As filed with the Securities and Exchange Commission on February 26, 1999
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. 9 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 10
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
[ ] on (date) pursuant to paragraph (b) of
Rule 485
[ ] 60 days after filing pursuant to
paragraph (a)(1) of Rule 485
[X] on April 30, 1999 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
<PAGE>
PROSPECTUS
[ICAP Logo]
April 30, 1999
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
Telephone: 888-221-ICAP (4227)
Website: www.icapfunds.com
Like all mutual fund shares, the Securities and
Exchange Commission ("SEC") has not approved or
disapproved of these securities or passed upon the
adequacy of this Prospectus. Any representation to the
contrary is a criminal offense.
___________________
<PAGE>
TABLE OF CONTENTS
Page
THE PORTFOLIOS 3
Investment Objectives 3
Investment Selection Process 3
Types of Investments, Portfolio Policies, and
Risk Factors 4
Who Should Invest 5
Performance History 6
Prior Performance of the Adviser 8
Fees and Expenses 10
Financial Highlights 11
MANAGEMENT OF THE PORTFOLIOS 15
Investment Adviser 15
Investment Team 15
YOUR ACCOUNT 15
How to Contact ICAP 15
Minimum Investments 16
How to Open an Account 16
How to Buy Shares 16
How to Sell Shares 18
Valuation of Portfolio Shares 20
Dividends, Capital Gain Distributions, and Taxes 20
ADDITIONAL INFORMATION 20
<PAGE>
THE PORTFOLIOS
Investment Objectives
Discretionary Equity Portfolio. The investment
objective of the Discretionary Equity Portfolio is to
seek a superior total return with only a moderate
degree of risk. The Discretionary Equity Portfolio
seeks to achieve its investment objective by investing
primarily in U.S. dollar-denominated equity securities
of companies with market capitalizations of at least
$500 million. The Discretionary Equity Portfolio seeks
to achieve a total return greater than the Standard &
Poor's 500 Stock Index (the "S&P 500"). The
Discretionary Equity Portfolio may invest up to 35% of
its total assets in cash and cash equivalents for any
purpose, including pending investment or reinvestment,
and may invest up to 100% of its total assets in such
instruments for temporary defensive purposes when
market conditions warrant. The Discretionary Equity
Portfolio will typically hold between 40 and 45
securities.
Equity Portfolio. The investment objective of the
Equity Portfolio is to seek a superior total return
with only a moderate degree of risk. The Equity
Portfolio seeks to achieve its investment objective by
investing primarily in U.S. dollar-denominated equity
securities of companies with market capitalizations of
at least $500 million. The Equity Portfolio seeks to
achieve a total return greater than the S&P 500. The
Equity Portfolio may invest in cash and cash
equivalents to meet anticipated redemption requests, to
pay expenses and pending investment or reinvestment.
The Equity Portfolio's investment in such instruments
will generally not exceed 5% of its total assets. The
Equity Portfolio intends to be virtually fully invested
in equity securities at all times. The Equity
Portfolio will typically hold between 40 and 45
securities.
Select Equity Portfolio. The investment objective
of the Select Equity Portfolio is to seek a superior
total return. The Select Equity Portfolio seeks to
achieve its investment objective by investing primarily
in U.S. dollar-denominated equity securities of
companies with market capitalizations of at least $500
million. The Select Equity Portfolio seeks to achieve
a total return greater than the S&P 500. The Select
Equity Portfolio may invest up to 35% of its total
assets in cash and cash equivalents for any purpose,
including pending investment or reinvestment, and may
invest up to 100% of its total assets in such
instruments for temporary defensive purposes when
market conditions warrant. While the Discretionary
Equity, Equity and Select Equity Portfolios are
similar, the Select Equity Portfolio will concentrate
its investments in fewer securities than the
Discretionary Equity and Equity Portfolios.
Specifically, the Select Equity Portfolio will
typically hold between 15 and 25 securities in its
investment portfolio.
Euro Select Equity Portfolio. The investment
objective of the Euro Select Equity Portfolio is to
seek a superior total return with income as a secondary
objective. The Euro Select Equity Portfolio seeks to
achieve its investment objective by investing primarily
in equity securities, predominantly American Depository
Receipts ("ADRs"), of established European companies
with market capitalizations of at least $1 billion.
See page 4 for an explanation of ADRs. The Portfolio
seeks to achieve a total return greater than the Morgan
Stanley Capital International - Europe Index (the "MSCI-
Europe Index"). The Euro Select Equity Portfolio may
invest up to 35% of its total assets in cash and cash
equivalents for any purpose, including pending
investment or reinvestment, and may invest up to 100%
of its total assets in such instruments for temporary
defensive purposes when market conditions warrant. The
Euro Select Equity Portfolio will typically hold
between 15 and 25 securities.
Investment Selection Process
Institutional Capital Corporation ("ICAP"), the
investment adviser to the Portfolios, uses a team
approach with a value-oriented investment style. ICAP
believes that a team approach to managing assets helps
ensure that its investment style is consistently
applied over time and that the knowledge, experience
and interaction of its investment professionals greatly
enhance the investment decision-making process. ICAP's
investment process involves three key components:
Valuation, Identification of a Catalyst, and Research.
Valuation
First, ICAP uses its proprietary valuation
models to identify, from a universe of well
established large- and mid-capitalization companies,
those companies which ICAP believes offer the best
relative values, with stable-to-improving earnings
trends. The universe of companies reviewed for the
Discretionary Equity, Equity and Select Equity
Portfolios will generally consist of approximately
450 companies; for the Euro Select Equity Portfolio,
this number will be approximately 150.
<PAGE>
Identification of a Catalyst
Next, ICAP looks beyond traditional measures of
value to focus on companies where a catalyst
indicates that a positive change is about to occur.
Specifically, ICAP focuses on companies where this
catalyst has the potential to produce stock
appreciation of 15% or more relative to the market
over a nine-to-fifteen month period. The catalyst
can be industry-wide (e.g., significant anticipated
sales increases) or company specific (e.g., a
corporate restructuring or the introduction of a new
product).
Research
Research is key to the investment process.
ICAP uses its own internally-generated research to
evaluate the financial condition and business
prospects of every company it considers, focusing on
those companies where a catalyst is about to occur.
Once potential investment candidates are identified,
ICAP not only communicates with top management at
each of these companies, but also the customers,
competitors and suppliers of these companies to
enhance its findings.
From this highly disciplined process, ICAP's
investment management team typically identifies 40 to
45 securities with the best performance prospects for
the Discretionary Equity and Equity Portfolios and 15
to 25 securities for the Select Equity and Euro Select
Equity Portfolios. Once ICAP's investment management
team has discussed, evaluated and approved each
recommendation, the securities are added to the
Portfolios.
The process does not end with the purchase of a
security. Rather, ICAP continuously monitors each
security and makes sell decisions when a stock reaches
its target price, its prospects change, or another
stock offers greater opportunity for appreciation.
Types of Investments, Portfolio Policies, and Risk
Factors
In implementing the investment objective of each
Portfolio, ICAP may invest in the following securities
and follow the policies described below. Some of these
securities and portfolio policies involve special
risks, which are described below and in the Statement
of Additional Information. Please note that the
overall risk of each Portfolio is that a strategy used
by ICAP may fail to produce the intended result.
Common Stocks and Other Equity Securities
The Portfolios will invest at least 65% of their
respective total assets in common stocks and other
equity securities. Other equity securities may include
ADRs, warrants, Real Estate Investment Trusts
("REITs"), and other securities convertible or
exchangeable into common stock. Common stocks and
other equity securities generally increase or decrease
in value based on the earnings of a company and on
general industry and market conditions.
Risk Factors
On the basis of each company's prospects and the
overall market conditions, each Portfolio's share price
will fluctuate and may, at redemption, be worth more,
or less, than the initial purchase price _ accordingly,
you may lose money on your investment.
American Depository Receipts
Each Portfolio may invest in ADRs. ADRs, which
are typically issued by a U.S. financial institution (a
"depositary"), 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.
Risk Factors
Investments in ADRs may entail the special risks
of international investment, including currency
exchange fluctuations, government regulations and the
potential for political and economic instability. You
should expect that the Euro Select Equity Portfolio's
share price may be more volatile than that of a U.S.-
only fund. Moreover, the Euro Select Equity Portfolio
could be adversely affected if the European Economic
and Monetary Union or the single European currency (the
Euro) does not succeed.
<PAGE>
Cash and Cash Equivalents; Temporary Strategies
Cash equivalents are short-term fixed income
securities issued by private and governmental
institutions.
Risk Factors
To the extent a Portfolio invests in cash or cash
equivalents, it may not achieve its investment
objective.
Options and Futures Transactions
The Portfolios may invest up to 30% of their
respective net assets in options and futures
transactions which are sometimes referred to as
derivative transactions. The Portfolios' options and
futures transactions may include instruments such as
stock options, stock index options and futures
contracts. If these practices are used, the intent
would be primarily to hedge the Portfolios. A
Portfolio may hold a futures or options position until
its expiration, or it can close out such a position
before then at current value if a liquid secondary
market is available.
Risk Factors
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.
Non-Diversification of the Select Equity and Euro
Select Equity Portfolios
As "non-diversified" portfolios, the Select Equity
and Euro Select Equity Portfolios invest in a more
limited number of companies than other mutual funds.
Each Portfolio may invest 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. Each Portfolio may also invest
the other 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.
Risk Factors
Non-diversification involves an increased risk of
loss to the Portfolios when the market value of a
security declines and may likely increase each
Portfolio's volatility.
Portfolio Turnover
Under normal market conditions, the Discretionary
Equity and Equity Portfolios anticipate that portfolio
turnover rates will generally not exceed 150%. The
Select Equity and Euro Select Equity Portfolios
anticipate that portfolio turnover rates will be
between 100% and 300% and 150% and 200%, respectively.
The portfolio turnover rate indicates changes in a
Portfolio's securities holdings; generally, if all the
securities in a Portfolio at the beginning of the
period are replaced by the end of the period, the
turnover rate would be 100%.
Risk Factors
You may realize taxable gains as a result of such
trading of a Portfolio's assets and the Portfolio will
incur transaction costs in connection with buying and
selling securities.
Who Should Invest
The Portfolios are suitable for long-term
investors only. The Portfolios are not designed as
short-term investment vehicles. An investment in one
or more Portfolios may be an appropriate investment for
you if you:
seek long-term capital appreciation;
want to include an equity fund in your investment
portfolio; and
are willing to accept the risk that your
investment may fluctuate over the short term in
exchange for the potential to realize greater financial
gains in the future.
<PAGE>
Performance History
The return information provided in the bar charts
and tables below illustrate how each Portfolio's
performance can vary, which is one indication of the
risks of investing in the Portfolios. The information
shows changes in each Portfolio's performance from year
to year and shows how each Portfolio's average annual
returns compare with those of a broad-based measure of
market performance over the life of the Portfolio.
Please keep in mind that past performance is not
necessarily indicative of future returns.
