<PAGE>
FMC SELECT FUND
Investment Adviser:
FIRST MANHATTAN CO.
This Prospectus offers shares of the FMC Select Fund (the "Fund"), which is a
separate series of The Advisors' Inner Circle Fund (the "Trust").
This Prospectus sets forth concisely the information about the Fund and the
Trust that a prospective investor should know before investing. Investors are
advised to read this Prospectus and retain it for future reference. A Statement
of Additional Information dated February 28, 1997 has been filed with the
Securities and Exchange Commission and is available without charge by calling 1-
800-932-7781. The Statement of Additional Information is incorporated into this
Prospectus by reference.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
February 28, 1997
FMC-F-001-03
THE ADVISORS' INNER CIRCLE FUND
<PAGE>
SUMMARY
The following provides basic information about the FMC Select Fund (the "Fund"),
one of the mutual funds comprising The Advisors' Inner Circle Fund (the
"Trust"). This summary is qualified in its entirety by reference to the more
detailed information provided elsewhere in this Prospectus and in the Statement
of Additional Information.
What is the Fund's Investment Objective and Policies? The Fund seeks to obtain
a favorable rate of return principally through capital appreciation and to a
limited degree through current income by investing in a portfolio of equity and
fixed income securities, including money market instruments.
What are the Risks Involved with an Investment in the Fund? An investment in the
Fund entails certain risks and considerations of which investors should be
aware. The Fund invests in equity and fixed income securities that fluctuate in
value, and investors should expect the Fund's net asset value per share to
fluctuate in value. The Fund also may invest in securities that have
speculative characteristics. See "Investment Objective," "General Investment
Policies," "Risk Factors" and "Description of Permitted Investments and Risk
Factors."
Who is the Adviser? First Manhattan Co. (the "Adviser") serves as the
investment adviser to the Fund. In addition to advising the Fund, the Adviser
provides advisory services to individuals, partnerships, trusts, pension and
other employee benefit plans, and eleemosynary and other institutions. See "The
Adviser."
Who is the Administrator? SEI Fund Resources (the "Administrator") serves as
the administrator and shareholder servicing agent of the Fund. See "The
Administrator."
Who is the Transfer Agent? DST Systems, Inc. (the "Transfer Agent") serves as
the transfer agent and dividend disbursing agent for the Trust. See "The
Transfer Agent."
Who is the Distributor? SEI Financial Services Company (the "Distributor")
serves as the distributor of the Fund's shares. See "The Distributor."
Is there a Sales Load? No, shares of the Fund are offered on a no-load basis.
Is there a Minimum Investment? The Fund requires a minimum initial investment
of $10,000, and subsequent investments must total $1,000 or more. These minimum
purchase requirements may be reduced or waived by the Distributor or for
investors who purchase shares of the Fund through omnibus accounts maintained by
registered broker-dealers who have executed sub-distribution agreements with the
Distributor.
2
<PAGE>
How do I Purchase and Redeem Shares? Purchases and redemptions may be made on
days when the New York Stock Exchange is open for business ("Business Days"). A
purchase order will be effective as of the Business Day received by the Fund's
Transfer Agent if the Transfer Agent receives an order and payment by check or
with readily available funds prior to 4:00 p.m., Eastern time. To open an
account using wired funds, you must first call 1-800-808-4921. Redemption orders
-----
placed prior to 4:00 p.m., Eastern time on any Business Day will be effective
that day. The Fund also offers both a Systematic Investment Plan and a
Systematic Withdrawal Plan. The purchase and redemption price for shares is the
net asset value per share determined as of the end of the day the order is
effective. See "Purchase and Redemption of Shares."
How are Distributions Paid? The Fund distributes substantially all of its net
investment income (exclusive of capital gains) in the form of quarterly
dividends. Any realized capital gain is distributed at least annually.
Distributions of net investment income and capital gains are paid in additional
shares unless the shareholder elects to take the payment in cash. See "General
Information -- Dividends and Distributions."
3
<PAGE>
EXPENSE SUMMARY
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES FMC SELECT FUND
- --------------------------------------------------------------------------------
<S> <C>
Sales Load Imposed on Purchases.............................................None
Sales Load Imposed on Reinvested Dividends..................................None
Deferred Sales Load.......................................................None
Redemption Fees (1)........................................................None
Exchange Fees..............................................................None
- --------------------------------------------------------------------------------
</TABLE>
(1) A wire redemption charge, currently $10.00, is deducted from the amount of
a Federal Reserve wire redemption payment made at the request of a
shareholder.
<TABLE>
<CAPTION>
ANNUAL OPERATING EXPENSES
(as a percentage of average net assets)
- --------------------------------------------------------------------------------
<S> <C>
Advisory Fees (after waivers)(2)........................................... .70%
12b-1 Fees................................................................. None
Other Expenses............................................................. .40%
- --------------------------------------------------------------------------------
Total Operating Expenses (2) 1.10%
- --------------------------------------------------------------------------------
</TABLE>
(2) The Adviser has, on a voluntary basis, agreed to waive Fund expenses in
order to limit the Fund's total operating expenses to a maximum of 1.10% of
average daily net assets. The other expenses and total operating expenses
shown reflect this voluntary arrangement. The Adviser reserves the right
to terminate this arrangement at any time in its sole discretion. Absent
such waivers, advisory fees and annual total operating expenses for the
fiscal period ended October 31, 1996 would have been .80% and 1.20% of
average daily net assets, respectively. See "The Adviser."
<TABLE>
<CAPTION>
EXAMPLE
- --------------------------------------------------------------------------------
1 year 3 years 5 years 10 years
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
You would pay the following expenses
on a $1,000 investment in the Fund $11 $35 $61 $134
assuming (1) 5% annual return and (2)
redemption at the end of each time
period.
- --------------------------------------------------------------------------------
</TABLE>
The example is based upon total operating expenses of the Fund after fee waivers
as shown in the expense table. The example should not be considered a
representation of past or future expenses, and actual expenses may be greater or
less than those shown. The purpose of the expense table and example is to assist
the investor in understanding the various costs and expenses that may be
directly or indirectly borne by shareholders of the Fund. Additional information
may be found under "The Adviser" and "The Administrator."
4
<PAGE>
FINANCIAL HIGHLIGHTS The Advisors' Inner Circle Fund
The following information on the FMC Select Fund has been audited by Arthur
Andersen LLP, the Fund's independent public accountants, as indicated in their
report dated December 6, 1996 on the Fund's financial statements as of October
31, 1996. This table should be read in conjunction with the Fund's audited
financial statements and notes thereto. The Fund's financial statements and
additional performance information are contained in the Annual Report to
Shareholders, which is available without charge by calling 1-800-932-7781.
For a Share of the Portfolio Outstanding Throughout the Period:
<TABLE>
<CAPTION>
FMC
Select
Fund
- -----------------------------------------------------------------------------
<S> <C> <C>
11/01/95 5/8/95(2)
to to
10/31/96 10/31/95
- -----------------------------------------------------------------------------
Net Asset Value, Beginning of Period......... $10.97 $10.00
- -----------------------------------------------------------------------------
Income From Investment Operations:
- -----------------------------------------------------------------------------
Net Investment Income..................... 0.14 0.10
- -----------------------------------------------------------------------------
Realized and Unrealized
Gains on Securities..................... 2.48 0.96
- -----------------------------------------------------------------------------
Total From Investment Operations............. 2.62 1.06
- -----------------------------------------------------------------------------
Less Distributions:
Distributions From Net Investment Income..... (0.14) (0.09)
- -----------------------------------------------------------------------------
Distributions from Capital Gains............. (0.03) --
- -----------------------------------------------------------------------------
Total Distributions..................... (0.17) (0.09)
- -----------------------------------------------------------------------------
Net Asset Value, End of Period............... $13.42 $10.97
- -----------------------------------------------------------------------------
Total Return(1).............................. 23.99% 10.60%
- -----------------------------------------------------------------------------
Ratios and Supplemental Data
Net Assets, End Of Period (000).............. $47,909 $27,202
Ratios Of Expenses To Average Net Assets..... 1.10% 1.10%*
Ratio Of Expenses To Average Net Assets
(Excluding Reimbursements)................... 1.20% 1.57%*
Ratio Of Net Investment Income To Average
Net Assets................................... 1.10% 1.96%*
Ratio Of Net Income to Average
Net Assets (Excluding Reimbursements)........ 1.00% 1.49%*
Portfolio Turnover Rate...................... 24.39% 1.87%
Average Commission Rate (3).................. $0.0600 --
=============================================================================
</TABLE>
* Annualized
(1) Total Return is for the period indicated and has not been annualized.
(2) The FMC Select Fund commenced operations on May 8, 1995.
(3) Average commission rate paid per share for the security purchases and
sales on which commissions were paid during the period.
5
<PAGE>
THE TRUST AND THE FUND
The Advisors' Inner Circle Fund (the "Trust") is designed to provide a
convenient and economic means of investing in professionally managed portfolios
of securities by offering shares in a number of separately-managed mutual funds,
each of which is a separate series ("fund") of the Trust. Each share of each
mutual fund represents an undivided, proportionate interest in that mutual fund.
This Prospectus offers shares of the FMC Select Fund (the "Fund"), a diversified
portfolio.
INVESTMENT OBJECTIVE
The Fund seeks a favorable rate of return principally through capital
appreciation and to a limited degree through current income. There can be no
assurance that the Fund will be able to achieve its investment objective.
GENERAL INVESTMENT POLICIES
The Fund invests principally in equity securities, and to a limited degree in
fixed income securities, including money market instruments. The Fund
ordinarily will invest a predominant portion of its assets (75%-85%) in equity
securities and the remainder in fixed income securities, including money market
instruments. The exact percentage of the Fund's assets invested in equity and
fixed income securities will vary from time to time in accordance with the
Adviser's assessment of investment opportunities.
Equity Securities. The equity securities in which the Fund may invest are
- -----------------
common stocks, preferred stocks, and convertible securities of domestic
companies, as well as warrants to purchase such securities. The Adviser may
also purchase U.S. dollar-denominated equity securities (including Depositary
Receipts) and preferred stocks (including preferred stocks convertible into
common stocks) issued by foreign companies, as well as debt securities
convertible into common stocks, and shares of closed-end investment companies.
The Fund may purchase equity securities that are traded on registered exchanges
or the over-the-counter market in the United States.
In selecting equity securities for the Fund, the Adviser will not attempt to
forecast either the economy or the stock market, but rather will focus its
efforts on searching out investment opportunities in equity securities of
companies with strong balance sheets, favorable returns on equity and businesses
of which the Adviser has an understanding, and in equity securities of companies
where all of these factors may not be present, but whose shares nevertheless
sell at a market valuation below their perceived intrinsic value.
Fixed Income Securities. The fixed income securities that may be purchased by
- -----------------------
the Fund are: (i) obligations issued or guaranteed as to principal and interest
by the U.S. Government, its agencies or instrumentalities ("U.S. Government
securities"); (ii) dollar denominated corporate bonds and debentures of U.S. and
foreign companies that are rated BBB- or higher by Standard & Poor's Corporation
("S&P") or Baa3 or higher by Moody's Investors Services, Inc. ("Moody's"), or
are
6
<PAGE>
unrated but of comparable quality as determined by the Adviser; (iii) mortgage-
backed securities that are issued or guaranteed by a U.S. Government agency or
that are privately-issued collateralized mortgage obligations ("CMOs") or real
estate mortgage investment conduits ("REMICs") rated in one of the top two
categories by S&P or Moody's; (iv) high quality commercial paper; (v) securities
issued by the Government of Canada and supranational agencies such as the World
Bank; (vi) asset-backed securities rated in one of the top two categories by S&P
or Moody's; (vii) short-term debt obligations of U.S. and foreign banks; (viii)
zero coupon securities; (ix) money market instruments; and (x) repurchase
agreements.
