<PAGE>
February 28, 1998
Dear contract owner investing in The Palladian-Registered Trademark- Trust:
We are pleased to provide you with The Palladian Trust's ("Trust") Annual
Report. As you may know, The Fulcrum Fund variable annuity contract and the
Trust were created to provide a range of investment options, each seeking
maximum long-term total return in a particular asset class.
Following this letter you will find a detailed performance summary from each
portfolio manager, financial statements for each portfolio including a listing
of the individual securities held by each portfolio. It is our hope that this
Annual Report will give you a comprehensive view of our performance in managing
your investments.
Thank you for your continued support of The Fulcrum Fund and The Palladian
Trust.
Very truly yours,
Matthew J. Stacom
Chairman
The Palladian Trust
<PAGE>
THE VALUE PORTFOLIO
Driven by low inflation, low interest rates, good corporate earnings gains,
deals, stock repurchase programs and liquidity (the continuing strong flow of
cash into U.S. equity funds), stocks posted strong gains in 1997. Until
correcting in late December, large cap growth stocks continued to lead the
market parade. However, large cap value and mid and small cap indices also
posted solid gains.
In the fourth quarter of 1997, the U.S. stock market suffered repeated bouts of
the Asian Flu. As we write, the patient remains unstable. While the
International Monetary Fund is ministering to ailing Asian economies, the ever
vigilant Dr. Greenspan is carefully monitoring the U.S. economy's vital signs.
As we head into 1998, we will be making our rounds as well. We are relatively
pleased with the patient's condition, but as always, are on the lookout for any
symptoms of a relapse.
WHAT WE DO. The success of momentum investing in recent years and investors'
desire for instant gratification have combined to make value investing appear
dull. At the risk of being dull, we will once again describe the "boring" value
approach that has seen us through both good and bad markets for over 20 years at
GAMCO Investors, Inc. and affiliates.
The focus of valuation approach is on free cash flow: earnings before interest,
taxes, depreciation and amortization (EBITDA) minus the capital expenditures
necessary to grow the business. We believe free cash flow is the best barometer
of a business' value. Rising free cash flow often foreshadows net earnings
improvement. We also look at earnings per share trends. Unlike Wall Street's
ubiquitous earnings momentum players, we do not try to forecast earnings with
accounting precision and then trade stocks based on quarterly expectations and
realities. We simply try to position ourselves in front of long-term earnings
uptrends. In addition, we analyze on and off balance sheet assets and
liabilities such as plant and equipment, inventories, receivables, and legal,
environmental and health care issues. We want to know everything and anything
that will add to or detract from our private market value (PMV) estimates.
Finally, we look for a catalyst; something happening in the company's industry
or indigenous to the company itself that will surface value. In the case of the
independent telephone stocks, the catalyst is a regulatory change. In the
agricultural equipment business, it is the increasing worldwide demand for
American food and feed crops. In other instances, it may be a change in
management, sale or spin-off of a division or the development of a profitable
new business.
Once we identify stocks that qualify as fundamental and conceptual bargains, we
then become patient investors. This has been a proven long-term method for
preserving and enhancing wealth in the U.S. equities market. At the margin, our
new investments are focused on businesses that are well managed and will benefit
from sustainable long term economic dynamics. These include macro trends, such
as the globalization of the market in filmed entertainment and
telecommunications, and micro trends, such as an increased focus on productivity
enhancing goods and services.
1998: WILL IT BE ANOTHER GOOD YEAR? Despite a roller coaster ride featuring
some breathtaking ascents and declines, equity investors enjoyed themselves in
1997. Will 1998 be equally
<PAGE>
thrilling? We expect to continue to experience considerable market volatility
as investors react to economic and market developments overseas and attempt to
assess the impact on the U.S. economy and corporate earnings.
Looking ahead, many of the favorable economic factors that propelled stocks in
recent years will likely remain intact. Asian currency devaluation will
probably diminish inflationary pressure on the U.S. economy and delay the need
for a Federal Reserve interest rate hike. Long interest rates should remain low
and perhaps trend lower. Deals, restructurings and share repurchase programs
should continue to buoy stocks.
The wild cards are corporate earnings and investor psychology. In general, we
believe corporate earnings growth from U.S. operations will be relatively
strong--in the 8% to 9% range. However, the non-U.S. portion of earnings is
likely to be as much as 10% lower in 1998. With earnings expectations high
across the board, we suspect we will see more earnings disappointments in the
year ahead. Other issues on our "Bear Watch" include:
- The Asian Flu spreading to Latin American currencies and economies.
- An upswing in wage inflation not offset by productivity gains.
- The emergence of trade barriers that cause a global political
backlash.
- A disruption of oil flow from the Middle East.
- The lame duck administration. Will Greenspan and Rubin retire before
2000 causing a crisis in confidence, if not in the economy?
- Last, but not least, the level of the market -- valuations are high
and the margin of safety relatively low.
How will investors react if any or all of our concerns prove justified? We will
just have to wait and see. Investors have become conditioned to buying on
market dips. That's understandable because it's worked quite well since this
bull market began in 1982. Indeed, we saw the market rebound strongly from the
sharp correction we experienced in late October. However, if the problems in
Asia continue to escalate and we see more widespread earnings disappointments
from U.S. companies, investors may be somewhat more reluctant to view each
market dip as a buying opportunity. Bear in mind, liquidity itself does not
drive markets higher. It is liquidity combined with favorable investor
psychology that fuels a rising market. In other words, if greed turns to fear,
we could see a more substantial and prolonged market slump than we have become
accustomed to.
Our conclusion after all this conjecture is that in 1998, the market will be up
5% to down 15%. We hope the market surprises on the upside. However, we
believe in the Boy Scout motto: "be prepared". Although value stocks will not
likely be immune to a substantial market correction, we believe they will
perform significantly better than the more fully valued market darlings.
Consequently, we are carefully monitoring the Fund portfolio, trimming or
eliminating holdings that have become more fully priced in this market advance
and adding to positions that offer better fundamental value. We are also being
more patient in re-deploying cash reserves. We doubt the Fund will be able to
duplicate its terrific 1997 returns in what should be a much more challenging
market. However, we believe we can achieve our 10% real rate of return
objective in the year ahead.
<PAGE>
1997 was yet another very good year for equity investors. If earnings
expectations are realized, 1998 may be a reasonably good year as well. We do
have our reservations and are mindful that at current valuations, stocks are
well above the safety net. As always, we are focusing on value--stocks trading
at a material discount to their longer term intrinsic value. We believe this
discipline will effectively preserve and enhance the value of the assets you
have entrusted to us.
GAMCO INVESTORS, INC.
PORTFOLIO MANAGER TO THE VALUE PORTFOLIO
<PAGE>
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT
IN THE VALUE PORTFOLIO AND S&P 500 INDEX
[GRAPH]
<TABLE>
<CAPTION>
Date Value S&P 500
<S> <C> <C>
01/31/96 10,000 10,000
03/31/96 10,210 10,190
06/30/96 10,840 10,647
09/30/96 11,060 10,976
12/31/96 11,513 11,891
03/31/97 11,894 12,210
06/30/97 13,259 14,342
09/30/97 14,476 15,416
12/31/97 15,236 15,859
</TABLE>
Past performance is not predictive of future performance. Persons who
invest in the Portfolio through a variable annuity contract should note this
graph does not reflect separate account expenses or sales charges deducted by
the insurance company.
- ---------------
*Portfolio's inception date
S&P 500 INDEX
Capitalization weighted index of 500 large stocks, representing
approximately 70% of the broad U.S. equity markets. Membership is decided
upon by the Standard & Poor's 500 committee. The index is calculated on a
total return basis, which includes reinvestment of gross dividends before
deduction of withholding taxes.
<PAGE>
THE GROWTH PORTFOLIO
The stock market's strong performance in 1997 was driven primarily by outsized
gains in a relatively small number of huge multinational companies with
predictable earnings growth. Their stock prices benefited from benign
inflation, which allowed lower bond yields, which in turn permitted higher
price-earnings ratios. As a result, the S&P 500, with a gain of 29% handily
outdistanced the smaller cap averages. The Russell 2000, for example, showed an
increase for the year of only 21%.
Factors which contributed to the strong relative performance of larger stocks
were the continuing trend toward indexing, which becomes a self-fulfilling
process as index funds continue to outperform their more active competitors.
Additionally, to the extent that the bull market is fueled by foreign investors,
considerations of visibility, liquidity, familiarity and predictability may
outweigh valuation considerations.
The outlook for 1998 is dominated by continuing disinflation. As a result,
long-term bond yields are expected to fall further. This, in turn, will lead to
higher price-earnings ratios, particularly for high growth companies.
The difficult task will be to isolate those companies that enjoy sufficient
pricing power and stability that they will be able to grow earnings in an
environment of slow domestic growth, continuing downward pressure on Asian
exports and a strong dollar.
Our focus continues to be on domestic service and retail companies. As a broad
generalization, such companies are largely immune to technological obsolescence,
have little inventory risk, are not subject to foreign competition and may, in
fact, benefit from lower import prices. Specific industries that fit in these
broad categories include apparel retailers, restaurants, service providers such
as legal service and personnel firms. Additionally, certain computer software
companies qualify, provided they do not have significant foreign exposure.
As of late February, the characteristics of the portfolio may be summarized as
follows: secular growth of the stocks in the fund are projected to be 30%
annually for the next three years; earnings next quarter are projected to show
an average gain in excess of 40%; yet the price earnings ratio on 1998 earnings
is a mere 22.9X, barely above the valuation of the overall market. We expect
that this universe of fast-growing superior companies will continue to
outperform the broader averages by a significant margin.
STONEHILL CAPITAL MANAGEMENT, INC.
PORTFOLIO MANAGER TO THE GROWTH PORTFOLIO
<PAGE>
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT
IN THE GROWTH PORTFOLIO AND S&P 500 INDEX
[GRAPH]
<TABLE>
<CAPTION>
Date Growth S&P 500
<S> <C> <C>
01/31/96 10,000 10,000
03/31/96 10,170 10,190
06/30/96 9,410 10,647
09/30/96 11,420 10,976
12/31/96 10,840 11,891
03/31/97 10,690 12,210
06/30/97 12,160 14,342
09/30/97 13,740 15,416
12/31/97 11,950 15,859
</TABLE>
Past performance is not predictive of future performance. Persons who
invest in the Portfolio through a variable annuity contract should note this
graph does not reflect separate account expenses or sales charges deducted by
the insurance company.
- ---------------
*Portfolio's inception date
S&P 500 INDEX
Capitalization weighted index of 500 large stocks, representing
approximately 70% of the broad U.S. equity markets. Membership is decided
upon by the Standard & Poor's 500 committee. The index is calculated on a
total return basis, which includes reinvestment of gross dividends before
deduction of withholding taxes.
<PAGE>
THE INTERNATIONAL GROWTH PORTFOLIO
1997 was an eventful year for world equity markets, especially among small cap
stocks. The economic crisis in Asia rocked markets and currencies. Several Asian
markets were down more than 70% in U.S. dollar terms. Small cap companies
continued to underperform large cap stocks. The strong headline performances of
many markets around the world hid the divergence in performance and valuations
of these two sectors.
Against this backdrop, your fund was down 5.25% for the year 1997. The Salomon
Extended Market Index, which measures non-U.S. small companies, was down 8.1%
for the year. The MSCI EAFE Index, which is dominated by large caps, was up
4.9%, highlighting how small companies lagged large firms for the year. Asian
companies represented about 17.80% of the fund at the end of the year. The
fund's Asian holdings were not immune and contributed to the overall down year.
During 1997, we added several new names. Physio-Control International, the
fund's largest position at year end, makes automatic external defibrillators,
which can be used to save the lives of heart attack victims and increasingly are
found on airplanes, at ski resorts and in public auditoriums. McBride PLC, the
second largest holding, produces private label consumer goods in Europe. This
new holding is one of the leading players in this industry and benefits as
retailers dedicate more shelf space to private labels. Other new holdings
include Regent Inns, an operator of pubs in the United Kingdom and Investec, a
dominant publishing and television concern in Portugal.
BEE & ASSOCIATES, INC.
PORTFOLIO MANAGER TO THE INTERNATIONAL GROWTH PORTFOLIO
<PAGE>
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT
IN THE INTERNATIONAL GROWTH PORTFOLIO AND MORGAN STANLEY EAFE INDEX
CAPITAL INTERNATIONAL-EUROPE, AUSTRALIA, FAR EAST INDEX
[GRAPH]
<TABLE>
<CAPTION>
International
Date Growth EAFE
<S> <C> <C>
03/25/96 10,000 10,000
03/31/96 9,990 10,075
06/30/96 7,270 10,195
09/30/96 9,810 10,141
12/31/96 10,330 10,262
03/31/97 10,600 10,061
06/30/97 10,760 11,324
09/30/97 10,980 11,204
12/31/97 9,783 10,286
</TABLE>
Past performance is not predictive of future performance. Persons who
invest in the Portfolio through a variable annuity contract should note this
graph does not reflect separate account expenses or sales charges deducted by
the insurance company.
