<PAGE>
SECURITY CAPITAL
[ART WORK APPEARS HERE]
U.S. REAL ESTATE SHARES
1999 SEMIANNUAL REPORT
[LOGO OF SECURITY CAPITAL APPEARS HERE]
<PAGE>
SECURITY CAPITAL
U.S. REAL ESTATE SHARES
- --------------------------------------------------------------------------------
Security Capital U.S. Real Estate Shares is a highly focused, no-load real
estate mutual fund that seeks to provide shareholders with above average
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 returns, as compared with other U.S.
real estate mutual funds that invest primarily in real estate securities in the
United States, by integrating in-depth proprietary research with sophisticated
capital markets research and modeling techniques.
<PAGE>
TO OUR SHAREHOLDERS
- --------------------------------------------------------------------------------
U.S real estate securities staged a solid turnaround in the first half of 1999
ending a nearly 18-month "bear" market for these stocks. After a lackluster
start to the year, stock price performance improved in April as investors
partially closed the gap between real estate stock prices and the underlying
real estate asset values in an industry characterized by strong operating and
investment fundamentals. Real estate securities, as measured by the Wilshire
Real Estate Securities Index, provided investors with a 6.8% total rate of
return for the period January 1, 1999 through June 30, 1999. For the trailing
12 months ending June 30, 1999 this index returned -6.9%.
The total rate of return of Security Capital U.S. Real Estate Shares for the
first half of 1999 was 10.4%, strong both in absolute terms as well as in
comparison to the 6.8% return of the wilshire Real Estate Securities Index
benchmark. The Fund's average annual total rate of return since December 20,
1996 (inception) through June 30, 1999 stands at 9.7% compared to 3.9% for the
benchmark. This performance represents first quartile performance among real
estate securities funds. We attribute this outperformance to our disciplined and
highly focused investment process that examines a real estate company's value
utilizing multiple valuation methodologies. At present, we believe our net asset
value approach best captures the current real estate securities pricing
opportunities. Our early tilt in the first half toward quality companies selling
at large discounts to net asset values was rewarded by strong price increases as
investors refocused on underlying asset values.
Although there appeared to be no single catalyst for the first half turnaround
in real securities, a unifying theme implicit in many of the factors listed
below was an overall sentiment shift by investors toward "value" and away from
"growth." Specifically:
. Private investment capital evidenced strong interest through a number
of actual and rumored transactions including the announced management-
lead LBO of Berkshire Realty (BRI) and Sunstone Hotel Investors (SSI),
and a tender for Burnham Pacific Properties (BPP) by a private
retailing company.
1
<PAGE>
- --------------------------------------------------------------------------------
. The broader equity market witnessed a general rotation by equity
managers out of large cap securities and into under-performing
mid- and small-cap equities including REITs.
. The rebound in energy prices and early signs of a recovery in
Asia/Pacific economies signaled an end to broader concerns regarding
deflationary pressures viewed as a threat to hard asset valuations
including real estate.
. Warren Buffett announced significant investment positions in two
public real estate companies: Tanger Factory Outlet Centers (SKT) and
Town & Country Trust (TCT), thereby rekindling interest amongst retail
investors.
Financial and operating performance indicators for real estate companies
remained strong during the first half as continued strength in the U.S.
economy provided for the absorption of new real estate supply at stable or
increasing rents. Earnings growth for the first half for companies in the
Wilshire Real Estate Securities Index reflected attractive funds from
operations (FFO), a supplemental measure of real estate investment trust
performance, averaging 11.1 percent with "same store" net operating income
growing at 4.9 percent. At the top of the performance list were the office
companies, which had FFO growth and same store NOI growth averaging 15.5
percent and 6.1 percent, respectively. Portfolio occupancies were generally
stable or improving during the first half, although increased levels of new
development, particularly in Southern and Southeastern markets, are likely
to have an impact in the next 12 months.
Average debt levels of publicly traded real estate companies continued to
increase moderately during the first half of 1999, as real estate companies
took advantage of low cost long-term debt in an environment of expensive
equity capital. On average, debt levels stand at 47 percent of market
capitalization, a level we consider prudent. Real estate companies are also
actively pursuing acquisition "joint venture" programs driven by these same
capital pricing pressures, taking advantage of a continued appetite for
direct real estate investments by institutional investors. If properly
structured, we expect this marriage of operating skills and long-term
capital to provide select companies with an important and profitable source
of growth.