Debt rated BBB- by S&P is regarded as having an adequate capacity to pay
interest and repay principal. In S&P's view, whereas the issuer normally
exhibits adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than in higher rated categories. Bonds
rated Baa3 by Moody's are considered medium grade obligations (i.e., they are
neither highly protected nor poorly secured). Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
In the view of Moody's, such bonds lack outstanding investment characteristics
and in fact have speculative characteristics as well. In the event any fixed
income security held by the Fund is downgraded below the applicable rating
category set forth above, the Adviser will review the security and determine
whether to retain or dispose of it.
In selecting fixed income securities for the Fund, the Adviser will seek added
returns from the long-term compounding of incremental yields rather than from
attempting to anticipate bond market price swings. The sources of incremental
returns are (1) the higher yields on corporate and government agency securities
compared to U.S. Treasury securities and (2) mispriced prepayment options. The
fixed income component of the Fund ordinarily will consist of securities with a
duration of up to eight years. Interest rate forecasting will not play a
significant role in the Adviser's fixed income investment strategy.
Auxiliary Policies.
- ------------------
Although not primary strategies employed by the Adviser in managing the Fund,
the Fund may engage in a number of investment practices in order to meet its
investment objective. In this regard, the Fund may invest in variable and
floating rate obligations, enter into forward commitments, purchase securities
on a when-issued basis and sell securities short against the box. The Fund may
also purchase put and call options and write covered call options on fixed
income and equity securities, and may enter into futures contracts (including
index futures contracts), purchase options on futures contracts, and lend its
securities.
The Fund also may invest up to 5% of its total assets in convertible debt
securities rated Caa or higher by Moody's or CCC or higher by S&P, Duff & Phelps
Corporation or Fitch Investor Services, Inc. While the Adviser will purchase
such securities with a view to the capital appreciation potential
7
<PAGE>
associated with the underlying equity security, below investment-grade issues,
otherwise known as "junk bonds," present special risks. See the "Description of
Permitted Investments and Risk Factors."
For temporary defensive purposes during periods when the Adviser determines that
market conditions warrant, the Adviser may invest up to 100% of the Fund's
assets in cash or money market instruments.
For a description of the permitted investments of the Fund and the associated
risk factors, see "Description of Permitted Investments and Risk Factors." For
a description of ratings, see the Appendix to the Statement of Additional
Information.
RISK FACTORS
Equity Securities -- Investments in common stocks are subject to market risks
- -----------------
which may cause their prices to fluctuate over time. The value of convertible
securities is also affected by prevailing interest rates, the credit quality of
the issuer and any call provisions. Changes in the value of portfolio
securities will not necessarily affect cash income derived from these securities
but will affect the Fund's net asset value.
Fixed Income Securities -- The market value of fixed income investments will
- -----------------------
generally change in response to interest rate changes and other factors. During
periods of falling interest rates, the values of outstanding fixed income
securities generally rise. Conversely, during periods of rising interest rates,
the values of such securities generally decline. Moreover, while securities
with longer maturities tend to produce higher yields, the prices of longer
maturity securities are also subject to greater market fluctuations as a result
of changes in interest rates.
Options -- Risks associated with options transactions include the following: (1)
- -------
if hedging, the success of such a strategy may depend on an ability to
accurately predict movements in the prices of individual securities,
fluctuations in markets and movements in interest rates; (2) there may be an
imperfect correlation between the movement in prices of options and the
securities underlying them; (3) there may not be a liquid secondary market for
an option; and (4) while the Fund will receive a premium when it writes covered
call options, it may not participate fully in a rise in the market value of the
underlying security.
Securities of Foreign Issuers -- There are certain risks connected with
- -----------------------------
investing in foreign securities. These include risks of adverse political and
economic developments (including possible governmental seizure or
nationalization of assets), the possible imposition of exchange controls or
other government restrictions, less uniformity in accounting and reporting
requirements, the possibility that there will be less information on such
securities and their issuers available to the public, the difficulty of
obtaining or enforcing court judgments abroad, restrictions of foreign
investments in other jurisdictions, difficulties in effecting repatriation of
capital invested abroad, and the difficulties in
8
<PAGE>
transaction settlements and the effect of delay on shareholder equity. Foreign
securities may be subject to foreign taxes, and may be less marketable than
comparable U.S. securities.
INVESTMENT LIMITATIONS
The investment objective of the Fund and the investment limitations set forth
below and in the Statement of Additional Information are fundamental policies of
the Fund. Fundamental policies cannot be changed with respect to the Fund
without the consent of the holders of a majority of the Fund's outstanding
shares.
The Fund may not:
1. Purchase securities of any issuer (except securities issued or guaranteed as
to principal and interest by the United States, its agencies or
instrumentalities and repurchase agreements involving such securities) if as a
result more than 5% of the total assets of the Fund would be invested in the
securities of such issuer. This restriction applies to 75% of the Fund's total
assets.
2. Purchase any securities which would cause 25% or more of the total assets of
the Fund to be invested in the securities of one or more issuers conducting
their principal business activities in the same industry, provided that this
limitation does not apply to investments in U.S. Government securities and
repurchase agreements involving such securities. For purposes of this
limitation (i) utility companies will be classified according to their services,
for example, gas, gas transmission, electric and telephone will each be
considered a separate industry, (ii) financial service companies will be
classified according to the end users of their services, for example, automobile
finance, bank finance and diversified finance will each be considered a separate
industry, and (iii) supranational entities will be considered to represent one
industry.
3. Borrow money except for temporary or emergency purposes and then only in an
amount not exceeding 10% of the value of its total assets. The Fund will not
purchase additional securities while borrowings exceed 5% of its assets.
As relating to investment limitation numbers 1 and 2, the foregoing percentages
will apply at the time of the purchase of a security. Additional investment
limitations are set forth in the Statement of Additional Information.
THE ADVISER
First Manhattan Co. is a professional investment management firm organized as a
limited partnership that was founded in 1964. Because of the amount of his
ownership of the firm's outstanding partnership interests, Mr. David S.
Gottesman is deemed to control the Adviser. As of December 31, 1996, the
Adviser had management authority with respect to approximately $6 billion of
assets. The principal business address of the Adviser is 437 Madison Avenue,
New York, New York 10022.
9
<PAGE>
The Adviser serves as the Fund's investment adviser pursuant to an investment
advisory agreement (the "Advisory Agreement"). Under the terms of the Advisory
Agreement, the Adviser makes the investment decisions for the assets of the Fund
and continuously reviews, supervises and administers the Fund's investment
program, subject to the supervision of, and policies established by, the
Trustees of the Trust. In addition to advising the Fund, the Adviser provides
advisory services to individuals, partnerships, trusts, pension and other
employee benefit plans, and eleemosynary and other institutions.
Bernard C. Groveman, CFA, and A. Byron Nimocks, general partners of the Adviser
since 1994 and 1990, respectively, have managed the equity component of the Fund
since the Fund commenced operations. From 1990-1993, Mr. Groveman was a
portfolio manager with the Adviser.
William K. McElroy, a Managing Director of the Adviser, has managed the fixed
income component of the Fund since the Fund commenced operations. Mr. McElroy
has been a portfolio manager with the Adviser since 1987.
For its services, the Adviser is entitled to a fee, which is calculated daily
and paid monthly, at an annual rate of .80% of the average daily net assets of
the Fund. The Adviser has voluntarily agreed to waive a portion of its advisory
fee in order to limit total operating expenses of the Fund to not more than
1.10% of its average daily net assets. The Adviser reserves the right, in its
sole discretion, to terminate its fee waiver at any time. For the fiscal year
ended October 31, 1996, the Adviser received a fee (after waiver) equal to .70%
of the Fund's average daily net assets.
THE ADMINISTRATOR
SEI Fund Resources (the "Administrator"), a wholly-owned subsidiary of SEI
Corporation ("SEI"), provides the Trust with administrative services, including
regulatory reporting and all necessary office space, equipment, personnel and
facilities.
For these administrative services, the Administrator is entitled to a fee, which
is calculated daily and paid monthly, at an annual rate of .20% of the average
daily net assets. The Administrator's fee is subject to an annual minimum of
$75,000.
The Administrator also serves as shareholder servicing agent for the Fund under
a shareholder servicing agreement with the Trust.
THE TRANSFER AGENT
DST Systems, Inc., 1004 Baltimore Street, Kansas City, Missouri 64105 (the
"Transfer Agent") serves as the transfer agent and dividend disbursing agent for
the Trust under a transfer agency agreement with the Trust.
10
<PAGE>
THE DISTRIBUTOR
SEI Financial Services Company (the "Distributor"), Oaks, Pennsylvania 19456, a
wholly-owned subsidiary of SEI Investments Company, serves as the Trust's
distributor pursuant to a distribution agreement (the "Distribution Agreement").
No compensation is paid to the Distributor for distribution services for the
shares of the Fund.
FUND TRANSACTIONS
The Advisory Agreement authorizes the Adviser to select broker-dealers that will
execute the purchase or sale of securities for the Fund and directs the Adviser
to seek to obtain the best net results. The Fund expects to execute all or a
substantial portion of its brokerage or other agency transactions through the
Adviser, and may execute agency transactions through the Distributor, for which
each may receive usual and customary compensation.
PURCHASE AND REDEMPTION OF SHARES
Investors may purchase and redeem shares of the Fund directly through the
Transfer Agent at: The Advisors' Inner Circle Fund, P.O. Box 419009, Kansas
City, Missouri 64141-6009, or by contacting the Adviser. Shareholders may place
purchase and redemption orders by telephone; when market conditions are
extremely busy, it is possible that investors may experience difficulties
placing orders by telephone and may wish to place orders by mail. Purchases and
redemptions of shares of the Fund may be made on days when the New York Stock
Exchange is open for business (a "Business Day"). Shares of the Fund are offered
only to residents of states in which such shares are eligible for purchase.
The minimum initial investment in the Fund is $10,000, and subsequent purchases
must be at least $1,000. These minimum purchase requirements may be reduced or
waived by the Distributor or for investors who purchase shares of the Fund
through omnibus accounts maintained by registered broker-dealers who have
executed sub-distribution agreements with the Distributor. No minimum applies
to subsequent purchases effected by dividend reinvestment. As described below,
subsequent purchases through the Fund's Systematic Investment Plan must be at
least $100.
Purchases by Mail
An account may be opened by mailing a check or other negotiable bank draft
(payable to the FMC Select Fund) for $10,000 or more, together with a completed
Account Application, to the Transfer Agent at: The Advisors' Inner Circle Fund,
P.O. Box 419009, Kansas City, Missouri 64141-6009. Third-party checks, credit
cards, credit card checks and cash will not be accepted. Subsequent investments
may also be mailed directly to the Transfer Agent.
11
<PAGE>
Purchases by Wire Transfer
Shareholders having an account with a commercial bank that is a member of the
Federal Reserve System may purchase shares of the Fund by requesting their bank
to transmit funds by wire to: United Missouri Bank, N.A.; ABA #10-10-00695; for
Account Number 9870601087; Further Credit: FMC Select Fund. The shareholder's
name and account number must be specified in the wire.
Initial Purchases: Before making an initial investment by wire, an investor
must first telephone 1-800-808-4921 to be assigned an account number. The
investor's name, account number, taxpayer identification number or Social
Security number, and address must be specified in the wire. In addition, an
Account Application should be promptly forwarded to the Transfer Agent at: The
Advisors' Inner Circle Fund, P.O. Box 419009, Kansas City, Missouri 64141-6009.
Subsequent Purchases: Additional investments may be made at any time through
the wire procedures described above, which must include a shareholder's name and
account number. The investor's bank may impose a fee for investments by wire.
General Information Regarding Purchases
A purchase order will be effective as of the day received by the Transfer Agent
if the Transfer Agent receives the order and payment before 4:00 p.m., Eastern
time. Payment may be made by check or readily available funds. The purchase
price of shares of the Fund is the net asset value per share next determined
after a purchase order is effective. Purchases will be made in full and
fractional shares of the Fund calculated to three decimal places. The Trust
will not issue certificates representing shares of the Fund.
