<PAGE>
As filed with the SEC on July 2, 1998
Reg. No. 33-73882
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / /
Pre-Effective Amendment No. / /
Post-Effective Amendment No. 7 /x/
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 / /
Amendment No. 10 /x/
(Check appropriate box or boxes)
------------------
THE PALLADIAN TRUST
(Exact name of registrant as specified in charter)
440 Lincoln Street
Worcester, MA 01653
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (800) 917-1909
George Boyd
440 Lincoln Street
Worcester, MA 01653
(Name and Address of Agent for Service of Process)
copies to:
Christopher E. Palmer
Shea & Gardner
1800 Massachusetts Avenue, NW
Washington, DC 20036
-----------------------
<PAGE>
Approximate Date of Public Offering: Continuous.
It is proposed that this filing will become effective (check appropriate box)
/ / immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/x/ on September 1, 1998 pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / on (date) pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
/ / this post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
Title of Securities Being Registered: Portfolio shares
<PAGE>
CROSS REFERENCE SHEET
FOR PROSPECTUS AND SAI
(as required by Rule 495)
<TABLE>
<CAPTION>
Form N-1A Item No. Caption in Part A Prospectus
------------------ ----------------------------
<S> <C> <C>
Item 1. Cover Page Cover Page
Item 2. Synopsis Summary of Expenses
Item 3. Condensed Financial Performance Information
Item 4. General Description of General Information; Investment
Registrant Objectives and Policies;
Description of Securities and
Investment Techniques
Item 5. Management of the Fund Management of the Trust
Item 6. Capital Stock and Other Dividends, Distributions,
Securities and Taxes; Other Information
Item 7. Purchase of Securities Being Investment in the Trust
Offered
Item 8. Redemption of Repurchase Investment in the Trust
Item 9. Pending Legal Proceedings Not Applicable
<PAGE>
<CAPTION>
Caption in Part B Statement
Form N-1A Item No. of Additional Information
------------------ ----------------------------
<S> <C> <C>
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information Not Applicable
and History
Item 13. Investment Objectives Description of Securities and
and Policies Investment Techniques;
Investment Restrictions;
Appendix
Item 14. Management of the Fund Management of the Trust
Item 15. Control Person and Principal Management of the Trust
Holders of Securities
Item 16. Investment Advisory and Management of the Trust
Other Services
Item 17. Brokerage Allocation and Portfolio Transactions
Other Practices and Brokerage
Item 18. Capital Stock and Other Capitalization
Securities
Item 19. Purchase, Redemption and Not Applicable
Pricing of Securities Being
Offered
Item 20. Tax Status Taxation
Item 21. Underwriters Not Applicable
Item 22. Calculations of Performance Performance Information
Data
Item 23. Financial Statements Financial Statements
</TABLE>
<PAGE>
Part C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to this Registration Statement.
<PAGE>
PROSPECTUS
FOR
THE VALUE PORTFOLIO
THE GROWTH PORTFOLIO
THE INTERNATIONAL GROWTH PORTFOLIO
THE STRATEGIC INCOME PORTFOLIO, AND
THE GLOBAL INTERACTIVE/TELECOMM PORTFOLIO
OF
THE FULCRUM TRUST
440 LINCOLN STREET
WORCESTER, MASSACHUSETTS 01653
(800) 917-1909
September 1, 1998
This prospectus offers shares of five portfolios (each individually a
"Portfolio" or collectively the "Portfolios") of The Fulcrum Trust (the
"Trust"), which is an open-end, management investment company. Each Portfolio
has its own investment objective or objectives and investment policies. Shares
of the Portfolios may be sold only to: (1) life insurance company separate
accounts (the "Separate Accounts") to serve as the underlying investment medium
for variable annuity and variable life insurance contracts; (2) qualified
retirement plans, as permitted by Treasury Regulations; and (3) life insurance
companies and advisers to the Portfolios and their affiliates. Shares will not
be offered directly to the public.
Allmerica Financial Investment Management Services, Inc. ("AFIMS") serves as
overall manager of the Portfolios. AFIMS manages the operations of the Trust and
monitors the investment advisers that provide day-to-day management of the
Portfolios (the "Portfolio Managers").
The five Portfolios and their respective Portfolio Managers are as follows:
<TABLE>
<CAPTION>
PORTFOLIO PORTFOLIO MANAGER
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
The Value Portfolio GAMCO Investors, Inc.
The Growth Portfolio Pilgrim Baxter Analytic Investors, Inc.
The International Growth Portfolio Bee & Associates Incorporated
The Strategic Income Portfolio Allmerica Asset Management, Inc.
The Global Interactive/Telecomm Portfolio GAMCO Investors, Inc.
</TABLE>
Information about the investment objectives and policies of each Portfolio,
along with a detailed description of the types of securities and other assets in
which each Portfolio may invest, are set forth in this prospectus. There can be
no assurance that the investment objective for any Portfolio will be achieved.
The Strategic Income Portfolio (formerly known as the Global Strategic
Income Portfolio) may invest up to 50% of its assets in bonds rated below
investment grade (commonly referred to as "junk bonds" or "high yield/high risk
bonds"). High yield/high risk bonds involve significant risks. See page 21.
This prospectus sets forth concisely the information a prospective purchaser
of a variable contract or a participant in a qualified retirement plan should
know before directing that contributions or amounts credited to him or her be
invested in the Portfolios. A Statement of Additional Information (the "SAI")
dated September 1, 1998 containing additional and more detailed information
about the Portfolios has been filed with the Securities and Exchange Commission
and is hereby incorporated by reference into this prospectus. It is available
without charge and can be obtained by writing or calling the Trust at the
address and telephone number printed above.
------------------------
PROSPECTIVE PURCHASERS OF A VARIABLE CONTRACT SHOULD READ THIS PROSPECTUS IN
CONJUNCTION WITH THE PROSPECTUS FOR THE SEPARATE ACCOUNT. BOTH PROSPECTUSES
SHOULD BE READ CAREFULLY AND RETAINED FOR FUTURE REFERENCE.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
SUMMARY OF EXPENSES....................................................................................... 4
FINANCIAL HIGHLIGHTS...................................................................................... 8
GENERAL INFORMATION....................................................................................... 10
The Fulcrum Trust..................................................................................... 10
The Manager and Portfolio Managers.................................................................... 10
Investment Objectives................................................................................. 10
MANAGEMENT OF THE TRUST................................................................................... 11
Manager............................................................................................... 11
Portfolio Managers.................................................................................... 11
Management and Portfolio Management Investment Advisory Fees.......................................... 13
Expense Limitations................................................................................... 15
Custodian and Transfer Agent.......................................................................... 16
INVESTMENT OBJECTIVES AND POLICIES........................................................................ 16
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES....................................................... 20
U.S. Government Securities............................................................................ 20
Debt Securities....................................................................................... 21
Mortgage-Backed Securities............................................................................ 21
Other Asset-Backed Securities......................................................................... 22
Variable and Floating Rate Securities................................................................. 22
Banking Industry and Savings Industry Obligations..................................................... 22
Commercial Paper...................................................................................... 23
Repurchase Agreements................................................................................. 23
Reverse Repurchase Agreements......................................................................... 23
Lending Portfolio Securities.......................................................................... 23
Illiquid Securities................................................................................... 24
Warrants.............................................................................................. 24
Other Investment Companies............................................................................ 24
Short Sales........................................................................................... 24
Short Sales Against the Box........................................................................... 25
Foreign Securities.................................................................................... 25
Investment in Gold and Other Precious Metals.......................................................... 27
Futures Contracts..................................................................................... 27
Options............................................................................................... 28
Foreign Currency Transactions......................................................................... 30
Leverage.............................................................................................. 30
Indexed Securities.................................................................................... 30
INVESTMENT IN THE TRUST................................................................................... 30
Determination of Net Asset Value...................................................................... 30
Purchase of Shares.................................................................................... 31
Redemption of Shares.................................................................................. 32
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
DIVIDENDS, DISTRIBUTIONS, AND TAXES....................................................................... 32
OTHER INFORMATION......................................................................................... 33
Capitalization........................................................................................ 33
Voting Rights......................................................................................... 33
Portfolio Brokerage................................................................................... 34
Year 2000............................................................................................. 34
Performance Information............................................................................... 34
APPENDIX A................................................................................................ 36
APPENDIX B................................................................................................ 37
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFERING CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS BEING AUTHORIZED BY
THE TRUST. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY THE TRUST TO SELL
SHARES IN ANY STATE TO ANY PERSON TO WHOM IT IS UNLAWFUL FOR THE TRUST TO MAKE
SUCH AN OFFER IN SUCH STATE.
3
<PAGE>
SUMMARY OF EXPENSES
The following tables show the expenses that will be incurred by each
Portfolio, expressed as a percentage of average net assets during the year. If
you have been given this prospectus because you are considering the purchase of
a variable contract, you should refer to the variable contract prospectus for
more information about expenses under the variable contract, which are in
addition to expenses of the Portfolios.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTIONS EXPENSES (FOR EACH PORTFOLIO)
- ------------------------------------------------------------
<S> <C>
Sales Load on Purchases................................. None
Sales Load on Reinvested Dividends...................... None
Deferred Sales Load Imposed on Redemption............... None
Exchange Fees........................................... None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
</TABLE>
For the first 12 full calendar months after a new Portfolio Manager is hired
(or, in the case of a Portfolio that has had only one Portfolio Manager, for the
first 12 full calendar months of operations), the advisory agreements set the
management fee at an annual rate of 0.80% of the Portfolio's average daily net
assets. As of the date of this prospectus, this initial fee is relevant for only
two of the Portfolios--the Strategic Income Portfolio and the Growth Portfolio.
The Strategic Income Portfolio has a new Portfolio Manager effective April 13,
1998 and the Growth Portfolio has a new Portfolio Manager effective August 1,
1998. Thus, the initial fee is applicable through April 30, 1999 for the
Strategic Income Portfolio and through July 31, 1999 for the Growth Portfolio.
Those fees are subject to additional limitations set forth in notes (1) and (2)
to the charts below.
After the initial 12-month period described above, each Portfolio has a
performance-based advisory fee. As of the date of this prospectus, this fee is
in effect for all Portfolios other than the Strategic Income Portfolio and the
Growth Portfolio. The base fee is 2.00%, but the total fee may vary from between
0.00% to 4.00%, depending on the Portfolio's performance. The base fee of 2.00%
would be paid if Portfolio performance (net of all fees and expenses, including
the advisory fee) is between 1.5 and 3.0 percentage points better than the
benchmark index. A fee of 4.00% would be paid only if Portfolio performance (net
of all fees and expenses, including the advisory fee) was at least 7.5
percentage points better than the benchmark index. No fee will apply if the
Portfolio's performance is more than 3.0 percentage points lower than the
benchmark index. See "Management and Portfolio Management Investment Advisory
Fees," pages 13-15.
We show below expense information first using the fees that actually applied
during 1997, with the caveat that the fee for the Strategic Income Portfolio has
been restated to 0.40% to reflect the current fee arrangement described in note
(1) to the charts below.
We also show below expense information assuming fees of 0.00%, 2.00% and
4.00%, because the fee in 1998 and future years may vary. You should note,
however, that the fee could be any figure between 0.00% and 4.00%, not just the
specific figures shown below.
For each of the fee levels shown, we have included an example prepared in
accordance with the requirements of the Securities and Exchange Commission. The
purpose of the examples is to assist investors in understanding the various
costs and expenses that an investor in the Portfolios will bear directly or
indirectly. They show the total expenses that would be payable if you redeemed
your shares after having held them for one and three year periods respectively.
Each example assumes a 5% annual rate of return pursuant to requirements of the
Securities and Exchange Commission. This hypothetical rate
4
<PAGE>
of return is not intended to be representative of past or future performance.
The amounts shown are based upon estimates. Actual expenses may be greater than
or less than those shown.
1. USING 1997 MANAGEMENT FEES(1)
<TABLE>
<CAPTION>
OTHER EXPENSES
(AFTER ANY
APPLICABLE TOTAL OPERATING
FUND MANAGEMENT FEES REIMBURSEMENT) EXPENSES
- --------------------------------------------------------- ---------------- ------------------ -----------------
<S> <C> <C> <C>
Value Portfolio........................................ 0.14%(2) 1.00%(3) 1.14%
Growth Portfolio....................................... 0.20%(2) 1.00%(3) 1.20%
International Growth Portfolio......................... 0.58%(2) 1.20%(3) 1.78%
Strategic Income Portfolio............................. 0.40%(1) 1.20%(3) 1.60%
Global Interactive/Telecomm Portfolio.................. 0.27%(2) 1.20%(3) 1.47%
</TABLE>
EXAMPLE. A shareholder would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return, (2) the advisory fees in the
above chart, and (3) redemption at the end of each time period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
----------- -----------
<S> <C> <C>
Value Portfolio........................................................................ $ 11 $ 36
Growth Portfolio....................................................................... $ 12 $ 37
International Growth Portfolio......................................................... $ 18 $ 55
Strategic Income Portfolio............................................................. $ 16 $ 50
Global Interactive/Telecomm Portfolio.................................................. $ 15 $ 46
</TABLE>
2. ASSUMING MANAGEMENT FEE OF 0%
An advisory fee of 0% would be paid if the Portfolio's performance (net of
all fees and expenses) was more than 3.0 percentage points lower than the
benchmark index.
<TABLE>
<CAPTION>
OTHER EXPENSES
(AFTER ANY
APPLICABLE TOTAL OPERATING
FUND MANAGEMENT FEES REIMBURSEMENT) EXPENSES
- --------------------------------------------------------- ---------------- ------------------ -----------------
<S> <C> <C> <C>
Value Portfolio........................................ 0%(2) 1.00%(3) 1.00%
Growth Portfolio....................................... 0%(2) 1.00%(3) 1.00%
International Growth Portfolio......................... 0%(2) 1.20%(3) 1.20%
Strategic Income Portfolio............................. 0%(2) 1.20%(3) 1.20%
Global Interactive/Telecomm Portfolio.................. 0%(2) 1.20%(3) 1.20%
</TABLE>
EXAMPLE. A shareholder would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return, (2) an advisory fee of 0%, and
(3) redemption at the end of each time period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
----------- -----------
<S> <C> <C>
Value Portfolio........................................................................ $ 10 $ 31
Growth Portfolio....................................................................... $ 10 $ 31
International Growth Portfolio......................................................... $ 12 $ 37
Strategic Income Portfolio............................................................. $ 12 $ 37
Global Interactive/Telecomm Portfolio.................................................. $ 12 $ 37
</TABLE>
5
<PAGE>
3. ASSUMING MANAGEMENT FEE OF 2.00%
An advisory fee of 2.00% would be paid if the Portfolio's performance (net
of all fees and expenses, including the 2.00% advisory fee) was between 1.5 and
3.0 percentage points better than the benchmark index.
<TABLE>
<CAPTION>
OTHER EXPENSES
(AFTER ANY
APPLICABLE TOTAL OPERATING
FUND MANAGEMENT FEES REIMBURSEMENT) EXPENSES
- --------------------------------------------------------- ---------------- ------------------ -----------------
<S> <C> <C> <C>
Value Portfolio........................................ 2.00%(2) 1.00%(3) 3.00%
Growth Portfolio....................................... 2.00%(2) 1.00%(3) 3.00%
International Growth Portfolio......................... 2.00%(2) 1.20%(3) 3.20%
Strategic Income Portfolio............................. 2.00%(2) 1.20%(3) 3.20%
Global Interactive/Telecomm Portfolio.................. 2.00%(2) 1.20%(3) 3.20%
</TABLE>
EXAMPLE. A shareholder would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return, (2) an advisory fee of 2%, and
(3) redemption at the end of each time period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
----------- -----------
<S> <C> <C>
Value Portfolio........................................................................ $ 30 $ 92
Growth Portfolio....................................................................... $ 30 $ 92
International Growth Portfolio......................................................... $ 32 $ 98
Strategic Income Portfolio............................................................. $ 32 $ 98
Global Interactive/Telecomm Portfolio.................................................. $ 32 $ 98
</TABLE>
4. ASSUMING MANAGEMENT FEE OF 4.00%
An advisory fee of 4.00% would be paid if the Portfolio's performance (net
of all fees and expenses, including the 4.00% advisory fee) was at least 7.5
percentage points better than the benchmark index.
<TABLE>
<CAPTION>
OTHER EXPENSES
(AFTER ANY
APPLICABLE TOTAL OPERATING
FUND MANAGEMENT FEES REIMBURSEMENT) EXPENSES
- --------------------------------------------------------- ---------------- ------------------ -----------------
<S> <C> <C> <C>
Value Portfolio........................................ 4.00%(2) 1.00%(3) 5.00%
Growth Portfolio....................................... 4.00%(2) 1.00%(3) 5.00%
International Growth Portfolio......................... 4.00%(2) 1.20%(3) 5.20%
Strategic Income Portfolio............................. 4.00%(2) 1.20%(3) 5.20%
Global Interactive/Telecomm Portfolio.................. 4.00%(2) 1.20%(3) 5.20%
</TABLE>
EXAMPLE. A shareholder would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return, (2) an advisory fee of 4%, and
(3) redemption at the end of each time period. In order to have both a 5%
annual return and an advisory fee of 4%, the Portfolio's performance would
have to be 9% before deduction of the 4% fee (resulting in performance of
5%) and the benchmark index would have to DECREASE at least 2.5 percentage
points (meaning that the Portfolio's
6
<PAGE>
performance after fees and expenses was at least 7.5 percentage points
better than the benchmark index).
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
----------- -----------
<S> <C> <C>
Value Portfolio........................................................................ $ 50 $ 150
Growth Portfolio....................................................................... $ 50 $ 150
International Growth Portfolio......................................................... $ 52 $ 156
Strategic Income Portfolio............................................................. $ 52 $ 156
Global Interactive/Telecomm Portfolio.................................................. $ 52 $ 156
</TABLE>
- ------------------------
(1) The actual management fee for the Strategic Income Portfolio for 1997 was
0.41%. The fee listed in the first table has been restated to 0.40% because,
effective April 13, 1998, a new Portfolio Manager is in place. Although the
current Portfolio Manager Agreement sets the fee at 0.80% through April 30,
1999, the fee is subject to two important limitations. First, from April 13,
1998 through June 8, 1998, the fee was calculated at the lesser of the
following two rates: (1) 0.80%; and (2) the rate that would have applied
under the old advisory agreement. The latter rate varies based on prior
performance, but as noted above was 0.41% for 1997. Second, the Manager and
the Portfolio Manager have voluntarily agreed to limit their fee from June
9, 1998 through April 30, 1999 to annual rate of 0.40%. See "Management and
Portfolio Management Investment Advisory Fees," pages 13-15.
(2) See "Management and Portfolio Management Investment Advisory Fees," pages
13-15, for a complete description of the advisory fee. Effective August 1,
1998, a new Portfolio Manager is in place for the Growth Portfolio. The
Manager and the Portfolio Manager have voluntarily agreed to limit their fee
from August 1, 1998 through July 31, 1999 to the lesser of the following two
rates: (1) 0.80%, the rate specified in the Portfolio Manager Agreement; or
(2) the rate that would have applied under the prior Portfolio Manager
Agreement with the prior Portfolio Manager. The latter rate varies based on
prior performance.
(3) Restated to reflect the expense limitation in effect during 1998. Allmerica
Financial Life Insurance and Annuity Company 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 limitations (expressed as an annualized percentage of
average daily net assets): Value Portfolio, 1.00%; Growth Portfolio, 1.00%;
International Growth Portfolio, 1.20%; Strategic Income Portfolio, 1.20%;
Global Interactive/Telecomm Portfolio, 1.20%. There was a different expense
limitation in effect during 1997. See "Expense Limitations," pages 15-16.
Without that expense limitation, the 1997 "other expense" ratios would have
been the following: Value Portfolio, 4.04%; Growth Portfolio, 5.48%;
International Growth Portfolio, 6.10%; Strategic Income Portfolio, 5.31%;
Global Interactive/Telecomm Portfolio, 6.28%.
7
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights for the periods indicated have been audited by
Coopers & Lybrand L.L.P., independent accountants, whose report thereon appears
in the Trust's annual report and in the Statement of Additional Information. The
financial highlights should be read in conjunction with the financial
statements. The annual report and Statement of Additional Information contain
additional information and are available upon request and without charge. The
information presented is for a share of beneficial interest outstanding through
the periods ended December 31, except as noted.
<TABLE>
<CAPTION>
VALUE PORTFOLIO GROWTH PORTFOLIO
------------------------------------- --------------------------------------
FOR THE YEAR FOR THE PERIOD FOR THE YEAR FOR THE PERIOD
ENDED ENDED ENDED 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 from 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
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
INTERNATIONAL GROWTH PORTFOLIO GLOBAL STRATEGIC INCOME PORTFOLIO****
-------------------------------------- --------------------------------------
FOR THE YEAR FOR THE PERIOD FOR THE YEAR FOR THE PERIOD
ENDED ENDED ENDED ENDED
DEC. 31, 1997 DEC. 31, 1996** DEC. 31, 1997 DEC. 31, 1996*
-------------------------------------- --------------------------------------
<S> <C> <C> <C> <C>
-------------------------------------- --------------------------------------
Net asset value, beginning of
period............................ $ 10.33 $ 10.00 $ 9.98 $ 10.00
-------------- ------- -------------- ---------------
INCOME/(LOSS) FROM INVESTMENT
OPERATIONS:
Net investment income/(loss)....... 0.10(1)(4) (4.16)(1)(2) 0.36(1),(4) (0.19)(1),(2)
Net realized and unrealized
gain/(loss) on investments........ (0.63) 4.67 (0.30) 0.23
-------------- ------- -------------- ---------------
Total from investment operations... (.53) 0.51 0.06 0.04
-------------- ------- -------------- ---------------
LESS DISTRIBUTIONS:
Net Investment Income.............. (0.05) -- (0.11) --
Net Realized Gain from Investment
Transactions...................... (0.03) -- (0.05) --
Distributions from capital......... -- (0.18) -- (0.06)
-------------- ------- -------------- ---------------
Total distributions................ (0.08) (0.18) (0.16) (0.06)
-------------- ------- -------------- ---------------
Net asset value, end of period..... $ 9.72 $ 10.33 $ 9.88 $ 9.98
-------------- ------- -------------- ---------------
-------------- ------- -------------- ---------------
Total Return....................... (5.25)(4) 5.13%(2)(3) 0.60%(4) 0.44%(2),(3)
-------------- ------- -------------- ---------------
-------------- ------- -------------- ---------------
RATIOS TO AVERAGE NET
ASSETS/SUPPLEMENTAL DATA:
Net assets, end of reporting
period............................ $ 3,207,002 $ 97,387 $ 2,699,938 $ 1,106,697
Ratio of operating expenses to
average net assets................ 1.78%(4) 67.76%(2) 1.61%(4) 7.37%(2),***
Ratio of net investment
income/(loss) to average net
assets............................ 0.97%(4) (56.37%)(2) 3.67%(4) (2.15%)(2),***
Portfolio turnover rate............ 13.02% 116.21% 713.04% 212.36%
Average commission per share....... $0.0110 $0.0101 n/a n/a
<CAPTION>
GLOBAL INTERACTIVE/TELECOMM PORTFOLIO
--------------------------------------
FOR THE YEAR FOR THE PERIOD
ENDED ENDED
DEC. 31, 1997 DEC. 31, 1996*
--------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of
period............................ $ 10.00 $ 10.00
-------------- ---------------
INCOME/(LOSS) FROM INVESTMENT
OPERATIONS:
Net investment income/(loss)....... 0.08(1),(4) (0.75)(1),(2)
Net realized and unrealized
gain/(loss) on investments........ 3.95 0.80
-------------- ---------------
Total from investment operations... 4.03 0.05
-------------- ---------------
LESS DISTRIBUTIONS:
Net Investment Income.............. (0.04) --
Net Realized Gain from Investment
Transactions...................... (0.67) --
Distributions from capital......... -- (0.05)
-------------- ---------------
Total distributions................ (0.71) (0.05)
-------------- ---------------
Net asset value, end of period..... $ 13.32 $ 10.00
-------------- ---------------
-------------- ---------------
Total Return....................... 40.24%(4) 0.49%(2),(3)
-------------- ---------------
-------------- ---------------
RATIOS TO AVERAGE NET
ASSETS/SUPPLEMENTAL DATA:
Net assets, end of reporting
period............................ $ 3,016,441 $ 594,315
Ratio of operating expenses to
average net assets................ 1.47%(4) 9.83%(2),***
Ratio of net investment
income/(loss) to average net
assets............................ 0.64%(4) (8.32%)(2),***
Portfolio turnover rate............ 114.11% 71.44%
Average commission per share....... $0.0509 $0.0659
</TABLE>
- ------------------------------
*Commencement of operations February 1, 1996
**Commencement of operations March 26, 1996
***Annualized
****Effective June 8, 1998, renamed Strategic Income Portfolio
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 to the financial statements).
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 to the financial statements
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 to the financial statements).
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.
9
<PAGE>
GENERAL INFORMATION
THE FULCRUM TRUST
This Prospectus offers shares of five Portfolios (the "Portfolios") of The
Fulcrum Trust (the "Trust"), each with its own investment objective and
investment policies. The Trust was established as a Massachusetts business trust
and is registered under the Investment Company Act of 1940 (the "1940 Act") as
an open-end management investment company. The Trust was formerly named The
Palladian Trust.
THE MANAGER AND PORTFOLIO MANAGERS
Allmerica Financial Investment Management Services, Inc. ("AFIMS") serves as
overall manager of the Portfolios. AFIMS manages the operations of the Trust and
monitors the investment advisers that provide day-to-day management of the
Portfolios (the "Portfolio Managers"). The five Portfolios and their respective
Portfolio Managers are as follows:
<TABLE>
<CAPTION>
PORTFOLIO PORTFOLIO MANAGER
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
The Value Portfolio................................... GAMCO Investors, Inc.
The Growth Portfolio.................................. Pilgrim Baxter Analytic Investors, Inc.
The International Growth Portfolio.................... Bee & Associates Incorporated
The Strategic Income Portfolio........................ Allmerica Asset Management, Inc.
The Global Interactive/Telecomm Portfolio............. GAMCO Investors, Inc.
</TABLE>
Each Portfolio Manager is paid on an incentive fee basis, which could result
in either higher than average advisory fees or possibly no advisory fee at all,
depending on how well each Portfolio Manager performs for you.
GAMCO Investors, Inc., the Portfolio Manager for the Value Portfolio and the
Global Interactive/ Telecomm Portfolio, has invested approximately $1 million in
the Portfolios it manages (approximately $500,000 in each Portfolio). The
Portfolio Manager for the International Growth Portfolio (Bee & Associates
Incorporated) has agreed that it or its principals will invest $1 million
(directly or through qualified plans) in its Portfolio when it reaches $10
million in total assets. Although a Portfolio Manager is permitted by law to
sell its shares at any time, each of these Portfolio Managers currently intend
to maintain that investment as long as it manages the Portfolio. Once a
Portfolio Manager makes that investment, and for as long as it maintains the
investment, the Portfolio Manager will be managing a portion of their own money
along with your money. The Portfolio Manager for the Growth Portfolio and the
Strategic Income Portfolio do not currently have investments in their
Portfolios.
There can be no assurance that any particular Portfolio investment objective
will be attained. The Board of Trustees may establish additional Portfolios at
any time and may discontinue offering a Portfolio at any time.
INVESTMENT OBJECTIVES
The Trust is currently offering shares of five separate Portfolios. Each
Portfolio has a different investment objective which it pursues through
different investment policies as described below. Since the Portfolios have
different investment objectives, each can be expected to have different
investment results and incur different market and financial risks. There can be
no assurance that any of these objectives will be met.
The investment objectives of the Portfolios are fundamental, which means
they may not be changed without shareholder approval as required by the 1940
Act.
10
<PAGE>
THE VALUE PORTFOLIO seeks to make money for investors by investing primarily
in companies that the Portfolio Manager believes are undervalued and that by
virtue of anticipated developments may, in the Portfolio Manager's judgment,
achieve significant capital appreciation.
THE GROWTH PORTFOLIO seeks to make money for investors by investing
primarily in securities selected for their long-term growth prospects.
THE INTERNATIONAL GROWTH PORTFOLIO seeks to make money for investors by
investing internationally for long-term capital appreciation, primarily in
equity securities.
THE STRATEGIC INCOME PORTFOLIO seeks to make money for investors by
investing for high current income and capital appreciation in a variety of
fixed-income securities.
THE GLOBAL INTERACTIVE/TELECOMM PORTFOLIO seeks to make money for investors
primarily by investing globally in equity securities of companies engaged in the
development, manufacture or sale of interactive and/or telecommunications
services and products.
MANAGEMENT OF THE TRUST
The business and affairs of the Trust are managed under the direction of the
Board of Trustees. Additional information about the trustees and officers of the
Trust may be found in the Statement of Additional Information under the heading
"Management of the Trust."
The Trust is responsible for the payment of certain fees and expenses
including, among others, the following: (1) fees of the Manager and the
Portfolio Managers; (2) custodial, accounting, auditing, legal and transfer
agency fees; (3) fees of independent trustees; (4) brokerage fees and
commissions in connection with the purchase and sale of Portfolio securities;
(5) taxes; (6) the reimbursement of organizational expenses; and (7) expenses of
printing and mailing prospectuses, proxy statements and shareholder
communications.
MANAGER
Allmerica Financial Investment Management Services, Inc. ("AFIMS" or the
"Manager") serves as overall Manager of the Trust. As Manager, AFIMS is
responsible for general administration of the Trust as well as monitoring and
evaluating the performance of the Portfolio Managers. AFIMS, a Massachusetts
corporation, is registered with the Securities and Exchange Commission as an
investment adviser. AFIMS is located at 440 Lincoln Street, Worcester,
Massachusetts 01653. AFIMS 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
their variable contracts, Allmerica Financial Life Insurance and Annuity Company
("Allmerica Financial") and First Allmerica Financial Life Insurance Company.
The advisory agreement under which AFIMS serves as Manager was approved by
shareholders at a meeting on June 8, 1998.
Prior to February 12, 1998, Palladian Advisors, Inc. ("PAI") served as
Manager of the Trust, and Tremont Partners, Inc. ("Tremont") served as Portfolio
Advisor to the Trust. AFIMS now serves as Manager of the Trust, and there is no
Portfolio Advisor. Tremont was previously paid by PAI (not the Trust). Thus,
overall advisory fees were not changed as a result of the switch from PAI and
Tremont to AFIMS.
PORTFOLIO MANAGERS
Each Portfolio Manager makes specific investments on behalf of a Portfolio
in accordance with the particular Portfolio's objective and the Portfolio
Manager's investment approach and strategies. The Portfolio Managers designated
for each Portfolio are listed and described below.
11
<PAGE>
Selection and retention criteria for Portfolio Managers include: (1) their
historical performance records relative to their respective markets and peer
groups; (2) consistent performance in the context of the markets and
preservation of capital in declining markets; (3) organizational stability and
reputation; (4) the quality and depth of investment personnel; (5) the ability
of the Portfolio Manager to apply its approach consistently; and (6) a
willingness to work on an incentive fee basis. Each Portfolio Manager will not
necessarily exhibit all of the criteria to the same degree. Short-term
investment performance, by itself, is not a significant factor in selecting or
terminating a Portfolio Manager. It should be noted, however, that there can be
no certainty that any Portfolio Manager will obtain superior results at any
given time.
The Portfolio Managers activities are subject to general oversight by the
Trustees and AFIMS. Although the Trustees and AFIMS do not evaluate the
investment merits of the Portfolio Managers' specific securities selections,
they do review the performance of each Portfolio Manager relative to the
selection criteria.
The Portfolio Managers for the Portfolios are as follows:
THE VALUE PORTFOLIO. GAMCO Investors, Inc. ("GAMCO"), One Corporate Center,
Rye, New York 10580-1434, acts as investment adviser for individuals, pension
trusts, profit-sharing trusts and endowments. GAMCO is a wholly-owned subsidiary
of Gabelli Funds, Inc. As of June 30, 1998, GAMCO managed assets of
approximately $7.3 billion. Mario J. Gabelli may be deemed a "controlling
person" of GAMCO on the basis of his ownership of stock of Gabelli Funds, Inc.
Mr. Gabelli is primarily responsible for the day-to-day investment management of
the Portfolio. Mr. Gabelli has been the Chief Investment Officer of GAMCO since
its organization in 1978.
THE GROWTH PORTFOLIO. Pilgrim Baxter Analytic Investors, Inc. ("Pilgrim
Baxter"), 700 South Flower Street, Suite 2400, Los Angeles, California 90017 is
an indirect wholly-owned subsidiary of United Asset Management Corporation, a
publicly traded company. It was formed in 1970 to provide management of
investment advisory accounts to individuals, banks/thrift institutions,
investment companies, pension and profit sharing plans, trusts, estates or
charitable organizations and other corporations. As of June 30, 1998, Pilgrim
Baxter managed assets totaling approximately $500 million. Harindra de Silva is
primarily responsible for the day-to-day investment of the Portfolio. He is a
Chartered Financial Analyst and serves as President of Pilgrim Baxter Analytic
Investors, Inc. From 1986 to 1988, he was a Principal of Analysis Group, Inc.,
where he was responsible for providing economic research services to
institutional investors including investment managers, large pension funds, and
endowments. This included the development of new investment products,
performance attribution, as well as enhancing the value added from current
strategies.
On June 17, 1998, the Portfolio Manager Agreement under which Pilgrim Baxter
serves as Portfolio Manager was approved by the Board of Trustees. Under the
rules of the SEC, shareholder approval of the agreement is required so that
Pilgrim Baxter may continue as Portfolio Manager past October 29, 1998. Contract
owners invested in the Portfolio as of July 17, 1998 will have an opportunity to
vote in person or by proxy on this agreement with Pilgrim Baxter at a meeting
scheduled for September 15, 1998. If shareholders approve the agreement, Pilgrim
Baxter will continue to serve as Portfolio Manager. If not, the Board will meet
to consider its options and a supplement to the prospectus will be provided.
THE INTERNATIONAL GROWTH PORTFOLIO. Bee & Associates Incorporated ("BAI"),
370 17th Street, Suite 3560, Denver, Colorado 80202, was formed in 1989 to
provide global equity management expertise to individuals, retirement plan
sponsors, foundations, endowments and other entities. As of June 30, 1998, BAI
managed assets of approximately $ million. Bruce B. Bee is primarily
responsible for the day-to-day investment management of the Portfolio. Since
BAI's organization in 1989, Mr. Bee has been the firm's controlling person and
principal portfolio manager.
THE STRATEGIC INCOME PORTFOLIO. Allmerica Asset Management, Inc. ("AAM"),
like AFIMS (the Trust's Manager), is an indirect, wholly-owned subsidiary of
Allmerica Financial Corporation ("AFC"), a
12
<PAGE>
publicly traded company. AAM is located at 440 Lincoln Street, Worcester,
Massachusetts 01653. As of June 30, 1998, AAM managed assets of approximately
$11.4 billion. Lisa M. Coleman is primarily responsible for the day-to-day
investment management of the Portfolio. Since 1994, Ms. Coleman has served as a
portfolio manager for AAM. From 1989 through 1994, she served as a Deputy
Manager, Portfolio Management, for Brown Brothers Harriman & Company.
THE GLOBAL INTERACTIVE/TELECOMM PORTFOLIO. GAMCO manages this Portfolio, as
well as the Value Portfolio. Mario J. Gabelli is primarily responsible for the
day-to-day investment management of the Global Interactive/Telecomm Portfolio.
Mr. Gabelli has been Chief Investment Officer of GAMCO since its organization in
1978.
MANAGEMENT AND PORTFOLIO MANAGEMENT INVESTMENT ADVISORY FEES
As explained in more detail above, AFIMS serves as the overall manager of
the Portfolios, and the Portfolio Managers handle the day-to-day investment
management of the Portfolios. For these services, each Portfolio pays an overall
management fee, computed and accrued daily and paid monthly, based on its
average daily net assets. The overall fee varies based on the performance of
that Portfolio (after expenses) compared to that of an appropriate benchmark.
The overall advisory fee is split among the various advisers in the following
manner. The Portfolio Manager receives 80% of the fee, and AFIMS receives the
remaining 20%.
FIXED ADVISORY FEE FOR THE 12 FULL CALENDAR MONTHS. For the period
beginning on the effective date of a Portfolio Management Agreement with a new
Portfolio Manager (or, in the case of a Portfolio that has had only one
Portfolio Manager, the day on which the Portfolio commenced investment
operations) and ending with the last day of the twelfth full calendar month
thereafter, each Portfolio will be paid a monthly advisory fee calculated at an
annual rate of 0.80% of the Portfolio's average daily net assets. As of the date
of this prospectus, this initial fee is applicable to the Growth Portfolio and
the Strategic Income Portfolio. In addition, the fees for those Portfolios are
subject to certain limitations described in notes (1) and (2) to the charts on
pages 4-7.
PERFORMANCE-BASED FEE. After the first 12 full calendar months with a new
Portfolio Manager as described above, each Portfolio pays, at the end of each
month, 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 equals 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.
As noted above, performance of both the Portfolio and the selected benchmark
index is calculated on a rolling 12-month period (I.E., the previous 12 months,
including the month for which the fee is being calculated). The performance of a
Portfolio is calculated by first determining the change in the Portfolio's net
asset value per share during the period, assuming the reinvestment of
distributions during that period, and then expressing this amount as a
percentage of the net asset value per share at the beginning of the period. Net
asset value per share is calculated by dividing the value of the securities held
by the Portfolio plus any cash or other assets minus all liabilities including
accrued advisory fees and the other expenses, by the total number of shares
outstanding at the time. The performance of the selected benchmark index is
calculated as the sum of the change in the level of the index during the period,
plus the value of any dividends or distributions made by the companies whose
securities comprise the index accumulated to the end of the period, and then
expressing that amount as a percentage of the index at the beginning of the
period.
13
<PAGE>
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 PERFORMANCE
OF THE PORTFOLIO
(NET OF EXPENSES INCLUDING BASIC FEE AND
INCENTIVE FEE) INCENTIVE FEE TOTAL ADVISORY
AND CHANGE IN SELECTED BENCHMARK INDEX BASIC FEE (%) (%) 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.
SIZE OF FEE. The Basic Fee payable by the Portfolios is at a rate higher
than the investment advisory fees paid by most other investment companies. If a
Portfolio outperforms the selected benchmark by 3.0 percentage points or more,
the advisory fee payable by a Portfolio may further exceed those paid by other
investment companies. On the other hand, if a Portfolio underperforms the
selected benchmark, the advisory fee paid by the Portfolio may be less than
those paid by other investment companies. If, during the applicable performance
period, a Portfolio underperforms the selected benchmark by three or more
percentage points, the Portfolio will not pay any advisory fee, although the
Manager and Portfolio Managers will remain obligated to provide the Portfolio
with the services contemplated herein as long as they are in effect.
PERFORMANCE BENCHMARKS. As described above, total advisory fees paid to
each Portfolio Manager for advising the Portfolios are based on the performance
of the Portfolio they manage relative to a market
14
<PAGE>
benchmark selected in light of the investment objective and policies of the
Portfolio. The performance benchmarks selected for the Portfolios are listed
below and described in more detail in Appendix A.
<TABLE>
<CAPTION>
PORTFOLIO PERFORMANCE BENCHMARK
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
The Value Portfolio................................... S&P 500
The Growth Portfolio.................................. S&P 500
The International Growth Portfolio.................... MSCI--Europe, Australia, Far East
(EAFE) Index
The Strategic Income Portfolio........................ Lehman Brothers Aggregate Bond Index
The Global Interactive/Telecomm Portfolio............. S&P 500
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
EXPENSE LIMITATIONS
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 limitations (expressed as an annualized percentage
of average daily net assets): Value Portfolio, 1.00%; Growth Portfolio, 1.00%;
International Growth Portfolio, 1.20%; Strategic Income Portfolio, 1.20%; Global
Interactive/Telecomm Portfolio, 1.20%. 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 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, $8,469.29; Growth Portfolio, $10,350.93;
International Growth Portfolio, $7,723.73; Strategic Income Portfolio,
$7,936.72; Global Interactive/Telecomm Portfolio, $6,618.72. 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.
REIMBURSEMENT PROVISION FOR 1998 EXPENSES. For the two years following the
date that the Allmerica Financial expense 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 below. After the two year period after
the Allmerica Financial expense limitation ends, the Portfolios' obligation to
reimburse Allmerica Financial will cease.
EXPENSE LIMITATIONS FOR 1996 AND 1997 EXPENSES. The former Manager of the
Trust, Palladian Advisors, Inc. ("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%; Strategic Income
Portfolio, 1.20%; Global Interactive/Telecomm Portfolio, 1.20%. In addition, PAI
voluntarily contributed to the Portfolios the following amounts as capital:
Value Portfolio, $51,906.35; Growth Portfolio, $49,230.63; International Growth
Portfolio, $34,947.29; Strategic Income Portfolio, $52,077.06; and Global
Interactive/Telecomm Portfolio, $40,662.47. The amounts were contributed to
offset expenses accrued to the Portfolios in excess of the expense limitations
set forth above during the period from the commencement of operations to
September 10, 1996 when the expense limitations became effective.
15
<PAGE>
At the request of the Board of Trustees, PAI 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 currently includes Allmerica Financial, the issuer
of a variable annuity contract utilizing the Portfolios as investment options,
certain principals of PAI or entities selling the variable contracts (H. Michael
Schwartz, Lesta Summerfield-Stacom, and Andrew Westhem).
On January 28, 1998, the Payment Group paid the Portfolios the full amounts
then due under the expense limitation arrangement. Subsequent adjustments were
made during the audit and Allmerica Financial paid the Portfolios additional
amounts due under the expense limitation arrangement. Combining these payments,
the following amounts have been paid to the Trust: Value Portfolio, $146,510;
Growth Portfolio, $123,531; International Growth Portfolio, $96,868; Strategic
Income Portfolio, $121,760; Global Interactive/Telecomm Portfolio, $99,327.
Accordingly, the Trust has been fully reimbursed for amounts owed under the
expense limitation arrangement.
REIMBURSEMENT PROVISION FOR 1996 AND 1997 EXPENSES. Through December 31,
1999, each Portfolio must reimburse the Payment Group for the payment described
above, provided that such reimbursement does not cause the Portfolio's "other
expense" ratio to exceed the 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.
CUSTODIAN AND TRANSFER AGENT
The custodian and transfer agent for the Trust is Investors Bank & Trust
Company, 89 South Street, Boston, MA 02111.
INVESTMENT OBJECTIVES AND POLICIES
Each of the Portfolios has a different investment objective, described
below. Each Portfolio is managed by its own Portfolio Manager. There can be no
assurance that any of the Portfolios will achieve their investment objective.
Each Portfolio is subject to the risk of changing economic, business, and
financial conditions, as well as the risk the Portfolio Manager will not
accurately anticipate those changes. As with any security, a risk of loss is
inherent in an investment in a Portfolio's shares.
The different types of securities and investment techniques used by the
individual Portfolio Managers all have attendant risks of varying degrees. For
example, with respect to equity securities, there can be no assurance of capital
appreciation and there is a substantial risk of decline. With respect to debt
securities, there exists the risk that the issuer of a security may not be able
to meet its obligations on interest or principal payments at the time called for
by the instrument. In addition, the value of debt instruments generally rises
and falls inversely with interest rates.
Certain types of investments and investment techniques common to one or more
Portfolios are described in greater detail, including the risks of each, under
"Description of Securities and Investment Techniques" in this Prospectus and in
the Statement of Additional Information.
The investment objectives of the Portfolios are fundamental, which means
that they may be changed only with shareholder approval in accordance with the
1940 Act. Unless otherwise indicated, each Portfolio's practices, policies, and
programs for achieving its objectives are not fundamental and thus may be
changed by the Board of Trustees without shareholder approval. The Statement of
Additional
16
<PAGE>
Information sets forth certain investment restrictions which are fundamental,
and, like the investment objectives, may be changed only with shareholder
approval.
THE VALUE PORTFOLIO
The Value Portfolio seeks to make money for investors by investing primarily
in companies that the Portfolio Manager believes are undervalued and that by
virtue of anticipated developments may, in the Portfolio Manager's judgment,
achieve significant capital appreciation.
In identifying such companies, the Portfolio Manager seeks to invest in
companies that, in the public market, are selling at a significant discount to
their private market value, the value the Portfolio Manager believes informed
industrialists would be willing to pay to acquire companies with similar
characteristics. If investor attention is focused on the underlying asset values
of these companies through an emerging or anticipated development or other
catalyst, an investment opportunity to realize this private market value may
exist. Undervaluation of a company can result from a variety of factors, such as
a lack of investor recognition of (1) the underlying value of a company's fixed
assets, (2) the value of a consumer or commercial franchise, (3) changes in the
economic or financial environment particularly affecting a company, (4) new,
improved or unique products or services, (5) new or rapidly expanding markets,
(6) technological developments or advancements affecting a company or its
products, or (7) changes in government regulations, political climate or
competitive conditions. The actual developments or catalysts particularly
applicable to a given company that may, in the Portfolio Manager's judgment,
lead to significant appreciation of that company's securities include: a change
in management or management policies; the acquisition of a significant equity
position by an investor or group of investors acting in concert; a merger,
reorganization, sale of a division, or a third-party or issuer tender offer, the
spin-off to shareholders of a subsidiary, division or other substantial assets;
or a recapitalization, an internal reorganization or the retirement or death of
a senior officer or substantial shareholder. In addition to the foregoing
factors, developments and catalysts, the Portfolio Manager, in selecting
investments, also considers the market price of the issuer's securities, its
balance sheet characteristics and the perceived strength of its management.
The Portfolio seeks to achieve its objective by investing primarily in a
portfolio of common stocks, preferred stocks and other securities convertible
into, or exchangeable for, common stocks. The Portfolio may invest up to 5% of
its assets in high yield/high risk debt securities. See "Debt Securities," page
21. When the Portfolio Manager believes that a defensive investment posture is
warranted or when opportunities for capital appreciation do not appear
attractive, the Portfolio may temporarily invest all or a portion of its assets
in short-term money market instruments, such as obligations of the U.S.
Government and its agencies and instrumentalities, high-quality commercial paper
and bank certificates of deposit and time deposits and repurchase agreements
with respect to such instruments.
THE GROWTH PORTFOLIO
The Growth Portfolio seeks to make money for investors by investing
primarily in securities selected for their long-term growth prospects.
To achieve its objective, the Portfolio generally invests at least 65% of
its assets in the common stocks of U.S. domiciled corporations and equity-type
investments that relate to U.S. domiciled corporations. Equity-type investments
include preferred stock, warrants and convertible securities. The Portfolio may
also invest in foreign equity securities, foreign equity-type investments,
investment grade debt securities, high yield/high risk debt securities (up to 5%
of assets), futures contracts and options, money market investments and other
securities described on pages 20-30 of the prospectus. For temporary defensive
purposes, the Portfolio may invest all or part of its assets in investment grade
debt securities or money market instruments.
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The Portfolio Manager currently uses a proprietary computer model designed
to build a portfolio of stocks that, when viewed as a group, have fundamental
characteristics that are considered to be superior to the 500 stocks included in
the Standard & Poor's 500 Composite Stock Price Index. The model seeks to
identify a portfolio of stocks with, among other characteristics, higher than
average return on equity and earnings growth at a reasonable price and positive
price momentum over the last 6 to 12 months. The model focuses on the
characteristics of the aggregate portfolio rather than screening for individual
stocks that meet all the desired characteristics. While the Growth Portfolio may
invest in stocks of any company, it is anticipated that it will invest primarily
in stocks of medium to large companies in the S&P 500 (that is, typically
companies with a market capitalization of $15 billion or higher).
THE INTERNATIONAL GROWTH PORTFOLIO
The International Growth Portfolio seeks to make money for investors by
investing internationally for long-term capital appreciation, primarily in
equity securities.
Foreign securities are defined as securities of issuers whose principal
activities are outside of the United States. In determining whether an issuer's
principal activities and interests are outside the United States, the Portfolio
Manager will look at such factors as the location of its assets, personnel,
sales and earnings.
Normally, at least 65% of the Portfolio's total assets will be invested in
securities of issuers from at least three different countries outside of North
America. Although the Portfolio may invest up to 35% in securities of issuers
from Canada, Mexico and the United States, the Portfolio Manager currently does
not expect to invest in a significant part of this amount in securities of U.S.
issuers. No more than 20% of the Portfolio's net assets may be invested in the
securities of any one foreign country, except that the Portfolio may invest up
to 35% of net assets in securities of issuers located in any one of the
following countries: Australia, Canada, France, Japan, the United Kingdom or
Germany.
In considering securities for the Portfolio, the Portfolio Manager will
concentrate on companies with market capitalization of under $1 billion. When
allocating the Portfolio's investments among geographic regions and individual
countries, the Portfolio Manager considers various criteria, such as prospects
for relative economic growth among countries, expected levels of inflation,
government policies influencing business conditions, and the outlook for
currency relationships. The Portfolio Manager expects to invest most of the
Portfolio's assets in securities of issuers located in developed countries in
these general geographic areas: the Americas (other than the United States), the
Far East and Pacific Basin, Australia, Scandinavia and Western Europe.
