(LOGO)
ICAP
Annual
Report
December 31, 1997
ICAP Funds
Discretionary
Equity
Portfolio
Equity
Portfolio
<PAGE>
Table of Contents
page
Letter to Shareholders 1
Investment Highlights 6
Schedules of Investments
Discretionary Equity Portfolio 8
Equity Portfolio 12
Statements of Assets and Liabilities 16
Statements of Operations 17
Statements of Changes in Net Assets
Discretionary Equity Portfolio 18
Equity Portfolio 19
Financial Highlights
Discretionary Equity Portfolio 20
Equity Portfolio 21
Notes to Financial Statements 22
<PAGE>
January 1998
Dear Shareholder:
The ICAP Funds finished their third year having rung up a cumulative return of
126.3% (an average annual total return of 31.3%) for the Equity Portfolio, and
118.3% (an average annual total return of 29.7%) for the Discretionary Equity
Portfolio. These returns since inception place both funds well within the top
quartile of the Lipper Growth & Income universe <F1>, and the Morningstar Large
Cap Value universe <F2>. The ICAP Equity Portfolio was one of only a very few to
have beaten the S&P 500 over this three year period. As a result of this strong
performance, Morningstar has awarded both the ICAP Discretionary Equity
Portfolio and the Equity Portfolio a five star rating.
The ICAP Equity Portfolio delivered a 29.1% return in 1997, while the
Discretionary Equity Portfolio returned 28.6%. While these high absolute returns
trailed the S&P 500's 33.4%, both funds had stronger performance than the vast
majority of America's other mutual funds during 1997 <F3>.
To say that 1997 was an unusual year for the markets would be an understatement.
Despite robust U.S. economic conditions, coming in the sixth year of an
expansion, the Fed tightened only once early in the year, even as labor markets
strengthened and wages accelerated. The combination of global slack early in the
year, and the effects of the turmoil in Asia later, kept a lid on reported and
prospective inflation in the U.S. The Fed responded to this mixture of domestic
strength and international weakness by holding short rates steady. As the
reality of a sharp slowdown in Asia sank in, commodity prices broke sharply and
U.S. interest rates dropped to very low levels. The lack of competition from
interest rates allowed equity markets to close near record levels, despite a
sharp contraction earlier in the year, and the largest one-day point decline in
the Dow in its history on October 27.
As we enter the New Year, the U.S. economy seems to be catching its breath.
Despite an inevitable slowdown in exports, and a likely downturn in business
investment, the strong underpinning provided by employment and real incomes
(aided by NEGATIVE import prices) is providing solid support for consumption and
the housing sector. Consequently, while we have reduced our estimate for growth
in the U.S., we still expect a moderate 2.5% advance in real GDP.
Economic conditions in Europe appear to be coming to life after a multi-year
slump (although the strength in the U.K. has paralleled the U.S.). Internal
demand and net exports are offsetting continued sluggish employment on the
continent. We anticipate that a continuation of supportive monetary policy,
weaker currencies and healthy corporate restructuring will allow Europe to show
some ACCELERATION in growth, despite the weakness in the Pacific Rim.
page 1
Asia remains the questionmark in the 1998 economic outlook. Current conditions
are obviously quite weak. Anecdotal reports would seem to indicate that many
countries are actually CONTRACTING, not just growing more slowly. Given the
current lack of leadership in Japan, that HUGE economy cannot act as a
locomotive for the region. In fact, we anticipate Japan's own exports to Asia
will drop, and they are equally unlikely to provide much import support for
their weak neighbors. Moreover, IMF aid for countries from Thailand to Korea may
come with conditions which inhibit domestic demand. Consequently, while growth
will ultimately return to this region, recovery in 1998 will likely take longer
and start from a lower base. American manufacturers are bracing for a
liquidation sale from Asian competitors as they desperately seek dollars to
repay debts. Price competition is likely to be quite severe. Moreover, the
potentially big negative swing in the U.S. trade deficit, coming in an election
year, will add fuel to the anti-trade arguments which were used to defeat
President Clinton's fast track authority in 1997.
U.S. equity markets enter 1998 with valuations at near record levels, but with
the outlook for corporate profits deteriorating sharply. Nominal revenue growth
for corporate America is likely to resemble a recession-like 4-5%. Margins will
face an onslaught of problems ranging from import price competition, to higher
wage costs, to the impact of a stronger dollar. Unfortunately, Wall Street
estimates for individual corporate earnings do not reflect this harsh reality.
Consequently, MANY, MANY companies will experience earnings shortfalls and their
shares will be penalized. The silver lining to disappointing profits will be
that interest rates will remain quite subdued, and that the record amount of
merger and acquisitions activity seen in 1997 is likely to continue into 1998.
Overall, we would expect a choppy year in U.S. equities, with the major averages
seeing single digit positive gains.
We at ICAP have a well defined strategy for coping with this uncertain
environment as we enter 1998:
a) We will continue to focus on corporate restructurings. These companies
are likely to have less inherent risks, (because of prior performance).
