As filed with the Securities and Exchange Commission on April 30, 1998
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. 8 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT
OF 1940 [X]
Amendment No. 9
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
It is proposed that this filing will become
effective (check appropriate box):
[ ] immediately upon filing pursuant to
paragraph (b) of Rule 485.
[X] on April 30, 1998 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>
April 30, 1998
ICAP FUNDS, INC.
225 West Wacker Drive, Suite 2400
Chicago, Illinois 60606
1-888-221-ICAP
(1-888-221-4227)
www.icapfunds.com
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 European 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. At any time,
the Euro Select Portfolio will be invested in a
relatively limited number of securities and/or
companies. 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 April 30, 1998, which has been filed with the
Securities and Exchange Commission (the "SEC") 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). It is also
available, along with other related materials, on the
SEC's Internet Web Site (http://www.sec.gov).
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 9
INVESTMENT OBJECTIVES AND POLICIES 11
Discretionary Equity Portfolio 11
Equity Portfolio 12
Select Equity Portfolio 12
Euro Select Portfolio 12
INVESTMENT TECHNIQUES AND RISKS 13
INVESTMENT RESTRICTIONS 17
MANAGEMENT 17
HOW TO PURCHASE SHARES 18
HOW TO REDEEM SHARES 20
EXCHANGE PRIVILEGE 21
TAX-SHELTERED RETIREMENT PLANS 21
DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS AND TAX
TREATMENT 21
DETERMINATION OF NET ASSET VALUE 22
SHAREHOLDER REPORTS 23
FINANCIAL INTERMEDIARIES 23
ORGANIZATION 24
ADMINISTRATOR AND FUND ACCOUNTANT 24
CUSTODIAN AND TRANSFER AGENT 24
YEAR 2000 ISSUE 24
COMPARISON OF INVESTMENT RESULTS 25
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 March 31,
1998, ICAP had approximately $12 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
Shareholder Transaction Expenses
<TABLE>
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>
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, 1997, 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 0.22% and 1.02%,
respectively, and other expenses and total operating
expenses for the Equity Portfolio would have been 0.17%
and 0.97%, respectively. ICAP has voluntarily agreed
to continue this waiver/reimbursement policy for the
year ending December 31, 1998, 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 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
Discretionary Equity Portfolio
The following Financial Highlights of the
Discretionary Equity Portfolio for the years ended
December 31, 1997, 1996 and 1995 have been audited by
Coopers & Lybrand L.L.P., independent certified public
accountants. Their report is included in the Company's
Annual Report for the year ended December 31, 1997.
The Annual Report is incorporated by reference into the
Statement of Additional Information for the Portfolios.
The Financial Highlights should be read in conjunction
with the financial statements and related notes
included in the Annual Report, a copy 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). The
Discretionary Equity Portfolio commenced operations on
January 1, 1995. Financial information for the Select
Equity and Euro Select Portfolios will be provided
supplementally, as neither Portfolio commenced
operations until January 1, 1998.
Year Ended December 31,
(For a share outstanding 1997 1996 1995
throughout the year)
Net asset value, beginning of $29.55 $25.42 $20.00
year
Income from investment
operations:
Net investment income 0.48 0.36 0.31
Net realized and unrealized 7.80 6.09 6.70
gain on investments
Total income from investment 8.28 6.45 7.01
operations
Less distributions:
From net investment income (0.48) (0.36) (0.31)
In excess of book net (0.01) -- --
investment income
From net realized gain on (7.00) (1.80) (1.27)
investments
In excess of book net realized -- (0.16) (0.01)
gain on investments
Total distributions (7.49) (2.32) (1.59)
Net asset value, end of year $30.34 $29.55 $25.42
Total return 28.60% 25.55% 35.21%
Supplemental data and ratios:
Net assets, end of year $157,137 $110,280 $37,362
in thousands)
Ratio of expenses to average 0.80% 0.80% 0.80%
net assets(1)
Ratio of net investment income 1.37% 1.35% 1.71%
to average net assets(1)
Portfolio turnover rate 131% 138% 102%
Average commission rate paid $0.0354 $0.0356 N/A
on portfolio investment
transactions
_______________
(1) Net of waivers by ICAP. Without waivers of
expenses, the ratio of expenses to average net
assets would have been 1.02%, 1.11% and 1.56%, and
the ratio of net investment income to average net
assets would have been 1.15%, 1.04% and 0.95% for
the years ended December 31, 1997, 1996 and 1995,
respectively.
<PAGE>
FINANCIAL HIGHLIGHTS
Equity Portfolio
The following Financial Highlights of the Equity
Portfolio for the years ended December 31, 1997, 1996
and 1995 have been audited by Coopers & Lybrand L.L.P.,
independent certified public accountants. Their report
is included in the Company's Annual Report for the year
ended December 31, 1997. The Annual Report is
incorporated by reference into the Statement of
Additional Information for the Portfolios. The
Financial Highlights should be read in conjunction with
the financial statements and related notes included in
the Annual Report, a copy 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). The Equity Portfolio
commenced operations on January 1, 1995. Financial
information for the Select Equity and Euro Select
Portfolios will be provided supplementally, as neither
Portfolio commenced operations until January 1, 1998.
