THIS DOCUMENT IS A COPY OF THE POST-EFFECTIVE AMENDMENT FILED ON NOVEMBER 15,
1995 PURSUANT TO A RULE 201 HARDSHIP EXEMPTION. PLEASE NOTE THAT THIS
DOCUMENT CONTAINS MORE THAN WHAT WAS FILED ON NOVEMBER 15, 1995 PURSUANT TO
THE HARDSHIP EXEMPTION BECAUSE THIS IS THE REGISTRANT'S FIRST FULL ELECTRONIC
FILING.
As filed with the Securities and Exchange Commission on
November 15, 1995
Securities Act Registration No. 33-86006
Investment Company Act Registration No. 811-8850
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. _____ [ ]
Post-Effective Amendment No. 2 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 3 [X]
ICAP FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
225 West Wacker Drive, Suite 2400
Chicago, Illinois 60606
(Address of Principal Executive (Zip Code)
Offices)
Registrant's Telephone Number, including Area Code: (312) 424-9100
Pamela H. Conroy
225 West Wacker Drive, Suite 2400
Chicago, Illinois 60606
(Name and Address of Agent for Service)
Copies to:
Carol A. Gehl
Godfrey & Kahn, S.C.
780 North Water Street
Milwaukee, Wisconsin 53202
Registrant has registered an indefinite amount of securities pursuant to
Rule 24f-2 under the Investment Company Act of 1940; the Registrant's Rule
24f-2 Notice for the year ended December 31, 1995 will be filed on or before
February 29, 1996.
It is proposed that this filing will become effective (check appropriate
box).
[ ] immediately upon filing pursuant to paragraph (b) of Rule
485
[X] on November 15, 1995 pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule
485
[ ] on (date) pursuant to paragraph (a)(1) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2) of Rule
485
<PAGE>
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
<TABLE>
CALCULATION OF REGISTRATION FEE
<C> <C>
<S> <C> <C> Aggregate Amount of
Title of Securities Amount Being Offering Price Offering Registration
Being Registered Registered Per Share Price Fee
- -------------------------------------------------------------------------------------------
Common Stock,
.01 par value:
Equity Portfolio 1,548,589.16 $26.55 $41,116,369.70 $8,223
- -------------------------------------------------------------------------------------------
Discretionary Equity
Portfolio 1,111,764.955 $25.95 $28,978,753.08 $5,769
- -------------------------------------------------------------------------------------------
(1) Net asset value as of November 13, 1995.
</TABLE>
<PAGE>
CROSS REFERENCE SHEET
(Pursuant to Rule 481 showing the location in the Prospectus and
the Statement of Additional Information of the responses to the Items of Parts
A and B of Form N-1A).
Item No. on Form N-1A Caption or Subheading in
Prospectus or Statement
of Additional Information
PART A - INFORMATION REQUIRED IN PROSPECTUS
1. Cover Page Cover Page
2. Synopsis Summary; Summary of Portfolio
Expenses
3. Condensed Financial Financial Highlights
4. General Description of Registrant Organization; Investment
Objectives and Policies;
Investment Techniques and
Risks;Investment Restrictions
5. Management of the Fund Management; Portfolio Expenses
5A. Management's Discussion of Fund
Performance *
6. Capital Stock and Other
Securities Dividends, Capital Gains
Distributions and Tax Treatment;
Organization
7. Purchase of Securities Being
Offered How to Purchase Portfolio
Shares; Determination of Net
Asset Value; Exchange Privilege
8. Redemption or Repurchase How to Redeem Shares;
Determination of Net Asset
Value; Exchange Privilege
9. Pending Legal Proceedings *
PART B - INFORMATION REQUIRED IN STATEMENT OF ADDITIONAL
INFORMATION
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Included in Prospectus under
the heading Organization
13. Investment Objectives and Policies Investment Restrictions;
Investment Policies and
Techniques
14. Management of the Fund Directors and Officers
15. Control Persons and Principal
Holders of Securities Principal Shareholders;
Directors and Officers;
Investment Adviser
<PAGE>
16. Investment Advisory and Other
Services Investment Adviser; Management
(in Prospectus); Custodian;
Transfer Agent and Dividend-
Disbursing Agent; Independent
Accountants
17. Brokerage Allocation and Other
Practices Portfolio Transactions and
Brokerage
18. Capital Stock and Other Securities Included in Prospectus under
the heading Organization
19. Purchase, Redemption and Pricing of
Securities Being Offered Included in Prospectus under
the headings How to Purchase
Portfolio Shares; Determination
of Net Asset Value; How to
Redeem Shares; Exchange
Privilege and in the Statement
of Additional Information
under the heading Investment
Adviser
20. Tax Status Included in Prospectus under
the heading Dividends, Capital
Gains Distributions and Tax
Treatment
21. Underwriters *
22. Calculations of Performance Data Performance Information
23. Financial Statements Financial Statements
___________________
*Answer negative or inapplicable
<PAGE>
PROSPECTUS
December 31, 1994
ICAP FUNDS, INC.
225 West Wacker Drive, Suite 2400
Chicago, Illinois 60606
1-800-645-2457
ICAP FUNDS, INC. is an open-end, diversified, management investment
company, known as a mutual fund (the "Company"). The Company is currently
comprised of two separate portfolios, the ICAP DISCRETIONARY EQUITY PORTFOLIO
(the "Discretionary Equity Portfolio") and the ICAP EQUITY PORTFOLIO (the
"Equity Portfolio") (hereinafter collectively referred to as the
"Portfolios").
The investment objective of the Portfolios is to seek a superior total
return with only a moderate degree of risk. This investment objective is
relative to and measured against the Standard & Poor's 500 Stock Index (the
"S&P 500"); the Portfolios seek to achieve a total return greater than the S&P
500 with an equal or lesser degree of risk than the S&P 500. Both Portfolios
seek to achieve this investment objective primarily through the capital
appreciation of investments in equity securities of domestic companies with
market capitalizations of at least $500 million. The distinction between the
two Portfolios is that the Discretionary Equity Portfolio has the discretion
to invest up to 35% of its total assets and, for defensive, temporary
purposes, up to 100% of its total assets, in short-term fixed income
securities; hence, the name "Discretionary" Equity Portfolio. The Equity
Portfolio, on the other hand, will not invest in short-term fixed income
securities for investment purposes, but rather intends, under normal market
conditions, to be virtually fully invested at all times. The Portfolios are
100% "no-load." There are no sales, redemption or 12b-1 fees.
This Prospectus sets forth concisely the information that you should be
aware of prior to investing in the Company. Please read this Prospectus
carefully and retain it for future reference. Additional information
regarding the Company is included in the Statement of Additional Information
dated December 31, 1994, which has been filed with the Securities and Exchange
Commission and is incorporated in this Prospectus by reference. A copy of the
Company's Statement of Additional Information is available without charge by
writing to the Company at the address listed above or by calling 1-800-645-
2457.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
Page
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Investment Objective . . . . . . . . . . . . . . . . . . . . . . . . 4
Investment Adviser . . . . . . . . . . . . . . . . . . . . . . . . . 4
Purchases and Redemptions . . . . . . . . . . . . . . . . . . . . . 4
Shareholder Services . . . . . . . . . . . . . . . . . . . . . . . . 4
SUMMARY OF PORTFOLIO EXPENSES . . . . . . . . . . . . . . . . . . . . . . 5
Fee Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Example . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
INVESTMENT OBJECTIVES AND POLICIES . . . . . . . . . . . . . . . . . . . 6
DISCRETIONARY EQUITY PORTFOLIO . . . . . . . . . . . . . . . . . . . . . 6
Investment Objective . . . . . . . . . . . . . . . . . . . . . . . . 6
Investment Policies . . . . . . . . . . . . . . . . . . . . . . . . 6
EQUITY PORTFOLIO . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Investment Objective . . . . . . . . . . . . . . . . . . . . . . . . 7
Investment Policies . . . . . . . . . . . . . . . . . . . . . . . . 7
INVESTMENT TECHNIQUES AND RISKS . . . . . . . . . . . . . . . . . . . . . 7
Investment Grade Debt Securities . . . . . . . . . . . . . . . . . . 7
Short-Term Fixed Income Securities . . . . . . . . . . . . . . . . . 7
When-Issued Securities . . . . . . . . . . . . . . . . . . . . . . . 8
Illiquid Securities . . . . . . . . . . . . . . . . . . . . . . . . 8
ADRs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Options and Futures Transactions . . . . . . . . . . . . . . . . . . 9
Lending of Portfolio Securities . . . . . . . . . . . . . . . . . . 9
Portfolio Turnover . . . . . . . . . . . . . . . . . . . . . . . . . 9
INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . . . 10
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
HOW TO PURCHASE PORTFOLIO SHARES . . . . . . . . . . . . . . . . . . . . 11
Initial Investment - Minimum $100,000 . . . . . . . . . . . . . . . 11
Subsequent Investments - Minimum $1,000 . . . . . . . . . . . . . . 12
HOW TO REDEEM SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . 12
EXCHANGE PRIVILEGE . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
TAX-SHELTERED RETIREMENT PLANS . . . . . . . . . . . . . . . . . . . . . 13
Individual Retirement Account . . . . . . . . . . . . . . . . . . . 13
Simplified Employee Pension Plan . . . . . . . . . . . . . . . . . . 13
<PAGE>
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAX TREATMENT . . . . . . . . 13
PORTFOLIO EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
DETERMINATION OF NET ASSET VALUE . . . . . . . . . . . . . . . . . . . . 14
SHAREHOLDER REPORTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ORGANIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ADMINISTRATOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
CUSTODIAN AND TRANSFER AGENT . . . . . . . . . . . . . . . . . . . . . . 16
COMPARISON OF INVESTMENT RESULTS . . . . . . . . . . . . . . . . . . . . 16
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and the
Statement of Additional Information, and if given or made, such information or
representations may not be relied upon as having been authorized by the
Company. This prospectus does not constitute an offer to sell securities in
any state to any person to whom it is unlawful to make such offer in such
state.
<PAGE>
SUMMARY
Investment Objective
The investment objective of both the Discretionary Equity Portfolio and
the Equity Portfolio, each being separate portfolios of the Company, an open-
end, diversified management investment company, is to seek a superior total
return with only a moderate degree of risk. This investment objective is
relative to and measured against the S&P 500; the Portfolios seek to achieve a
total return greater than the S&P 500 with an equal or lesser degree of risk
than the S&P 500. The Portfolios seek to achieve this investment objective
primarily through the capital appreciation of investments in equity securities
of domestic companies with market capitalizations of at least $500 million.
The distinction between the two Portfolios is that the Discretionary Equity
Portfolio may invest up to 35% of its total assets and, for defensive,
temporary purposes, up to 100% of its total assets, in short-term fixed income
securities, while the Equity Portfolio intends, under normal market
conditions, to be virtually fully invested at all times. Each Portfolio's
investments are subject to market risk and the value of its shares will
fluctuate with changing market valuations of its portfolio holdings. See
"INVESTMENT OBJECTIVES AND POLICIES" and "INVESTMENT TECHNIQUES AND RISKS."
Investment Adviser
Institutional Capital Corporation ("ICAP") is the investment adviser to
the Portfolios. ICAP was organized in 1970 and acts as the investment adviser
to individual and institutional clients with investment portfolios of
approximately $2.5 billion. See "MANAGEMENT."
Purchases and Redemptions
Shares of the Portfolios are sold and redeemed at net asset value,
without the imposition of any sales or redemption charges. The minimum
initial investment required by both Portfolios is $100,000. The minimum
subsequent investment is $1,000. These minimums may be changed or waived at
any time at the discretion of the Portfolios. See "HOW TO PURCHASE PORTFOLIO
SHARES" and "HOW TO REDEEM SHARES." Shares in one Portfolio may be exchanged
for shares in another Portfolio at their relative net asset values, without
any charge. See "EXCHANGE PRIVILEGE."
Shareholder Services
Questions regarding either of the Portfolios may be directed to the
Company at the address and telephone number on page 1 of this Prospectus.
<PAGE>
SUMMARY OF PORTFOLIO EXPENSES
Fee Tables
Shareholder Transaction Expenses
Sales Load Imposed on Purchases NONE
Sales Load Imposed on Reinvested Dividends NONE
Deferred Sales Load Imposed on Redemptions NONE
Redemption Fees NONE
Exchange Fees NONE
Annual Operating Expenses (after waivers or reimbursements) (as a
percentage of average net assets)
Discretionary Equity Equity
Portfolio Portfolio
Management Fees 0.80% 0.80%
12b-1 Fees NONE NONE
Other Expenses (Net of
Reimbursement) 0% 0%
TOTAL OPERATING EXPENSES 0.80% 0.80%
(after Waivers or
Reimbursements)
The Portfolios' investment adviser, ICAP, has agreed to waive its
management fee and/or reimburse each Portfolio's operating expenses to the
extent necessary to ensure that each Portfolio's Total Operating Expenses do
not exceed 0.80% of the Portfolio's average daily net assets for the
Portfolio's first 12 months of operation. "Other Expenses" have been
estimated as the Portfolios did not begin operations until December 31, 1994,
and are presented net of reimbursements. Absent these reimbursements, the
Other Expenses and Total Operating Expenses for the Discretionary Equity
Portfolio are estimated to be 0.54% and 1.34%, respectively; Other Expenses
and Total Operating Expenses for the Equity Portfolio are estimated to be
0.37% and 1.17%, respectively. For additional information concerning fees and
expenses, see "MANAGEMENT."
There are certain charges associated with certain services offered by the
Portfolios, such as a service fee of $9.00 for redemptions effected via wire
transfer. See "HOW TO REDEEM SHARES." Purchases and redemptions may also be
made through broker-dealers or others who may charge a commission or other
transaction fee for their services.
Example
You would pay the following expenses on a $1,000 investment, assuming (i)
5% annual return, and (ii) redemption at the end of each time period:
Discretionary
Equity Portfolio Equity Portfolio
1 Year ............. $ 8 $ 8
3 Years ............ $26 $26
<PAGE>
The Fee Tables, including the Example, are included to assist you in
understanding the various costs and expenses that an investor in the
Portfolios bears directly or indirectly. The Example is based on the Total
Operating Expenses specified in the table above. The amounts in the Example
may increase absent the waivers or reimbursements. Please remember that the
Example should not be considered representative of past or future expenses and
that actual expenses may be greater or lesser than those shown. The
assumption in the Example of a 5% annual rate of return is required by
regulations of the Securities and Exchange Commission ("SEC") applicable to
all mutual funds. This return is hypothetical and should not be considered
representative of past or future performance of the Portfolios.
INVESTMENT OBJECTIVES AND POLICIES
When making investment decisions, ICAP develops an economic framework
(including an interest rate, inflation, and business cycle outlook) and
analyzes strategic economic and/or industry themes to identify appropriate
investments. A variety of proprietary research techniques and computer models
are used to search for issuers possessing best relative value based on
proprietary price/earnings projections and analysis of earnings momentum.
Furthermore, a clear catalyst, either stock-specific, industry or economic,
which ICAP believes will trigger significant price appreciation must exist.
ICAP also utilizes a wide variety of external sources for investment
information including recognized strategists, economists, technical and
fundamental analysts, corporate executives, and industry sources.
For each investment, ICAP establishes an upside price target and a
downside risk potential. This strategy allows for continuous monitoring of
fundamental conditions and stock price performance. Although ICAP typically
expects the investment potential of each investment to be realized over a nine
to fifteen month time period, it is not unusual for equities to be held for a
longer period if the potential is justified. Investments that underperform
the market are reviewed intensively. If the risk/reward of a particular
investment becomes unattractive or the reasons for owning the security no
longer appear valid, the investment is typically sold expeditiously to avoid
future underperformance.
The investment objectives presented below may not be changed without
shareholder approval. Other investment restrictions which may not be changed
without shareholder approval are contained in the Company's Statement of
Additional Information. Since all investments are subject to inherent market
risks, there is no assurance that these objectives will be realized. Except
for each Portfolio's investment objective and the investment restrictions
enumerated in the Company's Statement of Additional Information, a Portfolio's
policies may be changed without a vote of the Portfolio's shareholders.
DISCRETIONARY EQUITY PORTFOLIO
Investment Objective
The Discretionary Equity Portfolio's investment objective is to seek a
superior total return with only a moderate degree of risk. This investment
objective is relative to and measured against the S&P 500; the Portfolio seeks
to achieve a total return greater than the S&P 500 with an equal or lesser
degree of risk than the S&P 500. The distinction between the Discretionary
Equity Portfolio and the Equity Portfolio is that the Discretionary Equity
Portfolio may invest up to 35% of its total assets and, for defensive,
temporary purposes, up to 100% of its total assets, in short-term fixed income
securities while the Equity Portfolio intends to be virtually fully invested
in equity securities at all times.
Investment Policies
The Discretionary Equity Portfolio will seek, under normal market
conditions, to achieve its investment objective by investing its assets
primarily in equity securities of domestic companies with market
capitalizations of
<PAGE>
at least $500 million, which include but are not limited to
common stocks; preferred stocks; warrants to purchase common stocks or
preferred stocks; American Depository Receipts ("ADRs"); and securities
convertible into common or preferred stocks, such as convertible bonds and
debentures rated Baa or higher by Moody's Investors Service ("Moody's") or BBB
or higher by Standard & Poor's ("S&P"), Duff & Phelps, Inc. ("D&P") or Fitch
Investors Service, Inc. ("Fitch"). In addition, the Discretionary Equity
Portfolio may invest up to 35% of its total assets in short-term fixed income
securities for any purpose including pending investment or reinvestment, and
may invest up to 100% of its assets in such instruments as a temporary
defensive measure. However, under normal market conditions, at least 65% of
the value of its total assets will be invested in equity securities.
EQUITY PORTFOLIO
Investment Objective
The Equity Portfolio's investment objective is to seek a superior total
return with only a moderate degree of risk. This investment objective is
relative to and measured against the S&P 500; the Portfolio seeks to achieve a
total return greater than the S&P 500 with an equal or lesser degree of risk
than the S&P 500. The Equity Portfolio intends to be virtually fully invested
at all times with only nominal short-term fixed income positions held at any
time. If short-term fixed income securities are held, however, it would be to
meet anticipated redemption requests, pay expenses and pending investment,
which, in any case, would not exceed 5% of the Equity Portfolio's total
assets. Because the Equity Portfolio will hold only nominal short-term fixed
income positions, it may be subject to greater risk in times of market
volatility than the Discretionary Equity Portfolio.
Investment Policies
The Equity Portfolio will seek to achieve its investment objective by
investing its assets primarily in equity securities of domestic companies with
market capitalizations of at least $500 million, which include but are not
limited to common stocks; preferred stocks; warrants to purchase common stocks
or preferred stocks; ADRs; and securities convertible into common or preferred
stocks, such as convertible bonds and debentures rated Baa or higher by
Moody's or BBB or higher by S&P, D&P or Fitch. The Equity Portfolio will only
hold short-term fixed income securities to meet anticipated redemption
requests, pay expenses and pending investment. As a result, the Equity
Portfolio's investment in such securities generally will not exceed 5% of its
total assets. Thus, under normal market conditions, at least 65% of the value
of its total assets will be invested in equity securities.
