Trust:
THE ADVISORS' INNER CIRCLE FUND
Funds:
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 March 1, 1999. The Prospectus for the MDL Funds may be obtained
by calling 1-800-932-7781.
TABLE OF CONTENTS
THE TRUST................................................................S - 3
INVESTMENT OBJECTIVES AND POLICIES.......................................S - 3
DESCRIPTION OF PERMITTED INVESTMENTS.....................................S - 5
INVESTMENT LIMITATIONS...................................................S - 16
THE ADVISER..............................................................S - 18
THE ADMINISTRATOR........................................................S - 20
THE DISTRIBUTOR..........................................................S - 22
THE TRANSFER AGENT.......................................................S - 22
THE CUSTODIAN............................................................S - 22
INDEPENDENT PUBLIC ACCOUNTANTS...........................................S - 22
LEGAL COUNSEL............................................................S - 22
TRUSTEES AND OFFICERS OF THE TRUST.......................................S - 23
PERFORMANCE INFORMATION..................................................S - 26
COMPUTATION OF YIELD.....................................................S - 27
CALCULATION OF TOTAL RETURN..............................................S - 27
PURCHASING SHARES........................................................S - 27
REDEEMING SHARES.........................................................S - 28
DETERMINATION OF NET ASSET VALUE.........................................S - 28
TAXES ................................................................S - 28
FUND TRANSACTIONS........................................................S - 32
TRADING PRACTICES AND BROKERAGE..........................................S - 32
DESCRIPTION OF SHARES....................................................S - 35
SHAREHOLDER LIABILITY....................................................S - 35
LIMITATION OF TRUSTEES' LIABILITY........................................S - 36
5% AND 25% SHAREHOLDERS..................................................S - 36
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EXPERTS ................................................................S - 37
FINANCIAL STATEMENTS.....................................................S - 37
March 1, 1999
MDL-F-002-02
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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.
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 "Fund Fees
and Expenses" in the Prospectus.
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. The MDL Funds' investment objectives are fundamental and cannot be
changed without the consent of shareholders. 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" herein.
MDL Broad Market Fixed Income Fund
Under normal conditions the Fixed Income Fund will principally 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
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invest less than 25% of its total assets in corporate fixed income securities
and less than 30% of its total assets in MBSs. The Fund's duration ordinarily
will range between 4 and 7 years.
In addition to its principal investments, the Fund may also invest in the
following securities which are not part of its principal investment strategy:
(i) short-term U.S. bank obligations; (ii) shares of other investment companies;
and (iii) repurchase agreements.
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
principally invest (at least 80% of its net assets) in the securities described
in the Prospectus.
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 with equity market capitalizations in excess of $500
million.
In addition to its principal investments, the Fund may also invest in other
equity securities of large cap companies, 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 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
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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.
DESCRIPTION OF PERMITTED INVESTMENTS
American Depositary Receipts
The Equity Fund may invest in 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 securities issued by corporations that are
exchangeable for a set number of another security at a prestated price. 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 option
provisions.
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.
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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.
The Euro
On January 1, 1999, the European Monetary Union (EMU) implemented a new currency
unit, the Euro. The countries initially converting or tying their currencies to
the Euro include Austria, Belgium, France, Germany, Luxembourg, the Netherlands,
Ireland, Finland, Italy, Portugal, and Spain. Financial transactions and market
information, including share quotations and company accounts, in participating
countries are denominated in Euros. Approximately 46% of the stock exchange
capitalization of the total European market is now reflected in Euros, and
participating governments now issue their bonds in Euros. Monetary policy for
participating countries is now uniformly managed by a new central bank, the
European Central Bank (ECB).
Although it is not possible to predict the impact of the Euro conversion on the
MDL Funds, the transition to the Euro may change the economic environment and
behavior of investors, particularly in European markets. For example, investors
may begin to view those countries participating in the EMU as a single entity,
and the Adviser may need to adapt investment strategies accordingly. The process
of implementing the Euro also may adversely affect financial markets worldwide
and may result in changes in the relative strength and value of the U.S. dollar
or other major currencies, as well as possible adverse tax consequences. The
transition to the Euro is likely to have a significant impact on fiscal and
monetary policy in the participating countries and may produce unpredictable
effects on trade and commerce generally. These resulting uncertainties could
create increased volatility in financial markets world-wide.
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.
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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
purchase 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.
A Fund may use futures contracts, and related options for bona fide hedging
purposes, to offset changes in the value of securities held or expected to be
acquired. They may also be used to minimize fluctuations in foreign currencies
or to gain exposure to a particular market or instrument. A 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 and for
which there appears to be a liquid secondary market.
Index futures are futures contracts for various indices that are traded on
registered securities exchanges. An index futures contract obligates the seller
to deliver (and the purchaser to take) an amount of cash equal to a specific
dollar amount times the difference between the value of a specific index at the
close of the last trading day of the contract and the price at which the
agreement is made.
Although futures contracts by their terms call for actual delivery or acceptance
of the underlying securities, in most cases the contracts are closed out before
the settlement date without the making or taking of delivery. Closing out an
open futures position is done by taking an opposite position ("buying" a
contract which has previously been "sold" or "selling" a contract which has
previously been "purchased") in an identical contract to terminate the position.
Brokerage commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with or for the account of a broker or custodian to
initiate and maintain open secondary market will exist for any particular
futures contract at any specific time. Thus, it may not be possible to close a
futures position. In the event of adverse price movements, a Fund would continue
to be required to make daily cash payments to maintain its required margin. In
such situations, if a Fund has insufficient cash, it may have to sell portfolio
securities to meet daily margin requirements at a time when it may be
disadvantageous to do so. In addition, the MDL Funds may be required to make
delivery of the instruments underlying the futures contracts they hold. The
inability to close options and futures positions also could have an adverse
impact on the ability to effectively hedge the underlying securities.
The risk of loss in trading futures contracts can be substantial, due both to
the low margin deposits required and the extremely high degree of leverage
involved in futures pricing. As a result, a relatively small price movement in a
futures contract may result in immediate and substantial loss (or gain) to a
Fund. For example, if at the time of purchase, 10% of the value of the futures
contract is deposited as margin, a subsequent 10% decrease in the value of the
futures
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contract would result in a total loss of the margin deposit, before any
deduction for the transaction costs, if the account were then closed out. A 15%
decrease would result in a loss equal to 150% of the original margin deposit if
the contract were closed out. Thus, a purchase or sale of a futures contract may
result in losses in excess of the amount invested in the contract. However,
because the MDL Funds will be engaged in futures transactions only for hedging
purposes, the Adviser does not believe that the MDL Funds will generally be
subject to the risks of loss frequently associated with futures transactions.
The MDL Funds presumably would have sustained comparable losses if, instead of
the futures contract, they had invested in the underlying financial instrument
and sold it after the decline. The risk of loss from the purchase of options is
less as compared with the purchase or sale of futures contracts because the
maximum amount at risk is the premium paid for the option.
Utilization of futures transactions by the MDL Funds does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the fund securities being hedged. It is also
possible that the MDL Funds could both lose money on futures contracts and
experience a decline in value of its fund securities. There is also the risk of
loss by the MDL Funds of margin deposits in the event of the bankruptcy of a
broker with whom the MDL Funds have an open position in a futures contract or
related option.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of future positions and subjecting some futures
traders to substantial losses.
Illiquid Securities
Illiquid securities are securities that cannot be disposed of within seven 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 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. Investing in shares of other investment
companies is not a principal investment strategy of either
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Fund. 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.
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
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period of time; however, it cannot be traded in the secondary market. Time
deposits with a withdrawal 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, adjustable rate mortgages, and floating
mortgages.
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, Fannie Mae, and FHLMC each guarantees timely distributions
of interest to certificate holders. GNMA and Fannie Mae also guarantee
timely distributions of scheduled principal. In the past, FHLMC has only
guaranteed 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.
Obligations of GNMA are backed by the full faith and credit of the United
States Government. Obligations of Fannie Mae and FHLMC are not backed by
the full faith and credit of the United States Government but are
considered to be of high quality since they are considered to be
instrumentalities of the United States. The market value and interest yield
of these mortgage-backed securities can vary due to market interest rate
fluctuations and early prepayments of underlying mortgages. These
securities represent ownership in a pool of federally insured mortgage
loans with a maximum maturity of 30 years. However, due to scheduled and
unscheduled principal payments on the underlying loans, these securities
have a shorter average maturity and, therefore, less principal volatility
than a comparable 30-year bond. Since prepayment rates vary widely, it is
not possible to accurately predict the average maturity of a particular
mortgage-backed security. The scheduled monthly interest and principal
payments relating to mortgages in the pool will be "passed through" to
investors. Government mortgage-backed securities differ from conventional
bonds in that principal is paid back to the certificate holders over the
life of the loan rather than at maturity. As a result, there will be
monthly scheduled
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payments of principal and interest. In addition, there may be unscheduled
principal payments representing prepayments on the underlying mortgages.
Although these securities may offer yields higher than those available from
other types of U.S. Government securities, mortgage-backed securities may
be less effective than other types of securities as a means of "locking in"
attractive long-term rates because of the prepayment feature. For instance,
when interest rates decline, the value of these securities likely will not
rise as much as comparable debt securities due to the prepayment feature.
In addition, these prepayments can cause the price of a mortgage-backed
security originally purchased at a premium to decline in price to its par
value, which may result in a loss.
Private Pass-Through Securities
Private pass-through securities are mortgage-backed securities issued by a
non-governmental agency, such as a trust. While they are generally
structured with one or more types of credit enhancement, private
pass-through securities generally lack a guarantee by an entity having the
credit status of a governmental agency or instrumentality. The two
principal types of private mortgage-backed securities are collateralized
mortgage obligations ("CMOs") and real estate mortgage investment conduits
("REMICs").
CMOs
CMOs are securities collateralized by mortgages, mortgage pass-throughs,
mortgage pay-through bonds (bonds representing an interest in a pool of
mortgages where the cash flow generated from the mortgage collateral pool
is dedicated to bond repayment), and mortgage-backed bonds (general
obligations of the issuers payable out of the issuers' general funds and
additionally secured by a first lien on a pool of single family detached
properties). CMOs are rated in one of the two highest categories by S&P or
Moody's. Many CMOs are issued with a number of classes or series which have
different expected maturities. Investors purchasing such CMOs are credited
with their portion of the scheduled payments of interest and principal on
the underlying mortgages plus all unscheduled prepayments of principal
based on a predetermined priority schedule. Accordingly, the CMOs in the
longer maturity series are less likely than other mortgage pass-throughs to
be prepaid prior to their stated maturity. Although some of the mortgages
underlying CMOs may be supported by various types of insurance, and some
CMOs may be backed by GNMA certificates or other mortgage pass-throughs
issued or guaranteed by U.S. Government agencies or instrumentalities, the
CMOs themselves are not generally guaranteed.
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REMICs
REMICs are private entities formed for the purpose of holding a fixed pool
of mortgages secured by an interest in real property. REMICs are similar to
CMOs in that they issue multiple classes of securities and are rated in one
of the two highest categories by S&P or Moody's.
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 or FHLMC 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. 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. 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
Stripped mortgage-backed securities are securities that are created when a
U.S. Government agency or a financial institution separates the interest
and principal components of a mortgage-backed security and sells them as
individual securities. The holder of the "principal-only" security (PO)
receives the principal payments made by the underlying mortgage-backed
security, while the holder of the "interest-only" security (IO) receives
interest payments from the same underlying security.
The prices of stripped mortgage-backed securities may be particularly
affected by changes in interest rates. As interest rates fall, prepayment
rates tend to increase, which tends to reduce prices of IOs and increase
prices of POs. Rising interest rates can have the opposite effect.
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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 Fund may write call options on a covered basis only, and will not engage in
option writing strategies for speculative purposes. A call option gives the
purchaser of such option the right to buy, and the writer, in this case the
Fund, the obligation to sell the underlying security at the exercise price
during the option period. The advantage to the MDL Funds of writing covered
calls is that the MDL Funds receive a premium which is additional income.
