<PAGE>
SECURITY CAPITAL
[PICTURE]
U.S. REAL ESTATE SHARES
2000 SEMIANNUAL REPORT
[LOGO]
SECURITY CAPITAL
<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
--------------------------------------------------------------------------------
In contrast to the challenging and frustrating conditions that
characterized our sector in 1999, U.S. real estate securities generated
strong performance during the first half of 2000 both in absolute terms as
well as relative to broader market indices. The Wilshire Real Estate
Securities Index ("WARESI") benchmark posted a total return of 15.2%
through June 30, 2000. By comparison, the S&P 500 and Russell 2000 indices
generated returns through June 30, 2000 of -0.4% and 3.1% respectively.
While deeply discounted pricing is clearly the fuel that drove the
performance of real estate securities during the first half of 2000, we
believe that the spark for investors after two down years was a combination
of broader equity market volatility and signs of reaccelerating
fundamentals in key property segments. Real estate stocks began the year
undeniably cheap. Pricing had rolled back to year-end 1995 levels while
earnings (funds from operations or "FFO") increased over 67% over the
intervening period. Yet this alone had not been enough to refocus investor
interest towards the group. The mood changed dramatically in March and
April with equity market gyrations, particularly in the growth/technology-
oriented sectors, serving to reawaken investors to the concept of risk and
highlighting the strong income/value attributes of real estate stocks as a
tool for portfolio diversification. Another factor for investors was a
clear picture of strong and/or accelerating real estate operating
fundamentals that emerged in first quarter operating results, with demand
for office space and hotel rooms, in particular, outpacing supply in many
key markets.
By property type, the best stock performance during the first half of 2000
came from the hotel, office and multifamily companies, which generated
total returns for the first half of 25.1%, 17.9% and 14.8% respectively.
Hotel company performance was led by large-cap Starwood Hotels & Resorts
(HOT), which benefitted from strong room demand, a liquid balance sheet
following the year-end sale of its Caesar's gaming operation and
consolidation of its international Ciga interests, and a highly coherent
strategy for its core Westin and Sheraton brands. Office companies
continued to benefit from fundamental strength in the form of strong net
absorption and balanced new supply in key urban markets such as San
Francisco, Manhattan, Boston and Washington D.C. The San Francisco office
market, in particular, has experienced unprecedented growth in rents early
in 2000 as technology-oriented firms execute aggressive growth strategies
in a tight, supply constrained market. The performance of multifamily
companies during the first half was driven by their defensive attributes in
a rising interest rate environment--home ownership becomes more expensive
as mortgage rates increase--as well as an observed reduction in the pace of
multifamily construction.
The factory outlet and the self-storage sectors were underperformers during
the first half with total returns of -9.0% and 4.9% respectively. Operating
and financial distress at Prime Retail (PRT) was the primary component
behind factory outlet performance. A factor for the self-storage sector has
been negative earnings revisions associated with both higher expected
levels
1
<PAGE>
of investment in new development as well as revised late fee policies, an area
that has recently come under legal scrutiny.
Security Capital U.S. Real Estate Shares ("SC-US Real Estate Shares") generated
a 17.6% total return for the first half of 2000, outperforming the WARESI
benchmark by 242 basis points and ranking the Fund in the top 3% of real estate
mutual funds evaluated by Morningstar(R) for this period/1/. We attribute this
outperformance to strong stock selection that led to overweight positions in key
stocks including Starwood Hotels & Resorts (HOT), Spieker Properties (SPK),
Cornerstone Properties (CPP, now EOP following the merger on June 19, 2000 with
Equity Office Properties), Avalon Bay Communities (AVB) and Urban Shopping
Centers (URB). On a trailing three-year basis, SC-US Real Estate Shares has an
average annual total return of 7.2%, outperforming the WARESI benchmark by 599
basis points. This three-year performance places the Fund in the top 2% of real
estate mutual funds ranked by Morningstar/2/. In addition, SC-US Real Estate
Shares has earned a Morningstar Category Rating of 5, the highest possible. The
Morningstar Category Rating is a quantitative measure of risk-adjusted
performance over a three-year period and shows how well a fund has balanced risk
and return relative to other funds in its category. Since its inception on
December 20, 1996, SC-US Real Estate Shares' average annual total return of 9.0%
is 491 basis points in excess of the comparable WARESI return.