- ---------------
*Portfolio's inception date
MORGAN STANLEY CAPITAL INTERNATIONAL-
EUROPE, AUSTRALIA, FAR EAST INDEX
The arithmetic, market value-weighted average of the performance of over
900 securities listed on the stock exchanges of the following 18 countries:
Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong,
Italy, Japan, Netherlands, New Zealand, Norway, Singapore/Malaysia, Spain,
Sweden, Switzerland, and the United Kingdom. The Index is calculated on a
total return basis, which includes reinvestment of gross dividends before
deduction of withholding taxes.
<PAGE>
THE GLOBAL STRATEGIC INCOME PORTFOLIO
US economic growth remained strong while inflation continued to fall. The
crisis in East Asia caused a lowering of forecasts for growth and inflation
which allowed yields to continue their downward trend. FFTW had overweighted
duration positions. FFTW's US bloc positions contributed positively to return.
Rates rose in fourth quarter as Fed tightened. FFTW was short duration.
Europe enjoyed strong economic growth and business confidence increased. After
the tightening by the Bundesbank, market expectations of upward pressure on
interest rates declined. European yield spreads traded in a narrow range as EMU
has now been fully discounted. FFTW's Core Europe duration positions were
overweighted throughout the fourth quarter. The portfolio was overweight higher
yielding markets, i.e. UK and Denmark, and underweight markets where spreads
versus Germany were very narrow, i.e. France, Belgium and the Netherlands.
Duration and yield curve positions in Core Europe contributed positively to
performance, and country spread positions detracted from performance.
Domestic demand failed to pick up in the fourth quarter and the East Asian
crisis dampened the prospects for exports to other Asian countries. The yields
of JGBs declined, and the crumbling financial sector created a credit crunch
within Japan. FFTW's underweight position was maintained throughout the fourth
quarter in the belief that yields were too low in both real and nominal terms.
Japanese positions detracted from portfolio returns.
In foreign exchange, FFTW was overweight the USD versus DM for most of the year.
This added value to the portfolio.
FISCHER FRANCIS TREES & WATTS, INC.
PORTFOLIO MANAGER TO THE GLOBAL STRATEGIC INCOME PORTFOLIO
<PAGE>
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT
IN THE GLOBAL STRATEGIC INCOME PORTFOLIO AND
CAPITAL INTERNATIONAL-EUROPE, AUSTRALIA, FAR EAST INDEX
[GRAPH]
<TABLE>
<CAPTION>
Global J.P. Morgan
Strategic Global Gov't
Date Income Bond
<S> <C> <C>
03/25/96 10,000 10,000
03/31/96 9,750 10,075
06/30/96 9,420 10,195
09/30/96 9,950 10,141
12/31/96 10,044 10,262
03/31/97 9,732 10,061
06/30/97 9,883 11,324
09/30/97 10,034 11,204
12/31/97 10,102 10,286
</TABLE>
Past performance is not predictive of future performance. Persons who
invest in the Portfolio through a variable annuity contract should note this
graph does not reflect separate account expenses or sales charges deducted by
the insurance company.
- ---------------
*Portfolio's inception date
J.P. MORGAN GLOBAL GOVERNMENT BOND INDEX, UNHEDGED
Weighted by market capitalization and is comprised of 424 bonds with
maturities greater than one year in over 13 countries. Foreign currencies
are converted into dollars at spot rates which gives the index exposure to
both bond and currency markets.
<PAGE>
THE GLOBAL INTERACTIVE / TELECOMM PORTFOLIO
Driven by low inflation, low interest rates, good corporate earnings gains,
deals, stock repurchase programs and liquidity (the continuing strong flow of
cash into U.S. equity funds), stocks posted strong gains in 1997. Until
correcting in late December, large cap growth stocks continued to lead the
market parade. However, large cap value and mid and small cap indices also
posted solid gains. 1997 was a particularly good year for global multimedia
stocks.
PORTFOLIO STRUCTURE. As we have indicated in past discussions, the fund's
investment parameters fall within two main investment universes: companies
involved in creativity or copyright; and companies involved in the distribution,
principally the delivery of these copyrights, but also, the broad scope of
communications-related services such as basic voice and data.
1998: WILL IT BE ANOTHER GOOD YEAR FOR MULTIMEDIA STOCKS? After several years
of under-performing relative to other market sectors, telecommunications, cable
television, cable networks, broadcast and filmed entertainment producers were
among 1997's best performing industry groups. There are a number of reasons why
these sleeping giants awoke. Cable television operators did a good job
protecting market share from satellite broadcasters and received strong
strategic and financial backing from leading technology companies committed to
making CATV companies' coaxial connections into American homes the primary
internet transmission highway. We think the cable television industry is in
terrific shape. The systems are built out. Strong financial partners are
providing the capital for technological upgrades. Cash flows from traditional
cable TV services are trending up and new services are finally coming on stream.
This industry, which Wall Street had written off a year ago, has a very
promising future.
The same can be said for cable networks. Until cable television operators fully
upgrade systems to provide more channel capacity, the existing network slots
will be coveted by programmers and advertisers. We expect to see continuing
consolidation in the industry and strategic partners that can help maximize cash
flow and profits.
Telecommunications stocks probably offer the greatest long term upside
potential. The global deregulation of the telecommunications industry is
finally unfolding. Giant mergers will take place as the big players jockey for
domestic and global market share. Broadcasters should also do well as
deregulation continues to spawn consolidation in the industry. The short,
intermediate and long term prospects for global multimedia stocks are exciting
and continue to believe these industry groups will be market leaders in 1998 and
beyond.
IN CONCLUSION. Multimedia stocks reigned in 1997. We believe they continue to
offer a wealth of opportunity for investors. Global barriers are finally coming
down. The mating game will be intense as suitors compete for the most
attractive partners. We are in the midst of an exciting party that could last
well into the next decade.
GAMCO INVESTORS, INC.
PORTFOLIO MANAGER TO THE GLOBAL INTERACTIVE / TELECOMM PORTFOLIO
<PAGE>
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT
IN THE GLOBAL INTERACTIVE/TELECOMM PORTFOLIO AND S&P 500 INDEX
[GRAPH]
<TABLE>
<CAPTION>
Global
Interactive
Date Telecomm S&P 500
<S> <C> <C>
01/31/96 10,000 10,000
03/31/96 9,950 10,190
06/30/96 9,720 10,647
09/30/96 10,030 10,976
12/31/96 10,049 11,891
03/31/97 10,421 12,210
06/30/97 11,526 14,342
09/30/97 12,702 15,416
12/31/97 14,097 15,859
</TABLE>
Past performance is not predictive of future performance. Persons who
invest in the Portfolio through a variable annuity contract should note this
graph does not reflect separate account expenses or sales charges deducted by
the insurance company.
- ---------------
*Portfolio's inception date
S&P 500 INDEX
Capitalization weighted index of 500 large stocks, representing
approximately 70% of the broad U.S. equity markets. Membership is decided
upon by the Standard & Poor's 500 committee. The index is calculated on a
total return basis, which includes reinvestment of gross dividends before
deduction of withholding taxes.
<PAGE>
THE PALLADIAN TRUST
STATEMENTS OF ASSETS AND LIABILITIES
AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
GLOBAL GLOBAL
INTERNATIONAL STRATEGIC INTERACTIVE/
VALUE GROWTH GROWTH INCOME TELECOMM
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments:
At identified cost. . . . . . . . . . . . . . . . $4,548,152 $3,928,673 $3,320,007 $2,219,986 $1,836,313
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
At value. . . . . . . . . . . . . . . . . . . . . $5,095,033 $4,205,105 $3,044,332 $2,241,944 $2,234,365
Cash (Interest bearing account). . . . . . . . . . . 1,722,459 124,945 82,734 582,113 905,389
Foreign Cash . . . . . . . . . . . . . . . . . . . . ---- ---- 3,970 16,965 ----
Receivables: . . . . . . . . . . . . . . . . . . . .
Interest and dividends . . . . . . . . . . . . . 11,169 553 3,822 68,710 7,184
Investments sold . . . . . . . . . . . . . . . . 61,510 20,119 ---- ---- ----
Forward foreign exchange contracts to buy . . . . ---- ---- ---- 1,077,624 ----
Forward foreign exchange contracts to sell . . . ---- ---- 3,969 701,879 ----
Expense reimbursements . . . . . . . . . . . . . 146,510 123,531 96,868 121,760 99,327
Shares of beneficial interest purchased . . . . . 5,115 6,106 7,304 ---- 8,731
Unamortized organization costs . . . . . . . . . . . 14,678 14,678 15,330 ---- 14,678
------------- ------------- ------------- ------------- -------------
Total Assets . . . . . . . . . . . . . . . . . . $7,056,474 $4,495,037 $3,258,329 $4,810,995 $3,269,674
------------- ------------- ------------- ------------- -------------
LIABILITIES
Payables:
Investments purchased . . . . . . . . . . . . . . $429,049 ---- $21,968 $282,738 $230,802
Forward foreign exchange contracts to buy . . . . ---- ---- ---- 1,119,231 ----
Forward foreign exchange contracts to sell . . . ---- ---- 3,969 682,582 ----
Shares of beneficial interest repurchased . . . . ---- $322 91 2,044 269
Accrued expenses . . . . . . . . . . . . . . . . 42,773 31,184 25,299 24,462 22,162
------------- ------------- ------------- ------------- -------------
Total Liabilities . . . . . . . . . . . . . . . . 471,822 31,506 51,327 2,111,057 253,233
------------- ------------- ------------- ------------- -------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . $6,584,652 $4,463,531 $3,207,002 $2,699,938 $3,016,441
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
NET ASSETS CONSIST OF:
Undistributed net investment income / (loss) . . . $23 ---- ($94) $1,131 ($89)
Net unrealized appreciation (depreciation)
of investments. . . . . . . . . . . . . . . . . . 546,881 $276,432 (275,675) (27,404) 398,052
Accumulated net realized gain / (loss) . . . . . . . 15,203 (381,286) (7,211) 9,981 (9,487)
Capital shares . . . . . . . . . . . . . . . . . . . 6,022,545 4,568,385 3,489,982 2,716,230 2,627,965
------------- ------------- ------------- ------------- -------------
Total Net Assets. . . . . . . . . . . . . . . . . $6,584,652 $4,463,531 $3,207,002 $2,699,938 $3,016,441
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Shares of beneficial interest outstanding . . . . 487,816 373,580 329,943 273,302 226,425
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
NET ASSET VALUE, offering price and redemption
price per share of beneficial interest
outstanding . . . . . . . . . . . . . . . . . . . $13.50 $11.95 $9.72 $9.88 $13.32
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
THE PALLADIAN TRUST
STATEMENTS OF OPERATIONS
FOR THE PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
GLOBAL GLOBAL
INTERNATIONAL STRATEGIC INTERACTIVE/
VALUE GROWTH GROWTH INCOME TELECOMM
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends (Net of foreign withholding taxes of
$1,577 and and $75 for the International Growth
and Global Interactive / Telecomm) portfolio. . . $21,839 $2,085 $20,929 ---- $11,128
Interest . . . . . . . . . . . . . . . . . . . . . . 46,168 13,171 22,778 $99,446 18,494
------------- ------------- ------------- ------------- -------------
Total Investment Income . . . . . . . . . . . . . 68,007 15,256 43,707 99,446 29,622
------------- ------------- ------------- ------------- -------------
EXPENSES
Amortization of organization costs . . . . . . . . . 4,756 4,756 4,745 2,723 4,756
Auditing fees. . . . . . . . . . . . . . . . . . . . 27,405 17,688 13,814 16,269 11,764
Custodian fees . . . . . . . . . . . . . . . . . . . 14,942 23,337 12,158 9,855 6,115
Insurance. . . . . . . . . . . . . . . . . . . . . . 3,756 3,756 3,755 3,755 3,756
Legal fees . . . . . . . . . . . . . . . . . . . . . 29,957 15,799 13,131 23,766 14,339
