<PAGE>
THE ADVISORS' INNER CIRCLE FUND
Investment Adviser:
MDL CAPITAL MANAGEMENT, INC.
THE ADVISORS' INNER CIRCLE FUND (the "Trust") provides a convenient and
economical means of investing in professionally managed portfolios of
securities. This Prospectus offers shares of the following mutual funds (the
"MDL Funds"), each of which is a separate series of the Trust.
- MDL BROAD MARKET FIXED INCOME FUND
- MDL LARGE CAP GROWTH EQUITY FUND
This Prospectus sets forth concisely the information about the Trust and the MDL
Funds 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 November 1, 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 NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
NOVEMBER 1, 1997
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2
SUMMARY
THE FOLLOWING PROVIDES BASIC INFORMATION ABOUT THE MDL BROAD MARKET FIXED
INCOME FUND (THE "FIXED INCOME FUND") AND THE MDL LARGE CAP GROWTH EQUITY
FUND (THE "EQUITY FUND" AND TOGETHER WITH THE FIXED INCOME FUND, THE "MDL
FUNDS"). THE MDL FUNDS ARE TWO OF THE MUTUAL FUNDS COMPRISING THE ADVISORS'
INNER CIRCLE FUND (THE "TRUST").
WHAT ARE THE INVESTMENT OBJECTIVES? The Fixed Income Fund seeks total
return consistent with preservation of capital. The Equity Fund seeks
long-term growth of capital with a secondary objective of income.
WHAT ARE THE PERMITTED INVESTMENTS? The Fixed Income Fund seeks to achieve
its objective by investing at least 80% of its net assets under normal
conditions in fixed income securities rated in one of the top three ratings
categories by Standard & Poor's Corporation or Moody's Investors Services
Inc. or determined by the adviser to be of comparable quality. The "broad
market" of securities in which the Fixed Income Fund may invest includes
U.S. Government securities, corporate fixed income securities and
mortgage-backed securities. The Equity Fund seeks to achieve its objective
by investing at least 80% of its net assets under normal conditions in
common stocks and other equity securities. See "Investment Objectives and
Policies" and "Description of Permitted Investments and Risk Factors."
WHAT ARE THE RISKS INVOLVED WITH AN INVESTMENT IN THE MDL FUNDS? The MDL
Funds invest in securities that fluctuate in value, and investors should
expect the MDL Funds' net asset value per share to fluctuate. Values of
fixed income securities and, correspondingly, of mutual funds invested in
such securities, such as the Fixed Income Fund, generally tend to vary
inversely with interest rates and may be affected by other market and
economic factors as well. The Equity Fund will purchase equity securities,
which may be volatile and fluctuate in value more than other types of
investments. To the extent set forth under "Investment Objectives and
Policies" and "Description of Permitted Investments and Risk Factors" the
MDL Funds may engage in the following investment practices: the purchase of
mortgage-related securities, the use of repurchase agreements and reverse
repurchase agreements, the purchase or sale of securities on a "when-issued"
or "forward commitment" basis and the use of options and futures. See
"Investment Objectives and Policies" and "Description of Permitted
Investments and Risk Factors."
WHO IS THE ADVISER? MDL Capital Management, Inc. (the "Adviser") serves as
the investment adviser of the MDL Funds. See "Expense Summary" and "The
Adviser."
WHO IS THE ADMINISTRATOR? SEI Fund Resources (the "Administrator") serves
as the administrator and shareholder servicing agent of the MDL Funds. 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 Investments Distribution Co. (the
"Distributor") acts as the distributor of the MDL Funds' shares. See "The
Distributor."
IS THERE A SALES LOAD? No, shares of the MDL Funds are offered on a no-load
basis.
IS THERE A MINIMUM INVESTMENT? The minimum initial investment in each MDL
Fund is $500 and subsequent investments must be at least $100. For purchases
made through the MDL Funds' Systematic Investment Plan, the minimum initial
and subsequent investments in each Fund are $50. The Trust reserves the
right to accept smaller purchases at its sole discretion.
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3
HOW DO I PURCHASE AND REDEEM SHARES? Purchases and redemptions may be made
through the Transfer Agent on any day when the New York Stock Exchange is
open for business (a "Business Day"). A purchase order will be effective as
of the Business Day received by the Transfer Agent if the Transfer Agent
receives an order and payment with readily available funds prior to 4:00
p.m., Eastern time. To purchase shares by wire, you must first call
1-800-808-4921. Redemption orders placed with the Transfer Agent prior to
4:00 p.m., Eastern time on any Business Day will be effective that day. 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. Each MDL Fund
reserves the right, upon 30 days' written notice, to redeem an account if
the net asset value of the shares in that account falls below $500. See
"Purchase and Redemption of Shares."
HOW ARE DISTRIBUTIONS PAID? The MDL Funds distribute substantially all of
their net investment income (exclusive of capital gains) in the form of
dividends, which for the Fixed Income Fund are declared and paid monthly and
for the Equity Fund are declared and paid quarterly. Any capital gain is
distributed at least annually. Distributions are paid in additional shares
unless the shareholder elects to take the payment in cash. See "General
Information--Dividends and Distributions."
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4
EXPENSE SUMMARY
<TABLE>
<CAPTION>
FIXED
INCOME EQUITY
SHAREHOLDER TRANSACTION EXPENSES FUND FUND
- ----------------------------------------------------------------------------
<S> <C> <C>
Maximum Sales Load Imposed on Purchases........... None None
Maximum Sales Load Imposed on Reinvested
Dividends....................................... None None
Deferred Sales Charges............................ None None
Redemption Fees*.................................. None None
Exchange Fees..................................... None None
- ----------------------------------------------------------------------------
</TABLE>
* Shareholders are charged a fee, currently $10.00, for redemptions by wire.
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
- ----------------------------------------------------------------------------
<S> <C> <C>
Management Fees (after fee waivers)(1)............ .00% .31%
Other Expenses(2)................................. .90% .95%
- ----------------------------------------------------------------------------
Total Operating Expenses (after fee
waivers)(1)(2).................................. .90% 1.26%
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
</TABLE>
(1) The Adviser has voluntarily agreed to waive all or a portion of its advisory
fees for each MDL Fund and to reimburse expenses of each MDL Fund in amounts
necessary to maintain Total Operating Expenses at not more than .90% and
1.26% of the average daily net assets of the Fixed Income and the Equity
Funds, respectively. Absent any voluntary waivers, advisory fees for the
Fixed Income and Equity Funds would be .45% and .74%, respectively, and
Total Operating Expenses, based on estimates of Other Expenses, would be
1.35% and 1.69% of the respective Fund's average daily net assets. Fee
waivers are expected to be in effect for the current fiscal year.
(2) Other Expenses for the Funds are estimated for the current fiscal year.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
FIXED
INCOME EQUITY
EXAMPLE FUND FUND
- --------------------------------------------------------------------------------
<S> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and
(2) redemption at the end of each time period:
1 year............................................ $ 9 $ 13
3 years........................................... $ 29 $ 40
- --------------------------------------------------------------------------------
</TABLE>
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. THE MDL FUNDS ARE NEW, AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN. The purpose of the expense summary 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 MDL Funds. Additional information may be
found under "The Adviser" and "The Administrator."
<PAGE>
5
THE TRUST AND THE MDL FUNDS
The Advisors' Inner Circle Fund (the "Trust") offers shares in a number of
mutual funds, each of which is a separate series ("portfolio") of the Trust.
Each share of each portfolio represents an undivided, proportionate interest in
that portfolio. This Prospectus offers shares of the Trust's MDL Broad Market
Fixed Income Fund (the "Fixed Income Fund") and the MDL Large Cap Growth Equity
Fund (the "Equity Fund" and together with the Fixed Income Fund, the "MDL
Funds"), each a diversified investment portfolio. Information regarding the
other portfolios in the Trust is contained in separate prospectuses that may be
obtained by calling 1-800-932-7781.
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of the Fixed Income Fund is to seek total return
consistent with preservation of capital. The investment objective of the Equity
Fund is to seek long-term growth of capital with a secondary objective of
income. There can be no assurance that an MDL Fund will be able to achieve its
investment objective. In addition to the investments and strategies described
below, the MDL Funds may invest in certain securities and obligations as set
forth in "Description of Permitted Investments and Risk Factors" herein, and as
described under the "Description of Permitted Investments" in the Statement of
Additional Information.
MDL BROAD MARKET FIXED INCOME FUND
Under normal conditions the Fixed Income Fund will invest at least 80% of its
net assets in U.S. Treasury bills, notes and bonds and other fixed income
securities issued or guaranteed by the United States Government, its agencies or
instrumentalities ("U.S. Government Securities"), and corporate fixed income
securities rated A- or higher by Standard & Poor's Corporation ("S&P"), A or
higher by Moody's Investors Services, Inc. ("Moody's") or of comparable quality
as determined by the Adviser. The U.S. Government Securities in which the Fund
may invest include mortgage-backed securities ("MBSs"), and mortgage-related
securities such as pass-through securities and collateralized mortgage
obligations. The Fund intends to invest less than 25% of its total assets in
corporate fixed income securities and less than 30% of its total assets in MBSs.
Additional securities in which the Fund may invest include: (i) short-term U.S.
bank obligations; (ii) shares of other investment companies; and (iii)
repurchase agreements. The Fund's duration ordinarily will range between 3 1/2
and 6 1/2 years.
The Fixed Income Fund may purchase or sell securities on a when-issued or
forward commitment basis and sell securities short "against the box." The Fund
may engage in reverse repurchase agreements with banks and dealers in amounts up
to 33 1/3% of the Fund's total assets at the time the Fund enters into the
agreements. In order to remain fully invested and to reduce transaction costs,
up to 15% of the Fund's total assets may be invested in futures contracts and
options on futures contracts, including securities index futures contracts and
options on securities index futures contracts.
For temporary defensive purposes when the Adviser determines that market
conditions warrant, the Fixed Income Fund may also invest up to 100% of its
assets in money market securities or hold cash.
