SECURITY CAPITAL U S REAL ESTATE SHARES INC, 485BPOS, 2000-04-28

SECURITY CAPITAL U S REAL ESTATE SHARES INC
485BPOS, 2000-04-28

Previous: SELIGMAN VALUE FUND SERIES INC, 485BPOS, 2000-04-28

Next: SPACEDEV INC, 10SB12G/A, 2000-04-28

<PAGE>

As filed with the Securities and Exchange Commission on April 28, 2000

Registration Nos. 333-20649
811-8033
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

----------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 12
and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940

Amendment No. 14
(Check Appropriate Box or Boxes)

----------------------
Security Capital Real Estate Mutual Funds Incorporated
(Exact Name of Registrant as Specified in Charter)
11 South LaSalle Street
Chicago, Illinois 60603
(312) 345-5800
(Address of Principal Executive Offices, Including Zip Code, and Telephone
Number, Including Area Code)

Anthony R. Manno Jr.
Security Capital Global Capital Management Group Incorporated
11 South LaSalle Street
Chicago, Illinois 60603
(Name and Address of Agent for Service)

With Copies to:

David T. Novick Jeffrey A. Klopf
Security Capital Group Incorporated Security Capital Group Incorporated
11 South LaSalle Street 125 Lincoln Avenue
Chicago, Illinois 60603 Santa Fe, New Mexico 87501

Diane E. Ambler
Mayer, Brown & Platt
1909 K Street, N.W.
Washington, D.C. 20006

It is proposed that this filing will become effective (check appropriate
box):
[ ]immediately upon filing pursuant to [ ]on (date) pursuant to paragraph
paragraph (b). (a)(1) of Rule 485.
[X]on April 28, 2000 pursuant to [ ]75 days after filing pursuant
paragraph (b). to paragraph (a)(2).
[ ]60 days after filing pursuant [ ]on date pursuant to paragraph
to paragraph (a)(1). (a)(2) of Rule 485.

If appropriate, check the following box:

[ ]this post-effective amendment designates
a new effective date for a previously
filed post-effective amendment

Title of Securities being Registered................................Common Stock

<PAGE>

S E C U R I T Y C A P I T A L

U. S. R E A L E S T A T E S H A R E S

================================================================================

A mutual fund investing

primarily in real estate securities

in the United States

P O S P E C T U S

April 28, 2000

As is the case with all mutual fund shares, the Securities and Exchange
Commission has not approved or disapproved these securities and has not passed
on the adequacy of this prospectus. Any representation to the contrary is a
criminal offense.

[LOGO]
<PAGE>

SECURITY CAPITAL
U.S. REAL ESTATE SHARES

TABLE OF CONTENTS

<TABLE>
<S> <C>
The Fund Blueprint............................................... 2
Overview
Prior Investment Results
Shareholder Costs
Building the Fund Portfolio...................................... 6
The Investment Adviser and Management Team
Types of Investments
Investment Risks
How the Fund Manages Risk
How the Fund is Managed.......................................... 12
Opportunities in the Real Estate Industry
Investment Process
On Becoming a Shareholder........................................ 15
How to Purchase Fund Shares
How to Redeem Fund Shares
Other Redemption Information
Performance Reporting
Tax Consequences and Year-End Reporting
Reports to Shareholders
Financial Highlights............................................. 23
To Learn More About the Fund..................................... Back Cover
Contact Us for More Information.................................. Back Cover
</TABLE>

A WORD TO POTENTIAL INVESTORS

The information in this prospectus is presented to help you decide whether the
fund matches your financial situation and investment goals.

The minimum initial investment in the fund's shares -- which are sold at net
asset value without a sales charge -- is $2,500.

About This Document

This prospectus describes the objectives and policies of the fund, the potential
risks of investing, the fund's management, and other information necessary to
make an informed investment decision.

Please read it carefully before you invest and then retain it for future
reference.
<PAGE>

THE FUND

BLUEPRINT

OVERVIEW

What are the fund's investment objectives?

. The fund seeks to provide shareholders with above-average total returns,
including current income and capital appreciation, primarily through
investments in real estate securities in the United States.

. Long-term, the fund's objective is to achieve top-quartile total returns as
compared with other mutual funds that invest primarily in real estate
securities in the United States.

What kind of investments does the fund make?

. The fund invests primarily in real estate securities. It does not invest in
real estate directly.

. The fund's investments generally include equity securities -- primarily
common stocks of real estate investment trusts (REITs) and real estate
operating companies (REOCs), rights, warrants, convertible securities, and
preferred stocks. For a description of REITs and REOCs, please see "Types
of Investments" on page 7 of this prospectus.

. Typically, at least 80 percent of the fund's assets are invested in equity
securities of publicly traded real estate companies operating in the United
States.

What type of investor might consider investing in the fund?

Based on the fund's investment goals and strategies, it might be suitable for
investors who:

. seek to diversify their investment holdings by adding a real estate
component to their portfolio

. have a long-term investment horizon

. expect real estate to provide above-average investment returns over time

2
<PAGE>

What are the chief risks of investing in the fund?

An investment in the fund involves risk. An investor in the fund can lose money
if the value of the fund's investments declines.

. Market risk. The prices of real estate securities will vary with conditions
in the financial markets.

. Real estate exposure. The fund may be affected by the same factors that
influence the value of real estate in general.

. Interest rate risk. Higher mortgage rates can affect the profitability and
liquidity of properties in the real estate market (and, therefore, can
affect the value of the real estate securities associated with those
properties).

. Credit risk. A decline in the credit rating or perceived credit quality of
a real estate company's debt can have a negative impact on the value of its
stock.

. Non-diversified portfolio. The fund is non-diversified; therefore, the fund
may invest a greater percentage of its assets in the securities of one
issuer than a diversified fund. Accordingly, the results of any one
investment can have a significant impact on the fund's performance --
either good or bad.

. Concentration risk. Because the fund invests primarily in real estate
securities, the fund's reaction to real estate market variables may be
greater than that of a fund that invests in more than one market sector.

3
<PAGE>

PRIOR INVESTMENT RESULTS

The future performance of a mutual fund cannot be predicted by looking at its
performance in the past. However, a review of its prior results can help
illustrate the variability of returns that an investor in the fund would have
experienced over various time periods.

The total returns achieved by the fund through the fiscal years ended
December 31, 1998 and 1999 are shown in the bar chart below.

Security Capital U.S. Real Estate Shares Comparative Returns vs. Industry
Benchmarks Average Annual Total Returns

<TABLE>
<CAPTION>
One-Year April 23, 1997/(1)/ to Dec. 31, 1999
1999
<S> <C> <C>
SC-US Real Estate Shares/(2)/ 0.58% 4.77%

NAREIT Equity Index/(3)/ -4.62% -1.29%

Wilshire Real Estate
Securities Index /(4)/ -3.19% -0.88%
</TABLE>

This table compares the fund's results to changes in the National Association of
Real Estate Investment Trusts (NAREIT) Equity Index/2/ and the Wilshire Real
Estate Securities Index (WARESI)./3/ It provides an indication of the risks of
investing in the fund by comparing the fund's performance with a broad measure
of market performance. The calculation of total return assumes reinvestment of
all capital gains and income dividends. Results shown for the indices also
assume the reinvestment of dividends. Because the indices are not managed
investments, no operating expenses are deducted from their total returns.

1 The effective date of the fund's registration statement with the Securities
and Exchange Commission.

2 Effective February 1, 2000, the fund's Class R shares were converted into
Class I shares, with the resulting class known as Security Capital U.S.
Real Estate shares. The returns shown above are for the former Class I
shares. During the same period, the former Class R shares had average
annual total returns of 0.43% and 4.70% for the calendar year 1999 and for
the period April 23, 1997-December 31, 1999, respectively.

3 The NAREIT Equity Index is an unmanaged index of publicly traded U.S. tax-
qualified REITs that have 75% or more of their gross invested book assets
invested in the equity ownership of real estate.

4 The WARESI is an unmanaged, broad-based, market capitalization-weighted
index composed of publicly traded REITs and REOCs and partnerships, not
including special purpose or healthcare REITs. It is comprised of major
companies engaged in the equity ownership and operation of commercial real
estate. Prior to utilizing WARESI, the fund used the Wilshire REIT Index as
a benchmark, but changed because it was limited solely to REITs.

Security Capital U.S. Real Estate Shares
Calendar Year Total Returns/(1)/

1998 1999

-11.97% 0.58%

The fund's best quarterly performance during this time period was a gain of
13.73% for the quarter ended June 30, 1999. Its worst quarterly performance was
a -10.14% loss for the quarter ended September 30, 1998.

(1) Effective February 1, 2000, the fund's Class R shares were converted into
Class I shares, with the resulting class known as Security Capital U.S.
Real Estate shares. The returns shown above are for the former Class I
shares.

4
<PAGE>

SHAREHOLDER COSTS

The table below shows the amount of fees and expenses you may pay if you buy and
hold shares of the fund.

Shareholder Transaction Expenses (paid directly from your investment)

<TABLE>
<S> <C>
. Maximum sales charge (load) imposed on purchases
(as a percentage of offering price).................................. none

. Maximum deferred sales charge (load)................................. none

. Maximum sales charge (load) imposed on reinvested
dividends and other distributions.................................... none

. Redemption fee (as a percentage of amount redeemed, if applicable)... none

. Exchange fee......................................................... none
</TABLE>

Annual Fund Operating Expenses (expenses that are deducted from fund assets)

<TABLE>
<S> <C>
. Management fees..................................................... 0.60%
. Distribution and/or service (12b-1) fees............................ 0.25%
. Other expenses...................................................... 0.77%
. Total annual fund operating expenses................................ 1.62%
. Less reimbursed expenses*........................................... 0.27%
. Net fund operating expenses**....................................... 1.35%
</TABLE>

* Under the terms of an agreement dated December 14, 1999, GCMG agreed
that, beginning January 1, 2000, it would waive fees and/or reimburse
expenses to maintain the net operating expenses of the fund's Class I
and Class R shares, other than brokerage fees and commissions, taxes,
interest and other extraordinary expenses, at no more than 1.35% of the
average daily net asset value of the fund's Class I and Class R shares
until December 31, 2000. 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. Please note that the table
reflects the waiver in effect for the 2000 calendar year.

** Under an agreement dated December 7, 1998, GCMG maintained the net
operating expenses of the fund's Class I shares and Class R shares at
1.20% of the fund's Class I average daily net asset value and 1.35% of
the fund's Class R average daily net asset value and reimbursed expenses
of $256,747 and $8,775, respectively, through December 31, 1999.

What are the costs to the typical investor?

To help you compare the costs of investing in this fund with those of other
funds, the following examples illustrate the typical expenses a shareholder
would pay on a $10,000 investment over various time periods.

The following calculations assume that the fund's operating expenses remained
the same and that a 5 percent return was earned on your investment each year.

If you were to redeem your shares at the end of the period indicated, your costs
would be:

1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------------------------------
$138 $430 $744 $1,632

An investor's actual costs may be higher or lower than those shown in the
example.

5
<PAGE>

BUILDING THE

FUND PORTFOLIO

Security Capital and its affiliates

. A leader in public company ownership in the real estate industry

. Experience and market data from 16 affiliated companies

. Operations in 11 property types

. Market presence in 14 countries

Security Capital Global Capital Management Group (GCMG)

. Registered investment adviser with assets under management of more than
$1.5 billion as of March 31, 2000

Security Capital U.S. Real Estate Shares is a series of Security Capital Real
Estate Mutual Funds Incorporated (SC-REMFs). The following sections provide
basic information about the fund's management team and investment operations.

The Investment Adviser and Management Team

Security Capital Global Capital Management Group Incorporated (GCMG) is an
indirect, wholly owned subsidiary of Security Capital Group Incorporated
(Security Capital), a publicly traded company which, together with its
affiliated real estate operating companies, has a market capitalization of $23.6
billion (as of December 31, 1999).

GCMG, which is registered as an investment adviser with the Securities and
Exchange Commission (SEC), commenced operations in January 1995. Its offices are
located at 11 South LaSalle Street, Chicago, Illinois 60603.

GCMG, under the supervision of the directors of SC-REMFs, provides investment
advice and conducts the investment management activities of the fund. A team of
full-time GCMG professionals, working together as the fund's Portfolio
Management Committee, is primarily responsible for overseeing the day-to-day
operations of the fund.

GCMG has assets under management of more than $1.5 billion (as of March 31,
2000).

GCMG is uniquely positioned to capitalize on the real estate research and
investment expertise of Security Capital. The tools and resources that have been
developed and deployed since then reflect the organization's deep roots and
global reach in the real estate industry.

For services provided as investment adviser to the fund, GCMG is paid an annual
management fee equal to 0.60 percent of the average daily net asset value of the
fund's shares. The aggregate management fee paid to GCMG after expense waivers
and reimbursement was 0.33 percent of the average daily net asset value of the
fund's shares during the fiscal year ended December 31, 1999.

6
<PAGE>

Distribution and Servicing Plan

The fund has adopted a distribution and servicing plan under Rule 12b-1 of the
Investment Company Act of 1940 to help cover the cost of distributing and
providing services to shareholders.

The plan provides for the payment of a monthly fee (a "12b-1 fee") equal to 0.25
percent of the value of the average daily net assets invested in the fund's
shares. This payment is made to the fund's distributor, Security Capital Markets
Group Incorporated, an affiliate of GCMG.

Because the 12b-1 fee is paid out of fund assets on an ongoing basis, it will
increase the cost of an investment in the fund over time. It is possible that
such an arrangement would ultimately result in higher costs than the payment of
other types of sales charges.

The fund's distributor may enter into agreements with various third-party
organizations to provide certain distribution or servicing functions. These
organizations might include various brokerage firms or other industry-recognized
service providers of fund supermarkets or similar programs, as well as
institutional shareholders of record, financial institutions, depository
institutions, and other financial intermediaries. These agreements may be
governed by the plan.

TYPES OF INVESTMENTS

In seeking to achieve the fund's investment objectives, the fund's Portfolio
Management Committee uses the following types of investments and investment
policies, which may be changed by the fund's board of directors without
shareholder approval.

Real Estate Securities

The fund will invest, under normal market conditions, at least 80 percent of its
assets in equity securities of real estate companies operating in the United
States. The real estate securities in which the fund may invest include:

. real estate investment trusts (REITs)

. real estate operating companies (REOCs)

. common stocks

. rights or warrants to purchase common stocks

. convertible securities

. preferred stocks

7
<PAGE>

Real Estate Investment Trusts (REITs)
The fund may invest without limit in shares of REITs, which pool investors'
funds for investment primarily in income-producing real estate or in real estate
related loans (such as mortgages) or other interests. Therefore, a REIT normally
derives its income from rents or from interest payments, and may realize capital
gains by selling properties that have appreciated in value. A REIT is not taxed
on income distributed to shareholders if it complies with several requirements
relating to its organization, ownership, assets, and income and a requirement
that it distribute to its shareholders at least 95% of its taxable income (other
than net capital gains) for each taxable year.

Real Estate Operating Companies (REOCs)
A REOC is a company that derives at least 50 percent of its revenues from the
ownership, construction, financing, management or sale of commercial,
industrial, or residential real estate (or that has at least 50 percent of its
assets invested in such real estate).

Defensive Investments
If the fund's investment adviser (GCMG) determines that market conditions
justify a more defensive portfolio, the fund may make temporary investments in
high-grade bonds, U.S. government securities, and short-term money market
instruments. Such investments need not be issued by a real estate company.

Under normal circumstances, it is not likely that the fund will invest a
substantial portion of its assets in such securities. If such investments are
made, the fund will invest only in securities rated "investment grade" or
considered by GCMG to be of comparable quality.

If the fund makes defensive investments, such investments might not be
consistent with the fund's investment objectives. Therefore, during the period
of time when such investments are held, these objectives might not be met.

Investments in companies controlled by Security Capital
The real estate securities in which the fund invests may occasionally include
securities issued by real estate companies that are controlled by Security
Capital or its affiliates, subject to procedures approved by the directors
(including a majority of the independent directors) of SC-REMFs to assure that
these investments are made in the best interests of fund shareholders, prevent
conflicts of interest and comply with applicable law. Among other things, the
procedures will require investment decisions related to these controlled
companies to be made by GCMG independently of Security Capital and its other
affiliates. Because of certain federal securities laws limitations, the fund may
be restricted in its resale of these securities and will treat them as illiquid
subject to the fund's 10 percent limitation on investment in illiquid
securities.

8
<PAGE>

INVESTMENT RISKS

All investments involve some degree of risk. While all mutual funds, including
this one, employ techniques and practices to limit risk, there is always a
possibility that investors may earn a smaller return than expected or lose some
or all of their investment.

For this reason, an investment in the fund should be considered a long-term
investment. Before investing, investors should read this prospectus carefully
and come to understand the risks described below.

Please note that the most significant risks of investing in the fund are those
associated with investing in the real estate market. These risks could have a
direct impact on the fund's net asset value, yield, and total return.

Real Estate Exposure
The fund will not invest in real estate directly, but its investments will be
highly concentrated in real estate securities (see "Types of Investments"). The
value of real estate securities, of course, will be affected by many of the
factors that affect the value of real estate.

As a result, the fund is subject to investment risks that are similar to those
associated with direct ownership of real estate. For example, general or local
economic conditions could contribute to:

. a decline in the value of commercial or residential properties
. extended vacancies of properties
. increases in property taxes and operating expenses
. changes in interest rates

Real estate markets in general could also be affected by a range of variables
that could contribute to a fluctuation in the value of real estate securities,
including:

. variations in supply and demand
. increased competition or overbuilding
. changes in existing laws
. environmental issues

Other important risk factors that could affect the value of a real estate
security might apply to individual properties or the issuers of particular
securities:

. casualty or condemnation losses
. legal liabilities for injury or damages
. operating losses

Investing in REITs and REOCs
The fund's investments in REITs and REOCs (together "real estate securities")
are subject to the same general investment risks as those described under "Real
Estate Exposure."

9
<PAGE>

In general, the performance of real estate securities is dependent on the
management skills of their managers and of the operators of the real estate
properties in which they invest. Also, real estate securities may be affected by
changes in the value of the underlying property owned by such entities.

Under certain conditions, real estate securities could possibly fail to qualify
for tax-free pass-through of their income, resulting in a tax liability for
shareholders (such as the fund). Real estate securities also generate certain
expenses that would be paid indirectly by fund shareholders.

The fund may not be able to sell illiquid securities, including securities
issued by real estate companies controlled by Security Capital or its affiliates
at a time when GCMG otherwise believes it would be appropriate to do so and,
therefore, the fund may be disadvantaged.

Market Risk
The prices of the common stocks of REITs and REOCs, and other securities in
which the fund invests, will fluctuate from day to day and may--in either the
near term or over the long run--decline in value. The value of the fund may be
affected by a decline in financial markets in general.

Interest Rate Risk
As interest rates fluctuate, mortgage rates and other lending rates will
increase or decrease, which could affect the value of the fund's portfolio.
Higher mortgage rates, for example, could make properties less profitable or
more difficult to sell (as credit becomes more costly). Such conditions could
depress the prices of the securities in which the fund invests over either
short- or long-term periods.

Credit Risk
The performance of the fund may be affected by the credit ratings or perceived
credit quality of the real estate companies in which it invests. For example, if
a real estate company's credit rating is downgraded, or if market conditions
suggest that its ability to service its debt may be impaired in the future, the
price of its stock may decline, thereby affecting the value of the fund
portfolio.

Performance Risk
There can be no assurance that the fund will meet its investment objectives. As
with any mutual fund, the performance of the fund will vary and may not match
that of similar funds or relevant benchmark indexes. The value of fund shares
will vary and, when sold, may be worth more or less than their original cost.

10
<PAGE>

issuers than a diversified investment company. As a result, the economic,
political, or regulatory conditions that affect these issuers may have a greater
impact on this fund than on a similar fund that is more diversified.

Similarly, because the fund concentrates its investments in the real estate
industry, it is susceptible to the same risks that direct ownership of real
estate would entail. Therefore, its performance will be more dependent on
conditions in the real estate industry than a fund that invests in a more
diverse range of industries or market sectors.

HOW THE FUND MANAGES RISK

As the fund seeks to reduce investment risk, it will--under normal market
conditions--adhere to the following guidelines; which may be changed by the
fund's board of directors without shareholder approval:

With respect to the fund's total assets:
. not more than 15 percent of the fund's market value will be invested in the
securities of a single issuer

With respect to 50 percent of the market value of its total assets:
. not more than 5 percent will be invested in the securities of a single
issuer
. the fund will not own more than 10 percent of the outstanding voting
securities of a single issuer

Under certain circumstances, the fund may also invest up to 100 percent of its
assets in defensive investments (see "Types of Investments").

11
<PAGE>

HOW THE FUND

IS MANAGED
- --------------------------------------------------------------------------------

The fund follows a disciplined, research-driven investment approach. The key
elements of this approach are outlined below.

OPPORTUNITIES IN THE
REAL ESTATE INDUSTRY

GCMG believes that the U.S. real estate industry has experienced a fundamental
transformation, creating significant investment opportunities. As of December
31, 1999, the total market capitalization of U.S. equity REITs and REOCs was
approximately $317 billion, up from $8.8 billion as of December 31, 1990.

This shift from direct investment to increased "securitization" of real estate
offers significant benefits to shareholders, including:

. an efficient, practicable method of adding a diversified real estate
component to an investment portfolio
. enhanced liquidity versus private direct investments
. real-time pricing
. the potential for high dividend yields
. the potential for growth and sustainable rates of return

REITs have generally outperformed direct real estate investments over the long-
term. GCMG believes this trend will continue over the next decade.

INVESTMENT PROCESS

The organization and decision-making processes of GCMG are rooted in the belief
that superior investment results are achieved through a dedication to
proprietary, fundamental research. GCMG has developed a sophisticated set of
analytical tools that focus on fully integrating the following three research
disciplines:
. Real Estate Research
. Company Analysis
. Market Strategy

12
<PAGE>

These are highly specialized disciplines and each impacts the performance of
real estate companies and the ultimate pricing of their securities. A separate
team is dedicated to each research discipline to ensure balanced representation
in the investment process. The investment process integrates these three
disciplines under the broad direction of the Portfolio Management Committee, the
decision-making body for investment strategies.

Real Estate Research
Real Estate Research Group

The focus of the Real Estate Research Group is to understand the market
pressures and factors that affect rent growth, occupancy and development. This
understanding provides perspectives on future supply and demand trends for
property types in various markets and the relative impact for different
companies. This proprietary market and property analysis is an essential
component to the models developed by the Company Analysis Team.

Company Analysis
Company Analysis Team

The Company Analysis Team focuses on analyzing the companies within GCMG's
defined universe of investments. They evaluate the ability of a company to grow
their cash flow streams. They form a complete assessment of the company's
assets, operating management team and strategies through company and property
visits, careful scrutiny of SEC filings and field work. A five-year cash flow
forecast is developed in the course of evaluating companies, as GCMG believes
that the strength and quality of a company's net cash flow is a key determinant
of above-average return opportunities.

Market Strategy
Market Strategy Team

The Market Strategy Team focuses on interpreting and predicting pricing trends
and the valuation of securities within the context of real estate securities
market and financial market return expectations. The target pricing perspectives
generated are used by the Portfolio Management Committee to construct trading
strategies and make stock selections. The Market Strategy Team is then
responsible for executing the trading strategies.

13
<PAGE>

Portfolio Construction
Portfolio Management Committee

The Portfolio Management Committee directs all key investment decisions and
oversees the investment process. The Committee meets weekly and evaluates
emerging real estate research, specific analysis and the recommendations from
the Company Analysis Team, as well as key recurring reports to create price
forecasts to produce a highly focused target portfolio for the fund. This target
portfolio is the final product integrating the critical real estate and capital
market expertise which helps to identify the most attractive investment
opportunities.

14
<PAGE>

ON BECOMING A

SHAREHOLDER
================================================================================

HOW TO PURCHASE FUND SHARES

Investors may open an account to purchase fund shares through the fund's
transfer agent or through various authorized brokers and their intermediaries.
The fund has authorized one or more unaffiliated brokers to accept purchase and
redemption orders on its behalf. These brokers, in turn, may designate
intermediaries to accept such orders on the fund's behalf. In such cases, the
fund will be deemed to have received an order when an authorized broker (or its
authorized intermediary) accepts the order.

All purchases of the fund's shares are made at the net asset value determined
after the receipt of your payment by the fund's transfer agent or an authorized
broker (or its authorized designee). All shares purchased, together with any
dividends and capital gains that are paid in additional shares, will be credited
to this account.

In some instances, when the fund's shares are offered through an authorized
broker or intermediary agent, an investor may be charged a fee to effect a
transaction through such broker or agent.

Initial Investment

The minimum initial investment in the fund is $2,500. For individual retirement
accounts (including Traditional IRAs and Roth IRAs) and employee benefit plans
qualified under sections 401, 403(b)(7) or 457 of the code, as well as UGMA or
UTMA accounts, the minimum initial investment is $1,000. For investors using the
Automatic Investment Plan (described below), the minimum investment is $250.

The initial purchase of shares may be made only by mail or by wire; telephone
transactions may be used only for subsequent purchases of fund shares. To open
an account, follow the procedures outlined below:

By Mail

1. Complete and sign the account application enclosed with this prospectus.
2. Enclose a check or money order drawn on a U.S. bank, savings and loan, or
credit union (made payable to "Security Capital Real Estate Mutual Funds").

The following describes how to open an account, what to expect as a shareholder
in the fund, and other important information that can help make owning fund
shares a more satisfying experience.

15
<PAGE>

3. Send your application and payment to one of the following addresses:

. Via U.S. Mail
. Boston Financial Data Services
Attn: Security Capital Real Estate Mutual Funds Incorporated
P.O. Box 8121
Boston, Massachusetts 02266-8121

. Via Overnight Delivery Service
Boston Financial Data Services
Attn: Security Capital Real Estate Mutual Funds Incorporated
66 Brooks Drive
Braintree, Massachusetts 02184

By Wire
1. Call toll-free 1-800-409-4189 prior to wiring any funds in order to obtain
a confirmation number and to ensure prompt and accurate handling of your
investment. A completed application must be on file before funds are wired.
2. Use the following instructions to wire your investment to the fund's
transfer agent:

. Wire to:
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02101
ABA Number 011000028

. Credit:
DDA Number 9905-378-7

. Further Credit:
Security Capital Real Estate Mutual Funds Incorporated
Shareholder Registration
Shareholder Fund and Account Number

All Investments
. Customer orders will be priced at the fund's net asset value (see
"Determination of Net Asset Value") computed after they are accepted by the
fund's transfer agent, an authorized broker, or its authorized
intermediary.
. Payment must be in U.S. funds. Neither cash nor third-party checks will be
accepted. If a shareholder's check does not clear, a service fee of $20
will be charged.
. All funds will be invested in full and fractional shares. A confirmation
indicating the details of each purchase will be sent to you promptly after
each transaction.

16
<PAGE>

. Certificates for full shares can be obtained by writing to the transfer
agent; all fractional shares will be held in book entry form. Please note
that it is more difficult to redeem shares held in certificate form.

Additional Investments
If you wish to purchase additional shares, the minimum for subsequent
investments is $250. These share purchases may be made by mail, by wire, or by
telephone as described below.

By Mail
1. When making an additional investment by mail, please use the Additional
Investment Form provided on the lower portion of your account statement.
2. Enclose a check or money order drawn on a U.S. bank, savings and loan, or
credit union (made payable to "Security Capital Real Estate Mutual Funds").
3. Send your form and payment to one of the addresses listed under By Mail in
the "Initial Investment" section above.

By Wire
1. To make an additional purchase by wire, a shareholder may call toll-free
1-800-409-4189 for complete wiring instructions.

By Telephone
1. Call toll-free 1-800-409-4189 to request a purchase of additional shares by
moving money from your bank account to your fund account. (Please note that
you must have previously elected the telephone purchase option in writing.)
Your bank account must be held at a domestic financial institution that is
an Automated Clearing House (ACH) member.
2. To purchase shares at the net asset value determined at the close of any
given trading day, the transfer agent must receive a purchase order by
telephone before the close of regular trading on that day.

Automatic Investment Plan
The Automatic Investment Plan allows regular, systematic investments in the
fund's shares from a bank checking or NOW account. The fund will reduce the
minimum initial investment to $250 if a shareholder elects to use the Automatic
Investment Plan. To establish the Automatic Investment Plan, an investor should
complete the appropriate section in the account application and an existing
shareholder should call 1-888-SECURITY (toll free) for an automatic investment
plan form.

17
<PAGE>

The Automatic Investment Plan can be set up with any financial institution that
is a member of the ACH. Under certain circumstances (such as discontinuation of
the Automatic Investment Plan before the minimum initial investment is reached,
or, after reaching the minimum initial investment, the account balance is
reduced to less than $500), the fund reserves the right to close such account.
Prior to closing any account for failure to reach the minimum initial
investment, the fund will give a shareholder written notice and 60 days in which
to reinstate the Automatic Investment Plan or otherwise reach the minimum
initial investment. A shareholder should consider his or her financial ability
to continue in the Automatic Investment Plan until the minimum initial
investment amount is met because the fund has the right to close such account
for failure to reach the minimum initial investment. Such closing may occur in
periods of declining share prices.

Under the Automatic Investment Plan, a shareholder may choose to make
investments on the day of his or her choosing (or the next business day
thereafter) in amounts of $250 or more. There is no service fee for
participating in the Automatic Investment Plan. However, a service fee of $20
will be deducted from a shareholder's account for any Automatic Investment Plan
purchase that does not clear due to insufficient funds or, if prior to notifying
the fund in writing or by telephone to terminate the plan, a shareholder closes
his or her bank account or in any manner prevents, withdrawal of funds from the
designated bank checking or NOW account.

The Automatic Investment Plan is a method of using dollar-cost averaging, which
is an investment strategy that involves investing a fixed amount of money at a
regular time interval. However, a program of regular investment cannot ensure a
profit or protect against a loss from declining markets. By always investing the
same amount, a shareholder will be purchasing more shares when the price is low
and fewer shares when the price is high. Since such a program involves
continuous investment regardless of fluctuating share values, a shareholder
should consider his or her financial ability to continue the program through
periods of low share price levels.

18
<PAGE>

HOW TO REDEEM FUND SHARES

You may request redemption of some or all of your shares at any time, either by
telephone or by mail, through the fund's transfer agent. You may also request to
redeem shares through an authorized broker or agent, though you may be charged a
fee to do so.

By Telephone

Call the transfer agent toll-free at 1-800-409-4189 to request a redemption of
your shares. (Please note that you must have previously elected the telephone
redemption option in writing.)

By Mail and By Wire

1. For most redemption requests, you need only furnish a written,
unconditional request stating the number of your shares (or the exact
dollar amount) that you wish to redeem. Your request must be signed exactly
as the shares are registered, and all joint owners must sign.
2. Send your written request to Security Capital Real Estate Mutual Funds
Incorporated at one of the addresses listed under By Mail in the "Initial
Investment" section above.
3. If you wish, you may have your redemption proceeds wired to a commercial
bank that you have authorized on your account application (a service fee of
$12 will be charged for wire redemptions). Otherwise, a check for the
proceeds will be mailed to you at the address of record for your account.

Once your request has been accepted, the fund normally will mail redemption
proceeds to you on the next business day, and no later than seven business days
after it receives and accepts your request. When a purchase has been made by
check, the fund may hold payment of redemption proceeds until reasonably
satisfied that the check has cleared. This may take up to 12 days.

To request redemption of any shares held in certificate form, the certificate
must be endorsed for transfer (or accompanied by a duly executed stock power)
and must be submitted to the transfer agent together with your written
redemption request.

Redemption proceeds will be mailed directly to you or transferred to a
predesignated account. To change the designated account, a written request with
signature(s) guaranteed must be sent to the fund's transfer agent. No telephone
redemptions will be allowed within 30 days of such a change.

The fund reserves the right to limit the number of telephone redemptions made by
a shareholder.

19
<PAGE>

For Your Protection
To help ensure the integrity of your account, the fund employs the following
reasonable measures to protect against unauthorized redemption of fund shares.
These include:
. The fund may require some form of personal identification prior to acting
upon telephone instructions, providing written confirmation of all such
transactions, and/or tape recording all telephone instructions.
. Once a telephone redemption request has been made, it may not be modified
or canceled.
. Additional documentation may be requested from corporations, executors,
administrators, trustees, guardians, agents, or attorneys-in-fact before a
redemption request made by mail or by wire is granted.

. Any written redemption requests received within 30 days after an address
change must be accompanied by a signature guarantee (see "Signature
Guarantees" below).
. The fund reserves the right to refuse any telephone redemption in whole or
in part.

Assuming procedures such as the above have been followed, the fund will not be
liable for any loss, cost, or expense for acting upon a shareholder's telephone
instructions or for any unauthorized telephone redemption.

Signature Guarantees
Signature guarantees are required for any of the following transactions:
. redemption requests mailed to or wired to a person other than the
registered owner(s) of the shares
. redemption requests to be mailed to or wired to an address other than the
account's address of record

. any redemption request received within 30 days of a change of address
. any redemption request involving $100,000 or more

A signature guarantee may be obtained from any eligible guarantor institution,
as defined by the SEC, such as banks, savings associations, credit unions,
brokerage firms, and others.

20
<PAGE>

OTHER REDEMPTION INFORMATION

The fund may suspend the right of redemption during any period when:
. trading on the New York Stock Exchange (NYSE) is restricted or the NYSE is
closed (other than customary weekend and holiday closings)
. an emergency (as defined by rules adopted by the SEC) makes disposal of
portfolio securities or determination of the value of net assets of the
fund not reasonably practicable

A shareholder's account may be closed if, upon the redemption of shares, the
value of remaining shares is less than $2,500 ($1,000 in the case of individual
retirement accounts and employee benefit plans qualified under sections 401,
403(b)(7) or 457 of the code). The shareholder will be given notice of at least
60 days and the opportunity to make additional investments that will increase
the account's value so that it satisfies the minimum amount required.

The fund may, under certain circumstances, redeem shares in kind.

PERFORMANCE REPORTING

Determination of Net Asset Value
Shares of the fund are sold, without a sales charge, at net asset value. The net
asset value per share is calculated on each day the NYSE is open for trading.
Net asset value will not be calculated on any national holiday or any other day
the NYSE is not open for trading.

Net asset value is determined by adding the market value of all securities in
the fund's portfolio and any other assets, subtracting liabilities, and dividing
by the total number of shares then outstanding. This is the price at which
purchase or redemption of the fund's shares is effected.

Each trading day, portfolio securities are valued at their last sale price as of
the close of trading on the exchange representing the principal market for such
securities, or at the mean of the closing bid and asked price for that day. Any
securities for which market quotations are not readily available are valued in
good faith in a manner that best reflects their fair value.

Dividends and Distributions
The fund pays dividends from its investment income once each quarter and pays
any capital gains at least once each year. All dividends and distributions are
automatically reinvested in additional shares of the fund (at net asset value)
unless you choose to have them paid in cash. As a shareholder, you will receive
a statement reflecting all payments made to your account.

21
<PAGE>

TAX CONSEQUENCES AND YEAR-END REPORTING

Federal Income Taxes
To comply with tax law requirements, the fund intends to make annual
distributions of its investment income. It is likely that a portion of each
distribution (whether received in cash or reinvested in shares of the fund) will
be taxable to shareholders of the fund as ordinary income and the remainder of
such distribution will be taxable to shareholders as long-term capital gain.

Sales and other dispositions by a shareholder of his or her shares of the fund
generally will be treated as capital gain if the amount received by the
shareholder in the sale exceeds the shareholder's tax basis in the shares and
will be treated as a capital loss if the shareholder's tax basis in the fund
shares exceeds the amount received by the shareholder in the sale. A
shareholder's tax basis in his or her shares generally will equal the cost of
the shares plus the amount of any distributions reinvested in shares of the
fund. Any capital gain or loss will be long-term capital gain or loss if the
shares sold have been owned by the shareholder for more than one year from the
date of sale.

State and Local Taxes
Fund distributions also may be subject to state and local taxes. Shareholders
should consult their own tax advisers regarding the particular state and local
tax consequences of an investment in the fund.

Year-End Tax Statement
After the end of each calendar year, the fund will send shareholders a statement
showing the amount of all dividends and distributions paid during the year and
the portion of those distributions that will be treated as a capital gain
distribution.

REPORTS TO SHAREHOLDERS

The fund sends a report of portfolio investments and other information to its
shareholders on a semi-annual basis. An annual report, which includes financial
statements audited by an independent accounting firm, is sent to shareholders
each year. Please call toll-free 1-888-SECURITY for a copy of the fund's most
recent shareholder report.

22
<PAGE>

FINANCIAL

HIGHLIGHTS

================================================================================

<TABLE>
<CAPTION>
April 23, 1997/(1)/
through
1999 1998 December 31, 1997
<S> <C> <C> <C>
Per Share Data/(2)/
Net asset value, beginning of period............. $ 9.82 $ 11.95 $ 10.15
Income from investment operations:
Net investment income......................... 0.45 0.42 0.31
Net realized and unrealized gain
(loss) on investments....................... (0.39) (1.80) 2.49
----------- ---------- ---------
Total from investment operations.............. 0.06 (1.38) 2.80
Less distributions:
Dividends from net investment income.......... (0.45) (0.43) (0.31)
Distributions from net realized gains......... - (0.29) (0.54)
Return of capital............................. (0.06) (0.03) -
----------- ---------- ---------
Total distributions........................... (0.51) (0.75) (1.00)
Net asset value, end of period................... $ 9.37 $ 9.82 $ 11.95
Total return/(3)/................................ 0.58% (11.94)% 28.01%
Supplemental data and ratios:
Net assets, end of period ($000).............. $50,949 $94,811 $117,232
Ratio of expenses to average net assets/(4)(5)/ 1.20% 1.00% 1.16%
Ratio of net investment income to
average net assets/(4)(5)/.................. 4.18% 4.75% 4.08%
Portfolio turnover rate....................... 49.66% 109.49% 82.10%
</TABLE>

(1) Date the fund was effective with the SEC.
(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 of both Classes.
(3) Not annualized for the period April 23, 1997 through December 31, 1997.
(4) Annualized.
(5) Without expense reimbursements of $256,747 for the year ended December 31,
1999, the ratio of expenses to average net assets would have been 1.62%,
and the ratio of net investment income to average net assets would have
been 3.76%. Without expense reimbursements of $301,721 for the year ended
December 31, 1998, the ratio of expenses to average net assets would have
been 1.29% and the ratio of net investment income to average net assets
would have been 4.46%. Without expense reimbursement of $30,276 for the
period April 23, 1997 through December 31, 1997, the ratio of expenses to
average net assets would have been 1.19% and the ratio of net investment
income to average net assets would have been 4.04%.

The financial highlights table is intended to help you understand the fund's
financial performance since April 23, 1997, the effective date of the fund's
registration statement with the SEC.

The information in this table reflects financial results for a single fund
share. The total returns in the table represent the rate that an investor would
have earned (or lost) on an investment in the fund (assuming reinvestment of all
dividends and distributions).

This information has been audited by Arthur Andersen LLP, whose report--along
with the fund's financial statements--is included in the statement of additional
information, which is available upon request.

23
<PAGE>

This page intentionally left blank.
<PAGE>

SECURITY CAPITAL
EUROPEAN REAL ESTATE SHARES

================================================================================

A mutual fund investing
primarily in equity securities
of publicly traded real estate companies
organized principally in European countries

PROSPECTUS
April 28, 2000

LOGO
SECURITY CAPITAL

<PAGE>

SECURITY CAPITAL
EUROPEAN REAL ESTATE SHARES

================================================================================

TABLE OF CONTENTS

<TABLE>
<S> <C>
The Fund Blueprint..................................................... 2
Overview
Prior Investment Results
Shareholder Costs
Building the Fund Portfolio............................................ 6
The Investment Adviser and Management Team
Types of Investments
Investment Risks
How the Fund Manages Risk
How the Fund is Managed................................................ 14
Opportunities in the Real Estate Industry
Investment Process
On Becoming a Shareholder.............................................. 16
How to Purchase Fund Shares
How to Redeem Fund Shares
Other Redemption Information
Performance Reporting
Tax Consequences and Year-End Reporting
Reports to Shareholders
Financial Highlights................................................... 24
To Learn More About the Fund................................... Back Cover
Contact Us for More Information................................ Back Cover
</TABLE>

A WORD TO POTENTIAL INVESTORS

The information in this prospectus is presented to help you decide whether the
fund matches your financial situation and investment goals.

The minimum initial investment in the fund's shares -- which are sold at net
asset value without a sales charge -- is $2,500.

About This Document

This prospectus describes the objectives and policies of the fund, the potential
risks of investing, the fund's management, and other information necessary to
make an informed investment decision.

Please read it carefully before you invest and then retain it for future
reference.
<PAGE>

THE FUND

BLUEPRINT

================================================================================

OVERVIEW

What are the fund's investment objectives?
. The fund seeks to provide shareholders with above-average total returns,
including current income and capital appreciation, primarily through
investments in equity securities of publicly traded real estate companies
organized principally in European countries.
. Long-term, the fund's objective is to achieve top-quartile total returns as
compared with other mutual funds that invest in publicly traded real estate
companies organized principally in European countries.

What kind of investments does the fund make?
. The fund invests primarily in real estate securities. It does not invest in
real estate directly.
. Typically, at least 65 percent of the fund's assets are invested in equity
securities of publicly traded real estate companies located primarily in
European countries, including Austria, Belgium, Denmark, Finland, France,
Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain,
Sweden, Switzerland, Turkey, and the United Kingdom.
. The fund's investments generally include equity securities-primarily common
stocks, rights or warrants to purchase common stocks, convertible
securities, and preferred stocks.

What type of investor might consider investing in the fund?
Based on the fund's investment goals and strategies, it might be suitable for
investors who:
. seek to diversify their investment holdings by adding a real estate
component to their portfolio
. wish to add a measure of international diversification to their portfolio
. have a long-term investment horizon
. expect real estate to provide above-average investment returns over time

2
<PAGE>

What are the chief risks of investing in the fund?
An investment in the fund involves risks. An investor in the fund can lose money
if the value of the fund's investments declines.
. Market risk. The prices of real estate securities will vary with conditions
in the financial markets.
. Foreign securities risk. The fund's investments in securities issued by
companies and governments of foreign nations may present certain political,
economic, currency, regulatory, market and transaction risks which would
not normally be encountered when investing in securities of U.S. issuers.
. Real estate exposure. The fund may be affected by the same factors that
influence the value of real estate in general.
. Interest rate risk. Higher interest rates can affect the profitability and
liquidity of properties in the real estate market (and, therefore, can
affect the value of the real estate securities associated with those
properties).
. Credit risk. A decline in the credit rating or perceived credit quality of
a real estate company's debt can have a negative impact on the value of its
stock.
. Non-diversified portfolio. The fund is non-diversified; therefore, the fund
may invest a greater percentage of its assets in the securities of one
issuer than a diversified fund. Accordingly, the results of any one
investment can have a significant impact on the fund's performance--either
good or bad.
. Concentration risk. Because the fund invests primarily in real estate
securities, the fund's reaction to real estate market variables may be
greater than that of a fund that invests in more than one market sector.

3
<PAGE>

PRIOR INVESTMENT RESULTS

The future performance of a mutual fund cannot be predicted by looking at its
performance in the past. However, a review of its prior results can help
illustrate the variability of fund returns that an investor in the fund would
have experienced over various time periods.

The total return achieved by the fund through the fiscal year ended December 31,
1999, is shown in the bar chart below.