Management and advisory fees . . . . . . . . . . . . 4,734 4,192 9,242 7,538 4,050
Other. . . . . . . . . . . . . . . . . . . . . . . . 463 302 237 298 200
Portfolio accounting fees. . . . . . . . . . . . . . 49,459 49,459 49,459 49,459 49,459
Registration and filing fees . . . . . . . . . . . . 6,176 4,028 3,155 3,969 2,672
Shareholders' expenses . . . . . . . . . . . . . . . 463 302 237 298 200
Trustees' fees and expenses. . . . . . . . . . . . . 8,518 3,495 2,924 7,746 4,389
------------- ------------- ------------- ------------- -------------
Total Expenses. . . . . . . . . . . . . . . . . . 150,629 127,114 112,857 125,676 101,700
Less expense reimbursements. . . . . . . . . . . . . (123,916) (108,474) (84,536) (95,354) (81,113)
------------- ------------- ------------- ------------- -------------
Net Expenses. . . . . . . . . . . . . . . . . . . 26,713 18,640 28,321 30,322 20,587
------------- ------------- ------------- ------------- -------------
NET INVESTMENT INCOME / (LOSS) . . . . . . . . . . . 41,294 (3,384) 15,386 69,124 9,035
------------- ------------- ------------- ------------- -------------
REALIZED AND UNREALIZED GAIN /
(LOSS) ON INVESTMENTS:
Net realized gain / (loss) from:
Security transactions . . . . . . . . . . . . . . 384,615 (374,694) (3,799) (25,984) 142,691
Forward foreign exchange contracts. . . . . . . . ---- ---- (11,495) (6,113) ----
Forward currency transactions . . . . . . . . . . ---- ---- 19,827 4,212 ----
Net change in unrealized appreciation/
(depreciation) on:
Security transactions . . . . . . . . . . . . . . 494,905 267,942 (278,769) 46,407 395,112
Forward foreign exchange contracts. . . . . . . . ---- ---- ---- (21,221) ----
Foreign currency transactions . . . . . . . . . . ---- ---- (156) (16,367) 1
------------- ------------- ------------- ------------- -------------
Net realized and unrealized gain / (loss)
on investments. . . . . . . . . . . . . . . . . . 879,520 (106,752) (274,392) (19,066) 537,804
------------- ------------- ------------- ------------- -------------
NET INCREASE / (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS . . . . . . . . . . . . 920,814 (110,136) (259,006) 50,058 546,839
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
THE PALLADIAN TRUST
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
GLOBAL GLOBAL
INTERNATIONAL STRATEGIC INTERACTIVE/
VALUE GROWTH GROWTH INCOME TELECOMM
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income / (loss) . . . . . . . . . . . $41,294 ($3,384) $15,386 $69,124 $9,035
Net realized gain / (loss) on securities,
forward foreign exchange contracts and
foreign currency transactions . . . . . . . . . . 384,615 (374,694) 4,533 (27,885) 142,691
Net unrealized gain / (loss) on securities,
forward foreign exchange contracts and
other assets and liabilities denominated
in foreign currencies . . . . . . . . . . . . . . 494,905 267,942 (278,925) 8,819 395,113
------------- ------------- ------------- ------------- -------------
Net increase / (decrease) in net assets
resulting from operations . . . . . . . . . . . . $920,814 ($110,136) ($259,006) $50,058 $546,839
Distributions to shareholders from:
Net investment income . . . . . . . . . . . . . . ($41,271) ---- ($15,480) ($29,924) ($9,124)
Net realized gain from investment
transactions. . . . . . . . . . . . . . . . . . . (369,412) ---- (8,333) (12,484) (142,691)
NET INCREASE
FROM TRANSACTIONS IN SHARES
OF BENEFICIAL INTEREST . . . . . . . . . . . . . 5,174,190 4,425,263 3,392,434 1,585,590 2,027,102
------------- ------------- ------------- ------------- -------------
NET INCREASE IN NET ASSETS . . . . . . . . . . . . . 5,684,321 4,315,127 3,109,615 1,593,240 2,422,126
NET ASSETS:
Beginning of period. . . . . . . . . . . . . . . . . 900,331 148,404 97,387 1,106,698 594,315
------------- ------------- ------------- ------------- -------------
End of period. . . . . . . . . . . . . . . . . . . . $6,584,652 $4,463,531 $3,207,002 $2,699,938 $3,016,441
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
THE PALLADIAN TRUST
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE PERIOD ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
GLOBAL GLOBAL
INTERNATIONAL STRATEGIC INTERACTIVE/
VALUE GROWTH GROWTH INCOME TELECOMM
PORTFOLIO* PORTFOLIO* PORTFOLIO** PORTFOLIO* PORTFOLIO*
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income / (loss) . . . . . . . . . . . ($44,718) ($29,053) ($28,209) ($20,549) ($42,738)
Net realized gain / (loss) on securities,
forward foreign exchange contracts and
foreign currency transactions . . . . . . . . . . 49,534 (6,592) 1,702 7,097 2,887
Net unrealized gain / (loss) on securities,
forward foreign exchange contracts and
other assets and liabilities denominated
in foreign currencies . . . . . . . . . . . . . . 51,976 8,490 3,249 (36,223) 2,939
------------- ------------- ------------- ------------- -------------
Net increase / (decrease) in net assets
resulting from operations . . . . . . . . . . . . 56,792 (27,155) (23,258) (49,675) (36,912)
Distributions to shareholders from:
Distribution from capital . . . . . . . . . . . . (49,534) ---- (1,702) (7,097) (2,887)
NET INCREASE
FROM TRANSACTIONS IN SHARES
OF BENEFICIAL INTEREST . . . . . . . . . . . . . 831,167 116,328 77,400 1,061,393 583,452
Capital contribution from advisor. . . . . . . . . . 51,906 49,231 34,947 52,077 40,662
------------- ------------- ------------- ------------- -------------
NET INCREASE IN NET ASSETS . . . . . . . . . . . . . 890,331 138,404 87,387 1,056,698 584,315
NET ASSETS:
Beginning of period. . . . . . . . . . . . . . . . . 10,000 10,000 10,000 50,000 10,000
------------- ------------- ------------- ------------- -------------
End of period. . . . . . . . . . . . . . . . . . . . $900,331 $148,404 $97,387 $1,106,698 $594,315
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
* COMMENCEMENT OF OPERATIONS FEBRUARY 1, 1996
** COMMENCEMENT OF OPERATIONS MARCH 26, 1996
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
THE PALLADIAN TRUST
FINANCIAL HIGHLIGHTS
FOR THE PERIOD ENDED
<TABLE>
<CAPTION>
VALUE PORTFOLIO GROWTH PORTFOLIO
---------------------------------- -----------------------------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED
DEC. 31, 1997 DEC. 31, 1996* DEC. 31, 1997 DEC. 31, 1996*
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period . . . . $10.88 $10.00 $10.84 $10.00
INCOME/(LOSS) FROM INVESTMENT
OPERATIONS:
Net investment income/(loss) . . . . . . . . 0.17(1),(4) (0.64)(1),(2) (0.02)(1),(4) (2.96)(1),(2)
Net realized and unrealized gain/
(loss) on investments. . . . . . . . . . 3.35 2.15 1.13 3.80
------------- ------------- ------------- -------------
Total from investment operations . . . . . . 3.52 1.51 1.11 0.84
------------- ------------- ------------- -------------
LESS DISTRIBUTIONS:
Net Investment Income. . . . . . . . . . . . (0.09) ---- ---- ----
Net Realized Gain from Investment. . . . . .
Transactions. . . . . . . . . . . . . . . (0.81) ---- ---- ----
Distributions form capital . . . . . . . . . ---- (0.63) ---- ----
Total distributions. . . . . . . . . . . . . (0.90) (0.63) ---- ----
------------- ------------- ------------- -------------
Net asset value, end of period . . . . . . . $13.50 $10.88 $11.95 $10.84
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Total Return . . . . . . . . . . . . . . . . 32.36%(4) 15.13%(2),(3) 10.24%(4) 8.40%(2),(3)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
RATIOS TO AVERAGE NET ASSETS/
SUPPLEMENTAL DATA:
Net assets, end of reporting period. . . . . $6,584,652 $900,331 $4,463,531 $148,404
Ratio of operating expenses to
average net assets. . . . . . . . . . . . 0.84%(4) 8.19%(2),*** 0.90%(4) 34.15%(2),***
Ratio of net investment income/(loss)
to average net assets . . . . . . . . . . 1.30%(4) (6.55%)(2),*** (0.16%)(4) (31.31%)(2),***
Portfolio turnover rate. . . . . . . . . . . 176.79% 73.63% 208.68% 580.48%
Average commission per share . . . . . . . . $0.0398 $0.0607 $0.0529 $0.0344
<CAPTION>
INTERNATIONAL GROWTH PORTFOLIO
----------------------------------
FOR THE FOR THE
YEAR ENDED PERIOD ENDED
DEC. 31, 1997 DEC. 31, 1996*
- -------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period . . . . $10.33 $10.00
INCOME/(LOSS) FROM INVESTMENT
OPERATIONS:
Net investment income/(loss) . . . . . . . . 0.10(1),(4) (4.16)(1),(2)
Net realized and unrealized gain/
(loss) on investments. . . . . . . . . . (0.63) 4.67
------------- -------------
Total from investment operations . . . . . . (0.53) 0.51
------------- -------------
LESS DISTRIBUTIONS:
Net Investment Income. . . . . . . . . . . . (0.05) ----
Net Realized Gain from Investment. . . . . .
Transactions. . . . . . . . . . . . . . . (0.03) ----
Distributions form capital . . . . . . . . . ---- (0.18)
Total distributions. . . . . . . . . . . . . (0.08) (0.18)
------------- -------------
Net asset value, end of period . . . . . . . $9.72 $10.33
------------- -------------
------------- -------------
Total Return . . . . . . . . . . . . . . . . (5.25%)(4) 5.13%(2),(3)
------------- -------------
------------- -------------
RATIOS TO AVERAGE NET ASSETS/
SUPPLEMENTAL DATA:
Net assets, end of reporting period. . . . . $3,207,002 $97,387
Ratio of operating expenses to
average net assets. . . . . . . . . . . . 1.78%(4) 67.76%(2),***
Ratio of net investment income/(loss)
to average net assets . . . . . . . . . . 0.97%(4) (56.37%)(2),***
Portfolio turnover rate. . . . . . . . . . . 13.02% 116.21%
Average commission per share . . . . . . . . $0.0110 $0.0101
</TABLE>
* Commencement of operations February 1, 1996
** Commencement of operations March 26, 1996
*** Annualized
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
THE PALLADIAN TRUST
FINANCIAL HIGHLIGHTS
FOR THE PERIOD ENDED
<TABLE>
<CAPTION>
GLOBAL STRATEGIC INCOME PORTFOLIO GLOBAL INTERACTIVE/TELECOMM PORTFOLIO
--------------------------------- -------------------------------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED
DEC. 31, 1997 DEC. 31, 1996* DEC. 31, 1997 DEC. 31, 1996*
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period . . . . $9.98 $10.00 $10.00 $10.00
INCOME/(LOSS) FROM INVESTMENT
OPERATIONS:
Net investment income/(loss) . . . . . . . . 0.36(1),(4) (0.19)(1),(2) 0.08(1),(4) (0.75)(1),(2)
Net realized and unrealized gain/
(loss) on investments. . . . . . . . . . (0.30) 0.23 3.95 0.80
------------- ------------- ------------- -------------
Total from investment operations . . . . . . 0.06 0.04 4.03 0.05
LESS DISTRIBUTIONS:
Net Investment Income. . . . . . . . . . . . (0.11) ---- (0.04) ----
Net Realized Gain from Investment
Transactions. . . . . . . . . . . . . . . (0.05) ---- (0.67) ----
Distributions form capital . . . . . . . . . ---- (0.06) ---- (0.05)
------------- ------------- ------------- -------------
Total distributions. . . . . . . . . . . . . (0.16) (0.06) (0.71) (0.05)
------------- ------------- ------------- -------------
Net asset value, end of period . . . . . . . $9.88 $9.98 $13.32 $10.00
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Total Return . . . . . . . . . . . . . . . . 0.60%(4) 0.44%(2),(3) 40.24%(4) 0.49%(2),(3)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
RATIOS TO AVERAGE NET ASSETS/
SUPPLEMENTAL DATA:
Net assets, end of reporting period. . . . . $2,699,938 $1,106,697 $3,016,441 $594,315
Ratio of operating expenses to
average net assets. . . . . . . . . . . . 1.61%(4) 7.37%(2),*** 1.47%(4) 9.83%(2),***
Ratio of net investment income/(loss)
to average net assets . . . . . . . . . . 3.67%(4) (2.15%)(2),*** 0.64%(4) (8.32%)(2),***
Portfolio turnover rate. . . . . . . . . . . 713.04% 212.36% 114.11% 71.44%
Average commission per share . . . . . . . . n/a n/a $0.0509 $0.0659
</TABLE>
* Commencement of operations February 1, 1996
** Commencement of operations March 26, 1996
*** Annualized
- --------------------------------------------------------------------------------
The table above provides condensed financial information concerning income and
capital changes for one share for each portfolio of the Palladian Trust. Such
information is based upon the Trust's financial statements.
1. This information was prepared using the average number of shares outstanding
during the period.