Discretionary Equity Portfolio
(Inception 12/31/94)
Calendar Year Total Returns
35.21% 25.55% 28.60% 10/17%
1995 1996 1997 1998
Best and Worst Quarterly Performance
12/31/94 to 12/31/98
Best quarter return Worst quarter return
16.14% (2nd -16.31% (3rd
quarter, 1997) quarter, 1998)
Equity Portfolio (Inception 12/31/94)
Calendar Year Total Returns
38.85% 26.26% 29.08% 11/42%
1995 1996 1997 1998
<PAGE>
Best and Worst Quarterly Performance
12/31/94 to 12/31/98
Best quarter return Worst quarter return
17.23% (2nd -17.48% (3rd
quarter, 1997) quarter, 1998)
Select Equity Portfolio (Inception 12/31/97)
Calendar Year Total Return
15.33%
1998
Best and Worst Quarterly Performance
for year ended 12/31/98
Best quarter return Worst quarter return
18.66% (4th -16.91% (3rd
quarter, 1998) quarter, 1998)
Euro Select Equity Portfolio (Inception 12/31/97)
Calendar Year Total Return
27.40%
1998
Best and Worst Quarterly Performance
for year ended 12/31/98
Best quarter return Worst quarter return
24.20% (4th -23.27% (3rd
quarter, 1998) quarter, 1998)
<PAGE>
Average Annualized Total Returns
as of December 31, 1998
Portfolio/Index One Year Since
Inception
(12/31/94)
Discretionary 10.17% 24.53%
Equity Portfolio
Equity Portfolio 11.42% 26.01%
S&P 500 Index(1) 28.58% 30.51%
Portfolio/Index One Year Since
Inception
(12/31/97)
Select Equity 15.33% 15.33%
Portfolio
S&P 500 Index(1) 28.58% 28.58%
Euro Select Equity 27.40% 27.40%
Portfolio
MSCI-Europe 28.53% 28.53%
Index(2)
____________
(1) The S&P 500 is an unmanaged index generally
representative of the U.S. market for large-to-mid-
capitalization stocks.
(2) The MSCI-Europe Index is an unmanaged index
generally representative of the European market for
large-to-mid-capitalization stocks.
Prior Performance of the Adviser
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
federal tax and securities laws. 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-, 5- and 10-year periods ended March 31, 1999. 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 had been regulated as investment companies
under the federal tax and securities laws.
The performance information set forth below for
the private accounts of ICAP 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, if any, all dividends, interest,
accrued income, and realized and unrealized gains and
losses. Total return is calculated quarterly in
accordance with the "time-weighted" rate of return
method provided for by AIMR standards, accounted for on
a trade-date and accrual basis. Principal additions
and withdrawals are weighted in computing the quarterly
returns based on the timing of these transactions.
Annual returns are derived from quarterly returns.
<PAGE>
ICAP's Discretionary Equity and Equity Composites
and Discretionary Equity and Equity Portfolios
Annualized Performance vs. S&P 500
Performance through March 31, 1999
Average Annualized Total Return
<TABLE>
<CAPTION>
ICAP Discretionary Discretionary ICAP Equity Equity
Time Period Equity Composite Equity Portfolio Composite Portfolio S&P 500
<S> <C> <C> <C> <C> <C>
1 year % % % % %
5 years % N/A % N/A %
10 years % N/A N/A N/A %
</TABLE>
The ICAP composite performance presented above
reflects the performance of the Private Accounts
included in the Discretionary Equity and Equity
Composites reduced by the total operating expenses
(before waivers and/or reimbursements) for the
Discretionary Equity and Equity Portfolios,
respectively, as set forth in "Fees and Expenses" on
page 10. The performance of the Discretionary Equity
and Equity Portfolios has been reduced by the total
operating expenses actually incurred by each Portfolio
for the periods 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.
In addition to the Private Accounts, from January
through December 1997, ICAP funded and managed a single
separate account (the "Euro Account") which pursued
substantially the same investment objective, policies
and strategies, and employed the same management style,
as that of the Euro Select Equity Portfolio. After the
close of business on December 31, 1997, all of the
assets in the Euro Account were contributed to the Euro
Select Equity Portfolio in exchange for shares in the
Portfolio. Like the Private Accounts, the Euro Account
was not subject to the same types of expenses to which
the Euro Select Equity Portfolio is subject nor to the
specific tax restrictions and investment limitations
imposed on the Portfolio by the federal tax and
securities laws. The following chart compares the
performance of the Euro Account to the average
performance of the MSCI-Europe Index for the period
from January 1, 1997 to December 31, 1997. The
performance results of the Euro Account described below
could have been adversely affected if the Euro Account
had been regulated as an investment company under the
federal tax and securities laws.
ICAP's Euro Account Performance vs. MSCI-Europe Index
Performance through December 31, 1997
Total Return
Time Period Euro Account MSCI-Europe Index
1st Quarter, 1997 6.6% 4.9%
2nd Quarter, 1997 13.6% 8.9%
3rd Quarter, 1997 10.4% 8.3%
4th Quater, 1997 -3.3% 0.1%
1997 29.4% 23.8%
The ICAP performance presented above reflects the
performance of the Euro Account reduced by the total
operating expenses (before waivers and/or
reimbursements) for the Euro Select Equity Portfolio as
set forth in "Fees and Expenses" on page 10. The MSCI-
Europe 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 Euro Account performance
represents ICAP's past performance in managing a
private account and should not be interpreted as
indicative of the past or future performance of the
Euro Select Equity Portfolio.
<PAGE>
The performance of the Euro Select Equity
Portfolio for the period from January 1, 1998 through
December 31, 1998 and for the quarter ended March 31,
1999, as compared to the performance of the MSCI-Europe
Index for the same periods is as follows:
Total Return
Euro Select
Time Period Equity MSCI-Europe
Portfolio Index
1st Quarter, 1998 21.20% 20.30%
2nd Quarter, 1998 10.30% 5.14%
3rd Quarter, 1998 -23.27% -14.42%
4th Quarter, 1998 24.20% 18.72%
1998 27.40% 28.53%
1st Quarter, 1999 % %
The Euro Select Equity Portfolio commenced
operations after the close of business on December 31,
1997. The performance of the Euro Select Equity
Portfolio has been reduced by the total operating
expenses actually incurred by the Portfolio for the
periods indicated.
Fees and Expenses
The following table describes the fees and
expenses that you may pay if you buy and hold shares of
the Portfolios.
Discret- Select Euro
ionary Equity Equity Select
Equity Portfolio Portfolio Equity
Portfolio
Shareholder Fees (fees paid
directly from your
investment(1) None None None None
Annual Portfolio Operating Expenses
(expenses that are deducted from
Portfolio assets)(2)
Management fee 0.80% 0.80% 0.80% 1.00%
Distribution and service
(12b-1) fees None None None None
Other expenses 0.18% 0.11% 2.54% 0.67%
Total 0.98% 0.91% 3.34% 1.67%
Less: Fee waiver/expense -0.18% -0.11% -2.54% -0.67%
reimbursement(3)
Net expenses 0.80% 0.80% 0.80% 1.00%
____________
(1) If you redeem shares by wire, you will be
charged a $10 service fee. See "Your Account How
to Sell Shares" on page 18.
(2) Operating expenses are deducted from Portfolio
assets before computing the daily share price or
making distributions. As a result, they do not
appear on your account statement, but instead reduce
your total return and distributions. These expenses
are expressed as a percentage of net assets.
(3) Pursuant to an expense cap agreement dated
April 30, 1999 between ICAP and the Portfolios, ICAP
agreed to waive its management fee and/or reimburse
the operating expenses of the Portfolios to the
extent necessary to ensure that each of the
Discretionary Equity, Equity and Select Equity
Portfolio's total operating expenses would not
exceed 0.80% of that Portfolio's average net assets
and that the Euro Select Equity Portfolio's total
operating expenses would not exceed 1.00% of the
Euro Select Equity Portfolio's average net assets.
The term of this expense cap agreement is 12 months.
For more information, see "Management of the
Portfolios" on page 15.
Example
The following Example is intended to help you
compare the cost of investing in one or more of the
Portfolios with the cost of investing in other mutual
funds. The Example assumes that
<PAGE>
you invest $10,000 in
each Portfolio for the time periods indicated and then
redeem all of your shares at the end of those periods.
The Example also assumes that you have a 5% return each
year and that each Portfolio's total operating expenses
remain the same each year. Although your actual costs
may be higher or lower, based on these assumptions,
your costs would be as follows:
1 Year 3 Years 5 Years 10 Years
Discretionary Equity $82 $294 $524 $1,185
Portfolio
Equity Portfolio $82 $279 $493 $1,109
Select Equity Portfolio $82 $789 $1,521 $3,459
Euro Select Equity $102 $461 $844 $1,920
Portfolio
Financial Highlights
The financial highlights tables are intended to
help you understand the Portfolios' financial
performance for the period from a Portfolio's
commencement of operations to December 31, 1998. The
total returns presented in the table represent the rate
that an investor would have earned on an investment in
the Portfolio for the stated period (assuming
reinvestment of all dividends and distributions). This
information has been audited by PricewaterhouseCoopers
LLP, whose report, along with the financial statements,
is included in the annual report of the Portfolios,
which is available upon request.
