FMC STRATEGIC
VALUE FUND
ANNUAL REPORT
OCTOBER 31, 1998
ADVISED BY:
FIRST MANHATTAN CO.
<PAGE>
MANAGER'S DISCUSSION OF FUND PERFORMANCE
Dear Shareholder:
The FMC Strategic Value Fund (the "Fund") had a total return of 4.25% for the
period from inception on August 17, 1998 to the fiscal year end, October 31,
1998. This compares with a return of -5.77% over the same period for the Fund's
benchmark, the Russell 2000 Index.
As the name of the Fund implies, we are focusing our investment efforts on
finding attractive values in the stock market, i.e., companies that are selling
at a discount to what we believe is the intrinsic business value of the company
and where we can identify a catalyst which could help the company to realize the
difference between the price of its stock and the intrinsic value. While we try
to assess a company's future growth potential, our valuation pays particular
attention to current levels of free cash flow and our overall assessment of
management's strategy to allocate this cash.
The price/earnings multiple of the Fund's portfolio is currently about
12.6x based on 1998 estimates which represents a substantial discount to the 18x
p/e ratio of the Russell 2000. In the majority of our portfolio holdings,
capital spending approximates depreciation and amortization; thus earnings per
share (EPS) equates to free cash flow, so the discount based on this multiple is
even greater. Since we cannot control the timing as to when this pricing
discrepancy will be narrowed, shareholders should focus on the long term.
If we can continue building our portfolio with companies having attributes
similar to the two stocks discussed below, we believe the portfolio will be well
positioned to deal with the anticipation or reality of an economic slowdown.
Two of the Fund's current portfolio holdings that typify our value analysis are
Westinghouse Air Brake and Gardner Denver. Both meet our objective of 50%
appreciation potential over three years.
Westinghouse Air Brake (WABCO) is the largest manufacturer of value-added rail
equipment in North America with a presence that dates back to 1869. WABCO offers
a variety of high quality products that are found in practically all freight
cars, locomotives and transit cars. The company's leading market position (50%+
market share), coupled with efficient manufacturing facilities produces
impressive gross profit margins of 33%. Growth is being driven by the need to
upgrade an aging rail and transit fleet as well as technological innovation;
WABCO is a leader in introducing new products that enhance safety and
productivity. WABCO has compiled an impressive record over the past five years
with compound EPS growth of 20% through 1998's estimated $1.75. We paid 11x
estimated 1998 earnings for WABCO, which is not only low on an absolute basis,
but also a significant discount to the multiple for the overall market. In our
view, the large disparity exists because of the company's historic dependence
on the OEM freight car market, which is perceived to be cyclical. Management has
judiciously used its free cash flow (basically, net income) to make accretive
acquisitions, which have diversified its rail transportation activities so that
the freight OEM business now represents less than 20% of total sales. As
earnings growth continues (we estimate $1.95 for 1999), we believe that the
market will better recognize this quality company.
Gardner Denver (GDI) is a leading manufacturer of compressors and blowers that
are sold to a highly diverse range of manufacturing and service companies.
Compressed air products account for 80% of sales with the balance derived from
the manufacture of pumps that are used in the oil and gas industry for drilling
and oil well servicing. Since its spinout from Cooper Industries in 1994, a time
when Gardner Denver was reporting losses, management has done an excellent job
of rebuilding the company with earnings that have risen steadily to an estimated
$2.15 per share for 1998. The sharp decline in oil prices and related reductions
in spending budgets by the oil and gas producers could lead to a decline in pump
sales, which in turn could cause overall EPS for GDI to decline by about 10% to
an estimated $1.95 in 1999. We purchased our position in GDI for 10x this
estimate, a very attractive price for a company generating 14% pre-tax margins
and a 16% after tax return on invested capital. Thus, while the short-term
outlook of GDI is somewhat soft, its free cash flow, which also approximates
EPS, should remain strong. Management recently initiated a 10% share repurchase
program, confirming our view that GDI is under-valued.
I trust that this report has given you useful insight into how your assets are
being managed. I appreciate your confidence.
Sincerely,
/s[Signature Omitted]
Edward I. Lefferman
Portfolio Manager
<PAGE>
TOTAL RETURN 1
Annualized Cumulative
Inception Inception
to Date to Date
22.47% 4.25%
COMPARISON OF CHANGE IN THE VALUE OF A $10,000 INVESTMENT IN THE
FMC STRATEGIC VALUE FUND, VERSUS THE RUSSELL 2000 VALUE INDEX, AND THE
S&P400/BARRA VALUE INDEX.
