As filed with the Securities and Exchange Commission on December 23, 1997
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 [X]
Pre-Effective Amendment No. _____ [ ]
Post-Effective Amendment No. 7 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT
OF 1940 [X]
Amendment No. 8
ICAP FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
225 West Wacker Drive, Suite 2400
Chicago, Illinois 60606
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code:
(312) 424-9100
Pamela H. Conroy
Institutional Capital Corporation
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 ending December 31, 1997 will be filed on
or before February 28, 1998.
It is proposed that this filing will become
effective (check appropriate box).
[ ] immediately upon filing pursuant to
paragraph (b) of Rule 485
[X] on December 31, 1997 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
[ ] on (date) pursuant to paragraph
(a)(2) of Rule 485
If appropriate, check the following box:
[ ] this post-effective amendment
designates a new effective date
for a previously filed
post-effective amendment.
<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).
Caption or Subheading in
Prospectus or Statement
Item No. on Form N-1A of Additional Information
PART A - INFORMATION REQUIRED IN PROSPECTUS
1. Cover Page Cover Page
2. Synopsis Highlights; Summary of
Portfolio Expenses
3. Condensed Financial Financial Highlights
Information
4. General Description of Organization; Investment
Registrant Objectives and Policies;
Investment Techniques and
Risks; Investment
Restrictions
5. Management of the Fund Management
5A. Management's Discussion *
of Fund Performance
6. Capital Stock and Other Dividends, Capital Gain
Securities Distributions and Tax
Treatment; Organization
7. Purchase of Securities How to Purchase Shares;
Being Offered 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 Included in Prospectus
History under the heading
Organization
13. Investment Objectives and Investment Restrictions;
Policies Investment Policies and
Techniques
14. Management of the Fund Directors and Officers
<PAGE>
15. Control Persons and Principal Principal Shareholders;
Holders of Securities Directors and Officers;
Investment Adviser
16. Investment Advisory and Investment Adviser;
Other Services Management (in
Prospectus); Custodian;
Dividend-Disbursing and
Transfer Agent;
Independent Accountants
17. Brokerage Allocation and Portfolio Transactions
Other Practices and Brokerage
18. Capital Stock and Other Included in Prospectus
Securities under the heading
Organization
19. Purchase, Redemption and Included in Prospectus
Pricing of Securities Being under the headings How to
Offered Purchase 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 Gain
Distributions and Tax
Treatment
21. Underwriters **
22. Calculations of Performance Information
Performance Data
23. Financial Statements Financial Statements
________________________________
* The information called for by this item is contained
in the Annual Report of the Registrant.
**Answer negative or inapplicable.
<PAGE>
PROSPECTUS
Dated December 31, 1997
ICAP FUNDS, INC.
225 West Wacker Drive, Suite 2400
Chicago, Illinois 60606
1-888-221-ICAP
(1-888-221-4227)
ICAP FUNDS, INC. is an open-end, management
investment company, known as a mutual fund (the
"Company"). The Company is currently comprised of the
following four portfolios, the first two of which are
diversified portfolios and the last two of which are
non-diversified portfolios: the ICAP DISCRETIONARY
EQUITY PORTFOLIO (the "Discretionary Equity
Portfolio"), the ICAP EQUITY PORTFOLIO (the "Equity
Portfolio"), the ICAP SELECT EQUITY PORTFOLIO (the
"Select Equity Portfolio") and the ICAP EURO SELECT
EQUITY PORTFOLIO (the "Euro Select Portfolio")
(collectively referred to as the "Portfolios"). The
Portfolios are 100% "no-load." There are no sales,
redemption or 12b-1 fees.
The investment objective of both the Discretionary
Equity and Equity 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 Discretionary Equity and Equity Portfolios
each 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 U.S. dollar-denominated
equity securities of companies with market
capitalizations of at least $500 million. The
Discretionary Equity and Equity Portfolios are
distinguished in the following manner: the
Discretionary Equity Portfolio has the discretion to
invest up to 35% of its total assets and, for temporary
defensive purposes, up to 100% of its total assets, in
cash and short-term fixed income securities, hence the
name "Discretionary" Equity Portfolio, while the Equity
Portfolio will not invest in cash or short-term fixed
income securities for investment purposes, but rather
intends, under normal market conditions, to be
virtually fully invested at all times.
The investment objective of the Select Equity
Portfolio is to seek a superior total return. This
investment objective is relative to and measured
against the S&P 500; the Select Equity Portfolio seeks
to achieve a total return greater than the S&P 500.
The Select Equity Portfolio seeks to achieve its
investment objective primarily through the capital
appreciation of investments in U.S. dollar-denominated
equity securities of companies with market
capitalizations of at least $500 million. While the
Select Equity, Discretionary Equity and Equity
Portfolios are similar in terms of the types of
securities in which each Portfolio may invest, the
Select Equity Portfolio will concentrate its
investments in fewer securities and/or companies than
the Discretionary Equity and Equity Portfolios. The
Select Equity Portfolio has the discretion to invest up
to 35% of its total assets and, for temporary defensive
purposes, up to 100% of its total assets, in cash and
short-term fixed income securities.
The investment objective of the Euro Select
Portfolio is to seek a superior total return with
income as a secondary objective. This investment
objective is relative to and measured against the
Morgan Stanley Capital International Euro Index (the
"Euro Index"); the Euro Select Portfolio seeks to
achieve a total return greater than the Euro Index.
The Euro Select Portfolio seeks to achieve its
investment objective primarily through the capital
appreciation of investments in equity securities,
predominantly American Depository Receipts ("ADRs"), of
established European companies with market
capitalizations of at least $1 billion. The Euro
Select Portfolio has the discretion to invest up to 35%
of its total assets and, for temporary defensive
purposes, up to 100% of its total assets, in cash and
short-term fixed income securities.
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, 1997, 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
ICAP Funds, Inc., c/o Sunstone Investor Services, LLC,
P.O. Box 2160, Milwaukee, Wisconsin 53201-2160 or by
calling 1-888-221-ICAP (1-888-221-4227).
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
HIGHLIGHTS 2
SUMMARY OF PORTFOLIO EXPENSES 3
FINANCIAL HIGHLIGHTS 5
PRIOR PERFORMANCE OF PRIVATE ACCOUNTS OF THE
ADVISER 6
INVESTMENT OBJECTIVES AND POLICIES 7
INVESTMENT TECHNIQUES AND RISKS 9
INVESTMENT RESTRICTIONS 13
MANAGEMENT 13
HOW TO PURCHASE SHARES 14
HOW TO REDEEM SHARES 15
EXCHANGE PRIVILEGE 17
TAX-SHELTERED RETIREMENT PLANS 17
DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS AND TAX
TREATMENT 17
DETERMINATION OF NET ASSET VALUE 18
SHAREHOLDER REPORTS 19
FINANCIAL INTERMEDIARIES 19
ORGANIZATION 19
ADMINISTRATOR AND FUND ACCOUNTANT 20
CUSTODIAN AND TRANSFER AGENT 20
COMPARISON OF INVESTMENT RESULTS 20
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>
HIGHLIGHTS
Investment Objectives
General. The Company is currently comprised of
the following four portfolios, the first two of which
are diversified portfolios and the last two of which
are non-diversified portfolios: the Discretionary
Equity Portfolio, the Equity Portfolio, the Select
Equity Portfolio and the Euro Select Portfolio.
Discretionary Equity and Equity Portfolios. The
investment objective of both the Discretionary Equity
and the Equity 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 S&P 500. Both Portfolios seek to achieve
this investment objective primarily through the capital
appreciation of investments in U.S. dollar-denominated
equity securities of 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 temporary defensive purposes,
up to 100% of its total assets, in cash and short-term
fixed income securities, while the Equity Portfolio
intends, under normal market conditions, to be
virtually fully invested at all times.
Select Equity Portfolio. The investment objective
of the Select Equity Portfolio is to seek a superior
total return. This investment objective is relative to
and measured against the S&P 500. The Select Equity
Portfolio seeks to achieve its investment objective
primarily through the capital appreciation of
investments in U.S. dollar-denominated equity
securities of companies with market capitalizations of
at least $500 million. At any time, the Select Equity
Portfolio will be invested in a relatively limited
number of securities and/or companies.
Euro Select Portfolio. The investment objective
of the Euro Select Portfolio is to seek a superior
total return with income as a secondary objective. The
investment objective of the Euro Select Portfolio is
relative to and measured against the Euro Index. The
Euro Select Portfolio seeks to achieve its investment
objective primarily through the capital appreciation of
investments in equity securities, predominantly ADRs,
of established European companies with market
capitalizations of at least $1 billion. At any time,
the Euro Select Portfolio will be invested in a
relatively limited number of securities and/or
companies.
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. As of November
30, 1997, ICAP had approximately $10 billion under
management. 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 each Portfolio is $10,000. The minimum
subsequent investment is $1,000. These minimums may be
changed or waived at any time at the discretion of the
Company. See "HOW TO PURCHASE SHARES" and "HOW TO
REDEEM SHARES." Shares in one Portfolio may be
exchanged for shares in another Portfolio at their
relative net asset values. See "EXCHANGE PRIVILEGE."
Shareholder Services
Questions regarding the Portfolios may be directed
to the Company at the address and telephone number
below:
ICAP Funds, Inc.
c/o Sunstone Investor Services, LLC
P.O. Box 2160
Milwaukee, Wisconsin 53201-2160
1-888-221-ICAP
(1-888-221-4227)
<PAGE>
SUMMARY OF PORTFOLIO EXPENSES
The purpose of the following Fee Tables and
Example is to assist you in understanding the various
costs and expenses that you will bear directly
(shareholder transaction expenses) or indirectly
(annual fund operating expenses) should you invest in
one or more of the Portfolios.
Fee Tables
<TABLE>
<CAPTION>
Shareholder Transaction Expenses Discretionary
Equity Equity Select Equity Euro Select
Portfolio Portfolio Portfolio Portfolio
<S> <C> <C> <C> <C>
Sales Load Imposed on Purchases NONE NONE NONE NONE
Sales Load Imposed on Reinvested Dividends NONE NONE NONE NONE
Deferred Sales Load Imposed on Redemptions NONE NONE NONE NONE
Redemption Fees NONE NONE NONE NONE
Exchange Fees NONE NONE NONE NONE
</TABLE>
Annual Operating Expenses (after waivers and/or
reimbursements) (as a percentage of average net assets)
<TABLE>
<CAPTION>
Discretionary
Equity Equity Select Equity Euro Select
Portfolio Portfolio Portfolio Portfolio
<S> <C> <C> <C> <C>
Management Fees 0.80% 0.80% 0.80% 1.00%
12b-1 Fees NONE NONE NONE NONE
Other Expenses (net of reimbursements) 0% 0% 0% 0%
TOTAL OPERATING EXPENSES 0.80% 0.80% 0.80% 1.00%
(after waivers and/or reimbursements)
</TABLE>
For the year ended December 31, 1996, the
Portfolios' investment adviser, ICAP, voluntarily
agreed to waive its management fee and/or reimburse the
operating expenses of the Discretionary Equity and
Equity Portfolios to the extent necessary to ensure
that neither Portfolio's total operating expenses
exceeded 0.80% of that Portfolio's average net assets.
Absent these waivers/reimbursements, other expenses and
total operating expenses for the Discretionary Equity
Portfolio would have been 0.31% and 1.11%,
respectively, and other expenses and total operating
expenses for the Equity Portfolio would have been 0.32%
and 1.12%, respectively. ICAP has voluntarily agreed
to continue this waiver/reimbursement policy for the
year ending December 31, 1997, and for an indefinite
amount of time beyond that date.
For the year ending December 31, 1998, and for an
indefinite period of time beyond that date, ICAP has
also voluntarily agreed to waive its management fee
and/or reimburse the operating expenses of the Select
Equity and Euro Select Portfolios to the extent
necessary to ensure that the Select Equity Portfolio's
total operating expenses do not exceed 0.80% of the
Portfolio's average net assets, and the Euro Select
Portfolio's total operating expenses do not exceed
1.00% of the Portfolio's average net assets. Absent
these waivers/reimbursements, other expenses and total
operating expenses for the Select Equity Portfolio are
estimated to be 0.50% and 1.30%, respectively, for the
year ending December 31, 1998, and other expenses and
total operating expenses for the Euro Select Portfolio
are estimated to be 0.51% and 1.51%, respectively, for
the year ending December 31, 1998. 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 $10.00 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.
<PAGE>
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 Equity Select Equity Euro Select
Portfolio Portfolio Portfolio Portfolio
1 Year $8 $8 $8 $11
3 Years $26 $26 $26 $33
5 Years $46 $46 $46 $57
10 Years $102 $102 $102 $126
The Example is based on the total operating
expenses specified in the Annual Operating Expenses
table above. The amounts in the Example may increase
absent the waivers and/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 the past or
future performance of the Portfolios.
<PAGE>
FINANCIAL HIGHLIGHTS
The following Financial Highlights of the
Discretionary Equity and Equity Portfolios for the
years ended December 31, 1996 and 1995 have been
audited by Coopers & Lybrand L.L.P., independent
certified public accountants. Their report is included
in the Portfolios' Annual Report for the year ended
December 31, 1996. The Annual Report is incorporated
by reference into the Statement of Additional
Information for the Portfolios. The following
Financial Highlights for the six months ended June 30,
1997 have not been audited. The year-end Financial
Highlights should be read in conjunction with the
financial statements and related notes included in the
Annual Report and the semi-annual Financial Highlights
should be read in conjunction with the Semi-Annual
Report for the six months ended June 30, 1997, copies
of which may be obtained without charge by writing to
or calling the Company at ICAP Funds, Inc., c/o
Sunstone Investor Services, LLC, P.O. Box 2160,
Milwaukee, Wisconsin 53201-2160, 1-888-221-ICAP (1-888-
221-4227). Both the Discretionary Equity and Equity
Portfolios commenced operations on January 1, 1995. As
of the date hereof, neither the Select Equity nor the
Euro Select Portfolio has commenced operations.
<TABLE>
<CAPTION>
Discretionary Equity
Equity Portfolio Portfolio
Six Months Year Ended Six Months Year Ended
Ended December 31, Ended December 31,
June 30, 1997 1996 1997 June 30, 1997 1996 1997
<S> <C> <C> <C> <C> <C> <C>
Net asset value, $29.55 $25.42 $20.00 $31.16 $26.03 $20.00
beginning of period
Income from investment
operations:
Net investment income 0.29 0.36 0.31 0.23 0.31 0.28
Net realized and 5.83 6.09 6.70 6.52 6.49 7.45
unrealized gain on
investments
Total income from 6.12 6.45 7.01 6.75 6.80 7.73
investment operations
Less distributions:
From net investment (0.30) (0.36) (0.31) (0.24) (0.30) (0.28)
income
From net realized gain -- (1.96) (1.27) -- (1.37) (1.41)
on investments
In excess of book net -- -- (0.01) -- -- (0.01)
realized gain on
investments
Total distributions (0.30) (2.32) (1.59) (0.24) (1.67) (1.70)
Net asset value, end of $35.37 $29.55 $25.42 $37.67 $31.16 $26.03
period
Total return(1) 20.75% 25.55% 35.21% 21.71% 26.26% 38.85%
Supplemental data and
ratios:
Net assets, end of $145,438 $110,280 $37,362 $280,992 $149,125 $46,788
period
(in thousands)
Ratio of expenses to 0.80% 0.80% 0.80% 0.80% 0.80% 0.80%
average net
assets(2),(3)
Ratio of net investment
income to average net 1.79% 1.35% 1.71% 1.56% 1.15% 1.49%
assets(2),(3)
Portfolio turnover 61% 138% 102% 51% 125% 105%
rate(1)
Average commission $0.0376 $0.0356 N/A $0.0370 $0.0365 N/A
rate paid on
portfolio investment
transactions
</TABLE>
_______________
(1) Not annualized for the six months ended June
30, 1997.
(2) Net of waivers by ICAP. Without waivers of
expenses, the ratio of expenses to average net
assets for the Discretionary Equity Portfolio would
have been 1.03%, 1.11% and 1.56%, and the ratio of
net investment income to average net assets would
have been 1.56%, 1.04% and 0.95% for the six months
ended June 30, 1997 and the years ended December 31,
1996 and December 31, 1995, respectively. Without
waivers of expenses, the ratio of expenses to
average net assets for the Equity Portfolio would
have been 0.97%, 1.12% and 1.44%, and the ratio of
net investment income to average net assets would
have been 1.39%, 0.83% and 0.85% for the six months
ended June 30, 1997 and for the years ended December
31, 1996 and December 31, 1995, respectively.
(3) Annualized for the six months ended June 30,
1997.
<PAGE>
PRIOR PERFORMANCE OF PRIVATE ACCOUNTS OF THE ADVISER
The performance information set forth below for
the private accounts of the Adviser has been calculated
in accordance with recommended standards of the
Association of Investment Management and Research
("AIMR"), retroactively applied to all time periods.
All returns presented were calculated on a total return
basis and include all dividends and interest, if any,
accrued income, if any, and realized and unrealized
gains and losses. Total return is calculated quarterly
in accordance with the "time-weighted" rate of return
method provided for by AIMR standards, accounted for on
a trade-date and accrual basis. Principal additions
and withdrawals are weighted in computing the quarterly
returns based on the timing of these transactions. The
quarterly returns are geometrically linked to derive
annual total returns.