Year Ended December 31,
(For a share outstanding 1997 1996 1995
throughout the year)
Net asset value, beginning of $31.16 $26.03 $20.00
year
Income from investment
operations:
Net investment income 0.37 0.31 0.28
Net realized and unrealized gain 8.57 6.49 7.45
on investments
Total income from investment 8.94 6.80 7.73
operations
Less distributions:
From net investment income (0.37) (0.30) (0.28)
In excess of book net (0.01) -- --
investment income
From net realized gain on (4.59) (1.30) (1.41)
investments
In excess of book net realized (0.01) (0.07) (0.01)
gain on investments
Total distributions (4.98) (1.67) (1.70)
Net asset value, end of year $35.12 $31.16 $26.03
Total return 29.08% 26.26% 38.85%
Supplemental data and ratios:
Net assets, end of year $371,402 $149,125 $46,788
in thousands)
Ratio of expenses to average 0.80% 0.80% 0.80%
net assets(1)
Ratio of net investment income 1.06% 1.15% 1.49%
to average net assets(1)
Portfolio turnover rate 121% 125% 105%
Average commission rate paid $0.0330 $0.0365 N/A
on portfolio investment
transactions
_______________
(1) Net of waivers by ICAP. Without waivers of
expenses, the ratio of expenses to average net
assets would have been 0.97%, 1.12% and 1.44%, and
the ratio of net investment income to average net
assets would have been 0.89%, 0.83% and 0.85% for
the years ended December 31, 1997, 1996 and 1995,
respectively.
<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, if any. 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 March 31, 1998.
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 March 31, 1998
Average Annualized Total Return
ICAP
Discretionary Discretionary ICAP Equity Equity
Time Period Equity Composite Equity Portfolio Composite Portfolio S&P 500
1 year 37.5% 37.8% 39.1% 39.3% 48.0%
3 years 30.4% 30.8% 31.9% 32.4% 32.8%
5 years 22.0% N/A 23.4% N/A 22.4%
10 years 18.6% N/A N/A N/A 18.9%
<PAGE>
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."
In addition to the Private Accounts, from January
through December 1997, ICAP funded and managed a single
separate account (the "Account") which pursued
substantially the same investment objective, policies
and strategies, and employed the same management style,
as that of the Euro Select Portfolio. On January 1,
1998, all of the assets in the Account were contributed
to the Euro Select Portfolio in exchange for shares in
such Portfolio. Like the Private Accounts, the Account
was 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 compares the
performance of the Account to the average performance
of the Euro Index for each of the four quarters ended
December 31, 1997 and for the period from January 1,
1997 to December 31, 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 Performance vs. Euro Index
Performance through December 31, 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%
4th Quarter (3.3)% (0.4)%
1/1/97 - 12/31/97 29.4% 23.8%
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.
The performance of the Euro Select Portfolio from
January 1, 1998 (commencement of operations) through
March 31, 1998 as compared to the average performance
of the Euro Index for the same period is as follows:
<PAGE>
Euro Select
Time Period Portfolio Euro Index
1/1/98 - 3/31/98 21.2% 20.3%
The performance of the Euro Select Portfolio
presented above reflects the performance of such
Portfolio reduced by the total operating expenses
actually incurred by the Portfolio for the period
indicated.
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 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
<PAGE>
Corporation ("S&P"), Duff & Phelps, Inc. ("D&P") or
Fitch IBCA Information, Inc. ("Fitch"), or unrated
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 or unrated securities of
comparable quality as determined by ICAP. 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.
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 or unrated securities of
comparable quality as determined by ICAP. 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.
<PAGE>
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 or unrated
securities of comparable quality as determined by ICAP.
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
their 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"); and illiquid securities.
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-1 or higher by S&P, Prime-1 or higher by
Moody's, F-2 or higher by Fitch or D-2 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); and repurchase
agreements entered into only with respect to
obligations of the U.S. government, its agencies or
instrumentalities. Repurchase agreements could involve
certain risks in the event of the default or insolvency
of the other party to the agreement, including possible
delays or restrictions upon a Portfolio's ability to
dispose of the underlying securities.
<PAGE>
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.
Real Estate Investment Trust Securities ("REITs")
Each Portfolio may invest without limitation in
the equity securities of REITs. REITs are pooled
investment vehicles which invest primarily in income
producing real estate or real estate related loans or
interests. REITs are generally classified as equity
REITs, mortgage REITs or a combination of equity and
mortgage REITs. Equity REITs invest the majority of
their assets directly in real property and derive
income primarily from the collection of rents. Equity
REITs can also realize capital gains by selling
properties that have appreciated in value. Mortgage
REITs invest the majority of their assets in real
estate mortgages and derive income primarily from the
collection of interest payments. Similar to investment
companies, REITs are not taxed on income distributed to
shareholders provided they comply with several
requirements of the Code. A Portfolio which invests in
REITs will indirectly bear its proportionate share of
the expenses incurred by the REITs in addition to the
expenses incurred directly by the Portfolio.
Investments in REITs may subject a Portfolio to risks
similar to those associated with direct ownership of
real estate (in addition to securities markets risks).
REITs are sensitive to factors such as changes in real
estate value and property taxes, interest rates, cash
flow of underlying real estate assets, supply and
demand and the management skill and creditworthiness of
the issuer. REITs may also be affected by tax and
regulatory requirements.
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.
<PAGE>
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.
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.
<PAGE>
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.
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.