If a new, or reinvigorated management has an underutilized FRANCHISE,
they can manage to attain higher earnings, and conceivably a higher P/E,
even in a market that struggles. These companies tend to be UNDEROWNED,
and UNDERFOLLOWED; this gives our analysts an excellent opportunity to
provide creative value added.
b) We will continue to focus on Europe at the margin. Europe is benefiting
from relatively better economic growth, easy monetary policy and
corporate restructuring. Whereas U.S. households have RECORD levels of
exposure to equities, Europeans are just beginning to get the "equity
habit." While valuations are no longer low in Europe, pockets of value do
exist, and earnings momentum will be superior to that in the U.S.
page 2
c) We will continue to look for opportunities that meet our internal
criteria of 15% relative upside (based on our valuation model) AND
stable-to-improving estimate revisions; but we will be looking at the
margin in the MID-CAP sector where valuations are more neglected. There
was a MINDLESS rush into mega-cap stocks in the fourth quarter of 1997 as
part of a flight to dollar based quality and liquidity. This has created
greater absolute and relative value further down the capitalization
spectrum.
d) We will continue to ruthlessly exercise our sell disciplines. True
disappointments in our investment catalysts will cause us to sell a
stock, and we will have to be out ahead of the crowd in order to provide
value added.
By following these tenets we will be sticking to our roots in value investing.
Our goal, as an adviser to large corporate pension plans for the past 28 years,
has been to capture the bulk of the move in up markets, but to judiciously
CONSERVE OUR CLIENT'S CAPITAL during periods of adversity. As we have written
before, bull markets are generally choked off by tight money, not high
valuation, so with interest rates at low absolute levels and global central
banks more likely to ease than tighten, we are more concerned about individual
stock risk than that of the overall market. But given the amazing degree of
complacency among U.S. investors we want to redouble our vigilance, and take
advantage of the strengths of having a TEAM of investment professionals
dedicated to our model portfolio. Our six senior investment professionals have
an average of 20 years experience and have weathered many storms. This team is
backed up by another five junior analysts (who are being indoctrinated in our
philosophy and process), as well as superb trading operations. This group will
be acting as ONE to manage the ICAP Funds in 1998.
In closing, I would like to add that on January 1, 1998 ICAP launched two new
Portfolios: the ICAP Select Equity Portfolio and the ICAP Euro Select Equity
Portfolio. These Portfolios use our existing expertise and are natural product
extensions. The ICAP Select Equity Portfolio is similar to the existing
portfolios, but is "concentrated," investing in a relatively limited number of
companies. The ICAP Euro Select Equity Portfolio is also "concentrated" and
builds off our expertise to find good values in large multinational firms
primarily in Europe. If you would like further information, please call the ICAP
Funds at 1-888-221-ICAP.
Thank you for your continuing support of the ICAP Funds.
Very truly yours,
/S/ Robert H. Lyon
Robert H. Lyon
President
page 3
P.S. Having started my career in the heyday of the "nifty-fifty," or "one-
decision" investing (circa 1972-73), I have recently been struck by a major case
of deja vu. Whether as a result of index funds, global investors seeking dollar-
based predictability, or some other cosmic force, the mega-cap U.S. stocks have
reached valuation levels that are out of sync with their growth rates,
especially considering that many of these firms are multinationals whose
earnings will be penalized by the continued strength of the U.S. dollar. For
reference I have enclosed a list of selected stocks from that former period of
euphoria - the obvious point is that ideal conditions can change, and that
DESPITE HAVING SUBSTANTIAL EARNINGS GROWTH, P/E CONTRACTION CAN LEAD TO RETURNS
WHICH ARE WELL BELOW THOSE PROJECTED BY BUYERS AT THE TIME OF PURCHASE. We at
ICAP will continue to focus on the unloved, underfollowed and underowned
companies where valuations are still attractive.
1972 - 1982
10 Year Change
10 Year CAGR*
EPS P/E Stock Price
------ ------ -----------
American Home Products 232.3% (66.9)% 0.96%
Avon Products 27.3% (84.6)% (15.05)%
Colgate-Palmolive Co. 134.6% (73.3)% (4.58)%
Bristol Myers Squibb 298.4% (51.1)% 6.90%
International Business Machines 235.0% (64.3)% 1.82%
IFF 191.5% (78.2)% (4.43)%
Coca-Cola Co. 143.2% (71.2)% (3.50)%
Merck & Co. 181.9% (66.3)% (0.52)%
Pepsico Inc. 136.0% (47.8)% 2.10%
Procter & Gamble Co. 183.0% (62.5)% 0.59%
Polaroid Corp. (43.9)% (64.3)% (14.86)%
Texas Instruments Inc. 181.1% (47.3)% 4.00%
Xerox Corp. 37.3% (81.8)% 12.93%
Average 149.1% (66.1)% (3.0)%
* Compound Annualized Growth Rate
Source: FactSet Data Systems
<F1> Source: Lipper Analytical Services.
<F2> Source: Morningstar, Inc.
<F3> Past performance is no guarantee of future results. In the absence of
existing fee waivers, total returns would be reduced. Investment return
and principal value of an investment will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
page 4
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page 5
Investment Highlights
ICAP Discretionary Equity Portfolio
Total Return
Portfolio Total Return
FOR THE YEAR ENDED 12/31/97
- - ---------------------------
ONE YEAR 28.6%
AVERAGE ANNUAL
SINCE COMMENCEMENT 29.7%
ICAP
DISCRETIONARY S&P 500
EQUITY STOCK
PORTFOLIO INDEX
--------- -----
12/31/94 100,000.00 100,000.00
3/31/95 108,812.40 109,736.55
6/30/95 122,344.82 120,212.78
9/30/95 131,897.92 129,765.13
12/31/95 136,211.67 137,577.90
3/31/96 145,950.46 144,962.49
6/30/96 148,276.61 151,467.82
9/30/96 153,348.78 156,149.13
12/31/96 169,759.05 169,165.68
3/31/97 176,494.69 173,701.05
6/30/97 204,979.02 204,025.67
9/30/97 222,731.16 219,308.86
12/31/97 218,312.74 225,604.93
This chart assumes an initial gross investment of $100,000 made on 12/31/94.
