SUNSTONE FINANCIAL GROUP, INC.
207 East Buffalo Street, Suite 400
Milwaukee, Wisconsin 53202
(414) 271-5885
Fax: (414) 271-5910
February 14, 1997
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, DC 20549
Re: ICAP Funds, Inc.
(33-86006;811-8850)
Filing Pursuant to Rule 30b2-1 and Section 24(b) under the Investment
Company Act of 1940
Ladies and Gentlemen:
On behalf of the above-referenced registered investment company, transmitted
herewith for filing pursuant to Rule 30b2-1 and Section 24(b) under the
Investment Company Act of 1940, as amended, is the Fund's Annual Report for the
year ending December 31, 1996. Questions regarding this filing may be directed
to the undersigned at (414) 271-5885.
Sincerely,
/s/ Constance Dye Shannon
Constance Dye Shannon
Legal and Compliance Manager
cc: Carol Gehl, Esq.
Encl.
ICAP
ANNUAL REPORT
December 31, 1996
ICAP Funds
Discretionary Equity Portfolio
Equity Portfolio
TABLE OF CONTENTS
page
Letter to Shareholders 1
Investment Highlights 4
Schedules of Investments
Discretionary Equity Portfolio 6
Equity Portfolio 10
Statements of Assets and Liabilities 14
Statements of Operations 15
Statements of Changes in Net Assets
Discretionary Equity Portfolio 16
Equity Portfolio 17
Financial Highlights
Discretionary Equity Portfolio 18
Equity Portfolio 19
Notes to Financial Statements 20
January 1997
Dear Shareholder:
The ICAP Funds closed their second year on a successful note. The Discretionary
Equity Portfolio had a total return of 25.6%, while the Equity Portfolio
delivered 26.3%. These returns compare to 23.0% for the S&P 500, and 22.0% for
the S&P Value Index. The returns of both ICAP Portfolios placed them in the top
quartile of the Lipper Growth and Income category<F1> and the Large Value
Morningstar category<F2>. In fact, for the two year period since inception, the
Equity and Discretionary Equity Portfolios ranked in the top 3% and 10%,
respectively, of the Lipper Growth and Income Category<F3>.
In our mid-year report, we were concerned that a stronger-than-expected domestic
economy could lead to higher short-term interest rates and weakness in stocks,
particularly small, "unseasoned" issues. Almost immediately, there was a sharp
correction in the stock market, which hit smaller stocks very hard. However, the
economy moderated into the fall, interest rates softened (modestly) and better
quality stocks resumed their uptrend.
As we pass into the new year, we remain optimistic that the U.S. economy is on
solid ground. Employment gains have been solid, real incomes are growing,
inventories are lean and American manufacturers are very competitive, despite a
healthy rise in the dollar. The outlook for the rest of the world is more
subdued. Japan remains bogged down with their weak banking and real estate
sectors, and is now facing a period of less stimulative government spending.
Conditions in Europe also remain soft as fiscal policy is expected to stay tight
for the next couple of years as countries prepare for a common currency. The
silver lining to economic weakness overseas is that GLOBAL interest rates are
expected to stay subdued.
Inflation is expected to remain moderate. Global capacity utilization is soft.
In addition, productivity gains from the widespread implementation of technology
as it applies to many manufacturing and service sectors, as well as the lower
trend of health care costs, are likely to mute any cost pressures that may show
up in the domestic economy. However, we would still characterize the market as
having only NEUTRAL attraction. We would not expect any large scale retreat in
equity prices without a tightening of Federal Reserve policy (and even that
would be coming in the context of a relatively accommodative Bank of Japan and
Bundesbank). As long as the easy availability of credit is mixed with excess
GLOBAL industrial capacity, valuations can remain high and the liquidity to
support stock prices should not be choked off.
As we look out into 1997 we would also expect a possible cut in the capital
gains tax rate and the high level of corporate merger and acquisition activity
(highlighted in the ICAP Funds during the fourth quarter by the takeover fight
for Conrail which was a significant holding in each Portfolio), to be further
props for the market. Another positive sign is that the extreme level of
speculation witnessed in the second quarter of 1996 (led by numerous Internet
IPO's) has subsided. Although we expect the combination of a low level of
nominal GDP growth, and potentially tighter labor markets, to squeeze profit
margins and cause indigestion for many individual companies (and their
respective stocks), overall corporate profits should rise by 6-8% and the market
should deliver a similar return. However, another year of large double-digit
gains is unlikely.