Investment Outlook
Entering the second half of the year, it is clear that real estate securities
have reentered the world of the living. For the first time in over two years,
investors have moved beyond questions of "where's the bottom?" and "what's the
catalyst?" and have begun to consider the performance potential for the group as
the market for real estate securities transitions towards more balanced pricing.
In our view, we are still in the early stages of recognizing the true value of
many public real estate companies. Based on the following perspectives, we
believe that the performance opportunity for SC-US Real Estate Shares today is
very healthy, particularly on a risk-adjusted basis.
. High quality real estate at bargain prices. Notwithstanding pricing gains
over the last six months, the valuation of many public real estate
companies continues to reflect a significant discount to the cash flow-
based value of the underlying net asset value ("NAV"). A key factor is the
strong cash flow growth occurring at the asset level in the context of
historically low vacancy rates, healthy demand by users and balanced levels
of new supply. Also important is the healthy demand for real estate assets
by institutional investors on a private/direct basis. In this context, we
believe NAVs for high quality real estate are stable, with the underlying
cash flow streams undervalued in a public equity format.
2
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. Undervalued operating platforms. While the market has often viewed NAV as an
upper bound for pricing many public real estate companies, select companies
have emerged with the capability of adding value beyond the piecemeal value
of their underlying real estate assets. We believe companies that
demonstrate excellence in the following key areas over time will warrant a
consistent premium to NAV.
- Fully integrated management teams with unique execution capabilities
- Significant operational and financing efficiencies
- Disciplined capital allocation
- Broad ownership with demonstrated trading liquidity
- Strong asset liquidity and portfolio diversification
. Attractive portfolio diversification characteristics. Broader equity market
volatility is leading investors to seek effective portfolio diversification
tools. With a healthy income component and a demonstrated low correlation of
performance to the broader equity market, there is increasing recognition of
real estate securities in this regard. We believe this trend is still in its
early stages and has the potential to be a meaningful driver of liquidity
and pricing over the next 12-18 months.
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 appreciate your continued support.
Sincerely,
/s/ Anthony R. Manno Jr. /s/ Kenneth D. Statz
Anthony R. Manno Jr. Kenneth D. Statz
President Managing Director
/1/ Source: Morningstar Principia(TM) Pro Plus. Overall ranking among 128 real
estate mutual funds for the year-to-date period ending June 30, 2000.
/2/ Source: Morningstar Principia Pro Plus. Overall ranking among 69 real estate
mutual funds for the three-year period ending June 30, 2000.
(C) 2000 by Morningstar, Inc. All rights reserved. The information contained
herein is the proprietary information of Morningstar, Inc., may not be copied or
redistributed for any purpose and may only be used for non-commercial, personal
purposes. The information contained herein is not represented or warranted to be
accurate, correct, complete or timely. Morningstar, Inc. shall not be
responsible for investment decisions, damages or other losses resulting from use
of this information. Past performance is no guarantee of future performance.
Morningstar, Inc. has not granted consent for it to be considered or deemed an
"expert" under the Securities Act of 1933.
3
<PAGE>
FUND PERFORMANCE
--------------------------------------------------------------------------------
SC-US Real Estate Shares' investment performance compared to frequently used
performance benchmarks is shown below.
COMPARATIVE RETURNS
Average Annual Total Returns
Period Ended June 30, 2000
<TABLE>
<CAPTION>
Since Inception
Year-to-Date One-Year Three-Year (12/20/96-6/30/00)
------------------------------------------------------------------
<S> <C> <C> <C> <C>
SC-US Real Estate Shares 17.6% 7.1% 7.2% 9.0%
------------------------------------------------------------------------------------------------
Wilshire Real Estate
Securities Index/1/ 15.2% 4.5% 1.2% 4.0%
------------------------------------------------------------------------------------------------
NAREIT Equity Index/2/ 13.2% 3.0% 0.4% 3.1%
</TABLE>
Past performance is not indicative of future results. The performance of the
above-referenced indices includes reinvested dividends and does not include any
fees or expenses. The underlying portfolio securities of SC-US Real Estate
Shares may differ from those of the indices. (1) Wilshire Real Estate Securities
Index is an unmanaged, market-capitalization weighted index comprising publicly
traded REITs and real estate operating companies except for special purpose and
healthcare REITs; and (2) 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.