The Portfolio Manager may invest the Portfolio's assets in all types of
securities, most of which are denominated in foreign currencies. The Portfolio
Manager expects that opportunities for long term growth of capital will come
primarily from common stock, securities such as warrants or rights that are
convertible into common stock, preferred stock, and depository receipts for
those securities. The Portfolio may invest up to 5% of its assets in high
yield/high risk debt securities. See "Debt Securities," page 21. The Portfolio
does not place any emphasis on dividends or interest income except when the
Portfolio Manager believes this income will have a favorable influence on the
market value of the security. The Portfolio may invest in indexed securities
whose value depends on the price of foreign currencies, commodities, securities
indices, or other financial indicators. In the normal course of managing the
Portfolio, the Portfolio Manager may invest a portion of the Portfolio's assets
in U.S. and foreign government obligations and money market securities
(including repurchase agreements) when the Portfolio has monies not yet
invested, it has sold one security and is waiting to buy another one, so that it
will be prepared to meet redemption requests, or to earn a return on available
cash balances. When market conditions warrant, the Portfolio Manager can make
substantial temporary defensive investments in U.S. government obligations or
investment-grade obligations of companies incorporated in and having principal
business activities in the United States.
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THE STRATEGIC INCOME PORTFOLIO
The Strategic Income Portfolio seeks to make money for investors by
investing for high current income and capital appreciation in a variety of
fixed-income securities.
The Portfolio allocates its assets among debt securities in three separate
areas: (1) investment grade corporate debt securities and securities issued or
guaranteed as to principal or interest by the U.S. Government or its agencies or
instrumentalities; (2) below investment-grade corporate debt securities; and (3)
foreign securities which include government debt of developed emerging markets,
corporate obligations of foreign companies, and debt obligations of
supranational entities. The Portfolio will select particular debt securities
based on their relative value merits.
Debt securities in which the Strategic Income Portfolio may invest include
bonds, notes, debentures, mortgage-backed and asset-backed securities, and other
similar instruments. The Portfolio normally invests at least 50% of its total
assets in U.S. and foreign debt and other fixed-income securities that, at the
time of purchase, are investment grade. The Strategic Income Portfolio may
consider making carefully selected investments in below investment-grade debt
securities of issuers in the United States and in foreign markets. No more than
50% of the Portfolio's assets may be invested in securities below investment
grade quality (also called high yield or junk bonds), which involve a high
degree of risk and are predominantly speculative. Consistent with the foregoing
percentage limitations, the Portfolio may invest in securities that are in
default in payment of principal and/or interest.
Investment in foreign markets involve substantial risks typically not
associated with investing in the United States. Emerging market securities
generally are subject to greater risk than securities from developed nations.
For purposes of the Portfolio's operations, "emerging markets" consist of all
countries determined by the Portfolio Manager to have developing or emerging
economies and markets.
The Strategic Income Portfolio also may invest up to 5% of its assets in
loan participations and assignments.
THE GLOBAL INTERACTIVE/TELECOMM PORTFOLIO
The Global Interactive/Telecomm Portfolio seeks to make money for investors
primarily by investing globally in equity securities of companies engaged in the
development, manufacture or sale of interactive and/or telecommunications
services and products.
Under normal circumstances, at least 65% of the Portfolio's total assets
will be invested in common and preferred stocks of (1) companies participating
in emerging technological advances in interactive services and products that are
accessible to individuals in their homes or offices through consumer electronics
devices; (2) telecommunications companies; and (3) companies outside of the
telecommunications industry which, in the opinion of the Portfolio Manager,
stand to benefit from development in the telecommunications industry. The
Portfolio may invest up to 5% of its assets in high yield/high risk debt
securities. See "Debt Securities," page 21. When the Portfolio Manager believes
that a defensive investment posture is warranted or when opportunities for
capital appreciation do not appear attractive, the Portfolio may temporarily
invest all or a portion of its assets in short-term money market instruments,
such as obligations of the U.S. Government and its agencies and
instrumentalities, high-quality commercial paper and bank certificates of
deposit and time deposits and repurchase agreements with respect to such
instruments.
For example, the Portfolio may invest in companies involved in the following
products and services: emerging technologies combining television, telephone and
computer systems; regular telephone service; wireless communications services
and equipment, including cellular telephone data and voice transmission;
electronic components and communications equipment; video conferencing;
electronic mail; local and wide area networking; linkage of data and word
processing systems; publishing and information systems; broadcasting, including
television and radio; cable television systems and networks; wireless cable
television and other emerging distribution technologies; the creation,
packaging, distribution, and ownership of
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entertainment programming; computer hardware and software and other equipment
used in the creation and distribution of entertainment programming; interactive
and multimedia programming including home shopping and multiplayer games; and
advertising agencies and niche advertising mediums such as in-store or direct
mail.
In analyzing companies for investment, the Portfolio Manager ordinarily
looks for several of the following characteristics: above-average per share
earnings growth; high return on invested capital; a healthy balance sheet; sound
financial and accounting policies and overall financial strength; strong
competitive advantages; and effective research and product development and
marketing.
The Portfolio Manager will allocate the Portfolio's assets among securities
of countries and in currency denominations and industry sectors where
opportunities for meeting the Portfolio's investment objective are expected to
be the most attractive. The Portfolio may invest substantially in securities
denominated in one or more foreign currencies. Under normal conditions, the
Portfolio will invest in at least three different countries, including the
United States; issuers in any one country, other than the U.S., will represent
no more than 40% of the Portfolio's assets.
The governments of some foreign countries have been engaged in programs of
selling part or all of their stakes in government owned or controlled
enterprises ("privatizations"). The Portfolio Manager believes that
privatizations in the telecommunications industry may offer opportunities for
significant capital appreciation and intends to invest assets of the Portfolio
in privatizations in appropriate circumstances. In certain foreign countries,
the ability of foreign entities such as the Portfolio to participate in
privatizations may be limited by local law and/or the terms on which the
Portfolio may be permitted to participate may be less advantageous than those
afforded local investors. There can be no assurance that foreign governments
will continue to sell companies currently owned or controlled by them or that
privatization programs will be successful.
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
The following discussion describes in greater detail different types of
securities and investment techniques used by the individual Portfolios, as
described in "Investment Objectives and Policies" as well as the risks
associated with such securities and techniques.
U.S. GOVERNMENT SECURITIES
All of the Portfolios may invest in U.S. Government securities. U.S.
Government securities are obligations of, or are guaranteed by, the U.S.
Government, its agencies or instrumentalities. Treasury bills, notes, and bonds
are direct obligations of the U.S. Treasury. Securities guaranteed by the U.S.
Government include federal agency obligations guaranteed as to principal and
interest by the U.S. Treasury (such as Government National Mortgage Association
("GNMA") certificates, described in the section on "Mortgage-Backed Securities,"
and Federal Housing Administration debentures). In guaranteed securities, the
payment of principal and interest is unconditionally guaranteed by the U.S.
Government, and thus they are of the highest credit quality. Such direct
obligations or guaranteed securities are subject to variations in market value
due to fluctuations in interest rates, but, if held to maturity, the U.S.
Government is obligated to or guarantees to pay them in full.
Securities issued by U.S. Government instrumentalities and certain federal
agencies are neither direct obligations of nor guaranteed by the Treasury.
However, they involve federal sponsorship in one way or another: some are backed
by specific types of collateral; some are supported by the issuer's right to
borrow from the Treasury; some are supported by the discretionary authority of
the Treasury to purchase certain obligations of the issuer; others are supported
only by the credit of the issuing government agency or instrumentality. These
agencies and instrumentalities include, but are not limited to, Federal Land
Banks, Farmers Home Administration, Federal National Mortgage Association
("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC"), Student Loan
Mortgage Association, Central Bank for Cooperatives, Federal Intermediate Credit
Banks, and Federal Home Loan Banks.
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DEBT SECURITIES
All Portfolios may invest in debt securities of domestic or foreign issuers
(both U.S. dollar denominated and non-U.S. dollar denominated). All Portfolios
may also invest in obligations of international organizations such as the
International Bank for Reconstruction and Development (the World Bank). Each
Portfolio may only invest in (1) debt securities which meet the minimum ratings
criteria set forth for that particular Portfolio and (2) unrated debt securities
that are, in the Portfolio Manager's determination, comparable in quality to the
rated debt securities in which the Portfolio may invest.
The investment return on a corporate debt security reflects interest
earnings and changes in the market value of the security. The market value of
corporate debt obligations may be expected to rise and fall inversely with
interest rates generally. There also exists the risk that the issuers of the
securities may not be able to meet their obligations on interest or principal
payments at the time called for by an instrument. Bonds rated BBB or Baa, which
are considered medium-grade category bonds, do not have economic characteristics
that provide the high degree of security with respect to payment of principal
and interest associated with higher rated bonds, and generally have some
speculative characteristics. A bond will be placed in this rating category where
interest payments and principal security appear adequate for the present, but
economic characteristics that provide longer term protection may be lacking. Any
bond, and particularly those rated BBB or Baa, may be susceptible to changing
conditions, particularly to economic downturns, which could lead to a weakened
capacity to pay interest and principal.
The Strategic Income Portfolio may invest up to 50% of its assets in debt
securities that are below investment grade (I.E., rated BB or lower by Standards
& Poor's, rated Ba or lower by Moody's, or unrated but determined by the
Portfolio Manager to be of similar quality). These securities are commonly
referred to as "junk bonds" or "high yield/high risk debt securities." The
Value, Growth, International Growth and Global Interactive/Telecomm Portfolios
may each invest up to 5% of assets in high yield/high risk debt securities.
High yield/high risk debt securities involve significant risks. They are
considered predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the obligation.
The market value of the securities also tend to be more sensitive than higher
rated securities to news about the issuer and changes in overall economic
conditions. In addition, markets for lower-rated securities may be more limited
than for higher-rated securities.
New issues of certain debt securities are often offered on a when-issued or
firm-commitment basis; that is, the payment obligation and the interest rate are
fixed at the time the buyer enters into the commitment, but delivery and payment
for the securities normally take place after the customary settlement time. The
value of when-issued securities or securities purchased on a firm-commitment
basis may vary prior to and after delivery depending on market conditions and
changes in interest rate levels. However, the Portfolios will not accrue any
income on these securities prior to delivery. The Portfolios will maintain in a
segregated account with its custodian an amount of cash or high quality debt
securities equal (on a daily marked-to-market basis) to the amount of its
commitment to purchase the when-issued securities or securities purchased on a
firm-commitment basis.
Many securities of foreign issuers are not rated by Moody's or Standard and
Poor's; therefore, the selection of such issuers depends, to a large extent, on
the credit analysis performed or used by the Portfolio Manager.
MORTGAGE-BACKED SECURITIES
All Portfolios may invest in mortgage-backed securities issued by the
Government National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA"), and the Federal Home Loan Mortgage Corporation ("FHLMC").
These securities represent an interest in a pool of mortgages, such as 30-year
and 15-year fixed mortgages and adjustable rate mortgages. For GNMA securities,
the payment of principal and interest on the underlying mortgages is guaranteed
by the full faith and credit of
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the U.S.; for FNMA and FHLMC securities the payment of principal and interest is
guaranteed by the issuing agency but not the U.S. The guarantees, however, do
not extend to the securities' value or yield, which are likely to fluctuate
inversely with fluctuations in interest rates. Because the prepayment
characteristics of the underlying mortgages vary, it is not possible to predict
accurately the average life of a particular issue of mortgage-backed securities.
The Portfolios may invest in mortgage-backed securities issued by private
entities, such as commercial or mortgage banks, savings and loan associations,
or broker-dealers, that meet the quality standards discussed above for debt
securities.
The Portfolios may invest in collateralized mortgage obligations ("CMOs"). A
CMO is a security issued by a corporation or a U.S. government instrumentality
that is backed by a portfolio of mortgages or mortgage-backed securities. The
issuer's obligation to make interest and principal payments is secured by the
underlying portfolio of mortgages or mortgage-backed securities. CMOs are
partitioned into several classes with a ranked priority by which classes of
obligations are redeemed.
OTHER ASSET-BACKED SECURITIES
All Portfolios may invest in asset-backed securities, which represent a
participation in, or are secured by and payable from, a stream of payments
generated by particular assets, such as automobile or credit card receivables.
Asset-backed securities present certain risks, including the risk that the
underlying obligor on the asset, such as the automobile purchaser or the credit
card holder, may default on his or her obligation. In addition, asset-backed
securities often do not provide a security interest in the related collateral.
For example, credit card receivables are generally unsecured, and the pool of
automobile receivables may not include the security interests in those
automobiles. In general, however, these type of loans have a shorter average
life than mortgage loans and are less likely to have substantial prepayments.
VARIABLE AND FLOATING RATE SECURITIES
All Portfolios may invest in variable and floating rate securities.
Variable rate securities provide for automatic establishment of a new
interest rate at fixed intervals (E.G., daily, monthly, semi-annually, etc.).
Floating rate securities provide for automatic adjustment of the interest rate
whenever some specified interest rate index changes. The interest rate on
variable or floating rate securities is ordinarily determined by reference to or
is a percentage of a bank's prime rate, the 90-day U.S. Treasury bill rate, the
rate of return on commercial paper or bank certificates of deposit, an index of
short-term interest rates, or some other objective measure.
Variable or floating rate securities frequently include a demand feature
entitling the holder to sell the securities to the issuer at par value. In many
cases, the demand feature can be exercised at any time on 7 days' notice; in
other cases, the demand feature is exercisable at any time on 30 days' notice or
on similar notice at intervals of not more than one year. Some securities which
do not have variable or floating interest rates may be accompanied by puts
producing similar results and price characteristics.
BANKING INDUSTRY AND SAVINGS INDUSTRY OBLIGATIONS
All Portfolios may invest in certificates of deposit, time deposits,
bankers' acceptances, and other short-term debt obligations issued by commercial
banks and in certificates of deposit, time deposits, and other short-term
obligations issued by savings and loan associations ("S&Ls"). Certificates of
deposit are receipts from a bank or an S&L for funds deposited for a specified
period of time at a specified rate of return. Time deposits in banks or S&Ls are
generally similar to certificates of deposit, but are uncertificated. Bankers'
acceptances are time drafts drawn on commercial banks by borrowers, usually in
connection with international commercial transactions. Each Portfolio may also
invest in obligations of foreign branches of commercial banks and foreign banks
so long as the securities are U.S. dollar-denominated. See "Foreign Securities"
on pages 25-27 and "Banking Industry and Savings Industry Obligations" in the
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Statement of Additional Information regarding risks attending investment in
foreign instruments generally and foreign bank instruments in particular.
The Portfolios will not invest in obligations issued by a commercial bank or
S&L unless:
(i) the bank or S&L has total assets of at least $1 billion, or the
equivalent in other currencies, and the institution has outstanding
securities rated A or better by Moody's or Standard and Poor's, or, if the
institution has no outstanding securities rated by Moody's or Standard &
Poor's, it has, in the determination of the Portfolio Manager, similar
creditworthiness to institutions having outstanding securities so rated;
(ii) in the case of a U.S. bank or S&L, its deposits are insured by the
Federal Deposit Insurance Corporation or the Savings Association Insurance
Fund, as the case may be; and
(iii) in the case of a foreign bank, the security is, in the
determination of the Portfolios' Portfolio Manager, of an investment quality
comparable with other debt securities which may be purchased by the
Portfolios. These limitations do not prohibit investments in securities
issued by foreign branches of U.S. banks, provided such U.S. banks meet the
foregoing requirements.
COMMERCIAL PAPER
All Portfolios may invest in commercial paper, which includes short-term
unsecured promissory notes, variable rate demand notes, and variable note master
demand notes issued by domestic and foreign bank holding companies,
corporations, and financial institutions, as well as similar taxable instruments
issued by government agencies and instrumentalities. All commercial paper
purchased by the Portfolios must be, the time of investment, (i) rated "P-1" by
Moody's or "A-1" by S&P, (ii) issued or guaranteed as to principal and interest
by issuers having an existing debt security rating of "Aa" or better by Moody's
or "AA" by S&P, or (iii) securities which, if not rated, are in the opinion of
the Portfolio Manager of an investment quality comparable to rated commercial
paper in which the Portfolio may invest. See Appendix B for description of these
ratings.
REPURCHASE AGREEMENTS
All Portfolios may enter into repurchase agreements with banks and
broker-dealers under which they acquire securities subject to an agreement with
the seller to repurchase the securities at an agreed-upon time and price. If the
seller should default on its obligation to repurchase the securities, the
Portfolio may experience delays or difficulties in exercising its right to
realize a gain upon the securities held as collateral and might incur a loss if
the value of the securities should decline.
REVERSE REPURCHASE AGREEMENTS
All Portfolios may enter into reverse repurchase agreements with banks and
broker-dealers. Those agreements have the characteristics of borrowing and
involve the sale of securities held by a Portfolio with an agreement to
repurchase the securities at an agreed-upon price and date, which reflect a rate
of interest paid for the use of funds for the period. Generally, the effect of
such a transaction is that a Portfolio can recover all or most of the cash
invested in the securities involved during the term of the reverse repurchase
agreement, while in many cases it will be able to keep some of the interest
income associated with those securities. Such transactions are only advantageous
if the Portfolio has an opportunity to earn a greater rate of interest on the
cash derived from the transaction than the interest cost of obtaining that cash.
A Portfolio may be unable to realize a return from the use of the proceeds equal
to or greater than the interest required to be paid.
LENDING PORTFOLIO SECURITIES
For the purpose of realizing additional income, each Portfolio may lend
securities with a value of up to 33% of its total assets to unaffiliated
broker-dealers or institutional investors. Any such loan will be
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continuously secured by collateral at least equal to the value of the security
loaned. Although the risk of lending portfolio securities are believed to be
slight, as with other extensions of secured credit, such lending could result in
delays in receiving additional collateral or in the recovery of the securities
or possible loss of rights in the collateral should the borrower fail
financially. Loans will only be made to firms deemed to be of good standing and
will not be made unless the consideration to be earned from such loans would
justify the risk.
ILLIQUID SECURITIES
Each Portfolio may invest up to 15% of its net assets in securities for
which there is no readily available market ("illiquid securities"), which would
include repurchase agreements having more than 7 days to maturity. A
considerable period of time may elapse between a Portfolio's decision to dispose
of such securities and the time when the Portfolio is able to dispose of them,
during which time the value of the securities could decline. The SEC has adopted
Rule 144A which permits resale among certain institutional investors of certain
unregistered securities. As a result, a significant institutional trading market
has developed in many unregistered securities relying on this rule. In
determining whether such securities should be considered liquid, the Portfolios
will consider the following factors, among others: (1) the frequency of the
trades and the quotes for the security; (2) the number of dealers willing to
purchase or sell the security and the number of potential purchasers; (3) dealer
undertakings to make a market in the security; and (4) the nature of the
security and the nature of the marketplace trades (for example, the time needed
to dispose of the security, the method of soliciting offers, and the mechanics
of the transfer).
WARRANTS
Each Portfolio may invest up to 5% of its net assets in warrants (not
including those that have been acquired in units or attached to other
securities), measured at the time of acquisition. No Portfolio may acquire a
warrant not listed on the New York or American Stock Exchanges if, after the
purchase, more than 2% of the Portfolio's assets would be invested in such
warrants.
The holder of a warrant has the right to purchase a given number of shares
of a particular issuer at a specified price until expiration of the warrant.
Such investments can provide a greater potential for profit or loss than an
equivalent investment in the underlying security. Prices of warrants do not
necessarily move in tandem with the prices of the underlying securities, and are
speculative investments. They pay no dividends and confer no rights other than a
purchase option. If a warrant is not exercised by the date of its expiration,
the Portfolio will lose its entire investment in such warrant.
OTHER INVESTMENT COMPANIES
All Portfolios may invest in shares issued by other investment companies. A
Portfolio is limited in the degree to which it may invest in shares of another
investment company in that it may not, at the time of the purchase, (1) acquire
more than 3% of the outstanding voting shares of the investment company, (2)
invest more than 5% of the Portfolios' total assets in the investment company,
or (3) invest more than 10% of the Portfolios' total assets in all investment
company holdings. As a shareholder in any investment company, a Portfolio will
bear its ratable share of the investment company's expenses, including
management fees in the case of a management investment company.
SHORT SALES
All Portfolios may make short sales of securities. A short sale is a
transaction in which the Portfolio sells a security it does not own (but has
borrowed) in anticipation of a decline in the market price of the security. A
Portfolio may make short sales to offset a potential decline in a long position
or a group of long positions, or if the Portfolio Manager believes that a
decline in the price of a particular security or group of securities is likely.
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When a Portfolio makes a short sale, the proceeds it receives are retained
by the broker until the Portfolio replaces the borrowed security. In order to
deliver the security to the buyer, the Portfolio must arrange through a broker
to borrow the security and, in so doing, the Portfolio becomes obligated to
replace the security borrowed at its market price at the time of replacement,
whatever that price may be. The Portfolio may have to pay a premium to borrow
the security. The Portfolio must also pay any dividends or interest payable on
the security until the Portfolio replaces the security.
The Portfolios' obligation to replace the security borrowed in connection
with the short sale will be secured by collateral deposited with the broker,
consisting of cash or U.S. Government securities or other securities acceptable
to the broker. In addition, with respect to any short sale, other than short
sales against the box, as discussed below, the Portfolios will be required to
deposit collateral consisting of cash, U.S. Government securities or other
liquid assets in a segregated account with its custodian in an amount such that
the value of the sum of both collateral deposits is at all times equal to at
least 100% of the current market value of the securities sold short. The
deposits do not necessarily limit the Portfolios' potential loss on a short
sale, which may exceed the entire amount of the collateral.
If the price of the security sold short increases between the time of the
short sale and the time the Portfolios replaces the borrowed security, the
Portfolio will incur a loss, and if the price declines during this period, the
Portfolio will realize a capital gain. Any realized gain will be decreased, and
any incurred loss increased, by the amount of transactional costs and any
premium, dividend, or interest which the Portfolios may have to pay in
connection with such short sale.
A Portfolio may make a short sale only if, at the time the short sale is
made and after giving effect thereto, the market value of all securities sold
short is 25% or less of the value of its net assets and the market value of
securities sold short which are not listed on a national securities exchange
does not exceed 10% of the Portfolio's net assets. In addition, a Portfolio will
not make short sales of the securities of any one issuer to the extent of more
than 2% of the Portfolio's net assets, nor will a Portfolio make short sales of
more than 2% of the outstanding securities of one class of any issuer. The
Portfolios are not required to liquidate an existing short sale position solely
because a change in market values has caused one or more of these percentage
limitations to be exceeded.
SHORT SALES AGAINST THE BOX
All Portfolios may make short sales "against the box." A short sale "against
the box" is a short sale where, at the time of the short sale, a Portfolio owns
or has the immediate and unconditional right, at no added cost, to obtain the
identical security. The Portfolios would enter into such a transaction to defer
a gain or loss for Federal income tax purposes on the security owned by the
Portfolio or to receive a portion of the interest earned by the executing broker
from the proceeds of the sale. Short sales against the box are not subject to
the percentage limitations on short sales described above.
FOREIGN SECURITIES
All Portfolios, except the Strategic Income Portfolio, may invest in equity
securities of foreign issuers. Each of the Portfolios may invest in American
Depository Receipts ("ADRs"), which are described below. All Portfolios may
invest in foreign government securities, except that neither the Value nor the
Growth Portfolios will purchase foreign government securities if, as a result,
more than 10% of the value of its total assets would be invested in such
securities. The Portfolios may invest in foreign branches of commercial banks
and foreign banks. See the "Banking Industry and Savings Industry Obligations"
discussion in this section for further description of these securities.
Each Portfolio is subject to the following guidelines for diversification of
foreign security investments. If a Portfolio has less than 20% of its assets in
foreign issuers, then all of such investment may be in issuers domiciled or
primarily traded in one country. If a Portfolio has at least 20% but less than
40% of its assets in foreign issuers, then such investment must be allocated to
issuers domiciled or primarily traded in at least two different countries.
Similarly, if a Portfolio has at least 40% but less than 60% of its assets in
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foreign issuers, such investment must be allocated in at least three different
countries. Foreign investments must be allocated to at least four different
countries if at least 60% of a Portfolios' assets is in foreign issuers, and to
at least five different countries if at least 80% is in foreign issuers.
A Portfolio may have no more than 20% of its net asset value invested in
securities of issuers domiciled or primarily traded in any one foreign country,
except that a Portfolio may have up to 35% of its net asset value invested in
securities of issuers domiciled or primarily traded in any one of the following
countries: Australia, Canada, France, Japan, The United Kingdom, or Germany.
Investments in foreign securities offer potential benefits not available
solely in securities of domestic issuers by offering the opportunity to invest
in foreign issuers that appear to offer growth potential, or in foreign
countries with economic policies or business cycles different from those of the
United States, or to reduce fluctuations in portfolio value by taking advantage
of foreign stock markets that may not move in a manner parallel to U.S. markets.
Investments in securities of foreign issuers involve certain risks not
ordinarily associated with investments in securities of domestic issuers. Such
risks include fluctuations in foreign exchange rates, future political and
economic developments, and the possible imposition of exchange controls or other
foreign governmental laws or restrictions. Since each of these Portfolios may
invest in securities denominated or quoted in currencies other than the U.S.
dollar, changes in foreign currency exchange rates will affect the value of
securities in the portfolio and the unrealized appreciation or depreciation of
investments so far as U.S. investors are concerned. In addition, with respect to
certain countries, there is the possibility of expropriation of assets,
confiscatory taxation, other foreign taxation, political or social instability,
or diplomatic developments that could adversely affect investments in those
countries.
There may be less publicly available information about a foreign company
than about a U.S. company, and foreign companies may not be subject to
accounting, auditing, and financial reporting standards and requirements
comparable to or as uniform as those of U.S. companies. Foreign securities
markets, while growing in volume, have, for the most part, substantially less
volume than U.S. markets. Securities of many foreign companies are less liquid
and their prices more volatile than securities of comparable U.S. companies.
Transactional costs in non-U.S. securities markets are generally higher than in
U.S. securities markets. There is generally less government supervision and
regulation of exchanges, brokers, and issuers than there is in the U.S. A
Portfolio might have greater difficulty taking appropriate legal action with
respect to foreign investments in non-U.S. courts than with respect to domestic
issuers in U.S. courts. In addition, transactions in foreign securities may
involve greater time from the trade date until settlement than domestic
securities transactions and involve the risk of possible losses through the
holding of securities by custodians and securities depositories in foreign
countries.
Dividend and interest income from foreign securities may generally be
subject to withholding taxes by the country in which the issuer is located and
may not be recoverable by a Portfolio or its investors.
ADRs are certificates issued by a U.S. bank or trust company representing
the right to receive securities of a foreign issuer deposited in a foreign
subsidiary or branch or a correspondent of that bank. Generally, ADRs, in
registered form, are designed for use in U.S. securities markets and may offer
U.S. investors more liquidity than the underlying securities.
Investment in emerging markets countries presents risks in a greater degree
than, and in addition to, those presented by investment in foreign issuers in
general. A number of emerging market countries restrict, to varying degrees,
foreign investment in securities. Repatriation of investment income, capital,
and proceeds of sales by foreign investors may require governmental registration
and/or approval in some emerging market countries. A number of the currencies of
developing countries have experienced significant declines against the U.S.
dollar in recent years, and devaluation may occur subsequent to investments in
those currencies by the Portfolio. Inflation and rapid fluctuations in inflation
rates have had and may continue to have negative effects on the economies and
securities markets of certain emerging market countries.
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Many of the emerging securities markets are relatively small, have low
trading volumes, suffer periods of relative illiquidity, and are characterized
by significant price volatility. There is a risk in emerging market countries
that a future economic or political crisis could lead to price controls, forced
mergers of companies, expropriation or confiscatory taxation, seizure,
nationalization, foreign exchange controls (which may include suspension of the
ability to transfer currency from a given country) or creation of government
monopolies, any of which may have a detrimental effect on a Portfolio's
investment.
INVESTMENT IN GOLD AND OTHER PRECIOUS METALS
All Portfolios may invest up to 10% of its total assets, in gold bullion and
coins and other precious metals (silver or platinum) bullion and in futures
contracts with respect to such metals. Each Portfolio may also engage in gold
futures contracts. (See "Futures Contracts" for further explanation of this
investment technique.) The Portfolios will further restrict the level of their
metal investments if necessary in order to comply with applicable regulatory
requirements. In order to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), each
Portfolio intends to manage its metal investments and/or futures contracts on
metals so that less than 10% of its gross income for tax purposes during any
fiscal year (the current limit on so-called non-qualifying income) is derived
from these and other sources that produce such non-qualifying income.
Metals will not be purchased in any form that is not readily marketable, and
gold coins will be purchased for their intrinsic value only, I.E., coins will
not be purchased for their numismatic value. Any metals purchased by the
Portfolios will be delivered to and stored with a qualified custodian bank.
Metal investments do not generate interest or dividend income and will subject
the Portfolios to higher custody and transactional costs than are normally
associated with the ownership of securities or futures contracts on precious
metals.
Metal investments are considered speculative and are affected by various
worldwide economic, financial, and political factors. Prices may fluctuate
sharply over short time periods due to changes in inflation expectations in
various countries, metal sales by central banks of governments or international
agencies, speculation, changes in industrial and commercial demand, and
governmental prohibitions or restriction on the private ownership of certain
precious metals or minerals. At the present time, there are four major producers
of gold bullion: the Republic of South Africa, the United States, Canada, and
Australia. Political and economic conditions in these countries will have a
direct effect on the mining and distribution of gold and, consequently, on its
price.
FUTURES CONTRACTS
All Portfolios may purchase and sell (i) interest rate and other debt
related futures contracts, (ii) stock index and other equity related futures
contracts, (iii) foreign currency futures contracts, (iv) futures contracts on
gold and other precious metals, and (v) options on these futures contracts. A
futures contract provides for the future sale by one party and purchase by the
other party of a specified amount of a particular financial instrument or
commodity for a specified price at a designated date, time, and place.
All Portfolios may use futures contracts for the purpose of hedging
positions with respect to securities, interest rates, foreign currencies, and
gold and other precious metals. In addition, the Growth Portfolio may also use
futures contracts for non-hedging purposes (in other words, for investment
purposes). For example, the Portfolio Manager may invest in futures contracts
rather than investing directly in securities. The initial margins and premiums
associated with futures contracts used for non-hedging purposes will not exceed
5% of the fair market value of the Portfolio's assets, taking into account
unrealized profits and losses on such futures contracts. The Portfolio may not
purchase or sell a futures contract for non-hedging purposes if immediately
thereafter the sum of the amount of margin deposits and premiums paid for
related options would exceed 5% of the market value of the Portfolio's total
assets.
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An option on a futures contract gives the purchaser or holder the right, but
not the obligation, to assume a position in a futures contract (a long position
if the option is a call and a short position if the option is a put) at a
specified price at any time during the option exercise period. The Portfolios
will utilize options on futures contracts for the same purposes that they use
the underlying futures contracts.
There are several risks associated with the use of futures and futures
options. While a Portfolio's hedging transactions may protect it against adverse
movements in the general level of interest rates or other economic conditions,
such transactions could also preclude a Portfolio from the opportunity to
benefit from favorable movements in the level of interest rates or other
economic conditions. There can be no guarantee that there will be correlation
between price movements in the hedging vehicle and in the securities or other
assets being hedged. An incorrect correlation could result in a loss on both the
hedged assets and the hedging vehicle so that the Portfolio's return might have
been better if hedging had not been attempted. The degree of imperfection of
correlation depends on circumstances such as variations in speculative market
demand for futures and futures options, including technical influences in
futures trading and futures options, and differences between the financial
instruments being hedged and the instruments underlying the standard contracts
available for trading in such respects as interest rate levels, maturities, and
creditworthiness of issuers. A decision as to whether, when, and how to hedge
involves the exercise of skill and judgment and even a well-conceived hedge may
be unsuccessful to some degree because of market behavior or unexpected market
trends. Successful use of futures contracts for investment purposes, like
successful investment in securities, depends on the ability of the Portfolio
Manager to predict correctly movements in the relevant markets.
There can be no assurance that a liquid market will exist at a time when a
Portfolio seeks to close out a futures contract or a futures option position.
Most futures exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single day; once the daily limit
has been reached on a particular contract, no trades may be made that day at a
price beyond that limit. In addition, certain of these instruments are
relatively new and without a significant trading history. As a result, there is
no assurance that an active secondary market will develop or continue to exist.
The daily limit governs only price movements during a particular trading day and
therefore does not limit potential losses because the limit may work to prevent
the liquidation of unfavorable positions. For example, futures prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of positions and
subjecting some holders of futures contracts to substantial losses. Lack of a
liquid market for any reason may prevent the Portfolios from liquidating an
unfavorable position and the Portfolios would remain obligated to meet margin
requirements and continue to incur losses until the position is closed.
A Portfolio will only enter into futures contracts or futures options which
are standardized and traded on a U.S. exchange or board of trade, or, in the
case of futures options, for which an established over-the-counter market
exists.
OPTIONS
The Portfolios may purchase and sell (I.E., write) put and call options on
equity securities, debt securities, securities indices, and foreign currencies.
An option gives the owner the right to buy or sell securities at a predetermined
exercise price for a given period of time.
Although options will be primarily used to minimize principal fluctuations
or to generate additional premium income, they do involve certain risks. The
Portfolio Manager may not correctly anticipate movements in the relevant
markets, thus causing losses on the Portfolio's options positions.
A position in an exchange-traded option may be closed out only on an
exchange, board of trade or other trading facility which provides a secondary
market for an option of the same series. Although the Portfolios will generally
purchase or write only those exchange-traded options for which there appears to
be an active secondary market, there is no assurance that a liquid secondary
market on an exchange will
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exist for any particular option, or at any particular time, and for some options
no secondary market on an exchange or otherwise may exist. In such event it
might not be possible to effect closing transactions in particular options, with
the result that the Portfolio would have to exercise its options in order to
realize any profit and would incur brokerage commissions upon the exercise of
such options and upon the subsequent disposition of underlying securities
acquired through the exercise of call options or upon the purchase of underlying
securities for the exercise of put options. If a Portfolio as a covered call
option writer is unable to effect a closing purchase transaction in a secondary
market, it will not be able to sell the underlying security until the option
expires or it delivers the underlying security upon exercise.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (v) the facilities of an exchange or
a clearing corporation may not at all times be adequate to handle current
trading volume; or (vi) one or more exchanges could, for economic or other
reasons, decide to be compelled at some future date to discontinue the trading
of options (or a particular class or series of options), in which event the
secondary market on that exchange (or in the class or series of options) would
cease to exist, although outstanding options on that exchange that had been
issued by a clearing corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms. There is no assurance
that higher than anticipated trading activity or other unforeseen events might
not, at times, render certain of the facilities of any of the clearing
corporations inadequate, and thereby result in the institution by an exchange of
special procedures which may interfere with the timely execution of customers'
orders.
The purchase and sale of over-the-counter ("OTC") options will also be
subject to certain risks. Unlike exchange-traded options, OTC options generally
do not have a continuous liquid market. Consequently, a Portfolio will generally
be able to realize the value of an OTC option it has purchased only by
exercising it or reselling it to the dealer who issued it. Similarly, when a
Portfolio writes an OTC option, it generally will be able to close out the OTC
option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the Portfolio originally wrote the OTC
option. There can be no assurance that a Portfolio will be unable to liquidate
an OTC option at a favorable price at any time prior to expiration. In the event
of insolvency of the other party, the Portfolio may be unable to liquidate an
OTC option.
The distinctive characteristics of options on stock indices create certain
risks that are not present with stock options. Index prices may be distorted if
trading of certain stocks included in the index is interrupted. Trading in the
index options also may be interrupted in certain circumstances, such as if
trading were halted in a substantial number of stocks included in the index. If
this occurred, a Portfolio would not be able to close out options which it had
purchased or written and, if restrictions on exercise were imposed, may be
unable to exercise an option it holds, which could result in substantial losses
to the Portfolio. Price movements in a Portfolio's equity security holdings
probably will not correlate precisely with movements in the level of the index
and, therefore, in writing a call on a stock index a Portfolio bears the risk
that the price of the securities held by the Portfolio may not increase as much
as the index. In such event, the Portfolio would bear a loss on the call which
is not completely offset by movement in the price of the Portfolio's equity
securities. It is also possible that the index may rise when the Portfolio's
securities do not rise in value. If this occurred, the Portfolio would
experience a loss on the call which is not offset by an increase in the value of
its securities holdings and might also experience a loss in its securities
holdings.
A Portfolio's successful use of options on foreign currencies depends upon
the manager's ability to predict the direction of the currency exchange markets
and political conditions, which requires different skills and techniques than
predicting changes in the securities markets generally.
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FOREIGN CURRENCY TRANSACTIONS
All Portfolios may enter into forward currency contracts and enter into
currency exchange transactions on a spot (I.E., cash) basis. A forward currency
contract is an obligation to purchase or sell a currency against another
currency at a future date and price as agreed by the parties. A Portfolio may
either accept or make delivery of the currency at the maturity of the forward
contract or, prior to maturity, enter into a closing transaction involving the
purchase or sale of an offsetting contract. A Portfolio will engage in forward
currency transactions in anticipation of or to protect itself against
fluctuations in currency exchange rates, as further described in the Statement
of Additional Information.
LEVERAGE
Each Portfolio may leverage its investments by purchasing securities with
borrowed money. In leveraging its investments, each Portfolio may borrow up to
33 1/3% of the value of its total assets (minus liabilities other than the
borrowing). Leveraging by means of borrowing will exaggerate the effect of any
increase or decrease in the value of portfolio securities on a Portfolios' net
asset value; money borrowed will be subject to interest and other costs (which
may include commitment fees and/or the cost of maintaining minimum average
balances), which may or may not exceed the income received from the securities
purchased with borrowed funds. The use of borrowing tends to result in a faster
than average movement, up or down, in the net asset value of the Portfolio's
shares. A Portfolio also may be required to maintain minimum average balances in
connection with such borrowing or to pay a commitment or other fee to maintain a
line of credit; either of these requirements would increase the cost of
borrowing over the stated interest rate.
Reverse repurchase agreements, short sales of securities, and short sales of
securities against the box will be included as borrowing subject to the
borrowing limitations described above. Securities purchased on a when-issued or
delayed delivery basis will not be subject to the Portfolio's borrowing
limitations to the extent that a Portfolio establishes and maintains liquid
assets in a segregated account with the Trust's custodian equal to the
Portfolio's obligations under the when-issued or delayed delivery arrangement.
A Portfolio may, in connection with permissible borrowings, transfer as
collateral securities it owns.
INDEXED SECURITIES
Each Portfolio may invest up to 5% of its assets in indexed securities.
Indexed securities values are linked to currencies, interest rates, commodities,
indices, or other financial indicators. Most indexed securities are short to
intermediate term fixed-income securities whose values at maturity or interest
rates rise or fall according to the change in one or more specified underlying
instruments. Indexed securities may be positively or negatively indexed (I.E.,
their value may increase or decrease if the underlying instrument appreciates),
and may have return characteristics similar to direct investments in the
underlying instrument or to one or more options on the underlying instrument.
Indexed securities may be more volatile than the underlying instrument itself.
INVESTMENT IN THE TRUST
DETERMINATION OF NET ASSET VALUE
The net asset values per share of the Portfolios are calculated as of 4:00
p.m. (New York City time), Monday through Friday, on each day that the New York
Stock Exchange is open for trading, exclusive of federal holidays. Net asset
value per share is calculated by dividing the aggregate value of each
Portfolio's assets less all liabilities by the number of each Portfolio's
outstanding shares.
The Board of Trustees has established procedures to value each Portfolio's
assets to determine net asset value. In general, these valuations are based on
actual or estimated market value, with special provisions for assets not having
readily available market quotations and short-term debt securities. The net
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asset values per share of each Portfolio will fluctuate in response to changes
in market conditions and other factors.
Portfolio securities for which market quotations are readily available are
stated at market value. Market value is determined on the basis of last reported
sales price, 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. In other cases, securities are valued at their fair
value as determined in good faith by the Board of Trustees, although the actual
calculations will be made by persons acting under the direction of the Board and
subject to the Board's review. Money market instruments are valued at market
value, except that instruments maturing in sixty days or less may be valued
using the amortized cost method valuation. The value of a foreign security is
determined in its national currency based upon the price on the foreign exchange
as of its close of business immediately preceding the time of valuation.
Securities traded in over-the-counter markets outside the United States are
valued at the last available price in the over-the-counter market prior to the
time of valuation.
Debt securities, including those to be purchased under firm commitment
agreements (other than obligations having a maturity sixty days or less at their
date of acquisition valued under the amortized cost method), 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. Debt obligations having a
maturity of sixty days or less may be valued at amortized cost unless the
Portfolio Manager believes that amortized cost does not approximate market
value.
When a Portfolio writes a put or call option, the amount of the premium is
included in the Portfolios' assets and an equal amount is included in its
liabilities. The liability thereafter is adjusted to the current market value of
the option. The premium paid for an option purchased by the Portfolio is
recorded as an asset and subsequently adjusted to market value. Futures and
options thereon which are traded on commodities exchanges or boards of trade
will be valued at their closing settlement price on such exchange or board of
trade. Foreign securities quoted in foreign currencies generally are valued at
appropriately translated foreign market closing prices.
Trading in securities on exchanges and over-the-counter markets in European
and Pacific Basin countries is normally completed well before 4:00 p.m., New
York City time. Trading on these exchanges may not take place on all New York
business days and in addition, trading takes place in various foreign markets on
days which are not business days in New York and on which the Trust's net asset
value is not calculated. As a result, the calculation of the net asset value of
a Portfolio investing in foreign securities may not take place contemporaneously
with the determination of the prices of the securities included in the
calculation. Events that may affect the value of these securities that occur
between the time their prices are determined and the time the Portfolios' net
asset value is determined may not be reflected in the calculation of net asset
value of the Portfolio unless the Portfolio Manager, acting under authority
delegated by the Board of Trustees, deems that the particular event would
materially affect net asset value. In this event, the securities would be valued
at fair market value as determined in good faith by the Board of Trustees of the
Trust, although the actual calculations will be made by the Portfolio Manager
acting under the direction of the Board and subject to the Board's review.
PURCHASE OF SHARES
The Trust is intended to be a funding vehicle for variable annuity and
variable life insurance contracts offered by various insurance companies and for
certain qualified pension and retirement plans. The Trust currently does not
foresee any disadvantages to variable contract owners or retirement plan
participants arising from offering the Trust's shares to separate accounts of
unaffiliated insurers, to separate accounts funding both life insurance
contracts and annuity contracts, and to qualified plans. Because of differences
in tax treatment and other considerations, however, it is possible that the
interests of contract owners and
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plan participants might at some time be in conflict. Accordingly, the Board of
Trustees will monitor events in order to identify the existence of any material
irreconcilable conflicts and to determine what action, if any, should be taken
in response to any such conflict.
Shares of the Portfolios are sold at their respective net asset values
(without a sales charge) next computed after receipt of a purchase order. The
Portfolios reserve the right to cease offering their shares at any time.
REDEMPTION OF SHARES
Shares of the Portfolios may be redeemed on any business day. Redemptions
are effected at the net asset value per share next determined after receipt of
the redemption request. Redemption proceeds normally will be paid within seven
days following receipt of instructions in proper form, or sooner if required by
law.
The right of redemption may be suspended by the Trust or the payment date
postponed beyond seven days when the New York Stock Exchange is closed (other
than customary weekend and holiday closings) or for any period during which
trading thereon is restricted because an emergency exists, as determined by the
Securities and Exchange Commission, making disposal of portfolio securities or
valuation of net assets not reasonably practicable, and whenever the Securities
and Exchange Commission has by order permitted such suspension or postponement
for the protection of shareholders.
If the Board of Trustees should determine that it would be detrimental to
the best interests of the remaining shareholders of the Portfolios to make
payment wholly or partly in cash, the Portfolios may pay the redemption price in
whole or in part by a distribution in kind of securities from the portfolios of
the Portfolios, in lieu of cash, in conformity with applicable rules of the
Securities and Exchange Commission. If shares are redeemed in kind, the
redeeming shareholder might incur brokerage costs in converting the assets into
cash.
DIVIDENDS, DISTRIBUTIONS, AND TAXES
The Trust intends that the Portfolios will qualify to be treated as
regulated investment companies under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"). In any year in which the Portfolios qualify as
regulated investment companies and distribute substantially all of their net
investment income and their net capital gains, the Portfolios generally will not
be subject to federal income tax to the extent they distributes to shareholders
such income and capital gains in the manner required under the Code.
Tax consequences to the Variable Contract owners are described in the
prospectus for the pertinent Variable Contract.
The provisions of the Code and the Treasury Regulations that apply to
qualified retirement plans are complex and vary according to the type of plan
and its terms and conditions. Accordingly, this prospectus provides only general
tax information, and participants in qualified retirement plans that invest
directly in the Portfolios should consult a qualified tax adviser before
purchasing or redeeming any Portfolio shares. In general, assuming that a plan
adheres to the applicable limitations of the Code and Treasury Regulations,
payments for the purchase of Portfolio shares (other than after-tax employee
payments) will be deductible (or not includable in income) up to certain amounts
each year. Federal income tax currently is not imposed upon the investment
income and realized gains until redemption. When Portfolio shares are redeemed
for the purpose of making payments to plan participants, all or a portion of the
payment is normally taxable as ordinary income. Some redemptions may also be
subject to penalty tax. For more information contact a qualified tax adviser.
The Portfolios will declare as a dividend and distribute net investment
income at least once annually. The Portfolios will distribute any net realized
capital gains at least once annually. All dividends and
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distributions will be reinvested automatically at net asset value in additional
shares of the Portfolios. Dividends declared in October, November, or December
to shareholders of record in such month and paid during the following January
will be treated as having been distributed and received by shareholders on
December 31.
Regulations under Section 817(h) of the Code contain certain diversification
requirements. Generally, under those regulations, the Portfolios will be
required to diversify its investments so that, on the last day of each quarter
of a calendar year, no more than 55% of the value of its assets will be
represented by any one investment, no more than 70% will be represented by any
two investments, no more than 80% will be represented by any three investments,
and no more than 90% will be represented by any four investments. For this
purpose, all securities of a given issuer are treated as a single investment,
but, each U.S. Government agency and instrumentality is treated as a separate
issuer. In addition, any security issued, guaranteed, or insured (to the extent
so guaranteed or insured) by the United States or an instrumentality of the U.S.
will be treated as a security issued by the U.S. Government or its
instrumentality, whichever is applicable.
OTHER INFORMATION
CAPITALIZATION
The Trust was organized as a Massachusetts business trust on September 8,
1993. The Trust currently issues shares of the five portfolios described in this
prospectus. The Agreement and Declaration of Trust established three other
portfolios, and the Board of Trustees may establish additional portfolios in the
future. The capitalization of the Trust consists solely of an unlimited number
of shares of beneficial interest with a par value of $0.001 each. When issued in
accordance with the Trust's Agreement and Declaration of Trust, shares of the
Portfolios are fully paid, redeemable, freely transferable, and non-assessable
by the Trust.
Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the Trust. However, the
Declaration of Trust disclaims liability of the shareholders, Trustees or
officers of the Trust for acts or obligations of the Trust, which are binding
only on the assets and property of the Trust, and requires that notice of the
disclaimer be given in each contract or obligation entered into or executed by
the Trust or the Trustees. The Declaration of Trust provides for indemnification
out of Trust property for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust. The risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Trust itself would be unable to meet its obligations,
and should be considered remote.
VOTING RIGHTS
Shareholders of the Trust are given certain voting rights. Each share of the
Portfolios will be given one vote, unless otherwise required by law.
Massachusetts business trust law does not require the Trust to hold annual
shareholder meetings, although special meetings may be called for the Portfolio,
or for the Trust as a whole, for purposes such as electing or removing Trustees,
changing fundamental policies, or approving a contract for investment advisory
services. In accordance with current laws, it is anticipated that an insurance
company issuing a Variable Contract that participates in the Trust will request
voting instructions from Variable Contract owners and will vote shares or other
voting interests in the Separate Account in proportion to the voting
instructions received.
As explained in "The Manager and Portfolio Managers" page 10, some Portfolio
Managers invested or agreed to invest in the Portfolios they manage. Each of
those Portfolio Managers has agreed to vote its
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shares in the same proportion as all Contract owners having voting rights with
respect to the Portfolio or in such other manner as may be required by the SEC
or its staff.
PORTFOLIO BROKERAGE
A Portfolio Manager may employ an affiliated broker to execute brokerage
transactions on behalf of the Portfolio as long as the commissions are
reasonable and fair compared to the commissions received by other brokers in
connection with comparable transactions involving similar securities being
purchased or sold on a securities exchange during a comparable period of time.
GAMCO, the Portfolio Manager for the Value and Global Interactive Telecomm
Portfolios, uses an affiliated broker (Gabelli & Company, Inc.) to execute most
brokerage transactions on behalf of those two Portfolios. The Portfolios may not
engage in any transactions in which a Portfolio Manager or its affiliates acts
as principal, including over-the-counter purchases and negotiated trades in
which such party acts as a principal.