Securities rated A- by S&P or A by Moody's possess many favorable investment
attributes and are to be considered as upper-medium grade obligations. They have
a strong capacity to pay interest and repay principal although they are somewhat
more susceptible to the adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
MDL LARGE CAP GROWTH EQUITY FUND
The Equity Fund intends to be as fully invested as practicable in common stocks
and other equity securities. Under normal circumstances the Fund will invest at
least 80% of its net assets in common stocks and other equity securities of
large cap companies (defined below), which may include warrants, rights to
purchase common stocks, debt securities convertible into common stocks, and
preferred stocks. The Fund may invest in equity securities of foreign issuers
traded in the United States in the form of American Depositary Receipts.
The Equity Fund will invest primarily in the common stocks of large cap
companies, that is, those established companies with equity-market
capitalizations in excess of $3 billion. The Fund may also invest in common
stocks of smaller companies
<PAGE>
6
with equity market capitalizations in excess of $500 million.
The Equity Fund may also engage in repurchase agreements. The Fund may engage in
reverse repurchase agreements with banks and dealers in amounts up to 33 1/3% of
the Fund's total assets at the time the Fund enters into the agreements. Up to
15% of the Fund's total assets may be invested in futures contracts and options
on futures contracts, including securities index futures contracts and options
on securities index futures contracts.
For temporary defensive purposes when the Adviser determines that market
conditions warrant, the Equity Fund may also invest up to 100% of its assets in
money market securities or hold cash.
PORTFOLIO TURNOVER
The portfolio turnover rate for the Fixed Income and Equity Funds is not
expected to exceed 50% and 80%, respectively.
INVESTMENT LIMITATIONS
The investment objective of each Fund and the investment limitations set forth
below and in the Statement of Additional Information are fundamental policies of
the MDL Funds. Fundamental policies cannot be changed without the consent of the
holders of a majority of the appropriate Fund's outstanding shares.
No Fund may:
1. Purchase securities of any issuer (except securities issued or guaranteed
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 each Fund's total assets.
2. Purchase any securities which would cause 25% or more of the total assets
of a 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 obligations issued or guaranteed
by the U.S. Government, its agencies or instrumentalities and repurchase
agreements involving such securities. For purposes of this limitation, (i)
utility companies will be divided according to their services, for example,
gas distribution, gas transmission, electric and telephone will each be
considered a separate industry, and (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.
The foregoing percentages will apply at the time of the purchase of a security.
Additionally, it is a non-fundamental policy of each MDL Fund to limit
borrowings to no more than 5% of its net assets. Fully collaterallized reverse
repurchase agreements are not considered borrowings for purposes of the
foregoing limitation.
THE ADVISER
MDL Capital Management, Inc. (the "Adviser" or "MDL") has been retained under an
investment advisory agreement with the Trust (the "Advisory Agreement") to act
as the investment adviser for the MDL Funds. Under the Advisory Agreement, the
Adviser makes the investment decisions for the assets of each Fund and
continuously reviews, supervises and administers each Fund's investment program,
subject to the supervision of, and policies established by, the Trustees of the
Trust.
The Adviser's principal business address is 730 Centre City Tower, 650
Smithfield Street, Pittsburgh, Pennsylvania 15222. As of September 30, 1997, the
Adviser had approximately $350 million of assets under management for
institutional clients such as Taft-Hartley plans, hospitals, public sector
funds, foundations, and ERISA plans. The Adviser has not previously served as an
investment adviser to a registered investment company, and, as such, does not
have extensive experience advising a highly regulated entity such as an
investment company. This may present additional risks for the MDL Funds.
Messrs. Mark D. Lay and Edward Adatepe have served as co-portfolio managers of
both the Fixed Income and Equity Funds, since their commencement of operations.
Mr. Lay has served as the Chairman and Chief Executive Officer of the Adviser
since 1993. Prior thereto, Mr. Lay was an account executive at Dean Witter
Reynolds, Inc. Mr. Lay received a B.A.
<PAGE>
7
degree in Economics from Columbia University. Mr. Adatepe has been the Chief
Investment Officer of the Adviser since 1994. Prior thereto, Mr. Adatepe was the
Managing Director of RRZ Investment Management, Inc., where he was responsible
for managing both fixed income and equity portfolios for various public and
private pension funds. Mr. Adatepe received a B.S. degree in physics from
Allegheny College and a M.S. degree in Industrial Administration from
Carnegie-Mellon University.
In addition to the co-portfolio managers, the Adviser employs a team of highly
qualified investment professionals to provide advice and input regarding the
management of the MDL Funds. Included within this team are Steven Sanders and
Jim Taylor. Mr. Sanders serves as the Adviser's President and economist. He also
appears weekly as an investment specialist on the CNBC International Business
Television Network. Mr. Taylor is Director of Equity Research and is a
securities analyst for the Funds. Mr. Taylor holds a B.S. degree in Management
and Economics from the University of Pittsburgh, and an MBA from Duquesne
University.
Under the Advisory Agreement, the Adviser receives a monthly management fee
computed separately for each Fund. Such fees are payable at an annual rate of
.45% and .74% of the average daily net assets of the Fixed Income and Equity
Funds, respectively. The Adviser has voluntarily agreed to waive all or a
portion of its fee for each Fund and to reimburse expenses of each Fund in order
to limit total operating expenses for the Fixed Income and Equity Funds to an
annual rate of not more than .90% and 1.26% of average daily net assets,
respectively. The Adviser reserves the right, in its sole discretion, to
terminate its voluntary fee waivers and reimbursements at any time, however, the
advisory fee waivers are expected to be in effect for the current fiscal year.
The Adviser may, from its own resources, compensate broker-dealers whose clients
purchase shares of the Funds.
The following graph presents the cumulative compounded rate of total return for
one year and since inception attained by all of the accounts managed by MDL with
investment objectives and policies substantially similar to those of each of the
Fixed Income and Equity Funds (the "Composites"), respectively, compared to
appropriate indices.
PAST PERFORMANCE OF MDL*
PERIODS ENDING SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
SINCE INCEPTION
FIXED INCOME 1 YEAR (12/31/92)
- ------------------------------------------------------- ------ ---------------
<S> <C> <C>
MDL Fixed Income Composite (Gross of Advisory
Fees)(1)............................................... 9.86% 48.18%
MDL Fixed Income Composite (Net of Advisory Fees)(2)... 9.36% 45.78%
Lehman Government/ Corporate Bond Index................ 9.60% 39.82%
<CAPTION>
SINCE INCEPTION
EQUITY 1 YEAR (6/30/95)
- ------------------------------------------------------- ------ ---------------
<S> <C> <C>
MDL Equity Composite (Gross of Advisory Fees)(1)....... 40.53% 84.91%
MDL Equity Composite (Net of Advisory Fees)(2)......... 39.78% 83.22%
S&P 500 Index.......................................... 40.38% 82.20%
</TABLE>
* The performance results described above are unaudited results based on a
composite of all discretionary fixed income and equity portfolios that were
advised by MDL with investment objectives and policies substantially similar
to those of the respective Fund through September 30, 1997. Mr. Lay managed
the accounts of the Fixed Income accounts since their inception. Mr. Adatepe
joined Mr. Lay as manager of the Fixed Income accounts in March, 1994. The
Equity accounts were managed by Mr. Lay and Mr. Adatepe for all periods
shown. Reinvestment of dividends is assumed. All performance figures are time
weighted total return calculations and are based on trade date accounting.
(1) The deduction of advisory fees is not reflected.
(2) The results are net of a model advisory fee (equal to the highest advisory
fee that MDL charged).
The Lehman Government/Corporate Bond Index is an unmanaged index of
investment-grade U.S. Government and corporate debt securities. The S&P 500
Index is an unmanaged weighted index of 500 industrial, transportation, utility
and financial companies widely regarded by investors as representative of the
stock market. The comparison of the Composites with these indices is meant to
<PAGE>
8
provide you with a general sense of how the Composites compared to standard
benchmarks of the market. The indices are "paper calculations" and do not
reflect any expenses that generally accompany investments in private accounts or
mutual funds such as sales charges, expenses for fund operation, management fees
and portfolio transaction costs. The effect of imposing such charges would be to
decrease the indices' performance shown above.
Registered investment companies such as the MDL Funds, are subject to certain
regulatory and tax restrictions on investment that are not applicable to the
Adviser's private accounts. Additionally, the operating expenses of the MDL
Funds will be different from, and may be higher than, the operating expenses of
these individual accounts. The performance of MDL is provided merely to indicate
its proficiency in managing similar investment portfolios. Investors should note
that past performance is no guarantee of future results.
THE ADMINISTRATOR
SEI Fund Resources (the "Administrator"), 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 from
each Fund, which is calculated daily and paid monthly based on the respective
Fund's asset level, at an annual rate of: .15% on the first $50 million of
average daily net assets; .125% on the next $50 million of average daily net
assets; and .10% on average daily net assets over $100 million. However, each
Fund pays a minimum annual administration fee of $80,000, which would be
increased by $15,000 per additional class. Due to the minimum annual
administration fee, the administration fee that a Fund pays will decline
according to the administration fee schedule described above only after a Fund's
net asset level reaches $54 million.
The Administrator also serves as shareholder servicing agent for the MDL Funds.
THE TRANSFER AGENT
DST Systems, Inc., 1004 Baltimore Street, 2nd Floor, Kansas City, Missouri 64105
(the "Transfer Agent") serves as the transfer agent and dividend disbursing
agent for the Trust.
THE DISTRIBUTOR
SEI Investments Distribution Co. (the "Distributor"), Oaks, Pennsylvania, 19456,
a wholly-owned subsidiary of SEI Investments Company, serves as the Trust's
distributor. No compensation is paid to the Distributor for distribution
services for the shares of the MDL Funds.