2
<PAGE>
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Our outlook for the performance of real estate securities is positive,
reflecting the general health of the underlying property markets and the
attractive valuation of real estate securities relative to other equities of
fixed income alternatives. We believe the following trends are important to
achieving favorable performance and valuations:
. Increasing evidence of capital markets-imposed discipline on the
development pipeline for speculative real estate supply.
. Accelerating demand for real estate investments by U.S. pensions and
foreign institutions is leading to stable or increasing asset values,
and the opportunity for many public real estate companies to
selectively cull their portfolios.
. The strong operating capabilities and scale of many public real estate
companies are being leveraged through acquisition joint ventures with
private capital providing attractive opportunities for earnings growth
without returning to the public equity markets.
We remain focused on those real estate companies where our research identifies
high quality assets, sound business strategies, and attractive total rate of
return potential. We believe that the disparity between a healthy real estate
industry and the low valuations of real estate securities provides an attractive
opportunity for long-term investors.
We appreciate your continued support.
Sincerely,
/s/ Anthony R. Manno Jr. /s/ Kenneth D. Statz
Anthony R. Manno Jr. Kenneth D. Statz
President Managing Director
3
<PAGE>
FUND PERFORMANCE
- -------------------------------------------------------------------------------
The Fund's performance compared to frequently used performance benchmarks is
shown in the table below. The net asset value per share (unaudited) as of June
30, 1999 was $10.59. Total dividends of $0.24 and $0.23 per share were paid to
shareholders of record of Class I (Institutional) Shares and Class R (Retail)
Shares, respectively, for the period ended June 30, 1999.
Security Capital U.S. Real Estate Shares
Comparative Returns versus Industry Benchmarks
<TABLE>
<CAPTION>
Average Annual Total Returns
-------------------------------------------------------------------------
One-Year Average Annual Since Inception
Period Ended June 30, 1999 YTD 6/30/99 Since 5/30/98 12/20/96-6/30/99
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SC-US Real Estate Shares 10.40% 2.71% 9.66%
Class R (Retail) Shares
- ------------------------------------------------------------------------------------------------------------
SC-US Real Estate Shares 10.48% 2.82% 9.71%
Class I (Institutional) Shares
- ------------------------------------------------------------------------------------------------------------
NAREIT Equity Index/1/ 4.78% (8.97)% 3.17%
- ------------------------------------------------------------------------------------------------------------
Wilshire Real Estate 6.78% (6.88)% 3.89%
Securities Index/2/
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Past Performance is not indicative of future results. The performance of the
above-referenced indices does not include any fees or expenses, and the
underlying portfolio securities of SC-US Real Estate Shares may differ from
those of the indices. (1) NAREIT Equity Index is an unmanaged index of publicly
traded U.S. tax-qualified REITs which have 75% or more of their gross invested
book assets invested in the equity ownership of real estate; and (2) Wilshire
Real Estate Securities Index is an unmanaged, market-capitalization weighted
index comprising publicly traded REITs and real estate operating companies
except for special and health care REITs.
Security Capital U.S. Real Estate Shares - Class R (Retail) Shares
Growth of a $10,000 Investment
Period from December 20, 1996 to June 30, 1999
[GRAPH APPEARS HERE]
CUMULATIVE VALUE OF $10,000 INVESTED
------------------------------------
<TABLE>
<CAPTION>
Wilshire RE NAREIT
SC-US Securities Equity
Class R Index Index
--------------------------------------------------------
<S> <C> <C> <C>
20-Dec-96 $10,000 $10,000 $10,000
December $10,377 $10,425 $10,410
January 1997 $10,459 $10,574 $10,526
February $10,538 $10,580 $10,505
March $10,509 $10,616 $10,483
April $10,079 $10,273 $10,196
May $10,329 $10,580 $10,494
June $10,997 $11,104 $11,003
July $11,458 $11,470 $11,343
August $11,469 $11,385 $11,316
September $12,823 $12,507 $12,304
October $12,400 $11,976 $11,972
November $12,638 $12,217 $12,231
December $12,991 $12,489 $12,519
January 1998 $12,891 $12,313 $12,453
February $12,601 $12,155 $12,241
March $13,047 $12,395 $12,461
April $12,541 $12,004 $12,054
May $12,395 $11,889 $11,970
June $12,294 $11,826 $11,889
July $11,454 $11,003 $11,117
August $10,343 $ 9,860 $10,068
September $11,046 $10,412 $10,638
October $11,000 $10,269 $10,441
November $11,344 $10,462 $10,595
December $11,437 $10,313 $10,328
January 1999 $11,355 $10,089 $10,112
February $11,378 $10,009 $ 9,875
March $11,106 $ 9,955 $ 9,830
April $12,557 $11,016 $10,763
May $12,757 $11,203 $11,000
June $12,627 $11,012 $10,822
</TABLE>
---------------------------------------------------------------------------
--- SC-US Class R --- NAREIT Index --- Wilshire Real Estate Securities
Index
---------------------------------------------------------------------------
Past Performance is not indicative of future results. The performance of SC-US
Real Estate Shares Class I (Institutional) Shares is greater than that of the
SC-US Real Estate Shares Class R (Retail) Shares for the time period indicated
above based on the difference in expenses of each class. Prior to utilizing the
Wilshire Real Estate Securities Index (WARESI), the Fund used the Wilshire REIT
Index and the Bloomberg REIT Index as benchmarks but changed because WARESI most
closely tracks the Fund's investment universe.