YEAR 2000
The services provided to the Trust and its shareholders by the Manager, the
Portfolio Managers, and the custodian depend on the smooth functioning of their
respective computer systems and their outside service providers' computer
systems. Some computer software currently in use cannot distinguish the year
2000 from the year 1900 because of the way that dates are encoded and
calculated. Failure to correct or replace this type of software could adversely
affect, among other things, the handling of securities trades, the payment of
interest and dividends, the pricing of the Portfolios' securities and of the
Portfolios' shares, and account services. Although there is a possibility of the
Portfolios suffering some adverse impact because of this "Year 2000" issue, the
Manager, the Portfolio Managers, and the custodian have advised the Trust that
they are taking steps to prepare for the year 2000, and that they expect that
they will have put in place the necessary changes to their computer systems in
time to prevent adverse impact to the Portfolios.
PERFORMANCE INFORMATION
The Trust may, from time to time, include quotations of each Portfolio's
total return in advertisements or reports to shareholders or prospective
investors. Performance information for the Portfolios will not be advertised or
included in sales literature for Variable Contracts unless accompanied by
comparable performance information for a separate account to which the
Portfolios offer their shares. Quotations of total return will be expressed in
terms of the average annual compounded rate of return of a hypothetical
investment in the Portfolios over periods of 1, 5 and 10 years (up to the life
of the Portfolios). All total return figures will reflect the deduction of a
proportional share of each Portfolio's expenses on an annual basis, and will
assume that all dividends and distributions are reinvested when paid. Quotations
of total return reflect only the performance of a hypothetical investment in the
Portfolios during the particular time period on which the calculations are
based. Total return for the Portfolios will vary based on changes in market
conditions and the level of each Portfolio's expenses, and no reported
performance figure should be considered an indication of performance which may
be expected in the future.
Quotations of total return for the Portfolios will not take into account
charges or deductions against any Separate Account to which the Portfolio shares
are sold or charges and deductions against the pertinent Variable Contract,
although comparable performance information for the Separate Account will take
such charges into account. A person considering the purchase of a Variable
Contract should not compare a Portfolio's total return with the total returns of
mutual funds that sell their shares directly to the public since the Portfolio's
figures do not reflect charges against the separate accounts or the Variable
Contracts.
Reports and promotional literature may also contain other information,
including the effect of tax deferred compounding on each Portfolio's investment
returns, or returns in general, which may be
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illustrated by graphs, charts, or otherwise, and which may include a comparison,
at various points in time, of the return from an investment in the Portfolio (or
returns in general) on a tax-deferred basis (assuming one or more tax rates)
with the return on a taxable basis. For a more detailed description of the
methods used to calculate each Portfolio's total return, see the SAI.
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APPENDIX A
DESCRIPTION OF INDICES
The following information as to each index has been supplied by the
respective preparer of the index or has been obtained from other
publicly-available information.
S&P 500 COMPOSITE STOCK PRICE INDEX
The purpose of the S&P 500 Composite Stock Price Index is to portray the
pattern of common stock price movement. Construction of the index proceeds from
industry groups to the whole. Currently there are four groups: 400 Industrials,
40 Utilities, 20 Transportation and 40 Financial. Since some industries are
characterized by companies of relatively small stock capitalization, the index
does not comprise the 500 largest companies listed on the New York Stock
Exchange.
Component stocks are chosen solely with the aim of achieving a distribution
by broad industry groupings that approximates the distribution of these
groupings in the New York Stock Exchange common stock population, taken as the
assumed model for the composition of the total market. Each stock added to the
index must represent a viable enterprise and must be representative of the
industry group to which it is assigned. Its market price movements must in
general be responsive to changes in industry affairs.
The formula adopted by S&P is generally defined as a "base-weighted
aggregative" expressed in relatives with the average value for the base period
(1941-1943) equal to 10. Each component stock is weighted so that it will
influence the index in proportion to its respective market importance. The most
suitable weighting factor for this purpose is the number of shares outstanding.
The price of any stock multiplied by number of shares outstanding gives the
current market value for that particular issue. This market value determines the
relative importance of the security.
Market values for individual stocks are added together to obtain their
particular group market value. These group values are expressed as a relative,
or index number, to the base period (1941-1943) market value. As the base period
market value is relatively constant, the index number reflects only fluctuations
in current market values.
MORGAN STANLEY CAPITAL INTERNATIONAL EUROPE, AUSTRALIA, AND THE FAR EAST INDEX
The Morgan Stanley EAFE index measures the performance in Europe, Australia,
and the Far East (EAFE). EAFE contains 20 countries, excluding the U.S. and the
emerging markets of Latin America. Japan represents approximately 46% of the
Index value. EAFE is divided into 8 economic sectors and 38 industry groups.
Banking, utilities, and health care are the largest groups.
LEHMAN BROTHERS AGGREGATE BOND INDEX
The Lehman Brothers Aggregate Bond Index measures the overall domestic bond
market and combines four other indices: the Lehman Brothers Government Bond
Index, which tracks the returns of U.S. Treasuries, agency bonds, and one- to
three-year U.S. government obligations; the Lehman Brothers Corporate Bond
Index, which tracks the returns of all publicly issued, fixed-rate,
nonconvertible, dollar-denominated, investment-grade corporate debt registered
with the Securities and Exchange Commission; the Lehman Brothers Mortgage-Backed
Securities Index, which includes 15- and 30-year fixed-rate securities backed by
mortgage pools issued by GNMA, FNMA, and FHLMC; and the Lehman Brothers
Asset-Backed Securities Index, which tracks fixed-income securities that
represent a participation in, or are secured by and payable from, a stream of
payments generated by particular assets (for example, trade receivables).
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APPENDIX B
DESCRIPTION OF RATINGS
CERTAIN RATINGS OF CORPORATE DEBT SECURITIES
MOODY'S INVESTORS SERVICE INC.
AAA--Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged."
AA--Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
A--Bonds rated A possess many favorable investment attributes and are generally
considered as upper-medium-grade obligations.
BAA--Bonds rated Baa are considered medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
BA--Bonds rated Ba are judged to have speculative elements; their future cannot
be considered as well-assured. Often the protection of interest and principal
payments may be very moderate and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position characterize bonds in
this class.
B--Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
CAA--Bonds rated Caa are of poor standing. Such issues may be in default or
elements of danger with respect to principal or interest may be present.
CA--Bonds rated Ca represent obligations which are speculative in a high degree.
Such issues are often in default or have other marked short comings.
STANDARD & POOR'S CORPORATION
AAA--Bonds rated AAA have the highest rating assigned by Standard & Poor's to a
debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA--Bonds rated AA have a very strong capacity to pay interest and repay
principal, and differ from the highest rated issues in small degree.
A--Bonds rated A have a strong capacity to pay interest and repay principal,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
BBB--Bonds rated BBB are regarded as having adequate capacity to pay interest
and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in the higher rated categories.
BB, B, CCC, CC--Bonds rated BB, B, CCC, and CC are regarded on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
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RATINGS OF COMMERCIAL PAPER
MOODY'S INVESTORS SERVICE, INC.
Prime-1 is the highest commercial paper rating assigned by Moody's. Issuers
rated Prime-1 (or supporting institutions) are considered to have a superior
capacity for repayment of short-term promissory obligations. Issuers rated
Prime-2 (or supporting institutions) are considered to have a strong capacity
for repayment of short-term promissory obligations. This will normally be
evidenced by many of the characteristics of issuers rated Prime-1 but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate
may be more affected by external conditions. Ample alternative liquidity is
maintained.
STANDARD & POOR'S CORPORATION
Commercial paper rated A-1 by S&P indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Capacity for
timely payment on commercial paper on commercial paper rated A-2 is strong, but
the relative degree of safety is not as high as for issues designated A-1.
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STATEMENT OF ADDITIONAL INFORMATION
for
The Value Portfolio,
The Growth Portfolio,
The International Growth Portfolio,
The Strategic Income Portfolio, and
The Global Interactive/Telecomm Portfolio
of
THE FULCRUM TRUST
440 Lincoln Street
Worcester, Massachusetts 01653
(800) 917-1909
September 1, 1998
This Statement of Additional Information discusses five portfolios
listed above (the "Portfolios") of The Fulcrum Trust (the "Trust"), which
is an open-end management investment company.
Shares of the Portfolios may be sold only to: (1) life insurance
company separate accounts (the "Separate Accounts") to serve as the
underlying investment medium for variable annuity and variable life insurance
contracts; (2) qualified retirement plans, as permitted by Treasury
Regulations; and (3) life insurance companies and advisers to the Portfolios
and their affiliates.
This Statement of Additional Information is intended to supplement the
information provided to investors in the Trust's Prospectus dated September 1,
1998. It has been filed with the Securities and Exchange Commission as
part of the Trust's Registration Statement. Investors should note, however,
that this Statement of Additional Information is not itself a prospectus and
should be read carefully in conjunction with the Prospectus for the
Portfolios and retained for future reference. The contents of this Statement
of Additional Information are incorporated by reference in the Prospectus in
their entirety. A copy of the Prospectus may be obtained free of charge from
the Trust at the address and telephone number listed above.
Manager:
Allmerica Financial Investment Management Services, Inc.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INTRODUCTION 4
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES 4
Mortgage-Backed Securities 4
GNMA Certificates 4
FNMA and FHLMC Mortgage-Backed Obligations 5
Collateralized Mortgage Obligations (CMOs) 6
Other Mortgage-Backed Securities 6
Asset-Backed Securities 7
Banking Industry and Savings Industry Obligations 8
Commercial Paper 9
Repurchase Agreements 9
Options on Equity Securities 10
Options on Debt Securities 11
Options on Stock Indices 12
Options on Foreign Currencies 14
Futures Contracts 15
Options on Futures Contracts 15
When-Issued or Delayed Delivery Securities 16
Foreign Currency Transactions 16
INVESTMENT RESTRICTIONS 18
MANAGEMENT OF THE TRUST 21
Trustees and Officers 21
Service Providers 23
PORTFOLIO TRANSACTIONS AND BROKERAGE 24
Investment Decisions 24
Brokerage and Research Services 24
PERFORMANCE INFORMATION 27
TAXATION 28
OTHER INFORMATION 29
Capitalization 29
Organization Expenses 30
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Registration Statement 30
FINANCIAL STATEMENTS 32
</TABLE>
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INTRODUCTION
This Statement of Additional Information is designed to elaborate upon
the discussion of certain securities and investment techniques which are
described in the Portfolios' Prospectus. The more detailed information
contained herein is intended solely for investors who have read the
Prospectus and are interested in a more detailed explanation of certain
aspects of some of the Portfolios' securities and some investment techniques.
Some of the Portfolios' investment techniques are described only in the
Prospectus and are not repeated herein. Captions and defined terms in this
Statement of Additional Information generally correspond to like captions and
terms in the Portfolios' Prospectus.
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
MORTGAGE-BACKED SECURITIES
All Portfolios may invest in mortgage-backed securities.
GNMA CERTIFICATES. Government National Mortgage Association ("GNMA")
certificates are mortgage-backed securities representing part ownership of a
pool of mortgage loans on which timely payment of interest and principal is
guaranteed by the full faith and credit of the U.S. Government. GNMA is a
wholly owned U.S. Government corporation within the Department of Housing and
Urban Development. GNMA is authorized to guarantee, with the full faith and
credit of the U.S. Government, the timely payment of principal and interest
on securities issued by institutions approved by GNMA (such as savings and
loan institutions, commercial banks, and mortgage bankers) and backed by
pools of FHA-insured or VA-guaranteed mortgages.
Interests in pools of mortgage-backed securities differ from other forms
of debt securities, which normally provide for periodic payment of interest
in fixed amounts with principal payments at maturity or specified call dates.
Instead, these securities provide a periodic payment which consists of both
interest and principal payments. In effect, these payments are a
"pass-through" of the periodic payments made by the individual borrowers on
the residential mortgage loans, net of any fees paid to the issuer or
guarantor of such securities. Additional payments are caused by repayments
of principal resulting from the sale of the underlying residential property,
refinancing or foreclosure, net of fees or costs which may be incurred.
Mortgage-backed securities issued by GNMA are described as "modified
pass-through" securities. These securities entitle the holder to receive all
interest and principal payments owed on the mortgage pool, net of certain
fees, at the scheduled payment dates, regardless of whether or not the
mortgagor actually makes the payment. Although GNMA guarantees timely payment
even if homeowners delay or default, tracking the "pass-through" payments
may, at
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times, be difficult. Expected payments may be delayed due to the delays in
registering the newly traded paper securities. The custodian's policies for
crediting missed payments while errant receipts are tracked down may vary.
Other mortgage-backed securities, such as those of the Federal Home Loan
Mortgage Corporation ("FHLMC") and the Federal National Mortgage Association
("FNMA"), trade in book-entry form and should not be subject to the risk of
delays in timely payment of income.
Although the mortgage loans in the pool will have maturities of up to 30
years, the actual average life of the GNMA certificates typically will be
substantially less because the mortgages will be subject to normal principal
amortization and may be prepaid prior to maturity. Early repayments of
principal on the underlying mortgages may expose a Portfolio to a lower rate
of return upon reinvestment of principal. Prepayment rates vary widely and
may be affected by changes in market interest rates. In periods of falling
interest rates, the rate of prepayment tends to increase, thereby shortening
the actual average life of the GNMA certificates. Conversely, when interest
rates are rising, the rate of prepayment tends to decrease, thereby
lengthening the actual average life of the GNMA certificates. Accordingly,
it is not possible to accurately predict the average life of a particular
pool. Reinvestment of prepayments may occur at higher or lower rates than
the original yield on the certificates. Due to the prepayment feature and
the need to reinvest prepayments of principal at current rates, GNMA
certificates can be less effective than typical bonds of similar maturities
at "locking in" yields during periods of declining interest rates, although
they may have comparable risks of decline in value during periods of rising
interest rates.
FNMA AND FHLMC MORTGAGE-BACKED OBLIGATIONS. Government-related
guarantors (i.e., not backed by the full faith and credit of the U.S.
Government) include the FNMA and the FHLMC. FNMA, a federally chartered and
privately owned corporation, issues pass-through securities representing
interests in a pool of conventional mortgage loans. FNMA guarantees the
timely payment of principal and interest, but this guarantee is not backed by
the full faith and credit of the U.S. Government. FNMA also issues REMIC
Certificates, which represent an interest in a trust funded with FNMA
Certificates. REMIC Certificates are guaranteed by FNMA, and not by the full
faith and credit of the U.S. Government.
FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of
Housing and Urban Development. FNMA purchases conventional (i.e., not
insured or guaranteed by any government agency) residential mortgages from a
list of approved seller/servicers which include state and federally chartered
savings and loan associations, mutual savings banks, commercial banks, credit
unions, and mortgage bankers. FHLMC, a corporate instrumentality of the
United States, was created by Congress in 1970 for the purpose of increasing
the availability of mortgage credit for residential housing. Its stock is
owned by the twelve Federal Home Loan Banks. FHLMC
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issues Participation Certificates ("PCS") which represent interests in
conventional mortgages from FHLMC's national portfolio. FHLMC guarantees the
timely payment of interest and ultimate collection of principal and maintains
reserves to protect holders against losses due to default. PCS are not
backed by the full faith and credit of the U.S. Government. As is the case
with GNMA certificates, the actual maturity and realized yield on particular
FNMA and FHLMC pass-through securities will vary based on the prepayment
experience of the underlying pool of mortgages.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS). A CMO is a hybrid between a
mortgage-backed bond and a mortgage pass-through security. Similar to a
bond, interest and prepaid principal are paid, in most cases, semiannually.
CMOs may be collateralized by whole mortgage loans, but are more typically
collateralized by portfolios of mortgage pass-through securities guaranteed
by GNMA, FHLMC, or FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. CMOs provide for a modified form of
call protection through a de facto breakdown of the underlying pool of
mortgages according to how quickly the loans are repaid. Monthly payment of
principal received from the pool of underlying investors, including
prepayments, is first returned to investors holding the shortest maturity
class. Investors holding the longer maturity classes receive principal only
after the first class has been retired. An investor is partially guarded
against a sooner-than-desired return of principal because of the sequential
payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple
Series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond
offering are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third-party trustee as
security for the Bonds. Principal and interest payments from the Collateral
are used to pay principal on the Bonds in the order A, B, C, Z. The Series
A, B, and C Bonds all bear current interest. Interest on the Series Z Bond
is accrued and added to the principal; a like amount is paid as principal on
the Series A, B, or C Bond currently being paid off. When the Series A, B,
and C Bonds are paid in full, interest and principal on the Series Z Bond
begin to be paid currently. With some CMOs, the issuer serves as a conduit to
allow loan originators (primarily builders or savings and loan associations)
to borrow against their loan portfolios.
OTHER MORTGAGE-BACKED SECURITIES. Commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers, and
other secondary market issuers also create pass-through pools of conventional
residential mortgage loans. In addition, such issuers may be the originators
and/or servicers of the underlying mortgage loans as well as the guarantors
of the mortgage-backed securities. Pools created by such non-
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governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or
indirect government or agency guarantees of payments in the former pools.
Timely payment of interest and principal of these pools may be supported by
various forms of insurance or guarantees, including individual loan, title,
pool and hazard insurance, and letters of credit. The insurance and
guarantees are issued by governmental entities, private insurers, and the
mortgage poolers. Such insurance, guarantees, and the creditworthiness of
the issuers thereof will be considered in determining whether a
mortgage-backed security meets a Portfolio's investment quality standards.
There can be no assurance that the private insurers or guarantors can meet
their obligations under the insurance policies or guarantee arrangements.
All Portfolios may buy mortgage-backed securities without insurance or
guarantees, if the Portfolio Manager determines that the securities meet a
Portfolio's quality standards. Although the market for such securities is
becoming increasingly liquid, securities issued by certain private
organizations may not be readily marketable. A Portfolio will not purchase
mortgage-backed securities or any other assets which, in the opinion of the
Portfolio Manager, are illiquid if, as a result, more than 15% of the value
of a Portfolio's total assets will be illiquid. As new types of
mortgage-backed securities are developed and offered to investors, the
Portfolio Manager will, consistent with a Portfolio's investment objectives,
policies, and quality standards, consider making investments in such new
types of mortgage-backed securities.
ASSET-BACKED SECURITIES
All Portfolios may purchase asset-backed securities. Two such
securities are "CARS-SM-" ("Certificates for Automobile Receivables-SM-") and
Credit Card Receivable Securities.
CARS-SM-, represent undivided fractional interests in a trust ("trust")
whose assets consist of a pool of motor vehicle retail installment sales
contracts and security interests in the vehicles securing the contracts.
Payments of principal and interest on CARS-SM- are "passed-through" monthly
to certificate holders, and are guaranteed up to certain amounts by a letter
of credit issued by a financial institution unaffiliated with the trustee or
originator of the trust. Underlying sales contracts are subject to
prepayment, which may reduce the overall return to certificate holders.
Certificate holders may also experience delays in payment or losses on
CARS-SM- if the full amounts due on underlying sales contracts are not
realized by the trust because of unanticipated legal or administrative costs
of enforcing the contracts, or because of depreciation, damage, or loss of
the vehicles securing the contracts, or other factors.
Credit Card Receivable Securities are asset-backed securities backed by
receivables from revolving credit card agreements. Credit balances on
revolving credit card agreements ("Accounts") are generally paid down more
rapidly than are Automobile Contracts. Most of
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the Credit Card Receivable Securities issued publicly to date have been
Pass-Through Certificates. In order to lengthen the maturity of Credit Card
Receivable Securities, most such securities provide for a fixed period during
which only interest payments on the underlying Accounts are passed through to
the security holder and principal payments received on such Accounts are used
to fund the transfer to the pool of assets supporting the related Credit Card
Receivable Securities of additional credit card charges made on an Account.
The initial fixed period usually may be shortened upon the occurrence of
specified events which signal a potential deterioration in the quality of the
assets backing the security, such as the imposition of a cap on interest
rates. The ability of the issuer to extend the life of an issue of Credit
Card Receivable Securities thus depends upon the continued generation of
additional principal amounts in the underlying Accounts during the initial
period and the non-occurrence of specified events. An acceleration in
cardholders' payment rates or any other event which shortens the period
during which additional credit card charges on an Account may be transferred
to the pool of assets supporting the related Credit Card Receivable Security
could shorten the expected weighted average life of the security and thus
reduce its yield. Credit card holders are entitled to the protection of a
number of state and federal consumer credit laws, many of which give such
holder the right to set off certain amounts against balances owed on the
credit card, thereby reducing amounts paid on Accounts. In addition, unlike
many other asset-backed securities, Accounts are unsecured obligations of the
cardholder.
BANKING INDUSTRY AND SAVINGS INDUSTRY OBLIGATIONS
Obligations of foreign banks involve somewhat different investment risks
than those affecting obligations of U.S. banks, which include: (i) the
possibility that their liquidity could be impaired because of future
political and economic developments; (ii) their obligations may be less
marketable than comparable obligations of U.S. banks; (iii) a foreign
jurisdiction might impose withholding taxes on interest income payable on
those obligations; (iv) foreign deposits may be seized or nationalized; (v)
foreign governmental restrictions, such as exchange controls, may be adopted
which might adversely affect the payment of principal and interest on those
obligations; and (vi) the selection of those obligations may be more
difficult because there may be less publicly available information concerning
foreign banks and/or because the accounting, auditing, and financial
reporting standards, practices and requirements applicable to foreign banks
may differ from those applicable to U.S. banks. Foreign banks are not
generally subject to examination by any U.S. Government agency or
instrumentality.
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COMMERCIAL PAPER
Commercial paper obligations may include variable amount master demand
notes. These notes are obligations that permit the investment of fluctuating
amounts at varying rates of interest pursuant to direct arrangements between
a Portfolio, as lender, and the borrower. These notes permit daily changes
in the amounts borrowed. The lender has the right to increase or to decrease
the amount under the note at any time up to the full amount provided by the
note agreement; and the borrower may prepay up to the full amount of the note
without penalty. Because variable amount master demand notes are direct
lending arrangements between the lender and borrower, and because no
secondary market exists for those notes, such instruments will probably not
be traded. However, the notes are redeemable (and thus immediately repayable
by the borrower) at face value, plus accrued interest, at any time. In
connection with master demand note arrangements, the Portfolio Manager will
monitor, on an ongoing basis, the earning power, cash flow, and other
liquidity ratios of the borrower and its ability to pay principal and
interest on demand. The Portfolio Manager also will consider the extent to
which the variable amount master demand notes are backed by bank letters of
credit. These notes generally are not rated by Moody's or S&P; the Portfolio
may invest in them only if the Portfolio Manager believes that at the time of
investment the notes are of comparable quality to the other commercial paper
in which the Portfolio may invest. Master demand notes are considered by the
Portfolio to have a maturity of one day, unless the Portfolio Manager has
reason to believe that the borrower could not make immediate repayment upon
demand. See Appendix B to the Prospectus for a description of Moody's and
S&P ratings applicable to commercial paper.
REPURCHASE AGREEMENTS
The term of a repurchase agreement is generally quite short, possibly
overnight or for a few days, although it may extend over a number of months
(up to one year) from the date of delivery. The resale price is in excess of
the purchase price by an amount which reflects an agreed-upon market rate of
return, effective for the period of time the Portfolio is invested in the
security. This results in a fixed rate of return protected from market
fluctuations during the period of the agreement. This rate is not tied to
the coupon rate on the security subject to the repurchase agreement.
A Portfolio may engage in repurchase transactions in accordance with
guidelines approved by the Board of Trustees of the Trust, which include
monitoring the creditworthiness of the parties with which a Portfolio engages
in repurchase transactions, obtaining collateral at least equal in value to
the repurchase obligation, and marking the collateral to market on a daily
basis.
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A Portfolio may not enter into a repurchase agreement having more than
seven days remaining to maturity if, as a result, such agreements together
with any other securities that are not readily marketable, would exceed 15%
of the net assets of the Portfolio. If the seller should become bankrupt or
default on its obligations to repurchase the securities, a Portfolio may
experience delay or difficulties in exercising its rights to the securities
held as collateral and might incur a loss if the value of the securities
should decline. A Portfolio also might incur disposition costs in connection
with liquidating the securities.
OPTIONS ON EQUITY SECURITIES
The Portfolios may purchase and write (i.e., sell) put and call options
on equity securities that are traded on U.S. securities exchanges, are listed
on the National Association of Securities Dealers Automated Quotation System
("NASDAQ"), or that result from privately negotiated transactions with
broker-dealers ("OTC options"). A call option is a short-term contract
pursuant to which the purchaser or holder, in return for a premium paid, has
the right to buy the security underlying the option at a specified exercise
price at any time during the term of the option. The writer of the call
option, who receives the premium, has the obligation, upon exercise of the
option, to deliver the underlying security against payment of the exercise
price. A put option is a similar contract which gives the purchaser or
holder, in return for a premium, the right to sell the underlying security at
a specified price during the term of the option. The writer of the put, who
receives the premium, has the obligation to buy the underlying security at
the exercise price upon exercise by the holder of the put.
A Portfolio will write only "covered" options on stocks. A call option
is covered if: (1) the Portfolio owns the security underlying the option; or
(2) the Portfolio has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional
consideration held in a segregated account by its custodian) upon conversion
or exchange of other securities it holds; or (3) the Portfolio holds on a
share-for-share basis a call on the same security as the call written where
the exercise price of the call held is equal to or less than the exercise
price of the call written or greater than the exercise price of the call
written if the difference is maintained by the Portfolio in cash, Government
securities or other liquid assets in a segregated account with its custodian.
A put option is covered if: (1) the Portfolio deposits and maintains with its
custodian in a segregated account cash, U.S. Government securities or other
liquid assets having a value equal to or greater than the exercise price of
the option; or (2) the Portfolio holds on a share-for-share basis a put on
the same security as the put written where the exercise price of the put held
is equal to or greater than the exercise price of the put written or less
than the exercise price if the difference is maintained by the Portfolio in
cash, Government securities or other liquid assets in a segregated account
with its custodian.
10
<PAGE>
A Portfolio may also purchase "protective puts" (i.e., put options
acquired for the purpose of protecting a Portfolio security from a decline in
market value). The loss to the Portfolio is limited to the premium paid for,
and transaction costs in connection with, the put plus the initial excess, if
any, of the market price of the underlying security over the exercise price.
However, if the market price of the security underlying the put rises, the
profit the Portfolio realizes on the sale of the security will be reduced by
the premium paid for the put option less any amount (net of transaction
costs) for which the put may be sold.
A Portfolio may also purchase putable and callable equity securities,
which are securities coupled with a put or call option provided by the issuer.
A Portfolio may purchase call options for hedging and investment
purposes. No Portfolio intends to invest more than 5% of its net assets at
any one time in the purchase of call options on stocks.
If the writer of an exchange-traded option wishes to terminate the
obligation, he or she may effect a "closing purchase transaction" by buying
an option of the same series as the option previously written. Similarly,
the holder of an option may liquidate his or her position by exercise of the
option or by effecting a "closing sale transaction" by selling an option of
the same series as the option previously purchased. There is no guarantee
that closing purchase or closing sale transactions can be effected.
OPTIONS ON DEBT SECURITIES
The Portfolios may purchase and write exchange-traded and OTC put and
call options on debt securities. Options on debt securities are similar to
options on stock, except that the option holder has the right to take or make
delivery of a debt security, rather than stock.
A Portfolio will write only "covered" options. Options on debt
securities are covered in the same manner as options on stocks, discussed
above, except that, in the case of call options on U.S. Treasury Bills, the
Portfolio might own U.S. Treasury Bills of a different series from those
underlying the call option, but with a principal amount and value
corresponding to the option contract amount and a maturity date no later than
that of the securities deliverable under the call option.
A Portfolio may also write straddles (i.e., a combination of a call and
a put written on the same security at the same strike price where the same
issue of the security is considered as the cover for both the put and the
call). In such cases, the Portfolio will also segregate or deposit for the
benefit of the Portfolio's broker cash, U.S. Government securities or other
liquid assets equivalent to the amount, if any, by which the put is "in the
money." It is contemplated that each Portfolio's use of straddles will be
limited to 5% of the Portfolio's net assets (meaning
11
<PAGE>
that the securities used for cover or segregated as described above will not
exceed 5% of the Portfolio's net assets at the time the straddle is written).
A Portfolio may purchase "protective puts" in an effort to protect the
value of a security that it owns against a substantial decline in market
value. Protective puts are described in OPTIONS ON EQUITY SECURITIES above.
A Portfolio may wish to protect certain securities against a decline in
market value at a time when put options on those particular securities are
not available for purchase. A Portfolio may therefore purchase a put option
on securities it does not hold. While changes in the value of the put should
generally offset changes in the value of the securities being hedged, the
correlation between the two values may not be as close in these transactions
as in transactions in which the Portfolio purchases a put option on an
underlying security it owns.
A Portfolio may also purchase call options on debt securities for
hedging or investment purposes. No Portfolio currently intends to invest
more than 5% of its net assets at any one time in the purchase of call
options on debt securities.
A Portfolio may also purchase putable and callable debt securities,
which are securities coupled with a put or call option provided by the issuer.
A Portfolio may enter into closing purchase or sale transactions in a
manner similar to that discussed above in connection with options on equity
securities.
OPTIONS ON STOCK INDICES
The Portfolios may purchase and sell put and call options on stock
indices traded on national securities exchanges, listed on NASDAQ or that
result from privately negotiated transactions with broker-dealers ("OTC
options"). Options on stock indices are similar to options on stock except
that, rather than the right to take or make delivery of stock at a specified
price, an option on a stock index gives the holder the right to receive, upon
exercise of the option, an amount of cash if the closing level of the stock
index upon which the option is based is greater than in the case of a call,
or less than, in the case of a put, the strike price of the option. This
amount of cash is equal to such difference between the closing price of the
index and the strike price of the option times a specified multiple (the
"multiplier"). If the option is exercised, the writer is obligated, in
return for the premium received, to make delivery of this amount. Unlike
stock options, all settlements are in cash, and gain or loss depends on price
movements in the stock market generally (or in a particular industry or
segment of the market) rather than price movements in individual stocks.
A Portfolio will write only "covered" options on stock indices. A call
option is covered if the Fund follows the segregation requirements set forth
in this paragraph. When a Portfolio
12
<PAGE>
writes a call option on a broadly based stock market index, it will segregate
or put into escrow with its custodian or pledge to a broker as collateral for
the option, cash, Government securities or other liquid assets, or "qualified
securities" (defined below) with a market value at the time the option is
written of not less than 100% of the current index value times the multiplier
times the number of contracts. A "qualified security" is an equity security
which is listed on a national securities exchange or listed on NASDAQ against
which the Portfolio has not written a stock call option and which has not
been hedged by the Portfolio by the sale of stock index futures. When a
Portfolio writes a call option on an industry or market segment index, it
will segregate or put into escrow with its custodian or pledge to a broker as
collateral for the option, cash, Government securities or other liquid
assets, or at least five qualified securities, all of which are stocks of
issuers in such industry or market segment, with a market value at the time
the option is written of not less than 100% of the current index value times
the multiplier times the number of contracts. Such stocks will include
stocks which represent at least 50% of the weighting of the industry or
market segment index and will represent at least 50% of the Portfolio's
holdings in that industry or market segment. No individual security will
represent more than 15% of the amount so segregated, pledged or escrowed in
the case of broadly based stock market stock options or 25% of such amount in
the case of industry or market segment index options. If at the close of
business on any day the market value of such qualified securities so
segregated, escrowed, or pledged falls below 100% of the current index value
times the multiplier times the number of contracts, the fund will so
segregate, escrow, or pledge an amount in cash, Government securities, or
other liquid assets equal in value to the difference. In addition, when a
Portfolio writes a call on an index which is in-the-money at the time the
call is written, it will segregate with its custodian or pledge to the broker
as collateral, cash, U.S. government securities or other liquid assets equal
in value to the amount by which the call is in-the-money times the multiplier
times the number of contracts. Any amount segregated pursuant to the
foregoing sentence may be applied to the Portfolio's obligation to segregate
additional amounts in the event that the market value of the qualified
securities falls below 100% of the current index value times the multiplier
times the number of contracts.
A call option is also covered if the Portfolio holds a call on the same
index as the call written where the strike price of the call held is equal to
or less than the strike price of the call written or greater than the strike
price of the call written if the difference is maintained by the Portfolio in
cash, Government securities or other liquid assets in a segregated account
with its custodian.
A put option is covered if: (1) the Portfolio holds in a segregated
account cash, Government securities or other liquid assets of a value equal
to the strike price times the multiplier times the number of contracts; or
(2) the Portfolio holds a put on the same index as the put written where the
strike price of the put held is equal to or greater than the strike price of
the put written or less than the strike price of the put written if the
difference is maintained
13
<PAGE>
by the Portfolio in cash, Government securities or other liquid assets in a
segregated account with its custodian.
A Portfolio may purchase put and call options for hedging and investment
purposes. No Portfolio intends to invest more than 5% of its net assets at
any one time in the purchase of puts and calls on stock indices. A Portfolio
may effect closing sale and purchase transactions involving options on stock
indices, as described above in connection with stock options.
The prospectus details certain risks particular to options on stock
indices. In addition, when a Portfolio has written a call, there is also a
risk that the market may decline between the time the Portfolio has a call
exercised against it, at a price which is fixed as of the closing level of
the index on the date of exercise, and the time the Portfolio is able to sell
stocks in its Portfolio. As with stock options, the Portfolio will not learn
that an index option has been exercised until the day following the exercise
date but, unlike a call on stock where the Portfolio would be able to deliver
the underlying securities in settlement, the Portfolio may have to sell part
of its stock Portfolio in order to make settlement in cash, and the price of
such stocks might decline before they can be sold. This timing risk makes
certain strategies involving more than one option substantially more risky
with options in stock indices than with stock options.
There are also certain special risks involved in purchasing put and call
options on stock indices. If a Portfolio holds an index option and exercises
it before final determination of the closing index value for that day, it
runs the risk that the level of the underlying index may change before
closing. If such a change causes the exercise option to fall out
of-the-money, the Portfolio will be required to pay the difference between
the closing index value and the strike price of the option (times the
applicable multiplier) to the assigned writer. Although a Portfolio may be
able to minimize the risk by withholding exercise instructions until just
before the daily cutoff time or by selling rather than exercising an option
when the index level is close to the exercise price, it may not be possible
to eliminate this risk entirely because the cutoff times for index options
may be earlier than those fixed for other types of options and may occur
before definitive closing index values are announced.
OPTIONS ON FOREIGN CURRENCIES
The Portfolios may purchase and write put and call options on foreign
currencies traded on U.S. or foreign securities exchanges or boards of trade.
Options on foreign currencies are similar to options on stock, except that
the option holder has the right to take or make delivery of a specified
amount of foreign currency, rather than stock.
14
<PAGE>
FUTURES CONTRACTS
The Portfolios may purchase and sell stock index futures contracts. A
stock index futures contract is an agreement in which the seller of the
contract agrees to deliver to the buyer an amount of cash equal to a specific
dollar amount times the difference between the value of a specific stock
index at the close of the last trading day of the contract and the price at
which the agreement is made. No physical delivery of the underlying stocks
in the index is made. In addition, the Portfolios may, for hedging purposes,
purchase and sell (a) futures contracts on interest-bearing securities (such
as U.S. Treasury bonds and notes) or interest rate indices (referred to
collectively as "interest rate futures contracts"); (2) futures contracts on
foreign currencies or groups of foreign currencies; and (3) futures contracts
on gold and other precious metals.
When the futures contract is entered into, each party deposits with a
broker or in a segregated custodial account approximately 5% of the contract
amount, called the "initial margin." Subsequent payments to and from the
broker, called the "variation margin," will be made on a daily basis as the
underlying security, index or rate fluctuates making the long and short
positions in the futures contracts more or less valuable, a process known as
"marking to the market."
OPTIONS ON FUTURES CONTRACTS
The Portfolios may enter into certain transactions involving options on
futures contracts. An option on a futures contract gives the purchaser or
holder the right, but not the obligation, to assume a position in a futures
contract (a long position if the option is a call and a short position if the
option is a put) at a specified price at any time during the option exercise
period. The writer of the option is required upon exercise to assume an
offsetting futures position (a short position if the option is a call and long
position if the option is a put). Upon exercise of the option, the assumption
of offsetting futures positions by the writer and holder of the option will be
accomplished by delivery of the accumulated balance in the writer's futures
margin account which represents the amount by which the market price of the
futures contract, at exercise, exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option on the futures contract.
As an alternative to exercise, the holder or writer of an option may terminate a
position by selling or purchasing an option of the same series. There is no
guarantee that such closing transactions can be effected. The Portfolios intend
to utilize options on futures contracts for the same purposes that they use the
underlying futures contracts.
Options on futures contracts are subject to risks similar to those
described above with respect to options on securities, options on stock indices,
and futures contracts. These risks
15
<PAGE>
include the risk that the Portfolio manager may not correctly predict changes
in the market, the risk of imperfect correlation between the option and the
securities being hedged, and the risk that there might not be a liquid
secondary market for the option. There is also the risk of imperfect
correlation between the option and the underlying futures contract. If there
were no liquid secondary market for a particular option on a futures
contract, the Portfolio might have to exercise an option it held in order to
realize any profit and might continue to be obligated under an option it had
written until the option expired or was exercised. If a Portfolio were
unable to close out an option it had written on a futures contract, it would
continue to be required to maintain initial margin and make variation margin
payments with respect to the option position until the option expired or was
exercised against the Portfolio.
WHEN-ISSUED OR DELAYED DELIVERY SECURITIES
All Portfolios may purchase securities on a when-issued or delayed
delivery basis if the Portfolio holds, and maintains until the settlement
date in a segregated account, cash, U.S. Government securities, or high-grade
debt obligations in an amount sufficient to meet the purchase price, or if
the Portfolio enters into offsetting contracts for the forward sale of other
securities it owns. Purchasing securities on a when-issued or delayed
delivery basis involves a risk of loss if the value of the security to be
purchased declines prior to the settlement date, which risk is in addition to
the risk of decline in value of the Portfolios' other assets. Although a
Portfolio would generally purchase securities on a when-issued basis or enter
into forward commitments with the intention of acquiring securities, the
Portfolio may dispose of a when-issued or delayed delivery security prior to
settlement if the Portfolio Manager deems it appropriate to do so. The
Portfolio may realize short-term profits or losses upon such sales.
FOREIGN CURRENCY TRANSACTIONS
The Portfolios may enter into forward currency contracts and enter into
currency exchange transactions on a spot (i.e. cash) basis. A forward
currency contract is an obligation to purchase or sell a currency against
another currency at a future date and price as agreed upon by the parties. A
Portfolio may either accept or make delivery of the currency at the maturity
of the forward contract or, prior to maturity, enter into a closing
transaction involving the purchase or sale of an offsetting contract. A
Portfolio will engage in forward currency transactions in anticipation of or
to protect itself against fluctuations in currency exchange rates.
A Portfolio may enter into forward foreign currency contracts in two
circumstances. First, when a Portfolio enters into a contract for the
purchase or sale of a security denominated in a foreign currency, the
Portfolio may desire to "lock in" the U.S. dollar price of the security. By
entering into a forward contract for a fixed amount of dollars for the
purchase or sale of the amount of foreign currency involved in the underlying
transactions, the Portfolio will be able
16
<PAGE>
to protect itself against a possible loss resulting from an adverse change in
the relationship between the U.S. dollar and such foreign currency during the
period between the date on which the security is purchased or sold and the
date on which payment is made or received.
Second, when the Portfolio Manager believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract for a fixed amount of dollars to
sell the amount of foreign currency approximating the value of some or all of
the Portfolios securities denominated in such foreign currency. The precise
matching of the forward contract amounts and the value of the securities
involved will not generally be possible since the future value of securities
in foreign currencies will change as a consequence of market movements in the
value of these securities between the date on which the forward contract is
entered into and the date it matures. The projection of short-term currency
market movement is extremely difficult, and the successful execution of a
short-term hedging strategy is highly uncertain. None of the Portfolios will
enter into such forward contracts or maintain a net exposure to such
contracts where the consummation of the contracts would obligate the
Portfolios to deliver an amount of foreign currency in excess of the value of
the Portfolios securities or other assets denominated in that currency.
A Portfolio's custodian will place cash, Government securities or other
liquid assets into a segregated account of the Portfolio in an amount equal
to the value of the Portfolio's total assets committed to the consummation of
forward foreign currency exchange contracts. If the value of the assets
placed in the segregated account declines, additional cash or securities will
be placed in the account on a daily basis so that the value of the account
will equal the amount of the Portfolio's commitments with respect to such
contracts.
At the maturity of a forward contract, a Portfolio may either sell the
portfolio security and make delivery of the foreign currency, or it may
retain the security and terminate its contractual obligation to deliver the
foreign currency by purchasing an "offsetting" contract with the same
currency trader obligating it to purchase, on the same maturity date, the
same amount of the foreign currency.
It is impossible to forecast the market value of a particular portfolio
security at the expiration of the contract. Accordingly, if a decision is
made to sell the security and make delivery of the foreign currency, it may
be necessary for the Portfolio to purchase additional foreign currency on the
spot market (and bear the expense of such purchase) if the market value of
the security is less than the amount of foreign currency that the Portfolio
is obligated to deliver.
If the Portfolio retains the portfolio security and engages in an
offsetting transaction, it will incur a gain or a loss (as described below)
to the extent that there has been movement in forward contract prices.
Should forward prices decline during the period between the
17
<PAGE>
Portfolios entering into a forward contract for the sale of a foreign
currency and the date it enters into an offsetting contract for the purchase
of the foreign currency, the Portfolio will realize a gain to the extent that
the price of the currency it has agreed to sell exceeds the price of the
currency it has agreed to purchase. Should forward prices increase, the
Portfolio will suffer a loss to the extent that the price of the currency it
has agreed to purchase exceeds the price of the currency it has agreed to
sell.
Forward contracts are not traded on regulated commodities exchanges.
There can be no assurance that a liquid market will exist when a Portfolio
seeks to close out a forward currency position, and in such an event, a
Portfolio might not be able to effect a closing purchase transaction at any
particular time. In addition, a Portfolio entering into a forward foreign
currency contract incurs the risk of default by the counter party to the
transaction. The CFTC has indicated that it may in the future assert
jurisdiction over certain types of forward contracts in foreign currencies
and attempt to prohibit certain entities from engaging in such foreign
currency forward transactions.
Although the Portfolios value their assets daily in terms of U.S.
dollars, they do not intend physically to convert their holdings of foreign
currencies into U.S. dollars on a daily basis. They will do so from time to
time, and investors should be aware of the costs of currency conversion.
Although foreign exchange dealers do not charge a fee for conversion, they do
realize a profit based on the difference (the "spread") between the prices at
which they are buying and selling various currencies. Thus, a dealer may
offer to sell a foreign currency to a Portfolio at one rate, while offering a
lesser rate of exchange should the Portfolio desire to resell that currency
to the dealer.
INVESTMENT RESTRICTIONS
Each Portfolio's investment objective as set forth under "Investment
Objectives and Policies" in the Prospectus, together with the investment
restrictions set forth below, are, fundamental and may not be changed with
respect to any Portfolio without the approval of a majority of the
outstanding voting shares of that Portfolio. The vote of a majority of the
outstanding voting securities of a Portfolio means the vote, at an annual or
special meeting, of the lesser of (a) 67% or more of the voting securities
present at such meeting, if the holders of more than 50% of the outstanding
voting securities of such Portfolio are present or represented by proxy; or
(b) more than 50% of the outstanding voting securities of such Portfolio.
None of the Portfolios will:
(1) Make an investment unless, when considering all its other
investments, 75% of the value of a Portfolio's assets would consist of
cash, cash items, obligations of the United States government, its
agencies or instrumentalities, securities of other investment companies,
and other securities. For purposes of this restriction, "other securities"
are
18
<PAGE>
limited for each issuer to not more than 5% of the value of a
Portfolio's assets and to not more than 10% of the issuer's outstanding
voting securities held by the Fulcrum Trust as a whole. Some uncertainty
exists as to whether certain of the types of bank obligations in which a
Portfolio may invest, such as certificates of deposit and bankers'
acceptances, should be classified as "cash items" rather than "other
securities" for purposes of this restriction, which is a diversification
requirement under the 1940 Act. Interpreting most bank obligations as
"other securities" limits the amount a Portfolio may invest in the
obligations of any one bank to 5% of its total assets. If there is an
authoritative decision that any of these obligations are not "securities"
for purposes of this diversification test, this limitation would not apply
to the purchase of such obligations.
(2) Invest in a security if more than 25% of its total assets (taken
at market value at the time of such investment) would be invested in the
securities of issuers in any particular industry, except (a) that this
restriction does not apply to securities issued or guaranteed by the
U.S. Government or its agencies or instrumentalities (or repurchase
agreements with respect thereto), and to securities or obligations
issued by banks, as permitted by the SEC; and (b) that the Global
Interactive/Telecomm Portfolio may invest more than 25% of its total
assets in the public utilities industry and may invest more than 25% of
its total assets in the telecommunications industry.
(3) Purchase or sell real estate, except that a Portfolio may invest
in securities secured by real estate or real estate interests or issued by
companies in the real estate industry or which invest in real estate or
real estate interests;
(4) Buy or sell commodities or commodity contracts, except that the
Portfolio may purchase and sell futures contracts and related options,
foreign currency, forward foreign currency exchange contracts, and gold
and other precious metals.
(5) Purchase securities on margin (except for use of short-term
credit necessary for clearance of purchases and sales of portfolio
securities), except a Portfolio engaged in transactions in options,
futures, and options on futures may make margin deposits in connection
with those transactions, except that effecting short sales will be
deemed not to constitute a margin purchase for purposes of this
restriction.
(6) Lend any funds or other assets, except that a Portfolio may,
consistent with its investment objective and policies:
(a) invest in debt obligations, even though the purchase of such
obligations may be deemed to be the making of loans;
(b) enter into repurchase agreements; and
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<PAGE>
(c) lend its portfolio securities in accordance with applicable
guidelines established by the Board of Trustees;
(7) Issue senior securities, except insofar as a Portfolio may be
deemed to have issued a senior security by reason of borrowing money in
according with that Portfolio's borrowing policies, or in connection
with any repurchase agreement, and except, for purposes of this
investment restriction, collateral or escrow arrangements with respect
to the making of short sales, purchase or sale of futures contracts or
related options, purchase or sale of forward currency contracts, writing
of options, and collateral arrangements with respect to margin or other
deposits respecting futures contracts, related options, and forward
currency contracts are not deemed to be an issuance of a senior security;
(8) Act as an underwriter of securities of other issuers, except,
when in connection with the disposition of portfolio securities, a
Portfolio may be deemed to be an underwriter under the federal
securities laws; and
(9) Borrow money or pledge, mortgage, or hypothecate its assets,
except that a Portfolio may: (a) borrow from banks, but only if
immediately after each borrowing and continuing thereafter there is
asset coverage of 300%; and (b) enter into reverse repurchase agreements
and transactions in options, futures, options on futures, and forward
currency contracts.
20
<PAGE>
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
Set forth below is a list of the Trustees of the Trust, their business
addresses, and principal occupations during the past five years:
<TABLE>
<CAPTION>
Principal Occupations During
Name and Address Position with the Trust Past Five Years
---------------- ----------------------- ---------------
<S> <C> <C>
George J. Sullivan, Jr. Chairman of the Board; Chief Executive Officer, Newfound
Newfound Consultants, Inc. c/o c3 President Consultants, Inc. (financial consulting),
260 Franklin Street Suite 260 1995-present; Chief Operating Officer,
Boston, MA 02110 Noble Partners, L.P. (investment advisory
services), 1991-1995.
Tom N. Dallape Trustee; Commercial Land Broker, The
18881 Von Karman Avenue Vice President Hoffman Company (Partner since
Suite 1225 January 1997; Senior Associate prior to
Irvine, CA 92612 January 1997).
Gordon Holmes Trustee Lecturer and Executive in Residence,
Boston University School Boston University, 1997-present; Certified
of Management Public Accountant and Partner with Tofias, Fleishman,
595 Commonwealth Avenue Shapiro and Co., P.C., prior to 1997.
Boston, MA 02215
</TABLE>
Set forth below is a list of the Officers of the Trust, their business
addresses, and principal occupations during the past five years:
<TABLE>
<CAPTION>
Principal Occupations During
Name and Address Position with the Trust Past Five Years
---------------- ----------------------- ---------------
<S> <C> <C>
David J. Mueller Vice President Vice President, First Allmerica
440 Lincoln Street Financial Life Insurance Company
Worcester, MA 01653 since 1996; Assistant Vice
President, First Allmerica 1995-
1996; Business Analyst, First
Allmerica 1993-1995; Manager,
Coopers & Lybrand 1987-1993
Lisa M. Coleman Vice President Vice President of Allmerica Asset
440 Lincoln Street Management, Inc. since 1994; Deputy
Worcester, MA 01653 Manager at Brown Brothers Harriman,
1989-1994
Stephen W. Bright Vice President Vice President of Allmerica Asset
440 Lincoln Street Management, Inc. since 1996; Client
Worcester, MA 01653 Relationship Manager, Connecticut Mutual,
1994-1995; Investment Officer, Travelers,
1986-1994
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Principal Occupations During
Name and Address Position with the Trust Past Five Years
---------------- ----------------------- ---------------
<S> <C> <C>
Thomas P. Cunningham Treasurer Investment Product Manager, First
440 Lincoln Street Allmerica Financial Life
Worcester, MA 01653 Insurance Company since March
1996; Vice President, First Data
Investor Services Group, Inc.
