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SECURITY CAPITAL
[PHOTO APPEARS HERE]
EUROPEAN REAL ESTATE SHARES
1999 ANNUAL REPORT
[LOGO]
SECURITY CAPITAL
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SECURITY CAPITAL
EUROPEAN REAL ESTATE SHARES
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Security Capital European Real Estate Shares is a highly focused, no-load mutual
fund that 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. The long-term objective of the Fund 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, by integrating in-depth proprietary real estate market
research with sophisticated capital markets research and modeling techniques.
<PAGE>
TO OUR SHAREHOLDERS
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Security Capital European Real Estate Shares ("SC-European Real Estate Shares")
generated a total return of 4.1% for the year ended December 31, 1999, as
compared to 2.6% for its benchmark, the Salomon Smith Barney-European Property
Index. The net asset value ("NAV") per share at December 31, 1999 was $10.26 and
total dividends of $0.45 per share were paid to shareholders of record for the
year ended December 31, 1999.
A consistent drag in 1999 on European stock returns denominated in USD terms was
the persistent strength of the U.S. Dollar versus the European currencies. The
Euro basically reached parity with the U.S. Dollar at the end of the year and
lost almost 1400 basis points since its inception at the beginning of the year.
The Swedish Krona was down for the year almost 500 basis points and the British
Pound lost almost 250 basis points. The overall impact in 1999 from currency
effects on the stated returns for SC-European Real Estate Shares was over -700
basis points.
Although the performance of European real estate securities was considerably
softer over the last three months, it still remained solid for the year with the
benchmark up 16.5% in Euro terms. German property companies continued to enjoy
their strong performance through year-end and were the best performing market in
Europe. Swedish companies also had strong performance for the year. On the other
end of the spectrum, Spanish property stocks had a very weak performance in
1999, after strong gains from 1996 through 1998. U.K. real estate companies had
an overall mediocre year with significant declines in the fourth quarter,
offsetting earlier strong performance. Consistent themes across the Fund that
may have caused the poor year-end performance were rising interest rates and a
general investor belief that property values had risen to cyclical peaks.
Interestingly, these are the same themes that have held back pricing gains in
the U.S. commercial real estate stocks. The average discount to NAV per share at
year-end for the U.K. companies owned in the portfolio was about 33%, compared
to 22% at the end of 1998.
The Fund's overweight in Spanish real estate companies was the most significant
depressant on performance from both a relative and absolute basis in the fourth
quarter. A rising interest rate environment and the strong development
orientation of these companies resulted in severe price declines for companies
such as Vallerhermoso SA, which was off 27% in USD terms for the quarter. A
rebound in the oversold Swedish real estate companies partially offset the
Spanish overweight.
1
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The gross domestic product growth forecasts for Europe for the next two years
average about 2.5% annually. This should provide good demand support for
continuously increasing rental and capital values for most property markets. We
observe that the current historically high level of NAV discounts we measure in
SC-European Real Estate Shares' holdings suggests an economic recession is
likely over the next two years, as opposed to the solid growth in rental
revenues and stable asset values that we are expecting. Accordingly, we believe
investors will begin to look through the current assumed peak in asset values
and become comfortable in 2000 with the relative attractiveness of real estate
securities versus the general market.
In summary, we view current stock price levels as an attractive entry point for
long-term investors. Our strategy in managing SC-European Real Estate Shares
will focus on company specific research while maintaining country neutral
weights. We believe the current downdraft in property share prices has
compressed valuation differentials and will allow us to reorient the Fund toward
the highest quality portfolios selling at significant discounts (both absolutely
and relatively) to stated NAV per share. We are also emphasizing companies with
large, well-conceived development pipelines that may lead to significantly
faster growth in NAV over the next three years.
We appreciate your continued support.
Sincerely,
/s/ Anthony R. Manno Jr. /s/ Kenneth D. Statz
Anthony R. Manno Jr. Kenneth D. Statz
President Managing Director
2
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FUND PERFORMANCE
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The Fund's performance compared to a frequently used performance benchmark is
shown in the table below.
Comparative Returns versus Industry Benchmark
Average Annual Total Returns
Period Ended December 31, 1999
Since Inception
One-Year (6/30/98-12/31/99)
-------- ------------------
SC-European Real Estate Shares
Class R (Retail) Shares/1/ 4.12% 4.93%
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SC-European Real Estate Shares
Class I (Institutional) Shares 4.12% 4.93%
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Salomon Smith Barney-
European Property Index/2/ 2.63% (4.02)%
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Past performance is not indicative of future results. The performance of the
above-referenced index does not include any fees or expenses, and the underlying
portfolio of SC-European Real Estate Shares may differ from those of the index.