Discretionary Equity Portfolio
Year Ended December 31,
Per share data: 1995 1996 1997 1998
Net asset value, beginning of $20.00 $25.42 $29.55 $30.34
year
Income from investment
operations:
Net investment income 0.31 0.36 0.48 0.52
Net realized and unrealized 6.70 6.09 7.80 2.57
gain on investments
Total income from investment 7.01 6.45 8.28 3.09
operations
Less distributions:
From net investment income (0.31) (0.36) (0.48) (0.52)
In excess of book net - - (0.01) -
investment income
From net realized gain on (1.27) (1.80) (7.00) (0.90)
investments
In excess of book net realized (0.01) (0.16) - -
gain on investments
Total distributions (1.59) (2.32) (7.49) (1.42)
Net asset value, end of year $25.42 $29.55 $30.34 $32.01
Total return 35.21% 25.55% 28.60% 10.17%
Supplemental data and ratios:
Net assets, end of year (in $37,362 $110,280 $157,137 $205,369
thousands)
Ratio of expenses to average
net assets:
Before expense reimbursement 1.56% 1.11% 1.02% 0.98%
After expense reimbursement 0.80% 0.80% 0.80% 0.80%
Ratio of net investment income to
average net assets:
Before expense reimbursement 0.95% 1.04% 1.15% 1.47%
After expense reimbursement 1.71% 1.35% 1.37% 1.65%
Portfolio turnover rate 102% 138% 131% 129%
<PAGE>
Equity Portfolio
Year Ended December 31,
Per share data: 1995 1996 1997 1998
Net asset value, beginning of $20.00 $26.03 $31.16 $35.12
year
Income from investment
operations:
Net investment income 0.28 0.31 0.37 0.50
Net realized and unrealized 7.45 6.49 8.57 3.51
gain on investments
Total income from investment 7.73 6.80 8.94 4.01
operations
Less distributions:
From net investment income (0.28) (0.30) (0.37) (0.50)
In excess of book net - - (0.01) -
investment income
From net realized gain on (1.41) (1.30) (4.59) -
investments
In excess of book net realized (0.01) (0.07) (0.01) -
gain on investments
Total distributions (1.70) (1.67) (4.98) (0.50)
Net asset value, end of year $26.03 $31.16 $35.12 $38.63
Total return 38.85% 26.26% 29.08% 11.42%
Supplemental data and ratios:
Net assets, end of year (in $46,788 $149,125 $371,402 $717,267
thousands)
Ratio of expenses to average
net assets:
Before expense reimbursement 1.44% 1.12% 0.97% 0.91%
After expense reimbursement 0.80% 0.80% 0.80% 0.80%
Ratio of net investment income to
average net assets:
Before expense reimbursement 0.85% 0.83% 0.89% 1.28%
After expense reimbursement 1.49% 1.15% 1.06% 1.39%
Portfolio turnover rate 105% 125% 121% 133%
<PAGE>
Select Equity Portfolio
Year Ended
Per share data: December 31,
1998
Net asset value, beginning of $20.00
year
Income from investment
operations:
Net investment income 0.28
Net realized and unrealized 2.78
gain on investments
Total income from investment 3.06
operations
Less distributions:
From net investment income (0.29)
Total distributions (0.29)
Net asset value, end of year $22.77
Total return 15.33%
Supplemental data and ratios:
Net assets, end of year (in $9,581
thousands)
Ratio of expenses to average
net assets:
Before expense reimbursement 3.34%
After expense reimbursement 0.80%
Ratio of net investment income to
average net assets:
Before expense reimbursement (0.72)%
After expense reimbursement 1.82%
Portfolio turnover rate 250%
<PAGE>
Euro Select Equity Portfolio
Year Ended
Per share data: December
31, 1998
Net asset value, beginning of $20.00
year
Income from investment
operations:
Net investment income 0.35
Net realized and unrealized 5.07
gain on investments
Total income from investment 5.42
operations
Less distributions:
From net investment income (0.37)
From net realized gain on (0.73)
investments
Total distributions (1.10)
Net asset value, end of year $24.32
Total return 27.40%
Supplemental data and ratios:
Net assets, end of year (in $28,034
thousands)
Ratio of expenses to average
net assets:
Before expense reimbursement 1.67%
After expense reimbursement 1.00%
Ratio of net investment income to
average net assets:
Before expense reimbursement 1.02%
After expense reimbursement 1.69%
Portfolio turnover rate 272%
<PAGE>
MANAGEMENT OF THE PORTFOLIOS
Investment Adviser
Institutional Capital (ICAP) has been in the
investment management business since 1970, managing
money for some of the world's largest and most
respected corporations and institutions. As of March
31, 1999, ICAP had approximately $__ billion in assets
under management.
The Discretionary Equity, Equity and Select Equity
Portfolio each pay ICAP an annual management fee of
0.80% of the Portfolio's average net assets. The
advisory fee is accrued daily and paid monthly.
Pursuant to an expense cap agreement dated April 30,
1999 between ICAP and the Portfolios, ICAP agreed to
waive its management fee and/or reimburse each
Portfolio's operating expenses to the extent necessary
to ensure that each Portfolio's total operating
expenses would not exceed 0.80% of its average net
assets. The term of this expense cap agreement is 12
months.
The Euro Select Equity Portfolio pays ICAP an
annual management fee of 1.00% of the Portfolio's
average net assets. The advisory fee is accrued daily
and paid monthly. Pursuant to the expense cap
agreement, ICAP agreed to waive its management fee
and/or reimburse the Portfolio's operating expenses to
the extent necessary to ensure that the Portfolio's
total operating expenses would not exceed 1.00% of its
average net assets. The term of this expense cap
agreement is 12 months.
The expense cap agreement has the effect of
lowering the overall expense ratio for the applicable
Portfolio and increasing the overall return to
investors during the term of the agreement.
Under the Investment Advisory Agreement, not only
is ICAP responsible for management of Portfolio assets,
but also for Portfolio transactions and brokerage.
Investment Team
The investment decisions for each Portfolio are
made through a team approach, with all of the ICAP
investment professionals contributing to the process.
The senior members of the investment management team
average more than 20 years of experience in the
investment industry, including more than 16 years with
ICAP. Each investment professional has developed an
expertise in at least one functional investment area,
including equity research, strategy, fixed income
analysis, quantitative research, technical research and
trading. Moreover, each of the senior members of the
investment management team is responsible for
monitoring one or more economic sectors, which has
enabled ICAP to develop expertise across all
industries. The other investment professionals on the
investment management team provide analytical support,
research and expertise to the entire team. Formal
investment management team meetings are generally held
several times each week. At these meetings, a
comprehensive review of ICAP's investment positions 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, and investment
recommendations are presented to the entire team for
decisions.
YOUR ACCOUNT
How to Contact ICAP
For overnight deliveries, use:
ICAP Funds, Inc.
c/o Sunstone Financial Group, Inc.
207 East Buffalo Street
Suite 315
Milwaukee, Wisconsin 53202-5712
<PAGE>
For regular mail deliveries, use:
ICAP Funds, Inc.
c/o Sunstone Financial Group, Inc.
P.O. Box 2160
Milwaukee, Wisconsin 53201-2160
By telephone:
888-221-ICAP (4227)
Sunstone Financial Group, Inc. serves as the
Portfolios' transfer agent (the "Transfer Agent").
Minimum Investments
The minimum investment requirements for each
Portfolio are as follows:
Initial investment: $10,000
Subsequent investments: $ 1,000
Automatic Investment Plan
("AIP"): $ 5,000
(to maintain the plan,
you must invest at least
$250 per transaction)
The Portfolios may change or waive these minimums
at any time; you will be given at least 30 days
notice of any increase in the minimum dollar
amount of purchases.
How to Open an Account
Read this Prospectus carefully.
Complete the appropriate parts of the Purchase
Application, carefully following the instructions. If
you have questions, please contact your investment
professional or call us at 888-221-ICAP (4227).
Make your initial investment, and any subsequent
investments, following the instructions set forth
below. Send all items to one of the addresses
referenced in "How to Contact ICAP" on page 15.
All applications to purchase shares are subject to
acceptance by the Portfolios and are not binding until
so accepted. The Portfolios reserve the right to
decline a purchase application in whole or in part.
On the application, you will be asked to certify
that your Social Security or taxpayer
identification number is correct and that you are
not subject to backup withholding. In order to do
this, an original signed purchase application must
be on file with the Transfer Agent. If you are
subject to the 31% backup withholding or you did
not certify your taxpayer identification number,
the IRS requires the Portfolios to withhold 31% of
any dividends paid and redemption or exchange
proceeds.
How to Buy Shares
You may pay for your shares by check or wire. You
may also use the Exchange privilege or the Automatic
Investment Plan ("AIP"). The share price you receive
will be the Portfolio's net asset value next computed
after the time the Transfer Agent receives your
purchase order in proper form. The Transfer Agent must
receive your purchase order by 4:00 p.m., Eastern Time
(or by the close of the New York Stock Exchange (the
"NYSE"), if earlier) for your purchase to be effected
on that day. See "Valuation of Portfolio Shares" on
page 20. A confirmation indicating the details of each
purchase transaction will be sent to you promptly.
By Check
To establish a new account, see "How to Open an
Account" on page 16.
Make out a check (or money order) for the
investment amount, payable to "ICAP Funds." Cash,
credit cards, third-party checks and credit card checks
will not be accepted.
<PAGE>
If you wish to make additional purchases, complete
the investment slip that is included with your account
statement, or, if this is not convenient, reference
your name, account number and address on your check.
Checks are considered received and accepted when
received in good order by the Transfer Agent.
If your check does not clear, you will be charged
a $20 service fee. You will also be responsible for
any losses suffered by the Portfolios as a result.
By Wire
To establish a new account, see "How to Open An
Account" on page 16.
Instruct your bank to use the following
instructions when wiring funds:
Wire to: UMB Bank, n.a.
ABA Number 101000695
Credit: ICAP Funds, Inc.
Account Number 987-0609665
Further credit: ICAP Funds, Inc.
(name of Portfolio being purchased)
(your account number)
(your name or account registration)
(your social security or taxpayer
identification number)
The Transfer Agent must receive your wire by 4:00
p.m., Eastern Time (or by the close of the NYSE, if
earlier) for your purchase to be effected on that day.
The Portfolios are not responsible for the
consequences of delays resulting from the banking or
Federal Reserve wire system.
By Automatic Investment Plan (AIP)
The Automatic Investment Plan allows you to make
regular, systematic investments in one or more
Portfolios from your bank account.
Applications to establish the AIP on an existing
account are available from the Transfer Agent. Please
call 888-221-ICAP (4227) to obtain an application.
Under the AIP, you may choose to make additional
investments on the 5th, 10th, 15th, 20th, 25th and/or
last day of the month (or the following business day if
one of these days falls on a weekend or holiday) in
amounts of $250 or more.
A service fee of $20 will be deducted from your
account for any AIP purchase that does not clear due to
insufficient funds or if you prevent withdrawal of
funds from the designated account.
Upon a full redemption, any AIP established on
your account will automatically be terminated, unless
otherwise instructed in writing.
By Exchange
You may exchange your shares in one Portfolio for
shares in any other Portfolio at any time by written or
telephone request.
The value of the shares to be exchanged and the
price of the shares being purchased will be the net
asset value next determined after receipt and
acceptance of instructions for exchange. Please note
that an exchange is not a tax-free transaction.
Send written exchange requests to one of the
addresses referenced in "How to Contact ICAP" on
page 15.
Telephone exchange requests may be subject to
limitations, including those relating to frequency,
that may be established from time to time.
<PAGE>
How to Sell Shares
You may sell (redeem) all or a portion of your
shares at any time. The share price you receive will
be the Portfolio's net asset value next computed after
the time the Transfer Agent receives your redemption
request in proper form. The Transfer Agent must
receive your redemption request by 4:00 p.m., Eastern
Time (or by the close of the NYSE, if earlier) for your
redemption request to be effected on that day. See
"Valuation of Portfolio Shares" on page 19. The
Portfolios normally will mail or wire your redemption
proceeds per your instructions the next business day
and, in any event, no later than seven business days
after receipt by the Transfer Agent of a redemption
request in good order. Redemptions may be made by
written or telephone request as described below. You
may also redeem shares using the Exchange privilege or
the Systematic Withdrawal Plan. A confirmation
indicating the details of each redemption transaction
will be sent to you promptly.
By Written Request
Write a letter of instruction or complete a
Redemption Request Form indicating the Portfolio name,
your account number, the name(s) in which the account
is registered and the dollar value or number of shares
you wish to sell.
Include the signatures of all registered account
holders and any additional documents that may be
required. See "Special Situations" on page 19.
Send your request to one of the addresses
referenced in "How to Contact ICAP" on page 15. If
your redemption request is inadvertently sent to ICAP,
the investment adviser, whose offices are located in
Chicago, it will be forwarded to the Transfer Agent,
but the effective date of redemption will be delayed
until the request is received by the Transfer Agent.