1994-1995; Vice President,
Fidelity Investments 1990-1993
George M. Boyd Secretary Counsel, First Allmerica
440 Lincoln Street Financial Life Insurance Company
Worcester, MA 10653 since January 1997; Director,
Mutual Fund Administration -
Legal and Regulatory, Investors
Bank and Trust Company 1995-1996;
Vice President and Counsel, 440
Financial Group and First Data
Investor Services Group 1992-1995
Joseph W. MacDougall, Jr. Assistant Secretary Vice President and Associate General
440 Lincoln Street Counsel, First Allmerica Financial
Worcester, MA 01653 Life Insurance Company, 1986-present
</TABLE>
None of the trustees or officers directly owns shares of the Portfolios.
In addition, as of the date of this Statement of Additional Information, the
Trustees and Officers in the aggregate
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<PAGE>
owned variable contracts that entitled them to give voting instructions with
respect to less than one percent of the outstanding shares of the Portfolios.
Trustees other than those affiliated with the Manager receive $1,500 for
each Board meeting and are reimbursed for any expenses incurred in attending
such meetings or otherwise in carrying out their responsibilities as trustees.
SERVICE PROVIDERS
For information about the custodian and transfer agent, and the
principal underwriter, see the prospectus.
For 1996, the Value Portfolio accrued fees to Fulcrum Advisors, Inc.
("PAI") of $1,031, of which the Portfolio paid PAI $379. PAI paid Tremont
Partners, Inc. ("Tremont") $121. For 1997, the Value Portfolio accrued fees
to PAI of $947, of which the Portfolio paid PAI $53. PAI paid Tremont $53.
For 1996, the Growth Portfolio accrued fees to PAI of $129, of which the
Portfolio paid PAI $35. PAI paid Tremont $32. For 1997, the Growth
Portfolio accrued fees to PAI of $838, of which the Portfolio paid PAI $271.
PAI paid Tremont $271.
For 1996, the International Growth Portfolio accrued fees to PAI of $67,
of which the Portfolio paid PAI $17. PAI paid Tremont $17. For 1997, the
International Growth Portfolio accrued fees to PAI of $1,848, of which the
Portfolio paid PAI $524. PAI paid Tremont $524.
For 1996, the Strategic Income Portfolio accrued fees to PAI of
$1525, of which the Portfolio paid PAI $634. PAI paid Tremont $381. For
1997, the Strategic Income Portfolio accrued fees to PAI of $1,508, of
which the Portfolio paid PAI $432. PAI paid Tremont $432.
For 1996, the Global Interactive/Telecomm Portfolio accrued fees to PAI
of $798, of which the Portfolio paid PAI $321. PAI paid Tremont $200. For
1997, the Global Interactive/Telecomm Portfolio accrued fees to PAI of $810,
of which the Portfolio paid PAI $24. PAI paid Tremont $24.
For 1996 the Portfolios paid the following fees to the Portfolio
Managers: Value ($4,127); Growth ($517); International Growth ($269);
Strategic Income ($6,097); Global Interactive/Telecomm ($3,193). For 1997
the Portfolios paid the following fees to the Portfolio Managers: Value
($3,787); Growth ($3,354); International Growth ($7,394); Strategic
Income ($6,030); Global Interactive/Telecomm ($3,240).
23
<PAGE>
Coopers & Lybrand, L.L.P., 250 W. Pratt Street, Baltimore, MD 21201,
serves as independent accountants for the Trust.
Investors Bank & Trust Company ("IBT"), 200 Clarendon Street, Boston,
Massachusetts 02116 provides fund accounting and transfer agency services.
The fee for each Portfolio is based on an annual rate of 0.05% of net assets
for the first $600 million in net assets and an annual rate of 0.03% of net
assets for net assets in excess of $600 million. In addition, each Portfolio
will reimburse IBT for out-of-pocket expenses such as pricing services.
There is currently a minimum annual fee of $48,500 per Portfolio. For fund
accounting services during 1996, each Portfolio paid $35,000 to IBT. For
fund accounting and transfer agency services during 1997, each Portfolio paid
$49,459 to IBT.
PORTFOLIO TRANSACTIONS AND BROKERAGE
INVESTMENT DECISIONS
Investment decisions for each Portfolio are made by the Portfolio
Manager of each Portfolio. Each Portfolio Manager has investment advisory
clients other than the Portfolio. A particular security may be bought or
sold by a Portfolio Manager for certain clients even though it could have
been bought or sold for other clients at the same time. It also sometimes
happens that two or more clients simultaneously purchase or sell the same
security, in which event each day's transactions in such security are,
insofar as possible, allocated between such clients in a manner deemed fair
and reasonable by the Portfolio Manager. Although there is no specified
formula for allocating such transactions, the various allocation methods used
by the Portfolio Manager, and the results of such allocations, are subject to
periodic review by the Trust's Manager and Board of Trustees. There may be
circumstances when purchases or sales of portfolio securities for one or more
clients will have an adverse effect on other clients.
BROKERAGE AND RESEARCH SERVICES
Each Portfolio Manager is responsible for the selection of brokers and
dealers to effect that Portfolio's transactions and the negotiation of brokerage
commissions, if any. Transactions on a stock exchange in equity securities will
be executed primarily through brokers who will receive a commission paid by the
Portfolio. In the United States, commissions are usually negotiated; in other
countries, the commissions are usually fixed. Equity securities traded in the
over-the-counter ("OTC") markets are generally traded on a "net" basis with a
dealer acting as principal for its own account without a stated commission,
although the price of the security usually includes a profit to the dealer in
the form of the spread between the bid and asked prices. In some instances, the
Portfolio Managers may execute OTC transactions on an agency basis through a
broker who is not a market marker in the particular security, and in those
transactions
24
<PAGE>
the Portfolio will also pay a brokerage commission. Fixed income securities
are generally traded on a "net" basis. In underwritten offerings, securities
are purchased at a fixed price that includes an amount of compensation to the
underwriter, generally referred to as the underwriter's concession or
discount. On occasion, certain of these securities may be purchased directly
from an issuer, in which case neither commissions nor discounts are paid.
In purchasing and selling securities, it is the policy of each Portfolio
Manager to seek the best execution for the Portfolio taking into account such
factors as price (including the applicable brokerage commission or dollar
spread), size of order, the nature of the market for the security, the timing
of the transaction, the reputation, experience and financial stability of the
broker-dealer involved, the quality of the service, the difficulty of the
execution, the operational facilities of the firms involved, and the firm's
risk in positioning a block of securities.
Notwithstanding the above, under certain conditions, the Portfolios are
authorized to pay higher brokerage commissions in return for brokerage and
research services. A Portfolio Manager may cause a Portfolio to pay a
broker-dealer who furnishes brokerage and/or research services a commission
or price for executing a transaction that is in excess of the commission or
price another broker would have received for executing the transaction if it
is determined that such commission or price is reasonable in relation to the
value of the brokerage and/or research services which have been provided. In
some cases, research services are generated by third parties, but are
provided to the Portfolio Manager or through broker-dealers.
The Portfolio Managers may receive a wide range of research services
from broker-dealers, including information on securities markets, the
economy, individual companies, statistical information, accounting and tax
law interpretations, technical market action, pricing and appraisal services,
and credit analyses. Research services may be in the form of written
reports, telephone contacts, personal meetings with security analysts,
corporate and industry spokespersons, economists, academicians, and
government representatives, and access to various computer-generated data.
Research services received from broker-dealers are supplemental to each
Portfolio Manager's own research efforts and, when utilized, are subject to
internal analysis before being incorporated into the investment process.
In allocating brokerage, a Portfolio Manager may periodically assess the
contribution of the brokerage and research services provided by
broker-dealers, and allocate a portion of the brokerage business of its
clients on the basis of these assessments. In addition, broker-dealers
sometimes suggest a level of business they would like to receive in return
for the various brokerage and research services they provide. Actual
brokerage received by any firm may be less than the suggested allocations,
but can (and often does) exceed the suggestions because total brokerage is
allocated on the basis of all the considerations described above. Net prices
and
25
<PAGE>
commissions are periodically reviewed to determine whether they are
reasonable in relation to the services provided. In some instances, the
Portfolio Managers receive research services they might otherwise have had to
perform for themselves. The research services provided by broker-dealers can
be useful to the Portfolio Managers in serving other clients, as well as the
Portfolios.
Paying commission amounts greater than otherwise available to obtain
research services poses potential conflicts of interest for the Portfolio
Manager. The Portfolio Manager may have an incentive to pay increased
commissions to obtain research services instead of paying for those services
from its own operating revenues. In addition, the Portfolio Manager may have
an incentive to select a broker-dealer based on the research services it
provides rather than the quality of trade execution. PAI and the Trust Board
will monitor the Portfolio Managers' use of soft dollar arrangements.
GAMCO, the Portfolio Manager for the Value and Global
Interactive/Telecomm Portfolios, uses an affiliated broker-dealer, Gabelli &
Company, Inc., for most of its transactions. GAMCO is not authorized to pay
higher brokerage commissions to Gabelli & Company, Inc. in return for
research services.
During 1996, the Value Portfolio paid total
commissions of $5,086. No commissions were paid to brokers because of
research services provided to the Portfolio Manager pursuant to any agreement
or internal allocation procedure. All commissions were paid to Gabelli &
Company, Inc., a broker affiliated with the Portfolio Manager. During 1997,
the Value Portfolio paid total commissions of $19,112. No commissions were
paid to brokers because of research services provided to the Portfolio
Manager pursuant to any agreement or internal allocation procedure. $17,367
of commissions (90.9% of total commissions) were paid to Gabelli & Company,
Inc., a broker affiliated with the Portfolio Manager. Those commissions paid
to Gabelli & Company,
26
<PAGE>
Inc. related to transactions representing 91.5% of the aggregate dollar amount
of transactions involving payment of commissions.
During 1996, the Growth Portfolio paid total commissions of $2,514.
During 1997, the Growth Portfolio paid total commissions of $36,181. All
commissions were paid to brokers because of research services provided to the
Portfolio Manager that managed the Portfolio during 1996 and 1997. No
commissions were paid to brokers affiliated with the Trust or the Portfolio
Manager.
During 1996, the International Growth Portfolio paid total commissions
of $516. During 1997, the International Growth Portfolio paid total
commissions of $10,780. No commissions were paid to brokers because of
research services provided to the Portfolio Manager pursuant to any agreement
or internal allocation procedure. No commissions were paid to brokers
affiliated with the Trust or the Portfolio Manager.
The Strategic Income Portfolio did not pay any commissions in
1996 or 1997.
During 1996, the Global Interactive/Telecomm Portfolio paid total
commissions of $3,205. During 1997, the Global Interactive/Telecomm
Portfolio paid total commissions of $5,693. No commissions were paid to
brokers because of research services provided to the Portfolio Manager
pursuant to any agreement or internal allocation procedure. All commissions
were paid to Gabelli & Company, Inc., a broker affiliated with the Portfolio
Manager.
PERFORMANCE INFORMATION
The Trust may, from time to time, include the total return of the
Portfolios in advertisements or sales literature.
Quotations of average annual total return for a Portfolio will be
expressed in terms of the average annual compounded rate of return of a
hypothetical investment in the Portfolio over certain periods that will
include periods of one, five, and ten years (or, if less, up to the life of
the Portfolio), calculated pursuant to the following formula:
n
P(1+T) = ERV (where P = a hypothetical initial payment of $1,000, T = the
average annual total return, n = the number of years, and ERV = the ending
redeemable value of a hypothetical $1,000 payment made at the beginning of
the period). Quotations of total return may also be shown for other periods.
All total return figures reflect the deduction of a proportional share of
Portfolio expenses on an annual basis, and assume that all dividends and
distributions are reinvested when paid.
AVERAGE ANNUAL RETURNS are calculated by determining the change in value of a
hypothetical investment in the Portfolio over a stated period, and
calculating the annually compounded percentage rate that would have produced
the same result if the rate of growth or decline in value has been constant
over the period. Average annual returns covering periods of less than one
year are calculated by determining the Portfolio's total return for the
period, extrapolating that return for a full year, and stating the result as
an annual return. Because this method assumes that performance will remain
constant for the entire year when in fact it is unlikely that performance
will remain constant, average annual returns for a partial year must be
viewed as strictly theoretical information.
INVESTORS ALSO SHOULD BE AWARE THAT A PORTFOLIO'S PERFORMANCE IS NOT CONSTANT
OVER TIME, BUT VARIES FROM YEAR TO YEAR. AVERAGE ANNUAL RETURN REPRESENTS
AVERAGED FIGURES AS OPPOSED TO THE ACTUAL PERFORMANCE OF THE PORTFOLIO.
A Portfolio also may quote cumulative total returns which reflect the simple
change in value of an investment over a stated period. Average annual total
returns and cumulative total returns may be quoted as a percentage or as a
dollar amount. They may be calculated for a single investment, for a series
of investments or for a series of redemptions over any time period. Total
returns may be broken down into their components of income and capital in
order to show their respective contributions to total return. Performance
information may be quoted numerically or in a table, graph or similar
illustration.
YIELDS OF THE PORTFOLIOS
The 30-day (or one month) standard yields of the Portfolios are calculated as
follows:
6
YIELD = 2[(a - b + 1) - 1)]
-----
cd
Where: a = dividends and interest earned by a Portfolio during the period;
b = expenses accrued for the period (not of reimbursements);
c = average daily number of shares outstanding during the period
entitled to receive dividends; and
d = maximum offering price per share on the last day of the period.
For the purpose of determining net investment income earned during the period
(variable "a" in the formula), dividend income on equity securities held by a
Portfolio is recognized by accruing 1/360 of the stated dividend rate of the
security each day that the security is in the Portfolio. Except as noted
below, interest earned on debt obligations held by a Portfolio is calculated
by computing the yield to maturity of each obligation based on the market
value of the obligation (including actual accrued interest) at the close of
business on the last business day of each month, or, with respect to
obligations purchased during the month, the purchase price (plus actual
accrued interest) and dividing the result by 360 and multiplying the quotient
by the market value of the obligation (including actual accrued interest) in
order to determine the interest income on the obligation for each day of the
subsequent month that the obligation is held by the Portfolio. For purposes
of this calculation, it is assumed that each month contains 30 days. The
maturity of an obligation with a call provision is the next call date on
which the obligation reasonably may be expected to be called or, if none, the
maturity date. With respect to debt obligations purchased at a discount or
premium, the formula generally calls for amortization of the discount or
premium. The amortization schedule will be adjusted monthly to reflect
changes in the market value of such debt obligations. Expenses accrued for
the period (variable "b" in the formula) include all recurring fees charged
by a Portfolio to all shareholder accounts in proportion to the length of the
base period and the Portfolio's mean (or median) account size. Undeclared
earned income will be subtracted from the offering price per share (variable
"d" in the formula).
27
<PAGE>
Performance information for a Portfolio may be compared, in
advertisements, sales literature, and reports to shareholders to: (i) the
Standard & Poor's 500 Stock Index ("S & P 500"), the Dow Jones Industrial
Average ("DJIA"), the Lehman Brothers Government Bond Index, the Donoghue
Money Market Institutional Averages, the Lehman Brothers Government Corporate
Index, the Salomon High Yield Index, or other indices that measure
performance of a pertinent group of securities, (ii) other groups of mutual
funds tracked by Lipper Analytical Services, a widely used independent
research firm which ranks mutual funds by overall performance, investment
objectives, and assets, or tracked by other services, companies,
publications, or persons who rank mutual funds on overall performance or
other criteria; and (iii) the Consumer Price Index (measure for inflation) to
assess the real rate of return from an investment in the Portfolio. Unmanaged
indices may assume the reinvestment of dividends but generally do not reflect
deductions for administrative and management costs and expenses.
Performance information for any Portfolio reflects only the performance
of a hypothetical investment in the Portfolio during the particular time
period on which the calculations are based. Performance information should
be considered in light of the Portfolio's investment objective or objectives
and investment policies and the market conditions during the given time
period. Performance information should not be considered as a representation
of what may be achieved in the future.
PERFORMANCE INFORMATION FOR PERIOD ENDED DECEMBER 31, 1997
Set forth below are average annual total return information for the Value
Portfolio, Growth Portfolio, International Growth Portfolio, Strategic Income
Portfolio and Global Interactive/Telecomm Portfolio for the 1 year and/or
since inception periods ended December 31, 1997 and yield for the Strategic
Income Portfolio for the 30-day period ended December 31, 1997.
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1 YEAR PERIOD SINCE INCEPTION
------------- ---------------
<S> <C> <C>
Value Portfolio 32.34% 52.36%
Growth Portfolio 10.24% 19.50%
International Growth Portfolio -5.20% -0.33%
Strategic Income Portfolio 0.58% 1.02%
Global Interactive/Telecomm Portfolio 40.28% 40.97%
</TABLE>
The Value Portfolio, Growth Portfolio, Strategic Income Portfolio and Global
Interactive/Telecomm Portfolio began business operations on February 1, 1996.
The International Growth Portfolio began operations on March 26, 1996.
YIELD FOR 30 DAY PERIOD
-----------------------
ENDED DECEMBER 31, 1997
-----------------------
(UNAUDITED)
Strategic Income Portfolio 3.83%
Quotations of total return for a Portfolio will not take into account
charges and deductions against any Variable Accounts to which the Portfolio's
shares are sold. Performance for the Variable Accounts will therefore be
lower than performance of the Portfolios. Performance information of the
Portfolios will be accompanied by performance information for the applicable
Variable Account.
TAXATION
The requirements applicable to a Portfolios' qualification as a
regulated investment company may limit the extent to which a Portfolio will
be able to engage in transactions in options, futures contracts or forward
contracts.
Income received by a Portfolio from sources within a foreign country may
be subject to withholding and other taxes imposed by that country. Tax
conventions between certain countries and the U.S. may reduce or eliminate
such taxes.
To comply with regulations under Section 817(h) of the Code, each
Portfolio of the Trust will be required to diversify its investments so that
on the last day of each quarter of a calendar year, no more than 55% of the
value of its assets is represented by any one investment, no
28
<PAGE>
more than 70% is represented by any two investments, no more than 80% is
represented by any three investments, and no more than 90% is represented by
any four investments.
Generally, securities of a single issuer are treated as one investment
and obligations of each U.S. Government agency and instrumentality (such as
the Government National Mortgage Association) are treated for purposes of
Section 817(h) as issued by separate issuers.
In connection with the issuance of the diversification regulations, the
Treasury Department announced that it would issue future regulations or
rulings addressing the circumstances in which a variable contract owner's
control of the investments of a separate account may cause the contract
owner, rather than the insurance company, to be treated as the owner of the
assets held by the separate account. If the variable contract owner is
considered the owner of the securities underlying the separate account,
income and gains produced by those securities would be included currently in
the contract owner's gross income. Among the areas in which Treasury has
indicated informally that it is concerned that there may be too much contract
owner control is where a mutual fund (or Portfolio) underlying a separate
account invests solely in securities issued by companies in a specific
industry.
These future rules and regulations proscribing investment control may
adversely affect the ability of certain Portfolios of the Trust to operate as
described in this Prospectus. There is, however, no certainty as to what
standards, if any, Treasury will ultimately adopt.
In the event that unfavorable rules or regulations are adopted, there
can be no assurance that the Portfolios will be able to operate as currently
described in the Prospectus, or that a Portfolio will not have to change its
investment objective or objectives, investment policies, or investment
restrictions. While a Portfolios' investment objective is fundamental and
may be changed only by a vote of a majority of its outstanding shares, the
Trustees have reserved the right to modify the investment policies of a
Portfolio as necessary to prevent any such prospective rules and regulations
from causing the Variable Contract Owners to be considered the owners of the
assets underlying the Variable Accounts.
OTHER INFORMATION
CAPITALIZATION
The Trust is a Massachusetts business trust established under an
Agreement and Declaration of Trust dated September 8, 1993. Effective
September 1, 1998, the Trust changed its name to the Fulcrum Trust. The Trust
is currently offering to Separate Accounts shares of five different "series"
or Portfolios. Each Portfolio is, for investment purposes, a separate
investment fund, and each issues a separate class of capital stock with a par
value of $0.001 per share. Each share of stock issued with respect to a
Portfolio has a pro
29
<PAGE>
rata interest in the assets of that Portfolio and has no interest in the
assets of any other Portfolio. Each Portfolio bears its own liabilities and
also its proportionate share of the general liabilities of the Trust. This
Statement of Additional Information discusses the initial five Portfolios,
which issue the following five shares: Value Portfolio shares, Growth
Portfolio shares, International Growth Portfolio shares, Strategic
Income Portfolio shares, and Global Interactive/Telecomm Portfolio shares.
The Agreement and Declaration of Trust established three other
Portfolios, and the Board of Trustees may establish additional Portfolios
(with different investment objectives and policies) at any time in the
future. The Trust has sold 1,000 shares of one of those Portfolios (the
Balanced Opportunity Portfolio) to provide part of the Trust's initial
capitalization, but the Trust is not now offering shares of that Portfolio to
Separate Accounts or qualified plans. Establishment and offering of
additional Portfolios will not alter the rights of the Trust's shareholders.
When issued in accordance with the terms of the Agreement and Declaration of
Trust, shares are fully paid, redeemable, freely transferable, and
non-assessable by the Trust. Shares do not have preemptive rights or
subscription rights. In liquidation of a Portfolio of the Trust, each
shareholder is entitled to receive his or her pro rata share of the net
assets of that Portfolio.
ORGANIZATION EXPENSES
Certain of the expenses incurred by the Portfolios in connection with
its organization, its registration with the Securities and Exchange
Commission, and the public offering of its shares were advanced on behalf of
the Trust by the previous Manager. These organizational expenses are
deferred and amortized by the Portfolio over a period not exceeding 60 months
from the date of the Portfolio's commencement of operations.
REGISTRATION STATEMENT
This Statement of Additional Information and the prospectus do not
contain all the information included in the Trust's registration statement
filed with the Securities and Exchange Commission under the Securities Act of
1933 with respect to the securities offered by the prospectus. Certain
portions of the registration statement have been omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. The
registration statement, including the exhibits filed therewith, may be
examined at the offices of the Securities and Exchange Commission in
Washington, D.C.
Statements contained herein and in the prospectus as to the contents of
any contract or other documents referred to are not necessarily complete,
and, in each instance, reference is made to
30
<PAGE>
the copy of such contract or other documents filed as an exhibit to the
registration statement, each such statement being qualified in all respects
by such reference.
31
<PAGE>
FINANCIAL STATEMENTS
32
<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.
1
<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.
2
<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.
3
<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.
4
<PAGE>
FINANCIAL HIGHLIGHTS
<PAGE>
<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
</TABLE>
* Commencement of operations February 1, 1996
** Commencement of operations March 26, 1996
*** Annualized
<TABLE>
<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 . . . . . . (.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
6
<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
**** Effective June 8, 1998, renamed Strategic Income Portfolio
- --------------------------------------------------------------------------------
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 to the financial statements). 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 to the financial statements
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 to the financial statements). 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.
7
<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
-------------
8
<PAGE>
ENTERTAINMENT 11.0%
3,000 BET Holdings, Inc., Class A * . . . . . . . . . . . 163,875
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
-------------
9
<PAGE>
PHARMACEUTICALS 0.9%
5,000 Ivax Corporation * . . . . . . . . . . . . . . . . 33,750
1,000 Twinlab Corp. * . . . . . . . . . . . . . . . . . . 24,750
-------------
58,500
-------------
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.
10
<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
11
<PAGE>
3,500 Intersolv, Inc. * . . . . . . . . . . . . . . . . . 70,875
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
12
<PAGE>
6,000 Wall Street Deli, Inc. * . . . . . . . . . . . . . 20,250
-------------
663,593
-------------
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.
13
<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
-------------
14
<PAGE>
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
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.
15
<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>
16
<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>
17
<PAGE>
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
18
<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.
19
<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
------------
20
<PAGE>
INTERNET 0.4%
500 AT Home Corp. * . . . . . . . . . . . . . . . . . . 12,563
------------
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.
21
<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.
22
<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
23
<PAGE>
continue to comply with the provisions of Sub Chapter M of the Internal
Revenue Code available to regulated 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
24
<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
25
<PAGE>
performance. Each Portfolio Manager has received 80% of the fee, and PAI has
received the remaining 20%. PAI 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
26
<PAGE>
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 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>
27
<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
28
<PAGE>
Redeemed...................................... (2,372) (24,370)
------- --------
Net Increase.................................. 12,690 $116,328
------- --------
------- --------
</TABLE>
<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 $1,772,206
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
29
<PAGE>
Sold........................................... 58,734 $586,289
Issued as reinvestment of dividends............ 288 2,886
Redeemed....................................... (608) (5,723)
------ --------
Net Increase................................... 58,414 $583,452
------ --------
------ --------
</TABLE>
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
30
<PAGE>
to exceed the specified rates above. The fees waived and expense subject to
reimbursement by PAI for each Portfolio were as follows:
<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.
31
<PAGE>
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 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.
32
<PAGE>
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 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.
33
<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 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"),
including the portfolios of investments, 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
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS:
1. Financial Statements included in the Prospectus constituting
Part A of this Registration Statement: Financial Highlights
2. Financial Statements included in the Statement of Additional
Information constituting Part B of this Registration Statement:
Statement of Assets and Liabilities
Statement of Operations
Statement of Changes in Net Assets
Financial Highlights
Portfolio of Investments
Notes to Financial Statements
Report of Independent Accountants
(b) EXHIBITS
1. Declaration of Trust.(1)
2. By-Laws.(1)
3. Not applicable.
4. Not applicable.
5. (a) Management Agreement between the Registrant and Allmerica
Investment Management Company, Inc. ("AIMCO"), predecessor to
Allmerica Financial Investment Management Services, Inc.
("AFIMS")(2)
(b) Portfolio Manager Agreement among the Registrant, AIMCO
and Allmerica Asset Management, Inc.(2)
(c) Form of Portfolio Manager Agreement among the Registrant,
AFIMS and Pilgrim Baxter Analytic Investors, Inc.(2)
(d) Form of subadvisory agreement among the Registrant,
Palladian Advisors, Inc. and a Portfolio Manager (for all
Portfolios other than the Growth Portfolio and the Strategic
Income Portfolio).(3)
(e) Substitution agreement among the Registrant,
Palladian Advisors, Inc., AIMCO and Bee & Associates,
Incorporated with respect to the International Growth
Portfolio.(2)
(f) Substitution agreement among the Registrant,
Palladian Advisor, Inc., AIMCO and Fischer Francis Trees
and Watts, Inc. with respect to the Global Strategic Income
Portfolio.(2)
(g) Substitution agreement among the Registrant, Palladian
Advisors, Inc., AIMCO and GAMCO Investors, Inc. with respect
to the Value Portfolio.(2)
(h) Substitution agreement among the Registrant, Palladian
Advisors, Inc., AIMCO and GAMCO Investors, Inc. with respect
to the Global Interactive/Telecomm Portfolio.(2)
(i) Substitution agreement among the Registrant, Palladian
Advisors, Inc., AIMCO and Stonehill Capital Management, Inc.
with respect to the Growth Portfolio.(2)
C-1
<PAGE>
6. Not applicable.
7. Not applicable.
8. Form of custodial and fund accounting contract between the
Registrant and Investors Bank & Trust Company.(4)
9. (a) Form of transfer agency agreement between Registrant and
Investors Bank & Trust Company.(4)
(b) Form of Portfolio Manager Investment Agreement.(4)
(c) Participation Agreement among the Registrant, AIMCO,
and Allmerica Financial Life Insurance and Annuity Company.(2)
(d) Participation Agreement among the Registrant, AIMCO,
and First Allmerica Financial Life Insurance Company.(2)
10. Opinion of counsel.(1)
11. Consent of independent accountants.(2)
12. Not applicable.
13. Not applicable.
14. Not applicable.
15. Not applicable.
16. Schedule for Computation of Performance Quotations.(2)
18. Not applicable.
19. Powers of attorney.(2)
27. Financial Data Schedules.(2)
- -------------------------
C-2
<PAGE>
(1) Incorporated by reference to post-effective amendment No. 1, Reg. No.
33-73882, filed January 26, 1996.
(2) Filed herewith.
(3) Incorporated by reference to post-effective amendment No. 6, Reg. No.
33-73882, filed May 1, 1998.
(4) Incorporated by reference to pre-effective amendment no. 2, Reg. No.
33-73882, filed October 18, 1995.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
Number of
Record Holders
Title of Class (as of 6/1/98)
-------------- --------------
<S> <C>
Value 4
Growth 3
Balanced Opportunity 1
International Growth 3
Strategic Income 2
Global Interactive/Telecomm 4
</TABLE>
ITEM 27. INDEMNIFICATION.
Section 5.4 of the Agreement and Declaration of Trust of The Fulcrum
Trust provides in part:
"The Trust shall indemnify (from the assets of the Portfolio or
Portfolio in question) each of its Trustees and officers (including
persons who serve at the Trust's request as directors, officers or
trustees of another organization in which the Trust has any interest
as a shareholder, creditor or otherwise) [hereinafter referred to as a
"Covered Person"] against all liabilities, including but not limited
to amounts paid in satisfaction of judgments, in compromise or as
fines and penalties, and expenses, including reasonable accountants'
and
C-3
<PAGE>
counsel fees, incurred by any Covered Person in connection with
the defense or disposition of any action, suit or other proceeding,
whether civil or criminal, before any court or administrative or
legislative body, in which such Covered Person may be or may have been
involved as a party or otherwise or with which such person may be or
may have been threatened, while in office or thereafter, by reason of
being or having been such a Trustee or officer, director or trustee,
except with respect to any matter as to which it has been determined
that such Covered Person (i) did not act in good faith in the
reasonable relief that such Covered Person's action was in or not
opposed to the best interests of the Trust or (ii) had acted with
willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of such Covered Person's office
(either and both of the conduct described in (i) and (ii) being
referred to hereafter as "Disabling Conduct")."
The Agreement and Declaration, Exhibit 1 hereto, provides additional terms of
this indemnification.
The agreement between the Registrant and the Manager includes the
following indemnification provision:
"The Manager shall not be liable for any loss suffered by the Trust as
the result of actions by persons other than the Manager or for any
loss suffered by the Trust as the result of any negligent act or error
of judgment of the Manager in connection with the matters to which
this Agreement relates, except a loss resulting from a breach by the
Manager of its fiduciary duty with respect to the receipt of
compensation for services (in which case any award of damages shall be
limited to the period and the amount set forth in Section 36(b)(3) of
the 1940 Act) or loss resulting from willful misfeasance, bad faith or
gross negligence on its part in the performance of its duties under
this Agreement or from reckless disregard by it of its obligations and
duties under this Agreement. The Trust shall indemnify the Manager
and hold it harmless from all cost, damage and expense, including
reasonable expenses for legal counsel, incurred by the Manager
resulting from actions for which it is relieved of responsibility by
this paragraph. The Manager shall indemnify the Trust and hold it
harmless from all cost, damage and expense, including reasonable
expenses for legal counsel, incurred by the Trust resulting from (i) a
breach by the Manager of its fiduciary duty with respect to
compensation for services paid by the Trust (in which case any award
of damages shall be limited to the period and the amount set forth in
Section 36(b)(3) of the 1940 Act); (ii) willful misfeasance, bad faith
or gross negligence by the Manager in the performance of its duties
under this Agreement; or (iii) reckless disregard by the Manager of
its obligations and duties under this Agreement."
C-4
<PAGE>
The agreements with the Portfolio Managers include substantially similar
provisions.
The Participation Agreements with the life insurance companies investing
in the Trust (each a "Life Company") include certain indemnification
provisions. Subject to certain limitations, the Life Company agrees, among
other things, to indemnify the Registrant, the Manager and the principal
underwriter for any and all losses, claims, damages, or liabilities
(including legal and other expenses) arising out of certain
misrepresentations or omissions, a failure by Life Company to substantially
provide the services required by the Participation Agreement, or a material
breach of the Participation Agreement. Subject to certain limitations, the
Manager and the principal underwriter agree, among other things, to indemnify
the Life Company against all losses, claims, damages, or liabilities
(including legal and other expenses) arising out of certain
misrepresentations or omissions, a failure by the Trust to meet certain
requirements, or a material breach of the Participation Agreement.
Participation agreements with other insurance companies include similar
provisions.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
(a) ALLMERICA FINANCIAL INVESTMENT MANAGEMENT SERVICES, INC.
See "Management of the Trust" in both Prospectuses and Statements of
Additional Information (Parts A and B) of this Registration Statement.
Information as to Allmerica Financial Investment Management Services,
Inc.'s directors and officers is included in its Form ADV filed with the
Securities and Exchange Commission (File Number 801-55463) on April 15, 1998,
the text of which is incorporated herein by reference.
(b) GAMCO INVESTORS, INC.
C-5
<PAGE>
See "Management of the Trust" both in the Prospectus and Statement of
Additional Information (Parts A and B) of this Registration Statement
relating to the Value and Global Interactive/Telecomm Portfolios.
Information as to GAMCO Investors, Inc.'s directors and executive
officers is included in its Form ADV filed with the Securities and Exchange
Commission (File No. 801-141-32), as most recently amended, the text of which
is incorporated herein by reference.
(c) ANALYTIC/TSA GLOBAL ASSET MANAGEMENT, INC. --
(To Be Renamed Pilgrim Baxter Analytic Investors, Inc.)
See "Management of the Trust" both in the Prospectus and Statement of
Additional Information (Parts A and B) of this Registration Statement
relating to the Growth Portfolio.
Information as to Analytic/TSA Global Asset Management, Inc.'s (to be
renamed Pilgrim Baxter Analytic Investors, Inc.) directors and executive
officers is included in its Form ADV filed with the Securities and Exchange
Commission (File No. 801-7082), as most recently amended, the text of which
is incorporated herein by reference.
(d) BEE & ASSOCIATES INCORPORATED
See "Management of the Trust" both in the Prospectus and Statement of
Additional Information (Parts A and B) of this Registration Statement
relating to the International Growth Portfolio.
Information as to Bee & Associates Incorporated's directors and
executive officers is included in its Form ADV filed with the Securities and
Exchange Commission (File No. 801-345-38), as most recently amended, the text
of which is incorporated herein by reference.
(e) ALLMERICA ASSET MANAGEMENT, INC.
See "Management of the Trust" both in the Prospectus and Statement of
Additional Information (Parts A and B) of this Registration Statement
relating to the Strategic Income Portfolio.
Information as to the directors and executive officers of Allmerica
Asset Management is included in its Form ADV filed with the Securities and
Exchange Commission (File No. 801-441-89), as most recently amended, the text
of which is incorporated herein by reference.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Not applicable.
(b) Not applicable.
C-6
<PAGE>
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules thereunder
are maintained at the offices of (1) the Registrant, Allmerica Financial
Investment Management Services, Inc., and Allmerica Asset Management, Inc.,
440 Lincoln Street, Worcester, MA 01653; (2) GAMCO Investors, Inc., One
Corporate Center, Rye, NY 10580; (3) Pilgrim Baxter Analytic Investors, Inc.,
700 South Flower Street, Suite 2400, Los Angeles, CA 90017; (4) Bee &
Associates Incorporated, 370 17th Street, Denver, CO 80202; and (5) Investors
Bank & Trust Company, 200 Clarendon Street, Boston, MA 02111.
ITEM 31. MANAGEMENT SERVICES
Not applicable.
ITEM 32. UNDERTAKINGS
The Registrant undertakes to furnish each person to whom a prospectus
is delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Worcester, and Commonwealth of
Massachusetts on the 29th day of June, 1998.
THE PALLADIAN TRUST
(Registrant)
By: /s/ George J. Sullivan, Jr. /s/ Thomas P. Cunningham
s------------------------------- ------------------------------
George J. Sullivan, Jr. Thomas P. Cunningham
Chairman, President and Trustee (Attorney-in-Fact)
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated and on the 29th day of June, 1998.
SIGNATURE AND TITLE
/s/ George J. Sullivan, Jr. /s/ Thomas P. Cunningham
- --------------------------- ------------------------------
George J. Sullivan, Jr. Thomas P. Cunningham
Chairman, President and Trustee (Attorney-in-Fact)
/s/ Thomas N. Dallape /s/ Thomas P. Cunningham
- --------------------------- ------------------------------
Thomas N. Dallape Thomas P. Cunningham
Trustee (Attorney-in-Fact)
/s/ Gordon Holmes /s/ Thomas P. Cunningham
- ---------------------------- ------------------------------
Gordon Holmes Thomas P. Cunningham
Trustee (Attorney-in-Fact)
/s/ Thomas P. Cunningham
- --------------------------- ------------------------------
Thomas P. Cunningham
Treasurer,
Principal Financial Officer,
Principal Accounting Officer
C-8
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
5(a) Management Agreement between the Registrant and Allmerica
Investment Management Company, Inc. ("AIMCO"), predecessor to
Allmerica Financial Investment Management Services, Inc.
("AFIMS")
5(b) Portfolio Manager Agreement among the Registrant, AIMCO and
Allmerica Asset Management, Inc.
5(c) Portfolio Manager Agreement among the Registrant, AFIMS and
Pilgrim Baxter Analytic Investors, Inc.
5(e) Substitution agreement among the Registrant, Palladian Advisors,
Inc., AIMCO and Bee & Associates, Incorporated
5(f) Substitution agreement among the Registrant, Palladian Advisors,
Inc., AIMCO and Fischer Francis Trees and Watts, Inc.
5(g) Substitution agreement among the Registrant, Palladian
Advisors, Inc., AIMCO and GAMCO Investors, Inc.
5(h) Substitution agreement among the Registrant, Palladian
Advisors, Inc., AIMCO and GAMCO Investors, Inc.
5(i) Substitution agreement among the Registrant, Palladian
Advisors, Inc., AIMCO and Stonehill Capital Management, Inc.
9(c) Participation Agreement among the Registrant, AIMCO
and Allmerica Financial Life Insurance and Annuity Company.
9(d) Participation Agreement among the Registrant, AIMCO
and First Allmerica Financial Life Insurance Company
11 Consent of Independent Accountants
16 Schedule for Computation of Performance Quotations
19 Powers of attorney
27 Financial Data Schedules
<PAGE>
INVESTMENT MANAGEMENT AGREEMENT
Agreement, made this 12th day of February, 1998, between The
Palladian Trust (the "Trust"), a Massachusetts business trust, and Allmerica
Investment Management Company, Inc. (the "Manager"), a Massachusetts
corporation.
WHEREAS, the Trust is a diversified, open-end management investment
company registered under the Investment Company Act of 1940, as amended (the
"1940 Act"); and
WHEREAS, the Manager is registered as an investment adviser under
the Investment Advisers Act of 1940; and
WHEREAS, the Trust is authorized to issue shares of beneficial
interest in separate portfolios with each such portfolio representing interests
in a separate portfolio of securities and other assets; and
WHEREAS, the Trust currently offers shares of five portfolios
designated as The Value Portfolio, The Growth Portfolio, The International
Growth Portfolio, The Global Strategic Income Portfolio, and The Global
Interactive/Telecom Portfolio (collectively, the "Current Portfolios"); and
WHEREAS, the Trust may establish additional portfolios with respect
to which the Trust desires to retain the Manager to render management services
hereunder and with respect to which the Manager is willing to do so (those
portfolios plus the Current Portfolios are collectively referred to as the
"Portfolios"); and
WHEREAS, the Trust desires to avail itself of the services of the
Manager for the provision of advice with respect to the selection and monitoring
of portfolio managers for the Portfolios and for the provision of other services
for the Trust; and
WHEREAS, the Manager is willing to render such services to the
Trust.
Therefore, the parties agree as follows:
1. Appointment. The Trust hereby appoints the Manager to provide
management services with respect to the Current Portfolios for the period and on
the terms set forth in this Agreement, subject to the direction of the Board of
Trustees of the Trust (the "Board of Trustees"). The Manager accepts such
appointment and agrees to render the services described herein for the
compensation provided in paragraph 9, In the event the Trust establishes one or
more portfolios other than the Current Portfolios with respect to which it
desires to
<PAGE>
retain the Manager to render management services pursuant to this Agreement, it
shall so notify the Manager in writing. If the Manager is willing to render such
services it shall so notify the Trust in writing, whereupon such portfolio shall
become a Portfolio as that term is used in this Agreement.
2. Services of the Manager. Subject to the supervision of the Board of
Trustees, the Manager shall provide the following management services with
respect to the Portfolios:
(a) The Manager shall analyze and recommend for consideration by the
Board of Trustees investment advisory firms to be retained by the Trust to
provide day-to-day investment management of the Portfolios (the "Portfolio
Managers").
(b) The Manager shall monitor and evaluate the performance of the
Portfolio Managers and make recommendations to the Board of Trustees concerning
the renewal or termination of agreements with Portfolio Managers (the "Portfolio
Management Agreements"), although the Manager is not authorized, except as
provided in paragraph 3 of the Agreement, to make determinations with respect to
the investment of a Portfolio's assets or the purchase or sale of securities or
other investments for a Portfolio.
(c) The Manager shall monitor the Portfolio Managers for compliance
with the investment policies and restrictions of each Portfolio, the 1940 Act,
the Internal Revenue Code, and all other applicable federal and state laws and
regulations.
(d) The Manager shall coordinate all matters relating to the
functions of the Trust's Manager, Portfolio Managers, custodian, transfer agent,
accountants, attorneys, and other parties performing services or operational
functions for the Trust.
(e) The Manager shall provide the Trust and the Portfolios with the
services of a sufficient number of persons competent to perform such
administrative and clerical functions as are necessary to provide effective
supervision and administration of the Trust.
(f) The Manager shall provide the Trust with adequate office space,
communications facilities, and other facilities necessary for its operations as
contemplated in this Agreement.
Page 2
<PAGE>
(g) The Manager shall provide the Board of Trustees such periodic
and special reports as the Board may reasonably request.
(h) The Manager shall make its officers and employees available to
the Board of Trustees and officers of the Trust for consultation and discussions
regarding the administration and management of the Trust.
(i) The Manager shall provide such assistance as the Board of
Trustees shall reasonably request in connection with the conduct of meetings of
the Board or otherwise.
3. Investment Management Authority, In the event that a Portfolio
Management Agreement pertaining to a Portfolio is terminated or if, at any time,
no Portfolio Manager is engaged to manage the assets of a Portfolio, then the
Manager, subject to the supervision of the Board of Trustees, will provide
day-to-day investment management of any such Portfolio. The Manager will provide
investment research and conduct a continuous program of evaluation, investment,
sales, and reinvestment of the Portfolio's assets by determining the securities
and other investments that shall be purchased, entered into, sold, closed, or
exchanged for the Portfolio, when these transactions should be executed, and
what portion of the assets of the Portfolio should be held in the various
securities and other investments in which it may invest. The Manager is hereby
authorized to execute and perform such services on behalf of the Portfolio. To
the extent permitted by the investment policies of the Portfolio, the Manager
shall make decisions for the Portfolio as to foreign currency matters and make
determinations as to, and execute and perform, foreign currency exchange
contracts on behalf of the Portfolio. The Manager will provide the services
under this Agreement in accordance with the Portfolio's investment objective or
objectives, policies, and restrictions as stated in the Trust's registration
statement under the Securities Act of 1933 and the 1940 Act as filed with the
Securities and Exchange Commission ("SEC") and amended from time to time (the
"Registration Statement"). Furthermore, under these circumstances:
(a) The Manager will use reasonable efforts to manage the Portfolio
so that it will (1) qualify as a regulated investment company under Subchapter M
of the Internal Revenue Code, (2) comply with the diversification requirements
of Section 817(h) of the Internal Revenue Code and regulations issued
thereunder, and (3) comply with any other rules and regulations pertaining to
investment vehicles underlying variable annuity or variable life insurance
policies. In managing the Portfolio in accordance with these
Page 3
<PAGE>
requirements, the Manager shall be entitled to receive and act upon advice of
counsel to the Trust or counsel to the Manager.
(b) On occasions when the Manager deems the purchase or sale of a
security to be in the best interest of the Portfolio as well as any other
investment advisory clients, the Manager may, to the extent permitted by
applicable laws and regulations, including, but not limited to Section 17(d) of
the 1940 Act, but shall not be obligated to, aggregate the securities to be so
sold or purchased with those of its other clients where such aggregation is not
inconsistent with the policies set forth in the Registration Statement, In such
event, allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the Manager in a manner
that is fair and equitable in the judgment of the Manager in the exercise of its
fiduciary obligations to the Trust and to such other clients.
(c) In connection with the purchase and sale of securities for the
Portfolio, the Manager will arrange for the transmission to the custodian for
the Trust on a daily basis, such confirmation, trade tickets, and other
documents and information as may be reasonably necessary to enable the custodian
to perform its administrative and recordkeeping responsibilities with respect to
the Portfolio. With respect to portfolio securities to be purchased or sold
through the Depository Trust Company, the Manager will arrange for the automatic
transmission of the confirmation of such trades to the Trust's custodian.
(d) The Manager will assist the custodian or recordkeeping agent for
the Trust in determining, consistent with the procedures and policies stated in
the Registration Statement, the value of any portfolio securities or other
assets of the Portfolio for which the custodian or recordkeeping agent seeks
assistance or review from the Manager. The Manager will monitor on a daily basis
the determination by the custodian or recordkeeping agent for the Trust the
value of portfolio securities and other assets of the Portfolio and the
determination of net asset value of the Portfolio.
(e) The Manager will regularly report to the Board of Trustees on
the investment program for the Portfolio, and will furnish the Board of Trustees
such periodic and special reports as the Board may reasonably request.
(f) In rendering the services required under this paragraph, the
Manager may, from time to time, employ or associate with itself such person or
persons as it believes
Page 4
<PAGE>
necessary to assist it in carrying out its obligations under this Agreement. The
Manager shall be responsible for making reasonable inquiries and for reasonably
ensuring that any employee of the Manager, any person or firm that the Manager
has employed or with which it has associated, or any employee thereof involved
in any material connection with the handling of Trust assets, has not, to the
best of the Manager's knowledge:
(i) been convicted, in the last ten (10) years, of any felony
or misdemeanor arising out of conduct involving embezzlement, fraudulent
conversion, or misappropriation of funds or securities, or involving
violations of Sections 1341, 1342, or 1343 of Title 18, United States
Code; or
(ii) been found by any state regulatory authority, within the
last ten (10) years, to have violated or to have acknowledged violation
of any provision of any state insurance law involving fraud, deceit, or
knowing misrepresentation; or
(iii) been found by any federal or state regulatory
authorities, within the last ten (10) years, to have violated or to have
acknowledged violation of any provisions of federal or state securities
laws involving fraud, deceit, or knowing misrepresentation.
(g) In connection with its responsibilities under this paragraph 3,
the Manager is responsible for decisions to buy and sell securities and other
investments for the Portfolio, broker-dealer selection, and negotiation of
brokerage commission rates. The Manager's primary consideration in effecting a
security transaction will be to obtain the best execution for the Portfolio,
taking into account the factors specified in the Registration Statement. Subject
to the Registration Statement and such policies as the Board of Trustees may
determine and consistent with Section 28(e) of the Securities Exchange Act of
1934, the Manager shall not be deemed to have acted unlawfully or to have
breached any duty created by this Agreement or otherwise solely by reason of its
having caused the Portfolio to pay a broker-dealer for effecting a portfolio
investment transaction in excess of the amount of commission another
broker-dealer would have charged for effecting that transaction, if the Manager
or its affiliate determines in good faith that such amount of commission was
reasonable in relation to the value of the brokerage and research services
provided by such broker-dealer, viewed in terms of either that particular
transaction or the Manager's overall responsibilities with
Page 5
<PAGE>
respect to the Portfolio and to its other clients as to which it exercises
investment discretion.
4. Conformity with Applicable Law. The Manager, in the performance of its
duties and obligations under this Agreement, shall act in conformity with the
Registration Statement and with the instructions and directions of the Board of
Trustees and will conform to, and comply with, the requirements of the 1940 Act
and all other applicable federal and state laws and regulations.
5. Exclusivity. The services of the Manager under this Agreement are not
to be deemed exclusive, and the Manager, or any affiliate Thereof, shall be free
to render similar services to other investment companies and other clients
(whether or not their investment objectives and policies are similar to those of
any of the Portfolios) and to engage in other activities, so long as its
services hereunder are not impaired thereby.
6. Documents. The Trust has delivered copies of each of the following
documents to the Manager and will deliver to it all future amendments and
supplements thereto, if any:
(a) the Trust's Declaration of Trust and its bylaws;
(b) the Registration Statement; and
(c) the prospectus and statement of additional information of the
Trust as currently in effect and as amended and supplemented from time to time.
7. Records. The Manager agrees to maintain and to preserve records
relating to the Trust as required by the 1940 Act. The Manager further agrees
that all records which it maintains for the Trust are the property of the Trust
and it will promptly surrender any of such records upon request.