<PAGE>
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%. The portfolio turnover rate is
calculated by dividing the lesser of a Portfolio's
annual purchases or proceeds from sales of securities
(exclusive of purchases or sales of securities whose
maturities at the time of acquisition were one year or
less) by the monthly average value of long-term
securities held during the year. High portfolio
turnover involves correspondingly greater transaction
costs in the form of dealer spreads and brokerage
commissions, which are borne directly by the
Portfolios.
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 (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,
1997, 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
<PAGE>
31, 1998 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.
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.
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
March 31, 1998, ICAP had approximately $12 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 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.
<PAGE>
Initial Investment - Minimum $10,000
You may purchase shares of a Portfolio by
completing a Purchase 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 on
the next page.
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 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.
<PAGE>
Automatic Investment Plan
The Company offers an automatic investment plan
("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 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. If
you have any questions concerning the nature of such
documentation, please contact the Transfer Agent 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 Time (or by the close of
the NYSE, if earlier). 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; a signature
guarantee will be required at that time. 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
<PAGE>
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
Except in the case of custodian-to-custodian IRA
transfers, 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 or bank account 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 and loan 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
distributions in cash or to reinvest them in shares may
be changed by writing to: ICAP Funds,
<PAGE>
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.
If you have elected to receive dividends and/or
capital gain distributions in cash and the postal or
other delivery service is unable to deliver checks to
your address of record, your distribution option will
automatically be converted to having all dividend and
other distributions reinvested in additional shares. No
interest will accrue on amounts represented by uncashed
distribution or redemption checks.
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 of the NYSE
(generally 4:00 p.m., Eastern 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, or its delegate. 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. 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.
<PAGE>
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.
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
<PAGE>
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 March 31, 1998, no
person owned a controlling interest (i.e., more than
25%) in the Company. For information on persons who
owned of record or are known by the Company to have
owned of record or beneficially 5% or more of the
outstanding shares of one or more of the Portfolios as
of such date, please see the Statement of Additional
Information.
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 53202-5712, 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.
YEAR 2000 ISSUE
The Portfolios' operations depend on the seamless
functioning of computer systems in the financial
service industry, including those of ICAP, the
Custodian and the Transfer Agent. Many computer
software systems in use today cannot properly process
date-related information after December 31, 1999
because of the method by which dates are encoded and
calculated. This failure, commonly referred to as the
"Year 2000 Issue," could adversely affect the handling
of security trades, pricing and account servicing for
the Portfolios.
ICAP has made compliance with the Year 2000 Issue
a high priority and is taking steps that it believes
are reasonably designed to address the Year 2000 Issue
with respect to its computer systems. ICAP has also
been informed that comparable steps are being taken by
the Portfolios' other major service providers. ICAP
does not currently anticipate that the Year 2000 Issue
will have a material impact on its ability to continue
to fulfill its duties as investment adviser to the
Portfolios.
<PAGE>
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 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 the Select Equity and
Euro Select Portfolios did not commence operations
until January 1, 1998, performance information will not
be provided for such Portfolios until the 1998 Semi-
Annual Report is available.
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 INVESTMENT ADVISER
Pamela H. Conroy Institutional Capital
Senior Vice President, Corporation
Secretary and Director, 225 West Wacker Drive,
Institutional Capital Suite 2400
Corporation Chicago, Illinois 60606-1229
Dr. James A. Gentry
Professor of Finance, CUSTODIAN
University of Illinois
UMB Bank, n.a.
Joseph A. Hays 928 Grand Boulevard
Retired Vice Kansas City, Missouri 64141-6226
President/Corporate Relations,
Tribune Company
Robert H. Lyon DIVIDEND-DISBURSING AND
President, Chie Investment TRANSFER AGENT
Officer and Director,
Institutional Capital Sunstone Investor Services, LLC
Corporation P.O. Box 2160
Milwaukee, Wisconsin 53201-2160
Gary S. Maurer
Executive Vice President and
Director,
Institutional Capital ADMINISTRATOR AND FUND
Corporation ACCOUNTANT
Harold W. Nations Sunstone Financial Group, Inc.
Partner, Holleb & Coff 207 East Buffalo Street,
Suite 400
Donald D. Niemann Milwaukee, Wisconsin 53202-5712
Executive Vice President and
Director,
Institutional Capital
Corporation
AUDITORS
Barbara C. Schanmier Coopers & Lybrand L.L.P.
Senior Vice President and 411 East Wisconsin Avenue
Director, Milwaukee, Wisconsin 53202-9905
Institutional Capital
Corporation
LEGAL COUNSEL
OFFICERS
Godfrey & Kahn, S.C.
Robert H. Lyon 780 North Water Street
President Milwaukee, Wisconsin 53202-3590
Pamela H. Conroy
Vice President and Treasurer
Donald D. Niemann
Vice President and Secretary
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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)
www.icapfunds.com
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
April 30, 1998. 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 April 30, 1998.
<PAGE>
ICAP FUNDS, INC.
TABLE OF CONTENTS
Page No.
INVESTMENT RESTRICTIONS 3
INVESTMENT POLICIES AND TECHNIQUES 4
DIRECTORS AND OFFICERS 14
PRINCIPAL SHAREHOLDERS 16
INVESTMENT ADVISER 19
PORTFOLIO TRANSACTIONS AND BROKERAGE 20
CUSTODIAN 21
DIVIDEND-DISBURSING AND TRANSFER AGENT 22
TAXES 22
DETERMINATION OF NET ASSET VALUE 23
SHAREHOLDER MEETINGS 23
PERFORMANCE INFORMATION 24
INDEPENDENT ACCOUNTANTS 25
FINANCIAL STATEMENTS 25
APPENDIX A - BOND RATINGS A-1
No person has been authorized to give any
information or to make any representations other than
those contained in this Statement of Additional
Information and the Prospectus dated April 30, 1998,
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 ICAP Euro Select Equity
Portfolio (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.