Returns shown include the reinvestment of all dividends. Past performance is not
predictive of future results. Investment return and principal value will
fluctuate so that shares, when redeemed, may be worth more or less than the
original cost. In the absence of existing fee waivers, total return would be
reduced.
The S&P 500 Stock Index is an unmanaged index of 500 selected common stocks,
most of which are listed on the New York Stock Exchange. The Index is heavily
weighted toward stocks with large market capitalizations and represents
approximately two-thirds of the total market value of all domestic common
stocks. A direct investment in the S&P 500 Stock Index is not possible.
Sector Breakdown
I-CAP DISCRETIONARY S&P 500
EQUITY PORTFOLIO STOCK INDEX
Basic Industries 7.714% 4.958%
Capital Equipment-Technology 10.030% 12.862%
Capital Spending 11.950% 7.994%
Consumer Durables 3.950% 2.756%
Consumer Services 12.880% 5.781%
Consumer Staples 13.670% 12.148%
Energy 7.470% 9.071%
Financial 10.690% 16.966%
Healthcare 13.027% 11.354%
Retail 2.000% 5.146%
Transportation 6.620% 1.275%
Utilities 0.000% 9.689%
page 6
Investment Highlights
ICAP Equity Portfolio
Total Return
Portfolio Total Return
FOR THE YEAR ENDED 12/31/97
- - ---------------------------
ONE YEAR 29.1%
AVERAGE ANNUAL
SINCE COMMENCEMENT 31.3%
ICAP S&P 500
EQUITY STOCK
PORTFOLIO INDEX
---------- ----------
12/31/94 100,000.00 100,000.00
3/31/95 109,246.39 109,736.55
6/30/95 123,850.87 120,212.78
9/30/95 134,727.64 129,765.13
12/31/95 138,853.00 137,577.90
3/31/96 150,466.83 144,962.49
6/30/96 152,460.84 151,467.82
9/30/96 157,784.04 156,149.13
12/31/96 175,313.64 169,165.68
3/31/97 182,012.06 173,701.05
6/30/97 213,374.41 204,025.67
9/30/97 231,727.14 219,308.86
12/31/97 226,302.78 225,604.93
This chart assumes an initial gross investment of $100,000 made on 12/31/94.
Returns shown include the reinvestment of all dividends. Past performance is not
predictive of future results. Investment return and principal value will
fluctuate so that shares, when redeemed, may be worth more or less than the
original cost. In the absence of existing fee waivers, total return would be
reduced.
The S&P 500 Stock Index is an unmanaged index of 500 selected common stocks,
most of which are listed on the New York Stock Exchange. The Index is heavily
weighted toward stocks with large market capitalizations and represents
approximately two-thirds of the total market value of all domestic common
stocks. A direct investment in the S&P 500 Stock Index is not possible.
Sector Breakdown
I-CAP S&P 500
EQUITY STOCK INDEX
Basic Industries 7.206% 4.958%
Capital Equipment-Technology 10.510% 12.862%
Capital Spending 12.130% 7.994%
Consumer Durables 3.800% 2.756%
Consumer Services 12.590% 5.781%
Consumer Staples 13.370% 12.148%
Energy 7.140% 9.071%
Financial 11.520% 16.966%
Healthcare 13.044% 11.354%
Retail 2.010% 5.146%
Transportation 6.680% 1.275%
Utilities 0.000% 9.689%
page 7
Discretionary Equity Portfolio
Schedule of Investments
December 31, 1997
--------------------------------------------------------------------
NUMBER
OF SHARES VALUE
--------------------------------------------------------------------
COMMON STOCKS 89.81%
AUTOS, TRUCKS 3.67%
95,100 General Motors Corp. $ 5,765,437
-----------
BANKS 9.94%
36,600 Banc One Corp. 1,987,837
36,500 Citicorp 4,614,969
86,200 NationsBank Corp. 5,242,037
11,100 Wells Fargo & Co. 3,767,756
-----------
15,612,599
-----------
CHEMICALS 6.17%
31,500 Akzo Nobel ADR 2,736,562
93,584 Du Pont (E.I.) de Nemours & Co. 5,620,889
40,700 IMC Global Inc. 1,332,925
-----------
9,690,376
-----------
COMMUNICATIONS 2.20%
60,700 Motorola, Inc. 3,463,694
-----------
COMPUTER SYSTEMS 2.53%
38,034 International Business Machines Corp. 3,976,930
-----------
DEFENSE 8.18%
72,400 Boeing Co. 3,543,075
41,650 Northrop Grumman Corp. 4,789,750
6,065 Raytheon Co. - Class A 299,057
83,600 Raytheon Co. - Class B 4,221,800
-----------
12,853,682
-----------
DRUGS, SUPPLIES 8.55%
67,344 American Home Products Corp. 5,151,816
5,700 Baxter International, Inc. 287,494
105,700 Hoechst AG - ADR 3,706,106
96,756 Rhone-Poulenc SA - ADR 4,293,548
-----------
13,438,964
-----------
ELECTRONICS 3.58%
30,800 LSI Logic Corp.* 608,300
83,000 Philips Electronics N.V. 5,021,500
-----------
5,629,800
-----------
See notes to financial statements.