8. Expenses. During the term of this Agreement, the Manager will pay all
expenses incurred by it in connection with its activities under this Agreement,
including all rent and other expense involved in providing office space and
equipment required by the Manager and the salaries and expenses of all personnel
of the Manager. The Manager further agrees to pay all salaries, fees and
expenses of any officer or trustee of the Trust who is an officer, director or
employee of the Manager or any of its affiliates. The Manager further agrees to
pay all rent and other expense in providing office space for the Trust. Nothing
in this Agreement shall require the Manager to bear the following expenses:
Page 6
<PAGE>
(a) Fees of the Portfolio Managers;
(b) Charges for audits by the Trust's independent public
accountants;
(c) Charges of the Trust's transfer agent, registrar, and/or
dividend disbursing agent;
(d) Charges of the Trust's custodian and/or accountant;
(e) Costs of obtaining quotations for calculating the value of each
Portfolio's net assets;
(f) Costs of maintaining the Trust's tax records;
(g) Salaries and other compensation of any of the Trust's executive
officers and employees, if any, who are not officers, directors, or employees of
the Manager, or any of its affiliates;
(h) Taxes levied against the Trust;
(i) Brokerage fees and commissions in connection with the purchase
and sale of portfolio securities for the Trust;
(j) Costs, including the interest expense, of borrowing by the
Trust;
(k) Costs and/or fees incident to meetings of the Trust's
shareholders, the preparation and mailings of prospectuses, reports, proxy
statements and other communications by the Trust to its shareholders, the filing
of reports with regulatory bodies, the maintenance of the Trust's existence, and
the registration of shares with federal and state securities or insurance
authorities;
(1) The Trust's legal fees, including the legal fees related to the
registration and continued qualification of the Trust's shares for sale;
(m) Costs of printing stock certificates representing shares of the
Trust;
(n) Trustees' fees and expenses of Trustees who are not officers,
directors, or employees of the Manager or any of its affiliates;
Page 7
<PAGE>
(o) The Trust's pro rata portion of the fidelity bond required by
Section 17(g) of the 1940 Act, or other insurance premiums;
(p) Membership dues for any association of which the Trust is a
member;
(q) Extraordinary expenses of the Trust as may arise, including
expenses incurred in connection with litigation, proceedings, other claims
against the Trust (unless the Manager is responsible for such expenses under
paragraph 10 of this Agreement), and the legal obligations of the Trust to
indemnify its trustees, officers, employees, shareholders, distributors, and
agents with respect to such claims; and
(r) Organizational and offering expenses of the Trust and, if
applicable, reimbursement (with interest) of underwriting discounts and
commissions.
9. Compensation.
(a) For the services provided and the expenses borne by the Manager
pursuant to this Agreement, each Portfolio will pay the Manager a fee calculated
in accordance with this paragraph 9.
(b) A Portfolio will pay the Manager 20% of the Initial Monthly
Advisory Fee or the Monthly Advisory Fee, as those terms are defined in this
paragraph, whichever is applicable; provided, however, that for any period
during which the Manager is providing the services described in paragraph 3, a
Portfolio will pay the Manager 100% of the Initial Monthly Advisory Fee or the
Monthly Advisory Fee, as those terms are defined in this paragraph, whichever is
applicable.
(c) For the period beginning with the day on which a Portfolio
commences investment operations and ending with the last day of the twelfth full
calendar month thereafter, the Portfolio will pay at the end of each month, an
advisory fee calculated at an annual rate of 0.80% of the Portfolio's average
daily net assets (the "Initial Monthly Advisory Fee").
(d) For the period beginning with the first day of the thirteenth
full calendar month after which a Portfolio commences operations and continuing
through the remainder of the term of this Agreement, the Portfolio will pay at
the end of each month, an advisory fee (the "Monthly Advisory Fee"). The Monthly
Advisory Fee equals the Basic Fee (as defined in paragraph 9(e) below) plus the
Incentive Fee (as defined in
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<PAGE>
paragraph 9(f) below) and adjusted, if so required, by paragraph 9(i) below.
(e) The Basic Fee equals one-twelfth of 2% multiplied by the
Portfolio's average daily net assets for the previous 12 months (including the
month for which the fee is being calculated).
(f) The Incentive Fee equals: (i) one-twelfth of the Annual
Incentive Fee set forth in the chart below based on the difference between the
Performance of the Portfolio and the Performance of the Benchmark, as those
terms are defined in paragraphs 9(g) and 9(h) below; (ii) multiplied by the
Portfolio's average daily net assets for the previous 12 months (including the
month for which the fee is being calculated).
================================================================================
Annual
Percentage Point Difference Between Performance of the Incentive
Portfolio and Performance of the Benchmark Fee (%)
================================================================================
+7.5 or greater 2.0%
- --------------------------------------------------------------------------------
+6.0 or greater, but less than +7.5 1.5
- --------------------------------------------------------------------------------
+4.5 or greater, but less than +6.0 1.0
- --------------------------------------------------------------------------------
+3.0 or greater, but less than +4.5 0.5
- --------------------------------------------------------------------------------
+1.5 or greater, but less than +3.0 0.0
- --------------------------------------------------------------------------------
0.0 or greater, but less than +1.5 -0.5
- --------------------------------------------------------------------------------
-1.5 or greater, but less than 0.0 -1.0
- --------------------------------------------------------------------------------
-3.0 or greater, but less than -1.5 -1.5
- --------------------------------------------------------------------------------
Less than -3.0 -2.0
================================================================================
(g) The Performance of the Portfolio will be calculated by first
determining the change in the Portfolio's net asset value per share during the
previous twelve months (including the month for which the fee is being computed)
assuming the reinvestment of distributions during that period, and then
expressing this amount as a percentage of the net asset value per share at. the
beginning of the period. Net asset value per share is calculated by dividing the
value of the securities held by the Portfolio plus any cash or other assets
minus all liabilities including accrued advisory fees and the other expenses, by
the total number of shares outstanding at the time, The Performance of the
Portfolios shall be calculated in accordance with SEC rules.
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<PAGE>
(h) The Performance of the Benchmark will be calculated by first
determining the change in the level of the Benchmark during the previous twelve
months (including the month for which the fee is being computed) plus the value
of any cash dividends or distributions made by the companies whose securities
comprise the Benchmark accumulated to the end of the period, and then expressing
this amount as a percentage of the Benchmark at the beginning of the period. The
Performance of the Benchmark shall be calculated in accordance with SEC rules.
The Benchmark for each Portfolio is the Benchmark established by the agreement
between the Trust and the Portfolio Manager for that Portfolio. If any Benchmark
ceases to be published, changes in any material respect or otherwise becomes
impracticable to use for purposes of the Incentive Fee, the Monthly Advisory Fee
for that Portfolio will equal the Basic Fee (with no incentive adjustment) until
such time as the Board of Trustees approves a substitute Benchmark.
(i) Notwithstanding paragraphs 9(a)-9(h) above, if the Performance
of a Portfolio (minus payment of all expenses, including the Basic Fee and any
Incentive Fee) is negative and does not exceed the Performance of the Benchmark
by six percentage points, then the Monthly Advisory Fee will equal zero.
Notwithstanding paragraphs 9(a)-9(h) above, if the Performance of a Portfolio
(minus payment of all expenses, including the Basic Fee and any Incentive Fee)
is negative, exceeds the Performance of the Benchmark by six percentage points,
but does not exceed the Performance of the Benchmark by twelve percentage
points, then the Monthly Advisory Fee will not be greater than one-twelfth of 1%
of the Portfolio's average daily net assets for the previous 12 months
(including the month for which the fee is being calculated). Notwithstanding
paragraphs 9(a)-9(h) above, if the Performance of a Portfolio (minus payment of
all expenses, including the Basic Fee and any Incentive Fee) is negative and
exceeds the Performance of the Benchmark by twelve percentage points, then the
Monthly Advisory Fee will not be greater than one-twelfth of 2% of the
Portfolio's average daily net assets for the previous 12 months (including the
month for which the fee is being calculated)
10. Liability and Indemnification. The Manager and the Trust each may rely
on information reasonably believed by it to be accurate and reliable. The
Manager shall not be liable for any loss suffered by the Trust as the result of
actions by persons other than the Manager or for any loss suffered by the Trust
as the result of any negligent act or error of judgment of the Manager in
connection with the matters to which this Agreement relates, except a loss
resulting from a breach by the Manager of its fiduciary duty with respect to the
receipt
Page 10
<PAGE>
of compensation for services (in which case any award of damages shall be
limited to the period and the amount set forth in Section 36(b)(3) of the 1940
Act) or loss resulting from willful misfeasance, bad faith or gross negligence
on its part in the performance of its duties under this Agreement or from
reckless disregard by it of its obligations and duties under this Agreement. The
Trust shall indemnify the Manager and hold it harmless from all cost, damage and
expense, including reasonable expenses for legal counsel, incurred by the
Manager resulting from actions for which it is relieved of responsibility by
this paragraph. The Manager shall indemnify the Trust and hold it harmless from
all cost, damage and expense, including reasonable expenses for legal counsel,
incurred by the Trust resulting from (i) a breach by the Manager of its
fiduciary duty with respect to compensation for services paid by the Trust (in
which case any award of damages shall be limited to the period and the amount
set forth in Section 36(b)(3) of the 1940 Act); (ii) willful misfeasance, bad
faith or gross negligence by the Manager in the performance of its duties under
this Agreement; or (iii) reckless disregard by the Manager of its obligations
and duties under this Agreement.
11. Continuation and Termination. This Agreement shall take effect on the
date first written above, and shall continue in effect, unless sooner terminated
as provided herein, for 119 days thereafter, and provided that the Agreement is
approved by a majority of the outstanding voting shares of the Trust by the end
of such 119th day, shall continue for two years from the date of this Agreement,
and shall continue from year to year thereafter with respect to each Portfolio
so long as such continuance is specifically approved at least annually (i) by
the vote of a majority of the Board of Trustees; or (ii) by vote of a majority
of the outstanding voting shares of the Portfolio; provided, further, in either
event that continuance is also approved by the vote of a majority of the Board
of Trustees who are not parties to this Agreement or "interested persons" (as
defined in the 1940 Act) of the Trust or the Manager, cast in person at a
meeting called for the purpose of voting on such approval. Any approval of this
Agreement by the holders of a majority of the outstanding shares (as defined in
the 1940 Act) of a Portfolio shall be effective to continue this Agreement with
respect to such Portfolio notwithstanding (i) that this Agreement has not been
approved by the holders of a majority of the outstanding shares of any other
Portfolio or (ii) that this Agreement has not been approved by the vote of a
majority of the outstanding shares of the Trust, unless such approval shall be
required by any other applicable law or otherwise. This Agreement may be
terminated by the Trust at any time, without the payment of any penalty, by vote
of a majority of the entire Board of
Page 11
<PAGE>
Trustees or by a vote of a majority of the outstanding voting shares of the
Trust, or with respect to a Portfolio, by vote of a majority of the outstanding
voting shares of such Portfolio, on sixty (60) days' written notice to the
Manager, or by the Manager at any time, without the payment of any penalty, on
ninety (90) days' written notice to the Trust. This Agreement will automatically
and immediately terminate in the event of its "assignment" (as defined in the
1940 Act).
12. Independent Contractor. The Manager shall for all purposes herein be
deemed to be an independent contractor and shall, unless otherwise expressly
provided herein or authorized by the Board of Trustees from time to time, have
no authority to act for or represent the Trust in any way or otherwise be deemed
its agent.
13. Notice. Notices of any kind to be given to the Manager by the Trust
shall be in writing and shall be duly given if sent by first class mail or
delivered to the Manager at 440 Lincoln Street, Worster, MA 01653, or at such
other address or to such individual as shall be specified by the Manager to the
Trust. Notices of any kind to be given to the Trust by the Manager shall be in
writing and shall be duly given if sent by first class mail or delivered to 440
Lincoln Street, Worster, MA 01653, or at such other address or to such
individual as shall be specified by the Trust to the Manager.
14. Obligation. A copy of the Trust's Agreement and Declaration of Trust
is on file with the Secretary of the Commonwealth of Massachusetts. Notice is
hereby given that this Agreement has been executed on behalf of the Trust by a
trustee of the Trust in his or her capacity as trustee and not individually. The
obligations of this Agreement shall only be binding upon the assets and property
of the Trust and shall not be binding upon any trustee, officer, or shareholder
of the Trust individually.
15. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original.
16. Applicable law. This Agreement shall be governed by the laws of
Massachusetts, provided that nothing herein shall be construed in a manner
inconsistent with the 1940 Act, the Investment Advisers Act of 1940, or any
rules or order of the SEC thereunder.
17. Severability. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of this
Agreement shall not
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<PAGE>
be affected thereby and, to this extent, the provisions of this Agreement shall
be deemed to be severable.
18. Captions. The captions of this Agreement are included for convenience
only and in no way define or limit any of the provisions hereof or otherwise
affect their construction or effect.
Page 13
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument
to be executed by their officers designated below on the day and year first
above written.
The Palladian Trust
/s/ Christopher E. Palmer By: /s/ Matthew J. Stacom
- --------------------------------- --------------------------------
Witness Matthew J. Stacom
Trustee
Allmerica Investment
Management Company, Inc.
/s/ Irene Nosel By: /s/ Thomas P. Cunningham
- --------------------------------- ---------------------------------
Witness
Page 14
<PAGE>
GLOBAL STRATEGIC INCOME PORTFOLIO
PORTFOLIO MANAGER AGREEMENT
Agreement, made this 11th day of April, 1998, among The Palladian
Trust (the "Trust"), a Massachusetts business trust; Allmerica Investment
Management Company, Inc. (the "Manager"), a Massachusetts corporation; and
Allmerica Asset Management, Inc. (the "Portfolio Manager"), a Massachusetts
corporation.
WHEREAS, the Trust is a diversified, open-end management investment
company registered under the Investment company Act of 1940, as amended (the
"1940 Act"); and
WHEREAS, the Manager and the Portfolio Manager are both registered
as investment advisers under the Investment Advisers Act of 1940; and
WHEREAS, the Trust is authorized to issue shares of beneficial
interest in separate portfolios with each such portfolio representing interests
in a separate portfolio of securities and other assets; and
WHEREAS, the Manager has entered into a management agreement with
the Trust, pursuant to which the Manager will provide, among other services,
advice with respect to the selection and monitoring of portfolio managers to
handle the day-to-day investment management of certain portfolios; and
WHEREAS, the Trust and the Manager desire to retain the Portfolio
Manager to provide investment advisory services to the Global Strategic Income
Portfolio of the Trust (the "Portfolio"), and the Portfolio Manager is willing
to render such services.
Therefore, the parties agree as follows:
1. Appointment. The Trust hereby appoints the Portfolio Manager to provide
investment advisory services with respect to the Portfolio for the period and on
the terms set forth in this Agreement, subject to the direction of the Board of
Trustees of the Trust (the "Board of Trustees"). The Portfolio Manager accepts
such appointment and agrees to render the services described herein for the
compensation provided in paragraph 13.
2. Services of the Portfolio Manager.
(a) Subject to the supervision of the Board of Trustees, the
Portfolio Manager will provide day-to-day investment management of the
Portfolio. The Portfolio Manager will provide investment research and conduct a
continuous program of evaluation, investment, sales, and reinvestment of the
Portfolio's assets by determining the securities and other investments that
shall be purchased, entered into, sold, closed, or exchanged for the Portfolio,
when these transactions should be
<PAGE>
executed, and what portion of the assets of the Portfolio should be held in the
various securities and other investments in which it may invest. The Portfolio
Manager is hereby authorized to execute and perform such services on behalf of
the Portfolio. To the extent permitted by the investment policies of the
Portfolio, the Portfolio Manager shall make decisions for the Portfolio as to
foreign currency matters and make determinations as to, and execute and perform,
foreign currency exchange contracts on behalf of the Portfolio. The Portfolio
Manager will provide the services under this Agreement in accordance with the
Portfolio's investment objective or objectives, policies, and restrictions as
stated in the Trust's registration statement under the Securities Act of 1933
and the 1940 Act as filed with the Securities and Exchange Commission ("SEC")
and amended from time to time (the "Registration Statement").
(b) The Portfolio Manager will use reasonable efforts to manage the
Portfolio so that it will (1) qualify as a regulated investment company under
Subchapter M of the Internal Revenue code, (2) comply with the diversification
requirements of Section 817(h) of the Internal Revenue Code and regulations
issued thereunder, and (3) comply with any other rules and regulations
pertaining to investment vehicles underlying variable annuity or variable life
insurance policies. In managing the Portfolio in accordance with these
requirements, the Portfolio Manager shall be entitled to receive and act upon
advice of counsel to the Trust or counsel to the Manager.
(c) On occasions when the Portfolio Manager deems the purchase or
sale of a security to be in the best interest of the Portfolio as well as any
other investment advisory clients, the Portfolio Manager may, to the extent
permitted by applicable laws and regulations, including, but not limited to
Section 17(d) of the 1940 Act, but shall not be obligated to, aggregate the
securities to be so sold or purchased with those of its other clients where such
aggregation is not inconsistent with the policies set forth in the Registration
Statement, In such event, allocation of the securities so purchased or sold, as
well as the expenses incurred in the transaction, will be made by the Portfolio
Manager in a manner that is fair and equitable in the judgment of the Portfolio
Manager in the exercise of its fiduciary obligations to the Trust and to such
other clients.
(d) In connection with the purchase and sale of securities for the
Portfolio, the Portfolio Manager will arrange for the transmission to the
custodian for the Trust on a daily basis, such confirmation, trade tickets, and
other documents and information as may be reasonably necessary to enable the
custodian to perform its administrative and recordkeeping responsibilities with
respect to the Portfolio. With respect to portfolio securities to be purchased
or sold through the
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<PAGE>
Depository Trust Company, the Portfolio Manager will arrange for the automatic
transmission of the confirmation of such trades to the Trust's custodian. The
Portfolio Manager will provide to the Manager copies of the documents and
information sent to the custodian and the Depository Trust Company as requested
by the Manager.
(e) The Portfolio Manager will assist the custodian or recordkeeping
agent for the Trust in determining, consistent with the procedures and policies
stated in the Registration Statement, the value of any portfolio securities or
other assets of the Portfolio for which the custodian or recordkeeping agent
seeks assistance or review from the Portfolio Manager. The Portfolio Manager
will monitor on a daily basis the determination by the custodian or
recordkeeping agent for the Trust the value of portfolio securities and other
assets of the Portfolio and the determination of net asset value of the
Portfolio.
(f) The Portfolio Manager shall regularly report to the Board of
Trustees on the investment program for the Portfolio, and will furnish the Board
of Trustees such periodic and special reports as the Board may reasonably
request.
(g) The Portfolio Manager shall make its officers and employees
available to the Board of Trustees, officers of the Trust, and officers of the
Manager for consultation and discussions regarding the investment program for
the Portfolio.
3. Broker-Dealer Selection. The Portfolio Manager is responsible
for decisions to buy and sell securities and other investments for the
Portfolio, broker-dealer selection, and negotiation of brokerage commission
rates. The Portfolio Manager's primary consideration in effecting a security
transaction will be to obtain the best execution for the Portfolio, taking into
account the factors specified in the Registration Statement. Subject to the
Registration Statement and such policies as the Board of Trustees may determine
and consistent with Section 28(e) of the Securities Exchange Act of 1934, the
Portfolio Manager shall not be deemed to have acted unlawfully or to have
breached any duty created by this Agreement or otherwise solely by reason of its
having caused the Portfolio to pay a broker-dealer for effecting a portfolio
investment transaction in excess of the amount of commission another
broker-dealer would have charged for effecting that transaction, if the
Portfolio Manager determines in good faith that such amount of commission was
reasonable in relation to the value of the brokerage and research services
provided by such broker-dealer, viewed in terms of either that particular
transaction or the Portfolio Manager's overall responsibilities with respect to
the Portfolio and to its other clients as to which it exercises investment
discretion.
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<PAGE>
4. Employees. In rendering the services required under this Agreement, the
Portfolio Manager may, from time to time, employ such person or persons as it
believes necessary to assist it in carrying out its obligations under this
Agreement. The Portfolio Manager shall be responsible for making reasonable
inquiries and for reasonably ensuring that no employee of the Portfolio Manager:
(a) has been convicted, in the last ten (10) years, of any felony or
misdemeanor arising out of conduct involving embezzlement,
fraudulent conversion, or misappropriation of funds or securities,
or involving violations of Sections 1341, 1342, or 1343 of Title 18,
United States Code; or
(b) has been found by any state regulatory authority, within the
last ten (10) years, to have violated or to have acknowledged
violation of any provision of any state insurance law involving
fraud, deceit, or knowing misrepresentation; or
(c) has been found by any federal or state regulatory authorities,
within the last ten (10) years, to have violated or to have
acknowledged violation of any provisions of federal or state
securities laws involving fraud, deceit, or knowing
misrepresentation; or
(d) is ineligible by reason of Section 9 of the 1940 Act to serve as
an employee of an investment adviser to an investment company.
5. Conformity with Applicable Law. The Portfolio Manager, in the
performance of its duties and obligations under this Agreement, shall act in
conformity with the Registration Statement and with the instructions and
directions of the Board of Trustees and will conform to, and comply with, the
requirements of the 1940 Act and all other applicable federal and state laws and
regulations.
6. Exclusivity, The services of the Portfolio Manager under this Agreement
are not deemed exclusive, and the Portfolio Manager, or any affiliate thereof,
shall be free to render similar services to other investment companies and other
clients and to engage in other activities, so long as its services hereunder are
not impaired thereby.
7. Documents. The Trust has delivered copies of each of the following
documents to the Portfolio Manager and will deliver to it all future amendments
and supplements thereto, if any:
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<PAGE>
-5-
(a) the Trust's Declaration of Trust and its by-laws;
(b) the Registration Statement; and
(c) the prospectus and statement of additional information of the
Trust as currently in effect and as amended and supplemented from time to time.
8. Records. The Portfolio Manager agrees to maintain and to preserve
records relating to the Trust as required by the 1940 Act. The Portfolio Manager
further agrees that all records which it maintains for the Trust are the
property of the Trust and it will promptly surrender any of such records upon
request.
9. Disclosure by Portfolio Manager. The Portfolio Manager will not
disclose or use any records or information obtained pursuant to this Agreement
(excluding investment research and investment advice) in any manner whatsoever
except as required to carry out its duties as investment adviser or in the
ordinary course of business in connection with placing orders for the purchase
and sale of securities, and will keep confidential any information obtained
pursuant to this Agreement, and disclose such information only if the Board of
Trustees has authorized such disclosure, or if such disclosure is expressly
required by applicable federal or state law or regulations or regulatory
authorities having the requisite authority.
10. Disclosure about Portfolio Manager. The Portfolio Manager will
cooperate with the Trust and the Manager by providing and reviewing information
relating to the Portfolio Manager and the Portfolio for use in the Registration
Statement, shareholder reports and other documents. The Portfolio Manager
represents and warrants that it is a duly registered investment adviser under
the Investment Advisers Act of 1940 and a duly registered investment adviser in
all states in which the Portfolio Manager is required to be registered.
11. Compliance. The Portfolio Manager agrees that it shall immediately
notify the Manager and the Trust in the event that:
(a) the SEC has censured the Portfolio Manager; placed limitations
upon its activities, functions or operations; suspended or revoked its
registration as an investment adviser; or commenced proceedings or an
investigation that may result in any of these actions; or
(b) the Portfolio Manager has a reasonable basis for believing that
the Portfolio has ceased to qualify or might not
Page 5
<PAGE>
-6-
qualify as a regulated investment company under Subchapter M of the Internal
Revenue Code; or
(c) the Portfolio Manager has a reasonable basis for believing that
the Portfolio has ceased to comply or might not comply with the diversification
provisions of Section 817(h) of the Internal Revenue Code or the regulations
thereunder; or
(d) the Portfolio Manager has become aware of a material fact that
is not contained in the Registration Statement or prospectus for the Trust, or
any amendment or supplement thereto, or that any statement contained therein
that has become untrue or misleading in any material respect.
12. Expenses. During the term of this Agreement, the Portfolio Manager
will pay all expenses incurred by it in connection with its activities under
this Agreement, including all rent and other expenses involved in providing
office space and equipment required by the Portfolio Manager and the salaries
and expenses of all personnel of the Portfolio Manager. The Portfolio Manager
further agrees to pay all salaries, fees and expenses of any officer or trustee
of the Trust who is an officer, director or employee of the Portfolio Manager or
any of its affiliates. Nothing in this Agreement shall require the Portfolio
Manager to bear the following expenses:
(a) Fees of the Manager and the Portfolio Advisor;
(b) Charges for audits by the Trust's independent public
accountants;
(c) Charges of the Trust's transfer agent, registrar, and/or
dividend disbursing agent;
(d) Charges of the Trust's custodian and/or accountant;
(e) Costs of obtaining quotations for calculating the value of each
Portfolio's net assets;
(f) Costs of maintaining the Trust's tax records;
(g) Salaries and other compensation of any of the Trust's executive
officers and employees, if any, who are not officers, directors, or employees of
the Portfolio Manager or any of its affiliates;
(h) Taxes levied against the Trust;
Page 6
<PAGE>
-7-
(i) Brokerage fees and commissions in connection with the purchase
and sale of portfolio securities for the Trust;
(j) Costs, including the interest expense, of borrowing by the
Trust;
(k) Costs and/or fees incident to meetings of the Trust's
shareholders, the preparation and mailings of prospectuses, reports, proxy
statements and other communications by the Trust to its shareholders, the filing
of reports with regulatory bodies, the maintenance of the Trust's existence, and
the registration of shares with federal and state securities or insurance
authorities;
(l) The Trust's legal fees, including the legal fees related to the
registration and continued qualification of the Trust's shares for sale;
(m) Costs of printing stock certificates representing shares of the
Trust;
(n) Trustees' fees and expenses of Trustees who are not officers,
directors, or employees of the Portfolio Manager or any affiliates;
(o) Trust's pro rata portion of the fidelity bond required by
Section 17(g) of the 1940 Act, or other insurance premiums;
(p) Membership dues for any association of which the Trust is a
member;
(q) Extraordinary expenses of the Trust as may arise, including
expenses incurred in connection with litigation, proceedings, other claims
against the Trust (unless the Portfolio Manager is responsible for such expenses
under paragraph 14 of this Agreement), and the legal obligations of the Trust to
indemnify its trustees, officers, employees, shareholders, distributors, and
agents with respect to such claims; and
(r) Organizational and offering expenses of the Trust and, if
applicable, reimbursement (with interest) of underwriting discounts and
commissions.
13. Compensation.
(a) For the services provided and the expenses borne by the
Portfolio Manager pursuant to this Agreement, the Trust will pay the Portfolio
Manager 80% of the Initial Monthly
Page 7
<PAGE>
-8-
Advisory Fee or the Monthly Advisory Fee, as those terms are defined in this
paragraph, whichever is applicable.
(b) For the period beginning with the effective date of this
Agreement and ending with the last day of the twelfth full calendar month
thereafter, the Portfolio will pay at the end of each month, an advisory fee
calculated at an annual rate of 0.80% of the Portfolio's average daily net
assets (the "Initial Monthly Advisory Fee").
(c) For the period beginning with the first day of the thirteenth
full calendar month after the effective date of this Agreement and continuing
through the remainder of the term of this Agreement, the Portfolio will pay at
the end of each month, an advisory fee (the "Monthly Advisory Fee"). The Monthly
Advisory Fee equals the Basic Fee (as defined in paragraph 13(d) below) plus the
Incentive Fee (as defined in paragraph 13(e) below) and adjusted, if so
required, by paragraph 13(h) below.
(d) The Basic Fee equals one-twelfth of 2% multiplied by the
Portfolio's average daily net assets for the previous 12 months (including the
month for which the fee is being calculated).
(e) The Incentive Fee equals: (i) one-twelfth of the Annual
Incentive Fee set forth in the chart below based on the difference between the
Performance of the Portfolio and the Performance of the Benchmark, as those
terms are defined in paragraphs 13(f) and 13(g) below; (ii) multiplied by the
Portfolio's average daily net assets for the previous 12 months (including the
month for which the fee is being calculated).
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<PAGE>
-9-
================================================================================
Annual
Percentage Point Difference Between Performance of the Incentive
Portfolio and Performance of the Benchmark Fee (%)
================================================================================
+7.5 or greater 2.0%
- --------------------------------------------------------------------------------
+6.0 or greater, but less than +7.5 1.5
- --------------------------------------------------------------------------------
+4.5 or greater, but less than +6.0 1.0
- --------------------------------------------------------------------------------
+3.0 or greater, but less than +4.5 0.5
- --------------------------------------------------------------------------------
+1.5 or greater, but less than +3.0 0.0
- --------------------------------------------------------------------------------
0.0 or greater, but less than +1.5 -0.5
- --------------------------------------------------------------------------------
-1.5 or greater, but less than 0.0 -1.0
- --------------------------------------------------------------------------------
-3.0 or greater, but less than -1.5 -1.5
- --------------------------------------------------------------------------------
Less than -3.0 -2.0
================================================================================
(f) The Performance of the Portfolio will be calculated by first
determining the change in the Portfolio's net asset value per share during the
previous twelve months (including the month for which the fee is being computed)
assuming the reinvestment of distributions during that period, and then
expressing this amount as a percentage of the net asset value per share at The
beginning of the period. Net asset value per share is calculated by dividing the
value of the securities held by the Portfolio plus any cash or other assets
minus all liabilities including accrued advisory fees and the other expenses, by
the total number of shares outstanding at the time. The Performance of the
Portfolios shall be calculated in accordance with SEC rules.
(g) The Performance of the Benchmark will be calculated by first
determining the change in the level of the Benchmark during the previous twelve
months (including the month for which the fee is being computed) plus the value
of any cash dividends or distributions made by the companies whose securities
comprise the Benchmark accumulated to the end of the period, and then expressing
this. amount as a percentage of the Benchmark at the beginning of the period,
The Performance of the Benchmark shall be calculated in accordance with SEC
rules. The Benchmark is J.P. Morgan Global Government Bond Index, Unhedged. If
the Benchmark ceases to be published, changes in any material respect
Page 9
<PAGE>
-10-
or otherwise becomes impracticable to use for purposes of the Incentive Fee, the
Monthly Advisory Fee will equal the Basic Fee (with no incentive adjustment)
until such time as the Board of Trustees approves a substitute Benchmark.
(h) Notwithstanding paragraphs 13(a)-13(g) above, if the
Performance of a Portfolio (minus payment of all expenses, including the Basic
Fee and any Incentive Fee) is negative and does not exceed the Performance of
the Benchmark by six percentage points, then the Monthly Advisory Fee will equal
zero. Notwithstanding paragraphs 13(a)-13(g) above, if the Performance of a
Portfolio (minus payment of all expenses, including the Basic Fee and any
Incentive Fee) is negative, exceeds the Performance of the Benchmark by six
percentage points, but does not exceed the Performance of the Benchmark by
twelve percentage points, then the Monthly Advisory Fee will not be greater than
one-twelfth of 1% of the Portfolio's average daily net assets for the previous
12 months (including the month for which the fee is being calculated).
Notwithstanding paragraphs 13(a)-13(g) above, if the Performance of a Portfolio
(minus payment of all expenses, including the Basic Fee and any Incentive Fee)
is negative and exceeds the Performance of the Benchmark by twelve percentage
points, then the Monthly Advisory Fee will not be greater than one-twelfth of
2% of the Portfolio's average daily net assets for the previous 12 months
(including the month for which the fee is being calculated).
14. Liability and Indemnification. The Portfolio Manager, the Manager and
the Trust each may rely on information reasonably believed by it to be accurate
and reliable. The Portfolio Manager shall not be liable to the Trust or its
shareholders for any loss suffered by the Trust as the result of any negligent
act or error of judgment of the Portfolio Manager in connection with the matters
to which this Agreement relates, except a loss resulting from a breach by the
Portfolio Manager of its fiduciary duty with respect to the receipt of
compensation for services (in which case any award of damages shall be limited
to the period and the amount set forth in Section 36(b)(3) of the 1940 Act) or
loss resulting from willful misfeasance, bad faith or gross negligence on its
part in the performance of its duties or from reckless disregard by it of its
obligations and duties under this Agreement. The Trust shall indemnify the
Portfolio Manager and hold it harmless from all cost, damage and expense,
including reasonable expenses for legal counsel, incurred by the Portfolio
Manager resulting from actions for which it is relieved of responsibility by
this paragraph. The Portfolio Manager shall indemnify the Trust and hold it
harmless from all cost, damage and expense, including reasonable expenses for
legal counsel, incurred by the Trust resulting from (i) a breach by the
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<PAGE>
- 11 -
Portfolio Manager of its fiduciary duty with respect to compensation for
services paid by the Trust (in which case any award of damages shall be limited
to the period and the amount set forth in Section 36(b)(3) of the 1940 Act);
(ii) willful misfeasance, bad faith or gross negligence by the Portfolio Manager
in the performance of its duties under this Agreement; or (iii) reckless
disregard by the Portfolio Manager of its obligations and duties under this
Agreement.
15. Continuation and Termination. This Agreement shall take effect on the
date first written above, and shall continue in effect, unless sooner terminated
as provided herein, for 119 days thereafter, and provided that the Agreement is
approved by a majority of the outstanding voting shares of the Portfolio by the
end of such 119th day, shall continue for two years from the date of this
Agreement and shall continue from year to year thereafter so long as such
continuance is specifically approved at least annually (i) by the vote of a
majority of the Board of Trustees; or (ii) by vote of a majority of the
outstanding voting shares of the Portfolio; provided, further, in either event
that continuance is also approved by the vote of a majority of the Board of
Trustees who are not parties to this Agreement or "interested persons" (as
defined in the 1940 Act) of the Trust, the Manager or the Portfolio Manager cast
in person at a meeting called for the purpose of voting on such approval. This
Agreement may be terminated (i) by the Trust at any time, without the payment of
any penalty, by vote of a majority of the entire Board of Trustees or by a vote
of a majority of the outstanding voting shares of the Portfolio, on sixty (60)
days' written notice to the Manager and the Portfolio Manager, (ii) by the
Manager at any time, without the payment of any penalty, on ninety (90) days'
written notice to the Trust and the Portfolio Manager, or (iii) by the Portfolio
Manager at any time, without the payment of any penalty, on ninety (90) days'
written notice to the Trust and the Manager. This Agreement will automatically
and immediately terminate in the event of its "assignment" (as defined in the
1940 Act).
16. Independent Contractor. The Portfolio Manager shall for all purposes
herein be deemed to be an independent contractor and shall, unless otherwise
expressly provided herein or authorized by the Board of Trustees from time to
time, have no authority to act for or represent the Trust in any way or
otherwise be deemed its agent.
17. Use of Name. It is understood that the words "Palladian" and "Fulcrum
Fund," any derivative thereof and any design associated with those words
(collectively, the "Words and Designs") are the valuable property of the Trust,
and that the
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- 12 -
Portfolio Manager shall have the right to use the Words and Designs only with
the approval of the Trust. Upon termination of this Agreement, the Portfolio
Manager shall promptly discontinue all use of the Words and Designs.
18. Sales Literature. The Manager agrees to furnish to the Portfolio
Manager all sales literature which refers to the Portfolio Manager prior to use
thereof and not to use such sales literature if the Portfolio Manager reasonably
objects in writing five business days (or such other time as may be mutually
agreed) after receipt thereof. Sales literature may be furnished to the
Portfolio Manager by first class mail, overnight delivery service, facsimile
transmission equipment, or hand delivery.
19. Notice. Notices of any kind to be given to the Trust shall be in
writing and shall be duly given if sent by first class mail or delivered to the
Trust at 440 Lincoln Street, Worcester, MA 01653, or at such other address or to
such individual as shall be specified by the Trust (with proper notice to the
Manager and the Portfolio Manager). Notices of any kind to be given to the
Manager shall be in writing and shall be duly given if sent by first class mail
or delivered to the Manager at 440 Lincoln Street, Worcester, MA 01653, or at
such other address or to such individual as shall be specified by the Manager
(with proper notice to the Trust and the Portfolio Manager). Notices of any kind
to be given to the Portfolio Manager shall be in writing and shall be duly given
if sent by first class mail or delivered to the Portfolio Manager at 440 Lincoln
Street, Worcester, MA 01653, or at such other address or to such individual as
shall be specified by the Portfolio Manager (with proper notice to the Trust and
the Manager).
20. Obligation. A copy of the Trust's Agreement and Declaration of Trust
is on file with the Secretary of the Commonwealth of Massachusetts. Notice is
hereby given that this Agreement has been executed on behalf of the Trust by a
trustee of the Trust in his or her capacity as trustee and not individually. The
obligations of this Agreement shall only be binding upon the assets and property
of the Trust and shall not be binding upon any trustee, officer, or shareholder
of the Trust individually.
21. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original.
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<PAGE>
- 13 -
22. Applicable law. This Agreement shall be governed by the laws of
Massachusetts, provided that nothing herein shall be construed in a manner
inconsistent with the 1940 Act, the Investment Advisers Act of 1940, or any
rules or order of the SEC thereunder.
23. Severability. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of this
Agreement shall not be affected thereby and, to this extent, the provisions of
this Agreement shall be deemed to be severable.
24. Captions. The captions of this Agreement are included for convenience
only and in no way define or limit any of the provisions hereof or otherwise
affect their construction or effect.
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<PAGE>
- 14-
IN WITNESS WHEREOF, the parties hereto have caused this instrument
to be executed by their officers designated below on the day and year first
above written.
The Palladian Trust
/s/ Sonja Gjakovski By: /s/ George M. Boyd
---------------------------- --------------------
Witness George M. Boyd
Assistant Secretary
Allmerica Investment Management
Company, Inc.
/s/ Sonja Gjakovski By: /s/ Thomas P. Cunningham
---------------------------- ----------------------------
Witness Name: Thomas P. Cunningham
Title: Vice President
Allmerica Asset Management, Inc.
/s/ Sonja Gjakovski By: /s/ Lisa M. Coleman
---------------------------- ----------------------------
Witness Name: Lisa M. Coleman
Title: Vice President
Page 14
<PAGE>
GROWTH PORTFOLIO
PORTFOLIO MANAGER AGREEMENT
Agreement, made this 1st day of August, 1998, among The Palladian Trust (the
"Trust"), a Massachusetts business trust; Allmerica Financial Investment
Management Services, Inc. (the "Manager"), a Massachusetts corporation; and
Pilgrim Baxter Analytic Investors, Inc. (the "Portfolio Manager"), a
California corporation.
WHEREAS, the Trust is a diversified, open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"); and
WHEREAS, the Manager and the Portfolio Manager are both registered as investment
advisers under the Investment Advisers Act of 1940; and
WHEREAS, the Trust is authorized to issue shares of beneficial interest in
separate portfolios with each such portfolio representing interests in a
separate portfolio of securities and other assets; and
WHEREAS, the Manager has entered into a management agreement with the Trust,
pursuant to which the Manager will provide, among other services, advice with
respect to the selection and monitoring of portfolio managers to handle the
day-to-day investment management of certain portfolios; and
WHEREAS, the Trust and the Manager desire to retain the Portfolio Manager to
provide investment advisory services to the Growth Portfolio of the Trust (the
"Portfolio"), and the Portfolio Manager is willing to render such services.
Therefore, the parties agree as follows:
1. APPOINTMENT. The Trust hereby appoints the Portfolio Manager to provide
investment advisory services with respect to the Portfolio for the period and on
the terms set forth in this Agreement, subject to the direction of the Board of
Trustees of the Trust (the "Board of Trustees"). The Portfolio Manager accepts
such appointment and agrees to render the services described herein for the
compensation provided in paragraph 13.
2. SERVICES OF THE PORTFOLIO MANAGER.
(a) Subject to the supervision of the Board of Trustees, the Portfolio
Manager will provide day-to-day investment management of the Portfolio. The
Portfolio Manager will provide investment research and conduct a continuous
program of evaluation, investment, sales, and reinvestment of the Portfolio's
assets by determining the securities and other investments that shall be
purchased, entered into, sold, closed, or exchanged for the Portfolio, when
these transactions should be executed, and what portion of the assets of the
Portfolio should be held in the various securities and other investments in
which it may invest. The Portfolio Manager is hereby authorized to execute and
perform such services on behalf of the Portfolio. To the extent permitted by the
investment policies of the Portfolio, the Portfolio Manager shall make decisions
<PAGE>
for the Portfolio as to foreign currency matters and make determinations as to,
and execute and perform, foreign currency exchange contracts on behalf of the
Portfolio. The Portfolio Manager will provide the services under this Agreement
in accordance with the Portfolio's investment objective or objectives, policies,
and restrictions as stated in the Trust's registration statement under the
Securities Act of 1933 and the 1940 Act as filed with the Securities and
Exchange Commission ("SEC") and amended from time to time (the "Registration
Statement"). Manager shall promptly provide Portfolio Manager with the most
current effective version of such Registration Statement if any amendments
or supplements to the Registration Statement are filed with the SEC.
(b) The Portfolio Manager will use reasonable efforts to manage the
Portfolio so that it will (1) qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code and (2) comply with the
diversification requirements of Section 817(h) of the Internal Revenue Code
and regulations issued thereunder. In managing the Portfolio in accordance with
these requirements, the Portfolio Manager shall be entitled to receive and act
upon advice of counsel to the Trust or counsel to the Manager.
(c) On occasions when the Portfolio Manager deems the purchase or sale of
a security to be in the best interest of the Portfolio as well as any other
investment advisory clients, the Portfolio Manager may, to the extent permitted
by applicable laws and regulations, including, but not limited to Section 17(d)
of the 1940 Act, but shall not be obligated to, aggregate the securities to be
so sold or purchased with those of its other clients. In such event,
allocation of the securities so purchased or sold, as well as the expenses
incurred in the transaction, will be made by the Portfolio Manager in a manner
that is fair and equitable in the judgment of the Portfolio Manager in the
exercise of its fiduciary obligations to the Trust and to such other clients.
(d) In connection with the purchase and sale of securities for the
Portfolio, the Portfolio Manager will arrange for the transmission to the
custodian for the Trust on a daily basis, such confirmation, trade tickets, and
other documents and information as may be reasonably necessary to enable the
custodian to perform its administrative and recordkeeping responsibilities with
respect to the Portfolio. With respect to portfolio securities to be purchased
or sold through the Depository Trust Company, the Portfolio Manager will arrange
for the automatic transmission of the confirmation of such trades to the Trust's
custodian. The Portfolio Manager will provide to the Manager copies of the
documents and information sent to the custodian and the Depository Trust Company
as requested by the Manager.
(e) The Portfolio Manager will provide reasonable assistance to the
custodian or recordkeeping agent for the Trust in determining, consistent
with the procedures and policies stated in the Registration Statement, the
value of any portfolio securities or other assets of the Portfolio for which
the custodian or recordkeeping agent seeks assistance or review from the
Portfolio Manager.
(f) The Portfolio Manager shall regularly report to the Board of Trustees
on the investment program for the Portfolio, and will furnish the Board of
Trustees such periodic and special reports as the Board may reasonably request.
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<PAGE>
(g) The Portfolio Manager shall make its officers and employees available
to the Board of Trustees, officers of the Trust, and officers of the Manager for
consultation and discussions regarding the investment program for the Portfolio
at such times as the Board of Trustees, Officers or Manager may reasonably
request.
3. BROKER-DEALER SELECTION. The Portfolio Manager is responsible for
decisions to buy and sell securities and other investments for the Portfolio,
broker-dealer selection, and negotiation of brokerage commission rates. The
Portfolio Manager's primary consideration in effecting a security transaction
will be to obtain the best execution for the Portfolio. Subject to such
policies as the Board of Trustees may determine and consistent with Section
28(e) of the Securities Exchange Act of 1934, the Portfolio Manager shall not
be deemed to have acted unlawfully or to have breached any duty created by
this Agreement or otherwise solely by reason of its having caused the
Portfolio to pay a broker-dealer for effecting a portfolio investment
transaction in excess of the amount of commission another broker-dealer would
have charged for effecting that transaction, if the Portfolio Manager
determines in good faith that such amount of commission was reasonable in
relation to the value of the brokerage and research services provided by such
broker-dealer, viewed in terms of either that particular transaction or the
Portfolio Manager's overall responsibilities with respect to the Portfolio
and to its other clients as to which it exercises investment discretion.
4. EMPLOYEES. In rendering the services required under this Agreement, the
Portfolio Manager may, from time to time, employ such person or persons as it
believes necessary to assist it in carrying out its obligations under this
Agreement. The Portfolio Manager shall be responsible for making reasonable
inquiries and for reasonably ensuring that:
(i) no employee of the Portfolio Manager who provides investment advice to
the Trust:
(a) has been convicted, in the last ten (10) years, of any felony or
misdemeanor arising out of conduct involving embezzlement, fraudulent
conversion, or misappropriation of funds or securities, or involving
violations of Sections 1341, 1342, or 1343 of Title 18, United States
Code; or
(b) has been found by any state regulatory authority, within the last ten
(10) years, to have violated or to have acknowledged violation of any
provision of any state insurance law involving fraud, deceit, or knowing
misrepresentation; or
(c) has been found by any federal or state regulatory authorities, within
the last ten (10) years, to have violated or to have acknowledged
violation of any provisions of federal or state securities laws involving
fraud, deceit, or knowing misrepresentation; and
(ii) no employee of the Portfolio Manager is ineligible by reason of
Section 9 of the 1940 Act to serve as an employee of an investment adviser
to an investment company.
5. CONFORMITY WITH APPLICABLE LAW. The Portfolio Manager, in the performance of
its duties and obligations under this Agreement, shall act in conformity with
the Registration Statement and with the instructions and directions of the Board
of Trustees and will conform to, and comply with, the requirements of the 1940
Act and all other applicable federal and state laws and regulations.
3
<PAGE>
6. EXCLUSIVITY. The services of the Portfolio Manager under this Agreement are
not deemed exclusive, and the Portfolio Manager, or any affiliate thereof, shall
be free to render similar services to other investment companies and other
clients and to engage in other activities, so long as its services hereunder are
not materially impaired thereby.
7. DOCUMENTS. The Trust has delivered copies of each of the following
documents to the Portfolio Manager and will promptly deliver to it all future
amendments and supplements thereto, if any:
(a) the Trust's Declaration of Trust and its by-laws;
(b) the Registration Statement; and
(c) the prospectus and statement of additional information of the Trust as
currently in effect and as amended and supplemented from time to time.
8. RECORDS. The Portfolio Manager agrees to maintain and to preserve records
relating to the Trust as required by the 1940 Act. The Portfolio Manager further
agrees that all records which it maintains for the Trust are the property of the
Trust and it will promptly surrender any of such records upon request.
9. DISCLOSURE BY PORTFOLIO MANAGER. The Portfolio Manager will not
disclose or use any records or information obtained pursuant to this
Agreement (excluding investment research and investment advice) in any manner
whatsoever except as required to carry out its duties as investment adviser
or in the ordinary course of business in connection with placing orders for
the purchase and sale of securities, and will keep confidential any
information obtained from the Trust pursuant to this Agreement, and disclose
such information only if the Board of Trustees has authorized such
disclosure, or if such disclosure is expressly required by applicable federal
or state law or regulations or regulatory authorities having the requisite
authority.
10. DISCLOSURE ABOUT PORTFOLIO MANAGER. The Portfolio Manager will cooperate
with the Trust and the Manager by providing and reviewing information relating
to the Portfolio Manager and the Portfolio for use in the Registration
Statement, shareholder reports and other documents. The Portfolio Manager
represents and warrants that it is a duly registered investment adviser under
the Investment Advisers Act of 1940 and a duly registered investment adviser in
all states in which the Portfolio Manager is required to be registered.
11. COMPLIANCE. The Portfolio Manager agrees that it shall promptly notify
the Manager and the Trust in the event that:
(a) the SEC has censured the Portfolio Manager; placed limitations upon
its activities, functions or operations; suspended or revoked its registration
as an investment adviser; or commenced proceedings or an investigation that may
result in any of these actions; or
(b) the Portfolio Manager has a reasonable basis for believing that the
Portfolio has ceased to qualify or might not qualify as a regulated investment
company under Subchapter M of the Internal Revenue Code; or
4
<PAGE>
(c) the Portfolio Manager has a reasonable basis for believing that the
Portfolio has ceased to comply or might not comply with the diversification
provisions of Section 817(h) of the Internal Revenue Code or the regulations
thereunder; or
(d) the Portfolio Manager has actual knowledge that a material fact
that is not contained in the Registration Statement or prospectus for the
Trust, or any amendment or supplement thereto, or that any statement
contained therein that has become untrue or misleading in any material
respect.