2. The total return, ratio of operating expenses and the ratio of net investment
loss for the period ended December 31, 1996 reflect the impact of an expense
reimbursement totaling $169,554, allocated to each portfolio following
stipulated criteria (See Note 10). Absent the reimbursement, net investment
loss per share, and the ratios of expenses and net investment loss to average
net assets for the Value Portfolio, the Growth Portfolio, the International
Growth Portfolio, the Global Strategic Income Portfolio and the Global
Interactive /Telecomm Portfolio shares would have been ($1.22), ($5.61),
($7.56), ($0.63) and, ($1.34), respectively, 14.13%, 63.54%, 126.26%,12.30%,
and 16.45%, respectively, (12.40%), (58.37%), (92.05%), (7.02%), and
(14.82%), respectively.
3. Total return measures the change in the value of an investment for the year
indicated. For the period ended December 31, 1996 the total return includes
a capital infusion totaling $228,823 (See Note 9 concerning amount allocated
to each Portfolio). Absent the infusion, total return for the Value
Portfolio, the Growth Portfolio, the International Growth Portfolio, the
Global Strategic Income Portfolio and Global Interactive /Telecomm Portfolio
would have been 7.64%, (41.75%), (46.50%), (4.49%), and (6.68%),
respectively.
4. The total return, ratio of operating expenses and the ratio of net investment
loss for the period ended December 31, 1997 reflect the impact of an expense
reimbursement totaling $587,996, allocated to each portfolio following
stipulated criteria (See Note 10). Absent the reimbursement, net investment
loss per share, and the ratios of expenses and net investment loss to average
net assets for the Value Portfolio, the Growth Portfolio, the International
Growth Portfolio, the Global Strategic Income Portfolio and the Global
Interactive /Telecomm Portfolio shares would have been ($0.34), ($0.68),
($0.45), ($0.14) and, ($0.62), respectively, 4.75%, 6.12%, 7.11%, 6.68%, and
7.26%, respectively, (2.60%), (5.38%), (4.36%), (1.39%), and (5.14%),
respectively.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
THE PALLADIAN TRUST
THE VALUE PORTFOLIO
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- ------ --------
<S> <C>
COMMON STOCKS 77.4%
AEROSPACE 6.1%
1,000 Curtiss Wright Corp. . . . . . . . . . . . . . . . 36,313
5,000 Fairchild Corp. Class A * . . . . . . . . . . . . . 124,375
1,500 Sequa Corp., Class B * . . . . . . . . . . . . . . 111,750
3,000 SPS Technologies, Inc. * . . . . . . . . . . . . . 130,875
-------------
403,313
-------------
AUTOMOTIVE 8.0%
8,000 Earl Scheib, Inc. * . . . . . . . . . . . . . . . . $64,000
3,000 Echlin Inc. . . . . . . . . . . . . . . . . . . . . 108,562
500 Federal-Mogul Corp. . . . . . . . . . . . . . . . . 20,250
1,000 ITT Industries Inc. . . . . . . . . . . . . . . . . 31,375
3,000 Kollmorgen . . . . . . . . . . . . . . . . . . . . 54,937
3,000 Meritor Automotive, Inc. . . . . . . . . . . . . . 63,188
1,000 Modine MFG Co. . . . . . . . . . . . . . . . . . . 34,125
1,000 Standard Motor Products . . . . . . . . . . . . . . 22,563
4,000 Wynn's International, Inc. . . . . . . . . . . . . 127,500
-------------
526,500
-------------
BEVERAGES 3.1%
4,000 Celestial Seasonings, Inc. * . . . . . . . . . . . 126,000
1,500 Chock Full O'Nuts * . . . . . . . . . . . . . . . . 10,500
2,000 Seagram . . . . . . . . . . . . . . . . . . . . . . 64,624
-------------
201,124
-------------
BROADCASTING & CABLE 4.7%
5,000 Ackerly Communications. . . . . . . . . . . . . . . 84,688
2,000 Gray Communications Sys., Class B . . . . . . . . . 51,500
6,000 US West Media Group * . . . . . . . . . . . . . . 173,250
-------------
309,438
-------------
CHEMICAL 1.6%
2,500 Monsanto Co. . . . . . . . . . . . . . . . . . . . 105,000
-------------
CONSUMER SERVICES 4.3%
1,000 General Cigar Holdings, Inc., Class A * . . . . . . 21,312
1,500 General Cigar Holdings, Inc., Class B * . . . . . . 33,210
3,000 Hudson General Corp. . . . . . . . . . . . . . . . 144,000
1,000 H&R Block, Inc. . . . . . . . . . . . . . . . . . . 44,813
2,000 Rollins, Inc. . . . . . . . . . . . . . . . . . . . 40,500
-------------
283,835
-------------
DEPARTMENT STORES 2.3%
5,000 Neiman Marcus Group, Inc. * . . . . . . . . . . . . 151,250
-------------
ENTERTAINMENT 11.0%
3,000 BET Holdings, Inc., Class A * . . . . . . . . . . . 163,875
<PAGE>
2,000 Cablevision Systems Corp. * . . . . . . . . . . . . 191,500
3,000 Gaylord Entertainment . . . . . . . . . . . . . . . 95,827
1,000 Liberty Media Group, Class A * . . . . . . . . . . 36,250
1,000 Time Warner, Inc. . . . . . . . . . . . . . . . . . 62,000
8,000 Trump Hotels & Casino Resorts * . . . . . . . . . . 53,500
3,000 Viacom, Inc. * . . . . . . . . . . . . . . . . . . 122,625
-------------
725,577
-------------
FINANCIAL SERVICES 2.2%
2,000 GATX Corp. . . . . . . . . . . . . . . . . . . . . 145,125
-------------
GAMING 6.3%
5,000 ITT Corp. * . . . . . . . . . . . . . . . . . . . . 414,375
-------------
GROCERY STORES 0.7%
7,000 Bruno's Inc. * . . . . . . . . . . . . . . . . . . 14,438
1,000 Giant Food Inc. . . . . . . . . . . . . . . . . . . 33,688
-------------
48,126
-------------
INDUSTRIAL 3.0%
500 Midland Co. . . . . . . . . . . . . . . . . . . . . 31,500
7,000 Pacific Scientific Co. . . . . . . . . . . . . . . 167,875
-------------
199,375
-------------
INDUSTRIAL EQUIPMENT & SUPPLIES 0.9%
3,000 AMPCO - Pittsburgh Corp. . . . . . . . . . . . . . 58,687
-------------
LABORATORY APPARATUS 0.4%
1,000 Ametek Inc. . . . . . . . . . . . . . . . . . . . . 27,000
-------------
METALS & MINING 1.0%
2,000 Handy & Harman . . . . . . . . . . . . . . . . . . 69,000
-------------
MISCELLANEOUS 5.2%
6,000 Carter-Wallace . . . . . . . . . . . . . . . . . . 101,500
20,000 Envirosource, Inc. * . . . . . . . . . . . . . . . 60,000
2,000 Fedders Corp. Class A . . . . . . . . . . . . . . . 12,250
5,000 Trimas Corp. . . . . . . . . . . . . . . . . . . . 171,875
-------------
345,625
-------------
NEWSPAPERS / PUBLISHING 0.6%
1,000 Media General Inc., Class A . . . . . . . . . . . . 41,812
-------------
OIL & GAS 7.7%
4,000 Pennzoil. . . . . . . . . . . . . . . . . . . . . . 267,250
2,000 RPC, Inc. . . . . . . . . . . . . . . . . . . . . . 23,625
5,000 Southwest Gas Co. . . . . . . . . . . . . . . . . . 93,437
2,000 Tejas Gas Corp. / De *. . . . . . . . . . . . . . . 122,500
-------------
506,812
-------------
PAPER & PLASTIC PRODUCTS 0.9%
750 Ferro Corp. . . . . . . . . . . . . . . . . . . . . 18,234
1,200 Greif Bros. Corp. . . . . . . . . . . . . . . . . . 40,200
-------------
58,434
-------------
PHARMACEUTICALS 0.9%
5,000 Ivax Corporation * . . . . . . . . . . . . . . . . 33,750
1,000 Twinlab Corp. * . . . . . . . . . . . . . . . . . . 24,750
-------------
58,500
-------------
<PAGE>
RETAILING 0.8%
3,000 Lillian Vernon Corporation . . . . . . . . . . . . 49,875
-------------
TELECOMMUNICATIONS 5.7%
3,000 Centennial Cellular Corp.*. . . . . . . . . . . . . 61,500
10,000 Citizens Utilities, Class B . . . . . . . . . . . . 96,250
1,000 Frontier Corporation. . . . . . . . . . . . . . . . 24,062
1,000 Sprint - 8.25% 3/31/00 . . . . . . . . . . . . . . 44,750
3,000 Telephone & Data System . . . . . . . . . . . . . . 139,688
-------------
366,250
-------------
TOTAL INVESTMENTS (COST $4,548,152) ** 77.4% 5,095,033
- -------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (Net) 22.6% 1,489,619
- -------------------------------------------------------------------------------
NET ASSETS 100.0% $6,584,652
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
* NON-INCOME PRODUCING SECURITY
** APPROXIMATES AGGREGATE COST FOR FEDERAL TAX PURPOSES
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
THE PALLADIAN TRUST
THE GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- ------ --------
<S> <C>
COMMON STOCKS 94.2%
APPAREL 5.4%
2,500 Gucci Group . . . . . . . . . . . . . . . . . . . . $104,687
800 Nautica Enterprises, Inc. * . . . . . . . . . . . . 18,600
3,200 North Face, Inc. * . . . . . . . . . . . . . . . . 70,400
2,000 Polo Ralph Lauren Corp. * . . . . . . . . . . . . . 48,625
-------------
242,312
-------------
BANKS & FINANCIAL SERVICES 8.4%
2,200 Amerin Corporation * . . . . . . . . . . . . . . . 61,600
550 Bank of New York - Warrants . . . . . . . . . . . . 93,087
500 BankBoston Corporation . . . . . . . . . . . . . . 46,969
1,200 Charles Schwab & Co., Inc. . . . . . . . . . . . . 50,325
2,000 Leasing Solutions, Inc. * . . . . . . . . . . . . . 47,750
1,900 Paine Webber Group, Inc. . . . . . . . . . . . . . 65,669
1,000 Southern Pacific Funding Cr. * . . . . . . . . . . 13,125
-------------
378,525
-------------
CAPITAL EQUIPMENT & GOODS 2.1%
1,000 Applied Science & Technology * . . . . . . . . . . 11,250
2,200 ATMI, Inc. * . . . . . . . . . . . . . . . . . . . 53,350
600 Tyco International, LTD . . . . . . . . . . . . . . 27,037
-------------
91,637
-------------
CHEMICALS 0.4%
1,200 Brunswick Technologies * . . . . . . . . . . . . . 17,550
-------------
COMMUNICATIONS 8.9%
400 Harte-Hanks Communications . . . . . . . . . . . . 14,850
3,000 ICT Group, Inc. * . . . . . . . . . . . . . . . . . 13,500
1,400 IDT Corporation * . . . . . . . . . . . . . . . . . 28,350
500 Metro Networks, Inc. * . . . . . . . . . . . . . . 16,375
3,500 Mindspring Enterprises, Inc. * . . . . . . . . . . 117,688
1,000 Premiere Technologies, Inc. * . . . . . . . . . . . 27,625
1,500 Smartalk Teleservices * . . . . . . . . . . . . . . 34,125
1,000 Transcrypt International, Inc. * . . . . . . . . . 24,875
1,340 Worldcom, Inc. . . . . . . . . . . . . . . . . . . 40,535
2,000 Xlconnect Solutions, Inc. * . . . . . . . . . . . . 34,000
1,500 Xpedite Systems, Inc. * . . . . . . . . . . . . . . 45,750
-------------
397,673
-------------
COMPUTER SOFTWARE 7.7%
1,000 Datastream Systems, Inc. * . . . . . . . . . . . . 31,000
2,000 Elcom International, Inc. * . . . . . . . . . . . . 14,000
1,000 Hyperion Software Corp. * . . . . . . . . . . . . . 35,750
2,000 Infinity Financial Tech., Inc. * . . . . . . . . . 41,875
3,500 Intersolv, Inc. * . . . . . . . . . . . . . . . . . 70,875
<PAGE>
2,000 Int'l Microcomputer Software . . . . . . . . . . . 28,250
1,000 Legato Systems, Inc. * . . . . . . . . . . . . . . 44,000
2,300 Lightbridge, Inc. * . . . . . . . . . . . . . . . . 43,700
1,000 Mercury Interactive Corp. * . . . . . . . . . . . . 26,750
500 Remedy Corp. * . . . . . . . . . . . . . . . . . . 10,500
-------------
346,700
-------------
ENERGY 4.8%
1,100 Cliffs Drilling Co. * . . . . . . . . . . . . . . . 54,863
2,500 Evergreen Resources, Inc. * . . . . . . . . . . . . 38,750
1,600 Global Marine Inc. * . . . . . . . . . . . . . . . 39,200
900 Noble Drilling Corp. * . . . . . . . . . . . . . . 27,563
1,800 Trico Marine Services, Inc. * . . . . . . . . . . . 52,875
-------------
213,251
-------------
FOOD & BEVERAGE 0.8%
1,000 Pepsico, Inc. . . . . . . . . . . . . . . . . . . . 36,438
-------------
HEALTHCARE 2.8%
1,500 American Oncology Resources * . . . . . . . . . . . 24,000
2,000 Intensiva Healthcare Corp. * . . . . . . . . . . . 15,000
2,500 Pharmerica, Inc. * . . . . . . . . . . . . . . . . 25,938
1,060 Safeskin Corp. . . . . . . . . . . . . . . . . . . 60,155
-------------
125,093
-------------
HOUSING 2.6%
120 Continental Homes Holding Corp. . . . . . . . . . . 4,830
3,500 D.R. Horton, Inc. . . . . . . . . . . . . . . . . . 60,813
1,500 Oakwood Homes Corp. . . . . . . . . . . . . . . . . 49,781
-------------
115,424
-------------
LEISURE 3.7%