Security Capital European Real Estate Shares
Comparative Returns vs. Industry Benchmark
Average Annual Total Returns

<TABLE>
<CAPTION>
One-Year
Jan. 1, 1999 to June 30, 1998/(1)/
Dec. 31, 1999 to Dec. 31, 1999

<S> <C> <C>
C-European Real Estate
Shares 4.12% 4.93%

Salomon Smith Barney-European
Property Index 2.63% -4.02%
</TABLE>

This table compares the fund's results to changes in the Salomon Smith Barney -
European Property Index. It provides an indication of the risks of investing in
the fund by comparing the fund's performance with a broad measure of market
performance. The calculation of total return assumes reinvestment of all capital
gains and income dividends. Results shown for the index also assumes the
reinvestment of dividends. Because the index is not a managed investment, no
operating expenses are deducted from its total returns.

/1/ The effective date of the fund's registration statement with the Securities
and Exchange Commission.

/2/ Effective February 1, 2000, the fund's Class R shares were converted into
Class I shares, with the resulting class known as Security Capital European
Real Estate shares. The returns shown above are for the former Class I
shares. Since inception, there were no former Class R shares outstanding.

/3/ The Salomon Smith Barney - European Property Index is a float-weighted index
that includes 15 countries in Europe and the listed shares of all real
estate companies with an available market capitalization (float) of at least
$100 million.

Security Capital European Real Estate Shares
Calendar Year Total Returns/(1)/

The fund's best quarterly performance during this time period was a gain of
4.45% for the quarter ended September 30, 1999. Its worst quarterly performance
was a 7.81% loss for the quarter ended December 31, 1999.

/(1)/ Effective February 1, 2000, the fund's Class R shares were converted into
Class I shares, with the resulting class known as Security Capital
European Real Estate shares. The returns shown above are for the former
Class I shares.

4
<PAGE>

SHAREHOLDER COSTS

The table below shows the amount of fees and expenses you may pay if you buy and
hold shares of the fund.

These expenses cover basic operating costs, such as fund management, account
administration, and other services. Other customary expenses include transfer
agent fees, custodial fees paid to the bank that holds the fund's securities,
audit fees, and legal expenses.

Shareholder Transaction Expenses (paid directly from your investment)

. Maximum sales charge (load) imposed on purchases
(as a percentage of offering price).............................. none
. Maximum deferred sales charge (load)............................. none
. Maximum sales charge (load) imposed on reinvested dividends and
other distributions.............................................. none
. Redemption fee (as a percentage of amount redeemed, if
applicable)...................................................... none
. Exchange fee..................................................... none

Annual Fund Operating Expenses (expenses that are deducted from fund assets)

. Management fees................................................. 0.85%
. Distribution and/or service (12b-1) fees........................ 0.25%
. Other expenses.................................................. 3.22%
. Total annual fund operating expenses............................ 4.32%
. Less reimbursed expenses*....................................... 2.87%
. Net fund operating expenses**................................... 1.45%

* Under the terms of an agreement dated December 14, 1999, GCMG agreed
that, beginning January 1, 2000, it would waive fees and/or reimburse
expenses to maintain the net operating expenses of the fund's Class I
shares at 1.45% of the value of the daily net assets of the Class I
shares and the fund's Class R shares at 1.60% of the value of the daily
net assets of the Class R shares. Effective February 1, 2000, the fund's
Class R shares were converted to Class I shares, with the resulting
class known as Security Capital European Real Estate Shares. Please note
that the table reflects the waiver of 1.45% in effect for the fund's one
class of shares for the 2000 calendar year.

** Under an agreement dated December 7, 1998, GCMG maintained the net
operating expenses of the fund's Class I shares at 1.45% of the fund's
Class I shares average daily net asset value and reimbursed expenses of
$337,352 through December 31, 1999. There were no outstanding Class R
shares for the period shown.

What are the costs to the typical investor?
To help you compare the costs of investing in this fund with those of other
funds, the following examples illustrate the typical expenses a shareholder
would pay on a $10,000 investment over various time periods.

The following calculations assume that the fund's operating expenses remained
the same and that a 5 percent return was earned on your investment each year.

If you were to redeem your shares at the end of the period indicated, your costs
would be:

1 YEAR 3 YEARS 5 YEARS 10 YEARS
------------------------------------
$149 $462 $797 $1,745

An investor's actual costs may be higher or lower than those shown in the
example.
<PAGE>

BUILDING THE FUND PORTFOLIO
================================================================================

Security Capital and its affiliates

. A leader in public company ownership in the real estate Industry

. Experience and market data from 16 affiliated companies

. Operations in 11 property types

. Market presence in 14 countries

Security Capital Global Capital Management Group (GCMG)

. Registered investment advisor with assets under management of more than
$1.5 billion as of march 31, 2000

Security Capital European Real Estate Shares is a series of Security Capital
Real Estate Mutual Funds Incorporated (SC-REMFs). The following sections provide
basic information about the fund's management team and investment
operations.

THE INVESTMENT ADVISER AND MANAGEMENT TEAM

GCMG has assets under management of more than $1.5 billion (as of March 31,
2000). GCMG is uniquely positioned to capitalize on the real estate research and
investment expertise of Security Capital. The tools and resources which have
been developed and deployed since then reflect the organization's deep roots and
global reach in the real estate industry.

For services provided as investment adviser to the fund, GCMG is paid an annual
management fee equal to 0.85% of the average daily net asset value of the fund's
shares. After expense waivers and reimbursement, no management fee was paid to
GCMG and Security Capital Global Capital Management Group (Europe) S.A., the
fund's former investment sub-adviser, during the fiscal year ended December 31,
1999.

6
<PAGE>

Distribution and Servicing Plan

The fund has adopted a distribution and servicing plan under Rule 12b-1 of the
Investment Company Act of 1940 to help cover the cost of distributing and
providing services to shareholders.

The fund's distributor may enter into agreements with various third-party
organizations to provide certain distribution or servicing functions. These
organizations might include various brokerage firms or other industry-recognized
service providers of fund supermarkets or similar programs as well as
institutional shareholders of record, financial institutions, depository
institutions, and other financial intermediaries. These agreements may be
governed by the plan.

TYPES OF INVESTMENTS

Real Estate Securities
The fund will invest, under normal market conditions, at least 65 percent of its
assets in equity securities of publicly traded real estate companies operating
principally in European countries, including Austria, Belgium, Denmark, Finland,
France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal,
Spain, Sweden, Switzerland, Turkey, and the United Kingdom. The fund may also
invest in the equity securities of real estate companies located in Eastern
Europe and other European emerging market countries. The real estate securities
in which the fund may invest includes:
. common stocks
. rights or warrants to purchase common stocks
. convertible securities
. preferred stocks
The fund may, from time to time, invest in debt securities of issuers in the
real estate industry. Such securities will be rated as investment grade quality

7
<PAGE>

(rated no lower than A by at least one major rating agency) or, if not rated,
believed by the fund's investment adviser to be of comparable quality.

Depositary Receipts
The fund may purchase sponsored or unsponsored American Depositary Receipts
("ADRs"), European Depositary Receipts ("EDRs") and Global Depositary Receipts
("GDRs") (collectively, "Depositary Receipts"). ADRs are Depositary Receipts
typically used by a U.S. bank or trust company which evidence ownership of
underlying securities issued by a foreign corporation. EDRs and GDRs are
typically issued by foreign banks or trust companies, although they also may be
issued by U.S. banks or trust companies, and evidence ownership of underlying
securities issued by either a foreign or a United States corporation. Generally,
Depositary Receipts in registered form are designed for use in the U.S.
securities markets outside the United States. Depositary Receipts may not
necessarily be denominated in the same currency as the underlying securities
into which they may be converted.

Defensive Investments

If the fund's investment adviser (GCMG) determines that market conditions
justify a more defensive portfolio, the fund may make temporary investments in
high-grade, short-term corporate obligations, bank obligations, or money market
securities denominated in U.S. dollars or any foreign currency. Such investments
need not be issued by a real estate company. Defensive investments may include
short-term (less than 12 months to maturity) and medium-term (not greater than
five years to maturity) obligations issued or guaranteed by the U.S. Government
or the government of a foreign country, their agencies, or their
instrumentalities.

8
<PAGE>

cedures will require investment decisions related to these controlled companies
to be made by GCMG independently of Security Capital and its other affiliates.
Because of certain federal securities laws limitations, the fund may be
restricted in its resale of these securities and will treat them as illiquid
subject to the fund's 10 percent limitation on investment in illiquid
securities.

INVESTMENT RISKS

As a result, the fund is subject to investment risks that are similar to those
associated with direct ownership of real estate. For example, general or local
economic conditions could contribute to:
. a decline in the value of commercial or residential properties
. extended vacancies of properties
. increases in property taxes and operating expenses
. changes in interest rates

Real estate markets in general could also be affected by a range of variables
that could contribute to a fluctuation in the value of real estate securities,
including:
. variations in supply and demand
. increased competition or overbuilding
. changes in existing laws
. environmental issues

9
<PAGE>

Other important risk factors which could affect the value of a real
estate security might apply to individual properties or the issuers of
particular securities:
. casualty or condemnation losses
. legal liabilities for injury or damages
. operating losses

Investing in Foreign Securities
Investments in foreign securities, including those of foreign governments, may
involve greater risks than investing in comparable domestic securities.
Securities of some foreign companies and governments may be traded in the United
States, but many foreign securities are traded primarily in foreign markets. The
risks of foreign investing include:
. Currency Risk. As long as the fund holds a foreign security, its value will
be affected by the value of the local currency relative to the U.S. dollar.
When the fund sells a foreign denominated security, its value may be worth
less in U.S. dollars even though the security increases in value in its
home country. U.S. dollar denominated securities of foreign issuers may
also be affected by currency risk.
. Political and Economic Risk. Foreign investments may be subject to
heightened political and economic risks, particularly in underdeveloped or
developing countries which may have relatively unstable governments and
economies based on only a few industries. In some countries, there is the
risk that the government may take over the assets or operations of a
company or that the government may impose taxes or limits on the removal of
the fund's assets from that country. The fund may invest in European
emerging market countries, including Hungary, Poland, the Czech Republic,
the Slovak Republic and Romania. Investments by the fund in issuers located
in these countries involve greater risks such as immature economic
structures, national policies restricting investments by foreigners and
different legal systems.
. Regulatory Risk. There may be less government supervision of foreign
markets. Foreign issuers may not be subject to the uniform accounting,
auditing and financial reporting standards and practices applicable to
domestic issuers. Accordingly, there may be less publicly available
information about foreign issuers than domestic issuers.
. Market Risk. Foreign securities markets, particularly those of
underdeveloped or developing countries, may be less liquid and more
volatile than domestic markets. Certain markets may require payment for
securities before delivery and delays may be encountered in settling
securities transactions. In some foreign markets, there may be protection
against failure by other parties to complete transactions. Also, there may
be limited legal recourse against an issuer in the event of a default on a
debt instrument.

10
<PAGE>

. Transaction Costs. Transaction costs of buying and selling foreign
securities, including brokerage, tax and custody costs, are generally
higher than those involved in domestic transactions.

Foreign securities purchased indirectly (e.g., depositary receipts) are subject
to many of the above risks, including currency risk, because their values depend
on the performance of a foreign security denominated in its home currency.

Euro Conversion Risk
The countries that currently comprise the European Economic and Monetary Union
("EMU") agreed to reduce trade barriers between themselves and eliminate
fluctuations in their currencies through the introduction of a single European
currency on January 1, 1999. This single European currency (the euro) is
expected to replace the existing national currencies of all initial EMU
participants by July 1, 2002. All European securities are generally now priced
in the euro. Thereafter, these securities will trade and make dividend and other
payments only in euros. Like other investment companies and business
organizations, including companies in which the fund invests, the fund could be
adversely affected:
. If the euro, or EMU as a whole, does not take effect as planned.
. If the value of the euro declines.
. If the computing, accounting and trading systems used by the fund's service
providers or other entities with which the fund or its service providers do
business are not capable of recognizing the euro as a distinct currency
beginning with the euro conversion.

Investing in Real Estate Companies
The fund will not invest in real estate directly, but only in securities issued
by real estate companies. However, the fund may be subject to risks similar to
those associated with the direct ownership of real estate (in addition to
securities markets risks) because of its policy of concentration in the
securities of companies in the real estate industry. These risks are described
under "Real Estate Exposure."

Under certain conditions, certain real estate securities could possibly fail to
qualify for tax-free pass-through of their income, resulting in a tax liability
for shareholders (such as the fund). Real estate securities also generate
certain expenses which would be paid indirectly by fund shareholders.

11
<PAGE>

The fund may not be able to sell illiquid securities, including securities
issued real estate companies controlled by Security Capital or its affiliates at
a time when GCMG otherwise believes it would be appropriate to do so and,
therefore, the fund may be disadvantaged.

Market Risk
The prices of the common stocks of real estate companies and other securities in
which the fund invests will fluctuate from day to day and may - in either the
near term or over the long run - decline in value. The value of the fund may be
affected by a decline in financial markets in general.

Interest Rate Risk
As interest rates fluctuate, mortgage rates and other lending rates will
increase or decrease, which could affect the value of the fund's portfolio.

Higher mortgage rates, for example, could make properties less profitable or
more difficult to sell (as credit becomes more costly). Such conditions could
depress the prices of the securities in which the fund invests over either
short-or long-term periods.

Concentration Risk
The fund is non-diversified. This means that the proportion of its assets that
can be invested in the securities of a single issuer is not limited by law. In
addition, the fund generally will invest in a smaller number of individual
issuers than a diversified investment company. As a result, the economic,
political, or regulatory conditions that affect these issuers may have a greater
impact on this fund than on a similar fund that is more diversified.

Similarly, because the fund concentrates its investments in the real estate
industry, it is susceptible to the same risks that direct ownership of real
estate would entail. Therefore, its performance will be more dependent on
conditions in the real estate industry than a fund which invests in a more
diverse range of industries or market sectors.

12
<PAGE>

HOW THE FUND MANAGES RISK
As the fund seeks to reduce investment risk, it will -- under normal market
conditions -- adhere to the following guidelines; which may be changed by the
fund's board of directors without shareholder approval:

With respect to the fund's total assets:
. not more than 15 percent of the fund's market value will be invested in the
securities of a single issuer

Under certain circumstances, the fund may also invest up to 100 percent of its
assets in defensive investments (see "Types of Investments").

13
<PAGE>

HOW THE FUND
IS MANAGED
================================================================================

The fund follows a disciplined, research-driven investment approach. The key
elements of this approach are outlined below.

OPPORTUNITIES IN THE
REAL ESTATE INDUSTRY

GCMG believes that the real estate industry throughout Europe will experience
the same fundamental transformation as experienced in the U.S., creating
significant investment opportunities.

The "securitization" of real estate in Europe offers significant benefits to
shareholders, including:
. an efficient, practicable method of adding an international real estate
component to an investment portfolio
. enhanced liquidity
. real-time pricing
. the potential for high dividend yields
. the potential for growth and sustainable rates of return

INVESTMENT PROCESS

The organization and decision-making processes of GCMG are rooted in the belief
that superior investment results are achieved through a dedication to
proprietary research. GCMG has developed a sophisticated and fully integrated
set of analytical tools that focus on the following three research disciplines:
. Real Estate Research
. Company Analysis
. Market Strategy

14
<PAGE>

Real Estate Research

Real Estate Research Group

Company Analysis

Company Analysis Team

Market Strategy

Market Strategy Team

Portfolio Construction

Portfolio Management Committee

The Portfolio Management Committee directs all key investment decisions and
oversees the investment process. The Committee meets weekly and evaluates
emerging real estate research, specific analysis and recommendations from the
Company Analysis Team, as well as key recurring reports to create price forcasts
to produce a highly focused target portfolio for the fund. This target portfolio
is the final product integrating real estate and capital market expertise that
helps to identify the most attractive investment opportunities.

15
<PAGE>

ON BECOMING A SHAREHOLDER
================================================================================

The following describes how to open an account, what to expect as a shareholder
in the fund, and other important information that can help make owning fund
shares a more satisfying experience.

HOW TO PURCHASE FUND SHARES

In some instances, when the fund's shares are offered through an authorized
broker or intermediary agent, an investor may be charged a fee to effect a
transaction through such broker or agent.

Initial Investment

By Mail
1. Complete and sign the account application enclosed with this prospectus.
2. Enclose a check or money order drawn on a U.S. bank, savings and loan, or
credit union (made payable to "Security Capital Real Estate Mutual Funds").

16
<PAGE>

3. Send your application and payment to one of the following addresses:

. Via U.S. Mail
Boston Financial Data Services
Attn: Security Capital Real Estate Mutual Funds Incorporated
P.O. Box 8121
Boston, Massachusetts 02266-8121

. Via Overnight Delivery Service
Boston Financial Data Services
Attn: Security Capital Real Estate Mutual Funds Incorporated
66 Brooks Drive
Braintree, Massachusetts 02184

. Wire to:
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02101
ABA Number 011000028

. Credit:
DDA Number 9905-378-7

. Further Credit:
Security Capital Real Estate Mutual Funds Incorporated
Shareholder Registration
Shareholder Fund and Account Number

All Investments

. Customer orders will be priced at the fund's net asset value (see
"Determination of Net Asset Value") computed after they are accepted by the
fund's transfer agent, an authorized broker, or its authorized
intermediary.
. Payment must be in U.S. funds. Neither cash nor third-party checks will be
accepted. If a shareholder's check does not clear, a service fee of $20
will be charged.
. All funds will be invested in full and fractional shares. A confirmation
indicating the details of each purchase will be sent to you promptly after
each transaction.

17
<PAGE>

Additional Investments

If you wish to purchase additional shares, the minimum for subsequent
investments is $250. These share purchases may be made by mail, by wire, or by
telephone as described below.

By Mail
1. When making an additional investment by mail, please use the Additional
Investment Form provided on the lower portion of your account
statement.

2. Enclose a check or money order drawn on a U.S. bank, savings and loan, or
credit union (made payable to "Security Capital Real Estate Mutual Funds").

3. Send your form and payment to one of the addresses listed under By Mail in
the "Initial Investment" section above.

By Wire
1. To make an additional purchase by wire, a shareholder may call toll-free 1-
800-409-4189 for complete wiring instructions.

By Telephone

1. Call toll-free 1-800-409-4189 to request a purchase of additional shares by
moving money from your bank account to your fund account. (Please note that
you must previously elect the telephone purchase option in writing.) Your
bank account must be held at a domestic financial institution that is an
Automated Clearing House (ACH) member.
2. To purchase shares at the net asset value determined at the close of any
given trading day, the transfer agent must receive a purchase order by
telephone before the close of regular trading on that day.

Automatic Investment Plan

The Automatic Investment Plan allows regular, systematic investments in the
fund's shares from a bank checking or NOW account. The fund will reduce the
minimum initial investment to $250 if a shareholder elects to use the Automatic
Investment Plan. To establish the Automatic Investment Plan, an investor should
complete the appropriate section in the account application and an existing
shareholder should call 1-888-SECURITY (toll free) for an automatic investment
plan form.

18
<PAGE>

investment is reached, or, after reaching the minimum initial investment, the
account balance is reduced to less than $500), the fund reserves the right to
close such account. Prior to closing any account for failure to reach the
minimum initial investment, the fund will give a shareholder written notice and
60 days in which to reinstate the Automatic Investment Plan until the minimum
initial investment amount is met because the fund has the right to close such
account for failure to reach the minimum initial investment. Such closings may
occur in periods of declining share prices.

Under the Automatic Investment Plan, a shareholder may choose to make
investments on the day of his or her choosing (or the next business day
thereafter) in the amounts of $250 or more. There is no service fee for
participating in the Automatic Investment Plan. However, a service fee of $20
will be deducted from a shareholder's account for any Automatic Investment Plan
purchase that does not clear due to insufficient funds or, if prior to notifying
the fund in writing or by telephone to terminate the plan, a shareholder closes
his or her bank account or in any manner prevents withdrawal of funds from the
designated bank checking or NOW account.

The Automatic Investment Plan is a method of using dollar cost averaging, which
is an investment strategy that involves investing a fixed amount of money at a
regular time interval. However, a program of regular investment cannot ensure a
profit or protect against a loss from declining markets. By always investing the
same amount, a shareholder will be purchasing more shares when the price is low
and fewer shares when the price is high. Since such a program involves
continuous investment regardless of fluctuating share values, a shareholder
should consider his or her financial ability to continue the program through
periods of low share price levels.

HOW TO REDEEM FUND SHARES

By Telephone

Call the transfer agent toll-free at 1-800-409-4189 to request a redemption of
your shares. (Please note that you must have previously elected the telephone
redemption option in writing.)

By Mail and By Wire
1. For most redemption requests, you need only furnish a written,
unconditional request stating the number of your shares (or the exact
dollar amount) that you wish to redeem. Your request must be signed

19
<PAGE>

exactly as the shares are registered, and all joint owners must sign.
2. Send your written request to Security Capital Real Estate Mutual Funds
Incorporated at one of the addresses listed under By Mail in the "Initial
Investment" section above.
3. If you wish, you may have your redemption proceeds wired to a commercial bank
that you have authorized on your account application (a service fee of $12
will be charged for wire redemptions). Otherwise, a check for the proceeds
will be mailed to you at the address of record for your account.

The fund reserves the right to limit the number of telephone redemptions made by
a shareholder.

. Any written redemption requests received within 30 days after an address
change must be accompanied by a signature guarantee (see "Signature
Guarantees" below ).

20
<PAGE>

. The fund reserves the right to refuse any telephone redemption in whole or
in part.

Signature Guarantees

Signature guarantees are required for any of the following transactions:
. redemption requests mailed to or wired to a person other than the
registered owner(s) of the shares
. redemption requests to be mailed to or wired to an address other than the
account's address of record
. any redemption request received within 30 days of a change of address
. any redemption request involving $100,000 or more

A signature guarantee may be obtained from any eligible guarantor institution,
as defined by the SEC, such as banks, savings associations, credit unions,
brokerage firms, and others.

OTHER REDEMPTION INFORMATION

A shareholder's account may be closed if, upon the redemption of shares, value
of remaining shares is less than $2,500 ($1,000 in the case of individual
retirement accounts and employee benefit plans qualified under sections 401,
403(b)(7) or 457 of the tax code). The shareholder will be given notice of at
least 60 days and the opportunity to make additional investments which will
increase the account's value so that it satisfies the minimum amount
required.

The fund may, under certain circumstances, redeem shares in kind.

21
<PAGE>

PERFORMANCE REPORTING

Dividends and Distributions
The fund pays dividends from its investment income once each quarter and pays
any capital gains at least once each year. All dividends and distributions are
automatically reinvested in additional shares of the fund unless you choose to
have them paid in cash. As a shareholder, you will receive a statement
reflecting all payments made to your account.

TAX CONSEQUENCES AND YEAR-END REPORTING

22
<PAGE>

Any capital gain or loss will be long-term capital gain or loss if the
shares sold have been owned by the shareholder for more than one year from the
date of sale.

REPORTS TO SHAREHOLDERS

23
<PAGE>

FINANCIAL
HIGHLIGHTS
================================================================================

The financial highlights table is intended to help you understand the fund's
financial performance since June 30, 1998, the effective date of the fund's
registration statement with the SEC.

This information has been audited by Arthur Andersen LLP, whose report -- along
with the fund's financial statements -- is included in the statement of
additional information, which is available upon request.

June 30, 1998 (1)
through
1999 December 31, 1998
Per Share Data
Net asset value, beginning of period $ 10.28 $ 10.00
Income from investment operations:
Net investment income 0.20 0.04
Net realized and unrealized gain on investments 0.23 0.28
------ -----
Total from investment operations 0.43 0.32

Less distributions:
Dividends from net investment income (0.17) (0.02)
Dividends in excess of net investment income - (0.02)
Dividends from net realized gains (0.28) -
Return of capital - -
------ -----
Total distributions (0.45) (0.04)
Net asset value, end of period $ 10.26 $ 10.28
Total return /(2)/ 4.12% 3.25%
Supplemental data and ratios:
Net assets, end of period ($000) $10,582 $ 6,071
Ratio of expenses to average net assets
/(3)(4)/ 1.45% 1.45%
Ratio of net investment income to average
net assets/(3)(4)/ 1.84% 1.32%
Portfolio turnover rate 61.37% 0%

(1) Date the fund was effective with the SEC.
(2) Not annualized for the period June 30, 1998 through December 31, 1998.
(3) Annualized.
(4) Without voluntary expense reimbursements of $337,352 for the year ended
December 31, 1999, the ratio of expenses to average net assets would have
been 4.32% and the ratio of net investment loss to average net assets would
have been (1.03). Without voluntary expense reimbursements of $155,345 for
the period ended December 31, 1998, the ratio of expenses to average net
assets would have been 9.66% and the ratio of net investment loss to
average net assets would have been (6.89)%.

24
<PAGE>

TO LEARN MORE ABOUT THE FUND

. See the fund's current annual and semi-annual reports for an in-depth
discussion of the market conditions and investment strategies which
significantly affected the Fund's performance during its last fiscal year.

. Review the fund's Statement of Additional Information (which is
incorporated by reference into this prospectus) for more details on the
fund's portfolio, investment policies, and operating procedures.

Contact Security Capital Real Estate Mutual Funds Incorporated if you have
questions or wish to obtain a free copy of these documents; simply call toll-
free 1-888-SECURITY or access the Security Capital web site
(www.securitycapital.com).

The fund's Statement of Additional Information and current annual and semi-
annual reports are also available, along with other related materials, on the
SEC's web site (www.sec.gov). Materials may also be reviewed without charge, or
copied for a fee, at the SEC's Public Reference Room in Washington, DC. For
details, call the SEC at 1-800-SEC-0330.

Investment Company Act file number: 811-8033
<PAGE>

LOGO

11 South LaSalle Street, 2nd Floor
Chicago, Illinois 60603

STATEMENT OF ADDITIONAL INFORMATION

SECURITY CAPITAL REAL ESTATE MUTUAL FUNDS INCORPORATED
Security Capital U.S. Real Estate Shares
Security Capital European Real Estate Shares

April 28, 2000

Security Capital Real Estate Mutual Funds Incorporated ("SC-REMFs") is an
open-end management investment company organized under Maryland law with two
investment portfolios ("Funds"): Security Capital U.S. Real Estate Shares ("SC-
US") and Security Capital European Real Estate Shares ("SC-EUROPEAN"). Security
Capital Global Capital Management Group Incorporated ("GCMG ") serves as both
investment adviser and administrator to the Funds.

This Statement of Additional Information is not a prospectus and is authorized
for distribution only when preceded or accompanied by the prospectus of SC-US
and/or SC-EUROPEAN dated April 28, 2000 (each, a "Prospectus"). This Statement
of Additional Information contains additional and more detailed information than
that set forth in a Prospectus and should be read in conjunction with the
applicable Prospectus, additional copies of which may be obtained without charge
by writing or calling toll free 1-888-SECURITY.

Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Investment Objectives and Policies................... 2
Investment Restrictions.............................. 22
Management of SC-REMFs............................... 24
Distribution and Servicing Plans..................... 31
Other Distribution and/or Servicing Arrangements..... 32
Determination of Net Asset Value..................... 33
Redemption of Shares................................. 33
Portfolio Transactions and Brokerage................. 33
Taxation............................................. 34
Organization and Description of Capital Stock........ 41
Performance Information.............................. 42
Counsel and Independent Accountants.................. 44
Financial Statements................................. 45
</TABLE>

<PAGE>

INVESTMENT OBJECTIVES AND POLICIES

The following discussion of the investment objectives and policies of the
Funds supplements, and should be read in conjunction with, the information
regarding each Fund's investment objectives and policies set forth in the Fund's
Prospectus. This discussion includes supplemental information regarding
investments and investment strategies that the Funds may use and the risks they
entail. Certain of these may not be available to both Funds. Except as
otherwise provided below under "Investment Restrictions," the Funds' investment
policies are not fundamental and may be changed by SC-REMFs' Board of Directors
without the approval of the shareholders; however, a Fund will not change its
investment policies without written notice to shareholders.

Illiquid Securities

A Fund will not invest in illiquid securities if immediately after such
investment more than 10% of the Fund's net assets (taken at market value) would
be invested in such securities. For this purpose, illiquid securities include,
among others, securities that are illiquid by virtue of the absence of a readily
available market or legal or contractual restrictions on resale.

Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
and securities that are otherwise not readily marketable. Securities that have
not been registered under the Securities Act are referred to as private
placements or restricted securities and are purchased directly from the issuer
or in the secondary market. Mutual funds do not typically hold a significant
amount of these restricted or other illiquid securities because of the potential
for delays on resale and uncertainty in valuation. Limitations on resale may
have an adverse effect on the marketability of portfolio securities and a mutual
fund might be unable to dispose of restricted or other illiquid securities
promptly or at reasonable prices and might thereby experience difficulty
satisfying redemptions within seven business days. A mutual fund might also
have to register such restricted securities in order to dispose of them,
resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.

In recent years, a large institutional market has developed for certain
securities that are not registered under the Securities Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments. The Securities and Exchange Commission (the "SEC") has adopted
Rule 144A which allows a broader institutional trading market for securities
otherwise subject to restriction on resale to the general public. Rule 144A
establishes a "safe harbor" from the registration requirements of the Securities
Act of resales of certain securities to qualified institutional buyers.

GCMG will monitor the liquidity of restricted securities in the Funds'
portfolios under the supervision of the Board of Directors. In reaching
liquidity decisions, GCMG will consider, among other factors, the following: (1)
the frequency of trades and quotes for the security; (2) the number of dealers
wishing to purchase or sell the security and the number of other potential
purchasers; (3) dealer undertakings to make a market in the security; and (4)
the nature of the security and the nature of the marketplace trades (e.g., the
time needed to dispose of the security, the method of soliciting offers and the
mechanics of the transfer).

Investments in Companies Controlled by Security Capital

The securities in which the Funds invest may occasionally include securities
issued by real estate companies that are controlled by Security Capital Group
Incorporated ("Security Capital") or its affiliates (a "Security Capital
controlled real estate company"). These investments could create possible
conflicts of interest and raise potential issues under the federal securities
laws including compliance with joint arrangement prohibitions under the
Investment Company Act of 1940, as amended ("1940 Act"). In addition, if a Fund
invests in securities issued by a Security Capital controlled real estate
company, the Fund may be considered an affiliate of the issuer of such
securities, thus limiting the Fund's ability to resell them pursuant to Rule 144
under the Securities Act. As a result, the Funds will treat securities issued
by Security Capital controlled real estate companies as illiquid securities.

2
<PAGE>

In order to assure that these types of investments are in the best interests
of the Funds' shareholders, the directors (including a majority of the
independent directors) of SC-REMFs will consider the potential for conflicts and
whether possible resale restrictions are in the best interests of the Funds,
before the Funds engage in these types of investment activities, and will
approve procedures designed to prevent conflicts of interest and assure
compliance with applicable law. Pursuant to these procedures, investments by
the Funds in Security Capital controlled real estate companies will only be made
through unaffiliated third party broker-dealers, in arms-length transactions, at
market prices. Security Capital and GCMG have instituted Chinese wall
procedures designed to assure that investment decisions related to Security
Capital controlled real estate companies are made independently of Security
Capital and its other affiliates by preventing GCMG from accessing non-public
information regarding securities of Security Capital controlled real estate
companies. If the compliance procedures are inadequate or breached, the Funds
and their affiliates may be found to have violated the 1940 Act or other federal
securities laws. Additionally, all of the Funds' transactions in securities of
Security Capital controlled real estate companies will be subject to the prior
approval of the GCMG compliance officer responsible for compliance with
applicable federal securities law requirements.

Convertible Securities

Each Fund may invest in convertible securities, that is, bonds, notes
debentures, preferred stocks and other securities that are convertible into
common stock. Investments in convertible securities can provide an opportunity
for capital appreciation and/or income through interest and dividend payments by
virtue of their conversion or exchange features.

The convertible securities in which a Fund may invest are either fixed income
or zero coupon debt securities which may be converted or exchanged at a stated
or determinable exchange ratio into underlying shares of common stock. The
exchange ratio for any particular convertible security may be adjusted from time
to time due to stock splits, dividends, spin-offs, other corporate distributions
or scheduled changes in the exchange ratio. Convertible debt securities and
convertible preferred stocks, until converted, have general characteristics
similar to both debt and equity securities. Although to a lesser extent than
with debt securities generally, the market value of convertible securities tends
to decline as interest rates increase and, conversely, tends to increase as
interest rates decline. In addition, because of the conversion or exchange
feature, the market value of convertible securities typically changes as the
market value of the underlying common stocks changes, and, therefore, also tends
to follow movements in the general market for equity securities. A unique
feature of convertible securities is that as the market price of the underlying
common stock declines, convertible securities tend to trade increasingly on a
yield basis, and so may not experience market value declines to the same extent
as the underlying common stock. When the market price of the underlying common
stock increases, the prices of the convertible securities tend to rise as a
reflection of the value of the underlying common stock, although typically not
as much as the underlying common stock. While no securities investments are
without risk, investments in convertible securities generally entail less risk
than investments in common stock of the same issuer. As debt securities,
convertible securities are investments which provide for a stream of income (or
in the case of zero coupon securities, accretion of income) with generally
higher yields than common stocks. Of course, like all debt securities, there
can be no assurance of income or principal payments because the issuers of the
convertible securities may default on their obligations. Convertible securities
generally offer lower yields than non-convertible securities of similar quality
because of their conversion or exchange features.

Convertible securities generally are subordinated to other similar but non-
convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock, of the
same issuer. However, because of the subordination feature, convertible bonds
and convertible preferred stock typically have lower ratings than similar non-
convertible securities.

Convertible securities may be issued as fixed income obligations that pay
current income or as zero coupon notes and bonds, including Liquid Yield Option
Notes ("LYONs"). Zero coupon securities pay no cash income and are sold at
substantial discounts from their value at maturity. When held to maturity, their
entire income, which consists of accretion of discount, comes from the
difference between the issue price and their value at maturity. Zero coupon
convertible securities generally are expected to be less volatile than the
underlying common stocks as they usually are issued with shorter maturities (15
years or less) and are issued with options and/or redemption features
exercisable by the holder of the obligation entitling the holder to redeem the
obligation and receive a defined cash payment.

3
<PAGE>

Zero Coupon Bonds

Each Fund may invest in zero coupon securities, which are debt obligations
that do not entitle the holder to any periodic payment of interest prior to
maturity or that specify a future date when the securities begin to pay current
interest. Zero coupon securities are issued and traded at a discount from their
face amount or par value. This discount varies depending on prevailing interest
rates, the time remaining until cash payments begin, the liquidity of the
security, and the perceived credit quality of the issuer.

The discount on zero coupon securities ("original issue discount") must be
taken into income ratably by a Fund prior to the receipt of any actual payments.
Because the Fund must distribute substantially all of its net income to its
shareholders each year for income and excise tax purposes, the Fund may have to
dispose of portfolio securities under disadvantageous circumstances to generate
cash, or may be required to borrow, to satisfy its corresponding Fund's
distribution requirements.

The market prices of zero coupon securities generally are more volatile than
the prices of securities that pay interest periodically. Zero coupon securities
are likely to respond to changes in interest rates to a greater degree than
other types of debt securities having a similar maturity and credit quality.

Foreign Securities

SC-EUROPEAN invests primarily in the securities of foreign issuers.

Political, Social and Economic Risks

Investing in securities of non-U.S. companies may entail additional risks due
to the potential political, social and economic instability of certain countries
and the risks of expropriation, nationalization, confiscation or the imposition
of restrictions on foreign investment; convertibility of currencies into U.S.
dollars and on repatriation of capital invested. In the event of such
expropriation, nationalization or other confiscation by any country, SC-EUROPEAN
could lose its entire investment in any such country.

Religious, Political, or Ethnic Instability

Certain countries in which SC-EUROPEAN may invest may have groups that
advocate radical religious or revolutionary philosophies or support ethnic
independence. Any disturbance on the part of such individuals could carry the
potential for widespread destruction or confiscation of property owned by
individuals and entities foreign to such country and could cause the loss of SC-
EUROPEAN's investment in those countries. Instability may also result from,
among other things: (i) authoritarian governments or military involvement in
political and economic decision-making, including changes in government through
extra-constitutional means; (ii) popular unrest associated with demands for
improved political, economic and social conditions; and (iii) hostile relations
with neighboring or other countries. Such political, social and economic
instability could disrupt the principal financial markets in which SC-EUROPEAN
invests and adversely affect the value of the Fund's assets.

Foreign Investment Restrictions

Certain countries prohibit or impose substantial restrictions on investments
in their capital markets, particularly their equity markets, by foreign entities
such as SC-EUROPEAN. These restrictions or controls may at times limit or
preclude investment in certain securities and may increase the cost and expenses
of SC-EUROPEAN. For example, certain countries require prior governmental
approval before investments by foreign persons may be made, or may limit the
amount of investment by foreign persons in a particular company or limit the
investment by foreign persons to only a specific class of securities of a
company that may have less advantageous terms than securities of the company
available for purchase by nationals. Moreover, the national policies of certain
countries may restrict investment opportunities in issuers or industries deemed
sensitive to national interests. In addition, some countries require
governmental approval for the repatriation of investment income, capital or the
proceeds of securities sales by foreign investors. In addition, if there is a
deterioration in a country's balance of payments or for other reasons, a country
may impose restrictions on

4
<PAGE>

foreign capital remittances abroad. SC-EUROPEAN could be adversely affected by
delays in, or a refusal to grant, any required governmental approval for
repatriation, as well as by the application to it of other restrictions on
investments.

Non-Uniform Corporate Disclosure Standards and Governmental Regulation

Foreign companies are subject to accounting, auditing and financial standards
and requirements that differ, in some cases significantly, from those applicable
to U.S. companies. In particular, the assets, liabilities and profits appearing
on the financial statements of such a company may not reflect its financial
position or results of operations in the way they would be reflected had such
financial statements been prepared in accordance with U.S. generally accepted
accounting principles. Most of the foreign securities held by SC-EUROPEAN will
not be registered with the SEC or regulators of any foreign country, nor will
the issuers thereof be subject to the SEC's reporting requirements. Thus, there
will be less available information concerning foreign issuers of securities held
by SC-EUROPEAN than is available concerning U.S. issuers. In instances where
the financial statements of an issuer are not deemed to reflect accurately the
financial situation of the issuer, GCMG will take appropriate steps to evaluate
the proposed investment, which may include on-site inspection of the issuer,
interviews with its management and consultations with accountants, bankers and
other specialists. There is substantially less publicly available information
about foreign companies than there are reports and ratings published about U.S.
companies and the U.S. government. In addition, where public information is
available, it may be less reliable than such information regarding U.S. issuers.
Issuers of securities in foreign jurisdictions are generally not subject to the
same degree of regulation as are U.S. issuers with respect to such matters as
restrictions on market manipulation, insider trading rules, shareholder proxy
requirements and timely disclosure of information.

Currency Fluctuations

SC-EUROPEAN under normal circumstances will invest a substantial portion of
its total assets in the securities of foreign issuers which are denominated in
foreign currencies. The strength or weakness of the U.S. dollar against such
foreign currencies will account for part of SC-EUROPEAN's investment
performance. A decline in the value of any particular currency against the U.S.
dollar will cause a decline in the U.S. dollar value of SC-EUROPEAN's holdings
of securities and cash denominated in such currency and, therefore, will cause
an overall decline in the Fund's net asset value and any net investment income
and capital gains derived from such securities to be distributed in U.S. dollars
to shareholders in the Fund. Moreover, if the value of the foreign currencies
in which SC-EUROPEAN receives its income falls relative to the U.S. dollar
between receipt of the income and the making of the Fund distributions, the Fund
may be required to liquidate securities in order to make distributions if the
Fund has insufficient cash in U.S. dollars to meet distribution requirements.

The rate of exchange between the U.S. dollar and other currencies is
determined by several factors including the supply and demand for particular
currencies, central bank efforts to support particular currencies, the relative
movement of interest rates, the pace of business activity in the other
countries, and the United States, and other economic and financial conditions
affecting the world economy.

Although SC-EUROPEAN values its assets daily in terms of U.S. dollars, SC-
EUROPEAN does not intend to convert its holdings of foreign currencies into U.S.
dollars on a daily basis. SC-EUROPEAN will do so, from time to time, and
investors should be aware of the costs of currency conversion. Although foreign
exchange dealers do not charge a fee for conversion, they do realize a profit
based on the difference ("spread") between the prices at which they buy and sell
various currencies. Thus, a dealer may offer to sell a foreign currency to SC-
EUROPEAN at one rate, while offering a lesser rate of exchange should the Fund
desire to sell that currency to the dealer.

Adverse Market Characteristics

Securities of many foreign issuers may be less liquid and their prices more
volatile than securities of comparable U.S. issuers. In addition, foreign
securities markets and brokers generally are subject to less governmental
supervision and regulation than in the United States, and foreign securities
transactions usually are subject to fixed commissions, which generally are
higher than negotiated commissions on U.S. transactions. In addition, foreign
securities transactions may be subject to difficulties associated with the
settlement of such transactions. Delays in settlement could result in temporary
periods when assets of SC-EUROPEAN are uninvested and no return is earned
thereon. The inability of SC-EUROPEAN to make intended security purchases due
to settlement problems could cause SC-EUROPEAN to miss

5
<PAGE>

attractive investment opportunities. Inability to dispose of a security due to
settlement problems either could result in losses to SC-EUROPEAN due to
subsequent declines in value of that security or, if SC-EUROPEAN has entered
into a contract to sell the security, could result in possible liability to the
purchaser. GCMG will consider such difficulties when determining the allocation
of SC-EUROPEAN's assets, although GCMG does not believe that such difficulties
will have a material adverse effect on SC-EUROPEAN's trading activities.

SC-EUROPEAN may use foreign custodians, which may involve risks in addition to
those related to the use of U.S. custodians. Such risks include uncertainties
relating to determining and monitoring the foreign custodian's financial
strength, reputation and standing; maintaining appropriate safeguards concerning
SC-EUROPEAN's investments; and possible difficulties in obtaining and enforcing
judgments against such custodians.

Withholding Taxes

SC-EUROPEAN's net investment income from foreign issuers may be subject to
withholding taxes by the foreign issuer's country, thereby reducing SC-
EUROPEAN's net investment income or delaying the receipt of income when those
taxes may be recaptured. See "Taxes."

Concentration

Because SC-EUROPEAN invests a significant portion of its assets in securities
of issuers located in a particular region of the world, SC-EUROPEAN may be
subject to greater risks and may experience greater volatility than a fund that
is more broadly diversified geographically.

There are special risks attendant to investment in the Western European
countries. The countries that are members of the European Economic Community
("Common Market") (Belgium, Denmark, France, Germany, Greece, Ireland,
Luxembourg, the Netherlands, Portugal, Spain and the United Kingdom) have
eliminated certain import tariffs and quotas and other trade barriers with
respect to one another over the past several years. GCMG believes that these
Common Market reforms are likely to improve the prospects for economic growth in
many Western European countries. In addition, these reforms could benefit real
estate operating companies domiciled in Western European countries by expanding
their markets. Nevertheless, it is not clear what the form or effect of such
reforms will be on real estate companies in Western Europe. Therefore it is
impossible to predict their long-term impact on SC-EUROPEAN's investments.

EURO Conversion

Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the
Netherlands, Portugal, and Spain are members of the European Economic Monetary
Union (the "European Union"). Effective January 1, 1999, the member countries
of the European Union introduced the "euro" as a common currency. During a
three year transitional period, the euro will coexist with each member country's
currency. Beginning July 1, 2002, the euro is expected to become the sole
currency of the member countries.