12. EXPENSES. During the term of this Agreement, the Portfolio Manager will
pay all expenses incurred by it in connection with its activities under this
Agreement, including all rent and other expenses involved in providing office
space and equipment required by the Portfolio Manager and the salaries and
expenses of all personnel of the Portfolio Manager. The Portfolio Manager
further agrees to pay all salaries, fees and expenses of any officer or
trustee of the Trust who is an officer, director or employee of the Portfolio
Manager or any of its affiliates. Nothing in this Agreement shall require the
Portfolio Manager to bear the expenses of the Trust or Manager, including but
not limited to the following expenses:
(a) Fees of the Manager;
(b) Charges for audits by the Trust's independent public accountants;
(c) Charges of the Trust's transfer agent, registrar, and/or dividend
disbursing agent;
(d) Charges of the Trust's custodian and/or accountant;
(e) Costs of obtaining quotations for calculating the value of each
Portfolio's net assets;
(f) Costs of maintaining the Trust's tax records;
(g) Salaries and other compensation of any of the Trust's executive
officers and employees, if any, who are not officers, directors, or employees of
the Portfolio Manager or any of its affiliates;
(h) Taxes levied against the Trust;
(i) Brokerage fees and commissions in connection with the purchase and
sale of portfolio securities for the Trust;
(j) Costs, including the interest expense, of borrowing by the Trust;
(k) Costs and/or fees incident to meetings of the Trust's shareholders,
the preparation and mailings of prospectuses, reports, proxy statements and
other communications by the Trust to its shareholders, the filing of reports
with regulatory bodies, the maintenance of the Trust's existence, and the
registration of shares with federal and state securities or insurance
authorities;
(l) The Trust's legal fees, including the legal fees related to the
registration and continued qualification of the Trust's shares for sale;
5
<PAGE>
(m) Costs of printing stock certificates representing shares of the Trust;
(n) Trustees' fees and expenses of Trustees who are not officers,
directors, or employees of the Portfolio Manager or any affiliates;
(o) Trust's pro rata portion of the fidelity bond required by Section
17(g) of the 1940 Act, or other insurance premiums;
(p) Membership dues for any association of which the Trust is a member;
(q) Extraordinary expenses of the Trust as may arise, including expenses
incurred in connection with litigation, proceedings, other claims against the
Trust (unless the Portfolio Manager is responsible for such expenses under
paragraph 14 of this Agreement), and the legal obligations of the Trust to
indemnify its trustees, officers, employees, shareholders, distributors, and
agents with respect to such claims; and
(r) Organizational and offering expenses of the Trust and, if applicable,
reimbursement (with interest) of underwriting discounts and commissions.
13. COMPENSATION.
(a) For the services provided and the expenses borne by the Portfolio
Manager pursuant to this Agreement, the Trust will pay the Portfolio Manager 80%
of the Initial Monthly Advisory Fee or the Monthly Advisory Fee, as those terms
are defined in this paragraph, whichever is applicable.
(b) For the period beginning with the effective date of this Agreement and
ending with the last day of the twelfth full calendar month thereafter, the
Portfolio will pay at the end of each month, an advisory fee calculated at an
annual rate of 0.80% of the Portfolio's average daily net assets (the "Initial
Monthly Advisory Fee").
(c) For the period beginning with the first day of the thirteenth full
calendar month after the effective date of this Agreement and continuing through
the remainder of the term of this Agreement, the Portfolio will pay at the end
of each month, an advisory fee (the "Monthly Advisory Fee"). The Monthly
Advisory Fee equals the Basic Fee (as defined in paragraph 13(d) below) plus the
Incentive Fee (as defined in paragraph 13(e) below) and adjusted, if so
required, by paragraph 13(h) below.
(d) The Basic Fee equals one-twelfth of 2% multiplied by the Portfolio's
average daily net assets for the previous 12 months (including the month for
which the fee is being calculated).
(e) The Incentive Fee equals: (i) one-twelfth of the Annual Incentive Fee
set forth in the chart below based on the difference between the Performance of
the Portfolio and the Performance of the Benchmark, as those terms are defined
in paragraphs 13(f) and 13(g) below; (ii) multiplied by the Portfolio's average
daily net assets for the previous 12 months (including the month for which the
fee is being calculated).
6
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Percentage Point Difference Between Performance of the Annual
Portfolio and Performance of the Benchmark Incentive
Fee (%)
- --------------------------------------------------------------------------------
<S> <C>
+7.5 or greater 2.0%
- --------------------------------------------------------------------------------
+6.0 or greater, but less than +7.5 1.5
- --------------------------------------------------------------------------------
+4.5 or greater, but less than +6.0 1.0
- --------------------------------------------------------------------------------
+3.0 or greater, but less than +4.5 0.5
- --------------------------------------------------------------------------------
+1.5 or greater, but less than +3.0 0.0
- --------------------------------------------------------------------------------
0.0 or greater, but less than +1.5 -0.5
- --------------------------------------------------------------------------------
- -1.5 or greater, but less than 0.0 -1.0
- --------------------------------------------------------------------------------
- -3.0 or greater, but less than -1.5 -1.5
- --------------------------------------------------------------------------------
Less than -3.0 -2.0
- --------------------------------------------------------------------------------
</TABLE>
(f) The Performance of the Portfolio will be calculated by first
determining the change in the Portfolio's net asset value per share during the
previous twelve months (including the month for which the fee is being computed)
assuming the reinvestment of distributions during that period, and then
expressing this amount as a percentage of the net asset value per share at the
beginning of the period. Net asset value per share is calculated by dividing the
value of the securities held by the Portfolio plus any cash or other assets
minus all liabilities including accrued advisory fees and the other expenses, by
the total number of shares outstanding at the time. The Performance of the
Portfolios shall be calculated in accordance with SEC rules.
(g) The Performance of the Benchmark will be calculated by first
determining the change in the level of the Benchmark during the previous twelve
months (including the month for which the fee is being computed) plus the value
of any cash dividends or distributions made by the companies whose securities
comprise the Benchmark accumulated to the end of the period, and then expressing
this amount as a percentage of the Benchmark at the beginning of the period. The
Performance of the Benchmark shall be calculated in accordance with SEC rules.
The Benchmark is the Standard & Poors 500 Index. If the Benchmark ceases to be
published, changes in any material respect or otherwise becomes impracticable to
use for purposes of the Incentive Fee, the Monthly Advisory Fee will equal the
Basic Fee (with no incentive adjustment) until such time as the Board of
Trustees approves a substitute Benchmark.
(h) Notwithstanding paragraphs 13(a)-13(g) above, if the Performance of a
Portfolio (minus payment of all expenses, including the Basic Fee and any
Incentive Fee) is negative and does not exceed the Performance of the Benchmark
by six percentage points, then the Monthly Advisory Fee will equal zero.
Notwithstanding paragraphs 13(a)-13(g) above, if the Performance of a Portfolio
(minus payment of all expenses, including the Basic Fee and any Incentive Fee)
is negative, exceeds the Performance of the Benchmark by six percentage points,
but does not exceed the Performance of the Benchmark by twelve percentage
points, then the Monthly
7
<PAGE>
Advisory Fee will not be greater than one-twelfth of 1% of the Portfolio's
average daily net assets for the previous 12 months (including the month for
which the fee is being calculated). Notwithstanding paragraphs 13(a)-13(g)
above, if the Performance of a Portfolio (minus payment of all expenses,
including the Basic Fee and any Incentive Fee) is negative and exceeds the
Performance of the Benchmark by twelve percentage points, then the Monthly
Advisory Fee will not be greater than one-twelfth of 2% of the Portfolio's
average daily net assets for the previous 12 months (including the month for
which the fee is being calculated).
14. LIABILITY AND INDEMNIFICATION. The Portfolio Manager, the Manager and the
Trust each may rely on information reasonably believed by it to be accurate and
reliable. The Portfolio Manager shall not be liable to the Trust or its
shareholders for any loss suffered by the Trust as the result of any negligent
act or error of judgment of the Portfolio Manager in connection with the matters
to which this Agreement relates, except a loss resulting from a breach by the
Portfolio Manager of its fiduciary duty with respect to the receipt of
compensation for services (in which case any award of damages shall be limited
to the period and the amount set forth in Section 36(b)(3) of the 1940 Act) or
loss resulting from willful misfeasance, bad faith or gross negligence on its
part in the performance of its duties or from reckless disregard by it of its
obligations and duties under this Agreement. The Trust shall indemnify the
Portfolio Manager and hold it harmless from all cost, damage and expense,
including reasonable expenses for legal counsel, incurred by the Portfolio
Manager resulting from actions for which it is relieved of responsibility by
this paragraph. The Portfolio Manager shall indemnify the Trust and hold it
harmless from all cost, damage and expense, including reasonable expenses for
legal counsel, incurred by the Trust resulting from (i) a breach by the
Portfolio Manager of its fiduciary duty with respect to compensation for
services paid by the Trust (in which case any award of damages shall be limited
to the period and the amount set forth in Section 36(b)(3) of the 1940 Act);
(ii) willful misfeasance, bad faith or gross negligence by the Portfolio Manager
in the performance of its duties under this Agreement; or (iii) reckless
disregard by the Portfolio Manager of its obligations and duties under this
Agreement.
15. CONTINUATION AND TERMINATION. This Agreement shall take effect on the date
first written above, and shall continue in effect, unless sooner terminated as
provided herein, for 119 days thereafter, and provided that the Agreement is
approved by a majority of the outstanding voting shares of the Portfolio by the
end of such 119th day, shall continue for two years from the date of this
Agreement and shall continue from year to year thereafter so long as such
continuance is specifically approved at least annually (i) by the vote of a
majority of the Board of Trustees; or (ii) by vote of a majority of the
outstanding voting shares of the Portfolio; provided, further, in either event
that continuance is also approved by the vote of a majority of the Board of
Trustees who are not parties to this Agreement or "interested persons" (as
defined in the 1940 Act) of the Trust, the Manager or the Portfolio Manager cast
in person at a meeting called for the purpose of voting on such approval. This
Agreement may be terminated (i) by the Trust at any time, without the payment of
any penalty, by vote of a majority of the entire Board of Trustees or by a vote
of a majority of the outstanding voting shares of the Portfolio, on sixty (60)
days' written notice to the Manager and the Portfolio Manager, (ii) by the
Manager at any time, without the payment of any penalty, on ninety (90) days'
written notice to the Trust and the Portfolio Manager, or (iii) by the Portfolio
Manager at any time, without the payment of any penalty, on ninety (90) days'
written notice to the Trust and the Manager. This Agreement will automatically
and immediately terminate in the event of its "assignment" (as defined in the
1940 Act).
8
<PAGE>
16. INDEPENDENT CONTRACTOR. The Portfolio Manager shall for all purposes herein
be deemed to be an independent contractor and shall, unless otherwise expressly
provided herein or authorized by the Board of Trustees from time to time, have
no authority to act for or represent the Trust in any way or otherwise be deemed
its agent.
17. USE OF NAME. It is understood that the words "Palladian," "Fulcrum Fund" and
"Fulcrum Trust", any derivative thereof and any design associated with those
words (collectively, the "Words and Designs") are the valuable property of the
Trust, and that the Portfolio Manager shall have the right to use the Words and
Designs only with the approval of the Trust. Upon termination of this Agreement,
the Portfolio Manager shall promptly discontinue all use of the Words and
Designs.
18. SALES LITERATURE. The Manager agrees to furnish to the Portfolio Manager all
sales literature which refers to the Portfolio Manager prior to use thereof and
not to use such sales literature if the Portfolio Manager reasonably objects in
writing five business days (or such other time as may be mutually agreed) after
receipt thereof. Sales literature may be furnished to the Portfolio Manager by
first class mail, overnight delivery service, facsimile transmission equipment,
or hand delivery.
19. NOTICE. Notices of any kind to be given to the Trust shall be in writing
and shall be duly given if sent by first class mail or delivered to the Trust
at 440 Lincoln Street, Worcester, MA 01653, or at such other address or to
such individual as shall be specified by the Trust (with proper notice to the
Manager and the Portfolio Manager). Notices of any kind to be given to the
Manager shall be in writing and shall be duly given if sent by first class
mail or delivered to the Manager at 440 Lincoln Street, Worcester, MA 01653,
or at such other address or to such individual as shall be specified by the
Manager (with proper notice to the Trust and the Portfolio Manager). Notices
of any kind to be given to the Portfolio Manager shall be in writing and
shall be duly given if sent by first class mail or delivered to the Portfolio
Manager at 825 Duportail Road, Wayne, PA 19087, or at such other address or
to such individual as shall be specified by the Portfolio Manager (with
proper notice to the Trust and the Manager).
20. OBLIGATION. A copy of the Trust's Agreement and Declaration of Trust is on
file with the Secretary of the Commonwealth of Massachusetts. Notice is hereby
given that this Agreement has been executed on behalf of the Trust by a trustee
of the Trust in his or her capacity as trustee and not individually. The
obligations of this Agreement shall only be binding upon the assets and property
of the Trust and shall not be binding upon any trustee, officer, or shareholder
of the Trust individually.
21. COUNTERPARTS. This Agreement may be executed in one or more counterparts,
each of which shall be deemed to be an original.
22. APPLICABLE LAW. This Agreement shall be governed by the laws of
Massachusetts, provided that nothing herein shall be construed in a manner
inconsistent with the 1940 Act, the Investment Advisers Act of 1940, or any
rules or order of the SEC thereunder.
23. SEVERABILITY. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of this
Agreement shall not be affected thereby
9
<PAGE>
and, to this extent, the provisions of this Agreement shall be deemed to be
severable.
24. CAPTIONS. The captions of this Agreement are included for convenience only
and in no way define or limit any of the provisions hereof or otherwise affect
their construction or effect.
10
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below on the day and year first above
written.
The Palladian Trust
By:
- -------------------------------- --------------------------------
Attest George M. Boyd
Secretary
Allmerica Financial Investment
Management Services, Inc.
By:
- -------------------------------- --------------------------------
Attest Name:
Title:
Pilgrim Baxter Analytic
Investors, Inc.
By:
- -------------------------------- --------------------------------
Attest Name:
Title:
11
<PAGE>
SUBSTITUTION AGREEMENT
Agreement, made this 11th day of February, 1998, by and among Palladian
Advisors, Inc. ("PAI"), a Delaware corporation; Allmerica Investment Management
Company, Inc. ("AIMCO"), a Massachusetts corporation; Bee & Associates
Incorporated, a Colorado corporation (the "Portfolio Manager"); and The
Palladian Trust (the "Trust") , a Massachusetts business trust.
WHEREAS, the Trust is registered with the Securities and Exchange
Commission as an open-end management investment company under the Investment
Company Act of 1940, as amended ("Act"), and the Trust issues shares in several
different classes, each of which is known as a "Portfolio"; and
WHEREAS, PAI has served as Manager to the Trust pursuant to a Management
Agreement between the Trust and PAI dated October 12, 1995; and
WHEREAS, the Trust and PAI entered into a Portfolio Management Agreement
with the Portfolio Manager, dated October 12, 1995 (the "Portfolio Management
Agreement"), under which the Portfolio Manager currently serves as the Portfolio
Manager for The International Growth Portfolio of the Trust; and
WHEREAS, the Trust and PAI have terminated the Management Agreement with
PAI, effective at the close of business on February 11, 1998; and
WHEREAS, commencing February 12, 1998, AIMCO has agreed to serve as
Manager to the Trust pursuant to a new Management Agreement between the Trust
and AIMCO dated February 12, 1998; and
WHEREAS, the Management Agreement between AIMCO and the Trust is subject
to approval by the vote of a majority of the outstanding voting securities of
each Portfolio of the `trust, and a special meeting of shareholders must be held
within a 120-day period after February 11, 1998 for purposes of obtaining such
approval; and
WHEREAS, PAI, the Portfolio Manager, and the Trust desire to substitute
AIMCO as. a party to the Portfolio Management Agreement in the place of PAI and
AIMCO desires to be substituted as a party to the Portfolio Management Agreement
in the place of PAI.
Therefore, the parties agree as follows:
1. Substitution of Party. Effective as of February 12, 1998, AIMCO is
hereby substituted as a party to the Portfolio Management Agreement in the place
of PAI. The substitution shall be effective for a period of 120 days after
February 11, 1998,
<PAGE>
2
and shall be effective thereafter subject to approval of the Management
Agreement between AIMCO and the Trust by the vote of a majority of the
outstanding voting securities of The International Growth Portfolio of the Trust
at a meeting of shareholders, which will be held within a 120-day period after
February 11, 1998. In the event that shareholders of The International Growth
Portfolio do not approve the Management Agreement as provided above, the
Portfolio Management Agreement shall terminate as of the close of business on
the 120th day after February 11, 1998.
2. Performance of Duties. As of the effectiveness of the substitution as
described above, AIMCO hereby assumes and agrees to perform all of PAI's duties
and obligations under the Portfolio Management Agreement and be subject to all
of the terms and conditions of said Agreement as if they applied to PAI. AIMCO
shall not be responsible for any claim or demand arising under the Portfolio
Management Agreement from services rendered prior to the effective date of this
Substitution Agreement unless otherwise agreed by AIMCO, and PAI shall not be
responsible for any claim or demand arising under the Portfolio Management
Agreement from services rendered after the effective date of this Substitution
Agreement unless otherwise agreed by PAI.
3. Representation of AIMCO. AIMCO represents and warrants that it is
registered as an investment adviser under the Investment Advisers Act of 1940.
4. Consent. The Trust and the Portfolio Manager hereby consent to this
substitution of AIMCO as a party to the Portfolio Management Agreement in the
place of PAI and the assumption by AIMCO of PAI's interest in such Agreement and
the duties and obligations thereunder, and agree, subject to the terms and
conditions of said Agreement, to look to AIMCO for the performance of the
Manager's duties and obligations under said Agreement after the effective date
as described above.
5. Indemnification By AIMCO. Notwithstanding any limitation of liability
in the Portfolio Management Agreement, AIMCO shall indemnify and hold harmless
the Portfolio Manager, its affiliates and the directors, officers, agents and
employees of the foregoing (each an "Indemnified Person") from all cost, damage
and expense, including reasonable expenses for legal counsel, incurred by an
Indemnified Person as a result of the AIMCO's actions or omissions in performing
its duties under the Portfolio Management Agreement that constitute negligence,
bad faith, breach of trust or fiduciary duty, a material violation of one or
more of the Portfolio Management Agreement, fraud, reckless or intentional
misconduct, or violation of law or regulation. In the event an Indemnified
Person receives a demand, claim or lawsuit relating to the Trust, its shares,
<PAGE>
3
and/or the Agreements, the Indemnified Person shall promptly notify AIMCO and
the Portfolio Manager.
6. Indemnification By Portfolio Manager. Notwithstanding any limitation of
liability in the Portfolio Management Agreement, the Portfolio Manager shall
indemnify and hold harmless AIMCO, its affiliates and the directors, officers,
agents and employees of the foregoing (each an "Indemnified Person") from all
cost, damage and expense, including reasonable expenses for legal counsel,
incurred by an Indemnified Person as a result of the Portfolio Manager's actions
or omissions in performing its duties under the Portfolio Management Agreement
that constitute negligence, bad faith, breach of trust or fiduciary duty, a
material violation of the Portfolio Management Agreement, fraud, reckless or
intentional misconduct, or violation of law or regulation. In the event an
Indemnified Person receives a demand, claim or lawsuit relating to the Trust,
its shares, and/or the Agreements, the Indemnified Person shall promptly notify
AIMCO and the Portfolio Manager.
7. Notice. Notices shall be in writing and shall be duly given if sent by
first class mail or delivered to the following addresses or to such other
address as shall be specified by a party with proper notice to the other
parties:
If as to AIMCO:
Allmerica Investment Management
Company, Inc.
440 Lincoln Street
Worcester, MA 01653
Attn: President
If as to the Trust:
The Palladian Trust
440 Lincoln Street
Worcester, MA 01653
Attn: President
If as to PAI:
Palladian Advisors, Inc.
701 Palomar Airport Road
Suite 300
Carlsbad, CA 92009
Attn: President
<PAGE>
4
If as to the Portfolio Manager:
Bee & Associates Incorporated
370 17th Street, Suite 5150
Denver, CO 80202
Attn: President
8. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original.
9. Captions. The captions of this Agreement are included for convenience
only and in no way define or limit any of the provisions hereof or otherwise
affect their construction or effect.
<PAGE>
5
IN WITNESS WHEREOF, the parties hereto have caused this Substitution
Agreement to be executed by their duly authorized officers as of the date and
year first written above.
Palladian Advisors, Inc.
/s/ Janne Leal By: /s/ H. Michael Schwartz
- ---------------------------- ----------------------------------
Witness H. Michael Schwartz
President
Allmerica Investment Management
Company, Inc.
/s/ Irene Nosel By: /s/ Thomas P. Cunningham
- ---------------------------- ----------------------------------
Witness Thomas P. Cunningham
Vice President
----------------------------------
Title
Bee & Associates Incorporated
/s/ Catherine A. Callahan By: /s/ Bruce B. Bee
- ---------------------------- ----------------------------------
Witness
President
----------------------------------
Title
The Palladian Trust
/s/ Christopher E. Palmer By: /s/ Matthew J. Stacom
- ---------------------------- ----------------------------------
Witness
Trustee
<PAGE>
SUBSTITUTION AGREEMENT
Agreement, made this 11th day of February, 1998, by and among Palladian
Advisors, Inc. ("PAI"), a Delaware corporation; Allmerica Investment Management
Company, Inc. ("AIMCO"), a Massachusetts corporation; Fischer Francis Trees &
Watts, Inc., a New York corporation (the "Portfolio Manager"); and The Palladian
Trust (the "Trust") , a Massachusetts business trust.
WHEREAS, the Trust is registered with the Securities and Exchange
Commission as an open-end management investment company under the Investment
Company Act of 1940, as amended ("Act"), and the Trust issues shares in several
different classes, each of which is known as a "Portfolio"; and
WHEREAS, PAI has served as Manager to the Trust pursuant to a Management
Agreement between the Trust and PAI dated October 12, 1995; and
WHEREAS, the Trust and PAI entered into a Portfolio Management Agreement
with the Portfolio Manager, dated October 12, 1995 (the "Portfolio Management
Agreement"), under which the Portfolio Manager currently serves as the Portfolio
Manager for The Global Strategic Income Portfolio of the Trust; and
WHEREAS, the Trust and PAI have terminated the Management Agreement with
PAI, effective at the close of business on February 11, 1998; and
WHEREAS, commencing February 12, 1998, AIMCO has agreed to serve as
Manager to the Trust pursuant to a new Management Agreement between the Trust
and AIMCO dated February 12, 1998; and
WHEREAS, the Management Agreement between AIMCO and the Trust is subject
to approval by the vote of a majority of the outstanding voting securities of
each Portfolio of the Trust, and a special meeting of shareholders must be held
within a 120-day period after February 11, 1998 for purposes of obtaining such
approval; and
WHEREAS, PAI, the Portfolio Manager, and the Trust desire to substitute
AIMCO as a party to the Portfolio Management Agreement in the place of PAI and
AIMCO desires to be substituted as a party to the Portfolio Management Agreement
in the place of PAI.
Therefore, the parties agree as follows:
1. Substitution of Party. Effective as of February 12, 1998, AIMCO is
hereby substituted as a party to the Portfolio Management Agreement in the place
of PAI. The substitution shall be effective for a period of 120 days after
February 11, 1998,
<PAGE>
2
and shall be effective thereafter subject to approval of the Management
Agreement between AIMCO and the Trust by the vote of a majority of the
outstanding voting securities of The Global Strategic Income Portfolio of the
Trust at a meeting of shareholders, which will be held within a 120-day period
after February 11, 1998. In the event that shareholders of The Global Strategic
Income Portfolio do not approve the Management Agreement as provided above, the
Portfolio Management Agreement shall terminate as of the close of business on
the 120th day after February 11, 1998.
2. Performance of Duties. As of the effectiveness of the substitution as
described above, AIMCO hereby assumes and agrees to perform all of PAI's duties
and obligations under the Portfolio Management Agreement and be subject to all
of the terms and conditions of said Agreement as if they applied to PAI. AIMCO
shall not be responsible for any claim or demand arising under the Portfolio
Management Agreement from services rendered prior to the effective date of this
Substitution Agreement unless otherwise agreed by AIMCO, and PAI shall not be
responsible for any claim or demand arising under the Portfolio Management
Agreement from services rendered after the effective date of this Substitution
Agreement unless otherwise agreed by PAI.
3. Representation of AIMCO. AIMCO represents and warrants that it is
registered as an investment adviser under the Investment Advisers Act of 1940.
4. Consent. The Trust and the Portfolio Manager hereby consent to this
substitution of AIMCO as a party to the Portfolio Management Agreement in the
place of PAI and the assumption by AIMCO of PAI's interest in such Agreement and
the duties and obligations thereunder, and agree, subject to the terms and
conditions of said Agreement, to look to AIMCO for the performance of the
Manager's duties and obligations under said Agreement after the effective date
as described above.
5. Indemnification By AIMCO. Notwithstanding any limitation of liability
in the Portfolio Management Agreement, AIMCO shall indemnify and hold harmless
the Portfolio Manager, its affiliates and the directors, officers, agents and
employees of the foregoing (each an "Indemnified Person") from all cost, damage
and expense, including reasonable expenses for legal counsel, incurred by an
Indemnified Person as a result of the AIMCO's actions or omissions in performing
its duties under the Portfolio Management Agreement that constitute negligence,
bad faith, breach of trust or fiduciary duty, a material violation of one or
more of the Portfolio Management Agreement, fraud, reckless or intentional
misconduct, or violation of law or regulation. In the event an Indemnified
Person receives a demand, claim or lawsuit relating to the Trust, its shares,
<PAGE>
3
and/or the Agreements, the Indemnified Person shall promptly notify AIMCO and
the Portfolio Manager.
6. Indemnification By Portfolio Manager. Notwithstanding any limitation of
liability in the Portfolio Management Agreement, the Portfolio Manager shall
indemnify and hold harmless AIMCO, its affiliates and the directors, officers,
agents and employees of the foregoing (each an "Indemnified Person") from all
cost, damage and expense, including reasonable expenses for legal counsel,
incurred by an Indemnified Person as a result of the Portfolio Manager's actions
or omissions in performing its duties under the Portfolio Management Agreement
that constitute negligence, bad faith, breach of trust or fiduciary duty, a
material violation of the Portfolio Management Agreement, fraud, reckless or
intentional misconduct, or violation of law or regulation. In the event an
Indemnified Person receives a demand, claim or lawsuit relating to the Trust,
its shares, and/or the Agreements, the Indemnified Person shall promptly notify
AIMCO and the Portfolio Manager.
7. Notice. Notices shall be in writing and shall be duly given if sent by
first class mail or delivered to the following addresses or to such other
address as shall be specified by a party with proper notice to the other
parties:
If as to AIMCO:
Allmerica Investment Management
Company, Inc.
440 Lincoln Street
Worcester, MA 01653
Attn: President
If as to the Trust:
The Palladian Trust
440 Lincoln Street
Worcester, MA 01653
Attn: President
If as to PAI:
Palladian Advisors, Inc.
701 Palomar Airport Road
Suite 300
Carlsbad, CA 92009
Attn: President
<PAGE>
4
If as to the Portfolio Manager:
Fischer Francis Trees & Watts, Inc.
200 Park Avenue, 46th Floor
New York, NY 10166
Attn: President
8. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original.
9. Captions. The captions of this Agreement are included for convenience
only and in no way define or limit any of the provisions hereof or otherwise
affect their construction or effect.
<PAGE>
5
IN WITNESS WHEREOF, the parties hereto have caused this Substitution
Agreement to be executed by their duly authorized officers as of the date and
year first written above.
Palladian Advisors, Inc.
/s/ Janne Leal By: /s/ H. Michael Schwartz
- ---------------------------- ----------------------------------
Witness H. Michael Schwartz
President
Allmerica Investment Management
Company, Inc.
/s/ Irene Nosel By: /s/ Thomas P. Cunningham
- ---------------------------- ----------------------------------
Witness Vice President
----------------------------------
Title
Fischer Francis Trees & Watts, Inc.
/s/ By: /s/ Stephen P. Casper
- ---------------------------- ----------------------------------
Witness Managing Director
----------------------------------
Title
The Palladian Trust
/s/ Christopher E. Palmer By: /s/ Matthew J. Stacom
- ---------------------------- ----------------------------------
Witness Matthew J. Stacom
Trustee
<PAGE>
SUBSTITUTION AGREEMENT
Agreement, made this 11th day of February, 1998, by and among Palladian
Advisors, Inc. ("PAI"), a Delaware corporation; Allmerica Investment Management
Company. Inc. ("AIMCO"), a Massachusetts corporation; GAMCO Investors, Inc., a
New York corporation (the "Portfolio Manager"); and The Palladian Trust (the
"Trust"), a Massachusetts business trust.
WHEREAS, the Trust is registered with the Securities and Exchange
Commission as an open-end management investment company under the Investment
Company Act of 1940, as amended ("Act"), and the Trust issues shares in several
different classes, each of which is known as a "Portfolio"; and
WHEREAS, PAI has served as Manager to the Trust pursuant to a Management
Agreement between the Trust and PAI dated October 12, 1995; and
WHEREAS, the Trust and PAI entered into a Portfolio Management Agreement
with the Portfolio Manager, dated October 12, 1995 (the "Portfolio Management
Agreement"), under which the Portfolio Manager currently serves as the Portfolio
Manager for The Value Portfolio of the Trust; and
WHEREAS, the Trust and PAI have terminated the Management Agreement with
PAI, effective at the close of business on February 11, 1998; and
WHEREAS, commencing February 12, 1998, AIMCO has agreed to serve as
Manager to the Trust pursuant to a new Management Agreement between the Trust
and AIMCO dated February 12, 1998; and
WHEREAS, the Management Agreement between AIMCO and the Trust is subject
to approval by the vote of a majority of the outstanding voting securities of
each Portfolio of the Trust, and a special meeting of shareholders must be held
within a 120-day period after February 11, 1998 for purposes of obtaining such
approval; and
WHEREAS, PAI, the Portfolio Manager, and the Trust desire to substitute
AIMCO as a party to the Portfolio Management Agreement in the place of PAI and
AIMCO desires to be substituted as a party to the Portfolio Management Agreement
in the place of PAI.
Therefore, the parties agree as follows:
1. Substitution of Party. Effective as of February 12, 1998, AIMCO is
hereby substituted as a party to the Portfolio Management Agreement in the place
of PAI. The substitution shall be effective for a period of 120 days after
February 11, 1998,
<PAGE>
2
and shall be effective thereafter subject to approval of the Management
Agreement between AIMCO and the Trust by the vote of a majority of the
outstanding voting securities of The Value Portfolio of the Trust at a meeting
of shareholders, which will be held within a 120-day period after February 11,
1998, In the event that shareholders of The Value Portfolio do not approve the
Management Agreement as provided above, the Portfolio Management Agreement shall
terminate as of the close of business on the 120th day after February 11, 1998.
2. Performance of Duties. As of the effectiveness of the substitution as
described above, AIMCO hereby assumes and agrees to perform all of PAI's duties
and obligations under the Portfolio Management Agreement and be subject to all
of the terms and conditions of said Agreement as if they applied to PAI. AIMCO
shall not be responsible for any claim or demand arising under the Portfolio
Management Agreement from services rendered prior to the effective date of this
Substitution Agreement unless otherwise agreed by AIMCO, and PAI shall not be
responsible for any claim or demand arising under the Portfolio Management
Agreement from services rendered after the effective date of this Substitution
Agreement unless otherwise agreed by PAI.
3. Representation of AIMCO. AIMCO represents and warrants that it is
registered as an investment adviser under the Investment Advisers Act of 1940.
4. Consent. The Trust and the Portfolio Manager hereby consent to this
substitution of AIMCO as a party to the Portfolio Management Agreement in the
place of PAI and the assumption by AIMCO of PAI's interest in such Agreement and
the duties and obligations thereunder, and agree, subject to the terms and
conditions of said Agreement, to look to AIMCO for the performance of the
Manager's duties and obligations under said Agreement after the effective date
as described above.
5. Indemnification By AIMCO. Notwithstanding any limitation of liability
in the Portfolio Management Agreement, AIMCO shall indemnify and hold harmless
the Portfolio Manager, its affiliates and the directors, officers, agents and
employees of the foregoing (each an "Indemnified Person") from all cost, damage
and expense, including reasonable expenses for legal counsel, incurred by an
Indemnified Person as a result of the AIMCO's actions or omissions in performing
its duties under the Portfolio Management Agreement that constitute negligence,
bad faith, breach of trust or fiduciary duty, a material violation of one or
more of the Portfolio Management Agreement, fraud, reckless or intentional
misconduct, or violation of law or regulation. In the event an Indemnified
Person receives a demand, claim or lawsuit relating to the Trust, its shares,
and/or the Agreements, the Indemnified Person shall promptly notify AIMCO and
the Portfolio Manager.
<PAGE>
3
6. Indemnification By Portfolio Manager. Notwithstanding any limitation of
liability in the Portfolio Management Agreement, the Portfolio Manager shall
indemnify and hold harmless AIMCO, its affiliates and the directors, officers,
agents and employees of the foregoing (each an "Indemnified Person") from all
cost, damage and expense, including reasonable expenses for legal counsel,
incurred by an Indemnified Person as a result of the Portfolio Manager's actions
or omissions in performing its duties under the Portfolio Management Agreement
that constitute negligence, bad faith, breach of trust or fiduciary duty, a
material violation of the Portfolio Management Agreement, fraud, reckless or
intentional misconduct, or violation of law or regulation. In the event an
Indemnified Person receives a demand, claim or lawsuit relating to the Trust,
its shares, and/or the Agreements, the Indemnified Person shall promptly notify
AIMCO and the Portfolio Manager.
7. Notice. Notices shall be in writing and shall be duly given if sent by
first class mail or delivered to the following addresses or to such other
address as shall be specified by a party with proper notice to the other
parties:
If as to AIMCO:
Allmerica Investment Management
Company, Inc.
440 Lincoln Street
Worcester, MA 01653
Attn: President
If as to the Trust:
The Palladian Trust
440 Lincoln Street
Worcester, MA 01653
Attn: President
If as to PAI:
Palladian Advisors, Inc.
701 Palomar Airport Road
Suite 300
Carlsbad, CA 92009
Attn: President
If as to the Portfolio Manager:
GAMCO Investors, Inc.
Corporate Center at Rye
Rye, NY 10580
Attn: President
<PAGE>
4
8. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original.
9. Captions. The captions of this Agreement are included for convenience
only and in no way define or limit any of the provisions hereof or otherwise
affect their construction or effect.
IN WITNESS WHEREOF, the parties hereto have caused this Substitution
Agreement to be executed by their duly authorized officers as of the date and
year first written above.
Palladian Advisors, Inc.
/s/ Janne Leal By: /s/ H. Michael Schwartz
- ---------------------------- ----------------------------------
Witness H. Michael Schwartz
President
Allmerica Investment Management
Company, Inc.
/s/ Irene Nosel By: /s/ Thomas P. Cunningham
- ---------------------------- ----------------------------------
Witness
Vice President
----------------------------------
Title
GAMCO Investors, Inc.
/s/ By: /s/ Douglas R. Jamieson
- ---------------------------- ----------------------------------
Witness Executive Vice President
----------------------------------
Title
The Palladian Trust
/s/ Christopher E. Palmer By: /s/ Matthew J. Stacom
- ---------------------------- ----------------------------------
Witness Matthew J. Stacom
Trustee
<PAGE>
SUBSTITUTION AGREEMENT
Agreement, made this 11th day of February, 1998, by and among Palladian
Advisors, Inc. ("PAI"), a Delaware corporation; Allmerica Investment Management
Company, Inc. ("AIMCO"), a Massachusetts corporation; GAMCO Investors, Inc., a
New York corporation (the "Portfolio Manager"); and The Palladian Trust (the
"Trust"), a Massachusetts business trust.
WHEREAS, the Trust is registered with the Securities and Exchange
Commission as an open-end management investment company under the Investment
Company Act of 1940, as amended ("Act"), and the Trust issues shares in several
different classes, each of which is known as a "Portfolio"; and
WHEREAS, PAI has served as Manager to the Trust pursuant to a Management
Agreement between the Trust and PAI dated October 12, 1995; and
WHEREAS, the Trust and PAI entered into a Portfolio Management Agreement
with the Portfolio Manager, dated October 12, 1995 (the "Portfolio Management
Agreement"), under which the Portfolio Manager currently serves as the Portfolio
Manager for The Global Interactive/Telecomm Portfolio of the Trust; and
WHEREAS, the Trust and PAI have terminated the Management Agreement with
PAI, effective at the close of business on February 11, 1998; and
WHEREAS, commencing February 12, 1998, AIMCO has agreed to serve as
Manager to the Trust pursuant to a new Management Agreement between the Trust
and AIMCO dated February 12, 1998; and
WHEREAS, the Management Agreement between AIMCO and the Trust is subject
to approval by the vote of a majority of the outstanding voting securities of
each Portfolio of the Trust, and a special meeting of shareholders must be held
within a 120-day period after February 11, 1998 for purposes of obtaining such
approval; and
WHEREAS, PAI, the Portfolio Manager, and the Trust desire to substitute
AIMCO as a party to the Portfolio Management Agreement in the place of PAI and
AIMCO desires to be substituted as a party to the Portfolio Management Agreement
in the place of PAI.
Therefore, the parties agree as follows:
1. Substitution of Party. Effective as of February 12, 1998, AIMCO is
hereby substituted as a party to the Portfolio Management Agreement in the place
of PAI. The substitution shall be effective for a period of 120 days after
February 11, 1998,
<PAGE>
2
and shall be effective thereafter subject to approval of the Management
Agreement between AIMCO and the Trust by the vote of a majority of the
outstanding voting securities of The Global Interactive/Telecomm Portfolio of
the Trust at a meeting of shareholders, which will be held within a 120-day
period after February 11, 1998. 1n the event that shareholder of The Global
Interactive/Telecomm Portfolio do not approve the Management Agreement as
provided above, the Portfolio Management Agreement shall terminate as of the
close of business on the 120th day after February 11, 1998.
2. Performance of Duties. As of the effectiveness of the substitution as
described above, AIMCO hereby assumes and agrees to perform all of PAI's duties
and obligations under the Portfolio Management Agreement and be subject to all
of the terms and conditions of said Agreement as if they applied to PAI. AIMCO
shall not be responsible for any claim or demand arising under the Portfolio
Management Agreement from services rendered prior to the effective date of this
Substitution Agreement unless otherwise agreed by AIMCO, and PAI shall not be
responsible for any claim or demand arising under the Portfolio Management
Agreement from services rendered after the effective date of this Substitution
Agreement unless otherwise agreed by PAI.
3. Representation of AIMCO. AIMCO represents and warrants that it is
registered as an investment adviser under the Investment Advisers Act of 1940.
4. Consent. The Trust and the Portfolio Manager hereby consent to this
substitution of AIMCO as a party to the Portfolio Management Agreement in the
place of PAI and the assumption by AIMCO of PAI's interest in such Agreement and
the duties and obligations thereunder, and agree, subject to the terms and
conditions of said Agreement, to look to AIMCO for the performance of the
Manager's duties and obligations under said Agreement after the effective date
as described above.
5. Indemnification By AIMCO. Notwithstanding any limitation of liability
in the Portfolio Management Agreement, AIMCO shall indemnify and hold harmless
the Portfolio Manager, its affiliates and the directors, officers, agents and
employees of the foregoing (each an "Indemnified Person") from all cost, damage
and expense, including reasonable expenses for legal counsel, incurred by an
Indemnified Person as a result of the AIMCO's actions or omissions in performing
its duties under the Portfolio Management Agreement that constitute negligence,
bad faith, breach of trust or fiduciary duty, a material violation of one or
more of the Portfolio Management Agreement, fraud, reckless or intentional
misconduct, or violation of law or regulation. In the event an Indemnified
Person receives a demand, claim or lawsuit relating to the Trust, its shares,
<PAGE>
3
and/or the Agreements, the Indemnified Person shall promptly notify AIMCO and
the Portfolio Manager.
6. Indemnification By Portfolio Manager. Notwithstanding any limitation of
liability in the Portfolio Management Agreement, the Portfolio Manager shall
indemnify and hold harmless AIMCO, its affiliates and the directors, officers,
agents and employees of the foregoing (each an "Indemnified Person") from all
cost, damage and expense, including reasonable expenses for legal counsel,
incurred by an Indemnified Person as a result of the Portfolio Manager's actions
or omissions in performing its duties under the Portfolio Management Agreement
that constitute negligence, bad faith, breach of trust or fiduciary duty, a
material violation of the Portfolio Management Agreement, fraud, reckless or
intentional misconduct, or violation of law or regulation. In the event an
Indemnified Person receives a demand, claim or lawsuit relating to the Trust,
its shares, and/or the Agreements, the Indemnified Person shall promptly notify
AIMCO and the Portfolio Manager.
7. Notice. Notices shall be in writing and shall be duly given if sent by
first class mail or delivered to the following addresses or to such other
address as shall be specified by a party with proper notice to the other
parties:
If as to AIMCO:
Allmerica Investment Management
Company, Inc.
440 Lincoln Street
Worcester, MA 01653
Attn: President
If as to the Trust:
The Palladian Trust
440 Lincoln Street
Worcester, MA 01653
Attn: President
If as to PAI:
Palladian Advisors, Inc.
701 Palomar Airport Road
Suite 300
Carlsbad, CA 92009
Attn: President
<PAGE>
4
If as to the Portfolio Manager:
GAMCO Investors, Inc.
Corporate Center at Rye
Rye, NY 10580
Attn: President
8. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original.
9. Captions. The captions of this Agreement are included for convenience
only and in no way define or limit any of the provisions hereof or otherwise
affect their construction or effect.
<PAGE>
5
IN WITNESS WHEREOF, the parties hereto have caused this Substitution
Agreement to be executed by their duly authorized officers as of the date and
year first written above.
Palladian Advisors, Inc.
/s/ Janne Leal By: /s/ H. Michael Schwartz
- ---------------------------- ----------------------------------
Witness H. Michael Schwartz
President
Allmerica Investment Management
Company, Inc.
/s/ Irene Nosel By: /s/ Thomas P. Cunningham
- ---------------------------- ----------------------------------
Witness Vice President
----------------------------------
Title
GAMCO Investors, Inc.
/s/ By: /s/ Douglas R. Jamieson
- ---------------------------- ----------------------------------
Witness Executive Vice President
----------------------------------
Title
The Palladian Trust
/s/ Christopher E. Palmer By: /s/ Matthew J. Stacom
- ---------------------------- ----------------------------------
Witness Matthew J. Stacom
Trustee
<PAGE>
SUBSTITUTION AGREEMENT
Agreement, made this 11th day of February, 1998, by and among Palladian
Advisors, Inc. ("PAI"), a Delaware corporation; Allmerica Investment Management
Company, Inc. ("AIMCO"), a Massachusetts corporation; Stonehill Capital
Management, Inc., a Delaware corporation (the "Portfolio Manager"); and The
Palladian Trust (the "Trust"), a Massachusetts business trust.
WHEREAS, the Trust is registered with the Securities and Exchange
Commission as an open-end management investment company under the Investment
Company Act of 1940, as amended ("Act"), and the Trust issues shares in several
different classes, each of which is known as a "Portfolio"; and
WHEREAS, PAI has served as Manager to the Trust pursuant to a Management
Agreement between the Trust and PAI dated October 12, 1995; and
WHEREAS, the Trust and PAI entered into a Portfolio Management Agreement
with the Portfolio Manager, dated October 12, 1995 (the "Portfolio Management
Agreement"), under which the Portfolio Manager currently serves as the Portfolio
Manager for The Growth Portfolio of the Trust; and
WHEREAS, the Trust and PAI have terminated the Management Agreement with
PAI, effective at the close of business on February 11, 1998; and
WHEREAS, commencing February 12, 1998, AIMCO has agreed to serve as
Manager to the Trust pursuant to a new Management Agreement between the Trust
and AIMCO dated February 12, 1998; and
WHEREAS, the Management Agreement between AIMCO and the Trust is subject
to approval by the vote of a majority of the outstanding voting securities of
each Portfolio of the Trust, and a special meeting of shareholders must be held
within a 120-day period after February 11, 1998 for purposes of obtaining such
approval; and
WHEREAS, PAI, the Portfolio Manager, and the Trust desire to substitute
AIMCO as a party to the Portfolio Management Agreement in the place of PAI and
AIMCO desires to be substituted as a party to the Portfolio Management Agreement
in the place of PAI.
Therefore, the parties agree as follows:
1. Substitution of Party. Effective as of February 12, 1998, AIMCO is
hereby substituted as a party to the Portfolio Management Agreement in the place
of PAI. The substitution shall be effective for a period of 120 days after
February 11, 1998,
<PAGE>
2
and shall be effective thereafter subject to approval of the Management
Agreement between AIMCO and the Trust by the vote of a majority of the
outstanding voting securities of The Growth Portfolio of the Trust at a meeting
of shareholders, which will be held within a 120-day period after February 11,
1998. In the event that shareholders of The Growth Portfolio do not approve the
Management Agreement as provided above, the Portfolio Management Agreement shall
terminate as of the close of business on the 120th day after February 11, 1998.
2. Performance of Duties. As of the effectiveness of the substitution as
described above, AIMCO hereby assumes and agrees to perform all of PAI's duties
and obligations under the Portfolio Management Agreement and be subject to all
of the terms and conditions of said Agreement as if they applied to PAI. AIMCO
shall not be responsible for any claim or demand arising under the Portfolio
Management Agreement from services rendered prior to the effective date of this
Substitution Agreement unless otherwise agreed by AIMCO, and PAI shall not be
responsible for any claim or demand arising under the Portfolio Management
Agreement from services rendered after the effective date of this Substitution
Agreement unless otherwise agreed by PAI.
3. Representation of AIMCO. AIMCO represents and warrants that it is
registered as an investment adviser under the Investment Advisers Act of 1940.
4. Consent. The Trust and the Portfolio Manager hereby consent to this
substitution of AIMCO as a party to the Portfolio Management Agreement in the
place of PAI and the assumption by AIMCO of PAI's interest in such Agreement and
the duties and obligations thereunder, and agree, subject to the terms and
conditions of said Agreement, to look to AIMCO for the performance of the
Manager's duties and obligations under said Agreement after the effective date
as described above.
5. Indemnification By AIMCO. Notwithstanding any limitation of liability
in the Portfolio Management Agreement, AIMCO shall indemnify and hold harmless
the Portfolio Manager, its affiliates and the directors, officers, agents and
employees of the foregoing (each an "Indemnified Person") from all cost, damage
and expense, including reasonable expenses for legal counsel, incurred by an
Indemnified Person as a result of the AIMCO's actions or omissions in performing
its duties under the Portfolio Management Agreement that constitute negligence,
bad faith, breach of trust or fiduciary duty, a material violation of one or
more of the Portfolio Management Agreement, fraud, reckless or intentional
misconduct, or violation of law or regulation. In the event an Indemnified
Person receives a demand, claim or lawsuit relating to the Trust, its shares,
and/or the Agreements, the Indemnified Person shall promptly notify AIMCO and
the Portfolio Manager.
<PAGE>
3
6. Indemnification By Portfolio Manager. Notwithstanding any limitation of
liability in the Portfolio Management Agreement, the Portfolio Manager shall
indemnify and hold harmless AIMCO, its affiliates and the directors, officers,
agents and employees of the foregoing (each an "Indemnified Person") from all
cost, damage and expense, including reasonable expenses for legal counsel,
incurred by an Indemnified Person as a result of the Portfolio Manager's actions
or omissions in performing its duties under the Portfolio Management Agreement
that constitute negligence, bad faith, breach of trust or fiduciary duty, a
material violation of the Portfolio Management Agreement, fraud, reckless or
intentional misconduct, or violation of law or regulation. In the event an
Indemnified Person receives a demand, claim or lawsuit relating to the Trust,
its shares, and/or the Agreements, the Indemnified Person shall promptly notify
AIMCO and the Portfolio Manager.
7. Notice. Notices shall be in writing and shall be duly given if sent by
first class mail or delivered to the following addresses or to such other
address as shall be specified by a party with proper notice to the other
parties:
If as to AIMCO:
Allmerica Investment Management
Company, Inc.
440 Lincoln Street
Worcester, MA 01653
Attn: President
If as to the Trust:
The Palladian Trust
440 Lincoln Street
Worcester, MA 01653
Attn: President
If as to PAI:
Palladian Advisors, Inc.
701 Palomar Airport Road
Suite 300
Carlsbad, CA 92009
Attn: President
If as to the Portfolio Manager:
Stonehill Capital Management, Inc.
277 Park Avenue, 26th Floor
New York, New York 10172
Attn: President
<PAGE>
4
8. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original.
9. Captions. The captions of this Agreement are included for convenience
only and in no way define or limit any of the provisions hereof or otherwise
affect their construction or effect.
IN WITNESS WHEREOF, the parties hereto have caused this Substitution
Agreement to be executed by their duly authorized officers as of the date and
year first written above.
Palladian Advisors, Inc.
/s/ Janne Leal By: /s/ H. Michael Schwartz
- ---------------------------- ----------------------------------
Witness H. Michael Schwartz
President
Allmerica Investment Management
Company, Inc.
/s/ Irene Nosel By: /s/ Thomas P. Cunningham
- ---------------------------- ----------------------------------
Witness
Vice President
----------------------------------
Title
Stonehill Capital Management, Inc.