Since 1970, ICAP has managed separate private
accounts (the "Private Accounts") which pursue
substantially the same investment objective, policies
and strategies, and which are managed in the same
manner, as the Discretionary Equity Portfolio, and
since 1991, ICAP has managed Private Accounts which
pursue substantially the same investment objective,
policies and strategies, and which are managed in the
same manner, as the Equity Portfolio. ICAP believes
that it has produced outstanding investment results
over time for its Private Accounts. The Private
Accounts are not subject to the same types of expenses
to which the Discretionary Equity and Equity Portfolios
are subject nor to the specific tax restrictions and
investment limitations imposed on the Portfolios by the
Internal Revenue Code of 1986, as amended (the "Code"),
and the Investment Company Act of 1940, as amended (the
"1940 Act"), respectively. The following chart
illustrates how the performance of ICAP's Discretionary
Equity Composite (a composite including all of ICAP's
discretionary equity Private Accounts) and its Equity
Composite (a composite including all of ICAP's equity
Private Accounts) compares, where applicable, to the
average performance of the S&P 500 for the most recent
1-, 3-, 5- and 10-year periods ended September 30,
1997. Also included in the chart is the performance of
the Discretionary Equity and Equity Portfolios. The
performance results of the composites described below
could have been adversely affected if the Private
Accounts included in the composites had been regulated
as investment companies under the federal tax and
securities laws.
ICAP's Discretionary Equity and Equity Composites
and Discretionary Equity and Equity Portfolios
Annualized Performance vs. S&P 500
Performance through September 30, 1997
Average Annualized Total Return
<TABLE>
<CAPTION>
ICAP Discretionary Discretionary ICAP Equity Equity
Time Period Equity Composite Equity Portfolio Composite Portfolio S&P 500
<S> <C> <C> <C> <C>
1 year 43.6% 45.2% 46.3% 46.9% 40.4%
3 years 30.1% N/A 31.7% N/A 29.9%
5 years 22.5% N/A 24.6% N/A 20.8%
10 years 16.8% N/A N/A N/A 14.7%
</TABLE>
The ICAP composite performance presented above
reflects the performance of the Private Accounts
included in the Discretionary Equity and Equity
Composites reduced by the annual total operating
expenses (before waivers and/or reimbursements) for the
Discretionary Equity and Equity Portfolios,
respectively, as set forth in "SUMMARY OF PORTFOLIO
EXPENSES." The performance of the Discretionary Equity
and Equity Portfolios presented above reflects the
performance of each Portfolio reduced by the total
operating expenses actually incurred by each Portfolio
for the period indicated. The S&P 500 returns assume
reinvestment of all dividends paid by the stocks
included in the index, but do not include brokerage
commissions or other fees an investor would incur by
investing in the portfolio of stocks comprising the
index. The Discretionary Equity and Equity Composites
represent ICAP's past performance in managing private
accounts and should not be interpreted as indicative of
the past or future performance of the Discretionary
Equity or Equity Portfolios. See "FINANCIAL
HIGHLIGHTS."
<PAGE>
In addition to the Private Accounts, since January
1997, ICAP has funded and managed a single separate
account (the "Account") which pursues substantially the
same investment objective, policies and strategies, and
employs the same management style, as that of the Euro
Select Portfolio. Like the Private Accounts, the
Account is not subject to the same types of expenses to
which the Euro Select Portfolio is subject nor to the
specific tax restrictions and investment limitations
imposed on the Portfolio by the Code and the 1940 Act,
respectively. The following chart illustrates how the
performance of the Account compares to the average
performance of the Euro Index for each of the three
quarters ended September 30, 1997 and for the period
from January 1, 1997 to September 30, 1997. The
performance results of the Account described below
could have been adversely affected if the Account had
been regulated as an investment company under the
federal tax and securities laws.
ICAP's Account Annualized Performance vs. Euro Index
Performance through September 30, 1997
Total Return
Time Period ICAP Account Euro Index
1st Quarter 6.6% 4.9%
2nd Quarter 13.6% 8.9%
3rd Quarter 10.4% 8.3%
1/1/97 - 9/30/97 33.7% 23.7%
The ICAP performance presented above reflects the
performance of the Account reduced by the estimated
annual total operating expenses (before waivers and/or
reimbursements) for the Euro Select Portfolio as set
forth in "SUMMARY OF PORTFOLIO EXPENSES." The Euro
Index returns assume reinvestment of all dividends paid
by the stocks included in the index net of foreign
withholding taxes, but do not include brokerage
commissions or other fees an investor would incur by
investing in the portfolio of stocks comprising the
index. The Account performance represents ICAP's past
performance in managing a private account and should
not be interpreted as indicative of future performance
of the Euro Select Portfolio.
INVESTMENT OBJECTIVES AND POLICIES
The initial step in the investment process focuses
on top-down research. 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.
The key to the investment process is bottom-up
stock selection and the identification of a catalyst.
A variety of proprietary research techniques and
computer models are used to search for issuers
possessing the 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 in a
definable time period must exist. In order to enhance
its internal research, 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. Since all
investments are subject to inherent market risks, there
is no assurance that these objectives will be realized.
Except for
<PAGE>
each Portfolio's investment objective and
the investment restrictions enumerated in the Company's
Statement of Additional Information, a Portfolio's
investment 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 temporary defensive purposes, up to
100% of its total assets, in cash and 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 U.S. dollar-denominated equity
securities of companies with market capitalizations of
at least $500 million, which include, but are not
limited to, common stocks; preferred stocks; warrants
to purchase common 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 Investors Service ("Moody's"), BBB or
higher by Standard & Poor's ("S&P"), Duff & Phelps,
Inc. ("D&P") or Fitch Investors Service, Inc.
("Fitch"), or securities of comparable quality as
determined by ICAP (i.e., investment grade debt
securities). Under normal market conditions, the
Discretionary Equity Portfolio will invest at least 65%
of the value of its total assets in equity securities.
In addition, the Discretionary Equity Portfolio may
invest up to 35% of its total assets in cash and short-
term fixed income securities for any purpose, including
pending investment or reinvestment, and may invest up
to 100% of its total assets in such instruments as a
temporary defensive measure.
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 cash or short-term fixed income positions held
at any time. If cash or short-term fixed income
securities are held, however, the purpose of such
holdings would be to meet anticipated redemption
requests, pay expenses and pending investment, which,
in any case, generally would not exceed 5% of the
Equity Portfolio's total assets. The Equity Portfolio
may, however, temporarily exceed this 5% limitation,
but only in circumstances pending investment and only
for short periods of time. Because the Equity
Portfolio will hold only nominal cash and short-term
fixed income positions, it may be subject to greater
risk in times of market volatility than the other
Portfolios.
Investment Policies. The Equity Portfolio will
seek to achieve its investment objective by investing
its assets primarily in U.S. dollar-denominated equity
securities of companies with market capitalizations of
at least $500 million, which include, but are not
limited to, common stocks; preferred stocks; warrants
to purchase common or preferred stocks; ADRs; and
securities convertible into common or preferred stocks,
such as convertible bonds and debentures which are
rated investment grade. Under normal market
conditions, at least 65% of the value of the Equity
Portfolio's total assets will be invested in such
equity securities. The Equity Portfolio will only hold
cash or 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.
Select Equity Portfolio
Investment Objective. The Select Equity
Portfolio's investment objective is to seek a superior
total return. 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.
Under normal market conditions, the Select Equity
Portfolio will invest at least 65% of its total assets
in U.S. dollar-denominated equity securities of
companies with market capitalizations of $500 million
or more. At any time, the Select Equity Portfolio will
be invested in a relatively limited number of
securities and/or companies.
<PAGE>
Investment Policies. The Select Equity Portfolio
will seek to achieve its investment objective by
investing its assets in U.S. dollar-denominated equity
securities of at least 15 companies with market
capitalizations of $500 million or more. These
securities include, but are not limited to, commons
stocks; preferred stocks; warrants to purchase common
or preferred stocks; ADRs; and securities convertible
into common or preferred stocks, such as convertible
bonds and debentures which are rated investment grade.
Under normal market conditions, the Select Equity
Portfolio will invest at least 65% of its total assets
in such securities. In addition, the Select Equity
Portfolio may invest up to 35% of its total assets in
cash and short-term fixed income securities for any
purpose, including pending investment or reinvestment,
and may invest up to 100% of its total assets in such
instruments as a temporary defensive measure.
Euro Select Portfolio
Investment Objective. The Euro Select Portfolio's
investment objective is to seek a superior total return
with income as a secondary objective. This investment
objective is relative to and measured against the Euro
Index; the Euro Select Portfolio seeks to achieve a
total return greater than the Euro Index. Under normal
market conditions, the Euro Select Portfolio will
invest at least 65% of its total assets in equity
securities, predominately ADRs, of established European
companies with market capitalizations of $1 billion or
more. At any time, the Euro Select Portfolio will be
invested in a relatively limited number of securities
and/or companies.
Investment Policies. The Euro Select Portfolio
will seek to achieve its investment objective by
investing its assets in the equity securities of at
least 15 companies which generally pay dividends and
which have market capitalizations of $1 billion or
more. These securities include, but are not limited
to, common stocks; preferred stocks; warrants to
purchase common or preferred stocks; ADRs; and
securities convertible into common or preferred stocks,
such as convertible bonds and debentures which are
rated investment grade. Under normal market
conditions, the Euro Select Portfolio will invest at
least 65% of its total assets in such securities. In
addition, the Euro Select Portfolio may invest up to
35% of its total assets in cash and short-term fixed
income securities for any purpose, including pending
investment or reinvestment, and may invest up to 100%
of its total assets in such instruments as a temporary
defensive measure.
INVESTMENT TECHNIQUES AND RISKS
None of the Portfolios 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"); illiquid securities; and transactions
in short sales against the box.
Short-Term Fixed Income Securities
The Discretionary Equity, Select Equity and Euro
Select Portfolios may invest up to 35% of their
respective total assets in cash and short-term fixed
income securities, while the Equity Portfolio may
generally not invest more than 5% of its total assets
in such instruments. In addition, when ICAP believes
that market conditions warrant, the Discretionary
Equity, Select Equity and Euro Select Portfolios may
invest up to 100% of their respective total 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 or determined by ICAP to be of comparable
quality, 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 U.S. governmental agencies or
instrumentalities; certificates of deposit issued
against funds deposited in a U.S. or foreign bank and
its subsidiaries and branches, or a U.S. savings and
loan association; bank time deposits, which are monies
kept on deposit with U.S. and foreign banks and their
subsidiaries and branches, or U.S. 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; and repurchase
agreements entered into only with respect to
obligations of the U.S. government, its agencies or
<PAGE>
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. Each Portfolio will segregate and maintain
cash or other liquid assets in an amount at least equal
to the amount of outstanding commitments for when-
issued securities at all times. Such securities
involve a risk of loss if the value of the security to
be purchased declines prior to the settlement date.
Warrants
Each Portfolio may invest without limitation in
warrants. 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.
ADRs and Foreign Securities
Each Portfolio may invest without limitation in
ADRs and other foreign instruments denominated in U.S.
dollars. ADRs are securities, typically issued by a
U.S. financial institution (a "depositary"), which
evidence ownership interests in a security or pool of
securities issued by a foreign company which have been
deposited with the depositary. ADRs are denominated in
U.S. dollars and trade in the U.S. securities markets.
ADRs may be "sponsored" or "unsponsored." Sponsored
ADRs are established jointly by a depositary and a
foreign company, whereas unsponsored ADRs may be
established by a depositary without participation by
the underlying foreign company. Holders of unsponsored
ADRs generally bear all the costs associated with
establishing the unsponsored ADR. The depositary of an
unsponsored ADR is under no obligation to distribute
shareholder communications, including financial
statements, received from the foreign company or to
pass through to the holders of the unsponsored ADR
voting rights with respect to the deposited securities
or pool of securities. While the Portfolios may invest
without limitation in sponsored or unsponsored ADRs,
the ADRs purchased by the Portfolios will generally be
sponsored. In addition to ADRs, the Euro Select
Portfolio may invest directly and without limitation in
foreign securities.
Investments in securities of foreign issuers
involve risks which are in addition to the usual risks
inherent in domestic investments. An investment in
ADRs is subject to some of the same risks as direct
investments in foreign securities. In many countries
there is less publicly available information about
issuers than is available in the reports and ratings
published about companies in the U.S. 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
illiquidity and volatility of foreign securities
markets; 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.
<PAGE>
Options and Futures Transactions
Each Portfolio may engage in options and futures
transactions which are sometimes referred to as
"derivative" 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 Commodity
Futures Trading Commission (the "CFTC") regulates the
trading of futures and options on futures transactions.
The Portfolios will only engage in futures and options
on futures transactions which must, pursuant to
regulations promulgated by 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 exceeds 5% of a Portfolio's
net assets. In addition, with respect to both its
options and futures (including options on futures)
transactions, no Portfolio will enter into any such
transaction if more than 30% of the Portfolio's net
assets would be committed to such instruments. A
Portfolio may hold an options or futures 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, a Portfolio will set aside permissible
liquid assets in a segregated account to secure its
potential obligations under its options or futures
positions.
The use of derivative instruments, such as options
and futures, involves risks and special considerations
which include, among others, the following:
Correlation Risk. When a derivative transaction
is used to completely hedge another position, changes
in the market value of the combined position (the
derivative instrument plus the position being hedged)
can result from an imperfect correlation between the
price movements of the two instruments. With a perfect
hedge, the value of the combined position remains
unchanged for any change in the price of the underlying
asset. With an imperfect hedge, the value of the
derivative instrument and its hedge are not perfectly
correlated. Correlation risk is the risk that there
might be imperfect correlation, or even no correlation,
between price movements of a derivative instrument and
price movements of investments being hedged.
Liquidity Risk. Derivatives are also subject to
liquidity risk. Liquidity risk is the risk that a
derivative instrument cannot be sold, closed out or
replaced quickly at or very close to its fundamental
value. Generally, exchange-traded contracts are very
liquid because the exchange clearinghouse is the
counterparty of every contract. Over-the-counter
transactions are less liquid than exchange-traded
derivatives since they often can only be closed out
with the other party to the transaction.
In addition to the foregoing risks, there is the
risk of potentially unlimited losses that may result
from investing in certain derivatives. For additional
information, please see the Statement of Additional
Information.
Foreign Currency Hedging Transactions
The Euro Select Portfolio may enter into forward
foreign currency exchange contracts ("forward
contracts") and foreign currency futures contracts and
options thereon (see "- Options and Futures
Transactions," above). Forward contracts provide for
the purchase, sale or exchange of an amount of a
specified foreign currency at a future date. The Euro
Select Portfolio will enter into forward contracts for
hedging purposes only; that is, only to protect against
the effects of fluctuating rates of currency exchange
and exchange control regulations between trade and
settlement dates, dividend declaration and distribution
dates and purchase and sale dates. A foreign currency
futures contract is a standardized contract for the
future delivery of a specified amount of a foreign
currency at a future date at a price set at the time of
the contract. Foreign currency futures contracts and
options thereon traded in the U.S. are traded on
regulated exchanges. Parties to a futures contract
must make "margin" deposits to secure performance of
the contract, which generally range from 2% to 5% of
the contract price, and may be required to make
"variation" margin deposits as the value of the futures
contract fluctuates. The Euro Select Portfolio will
enter into foreign currency futures and options
transactions for hedging and other permissible risk
management purposes only and may segregate assets to
cover its futures contracts obligations.
<PAGE>
At the maturity of a forward or futures contract,
the Euro Select Portfolio may either accept or make
delivery of the currency specified in the contract or,
prior to maturity, enter into a closing purchase
transaction involving the purchase or sale of an
offsetting contract. Closing purchase transactions
with respect to forward contracts are usually effected
with the currency trader who is a party to the original
forward contract. Closing purchase transactions with
respect to futures contracts are effected on an
exchange. The Euro Select Portfolio will only enter
into such a forward or futures contract if it is
expected that there will be a liquid market in which to
close out such contract. There can, however, be no
assurance that such a liquid market will exist in which
to close a forward or futures contract, in which case
the Euro Select Portfolio may suffer a loss.
The Euro Select Portfolio may attempt to
accomplish objectives similar to those described above
with respect to forward and futures contracts for
currency by means of purchasing put or call options on
foreign currencies on exchanges. A put option gives
the Portfolio the right to sell a currency at the
exercise price until the expiration of the option. A
call option gives the Portfolio the right to purchase a
currency at the exercise price until the expiration of
the option. The Euro Select Portfolio will not enter
into foreign currency forwards, futures or related
options on futures contracts if, along with the
Portfolio's investments in other options, more than 30%
of its net assets would be committed to such
instruments.