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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.
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 captions "Investment Objectives
and Policies" and "Investment Techniques and Risks."
Illiquid Securities
The Portfolios may invest in illiquid securities
(i.e., securities that are not readily marketable).
For purposes of this restriction, illiquid securities
include, but are not limited to, restricted securities
(securities the disposition of which is restricted
under the federal securities laws), securities which
may 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
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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 instruments allowing for the
disposition to a third party or the issuer thereof
(e.g., certain repurchase obligations and demand
instruments), (iii) the availability of market
quotations (e.g., for securities quoted in the PORTAL
system) and (iv) other permissible relevant factors.
Restricted securities may be sold only in
privately negotiated transactions or in a public
offering with respect to which a registration statement
is in effect under the Securities Act. Where
registration is required, a Portfolio may be obligated
to pay all or part of the registration expenses and a
considerable period may elapse between the time of the
decision to sell and the time the Portfolio may be
permitted to sell a security under an effective
registration statement. If, during such a period,
adverse market conditions were to develop, the
Portfolio might obtain a less favorable price than that
which prevailed when it decided to sell. Restricted
securities will be priced at fair value as determined
in good faith by the Board of Directors 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
<PAGE>
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.
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.
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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, 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
<PAGE>
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.
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.
<PAGE>
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 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.
(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
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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 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
<PAGE>
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 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.
<PAGE>
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 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.
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
<PAGE>
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.
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.
<PAGE>
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, 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.
*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 a 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 The Northern Trust Company 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.
<PAGE>
*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.
*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.
<PAGE>
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 March 31, 1998, 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 beneficially owned 88,743
shares (49.1%) of the Select Equity Portfolio and
126,682 shares (11.3%) of the Euro Select Portfolio.
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)
_______________
(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 March 31, 1998, 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
one or more of the Portfolios:
Percentage Percentage
Name and Address Portfolio No. Shares of Portfolio of Company
Charles Schwab & Co., Inc. Discretionary 305,698 5.2% 1.5%
Special Custody Account FBO Equity
Customers
Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
<PAGE>
Marshall & Ilsley Trust Co. Discretionary 314,451 5.3% 1.5%
Trustee FBO Oil Gear Co. Equity
1000 N. Water Street
Milwaukee, WI 53202
Mitra & Co. Discretionary 353,475 6.0% 1.7%
1000 N. Water Street Equity
Attn: Mutual Funds
Milwaukee, WI 53202
Northern Trust Company Discretionary 394,754 6.7% 1.9%
Trustee FBO Sun Times Equity
Company
Master Retirement Trust
P. O. Box 92956
Chicago, IL 60675
Capinco Discretionary 445,287 7.6% 2.1%
Firstar Trust Company Equity
P.O. Box 1787
Milwaukee, WI 53201
Wendel & Co. Discretionary 867,265 14.8% 4.2%
Trustee FBO Presbyterian Equity
Intercommunity Hospital
c/o The Bank of New York
Mutual Funds Reorganization Dept.
P.O. Box 1066
Wall Street Station
New York, NY 10268
<PAGE>
Percentage Percentage
Name and Address Portfolio No. Shares of Portfolio of Company
Fidelity Investments Equity 1,141,421 8.4% 5.5%
Institutional Operations
Co., Inc. as Agent for
Certain Employee Benefit
Plans
Mail Zone KWIC
100 Magellan Way
Covington, KY 41015-1987
Thomas and Susan Wenzel Select Equity 9,368 5.2% *
as Joint Tenants
2217 Center Avenue
Northbrook, IL 60062-4518
Gary and Laura Maurer Select Equity 12,406 6.9% *
as Joint Tenants
2600 N. Lakeview Ave., Apt. 9-B
Chicago, IL 60614-1837
Gearoid and Adrienne Doyle Select Equity 14,144 7.8% *
as Joint Tenants
3000 N. Sheridan Road, #13D
Chicago, IL 60657
Institutional Capital
Corporation Select Equity 42,833 23.7% *
225 West Wacker Drive,
Suite 2400
Chicago, IL 60606
Robert and Donna Lyon Select Equity 75,073 41.5% *
as Joint Tenants
900 Private Road
Winnetka, IL 60093-1526
Robert and Donna Lyon Euro Select 99,420 8.8% *
as Joint Tenants
900 Private Road
Winnetka, IL 60093-1526
Institutional Capital
Corporation Euro Select 133,131 11.8% *
225 West Wacker Drive,
Suite 2400
Chicago, IL 60606
Mayo Foundation Euro Select 384,318 34.2% 1.8%
Treasury Services
200 First Street SW
Rochester, MN 55905
<PAGE>
Percentage Percentage
Name and Address Portfolio No. Shares of Portfolio of Company
Mayo Foundation Pension
Fund Euro Select 422,750 37.6% 2.0%
Treasury Services
200 First Street SW
Rochester, MN 55905
__________________________
* Less than 1%
As of March 31, 1998, no person owned a
controlling interest (i.e., more than 25%) in the
Company. However, Robert H. Lyon, the President and a
controlling person of ICAP, beneficially owned a
controlling interest in the Select Equity Portfolio and
the Mayo Foundation beneficially owned a controlling
interest in the Euro Select Portfolio. 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 a 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.