If a check received for the purchase of shares does not clear, the purchase will
be cancelled, and the investor could be liable for any losses or fees incurred.
The Trust reserves the right to reject a purchase order when the Trust
determines that it is not in the best interest of the Trust or its shareholders
to accept such order.
Redemptions
Redemption orders received by the Transfer Agent prior to 4:00 p.m., Eastern
time on any Business Day will be effective that day. The redemption price of
shares is the net asset value of the Fund next determined after the redemption
order is effective. Payment on redemption will be made as promptly as possible
and, in any event, within seven days after the redemption order is received,
provided, however, that the investment being redeemed has been in the
shareholder's account for a minimum of 15 days. Shareholders may not close
their accounts by telephone.
Shareholders may receive redemption payments in the form of a check or by
Federal Reserve wire transfer or Automated Clearing House ("ACH") wire transfer.
There is no charge for having a check for redemption proceeds mailed. The
custodian will deduct a wire charge, currently $10.00, from the
12
<PAGE>
amount of a Federal Reserve wire redemption payment made at the request of a
shareholder. Shareholders cannot redeem shares of the Fund by Federal Reserve
wire on Federal holidays restricting wire transfers. The Trust does not charge
for ACH wire transfers; however, such transactions will not be posted to a
shareholder's bank account until the second Business Day following the
transaction.
Systematic Withdrawal Plan -- The Fund offers a Systematic Withdrawal Plan
("SWP") for shareholders who wish to receive regular distributions from their
account. Upon commencement of the SWP, the account must have a current value of
$25,000 or more. Shareholders may elect to receive automatic payments via ACH
wire transfers of $100 or more on a monthly, quarterly, semi-annual or annual
basis. An application form for SWP may be obtained by calling 1-800-932-7781.
Shareholders should realize that if withdrawals exceed income dividends, their
invested principal in the account will be depleted. Thus, depending on the
frequency and amounts of the withdrawal payments and/or any fluctuations in the
net asset value per share, their original investment could be exhausted
entirely. To participate in the SWP, shareholders must have their dividends
automatically reinvested. Shareholders may change or cancel the SWP at any
time, upon written notice to the Transfer Agent.
Additional Redemption Information -- Neither the Trust nor the Transfer Agent
will be responsible for the authenticity of the redemption instructions received
by telephone if it reasonably believes those instructions to be genuine. The
Trust and the Transfer Agent will each employ reasonable procedures to confirm
that telephone instructions are genuine. Such procedures may include taping of
telephone conversations.
The right of redemption may be suspended or the date of payment of redemption
proceeds postponed during certain periods as set forth more fully in the
Statement of Additional Information.
Calculation of Net Asset Value -- The net asset value per share of the Fund is
determined by dividing the total market value of the Fund's investments and
other assets, less any liabilities, by the total outstanding shares of the Fund.
Net asset value per share is determined daily as of the close of business of the
New York Stock Exchange (normally 4:00 p.m., Eastern time) on any Business Day.
The Fund will use a pricing service to provide market quotations. With respect
to fixed income securities, the pricing service may use a matrix system of
valuation which considers factors such as securities prices, yield features,
call features, ratings and developments related to a specific security.
PERFORMANCE
From time to time, the Fund may advertise its yield and total return. These
figures will be based on historical earnings and are not intended to indicate
future performance. No representation can be made regarding actual future
yields or returns. The yield of the Fund refers to the annualized income
generated by an investment in the Fund over a specified 30-day period. The
yield is calculated by
13
<PAGE>
assuming that the same amount of income generated by the investment during that
period is generated in each 30-day period over one year and is shown as a
percentage of the investment.
The total return of the Fund refers to the average compounded rate of return on
a hypothetical investment, for designated time periods (including but not
limited to the period from which the Fund commenced operations through the
specified date), assuming that the entire investment is redeemed at the end of
each period and assuming the reinvestment of all dividend and capital gain
distributions.
The Fund may periodically compare its performance to that of other mutual funds
tracked by mutual fund rating services (such as Lipper Analytical Services,
Inc.), or by financial and business publications and periodicals, broad groups
of comparable mutual funds and unmanaged indices. The performance of unmanaged
indices may assume investment of dividends but generally do not reflect
deductions for administrative and management costs, or other investment
alternatives. The Fund may quote Morningstar, Inc., a service that ranks mutual
funds on the basis of risk-adjusted performance. The Fund may quote Ibbotson
Associates of Chicago, Illinois, which provides historical returns of the
capital markets in the United States. The Fund may use long-term performance of
these capital markets to demonstrate general long-term risk versus reward
scenarios and could include the value of a hypothetical investment in any of the
capital markets. The Fund may also quote financial and business publications
and periodicals as they relate to fund management, investment philosophy, and
investment techniques.
The Fund may quote various measures of volatility and benchmark correlation in
advertising and may compare these measures to those of other funds. Measures of
volatility attempt to compare historical share price fluctuations or total
returns to a benchmark while measures of benchmark correlation indicate how
valid a comparative benchmark might be.
TAXES
The following summary of federal income tax consequences is based on current tax
laws and regulations, which may be changed by legislative, judicial or
administrative action. No attempt has been made to present a detailed
explanation of the federal, state or local income tax treatment of the Fund or
its shareholders. Accordingly, shareholders are urged to consult their tax
advisers regarding specific questions as to federal, state and local income
taxes.
Tax Status of the Fund:
The Fund is treated as a separate entity for federal income tax purposes and is
not combined with the Trust's other funds. The Fund intends to qualify for the
special tax treatment afforded regulated investment companies under Subchapter M
of the Internal Revenue Code of 1986, as amended. So long as the Fund qualifies
for this special tax treatment, it will be relieved of federal income tax on
that part of its net investment income and net capital gain (the excess of net
long-term capital gain over net short-term capital loss) which it distributes to
shareholders.
14
<PAGE>
Tax Status of Distributions:
The Fund will distribute all of its net investment income (including, for this
purpose, net short-term capital gain) to shareholders. Dividends from net
investment income will be taxable to shareholders as ordinary income whether
received in cash or in additional shares. Distributions from net investment
income will qualify for the dividends-received deduction for corporate
shareholders only to the extent such distributions are derived from dividends
paid by domestic corporations. It can be expected that only certain dividends of
the Fund will qualify for that deduction. Any net capital gains will be
distributed annually and will be taxed to shareholders as long-term capital
gains, regardless of how long the shareholder has held shares. The Fund will
make annual reports to shareholders of the federal income tax status of all
distributions, including the amount of dividends eligible for the dividends-
received deduction.
Certain securities purchased by the Fund are sold with original issue discount
and thus generally do not make periodic cash interest payments. The Fund will
be required to include as part of its current income a portion of the accrued
discount on such obligations even though the Fund has not received any interest
payments on such obligations during that period. Because the Fund distributes
all of its net investment income to its shareholders, the Fund may have to sell
fund securities to distribute such accreted income, which may occur at a time
when the Adviser would not have chosen to sell such securities and which may
result in a taxable gain or loss.
Income received on direct U.S. government obligations is exempt from income tax
at the state level when received directly and may be exempt, depending on the
state, when received by a shareholder from the Fund provided certain state-
specific conditions are satisfied. The Fund will inform shareholders annually
of the percentage of income and distributions derived from direct U.S.
government obligations. Shareholders should consult their tax advisers to
determine whether any portion of the income dividends received from the Fund is
considered tax exempt in their particular state.
Dividends declared by the Fund in October, November or December of any year and
payable to shareholders of record on a date in one of those months will be
deemed to have been paid by the Fund and received by the shareholders on
December 31 of that year, if paid by the Fund at any time during the following
January.
The Fund intends to make sufficient distributions prior to the end of each
calendar year to avoid liability for federal excise tax. Such distributions
will be invested in additional shares of the Fund unless the investor has chosen
to receive distributions in cash.
A sale, exchange or redemption of the Fund's shares is a taxable event to the
shareholder.
15
<PAGE>
GENERAL INFORMATION
The Trust
The Trust, an open-end investment management company, was organized under
Massachusetts law as a business trust under a Declaration of Trust dated July
18, 1991. The Declaration of Trust permits the Trust to offer separate series
of shares. All consideration received by the Trust for shares of any fund and
all assets of such fund belong to that fund and would be subject to liabilities
related thereto. The Trust reserves the right to create and issue shares of
additional funds. Information regarding the other funds of the Trust is
contained in separate prospectuses that may be obtained by calling 1-800-932-
7781.
The Fund pays its (i) operating expenses, including fees of its service
providers, expenses of preparing prospectuses, proxy solicitation material and
reports to shareholders, costs of custodial services and registering shares
under federal and state securities laws, pricing and insurance expenses,
brokerage costs, interest charges, taxes and organization expenses and (ii) pro
rata share of the Trust's other expenses, including audit and legal expenses.
Expenses not attributable to a specific fund are allocated across all of the
funds on the basis of relative net assets.
Trustees of the Trust
The management and affairs of the Trust are supervised by the Trustees under the
laws of the Commonwealth of Massachusetts. The Trustees have approved contracts
under which, as described above, certain companies provide essential management
services to the Trust.
Voting Rights
Each share held entitles the shareholder of record to one vote. The Fund will
vote separately on matters relating solely to it. As a Massachusetts business
trust, the Trust is not required to hold annual meetings of shareholders but
shareholders' approval will be sought for certain changes in the operation of
the Trust and for the election of Trustees under certain circumstances.
In addition, a Trustee may be removed by the remaining Trustees or by
shareholders at a special meeting called upon written request of shareholders
owning at least 10% of the outstanding shares of the Trust. In the event that
such a meeting is requested, the Trust will provide appropriate assistance and
information to the shareholders requesting the meeting.
As of February 19, 1997, the First Manhattan Co. Thrift Plan and Trust (New
York, NY), the participants in which are the partners and employees of the
Adviser, owned a controlling interest in the Fund as defined by the Investment
Company Act of 1940, as amended.
16
<PAGE>
Reporting
The Trust issues unaudited financial information semiannually and audited
financial statements annually to shareholders of record for the Fund. The Trust
also furnishes periodic reports and, as necessary, proxy statements to
shareholders of record.
Shareholder Inquiries
Shareholder inquiries not involving orders to purchase or redeem shares may be
directed to the FMC Select Fund, c/o The Advisors' Inner Circle Fund, P.O. Box
419009, Kansas City, Missouri 64141-6009 or by calling 1-800-932-7781. Purchases
and redemptions of shares may be made through the Transfer Agent by calling 1-
800-808-4921.
Dividends and Distributions
Substantially all of the net investment income (excluding capital gain) of the
Fund is distributed in the form of quarterly dividends. Shareholders of record
on the last Business Day of each quarter will be entitled to receive the
quarterly dividend distribution. If any capital gain is realized,
substantially all of it is distributed at least annually.
Shareholders automatically receive all income dividends and capital gain
distributions in additional shares at the net asset value next determined
following the record date, unless the shareholder has elected to take such
payment in cash. Shareholders may change their election by providing written
notice to the Transfer Agent at least 15 days prior to the distribution.
Shareholders may receive payments for cash distributions in the form of a check
or by Federal Reserve wire transfer or ACH wire transfer.
Dividends and other distributions of the Fund are paid on a per share basis.
The value of each share will be reduced by the amount of the payment. If shares
are purchased shortly before the record date for a dividend or the distribution
of ordinary income or capital gains, a shareholder will pay the full price for
the shares and receive some portion of the price back as a taxable dividend or
distribution.
Counsel and Independent Public Accountants
Morgan, Lewis & Bockius LLP serves as counsel to the Trust. Arthur Andersen LLP
serves as the independent public accountants of the Trust.
Custodian
CoreStates Bank, N.A., Broad and Chestnut Streets, P.O. Box 7618, Philadelphia,
Pennsylvania 19101 serves as the custodian (the "Custodian") of the Fund. The
Custodian holds cash, securities and other assets of the Trust as required by
the Investment Company Act of 1940, as amended.