Non-Diversification of the Select Equity and Euro
Select Portfolios
The Select Equity and Euro Select Portfolios are
"non-diversified" and, as such, are permitted to invest
their respective assets in a more limited number of
issuers than other investment companies. Under the
Code, however, for income tax purposes neither
Portfolio may (i) invest more than 25% of its total
assets in the securities of any one company or in the
securities of any two or more companies controlled by
the Portfolio which, pursuant to regulations under the
Code, may be deemed to be engaged in the same, similar
or related trades or businesses, and (ii) with respect
to 50% of its total assets, invest more than 5% of its
total assets in the securities of any one company or
own more than 10% of the outstanding voting securities
of a single company. Thus, as a "non-diversified"
fund, each Portfolio may invest (i) up to 50% of its
total assets in the securities of as few as two
companies, up to 25% each, so long as the Portfolio
does not control the two companies and the two
companies are engaged in different businesses, and (ii)
up to 50% of its total assets in the securities of as
few as ten companies, up to 5% each, so long as the
Portfolio does not own in excess of 10% of any
company's outstanding voting stock. This practice
involves an increased risk of loss to the Select Equity
and Euro Select Portfolios if the market value of a
security should decline or its issuer were otherwise
unable to meet its obligations.
Portfolio Turnover
The Discretionary Equity and Equity Portfolios'
historical portfolio turnover rate is listed under
"FINANCIAL HIGHLIGHTS." Under normal market
conditions, each of these Portfolios anticipate that
its portfolio turnover rate will generally not exceed
150% and is expected to be between 100% and 125%. The
Select Equity and Euro Select Portfolios anticipate
that their respective portfolio turnover rates will
generally not exceed 200% and are expected to be
between 100% and 150%. 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 has 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. See "DIVIDENDS, CAPITAL GAIN
DISTRIBUTIONS AND TAX TREATMENT."
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, no Portfolio may:
(1) 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 1940 Act
which may involve a borrowing, provided that the
combination of (i) and
<PAGE>
(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); or
(2) 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, as amended, in connection
with the purchase and sale of portfolio securities.
In addition, since the Discretionary Equity and
Equity Portfolios are "diversified," neither Portfolio
may, 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.
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 is responsible for managing the Company's
business and affairs. The Company has entered into an
investment advisory agreement with ICAP dated as of
December 30, 1994, as amended (the "Advisory
Agreement"), pursuant to which ICAP manages the
investments and business affairs of each of the
Portfolios, 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, Illinois 60606. With
respect to the Advisory Agreement as it relates to the
Discretionary Equity and Equity Portfolios, each
Portfolio compensates ICAP for its investment advisory
services at the annual rate of 0.80% of the Portfolio's
average net assets. For the year ended December 31,
1996, ICAP voluntarily 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 exceeded 0.80% of
the Portfolio's average net assets. ICAP has
voluntarily agreed to continue this
waiver/reimbursement policy for the year ending
December 31, 1997 and for an indefinite amount of time
beyond that date. 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 for the time any such
amounts were waived and/or reimbursed. For the year
ended December 31, 1996, after waivers and
reimbursements, these expenses totaled 0.80% of each
Portfolio's average net assets.
With respect to the Advisory Agreement as it
relates to the Select Equity and Euro Select
Portfolios, the Select Equity Portfolio compensates
ICAP for its investment advisory services at the annual
rate of 0.80% of the Portfolio's average net assets,
while the Euro Select Portfolio compensates ICAP at the
annual rate of 1.00% of the Portfolio's average net
assets. For the year ending December 31, 1998 and for
an indefinite amount of time beyond that date, ICAP has
voluntarily agreed to waive its management fee and/or
reimburse each Portfolio's operating expenses to the
extent necessary to ensure that the Select Equity
Portfolio's total operating expenses do not exceed an
annual rate of 0.80% of the Portfolio's average net
assets, and the Euro Select Portfolio's total operating
expenses do not exceed an annual rate of 1.00% of the
Portfolio's average net assets.
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 several times each
week 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.
<PAGE>
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 the salaries, fees and expenses of all
officers and directors of the Company who are
interested persons of ICAP. ICAP also serves as
investment adviser to pension and profit-sharing plans,
and other institutional and private investors. As of
November 30, 1997, ICAP had approximately $10 billion
under management. Mr. Robert H. Lyon, President of
ICAP, owns shares representing 51% of the voting rights
of ICAP, which constitutes a controlling interest.
HOW TO PURCHASE SHARES
Shares of the Portfolios are offered and sold on a
continuous basis at the next offering price calculated
after receipt of the purchase order by the Portfolio.
This price is the net asset value of the Portfolio and
is determined as of the close of trading (generally
4:00 p.m., Eastern Standard Time, or the close of the
New York Stock Exchange (the "NYSE") if different) on
each day the NYSE 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 each
Portfolio is $10,000. Subsequent investments may be
made by mail or wire with a minimum subsequent
investment of $1,000. The Company reserves 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 purchases.
Payment may be delayed for up to seven business
days on redemption requests for recent purchases made
by check in order to ensure that the check has cleared.
This is a security precaution only and does not affect
your investment.
Initial Investment - Minimum $10,000
You may purchase shares of a Portfolio by
completing an application (which can be obtained by
calling 1-888-221-ICAP (1-888-221-4227)) and mailing it
along with a check or money order payable to "ICAP
Funds" to: ICAP Funds, Inc., c/o Sunstone Investor
Services, LLC (the "Transfer Agent"), P.O. Box 2160,
Milwaukee, Wisconsin 53201-2160. For overnight
deliveries, please use 207 East Buffalo Street, Suite
315, Milwaukee, Wisconsin 53202-5712. Purchases must
be made in U.S. dollars and all checks must be drawn on
a U.S. bank. Cash, credit cards, third-party checks
and credit card checks will not be accepted. If your
check does not clear, you will be charged a $23 service
fee. You will also be responsible for any losses
suffered by the Portfolio as a result. All
applications to purchase shares of a Portfolio 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 a Portfolio 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 a
Portfolio by wire. To purchase shares by wire
transfer, please follow the wire instructions listed
below.
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
and send both the check and the form to ICAP Funds,
Inc., c/o Sunstone Investor Services, LLC, P.O. Box
2160, Milwaukee, Wisconsin 53201-2160. For overnight
deliveries, please
<PAGE>
use 207 East Buffalo Street, Suite
315, Milwaukee, Wisconsin 53202-5712. To make an
additional purchase by wire, please follow the wire
instructions listed below.
Wire Instructions
To establish a new account by wire transfer,
please call the Transfer Agent at 1-888-221-ICAP
(1-888-221-4227). The Transfer Agent will assign an
account number to you at that time.
Initial and subsequent investments should be wired
through the Federal Reserve System as follows:
UMB Bank, n.a.
ABA Number 101000695
For credit to ICAP Funds, Inc.
Account Number 987-0609665
For further credit to ICAP Funds, Inc.
(investor account number)
(name or account registration)
(social security or taxpayer identification number)
(identify which Portfolio to purchase)
Wired funds are considered received and accepted
on the day they are deposited in the Portfolio's
account if they reach the account by the Portfolio's
cut-off time for purchases and all required information
is provided in the wire instructions. The Company is
not responsible for the consequences of delays
resulting from the banking or Federal Reserve wire
system.
Automatic Investment Plan
The Company offers an automatic investment plan
(the "AIP") whereby you may automatically make
purchases of Portfolio shares on a regular, convenient
basis ($250 minimum per transaction). A $5,000 minimum
initial investment must be met before the AIP may be
established. In addition, the Company requires 10
business days after receipt of your request to initiate
the AIP to verify your account information. Under the
AIP, your designated bank or other financial
institution debits a preauthorized amount in your
account each month and applies the amount to the
purchase of Portfolio shares. No service fee is
currently charged by the Company for participating in
the AIP; however, a $23 fee will be imposed by the
Transfer Agent if sufficient funds are not available in
your account at the time of the automatic transaction.
Applications to establish the AIP are available from
the Transfer Agent. Investors who wish to make a
change in investments made through the AIP may do so by
calling 1-888-221-ICAP (1-888-221-4227).
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 business days after receipt of a
redemption request. In addition, payment may be
delayed for up to seven business days on redemption
requests for recent purchases made by check in order to
ensure that the check has cleared. In addition to the
redemption procedures described below, redemptions may
also be made through broker/dealers who may charge a
commission or other transaction fee.
Written Redemption
You may redeem your Portfolio shares by mailing a
written, unconditional request to: ICAP Funds, Inc.,
c/o Sunstone Investor Services, LLC, P.O. Box 2160,
Milwaukee, Wisconsin 53201-2160. For redemption
requests sent via overnight delivery, please use 207
East Buffalo Street, Suite 315, Milwaukee, Wisconsin
53202-5712. If your redemption request is
inadvertently sent to ICAP, the investment adviser to
the Portfolios, it will be forwarded to
<PAGE>
Sunstone
Investor Services, LLC, but the effective date of
redemption will be delayed until the request is
received by Sunstone Investor Services, LLC. 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. In
case of any questions concerning the nature of such
documentation, the Transfer Agent should be contacted
at 1-888-221-ICAP (1-888-221-4227). Redemption
proceeds may be wired to a commercial bank authorized
on your account application. However, you will be
charged a $10.00 service fee for such wire redemptions.
Telephone Redemption
You may also redeem your Portfolio shares via
telephone by simply calling the Transfer Agent at
1-888-221-ICAP (1-888-221-4227). You may redeem
between $500 and $50,000 per account per day by
telephone. You must make your telephone redemption
request by 3:00 p.m., Central Standard Time. If you
did not authorize telephone redemptions in your
original purchase application, you may do so by
contacting the Transfer Agent and requesting the
relevant documentation necessary to authorize such
transactions. You must designate an account on your
purchase application, or in writing with a signature
guarantee, to have proceeds of a telephone redemption
wired to your bank account. Proceeds from telephone
redemptions will be mailed or wired only to your
address or bank of record. You should realize that in
using the telephone redemption service, you may be
giving up a measure of security that you may have had
if you redeemed your Portfolio shares in writing.
Neither the Company nor its agents will be liable for
following instructions communicated by telephone that
they reasonably believe to be genuine. Reasonable
procedures will be employed on behalf of each Portfolio
to confirm that instructions communicated by telephone
are genuine. Such procedures may include providing
written confirmation of telephone transactions, tape
recording telephone instructions or requiring specific
personal information prior to acting upon telephone
instructions.
Systematic Withdrawal Plan
You may set up automatic withdrawals from your
Portfolio account at regular intervals. To begin
distributions, you must have an initial balance of
$10,000 in your account and withdraw at least $1,000
per payment. To establish the systematic withdrawal
plan ("SWP"), you must complete a SWP application and
return it to ICAP Funds, Inc., c/o Sunstone Investor
Services, LLC, P.O. Box 2160, Milwaukee, Wisconsin
53201-2160. For overnight delivery, please use 207
East Buffalo Street, Suite 315, Milwaukee, Wisconsin
53202-5712. Redemptions will take place on the 5th
and/or 20th day of the month (or the following business
day) as indicated on your SWP application. Depending
upon the size of the account and the withdrawals
requested (and fluctuations in the net asset value of
the shares redeemed), redemptions for the purpose of
satisfying such withdrawals may reduce or even exhaust
your account. If the amount remaining in your account
is not sufficient to meet a plan payment, the remaining
amount will be redeemed and the SWP will be terminated.
Signature Guarantees
As a protection to both you and the Company, the
Company requires a signature guarantee for all
authorized owners of an account: (i) if you request
that redemption proceeds be mailed or wired to a person
other than the registered owner(s) of the shares; (ii)
if you request that redemption proceeds be mailed or
wired to other than the address of record; or (iii) if
you submit a redemption request within 30 days of an
address change. 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. Please note that a notary public stamp or seal
is not acceptable.
Your account may be terminated by the Company 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 $1,000.
Upon any such termination, a check for the redemption
proceeds will be sent to the account of record within
seven business days of the redemption.
<PAGE>
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. You may also make exchange
requests by telephone. If you did not authorize the
use of the telephone exchange service in your original
purchase application, you may do so by contacting the
Transfer Agent and requesting the relevant
documentation necessary to authorize such service. 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 and acceptance 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. Written exchange requests should be
directed to: ICAP Funds, Inc., c/o Sunstone Investor
Services, LLC, P.O. Box 2160, Milwaukee, Wisconsin
53201-2160. For exchange requests sent via overnight
delivery, please use 207 East Buffalo Street, Suite
315, Milwaukee, Wisconsin 53202-5712. Telephone
exchange requests may be made by calling the Transfer
Agent at 1-888-221-ICAP (1-888-221-4227). Neither the
Company nor its agents will be liable for following
exchange instructions communicated by telephone that
they reasonably believe to be genuine. Reasonable
procedures will be employed on behalf of each Portfolio
to confirm that instructions communicated by telephone
are genuine. Exchange requests may be subject to
limitations, including those relating to 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
Through its custodian, UMB Bank, n.a. (the
"Custodian"), the Company offers several qualified
retirement plans for adoption by individuals and
employers (including, but not limited to, IRAs, SEP-
IRAs and Roth IRAs). For further information, please
call 1-888-221-ICAP (1-888-221-4227) or write to ICAP
Funds, Inc., c/o Sunstone Investor Services, LLC, at
P.O. Box 2160, Milwaukee, Wisconsin 53201-2160.
DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS AND TAX TREATMENT
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 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 capital
gains, whether received in cash or reinvested in
additional shares, are taxable as a 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 capital 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.
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 decreases by
the amount of the payment. If you purchase shares
shortly before a distribution, you will be subject to
income taxes on the distribution, even though the value
of your investment (plus cash received, if any) remains
the same. All dividends or capital gain distributions
will automatically be reinvested in Portfolio shares at
the then prevailing net asset value unless an investor
specifically requests that 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 Sunstone Investor Services,
LLC, P.O. Box 2160, Milwaukee, Wisconsin 53201-2160.
For overnight deliveries, please use 207 East Buffalo
Street, Suite 315, Milwaukee, Wisconsin 53202-5712.
Such notice must be received at least five days prior
to the record date of any dividend or capital gain
distribution. Income dividends and capital gain
distributions received in cash may only be sent by wire
if in amounts of $500 or more.
<PAGE>
If you do not furnish the Company with your
correct social security number or taxpayer
identification number, or if required by another
section of the Code, the Company 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.
DETERMINATION OF NET ASSET VALUE
Each Portfolio's net asset value per share is
determined as of the close of trading (generally 4:00
p.m., Eastern Standard Time, unless the NYSE closes at
a different time) on each day the NYSE is open for
business. Purchase orders received or shares tendered
for redemption on a day the NYSE is open for trading,
prior to the close of trading on that day, will be
valued as of the close of trading on that day.
Applications for purchase of shares and requests for
redemption of shares received after the close of
trading on the NYSE will be valued as of the close of
trading on the next day the NYSE is open. A
Portfolio's net asset value is not required to 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 the 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 and securities not listed on a national securities
exchange or Nasdaq are valued at the most recent bid
prices. Other exchange traded securities (generally
foreign securities) will be valued based on market
quotations.
Securities quoted in foreign currency will be
valued in U.S. dollars at the foreign currency exchange
rates that are prevailing at the time the daily net
asset value per share is determined. Although foreign
assets are valued in U.S. dollars on a daily basis,
foreign assets are not converted into U.S. dollars on a
daily basis. Foreign currency exchange rates are
generally determined prior to the close of trading on
the NYSE. Occasionally, events affecting the value of
foreign investments and such exchange rates occur
between the time at which they are determined and the
close of trading on the NYSE. Such events would not
normally be reflected in the calculation of a
Portfolio's net asset value on that day. If events
that materially affect the value of a Portfolio's
foreign investments or the foreign currency exchange
rates occur during such period, the investments will be
valued at their fair value as determined in good faith
by or under the direction of the Board of Directors of
the Company. Certain of the securities holdings of the
Portfolios may, from time to time, be listed primarily
on foreign exchanges that trade on other days than
those on which the NYSE is open for business (i.e.,
Saturday). As a result, the net asset value of the
applicable Portfolio may be significantly affected by
such trading on days when investors cannot effect
transactions in their accounts.
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 or its delegate. 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 assumed each day, regardless of
the impact of fluctuating interest rates on the value
of the security. Regardless of the method employed to
value a particular security, all valuations are subject
to review by the Company's Board of Directors or its
delegate who may determine the fair value of a security
pursuant to the Company's pricing procedures.
<PAGE>
SHAREHOLDER REPORTS
You will be provided at least semi-annually with a
report showing the Portfolio's 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. In addition,
an individual account statement will be sent to you by
the Transfer Agent at least quarterly. 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), the
Portfolios or the Company, you should call the Transfer
Agent at 1-888-221-ICAP (1-888-221-4227) or write to
ICAP Funds, Inc., c/o Sunstone Investor Services, LLC,
P.O. Box 2160, Milwaukee, Wisconsin 53201-2160.
FINANCIAL INTERMEDIARIES
Broker/dealers, financial institutions and other
financial intermediaries that have entered into
agreements with ICAP may enter purchase or redemption
orders on behalf of their customers. If you purchase
or redeem shares of a Portfolio through a financial
intermediary, certain features of the Portfolio
relating to such transactions may not be available or
may be modified in accordance with the terms of the
intermediaries' agreement with ICAP. In addition,
certain operational policies of a Portfolio, including
those related to settlement and dividend accrual, may
vary from those applicable to direct shareholders of
the Portfolio and may vary among intermediaries. We
urge you to consult your financial intermediary for
more information regarding these matters. In addition,
a Portfolio may pay, directly or indirectly through
arrangements with ICAP, amounts to financial
intermediaries that provide transfer agent and/or other
administrative services relating to the Portfolio to
their customers provided, however, that the Portfolio
will not pay more for these services through
intermediary relationships than it would if the
intermediaries' customers were direct shareholders in
the Portfolio. Certain financial intermediaries may
charge a commission or other transaction fee for their
services. You will not be charged for such fees if you
purchase or redeem your Portfolio shares directly from
a Portfolio without the intervention of a financial
intermediary.