[LINE GRAPH OMITTED]
PLOT POINTS ARE AS FOLLOWS:
FMC Strategic Russell 2000 S&P 400/BARRA
Value Fund Value Index Value Index
8/31/98 10000 10000 10000
10/31/98 11114 10879 11628
1These figures represent past performance. Past performance is no guarantee of
future results. The investment return and principal value of an investment will
fluctuate, so an investor's shares, when redeemed, may be worth more or less
than their original cost.
2The FMC Strategic Value Fund commenced operations on August 17, 1998.
[Pie Chart Omitted]
Plot points are as follows:
Portfolio Composition
Printing & Publishing 3%
Food, Beverage & Tobacco 4%
Apparel/Textiles 4%
Insurance 5%
Machinery 7%
Specialty Machinery 11%
Miscellaneous Business Services 11%
Manufacturing 20%
U.S. Treasury Obligations 35%
% of Total Fund Investments
<PAGE>
STATEMENT OF NET ASSETS FMC STRATEGIC VALUE FUND
October 31, 1998
Face Market
Amount Value
FMC STRATEGIC VALUE FUND (000) (000)
- --------------------------------------------------------------------------------
COMMON STOCKS (68.2%)
APPAREL/TEXTILES (4.3%)
U.S. Industries ................................. $15,000 $ 245
------
FOOD, BEVERAGE & TOBACCO (4.5%)
Corn Products International ..................... 9,000 256
------
INSURANCE (5.4%)
Leucadia National ............................... 10,000 306
------
MACHINERY (7.4%)
Denison International ADR* ...................... 11,000 162
Gardner Denver Inc.* ............................ 18,000 259
------
421
------
MANUFACTURING (20.8%)
Agrium .......................................... 32,000 336
Aztec ........................................... 14,000 132
Trinity Industries .............................. 10,000 371
Westinghouse Air Brake .......................... 16,000 344
------
1,183
------
MISCELLANEOUS BUSINESS SERVICES (11.3%)
Moore ........................................... 28,000 317
Pinkerton's* .................................... 20,000 328
------
645
------
PRINTING & PUBLISHING (3.4%)
New England Business Service .................... 6,100 190
------
SPECIALTY MACHINERY (11.1%)
Cooper Cameron* ................................. 10,000 348
Tecumseh Products ............................... 5,500 286
------
634
------
TOTAL COMMON STOCKS
(Cost $3,686) ................................... 3,880
------
U.S. TREASURY OBLIGATIONS (35.9%)
U.S. Treasury Bills (A)
4.957%, 11/27/98 ........................... 365 364
4.665%, 12/24/98 ........................... 38 38
3.805%, 02/25/99 ........................... 56 55
5.014%, 02/25/99 ........................... 1,198 1,182
5.810%, 02/25/99 ........................... 12 12
4.213%, 03/04/99 ........................... 400 394
------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $2,043) ................................... 2,045
------
The accompanying notes are an integral part of the financial statements.
<PAGE>
STATEMENT OF NET ASSETS FMC STRATEGIC VALUE FUND
October 31, 1998
Market
Value
FMC STRATEGIC VALUE FUND (concluded) (000)
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (104.1%)
(Cost $5,730) ................................... $5,925
------
OTHER ASSETS AND LIABILITIES, NET (-4.1%) .......... (234)
------
NET ASSETS:
Portfolio Shares (unlimited authorization
-- no par value) based on 547,232 outstanding
shares of beneficial interest ................. 5,461
Undistributed net investment income ............. 4
Accumulated net realized gain on investments .... 31
Net unrealized appreciation on investments ...... 195
------
TOTAL NET ASSETS (100.0%) .......................... $5,691
======
Net Asset Value, Offering and Redemption Price Per Share $10.40
======
*NON-INCOME PRODUCING SECURITY.
(A) THE RATE REPORTED ON THE STATEMENT OF NET ASSETS IS THE
EFFECTIVE YIELD AS OF OCTOBER 31, 1998.