We at ICAP continue to feel that these market conditions will continue to favor
the type of bottom-up stock selection that we have practiced since 1970. We feel
that our focus on corporate restructurings (including those that are
increasingly going on in Europe) remains appropriate. We also continue to feel
that our SELL DISCIPLINE will be important in helping us avoid problem stocks
and in minimizing the damage from those mistakes which we inevitably will make.
The economic conditions we outlined above (a low rate of nominal GDP growth
coupled with modestly higher labor costs), will result in a variety of earnings
disappointments. The trick for most managers will be in avoiding these
torpedoes.
Of the twelve key restructuring candidates that we outlined in our mid-year
report, ten remain in the portfolio (Mobil and Hoechst having been sold after
hitting their targets). These dozen names averaged a 15.2% return in the second
half of 1996 (versus 11.7% for the S&P 500). Additional restructuring names,
including Rhone-Poulenc, Nynex, Elf Aquitaine, Banc One and CS Holdings have
been added to each Portfolio. As we have discussed in prior letters, we feel
that large companies which are reconfiguring their business mix by hiving off
weaker units, or monetizing "crown jewels," provide an excellent low risk, high
reward approach to coping with today's overall valuation and business climate.
Our highly skilled, and disciplined, investment TEAM continues to comb the major
stock exchanges of the world in search of more such vehicles. In working to
provide you with better returns, our analysts are particularly interested in
ascertaining the dedication, and motivation, of the managements of these
companies. Stocks of this nature are more likely to yield positive surprises in
the demanding investment environment that we expect in 1997.
In closing, I would also like to extend a personal note of thanks to your
outside directors, Dr. James Gentry, Joseph (Andy) Hays and Harold Nations, who
add value to your Portfolios by scrutinizing both administrative and investment
issues on your behalf. Their questions and suggestions help add value above and
beyond that provided by Institutional Capital (your investment adviser).
Thank you for your continuing support of the ICAP Funds.
Very truly yours,
/s/ Robert H. Lyon
Robert H. Lyon
President
<F1> Source, Lipper Analytical Services.
<F2> Source, Morningstar.
<F3> Past performance is no guarantee of future results. In the absence of
existing fee waivers, total returns would be reduced. Investment return
and principal value of an investment will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original
cost.
<TABLE>
<CAPTION>
INVESTMENT HIGHLIGHTS
ICAP DISCRETIONARY EQUITY PORTFOLIO
TOTAL RETURN
12/31/94 3/31/95 6/30/95 9/30/95 12/31/95 3/31/96 6/30/96 9/30/96 12/31/96
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ICAP Discretionary
Equity Portfolio 100,000.00 108,812.40 122,344.82 131,897.92 135,211.67 145,950.46 148,276.61 153,348.78 169,759.05
S&P 500 Stock Index 100,000.00 109,736.55 120,212.78 129,765.13 137,577.90 144,962.49 151,467.82 156,149.13 169,165.68
</TABLE>
This chart assumes an initial gross investment of $100,000 made on 12/31/94.
Returns shown include the reinvestment of all dividends. Past performance is not
predictive of future results. Investment return and principal value will
fluctuate so that shares, when redeemed, may be worth more or less than the
original cost. In the absence of existing fee waivers, total return would be
reduced.
The S&P 500 Stock Index is an unmanaged index of 500 selected common stocks,
most of which are listed on the New York Stock Exchange. The Index is heavily
weighted toward stocks with large market capitalizations and represents
approximately two-thirds of the total market value of all domestic common
stocks.
PORTFOLIO TOTAL RETURN
FOR THE PERIOD ENDED 12/31/96
- ---------------------------------------------------------------------
ONE YEAR 25.6%
AVERAGE ANNUAL SINCE COMMENCEMENT 30.3%
SECTOR BREAKDOWN
ICAP DISCRETIONARY
EQUITY PORTFOLIO S&P 500 STOCK INDEX
- ------------------------------------------------------------------------------
Basic Industries 7.9 5.8
Capital Equipment-Technology 7.4 13.0
Capital Spending 7.5 9.3
Consumer Durables 2.9 2.9
Consumer Services 13.2 4.9
Consumer Staples 4.2 12.8
Energy 6.1 10.1
Financial 15.2 15.1
Healthcare 15.1 10.3
Retail 4.5 5.0
Transportation 7.2 1.5
Utilities 8.8 9.3
<TABLE>
<CAPTION>
INVESTMENT HIGHLIGHTS
ICAP EQUITY PORTFOLIO
TOTAL RETURN
12/31/94 3/31/95 6/30/95 9/30/95 12/31/95 3/31/96 6/30/96 9/30/96 12/31/96
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ICAP Equity
Portfolio 100,000.00 109,246.39 123,850.87 134,727.64 138,853.00 150,466.83 152,460.84 157,784.04 175,313.64
S&P 500 Stock
Index 100,000.00 109,736.55 120,212.78 129,765.13 137,577.90 144,962.49 151,467.82 156,149.13 169,165.68
</TABLE>
This chart assumes an initial gross investment of $100,000 made on 12/31/94.