PURCHASE AND REDEMPTION OF SHARES
Investors may purchase and redeem shares of the MDL Funds directly through the
Transfer Agent, P.O. Box 419009, Kansas City, Missouri 64141-6009, by mail or
wire transfer. Shareholders may place purchase and redemption orders by
telephone at 1-800-932-7781; 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
MDL Funds may be made on any day on which the New York Stock Exchange is open
for business (a "Business Day"). Shares of the MDL Funds are offered only to
residents of states in which such shares are eligible for purchase.
MINIMUM INVESTMENTS
The minimum initial investment in each Fund is $500. Subsequent investments for
each Fund must be at least $100. Each Fund reserves the right to accept smaller
purchases at its sole discretion. See "Minimum Account Sizes and Involuntary
Redemptions of Shares."
PURCHASES BY MAIL
An account may be opened by mailing a check or other negotiable bank draft
(payable to the name of the Fund) for $500 or more together with a completed
Account Application to MDL Funds, P.O. Box 419009, Kansas City, Missouri
64141-6009. Subsequent investments may also be mailed directly to the Transfer
Agent. All purchases made by check should be in U.S. dollars and made payable to
the MDL ________ Fund. Third party checks, credit cards, credit card checks and
cash will not be accepted. When purchases are made by check, redemption proceeds
will be forwarded only upon collection of payment for such shares, which may
take up to 15 days.
<PAGE>
9
PURCHASES BY WIRE TRANSFER
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, Fund'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:
MDL Funds, P.O. Box 419009, Kansas City, Missouri 64141-6009.
Shareholders having an account with a commercial bank that is a member of the
Federal Reserve System may purchase shares of the MDL Funds by requesting their
bank to transmit funds by wire to: United Missouri Bank; ABA #10-10-00695 for
Account Number 98-7052-396-5; Further Credit: MDL ________ Fund. The
shareholder's name, the Fund's name and account number must be specified in the
wire.
SUBSEQUENT PURCHASES: Additional investments may be made at any time through
the wire procedures described above, which must include the shareholder's name,
the Fund'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 a Fund is the daily net asset value per share next determined
after a purchase order is received. Purchases will be made in full and
fractional shares of the MDL Funds calculated to three decimal places. The Trust
will not issue certificates representing shares of the MDL Funds.
The Trust reserves the right to reject a purchase order when the Distributor or
the Transfer Agent determines that it is not in the best interest of the Trust,
a Fund and/or its shareholders to accept such offer.
SYSTEMATIC INVESTMENT PLAN
A Shareholder may also arrange for periodic additional investments in the MDL
Funds through automatic deductions by Automated Clearing House ("ACH")
transactions from a checking or savings account by completing the appropriate
section of the Account Application form. This Systematic Investment Plan is
subject to account minimum initial purchase amounts and a minimum pre-authorized
investment amount of $50 per month. An Account Application form may be obtained
by calling 1-800-932-7781.
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 of a Fund is the net asset value per share of that Fund next determined
after a valid redemption order, in good form, is received. Payment on redemption
will be made as promptly as possible and, in any event, within seven days after
the redemption order is received. Shareholders may not close their accounts by
telephone.
Shareholders may receive redemption payments in the form of a check or by
Federal Reserve or ACH wire transfer. There is no charge for having a check for
redemption proceeds mailed. A wire charge, currently $10.00, will be deducted
from the amount of a Federal Reserve wire redemption payment made at the request
of a shareholder, except that certain institutions may be exempt from this
charge. Shareholders cannot redeem shares of the MDL Funds by Federal Reserve
wire on federal holidays restricting wire transfers. The Trust does not charge
for ACH wire transactions; however, such transactions will not be posted to a
shareholder's bank account until the second Business Day following the
transaction.
Shareholders are granted telephone redemption privileges automatically and may
call 1-800-932-7781 to place their redemption orders. 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
are genuine. The Trust and the Transfer Agent will each employ reasonable
procedures to confirm that telephone instructions are genuine, and may be liable
for losses resulting from unauthorized or fraudulent telephone transactions if
it does not employ those procedures.
<PAGE>
10
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.
SYSTEMATIC WITHDRAWAL PLAN
The MDL Funds offer 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 $500 or more. Shareholders may
elect to receive automatic payments via ACH wire transfers of $50 or more on a
monthly, quarterly, semi-annual or annual basis. An application form for the 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 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.
MINIMUM ACCOUNT SIZES AND INVOLUNTARY REDEMPTIONS OF SHARES
If the value of a Fund account falls below $500 because of shareholder
redemption(s), the Trust will notify the shareholder, and if the account value
remains below $500 for a continuous 60-day period, the shares in such account
are subject to redemption by the Trust and, if redeemed, the daily net asset
value of such shares will be promptly paid to the shareholder. The Trust,
however, will not redeem shares based solely upon changes in the market that
reduce the net asset value of shares.
The Trust reserves the right to modify or terminate the involuntary redemption
features of the shares as stated above at any time upon 60 days' notice to
shareholders.
NET ASSET VALUE
The net asset value per share of each 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 4:00 p.m., Eastern time on any Business Day. The MDL
Funds will use a pricing service to provide market quotations. The pricing
service may use a matrix system of valuation for fixed income securities 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 Fixed Income Fund may advertise its yield and total
return and the Equity Fund may advertise its 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 Fixed Income Fund refers to the annualized income
generated by an investment in the Fund over a specified 30-day period. The yield
is calculated by 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 a 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 MDL Funds 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 MDL Funds may periodically compare their performance to that of other mutual
funds tracked by mutual fund rating services (such as Lipper Analytical
Services, Inc.), financial and business publications and periodicals, broad
groups of comparable mutual funds, unmanaged indices, which may assume
investment of dividends but generally do not reflect deductions for
administrative and management costs, or other investment alternatives. The MDL
Funds may quote Morningstar, Inc., a service that ranks mutual funds on the
basis of risk-adjusted performance. The MDL Funds may quote Ibbotson Associates
of Chicago, Illinois, which provides historical returns of the capital markets
in the U.S. The MDL Funds may use
<PAGE>
11
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 MDL Funds may also quote financial
and business publications and periodicals as they relate to fund management,
investment philosophy, and investment techniques.
The MDL Funds 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. Measures of volatility and correlation
are calculated using averages of historical data and cannot be calculated
precisely.
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 MDL Funds or their 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 MDL FUNDS
Each Fund is treated as a separate entity for federal income tax purposes and is
not combined with the Trust's other portfolios. Each Fund intends to qualify for
the special tax treatment afforded regulated investment companies as defined
under Subchapter M of the Internal Revenue Code of 1986, as amended. So long as
a 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.
TAX STATUS OF DISTRIBUTIONS
Each 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; dividends of the MDL Funds are not expected to
qualify for this deduction. Any net capital gain will be distributed annually
and will be taxed to shareholders as long-term capital gain, regardless of how
long the shareholder has held shares. The MDL Funds will make annual reports to
shareholders of the federal income tax status of all distributions.
Income received on direct U.S. 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 MDL Funds provided certain
state-specific conditions are satisfied. The MDL Funds will inform shareholders
annually of the percentage of income and distributions, if any, derived from
direct U.S. obligations. Shareholders should consult their tax advisers to
determine whether any portion of the income dividends received from the MDL
Funds is considered tax exempt in their particular state.
Dividends declared by the MDL Funds 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 MDL Funds and received by the shareholders on
December 31 of that year, if paid by the MDL Funds at any time during the
following January.
Each Fund intends to make sufficient distributions prior to the end of each
calendar year to avoid liability for federal excise tax.
Sale, exchange or redemption of a Fund's shares is a taxable event to the
shareholder.
GENERAL INFORMATION
THE TRUST
The Trust, an open-end management investment 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
("portfolios") of shares. All consideration received
<PAGE>
12
by the Trust for shares of any portfolio and all assets of such portfolio belong
to that portfolio and are subject to liabilities related thereto. The Trust
reserves the right to create and issue shares of additional portfolios.
Each 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 its shares
under federal and state securities laws, pricing and insurance expenses and pays
additional 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. The MDL Funds' expense ratios are disclosed under "Expense
Summary."
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 shareholder of record is entitled to one vote or fraction thereof for each
share or fractional share held. Each 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.
REPORTING
The Trust issues unaudited financial information semiannually and audited
financial statements annually for the MDL Funds. The Trust also furnishes
periodic reports and, as necessary, proxy statements to shareholders of record.
SHAREHOLDER INQUIRIES
Shareholder inquiries should be directed to MDL Funds, P.O. Box 419009, Kansas
City, Missouri 64141-6009 or by calling 1-800-932-7781. Purchase and redemption
transactions should be made through the Transfer Agent by calling
1-800-932-7781.
DIVIDENDS AND DISTRIBUTIONS
The Fixed Income Fund declares dividends of substantially all of its net
investment income (exclusive of capital gains) monthly and pays such dividends
on the first Business Day of each month. The Equity Fund declares dividends of
substantially all of its net investment income (exclusive of capital gains)
quarterly and pays such dividends on the first Business Day of each quarter.
Shares purchased begin earning dividends on the Business Day following receipt
of funds by the Transfer Agent. Normally, this will occur within two Business
Days after an order is received. If any capital gain is realized, substantially
all of it will be distributed at least annually.
Shareholders automatically receive all income dividends and capital gain
distributions in additional shares, 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 or ACH wire transfer.
Dividends and other distributions of the MDL Funds 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 distribution of
capital gains, a shareholder will pay the full price for the shares and receive
some portion of the price back as a taxable distribution or dividend.
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.
<PAGE>
13
CUSTODIAN
CoreStates Bank, N.A., Broad and Chestnut Streets, P.O. Box 7618, Philadelphia,
Pennsylvania 19101 acts as custodian (the "Custodian") of the MDL Funds. The
Custodian holds cash, securities and other assets of the Trust as required by
the Investment Company Act of 1940, as amended (the "1940 Act").
