEMENT HIGHLIGHTS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, 1998(1)
---------------
Class I
---------------
<S> <C>
Per Share Data:
Net Asset Value, beginning of period $ 10.00
---------------
Income from investment operations
Net investment income -
Net realized and unrealized gain on investments -
---------------
Total from investment operations -
---------------
Less Distributions:
Dividends from net investment income -
Dividends from net realized gains -
---------------
Total distributions -
---------------
Net asset value, end of period $ 10.00
---------------
---------------
Total Return(2) 0.00%
Supplemental data and ratios:
Net assets, end of period $ 1,007,580
Ratio of expenses to average net assets(3)(4) 1.55%
Ratio of net investment income to average net assets(3)(4) 2.91%
Portfolio turnover rate(5) 0.00%
</TABLE>
(1) Fund commenced operations June 30, 1998.
(2) Not annualized.
(3) Annualized.
(4) Without expense reimbursements of $918 for the period ended June 30, 1998,
the ratio of expenses to average net assets would have been 34.90% for
Class I and the ratio of net investment income to average net assets
would have been (30.45)% for Class I.
(5) There were no long-term investment transactions for the period ended
June 30, 1998.
6
SEE NOTES TO THE FINANCIAL STATEMENTS.
<PAGE>
SECURITY CAPITAL ASIA/PACIFIC REAL ESTATE SHARES
NOTES TO THE FINANCIAL STATEMENTS -- JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Security Capital Asia/Pacific Real Estate Shares (the "Fund") is a
non-diversified investment portfolio of Security Capital Real Estate Mutual
Funds Incorporated ("SC-REMFs"), which is an open-end management investment
company under the Investment Company Act of 1940 (the "1940 Act"), and is a
Maryland corporation. SC-REMFs is comprised of four investment portfolios, the
Fund, Security Capital U.S. Real Estate Shares, Security Capital European Real
Estate Shares and Security Capital Real Estate Arbitrage Shares. The Fund
consists of Class I and Class R Shares, which differ in services provided to
shareholders and expenses. Class I Shares commenced operations on June 30, 1998.
Class R Shares were not offered as of June 30, 1998.
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 Director's Valuation Committee. Temporary cash investments (those with
remaining maturities of 60 days or less) are valued at amortized cost, which
approximates market value.
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.
d) Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
e) Other -- Investment and shareholder transactions are recorded on trade
date. The Fund determines the gain or loss realized from the investment
transactions, using the specific 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
7
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
- --------------------------------------------------------------------------------
basis. Generally accepted accounting principles require that permanent
financial reporting and tax differences be reclassified to capital stock.
2. CAPITAL SHARE TRANSACTIONS
Transactions in Class I Shares of the Fund were as follows for the period from
commencement of investment operations through June 30, 1998:
<TABLE>
<CAPTION>
June 30, 1998
- ---------------------------------------------------------------------------------------
Amount Shares
----------------------
<S> <C> <C>
Class I Shares:
Shares Sold $1,007,500 100,750
Shares issued to holders in reinvestment of dividends - -
Shares redeemed - -
---------- -------
Net increase $1,007,500 100,750
---------- -------
---------- -------
</TABLE>
3. INVESTMENT TRANSACTIONS
The Fund did not engage in long-term investment transactions on June 30, 1998.
At June 30, 1998, gross unrealized appreciation and depreciation of investments
for tax purposes were as follows:
<TABLE>
<S> <C>
Appreciation $ -
(Depreciation) -
----------
Net appreciation on investments $ -
----------
----------
</TABLE>
At June 30, 1998 the cost of investments for federal income tax purposes was
$999,445.
4. INVESTMENT ADVISORY AND OTHER AGREEMENTS
SC-REMFs has entered into an Investment Advisory Agreement with Security Capital
Global Capital Management Group Incorporated ("GCMG"). Pursuant to the Advisory
Agreement, GCMG is entitled to receive a management fee, calculated daily and
payable monthly, at the annual rate of 0.95% as applied to the Fund's average
daily net assets. GCMG has entered into an investment sub-advisory agreement
with Security Capital Global Capital Management Group (Asia) Incorporated
("GCMG-Asia") ("Sub-Advisory Agreement") pursuant to which GCMG-Asia provides
various portfolio management and investment advisory services to the Fund. Under
the Sub-Advisory Agreement, GCMG-Asia receives a monthly management fee based on
its costs (including payroll, rent, and other allocable costs and expenses) plus
a mark-up of 10% from GCMG.