INVESTMENT TECHNIQUES AND RISKS
Neither Portfolio will invest more than 5% of its net assets in any one
of the following types of investments: investment grade debt securities; non-
investment grade debt securities (commonly referred to as "junk bonds");
warrants; illiquid securities; unseasoned companies; and transactions in short
sales against the box.
Investment Grade Debt Securities
Investment grade debt securities include bonds rated Baa or higher by
Moody's and BBB or higher by S&P, D&P or Fitch. Bonds rated BBB by S&P or Baa
by Moody's, although considered investment grade, have speculative
characteristics and may be subject to greater fluctuations in value than
higher-rated bonds. For a more extensive discussion of these ratings, see the
Company's Statement of Additional Information.
Short-Term Fixed Income Securities
The Discretionary Equity Portfolio may invest up to 35% of its total
assets and the Equity Portfolio may invest up to 5% of its total assets in
short-term fixed income securities. In addition, when ICAP believes that
market
<PAGE>
conditions warrant, the Discretionary Equity Portfolio may invest up to
100% of its assets in such instruments for temporary defensive purposes.
Short-term fixed income securities must be rated at least A or higher by S&P,
Moody's or Fitch or A- or higher by D&P, and include without limitation the
following securities, each of which has a stated maturity of one year or less
from the date of purchase unless otherwise indicated: U.S. government
securities, including bills, notes and bonds, differing as to maturity and
rate of interest, which are either issued or guaranteed by the U.S. Treasury
or by U.S. governmental agencies or instrumentalities; certificates of deposit
issued against funds deposited in a U.S. bank or savings and loan association;
bank time deposits, which are monies kept on deposit with U.S. banks or
savings and loan associations for a stated period of time at a fixed rate of
interest; bankers' acceptances which are short-term credit instruments used to
finance commercial transactions; commercial paper and commercial paper master
notes (which are demand instruments without a fixed maturity bearing interest
at rates which are fixed to known lending rates and automatically adjusted
when such lending rates change) rated A-1 or better by S&P, Prime-1 or better
by Moody's, Duff 2 or higher by D&P, or Fitch 2 or higher by Fitch; or
repurchase agreements entered into only with respect to obligations of the
U.S. government, its agencies or instrumentalities. Repurchase agreements
could involve certain risks in the event of the default or insolvency of the
other party to the agreement, including possible delays or restrictions upon a
Portfolio's ability to dispose of the underlying securities.
When-Issued Securities
Each Portfolio may invest without limitation in securities purchased on a
when-issued or delayed delivery basis ("When-Issued Securities"). Although
the payment and terms of these securities are established at the time the
purchaser enters into the commitment, these securities may be delivered and
paid for at a future date, generally within 45 days. Purchasing When-Issued
Securities allows a Portfolio to lock in a fixed price on a security it
intends to purchase. The Portfolios will segregate and maintain cash, cash
equivalents, U.S. government securities, or other high-quality, liquid debt
securities in an amount at least equal to the amount of outstanding
commitments for When-Issued Securities at all times.
Illiquid Securities
Each Portfolio may invest up to 5% of the value of its net assets in
illiquid securities, which include, but are not limited to, restricted
securities (securities the disposition of which is restricted under the
federal securities laws), securities which may be resold pursuant to Rule 144A
under the Securities Act of 1993 and repurchase agreements with maturities in
excess of seven days. Risks associated with restricted securities include the
potential obligation to pay all or part of the registration expenses in order
to sell restricted securities. A considerable period of time may elapse
between the time of the decision to sell a restricted security and the time a
Portfolio may be permitted to sell under an effective registration statement
or otherwise. If, during such a period, adverse conditions were to develop,
the Portfolio might obtain a less favorable price than that which prevailed
when it decided to sell. The Board of Directors of the Company, or its
delegate, has the ultimate authority to determine, to the extent permissible
under the federal securities laws, which securities are liquid or illiquid.
The Board of Directors has adopted guidelines and delegated this determination
to ICAP.
ADRs
Each of the Portfolios may invest in ADRs or other instruments
denominated in U.S. dollars. ADRs are receipts typically issued by a U.S.
bank or trust company evidencing ownership of the underlying foreign security
and denominated in U.S. dollars. Some institutions issuing ADRs may not be
sponsored by the issuer. A non-sponsored depository may not provide the same
shareholder information that a sponsored depository is required to provide
under its contractual arrangements with the issuer, including reliable
financial statements.
Investments in securities of foreign issuers involve risks which are in
addition to the usual risks inherent in domestic investment. In many
countries, there is less publicly available information about issuers than is
available
<PAGE>
in the reports and ratings published about companies in the United
States. Additionally, foreign companies are not subject to uniform
accounting, auditing and financial reporting standards. Other risks inherent
in foreign investment include expropriation, confiscatory taxation,
withholding taxes on dividends and interest, less extensive regulation of
foreign brokers, securities markets and issuers, costs incurred in conversions
between currencies, the possibility of delays in settlement in foreign
securities markets, limitations on the use or transfer of assets (including
suspension of the ability to transfer currency from a given country), the
difficulty of enforcing obligations in other countries, diplomatic
developments, and political or social instability. Foreign economies may
differ favorably or unfavorably from the U.S. economy in various respects, and
many foreign securities are less liquid and their prices are more volatile
than comparable U.S. securities. From time to time, foreign securities may be
difficult to liquidate rapidly without adverse price effects. Certain costs
attributable to foreign investing, such as custody charges and brokerage
costs, are higher than those attributable to domestic investing.
Options and Futures Transactions
Each of the Portfolios may engage in options and futures transactions. A
Portfolio's options and futures transactions may include instruments such as
stock index options and futures contracts. Such transactions may be used for
several reasons, including hedging unrealized portfolio gains. The Portfolios
will only engage in futures and options transactions which must, pursuant to
regulations promulgated by the Commodity Futures Trading Commission (the
"CFTC"), constitute bona fide hedging or other permissible risk management
transactions and will not enter into such transactions if the sum of the
initial margin deposits and premiums paid for unexpired options exceed 5% of
the Portfolio's total assets. In addition, neither Portfolio will enter into
options and futures transactions if more than 30% of the Portfolio's net
assets would be committed to such instruments. A Portfolio may hold a futures
or options position until its expiration, or it can close out such a position
before then at current value if a liquid secondary market is available. If a
Portfolio cannot close out a position, it may suffer a loss apart from any
loss or gain experienced at the time the Portfolio decided to close the
position. When required by guidelines of the SEC or the CFTC, each Portfolio
will set aside permissible liquid assets in a segregated account to secure its
potential obligations under its futures or options positions. Such liquid
assets may include cash, U.S. government securities and high grade liquid debt
securities. The ability of the Portfolios to effectively use options and
futures is largely dependent upon ICAP's ability to correctly use such
instruments which may involve different skills than are associated with
securities generally.
Lending of Portfolio Securities
Each Portfolio may lend its portfolio securities, up to 33 1/3% of its
total assets, to broker-dealers or institutional investors. The loans will be
secured continuously by collateral equal at least to the value of the
securities lent by "marking to market" daily. The Portfolios will continue to
receive the equivalent of the interest or dividends paid by the issuer of the
securities lent and will retain the right to call, upon notice, the lent
securities. The Portfolios may also receive interest on the investment of the
collateral or a fee from the borrower as compensation for the loan. The
Portfolios may pay reasonable custodial and administrative fees in connection
with a loan. While there may be delays in recovery or even loss of rights in
the collateral should the borrower fail financially, ICAP will review the
credit worthiness of the entities to which loans are made to evaluate those
risks.
Portfolio Turnover
Each Portfolio anticipates that its portfolio turnover rate will
generally not exceed 150% and is expected to be between 100 and 125%. A
turnover rate of 100% would occur, for example, if all of the securities held
by a Portfolio were replaced within one year. In the event a Portfolio were
to have a turnover rate of 100% or more in any year, it would result in the
payment by the Portfolio of increased brokerage costs and could result in the
payment by shareholders of increased taxes on realized investment gains.
<PAGE>
INVESTMENT RESTRICTIONS
The Company has adopted several restrictions on the investments and other
activities of the Portfolios that may not be changed without shareholder
approval. For example, neither Portfolio may:
(1) With respect to 75% of its total assets, purchase the securities of
any issuer (except securities issued or guaranteed by the U.S. government or
any agency or instrumentality thereof) if, as a result, (i) more than 5% of
the Portfolio's total assets would be invested in securities of that issuer,
or (ii) the Portfolio would hold more than 10% of the outstanding voting
securities of that issuer.
(2) Borrow money, except that the Portfolio may (i) borrow money from
banks for temporary or emergency purposes (but not for leverage or the
purchase of investments) and (ii) make other investments or engage in other
transactions permissible under the Investment Company Act of 1940 which may
involve a borrowing, provided that the combination of (i) and (ii) shall not
exceed 33 1/3% of the value of the Portfolio's total assets (including the
amount borrowed), less the Portfolio's liabilities (other than borrowings).
For additional investment restrictions, see the Company's Statement of
Additional Information.
MANAGEMENT
Under the laws of the State of Maryland, the Board of Directors of the
Company (the "Board of Directors") is responsible for managing its business
and affairs. The Company has entered into an investment advisory agreement
with ICAP dated December 30, 1994 (the "Investment Advisory Agreement")
pursuant to which ICAP manages each Portfolio's investments and business
affairs, subject to the supervision of the Company's Board of Directors. The
Board of Directors also oversees duties required by applicable state and
federal law.
ICAP, an independent investment advisory firm, was founded in 1970 and is
located at 225 West Wacker Drive, Suite 2400, Chicago, IL 60606. Under the
Investment Advisory Agreement, each Portfolio compensates ICAP for its
investment advisory services at the annual rate of 0.80% of the Portfolio's
average daily net assets. The advisory fee is higher than that paid by most
investment companies. The Company's Board of Directors believes that this fee
is reasonable in light of each Portfolio's investment objective. ICAP has
agreed to waive its management fee and/or reimburse each Portfolio's operating
expenses to the extent necessary to ensure that each Portfolio's Total
Operating Expenses do not exceed 0.80% of the Portfolio's average daily net
assets for the Portfolio's first 12 months of operation. Any such waiver or
reimbursement will have the effect of lowering the overall expense ratio for
the Portfolio and increasing the Portfolio's overall return to investors at
the time any such amounts were waived and/or reimbursed.
The investment decisions for each Portfolio are made through a team
approach, with all of the ICAP investment professionals contributing to the
process. Each of the officers and other investment professionals of ICAP has
developed an expertise in at least one functional investment area, including
equity research, strategy, fixed income analysis, quantitative research,
technical research, and trading. A key element in the decision making process
is a formal investment committee meeting generally held each business day and
attended by all the investment professionals. At this meeting, a
comprehensive review of ICAP's investment position is undertaken. Pertinent
information from outside sources is shared and incorporated into the
investment outlook. The investment strategy, each asset sector, and each
individual security holding are reviewed to verify their continued
appropriateness. Investment recommendations are presented to the committee
for decisions.
ICAP provides continuous advice and recommendations concerning each
Portfolio's investments, and is responsible for selecting the broker-dealers
who execute the portfolio transactions. In executing such transactions, ICAP
seeks to obtain the best net results for the Portfolios. ICAP provides office
space for the Company and pays
<PAGE>
the salaries, fees and expenses of all officers
and directors of the Company who are interested persons of ICAP. While ICAP
has not previously provided investment advice to a registered investment
company, ICAP serves as investment adviser to pension and profit-sharing
plans, and other institutional and private investors. As of September 30,
1994, ICAP had approximately $2.5 billion under management. Mr. Robert H.
Lyon, President of ICAP, owns shares representing 51% of the voting rights of
ICAP.
HOW TO PURCHASE PORTFOLIO SHARES
Shares of the Portfolios are sold on a continual basis at the next
offering price after receipt of the order by the Portfolio. This price is the
net asset value of the Portfolio and is determined as of the close of trading
(currently 4:00 p.m., Eastern Standard Time) on each day the New York Stock
Exchange is open. See "DETERMINATION OF NET ASSET VALUE." The price at which
your purchase will be effected is based on the Portfolio's net asset value
next determined after the Portfolio receives your request in proper form. A
confirmation indicating the details of the transaction will be sent to you
promptly. Shares are credited to your account, but certificates are not
issued. However, you will have full shareholder rights.
The minimum initial investment required by both Portfolios is $100,000.
Subsequent investments may be made by mail or wire with a minimum subsequent
investment of $1,000. The Portfolios reserve the right to change or waive
these minimums at any time. Shareholders will be given at least 30 days'
notice of any increase in the minimum dollar amount of subsequent investments.
If you purchase shares of either Portfolio by check and request the
redemption of such shares within fifteen days of the initial purchase, the
Portfolio will not forward the portion of your redemption proceeds which has
not been collected by the Portfolio. This is a security precaution only and
does not affect your investment.
Initial Investment - Minimum $100,000
You may purchase shares of the Portfolios by completing an application
form and mailing it along with a check or money order payable to "ICAP Funds"
to: ICAP Funds, Inc., c/o Supervised Service Company, Inc. at either P.O. Box
419330, Kansas City, MO 64141-6336 or 811 Main Street, Kansas City, MO 64105-
2005. Purchases must be made in U.S. dollars and all checks must be drawn on
a U.S. bank. If your check does not clear, you will be charged a $20 service
fee. You will also be responsible for any losses suffered by the Portfolios
as a result. All applications to purchase shares of the Portfolios are
subject to acceptance by the Company and are not binding until so accepted.
The Company reserves the right to decline to accept a purchase order
application in whole or in part.
Alternatively, you may place an order to purchase shares of the
Portfolios through a broker-dealer. Broker-dealers may charge a transaction
fee for placing orders to purchase Portfolio shares. It is the responsibility
of the broker-dealer to place the order with the appropriate Portfolio on a
timely basis.
In addition, you may purchase shares of the Portfolios by wire. To
establish a new account by wire transfer, please call the Transfer Agent at 1-
800-645-2457. The Transfer Agent will assign an account number to you at that
time. Funds should be wired through the Federal Reserve System as follows:
United Missouri Bank
ABA Number 101000 695
For credit to ICAP Funds, Inc.
Account Number 98-7060-765-4
For further credit to ICAP Funds, Inc.
(investor account number)
(name or account registration)
<PAGE>
(social security or tax identification number)
(identiy which Portfolio to purchase)
The Portfolios are not responsible for the consequences of delays resulting
from the banking or Federal Reserve wire system.
Subsequent Investments - Minimum $1,000
Additions to your account in amounts of $1,000 or more may be made by
mail or by wire . When making an additional purchase by mail, enclose a check
payable to "ICAP Funds" along with the Additional Investment Form provided on
the lower portion of your account statement. To make an additional purchase
by wire, please follow the instructions listed above.
HOW TO REDEEM SHARES
You may request redemption of part or all of your Portfolio shares at any
time. The price you receive will be the net asset value next determined after
the Portfolio receives your request in proper form. Once your redemption
request is received in proper form, the Portfolio normally will mail or wire
your redemption proceeds the next business day and, in any event, no later
than seven days after receipt of a redemption request. However, the Portfolio
may hold payment of that portion of an investment which was made by check
which has not been collected. Redemptions may also be made through broker-
dealers who may charge a commission or other transaction fee.
To request redemption of Portfolio shares, you must furnish a written,
unconditional request to: ICAP Funds, Inc., c/o Supervised Service Company,
Inc. at either P.O. Box 419336, Kansas City, MO 64141-6336 or 811 Main Street,
Kansas City, MO 64105-2005. The request must (i) be signed exactly as the
shares are registered, including the signature of each owner and (ii) specify
the number of Portfolio shares or dollar amount to be redeemed. Additional
documentation may be requested from corporations, executors, administrators,
trustees, guardians, agents, or attorneys-in-fact. Signature guarantees are
required for: (i) redemption requests over $25,000, (ii) redemption requests
to be mailed or wired to a person other than the registered owner(s) of the
shares, and (iii) redemption requests to be mailed or wired to other than the
address of record. A signature guarantee may be obtained from any eligible
guarantor institution, as defined by the SEC. These institutions include
banks, savings associations, credit unions, brokerage firms, and others.
Redemption proceeds may be wired to a commercial bank authorized on your
account application. You will be charged a $9.00 service fee for wire
redemptions.
Your account may be terminated by a Portfolio on not less than 30 days'
notice if, at the time of any redemption of shares in your account, the value
of the remaining shares in the account falls below $10,000. Upon any such
termination, a check for the proceeds of redemption will be sent to you within
seven days of the redemption.
EXCHANGE PRIVILEGE
You may exchange your shares in a Portfolio for shares in any other
Portfolio of the Company at any time by written request. The value of the
shares to be exchanged and the price of the shares being purchased will be the
net asset value next determined after receipt of instructions for exchange.
An exchange from one Portfolio to another is treated the same as an ordinary
sale and purchase for federal income tax purposes and you will realize a
capital gain or loss. This is not a tax-free exchange. Exchange requests
should be directed to: ICAP Funds, Inc., c/o Supervised Service Company, Inc.
at either P.O. Box 419336, Kansas City, MO 64141-6336 or 811 Main Street,
Kansas City, MO 64105-2005. Exchange requests may be subject to limitations,
including those relating to
<PAGE>
frequency, that may be established from time to
time to ensure that the exchanges do not disadvantage the Portfolios or their
investors. The Company reserves the right to modify or terminate the exchange
privilege upon 60 days' written notice to each shareholder prior to the
modification or termination taking effect.
TAX-SHELTERED RETIREMENT PLANS
The Company offers through its Custodian, United Missouri Bank, n.a.,
certain qualified retirement plans for adoption by individuals and employers.
Participants in these plans can accumulate shares of a Portfolio on a tax
deferred basis. Contributions to these plans are tax deductible as provided
by law and earnings are tax deferred until distributed.
Individual Retirement Account ("IRA")
Individuals who receive compensation or earned income, even if they are
active participants in a qualified retirement plan (or certain similar
retirement plans), may establish their own tax-sheltered Individual Retirement
Account ("IRA"). The Portfolios offer a prototype IRA plan which may be
adopted by individuals to establish a new IRA or to roll-over funds from an
existing IRA. There may be a charge for establishing an IRA account and there
is also an annual maintenance fee.
Earnings on amounts held in an IRA are not taxed until withdrawal.
However, the amount of deduction, if any, allowed for IRA contributions is
limited for individuals who are active participants in an employer-sponsored
retirement plan and whose incomes exceed specific limits.
Simplified Employee Pension Plan ("SEP/IRA")
The Portfolios also offer a simplified employee pension ("SEP") plan for
employers, including self-employed individuals, who wish to purchase Portfolio
shares with tax-deductible contributions. Under the SEP plan, employer
contributions are made directly to the IRA accounts of eligible participants.
A complete description of the above plans, as well as a description of
the applicable service fees may be obtained by calling 1-800-645-2457 or
writing to the Company at 225 West Wacker Drive, Suite 2400, Chicago, Illinois
60606. Please note that early withdrawals from a retirement plan may result
in adverse tax consequences.
DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAX TREATMENT
Each Portfolio intends to operate as a "Regulated Investment Company"
under Subchapter M of the Internal Revenue Code, and therefore will not be
liable for federal income taxes to the extent earnings are distributed on a
timely basis.