ORGANIZATION
The Company was organized as a Maryland
corporation on November 1, 1994. The Company is
authorized to issue 200,000,000, $.01 par value shares,
in addition to the 100,000,000, $.01 par value shares
of the Discretionary Equity Portfolio, the 100,000,000,
$.01 par value shares of the Equity Portfolio, the
50,000,000, $.01 par value shares of the Select Equity
Portfolio and the 50,000,000, $.01 par value shares of
the Euro Select Portfolio. The assets belonging to the
Discretionary Equity, Equity, Select Equity and Euro
Select Portfolios are held separately by the Custodian,
and if the Company were to issue additional series,
each additional series would be held separately. In
effect, each series is a separate portfolio.
Each share, irrespective of Portfolio, is entitled
to one vote on all questions, except that matters
affecting only one Portfolio are voted upon only by
that Portfolio. 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 1940 Act. The
Company has adopted procedures in its Bylaws for the
removal of directors by the shareholders as well as by
the Board of Directors. As of November 30, 1997, no
person owned a controlling interest in the Company.
<PAGE>
ADMINISTRATOR AND FUND ACCOUNTANT
Pursuant to an Administration and Fund Accounting
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 and provides
administrative services (which include clerical,
compliance and regulatory services such as filing all
federal income and excise tax returns and state income
tax returns, assisting with regulatory filings,
preparing financial statements and monitoring expense
accruals). For the foregoing, the Administrator
receives from the Portfolios a fee, computed daily and
payable monthly based on each Portfolio's average
annual net assets at the annual rate of .175 of 1% on
the first $50,000,000, .10 of 1% on the next
$50,000,000, .05 of 1% on the next $150,000,000 and .03
of 1% on average annual net assets in excess of
$250,000,000, subject to an annual aggregate minimum
from all Portfolios of $230,000, plus out-of-pocket
expenses.
CUSTODIAN AND TRANSFER AGENT
UMB Bank, n.a., 928 Grand Boulevard, Kansas City,
Missouri 64141-6226 acts as Custodian of each
Portfolio's assets. Sunstone Investor Services, LLC,
207 East Buffalo Street, Suite 315, P.O. Box 2160,
Milwaukee, Wisconsin 53201-2160 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.
All 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 the Discretionary Equity
and Equity Portfolios appears in the Annual and Semi-
Annual Report of the Discretionary Equity and Equity
Portfolios, a copy of which may be obtained without
charge by calling or writing to the Company. Since, as
of the date hereof, the Select Equity and Euro Select
Portfolios have not commenced operations, performance
information is not yet available for such Portfolios.
The Company reserves the right to change any of the
policies, practices and procedures described in this
Prospectus with respect to any Portfolio, including the
Statement of Additional Information, without
shareholder approval except in those instances where
shareholder approval is expressly required.
<PAGE>
DIRECTORS CUSTODIAN
Pamela H. Conroy UMB Bank, n.a.
Senior Vice President, 928 Grand Boulevard
Secretary and Director, Kansas City, Missouri 64141-
Institutional Capital Corp. 6226
Dr. James A. Gentry
Professor of Finance, DIVIDEND-DISBURSING AND
University of Illinois TRANSFER AGENT
Joseph A. Hays Sunstone Investor Services, LLC
Retired Vice P.O. Box 2160
President/Corporate Relations, Milwaukee, Wisconsin 53201-2160
Tribune Company
Robert H. Lyon
President, Chief Investment ADMINISTRATOR AND FUND
Officer and Director, ACCOUNTANT
Institutional Capital Corp.
Sunstone Financial Group, Inc.
Gary S. Maurer 207 East Buffalo Street,
Executive Vice President and Suite 400
Director, Milwaukee, Wisconsin 53202-5712
Institutional Capital Corp.
Harold W. Nations
Partner, Holleb & Coff AUDITORS
Donald D. Niemann Coopers & Lybrand L.L.P.
Executive Vice President and 411 East Wisconsin Avenue
Director, Milwaukee, Wisconsin 53202-9905
Institutional Capital Corp.
Barbara C. Schanmier
Senior Vice President and LEGAL COUNSEL
Director,
Institutional Capital Corp. Godfrey & Kahn, S.C.
780 North Water Street
Milwaukee, Wisconsin 53202-3590
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 60606-1229
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
ICAP FUNDS, INC.
ICAP Discretionary Equity Portfolio
ICAP Equity Portfolio
ICAP Select Equity Portfolio
ICAP Euro Select Equity Portfolio
225 West Wacker Drive, Suite 2400
Chicago, Illinois 60606
1-888-221-ICAP
(1-888-221-4227)
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, 1997. Requests for copies of the
Prospectus should be made by writing to the Company at
the address listed above; or by calling 1-888-221-ICAP.
This Statement of Additional Information is dated December 31, 1997.
<PAGE>
ICAP FUNDS, INC.
TABLE OF CONTENTS
Page No.
INVESTMENT RESTRICTIONS 3
INVESTMENT POLICIES AND TECHNIQUES 4
DIRECTORS AND OFFICERS 13
PRINCIPAL SHAREHOLDERS 16
INVESTMENT ADVISER 17
PORTFOLIO TRANSACTIONS AND BROKERAGE 18
CUSTODIAN 19
DIVIDEND-DISBURSING AND TRANSFER AGENT 19
TAXES 20
DETERMINATION OF NET ASSET VALUE 21
SHAREHOLDER MEETINGS 21
PERFORMANCE INFORMATION 21
INDEPENDENT ACCOUNTANTS 23
FINANCIAL STATEMENTS 23
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, 1997,
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") 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 ("S&P 500"). The
investment objective of the ICAP Select Equity
Portfolio (the "Select Equity Portfolio") is to seek a
superior total return. This investment objective is
relative to and measured against the S&P 500. The
investment objective of the Euro Select Portfolio is to
seek a superior total return with income as a secondary
objective. This investment objective is relative to
and measured against the Morgan Stanley Capital
International Euro Index (the "Euro Index"). The
investment objective and policies of each Portfolio are
described in detail in the Prospectus under the caption
"INVESTMENT OBJECTIVES AND POLICIES." The following is
a complete list of each Portfolio's fundamental
investment limitations which cannot be changed without
shareholder approval.
Neither the Discretionary Equity Portfolio nor the
Equity 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.
No Portfolio may:
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, as amended (the "1940 Act"), 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,
as amended (the "Securities Act"), 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
such 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 1940 Act.
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.
No 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. 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.
4. Purchase securities of open-end or closed-
end investment companies except in compliance with
the 1940 Act.
5. Enter into option contracts or futures
contracts (including options on futures contracts)
or forward contracts (with respect to the Euro
Select Portfolio only) if more than 30% of the
Portfolio's net assets would be represented by
such contracts.
6. Enter into futures contracts or options
on futures contracts if more than 5% of the
Portfolio's net assets would be committed to
initial margin deposits and premiums on such
contracts.
7. Purchase securities when borrowings
exceed 5% of its total assets.
INVESTMENT POLICIES AND TECHNIQUES
The following information supplements the
discussion of the investment objectives, policies and
techniques of the Portfolios, as described in the
Prospectus under the same caption.
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 only be resold pursuant to Rule 144A under the
Securities Act and repurchase agreements with
maturities in excess of seven days. However, a
Portfolio will not acquire illiquid securities if, as a
result, such securities would comprise more than 5% of
the value of such 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 istruments allowing for the
disposition to a third party or the issuer thereof
(e.g., certain repurchase obligations and demand
<PAGE>
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 or its
delegate. 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, Select Equity and Euro
Select Portfolios may invest up to 35% of their
respective total assets in cash and short-term fixed
income securities, while the Equity Portfolio intends
to be fully invested at all times and accordingly will
only hold cash or short-term fixed income securities to
meet anticipated redemption requests, pending
investment and to pay expenses which, in any case,
generally will not exceed 5% of its total assets. The
Equity Portfolio may, however, temporarily exceed this
5% limitation, but only in circumstances pending
investment and only for short periods of time. In
addition, when ICAP believes that market conditions
warrant, the Discretionary Equity, Select Equity and
Euro Select Portfolios may invest up to 100% of their
respective total assets in such securities for
temporary defensive purposes. 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 U.S.
governmental 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 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 U.S. or foreign bank (and its
subsidiaries and branches) or a U.S. 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. Bank time deposits, which are monies kept
on deposit with U.S. or foreign banks (and their
subsidiaries and branches) or U.S. 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.
<PAGE>
4. 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.
5. 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.
6. 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.
When-Issued Securities
The Portfolios may from time to time and without
limitation 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.
During the period between the purchase and settlement,
no payment is made by the Portfolio 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 applicable Portfolio's 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 and other liquid
assets equal in value to commitments for when-issued
securities. 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,
<PAGE>
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).
Non-Investment Grade Debt Securities "Junk Bonds"
The Portfolios may invest up to 5% of their net
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
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 the
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 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
Portfolio's investments and carefully evaluates whether
to dispose of or to retain junk bond securities whose
credit ratings or credit quality may have changed.
<PAGE>
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.
Derivative Instruments
In General. The Portfolios may use derivative
instruments for any lawful purpose consistent with
their respective investment objectives such as hedging
or managing risk, but not for speculation. Derivative
instruments are commonly defined to include securities
or contracts whose value depend on (or "derive" from)
the value of one or more other assets, such as
securities, currencies or commodities. These "other
assets" are commonly referred to as "underlying
assets."
A derivative instrument generally consists of, is
based upon or exhibits characteristics similar to
options or forward contracts. Options and forward
contracts are considered to be the basic "building
blocks" of derivatives. For example, forward-based
derivatives include forward contracts and swap
contracts as well as exchange-traded futures. Option-
based derivatives include privately negotiated, over-
the-counter ("OTC") options (including caps, floors,
collars and options on forward and swap contracts) and
exchange-traded options on futures. Diverse types of
derivatives may be created by combining options or
forward contracts in different ways, and by applying
these structures to a wide range of underlying assets.
An option is a contract in which the "holder" (the
buyer) pays a certain amount (the "premium") to the
"writer" (the seller) to obtain the right, but not the
obligation, to buy from the writer (in a "call") or
sell to the writer (in a "put") a specific asset at an
agreed upon price at or before a certain time. The
holder pays the premium at inception and has no
further financial obligation. The holder of an option-
based derivative generally will benefit from favorable
movements in the price of the underlying asset but is
not exposed to corresponding losses due to adverse
movements in the value of the underlying asset. The
writer of an option-based derivative generally will
receive fees or premiums but generally is exposed to
losses due to changes in the value of the underlying
asset.
A forward is a sales contract between a buyer
(holding the "long" position) and a seller (holding the
"short" position) for an asset with delivery deferred
until a future date. The buyer agrees to pay a fixed
price at the agreed future date and the seller agrees
to deliver the asset. The seller hopes that the market
price on the delivery date is less than the agreed upon
price, while the buyer hopes for the contrary. The
change in value of a forward-based derivative generally
is roughly proportional to the change in value of the
underlying asset.
Hedging. The Portfolios may use derivative
instruments to protect against possible adverse changes
in the market value of securities held in, or
anticipated to be held in, their respective portfolios.
Derivatives may also be used by the Portfolios to "lock-
in" realized but unrecognized gains in the value of
portfolio securities. Hedging strategies, if
successful, can reduce the risk of loss by wholly or
partially offsetting the negative effect of unfavorable
price movements in the investments being hedged.
However, hedging strategies can also reduce the
opportunity for gain by offsetting the positive effect
of favorable price movements in the hedged investments.
Managing Risk. The Portfolios may also use
derivative instruments to manage the risks of their
respective assets. Risk management strategies include,
but are not limited to, facilitating the sale of
portfolio securities, managing the effective maturity
or duration of debt obligations held, establishing a
position in the derivatives markets as a
<PAGE>
substitute for
buying or selling certain securities or creating or
altering exposure to certain asset classes, such as
equity, debt and foreign securities. The use of
derivative instruments may provide a less expensive,
more expedient or more specifically focused way for a
Portfolio to invest than "traditional" securities
(i.e., stocks or bonds) would.
Exchange or OTC Derivatives. Derivative
instruments may be exchange-traded or traded in OTC
transactions between private parties. Exchange-traded
derivatives are standardized options and futures
contracts traded in an auction on the floor of a
regulated exchange. Exchange contracts are generally
liquid. The exchange clearinghouse is the counterparty
of every contract. Thus, each holder of an exchange
contract bears the credit risk of the clearinghouse
(and has the benefit of its financial strength) rather
than that of a particular counterparty. OTC
transactions are subject to additional risks, such as
the credit risk of the counterparty to the instrument,
and are less liquid than exchange-traded derivatives
since they often can only be closed out with the other
party to the transaction.
Risks and Special Considerations. The use of
derivative instruments involves risks and special
considerations as described below. Risks pertaining to
particular derivative instruments are described in the
sections that follow.
(1) Market Risk. The primary risk of derivatives
is the same as the risk of the underlying assets;
namely, that the value of the underlying asset may go
up or down. Adverse movements in the value of an
underlying asset can expose a Portfolio to losses.
Derivative instruments may include elements of leverage
and, accordingly, the fluctuation of the value of the
derivative instrument in relation to the underlying
asset may be magnified. The successful use of
derivative instruments depends upon a variety of
factors, particularly ICAP's ability to predict
movements of the securities, currencies and commodities
markets, which requires different skills than
predicting changes in the prices of individual
securities. There can be no assurance that any
particular strategy adopted will succeed. A decision
to engage in a derivative transaction will reflect
ICAP's judgment that the derivative transaction will
provide value to a Portfolio and its shareholders and
is consistent with the Portfolio's objectives,
investment limitations and operating policies. In
making such a judgment, ICAP will analyze the benefits
and risks of the derivative transaction and weigh them
in the context of the Portfolio's entire portfolio and
investment objective.
(2) Credit Risk. The Portfolios will be subject
to the risk that a loss may be sustained as a result of
the failure of a counterparty to comply with the terms
of a derivative instrument. The counterparty risk for
exchange-traded derivative instruments is generally
less than for privately-negotiated or OTC derivative
instruments, since generally a clearing agency, which
is the issuer or counterparty to each exchange-traded
instrument, provides a guarantee of performance. For
privately-negotiated instruments, there is no similar
clearing agency guarantee. In all transactions, the
Portfolios will bear the risk that the counterparty
will default, and this could result in a loss of the
expected benefit of the derivative transaction and
possibly other losses to the Portfolios. The
Portfolios will enter into transactions in derivative
instruments only with counterparties that ICAP
reasonably believes are capable of performing under the
contract.
(3) Correlation Risk. When a derivative
transaction is used to completely hedge another
position, changes in the market value of the combined
position (the derivative instrument plus the position
being hedged) can result from an imperfect correlation
between the price movements of the two instruments.
With a perfect hedge, the value of the combined
position remains unchanged for any change in the price
of the underlying asset. With an imperfect hedge, the
value of the derivative instrument and its hedge are
not perfectly correlated. Correlation risk is the risk
that there might be imperfect correlation, or even no
correlation, between price movements of a derivative
instrument and price movements of investments being
hedged. For example, if the value of a derivative
instrument used in a short hedge (such as writing a
call option, buying a put option or selling a futures
contract) increased by less than the decline in value
of the hedged investments, the hedge would not be
perfectly correlated. Such a lack of correlation might
occur due to factors unrelated to the value of the
investments being hedged, such as speculative or other
pressures on the markets in which these instruments are
traded. The effectiveness of hedges using instruments
on indices will depend, in part, on the degree of
correlation between price movements in the index and
price movements in the investments being hedged.
(4) Liquidity Risk. Derivatives are also subject
to liquidity risk. Liquidity risk is the risk that a
derivative instrument cannot be sold, closed out or
replaced quickly at or very close to its fundamental
value. Generally, exchange contracts are very liquid
because the exchange clearinghouse is the counterparty
of every contract. OTC transactions are less liquid
than exchange-traded derivatives since they often can
only be closed out with the other party to the
transaction. A Portfolio might be required by
applicable regulatory requirements to maintain assets
as "cover," maintain
<PAGE>
segregated accounts and/or make
margin payments when it takes positions in derivative
instruments involving obligations to third parties
(i.e., instruments other than purchased options). If
the Portfolio is unable to close out its positions in
such instruments, it might be required to continue to
maintain such assets or accounts or make such payments
until the position expired, matured or is closed out.
The requirements might impair the Portfolio's ability
to sell a portfolio security or make an investment at a
time when it would otherwise be favorable to do so, or
require that the Portfolio sell a portfolio security at
a disadvantageous time. A Portfolio's ability to sell
or close out a position in an instrument prior to
expiration or maturity depends on the existence of a
liquid secondary market or, in the absence of such a
market, the ability and willingness of the counterparty
to enter into a transaction closing out the position.