However, if the security rises in value, the MDL Funds may not fully participate
in the market appreciation.
During the option period, a covered call option writer may be assigned an
exercise notice by the broker-dealer through whom such call option was sold
requiring the writer to deliver the underlying security against payment of the
exercise price. This obligation is terminated upon the expiration of the option
period or at such earlier time in which the writer effects a closing purchase
transaction. A closing purchase transaction is one in which the Fund, when
obligated as a writer of an option, terminates its obligation by purchasing an
option of the same series as the option previously written.
A closing purchase transaction cannot be effected with respect to an option once
the option writer has received an exercise notice for such option.
Closing purchase transactions will ordinarily be effected to realize a profit on
an outstanding call option, to prevent an underlying security from being called,
to permit the sale of the underlying security or to enable a Fund to write
another call option on the underlying security with either a different exercise
price or expiration date or both. A Fund may realize a net gain or loss from a
closing purchase transaction depending upon whether the net amount of the
original premium received on the call option is more or less than the cost of
effecting the closing purchase transaction. Any loss incurred in a closing
purchase transaction may be partially or entirely offset by the premium received
from a sale of a different call option on the same underlying security. Such a
loss may also be wholly or partially offset by unrealized appreciation in the
market value of the underlying security.
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If a call option expires unexercised, a Fund will realize a short-term capital
gain in the amount of the premium on the option, less the commission paid. Such
a gain, however, may be offset by depreciation in the market value of the
underlying security during the option period. If a call option is exercised, a
Fund will realize a gain or loss from the sale of the underlying security equal
to the difference between the cost of the underlying security, and the proceeds
of the sale of the security plus the amount of the premium on the option, less
the commission paid.
The market value of a call option generally reflects the market price of an
underlying security. Other principal factors affecting market value include
supply and demand, interest rates, the price volatility of the underlying
security, and the time remaining until the expiration date.
The MDL Funds will write call options only on a covered basis, which means that
a Fund will own the underlying security subject to a call option at all times
during the option period. Unless a closing purchase transaction is effected, a
Fund would be required to continue to hold a security which it might otherwise
wish to sell, or deliver a security it would want to hold. Options written by
the MDL Funds will normally have expiration dates between one and nine months
from the date written. The exercise price of a call option may be below, equal
to, or above the current market value of the underlying security at the time the
option is written.
Repurchase Agreements
Repurchase agreements are agreements by which a person (e.g., a Fund) obtains a
security and simultaneously commits to return the security to the seller (a
primary securities dealer as recognized by the Federal Reserve Bank of New York
or a national member bank as defined in Section 3(d)(1) of the Federal Deposit
Insurance Act, as amended) at an agreed upon price (including principal and
interest) on an agreed upon date within a number of days (usually not more than
seven) from the date of purchase. The resale price reflects the purchase price
plus an agreed upon market rate of interest which is unrelated to the coupon
rate or maturity of the underlying security. A repurchase agreement involves the
obligation of the seller to pay the agreed upon price, which obligation is, in
effect, secured by the value of the underlying security.
Repurchase agreements are considered to be loans by a Fund for purposes of its
investment limitations. The repurchase agreements entered into by a Fund will
provide that the underlying security at all times shall have a value at least
equal to 102% of the resale price stated in the agreement (the Adviser monitors
compliance with this requirement). Under all repurchase agreements entered into
by a Fund, the appropriate Custodian or its agent must take possession of the
underlying collateral. However, if the seller defaults, a Fund could realize a
loss on the sale of the underlying security to the extent that the proceeds of
the sale including accrued interest are less than the resale price provided in
the agreement including interest. In addition, even though the Bankruptcy Code
provides protection for most repurchase agreements, if the seller should be
involved in bankruptcy or insolvency proceedings, a Fund may incur delay and
costs in selling the underlying security or may suffer a loss of principal and
interest if the Fund is
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treated as an unsecured creditor and required to return the underlying security
to the seller's estate.
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 Investment Company Act of 1940, as amended (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 Agency Obligations
U.S. Government agency obligations are obligations issued or guaranteed by
agencies or instrumentalities of the U.S. Government. Agencies of the United
States Government which issue obligations consist of, among others, the Export
Import Bank of the United States, Farmers Home Administration, Federal Farm
Credit Bank, Federal Housing Administration, GNMA, Maritime Administration,
Small Business Administration and The Tennessee Valley Authority. Obligations of
instrumentalities of the United States Government include securities issued by,
among others, Federal Home Loan Banks, FHLMC, Federal Intermediate Credit Banks,
Federal Land Banks, Fannie Mae and the United States Postal Service as well as
government trust certificates. Some of these securities are supported by the
full faith and credit of the United States Treasury, others are supported by the
right of the issuer to borrow from the Treasury and 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 the value of the
obligation prior to maturity.
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Variable and Floating Rate Securities
Variable and floating rate instruments involve certain obligations that 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 set 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 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 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.
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<PAGE>
Each Fund may not:
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.
3. Acquire more than 10% of the voting securities of any one issuer.
4. Invest in companies for the purpose of exercising control.
5. 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.
6. 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.
7. 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.
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<PAGE>
8. 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."
9. Act as an underwriter of securities of other issuers except as it may be
deemed an underwriter in selling the Fund security.
10. Purchase securities of other investment companies except as permitted by
the 1940 Act and the rules and regulations thereunder.
The foregoing percentages will apply at the time of the purchase of a security.
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.
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.
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") 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. 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 225 Ross Street, Pittsburgh,
Pennsylvania 15219. As of December 31, 1998, the Adviser had approximately $815
million of assets under
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management for institutional clients such as Taft-Hartley plans, hospitals,
public sector funds, foundations and ERISA plans.
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. 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 MDL 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 MDL Funds.
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.
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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 period beginning November 1, 1997 and ended October 31, 1998, the
MDL Funds paid advisory fees of:
- --------------------------------------------------------------------------------
Fund Fees Paid Fees Waived Fees Reimbursed
- --------------------------------------------------------------------------------
Fixed Income Fund $0 $7,119 $156,459
- --------------------------------------------------------------------------------
Equity Fund $0 $9,636 $141,746
- --------------------------------------------------------------------------------
THE ADMINISTRATOR
SEI Investments Mutual Funds Services (the "Administrator"), provides the Trust
with administrative services, including regulatory reporting and all necessary
office space, equipment, personnel and facilities.
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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. For the fiscal period commencing
November 1, 1997 and ended October 31, 1998, the Administrator received a fee
equal to 5.06% of the Fixed Income Fund and 6.14% of the Equity Fund's average
daily net assets.
The Administration Agreement provides that the Administrator shall not be liable
for any error of judgment or mistake of law or for any loss suffered by the 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 Arbor Fund, ARK Funds, Armada Funds, Bishop Street Funds, Boston 1784
Funds(R), CrestFunds, Inc., CUFUND, The Expedition Funds, First American Funds,
Inc., First American Investment Funds, Inc., First American Strategy Funds,
Inc., HighMark Funds, Monitor Funds, The Nevis Funds, Oak Associates Funds, The
PBHG Funds, Inc., PBHG Advisor Funds, Inc., PBHG Insurance Series Fund, Inc.,
The Pillar Funds, SEI Asset Allocation Trust, SEI Daily Income Trust, SEI Index
Funds, SEI Institutional International Trust, SEI Institutional Investments
Trust, SEI Institutional Managed Trust, SEI Liquid Asset Trust, SEI Tax Exempt
Trust, STI Classic Funds, STI Classic Variable Trust, TIP Funds and Alpha Select
Funds.
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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" ("RIC") under provisions of the Internal Revenue Code of 1986, as
amended (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 period beginning November 1, 1997 and ended October 31, 1998, the
MDL Funds each paid administration fees of $80,000.
THE DISTRIBUTOR
SEI Investments Distribution Co. (the "Distributor"), a wholly-owned subsidiary
of SEI Investments, 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.
No compensation is paid to the Distributor for distribution services for the
shares of the Fund.
THE TRANSFER AGENT
DST Systems, Inc., 330 W. 9th Street, Kansas City, Missouri 64105 serves as the
Trust's transfer agent.
THE CUSTODIAN
First Union National Bank, Broad and Chestnut Streets, P.O. Box 7618,
Philadelphia, Pennsylvania 19101 acts as custodian (the "Custodian") of the
Trust. The Custodian holds cash, securities and other assets of the Trust as
required by the 1940 Act.
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP serves as independent public accountants for the Trust.
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP, 1800 M Street, N.W., Washington, D.C. 20036 serves
as legal counsel to the Trust.
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TRUSTEES AND OFFICERS 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. The Trust pays the fees for unaffiliated Trustees.
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 Arbor Fund, ARK Funds, Armada Funds, Bishop
Street Funds, Boston 1784 Funds(R), CrestFunds, Inc., CUFUND, The Expedition
Funds, First American Funds, Inc., First American Investment Funds, Inc., First
American Strategy Funds, Inc., HighMark Funds, Monitor Funds, Oak Associates
Funds, The PBHG Funds, Inc., PBHG Advisor Funds, Inc., PBHG Insurance Series
Fund, Inc., The Pillar Funds, SEI Asset Allocation Trust, SEI Daily Income
Trust, SEI Index Funds, SEI Institutional International Trust, SEI Institutional
Investments Trust, SEI Institutional Managed Trust, SEI Liquid Asset Trust, SEI
Tax Exempt Trust, STI Classic Funds, STI Classic Variable Trust, TIP Funds and
Alpha Select Funds, each of which is an open-end management investment company
managed by SEI Investments Mutual Funds Services or its affiliates and, except
for PBHG Advisor Funds, Inc., 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 Arbor Fund, Boston 1784 Funds(R), The Expedition
Funds, Oak Associates Funds, Pillar Funds, SEI Asset Allocation Trust, SEI Daily
Income Trust, SEI Index Funds, SEI Institutional Investments Trust, SEI
Institutional Managed Trust, SEI Institutional International Trust, SEI Liquid
Asset Trust and SEI Tax Exempt Trust.
JOHN T. COONEY (DOB 01/20/27) -- Trustee** -- Vice Chairman of Ameritrust Texas
N.A., 1989-1992, and MTrust Corp., 1985-1989. Trustee of The Arbor Fund, The
Expedition Funds, and Oak Associates Funds.
WILLIAM M. DORAN (DOB 05/26/40) -- Trustee* -- 1701 Market Street, Philadelphia,
PA 19103-2921. Partner, Morgan, Lewis & Bockius LLP (law firm), counsel to the
Trust, SEI Investments, the Administrator and the Distributor. Director and
Secretary of SEI Investments and Secretary of the Administrator and the
Distributor. Trustee of The Arbor Fund, The Expedition Funds, Oak Associates
Funds, SEI Asset Allocation Trust, SEI Daily Income Trust,
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SEI Index Funds, SEI Institutional Investments Trust, SEI Institutional Managed
Trust, SEI Institutional 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 Arbor Fund, The Expedition Funds and Oak
Associates Funds.
EUGENE B. 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 Officer
of Jos. Schlitz Brewing Company before 1978. Trustee of The Arbor Fund, The
Expedition Funds and Oak Associates Funds.
JAMES M. STOREY (DOB 04/12/31) -- Trustee** -- Partner, Dechert Price & Rhoads,
from September 1987 - December 1993; Trustee of The Arbor Fund, The Expedition
Funds, Oak Associates Funds, SEI Asset Allocation Trust, SEI Daily Income Trust,
SEI Index Funds, SEI Institutional Investments Trust, SEI Institutional Managed
Trust, SEI Institutional International Trust, SEI Liquid Asset Trust and SEI Tax
Exempt Trust.
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.