<PAGE>
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 years ended
December 31, 1995, 1996 and 1997, 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% 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, 1998, and for an indefinite period of time
thereafter. During the years ended December 31, 1995,
1996 and 1997, ICAP received $7,820, $434,716 and
$832,551 from the Discretionary Equity Portfolio,
respectively, and $36,319, $436,868 and $1,689,897 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, $715,273 and $1,157,843 for the Discretionary
Equity Portfolio, respectively, and $190,793, $723,879
and $2,141,357 from the Equity Portfolio, respectively,
had ICAP not waived a portion of its fees during the
years ended December 31, 1995, 1996 and 1997. 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 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. 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, 1996 and 1997 was $44,543,
$197,710 and $239,444, respectively, and the aggregate
amount of brokerage commissions paid by the Equity
Portfolio for the years ended December 31, 1995, 1996
and 1997 was $51,101, $220,706 and $522,276,
respectively. The increase in brokerage fees from 1995
to 1997 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.
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
<PAGE>
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
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,
1996 and 1997 was 102%, 138% and 131%, respectively,
and the Equity Portfolio's portfolio turnover rate for
the years ended December 31, 1995, 1996 and 1997 was
105%, 125% and 121%, 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 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 Boulevard, Kansas City, Missouri 64141-6226,
has custody of all securities and cash of each
Portfolio, delivers and receives payment for securities
sold, receives and pays for securities purchased,
collects income from investments and performs other
duties, all as directed by the officers of the Company.
<PAGE>
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.
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
<PAGE>
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 "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.
<PAGE>
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.
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, 1996
and 1997 was 35.21%, 25.55% and 28.60%, respectively,
and the total return for the Equity Portfolio for the
years ended December 31, 1995, 1996 and 1997 was
38.85%, 26.26% and 29.08%, respectively.
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
<PAGE>
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.
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 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.
The performance of the Portfolios may also be
discussed during television interviews of ICAP
personnel conducted by news organizations to be
broadcast in the United States and elsewhere.
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, 1997 as
filed with the Securities and Exchange Commission on
February 19, 1998.
(a) Schedules of Investments as of December 31, 1997.
(b) Statements of Assets and Liabilities as of December 31, 1997.
(c) Statements of Operations for the year ended December 31, 1997.
<PAGE>
(d) Statements of Changes in Net Assets for the years ended December
31, 1997 and 1996.
(e) Financial Highlights for the years ended December 31, 1997, 1996
and 1995.
(f) Notes to Financial Statements.
(g) Report of Independent Accountants dated January 23, 1998.
The Company's Annual Report, which is incorporated
herein by reference, may be obtained without charge by
calling or writing to Sunstone Investor Services, LLC.
<PAGE>
APPENDIX
SHORT-TERM RATINGS
Standard & Poor's Short-Term Debt Credit Ratings
A Standard & Poor's credit rating is a current
opinion of the creditworthiness of an obligor with
respect to a specific financial obligation, a specific
class of financial obligations or a specific financial
program. It takes into consideration the
creditworthiness of guarantors, insurers or other forms
of credit enhancement on the obligation and takes into
account the currency in which the obligation is
denominated. The credit rating is not a recommendation
to purchase, sell or hold a financial obligation,
inasmuch as it does not comment as to market price or
suitability for a particular investor.
Credit ratings are based on current information
furnished by the obligors or obtained by Standard &
Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in
connection with any credit rating and may, on occasion,
rely on unaudited financial information. Credit
ratings may be changed, suspended or withdrawn as a
result of changes in, or unavailability of, such
information, or based on other circumstances.
Short-term ratings are generally assigned to those
obligations considered short-term in the relevant
market. In the U.S., for example, that means
obligations with an original maturity of no more than
365 days_including commercial paper. Short-term
ratings are also used to indicate the creditworthiness
of an obligor with respect to put features on long-term
obligations. The result is a dual rating, in which the
short-term rating addresses the put feature, in
addition to the usual long-term rating.
Ratings are 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 A short-term obligation rated `A-1' is
rated in the highest category by Standard &
Poor's. The obligor's capacity to meet its
financial commitment on the obligation is
strong. Within this category, certain
obligations are designated with a plus sign
(+). This indicates that the obligor's
capacity to meet its financial commitment on
these obligations is extremely strong.
A-2 A short-term obligation rated `A-2' is
somewhat more susceptible to the adverse
effects of changes in circumstances and
economic conditions than obligations in
higher rating categories. However, the
obligor's capacity to meet its financial
commitment on the obligation is satisfactory.
A-3 A short-term obligation rated `A-3'
exhibits adequate protection parameters.
However, adverse economic conditions or
changing circumstances are more likely to
lead to a weakened capacity of the obligor to
meet its financial commitment on the
obligation.
B A short-term obligation rated `B' is
regarded as having significant speculative
characteristics. The obligor currently has
the capacity to meet its financial commitment
on the obligation; however, it faces major
ongoing uncertainties which could lead to the
obligor's inadequate capacity to meet its
financial commitment on the obligation.
C A short-term obligation rated `C' is
currently vulnerable to nonpayment and is
dependent upon favorable business, financial
and economic conditions for the obligor to
meet its financial commitment on the
obligation.