Therefore, there is no assurance that any derivatives
position can be sold or closed out at a time and price
that is favorable to the Portfolios.
(5) Legal Risk. Legal risk is the risk of loss
caused by the legal unenforceability of a party's
obligations under the derivative. While a party
seeking price certainty agrees to surrender the
potential upside in exchange for downside protection,
the party taking the risk is looking for a positive
payoff. Despite this voluntary assumption of risk, a
counterparty that has lost money in a derivative
transaction may try to avoid payment by exploiting
various legal uncertainties about certain derivative
products.
(6) Systemic or "Interconnection" Risk.
Interconnection risk is the risk that a disruption in
the financial markets will cause difficulties for all
market participants. In other words, a disruption in
one market will spill over into other markets, perhaps
creating a chain reaction. Much of the OTC derivatives
market takes place among the OTC dealers themselves,
thus creating a large interconnected web of financial
obligations. This interconnectedness raises the
possibility that a default by one large dealer could
create losses for other dealers and destabilize the
entire market for OTC derivative instruments.
General Limitations. The use of derivative
instruments is subject to applicable regulations of the
Securities and Exchange Commission (the "SEC"), the
several options and futures exchanges upon which they
may be traded, the Commodity Futures Trading Commission
("CFTC") and various state regulatory authorities.
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. In accordance with Rule 4.5 of the
regulations under the Commodities Exchange Act (the
"CEA"), the notice of eligibility for the Portfolios
includes representations 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 qualify as a bona fide hedging
position if the aggregate initial margin deposits and
premiums required to establish these positions, less
the amount by which any such futures contracts and
related options positions are "in the money," do not
exceed 5% of each Portfolio's net assets. Adherence to
these guidelines does not, however, limit a Portfolio's
risk to 5% of the Portfolio's assets. In addition to
the foregoing guidelines, no Portfolio will enter into
options, futures or options on futures transactions if
more than 30% of the Portfolio's net assets would be
committed to such instruments.
The SEC has identified certain trading practices
involving derivative instruments that involve the
potential for leveraging Portfolio assets in a manner
that raises issues under the 1940 Act. In order to
limit the potential for the leveraging of Portfolio
assets, as defined under the 1940 Act, the SEC has
stated that a Portfolio may use coverage or the
segregation of the Portfolio's assets. The Portfolios
will also set aside permissible liquid assets in a
segregated custodial account if required to do so by
SEC and CFTC regulations. Assets used as cover or held
in a segregated account cannot be sold while the
derivative position is open, unless they are replaced
with similar assets. As a result, the commitment of a
large portion of a Portfolio's assets to segregated
accounts could impede portfolio management or the
Portfolio's ability to meet redemption requests or
other current obligations.
In some cases, a Portfolio may be required to
maintain or limit exposure to a specified percentage of
its assets to a particular asset class. In such cases,
when a Portfolio uses a derivative instrument to
increase or decrease exposure to an asset class and is
required by applicable SEC guidelines to set aside
liquid assets in a segregated account to secure its
obligations under the derivative instruments, ICAP may,
where reasonable in light of the circumstances, measure
compliance with the applicable percentage by reference
to the nature of the economic exposure created through
the use
<PAGE>
of the derivative instrument and by reference
to the nature of the exposure arising from the assets
set aside in the segregated account.
Options. The Portfolios may use options for any
lawful purpose consistent with their respective
investment objectives such as hedging or managing risk
but not for speculation. An option is a contract in
which the "holder" (the buyer) pays a certain amount
(the "premium") to the "writer" (the seller) to obtain
the right, but not the obligation, to buy from the
writer (in a "call") or sell to the writer (in a "put")
a specific asset at an agreed upon price (the "strike
price" or "exercise price") at or before a certain time
(the "expiration date"). The holder pays the premium
at inception and has no further financial obligation.
The holder of an option will benefit from favorable
movements in the price of the underlying asset but is
not exposed to corresponding losses due to adverse
movements in the value of the underlying asset. The
writer of an option will receive fees or premiums but
is exposed to losses due to changes in the value of the
underlying asset. The Portfolios may purchase (buy) or
write (sell) put and call options on assets, such as
securities, currencies, commodities and indices of debt
and equity securities ("underlying assets") and enter
into closing transactions with respect to such options
to terminate an existing position. Options used by the
Portfolios may include European, American and Bermuda
style options. If an option is exercisable only at
maturity, it is a "European" option; if it is also
exercisable prior to maturity, it is an "American"
option. If it is exercisable only at certain times, it
is a "Bermuda" option.
The Portfolios may purchase (buy) and write (sell)
put and call options and enter into closing
transactions with respect to such options to terminate
an existing position. The purchase of call options
serves as a long hedge, and the purchase of put options
serves as a short hedge. Writing put or call options
can enable the Portfolios to enhance income by reason
of the premiums paid by the purchaser of such options.
Writing call options serves as a limited short hedge
because declines in the value of the hedged investment
would be offset to the extent of the premium received
for writing the option. However, if the security
appreciates to a price higher than the exercise price
of the call option, it can be expected that the option
will be exercised and the affected Portfolio will be
obligated to sell the security at less than its market
value or will be obligated to purchase the security at
a price greater than that at which the security must be
sold under the option. All or a portion of any assets
used as cover for OTC options written by the Portfolios
would be considered illiquid to the extent described
under "INVESTMENT POLICIES AND TECHNIQUES - Illiquid
Securities." Writing put options serves as a limited
long hedge because increases in the value of the hedged
investment would be offset to the extent of the premium
received for writing the option. However, if the
security depreciates to a price lower than the exercise
price of the put option, it can be expected that the
put option will be exercised and the affected Portfolio
will be obligated to purchase the security at more than
its market value.
The value of an option position will reflect,
among other things, the historical price volatility of
the underlying investment, the current market value of
the underlying investment, the time remaining until
expiration, the relationship of the exercise price to
the market price of the underlying investment and
general market conditions.
A Portfolio may effectively terminate its right or
obligation under an option by entering into a closing
transaction. For example, a Portfolio may terminate
its obligation under a call or put option that it had
written by purchasing an identical call or put option;
this is known as a closing purchase transaction.
Conversely, a Portfolio may terminate a position in a
put or call option it had purchased by writing an
identical put or call option; this is known as a
closing sale transaction. Closing transactions permit
the Portfolio to realize the profit or limit the loss
on an option position prior to its exercise or
expiration.
The Portfolios may purchase or write both exchange-
traded and OTC options. Exchange-traded options are
issued by a clearing organization affiliated with the
exchange on which the option is listed that, in effect,
guarantees completion of every exchange-traded option
transaction. In contrast, OTC options are contracts
between a Portfolio and the other party to the
transaction ("counter party") (usually a securities
dealer or a bank) with no clearing organization
guarantee. Thus, when a Portfolio purchases or writes
an OTC option, it relies on the counter party to make
or take delivery of the underlying investment upon
exercise of the option. Failure by the counter party
to do so would result in the loss of any premium paid
by the Portfolio as well as the loss of any expected
benefit of the transaction.
The Portfolios' ability to establish and close out
positions in exchange-listed options depends on the
existence of a liquid market. The Portfolios intend to
purchase or write only those exchange-traded options
for which there
<PAGE>
appears to be a liquid secondary
market. However, there can be no assurance that such a
market will exist at any particular time. Closing
transactions can be made for OTC options only by
negotiating directly with the counter party, or by a
transaction in the secondary market if any such market
exists. Although the Portfolios will enter into OTC
options only with counter parties that are expected to
be capable of entering into closing transactions, there
is no assurance that the Portfolios will in fact be
able to close out OTC options at favorable prices prior
to expiration. In the event of insolvency of the
counter party, the Portfolios might be unable to close
out an OTC option position at any time prior to its
expiration. If a Portfolio were unable to effect a
closing transaction for an option it had purchased, it
would have to exercise the option to realize any
profit.
The Portfolios may engage in options transactions
on indices in much the same manner as the options on
securities discussed above, except the index options
may serve as a hedge against overall fluctuations in
the securities market in general.
The writing and purchasing of options is a highly
specialized activity that 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.
Futures Contracts. The Portfolios may use futures
contracts for any lawful purpose consistent with their
respective investment objectives such as hedging and
managing risk but not for speculation. The Portfolios
may enter into futures contracts, including interest
rate, index and currency futures. The Portfolios may
also purchase put and call options, and write covered
put and call options, on futures in which they are
allowed to invest. The purchase of futures or call
options thereon can serve as a long hedge, and the sale
of futures or the purchase of put options thereon can
serve as a short hedge. Writing covered call options
on futures contracts can serve as a limited short
hedge, and writing covered put options on futures
contracts can serve as a limited long hedge, using a
strategy similar to that used for writing covered
options in securities. The Portfolios' hedging may
include purchases of futures as an offset against the
effect of expected increases in currency exchange rates
and securities prices and sales of futures as an offset
against the effect of expected declines in currency
exchange rates and securities prices. The Portfolios
may also write put options on futures contracts while
at the same time purchasing call options on the same
futures contracts in order to create synthetically a
long futures contract position. Such options would
have the same strike prices and expiration dates. The
Portfolios will engage in this strategy only when ICAP
believes it is more advantageous than purchasing the
futures contract.
To the extent required by regulatory authorities,
the Portfolios may enter into futures contracts that
are traded on national futures exchanges and are
standardized as to maturity date and underlying
financial instrument. Futures exchanges and trading
are regulated under the CEA by the CFTC. Although
techniques other than sales and purchases of futures
contracts could be used to reduce a Portfolio's
exposure to market, currency or interest rate
fluctuations, a Portfolio may be able to hedge its
exposure more effectively and perhaps at a lower cost
through using futures contracts.
An interest rate futures contract provides for the
future sale by one party and purchase by another party
of a specified amount of a specific financial
instrument (e.g., a debt security) or currency for a
specified price at a designated date, time and place.
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 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 the currency 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
Portfolio realizes a gain; if it is more, the Portfolio
realizes a loss. Conversely, if the offsetting sale
price is more than the original purchase price, a
Portfolio realizes a gain; if it is less, the Portfolio
realizes a loss. The transaction costs must also be
included in these calculations. There can be no
assurance, however, that a Portfolio will be able to
enter into an offsetting transaction with respect to a
particular futures contract at a particular time. If a
Portfolio is not able to enter into an offsetting
transaction, the Portfolio will continue to be required
to maintain the margin deposits on the futures
contract.
<PAGE>
No price is paid by the Portfolios upon entering
into a futures contract. Instead, at the inception of
a futures contract, a Portfolio is required to deposit
in a segregated account with its custodian, in the name
of the futures broker through whom the transaction was
effected, "initial margin," consisting of cash or other
liquid assets, in an amount generally equal to 10% or
less of the contract value. Margin must also be
deposited when writing a call or put option on a
futures contract, in accordance with applicable
exchange rules. Unlike margin in securities
transaction, initial margin on futures contracts does
not represent a borrowing, but rather is in the nature
of a performance bond or good-faith deposit that is
returned to the Portfolio at the termination of the
transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as
periods of high volatility, a Portfolio may be required
by an exchange to increase the level of its initial
margin payment, and initial margin requirements might
be increased generally in the future by regulatory
action.
Subsequent "variation margin" payments are made to
and from the futures broker daily as the value of the
futures position varies, a process known as "marking to
market." Variation margin does not involve borrowing,
but rather represents a daily settlement of a
Portfolio's obligations to or from a futures broker.
When a Portfolio purchases an option on a future, the
premium paid plus transaction costs is all that is at
risk. In contrast, when a Portfolio purchases or sells
a futures contract or writes a call or put option
thereon, it is subject to daily variation margin calls
that could be substantial in the event of adverse price
movements. If the Portfolio has insufficient cash to
meet daily variation margin requirements, it might need
to sell securities at a time when such sales are
disadvantageous. Purchasers and sellers of futures
positions and options on futures can enter into
offsetting closing transactions by selling or
purchasing, respectively, an instrument identical to
the instrument held or written. Positions in futures
and options on futures may be closed only on an
exchange or board of trade that provides a secondary
market. The Portfolios intend to enter into futures
transactions only on exchanges or boards of trade where
there appears to be a liquid secondary market.
However, there can be no assurance that such a market
will exist for a particular contract at a particular
time.
Under certain circumstances, futures exchanges may
establish daily limits on the amount that the price of
a future or option on a futures contract can vary from
the previous day's settlement price; once that limit is
reached, no trades may be made that day at a price
beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily
limit for several consecutive days with little or no
trading, thereby preventing liquidation of unfavorable
positions.
If a Portfolio were unable to liquidate a futures
or option on a futures contract position due to the
absence of a liquid secondary market or the imposition
of price limits, it could incur substantial losses.
The Portfolio would continue to be subject to market
risk with respect to the position. In addition, except
in the case of purchased options, the Portfolio would
continue to be required to make daily variation margin
payments and might be required to maintain the position
being hedged by the future or option or to maintain
certain liquid securities in a segregated account.
Certain characteristics of the futures market
might increase the risk that movements in the prices of
futures contracts or options on futures contracts might
not correlate perfectly with movements in the prices of
the investments being hedged. For example, all
participants in the futures and options on futures
contracts markets are subject to daily variation margin
calls and might be compelled to liquidate futures or
options on futures contracts positions whose prices are
moving unfavorably to avoid being subject to further
calls. These liquidations could increase the price
volatility of the instruments and distort the normal
price relationship between the futures or options and
the investments being hedged. Also, because initial
margin deposit requirements in the futures markets are
less onerous than margin requirements in the securities
markets, there might be increased participation by
speculators in the futures markets. This participation
also might cause temporary price distortions. In
addition, activities of large traders in both the
futures and securities markets involving arbitrage,
"program trading" and other investment strategies might
result in temporary price distortions.
DIRECTORS AND OFFICERS
The Company was organized in October 1994 and,
prior thereto, had no business history. The directors
and officers of the Company, together with information
as to their principal business occupations during the
last five years,
<PAGE>
and other information, are shown
below. Each director who is deemed an "interested
person," as defined in the 1940 Act, is indicated by an
asterisk.
<PAGE>
*Robert H. Lyon, President and a Director of the
Company (DOB 3/5/50).
Mr. Lyon joined ICAP in 1988 and has been the
President, Chief Investment Officer and a Director
of ICAP since 1992. Since June 1996, Mr. Lyon has
also served as a member of the Board of Trustees
of the Nuveen Investment Trust, an open-end
management investment company which currently
offers three separate taxable investment
portfolios, including the Nuveen Growth and Income
Stock Fund, the Nuveen Balanced Stock and Bond
Fund and the Nuveen Balanced Municipal and Stock
Fund. 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.
Mr. Lyon has served as President and a Director of
the Company since its inception in December 1994.
*Pamela H. Conroy, Vice President, Treasurer and a
Director of the Company (DOB 12/23/61).
Ms. Conroy has been the Senior Vice President of
ICAP since joining ICAP in August of 1994, a
Director of ICAP since March 1995 and Secretary of
ICAP since September 1997. As Senior Vice
President, her responsibilities include
accounting, systems, communication and product
development. Prior to joining ICAP, Ms. Conroy
worked at 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. Ms. Conroy has served as Vice
President, Treasurer and a Director of the Company
since its inception in December 1994.
*Donald D. Niemann, Vice President, Secretary and a
Director of the Company (DOB 2/27/43).
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). Mr.
Niemann has served as Vice President and Secretary
of the Company since its inception in December
1994, and as a Director of the Company since July
1995.
Dr. James A. Gentry, a Director of the Company (DOB
11/22/30).
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. Dr. Gentry has served as a Director
of the Company since its inception in December
1994.
Joseph A. Hays, a Director of the Company (DOB 6/3/30).
Mr. Hays has been Vice President/Corporate
Relations for the Tribune Company, a diverse media
company, since April 1983. Mr. Hays received a
B.S. in journalism from Utah State University and
a Bachelor of Law from Indiana University. Mr.
Hays has served as a Director of the Company since
July 1995.
<PAGE>
*Gary S. Maurer, a Director of the Company (DOB
9/26/47).
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. Mr. Maurer has
served as a Director of the Company since its
inception in December 1994.
Harold W. Nations, a Director of the Company (DOB
3/14/54).
Mr. Nations is a partner with the law firm of
Holleb & Coff in Chicago, Illinois. He has been
with Holleb & Coff since September 1997. From
March 1991 until September 1997, Mr. Nations was a
partner with the law firm of Shefsky & Froelich
Ltd. in Chicago, Illinois. For the seven years
prior thereto, Mr. Nations was associated with the
firm of Skadden, Arps, Slate, Meagher & Flom. Mr.
Nations received a B.S. in chemistry from the
Georgia Institute of Technology and a J.D. from
Northwestern University Law School. Mr. Nations
has served as a Director of the Company since its
inception in December 1994.
*Barbara C. Schanmier, a Director of the Company (DOB
3/29/50).
Ms. Schanmier, who joined ICAP in 1981, currently
serves as Senior Vice President for Trading and is
a Director of ICAP. Previously, Ms. Schanmier
served as an investment officer and trader at
Harris Trust & Savings Bank. Prior to that, Ms.
Schanmier served as an equity trader at First
Wisconsin Trust. She studied accounting at the
University of Wisconsin. Ms. Schanmier has served
as a Director of the Company since its inception
in December 1994.