See notes to the financial statements.
4
<PAGE>
SECURITY CAPITAL U.S. REAL ESTATE SHARES
SCHEDULE OF INVESTMENTS-JUNE 30, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Market Value
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS - 95.5%
DIVERSIFIED - 25.2%
201,200 Prentiss Properties Trust $ 4,728,200
194,000 TrizecHahn Corporation 3,952,750
114,300 Liberty Property Trust 2,843,212
71,600 Spieker Properties, Inc. 2,783,450
53,000 Vornado Realty Trust 1,871,563
------------
16,179,175
OFFICE - 24.4%
179,800 Arden Realty, Inc. 4,427,575
170,175 Equity Office Properties Trust 4,360,734
86,500 Boston Properties, Inc. 3,103,187
187,000 Cornerstone Properties, Inc. 2,968,625
30,000 Highwoods Properties, Inc. 823,125
------------
15,683,246
MULTIFAMILY - 21.7%
134,073 Avalon Bay Communities, Inc. 4,960,701
90,100 Essex Property Trust, Inc. 3,187,288
52,500 Apartment Investment & Management Company 2,244,375
64,900 Charles E. Smith Residential Realty, Inc. 2,202,544
61,800 Amli Residential Properties Trust 1,382,775
------------
13,977,683
HOTELS - 8.1%
126,000 Starwood Hotels & Resorts Worldwide, Inc. 3,850,875
133,000 Innkeepers USA Trust 1,330,000
------------
5,180,875
REGIONAL MALLS - 6.8%
127,500 Urban Shopping Centers, Inc. 4,016,250
13,250 The Rouse Company 336,219
------------
4,352,469
STORAGE - 4.7%
107,000 Public Storage, Inc. 2,996,000
INDUSTRIAL - 4.6%
138,100 Cabot Industrial Trust 2,934,625
Total common stocks ------------
(cost $56,941,003) 61,304,073
</TABLE>
See notes to the financial statements.
5
<PAGE>
SCHEDULE OF INVESTMENTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
- ------------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENTS - 5.8%
$2,001,000 United States Treasury Bill, 2.800%, 07/08/1999 $ 1,999,911
1,758,676 Agreement with State Street Bank and Trust Company,
3.250%, dated 06/30/1999, to be repurchased at
$1,758,835, on 07/01/1999, collateralized by
$1,735,000 U.S. Treasury Bond, 6.375% maturing
on 08/15/2027 (market value $1,796,037) 1,758,676
-----------
Total Short-term investments
(cost $3,758,587) 3,758,587
-----------
Total investments - 101.3%
(cost $60,699,590) 65,062,660
Other liabilities in excess of assets - (1.3%) (811,314)
-----------
Net assets - 100.0% $64,251,346
-----------
</TABLE>
See notes to the financial statements.
6
<PAGE>
SECURITY CAPITAL U.S. REAL ESTATE SHARES
STATEMENT OF ASSETS AND LIABILITIES-JUNE 30, 1999
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at market value
(cost $60,699,590) $65,062,660
Dividends receivable 537,449
Deferred organization costs 60,600
Receivable from investment adviser 17,773
Other assets 17,223
-----------
Total assets 65,695,705
-----------
LIABILITIES:
Payable for investment securities purchased 1,145,944
Payable for fund shares redeemed 191,811
Payable to distributor 28,507
Accrued expenses and other liabilities 78,097
-----------
Total liabilities 1,444,359
-----------
Net assets $64,251,346
===========
NET ASSETS CONSIST OF:
Capital Stock $65,116,114
Undistributed net investment income 146
Accumulated undistributed net realized loss on investments (5,227,984)
Net unrealized appreciation on investments 4,363,070
-----------
Total net assets $64,251,346
-----------
CLASS I:
Net assets $61,517,006
Shares outstanding (50,000,000 shares of $0.01 par value authorized) 5,810,317
Net asset value and redemption price per share $ 10.59
-----------
CLASS R:
Net assets $ 2,734,340
Shares outstanding (50,000,000 shares of $0.01 par value authorized) 258,259
Net asset value and redemption price per share $ 10.59
-----------
</TABLE>
See notes to the financial statements.