Redemption proceeds will be mailed or wired per
your request to the name(s) and address in which the
account is registered or bank of record as shown on the
records of the Transfer Agent, or otherwise according
to your letter of instruction if the request is
received in good order. Please note that a $10 fee
will be deducted from your account if you redeem by
wire.
The Transfer Agent must receive your redemption
request by 4:00 p.m., Eastern Time (or by the close of
the NYSE, if earlier) for your redemption request to be
effected on that day.
By Telephone
Telephone redemption privileges must have been
previously established for your account to use this
option.
To place your redemption request, please call the
Transfer Agent at 888-221-ICAP (4227).
Redemption requests received by 4:00 p.m., Eastern
Time (or by the close of the NYSE, if earlier) by
telephone are available for redemptions of between $500
and $50,000 per account per day.
Proceeds redeemed by telephone will be mailed or
wired per your request only to your address or bank of
record as shown on the records of the Transfer Agent.
Please note that a $10 fee will be deducted from your
account if you redeem by wire.
In order to arrange for telephone redemptions
after an account has been opened or to change the bank
account or address designated to receive redemption
proceeds, a written request must be sent to the
Transfer Agent. The request must be signed by each
shareholder of the account, with the signatures
guaranteed. Further documentation may be requested
from corporations, executors, administrators, trustees
and guardians. See "Special Situations" on page 19.
The Portfolios reserve the right to refuse any
request made by telephone and may limit the amount
involved or the number of telephone redemptions.
Once you place a telephone redemption request, it
cannot be canceled or modified.
Neither the Portfolios nor the Transfer Agent will
be responsible for the authenticity of redemption
instructions received by telephone. Accordingly, you
bear the risk of loss. However, the Portfolios will
use reasonable procedures to ensure that instructions
received by telephone are genuine, including recording
telephone transactions and sending written confirmation
of such transactions to the investor of record.
You may experience difficulty in implementing a
telephone redemption during periods of drastic economic
or market changes. If you are unable to contact the
Transfer Agent by telephone, you may also redeem shares
by written request, as noted above.
<PAGE>
By Systematic Withdrawal
The Systematic Withdrawal Plan allows you to set
up automatic withdrawals from your account at regular
intervals.
Applications to establish the Systematic
Withdrawal Plan are available from the Transfer Agent.
Please call 888-221-ICAP (4227) to obtain an
application.
To begin withdrawals, you must have an initial
balance of $10,000 in your account and withdraw at
least $1,000 per payment.
Withdrawals will take place on the 5th, 10th,
15th, 20th, 25th and/or last day of the month (or the
following business day if one of these days falls on a
weekend or holiday), as indicated on your 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 deplete 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
plan will be terminated.
By Exchange
You may exchange your shares in one Portfolio for
shares in any other Portfolio at any time by written or
telephone request.
The value of the shares to be exchanged and the
price of the shares being purchased will be the net
asset value next determined after receipt and
acceptance of instructions for exchange. Please note
that an exchange is not a tax-free transaction.
Send written exchange requests to one of the
addresses referenced in "How to Contact ICAP" on
page 15.
Telephone exchange requests may be subject to
limitations, including those relating to frequency,
that may be established from time to time.
Signature Guarantees. As a protection to both you
and the Portfolios, the Portfolios require 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. These institutions include
banks, savings and loan associations, credit unions,
brokerage firms and others. A notary public stamp or
seal is not acceptable.
Special Situations. Redemption requests from
corporate, trust, and institutional accounts, and
executors, administrators, and guardians, require
documents in addition to those described above,
evidencing the authority of the officers, trustees or
others. In order to avoid delays in processing
redemption requests for these accounts, please call the
Transfer Agent at 888-221-ICAP (4227) before making the
redemption request to determine what additional
documents are required.
Investments Made Through Financial Services
Agents. If you invest through a financial services
agent (rather than directly with the Portfolios through
the Transfer Agent), the policies and fees may be
different than those described. Financial advisers,
financial supermarkets, and other financial services
agents may charge transaction and other fees and may
set different minimum investments or limitations on
buying and selling shares. Consult a representative of
your financial services agent if you have any
questions. Your financial services agent is
responsible for transmitting your orders in a timely
manner.
Closing of Accounts. Your account may be closed
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 your account falls below $1,000.
If the value of your account does not reach $1,000
within the 30 days, a check for the proceeds of the
redemption of your account will be sent to you within
seven days. In addition, unless otherwise instructed
in writing, your account will be closed and the
proceeds sent to you within seven days if you attempt
to redeem more than the value remaining in your
account.
<PAGE>
Valuation of Portfolio Shares
The price of Portfolio shares is based on each
Portfolio's net asset value, which is calculated using
the market price method of valuation and is determined
as of the close of trading (generally 4:00 p.m. Eastern
Time) on each day the NYSE is open for business. The
Portfolios do not determine net asset value on days the
NYSE is closed. The NYSE is currently closed on New
Year's Day, Martin Luther King, Jr. Day, President's
Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day. In addition,
if any of these 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. The
price at which a purchase order or redemption request
is effected is based on the next calculation of net
asset value after the order is placed or the request is
received in proper form.
Dividends, Capital Gain Distributions, and Taxes
For federal income tax purposes, all dividends and
distributions of net realized short-term capital gains
you receive from the Portfolios are taxable as ordinary
income, whether reinvested in additional shares or
received in cash. Distributions of net realized long-
term capital gains you receive from the Portfolios,
whether reinvested in additional shares or received in
cash, are taxable as a capital gain. The capital gain
holding period (and applicable tax rate) is determined
by the length of time the Portfolios have held the
security and not the length of time you have held
shares in the Portfolios. You will be 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. Please note, however, that the investment
focus of each Portfolio is capital appreciation, not
the production of distributions. You should measure
the success of your investment by the value of your
investment at any given time and not by the
distributions you receive.
All dividends and capital gain distributions will
automatically be reinvested in additional shares at the
then prevailing net asset value unless you specifically
request that dividends or capital gains or both be paid
in cash. The election to receive dividends and capital
gain distributions in cash or to reinvest them in
shares may be changed by writing to one of the
addresses referenced in "How to Contact ICAP" on page
15. 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 distribution checks
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 distributions reinvested in additional
shares. No interest will accrue on amounts represented
by uncashed distribution or redemption checks.
ADDITIONAL INFORMATION
Officers and Directors
Robert H. Lyon, President and Director
Pamela H. Conroy, Vice President, Treasurer and Director
Donald D. Niemann, Vice President, Secretary and Director
Dr. James A. Gentry, Director
Joseph Andrew Hays, Director
Gary S. Maurer, Director
Harold W. Nations, Director
Barbara C. Schanmier, Director
<PAGE>
Investment Adviser
Institutional Capital Corporation
225 West Wacker Drive, Suite 2400
Chicago, Illinois 60606-1229
Custodian
UMB Bank, n.a.
928 Grand Boulevard
Kansas City, Missouri 64141-6226
Legal Counsel
Godfrey & Kahn, S.C.
780 North Water Street
Milwaukee, Wisconsin 53202
Transfer Agent
Sunstone Financial Group, Inc.
207 East Buffalo Street
Suite 400
Milwaukee, Wisconsin 53202-5712
For regular mail deliveries, use:
ICAP Funds, Inc.
c/o Sunstone Financial Group, Inc.
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
Auditor
PricewaterhouseCoopers LLP
100 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
Year 2000 Issue
The Portfolios' operations depend on the seamless
functioning of computer systems in the financial
service industry. 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.
The Portfolios have made compliance with the Year
2000 Issue a high priority. Accordingly, the
Portfolios are taking steps that they believe are
reasonably designed to address the Year 2000 Issue,
focusing primarily on the computer software systems of
the Transfer Agent and the Portfolios' custodian. In
this regard, these service providers have represented
to the Portfolios that they do not currently anticipate
that the Year 2000 Issue will have a material impact on
their ability to continue to fulfill their duties as
service providers to the Portfolios.
<PAGE>
The Statement of Additional Information for the
Portfolios contains additional information about each
Portfolio and is incorporated into this Prospectus by
reference. Additional information about the
Portfolios' investments is contained in the Portfolios'
annual and semi-annual reports to shareholders. The
Portfolios' annual reports provide a discussion of the
market conditions and investment strategies that
significantly affected each Portfolio's performance
during its last fiscal year. You may receive the
Statement of Additional Information, annual reports and
semi-annual reports without charge, request other
information about the Portfolios and make shareholder
inquiries by contacting the Portfolios at the address,
toll-free telephone number or Website noted on the
cover page of this Prospectus. These documents may
also be obtained from certain financial intermediaries.
Information about the Portfolios (including the
Statement of Additional Information) can be reviewed
and copied at the SEC's Public Reference Room in
Washington, D.C. Please call the SEC at 800-SEC-0330
for information relating to the operation of the Public
Reference Room. Reports and other information about
the Portfolios are also available on the SEC's Internet
Website located at http://www.sec.gov. Alternatively,
copies of this information may be obtained, upon
payment of a duplicating fee, by writing the Public
Reference Section of the SEC, Washington, D.C. 20549-
6009.
(c)Copyright 1999 Institutional Capital Corporation
The Portfolios' 1940 Act File Number is 811-8850.
<PAGE>
[ICAP Logo]
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
888-221-ICAP (4227)
www.icapfunds.com
This Statement of Additional Information ("SAI")
is not a prospectus and should be read in conjunction
with the Prospectus of ICAP Funds, Inc. (the
"Company"), dated April 30, 1999. The Company is
comprised of 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") (individually, the "Portfolio" and
collectively, the "Portfolios").
The Portfolios' audited financial statements for
the year ended December 31, 1998 are incorporated
herein by reference to the Portfolios' 1998 Annual
Report.
A copy of the Portfolios' Annual Report and/or
Prospectus is available without charge upon request to
the above address, toll-free telephone number or
website.
This Statement of Additional Information is dated
April 30, 1999.
<PAGE>
TABLE OF CONTENTS
CORPORATE ORGANIZATION 3
INVESTMENT POLICIES: FUNDAMENTAL AND NON-FUNDAMENTAL 3
IMPLEMENTATION OF INVESTMENT OBJECTIVES 5
DIRECTORS AND OFFICERS 16
PRINCIPAL SHAREHOLDERS 18
INVESTMENT ADVISER 18
PORTFOLIO TRANSACTIONS AND BROKERAGE 19
ADMINISTRATOR 20
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSING AGENT 21
PURCHASE AND PRICING OF SHARES 21
TAXATION OF THE PORTFOLIOS 22
PERFORMANCE INFORMATION 23
INDEPENDENT ACCOUNTANTS 25
FINANCIAL STATEMENTS 25
No person has been authorized to give any
information or to make any representations other than
those contained in this SAI and related Prospectus, and
if given or made, the information or representations
may not be relied upon as having been made by the
Portfolios. This SAI is not an offer to sell
securities in any state or jurisdiction in which an
offering may not legally be made.
<PAGE>
CORPORATE ORGANIZATION
The Company is an open-end management investment
company, commonly referred to as a mutual fund. The
Company is organized as a Maryland corporation and was
incorporated on November 1, 1994.