Conversion to the euro may impact the trading in securities of issuers located
in, or denominated in the currencies of, the member countries. It is possible
that foreign exchanges, settlement processes, the custody of assets and
accounting also may be affected. The transition of member states' currency into
the euro will eliminate the currency risk among the member countries and will
likely affect GCMG's investment considerations with respect to SC-EUROPEAN. To
the extent SC-EUROPEAN holds non-U.S. dollar-denominated securities, including
those denominated in the euro, SC-EUROPEAN will still be subject to currency
risk due to fluctuations in those currencies as compared to the U.S. dollar.

The introduction of the euro is expected to affect derivative and other
financial contracts in which SC-EUROPEAN may invest insofar as price sources
based upon current currencies of the member countries will be replaced, and
market conventions, such as day-count fractions or settlement dates, applicable
to underlying instruments may be changed to conform to the conventions
applicable to the euro currency.

6
<PAGE>

The overall impact of the transition of member countries currencies to the
euro cannot be determined with certainty at this time. In addition to the
effects described above, it is likely that more general short and long-term
ramifications can be expected, such as changes in the economic environment and
changes in the behavior of investors, all of which will impact SC-EUROPEAN's
investments.

GCMG is taking steps it believes will reasonably address euro-related changes
to enable SC-EUROPEAN to process transactions accurately and completely with
minimal disruption to business activities.

Eastern European Countries

Investment by SC-EUROPEAN in Eastern European countries involves a high degree
of risk and special considerations not typically associated with investing in
the United States securities market, and should be considered highly
speculative. Such risks include: (1) delays in settling portfolio transactions
and risk of loss arising out of the system of share registration and custody;
(2) the risk that it may be impossible or more difficult than in other countries
to obtain and/or enforce a judgment; (3) pervasiveness of corruption and crime
in the economic system; (4) currency exchange rate volatility and the lack of
available currency hedging instruments; (5) higher rates of inflation (including
the risk of social unrest associated with periods of hyper-inflation) and high
unemployment; (6) controls on foreign investment and local practices disfavoring
foreign investors and limitations on repatriation of invested capital, profits
and dividends, and on SC-EUROPEAN's ability to exchange local currencies for
U.S. dollars; (7) political instability and social unrest and violence; (8) the
risk that the governments of Russian and Eastern European countries may decide
not to continue to support the economic reform programs and could follow
radically different political and/or economic policies to the detriment of
investors, including non-market-oriented policies such as the support of certain
industries at the expense of other sectors or investors, or a return to the
centrally planned economy that existed when such countries had a communist form
of government; (9) the financial condition of companies in these countries,
including large amounts of inter-company debt which may create a payments crisis
on a national scale; (10) dependency on exports and the corresponding importance
of international trade; (11) the risk that the tax system in these countries
will not be reformed to prevent inconsistent, retroactive and/or exorbitant
taxation; and (12) the underdeveloped nature of the securities markets.

Emerging Markets

SC-EUROPEAN may invest in securities of issuers in emerging markets. Most
emerging securities markets may have substantially less volume and are subject
to less government supervision than U.S. securities markets. Securities of many
issuers in emerging markets may be less liquid and more volatile than securities
of comparable domestic issuers. In addition, there is less regulation of
securities exchanges, securities dealers, and listed and unlisted companies in
emerging markets than in the U.S.

Emerging markets also have different clearance and settlement procedures, and
in certain markets there have been times when settlements have been unable to
keep pace with the volume of securities transactions. Delays in settlement
could result in temporary periods when a portion of the assets of SC-EUROPEAN is
uninvested and no cash is earned thereon. The inability of SC-EUROPEAN to make
intended security purchases due to settlement problems could cause SC-EUROPEAN
to miss attractive investment opportunities. The inability to dispose of
portfolio securities due to settlement problems could result either in losses to
SC-EUROPEAN due to subsequent declines in value of the portfolio security or, if
SC-EUROPEAN has entered into a contract to sell the security, could result in
possible liability to the purchaser. Costs associated with transactions in
foreign securities are generally higher than costs associated with transactions
in U.S. securities. Such transactions also involve additional costs for the
purchase or sale of foreign currency.

Foreign investment in certain emerging market debt obligations is restricted
or controlled to varying degrees. These restrictions or controls may at times
limit or preclude foreign investment in certain emerging markets debt
obligations and increase the costs and expenses to SC-EUROPEAN. Certain
emerging markets require prior governmental approval of investments by foreign
persons, limit the amount of investment by foreign persons in a particular
company, limit the investment by foreign persons only to a specific class of
securities of a company that may have less advantageous rights than the classes
available for purchase by domiciliaries of the countries and/or impose
additional taxes on foreign

7
<PAGE>

investors. Certain emerging markets may also restrict investment opportunities
in issuers in industries deemed important to national interest.

Certain emerging markets may require governmental approval for the
repatriation of investment income, capital or the proceeds of sates of
securities by foreign investors. In addition, if a deterioration occurs in an
emerging market's balance of payments or for other reasons, a country could
impose temporary restrictions on foreign capital remittances. SC-EUROPEAN could
be adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by the application
of any restrictions on investments.

In the course of investment in emerging market debt obligations, SC-EUROPEAN
will be exposed to the direct or indirect consequences of political, social and
economic changes in one or more emerging markets. Political changes in emerging
market countries may affect the willingness of an emerging market country
governmental issuer to make or provide for timely payments of its obligations.

The country's economic status, as reflected, among other things, in its
inflation rate, the amount of its external debt and its gross domestic product,
also affects its ability to honor its obligations. While GCMG manages the
assets of SC-EUROPEAN in a manner that will seek to minimize the exposure to
such risks, and will further reduce risk by owning the bonds of many issuers,
there can be no assurance that adverse political, social or economic changes
will not cause SC-EUROPEAN to suffer a loss of value in respect of the
securities in its portfolio.

The risk also exists that an emergency situation may arise in one or more
emerging markets as a result of which trading of securities may cease or may be
substantially curtailed and prices for SC-EUROPEAN's securities in such markets
may not be readily available. SC-REMFs may suspend redemption of SC-EUROPEAN's
shares for any period during which an emergency exists, as determined by the
SEC. Accordingly if SC-EUROPEAN believes that appropriate circumstances exist,
SC-REMFs will promptly apply to the SEC for a determination that an emergency is
present. During the period commencing from SC-EUROPEAN's identification of such
condition until the date of the SEC action, the Fund's securities in the
affected markets will be valued at fair value determined in good faith by or
under the direction of SC-REMFs Board of Directors.

Volume and liquidity in most foreign bond markets are less than in the U.S.
and securities of many foreign companies are less liquid and more volatile than
securities of comparable U.S. companies. Fixed commissions on foreign securities
exchanges are generally higher than negotiated commissions on U.S. exchanges,
although SC-EUROPEAN endeavors to achieve the most favorable net results on its
portfolio transactions. There is generally less government supervision and
regulation of business and industry practices, securities exchanges, brokers,
dealers and listed companies than in the U.S., mail service between the U.S. and
foreign countries may be slower or less reliable than within the U.S., thus
increasing the risk of delayed settlements of portfolio transactions or loss of
certificates for portfolio securities. In addition, with respect to certain
emerging markets, there is the possibility of expropriation or confiscatory
taxation, political or social instability, or diplomatic developments which
could affect the Fund's investments in those countries. Moreover, individual
emerging market economies may differ favorably or unfavorably from the U.S.
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments
position. The chart below sets forth the risk ratings of selected emerging
market countries, sovereign debt securities.

8
<PAGE>

Sovereign Risk Ratings for Selected Emerging Market Countries as of 12/3l/99
(Source: J.P. Morgan Securities, Inc., Emerging Markets Research)

<TABLE>
<CAPTION>
Country Moody's S&P's
- ---------------- ------- -----
<S> <C> <C>
Chile Baal A-
Turkey B1 B
Mexico Baa3 BB+
Czech Republic Baal BBB+
Hungary Baa1 BBB+
Colombia Ba2 BB+
Venezuela B2 B
Morocco Ba1 BB
Argentina B1 BB
Brazil B2 B+
Poland Baa1 BBB
Croatia Baa3 BBB-
</TABLE>

SC-EUROPEAN may have limited legal recourse in the event of a default with
respect to certain debt obligations it holds. If the issuer of a fixed-income
security owned by SC-EUROPEAN defaults, SC-EUROPEAN may incur additional
expenses to seek recovery. Debt obligations issued by emerging market country
governments differ from debt obligations of private entities; remedies from
defaults on debt obligations issued by emerging market governments, unlike those
on private debt, must be pursued in the courts of the defaulting party itself.
SC-EUROPEAN's ability to enforce its rights against private issuers may be
limited. The ability to attach assets to enforce a judgment may be limited.
Legal recourse is therefore somewhat diminished. Bankruptcy, moratorium and
other similar laws applicable to private issuers of debt obligations may be
substantially different from those of other countries. The political context,
expressed as an emerging market governmental issuer's willingness to meet the
terms of the debt obligation, for example, is of considerable importance. In
addition, no assurance can be given that the holders of commercial bank debt may
not contest payments to the holders of debt obligations in the event of default
under commercial bank loan agreements. With four exceptions, (Panama, Cuba,
Costa Rica and Yugoslavia), no sovereign emerging markets borrower has defaulted
on an external bond issue since World War II.

Income from securities held by SC-EUROPEAN could be reduced by a
withholding tax on the source or other taxes imposed by the emerging market
countries in which SC-EUROPEAN makes its investments. SC-EUROPEAN's net asset
value may also be affected by changes in the rates or methods of taxation
applicable to SC-EUROPEAN or to entities in which SC-EUROPEAN has invested.
GCMG will consider the cost of any taxes in determining whether to acquire any
particular investments, but can provide no assurance that the taxes will not be
subject to change.

Many emerging markets have experienced substantial, and in some periods,
extremely high rates of inflation for many years. Inflation and rapid
fluctuations in inflation rates have had and may continue to have adverse
effects on the economies and securities markets of certain emerging market
countries. In an attempt to control inflation, wage and price controls have
been imposed in certain countries. In recent years, certain of these countries
have begun to control inflation through prudent economic policies.

Emerging market governmental issuers are among the largest debtors to
commercial banks, foreign governments, international financial organizations and
other financial institutions. Certain emerging market governmental issuers have
not been able to make payments of interest on or principal of debt obligations
as those payments have come due. Obligations arising from past restructuring
agreements may affect the economic performance and political and social
stability of those issuers.

Governments of many emerging market countries have exercised and continue
to exercise substantial influence over many aspects of the private sector
through the ownership or control of many companies, including some of the
largest in any given country. As a result, government actions in the future
could have a significant effect on economic conditions in emerging markets,
which in turn, may adversely affect companies in the private sector, general
market

9
<PAGE>

conditions and prices and yields of certain of the securities in SC-EUROPEAN's
portfolio. Expropriation, confiscatory taxation, nationalization, political,
economic or social instability or other similar developments have occurred
frequently over the history of certain emerging markets and could adversely
affect SC-EUROPEAN's assets should these conditions recur.

The ability of emerging market country governmental issuers to make timely
payments on their obligations is likely to be influenced strongly by the
issuer's balance of payments, including export performance, and its access to
international credits and investments. An emerging market whose exports are
concentrated in a few commodities could be vulnerable to a decline in the
international prices of one or more of those commodities. Increased
protectionism on the part of an emerging market's trading partners could also
adversely affect the country's exports and diminish its trade account surplus,
if any. To the extent that an emerging market receives payment for its exports
in currencies other than dollars or non-emerging market currencies, its ability
to make debt payments denominated in dollars or non-emerging market currencies
could be affected.

To the extent that an emerging market country cannot generate a trade
surplus, it must depend on continuing loans from foreign governments,
multilateral organizations or private commercial banks, aid payments from
foreign governments and on inflows of foreign investment. The access of
emerging markets to these forms of external funding may not be certain, and a
withdrawal of external funding could adversely affect the capacity of emerging
market country governmental issuers to make payments on their obligations. In
addition, the cost of servicing emerging market debt obligations can be affected
by a change in international interest rates since the majority of these
obligations carry interest rates that are adjusted periodically based upon
international rates.

Another factor bearing on the ability of emerging market countries to repay
debt obligations is the level of international reserves of the country.
Fluctuations in the level of these reserves affect the amount of foreign
exchange readily available for external debt payments and thus could have a
bearing on the capacity of emerging market countries to make payments on these
debt obligations.

Investment Funds

Some emerging market countries have laws and regulations that currently
preclude direct investment in the securities of their companies. However,
indirect investment in the securities of companies listed and traded on the
stock exchanges in these countries is permitted by certain emerging market
countries through investment funds that have been specifically authorized. SC-
EUROPEAN may invest in these investment funds subject to the provisions of the
1940 Act, as applicable and other applicable laws.

Foreign Currency Transactions

SC-EUROPEAN endeavors to buy and sell foreign currencies on as favorable a
basis as practicable. Some price spread on currency exchange (to cover service
charges) may be incurred, particularly when SC-EUROPEAN changes investments from
one country to another or when proceeds of the sale of shares in U.S. dollars
are used for the purchase of securities in foreign countries. Also, some
countries may adopt policies which would prevent SC-EUROPEAN from transferring
cash out of the country or withhold portions of interest and dividends at the
source. There is the possibility of cessation of trading on national exchanges,
expropriation, nationalization or confiscatory taxation, withholding and other
foreign taxes on income or other amounts, foreign exchange controls (which may
include suspension of the ability to transfer currency from a given country),
default in foreign government securities, political or social instability, or
diplomatic developments which could affect investments in securities of issuers
in foreign nations.

SC-EUROPEAN may be affected either unfavorably or favorably by fluctuations
in the relative rates of exchange between the currencies of different nations,
by exchange control regulations and by indigenous economic and political
developments. Some countries in which SC-EUROPEAN may invest may also have fixed
or managed currencies that are not free-floating against the U.S. dollar.
Further, certain currencies have experienced a steady devaluation relative to
the U.S. dollar. Any devaluations in the currencies in which SC-EUROPEAN's
portfolio securities are denominated may have a detrimental impact on SC-
EUROPEAN. SC-REMFs' management endeavors

10
<PAGE>

to avoid unfavorable consequences and to take advantage of favorable
developments in particular nations where from time to time it places SC-
EUROPEAN's investments.

The exercise of this flexible policy may include decisions to purchase
securities with substantial risk characteristics and other decisions such as
changing the emphasis on investments from one nation to another and from one
type of security to another. Some of these decisions may later prove profitable
and others may not. No assurance can be given that profits, if any, will exceed
losses.

SC-REMFs' Board of Directors considers at least annually the likelihood of
the imposition by any foreign government of exchange control restrictions which
would affect the liquidity of SC-EUROPEAN's assets maintained with custodians in
foreign countries, as well as the degree of risk from political acts of foreign
governments to which such assets may be exposed. The Board also considers the
degree of risk involved through the holding of portfolio securities in domestic
and foreign securities depositories. However, in the absence of willful
misfeasance, bad faith or gross negligence on the part of GCMG, any losses
resulting from the holding of SC-EUROPEAN's portfolio securities in foreign
countries and/or with securities depositories will be at the risk of the
shareholders. No assurance can be given that SC-EUROPEAN's appraisal of the
risks will always be correct or that such exchange control restrictions or
political acts of foreign governments might not occur.

Privatizations

The governments of some foreign countries have been engaged in programs of
selling part or all of their stakes in government owned or controlled
enterprises ("Privatizations"). GCMG believes that Privatizations may offer
opportunities for significant capital appreciation and intends to invest assets
of SC-EUROPEAN in Privatizations in appropriate circumstances. In certain
foreign countries, the ability of foreign entities such as SC-EUROPEAN to
participate in Privatizations may be limited by local law, or the terms on which
SC-EUROPEAN may be permitted to participate may be less advantageous that those
for local investors. There can be no assurance that foreign governments will
continue to sell companies currently owned or controlled by them or that
Privatization programs will be successful.

Brady Bonds

SC-EUROPEAN may invest in Brady Bonds, which are securities created through
the exchange of existing commercial bank loans to public and private entities in
certain emerging markets for new bonds in connection with debt restructurings
under a debt restructuring plans introduced by former U.S. Secretary of the
Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Plan debt restructurings
have been implemented to date in Argentina, Brazil, Bulgaria, Costa Rica,
Dominican Republic, Ecuador, Jordan, Mexico, Morocco, Nigeria, the Philippines,
Poland and Uruguay.

Brady Bonds have been issued only recently, and for that reason do not have
a long payment history. Brady Bonds may be collateralized or uncollateralized,
are issued in various currencies (but primarily the U.S. dollar) and are
actively traded in over-the-counter secondary markets.

Dollar-denominated, collateralized Brady Bonds, which may be fixed-rate
bonds or floating-rate bonds, are generally collateralized in full as to
principal by U.S. Treasury zero coupon bonds having the same maturity as the
bonds. Interest payments on many Brady Bonds generally are collateralized by
cash or securities in an amount that, in the case of fixed rate bonds, is equal
to at least one year of rolling interest payments or, in the case of floating
rate bonds, initially is equal to at least one year's rolling interest payments
based on the applicable interest rate at that time and is adjusted at regular
intervals thereafter. Brady Bonds are often viewed as having three or four
valuation components: the collateralized interest payments; the uncollateralized
interest payments; and any uncollateralized repayment of principal at maturity
(these uncollateralized amounts constitute the "residual risk"). In light of
the residual risk of Brady Bonds and the history of defaults of countries
issuing Brady Bonds, with respect to commercial bank loans by public and private
entities, investment in Brady Bonds may be viewed as speculative.

11
<PAGE>

Sovereign Debt

SC-EUROPEAN also may invest in sovereign debt. Investment in sovereign
debt can involve a high degree of risk. The governmental entity that controls
the repayment of sovereign debt may not be able or willing to repay the
principal and/or interest when due in accordance with the terms of such debt. A
governmental entity's willingness or ability to repay principal and interest due
in a timely manner may be affected by, among other factors, its cash flow
situation, the extent of its foreign reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt
service burden to the economy as a whole, the governmental entity's policy
towards the International Monetary Fund, and the political constraints to which
a governmental entity may be subject. Governmental entities may also be
dependent on expected disbursements from foreign governments, multilateral
agencies and others abroad to reduce principal and interest arrearages on their
debt. The commitment on the part of these governments, agencies and others to
make such disbursements may be conditioned on a governmental entity's
implementation of economic reforms and/or economic performance and the timely
service of such debtor's obligations. Failure to implement such reforms,
achieve such levels of economic performance or repay principal or interest when
due may result in the cancellation of such parties' commitments to lend funds to
the governmental entity, which may further impair such debtor's ability or
willingness to service its debts in a timely manner. Consequently, governmental
entities may default on their sovereign debt. Holders of sovereign debt
(including SC-EUROPEAN) may be requested to participate in the rescheduling of
such debt and to extend further loans to governmental entities. There is no
bankruptcy proceeding by which sovereign debt on which governmental entities
have defaulted may be collected in whole or in part.

Depository Receipts

SC-EUROPEAN may hold securities of foreign issuers in the form of American
Depository Receipts ("ADRs"), American Depository Shares ("ADSs"), Global
Depository Receipts ("GDRs") and European Depository Receipts ("EDRs") or other
securities convertible into securities of eligible issuers. These securities
may not necessarily be denominated in the same currency as the securities for
which they may be exchanged. ADRs and ADSs are typically issued by an American
bank or trust company that evidences ownership of underlying securities issued
by a foreign corporation. EDRs, which are sometimes referred to as Continental
Depository Receipts ("CDRs"), are receipts issued in Europe, typically by
foreign banks and trust companies that evidence ownership of either foreign or
domestic securities. Generally, ADRs and ADSs in registered form are designed
for use in U.S. securities markets and EDRs in bearer form are designed for use
in European securities markets. For purposes of SC-EUROPEAN's investment
policies, investment in ADRs, ADSs, GDRs and EDRs will be deemed to be an
investment in the equity securities representing securities of foreign issuers
into which they may be converted.

ADR facilities may be established as either "unsponsored" or "sponsored".
While ADRs issued under these two types of facilities are in some respects
similar, there are distinctions between them relating to the rights and
obligations of ADR holders and the practices of market participants. A
depository may establish an unsponsored facility without participation by (or
even necessarily the acquiescence of) the issuer of the deposited securities,
although typically the depository requests a letter of non-objection from such
issuer prior to the establishment of the facility. Holders of unsponsored ADRs
generally bear all the costs of such facilities. The depository usually charges
fees upon the deposit and withdrawal of the deposited securities, the conversion
of dividends into U.S. dollars, the disposition of non-cash distributions, and
the performance of other services. The depository of an unsponsored facility
frequently is under no obligation to distribute shareholder communications
received from the issuer of the deposited securities or to pass through voting
rights to ADR holders with respect to the deposited securities. Sponsored ADR
facilities are created in generally the same manner as unsponsored facilities,
except that the issuer of the deposited securities enters into a deposit
agreement with the depository. The deposit agreement sets out the rights and
responsibilities of the issuer, the depository and the ADR holders. With
sponsored facilities, the issuer of the deposited securities generally will bear
some of the costs relating to the facility (such as dividend payment fees of the
depository), although ADR holders continue to bear certain other costs (such as
deposit and withdrawal fees). Under the terms of most sponsored arrangements,
depositories agree to distribute notices of shareholder meetings and voting
instructions, and to provide shareholder communications and other information to
the ADR holders at the request of the issuer of the deposited securities. SC-
EUROPEAN may invest in both sponsored and unsponsored ADRs.

12
<PAGE>

Eurodollars and Yankee Dollars

SC-EUROPEAN may also invest in obligations of foreign branches of U.S.
banks (denominated in Eurodollars) and U.S. branches of foreign banks ("Yankee
dollars") as well as foreign branches of foreign banks. These investments
involve risks that are different from investments in securities of U.S. banks,
including potential unfavorable political and economic developments, different
tax provisions, seizure of foreign deposits, currency controls, interest
limitations or other governmental restrictions which might affect payment of
principal or interest.

Strategic Transactions and Derivatives

SC-EUROPEAN may, but is not required to, utilize various investment
strategies as described below to hedge various market risks (such as interest
rates, currency exchange rates, and broad or specific equity or fixed-income
market movements), to manage the effective maturity or duration of fixed-income
securities in the Fund's portfolio, or to enhance potential gain. These
strategies may be executed through the use of derivative contracts. Such
strategies are generally accepted as a part of modern portfolio management and
are regularly utilized by many mutual funds and other institutional investors.
Techniques and instruments may change over time as new instruments and
strategies are developed or regulatory changes occur.

In the course of pursuing these investment strategies, SC-EUROPEAN may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, equity and fixed-income indices and other financial instruments,
purchase and sell financial futures contracts and options thereon, enter into
various interest rate transactions such as swaps, caps, floors or collars, and
enter into various currency transactions such as currency forward contracts,
currency futures contracts, currency swaps or options on currencies or currency
futures (collectively, all the above are called "Strategic Transactions").
Strategic Transactions may be used without limit to attempt to protect against
possible changes in the market value of securities held in or to be purchased
for SC-EUROPEAN's portfolio resulting from securities markets or currency
exchange rate fluctuations, to protect SC-EUROPEAN's unrealized gains in the
value of its portfolio securities, to facilitate the sale of such securities for
investment purposes, to manage the effective maturity or duration of fixed-
income securities in SC-EUROPEAN's portfolio, or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities. Any or all of these investment techniques may be used at
any time and in any combination and there is no particular strategy that
dictates the use of one technique rather than another, as use of any Strategic
Transaction is a function of numerous variables including market conditions.
The ability of SC-EUROPEAN to utilize these Strategic Transactions successfully
will depend on GCMG's ability to predict pertinent market movements, which
cannot be assured. SC-EUROPEAN will comply with applicable regulatory
requirements when implementing these strategies, techniques and instruments.
Strategic Transactions involving financial futures and options thereon will be
purchased, sold or entered into only for bona fide hedging, risk management or
portfolio management purposes and not to create leveraged exposure in SC-
EUROPEAN.

Strategic Transactions, including derivative contracts, have risks
associated with them including possible default by the other party to the
transaction, illiquidity and, to the extent GCMG's view as to certain market
movements is incorrect, the risk that the use of such Strategic Transactions
could result in losses greater than if they had not been used. Use of put and
call options may result in losses to SC-EUROPEAN, force the sale or purchase of
portfolio securities at inopportune times or for prices higher than (in the case
of put options) or lower than (in the case of call options) current market
values, limit the amount of appreciation SC-EUROPEAN can realize on its
investments or cause SC-EUROPEAN to hold a security it might otherwise sell.
The use of currency transactions can result in SC-EUROPEAN incurring losses as a
result of a number of factors including the imposition of exchange controls,
suspension of settlements, or the inability to deliver or receive a specified
currency. The use of options and futures transactions entails certain other
risks. In particular, the variable degree of correlation between price
movements of futures contracts and price movements in the related portfolio
position of SC-EUROPEAN creates the possibility that losses on the hedging
instrument may be greater than gains in the value of SC-EUROPEAN's position. In
addition, futures and options markets may not be liquid in all circumstances and
certain over-the-counter options may have no markets. As a result, in certain
markets, SC-EUROPEAN might not be able to close out a transaction without
incurring substantial losses, if at all. Although the use of futures and
options transactions for hedging should tend to minimize the risk of loss due to
a decline in the value of the hedged position, at the same time they tend to
limit any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures
contracts would create a greater ongoing potential financial risk than would
purchases of options, where the exposure is limited to the

13
<PAGE>

cost of the initial premium. Losses resulting from the use of Strategic
Transactions would reduce net asset value, and possibly income, and such losses
can be greater than if the Strategic Transactions had not been utilized.

General Characteristics of Options

Put options and call options typically have similar structural
characteristics and operational mechanics regardless of the underlying
instrument on which they are purchased or sold. Thus, the following general
discussion relates to each of the particular types of options discussed in
greater detail below. In addition, many Strategic Transactions involving
options require segregation of SC-EUROPEAN's assets in special accounts, as
described below under "Use of Segregated and Other Special Accounts."

A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
For instance, SC-EUROPEAN's purchase of a put option on a security might be
designed to protect its holdings in the underlying instrument (or, in some
cases, a similar instrument) against a substantial decline in the market value
by giving SC-EUROPEAN the right to sell such instrument at the option exercise
price. A call option, upon payment of a premium, gives the purchaser of the
option the right to buy, and the seller the obligation to sell, the underlying
instrument at the exercise price. SC-EUROPEAN's purchase of a call option on a
security, financial future, index, currency or other instrument might be
intended to protect SC-EUROPEAN against an increase in the price of the
underlying instrument that it intends to purchase in the future by fixing the
price at which it may purchase such instrument. An American style put or call
option may be exercised at any time during the option period while a European
style put or call option may be exercised only upon expiration or during a fixed
period prior thereto. SC-EUROPEAN is authorized to purchase and sell exchange
listed options and over-the-counter options ("OTC options"). Exchange listed
options are issued by a regulated intermediary such as the Options Clearing
Corporation ("OCC"), which guarantees the performance of the obligations of the
parties to such options. The discussion below uses the OCC as an example, but
is also applicable to other financial intermediaries.

With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.

SC-EUROPEAN's ability to close out its position as a purchaser or seller of
an OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.

The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent
that the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.

OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. SC-
EUROPEAN will only sell OTC options (other than OTC currency options) that are
subject to a buy-back

14
<PAGE>

provision permitting the Fund to require the Counterparty to sell the option
back to SC-EUROPEAN at a formula price within seven days. SC-EUROPEAN expects
generally to enter into OTC options that have cash settlement provisions,
although it is not required to do so.

Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with SC-EUROPEAN or fails to make a cash settlement
payment due in accordance with the terms of that option, SC-EUROPEAN will lose
any premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, GCMG must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be satisfied.
SC-EUROPEAN will engage in OTC option transactions only with U.S. government
securities dealers recognized by the Federal Reserve Bank of New York as
"primary dealers", or broker dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of A-1 from S&P or P-1 from
Moody's or an equivalent rating from any other nationally recognized statistical
rating organization ("NRSRO") or, in the case of OTC currency transactions, are
determined to be of equivalent credit quality by GCMG. The staff of the SEC
currently takes the position that OTC options purchased by a fund, and portfolio
securities "covering" the amount of a fund's obligation pursuant to an OTC
option sold by it (the cost of the sell-back plus the in-the-money amount, if
any) are illiquid, and are subject to SC-EUROPEAN's limitation on investments in
illiquid securities.

If SC-EUROPEAN sells a call option, the premium that it receives may serve
as a partial hedge, to the extent of the option premium, against a decrease in
the value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.

SC-EUROPEAN may purchase and sell call options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, corporate debt
securities, equity securities (including convertible securities) and Eurodollar
instruments that are traded on U.S. and foreign securities exchanges and in the
over-the-counter markets, and on securities indices, currencies and futures
contracts. All calls sold by SC-EUROPEAN must be "covered" (i.e., SC-EUROPEAN
must own the securities or futures contract subject to the call) or must meet
the asset segregation requirements described below as long as the call is
outstanding. Even though SC-EUROPEAN will receive the option premium to help
protect it against loss, a call sold by SC-EUROPEAN exposes SC-EUROPEAN during
the term of the option to possible loss of opportunity to realize appreciation
in the market price of the underlying security or instrument and may require SC-
EUROPEAN to hold a security or instrument which it might otherwise have sold.

SC-EUROPEAN may purchase and sell put options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, foreign sovereign
debt, corporate debt securities, equity securities (including convertible
securities) and Eurodollar instruments (whether or not it holds the above
securities in its portfolio), and on securities indices, currencies and futures
contracts other than futures on individual corporate debt and individual equity
securities. SC-EUROPEAN will not sell put options if, as a result, more than 50%
of SC-EUROPEAN's assets would be required to be segregated to cover its
potential obligations under such put options other than those with respect to
futures and options thereon. In selling put options, there is a risk that SC-
EUROPEAN may be required to buy the underlying security at a disadvantageous
price above the market price.

General Characteristics of Futures

SC-EUROPEAN may enter into financial futures contracts or purchase or sell
put and call options on such futures as a hedge against anticipated interest
rate, currency or equity market changes, for duration management and for risk
management purposes. Futures are generally bought and sold on the commodities
exchanges where they are listed with payment of initial and variation margin as
described below. The sale of a futures contract would create a firm obligation
by SC-EUROPEAN, as seller, to deliver to the buyer the specific type of
financial instrument called for in the contract at a specific future time for a
specified price (or, with respect to index futures and Eurodollar instruments,
the net cash amount). Options on futures contracts are similar to options on
securities except that an option on a futures contract gives the purchaser the
right in return for the premium paid to assume a position in a futures contract
and obligates the seller to deliver such position.

15
<PAGE>

SC-EUROPEAN's use of financial futures and options thereon will in all
cases be consistent with applicable regulatory requirements and in particular
the rules and regulations of the Commodity Futures Trading Commission and will
be entered into only for bona fide hedging, risk management (including duration
management) or other portfolio management purposes. Typically, maintaining a
futures contract or setting an option thereon requires a fund to deposit with a
financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of an option on financial futures involves payment of
a premium for the option without any further obligation on the part of the fund.
If a fund exercises an option on a futures contract it will be obligated to post
initial margin (and potential subsequent variation margin) for the resulting
futures position just as it would for any position. Futures contracts and
options thereon are generally settled by entering into an offsetting transaction
but there can be no assurance that the position can be offset prior to
settlement at an advantageous price, nor that delivery will occur.

SC-EUROPEAN will not enter into a futures contract or related option
(except for closing transactions) if, immediately thereafter, the sum of the
amount of its initial margin and premiums on open futures contracts and options
thereon would exceed 5% of SC-EUROPEAN's total assets (taken at current value);
however, in the case of an option that is in-the-money at the time of the
purchase, the in-the-money amount may be excluded in calculating the 5%
limitation. The segregation requirements with respect to futures contracts and
options thereon are described below.

Options on Securities Indices and Other Financial Indices

SC-EUROPEAN also may purchase and sell call and put options on securities
indices and other financial indices and in so doing can achieve many of the same
objectives it would achieve through the sale or purchase of options on
individual securities or other instruments. Options on securities indices and
other financial indices are similar to options on a security or other instrument
except that, rather than settling by physical delivery of the underlying
instrument, they settle by cash settlement, i.e., an option on an index gives
the holder the right to receive, upon exercise of the option, an amount of cash
if the closing level of the index upon which the option is based exceeds, in the
case of a call, or is less than, in the case of a put, the exercise price of the
option (except if, in the case of an OTC option, physical delivery is
specified). This amount of cash is equal to the excess of the closing price of
the index over the exercise price of the option, which also may be multiplied by
a formula value. The seller of the option is obligated, in return for the
premium received, to make delivery of this amount. The gain or loss on an
option on an index depends on price movements in the instruments making up the
market, market segment, industry or other composite on which the underlying
index is based, rather than price movements in individual securities, as is the
case with respect to options on securities.

Currency Transactions

SC-EUROPEAN may engage in currency transactions with counterparties in
order to hedge the value of portfolio holdings denominated in particular
currencies against fluctuations in relative value. Currency transactions
include forward currency contracts, exchange listed currency futures, exchange
listed and OTC options on currencies, and currency swaps. A forward currency
contract involves a privately negotiated obligation to purchase or sell (with
delivery generally required) a specific currency at a future date, which may be
any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. A currency swap is an
agreement to exchange cash flows based on the notional difference among two or
more currencies and operates similarly to an interest rate swap, which is
described below. SC-EUROPEAN may enter into currency transactions with
counterparties which have received (or the guarantors of the obligations of
which have received) a credit rating of A-1 or P-1 by S&P or Moody's,
respectively, or that have an equivalent rating from a NRSRO or are determined
to be of equivalent credit quality by GCMG.

SC-EUROPEAN's dealings in currency transactions such as futures, options,
options on futures and swaps will be limited to hedging involving either
specific transactions or portfolio positions except as described below.
Transaction hedging is entering into a currency transaction with respect to
specific assets or liabilities of SC-EUROPEAN, which will generally arise in
connection with the purchase or sale of its portfolio securities or the receipt
of income therefrom.

16
<PAGE>

Position hedging is entering into a currency transaction with respect to
portfolio security positions denominated or generally quoted in that currency.

SC-EUROPEAN will not enter into a transaction to hedge currency exposure to
an extent greater, after netting all transactions intended wholly or partially
to offset other transactions, than the aggregate market value (at the time of
entering into the transaction) of the securities held in its portfolio that are
denominated or generally quoted in or currently convertible into such currency,
other than with respect to forward currency contracts entered into for non-
hedging purposes, or to proxy hedging or cross hedging as described below.

SC-EUROPEAN may also cross-hedge currencies by entering into transactions
to purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which SC-EUROPEAN has or in which it expects to
have portfolio exposure.

To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, SC-EUROPEAN may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a commitment or option to sell a currency. Changes
in value are generally considered to be correlated to a currency or currencies
in which some or all of SC-EUROPEAN's portfolio securities are or are expected
to be denominated, in exchange for U.S. dollars. The amount of the commitment or
option would not exceed the value of SC-EUROPEAN's securities denominated in
correlated currencies. For example, if GCMG considers that the Austrian
schilling is correlated to the German Deutsche mark (the "D-mark"), SC-EUROPEAN
holds securities denominated in schillings and GCMG believes that the value of
schillings will decline against the U.S. dollar, GCMG may enter into a
commitment or option to sell D-marks and buy dollars. Currency hedging involves
some of the same risks and considerations as other transactions with similar
instruments. Currency transactions can result in losses to SC-EUROPEAN if the
currency being hedged fluctuates in value to a degree or in a direction that is
not anticipated. Further, there is the risk that the perceived correlation
between various currencies may not be present or may not be present during the
particular time that the Fund is engaging in proxy hedging. If SC-EUROPEAN
enters into a currency hedging transaction, SC-EUROPEAN will comply with the
asset segregation requirements described below.

Risks of Currency Transactions

Currency transactions are subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be negatively affected by
government exchange controls, blockages, and manipulations or exchange
restrictions imposed by governments. These can result in losses to SC-EUROPEAN
if it is unable to deliver or receive currency or funds in settlement of
obligations and could also cause hedges it has entered into to be rendered
useless, resulting in full currency exposure as well as incurring transaction
costs. Buyers and sellers of currency futures are subject to the same risks
that apply to the use of futures generally. Further, settlement of a currency
futures contract for the purchase of most currencies must occur at a bank based
in the issuing nation. Trading options on currency futures is relatively new,
and the ability to establish and close out positions on such options is subject
to the maintenance of a liquid market which may not always be available.
Currency exchange rates may fluctuate based on factors extrinsic to that
country's economy.

Combined Transactions

SC-EUROPEAN may enter into multiple transactions, including multiple
options transactions, multiple futures transactions, multiple currency
transactions (including forward currency contracts) and multiple interest rate
transactions and any combination of futures, options, currency and interest rate
transactions ("combined" transactions), instead of a single Strategic
Transaction, as part of a single or combined strategy when, in the opinion of
GCMG, it is in the best interests of SC-EUROPEAN to do so. A combined
transaction will usually contain elements of risk that are present in each of
its component transactions. Although combined transactions are normally entered
into based on GCMG's judgment that the combined strategies will reduce risk or
otherwise more effectively achieve the desired portfolio management goal, it is
possible that the combination will instead increase such risks or hinder
achievement of the portfolio management objective.

17
<PAGE>

Swaps, Caps, Floors and Collars

Among the Strategic Transactions into which SC-EUROPEAN may enter are
interest rate, currency and index swaps and the purchase or sale of related
caps, floors and collars. SC-EUROPEAN expects to enter into these transactions
primarily to preserve a return or spread on a particular investment or portion
of its portfolio, to protect against currency fluctuations, as a duration
management technique or to protect against any increase in the price of
securities SC-EUROPEAN anticipates purchasing at a later date. SC-EUROPEAN
intends to use these transactions as hedges and not as speculative investments
and will not sell interest rate caps or floors where it does not own securities
or other instruments providing the income stream SC-EUROPEAN may be obligated to
pay. Interest rate swaps involve the exchange by a fund with another party of
their respective commitments to pay or receive interest, e.g., an exchange of
floating rate payments for fixed rate payments with respect to a notional amount
of principal. A currency swap is an agreement to exchange cash flows on a
notional amount of two or more currencies based on the relative value
differential among them and an index swap is an agreement to swap cash flows on
a notional amount based on changes in the values of the reference indices. The
purchase of a cap entitles the purchaser to receive payments on a notional
principal amount from the party selling such cap to the extent that a specified
index exceeds a predetermined interest rate or amount. The purchase of a floor
entitles the purchaser to receive payments on a notional principal amount from
the party selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return within a predetermined range of interest
rates or values.

SC-EUROPEAN will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with SC-EUROPEAN receiving or paying, as the case
may be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, GCMG and
SC-EUROPEAN believe such obligations do not constitute senior securities under
the 1940 Act and, accordingly, will not treat them as being subject to its
borrowing restrictions. SC-EUROPEAN will not enter into any swap, cap, floor or
collar transaction unless, at the time of entering into such transaction, the
unsecured long-term debt of the Counterparty, combined with any credit
enhancements, is rated at least A by S&P or Moody's or has an equivalent rating
from an NRSRO or is determined to be of equivalent credit quality by GCMG. If
there is a default by the Counterparty, SC-EUROPEAN may have contractual
remedies pursuant to the agreements related to the transaction. The swap market
has grown substantially in recent years with a large number of banks and
investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.

Eurodollar Instruments

SC-EUROPEAN may invest in Eurodollar instruments. Eurodollar instruments
are U.S. dollar-denominated futures contracts or options thereon which are
linked to the London Interbank Offered Rate ("LIBOR"), although foreign
currency-denominated instruments are available from time to time. Eurodollar
futures contracts enable purchasers to obtain a fixed rate for the lending of
funds and sellers to obtain a fixed rate for borrowings. SC-EUROPEAN might use
Eurodollar futures contracts and options thereon to hedge against changes in
LIBOR, to which many interest rate swaps and fixed income instruments are
linked.

Risks of Strategic Transactions Outside the U.S.

When conducted outside the U.S., Strategic Transactions may not be
regulated as rigorously as in the U.S., may not involve a clearing mechanism and
related guarantees, and are subject to the risk of governmental actions
affecting trading in, or the prices of, foreign securities, currencies and other
instruments. The value of such positions also could be adversely affected by:
(i) other complex foreign political, legal and economic factors, (ii) lesser
availability than in the U.S. of data on which to make trading decisions, (iii)
delays in SC-EUROPEAN's ability to act upon economic events occurring in foreign
markets during non-business hours in the U.S., (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
U.S., and (v) lower trading volume and liquidity.

18
<PAGE>

Warrants

SC-EUROPEAN may invest in warrants. The holder of a warrant has the right,
until the warrant expires, to purchase a given number of shares of a particular
issuer at a specified price. Such investments can provide a greater potential
for profit or loss than an equivalent investment in the underlying security.
Prices of warrants do not necessarily move, however, in tandem with the prices
of the underlying securities and are, therefore, considered speculative
investments. Warrants pay no dividends and confer no rights other than a
purchase option. Thus, if a warrant held by SC-EUROPEAN were not exercised by
the date of its expiration, SC-EUROPEAN would lose the entire purchase price of
the warrant.

Use of Segregated and Other Special Accounts

Many Strategic Transactions, in addition to other requirements, require
that a fund segregate cash or liquid high grade assets with its custodian to the
extent fund obligations are not otherwise "covered" through ownership of the
underlying security, financial instrument or currency. In general, either the
full amount of any obligation by a fund to pay or deliver securities or assets
must be covered at all times by the securities, instruments or currency required
to be delivered, or, subject to any regulatory restrictions, an amount of cash
or liquid assets at least equal to the current amount of the obligation must be
segregated with the custodian. The segregated assets cannot be sold or
transferred unless equivalent assets are substituted in their place or it is no
longer necessary to segregate them. For example, a call option written by SC-
EUROPEAN will require SC-EUROPEAN to hold the securities subject to the call (or
securities convertible into the needed securities without additional
consideration) or to segregate cash or liquid assets sufficient to purchase and
deliver the securities if the call is exercised. A call option sold by SC-
EUROPEAN on an index will require SC-EUROPEAN to own portfolio securities which
correlate with the index or to segregate cash or liquid assets equal to the
excess of the index value over the exercise price on a current basis. A put
option written by SC-EUROPEAN requires the Fund to segregate cash or liquid
assets equal to the exercise price.

Except when a fund enters into a forward contract for the purchase or sale
of a security denominated in a particular currency, which requires no
segregation, a currency contract which obligates the fund to buy or sell
currency will generally require the fund to hold an amount of that currency or
liquid assets denominated in that currency equal to the fund's obligations or to
segregate cash or liquid assets equal to the amount of the fund's obligation.

OTC options entered into by SC-EUROPEAN, including those on securities,
currency, financial instruments or indices and OCC issued and exchange listed
index options, will generally provide for cash settlement. As a result, when
SC-EUROPEAN sells these instruments it will only segregate an amount of cash or
liquid assets equal to its accrued net obligations, as there is no requirement
for payment or delivery of amounts in excess of the net amount. These amounts
will equal 100% of the exercise price in the case of a non cash-settled put, the
same as an OCC guaranteed listed option sold by SC-EUROPEAN, or the in the money
amount plus any sell-back formula amount in the case of a cash-settled put or
call. In addition, when SC-EUROPEAN sells a call option on an index at a time
when the in-the-money amount exceeds the exercise price, SC-EUROPEAN will
segregate, until the option expires or is closed out, cash or cash equivalents
equal in value to such excess. OCC issued and exchange listed options sold by
SC-EUROPEAN other than those above generally settle with physical delivery, or
with an election of either physical delivery or cash settlement and SC-EUROPEAN
will segregate an amount of cash or liquid assets equal to the full value of the
option. OTC options settling with physical delivery, or with an election of
either physical delivery or cash settlement will be treated the same as other
options settling with physical delivery.