Returns shown include the reinvestment of all dividends. Past performance is not
predictive of future results. Investment return and principal value will
fluctuate so that shares, when redeemed, may be worth more or less than the
original cost. In the absence of existing fee waivers, total return would be
reduced.
The S&P 500 Stock Index is an unmanaged index of 500 selected common stocks,
most of which are listed on the New York Stock Exchange. The Index is heavily
weighted toward stocks with large market capitalizations and represents
approximately two-thirds of the total market value of all domestic common
stocks.
PORTFOLIO TOTAL RETURN
FOR THE PERIOD ENDED 12/31/96
- ---------------------------------------------------------------------
ONE YEAR 26.3%
AVERAGE ANNUAL SINCE COMMENCEMENT 32.4%
SECTOR BREAKDOWN
ICAP EQUITY PORTFOLIO S&P 500 STOCK INDEX
- -------------------------------------------------------------------------------
Basic Industries 7.8 5.8
Capital Equipment-Technology 9.0 13.0
Capital Spending 9.1 9.3
Consumer Durables 4.0 2.9
Consumer Services 12.7 4.9
Consumer Staples 4.8 12.8
Energy 3.1 10.1
Financial 15.1 15.1
Healthcare 14.8 10.3
Retail 4.6 5.0
Transportation 6.7 1.5
Utilities 8.3 9.3
DISCRETIONARY EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS
December 31, 1996
- -------------------------------------------------------------------------------
NUMBER
OF SHARES VALUE
- -------------------------------------------------------------------------------
COMMON STOCKS 93.89%
AUTOS & TRUCKS 2.77%
54,700 General Motors Corp. $ 3,049,525
------------
BANKS & FINANCE 9.31%
56,100 Banc One Corp. 2,412,300
25,795 Citicorp 2,656,885
82,800 CS Holdings - ADR 2,119,680
11,400 Wells Fargo & Co. 3,075,150
------------
10,264,015
------------
CHEMICALS 6.76%
35,650 Dow Chemical Co. 2,794,069
29,292 Du Pont (E.I.) de Nemours & Co. 2,764,432
36,700 Grace (W.R.) & Co. 1,899,225
------------
7,457,726
------------
COMMUNICATIONS 1.92%
34,550 Motorola, Inc. 2,120,506
------------
COMPUTER SYSTEMS 2.52%
18,442 International Business Machines Corp. 2,784,742
------------
DEFENSE 7.16%
32,000 Boeing Co. 3,404,000
25,450 Northrop Grumman Corp. 2,105,988
49,500 Raytheon Co. 2,382,188
------------
7,892,176
------------
DRUGS & SUPPLIES 10.96%
44,194 American Home Products Corp. 2,590,873
26,600 Bristol-Myers Squibb 2,892,750
65,512 Novartis AG - ADR 3,739,425
84,600 Rhone-Poulenc SA - ADR 2,865,825
------------
12,088,873
------------
ELECTRONICS 1.07%
54,700 General Instrument Corp.<F4> 1,182,888
------------
See notes to financial statements.
DISCRETIONARY EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS(CONT'D.)
December 31, 1996
- -------------------------------------------------------------------------------
NUMBER
OF SHARES VALUE
- -------------------------------------------------------------------------------
ENTERTAINMENT 6.24%
72,100 Host Marriott International Corp.<F4> $1,153,600
49,500 ITT Corp.<F4> 2,147,063
89,500 Philips Electronics N.V. 3,580,000
-----------
6,880,663
-----------
FINANCIAL - MISCELLANEOUS 2.52%
61,166 Travelers Group, Inc. 2,775,407
-----------
FOOD, TOBACCO & BEVERAGE 2.15%
25,150 Loews Corp. 2,370,387
-----------
HEALTHCARE - MISCELLANEOUS 3.40%
26,200 Aetna, Inc. 2,096,000
75,550 Tenet Healthcare Corp.<F4> 1,652,656
-----------
3,748,656
-----------
INSURANCE 2.71%
51,693 Allstate Corp. 2,991,732
-----------
MEDIA 2.80%
63,050 Dun and Bradstreet Corp. 1,497,437
45,400 Scripps (E.W.) Co. 1,589,000
-----------
3,086,437
-----------
METALS 0.74%
35,400 Allegheny Teledyne Corp. 814,200
-----------
OILS 5.86%
37,816 Amoco Corp. 3,044,188
75,500 Elf Aquitaine - ADR 3,416,375
-----------
6,460,563
-----------
RETAIL 4.26%
64,642 Federated Department Stores, Inc.<F4> 2,205,908
108,900 Wal-Mart Stores, Inc. 2,491,088
-----------
4,696,996
-----------
SERVICES - MISCELLANEOUS 3.57%
76,300 Peninsular & Oriental - ADR 1,540,497
73,600 WMX Technologies, Inc. 2,401,200
-----------
3,941,697
-----------
See notes to financial statements.