7
<PAGE>
SECURITY CAPITAL U.S. REAL ESTATE SHARES
STATEMENT OF OPERATIONS-PERIOD ENDED JUNE 30, 1999
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividend income $ 1,959,174
Interest income 40,926
-----------
Total investment income 2,000,100
-----------
EXPENSES:
Investment advisory fee 213,430
Distribution expense - Class I 84,560
Distribution expense - Class R 4,369
Administration fee 7,115
Sub-administration fee 48,120
Transfer agent, custody and accounting costs 65,224
Federal and state registration 43,581
Professional fees 49,484
Shareholders reports and notices 21,103
Directors' fees and expenses 11,331
Amortization of organization expenses 11,707
Other 1,224
-----------
Total expenses before reimbursement 561,248
-----------
Less: Reimbursement from adviser (131,827)
-----------
Net expenses 429,421
-----------
Net investment income 1,570,679
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 2,240,619
Change in unrealized appreciation on investments 3,464,282
-----------
Net realized and unrealized gain on investments 5,704,901
-----------
Net increase in net assets resulting from operations $ 7,275,580
-----------
</TABLE>
See notes to the financial statements.
8
<PAGE>
SECURITY CAPITAL U.S. REAL ESTATE SHARES
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six months ended
June 30, 1999 Year ended
(Unaudited) Dec. 31, 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Net investment income $ 1,570,679 $ 5,067,089
Net realized gain (loss) on investments 2,240,619 (6,891,855)
Change in unrealized appreciation (depreciation)
on investments 3,464,282 (12,286,350)
--------------------------------
Net increase (decrease) in net assets resulting
from operations 7,275,580 (14,111,116)
CAPITAL SHARE TRANSACTIONS:
Proceed from shares sold 9,454,042 9,750,054
Shares issued to holders in reinvestment
of dividends 489,842 720,546
Cost of shares redeemed (46,207,905) (11,297,204)
--------------------------------
Net decrease in net assets from
capital share transactions (36,264,021) (826,604)
DISTRIBUTIONS TO
CLASS I SHAREHOLDERS:
From net investment income (1,512,162) (4,936,792)
From net realized gains -- (1,997,333)
Return of capital -- (389,531)
--------------------------------
Total distributions Class I (1,512,162) (7,323,656)
DISTRIBUTIONS TO
CLASS R SHAREHOLDERS:
From net investment income (58,371) (137,519)
From net realized gains -- (12,118)
Return of capital -- (10,851)
--------------------------------
Total distributions Class R (58,371) (160,488)
Total decrease in net assets (30,558,974) (22,421,864)
NET ASSETS:
Beginning of period 94,810,320 117,232,184
---------------------------------
End of period $ 64,251,346 $ 94,810,320
=================================
</TABLE>
/1/Includes undistributed net investment income of $146 for the period ended
June 30, 1999.
See notes to the financial statements.