D A short-term obligation rated `D' is in
payment default. The `D' rating category is
used when payments on an obligation are not
made on the date due even if the applicable
grace period has not expired, unless Standard
& Poor's believes that such payments will be
made during such grace period. The `D'
rating also will be used upon the filing of a
bankruptcy petition or the taking of a
similar action if payments on an obligation
are jeopardized.
<PAGE>
Moody's Short-Term Debt Ratings
Moody's short-term debt ratings are opinions of
the ability of issuers to repay punctually senior debt
obligations. These obligations have an original
maturity not exceeding one year, unless explicitly
noted. Moody's ratings are opinions, not
recommendations to buy or sell, and their accuracy is
not guaranteed.
Moody's employs the following three designations,
all judged to be investment grade, to indicate the
relative repayment ability of rated issuers:
PRIME-1 Issuers rated `Prime-1' (or supporting
institutions) have a superior ability for
repayment of senior short-term debt
obligations. Prime-1 repaying ability will
often be evidenced by many of the following
characteristics:
Leading market positions in well-established
industries.
High rates of return on funds employed.
Conservative capitalization structure with
moderate reliance on debt and ample asset protection.
Broad margins in earnings coverage of fixed
financial charges and high internal cash generation.
Well-established access to a range of financial
markets and assured sources of alternate liquidity.
PRIME-2 Issuers rated `Prime-2' (or supporting
institutions) have a strong ability for
repayment of senior short-term debt
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, may be more
subject to variation. Capitalization
characteristics, while still appropriate, may
be more affected by external conditions.
Ample alternate liquidity is maintained.
PRIME-3 Issuers rated `Prime-3' (or supporting
institutions) have an acceptable ability for
repayment of senior short-term obligations.
The effect of industry characteristics and
market compositions may be more pronounced.
Variability in earnings and profitability may
result in changes in the level of debt
protection measurements and may require
relatively high financial leverage. Adequate
alternate liquidity is maintained.
NOT PRIME Issuers rated `Not Prime' do not fall within
any of the Prime rating categories.
Fitch IBCA International Short-Term Debt Credit Ratings
Fitch IBCA's international debt credit ratings are
applied to the spectrum of corporate, structured and
public finance. They cover sovereign (including
supranational and subnational), financial, bank,
insurance and other corporate entities and the
securities they issue, as well as municipal and other
public finance entities, securities backed by
receivables or other financial assets and
counterparties. When applied to an entity, these short-
term ratings assess its general creditworthiness on a
senior basis. When applied to specific issues and
programs, these ratings take into account the relative
preferential position of the holder of the security and
reflect the terms, conditions and covenants attaching
to that security.
International credit ratings assess the capacity
to meet foreign currency or local currency commitments.
Both "foreign currency" and "local currency" ratings
are internationally comparable assessments. The local
currency rating measures the probability of payment
within the relevant sovereign state's currency and
jurisdiction
<PAGE>
and therefore, unlike the foreign currency
rating, does not take account of the possibility of
foreign exchange controls limiting transfer into
foreign currency.
A short-term rating has a time horizon of less
than 12 months for most obligations, or up to three
years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to
meet financial commitments in a timely manner.
F-1 Highest credit quality. Indicates the
strongest capacity for timely payment of
financial commitments; may have an added "+"
to denote any exceptionally strong credit
feature.
F-2 Good credit quality. A satisfactory
capacity for timely payment of financial
commitments, but the margin of safety is not
as great as in the case of the higher
ratings.
F-3 Fair credit quality. The capacity for
timely payment of financial commitments is
adequate; however, near term adverse changes
could result in a reduction to non-investment
grade.
B Speculative. Minimal capacity for
timely payment of financial commitments, plus
vulnerability to near term adverse changes in
financial and economic conditions.
C High default risk. Default is a real
possibility. Capacity for meeting financial
commitments is solely reliant upon a
sustained, favorable business and economic
environment.
D Default. Denotes actual or imminent
payment default.
Duff & Phelps, Inc. Short-Term Debt Ratings
Duff & Phelps Credit Ratings' short-term debt
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 debt 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.
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.
<PAGE>
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.
LONG-TERM RATINGS
Standard & Poor's Long-Term Debt Credit Ratings
A Standard & Poor's credit rating is a current
opinion of the creditworthiness of an obligor with
respect to a specific financial obligation, a specific
class of financial obligations or a specific financial
program. It takes into consideration the
creditworthiness of guarantors, insurers or other forms
of credit enhancement on the obligation and takes into
account the currency in which the obligation is
denominated. The credit rating is not a recommendation
to purchase, sell or hold a financial obligation,
inasmuch as it does not comment as to market price or
suitability for a particular investor.
Credit ratings are based on current information
furnished by the obligors or obtained by Standard &
Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in
connection with any credit rating and may, on occasion,
rely on unaudited financial information. Credit
ratings may be changed, suspended or withdrawn as a
result of changes in, or unavailability of, such
information, or based on other circumstances.
Credit ratings are based, in varying degrees, on
the following considerations: (1) likelihood of
payment_capacity and willingness of the obligor to meet
its financial commitment on an obligation in accordance
with the terms of the obligation; (2) nature of and
provisions of the obligation; and (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.