DISCRETIONARY EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS(CONT'D.)
December 31, 1996
- -------------------------------------------------------------------------------
NUMBER
OF SHARES VALUE
- -------------------------------------------------------------------------------
TELEPHONE 8.42%
81,800 MCI Communications Corp. $ 2,673,838
68,200 Nynex Corp. 3,282,125
90,700 Pacific Telesis Group 3,333,225
-------------
9,289,188
-------------
TOYS 1.90%
37,800 Hasbro, Inc. 1,469,475
22,553 Mattel, Inc. 625,846
-------------
2,095,321
-------------
TRANSPORTATION 6.85%
23,800 AMR Corp.<F4> 2,097,375
29,034 Burlington Northern Santa Fe Corp. 2,507,812
49,010 Union Pacific Corp. 2,946,726
-------------
7,551,913
-------------
TOTAL COMMON STOCKS
(cost $88,477,800) 103,543,611
-------------
PREFERRED STOCK 1.51%
COMMUNICATIONS 1.51%
29,000 Nokia Corp. Preferred ADS 1,667,500
-------------
TOTAL PREFERRED STOCK
(cost $1,084,927) 1,667,500
-------------
See notes to financial statements.
DISCRETIONARY EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS(CONT'D.)
December 31, 1996
- -------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- -------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS 4.56%
DISCOUNTED COMMERCIAL PAPER 2.44%
$2,700,000 Lucent Technologies, 5.35%, 1/29/97 $ 2,689,026
---------------
MONEY MARKET 2.12%
2,336,565 Money Market Fiduciary 2,336,565
---------------
TOTAL SHORT-TERM INVESTMENTS
(cost $5,025,591) 5,025,591
---------------
TOTAL INVESTMENTS 99.96%
(cost $94,588,318) 110,236,702
Cash and Other Assets,
less Liabilities 0.04% 43,125
---------------
NET ASSETS 100.00% $110,279,827
===============
See notes to financial statements.
<F4> Non-income producing
EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS
December 31, 1996
- -------------------------------------------------------------------------------
NUMBER
OF SHARES VALUE
- -------------------------------------------------------------------------------
COMMON STOCKS 93.01%
AUTOS & TRUCKS 3.35%
89,500 General Motors Corp. $ 4,989,625
-----------
BANKS & FINANCE 8.95%
69,200 Banc One Corp. 2,975,600
36,605 Citicorp 3,770,315
103,400 CS Holdings - ADR 2,647,040
14,650 Wells Fargo & Co. 3,951,838
-----------
13,344,793
-----------
BUILDING 0.49%
10,500 Armstrong World Industries, Inc. 729,750
-----------
CHEMICALS 6.44%
45,550 Dow Chemical Co. 3,569,981
38,958 Du Pont (E.I.) de Nemours & Co. 3,676,661
45,600 Grace (W.R.) & Co. 2,359,800
-----------
9,606,442
-----------
COMMUNICATIONS 1.86%
45,300 Motorola, Inc. 2,780,288
-----------
COMPUTER SYSTEMS 3.55%
35,058 International Business Machines Corp. 5,293,758
-----------
DEFENSE 6.86%
41,200 Boeing Co. 4,382,650
31,900 Northrop Grumman Corp. 2,639,725
66,600 Raytheon Co. 3,205,125
-----------
10,227,500
-----------
DRUGS & SUPPLIES 10.77%
59,056 American Home Products Corp. 3,462,158
40,400 Bristol-Myers Squibb 4,393,500
82,113 Novartis AG - ADR 4,687,010
103,700 Rhone-Poulenc SA - ADR 3,512,838
-----------
16,055,506
-----------
See notes to financial statements.
EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS(CONT'D.)