9
<PAGE>
SECURITY CAPITAL U.S. REAL ESTATE SHARES
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six months ended Dec. 20, 1996/1/
June 30, 1999 Year ended Year ended through
(Unaudited) Dec. 31, 1998 Dec. 31, 1997/2/ Dec. 31, 1996
-----------------------------------------------------------------------------------
Class I Class R Class I Class R Class I Class R
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
For a share outstanding for each period:
Net asset value, beginning of period $ 9.82 $ 9.82 $ 11.95 $ 11.95 $ 10.38 $ 10.38 $ 10.00
--------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.22/3/ 0.21/3/ 0.42 0.38 0.46/3/ 0.46/3/ 0.02
Net realized and unrealized gain (loss)
on investments 0.79 0.79 (1.80) (1.76) 2.11 2.11 0.36
--------------------------------------------------------------------------------
Total from investment operations 1.01 1.00 (1.38) (1.38) 2.57 2.57 0.38
--------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.24) (0.23) (0.43) (0.43) (0.46) (0.46) --
Dividends from net realized gains -- -- (0.29) (0.29) (0.54) (0.54) --
Return of capital -- -- (0.03) (0.03) -- -- --
--------------------------------------------------------------------------------
Total distributions (0.24) (0.23) (0.75) (0.75) (1.00) (1.00) --
--------------------------------------------------------------------------------
Net asset value, end of period $ 10.59 $10.59 9.82 $ 9.82 $ 11.95 $11.95 $ 10.38
--------------------------------------------------------------------------------
Total return/4/ 10.48% 10.40% (11.94)% (11.97)% 25.20% 25.19% 3.77%
Supplemental data and ratios:
Net assets, end of period ($000) $ 61,517 $2,734 $90,540 $ 4,271 $116,560 $ 672 $10,247
Ratio of expenses to
average net assets/5.6/ 1.20% 1.35% 1.00% 1.15% 0.94% 0.95% --%
Ratio of net investment income to
average net assets/5.6/ 4.42% 4.27% 4.75% 4.60% 4.08% 4.07% 19,71%
Portfolio turnover rate/7/ 26.41% 26.41% 109.49% 109.49% 104.17% 104.17% --%
</TABLE>
/1/ Inception date.
/2/ On December 16, 1997, the Fund's existing shareholders were split into Class
I and Class R 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 six months ended June 30, 1999 and the period
December 20, 1996 through December 31, 1996.
/5/ Annualized.
/6/ Without voluntary expense reimbursements of $127,809 for Class I and $4,018
for Class R for the six months ended June 30, 1999, the ratio of expenses to
average net assets would have been 1.58% for both Classes, and the ratio of
net investment income to average net assets would have been 4.04% for both
Classes. Without voluntary expense reimbursements of $301,721 for Class I
and $3,478 for Class R for the year ended December 31, 1998, the ratio of
expenses to average net assets would have been 1.29% for both Classes, and
the ratio of net investment income to average net assets would have been
4.46% for both Classes. Without voluntary expense reimbursements of $30,276
and $167 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 4.06% and 4.04% for Class I and Class R, respectively.
/7/ Portfolio turnover rate is calculated on the basis of the Fund as a whole
without distinguishing between the classes of shares issued.
See notes to the financial statements.
10
<PAGE>
SECURITY CAPITAL U.S. REAL ESTATE SHARES
NOTES TO THE FINANCIAL STATEMENTS - JUNE 30, 1999
(UNAUDITED)
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Security Capital U.S. 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 two investment portfolios,
the Fund and Security Capital European Real Estate Shares. The Fund
consists of Class I and Class R shares, which differ in services provided
to shareholders and expenses. The Fund commenced operations on December 20,
1996.
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 Valuation Committee. Temporary cash
investments (those with remaining maturities of 60 days or less) are valued
at amortized cost, 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
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. As of December 31, 1998, the Fund has a realized capital loss
carry forward, for federal income tax purposes, of $4,307,707 (expires
December 31, 2006), available to be used to offset future realized capital
gains. As of December 31, 1998, the Fund has elected for Federal income tax
purposes to defer a $2,495,483 current year post October capital loss as
though the loss was incurred on the first day of the next fiscal year. For
the period ended December 31, 1998, ordinary distributions paid to
shareholders in the amount of $141,581 were reallocated to capital gain
distributions.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
(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 decide 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. Generally accepted accounting
principles require that permanent financial reporting and tax differences be
reclassified to capital stock.
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. Distributions received from the REITs that are determined to be
capital gains or losses are recorded by the Fund as a realized gain or loss on
the investment. The character of such distributions, for tax and financial
reporting purposes, is determined by the Fund based on estimates and information
received by the Fund from the REITs.
(d) Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
(e) Other - Investment and shareholder transactions are recorded on trade date.