page 8
Discretionary Equity Portfolio
Schedule of Investments (cont'd)
December 31, 1997
--------------------------------------------------------------------
NUMBER
OF SHARES VALUE
--------------------------------------------------------------------
ENTERTAINMENT 1.81%
145,300 Host Marriott Corp.* $ 2,851,513
------------
FOOD, TOBACCO & BEVERAGE 10.91%
109,300 Archer Daniels Midland Co. 2,370,444
91,650 Diageo plc - ADR 3,471,244
51,600 Loews Corp. 5,476,050
128,600 Philip Morris Cos., Inc. 5,827,187
------------
17,144,925
------------
FOREST & PAPER, CONTAINERS 0.52%
26,900 Boise Cascade Corp. 813,725
------------
HEALTHCARE - MISCELLANEOUS 1.64%
77,750 Tenet Healthcare Corp.* 2,575,469
------------
MEDIA 5.14%
122,350 Dun and Bradstreet Corp. 3,785,203
148,550 U S WEST Media Group* 4,289,381
------------
8,074,584
------------
METALS 2.23%
58,350 Reynolds Metals Co. 3,501,000
------------
NATURAL GAS 1.39%
89,900 Union Pacific Resources Group 2,180,075
------------
NON-DEFENSE CAPITAL SPENDING 2.93%
27,000 B.F. Goodrich Company 1,118,812
57,600 Case Corp. 3,481,200
------------
4,600,012
------------
OIL 5.56%
35,700 Ashland Inc. 1,916,644
42,650 Elf Aquitaine - ADR 2,500,356
111,250 Unocal Corp. 4,317,891
------------
8,734,891
------------
RETAIL 1.86%
67,692 Federated Department Stores, Inc.* 2,914,987
------------
SERVICES - MISCELLANEOUS 2.04%
139,290 Peninsular & Oriental - ADR 3,203,670
------------
See notes to financial statements.
page 9
Discretionary Equity Portfolio
Schedule of Investments (cont'd)
December 31, 1997
--------------------------------------------------------------------
NUMBER
OF SHARES VALUE
--------------------------------------------------------------------
SOFTWARE & SERVICES 1.01%
54,100 First Data Corp. $ 1,582,425
------------
TOYS 1.80%
90,000 Hasbro, Inc. 2,835,000
------------
TRANSPORTATION 6.15%
17,400 AMR Corp.* 2,235,900
36,484 Burlington Northern Santa Fe Corp. 3,390,732
148,300 Canadian Pacific, Ltd. 4,041,175
------------
9,667,807
------------
TOTAL COMMON STOCKS
(cost $122,850,020) 141,111,565
------------
PREFERRED STOCK 2.98%
MEDIA 2.98%
235,900 News Corp. Ltd. ADR 4,688,513
------------
TOTAL PREFERRED STOCK
(cost $4,201,893) 4,688,513
------------
See notes to financial statements.
page 10
Discretionary Equity Portfolio
Schedule of Investments (cont'd)
December 31, 1997
--------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
--------------------------------------------------------------------
SHORT-TERM INVESTMENTS 7.42%
DISCOUNTED COMMERCIAL PAPER 4.57%
$1,100,000 Procter & Gamble Co. (The), 5.55%, 1/6/98 $ 1,099,207
6,100,000 Lucent Technologies Inc., 5.55%, 1/16/98 6,086,650
------------
7,185,857
------------
MONEY MARKET 2.85%
4,481,062 UMB Bank Money Market Fiduciary 4,481,062
------------
TOTAL SHORT-TERM INVESTMENTS
(cost $11,666,919) 11,666,919
------------
TOTAL INVESTMENTS 100.21%
(cost $138,718,832) 157,466,997
Liabilities, less Cash
and Other Assets (0.21)% (330,321)
------------
NET ASSETS 100.00% $157,136,676
============
See notes to financial statements.
* Non-income producing
page 11
Equity Portfolio
Schedule of Investments
December 31, 1997
--------------------------------------------------------------------
NUMBER
OF SHARES VALUE
--------------------------------------------------------------------
COMMON STOCKS 94.97%
AUTOS, TRUCKS 3.74%
229,050 General Motors Corp. $13,886,156
-----------
BANKS 11.35%
102,550 Banc One Corp. 5,569,747
89,700 Citicorp 11,341,444
208,550 NationsBank Corp. 12,682,447
37,000 Wells Fargo & Co. 12,559,188
-----------
42,152,826
-----------
CHEMICALS 6.27%
82,250 Akzo Nobel ADR 7,145,469
204,116 Du Pont (E.I.) de Nemours & Co. 12,259,717
119,100 IMC Global Inc. 3,900,525
-----------
23,305,711
-----------
COMMUNICATIONS 2.32%
150,900 Motorola, Inc. 8,610,731
-----------
COMPUTER SYSTEMS 2.72%
96,766 International Business Machines Corp. 10,118,095
-----------
DEFENSE 8.76%
192,100 Boeing Co. 9,400,894
99,500 Northrop Grumman Corp. 11,442,500
14,607 Raytheon Co. - Class A 720,284
217,150 Raytheon Co. - Class B 10,966,075
-----------
32,529,753
-----------
DRUGS, SUPPLIES 8.97%
171,906 American Home Products Corp. 13,150,809
14,000 Baxter International, Inc. 706,125
266,100 Hoechst AG - ADR 9,330,131
228,069 Rhone-Poulenc SA -- ADR 10,120,562
-----------
33,307,627
-----------
ELECTRONICS 4.23%
93,400 LSI Logic Corp.* 1,844,650
229,280 Philips Electronics N.V. 13,871,440
-----------
15,716,090
-----------
See notes to financial statements.