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 1.55% of the average net assets of the Class I Shares, computed on a daily
basis, for the period June 30, 1998.
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.
8
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
- --------------------------------------------------------------------------------
State Street Bank and Trust Company ("State Street"), a publicly held bank
holding company, serves as sub-administrator, custodian, and accounting services
agent for the Fund. Sub-administration, custodian, and accounting services will
be charged by State Street according to contractual fee schedules agreed to by
the Fund.
Boston Financial Data Services, Inc. ("BFDS"), a privately held company and an
affiliate of State Street, serves as transfer agent for the Fund. Transfer agent
services will be charged by BFDS according to contractual fee schedules agreed
to by the Fund.
5. CONCENTRATION OF RISKS
The Fund will invest a substantial portion of its assets in publicly-traded real
estate companies organized principally in countries in the Asia/Pacific region.
The Fund may be subject to risks similar to those associated with the direct
ownership of real estate (in addition to securities market 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.
The Fund will invest primarily in foreign securities. Substantial risks are
involved when 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 generally not 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. The
Fund 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.
The securities of some foreign companies and foreign securities markets are less
liquid and at times more volatile than securities of comparable U.S. companies
and U.S. securities markets.
The foregoing discussion is general in nature and is subject to the risk
considerations described in the Fund's Prospectus and Statement of Additional
Information.
6. DISTRIBUTION AND SERVICING PLANS
The Fund has adopted distribution 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
distribution fee equal to, on an annual basis, 0.25% of the value of the 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 the respect of these
services such amounts as it may determine. The Fund has made no payments
pursuant to the Plan for the period ended June 30, 1998.
9
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITY CAPITAL
REAL ESTATE
ARBITRAGE SHARES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SEMIANNUAL REPORT
JUNE 30, 1998
[LOGO]
SECURITY CAPITAL
REAL ESTATE MUTUAL FUNDS INCORPORATED
<PAGE>
SECURITY CAPITAL REAL ESTATE ARBITRAGE SHARES
STATEMENT OF ASSETS AND LIABILITIES - JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
ASSETS:
<S> <C>
Cash $ 2,718
Deferred organization costs 174,904
Receivable for investment securities sold 999,364
Receivable for fund shares sold 5,000
---------------
Total Assets 1,181,986
---------------
LIABILITIES:
Payable to investment adviser 56
Payable to investment adviser (organization costs) 175,000
Accrued expenses and other liabilities 443
---------------
Total Liabilities 175,499
---------------
NET ASSETS $ 1,006,487
---------------
---------------
NET ASSETS CONSIST OF:
Capital Stock $ 1,007,500
Undistributed net investment (loss) (932)
Accumulated undistributed net realized
(loss) on investments (81)
Net unrealized appreciation on investments -
---------------
Total Net Assets $ 1,006,487
---------------
---------------
CLASS I:
Net assets $ 1,006,487
Shares outstanding (50,000,000 shares
of $0.01 par value authorized) 100,750
Net asset value and redemption price
per share $ 9.99
---------------
---------------
</TABLE>
SEE NOTES TO THE FINANCIAL STATEMENTS 2
<PAGE>
SECURITY CAPITAL REAL ESTATE ARBITRAGE SHARES
STATEMENT OF OPERATIONS - JUNE 30, 1998 (UNAUDITED)*
- --------------------------------------------------------------------------------
<TABLE>
INVESTMENT INCOME:
<S> <C>
Dividend income $ -
Interest income 123
---------------
Total investment income 123
---------------
EXPENSES:
Investment advisory fee 55
Administration fee 1
Sub-Administration fee 232
Shareholder servicing and accounting costs 82
Custody fees 34
Federal and state registration 460
Professional fees 58
Reports to shareholders 30
Amortization of organization costs 96
Distribution expense 7
---------------
Total expenses 1,055
---------------
NET INVESTMENT (LOSS) (932)
---------------
---------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized (loss) on investments (81)
Change in unrealized appreciation on investments -
---------------
Net realized and unrealized (loss) on investments (81)
---------------
NET (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ (1,013)
---------------
---------------
</TABLE>
* Fund commenced operations on June 30, 1998.