ADR -- AMERICAN DEPOSITORY RECEIPT
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS FMC STRATEGIC VALUE FUND
FMC
STRATEGIC
VALUE FUND
-------------
8/17/98 TO
10/31/98(1)
(000)
- ---------------------------------------------------------------------------------------------------------------------------
Investment Income:
<S> <C>
Dividend Income ........................................................................... $ 5
Interest Income ........................................................................... 23
- ---------------------------------------------------------------------------------------------------------------------------
Total Investment Income.................................................................. 28
- ---------------------------------------------------------------------------------------------------------------------------
Expenses:
Investment Advisory Fees .................................................................. 10
Investment Advisory Fee Waiver ............................................................ (10)
Reimbursements by Advisor.................................................................. (18)
Administrative Fees ....................................................................... 16
Administrative Fee Waiver ................................................................. (10)
Custodian Fees ............................................................................ --
Professional Fees ......................................................................... 13
Transfer Agent Fees ....................................................................... 3
Printing Fees ............................................................................. 2
Trustee Fees .............................................................................. 1
Registration and Filing Fees .............................................................. 3
Insurance and Other Fees .................................................................. 1
Organization Costs......................................................................... 2
- ---------------------------------------------------------------------------------------------------------------------------
Total Expenses, Net ..................................................................... 13
- ---------------------------------------------------------------------------------------------------------------------------
Net Investment Income ................................................................. 15
- ---------------------------------------------------------------------------------------------------------------------------
Net Realized Gain from Securities Sold .................................................... 31
Net Change in Unrealized Appreciation of Investment Securities ............................ 195
- ---------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain on Investments ......................................... 226
- ---------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations....................................... $241
===========================================================================================================================
</TABLE>
Amounts designated as "--" are either $0 or have been rounded to $0.
(1) The FMC Strategic Value Fund commenced operations on August 17, 1998.
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS FMC STRATEGIC VALUE FUND
FMC STRATEGIC
VALUE FUND
------------
8/17/98
TO 10/31/98(1)
(000)
- ---------------------------------------------------------------------------------------------------------------------------
Investment Activities:
<S> <C>
Net Investment Income ............................................................... $ 15
Net Realized Gain from Securities Sold .............................................. 31
Net Change in Unrealized Appreciation of Investment Securities ...................... 195
- ---------------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations............................... 241
- ---------------------------------------------------------------------------------------------------------------------------
Distributions to Shareholders:
Net Investment Income ............................................................... (11)
Realized Capital Gains............................................................... --
- ---------------------------------------------------------------------------------------------------------------------------
Total Distributions ............................................................... (11)
- ---------------------------------------------------------------------------------------------------------------------------
Capital Share Transactions:
Proceeds from Shares Issued ......................................................... 5,449
Reinvestment of Cash Distributions .................................................. 12
Cost of Shares Redeemed ............................................................. --
- ---------------------------------------------------------------------------------------------------------------------------
Increase in Net Assets Derived from Capital Share Transactions....................... 5,461
- ---------------------------------------------------------------------------------------------------------------------------
Total Increase in Net Assets ...................................................... 5,691
- ---------------------------------------------------------------------------------------------------------------------------
Net Assets:
Beginning of Period ................................................................. --
- ---------------------------------------------------------------------------------------------------------------------------
End of Period ....................................................................... $ 5,691
===========================================================================================================================
Shares Issued and Redeemed:
Shares Issued ...................................................................... 546
Shares Issued in Lieu of Cash Distributions ........................................ 1
Shares Redeemed .................................................................... --
- ---------------------------------------------------------------------------------------------------------------------------
Net Increase in Share Transactions ................................................ 547
===========================================================================================================================
</TABLE>
(1) The FMC Strategic Value Fund commenced operations on August 17, 1998.
Amounts designated as "--" are either $0 or have been rounded to $0.
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS FMC STRATEGIC VALUE FUND
For a Share Outstanding Throughout Each Period
For the Periods Ended October 31,
Ratio
Net Net Net of Net
Asset Realized and Distributions Distributions Asset Assets Ratio Investment
Value Net Unrealized from Net from Value End of Expenses Income
Beginning Investment Gains on Investment Capital End Total of Period to Average to Average
of Period Income Securities Income Gains of Period Return (000) Net Assets Net Assets
--------- ---------- ----------- ------------- ------------- --------- ------ --------- ----------- ----------
- ------------------------
FMC STRATEGIC VALUE FUND
- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998(1) $10.00 0.03 0.39 (0.02) -- $10.40 4.25%+ $ 5,691 1.30%* 1.45%*
- ------------------------
FMC STRATEGIC VALUE FUND
- ------------------------
Ratio
of Net
Ratio Investment
of Expenses Income
to Average to Average
Net Assets Net Assets Portfolio
(Excluding (Excluding Turnover
Waivers) Waivers) Rate
----------- ----------- ---------
1998(1) 5.07%* (2.32)%* 6.86%
</TABLE>
* Annualized
+ Total return is for the period indicated and has not been annualized.
(1) The FMC Strategic Value Fund commenced operations on August 17, 1998.
Amounts designated as "--" are either $0 or have been rounded to $0.