GEORGE J. SULLIVAN, JR. (DOB 11/13/42) -- Trustee** -- Chief Executive Officer,
Newfound Consultants Inc. since April 1997. General Partner, Teton Partners,
L.P., June 1991-December 1996; Chief Financial Officer, Noble Partners, L.P.,
March 1991-December 1996; Treasurer and Clerk, Peak Asset Management, Inc.,
since 1991; Trustee, Navigator Securities Lending Trust, since 1995. Trustee of
The Arbor Fund, The Expedition Funds, Oak Associates Funds, SEI Asset Allocation
Trust, SEI Daily Income Trust, SEI Index Funds, SEI Liquid Asset Trust, SEI
Institutional Investments Trust, SEI Institutional Managed Trust, SEI
Institutional International Trust, and SEI Tax Exempt Trust.
JAMES R. FOGGO (DOB 06/30/64) -- Vice President and Assistant Secretary -- Vice
President and Assistant Secretary of the Administrator and the Distributor since
1998. Associate, Paul Weiss, Rifkind, Wharton & Garrison (law firm), 1998.
Associate, Baker & McKenzie (law firm), 1995-1998. Associate, Battle Fowler
L.L.P. (law firm), 1993-1995. Operations Manager, The Shareholder Services
Group, Inc., 1986-1990.
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LYDIA A. GAVALIS (DOB 06/05/64) -- Vice President and Assistant Secretary --
Vice President and Assistant Secretary of the Administrator and the Distributor
since 1998. Assistant General Counsel and Director of Arbitration, Philadelphia
Stock Exchange, 1989-1998.
KATHY HEILIG (DOB 12/21/58) -- Vice President and Assistant Secretary --
Treasurer of SEI Investments since 1997; Assistant Controller of SEI Investments
since 1995; Vice President of SEI Investments since 1991; Director of Taxes of
SEI Investments, 1987 to 1991. Tax Manager, Arthur Andersen LLP prior to 1987.
JOSEPH M. O'DONNELL (DOB 11/13/54) -- Vice President and Assistant Secretary --
Vice President and Assistant Secretary of the Administrator and the Distributor
since 1998. Vice President and General Counsel, FPS Services, Inc., 1993-1997.
Staff Counsel and Secretary, Provident Mutual Family of Funds, 1990-1993.
KEVIN P. ROBINS (DOB 04/15/61) -- Vice President and Assistant Secretary --
Senior Vice President and General Counsel of SEI Investments, the Administrator
and the Distributor since 1994. Assistant Secretary of SEI Investments since
1992; Secretary of the Administrator since 1994. Vice President, General Counsel
and Assistant Secretary of the Administrator and the Distributor, 1992-1994.
Associate, Morgan, Lewis & Bockius LLP (law firm), 1988-1992.
LYNDA J. STRIEGEL (DOB 10/30/48) -- Vice President and Assistant Secretary --
Vice President and Assistant Secretary of the Administrator and the Distributor
since 1998. Senior Asset Management Counsel, Barnett Banks, Inc., 1997-1998.
Partner, Groom and Nordberg, Chartered, 1996-1997. Associate General Counsel,
Riggs Bank, N.A., 1991-1995.
MARK E. NAGLE (DOB 10/20/59) -- Controller and Chief Financial Officer -- Vice
President of Fund Accounting and Administration for SEI Fund Resources and Vice
President of the Administrator since 1996. Vice President of the Distributor
since December 1997. Vice President, Fund Accounting, BISYS Fund Services,
September 1995 to November 1996. Senior Vice President and Site Manager,
Fidelity Investments 1981 to September 1995.
JOHN H. GRADY, JR. (DOB 06/01/61) -- Secretary --1701 Market Street,
Philadelphia, PA 19103-2921, Partner since 1995, Morgan, Lewis & Bockius LLP
(law firm), counsel to the Trust, SEI Investments, the Administrator and the
Distributor.
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*Messrs. Nesher and Doran are Trustees who may be deemed to be "interested"
persons of the MDL Funds as that term is defined in the 1940 Act.
**Messrs. Cooney, Patterson, Peters, Storey and Sullivan serve as members of the
Audit Committee of the MDL Funds.
The Trustees and officers of the Trust own less than 1% of the outstanding
shares of the Trust. The Trust pays the fees for unaffiliated Trustees.
The following table exhibits Trustee compensation for the fiscal year ended
October 31, 1998.
<TABLE>
<CAPTION>
====================================================================================================================
Total Compensation
Aggregate Pension or From Registrant and
Compensation Retirement Fund Complex*
From Registrant Benefits Paid to Trustees for
for the Fiscal Accrued as Estimated Annual the Fiscal
Year Ended Part of Fund Benefits Upon Year Ended
Name of Person, Position October 31, 1998 Expenses Retirement October 31,1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John T. Cooney, Trustee $8,142 N/A N/A $29,000 for services
on 1 board
- --------------------------------------------------------------------------------------------------------------------
**Frank E. Morris, Trustee $8,142 N/A N/A $29,000 for services
on 1 board
- --------------------------------------------------------------------------------------------------------------------
Robert Patterson, Trustee $8,337 N/A N/A $30,000 for services
on 1 board
- --------------------------------------------------------------------------------------------------------------------
Eugene B. Peters, Trustee $8,337 N/A N/A $30,000 for services
on 1 board
- --------------------------------------------------------------------------------------------------------------------
James M. Storey, Esq., Trustee $8,337 N/A N/A $30,000 for services
on 1 board
- --------------------------------------------------------------------------------------------------------------------
William M. Doran, Esq., Trustee $ 0 N/A N/A $0 for services
on 1 board
- --------------------------------------------------------------------------------------------------------------------
Robert A. Nesher, Chairman of the $ 0 N/A N/A $0 for services
Board on 1 board
====================================================================================================================
</TABLE>
*For purposes of this table, the MDL Funds are the only investment company in
the "Fund Complex."
**Retired December 31, 1998.
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.
S - 26
<PAGE>
Performance Comparisons
The MDL Funds may periodically compare its performance to other mutual funds
tracked by mutual fund rating services, to broad groups of comparable mutual
funds, or to unmanaged indices. These comparisons may assume reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs.
COMPUTATION OF YIELD
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.
For the 30-day period ended October 31, 1998, the Fixed Income Fund's yield was
3.81% and the Equity Fund's yield was 0.31%.
CALCULATION OF TOTAL RETURN
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)(n) = ERV, where P = a hypothetical initial payment
of $1,000; T = average annual total return; n = number of years; and ERV =
ending redeemable value, as of the end of the designated time period, of a
hypothetical $1,000 payment made at the beginning of the designated time period.
For the period from November 1, 1997 (commencement of operations) through
October 31, 1998, the Fixed Income Fund's total return was 9.10% and the Equity
Fund's total Return was 18.72%.
PURCHASING 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.
S - 27
<PAGE>
REDEEMING SHARES
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.
A Shareholder will at all times be entitled to aggregate cash redemptions from
all portfolios of the Trust during any 90-day period of up to the lesser of
$250,000 or 1% of the Trust's net assets.
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 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 additional federal income tax
considerations generally affecting the MDL Funds and their shareholders that are
not described in the MDL Funds' prospectus. No attempt is made to present a
detailed explanation of the tax treatment of the MDL Funds or their
shareholders, and the discussion here and in the MDL Funds' prospectus is not
intended as a substitute for careful tax planning. Shareholders are to consult
with their tax advisors with specific reference to their own tax situation,
including their state and local tax liabilities.
S - 28
<PAGE>
Federal Income Tax Treatment of Dividends and Distributions
The following general discussion of certain federal income tax consequences is
based on the Internal Revenue Code of 1986, as amended (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.
Qualification as Regulated Investment Company
Each Fund intends to qualify and elect to be treated 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 as a RIC, a Fund must distribute at least 90% of its net
investment income (that generally includes dividends, taxable interest, and the
excess of net short-term capital gains over net long-term capital losses less
operating expenses) and at least 90% of its net tax exempt interest income, for
each tax year, if any, to its shareholders and also must meet several additional
requirements. Shareholders are urged to consult their tax advisors with specific
reference to their own tax situations, including their state and local tax
liabilities. 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.
The MDL Funds may make investments in securities (such as STRIPS) that bear
"original issue discount" or "acquisition discount" (collectively, "OID
Securities"). The holder of such securities is deemed to have received interest
income even though no cash payments have been received. Accordingly, OID
Securities may not produce sufficient current cash receipts to match the amount
of distributable net investment income the MDL Funds must distribute to satisfy
the Distribution Requirement. In some cases, the MDL Funds may have to borrow
money or dispose of other investments in order to make sufficient cash
distributions to satisfy the Distribution Requirement.
S - 29
<PAGE>
Although each Fund intends to distribute substantially all of its net investment
income and may distribute its capital gains for any taxable year, each Fund will
be subject to federal income taxation to the extent any such income or gains are
not distributed.
If the MDL Funds fails to qualify for any taxable year as a RIC, all of their
taxable income will be subject to tax at regular corporate income tax rates
without any deduction for distributions to shareholders and such distributions
generally will be taxable to shareholders as ordinary dividends to the extent of
a Fund's current and accumulated earnings and profits. In this event,
distributions generally will be eligible for the dividends-received deduction
for corporate shareholders.
Fund Distributions
Distributions of investment company taxable income will be taxable to
shareholders as ordinary income, regardless of whether such distributions are
paid in cash or are reinvested in additional Shares, to the extent of a Fund's
earnings and profits. Each Fund anticipates that it will distribute
substantially all of its investment company taxable income for each taxable
year.
Each Fund may either retain or distribute to shareholders its excess of net
long-term capital gains over net short-term capital losses ("net capital
gains"). If such gains are distributed as a capital gains distribution, they are
taxable to shareholders who are individuals at a maximum rate of 20%, regardless
of the length of time the shareholder has held shares. If any such gains are
retained, a Fund will pay federal income tax thereon.
In the case of corporate shareholders, distributions (other than capital gains
distributions) from a RIC generally qualify for the dividends-received deduction
to the extent of the gross amount of qualifying dividends received by a Fund for
the year. Generally, and subject to certain limitations, a dividend will be
treated as a qualifying dividend if it has been received from a domestic
corporation. Accordingly, it is not expected that any Fixed Income Fund
distribution will qualify for the corporate dividends-received deduction.
Conversely, distributions from the Equity Fund generally will qualify for the
corporate dividends-received deduction.
Ordinarily, investors should include all dividends as income in the year of
payment. However, dividends declared payable to shareholders of record in
December of one year, but paid in January of the following year, will be deemed
for tax purposes to have been received by the shareholder and paid by the Fund
in the year in which the dividends were declared.
Each Fund will provide a statement annually to shareholders as to the federal
tax status of distributions paid (or deemed to be paid) by the Fund during the
year, including the amount of dividends eligible for the corporate
dividends-received deduction.
S - 30
<PAGE>
Sale or Exchange of Fund Shares
Generally, gain or loss on the sale or exchange of a Share will be capital gain
or loss that will be long-term if the Share has been held for more than twelve
months and otherwise will be short-term. For individuals, long-term capital
gains are currently taxed at a maximum rate of 20% and short-term capital gains
are currently taxed at ordinary income tax rates. However, if a shareholder
realizes a loss on the sale, exchange or redemption of a Share held for six
months or less and has previously received a capital gains distribution with
respect to the Share (or any undistributed net capital gains of a Fund with
respect to such Share are included in determining the shareholder's long-term
capital gains), the shareholder must treat the loss as a long-term capital loss
to the extent of the amount of the prior capital gains distribution (or any
undistributed net capital gains of a Fund that have been included in determining
such shareholder's long-term capital gains). In addition, any loss realized on a
sale or other disposition of Shares will be disallowed to the extent an investor
repurchases (or enters into a contract or option to repurchase) Shares within a
period of 61 days (beginning 30 days before and ending 30 days after the
disposition of the Shares). This loss disallowance rule will apply to Shares
received through the reinvestment of dividends during the 61-day period.
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 failed to
certify 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.