Except for Dr. James A. Gentry, Mr. Harold W.
Nations and Mr. Joseph A. Hays, 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 55 East Monroe Street, Suite 4100, Chicago, Illinois
60603. Mr. Hays' address is 1110 North Lake Shore
Drive, Apartment 24-South, Chicago, Illinois 60611.
As of November 30, 1997, officers and directors of
the Company beneficially owned less than 1% of the
Discretionary Equity Portfolio's then outstanding
shares and less than 1% of the then outstanding shares
of the Equity Portfolio. As of such date, officers and
directors of the Company did not beneficially own any
shares of the Select Equity or Euro Select Portfolios.
Directors and officers of the Company who are also
officers, directors, employees or shareholders of ICAP
do not receive any remuneration from the Portfolios for
serving as directors or officers.
The following table provides information relating
to compensation paid to directors of the Company for
their services as such for the fiscal year ended
December 31, 1997:
Name Cash Other Total
Compensation Compensation(1)
Robert H. Lyon $0 $0 $0
Pamela H. Conroy $0 $0 $0
Donald D. Niemann $0 $0 $0
Dr. James A. Gentry $0 $15,000 $15,000
Joseph A. Hays $0 $15,000 $15,000
Gary S. Maurer $0 $0 $0
Harold W. Nations $0 $15,000 $15,000
Barbara C. Schanmier $0 $0 $0
All directors as a $0 $45,000 $45,000
group (8 persons)
<PAGE>
_______________
(1) Each director who is not deemed an "interested
person," as defined in the 1940 Act, receives $3,750
worth of shares of common stock in the Portfolio or
Portfolios of his choice for each board meeting such
director attends. The board held 4 meetings during
the year ended December 31, 1997.
PRINCIPAL SHAREHOLDERS
As of November 30, 1997, the following persons
owned of record or are known by the Company to own of
record or beneficially 5% or more of the outstanding
shares of a Portfolio:
Name and Address Portfolio No. Shares Percentage
Marshall & Ilsley Trust Co. Discretionary Equity 252,564 5.96%
Trustee FBO Oil Gear Co.
1000 N. Water Street
Milwaukee, WI 53202
Bank of America Discretionary Equity 235,096 5.55%
Trustee FBO Presbyterian
Intercommunity Hospital
Defined Benefit Retirement
Plan
P.O. Box 3577
Terminal Anne
Los Angeles, CA 90051
Wendel & Co. Discretionary Equity 696,178 16.43%
Trustee FBO Presbyterian
Intercommunity Hospital
c/o The Bank of New York
Mutual Funds Reorganization
Dept.
P.O. Box 1066
Wall Street Station
New York, NY 10268
Mitra & Co. Discretionary Equity 274,305 6.47%
1000 N. Water Street
Attn: Mutual Funds
Milwaukee, WI 53202
Northern Trust Company Discretionary Equity 316,880 7.48%
Trustee FBO Sun Times
Company Master Retirement
Trust
P. O. Box 92956
Chicago, IL 60675
Capinco Discretionary Equity 355,597 8.39%
Firstar Trust Company
P.O. Box 1787
Milwaukee, WI 53201
<PAGE>
Charles Schwab & Co., Inc. Equity 466,458 5.20%
Special Custody Account FBO
Customers
Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
Pennsylvania State Education Equity 454,953 5.07%
Association Pension Plan
400 North 3rd Street, Box 1724
Harrisburg, PA 17105
As of November 30, 1997, no person owned a
controlling interest in the Company. 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") serves
as the investment adviser to the Portfolios pursuant to
an advisory agreement dated as of December 30, 1994, as
amended (the "Advisory Agreement"). Mr. Lyon controls
ICAP and is the President, Chief Investment Officer and
a director of ICAP. Ms. Conroy is the Senior Vice
President, Secretary and a director of ICAP, and both
Mr. Niemann and Mr. Maurer are Executive Vice
Presidents and directors of ICAP. Ms. Schanmier is a
Senior Vice President and director of ICAP. Mr. Lyon
owns 51% of ICAP.
The Advisory Agreement as it relates to the
Discretionary Equity and Equity Portfolios is dated as
of December 30, 1994, while the amendments to the
Advisory Agreement to add the Select Equity and Euro
Select Portfolios are dated as of December 31, 1997.
The Advisory Agreement has an initial term of two years
(with a December 30, 1994 or December 31, 1997 starting
point, as the case may be) and is required to be
approved annually thereafter by the Board of Directors
of the Company or by vote of a majority of the
applicable Portfolio's outstanding voting securities
(as defined in the 1940 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 as it relates
to the Discretionary Equity and Equity Portfolios was
initially approved by the vote of a majority of the
Company's directors, including a majority of directors
who were not parties to the agreement or interested
persons of any such party, on December 6, 1994 and by
the initial shareholders of each Portfolio on December
14, 1994. Most recently, the agreement was approved by
the directors, including the disinterested directors,
on February 20, 1997. The amendments to the Advisory
Agreement to add the Select Equity and Euro Select
Portfolios were initially approved by a vote of a
majority of the Company's directors, including a
majority of directors who were not parties to the
agreement or interested persons of any such party, on
November 13, 1997. 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 the applicable 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
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, the
Discretionary Equity, Equity and Select Equity
Portfolios pay to ICAP a monthly advisory fee at the
annual rate of 0.80% of the average net asset value of
the respective Portfolio, and the Euro Select Portfolio
pays to ICAP a monthly advisory fee at the annual rate
of 1.00% of the average net asset value of the
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. For the year ended
December 31, 1996, ICAP voluntarily agreed to waive its
management fee and/or reimburse operating expenses of
the Discretionary Equity and Equity Portfolios to the
extent necessary to ensure that neither Portfolio's
total operating expenses exceeded 0.80%
<PAGE>
of the
respective Portfolio's average net assets, and ICAP has
voluntarily agreed to continue this
waiver/reimbursement policy for the year ending
December 31, 1997, and for an indefinite period of time
thereafter. During the years ended December 31, 1995
and 1996, ICAP received $7,820 and $434,716 from the
Discretionary Equity Portfolio, respectively, and
$36,319 and $436,868 from the Equity Portfolio,
respectively, as compensation for its services under
the Advisory Agreement. The amounts received by ICAP
for such services would have been $141,845 and $715,273
for the Discretionary Equity Portfolio, respectively,
and $190,793 and $723,879 from the Equity Portfolio,
respectively, had ICAP not waived a portion of its fees
during the years ended December 31, 1995 and 1996. For
the year ending December 31, 1998, and for an
indefinite amount of time thereafter, ICAP has
voluntarily agreed to waive its management fee and/or
reimburse operating expenses of the Select Equity and
Euro Select Portfolios to the extent necessary to
insure that the Select Equity Portfolio's total
operating expenses do not exceed 0.80% of the
Portfolio's average net assets, and the Euro Select
Portfolio's total operating expenses do not exceed
1.00% of the Portfolio's average net assets. A brief
description of the Advisory Agreement is set forth in
the Prospectus under "MANAGEMENT."
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.
The aggregate amount of brokerage commissions paid
by the Discretionary Equity Portfolio for the years
ended December 31, 1995 and 1996 was $44,543 and
$197,710, respectively, and the aggregate amount of
brokerage commissions paid by the Equity Portfolio for
the years ended December 31, 1995 and 1996 was $51,101
and $220,706, respectively. The increase in brokerage
fees from 1995 to 1996 is due to the increase in net
assets under management and the attendant increase in
volume and dollar value of transactions effected on
behalf of the Portfolios. As of the date hereof,
neither the Select Equity nor the Euro Select Portfolio
has commenced operations.
Section 28(e) of the Securities Exchange Act of
1934, as amended ("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, 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. ICAP's Advisory Agreement with the
Portfolios 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
<PAGE>
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 a 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.
The Discretionary Equity Portfolio's portfolio
turnover rate for the years ended December 31, 1995 and
1996 was 102% and 138%, respectively, and the Equity
Portfolio's portfolio turnover rate for the years ended
December 31, 1995 and 1996 was 105% and 125%,
respectively. As of the date hereof, neither the
Select Equity nor the Euro Select Portfolio has
completed a full year of operations. The Discretionary
Equity and Equity Portfolios anticipate that their
respective portfolio turnover rates will not exceed
150%, and will generally be between 100% and 125%,
while the Select Equity and Euro Select Portfolios
anticipate that their respective portfolio turnover
rates will not exceed 200%, and will generally be
between 100% and 150%. The annual portfolio turnover
rate indicates changes in a 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 for the Portfolios, UMB Bank, n.a.,
928 Grand Avenue, Kansas City, Missouri 64141, 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.
DIVIDEND-DISBURSING AND TRANSFER AGENT
Sunstone Investor Services, LLC ("Sunstone") acts
as dividend-disbursing and transfer agent for the
Portfolios. Sunstone is compensated based on an annual
fee per open account of $18.00 (subject to a minimum of
$17,000 to $20,000 per Portfolio per year) plus out-of-
pocket expenses such as postage and printing expenses
in connection with shareholder communications.
Sunstone also receives an annual fee per closed account
of $3.00.
<PAGE>
TAXES
In General
Each Portfolio will be treated as a separate
entity for federal income tax purposes since the
Internal Revenue Code of 1986, as amended (the "Code"),
requires that all portfolios of a series fund be
treated as separate taxpayers. As indicated under
"DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS AND TAX
TREATMENT" 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 Company's management
practices or policies.
A dividend or capital gain distribution received
shortly after the purchase of Portfolio 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 held for longer than
twelve months by a Portfolio are taxable as capital
gains when realized and distributed. If the net asset
value of Portfolio 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.
Foreign Transactions
Interest and dividends received by a Portfolio may
be subject to income, withholding or other taxes
imposed by foreign countries and U.S. possessions that
would reduce the yield on its securities. Tax
conventions between certain countries and the United
States may reduce or eliminate these foreign taxes,
however, and many foreign countries do not impose taxes
on capital gains in respect of investments by foreign
investors. If more than 50% of the value of a
Portfolio's total assets at the close of its taxable
year consists of securities of foreign corporations, it
will be eligible to, and may, file an election with the
Internal Revenue Service that would enable its
shareholders, in effect, to receive the benefit of the
foreign tax credit with respect to any foreign and U.S.
possessions income taxes paid by it. Pursuant to the
election, a Portfolio would treat those taxes as
dividends paid to its shareholders and each shareholder
would be required to (i) include in gross income, and
treat as paid by him, his proportionate share of those
taxes, (ii) treat his share of those taxes and of any
dividend paid by the Portfolio that represents income
from foreign or U.S. possessions sources as his own
income from those sources and (iii) either deduct the
taxes deemed paid by him in computing his taxable
income or, alternatively, use the foregoing information
in calculating the foreign tax credit against his
federal income tax. Each Portfolio will report to its
shareholders shortly after each taxable year their
respective shares of its income from sources within,
and taxes paid to, foreign countries and U.S.
possessions if it makes this election.
Each Portfolio maintains its accounts and
calculates its income in U.S. dollars. In general,
gain or loss (i) from the disposition of foreign
currencies and forward currency contracts, (ii) from
the disposition of foreign-currency-denominated debt
securities that are attributable to fluctuations in
exchange rates between the date the securities are
acquired and their disposition date and (iii)
attributable to fluctuations in exchange rates between
the time a Portfolio accrues interest or other
receivables or expenses or other liabilities
denominated in a foreign currency and the time the
Portfolio actually collects those receivables or pays
those liabilities, will be treated as ordinary income
or loss. A foreign-currency-denominated debt security
acquired by a Portfolio may bear interest at a high
nominal rate that takes into account expected decreases
in the value of the principal amount of the security
due to anticipated currency devaluations; in that case,
a Portfolio would be required to include the interest
in income as it accrues but generally would realize a
currency loss with respect to the principal only when
the principal was received (through disposition or upon
maturity).
Derivative Instruments
The use of derivatives strategies, such as
purchasing and selling (writing) options and futures
and entering into forward currency contracts, involves
complex rules that will determine for income tax
purposes the character and timing of recognition of the
gains and losses a Portfolio will realize in connection
therewith. Gains from the disposition of foreign
currencies (except certain gains therefrom that may be
excluded by future regulations), and income from
transactions in options, futures and forward currency
contracts derived by a Portfolio with respect to its
business of investing in securities or foreign
currencies, will qualify as permissible income under
the "Income Requirement." The
<PAGE>
"Income Requirement" is
a requirement in the Code that a Portfolio must derive
at least 90% of its gross income each taxable year from
dividends, interest, payments with respect to
securities loans and gains from the sale or other
disposition of securities or foreign currencies or
other income (including gains from options, futures and
forward contracts) derived with respect to its business
of investing in securities of those currencies.
For federal income tax purposes, each Portfolio is
required to recognize as income for each taxable year
its net unrealized gains and losses on options, futures
or forward currency contracts that are subject to
section 1256 of the Code ("Section 1256 Contracts") and
are held by the Portfolio as of the end of the year, as
well as gains and losses on Section 1256 Contracts
actually realized during the year. Except for Section
1256 Contracts that are part of a "mixed straddle" and
with respect to which a Portfolio makes a certain
election, any gain or loss recognized with respect to
Section 1256 Contracts 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 Section 1256 Contract.
This section is not intended to be a full
discussion of federal income tax laws and the effect of
such laws on an investor. There may be other federal,
state or local tax considerations applicable to a
particular investor. Investors are urged to consult
their own tax advisors.
DETERMINATION OF NET ASSET VALUE
As set forth in the Prospectus under the same
caption, the net asset value per share of each
Portfolio is determined as of the close of trading on
each day the New York Stock Exchange (the "NYSE") is
open for trading. The Portfolios do not determine net
asset value on days the NYSE is closed and at other
times described in the Prospectus. The NYSE is closed
on New Year's Day, Martin Luther King 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 NYSE will not be open for trading on the
preceding Friday and when such holiday falls on a
Sunday, the NYSE will not be open for trading on the
succeeding Monday, unless unusual business conditions
exist, such as the ending of a monthly or yearly
accounting period. Shares of the Portfolios are
offered and sold on a continuous basis at a price equal
to the net asset value per share as determined in
accordance with the foregoing provisions.
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 1940 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 1940 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 directors from office and may elect a
successor or successors to fill any resulting vacancies
for the unexpired terms of removed directors.
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:
P(1+T)n = 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.
The total return for the Discretionary Equity
Portfolio for the years ended December 31, 1995 and
1996 was 35.21% and 25.55%, respectively, and the total
return for the Equity Portfolio for the years ended
December 31, 1995 and 1996 was 38.85% and 26.26%,
respectively. As of the date hereof, neither the
Select Equity nor the Euro Select Portfolio has
commenced operations.
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 tracked by
Morningstar, Inc. ("Morningstar"), 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,
the NASDAQ Over-the-Counter Composite Index and the
Morgan Stanley Capital International Euro Index. There
are differences and similarities between the
investments that the Portfolios may purchase and the
investments measured by these indices.
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P., 411 East Wisconsin
Avenue, Milwaukee, Wisconsin 53202 have been selected
as the independent accountants for the Portfolios.
FINANCIAL STATEMENTS
The following audited financial statements of the
Discretionary Equity and Equity Portfolios are
incorporated herein by reference to the Company's
Annual Report for the year ended December 31, 1996 as
filed with the Securities and Exchange Commission on
February 27, 1997:
(a) Schedules of Investments as of
December 31, 1996.
(b) Statements of Assets and Liabilities
as of December 31, 1996.
(c) Statements of Operations for the year
ended December 31, 1996.
(d) Statements of Changes in Net Assets for
the years ended December 31, 1996 and 1995.
(e) Financial Highlights for the years ended
December 31, 1996 and 1995.
(f) Notes to Financial Statements.
(g) Report of Independent Accountants dated
January 24, 1997.
In addition, the unaudited financial statements
and related notes contained in the Company's Semi-
Annual Report for the period ended June 30, 1997,
which, along with the Company's Annual Report, may be
obtained without charge by calling or writing to
Sunstone Investor Services, LLC, are incorporated
herein by reference. Financial statements for the
Select Equity and Euro Select Portfolios are not
available since neither Portfolio has, as of the date
hereof, commenced operations.
<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, 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 based on 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 S&P. 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.
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
<PAGE>
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.
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.
<PAGE>
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 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.
<PAGE>
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.
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.
C Bonds are in imminent default in payment
of interest or principal.
DDD,
DD
and 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.
<PAGE>
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.
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.
Structured finance issues, including real estate, asset-
backed and mortgage-backed financings, use this same
rating scale. Duff & Phelps Credit Rating claims
paying ability ratings of insurance companies use the
same scale with minor modification in the definitions.
Thus, an investor can compare the credit quality of
investment alternatives across industries and
structural types. A "Cash Flow Rating" (as noted for
specific ratings) addresses the likelihood that
aggregate principal and interest will equal or exceed
the rated amount under appropriate stress conditions.
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 is modest, but may
AA vary slightly from time to time because
of economic conditions.
AA-
A+ Protection factors are average but
adequate. However, risk factors are more
A variable and greater in periods of
economic stress.
A-
BBB+ Below average protection factors but
still considered sufficient for prudent
BBB investment. Considerable variability in
risk during economic cycles.