SEE NOTES TO THE FINANCIAL STATEMENTS 3
<PAGE>
SECURITY CAPITAL REAL ESTATE ARBITRAGE SHARES
STATEMENT OF CHANGES IN NET ASSETS - JUNE 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Period
ended
June 30, 1998*
- --------------------------------------------------------------------------------------
<S> <C>
OPERATIONS:
Net investment (loss) $ (932)
Net realized (loss) on investments (81)
Change in unrealized appreciation on investments -
-------------------
Net (decrease) in net assets resulting from operations (1,013)
CAPITAL SHARE TRANSACTIONS:
Proceed from shares sold 1,007,500
Shares issued to holders in reinvestment of dividends -
Cost of shares redeemed -
-------------------
Net increase in net assets from capital share transactions 1,007,500
TOTAL INCREASE IN NET ASSETS 1,006,487
NET ASSETS:
Beginning of period -
-------------------
End of period (including undistributed net investment
(loss) of $932) $ 1,006,487
-------------------
-------------------
</TABLE>
* Fund commenced operations on June 30, 1998.
SEE NOTES TO THE FINANCIAL STATEMENTS 4
<PAGE>
SECURITY CAPITAL REAL ESTATE ARBITRAGE SHARES
FINANCIAL STATEMENT HIGHLIGHTS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, 1998(1)
-------------------
Class I
-------------------
<S> <C>
Per Share Data:
Net Asset Value, beginning of period $ 10.00
-------------------
Income from investment operations
Net investment (loss) (0.01)
Net realized and unrealized gain on investments -
-------------------
Total from investment operations (0.01)
-------------------
-------------------
Net asset value, end of period $ 9.99
-------------------
-------------------
Total Return(2) (0.10)%
Supplemental data and ratios:
Net assets, end of period $ 1,006,487
Ratio of expenses to average net assets(3)(4) 38.30%
Ratio of net investment income to average net assets(3)(4) (33.89)%
Portfolio turnover rate(5) 0.00%
</TABLE>
(1) Fund commenced operations June 30, 1998.
(2) Not annualized.
(3) Annualized.
(4) Without expense reimbursements of $996 for the period ended June 30, 1998,
the ratio of expenses to average net assets would have been 38.30% for
Class I and the ratio of net investment income to average net assets would
have been (33.89)% for Class I.
(5) There were no long-term investment transactions for the period ended June
30, 1998.
SEE NOTES TO THE FINANCIAL STATEMENTS 5
<PAGE>
SECURITY CAPITAL REAL ESTATE ARBITRAGE SHARES
NOTES TO THE FINANCIAL STATEMENTS -- JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Security Capital Real Estate Arbitrage Shares (the "Fund") is a non-diversified
investment portfolio of Security Capital Real Estate Mutual Funds Incorporated
("SC-REMFs"), which is an open-end management investment company under the
Investment Company Act of 1940 (the "1940 Act"), and is a Maryland corporation.
SC-REMFs is comprised of four investment portfolios, the Fund, Security Capital
U.S. Real Estate Shares, Security Capital European Real Estate Shares and
Security Capital Asia/Pacific Real Estate Shares. The Fund consists of Class I
Shares which commenced operations on June 30, 1998.
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 Director's Valuation Committee. Temporary cash investments (those with
remaining maturities of 60 days or less) are valued at amortized cost, which
approximates market value.
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 annually. 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.
6
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
- --------------------------------------------------------------------------------
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.
2. CAPITAL SHARE TRANSACTIONS
Transactions for Class I Shares of the Fund were as follows for the period from
commencement of investment operations through June 30, 1998:
<TABLE>
<CAPTION>
June 30, 1998
- ---------------------------------------------------------------------------------------------
Amount Shares
----------------------------
<S> <C> <C>
Class I Shares:
Shares Sold $1,007,500 100,750
Shares issued to holders in reinvestment of dividends - -
Shares redeemed - -
----------- --------
Net increase $1,007,500 100,750
----------- --------
----------- --------
</TABLE>
3. INVESTMENT TRANSACTIONS
The Fund did not engage in long-term investment transactions on June 30, 1998.
At June 30, 1998, gross unrealized appreciation and depreciation of investments
for tax purposes were as follows:
<TABLE>
<S> <C>
Appreciation $ -
(Depreciation) -
-----------
Net appreciation on investments $ -
-----------
-----------
</TABLE>
At June 30, 1998 the cost of investments for federal income tax purposes was $0.
7
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
- --------------------------------------------------------------------------------
4. INVESTMENT ADVISORY AND OTHER AGREEMENTS
SC-REMFs has entered into an Investment Advisory Agreement with Security Capital
Global Capital Management Group Incorporated ("GCMG"). Pursuant to the
Investment Advisory Agreement, GCMG is entitled to receive an investment
advisory fee of 2.00% during the first three full months of the Fund's
operations, calculated daily and payable monthly, at the annual rate of 2.00% as
applied to the Fund's average daily net assets.
