<PAGE>
SECURITY CAPITAL
[PHOTO APPEARS HERE]
U.S. REAL ESTATE SHARES
1998 ANNUAL REPORT
[LOGO]
SECURITY CAPITAL
<PAGE>
SECURITY CAPITAL
U.S. REAL ESTATE SHARES
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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 real estate market research
with sophisticated capital markets research and modeling techniques.
<PAGE>
TO OUR SHAREHOLDERS
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1998 proved to be a challenging year for investors in real estate securities.
Investor sentiment began to turn negative early in the year as anxiety mounted
over the risk of escalating levels of real estate development, isolated evidence
of undisciplined capital deployment and uncertainty about the potential impact
of Asian turmoil on the U.S. economy. Washington's legislative review of the
"paired share" REIT structure, an issue impacting only five companies, also cast
a shadow over the entire group as investors were either confused or left to
question what broader initiatives might follow. The resulting motivated selling,
led by momentum and retail investors from office and hotel stocks, severely
depressed prices and led to a (17.43)% total return for the Wilshire Real Estate
Securities Index for the year. Ironically, this disappointing price performance
for real estate securities occurred against a backdrop of companies generally
achieving or exceeding their earnings estimates and enjoying unprecedented
health at the operating market level. A price correction of this magnitude for
real estate securities is unprecedented during a period of healthy real estate
fundamentals.
Your Fund was not immune to this difficult environment. SC-US Real Estate Shares
generated a total return for the year ended December 31, 1998 of (11.97)%
clearly a disappointing year. More encouraging, however, was that the Fund
continued its trend of outperformance. Indeed, the Fund surpassed the Wilshire
Real Estate Securities Index by 5.46 percentage points during 1998, and achieved
our goal of first-quartile results among real estate funds. We attribute this
outperformance to our disciplined and highly focused investment process. Our
advantage was most evident later in the year as we moved aggressively to take
advantage of particularly indiscriminate pricing of a number of high-quality
stocks, mostly in the office sector. The improved pricing of the office group
during the fourth quarter was an important factor in the Fund's strong relative
performance during 1998. Of course we appreciate that superior relative
performance is little consolation for our investors who lost money in real
estate securities in 1998.
3
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The silver lining to the events of 1998 is that the investment environment for
real estate securities as we move into 1999 is highly positive. This favorable
outlook reflects a number of factors, including the health of the underlying
property markets and the depressed valuation of real estate securities relative
to other equities and fixed income alternatives. Furthermore, the recent Clinton
budget proposal includes REIT initiatives we view as positive and indicative of
a supportive stance from Washington towards public ownership of real estate.
Despite anxiety about future overbuilding that drove investor sentiment and
valuations in 1998, our research indicates that the underlying property markets
are, with few exceptions, in very good shape. Office markets, for example, are
experiencing record occupancy levels with growing or stable rents. Although
development has been active in many suburban markets, it is proportional to
strong office employment growth. In Central Business Districts, large scale,
planning-intensive projects are almost non-existent. Growth in consumer
spending and record levels of new household formation are driving similarly
favorable conditions in the retail and multifamily sectors. Importantly, for all
property types, there is strong evidence that capital flows for new development
and acquisitions are being regulated by public market pricing disciplines
instead of the fee-driven models of the past. If further validated with the
passage of time, this is a very positive scenario for real estate investors with
important implications for future profitability and value. With generally
healthy real estate markets, although not a guarantee of future results, we are
projecting 8% to 11% earnings growth for the group of real estate securities in
1999.
Against this positive fundamental backdrop, the pricing of many real estate
securities appears highly attractive relative to other equities and fixed income
alternatives. Following a 28% decline in valuation multiples during 1998, real
estate securities comprising the Wilshire Real Estate Securities Index currently
trade at a multiple on estimated 1999 earnings (Funds From Operations) of 9
times. This represents a 67% discount to the 27.4 price/EPS multiple of the
broader equity market as measured by the Standard & Poor's 500 Index. By
comparison, over
4
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the last four years this discount has averaged about 35%. The current average
dividend yield for these same real estate companies is 6.8%, versus 1.3% for the
S&P 500, and dividend payout levels represent a conservative ratio to operating
cash flow. A further dynamic we are seeing is the relative lack of
differentiation in pricing among real estate securities despite significant
differences in their underlying quality. These low relative valuations and
strong income yields, coupled with little pricing differentiation, define the
attractive total rate of return potential we see for 1999.