page 12
Equity Portfolio
Schedule of Investments (cont'd)
December 31, 1997
--------------------------------------------------------------------
NUMBER
OF SHARES VALUE
--------------------------------------------------------------------
ENTERTAINMENT 1.85%
350,450 Host Marriott Corp.* $ 6,877,581
------------
FOOD, TOBACCO & BEVERAGE 11.43%
286,100 Archer Daniels Midland Co. 6,204,794
229,400 Diageo plc - ADR 8,688,525
122,500 Loews Corp. 13,000,312
321,100 Philip Morris Cos., Inc. 14,549,844
------------
42,443,475
------------
FOREST & PAPER, CONTAINERS 0.58%
71,100 Boise Cascade Corp. 2,150,775
------------
HEALTHCARE - MISCELLANEOUS 1.77%
198,200 Tenet Healthcare Corp.* 6,565,375
------------
MEDIA 5.01%
270,900 Dun and Bradstreet Corp. 8,380,969
354,750 U S WEST Media Group* 10,243,406
------------
18,624,375
------------
METALS 2.17%
134,250 Reynolds Metals Co. 8,055,000
------------
NATURAL GAS 1.48%
226,300 Union Pacific Resources Group 5,487,775
------------
NON-DEFENSE CAPITAL SPENDING 3.19%
315,000 AGCO Corp. 9,213,750
63,600 B.F. Goodrich Company 2,635,425
------------
11,849,175
------------
OIL 5.56%
80,600 Ashland Inc. 4,327,212
107,070 Elf Aquitaine - ADR 6,276,979
258,650 Unocal Corp. 10,038,853
------------
20,643,044
------------
RETAIL 1.98%
170,958 Federated Department Stores, Inc.* 7,361,879
------------
See notes to financial statements.
page 13
Equity Portfolio
Schedule of Investments (cont'd)
December 31, 1997
--------------------------------------------------------------------
NUMBER
OF SHARES VALUE
--------------------------------------------------------------------
SERVICES - MISCELLANEOUS 2.19%
354,293 Peninsular & Oriental - ADR $ 8,148,739
-----------
SOFTWARE & SERVICES 1.07%
135,950 First Data Corp. 3,976,537
-----------
TOYS 1.75%
205,925 Hasbro, Inc. 6,486,637
-----------
TRANSPORTATION 6.58%
43,750 AMR Corp.* 5,621,875
92,766 Burlington Northern Santa Fe Corp. 8,621,440
373,900 Canadian Pacific, Ltd. 10,188,775
-----------
24,432,090
-----------
TOTAL COMMON STOCKS
(cost $320,127,190) 352,729,446
-----------
PREFERRED STOCK 3.35%
MEDIA 3.35%
625,700 News Corp. Ltd. ADR 12,435,788
-----------
TOTAL PREFERRED STOCK
(cost $11,227,535) 12,435,788
-----------
See notes to financial statements.
page 14
Equity Portfolio
Schedule of Investments (cont'd)
December 31, 1997
--------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
--------------------------------------------------------------------
SHORT-TERM INVESTMENT 1.90%
MONEY MARKET 1.90%
$7,040,464 UMB Bank Money Market Fiduciary $ 7,040,464
------------
TOTAL SHORT-TERM INVESTMENT
(cost $7,040,464) 7,040,464
------------
TOTAL INVESTMENTS 100.22%
(cost $338,395,189) 372,205,698
------------
Liabilities, less Cash
and Other Assets (0.22)% (803,720)
------------
NET ASSETS 100.00% $371,401,978
============
See notes to financial statements.
* Non-income producing.
page 15
ICAP Funds, Inc.
Statements of Assets and Liabilities
December 31, 1997
- - -----------------------------------------------------------------------------
DISCRETIONARY
EQUITY EQUITY
PORTFOLIO PORTFOLIO
- - -----------------------------------------------------------------------------
ASSETS:
Investments, at value
(cost $138,718,832 and $338,395,189,
respectively) $157,466,997 $372,205,698
Dividends and interest receivable 129,477 356,072
Deferred organization costs 14,520 14,519
Prepaid blue sky fees 12,468 12,028
------------ ------------
Total Assets 157,623,462 372,588,317
------------ ------------
LIABILITIES:
Payable for securities purchased 357,966 888,378
Accrued investment advisory fee 78,752 184,588
Accrued expenses 50,068 113,373
------------ ------------
Total Liabilities 486,786 1,186,339
------------ ------------
NET ASSETS $157,136,676 $371,401,978
============ ============
NET ASSETS CONSIST OF:
Capital stock $ 51,792 $ 105,746
Paid-in-capital in excess of par 138,896,579 337,889,339
Undistributed net investment income 1,241 4,372
Distributions in excess of book net realized
gain on investments (561,101) (407,988)
Net unrealized appreciation on investments 18,748,165 33,810,509
------------ ------------
NET ASSETS $157,136,676 $371,401,978
============ ============
CAPITAL STOCK, $0.01 PAR VALUE
Authorized 100,000,000 100,000,000
Issued and outstanding 5,179,158 10,574,593
NET ASSET VALUE, REDEMPTION PRICE AND
OFFERING PRICE PER SHARE $30.34 $35.12
====== ======
See notes to financial statements.
page 16
ICAP Funds, Inc.