GROWTH OF A $10,000 INVESTMENT
Period from December 20, 1996 to June 30, 2000
[Graph]
<TABLE>
<CAPTION>
Wilshire RE NAREIT
Security Equity
SC-US 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 $12,992 $12,489 $12,519
January 1998 $12,890 $12,313 $12,453
February $12,600 $12,155 $12,241
March $13,046 $12,396 $12,461
April $12,540 $12,004 $12,054
May $12,395 $11,889 $11,970
June $12,293 $11,826 $11,889
July $11,466 $11,003 $11,117
August $10,355 $9,860 $10,068
September $11,046 $10,412 $10,638
October $11,013 $10,269 $10,441
November $11,356 $10,462 $10,595
December $11,441 $10,313 $10,328
January 1999 $11,371 $10,089 $10,112
February $11,394 $10,009 $9,875
March $11,115 $9,955 $9,830
April $12,567 $11,016 $10,763
May $12,779 $11,203 $11,000
June $12,641 $11,012 $10,822
July $12,056 $10,590 $10,477
August $12,056 $10,431 $10,344
September $11,654 $9,961 $9,951
October $11,243 $9,776 $9,706
November $10,940 $9,622 $9,548
December $11,507 $9,984 $9,851
January 2000 $11,606 $10,025 $9,883
February $11,457 $9,834 $9,765
March $12,042 $10,264 $10,087
April $12,900 $10,996 $10,765
May $13,075 $11,128 $10,870
June $13,536 $11,503 $11,149
</TABLE>
See notes to the financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
F U N D F A C T S
----------------------------------------------------------------------------------------------------------------
TOP 10 HOLDINGS FUND AT A GLANCE
% of Total Net Assets
<S> <C> <C> <C>
Minimum initial investment $2,500/1/
Equity Office Properties Trust 9.2%
Minimum subsequent investment $ 250
Starwood Hotels &
Resorts Worldwide, Inc. 7.4% Sales charge (load) None
Public Storage, Inc. 5.9% Redemption fee None
General Growth Properties, Inc. 5.6% Symbol SUSIX
Arden Realty, Inc. 5.5% Contact 1-888-SECURITY
Liberty Property Trust 5.5% Web Site www.securitycapital.com
Prentiss Properties Trust 5.3%
Avalon Bay Communities, Inc. 4.6%
Charles E. Smith
Residential Realty, Inc. 4.5%
Equity Residential
Properties Trust 4.2%
-----
Total 57.7%
</TABLE>
/1/ $1,000 for IRAs and UGMA/UTMA accounts.
SECTOR WEIGHTINGS/2/
Office 24.6%
Other/3/ 6.7%
Shopping
Centers 3.4%
Storage 5.9%
Hotels 7.4%
Multifamily 28.2%
Diversified 14.1%
Regional Malls 9.7%
/2/ Sector classifications are as defined by Wiltshire Associates.
/3/ Other includes short-term investments and other liabilities in excess of
assets.
MORNINGSTAR(R)
CATEGORY RATING
[DIAGRAM]
The Morningstar Category Rating is a quantitative measure of risk-adjusted
performance over a three-year period and shows how well a fund has balanced risk
and return relative to other funds in its category.
(C) 2000 by Morningstar, Inc. All rights reserved. The information contained
herein is the proprietary information of Morningstar, Inc., may not be copied or
redistributed for any purpose and may only be used for non-commercial, personal
purposes. The information contained herein is not represented or warranted to be
accurate, correct, complete or timely. Morningstar, Inc. shall not be
responsible for investment decisions, damages or other losses resulting from use
of this information. Past performance is no guarantee of future performance.