/s/ By: /s/ Robert L. Emerson
- ---------------------------- ----------------------------------
Witness President
----------------------------------
Title
The Palladian Trust
/s/ Christopher E. Palmer By: /s/ Matthew J. Stacom
- ---------------------------- ----------------------------------
Witness Matthew J. Stacom
Trustee
<PAGE>
PARTICIPATION AGREEMENT
Among
THE PALLADIAN TRUST
ALLMERICA INVESTMENT MANAGEMENT COMPANY, INC.
and
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
DATED AS OF
April 9, 1998
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
ARTICLE I. Purchase of Fund Shares 4
ARTICLE II Representations and Warranties 5
ARTICLE III Prospectuses, Reports to Shareholders
and Proxy Statements, Voting 6
ARTICLE IV Sales Material and Information 8
ARTICLE V Fees and Expenses 9
ARTICLE VI Diversification 9
ARTICLE VII Potential Conflicts 10
ARTICLE VIII Indemnification 11
ARTICLE IX. Applicable Law 15
ARTICLE X Termination 15
ARTICLE XI Notices 16
ARTICLE XII Miscellaneous 17
SCHEDULE A Separate Accounts and Variable Products A-1
SCHEDULE B Portfolios of The Palladian Trust B-1
SCHEDULE C Proxy Voting Procedures C-1
2
<PAGE>
THIS AGREEMENT, made and entered into as of the 9th day of April, 1998 by and
among: ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY (hereinafter the
"Company"), a Delaware corporation, on its own behalf and on behalf of each
separate account of the Company set forth on Schedule A hereto, as may be
amended from time to time (each such account hereinafter referred to as the
"Account"); THE PALLADIAN TRUST, an unincorporated Massachusetts business trust
(hereinafter the "Fund"), and ALLMERICA INVESTMENT MANAGEMENT COMPANY, INC.
(hereinafter the "Adviser"), a Massachusetts corporation
WHEREAS, the Fund engages in business as an open-end management investment
company and is available to act as (i) the investment vehicle for separate
accounts established by insurance companies for individual and group life
insurance policies and annuity contracts with variable accumulation and/or
pay-out provisions (hereinafter referred to individually and/or collectively as
"Variable Products") and (ii) the investment vehicle for certain qualified
pension and retirement plans (hereinafter "Qualified Plans"); and
WHEREAS, insurance companies desiring to utilize the Fund as an investment
vehicle under their Variable Products enter into participation agreements with
the Fund and the Adviser (the "Participating Insurance Companies");
WHEREAS, shares of the Fund are divided into several series of shares,
each representing the interest in a particular managed portfolio of securities
and other assets (each such series hereinafter referred to as a "Portfolio"),
any one or more of which may be made available under this Agreement, as may be
amended from time to time by mutual agreement of the parties hereto; and
WHEREAS, the Fund has received for an order from the Securities and
Exchange Commission, granting Participating Insurance Companies and Variable
Insurance Product separate accounts exemptions from the provisions of Sections
9(a), 13(a), 15(a), and 15(b) of the Investment Company Act of 1940, as amended
(hereinafter the "1940 Act"), and Rules 6e-2(b)(15) and 6e-3(T)(b)(l5)
thereunder, to the extent necessary to permit shares of the Fund to be sold to
and held by separate accounts of both affiliated and unaffiliated life insurance
companies and Qualified Plans (hereinafter the "Shared Funding Exemptive
Order"); and
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and its shares are registered under the Securities
Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, the Adviser is duly registered as an investment adviser under the
Investment Advisers Act of 1940, as amended, and any applicable state securities
laws and manages each of the certain portfolios of the Fund and retains
Sub-Advisers for the daily investment and reinvestment of the assets of each
portfolio; and
WHEREAS, the Company has registered or will register certain
Variable Products under the 1933 Act; and
WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution or under authority of the Board of
Directors of the Company, to set aside and invest assets attributable to the
aforesaid Variable Products, and the Company has registered or will register
each Account as a unit investment trust under the 1940 Act; and
3
<PAGE>
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase, on behalf of each Account, shares
in the Portfolios set forth in Schedule B attached to this Agreement, to fund
certain of the aforesaid Variable Insurance Products and the Fund is authorized
to sell such shares to each such Account at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the parties
hereto agree as follows:
ARTICLE I. Purchase of Fund Shares
1.1. The Fund agrees to make available for purchase by the Company shares
of the Fund and shall execute orders placed for each Account on a daily basis at
the net asset value next computed after receipt by the Fund or its designee of
such order. For purposes of this Section 1.1, the Company shall be the designee
of the Fund for receipt of such orders from each Account and receipt by such
designee of an order prior to the close of regular trading on the New York Stock
Exchange ("NYSE") shall constitute receipt by the Fund; provided that the Fund
receives notice of such order by 10:00 a.m. Eastern time on the next following
Business Day. `Business Day" shall mean any day on which the New York Stock
Exchange is open for trading and on which the Fund calculates its net asset
value pursuant to the rules of the Securities and Exchange Commission.
1.2. The Fund, so long as this Agreement is in effect, agrees to make its
shares available indefinitely for purchase at the applicable net asset value per
share by the Company and its Accounts on those days on which the Fund calculates
its net asset value pursuant to rules of the Securities and Exchange Commission
and the Fund shall use reasonable efforts to calculate such net asset value on
each day which the New York Stock Exchange is open for trading. Notwithstanding
the foregoing, the Board of Trustees of the Fund (hereinafter the "Board") may
refuse to permit the Fund to sell shares of any Portfolio to any person, or
suspend or terminate the offering of shares of any Portfolio if such action is
required by law or by regulatory authorities having jurisdiction or is, in the
sole discretion of the Board acting in good faith and in light of their
fiduciary duties under federal and any applicable state laws, necessary in the
best interests of the shareholders of such Portfolio.
1.3. The Fund agrees that shares of the Fund will be sold only to
Participating Insurance Companies and their separate accounts and to certain
Qualified Plans. No shares of any Portfolio will be sold to the general public.
1.4. The Fund agrees to redeem for cash, on the Company's request, any
full or fractional shares of the Fund held by the Company, executing such
requests on a daily basis at the net asset value next computed after receipt by
the Fund or its designee of the request for redemption. For purposes of this
Section 1.4, the Company shall be the designee of the Fund for receipt of
requests for redemption from each Account and receipt by such designee of a
request prior to the close of regular trading on the NYSE shall constitute
receipt by the Fund, provided that the Fund receives notice of such request for
redemption on the next following Business Day.
1.5. The Company agrees that purchases and redemptions of Portfolio shares
offered by the then current prospectus of the Fund shall be made in accordance
with the provisions of such prospectus.
4
<PAGE>
1.6. The Company shall pay for Fund shares no later than the next Business
Day after an order to purchase Fund shares is made in accordance with the
provisions of Section 1.1 hereof Payment shall be in federal funds transmitted
by wire.
1.7. Issuance and transfer of the Fund's shares will be by book entry
only. Stock certificates will not be issued to the Company or any Account.
Shares ordered from the Fund will be recorded in an appropriate title for each
Account or the appropriate subaccount of each Account.
1.9. The Fund shall furnish same day notice (by wire or telephone,
followed by written confirmation) to the Company of any income, dividends or
capital gain distributions payable on the Fund's shares. The Company hereby
elects to receive all such income dividends and capital gain distributions as
are payable on the Portfolio shares in additional shares of that Portfolio, The
Company reserves the right to revoke this election and to receive all such
income dividends and capital gain distributions in cash. The Fund shall notify
the Company of the number of shares so issued as payment of such dividends and
distributions.
1.10. The Fund shall make the net asset value per share for each Portfolio
available to the Company on a daily basis as soon as reasonably practical after
the net asset value per share is calculated (normally by 6:30 p.m. Eastern time)
and shall use its best efforts to make such net asset value per share available
by 7:00 p.m. Eastern time.
ARTICLE II. Representations and Warranties
2.1. The Company represents and warrants that the Variable Products are or
will be registered under the 1933 Act; that the Variable Products will be issued
and sold in compliance in all material respects with all applicable federal and
state laws, and that the sale of the Variable Products shall comply in all
material respects with state insurance suitability requirements. The Company
further represents and warrants that it is an insurance company duly organized
and in good standing under applicable law, that it has legally and validly
established each Account as a segregated asset account under the Massachusetts
Insurance Code, and that it has registered or, prior to any issuance or sale of
the Variable Products, will register each Account as a unit investment trust in
accordance with the provisions of the 1940 Act to serve as a segregated
investment account for the Variable Products.
2.2. The Fund represents and warrants that Fund shares sold pursuant to
this Agreement shall be registered under the 1933 Act, duly authorized for
issuance and sold in compliance with the laws of the Commonwealth of
Massachusetts and all applicable federal and state securities laws, and that the
Fund is and shall make every effort to remain registered under the 1940 Act. The
Fund shall amend the registration statement for its shares under the 1933 Act
and the 1940 Act from time to time as required in order to effect the continuous
offering of its shares. The Fund shall register and qualify the shares for sale
in accordance with the laws of the various states only if and to the extent
deemed advisable by the Fund.
2.3. The Fund represents that it is currently qualified as a Regulated
Investment Company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"), and that it will make every effort to maintain such
qualification (under Subchapter M or any successor or similar provision) and
that it will notify the Company promptly upon having a reasonable basis for
believing that it has ceased to so qualify or that it might not so qualify in
the future.
5
<PAGE>
2.4. The Company represents that the Variable Products are currently
treated as life insurance policies or annuity contracts under applicable
provisions of the Code, that it will make every effort to maintain such
treatment, and that it will notify the Fund immediately upon having a reasonable
basis for believing that the Variable Products have ceased to be so treated or
that they might not be so treated in the future.
2.5. The Fund represents that to the extent that it decides to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act, the Fund
undertakes to have its board of Trustees, a majority of whom are not interested
persons of the Fund, formulate and approve any plan under Rule 12b-1 to finance
distribution expenses.
2.6. The Fund makes no representation as to whether any aspect of its
operations (including, but not limited to, fees and expenses and investment
policies) complies with the insurance laws or regulations of the various states.
2.7. The Fund represents that it is lawfully organized and validly
existing under the laws of the Commonwealth of Massachusetts and that it does
and will comply in all material respects with the 1940 Act.
2.8. The Adviser represents and warrants that it is and shall remain duly
registered in all material respects under all applicable federal and state
securities laws and that it will perform its obligations for the Fund in
compliance in all material respects with the laws of its state of domicile and
any applicable state and federal securities laws.
2.9. The Fund represents and warrants that its Trustees, officers,
employees, and other individuals/entities dealing with the money and/or
securities of the Fund are and shall continue to be at all times covered by a
blanket fidelity bond or similar coverage for the benefit of the Fund in an
amount not less than the minimal coverage as required currently by Rule 17g-(1)
of the 1940 Act or related provisions as may be promulgated from time to time.
The aforesaid blanket fidelity bond shall include coverage for larceny and
embezzlement and shall be issued by a reputable bonding company.
2.10. The Company represents and warrants that all of its directors,
officers, employees, investment advisers, and other individuals/entities dealing
with the money and/or securities of the Fund are covered by a blanket fidelity
bond or similar coverage, in an amount not less $5 million. The aforesaid, which
includes coverage for larceny and embezzlement, shall be issued by a reputable
bonding company. The Company agrees to make all reasonable efforts to see that
this bond or another bond containing these provisions is always in effect, and
agrees to notify the Fund promptly in writing in the event that such coverage no
longer applies.
ARTICLE III. Prospectuses, Reports to Shareholders and Proxy Statements; Voting
3.1. The Fund or its designee shall provide the Company with as many
printed copies of the Fund's current prospectus and statement of additional
information as the Company may reasonably request. If requested by the Company,
in lieu of providing printed copies, the Fund shall provide camera-ready film or
computer diskettes containing the Fund's prospectus and statement of additional
information, and such other assistance as is reasonably necessary in order for
the Company once each year (or more frequently if the prospectus and/or
statement of additional information for the Fund is amended during the year) to
have the prospectus for the Variable Products and the Fund's prospectus
6
<PAGE>
printed together in one document, and to have the statement of additional
information for the Fund and the statement of additional information for the
Variable Products printed together in one document. Alternatively, the Company
may print the Fund's prospectus and/or its statement of additional information
in combination with other fund companies' prospectuses and statements of
additional information.
3.2. Except as provided in this Section 3.2., all expenses of printing and
distributing Fund prospectuses and statements of additional information shall be
the expense of the Company. For any prospectuses and statements of additional
information provided by the Company to the existing owners of Variable Products
who currently own shares of one or more of the Fund's Portfolios, in order to
update disclosure as required by the 1933 Act and/or the 1940 Act, the cost of
printing shall be borne by the Fund. If the Company chooses to receive
camera-ready film or computer diskettes in lieu of receiving printed copies of
the Fund's prospectus, the Fund will reimburse the Company in an amount equal to
the product of x and y where x is the number of such prospectuses distributed to
owners of the Variable Products who currently own shares of one or more of the
Fund's Portfolios, and y is the Fund's per unit cost of typesetting and printing
the Fund's prospectus. The same procedures shall be followed with respect to the
Fund's statement of additional information, The Company agrees to provide the
Fund or its designee with such information as may be reasonably requested by the
Fund to assure that the Fund's expenses do not include the cost of printing any
prospectuses or statements of additional information other than those actually
distributed to existing owners of the Variable Products.
3.3. The Funds statement of additional information shall be obtainable
from the Fund, the Company or such other person as the Fund may designate, as
agreed upon by the parties.
3.4. The Fund, at its expense, shall provide the Company with copies of
its proxy statements, reports to shareholders, and other communications (except
for prospectuses and statements of additional information, which are covered in
section 3.1) to shareholders in such quantity as the Company shall reasonably
require for distribution to contract owners. The Fund or its designee shall bear
the cost of printing, duplicating, and mailing of these documents to current
contract owners, and the Company shall bear the cost for such documents used for
purposes other than distribution to current contract owners.
3.5. If and to the extent required by law the Company shall:
(i) solicit voting instructions from contract owners;
(ii) vote the Fund shares in accordance with instructions received
from contract owners; and
(iii) vote Fund shares for which no instructions have been received
in the same proportion as Fund shares of such Portfolio for
which instructions have been received,
so long as and to the extent that the Securities and Exchange Commission
continues to interpret the 1940 Act to require pass-through voting privileges
for variable contract owners. The Company reserves the right to vote Fund shares
held in any segregated asset account in its own right, to the extent permitted
by law. The Fund and the Company shall follow the procedures, and shall have the
corresponding responsibilities, for the handling of proxy and voting instruction
solicitations, as set forth in Schedule C attached hereto and incorporated
herein by reference. Participating Insurance Companies shall be responsible for
ensuring that each of their separate accounts participating in the Fund
calculates voting
7
<PAGE>
privileges in a manner consistent with the standards set forth on Schedule C,
which standards will also be provided to the other Participating Insurance
Companies, if any.
3.6. The Fund will comply with all provisions of the 1940 Act requiring
voting by shareholders, including Sections 16(a) and, if and when applicable,
16(b). Further, the Fund will act in accordance with the Securities and Exchange
Commission's interpretation of the requirements of Section 16(a) with respect to
periodic elections of trustees and with whatever rules the Commission may
promulgate with respect thereto.
3.7. The Fund shall use reasonable efforts to provide Fund prospectuses,
reports to shareholders, proxy materials and other Fund communications (or
camera-ready equivalents) to the Company sufficiently in advance of the
Company's mailing dates to enable the Company to complete, at reasonable cost,
the printing, assembling and/or distribution of the communications in accordance
with applicable laws and regulations.
ARTICLE IV. Sales Material and Information
4.1. The Company shall furnish, or shall cause to be furnished, to the
Fund or its designee, each piece of sales literature or other promotional
material in which the Fund or the Adviser(s) is named, at least fifteen Business
Days prior to its use. No such material shall be used if the Fund or its
designee reasonably objects to such use within fifteen Business Days after
receipt of such material.
4.2. The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund in
connection with the sale of the Variable Products other than the information or
representations contained in the registration statement or prospectus for the
Fund shares, as such registration statement and prospectus may be amended or
supplemented from time to time, or in reports or proxy statements for the Fund,
or in sales literature or other promotional material approved by the Fund or its
designee, except with the permission of the Fund.
4.3. The Fund or its designee shall furnish, or shall cause to be
furnished, to the Company or its designee, each piece of sales literature or
other promotional material in which the Company and/or its separate account(s)
is named at least fifteen Business Days prior to its use. No such material shall
be used if the Company or its designee reasonably objects to such use within
fifteen Business Days after receipt of such material.
4.4. The Fund and the Adviser shall not give any information or make any
representations on behalf of the Company or concerning the Company, each
Account, or the Variable Products, other than the information or representations
contained in a registration statement or prospectus for the Variable Products,
as such registration statement and prospectus may be amended or supplemented
from time to time, or in published reports for each Account which are in the
public domain or approved by the Company for distribution to contract owners, or
in sales literature or other promotional material approved by the Company or its
designee, except with the permission of the Company.
4.5. The Fund will provide to the Company at least one complete copy of
all registration statements, prospectuses, statements of additional information,
reports, proxy statements, sales literature and other promotional materials,
applications for exemptions, requests for no-action letters, and all amendments
to any of the above, that relate to the Fund or its shares, which are relevant
to the Company or the Variable Products.
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4.6. The Company will provide to the Fund at least one complete copy of
all registration statements, prospectuses, statements of additional information,
reports, solicitations for voting instructions, sales literature and other
promotional materials, applications for exemptions, requests for no action
letters, and all amendments to any of the above, that relate to the investment
in the Fund under the Variable Products.
4.7. For purposes of this Article IV, the phrase "sales literature or
other promotional material" includes, but is not limited to, any of the
following that refer to the Fund or any affiliate of the Fund: advertisements
(such as material published, or designed for use in, a newspaper, magazine, or
other periodical, radio, television, telephone or tape recording, videotape
display, signs or billboards, motion pictures, or other public media), sales
literature (i.e., any written communication distributed or made generally
available to customers or the public, including brochures, circulars, research
reports, market letters, form letters, seminar texts, reprints or excerpts of
any other advertisement, sales literature, or published article), educational or
training materials or other communications distributed or made generally
available to some or all agents or employees, and registration statements,
prospectuses, statements of additional information, shareholder reports, and
proxy materials.
ARTICLE V. Fees and Expenses
5.1. The Fund shall pay no fee or other compensation to the Company under
this Agreement, except that if the Fund or any Portfolio adopts and implements a
plan pursuant to Rule 12b-l to finance distribution expenses, then the Fund may
make payments to the Company for the Variable Products if and in amounts agreed
to in writing.
5.2. All expenses incident to performance by the Fund under this Agreement
shall be paid by the Fund, other than expenses assumed by the Adviser under the
Management Agreement between the Fund and the Adviser or by another party. The
Fund shall see to it that all its shares are registered and authorized for
issuance in accordance with applicable federal law and, if and to the extent
deemed advisable by the Fund, in accordance with applicable state laws prior to
their sale. The Fund shall bear the expenses for the cost of registration and
qualification of the Fund's shares, preparation and filing of the Fund's
prospectus and registration statement, proxy materials and reports, setting the
prospectus in type, setting in type and printing the proxy materials and reports
to shareholders (including the costs of printing a prospectus that constitutes
an annual report), the preparation of all statements and notices required by any
federal or state law, and all taxes on the issuance or transfer of the Fund's
shares.
ARTICLE VI. Diversification
6.1. The Fund will at all times invest money from the Variable Products in
such a manner as to ensure that the Variable Products will be treated as
variable contracts under the Code and the regulations issued thereunder. Without
limiting the scope of the foregoing, the Fund will at all times comply with
Section 817(h) of the Code and Treasury Regulation 1.817-5, relating to the
diversification requirements for variable annuity, endowment, or life insurance
contracts and any amendments or other modifications to such Section or
Regulations. In the event of a breach of this Article VI by the Fund, it will
take all reasonable steps (a) to notify Company of such breach and (b) to
adequately diversify the Fund so as to achieve compliance within the grace
period afforded by Regulation 1.817-5.
ARTICLE VII. Potential Conflicts
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7.1. The Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
separate accounts investing in the Fund. An irreconcilable material conflict may
arise for a variety of reasons, including: (a) an action by any state insurance
regulatory authority; (b) a change in applicable federal or state insurance,
tax, or securities laws or regulations, or a public ruling, private letter
ruling, no-action or interpretative letter, or any similar action by insurance,
tax, or securities regulatory authorities; (c) an administrative or judicial
decision in any relevant proceeding; (d) the manner in which the investments of
any Portfolio are being managed; (e) a difference in voting instructions given
by Variable Insurance Product owners; or (f) a decision by a Participating
Insurance Company to disregard the voting instructions of contract owners. The
Board shall promptly inform the Company if it determines that an irreconcilable
material conflict exists and the implications thereof.
7.2. Each of the Company and the Adviser will report any potential or
existing conflicts of which it is aware to the Board. Each of the Company and
the Adviser will assist the Board in carrying out its responsibilities under SEC
rules and regulations. The Adviser, and the participating insurance companies
and participating qualified plans will at least annually submit to the Board
such reports, materials, or data as the Board may reasonably request so that the
Board may fully carry out the obligations imposed upon by the conditions
contained in the Shared Funding Exemptive Order, and said reports, materials,
and data will be submitted more frequently if deemed appropriate by the Board.
7.3. If it is determined by a majority of the Board, or a majority of its
members who are not "interested persons" of the Fund, the Adviser or the Company
as that term is defined in the 1940 Act (hereinafter "disinterested members"),
that a material irreconcilable conflict exists, the Company and other
Participating Insurance Companies shall, at their expense and to the extent
reasonably practicable (as determined by a majority of the disinterested
directors), take whatever steps are necessary to remedy or eliminate the
irreconcilable material conflict, up to and including: (1) withdrawing the
assets allocable to some or all of the separate accounts from the Fund or any
Portfolio and reinvesting such assets in a different investment medium,
including (but not limited to) another Portfolio of the Fund, or submitting the
question whether such segregation should be implemented to a vote of all
affected contract owners and, as appropriate, segregating the assets of any
appropriate group (i.e., annuity contract owners, life insurance policy owners,
or variable contract owners of one or more Participating Insurance Companies)
that votes in favor of such segregation, or offering to the affected contract
owners the option of making such a change; and (2) establishing a new registered
management investment company or managed separate account.
7.4. If a material irreconcilable conflict arises because of a decision by
the Company to disregard contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Fund's election, to withdraw the affected Account's
investment in the Fund and terminate this Agreement with respect to such Account
(at the Company's expense); provided, however that such withdrawal and
termination shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the disinterested members
of the Board.
7.5. If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the Company will withdraw the
affected Account's investment in the Fund and terminate this Agreement with
respect to such Account within six months after the Board informs the Company in
writing that it has determined that such decision has created an irreconcilable
material conflict; provided, however, that such withdrawal and termination shall
be limited to the extent required by the foregoing material
10
<PAGE>
irreconcilable conflict as determined by a majority of the disinterested members
of the Board. Until the end of the foregoing six month period, the Fund shall
continue to accept and implement orders by the Company for the purchase (and
redemption) of shares of the Fund.
7.6. For purposes of Sections 7.3 through 7.5 of this Agreement, a
majority of the disinterested members of the Board shall determine whether any
proposed action adequately remedies any irreconcilable material conflict, but in
no event will the Fund be required to establish a new funding medium for the
Variable Products. The Company shall not be required by Section 7.3 to establish
a new funding medium for the Variable Products if an offer to do so has been
declined by vote of a majority of contract owners materially adversely affected
by the irreconcilable material conflict.
7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the 1940
Act or the rules promulgated thereunder with respect to mixed or shared funding,
or if the Fund obtains a Shared Exemptive Order which requires provisions that
are materially different from the provisions of this Agreement, then (a) the
Fund and/or the Participating Insurance Companies, as appropriate, shall take
such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T), as
amended, and Rule 6e-3, as adopted, or to the terms of the Shared Exemptive
Order, to the extent applicable; and (b) Sections 3.4, 3.5, 7.1, 7.2, 7.3, 7.4,
and 7.5 of this Agreement shall continue in effect only to the extent that terms
and conditions substantially identical to such Sections are contained in such
Rule(s) as so amended or adopted.
ARTICLE VIII. Indemnification
8.1. Indemnification By The Company
8.1(a) The Company agrees to indemnify and hold harmless the Fund and the
Adviser, each of their respective officers, employees, and Trustees or
Directors, and each person, if any, who controls the Fund or the Adviser within
the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified
Parties" and individually, "Indemnified Party," for purposes of this Section
8.1) against any and all losses, claims, damages, liabilities (including amounts
paid in settlement with the written consent of the Company) or litigation
(including legal and other expenses), to which the Indemnified Parties may
become subject under any statute, regulation, at common law or otherwise,
insofar as such losses, claims, damages, liabilities or expenses (or actions in
respect thereof) or settlements are related to the sale or acquisition of the
Fund's shares or the Variable Products and:
(i) arise out of or are based upon any untrue statements or alleged untrue
statements of any material fact contained in the registration statement or
prospectus for the Variable Products or contained in the Variable Products
or sales literature for the Variable Products (or any amendment or
supplement to any of the foregoing), or arise out of or are based upon the
omission or the alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, provided that this agreement to indemnify shall not apply as
to any Indemnified Party if such statement or omission or such alleged
statement or omission was made in reliance upon and in conformity with
information furnished to the Company by or on behalf of the Fund for use
in the registration statement or prospectus for the Variable Products or
in the Variable Products or sales literature (or any amendment or
supplement) or otherwise for use in connection with the sale of the
Variable Products or Fund shares; or
11
<PAGE>
(ii) arise out of or as a result of statements or representations (other
than statements or representations contained in the registration
statement, prospectus or sales literature of the Fund not supplied by the
Company, or persons under its control and other than statements or
representations authorized by the Fund or an Adviser) or unlawful conduct
of the Company or persons under its control, with respect to the sale or
distribution of the Variable Products or Fund shares; or
(iii) arise out of or as a result of any untrue statement or alleged
untrue statement of a material fact contained in a registration statement,
prospectus, or sales literature of the Fund or any amendment thereof or
supplement thereto or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, if such a statement or omission was
made in reliance upon and in conformity with information furnished to the
Fund by or on behalf of the Company; or
(iv) arise as a result of any failure by the Company to provide the
services and furnish the materials under the terms of this Agreement; or
(v) arise out of or result from any material breach of any representation
and/or warranty made by the Company in this Agreement or arise out of or
result from any other material breach of this Agreement by the Company, as
limited by and in accordance with the provisions of Sections 8.1(b) and
8.1(c) hereof.
8.1(b). The Company shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations or duties under this Agreement.
8.1(c). The Company shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Company in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Company of any
such claim shall not relieve the Company from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Company shall be entitled to participate,
at its own expense, in the defense of such action. The Company also shall be
entitled to assume the defense thereof, with counsel satisfactory to the party
named in the action. After notice from the Company to such party of the
Company's election to assume the defense thereof, the Indemnified Party shall
bear the fees and expenses of any additional counsel retained by it, and the
Company will not be liable to such party under this Agreement for any legal or
other expenses subsequently incurred by such party independently in connection
with the defense thereof other than reasonable costs of investigation.
8.1(d). The Indemnified Parties will promptly notify the Company of the
commencement of any litigation or proceedings against them in connection with
the issuance or sale of the Fund shares or the Variable Products or the
operation of the Fund.
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<PAGE>
8.2. Indemnification by the Adviser
8.2(a). The Adviser agrees, with respect to each Portfolio that it
manages, to indemnify and hold harmless the Company, each of its directors,
officers, and employees, and each person, if any, who controls the Company
within the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified
Parties" and individually, "Indemnified Party," for purposes of this Section
8.2) against any and all losses, claims, damages, liabilities (including amounts
paid in settlement with the written consent of the Adviser) or litigation
(including legal and other expenses) to which the Indemnified Parties may become
subject under any statute, regulation, at common law or otherwise, insofar as
such losses, claims, damages, liabilities or expenses (or actions in respect
thereof) or settlements are related to the sale or acquisition of shares of the
Portfolio that it manages or the Variable Products and:
(i)arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the registration statement or
prospectus or sales literature of the Fund (or any amendment or supplement
to any of the foregoing), or arise out of or are based upon the omission
or the alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading,
provided that this agreement to indemnify shall not apply as to any
Indemnified Party if such statement or omission or such alleged statement
or omission was made in reliance upon and in conformity with information
furnished to the Fund by or on behalf of the Company for use in the
registration statement or prospectus for the Fund or in sales literature
(or any amendment or supplement) or otherwise for use in connection with
the sale of the Variable Products or Portfolio shares; or
(ii) arise out of or as a result of statements or representations (other
than statements or representations contained in the registration
statement, prospectus or sales literature for the Variable Products not
supplied by the Fund or persons under its control and other than
statements or representations authorized by the Company) or unlawful
conduct of the Fund, Adviser(s) or persons under their control, with
respect to the sale or distribution of the Variable Products or Portfolio
shares; or
(iii) arise out of or as a result of any untrue statement or alleged
untrue statement of a material fact contained in a registration statement,
prospectus, or sales literature covering the Variable Products, or any
amendment thereof or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statement or statements therein not misleading, if
such statement or omission was made in reliance upon information furnished
to the Company by or on behalf of the Fund; or
(iv) arise as a result of any failure by the Fund to provide the services
and furnish the materials under the terms of this Agreement; or
(v) arise out of or result from any material breach of any representation
and/or warranty made by the Adviser in this Agreement or arise out of or
result from any other material breach of this Agreement by the Adviser; as
limited by and in accordance with the provisions of Sections 8.2(b) and
8.2(c) hereof.
8.2(b). The Adviser shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
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<PAGE>
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement.
8.2(c). The Adviser shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Adviser in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Adviser of any
such claim shall not relieve the Adviser from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Adviser will be entitled to participate, at
its own expense, in the defense thereof The Adviser also shall be entitled to
assume the defense thereof, with counsel satisfactory to the party named in the
action. After notice from the Adviser to such party of the Adviser's election to
assume the defense thereof, the Indemnified Party shall bear the fees and
expenses of any additional counsel retained by it, and the Adviser will not be
liable to such party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection with the defense
thereof other than reasonable costs of investigation.
8.2(d). The Company agrees promptly to notify the Adviser of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of the Variable Products or
the operation of each Account.
8.3. Indemnification by the Fund
8.3(a). The Fund agrees to indemnify and hold harmless the Company, and
each of its directors and officers and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act (hereinafter
collectively, the "Indemnified Parties" and individually, "Indemnified Party,"
for purposes of this Section 8.3) against any and all losses, claims, damages,
liabilities (including amounts paid in settlement with the written consent of
the Fund) or litigation (including legal and other expenses) to which the
Indemnified Parties may become subject under any statute, regulation, at common
law or otherwise, insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof), litigation or settlements result from
the gross negligence, bad faith or willful misconduct of the Board or any member
thereof, are related to the operations of the Fund and:
(i) arise as a result of any failure by the Fund to provide the services
and furnish the materials under the terms of this Agreement; or
(ii) arise out of or result from any material breach of any representation
and/or warranty made by the Fund in this Agreement or arise out of or
result from any other material breach of this Agreement by the Fund, as
limited and in accordance with the provisions of Sections 8.3(b) and
8.3(a);
8.3(b). The Fund shall not be liable under this indemnification provision
with respect to any losses, claims, damages, liabilities or litigation incurred
or assessed against an Indemnified Party as may arise from such Indemnified
Party's gross negligence, bad faith, or willful misconduct the performance of
such Indemnified Party's duties or by reason of such Indemnified Party's
reckless disregard of obligations and duties under this Agreement.
14
<PAGE>
8.3(c). The Fund shall not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party unless such
Indemnified Party shall have notified the Fund in writing within a reasonable
time after the summons or other first legal process giving information of the
nature of the claim shall have been served upon such Indemnified Party (or after
such Indemnified Party shall have received notice of such service on any
designated agent), but failure to notify the Fund of any such claim shall not
relieve the Fund from any liability which it may have to the Indemnified Party
against whom such action is brought otherwise than on account of this
indemnification provision. In case any such action is brought against the
Indemnified Parties, the Fund will be entitled to participate, at its own
expense, in the defense thereof The Fund also shall be entitled to assume the
defense thereof, with counsel satisfactory to the party named in the action.
After notice from the Fund to such party of the Fund's election to assume the
defense thereof, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the Fund will not be liable to such party
under this Agreement for any legal or other expenses subsequently incurred by
such party independently in connection with the defense thereof other than
reasonable costs of investigation.
8.3(d). The Company agrees promptly to notify the Fund of the commencement
of any litigation or proceedings against it or any of its respective officers or
directors in connection with this Agreement, the issuance or sale of the
Variable Products, with respect to the operation of either Account, or the sale
or acquisition of shares of the Fund.
ARTICLE IX. Applicable Law
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.
9.2. This Agreement shall be subject to the provisions of the 1933, 1934
and 1940 Acts, and the rules and regulations and rulings thereunder, including
such exemptions from those statutes, rules and regulations as the Securities and
Exchange Commission may grant (including, but not limited to, the Shared Funding
Exemptive Order) and the terms hereof shall be interpreted and construed in
accordance therewith.
ARTICLE X. Termination
10.1. This Agreement shall continue in full force and effect until the
first to occur of:
10.1(a) termination by any party for any reason by at least sixty (60)
days advance written notice delivered to the other parties; or
10.1(b) termination by the Company by written notice to the Fund and the
Adviser with respect to any Portfolio based upon the Company's determination
that shares of such Portfolio are not reasonably available to meet the
requirements of the Variable Products; or
10.1(c) termination by the Company by written notice to the Fund and the
Adviser with respect to any Portfolio in the event any of the Portfolio's shares
are not registered, issued or sold in accordance with applicable state and/or
federal law or such law precludes the use of such shares as the underlying
investment media of the Variable Products issued or to be issued by the Company;
or
10.1(d) termination by the Company by written notice to the Fund and the
Adviser with respect to any Portfolio in the event that such Portfolio ceases to
qualify as a Regulated Investment Company
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under Subchapter M of the Code or under any successor or similar provision, or
if the Company reasonably believes that the Fund may fail to so qualify; or
10.1(e) termination by the Company by written notice to the Fund and the
Adviser with respect to any Portfolio in the event that such Portfolio fails to
meet the diversification requirements specified in Article VI hereof; or
10.1(f) termination by the Fund by written notice to the Company if the
Fund shall determine, in its sole judgment exercised in good faith, that the
Company and/or its affiliated companies has suffered a material adverse change
in its business, operations, financial condition or prospects since the date of
this Agreement or is the subject of material adverse publicity, or
10.1(g) termination by the Company by written notice to the Fund and the
Adviser, if the Company shall determine, in its sole judgment exercised in good
faith, that either the Fund or the Adviser has suffered a material adverse
change in its business, operations, financial condition or prospects since the
date of this Agreement or is the subject of material adverse publicity; or
10.2. Notwithstanding any termination of this Agreement, the Fund shall,
at the option of the Company, continue to make available additional shares of
the Fund pursuant to the terms and conditions of this Agreement, for all
Variable Products in effect on the effective date of termination of this
Agreement (hereinafter referred to as "Existing Variable Products").
Specifically, without limitation, the owners of the Existing Variable Products
shall be permitted to direct reallocation of investments in the Portfolios of
the Fund, redemption of investments in the Portfolios of the Fund and/or
investment in the Portfolios of the Fund upon the making of additional purchase
payments under the Existing Variable Products. The parties agree that this
Section 10.2 shall not apply to any termination under Article VII and the effect
of such Article VII termination shall be governed by Article VII of this
Agreement.
10.3. The provisions of Article VIII Indemnification shall survive any
termination of this Agreement pursuant to this Article X Termination.
10.4. The Company shall not redeem Fund shares attributable to the
Variable Products (as distinct from Fund shares attributable to the Company's
assets held in the Account) except (i) as necessary to implement contract owner
initiated or approved transactions, or (ii) as required by state and/or federal
laws or regulations or judicial or other legal precedent of general application
(hereinafter referred to as a "Legally Required Redemption") or (iii) as
permitted by an order of the Securities and Exchange Commission pursuant to
Section 26(b) of the 1940 Act. Upon request, the Company will promptly furnish
to the Fund the opinion of counsel for the Company (which counsel shall be
reasonably satisfactory to the Fund) to the effect that any redemption pursuant
to clause (ii) above is a Legally Required Redemption. Furthermore, except in
cases where permitted under the terms of the Variable Products, the Company
shall not prevent contract owners from allocating payments to a Portfolio that
was otherwise available under the Variable Products without first giving the
Fund 90 days prior written notice of its intention to do so.
ARTICLE XI. Notices
Any notice shall be sufficiently given when hand delivered or sent by
registered or certified mail to the other party at the address of such party set
forth below or at such other address as such party may from time to time specify
in writing to the other party.
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If to the Fund:
The Palladian Trust
440 Lincoln Street
Worcester, MA 01653
Attention:George M. Boyd, Esq
If to Adviser:
Allmerica Investment Management Company, Inc.
440 Lincoln Street
Worcester, MA 01653
Attention: Abigail M. Armstrong, Esq.
If to the Company:
Allmerica Financial Life Insurance and Annuity Company
440 Lincoln Street
Worcester, Massachusetts 01653
Attention:Richard M. Reilly, President
ARTICLE XII. Miscellaneous
12.1. A copy of the Fund's Agreement and Declaration of Trust, as may be
amended from time to time, is on file with the Secretary of the Commonwealth of
Massachusetts. Notice is hereby given that this instrument is executed by the
Fund's Trustees as Trustees and not individually, and the Fund's obligations
under this Agreement are not binding upon any of the Trustees or Shareholders of
the Fund, but are binding only upon the assets and property of the Fund.
12.2. Subject to the requirements of legal process and regulatory
authority, each party hereto shall treat as confidential the names and addresses
of the owners of the Variable Products and all information reasonably identified
as confidential in writing by any other party hereto and, except as permitted by
this Agreement, shall not disclose, disseminate or utilize such names and
addresses and other confidential information until such time as it may come into
the public domain without the express written consent of the affected party.
12.3. The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
12.4. This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
12.5. If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
12.6. Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the
Securities and Exchange Commission, the National Association of Securities
Dealers and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this
17
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Agreement or the transactions contemplated hereby. Notwithstanding the
generality of the foregoing, each party hereto further agrees to furnish the
California Insurance Commissioner with any information or reports in connection
with services provided under this Agreement which such Commissioner may request
in order to ascertain whether the insurance operations of the Company are being
conducted in a manner consistent with the California Insurance Regulations and
any other applicable law or regulations.
12.7. The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and obligations
at law or in equity, which the parties hereto are entitled to under state and
federal laws.
12.8. This Agreement or any of the rights and obligations hereunder may
not be assigned by any party without the prior written consent of all parties
hereto; provided, however, that the Adviser may assign this Agreement or any
rights or obligations hereunder to any affiliate of or company controlled by or
under common control with the Adviser, if such assignee is duly licensed and
registered to perform the obligations of the Adviser under this Agreement.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
executed in its name and on its behalf by its duly authorized representative and
its seal to be hereunder affixed hereto as of the date specified above.
ALLMERICA FINANCIAL LIFE INSURANCE AND ANNUITY COMPANY
By: /s/ Richard M. Reilly
-------------------------------
Name: Richard M. Reilly
Title: President
THE PALLADIAN TRUST
By: /s/ Thomas P. Cunningham
-------------------------------
Name: Thomas P. Cunningham
Title: Treasurer
ALLMERICA INVESTMENT MANAGEMENT COMPANY, INC.
By: /s/ Richard F. Betzler, Jr.
-------------------------------
Name: Richard F. Betzler, Jr.
Title: Vice President
18
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SCHEDULE A
SEPARATE ACCOUNTS AND VARIABLE PRODUCTS
- --------------------------------------------------------------------------------
Variable Life Products
Separate Account Product Name 1933 Act # 1940 Act #
- ---------------- ------------ ---------- ----------
Fulcrum Variable Life Fulcrum SPVUL 333-15569 811-07913
Separate Account
Variable Annuity Products
Separate Account Product Name 1933 Act # 1940 Act #
- ---------------- ------------ ---------- ----------
Fulcrum Separate Account Fulcrum Annuity 333-11377 811-7799
- --------------------------------------------------------------------------------
<PAGE>
SCHEDULE B
Portfolios of
THE PALLADIAN TRUST
Value Portfolio
Growth Portfolio
International Growth Portfolio
Global Strategic Income Portfolio
Global Interactive/Telecomm Portfolio
<PAGE>
SCHEDULE C
PROXY VOTING PROCEDURES
The following is a list of procedures and corresponding responsibilities for the
handling of proxies and voting instructions relating to the Fund. The defined
terms herein shall have the meanings assigned in the Participation Agreement
except that the term "Company" shall also include the department or third party
assigned by the Company to perform the steps delineated below.
o The proxy proposals are given to the Company by the Fund as early as
possible before the date set by the Fund for the shareholder meeting to
enable the Company to consider and prepare for the solicitation of voting
instructions from owners of the Variable Products and to facilitate the
establishment of tabulation procedures. At this time the Fund will inform
the Company of the Record, Mailing and Meeting dates. This will be done
verbally approximately two months before meeting.
o Promptly after the Record Date, the Company will perform a "tape run," or
other activity, which will generate the names, addresses and number of
units which are attributed to each contract owner/policyholder (the
"Customer") as of the Record Date. Allowance should be made for account
adjustments made after this date that could affect the status of the
Customers' accounts as of the Record Date.
Note: The number of proxy statements is determined by the activities
described above. The Company will use its best efforts to call in the
number of Customers to the Fund, as soon as possible, but no later than
two weeks after the Record Date.
o The Fund's Annual Report must be sent to each Customer by the Company
either before or together with the Customers' receipt of voting
instruction solicitation material. The Fund will provide the last Annual
Report to the Company pursuant to the terms of Section 3.43 of the
Agreement to which this Schedule relates.
o The text and format for the Voting Instruction Cards ("Cards" or "Card")
is provided to the Company by the Fund. The Company, at its expense, shall
produce and personalize the Voting Instruction Cards. The Fund or its
affiliate must approve the Card before it is printed. Allow approximately
2-4 business days for printing information on the Cards. Information
commonly found on the Cards includes:
o name (legal name as found on account registration)
o address
o fund or account number
o coding to state number of units
o individual Card number for use in tracking and verification of votes
(already on Cards as printed by the Fund).
(This and related steps may occur later in the chronological process due to
possible uncertainties relating to the proposals.)
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o During this time, the Fund will develop, produce and pay for the Notice of
Proxy and the Proxy Statement (one document). Printed and folded notices
and statements will be sent to Company for insertion into envelopes
(envelopes and return envelopes are provided and paid for by the Company).
Contents of envelope sent to Customers by the Company will include:
o Voting Instruction Card(s)
o One proxy notice and statement (one document)
o return envelope (postage pre-paid by Company) addressed to the
Company or its tabulation agent
o "urge buckslip" - optional, but recommended. (This is a small,
single sheet of paper that requests Customers to vote as quickly as
possible and that their vote is important. One copy will be supplied
by the Fund.)
o cover letter - optional, supplied by Company and reviewed and
approved in advance by the Fund.
o The above contents should be received by the Company approximately 3-5
business days before mail date. Individual in charge at Company reviews
and approves the contents of the mailing package to ensure correctness and
completeness. Copy of this approval sent to the Fund.
o Package mailed by the Company.
* The Fund must allow at least a 15-day solicitation time to the
Company as the shareowner. (A 5-week period is recommended.)
Solicitation time is calculated as calendar days from (but not
including,) the meeting, counting backwards.
o Collection and tabulation of Cards begins. Tabulation usually takes place
in another department or another vendor depending on process used. An
often used procedure is to sort Cards on arrival by proposal into vote
categories of all yes, no, or mixed replies, and to begin data entry.
Note: Postmarks are not generally needed. A need for postmark information
would be due to an insurance company's internal procedure and has not been
required by the Fund in the past.
o Signatures on Card checked against legal name on account registration
which was printed on the Card. Note: For Example, if the account
registration is under "John A. Smith, Trustee," then that is the exact
legal name to be printed on the Card and is the signature needed on the
Card.
o If Cards are mutilated, or for any reason are illegible or are not signed
properly, they are sent back to Customer with an explanatory letter and a
new Card and return envelope. The mutilated or illegible Card is
disregarded and considered to be not received for purposes of vote
tabulation. Any Cards that have been "kicked out" (e.g. mutilated,
illegible) of the procedure are "hand verified," i.e., examined as to why
they did not complete the system. Any questions on those Cards are usually
remedied individually.
o There are various control procedures used to ensure proper tabulation of
votes and accuracy of that tabulation. The most prevalent is to sort the
Cards as they first arrive into categories depending upon their vote; an
estimate of how the vote is progressing may then be calculated. If the
initial estimates and the actual vote do not coincide, then an internal
audit of that vote should occur. This may entail a recount.
<PAGE>
o The actual tabulation of votes is done in units which is then converted to
shares. (It is very important that the Fund receives the tabulations
stated in terms of a percentage and the number of shares.) The Fund must
review and approve tabulation format.
o Final tabulation in shares is verbally given by the Company to the Fund on
the morning of the meeting not later than 10:00 am. Eastern time. The Fund
may request an earlier deadline if reasonable and if required to calculate
the vote in time for the meeting.
o A Certification of Mailing and Authorization to Vote Shares will be
required from the Company as well as an original copy of the final vote.
The Fund will provide a standard form for each Certification.
o The Company will be required to box and archive the Cards received from
the Customers. In the event that any vote is challenged or if otherwise
necessary for legal, regulatory, or accounting purposes, the Fund will be
permitted reasonable access to such Cards.
o All approvals and "signing-off may be done orally, but must always be
followed up in writing.
<PAGE>
PARTICIPATION AGREEMENT
Among
THE PALLADIAN TRUST
ALLMERICA INVESTMENT MANAGEMENT COMPANY, INC.
and
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
DATED AS OF
April 9, 1998
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
ARTICLE I. Purchase of Fund Shares 4
ARTICLE II Representations and Warranties 5
ARTICLE III Prospectuses, Reports to Shareholders
and Proxy Statements, Voting 6
ARTICLE IV Sales Material and Information 8
ARTICLE V Fees and Expenses 9
ARTICLE VI Diversification 9
ARTICLE VII Potential Conflicts 10
ARTICLE VIII Indemnification 11
ARTICLE IX. Applicable Law 15
ARTICLE X Termination 15
ARTICLE XI Notices 16
ARTICLE XII Miscellaneous 17
SCHEDULE A Separate Accounts and Variable Products A-1
SCHEDULE B Portfolios of The Palladian Trust B-1
SCHEDULE C Proxy Voting Procedures C-l
2
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THIS AGREEMENT, made and entered into as of the 9th day of April, 1998 by
and among: FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY (hereinafter the
"Company"), a Massachusetts corporation, on its own behalf and on behalf of each
separate account of the Company set forth on Schedule A hereto, as may be
amended from time to time (each such account hereinafter referred to as the
"Account"); THE PALLADIAN TRUST, an unincorporated Massachusetts business trust
(hereinafter the "Fund"), and ALLMERICA INVESTMENT MANAGEMENT COMPANY, INC.
(hereinafter the "Adviser"), a Massachusetts corporation
WHEREAS, the Fund engages in business as an open-end management investment
company and is available to act as (i) the investment vehicle for separate
accounts established by insurance companies for individual and group life
insurance policies and annuity contracts with variable accumulation and/or
pay-out provisions (hereinafter referred to individually and/or collectively as
"Variable Products") and (ii) the investment vehicle for certain qualified
pension and retirement plans (hereinafter "Qualified Plans"); and
WHEREAS, insurance companies desiring to utilize the Fund as an investment
vehicle under their Variable Products enter into participation agreements with
the Fund and the Adviser (the "Participating Insurance Companies");
WHEREAS, shares of the Fund are divided into several series of shares,
each representing the interest in a particular managed portfolio of securities
and other assets (each such series hereinafter referred to as a "Portfolio"),
any one or more of which may be made available under this Agreement, as may be
amended from time to time by mutual agreement of the parties hereto; and
WHEREAS, the Fund has received for an order from the Securities and
Exchange Commission, granting Participating Insurance Companies and Variable
Insurance Product separate accounts exemptions from the provisions of Sections
9(a), 13(a), 15(a), and 15(b) of the Investment Company Act of 1940, as amended
(hereinafter the "1940 Act"), and Rules 6e-2(b)(15) and 6e-3(T)(b)(15)
thereunder, to the extent necessary to permit shares of the Fund to be sold to
and held by separate accounts of both affiliated and unaffiliated life insurance
companies and Qualified Plans (hereinafter the "Shared Funding Exemptive
Order"); and
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and its shares are registered under the Securities
Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, the Adviser is duly registered as an investment adviser under the
Investment Advisers Act of 1940, as amended, and any applicable state securities
laws and manages each of the certain portfolios of the Fund and retains
Sub-Advisers for the daily investment and reinvestment of the assets of each
portfolio; and
WHEREAS, the Company has registered or will register certain Variable
Products under the 1933 Act; and
WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution or under authority of the Board of
Directors of the Company, to set aside and invest assets attributable to the
aforesaid Variable Products, and the Company has registered or will register
each Account as a unit investment trust under the 1940 Act; and
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WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase, on behalf of each Account, shares
in the Portfolios set forth in Schedule B attached to this Agreement, to fund
certain of the aforesaid Variable Insurance Products and the Fund is authorized
to sell such shares to each such Account at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the parties
hereto agree as follows:
ARTICLE I. Purchase of Fund Shares
1.1. The Fund agrees to make available for purchase by the Company shares
of the Fund and shall execute orders placed for each Account on a daily basis at
the net asset value next computed after receipt by the Fund or its designee of
such order. For purposes of this Section 1.1, the Company shall be the designee
of the Fund for receipt of such orders from each Account and receipt by such
designee of an order prior to the close of regular trading on the New York Stock
Exchange ("NYSE") shall constitute receipt by the Fund; provided that the Fund
receives notice of such order by 10:00 a.m. Eastern time on the next following
Business Day. "Business Day" shall mean any day on which the New York Stock
Exchange is open for trading and on which the Fund calculates its net asset
value pursuant to the rules of the Securities and Exchange Commission.