December 31, 1996
- -------------------------------------------------------------------------------
NUMBER
OF SHARES VALUE
- -------------------------------------------------------------------------------
ELECTRONICS 1.04%
71,700 General Instrument Corp.<F5> $1,550,512
-----------
ENTERTAINMENT 5.71%
97,200 Host Marriott International Corp.<F5> 1,555,200
59,900 ITT Corp.<F5> 2,598,163
109,230 Philips Electronics N.V. 4,369,200
-----------
8,522,563
-----------
FINANCIAL - MISCELLANEOUS 2.59%
85,100 Travelers Group, Inc. 3,861,412
-----------
FOOD, TOBACCO & BEVERAGE 2.56%
40,450 Loews Corp. 3,812,412
-----------
HEALTHCARE - MISCELLANEOUS 3.28%
35,250 Aetna, Inc. 2,820,000
94,900 Tenet Healthcare Corp.<F5> 2,075,938
-----------
4,895,938
-----------
INSURANCE 2.84%
73,150 Allstate Corp. 4,233,556
-----------
MEDIA 2.86%
81,500 Dun and Bradstreet Corp. 1,935,625
61,500 New York Times Co., Class A 2,337,000
-----------
4,272,625
-----------
METALS 0.84%
54,300 Allegheny Teledyne Corp. 1,248,900
-----------
NON-DEFENSE CAPITAL SPENDING 1.83%
95,500 AGCO Corp. 2,733,687
-----------
OILS 2.94%
97,000 Elf Aquitaine - ADR 4,389,250
-----------
RETAIL 4.39%
93,608 Federated Department Stores, Inc.<F5> 3,194,373
146,500 Wal-Mart Stores, Inc. 3,351,188
-----------
6,545,561
-----------
See notes to financial statements.
EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS(CONT'D.)
December 31, 1996
- -------------------------------------------------------------------------------
NUMBER
OF SHARES VALUE
- -------------------------------------------------------------------------------
SERVICES - MISCELLANEOUS 3.54%
101,300 Peninsular & Oriental - ADR $ 2,045,247
99,100 WMX Technologies, Inc. 3,233,138
-----------
5,278,385
-----------
TELEPHONE 7.93%
128,100 MCI Communications Corp. 4,187,269
86,600 Nynex Corp. 4,167,625
94,350 Pacific Telesis Group 3,467,362
-----------
11,822,256
-----------
TOYS 1.98%
48,600 Hasbro, Inc. 1,889,325
38,273 Mattel, Inc. 1,062,076
-----------
2,951,401
-----------
TRANSPORTATION 6.41%
31,550 AMR Corp.<F5> 2,780,344
36,166 Burlington Northern Santa Fe Corp. 3,123,838
60,690 Union Pacific Corp. 3,648,986
-----------
9,553,168
-----------
TOTAL COMMON STOCKS
(cost $120,836,433) 138,699,288
-----------
PREFERRED STOCK 2.10%
COMMUNICATIONS 2.10%
54,550 Nokia Corp. Preferred ADS 3,136,625
-----------
TOTAL PREFERRED STOCK
(cost $2,160,368) 3,136,625
-----------
See notes to financial statements.
EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS(CONT'D.)
December 31, 1996
- -------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
- -------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS 4.81%
MONEY MARKET 4.81%
$7,170,249 Money Market Fiduciary $ 7,170,249
-----------
TOTAL SHORT-TERM INVESTMENTS
(cost $7,170,249) 7,170,249
-----------
TOTAL INVESTMENTS 99.92%
(cost $130,167,050) 149,006,162
Cash and Other Assets,
less Liabilities 0.08% 118,448
-----------
NET ASSETS 100.00% $149,124,610
=============
See notes to financial statements.
<F5> Non-income producing
ICAP FUNDS, INC.
STATEMENTS OF ASSETS AND LIABILITIES
December 31, 1996
- -------------------------------------------------------------------------------
DISCRETIONARY
EQUITY EQUITY
PORTFOLIO PORTFOLIO
- -------------------------------------------------------------------------------
ASSETS:
Investments, at value (cost $94,588,318
and $130,167,050, respectively) $110,236,702 $149,006,162
Interest and dividends receivable 156,786 203,909
Deferred organization costs 21,776 21,775
Prepaid blue sky fees 18,234 17,230
------------ ------------
Total Assets 110,433,498 149,249,076
------------ ------------
LIABILITIES:
Accrued expenses 57,909 69,229
Accrued investment advisory fee 43,660 55,237
Other liabilities 52,102 -
------------ ------------
Total Liabilities 153,671 124,466
------------ ------------
NET ASSETS $110,279,827 $149,124,610
============ ============
NET ASSETS CONSIST OF:
Capital stock $ 37,318 $ 47,855
Paid-in-capital in excess of par 95,128,555 130,536,547
Undistributed net investment income 38,117 40,435
Distributions in excess of book net realized gain
on investments (572,547) (339,339)
Net unrealized appreciation on investments 15,648,384 18,839,112
------------ ------------
NET ASSETS $110,279,827 $149,124,610
============ ============
CAPITAL STOCK, $0.01 PAR VALUE
Authorized 100,000,000 100,000,000
Issued and outstanding 3,731,749 4,785,550
NET ASSET VALUE, REDEMPTION PRICE AND
OFFERING PRICE PER SHARE $29.55 $31.16
====== ======
See notes to financial statements.