Morningstar, Inc. has not granted consent for it to be considered or deemed an
"expert" under the Securities Act of 1933.
See notes to the financial statements. 5
<PAGE>
SECURITY CAPITAL U.S. REAL ESTATE SHARES
SCHEDULE OF INVESTMENTS-JUNE 30, 2000 (UNAUDITED)
--------------------------------------------------------------------------------
Shares Market Value
-------------------------------------------------------------------------
COMMON STOCKS - 93.3%
MULTIFAMILY - 28.2%
104,073 Avalon Bay Communities, Inc. $ 4,345,048
111,100 Charles E. Smith Residential Realty, Inc. 4,221,800
84,900 Equity Residential Properties Trust 3,905,400
88,250 Apartment Investment & Management Company 3,816,812
83,950 Essex Property Trust, Inc. 3,525,900
149,200 Amli Residential Properties Trust 3,515,525
67,300 Post Properties, Inc. 2,961,200
-----------
26,291,685
OFFICE - 24.6%
312,408 Equity Office Properties Trust 8,610,737
219,300 Arden Realty, Inc. 5,153,550
82,200 Boston Properties, Inc. 3,174,975
118,900 Mack-Cali Realty Corporation 3,054,244
122,200 Highwoods Properties, Inc. 2,932,800
-----------
22,926,306
DIVERSIFIED - 14.1%
199,000 Liberty Property Trust 5,161,563
205,200 Prentiss Properties Trust 4,924,800
66,400 Spieker Properties, Inc. 3,054,400
-----------
13,140,763
REGIONAL MALLS - 9.7%
165,600 General Growth Properties, Inc. 5,257,800
110,700 Urban Shopping Centers, Inc. 3,729,206
-----------
8,987,006
HOTELS - 7.4%
212,150 Starwood Hotels & Resorts Worldwide, Inc. 6,908,134
STORAGE - 5.9%
234,300 Public Storage, Inc. 5,491,406
SHOPPING CENTERS - 3.4%
158,500 Federal Realty Investment Trust 3,170,000
Total common stocks
-----------
(cost $79,577,857) 86,915,300
6 See notes to the financial statements.
<PAGE>
SCHEDULE OF INVESTMENTS (CONTINUED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount Market Value
----------------------------------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENTS-7.8%
$3,225,034 Agreement with State Street Bank and Trust Company,
3.500%, dated 06/30/2000, to be repurchased at
$3,225,975, on 07/03/2000, collateralized by
$2,340,000 U.S. Treasury Bond, 14.000% maturing
on 11/15/2011 (market value $3,250,772) $ 3,225,034
4,000,000 United States Treasury Bill, 4.250%, 07/06/2000 3,997,639
-----------
Total short-term investments
(cost $7,222,673) 7,222,673
-----------
Total investments - 101.1%
(cost $86,800,530) 94,137,973
Other liabilities in excess of assets - (1.1)% (1,045,880)
-----------
Net assets-100.0% $93,092,093
===========
</TABLE>
See notes to the financial statements. 7
<PAGE>
SECURITY CAPITAL U.S. REAL ESTATE SHARES
STATEMENT OF ASSETS AND LIABILITIES-JUNE 30, 2000 (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at market value
(cost $86,800,530) $94,137,973
Receivable for investment securities sold 423,946
Receivable for fund shares sold 1,836,904
Dividends and interest receivable 830,546
Deferred organization costs 36,927
Other assets 623
-----------
Total assets 97,266,919
-----------
LIABILITIES:
Payable for investment securities purchased $ 3,366,017
Payable to investment adviser 49,579
Payable to distributor 18,450
Payable for fund shares repurchased 704,266
Accrued expenses and other liabilities 36,514
-----------
Total liabilities 4,174,826
-----------
Net assets $93,092,093
===========
NET ASSETS CONSIST OF:
Capital stock $91,398,707
Accumulated undistributed net realized loss on investments (5,644,057)