The rating definitions are expressed in terms of
default risk. As such, they pertain to senior
obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to
reflect the lower priority in bankruptcy. (Such
differentiation applies when an entity has both senior
and subordinated obligations, secured and unsecured
obligations, or operating company and holding company
obligations.) Accordingly, in the case of junior debt,
the rating may not conform exactly with the category
definition.
<PAGE>
AAA An obligation rated `AAA' has the
highest rating assigned by Standard & Poor's.
The obligor's capacity to meet its financial
commitment on the obligation is EXTREMELY
STRONG.
AA An obligation rated `AA' differs from
the highest rated obligations only in small
degree. The obligor's capacity to meet its
financial commitment on the obligation is
VERY STRONG.
A An obligation rated `A' is somewhat more
susceptible to the adverse effects of changes
in circumstances and economic conditions than
obligations in higher rated categories.
However, the obligor's capacity to meet its
financial commitment on the obligation is
still STRONG.
BBB An obligation rated `BBB' exhibits
ADEQUATE protection parameters. However,
adverse economic conditions or changing
circumstances are more likely to lead to a
weakened capacity of the obligor to meet its
financial commitment on the obligation.
Obligations rated `BB', `B', `CCC, `CC', and `C'
are regarded as having significant speculative
characteristics. `BB' indicates the least degree of
speculation and `C' the highest. While such
obligations will likely have some quality and
protective characteristics, these may be outweighed by
large uncertainties or major exposures to adverse
conditions.
BB An obligation rated `BB' is LESS
VULNERABLE to nonpayment than other
speculative issues. However, it faces major
ongoing uncertainties or exposure to adverse
business, financial or economic conditions
which could lead to the obligor's inadequate
capacity to meet its financial commitment on
the obligation.
B An obligation rated `B' is MORE
VULNERABLE to nonpayment than obligations
rated `BB', but the obligor currently has the
capacity to meet its financial commitment on
the obligation. Adverse business, financial
or economic conditions will likely impair the
obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC An obligation rated `CCC' is CURRENTLY
VULNERABLE to nonpayment, and is dependent
upon favorable business, financial and
economic conditions for the obligor to meet
its financial commitment on the obligation.
In the event of adverse business, financial
or economic conditions, the obligor is not
likely to have the capacity to meet its
financial commitment on the obligation.
CC An obligation rated `CC' is CURRENTLY
HIGHLY VULNERABLE to nonpayment.
C The `C' rating may be used to cover a
situation where a bankruptcy petition has
been filed or similar action has been taken,
but payments on this obligation are being
continued.
D An obligation rated `D' is in payment
default. The `D' rating category is used
when payments on an obligation are not made
on the date due even if the applicable grace
period has not expired, unless Standard &
Poor's believes that such payments will be
made during such grace period. The `D'
rating also will be used upon the filing of a
bankruptcy petition or the taking of a
similar action if payments on an obligation
are jeopardized.
Plus (+) or minus (_): The ratings from `AA'
to `CCC' may be modified by the addition of a
plus or minus sign to show relative standing
within the major rating categories.
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
<PAGE>
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 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.
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.
Moody's applies numerical modifiers 1, 2 and 3 in
each generic rating classification from `Aa' through
`B.' The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category;
the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates a ranking in the lower end of that
generic rating category.
Fitch IBCA International Long-Term Debt Credit Ratings
Fitch IBCA's international debt credit ratings are
applied to the spectrum of corporate, structured and
public finance. They cover sovereign (including
supranational and subnational), financial, bank,
insurance and other corporate entities and the
securities they issue, as well as municipal and other
public finance entities, securities backed by
receivables or other financial assets and
counterparties. When applied to an entity, these long-
term ratings assess its general creditworthiness on a
senior basis. When applied to specific issues and
programs, these ratings take into account the relative
preferential position of the holder of the security and
reflect the terms, conditions and covenants attaching
to that security.
<PAGE>
International credit ratings assess the capacity
to meet foreign currency or local currency commitments.
Both "foreign currency" and "local currency" ratings
are internationally comparable assessments. The local
currency rating measures the probability of payment
within the relevant sovereign state's currency and
jurisdiction and therefore, unlike the foreign currency
rating, does not take account of the possibility of
foreign exchange controls limiting transfer into
foreign currency.
Investment Grade
AAA Highest credit quality. `AAA' ratings
denote the lowest expectation of credit risk.
They are assigned only in case of
exceptionally strong capacity for timely
payment of financial commitments. This
capacity is highly unlikely to be adversely
affected by foreseeable events.
AA Very high credit quality. `AA' ratings
denote a very low expectation of credit risk.
They indicate very strong capacity for timely
payment of financial commitments. This
capacity is not significantly vulnerable to
foreseeable events.
A High credit quality. `A' ratings denote
a low expectation of credit risk. The
capacity for timely payment of financial
commitments is considered strong. This
capacity may, nevertheless, be more
vulnerable to changes in circumstances or in
economic conditions than is the case for
higher ratings.
BBB Good credit quality. `BBB' ratings
indicate that there is currently a low
expectation of credit risk. The capacity for
timely payment of financial commitments is
considered adequate, but adverse changes in
circumstances and in economic conditions are
more likely to impair this capacity. This is
the lowest investment grade category.
Speculative Grade
BB Speculative. `BB' ratings indicate that
there is a possibility of credit risk
developing, particularly as the result of
adverse economic change over time; however,
business or financial alternatives may be
available to allow financial commitments to
be met.