ICAP FUNDS, INC.
STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1996
- -------------------------------------------------------------------------------
DISCRETIONARY
EQUITY EQUITY
PORTFOLIO PORTFOLIO
- -------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $1,671,155<F6> $1,655,907<F7>
Interest 252,813 103,162
------------ ------------
1,923,968 1,759,069
------------ ------------
EXPENSES:
Investment advisory fees 715,273 723,879
Fund administration and accounting fees 126,877 127,854
Federal and state registration fees 47,850 53,030
Directors' fees and expenses 21,499 21,517
Legal fees 21,243 21,251
Shareholder servicing 17,469 17,211
Custody fees 16,695 17,629
Audit fees 9,863 9,863
Amortization of organization costs 7,257 7,257
Reports to shareholders 6,784 6,551
Other 5,020 4,848
-------- --------
Total expenses before waiver 995,830 1,010,890
Waiver of expenses by adviser (280,557) (287,011)
---------- ----------
Net expenses 715,273 723,879
---------- ----------
NET INVESTMENT INCOME 1,208,695 1,035,190
---------- ----------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS:
Net realized gain on investments 6,299,055 5,779,806
Change in unrealized appreciation on investments 13,371,227 15,258,719
----------- -----------
Net gain on investments 19,670,282 21,038,525
----------- -----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $20,878,977 $22,073,715
=========== ===========
<F6> Net of $47,016 in foreign withholding taxes.
<F7> Net of $30,827 in foreign withholding taxes.
See notes to financial statements.
ICAP FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
DISCRETIONARY DISCRETIONARY
EQUITY EQUITY
PORTFOLIO PORTFOLIO
YEAR ENDED YEAR ENDED
DEC. 31, 1996 DEC. 31, 1995
- -------------------------------------------------------------------------------
OPERATIONS:
Net investment income $ 1,208,695 $ 303,024
Net realized gain on investments 6,299,055 1,751,535
Change in unrealized appreciation
on investments 13,371,227 2,277,157
---------- ---------
Net increase in net assets resulting
from operations 20,878,977 4,331,716
---------- ---------
DISTRIBUTIONS PAID FROM:
Net investment income (1,180,843) (300,886)
Net realized gain on investments (6,853,187) (1,751,535)
In excess of book net realized gain
on investments - (18,415)
----------- -----------
Net decrease in net assets resulting from
distributions paid (8,034,030) (2,070,836)
----------- -----------
CAPITAL SHARE TRANSACTIONS:
Shares sold 60,577,180 33,190,611
Shares issued to holders in reinvestment
of distributions 7,940,201 1,982,225
Shares redeemed (8,444,934) (170,283)
----------- ---------
Net increase in net assets resulting from
capital share transactions 60,072,447 35,002,553
----------- -----------
TOTAL INCREASE IN NET ASSETS 72,917,394 37,263,433
NET ASSETS:
Beginning of year 37,362,433 99,000
----------- -----------
End of year $110,279,827 $37,362,433
============ ===========
See notes to financial statements.
ICAP FUNDS, INC.
STATEMENTS OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
EQUITY EQUITY
PORTFOLIO PORTFOLIO
YEAR ENDED YEAR ENDED
DEC. 31, 1996 DEC. 31, 1995
- -------------------------------------------------------------------------------
OPERATIONS:
Net investment income $ 1,035,190 $ 356,342
Net realized gain on investments 5,779,806 2,362,765
Change in unrealized appreciation
on investments 15,258,719 3,580,393
---------- ---------
Net increase in net assets resulting
from operations 22,073,715 6,299,500
---------- ---------
DISTRIBUTIONS PAID FROM:
Net investment income (998,870) (356,342)
In excess of book net investment income - (4,012)
Net realized gain on investments (6,104,860) (2,362,765)
In excess of book net realized gain
on investments - (14,285)
----------- -----------
Net decrease in net assets resulting from
distributions paid (7,103,730) (2,737,404)
----------- -----------
CAPITAL SHARE TRANSACTIONS:
Shares sold 101,599,973 42,888,716
Shares issued to holders in reinvestment
of distributions 6,875,245 2,429,267
Shares redeemed (21,108,211) (2,093,461)
----------- ---------
Net increase in net assets resulting from
capital share transactions 87,367,007 43,224,522
----------- -----------
TOTAL INCREASE IN NET ASSETS 102,336,992 46,786,618
NET ASSETS:
Beginning of year 46,787,618 1,000
----------- -----------
End of year $149,124,610 $46,787,618
============ ===========
See notes to financial statements.