BBB-
<PAGE>
BB+ Below investment grade but deemed likely
to meet obligations when due.
BB Present or prospective financial
protection factors fluctuate according to
BB- 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 will not be met
B when due. Financial protection factors
will fluctuate widely according to
B- 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'.
<PAGE>
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.
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.
<PAGE>
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+'.
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 used 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.
The distinguishing feature of Duff & Phelps Credit
Ratings' short-term ratings is the refinement of the
traditional `1' category. The majority of short-term
debt issuers carry the highest rating, yet quality
differences exist within that tier. As a consequence,
Duff & Phelps Credit Rating has incorporated gradations
of `1+' (one plus) and `1-` (one minus) to assist
investors in recognizing those differences.
These ratings are recognized by the SEC for broker-
dealer requirements, specifically capital computation
guidelines. These ratings meet Department of Labor
ERISA guidelines governing pension and profit sharing
investments. State regulators also recognize the
ratings of Duff & Phelps Credit Rating for insurance
company investment portfolios.
<PAGE>
Rating Scale: Definition
High Grade
D-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.
D-1 Very high certainty of timely
payment. Liquidity factors are
excellent and supported by good
fundamental protection factors. Risk
factors are minor.
D-1- High certainty of timely payment.
Liquidity factors are strong and
supported by good fundamental protection
factors. Risk factors are very small.
Good Grade
D-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
D-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
D-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
D-5 Issuer failed to meet scheduled
principal and/or interest payments.
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements (included or
incorporated by reference into Parts A and B)
Schedules of Investments as of December
31, 1996 and June 30, 1997.
Statements of Assets and Liabilities as
of December 31, 1996 and June 30, 1997.
Statements of Operations for the year
ended December 31, 1996 and the six months
ended June 30, 1997.
Statements of Changes in Net
Assets for the years ended December 31,
1996 and 1995 and the six months
ended June 30, 1997.
Financial Highlights for the years ended
December 31, 1996 and 1995 and the six
months ended June 30, 1997.
Notes to Financial Statements for the
year ended December 31, 1996 and the six months
ended June 30, 1997.
Report of Independent Accountants dated
January 24, 1997.
(b) Exhibits
(1) (a) Registrant's Articles
of Incorporation (1)
(b) Articles
Supplementary, dated December 8, 1997
(2) Registrant's By-Laws (1)
(3) None
(4) None
(5) (a) Investment
Advisory Agreement dated as of
December 30, 1994 (Discretionary
Equity and Equity Portfolios) (1)
(b) Amendment to
Investment Advisory Agreement dated
as of December 31, 1997 (Select
Equity Portfolio)
(c) Amendment to
Investment Advisory Agreement dated
as of December 31, 1997 (Euro Select
Portfolio)
(6) None
(7) None
(8) (a) Custodian Agreement with
United Missouri Bank, n.a. dated December 30,
1994 (1)
(b) Amendment to
Custodian Agreement with United
Missouri Bank, n.a.
<PAGE>
(9.1) (a) Transfer Agency
Agreement with Sunstone Investor
Services, LLC dated as of November
1, 1995 (2)
(b) Amendment to Transfer
Agency Agreement with Sunstone
Investor Services, LLC dated
November 13, 1997
(9.2) Amended and Restated
Administration and Fund Accounting
Agreement with Sunstone Financial Group,
Inc. dated as of November 13, 1997
(10) (a) Opinion and
Consent of Godfrey & Kahn, S.C.
(Discretionary Equity and Equity
Portfolios) (1)
(b) Opinion and Consent
of Godfrey & Kahn, S.C. (Select
Equity and Euro Select Portfolios)
(11) Consent of Coopers &
Lybrand L.L.P.
(12) None
(13) Subscription Agreements (1)
(14) (a) Individual
Retirement Trust Account (1)
(b) Supplement to
IRA Disclosure Statement and
Custodial Agreement (1)
(15) None
(16) Schedule for Computation
of Performance Quotations (1)
(17) Financial Data Schedule (3)
(18) Powers of Attorney for Directors
and Officers (see signature page)
____________
(1) Incorporated by reference to Registrant's
Registration Statement on Form N-1A as filed with the
Securities and Exchange Commission on April 29, 1997.
(2) Incorporated by reference to Registrant's
Registration Statement on Form N-1A as filed with the
Securities and Exchange Commission on April 29, 1996.
(3) Incorporated by reference to Registrant's Annual
and Semi-Annual N-SAR as filed with the Securities
and Exchange Commission on February 27, 1997 and
August 21, 1997, respectively.
<PAGE>
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 November 30, 1997
Common Stock, $.01 par value
Discretionary Equity Portfolio 143
Equity Portfolio 248
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
Since 1996, the Registrant's investment adviser,
Institutional Capital Corporation ("ICAP"), has served
as sub-adviser to the taxable investment portfolios
offered by the Nuveen Investment Trust (the "Trust"),
an open-end management investment company (i.e., the
Nuveen Growth and Income Stock Fund, the Nuveen
Balanced Stock and Bond Fund and the Nuveen Balanced
Municipal and Stock Fund). Mr. Robert Lyon, ICAP's
President, also serves as a member of the Board of
Trustees of the Trust. The principal business address
of the Trust is 333 West Wacker Drive, 32nd Floor,
Chicago, Illinois 60606.
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, as amended, 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 UMB Bank,
n.a., 928 Grand Boulevard, Kansas City, Missouri 64141,
relating to its function as custodian, (2) records held
and maintained by Sunstone Financial Group, Inc., 207
East Buffalo Street, Suite 400, Milwaukee, Wisconsin
53202, relating to its function as administrator and
fund accountant and (3) records held and maintained by
Sunstone Investor Services, LLC, 207 East Buffalo
Street, Suite B-15, Milwaukee, Wisconsin 53202 relating
to its function as transfer agent.
<PAGE>
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.
(a) Registrant undertakes to furnish each
person to whom a Prospectus or Statement of
Additional Information is delivered with a
copy of the Registrant's 1996 Annual Report
and 1997 Semi-Annual Report, upon request and
without charge.
(b) Registrant undertakes to file a post-
effective amendment to this Registration
Statement within four to six months of the
effective date of this Registration Statement
which will contain financial statements of
the Select Equity and Euro Select Portfolios
(which need not be certified) as of and for
the time period reasonably close or as soon
as practicable to the date of such post-
effective amendment.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act
of 1933 and the Investment Company Act of 1940, the
Registrant certifies that it meets all of the
requirements for effectiveness of this Registration
Statement pursuant to Rule 485(b) under the Securities
Act of 1933 and has duly caused this Post-Effective
Amendment No. 7 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 23rd day of December, 1997.
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. 7 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/ Pamela H. Conroy Vice President, Treasurer December 23, 1997
- ----------------------- and a Director
Pamela H. Conroy
- ----------------------- Director __________, 1997
Dr. James A. Gentry
- ----------------------- Director __________, 1997
Joseph Andrew Hays
/s/ Robert H. Lyon President and a Director December 23, 1997
- ------------------------
Robert H. Lyon
/s/ Gary S. Maurer Director December 23, 1997
- -------------------------
Gary S. Maurer
/s/ Harold W. Nations Director December 23, 1997
- -------------------------
Harold W. Nations
/s/ Donald D. Niemann Vice President, Secretary December 23, 1997
- ------------------------- and a Director
Donald D. Niemann
/s/ Barbara C. Schanmier Director December 23, 1997
- --------------------------
Barbara C. Schanmier
<PAGE>
EXHIBIT INDEX
Exhibit No.Exhibit
(1) (a) Registrant's Articles of
Incorporation (1)
(b) Articles Supplementary,
dated December 8, 1997
(2) Registrant's By-Laws (1)
(3) None
(4) None
(5) (a) Investment Advisory
Agreement dated as of December 30, 1994
(Discretionary Equity and Equity
Portfolios) (1)
(b) Amendment to Investment
Advisory Agreement dated as of December
31, 1997 (Select Equity Portfolio)
(c) Amendment to Investment
Advisory Agreement dated as of December
31, 1997 (Euro Select Portfolio)
(6) None
(7) None
(8) (a) Custodian Agreement with
United Missouri Bank, n.a. dated December
30, 1994 (1)
(b) Amendment to Custodian
Agreement with United Missouri Bank,
n.a.
(9.1) (a) Transfer Agency
Agreement with Sunstone Investor
Services, LLC dated as of November 1,
1995 (2)
(b) Amendment to Transfer
Agency Agreement with Sunstone Investor
Services, LLC dated November 13, 1997
(9.2) Amended and Restated Administration
and Fund Accounting Agreement with
Sunstone Financial Group, Inc. dated as of
November 13, 1997
(10) (a) Opinion and Consent of
Godfrey & Kahn, S.C. (Discretionary
Equity and Equity Portfolios) (1)
(b) Opinion and Consent of
Godfrey & Kahn, S.C. (Select Equity and
Euro Select Portfolios)
(11) Consent of Coopers & Lybrand L.L.P.
(12) None
(13) Subscription Agreements (1)
(14) (a) Individual Retirement Trust Account (1)
(b) Supplement to IRA
Disclosure Statement and Custodial
Agreement (1)
(15) None
<PAGE>
(16) Schedule for Computation of
Performance Quotations (1)
(17) Financial Data Schedule (3)
(18) Powers of Attorney for Directors and
Officers (see signature page)
____________
(1) Incorporated by reference to Registrant's
Registration Statement on Form N-1A as filed with the
Securities and Exchange Commission on April 29, 1997.
(2) Incorporated by reference to Registrant's
Registration Statement on Form N-1A as filed with the
Securities and Exchange Commission on April 29, 1996.
(3) Incorporated by reference to Registrant's Annual
and Semi-Annual N-SAR as filed with the Securities
and Exchange Commission on February 27, 1997 and
August 21, 1997, respectively.
Exhibit 1(b)
ICAP FUNDS, INC.
Articles Supplementary
ICAP Funds, Inc., a Maryland corporation
having its principal office in Maryland in Baltimore
City (hereinafter called the "Corporation"), hereby
certifies to the State Department of Assessments and
Taxation of Maryland that:
FIRST: The Board of Directors of the
Corporation by consent action effective on September
16, 1997, unanimously approved the adoption of a
resolution classifying (i) Fifty Million (50,000,000)
shares of the Corporation's authorized but unissued and
unclassified Common Stock as the ICAP Euro Select
Equity Portfolio (the "Euro Select Portfolio"), and
(ii) Fifty Million (50,000,000) shares of the
Corporation's authorized but unissued and unclassified
Common Stock as the ICAP Select Equity Portfolio (the
"Select Equity Portfolio").
SECOND: The shares of the Euro Select
Portfolio and the Select Equity Portfolio as so
classified by the Board of Directors of the Corporation
shall have the preferences, conversion and other
rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms and conditions of
redemption as set forth in Article V, Section 5.5 of
the Articles of Incorporation of the Corporation, and
shall be subject to all of the provisions of the
Articles of Incorporation of the Corporation relating
to the stock of the Corporation generally.
THIRD: The shares of the Euro Select
Portfolio and the Select Equity Portfolio aforesaid
have been duly classified by the Board of Directors
pursuant to authority and power contained in the
Articles of Incorporation of the Corporation.
FOURTH: These Articles Supplementary will
become effective at 12:00 a.m. on December 31, 1997.
IN WITNESS WHEREOF, ICAP Funds, Inc. has
caused these Articles Supplementary to be signed as of
the 8th day of December, 1997 in its name and on its
behalf by its duly undersigned authorized officers, who
acknowledge that these Articles Supplementary are the
act of the Corporation and that, to the best of their
knowledge, information and belief, all matters and
facts set forth herein relating to the authorization
and approval of these Articles Supplementary are true
in all material respects and that this statement is
made under penalties of perjury.
Witness: ICAP Funds, Inc.
/s/ Donald D. Niemann By: /s/ Robert H. Lyon
- ---------------------- -----------------------
Donald D. Niemann Robert H. Lyon
Secretary President
Exhibit 5(b)
EXHIBIT C
to the
Investment Advisory Agreement
ICAP Select Equity Portfolio
For all services rendered by ICAP hereunder,
the above-named Portfolio of the Corporation shall pay
ICAP and ICAP agrees to accept as full compensation for
all services rendered hereunder, an annual investment
advisory fee equal to 0.80% of the average daily net
assets of the Portfolio.
The portion of the fee based upon the average
daily net assets of the Portfolio shall be accrued
daily at the rate of 1/365th of 0.80% applied to the
daily net assets of the Portfolio.
The advisory fee so accrued shall be paid to
ICAP monthly.
Executed this 31st day of December, 1997.
INSTITUTIONAL CAPITAL CORPORATION
By: /s/ Robert H. Lyon
--------------------------
Robert H. Lyon, President
ICAP FUNDS, INC.
By: /s/ Pamela H. Conroy
------------------------
Pamela H. Conroy
Vice President and Treasurer
Exhibit 5(c)
EXHIBIT D
to the
Investment Advisory Agreement
ICAP Euro Select Equity Portfolio
For all services rendered by ICAP hereunder,
the above-named Portfolio of the Corporation shall pay
ICAP and ICAP agrees to accept as full compensation for
all services rendered hereunder, an annual investment
advisory fee equal to 1.00% of the average daily net
assets of the Portfolio.
The portion of the fee based upon the average
daily net assets of the Portfolio shall be accrued
daily at the rate of 1/365th of 1.00% applied to the
daily net assets of the Portfolio.
The advisory fee so accrued shall be paid to
ICAP monthly.
Executed this 31st day of December, 1997.
INSTITUTIONAL CAPITAL CORPORATION
By: /s/ Robert H. Lyon
---------------------------
Robert H. Lyon, President
ICAP FUNDS, INC.
By: /s/ Pamela H. Conroy
---------------------------
Pamela H. Conroy
Vice President and Treasurer
Exhibit 8 (b)
APPENDIX B
The CUSTODY AGREEMENT between UMB BANK, N.A. and
ICAP FUNDS, INC., dated December 30, 1994, is
hereby amended to include the following funds.
ICAP DISCRETIONARY EQUITY
ICAP EQUITY
ICAP EURO SELECT EQUITY PORTFOLIO
ICAP SELECT EQUITY PORTFOLIO
ICAP FUNDS, INC. UMB BANK, N.A.
By: /s/ Pamela H. Conroy By: /s/ Ralph Fautoro
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Title: Vice President Title: Senior Vice President
Date: 11-3-97 Date: 10-27-97
Exhibit 9.1(b)
Amended and Restated
Schedule A
to the
Transfer Agent Agreement
by and between
ICAP Funds, Inc.
and
Sunstone Investor Services LLC
Intending to be legally bound, the undersigned hereby
amend and restate Schedule A to the aforesaid Agreement
to include the following investment portfolios
effective as of the date hereof:
ICAP Equity Portfolio
ICAP Discretionary Equity Portfolio
ICAP Euro Select Equity Portfolio
ICAP Select Equity Portfolio
Dated: November 13, 1997.
ICAP FUNDS, INC. SUNSTONE INVESTOR SERVICES LLC
By: /s/ Pamela H. Conroy By: /s/ Miriam M. Allison
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Vice President and Treasurer Miriam M. Allison
President
Amended and Restated
Schedule C
to the
Transfer Agent Agreement
by and between
ICAP Funds, Inc.
and
Sunstone Investor Services LLC
Intending to be legally bound, the undersigned hereby
amend and restate Schedule C to the aforesaid as
follows effective as of the date hereof:
FEE SCHEDULE
Base fees
Annual Shareholder Minimum Annual Fee Per Fund
Account Fee 0 to 249 more than 250
Type of Fund Open/Closed shareholders shareholders
Equity $18.00/$3.00 $17,000 $20,000
The base fee assumes a single class of shares, no
load, no 12b-1 plan, availability of automatic
investment plans and systematic withdrawal plans,
quarterly or less frequent dividend distributions
for equity funds, annual capital gains
distributions, and includes all standard reports.
Additional fees to be added to base fee
Type of Service or Annual Shareholder Minimum Annual Fee
Fund Function Account Fee Per Fund
12b-1 plan $1.00 $1,000
Multiple class 25% of base fee minimum
(per class)
One-time set-up fees
New funds set up (per fund) $2,000
NSCC Fund/SERV and Networking set-up (per fund group) 2,500
Remote access set-up (per location) 500
Voice Response Unit (VRU) set-up 2,000
Account maintenance and processing fees (per
occurrence)
Omnibus account transaction $2.50
Certificate issuance $4.00
Locating lost shareholders $8.00
Out-of-pocket expenses
Per statement confirmation and check processing $0.25
Per tax form processing $0.15
Per label printing for proxy or marketing purposes $0.05
Production of ad hoc reports starting at $100
Bulk mailings/insert handling charge
1 insert $0.06
2 - 3 inserts $0.08
4 or more inserts as quoted
Bank account service fees and any other bank charges at cost
Statement paper, cheek stock, envelopes, tax forms at cost
Postage and express delivery charges at cost
Telephone and long distance charges at cost
Fax charges at cost
P.O. box rental at cost
800-phone number at cost
Inventory and records storage at cost
Fund/SERV charges at cost
Monthly remote access user charges
First user and password $250
Additional users and passwords (each) $100
Remote access line charge at cost
Additional
(which may be passed on to shareholders)
Outgoing wire fee varies by bank
Account transcripts older than 2 years
(per year, per fund) $5.00
Non-sufficient funds varies by bank
IRA/SEP/SIMPLE/403(b) processing
Annual maintenance or custodial fee (per account) $15.00
Account termination (transfer or rollover) $15.00
Custom programming
Additional fees may apply for special programming to
meet your servicing requirements or to create custom reports.