B Highly speculative. `B' ratings
indicate that significant credit risk is
present, but a limited margin of safety
remains. Financial commitments are currently
being met; however, capacity for continued
payment is contingent upon a sustained,
favorable business and economic environment.
CCC,
CC, C High default risk. Default is a
real possibility. Capacity for meeting
financial commitments is solely reliant upon
sustained, favorable business or economic
developments. A `CC' rating indicates that
default of some kind appears probable. `C'
ratings signal imminent default.
DDD,
DD
and D Default. Securities are not
meeting current obligations and are extremely
speculative. `DDD' designates the highest
potential for recovery of amounts outstanding
on any securities involved. For U.S.
corporates, for example, `DD' indicates
expected recovery of 50% - 90% of such
outstandings, and `D' the lowest recovery
potential, i.e. below 50%.
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
<PAGE>
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-
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
<PAGE>
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.
D Preferred stock with dividend
arrearages.
<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, 1997.
Statements of Assets and Liabilities as
of December 31, 1997.
Statements of Operations for the year
ended December 31, 1997.
Statements of Changes in Net
Assets for the years ended December 31,
1997 and 1996.
Financial Highlights for the years ended
December 31, 1997, 1996 and 1995.
Notes to Financial Statements for the
year ended December 31, 1997.
Report of Independent Accountants dated
January 23, 1998.
(b) Exhibits
(1) (a) Registrant's Articles of Incorporation (1)
(b) Articles Supplementary, dated December 8, 1997 (2)
(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) (2)
(c) Amendment to Investment Advisory Agreement dated
as of December 31, 1997 (Euro Select Portfolio) (2)
(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. (2)
<PAGE>
(9.1) (a) Transfer Agency Agreement with Sunstone Investor
Services, LLC dated as of November 1, 1995 (3)
(b) Amendment to Transfer Agency Agreement with Sunstone
Investor Services, LLC dated November 13, 1997 (2)
(9.2) Amended and Restated Administration and Fund Accounting
Agreement with Sunstone Financial Group, Inc. dated as
of November 13, 1997 (2)
(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) (2)
(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 (4)
____________
(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 December 23,
1997.
(3) Incorporated by reference to Registrant's
Registration Statement on Form N-1A as filed with the
Securities and Exchange Commission on April 29, 1996.
(4) Incorporated by reference to Registrant's Annual
N-SAR as filed with the Securities and Exchange
Commission on February 26, 1998.
<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 March 31, 1998
Common Stock, $.01 par value
Discretionary Equity Portfolio 167
Equity Portfolio 320
Select Equity Portfolio 35
Euro Select Equity Portfolio 57
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,
<PAGE>
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.
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 is delivered with
a copy of the Registrant's 1997 Annual
Report, upon request and without charge. A
copy of the 1997 Annual Report will be
provided to each person to whom a Statement
of Additional Information is delivered if the
person is not a shareholder of the Fund at
the time the Statement of Additional
Information is so delivered.
<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. 8 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 30th day of April, 1998.
ICAP FUNDS, INC.
(Registrant)
By:/s/ Robert H. Lyon
-----------------------
Robert H. Lyon
President
Pursuant to the requirements of the Securities Act
of 1933, this Post-Effective Amendment No. 8 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 April 30, 1998
- ------------------------ and a Director
Pamela H. Conroy
/s/ Dr. James A. Gentry Director April 30, 1998
- ------------------------
Dr. James A. Gentry
Director _______, 1998
- ------------------------
Joseph Andrew Hays
/s/ Robert H. Lyon President and a Director April 30, 1998
- ------------------------
Robert H. Lyon
/s/ Gary S. Maurer Director April 30, 1998
- ------------------------
Gary S. Maurer
Director _______, 1998
- ------------------------
Harold W. Nations
/s/ Donald D. Niemann Vice President, Secretary April 30, 1998
- ------------------------ and a Director
Donald D. Niemann
/s/ Barbara C. Schanmier Director April 30, 1998
- ------------------------
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)
(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) (2)
(c) Amendment to Investment Advisory Agreement dated as of
December 31, 1997 (Euro Select Portfolio) (2)
(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. (2)
(9.1) (a) Transfer Agency Agreement with Sunstone Investor
Services, LLC dated as of November 1, 1995 (3)
(b) Amendment to Transfer Agency Agreement with Sunstone
Investor Services, LLC dated November 13, 1997 (2)
(9.2) Amended and Restated Administration and Fund Accounting
Agreement with Sunstone Financial Group, Inc. dated as of
November 13, 1997 (2)
(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)(2)
(11) Consent of Coopers & Lybrand L.L.P.
(12) None
<PAGE>
(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 (4)
____________
(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 December 23,
1997.
(3) Incorporated by reference to Registrant's
Registration Statement on Form N-1A as filed with the
Securities and Exchange Commission on April 29, 1996.
(4) Incorporated by reference to Registrant's Annual
N-SAR as filed with the Securities and Exchange
Commission on February 26, 1998.
Exhibit 11
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. 8 to the Registration
Statement on Form N-1A of the ICAP Funds, Inc. of our
report dated January 23, 1998, on our audits of the
financial statements and financial highlights of the
ICAP Discretionary Equity Portfolio and the ICAP Equity
Portfolio, each a series of the ICAP Funds, Inc., which
report is included in the Annual Report for the year
ended December 31, 1997, 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
April 27, 1998