Thereafter, the Fund will pay GCMG an annual investment advisory fee which
increases or decreases from a "fulcrum fee" or base fee of 2.00% of the Fund's
average daily net assets ("Base Fee") based on the total return investment
performance of the Fund for the prior twelve-month period. Until the Fund
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 the Fund's average net assets. The advisory fee is structured
so that it will be 2.00% of the Fund's average net assets if the Fund'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 the Fund'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 the examples of
the advisory fees which would be applicable at the stated levels of the Fund's
performance relative to the Index Return for particular twelve-month period.
<TABLE>
<CAPTION>
<S> <C>
ADVISORY FEE
FUND PERFORMANCE (AS % OF AVERAGE
(NET OF FEES AND EXPENSES) DAILY NET ASSETS)*
-------------------------- ------------------
Index Return + 15% 3.50%
Index Return + 10 3.00
Index Return + 5 2.50
Index Return + 3 2.30
Index Return + 1 2.10
Index Return 2.00
Index Return - 1 1.90
Index Return - 3 1.70
Index Return - 5 1.50
Index Return - 10 1.00
Index Return - 15 0.50
</TABLE>
* The advisory fee increases or decreases from the Base Fee of 2.00%
GCMG will not waive or reimburse the Fund for management fees and other
expenses.
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.
State Street Bank and Trust Company ("State Street"), a publicly held bank
holding company, serves as sub-administrator, custodian, and accounting services
agent for the Fund. Sub-administration, custodian, and accounting services will
be charged by State Street according to contractual fee schedules agreed to by
the Fund.
8
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
- --------------------------------------------------------------------------------
Boston Financial Data Services, Inc. ("BFDS"), a privately held company and an
affiliate of State Street, serves as transfer agent for the Fund. Transfer agent
services will be charged by BFDS according to contractual fee schedules agreed
to by the Fund.
5. CONCENTRATION OF RISKS
The Fund intends to engage in various arbitrage transactions, primarily through
investments in real estate securities in the United States.
The Fund will 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 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.
The Fund may also engage in short sales. A short sale is a transaction in which
the Fund sells securities it does not own, but has borrowed, in anticipation of
a decline in the market value of the securities. An increase in the value of
securities sold short by the Fund will result in a loss to the Fund, and there
can be no assurance that the Fund 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.
The Fund may also borrow money to invest in additional portfolio securities in
connection with liquidity arbitrage transactions. The interest the Fund must pay
on borrowed money will reduce the amount of any potential gains or increase
losses. Successful use of leverage depends on GCMG's ability to predict market
movements correctly. The Fund may at times borrow money by means of reverse
repurchase agreements, which will increase the Fund'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 Fund's repurchase obligation, and the Fund's use of proceeds under
the agreement may effectively be restricted pending such decision.
The foregoing discussion is general in nature and is subject to the risk
considerations described in the Fund's Prospectus and Statement of Additional
Information.
6. DISTRIBUTION AND SERVICING PLANS
The Fund has adopted a distribution plan with respect to the Class I Shares
pursuant to Rule 12b-1 under the 1940 Act ("Plan"). Under the Plan, the Fund
pays to Security Capital Markets Group Incorporated in its capacity as principal
distributor of the Fund's shares (the "Distributor"), a monthly distribution fee
equal to, on an annual basis, 0.25% of the value of the Fund's 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 the Fund's shares and for
providing certain services to the Fund's shareholders. The Distributor may pay
third parties in the respect of these services such amounts as it may determine.
The Fund has made no payments pursuant to the Plan for the period ended June 30,
1998.