17
<PAGE>
DESCRIPTION OF PERMITTED INVESTMENTS AND RISK FACTORS
The following is a description of certain permitted investments and associated
risk factors for the Fund:
Asset-Backed Securities -- Asset-backed securities are secured by non-mortgage
assets such as company receivables, truck and auto loans, leases and credit card
receivables. Such securities are generally issued as pass-through certificates,
which represent undivided fractional ownership interests in the underlying pools
of assets. Such securities also may be debt instruments which are also known as
collateralized obligations and are generally issued as the debt of a special
purpose entity, such as a trust, organized solely for the purpose of owning such
assets and issuing such debt.
Bank Obligations -- Debt obligations issued by U.S. and foreign banks, including
bankers' acceptances (bills of exchange or time draft drawn on and accepted by
commercial banks and used by corporations to finance the shipment and storage of
goods and to furnish dollar exchange), certificates of deposit (negotiable
interest bearing instruments with specific maturities issued by banks and
savings and loan institutions in exchange for the deposit of funds), and time
deposits (non-negotiable receipts issued by banks in exchange for the deposit of
funds that earn a specified rate of interest over a definite period of time).
Commercial Paper -- Unsecured short-term promissory notes issued by corporations
and other entities. The maturities on these issues vary from a few days to nine
months.
Convertible Securities -- Convertible securities have characteristics of both
fixed income and equity securities. Because of the conversion feature (which
may be mandatory or optional), the market value of convertible securities tends
to move together with the market value of the underlying stock. As a result, the
Fund's selection of convertible securities is based, to a great extent, on the
potential for capital appreciation that may exist in the underlying stock. The
value of convertible securities is also affected by prevailing interest rates,
the credit quality of the issuer, and any call provisions.
High Risk, High Yield Convertible Securities -- Fixed income securities
- --------------------------------------------
(including convertible securities) rated below investment grade are often
referred to as "junk bonds." Such securities involve greater risk of default or
price declines than investment grade securities due to changes in the issuer's
creditworthiness and the outlook for economic growth. The market for these
securities may be less active, causing market price volatility and limited
liquidity in the secondary market. This may limit the Fund's ability to sell
such securities at their market value. In addition, the market for these
securities may also be adversely affected by legislative and regulatory
developments. Credit quality in the junk bond market can change suddenly and
unexpectedly, and even recently issued credit ratings may not fully reflect the
actual risks imposed by a particular security.
18
<PAGE>
Corporate Bonds -- Debt instruments issued by a private corporation, as distinct
from one issued by a governmental agency or municipality. Corporate bonds
generally have the following features: (1) they are taxable; (2) they have a par
value of $1,000; and (3) they have a term maturity. They are sometimes traded
on major exchanges.
Equity Securities -- Investments in equity securities in general are subject to
market risks that may cause their prices to fluctuate over time. The value of
securities, such as warrants or convertible debt, exercisable for or convertible
into equity securities is also affected by prevailing interest rates, the credit
quality of the issuer and any call provision. Fluctuations in the value of
equity securities in which the Fund invests will cause the net asset value of
the Fund to fluctuate. An investment in the Fund may therefore be more suitable
for long-term investors.
Fixed Income Securities -- The market value of the fixed income investments in
which the Fund invests will change in response to interest rate changes and
other factors. During periods of falling interest rates, the values of
outstanding fixed income securities generally rise. Conversely, during periods
of rising interest rates, the values of such securities generally decline.
Moreover, while securities with longer maturities tend to produce higher yields,
the prices of longer maturity securities are also subject to greater market
fluctuations as a result of changes in interest rates. Changes by recognized
agencies in the rating of any fixed income security and in the ability of an
issuer to make payments of interest and principal also affect the value of these
investments. Changes in the value of these securities will not necessarily
affect cash income derived from these securities but will affect the Fund's net
asset value.
Futures Contracts and Options on Futures Contracts -- Futures contracts provide
for the future sale by one party and purchase by another party of a specified
amount of a specific security at a specified future time and at a specified
price. An option on a futures contract gives the purchaser the right, in
exchange for a premium, to assume a position in a futures contract at a
specified exercise price during the term of the option. The Fund may use
futures contracts and related options for bona fide hedging purposes, to offset
---- ----
changes in the value of securities held or expected to be acquired, to minimize
fluctuations in foreign currencies, or to gain exposure to a particular market
or instrument. The Fund will minimize the risk that it will be unable to close
out a futures contract by only entering into futures contracts which are traded
on national futures exchanges.
Stock index futures are futures contracts for various stock indices that are
traded on registered securities exchanges. A stock index futures contract
obligates the seller to deliver (and the purchaser to accept, an amount of cash
equal to a specific dollar amount times the difference between the value of a
specific stock index at the close of the last trading day of the contract and
the price at which the agreement is made.
There are risks associated with these activities, including the following: (1)
the success of a hedging strategy may depend on an ability to accurately predict
movements in the prices of individual securities, fluctuations in markets and
movements in interest rates, (2) there may be an imperfect or no correlation
between the changes in market value of the securities held by the Fund and the
prices
19
<PAGE>
of futures and options on futures, (3) there may not be a liquid secondary
market for a futures contract or option, (4) trading restrictions or limitations
may be imposed by an exchange, and (5) government regulations may restrict
trading in futures contracts and futures options.
Investment Company Securities -- The Fund's purchase of investment company
securities will result in the layering of expenses. The Fund is prohibited from
acquiring the securities of other investment companies if, as a result of such
acquisition, the Fund owns in the aggregate (1) more than 3% of the total
outstanding voting stock of the acquired company, (2) securities issued by the
acquired company having an aggregate value of 5% of the value of the total
assets of the Fund, or (3) securities issued by the acquired company and all
other investment companies having an aggregate value in excess of 10% of the
value of the total assets of the Fund.
Money Market Instruments -- These high quality, short-term debt instruments
consist of U.S. Government securities; certificates of deposit, time deposits
and bankers' acceptances issued by high quality banks or savings and loan
associations; commercial paper rated A-1 or A-2 by S&P or Prime-1 or Prime-2 by
Moody's, or, if not rated, determined by the Adviser to be of comparable
quality; repurchase agreements involving any of the foregoing securities; and,
to the extent permitted by applicable law, shares of other investment companies
investing solely in money market instruments.
Mortgage Backed Securities -- The Fund may acquire securities representing an
interest in a pool of mortgage loans that are issued or guaranteed by a U.S.
Government agency. The primary issuers or guarantors of these mortgage-backed
securities are the Government National Mortgage Association, the Federal
National Mortgage Association and the Federal Home Loan Mortgage Corporation.
The Fund may also purchase collateralized mortgage obligations and real estate
mortgage investment conduits issued by governmental and non-governmental
entities. The mortgages backing these securities include conventional 30 year
fixed rate mortgages, graduated payment mortgages, and adjustable rate
mortgages. These mortgages may be supported by various types of insurance, may
be backed by GNMA certificates or other mortgage pass-throughs issued or
guaranteed by the U.S. Government, its agencies or instrumentalities. However,
the guarantees do not extend to the mortgage backed securities' market value,
which is likely to vary inversely with fluctuations in interest rates. These
certificates are in most cases "pass-through" instruments, through which the
holder receives a share of all interest and principal payments from the
mortgages underlying the certificate. Because the prepayment rates of the
underlying mortgages fluctuate, it is not possible to predict accurately the
average life or anticipated yield of a particular issue of pass-through
certificates. During periods of declining interest rates, prepayment of
mortgages underlying mortgage backed securities can be expected to accelerate.
When the mortgage obligations are prepaid, the Fund reinvests the prepaid
amounts in securities, the yield of which reflects interest rates prevailing at
the time. Moreover, prepayments of mortgages which underlie securities
purchased at a premium could result in capital losses.
Options -- A put option gives the purchaser of the option the right to sell, and
the writer of the option the obligation to buy, the underlying security at any
time during the option period. A call option gives the purchaser of the option
the right to buy, and the writer of the option the obligation
20
<PAGE>
to sell, the underlying security at any time during the option period. The
premium paid to the writer is the consideration for undertaking the obligations
under the option contract. The initial purchase (sale) of an option contract is
an "opening transaction." In order to close out an option position, the Fund may
enter into a "closing transaction," which is simply the sale (purchase) of an
option contract on the same security with the same exercise price and expiration
date as the option contract originally opened.
The Fund may purchase put and call options to protect against a decline in the
market value of the securities in its fund or to protect against an increase in
the cost of securities that the Fund may seek to purchase in the future. When
purchasing put and call options, the Fund pays a premium therefor. If price
movements in the underlying securities are such that exercise of the options
would not be profitable for the Fund, loss of the premium paid may be offset by
an increase in the value of the Fund's securities or by a decrease in the cost
of acquisition of securities by the Fund.
The Fund may write covered call options as a means of increasing the yield on
its fund and as a means of providing limited protection against decreases in its
market value. When the Fund sells an option, if the underlying securities do
not increase or decrease to a price level that would make the exercise of the
option profitable to the holder thereof, the option generally will expire
without being exercised and the Fund will realize as profit the premium received
for such option. When a call option of which the Fund is the writer is
exercised, the Fund will be required to sell the underlying securities to the
option holder at the strike price, and will not participate in any increase in
the price of such securities above the strike price. The Fund may purchase and
write options only on an exchange.
Risk Factors. Risks associated with options transactions include: (1) the
- ------------
success of a hedging strategy may depend on an ability to accurately predict
movements in the prices of individual securities, fluctuations in markets and
movements in interest rates; (2) there may be an imperfect correlation between
the movement in prices of options and the securities underlying them; (3) there
may not be a liquid secondary market for options; and (4) while the Fund will
receive a premium when it writes covered call options, it may not participate
fully in a rise in the market value of the underlying security.
Repurchase Agreements -- Repurchase agreements are agreements by which a person
obtains a security and simultaneously commits to return the security to the
seller at an agreed upon price (including principal and interest) on an agreed
upon date within a number of days from the date of purchase. The Custodian or
its agent will hold the security as collateral for the repurchase agreement.
Collateral must be maintained at a value at least equal to 102% of the purchase
price. The Fund bears a risk of loss in the event the other party defaults on
its obligations and the Fund is delayed or prevented from its right to dispose
of the collateral securities or if the Fund realizes a loss on the sale of the
collateral securities. The Adviser will enter into repurchase agreements on
behalf of the Fund only with financial institutions deemed to present minimal
risk of bankruptcy during the term of the agreement based on guidelines
established and periodically reviewed by the Trustees. Repurchase agreements
are considered to be loans by the Fund.
21
<PAGE>
Securities of Foreign Issuers -- The Fund will purchase only those securities of
foreign issuers (including American Depositary Receipts or "ADRs") that are
traded on registered exchanges or the over-the-counter market in the United
States. ADRs are typically issued by a U.S. financial institution and evidence
ownership of underlying securities issued by a foreign issuer. Investments in
securities of foreign issuers are subject to special risks such as future
adverse political and economic developments, possible seizure, nationalization
or expropriation of foreign investments, less stringent disclosure requirements,
the possible establishment of exchange controls or taxation at the source,
greater fluctuation in value due to changes in exchange rates, or the adoption
of other foreign governmental restrictions. Foreign securities issuers are
often subject to accounting treatment and engage in business practices different
from those respecting domestic securities issuers.
Securities Lending -- In order to generate additional income, the Fund may lend
securities which it owns pursuant to agreements requiring that the loan be
continuously secured by collateral consisting of cash, securities of the U.S.
Government or its agencies equal to at least 100% of the market value of the
securities loan. The Fund continues to receive interest on the securities loaned
while simultaneously earning interest on the investment of cash collateral.
Collateral is marked to market daily. There may be risks of delay in recovery of
the securities or even loss of rights in the collateral should the borrower of
the securities fail financially or become insolvent.