For federal income tax purposes, all dividends paid by the Portfolios and
net realized short-term capital gains are taxable as ordinary income whether
reinvested or received in cash unless you are exempt from taxation or entitled
to a tax deferral. Distributions paid by a Portfolio from net realized long-
term capital gains, whether received in cash or reinvested in additional
shares, are taxable as capital gain. The capital gain holding period is
determined by the length of time the Portfolio has held the security and not
the length of time you have held shares in the Portfolio. Investors are
informed annually as to the amount and nature of all dividends and capital
gains paid during the prior year. Such gains and dividends may also be
subject to state or local taxes. If you are not required to pay taxes on your
income, you are generally not required to pay federal income taxes on the
amounts distributed to you.
<PAGE
Dividends are usually distributed quarterly, and capital gains, if any,
are usually distributed annually in December. When a dividend or capital gain
is distributed, a Portfolio's net asset value will decrease by the amount of
the payment. A dividend or capital gains distribution received shortly after
the purchase of shares reduces the net asset value of shares by the amount of
the dividend or distribution and, although in effect a return of capital, will
be subject to income taxes. All dividends or capital gains distributions will
automatically be reinvested in shares of the Portfolios at the then prevailing
net asset value unless an investor specifically requests that either dividends
or capital gains or both be paid in cash. The election to receive dividends
or reinvest them may be changed by writing to: ICAP Funds, Inc., c/o
Supervised Service Company, Inc. at either P.O. Box 419336, Kansas City, MO
64141-6336 or 811 Main Street, Kansas City, MO 64105-2005. Such notice must
be received at least 1 day prior to the record date of any dividend or capital
gain distribution.
If you do not furnish a Portfolio with your correct social security
number or employer identification number, the Portfolio is required by federal
law to withhold federal income tax from your distributions and redemption
proceeds at a rate of 31%.
This section is not intended to be a full discussion of federal income
tax laws and the effect of such laws on you. There may be other federal,
state, or local tax considerations applicable to a particular investor. You
are urged to consult your own tax advisor.
PORTFOLIO EXPENSES
Each Portfolio is responsible for its own expenses, including, without
limitation: interest charges; taxes; brokerage commissions; organizational
expenses; expenses of registering or qualifying shares for sale with the
states and the SEC; expenses of issue, sale, repurchase or redemption of
shares; expenses of printing and distributing prospectuses to existing
shareholders; charges of custodians; expenses for accounting, administrative,
audit, and legal services; fees for directors who are not interested persons
of ICAP; expenses of fidelity bond coverage and other insurance; expenses of
indemnification; extraordinary expenses; and costs of shareholder and director
meetings.
DETERMINATION OF NET ASSET VALUE
Each Portfolio's net asset value per share is determined as of the close
of trading (currently 4:00 p.m. Eastern Standard Time) on each day the New
York Stock Exchange is open for business. A Portfolio's net asset value may
not be calculated on days during which a Portfolio receives no orders to
purchase shares and no shares are tendered for redemption. Net asset value is
calculated by taking the fair value of the Portfolio's total assets, including
interest or dividends accrued, but not yet collected, less all liabilities,
and dividing by the total number of shares outstanding. The result, rounded
to the nearest cent, is the net asset value per share. In determining net
asset value, expenses are accrued and applied daily and securities and other
assets for which market quotations are available are valued at market value.
Common stocks and other equity-type securities are valued at the last sales
price on the national securities exchange or Nasdaq on which such securities
are primarily traded; however, securities traded on a national securities
exchange or Nasdaq for which there were no transactions on a given day or
securities not listed on an exchange or Nasdaq are valued at the most recent
bid prices. Debt securities are valued by a pricing service that utilizes
electronic data processing techniques to determine values for normal
institutional-sized trading units of debt securities without regard to the
existence of sale or bid prices when such values are believed to more
accurately reflect the fair market value of such securities; otherwise, actual
sale or bid prices are used. Any securities or other assets for which market
quotations are not readily available are valued at fair value as determined in
good faith by the Board of Directors. Debt securities having remaining
maturities of 60 days or less when purchased are valued by the amortized cost
method when the Board of Directors determines that the fair market value of
such securities is their amortized cost. Under this method of valuation, a
security is initially valued at its acquisition cost, and thereafter,
amortization of any discount or premium is assumed each day, regardless of the
impact of
<PAGE>
fluctuating interest rates on the market value of the security.
Regardless of the method employed to value a particular security, all
valuations are subject to review by ICAP; ICAP may determine the appropriate
value of a security whenever the value as calculated is significantly
different from the previous day's calculated value.
SHAREHOLDER REPORTS
You will be provided at least semi-annually with a report showing the
Portfolio or Portfolios' holdings and annually after the close of the
Company's fiscal year, which ends December 31, with an annual report
containing audited financial statements. An individual account statement will
be sent to you by the Transfer Agent after each purchase or redemption of
Portfolio shares as well as on a monthly basis. You will also receive an
annual statement after the end of the calendar year listing all transactions
in shares of the Portfolios during such year.
If you have questions about your account(s), you should call the
Portfolios' Transfer Agent at 1-800-645-2457. Investors who have general
questions about the Portfolios or the Company or desire additional information
should write to ICAP Funds, Inc., 225 West Wacker Drive, Suite 2400, Chicago,
Illinois 60606.
ORGANIZATION
ICAP Funds, Inc. (the "Company") was organized as a Maryland corporation
on November 1, 1994. The Company is authorized to issue 300,000,000, $.01 par
value shares, in addition to the 100,000,000, $.01 par value shares of the
Discretionary Equity Portfolio and the 100,000,000, $.01 par value shares of
the Equity Portfolio. The assets belonging to the Discretionary Equity
Portfolio and the Equity Portfolio will be held separately by the Custodian,
and if the Company issues additional series, each additional series will be
held separately. In effect, each series will be a separate portfolio.
Each share, irrespective of series, is entitled to one vote on all
questions, except that certain matters must be voted on separately by the
series of shares affected, and matters affecting only one series are voted
upon only by that series. Shares have non-cumulative voting rights, which
means that the holders of more than 50% of the shares voting for the election
of Directors can elect all of the Directors if they choose to do so and, in
such event, the holders of the remaining shares will not be able to elect any
person or persons to the Board of Directors.
The Company will not hold annual shareholders' meetings except when
required by the Investment Company Act of 1940. The Company has adopted
procedures in its By-laws for the removal of Directors by the shareholders as
well as by the Board of Directors. As of December 9, 1994, ICAP owned a
controlling interest in the Company.
ADMINISTRATOR
Pursuant to an Administration Agreement, Sunstone Financial Group, Inc.
(the "Administrator"), 207 East Buffalo Street, Suite 400, Milwaukee,
Wisconsin 53202, calculates the daily net asset value of each Portfolio,
prepares and files all federal income and excise tax returns and state income
tax returns (other than those required to be made by the Portfolios' Custodian
or the Transfer Agent), oversees the Portfolios' insurance relationships,
participates in the preparation of the registration statement, proxy
statements and reports, prepares compliance filings relating to the
registration of the securities of the Portfolios pursuant to state securities
laws, compiles data for and prepares notices to the SEC, prepares the
financial statements for the annual and semi-annual reports to the SEC and
current investors, monitors the Portfolios' expense accruals and performs
securities valuations, monitors the Portfolios' status as a regulated
investment company under Subchapter M of the Internal Revenue Code and
monitors compliance with the Portfolios' investment policies and restrictions,
from time to time, and generally assists in the Portfolios' administrative
operations.
<PAGE>
The Administrator, at its own expense and without reimbursement
from the Portfolios, furnishes office space and all necessary office
facilities, equipment, supplies and clerical and executive personnel for
performing the services required to be performed by it under the
Administration Agreement. For the foregoing, the Administrator receives from
the Portfolios an aggregate fee, computed daily and payable monthly based on
each Portfolio's aggregate average net assets at the annual rate of .20 of 1%
on the first $50,000,000, .175 of 1% on the next $50,000,000, .10 of 1% on the
next $150,000,000, .075 of 1% on the next $250,000,000 and .05 of 1% on
average net assets in excess of $500,000,000, subject to an annual minimum of
$120,000, plus out of pocket expenses.
CUSTODIAN AND TRANSFER AGENT
United Missouri Bank, n.a., 928 Grand Avenue, Kansas City, MO 64141, acts
as Custodian of each Portfolio's assets. Supervised Service Company, Inc.,
811 Main Street, Kansas City, MO 64105-2005 acts as dividend-disbursing and
Transfer Agent for the Portfolios.
COMPARISON OF INVESTMENT RESULTS
Each Portfolio may from time to time compare its investment results to
various passive indices or other mutual funds and cite such comparisons in
reports to shareholders, sales literature, and advertisements. The results
may be calculated on the basis of average annual total return, total return,
or cumulative total return.
Average annual total return and total return figures assume the
reinvestment of all dividends and measure the net investment income generated
by, and the effect of, any realized and unrealized appreciation or
depreciation of the underlying investments in each Portfolio over a specified
period of time. Average annual total return figures are annualized and
therefore represent the average annual percentage change over the specified
period. Total return figures are not annualized and represent the aggregate
percentage or dollar value change over the period. Cumulative total return
simply reflects a Portfolio's performance over a stated period of time.
Average annual total return, total return and cumulative total return are
based upon the historical results of each Portfolio and are not necessarily
representative of the future performance of the respective Portfolio.
Additional information concerning the performance of each Portfolio appears in
the Statement of Additional Information.
The Company reserves the right to change any of the policies,
practices and procedures described in this prospectus with respect
to either Portfolio, including the Statement of Additional
Information, without shareholder approval except in those instances
where shareholder approval is expressly required.
DIRECTORS
Robert H. Lyon
Pamela H. Conroy
Gary S. Maurer
Dr. James A. Gentry
Ms. Barbara A. Chiesa
Mr. Harold W. Nations
OFFICERS
Robert H. Lyon
President
Pamela H. Conroy
Vice President and Treasurer
Donald D. Niemann
Vice President and Secretary
INVESTMENT ADVISER
Institutional Capital Corporation
225 West Wacker Drive, Suite 2400
Chicago, IL 60606
CUSTODIAN
United Missouri Bank, n.a.
928 Grand Avenue
Kansas City, MO 64141
TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT
Supervised Service Company, Inc.
811 Main Street
Kansas City, MO 64105-2005
ADMINISTRATOR
Sunstone Financial Group, Inc.
207 East Buffalo Street, Suite 400
Milwaukee, WI 53202
<PAGE>
AUDITORS
Coopers & Lybrand L.L.P.
411 East Wisconsin Avenue
Milwaukee, WI 53202
LEGAL COUNSEL
Godfrey & Kahn, S.C.
780 North Water Street
Milwaukee, WI 53202
STATEMENT OF ADDITIONAL INFORMATION
ICAP FUNDS, INC.
ICAP Discretionary Equity Portfolio
ICAP Equity Portfolio
225 West Wacker Drive, Suite 2400
Chicago, Illinois 60606
1-800-645-2457
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the Prospectus of ICAP Funds, Inc. (the
"Company"), dated December 31, 1994. Requests for copies of the Prospectus
should be made by writing to the Company at the address listed above; or by
calling 1-800-645-2457.
This Statement of Additional Information is dated December 31, 1994, as
supplemented through July 31, 1995.
ICAP FUNDS, INC.
TABLE OF CONTENTS
Page No.
INVESTMENT RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . . .4
INVESTMENT POLICIES AND TECHNIQUES . . . . . . . . . . . . . . . . . . .6
Illiquid Securities . . . . . . . . . . . . . . . . . . . . . . . . .6
Short-Term Fixed Income Securities . . . . . . . . . . . . . . . . . .6
Short Sales Against the Box . . . . . . . . . . . . . . . . . . . . .8
Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
When-Issued Securities . . . . . . . . . . . . . . . . . . . . . . . .8
Unseasoned Companies . . . . . . . . . . . . . . . . . . . . . . . . .9
Non-Investment Grade Debt Securities "Junk Bonds" . . . . . . . . . .9
Hedging Strategies . . . . . . . . . . . . . . . . . . . . . . . . . 11
General Description of Hedging Strategies . . . . . . . . . . . .11
General Limitations on Futures and Options Transactions . . . . .11
Asset Coverage for Futures and Options Positions . . . . . . . .11
Stock Index Options . . . . . . . . . . . . . . . . . . . . . . .12
Certain Considerations Regarding Options . . . . . . . . . . . .12
Federal Tax Treatment of Options . . . . . . . . . . . . . . . .13
Futures Contracts . . . . . . . . . . . . . . . . . . . . . . . .13
Options on Futures . . . . . . . . . . . . . . . . . . . . . . .15
Federal Tax Treatment of Futures Contracts . . . . . . . . . . .16
DIRECTORS AND OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . 16
PRINCIPAL SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . 18
INVESTMENT ADVISER . . . . . . . . . . . . . . . . . . . . . . . . . . 19
PORTFOLIO TRANSACTIONS AND BROKERAGE . . . . . . . . . . . . . . . . . 20
CUSTODIAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT . . . . . . . . . . . . . 22
TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
DETERMINATION OF NET ASSET VALUE . . . . . . . . . . . . . . . . . . . 22
SHAREHOLDER MEETINGS . . . . . . . . . . . . . . . . . . . . . . . . . 22
<PAGE>
PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . 23
INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . . 25
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . 25
APPENDIX A - BOND RATINGS . . . . . . . . . . . . . . . . . . . . . . . A-1
No person has been authorized to give any information or to make any
representations other than those contained in this Statement of Additional
Information and the Prospectus dated December 31, 1994, and if given or made,
such information or representations may not be relied upon as having been
authorized by the Company.
This Statement of Additional Information does not constitute an offer to
sell securities.
<PAGE>
INVESTMENT RESTRICTIONS
The investment objective of both the ICAP Discretionary Equity Portfolio
(the "Discretionary Equity Portfolio") and the ICAP Equity Portfolio (the
"Equity Portfolio") (hereinafter collectively referred to as the "Portfolios")
is to seek a superior total return with only a moderate degree of risk. This
investment objective is relative to and measured against the Standard & Poor's
500 ("S&P 500"). The investment objective and policies of each Portfolio are
described in detail in the Prospectus under the captions "DISCRETIONARY EQUITY
PORTFOLIO" and "EQUITY PORTFOLIO." The following is a complete list of each
Portfolio's fundamental investment limitations which cannot be changed without
shareholder approval.
Neither Portfolio may:
1. With respect to 75% of its total assets, purchase securities
of any issuer (except securities issued or guaranteed by the U.S.
government or any agency or instrumentality thereof) if, as a result,
(i) more than 5% of the Portfolio's total assets would be invested in
the securities of that issuer, or (ii) the Portfolio would hold more
than 10% of the outstanding voting securities of that issuer.
2. Borrow money, except that the Portfolio may (i) borrow money
from banks for temporary or emergency purposes (but not for leverage or
the purchase of investments) and (ii) make other investments or engage
in other transactions permissible under the Investment Company Act of
1940 which may involve a borrowing, provided that the combination of (i)
and (ii) shall not exceed 33 1/3% of the value of the Portfolio's total
assets (including the amount borrowed), less the Portfolio's liabilities
(other than borrowings).
3. Act as an underwriter of another issuer's securities, except
to the extent that the Portfolio may be deemed to be an underwriter
within the meaning of the Securities Act of 1933 in connection with the
purchase and sale of portfolio securities.
4. Make loans to other persons, except through (i) the purchase
of debt securities permissible under the Portfolio's investment
policies, (ii) repurchase agreements, or (iii) the lending of portfolio
securities, provided that no such loan of portfolio securities may be
made by the Portfolio if, as a result, the aggregate of such loans would
exceed 33 1/3% of the value of the Portfolio's total assets.
5. Purchase or sell physical commodities unless acquired as a
result of ownership of securities or other instruments (but this shall
not prevent the Portfolio from purchasing or selling options, futures
contracts, or other derivative instruments, or from investing in
securities or other instruments backed by physical commodities).
6. Purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall not
prohibit the Portfolio from purchasing or selling securities or other
instruments backed by real estate or of issuers engaged in real estate
activities).
7. Issue senior securities, except as permitted under the
Investment Company Act of 1940.
8. Purchase the securities of any issuer if, as a result, more
than 25% of the Portfolio's total assets would be invested in the
securities of issuers whose principal business activities are in the
same industry.
<PAGE>
With the exception of the investment restriction set out in item 2
above, if a percentage restriction is adhered to at the time of investment, a
later increase in percentage resulting from a change in market value of the
investment or the total assets will not constitute a violation of that
restriction.
The following investment policies may be changed by the Board of
Directors of the Company (the "Board of Directors") without shareholder
approval.
Neither Portfolio may:
1. Sell securities short, unless the Portfolio owns or has the
right to obtain securities equivalent in kind and amount to the
securities sold short, and provided that transactions in options,
futures contracts, options on futures contracts, or other derivative
instruments are not deemed to constitute selling securities short.
2. Purchase securities on margin, except that the Portfolio may
obtain such short-term credits as are necessary for the clearance of
transactions; and provided that margin deposits in connection with
futures contracts, options on futures contracts, or other derivative
instruments shall not constitute purchasing securities on margin.
3. Pledge, mortgage or hypothecate any assets owned by the
Portfolio except as may be necessary in connection with permissible
borrowings or investments and then such pledging, mortgaging, or
hypothecating may not exceed 33 1/3% of the Portfolio's total assets at
the time of the borrowing or investment.
4. Purchase the securities of any issuer (other than securities
issued or guaranteed by domestic or foreign governments or political
subdivisions thereof) if, as a result, more than 5% of its total assets
would be invested in the securities of issuers that, including
predecessors or unconditional guarantors, have a record of less than
three years of continuous operation. This policy does not apply to
securities of pooled investment vehicles or mortgage or asset-backed
securities.
5. Invest in illiquid securities if, as a result of such
investment, more than 5% of the Portfolio's net assets would be invested
in illiquid securities.
6. Purchase securities of open-end or closed-end investment
companies except in compliance with the Investment Company Act and
applicable state law.
7. Enter into futures contracts or related options if more than
30% of the Portfolio's net assets would be represented by futures
contracts or more than 5% of the Portfolio's net assets would be
committed to initial margin deposits and premiums on futures contracts
and related options.
8. Invest in direct interests in oil, gas or other mineral
exploration programs or leases; however, the Portfolio may invest in the
securities of issuers that engage in these activities.
9. Purchase securities when borrowings exceed 5% of its total
assets.
<PAGE>
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the discussion of the Portfolios'
investment objectives, policies, and techniques that are described in the
Prospectus under the captions "DISCRETIONARY EQUITY PORTFOLIO," "EQUITY
PORTFOLIO," and "INVESTMENT TECHNIQUES AND RISKS."