Net unrealized appreciation on investments 7,337,443
-----------
Total net assets $93,092,093
===========
Shares outstanding (50,000,000 shares of $0.01 par value authorized) 8,654,869
Net asset value and redemption price per share $ 10.76
===========
</TABLE>
8 See notes to the financial statements.
<PAGE>
SECURITY CAPITAL U.S. REAL ESTATE SHARES
STATEMENT OF OPERATIONS-PERIOD ENDED JUNE 30, 2000
(UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividend income $ 2,176,502
Interest income 122,001
-----------
Total investment income 2,298,503
-----------
EXPENSES:
Investment advisory fee 207,758
Distribution expense 86,566
Administration fee 6,925
Sub-administration fee 44,754
Transfer agent, custody and accounting costs 56,712
Federal and state registration 18,884
Professional fees 34,809
Shareholders reports and notices 13,426
Directors' fees and expenses 11,934
Amortization of organization expenses 11,772
Other 169
-----------
Total expenses before reimbursement 493,709
-----------
Less: Reimbursement from adviser (26,254)
-----------
Net expenses 467,455
-----------
Net investment income $ 1,831,048
===========
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments $ 129,728
Change in unrealized appreciation on investments 9,328,719
-----------
Net realized and unrealized gain on investments 9,458,447
-----------
Net increase in net assets resulting from operations $11,289,495
===========
</TABLE>
See notes to the financial statements. 9
<PAGE>
SECURITY CAPITAL U.S. REAL ESTATE SHARES
STATEMENT OF CHANGES IN NET ASSETS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six months ended
June 30, 2000 Year ended
(unaudited) Dec. 31, 1999
----------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Net investment income $ 1,831,048 $ 2,667,833
Net realized gain on investments 129,728 1,688,769
Change in unrealized appreciation
(depreciation) on investments 9,328,719 (2,890,064)
------------------------------
Net increase in net assets
resulting from operations 11,289,495 1,466,538
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 78,293,663 24,317,153
Shares issued to holders in
reinvestment of dividends 1,038,188 897,177
Cost of shares redeemed (46,647,529) (67,481,770)
------------------------------
Net increase (decrease) in net assets
from capital share transactions 32,684,322 (42,267,440)
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (1,831,048) (2,546,365)
From net realized gains -- --
Return of capital -- (366,516)
------------------------------
Total distributions (1,831,048) (2,912,881)
DISTRIBUTIONS TO
CLASS R SHAREHOLDERS:
From net investment income -- (128,690)
From net realized gains -- --
Return of capital -- (18,523)
------------------------------
Total distributions Class R -- (147,213)
Total increase (decrease) in net assets 42,142,769 (43,860,996)
NET ASSETS:
Beginning of period 50,949,324 94,810,320
------------------------------
End of period $ 93,092,093 $ 50,949,324
==============================
</TABLE>
10 See notes to the financial statements.
<PAGE>
SECURITY CAPITAL U.S. REAL ESTATE SHARES
FINANCIAL HIGHLIGHTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period ended Dec. 20, 1996/1/
June 30, 2000 Year ended Year ended Year ended through
(unaudited) Dec. 31, 1999 Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1996
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For a share outstanding for each period:/2/
Net asset value, beginning of period $ 9.37 $ 9.82 $ 11.95 $ 10.38 $ 10.00
-------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.25 0.45 0.42 0.46/3/ 0.02
Net realized and unrealized gain (loss)
on investments 1.39 (0.39) (1.80) 2.11 0.36
-------------------------------------------------------------------------------
Total from investment operations 1.64 0.06 (1.38) 2.57 0.38
-------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.25) (0.45) (0.43) (0.46) --
Dividends from net realized gains -- -- (0.29) (0.54) --
Return of capital -- (0.06) (0.03) -- --
-------------------------------------------------------------------------------
Total distributions (0.25) (0.51) (0.75) (1.00) --
-------------------------------------------------------------------------------
Net asset value, end of period $ 10.76 $ 9.37 $ 9.82 $ 11.95 $ 10.38
-------------------------------------------------------------------------------
Total return/4/ 17.6% 0.6% (11.9)% 25.2% 3.8%
Supplemental data and ratios:
Net assets, end of period ($000) $93,092 $50,949 $94,811 $117,232 $10,247
Ratio of expenses to
average net assets/5/,/6/ 1.35% 1.20% 1.00% 0.94% --%
Ratio of net investment income to
average net assets/5/,/6/ 5.29% 4.18% 4.75% 4.08% 19.71%
Portfolio turnover rate 58.15% 49.66% 109.49% 104.17% --%
</TABLE>
/1/ Inception date.