Federal Excise Tax
If a Fund fails to distribute in a calendar year at least 98% of its ordinary
income for the year and 98% of its capital gain net income (the excess of short
and long term capital gains over short and long term capital losses) for the
one-year period ending October 31 of that year (and any retained amount from the
prior calendar year), a Fund will be subject to a nondeductible 4% Federal
excise tax on the undistributed amounts. Each Fund intends to make sufficient
distributions to avoid imposition of this tax, or to retain, at most its net
capital gains and pay tax thereon.
State and Local 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.
S - 31
<PAGE>
FUND 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.
TRADING PRACTICES AND BROKERAGE
The Trust selects brokers or dealers to execute transactions for the purchase or
sale of portfolio securities on the basis of its judgment of their professional
capability to provide the service. The primary consideration is to have brokers
or dealers provide transactions at best price and execution for the Trust. Best
price and execution includes many factors, including the price paid or received
for a security, the commission charged, the promptness and reliability of
execution, the confidentiality and placement accorded the order and other
factors affecting the overall benefit obtained by the account on the
transaction. The Trust's determination of what are reasonably competitive rates
is based upon the professional knowledge of its trading department as to rates
paid and charged for similar transactions throughout the securities industry. In
some instances, the Trust pays a minimal share transaction cost when the
transaction presents no difficulty. Some trades are made on a net basis where
the Trust either buys securities directly from the dealer or sells them to the
dealer. In these instances, there is no direct commission charged but there is a
spread (the difference between the buy and sell price) which is the equivalent
of a commission.
The Trust may allocate out of all commission business generated by the fund and
accounts under management by the Adviser, brokerage business to brokers or
dealers who provide brokerage and research services. These research services
include advice, either directly or through publications or writings, as to the
value of securities, the advisability of investing in, purchasing or selling
S - 32
<PAGE>
securities, and the availability of securities or purchasers or sellers of
securities; furnishing of analyses and reports concerning issuers, securities or
industries; providing information on economic factors and trends, assisting in
determining portfolio strategy, providing computer software used in security
analyses, and providing portfolio performance evaluation and technical market
analyses. Such services are used by the Adviser in connection with its
investment decision-making process with respect to one or more funds and
accounts managed by it, and may not be used exclusively with respect to the fund
or account generating the brokerage.
As provided in the Securities Exchange Act of 1934 (the "1934 Act") higher
commissions may be paid to broker-dealers who provide brokerage and research
services than to broker-dealers who do not provide such services if such higher
commissions are deemed reasonable in relation to the value of the brokerage and
research services provided. Although transactions are directed to broker-dealers
who provide such brokerage and research services, the Trust believes that the
commissions paid to such broker-dealers are not, in general, higher than
commissions that would be paid to broker-dealers not providing such services and
that such commissions are reasonable in relation to the value of the brokerage
and research services provided. In addition, portfolio transactions which
generate commissions or their equivalent are directed to broker-dealers who
provide daily portfolio pricing services to the Trust. Subject to best price and
execution, commissions used for pricing may or may not be generated by the funds
receiving the pricing service.
The Adviser may place a combined order for two or more accounts or funds engaged
in the purchase or sale of the same security if, in its judgment, joint
execution is in the best interest of each participant and will result in best
price and execution. Transactions involving commingled orders are allocated in a
manner deemed equitable to each account or fund. It is believed that the ability
of the accounts to participate in volume transactions will generally be
beneficial to the accounts and funds. Although it is recognized that, in some
cases, the joint execution of orders could adversely affect the price or volume
of the security that a particular account or the MDL Funds may obtain, it is the
opinion of the Adviser and the Trust's Board of Trustees that the advantages of
combined orders outweigh the possible disadvantages of separate transactions.
Consistent with the Conduct Rules of the National Association of Securities
Dealers, Inc., and subject to seeking best price and execution, the MDL Funds,
at the request of the Distributor, give consideration to sales of shares of the
Trust as a factor in the selection of brokers and dealers to execute Trust
portfolio transactions.
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 1934 Act 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
S - 33
<PAGE>
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 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.
For the fiscal period beginning November 1, 1997 and ended October 31, 1998, the
following commissions were paid on brokerage transactions, pursuant to an
agreement or understanding, to brokers because of research services provided by
the brokers:
================================================================================
Total Dollar
Amount of Total Dollar Amount of
Brokerage Transactions Involving Directed
Commissions for Brokerage Commissions for
Fund Research Services Research Services
- --------------------------------------------------------------------------------
Fixed Income Fund $0 $0
- --------------------------------------------------------------------------------
Equity Fund $0 $0
- --------------------------------------------------------------------------------
For the fiscal period beginning November 1, 1997 and ended October 31, 1998, the
MDL Funds paid $0 to SEI Investments.
For the fiscal period beginning November 1, 1997 and ended October 31, 1998, the
MDL Funds paid the following brokerage commissions:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
% of Total
Total $ Amount % of Total Brokerage
Total $ of Brokerage Brokerage Transactions
Amount of Commissions Commissions Effected
Brokerage Paid to Paid to the Through
Commissions Affiliated Affiliated Affiliated
Fund Paid Brokers Brokers Brokers
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed Income Fund $ 0 $0 0% 0%
- -----------------------------------------------------------------------------------------------------
Equity Fund $4,841 $0 0% 0%
- -----------------------------------------------------------------------------------------------------
</TABLE>
S - 34
<PAGE>
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 period beginning
November 1, 1997 and ended October 31, 1998, the Fixed Income Fund held $298,000
of Morgan Stanley's repurchase agreements and the Equity Fund held $150,000 of
Morgan Stanley's repurchase agreements.
The portfolio turnover rate for the Fixed Income and Equity Funds for the period
from November 1, 1997 to October 31, 1998 was 72.82% and 127.68%, 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.
S - 35
<PAGE>
LIMITATION OF TRUSTEES' LIABILITY
The Declaration of Trust provides that a Trustee shall be liable only for his or
her own willful defaults and, if reasonable care has been exercised in the
selection of officers, agents, employees or investment advisers, shall not be
liable for any neglect or wrongdoing of any such person. The Declaration of
Trust also provides that the Trust will indemnify its Trustees and officers
against liabilities and expenses incurred in connection with actual or
threatened litigation in which they may be involved because of their offices
with the Trust unless it is determined in the manner provided in the Declaration
of Trust that they have not acted in good faith in the reasonable belief that
their actions were in the best interests of the Trust. However, nothing in the
Declaration of Trust shall protect or indemnify a Trustee against any liability
for his or her willful misfeasance, bad faith, gross negligence or reckless
disregard of his or her duties.
5% AND 25% SHAREHOLDERS
As of February 16, 1999, the following persons were the only persons who were
record owners (or to the knowledge of the Fund, beneficial owners) of 5% and 25%
or more of the MDL Funds' shares. Persons who owned of record or beneficially
more than 25% of a Fund's outstanding shares may be deemed to control that Fund
within the meaning of the Act.
The Fixed Income Fund
Shareholder Number of Shares %
- ----------- ---------------- -----
City of Aliquippa -- Police 294,488 17.78%
300 Franklin Ave.
Aliquippa, PA 15001-3708
Beaver County Retirement Plan 1,169,064 70.57%
Courthouse
Beaver, PA 15009
The Equity Fund
Shareholder Number of Shares %
- ----------- ---------------- -----
City of Aliquippa -- Police 228,061 12.21%
300 Franklin Ave.
Aliquippa, PA 15001-3708
Beaver County Retirement Plan 1,377,233 73.73%
Courthouse
Beaver, PA 15009
S - 36
<PAGE>
The Trust believes that most of the shares referred to above were held by the
above persons in accounts for their fiduciary, agency or custodial customers.
EXPERTS
The financial statements incorporated by reference have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report with
respect thereto, in reliance upon the authority of said firm as experts in
giving said reports.
FINANCIAL STATEMENTS
The financial statements for the fiscal period beginning November 1, 1997 and
ended October 31, 1998, including notes thereto and the report of Arthur
Andersen LLP thereon, are herein incorporated by reference in reliance upon the
authority of said firm as experts in giving said report. A copy of the 1998
Annual Report to Shareholders must accompany the delivery of this Statement of
Additional Information.
S - 37
<PAGE>
Trust:
THE ADVISORS' INNER CIRCLE FUND
Fund:
SAGE CORPORATE BOND FUND
Investment Adviser:
SAGE GLOBAL FUNDS, LLC
This Statement of Additional Information is not a prospectus and relates only to
the SAGE Corporate Bond Fund (the "Fund"). It is intended to provide additional
information regarding the activities and operations of The Advisors' Inner
Circle Fund (the "Trust") and the Fund and should be read in conjunction with
the Fund's Prospectus dated March 1, 1999. The Prospectus for the Fund may be
obtained by calling 1-888-227-0595.
TABLE OF CONTENTS
THE TRUST.............................................................S - 3
INVESTMENT OBJECTIVE AND POLICIES.....................................S - 3
DESCRIPTION OF PERMITTED INVESTMENTS..................................S - 4
INVESTMENT LIMITATIONS................................................S - 12
THE ADVISER...........................................................S - 14
THE SUB-ADVISER.......................................................S - 15
THE ADMINISTRATOR.....................................................S - 16
THE DISTRIBUTOR.......................................................S - 17
THE TRANSFER AGENT....................................................S - 18
THE CUSTODIAN.........................................................S - 18
INDEPENDENT PUBLIC ACCOUNTANTS........................................S - 18
LEGAL COUNSEL.........................................................S - 18
TRUSTEES AND OFFICERS OF THE TRUST....................................S - 18
PERFORMANCE INFORMATION...............................................S - 22
COMPUTATION OF YIELD..................................................S - 22
CALCULATION OF TOTAL RETURN...........................................S - 23
PURCHASING SHARES.....................................................S - 23
REDEEMING SHARES......................................................S - 23
DETERMINATION OF NET ASSET VALUE......................................S - 24
TAXES .............................................................S - 24
FUND TRANSACTIONS.....................................................S - 27
TRADING PRACTICES AND BROKERAGE.......................................S - 27
DESCRIPTION OF SHARES.................................................S - 30
SHAREHOLDER LIABILITY.................................................S - 30
LIMITATION OF TRUSTEES' LIABILITY.....................................S - 30
5% AND 25% SHAREHOLDERS...............................................S - 30
EXPERTS .............................................................S - 31
FINANCIAL STATEMENTS..................................................S - 31
S - 1
<PAGE>
March 1, 1999
SAG-F-002-02
S - 2
<PAGE>
THE TRUST
This Statement of Additional Information relates only to the SAGE Corporate Bond
Fund (the "Fund"). The Fund is a separate series of The Advisors' Inner Circle
Fund (the "Trust"), an open-end investment management company established under
Massachusetts law as a Massachusetts business trust under a Declaration of Trust
dated July 18, 1991. The Declaration of Trust permits the Trust to offer
separate series ("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 Fund.
The Fund pays its (i) operating expenses, including fees of its service
providers, expenses of preparing prospectuses, proxy solicitation material and
reports to shareholders, costs of custodial services and registering 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 Fund's expense ratios are disclosed under "Fund Fees and
Expenses" in the Prospectus.
INVESTMENT OBJECTIVE AND POLICIES
The Fund seeks a high level of current income consistent with preservation of
capital by investing in a portfolio of investment grade corporate bonds that, in
the Adviser's or Sub- Adviser's opinion, will maintain an already established
credit rating or will benefit from an improvement in the issuer's credit rating.
This investment objective is fundamental and cannot be changed without the
consent of shareholders. There can be no assurance that the Fund will be able to
achieve its investment objective.
Under normal conditions the Fund will principally invest (at least 80% of its
total assets) in corporate bonds rated in one of the four highest rating
categories ("investment grade") by a nationally recognized statistical rating
organization (an "NRSRO") or that the Sub-Adviser determines are of comparable
quality.