The Company is authorized to issue shares of
common stock in series and classes. The Company
currently offers four series of shares: the
Discretionary Equity Portfolio, the Equity Portfolio,
the Select Equity Portfolio and the Euro Select Equity
Portfolio. Each share of common stock of each
Portfolio is entitled to one vote, and each share is
entitled to participate equally in dividends and
capital gain distributions by the respective Portfolio
and in the residual assets of the respective Portfolio
in the event of liquidation. However, each Portfolio
bears its own expenses and matters affecting only one
Portfolio are voted on only by that Portfolio's
shareholders. The Discretionary Equity and Equity
Portfolios are "diversified" and the Select Equity and
Euro Select Equity Portfolios are "non-diversified,"
within the meaning of the Investment Company Act of
1940, as amended (the "1940 Act").
No certificates will be issued for shares held in
your account. You will, however, have full shareholder
rights.
Generally, the Portfolios will not hold annual
shareholders' meetings unless required by the 1940 Act
or Maryland law.
INVESTMENT POLICIES: FUNDAMENTAL AND NON-FUNDAMENTAL
The following are the fundamental investment
policies applicable to each Portfolio which cannot be
changed without the approval of a majority of the
relevant Portfolio's outstanding voting securities. As
used herein, a "majority of the relevant Portfolio's
outstanding voting securities" means the lesser of (i)
67% of the shares of common stock of the Portfolio
represented at a meeting at which more than 50% of the
outstanding shares are present or (ii) more than 50% of
the outstanding shares of common stock of the
Portfolio.
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 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.
<PAGE>
5. Purchase or sell physical commodities
unless acquired as a result of ownership of
securities or other instruments (but this shall
not prevent the Portfolio from purchasing or
selling options, futures contracts or other
derivative instruments, or from investing in
securities or other instruments backed by physical
commodities).
6. Purchase or sell real estate unless
acquired as a result of ownership of securities or
other instruments (but this shall not prohibit the
Portfolio from purchasing or selling securities or
other instruments backed by real estate or of
issuers engaged in real estate activities).
7. Issue senior securities, except as
permitted under the 1940 Act.
8. Purchase the securities of any issuer if,
as a result, more than 25% of the Portfolio's
total assets would be invested in the securities
of issuers whose principal business activities are
in the same industry.
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.
Each Portfolio's investment objective is also a
fundamental investment policy which cannot be changed
without the approval of a majority of the relevant
Portfolio's outstanding voting securities. 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. The
investment objective of the Select Equity Portfolio is
to seek a superior total return. The investment
objective of the Euro Select Equity Portfolio is to
seek a superior total return with income as a secondary
objective.
The following are the non-fundamental investment
policies applicable to each Portfolio which may be
changed by the Board of Directors of the Portfolios
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 Equity 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.
<PAGE>
IMPLEMENTATION OF INVESTMENT OBJECTIVES
The following information supplements the
discussion of the Portfolios' investment objectives and
strategies described in the Prospectus under the
headings "Investment Objectives" and "Types of
Investments, Portfolio Policies, and Risk Factors."
In General
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.
Investment grade debt securities include long-term
debt obligations rated Baa or higher by Moody's
Investors Service ("Moody's"), BBB or higher by
Standard & Poor's Corporation ("S&P"), Duff & Phelps,
Inc. ("D&P") or Fitch IBCA Information, Inc. ("Fitch"),
or unrated securities of comparable quality as
determined by the investment adviser to the Portfolios,
Institutional Capital Corporation ("ICAP"). Bonds
rated Baa by Moody's or BBB by S&P, although considered
investment grade, have speculative characteristics and
may be subject to greater fluctuations in value than
higher-rated bonds.
Non-Investment Grade Debt Securities ("Junk Bonds")
Each Portfolio may invest up to 5% of its 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.
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
<PAGE>
market, it may be forced to
liquidate a portion of its portfolio securities without
regard to their investment merits. Due to the limited
liquidity of junk bond securities, a Portfolio may be
forced to liquidate these securities at a substantial
discount. Any such liquidation would reduce the
Portfolio's asset base over which expenses could be
allocated and could result in a reduced rate of return
for the Portfolio.
Payment Expectations. Junk bond securities
typically contain redemption, call or prepayment
provisions which permit the issuer of such securities
containing such provisions to redeem the securities at
its discretion. During periods of falling interest
rates, issuers of these securities are likely to redeem
or prepay the securities and refinance them with debt
securities with a lower interest rate. To the extent
an issuer is able to refinance the securities, or
otherwise redeem them, a Portfolio may have to replace
the securities with a lower yielding security, which
could result in a lower return for the Portfolio.
Credit Ratings. Credit ratings issued by credit-
rating agencies evaluate the safety of principal and
interest payments of rated securities. They do not,
however, evaluate the market value risk of junk bond
securities and, therefore, may not fully reflect the
true risks of an investment. In addition, credit
rating agencies may or may not make timely changes in a
rating to reflect changes in the economy or in the
condition of the issuer that affect the value of the
security. Consequently, credit ratings are used only
as a preliminary indicator of investment quality.
Investments in junk bond securities will be more
dependent on ICAP's credit analysis than would be the
case with investments in investment-grade debt
securities. ICAP employs its own credit research and
analysis, which includes a study of existing debt,
capital structure, ability to service debt and to pay
dividends, the issuer's sensitivity to economic
conditions, its operating history and the current trend
of earnings. ICAP continually monitors each
Portfolio's investments and carefully evaluates whether
to dispose of or to retain junk bond securities whose
credit ratings or credit quality may have changed.
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.
Illiquid Securities
Each Portfolio may invest up to 5% of its net
assets 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,
repurchase agreements with maturities in excess of
seven days and other securities that are not readily
marketable. 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. Certain securities exempt from
registration or issued in transactions exempt from
registration under the Securities Act, including
securities that may be resold to institutional
investors pursuant to Rule 144A under the Securities
Act, may be considered liquid under guidelines adopted
by the Board.
The Board of Directors has delegated the day-to-
day determination of the liquidity of any security to
ICAP, 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
<PAGE>
instruments), (iii) the availability of
market quotations (e.g., for securities quoted in the
PORTAL system) and (iv) other permissible relevant
factors.
Restricted securities may be sold only in
privately negotiated transactions or in a public
offering with respect to which a registration statement
is in effect under the Securities Act. Where
registration is required, a Portfolio may be obligated
to pay all or part of the registration expenses and a
considerable period may elapse between the time of the
decision to sell and the time the Portfolio may be
permitted to sell a security under an effective
registration statement. If, during such a period,
adverse market conditions were to develop, the
Portfolio might obtain a less favorable price than that
which prevailed when it decided to sell. Restricted
securities will be priced at fair value as determined
in good faith by the Board of Directors or its
delegate. If, through the appreciation of restricted
securities or the depreciation of unrestricted
securities, a Portfolio should be in a position where
more than 5% of the value of its net assets are
invested in illiquid securities, including restricted
securities which are not readily marketable, the
affected Portfolio will take such steps as is deemed
advisable, if any, to protect liquidity.
Warrants
Each Portfolio may invest without limitation in
warrants. Warrants 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. 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.
In addition, the value of a warrant does not
necessarily change with the value of the underlying
security, and a warrant ceases to have value if it is
not exercised prior to its expiration date.
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 Internal Revenue Code of 1986, as
amended (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.
Foreign Securities
The Euro Select Equity Portfolio may invest directly
and without limitation in foreign securities. Investments
in securities of foreign issuers involve risks which
are in addition to the usual risks inherent in domestic
investments. 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
<PAGE>
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.
Foreign Currency Hedging Transactions
The Euro Equity Select Portfolio may enter into
forward foreign currency exchange contracts ("forward
contracts") and foreign currency futures contracts and
options thereon. See "_Derivative Instruments," below.
Forward contracts provide for the purchase, sale or
exchange of an amount of a specified foreign currency
at a future date. The Euro Select Equity Portfolio will
enterinto 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. The Euro Select Equity 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 Equity Portfolio may either accept or make
delivery of the currency specified in the contract or,
prior to maturity, enter into a closing 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 Equity 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 Equity Portfolio may suffer a loss.
The Euro Select Equity 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 Equity 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.
Borrowing
Each Portfolio is authorized to borrow money from
banks and make other investments or engage in other
transactions permissible under the 1940 Act which may be
considered a borrowing (such as mortgage dollar rolls
and reverse repurchase agreements), provided that the
amount borrowed cannot exceed 33 1/3% of the value of
the Portfolio's total assets. A Portfolio's borrowings
may create an opportunity for greater return to the
Portfolio and, ultimately, the Portfolio's
shareholders, but at the same time increase exposure to
losses. In addition, interest payments and fees paid
by a Portfolio on any borrowings may offset or exceed
the return earned on borrowed funds. Each Portfolio
currently intends to borrow money only for temporary,
extraordinary or emergency purposes and may not
purchase securities when its borrowings exceed 5% of
its total assets.
Lending Portfolio Securities
Each Portfolio may lend portfolio securities with
a value not exceeding 33 1/3% of the Portfolio's total
assets to brokers, dealers or other institutional
borrowers as a means of earning income. In return, the
Portfolios will receive collateral in cash or money
market instruments. The collateral will be maintained
at all times in an amount equal to at least 100% of the
current market value of the loaned securities. The
purpose of securities lending is to permit the borrower
to use such securities for delivery to purchasers when
such borrower has sold securities short. The
Portfolios will continue to receive the equivalent of
the interest or dividends paid by the
<PAGE>
issuer of the
securities lent. The Portfolios may also receive
interest on the investment of collateral or a fee from
the borrower as compensation for the loan. The
Portfolios may pay reasonable custodial and
administrative fees in connection with a loan. The
Portfolios will retain the right to call, upon notice,
lent securities. While there may be delays in recovery
or even a loss of right in collateral should the
borrower fail financially, ICAP will review the
creditworthiness of the entities to which such loans
are made to evaluate those risks. Although the
Portfolios are authorized to lend securities, they do
not presently intend to engage in lending activities.
Derivative Instruments
In General. Each Portfolio may invest up to 30%
of its net assets in derivative instruments. 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."
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 over-
the-counter ("OTC") transactions between private
parties. Exchange-traded derivatives are standardized
options and futures contracts traded in an auction on
the floor of a regulated exchange. Exchange contracts
are generally liquid. The exchange clearinghouse is
the counterparty of every contract. Thus, each holder
of an exchange contract bears the credit risk of the
clearinghouse (and has the benefit of its financial
strength) rather than that of a particular
counterparty. OTC transactions are subject to
additional risks, such as the credit risk of the
counterparty to the instrument, and are less liquid
than exchange-traded derivatives since they often can
only be closed out with the other party to the
transaction.
Risks and Special Considerations. The use of
derivative instruments involves risks and special
considerations as described below. Risks pertaining to
particular derivative instruments are described in the
sections that follow.