The accompanying notes are an integral part of the financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS FMC STRATEGIC VALUE FUND
October 31, 1998
1. ORGANIZATION:
THE ADVISORS' INNER CIRCLE FUND (the "Trust") is organized as a Massachusetts
business trust under an Amended and Restated Agreement and Declaration of Trust
dated February 18, 1997. The Trust is registered under the Investment Company
Act of 1940, as amended, as a diversified open-end management investment company
with eight portfolios. The financial statements herein are those of the FMC
Strategic Value Fund (the "Fund"). The financial statements of the remaining
portfolios are not presented herein. The assets of each portfolio are
segregated, and a shareholder's interest is limited to the portfolio in which
shares are held. The Fund's prospectus provides a description of the Fund's
investment objectives, policies and strategies.
2. SIGNIFICANT ACCOUNTING POLICIES:
The following is a summary of the significant accounting policies followed by
the Fund.
SECURITY VALUATION -- Investments in equity securities which are traded on a
national exchange (or reported on the NASDAQ national market system) are stated
at the last quoted sales price if readily available for such equity securities
on each business day; other equity securities traded in the over-the-counter
market and listed equity securities for which no sale was reported on that date
are stated at the last quoted bid price. Debt obligations exceeding sixty days
to maturity for which market quotations are readily available are valued at the
most recent quoted bid price. Debt obligations with sixty days or less remaining
until maturity may be valued at their amortized cost, which approximates market
value.
FEDERAL INCOME TAXES -- It is the Fund's intention to qualify as a regulated
investment company by complying with the appropriate provisions of the Internal
Revenue Code of 1986, as amended. Accordingly, no provision for Federal income
taxes is required.
SECURITY TRANSACTIONS AND RELATED INCOME -- Security transactions are
accounted for on the date the security is purchased or sold (trade date). Costs
used in determining realized gains and losses on the sales of investment
securities are those of the specific securities sold, adjusted for the accretion
and amortization of purchase discounts or premiums during the respective holding
period which is calculated using the effective interest method. Interest income
is recognized on the accrual basis. Dividend income is recorded on the ex-date.
NET ASSET VALUE PER SHARE -- The net asset value per share of the Fund is
calculated on each business day by dividing the total value of assets, less
liabilities, by the number of shares outstanding.
EXPENSES -- Expenses that are directly related to the Funds are charged to
the Fund. Other operating expenses of the Trust are prorated to the Fund on the
basis of relative daily net assets compared to the aggregate daily net assets of
the Trust.
DISTRIBUTIONS TO SHAREHOLDERS -- Distributions from net investment income are
declared and paid to shareholders quarterly. Any net realized capital gains are
distributed to Shareholders at least annually.
Distributions from net investment income and net realized capital gains are
determined in accordance with the U.S. Federal income tax regulations, which may
differ from those amounts determined under generally accepted accounting
principles. These book/tax differences are either temporary or permanent in
nature. To the extent these differences are permanent, they are charged or
credited to paid-in-capital in the period that the differences arise. These
reclassifications have no effect on net assets or net asset value.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
3. ORGANIZATIONAL COSTS AND TRANSACTIONS WITH AFFILIATES:
Organizational costs have been capitalized by the Trust and are being amortized
over twelve months commencing with the start-up. In the event the initial shares
of the Trust are redeemed by any holder thereof during the period that the Trust
is amortizing its organizational
<PAGE>
NOTES TO FINANCIAL STATEMENTS (concluded) FMC STRATEGIC VALUE FUND
October 31, 1998 costs, the redemption proceeds payable to the holder thereof by
the Portfolio will be reduced by the unamortized organizational costs in the
same ratio as the number of initial shares being redeemed bears to the number of
initial shares outstanding at the time of redemption.
Certain officers of the Trust are also officers of SEI Investments Mutual Funds
Services (the "Administrator") and/or SEI Investments Distribution Co. (the
"Distributor"). Such officers are paid no fees by the Trust for serving as
officers of the Trust.
4. ADMINISTRATION, SHAREHOLDER SERVICING AND DISTRIBUTION AGREEMENTS:
The Trust and the Administrator are parties to an Administration Agreement under
which the Administrator provides management and administrative services for an
annual fee equal to the higher of $75,000 or .15% of the Fund's average daily
net assets.The Administrator has voluntarily agreed to limit its fee to no
higher than $27,500 for the Fund's initial fiscal year.
DST Systems Inc. (the "Transfer Agent") serves as the transfer agent and
dividend disbursing agent for the Fund under a transfer agency agreement with
the Fund.