Additional securities which are not part of the Fund's principal investment
strategy in which the Fund may invest consist of: (i) U.S. Government
securities; (ii) mortgage-backed securities, including collateralized mortgage
obligations and real estate mortgage investment conduits; (iii) floating or
variable rate securities; (iv) U.S. dollar denominated fixed income securities
issued by U.S. or foreign corporations or issued or guaranteed by foreign
governments, their political subdivisions, agencies or instrumentalities; (v)
U.S. dollar denominated obligations of supranational entities; (vi) short term
bank obligations; (vii) commercial paper; (viii) asset backed securities; (ix)
loan participations; (x) preferred stock that is rated investment grade quality
by an NRSRO or determined to be of comparable quality by the Sub-Adviser; and
(xi) repurchase agreements. The Fund may invest in foreign securities in the
form of depositary
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receipts. 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, and may purchase securities on a when-issued basis.
The Sub-Adviser seeks to identify investment grade corporate bonds where a
credit rating improvement is likely. The Sub-Adviser's research is company
specific and similar in nature to the traditional fundamental research used to
make common stock selections. Companies chosen as rating upgrade candidates are
placed on the Sub-Adviser's "upgrade list" and purchases are made when
intermediate maturity issues become available at an advantageous price.
Individual decisions are made on a "buy to hold" basis. A credit downgrade will
trigger a sell decision automatically. Securities rated in the lowest category
of investment grade securities have speculative characteristics.
Normally, the Fund will maintain a dollar-weighted average portfolio maturity of
between four and six years. There are no restrictions on the maturity of any
single instrument. For temporary defensive purposes when the Sub-Adviser
determines that market conditions warrant, the Fund may also invest up to 100%
of its assets in money market securities or hold cash.
DESCRIPTION OF PERMITTED INVESTMENTS
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.
Asset-Backed Securities -- Asset-backed securities are securities backed by
non-mortgage assets such as company receivables, truck and auto loans, leases
and credit card receivables. Other asset-backed securities may be created in the
future. These securities may be traded over-the-counter and typically have a
short-intermediate maturity structure depending on the paydown characteristics
of the underlying financial assets which are passed through to the security
holder. These securities are generally issued as pass-through certificates,
which represent undivided fractional ownership interests in the underlying pool
of assets. Asset-backed securities may also be debt obligations, which are known
as collateralized obligations and are generally issued as the
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debt of a special purpose entity, such as a trust, organized solely for the
purpose of owning these assets and issuing debt obligations.
Asset-backed securities are not issued or guaranteed by the U.S. Government, its
agencies or instrumentalities; however, the payment of principal and interest on
such obligations may be guaranteed up to certain amounts and, for a certain
period, by a letter of credit issued by a financial institution (such as a bank
or insurance company) unaffiliated with the issuers of such securities. The
purchase of asset-backed securities raises risk considerations peculiar to the
financing of the instruments underlying such securities. For example, there is a
risk that another party could acquire an interest in the obligations superior to
that of the holders of the asset- backed securities. There also is the
possibility that recoveries on repossessed collateral may not, in some cases, be
available to support payments on those securities.
Asset-backed securities entail prepayment risk, which may vary depending on the
type of asset, but is generally less than the prepayment risk associated with
mortgage-backed securities. In addition, credit card receivables are unsecured
obligations of the card holder.
The market for asset-backed securities is at a relatively early stage of
development. Accordingly, there may be a limited secondary market for such
securities.
The Euro -- On January 1, 1999, the European Monetary Union (EMU) implemented a
new currency unit, the Euro. The countries initially converting or tying their
currencies to the Euro include Austria, Belgium, France, Germany, Luxembourg,
the Netherlands, Ireland, Finland, Italy, Portugal, and Spain. Financial
transactions and market information, including share quotations and company
accounts, in participating countries are denominated in Euros. Approximately 46%
of the stock exchange capitalization of the total European market is now
reflected in Euros, and participating governments now issue their bonds in
Euros. Monetary policy for participating countries is now uniformly managed by a
new central bank, the European Central Bank (ECB).
Although it is not possible to predict the impact of the Euro conversion on the
Fund, the transition to the Euro may change the economic environment and
behavior of investors, particularly in European markets. For example, investors
may begin to view those countries participating in the EMU as a single entity,
and the Adviser may need to adapt investment strategies accordingly. The process
of implementing the Euro also may adversely affect financial markets worldwide
and may result in changes in the relative strength and value of the U.S. dollar
or other major currencies, as well as possible adverse tax consequences. The
transition to the Euro is likely to have a significant impact on fiscal and
monetary policy in the participating countries and may produce unpredictable
effects on trade and commerce generally. These resulting uncertainties could
create increased volatility in financial markets world-wide.
Investment Company Shares -- The 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 Fund may
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invest directly. Investing in shares of other investment companies is not a
principal investment strategy of the Fund. These investment companies typically
incur fees that are separate from those fees incurred directly by the Fund. The
Fund's purchase of such investment company securities results in the layering of
expenses, such that shareholders would indirectly bear a proportionate share of
the operating expenses of such investment companies, including advisory fees, in
addition to paying Fund expenses. Under applicable regulations, the 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 -- 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,
Fannie Mae, and FHLMC each guarantees timely distributions of interest
to certificate holders. GNMA and Fannie Mae also guarantee timely
distributions of scheduled principal. In the past, FHLMC has only
guaranteed 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.
Obligations of GNMA are backed by the full faith and credit of the
United States Government. Obligations of Fannie Mae and FHLMC are not
backed by the full faith and credit of the United States Government but
are considered to be of high quality since they are considered to be
instrumentalities of the United States. The market value and interest
yield of these mortgage-backed securities can vary due to market
interest rate
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fluctuations and early prepayments of underlying mortgages. These
securities represent ownership in a pool of federally insured mortgage
loans with a maximum maturity of 30 years. However, due to scheduled
and unscheduled principal payments on the underlying loans, these
securities have a shorter average maturity and, therefore, less
principal volatility than a comparable 30-year bond. Since prepayment
rates vary widely, it is not possible to accurately predict the average
maturity of a particular mortgage-backed security. The scheduled
monthly interest and principal payments relating to mortgages in the
pool will be "passed through" to investors. Government mortgage-backed
securities differ from conventional bonds in that principal is paid
back to the certificate holders over the life of the loan rather than
at maturity. As a result, there will be monthly scheduled payments of
principal and interest. In addition, there may be unscheduled principal
payments representing prepayments on the underlying mortgages. Although
these securities may offer yields higher than those available from
other types of U.S. Government securities, mortgage-backed securities
may be less effective than other types of securities as a means of
"locking in" attractive long-term rates because of the prepayment
feature. For instance, when interest rates decline, the value of these
securities likely will not rise as much as comparable debt securities
due to the prepayment feature. In addition, these prepayments can cause
the price of a mortgage-backed security originally purchased at a
premium to decline in price to its par value, which may result in a
loss.
Private Pass-Through Securities: Private pass-through securities are
mortgage-backed securities issued by a non-governmental agency, such as
a trust. While they are generally structured with one or more types of
credit enhancement, private pass-through securities generally lack a
guarantee by an entity having the credit status of a governmental
agency or instrumentality. The two principal types of private
mortgage-backed securities are collateralized mortgage obligations
("CMOs") and real estate mortgage investment conduits ("REMICs").
CMOs: CMOs are securities collateralized by mortgages, mortgage
pass-throughs, mortgage pay-through bonds (bonds representing an
interest in a pool of mortgages where the cash flow generated from the
mortgage collateral pool is dedicated to bond repayment), and
mortgage-backed bonds (general obligations of the issuers payable out
of the issuers' general funds and additionally secured by a first lien
on a pool of single family detached properties). CMOs are rated in one
of the two highest categories by S&P or Moody's. Many CMOs are issued
with a number of classes or series which have different expected
maturities. Investors purchasing such CMOs are credited with their
portion of the scheduled payments of interest and principal on the
underlying mortgages plus all unscheduled prepayments of principal
based on a predetermined priority schedule. 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
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guaranteed by U.S. Government agencies or instrumentalities, the CMOs
themselves are not generally guaranteed.
REMICs: REMICs are private entities formed for the purpose of holding a
fixed pool of mortgages secured by an interest in real property. REMICs
are similar to CMOs in that they issue multiple classes of securities
and are rated in one of the two highest categories by S&P or Moody's.
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
or FHLMC 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. 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. 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 vary 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 values 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: Stripped mortgage-backed
securities are securities that are created when a U.S. Government
agency or a financial institution separates the interest and principal
components of a mortgage-backed security and sells them as individual
securities. The holder of the "principal-only" security (PO) receives
the principal payments made by the underlying mortgage-backed security,
while the holder of the "interest-only" security (IO) receives interest
payments from the same underlying security.
The prices of stripped mortgage-backed securities may be particularly
affected by changes in interest rates. As interest rates fall,
prepayment rates tend to increase, which tends to reduce prices of IOs
and increase prices of POs. Rising interest rates can have the opposite
effect.
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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.
Repurchase Agreements -- Repurchase agreements are agreements by which a person
(e.g., the Fund) obtains a security and simultaneously commits to return the
security to the seller (a primary securities dealer as recognized by the Federal
Reserve Bank of New York or a national member bank as defined in Section 3(d)(1)
of the Federal Deposit Insurance Act, as amended) at an agreed upon price
(including principal and interest) on an agreed upon date within a number of
days (usually not more than seven) from the date of purchase. The resale price
reflects the purchase price plus an agreed upon market rate of interest which is
unrelated to the coupon rate or maturity of the underlying security. A
repurchase agreement involves the obligation of the seller to pay the agreed
upon price, which obligation is, in effect, secured by the value of the
underlying security.
Repurchase agreements are considered to be loans by the Fund for purposes of its
investment limitations. The repurchase agreements entered into by the Fund will
provide that the underlying security at all times shall have a value at least
equal to 102% of the resale price stated in the agreement (the Advisors monitor
compliance with this requirement). Under all repurchase agreements entered into
by the Fund, the appropriate custodian or its agent must take possession of the
underlying collateral. However, if the seller defaults, the Fund could realize a
loss on the sale of the underlying security to the extent that the proceeds of
the sale including accrued interest are less than the resale price provided in
the agreement including interest. In addition, even though the Bankruptcy Code
provides protection for most repurchase agreements, if the seller should be
involved in bankruptcy or insolvency proceedings, the Fund may incur delay and
costs in selling the underlying security or may suffer a loss of principal and
interest if the Fund is treated as an unsecured creditor and required to return
the underlying security to the seller's estate.
Reverse Repurchase Agreements -- Reverse repurchase agreements are agreements by
which the Fund sells securities to financial institutions and simultaneously
agrees to repurchase those securities at a mutually agreed-upon date and price.
At the time the 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
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securities. Reverse repurchase agreements may be considered to be borrowings
by the Fund under the Investment Company Act of 1940, as amended (the "1940
Act").
Securities of Foreign Governments -- The Fund may invest in U.S. dollar
denominated obligations or securities of the Government of Canada and its
provincial and local governments and U.S. dollar denominated securities issued
or guaranteed by other foreign governments, their political subdivisions,
agencies or instrumentalities. Permissible investments may consist of
obligations or foreign branches of U.S. banks and of foreign banks, including
Yankee Certificates of Deposit. In addition, the Fund may invest in American
Depositary Receipts. These instruments may subject the 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, or
the adoption of other foreign governmental restrictions which might adversely
affect the payment of principal and interest on such obligations. Such
investments may also entail higher custodial fees and sales commissions than
domestic investments. 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.
Securities of Foreign Issuers -- There are certain risks connected with
investing in foreign securities. These include risks of adverse political and
economic developments (including possible governmental seizure or
nationalization of assets), the possible imposition of exchange controls or
other governmental restrictions, less uniformity in accounting and reporting
requirements, the possibility that there will be less information on such
securities and their issuers available to the public, the difficulty of
obtaining or enforcing court judgments abroad, restrictions on foreign
investments in other jurisdictions, difficulties in effecting repatriation of
capital invested abroad, and difficulties in transaction settlements and the
effect of delay on shareholder equity. Foreign securities may be subject to
foreign taxes, and may be less marketable than comparable U.S. securities. The
value of the Fund's investments denominated in foreign currencies will depend on
the relative strengths of those currencies and the U.S. dollar, and the Fund may
be affected favorably or unfavorably by changes in the exchange rates or
exchange control regulations between foreign currencies and the U.S. dollar.