Statements of Operations
For the Year Ended December 31, 1997
- - -----------------------------------------------------------------------------
DISCRETIONARY
EQUITY EQUITY
PORTFOLIO PORTFOLIO
- - -----------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $2,489,041<F1> $4,533,535<F2>
Interest 651,263 432,696
---------- ---------
3,140,304 4,966,231
---------- ---------
EXPENSES:
Investment advisory fees 1,157,843 2,141,357
Fund administration and accounting fees 159,865 221,335
Federal and state registration fees 41,689 89,996
Legal fees 24,746 24,739
Directors' fees and expenses 22,619 22,603
Custody fees 22,462 34,581
Shareholder servicing 19,860 24,187
Audit fees 13,978 13,971
Amortization of organization costs 7,256 7,256
Reports to shareholders 7,252 7,459
Other 5,565 5,333
---------- ---------
Total expenses before waiver 1,483,135 2,592,817
Waiver of expenses by adviser (325,292) (451,460)
---------- ---------
Net expenses 1,157,843 2,141,357
---------- ---------
NET INVESTMENT INCOME 1,982,461 2,824,874
---------- ---------
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS:
Net realized gain on investments 29,520,220 42,465,810
Change in unrealized appreciation
on investments 3,099,781 14,971,397
---------- ----------
Net gain on investments 32,620,001 57,437,207
---------- ----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $34,602,462 $60,262,081
=========== ===========
<F1> Net of $57,602 in foreign withholding taxes.
<F2> Net of $108,945 in foreign withholding taxes.
See notes to financial statements.
page 17
Discretionary Equity Portfolio
Statements of Changes in Net Assets
- - -----------------------------------------------------------------------------
YEAR YEAR
ENDED ENDED
DEC. 31, 1997 DEC. 31, 1996
- - -----------------------------------------------------------------------------
OPERATIONS:
Net investment income $ 1,982,461 $ 1,208,695
Net realized gain on investments 29,520,220 6,299,055
Change in unrealized appreciation
on investments 3,099,781 13,371,227
------------ -----------
Net increase in net assets resulting
from operations 34,602,462 20,878,977
------------ -----------
DISTRIBUTIONS PAID FROM:
Net investment income (2,016,514) (1,180,843)
In excess of book net investment income (6,886) --
Net realized gain on investments (29,508,774) (6,299,055)
In excess of book net realized gain
on investments -- (554,132)
------------ -----------
Net decrease in net assets resulting from
distributions paid (31,532,174) (8,034,030)
------------ -----------
CAPITAL SHARE TRANSACTIONS:
Shares sold 27,202,442 60,577,180
Shares issued to holders in
reinvestment of distributions 30,736,909 7,940,201
Shares redeemed (14,152,790) (8,444,934)
------------ -----------
Net increase in net assets resulting from
capital share transactions 43,786,561 60,072,447
------------ -----------
TOTAL INCREASE IN NET ASSETS 46,856,849 72,917,394
NET ASSETS:
Beginning of year 110,279,827 37,362,433
------------ -----------
End of year $157,136,676 $110,279,827
============ ===========
See notes to financial statements.
page 18
Equity Portfolio
Statements of Changes in Net Assets
- - -----------------------------------------------------------------------------
YEAR YEAR
ENDED ENDED
DEC. 31, 1997 DEC. 31, 1996
- - -----------------------------------------------------------------------------
OPERATIONS:
Net investment income $ 2,824,874 $ 1,035,190
Net realized gain on investments 42,465,810 5,779,806
Change in unrealized appreciation
on investments 14,971,397 15,258,719
----------- -----------
Net increase in net assets resulting
from operations 60,262,081 22,073,715
----------- -----------
DISTRIBUTIONS PAID FROM:
Net investment income (2,861,245) (998,870)
In excess of book net investment income (3,755) --
Net realized gain on investments (42,465,810) (5,779,806)
In excess of book net realized gain
on investments (68,649) (325,054)
----------- -----------
Net decrease in net assets resulting from
distributions paid (45,399,459) (7,103,730)
----------- -----------
CAPITAL SHARE TRANSACTIONS:
Shares sold 191,752,572 101,599,973
Shares issued to holders in
reinvestment of distributions 44,264,988 6,875,245
Shares redeemed (28,602,814) (21,108,211)
----------- -----------
Net increase in net assets resulting from
capital share transactions 207,414,746 87,367,007
----------- -----------
TOTAL INCREASE IN NET ASSETS 222,277,368 102,336,992
NET ASSETS:
Beginning of year 149,124,610 46,787,618
----------- -----------
End of year $371,401,978 $149,124,610
=========== ===========
See notes to financial statements.
page 19
Discretionary Equity Portfolio
Financial Highlights
- - -----------------------------------------------------------------------------
YEAR YEAR YEAR
ENDED ENDED ENDED
(For a share outstanding DEC. 31, DEC. 31, DEC. 31,
throughout the year) 1997 1996 1995 <F1>
- - -----------------------------------------------------------------------------
Net asset value, beginning of year $29.55 $25.42 $20.00
Income from investment operations:
Net investment income 0.48 0.36 0.31
Net realized and unrealized gain on
investments 7.80 6.09 6.70
------ ------ ------
Total income from investment
operations 8.28 6.45 7.01
------ ------ ------
Less distributions:
From net investment income (0.48) (0.36) (0.31)
In excess of book net investment
income (0.01) -- --
From net realized gain on
investments (7.00) (1.80) (1.27)
In excess of book net realized gain
on investments -- (0.16) (0.01)
------ ------ ------
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
(in thousands) $157,137 $110,280 $37,362
Ratio of expenses to average
net assets <F2> 0.80% 0.80% 0.80%
Ratio of net investment income to
average net assets <F2> 1.37% 1.35% 1.71%
Portfolio turnover rate 131% 138% 102%
Average commission rate paid on
portfolio investment
transactions $0.0354 $0.0356 N/A
<F1> Commencement of operations January 1, 1995.