721 Cendant Corp. * . . . . . . . . . . . . . . . . . . 24,781
1,600 DM Management Company * . . . . . . . . . . . . . . 25,000
1,000 Equity Marketing, Inc. * . . . . . . . . . . . . . 25,000
3,600 Grand Casinos, Inc. * . . . . . . . . . . . . . . . 49,050
3,000 Suburban Lodges of America * . . . . . . . . . . . 39,937
-------------
163,768
-------------
POLLUTION CONTROL 1.9%
1,500 KTI, Inc. . . . . . . . . . . . . . . . . . . . . . 24,563
4,000 Stericycle, Inc. * . . . . . . . . . . . . . . . . 58,500
-------------
83,063
-------------
RESTAURANTS 14.9%
600 Dave & Buster's Inc. . . . . . . . . . . . . . . . 13,500
3,000 Fresh America Corp. * . . . . . . . . . . . . . . . 57,750
6,000 Friendly Ice Cream Corp. * . . . . . . . . . . . . 69,750
2,000 Garden Fresh Restaurant Corp. * . . . . . . . . . . 28,750
2,900 Landry's Seafood Restaurant * . . . . . . . . . . . 69,600
2,500 Morton's Restaurant Group Inc. * . . . . . . . . . 50,625
15,375 New York Restaurant Group *** . . . . . . . . . . . 148,368
1,000 Papa John's Intl. Inc. * . . . . . . . . . . . . . 34,875
3,000 PJ America, Inc. * . . . . . . . . . . . . . . . . 45,000
1,000 Rainforest Cafe, Inc. * . . . . . . . . . . . . . . 33,000
3,000 Showbiz Pizza Time * . . . . . . . . . . . . . . . 69,000
2,000 Total Entertainment Restaurant *. . . . . . . . . . 9,125
2,000 Unique Casual Restaurant, Inc. * . . . . . . . . . 14,000
6,000 Wall Street Deli, Inc. * . . . . . . . . . . . . . 20,250
-------------
663,593
-------------
<PAGE>
RESTAURANT EQUIPMENT 2.5%
15,200 Turbochef, Inc. * . . . . . . . . . . . . . . . . . 110,200
-------------
RETAIL 7.4%
700 Borders Group Inc.* . . . . . . . . . . . . . . . . 21,918
500 Central Garden & Pet Co. * . . . . . . . . . . . . 13,125
2,000 Gymboree * . . . . . . . . . . . . . . . . . . . . 54,750
2,500 Hot Topic, Inc. * . . . . . . . . . . . . . . . . . 56,875
2,500 Party City Corp. * . . . . . . . . . . . . . . . . 80,625
3,500 Travis Boats & Motors Inc. * . . . . . . . . . . . 84,437
5,000 US Home & Garden, Inc. * . . . . . . . . . . . . . 20,625
-------------
332,355
-------------
SERVICES 8.6%
1,200 Accustaff, Inc. * . . . . . . . . . . . . . . . . . 27,600
500 Corestaff Inc. * . . . . . . . . . . . . . . . . . 13,250
2,200 Detection Systems Inc. * . . . . . . . . . . . . . 30,663
6,000 Forensic Technologies Intl. * . . . . . . . . . . . 75,000
3,000 Labor Ready, Inc. . . . . . . . . . . . . . . . . . 57,750
1,000 Meta Group, Inc. * . . . . . . . . . . . . . . . . 22,000
1,000 Personnel Group of America Inc. * . . . . . . . . . 33,000
1,700 Prepaid Legal Services, Inc. * . . . . . . . . . . 58,119
1,000 Service Experts, Inc. * . . . . . . . . . . . . . . 28,625
2,000 SOS Staffing Svcs. Inc. * . . . . . . . . . . . . . 37,750
-------------
383,757
-------------
TECHNOLOGY 7.9%
1,500 CMC Industries, Inc. * . . . . . . . . . . . . . . 8,813
1,750 Compaq Computer * . . . . . . . . . . . . . . . . . 98,766
1,500 Dell Computer Corp. * . . . . . . . . . . . . . . . 126,000
2,000 Intel Corp. - Warrants . . . . . . . . . . . . . . 98,937
5,000 Marine Management Systems - Warrants . . . . . . . 1,562
2,000 Object Design, Inc. * . . . . . . . . . . . . . . . 16,750
-------------
350,828
-------------
TRANSPORTATION 3.4%
2,000 Dynamex, Inc. * . . . . . . . . . . . . . . . . . . 22,500
1,000 Kellstrom Industries, Inc. * . . . . . . . . . . . 24,750
2,000 Smithway Motor Express * . . . . . . . . . . . . . 26,000
12,500 Transit Group, Inc. * . . . . . . . . . . . . . . . 79,688
-------------
152,938
-------------
TOTAL INVESTMENTS (COST $3,928,673) ** 94.2% 4,205,105
- -------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (Net) 5.8% 258,426
- -------------------------------------------------------------------------------
NET ASSETS 100.0% $4,463,531
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
* NON-INCOME PRODUCING SECURITY
** APPROXIMATES AGGREGATE COST FOR FEDERAL TAX PURPOSES
*** PRIVATE PLACEMENT/ILLIQUID SECURITY AND FAIR VALUE BY MANAGEMENT
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
THE PALLADIAN TRUST
THE INTERNATIONAL GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- ------ --------
<S> <C>
COMMON STOCKS 94.9%
DENMARK 0.2%
250 Inwear Group. . . . . . . . . . . . . . . . . . . . $7,735
-------------
ENGLAND 21.2%
10,000 JBA Holdings PLC. . . . . . . . . . . . . . . . . . 170,108
60,000 McBride PLC . . . . . . . . . . . . . . . . . . . . 174,545
30,000 Regent Inns PLC . . . . . . . . . . . . . . . . . . 161,233
45,200 Victrex PLC . . . . . . . . . . . . . . . . . . . . 174,578
-------------
680,464
-------------
FINLAND 0.1%
250 Benefon OY . . . . . . . . . . . . . . . . . . . . 2,848
-------------
FRANCE 3.5%
875 Atos . . . . . . . . . . . . . . . . . . . . . . . 112,818
-------------
HONG KONG 7.9%
512,750 Lung Kee (Bermuda) Holdings . . . . . . . . . . . . 138,957
413,000 Sinocan Holdings Limited . . . . . . . . . . . . . 114,589
-------------
253,546
-------------
INDONESIA 1.0%
180,000 Davomas Abadi-Foreign . . . . . . . . . . . . . . . 32,727
-------------
JAPAN 4.9%
12,500 Justsystem Corporation *. . . . . . . . . . . . . . 158,010
-------------
NORWAY 6.8%
20,000 Norsk Lotteridrift ASA * . . . . . . . . . . . . . 81,236
15,500 Radio P4. . . . . . . . . . . . . . . . . . . . . . 136,410
-------------
217,646
-------------
PORTUGAL 4.9%
5,350 Investec-Consultoria Intl. * . . . . . . . . . . . 158,421
-------------
SINGAPORE 4.1%
127,000 Electronic Resources, LTD . . . . . . . . . . . . . 129,153
-------------
SWEDEN 12.9%
8,200 Investment AB Bure. . . . . . . . . . . . . . . . . 107,924
11,500 IRO AB . . . . . . . . . . . . . . . . . . . . . . 168,012
10,600 Nobel Biocare AB . . . . . . . . . . . . . . . . . 138,843
-------------
414,779
-------------
SWITZERLAND 13.3%
685 Publicitas Holding SA-R . . . . . . . . . . . . . . 149,539
<PAGE>
1,100 Selecta Group-Reg * . . . . . . . . . . . . . . . . 147,545
95 Stratec Holding AB. . . . . . . . . . . . . . . . . 127,425
-------------
424,509
-------------
UNITED STATES 14.1%
6,400 Fila Holdings SPA - ADR . . . . . . . . . . . . . . 128,800
5,000 Pfeiffer Vacuum Tech.- ADR *. . . . . . . . . . . . 140,313
11,500 Physio-Control Intl. Corp. * . . . . . . . . . . . 182,563
-------------
451,676
-------------
TOTAL INVESTMENTS (COST $3,320,007) ** 94.9% 3,044,332
- -------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (NET) 5.1% 162,670
- -------------------------------------------------------------------------------
NET ASSETS 100.0% $3,207,002
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
* NON-INCOME PRODUCING SECURITY
** APPROXIMATES AGGREGATE COST FOR FEDERAL TAX PURPOSES
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
THE PALLADIAN TRUST
THE GLOBAL STRATEGIC INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
FACE VALUE (NOTE 1)
- ---------- --------
<S> <C>
UNITED STATES DOLLAR BONDS 37.0%
50,000 U.S. Treasury Bond
7.625% due 2/15/25 . . . . . . . . . . . . . . $60,687
170,000 U.S. Treasury Bond
6.50% due 11/15/26 . . . . . . . . . . . . . . 181,528
80,000 U.S. Treasury Note
6.250% due 2/15/07 . . . . . . . . . . . . . . 82,600
110,000 U.S. Treasury Note
6.625% due 5/15/07 . . . . . . . . . . . . . . 116,496
50,000 U.S. Treasury Note
6.125% due 8/15/07 . . . . . . . . . . . . . . 51,406
230,000 U.S. Treasury Note
5.875% due 9/30/02 . . . . . . . . . . . . . . 231,437
110,000 U.S. Treasury Note
5.750% due 10/31/02 . . . . . . . . . . . . . . 110,171
110,000 U.S. Treasury Note
5.750% due 11/30/02 . . . . . . . . . . . . . . 110,139
50,000 U.S. Treasury Note
7.000% due 7/15/06 . . . . . . . . . . . . . . 54,000
-------------
998,464
-------------
ITALIAN LIRA BOND 4.8%
190,000,000 Italy BTPS
8.750% due 7/1/06 . . . . . . . . . . . . . . 129,960
-------------
GERMAN DEUTSCHE MARK BOND 27.2%
1,120,000 Deutschland Republic
7.375% due 1/3/05 . . . . . . . . . . . . . . 703,689
50,000 Deutschland Republic
6.500% due 7/04/27 . . . . . . . . . . . . . . 30,122
-------------
733,811
-------------
JAPANESE YEN BOND . . . . . . . . . . . . . .7.5%
24,400,000 JAPAN - 184 (10 Year Issue)
2.900% due 12/20/05 . . . . . . . . . . . . . 203,496
-------------
BRITISH POUND BOND 6.5%
100,000 United Kingdom Treasury
7.250% due 12/07/07 . . . . . . . . . . . . . 176,213
-------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
TOTAL INVESTMENTS (COST $2,219,986) ** 83.0% 2,241,944
OTHER ASSETS AND LIABILITIES (NET) 17.0% 457,994
NET ASSETS 100.0% $2,699,938
- ----------------------------------------------------------------------------
</TABLE>
SCHEDULE OF FORWARD FOREIGN EXCHANGE CONTRACTS
<TABLE>
<CAPTION>
CONTRACT MARKET
VALUE VALUE
FACE VALUE DATE (NOTE 1)
- ---------- ---- --------
<S> <C> <C>
FORWARD FOREIGN EXCHANGE CONTRACTS TO BUY
30,000 Australian Dollar . . . . . . 02/25/98 $ 19,509
20,000 British Pound. . . . . . . . . 02/25/98 32,783
105,406 Canadian Dollar. . . . . . . . 02/25/98 73,886
200,000 Finnish Markka . . . . . . . . 02/25/98 36,819
400,000 French Franc . . . . . . . . . 02/25/98 66,678
28,896 German Deutsche. . . . . . . . 02/25/98 16,115
70,000 German Deutsche. . . . . . . . 02/25/98 39,037
30,000 German Deutsche. . . . . . . . 02/25/98 16,730
70,000 German Deutsche. . . . . . . . 02/25/98 39,037
20,926 German Deutsche. . . . . . . . 02/25/98 11,670
146,906 German Deutsche. . . . . . . . 02/25/98 81,926
40,000 German Deutsche. . . . . . . . 02/25/98 22,307
1,441,390 Japanese Yen . . . . . . . . . 02/25/98 11,133
5,029,500 Japanese Yen . . . . . . . . . 02/25/98 38,846
7,165,490 Japanese Yen . . . . . . . . . 02/25/98 55,343
1,440,400 Japanese Yen . . . . . . . . . 02/25/98 11,125
5,747,760 Japanese Yen . . . . . . . . . 02/25/98 44,394
26,753,726 Japanese Yen . . . . . . . . . 02/25/98 206,636
14,241,693 Japanese Yen . . . . . . . . . 02/25/98 109,998
12,258,500 Spanish Peseta . . . . . . . . 02/25/98 80,580
500,000 Swedish Krona. . . . . . . . . 02/25/98 63,072
- ---------------------------------------------------------------------------
TOTAL FORWARD FOREIGN EXCHANGE CONTRACTS TO BUY
(CONTRACT AMOUNT $1,119,232) ** $1,077,624
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CONTRACT MARKET
VALUE VALUE
FACE VALUE DATE (NOTE 1)
- ---------- ---- --------
<S> <C> <C>
FORWARD FOREIGN EXCHANGE CONTRACTS TO SELL
50,000 British Pound . . . . . . . . . 02/25/98 81,957
70,688 German Deutsche . . . . . . . . 02/25/98 39,421
70,000 German Deutsche . . . . . . . . 02/25/98 39,037
80,000 German Deutsche . . . . . . . . 02/25/98 44,614
100,000 German Deutsche . . . . . . . . 02/25/98 55,767
20,000 German Deutsche . . . . . . . . 02/25/98 11,154
20,000 German Deutsche . . . . . . . . 02/25/98 11,154
<PAGE>
86,113 German Deutsche . . . . . . . . 02/25/98 48,023
224,034 German Deutsche . . . . . . . . 02/25/98 124,939
130,452,090 Italian Lira. . . . . . . . . . 02/25/98 73,717
5,117,420 Japanese Yen. . . . . . . . . . 02/25/98 39,525
5,117,280 Japanese Yen. . . . . . . . . . 02/25/98 39,524
2,181,000 Japanese Yen. . . . . . . . . . 02/25/98 16,845
2,908,260 Japanese Yen. . . . . . . . . . 02/25/98 22,462
50,000 Swiss Franc . . . . . . . . . . 02/25/98 34,443
- ---------------------------------------------------------------------------
TOTAL FORWARD FOREIGN EXCHANGE CONTRACTS TO SELL
(CONTRACT AMOUNT $701,879) ** $682,582
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
</TABLE>
* NON-INCOME PRODUCING SECURITY
** APPROXIMATES AGGREGATE COST FOR FEDERAL TAX PURPOSES
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