Changes in foreign currency exchange rates also may affect the value of
dividends and interest earned, gains and losses realized on the sale of
securities and net investment income and gains, if any, to be distributed to
shareholders by the Fund.
Supranational Agency Obligations -- Supranational agency obligations are
obligations of supranational entities established through the joint
participation of several governments, including the Asian Development Bank,
Inter-American Development Bank, International Bank for Reconstruction and
Development (also known as the "World Bank"), African Development
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Bank, European Economic Community, European Investment Bank, and the Nordic
Investment Bank.
United States Government Agency Obligations --U.S. Government agency
obligations are obligations issued or guaranteed by agencies or
instrumentalities of the U.S. Government. Agencies of the United States
Government which issue obligations consist of, among others, the Export Import
Bank of the United States, Farmers Home Administration, Federal Farm Credit
Bank, Federal Housing Administration, GNMA, Maritime Administration, Small
Business Administration and The Tennessee Valley Authority. Obligations of
instrumentalities of the United States Government include securities issued by,
among others, Federal Home Loan Banks, FHLMC, Federal Intermediate Credit Banks,
Federal Land Banks, Fannie Mae and the United States Postal Service as well as
government trust certificates. Some of these securities are supported by the
full faith and credit of the United States Treasury, others are supported by the
right of the issuer to borrow from the Treasury and 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 the value of the
obligation prior to maturity.
U.S. Government Securities -- U.S. Government securities consist of bills, notes
and bonds issued by the U.S. Treasury, separately traded interest and principal
component parts of such obligations that are transferable through the federal
book-entry system known as Separately Traded Registered Interest and Principal
Securities ("STRIPS"), 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 Fund's shares.
Variable and Floating Rate Securities -- Variable and floating rate instruments
involve certain obligations that 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 set 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
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demand notice exceeding seven days may be considered illiquid if there is no
secondary market for such security.
When-Issued Securities -- The Fund may purchase debt obligations on a
when-issued basis, in which case delivery and payment normally take place on a
future date. The Fund 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 Fund, however, will not use such purchases for leveraging; instead, as
disclosed in the Prospectus, the Fund will set aside assets to cover its
commitments. If the value of these assets declines, the Fund will place
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 the Fund that
cannot be changed without the consent of the holders of a majority of the Fund's
outstanding shares. The phrase "majority of the outstanding shares" means the
vote of (i) 67% or more of the Fund's shares present at a meeting, if more than
50% of the outstanding shares of the Fund are present or represented by proxy;
or (ii) more than 50% of the Fund's outstanding shares, whichever is less.
The Fund may not:
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 the
Fund's total assets.
2. Purchase any securities which would cause 25% or more of the total
assets of the Fund to be invested in the securities of one or more
issuers conducting their principal business activities in the same
industry, provided that this limitation does not apply to investments
in 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
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according to the end users of their services, for example, automobile
finance, bank finance and diversified finance will each be considered a
separate industry.
3. Acquire more than 10% of the voting securities of any one issuer.
4. Invest in companies for the purpose of exercising control.
5. 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.
6. 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.
7. 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.
8. 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."
9. Act as an underwriter of securities of other issuers except as it may
be deemed an underwriter in selling the Fund security.
10. Purchase securities of other investment companies except as permitted
by the 1940 Act and the rules and regulations thereunder.
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Non-Fundamental Policies
The following investment limitation of the Fund is non-fundamental and may be
changed by the Trust's Board of Trustees without shareholder approval:
1. The Fund may not invest in illiquid securities in an amount exceeding,
in the aggregate, 15% of the Fund's net assets.
2. The Fund will limit borrowings to no more than 5% of its total assets
(fully collateralized reverse repurchase agreements are not considered
borrowings for purposes of the foregoing limitation).
3. The Fund will refrain from investing in the following derivative
instruments: options, futures, swaps, structured notes or residuals.
Except with respect to the 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
SAGE Global Funds LLC (the "Adviser" or "SAGE") 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. Under the Advisory
Agreement, the Adviser makes the investment decisions for the assets of the Fund
and continuously reviews, supervises and administers the Fund's investment
program, subject to the supervision of, and policies established by, the
Trustees of the Trust.
The Adviser is a professional investment management firm organized as a
Massachusetts limited liability company that was founded in July, 1997. SAGE is
majority-owned by Standard Asset Group, Inc., the Fund's sub-adviser. The
Adviser's principal business address is 55 William Street, Wellesley,
Massachusetts 02481.
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 Fund.
For its services, the Adviser is entitled to a fee, which is calculated daily
and paid monthly, at an annual rate of .55% of the average daily net assets of
the Fund. The Adviser has voluntarily agreed to waive a portion of its advisory
fees in order to limit total operating expenses of the
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<PAGE>
Fund to not more than .90% of average daily net assets. The Adviser reserves the
right, in its sole discretion, to terminate its fee waiver at any time.
Additionally, the Adviser has contractually agreed to waive its entire advisory
fee for any calendar year which follows a calendar year in which the Fund's net
asset value per share declines, adjusted for dividends and distributions paid
during such year. The Adviser may, from its own resources, compensate
broker-dealers whose clients purchase shares of the Funds.
The continuance of the Advisory Agreement, after the first two years, must be
specifically approved at least annually (i) by the vote of the Trustees or by a
vote of the shareholders of the Fund, and (ii) by the vote of a majority of the
Trustees who are not parties to the 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 the 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.
For the fiscal period beginning November 1, 1997 and ended October 31, 1998, the
Fund paid advisory fees of $0, the Adviser waived fees of $27,804 and the
Adviser reimbursed the Fund $104,780.
THE SUB-ADVISER
Standard Asset Group, Inc. (the "Sub-Adviser") serves as investment sub-adviser
to the Fund pursuant to a sub-advisory agreement by and between Standard Asset
Group, Inc. and the Adviser (the "Sub-Advisory Agreement"). Pursuant to the
Sub-Advisory Agreement, Standard Asset Group, Inc. is entitled to receive a
sub-advisory fee, which is calculated daily and paid monthly at an annual rate
of .20% of the average daily net assets of the Fund. The Sub-Adviser has
voluntarily agreed to waive its sub-advisory fees in the same proportion as the
Adviser waives its advisory fees from the Fund. In addition, the Sub-Adviser
will not be entitled to receive sub-advisory fees during any calendar year in
which the Adviser is not entitled to receive any advisory fees.
The Sub-Adviser is a professional investment management firm organized as
Massachusetts corporation that was founded in 1987. Gordon J. Rollert controls a
majority of the Sub-Adviser's outstanding voting stock. As of December 31, 1998,
the Sub-Adviser and its affiliates had approximately $300 million of assets
under management. The Sub-Adviser currently serves as the investment adviser or
sub-adviser to institutional clients including SAGE Advisory Services, LLC,
which, in turn, provides advisory services to individuals. The Sub-Adviser's
principal business address is 55 William Street, Wellesley, Massachusetts 02481.
The Sub-Adviser has been retained under the Sub-Advisory Agreement to act as the
investment sub-adviser for the Fund. Under the Sub-Advisory Agreement, the
Sub-Adviser manages the
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<PAGE>
investments of the Fund, selects investments, and places all orders for
purchases and sales of the Fund's securities, subject to the general supervision
of the Trustees of the Trust and the Adviser.
Gordon J. Rollert has had primary responsibility for managing the Fund since it
commenced operations. Mr. Rollert has served as President of the Sub-Adviser
since 1987. He has managed institutional portfolios since 1965, initially as a
portfolio manager with Eaton Vance and later as a portfolio manager and
executive officer of the following investment advisory firms: Alliance Capital,
Rollert & Sullivan, Trust Management Bank, the Nova Fund and SAGE Advisory
Services LLC. He is a Chartered Financial Analyst and member of the Boston
Security Analysts Society and the New York Society of Security Analysts. He
holds a BA in Economics and History from DePauw University and a MBA from the
University of Michigan. He is a trustee of DePauw University, chairing the
Finance and Investment Committees.
For the fiscal period beginning November 1, 1997 and ended October 31, 1998,
SAGE paid the Sub-Adviser sub-advisory fees of $0, the Sub-Adviser waived fees
of $5,662 and reimbursed the Fund $21,337.
THE ADMINISTRATOR
SEI Investments Mutual Funds Services (the "Administrator"), provides the Fund
with administrative services, including regulatory reporting and all necessary
office space, equipment, personnel and facilities.
For these administrative services, the Administrator is entitled to a fee, which
is calculated daily and paid monthly, at an annual rate of: 0.15% on the first
$100 million of the Fund's average daily net assets; 0.125% on the next $100
million of average daily net assets; and 0.10% on the average daily net assets
over $200 million. However, the Fund pays a minimum annual administration fee of
$75,000, which would be increased by $15,000 per additional class. Due to the
minimum annual administration fee, the administration fee that the Fund pays
will decline according to the administration fee schedule described above only
after the Fund's net asset level reaches $50 million. For the fiscal year ended
October 31, 1998, the Administrator received a fee equal to 1.29% of the Fund's
average daily net assets.
The Administration Agreement provides that the Administrator shall not be liable
for any error of judgment or mistake of law or for any loss suffered by the Fund
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
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<PAGE>
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 the 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 Arbor Fund, ARK Funds, Armada Funds, Bishop Street Funds, Boston 1784
Funds(R), CrestFunds, Inc., CUFUND, The Expedition Funds, First American Funds,
Inc., First American Investment Funds, Inc., First American Strategy Funds,
Inc., HighMark Funds, Monitor Funds, The Nevis Funds, Oak Associates Funds, The
PBHG Funds, Inc., PBHG Advisor Funds, Inc., PBHG Insurance Series Fund, Inc.,
The Pillar Funds, SEI Asset Allocation Trust, SEI Daily Income Trust, SEI Index
Funds, SEI Institutional International Trust, SEI Institutional Investments
Trust, SEI Institutional Managed Trust, SEI Liquid Asset Trust, SEI Tax Exempt
Trust, STI Classic Funds, STI Classic Variable Trust, TIP Funds and Alpha Select
Funds.
The Administrator will not be required to bear expenses of the Fund to an extent
which would result in the Fund's inability to qualify as a "regulated investment
company" ("RIC") under provisions of the Internal Revenue Code of 1986, as
amended (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 period beginning November 1, 1997 and ended October 31, 1998, the
Fund paid administration fees of $65,343.
THE DISTRIBUTOR
SEI Investments Distribution Co. (the "Distributor"), a wholly-owned subsidiary
of SEI Investments, 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.
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<PAGE>
No compensation is paid to the Distributor for distribution services for the
shares of the Fund.
THE TRANSFER AGENT
DST Systems, Inc., 330 W. 9th Street, Kansas City, Missouri 64105 serves as
the Fund's transfer agent.
THE CUSTODIAN
First Union National Bank, Broad and Chestnut Streets, P.O. Box 7618,
Philadelphia, Pennsylvania 19101 acts as custodian (the "Custodian") of the
Fund. The Custodian holds cash, securities and other assets of the Fund as
required by the 1940 Act.
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP serves as independent public accountants for the Fund.
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP, 1800 M Street, N.W., Washington, D.C., 20036
serves as legal counsel to the Fund.
TRUSTEES AND OFFICERS 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. The Trust pays the fees for unaffiliated Trustees.