DESCRIPTION OF PERMITTED INVESTMENTS AND RISK FACTORS
The following is a description of some permitted investments for the MDL Funds,
and the associated risk factors:
AMERICAN DEPOSITARY RECEIPTS ("ADRs")-- ADRs are securities, typically issued by
a U.S. financial institution (a "depositary"), that evidence ownership interests
in a security or a pool of securities issued by a foreign issuer and deposited
with the depositary. ADRs may be available through "sponsored" or "unsponsored"
facilities. A sponsored facility is established jointly by the issuer of the
security underlying the receipt and a depositary, whereas, an unsponsored
facility may be established by a depositary without participation by the issuer
of the underlying security. Holders of unsponsored depositary receipts generally
bear all the costs of the unsponsored facility. The depositary of an unsponsored
facility frequently is under no obligation to distribute shareholder
communications received from the issuer of the deposited security or to pass
through, to the holders of the receipts, voting rights with respect to the
deposited securities.
CONVERTIBLE SECURITIES--Convertible securities are corporate securities that are
exchangeable for a set number of another security at a prestated price.
Convertible securities typically have characteristics of both fixed income and
equity securities. Because of the conversion feature, the market value of a
convertible security tends to move with the market value of the underlying
stock. The value of a convertible security is also affected by prevailing
interest rates, the credit quality of the issuer and any call provisions.
CORPORATE BONDS--A corporate bond is a debt instrument 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.
DURATION--Duration is a measure of the expected change in value of a fixed
income security for a given change in interest rates. For example, if interest
rates changed by one percent, the value of a security having an effective
duration of two years generally would vary by two percent. Duration takes the
length of the time intervals between the present time and time that the interest
and principal payments are scheduled, or in the case of a callable bond,
expected to be received, and weighs them by the present values of the cash to be
received at each future point in time.
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 Equity Fund invests will cause the net asset
value of the Fund to fluctuate. An investment in the Equity Fund may therefore
be more suitable for long-term investors.
FIXED INCOME SECURITIES--The market value of the fixed income investments in
which the MDL Funds invest 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 a Fund's net
asset value.
<PAGE>
14
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 MDL Funds may use
futures contracts and related options for BONA FIDE hedging purposes. Each 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 a Fund and the
prices 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.
ILLIQUID SECURITIES--Illiquid securities are securities that cannot be disposed
of within seven business days at approximately the price at which they are being
carried on a Fund's books. An illiquid security includes a demand instrument
with a demand notice period exceeding seven days, where there is no secondary
market for such security, and repurchase agreements with a remaining term to
maturity in excess of seven days.
INVESTMENT COMPANY SECURITIES--Each Fund may invest up to 10% of its total
assets in the securities of other open-end investment companies that invest
exclusively in securities which that Fund may invest directly. A Fund's purchase
of investment company securities will cause shareholders to bear not only their
proportionate share of the expenses of the Fund (including operating expenses
and the fees of the Adviser), but also similar expenses of the underlying
investment companies.
MONEY MARKET INSTRUMENTS--Money market instruments include short-term U.S.
Government Securities; custodial receipts evidencing separately traded interest
and principal components of securities issued by the U.S. Treasury; commercial
paper rated in the highest short-term rating category by a nationally recognized
statistical rating organization or determined by the Adviser to be of comparable
quality at the time of purchase; short-term bank obligations (certificates of
deposit, time deposits and bankers' acceptances) of U.S. commercial banks with
assets of at least $1 billion as of the end of their most recent fiscal year;
and repurchase agreements involving such securities.
BANKERS' ACCEPTANCES: Bankers' acceptances are bills of exchange or time drafts
drawn on and accepted by a commercial bank. Bankers' acceptances are used by
corporations to finance the shipment and storage of goods. Maturities are
generally six months or less.
CERTIFICATES OF DEPOSIT: Certificates of deposit are interest bearing
instruments with a specific maturity. They are issued by banks and savings and
loan institutions in exchange for the deposit of funds and normally can be
traded in the secondary market prior to maturity. Certificates of deposit with
penalties for early withdrawal will be considered illiquid.
COMMERCIAL PAPER: Commercial paper is a term used to describe unsecured
short-term promissory notes issued by banks, municipalities, corporations and
other entities. Maturities on these issues vary from a few to 270 days.
TIME DEPOSITS: Time deposits are non-negotiable receipts issued by a bank in
exchange for the deposit of funds. Like a certificate of deposit, it earns a
specified rate of interest over a definite period of time; however, it cannot be
traded in the secondary market. Time deposits with a withdrawal
<PAGE>
15
penalty or that mature in more than seven days are considered to be illiquid
securities.
MORTGAGE-BACKED SECURITIES--Mortgage-backed securities are instruments that
entitle the holder to a share of all interest and principal payments from
mortgages underlying the security. The mortgages backing these securities
include conventional thirty-year fixed rate mortgages, graduated payment
mortgages and adjustable rate mortgages. During periods of declining interest
rates, prepayment of mortgages underlying mortgage-backed securities can be
expected to accelerate. Prepayment of mortgages which underlie securities
purchased at a premium often results in capital losses, while prepayment of
mortgages purchased at a discount often results in capital gains. Because of
these unpredictable prepayment characteristics, it is often not possible to
predict accurately the average life or realized yield of a particular issue.
GOVERNMENT PASS-THROUGH SECURITIES: These are securities that are issued or
guaranteed by a U.S. Government agency representing an interest in a pool of
mortgage loans. The primary issuers or guarantors of these mortgage-backed
securities are the Government National Mortgage Association ("GNMA"), Fannie Mae
and the Federal Home Loan Mortgage Corporation ("FHLMC"). Fannie Mae and FHLMC
obligations are not backed by the full faith and credit of the U.S. Government
as GNMA certificates are, but Fannie Mae and FHLMC securities are supported by
the instrumentalities' right to borrow from the U.S. Treasury. GNMA, FNMA and
FHLMC each guarantees timely distributions of interest to certificate holders.
GNMA and FNMA also each guarantees timely distributions of scheduled principal.
FHLMC has in the past guaranteed only the ultimate collection of principal of
the underlying mortgage loan; however, FHLMC now issues mortgage-backed
securities (FHLMC Gold PCS) which also guarantee timely payment of monthly
principal reductions. Government and private guarantees do not extend to the
securities' value, which is likely to vary inversely with fluctuations in
interest rates.
PRIVATE PASS-THROUGH SECURITIES: These are mortgage-backed securities issued by
a non-governmental entity, such as a trust. These securities include
collateralized mortgage obligations ("CMOs") and real estate mortgage investment
conduits ("REMICs") that are rated in one of the top four rating categories.
While they are generally structured with one or more types of credit
enhancement, private pass-through securities typically lack a guarantee by an
entity having the credit status of a governmental agency or instrumentality.
CMOS: CMOs are debt obligations or multiclass pass-through certificates issued
by agencies or instrumentalities of the U.S. Government or by private
originators or investors in mortgage loans. In a CMO, series of bonds or
certificates are usually issued in multiple classes. Principal and interest paid
on the underlying mortgage assets may be allocated among the several classes of
a series of a CMO in a variety of ways. Each class of a CMO, often referred to
as a "tranche," is issued with a specific fixed or floating coupon rate and has
a stated maturity or final distribution date. Principal payments on the
underlying mortgage assets may cause CMOs to be retired substantially earlier
then their stated maturities or final distribution dates, resulting in a loss of
all or part of any premium paid.
REMICS: A REMIC is a CMO that qualifies for special tax treatment under the
Code and invests in certain mortgages principally secured by interests in real
property. Investors may purchase beneficial interests in REMICs, which are known
as "regular" interests, or "residual" interests. Guaranteed REMIC pass-through
certificates ("REMIC Certificates") issued by Fannie Mae, FHLMC or GNMA
represent beneficial ownership interests in a REMIC trust consisting principally
of mortgage loans or Fannie Mae, FHLMC or GNMA-guaranteed mortgage pass-through
certificates. For FHLMC REMIC Certificates, FHLMC guarantees the timely payment
of interest, and also guarantees the payment of principal as payments are
required to be made on the underlying mortgage participation certificates.
Fannie Mae REMIC Certificates are issued and guaranteed as to timely
distribution of principal and interest by Fannie Mae. GNMA REMIC Certificates
are backed by the full faith and credit of the U.S. Government.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS"): ARMS are a form of pass-through
security representing interests in pools of mortgage loans whose interest rates
are adjusted from time to time.
<PAGE>
16
The adjustments usually are determined in accordance with a predetermined
interest rate index and may be subject to certain limits. While the value of
ARMS, like other debt securities, generally varies inversely with changes in
market interest rates (increasing in value during periods of declining interest
rates and decreasing in value during periods of increasing interest rates), the
value of ARMS should generally be more resistant to price swings than other debt
securities because the interest rates of ARMS move with market interest rates.
The adjustable rate feature of ARMS will not, however, eliminate fluctuations in
the prices of ARMS, particularly during periods of extreme fluctuations in
interest rates. Also, since many adjustable rate mortgages only reset on an
annual basis, it can be expected that the prices of ARMS will fluctuate to the
extent that changes in prevailing interests rates are not immediately reflected
in the interest rates payable on the underlying adjustable rate mortgages.
STRIPPED MORTGAGE-BACKED SECURITIES ("SMBS"): SMBs are usually structured with
two classes that receive specified proportions of the monthly interest and
principal payments from a pool of mortgage securities. One class may receive all
of the interest payments and is thus termed an interest-only class ("IO"), while
the other class may receive all of the principal payments and is thus termed the
principal-only class ("PO"). The value of IOs tends to increase as rates rise
and decrease as rates fall; the opposite is true of POs. SMBs are extremely
sensitive to changes in interest rates because of the impact thereon of
prepayment of principal on the underlying mortgage securities. During times when
interest rates are experiencing fluctuations, such securities can be difficult
to price on a consistent basis. The market for SMBs is not as fully developed as
other markets; SMBs therefore may be illiquid.