/2/ Effective February 1, 2000, the Fund's Class R shares were converted to
Class I shares, with the resulting class known as Security Capital U.S.
Real Estate Shares. The information in this table reflects financial
results for the former Class I shares, with the exception of net assets
which are both Classes.
/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 ended June 30, 2000 and for the period
December 20, 1996 through December 31, 1996.
/5/ Annualized.
/6/ Without voluntary expense reimbursements of $26,254, $256,747, $301,721 and
$30,276 for the period ended June 30, 2000 and the years ended December 31,
1999, 1998 and 1997, respectively, the ratio of expenses to average net
assets would have been 1.43%, 1.62%, 1.29% and 0.97%, respectively.
Without voluntary expense reimbursements of $26,254, $256,747, $301,721 and
$30,276 for the period ended June 30, 2000 and the years ended December 31,
1999, 1998 and 1997, respectively, the ratio of net investment income to
average net assets would have been 5.21%, 3.76%, 4.46% and 4.05%,
respectively.
See notes to the financial statements. 11
<PAGE>
SECURITY CAPITAL U.S. REAL ESTATE SHARES
NOTES TO THE FINANCIAL STATEMENTS-JUNE 30, 2000
(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
commenced operations on December 20, 1996.
Effective February 1, 2000, Class R shares of the Fund were converted to
Class I shares of the Fund with the surviving class being known as Security
Capital U.S. Real Estate Shares ("SC-US").
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 31,1999, the Fund has a realized capital loss
carry forward, for federal income tax purposes, of $3,919,058 (expires
December 31, 2006), available to be used to offset future realized capital
gains. As of December 31, 1999, the Fund has elected for Federal income tax
purposes to defer a $1,572,439 current year post October capital loss as
though the loss was incurred on the first day of the next fiscal year.
12
<PAGE>
NOTES TO THE 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) Repurchase Agreements - The Fund may enter into repurchase agreements
with brokers, dealers or banks that meets the credit guidelines approved by
the Board of Directors. In a repurchase agreement, a fund buys a security
from a seller that has agreed to repurchase the same security at a mutually
agreed upon date and price. If the seller is unable to make timely
repurchase, the fund's expected proceeds could be delayed, or the fund
could suffer a loss in principal or current interest, or incur costs in
liquidating the collateral.
e) 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.
f) 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
13
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
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. Sector classifications in the Schedule of Investments are as
defined by Wilshire Associates.
2. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the Fund were as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30, 2000:
-----------------------------------------------------------------------------------------
Amount Shares
--------------------------
<S> <C> <C>
Shares sold $ 77,378,341 7,552,074
Shares issued to holders in reinvestment of dividends 1,038,188 98,897
Shares redeemed (41,157,273) (3,947,522)
--------------------------
Net increase $ 37,259,256 3,703,449
==========================
Class R Shares:*
Shares sold $ 915,322 96,175
Shares issued to holders in reinvestment of dividends -- --
Shares redeemed (5,490,256) (580,642)
--------------------------
Net decrease $ (4,574,934) (484,467)
==========================
* Represents activity from January 1, 2000 - January 31, 2000. Effective
February 1, 2000, the Fund's Class R shares were converted to Class I shares,
with the resulting class being known as Security Capital U.S. Real Estate
Shares.
<CAPTION>
Year Ended December 31, 1999:
----------------------------------------------------------------------------------------
Amount Shares
-------------------------
<S> <C> <C>
Class I Shares:
Shares sold $ 19,952,507 2,027,897
Shares issued to holders in reinvestment of dividends 776,057 79,866
Shares redeemed (63,391,015) (6,377,077)
---------------------------
Net decrease $(42,662,451) (4,269,314)
===========================
Class R Shares:
Shares sold $ 4,364,646 455,863
Shares issued to holders in reinvestment of dividends 121,120 12,565
Shares redeemed (4,090,755) (418,787)
---------------------------
Net increase $ 395,011 49,641
===========================
</TABLE>
<PAGE>
NOTES TO THE 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, 2000, were $69,228,267 and $36,981,485,
respectively.