<F2> Net of waivers by the Adviser. 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, December 31,
1996 and December 31, 1995, respectively.
See notes to financial statements.
page 20
Equity Portfolio
Financial Highlights
- - -------------------------------------------------------------------------------
YEAR YEAR YEAR
ENDED ENDED ENDED
(For a share outstanding DEC. 31, DEC. 31, DEC. 31,
throughout the year) 1997 1996 1995 <F1>
- - -------------------------------------------------------------------------------
Net asset value, beginning of year $31.16 $26.03 $20.00
Income from investment operations:
Net investment income 0.37 0.31 0.28
Net realized and unrealized gain
on investments 8.57 6.49 7.45
------ ------ ------
Total income from investment
operations 8.94 6.80 7.73
------ ------ ------
Less distributions:
From net investment income (0.37) (0.30) (0.28)
In excess of book net
investment income (0.01) -- --
From net realized gain on investments (4.59) (1.30) (1.41)
In excess of book net realized gain on
investments (0.01) (0.07) (0.01)
------ ------ ------
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
(in thousands) $371,402 $149,125 $46,788
Ratio of expenses to average
net assets <F2> 0.80% 0.80% 0.80%
Ratio of net investment income to
average net assets <F2> 1.06% 1.15% 1.49%
Portfolio turnover rate 121% 125% 105%
Average commission rate paid on
portfolio investment transactions $0.0330 $0.0365 N/A
<F1> Commencement of operations January 1, 1995.
<F2> Net of waivers by the Adviser. 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, December 31,
1996 and December 31, 1995, respectively.
See notes to financial statements.
page 21
Notes to Financial Statements
December 31, 1997
1. Organization
ICAP Funds, Inc. ("ICAP") was incorporated on November 1, 1994 under the laws of
the State of Maryland and is registered as an open-end management investment
company under the Invest-ment Company Act of 1940. Both the Discretionary Equity
and EquityPortfolios (the "Portfolios") are diversified portfolios of ICAP.
Institutional Capital Corporation is the investment adviser (the "Adviser") to
the Portfolios. Both Portfolios commenced operations on January 1, 1995.
2. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by ICAP in the preparation of its financial statements. These policies
are in conformity with generally accepted accounting principles.
a) Investment Valuation - Common stocks and other equity-type securities are
valued at the last sales price on the national securities exchange or Nasdaq on
which such securities are primarily traded; however, securities traded on a
national securities exchange or Nasdaq for which there were no transactions on a
given day or securities not listed on an exchange or Nasdaq are valued at the
most recent bid prices. Debt securities are valued by a pricing service that
utilizes electronic data processing techniques to determine values for normal
institutional-sized trading units of debt securities without regard to the
existence of sale or bid prices when such values are believed to more accurately
reflect the fair value of such securities; otherwise, actual sale or bid prices
are used. Any securities or other assets for which market quotations are not
readily available are valued at fair value as determined in good faith by the
Board of Directors. Debt securities having remaining maturities of 60 days or
less when purchased are valued by the amortized cost method when the Board of
Directors determines that the fair value of such securities is their amortized
cost. Under this method of valuation, a security is initially valued at its
acquisition cost, and thereafter, amortization of any discount or premium is
recognized daily.
b) Federal Income and Excise Taxes - It is each Portfolio's policy to meet the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all investment company net taxable
income and net capital gains to shareholders in a manner which results in no tax
cost to the Portfolio. Therefore, no federal income or excise tax provision is
required.
c) Distributions to Shareholders - Dividends from net investment income are
declared and paid quarterly. Dividends differ from book net investment income
due to the nondeductible tax treatment of items such as organization costs.
Distributions of net realized capital gains, if any, will be declared at least
annually. Distributions to shareholders are recorded on the ex-dividend date.
The character of distributions made during the year from net investment income
or net realized gain may differ from the characterization for federal income tax
purposes due to differences in the recognition of income, expense and gain items
for financial statement and tax pur-poses. Where appropriate, reclassifications
between net asset accounts are made for such differences that are permanent in
nature. Accordingly, at December 31, 1997, reclassifications were recorded from
undistributed net investment income to reduce paid-in capital by $4,063 for both
the Discretionary Equity and Equity Portfolios.
page 22
d) Short-Term Investments - The Portfolios maintain uninvested cash in a bank
overnight investment vehicle at their custodian. This may present credit risk to
the extent the custodian fails to perform in accordance with the custody
agreement. The creditworthiness of the custodian is monitored and this
investment is considered to present minimal credit risk by the Portfolios'
Adviser.
e) Other - Investment transactions are accounted for on the trade date plus one.
The Portfolios determine the gain or loss realized from the investment
transactions by comparing the identified original cost of the security lot sold
with the net sales proceeds. Dividend income is recognized on the ex-dividend
date and interest income is recognized on an accrual basis. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
increases and decreases in net assets from operations during the reporting
period. Actual results could differ from those estimates.