ICAP FUNDS, INC.
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
DISCRETIONARY DISCRETIONARY
EQUITY EQUITY
PORTFOLIO PORTFOLIO
YEAR ENDED YEAR ENDED
(For a share outstanding throughout the year) DEC. 31, 1996 DEC. 31, 1995<F8>
- -------------------------------------------------------------------------------
Net asset value, beginning of year $25.42 $20.00
Income from investment operations:
Net investment income 0.36 0.31
Net realized and unrealized gain on investments 6.09 6.70
------ -----
Total income from investment operations 6.45 7.01
------ -----
Less distributions:
From net investment income (0.36) (0.31)
From net realized gain on investments (1.96) (1.27)
In excess of book net realized gain on investments - (0.01)
------ ------
Total distributions (2.32) (1.59)
------ ------
Net asset value, end of year $29.55 $25.42
====== ======
Total return 25.55% 35.21%
Supplemental data and ratios:
Net assets, end of year (in thousands) $110,280 $37,362
Ratio of expenses to average net assets<F9> 0.80% 0.80%
Ratio of net investment income to average
net assets<F9> 1.35% 1.71%
Portfolio turnover rate 138% 102%
Average commission rate paid on portfolio
investment transactions $0.0356 N/A
<F8> Commencement of operations January 1, 1995.
<F9> Net of waivers by ICAP. Without waivers of expenses, the ratio of expenses
to average net assets would have been 1.11% and 1.56%, and the ratio of net
investment income to average net assets would have been 1.04% and 0.95% for
the years ended December 31, 1996 and December 31, 1995, respectively.
See notes to financial statements.
ICAP FUNDS, INC.
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
EQUITY EQUITY
PORTFOLIO PORTFOLIO
YEAR ENDED YEAR ENDED
(For a share outstanding throughout the year) DEC. 31, 1996 DEC. 31,1995<F10>
- -------------------------------------------------------------------------------
Net asset value, beginning of year $26.03 $20.00
Income from investment operations:
Net investment income 0.31 0.28
Net realized and unrealized gain on investments 6.49 7.45
------ -----
Total income from investment operations 6.80 7.73
------ -----
Less distributions:
From net investment income (0.30) (0.28)
From net realized gain on investments (1.37) (1.41)
In excess of book net realized gain on investments - (0.01)
------ ------
Total distributions (1.67) (1.70)
------ ------
Net asset value, end of year $31.16 $26.03
====== ======
Total return 26.26% 38.85%
Supplemental data and ratios:
Net assets, end of year (in thousands) $149,125 $46,788
Ratio of expenses to average net assets<F11> 0.80% 0.80%
Ratio of net investment income to average
net assets<F11> 1.15% 1.49%
Portfolio turnover rate 125% 105%
Average commission rate paid on portfolio
investment transactions $0.0365 N/A
<F10> Commencement of operations January 1, 1995.
<F11> Net of waivers by ICAP. Without waivers of expenses, the ratio of
expenses to average net assets would have been 1.12% and 1.44%, and the
ratio of net investment income to average net assets would have been
0.83% and 0.85% for the years ended December 31, 1996 and December 31,
1995, respectively.
See notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
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.
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 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 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
recognized daily.
b) Federal Income and Excise Taxes - It is each Portfolio's policy to meet the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all investment company net taxable
income and net capital gains to shareholders in a manner which results in no tax
cost to the Portfolio. Therefore, no federal income or excise tax provision is
required.
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.
The character of distributions made during the year from net investment income
or net realized gain may differ from the characterization for federal income tax
purposes due to differences in the recognition of income, expense and gain items
for financial statement and tax purposes. Where appropriate, reclassifications
between net asset accounts are made for such differences that are permanent in
nature. Accordingly, at December 31, 1996, reclassifications were recorded from
undistributed net investment income to reduce paid-in capital by $4,064 for both
the Discretionary Equity and Equity Portfolios.
d) Short-term Investments - The Portfolios maintain uninvested cash in a bank
overnight investment vehicle at their custodian. This may present credit risk
to the extent the custodian fails to perform in accordance with the custody
agreement. The creditworthiness of the custodian is monitored and this
investment is considered 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. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of increases and
decreases in net assets from operations during the reporting period. Actual
results could differ from those estimates.