In the case of a futures contract or an option thereon, SC-EUROPEAN must
deposit initial margin and possible daily variation margin in addition to
segregating cash or liquid assets sufficient to meet its obligation to purchase
or provide securities or currencies, or to pay the amount owed at the expiration
of an index-based futures contract. Such liquid assets may consist of cash,
cash equivalents, liquid debt or equity securities or other acceptable assets.

With respect to swaps, SC-EUROPEAN will accrue the net amount of the
excess, if any, of its obligations over its entitlements with respect to each
swap on a daily basis and will segregate an amount of cash or liquid assets
having a value equal to the accrued excess. Caps, floors and collars require
segregation of assets with a value equal to the SC-EUROPEAN's net obligation, if
any.

19
<PAGE>

Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. SC-EUROPEAN may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, SC-EUROPEAN could purchase a put option if the
strike price of that option is the same or higher than the strike price of a put
option sold by SC-EUROPEAN. Moreover, instead of segregating cash or liquid
assets if SC-EUROPEAN held a futures or forward contract, it could purchase a
put option on the same futures or forward contract with a strike price as high
or higher than the price of the contract held. Other Strategic Transactions may
also be offset in combinations. If the offsetting transaction terminates at the
time of or after the primary transaction no segregation is required, but if it
terminates prior to such time, cash or liquid assets equal to any remaining
obligation would need to be segregated.

Investment Company Securities

Securities of other investment companies may be acquired by the Funds to
the extent permitted under the 1940 Act. Investment companies incur certain
expenses such as management, custodian, and transfer agency fees, and,
therefore, any investment by the Fund in shares of other investment companies
may be subject to such duplicate expenses.

Repurchase Agreements

The Funds may enter into repurchase agreements with brokers, dealers or
banks that meet the credit guidelines approved by the Board of Directors. In a
repurchase agreement, a fund buys a security from a seller that has agreed to
repurchase the same security at a mutually agreed upon date and price. The
resale price normally is in excess of the purchase price, reflecting an agreed
upon interest rate. This interest rate is effective for the period of time the
fund is invested in the agreement and is not related to the coupon rate on the
underlying security. A repurchase agreement may also be viewed as a fully
collateralized loan of money by a fund to the seller. The duration of
repurchase agreements will usually be short, from overnight to one week, and at
no time will a Fund invest in repurchase agreements for more than thirteen
months. The securities that are subject to repurchase agreements, however, may
have maturity dates in excess of thirteen months from the effective date of the
repurchase agreement. A Fund will always receive securities as collateral whose
market value is, and during the entire term of the agreement remains, at least
equal to 100% of the dollar amount invested by the Fund in each agreement plus
accrued interest, and the Fund will make payment for such securities only upon
physical delivery or upon evidence of book entry transfer to the account of the
Fund's custodian. If the seller defaults, SC-EUROPEAN or SC-US might incur a
loss if the value of the collateral securing the repurchase agreement declines
and might incur disposition costs in connection with liquidating the collateral.
In addition, if bankruptcy proceedings are commenced with respect to the seller
of the security, realization upon disposal of the collateral by SC-EUROPEAN or
SC-US may be delayed or limited.

Leverage

SC-EUROPEAN may use leverage to increase its holdings of portfolio
securities. Leverage creates an opportunity for increased net income but, at
the same time, creates special risk considerations. For example, leveraging may
exaggerate changes in the net asset value of SC-EUROPEAN shares and in the yield
on SC-EUROPEAN's portfolio. Although the principal of such borrowings will be
fixed, SC-EUROPEAN's assets may change in value during the time the borrowing is
outstanding. Since any decline in value of SC-EUROPEAN's investments will be
borne entirely by SC-EUROPEAN's shareholders (and not by those persons providing
the leverage to SC-EUROPEAN), the effect of leverage in a declining market
would be a greater decrease in net asset value than if SC-EUROPEAN were not so
leveraged. Leveraging will create interest expenses for SC-EUROPEAN, which can
exceed the investment return from the borrowed funds. To the extent the
investment return derived from securities purchased with borrowed funds exceeds
the interest SC-EUROPEAN will have to pay, SC-EUROPEAN's investment return will
be greater than if leveraging were not used. Conversely, if the investment
return from the assets retained with borrowed funds is not sufficient to cover
the cost of leveraging, the investment return of SC-EUROPEAN will be less than
if leveraging were not used.

20
<PAGE>

Reverse Repurchase Agreements

In connection with its leveraging activities, SC-EUROPEAN may enter into
reverse repurchase agreements in which SC-EUROPEAN sells securities and agrees
to repurchase them at a mutually agreed date and price. A reverse repurchase
agreement may be viewed as a borrowing by SC-EUROPEAN, secured by the security
which is the subject of the agreement. In addition to the general risks
involved in leveraging, reverse repurchase agreements involve the risk that, in
the event of the bankruptcy or insolvency of SC-EUROPEAN's Counterparty, SC-
EUROPEAN would be unable to recover the security which is the subject of the
agreement, that the amount of cash or other property transferred by the
Counterparty to SC-EUROPEAN under the agreement prior to such insolvency or
bankruptcy is less than the value of the security subject to the agreement, or
that SC-EUROPEAN may be delayed or prevented, due to such insolvency or
bankruptcy, from using such cash or property or may be required to return it to
the Counterparty or its trustee or receiver.

Securities Lending

SC-US and SC-EUROPEAN may lend portfolio securities, provided: (1) the loan
is secured continuously by collateral consisting of U.S. Government securities,
cash, or cash equivalents adjusted daily to have market value at least equal to
the current market value of the securities loaned; (2) SC-US and SC-EUROPEAN may
at any time call the loan and regain the securities loaned within 5 business
days; (3) SC-US and SC-EUROPEAN will receive any interest or dividends paid on
the loaned securities; and (4) the aggregate market value of securities of SC-US
and SC-EUROPEAN loaned will not at any time exceed one-third (or such other
limit as the Board of Directors may establish) of the total assets of the Fund.

Before SC-US or SC-EUROPEAN enters into a loan, GCMG considers relevant
facts and circumstances, including the creditworthiness of the borrower. The
risks in lending portfolio securities, as with other extensions of credit,
consist of possible delay in recovery of the securities or possible loss of
rights in the collateral should the borrower fail financially. Although voting
rights or rights to consent with respect to the loaned securities pass to the
borrower, SC-US and SC-EUROPEAN retain the right to call the loans at any time
on reasonable notice, and will do so in order that the securities may be voted
by SC-US or SC-EUROPEAN if the holders of such securities are asked to vote upon
or consent to matters materially affecting the investment.

When-Issued Securities

SC-EUROPEAN may from time to time purchase securities on a "when-issued" or
"forward delivery" basis for payments and delivery at a later date. The price
of such securities, which may be expressed in yield terms, is fixed at the time
the commitment to purchase is made, but delivery and payment for the when-issued
or forward delivery securities takes place at a later date. During the period
between purchase and settlement, no payment is made by a Fund to the issuer and
no interest accrues to SC-EUROPEAN. To the extent that assets of SC-EUROPEAN
are held in cash pending the settlement of a purchase of securities, the Fund
would earn no income; however, it is the Fund's intention to be fully invested
to the extent practicable and subject to the policies stated above.

While when-issued or forward delivery securities may be sold prior to the
settlement date, SC-EUROPEAN intends to purchase such securities with the
purpose of actually acquiring them unless a sale appears desirable for
investment reasons. At the time SC-EUROPEAN makes the commitment to purchase a
security on a when-issued or forward delivery basis, it will record the
transaction and reflect the value of the security in determining its net asset
value. At the time of settlement, the market value of the when-issued or
forward delivery securities may be more or less than the purchase price. SC-
EUROPEAN does not believe that its net asset value or income will be adversely
affected by its purchase of securities on a when-issued or forward delivery
basis. SC-EUROPEAN will establish a segregated account with the Funds'
custodian in which it will maintain cash or liquid assets equal in value of
commitments for when-issued or forward delivery securities. Such segregated
securities either will mature or, if necessary, be sold on or before the
settlement date. SC-EUROPEAN will not enter into such transactions for leverage
purposes.

21
<PAGE>

Short Sales

The Funds, to the extent permitted by other countries, may engage in short
sales. The Funds will not engage in a short sale if immediately after such
transaction the aggregate market value of all securities sold short would exceed
10% of a Fund's net assets (taken at market value).

The Funds may seek to realize gains through short sale transactions in
securities listed on one or more national securities exchanges or on the
National Association of Securities Dealers, Inc. Automated Quotation System.
Short selling involves the sale of borrowed securities. At the time a short
sale is effected, a Fund incurs an obligation to replace the security borrowed
at whatever its price may be at the time that the Fund purchases it for delivery
to the lender. When a short sale transaction is closed out by delivery of the
securities, any gain or loss on the transaction is taxable as a short term
capital gain or loss. Until the security is replaced, the Fund is required to
pay to the lender amounts equal to any dividends or interest which accrue during
the period of the loan. To borrow the security, a Fund also may be required to
pay a premium, which would increase the cost of the security sold. Until a Fund
replaces a borrowed security in connection with a short sale, the Fund will: (a)
maintain daily a segregated account containing cash or liquid securities, at
such a level that (i) the amount deposited in the segregated account plus the
amount deposited with the broker as collateral will equal the current value of
the security sold short and (ii) the amount deposited in the segregated account
plus the amount deposited with the broker as collateral will not be less than
the market value of the security at the time it was sold short; or (b) otherwise
cover its short position.

Since short selling can result in profits when stock prices generally decline,
the Funds in this manner, can, to a certain extent, hedge the market risk to the
value of its other investments and protect its equity in a declining market.
However, the Funds could, at any given time, suffer both a loss on the purchase
or retention of one security, if that security should decline in value, and a
loss on a short sale of another security, if the security sold short should
increase in value. Moreover, to the extent that in a generally rising market
the Funds maintain short positions in securities rising with the market, the net
asset value of the Funds would be expected to increase to a lesser extent than
the net asset value of an investment company that does not engage in short
sales.

Temporary Defensive Position

Under normal market conditions, the Funds do not intend to have a substantial
portion of their assets invested in cash, money market instruments or U.S.
Government securities. However, when GCMG determines that adverse market
conditions exist, each fund may adopt a temporary defensive posture and invest
entirely in cash, high-grade bonds, and short-term money market instruments,
including domestic bank obligations and repurchase agreement. When a Fund is
invested in this manner, it may not be able to achieve its investment objective.

INVESTMENT RESTRICTIONS

The Funds are series of SC-REMFs, which is an open-end investment company
organized under Maryland law. The Funds are "non-diversified", which means that
they are not limited by the 1940 Act in the proportion of assets they may invest
in the securities of a single issuer.

However, the Funds are subject to certain investment restrictions that are
deemed fundamental policies of the Fund. Such fundamental policies are those
that cannot be changed without the approval of the holders of a majority of a
Fund's outstanding shares which means the vote of (i) 67% or more of a Fund's
shares present at a meeting, if the holders of more than 50% of the outstanding
shares of a Fund are present or represented by proxy, or (ii) more than 50% of
the Fund's outstanding shares, whichever is less.

SC-US may not:

1. Make loans except through the purchase of debt obligations in
accordance with its investment objective and policies;

22
<PAGE>

2. Borrow money, except that SC-US may borrow money from banks for
temporary or emergency purposes, including the meeting of redemption requests
which might require the untimely disposition of securities, but not in an
aggregate amount exceeding 33-1/3% of the value of SC-US's total assets
(including the amount borrowed) less liabilities (not including the amount
borrowed) at the time the borrowing is made. Outstanding borrowings in excess
of 5% of the value of SC-US's total assets will be repaid before any subsequent
investments are made;

3. Invest in illiquid securities, as defined in "Investment Objective
and Policies," if immediately after such investment more than 10% of SC-US's net
assets (taken at market value) would be invested in such securities;

4. Engage in short sales or short sales against the box if immediately
following such transaction the aggregate market value of all securities sold
short and sold short against the box would exceed 10% of SC-US's net assets
(taken at market value); or

5. Purchase or sell real estate, except that SC-US may purchase
securities issued by companies in the real estate industry and will, as a matter
of fundamental policy, concentrate its investments in such securities.

6. Pledge, hypothecate, mortgage or otherwise encumber its assets, except to
secure permitted borrowings;

7. Participate on a joint or joint and several basis in any securities
trading account;

8. Invest in companies for the purpose of exercising control;

9. Purchase a security if, as a result (unless the security is
acquired pursuant to a plan of reorganization or an offer of exchange), SC-US
would own any securities of an open-end investment company or more than 3% of
the value of SC-US's total assets would be invested in securities of any closed-
end investment company or more than 10% of such value in closed-end investment
companies in general; or

10. (a) purchase or sell commodities or commodity contracts; (b) invest in
interests in oil, gas, or other mineral exploration or development programs; (c)
purchase securities on margin, except for such short-term credits as may be
necessary for the clearance of transactions and except for borrowings in an
amount not exceeding 33 1/3% of the value of SC-US's total assets; or (d) act as
an underwriter of securities, except that SC-US may acquire restricted
securities under circumstances in which, if such securities were sold, SC-US
might be deemed to be an underwriter for purposes of the Securities Act.

SC-EUROPEAN may not:

1. Invest directly in real estate or interests in real estate (although it
may purchase securities secured by real estate or interests therein, or issued
by companies or investment trusts which invest in real estate or interests
therein); invest in interests (other than publicly issued debentures or equity
stock interests) in oil, gas or other mineral exploration or development
programs; or purchase or sell commodity contracts (except futures contracts as
described in the Prospectus);

2. Act as an underwriter or issue senior securities;

3. Issue senior securities or borrow money, except that SC-EUROPEAN may
borrow money from banks in an amount not exceeding 33-1/3% of the value of SC-
EUROPEAN's total assets (not including the amount borrowed), except for
temporary or emergency purposes and to secure borrowings. If at any time SC-
EUROPEAN's borrowings exceed this limitation due to a decline in SC-EUROPEAN's
assets, such borrowings will be reduced within three days to the extent
necessary to comply with this limitation. Arrangements with respect to margin
for futures contracts are not deemed to be a pledge of assets;

4. Pledge, hypothecate, mortgage or otherwise encumber its assets, except to
secure permitted borrowings;

5. Participate on a joint or a joint and several basis in any trading
account in securities;

23
<PAGE>

6. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (except this shall not prevent SC-
EUROPEAN from purchasing or selling options or futures contracts or from
investing in securities or other instruments backed by physical commodities);

7. Lend any security or make any other loan if, as a result, more than 33
1/3% of its total assets would be lent to other parties, but this limitation
does not apply to purchases of debt securities or repurchase agreements;

8. Underwrite securities issued by others, except to the extent that SC-
EUROPEAN may be considered an underwriter within the meaning of the Securities
Act in the disposition of restricted securities;

9. Write or acquire options or interests in oil, gas or other mineral
exploration or development programs; or

10. Invest for the purpose of exercising control over management of any
company.

In addition, SC-EUROPEAN has adopted non-fundamental investment limitations as
stated below. Such limitations may be changed without shareholder approval.

SC-EUROPEAN may not:

1. Purchase securities on margin except that SC-EUROPEAN may enter into
option transactions and futures contracts as described in their Prospectuses,
and as specified above in fundamental investment limitation number (1) above;

2. Purchase or retain securities of an issuer if the officers and Directors
of SC-REMFs or GCMG owning more than 1/2 of 1% of such securities, together own
more than 5% of such securities;

3. Invest more than 10% of its net assets in illiquid securities, including
securities of foreign companies that are not listed on a foreign securities
exchange or a recognized U.S. exchange;

4. Invest its assets in securities of any investment company, except as
permitted by the 1940 Act or the rules, regulations, interpretations or orders
of the SEC and its staff thereunder; or

5. Make loans except (i) by purchasing bonds, debentures or similar
obligations (including repurchase agreements, subject to the limitations as
described in the respective Prospectuses) that are publicly distributed, and
(ii) by lending its portfolio securities to banks, brokers, dealers and other
financial institutions so long as such loans are not inconsistent with the 1940
Act or the Rules and Regulations or interpretations of the SEC thereunder;

If a percentage restriction is met at the time of investment, a later increase
or decrease in the percentage due to a change in value of portfolio securities
or the amount of assets will not be considered a violation of any of the
foregoing restrictions. The investment restrictions do not preclude a Fund from
purchasing the securities of any issuer pursuant to the exercise of subscription
rights distributed to the Fund by the issuer, unless such purchase would result
in a violation of a fundamental investment restriction listed above.

MANAGEMENT OF SC-REMFs

The overall management of the business and affairs of the Funds is vested with
the Board of Directors of SC-REMFs. The Board of Directors approves all
significant agreements between SC-REMFs and persons or companies furnishing
services to the Funds, including SC-REMFs' agreements with GCMG or with the
Funds' administrator, custodian and transfer agent. The management of each of
the Fund's day to day operations is delegated to the officers of SC-REMFs, who
include the Managing Directors, GCMG and the administrator, subject always to
the investment objective and policies of each of the Funds and to general
supervision by the Board of Directors. Although SC-REMFs is not required by law
to hold annual meetings, it may hold shareholder meetings from time to time on
important matters and shareholders have the right to call a meeting to remove a
Director or to take other action described in SC-REMFs' Articles of
Incorporation.

24
<PAGE>

The directors and officers of SC-REMFs and their principal occupations during
the past five years are set forth below. Directors deemed to be "interested
persons" of SC-REMFs for purposes of the 1940 Act are indicated by an asterisk.

<TABLE>
<CAPTION>
Principal
Occupations During
Name and Address Office Age The Past Five Years
- ---------------- ------ --- -------------------
<S> <C> <C> <C>
Anthony R. Manno Jr.* Chairman of 48 Managing Director and President of GCMG since January
11 South LaSalle Street the Board of 1995, where he is responsible for overseeing all investment
Chicago, Illinois 60603 Directors, and capital allocation matters for GCMG's public market
Managing securities activities and is also responsible for company and
Director and industry analysis, market strategy and trading and reporting.
President Mr. Manno was a member of the Investment Committee of
Security Capital from March 1994 to June 1996. Prior to
joining Security Capital, Mr. Manno was a Managing Director
of LaSalle Partners Limited from March 1980 to March 1994.
Mr. Manno received his M.B.A. from the University of
Chicago Graduate School of Business, an M.A. and a B.A.
from Northwestern University and is a Certified Public
Accountant.

Robert H. Abrams Director 67 Founding Director of the Program in Real Estate at Cornell
114 West Sibley Hall University. Founder of Colliers ABR, Inc. (formerly Abrams
Cornell University Benisch Riker Inc.), a property management firm. Mr.
Ithaca, New York 14853 Abrams was Principal of Colliers ABR, Inc. from 1978 to
1992 and since 1992, has served as a Consultant. From 1959
to 1978 Mr. Abrams was Executive Vice President and
Director of Cross and Brown Company. Mr. Abrams also
serves as Trustee Emeritus and Presidential Counselor of his
alma mater, Cornell University. Mr. Abrams received his
M.B.A. from Harvard University and his B.A. from Cornell
University.

Stephen F. Kasbeer Director 75 Retired; Senior Vice President for Administration and
8 Bonanza Trail Treasurer of Loyola University, Chicago from 1981 to July
Santa Fe, New Mexico 87505 1994, where he was responsible for administration,
investment, real estate and treasurer functions. At Loyola
University, he also served as Chief Investment Officer, was
Chairman of the Operations Committee, was a member of the
Investment and Finance Committees of the Board of Trustees
and was President and a Director of the Loyola Management
Company. Currently, Mr. Kasbeer serves as a Director of
Endowment Realty, Inc. and Endowment Realty II and as a
Member of the Investment Committee of the University of
San Diego. Mr. Kasbeer also serves as Trustee, Treasurer and
Chairman of the Investment and Finance Committees of Santa
Fe Preparatory School and as Trustee and Chairman of the
Santa Fe Preparatory School Combined Permanent
Endowment Fund Trust. Mr. Kasbeer received his J.D. from
John Marshall Law School and his M.A. and B.S. from
Northwestern University.
</TABLE>

25
<PAGE>

<TABLE>
<CAPTION>
Principal
Occupations During
Name and Address Office Age The Past Five Years
- ---------------- ------ --- -------------------
<S> <C> <C> <C>
George F. Keane Director 70 Chairman of the Board of Trigen Energy Corporation since
7408 Eaton Court 1994. As founding chief executive of The Common Fund in
University Park, Florida 34201 1971 and Endowment Realty Investors in 1988, Mr. Keane for
many years headed an investment management service for
colleges, universities and independent schools that managed
$15 billion for 1,200 educational institutions when he became
President Emeritus of the Common Fund in 1993. He has
served as a member of the Investment Advisory Committee of
the $95 billion New York State Common Retirement Fund
since 1982. He has been a Director of the Northern Trust of
Connecticut since 1991, a Trustee of the Nicholas Applegate
Investment Trust since 1993, and a Director of the Bramwell
Funds since 1994. He is also a Director of Universal Stainless
& Alloy Products, Global Pharmaceutical Corporation, United
Water Resources and United Properties Group, and the
Universal Bond Fund, and is an advisor to Associated Energy
Managers. Mr. Keane also serves on the Finance Committee
of the University of South Florida, and of his alma mater,
Fairfield University where he received his B.A. Mr. Keane
also holds honorary degrees from Loyola University, Chicago,
Illinois and Lawrence University, Appleton, Wisconsin.

Kenneth D. Statz Managing 41 Managing Director of GCMG since November 1997 where he
11 South LaSalle Street Director is responsible for the development and implementation of
Chicago, Illinois 60603 portfolio investment strategy. Prior thereto, Senior Vice
President of GCMG from July 1996 to October 1997 and Vice
President from May 1995 to June 1996. Prior to joining
Security Capital, Mr. Statz was a Vice President and Senior
REIT Analyst in the investment research department of
Goldman, Sachs & Co., from February 1993 to January 1995,
concentrating on research and underwriting for the REIT
industry. Prior thereto, Mr. Statz was a real estate stock
portfolio manager and a managing director of Chancellor
Capital Management from August 1982 to February 1992.
Mr. Statz received his M.B.A. and B.B.A. from the
University of Wisconsin, Madison.

Kevin W. Bedell Senior Vice 44 Senior Vice President of GCMG since November 1997 and
11 South LaSalle Street President Vice President since July 1996, where he is responsible for
Chicago, Illinois 60603 directing the activities of the industry/company securities
research group and providing in-depth proprietary research on
publicly traded companies with office and industrial sectors.
Prior to joining GCMG, Mr. Bedell spent nine years with
LaSalle Partners Limited where he was Equity Vice President
and Portfolio Manager responsible for the strategic,
operational and financial management of a private REIT with
commercial real estate investments of $800 million. Mr.
Bedell received his M.B.A. from the University of Chicago
and his B.A. from Kenyon College.
</TABLE>

26
<PAGE>

<TABLE>
<CAPTION>
Principal
Occupations During
Name and Address Office Age The Past Five Years
- ---------------- ------ --- -------------------
<S> <C> <C> <C>
Jeffrey C. Nellessen Vice 38 Vice President and Controller of GCMG since March 1997.
11 South LaSalle Street President, Prior thereto, from June 1988 to March 1997, he was
Chicago, Illinois 60603 Treasurer and Controller, Manager of Client Administration and Compliance
Assistant Officer at Strong Capital Management, Inc. Mr. Nellessen is
Secretary a Certified Public Accountant, Certified Management
Accountant and a Certified Financial Planner. He received his
B.B.A. from the University of Wisconsin, Madison.

David T. Novick Vice President 35 Vice President of Security Capital since June 1998. Prior
11 South LaSalle Street and Secretary thereto, from September 1989 to June 1998, he was an
Chicago, Illinois 60603 attorney, and most recently a Partner, with the law firm of
Katten Muchin and Zavis. Mr. Novick received his B.S.B.A.
from Boston University and his J.D. from the University of
Illinois.

</TABLE>

Compensation of Directors and Certain Officers

The Directors of SC-REMFs who are interested persons of SC-REMFs, under the
1940 Act, (which includes persons who are employees of GCMG or officers or
employees of any of its affiliates) receive no remuneration from SC-REMFs. Each
of the other Directors is paid an annual retainer of $14,000 and is reimbursed
for the expenses of attendance at meetings. The following table sets forth
information regarding compensation earned by the Directors by SC-REMFs for the
fiscal year ending December 31, 1999.

Compensation Table
Fiscal Year Ending December 31, 1999

<TABLE>
<CAPTION>
Pension or
Retirement
Benefits Estimated
Aggregate Accrued as Annual Total
Compensation Part of Benefits Compensation
From SC-REMFs Upon From SC-REMFS
Name of Person, Position SC-REMFs Expenses Retirement Paid To Directors
- ------------------------ ------------ ---------- ---------- -----------------
<S> <C> <C> <C> <C>
George F. Keane
Director ......................... $18,500 N/A N/A $18,500
Stephen F. Kasbeer
Director ........................ $15,000 N/A N/A $15,000
Robert H. Abrams
Director ......................... $18,500 N/A N/A $18,500
**Anthony R. Manno Jr.
Chairman, Managing Director and
President ........................ 0 N/A N/A 0
**John H. Gardner, Jr. /(1)/
Director ..................... 0 N/A N/A 0
</TABLE>

- -----------------------------------
** "Interested person," as defined in the 1940 Act, of SC-REMFs.
(1) Resigned position as Director effective May 1, 1999.

27
<PAGE>

GCMG

Security Capital Global Capital Management Group Incorporated, a Delaware
corporation, is a registered investment adviser, which commenced operations in
January 1995 under Delaware law and specializes in the management of real estate
securities portfolios. GCMG is a wholly-owned subsidiary of Security Capital
Investment Research Group Incorporated, which is wholly-owned by Security
Capital. Security Capital is a publicly-traded company which, through its
affiliates, has a market presence in 14 countries throughout the world. SC-
REALTY Incorporated ("SC-REALTY"), a wholly-owned subsidiary of Security
Capital, owns a controlling interest in SC-US and SC-EUROPEAN. GCMG is
affiliated with SC-REALTY and SC-REMFs because they are under the common control
of Security Capital.

Investment Advisory Agreements

Pursuant to an investment advisory agreement with SC-REMFs with respect to
each Fund (the "Advisory Agreement"), GCMG furnishes a continuous investment
program and makes the day-to-day investment decisions for the Funds, executes
the purchase and sale orders for the portfolio transactions of the Funds and
generally manages the Funds' investments in accordance with their stated
policies, subject to the general supervision of SC-REMFs' Board of Directors.

Under the Advisory Agreement for SC-US, which is dated December 16, 1997, SC-
US pays GCMG, monthly, an annual management fee in an amount equal to .60% of
the average daily net asset value of SC-US's shares. Under a separate
agreement, GCMG has agreed to waive advisory fees and/or reimburse expenses to
maintain the total operating expenses, other than brokerage fees and
commissions, interest, taxes and other extraordinary expenses of SC-US at 1.35%
of the value of SC-US's average daily net assets, for the 2000 fiscal year.
For the period April 23, 1997 (the effective date of SC-US's initial
registration statement) through December 31, 1997; January 1, 1998 through
December 31, 1998; and January 1, 1999 through December 31, 1999, GCMG earned
$607,727, $335,505, and $117,957, respectively, net of waivers of $30,443,
$305,199, and $265,522, respectively, for providing investment management
services to SC-US.

Under the Advisory Agreement for SC-EUROPEAN, dated June 30, 1998, SC-EUROPEAN
pays GCMG, monthly, an annual management fee in an amount equal to .85% of the
average daily net asset value of SC-EUROPEAN's shares. Under a separate
agreement, GCMG has agreed to waive advisory fees and/or reimburse expenses to
maintain the total operating expenses, other than brokerage fees and
commissions, interest, taxes and other extraordinary expenses, of SC-EUROPEAN at
1.45% of the value of SC-EUROPEAN's average daily net assets until December 31,
2000. For the period June 30, 1998 (the effective date of SC-EUROPEAN's initial
registration statement) through December 31, 1998, and January 1, 1999 through
December 31, 1999, GCMG earned $0 and $0, respectively, net of waivers of
$155,345 and $337,350, respectively, for providing management services to SC-
EUROPEAN.

GCMG provides the Funds with such personnel as SC-REMFs may from time to time
request for the performance of clerical, accounting and other office services,
such as coordinating matters with the administrator, the transfer agent and the
custodian, which GCMG is not required to furnish under the Advisory Agreement.
The personnel rendering these services, who may act as officers of SC-REMFs, may
be employees of GCMG or its affiliates. The cost to SC-REMFs of these services
must be agreed to by SC-REMFs and is intended to be no higher than the actual
cost to GCMG or its affiliates of providing the services. SC-REMFs does not pay
for services performed by officers of GCMG or its affiliates. SC-REMFs may from
time to time hire its own employees or contract to have services performed by
third parties, and the management of SC-US intends to do so whenever it appears
advantageous to SC-REMFs.

In addition to the payments to GCMG under the Advisory Agreement described
above, each Fund pays for certain other costs of its operations including: (a)
administration, custodian and transfer agency fees, (b) fees of Directors who
are not affiliated with GCMG, (c) legal and auditing expenses, (d) costs of
printing and postage fees relating to preparing each Fund's prospectus and
shareholder reports, (e) costs of maintaining SC-REMFs' existence, (f) interest
charges, taxes, brokerage fees and commissions, (g) costs of stationery and
supplies, (h) expenses and fees related to registration and filing with federal
and state regulatory authorities, (i) distribution fees, and (j) upon the
approval of SC-REMFs' Board of Directors, costs of personnel of GCMG or its
affiliates rendering clerical, accounting and other office services. Each Fund
also pays for the portion of SC-REMFs' expenses attributable to its operations.
Income, realized gains and

28
<PAGE>

losses, unrealized appreciation and depreciation and certain expenses not
allocated to a particular Fund are allocated to each Fund based on the net
assets of the Fund in relation to the net assets of SC-REMFs.

The Advisory Agreement for SC-US was initially approved on November 25, 1997
by SC-REMFs' Directors, including a majority of the Directors who are not
interested persons (as defined in the 1940 Act) of SC-REMFs or GCMG ("non-
interested Directors"), and by SC-US's shareholders on December 12, 1997. The
Directors approved the continuance of the Advisory Agreement on December 14,
1999, and it will continue in effect until December 16, 2000. The Advisory
Agreement for SC-EUROPEAN was approved on June 24, 1998 by SC-REMFs' Directors
including a majority of the non-interested Directors. The Advisory Agreement
for SC-EUROPEAN continues in effect until June 30, 2000. The Advisory
Agreements for SC-US and SC-EUROPEAN will continue in effect, provided that
their continuance is specifically approved annually by the Directors or by a
vote of the shareholders, and in either case by a majority of the Directors who
are not parties to such Advisory Agreement or interested persons of any such
party, by vote cast in person at a meeting called for the purpose of voting on
such approval.

The Advisory Agreement for each Fund is terminable without penalty by the Fund
on sixty days' written notice when authorized either by majority vote of its
outstanding voting securities or by a vote of a majority of the Directors, or by
GCMG on sixty days' written notice, and will automatically terminate in the
event of its assignment. Each Advisory Agreement provides that in the absence
of willful misfeasance, bad faith or gross negligence on the part of GCMG, or of
reckless disregard of its obligations thereunder, GCMG shall not be liable for
any action or failure to act in accordance with its duties thereunder.

Administrator and Sub-Administrator

SC-REMFs has also entered into a fund administration and accounting agreement
with GCMG (the "Administration Agreement") under which GCMG performs certain
administrative functions for the Funds, including (i) providing office space,
telephone, office equipment and supplies; (ii) paying compensation of SC-REMFs'
officers for services rendered as such; (iii) authorizing expenditures and
approving bills for payment on behalf of SC-REMFs; (iv) supervising preparation
of the periodic updating of the Funds' prospectuses and statements of additional
information; (v) supervising preparation of semi-annual reports to the Funds'
shareholders, notices of dividends, capital gains distributions and tax credits,
and attending to routine correspondence and other communications with individual
shareholders; (vi) supervising the daily pricing of each Fund's investment
portfolio and the publication of the net asset value of the Funds' shares,
earnings reports and other financial data; (vii) monitoring relationships with
organizations providing services to SC-REMFs, including the Funds' custodian
(the "Custodian"), transfer agent (the "Transfer Agent") and printers; (viii)
providing trading desk facilities for the Funds; (ix) maintaining books and
records for the Funds (other than those maintained by the Custodian and Transfer
Agent) and preparing and filing of tax reports other than the Funds' income tax
returns; and (x) providing executive, clerical and secretarial help needed to
carry out these responsibilities.

In accordance with the terms of the Administration Agreement and with the
approval of SC-REMFs' Board of Directors, GCMG has caused SC-REMFs to retain
State Street Bank and Trust Company as sub-administrator (the "Sub-
Administrator") under a sub-administration agreement (the "Sub-Administration
Agreement").

Under the Sub-Administration Agreement, the Sub-Administrator has assumed
responsibility for performing certain of the foregoing administrative functions,
including overseeing the determination and publication of the net asset value of
the Funds' shares maintaining certain of the Funds' books and records that are
not maintained by GCMG as investment adviser, or by the Custodian or Transfer
Agent, preparing financial information for the Funds' income tax returns, proxy
statements, semi-annual and annual shareholders reports, and SEC filings, and
responding to certain shareholder inquiries. Under the terms of the Sub-
Administration Agreement, SC-REMFs pays the Sub-Administrator a monthly
administration fee at the annual rate of .08% of the first $750 million, .06% of
the next $250 million and .04% of SC-REMFs' average daily net assets over $1
billion, subject to an average annual minimum fee of $75,000 per investment
portfolio.

For the period April 23, 1997 (the effective date of SC-REMFs' initial
registration statement) through December 31 1997, Firstar Trust Company
("Firstar"), SC-REMFs' prior sub-administrator, earned $47,791 for providing
sub-administration services to SC-US. From January 1, 1998 to August 10, 1998,
the termination date of Firstar's contract with SC-REMFs, Firstar earned $52,465
for providing sub-administration services to SC-US. From June 30, 1998 to
December 31, 1998, the Sub-Administrator earned $160,625 for providing sub-
administration services to SC-US, SC-EUROPEAN, Security Capital Asia/Pacific
Real Estate Shares ("SC-ASIA"), and Security Capital Real Estate

29
<PAGE>

Arbitrage Shares ("SC-ARBITRAGE") (as of August 10, 1998). SC-ASIA and SC-
ARBITRAGE were terminated on December 31, 1998. From January 1, 1999 to December
31, 1999, the sub-administrator earned $175,788 for providing sub-administration
services to SC-US and SC-EUROPEAN.

Under the Administration Agreement, GCMG remains responsible for monitoring
and overseeing the performance by the Sub-Administrator of its obligations to
the Funds under the Sub-Administration Agreement, subject to the overall
authority of SC-REMFs' Board of Directors. For its services under the
Administration Agreement, GCMG receives a monthly fee from each Fund at the
annual rate of .02% of the value of each Fund's average daily net assets. For
the period April 23, 1997 (the effective date of SC-REMFs' initial registration
statement) through December 31, 1997, GCMG earned $15,930 for providing services
to SC-US. For the period January 1, 1998 through December 31, 1998, GCMG earned
$23,292 for providing services to SC-US, SC-EUROPEAN, SC-ASIA AND SC-ARBITRAGE
under the Administration Agreement, and for the period January 1, 1999 through
December 31, 1999, GCMG earned $15,136 for providing services to SC-US and SC-
EUROPEAN.

The Administration Agreement is terminable by either party on sixty days'
written notice to the other. The Administration Agreement provides that in the
absence of willful misfeasance, bad faith or gross negligence on the part of
GCMG, or of reckless disregard of its obligations thereunder, GCMG shall not be
liable for any action or failure to act in accordance with its duties
thereunder.

Custodian and Transfer Agent

State Street Bank and Trust Company ("Custodian"), which has its principal
business address at 225 Franklin Street, Boston, Massachusetts 02101, as been
retained to act as Custodian of the Funds' investments and as the Funds'
Transfer Agent.

The Custodian's responsibilities include safeguarding and controlling SC-
REMFs' cash and securities, handling the receipt and delivery of securities, and
collecting interest and dividends on the Funds' investment. Specifically, the
Custodian is responsible for holding all securities and cash of each Fund,
receiving and paying for securities purchased, delivering against payment for
securities sold, receiving and collecting income from investments, making all
payments covering expenses of SC-REMFs and performing other accounting and
administrative duties, all as directed by persons authorized by SC-REMFs. The
Custodian does not exercise any supervisory function in such matters as the
purchase and sale of portfolio securities, the payment of dividends, or payment
of expenses of the Funds or SC-REMFs. Portfolio securities of the Funds
purchased domestically are maintained in the custody of the Custodian and may be
entered into the book entry systems of securities depositories approved by the
Board of Directors. Portfolio securities maintained outside the United States
will be maintained in the custody of foreign branches of the Custodian and such
other custodians, including foreign banks and foreign securities depositories,
as are approved by the Custodian in its capacity as Foreign Custody Manager or
by the Board of Directors, pursuant to applicable 1940 Act rules.

In consideration for services provided, SC-REMFs pays the Custodian an annual
fee based upon the countries in which the Funds' assets are maintained, plus
transaction costs and other out of pocket expenses. SC-REMFs also pays the
Custodian a monthly fee for the performance of certain currency accounting
services in the amount of $3,000 for SC-US and $4,000 for SC-EUROPEAN.

The Transfer Agent's responsibilities include, without limitation: (i)
receiving for acceptance, orders for the purchase of shares and delivering
payment and appropriate documentation thereof to the Custodian; (ii) pursuant to
purchase orders, issuing the appropriate number of shares and holding such
shares in the appropriate shareholder account; (iii) receiving for acceptance
redemption requests and redemption directions and delivering the appropriate
documentation thereof to the Custodian; (iv) upon the receipt of monies paid by
the Custodian, causing to be paid such monies as instructed by redeeming
shareholders; (v) effecting transfers of shares upon the receipt of appropriate
instructions; (vi) as dividend disbursing agent, preparing and transmitting
payments for dividends and distributions declared by the Funds, including the
crediting of shareholder accounts in the case of dividend reinvestment plans;
(vii) recording the issuance of shares of the Funds and maintaining the records
required by SEC Rule 17Ad-10(e); and (viii) providing any other customary
services of a transfer agent, dividend disbursing agent, custodian of certain
retirement plans and, as relevant, agent in connection with accumulation, open-
account or similar plans.

30
<PAGE>

In consideration for services provided, SC-REMFs pays the Transfer Agent an
annual fee of $40,000 for the first class of shares, $30,000 for each of the
second and third classes of shares, $20,000 for each of the fourth and fifth
classes of shares and $15,000 for each class of shares thereafter, plus certain
additional account service fees.

Distributor

Security Capital Markets Group Incorporated ("Capital Markets" or
"Distributor"),which has its principal offices at 11 South LaSalle Street,
Chicago, Illinois 60603, serves as principal underwriter and distributor of the
Funds' shares. Capital Markets is an affiliate of GCMG and SC-REMFs because it
is wholly-own by Security Capital Financial Services, which is wholly-owned by
Security Capital.

Under separate Distribution and Servicing Agreements with SC-REMFs with
respect to the shares of each Fund, Capital Markets offers the Funds' shares on
an agency or "best efforts" basis under which a Fund is required to issue only
such shares as are actually sold. SC-US and SC-EUROPEAN offer shares for sale
to the public on continuous basis. Since April 23, 1997 (the effective date of
SC-REMFs initial registration statement), Capital Markets has received no
commissions in connection with the sale of the Funds' shares.

DISTRIBUTION AND SERVICING PLANS

The Board of Directors has adopted Distribution and Servicing Plans ("Plans")
with respect to SC-US (the"SC-US Plan') and SC-EUROPEAN (the "SC-EUROPEAN
Plan"). The Plans are implemented by a Distribution and Servicing Agreement
("Agreement") that SC-REMFs has entered into with the Distributor. The Plans and
the Agreement have been approved by a vote of the Board of Directors, including
a majority of the Directors who are not interested persons of SC-REMFs and have
no direct or indirect financial interest in the operation of the Plan
("Disinterested Directors"), cast in person at a meeting called for the purposes
of voting on the Plan. The annual compensation payable by SC-REMFs to the
Distributor under each Plan is an amount equal to .25% (on an annual basis) of
the value of the average daily net assets of the class of shares to which the
Plan relates.

Under the Plans, the Funds are authorized to pay a distribution fee for
distribution activities in connection with the sale of shares and a service fee
for services provided which are necessary for the maintenance of shareholder
accounts. To the extent such fee exceeds the expenses of these distribution and
shareholder servicing activities, the Distributor may retain such excess as
compensation for its services and may realize a profit from these arrangements.

The Plans are compensation plans which provide for the payment of a specified
distribution and service fee without regard to the distribution and service
expenses actually incurred by the Distributor. If the Plans were to be
terminated by the Board of Directors and no successor Plans were to be adopted,
the Directors would cease to make distribution and service payments to the
Distributor and the Distributor would be unable to recover the amount of any of
its unreimbursed distribution expenditures. However, the Distributor does not
intend to incur distribution and service expenses at a rate that materially
exceeds the rate of compensation received under the Plans. The Distributor also
may pay third parties in respect of these services such amount as it may
determine. The Funds understand that these third parties may also charge fees to
their clients who are beneficial owners of Fund shares in connection with their
client accounts. These fees would be in addition to any amounts which may be
received by them from the Distributor under the Plans.

The types of expenses for which the Distributor and third parties may be
compensated under the Plans include compensation paid to and expenses incurred
by their officers, employees and sales representatives, allocable overhead,
telephone and travel expenses, the printing of prospectuses and reports for
other than existing shareholders, preparation and distribution of sales
literature, advertising of any type and all other expenses incurred in
connection with activities primarily intended to result in the sale of shares.
Additional types of expenses covered by the Plans include responding to
shareholder inquiries and providing shareholders with information on their
investments.

Prior to February 1, 2000, SC-US and SC-EUROPEAN each issued two classes of
shares, Class I shares and Class R shares. The Board of Directors adopted
Distribution and Servicing Plans with respect to each of the Class I shares and
the Class R shares of SC-US (the "SC-US Class I Plan" and the "SC-US Class R
Plan") of SC-US and one Plan with respect to the Class I and Class R shares of
SC-EUROPEAN (the "SC-EUROPEAN Plan"). Effective February 1, 2000, the Class R
shares of SC-US and SC-EUROPEAN were converted to Class I shares of SC-US and
SC-EUROPEAN,

31
<PAGE>

respectively, with the surviving class for SC-US being known as Security Capital
U.S. Real Estate Shares and the surviving class for SC-EUROPEAN being known as
Security Capital European Real Estate Shares. After the conversion, the SC-US
Class R Plan was discontinued with the SC-US Class I Plan applying to all
existing shares of SC-US.

For the period January 1, 1999 through December 31, 1999, the Distributor
earned $151,876 for providing services under the SC-US Class I Plan and $7,907
for providing services under the SC-US Class R Plan. During that period, total
payments made by SC-US under the SC-US Class I Plan were spent as follows: (i)
$100,329 on advertising, including the printing and mailing of prospectuses to
other than current shareholders; (ii) $0 on compensation to underwriters; (iii)
$51,547 on compensation to broker-dealers; (iv) $0 on compensation to sales
personnel; and (v) $0 on interest, carrying or other financing charges. During
the same period, total payments made by SC-US under the SC-US Class R Plan were
spent as follows: (i) $7,907 on advertising, including printing and mailing of
prospectuses to other than current shareholders; (ii) $0 on compensation to
underwriters; (iii) $0 on compensation to broker-dealers; (iv) $0 on
compensation to sales personnel; and (v) $0 on interest, carrying or other
financing charges.