(1) Market Risk. The primary risk of derivatives
is the same as the risk of the underlying assets;
namely, that the value of the underlying asset may go
up or down. Adverse movements in the value of an
underlying asset can expose the Portfolios 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 anticipate
movements of the securities and currencies markets,
which requires different skills than anticipating
changes in the prices of individual securities. There
can be no assurance that any particular strategy
adopted will succeed. A decision to engage in a
derivative transaction will reflect ICAP's judgment
that the derivative transaction will provide value to a
Portfolio and its shareholders and is consistent with
the Portfolio's objectives, investment limitations and
operating policies. In making such a judgment, ICAP
will analyze the benefits and risks of the derivative
transaction and weigh them in the context of the
Portfolio's entire portfolio and investment objective.
(2) Credit Risk. The Portfolios will be subject
to the risk that a loss may be sustained as a result of
the failure of a counterparty to comply with the terms
of a derivative instrument. The counterparty risk for
exchange-traded
<PAGE>
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 a
Portfolio is unable to close out its positions in such
instruments, it might be required to continue to
maintain such assets or accounts or make such payments
until the position expired, matured or is closed out.
The requirements might impair the Portfolio's ability
to sell a portfolio security or make an investment at a
time when it would otherwise be favorable to do so, or
require that the Portfolio sell a portfolio security at
a disadvantageous time. A Portfolio's ability to sell
or close out a position in an instrument prior to
expiration or maturity depends on the existence of a
liquid secondary market or, in the absence of such a
market, the ability and willingness of the counterparty
to enter into a transaction closing out the position.
Therefore, there is no assurance that any derivatives
position can be sold or closed out at a time and price
that is favorable to the Portfolios.
(5) Legal Risk. Legal risk is the risk of loss
caused by the legal unenforceability of a party's
obligations under the derivative. While a party
seeking price certainty agrees to surrender the
potential upside in exchange for downside protection,
the party taking the risk is looking for a positive
payoff. Despite this voluntary assumption of risk, a
counterparty that has lost money in a derivative
transaction may try to avoid payment by exploiting
various legal uncertainties about certain derivative
products.
(6) Systemic or "Interconnection" Risk.
Interconnection risk is the risk that a disruption in
the financial markets will cause difficulties for all
market participants. In other words, a disruption in
one market will spill over into other markets, perhaps
creating a chain reaction. Much of the OTC derivatives
market takes place among the OTC dealers themselves,
thus creating a large interconnected web of financial
obligations. This interconnectedness raises the
possibility that a default by one large dealer could
create losses for other dealers and destabilize the
entire market for OTC derivative instruments.
General Limitations. The use of derivative
instruments is subject to applicable regulations of the
Securities and Exchange Commission (the "SEC"), the
several options and futures exchanges upon which they
may be traded, the Commodity Futures Trading Commission
("CFTC") and various state regulatory authorities.
<PAGE>
The Portfolios have 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
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 its net assets.
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, the SEC has stated that a Portfolio may use
coverage or the segregation of its assets. 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 and indices of debt and equity
securities ("underlying assets") and enter into closing
transactions with respect to such options to terminate
an existing position. Options used by the Portfolios
may include European, American and Bermuda style
options. If an option is exercisable only at maturity,
it is a "European" option; if it is also exercisable
prior to maturity, it is an "American" option; if it is
exercisable only at certain times, it is a "Bermuda"
option.
The Portfolios may purchase (buy) and write (sell)
put and call options and enter into closing
transactions with respect to such options to terminate
an existing position. The purchase of call options
serves as a long hedge, and the purchase of put options
serves as a short hedge. Writing put or call options
can enable the Portfolios to enhance income by reason
of the premiums paid by the purchaser of such options.
Writing call options serves as a limited short hedge
because declines in the value of the hedged investment
would be offset to the extent of the premium received
for writing the option. However, if the security
appreciates to a price higher than the exercise price
of the call option, it can be expected that the option
will be exercised and the affected Portfolio will be
obligated to sell the security at less than its market
value or will be obligated to purchase the security at
a price greater than that at which the security must be
sold under the option. All or a portion of any assets
used as cover for OTC options written by the Portfolios
would be considered illiquid to the extent described
under "_ Illiquid Securities," above. 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
<PAGE>
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 Portfolios to realize the profit or limit the loss
on an option position prior to its exercise or
expiration.
The Portfolios may purchase or write both exchange-
traded and OTC options. Exchange-traded options are
issued by a clearing organization affiliated with the
exchange on which the option is listed that, in effect,
guarantees completion of every exchange-traded option
transaction. In contrast, OTC options are contracts
between a Portfolio and the other party to the
transaction ("counterparty") (usually a securities
dealer or a bank) with no clearing organization
guarantee. Thus, when the Portfolios purchase or write
an OTC option, they rely on the counterparty to make or
take delivery of the underlying investment upon
exercise of the option. Failure by the counterparty to
do so would result in the loss of any premium paid by
the Portfolios as well as the loss of any expected
benefit of the transaction.
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, and purchase put and
call options, and write covered put and call options,
on such futures. 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 by the CFTC. Although techniques other
than sales and purchases of futures contracts could be
used to reduce a Portfolio's exposure to market,
currency or interest rate fluctuations, a Portfolio may
be able to hedge its exposure more effectively and
perhaps at a lower cost through using futures
contracts.
An interest rate futures contract provides for the
future sale by one party and purchase by another party
of a specified amount of a specific financial
instrument (e.g., a debt security) or currency for a
specified price at a designated date, time and place.
An index futures contract is an agreement pursuant to
which the parties agree to take or make delivery of an
amount of cash equal to the difference between the
value of the index at the close of the last trading day
of the contract and the price at which the index
futures contract was originally written. Transaction
costs are incurred when a futures contract is bought or
sold and margin deposits must be maintained. A futures
contract may be satisfied by delivery or purchase, as
the case may be, of the instrument or the currency or
by payment of the change
<PAGE>
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 loss; if it is more, the Portfolio
realizes a gain. 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
transactions, initial margin on futures contracts does
not represent a borrowing, but rather is in the nature
of a performance bond or good-faith deposit that is
returned to the Portfolio at the termination of the
transaction if all contractual obligations have been
satisfied. Under certain circumstances, such as
periods of high volatility, a Portfolio may be required
by an exchange to increase the level of its initial
margin payment, and initial margin requirements might
be increased generally in the future by regulatory
action.
Subsequent "variation margin" payments are made to
and from the futures broker daily as the value of the
futures position varies, a process known as "marking to
market." Variation margin does not involve borrowing,
but rather represents a daily settlement of a
Portfolio's obligations to or from a futures broker.
When a Portfolio purchases an option on a future, the
premium paid plus transaction costs is all that is at
risk. In contrast, when a Portfolio purchases or sells
a futures contract or writes a call or put option
thereon, it is subject to daily variation margin calls
that could be substantial in the event of adverse price
movements. If the Portfolio has insufficient cash to
meet daily variation margin requirements, it might need
to sell securities at a time when such sales are
disadvantageous. Purchasers and sellers of futures
positions and options on futures can enter into
offsetting closing transactions by selling or
purchasing, respectively, an instrument identical to
the instrument held or written. Positions in futures
and options on futures may be closed only on an
exchange or board of trade that provides a secondary
market. The Portfolios intend to enter into futures
transactions only on exchanges or boards of trade where
there appears to be a liquid secondary market.
However, there can be no assurance that such a market
will exist for a particular contract at a particular
time.
Under certain circumstances, futures exchanges may
establish daily limits on the amount that the price of
a future or option on a futures contract can vary from
the previous day's settlement price; once that limit is
reached, no trades may be made that day at a price
beyond the limit. Daily price limits do not limit
potential losses because prices could move to the daily
limit for several consecutive days with little or no
trading, thereby preventing liquidation of unfavorable
positions.
If a Portfolio were unable to liquidate a futures
or option on a futures contract position due to the
absence of a liquid secondary market or the imposition
of price limits, it could incur substantial losses.
Under these circumstances, 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
<PAGE>
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.
Cash Equivalents; Temporary Strategies
The Discretionary Equity, Select Equity and Euro
Select Equity Portfolios may invest up to 35% of their
respective total assets in cash and cash equivalents
for any purpose, including pending investment or
reinvestment, and may invest up to 100% of their
respective total assets in such instruments as a
temporary defensive measure when market conditions
warrant. The Equity Portfolio, on the other hand,
intends to be fully invested at all times and
accordingly will only hold cash or cash equivalents to
meet anticipated redemption requests, to pay expenses
and pending investment or reinvestment which, in any
case, generally will not exceed 5% of its total assets.
Cash equivalents are short-term fixed income securities
issued by private and governmental institutions which
are rated Prime-1 or higher by Moody's, A-1 or higher
by S&P, D-2 or higher by D&P, F-2 or higher by Fitch or
unrated securities of comparable quality as determined
by ICAP. Such securities include, without limitation,
the following:
U.S. Government Securities. These securities
include 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.
government agencies or instrumentalities. U.S.
government agency securities include securities
issued by (a) the Federal Housing Administration,
Farmers Home Administration, Export-Import Bank of
the United States, Small Business Administration
and Ginnie Mae, 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) Fannie Mae, 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, the Interamerican
Development Bank and the International Bank for
Reconstruction and Development, whose securities
are supported only by the credit of such agencies.
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.
Certificates of Deposit. These securities
are 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
securities are for a definite period of time, earn
a specified rate of return and are normally
negotiable. If a certificate of deposit is non-
negotiable, it will be considered illiquid and
will be subject to each Portfolio's 5% restriction
on investments in illiquid securities. A
certificate of deposit requires the issuer to pay
the amount deposited plus interest to the holder
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 the Portfolios may not be
fully insured.
Bank Time Deposits. Bank time deposits 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.
Bankers' Acceptances. Bankers' acceptances
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.
<PAGE>
Repurchase Agreements. For this purpose,
repurchase agreements include only those entered
into with respect to obligations of the U.S.
government, its agencies or instrumentalities. In
such a transaction, at the time a Portfolio
purchases the security, it simultaneously agrees
to resell 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 transactions afford
an opportunity for the Portfolios to invest
temporarily available cash. 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 Portfolios could incur a loss of both
principal and interest. ICAP monitors the value
of the collateral at the time the transaction 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
Portfolios. If the seller were to be subject to a
federal bankruptcy proceeding, the ability of the
Portfolios to liquidate the collateral could be
delayed or impaired because of certain provisions
of the bankruptcy laws.
Commercial Paper. These securities include
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). Master demand
notes are direct lending arrangements between a
Portfolio and a corporation. There is no
secondary market for such 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.
American Depository Receipts
The Portfolios may invest in American Depository
Receipts ("ADRs"). ADRs are denominated in U.S.
dollars and are designed for use in the U.S. securities
markets. ADRs are receipts typically issued by a U.S.
bank or trust company evidencing ownership of the
underlying securities. ADRs are deemed to have the same
classification as the underlying securities they
represent. Thus, an ADR representing ownership of
common stock will be treated as common stock.