3.Capital Share Transactions
Transactions in shares of the Portfolios were as follows:
DISCRETIONARY
EQUITY EQUITY
PORTFOLIO PORTFOLIO
------------------------- ---------------------------
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
DEC. 31, 1996 DEC. 31, 1995 DEC. 31, 1996 DEC. 31, 1995
------------- ------------- ------------- -------------
Shares sold 2,292,674 1,392,981 3,514,078 1,783,850
Shares issued to
holders in
reinvestment of
distributions 271,211 78,723 222,754 94,610
Shares redeemed (301,710) (7,080) (748,775) (81,017)
---------- ---------- ---------- ----------
Net increase 2,262,175 1,464,624 2,988,057 1,797,443
========== ========== ========== ==========
4.Investment Transactions
The aggregate purchases and sales of securities, excluding short-term
investments and U.S. government obligations, for the Portfolios for the year
ended December 31, 1996 are summarized below:
DISCRETIONARY
EQUITY EQUITY
PORTFOLIO PORTFOLIO
------------------ ----------------
Purchases $164,745,702 $186,468,500
Sales $113,677,828 $111,724,339
There were no purchases or sales of U.S. government obligations. At December
31, 1996, gross unrealized appreciation and depreciation of investments, based
on cost for federal income tax purposes of $95,160,869 and $130,506,391 for the
Discretionary Equity and Equity Portfolios, respectively, were as follows:
DISCRETIONARY
EQUITY EQUITY
PORTFOLIO PORTFOLIO
---------------- -----------------
Appreciation $15,741,387 $19,489,660
Depreciation (665,554) (989,889)
------------ ------------
Net appreciation on
investments $15,075,833 $18,499,771
=========== ===========
For the year ended December 31, 1996, 100% of dividends paid from net investment
income, excluding short-term capital gains, qualifies for the dividends received
deduction available to corporate shareholders of both the Discretionary Equity
and Equity Portfolios.
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. 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 has
agreed to voluntarily reimburse the Portfolios for the amount of such excess.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of the ICAP Funds, Inc.
We have audited the accompanying statements of assets and liabilities of the
ICAP Funds, Inc. (the "Fund") (comprising, respectively, the Discretionary
Equity and the Equity Portfolios), including the schedules of investments in
securities, as of December 31, 1996, and the related statements of operations
for the year then ended, and the statements of changes in net assets and the
financial highlights for each of the two years in the period then ended. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the respective portfolios constituting ICAP Funds, Inc., as of December 31,
1996, the results of their operations for the year then ended, and the changes
in their net assets and the financial highlights for each of the two years in
the period then ended, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Milwaukee, Wisconsin
January 24, 1997
DIRECTORS
Pamela H. Conroy
Senior Vice President and Director,
Institutional Capital Corp.
Dr. James A. Gentry
Professor of Finance,
University of Illinois
Joseph A. Hays
Retired Vice President/Corporate Relations,
Tribune Company
Robert H. Lyon
President, Chief Investment Officer
and Director,
Institutional Capital Corp.
Gary S. Maurer
Executive Vice President and Director,
Institutional Capital Corp.
Harold W. Nations
Partner,
Shefsky & Froelich Ltd.
Donald D. Niemann
Executive Vice President and Director,
Institutional Capital Corp.
Barbara C. Schanmier
Vice President and Director,
Institutional Capital Corp.
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, Illinois 60606
CUSTODIAN
UMB Bank, n.a.
928 Grand Avenue
Kansas City, Missouri 64141
TRANSFER AGENT
AND DIVIDEND-
DISBURSING AGENT
Sunstone Investor Services, LLC
207 East Buffalo Street, Suite 315
P.O. Box 2160
Milwaukee, Wisconsin 53201-2160
ADMINISTRATOR AND
FUND ACCOUNTANT
Sunstone Financial Group, Inc.
207 East Buffalo Street, Suite 400
Milwaukee, Wisconsin 53202
AUDITORS
Coopers & Lybrand L.L.P.
411 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
LEGAL COUNSEL
Godfrey & Kahn, S.C.
780 North Water Street
Milwaukee, Wisconsin 53202
This financial statement is submitted for the general information of the
shareholders of the ICAP Funds. It is not authorized for distribution to
prospective investors unless preceded or accompanied by an effective
prospectus.
ICAP Funds, Inc.
225 West Wacker Drive
Suite 2400
Chicago, IL 60606