For the period January 1, 1999 through December 31, 1999, the Distributor
earned $29,408 for providing services under the SC-EUROPEAN Plan. During that
period, total payments made by SC-EUROPEAN under the SC-EUROPEAN Plan were spent
as follows: (i) $9,322 on advertising, including the printing and mailing of
prospectuses to other than current shareholders; (ii) $0 on compensation to
underwriters; (iii) $529 on compensation to broker-dealers; (iv) $0 on
compensation to sales personnel; and (v) $0 on interest, carrying or other
financing charges.

Under the Plans, the Distributor will provide to the Board of Directors for
its review, and the Board will review at least quarterly, a written report of
the services provided and amounts expended by the Distributor under the Plans
and the purposes for which such services were performed and expenditures were
made.

The SC-US Class I Plan and the SC-US Class R Plan were approved initially by
the Board of Directors, including the Disinterested Directors, on November 25,
1997 and by SC-US's Class I and Class R shareholders on December 12, 1997. The
SC-EUROPEAN Plan was approved by the Board of Directors, including the
Disinterested Directors, on June 24, 1998. The Plans remain in effect from year
to year, provided such continuance is approved annually by a vote of the Board
of Directors, including a majority of the Disinterested Directors. The
continuance of the SC-US Class I Plan and the SC-US Class R Plan was approved by
the Board of Directors, including a majority of the Disinterested Directors, on
December 14, 1999 The continuance of the SC-EUROPEAN Plan was approved by the
Board of Directors on June 18, 1999. A Plan may not be amended to increase
materially the amount to be spent for the services described therein without the
approval of a majority of the Fund's outstanding shares.

All material amendments of a Plan must also be approved by the Board of
Directors in the manner described above. The Plans may be terminated at any time
without payment of any penalty by a vote of a majority of the Disinterested
Directors or by a vote of a majority of the outstanding class of shares. So
long as a Plan is in effect, the selection and nomination of Disinterested
Directors shall be committed to the discretion of the Disinterested Directors.
The Board of Directors has determined that in their judgment there is a
reasonable likelihood that the Plans will benefit SC-US, SC-EUROPEAN and their
shareholders.

OTHER DISTRIBUTION AND/OR SERVICING ARRANGEMENTS

The Distributor may enter into agreements ("Agreements") with institutional
shareholders of record, broker-dealers, financial institutions, depository
institutions, and other financial intermediaries as well as various brokerage
firms or other industry-recognized service providers of fund supermarkets or
similar programs ("Institutions"), to provide certain distribution, shareholder
servicing, administrative and/or accounting services for their clients
("Customers") who are beneficial owners of Fund shares. Such Agreements with
respect to all classes of shares may be governed by a Plan.

An Institution with which the Distributor has entered into an Agreement may
charge a Customer one or more of the following types of fees, as agreed upon by
the Institution and the Customer, with respect to the cash management or other
services provided by the institution: (i) account fees (a fixed amount per month
or per year); (ii) transaction fees (a fixed amount per transaction processed);
(iii) compensation balance requirements (a minimum dollar amount a Customer must
maintain in order to obtain the services offered); or (iv) account maintenance
fees (a periodic charge based upon the percentage of assets in the account or of
the dividend paid on those assets). Services provided by an

32
<PAGE>

Institution to Customers are in addition to, and not duplicative of, the
services provided under the Plan and SC-US's administration arrangements. A
Customer of an Institution should read the relevant Prospectus and this
Statement of Additional Information in conjunction with the Agreement and other
literature describing the services and related fees that would be provided by
the Institution to its Customer prior to any purchase of Fund shares.
Prospectuses are available from the Distributor upon request.

DETERMINATION OF NET ASSET VALUE

Net asset value per share is determined by SC-US and SC-EUROPEAN on each day
the New York Stock Exchange is open for trading, and on any other day during
which there is a sufficient degree of trading in the investments of SC-US and/or
SC-EUROPEAN to affect materially a Fund's net asset value. The New York Stock
Exchange is closed on Saturdays, Sundays, and on New Year's Day, Presidents' Day
(the third Monday in February), Good Friday, Memorial Day (the last Monday in
May), Independence Day, Labor Day (the first Monday in September), Thanksgiving
Day and Christmas Day (collectively, the "Holidays"). When any Holiday falls on
a Saturday, the Exchange is closed the preceding Friday, and when any Holiday
falls on a Sunday, the Exchange is closed the following Monday. No redemptions
will be made on Martin Luther King Day (the third Monday in January), Columbus
Day (the second Monday in October) and Veteran's Day, nor on any of the
Holidays.

Net asset value per share is determined by adding the market value of all
securities in a Fund's portfolio and its other assets, subtracting liabilities
incurred or accrued that are allocable to the Fund, and dividing by the total
number of the Fund's shares then outstanding.

For purposes of determining a Fund's net asset value per share, all assets and
liabilities initially expressed in foreign currencies will be converted into
U.S. dollars at the mean of the bid and asked prices of such currencies against
the U.S. dollar last quoted by a major bank which is a regular participant in
the institutional foreign exchange markets or on the basis of a pricing service
which takes into account the quotes provided by a number of such major banks.

REDEMPTION OF SHARES

Payment of the redemption price for shares redeemed may be made either in cash
or in portfolio securities (selected in the discretion of SC-REMFs' Board of
Directors and taken at their value used in determining a Fund's net asset value
per share as described in the Prospectus under "Determination of Net Asset
Value"), or partly in cash and partly in portfolio securities. However,
payments will be made wholly in cash unless SC-REMFs' Board of Directors
believes that economic conditions exist which would make such a practice
detrimental to the best interests of the Funds. If payment for shares redeemed
is made wholly or partly in portfolio securities, brokerage costs may be
incurred by the investor in converting the securities to cash. SC-REMFs will
not distribute in kind portfolio securities that are not readily marketable.

SC-REMFs has elected to be governed by Rule 18f-1 under the 1940 Act, which
obligates the Funds to redeem shares in cash, with respect to any one
shareholder during any 90-day period, up to the lesser of $250,000 or 1% of the
net assets of a Fund at the beginning of such period. Although redemptions in
excess of this limitation would normally be paid in cash, SC-US and SC-EUROPEAN
reserve the right to make payments in whole or in part in securities or other
assets in case of an emergency, or if the payment of redemption in cash would be
detrimental to the existing shareholders of a Fund as determined by the Board of
Directors. In such circumstances, the securities distributed would be valued as
set forth in the Prospectus. Should a Fund distribute securities, a shareholder
may incur brokerage fees or other transaction costs in converting the securities
to cash.

PORTFOLIO TRANSACTIONS AND BROKERAGE

Subject to the supervision of the Directors, decisions to buy and sell
securities for SC-US and SC-EUROPEAN and negotiation of brokerage commission
rates are made by GCMG. Transactions on stock exchanges involve the payment by
the Funds of negotiated brokerage commissions. There is generally no stated
commission in the case of securities traded in the over-the-counter market but
the price paid by the Funds usually includes an undisclosed dealer commission

33
<PAGE>

or mark-up. In certain instances, the Funds may make purchases of underwritten
issues at prices which include underwriting fees.

In selecting a broker to execute each particular transaction, GCMG will
take the following into consideration: the best net price available; the
reliability, integrity and financial condition of the broker; the size and
difficulty in executing the order; and the value of the expected contribution of
the broker to the investment performance of a Fund on a continuing basis.
Accordingly, the cost of the brokerage commissions to a Fund in any transaction
may be greater than that available from other brokers if the difference is
reasonably justified by other aspects of the portfolio execution services
offered. Subject to such policies and procedures as the Directors may determine,
GCMG shall not be deemed to have acted unlawfully or to have breached any duty
solely by reason of it having caused a Fund to pay a broker that provides
research services an amount of commission for effecting a portfolio investment
transaction in excess of the amount of commission another broker would have
charged for effecting that transaction if GCMG determines in good faith that
such amount of commission was reasonable in relation to the value of the
research service provided by such broker viewed in terms of either that
particular transaction or GCMG's ongoing responsibilities with respect to a
Fund. Research and investment information may be provided by these and other
brokers at no cost to GCMG and is available for the benefit of other accounts
advised by GCMG and its affiliates, and not all of the information will be used
in connection with the Funds. While this information may be useful in varying
degrees and may tend to reduce GCMG's expenses, it is not possible to estimate
its value and in the opinion of GCMG it does not reduce GCMG's expenses in a
determinable amount. The extent to which GCMG makes use of statistical, research
and other services furnished by brokers is considered by GCMG in the allocation
of brokerage business but there is no formula by which such business is
allocated. GCMG does so in accordance with their judgment of the best interests
of the Funds and their shareholders. GCMG may also take into account payments
made by brokers effecting transactions for the Funds to other persons on behalf
of the Funds for services provided to them for which it would be obligated to
pay (such as custodial and professional fees). In addition, consistent with the
Conduct Rules of the National Association of Securities Dealers, Inc., and
subject to seeking best price and execution, GCMG may consider sales of shares
of the Funds as a factor in the selection of brokers and dealers to enter into
portfolio transactions with the Funds.

Certain other clients of GCMG may have investment objectives and policies
similar to those of the Funds. GCMG may, from time to time, make
recommendations which result in the purchase or sale of a particular security by
its other clients simultaneously with a Fund. If transactions on behalf of more
than one client during the same period increase the demand for securities being
sold, there may be an adverse effect on the price of such securities. It is the
policy of GCMG to allocate advisory recommendations and the placing of orders in
a manner which is deemed equitable by GCMG to the accounts involved, including
the Funds. When two or more of the clients of GCMG (including the Funds) are
purchasing or selling the same security on a given day through the same broker-
dealer, such transactions may be averaged as to price.

TAXATION

Taxation of the Funds

The Funds each intend to qualify annually and to elect to be treated as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code").

To qualify as a regulated investment company, a Fund must, among other
things: (a) derive in each taxable year at least 90% of its gross income from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of stock, securities or foreign currencies or
other income derived with respect to its business of investing in such stock,
securities or currencies; (b) diversify its holdings so that, at the end of each
quarter of the taxable year, (i) at least 50% of the market value of the Fund's
assets is represented by cash and cash items (including receivables), U.S.
Government securities, the securities of other regulated investment companies
and other securities, with such other securities of any one issuer limited for
the purposes of this calculation to an amount not greater than 5% of the value
of the Fund's total assets and not greater than 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its total
assets is invested in the securities of any one issuer (other than U.S.
Government securities or the securities of other regulated investment
companies); and (c) distribute at least 90% of its investment company taxable
income (which includes, among other items, dividends, interest and net short-
term capital gains in excess of net long-term capital losses) each taxable year.

34
<PAGE>

As a regulated investment company, each Fund generally will not be subject
to U.S. federal income tax on its investment company taxable income and net
capital gains (the excess of net long-term capital gains over net short-term
capital losses), if any, that it distributes to shareholders. The Funds each
intend to distribute to their shareholders, at least annually, substantially all
of their investment company taxable income and net capital gains. Amounts not
distributed on a timely basis in accordance with a calendar year distribution
requirement are subject to a nondeductible 4% excise tax. To prevent imposition
of the excise tax, each Fund must distribute during each calendar year an amount
equal to the sum of (1) at least 98% of its ordinary income (not taking into
account any capital gains or losses) for the calendar year, (2) at least 98% of
its capital gains in excess of its capital losses (adjusted for certain ordinary
losses) for the one-year period ending on October 31 of the calendar year, and
(3) any ordinary income and capital gains for previous years that was not
distributed during those years. A distribution will be treated as paid on
December 31 of the current calendar year if it is declared by a Fund in October,
November or December with a record date in such a month and paid by the Fund
during January of the following calendar year. Such distributions will be
taxable to shareholders in the calendar year in which the distributions are
declared, rather than the calendar year in which the distributions are received.
To prevent application of the excise tax, each Fund intends to make its
distributions in accordance with the calendar year distribution requirement.

Distributions

Dividends paid out of a Fund's investment company taxable income will be
taxable to a U.S. shareholder as ordinary income. Because a portion of a Fund's
income may consist of dividends paid by U.S. corporations, a portion of the
dividends paid by the Fund may be eligible for the corporate dividends-received
deduction. Dividends paid by a Fund attributable to dividends received by the
Fund from REITs, however, are not eligible for such deduction. Distributions of
net capital gains, if any, designated as capital gain dividends are taxable as
long-term capital gains, regardless of how long the shareholder has held a
Fund's shares, and are not eligible for the dividends-received deduction.
Shareholders receiving distributions in the form of additional shares (i.e.,
through dividend reinvestment), rather than cash, generally will have taxable
income from the receipt of, and a cost basis in, each such share equal to the
net asset value of a share of the Fund on the reinvestment date. Shareholders
will be notified annually as to the U.S. federal tax status of distributions,
and shareholders receiving distributions in the form of additional shares will
receive a report as to the net asset value of those shares.

In general, the maximum tax rate for individual taxpayers on net long-term
capital gains (i.e., the excess of net long-term capital gain over net short-
term capital loss) is 20% for most assets held for more than one year at the
time of disposition. A lower rate of 18% will apply after December 31, 2000 for
assets held for more than 5 years. However, the 18% rate applies only to assets
acquired after December 31, 2000 unless the taxpayer elects to treat an asset
held prior to such date as sold for fair market value on January 1, 2001. In
the case of individuals whose ordinary income is taxed at a 15% rate, the 20%
rate for assets held for more than one year is reduced to 10% and the 18% rate
for assets held for more than 5 years is reduced to 8%.

The portion of a Fund distribution classified as a return of capital
generally is not taxable to the Fund shareholders, but it will reduce their tax
basis in their shares, which in turn would effect the amount of gain or loss
shareholders would realize on the sale or redemption of their shares. If a
return of capital distribution exceeds a shareholder's tax basis in his shares,
the excess is generally taxed as capital gain to the shareholder assuming the
shares are a capital asset.

REITs do not provide complete information about the taxability of their
distributions (i.e., how much of their distributions represent a return of
capital) until after the calendar year ends. As a result, the Funds may not be
able to determine how much of their annual distributions for a particular year
are taxable to shareholders until after the traditional January 31 deadline for
issuing Form 1099-DIV ("Form 1099"). The Funds in such circumstance may send
to shareholders amended Form 1099s after January 31 or may request permission
from the Internal Revenue Service for an extension permitting the Funds to send
the Form 1099 in February.

Sale of Shares

Upon the sale or other disposition of shares of the Funds, a shareholder
may realize a capital gain or loss that will constitute a long-term capital gain
if such shares have been held for more than 12 months on the date of
disposition. Any loss realized on a sale or exchange will be disallowed to the
extent the shares disposed of are replaced within a period of 61 days beginning
30 days before and ending 30 days after disposition of the shares. In such a
case, the basis of the
35
<PAGE>

shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized by a shareholder on a disposition of a Fund's shares held by the
shareholder for six months or less will be treated as a long-term capital loss
to the extent of any distributions of net capital gains received by the
shareholder with respect to such shares.

Investments in Real Estate Investment Trusts

The Funds may invest in REITs that hold residual interests in real estate
mortgage investment conduits ("REMICs"). Under Treasury regulations that have
not yet been issued in final form, but may apply retroactively, a portion of a
Fund's income from a REIT that is attributable to the REIT's residual interest
in a REMIC (referred to in the Code as an "excess inclusion") will be subject to
federal income tax in all events. These regulations are also expected to
provide that excess inclusion income of regulated investment companies, such as
the Funds, will be allocated to shareholders of the regulated investment company
in proportion to the dividends received by such shareholders, with the same
consequences as if the shareholders held the related REMIC residual interest
directly. In general, excess inclusion income allocated to shareholders (i)
cannot be offset by net operating losses (subject to a limited exception for
certain thrift institutions), (ii) will constitute unrelated business taxable
income to entities (including a qualified pension plan, an individual retirement
account, a 401(k) plan, a Keogh plan or other tax-exempt entity) subject to tax
on unrelated business income, thereby potentially requiring such an entity that
is allocated excess inclusion income, and otherwise might not be required to
file a tax return, to file a tax return and pay tax on such income, and (iii) in
the case of a foreign shareholder, will not qualify for any reduction in U.S.
federal withholding tax. In addition, if at any time during any taxable year a
"disqualified organization" (as defined in the Code) is a record holder of a
share in a regulated investment company, then the regulated investment company
will be subject to a tax equal to that portion of its excess inclusion income
for the taxable year that is allocable to the disqualified organization,
multiplied by the highest federal income tax rate imposed on corporations. GCMG
does not intend on behalf of SC-US to invest in REITs, a substantial portion of
the assets of which consists of residual interests in REMICs.

Backup Withholding

Except as described below, the Funds are required to withhold U.S. federal
income tax at the rate of 31% of all taxable distributions payable to
shareholders who fail to provide the Fund with their correct taxpayer
identification number or to make required certifications, or who have been
notified by the IRS that they are subject to backup withholding. Corporate
shareholders and certain other shareholders specified in the Code generally are
exempt from such backup withholding. Backup withholding is not an additional
tax. Any amounts withheld may be credited against the shareholder's U.S.
federal income tax liability.

Foreign Shareholders

U.S. taxation of a shareholder who, as to the United States, is a
nonresident alien individual, a foreign trust or estate, a foreign corporation
or foreign partnership ("foreign shareholder") depends on whether the income of
a Fund is "effectively connected" with a U.S. trade or business carried on by
the shareholder.

Income Not Effectively Connected.

If the income from a Fund is not "effectively connected" with a U.S. trade
or business carried on by the foreign shareholder, distributions of investment
company taxable income will be subject to a U.S. withholding tax of 30% (or
lower treaty rate, except in the case of any excess inclusion income allocated
to the shareholder (see "Taxation--Investments in Real Estate Investment
Trusts," above)), which tax is generally withheld from such distributions.

Distributions of capital gain dividends and any amounts retained by a Fund
that are designated as undistributed capital gains will not be subject to U.S.
withholding tax unless the foreign shareholder is a nonresident alien individual
and is physically present in the United States for more than 182 days during the
taxable year and meets certain other requirements. However, this 30% withholding
tax on capital gains of nonresident alien individuals who are physically present
in the United States for more than the 182-day period only applies in
exceptional cases because any individual present in the United States for more
than 182 days during the taxable year is generally treated as a resident for
U.S. income tax purposes; in that case, he or she would be subject to U.S.
income tax on his or her worldwide income at the graduated rates applicable to
U.S. citizens, rather than the 30% U.S. withholding tax. In the case of a
foreign shareholder
36
<PAGE>

who is a nonresident alien individual, a Fund may be required to withhold U.S.
income tax at a rate of 31% of distributions of net capital gains unless the
foreign shareholder certifies his or her non-U.S. status under penalties of
perjury or otherwise establishes an exemption. See "Taxation--Backup
Withholding," above. If a foreign shareholder is a nonresident alien individual,
any gain such shareholder realizes upon the sale or exchange of such
shareholder's shares of a Fund in the United States will ordinarily be exempt
from U.S. tax unless (i) the gain is U.S. source income and such shareholder is
physically present in the United States for more than 182 days during the
taxable year and meets certain other requirements, or is otherwise considered to
be a resident alien of the United States, or (ii) at any time during the shorter
of the period during which the foreign shareholder held shares of a Fund and the
five year period ending on the date of the disposition of those shares, the Fund
was a "U.S. real property holding corporation" (and, if the shares of the Fund
are regularly traded on an established securities market, the foreign
shareholder held more than 5% of the shares of the Fund), in which event the
gain would be taxed in the same manner as for a U.S. shareholder as discussed
above and a 10% U.S. withholding tax would be imposed on the amount realized on
the disposition of such shares to be credited against the foreign shareholder's
U.S. income tax liability on such disposition. A corporation is a "U.S. real
property holding corporation" if the fair market value of its U.S. real property
interests equals or exceeds 50% of the fair market value of such interests plus
its interests in real property located outside the United States plus any other
assets used or held for use in a business. U.S. real property interests include
interests in stock in U.S. real property holding corporations (other than stock
of a REIT controlled by U.S. persons and holdings of 5% or less in the stock of
publicly traded U.S. real property holding corporations) and certain
participating debt securities. The Funds have not been and do not expect to be
treated as U.S. real property corporations under these rules, but no assurances
can be given.

Income Effectively Connected.

If the income from a Fund is "effectively connected" with a U.S. trade or
business carried on by a foreign shareholder, then distributions of investment
company taxable income and capital gain dividends, any amounts retained by the
Fund which are designated as undistributed capital gains and any gains realized
upon the sale or exchange of shares of the Fund will be subject to U.S. income
tax at the graduated rates applicable to U.S. citizens, residents and domestic
corporations. Foreign corporate shareholders may also be subject to the branch
profits tax imposed by the Code.

The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may differ from those described herein.
Foreign shareholders are advised to consult their own tax advisers with respect
to the particular tax consequences to them of an investment in the Funds.

Special Tax Considerations

The following discussion relates to the particular Federal income tax
consequences of certain investment strategies of the Funds. A Fund that
utilizes options, short sale and futures investment strategies will be somewhat
limited by the requirements for its continued qualification as a regulated
investment company under the Code, in particular the Distribution Requirement
and the Asset Diversification Requirement.

Straddles

The options transactions that a Fund enters into may result in "straddles"
for Federal income tax purposes. The straddle rules of the Code may affect the
character of gains and losses realized by the Fund. In addition, losses realized
by the Fund on positions that are part of a straddle may be deferred under the
straddle rules, rather than being taken into account in calculating the
investment company taxable income and net capital gain of the Fund for the
taxable year in which such losses are realized. Losses realized prior to October
31 of any year may be similarly deferred under the straddle rules in determining
the "required distribution" that the Fund must make in order to avoid Federal
excise tax. Furthermore, in determining its investment company taxable income
and ordinary income, the Fund may be required to capitalize, rather than deduct
currently, any interest expense on indebtedness incurred or continued to
purchase or carry any positions that are part of a straddle. The tax
consequences to Funds holding straddle positions may be further affected by
various elections provided under the Code and Treasury regulations, but at the
present time the Funds are uncertain as to which (if any) of these elections
they will make.

Because only a few regulations implementing the straddle rules have been
promulgated by the U.S. Treasury, the tax consequences to a Fund of engaging in
options transactions are not entirely clear. Nevertheless, it is evident that
application of the straddle rules may substantially increase or decrease the
amount that must be distributed to

37
<PAGE>

shareholders in satisfaction of the Distribution Requirement (or to avoid
Federal excise tax liability) for any taxable year in comparison to a fund that
did not engage in options transactions.

Options and Section 1256 Contracts

The writer of a covered put or call option generally does not recognize
income upon receipt of the option premium. If the option expires unexercised or
is closed on an exchange, the writer generally recognizes short-term capital
gain. If the option is exercised, the premium is included in the consideration
received by the writer in determining the capital gain or loss recognized in the
resultant sale. However, options transactions that the Funds enter into, as well
as futures transactions and transactions in forward foreign currency contracts
that are traded in the interbank market entered into by SC-EUROPEAN, will be
subject to special tax treatment as "Section 1256 contracts." Section 1256
contracts are treated as if they are sold for their fair market value on the
last business day of the taxable year (i.e., marked-to-market), regardless of
whether a taxpayer's obligations (or rights) under such contracts have
terminated (by delivery, exercise, entering into a closing transaction or
otherwise) as of such date. Any gain or loss recognized as a consequence of the
year-end marking-to-market of Section 1256 contracts is combined (after
application of the straddle rules that are described above) with any other gain
or loss that was previously recognized upon the termination of Section 1256
contracts during that taxable year. The net amount of such gain or loss for the
entire taxable year is treated as 60% long-term capital gain or loss and 40%
short-term capital gain or loss, except in the case of marked-to-market forward
foreign currency contracts for which such gain or loss may be treated as
ordinary income or loss. See "Foreign Currency Transactions" below. Such short-
term capital gain (and, in the case of marked-to-market forward foreign currency
contracts, such ordinary income) would be included in determining the investment
company taxable income of a Fund for purposes of the Distribution Requirement,
even if it were wholly attributable to the year-end marking-to-market of Section
1256 contracts that the Fund continued to hold. Investors should also note that
Section 1256 contracts will be treated as having been sold on October 31 in
calculating the "required distribution" that a Fund must make to avoid Federal
excise tax liability.

A Fund may elect not to have the year-end marking-to-market rule apply to
Section 1256 contracts that are part of a "mixed straddle" with other
investments of the Fund that are not Section 1256 contracts (the "Mixed Straddle
Election").

Foreign Currency Transactions

In general, gains from "foreign currencies" and from foreign currency
options, foreign currency futures and forward foreign exchange contracts
relating to investments in stock, securities or foreign currencies will be
qualifying income for purposes of determining whether SC-EUROPEAN qualifies as a
regulated investment company. It is currently unclear, however, who will be
treated as the issuer of a foreign currency instrument or how foreign currency
options, futures or forward foreign currency contracts will be valued for
purposes of the Asset Diversification Requirement.

Under Code Section 988 special rules are provided for certain transactions
in a foreign currency other than the taxpayer's functional currency (i.e.,
unless certain special rules apply, currencies other than the U.S. dollar). In
general, foreign currency gains or losses from certain forward contracts, from
futures contracts that are not "regulated futures contracts", and from unlisted
options will be treated as ordinary income or loss. In certain circumstances
where the transaction is not undertaken as part of a straddle, SC-EUROPEAN may
elect capital gain or loss treatment for such transactions. Alternatively, a
Fund may elect ordinary income or loss treatment for transactions in futures
contracts and options on foreign currency that would otherwise produce capital
gain or loss. In general, gains or losses from a foreign currency transaction
subject to Code Section 988 will increase or decrease the amount of the Fund's
investment company taxable income available to be distributed to shareholders as
ordinary income, rather than increasing or decreasing the amount of the Fund's
net capital gain. Additionally, if losses from a foreign currency transaction
subject to Code Section 988 exceed other investment company taxable income
during a taxable year, the Fund will not be able to make any ordinary dividend
distributions, and any distributions made before the losses were realized but in
the same taxable year would be accredited as a return of capital to
shareholders, thereby reducing each shareholder's basis in his shares.

Conversion Transactions

All or a portion of the capital gain from the disposition or other
termination of any position that was part of a "conversion transaction" will
generally be treated as ordinary income. A conversion transaction is a
transaction, generally consisting of two or more positions taken with regard to
the same or similar property, where substantially all

38
<PAGE>

of the taxpayer's return is attributable to the time value of the taxpayer's net
investment in the transaction. A transaction, however, is not a conversion
transaction unless it also satisfies one of the following four criteria: (1) the
transaction consists of the acquisition of property by the taxpayer and a
substantially contemporaneous agreement to sell the same or substantially
identical property in the future; (2) the transaction is a straddle, within the
meaning of Code Section 1092 (treating stock as personal property); (3) the
transaction is one that was marketed or sold to the taxpayer on the basis that
it would have the economic characteristics of a loan but the interest-like
return would be taxed as capital gain; or (4) the transaction is described as a
conversion transaction in regulations to be promulgated on a prospective basis
by the Secretary of the Treasury.

Subject to regulations to be promulgated by the Secretary of the Treasury,
the amount of gain accredited as ordinary income generally shall not exceed the
amount of interest that would have accrued on a Fund's net investment in the
conversion transaction for the relevant period at a yield equal to 120% of the
applicable federal rate as defined in Code Section 1274(d). Thus, to the extent
that a Fund recognizes income from conversion transactions, shareholders will be
taxed on all or a part of this income at ordinary rates.

Constructive Sales of Certain Appreciated Financial Positions

Code Section 1259 provides that if there is a "constructive sale" of an
"appreciated financial position," the taxpayer recognizes gain as if such
position were sold, assigned or otherwise terminated at its fair market value on
the date of such constructive sale. The holding period of such position is
deemed to begin on the date of such constructive sale and any gain or loss
subsequently realized with respect to such position is to be adjusted for any
gain taken into account by reason of the earlier constructive sale of such
position.

An appreciated financial position for this purpose means an interest,
including a futures or forward contract, short sale, or option with respect to
any stock, debt instrument or partnership interest if there would be gain if
such position were sold, assigned or otherwise terminated at its fair market
value. A forward contract for this purpose means a contract to deliver a
substantially fixed amount of property for a substantially fixed price. An
offsetting notional principal contract for this purpose means, with respect to
any property, an agreement that includes a requirement to pay or provide credit
for all or substantially all of the investment yield (including appreciation) on
such property for a specified period and a right to be reimbursed for or receive
credit for all or substantially all of any decline in the value of such
property. An appreciated financial position, however, does not include any
position that is marked to market for federal income tax purposes, nor does it
include any position with respect to debt if (1) the debt unconditionally
entitles the holder to receive a specified principal amount, (2) the interest
payments (or other similar amounts) with respect to such debt are based on a
fixed rate or certain variable rates or consist of a specified portion of
interest payments on a pool of mortgages, which portion does not vary during the
period the debt is outstanding, and (3) the debt is not convertible directly or
indirectly into stock of the issuer or of any related person.

A taxpayer is treated as having made a constructive sale of an appreciated
financial position if the taxpayer or a related person (1) enters into a short
sale of the same or substantially identical property, (2) enters into an
offsetting notional principal contract with respect to the same or substantially
identical property, (3) enters into a futures or forward contract to deliver the
same or substantially identical property, (4) in the case of an appreciated
financial position that is a short sale, a notional principal contract or a
futures or forward contract with respect to any property, acquires the same or
substantially identical property, or (5) to the extent provided in regulations,
enters into one or more transactions or acquires one or more positions that have
substantially the same effect as a transaction described in the preceding
clauses (1) through (4). A person is related to another person with respect to a
transaction if the relationship is described in Code Section 267(b) or Code
Section 707(b) and such transaction is entered into with a view toward avoiding
the purposes of Code Section 1259. A constructive sale, however, does not
include any contract for sale of any stock, debt instrument or partnership
interest for which there is not a market on an established securities market or
otherwise if the contract settles within one year after the date the contract
was entered into. Also, a transaction which would otherwise be treated as a
constructive sale in a taxable year is disregarded if (1) the transaction is
closed before the end of the 30th day after the close of such taxable year, (2)
the taxpayer holds the appreciated financial position throughout the 60 day
period beginning on the date such transaction is closed and (3) at no time
during such 60 day period is the taxpayer's risk of loss with respect to such
position reduced by reason of the taxpayer (x) having an option to sell, having
a contractual obligation to sell, or having made and not closed a short sale of,
substantially identical property, (y) being the grantor of an option to buy
substantially identical property or (z) under regulations, having diminished his
risk of loss by holding one or more positions with respect to substantially
similar or related property. This exception to constructive sale treatment
applies even if the transaction that is closed is reestablished by a
substantially similar transaction (which

39
<PAGE>

would also be a constructive sale of the position) entered into during the 60
day period beginning on the date the first transaction is closed, provided that
the conditions in clauses (1) through (3) in the preceding sentence are
satisfied with respect to the substantially similar transaction.

In general, Code Section 1259 applies to any constructive sale after June
8, 1997. However, if before June 9, 1997 the taxpayer entered into any
transaction that is a constructive sale of any appreciated financial position
and before the close of the 30 day period beginning on the date of the enactment
of the Taxpayer Relief Act or before such later date as may be specified by the
Secretary of the Treasury, such transaction and position are clearly identified
in the taxpayer's records as offsetting, such transaction and position shall not
be taken into account in determining whether any other constructive sale after
June 8, 1997 has occurred. This transition rule ceases to apply as of the date
such transaction is closed or the taxpayer ceases to hold such position.

It is possible that a Fund may enter into some transactions that could
constitute constructive sales of certain appreciated investments held by the
Fund, which could have the affect of accelerating gain recognition with respect
to such investments.

Passive Foreign Investment Companies

SC-EUROPEAN may invest in stocks of foreign companies that are classified
under the Code as passive foreign investment companies ("PFICs"). In general, a
foreign company is classified as a PFIC if at least one-half of its assets
constitute investment-type assets or 75% or more of its gross income is
investment-type income. Under the PFIC rules, an "excess distribution" received
with respect to PFIC stock is treated as having been realized ratably over the
period during which SC-EUROPEAN held the PFIC stock. SC-EUROPEAN itself will be
subject to tax on the portion, if any, of the excess distribution that is
allocated to SC-EUROPEAN's holding period in prior taxable years (and an
interest factor will be added to the tax, as if the tax had actually been
payable in such prior taxable years) even though SC-EUROPEAN distributes the
corresponding income to shareholders. Excess distributions include any gain
from the sale of PFIC stock as well as certain distributions from a PFIC. All
excess distributions are taxable as ordinary income.

SC-EUROPEAN may be able to elect alternative tax treatment with respect to
PFIC stock. Under one such election, SC-EUROPEAN generally would be required to
include in its gross income its earnings of a PFIC on a current basis,
regardless of whether any distributions are received from the PFIC. Under a
second such election, SC-EUROPEAN would be entitled to mark-to-market at the end
of each year the stock of any PFIC that is listed on an established securities
market. If either election is made, the special rules, discussed above,
relating to the taxation of excess distributions, would not apply. In addition,
other elections may become available that would affect the tax treatment of PFIC
stock held by SC-EUROPEAN. SC-EUROPEAN's intention to qualify annually as a
regulated investment company may limit its elections with respect to PFIC stock.

Because the application of the PFIC rules may affect, among other things,
the character of gains, the amount of gain or loss and the timing of the
recognition of income with respect to PFIC stock, as well as subject SC-EUROPEAN
itself to tax on certain income from PFIC stock, the amount that must be
distributed to shareholders, and which will be taxed to shareholders as ordinary
income or long-term capital gains, may be increased or decreased substantially
as compared to a mutual fund that does not invest in PFIC stock.

Taxpayers may also elect to mark to market interests in a PFIC each year if
stock in the PFIC is regularly traded on a national securities exchange which is
registered with the Securities and Exchange Commission or the national market
system established pursuant to section 11A of the Securities and Exchange Act of
1934, as amended. The Internal Revenue Service has the authority to write
regulations to include other exchanges and to apply the mark to market rules to
options and interests in foreign corporations that are comparable to regulated
investment companies. Any gain or loss recognized under these rules will be
ordinary income rather than capital gain. Under recently proposed regulations,
all shares of PFICs owned by regulated investment companies such as SC-EUROPEAN
shall be treated as marketable stock. It is uncertain at this time whether the
Funds will make the mark to market election permitted under these rules.

Foreign Income Tax

Investment income received by SC-EUROPEAN from sources within foreign
countries may be subject to foreign income taxes withheld at the source. The
U.S. has entered into tax treaties with many foreign countries which entitle

40
<PAGE>

SC-EUROPEAN to a reduced rate of, or exemption from, taxes on such income. It is
impossible to determine the effective rate of foreign tax in advance since the
amount of SC-EUROPEAN's assets to be invested in various countries is not known.

If more than 50% of the value of SC-EUROPEAN's total assets at the close of
each taxable year consists of the stock or securities of foreign corporations,
SC-EUROPEAN may elect to "pass through" to SC-EUROPEAN's shareholders the amount
of foreign income taxes paid by SC-EUROPEAN (the "Foreign Tax Election").
Pursuant to the Foreign Tax Election, shareholders will be required (i) to
include in gross income, even though not actually received, their respective
pro-rata shares of the foreign income taxes paid by SC-EUROPEAN that are
attributable to any distributions they receive; and (ii) either to deduct their
pro-rata share of foreign taxes in computing their taxable income, or to use it
(subject to various Code limitations) as a foreign tax credit against federal
income tax (but not both). No deduction for foreign taxes may be claimed by a
non-corporate shareholder who does not itemize deductions or who is subject to
alternative minimum tax.

Generally, a credit for foreign taxes is subject to the limitation that it
may not exceed the shareholder's U.S. tax (determined without regard to the
availability of the credit) attributable to the shareholder's foreign source
taxable income. In determining the source and character of distributions
received from SC-EUROPEAN for this purpose, shareholders will be required to
allocate SC-EUROPEAN distributions according to the source of the income
realized by SC-EUROPEAN. SC-EUROPEAN's gains from the sale of stock and
securities and certain currency fluctuation gains and losses will generally be
treated as derived from U.S. sources. In addition, the limitation on the foreign
tax credit is applied separately to foreign source "passive" income, such as
dividend income. Moreover, shareholders will not be entitled to credit or deduct
their allocable share of foreign taxes imposed on SC-EUROPEAN if they have not
held their shares in SC-EUROPEAN for 16 days or more during the 30 day period
beginning 15 days before shares in SC-EUROPEAN become ex-dividend. The holding
period will be extended if the shareholder's risk of loss with respect to such
shares is reduced by reason of holding an offsetting position. Because of these
limitations, shareholders may be unable to claim a credit for the full amount of
their proportionate shares of the foreign income taxes paid by SC-EUROPEAN.

For tax years beginning after 1997, a shareholder who is an individual can
elect to utilize a simplified method of computing foreign tax credits if such
individual's entire gross income for the taxable year from foreign sources
consists of qualified passive income and such individual's creditable foreign
taxes during the year do not exceed $300 ($600 if a joint return is filed).
Under the simplified method, an individual can claim a foreign tax credit
without regard to the amount of his or her foreign source income, but the
individual cannot carry foreign tax credits back or forward from such year or to
such year. The simplified method should be available to individual shareholders
with respect to their share of taxes of SC-EUROPEAN.

Other Taxation

Shareholders of the Funds may be subject to state, local and foreign taxes
on their Fund distributions. Shareholders are advised to consult their own tax
advisers with respect to the particular state and local tax consequences to them
of an investment in a Fund.

THE FOREGOING IS ONLY A SUMMARY OF CERTAIN MATERIAL TAX CONSEQUENCES
AFFECTING THE FUNDS AND THEIR SHAREHOLDERS. SHAREHOLDERS ARE ADVISED TO CONSULT
THEIR OWN TAX ADVISORS WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO THEM
OF AN INVESTMENT IN THE PORTFOLIO.

ORGANIZATION AND DESCRIPTION OF CAPITAL STOCK

Security Capital Real Estate Mutual Funds Incorporated, formerly Security
Capital Employee REIT Fund Incorporated, was incorporated under Maryland law as
SCERF Incorporated ("SCERF"), a wholly-owned subsidiary of Security Capital, on
December 20, 1996. On January 23, 1997, all the assets and liabilities of SCERF
were transferred to Security Capital Employee REIT Fund Incorporated in a
reorganization transaction. On December 16, 1997, its name

41
<PAGE>

was changed to Security Capital U.S. Real Estate Shares Incorporated. On June
30, 1998, its name was changed to Security Capital Real Estate Mutual Funds
Incorporated.

SC-REMFs is authorized to issue 200,000,000 shares of stock, $.01 par value
per share. SC-REMFs' shares have no preemptive, conversion or exchange rights. A
shareholder may, at any time, require SC-REMFs to redeem all or any of the
shares owned by that shareholder at net asset value. Each share of SC-US and SC-
EUROPEAN has equal voting, dividend, distribution and liquidation rights. All
shares of SC-REMFs, when duly issued, are fully paid and nonassessable.
Shareholders are entitled to one vote per share. All voting rights for the
election of Directors are noncumulative, which means that the holders of more
than 50% of the shares can elect 100% of the Directors then nominated for
election if they choose to do so and, in such event, the holders of the
remaining shares will not be able to elect any Directors. The foregoing
description is subject to the provisions contained in SC-REMFs' Charter and By-
Laws which have been filed with the SEC as exhibits to the registration
statement of which this Statement of Additional Information is a part.

SC-REMFs' Board of Directors may, without shareholder approval, increase or
decrease the number of authorized but unissued shares of SC-REMFs' stock and
reclassify and issue any unissued shares of SC-REMFs. The Board of Directors
also may create additional series of shares with different investment
objectives, policies or restrictions without shareholder approval. The Board of
Directors of SC-REMFs has authorized the creation of two investment portfolios:
SC-US and SC-EUROPEAN.

SC-REMFs is not required to hold regular annual shareholders' meetings. A
shareholders' meeting shall, however, be called by the secretary upon the
written request of the holders of not less than 10% of the outstanding shares of
SC-REMFs entitled to vote at the meeting. SC-REMFs will assist shareholders
wishing to communicate with one another for the purpose of requesting such a
meeting.

As of March 31, 2000, SC REALTY owned 41.92% of the issued and outstanding
shares of SC-US, and 99.74% of the issued and outstanding shares of SC-EUROPEAN.
SC REALTY is a corporation organized under Nevada law which is wholly-owned by
Security Capital, a Maryland corporation.

As of March 31, 2000, the officers and directors of SC-REMFs, as a group,
owned less than 1% of the issued and outstanding shares of either SC-US or SC-
EUROPEAN. As of that date, the following persons owned of record 5% of each
Fund's outstanding shares:

<TABLE>
<CAPTION>
Amount and Nature
Name and Address of of Beneficial
Title of Class Beneficial Owner Ownership Percent of Class
- -------------- ------------------- ----------------- ----------------
<S> <C> <C> <C>
SC-US SC REALTY Incorporated 2,670,275.541 41.92%
3753 Howard Hughes Parkway
Las Vegas, Nevada 89109-0952
SC-EUROPEAN SC REALTY Incorporated 1,025,349.726 99.74%
3753 Howard Hughes Parkway
Las Vegas, Nevada 89109-0952
</TABLE>

Because SC REALTY owns 41.92% of the issued and outstanding shares of SC-US
and 99.74% of the issued and outstanding shares of SC-EUROPEAN, SC REALTY
controls the Funds for purposes of the 1940 Act. The effect of SC REALTY's
ownership of a controlling interest in the Funds and, therefore, SC-REMFs, is to
dilute the voting power of other shareholders. SC REALTY does not anticipate
that its initial control of the Funds will adversely effect the rights of future
shareholders.

PERFORMANCE INFORMATION

From time to time, a Fund may quote its total return in advertisements or
in reports and other communications to shareholders. A Fund's performance will
vary from time to time depending upon market conditions, the composition

42
<PAGE>

of its portfolio and its operating expenses. Consequently, any given performance
quotation should not be considered representative of a Fund's performance for
any specified period in the future. In addition, because performance will
fluctuate, it may not provide a basis for comparing an investment in a Fund with
certain bank deposits or other investments that pay a fixed yield for a stated
period of time. Investors comparing a Fund's performance with that of other
mutual funds should give consideration to the quality and maturity of the
respective investment companies' portfolio securities.

The Funds track their performance against the Morningstar Specialty-Real
Estate Ranking, a compilation of entities which invest at least 75% of their
holdings in real estate-based securities. In reports or other communications to
shareholders of a Fund or in advertising materials, a Fund may compare its
performance with that of (i) other mutual funds listed in the rankings prepared
by Lipper Analytical Services, Inc., publications such as Barron's, Business
Week, Forbes, Fortune, Institutional Investor, Kiplinger's Personal Finance,
Money, Morningstar Mutual Fund Values, The New York Times, The Wall Street
Journal and USA Today or other industry or financial publications or (ii) the
Dow Jones Industrial Average and other relevant indices and industry
publications. A Fund may also compare the historical volatility of its
portfolio to the volatility of such indices during the same time periods.
(Volatility is a generally accepted barometer of the market risk associated with
a portfolio of securities and is generally measured in comparison to the stock
market as a whole--the beta--or in absolute terms--the standard deviation.)
Specifically, the performance of the funds may be compared to:

The Standard & Poor's 500 Composite Stock Price Index: an unmanaged index
of stocks selected by Standard & Poor's Index Committee to include leading
companies in leading industries and to reflect the U.S. stock market.

The Russell 2000 Index: an unmanaged index of the 2000 smallest companies
in the Russell 3000 Index.

The Wilshire Real Estate Securities Index ("WARESI"): an unmanaged, broad-
based market capitalization-weighted index composed of publicly-traded real
estate investment trusts ("REITs"), real estate operating companies
("REOCs") and partnerships, not including special purpose or healthcare
REITs.