3. Capital Share Transactions
Transactions in shares of the Portfolios were as follows:
Discretionary
Equity Equity
Portfolio Portfolio
------------------- -----------------------
Year Year Year Year
Ended Ended Ended Ended
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1997 1996 1997 1996
-------- -------- -------- --------
Shares sold 840,715 2,292,674 5,274,966 3,514,078
Shares issued to holders
in reinvestment of
distributions 1,026,668 271,211 1,282,704 222,754
Shares redeemed (419,974) (301,710) (768,627) (748,775)
--------- --------- --------- ---------
Net increase 1,447,409 2,262,175 5,789,043 2,988,057
========= ========= ========= =========
page 23
4. Investment Transactions
The aggregate purchases and sales of securities, excluding short-term
investments and U.S. government obligations, for the Portfolios for the year
ended December 31, 1997 are summarized below:
Discretionary
Equity Equity
Portfolio Portfolio
------------- -----------
Purchases $179,235,857 $476,241,571
Sales $171,267,939 $310,349,457
There were no purchases or sales of U.S. government obligations. At December
31, 1997, gross unrealized appreciation and depreciation of investments, based
on cost for federal income tax purposes of $139,280,498 and $338,850,888 for the
Discretionary Equity and Equity Portfolios, respectively, were as follows:
Discretionary
Equity Equity
Portfolio Portfolio
------------- -----------
Unrealized appreciation $21,604,146 $43,601,300
Unrealized depreciation (3,417,647) (10,246,490)
----------- -----------
Net unrealized appreciation
on investments $18,186,499 $33,354,810
=========== ===========
For the year ended December 31, 1997, 86% and 100% of dividends paid from net
investment income, excluding short-term capital gains, qualifies for the
dividends received deduction available to corporate shareholders of the
Discretionary Equity and Equity Portfolios, respectively. For the year ended
December 31, 1997, the Discretionary Equity and Equity Portfolios designated
$6,543,011 and $7,167,921 as 28% rate capital gain distributions and $5,214,182
and $5,858,000 as 20% rate capital gain distributions, respectively.
5. Investment Advisory Agreement
The Portfolios have an agreement with the Adviser, with whom certain officers
and directors of ICAP are affiliated, to furnish investment advisory services to
the Portfolios. Under the terms of this agreement, the Portfolios will pay the
Adviser a monthly fee at the annual rate of 0.80% of average net assets. If the
aggregate annual operating expenses (excluding interest, taxes, brokerage
commissions and other costs incurred in connection with the purchase or sale of
portfolio securities, and extraordinary items) exceed 0.80%, the Adviser has
agreed to voluntarily reimburse the Portfolios for the amount of such excess.
page 24
Report of Independent Accountants
To the Shareholders and Board of Directors of the ICAP
Funds, Inc.
We have audited the accompanying statements of assets and
liabilities of the ICAP Funds, Inc. (the "Fund")
(comprising, respectively, the Discretionary Equity and the
Equity Portfolios), including the schedules of investments
in securities, as of December 31, 1997, and the related
statements of operations for the year then ended, the
statements of changes in net assets for each of the two
years in the period then ended, and the financial highlights
for each of the periods indicated. These financial
statements and financial highlights are the responsibility
of the Fund's management. Our responsibility is to express
an opinion on these financial statements and financial
highlights based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable assurance
about whether the financial statements and financial
highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of
December 31, 1997 by correspondence with the custodian and
brokers. An audit also includes assessing the accounting
principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements and financial
highlights referred to above present fairly, in all material
respects, the financial position of each of the respective
portfolios constituting ICAP Funds, Inc., as of December 31,
1997, the results of their operations for the year then
ended, the changes in their net assets for each of the two
years in the period then ended, and the financial highlights
for each of the periods indicated in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Milwaukee, Wisconsin
January 23, 1998
page 25
Directors
Pamela H. Conroy
Senior Vice President, Secretary and Director,
Institutional Capital Corporation
Dr. James A. Gentry
Professor of Finance, University of Illinois
Joseph A. Hays
Retired Vice President/Corporate Relations,
Tribune Company
Robert H. Lyon
President, Chief Investment Officer and Director,
Institutional Capital Corporation
Gary S. Maurer
Executive Vice President and Director,
Institutional Capital Corporation
Harold W. Nations
Partner, Holleb & Coff
Donald D. Niemann
Executive Vice President and Director,
Institutional Capital Corporation
Barbara C. Schanmier
Senior Vice President and Director,
Institutional Capital Corporation
Officers
Robert H. Lyon
President
Pamela H. Conroy
Vice President and Treasurer
Donald D. Niemann
Vice President and Secretary
Investment Adviser
Institutional Capital Corporation
225 West Wacker Drive, Suite 2400
Chicago, Illinois 60606-1229
Custodian
UMB Bank, n.a.
928 Grand Avenue
Kansas City, Missouri 64141-6226
Dividend-Disbursing and Transfer Agent
Sunstone Investor Services, LLC
P.O. Box 2160
Milwaukee, Wisconsin 53201-2160
Administrator and
Fund Accountant
Sunstone Financial Group, Inc.
207 East Buffalo Street, Suite 400
Milwaukee, Wisconsin 53202-5712
Auditors
Coopers & Lybrand L.L.P.
411 East Wisconsin Avenue
Milwaukee, Wisconsin 53202-9905
Legal Counsel
Godfrey & Kahn, S.C.
780 North Water Street
Milwaukee, Wisconsin 53202-3590
This financial statement is submitted for the general information of the
shareholders of the ICAP Funds. It is not authorized for distribution to
prospective investors unless preceded or
accompanied by an effective prospectus.
<PAGE>
ICAP Funds, Inc. 225 West Wacker Drive Suite 2400 Chicago, IL 60606