The Trust and Distributor are parties to a Distribution Agreement. The
Distributor receives no fees for its distribution services under this agreement.
5. INVESTMENT ADVISORY AND CUSTODIAN AGREEMENTS:
The Fund and First Manhattan Co. (the "Adviser") are parties to an Investment
Advisory Agreement under which the Adviser receives an annual fee equal to 1.00%
of the Fund's average daily net assets. The Adviser has, on a voluntary basis,
agreed to waive its fee in order to limit the Fund's total operating expenses to
a maximum of 1.30%. The Adviser reserves the right to terminate this arrangement
at any time in its sole discretion.
First Union National Bank acts as custodian (the "Custodian") for the Fund. The
Custodian plays no role in determining the investment policies of the Funds or
which securities are to be purchased and sold by the Fund.
6. INVESTMENT TRANSACTIONS:
The cost of security purchases and the proceeds from security sales, other than
short-term investments, for the year ended October 31, 1998 are as follows:
(000)
---------
Purchases
U.S. Government ..................... $ --
Other ............................... 3,867
Sales
U.S. Government ..................... $ --
Other ............................... 210
At October 31, 1998, the total cost of securities and the net realized gains or
losses on securities sold for Federal income tax purposes were not materially
different from amounts reported for financial reporting purposes. The aggregate
gross unrealized appreciation and depreciation for securities held by the Fund
at October 31, 1998, is as follows:
(000)
---------
Aggregate gross unrealized
appreciation ........................ $ 307
Aggregate gross unrealized
depreciation ........................ (112)
-------
Net unrealized appreciation ........... $ 195
=======
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Trustees of
FMC Strategic Value Fund of
Advisors' Inner Circle Fund:
We have audited the accompanying statement of net assets of the FMC Strategic
Value Fund (the "Fund"), one of the funds constituting Advisors' Inner Circle
Fund, as of October 31, 1998, and the related statement of operations, changes
in net assets, and financial highlights for the period presented. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
financial highlights. Our procedures included confirmation of securities owned
as of October 31, 1998, by correspondence with the custodian and broker. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
FMC Strategic Value Fund of Advisors' Inner Circle Fund as of October 31, 1998,
and the results of its operations, changes in its net assets, and financial
highlights for the period presented, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, PA
December 18, 1998
<PAGE>
NOTICE TO SHAREHOLDERS
OF
THE ADVISORS' INNER CIRCLE FUND
(UNAUDITED)
For shareholders that do not have an October 31, 1998 taxable year end, this
notice is for informational purposes only. For shareholders with an October 31,
1998 taxable year end, please consult your tax adviser as to the pertinence of
this notice.
For the fiscal year ended October 31, 1998, the portfolio is designating long
term capital gains, qualifying dividends and exempt interest income with regard
to distributions paid during the year as follows:
<TABLE>
<CAPTION>
(A) (B)
LONG TERM ORDINARY (C)
CAPITAL GAIN INCOME TOTAL (D) (E) (F)
DISTRIBUTIONS DISTRIBUTIONS DISTRIBUTIONS QUALIFYING TAX EXEMPT FOREIGN
PORTFOLIO (TAX BASIS) (TAX BASIS) (TAX BASIS) DIVIDENDS(1) INTEREST TAX CREDIT
------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
FMC Strategic Value Fund 0% 100% 100% 2% 0% 0%
- ----------------------------------------------------------------------------------------------------------------
<FN>
(1) Qualifying dividends represent dividends which qualify for the corporate dividends received deduction.
* Items (A)and (B) are based on a percentage of the portfolio's total distributions.
** Items (D) and (E) are based on a percentage of ordinary income distributions of the portfolio.
</FN>
</TABLE>
<PAGE>
FMC STRATEGIC VALUE FUND
P.O. Box 419009
Kansas City, MO 64141-6009
ADVISER:
FIRST MANHATTAN CO.
437 Madison Avenue
New York, NY 10022
DISTRIBUTOR:
SEI INVESTMENTS DISTRIBUTION CO.
Oaks, PA 19456
ADMINISTRATOR:
SEI INVESTMENTS MUTUAL FUNDS SERVICES
Oaks, PA 19456
LEGAL COUNSEL:
MORGAN, LEWIS & BOCKIUS LLP
1800 M Street N.W.
Washington, DC 20036
INDEPENDENT PUBLIC ACCOUNTANTS:
ARTHUR ANDERSEN LLP
1601 Market Street
Philadelphia, PA 19103
This information must be preceded or accompanied by a current prospectus
for the Fund described.
FMC-F-007-05