Illiquid Securities
The Portfolios may invest in illiquid securities (i.e., securities that
are not readily marketable). For purposes of this restriction, illiquid
securities include, but are not limited to, restricted securities (securities
the disposition of which is restricted under the federal securities laws),
securities which may be resold pursuant to Rule 144A under the Securities Act
of 1933, as amended (the "Securities Act"), and repurchase agreements with
maturities in excess of seven days. However, neither Portfolio will acquire
illiquid securities if, as a result, such securities would comprise more than
5% of the value of the Portfolio's net assets. The Board of Directors or its
delegate has the ultimate authority to determine, to the extent permissible
under the federal securities laws, which securities are liquid or illiquid for
purposes of this 5% limitation. The Board of Directors has delegated to
Institutional Capital Corporation ("ICAP") the day-to-day determination of the
liquidity of any security, although it has retained oversight and ultimate
responsibility for such determinations. Although no definitive liquidity
criteria are used, the Board of Directors has directed ICAP to look to such
factors as (i) the nature of the market for a security (including the
institutional private resale market), (ii) the terms of certain securities or
other instruments allowing for the disposition to a third party or the issuer
thereof (e.g., certain repurchase obligations and demand instruments), (iii)
the availability of market quotations (e.g., for securities quoted in the
PORTAL system), and (iv) other permissible relevant factors.
Restricted securities may be sold only in privately negotiated
transactions or in a public offering with respect to which a registration
statement is in effect under the Securities Act. Where registration is
required, a Portfolio may be obligated to pay all or part of the registration
expenses and a considerable period may elapse between the time of the decision
to sell and the time the Portfolio may be permitted to sell a security under
an effective registration statement. If, during such a period, adverse market
conditions were to develop, the Portfolio might obtain a less favorable price
than that which prevailed when it decided to sell. Restricted securities will
be priced at fair value as determined in good faith by the Board of Directors.
If, through the appreciation of restricted securities or the depreciation of
unrestricted securities, a Portfolio should be in a position where more than
5% of the value of its net assets are invested in illiquid securities,
including restricted securities which are not readily marketable, the affected
Portfolio will take such steps as is deemed advisable, if any, to protect
liquidity.
Short-Term Fixed Income Securities
The Discretionary Equity Portfolio may invest up to 35% of its total
assets and, for defensive, temporary purposes up to 100% of its total assets,
in short-term fixed income securities, defined below. The Equity Portfolio
intends to be fully invested at all times and accordingly will only hold
short-term fixed income securities to meet anticipated redemption requests,
pay expenses and pending investment, which, in any case, generally will not
exceed 5% of its total assets. Short-term fixed income securities are defined
to include without limitation, the following:
1. U.S. government securities, including bills, notes and bonds
differing as to maturity and rates of interest, which are either issued
or guaranteed by the U.S. Treasury or by U.S. government agencies or
instrumentalities. U.S. government agency securities include securities
issued by (a) the Federal Housing Administration, Farmers Home
Administration, Export-Import Bank of the United States, Small Business
Administration, and the Government National Mortgage Association, whose
securities are
<PAGE>
supported by the full faith and credit of the United
States; (b) the Federal Home Loan Banks, Federal Intermediate Credit
Banks, and the Tennessee Valley Authority, whose securities are
supported by the right of the agency to borrow from the U.S. Treasury;
(c) the Federal National Mortgage Association, whose securities are
supported by the discretionary authority of the U.S. government to
purchase certain obligations of the agency or instrumentality; and (d)
the Student Loan Marketing Association, whose securities are supported
only by its credit. While the U.S. government provides financial
support to such U.S. government-sponsored agencies or instrumentalities,
no assurance can be given that it always will do so since it is not so
obligated by law. The U.S. government, its agencies, and
instrumentalities do not guarantee the market value of their securities,
and consequently, the value of such securities may fluctuate.
2. Certificates of Deposit issued against funds deposited in a
bank or savings and loan association. Such certificates are for a
definite period of time, earn a specified rate of return, and are
normally negotiable. If such certificates of deposit are non-
negotiable, they will be considered illiquid securities and be subject
to the Portfolios' 5% restriction on investments in illiquid securities.
Pursuant to the certificate of deposit, the issuer agrees to pay the
amount deposited plus interest to the bearer of the certificate on the
date specified thereon. Under current FDIC regulations, the maximum
insurance payable as to any one certificate of deposit is $100,000;
therefore, certificates of deposit purchased by a Portfolio may not be
fully insured.
3. Bankers' acceptances which are short-term credit instruments
used to finance commercial transactions. Generally, an acceptance is a
time draft drawn on a bank by an exporter or an importer to obtain a
stated amount of funds to pay for specific merchandise. The draft is
then "accepted" by a bank that, in effect, unconditionally guarantees to
pay the face value of the instrument on its maturity date. The
acceptance may then be held by the accepting bank as an asset or it may
be sold in the secondary market at the going rate of interest for a
specific maturity.
4. Repurchase agreements which involve purchases of debt
securities. In such an action, at the time a Portfolio purchases the
security, it simultaneously agrees to resell and redeliver the security
to the seller, who also simultaneously agrees to buy back the security
at a fixed price and time. This assures a predetermined yield for the
Portfolio during its holding period since the resale price is always
greater than the purchase price and reflects an agreed-upon market rate.
Such actions afford an opportunity for the Portfolio to invest
temporarily available cash. The Portfolios may enter into repurchase
agreements only with respect to obligations of the U.S. government, its
agencies or instrumentalities; certificates of deposit; or bankers
acceptances in which the Portfolios may invest. Repurchase agreements
may be considered loans to the seller, collateralized by the underlying
securities. The risk to the Portfolios is limited to the ability of the
seller to pay the agreed-upon sum on the repurchase date; in the event
of default, the repurchase agreement provides that the affected
Portfolio is entitled to sell the underlying collateral. If the value
of the collateral declines after the agreement is entered into, however,
and if the seller defaults under a repurchase agreement when the value
of the underlying collateral is less than the repurchase price, the
Portfolio could incur a loss of both principal and interest. ICAP
monitors the value of the collateral at the time the action is entered
into and at all times during the term of the repurchase agreement. ICAP
does so in an effort to determine that the value of the collateral
always equals or exceeds the agreed-upon repurchase price to be paid to
the Portfolio. If the seller were to be subject to a federal bankruptcy
proceeding, the ability of a Portfolio to liquidate the collateral could
be delayed or impaired because of certain provisions of the bankruptcy
laws.
<PAGE>
5. Bank time deposits, which are monies kept on deposit with
banks or savings and loan associations for a stated period of time at a
fixed rate of interest. There may be penalties for the early withdrawal
of such time deposits, in which case the yields of these investments
will be reduced.
6. Commercial paper, which are short-term unsecured promissory
notes, including variable rate master demand notes issued by
corporations to finance their current operations. Master demand notes
are direct lending arrangements between a Portfolio and a corporation.
There is no secondary market for the notes. However, they are
redeemable by the Portfolios at any time. ICAP will consider the
financial condition of the corporation (e.g., earning power, cash flow,
and other liquidity ratios) and will continuously monitor the
corporation's ability to meet all of its financial obligations, because
a Portfolio's liquidity might be impaired if the corporation were unable
to pay principal and interest on demand. Investments in commercial
paper will be limited to commercial paper rated in the two highest
categories by a major rating agency or unrated commercial paper which
is, in the opinion of ICAP, of comparable quality.
Short Sales Against the Box
When ICAP believes that the price of a particular security held by a
Portfolio may decline, it may make "short sales against the box" to hedge the
unrealized gain on such security. Selling short against the box involves
selling a security which the Portfolio owns for delivery at a specified date
in the future. Each Portfolio will limit its transactions in short sales
against the box to 5% of its net assets. In addition, each Portfolio will
limit its transactions such that the value of the securities of any issuer in
which it is short will not exceed the lesser of 2% of the value of the
Portfolio's net assets or 2% of the securities of any class of the issuer.
If, for example, a Portfolio bought 100 shares of ABC at $40 per share in
January and the price appreciates to $50 in March, the Portfolio might "sell
short" the 100 shares at $50 for delivery the following July. Thereafter, if
the price of the stock declines to $45, it will realize the full $1,000 gain
rather than the $500 gain it would have received had it sold the stock in the
market. On the other hand, if the price appreciates to $55 per share, the
Portfolio would be required to sell at $50 and thus receive a $1,000 gain
rather than the $1,500 gain it would have received had it sold the stock in
the market. The Portfolios may also be required to pay a premium for short
sales which would partially offset any gain.
Warrants
Each Portfolio may invest in warrants if, after giving effect thereto,
not more than 5% of its net assets will be invested in warrants other than
warrants acquired in units or attached to other securities. Of such 5%, not
more than 2% of its assets at the time of purchase may be invested in warrants
that are not listed on the New York Stock Exchange or the American Stock
Exchange. Investing in warrants is purely speculative in that they have no
voting rights, pay no dividends, and have no rights with respect to the assets
of the corporation issuing them. Warrants basically are options to purchase
equity securities at a specific price for a specific period of time. They do
not represent ownership of the securities but only the right to buy them.
Warrants are issued by the issuer of the security, which may be purchased on
their exercise. The prices of warrants do not necessarily parallel the prices
of the underlying securities.
When-Issued Securities
The Portfolios may from time to time purchase securities on a "when-
issued" basis. The price of securities purchased on a when-issued basis is
fixed at the time the commitment to purchase is made, but delivery and payment
for the securities take place at a later date. Normally, the settlement date
occurs within 45 days of the purchase.
<PAGE>
During the period between the purchase
and settlement, no payment is made by the Portfolios to the issuer and no
interest is accrued on debt securities or dividend income is earned on equity
securities. Forward commitments involve a risk of loss if the value of the
security to be purchased declines prior to the settlement date, which risk is
in addition to the risk of decline in value of the Portfolios' other assets.
While when-issued securities may be sold prior to the settlement date, the
Portfolios intend to purchase such securities with the purpose of actually
acquiring them. At the time a Portfolio makes the commitment to purchase a
security on a when-issued basis, it will record the transaction and reflect
the value of the security in determining its net asset value. The Portfolios
do not believe that net asset value will be adversely affected by purchases of
securities on a when-issued basis.
The Portfolios will maintain cash, U.S. government securities and high
grade liquid debt securities equal in value to commitments for when-issued
securities. Such segregated securities either will mature or, if necessary,
be sold on or before the settlement date. When the time comes to pay for
when-issued securities, each Portfolio will meet its obligations from then
available cash flow, sale of the securities held in the separate account,
described above, sale of other securities or, although it would not normally
expect to do so, from the sale of the when-issued securities themselves (which
may have a market value greater or less than the Portfolio's payment
obligation).
Unseasoned Companies
Neither Portfolio may invest more than 5% of its net assets in
unseasoned companies. While smaller companies generally have potential for
rapid growth, they often involve higher risks because they lack the management
experience, financial resources, product diversification, and competitive
strengths of larger corporations. In addition, in many instances, the
securities of smaller companies are traded only over-the-counter or on
regional securities exchanges, and the frequency and volume of their trading
is substantially less than is typical of larger companies. Therefore, the
securities of smaller companies may be subject to wider price fluctuations.
When making large sales, the Portfolios may have to sell portfolio holdings of
small companies at discounts from quoted prices or may have to make a series
of smaller sales over an extended period of time due to the trading volume in
smaller company securities.
Non-Investment Grade Debt Securities "Junk Bonds"
The Portfolios may invest up to 5% of their assets in junk bonds. Junk
bonds while generally offering higher yields than investment grade securities
with similar maturities, involve greater risks, including the possibility of
default or bankruptcy. They are regarded as predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal. The
special risk considerations in connection with investments in these securities
are discussed below. Refer to the Appendix of this Statement of Additional
Information for a discussion of securities ratings.
Effect of Interest Rates and Economic Changes. The junk bond market is
relatively new and its growth has paralleled a long economic expansion. As a
result, it is not clear how this market may withstand a prolonged recession or
economic downturn. Such an economic downturn could severely disrupt the
market for and adversely affect the value of such securities.
All interest-bearing securities typically experience appreciation when
interest rates decline and depreciation when interest rates rise. The market
values of junk bond securities tend to reflect individual corporate
developments to a greater extent than do higher rated securities, which react
primarily to fluctuations in the general level of interest rates. Junk bond
securities also tend to be more sensitive to economic conditions than are
higher-rated securities. As a result, they generally involve more credit
risks than securities in the higher-rated categories. During an economic
downturn or a sustained period of rising interest rates, highly leveraged
issuers of junk bond
<PAGE>
securities may experience financial stress and may not
have sufficient revenues to meet their payment obligations. The risk of loss
due to default by an issuer of these securities is significantly greater than
issuers of higher-rated securities because such securities are generally
unsecured and are often subordinated to other creditors. Further, if the
issuer of a junk bond security defaulted, a Portfolio might incur additional
expenses to seek recovery. Periods of economic uncertainty and changes would
also generally result in increased volatility in the market prices of these
securities and thus in a Portfolio's net asset value.
As previously stated, the value of a junk bond security will generally
decrease in a rising interest rate market, and accordingly so will a
Portfolio's net asset value. If a Portfolio experiences unexpected net
redemptions in such a market, it may be forced to liquidate a portion of its
portfolio securities without regard to their investment merits. Due to the
limited liquidity of junk bond securities, a Portfolio may be forced to
liquidate these securities at a substantial discount. Any such liquidation
would reduce a Portfolio's asset base over which expenses could be allocated
and could result in a reduced rate of return for the Portfolio.
Payment Expectations. Junk bond securities typically contain
redemption, call or prepayment provisions which permit the issuer of such
securities containing such provisions to redeem the securities at its
discretion. During periods of falling interest rates, issuers of these
securities are likely to redeem or prepay the securities and refinance them
with debt securities with a lower interest rate. To the extent an issuer is
able to refinance the securities, or otherwise redeem them, a Portfolio may
have to replace the securities with a lower yielding security, which could
result in a lower return for the Portfolio.
Credit Ratings. Credit ratings issued by credit-rating agencies
evaluate the safety of principal and interest payments of rated securities.
They do not, however, evaluate the market value risk of junk bond securities
and, therefore may not fully reflect the true risks of an investment. In
addition, credit rating agencies may or may not make timely changes in a
rating to reflect changes in the economy or in the condition of the issuer
that affect the market value of the security. Consequently, credit ratings
are used only as a preliminary indicator of investment quality. Investments
in junk bond securities will be more dependent on ICAP's credit analysis than
would be the case with investments in investment-grade debt securities. ICAP
employs its own credit research and analysis, which includes a study of
existing debt, capital structure, ability to service debt and to pay
dividends, the issuer's sensitivity to economic conditions, its operating
history and the current trend of earnings. ICAP continually monitors each
Portfolios' investments and carefully evaluates whether to dispose of or to
retain junk bond securities whose credit ratings or credit quality may have
changed.
Liquidity and Valuation. A Portfolio may have difficulty disposing of
certain junk bond securities because there may be a thin trading market for
such securities. Because not all dealers maintain markets in all junk bond
securities there is no established retail secondary market for many of these
securities. The Portfolios anticipate that such securities could be sold only
to a limited number of dealers or institutional investors. To the extent a
secondary trading market does exist, it is generally not as liquid as the
secondary market for higher-rated securities. The lack of a liquid secondary
market may have an adverse impact on the market price of the security. The
lack of a liquid secondary market for certain securities may also make it more
difficult for a Portfolio to obtain accurate market quotations for purposes of
valuing the Portfolio. Market quotations are generally available on many junk
bond issues only from a limited number of dealers and may not necessarily
represent firm bids of such dealers or prices for actual sales. During
periods of thin trading, the spread between bid and asked prices is likely to
increase significantly. In addition, adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of junk bond securities, especially in a thinly traded
market.
New and Proposed Legislation. Recent legislation has been adopted, and
from time to time, proposals have been discussed, regarding new legislation
designed to limit the use of certain junk bond securities by certain issuers.
<PAGE>
An example of legislation is a recent law which requires federally insured
savings and loan associations to divest their investments in these securities
over time. It is not currently possible to determine the impact of the recent
legislation or the proposed legislation on the junk bond securities market.
However, it is anticipated that if additional legislation is enacted or
proposed, it could have a material affect on the value of these securities and
the existence of a secondary trading market for the securities.
Hedging Strategies
General Description of Hedging Strategies
The Portfolios may engage in hedging activities. ICAP may cause the
Portfolios to utilize a variety of financial instruments, including options,
futures contracts (sometimes referred to as "futures") and options on futures
contracts to attempt to hedge a Portfolio's holdings.
Hedging instruments on securities generally are used to hedge against
price movements in one or more particular securities positions that a
Portfolio owns or intends to acquire. Hedging instruments on stock indices,
in contrast, generally are used to hedge against price movements in broad
equity market sectors in which a Portfolio has invested or expects to invest.
The use of hedging instruments is subject to applicable regulations of the
Securities and Exchange Commission (the "SEC"), the several options and
futures exchanges upon which they are traded, the Commodity Futures Trading
Commission (the "CFTC") and various state regulatory authorities. In
addition, a Portfolio's ability to use hedging instruments will be limited by
tax considerations.
General Limitations on Futures and Options Transactions
The Company has filed a notice of eligibility for exclusion from the
definition of the term "commodity pool operator" with the CFTC and the
National Futures Association, which regulate trading in the futures markets.
Pursuant to Section 4.5 of the regulations under the Commodity Exchange Act
(the "CEA"), the notice of eligibility for the Portfolios includes the
representation that the Portfolios will use futures contracts and related
options solely for bona fide hedging purposes within the meaning of CFTC
regulations, provided that the Portfolios may hold other positions in futures
contracts and related options that do not fall within the definition of bona
fide hedging transactions (i.e., for speculative purposes) if aggregate
initial margins and premiums paid do not exceed 5% of the net asset value of
the respective Portfolios. In addition, neither Portfolio will enter into
futures contracts and options transactions if more than 30% of its net assets
would be committed to such instruments.
The foregoing limitations are not fundamental policies of the Portfolios
and may be changed without shareholder approval as regulatory agencies permit.
Various exchanges and regulatory authorities have undertaken reviews of
options and futures trading in light of market volatility. Among the possible
actions that have been presented are proposals to adopt new or more stringent
daily price fluctuation limits for futures and options transactions and
proposals to increase the margin requirements for various types of futures
transactions.
Asset Coverage for Futures and Options Positions
Each Portfolio will comply with the regulatory requirements of the SEC
and the CFTC with respect to coverage of options and futures positions by
registered investment companies and, if the guidelines so require, will set
aside cash, U.S. government securities, high grade liquid debt securities
and/or other liquid assets permitted by the SEC and CFTC in a segregated
custodial account in the amount prescribed. Securities held in a segregated
<PAGE>
account cannot be sold while the futures or options position is outstanding,
unless replaced with other permissible assets, and will be marked-to-market
daily.
Stock Index Options
Each Portfolio may (i) purchase stock index options for any purpose,
(ii) sell stock index options in order to close out existing positions, and/or
(iii) write covered options on stock indexes for hedging purposes. Stock
index options are put options and call options on various stock indexes. In
most respects, they are identical to listed options on common stocks. The
primary difference between stock options and index options occurs when index
options are exercised. In the case of stock options, the underlying security,
common stock, is delivered. However, upon the exercise of an index option,
settlement does not occur by delivery of the securities comprising the index.
The option holder who exercises the index option receives an amount of cash if
the closing level of the stock index upon which the option is based is greater
than, in the case of a call, or less than, in the case of a put, the exercise
price of the option. This amount of cash is equal to the difference between
the closing price of the stock index and the exercise price of the option
expressed in dollars times a specified multiple.
A stock index fluctuates with changes in the market values of the stocks
included in the index. For example, some stock index options are based on a
broad market index, such as the Standard & Poor's 500 or the Value Line
Composite Index or a narrower market index, such as the Standard & Poor's 100.