Dated: November 13, 1997.
ICAP FUNDS, INC. SUNSTONE INVESTOR SERVICES LLC
By: /s/ Pamela H. Conroy By: /s/ Miriam M. Allison
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Vice President and Treasurer Miriam M. Allison
President
Exhibit 9.2
AMENDED AND RESTATED
ADMINISTRATION AND FUND ACCOUNTING AGREEMENT
THIS AGREEMENT is made as of this 13th day of
November, 1997, by and between ICAP Funds, Inc., a
Maryland corporation (the "Corporation"), and Sunstone
Financial Group, Inc., a Wisconsin corporation (the
"Administrator").
WHEREAS, the Corporation is an open-end investment
company registered under the Investment Company Act of
1940, as amended (the "Act"). The Corporation is
authorized to create separate series, each with its own
separate investment portfolio, and the beneficial
interest in each such series will be represented by a
separate series of shares; and
WHEREAS, the Corporation and the Administrator
desire to enter into an agreement pursuant to which the
Administrator shall provide administration and fund
accounting services to such investment portfolios of
the Corporation as are listed on Schedule A hereto and
any additional investment portfolios the Corporation
and Administrator may agree upon and include on
Schedule A as such Schedule may be amended from time to
time (such investment portfolios and any additional
investment portfolios are individually referred to as a
"Fund" and collectively the "Funds").
NOW, THEREFORE, in consideration of the mutual
promises and agreements herein contained and other good
and valuable consideration, the receipt of which is
hereby acknowledged, the parties hereto, intending to
be legally bound, do hereby agree as follows:
1. Appointment
The Corporation hereby appoints the Administrator
as administrator and fund accountant of the Funds for
the period and on the terms set forth in this
Agreement. The Administrator accepts such appointment
and agrees to render the services herein set forth, for
the compensation herein provided.
2. Services as Administrator
(a) Subject to the direction and control of the
Corporation's Board of Directors and utilizing
information provided by the Corporation and its agents,
the Administrator will: (1) provide office space,
facilities, equipment and personnel to carry out its
services hereunder; (2) compile data for and prepare
with respect to the Funds timely Notices to the
Securities and Exchange Commission (the "Commission")
required pursuant to Rule 24f-2 under the Act and Semi-
Annual Reports on Form N-SAR; (3) prepare for execution
by the Corporation and file all federal income and
excise tax returns and state income tax returns (and
such other required tax filings as may be agreed to by
the parties) other than those required to be made by
the Corporation's custodian or transfer agent; (4)
prepare compliance filings relating to the registration
of the securities of the Funds pursuant to state
securities laws with the advice of the Corporation's
counsel; (5) prepare the financial statements for the
Annual and Semi-Annual Reports required pursuant to
Section 30(d) under the Act; (6) assist to the extent
requested by the Corporation with the preparation of
the Registration Statement for the Corporation (on Form
N-1A or any replacement therefor) and any amendments
thereto, and proxy materials; (7) monitor each Fund's
expense accruals and cause all appropriate expenses to
be paid from Corporation assets on proper authorization
from the Corporation; (8) calculate daily net asset
values and income factors of each Fund; (9) maintain
all general ledger accounts and related subledgers;
(10) perform security valuations in accordance with the
terms of the Funds' then current Prospectus and
instructions of the Funds' Board of Directors; (11)
assist in the acquisition of the Corporation's fidelity
bond required by the Act, monitor the amount of the
bond and make the necessary Commission filings related
thereto; (12) from time to time as the Administrator
deems appropriate, check each Fund's compliance with
the policies and limitations of each Fund relating to
the portfolio investments as set forth in the
Prospectus, Statement of Additional Information, By-
laws and Articles of Incorporation and monitor each
Fund's status as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as
amended (but this function shall not relieve the
Corporation's investment adviser of its primary day-to-
day responsibility for assuring such compliance); (13)
maintain, and/or coordinate with the other service
providers the maintenance of, the accounts, books and
other documents required pursuant to Rule 3la-l(a) and
(b) under the Act; and ( 14) generally assist in the
Corporation's administrative operations. The duties of
the Administrator shall be confined to those expressly
set forth herein, and no implied duties are assumed by
or may be asserted against the Administrator hereunder.
(b) The Directors of the Corporation shall cause
the officers, adviser, distributor, if any, legal
counsel, independent accountants, custodian and
transfer agent for the Funds to cooperate with the
Administrator and to provide the Administrator, upon
request, with such information, documents and advice
relating to the Funds and the Corporation as is within
the possession or knowledge of such persons, in order
to enable the Administrator to perform its duties
hereunder. In connection with its duties hereunder,
the Administrator shall be entitled to rely, and shall
be held harmless by the Corporation when acting in
reliance, upon the instruction, advice, information or
any documents relating to the Funds provided to the
Administrator by any of the aforementioned persons.
Fees charged by such persons shall be an expense of the
respective Fund. The Administrator shall be entitled
to rely on any document which it reasonably believes to
be genuine and to have been signed or presented by the
proper party. The Administrator shall not be held to
have notice of any change of authority of any officer,
agent or employee of the Corporation until receipt of
written notice thereof from the Corporation. The
Administrator shall cooperate with the Corporation and
its legal counsel, independent accountants, custodian
and transfer agent upon reasonable request in order to
enable the Corporation's service providers to perform
their duties with respect to the Funds.
(c) In compliance with the requirements of Rule
31a-3 under the Act, the Administrator hereby agrees
that all records which it maintains for the Corporation
are the property of the Corporation and further agrees
to surrender promptly to the Corporation any of such
records upon the Corporation's request free of any
liens and charges. The Administrator further agrees to
preserve for the periods prescribed by Rule 31a-2 under
the Act the records described in (a) above which are
maintained by the Administrator for the Corporation.
(d) The Administrator shall perform its duties
hereunder in compliance with all applicable laws.
(e) The Funds' Board of Directors and the Funds'
investment adviser have and retain primary
responsibility for all compliance matters relating to
the Funds including but not limited to compliance with
the Investment Company Act of 1940, as amended, the
Internal Revenue Code of 1986, as amended, and the
policies and limitations of each Fund relating to the
portfolio investments as set forth in the Prospectus
and Statement of Additional Information. Sunstone's
monitoring and other functions hereunder shall not
relieve the Board and the investment adviser of their
responsibilities for assuring such compliance.
3. Fees; Delegation; Expenses
(a) In consideration of the services rendered
pursuant to this Agreement, the Corporation will pay
the Administrator a fee, computed daily and payable
monthly, at the annual rates specified on Schedule B
attached hereto, plus out-of-pocket expenses. Out-of-
pocket expenses include, but are not limited to,
travel, lodging and meals in connection with travel on
behalf of the Corporation, programming and related
expenses (previously incurred or to be incurred by
Administrator) in connection with providing electronic
transmission of data between the Administrator and the
Funds' other service providers, brokers, dealers and
depositories, and photocopying, postage and overnight
delivery expenses. The minimum annual fee to be paid
by the Corporation to the Administrator hereunder
(exclusive of out-of-pocket expenses) shall be $65,000
per year for the first Fund and $55,000 per year for
each Fund thereafter. Fees shall be paid at a rate
that would aggregate at least the applicable minimum
fee. In addition to the foregoing, the Corporation
shall pay to Administrator $30,000 for administrative
organizational services performed by Administrator,
plus out-of-pocket expenses related thereto
(b) For the purpose of determining fees payable
to the Administrator, net asset value shall be computed
in accordance with the Corporation's Prospectuses and
resolutions of the Corporation's Board of Directors.
The fee for the period from the day of the month this
Agreement is entered into until the end of that month
shall be pro-rated according to the proportion which
such period bears to the full monthly period. Upon any
termination of this Agreement before the end of any
month, the fee for such part of a month shall be pro-
rated according to the proportion which such period
bears to the full monthly period and shall be payable
upon the date of termination of this Agreement. Should
the Corporation be liquidated, merged with or acquired
by another fund or investment company, any accrued fees
shall be immediately payable.
(c) The Administrator will bear all expenses in
connection with the performance of its services under
this Agreement except as otherwise provided herein.
Other costs and expenses to be incurred in the
operation of the Funds, including, but not limited to:
taxes; interest; brokerage fees and commissions, if
any; salaries, fees and expenses of officers and
Directors; Commission fees and state Blue Sky fees;
advisory and administration fees; charges of
custodians, transfer agents dividend disbursing and
accounting services agents; security pricing services;
insurance premiums; outside auditing and legal
expenses; costs of organization and maintenance of
corporate existence; typesetting, printing, proofing
and mailing of prospectuses, statements of additional
information, supplements, notices and proxy materials
for regulatory purposes and for distribution to current
shareholders; typesetting, printing, proofing and
mailing and other costs of shareholder reports;
expenses incidental to holding meetings of the Fund's
shareholders and Directors; and any extraordinary
expenses; will be borne by the Funds or their
investment adviser. Expenses incurred for distribution
of fund shares, including the typesetting, printing,
proofing and mailing of prospectuses for persons who
are not shareholders of the Corporation, will be borne
by the Corporation or its investment adviser.
4. Propriety and Confidential Information
The Administrator agrees on behalf of itself and
its employees to treat confidentially and as
proprietary information of the Corporation all records
and other information relative to the Funds and prior,
present or potential shareholders of the Corporation
(and clients of said shareholders), and not to use such
records and information for any purpose other than
performance of its responsibilities and duties
hereunder, except after prior notification to and
approval in writing by the Corporation, which approval
shall not be unreasonably withheld and may not be
withheld where the Administrator may be exposed to
civil or criminal proceedings for failure to comply,
when requested to divulge such information by duly
constituted authorities, or when so requested by the
Corporation.
5. Limitation of Liability
The Administrator shall not be liable for any
error of judgment or mistake of law or for any loss
suffered by the Funds in connection with the matters to
which this Agreement relates, except for a loss
resulting from willful misfeasance, bad faith or gross
negligence on its part in the performance of its duties
or from reckless disregard by it of its obligations and
duties under this Agreement.
6. Term
(a) This Agreement shall become effective as with
respect to each Fund listed on Schedule A hereof as of
the date hereof and, with respect to each Fund not in
existence on that date, on the date an amendment to
Schedule A to this Agreement relating to that Fund is
executed. This Agreement shall continue in effect with
respect to each Fund until November _, 1998.
Thereafter, if not terminated as provided herein, this
Agreement shall continue automatically in effect as to
each Fund for successive annual periods.
(b) This Agreement may be terminated with respect
to any one or more particular Funds without penalty (i)
upon mutual consent of the parties, or (ii) by either
party upon not less than ninety (90) days' written
notice to the other party (which notice may be waived
by the party entitled to the notice). The terms of
this Agreement shall not be waived, altered, modified,
amended or supplemented in any manner whatsoever except
by a written instrument signed by the Administrator and
the Corporation.
7. Non-Exclusivity
The services of the Administrator rendered to the
Corporation are not deemed to be exclusive. The
Administrator may render such services and any other
services to others, including other investment
companies. The Corporation recognizes that from time
to time directors, officers and employees of the
Administrator may serve as directors, trustees,
officers and employees of other corporations or trusts
(including other investment companies), that such other
entities may include the name of the Administrator as
part of their name and that the Administrator or its
affiliates may enter into investment advisory or other
agreements with such other corporations or trusts.
8. Governing Law; Invalidity
This Agreement shall be governed by Wisconsin law.
To the extent that the applicable laws of the State of
Wisconsin, or any of the provisions herein, conflict
with the applicable provisions of the Act, the latter
shall control, and nothing herein shall be construed in
a manner inconsistent with the Act or any rule or order
of the Commission thereunder. Any provision of this
Agreement which may be determined by competent
authority to be prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or
unenforceability in any jurisdiction shall not
invalidate or render unenforceable such provision in
any other jurisdiction.
9. Notices
Any notice required or to be permitted to be given
by either party to the other shall be in writing and
shall be deemed to have been given when sent by
registered or certified mail, postage prepaid, return
receipt requested, as follows: Notice to the
Administrator shall be sent to Sunstone Financial
Group, Inc., 207 East Buffalo Street, Suite 400,
Milwaukee, Wl, 53202, Attention Miriam M. Allison, and
notice to the Corporation shall be sent to 225 West
Wacker Drive, Suite 2400, Chicago, Illinois, 60606,
Attention Pamela Conroy.
10. Entire Agreement
This Agreement constitutes the entire Agreement of
the parties hereto.
11. Counterparts
This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an
original agreement but such counterparts shall together
constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused
this Agreement to be executed by a duly authorized
officer as of the day and year first above written.
ICAP FUNDS, INC.
By: /s/ Pamela H. Conroy
-----------------------
Vice President and Treasurer
SUNSTONE FINANCIAL GROUP, INC.
("Administrator")
By: /s/ Miriam M. Allison
-------------------------
President
Schedule A
to the
Amended and Restated
Administration and Fund Accounting Agreement
by and between
ICAP Funds, Inc.
and
Sunstone Financial Group, Inc.
Name of Fund Effective Date
ICAP Discretionary Equity Portfolio December 31, 1994
ICAP Equity Portfolio December 31, 1994
ICAP Select Equity Portfolio December 31, 1997
ICAP Euro Select Equity Portfolio December 31, 1997
Dated: November 13, 1997
ICAP FUNDS, INC. SUNSTONE FINANCIAL GROUP, INC.
By: /s/ Pamela H. Conroy By: /s/ Miriam M. Allison
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Vice-President and Treasurer President
Schedule B
to the
Amended and Restated
Administration and Fund Accounting Agreement
by and between
ICAP Funds, Inc.
and
Sunstone Financial Group, Inc.
Name of Fund Annual Fees Minimum Fee
Equity Portfolio Up to $50 Million 17.5 basis points $60,000
$50 Million to $100 Million 10.0 basis points
$100 Million to $250 Million 5.0 basis points
Over $250 Million 3.0 basis points
Discretionary Equity
Portfolio Up to $50 Million 17.5 basis points $60,000
$50 Million to $100 Million 10.0 basis points
$100 Million to $250 Million 5.0 basis points
Over $250 Million 3.0 basis points
Select Equity
Portfolio Up to $50 Million 17.5 basis points $55,000
$50 Million to $100 Million 10.0basis points
$100 Million to $250 Million 5.0 basis points
Over $250 Million 3.0 basis points
Euro Select
Equity Portfolio Up to $50 Million 17.5 basis points $55,000
$50 Million to $100 Million 10.0basis points
$100 Million to $250 Million 5.0 basis points
Over $250 Million 3.0 basis points
Fees shall be applied separately to each of the Funds
as indicated. The Corporation shall also pay/reimburse
the Administrator's out-of-pocket expenses as described
in the Agreement. Fees for additional funds or classes
of funds shall be separately established and agreed
upon by the parties.
Dated: November 13, 1997.
ICAP FUNDS, INC. SUNSTONE FINANCIAL GROUP, INC.
By: /s/ Pamela H. Conroy By: /s/ Miriam M. Allison
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Vice President and Treasurer Miriam M. Allison
President
GODFREY & KAHN, S.C.
ATTORNEYS AT LAW
780 NORTH WATER STREET
MILWAUKEE, WISCONSIN 53202
PHONE (414) 273-3500 FAX (414) 273-5198
December 23, 1997
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 a Registration Statement on
Form N-1A (Registration Nos. 33-86006 and 811-08850)
(the "Registration Statement") relating to the sale by
you of an indefinite number of shares of common stock,
$0.01 par value (the "Shares") of the ICAP Select
Equity Portfolio and the ICAP Euro Select Equity
Portfolio, each a separate series of ICAP Funds, Inc.
(the "Company"), in the manner set forth in the
Registration Statement (and the prospectus included
therein).
We have examined: (a) the Registration
Statement (and the prospectus included therein), (b)
the Company's Articles of Incorporation, as
supplemented, 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
the Registration Statement, will be duly authorized and
validly issued, fully paid and nonassessable.
We consent to the use of this opinion as an
exhibit to the Registration Statement. 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.
Very truly yours,
/s/ Godfrey & Kahn, S.C.
GODFREY & KAHN, S.C.
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of the ICAP Funds, Inc.
We consent to the incorporation by reference in
Post-Effective Amendment No. 6 to the Registration
Statement on Form N-1A of the ICAP Funds, Inc. of our
report dated January 24, 1997, on our audits of the
financial statements and financial highlights of the
ICAP Discretionary Equity Portfolio and the ICAP Equity
Portfolio, which constitute ICAP Funds, Inc., which
report is included in the Annual Report for the year
ended December 31, 1996, which is also incorporated by
reference in the Registration Statement. We also
consent to the reference to our Firm under the
captions, "FINANCIAL HIGHLIGHTS" in the Prospectus and
"INDEPENDENT ACCOUNTANTS" in the Statement of
Additional Information.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Milwaukee, Wisconsin
December 22, 1997