ADR facilities may be established as either
"unsponsored" or "sponsored." While ADRs issued under
these two types of facilities are in some respects
similar, there are distinctions between them relating
to the rights and obligations of ADR holders and the
practices of market participants. A depository may
establish an unsponsored facility without participation
by (or even necessarily the acquiescence of) the issuer
of the deposited securities, although typically the
depository requests a letter of non-objection from such
issuer prior to the establishment of the facility.
Holders of unsponsored ADRs generally bear all the
costs of such facilities. The depository usually
charges fees upon the deposit and withdrawal of the
deposited securities, the conversion of dividends into
U.S. dollars, the disposition of non-cash distribution,
and the performance of other services. The depository
of an unsponsored facility frequently is under no
obligation to distribute shareholder communications
received from the issuer of the deposited securities or
to pass through voting rights to ADR holders in respect
of the deposited securities. Sponsored ADR facilities
are created in generally the same manner as unsponsored
facilities, except that the issuer of the deposited
securities enters into a deposit agreement with the
depository. The deposit agreement sets out the rights
and responsibilities of the issuer, the depository and
the ADR holders. With sponsored facilities, the issuer
of the deposited securities generally will bear some of
the costs relating to the facility (such as dividend
payment fees of the depository), although ADR holders
continue to bear certain other costs (such as deposit
and withdrawal fees). Under the terms of most
sponsored arrangements, depositories agree to
distribute notices of shareholder meetings and voting
instructions, and to provide
<PAGE>
shareholder communications
and other information to the ADR holders at the request
of the issuer of the deposited securities.
DIRECTORS AND OFFICERS
Under the laws of the State of Maryland, the Board
of Directors of the Portfolios is responsible for
managing the Portfolios' business and affairs.
Directors and officers of the Portfolios, together
with information as to their principal business
occupations during at least the last five years, and
other information, are shown below. Each director and
officer 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
Portfolios (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 four separate taxable investment
portfolios, including the Nuveen Growth and Income
Stock Fund, the Nuveen Balanced Stock and Bond
Fund, the Nuveen Balanced Municipal and Stock Fund
and the Nuveen Euro Select Value 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 Portfolios since
December 1994.
*Pamela H. Conroy, Vice President, Treasurer and a
Director of the Portfolios (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
Portfolios since December 1994.
*Donald D. Niemann, Vice President, Secretary and a
Director of the Portfolios (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 Portfolios since December 1994, and as a
Director of the Portfolios since July 1995.
Dr. James A. Gentry, a Director of the Portfolios (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 Portfolios since December 1994.
<PAGE>
Joseph Andrew Hays, a Director of the Portfolios (DOB
6/3/30).
Since January 1996, Mr. Hays has been the
principal in a consulting firm, The Hays Group,
located in Chicago, Illinois. Mr. Hays retired in
1995 from the Tribune Company, a diverse media
enterprise, as Vice President for Corporate
Relations and a member of its executive committee
after 12 years of service. Mr. Hays' professional
career in industry has been as an executive
specializing in the external affairs of
corporations. 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 Portfolios since
July 1995.
*Gary S. Maurer, a Director of the Portfolios (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 Portfolios since
December 1994.
Harold W. Nations, a Director of the Portfolios (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 Portfolios since
December 1994.
*Barbara C. Schanmier, a Director of the Portfolios
(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 Portfolios since December
1994.
Except for Dr. Gentry, Mr. Nations and Mr. 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, 1999, officers and directors of
the Portfolios beneficially owned ___ shares (___%) of
the Discretionary Equity Portfolio's then outstanding
shares, ___ shares (___%) of the Equity Portfolio's
then outstanding shares, ___ shares (___%) of the
Select Equity Portfolio's then outstanding shares and
___ shares (___%) of the Euro Select Equity Portfolio's
then outstanding shares.
Directors and officers of the Portfolios who are
also officers, directors, employees or shareholders of
ICAP do not receive any remuneration from the
Portfolios for serving as directors or officers.
Accordingly, Mr. Lyon, Ms. Conroy, Mr. Niemann, Mr.
Maurer and Ms. Schanmier do not receive any
remuneration from the Portfolios for their services as
directors and/or officers. However, Dr. Gentry, Mr.
Hays and Mr. Nations received the following fees in
1998 for their services as directors of the Portfolios:
<PAGE>
Name Cash Other Total
Compensation(1) Compensation
James A. Gentry $20,000 $0 $20,000
Joseph A. Hays $20,000 $0 $20,000
Harold W. Nations $20,000 $0 $20,000
_______________
(1) These three directors are not deemed to be "interested"
persons as defined in the 1940 Act. Accordingly, they each
receive $5,000 in cash for each formal board meeting attended.
Each of the directors is compensated with $5,000 worth of shares
of common stock in the Portfolio or Portfolios choice for each
board meeting attended.
PRINCIPAL SHAREHOLDERS
As of March 31, 1999, the following persons owned
of record or are known by the Portfolios to own
beneficially 5% or more of the outstanding shares of
one or more of the Portfolios:
Number of Percentage Percentage
Name and Address Portfolio Shares of Portfolio of Company
[update]
Based on the foregoing, as of March 31, 1999, [no
person] owned a controlling interest (i.e., more than
25%) in any Portfolio or in the Company as a whole.
Shareholders with a controlling interest could affect
the outcome of proxy voting or the direction of
management of the Portfolios.
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 owns a
51% controlling interest in 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.
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
Equity 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 Portfolios 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
Portfolios' 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 Portfolios' 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 May 13, 1998. The
amendments to the Advisory Agreement to add the Select
Equity and Euro Select Equity Portfolios were initially
approved by a vote of a majority of the Portfolios'
directors, including a majority of directors who were
not parties to the agreement or interested persons of
any such party, on November 13, 1997. Most recently,
the agreement was approved by the directors, including
the disinterested directors, on May 13, 1998. The
Advisory Agreement is terminable, without penalty, on
60 days' written notice by the Board of Directors, 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 and business
affairs, subject to the supervision of the Portfolios'
Board of Directors. At its expense, ICAP provides
office space and all necessary office facilities,
equipment and personnel for managing the investments of
the Portfolios.
As compensation for its services, the
Discretionary Equity, Equity and Select Equity
Portfolios pay to ICAP a monthly advisory fee at the
annual rate of 0.80% of the average net asset value of
the respective Portfolio, and the Euro Select Equity
Portfolio pays to ICAP a monthly advisory fee at the
annual rate of 1.00% of the average net asset value of
the Portfolio. The advisory fee is accrued daily and
paid monthly. For the years ended December 31, 1996,
1997 and 1998, ICAP waived its management fee and/or
reimbursed 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. Pursuant to an expense cap
agreement dated April 30, 1999 between ICAP and the
Portfolios, ICAP has contractually agreed to continue
this waiver/reimbursement policy for a period of 12
months. For the years ended December 31, 1996, 1997
and 1998, ICAP received $434,716, $832,551 and
$1,174,319 from the Discretionary Equity Portfolio,
respectively, and $436,868, $1,689,897 and $4,004,094
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 $715,273, $1,157,843 and
$1,521,894 from the Discretionary Equity Portfolio,
respectively, and $723,879, $2,141,357 and $4,613,552
from the Equity Portfolio, respectively, had ICAP not
waived a portion of its fees during the years ended
December 31, 1996, 1997 and 1998. For the year ending
December 31, 1998, ICAP also waived its management fee
and/or reimbursed operating expenses of the Select
Equity and Euro Select Equity Portfolios to the extent
necessary to ensure that the Select Equity Portfolio's
total operating expenses would not exceed 0.80% of the
Portfolio's average net assets and the Euro Select Equity
Portfolio's total operating expenses would not exceed
1.00% of the Portfolio's average net assets. Pursuant
to the expense cap agreement, ICAP has also
contractually agreed to continue this waiver/reimbursement
policy for a period of 12 months. For the year ended
December 31, 1998, ICAP received $0 from the Select Equity
Portfolio and $79,905 from the Euro Select Equity Portfolio
as compensation for its services under the Advisory Agreement.
The amounts received by ICAP for such services would have been
$47,089 from the Select Equity Portfolio and $242,136 from the
Euro Select Equity Portfolio had ICAP not waived all or a portion
of its fees during 1998.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Under the Advisory Agreement, 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. Trades may
be done with brokers, dealers and, on occasion,
issuers. Remuneration for trades may include
commissions, dealer spreads, mark-ups and mark-downs.
In executing transactions on behalf of the
Portfolios, ICAP has no obligation to deal with any
broker or dealer. Rather, ICAP seeks the best
qualitative execution. The best net price is an
important factor, but ICAP also considers the full
range and quality of a broker's services, as described
below. Recognizing the value of the range of services,
the Portfolios may not pay the lowest commission or
spread available on a particular transaction.
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, 1996, 1997 and 1998 was $197,710,
$239,444 and $354,920, respectively, and the aggregate
amount of brokerage commissions paid by the Equity
Portfolio for the years ended December 31, 1996, 1997
and 1998 was $220,706, $522,276 and $1,216,016,
respectively. The increase in brokerage fees from 1996
to 1998 is due to the increase in net assets under
management and the attendant increase in volume and
dollar value of transactions effected
<PAGE>
on behalf of the
Portfolios. The aggregate amount of brokerage
commissions paid by the Select Equity and Euro Select
Equity Portfolios for the year ended December 31, 1998
was $26,597 and $80,601, respectively.
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 (i) 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;
(ii) furnishing analyses and reports concerning
issuers, industries, securities, economic factors and
trends, portfolio strategy and the performance of
accounts; and (iii) effecting securities transactions
and performing functions incidental thereto (such as
clearance, settlement and custody).
In selecting brokers or dealers, ICAP considers
investment and market information and other research,
such as economic, securities and performance
measurement research, provided by such brokers or
dealers, and the quality and reliability of brokerage
services, including execution capability, performance
and financial responsibility. Accordingly, the
commissions charged by any such broker or dealer 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 or dealer 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 them.
Such higher commissions will not, however, be paid by
the Portfolios unless (i) 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, including the Portfolios, as to which
it exercises investment discretion; (ii) such payment
is made in compliance with the provisions of Section
28(e), other applicable state and federal laws and the
Advisory Agreement; and (iii) in the opinion of ICAP,
the total commissions paid by the Portfolios are
reasonable in relation to the benefits to the
Portfolios over the long term. The aggregate amount of
brokerage commissions for transactions for which
research services were provided paid by the
Discretionary Equity Portfolio for the year ended
December 31, 1998 was $244,581; the aggregate amount of
such commissions paid by the Equity Portfolio for the
same time period was $797,535; the aggregate amount of
such commissions paid by the Select Equity and Euro
Select Equity Portfolios for 1998 was $14,109 and $60,369,
respectively. During the year ended December 31, 1998,
the Portfolios did not acquire any stock of their
regular brokers or dealers.
ICAP places portfolio transactions for other
advisory accounts in addition to the Portfolios.
Research services furnished by firms through which the
Portfolios effect their securities transactions may be
used by ICAP in servicing all of its accounts; that is,
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 or dealer 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. There can be no assurance
that a particular purchase or sale opportunity will be
allocated to the Portfolios. In making such
allocations between the Portfolios 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.