ESTIMATED AVERAGE LIFE: Due to the possibility of prepayments of the underlying
mortgage instruments, mortgage-backed securities generally do not have a known
maturity. In the absence of a known maturity, market participants generally
refer to an estimated average life. An average life estimate is a function of an
assumption regarding anticipated prepayment patterns, based upon current
interest rates, current conditions in the relevant housing markets and other
factors. The assumption is necessarily subjective, and thus different market
participants can produce different average life estimates with regard to the
same security. There can be no assurance that estimated average life will be a
security's actual average life.
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 a set
price 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 to
sell, the underlying security at a set price 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,
a 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 MDL Funds 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 MDL Funds may seek to purchase in the future.
When purchasing put and call options, the MDL Funds pay a premium therefor. If
price movements in the underlying securities are such that exercise of the
options would not be profitable for a 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.
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; and (3)
there may not be a liquid secondary market for options.
REPURCHASE AGREEMENTS--Repurchase agreements are agreements by which a Fund
obtains a security and simultaneously commits to return the security to the
seller at an agreed upon price on an agreed upon date within a number of
<PAGE>
17
days from the date of purchase. The Custodian will hold the security as
collateral for the repurchase agreement. A Fund bears a risk of loss in the
event the other party defaults on its obligations and the Fund is delayed or
prevented from exercising its right to dispose of the collateral or if the Fund
realizes a loss on the sale of the collateral. A Fund will enter into repurchase
agreements only with financial institutions deemed to present minimal risk of
bankruptcy during the term of the agreement based on established guidelines.
Repurchase agreements are considered loans under the 1940 Act.
REVERSE REPURCHASE AGREEMENTS--Reverse repurchase agreements are agreements by
which a Fund sells securities to financial institutions and simultaneously
agrees to repurchase those securities at a mutually agreed-upon date and price.
At the time a Fund enters into a reverse repurchase agreement, the Fund will
place liquid assets having a value equal to the repurchase price in a segregated
custodial account and monitor this account to ensure equivalent value is
maintained. Reverse repurchase agreements involve the risk that the market value
of securities sold by the Fund may decline below the price at which the Fund is
obligated to repurchase the securities. Reverse repurchase agreements may be
considered to be borrowings by the MDL Funds under the 1940 Act.
SHORT SALES AGAINST-THE-BOX--The MDL Funds may make short sales
"against-the-box" for the purpose of deferring realization of gain or loss for
federal income tax purposes and for the purpose of hedging against an
anticipated decline in the value of the underlying securities. A short sale
"against-the-box" is a short sale in which a Fund owns, or has the right to
obtain without payment of additional consideration, an equal amount of the same
type of securities sold short.
U.S. GOVERNMENT SECURITIES--U.S. Government securities consist of bills, notes
and bonds issued by the U.S. Treasury and obligations issued or guaranteed by
agencies of the U.S. Government, including, among others, the Federal Farm
Credit Bank, the Federal Housing Administration and the Small Business
Administration, and obligations issued or guaranteed by instrumentalities of the
U.S. Government, including, among others, FHLMC, the Federal Land Banks and the
U.S. Postal Service. Some of these securities are supported by the full faith
and credit of the U.S. Treasury, others are supported by the right of the issuer
to borrow from the Treasury, while still others are supported only by the credit
of the instrumentality. Guarantees of principal by agencies or instrumentalities
of the U.S. Government may be a guarantee of payment at the maturity of the
obligation so that in the event of a default prior to maturity there might not
be a market and thus no means of realizing on the obligation prior to maturity.
Guarantees as to the timely payment of principal and interest do not extend to
the value or yield of these securities nor to the value of the MDL Funds'
shares.
VARIABLE AND FLOATING RATE INSTRUMENTS-- Certain obligations may carry variable
or floating rates of interest, and may involve a conditional or unconditional
demand feature. Such instruments bear interest at rates which are not fixed, but
which vary with changes in specified market rates or indices. The interest rates
on these securities may be reset daily, weekly, quarterly or some other reset
period, and may have a floor or ceiling on interest rate changes. There is a
risk that the current interest rate on such obligations may not accurately
reflect existing market interest rates. A demand instrument with a demand notice
exceeding seven days may be considered illiquid if there is no secondary market
for such security.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES--When-issued or delayed delivery
basis transactions involve the purchase of an instrument with payment and
delivery taking place in the future. Delivery of and payment for these
securities may occur a month or more after the date of the purchase commitment.
The MDL Funds will maintain with the Custodian a separate account with liquid
securities or cash in an amount at least equal to these commitments. The
interest rate realized on these securities is fixed as of the purchase date and
no interest accrues to the MDL Funds before settlement. These securities are
subject to market fluctuation due to changes in market interest rates and it is
possible that the market value at the time of settlement could be higher or
lower than the purchase price if the general level of interest rates has
changed.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
SUMMARY.................................. 2
EXPENSE SUMMARY.......................... 4
THE TRUST AND THE MDL FUNDS.............. 5
INVESTMENT OBJECTIVES AND POLICIES....... 5
INVESTMENT LIMITATIONS................... 6
THE ADVISER.............................. 6
THE ADMINISTRATOR........................ 8
THE TRANSFER AGENT....................... 8
THE DISTRIBUTOR.......................... 8
PURCHASE AND REDEMPTION OF SHARES........ 8
PERFORMANCE.............................. 10
TAXES.................................... 11
GENERAL INFORMATION...................... 11
DESCRIPTION OF PERMITTED INVESTMENTS
AND RISK FACTORS....................... 13
</TABLE>
TRUST:
The Advisors' Inner Circle Fund
MDL FUNDS:
MDL Broad Market Fixed Income Fund
MDL Large Cap Growth Equity Fund
ADVISER:
MDL Capital Management, Inc.
DISTRIBUTOR:
SEI Investments Distribution Co.
ADMINISTRATOR:
SEI Fund Resources
LEGAL COUNSEL:
Morgan, Lewis & Bockius LLP
INDEPENDENT PUBLIC ACCOUNTANTS:
Arthur Andersen LLP
NOVEMBER 1, 1997
For information call: 1-800-932-7781
MDL-F-001-01
PROSPECTUS
MDL
BROAD MARKET FIXED INCOME FUND
MDL
LARGE CAP GROWTH EQUITY FUND
MDL
-----
Advised by
MDL CAPITAL MANAGEMENT, INC.
<PAGE>
MDL FUNDS Please return this application FOR ASSISTANCE PLEASE CALL:
and your check to: 800-932-7781
The MDL Funds All applicants must complete
P.O. Box 419009 sections 1,2,3,4, and 9. For
Kansas City, MO 64141-6009 optional services complete 5-8.
- -------------------------------------------------------------------------------
New Account Application
- -------------------------------------------------------------------------------
PLEASE DO NOT USE THIS APPLICATION TO OPEN AN IRA ACCOUNT.
1 ACCOUNT REGISTRATION
- -----------------------------------------------------------------
PLEASE PRINT OR TYPE CLEARLY.
PLEASE CHOOSE ONE TYPE OF ACCOUNT BELOW:
/ / INDIVIDUAL, OR / / JOINT
.................................................................
_________________________________________________________________
YOUR NAME: FIRST, MIDDLE, LAST
_________________________________________________________________
SOCIAL SECURITY NUMBER
_________________________________________________________________
JOINT OWNER'S NAME: FIRST, MIDDLE, LAST
_________________________________________________________________
JOINT OWNER'S SOCIAL SECURITY NUMBER
/ / CUSTODIAL/GIFT TO MINORS
.................................................................
_________________________________________________________________
CUSTODIAN'S NAME: FIRST, MIDDLE, LAST
_________________________________________________________________
MINOR'S NAME: FIRST, MIDDLE, LAST
_________________________________________________________________
MINOR'S SOCIAL SECURITY NUMBER MINOR'S STATE OF RESIDENCE
/ / TRUST
.................................................................
_________________________________________________________________
TRUSTEE(S)'S NAME
_________________________________________________________________
NAME OF TRUST AGREEMENT
_________________________________________________________________
BENEFICIARY'S NAME
_________________________________________________________________
TRUST'S TAXPAYER IDENTIFICATION NUMBER DATE OF TRUST AGREEMENT
/ / CORPORATION*/OTHER
..................................................................
_________________________________________________________________
NAME OF CORPORATION OR OTHER ENTITY
_________________________________________________________________
TYPE OF ENTITY
_________________________________________________________________
TAXPAYER IDENTIFICATION NUMBER
*PLEASE ENCLOSE A CORPORATE RESOLUTION WHICH IDENTIFIES INDIVIDUALS
AUTHORIZED TO CONDUCT TRANSACTIONS ON THIS ACCOUNT.
2 SHAREHOLDER ADDRESS
- -----------------------------------------------------------------
/ / U.S. Citizen
/ / Resident Alien (must have U.S. tax identification number and
domestic address.)
/ / Non-Resident Alien
_________________________________________________________________
STREET OR P.O. BOX
_________________________________________________________________
CITY, STATE, ZIP COUNTRY OF TAX RESIDENCY
( ) ( )
_________________________________________________________________
DAYTIME TELEPHONE EVENING TELEPHONE
3. FUND SELECTION/INVESTMENT OPTION
- -----------------------------------------------------------------
Enclose your check ($500 minimum) made payable to:
The MDL Funds. PLEASE NOTE THAT THE MDL FUNDS DO NOT ACCEPT THIRD
PARTY CHECKS.
_________________________________________________________________
MDL BROAD MARKET FIXED INCOME FUND (246) $
_________________________________________________________________
MDL LARGE CAP GROWTH EQUITY FUND (247) $
_________________________________________________________________
TOTAL $
_________________________________________________________________
4. DIVIDEND & CAPITAL GAINS INSTRUCTIONS
.................................................................
All distributions will be reinvested automatically unless one of the
following is checked:
/ / SEND ALL DIVIDENDS AND CAPITAL GAINS BY DIRECT DEPOSIT TO THE
BANK ACCOUNT INDICATED ON THE ENCLOSED VOIDED CHECK.
/ / SEND ALL DIVIDENDS AND CAPITAL GAINS BY CHECK TO THE ADDRESS
IN SECTION 2.