U.S. Government Securities -- Certain federal agencies have been established as
instrumentalities of the U.S. Government to supervise and finance certain types
of activities. Issues of these agencies, while not direct obligations of the
U.S. Government, are either backed by the full faith and credit of the United
States (e.g., GNMA obligations) or are guaranteed by the Treasury. Issues of
other agencies or instrumentalities are supported only by the issuing agency's
right to borrow from the Treasury or by the credit of the agency or
instrumentality (e.g., FNMA). Any guaranty by the U.S. Government, its agencies
or instrumentalities of the securities in which the Fund invests guarantees only
the payment of principal and interest on the guaranteed security and does not
guarantee the yield or value of that security or the yield or value of shares of
the Fund.
U.S. Treasury Securities -- U.S. Treasury securities consist of bills, notes and
bonds issued by the U.S. Treasury and separately traded interest and principal
component parts of such obligations that are transferable through the federal
book-entry system known as Separately Traded Registered Interest and Principal
Securities ("STRIPS").
Variable and Floating Rate Securities -- Certain of the obligations purchased by
the Fund may carry variable or floating rates of interest, may involve a
conditional or unconditional demand feature and may include variable amount
master demand notes. Such instruments bear interest at rates that are not
fixed, but vary with changes in specified market rates or indices, such as a
Federal Reserve composite index.
When-Issued Transactions -- The Fund may enter into forward commitments or
purchase securities on a when-issued basis, in which case delivery and payment
normally take place at a future date. The interest rate on these securities is
fixed as of the purchase date although no interest accrues
22
<PAGE>
until the settlement date. These securities are subject to market fluctuation
due to changes in market interest rates during the period between the purchase
date and the delivery date.
Zero Coupon Securities -- Zero coupon obligations are debt securities that do
not bear any interest, but instead are issued at a deep discount from par. The
value of a zero coupon obligation increases over time to reflect the interest
accreted. Such obligations will not result in the payment of interest until
maturity, and will have greater price volatility than similar securities that
are issued at par and pay interest periodically.
Please see the Statement of Additional Information for more information about
the permitted investments of the Fund.
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY................................................................ 2
EXPENSE SUMMARY........................................................ 4
FINANCIAL HIGHLIGHTS................................................... 5
THE TRUST AND THE FUND................................................. 6
INVESTMENT OBJECTIVE................................................... 6
GENERAL INVESTMENT POLICIES............................................ 6
RISK FACTORS........................................................... 8
INVESTMENT LIMITATIONS................................................. 9
THE ADVISER............................................................ 9
THE ADMINISTRATOR...................................................... 10
THE TRANSFER AGENT..................................................... 10
THE DISTRIBUTOR........................................................ 10
FUND TRANSACTIONS...................................................... 11
PURCHASE AND REDEMPTION OF SHARES...................................... 11
PERFORMANCE............................................................ 13
TAXES.................................................................. 14
GENERAL INFORMATION.................................................... 15
DESCRIPTION OF PERMITTED INVESTMENTS AND RISK FACTORS.................. 17
</TABLE>
<PAGE>
Fund:
FMC SELECT FUND
Adviser:
FIRST MANHATTAN CO.
Trust:
THE ADVISORS' INNER CIRCLE FUND
Distributor:
SEI FINANCIAL SERVICES COMPANY
Administrator:
SEI FUND RESOURCES
Legal Counsel:
MORGAN, LEWIS & BOCKIUS LLP
Independent Public Accountants:
ARTHUR ANDERSEN LLP
February 28, 1997
<PAGE>
FMC SELECT FUND
A Fund of:
THE ADVISORS' INNER CIRCLE FUND
Investment Adviser:
FIRST MANHATTAN CO.
This Statement of Additional Information is not a prospectus and relates only to
the FMC Select Fund (the "Fund"). It is intended to provide additional
information regarding the activities and operations of The Advisors' Inner
Circle Fund (the "Trust") and the Fund and should be read in conjunction with
the Fund's prospectus dated February 28, 1997. The Prospectus for the Fund may
be obtained by calling 1-800-932-7781.
TABLE OF CONTENTS
<TABLE>
<S> <C>
THE TRUST AND THE FUND....................................................S-2
DESCRIPTION OF PERMITTED INVESTMENTS......................................S-2
INVESTMENT LIMITATIONS....................................................S-5
THE ADVISER...............................................................S-7
THE ADMINISTRATOR.........................................................S-7
THE DISTRIBUTOR...........................................................S-8
TRUSTEES AND OFFICERS OF THE TRUST........................................S-8
COMPUTATION OF YIELD AND TOTAL RETURN....................................S-12
PURCHASE AND REDEMPTION OF SHARES........................................S-13
DETERMINATION OF NET ASSET VALUE.........................................S-13
TAXES....................................................................S-13
FUND TRANSACTIONS........................................................S-15
DESCRIPTION OF SHARES....................................................S-17
SHAREHOLDER LIABILITY....................................................S-17
LIMITATION OF TRUSTEES' LIABILITY........................................S-17
5% SHAREHOLDERS..........................................................S-18
EXPERTS..................................................................S-18
FINANCIAL STATEMENTS.....................................................S-18
APPENDIX................................................................. A-1
</TABLE>
February 28, 1997
FMC-F-002-04
<PAGE>
THE TRUST AND THE FUND
This Statement of Additional Information ("Statement") relates only to the FMC
Select Fund (the "Fund"). The Fund is a separate series of The Advisors' Inner
Circle Fund (the "Trust"), an open-end investment management company established
under Massachusetts law as a Massachusetts business trust under a Declaration of
Trust dated July 18, 1991. The Declaration of Trust permits the Trust to offer
separate series ("funds") of shares of beneficial interest ("shares"). Each
portfolio is a separate mutual fund, and each share of each fund represents an
equal proportionate interest in that fund. See "Description of Shares." No
investment in shares of a fund should be made without first reading that fund's
prospectus. Capitalized terms not defined herein are defined in the Prospectus
offering shares of the Fund.
DESCRIPTION OF PERMITTED INVESTMENTS
Mortgage Backed Securities
The Fund may invest in securities issued or guaranteed by the Government
National Mortgage Association ("GNMA"), a wholly-owned U.S. Government
corporation which guarantees the timely payment of principal and interest. The
market value and interest yield of these instruments can vary due to market
interest rate fluctuations and early prepayments of underlying mortgages. These
securities represent ownership in a pool of federally insured mortgage loans.
GNMA certificates consist of underlying mortgages with a maximum maturity of 30
years. However, due to scheduled and unscheduled principal payments, GNMA
certificates have a shorter average maturity and, therefore, less principal
volatility than a comparable 30-year bond. Since prepayment rates vary widely,
it is not possible to accurately predict the average maturity of a particular
GNMA pool. The scheduled monthly interest and principal payments relating to
mortgages in the pool will be "passed through" to investors. GNMA securities
differ from conventional bonds in that principal is paid back to the certificate
holders over the life of the loan rather than at maturity. As a result, there
will be monthly scheduled payments of principal and interest. In addition, there
may be unscheduled principal payments representing prepayments on the underlying
mortgages. Although GNMA certificates may offer yields higher than those
available from other types of U.S. Government securities, GNMA certificates may
be less effective than other types of securities as a means of "locking in"
attractive long-term rates because of the prepayment feature. For instance,
when interest rates decline, the value of a GNMA certificate likely will not
rise as much as comparable debt securities due to the prepayment feature. In
addition, these prepayments can cause the price of a GNMA certificate originally
purchased at a premium to decline in price to its par value, which may result in
a loss.
S-2
<PAGE>
The Fund may invest in mortgage backed securities consisting of collateralized
mortgage obligations ("CMOs") and real estate mortgage investment conduits
("REMICS"). CMOs are securities collateralized by mortgages, mortgage pass-
throughs, mortgage pay-through bonds (bonds representing an interest in a pool
of mortgages where the cash flow generated from the mortgage collateral pool is
dedicated to bond repayment) and mortgage backed bonds (general obligations of
the issuers payable out of the issuers' general funds and additionally secured
by a first lien on a pool of single family detached properties). CMOs typically
are issued with a number of classes or series which have different maturities
and which are retired using cash flow from underlying collateral according to a
specified plan.
Investors purchasing such CMOs in the shortest maturities receive or are
credited with their pro rata portion of the scheduled payments of interest and
principal on the underlying mortgages plus all unscheduled prepayments of
principal up to a predetermined portion of the total CMO obligation. Until that
portion of such CMO obligation is repaid, investors in the longer maturities
receive interest only. Accordingly, the CMOs in the longer maturity series are
less likely than other mortgage pass-throughs to be prepaid prior to their
stated maturity. Although some of the mortgages underlying CMOs may be
supported by various types of insurance, and some CMOs may be backed by GNMA
certificates or other mortgage pass-throughs issued or guaranteed by U.S.
Government agencies or instrumentalities, the CMOs themselves are not generally
guaranteed.
REMICs, which were authorized under the Tax Reform Act of 1986, are private
entities formed for the purpose of holding a fixed pool of mortgages secured by
an interest in real property. REMICs are similar to CMOs in that they issue
multiple classes of securities.
Repurchase agreements are agreements by which a person (e.g., the Fund) obtains
a security and simultaneously commits to return the security to the seller (a
member bank of the Federal Reserve System or primary securities dealer as
recognized by the Federal Reserve Bank of New York) at an agreed upon price
(including principal and interest) on an agreed upon date within a number of
days (usually not more than seven) from the date of purchase. The resale price
reflects the purchase price plus an agreed upon market rate of interest which is
unrelated to the coupon rate or maturity of the underlying security. A
repurchase agreement involves the obligation of the seller to pay the agreed
upon price, which obligation is in effect secured by the value of the underlying
security.
Repurchase agreements are considered to be loans by the Fund for purposes of its
investment limitations. The repurchase agreements entered into by the Fund will
provide that the underlying security at all times shall have a value at least
equal to 102% of the resale price stated in the agreement (the Adviser monitors
compliance with this requirement). Under all repurchase agreements entered into
by the Fund, the custodian or its agent must take possession of the underlying
collateral. However, if the seller defaults, the Fund could realize a loss on
the sale of the underlying security to the extent
S-3
<PAGE>
that the proceeds of sale including accrued interest are less than the resale
price provided in the agreement including interest. In addition, even though the
Bankruptcy Code provides protection for most repurchase agreements, if the
seller should be involved in bankruptcy or insolvency proceedings, the Fund may
incur delay and costs in selling the underlying security or may suffer a loss of
principal and interest if the Fund is treated as an unsecured creditor and is
required to return the underlying security to the seller's estate.
The Fund only invests in investment grade fixed income securities; however, it
may hold up to 5% of its total assets in convertible debt securities which are
rated as low as Caa by Moody's or CCC by S&P. Such below investment grade
instruments are high risk, high yield securities (known as "junk bonds") that
involve greater risk of default or price declines than investment grade
securities due to changes in the issuers' creditworthiness and the outlook for
economic growth. The market for these securities may be thinner and less active
causing market price volatility and limited liquidity in the secondary market.
This may limit the ability of the Fund to sell such securities at their market
value. In addition, the market for these securities may also be adversely
affected by legislative and regulatory developments. Credit quality in the junk
bond market can change suddenly and unexpectedly, and even recently issued
credit ratings may not fully reflect the actual risks imposed by a particular
security. For these reasons, it is the Fund's policy to use such ratings in
conjunction with the Adviser's own independent, ongoing review of credit
quality.
The Fund may invest in variable amount master demand notes which may or may not
be backed by bank letters of credit. These notes permit the investment of
fluctuating amounts at varying market rates of interest pursuant to direct
arrangements between the Fund, as lender, and the borrower. Such notes provide
that the interest rate on the amount outstanding varies on a daily, weekly or
monthly basis depending upon a stated short-term interest rate index. Both the
lender and the borrower have the right to reduce the amount of outstanding
indebtedness at any time. There is no secondary market for the notes. It is
not generally contemplated that such instruments will be traded.
The Fund may invest in when-issued securities. These securities involve the
purchase of debt obligations on a when-issued basis, in which case delivery and
payment normally take place at a future date. The Fund will only make
commitments to purchase obligations on a when-issued basis with the intention of
actually acquiring the securities, but may sell them before the settlement date.