THE PALLADIAN TRUST
THE GLOBAL INTERACTIVE / TELECOMM PORTFOLIO
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- ------ --------
<S> <C>
COMMON STOCKS 74.1%
CANADA 0.5%
500 British Columbia Telecomm . . . . . . . . . . . . . $15,568
------------
FOREIGN 0.3%
500 Havas S.A. Spons, ADR . . . . . . . . . . . . . . . 8,997
------------
UNITED STATES 73.3%
BROADCASTING, MEDIA, PRODUCTION & RADIO 17.6%
2,500 Ackerly Communications . . . . . . . . . . . . . . 42,344
1,000 Granite Broadcasting Corp - Conv. Pref. . . . . . . 48,500
500 Kingworld Productions, Inc. . . . . . . . . . . . . 28,875
500 Lee Enterprises . . . . . . . . . . . . . . . . . . 14,782
3,000 Lin Television Corp. * . . . . . . . . . . . . . . 163,500
2,500 Media General, Inc. - Class A . . . . . . . . . . . 104,531
1,000 Time Warner, Inc. . . . . . . . . . . . . . . . . . 62,000
600 United Television, Inc. . . . . . . . . . . . . . 62,325
------------
526,857
------------
CABLE 17.9%
2,000 BET Holdings Inc. Class A * . . . . . . . . . . . . 109,250
1,000 Cablevision Systems Corp. * . . . . . . . . . . . . 95,750
1,500 Century Communications * . . . . . . . . . . . . . 14,626
1,000 Home Shopping Network, Inc. * . . . . . . . . . . . 51,500
2,000 Tele-Communications, Inc. . . . . . . . . . . . . . 55,875
1,000 United International Holding, Class A * . . . . . . 11,500
2,000 US West Media Group * . . . . . . . . . . . . . . . 57,750
3,500 Viacom Inc Class A * . . . . . . . . . . . . . . . 143,063
------------
539,314
------------
COMMUNICATION SERVICES 1.8%
500 Comsat Corp. . . . . . . . . . . . . . . . . . . . 12,125
2,000 Loral Space & Communiation * . . . . . . . . . . . 42,875
------------
55,000
------------
DIVERSIFIED 0.9%
300 Sony Corp., ADR . . . . . . . . . . . . . . . . . . 27,225
------------
ENTERTAINMENT 4.0%
5,000 Ascent Entertainment Group * . . . . . . . . . . . 51,875
500 ITT Corp. * . . . . . . . . . . . . . . . . . . . . 41,438
1,000 Telecom-TCI Ventures * . . . . . . . . . . . . . . 28,312
------------
121,625
------------
INTERNET 0.4%
500 AT Home Corp. * . . . . . . . . . . . . . . . . . . 12,563
------------
<PAGE>
MISCELLANEOUS 7.2%
1,500 American Radio Systems Corp. * . . . . . . . . . . 79,969
3,000 Liberty Media Group, Class A. . . . . . . . . . . . 108,750
2,000 Shared Tech. Fairchid, Inc. * . . . . . . . . . . . 29,250
------------
217,969
TELECOMMUNICATIONS 22.8%
1,000 Cable & Wireless PLC - ADR . . . . . . . . . . . . 27,187
1,000 Century Telephone Enterprises . . . . . . . . . . . 49,812
500 Chris-Craft Industries, Inc. * . . . . . . . . . . 26,156
5,000 Citizens Utilities, Class B * . . . . . . . . . . . 48,125
1,000 Citizens Utilities, Preferred 5% CV . . . . . . . . 47,750
1,000 Frontier Corporation . . . . . . . . . . . . . . . 24,062
6,000 GST Telecommunications * . . . . . . . . . . . . . 71,250
2,000 MCI Communications Corp. . . . . . . . . . . . . . 85,625
1,600 So. New England Telecomm. . . . . . . . . . . . . . 80,500
3,000 Sprint . . . . . . . . . . . . . . . . . . . . . . 134,250
2,000 Telephone Data Systems . . . . . . . . . . . . . . 93,125
------------
687,842
WIRELESS COMMUNICATIONS 0.7%
2,500 Price Communcations * . . . . . . . . . . . . . . . 21,405
------------
TOTAL INVESTMENTS (COST $1,836,313) ** 74.1% 2,234,365
- -------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (NET) 25.9% 782,076
- -------------------------------------------------------------------------------
NET ASSETS 100.0% $3,016,441
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
* NON-INCOME PRODUCING SECURITY
** APPROXIMATES AGGREGATE COST FOR FEDERAL TAX PURPOSES
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
The Palladian Trust
Notes to Financial Statements
1. ORGANIZATION
The Palladian Trust (the "Trust") is registered under the Investment Company Act
of 1940, as amended, (the "Act") as an open-end management investment company
organized as a Massachusetts business trust. The Trust is comprised of five
portfolios: Value Portfolio, Growth Portfolio, International Growth Portfolio,
Global Strategic Income Portfolio and Global Interactive/Telecomm Portfolio
(collectively the "Portfolios"). The Trust is intended to serve as an investment
medium for (i) variable life insurance policies and variable annuity contracts
offered by insurance companies, (ii) certain qualified pension and retirement
plans, as permitted by Treasury Regulations; and (iii) advisers to the
Portfolios and their affiliates.
2. SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures in financial statements. Actual
results could differ from those estimates. The following is a summary of
significant accounting policies consistently followed by the Portfolios in the
preparation of their financial statements.
PORTFOLIO VALUATION: Domestic and foreign portfolio securities, except as noted
below, for which market quotations are readily available are stated at market
value. Market value is determined on the basis of the last reported sales price
in the principal market where such securities are traded or, if no sales are
reported, the mean between representative bid and asked quotations obtained from
a quotation reporting system or from established market makers.
Long-term debt securities, including those to be purchased under firm commitment
agreements, are normally valued on the basis of quotes obtained from brokers and
dealers or pricing services, which take into account appropriate factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics, and other market
data. Under certain circumstances, long-term debt securities having a maturity
of sixty days or less may be valued at amortized cost. Debt securities with a
maturity date at time of purchase of 60 days or less are valued at amortized
cost which approximates fair value.
Securities for which market quotations are not readily available are valued at
fair market value as determined in good faith by, or under the direction of the
Board of Trustees. In determining fair value, management considers all relevant
qualitative and quantitative information available. These factors are subject
to change over time and are reviewed periodically. The values assigned to fair
value investments are based on available information and do not necessarily
represent an amount that might ultimately be realized, since such amounts
depend on future developments inherent in long-term investments. However,
because of the inherent uncertainty of valuation, those estimated values may
differ significantly from the values that would have been used had a ready
market of the investments existed, and the differences could be material to
the investment.
At December 31, 1997, $148,368 or 3.3% of net assets of the Growth Portfolio
were valued by management under the direction of the Board of Trustees.
<PAGE>
FOREIGN CURRENCY. The books and records of the Portfolios are maintained in
U.S. dollars. Foreign currencies, investments and other assets and liabilities
are translated into U.S. dollars at the exchange rates prevailing at the end of
the period, and purchases and sales of investment securities, income and
expenses are translated on the respective dates of such transactions.
Unrealized gains and losses, not relating to securities, which result from
changes in foreign currency exchange rates have been included in unrealized
appreciation/(depreciation) of foreign currency transactions. Unrealized gains
and losses of securities, which result from changes in forward currency exchange
rates as well as changes in market prices of securities, have been included in
unrealized appreciation/(depreciation) of securities. Net realized foreign
currency gains and losses resulting from changes in exchange rates include
foreign currency gains and losses between trade date and settlement date on
investment securities transactions, gains and losses on foreign currency
transactions and the difference between the amounts of interest and dividends
recorded on the books of the Portfolios and the amount actually received. The
portion of foreign currency gains and losses related to fluctuations in exchange
rates between the initial purchase trade date and subsequent sale trade is
included in realized gain/(loss) from investment securities sold.
FORWARD FOREIGN CURRENCY CONTRACTS. All portfolios may enter into forward
foreign currency contracts. Foreign currency contracts are agreements to
exchange one currency for another at a future date and at a specified price.
The Portfolios may use forward foreign currency contracts to facilitate
transactions in foreign securities and to manage the Portfolios' foreign
currency exposure. The U.S. dollar market value, contract value and the foreign
currencies the Portfolios have committed to buy or sell are shown in the
Portfolio of Investments under the caption "Schedule of Forward Foreign Currency
Contracts." These amounts represent the aggregate exposure to each foreign
currency the Portfolios have acquired or hedged through currency contracts at
December 31, 1997. Forward foreign currency contracts that have been offset
with different counterparties are reflected as both a forward foreign currency
contract to buy and a forward foreign currency contract to sell. Forward
foreign currency contracts to buy generally are used to acquire exposure to
foreign currencies, while forward foreign currency contracts to sell are used to
hedge the Portfolios' investments against currency fluctuations. Also, a
forward foreign currency contract to buy or sell can offset a previously
acquired opposite forward foreign currency contract.
Forward foreign currency contracts are marked-to-market daily using foreign
currency exchange rates supplied by an independent pricing service. The change
in a contract's market value is recorded by the Portfolios as an unrealized gain
or loss. When the contract is closed or delivery is taken, the Portfolios
record a realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed.
The use of forward foreign currency contracts does not eliminate fluctuations in
the underlying prices of the Portfolio's securities, but it does establish a
rate of exchange that can be achieved in the future. Although forward foreign
currency contracts used for hedging purposes limit the risk of loss due to a
decline in the value of the hedged currency, they also limit any potential gain
that might result should the value of the currency increase. In addition, the
Portfolios could be exposed to risks if the counterparties to the contracts are
unable to meet the terms of their contracts.
FEDERAL INCOME TAXES. Each Portfolio of the Trust is a separate entity for
Federal income tax purposes. No provision for Federal income taxes has been
made since each Portfolio of the Trust, has complied and intends to continue to
comply with the provisions of Sub Chapter M of the Internal Revenue Code
available to regulated
<PAGE>
investment companies and to distribute its taxable income to shareholders
sufficient to relieve it from all or substantially all federal income taxes.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME. Investment transactions are
recorded on trade date. Dividend income and distributions to shareholders are
recorded on the ex-dividend date. Interest income (including amortization of
premium and discount on securities) and expenses are accrued daily. Realized
gains and losses from investment transactions are recorded on an identified cost
basis which is the same basis the Trust uses for Federal income tax purposes.