PLEASE BE SURE TO COMPLETE THE OTHER SIDE OF THIS FORM.
MDL-M-001-01000
<PAGE>
- -------------------------------------------------------------------------------
Account Options and Signature
- -------------------------------------------------------------------------------
5. TELEPHONE AUTHORIZATION
....................................................................
I hereby authorize and direct the agent to accept and act upon
telephone instructions for exchanges and/or redemptions involving
the account with corresponding registration unless one or both
of the following is (are) checked:
/ / I DO NOT AUTHORIZE TELEPHONE EXCHANGES.
/ / I DO NOT AUTHORIZE TELEPHONE REDEMPTIONS.
6. SYSTEMATIC INVESTMENT PLAN (SIP)
....................................................................
I hereby authorize and direct the agent to draw on my (our)
bank account on a periodic basis, as indicated in section 8, for
investment in my (our) account. Attached is a voided check of the
bank account I (we) wish to use. (Initial investments may not be
made through the Systematic Investment Plan.) Please note this
privilege will be effective 15 days after The MDL Funds receive
this application. IF NO DATE IS CHOSEN BELOW, YOUR BANK
ACCOUNT WILL BE DEBITED ON THE 15TH OF THE MONTH.
PREFERRED INVESTMENT SCHEDULE:
/ / Monthly / / Quarterly / / Semi-Annually / / Annually
/ / 1st, or / / 15th
_________________________________________________________________
BEGIN INVESTMENT ON (ENTER MONTH/YEAR) DAY OF MONTH
DEBIT MY BANK ACCOUNT AND INVEST AS FOLLOWS
($50 MINIMUM PER ACCOUNT):
$
_________________________________________________________________
FUND AMOUNT
$
_________________________________________________________________
FUND AMOUNT
7. SYSTEMATIC WITHDRAWAL PLAN (SWP)
....................................................................
An account balance of at least $500 is required.
PREFERRED WITHDRAWAL SCHEDULE:
/ / Monthly / / Quarterly / / Semi-Annually / / Annually
/ / 1st, or / / 15th
_________________________________________________________________
BEGIN INVESTMENT ON (ENTER MONTH/YEAR) DAY OF MONTH
I ELECT TO RECEIVE A PERIODIC PAYMENT OF ($50 MINIMUM
PER ACCOUNT):
$
_________________________________________________________________
FUND AMOUNT
$
_________________________________________________________________
FUND AMOUNT
8. BANK INFORMATION
....................................................................
FOR ACH & WIRE REDEMPTIONS, AND SIP & SWP
Your bank account information must be on file in order to exercise
telephone investment privileges. The account name(s) below
must match exactly at least one name in section 1. A blank,
voided check or deposit slip is necessary to provide account and
bank routing information and must accompany this application.
_________________________________________________________________
NAME OF BANK ABA NUMBER
_________________________________________________________________
REGISTRATION ON ACCOUNT
/ / Checking / / Savings
_________________________________________________________________
ACCOUNT NUMBER ACCOUNT TYPE
_________________________________________________________________
BANK ADDRESS: CITY, STATE, ZIP
9. APPLICANT'S SIGNATURE
....................................................................
I have read the current prospectus and this application and agree
to all terms. In addition, I authorize the instructions in this
application. I hold harmless and indemnify The MDL Funds, any
of their affiliates or mutual funds managed by such affiliates, and
each of their respective directors, trustees, officers, employees
and agents from any losses, expenses, costs or
liability (including attorney fees) which I may incur in connection
with these instructions or the exercise of the telephone exchange
privilege. I certify, under penalties of perjury:
1.) that the Social Security or Taxpayer Identification
Number entered below is correct;
2.) that the Internal Revenue Service (IRS) has never notified
me that I am subject to 31% backup withholding, or has
notified me that I am no longer subject to such backup
withholding.
THE IRS DOES NOT REQUIRE YOUR CONSENT TO ANY PROVISION OF
THIS DOCUMENT OTHER THAN THE CERTIFICATIONS ABOVE, WHICH ARE
REQUIRED TO AVOID BACK-UP WITHHOLDING.
___________________________________________________________________
SIGNATURE: OWNER, TRUSTEE, ETC., EXACTLY AS IT APPEARS IN SECTION 1
___________________________________________________________________
SOCIAL SECURITY OR TAXPAYER ID NUMBER
___________________________________________________________________
SIGNATURE: JOINT OWNER, EXACTLY AS IT APPEARS IN SECTION 1
___________________________________________________________________
SOCIAL SECURITY OR TAXPAYER ID NUMBER
RETURN THE FOLLOWING TO THE ADDRESS BELOW:
1. This completed application.
2. Voided bank check or deposit slip if applicable.
3. One check made payable to:
The MDL Funds
Send to:
The MDL Funds
P.O. Box 419009
Kansas city, MO 64141-6009
<PAGE>
TRUST:
THE ADVISORS' INNER CIRCLE FUND
PORTFOLIOS:
MDL BROAD MARKET FIXED INCOME FUND
MDL LARGE CAP GROWTH EQUITY FUND
INVESTMENT ADVISER:
MDL CAPITAL MANAGEMENT, INC.
This STATEMENT OF ADDITIONAL INFORMATION is not a prospectus and relates only to
the MDL Broad Market Fixed Income Fund (the "Fixed Income Fund") and MDL Large
Cap Growth Equity Fund (the "Equity Fund" and together with the Fixed Income
Fund, the "MDL Funds"). It is intended to provide additional information
regarding the activities and operations of The Advisors' Inner Circle Fund (the
"Trust") and the MDL Funds and should be read in conjunction with the MDL Funds'
Prospectus dated November 1, 1997. The Prospectus for the MDL Funds may be
obtained by calling 1-800-932-7781.
TABLE OF CONTENTS
<TABLE>
<S> <C>
THE TRUST........................................................................... S - 2
DESCRIPTION OF PERMITTED INVESTMENTS................................................ S - 2
INVESTMENT LIMITATIONS.............................................................. S - 4
THE ADVISER......................................................................... S - 5
THE ADMINISTRATOR................................................................... S - 6
THE DISTRIBUTOR..................................................................... S - 6
TRUSTEES AND OFFICERS OF THE TRUST.................................................. S - 7
PERFORMANCE INFORMATION............................................................. S - 9
PURCHASE AND REDEMPTION OF SHARES................................................... S - 9
DETERMINATION OF NET ASSET VALUE.................................................... S - 10
TAXES............................................................................... S - 10
PORTFOLIO TRANSACTIONS.............................................................. S - 11
DESCRIPTION OF SHARES............................................................... S - 12
SHAREHOLDER LIABILITY............................................................... S - 12
LIMITATION OF TRUSTEES' LIABILITY................................................... S - 12
EXPERTS............................................................................. S - 12
</TABLE>
November 1, 1997
MDL-F-002-01
<PAGE>
THE TRUST
This Statement of Additional Information relates only to the MDL Broad Market
Fixed Income Fund (the "Fixed Income Fund") and MDL Large Cap Growth Equity Fund
(the "Equity Fund" and together with the Fixed Income Fund, the "MDL Funds"),
each a diversified portfolio. Each 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 ("portfolios") of shares of beneficial interest
("shares"). Each portfolio is a separate mutual fund, and each share of each
portfolio represents an equal proportionate interest in that portfolio. See
"Description of Shares." No investment in shares of a portfolio should be made
without first reading that portfolio's prospectus. Capitalized terms not defined
herein are defined in the Prospectus offering shares of the MDL Funds.
DESCRIPTION OF PERMITTED INVESTMENTS
The following sets forth certain information as a supplement to the "Investment
Objectives and Policies" and "Description of Permitted Investments and Risk
Factors" sections of the Prospectus.
AMERICAN DEPOSITARY RECEIPTS
The Equity Fund may invest in American Depositary Receipts. These instruments
may subject the Equity Fund to investment risks that differ in some respects
from those related to investments in obligations of U.S. domestic issuers. Such
risks include future adverse political and economic developments, the possible
imposition of withholding taxes on interest or other income, possible seizure,
nationalization, or expropriation of foreign deposits, the possible
establishment of exchange controls or taxation at the source, greater
fluctuations in value due to changes in exchange rates, or the adoption of other
foreign governmental restrictions which might adversely affect the payment of
principal and interest on such obligations. Foreign issuers of securities or
obligations are often subject to accounting treatment and engage in business
practices different from those respecting domestic issuers of similar securities
or obligations. Foreign branches of U.S. banks and foreign banks may be subject
to less stringent reserve requirements than those applicable to domestic
branches of U.S. banks.
INVESTMENT COMPANY SHARES
Each MDL Fund may invest up to 10% of its total assets in shares of other
investment companies that invest exclusively in those securities in which the
appropriate Fund may invest directly. These investment companies typically incur
fees that are separate from those fees incurred directly by the Fund. A 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 Fund expenses. Under applicable regulations, a Fund is
prohibited from acquiring the securities of another investment company if, as a
result of such acquisition: (1) the Fund owns more than 3% of the total voting
stock of the other company; (2) securities issued by any one investment company
represent more than 5% of the Fund's total assets; or (3) securities (other than
treasury stock) issued by all investment companies represent more than 10% of
the total assets of the Fund.
MORTGAGE-BACKED SECURITIES
The Fixed Income Fund may invest in mortgage-backed securities, principally
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
S-2
<PAGE>
of the issuers' general funds and additionally secured by a first lien on a pool
of single-family detached properties).
Many CMOs are issued with a number of classes or series that have different
maturities and are retired in sequence. 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
generally are not guaranteed.
REMICs, which were authorized under the Internal Revenue Code of 1986, as
amended (the "Code"), are private entities formed for the purpose of holding a
fixed pool of mortgages secured by an interest in real property. REMICs are a
form of CMO, and issue multiple classes of securities.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with primary securities dealers
recognized by the Federal Reserve Bank of New York or with national member banks
as defined in Section 3(d)(1) of the Federal Deposit Insurance Act, as amended.