(1) The table above reflects the performance of the Fund's Class I
(Institutional) Shares. These were no outstanding Class R (Retail) Shares for
the period shown. The maximum expenses chargeable against Class R Shares is
1.60%, and the maximum expenses chargeable against Class I Shares is 1.45%, for
the year ended December 31, 1999. (2) 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.
Growth of a $10,000 Investment in Class I (Institutional) Shares
Period from June 30, 1998 to December 31, 1999
[GRAPH APPEARS HERE]
SSB-
SC- European
European Index/1/
-------- --------
30-Jun-98 $10,000 $10,000
July 1998 $10,020 $ 9,356
August $10,050 $ 8,933
September $10,210 $ 9,364
October $10,390 $ 9,102
November $10,340 $ 9,078
December $10,325 $ 9,160
January 1999 $10,084 $ 8,933
February $10,175 $ 9,156
March $10,712 $ 9,278
April $10,954 $ 9,511
May $11,156 $ 9,656
June $11,165 $ 9,718
July $11,774 $10,198
August $11,825 $10,195
September $11,662 $10,026
October $11,235 $ 9,676
November $10,879 $ 9,528
December $10,750 $ 9,401
Past performance is not indicative of future results. The graph above reflects
the performance of the Fund's Class I (Institutional) Shares. There were no
outstanding Class R (Retail) Shares for the period shown. The maximum expenses
chargeable against Class R Shares is 1.60%, and the maximum expenses chargeable
against Class I Shares is 1.45%, for the year ended December 31, 1999.
3
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SECURITY CAPITAL EUROPEAN REAL ESTATE SHARES
SCHEDULE OF INVESTMENTS-DECEMBER 31, 1999
===============================================================================
<TABLE>
<CAPTION>
Shares Market Value
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COMMON STOCKS - 90.8%
UNITED KINGDOM - 38.7%
<S> <C> <C>
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
------------
4,097,911
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 Commerce (Silic) 333,200
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
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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 IVDG 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
</TABLE>
/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%.
See notes to the financial statements.
4
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SCHEDULE OF INVESTMENTS (CONTINUED)
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<TABLE>
<CAPTION>
Principal
Amount Market Value
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<S> <C> <C>
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
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Total investments - 99.3%
(cost $10,646,700) 10,505,087
Other assets in excess of liabilities - 0.7% 76,491
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Net assets - 100.0% $10,581,578
===========
</TABLE>
See notes to the financial statements.
5
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SECURITY CAPITAL EUROPEAN REAL ESTATE SHARES
STATEMENT OF ASSETS AND LIABILITIES-DECEMBER 31, 1999
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<TABLE>
<CAPTION>
ASSETS:
<S> <C>
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
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Total assets 10,635,126
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LIABILITIES:
Payable to distributor 2,966
Accrued expenses and other liabilities 50,582
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Total liabilities 53,548
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Net assets $10,581,578
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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
-----------
</TABLE>
See notes to the financial statements.
6
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SECURITY CAPITAL EUROPEAN REAL ESTATE SHARES
STATEMENT OF OPERATIONS-YEAR ENDED DECEMBER 31, 1999
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<TABLE>
<CAPTION>
INVESTMENT INCOME:
<S> <C>
Dividend income/1/ $ 361,273
Interest income 25,985
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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
Shareholders reports and notices 32,215
Directors' fees and expenses 23,921
Amortization of organization costs 12,421
Other 874
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Total expenses before reimbursement 507,915
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Less: Reimbursement from adviser (337,352)
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Net expenses 170,563
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Net investment income 216,695
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REALIZED AND UNREALIZED loss ON INVESTMENTS:
Net realized loss on investments (22,621)
Net realized loss foreign currency transactions (52,858)
Change in unrealized appreciation on investments
and foreign currency (223,809)
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Net realized and unrealized loss on investments (299,288)
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Net decrease in net assets resulting from operations $ (82,593)
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</TABLE>
/1/ Net of foreign withholding taxes of $43,702.
See notes to the financial statements.
7
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SECURITY CAPITAL EUROPEAN REAL ESTATE SHARES
STATEMENT OF CHANGES IN NET ASSETS
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<TABLE>
<CAPTION>
Year ended Period ended
Dec. 31, 1999 Dec. 31, 1998/1/
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<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
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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) --
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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 --
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End of period/2/ $10,581,578 $6,071,315
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</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.
See notes to the financial statements.