Indexes may also be based on an industry or market segment, such as the AMEX
Oil and Gas Index or the Computer and Business Equipment Index. Options on
stock indexes are currently traded on the following exchanges: the Chicago
Board Options Exchange, the New York Stock Exchange, the American Stock
Exchange, the Pacific Stock Exchange, and the Philadelphia Stock Exchange.
A Portfolio's use of stock index options is subject to certain risks.
Successful use by the Portfolios of options on stock indexes will be subject
to the ability of the ICAP to correctly predict movements in the directions of
the stock market. This requires different skills and techniques than
predicting changes in the prices of individual securities. In addition, a
Portfolio's ability to effectively hedge all or a portion of the securities in
its portfolio, in anticipation of or during a market decline through
transactions in put options on stock indexes, depends on the degree to which
price movements in the underlying index correlate with the price movements of
the securities held by a Portfolio. Inasmuch as a Portfolio's securities will
not duplicate the components of an index, the correlation will not be perfect.
Consequently, each Portfolio will bear the risk that the prices of its
securities being hedged will not move in the same amount as the prices of its
put options on the stock indexes. It is also possible that there may be a
negative correlation between the index and a Portfolio's securities which
would result in a loss on both such securities and the options on stock
indexes acquired by the Portfolio.
The hours of trading for options may not conform to the hours during
which the underlying securities are traded. To the extent that the options
markets close before the markets for the underlying securities, significant
price and rate movements can take place in the underlying markets that cannot
be reflected in the options markets. The purchase of options is a highly
specialized activity which involves investment techniques and risks different
from those associated with ordinary portfolio securities transactions. The
purchase of stock index options involves the risk that the premium and
transaction costs paid by a Portfolio in purchasing an option will be lost as
a result of unanticipated movements in prices of the securities comprising the
stock index on which the option is based.
Certain Considerations Regarding Options
There is no assurance that a liquid secondary market on an options
exchange will exist for any particular option, or at any particular time, and
for some options no secondary market on an exchange or elsewhere may exist.
<PAGE>
If a Portfolio is unable to close out a call option on securities that it has
written before the option is exercised, the Portfolio may be required to
purchase the optioned securities in order to satisfy its obligation under the
option to deliver such securities. If a Portfolio is unable to effect a
closing sale transaction with respect to options on securities that it has
purchased, it would have to exercise the option in order to realize any profit
and would incur transaction costs upon the purchase and sale of the underlying
securities.
The writing and purchasing of options is a highly specialized activity
which involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. Imperfect correlation
between the options and securities markets may detract from the effectiveness
of attempted hedging. Options transactions may result in significantly higher
transaction costs and portfolio turnover for the Portfolios.
Federal Tax Treatment of Options
Certain option transactions have special tax results for the Portfolios.
Expiration of a call option written by a Portfolio will result in short-term
capital gain. If the call option is exercised, the Portfolio will realize a
gain or loss from the sale of the security covering the call option and, in
determining such gain or loss, the option premium will be included in the
proceeds of the sale.
If a Portfolio writes options other than "qualified covered call
options," as defined in Section 1092 of the Internal Revenue Code of 1986, as
amended (the "Code"), or purchases puts, any losses on such options trans-
actions, to the extent they do not exceed the unrealized gains on the
securities covering the options, may be subject to deferral until the
securities covering the options have been sold.
In the case of transactions involving "nonequity options," as defined in
Code Section 1256, the Portfolios will treat any gain or loss arising from the
lapse, closing out or exercise of such positions as 60% long-term and 40%
short-term capital gain or loss as required by Section 1256 of the Code. In
addition, such positions must be marked-to-market as of the last business day
of the year, and gain or loss must be recognized for federal income tax
purposes in accordance with the 60%/40% rule discussed above even though the
position has not been terminated. A "nonequity option" includes an option
with respect to any group of stocks or a stock index if there is in effect a
designation by the CFTC of a contract market for a contract based on such
group of stocks or indexes. For example, options involving stock indexes such
as the Standard & Poor's 500 and 100 indexes would be "nonequity options"
within the meaning of Code Section 1256.
Futures Contracts
The Portfolios may enter into futures contracts (hereinafter referred to
as "Futures" or "Futures Contracts"), including index Futures as a hedge
against movements in the equity markets, in order to establish more definitely
the effective return on securities held or intended to be acquired by the
Portfolios or for other purposes permissible under the CEA. Each Portfolio's
hedging may include sales of Futures as an offset against the effect of
expected declines in stock prices and purchases of Futures as an offset
against the effect of expected increases in stock prices. The Portfolios will
not enter into Futures Contracts which are prohibited under the CEA and will,
to the extent required by regulatory authorities, enter only into Futures
Contracts that are traded on national futures exchanges and are standardized
as to maturity date and underlying financial instrument. The principal
interest rate Futures exchanges in the United States are the Board of Trade of
the City of Chicago and the Chicago Mercantile Exchange. Futures exchanges
and trading are regulated under the CEA by the CFTC.
An index Futures Contract is an agreement pursuant to which the parties
agree to take or make delivery of an amount of cash equal to the difference
between the value of the index at the close of the last trading day of the
<PAGE>
contract and the price at which the index Futures Contract was originally
written. Transaction costs are incurred when a Futures Contract is bought or
sold and margin deposits must be maintained. A Futures Contract may be
satisfied by delivery or purchase, as the case may be, of the instrument or by
payment of the change in the cash value of the index. More commonly, Futures
Contracts are closed out prior to delivery by entering into an offsetting
transaction in a matching Futures Contract. Although the value of an index
might be a function of the value of certain specified securities, no physical
delivery of those securities is made. If the offsetting purchase price is
less than the original sale price, a gain will be realized; if it is more, a
loss will be realized. Conversely, if the offsetting sale price is more than
the original purchase price, a gain will be realized; if it is less, a loss
will be realized. The transaction costs must also be included in these
calculations. There can be no assurance, however, that the Portfolios will be
able to enter into an offsetting transaction with respect to a particular
Futures Contract at a particular time. If the Portfolios are not able to
enter into an offsetting transaction, the Portfolios will continue to be
required to maintain the margin deposits on the Futures Contract.
A public market exists in Futures Contracts covering a number of
indexes, including, but not limited to, the Standard & Poor's 500 Index, the
Standard & Poor's 100 Index, the NASDAQ 100 Index, the Value Line Composite
Index and the New York Stock Exchange Composite Index.
Margin is the amount of funds that must be deposited by each Portfolio
with its custodian in a segregated account in the name of the futures
commission merchant in order to initiate Futures trading and to maintain the
Portfolio's open positions in Futures Contracts. A margin deposit is intended
to ensure the Portfolio's performance of the Futures Contract. The margin
required for a particular Futures Contract is set by the exchange on which the
Futures Contract is traded and may be significantly modified from time to time
by the exchange during the term of the Futures Contract. Futures Contracts
are customarily purchased and sold on margins that may range upward from less
than 5% of the value of the Futures Contract being traded.
If the price of an open Futures Contract changes (by increase in the
case of a sale or by decrease in the case of a purchase) so that the loss on
the Futures Contract reaches a point at which the margin on deposit does not
satisfy margin requirements, the broker will require an increase in the
margin. However, if the value of a position increases because of favorable
price changes in the Futures Contract so that the margin deposit exceeds the
required margin, the broker will pay the excess to the Portfolio. In
computing daily net asset value, each Portfolio will mark to market the
current value of its open Futures Contracts. The Portfolios expect to earn
interest income on their margin deposits.
Because of the low margin deposits required, Futures trading involves an
extremely high degree of leverage. As a result, a relatively small price
movement in a Futures Contract may result in immediate and substantial loss,
as well as gain, to the investor. For example, if at the time of purchase,
10% of the value of the Futures Contract is deposited as margin, a subsequent
10% decrease in the value of the Futures Contract would result in a total loss
of the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit, if the Futures Contract were closed out.
Thus, a purchase or sale of a Futures Contract may result in losses in excess
of the amount initially invested in the Futures Contract. However, a
Portfolio would presumably have sustained comparable losses if, instead of the
Futures Contract, it had invested in the underlying financial instrument and
sold it after the decline.
Most United States Futures exchanges limit the amount of fluctuation
permitted in Futures Contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a Futures Contract may
vary either up or down from the previous day's settlement price at the end of
a trading session. Once the daily limit has been reached in a particular type
of Futures Contract, no trades may be made on that day at a price beyond that
<PAGE>
limit. The daily limit governs only price movement during a particular
trading day and therefore does not limit potential losses, because the limit
may prevent the liquidation of unfavorable positions. Futures Contract prices
have occasionally moved to the daily limit for several consecutive trading
days with little or no trading, thereby preventing prompt liquidation of
Futures positions and subjecting some Futures traders to substantial losses.
There can be no assurance that a liquid market will exist at a time when
the Portfolios seek to close out a Futures position. The Portfolios would
continue to be required to meet margin requirements until the position is
closed, possibly resulting in a decline in the Portfolios' net asset value.
In addition, many of the contracts discussed above are relatively new
instruments without a significant trading history. As a result, there can be
no assurance that an active secondary market will develop or continue to
exist.
Options on Futures
The Portfolios may also purchase or write put and call options on
Futures Contracts and enter into closing transactions with respect to such
options to terminate an existing position. A futures option gives the holder
the right, in return for the premium paid, to assume a long position (call) or
short position (put) in a Futures Contract at a specified exercise price prior
to the expiration of the option. Upon exercise of a call option, the holder
acquires a long position in the Futures Contract and the writer is assigned
the opposite short position. In the case of a put option, the opposite is
true. Prior to exercise or expiration, a futures option may be closed out by
an offsetting purchase or sale of a futures option of the same series.
The Portfolios may use options on Futures Contracts in connection with
hedging strategies. Generally, these strategies would be employed under the
same market and market sector conditions in which the Portfolios use put and
call options on securities or indexes. The purchase of put options on Futures
Contracts is analogous to the purchase of puts on securities or indexes so as
to hedge the Portfolios' securities holdings against the risk of declining
market prices. The writing of a call option or the purchasing of a put option
on a Futures Contract constitutes a partial hedge against declining prices of
the securities which are deliverable upon exercise of the Futures Contract.
If the futures price at expiration of a written call option is below the
exercise price, the Portfolio will retain the full amount of the option
premium which provides a partial hedge against any decline that may have
occurred in the Portfolio's holdings of securities. If the futures price when
the option is exercised is above the exercise price, however, the Portfolio
will incur a loss, which may be offset, in whole or in part, by the increase
in the value of the securities held by the Portfolio that were being hedged.
Writing a put option or purchasing a call option on a Futures Contract serves
as a partial hedge against an increase in the value of the securities the
Portfolio intends to acquire.
As with investments in Futures Contracts, each Portfolio is required to
deposit and maintain margin with respect to put and call options on Futures
Contracts written by it. Such margin deposits will vary depending on the
nature of the underlying Futures Contract (and the related initial margin
requirements), the current market value of the option, and other futures
positions held by the Portfolio. The Portfolios will set aside in a
segregated account at the Portfolios' custodian liquid assets, such as cash,
U.S. government securities or other high grade liquid debt obligations equal
in value to the amount due on the underlying obligation. Such segregated
assets will be marked to market daily, and additional assets will be placed in
the segregated account whenever the total value of the segregated account
falls below the amount due on the underlying obligation.
The risks associated with the use of options on Futures Contracts
include the risk that a Portfolio may close out its position as a writer of an
option only if a liquid secondary market exists for such options, which cannot
be assured. The Portfolios' successful use of options on Futures Contracts
depends on ICAP's ability to correctly predict the movement in prices of
Futures Contracts and the underlying instruments, which may prove to be
<PAGE>
incorrect. In addition, there may be imperfect correlation between the
instruments being hedged and the Futures Contract subject to the option. For
additional information, see "Futures Contracts."
Federal Tax Treatment of Futures Contracts
For federal income tax purposes, each Portfolio is required to recognize
as income for each taxable year its net unrealized gains and losses on Futures
Contracts as of the end of the year, as well as gains and losses actually
realized during the year. Except for transactions in Futures Contracts that
are classified as part of a "mixed straddle" under Code Section 1256, any gain
or loss recognized with respect to a Futures Contract is considered to be 60%
long-term capital gain or loss and 40% short-term capital gain or loss,
without regard to the holding period of the Futures Contract. In the case of
a Futures transaction not classified as a "mixed straddle," the recognition of
losses may be deferred to a later taxable year.
Sales of Futures Contracts that are intended to hedge against a change
in the value of securities held by a Portfolio may affect the holding period
of such securities and, consequently, the nature of the gain or loss on such
securities upon disposition.
Each Portfolio intends to operate as a "Regulated Investment Company"
under Subchapter M of the Code, and therefore will not be liable for federal
income taxes to the extent earnings are timely distributed. In addition, as a
result of being a Regulated Investment Company, net capital gain that the
Portfolios distribute to shareholders will retain their original capital gain
character in the shareholders' individual tax returns.
In order for each Portfolio to qualify for federal income tax treatment
as a Regulated Investment Company, at least 90% of the gross income of each
Portfolio for a taxable year must be derived from qualifying income; i.e.,
dividends, interest, income derived from loans of securities and gains from
the sale of securities, and other income (including gains on options and
futures contracts) derived with respect to the Portfolio's business of
investing in stock or securities. In addition, gains realized on the sale or
other disposition of securities or Futures Contracts held for less than three
months must be limited to less than 30% of the Portfolio's annual gross
income. It is anticipated that any net gain realized from the closing out of
Futures Contracts will be considered gain from the sale of securities and
therefore be qualifying income for purposes of the 90% requirement. For
purposes of applying these tests, any increase in value on a position that is
part of a designated hedge will be offset by any decrease in value (whether or
not realized) on any other position that is part of such hedge. It is
anticipated that unrealized gains on Futures Contracts which have been open
for less than three months as of the end of a Portfolio's fiscal year and
which are recognized for tax purposes will not be considered gains on
securities held less than three months for purposes of the 30% test.
The Portfolios will distribute to shareholders annually any net capital
gains which have been recognized for federal income tax purposes (including
unrealized gains at the end of the Portfolio's fiscal year) on Futures
transactions. Such distributions will be combined with distributions of
capital gains realized on the Portfolios' other investments and shareholders
will be advised of the nature of the payments.
DIRECTORS AND OFFICERS
The directors and officers of the Company, together with information as
to their principal business occupations during the last five years, and other
information, are shown below. Each director who is deemed an "interested
person," as defined in the Investment Company Act of 1940 ("Investment Company
Act"), is indicated by an asterisk.
<PAGE>
*Robert H. Lyon, President and a Director of the Company.
Mr. Lyon joined ICAP in 1988 and has been the President, Chief
Investment Officer, and a Director of ICAP since 1992. For the seven
years prior to joining ICAP, Mr. Lyon was an Executive Vice President
and Director of Research with Fred Alger Management in New York. Mr.
Lyon graduated from Northwestern University with a B.A. in economics and
received his M.B.A. from the Wharton School of Finance.
*Pamela H. Conroy, Vice President, Treasurer and a Director of the Company.
Ms. Conroy has been the Senior Vice President of ICAP since joining the
Company in August of 1994. Her responsibilities include accounting,
systems, communication and product development. Prior to joining ICAP,
Ms. Conroy worked at the Northern Trust where she served as a Vice
President and worked in a variety of capacities in the investments and
securities processing areas over a nine year period. Ms. Conroy earned
a B.A. from the University of Illinois and an M.M. from the Kellogg
School of Management.
*Gary S. Maurer, a Director of the Company.
Mr. Maurer, who joined ICAP in 1972, has served as Executive Vice
President and a Director of ICAP since March of 1993. His
responsibilities include oversight of quantitative research, as well as
performance measurement and analysis. In addition, Mr. Maurer is the
director of ICAP's client service effort. Mr. Maurer received a B.A. in
economics from Cornell University and an M.B.A. from the University of
Chicago.
*Barbara A. Chiesa, a Director of the Company.
Ms. Chiesa, who joined ICAP in 1981 currently serves as Vice President
for Trading and is a Director of ICAP. Previously, Ms. Chiesa served as
an investment officer and trader at Harris Trust & Savings Bank. Prior
to that, Ms. Chiesa served as an equity trader at First Wisconsin Trust.
She studied accounting at the University of Wisconsin.
Dr. James A. Gentry, a Director of the Company.
Dr. Gentry, who joined the faculty at the University of Illinois in
1966, is a Professor of Finance of the College of Commerce and Business
Administration at the University. Since joining the University, Dr.
Gentry has served as Associate Dean of the College of Commerce and
Business Administration and has authored numerous articles and chapters
in books. Currently, he teaches courses in advanced financial
management and an honors course that provides outstanding undergraduate
students with the opportunity to interact with leading corporate
executives. Dr. Gentry received an A.B. from Indiana State University,
and an M.B.A. and D.B.A. from Indiana University.
Harold W. Nations, a Director of the Company.
Mr. Nations is a partner with the law firm of Shefsky & Froelich in
Chicago, Illinois. He has been with Shefsky & Froelich since March,
1991. For the seven years prior thereto, Mr. Nations was an associate
with the firm of Skadden, Arps, Slate, Meagher, & Flom.
<PAGE>
Donald D. Niemann, Vice President and Secretary of the Company.
Mr. Niemann was an original co-founder of ICAP and has served as an
Executive Vice President and a Director of ICAP since March 1993. His
responsibilities at ICAP include stock research, selection and proxy
analysis. Mr. Niemann received a B.A. in history from Princeton
University and an M.B.A. from Harvard University. He is a Chartered
Financial Analyst (CFA).
Except for Dr. James A. Gentry and Mr. Harold W. Nations, the address of
all of the above persons is Institutional Capital Corporation, 225 West Wacker
Drive, Suite 2400, Chicago, Illinois 60606. Dr. Gentry's address is the
University of Illinois, 419 Commerce West, 1206 South 6th Street, Champaign,
Illinois 61820-6271. Mr. Nations address is 323 Rosewood Avenue, Winnetka,
Illinois, 60093.
As of June 30, 1995, officers and directors of the Company did not
beneficially own any shares of common stock of the Discretionary Equity
Portfolio; however, as of that date, such officers and directors did own 8,355
shares of common stock of the Equity Portfolio, which was .72% of the Equity
Portfolio's then outstanding shares. Directors and officers of the Company
who are also officers, directors, employees, or shareholders of ICAP do not
receive any remuneration from either of the Portfolios for serving as
directors or officers.