While our overall outlook for real estate securities is very positive, we
believe 1999 will be a period of differentiation in the market as the liquidity
and durable earnings power of higher quality companies are rewarded. By
contrast, we believe that companies that are pure "asset gatherers" will
encounter the true challenges and expense of running their portfolios and their
performance will suffer on a relative basis. We believe our highly disciplined
and conviction-oriented approach to investing--which combines proprietary
fundamental real estate research, industry and company analysis, and real estate
securities pricing--is tailor-made for this investment environment and we are
confident in our ability to continue to deliver first-quartile performance.
We appreciate your support during 1998 and look forward to a rewarding year in
1999.
Sincerely,
/s/ ANTHONY R. MANNO JR. /s/ KENNETH D. STATZ
Anthony R. Manno Jr. Kenneth D. Statz
President Managing Director
5
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FUND PERFORMANCE
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The Fund's performance compared to frequently used performance benchmarks is
shown in the table below. The net asset value per share as of December 31, 1998,
was $9.82; total dividends of $0.75 per share were paid to shareholders of
record throughout the year.
Security Capital U.S. Real Estate Shares
Comparative Returns versus Industry Benchmarks
Average Annual Total Return
Period Ended December 31, 1998
<TABLE>
<CAPTION>
Total Return Average Annual Total Return
One-Year Since Fund Inception (12/20/96)
------------ -------------------------------
<S> <C> <C>
SC-US Real Estate Shares (11.97)% 6.83%
Class R (Retail) Shares
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SC-US Real Estate Shares (11.94)% 6.85%
Class I (Institutional) Shares
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NAREIT Equity Index(1) (17.50)% 1.60%
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Wilshire Real Estate
Securities Index(2) (17.43)% 1.53%
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</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-USReal 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 December 31, 1998
[GRAPH APPEARS HERE]
[PLOT POINTS TO COME]
Past performance is not a guarantee of future performance. The performance of
SC-US Real Estate Shares Class I (Institutional) Shares is greater than that of
the Class R (Retail) Shares for the time period indicated above based upon 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 WARESl most closely
tracks the fund's investment universe.
6
<PAGE>
SECURITY CAPITAL U.S. REAL ESTATE SHARES
SCHEDULE OF INVESTMENTS -- DECEMBER 31, 1998
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<TABLE>
<CAPTION>
Shares Market Value
<C> <S> <C>
COMMON STOCKS - 96.1%
Office Properties - 27.3%
219,700 Boston Properties, Inc. $ 6,700,850
276,200 Equity Office Properties Trust 6,628,800
295,000 Cornerstone Properties Inc. 4,609,375
179,800 Arden Realty, Inc. 4,169,112
122,600 Mack-Cali Realty Corporation 3,785,275
-----------
25,893,412
Diversified - 25.2%
252,300 Vornado Realty Trust 8,515,125
215,000 TrizecHahn Corporation 4,407,500
167,200 Prentiss Properties Trust 3,730,650
144,300 Liberty Property Trust 3,553,388
74,300 Spieker Properties, Inc. 2,572,637
79,800 Catellus Development Corporation+ 1,142,138
-----------
23,921,438
Multifamily - 18.7%
155,000 Essex Property Trust, Inc. 4,611,250
134,073 Avalon Bay Communities, Inc. 4,592,000
116,200 Apartment Investment & Management Company 4,321,187
53,000 Equity Residential Properties Trust 2,143,188
62,700 Amli Residential Properties Trust 1,395,075
20,600 Irvine Apartment Communities, Inc. 656,625
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17,719,325
Regional Malls - 8.0%
232,400 Urban Shopping Centers, Inc. 7,611,100
</TABLE>
See notes to the financial statements. 7
<PAGE>
SCHEDULE OF INVESTMENTS (CONTINUED)
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<TABLE>
<CAPTION>
Shares Market Value
<S> <C> <C>
Storage - 7.7%
268,000 Public Storage, Inc. $ 7,252,750
Hotels - 6.7%
330,000 Host Marriott Corporation 4,558,125
148,000 Innkeepers USATrust 1,748,250
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6,306,375
Industrial - 2.5%
118,000 Cabot Industrial Trust 2,411,625
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Total Common Stock - (Cost $90,217,237) 91,116,025
Principal Amount
SHORT-TERM INVESTMENTS - 3.2%
$2,990,103 Agreement with State Street Bank and Trust Company,
3.250%, dated 12/31/1998, to be repurchased at
$2,991,183 on 01/04/1999, collateralized by $2,495,000
U.S. Treasury Note, 7.250% maturing 05/15/2016
(market value $3,050,123) 2,990,103
-----------
Total Short-Term Investments
(Cost $2,990,103) 2,990,103
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Total Investments - 99.3%
(Cost $93,207,340) 94,106,128
Other Assets in Excess of
Liabilities - 0.7% 704,192
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NET ASSETS 100.0% $94,810,320
===========
</TABLE>
+ Non income producing security.