As of June 30, 2000, gross unrealized appreciation and
depreciation of investments for tax purposes were as follows:
Appreciation $8,418,993
(Depreciation) (1,081,550)
----------
Net appreciation on investments $7,337,443
==========
As of June 30, 2000, the cost of investments for federal income tax purposes
was $86,800,530.
4. INVESTMENT ADVISORY AND OTHER AGREEMENTS
SC-REMFs has entered into an Investment Advisory Agreement with Security
Capital Global Capital Management Group Incorporated ("GCMG"), an indirect,
wholly-owned subsidiary of Security Capital Group Incorporated ("Security
Capital"). 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 1.35% of the net assets, computed on a daily basis, for the
year ended December 31, 2000.
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.
15
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
--------------------------------------------------------------------------------
5. DISTRIBUTION AND SERVICING PLANS
The Fund has adopted a plan pursuant to Rule 12b-1 under the 1940 Act
("Distribution Plan"). Under the Distribution Plan, the Fund pays to
Security Capital Markets Group Incorporated, an indirect, wholly-owned
subsidiary of Security Capital, 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 respect of these
services such amount as it may determine. For the six months ended June 30,
2000, the Fund has made payments totaling $97,071 as required by the
adopted Distribution Plans.
6. REORGANIZATION
The Fund was formerly 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 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, the tax basis of
securities held was higher than the basis for financial reporting purposes
by $30,491 and $24,444 of as December 31, 1999 and December 31, 1998,
respectively.
7. ORGANIZATION COSTS
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.
8. PRINCIPAL SHAREHOLDERS
As of June 30, 2000, SC Realty Incorporated, a wholly-owned subsidiary of
Security Capital, owned 24.4% of the Fund's total outstanding shares.
16
<PAGE>
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
DIRECTORS INVESTMENT MANAGEMENT TEAM
Anthony R. Manno Jr. Anthony R. Manno Jr.
Chairman and President Director, Chairman and President
Security Capital Real Estate Mutual Funds
Incorporated Kenneth D. Statz
Managing Director
Robert H. Abrams Kevin W. Bedell
Founding Director Program in Real Estate Senior Vice President
Cornell University
Anne Darnley
Trustee Emeritus and Presidential Counselor Vice President
Cornell University
Matthew E. Lamphier
Stephen F. Kasbeer Vice President
Former Senior Vice President for
Administration and Treasurer James D. Hardman
Loyola University Analyst
Director Bernard Krieg
Endowment Realty, Inc. Analyst
George F. Keane Robert P. Van Bergen Jr.
President Emeritus Analyst
The Commonfund Group
John H. Woo
Analyst
Director Matthew D. Hansen
Universal Stainless and Alloy Products Securities Trader
OFFICERS INVESTMENT ADVISER
Anthony R. Manno Jr. Security Capital Global Capital
Director, Chairman and President Management Group Incorporated
11 South LaSalle Street
Kenneth D. Statz Chicago, Illinois 60603
Managing Director 1-888-SECURITY
Kevin W. Bedell TRANSFER AGENT
Senior Vice President
Boston Financial Data Services, Inc.
Alexander K. Daggett P.O. Box 8121
Vice President - Client Services Boston, Massachusetts 02266-8121
1-800-409-4189
Jeffrey C. Nellessen
Vice President, Treasurer and Assistant Secretary AUDITORS
David T. Novick Arthur Andersen LLP
Vice President and Secretary 33 West Monroe Street
Chicago, Illinois 60603
Michael J. Heller
Assistant Treasurer LEGAL COUNSEL
Mayer, Brown & Platt
1909 K Street, N.W.
Washington, D.C. 20006
</TABLE>
<PAGE>
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SECURITY CAPITAL
11 South LaSalle Street, Chicago, Illinois 60603
1-888-SECURITY