Purchases of securities under agreements to resell are carried at cost, and the
related accrued interest is included in interest receivable.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends from net investment
income are declared and paid quarterly for all portfolios. Net realized capital
gains, if any, are distributed at least annually.
Income and capital gain distributions are determined in accordance with income
tax regulations which may differ from generally accepted accounting principles.
Permanent book and tax basis differences relating to shareholder distributions
will result in reclassifications to paid in capital. Undistributed net
investment income may include temporary book and tax basis differences which
will reverse in a subsequent period.
ORGANIZATION EXPENSE. Organization expenses were deferred and are being
amortized by each Portfolio on a straight-line basis over a five-year period
from commencement of operations. The amount paid by the Trust on any redemption
by Palladian Advisors, Inc. ("PAI") or, any other then-current holder of the
organizational seed capital shares ("Initial Shares") of the Portfolio, will be
reduced by a portion of any unamortized organization expenses of the Portfolio
determined by the proportion of the number of the Initial Shares of the
Portfolio redeemed to the number of the Initial Shares of the Portfolio
outstanding after taking into account any prior redemptions of the Initial
Shares of the Portfolio.
During the year ended December 31, 1997, all of the Initial Shares of the Global
Strategic Income Portfolio were withdrawn. Accordingly, the proceeds paid upon
withdrawal were reduced by the unamortized organization expenses of $16,710.
TRUSTEES. Each Trustee who is not an "interested person" (as defined in the
Act) of the Trust, receives $1,500 per meeting attended, as well as
reimbursement for reasonable out-of-pocket expenses, from the Trust.
3. MANAGER, PORTFOLIO ADVISOR, PORTFOLIO MANAGERS, ADMINISTRATION FEES AND
OTHER TRANSACTIONS.
PAI provided general supervision over the Trust, recommended investment advisors
to serve as portfolio managers, assessed their performance and made periodic
reports to the Trust. In performing these responsibilities, PAI relies upon
Tremont Partners, Inc. as Portfolio Advisor. PAI, not the Trust, paid the fees
of the Portfolio Advisor.
The Trust and PAI entered into portfolio management agreements with various
Portfolio Managers. The Portfolio Managers for the Portfolios are as follows:
GAMCO Investors, Inc. serves as the Portfolio Manager for The Value Portfolio
and The Global Interactive/Telecomm Portfolio; Stonehill Capital Management,
Inc. serves as the Portfolio Manager of The Growth Portfolio; Bee & Associates
Incorporated serves as the Portfolio Manager of The International Growth
Portfolio, and Fischer Francis Trees & Watts serves as the Portfolio Manager of
The Global
<PAGE>
Strategic Income Portfolio. Subsequent to December 31, 1997 Fischer Francis
Trees & Watts submitted its resignation as Portfolio Manager (see note 10).
Investors Bank & Trust Company provides transfer agency, portfolio accounting
and custody services for the Trust. The transfer agency and portfolio
accounting fees are the greater of $40,000 or .05% of net assets for the first
$600 million and .03% of the net assets in excess of $600 million. Custody fees
are separated between domestic and global.
Western Capital Financial Group, Inc. (the "Distributor") serves as the
principal underwriter and distributor of the shares of the Trust. The
Distributor does not currently charge any fees for serving in this capacity.
Certain officers of the Trust were also officers of PAI and the Distributor.
Mario J. Gabelli, together with certain affiliated entities, owns a majority
interest in the parent company of Tremont. The individual is also an officer of
GAMCO Investors, Inc. selected by Tremont to provide investment advisory
services to two Portfolios of the Trust.
An officer and sole shareholder of the Distributor is also an officer of PAI,
and a trustee and officer of the Trust. Certain officers of PAI were also
trustees and officers of the Trust.
The Value Portfolio and The Global Interactive/Telecomm Portfolio placed a
significant portion of their portfolio transactions through Gabelli & Co., an
affiliated entity of both portfolios and the Sub-Advisor, GAMCO Investors, Inc.
Total commissions paid to Gabelli & Co. were as follows:
<TABLE>
<CAPTION>
Portfolio 1997 1996
--------- ---- ----
<S> <C> <C>
Value $16,396 $4,896
Global Interactive / Telecomm $4,568 $3,200
</TABLE>
4. MANAGEMENT FEES
Each Portfolio paid an overall management fee, computed and accrued daily and
paid monthly, based on its average daily net assets. For the first twelve
months of operations, the management fee was .80% of average net assets.
Each Portfolio began paying at the end of each month starting on February 1,
1997 for the Value Portfolio, Growth Portfolio, Global Strategic Income
Portfolio and Global Interactive/Telecomm ) and on March 26, 1997 for the
International Growth Portfolio, a monthly advisory fee equal to a Basic Fee plus
or minus an Incentive Fee. (As explained below, the fee might be reduced if
absolute performance is negative.) The monthly Basic Fee will equal one-twelfth
of the annual Basic Fee rate of 2.0% multiplied by average daily net assets over
the previous 12 months. The Incentive Fee rate ranges from -2.0% to +2.0% on an
annual basis, depending on a comparison of the Portfolio's performance
(reflecting a deduction of Portfolio expenses) and the performance of a selected
benchmark index over the past 12 months. The monthly Incentive Fee, like the
monthly Basic Fee, is calculated by multiplying one-twelfth of the Incentive Fee
rate on an annual basis by the average daily net assets over the previous 12
months. Accordingly, the Total Fee could range from 0.0% to an annual rate of
4.0%, depending on performance. Each Portfolio Manager has received 80% of the
fee, and PAI has received the remaining 20%. PAI
<PAGE>
was responsible for paying the fee of Tremont, which equals 32.5% of the fee
received by PAI. Effective at the close of business on February 11, 1998 the
management agreement between PAI and the Trust was terminated (see note 10).
No Incentive Fee will be paid if the Portfolio's performance equals the targeted
performance -- selected benchmark index plus 2.25 percentage points. The maximum
fee will be paid if performance is 5.25 percentage points higher than the target
(i.e., 7.5 percentage points higher than the selected benchmark index). No fee
will be paid if performance is 5.25 percentage points lower than the target
(i.e., more than 3 percentage points below the selected benchmark index). The
chart below further explains the Incentive Fee at various performance levels.
<TABLE>
<CAPTION>
PERCENTAGE POINT DIFFERENCE BETWEEN ACTUAL PERFORMANCE OF THE PORTFOLIO
(NET OF EXPENSES INCLUDING BASIC FEE AND INCENTIVE FEE) AND THE TOTAL
% CHANGE IN THE SELECTED BENCHMARK INDEX FOR THE PERIOD BASIC FEE (%) INCENTIVE FEE (%) ADVISORY FEE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
+7.5 or greater 2.0 2.0 4.0
+6.0 or greater, but less than +7.5 2.0 1.5 3.5
+4.5 or greater, but less than +6.0 2.0 1.0 3.0
+3.0 or greater, but less than +4.5 2.0 0.5 2.5
+1.5 or greater, but less than +3.0 2.0 0.0 2.0
0.0 or greater, but less than +1.5 2.0 -0.5 1.5
- -1.5 or greater, but less than 0.0 2.0 -1.0 1.0
- -3.0 or greater, but less than -1.5 2.0 -1.5 0.5
Less than -3.0 2.0 -2.0 0.0
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
MAXIMUM FEE IF PERFORMANCE IS NEGATIVE. Notwithstanding the above schedule, if
the absolute performance of a Portfolio (after payment of all expenses,
including the Basic Fee and any Incentive Fee) is negative, the monthly advisory
fee will be the lesser of the fee calculated pursuant to the above schedule or
the alternative monthly advisory fee described below, which under certain
circumstances results in the Portfolios paying either no advisory fee or a lower
monthly advisory fee than under the performance fee schedule above. If a
Portfolio's performance (after payment of all expenses including advisory fees)
is negative and does not exceed the selected benchmark by six percentage points
(on an annual basis), no monthly advisory fee will be paid. If the Portfolio's
performance (after payment of all expenses including advisory fees) is negative
and does not exceed the selected benchmark by twelve percentage points but does
exceed the selected benchmark by six percentage points (on an annual basis), the
alternate monthly advisory fee will be based on an annual rate of 1.0% of
average daily net assets over the previous 12 months. If, on the other hand, the
performance of a Portfolio (after payment of all expenses including advisory
fees) is negative but exceeds the selected benchmark by twelve percentage points
or more (on an annual basis), the alternative monthly advisory fee will be based
on an annual rate of 2.0% of average daily net assets over the previous 12
months.
5. PORTFOLIO MANAGER INVESTMENT
Each Portfolio Manager has contractually agreed that it or an affiliate (either
directly or through a qualified plan) will invest a minimum total of $1 million
in the Portfolio or Portfolios it manages. The Portfolio Manager for the Global
Strategic Income Portfolio made the investment shortly after the Portfolio
commenced operations. The Portfolio Managers for the International Growth
Portfolio (Bee & Associates Incorporated) and the Growth Portfolio (Stonehill
Capital Management, Inc.) have each agreed that it or its principals will make
the investment (directly or through qualified plans) when that Portfolio reaches
$10 million in total assets. Since GAMCO Investors, Inc. manages both the Value
Portfolio and the Global Interactive/Telecomm Portfolio, it agreed to invest
$500,000 in each Portfolio. GAMCO Investors, Inc. made those investments
shortly after the Portfolios
<PAGE>
commenced operations. Although a Portfolio Manager is permitted by law to sell
its shares at any time, each Portfolio Manager currently intends to maintain
that investment as long as it manages the Portfolio.
Subsequent to year-end the Portfolio Manager of the Global Strategic Income
Portfolio withdrew their investment. See note 9 for further information.
6. PURCHASES AND SALES OF SECURITIES. The aggregate cost of purchases and
proceeds from sales of securities, excluding U.S. Government and short-term
investments, were as follows for the periods ended:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
Portfolio Purchases Sales
--------- --------- -----
<S> <C> <C>
Value $7,425,131 $3,913,037
Growth 7,952,647 3,760,971
International Growth 3,417,583 147,526
Global Strategic Income 10,884,962 9,451,882
Global Telecomm / Interactive 2,420,919 1,127,581
<CAPTION>
DECEMBER 31, 1996
Portfolio Purchases Sales
--------- --------- -----
<S> <C> <C>
Value $1,108,875 $506,966
Growth 945,895 834,937
International Growth 104,657 54,690
Global Strategic Income 2,038,929 1,668,243
Global Telecomm / Interactive 758,380 360,983
</TABLE>
The aggregate cost of purchases and proceeds from sales of long-term U.S.
Government Securities, excluding short-term investments, were as follows for the
periods ended:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
Portfolio Purchases Sales
--------- --------- -----
<S> <C> <C>
Global Strategic Income $4,348,221 $3,832,734
<CAPTION>
DECEMBER 31, 1996
Portfolio Purchases Sales
--------- --------- -----
<S> <C> <C>
Global Strategic Income $451,688 -----
</TABLE>
<PAGE>
The aggregate gross unrealized appreciated, aggregate gross unrealized
depreciated, net unrealized appreciated (depreciated), and cost of all
securities as computed on Federal income tax basis, each portfolio for the
periods as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
Portfolio Appreciation (Depreciation)
--------- ------------ --------------
<S> <C> <C>
Value $676,695 ($129,814)
Growth 483,840 (215,813)
International Growth 168,211 (445,362)
Global Strategic Income 33,218 (11,259)
Global Telecomm/Interactive 418,760 (20,707)
</TABLE>
7. SHARES OF BENEFICIAL INTEREST. Each Portfolio of the Trust may issue an
unlimited number of shares of beneficial interest without par value.