The National Association of Real Estate Trusts ("NAREIT") Equity Index: an
unmanaged index of publicly traded U.S. tax-qualified REITs that have 75%
or more of their gross invested book assets invested in the equity
ownership of real estate.

The National Counsel of Real Estate Fiduciaries Property Index: an
unmanaged index measuring appreciation (or depreciation), realized capital
gain or loss and income of real estate properties. Total return is computed
by adding income and capital appreciation return on a quarterly basis.

The Salomon Smith Barney-European Property Index: a float-weighted index
that includes 15 countries in Europe and the listed shares of all real
estate companies with an available market capitalization (float) of at
least $100 million.

From time to time, a Fund may advertise the "average annual total return"
of its shares over various periods of time. This total return figure shows the
average percentage change in value of an investment in the Fund's shares from
the beginning date of the measuring period to the ending date of the measuring
period. The figure reflects changes in the price of the Fund's shares and
assumes that any income, dividends and/or capital gains distributions made by
the Fund's shares during the period are reinvested in shares of the Fund.
Figures will be given for recent one-, five- and ten-year periods (when
applicable), and may be given for other periods as well (such as from
commencement of the Fund's operations, or on a year-by-year basis). When
considering "average" total return figures for periods longer than one year,
investors should note that the Fund's annual total return for any one year in
the period might have been greater or less than the average for the entire
period. The Fund also may use "aggregate" total return figures for various
periods, representing the cumulative change in value of an investment in the
Fund's shares for the specific period (again reflecting changes in the Fund's
share price and assuming reinvestment of dividends and distributions). Aggregate
total returns may be shown by means of schedules, charts or graphs, and may
indicate subtotals of the various components of total return (that is, the
change in value of initial investment, income dividends and capital gains
distributions).

It is important to note that total return figures are based on historical
earnings and are not intended to indicate future performance. The methods used
to determine performance are described below.

43
<PAGE>

Average Annual Total Return

A Fund's "average annual total return" figures are computed according to a
formula. The formula can be expressed as follows:

P(1 + T)/n/ = ERV

Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value of a hypothetical $1,000 investment
made at the beginning of a 1-, 5-, or 10-year period at the
end of a 1-, 5-, or 10-year period (or fractional portion
thereof), assuming reinvestment of all dividends and
distributions.

Aggregate Total Returns

A Fund's aggregate total return figures represent the cumulative change in
the value of an investment in a Fund for the specified period and is computed by
the following formula.

Aggregate Total Return = (ERV-P)
-------
P

Where: P = a hypothetical initial payment of $1,000.
ERV = Ending Redeemable Value of a hypothetical $1,000 investment
made at the beginning of the 1-, 5- or 10-year period or at
the end of the 1-, 5- or 10-year period (or fractional
portion thereof), assuming reinvestment of all dividends and
distributions.

Yield

Quotations of yield for a Fund will be based on all investment income per
share earned during a particular 30-day period (including dividends and
interest), less expenses accrued during the period ("net investment income") and
are computed by dividing net investment income by the maximum offering price per
share on the last day of the period, according to the following formula:

Yield = 2[(a-b + 1)/6/-1]
---
cd

Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.

COUNSEL AND INDEPENDENT ACCOUNTANTS

Legal matters in connection with the issuance of the shares of SC-REMFs
offered hereby will be passed upon by Mayer, Brown & Platt, 1909 K Street, NW,
Washington, DC, 20006, which will rely as to certain matters of Maryland law on
Ballard Spahr Andrews & Ingersoll, LLP.

Arthur Andersen LLP has been appointed as independent accountants for SC-
REMFs to audit SC-REMFs' annual financial statements.

44
<PAGE>

FINANCIAL STATEMENTS

The audited Financial Statements of Security Capital U.S. Real Estate
Shares Incorporated for the period January 1, 1999 through December 31, 1999 are
included herein.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

- --------------------------------------------------------------------------------

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, 1999, 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, 1999, 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, 1999, 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, 1999, 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, 1999, 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 2, 2000

45
<PAGE>

SECURITY CAPITAL U.S. REAL ESTATE SHARES
SCHEDULE OF INVESTMENTS -- DECEMBER 31, 1999

- -------------------------------------------------------------------
Shares Market Value
- -------------------------------------------------------------------
COMMON STOCKS - 88.7%
Office- 25.9%

179,800 Arden Realty, Inc. $ 3,607,237
98,500 Boston Properties, Inc. 3,065,813
96,000 Highwoods Properties, Inc. 2,232,000
147,000 Cornerstone Properties, Inc. 2,149,875
87,175 Equity Office Properties Trust 2,146,684
- -------------------------------------------------------------------
13,201,609

Diversified - 24.2%

193,300 TrizecHahn Corporation 3,261,937
129,200 Prentiss Properties Trust 2,713,200
89,300 Liberty Property Trust 2,165,525
103,800 Reckson Associates Realty Corporation 2,127,900
56,600 Spieker Properties, Inc. 2,062,363
- -------------------------------------------------------------------
12,330,925

Multifamily - 15.6%

94,073 Avalon Bay Communities, Inc. 3,227,880
64,900 Charles E. Smith Residential Realty, Inc. 2,295,837
61,800 Amli Residential Properties Trust 1,247,588
34,350 Essex Property Trust, Inc. 1,167,900
- -------------------------------------------------------------------
7,939,205

Regional Malls - 8.0%

127,500 Urban Shopping Centers, Inc. 3,458,438
22,100 General Growth Properties, Inc. 618,800
- -------------------------------------------------------------------
4,077,238

Hotels - 6.7%

145,500 Starwood Hotels & Resorts Worldwide, Inc. 3,419,250

Storage 4.3%

97,000 Public Storage, Inc. 2,200,688

Shopping Centers- 4.0%

108,500 Federal Realty Investment Trust 2,041, 156
- -------------------------------------------------------------------
Total Common Stocks - 45,210,071
(Cost $47,201,347)
- -------------------------------------------------------------------

46
<PAGE>

<TABLE>
<CAPTION>
SECURITY CAPITAL U.S. REAL ESTATE SHARES
SCHEDULE OF INVESTMENTS -- DECEMBER 31, 1999 (continued)

- ------------------------------------------------------------------------------------------------
Principal Amount Market Value
- ------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS - 8.4%
<S> <C> <C>
$1,757,067 Agreement with State Street Bank and Trust Company, $ 1,757,067
2.500%, dated 12/31/1999, to be repurchased at $1,757,433 on
01/03/2000, collateralized by $1,450,000 U.S. Treasury Bond,
12.375% maturing 05/15/2004 (market value $1,792,563)

2,500,000 United States Treasury Bill, 2.850%, 01/06/2000 2,499,010
- ------------------------------------------------------------------------------------------------
Total Short-Term Investments (Cost $4,256,077) 4,256,077
- ------------------------------------------------------------------------------------------------
Total Investments - 97.1% (Cost $51,457,424) 49,466,148
Other Assets in Excess of Liabilities - 2.9% 1,483,176
- ------------------------------------------------------------------------------------------------
NET ASSETS 100.0% $50,949,324
- ------------------------------------------------------------------------------------------------
</TABLE>

47
<PAGE>

<TABLE>
<CAPTION>
SECURITY CAPITAL U.S. REAL ESTATE SHARES
STATEMENT OF ASSETS AND LIABILITIES -- DECEMBER 31, 1999
- --------------------------------------------------------------------------------------
ASSETS:
- --------------------------------------------------------------------------------------
<S> <C>
Investments, at market value
(cost $51,457,424) $49,466,148
Receivable for fund shares sold 1,000,763
Dividends and interest receivable 502,504
Deferred organization costs 48,699
Other assets 4,622
- ----------------------------------------------------------------------------------
Total Assets 51,022,736
- ----------------------------------------------------------------------------------

LIABILITIES:
Payable to distributor 10,506
Payable for fund shares redeemed 4,810
Accrued expenses and other liabilities 58,096
- ----------------------------------------------------------------------------------
Total Liabilities 73,412
- ----------------------------------------------------------------------------------
Net assets $50,949,324

NET ASSETS CONSIST OF:
Capital stock $58,714,385
Accumulated undistributed net realized loss on investments (5,773,785)
Net unrealized depreciation on investments (1,991,276)
- ----------------------------------------------------------------------------------
Total Net Assets $50,949,324
- ----------------------------------------------------------------------------------

CLASS I:
Net assets $46,409,723
Shares outstanding (50,000,000 shares of $0.01 par value authorized) 4,951,420
Net asset value and redemption price per share $9.37
- ----------------------------------------------------------------------------------

CLASS R:
Net assets $ 4,539,601
Shares outstanding (50,000,000 shares of $0.01 par value authorized) 484,467
Net asset value and redemption price per share $9.37
- --------------------------------------------------------------------------------------
</TABLE>

48
<PAGE>

SECURITY CAPITAL U.S. REAL ESTATE SHARES
STATEMENT OF OPERATIONS -- YEAR ENDED DECEMBER 31, 1999

- ----------------------------------------------------------------------
INVESTMENT INCOME:

Dividend income $ 3,358,901
Interest income 80,558
- ----------------------------------------------------------------------
Total investment income 3,439,459
- ----------------------------------------------------------------------

EXPENSES:
Investment advisory fee 383,479
Distribution expense - Class I 151,876
Distribution expense - Class R 7,907
Administration fee 12,783
Sub-administration fee 93,288
Transfer agent, custody and accounting costs 133,720
Federal and state registration 49,667
Professional fees 114,863
Shareholder reports and notices 40,423
Directors' fees and expenses 23,921
Amortization of organizational expenses 23,608
Other 1,613
- ----------------------------------------------------------------------
Total expenses before reimbursement 1,037,148
- ----------------------------------------------------------------------
Less: Reimbursement from adviser (265,522)
- ----------------------------------------------------------------------
Net expenses 771,626
- ----------------------------------------------------------------------

Net investment income $ 2,667,833

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments $ 1,688,769
Change in unrealized appreciation on investments (2,890,064)
- ----------------------------------------------------------------------
Net realized and unrealized loss on investments (1,201,295)
- ----------------------------------------------------------------------

Net increase in net assets resulting from operations $ 1,466,538

49
<PAGE>

SECURITY CAPITAL US REAL ESTATE SHARES
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Year ended Period ended
Dec. 31, 1999 Dec. 31, 1998
<S> <C> <C>
OPERATIONS:
Net investment income $ 2,667,833 $ 5,067,089
Net realized gain (loss) on investments 1,688,769 (6,891,855)
Change in unrealized appreciation on investments (2,890,064) (12,286,350)
- -----------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations 1,466,538 (14,111,116)

CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 24,317,153 9,750,054
Shares issued to holders in reinvestment of dividends 897,177 720,546
Cost of shares redeemed (67,481,770) (11,297,204)
- -----------------------------------------------------------------------------------------
Net decrease in net assets from capital share
transactions (42,267,440) (826,604)

DISTRIBUTIONS TO CLASS I SHAREHOLDERS:
From net investment income (2,546,365) (4,936,792)
From net realized gains -- (1,997,333)
Return of Capital (366,516) (389,531)
- -----------------------------------------------------------------------------------------
Total distributions Class I (2,912,881) (7,323,656)

DISTRIBUTIONS TO CLASS R SHAREHOLDERS:
From net investment income (128,690) (137,519)
From net realized gains -- (12,118)
Return of Capital (18,523) (10,851)
- -----------------------------------------------------------------------------------------
Total distributions Class R (147,213) (160,488)

Total decrease in net assets (43,860,996) (22,421,864)

NET ASSETS:
Beginning of year 94,810,320 117,232,184
End of year $ 50,949,324 $ 94,810,320
- -----------------------------------------------------------------------------------------
</TABLE>

50
<PAGE>

SECURITY CAPITAL U.S. REAL ESTATE SHARES
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

- ------------------------------------------------------------------------------------------------------------------------------------
Year ended Year ended Year ended Dec. 20, 1996/(1)/
Dec. 31, 1999 Dec. 31, 1998 Dec. 31, 1997/(2)/ through
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 0.45 0.44 0.42 0.38 0.46/(3)/ 0.46/(3)/ 0.02
Net realized and

unrealized gain (loss)
on investments (0.39) (0.39) (1.80) (1.76) 2.11 2.11 0.36
- ------------------------------------------------------------------------------------------------------------------------------------
Total from investment
operations 0.06 0.05 (1.38) (1.38) 2.57 2.57 0.38
- ------------------------------------------------------------------------------------------------------------------------------------
Less distributions:

Dividends from net
investment income (0.45) (0.44) (0.43) (0.43) (0.46) (0.46) --

Dividends from net
realized gains -- -- (0.29) (0.29) (0.54) (0.54) --
Return of capital (0.06) (0.06) (0.03) (0.03) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.51) (0.50) (0.75) (0.75) (1.00) (1.00) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of
period $ 9.37 $ 9.37 $ 9.82 $ 9.82 $ 11.95 $ 11.95 $ 10.38
- ------------------------------------------------------------------------------------------------------------------------------------
Total return/(4)/ 0.58% 0.43% (11.94)% (11.97)% 25.20% 25.19% 3.77%

Supplemental data and
ratios:

Net assets, end of period
($000) $46,410 $4,539 $ 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)/ 4.18% 4.04% 4.75% 4.60% 4.08% 4.07% 19.71%

Portfolio turnover
rate/(7)/ 49.66% 49.66% 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 $256,747 for Class I and $8,775
for Class R for the year ended December 31, 1999, the ratio of expenses to
average net assets would have been 1.62% for both Classes, and the ratio of
net investment income to average net assets would have been 3.76% 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 4.05% 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.

51
<PAGE>

SECURITY CAPITAL U.S. REAL ESTATE SHARES
NOTES TO THE FINANCIAL STATEMENTS -- DECEMBER 31, 1999
- --------------------------------------------------------------------------------

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.

Effective February 1, 2000, Class R shares of the Fund were combined with the
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 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.

52
<PAGE>

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 meet the credit guidelines approved by the
Board of Directors. In a repurchase agreement, a fund buys a security from a
seller that has agreed to repurchase the same security at a mutually agreed
upon date and price. 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 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.

53
<PAGE>

2. CAPITAL SHARE TRANSACTIONS

Transactions in shares of the Fund were as follows:

<TABLE>
<CAPTION>
Year Ended 12/31/99:
- --------------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------------
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>

3. INVESTMENT TRANSACTIONS

The aggregate purchases and sales of long term investments by the Fund for the
year ended December 31, 1999, were $30,423,778 and $74,740,000, respectively.

As of December 31, 1999, gross unrealized appreciation and depreciation of
investments for federal income tax purposes were as follows:

Appreciation $ 1,052,177
(Depreciation) (3,325,741)
Net appreciation on investments $(2,273,564)

As of December 31, 1999, the cost of investments for federal income tax purposes
was $51,739,712.

54
<PAGE>

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 1.20% and 1.35% of the net assets of the Class I and
Class R shares, respectively, computed on a daily basis, for the year ended
December 31, 1999. Beginning January 1, 2000, the annual rate for Class I
will be 1.35%. Effective February 1, 2000, the annual rate for the SC-US
shares will be 1.35%.

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.

5. DISTRIBUTION AND SERVICING PLANS

The Fund adopted plans with respect to Class I and Class R shares pursuant
to Rule 12b-1 under the 1940 Act ("Distribution Plans"). Under the
Distribution Plans, 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 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 year ended December
31, 1999, the Fund has made cash payments totaling $428,700 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 as of December 31, 1999 and December 31, 1998,
respectively.

55
<PAGE>

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 December 31, 1999, SC Realty Incorporated, a wholly owned subsidiary
of Security Capital, owned 51.6% of the Fund's total outstanding
shares.

56
<PAGE>

FINANCIAL STATEMENTS

The audited Financial Statements of Security Capital European Real Estate
Shares Incorporated for the period January 1, 1999 through December 31, 1999 are
included herein.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------

To the board of directors and shareholders of
Security Capital European Real Estate Shares:

We have audited the accompanying statement of assets and liabilities of Security
Capital European 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, 1999, 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, 1999, 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.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Security Capital European Real Estate Shares as of December 31, 1999, 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, 1999, 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 2, 2000

57
<PAGE>

SECURITY CAPITAL EUROPEAN REAL ESTATE SHARES
SCHEDULE OF INVESTMENTS -- DECEMBER 31, 1999

- --------------------------------------------------------------------------------

Shares Market Value
COMMON STOCKS-90.8%

United Kingdom-38.7%
133,799 Chelsfield, PLC $ 678,634
80,000 Frogmore Estates, PLC 612,522
50,000 Land Securities, PLC 560,307
95,000 Development Securities, PLC 403,583
130,000 Great Portland Estates, PLC 403,179
60,000 British Land Company, PLC 399,302
63,750 Pillar Property, PLC 333,125
80,000 BPT, PLC 306,584
80,000 A&J Mucklow Group, PLC 235,188
30,000 Capital Shopping Centres, PLC 165,487
- --------------------------------------------------------------------------------
4,907,911

France - 13.2%
6,000 Kleipierre 580,233
8,750 Accor, SA 422,822
2,079 Societe Immobiliere de Location pour l'Industrie et le 333,200
Commerce (Silic)
500 Unibail 63,111
- --------------------------------------------------------------------------------
1,399,366
Spain - 11.1%
60,000 Prima Inmobilaria, SA 519,793
60,000 Vallerhermoso, SA 423,087
218,500 Filo, SA/(1)/ 237,714
- --------------------------------------------------------------------------------
1,180,594
Sweden - 9.0%
45,000 Castellum, AB 438,947
26,100 Tornet Fastighets, AB 361,946
43,000 Hufvudstaden, AB 149,078
- --------------------------------------------------------------------------------
949,971
Germany - 5.8%
39,363 IVG Holding, AG 612,628

Ireland - 4.3%
80,000 Green Property, PLC 455,322

Portugal - 2.9%
23,012 Sonae Inmobilaria, SA 303,441

Finland - 2.9%
77,900 Sponda Pyj 305,258

Switzerland - 2.9%
1,450 MAAG Holding, AG 305,062
- --------------------------------------------------------------------------------

Total common stocks
(cost $9,751,166)/(2)/ $9,609,553

58
<PAGE>

SECURITY CAPITAL EUROPEAN REAL ESTATE SHARES
SCHEDULE OF INVESTMENTS -- DECEMBER 31, 1999 (continued)

- --------------------------------------------------------------------------------
Principal
Amount Market Value

SHORT TERM INVESTMENTS - 8.5%

$895,534 Agreement with State Street Bank and Trust Company,
2.000%, dated 12/31/1999, to be repurchased at
$895,683, on 01/03/2000, collateralized by $740,000
U.S. Treasury Bond, 12.375% maturing on 05/15/2004
(market value $914,825) 895,534
- --------------------------------------------------------------------------------

Total investments - 99.3%
(cost $10,646,700) 10,505,087

Other assets in excess of liabilities - 0.7% 76,491
- --------------------------------------------------------------------------------
Net assets - 100.0% $10,581,578
- --------------------------------------------------------------------------------

/(1)/ Non income producing security.
/(2)/ Percentages of long-term investments are presented in this schedule by
country. Percentages of long-term investments by industry are as follows:
Diversified Real Estate 70.8% and Real Estate Development 20.0%.

59
<PAGE>

SECURITY CAPITAL EUROPEAN REAL ESTATE SHARES
STATEMENT OF ASSETS AND LIABILITIES -- DECEMBER 31, 1999

- --------------------------------------------------------------------------------

ASSETS:
Investments, at market value
(Cost $10,646,700) $10,505,087
Dividends and interest receivable 52,575
Deferred organization costs 43,415
Receivable from investment adviser 24,470
Other assets 9,579
- --------------------------------------------------------------------------------
Total Assets 10,635,126
- --------------------------------------------------------------------------------

LIABILITIES:
Payable to distributor 2,966
Accrued expenses and other liabilities 50,582
- --------------------------------------------------------------------------------
Total Liabilities 53,548
- --------------------------------------------------------------------------------
Net assets $10,581,578

NET ASSETS CONSIST OF:
Capital stock $11,050,300
Distributions in excess of net investment income (18,052)
Accumulated undistributed net realized loss on investments
and foreign currency transactions (308,802)
Net unrealized depreciation on investments and foreign
currency (141,868)
- --------------------------------------------------------------------------------
Total Net Assets $10,581,578
- --------------------------------------------------------------------------------

CLASS I:
Net assets $10,581,578
Shares outstanding (50,000,000 shares of $0.01 par
value authorized) 1,031,317
Net asset value and redemption price per share 10.26
- --------------------------------------------------------------------------------

60
<PAGE>

SECURITY CAPITAL EUROPEAN REAL ESTATE SHARES
STATEMENT OF OPERATIONS -- YEAR ENDED DECEMBER 31, 1999

- -------------------------------------------------------------------------------

INVESTMENT INCOME:
Dividend income/(1)/ $ 361,273
Interest income 25,985
- -------------------------------------------------------------------------------
Total investment income 387,258
- -------------------------------------------------------------------------------

EXPENSES:
Investment advisory fee 99,987
Distribution expense 29,408
Administration fee 2,353
Sub-administration fee 82,500
Transfer agent, custody and accounting costs 113,193
Federal and state registration 10,035
Professional fees 101,008
Shareholder reports and notices 32,215
Director's fees and expenses 23,921
Amortization of organization costs 12,421
Other 874
---------------------------------------------------------------------------
Total expenses before reimbursement 507,915
---------------------------------------------------------------------------
Less: Reimbursement from Adviser (337,352)
---------------------------------------------------------------------------
Net expenses 170,563
- -------------------------------------------------------------------------------
Net Investment Income 216,695

REALIZED AND UNREALIZED LOSS ON INVESTMENTS:
Net realized loss on investments (22,621)
Net realized loss on foreign currency transactions (52,858)
Change in unrealized appreciation on investments and foreign
currency (223,809)
---------------------------------------------------------------------------
Net realized and unrealized loss on investments (299,288)
- -------------------------------------------------------------------------------
Net decrease in net assets resulting $ (82,593)
from operations

/(1)/Net of foreign withholding taxes of $43,702.
- --------------------------------------------------------------------------------

61
<PAGE>

SECURITY CAPITAL EUROPEAN REAL ESTATE SHARES
STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------

Year ended Period ended
Dec. 31, 1999 Dec. 31, 1998/(1)/
<S> <C> <C>
OPERATIONS:
Net investment income $ 216,695 $ 24,976
Net realized loss on investments (22,621) (2,092)
Net realized loss on foreign currency transactions (52,858) (12,273)
Change in unrealized appreciation on investments and
foreign currency transactions (223,809) 81,941
- -----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations (82,593) 92,552

CAPITAL SHARE TRANSACTIONS:
Proceed from shares sold 10,056,961 6,007,500
Shares issued to holders in reinvestment of dividends 1,923 22
Cost of shares redeemed (5,000,963) (2,552)
- -----------------------------------------------------------------------------------------------------------------------
Net increase in net assets from capital share
transactions 5,057,921 6,004,970

DISTRIBUTIONS TO CLASS I SHAREHOLDERS:
From net investment income (180,976) (15,690)
In excess of net investment income -- (10,517)
From net realized gains (284,089) --
- -----------------------------------------------------------------------------------------------------------------------
Total distributions Class I (465,065) (26,207)

Total increase in net assets 4,510,263 6,071,315

NET ASSETS:
Beginning of period 6,071,315 --

End of period/(2)/ $10,581,578 $6,071,315
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>

/(1)/ Fund commenced operations on June 30, 1998.
/(2)/ Including distributions in excess of investment income of $18,052 and
$2,239, for the year ended December 31, 1999 and the period ended
December 31, 1998, respectively.

62
<PAGE>

SECURITY CAPITAL EUROPEAN REAL ESTATE SHARES
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Year ended Year ended
Dec. 31, 1999 Dec. 31, 1998/(1)/
Class I Class R
<S> <C> <C>
For a share outstanding for the period:
Net Asset Value, beginning of period $ 10.28 $ 10.00
- --------------------------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.20 0.04
Net realized and unrealized gain on investments and foreign
currency transactions 0.23 0.28
- --------------------------------------------------------------------------------------------------------------------------
Total from investment operations 0.43 0.32
- --------------------------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income (0.17) (0.02)
Dividends in excess of net investment income -- (0.02)
Dividends from net realized gains (0.28) (0.02)
- --------------------------------------------------------------------------------------------------------------------------
Total distributions (0.45) (0.04)
- --------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 10.26 $ 10.28
- --------------------------------------------------------------------------------------------------------------------------
Total return 4.12% 3.25%/(2)/
Supplemental data and ratios:
Net assets, end of period ($000) $10,582 $ 6,071
Ratio of expenses to average net assets/(4)/ 1.45% 1.45%/(3)/
Ratio of net investment income to average net assets/(4)/ 1.84% 1.32%/(3)/

Portfolio turnover rate 61.37% --%
</TABLE>

/(1)/ Fund commenced operations June 30, 1998.
/(2)/ Not annualized.
/(3)/ Annualized.
/(4)/ Without voluntary expense reimbursements of $337,352 for the year ended
December 31, 1999, the ratio of expenses to average net assets would have
been 4.32% for Class I and the ratio of net investment income to average
net assets would have been (1.03)% for Class I. Without voluntary expense
reimbursements of $155,345 for the period ended December 31, 1998, the
ratio of expenses to average net assets would have been 9.66% for Class I
and the ratio of net investment loss to average net assets would have
been (6.89)% for Class I.

63
<PAGE>

SECURITY CAPITAL EUROPEAN REAL ESTATE SHARES
NOTES TO THE FINANCIAL STATEMENTS--DECEMBER 31, 1999
- --------------------------------------------------------------------------------

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Security Capital European Real Estate Shares (the "Fund") is a non-
diversified investment portfolio of Security Capital Real Estate Mutual
Funds Incorporated ("SC-REMFs"), which is an open-end management investment
company under the Investment Company Act of 1940 (the "1940 Act"), and is a
Maryland corporation. The Fund commenced operations on June 30, 1998. SC-
REMFs is comprised of two investment portfolios, the Fund and Security
Capital U.S. Real Estate Shares. The Fund consists of Class I and Class R
shares, which differ in services provided to shareholders and expenses. As
of December 31,1999, there were no Class R shares outstanding.

Effective February 1, 2000, the Class R shares of the Fund were combined
with the Class I shares of the Fund with the surviving class being known as
Security Capital European Real Estate Shares.

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.

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 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 elected for Federal income tax purposes to
defer a $298,087 current year post October capital loss and a $18,113
current year post October currency loss as though the losses were incurred
on the first day of the next fiscal year.

The Fund has made an election under Internal Revenue Code 853 to pass
through foreign taxes paid by the Fund to its shareholders. During the year
ended December 31, 1999, the total amount of foreign taxes that will be
passed through to the shareholders and the foreign source income for
information reporting purposes will be $43,702 (of the total $43,702 taxes
withheld) and $404,975, respectively.

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.

d) Foreign Currency - The books and records of the Fund are maintained in
U.S. dollars. Foreign currencies, investments and other assets and
liabilities are translated into U.S. dollars at the exchange rates
prevailing at the end of the period.

64
<PAGE>

Purchases and sales of investments securities and items of income and
expense are translated on the respective dates of such transactions.
Unrealized gains and losses, not relating to securities, which result from
changes in foreign currency exchange rates have been included in the
unrealized appreciation (depreciation) of foreign currency. Net realized
foreign currency gains and losses resulting from changes in exchange rates
include foreign currency gains and losses between trade date and settlement
date on investment security transactions and foreign currency transactions,
and the difference between the amounts of interest and dividends recorded
on the books of a Fund and the amount actually received. The portion of
foreign currency gains and losses related to fluctuation in exchange rates
between the initial purchase trade date and subsequent sale trade date is
included in realized gains and losses on investment securities sold.

e) Repurchase Agreements - The Fund may enter into repurchase agreements
with brokers, dealers or banks that meet the credit guidelines approved by
the Board of Directors. In a repurchase agreement, a fund buys a security
from a seller that has agreed to repurchase the same security at a mutually
agreed upon date and price. 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.

f) 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.

g) 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.

2. CAPITAL SHARE TRANSACTIONS

Transactions in shares of the Fund were as follows:

<TABLE>
<CAPTION>
Year Ended 12/31/99:
- ---------------------------------------------------------------------------------------------
Amount Shares
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Class I Shares:
Shares sold $10,056,961 915,364
Shares issued to holders in reinvestment of dividends 1,923 187
Shares redeemed (5,000,963) (474,932)
- ---------------------------------------------------------------------------------------------
Net increase $ 5,057,921 440,619
- ---------------------------------------------------------------------------------------------

Period Ended 12/31/98:
- ---------------------------------------------------------------------------------------------
Amount Shares
- ---------------------------------------------------------------------------------------------
Class I Shares:
Shares sold $ 6,007,500 590,946
Shares issued to holders in reinvestment of dividends 22 2
Shares redeemed (2,552) (250)
- ---------------------------------------------------------------------------------------------
Net increase $6,004,970 590,698
</TABLE>

65
<PAGE>

3. INVESTMENT TRANSACTIONS

The aggregate purchases and sales of long term investments by the Fund for the
year ended December 31, 1999, were $13,347,557 and $6,453,718, respectively.

As of December 31, 1999, gross unrealized appreciation and depreciation of
investments for tax purposes were as follows:

<TABLE>
<S> <C>
Appreciation $ 527,961
(Depreciation) (680,289)
- ----------------------------------------------------
Net appreciation on investments $(152,328)
- ----------------------------------------------------
</TABLE>

As of December 31, 1999, the cost of investments for federal income tax purposes
was $10,657,415.

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 0.85% as applied to the Fund's average daily net assets. GCMG entered
into an investment sub-advisory agreement with Security Capital Global
Capital Management Group (Europe) S.A. ("GCMG-Europe"), an affiliate of
GCMG, pursuant to which GCMG-Europe provided various portfolio management
and investment advisory services to the Fund. Under the sub-advisory
agreement, GCMG-Europe received a monthly management fee from GCMG equal to
the annual rate of 0.08% of the Fund's average daily net asset value.
Effective November 15, 1999, GCMG terminated its investment sub-advisory
agreement with GCMG-Europe. Services previously provided by GCMG-Europe
will be furnished solely by GCMG.

GCMG voluntarily agrees to reimburse its management fee and other expenses
to the extent that total operating expenses (exclusive of interest, taxes,
brokerage commissions and other costs incurred in connection with the
purchase or sale of portfolio securities, and extraordinary items) exceed
the annual rate of 1.45% of the average net assets of the Class I shares,
computed on a daily basis, for the years ended December 31, 1999 and 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.

5. CONCENTRATION OF RISKS

The Fund will invest a substantial portion of its assets in publicly-traded
real estate companies organized principally in European nations. The Fund
may be subject to risks similar to those associated with the direct
ownership of real estate (in addition to securities market risks) because
of its policy of concentration in the securities of companies in the real
estate industry. Such risks include declines in the value of real estate,
risks related to general and local economic conditions, possible lack of
availability of mortgage funds, overbuilding, extended vacancies of
properties, increased competition, increases in real estate taxes and
operating expenses, changes in zoning laws, losses due to costs resulting
from the clean-up of environmental

66
<PAGE>

problems, liability to third parties for damages resulting from
environmental problems, casualty or condemnation losses, limitations on
rents, changes in neighborhood values, the appeal of properties to
customers and changes in interest rates.

The Fund will invest primarily in foreign securities. Substantial risks are
involved when investing in securities issued by companies and governments
of foreign nations, which are in addition to the usual risks inherent in
domestic investments. There is the possibility of expropriation,
nationalization, or confiscatory taxation, taxation of income earned in
foreign nations or other taxes imposed with respect to investments in
foreign nations, foreign exchange controls (which may include suspension of
the ability to transfer currency from a given country), foreign investment
controls on daily stock market movements, default in foreign government
securities, political or social instability, or diplomatic developments
which could affect investments in securities of issuers in foreign nations.
In addition, in many countries there is less publicly available information
about issuers than is available in reports about companies in the U.S.
Foreign companies are generally not subject to the same accounting and
auditing and financial reporting standards as those for U.S. Companies, and
auditing practices and requirements may not be comparable to those
applicable to U.S. companies. The Fund may encounter difficulties or be
unable to vote proxies, exercise shareholder rights, pursue legal remedies,
and obtain judgments in foreign courts.

Also most foreign countries withhold portions of income and dividends at
the source requiring investors to reclaim taxes withheld.

The securities of some foreign companies and foreign securities markets are
less liquid and at times more volatile than securities of comparable U.S.
companies and U.S. securities markets.

The foregoing discussion is general in nature and is subject to the risk
considerations described in the Fund's Prospectus and Statement of
Additional Information.

6. DISTRIBUTION AND SERVICING PLANS

The Fund has adopted distribution plans with respect to Class I and Class R
Shares pursuant to Rule 12b-1 under the 1940 Act ("Distribution Plans").
Under the Distribution Plans, the Fund pays to Security Capital Markets
Group Incorporated, an affiliate of GCMG, 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 the
respect of these services such amounts as it may determine. For the year
ended December 31, 1999, the Fund has made payments totaling $31,171 as
required by the adopted Distribution Plans.

7. PRINCIPAL SHAREHOLDERS

As of December 31, 1999, SC Realty Incorporated, a wholly owned subsidiary
of Security Capital, owned 99.4% of the Fund's total outstanding
shares.

67
<PAGE>

APPENDIX A

DESCRIPTION OF SECURITIES RATINGS

This Appendix describes ratings applied to corporate bonds by Standard & Poor's
("S&P"), Moody's Investors Service, Inc. ("Moody's") and Fitch Investor
Services, Inc. ("Fitch").

S&P's RATINGS

AAA: Debt rated 'AAA' has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.

AA: Debt rated 'AA' has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.

A: Debt rated 'A' has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.

BBB: Debt rated 'BBB' is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.

Debt rated 'BB,' 'B,' 'CCC,' and 'C' is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. 'BB' indicates the least degree of speculation and 'C' the highest.
While such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties of major exposures to adverse
markets.

BB: Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.

B: Debt rated 'B' has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The 'B' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied 'BB' or 'BB-'
rating.

CCC: Debt rated 'CCC' has a currently identifiable vulnerability to default, and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The 'CCC' rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
'B' or 'B-' rating.

CC: The rating 'CC' typically is applied to debt subordinated to senior debt
that is assigned an actual or implied 'CCC' rating.

C: The rating 'C' typically is applied to debt subordinated to senior debt
that is assigned an actual or implied 'CCC-' rating. The 'C' rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.

CI: The rating 'CI' is reserved for income bonds on which interest is being
paid.

68
<PAGE>

D: Debt rated 'D' is in payment default. The 'D' rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The 'D' rating will also be used upon
the filing of a bankruptcy petition if debt service payments are jeopardized.
The ratings from 'AA' to 'CCC' may be modified by the addition of a plus or
minus to show relative standing within the major rating categories.

MOODY'S RATINGS

Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.

Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.

A: Bonds which are rated A possess may favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.

Baa: Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.

Ba: Bonds which are Ba are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.

B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.

Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.

Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.

C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.

Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.

69
<PAGE>

FITCH RATINGS

AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.

AA: Bonds considered to be investment grade and of very high credit quality.
The obligor's ability to pay interest and repay principal is very strong,
although not quite as strong as bonds rated 'AAA.' Because bonds rated in the
'AAA' and 'AA' categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated 'F1+.'

A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.

BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however,
are more likely to have adverse impact on these bonds, and therefore impair
timely payment. The likelihood that the rating of these bonds will fall below
investment grade is higher than for bonds with higher ratings.

BB: Bonds are considered to be speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified which
could assist the obligor in satisfying its debt service requirements.

B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issues.

CCC: Bonds have certain identifiable characteristics that, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.

CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable.

C: Bonds are in imminent default in payment of interest or principal.

DDD, DD, and D: Bonds in default on interest and/or principal payments. Such
bonds are extremely speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of the obligor. 'DDD'
represents the highest potential for recovery on these bonds, and 'D' represents
the lowest potential for recovery.

Note: Fitch ratings (other than 'AAA,' 'DDD,' 'DD,' or 'D' categories) may be
modified by the addition of a plus (+) or minus (-) sign to show relative
position of a credit within the rating category.

70
<PAGE>

Security Capital Real Estate Mutual Funds Incorporated

Form N-1A

Part C -- Other Information

Item 23. Financial Statements and Exhibits.

(a) Financial Statements.

All required financial statements are filed herewith in Part B hereto
and are incorporated herein by reference.

(b) Exhibits:

A list of exhibits filed herewith is contained on the Exhibit Index
which immediately precedes such exhibits and is incorporated herein by
reference.

Item 24. Persons Controlled by or Under Common Control with Registrant.

Following is a list of entities that for purposes of the Investment Company
Act of 1940 are controlled by or under common control with Security Capital Real
Estate Mutual Funds Incorporated:

<TABLE>
<CAPTION>
Name Jurisdiction of Organization Basis of Control
- ----------------------------------- ---------------------------- -----------------------------------
<S> <C> <C>
Security Capital Group Maryland No entity controls Group.
Incorporated ("Group")

SC REALTY Incorporated ("SC Nevada Ownership by Group of 100% of
REALTY") voting securities.

Security Capital Preferred Maryland Ownership by SC REALTY of
Growth Incorporated ("SCPG") 9.28% of voting securities.

SCPG Services Incorporated Maryland Ownership by SCPG of 100% of
voting securities.

SCPG Ventures Incorporated Maryland Ownership by SCPG of 100% of
voting securities.

SCPG Ventures I Incorporated Delaware Ownership by SCPG Ventures
Incorporated of 100% of voting
securities.

SCPG Ventures II Incorporated Delaware Ownership by SCPG Ventures
Incorporated of 100% of voting
securities.
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
Name Jurisdiction of Organization Basis of Control
- ----------------------------------- ---------------------------- -----------------------------------
<S> <C> <C>
SCPG Ventures III Incorporated Delaware Ownership by SCPG Ventures
Incorporated of 100% of voting
securities.

Security Capital U.S. Realty Luxembourg Ownership by SC Realty of
("U.S. Realty") 39.64% of outstanding voting
securities.

Security Capital Holdings S.A. Luxembourg Ownership by Security Capital
U.S. Realty of 100% of voting
securities.

East Mixed-Use Realty Investors Maryland Ownership by Security Capital
Trust Holdings S.A. of 100% of voting
securities.

West Mixed-Use Realty Investors Maryland Ownership by Security Capital
Trust Holdings S.A. of 100% of voting
securities.

Midwest Mixed-Use Realty Maryland Ownership by Security Capital
Investors Trust Holdings S.A. of 100% of voting
securities.

Security Capital Investment Delaware Ownership by Group of 100% of
Research Incorporated voting securities.
("Investment Research")

Security Capital Real Estate Maryland Ownership by SC REALTY of
Mutual Funds Incorporated 51.61% of voting securities.

Security Capital European Realty Luxembourg Ownership by SC REALTY of
("SICAF") 34.55% of voting securities.

B.C. Holdings S.A. Luxembourg Ownership by SICAF of 100% of
voting securities.

Bernheim Comofi S.A. Belgium Ownership by B.C. Holdings S.A.
of 100% of voting securities.

Interparking S.A. Belgium Ownership by B.C. Holdings S.A.
of 73.6% of voting securities.

Access/Self Storage S.A. Luxembourg Ownership of SICAF of 100% of
voting securities.

Millers Storage S.A. Luxembourg Ownership of SICAF of 100% of
voting securities.
</TABLE>

2
<PAGE>

<TABLE>
<CAPTION>
Name Jurisdiction of Organization Basis of Control
- ----------------------------------- ---------------------------- -----------------------------------
<S> <C> <C>
London and Henley S.A. Luxembourg Ownership of SICAF of 95.56%
of voting securities.

SC-ER Special Opportunity Luxembourg Ownership of SICAF of 100% of
Holdings S.A. voting securities.

City & West End Properties S.A. Luxembourg Ownership by SICAF of 99.33%
of voting securities.

Hardwick Properties SARL Luxembourg Ownership by City & West End
Properties S.A. of 100% voting
securities.

City & West End Property Luxembourg Ownership by City & West End
Holdings SARL Properties S.A. of 100% of voting
securities.

Buckenham Investments Ltd. United Kingdom Ownership by City & West End
Property Holdings SARL of
100% of voting securities

Brockdish Investments Ltd. United Kingdom Ownership by City & West End
Property Holdings SARL of
100% of voting securities

Thornham Developments SARL Luxembourg Ownership by City & West End
Properties of 100% of voting
securities.

Palgrave Investments Ltd. United Kingdom Ownership by Thornham
Developments SARL of 100% of
voting securities.

Roydon Investments Ltd. United Kingdom Ownership by Thornham
Developments SARL of 100% of
voting securities.

Brockford Developments SARL Luxembourg Ownership by City & West End
Properties S.A. of 100% of voting
securities.

Chediston Investments Ltd. United Kingdom Ownership by Brockford
Developments SARL of 100% of
voting securities

Burtson Investments Ltd. United Kingdom Ownership by Brockford
Developments SARL of 100% of
voting securities
</TABLE>

3
<PAGE>

<TABLE>
<CAPTION>
Name Jurisdiction of Organization Basis of Control
- ----------------------------------- ---------------------------- -----------------------------------
<S> <C> <C>
Thelverton Developments SARL Luxembourg Ownership by City & West End
Properties S.A. of 100% of voting
securities.

Pulham Investments Ltd. United Kingdom Ownership by Thelverton
Developments SARL of 100% of
voting securities

Shimpling Investments Ltd. United Kingdom Ownership by Thelverton
Developments SARL of 100% of
voting securities

Wickhampton Developments Ltd. United Kingdom Ownership by City & West End
Properties S.A. of 100% of voting
securities.

Ormesby Developments Ltd. United Kingdom Ownership by Wickhampton
Developments Ltd. of 100% of
voting securities.

Bramerton Developments Ltd. United Kingdom Ownership by Wickhampton
Developments Ltd. of 100% of
voting securities.

Halesworth Developments Ltd. United Kingdom Ownership by Wickhampton
Developments Ltd. of 100% of
voting securities.

Halvergate Developments Ltd. United Kingdom Ownership by Wickhampton
Developments Ltd. of 100% of
voting securities.

Rensmeade Management Ltd. United Kingdom Ownership by Wickhampton
Developments Ltd. of 100% of
voting securities.

Starston Investments SARL Luxembourg Ownership by City & West End
Properties SA of 100% of voting
securities.

Mettingham Investments SARL Luxembourg Ownership by City & West End
Properties SA of 100% of voting
securities.

Redisham Properties Ltd. United Kingdom Ownership by Mettingham
Investments SARL of 100% of
voting securities.
</TABLE>

4
<PAGE>

<TABLE>
<CAPTION>
Name Jurisdiction of Organization Basis of Control
- ----------------------------------- ---------------------------- -----------------------------------
<S> <C> <C>
Henstead Properties, Ltd. United Kingdom Ownership by Redisham
Properties Ltd. of 100% of voting
securities

Bedfield Properties, Ltd. United Kingdom Ownership by Redisham
Properties Ltd. of 100% of voting
securities

City & West End Property Luxembourg Ownership by City & West End
Investments SARL Properties S.A. of 100% of voting
securities

Ashfield Real Estate Limited United Kingdom Ownership by City & West End
Property Investments SARL of
100% of voting securities

Metfield Properties Limited United Kingdom Ownership by City & West End
Property Investments SARL of
100% of voting securities

Bardwell Investments Limited United Kingdom Ownership by City & West End
Property Investments SARL of
100% of voting securities

Wingfield Investments Limited United Kingdom Ownership by City & West End
Property Investments SARL of
100% of voting securities

Stanway Investments Limited United Kingdom Ownership by City & West End
Property Investments SARL of
100% of voting securities

Wickham Investments Limited United Kingdom Ownership by City & West End
Property Investments SARL of
100% of voting securities

Billingford Investments Limited United Kingdom Ownership by City & West End
Property Investments SARL of
100% of voting securities

Braiseworth Investments Limited United Kingdom Ownership by City & West End
Property Investments SARL of
100% of voting securities

Bramford Investments Limited United Kingdom Ownership by City & West End
Property Investments SARL of
100% of voting securities

</TABLE>

5
<PAGE>

<TABLE>
<CAPTION>
Name Jurisdiction of Organization Basis of Control
- ----------------------------------- ---------------------------- -----------------------------------
<S> <C> <C>
Sternfield Investments Limited United Kingdom Ownership by City & West End
Property Investments SARL of
100% of voting securities

Hargate Investments Limited United Kingdom Ownership by City & West End
Property Investments SARL of
100% of voting securities

Hopton Investments Limited United Kingdom Ownership by City & West End
Property Investments SARL of
100% of voting securities

Akeler S.A. Luxembourg Ownership by SICAF of 96.99%
of voting securities.