9
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITY CAPITAL
EUROPEAN
REAL ESTATE SHARES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SEMIANNUAL REPORT
JUNE 30, 1998
[LOGO]-Registered Trademark-
SECURITY CAPITAL
REAL ESTATE MUTUAL FUNDS INCORPORATED
<PAGE>
SECURITY CAPITAL EUROPEAN REAL ESTATE SHARES
STATEMENT OF ASSETS AND LIABILITIES - JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Cash $ 2,708
Deferred organization costs 174,904
Receivable for investment securities sold 999,364
Receivable for fund shares sold 5,000
Receivable from investment adviser 973
-----------
Total Assets 1,182,949
-----------
LIABILITIES:
Payable to investment adviser 24
Payable to investment adviser (organization costs) 175,000
Accrued expenses and other liabilities 423
-----------
Total Liabilities 175,447
-----------
NET ASSETS $ 1,007,502
-----------
-----------
NET ASSETS CONSIST OF:
Capital Stock $ 1,007,500
Undistributed net investment income 83
Accumulated undistributed net realized
(loss) on investments (81)
Net unrealized appreciation on investments -
-----------
Total Net Assets $ 1,007,502
-----------
-----------
CLASS I:
Net assets $ 1,007,502
Shares outstanding (50,000,000 shares
of $0.01 par value authorized) 100,750
Net asset value and redemption price
per share $ 10.00
-----------
-----------
</TABLE>
SEE NOTES TO THE FINANCIAL STATEMENTS. 2
<PAGE>
SECURITY CAPITAL EUROPEAN REAL ESTATE SHARES
STATEMENT OF OPERATIONS - JUNE 30, 1998 (UNAUDITED)*
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividend income $ -
Interest income 123
-------
Total investment income 123
-------
EXPENSES:
Investment advisory fee 23
Administration fee 1
Sub-Administration fee 212
Shareholder servicing and accounting costs 82
Custody fees 34
Federal and state registration 470
Professional fees 58
Reports to shareholders 30
Amortization of organization costs 96
Distribution Expense 7
-------
Total expenses before reimbursement 1,013
Less: Reimbursement from Adviser (973)
-------
Net expenses 40
-------
NET INVESTMENT INCOME 83
-------
-------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized (loss) on investments (81)
Change in unrealized appreciation on investments -
-------
Net realized and unrealized (loss) on investments (81)
-------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 2
-------
-------
</TABLE>
* Fund commenced operations on June 30, 1998.
SEE NOTES TO THE FINANCIAL STATEMENTS. 3
<PAGE>
SECURITY CAPITAL EUROPEAN REAL ESTATE SHARES
STATEMENT OF CHANGES IN NET ASSETS - JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period
ended
June 30, 1998*
- --------------------------------------------------------------------------------
<S> <C>
OPERATIONS:
Net investment income $ 83
Net realized (loss) on investments (81)
Change in unrealized appreciation on investments -
------------
Net increase in net assets resulting from operations 2
CAPITAL SHARE TRANSACTIONS:
Proceed from shares sold 1,007,500
Shares issued to holders in reinvestment of dividends -
Cost of shares redeemed -
------------
Net increase in net assets from capital share transactions
1,007,500
TOTAL INCREASE IN NET ASSETS 1,007,502
NET ASSETS:
Beginning of period -
------------
End of period (including undistributed net investment
income of $83) $ 1,007,502
------------
------------
</TABLE>
* Fund commenced operations on June 30, 1998.
SEE NOTES TO THE FINANCIAL STATEMENTS. 4
<PAGE>
SECURITY CAPITAL EUROPEAN REAL ESTATE SHARES
FINANCIAL STATEMENT HIGHLIGHTS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, 1998(1)
----------------
Class I
----------------
<S> <C>
Per Share Data:
Net Asset Value, beginning of period $ 10.00
-----------
-----------
Income from investment operations
Net investment income -
Net realized and unrealized gain on investments -
-----------
-----------
Total from investment operations -
-----------
Less Distributions:
Dividends from net investment income -
Dividends from net realized gains -
-----------
-----------
Total distributions -
-----------
Net asset value, end of period $ 10.00
-----------
-----------
Total Return(2) 0.00%
Supplemental data and ratios:
Net assets, end of period $ 1,007,502
Ratio of expenses to average net assets(3)(4) 1.45%
Ratio of net investment income to average net assets(3)(4) 3.00%
Portfolio turnover rate(5) 0.00%
</TABLE>
(1) Fund commenced operations June 30, 1998.
(2) Not annualized.
(3) Annualized.
(4) Without expense reimbursements of $973 for the period ended June 30, 1998,
the ratio of expenses to average net assets would have been 36.79% for
Class I and the ratio of net investment income to average net assets would
have been (32.34)% for Class I.
(5) There were no long-term investment transactions for the period ended
June 30, 1998.
SEE NOTES TO THE FINANCIAL STATEMENTS. 5
<PAGE>
SECURITY CAPITAL EUROPEAN REAL ESTATE SHARES
NOTES TO THE FINANCIAL STATEMENTS -- JUNE 30, 1998 (UNAUDITED)
- -------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Security Capital European Real Estate Shares (the "Fund") is a non-diversified
investment portfolio of Security Capital Real Estate Mutual Funds Incorporated
("SC-REMFs"), which is an open-end management investment company under the
Investment Company Act of 1940 (the " 1940 Act"), and is a Maryland corporation.