8
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SECURITY CAPITAL EUROPEAN REAL ESTATE SHARES
FINANCIAL HIGHLIGHTS
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<TABLE>
<CAPTION>
Year ended Period ended
Dec. 31, 1999 Dec. 31, 1998/1/
-------------------------------
Class I Class I
-------------------------------
<S> <C> <C>
For a share outstanding for each 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
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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 loss 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.
See notes to the financial statements.
9
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SECURITY CAPITAL EUROPEAN REAL ESTATE SHARES
NOTES TO THE FINANCIAL STATEMENTS-DECEMBER 31, 1999
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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.
10
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NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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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. 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
=======================
</TABLE>
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
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<TABLE>
<CAPTION>
Period Ended 12/31/98:
- ------------------------------------------------------------------------------
Amount Shares
--------------------
<S> <C> <C>
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>
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.
At December 31, 1999, gross unrealized appreciation and depreciation of
investments for tax purposes were as follows:
Appreciation $ 527,961
(Depreciation) (680,289)
---------
Net appreciation on investments $(152,328)
=========
At 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.
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.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
Boston Financial Data Services, Inc. ("BFDS"), a privately held company and
an affiliate of State Street, serves as transfer agent for the Fund. Transfer
agent services will be charged by BFDS according to contractual fee schedules
agreed to by the Fund.
5. CONCENTRATION OF RISKS
The Fund will invest a substantial portion of its assets in publicly-traded
real estate companies organized principally in European nations. The Fund may
be subject to risks similar to those associated with the direct ownership of
real estate (in addition to securities market risks) because of its policy of
concentration in the securities of companies in the real estate industry.
Such risks include declines in the value of real estate, risks related to
general and local economic conditions, possible lack of availability of
mortgage funds, overbuilding, extended vacancies of properties, increased
competition, increases in real estate taxes and operating expenses, changes
in zoning laws, losses due to costs resulting from the clean-up of
environmental problems, liability to third parties for damages resulting from
environmental problems, casualty or condemnation losses, limitations on
rents, changes in neighborhood values, the appeal of properties to customers
and changes in interest rates.
The Fund will invest primarily in foreign securities. Substantial risks are
involved when investing in securities issued by companies and governments of
foreign nations, which are in addition to the usual risks inherent in
domestic investments. There is the possibility of expropriation,
nationalization, or confiscatory taxation, taxation of income earned in
foreign nations or other taxes imposed with respect to investments in foreign
nations, foreign exchange controls (which may include suspension of the
ability to transfer currency from a given country), foreign investment
controls on daily stock market movements, default in foreign government
securities, political or social instability, or diplomatic developments which
could affect investments in securities of issuers in foreign nations. In
addition, in many countries there is less publicly available information
about issuers than is available in reports about companies in the U.S.
Foreign companies are generally not subject to 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.
13
<PAGE>
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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.
14
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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, and the statements of changes in net assets
and the financial highlights for the year then ended and the period from June
30, 1998 (date of inception) to December 31, 1998. 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 audit.
We conducted our audit 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 audit
provides 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 European Real Estate Shares as of December 31, 1999, the
results of its operations for the year then ended, and the statements of changes
in its net assets and the financial highlights for the year then ended and the
period from June 30, 1998 (date of inception) to December 31, 1998, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 2, 2000
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<TABLE>
<CAPTION>
<S> <C>
DIRECTORS AND OFFICERS INVESTMENT MANAGEMENT TEAM
Anthony R. Manno Jr. Anthony R. Manno Jr.
Director, Chairman and President Director, Chairman and President
Robert H. Abrams Kenneth D. Statz
Director Managing Director
Stephen F. Kasbeer Kevin W. Bedell
Director Senior Vice President
George F. Keane Matthew D. Hansen
Director Securities Trader
Kenneth D. Statz Bernhard Krieg
Managing Director Analyst
Kevin W. Bedell John H. Woo
Senior Vice President Analyst
Jeffrey C. Nellessen
Vice President, Treasurer and Assistant Secretary
David T. Novick
Vice President and Secretary
Michael J. Heller
Assistant Treasurer
INVESTMENT ADVISER
Security Capital Global Capital
Management Group Incorporated
11 South LaSalle Street
Chicago, Illinois 60603
AUDITORS LEGAL COUNSEL
Arthur Andersen LLP Mayer, Brown & Platt
33 West Monroe Street 1909 K Street, N.W.
Chicago, Illinois 60603 Washington, D.C. 20006
</TABLE>
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11 South LaSalle Street, Chicago, Illinois 60603
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