The when-issued securities are subject to market fluctuation, and no interest
accrues on the security to the purchaser during this period. The payment
obligation and the interest rate that will be received on the securities are
each fixed at the time the purchaser enters into the commitment. Purchasing
obligations on a when-issued basis is a form of leveraging and can involve a
risk that the yields available in the market when the delivery takes place may
actually be higher than those obtained in the transaction itself. In that case
there could be an unrealized loss at the time of delivery.
S-4
<PAGE>
Segregated accounts will be established with the custodian, and the Fund will
maintain liquid assets (cash, U.S. Government obligations, or liquid, high
quality debt obligations) in an amount at least equal in value to its
commitments to purchase when-issued securities. If the value of these assets
declines, the Fund will place additional liquid assets in the account on a daily
basis so that the value of the assets in the account is equal to the amount of
such commitments.
The Fund may invest in warrants in an amount not exceeding 5% of the Fund's net
assets as valued at the lower of cost or market value. Included in that amount,
but not to exceed 2% of the Fund's net assets, may be warrants not listed on the
New York Stock Exchange or American Stock Exchange.
Investment Company Shares
The Fund may invest in shares of other investment companies, to the extent
permitted by applicable law and subject to certain restrictions. These
investment companies typically incur fees that are separate from those fees
incurred directly by the Fund. The Fund's purchase of such investment company
securities results in the layering of expenses, such that shareholders would
indirectly bear a proportionate share of the operating expenses of such
investment companies, including advisory fees, in addition to paying the
portfolio's usual expenses. See also "Investment Limitations."
INVESTMENT LIMITATIONS
The following policies are, except for policies 3, 6, 8 and 10, non-fundamental
policies of the Fund. Non-fundamental polices may be changed or eliminated by
the Trust's Board of Trustees without a vote of the Fund's shareholders. The
term "majority of the outstanding shares" of the Fund or the Trust,
respectively, means the vote of (i) 67% or more of the Fund's or the Trust's
shares present at a meeting, if more than 50% of the outstanding shares of the
Fund or the Trust are present or represented by proxy, or (ii) more than 50% of
the Fund's or the Trust's outstanding shares, whichever is less.
The Fund may not:
1. Acquire more than 10% of the voting securities of any one issuer.
2. Invest in companies for the purpose of exercising control.
3. Borrow money except for temporary or emergency purposes and then only in an
amount not exceeding 10% of the value of total assets. Borrowings from a
bank require asset coverage of at least 300%. In the event that such asset
coverage shall at any time fall below 300%, the Fund shall, within three
days thereafter or such longer period as the Securities and Exchange
Commission (the "SEC") may
S-5
<PAGE>
prescribe by rules and regulations, reduce the amount of its borrowings to
such an extent that the asset coverage of such borrowings shall be at least
300%. All borrowings in excess of 5% of total assets will be repaid before
making additional investments and any interest paid on such borrowings will
reduce income.
4. Make loans, except that the Fund may purchase or hold debt instruments in
accordance with its investment objective and policies, may lend its
portfolio securities, and may enter into repurchase agreements, as described
in the Prospectus and in this Statement of Additional Information.
5. Pledge, mortgage or hypothecate assets except to secure borrowings permitted
by (3) above in aggregate amounts not to exceed 10% of total assets taken at
current value at the time of the incurrence of such loan.
6. Purchase or sell real estate, real estate limited partnership interests or
commodities provided that this shall not prevent the Fund from investing in
readily marketable securities of issuers which can invest in real estate or
commodities, institutions that issue mortgages, and real estate investment
trusts which deal in real estate or interests therein, and provided further
that this shall not prevent the Fund from investing in commodities contracts
relating to financial instruments.
7. Make short sales of securities, maintain a short position or purchase
securities on margin, except that the Fund may obtain short-term credits as
necessary for the clearance of security transactions and may sell securities
short "against the box."
8. Act as an underwriter of securities of other issuers except as it may be
deemed an underwriter in selling a portfolio security.
9. Invest its assets in securities of any investment company, except as
permitted by the Investment Company Act of 1940 or pursuant to an order of
exemption therefrom.
10. Issue senior securities (as defined in the Investment Company Act of 1940)
except as permitted by rule, regulation or order of the SEC.
11. Invest in interests in oil, gas or other mineral exploration or development
programs and oil, gas or mineral leases.
S-6
<PAGE>
12. Invest in illiquid securities. An illiquid security is a security which
cannot be disposed of in the usual course of business within seven days, at
approximately the value at which the Fund has valued the instrument.
Illiquid securities include repurchase agreements maturing in excess of
seven days, time deposits with a withdrawal penalty, non-negotiable
instruments and instruments for which no market exists.
The foregoing percentages will apply at the time of the purchase of a security
and shall not be considered violated unless an excess occurs or exists
immediately after and as a result of a purchase of such security as to each
limitation except number 3.
THE ADVISER
The Trust and First Manhattan Co. (the "Adviser") have entered into an advisory
agreement (the "Advisory Agreement"). The Advisory Agreement provides that the
Adviser shall not be protected against any liability to the Trust or its
shareholders by reason of willful misfeasance, bad faith or gross negligence on
its part in the performance of its duties or from reckless disregard of its
obligations or duties thereunder.
For the fiscal period ended October 31, 1995 and the fiscal year ended October
31, 1996, the Adviser was paid $90,353 and $268,433, respectively, and for
fiscal period ended October 31, 1995 reimbursed fees of $53,582 and for fiscal
year ended October 31, 1996 waived fees of $38,766.
The continuance of the Advisory Agreement after the first two years must be
specifically approved at least annually (i) by the vote of the Trustees or by a
vote of the shareholders of the Fund, and (ii) by the vote of a majority of the
Trustees who are not parties to the
S-7
<PAGE>
Advisory Agreement or "interested persons" of any party thereto, cast in person
at a meeting called for the purpose of voting on such approval. The Advisory
Agreement will terminate automatically in the event of its assignment, and is
terminable at any time without penalty by the Trustees of the Trust or, by a
majority of the outstanding shares of the Fund, on not less than 30 days' nor
more than 60 days' written notice to the Adviser, or by the Adviser on 90 days'
written notice to the Trust.
THE ADMINISTRATOR
The Trust and SEI Fund Resources (the "Administrator") have entered into an
administration agreement (the "Administration Agreement"). The Administration
Agreement provides that the Administrator shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Trust in connection
with the matters to which the Administration Agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
the Administrator in the performance of its duties or from reckless disregard by
it of its duties and obligations thereunder. The Administration Agreement shall
remain in effect for a period of five years after the effective date of the
agreement and shall continue in effect for successive periods of two years
unless terminated by either party on not less than 90 days' prior written notice
to the other party. For the fiscal period ended October 31, 1995 and the fiscal
year ended October 31, 1996, the Administrator received fees of $36,370 and
$81,018, respectively, for the Fund.
The Trust and the Administrator have also entered into a shareholder servicing
agreement pursuant to which the Administrator provides certain shareholder
services in addition to those set forth in the Administration Agreement.
The Administrator, a Delaware business trust, has its principal business offices
at Oaks, Pennsylvania 19456. SEI Financial Management Corporation ("SFM"), a
wholly-owned subsidiary of SEI Investments Company ("SEI"), is the owner of all
beneficial interests in the Administrator. SEI and its affiliates, including
the Administrator, are leading providers of funds evaluation services, trust
accounting systems, and brokerage and information services to financial
institutions, institutional investors and money managers. The Administrator and
its affiliates also
S-8
<PAGE>
serve as administrator to the following other mutual funds: The Achievement
Funds Trust, The Arbor Fund, ARK Funds, Bishop Street Funds, CoreFunds, Inc.,
CrestFunds, Inc., CUFUND, FMB Funds, First American Funds, Inc., First American
Investment Funds, Inc., First American Strategy Funds, Inc., HighMark Funds,
Marquis Funds(R), Monitor Funds, Morgan Grenfell Investment Trust, The PBHG
Funds, Inc., The Pillar Funds, Profit Funds Investment Trust, Rembrandt
Funds(R), Santa Barbara Group of Mutual Funds, Inc., 1784 Funds(R), SEI Asset
Allocation Trust, SEI Daily Income Trust, SEI Index Funds, SEI Institutional
Investments Trust, SEI Institutional Managed Trust, SEI International Trust, SEI
Liquid Asset Trust, SEI Tax Exempt Trust, Stepstone Funds, STI Classic Funds and
STI Classic Variable Trust.
THE DISTRIBUTOR
SEI Financial Services Company (the "Distributor"), a wholly owned subsidiary of
SEI, and the Trust are parties to a distribution agreement (the "Distribution
Agreement"). The Distributor will not receive compensation for the distribution
of shares of the Fund.
The Distribution Agreement is renewable annually. The Distribution Agreement
may be terminated by the Distributor, by a majority vote of the Trustees who are
not interested persons and have no financial interest in the Distribution
Agreement or by a majority vote of the outstanding securities of the Trust upon
not more than 60 days' written notice by either party or upon assignment by the
Distributor.
TRUSTEES AND OFFICERS OF THE TRUST
The management and affairs of the Fund are supervised by the Trustees under the
laws of the Commonwealth of Massachusetts. Each may have held other positions
with the named companies during that period. The Fund pays the fees for
unaffiliated Trustees.
The Trustees and Executive Officers of the Fund, their respective dates of
birth, and their principal occupations for the last five years are set forth
below. Each may have held other positions with named companies during that
period. Unless otherwise noted, the business address of each Trustee and each
Executive Officer is SEI Investments Company, Oaks, Pennsylvania 19456. Certain
officers of the Fund also serve as officers of some or all of the following:
The Achievement Funds Trust, The Arbor Fund, ARK Funds, Bishop Street Funds,
CoreFunds, Inc., CrestFunds, Inc., CUFUND, FMB Funds, Inc., First American
Funds, Inc.,
S-9
<PAGE>
First American Investment Funds, Inc., First American Strategy Funds, Inc,
HighMark Funds, Marquis Funds(R), Monitor Funds, Morgan Grenfell Investment
Trust, The PBHG Funds, Inc., The Pillar Funds, Profit Funds Investment Trust,
Rembrandt Funds(R), Santa Barbara Group of Mutual Funds, Inc., 1784 Funds(R),
SEI Asset Allocation Trust, SEI Daily Income Trust, SEI Index Funds, SEI
Institutional Investments Trust, SEI Institutional Managed Trust, SEI
International Trust, SEI Liquid Asset Trust, SEI Tax Exempt Trust, Stepstone
Funds, STI Classic Funds, and STI Classic Variable Trust, each of which is an
open-end management investment company managed by SEI Fund Resources or its
affiliates and, except for Profit Funds Investment Trust, Rembrandt Funds(R),
and Santa Barbara Group of Mutual Funds, Inc., are distributed by SEI Financial
Services Company.
ROBERT A. NESHER (DOB 08/17/46) -- Chairman of the Board of Trustees* -- Retired
since 1994. Executive Vice President of SEI, 1986-1994. Director and Executive
Vice President of the Administrator and the Distributor, 1981-1994. Trustee of
the Arbor Fund, Marquis Funds(R), Advisors' Inner Circle Fund, SEI Asset
Allocation Trust, SEI Daily Income Trust, SEI Index Funds, SEI Institutional
Managed Trust, SEI International Trust, SEI Institutional Investments Trust, SEI
Liquid Asset Trust, SEI Tax Exempt Trust, Insurance Investment Products Trust,
1784 Funds(R), Pillar Funds, Rembrandt Funds, and Stepstone Funds.
JOHN T. COONEY (DOB 01/20/27) -- Trustee** -- 569 N. Post Oak Lane, Houston, TX
77024. Retired since 1992. Formerly Vice Chairman of Ameritrust Texas N.A.,
1989-1992, and MTrust Corp., 1985-1989. Trustee of the Arbor Fund, Marquis
Funds(R), and Advisors' Inner Circle Fund.