SC-REMFs is comprised of four investment portfolios, the Fund, Security Capital
U.S. Real Estate Shares, Security Capital Asia/Pacific Real Estate Shares and
Security Capital Real Estate Arbitrage Shares. The Fund consists of Class I and
Class R Shares, which differ in services provided to shareholders and expenses.
Class I Shares commenced operations on June 30, 1998. Class R Shares were not
offered as of June 30, 1998.
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 Director's Valuation Committee. Temporary cash investments (those with
remaining maturities of 60 days or less) are valued at amortized cost, which
approximates market value.
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.
d) Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
e) Other -- Investment and shareholder transactions are recorded on trade
date. The Fund determines the gain or loss realized from the investment
transactions, using the specific 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
6
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
- --------------------------------------------------------------------------------
basis. Generally accepted accounting principles require that permanent
financial reporting and tax differences be reclassified to capital stock.
2. CAPITAL SHARE TRANSACTIONS
Transactions in Class I Shares of the Fund were as follows for the period from
commencement of investment operations through June 30, 1998.
<TABLE>
<CAPTION>
June 30, 1998
- -------------------------------------------------------------------------------------------
Amount Shares
--------------------------
<S> <C> <C>
Class I Shares:
Shares Sold $1,007,500 100,750
Shares issued to holders in reinvestment of dividends - -
Shares redeemed - -
---------- --------
Net increase $1,007,500 100,750
---------- --------
---------- --------
</TABLE>
3. INVESTMENT TRANSACTIONS
The Fund did not engage in long-term investment transactions on June 30, 1998.
At June 30, 1998, gross unrealized appreciation and depreciation of investments
for tax purposes were as follows:
<TABLE>
<S> <C>
Appreciation $ -
(Depreciation) -
---------
Net appreciation on investments $ -
---------
---------
</TABLE>
At June 30, 1998 the cost of investments for federal income tax purposes was $0.
4. INVESTMENT ADVISORY AND OTHER AGREEMENTS
SC-REMFs has entered into an Investment Advisory Agreement with Security Capital
Global Capital Management Group Incorporated ("GCMG"). Pursuant to the Advisory
Agreement, GCMG is entitled to receive a management fee, calculated daily and
payable monthly, at the annual rate of 0.85% as applied to the Fund's average
daily net assets. GCMG has entered into an investment sub-advisory agreement
with Security Capital Global Capital Management Group (Europe) S.A.
("GCMG-Europe") ("Sub-Advisory Agreement") pursuant to which GCMG-Europe
provides various portfolio management and investment advisory services to the
Fund. Under the Sub-Advisory Agreement, GCMG-Europe receives a monthly
management fee from GCMG equal to the annual rate of 0.08% of the Fund's average
daily net asset value.
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 1.45% of the average net assets of the Class I Shares, computed on a daily
basis, for the period June 30, 1998.
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.
7
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED)
- --------------------------------------------------------------------------------
State Street Bank and Trust Company ("State Street"), a publicly held bank
holding company, serves as sub-administrator, custodian, and accounting services
agent for the Fund. Sub-administration, custodian, and accounting services will
be charged by State Street according to contractual fee schedules agreed to by
the Fund.
Boston Financial Data Services, Inc. ("BFDS"), a privately held company and an
affiliate of State Street, serves as transfer agent for the Fund. Transfer agent
services will be charged by BFDS according to contractual fee schedules agreed
to by the Fund.
5. CONCENTRATION OF RISKS
The Fund will invest a substantial portion of its assets in publicly-traded real
estate companies organized principally in European nations. The Fund may be
subject to risks similar to those associated with the direct ownership of real
estate (in addition to securities market 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.
The Fund will invest primarily in foreign securities. Substantial risks are
involved when 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 generally not 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. The
Fund 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.
The securities of some foreign companies and foreign securities markets are less
liquid and at times more volatile than securities of comparable U.S. companies
and U.S. securities markets.
The foregoing discussion is general in nature and is subject to the risk
considerations described in the Fund's Prospectus and Statement of Additional
Information.
6. DISTRIBUTION AND SERVICING PLANS
The Fund has adopted distribution 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
distribution fee equal to, on an annual basis, 0.25% of the value of the 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 the respect of these
services such amounts as it may determine. The Fund has made no payments
pursuant to the Plan for the period ended June 30, 1998.
8