Akeler Marlow SARL Luxembourg Ownership by Akeler SA of
100% of voting securities

Akeler Germany SARL Luxembourg Ownership by Akeler SA of
100% of voting securities

Akeler Portugal SARL Luxembourg Ownership by Akeler SA of
100% of voting securities

Akeler Property Investments Luxembourg Ownership by Akeler S.A. of
SARL 100% of voting securities.

Akeler Services Limited United Kingdom Ownership by Akeler Property
Investments SARL of 100% of
voting securities.

Akeler Developments Limited United Kingdom Ownership by Akeler Property
Investments SARL of 100% of
voting securities.

Akeler (Merthyr Tydfil) Limited United Kingdom Ownership by Akeler
Developments Limited of 100%
of voting securities.

Akeler Brentford Limited United Kingdom Ownership by Akeler
Developments Limited of 100%
of voting securities.

Akeler Management Limited United Kingdom Ownership by Akeler Property
Investments SARL of 100% of
voting securities.
</TABLE>

6
<PAGE>

<TABLE>
<CAPTION>
Name Jurisdiction of Organization Basis of Control
- ----------------------------------- ---------------------------- -----------------------------------
<S> <C> <C>
Akeler Glasgow Limited United Kingdom Ownership by Akeler Property
Investments SARL of 100% of
voting securities

Akeler Portugal Investimentos Portugal Ownership by Akeler Portugal
Imobiliarios Lda. SARL of 5% and Akeler Property
Investments SARL of 95% of
voting securities

Akeler 2 - Compra e Venda de Portugal Ownership by Akeler Portugal
Imoveis Lda. SARL of 5% and Akeler Portugal
Investimentos Imobiliarios Lda.
of 95% of voting securities

Akeler 3 - Sociedade Imobiliaria Portugal Ownership by Akeler Portugal
SA Investimentos Imobiliarios Lda.
of 100% of voting securities

BelmontCorp ("Belmont") Maryland Ownership by SC Realty of 100%
of voting securities.

Belmont One Corporation Delaware Ownership by Belmont of 100%
("Belmont One") of voting securities.

Belmont Two Corporation Delaware Ownership by Belmont of 100%
("Belmont Two") of voting securities.

Belmont Village L.P. Delaware Ownership by Belmont One of
1% general partnership interest
and ownership by Belmont Two
of 99% limited partnership.
interest

Belmont Village Buffalo Grove, Delaware Ownership by Belmont Village
L.L.C. L.P. of 100% of voting securities.

Belmont Village Carol Stream, Delaware Ownership by Belmont Village
L.L.C. L.P. of 100% of voting securities.

Belmont Village Glenview, Delaware Ownership by Belmont Village
L.L.C. L.P. of 100% of voting securities.

Belmont Village Hollywood Maryland Ownership by Belmont of 100%
Heights Incorporated of voting securities.

Belmont Village Lombard, Delaware Ownership by Belmont Village
L.L.C. L.P. of 100% of voting securities.

</TABLE>

7
<PAGE>

<TABLE>
<CAPTION>
Name Jurisdiction of Organization Basis of Control
- ----------------------------------- ---------------------------- -----------------------------------
<S> <C> <C>
Belmont Village San Jose Maryland Ownership by Belmont of 100%
Incorporated of voting securities.

Belmont Village Sabre Springs Maryland Ownership by Belmont of 100%
Incorporated of voting securities.

Security Capital BVI Holdings Maryland Ownership by Group of 100% of
Incorporated voting securities.

SCGPB Group British Virgin Islands Ownership by Security Capital
BVI Holdings of 100% of voting
securities.

Security Capital Global Capital Delaware Ownership by Investment
Management Incorporated Research of 100% of voting
securities.

Capital Division Incorporated Maryland Ownership by Investment
Research of 100% of voting
securities.

Real Estate Protection Mutual Bermuda Ownership by Group of 100% of
Limited voting securities.

Security Capital Real Estate Maryland Ownership by Investment
Research Group Incorporated Research of 100% of voting
securities.

Security Capital Financial Delaware Ownership by Group of 100% of
Services Group Incorporated voting securities.
("Financial Services")

SC Group Incorporated Texas Ownership by Financial Services
of 100% of voting securities.

Coast Services Incorporated Maryland Ownership by SC Group
Incorporated of 100% of voting
securities.

Security Capital Markets Group Delaware Ownership by Financial Services
Incorporated of 100% of voting securities.

Security Capital (EU) Luxembourg Ownership by Group of 100% of
Management Holdings S.A. voting securities.

Security Capital Global Capital Belgium Ownership by Security Capital
Management Group (Europe) (EU) Management Holdings S.A.
S.A. of 100% of voting securities.

</TABLE>

8
<PAGE>

<TABLE>
<CAPTION>
Name Jurisdiction of Organization Basis of Control
- ----------------------------------- ---------------------------- -----------------------------------
<S> <C> <C>
Security Capital U.S. Realty Luxembourg Ownership by Security Capital
Management S.A. (EU) Management Holdings S.A.
of 100% of voting securities.

Security Capital European Realty Luxembourg Ownership by Security Capital
Management S.A. U.S. Realty Management S.A. of
100% of voting securities.

Security Capital (UK) United Kingdom Ownership by Security Capital
Management Limited (EU) Management Holdings S.A.
of 100% of voting securities.

Security Capital U.S. Realty United Kingdom Ownership by Security Capital
Management Limited (UK) Management Limited of
100% of voting securities

Security Capital European Realty United Kingdom Ownership by Security Capital
Management Limited (UK) Management Limited of
100% of voting securities.

Security Capital European Luxembourg Ownership by Security Capital
Services S.A. (EU) Management Holdings S.A.
of 100% of voting securities.

Security Capital Real Estate Belgium Ownership by Security Capital
Research Group (Europe) S.A. European Services S.A. of 100%
of voting securities.

SC Realty Shares Limited Bermuda Ownership by SC Realty
Incorporated of 100% of voting
securities

Security Capital Markets Group United Kingdom Ownership by Security Capital
Limited Financial Services Group
Incorporated of 100% of voting
securities.

CarrAmerica Realty Corporation Delaware Ownership by Security Capital
Holdings S.A. of 42.7% of voting
securities.

Storage USA, Inc. Tennessee Ownership by Security Capital
Holdings S.A. of 42.2% of voting
securities.

Regency Realty Corporation Florida Ownership by Security Capital
Holdings S.A. of 60.4% of voting
securities.

</TABLE>

9
<PAGE>

<TABLE>
<CAPTION>
Name Jurisdiction of Organization Basis of Control
- ---- ---------------------------- ----------------
<S> <C> <C>
Urban Growth Property Trust Maryland Ownership by Security Capital
("UGPT") Holdings S.A. of 98.8% of
voting securities.

Urban Growth Property Limited Delaware Sole general partnership interest
Partnership owned by UGPT

UGPT-Skypark, Inc. Delaware Ownership by UGPT of 100% of
voting securities.

UGPT-Skypark Limited Delaware Sole general partnership interest
Partnership held by UPGT-Skypark, Inc..

UGPT-Skypark, L.L.C. Delaware Ownership by UGPT of 100% of
voting securities.

Urban Growth Wabash Randolph Delaware Ownership by Urban Growth
Partnership Property Limited Partnership of
81.3% of voting securities

Urban Growth Property-Flower Delaware Ownership by Urban Growth
L.L.C. Property Limited Partnership of
100% of voting securities

LWP Associates, L.L.C. Delaware Ownership by Urban Growth
Property Limited Partnership of
50% of voting securities.

Van Wells Realty Company, Delaware Ownership by Urban Growth
L.L.C. Property Limited Partnership of
50% of voting securities.

City Center Retail Trust Maryland Ownership by Security Capital
Holdings S.A. of 99% of voting
securities.

City Center Retail Delaware Sole general partner interest
Trust/McCaffrey Developments, owned by City Center Retail
L.P. Trust.

CCRT I Incorporated Delaware Ownership by City Center Retail
Trust of 100% of voting
securities.

CCRT II Incorporated Delaware Ownership by City Center Retail
Trust of 100% of voting
securities.
</TABLE>

10
<PAGE>

<TABLE>
<CAPTION>
Name Jurisdiction of Organization Basis of Control
- ---- ---------------------------- ----------------
<S> <C> <C>
CCRT McCaffrey Developments Delaware Ownership by CCRT/McCaffrey
LLC Developments L.P. of 100% of
voting securities.

CCR West Palm Incorporated Delaware Ownership by City Center Retail
Trust of 100% of voting
securities.

Interparking Incorporated Maryland Ownership by Security Capital
Holdings of 5.6% of voting
securities.

NPC-1 Incorporated Maryland Ownership by Interparking
Incorporated of 100% of voting
securities.

AV Valet, Inc. Maryland Ownership by Interparking
Incorporated of 100% of voting
securities.

Chicago Park Card Network, Inc. Illinois Ownership by Interparking
Incorporated of 100% of voting
securities.

CWS Communities Trust Maryland Ownership by Security Capital
Holdings S.A. of 96.6% of voting
securities.

CWS Communities L.P. Delaware Sole general partnership interest
owned by CWS Communities
Trust.

CWS Communities Incorporated Delaware Ownership by CWS
Communities Trust of 100% of
voting securities.

CWS Greenbriar L.L.C. Delaware Ownership by CWS
Communities Trust of 100% of
voting securities.

CWS Greenbriar L.P. Delaware 1% general partnership interest
owned by CWS Greenbriar, LLC,
99% limited partnership interest
owned by CWS Communities
L.P.

CWS Management Services Delaware Ownership by CWS
Incorporated Communities, L.P. of 95% of
voting securities.
</TABLE>

11
<PAGE>

<TABLE>
<CAPTION>
Name Jurisdiction of Organization Basis of Control
- ---- ---------------------------- ----------------
<S> <C> <C>
CWS Kennesaw, L.L.C. Delaware Ownership by CWS
Communities, L.P. of 100% of
voting securities.

Frigoscandia Holdings, L.L.C. Delaware Ownership of SC Realty
Incorporated of 41.359% of
voting securities.

Kingspark Holdings, L.L.C. Delaware Ownership by SC Realty
Incorporated of 39% of voting
securities.

Ameriton Properties, L.L.C. Delaware Ownership by Security Capital
Group Incorporated of 74% of
voting securities.

Archstone Communities Trust Maryland Ownership by U.S. Realty of
("ASN") 39.24% of voting securities.

Archstone Communities Delaware Ownership by ASN of 100% of
Incorporated voting securities.

Archstone Communities Limited Delaware ASN is sole general partner.
Partnership

Archstone Communities Limited Delaware Sole general partnership interest
Partnership II owned by ASN.

Archstone Financial Services Delaware Ownership by ASN of 100% of
Incorporated voting securities.

ASN San Diego Incorporated Delaware Ownership by ASN of 100% of
voting securities

SCA Florida Holdings (1) Florida Ownership by ASN of 100% of
Incorporated voting securities.

Atlantic Tennessee Limited Delaware Sole general partnership interest
Partnership owned by SCA Tennessee (3)
Incorporated

SCA Tennessee (3) Incorporated Maryland Ownership by ASN of 100% of
voting securities.

SCA Tennessee (4) Incorporated Maryland Ownership by ASN of 100% of
voting securities.

SCA-1 Incorporated Delaware Ownership by ASN of 100% of
voting securities.
</TABLE>

12
<PAGE>

<TABLE>
<CAPTION>
Name Jurisdiction of Organization Basis of Control
- ---- ---------------------------- ----------------
<S> <C> <C>
ASN Minnesota Holdings (1) Delaware Sole general partnership interest
LLC owned by ASN

Atlantic-Alabama (5) Maryland Ownership by ASN of 100% of
Incorporated voting securities.

Atlantic-Alabama (6) Maryland Ownership by ASN of 100% of
Incorporated voting securities.

SCA Florida Holdings (2) Delaware Ownership by ASN of 100% of
Incorporated voting securities.

SCA-Alabama Multifamily Trust Alabama Ownership by Atlantic-Alabama
(6) Incorporated of 100% of
voting securities.

SCA-North Carolina (1) Maryland Ownership by ASN of 100% of
Incorporated voting securities.

SCA-North Carolina (2) Maryland Ownership by ASN of 100% of
Incorporated voting securities.

SCA-North Carolina Limited Delaware Sole general partnership interest
Partnership owned by SCA-North Carolina
(1) Incorporated.

SCA-Indiana Limited Partnership Delaware Sole general partnership interest
owned by SCA-North Carolina
(1) Incorporated.

Security Capital Atlantic Delaware Ownership by ASN of 100% of
Multifamily Incorporated voting securities.

Atlantic Multifamily Limited Delaware SCA-I Incorporated is the sole
Partnership-1 general partner.

ASN Multifamily Limited Delaware SCA-North Carolina (1)
Partnership Incorporated is the sole general
partner.

SCP Nevada Holdings I Nevada Ownership by ASN of 100% of
Incorporated voting securities.

SCP Utah Holdings 4 Utah Ownership by ASN of 100% of
Incorporated voting securities.

SCP Utah Holdings 5 Utah Ownership by ASN of 100% of
Incorporated voting securities.
</TABLE>

13
<PAGE>

<TABLE>
<CAPTION>
Name Jurisdiction of Organization Basis of Control
- ---- ---------------------------- ----------------
<S> <C> <C>
PTR Multifamily Holdings Delaware Ownership by ASN of 100% of
Incorporated voting securities.

Spectrum Apartment Locators Texas Ownership by ASN of 100% of
Inc. voting securities.

Las Flores Development Texas Ownership by ASN of 100% of
Company voting securities.

Saferent L.L.C. Colorado Ownership by Archstone
Financial Services, Inc. of 49.5%
of voting securities.

PTR - Colorado (1), L.L.C. Colorado Ownership of ASN of 80% of
voting securities.

ASN-Massachusetts Holdings (1) Delaware Ownership by ASN of 100% of
Incorporated voting securities.

ASN-Massachusetts Holdings (3) Delaware Ownership by ASN of 100% of
Incorporated voting securities

ASN-Washington Holdings (1) Delaware Ownership by ASN of 100% of
Incorporated voting securities.

PTR-California Holdings (1) Maryland Ownership by ASN of 100% of
Incorporated voting securities.

PTR-California Holdings (2) Maryland Ownership by ASN of 100% of
Incorporated voting securities.

PTR-California Holdings (3) Delaware Ownership by ASN of 100% of
Incorporated voting securities.

AMERITON Properties Maryland Ownership by ASN of 95% of
Incorporated voting securities.

Ameriton Florida Holdings (1) Delaware Ownership by AMERITON
Incorporated Properties Incorporated of 100%
of voting securities.

Turtle Run at Coral Springs, Delaware Ownership by ASN of 100% of
L.L.C. voting securities.

Homestead Village Incorporated Maryland Ownership by SC Realty of
("Homestead") 87.02% of voting securities.

KC Homestead Village Missouri Ownership by Homestead Village
Redevelopment Corporation Incorporated of 100% of voting
securities.
</TABLE>

14
<PAGE>

<TABLE>
<CAPTION>
Name Jurisdiction of Organization Basis of Control
- ---- ---------------------------- ----------------
<S> <C> <C>
Atlantic Homestead Village Delaware Sole general partner interest
Limited Partnership owned by Atlantic Homestead
Village (1) Incorporated.

Atlantic Homestead Village (1) Maryland Ownership by Homestead Village
Incorporated Incorporated of 100% of voting
securities.

Atlantic Homestead Village (2) Maryland Ownership by Homestead Village
Incorporated Incorporated of 100% of voting
securities.

PTR Homestead Village (1) Maryland Ownership by Homestead Village
Incorporated Incorporated of 100% of voting
securities.

PTR Homestead Village (2) Maryland Ownership by Homestead Village
Incorporated Incorporated of 100% of voting
securities.

Homestead Alabama Alabama Ownership by Homestead Village
Incorporated Incorporated of 100% of voting
securities.

Homestead Village Management Delaware Ownership by Homestead Village
Incorporated Incorporated of 100% of voting
securities.

PTR Homestead Village Limited Delaware Sole general partnership interest
Partnership owned by PTR Homestead
Village (1) Incorporated.

HVI (2) Incorporated Delaware Ownership by Homestead Village
Incorporated of 100% of voting
securities

ProLogis Trust ("PLD") Maryland Ownership by SC Realty of
30.84% of voting securities

ProLogis Development Services Delaware Preferred: PLD
Incorporated Common: Development Services
Trust

ProLogis Management Delaware Ownership by PLD of 100% of
Incorporated voting securities

ProLogis California I LLC Delaware 50% ownership by PLD; 50%
Ownership by NYSCRF
</TABLE>

15
<PAGE>

<TABLE>
<CAPTION>
Name Jurisdiction of Organization Basis of Control
- ---- ---------------------------- ----------------
<S> <C> <C>
ProLogis RACER I LLC Delaware 100% Ownership by Sole
Member, ProLogis Development
Services Incorporated

ProLogis - Kansas City (1) Delaware Ownership by PLD of 100% of
Incorporated voting securities

ProLogis Logistics Services Delaware Ownership of Preferred stock by
Incorporated PLD -100% - Common by SCI
Logistics Holdings LLC

ProLogis Limited Partnership - I Delaware General partnership interest
owned by PLD - Limited
partnership interest owned by
Charles King and Associates,
King and Lyons, Bayside
Spinnaker Partners IV

ProLogis Limited Partnership - II Delaware General Partner: PLD Limited
Partners: Mesa Group II, Ltd.
and Crow Family 1991 L.P.

ProLogis Limited Partnership - Delaware General Partner: PLD Limited
III Partners: Tampa West Industrial
Park, Inc., Tampa East, Inc., The
Krauss Portfolio, Ltd., Elmer
Krauss Revocable Trust, Jeffrey
H. Schwartz

ProLogis Limited Partnership - Delaware General Partner: ProLogis IV,
IV Inc.; Limited Partner:
Krauss/Schwartz Properties, Ltd.

ProLogis - IV, Inc. Delaware Ownership by PLD of 100% of
voting securities

ProLogis - Alabama (1) Maryland Ownership by PLD of 100% of
Incorporated voting securities

ProLogis - Alabama (2) Maryland Ownership by PLD of 100% of
Incorporated voting securities

ProLogis Alabama Trust Alabama Trustee: ProLogis-Alabama (1)
Incorporated; Trustor: ProLogis -
Alabama (2) Incorporated

ProLogis - North Carolina (1) Maryland Ownership by PLD of 100% of
Incorporated voting securities
</TABLE>

16
<PAGE>

<TABLE>
<CAPTION>
Name Jurisdiction of Organization Basis of Control
- ---- ---------------------------- ----------------
<S> <C> <C>
ProLogis - North Carolina (2) Maryland Ownership by PLD of 100% of
Incorporated voting securities

ProLogis - North Carolina Delaware General Partner: ProLogis -
Limited Partnership North Carolina (1) Incorporated;
Limited Partner: ProLogis -
North Carolina (2) Incorporated

ProLogis Houston Holdings Inc. Delaware Ownership by PLD of 100% of
voting securities

MIT-JPM Limited Partnership Delaware General Partners: Meridian-Penn
Inc. and Meridian II Realty GP,
LLC. Limited Partners: Morgan
Guaranty Trust Co. of New York,
Meridian II Realty LP, LLC and
Meridian-Penn, Inc.

Meridian - Argent VI, Ltd. Texas General Partner: MIT Unsecured,
Inc. Limited Partner: Argent
Frankford, L.P. and MIT-ULP
Inc.

Meridian Realty Partners, L.P. Delaware General Partner: PLD. Limited
Partners: PLD and Kendall
Ontario I.

MDN/JSC-II Limited Partnership California General Partners: PLD and
Jackson-Shaw/Florida Inc.
Limited Partners: Arshaw
Partners I, South Arville Center
LP, Cameron Road LP, JSC-
Nevada, Inc., PLD

MDN/DPI- II Limited California General Partner: PLD. Limited
Partnership Partner: DPI Venture II Ltd.

Meridian Ohio Limited Delaware General Partners: MJV III Corp.
Partnership and PLD. Limited Partners: State
Teachers Retirement Board of
Ohio and PLD

ProLogis - France Developments Delaware Ownership by PLD of 100% of
Incorporated voting Securities

International Industrial Maryland Ownership by PLD of 100% of
Investments Incorporated voting Securities
</TABLE>

17
<PAGE>

<TABLE>
<CAPTION>
Name Jurisdiction of Organization Basis of Control
- ---- ---------------------------- ----------------
<S> <C> <C>
PLD International Incorporated Delaware Ownership by PLD of 100% of
voting Securities

ProLogis Management Services Delaware Ownership by PLD of 100% of
Incorporated voting Securities

ProLogis Mexico Trust Maryland Ownership by PLD of 100% of
voting Securities

ProLogis de Mexico S.A. de C.V. Mexico Ownership by ProLogis Mexico
Trust of 100% of voting
securities

PLDS de Mexico S.A. de C.V. Mexico Ownership by ProLogis-DS
Mexico Incorporated of 100% of
voting securities

ProLogis - DS Mexico Maryland Ownership by ProLogis
Incorporated Development Services
Incorporated of 100% of voting
securities

CS Integrated LLC Delaware Preferred shares owned by PLD;
Common shares owned by
ProLogis Logistics Services
Incorporated

CS Integrated Management Delaware 100% Ownership by Sole
Company LLC Member, CS Integrated LLC

CS Integrated Retail Services Delaware 100% Ownership by Sole
LLC Member, CS Integrated LLC

CS Integrated Retail Services Delaware 100% Ownership by Sole
(Atlanta) LLC Member, CS Integrated LLC

CS Integrated Retail Services Delaware 100% Ownership by Sole
(Kansas City, Kansas) LLC Member, CS Integrated LLC

CS Integrated Retail Services Delaware 100% Ownership by Sole
(Phoenix) LLC Member, CS Integrated LLC

CS Integrated Retail Services Delaware 100% Ownership by Sole
(Roanoke) LLC Member, CS Integrated LLC

CS Integrated Investment Delaware 100% Ownership by Sole
Management LLC Member, CS Integrated LLC

CS Integrated Investments Delaware 100% Ownership by Sole
Southwest LLC Member, CS Integrated LLC
</TABLE>

18
<PAGE>

<TABLE>
<CAPTION>
Name Jurisdiction of Organization Basis of Control
- ---- ---------------------------- ----------------
<S> <C> <C>
Enterprise Refrigerated Services Delaware 100% Ownership by Sole
LLC Member, CS Integrated LLC

CS Integrated-Texas Limited Delaware GP: CS Integrated Investment
Partnership Management LLC
LP: CS Integrated Investments
Southwest LLC

CS Integrated (Canada) Ltd. Canada 100% Ownership by CS
Integrated LLC

Meridian Refrigerated, Inc. California 100% Ownership by CS
Integrated LLC

Meridian Refrigerated East, Inc. Delaware 100% Ownership by Meridian
Refrigerated, Inc.

ProLogis Czech I SRO Czech Republic Ownership by PLD of 100% of
voting Securities

ProLogis Poland I Sp.z.oo Poland Ownership by PLD of 100% of
voting Securities

ProLogis Poland Management Poland Ownership by PLD of 100% of
Sp.z.oo voting Securities

ProLogis France I SAS France Fund

ProLogis Spain I, S.L. Spain Ownership by PLD of 100% of
voting Securities

ProLogis Netherlands III SARL Luxembourg Ownership by PLD of 100% of
voting Securities

ProLogis Netherlands IIa SARL Luxembourg Ownership by PLD of 100% of
voting Securities

Warsaw Industrial Center I Poland Fund
Sp.z.oo

Warsaw Industrial Center III Sp. Poland Fund
zo.o

Warsaw Industrial Center IV Poland Fund
Sp.zo.o

ProLogis Italy BV Netherlands Ownership by PLD of 100% of
voting Securities
</TABLE>

19
<PAGE>

<TABLE>
<CAPTION>
Name Jurisdiction of Organization Basis of Control
- ---- ---------------------------- ----------------
<S> <C> <C>
ProLogis Italy II BV Netherlands Ownership by PLD of 100% of
voting Securities
ProLogis Netherlands IV SARL Luxembourg Ownership by PLD of 100% of
voting Securities
Wooton Ashby (Kappa) Limited United Kingdom Preferred Stock Subsidiary
(Jersey)
Preferred Stock Subsidiary Luxembourg Ownership by PLD of 100% of
(Dormant) voting Securities
ProLogis Nederland VII SARL Luxembourg Ownership by PLD of 100% of
voting Securities
ProLogis Nederland VIII SARL Luxembourg Ownership by PLD of 100% of
voting Securities
ProLogis Nederland IX SARL Luxembourg Ownership by PLD of 100% of
voting Securities
ProLogis Nederland X SARL Luxembourg Ownership by PLD of 100% of
voting Securities
ProLogis Nederland XI SARL Luxembourg Ownership by PLD of 100% of
voting Securities
ProLogis Nederland XIV SARL Luxembourg Ownership by PLD of 100% of
voting Securities
ProLogis Nederland XV SARL Luxembourg Ownership by PLD of 100% of
voting Securities
ProLogis Nederland XVI SARL Luxembourg Ownership by PLD of 100% of
voting Securities
ProLogis Nederland XVII SARL Luxembourg Ownership by PLD of 100% of
voting Securities
ProLogis Nederland XVIII SARL Luxembourg Ownership by PLD of 100% of
voting Securities
ProLogis Nederland XIX SARL Luxembourg Ownership by PLD of 100% of
voting Securities
ProLogis Nederland XX SARL Luxembourg Ownership by PLD of 100% of
voting Securities
</TABLE>

20
<PAGE>

<TABLE>
<CAPTION>
Name Jurisdiction of Organization Basis of Control
- ---- ---------------------------- ----------------
<S> <C> <C>
ProLogis Nederland XXI SARL Luxembourg Ownership by PLD of 100% of
voting Securities
ProLogis Nederland XXII SARL Luxembourg Ownership by PLD of 100% of
voting Securities
Alconbury Holdings Limited United Kingdom Preferred Stock Subsidiary
(50%)
Alconbury Developments United Kingdom Preferred Stock Subsidiary
Limited (50%)
Alconbury Investments Limited United Kingdom Preferred Stock Subsidiary
(50%)
Alconbury Trading Limited United Kingdom Preferred Stock Subsidiary
(50%)
Alconbury Management Limited United Kingdom Preferred Stock Subsidiary
(50%)
Alconbury Aviation Limited United Kingdom Preferred Stock Subsidiary
(50%)
Alconbury Rail Limited (50%) United Kingdom Preferred Stock Subsidiary
Wooton Tay Street (Corby) Jersey Preferred Stock Subsidiary
Hollidene Properties Limited Jersey Preferred Stock Subsidiary
Wooton Ashby (Alpha) Limited Jersey Preferred Stock Subsidiary
Wooton (Stechford) Limited Jersey Preferred Stock Subsidiary
Wooton (Tay Street) Limited Jersey Preferred Stock Subsidiary
Wooton (Trent Street) Limited Jersey Preferred Stock Subsidiary
Wooton (Leeds) Limited Jersey Preferred Stock Subsidiary
Wooton Kingspark Limited United Kingdom Preferred Stock Subsidiary
Searancke Commercial Limited United Kingdom Preferred Stock Subsidiary
ProLogis Finance BV Netherlands Fund
ProLogis Investments Limited United Kingdom Preferred Stock Subsidiary
</TABLE>

21
<PAGE>

<TABLE>
<CAPTION>
Name Jurisdiction of Organization Basis of Control
- ---- ---------------------------- ----------------
<S> <C> <C>
ProLogis Developments Limited United Kingdom Preferred Stock Subsidiary
ProLogis (Coventry) Limited United Kingdom Preferred Stock Subsidiary
ProLogis Group Holdings United Kingdom Preferred Stock Subsidiary
Limited
ProLogis Holdings Limited United Kingdom Preferred Stock Subsidiary
Grange Park Developments United Kingdom Preferred Stock Subsidiary
Limited (50%)
BVP Developments Limited United Kingdom Preferred Stock Subsidiary
(50%)
Barton Business Park Limited United Kingdom Preferred Stock Subsidiary
(50%)
ProLogis Poland II sp zoo Poland Fund
ProLogis Poland III sp zoo Poland Ownership by PLD of 100% of
voting Securities
ProLogis Poland IV sp zoo Poland Ownership by PLD of 100% of
voting Securities
ProLogis Poland V sp zoo Poland Ownership by PLD of 100% of
voting Securities
ProLogis Poland VI sp zoo Poland Ownership by PLD of 100% of
voting Securities
ProLogis Poland VII sp zoo Poland Ownership by PLD of 100% of
voting Securities
ProLogis Poland VIII sp zoo Poland Ownership by PLD of 100% of
voting Securities
ProLogis Italy I srl Italy Ownership by PLD of 100% of
voting Securities
Garonor Holdings SA Luxembourg Ownership by PLD of 100% of
voting Securities
ProLogis France III SAS France Fund
</TABLE>

22
<PAGE>

<TABLE>
<CAPTION>
Name Jurisdiction of Organization Basis of Control
- ---- ---------------------------- ----------------
<S> <C> <C>
Garonor Services SAS France Ownership by PLD of 100% of
voting Securities
SCI Vitrolles France Fund
SNC Melun 7 France Ownership by PLD of 100% of
voting Securities
SNC Garonor Le Havre France Ownership by PLD of 100% of
voting Securities
SNC Cergy I Ext. France Fund
SNC Garonor Bordeaux France Fund
SNC Aulnay Ouest France Ownership by PLD of 100% of
voting Securities
Garonor Deutschland Gmbh German Ownership by PLD of 100% of
voting Securities
Garonor Verwaltung Gmbh Germany Ownership by PLD of 100% of
voting Securities
Garonor SAS France Fund
Garonor Verwaltung Gmbh & Germany Ownership by PLD of 100% of
Co. voting Securities
Koln Eifeltor KG Germany Ownership by PLD of 100% of
voting Securities
ProLogis Management Sarl Luxembourg Ownership by PLD of 100% of
voting Securities
ProLogis Netherlands V Sarl Luxembourg Ownership by PLD of 100% of
voting Securities
ProLogis Poland II Sarl Luxembourg Ownership by PLD of 100% of
voting Securities
ProLogis Poland III Sarl Luxembourg Ownership by PLD of 100% of
voting Securities
ProLogis Poland IV Sarl Luxembourg Ownership by PLD of 100% of
voting Securities
ProLogis Poland V Sarl Luxembourg Ownership by PLD of 100% of
voting Securities
</TABLE>

23
<PAGE>

<TABLE>
<CAPTION>
Name Jurisdiction of Organization Basis of Control
- ---- ---------------------------- ----------------
<S> <C> <C>
ProLogis Poland VI Sarl Luxembourg Ownership by PLD of 100% of
voting Securities
ProLogis Poland VII Sarl Luxembourg Ownership by PLD of 100% of
voting Securities
ProLogis Poland VIII Sarl Luxembourg Ownership by PLD of 100% of
voting Securities
ProLogis Spain II Sarl Luxembourg Ownership by PLD of 100% of
voting Securities
ProLogis Spain II bv Netherlands Ownership by PLD of 100% of
voting Securities
ProLogis Spain II SL Spain Ownership by PLD of 100% of
voting Securities
ProLogis France III Eurl France Ownership by PLD of 100% of
voting Securities
ProLogis France IV Eurl France Ownership by PLD of 100% of
voting Securities
ProLogis France V Eurl France Ownership by PLD of 100% of
voting Securities
ProLogis France VI Eurl France Ownership by PLD of 100% of
voting Securities
ProLogis France VII Eurl France Ownership by PLD of 100% of
voting Securities
ProLogis France VIII Eurl France Ownership by PLD of 100% of
voting Securities
ProLogis France IX Eurl France Ownership by PLD of 100% of
voting Securities
ProLogis France X Eurl France Ownership by PLD of 100% of
voting Securities
ProLogis France XI Eurl France Ownership by PLD of 100% of
voting Securities
ProLogis France XII Eurl France Ownership by PLD of 100% of
voting Securities
</TABLE>

24
<PAGE>

<TABLE>
<CAPTION>
Name Jurisdiction of Organization Basis of Control
- ---- ---------------------------- ----------------
<S> <C> <C>
ProLogis France XIII Eurl France Ownership by PLD of 100% of
voting Securities
ProLogis France XIV Eurl France Ownership by PLD of 100% of
voting Securities
ProLogis France XV Eurl France Ownership by PLD of 100% of
voting Securities
ProLogis France XVI Eurl France Ownership by PLD of 100% of
voting Securities
ProLogis France V Sarl Luxembourg Ownership by PLD of 100% of
voting Securities
ProLogis France VII Sarl Luxembourg Ownership by PLD of 100% of
voting Securities
ProLogis France VIII Sarl Luxembourg Ownership by PLD of 100% of
voting Securities
ProLogis France IX Sarl Luxembourg Ownership by PLD of 100% of
voting Securities
ProLogis France X Sarl Luxembourg Ownership by PLD of 100% of
voting Securities
ProLogis France XI Sarl Luxembourg Ownership by PLD of 100% of
voting Securities
ProLogis France XII Sarl Luxembourg Ownership by PLD of 100% of
voting Securities
ProLogis France XIII Sarl Luxembourg Ownership by PLD of 100% of
voting Securities
ProLogis France XIV Sarl Luxembourg Ownership by PLD of 100% of
voting Securities
ProLogis France XV Sarl Luxembourg Ownership by PLD of 100% of
voting Securities
ProLogis France XVI Sarl Luxembourg Ownership by PLD of 100% of
voting Securities
ProLogis France XVII Sarl Luxembourg Ownership by PLD of 100% of
voting Securities
</TABLE>

25
<PAGE>

<TABLE>
<CAPTION>
Name Jurisdiction of Organization Basis of Control
- ---- ---------------------------- ----------------
<S> <C> <C>
ProLogis France XVIII Sarl Luxembourg Ownership by PLD of 100% of
voting Securities
ProLogis France XIX Sarl Luxembourg Ownership by PLD of 100% of
voting Securities
ProLogis Finance Sarl Luxembourg Ownership by PLD of 100% of
voting Securities
PLD Europe Finance BV Netherlands Ownership by PLD of 100% of
voting Securities
PLD UK Finance BV Netherlands Ownership by PLD of 100% of
voting Securities
ProLogis UK V Sarl Luxembourg Preferred Stock Subsidiary
ProLogis UK VI Sarl Luxembourg Preferred Stock Subsidiary
ProLogis UK VIII Sarl Luxembourg Preferred Stock Subsidiary
ProLogis UK IX Sarl Luxembourg Preferred Stock Subsidiary
ProLogis UK XIV Sarl Luxembourg Preferred Stock Subsidiary
ProLogis UK XVII Sarl Luxembourg Preferred Stock Subsidiary
ProLogis UK XVIII Sarl Luxembourg Preferred Stock Subsidiary
ProLogis UK XIX Sarl Luxembourg Preferred Stock Subsidiary
ProLogis UK XX Sarl Luxembourg Preferred Stock Subsidiary
ProLogis UK XXI Sarl Luxembourg Preferred Stock Subsidiary
ProLogis UK XXII Sarl Luxembourg Preferred Stock Subsidiary
ProLogis UK XXIII Sarl Luxembourg Preferred Stock Subsidiary
ProLogis UK XXV Sarl Luxembourg Preferred Stock Subsidiary
ProLogis UK XXVI Sarl Luxembourg Preferred Stock Subsidiary
ProLogis UK XXVII Sarl Luxembourg Preferred Stock Subsidiary
ProLogis UK XVIII Sarl Luxembourg Preferred Stock Subsidiary
</TABLE>

26
<PAGE>

<TABLE>
<CAPTION>
Name Jurisdiction of Organization Basis of Control
- ---- ---------------------------- ----------------
<S> <C> <C>
ProLogis Japan Sarl Luxembourg Ownership by PLD of 100% of
voting Securities
ProLogis Japan I bv Netherlands Ownership by PLD of 100% of
voting Securities
ProLogis Japan II bv Netherlands Ownership by PLD of 100% of
voting Securities
ProLogis Japan YK Japan Ownership by PLD of 100% of
voting Securities
ProLogis France VI Sarl Luxembourg Fund
ProLogis France IV Sarl Luxembourg Fund
ProLogis France I Eurl France Fund
ProLogis France II Eurl France Fund
ProLogis France III Sarl Luxembourg Fund
ProLogis France II SAS France Fund
ProLogis UK Sarl Luxembourg Fund
ProLogis UK II Sarl Luxembourg Fund
ProLogis UK III Sarl Luxembourg Fund
ProLogis UK IV Sarl Luxembourg Fund
ProLogis UK X Sarl Luxembourg Fund
ProLogis UK XI Sarl Luxembourg Fund
ProLogis UK XV Sarl Luxembourg Fund
ProLogis UK XVI Sarl Luxembourg Fund
ProLogis UK VII Sarl Luxembourg Fund
ProLogis UK XXIV Sarl Luxembourg Fund
Kingspark Holdings SA Luxembourg Preferred Stock Subsidiary
ProLogis Netherlands Sarl Luxembourg Fund
</TABLE>

27
<PAGE>

<TABLE>
<CAPTION>
Name Jurisdiction of Organization Basis of Control
- ---- ---------------------------- ----------------
<S> <C> <C>
ProLogis Netherlands I Sarl Luxembourg Fund
ProLogis Netherlands II Sarl Luxembourg Fund
ProLogis Netherlands XII Sarl Luxembourg Fund
ProLogis Netherlands XIII Sarl Luxembourg Fund
ProLogis France II Sarl Luxembourg Fund
</TABLE>

Item 25. Indemnification.

Reference is made to Article Eighth of the Registrant's Articles of
Incorporation, incorporated by reference to SC-REMFs' Registration Statement on
Form N-1A (File Nos. 333-20649 and 811-8033), filed with the Securities and
Exchange Commission on January 29, 1997.

Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant by the Registrant pursuant to its Articles of Incorporation, its By-
Laws or otherwise, the Registrant is aware that in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the Act and, therefore, is unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by directors, officers or controlling
persons of the Registrant in connection with the successful defense of any act,
suit or proceeding) is asserted by such directors, officers or controlling
persons in connection with shares being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issues.

Item 26. Business and Other Connections of Investment Adviser.

See "Management of SC-REMFs" in the Statement of Additional Information
regarding the business of Security Capital Global Capital Management Group
Incorporated ("GCMG").

Set forth below is a list of each director and officer of GCMG indicating each
other business, profession, vocation, or employment of a substantial nature in
which such person has been, at any time during the past two fiscal years,
engaged for his or her own account or in the capacity of directors, officer,
partner, or trustee. Unless otherwise specified, the principal business address
of GCMG is 11 South LaSalle Street, Chicago, Illinois 60603.

Security Capital Global Capital Management Group Incorporated

<TABLE>
<CAPTION>
Name Title(s) Principal Occupations
<S> <C> <C>
Anthony R. Manno Jr. President and Managing Director Chairman of the Board, Managing
Director and President SC-REMFs

Kenneth D. Statz Managing Director Senior Vice President, GCMG,
Managing Director, SC-REMFs

Daniel F. Miranda Executive Vice President and
Managing Director
</TABLE>

28
<PAGE>

<TABLE>
<CAPTION>
Name Title(s) Principal Occupations
<S> <C> <C>
John H. Gardner, Jr.* Managing Director Director and Managing Director,
SC-REMFs; Previously, Senior
Vice President, Security Capital

Jeffrey C. Nellessen Vice President, Treasurer, and Vice President, Treasurer and
Assistant Secretary Assistant Secretary, SC-REMFs

Joshua D. Goldman* Vice President Previously, Associate with
Sonnenschein, Nath & Rosenthal

Kevin Bedell Senior Vice President Senior Vice President, SC-REMFs

David E. Rosenbaum Senior Vice President Previously, Analyst, Associate
and Vice President, Lazard Freres &
Company
</TABLE>

*No longer associated with GCMG.

Item 27. Principal Underwriter.

(a) Security Capital Markets Group Incorporated ("Capital Markets"), the
principal distributor for the Funds' securities, does not currently act as
principal underwriter or distributor for any other investment company.

(b) The table below sets forth certain information as to Capital Markets'
Directors, Officers and Control Persons:

<TABLE>
<CAPTION>
Name and Principal Positions and Offices Positions and Offices
Business Address with Underwriter with Registrant
---------------- ---------------- ---------------
<S> <C> <C>
Lucinda G. Marker/(1)/ President None
K. Scott Canon/(2)/* Director and Senior Vice President None
Jeffrey A. Klopf/(1)/ Director, Secretary and Senior Vice President None
Gerard de Gunzburg/(3)/ Senior Vice President None
Mary R. McCarthy/(3)/* Senior Vice President None
Garett C. House/(2)/ Senior Vice President None
Donald E. Suter/(2)/ Managing Director None
Robert H. Fippinger/(1)/* Vice President None
Joanna L. Rupp/(2)/ Vice President None
Mark P. Peppercorn/(4)/* Vice President None
George W. Ahl, III/(3)/ Vice President None
Nansie J. Bernard/(2)/ Vice President None
Leanne L. Gallagher/(2)/ Vice President None
</TABLE>
/(1)/ Principal business address is 125 Lincoln Avenue, Santa Fe, New Mexico,
87501.
/(2)/ Principal business address is 11 South LaSalle Street, Chicago, Illinois
60603.
/(3)/ Principal business address is 399 Park Avenue, 23rd Floor, New York, NY
10022.
/(4)/ Principal business address is 4410 Rosewood Drive, Pleasanton, California
94588.
* No longer associated with GCMG.

29
<PAGE>

Item 28. Location of Accounts and Records.

Certain of the records described in Section 31(a) of the 1940 Act and the
Rules 17 CFR 270.31a-1 to 31a-3 promulgated thereunder, are maintained by SC-
REMFs' Investment Adviser and Administrator, Security Capital Global Capital
Management Group Incorporated, 11 South LaSalle Street, Chicago, Illinois 60603.
The remainder of such records are maintained by State Street Bank & Trust
Company, the Funds' Sub-Administrator, 225 Franklin Street, Boston,
Massachusetts 02101.

Item 29. Management Services.

There are no management-related service contracts not discussed in Part A or
Part B.

30
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets the requirements of
Securities Act Rule 485(b) for effectiveness of this amendment to its
Registration Statement and has duly caused this amended Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Chicago, and State of Illinois on the 28th day of April, 2000.

SECURITY CAPITAL REAL ESTATE
MUTUAL FUNDS INCORPORATED

By: ____________________________
Anthony R. Manno Jr.
Chairman, Managing Director
and President

Pursuant to the requirements of the Securities Act of 1933, this amended
Registration Statement of Security Capital Real Estate Mutual Funds Incorporated
has been signed below by the following persons in the capacities and on the 28th
day of April, 2000.