8 See notes to the financial statements.
<PAGE>
SECURITY CAPITAL U.S. REAL ESTATE SHARES
STATEMENT OF ASSETS AND LIABILITIES -- DECEMBER 31, 1998
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<TABLE>
<S> <C>
ASSETS:
Investments, at market value
(cost $93,207,340) $ 94,106,128
Receivable for investment securities sold 3,299,641
Dividends receivable 1,529,269
Deferred organization costs 72,307
Receivable from investment adviser 68,688
Other assets 29,023
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Total Assets 99,105,056
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LIABILITIES:
Payable for investment securities purchased 3,943,397
Payable to distributor 279,423
Accrued expenses and other liabilities 71,916
------------
Total Liabilities 4,294,736
------------
NET ASSETS $ 94,810,320
============
NET ASSETS CONSIST OF:
Capital stock $101,380,135
Accumulated undistributed net realized loss on investments (7,468,603)
Net unrealized appreciation on investments 898,788
------------
Total Net Assets $ 94,810,320
============
CLASS I:
Net assets $ 90,539,801
Shares outstanding (50,000,000 shares of $0.01 par value authorized) 9,220,734
Net asset value and redemption price per share $9.82
============
CLASS R:
Net assets $ 4,270,519
Shares outstanding (50,000,000 shares of $0.01 par value authorized) 434,826
Net asset value and redemption price per share $9.82
============
</TABLE>
See notes to the financial statements. 9
<PAGE>
SECURITY CAPITAL U.S. REAL ESTATE SHARES
STATEMENT OF OPERATIONS -- YEAR ENDED DECEMBER 31, 1998
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<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividend income $5,909,086
Interest income 229,591
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Total investment income 6,138,677
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EXPENSES:
Investment advisory fee 640,704
Distribution expense 266,960
Administration fee 21,357
Sub-administration fee 93,090
Transfer agent, custody and accounting costs 137,660
Federal and state registration 22,829
Professional fees 53,676
Shareholder reports and notices 46,046
Directors' fees and expenses 29,357
Amortization of organizational expenses 23,607
Other 41,501
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Total expenses before reimbursement 1,376,787
Less: Reimbursement from Adviser (305,199)
-----------
Net expenses 1,071,588
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NET INVESTMENT INCOME 5,067,089
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REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on investments (6,891,855)
Change in unrealized appreciation on investments (12,286,350)
-----------
Net realized and unrealized loss on investments (19,178,205)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(14,111,116)