PRINCIPAL SHAREHOLDERS
As of June 30, 1995, the following persons owned of record or are known
by the Company to own of record or beneficially more than 5% of the Company's
outstanding shares:
Name and Address Portfolio No. Shares Percentage
Clark & Co. Discretionary 41,781 5.84%
235 West Schrock Road Equity
Westerville, OH 43081
Seattle First National Bank Discretionary 427,741 59.74%
P.O. Box 94627 Equity
Pasadena, CA 91109-4127
Marshall & Ilsley Trust Discretionary 239,107 33.39%
1000 N. Water Street Equity
Milwaukee, WI 53202
Cameron S. Avery & Lawrence Equity 118,650 10.21%
Howe & Howard Jessen &
Donald S. Perkins
c/o Cameron S. Avery
Bell Boyd & Lloyd
Three First National Plaza
#3200
Chicago, IL 60602
<PAGE>
Name and Address Portfolio No. Shares Percentage
Santa Barbara Bank and Trust Equity 101,876 8.76%
P.O. Box 2340
Santa Barbara, CA 93120-2340
Bank of America Equity 58,970 5.07%
P.O. Box 94627
Pasadena, CA 91109-4627
Northern Trust Company Equity 298,005 25.64%
P.O. Box 92956
Chicago, IL 60675
Keystone District Council of Equity 127,551 10.97%
Carpenters Pension Trust
524 South 22nd Street
Harrisburg, PA 17104
Chicago Symphony Orchestra Equity 171,845 14.78%
Pension Trust
220 South Michigan Avenue
Chicago, IL 60604
Wadsworth Atheneum Equity 215,863 18.57%
600 Main Street
Hartford, CT 06103-2990
Shareholders with a controlling interest could effect the outcome of
proxy voting or the direction of management of the Company.
INVESTMENT ADVISER
Institutional Capital Corporation ("ICAP") is the investment adviser to
the Portfolios. Mr. Lyon controls ICAP and is the President, Chief Investment
Officer, and a director of ICAP. Ms. Conroy is the Senior Vice President of
ICAP, and both Mr. Maurer and Mr. Niemann are Executive Vice Presidents and
Directors of ICAP. Mr. Lyon owns 51% of ICAP. A brief description of the
Portfolios' investment advisory agreement is set forth in the Prospectus under
"MANAGEMENT."
The Portfolios' advisory agreement is dated December 30, 1994 (the
"Advisory Agreement"). The Advisory Agreement has an initial term of one year
and thereafter is required to be approved annually by the Board of Directors
of the Company or by vote of a majority of each of the Portfolio's outstanding
voting securities (as defined in the Investment Company Act). Each annual
renewal must also be approved by the vote of a majority of the Company's
directors who are not parties to the Advisory Agreement or interested persons
of any such party, cast in person at a meeting called for the purpose of
voting on such approval. The Advisory Agreement was approved by the vote of a
majority of the Company's directors who are not parties to the Advisory
Agreement or interested persons of any such party on December 6, 1994 and by
the initial shareholders of each Portfolio on December 14, 1994. The Advisory
Agreement is terminable without penalty, on 60 days' written notice by the
Board of Directors of the Company, by vote of a majority of each of the
Portfolio's outstanding voting securities, or by ICAP, and will terminate
automatically in the event of its assignment.
Under the terms of the Advisory Agreement, ICAP manages the Portfolios'
investments, subject to the supervision of the Company's Board of Directors.
ICAP is responsible for investment decisions and supplies
<PAGE>
investment research
and portfolio management. At its expense, ICAP provides office space and all
necessary office facilities, equipment and personnel for servicing the
investments of the Portfolios.
As compensation for its services, each Portfolio pays to ICAP a monthly
advisory fee at the annual rate of .80% of the average daily net asset value
of the respective Portfolio. See "DETERMINATION OF NET ASSET VALUE" in the
Prospectus. From time to time, ICAP may voluntarily waive all or a portion of
its management fee for the Portfolios. In fact, ICAP has agreed to waive its
management fee and/or reimburse each Portfolio's operating expenses to the
extent necessary to ensure that neither Portfolio's total operating expenses
exceed .80% of the respective Portfolio's average daily net assets for each
Portfolio's first 12 months of operation. The organizational expenses of each
Portfolio were advanced by ICAP and will be reimbursed by the Portfolios over
a period of not more than 60 months. The organizational expenses were
approximately $31,982 for the Discretionary Equity Portfolio and $31,981 for
the Equity Portfolio.
The Advisory Agreement requires ICAP to reimburse the Portfolios in the
event that the expenses and charges payable by the Portfolios in any fiscal
year, including the advisory fee but excluding taxes, interest, brokerage
commissions, and similar fees, exceed those set forth in any statutory or
regulatory formula prescribed by any state in which shares of the Portfolios
are registered. Such excess is determined by valuations made as of the close
of each business day of the year. The most restrictive percentage limitation
currently applicable to the Portfolios will be 2 1/2% of each Portfolio's
average net asset value up to $30,000,000, 2% on the next $70,000,000 of each
Portfolio's average net asset value and 1 1/2% of each Portfolio's average net
asset value in excess of $100,000,000. Reimbursement of expenses in excess of
the applicable limitation will be made on a monthly basis and will be paid to
the Portfolios by reduction of ICAP's fee, subject to later adjustment, month
by month, for the remainder of the Portfolios' fiscal year. ICAP may from
time to time voluntarily absorb expenses for the Portfolios in addition to the
reimbursement of expenses in excess of applicable limitations.
PORTFOLIO TRANSACTIONS AND BROKERAGE
ICAP is responsible for decisions to buy and sell securities for the
Portfolios and for the placement of the Portfolios' securities business, the
negotiation of the commissions to be paid on such transactions and the
allocation of portfolio brokerage and principal business. It is the policy of
ICAP to seek the best execution at the best security price available with
respect to each transaction, in light of the overall quality of brokerage and
research services provided to ICAP or the Portfolios. The best price to the
Portfolios means the best net price without regard to the mix between purchase
or sale price and commission, if any. Purchases may be made from
underwriters, dealers, and, on occasion, the issuers. Commissions will be
paid on the Portfolios' futures and options transactions, if any. The
purchase price of portfolio securities purchased from an underwriter or dealer
may include underwriting commissions and dealer spreads. The Portfolios may
pay mark-ups on principal transactions. In selecting broker-dealers and in
negotiating commissions, ICAP considers the firm's reliability, the quality of
its execution services on a continuing basis and its financial condition.
Brokerage will not be allocated based on the sale of a Portfolio's shares.
Section 28(e) of the Securities Exchange Act of 1934 ("Section 28(e)")
permits an investment adviser, under certain circumstances, to cause an
account to pay a broker or dealer who supplies brokerage and research services
a commission for effecting a transaction in excess of the amount of commission
another broker or dealer would have charged for effecting the transaction.
Brokerage and research services include (a) furnishing advice as to the value
of securities, the advisability of investing, purchasing or selling
securities, and the availability of securities or purchasers or sellers of
securities; (b) furnishing analyses and reports concerning issuers,
industries, securities,
<PAGE>
economic factors and trends, portfolio strategy, and
the performance of accounts; and (c) effecting securities transactions and
performing functions incidental thereto (such as clearance, settlement, and
custody).
In selecting brokers, ICAP considers investment and market information
and other research, such as economic, securities and performance measurement
research, provided by such brokers, and the quality and reliability of
brokerage services, including execution capability, performance, and financial
responsibility. Accordingly, the commissions charged by any such broker may
be greater than the amount another firm might charge if ICAP determines in
good faith that the amount of such commissions is reasonable in relation to
the value of the research information and brokerage services provided by such
broker to the Portfolios. ICAP believes that the research information
received in this manner provides the Portfolios with benefits by supplementing
the research otherwise available to the Portfolios. The Advisory Agreement
provides that such higher commissions will not be paid by the Portfolios
unless (a) ICAP determines in good faith that the amount is reasonable in
relation to the services in terms of the particular transaction or in terms of
ICAP's overall responsibilities with respect to the accounts as to which it
exercises investment discretion; (b) such payment is made in compliance with
the provisions of Section 28(e), other applicable state and federal laws, and
the Advisory Agreement; and (c) in the opinion of ICAP, the total commissions
paid by the Portfolios will be reasonable in relation to the benefits to the
Portfolios over the long term. The investment advisory fees paid by the
Portfolios under the Advisory Agreement are not reduced as a result of ICAP's
receipt of research services.
ICAP places portfolio transactions for other advisory accounts managed
by ICAP. Research services furnished by firms through which the Portfolios
effect their securities transactions may be used by ICAP in servicing all of
its accounts; not all of such services may be used by ICAP in connection with
the Portfolios. ICAP believes it is not possible to measure separately the
benefits from research services to each of the accounts (including the
Portfolios) managed by it. Because the volume and nature of the trading
activities of the accounts are not uniform, the amount of commissions in
excess of those charged by another broker paid by each account for brokerage
and research services will vary. However, ICAP believes such costs to the
Portfolios will not be disproportionate to the benefits received by the
Portfolios on a continuing basis. ICAP seeks to allocate portfolio
transactions equitably whenever concurrent decisions are made to purchase or
sell securities by the Portfolios and another advisory account. In some
cases, this procedure could have an adverse effect on the price or the amount
of securities available to the Portfolios. In making such allocations between
the Portfolio and other advisory accounts, the main factors considered by ICAP
are the respective investment objectives, the relative size of portfolio
holdings of the same or comparable securities, the availability of cash for
investment and the size of investment commitments generally held.
Each Portfolio anticipates that its portfolio turnover rate will not
exceed 150%, and is expected to be between 100 and 125%. The annual portfolio
turnover rate indicates changes in each Portfolio's securities holdings; for
instance, a rate of 100% would result if all the securities in a portfolio
(excluding securities whose maturities at acquisition were one year or less)
at the beginning of an annual period had been replaced by the end of the
period. The turnover rate may vary from year to year, as well as within a
year, and may be affected by portfolio sales necessary to meet cash
requirements for redemptions of the Portfolios' shares.
CUSTODIAN
As custodian of the Portfolios' assets, United Missouri Bank, n.a. has
custody of all securities and cash of each Portfolio, delivers and receives
payment for securities sold, receives and pays for securities purchased,
collects income from investments and performs other duties, all as directed by
the officers of the Company.
<PAGE>
TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT
Supervised Service Company, Inc. ("SSC") acts as transfer agent and
dividend-disbursing agent for the Portfolios. SSC is compensated based on an
annual fee per open account of $8.00, plus out-of-pocket expenses such as
postage and printing expenses in connection with shareholder communications.
SSC also receives an annual fee per closed account of $3.60.
TAXES
Each Portfolio will be treated as a separate entity for Federal income
tax purposes since the Tax Reform Act of 1986 requires that all portfolios of
a series fund be treated as separate taxpayers. As indicated under
"DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS, AND TAX STATUS" in the Prospectus,
each Portfolio intends to qualify annually as a "regulated investment company"
under the Code. This qualification does not involve government supervision of
the Portfolios' management practices or policies.
A dividend or capital gains distribution received shortly after the
purchase of shares reduces the net asset value of shares by the amount of the
dividend or distribution and, although in effect a return of capital, will be
subject to income taxes. Net gains on sales of securities when realized and
distributed are taxable as capital gains. If the net asset value of shares
were reduced below a shareholder's cost by distribution of gains realized on
sales of securities, such distribution would be a return of investment
although taxable as stated above.
DETERMINATION OF NET ASSET VALUE
As set forth in the Prospectus under the same caption, the net asset
value of each of the Portfolios will be determined as of the close of trading
on each day the New York Stock Exchange is open for trading. The Portfolios
do not determine net asset value on days the New York Stock Exchange is closed
and at other times described in the Prospectus. The New York Stock Exchange
is closed on New Year's Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Additionally, if any of the aforementioned holidays falls on a Saturday, the
New York Stock Exchange will not be open for trading on the preceding Friday
and when such holiday falls on a Sunday, the New York Stock Exchange will not
be open for trading on the succeeding Monday, unless unusual business
conditions exist, such as the ending of a monthly or the yearly accounting
period.
SHAREHOLDER MEETINGS
Maryland law permits registered investment companies, such as the
Company, to operate without an annual meeting of shareholders under specified
circumstances if an annual meeting is not required by the Investment Company
Act. The Company has adopted the appropriate provisions in its Bylaws and
may, at its discretion, not hold an annual meeting in any year in which the
election of directors is not required to be acted on by shareholders under the
Investment Company Act.
The Company's Bylaws also contain procedures for the removal of
directors by shareholders of the Company. At any meeting of shareholders,
duly called and at which a quorum is present, the shareholders may, by the
affirmative vote of the holders of a majority of the votes entitled to be cast
thereon, remove any director or
<PAGE>
directors from office and may elect a
successor or successors to fill any resulting vacancies for the unexpired
terms of removed directors.
Upon the written request of the holders of shares entitled to not less
than ten percent (10%) of all the votes entitled to be cast at such meeting,
the Secretary of the Company shall promptly call a special meeting of
shareholders for the purpose of voting upon the question of removal of any
director. Whenever ten or more shareholders of record who have been such for
at least six months preceding the date of application, and who hold in the
aggregate either shares having a net asset value of at least $25,000 or at
least one percent (1%) of the total outstanding shares, whichever is less,
shall apply to the Company's Secretary in writing, stating that they wish to
communicate with other shareholders with a view to obtaining signatures to a
request for a meeting as described above and accompanied by a form of
communication and request which they wish to transmit, the Secretary shall
within five business days after such application either: (1) afford to such
applicants access to a list of the names and addresses of all shareholders as
recorded on the books of the Company; or (2) inform such applicants as to the
approximate number of shareholders of record and the approximate cost of
mailing to them the proposed communication and form of request.
If the Secretary elects to follow the course specified in clause (2) of
the last sentence of the preceding paragraph, the Secretary, upon the written
request of such applicants, accompanied by a tender of the material to be
mailed and of the reasonable expenses of mailing, shall, with reasonable
promptness, mail such material to all shareholders of record at their
addresses as recorded on the books unless within five business days after such
tender the Secretary shall mail to such applicants and file with the SEC,
together with a copy of the material to be mailed, a written statement signed
by at least a majority of the Board of Directors to the effect that, in their
opinion, either such material contains untrue statements of fact or omits to
state facts necessary to make the statements contained therein not misleading,
or would be in violation of applicable law, and specifying the basis of such
opinion.
After opportunity for hearing upon the objections specified in the
written statement so filed, the SEC may, and if demanded by the Board of
Directors or by such applicants shall, enter an order either sustaining one or
more of such objections or refusing to sustain any of them. If the SEC shall
enter an order refusing to sustain any of such objections, or if, after the
entry of an order sustaining one or more of such objections, the SEC shall
find, after notice and opportunity for hearing, that all objections so
sustained have been met, and shall enter an order so declaring, the Secretary
shall mail copies of such material to all shareholders with reasonable
promptness after the entry of such order and the renewal of such tender.
PERFORMANCE INFORMATION
As described in the "COMPARISON OF INVESTMENT RESULTS" section of the
Portfolios' Prospectus, the Portfolios' historical performance or return may
be shown in the form of various performance figures. The Portfolios'
performance figures are based upon historical results and are not necessarily
representative of future performance. Factors affecting the Portfolios'
performance include general market conditions, operating expenses and
investment management. Any additional fees charged by a dealer or other
financial services firm would reduce the returns described in this section.
<PAGE>
Total Return
The average annual total return of each Portfolio is computed by finding
the average annual compounded rates of return over the periods that would
equate the initial amount invested to the ending redeemable value, according
to the following formula:
n
P(1+T) = ERV
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
payment made at the beginning of the stated periods at
the end of the stated periods.
Performance for a specific period is calculated by first taking an investment
(assumed to be $1,000) ("initial investment") in a Portfolio's shares on the
first day of the period and computing the "ending value" of that investment at
the end of the period. The total return percentage is then determined by
subtracting the initial investment from the ending value and dividing the
remainder by the initial investment and expressing the result as a percentage.
The calculation assumes that all income and capital gains dividends paid by a
Portfolio have been reinvested at the net asset value of the Portfolio on the
reinvestment dates during the period. Total return may also be shown as the
increased dollar value of the hypothetical investment over the period.
Cumulative total return represents the simple change in value of an
investment over a stated period and may be quoted as a percentage or as a
dollar amount. Total returns may be broken down into their components of
income and capital (including capital gains and changes in share price) in
order to illustrate the relationship between these factors and their
contributions to total return.
Volatility
Occasionally statistics may be used to specify a Portfolio's volatility
or risk. Measures of volatility or risk are generally used to compare a
Portfolio's net asset value or performance relative to a market index. One
measure of volatility is beta. Beta is the volatility of a fund relative to
the total market as represented by the Standard & Poor's 500 Stock Index. A
beta of more than 1.00 indicates volatility greater than the market, and a
beta of less than 1.00 indicates volatility less than the market. Another
measure of volatility or risk is standard deviation. Standard deviation is
used to measure variability of net asset value or total return around an
average, over a specified period of time. The premise is that greater
volatility connotes greater risk undertaken in achieving performance.
Comparisons
From time to time, in marketing and other Portfolio literature, the
Portfolios' performance may be compared to the performance of other mutual
funds in general or to the performance of particular types of mutual funds
with similar investment goals, as tracked by independent organizations. Among
these organizations, Lipper Analytical Services, Inc. ("Lipper"), a widely
used independent research firm which ranks mutual funds by overall
performance, investment objectives, and assets, may be cited. Lipper
performance figures are based on changes in net asset value, with all income
and capital gains dividends reinvested. Such calculations do not include the
effect of any sales charges imposed by other funds. The Portfolios will be
compared to Lipper's appropriate fund category, that is, by fund objective and
portfolio holdings.
<PAGE>
The Portfolios' performance may also be compared to the performance of
other mutual funds by Morningstar, Inc., which ranks funds on the basis of
historical risk and total return. Morningstar's rankings range from five
stars (highest) to one star (lowest) and represent Morningstar's assessment of
the historical risk level and total return of a fund as a weighted average for
3, 5, and 10 year periods. Rankings are not absolute or necessarily
predictive of future performance.
Evaluations of Portfolio performance made by independent sources may
also be used in advertisements concerning the Portfolios, including reprints
of or selections from, editorials or articles about the Portfolios. Sources
for Portfolio performance and articles about the Portfolios may include
publications such as Money, Forbes, Kiplinger's, Financial World, Business
Week, U.S. News and World Report, the Wall Street Journal, Barron's and a
variety of investment newsletters.
The Portfolios may compare their performance to a wide variety of
indices and measures of inflation including the Standard & Poor's Index of 500
Stocks and the NASDAQ Over-the-Counter Composite Index. There are differences
and similarities between the investments that the Portfolios may purchase for
their respective portfolios and the investments measured by these indices.
Investors may want to compare the Portfolios' performance to that of
certificates of deposit offered by banks and other depository institutions.
Certificates of deposit may offer fixed or variable interest rates and
principal is guaranteed and may be insured. Withdrawal of the deposits prior
to maturity normally will be subject to a penalty. Rates offered by banks and
other depository institutions are subject to change at any time specified by
the issuing institution. Investors may also want to compare performance of
the Portfolios to that of money market funds. Money market fund yields will
fluctuate and shares are not insured, but share values usually remain stable.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P. have been selected as the independent
accountants for the Portfolios.
FINANCIAL STATEMENTS
The following audited financial statements of the Company are contained
herein:
(a) Report of Independent Accountants.
(b) Statement of Assets and Liabilities.
(c) Notes to Statement of Assets and Liabilities.
The following unaudited financial statements of each of the Portfolios
for the period from January 1, 1995 to June 30, 1995 are also contained
herein:
(a) Schedules of Investments in Securities.
(b) Statements of Assets and Liabilities.
<PAGE>
(c) Statements of Operations.
(d) Statements of Changes in Net Assets.
(e) Financial Highlights.
(f) Notes to Financial Statements.