A repurchase agreement will have an agreed-upon price (including principal and
interest) and an agreed-upon repurchase 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.
The repurchase agreements entered into by the MDL Funds 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 a Fund, the
Custodian or its agent must take possession of the underlying collateral.
However, if the seller defaults, the appropriate Fund could realize a loss on
the sale of the underlying security to the extent 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 Federal Bankruptcy
Code provides protection for 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 required to return the
underlying security to the seller's estate.
WHEN-ISSUED SECURITIES
Each Fund may purchase debt obligations on a when-issued basis, in which case
delivery and payment normally take place on a future date. The MDL Funds will
make commitments to purchase obligations on a when-issued basis only with the
intention of actually acquiring the securities, but may sell them before the
settlement date. During the period prior to the settlement date, the securities
are subject to market fluctuation, and no interest accrues on the securities to
the purchaser. The payment obligation and the interest rate that will be
received on the securities at settlement are each fixed at the time the
purchaser enters into the commitment. Purchasing obligations on a when-issued
basis may be used as a form of leveraging because the purchaser may accept the
market risk prior to payment for the securities. The MDL Funds, however, will
not use such purchases for leveraging; instead, as disclosed in the Prospectus,
a Fund will set aside assets to cover its commitments. If the value of these
assets declines, the Fund will place
S-3
<PAGE>
additional liquid assets aside on a daily basis so that the value of the assets
set aside is equal to the amount of the commitment.
INVESTMENT LIMITATIONS
FUNDAMENTAL POLICIES
The following investment limitations are fundamental policies of each Fund that
cannot be changed without the consent of the holders of a majority of that
Fund's outstanding shares. The phrase "majority of the outstanding shares" means
the vote of (i) 67% or more of a Fund's shares present at a meeting, if more
than 50% of the outstanding shares of a Fund are present or represented by
proxy, or (ii) more than 50% of a Fund's outstanding shares, whichever is less.
Each 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. Issue any class of senior security or sell any senior security of which it
is the issuer, except that the Fund may borrow from any bank, provided that
immediately after any such borrowing there is asset coverage of at least
300% for all borrowings of the Fund, and further provided that, to the
extent that such borrowings exceed 5% of the Fund's total assets, all
borrowings shall be repaid before the Fund makes additional investments. The
term "senior security" shall not include any temporary borrowings that do
not exceed 5% of the value of the Fund's total assets at the time the Fund
makes such temporary borrowing. In addition, investment strategies that
either obligate the Fund to purchase securities or require the Fund to
segregate assets will not be considered borrowings or senior securities.
This investment limitation shall not preclude the Fund from issuing multiple
classes of shares in reliance on SEC rules or orders.
4. Make loans if, as a result, more than 33 1/3% of its total assets would be
lent to other parties, except that the Fund may (i) purchase or hold debt
instruments in accordance with its investment objective and policies; (ii)
enter into repurchase agreements; and (iii) lend its securities.
5. Purchase or sell real estate, real estate limited partnership interests,
physical commodities or commodities contracts except that the Fund may
purchase commodities contracts relating to financial instruments, such as
financial futures contracts and options on such contracts.
6. Make short sales of securities, maintain a short position or purchase
securities on margin, except that a Fund may obtain short-term credits as
necessary for the clearance of security transactions and sell securities
short "against the box."
7. Act as an underwriter of securities of other issuers except as it may be
deemed an underwriter in selling the Fund security.
8. Purchase securities of other investment companies except as permitted by the
Investment Company Act of 1940, as amended (the "1940 Act") and the rules
and regulations thereunder.
NON-FUNDAMENTAL POLICIES
The following investment limitation of each Fund is non-fundamental and may be
changed by the Trust's Board of Trustees without shareholder approval:
1. A Fund may not invest in illiquid securities in an amount exceeding, in the
aggregate, 15% of the Fund's net assets.
S-4
<PAGE>
Except with respect to each Fund's policy concerning borrowing and illiquid
securities, if a percentage restriction is adhered to at the time of an
investment, a later increase or decrease in percentage resulting from changes in
values or assets will not constitute a violation of such restriction.
THE ADVISER
MDL Capital Management, Inc. (the "Adviser") and the Trust have entered into an
advisory agreement dated October 31, 1997 (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.
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 a Fund, and (ii) by the vote of a majority of the
Trustees who are not parties to the 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, with respect to a Fund, by a majority of the outstanding shares
of that 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 Adviser's fixed income decision making process begins with a "top down"
analysis of the factors that drive interest rates: economic growth, inflation,
the level of the dollar, monetary policy and fiscal policy. Based on this
process, the Adviser develops several interest rate projections and determines
an appropriate duration target and maturity structure.
The Adviser then apportions the Fixed Income Fund's portfolio among the
following sectors: (i) U.S. Government Securities, (ii) corporate fixed income
securities and (iii) MBSs. This allocation is based on an analysis of the
relative attractiveness of these sectors, on a total return basis, given the
Adviser's interest rate projections. The Adviser then selects approximately
15-20 individual securities that in the aggregate produce the desired portfolio
duration, maturity structure and sector allocation.
In the case of U.S. Government Securities, individual securities are selected
for purchase that offer better total return potential than other U.S. Government
Securities with similar durations. In the case of corporate fixed income
securities, the Adviser's selection process seeks to identify issues where
credit quality has recently been improving as evidenced by rating increases by
S&P or Moody's. In addition, the Adviser seeks corporate fixed income securities
that generally are non-callable and have an issue size of $250 million or
greater. In the case of MBSs, the Adviser seeks to purchase individual
securities that offer the best total return potential, given the Adviser's
interest rate projections, as compared to similar securities.
With respect to the Equity Fund, the Adviser evaluates these companies through a
multi-step screening process which begins with a universe of approximately 700
stocks, including those in the S&P 500 index. The Adviser seeks to purchase the
securities of companies with (i) high absolute and relative earnings momentum,
(ii) positive earnings surprise, (iii) positive price momentum and (iv) low
absolute and relative valuations. The Adviser then performs a fundamental
analysis of those companies that meet the foregoing criteria and selects from
those companies approximately 100 securities across 12 identified economic
sectors.
For the fiscal year ended October 31, 1997, the MDL Funds had not commenced
operations and therefore did not pay advisory fees.
S-5
<PAGE>
THE ADMINISTRATOR
The Administration Agreement provides that SEI Fund Resources (the
"Administrator") shall not be liable for any error of judgment or mistake of law
or for any loss suffered by the MDL Funds 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 of its duties and
obligations thereunder.
The Administration Agreement shall remain effective for the initial term of the
Agreement and each renewal term thereof unless earlier terminated (a) by the
mutual written agreement of the parties; (b) by either party of the
Administration Agreement on 90 days' written notice, as of the end of the
initial term or the end of any renewal term; (c) by either party of the
Administration Agreement on such date as is specified in written notice given by
the terminating party, in the event of a material breach of the Administration
Agreement by the other party, provided the terminating party has notified the
other party of such breach at least 45 days' prior to the specified date of
termination and the breaching party has not remedied such breach by the
specified date; (d) effective upon the liquidation of the Administrator; or (e)
as to a Fund or the Trust, effective upon the liquidation of the Fund or the
Trust, as the case may be.
The Administrator, a Delaware business trust, has its principal business offices
at Oaks, Pennsylvania 19456. SEI Investments Management Corporation ("SIMC"), a
wholly-owned subsidiary of SEI Investments Company ("SEI Investments"), is the
owner of all beneficial interest in the Administrator. SEI Investments and its
subsidiaries and 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 serve as administrator
or sub-administrator to the following other mutual funds: The Achievement Funds
Trust, The Advisors' Inner Circle Fund, The Arbor Fund, ARK Funds, Bishop Street
Funds, Boston 1784 Funds, CoreFunds, Inc., CrestFunds, Inc., CUFUND, The
Expedition Funds, FMB Funds, Inc., First American Funds, Inc., First American
Investment Funds, Inc., First American Strategy Funds, Inc., HighMark Funds,
Marquis-Registered Trademark- Funds, Monitor Funds, Morgan Grenfell Investment
Trust, The PBHG Funds, Inc., PBHG Insurance Series Fund, The Pillar Funds,
Profit Funds Investment Trust, Rembrandt Funds, Santa Barbara Group of Mutual
Funds, Inc., SEI Asset Allocation Trust, SEI Daily Income Trust, SEI Index
Funds, SEI Institutional Investments Trust, SEI Institutional Managed Trust, SEI
Inter-national Trust, SEI Liquid Asset Trust, SEI Tax Exempt Trust, STI Classic
Funds, STI Classic Variable Trust, and TIP Funds.
The Administrator will not be required to bear expenses of any Fund to an extent
which would result in the Fund's inability to qualify as a regulated investment
company under provisions of the Code. The term "expenses" is defined in such
laws or regulations, and generally excludes brokerage commissions, distribution
expenses, taxes, interest and extraordinary expenses.
For the fiscal year ended October 31, 1997, the MDL Funds had not commenced
operations and therefore did not pay administration fees.
THE DISTRIBUTOR
SEI Investments Distribution Co. (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 distribution of
shares of the Fund.
The Distribution Agreement shall remain in effect for a period of two years
after the effective date of the agreement and 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.
For the fiscal year ended October 31, 1997, the MDL Funds had not commenced
operations and therefore did not pay distribution fees.