WILLIAM M. DORAN (DOB 05/26/40) - Trustee* - 2000 One Logan Square,
Philadelphia, PA 19103. Partner, Morgan, Lewis & Bockius LLP (law firm),
counsel to the Trust, Administrator and Distributor, Director and Secretary of
SEI. Trustee of the Arbor Fund, SEI Liquid Asset Trust, SEI Tax Exempt Trust,
SEI Daily Income Trust, SEI Index Funds, SEI Institutional Managed Trust, SEI
International Trust, SEI Asset Allocation Trust, SEI Institutional Investments
Trust, Insurance Investment Products Trust, The Advisors' Inner Circle Fund, and
Marquis Funds(R).
FRANK E. MORRIS (DOB 12/30/23) -- Trustee** -- 105 Walpole Street, Dover, MA
02030. Retired since 1990. Peter Drucker Professor of Management, Boston
College, 1989-1990. President, Federal Reserve Bank of Boston, 1968-1988.
Trustee of The Arbor Fund, Marquis Funds(R), Advisors' Inner Circle Fund, SEI
Liquid Asset Trust, SEI Tax Exempt Trust, SEI Daily Income Trust, SEI Index
Funds, SEI Institutional Managed Trust, SEI International Trust, Insurance
Investment Products Trust, SEI Asset Allocation Trust and SEI Institutional
Investments Trust.
ROBERT A. PATTERSON (DOB 11/05/27) -- Trustee** -- 208 Old Main, University
Park, PA 16802. Pennsylvania State University, Senior Vice President, Treasurer
S-10
<PAGE>
(Emeritus). Financial and Investment Consultant, Professor of Transportation
(1984-present). Vice President-Investments, Treasurer, Senior Vice President
(Emeritus) (1982-1984). Director, Pennsylvania Research Corp.; Member and
Treasurer, Board of Trustees of Grove City College. Trustee of the Arbor Fund,
Marquis Funds(R), and Advisors' Inner Circle Fund.
GENE PETERS (DOB 06/03/29)--- Trustee** -- 943 Oblong Road, Williamstown, MA
01267. Private investor from 1987 to present. Vice President and Chief
Financial Officer, Western Company of North America (petroleum service company)
(1980-1986). President of Gene Peters and Associates (import company) (1978-
1980). President and Chief Executive Officer of Jos. Schlitz Brewing Company
before 1978. Trustee of the Arbor Fund, Marquis Funds(R) and Advisors' Inner
Circle Fund.
JAMES M. STOREY (DOB 04/12/31) -- Trustee** -- Partner, Dechert Price & Rhoads,
from September 1987 - December 1993; Trustee of the Arbor Fund, Marquis
Funds(R), Advisors' Inner Circle Fund, SEI Liquid Asset Trust, SEI Tax Exempt
Trust, SEI Daily Income Trust, SEI Index Funds, SEI Institutional Managed Trust,
SEI International Trust, Insurance Investment Products Trust, SEI Asset
Allocation Trust, and SEI Institutional Investments Trust.
DAVID G. LEE (DOB 04/16/52) -- President and Chief Executive Officer -- Senior
Vice President of the Administrator and Distributor since 1993. Vice President
of the Administrator and Distributor, 1991-1993. President, GW Sierra Trust
Funds before 1991.
SANDRA K. ORLOW (DOB 10/18/53) -- Vice President and Assistant Secretary -- Vice
President and Assistant Secretary of the Administrator and Distributor since
1988.
KEVIN P. ROBINS (DOB 04/15/61) -- Vice President and Assistant Secretary --
Senior Vice President, General Counsel and Assistant Secretary of SEI, Senior
Vice President, General Counsel and Secretary of the Administrator and
Distributor since 1994. Vice President and Assistant Secretary of SEI, the
Administrator and Distributor, 1992-1994. Associate, Morgan, Lewis & Bockius
LLP (law firm), 1988-1992.
RICHARD W. GRANT (DOB 10/25/45) -- Secretary -- 2000 One Logan Square,
Philadelphia, PA 19103, Partner, Morgan, Lewis & Bockius LLP (law firm), counsel
to the Trust, Administrator and Distributor.
KATHRYN L. STANTON (DOB 11/19/58) -- Vice President and Assistant Secretary,
Deputy General Counsel of SEI, Vice President and Assistant Secretary of the
Administrator and Distributor since 1994. Associate, Morgan, Lewis & Bockius
LLP (law firm), 1989-1994.
S-11
<PAGE>
JOSEPH P. LYDON (DOB 09/27/59)-- Vice President and Assistant Secretary --
Director, Business Administration of Fund Resources, April 1995. Vice
President, Fund Group, Dremen Value Management, LP, President Dremen Financial
Services, Inc. prior to 1995.
STEPHEN G. MEYER (DOB 07/12/65) -- Controller, Chief Financial Officer-Vice
President and Controller of SEI Fund Resources since 1995. Director, Internal
Audit and Risk Management, SEI Corporation, 1992-1995. Senior Associate,
Coopers and Lybrand, 1990-1992.
TODD B. CIPPERMAN (DOB 01/14/66) -- Vice President and Assistant Secretary --
Vice President and Assistant Secretary of SEI, the Administrator and the
Distributor since 1995. Associate, Dewey Ballantine (law firm) (1994-1995).
Associate, Winston & Strawn (law firm) (1991-1994).
BARBARA A. NUGENT (DOB 06/18/56) -- Vice President and Assistant Secretary --
Vice President and Assistant Secretary of SEI, the Administrator and Distributor
since 1996. Associate, Drinker Biddle & Reath (law firm) (1994-1996).
Assistant Vice President/Administration, Delaware Service Company, Inc. (1992-
1993); Assistant Vice President - Operations of Delaware Service Company, Inc.
(1988-1992).
MARC H. CAHN (DOB 06/19/57) -- Vice President and Assistant Secretary -- Vice
President and Assistant Secretary of SEI, the Administrator and Distributor
since 1996. Associate General Counsel, Barclays Bank PLC (1995-1996). ERISA
counsel, First Fidelity Bancorporation (1994-1995), Associate, Morgan, Lewis &
Bockius LLP (1989-1994).
- ----------------------------------------
S-12
<PAGE>
*Messrs. Nesher and Doran are Trustees who may be deemed to be "interested"
persons of the Fund as that term is defined in the 1940 Act.
**Messrs. Cooney, Morris, Patterson, Peters and Storey serve as members of the
Audit Committee of the Fund.
The Trustees and officers of the Trust own less than 1% of the outstanding
shares of the Trust. The Trust pays the fees for unaffiliated Trustees.
The following table exhibits Trustee compensation for the fiscal year ended
October 31, 1996.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Total
Compensation From
Aggregate Compensation Pension or Estimated Registrant and Trust
From Registrant for the Retirement Benefits Annual Benefits Complex* Paid to
Fiscal Year Ended Accrued as Part of Upon Trustees for the
Name of Person, Position October 31, 1996 Trust Expenses Retirement Fiscal Year Ended
October 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John T. Cooney $9,859 N/A N/A $9,859 for
services on 1 board
- -----------------------------------------------------------------------------------------------------------------------------
Frank E. Morris $10,006 N/A N/A $10,006 for
services on 1 board
- -----------------------------------------------------------------------------------------------------------------------------
Robert Patterson $10,006 N/A N/A $10,006 for
services on 1 board
- -----------------------------------------------------------------------------------------------------------------------------
Eugene B. Peters $10,006 N/A N/A $10,006 for
services on 1 board
- -----------------------------------------------------------------------------------------------------------------------------
James M. Storey, Esq. $10,006 N/A N/A $10,006 for
services on 1 board
- -----------------------------------------------------------------------------------------------------------------------------
William M. Doran, Esq. $0 N/A N/A $0 for
services on 1 board
- -----------------------------------------------------------------------------------------------------------------------------
Robert A. Nesher $0 N/A N/A $0 for
services on 1 board
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
COMPUTATION OF YIELD AND TOTAL RETURN
From time to time the Trust may advertise its yield and total return of the
Fund. These figures will be based on historical earnings and are not intended
to indicate future performance. No representation can be made concerning actual
future yields or returns. The yield of the Fund refers to the annualized income
generated by an investment in the
S-13
<PAGE>
Fund over a specified 30-day period. The yield is calculated by assuming that
the income generated by the investment during that 30-day period is generated in
each period over one year and is shown as a percentage of the investment. In
particular, yield will be calculated according to the following formula:
Yield = 2 [((a-b)/cd + 1)/6/ - 1)] where a = dividends and interest earned
during the period; b = expenses accrued for the period (net of reimbursement);
c = the average daily number of shares outstanding during the period that were
entitled to receive dividends; and d = the maximum offering price per share on
the last day of the period.
For the 30-day period ended October 31, 1996, the yield for the Fund was 1.00%.
The total return of the Fund refers to the average compounded rate of return to
a hypothetical investment for designated time periods (including but not limited
to, the period from which the Fund commenced operations through the specified
date), assuming that the entire investment is redeemed at the end of each
period. In particular, total return will be calculated according to the
following formula: P (1 + T)/n/ = ERV, where P = a hypothetical initial payment
of $1,000; T = average annual total return; n = number of years; and ERV =
ending redeemable value, as of the end of the designated time period, of a
hypothetical $1,000 payment made at the beginning of the designated time period.
For the fiscal year ended October 31, 1996 and for the period from May 8, 1995
(commencement of operations) through October 31, 1996, the total return for the
Fund was 23.99% and 23.74% (annualized) respectively. The cumulative total
return for the Fund from May 8, 1995 through October 31, 1996 was 37.13%.
PURCHASE AND REDEMPTION OF SHARES
Purchases and redemptions may be made through the Transfer Agent on any Business
Day. Shares of the Fund are offered on a continuous basis. Currently, the Fund
is closed for business when the following holidays are observed: New Year's
Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas.
It is currently the Trust's policy to pay all redemptions in cash. The Trust
retains the right, however, to alter this policy to provide for redemptions in
whole or in part by a distribution in-kind, readily marketable securities held
by the Fund in lieu of cash. Shareholders may incur brokerage charges on the
sale of any such securities so received in payment of redemptions.
The Trust reserves the right to suspend the right of redemption and/or to
postpone the date of payment upon redemption for any period during which trading
on the New York Stock Exchange is restricted, or during the existence of an
emergency (as determined by the
S-14
<PAGE>
SEC by rule or regulation) as a result of which disposal or valuation of the
Fund's securities is not reasonably practicable, or for such other periods as
the SEC has by order permitted. The Trust also reserves the right to suspend
sales of shares of the Fund for any period during which the New York Stock
Exchange, the Adviser, the Administrator, the Transfer Agent and/or the
Custodian are not open for business.
DETERMINATION OF NET ASSET VALUE
The securities of the Fund are valued by the Administrator. The Administrator
uses an independent pricing service to obtain valuations of securities. The
pricing service relies primarily on prices of actual market transactions as well
as trader quotations. However, the service may also use a matrix system to
determine valuations of fixed income securities, which system considers such
factors as security prices, yields, maturities, call features, ratings and
developments relating to specific securities in arriving at valuations. The
procedures of the pricing service and its valuations are reviewed by the
officers of the Trust under the general supervision of the Trustees.
TAXES
The following is only a summary of certain tax considerations generally
affecting the Fund and its shareholders, and is not intended as a substitute for
careful tax planning. Shareholders are urged to consult their tax advisers with
specific reference to their own tax situations, including their state and local
tax liabilities.
Federal Income Tax
The following discussion of federal income tax consequences is based on the Code
and the regulations issued thereunder as in effect on the date of this Statement
of Additional Information. New legislation, as well as administrative changes
or court decisions, may significantly change the conclusions expressed herein,
and may have a retroactive effect with respect to the transactions contemplated
herein.
The Fund intends to qualify as a "regulated investment company" ("RIC") as
defined under Subchapter M of the Code. By following such a policy, the Fund
expects to eliminate or reduce to a nominal amount the federal taxes to which it
may be subject.