<PAGE>
APPENDIX
BOND RATINGS
Standard & Poor's Debt Ratings
A Standard & Poor's corporate or municipal debt rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. This assessment may take into consideration obligors such as
guarantors, insurers, or lessees.
The debt rating is not a recommendation to purchase, sell, or hold a
security, inasmuch as it does not comment as to market price or suitability
for a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable. S&P does not
perform an audit in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed, suspended, or
withdrawn as a result of changes in, or unavailability of, such information,
or for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default -- capacity and willingness of the
obligor as to the timely payment of interest and repayment of
principal in accordance with the terms of the obligation.
2. Nature of and provisions of the obligation.
3. Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization, or other
arrangement under the laws of bankruptcy and other laws
affecting creditors' rights.
Investment Grade
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.
<PAGE>
Speculative grade
Debt rated 'BB', 'B', 'CCC', 'CC' 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 or
major risk exposures to adverse conditions.
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 Debt rated 'CC' typically is applied to debt subordinated to senior
debt that is assigned an actual or implied 'CCC' rating.
C Debt rated 'C' typically is applied to debt subordinated to senior
debt which is assigned an actual or implied 'CCC-' debt 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 no interest is
being paid.
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 grade period. The 'D' rating
also will be used upon the filing of a bankruptcy petition if debt service
payments are jeopardized.
Moody's Long-Term Debt 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 edged". 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 risk appear somewhat larger than in Aaa
securities.
<PAGE>
A - Bonds which are rated A possess many 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 some time 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 rated 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.
Fitch Investors Service, Inc. Bond Ratings
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The
ratings represent Fitch's assessment of the issuer's ability to meet the
obligations of a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided
by insurance policies or financial guaranties unless otherwise indicated.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since the rating categories do not fully reflect
small differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any
security. Ratings do not comment on the adequacy of market price, the
suitability of any security for a particular investor, or the tax-exempt
nature or taxability of payments made in respect of any security.
Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
<PAGE>
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
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 the issuers is generally rated
'F-1+'.
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 ratings of these bonds will fall
below investment grade is higher than for bonds with higher
ratings.
Fitch speculative grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The
ratings ('BB' to 'C') represent Fitch's assessment of the likelihood of timely
payment of principal and interest in accordance with the terms of obligation
for bond issues not in default. For defaulted bonds, the rating ('DDD' to
'D') is an assessment of the ultimate recovery value through reorganization or
liquidation.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the
issuer's future financial strength.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since the rating categories cannot fully reflect the
differences in the degrees of credit risk. Moreover, the character of the
risk factor varies from industry to industry and between corporate, health
care and municipal obligations.
BB Bonds are considered 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 issue.
CCC Bonds have certain identifiable characteristics which, 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 over time.
<PAGE>
C Bonds are in imminent default in payment of interest or principal.
DDD, and
DD, D Bonds are 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 of these bonds, and 'D' represents the lowest potential
for recovery.
Duff & Phelps, Inc. Long-Term Debt Ratings
These ratings represent a summary opinion of the issuer's long-term
fundamental quality. Rating determination is based on qualitative and
quantitative factors which may vary according to the basic economic and
financial characteristics of each industry and each issuer. Important
considerations are vulnerability to economic cycles as well as risks related
to such factors as competition, government action, regulation, technological
obsolescence, demand shifts, cost structure, and management depth and
expertise. The projected viability of the obligor at the trough of the cycle
is a critical determination.
Each rating also takes into account the legal form of the security,
(e.g., first mortgage bonds, subordinated debt, preferred stock, etc.). The
extent of rating dispersion among the various classes of securities is
determined by several factors including relative weightings of the different
security classes in the capital structure, the overall credit strength of the
issuer, and the nature of covenant protection. Review of indenture
restrictions is important to the analysis of a company's operating and
financial constraints.
The Credit Rating Committee formally reviews all ratings once per
quarter (more frequently, if necessary). Ratings of 'BBB-' and higher fall
within the definition of investment grade securities, as defined by bank and
insurance supervisory authorities.
Rating Scale Definition
AAA Highest credit quality. The risk factors are negligible,
being only slightly more than for risk-free U.S. Treasury
debt.
AA+ High credit quality. Protection factors are strong. Risk
AA is modest, but may vary slightly from time to time
AA- because of economic conditions.
A+ Protection factors are average but adequate. However, risk
A factors are more variable and greater in periods of
A- economic stress.
BBB+ Below average protection factors but still considered
BBB sufficient for prudent investment. Considerable
BBB- variability in risk during economic cycles.
BB+ Below investment grade but deemed likely to meet obligations
when due.
<PAGE>
BB Present or prospective financial protection factors
BB- fluctuate according to industry conditions or company
fortunes. Overall quality may move up or down frequently
within this category.
B+ Below investment grade and possessing risk that obligations
B will not be met when due. Financial protection factors
B- will fluctuate widely according to economic cycles,
industry conditions and/or company fortunes. Potential
exists for frequent changes in the rating within this
category or into a higher or lower rating grade.
CCC Well below investment grade securities. Considerable
uncertainty exists as to timely payment of principal,
interest or preferred dividends. Protection factors are
narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable
company developments.
DD Defaulted debt obligations. Issuer failed to meet scheduled
principal and/or interest payments.
DP Preferred stock with dividend arrearages.
SHORT-TERM RATINGS
Standard & Poor's Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt considered short-term in the relevant
market.
Ratings graded into several categories, ranging from 'A-1' for the
highest quality obligations to 'D' for the lowest. These categories are as
follows:
A-1 This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated 'A-1'.
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes
in circumstances than obligations carrying the higher designations.
B Issues rated 'B' are regarded as having only speculative capacity for
timely payment.
C This rating is assigned to short-term debt obligations with doubtful
capacity for payment.
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.
<PAGE>
Moody's Commercial Paper Ratings
The term "commercial paper" as used by Moody's means promissory
obligations not having an original maturity in excess of nine months. Moody's
makes no representation as to whether such commercial paper is by any other
definition "commercial paper" or is exempt from registration under the
Securities Act of 1933, as amended.
Moody's commercial paper ratings are opinions of the ability of issuers
to repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's makes no representation that such obligations
are exempt from registration under the Securities Act of 1933, nor does it
represent that any specific note is a valid obligation of a rated issuer or
issued in conformity with any applicable law. Moody's employs the following
three designations, all judged to be investment grade, to indicate the
relative repayment capacity of rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following
characteristics: (i) leading market positions in well established industries,
(ii) high rates of return on funds employed, (iii) conservative capitalization
structures with moderate reliance on debt and ample asset protection, (iv)
broad margins in earnings coverage of fixed financial charges and high
internal cash generation, and (v) well established access to a range of
financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above, but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes
in the level of debt protection measurements and the requirement for
relatively high financial leverage. Adequate alternate liquidity is
maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Fitch Investors Service, Inc. Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal
and investment notes.
The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
F-1+ (Exceptionally Strong Credit Quality) Issues assigned this rating
are regarded as having the strongest degree of assurance for
timely payment.
F-1 (Very Strong Credit Quality) Issues assigned this rating reflect
an assurance of timely payment only slightly less in degree than
issues rated 'F-1+'.
<PAGE>
F-2 (Good Credit Quality) Issues assigned this rating have a
satisfactory degree of assurance for timely payment but the margin
of safety is not as great as for issues assigned 'F-1+' and 'F-1'
ratings.
F-3 (Fair Credit Quality) Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely
payment is adequate, however, near-term adverse changes could
cause these securities to be rated below investment grade.
F-S (Weak Credit Quality) Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for
timely payment and are vulnerable to near-term adverse changes in
financial and economic conditions.
D (Default) Issues assigned this rating are in actual or imminent
payment default.
LOC The symbol LOC indicates that the rating is based on a letter of
credit issued by a commercial bank.
Duff & Phelps, Inc. Short-Term Debt Ratings
Duff & Phelps' short-term ratings are consistent with the rating
criteria utilized by money market participants. The ratings apply to all
obligations with maturities of under one year, including commercial paper, the
uninsured portion of certificates of deposit, unsecured bank loans, master
notes, bankers acceptances, irrevocable letters of credit, and current
maturities of long-term debt. Asset-backed commercial paper is also rated
according to this scale.
Emphasis is placed on liquidity which is defined as not only cash from
operations, but also access to alternative sources of funds including trade
credit, bank lines, and the capital markets. An important consideration is
the level of an obligor's reliance on short-term funds on an ongoing basis.
Rating Scale: Definition
Duff 1+ Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is
just below risk-free U.S. Treasury short-term obligations.
Duff 1 Very high certainty of timely payment. Liquidity factors
are excellent and supported by good fundamental protection
factors. Risk factors are minor.
Duff 1- High certainty of timely payment. Liquidity factors are
strong and supported by good fundamental protection factors.
Risk factors are very small.
Good Grade
Duff 2 Good certainty of timely payment. Liquidity factors and
company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to
capital markets is good. Risk factors are small.
Satisfactory Grade
<PAGE>
Duff 3 Satisfactory liquidity and other protection factors qualify
issue as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is
expected.
Non-investment Grade
Duff 4 Speculative investment characteristics. Liquidity is not
sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high
degree of variation.
Default
Duff 5 Issuer failed to meet scheduled principal and/or interest
payments.
<PAGE>
DISCRETIONARY EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS
June 30, 1995 (Unaudited)
- -----------------------------------------------------------------------------
Number Market
of Shares Value
- -----------------------------------------------------------------------------
COMMON STOCKS
Aerospace 1.99%
4,400 McDonnell Douglas Corp. $ 337,700
-----------
Autos & Parts 4.56%
14,000 Ford Motor Co. 416,500
9,050 Hughes Electronics Corp. 357,475
-----------
773,975
-----------
Banks & Finance 5.73%
8,900 BankAmerica Corp. 468,362
8,700 Citicorp 503,513
-----------
971,875
-----------
Beverages - Soft Drinks 2.53%
9,400 PepsiCo, Inc. 428,875
-----------
Chemicals 5.17%
6,050 Dow Chemical Co. 434,844
6,450 Du Pont (E.I.) de Nemours & Co. 443,438
-----------
878,282
-----------
Communication Equipment 2.73%
6,900 Motorola, Inc. 463,162
-----------
Conglomerates 2.94%
4,250 ITT Corp. 499,375
-----------
Drug & Medical Supplies 7.22%
5,300 American Home Products Corp. 410,087
10,100 Astra AB - ADR A 311,383
3,850 Lilly (Eli) & Co. 302,225
5,700 Mallinckrodt Group, Inc. 202,350
<PAGE>
-----------
1,226,045
-----------
Electric Equipment 3.82%
15,150 Philips Electronics N.V. 647,662
-----------
Entertainment 2.94%
9,300 Time Warner, Inc. 382,462
2,500 Viacom, Inc. - Class B* 115,938
-----------
498,400
-----------
<PAGE>
Hospital Management 1.04%
12,300 Tenet Healthcare Corp.* $ 176,813
-----------
Leisure 0.85%
5,525 Mattel, Inc. 143,650
-----------
Machinery 2.02%
4,000 Deere & Co. 342,500
-----------
Office Equipment 5.03%
7,500 Compaq Computer Corp.* 340,313
5,350 International Business Machines Corp. 513,600
-----------
853,913
-----------
Oils 6.52%
26,000 Canadian Pacific Ltd. 451,750
3,850 Mobil Corp. 369,600
10,350 Unocal Corp. 285,919
-----------
1,107,269
-----------
Oil Services 1.09%
7,700 McDermott International, Inc. 185,762
-----------
Other Financial 2.27%
8,800 Travelers Group, Inc. 385,000
-----------
Paper 2.37%
8,550 Weyerhaeuser Co. 402,919
-----------
Pollution Control 2.69%
16,100 WMX Technologies, Inc. 456,838
-----------
Railroads 3.04%
8,150 Burlington Northern, Inc. 516,506
-----------
Retail Stores 7.03%
14,200 Federated Department Stores, Inc.* 365,650
9,450 Sears, Roebuck and Co. 565,819
9,800 Wal-Mart Stores, Inc. 262,150
-----------
1,193,619
-----------
<PAGE>
Tobacco 5.47%
6,500 Philip Morris Cos., Inc. $ 483,437
16,000 RJR Nabisco Holdings Corp. 446,000
-----------
929,437
-----------
Utilities 2.14%
6,850 AT&T Corp. 363,906
-----------
Total Common Stocks 81.19%
(cost $12,520,516) 13,783,483
-----------
PREFERRED STOCKS
Communication Equipment 2.11%
6,000 Nokia Corp. - ADR A 357,750
-----------
Entertainment 2.96%
25,150 News Corp. Ltd. Preferred ADR 503,000
-----------
Media 2.39%
16,978 Times Mirror Co. - PERC 405,350
-----------
Total Preferred Stocks 7.46%
(cost $1,034,730) 1,266,100
-----------
- -----------------------------------------------------------------------------
Principal
Amount
- -----------------------------------------------------------------------------
SHORT-TERM INVESTMENTS
Commercial Paper 5.86%
$1,000,000 Du Pont (E.I.) de Nemours & Co., 5.85%, 8/3/95 994,747
-----------
Money Market 6.41%
1,088,123 United Missouri Bank
Money Market Fiduciary 1,088,123
-----------
Total Short-term Investments 12.27%
(cost $2,082,870) 2,082,870
-----------
Total Investments 100.92%
(cost $15,638,116) 17,132,453
<PAGE>
Liabilities, less Cash
and Other Assets (0.92)% (155,368)
-----------
NET ASSETS 100.00% $16,977,085
===========
See notes to financial statements.
*Non-income producing.
<PAGE>
EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS
June 30, 1995 (Unaudited)
- -----------------------------------------------------------------------------
Number Market
of Shares Value
-----------------------------------------------------------------------------
COMMON STOCKS
Aerospace 1.99%
7,425 McDonnell Douglas Corp. $ 569,869
-----------
Autos & Parts 5.00%
26,700 Ford Motor Co. 794,325
16,100 Hughes Electronics Corp. 635,950
-----------
1,430,275
-----------
Banks & Finance 6.50%
18,250 BankAmerica Corp. 960,406
15,500 Citicorp 897,063
-----------
1,857,469
-----------
Beverages - Soft Drinks 2.38%
14,900 PepsiCo, Inc. 679,812
-----------
Chemicals 5.56%
10,925 Dow Chemical Co. 785,234
11,700 Du Pont (E.I.) de Nemours & Co. 804,375
-----------
1,589,609
-----------
Communication Equipment 2.99%
12,750 Motorola, Inc. 855,844
-----------
Conglomerates 3.15%
7,675 ITT Corp. 901,813
-----------
Drug & Medical Supplies 7.71%
9,550 American Home Products Corp. 738,931
18,400 Astra AB - ADR A 567,272
6,650 Lilly (Eli) & Co. 522,025
10,600 Mallinckrodt Group, Inc. 376,300
<PAGE>
-----------
2,204,528
-----------
Electric Equipment 4.14%
27,700 Philips Electronics N.V. 1,184,175
-----------
<PAGE>
Entertainment 2.73%
13,800 Time Warner, Inc. $ 567,525
4,600 Viacom, Inc. - Class B* 213,325
-----------
780,850
-----------
Hospital Management 1.04%
20,650 Tenet Healthcare Corp.* 296,844
-----------
Leisure 0.93%
10,225 Mattel, Inc. 265,850
-----------
Machinery 2.29%
7,650 Deere & Co. 655,031
-----------
Office Equipment 5.57%
12,800 Compaq Computer Corp.* 580,800
10,550 International Business Machines Corp. 1,012,800
-----------
1,593,600
-----------
Oils 6.85%
46,950 Canadian Pacific Ltd. 815,756
6,500 Mobil Corp. 624,000
18,750 Unocal Corp. 517,969
-----------
1,957,725
-----------
Oil Services 1.42%
16,800 McDermott International, Inc. 405,300
-----------
Other Financial 2.55%
16,650 Travelers Group, Inc. 728,437
-----------
Paper 2.52%
15,300 Weyerhaeuser Co. 721,013
-----------
Pollution Control 3.26%
32,900 WMX Technologies, Inc. 933,538
-----------
Railroads 3.32%
15,000 Burlington Northern, Inc. 950,625
-----------
<PAGE>
Retail Stores 8.13%
29,000 Federated Department Stores, Inc.* 746,750
17,950 Sears, Roebuck and Co. 1,074,756
18,800 Wal-Mart Stores, Inc. 502,900
-----------
2,324,406
-----------
<PAGE>
Tobacco 5.36%
12,200 Philip Morris Cos., Inc. $ 907,375
22,390 RJR Nabisco Holdings Corp. 624,121
-----------
1,531,496
-----------
Utilities 3.14%
16,875 AT&T Corp. 896,484
-----------
Total Common Stocks 88.53%
(cost $23,667,051) 25,314,593
-----------
PREFERRED STOCKS
Communication Equipment 2.29%
11,000 Nokia Corp. - ADR A 655,875
-----------
Entertainment 3.12%
44,600 News Corp. Ltd. Preferred ADR 892,000
-----------
Media 2.43%
29,102 Times Mirror Co. - PERC 694,810
-----------
Tobacco 1.09%
50,900 RJR Nabisco Holdings Corp. Series C Pfd. 311,763
-----------
Total Preferred Stocks 8.93%
(cost $2,252,276) 2,554,448
-----------
- -----------------------------------------------------------------------------
Principal
Amount
- -----------------------------------------------------------------------------
SHORT-TERM INVESTMENTS
Commercial Paper 1.04%
$300,000 Du Pont (E.I.) de Nemours & Co., 5.85%, 8/3/95 298,424
-----------
Money Market 2.39%
683,630 United Missouri Bank
Money Market Fiduciary 683,630
Total Short-term Investments 3.43%
(cost $982,054) 982,054
-----------
<PAGE>
Total Investments 100.89%
(cost $26,901,381) 28,851,095
Liabilities, less
Cash and Other Assets (0.89)% (256,464)
-----------
NET ASSETS 100.00% $28,594,631
===========
See notes to financial statements.
*Non-income producing.
<PAGE>
ICAP FUNDS, INC.
STATEMENTS OF ASSETS AND LIABILITIES
June 30, 1995 (Unaudited)
- -----------------------------------------------------------------------------
Discretionary
Equity Equity
Portfolio Portfolio
- -----------------------------------------------------------------------------
ASSETS:
Investments, at market value
(cost $15,638,116 and $26,901,381,
respectively) $17,132,453 $28,851,095
Interest and dividends receivable 55,847 75,903
Receivable from adviser 55,478 66,267
Prepaid organization costs 33,016 33,015
Prepaid blue sky fees 9,405 10,725
----------- -----------
Total Assets 17,286,199 29,037,005
----------- -----------
LIABILITIES:
Payable for securities purchased 130,069 242,947
Dividend payable 87,191 100,901
Payable to adviser 49,668 41,987
Accrued investment advisory fee 33,345 33,722
Accrued expenses 17,841 22,817
----------- -----------
Total Liabilities 309,114 442,374
----------- -----------
NET ASSETS $16,977,085 $28,594,631
=========== ===========
NET ASSETS CONSIST OF:
Capital stock $6,979 $11,600
Paid-in-capital in excess of par 15,127,340 26,477,439
Distributions in excess of net investment income (65) (490)
Undistributed net realized gain on investments 348,494 156,368
Net unrealized appreciation on investments 1,494,337 1,949,714
----------- -----------
Net Assets $16,977,085 $28,594,631
=========== ===========
CAPITAL STOCK, $0.01 PAR VALUE
Authorized 100,000,000 100,000,000
Issued and outstanding 697,923 1,160,050
NET ASSET VALUE, REDEMPTION PRICE AND
OFFERING PRICE PER SHARE $24.33 $24.65
=========== ===========
See notes to financial statements.