============
</TABLE>
10 See notes to the financial statements.
<PAGE>
SECURITY CAPITAL U.S. REAL ESTATE SHARES
STATEMENT OF CHANGES IN NET ASSETS
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<TABLE>
<CAPTION>
Year Year
ended ended
December 31, 1998 December 31, 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Net investment income $ 5,067,089 $ 3,969,789
Net realized gain (loss) on investments (6,891,855) 8,063,795
Change in unrealized appreciation
on investments (12,286,350) 12,889,384
-------------------------------------
Net increase (decrease) in net assets resulting
from operations (14,111,116) 24,922,968
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 9,750,054 92,737,305
Shares issued to holders in reinvestment
of dividends 720,546 2,632,946
Cost of shares redeemed (11,297,204) (3,558,444)
-------------------------------------
Net increase (decrease) in net assets from
capital share transactions (826,604) 91,811,807
DISTRIBUTIONS TO SHAREHOLDERS:/(1)/
From net investment income -- (3,626,176)
DISTRIBUTIONS TO CLASS I SHAREHOLDERS:/(1)/
From net investment income (4,936,792) (372,583)
From net realized gains (1,997,333) (5,717,116)
Return of capital (389,531) --
-------------------------------------
Total distributions Class I (7,323,656) (6,089,699)
DISTRIBUTIONS TO CLASS R SHAREHOLDERS:/(1)/
From net investment income (137,519) (2,006)
From net realized gains (12,118) (31,388)
Return of capital (10,851) --
-------------------------------------
Total distributions Class R (160,488) (33,394)
TOTAL INCREASE (DECREASE) IN
NET ASSETS (22,421,864) 106,985,506
NET ASSETS:
Beginning of period 117,232,184 10,246,678
-------------------------------------
End of period $ 94,810,320 $117,232,184
=====================================
</TABLE>
(1) On December 16, 1997, the Fund's existing shareholders were split into
Class I and Class R shareholders 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. 11
<PAGE>
SECURITY CAPITAL U.S. REAL ESTATE SHARES
FINANCIAL HIGHLIGHTS
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<TABLE>
<CAPTION>
Year ended Year ended
Dec. 31, 1998 Dec. 31, 1997/(2)/ Dec. 20, 1996/(1)/
------------------------------------------ through
Class I Class R Class I Class R Dec. 31, 1996
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For a share outstanding for each period:
Net Asset Value, beginning of period $ 11.95 $ 11.95 $ 10.38 $ 10.38 $ 10.00
------------------------------------------------------------------
Income from investment operations:
Net investment income 0.42 0.38 0.46/(3)/ 0.46/(3)/ 0.02
Net realized and unrealized gain (loss)
on investments (1.80) (1.76) 2.11 2.11 0.36
------------------------------------------------------------------
Total from investment operations (1.38) (1.38) 2.57 2.57 0.38
------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.43) (0.43) (0.46) (0.46) --
Distributions from net realized gains (0.29) (0.29) (0.54) (0.54) --
Return of capital (0.03) (0.03) -- -- --
------------------------------------------------------------------
Total distributions (0.75) (0.75) (1.00) (1.00) --
------------------------------------------------------------------
Net Asset Value, end of period $ 9.82 $ 9.82 $ 11.95 $ 11.95 $ 10.38
==================================================================
Total return/(4)/ (11.94)% (11.97)% 25.20% 25.19% 3.77%
Supplemental data and ratios:
Net assets, end of period ($000) $ 90,540 $ 4,271 $116,560 $ 672 $10,247
Ratio of expenses to average net assets/(5)(6)/ 1.00% 1.15% 0.94% 0.95% --%
Ratio of net investment income to
average net assets/(5)(6)/ 4.75% 4.60% 4.08% 4.07% 19.71%
Portfolio turnover rate/(7)/ 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 period December 20, 1996, through December 31, 1996.
(5) Annualized.
(6) Without voluntary expense reimbursements of $301,721 and $3,478 for Class I
and Class R, respectively, for the year ended December 31, 1998, the ratio
of expenses to average net assets would have been 1.29% for both Class I
and Class R, and the ratio of net investment income to average net assets
would have been 4.46% for Class I and Class R. 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 4.05% 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.
12 See notes to the financial statements.
<PAGE>
SECURITY CAPITAL U.S. REAL ESTATE SHARES
NOTES TO THE FINANCIAL STATEMENTS -- DECEMBER 31, 1998
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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 fiscal year ended December 31, 1998, ordinary distributions paid
to shareholders in the amount of $141,581 were reallocated to capital gain
distributions.
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.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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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 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.
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
2. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the Fund were as follows:
<TABLE>
<CAPTION>
Year Ended 12/31/98:
- ------------------------------------------------------------------------------------
Amount Shares
-------------------------
<S> <C> <C>
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>
On December 16, 1997, the Fund's existing shareholders were split into Class I
and Class R shareholders based on the amount then invested in the Fund.