In order to qualify for treatment as a RIC under the Code, the Fund must
distribute annually to its shareholders at least the sum of 90% of its net
interest income excludable from gross income plus 90% of its investment company
taxable income (generally, net investment income plus net short-term capital
gain) ("Distribution Requirement") and also must meet several additional
requirements. Among these requirements are the following: (i) at least 90% of
the Fund's gross income each taxable year must be derived from dividends,
interest, payments with respect to securities loans, and gains from the sale or
other
S-15
<PAGE>
disposition of stock or securities, or certain other income; (ii) the Fund must
derive less than 30% of its gross income each taxable year from the sale or
other disposition of stocks or securities held for less than three months; (iii)
at the close of each quarter of the Fund's taxable year, at least 50% of the
value of its total assets must be represented by cash and cash items, U.S.
Government securities, securities of other RICs and other securities, with such
other securities limited, in respect to any one issuer, to an amount that does
not exceed 5% of the value of the Fund's assets and that does not represent more
than 10% of the outstanding voting securities of such issuer; and (iv) at the
close of each quarter of the Fund's taxable year, not more than 25% of the value
of its assets may be invested in securities (other than U.S. Government
securities or the securities of other RICs) of any one issuer or of two or more
issuers which the Fund controls or which are engaged in the same, similar or
related trades or business.
Notwithstanding the Distribution Requirement described above, which requires
only that the Fund distribute at least 90% of its annual investment company
taxable income and does not require any minimum distribution of net capital gain
(the excess of net long-term capital gain over net short-term capital loss), the
Fund will be subject to a nondeductible 4% federal excise tax to the extent it
fails to distribute by the end of any calendar year 98% of its ordinary income
for that year and 98% of its capital gain net income (the excess of short- and
long-term capital gains over short- and long-term capital losses) for the one-
year period ending on December 31st of that year, plus certain other amounts.
Any gain or loss recognized on a sale or redemption of shares of the Fund by a
non-exempt shareholder who is not a dealer in securities generally will be
treated as a long-term capital gain or loss if the shares have been held for
more than twelve months and otherwise generally will be treated as a short-term
capital gain or loss. If shares of the Fund on which a net capital gain
distribution has been received are subsequently sold or redeemed and such shares
have been held for six months or less, any loss recognized will be treated as a
long-term capital loss to the extent of the long-term capital gain distribution.
In certain cases, the Fund will be required to withhold, and remit to the United
States Treasury, 31% of any distributions paid to a shareholder who (1) has
failed to provide a correct taxpayer identification number, (2) is subject to
backup withholding by the Internal Revenue Service, or (3) has not certified to
the Fund that such shareholder is not subject to backup withholding.
If the Fund fails to qualify as a RIC for any taxable year, it will be taxable
at regular corporate rates. In such an event, all distributions (including
capital gains distributions) will be taxable as ordinary dividends to the extent
of the Fund's current and accumulated earnings and profits, and such
distributions will generally be eligible for the corporate dividends-received
deduction.
S-16
<PAGE>
State Taxes
The Fund is not liable for any income or franchise tax in Massachusetts if it
qualifies as a RIC for federal income tax purposes. Distributions by the Fund
to shareholders and the ownership of shares may be subject to state and local
taxes.
FUND TRANSACTIONS
The Fund has no obligation to deal with any broker-dealer or group of broker-
dealers in the execution of transactions in portfolio securities. Subject to
policies established by the Trustees of the Trust, the Adviser is responsible
for placing the orders to execute transactions for the Fund. In placing orders,
it is the policy of the Fund to seek to obtain the best net results taking into
account such factors as price (including the applicable dealer spread), the
size, type and difficulty of the transaction involved, the firm's general
execution and operational facilities, and the firm's risk in positioning the
securities involved. While the Adviser generally seeks reasonably competitive
spreads or commissions, the Fund will not necessarily be paying the lowest
spread or commission available.
The money market instruments in which the Fund may invest are traded primarily
in the over-the-counter market. Bonds and debentures are usually traded over-
the-counter, but may be traded on an exchange. Where possible, the Adviser will
deal directly with the dealers who make a market in the securities involved
except in those circumstances where better prices and execution are available
elsewhere. Such dealers usually are acting as principal for their own account.
On occasion, securities may be purchased directly from the issuer. Fixed income
securities are generally traded on a net basis and do not normally involve
either brokerage commissions or transfer taxes. The cost of executing fixed
income portfolio securities transactions of the Fund will primarily consist of
dealer spreads and underwriting commissions.
The Adviser may, consistent with the interests of the Fund, select brokers on
the basis of the research services they provide to the Adviser. Such services
may include analyses of the business or prospects of a company, industry or
economic sector, or statistical and pricing services. Information so received
by the Adviser will be in addition to and not in lieu of the services required
to be performed by the Adviser under the Advisory Agreement. If, in the judgment
of the Adviser, the Fund or other accounts managed by the Adviser will be
benefitted by supplemental research services, the Adviser is authorized to pay
brokerage commissions to a broker furnishing such services which are in excess
of commissions which another broker may have charged for effecting the same
transaction. These research services include advice, either directly or through
publications or writings, as to the value of securities, the advisability of
investing in, purchasing or selling securities, and the availability of
securities or purchasers or sellers of securities; furnishing of analyses and
reports concerning issuers, securities or industries; providing information on
economic factors and trends; assisting in determining portfolio strategy;
providing computer
S-17
<PAGE>
software used in security analyses; and providing portfolio performance
evaluation and technical market analyses. The expenses of the Adviser will not
necessarily be reduced as a result of the receipt of such supplemental
information, such services may not be used exclusively, or at all, with respect
to the Fund or account generating the brokerage, and there can be no guarantee
that the Adviser will find all of such services of value in advising the Fund.
It is expected that the Fund will execute all or substantially all of the Fund's
brokerage or other agency transactions through the Adviser, and may execute
agency transactions through the Distributor, for a commission in conformity with
the Investment Company Act of 1940, the Securities Exchange Act of 1934 and
rules promulgated by the SEC. Under these provisions, the Adviser and the
Distributor are permitted to receive and retain compensation for effecting
portfolio transactions for the Fund on an exchange. These rules further require
that commissions paid to the Adviser or the Distributor by the Fund for exchange
transactions not exceed "usual and customary" brokerage commissions. The rules
define "usual and customary" commissions to include amounts which are
"reasonable and fair compared to the commission, fee or other remuneration
received or to be received by other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time." The Trustees, including
those who are not "interested persons" of the Fund, have adopted procedures for
evaluating the reasonableness of commissions paid to the Adviser and the
Distributor and will review these procedures periodically. For the fiscal year
ended October 31, 1996, the Fund paid no brokerage commissions to the
Distributor. For the fiscal period ended October 31, 1996, all securities
transactions for the Fund were directed to the Adviser. For the fiscal year
ended October 31, 1996 and for the fiscal period ended October 31, 1995, the
Fund paid $56,991 and $48,428, respectively, in commissions to the Adviser.
For the fiscal period ended October 31, 1995 and the fiscal year ended October
31, 1996, the portfolio turnover rate for the Fund was 1.87% and 24.39%,
respectively.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of
portfolios and shares of each portfolio. Each share of a portfolio represents
an equal proportionate interest in that portfolio with each other share. Shares
are entitled upon liquidation to a pro rata share in the net assets of the
portfolio. Shareholders have no preemptive rights. All consideration received
by the Trust for shares of any portfolio and all assets in which such
consideration is invested would belong to that portfolio and would be subject to
the liabilities related thereto. Share certificates representing shares will
not be issued.
S-18
<PAGE>
SHAREHOLDER LIABILITY
The Trust is an entity of the type commonly known as a "Massachusetts business
trust." Under Massachusetts law, shareholders of such a trust could, under
certain circumstances, be held personally liable as partners for the obligations
of the trust. Even if, however, the Trust were held to be a partnership, the
possibility of the shareholders incurring financial loss for that reason appears
remote because the Trust's Declaration of Trust contains an express disclaimer
of shareholder liability for obligations of the Trust and requires that notice
of such disclaimer be given in each agreement, obligation or instrument entered
into or executed by or on behalf of the Trust or the Trustees, and because the
Declaration of Trust provides for indemnification out of the Trust property for
any shareholder held personally liable for the obligations of the Trust.
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee shall be liable only for his or
her own willful defaults and, if reasonable care has been exercised in the
selection of officers, agents, employees or investment advisers, shall not be
liable for any neglect or wrongdoing of any such person. The Declaration of
Trust also provides that the Trust will indemnify its Trustees and officers
against liabilities and expenses incurred in connection with actual or
threatened litigation in which they may be involved because of their offices
with the Trust unless it is determined in the manner provided in the Declaration
of Trust that they have not acted in good faith in the reasonable belief that
their actions were in the best interests of the Trust. However, nothing in the
Declaration of Trust shall protect or indemnify a Trustee against any liability
for his or her willful misfeasance, bad faith, gross negligence or reckless
disregard of his or her duties.
5% SHAREHOLDERS
As of February 19, 1997, the First Manhattan Co. Thrift Plan and Trust, the
participants in which are the partners and employees of the Adviser, held
36% of the shares of the Fund.
EXPERTS
S-19
<PAGE>
The financial statements of the Trust have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are incorporated by reference hereto in reliance upon the authority
of said firm as experts in giving said report.
FINANCIAL STATEMENTS
The financial statements for the fiscal year ended October 31, 1996, including
notes thereto and the report of Arthur Andersen LLP thereon, are herein
incorporated by reference. A copy of the 1996 Annual Report to Shareholders
must accompany the delivery of this Statement of Additional Information.
S-20
<PAGE>
APPENDIX
DESCRIPTION OF COMMERCIAL PAPER RATINGS
The following descriptions of commercial paper ratings have been published by
Standard & Poor's Corporation ("S&P") and Moody's Investors Service, Inc.
("Moody's"), respectively.
Commercial paper rated A-1 by S&P is regarded by S&P as having the greatest
capacity for timely payment. Ratings are further refined by the use of a plus
sign to indicate the relative degree of safety. Issues rated A-1+ are those
with "extremely strong safety characteristics." Those rated A-1 reflect a
"strong" degree of safety regarding timely payment.
Commercial paper issues rated Prime-1 by Moody's are judged by Moody's to be of
"superior" quality on the basis of relative repayment capacity.
DESCRIPTION OF CORPORATE BOND RATINGS
The following descriptions of corporate bond ratings have been published by S&P
and Moody's, respectively.
Debt rated AAA has the highest rating S&P assigns to a debt obligation. Such a
rating indicates an extremely strong capacity to pay principal and interest.
Debt rated AA also qualifies as high-quality debt. Capacity to pay principal
and interest is very strong, and differs from AAA issues only in small degree.
Debt rated A has a strong capacity to pay interest and repay principal although
it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
Debt rated BBB by S&P is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Debt rated BB has less near-term vulnerability to default than other speculative
grade debt. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions that could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB rating.
Debt rate B has greater vulnerability to default but presently has the capacity
to meet interest payments and principal repayments. Adverse business,
financial, or economic
A-1
<PAGE>
conditions would likely impair capacity or willingness to pay interest and repay
principal. The B rating category also is used for debt subordinated to senior
debt that is assigned an actual or implied BB rating.
Debt rated CCC has a current identifiable vulnerability to default, and is
dependent on favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category also is
used for debt subordinated to senior debt that is assigned an actual or implied
B rating.
Bonds which are rated Aaa by Moody's are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large, or an exceptionally
stable, margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues. Bonds rated Aa by
Moody's are judged by Moody's to be of high quality by all standards. Together
with bonds rated Aaa, they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
Bonds which are rated A possess many favorable investment attributes and are to
be considered as upper-medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Bonds rated Baa by Moody's are considered as medium grade obligations (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Bonds which are rated Ba are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
A-2
<PAGE>
Bonds which are rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
A-3