<PAGE>
ICAP FUNDS, INC.
STATEMENTS OF OPERATIONS
Six Months Ended June 30, 1995 (Unaudited)
- -----------------------------------------------------------------------------
Discretionary
Equity Equity
Portfolio Portfolio
- -----------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 100,104 1 $ 121,070 2
Interest 26,274 21,442
----------- -----------
126,378 142,512
----------- -----------
EXPENSES:
Investment advisory fees 33,345 33,722
Fund administration and accounting fees 28,059 33,018
Shareholder servicing 6,621 6,652
Federal and state registration fees 5,097 8,516
Legal fees 4,959 4,959
Audit fees 3,968 3,968
Amortization of organization costs 3,272 3,272
Custody fees 1,616 2,573
Reports to shareholders 885 1,595
Other 505 1,218
Directors' fees 496 496
----------- -----------
Total expenses before waiver and reimbursement 88,823 99,989
Waiver and reimbursement of expenses by adviser (55,478) (66,267)
----------- -----------
Net expenses 33,345 33,722
----------- -----------
NET INVESTMENT INCOME 93,033 108,790
----------- -----------
REALIZED AND UNREALIZED GAIN:
Net realized gain on investments 348,494 156,368
Change in unrealized appreciation on investments 1,494,337 1,949,714
----------- -----------
Net gain on investments 1,842,831 2,106,082
----------- -----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $1,935,864 $2,214,872
=========== ===========
1 Net of $4,946 in foreign withholding taxes.
2 Net of $4,064 in foreign withholding taxes.
See notes to financial statements.
<PAGE>
ICAP FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS
Six Months Ended June 30, 1995 (Unaudited)
- -----------------------------------------------------------------------------
Discretionary
Equity Equity
Portfolio Portfolio
- -----------------------------------------------------------------------------
OPERATIONS:
Net investment income $93,033 $108,790
Net realized gain on investments 348,494 156,368
Change in unrealized appreciation
on investments 1,494,337 1,949,714
----------- -----------
Net increase in net assets resulting
from operations 1,935,864 2,214,872
----------- -----------
DIVIDENDS PAID FROM:
Net investment income (93,098) (109,280)
CAPITAL SHARE TRANSACTIONS:
Shares sold 15,101,332 26,587,216
Shares issued to holders in reinvestment
of dividends 5,907 8,378
Shares redeemed (71,920) (107,555)
Net increase 15,035,319 26,488,039
----------- -----------
TOTAL INCREASE IN NET ASSETS 16,878,085 28,593,631
NET ASSETS:
Beginning of period 99,000 1,000
----------- -----------
End of period $16,977,085 $28,594,631
=========== ===========
See notes to financial statements.
<PAGE>
ICAP FUNDS, INC.
FINANCIAL HIGHLIGHTS
Six Months Ended June 30, 1995 (Unaudited)
- -----------------------------------------------------------------------------
Discretionary
Equity Equity
(For a share outstanding throughout the period) Portfolio 1 Portfolio 1
- -----------------------------------------------------------------------------
Net asset value, beginning of period$ 20.00 $20.00
Income from investment operations:
Net investment income 0.14 0.12
Net realized and unrealized gains on investments 4.33 4.65
------- -------
Total from investment operations 4.47 4.77
Less distributions:
Dividends from net investment income (0.14) (0.12)
Net asset value, end of period $24.33 $24.65
======= =======
Total return 22.34% 23.85%
Supplemental data and ratios:
Net assets, end of period (in thousands) $16,977 $28,595
Ratio of expenses to average net assets 2,3 0.80% 0.80%
Ratio of net investment income to average
net assets 2,3 2.22% 2.57%
Portfolio turnover rate 61% 47%
1 Commencement of operations January 1, 1995.
2 Net of reimbursements and waivers by ICAP. Without reimbursements and
waivers of expenses, the ratio of expenses to average net assets would be
2.12% and 2.37%, and the ratio of net investment income to average net assets
would be 0.90% and 1.00% for the Discretionary Equity and Equity Portfolios,
respectively.
3 Annualized.
See notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1995 (UNAUDITED)
1. Organization
ICAP Funds, Inc. ("ICAP") was incorporated on November 1, 1994 under the laws
of the State of Maryland and is registered as an open-end management
investment company under the Investment Company Act of 1940. Both the
Discretionary Equity and Equity Portfolios (the "Portfolios") are diversified
portfolios of ICAP. The Discretionary Equity and Equity Portfolios issued
and sold 4,950 and 50 shares of common stock, respectively ("initial shares")
at $20 per share to Institutional Capital Corporation. Institutional Capital
Corporation is the investment adviser (the "Adviser") to the Portfolios.
Both Portfolios commenced operations on January 1, 1995. The costs incurred
in connection with the organization, initial registration and public offering
of shares of the Portfolios aggregate $36,288 and $36,287 for the
Discretionary Equity and Equity Portfolios, respectively. These costs are
being amortized over the period of benefit, but not to exceed 60 months from
each Portfolios commencement of operations. The proceeds of any redemption
of the initial shares by the original stockholder or any transferee will be
reduced by a pro rata portion of any then unamortized organization expenses
in the same proportion as the number of initial shares being redeemed bears
to the number of initial shares outstanding at the time of such redemption.
2. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by ICAP in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
a) Investment Valuation - Common stocks and other equity-type securities are
valued at the last sales price on the national securities exchange or Nasdaq
on which such securities are primarily traded; however, securities traded on
a national securities exchange or Nasdaq for which there were no transactions
on a given day or securities not listed on an exchange or Nasdaq are valued
at the most recent bid prices. Debt securities are valued by a pricing
service that utilizes electronic data processing techniques to determine
values for normal institutional-sized trading units of debt securities
without regard to the existence of sale or bid prices when such values are
believed to more accurately reflect the fair market value of such securities;
otherwise, actual sale or bid prices are used. Any securities or other
assets for which market quotations are not readily available are valued at
fair value as determined in good faith by the Board of Directors. Debt
securities having remaining maturities of 60 days or less when purchased are
valued by the amortized cost method when the Board of Directors determines
that the fair market value of such securities is their amortized cost. Under
this method of valuation, a security is initially valued at its acquisition
cost, and thereafter, amortization of any discount or premium is assumed each
day, regardless of the impact of fluctuating interest rates on the market
value of the security. Regardless of the method employed to value a
particular security all valuations are subject to review by ICAP; ICAP may
determine the appropriate value of a security whenever the value as
calculated is significantly different from the previous day's calculated
value.
b) Federal Income Taxes - No provision for federal income taxes has been
made since the Portfolios have complied to date with the provisions of the
Internal Revenue Code available to regulated investment companies and intend
to continue to so comply in future years.
c) Distributions to Shareholders - Dividends from net investment income are
declared and paid quarterly. Dividends differ from book net investment
income due to the nondeductible tax treatment of items such as organization
costs. Distributions of net realized capital gains, if any, will be declared
at least annually. Distributions to shareholders are recorded on the ex-
dividend date.
d) Short-term Investments - The Portfolios maintain uninvested cash in a
bank overnight investment vehicle at its custodian. This may present credit
risk to the extent the custodian fails to perform in accordance with the
<PAGE>
custody agreement. The credit worthiness of the custodian is monitored and
this investment is determined to present minimal credit risk by the
Portfolios' Adviser.
e) Other - Investment transactions are accounted for on the trade date plus
one. The Portfolios determine the gain or loss realized from the investment
transactions by comparing the original cost of the security lot sold with the
net sale proceeds. Dividend income is recognized on the ex-dividend date and
interest income is recognized on an accrual basis.
3. Capital Share Transactions
Transactions in shares of the Portfolios for the six months ended June 30,
1995 were as follows:
Discretionary
Equity Equity
Portfolio Portfolio
------------- ---------
Shares sold 695,961 1,164,516
Shares issued to holders in
reinvestment of dividends 272 384
Shares redeemed (3,260) (4,900)
------- ---------
Net increase 692,973 1,160,000
======= =========
4. Investment Transactions
The aggregate purchases and sales of securities, excluding short-term
investments and U.S. government obligations, for the Portfolios for the six
months ended June 30, 1995 are summarized below:
Discretionary
Equity Equity
Portfolio Portfolio
------------- ---------
Purchases $18,011,937 $29,790,530
Sales $ 4,805,185 $ 4,027,571
There were no purchases or sales of U.S. government obligations. At June 30,
1995 gross unrealized appreciation and depreciation of investments were as
follows:
Discretionary
Equity Equity
Portfolio Portfolio
------------- ---------
Appreciation $1,597,447 $2,106,515
(Depreciation) (103,110) (156,801)
---------- ----------
Net appreciation on investments $1,494,337 $1,949,714
========== ==========
<PAGE>
5. Investment Advisory Agreement
The Portfolios have an agreement with the Adviser, with whom certain officers
and directors of ICAP are affiliated, to furnish investment advisory services
to the Portfolios. Under the terms of this agreement, the Portfolios will
pay the Adviser a monthly fee at the annual rate of 0.80% of average net
assets. Under the investment advisory agreement, if the aggregate annual
operating expenses (excluding interest, taxes, brokerage commissions and
other costs incurred in connection with the purchase or sale of portfolio
securities, and extraordinary items) exceed 0.80%, the Adviser will reimburse
the Portfolios for the amount of such excess.
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements (All included in Parts A and B)
Audited Financial Statements (as of December 8, 1994)
Report of Independent Certified Public Accountants
Statement of Assets and Liabilities
Notes to Financial Statements
Unaudited Financial Statements (as of June 30, 1995)
Schedules of Investments
Statements of Assets and Liabilities
Statements of Operations
Statements of Changes in Net Assets
Financial Highlights
Notes to Financial Statements
(b) Exhibits
(1) Registrant's Articles of Incorporation*
(2) Registrant's By-Laws*
(3) None
(4) None
(5) Investment Advisory Agreement**
(6) None
(7) None
(8) Custodian Agreement with United Missouri Bank, n.a.**
(9.1) Transfer Agency Agreement with Supervised Service Company,
Inc.**
(9.2) Administration and Fund Accounting Agreement with Sunstone
Financial Group, Inc.**
<PAGE>
(10) Opinion and Consent of Godfrey & Kahn, S.C.
(11) Consent of Coopers & Lybrand L.L.P.***
(12) None
(13) Subscription Agreements**
(14) Individual Retirement Trust Account**
(15) None
(16) None
(17) None
(18) Powers of Attorney for Directors and Officers (see
signature page)
* Incorporated by reference to Registrant's Registration Statement on
Form N-1A as filed with the Securities and Exchange Commission on
November 4, 1994.
** Incorporated by reference to Registrant's Pre-Effective Amendment No. 1
to its Registration Statement on Form N-1A as filed with the Securities
and Exchange Commission on December 14, 1994.
*** Incorporated by reference to Registrant's Post-Effective Amendment No.
1 to its Registration Statement on Form N-1A as filed with the
Securities and Exchange Commission on July 31, 1995.
Item 25. Persons Controlled by or under Common Control with Registrant
Registrant neither controls any person nor is under common control with
any other person.
Item 26. Number of Holders of Securities
Number of Record Holders
Title of Securities as of June 30, 1995
Common Stock, $.01 par value 18
<PAGE>
Item 27. Indemnification
Article VI of Registrant's By-Laws provides as follows:
ARTICLE VI INDEMNIFICATION
The Corporation shall indemnify (a) its Directors and officers,
whether serving the Corporation or at its request any other entity, to
the full extent required or permitted by (i) Maryland law now or
hereafter in force, including the advance of expenses under the
procedures and to the full extent permitted by law, and (ii) the
Investment Company Act of 1940, as amended, and (b) other employees and
agents to such extent as shall be authorized by the Board of Directors
and be permitted by law. The foregoing rights of indemnification shall
not be exclusive of any other rights to which those seeking
indemnification may be entitled. The Board of Directors may take such
action as is necessary to carry out these indemnification provisions
and is expressly empowered to adopt, approve and amend from time to
time such resolutions or contracts implementing such provisions or such
further indemnification arrangements as may be permitted by law.
Item 28. Business and Other Connections of Investment Adviser
None.
Item 29. Principal Underwriters
(a) None
(b) None
(c) None
Item 30. Location of Accounts and Records
All accounts, books or other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the rules promulgated
thereunder are in the possession of Institutional Capital Corporation,
Registrant's investment adviser, at Registrant's corporate offices, except
(1) records held and maintained by United Missouri Bank, n.a., 928 Grand
Avenue, Kansas City, MO 64141, relating to its function as custodian, (2)
records held and maintained by Sunstone Financial Group, Inc., 207 E. Buffalo
Street, Suite 400, Milwaukee, Wisconsin 53202, relating to its function as
administrator, and (3) records held and maintained by Supervised Service
Company, Inc., 811 Main Street, Kansas City, MO 64105 relating to its
function as transfer agent.
Item 31. Management Services
All management-related service contracts entered into by Registrant are
discussed in Parts A and B of this Registration Statement.
Item 32. Undertakings.
Registrant undertakes to call a meeting of shareholders, if requested
to do so by the holders of at least 10% of the Registrant's outstanding
shares, for the purpose of voting upon the question of removal of a director
or directors. The Registrant also undertakes to assist in communications
with other shareholders as required by Section 16(c) of the Investment
Company Act of 1940.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the Registrant has duly caused this Post-
Effective Amendment No. 2 to the Registration Statement on Form N-1A to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Chicago and State of Illinois on the 15th day of November, 1995.
ICAP FUNDS, INC. (Registrant)
By: /s/ Robert H. Lyon*
Robert H. Lyon
President
Each person whose signature appears below constitutes and
appoints Robert H. Lyon and Pamela H. Conroy, and each of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all post-effective amendments to this
Registration Statement and to file the same, with all exhibits thereto, and
any other documents in connection therewith, with the Securities and Exchange
Commission and any other regulatory body, granting unto said attorney-in-fact
and agent, full power and authority to do and perform each and every act and
thing requisite and necessary to be done, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming
all that said attorney-in-fact and agent, or his substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 2 to the Registration Statement on Form N-1A has
been signed below by the following persons in the capacities and on the
date(s) indicated.
Name Title Date
*/s/ Robert H. Lyon President and a Director November 15, 1995
Robert H. Lyon
/s/ Pamela H. Conroy Vice President, Treasurer November 15, 1995
Pamela H. Conroy and a Director
*/s/ Gary S. Meurer Director November 15, 1995
Gary S. Meurer
/s/ Barbara A. Chiesa Director November 15, 1995
Barbara A. Chiesa
/s/ Donald D. Niemann Director November 15, 1995
Donald D. Niemann
*Signed pursuant to the power-of-attorney previously filed with the signature
page of post-effective amendment no. 1 to this registration statement.
<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit
(1) Registrant's Articles of Incorporation (previously
filed as Exhibit 1 to the Registration Statement on Form N-1A,
File Nos. 811-8850 and 33-86006)
(2) Registrant's By-Laws (previously filed as Exhibit 2
to the Registration Statement on Form N-1A, File Nos.
811-8850 and 33-86006)
(3) None
(4) None
(5) Investment Advisory Agreement (previously filed as
Exhibit 5 to Registrant's Pre-Effective Amendment No.
1 to Registration Statement on Form N-1A, File Nos.
811-8850 and 33-86006)
(6) None
(7) None
(8) Custodian Agreement with United Missouri Bank, n.a.
(previously filed as Exhibit 8 to Registrant's Pre-
Effective Amendment No. 1 to Registration Statement
on Form N-1A, File Nos. 811-8850 and 33-86006)
(9.1) Transfer Agency Agreement with Supervised Service
Company, Inc. (previously filed as Exhibit 9.1 to
Registrant's Pre-Effective Amendment No. 1 to
Registration Statement on Form N-1A, File Nos. 811-
8850 and 33-86006)
(9.2) Administration and Fund Accounting Agreement with
Sunstone Financial Group, Inc. (previously filed as
Exhibit 9.2 to Registrant's Pre-Effective Amendment
No. 1 to Registration Statement on Form N-1A, File
Nos. 811-8850 and 33-86006)
(10) Opinion and Consent of Godfrey & Kahn, S.C.
CE
(11) Consent of Coopers & Lybrand L.L.P. (previously filed
as Exhibit 11 to Registrant's Post-Effective
Amendment No. 1 to Registration Statement on Form N-
1A, File Nos. 811-8850 and 33-86006)
(12) None
(13) Subscription Agreement (previously filed as Exhibit
13 to Registrant's Pre-Effective Amendment No. 1 to
Registration Statement on Form N-1A, File Nos. 811-
8850 and 33-86006)
<PAGE>
(14) Individual Retirement Trust Account (previously filed
as Exhibit 14 to Registrant's Pre-Effective Amendment
No. 1 to Registration Statement on Form N-1A, File
Nos. 811-8850 and 33-86006)
(15) None
(16) None
(17) None
(18) Power of Attorney for Directors and Officers (see
signature page)
Exhibit 10
November 15, 1995
ICAP Funds, Inc.
225 W. Wacker, Suite 2400
Chicago, IL 60606
Ladies and Gentlemen:
We have acted as your counsel in connection
with the preparation of Post-Effective Amendment No. 2
to Registration Statement No. 33-86006 and 811-08850
(the "Registration Statement") relating to the sale by
you of 2,660,354.115 shares of ICAP Funds, Inc. common
stock, $.01 par value (the "Shares"), in the manner set
forth in the Registration Statement. The Shares
represent 1,548,589.16 shares of the ICAP Equity
Portfolio and 1,111,764.955 shares of the ICAP
Discretionary Equity Portfolio.
We have examined: (a) Post-Effective
Amendment No. 2, (b) the Company's Articles of
Incorporation, and By-laws, (c) certain resolutions of
the Company's Board of Directors, and (d) such other
proceedings, documents and records as we have deemed
necessary to enable us to render this opinion. Based
upon the foregoing, we are of the opinion that the
Shares, when sold as contemplated in Post-Effective
Amendment No. 2 will be duly authorized and validly
issued, fully paid and nonassessable.
We consent to the use of this opinion as an
exhibit to Post-Effective Amendment No. 2. In giving
this consent, however, we do not admit that we are
"experts" within the meaning of Section 11 of the
Securities Act of 1933, as amended, or within the
category of persons whose consent is required by
Section 7 of said Act.
We understand that Post-Effective Amendment
No. 2 is for the sole purpose of increasing the number
of amount of securities proposed to be offered pursuant
to Section 24(e) of the Investment Company Act of 1940.
Based upon the foregoing, we hereby advise you that
Post-Effective Amendment No. 2 does not include
disclosure which we believe would render it ineligible
to become effective pursuant to paragraph (b) of Rule
485.
Very truly yours,
/s/ Godfrey & Kahn, S.C.
GODFREY & KAHN, S.C.
2<PAGE>