<TABLE>
<CAPTION>
Period from 12/17/97 through 12/31/97:
- ------------------------------------------------------------------------------------
Amount Shares
-------------------------
<S> <C> <C>
Class I Shares:
Reclassification of previous class $121,005,617 9,836,172
Shares sold -- --
Shares issued to holders in reinvestment of dividends 65,206 5,443
Shares redeemed (1,069,973) (85,735)
------------ ---------
Net increase $120,000,850 9,755,880
============ =========
Class R Shares:
Reclassification of previous class $ 658,057 53,492
Shares sold 2,500 208
Shares issued to holders in reinvestment of dividends 30,360 2,534
Shares redeemed -- --
------------ ---------
Net increase $ 690,917 56,234
============ =========
</TABLE>
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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<TABLE>
<CAPTION>
Period from 01/01/97 through 12/16/97:
- ------------------------------------------------------------------------------------------------
Amount Shares
---------------------------
<S> <C> <C>
Previous Class Shares:
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)
============= ===========
</TABLE>
3. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of long term investments by the Fund for the
year ended December 31, 1998, were $112,456,994 and $114,674,565, respectively.
At December 31, 1998, gross unrealized appreciation and depreciation of
investments for tax purposes were as follows:
Appreciation $ 3,175,604
(Depreciation) (2,942,229)
-----------
Net appreciation on investments $ 233,375
===========
At December 31, 1998, the cost of investments for federal income tax purposes
was $93,872,753.
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 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 year ended December 31, 1998.
For fiscal year 1999, 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 1.20% and 1.35% of the net assets of the Class I and
Class R Shares, respectively, computed on a daily basis.
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.
16
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NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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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. 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. The Fund has made no payments pursuant to the
Plans for the year ended December 31, 1998.
6. FORMATION AND RE-ORGANIZATION
The Fund, formerly was the sole investment portfolio of Security Capital
Employee REIT Fund Incorporated ("SCREF"), a Maryland corporation. On January
23, 1997, all of the assets and liabilities of SCREF 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 SCREF 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
sixty months from the Fund's commencement of operations.
7. PRINCIPAL SHAREHOLDERS
As of December 31, 1998, SC Realty Incorporated, a wholly owned subsidiary of
Security Capital Group Incorporated, GCMG's parent corporation, owned 89.9% of
the Fund's total outstanding shares.
17
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
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To the board of directors and shareholders of
Security Capital U.S. Real Estate Shares:
We have audited the accompanying statement of assets and liabilities of Security
Capital U.S. Real Estate Shares (a separate portfolio of Security Capital Real
Estate Mutual Funds Incorporated, a Maryland corporation), including the
schedule of investments, as of December 31, 1998, and the related statement of
operations for the year then ended, the statements of changes in net assets for
each of the two years in the period then ended, and the financial highlights for
the years ended December 31, 1998 and 1997 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, 1998, 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 as of December 31, 1998, the results of
its operations for the year then ended, the changes in its net assets for each
of the two years in the period then ended, and the financial highlights for the
years ended December 31, 1998 and 1997 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 15, 1999
18
<PAGE>
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DIRECTORS AND OFFICERS
Anthony R. Manno Jr.
Director, Chairman and President
John H. Gardner Jr.
Director, Managing Director
Robert H. Abrams
Director
Stephen F. Kasbeer
Director
George F. Keane
Director
Kenneth D. Statz
Managing Director
Kevin W. Bedell
Senior Vice President
Jeffrey C. Nellessen
Vice President, Treasurer and Assistant Secretary
David T. Novick
Vice President and Secretary
Michael J. Heller
Assistant Treasurer
INVESTMENT ADVISER
Security Capital Global Capital
Management Group Incorporated
11 South LaSalle Street
Chicago, Illinois 60603
AUDITORS
Arthur Andersen LLP
33 West Monroe Street
Chicago, Illinois 60603
INVESTMENT MANAGEMENT TEAM
Anthony R. Manno Jr.
Director, Chairman and President
Kenneth D. Statz
Managing Director
Kevin W. Bedell
Senior Vice President
Albert D. Adriani
Vice President
Anne Darnley
Vice President
Keyvan A. Arjomand
Securities Analyst
Matthew E. Lamphier
Securities Analyst
Gregory S. Millard
Securities Analyst
Yung R. Ho
Analyst
Andrew L. Kline
Analyst
Robert P. Van Bergen Jr.
Analyst
John H. Woo
Analyst
LEGAL COUNSEL
Mayer, Brown & Platt
2000 Pennsylvania Avenue, N.W.
Washington, D.C. 20006
<PAGE>
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SECURITY CAPITAL
11 South LaSalle Street, Chicago, IL 60603
1-888-SECURITY www.securitycapital.com