Signature Capacity Date
--------- -------- ----

/s/ Anthony R. Manno Jr. Chairman, Managing April 28, 2000
- -------------------------------- Director and President
Anthony R. Manno Jr.

/s/ Jeffrey C. Nellessen Principal Financial Officer April 28, 2000
- --------------------------------
Jeffrey C. Nellessen

/s/ Jeffrey C. Nellessen Comptroller April 28, 2000
- --------------------------------
Jeffrey C. Nellessen

/s/ Stephen F. Kasbeer Director April 28, 2000
- --------------------------------
Stephen F. Kasbeer

/s/ Anthony R. Manno Jr. Director April 28, 2000
- --------------------------------
Anthony R. Manno Jr.

/s/ George F. Keane Director April 28, 2000
- --------------------------------
George F. Keane

/s/ Robert H. Abrams Director April 28, 2000
- --------------------------------
Robert H. Abrams

31
<PAGE>

EXHIBIT INDEX

Exhibit No. Description
- -------------- ---------------------------------------------------
1* Articles of Incorporation.
1(a)**** Articles of Amendment dated December 16, 1997.
1(b)**** Articles of Amendment dated June 30, 1998.
1(c)**** Articles Supplementary dated June 30, 1998.
1(d)***** Articles Supplementary dated December 31, 1998.
1(e)****** Articles Supplementary dated March 11, 1999.
2(a)* By-Laws.
2(b)*** Amended By-Laws.
2(c) Amended By-Laws
5(a)***** Investment Advisory Agreement (SC-US).
5(b)***** Investment Advisory Agreement (SC-EUROPEAN).
5(c) Sponsorship Agreement (SC-US).
5(d) Sponsorship Agreement (SC-EUROPEAN).
6(a)***** Distribution and Servicing Agreement (SC-US)
6(b)***** Distribution and Servicing Agreement (SC-EUROPEAN)
8(a)***** Custodian Agreement.
9(a)***** Transfer Agency and Service Agreement.
9(b)***** Fund Accounting and Administration Agreement.
9(c)***** Sub-Administration Agreement.
10(a)** Opinion and Consent of Mayer, Brown & Platt regarding the
legality of the securities being issued.

32
<PAGE>

11(a) Consent of Mayer, Brown & Platt.
11(b) Consent of Ballard Spahr Andrews & Ingersoll.
11(c) Consent of Independent Public Accountants.
15(a)*** Rule 12b-1 Distribution and Service Plan for Class I Shares (SC-
US).
15(b)**** Rule 12b-1 Distribution and Service Plan for SC-EUROPEAN
18 Rule 18f-3 Multiple Class Plan

----------

*Incorporated herein by reference to Registrant's registration statement on
Form N-1A (File Nos. 333-20649 and 811-8033) filed with the Securities and
Exchange Commission on January 29, 1997.

**Incorporated herein by reference to Pre-Effective Amendment No. 2 to
Registrant's registration statement on Form N-1A (file Nos. 333-20649 and 811-
8033) filed with the Securities and Exchange Commission on April 21, 1997.

***Incorporated herein by reference to Post-Effective Amendment No. 4 to
Registrant's registration statement on Form N-1A (File Nos. 333-20649 and 811-
8033) filed with the Securities and Exchange Commission on December 17, 1997.

****Incorporated herein by reference to Post-Effective Amendment No. 8 to
Registrant's registration statement on Form N-1A (File Nos. 333-20649 and 811-
8033) filed with Securities and Exchange Commission on June 29, 1998.

*****Incorporated herein by reference to Post-Effective Amendment No. 10 to
Registrant's registration statement on Form N-1A (File Nos. 333-20649 and 811-
8033) filed with the Securities and Exchange Commission on March 1, 1999.

******Incorporated by reference to Post-Effective Amendment No. 12 to
Registrant's registration statement on Form N-1A (File Nos. 333-20649 and 811-
8033) filed with the Securities and Exchange Commission on April 30, 1999.

<PAGE>

Exhibit 2(c)

BY-LAWS
OF
SECURITY CAPITAL REAL ESTATE MUTUAL FUNDS INCORPORATED
Amended and Restated June 11, 1999

-----------------------

ARTICLE I

Offices

Section 1. Principal Office in Illinois. The Corporation shall have
a principal office in the City of Chicago, State of Illinois.

Section 2. Other Offices. The Corporation may have offices also at
such other places within and without the State of Illinois as the Board of
Directors may from time to time determine or as the business of the Corporation
may require.

ARTICLE II
Meetings of Stockholders

Section 1. Place of Meeting. Meetings of stockholders shall be held
at such place, either within the State of Illinois or at such other place within
the United States, as shall be fixed from time to time by the Board of
Directors.

Section 2. Annual Meetings. The Corporation shall not be required
to hold an annual meeting of stockholders in any year in which the election of
directors is not required to be acted on by stockholders under the Investment
Company Act of 1940. If the Corporation is required to hold a meeting of
stockholders to elect directors, the meeting shall be designated as the annual
meeting of stockholders for that year and shall be held no later

<PAGE>

than 120 days after the occurrence of the event requiring the meeting. Any
business may be considered at an annual meeting of stockholders without the
purpose of the meeting having been specified in the notice.

Section 3. Notice of Annual Meeting. Written or printed notice of
the annual meeting, stating the place, date and hour thereof, shall be given to
each stockholder entitled to vote thereat and each other stockholder entitled to
notice thereof not less than ten nor more than ninety days before the date of
the meeting.

Section 4. Special Meetings. Special meetings of stockholders may
be called by the chairman, the president or by the Board of Directors and shall
be called by the secretary upon the written request of holders of shares
entitled to cast not less than ten percent of all the votes entitled to be cast
at such meeting. Such request shall state the purpose or purposes of such
meeting and the matters proposed to be acted on thereat. In the case of such
request for a special meeting, upon payment by such stockholders to the
Corporation of the estimated reasonable cost of preparing and mailing a notice
of such meeting, the secretary shall give the notice of such meeting. The
secretary shall not be required to call a special meeting to consider any matter
which is substantially the same as a matter acted upon at any special meeting of
stockholders held within the preceding twelve months, other than the question of
removal of any director or directors of the Corporation, unless requested to do
so by holders of shares entitled to cast not less than a majority of all votes
entitled to be cast at such meeting.

Section 5. Notice of Special Meeting. Written or printed notice of
a special meeting of stockholders, stating the place, date, hour and purpose
thereof, shall be

-2-
<PAGE>

given by the secretary to each stockholder entitled to vote thereat and each
other shareholder entitled to notice thereof not less than ten nor more than
ninety days before the date fixed for the meeting.

Section 6. Business of Special Meetings. Business transacted at any
special meeting of stockholders shall be limited to the purposes stated in the
notice thereof.

Section 7. Quorum. The holders of shares entitled to cast a
majority of the votes entitled to be cast thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business, except with respect to any matter
which, under applicable statutes or regulatory requirements or the Corporation's
charter, requires approval by a separate vote of one or more classes of stock,
in which case the presence in person or by proxy of the holders of shares
entitled to cast a majority of the votes entitled to be cast on the matter shall
constitute a quorum. A meeting of stockholders convened on the date for which
it is called may be adjourned from time to time without further notice to a date
not more than 120 days after the record date.

Section 8. Voting. When a quorum is present at any meeting, the
affirmative vote of a majority of the votes cast by stockholders entitled to
vote on the matter, shall decide any question brought before such meeting
(except that directors may be elected by the affirmative vote of a plurality of
the votes cast), unless the question is one upon which by express provision of
the Investment Company Act of 1940, as from time to time in effect, or other
statutes or rules or orders of the Securities and Exchange Commission or any
successor thereto or of the Articles of Incorporation a different vote is
required, in which case such express provision shall govern and control the
decision of such question.

-3-
<PAGE>

Section 9. Proxies. Each stockholder shall at every meeting of
stockholders be entitled to vote in person or by written proxy signed by the
stockholder or by his duly authorized attorney-in-fact. No proxy shall be voted
after eleven months from its date, unless otherwise provided in the proxy.

Section 10. Record Date. In order that the Corporation may determine
the stockholders entitled to notice of or to vote at any meeting of stockholders
or any adjournment thereof, to express consent to corporate action in writing
without a meeting, or to receive payment of any dividend or other distribution
or allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the Board of Directors may fix, in advance, a record date which shall be
not more than ninety days and, in the case of a meeting of stockholders, not
less than ten days prior to the date on which the particular action requiring
such determination of stockholders is to be taken. In lieu of fixing a record
date, the Board of Directors may provide that the stock transfer books shall be
closed for a stated period, but not to exceed, in any case, twenty days. If the
stock transfer books are closed for the purpose of determining stockholders
entitled to notice of or to vote at a meeting of stockholders, such books shall
be closed for at least ten days immediately preceding such meeting. If no
record date is fixed and the stock transfer books are not closed for the
determination of stockholders: (1) The record date for the determination of
stockholders entitled to notice of, or to vote at, a meeting of stockholders
shall be at the close of business on the day on which notice of the meeting of
stockholders is mailed or the day thirty days before the meeting, whichever is
the closer date to the meeting; and (2) The record date for

-4-
<PAGE>

the determination of stockholders entitled to receive payment of a dividend or
an allotment of any rights shall be at the close of business on the day on which
the resolution of the Board of Directors, declaring the dividend or allotment of
rights, is adopted, provided that the payment or allotment date shall not be
more than sixty days after the date of the adoption of such resolution. If a
record date has been fixed for the determination of stockholders entitled to
vote at a meeting, only the stockholders of record on the record date shall be
entitled to vote at the meeting and such stockholders shall be entitled to vote
at the meeting notwithstanding the subsequent transfer or redemption of the
shares owned of record on such date.

Section 11. Inspectors of Election. The directors, in advance of any
meeting, may, but need not, appoint one or more inspectors to act at the meeting
or any adjournment thereof. If an inspector or inspectors are not appointed,
the person presiding at the meeting may, but need not, appoint one or more
inspectors. In case any person who may be appointed as an inspector fails to
appear or act, the vacancy may be filled by appointment made by the directors in
advance of the meeting or at the meeting by the person presiding thereat. Each
inspector, if any, before entering upon the discharge of his duties, may be
required to take and sign an oath faithfully to execute the duties of inspector
at such meeting with strict impartiality and according to the best of his
ability. The inspectors, if any, shall determine the number of shares
outstanding and the voting power of each, the shares represented at the meeting,
the existence of a quorum, the validity and effect of proxies, and shall receive
votes, ballots or consents, hear and determine all challenges and questions
arising in connection with the right to vote, count and tabulate all votes,
ballots or consents,

-5-
<PAGE>

determine the result, and do such acts as are proper to conduct the election or
vote with fairness to all stockholders. On request of the person presiding at
the meeting or any stockholder, the inspector or inspectors, if any, shall make
a report in writing of any challenge, question or matter determined by him or
them and execute a certificate of any fact found by him or them.

Section 12. Informal Action by Stockholders. Except to the extent
prohibited by the Investment Company Act of 1940, as from time to time in
effect, or rules or orders of the Securities and Exchange Commission or any
successor thereto, any action required or permitted to be taken at any meeting
of stockholders may be taken without a meeting if a consent in writing, setting
forth such action, is signed by all the stockholders entitled to vote on the
subject matter thereof and any other stockholders entitled to notice of a
meeting of stockholders (but not to vote thereat) have waived in writing any
rights which they may have to dissent from such action, and such consent and
waiver are filed with the records of the Corporation.

ARTICLE III

Board of Directors

Section 1. Number of Directors. The number of directors
constituting the entire Board of Directors (which initially was fixed at one in
the Corporation's Articles of Incorporation) may be increased or decreased from
time to time by the vote of a majority of the entire Board of Directors within
the limits permitted by law but at no time may be more than twenty, but the
tenure of office of a director in office at the time of any decrease in the
number of directors shall not be affected as a result thereof. The directors
shall be elected to

-6-
<PAGE>

hold offices at the annual meeting of stockholders and each director shall hold
office until the next annual meeting of stockholders or until his successor is
elected and qualifies. Any director may resign at any time upon written notice
to the Corporation. Any director may be removed, either with or without cause,
at any meeting of stockholders duly called and at which a quorum is present by
the affirmative vote of the majority of the votes entitled to be cast thereon,
and the vacancy in the Board of Directors caused by such removal may be filled
by the stockholders at the time of such removal. Directors need not be
stockholders.

Section 2. Vacancies and Newly-Created Directorships. Any vacancy
occurring in the Board of Directors for any cause other than by reason of an
increase in the number of directors may be filled by a majority of the remaining
members of the Board of Directors although such majority is less than a quorum.
Any vacancy occurring by reason of an increase in the number of directors may be
filled by a majority of the entire Board of Directors. A director elected by
the Board of Directors to fill a vacancy shall be elected to hold office until
the next annual meeting of stockholders or until his successor is elected and
qualifies.

Section 3. Powers. The business and affairs of the Corporation
shall be managed by or under the direction of the Board of Directors which may
exercise all such powers of the Corporation and do all such lawful acts and
things as are not by statute or by the Articles of Incorporation or by these By-
Laws conferred upon or reserved to the stockholders.

Section 4. Meetings. The Board of Directors of the Corporation or
any committee thereof may hold meetings, both regular and special, either within
or without the

-7-
<PAGE>

State of Maryland. Regular meetings of the Board of Directors may be held
without notice at such time and at such place as shall from time to time be
determined by the Board of Directors. Special meetings of the Board of Directors
may be called by the chairman, the president or by two or more directors. Notice
of special meetings of the Board of Directors shall be given by the secretary to
each director at least three days before the meeting if by mail or at least 24
hours before the meeting if given in person or by telephone or by telegraph. The
notice need not specify the business to be transacted.

Section 5. Quorum and Voting. During such times when the Board of
Directors shall consist of more than one director, a quorum for the transaction
of business at meetings of the Board of Directors shall consist of one-third of
the entire Board of Directors, but in no event less than two directors. The
action of a majority of the directors present at a meeting at which a quorum is
present shall be the action of the Board of Directors. If a quorum shall not be
present at any meeting of the Board of Directors, the directors present thereat
may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.

Section 6. Committees. The Board of Directors may appoint from
among its members an executive committee and other committees of the Board of
Directors, each committee to be composed of two or more of the directors of the
Corporation. The Board of Directors may delegate to such committees any of the
powers of the Board of Directors except those which may not by law be delegated
to a committee. Such committee or committees shall have the name or names as
may be determined from time to time by resolution adopted by the Board of
Directors. Unless the Board of Directors designates one

-8-
<PAGE>

or more directors as alternate members of any committee, who may replace an
absent or disqualified member at any meeting of the committee, the members of
any such committee present at any meeting and not disqualified from voting may,
whether or not they constitute a quorum, appoint another member of the Board of
Directors to act at the meeting in the place of any absent or disqualified
member of such committee. At meetings of any such committee, a majority of the
members or alternate members of such committee shall constitute a quorum for the
transaction of business and the act of a majority of the members or alternate
members present at any meeting at which a quorum is present shall be the act of
the committee.

Section 7. Minutes of Committee Meetings. The committees shall keep
regular minutes of their proceedings.

Section 8. Informal Action by Board of Directors and Committees.
Any action required or permitted to be taken at any meeting of the Board of
Directors or of any committee thereof may be taken without a meeting if a
written consent thereto is signed by all members of the Board of Directors or of
such committee, as the case may be, and such written consent is filed with the
minutes of proceedings of the Board of Directors or committee, provided,
however, that such written consent shall not constitute approval of any matter
which pursuant to the Investment Company Act of 1940 and the rules thereunder
requires the approval of directors by vote cast in person at a meeting.

Section 9. Meetings by Conference Telephone. The members of the
Board of Directors or any committee thereof may participate in a meeting of the
Board of Directors or committee by means of a conference telephone or similar
communications equipment by

-9-
<PAGE>

means of which all persons participating in the meeting can hear each other at
the same time and such participation shall constitute presence in person at such
meeting, provided, however, that such participation shall not constitute
presence in person with respect to matters which pursuant to the Investment
Company Act of 1940 and the rules thereunder require the approval of directors
by vote cast in person at a meeting.

Section 10. Fees and Expenses. Directors who are not "Interested
Persons," as defined in the Investment Company Act of 1940, may be paid their
expenses of attendance at each meeting of the Board of Directors and may be paid
a fixed sum for attendance at each meeting of the Board of Directors, a stated
salary as director or such other compensation as the Board of Directors may
approve. No such payment shall preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like reimbursement and
compensation for attending committee meetings.

ARTICLE IV

Notices

Section 1. General. Notices to directors and stockholders mailed to
them at their post office addresses appearing on the books of the Corporation
shall be deemed to be given at the time when deposited in the United States
mail.

Section 2. Waiver of Notice. Whenever any notice is required to be
given under the provisions of the statutes, of the Articles of Incorporation or
of these By-Laws, each person entitled to said notice waives notice if, before
or after the meeting he signs a written waiver of notice and such waiver is
filed with the records of the meeting.

-10-
<PAGE>

Attendance of a person at a meeting shall constitute a waiver of notice of such
meeting except when the person attends a meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened.

ARTICLE V

Officers

Section 1. General. The officers of the Corporation shall be chosen
by the Board of Directors and shall be a chairman of the Board of Directors, a
president, a secretary and a treasurer. The Board of Directors may choose also
such vice presidents and additional officers or assistant officers as it may
deem advisable. Any number of offices, except the offices of president and vice
president and chairman and vice president, may be held by the same person. No
officer shall execute, acknowledge or verify any instrument in more than one
capacity if such instrument is required by law to be executed, acknowledged or
verified by two or more officers.

Section 2. Other Officers and Agents. The Board of Directors may
appoint such other officers and agents as it desires who shall hold their
offices for such terms and shall exercise such powers and perform such duties as
shall be determined from time to time by the Board of Directors.

Section 3. Tenure of Officers. The officers of the Corporation
shall hold office at the pleasure of the Board of Directors. Each officer shall
hold his office until his successor is elected and qualifies or until his
earlier resignation or removal. Any officer may resign at any time upon written
notice to the Corporation. Any officer elected or appointed

-11-
<PAGE>

by the Board of Directors may be removed at any time by the Board of Directors
when, in its judgment, the best interests of the Corporation will be served
thereby. Any vacancy occurring in any office of the Corporation by death,
resignation, removal or otherwise shall be filled by the Board of Directors.

Section 4. Chairman of the Board of Directors. The chairman of the
Board of Directors shall preside at all meetings of the stockholders and of the
Board of Directors. Unless otherwise determined by the Board of Directors, he
shall be the chief executive officer and shall have general and active
management of the business of the Corporation and shall see that all orders and
resolutions of the Board of Directors are carried into effect. He shall be ex
officio a member of all committees designated by the Board of Directors except
as otherwise determined by the Board of Directors. He shall have authority to
execute instruments and contracts on behalf of the Corporation except where
required by law to be otherwise signed and executed and except where the signing
and execution thereof shall be expressly delegated by the Board of Directors to
some other officer or agent of the Corporation.

Section 5. President. The president shall act under the direction
of the chairman and in the absence or disability of the chairman shall perform
the duties and exercise the powers of the chairman. Unless otherwise determined
by the Board of Directors, he shall be the chief operating officer and shall
perform such other duties and have such other powers as the chairman or the
Board of Directors may from time to time prescribe. He shall have authority to
execute instruments and contracts on behalf of the Corporation except where
required by law to be otherwise signed and except where the

-12-
<PAGE>

signing and execution thereof shall be expressly delegated by the Board of
Directors to some other officer or agent of the Corporation.

Section 6. Vice Presidents. The vice presidents shall act under the
direction of the chairman and the president and in the absence or disability of
the president shall perform the duties and exercise the powers of the president.
They shall perform such other duties and have such other powers as the chairman,
the president or the Board of Directors may from time to time prescribe. The
Board of Directors may designate one or more executive vice presidents or may
otherwise specify the order of seniority of the vice presidents and, in that
event, the duties and powers of the president shall descend to the vice
presidents in the specified order of seniority.

Section 7. Secretary. The secretary shall act under the direction
of the chairman and the president. Subject to the direction of the chairman and
the president he shall attend all meetings of the Board of Directors and all
meetings of stockholders and record the proceedings in a book to be kept for
that purpose and shall perform like duties for the committees designated by the
Board of Directors when required. He shall give, or cause to be given, notice
of all meetings of stockholders and special meetings of the Board of Directors,
and shall perform such other duties as may be prescribed by the chairman or the
Board of Directors. He shall keep in safe custody the seal of the Corporation
and shall affix the seal or cause it to be affixed to any instrument requiring
it.

Section 8. Assistant Secretaries. The assistant secretaries in the
order of their seniority, unless otherwise determined by the chairman, the
president or the Board of Directors, shall, in the absence or disability of the
secretary, perform the duties and exercise

-13-
<PAGE>

the powers of the secretary. They shall perform such other duties and have such
other powers as the chairman, the president or the Board of Directors may from
time to time prescribe.

Section 9. Treasurer. The treasurer shall act under the direction
of the chairman and the president. Subject to the direction of the chairman and
the president he shall have the custody of the corporate funds and securities
and shall keep full and accurate accounts of receipts and disbursements in books
belonging to the Corporation and shall deposit all moneys and other valuable
effects in the name and to the credit of the Corporation in such depositories as
may be designated by the Board of Directors. He shall disburse the funds of the
Corporation as may be ordered by the chairman, the president or the Board of
Directors, taking proper vouchers for such disbursements, and shall render to
the chairman, the president and the Board of Directors, at its regular meetings,
or when the Board of Directors so requires, an account of all his transactions
as treasurer and of the financial condition of the Corporation.

Section 10. Assistant Treasurers. The assistant treasurers in the
order of their seniority, unless otherwise determined by the chairman, the
president or the Board of Directors, shall, in the absence or disability of the
treasurer, perform the duties and exercise the powers of the treasurer. They
shall perform such other duties and have such other powers as the chairman, the
president or the Board of Directors may from time to time prescribe.

-14-
<PAGE>

ARTICLE VI

Certificates of Stock

Section 1. General. Every holder of stock of the Corporation who
has made full payment of the consideration for such stock shall be entitled upon
request to have a certificate, signed by, or in the name of the Corporation by,
the chairman, the president or a vice president and countersigned by the
treasurer or an assistant treasurer or the secretary or an assistant secretary
of the Corporation, certifying the number of whole shares of each class of stock
owned by him in the Corporation.

Section 2. Fractional Share Interests. The Corporation may issue
fractions of a share of stock. Fractional shares of stock shall have
proportionately to the respective fractions represented thereby all the rights
of whole shares, including the right to vote, the right to receive dividends and
distributions and the right to participate upon liquidation of the Corporation,
excluding, however, the right to receive a stock certificate representing such
fractional shares.

Section 3. Signatures on Certificates. Any of or all the signatures
on a certificate may be a facsimile. In case any officer who has signed or
whose facsimile signature has been placed upon a certificate shall cease to be
such officer before such certificate is issued, it may be issued with the same
effect as if he were such officer at the date of issue. The seal of the
Corporation or a facsimile thereof may, but need not, be affixed to certificates
of stock.

Section 4. Lost, Stolen or Destroyed Certificates. The Board of
Directors may direct a new certificate or certificates to be issued in place of
any certificate or

-15-
<PAGE>

certificates theretofore issued by the Corporation alleged to have been lost,
stolen or destroyed, upon the making of any affidavit of that fact by the person
claiming the certificate or certificates to be lost, stolen or destroyed. When
authorizing such issue of a new certificate or certificates, the Board of
Directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate or
certificates, or his legal representative, to give the Corporation a bond in
such sum as it may direct as indemnity against any claim that may be made
against the Corporation with respect to the certificate or certificates alleged
to have been lost, stolen or destroyed.

Section 5. Transfer of Shares. Upon request by the registered owner
of shares, and if a certificate has been issued to represent such shares upon
surrender to the Corporation or a transfer agent of the Corporation of a
certificate for shares of stock duly endorsed or accompanied by proper evidence
of succession, assignment or authority to transfer, it shall be the duty of the
Corporation, if it is satisfied that all provisions of the Articles of
Incorporation, of the By-Laws and of the law regarding the transfer of shares
have been duly complied with, to record the transaction upon its books, issue a
new certificate to the person entitled thereto upon request for such
certificate, and cancel the old certificate, if any.

Section 6. Registered Owners. The Corporation shall be entitled to
recognize the person registered on its books as the owner of shares to be the
exclusive owner for all purposes including voting and dividends, and the
Corporation shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of

-16-
<PAGE>

any other person, whether or not it shall have express or other notice thereof,
except as otherwise provided by the laws of Maryland.

ARTICLE VII

Miscellaneous

Section 1. Reserves. There may be set aside out of any funds of the
Corporation available for dividends such sum or sums as the Board of Directors
from time to time, in their absolute discretion, think proper as a reserve or
reserves to meet contingencies, or for such other purpose as the Board of
Directors shall think conducive to the interest of the Corporation, and the
Board of Directors may modify or abolish any such reserve.

Section 2. Dividends. Dividends upon the stock of the Corporation
may, subject to the provisions of the Articles of Incorporation and of
applicable law, be declared by the Board of Directors at any time. Dividends
may be paid in cash, in property or in shares of the Corporation's stock,
subject to the provisions of the Articles of Incorporation and of applicable
law.

Section 3. Capital Gains Distributions. The amount and number of
capital gains distributions paid to the stockholders during each fiscal year
shall be determined by the Board of Directors. Each such payment shall be
accompanied by a statement as to the source of such payment, to the extent
required by law.

Section 4. Checks. All checks or demands for money and notes of the
Corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.

-17-
<PAGE>

Section 5. Fiscal Year. The fiscal year of the Corporation shall be
fixed by resolution of the Board of Directors.

Section 6. Seal. The corporate seal shall have inscribed thereon
the name of the Corporation, the year of its organization and the words
"Corporate Seal, Maryland." The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or in another manner reproduced or by placing
the word "(seal)" adjacent to the signature of the person authorized to sign the
document on behalf of the Corporation.

Section 7. Classes of Shares. Pursuant to the authority granted to
the Board of Directors under Article FIFTH of the charter of the Corporation and
Paragraph 6, titled "Charges and Expenses," in each description of stock
classified and designated pursuant to Articles Supplementary filed with the
State Department of Assessments and Taxation of Maryland on June 30, 1998, the
Board of Directors is authorized to adopt a plan pursuant to Rule 18f-3 of the
Investment Company Act of 1940, as amended from time to time, which sets forth
the separate arrangements and expense allocations for each class of shares and
any related conversion features or exchange privileges related thereto.

ARTICLE VIII

Indemnification

Section 1. Indemnification of Directors and Officers. The
Corporation shall indemnify its directors to the fullest extent that
indemnification of directors is permitted by the Maryland General Corporation
Law. The Corporation shall indemnify its officers to the same extent as its
directors and to such further extent as is consistent with law. The Corporation
shall indemnify its directors and officers who while serving as directors or

-18-
<PAGE>

officers also serve at the request of the Corporation as a director, officer,
partner, trustee, employee, agent or fiduciary of another corporation,
partnership, joint venture, trust, other enterprise or employee benefit plan to
the fullest extent consistent with law. The indemnification and other rights
provided by this Article shall continue as to a person who has ceased to be a
director or officer and shall inure to the benefit of the heirs, executors and
administrators of such a person. This Article shall not protect any such person
against any liability to the Corporation or any stockholder thereof to which
such person would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office ("disabling conduct").

Section 2. Advances. Any current or former director or officer of
the Corporation seeking indemnification within the scope of this Article shall
be entitled to advances from the Corporation for payment of the reasonable
expenses incurred by him in connection with the matter as to which he is seeking
indemnification without requiring a preliminary determination of ultimate
entitlement to indemnification except as provided below, to the fullest extent
permissible under the Maryland General Corporation Law. The person seeking
indemnification shall provide to the Corporation a written affirmation of his
good faith belief that the standard of conduct necessary for indemnification by
the Corporation has been met and a written undertaking to repay any such advance
if it should ultimately be determined that the standard of conduct has not been
met. In addition, at least one of the following additional conditions shall be
met: (a) the person seeking indemnification shall provide a security in form and
amount acceptable to the Corporation for his undertaking; (b) the Corporation is
insured against losses arising by reason of the

-19-
<PAGE>

advance; or (c) a majority of a quorum of directors of the Corporation who are
neither "interested persons" as defined in Section 2(a)(19) of the Investment
Company Act of 1940, as amended, nor parties to the proceeding ("disinterested
non-party directors"), or independent legal counsel, in a written opinion, shall
have determined, based on a review of facts readily available to the Corporation
at the time the advance is proposed to be made, that there is reason to believe
that the person seeking indemnification will ultimately be found to be entitled
to indemnification.

Section 3. Procedure. At the request of any person claiming
indemnification under this Article, the Board of Directors shall determine, or
cause to be determined, in a manner consistent with the Maryland General
Corporation Law, whether the standards required by this Article have been met.
Indemnification shall be made only following: (a) a final decision on the merits
by a court or other body before whom the proceeding was brought that the person
to be Indemnified was not liable by reason of disabling conduct; or (b) in the
absence of such a decision, a reasonable determination, based upon a review of
the facts, that the person to be indemnified was not liable by reason of
disabling conduct by (i) the vote of a majority of a quorum of disinterested
non-party directors or (ii) an independent legal counsel in a written opinion.

Section 4. Indemnification of Employees and Agents. Employees and
agents who are not officers or directors of the Corporation may be indemnified,
and reasonable expenses may be advanced to such employees or agents, as may be
provided by action of the Board of Directors or by contract, subject to any
limitations imposed by the Investment Company Act of 1940.

-20-
<PAGE>

Section 5. Other Rights. The Board of Directors may make further
provision consistent with law for indemnification and advance of expenses to
directors, officers, employees and agents by resolution, agreement or otherwise.
The indemnification provided by this Article shall not be deemed exclusive of
any other right, with respect to indemnification or otherwise, to which those
seeking indemnification may be entitled under any insurance or other agreement
or resolution of stockholders or disinterested directors or otherwise. The
rights provided to any person by this Article shall be enforceable against the
Corporation by such person who shall be presumed to have relied upon it in
serving or continuing to serve as a director, officer, employee, or agent as
provided above.

Section 6. Amendments. References in this Article are to the
Maryland General Corporation Law and to the Investment Company Act of 1940 as
from time to time amended. No amendment of these By-laws shall effect any right
of any person under this Article based on any event, omission or proceeding
prior to the amendment.

ARTICLE IX

Amendments

The Board of Directors shall have the power to make, alter and repeal
by-laws of the Corporation.

-21-

<PAGE>

Exhibit 5(c)

SPONSORSHIP AGREEMENT
---------------------

SPONSORSHIP AGREEMENT (the "Agreement"), dated as of December 14, 1999 by
and between Security Capital Global Capital Management Group Incorporated, a
Delaware corporation ("GCMG") and Security Capital Real Estate Mutual Funds
Incorporated, a Maryland corporation ("Fund").

WHEREAS, the Fund is an open-end investment company registered under the
Investment Company Act of 1940, as amended (the "Act") and Security Capital U.S.
Real Estate Shares is an investment portfolio of the Fund ("Portfolio") that
issues Class I shares and Class R shares; and

WHEREAS, GCMG serves as investment adviser to the Portfolio pursuant to an
Investment Advisory Agreement with the Fund dated December 16, 1997 ("Advisory
Agreement"), pursuant to which the Portfolio pays GCMG, monthly, an annual
management fee in an amount equal to .60% of the average daily net asset value
of the Portfolio ("Advisory Fee"); and

WHEREAS, the Fund and the GCMG desire to enter into an agreement pursuant
to which the GCMG shall waive the Advisory Fee and/or reimburse the Fund for
operating expenses relating to each class of the Portfolio's shares on the terms
and conditions hereto set forth;

NOW THEREFORE, in consideration of the mutual covenants and agreements
herein set forth, the parties covenant and agree as follows:

1. Duties of GCMG. GCMG hereby agrees that from January 1, 2000 through
December 31, 2000, GCMG shall waive the Advisory Fee and/or reimburse the Fund
to the extent necessary to maintain the total operating expenses (excluding
brokerage fees and commissions, interest, taxes and other extraordinary
expenses) of each class of the Portfolio at 1.35% of each class' average daily
net assets.

2. Annual Review. GCMG will review its undertaking to waive the Advisory Fee
and/or reimburse the Fund with respect to the Portfolio as set forth in
Paragraph 1 on an annual basis. There is no assurance GCMG will continue to
waive the Advisory Fee and/or reimburse expenses beyond the specified period.
GCMG shall notify the Fund promptly of its annual determination with respect to
the undertaking hereunder.

3. Severability. If any provision of this Agreement shall be found to be
invalid by a court decision, statute, rule or otherwise, the reminder of this
Agreement shall not be affected thereby.

<PAGE>

4. Notice. Any notices under this Agreement shall be in writing addressed and
delivered personally (or by telecopy) or mailed postage-paid, to the other party
at such address as such other party may designate in accordance with this
paragraph for the receipt of such notice. Until further notice to the other
party, it is agreed that the address of GCMG and the Fund shall be 11 South
LaSalle Street, Second Floor, Chicago, Illinois 60603.

5. Miscellaneous. Each party agrees to perform such further actions and
execute such further documents as are necessary to effectuate the purposes
hereof. This Agreement shall be construed and enforced and interpreted in
accordance with and governed by the laws of the State of Illinois without
reference to principles of conflicts of law. The captions in this Agreement are
included for convenience only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. This
Agreement may be executed in any number of counterparts, each of which shall be
deemed to be an original, but such counterparts shall, together, constitute only
one instrument.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, all as of the day and year first above written.

SECURITY CAPITAL REAL ESTATE MUTUAL FUNDS INCORPORATED

By: /s/ David T. Novick
------------------------------------------
David T. Novick, Vice President

SECURITY CAPITAL GLOBAL CAPITAL
MANAGEMENT GROUP INCORPORATED

By: /s/ Anthony R. Manno, Jr.
------------------------------------------
Anthony R. Manno Jr., President

<PAGE>

Exhibit 5(d)

SPONSORSHIP AGREEMENT
---------------------

WHEREAS, the Fund is an open-end investment company registered under the
Investment Company Act of 1940, as amended (the "Act") and Security Capital
European Real Estate Shares is an investment portfolio of the Fund ("Portfolio")
that issues Class I and Class R shares; and

WHEREAS, GCMG serves as investment adviser to the Portfolio pursuant to an
Investment Advisory Agreement with the Fund dated June 30, 1998 ("Advisory
Agreement"), pursuant to which the Portfolio pays GCMG, monthly, an annual
management fee in an amount equal to .85% of the average daily net asset value
of the Portfolio ("Advisory Fee"); and

NOW THEREFORE, in consideration of the mutual covenants and agreements
herein set forth, the parties covenant and agree as follows:

1. Duties of GCMG. GCMG hereby agrees that from January 1, 2000 through
December 31, 2000, GCMG shall waive the Advisory Fee and/or reimburse the Fund
to the extent necessary to maintain the total operating expenses (excluding
brokerage fees and commissions, interest, taxes and other extraordinary
expenses) of: (i) Class I shares of the Portfolio at 1.45% of the average daily
net assets of the Class I shares; and (ii) Class R shares of the Portfolio at
1.60% of the average daily net assets of the Class R shares.

3. Severability. If any provision of this Agreement shall be found to be
invalid by a court decision, statute, rule or otherwise, the remainder of this
Agreement shall not be affected thereby.
<PAGE>

SECURITY CAPITAL REAL ESTATE MUTUAL FUNDS INCORPORATED

By: /s/ David T. Novick
-----------------------------------------------
David T. Novick, Vice President

SECURITY CAPITAL GLOBAL CAPITAL
MANAGEMENT GROUP INCORPORATED

By: /s/ Anthony R. Manno
-----------------------------------------------
Anthony R. Manno Jr., President

<PAGE>

Exhibit 11(a)

CONSENT OF
----------
MAYER, BROWN & PLATT
--------------------

We hereby consent to the reference to our firm under the caption "Counsel
and Independent Accountants" in the statement of additional information
comprising a part of Post-Effective Amendment No. 12 to the Form N-1A
Registration Statement of Security Capital Real Estate Mutual Funds
Incorporated, File Nos. 333-20649 and 811-8033.

/s/ Mayer, Brown & Platt

MAYER, BROWN & PLATT

Washington, D.C.
April 28, 2000

<PAGE>

Exhibit 11(b)

Ballard Spahr Andrews & Ingersoll, LLP
19th Floor
300 East Lombard Street
Baltimore, Maryland 21202-3268
(410) 528-5600
Fax: (410) 528-5650
[email protected]

April 28, 2000

Security Capital Real Estate Mutual
Funds, Incorporated
11 South LaSalle Street
Chicago, Illinois 60603

Re: Security Capital Real Estate Mutual Funds, Incorporated
Registration Statement on Form N-1A
(Registration Nos. 333-20649 and 811-8033)
-------------------------------------------------------

Ladies and Gentlemen:

We hereby consent to the use of the name of our firm in the above-
referenced Registration Statement under the caption "Counsel and Independent
Accountants." In giving this consent, we do not admit that we are within the
category of persons whose consent is required by Section 7 of the Securities Act
of 1933, as amended.

Very truly yours,

/s/ Ballard Spahr Andrews & Ingersoll, LLP

<PAGE>

Exhibit 11(c)

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------

As independent public accountants, we hereby consent to the use of our reports
dated February 2, 2000, and to all references to our Firm included in or made a
part of this registration statement on Form N-1A of Security Capital Real Estate
Mutual Funds Incorporated (comprised of Security Capital U.S. Real Estate Shares
and Security Capital European Real Estate Shares).

ARTHUR ANDERSEN LLP

Chicago, Illinois
April 28, 2000

<PAGE>

Exhibit 18

SECURITY CAPITAL REAL ESTATE MUTUAL FUNDS INCORPORATED

AMENDED AND RESTATED
MULTIPLE CLASS PLAN PURSUANT TO RULE 18f-3

Security Capital Real Estate Mutual Funds Incorporated ("Fund") hereby
adopts this Multiple Class Plan pursuant to Rule 18f-3 under the Investment
Company Act of 1940, as amended, on behalf of its operating series, Security
Capital U.S. Real Estate Shares ("SC-US") and Security Capital European Real
Estate Shares ("SC-EUROPEAN") (each, a "Series").

A. GENERAL DESCRIPTION OF CLASSES THAT ARE OFFERED:
------------------------------------------------

1. Class R Shares. Class R shares of each Series are sold to the general
public without an initial or a deferred sales charge.

Class R shares of each Series are subject to a distribution fee and service
fee equal, in the aggregate, to .25 of 1% on an annual basis of the average
daily net assets of the Class R shares of the respective Series paid pursuant to
a distribution and service plan adopted pursuant to Rule 12b-1 under the 1940
Act.

Class R shares of each Series are available for purchase only by investors
whose minimum initial investment is $2,500 in the Series. Subsequent
investments must be at least $250.

For individual retirement account and employee benefit plans qualified
under Section 401, 403(b)(7) or 47 of the Internal Revenue Code of 1986, as
amended, as well as UGMA or UTMA accounts, the minimum initial investment is
$1,000 and subsequent investments must be at least $250.

For investors using the Automatic Investment Plan (described in the
prospectus for the Class R shares of each Series), the minimum initial
investment is $250 and subsequent investments must be at least $250.

The investment minimums for a Series may be changed or waived by the Series
at any time. Existing shareholders will be given at least 30 days notice of any
increase in the minimum dollar amount of subsequent investments.

2. Class I Shares. Class I shares of each Series are sold to the general
public without an initial or a deferred sales charge.

<PAGE>

Class I shares of each Series are subject to a distribution fee and service
fee equal, in the aggregate, to .25 of 1% on an annual basis of the average
daily net assets of the Class I shares of the Fund paid pursuant to a
distribution and service plan adopted pursuant to Rule 12b-1 under the 1940 Act.

Class I shares of a Series are available for purchase only by investors
whose minimum initial investment in the Series is $250,000. Subsequent
investments must be at least $20,000.

The Fund reserves the right to waive or modify minimum initial and
subsequent investment requirements in connection with purchases of Class I
shares of a Series, including for accounts established on behalf of the
following types of retirement plans: (i) plans qualified under Section 401(k) of
the Code; (ii) plans described in Section 403(b) of the Code; (iii) deferred
compensation plans described in Section 457 of the Code; (iv) simplified
employee pension (SEP) plans; and (v) salary reduction simplified employee
pension (SARSEP) plans.

B. EXPENSE ALLOCATIONS OF EACH CLASS:
----------------------------------

Certain expenses may be attributable to a particular Class of shares.
Income, realized gains and losses, unrealized appreciation and depreciation and
certain expenses not allocated to a particular Class shall be allocated to each
Class based on the net assets of that Class in relation to the net assets of the
Fund.

Each Class may pay a different amount of the following expenses:

(1) administration and transfer agency fees;
(2) fees of directors who are not affiliated with the Fund's investment
adviser;
(3) legal and auditing expenses;
(4) printing and postage fees that are related to preparing and
distributing the Fund's prospectus, proxy statements and shareholder
reports;
(5) costs of maintaining the Fund's existence;
(6) interest charges and taxes;
(7) costs of stationery and supplies;
(8) expenses and fees related to registration and filing with federal and
sate regulatory authorities; and
(9) costs of personnel rendering clerical accounting and other services.

C. CONVERSION FEATURE:
-------------------

Effective February 1, 2000, SC-US Class R Shares and SC-EUROPEAN Class R
Shares will be automatically converted to SC-US Class I Shares and SC-EUROPEAN
Class I Shares, respectively, provided (i) each such conversion is effected on
the basis of the relative net asset values of the classes without the imposition
of any sales load, fee or other charge; (ii) the expenses, including payments
authorized under the Distribution and Service Plan adopted pursuant to Rule 12b-
1 under the 1940 Act, for SC-US Class I Shares and SC-EUROPEAN Class I Shares,
are not higher than the expenses, including payments authorized under the
Distribution and Service Plan adopted pursuant to Rule 12b-1 under the 1940 Act,
for SC-US Class R Shares and SC-EUROPEAN

<PAGE>

Class I Shares, are not higher than the expenses, including payments authorized
under the Distribution and Service Plan adopted pursuant to Rule 12b-1 under the
1940 Act, for SC-US Class R Shares and SC-EUROPEAN Class R Shares, respectively;
(iii) each such conversion does not effect any increase in expenses to Class R
Shareholders; and (iv) the Board of Directors determines that each such
conversion is in the best interests of Class R Shareholders.

This conversion feature may be modified or terminated by the Fund.

D. EXCHANGE FEATURE:
----------------

Shares of each Class of a Series may be exchanged for shares of the
corresponding Class of any other Series of the Fund.

All exchanges hereunder shall be effected on the basis of the relative net
asset values of the Classes without the imposition of any sales load, fee or
other charge.

An investor may not exchange shares hereunder more than four times in any
twelve-month period, including the initial exchange.

This exchange feature may be modified or terminated by the Fund.

E . CLASS DESIGNATION:
------------------

Subject to approval by the Board of Directors, the Fund may alter the
nomenclature for the designations of one or more of its classes of shares.

F. ADDITIONAL INFORMATION:
-----------------------

This Multiple Class Plan is qualified by and subject to the terms of the
then current prospectus for each Class; provided, however, that none of the
terms set forth in any such prospectus shall be inconsistent with the terms of
the Class contained in this Plan. The prospectus for each Class contains
additional information about the Classes and each Series' multiple class
structure.

G. DATE OF EFFECTIVENESS:
----------------------

This Multiple Class Plan shall become effective immediately upon the
approval of a majority of the Board of Directors and by vote of a majority of
those Directors of the Fund who are not interested persons of the Fund.

By Action of the Board of Directors
December 14, 1999