The Fund determines the gain or loss realized from 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 quality 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.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
2. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the Fund were as follows:
<TABLE>
<CAPTION>
Six Months Ended 06/30/99:
-------------------------------------------------------------------------------------------
Amount Shares
------------------------------
<S> <C> <C>
Class I Shares:
Shares sold $ 7,787,706 762,188
Shares issued to holders in reinvestment of dividends 436,211 43,791
Shares redeemed (42,761,428) (4,216,396)
-----------------------------
Net decrease $ (34,537,511) (3,410,417)
-----------------------------
Class R Shares:
Shares sold $ 1,666,336 166,072
Shares issued to holders in reinvestment of dividends 53,631 5,419
Shares redeemed (3,446,477) (348,061)
-----------------------------
Net decrease $ (1,726,510) (176,570)
-----------------------------
Year Ended 12/31/98:
-------------------------------------------------------------------------------------------
Amount Shares
-----------------------------
Class I Shares:
Shares sold $ 5,322,503 509,433
Shares issued to holders in reinvestment of dividends 563,921 56,034
Shares redeemed (10,809,047) (1,100,613)
-----------------------------
Net decrease $ (4,922,623) (535,146)
-----------------------------
Class R Shares:
Shares sold $ 4,427,551 411,251
Shares issued to holders in reinvestment of dividends 156,625 15,304
Shares redeemed (488,157) (47,963)
-----------------------------
Net increase $ 4,096,019 378,592
-----------------------------
</TABLE>
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
3. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of long term investments by the Fund for
the six months ended June 30, 1999, were $18,320,740 and $53,837,593,
respectively.
As of June 30, 1999, gross unrealized appreciation and depreciation of
investments for tax purposes were as follows:
Appreciation $5,587,805
(Depreciation) (1,224,735)
----------
Net appreciation on investments $4,363,070
----------
As of June 30, 1999, the cost of investments for federal income tax
purposes was $60,699,590.
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 0.60% as
applied to the Fund's average daily net assets.
GCMG voluntarily agreed 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 extra-ordinary items) exceed
the annual rate of 1.20% and 1.35% of the net assets of the Class I and
Class R shares, respectively, computed on a daily basis, for the six months
ended June 30, 1999.
GCMG also serves as the Fund's administrator. GCMG charges 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.
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.
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
5. DISTRIBUTION AND SERVICING PLANS
The Fund has adopted plans with respect to Class I and Class R shares
pursuant to Rule 12b-1 under the 1940 Act ("Plans"). Under the Distribution
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 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. For the six months ended
June 30, 1999, the Fund has made payments totaling $339,846 as required by
the adopted Plans.
6. FORMATION AND RE-ORGANIZATION
The Fund, formerly was the sole investment portfolio of Security Capital
Employee REIT Fund 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 Fund was restructured as one
of four investment portfolios of SC-REMFs on June 30, 1998, and as one of
two investment portfolios of SC-REMFs on December 31, 1998.
The Reorganization was a taxable event to SCERF and a capital gain of
$1,002,746 was realized for tax purposes. As a result, at December 31,
1998, the tax basis of securities held was $24,444 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 Fund. These costs are being amortized over the period of
benefit, but not to exceed 60 months from the Fund's commencement of
operations.
7. PRINCIPAL SHAREHOLDERS
As of June 30, 1999, SC Realty Incorporated, a wholly owned subsidiary of
Security Capital Group Incorporated, GCMG's parent corporation, owned 75.6%
of the Fund's total outstanding shares.
15
<PAGE>
DIRECTORS AND OFFICERS INVESTMENT MANAGEMENT TEAM
Anthony R. Manno Jr. Anthony R. Manno Jr.
Director, Chairman and President Director, Chairman and President
Robert H. Abrams Kenneth D. Statz
Director Managing Director
Stephen F. Kasbeer Kevin W. Bedell
Director Senior Vice President
George F. Keane Anne Darnley
Director Vice President
Kenneth D. Statz Keyvan A. Arjomand
Managing Director Securities Analyst
Kevin W. Bedell Matthew E. Lamphier
Senior Vice President Securities Analyst
Jeffrey C. Nellessen Gregory S. Millard
Vice President, Treasurer and Securities Analyst
Assistant Secretary
David T. Novick Matthew D. Hansen
Vice President and Secretary Securities Trader
Michael J. Heller Yung R. Ho
Assistant Treasurer Analyst
Andrew L. Kline
Analyst
Robert P. Van Bergen Jr.
Analyst
John H. Woo
INVESTMENT ADVISER Analyst
Security Capital Global Capital
Management Group Incorporated
11 South LaSalle Street
Chicago, Illinois 60603
AUDITORS LEGAL COUNSEL
Arthur Andersen LLP Mayer, Brown & Platt
33 West Monroe Street 1909 K Street, N.W.
Chicago, Illinois 60603 Washington, D.C. 20006
16
<PAGE>
[LOGO OF SECURITY CAPITAL APPEARS HERE]
11 South LaSalle Street, Chicago, Illinois 60603
1-888-SECURITY www.securitycapital.com