ADMINISTRATOR
Pursuant to an Amended and Restated Administration
and Fund Accounting Agreement dated as of November 13,
1997, Sunstone Financial Group, Inc. ("Sunstone"),
provides administrative and fund accounting services to
the Portfolios. Under this agreement, Sunstone
calculates the daily net asset value of each Portfolio
<PAGE>
and provides various administrative services to the
Portfolios, including 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
years ended December 31, 1996, 1997 and 1998, Sunstone
received $254,731, $381,200 and $603,126, respectively,
for its services under this agreement.
Sunstone's address is 207 East Buffalo Street,
Suite 400, Milwaukee, Wisconsin, 53202.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT
As custodian for the Portfolios' assets, 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, if any, and performs
other duties, all as directed by the officers of the
Portfolios.
Sunstone, 207 East Buffalo Street, Suite 315,
Milwaukee, Wisconsin 53202, acts as transfer agent and
dividend-disbursing agent for the Portfolios.
PURCHASE AND PRICING OF SHARES
Purchase of Shares
Shares of the Portfolios are offered and sold on a
continuous basis at the net asset value next calculated
after the time Sunstone receives a purchase or redemption
order in good form. Please see "Your Account" in the
Prospectus for more information.
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.
Pricing of Shares
Shares of each Portfolio are offered to the public
at the net asset value per share next computed after
the time the purchase application and funds are
received in proper order. The net asset value per
share of each Portfolio is determined as of the close
of trading (generally 4:00 p.m. Eastern Time) on each
day the New York Stock Exchange (the "NYSE") is open
for business. Purchase orders and redemption requests
received 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 is not required to
calculate its net asset value on days during which it
receives no orders to purchase or redeem shares. Net
asset value per share for each Portfolio is
<PAGE>
calculated
by taking the market 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 in that
Portfolio. 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; provided,
however, securities traded on an exchange or Nasdaq for
which there were no transactions on a given day and
securities not listed on an exchange or Nasdaq are
valued at the average of the most recent bid and asked
prices. Other exchange traded securities (generally
foreign securities) will be valued based on market
quotations. 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. The Board of Directors
may approve the use of pricing services to assist the
Portfolios in the determination of net asset value.
Short-term fixed income securities held by the
Portfolios are generally valued on an amortized cost
basis.
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, 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.
TAXATION OF THE PORTFOLIOS
In General
Each Portfolio intends to qualify annually for
treatment as a "regulated investment company" under
Subchapter M of the Code and, if so qualified, will not
be liable for federal income taxes to the extent
earnings are distributed to shareholders on a timely
basis. In the event a Portfolio fails to qualify as a
"regulated investment company," it will be treated as a
regular corporation for federal income tax purposes.
Accordingly, the disqualifying Portfolio would be
subject to federal income taxes and any distributions
that it makes would be taxable and non-deductible by
the Portfolio. What this means for shareholders of
such Portfolio is that the cost of investing in the
Portfolio would increase. Under these circumstances,
it would be more economical for shareholders to invest
directly in securities held by the Portfolio, rather
than to invest indirectly in such securities through
the Portfolio.
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)
<PAGE>
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 share of its income from sources within, and
taxes paid to, foreign countries and U.S. possessions
if it makes this election.
Each Portfolio maintains its accounts and
calculates its income in U.S. dollars. In general,
gain or loss (i) from the disposition of foreign
currencies and forward currency contracts, (ii) from
the disposition of foreign-currency-denominated debt
securities that are attributable to fluctuations in
exchange rates between the date the securities are
acquired and their disposition date and (iii)
attributable to fluctuations in exchange rates between
the time a Portfolio accrues interest or other
receivables or expenses or other liabilities
denominated in a foreign currency and the time the
Portfolio actually collects those receivables or pays
those liabilities, will be treated as ordinary income
or loss. A foreign-currency-denominated debt security
acquired by a Portfolio may bear interest at a high
nominal rate that takes into account expected decreases
in the value of the principal amount of the security
due to anticipated currency devaluations; in that case,
a Portfolio would be required to include the interest
in income as it accrues but generally would realize a
currency loss with respect to the principal only when
the principal was received (through disposition or upon
maturity).
Derivative Instruments
The use of derivative 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 consinderations applicable to a particular investor.
Investors are urged to consult their own tax advisors.
PERFORMANCE INFORMATION
The historical performance or return of the
Portfolios may be shown in the form of various
performance figures, including average annual total
return, total return and cumulative total return. The
Portfolios' performance figures are based upon
historical results and are not necessarily
representative of future performance. Factors
affecting the Portfolios' performance include general
market conditions, operating expenses and investment
management. Any additional fees charged by a dealer or
other financial services firm would reduce the returns
described in this section.
<PAGE>
Total Return
Average annual total return and total return
figures measure both the net investment income
generated by, and the effect of any realized and
unrealized appreciation or depreciation of, the
underlying investments in a Portfolio over a specified
period of time, assuming the reinvestment of all
dividends and distributions. 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
therefore represent the aggregate percentage or dollar
value changes over the period.
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
gain 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
gain 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,
Equity, Select Equity and Euro Select Equity Portfolios
for the year ended December 31, 1998 was 10.17%,11.42%,
15.33% and 27.40%, respectively.
Comparisons
From time to time, in marketing and other
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, 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 rates funds on
the basis of historical risk and total return.
Morningstar's ratings 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. Ratings 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 S&P 500 Stock Index and the Morgan
Stanley Capital International - Europe 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
PricewaterhouseCoopers LLP, 100 East Wisconsin
Avenue, Milwaukee, Wisconsin 53202 have been selected
as the independent accountants for the Portfolios.
FINANCIAL STATEMENTS
The following audited financial statements are
incorporated herein by reference to the Portfolios'
Annual Report for the year ended December 31, 1998 as
filed with the SEC on __________ __, 1999:
(a) Schedules of Investments as of December 31, 1998.*
(b) Statements of Assets and Liabilities as of December 31, 1998.*
(c) Statements of Operations for the year ended December 31, 1998.*
(d) Statements of Changes in Net Assets for the years ended
December 31, 1997 and 1998.*
(e) Financial Highlights for the years ended December 31, 1995, 1996,
1997 and 1998.*
(f) Notes to Financial Statements.*
(g) Report of Independent Accountants dated _________ __, 1999.*
_________________________
* To be filed by amendment.
<PAGE>
PART C
OTHER INFORMATION
Item 23. Exhibits
See "Exhibit Index."
Item 24. Persons Controlled by or under Common Control
with Registrant
Registrant neither controls any person nor is
under common control with any other person.
Item 25. 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 26. 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, the Nuveen Balanced
Municipal and Stock Fund and the Nuveen Euro Select
Value 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.
Besides serving as investment adviser to the
Registrant and other private accounts, and as sub-
adviser to the Trust, ICAP is not currently and has not
during the past two fiscal years engaged in any other
business, profession, vocation or employment of a
substantial nature. Information regarding the
business, profession, vocation or employment of a
substantial nature of ICAP's directors and officers is
hereby incorporated by reference to the information
contained under "Directors and Officers" in the
Statement of Additional Information.
Item 27. Principal Underwriters
(a) None
(b) None
(c) None
<PAGE>
Item 28. 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 ICAP,
Registrant's investment adviser, at Registrant's
corporate offices, except (1) records held and
maintained by UMB Bank, n.a., 928 Grand Boulevard,
Kansas City, Missouri 64141, relating to its function
as custodian, (2) records held and maintained by
Sunstone Financial Group, Inc., 207 East Buffalo
Street, Suite 400, Milwaukee, Wisconsin 53202, relating
to its function as administrator and fund accountant
and (3) records held and maintained by Sunstone
Financial Group, Inc., 207 East Buffalo Street, Suite
315, Milwaukee, Wisconsin 53202 relating to its
function as transfer agent.
Item 29. Management Services
All management-related service contracts entered
into by Registrant are discussed in Parts A and B of
this Registration Statement.
Item 30. Undertakings.
(a) Registrant undertakes to furnish without
charge a copy of its Annual Report to each person to
whom a Statement of Additional Information is delivered
if the person is not a shareholder of the Portfolios at
the time the Statement of Additional Information is so
delivered.
(b) Registrant undertakes to furnish a copy of
its Annual Report to each person to whom a Prospectus
is delivered, upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act
of 1933 and the Investment Company Act of 1940, the
Registrant has duly caused this Post-Effective
Amendment No. 9 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 24th day of February, 1999.
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. 9 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 February 24, 1999
- ---------------------- and a Director
Pamela H. Conroy
/s/ James A. Gentry Director
- ---------------------- February 24, 1999
James A. Gentry
/s/ Joseph Andrew Hays Director February 24, 1999
- -----------------------
Joseph Andrew Hays
/s/ Robert H. Lyon President and a February 24, 1999
- ---------------------- Director
Robert H. Lyon
/s/ Gary S. Mauer Director February 24, 1999
- ----------------------
Gary S. Maurer
/s/ Harold W. Nations Director February 24, 1999
- -----------------------
Harold W. Nations
/s/ Donald D. Niemann Vice President, Secretary February 24, 1999
- ----------------------- and a Director
Donald D. Niemann
/s/ Barbara C. Schanmier Director February 24, 1999
- ------------------------
Barbara C. Schanmier
<PAGE>
EXHIBIT INDEX
Exhibit No.Exhibit
(a.1) Registrant's Articles of Incorporation (1)
(a.2) Registrant's Articles Supplementary, dated
December 8, 1997 (2)
(b) Registrant's By-Laws (1)
(c) None
(d.1) Investment Advisory Agreement dated as of
December 30, 1994 (Discretionary Equity
and Equity Portfolios) (1)
(d.2) Amendment to Investment Advisory Agreement
dated as of December 31, 1997 (Select
Equity Portfolio) (2)
(d.3) Amendment to Investment Advisory Agreement
dated as of December 31, 1997 (Euro Select
Portfolio) (2)
(d.4) Expense Cap Agreement dated April 30,
1999*
(e) None
(f) None
(g.1) Custodian Agreement with United Missouri
Bank, n.a. dated December 30, 1994 (1)
(g.2) Amendment to Custodian Agreement with
United Missouri Bank, n.a. (2)
(h.1) Transfer Agency Agreement with Sunstone
Investor Services, LLC dated as of
November 1, 1995 (3)
(h.2) Amendment to Transfer Agency Agreement
with Sunstone Investor Services, LLC dated
November 13, 1997 (2)
(h.3) Amended and Restated Administration and
Fund Accounting Agreement with Sunstone
Financial Group, Inc. dated as of November
13, 1997 (2)
(i.1) Opinion and Consent of Godfrey & Kahn,
S.C. (Discretionary Equity and Equity
Portfolios) (1)
(i.2) Opinion and Consent of Godfrey & Kahn,
S.C. (Select Equity and Euro Select
Portfolios) (2)
(j) Consent of PricewaterhouseCoopers LLP*
(k) None
(l) Subscription Agreements (1)
(m) None
(n) Financial Data Schedule (4)
(o) None
____________
*To be filed by amendment.
(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 ____________, 1999.