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 Arbor Fund, ARK Funds, Armada Funds, Bishop
Street Funds, Boston 1784 Funds(R), CrestFunds, Inc., CUFUND, The Expedition
Funds, First American Funds, Inc., First American Investment Funds, Inc., First
American Strategy Funds, Inc., HighMark Funds, Monitor Funds, Oak Associates
Funds, The PBHG Funds, Inc., PBHG Advisor Funds, Inc., PBHG Insurance Series
Fund, Inc., The Pillar Funds, SEI Asset Allocation Trust, SEI Daily Income
Trust, SEI Index Funds, SEI Institutional International Trust, SEI Institutional
Investments Trust, SEI Institutional Managed Trust, SEI Liquid Asset Trust, SEI
Tax Exempt Trust, STI Classic Funds, STI Classic Variable Trust, TIP Funds and
Alpha Select Funds, each of which is an open-end management investment company
managed by SEI
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<PAGE>
Investments Mutual Funds Services or its affiliates and, except for PBHG Advisor
Funds, Inc., 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 Arbor Fund, Boston 1784 Funds(R), The Expedition
Funds, Oak Associates Funds, Pillar Funds, SEI Asset Allocation Trust, SEI Daily
Income Trust, SEI Index Funds, SEI Institutional Investments Trust, SEI
Institutional Managed Trust, SEI Institutional International Trust, SEI Liquid
Asset Trust and SEI Tax Exempt Trust.
JOHN T. COONEY (DOB 01/20/27) -- Trustee** -- Vice Chairman of Ameritrust Texas
N.A., 1989-1992, and MTrust Corp., 1985-1989. Trustee of The Arbor Fund, The
Expedition Funds, and Oak Associates Funds.
WILLIAM M. DORAN (DOB 05/26/40) -- Trustee* --1701 Market Street, Philadelphia,
PA 19103-2921. Partner, Morgan, Lewis & Bockius LLP (law firm), counsel to the
Trust, SEI Investments, the Administrator and the Distributor. Director and
Secretary of SEI Investments and Secretary of the Administrator and the
Distributor. Trustee of The Arbor Fund, The Expedition Funds, Oak Associates
Funds, SEI Asset Allocation Trust, SEI Daily Income Trust, SEI Index Funds, SEI
Institutional Investments Trust, SEI Institutional Managed Trust, SEI
Institutional 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 Arbor Fund, The Expedition Funds and Oak
Associates Funds.
EUGENE B. 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 Officer
of Jos. Schlitz Brewing Company before 1978. Trustee of The Arbor Fund, The
Expedition Funds and Oak Associates Funds.
JAMES M. STOREY (DOB 04/12/31) -- Trustee** -- Partner, Dechert Price & Rhoads,
from September 1987 - December 1993; Trustee of The Arbor Fund, The Expedition
Funds, Oak Associates Funds, SEI Asset Allocation Trust, SEI Daily Income Trust,
SEI Index Funds, SEI Institutional Investments Trust, SEI Institutional Managed
Trust, SEI Institutional International Trust, SEI Liquid Asset Trust and SEI Tax
Exempt Trust.
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<PAGE>
GEORGE J. SULLIVAN, JR. (DOB 11/13/42) -- Trustee** -- Chief Executive Officer,
Newfound Consultants Inc. since April 1997. General Partner, Teton Partners,
L.P., June 1991- December 1996; Chief Financial Officer, Noble Partners, L.P.,
March 1991-December 1996; Treasurer and Clerk, Peak Asset Management, Inc.,
since 1991; Trustee, Navigator Securities Lending Trust, since 1995. Trustee of
The Arbor Fund, The Expedition Funds, Oak Associates Funds, SEI Asset Allocation
Trust, SEI Daily Income Trust, SEI Index Funds, SEI Liquid Asset Trust, SEI
Institutional Investments Trust, SEI Institutional Managed Trust, SEI
Institutional International Trust, and SEI Tax Exempt Trust.
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.
JAMES R. FOGGO (DOB 06/30/64) -- Vice President and Assistant Secretary -- Vice
President and Assistant Secretary of the Administrator and the Distributor since
1998. Associate, Paul Weiss, Rifkind, Wharton & Garrison (law firm), 1998.
Associate, Baker & McKenzie (law firm), 1995-1998. Associate, Battle Fowler
L.L.P. (law firm), 1993-1995. Operations Manager, The Shareholder Services
Group, Inc., 1986-1990.
LYDIA A. GAVALIS (DOB 06/05/64) -- Vice President and Assistant Secretary --
Vice President and Assistant Secretary of the Administrator and the Distributor
since 1998. Assistant General Counsel and Director of Arbitration, Philadelphia
Stock Exchange, 1989-1998.
KATHY HEILIG (DOB 12/21/58) -- Vice President and Assistant Secretary --
Treasurer of SEI Investments since 1997; Assistant Controller of SEI Investments
since 1995; Vice President of SEI Investments since 1991; Director of Taxes of
SEI Investments, 1987 to 1991. Tax Manager, Arthur Andersen LLP prior to 1987.
JOSEPH M. O'DONNELL (DOB 11/13/54) -- Vice President and Assistant Secretary --
Vice President and Assistant Secretary of the Administrator and the Distributor
since 1998. Vice President and General Counsel, FPS Services, Inc., 1993-1997.
Staff Counsel and Secretary, Provident Mutual Family of Funds, 1990-1993.
KEVIN P. ROBINS (DOB 04/15/61) -- Vice President and Assistant Secretary --
Senior Vice President and General Counsel of SEI Investments, the Administrator
and the Distributor since 1994. Assistant Secretary of SEI Investments since
1992; Secretary of the Administrator since
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<PAGE>
1994. Vice President, General Counsel and Assistant Secretary of the
Administrator and the Distributor, 1992-1994. Associate, Morgan, Lewis & Bockius
LLP (law firm), 1988-1992.
LYNDA J. STRIEGEL (DOB 10/30/48) -- Vice President and Assistant Secretary --
Vice President and Assistant Secretary of the Administrator and the Distributor
since 1998. Senior Asset Management Counsel, Barnett Banks, Inc., 1997-1998.
Partner, Groom and Nordberg, Chartered, 1996-1997. Associate General Counsel,
Riggs Bank, N.A., 1991-1995.
MARK E. NAGLE (DOB 10/20/59) -- Controller and Chief Financial Officer -- Vice
President of Fund Accounting and Administration for SEI Fund Resources and Vice
President of the Administrator since 1996. Vice President of the Distributor
since December 1997. Vice President, Fund Accounting, BISYS Fund Services,
September 1995 to November 1996. Senior Vice President and Site Manager,
Fidelity Investments 1981 to September 1995.
JOHN H. GRADY, JR. (DOB 06/01/61) -- Secretary --1701 Market Street,
Philadelphia, PA 19103-2921, Partner since 1995, Morgan, Lewis & Bockius LLP
(law firm), counsel to the Trust, SEI Investments, the Administrator and the
Distributor.
_________________
*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, Patterson, Peters, Storey and Sullivan serve as members of the
Audit Committee of the Fund.
The Trustees and officers of the Trust own less than 1% of the outstanding
shares of the Trust. The Trust pays the fees for unaffiliated Trustees.
The following table exhibits Trustee compensation for the fiscal period
beginning November 1, 1997 and ended October 31, 1998.
<TABLE>
<CAPTION>
Aggregate Pension or Estimated Total Compensation From
Compensation From Retirement annual Registrant and Fund
Registrant for the Benefits Accrued benefits Complex* Paid to Trustees for
Fiscal period Ended as Part of Trust Upon the Fiscal period Ended
Name of Person, Position October 31, 1998 Expenses Retirement October 31, 1998
- ------------------------ ------------------- ---------------- ---------- -----------------------------
<S> <C> <C> <C> <C>
John T. Cooney, Trustee $8,142 N/A N/A $29,000 for services on 1 board
**Frank E. Morris, Trustee $8,142 N/A N/A $29,000 for services on 1 board
Robert Patterson, Trustee $8,337 N/A N/A $30,000 for services on 1 board
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Aggregate Pension or Estimated Total Compensation From
Compensation From Retirement annual Registrant and Fund
Registrant for the Benefits Accrued benefits Complex* Paid to Trustees for
Fiscal period Ended as Part of Trust Upon the Fiscal period Ended
Name of Person, Position October 31, 1998 Expenses Retirement October 31, 1998
- ------------------------ ------------------- ---------------- ---------- -----------------------------
<S> <C> <C> <C> <C>
Eugene B. Peters, Trustee $8,337 N/A N/A $30,000 for services on 1 board
James M. Storey, Esq., Trustee $8,337 N/A N/A $30,000 for services on 1 board
William M. Doran, Esq., $0 N/A N/A $0 for service on 1 board
Trustee
Robert A. Nesher, Chairman of $0 N/A N/A $0 for service on 1 board
the Board
</TABLE>
* For purposes of this table, the Fund is the only investment company in the
"Fund Complex."
** Retired December 31, 1998.
PERFORMANCE INFORMATION
From time to time, the Trust may advertise yield and total return of the Fund.
These figures will be based on historical earnings and are not intended to
indicate future performance. No representation can be made concerning actual
future yields or returns.
Performance Comparisons
The Fund may periodically compare its performance to other mutual funds tracked
by mutual fund rating services, to broad groups of comparable mutual funds, or
to unmanaged indices. These comparisons may assume reinvestment of dividends but
generally do not reflect deductions for administrative and management costs.
COMPUTATION OF YIELD
The yield of the Fund refers to the annualized income generated by an investment
in the Fund over a specified 30-day period. The yield is calculated by assuming
that the income generated by the investment during that 30-day period is
generated in each period over one year and is shown as a percentage of the
investment. In particular, yield will be calculated according to the following
formula:
Yield = 2[((a-b)/cd+1)(6)-1], where a = dividends and interest earned during the
period; b = expenses accrued for the period (net of reimbursement); c = the
average daily number of shares outstanding during the period that were entitled
to receive dividends; and d = the maximum offering price per share on the last
day of the period.
For the 30-day period ended October 31, 1998, the Fund's yield was 4.79%.
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<PAGE>
CALCULATION OF TOTAL RETURN
The total return of the Fund refers to the average compounded rate of return to
a hypothetical investment for designated time periods (including, but not
limited to, the period from which 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)(n) = ERV, where P = a hypothetical initial payment
of $1,000; T = average annual total return; n = number of years; and ERV =
ending redeemable value, as of the end of the designated time period, of a
hypothetical $1,000 payment made at the beginning of the designated time period.
For the period from December 15, 1997 (commencement of operations) through
October 31, 1998, the Fund's total return was 3.87% (4.43% annualized).
PURCHASING SHARES
Purchases and redemptions may be made through the Distributor on a day on which
the Federal Reserve Banks are open for business, except Good Friday. Shares of
the Fund are offered on a continuous basis. Currently, the holidays observed by
the Federal Reserve Banks are as follows: New Year's Day, Presidents' Day,
Martin Luther King Jr. Day, Memorial Day, Independence Day, Labor Day, Columbus
Day, Veterans' Day, Thanksgiving and Christmas.
REDEEMING SHARES
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 Fund solely by their ownership of a certain percentage of
the Fund.
A Shareholder will at all times be entitled to aggregate cash redemptions from
all portfolios of the Trust during any 90-day period of up to the lesser of
$250,000 or 1% of the Trust's net assets.
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 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 Federal Reserve Banks, the
Adviser, the Administrator, the Transfer Agent and/or the Custodian are not open
for business.
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<PAGE>
DETERMINATION OF NET ASSET VALUE
The securities of the Fund 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 additional federal income tax
considerations generally affecting the Fund and its shareholders that are not
described in the Fund's prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Fund or its shareholders, and the
discussion here and in the Fund's prospectus is not intended as a substitute for
careful tax planning. Shareholders are urged to consult their tax advisors with
specific reference to their own tax situations, including their state and local
tax liabilities.
Federal Income Tax Treatment of Dividends and Distributions
The following general discussion of certain 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.
Qualification as Regulated Investment Company
The Fund intends to qualify and elect to be treated as a RIC under
Subchapter M of the Code. By following such a policy, the Fund expects to
eliminate or reduce to a nominal amount the federal taxes to which it may be
subject.