<TABLE>
<CAPTION>
VALUE PORTFOLIO SHARES AMOUNT
- --------------------------------------------------------------------------------
<S> <C> <C>
For the period ended: December 31, 1997
Sold........................................... 432,360 $5,547,192
Issued as reinvestment of dividends ........... 30,421 410,683
Redeemed....................................... (57,726) (783,685)
-------- ---------
Net Increase................................... 405,055 $5,174,190
------- ----------
------- ----------
For the period ended: December 31, 1996
Sold.......................................... 77,424 $783,945
Issued as reinvestment of dividends........... 4,552 49,532
Redeemed...................................... (215) (2,310)
----- -------
Net Increase.................................. 81,761 $831,167
------ --------
------ --------
<CAPTION>
GROWTH PORTFOLIO SHARES AMOUNT
- --------------------------------------------------------------------------------
<S> <C> <C>
For the period ended: December 31, 1997
Sold.......................................... 391,597 $4,843,510
Issued as reinvestment of dividends........... 0 0
Redeemed...................................... (31,707) (418,247)
-------- ---------
Net Increase.................................. 359,890 $4,425,263
------- ----------
------- ----------
For the period ended: December 31, 1996
Sold.......................................... 15,062 $140,698
Issued as reinvestment of dividends........... 0 0
Redeemed...................................... (2,372) (24,370)
------- --------
Net Increase.................................. 12,690 $116,328
------ --------
------ --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INTERNATIONAL GROWTH PORTFOLIO SHARES AMOUNT
- --------------------------------------------------------------------------------
<S> <C> <C>
For the period ended: December 31, 1997
Sold........................................... 347,778 $3,686,977
Issued as reinvestment of dividends............ 2,452 23,812
Redeemed....................................... (29,718) (318,355)
-------- ---------
Net Increase................................... 320,512 $3,392,434
------- ----------
------- ----------
For the period ended: December 31, 1996
Sold........................................... 9,266 $83,446
Issued as reinvestment of dividends............ 164 1,702
Redeemed....................................... (999) (7,748)
----- -------
Net Increase .................................. 8,431 $77,400
----- -------
----- -------
<CAPTION>
GLOBAL STRATEGIC INCOME PORTFOLIO SHARES AMOUNT
- --------------------------------------------------------------------------------
<S> <C> <C>
For the period ended: December 31, 1997
Sold........................................... 181,202 $1,722,206
Issued as reinvestment of dividends ........... 4,292 42,408
Redeemed....................................... (23,111) (229,024)
-------- ---------
Net Increase................................... 162,383 $1,585,590
------- ----------
------- ----------
For the period ended: December 31, 1996
Sold........................................... 140,820 $1,387,995
Issued as reinvestment of dividends............ 711 7,098
Redeemed....................................... (35,612) (333,700)
-------- ---------
Net Increase................................... 105,919 $1,061,393
------- ----------
------- ----------
<CAPTION>
GLOBAL INTERACTIVE/TELECOMM PORTFOLIO SHARES AMOUNT
- --------------------------------------------------------------------------------
<S> <C> <C>
For the period ended: December 31, 1997
Sold........................................... 174,816 $2,115,492
Issued as reinvestment of dividends............ 11,406 151,815
Redeemed..................................... (19,211) (240,205)
-------- ---------
Net Increase................................... 167,011 $2,027,102
------- ----------
------- ----------
For the period ended: December 31, 1996
Sold........................................... 58,734 $586,289
Issued as reinvestment of dividends............ 288 2,886
Redeemed....................................... (608) (5,723)
----- -------
Net Increase................................... 58,414 $583,452
------ --------
------ --------
</TABLE>
<PAGE>
8. CAPITAL LOSS CARRY FORWARD.
At December 31, 1997, the Portfolios had capital loss carry forwards.
<TABLE>
<CAPTION>
Portfolio Amount Expiration
--------- ------ ----------
<S> <C> <C>
Growth $4,913 2004
75,969 2005
International Growth $5,735 2005
</TABLE>
9. CAPITAL INFUSION.
On September 24, 1996 PAI agreed to voluntarily contribute capital to each of
Portfolios as follows:
<TABLE>
<CAPTION>
Portfolio Amount
--------- ------
<S> <C>
Value $51,906
Growth 49,231
International Growth 34,947
Global Strategic Income 52,077
Global Interactive / Telecomm 40,662
------
$228,823
</TABLE>
The amounts were contributed to offset expenses accrued to the Portfolios in
excess of the expense limitations set forth above from the period from the
inception of the Portfolios to September 10, 1996. PAI received no shares of
beneficial interest or other consideration in exchange for these contributions.
These capital contributions resulted in an increase to paid capital for each
Portfolio. PAI made the contribution on January 31, 1997.
10. SUBSEQUENT EVENTS
EXPENSE LIMITATIONS. Under terms approved by the Board of Trustees of the
Portfolios, PAI agreed to limit operating expenses and reimburse those expenses
to the extent that each Portfolio's "other expenses" (i.e. expenses other than
management fees) from September 11, 1996 through December 31, 1997 exceed the
following expense limitations (expressed as an annualized percentage of average
daily net assets): Value Portfolio, 0.70%; Growth Portfolio, 0.70%;
International Growth Portfolio, 1.20%; Global Strategic Income Portfolio, 1.20%;
Global Interactive/Telecomm Portfolio, 1.20%. Thereafter through December 31,
1999, the Portfolios were required to reimburse PAI for these expenses,
provided that average net assets had grown or expenses had declined sufficiently
to allow reimbursement without causing the portfolios' ratio of non-management
fee expenses to average net assets to exceed the specified rates above. The
fees waived and expense subject to reimbursement by PAI for each Portfolio were
as follows:
<PAGE>
<TABLE>
<CAPTION>
Expense
Expense Expense Reimbursement
Reimbursement Reimbursement since
for the period ended for the year ended Commencement
Portfolio December 31, 1996 December 31, 1997 of Operations
- --------- ----------------- ----------------- -------------
<S> <C> <C> <C>
Value 40,166 123,916 $164,082
Growth 26,018 108,474 134,492
International Growth 23,053 84,536 107,589
Global Strategic Income 46,749 95,354 142,103
Global Interactive/
Telecomm 33,568 81,113 114,681
<CAPTION>
Waived Advisor fees
or cash payment made
by the Advisor for Due From
the year ended Advisor at
Portfolio December 31, 1997 December 31, 1997
- --------- ----------------- -----------------
<S> <C> <C>
Value 17,572 146,510
Growth 10,961 123,531
International Growth 10,721 96,868
Global Strategic Income 20,343 121,760
Global Interactive/
Telecomm 15,354 99,327
</TABLE>
Through December 31, 1997, PAI had waived its fees or made cash payments to
reimburse expenses for the amounts due to the Portfolios as follows: Value
Portfolio, $17,572; Growth Portfolio, $10,961; International Growth Portfolio,
$10,721; Global Strategic Income Portfolio, $20,343; Global/Telecomm Portfolio,
$15,354. No other payments were made by PAI to the Portfolios.
At the request of the Board of Trustees, PAI had committed to pay all amounts
due under the expense reimbursement arrangement on or about December 31, 1997.
In January 1998, however, PAI advised the Board of Trustees that it did not have
sufficient assets to make the required payment. Accordingly, the Board of
Trustees and PAI pursued and considered other options under which the payment
could be made. The Board of Trustees determined that it was in the best
interests of shareholders to accept an offer from a group (the "Payment Group")
willing to immediately pay to the Trust the full amount due under the expense
limitation. The Payment Group includes Allmerica Financial Life Insurance and
Annuity Company ("Allmerica Financial"), the issuer of a variable annuity
contract utilizing the Portfolios as investment options, certain principals of
PAI and entities selling the variable contracts.
On January 28, 1998, the Payment Group paid the Portfolios the following amounts
due under the expense limitation arrangement: Value Portfolio, $128,362; Growth
Portfolio, $114,448; International Growth Portfolio, $89,895; Global Strategic
Income Portfolio, $103,436; Global Interactive/Telecomm Portfolio, $88,983. The
remaining amounts due to the portfolios will paid in March 1998 by Allmerica
Financial. Accordingly, the Trust will be fully reimbursed for amounts owed
under the expense limitation arrangement.
Through December 31, 1999, each Portfolio must reimburse the Payment Group for
the payment described above, any fees provided that such reimbursement does not
cause the Portfolio's "other expense" ratio to exceed the
<PAGE>
previous expense limitation for that Portfolio under the Manager's expense
limitation arrangement. (Those limitations are listed above). This
reimbursement obligation is the same as the reimbursement obligation that was in
place for PAI. After December 31, 1999, the Portfolios' reimbursement liability
to the Payment Group will cease.
MANAGEMENT CHANGES. In light of the inability of PAI to pay the Trust certain
amounts due under the expense reimbursement arrangement described above, the
Board of Trustees and PAI agreed to a termination of PAI's Management Agreement
with the Trust, effective at the close of business on February 11, 1998.
Effective February 12, 1998, Allmerica Investment Management Company, Inc.
("AIMCO"), assumed the function of Manager for the Trust.
AIMCO is registered with the Securities and Exchange Commission as an investment
adviser. AIMCO is an indirect, wholly-owned subsidiary of Allmerica Financial
Corporation ("AFC"). AFC is the parent company of the two life insurance
companies currently utilizing the Trust as an underlying fund for its variable
contracts, Allmerica Financial and First Allmerica Financial Life Insurance
Company.
As Manager, AIMCO serves as overall investment adviser to the Trust. AIMCO
is currently responsible for general administration of the Trust as well as
monitoring and evaluating the performance of the Portfolio Managers.
Advisory fees remain the same as described in Note 4.
AIMCO's advisory agreement will remain in effect past June 11, 1998, only if
approved by shareholders. The Board of Trustees, Allmerica Financial, AIMCO and
the other members of the Payment Group are considering whether additional
management changes should be made in the long-term. The Board of Trustees
expects that, near term, it will determine whether to seek shareholder
approval of the current AIMCO agreement, or another advisory agreement with
AIMCO or another adviser, or whether it will propose other approaches.
PORTFOLIO ADVISOR. Effective February 12, 1998, Tremont Partners, Inc.
("Tremont" or the "Portfolio Advisor"), no longer serves as Portfolio Advisor to
the Trust. Tremont was previously paid by PAI (not the Trust). Thus, overall
advisory fees have not changed.
PORTFOLIO MANAGER. Fischer Francis Trees & Watts, Inc. ("Fischer Francis") has
submitted its resignation as Portfolio Manager of the Global Strategic Income
Portfolio. It is expected that the resignation will be effective on or about
April 4, 1998. Fischer Francis has withdrawn its $1 million investment in the
Portfolio. The Trust and AIMCO are considering seeking a new Portfolio Manager
or winding down the operations of this Portfolio through a merger, substitutions
or other approach. If at any time there is no Portfolio Manager in place for
any Portfolio, under the current advisory agreement, the Manager or an
affiliate would be responsible for managing that Portfolio.
EXPENSE LIMITATIONS FOR 1998 EXPENSES. Allmerica Financial has agreed to limit
operating expenses and reimburse those expenses to the extent that each
Portfolio's 1998 "other expenses" (i.e., expenses other than management fees)
exceed the following expense limitation (expressed as an annualized percentage
of average daily net assets): Value Portfolio, 1.00%; Growth Portfolio, 1.00%;
International Growth Portfolio, 1.20%, Global Strategic Income Portfolio, 1.20%;
Global Interactive/Telecomm Portfolio, 1.20%. For the three global or
international Portfolios, the expense limitation for 1998 is the same percentage
(1.20%) as the 1997 limitation. For the Value and Growth Portfolios, the 1998
limitation is 1.00% rather than the 0.70% 1997 limitation. Allmerica Financial
has agreed to pay any amount due for a calendar month not later than the 15th
day of the following calendar month (with any final adjustment to be made not
later than January 15, 1999). Allmerica Financial, if
<PAGE>
agreed to by the Board, may continue this voluntary expense limitation past
December 31, 1998. This expense limitation was implemented effective February
13, 1998. In addition, on February 24, 1998, Allmerica Financial voluntarily
contributed to the Portfolios the following amounts as capital: Value Portfolio,
$8,469; Growth Portfolio, $10,350; International Growth Portfolio, $7,723;
Global Strategic Income Portfolio, $7,936; Global Interactive/Telecomm
Portfolio, $6,618. These amounts were contributed to offset expenses accrued to
the Portfolios in excess of the expense limitations during the period January 1,
1998 through February 12, 1998. Allmerica Financial received no shares of
beneficial interest or other consideration in exchange for these contributions.
These capital contributions resulted in an increase in paid in capital for each
Portfolio.
For the two years following the date that the Allmerica Financial expenses
limitation ends, each Portfolio will reimburse Allmerica Financial for any
Portfolio expenses it reimbursed pursuant to the expense limitation provided
that such reimbursement to Allmerica Financial does not cause the Portfolio's
"other expense" ratio to exceed the limitation for that Portfolio set forth
above. This reimbursement for the 1998 expenses will not commence until the
Payment Group has been fully reimbursed for the 1996 and 1997 expenses, as
discussed above. After the two year period after the Allmerica Financial
expense limitation ends, the Portfolios' obligation to reimburse Allmerica
Financial will cease.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees of
The Palladian Trust:
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of the Value Portfolio, Growth Portfolio,
International Growth Portfolio, Global Strategic Income Portfolio and Global
Interactive/Telecomm Portfolio (five portfolios of the Palladian Trust and
collectively the "Portfolios"), as of December 31, 1997, and the related
statements of operations, statements of changes in net assets and financial
highlights for the periods indicated therein. These financial statements and
financial highlights are the responsibility of the Portfolios' management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 1997, by correspondence with
the custodian and brokers. An audit includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial positions of the Portfolios as of December
31, 1997, the results of their operations, their changes in net assets and their
financial highlights for each of the periods indicated therein, in conformity
with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
March 16, 1998