S-6
<PAGE>
TRUSTEES AND OFFICERS OF THE TRUST
The Trustees and Executive Officers of the Trust, 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 the 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 Trust also serve as officers of some or all of the following:
The Achievement Funds Trust, The Advisors' Inner Circle Fund, The Arbor Fund,
ARK Funds, Bishop Street Funds, Boston 1784 Funds-Registered Trademark-,
CoreFunds, Inc., CrestFunds, Inc., CUFUND, The Expedition Funds, FMB Funds,
Inc., First American Funds, Inc., First American Investment Funds, Inc., First
American Strategy Funds, Inc, HighMark Funds, Marquis
Funds-Registered Trademark-, Monitor Funds, Morgan Grenfell Investment Trust,
The PBHG Funds, Inc., PBHG Insurance Series Fund, Inc., The Pillar Funds, Profit
Funds Investment Trust, Rembrandt Funds-Registered Trademark-, Santa Barbara
Group of Mutual Funds, Inc., 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,
STI Classic Funds, STI Classic Variable Trust and TIP Funds, 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-Registered Trademark-, and Santa Barbara Group of Mutual Funds, Inc., are
distributed by SEI Investments Distribution Co.
ROBERT A. NESHER (DOB 08/17/46)--Chairman of the Board of Trustees*-- Currently
performs various services on behalf of SEI Investments for which Mr. Nesher is
compensated. Executive Vice President of SEI Investments, 1986-1994. Director
and Executive Vice President of the Administrator and the Distributor,
1981-1994. Trustee of The Advisors' Inner Circle Fund, The Arbor Fund, Boston
1784 Funds-Registered Trademark-, The Expedition Funds, Marquis
Funds-Registered Trademark-, Pillar Funds, Rembrandt
Funds-Registered Trademark-, 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 and SEI Tax Exempt Trust.
JOHN T. COONEY (DOB 01/20/27)--Trustee**--Retired since 1992. Formerly Vice
Chairman of Ameritrust Texas N.A., 1989-1992, and MTrust Corp., 1985-1989.
Trustee of The Advisors' Inner Circle Fund, The Arbor Fund, The Expedition Funds
and Marquis Funds-Registered Trademark-.
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 Investments.
Trustee of The Advisors' Inner Circle Fund, The Arbor Fund, The Expedition
Funds, Marquis Funds-Registered Trademark-, 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 and
SEI Tax Exempt Trust.
FRANK E. MORRIS (DOB 12/30/23)--Trustee**--Retired since 1990. Peter Drucker
Professor of Management, Boston College, 1989-1990. President, Federal Reserve
Bank of Boston, 1968-1988. Trustee of The Advisors' Inner Circle Fund, The Arbor
Fund, The Expedition Funds, Marquis Funds-Registered Trademark-, 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 and SEI Tax Exempt Trust.
ROBERT A. PATTERSON (DOB 11/05/27)--Trustee**--Pennsylvania State University,
Senior Vice President, Treasurer (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 Advisors' Inner Circle Fund, The Arbor
Fund, The Expedition Funds, and Marquis Funds-Registered Trademark-.
GENE PETERS (DOB 06/03/29)-- Trustee**--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
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Officer of Jos. Schlitz Brewing Company before 1978. Trustee of The Advisors'
Inner Circle Fund, The Arbor Fund, The Expedition Funds and Marquis
Funds-Registered Trademark-.
JAMES M. STOREY (DOB 04/12/31)--Trustee**--Partner, Dechert Price & Rhoads, from
September 1987 - December 1993; Trustee of The Advisors' Inner Circle Fund, The
Arbor Fund, The Expedition Funds, Marquis Funds-Registered Trademark-, 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 and SEI Tax Exempt 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 Investments,
Senior Vice President, General Counsel and Secretary of the Administrator and
Distributor since 1994. Vice President and Assistant Secretary of SEI
Investments, 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 Investments, Vice President and
Assistant Secretary of the Administrator and Distributor since 1994. Associate,
Morgan, Lewis & Bockius LLP (law firm), 1989-1994.
MARK E. NAGLE (DOB 10/20/59)--Controller and Chief Financial Officer--Vice
President of Fund Accounting and Administration of SEI Fund Resources since
November 1996. Vice President of Fund Accounting, BISYS Fund Services, September
1995 to November 1996. Senior Vice President and Site Manager, Fidelity
Investments, 1981 to September 1995.
TODD B. CIPPERMAN (DOB 02/14/66)--Vice President and Assistant Secretary--Vice
President and Assistant Secretary of SEI Investments, 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 Investments, 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 Investments, 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).
- ------------------------
* 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.
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The following table exhibits Trustee compensation for the fiscal year ended
October 31, 1997.
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION FROM
REGISTRANT FOR PENSION OR
THE FISCAL YEAR RETIREMENT BENEFITS
ENDED OCTOBER 31, ACCRUED AS PART OF
NAME OF PERSON, POSITION 1997 TRUST EXPENSES
- --------------------------------------------- ----------------- --------------------
<S> <C> <C>
John T. Cooney, Trustee...................... $ 8,154 N/A
Frank E. Morris, Trustee..................... $ 8,154 N/A
Robert Patterson, Trustee.................... $ 8,154 N/A
Eugene B. Peters, Trustee.................... $ 8,154 N/A
James M. Storey, Esq., Trustee............... $ 8,154 N/A
William M. Doran, Esq., Trustee.............. $ 0 N/A
Robert A. Nesher, Chairman of the Board...... $ 0 N/A
</TABLE>
PERFORMANCE INFORMATION
From time to time, the Trust may advertise yield and total return of the Fixed
Income Fund and the total return of the Equity 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 Fixed Income Fund refers to the annualized income generated by an
investment in that 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.
The total return of a 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 that 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)TO THE POWER OF 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.
PURCHASE AND REDEMPTION OF SHARES
Purchases and redemptions may be made through the Distributor on a day on which
the New York Stock Exchange is open for business. Shares of the MDL Funds are
offered on a continuous basis. Currently, the holidays observed by the Trust and
the New York Stock Exchange are as follows: New Year's Day, Presidents' Day,
Martin Luther King Jr. 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 of securities held by a 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 has received
exemptive relief from the Securities and Exchange Commission (the "SEC"), which
permits the Trust to make in-kind redemptions to those shareholders that are
affiliated with the MDL Funds solely by their ownership of a certain percentage
of the MDL Funds.
The Trust reserves the right to suspend the right of redemption and/or to
postpone the date of payment upon redemption for any period on which trading on
the New York Stock Exchange is restricted, or during
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the existence of an emergency (as determined by the SEC by rule or regulation)
as a result of which the 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 any
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 MDL Funds are valued by the Administrator. The
Administrator will use 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 MDL Funds and their 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.
Each Fund intends to qualify as a "regulated investment company" ("RIC") as
defined under Subchapter M of the Code. By following such a policy, the MDL
Funds expect to eliminate or reduce to a nominal amount the federal taxes to
which they may be subject.
In order to qualify for treatment as a RIC under the Code, a Fund generally must
distribute annually to its shareholders at least 90% of its investment company
taxable income (generally, net investment income plus net short-term capital
gain) (the "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 disposition of stock or securities, or certain other income; (ii) 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 (iii) 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 and which are engaged in the same, similar or
related trades or businesses.
Notwithstanding the Distribution Requirement described above, which requires
only that a 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),
each 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
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period ending on October 31 of that year, plus certain other amounts. Each Fund
intends to make sufficient distributions of its ordinary income and capital gain
net income prior to the end of each calendar year to avoid liability for excise
tax.
Any gain or loss recognized on a sale or redemption of shares of the MDL Funds
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 a 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 MDL Funds 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 MDL Funds that such shareholder is not subject to backup withholding.
If a Fund fails to qualify as a RIC for any taxable year, it will be subject to
tax on its taxable income at regular corporate rates. In such an event, all
distributions from that Fund generally would be eligible for the corporate
dividend received deduction.
STATE TAXES
The MDL Funds are not liable for any income or franchise tax in Massachusetts if
it qualifies as a RIC for federal income tax purposes. Fund shareholders should
consult with their tax advisers regarding the state and local tax consequences
of investments in the MDL Funds.
PORTFOLIO TRANSACTIONS
The MDL Funds have 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 MDL Funds. In placing
orders, it is the policy of the Trust 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 MDL Funds will not necessarily be paying
the lowest spread or commission available.
The money market instruments in which the Fund invests 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. Money market
instruments are generally traded on a net basis and do not normally involve
either brokerage commissions or transfer taxes. The cost of executing portfolio
securities transactions of the MDL Funds will primarily consist of dealer
spreads and underwriting commissions.
It is expected that the MDL Funds may execute brokerage or other agency
transactions through the Distributor, which is a registered broker-dealer, for a
commission in conformity with the 1940 Act, the Securities Exchange Act of 1934
and rules promulgated by the SEC. Under these provisions, the Distributor is
permitted to receive and retain compensation for effecting portfolio
transactions for the MDL Funds on an exchange if a written contract is in effect
between the Distributor and the Trust expressly permitting the Distributor to
receive and retain such compensation. These rules further require that
commissions paid to the Distributor by the MDL Funds 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
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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 Trust, have adopted procedures for evaluating the
reasonableness of commissions paid to the Distributor and will review these
procedures periodically.
Since the Trust does not market its shares through intermediary brokers or
dealers, it is not the Trust's practice to allocate brokerage or principal
business on the basis of sales of its shares which may be made through such
firms. However, the Adviser may place portfolio orders with qualified
broker-dealers who recommend the MDL Funds' shares to clients, and may, when a
number of brokers and dealers can provide best net results on a particular
transaction, consider such recommendations by a broker or dealer in selecting
among broker-dealers.
The MDL Funds are required to identify any securities of its "regular brokers or
dealers" (as such term is defined in the 1940 Act, which the MDL Funds have
acquired during its most recent fiscal year. For the fiscal year ended October
31, 1997, the MDL Funds had not commenced operations.
The portfolio turnover rate for the Fixed Income and Equity Funds is estimated
to be 50% and 80%, respectively.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of
portfolios and shares of each portfolio, each of which represents an equal
proportionate interest in the 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. The Declaration of Trust
provides that the Trustees of the Trust may create additional series of shares.
All consideration received by the Trust for shares of any additional series and
all assets in which such consideration is invested would belong to that series
and would be subject to the liabilities related thereto. Share certificates
representing shares will not be issued.
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.
EXPERTS
Arthur Andersen LLP serves as independent public accountants to the Trust.
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