In order to qualify as a RIC, the Fund must distribute at least 90% of its net
investment income (generally, dividends, taxable interest, and the excess of net
short-term capital gains over net long-term capital losses less operating
expenses) and at least 90% of its net tax exempt interest income, for each tax
year, if any, to its shareholders 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
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<PAGE>
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 that the Fund controls and that are engaged in the same,
similar or related trades or businesses.
Although the Fund intends to distribute substantially all of its net investment
income and may distribute its capital gains for any taxable year, the Fund will
be subject to federal income taxation to the extent any such income or gains are
not distributed.
If the Fund fails to qualify for any taxable year as a RIC, all of its taxable
income will be subject to tax at regular corporate income tax rates without any
deduction for distributions to shareholders and such distributions generally
will be taxable to shareholders as ordinary dividends to the extent of the
Fund's current and accumulated earnings and profits. In this event,
distributions generally will be eligible for the dividends-received deduction
for corporate shareholders.
Fund Distributions
Distributions of investment company taxable income will be taxable to
shareholders as ordinary income, regardless of whether such distributions are
paid in cash or are reinvested in additional Shares, to the extent of the Fund's
earnings and profits. The Fund anticipates that it will distribute substantially
all of its investment company taxable income for each taxable year.
The Fund may either retain or distribute to shareholders its excess of net
long-term capital gains over net short-term capital losses ("net capital
gains"). If such gains are distributed as a capital gains distribution, they are
taxable to shareholders who are individuals at a maximum rate of 20%, regardless
of the length of time the shareholder has held shares. If any such gains are
retained, the Fund will pay federal income tax thereon.
In the case of corporate shareholders, distributions (other than capital gains
distributions) from a RIC generally qualify for the dividends-received deduction
only to the extent of the gross amount of qualifying dividends received by the
Fund for the year. Generally, and subject to certain limitations, a dividend
will be treated as a qualifying dividend if it has been received from a domestic
corporation. Accordingly, it is not expected that any Fund distribution will
qualify for the corporate dividends-received deduction.
Ordinarily, investors should include all dividends as income in the year of
payment. However, dividends declared payable to shareholders of record in
December of one year, but paid in January of the following year, will be deemed
for tax purposes to have been received by the shareholder and paid by the Fund
in the year in which the dividends were declared.
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<PAGE>
The Fund will provide a statement annually to shareholders as to the federal tax
status of distributions paid (or deemed to be paid) by the Fund during the year,
including the amount of dividends eligible for the corporate dividends-received
deduction.
Sale or Exchange of Fund Shares
Generally, gain or loss on the sale or exchange of a Share will be capital gain
or loss that will be long-term if the Share has been held for more than twelve
months and otherwise will be short-term. For individuals, long-term capital
gains are currently taxed at a maximum rate of 20% and short-term capital gains
are currently taxed at ordinary income tax rates. However, if a shareholder
realizes a loss on the sale, exchange or redemption of a Share held for six
months or less and has previously received a capital gains distribution with
respect to the Share (or any undistributed net capital gains of the Fund with
respect to such Share are included in determining the shareholder's long-term
capital gains), the shareholder must treat the loss as a long-term capital loss
to the extent of the amount of the prior capital gains distribution (or any
undistributed net capital gains of the Fund that have been included in
determining such shareholder's long-term capital gains). In addition, any loss
realized on a sale or other disposition of Shares will be disallowed to the
extent an investor repurchases (or enters into a contract or option to
repurchase) Shares within a period of 61 days (beginning 30 days before and
ending 30 days after the disposition of the Shares). This loss disallowance rule
will apply to Shares received through the reinvestment of dividends during the
61-day period.
In certain cases, the Fund will be required to withhold, and remit to the United
States Treasury, 31% of any distributions paid to a shareholder who (1) has
failed to provide a correct taxpayer identification number; (2) is subject to
backup withholding by the Internal Revenue Service; or (3) has failed to certify
the Fund that such shareholder is not subject to backup withholding.
Federal Excise Tax
If the Fund fails to distribute in a calendar year at least 98% of its ordinary
income for the year and 98% of its capital gain net income (the excess of short
and long term capital gains over short and long term capital losses) for the
one-year period ending October 31 of that year (and any retained amount from the
prior calendar year), the Fund will be subject to a nondeductible 4% Federal
excise tax on the undistributed amounts. The Fund intends to make sufficient
distributions to avoid imposition of this tax, or to retain, at most its net
capital gains and pay tax thereon.
State and Local Taxes
The Fund is not liable for any income or franchise tax in Massachusetts if it
qualifies as a RIC for federal income tax purposes. Fund shareholders should
consult with their tax advisers regarding the state and local tax consequences
of investments in the Fund.
S - 26
<PAGE>
FUND TRANSACTIONS
The Fund has no obligation to deal with any broker-dealer or group of
broker-dealers in the execution of transactions in portfolio securities. Subject
to policies established by the Trustees of the Trust, the Adviser and
Sub-Adviser are responsible for placing the orders to execute transactions for
the Fund. 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 each of the Adviser and
Sub-Adviser generally seeks reasonably competitive spreads or commissions, the
Fund will not necessarily be paying the lowest spread or commission available.
The money market instruments in which the Fund 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
and Sub-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 Fund will primarily consist
of dealer spreads and underwriting commissions.
TRADING PRACTICES AND BROKERAGE
The Trust selects brokers or dealers to execute transactions for the purchase or
sale of portfolio securities on the basis of its judgment of their professional
capability to provide the service. The primary consideration is to have brokers
or dealers provide transactions at best price and execution for the Trust. Best
price and execution includes many factors, including the price paid or received
for a security, the commission charged, the promptness and reliability of
execution, the confidentiality and placement accorded the order and other
factors affecting the overall benefit obtained by the account on the
transaction. The Trust's determination of what are reasonably competitive rates
is based upon the professional knowledge of its trading department as to rates
paid and charged for similar transactions throughout the securities industry. In
some instances, the Trust pays a minimal share transaction cost when the
transaction presents no difficulty. Some trades are made on a net basis where
the Trust either buys securities directly from the dealer or sells them to the
dealer. In these instances, there is no direct commission charged but there is a
spread (the difference between the buy and sell price) which is the equivalent
of a commission.
The Trust may allocate out of all commission business generated by the fund and
accounts under management by the Adviser, brokerage business to brokers or
dealers who provide brokerage and research services. These research services
include advice, either directly or through publications or writings, as to the
value of securities, the advisability of investing in, purchasing or selling
S - 27
<PAGE>
securities, and the availability of securities or purchasers or sellers of
securities; furnishing of analyses and reports concerning issuers, securities or
industries; providing information on economic factors and trends, assisting in
determining portfolio strategy, providing computer software used in security
analyses, and providing portfolio performance evaluation and technical market
analyses. Such services are used by the Adviser in connection with its
investment decision-making process with respect to one or more funds and
accounts managed by it, and may not be used exclusively with respect to the fund
or account generating the brokerage.
As provided in the Securities Exchange Act of 1934 (the "1934 Act") higher
commissions may be paid to broker-dealers who provide brokerage and research
services than to broker-dealers who do not provide such services if such higher
commissions are deemed reasonable in relation to the value of the brokerage and
research services provided. Although transactions are directed to broker-dealers
who provide such brokerage and research services, the Trust believes that the
commissions paid to such broker-dealers are not, in general, higher than
commissions that would be paid to broker-dealers not providing such services and
that such commissions are reasonable in relation to the value of the brokerage
and research services provided. In addition, portfolio transactions which
generate commissions or their equivalent are directed to broker-dealers who
provide daily portfolio pricing services to the Trust. Subject to best price and
execution, commissions used for pricing may or may not be generated by the funds
receiving the pricing service.
The Adviser may place a combined order for two or more accounts or funds engaged
in the purchase or sale of the same security if, in its judgment, joint
execution is in the best interest of each participant and will result in best
price and execution. Transactions involving commingled orders are allocated in a
manner deemed equitable to each account or fund. It is believed that the ability
of the accounts to participate in volume transactions will generally be
beneficial to the accounts and funds. Although it is recognized that, in some
cases, the joint execution of orders could adversely affect the price or volume
of the security that a particular account or the Fund may obtain, it is the
opinion of the Adviser and the Trust's Board of Trustees that the advantages of
combined orders outweigh the possible disadvantages of separate transactions.
Consistent with the Conduct Rules of the National Association of Securities
Dealers, Inc., and subject to seeking best price and execution, the Fund, at the
request of the Distributor, gives consideration to sales of shares of the Trust
as a factor in the selection of brokers and dealers to execute Trust portfolio
transactions.
It is expected that the Fund 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
Fund 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 Fund for exchange
S - 28
<PAGE>
transactions not exceed "usual and customary" brokerage commissions. The rules
define "usual and customary" commissions to include amounts which are
"reasonable and fair compared to the commission, fee or other remuneration
received or to be received by other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time." The Trustees, including
those who are not "interested persons" of the Trust, have adopted procedures for
evaluating the reasonableness of commissions paid to the Distributor and will
review these procedures periodically.
For the fiscal period beginning November 1, 1997 and ended October 31, 1998, the
Fund paid $0 to SEI Investments.
For the fiscal period beginning November 1, 1997 and ended October 31, 1998, the
Fund paid the following brokerage commissions:
<TABLE>
<CAPTION>
% of Total
Total $ Amount of Brokerage
Total $ Amount of Brokerage Commissions Commissions Paid to % of Total Brokerage
Brokerage Paid to Affiliated the Affiliated Transactions Effected
Commissions Paid Brokers Brokers Through Affiliated Brokers
----------------- --------------------- ------------------- --------------------------
<S> <C> <C> <C>
$11,960 $0 0% 0%
</TABLE>
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 and Sub-Adviser may place portfolio orders with
qualified broker-dealers who recommend the Fund's 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 Fund is required to identify any securities of its "regular brokers or
dealers" (as such term is defined in the 1940 Act, which the Fund has acquired
during its most recent fiscal year). For the fiscal period beginning November 1,
1997 and ended October 31, 1998, the Fund held $101,000 of debt securities
issued by Lehman Brothers and $205,000 of debt securities issues by Salomon
Brothers.
For the fiscal period beginning November 1, 1997 and ended October 31, 1998, the
portfolio turnover rate for the Fund was 48.99%.
DESCRIPTION OF SHARES
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<PAGE>
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.
5% AND 25% SHAREHOLDERS
As of February 1, 1999, the following persons were the only persons who were
record owners (or to the knowledge of the Trust, beneficial owners) of 5% and
25% or more of the Fund's shares. Persons who owned of record or beneficially
more than 25% of the Fund's outstanding shares may be deemed to control the Fund
within the meaning of the Act.
S - 30
<PAGE>
Shareholder Number of Shares %
- ----------- ---------------- -
Pakachoag Church 214,388 30.12%
203 Pakachoag St.
Auburn, MA 01501-2567
Gambill Trading Ltd 42,173 5.93%
Attn: Frederick Oritz
132 Minorca Ave.
Coral Gables, FL 33134-4510
Christina R. Du Bois 318,246 44.72%
c/o Mellon Asset Management
Acct 708443007
1 Boston Pl. 024 002D
Boston, MA 02108-4407
The Trust believes that most of the shares referred to above were held for the
record owner's fiduciary, agency or custodial customers.
EXPERTS
The financial statements of the Trust have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are incorporated by reference hereto in reliance upon the authority
of said firm as experts in giving said report.
FINANCIAL STATEMENTS
The financial statements for the fiscal period beginning November 1, 1997 and
ended October 31, 1998, including notes thereto and the report of Arthur
Andersen LLP thereon, are herein incorporated by reference in reliance upon the
authority of said firm as experts in giving said report. A copy of the 1998
Annual Report to Shareholders must accompany the delivery of this Statement of
Additional Information.
S - 31