1.2. The Fund, so long as this Agreement is in effect, agrees to make its
shares available indefinitely for purchase at the applicable net asset value per
share by the Company and its Accounts on those days on which the Fund calculates
its net asset value pursuant to rules of the Securities and Exchange Commission
and the Fund shall use reasonable efforts to calculate such net asset value on
each day which the New York Stock Exchange is open for trading. Notwithstanding
the foregoing, the Board of Trustees of the Fund (hereinafter the "Board") may
refuse to permit the Fund to sell shares of any Portfolio to any person, or
suspend or terminate the offering of shares of any Portfolio if such action is
required by law or by regulatory authorities having jurisdiction or is, in the
sole discretion of the Board acting in good faith and in light of their
fiduciary duties under federal and any applicable state laws, necessary in the
best interests of the shareholders of such Portfolio.
1.3. The Fund agrees that shares of the Fund will be sold only to
Participating Insurance Companies and their separate accounts and to certain
Qualified Plans. No shares of any Portfolio will be sold to the general public.
1.4. The Fund agrees to redeem for cash, on the Company's request, any
full or fractional shares of the Fund held by the Company, executing such
requests on a daily basis at the net asset value next computed after receipt by
the Fund or its designee of the request for redemption. For purposes of this
Section 1.4, the Company shall be the designee of the Fund for receipt of
requests for redemption from each Account and receipt by such designee of a
request prior to the close of regular trading on the NYSE shall constitute
receipt by the Fund, provided that the Fund receives notice of such request for
redemption on the next following Business Day.
1.5. The Company agrees that purchases and redemptions of Portfolio shares
offered by the then current prospectus of the Fund shall be made in accordance
with the provisions of such prospectus.
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1.6. The Company shall pay for Fund shares no later than the next Business
Day after an order to purchase Fund shares is made in accordance with the
provisions of Section 1.1 hereof. Payment shall be in federal funds transmitted
by wire.
1.7. Issuance and transfer of the Fund's shares will be by book entry
only. Stock certificates will not be issued to the Company or any Account.
Shares ordered from the Fund will be recorded in an appropriate title for each
Account or the appropriate subaccount of each Account.
1.9. The Fund shall furnish same day notice (by wire or telephone,
followed by written confirmation) to the Company of any income, dividends or
capital gain distributions payable on the Fund's shares. The Company hereby
elects to receive all such income dividends and capital gain distributions as
are payable on the Portfolio shares in additional shares of that Portfolio. The
Company reserves the right to revoke this election and to receive all such
income dividends and capital gain distributions in cash. The Fund shall notify
the Company of the number of shares so issued as payment of such dividends and
distributions.
1.10. The Fund shall make the net asset value per share for each Portfolio
available to the Company on a daily basis as soon as reasonably practical after
the net asset value per share is calculated (normally by 6:30 p.m. Eastern time)
and shall use its best efforts to make such net asset value per share available
by 7:00 p.m. Eastern time.
ARTICLE II. Representations and Warranties
2.1. The Company represents and warrants that the Variable Products are or
will be registered under the 1933 Act; that the Variable Products will be issued
and sold in compliance in all material respects with all applicable federal and
state laws, and that the sale of the Variable Products shall comply in all
material respects with state insurance suitability requirements. The Company
further represents and warrants that it is an insurance company duly organized
and in good standing under applicable law, that it has legally and validly
established each Account as a segregated asset account under the Massachusetts
Insurance Code, and that it has registered or, prior to any issuance or sale of
the Variable Products, will register each Account as a unit investment trust in
accordance with the provisions of the 1940 Act to serve as a segregated
investment account for the Variable Products.
2.2. The Fund represents and warrants that Fund shares sold pursuant to
this Agreement shall be registered under the 1933 Act, duly authorized for
issuance and sold in compliance with the laws of the Commonwealth of
Massachusetts and all applicable federal and state securities laws, and that the
Fund is and shall make every effort to remain registered under the 1940 Act. The
Fund shall amend the registration statement for its shares under the 1933 Act
and the 1940 Act from time to time as required in order to effect the continuous
offering of its shares. The Fund shall register and qualify the shares for sale
in accordance with the laws of the various states only if and to the extent
deemed advisable by the Fund.
2.3. The Fund represents that it is currently qualified as a Regulated
Investment Company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"), and that it will make every effort to maintain such
qualification (under Subchapter M or any successor or similar provision) and
that it will notify the Company promptly upon having a reasonable basis for
believing that it has ceased to so qualify or that it might not so qualify in
the future.
2.4. The Company represents that the Variable Products are currently
treated as life insurance policies or annuity contracts under applicable
provisions of the Code, that it will make every effort to
5
<PAGE>
maintain such treatment, and that it will notify the Fund immediately upon
having a reasonable basis for believing that the Variable Products have ceased
to be so treated or that they might not be so treated in the future.
2.5. The Fund represents that to the extent that it decides to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act, the Fund
undertakes to have its board of Trustees, a majority of whom are not interested
persons of the Fund, formulate and approve any plan under Rule 12b-1 to finance
distribution expenses.
2.6. The Fund makes no representation as to whether any aspect of its
operations (including, but not limited to, fees and expenses and investment
policies) complies with the insurance laws or regulations of the various states.
2.7. The Fund represents that it is lawfully organized and validly
existing under the laws of the Commonwealth of Massachusetts and that it does
and will comply in all material respects with the 1940 Act.
2.8. The Adviser represents and warrants that it is and shall remain duly
registered in all material respects under all applicable federal and state
securities laws and that it will perform its obligations for the Fund in
compliance in all material respects with the laws of its state of domicile and
any applicable state and federal securities laws.
2.9. The Fund represents and warrants that its Trustees, officers,
employees, and other individuals/entities dealing with the money and/or
securities of the Fund are and shall continue to be at all times covered by a
blanket fidelity bond or similar coverage for the benefit of the Fund in an
amount not less than the minimal coverage as required currently by Rule 17g-(1)
of the 1940 Act or related provisions as may be promulgated from time to time.
The aforesaid blanket fidelity bond shall include coverage for larceny and
embezzlement and shall be issued by a reputable bonding company.
2.10. The Company represents and warrants that all of its directors,
officers, employees, investment advisers, and other individuals/entities dealing
with the money and/or securities of the Fund are covered by a blanket fidelity
bond or similar coverage, in an amount not less $5 million. The aforesaid, which
includes coverage for larceny and embezzlement, shall be issued by a reputable
bonding company. The Company agrees to make all reasonable efforts to see that
this bond or another bond containing these provisions is always in effect, and
agrees to notify the Fund promptly in writing in the event that such coverage no
longer applies.
ARTICLE III. Prospectuses, Reports to Shareholders and Proxy Statements; Voting
3.1. The Fund or its designee shall provide the Company with as many
printed copies of the Fund's current prospectus and statement of additional
information as the Company may reasonably request. If requested by the Company,
in lieu of providing printed copies, the Fund shall provide camera-ready film or
computer diskettes containing the Fund's prospectus and statement of additional
information, and such other assistance as is reasonably necessary in order for
the Company once each year (or more frequently if the prospectus and/or
statement of additional information for the Fund is amended during the year) to
have the prospectus for the Variable Products and the Fund's prospectus printed
together in one document, and to have the statement of additional information
for the Fund and the statement of additional information for the Variable
Products printed together in one document.
6
<PAGE>
Alternatively, the Company may print the Fund's prospectus and/or its statement
of additional information in combination with other fund companies' prospectuses
and statements of additional information.
3.2. Except as provided in this Section 3.2., all expenses of printing and
distributing Fund prospectuses and statements of additional information shall be
the expense of the Company. For any prospectuses and statements of additional
information provided by the Company to the existing owners of Variable Products
who currently own shares of one or more of the Fund's Portfolios, in order to
update disclosure as required by the 1933 Act and/or the 1940 Act, the cost of
printing shall be borne by the Fund. If the Company chooses to receive
camera-ready film or computer diskettes in lieu of receiving printed copies of
the Fund's prospectus, the Fund will reimburse the Company in an amount equal to
the product of x and y where x is the number of such prospectuses distributed to
owners of the Variable Products who currently own shares of one or more of the
Fund's Portfolios, and y is the Fund's per unit cost of typesetting and printing
the Fund's prospectus. The same procedures shall be followed with respect to the
Fund's statement of additional information. The Company agrees to provide the
Fund or its designee with such information as may be reasonably requested by the
Fund to assure that the Fund's expenses do not include the cost of printing any
prospectuses or statements of additional information other than those actually
distributed to existing owners of the Variable Products.
3.3. The Fund's statement of additional information shall be obtainable
from the Fund, the Company or such other person as the Fund may designate, as
agreed upon by the parties.
3.4. The Fund, at its expense, shall provide the Company with copies of
its proxy statements, reports to shareholders, and other communications (except
for prospectuses and statements of additional information, which are covered in
section 3.1) to shareholders in such quantity as the Company shall reasonably
require for distribution to contract owners. The Fund or its designee shall bear
the cost of printing, duplicating, and mailing of these documents to current
contract owners, and the Company shall bear the cost for such documents used for
purposes other than distribution to current contract owners.
3.5. If and to the extent required by law the Company shall:
(i) solicit voting instructions from contract owners;
(ii) vote the Fund shares in accordance with instructions received
from contract owners; and
(iii) vote Fund shares for which no instructions have been received
in the same proportion as Fund shares of such Portfolio for
which instructions have been received,
so long as and to the extent that the Securities and Exchange Commission
continues to interpret the 1940 Act to require pass-through voting privileges
for variable contract owners. The Company reserves the right to vote Fund shares
held in any segregated asset account in its own right, to the extent permitted
by law. The Fund and the Company shall follow the procedures, and shall have the
corresponding responsibilities, for the handling of proxy and voting instruction
solicitations, as set forth in Schedule C attached hereto and incorporated
herein by reference. Participating Insurance Companies shall be responsible for
ensuring that each of their separate accounts participating in the Fund
calculates voting privileges in a manner consistent with the standards set forth
on Schedule C, which standards will also be provided to the other Participating
Insurance Companies, if any.
7
<PAGE>
3.6. The Fund will comply with all provisions of the 1940 Act requiring
voting by shareholders, including Sections 16(a) and, if and when applicable,
16(b). Further, the Fund will act in accordance with the Securities and Exchange
Commission's interpretation of the requirements of Section 16(a) with respect to
periodic elections of trustees and with whatever rules the Commission may
promulgate with respect thereto.
3.7. The Fund shall use reasonable efforts to provide Fund prospectuses,
reports to shareholders, proxy materials and other Fund communications (or
camera-ready equivalents) to the Company sufficiently in advance of the
Company's mailing dates to enable the Company to complete, at reasonable cost,
the printing, assembling and/or distribution of the communications in accordance
with applicable laws and regulations.
ARTICLE IV. Sales Material and Information
4.1. The Company shall furnish, or shall cause to be furnished, to the
Fund or its designee, each piece of sales literature or other promotional
material in which the Fund or the Adviser(s) is named, at least fifteen Business
Days prior to its use. No such material shall be used if the Fund or its
designee reasonably objects to such use within fifteen Business Days after
receipt of such material.
4.2. The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund in
connection with the sale of the Variable Products other than the information or
representations contained in the registration statement or prospectus for the
Fund shares, as such registration statement and prospectus may be amended or
supplemented from time to time, or in reports or proxy statements for the Fund,
or in sales literature or other promotional material approved by the Fund or its
designee, except with the permission of the Fund.
4.3. The Fund or its designee shall furnish, or shall cause to be
furnished, to the Company or its designee, each piece of sales literature or
other promotional material in which the Company and/or its separate account(s)
is named at least fifteen Business Days prior to its use. No such material shall
be used if the Company or its designee reasonably objects to such use within
fifteen Business Days after receipt of such material.
4.4. The Fund and the Adviser shall not give any information or make any
representations on behalf of the Company or concerning the Company, each
Account, or the Variable Products, other than the information or representations
contained in a registration statement or prospectus for the Variable Products,
as such registration statement and prospectus may be amended or supplemented
from time to time, or in published reports for each Account which are in the
public domain or approved by the Company for distribution to contract owners, or
in sales literature or other promotional material approved by the Company or its
designee, except with the permission of the Company.
4.5. The Fund will provide to the Company at least one complete copy of
all registration statements, prospectuses, statements of additional information,
reports, proxy statements, sales literature and other promotional materials,
applications for exemptions, requests for no-action letters, and all amendments
to any of the above, that relate to the Fund or its shares, which are relevant
to the Company or the Variable Products.
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<PAGE>
4.6. The Company will provide to the Fund at least one complete copy of
all registration statements, prospectuses, statements of additional information,
reports, solicitations for voting instructions, sales literature and other
promotional materials, applications for exemptions, requests for no action
letters, and all amendments to any of the above, that relate to the investment
in the Fund under the Variable Products.
4.7. For purposes of this Article IV, the phase "sales literature or other
promotional material" includes, but is not limited to, any of the following that
refer to the Fund or any affiliate of the Fund: advertisements (such as material
published, or designed for use in, a newspaper, magazine, or other periodical,
radio, television, telephone or tape recording, videotape display, signs or
billboards, motion pictures, or other public media), sales literature (i.e., any
written communication distributed or made generally available to customers or
the public, including brochures, circulars, research reports, market letters,
form letters, seminar texts, reprints or excerpts of any other advertisement,
sales literature, or published article), educational or training materials or
other communications distributed or made generally available to some or all
agents or employees, and registration statements, prospectuses, statements of
additional information, shareholder reports, and proxy materials.
ARTICLE V. Fees and Expenses
5.1. The Fund shall pay no fee or other compensation to the Company under
this Agreement, except that if the Fund or any Portfolio adopts and implements a
plan pursuant to Rule 12b-1 to finance distribution expenses, then the Fund may
make payments to the Company or for the Variable Products if and in amounts
agreed to in writing.
5.2. All expenses incident to performance by the Fund under this Agreement
shall be paid by the Fund, other than expenses assumed by the Adviser under the
Management Agreement between the Fund and the Adviser or by another party. The
Fund shall see to it that all its shares are registered and authorized for
issuance in accordance with applicable federal law and, if and to the extent
deemed advisable by the Fund, in accordance with applicable state laws prior to
their sale. The Fund shall bear the expenses for the cost of registration and
qualification of the Fund's shares, preparation and filing of the Fund's
prospectus and registration statement, proxy materials and reports, setting the
prospectus in type, setting in type and printing the proxy materials and reports
to shareholders (including the costs of printing a prospectus that constitutes
an annual report), the preparation of all statements and notices required by any
federal or state law, and all taxes on the issuance or transfer of the Fund's
shares.
ARTICLE VI. Diversification
6.1. The Fund will at all times invest money from the Variable Products in
such a manner as to ensure that the Variable Products will be treated as
variable contracts under the Code and the regulations issued thereunder. Without
limiting the scope of the foregoing, the Fund will at all times comply with
Section 817(h) of the Code and Treasury Regulation 1.817-5, relating to the
diversification requirements for variable annuity, endowment, or life insurance
contracts and any amendments or other modifications to such Section or
Regulations. In the event of a breach of this Article VI by the Fund, it will
take all reasonable steps (a) to notify Company of such breach and (b) to
adequately diversify the Fund so as to achieve compliance within the grace
period afforded by Regulation 1.817-5.
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ARTICLE VII. Potential Conflicts
7.1. The Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
separate accounts investing in the Fund. An irreconcilable material conflict may
arise for a variety of reasons, including: (a) an action by any state insurance
regulatory authority; (b) a change in applicable federal or state insurance,
tax, or securities laws or regulations, or a public ruling, private letter
ruling, no-action or interpretative letter, or any similar action by insurance,
tax, or securities regulatory authorities; (c) an administrative or judicial
decision in any relevant proceeding; (d) the manner in which the investments of
any Portfolio are being managed; (e) a difference in voting instructions given
by Variable Insurance Product owners; or (f) a decision by a Participating
Insurance Company to disregard the voting instructions of contract owners. The
Board shall promptly inform the Company if it determines that an irreconcilable
material conflict exists and the implications thereof.
7.2. Each of the Company and the Adviser will report any potential or
existing conflicts of which it is aware to the Board. Each of the Company and
the Adviser will assist the Board in carrying out its responsibilities under SEC
rules and regulations. The Adviser, and the participating insurance companies
and participating qualified plans will at least annually submit to the Board
such reports, materials, or data as the Board may reasonably request so that the
Board may fully carry out the obligations imposed upon by the conditions
contained in the Shared Funding Exemptive Order, and said reports, materials,
and data will be submitted more frequently if deemed appropriate by the Board.
7.3. If it is determined by a majority of the Board, or a majority of its
members, who are not "interested persons" of the Fund, the Adviser or the
Company as that term is defined in the 1940 Act (hereinafter "disinterested
members"), that a material irreconcilable conflict exists, the Company and other
Participating Insurance Companies shall, at their expense and to the extent
reasonably practicable (as determined by a majority of the disinterested
directors), take whatever steps are necessary to remedy or eliminate the
irreconcilable material conflict, up to and including: (1) withdrawing the
assets allocable to some or all of the separate accounts from the Fund or any
Portfolio and reinvesting such assets in a different investment medium,
including (but not limited to) another Portfolio of the Fund, or submitting the
question whether such segregation should be implemented to a vote of all
affected contract owners and, as appropriate, segregating the assets of any
appropriate group (i.e., annuity contract owners, life insurance policy owners,
or variable contract owners of one or more Participating Insurance Companies)
that votes in favor of such segregation, or offering to the affected contract
owners the option of making such a change; and (2) establishing a new registered
management investment company or managed separate account.
7.4. If a material irreconcilable conflict arises because of a decision by
the Company to disregard contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Fund's election, to withdraw the affected Account's
investment in the Fund and terminate this Agreement with respect to such Account
(at the Company's expense); provided, however that such withdrawal and
termination shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the disinterested members
of the Board.
7.5. If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the Company will withdraw the
affected Account's investment in the Fund and terminate this Agreement with
respect to such Account within six months after the Board informs the Company in
writing that it has
10
<PAGE>
determined that such decision has created an irreconcilable material conflict;
provided, however, that such withdrawal and termination shall be limited to the
extent required by the foregoing material irreconcilable conflict as determined
by a majority of the disinterested members of the Board. Until the end of the
foregoing six month period, the Fund shall continue to accept and implement
orders by the Company for the purchase (and redemption) of shares of the Fund.
7.6. For purposes of Sections 7.3 through 7.5 of this Agreement, a
majority of the disinterested members of the Board shall determine whether any
proposed action adequately remedies any irreconcilable material conflict, but in
no event will the Fund be required to establish a new funding medium for the
Variable Products. The Company shall not be required by Section 7.3 to establish
a new funding medium for the Variable Products if an offer to do so has been
declined by vote of a majority of contract owners materially adversely affected
by the irreconcilable material conflict.
7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the 1940
Act or the rules promulgated thereunder with respect to mixed or shared funding,
or if the Fund obtains a Shared Exemptive Order which requires provisions that
are materially different from the provisions of this Agreement, then (a) the
Fund and/or the Participating Insurance Companies, as appropriate, shall take
such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T), as
amended, and Rule 6e-3, as adopted, or to the terms of the Shared Exemptive
Order, to the extent applicable; and (b) Sections 3.4, 3.5, 7.1, 7.2, 7.3, 7.4,
and 7.5 of this Agreement shall continue in effect only to the extent that terms
and conditions substantially identical to such Sections are contained in such
Rule(s) as so amended or adopted.
ARTICLE VIII. Indemnification
8.1. Indemnification By The Company
8.1(a) The Company agrees to indemnify and hold harmless the Fund and the
Adviser, each of their respective officers, employees, and Trustees or
Directors, and each person, if any, who controls the Fund or the Adviser within
the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified
Parties" and individually, "Indemnified Party," for purposes of this Section
8.1) against any and all losses, claims, damages, liabilities (including amounts
paid in settlement with the written consent of the Company) or litigation
(including legal and other expenses), to which the Indemnified Parties may
become subject under any statute, regulation, at common law or otherwise,
insofar as such losses, claims, damages, liabilities or expenses (or actions in
respect thereof) or settlements are related to the sale or acquisition of the
Fund's shares or the Variable Products and:
(i) arise out of or are based upon any untrue statements or alleged untrue
statements of any material fact contained in the registration statement or
prospectus for the Variable Products or contained in the Variable Products
or sales literature for the Variable Products (or any amendment or
supplement to any of the foregoing), or arise out of or are based upon the
omission or the alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, provided that this agreement to indemnify shall not apply as
to any Indemnified Party if such statement or omission or such alleged
statement or omission was made in reliance upon and in conformity with
information furnished to the Company by or on behalf of the Fund for use
in the registration statement or prospectus for the Variable Products or
in the Variable Products or sales literature (or any amendment or
supplement) or otherwise for use in connection with the sale of the
Variable Products or Fund shares; or
11
<PAGE>
(ii) arise out of or as a result of statements or representations (other
than statements or representations contained in the registration
statement, prospectus or sales literature of the Fund not supplied by the
Company, or persons under its control and other than statements or
representations authorized by the Fund or an Adviser) or unlawful conduct
of the Company or persons under its control, with respect to the sale or
distribution of the Variable Products or Fund shares; or
(iii) arise out of or as a result of any untrue statement or alleged
untrue statement of a material fact contained in a registration statement,
prospectus, or sales literature of the Fund or any amendment thereof or
supplement thereto or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, if such a statement or omission was
made in reliance upon and in conformity with information furnished to the
Fund by or on behalf of the Company; or
(iv) arise as a result of any failure by the Company to provide the
services and furnish the materials under the terms of this Agreement; or
(v) arise out of or result from any material breach of any representation
and/or warranty made by the Company in this Agreement or arise out of or
result from any other material breach of this Agreement by the Company, as
limited by and in accordance with the provisions of Sections 8.1(b) and
8.1(c) hereof.
8.1(b). The Company shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations or duties under this Agreement.
8.1(c). The Company shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Company in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Company of any
such claim shall not relieve the Company from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Company shall be entitled to participate,
at its own expense, in the defense of such action. The Company also shall be
entitled to assume the defense thereof with counsel satisfactory to the party
named in the action. After notice from the Company to such party of the
Company's election to assume the defense thereof, the Indemnified Party shall
bear the fees and expenses of any additional counsel retained by it, and the
Company will not be liable to such party under this Agreement for any legal or
other expenses subsequently incurred by such party independently in connection
with the defense thereof other than reasonable costs of investigation.
8.1(d). The Indemnified Parties will promptly notify the Company of the
commencement of any litigation or proceedings against them in connection with
the issuance or sale of the Fund shares or the Variable Products or the
operation of the Fund.
12
<PAGE>
8.2. Indemnification by the Adviser
8.2(a). The Adviser agrees, with respect to each Portfolio that it
manages, to indemnify and hold harmless the Company, each of its directors,
officers, and employees, and each person, if any, who controls the Company
within the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified
Parties" and individually, "Indemnified Party," for purposes of this Section
8.2) against any and all losses, claims, damages, liabilities (including amounts
paid in settlement with the written consent of the Adviser) or litigation
(including legal and other expenses) to which the Indemnified Parties may become
subject under any statute, regulation, at common law or otherwise, insofar as
such losses, claims, damages, liabilities or expenses (or actions in respect
thereof) or settlements are related to the sale or acquisition of shares of the
Portfolio that it manages or the Variable Products and:
(i) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the registration statement or
prospectus or sales literature of the Fund (or any amendment or supplement
to any of the foregoing), or arise out of or are based upon the omission
or the alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading,
provided that this agreement to indemnify shall not apply as to any
Indemnified Party if such statement or omission or such alleged statement
or omission was made in reliance upon and in conformity with information
furnished to the Fund by or on behalf of the Company for use in the
registration statement or prospectus for the Fund or in sales literature
(or any amendment or supplement) or otherwise for use in connection with
the sale of the Variable Products or Portfolio shares; or
(ii) arise out of or as a result of statements or representations (other
than statements or representations contained in the registration
statement, prospectus or sales literature for the Variable Products not
supplied by the Fund or persons under its control and other than
statements or representations authorized by the Company) or unlawful
conduct of the Fund, Adviser(s) or persons under their control, with
respect to the sale or distribution of the Variable Products or Portfolio
shares; or
(iii) arise out of or as a result of any untrue statement or alleged
untrue statement of a material fact contained in a registration statement,
prospectus, or sales literature covering the Variable Products, or any
amendment thereof or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statement or statements therein not misleading, if
such statement or omission was made in reliance upon information furnished
to the Company by or on behalf of the Fund; or
(iv) arise as a result of any failure by the Fund to provide the services
and furnish the materials under the terms of this Agreement; or
(v) arise out of or result from any material breach of any representation
and/or warranty made by the Adviser in this Agreement or arise out of or
result from any other material breach of this Agreement by the Adviser; as
limited by and in accordance with the provisions of Sections 8.2(b) and
8.2(c) hereof.
8.2(b). The Adviser shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as such
13
<PAGE>
may arise from such Indemnified Party's willful misfeasance, bad faith, or gross
negligence in the performance of such Indemnified Party's duties or by reason of
such Indemnified Party's reckless disregard of obligations and duties under this
Agreement.
8.2(c). The Adviser shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Adviser in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Adviser of any
such claim shall not relieve the Adviser from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Adviser will be entitled to participate, at
its own expense, in the defense thereof. The Adviser also shall be entitled to
assume the defense thereof, with counsel satisfactory to the party named in the
action. After notice from the Adviser to such party of the Adviser's election to
assume the defense thereof, the Indemnified Party shall bear the fees and
expenses of any additional counsel retained by it, and the Adviser will not be
liable to such party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection with the defense
thereof other than reasonable costs of investigation.
8.2(d). The Company agrees promptly to notify the Adviser of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of the Variable Products or
the operation of each Account.
8.3. Indemnification by the Fund
8.3(a). The Fund agrees to indemnify and hold harmless the Company, and
each of its directors and officers and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act (hereinafter
collectively, the "Indemnified Parties" and individually, "Indemnified Party,"
for purposes of this Section 8.3) against any and all losses, claims, damages,
liabilities (including amounts paid in settlement with the written consent of
the Fund) or litigation (including legal and other expenses) to which the
Indemnified Parties may become subject under any statute, regulation, at common
law or otherwise, insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof), litigation or settlements result from
the gross negligence, bad faith or willful misconduct of the Board or any member
thereof, are related to the operations of the Fund and:
(i) arise as a result of any failure by the Fund to provide the services
and furnish the materials under the terms of this Agreement; or
(ii) arise out of or result from any material breach of any representation
and/or warranty made by the Fund in this Agreement or arise out of or
result from any other material breach of this Agreement by the Fund, as
limited and in accordance with the provisions of Sections 8.3(b) and
8.3(a);
8.3(b). The Fund shall not be liable under this indemnification provision
with respect to any losses, claims, damages, liabilities or litigation incurred
or assessed against an Indemnified Party as may arise from such Indemnified
Party's gross negligence, bad faith, or willful misconduct the performance of
such Indemnified Party's duties or by reason of such Indemnified Party's
reckless disregard of obligations and duties under this Agreement.
14
<PAGE>
8.3(c). The Fund shall not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party unless such
Indemnified Party shall have notified the Fund in writing within a reasonable
time after the summons or other first legal process giving information of the
nature of the claim shall have been served upon such Indemnified Party (or after
such Indemnified Party shall have received notice of such service on any
designated agent), but failure to notify the Fund of any such claim shall not
relieve the Fund from any liability which it may have to the Indemnified Party
against whom such action is brought otherwise than on account of this
indemnification provision. In case any such action is brought against the
Indemnified Parties, the Fund will be entitled to participate, at its own
expense, in the defense thereof. The Fund also shall be entitled to assume the
defense thereof, with counsel satisfactory to the party named in the action.
After notice from the Fund to such party of the Fund's election to assume the
defense thereof, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the Fund will not be liable to such party
under this Agreement for any legal or other expenses subsequently incurred by
such party independently in connection with the defense thereof other than
reasonable costs of investigation.
8.3(d). The Company agrees promptly to notify the Fund of the commencement
of any litigation or proceedings against it or any of its respective officers or
directors in connection with this Agreement, the issuance or sale of the
Variable Products, with respect to the operation of either Account, or the sale
or acquisition of shares of the Fund.
ARTICLE IX. Applicable Law
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.
9.2. This Agreement shall be subject to the provisions of the 1933, 1934
and 1940 Acts, and the rules and regulations and rulings thereunder, including
such exemptions from those statutes, rules and regulations as the Securities and
Exchange Commission may grant (including, but not limited to, the Shared Funding
Exemptive Order) and the terms hereof shall be interpreted and construed in
accordance therewith.
ARTICLE X. Termination
10.1. This Agreement shall continue in full force and effect until the
first to occur of:
10.1(a) termination by any party for any reason by at least sixty (60)
days advance written notice delivered to the other parties; or
10.1(b) termination by the Company by written notice to the Fund and the
Adviser with respect to any Portfolio based upon the Company's determination
that shares of such Portfolio are not reasonably available to meet the
requirements of the Variable Products; or
10.1(c) termination by the Company by written notice to the Fund and the
Adviser with respect to any Portfolio in the event any of the Portfolio's shares
are not registered, issued or sold in accordance with applicable state and/or
federal law or such law precludes the use of such shares as the underlying
investment media of the Variable Products issued or to be issued by the Company;
or
10.1(d) termination by the Company by written notice to the Fund and the
Adviser with respect to any Portfolio in the event that such Portfolio ceases to
qualify as a Regulated Investment Company
15
<PAGE>
under Subchapter M of the Code or under any successor or similar provision, or
if the Company reasonably believes that the Fund may fail to so qualify; or
10.1(e) termination by the Company by written notice to the Fund and the
Adviser with respect to any Portfolio in the event that such Portfolio fails to
meet the diversification requirements specified in Article VI hereof; or
10.1(f) termination by the Fund by written notice to the Company if the
Fund shall determine, in its sole judgment exercised in good faith, that the
Company and/or its affiliated companies has suffered a material adverse change
in its business, operations, financial condition or prospects since the date of
this Agreement or is the subject of material adverse publicity, or
10.1(g) termination by the Company by written notice to the Fund and the
Adviser, if the Company shall determine, in its sole judgment exercised in good
faith, that either the Fund or the Adviser has suffered a material adverse
change in its business, operations, financial condition or prospects since the
date of this Agreement or is the subject of material adverse publicity; or
10.2. Notwithstanding any termination of this Agreement, the Fund shall,
at the option of the Company, continue to make available additional shares of
the Fund pursuant to the terms and conditions of this Agreement, for all
Variable Products in effect on the effective date of termination of this
Agreement (hereinafter referred to as "Existing Variable Products").
Specifically, without limitation, the owners of the Existing Variable Products
shall be permitted to direct reallocation of investments in the Portfolios of
the Fund, redemption of investments in the Portfolios of the Fund and/or
investment in the Portfolios of the Fund upon the making of additional purchase
payments under the Existing Variable Products. The parties agree that this
Section 10.2 shall not apply to any termination under Article VII and the effect
of such Article VII termination shall be governed by Article VII of this
Agreement.
10.3. The provisions of Article VIII Indemnification shall survive any
termination of this Agreement pursuant to this Article X Termination.
10.4. The Company shall not redeem Fund shares attributable to the
Variable Products (as distinct from Fund shares attributable to the Company's
assets held in the Account) except (i) as necessary to implement contract owner
initiated or approved transactions, or (ii) as required by state and/or federal
laws or regulations or judicial or other legal precedent of general application
(hereinafter referred to as a "Legally Required Redemption") or (iii) as
permitted by an order of the Securities and Exchange Commission pursuant to
Section 26(b) of the 1940 Act. Upon request, the Company will promptly furnish
to the Fund the opinion of counsel for the Company (which counsel shall be
reasonably satisfactory to the Fund) to the effect that any redemption pursuant
to clause (ii) above is a Legally Required Redemption. Furthermore, except in
cases where permitted under the terms of the Variable Products, the Company
shall not prevent contract owners from allocating payments to a Portfolio that
was otherwise available under the Variable Products without first giving the
Fund 90 days prior written notice of its intention to do so.
ARTICLE XI. Notices
Any notice shall be sufficiently given when hand delivered or sent by
registered or certified mail to the other party at the address of such party set
forth below or at such other address as such party may from time to time specify
in writing to the other party.
16
<PAGE>
If to the Fund:
The Palladian Trust
440 Lincoln Street
Worcester, MA 01653
Attention: George M. Boyd, Esq.
If to Adviser:
Allmerica Investment Management Company, Inc.
440 Lincoln Street
Worcester, MA 01653
Attention: Abigail M. Armstrong, Esq.
If to the Company:
First Allmerica Financial Life Insurance Company
440 Lincoln Street
Worcester, Massachusetts 01653
Attention: Richard M. Reilly, President
ARTICLE XII. Miscellaneous
12.1. A copy of the Fund's Agreement and Declaration of Trust, as may be
amended from time to time, is on file with the Secretary of the Commonwealth of
Massachusetts. Notice is hereby given that this instrument is executed by the
Fund's Trustees as Trustees and not individually, and the Fund's obligations
under this Agreement are not binding upon any of the Trustees or Shareholders of
the Fund, but are binding only upon the assets and property of the Fund.
12.2. Subject to the requirements of legal process and regulatory
authority, each party hereto shall treat as confidential the names and addresses
of the owners of the Variable Products and all information reasonably identified
as confidential in writing by any other party hereto and, except as permitted by
this Agreement, shall not disclose, disseminate or utilize such names and
addresses and other confidential information until such time as it may come into
the public domain without the express written consent of the affected party.
12.3. The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
12.4. This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
12.5. If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
12.6. Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the
Securities and Exchange Commission, the National Association of Securities
Dealers and state insurance regulators) and shall permit such authorities
17
<PAGE>
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
Notwithstanding the generality of the foregoing, each party hereto further
agrees to furnish the California Insurance Commissioner with any information or
reports in connection with services provided under this Agreement which such
Commissioner may request in order to ascertain whether the insurance operations
of the Company are being conducted in a manner consistent with the California
Insurance Regulations and any other applicable law or regulations.
12.7. The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and obligations
at law or in equity, which the parties hereto are entitled to under state and
federal laws.
12.8. This Agreement or any of the rights and obligations hereunder may
not be assigned by any party without the prior written consent of all parties
hereto; provided, however, that the Adviser may assign this Agreement or any
rights or obligations hereunder to any affiliate of or company controlled by or
under common control with the Adviser, if such assignee is duly licensed and
registered to perform the obligations of the Adviser under this Agreement.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
executed in its name and on its behalf by its duly authorized representative and
its seal to be hereunder affixed hereto as of the date specified above.
FIRST ALLMERICA FINANCIAL LIFE INSURANCE COMPANY
By: /s/ Richard M. Reilly
-------------------------------
Name: Richard M. Reilly
Title: Vice President
THE PALLADIAN TRUST
By: /s/ Thomas P. Cunningham
-------------------------------
Name: Thomas P. Cunningham
Title: Treasurer
ALLMERICA INVESTMENT MANAGEMENT COMPANY, INC.
By: /s/ Richard F. Betzler, Jr.
-------------------------------
Name: Richard F. Betzler, Jr.
Title: Vice President
18
<PAGE>
SCHEDULE A
SEPARATE ACCOUNTS AND VARIABLE PRODUCTS
Variable Annuity Products
Separate Account Product Name 1933 Act # 1940 Act #
- ---------------- ------------ ---------- ----------
Fulcrum Separate Account Fulcrum Annuity 333-16929 811-07947
<PAGE>
SCHEDULE B
Portfolios of
THE PALLADIAN TRUST
Value Portfolio
Growth Portfolio
International Growth Portfolio
Global Strategic Income Portfolio
Global Interactive/Telecomm Portfolio
<PAGE>
SCHEDULE C
PROXY VOTING PROCEDURES
The following is a list of procedures and corresponding responsibilities for the
handling of proxies and voting instructions relating to the Fund. The defined
terms herein shall have the meanings assigned in the Participation Agreement
except that the term "Company" shall also include the department or third party
assigned by the Company to perform the steps delineated below.
o The proxy proposals are given to the Company by the Fund as early as
possible before the date set by the Fund for the shareholder meeting to
enable the Company to consider and prepare for the solicitation of voting
instructions from owners of the Variable Products and to facilitate the
establishment of tabulation procedures. At this time the Fund will inform
the Company of the Record, Mailing and Meeting dates. This will be done
verbally approximately two months before meeting.
o Promptly after the Record Date, the Company will perform a "tape run," or
other activity, which will generate the names, addresses and number of
units which are attributed to each contract owner/policyholder (the
"Customer") as of the Record Date. Allowance should be made for account
adjustments made after this date that could affect the status of the
Customers' accounts as of the Record Date.
Note: The number of proxy statements is determined by the activities
described above. The Company will use its best efforts to call in the
number of Customers to the Fund, as soon as possible, but no later than
two weeks after the Record Date.
o The Fund's Annual Report must be sent to each Customer by the Company
either before or together with the Customers' receipt of voting
instruction solicitation material. The Fund will provide the last Annual
Report to the Company pursuant to the terms of Section 3.43 of the
Agreement to which this Schedule relates.
o The text and format for the Voting Instruction Cards ("Cards" or "Card")
is provided to the Company by the Fund. The Company, at its expense, shall
produce and personalize the Voting Instruction Cards. The Fund or its
affiliate must approve the Card before it is printed. Allow approximately
2-4 business days for printing information on the Cards. Information
commonly found on the Cards includes:
o name (legal name as found on account registration)
o address
o fund or account number
o coding to state number of units
o individual Card number for use in tracking and verification of votes
(already on Cards as printed by the Fund).
(This and related steps may occur later in the chronological process due to
possible uncertainties relating to the proposals.)
<PAGE>
o During this time, the Fund will develop, produce and pay for the Notice of
Proxy and the Proxy Statement (one document). Printed and folded notices
and statements will be sent to Company for insertion into envelopes
(envelopes and return envelopes are provided and paid for by the Company).
Contents of envelope sent to Customers by the Company will include:
o Voting Instruction Card(s)
o One proxy notice and statement (one document)
o return envelope (postage pre-paid by Company) addressed to the
Company or its tabulation agent
o "urge buckslip" - optional, but recommended. (This is a small,
single sheet of paper that requests Customers to vote as quickly as
possible and that their vote is important. One copy will be supplied
by the Fund.)
o cover letter - optional, supplied by Company and reviewed and
approved in advance by the Fund.
o The above contents should be received by the Company approximately 3-5
business days before mail date. Individual in charge at Company reviews
and approves the contents of the mailing package to ensure correctness and
completeness. Copy of this approval sent to the Fund.
o Package mailed by the Company.
* The Fund must allow at least a 15-day solicitation time to the
Company as the shareowner. (A 5-week period is recommended.)
Solicitation time is calculated as calendar days from (but not
including,) the meeting, counting backwards.
o Collection and tabulation of Cards begins. Tabulation usually takes place
in another department or another vendor depending on process used. An
often used procedure is to sort Cards on arrival by proposal into vote
categories of all yes, no, or mixed replies, and to begin data entry.
Note: Postmarks are not generally needed. A need for postmark information
would be due to an insurance company's internal procedure and has not been
required by the Fund in the past.
o Signatures on Card checked against legal name on account registration
which was printed on the Card.
Note: For Example, if the account registration is under "John A. Smith,
Trustee," then that is the exact legal name to be printed on the Card and
is the signature needed on the Card.
o If Cards are mutilated, or for any reason are illegible or are not signed
properly, they are sent back to Customer with an explanatory letter and a
new Card and return envelope. The mutilated or illegible Card is
disregarded and considered to be not received for purposes of vote
tabulation. Any Cards that have been "kicked out" (e.g. mutilated,
illegible) of the procedure are "hand verified," i.e., examined as to why
they did not complete the system. Any questions on those Cards are usually
remedied individually.
o There are various control procedures used to ensure proper tabulation of
votes and accuracy of that tabulation. The most prevalent is to sort the
Cards as they first arrive into categories depending upon their vote; an
estimate of how the vote is progressing may then be calculated. If the
initial estimates and the actual vote do not coincide, then an internal
audit of that vote should occur. This may entail a recount.
<PAGE>
o The actual tabulation of votes is done in units which is then converted to
shares. (It is very important that the Fund receives the tabulations
stated in terms of a percentage and the number of shares.) The Fund must
review and approve tabulation format.
o Final tabulation in shares is verbally given by the Company to the Fund on
the morning of the meeting not later than 10:00 a.m. Eastern time. The
Fund may request an earlier deadline if reasonable and if required to
calculate the vote in time for the meeting.
o A Certification of Mailing and Authorization to Vote Shares will be
required from the Company as well as an original copy of the final vote.
The Fund will provide a standard form for each Certification.
o The Company will be required to box and archive the Cards received from
the Customers. In the event that any vote is challenged or if otherwise
necessary for legal, regulatory, or accounting purposes, the Fund will be
permitted reasonable access to such Cards.
o All approvals and "signing-off" may be done orally, but must always be
followed up in writing.
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in Post-Effective Amendment No. 7
to the Registration Statement of the Fulcrum Trust (formerly the Palladian
Trust) on Form N-1A of our report dated March 16, 1998 on our audit of the
financial statements and financial highlights of the Value Portfolio, Growth
Portfolio, International Growth Portfolio, Global Strategic Income Portfolio
and Global Interactive/Telecomm Portfolio (five portfolios of the Palladian
Trust) which report is included in the Annual Report to Shareholders for the
year ended December 31, 1997 which is incorporated by reference in the
Post-Effective Amendment to the Registration Statement. We also consent to
the reference to our Firm under the caption "Financial Highlights" in the
Prospectus and Service Providers in the Statement of Additional Information.
Baltimore, Maryland PricewaterhouseCoopers LLP
July 1, 1998
<PAGE>
GLOBAL STRATEGIC INCOME
<TABLE>
<S> <C> <C> <C> <C>
1 YEAR RETURN 1/01/1997-12/31/97 (10.102300/10.044371) [to the power of (1/365/365)-1] = .58%
SINCE INCEPTION 1/31/1996-12/31/97 (10.102300/10.0000000) [to the power of (1/700/365)-1] = 1.02%
</TABLE>
GLOBAL STRATEGIC INCOME - 30 DAY YIELD
FROM DATE USED 12/1/97
TOTAL INCOME 11,440.62
TOTAL EXPENSES 3,034.74
MAXIMUM OFFERING PRICE 9.8789
SEC ADVERTISING YIELD 3.8298
GLOBAL INTERACTIVE/TELECOM
<TABLE>
<S> <C> <C> <C> <C>
1 YEAR RETURN 1/01/1997-12/31/97 (14.096556/10.048800) [to the power of (1/365/365)-1] = 40.28%
SINCE INCEPTION 1/31/1996-12/31/97 (14.096556/10.0000000) [to the power of (1/700/365)-1] = 40.97%
</TABLE>
VALUE PORTFOLIO
<TABLE>
<S> <C> <C> <C> <C>
1 YEAR RETURN 1/01/1997-12/31/97 (15.236370/11.512998) [to the power of (1/365/365)-1] = 32.34%
SINCE INCEPTION 1/31/1996-12/31/97 (15.236370/10.0000000) [to the power of (1/700/365)-1] = 52.36%
</TABLE>
GROWTH PORTFOLIO
<TABLE>
<S> <C> <C> <C> <C>
1 YEAR RETURN 1/01/1997-12/31/97 (11.950000/10.840000) [to the power of (1/365/365)-1] = 10.24%
SINCE INCEPTION 1/31/1996-12/31/97 (11.950000/10.0000000) [to the power of (1/700/365)-1] = 19.50%
</TABLE>
INTERNATIONAL GROWTH PORTFOLIO
<TABLE>
<S> <C> <C> <C> <C>
1 YEAR RETURN 1/01/1997-12/31/97 (9.966790/10.513358) [to the power of (1/365/365)-1] = -5.20%
SINCE INCEPTION 1/31/1996-12/31/97 (9.966790/10.0000000) [to the power of (1/646/365)-1] = -.33%
</TABLE>
<PAGE>
Exhibit 19
Page 1 of 3
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS:
That I, George J. Sullivan, Jr., of Peabody, Massachusetts, as a trustee
of THE PALLADIAN TRUST, do hereby make, constitute and appoint as my true and
lawful attorneys in fact Thomas P. Cunningham, George M. Boyd and Christopher
E. Palmer, or any one of them alone, for me and in my name, place and stead
to sign registration statements under the Securities Act of 1933 and/or the
Investment Company Act of 1940 and any and all amendments thereto executed on
behalf of THE PALLADIAN TRUST, and filed with the Securities and Exchange
Commission.
IN WITNESS WHEREOF, I have hereunto set my hand this 17th day of June,
1998.
/s/ George J. Sullivan, Jr.
------------------------------
Signature
On this 17th day of June, 1998, before me personally appeared George J.
Sullivan, Jr., to me known and known to me to be the person mentioned and
described in and who executed the foregoing instrument and he duly
acknowledged to me that he executed the same.
/s/ Irene Nosel
------------------------------
Notary Public
<PAGE>
Exhibit 19
Page 2 of 3
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS:
That I, Gordon Holmes, of Boston, Massachusetts, as a trustee of THE
PALLADIAN TRUST, do hereby make, constitute and appoint as my true and lawful
attorneys in fact Thomas P. Cunningham, George M. Boyd and Christopher E.
Palmer, or any one of them alone, for me and in my name, place and stead to
sign registration statements under the Securities Act of 1933 and/or the
Investment Company Act of 1940 and any and all amendments thereto executed on
behalf of THE PALLADIAN TRUST, and filed with the Securities and Exchange
Commission.
IN WITNESS WHEREOF, I have hereunto set my hand this 17th day of June,
1998.
/s/ Gordon Holmes
------------------------------
Signature
On this 17th day of June, 1998, before me personally appeared Gordon
Holmes, to me known and known to me to be the person mentioned and described in
and who executed the foregoing instrument and he duly acknowledged to me that he
executed the same.
/s/ Irene Nosel
------------------------------
Notary Public
<PAGE>
Exhibit 19
Page 3 of 3
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS:
That I, Thomas N. Dallape, of Irvine, California, as a trustee of THE
PALLADIAN TRUST, do hereby make, constitute and appoint as my true and lawful
attorneys in fact Thomas P. Cunningham, George M. Boyd and Christopher E.
Palmer, or any one of them alone, for me and in my name, place and stead to sign
registration statements under the Securities Act of 1933 and/or the Investment
Company Act of 1940 and any and all amendments thereto executed on behalf of THE
PALLADIAN TRUST, and filed with the Securities and Exchange Commission.
IN WITNESS WHEREOF, I have hereunto set my hand this 9th day of 4,
1998.
/s/ Thomas N. Dallape
------------------------------
Signature
On this 9th day of April, 1998, before me personally appeared Thomas N.
Dallape, to me known and known to me to be the person mentioned and described in
and who executed the foregoing instrument and he duly acknowledged to me that he
executed the same.
/s/ Teresa M. Forrest
------------------------------
Notary Public
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> VALUE PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 4,548,152
<INVESTMENTS-AT-VALUE> 5,095,033
<RECEIVABLES> 64,510
<ASSETS-OTHER> 1,722,459
<OTHER-ITEMS-ASSETS> 174,472
<TOTAL-ASSETS> 7,056,474
<PAYABLE-FOR-SECURITIES> 429,049
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 42,773
<TOTAL-LIABILITIES> 471,822
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 487,816
<SHARES-COMMON-PRIOR> 210,566
<ACCUMULATED-NII-CURRENT> 41,294
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 546,881
<NET-ASSETS> 6,584,652
<DIVIDEND-INCOME> 21,839
<INTEREST-INCOME> 46,168
<OTHER-INCOME> 0
<EXPENSES-NET> 26,713
<NET-INVESTMENT-INCOME> 41,294
<REALIZED-GAINS-CURRENT> 384,615
<APPREC-INCREASE-CURRENT> 494,905
<NET-CHANGE-FROM-OPS> 920,814
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 41,271
<DISTRIBUTIONS-OF-GAINS> 369,412
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 432,359
<NUMBER-OF-SHARES-REDEEMED> 57,726
<SHARES-REINVESTED> 30,421
<NET-CHANGE-IN-ASSETS> 5,684,321
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 49,534
<GROSS-ADVISORY-FEES> 4,734
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 150,629
<AVERAGE-NET-ASSETS> 3,171,977
<PER-SHARE-NAV-BEGIN> 10.88
<PER-SHARE-NII> .17
<PER-SHARE-GAIN-APPREC> 3.35
<PER-SHARE-DIVIDEND> .09
<PER-SHARE-DISTRIBUTIONS> .81
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.50
<EXPENSE-RATIO> .84
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> GROWTH PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 3,928,673
<INVESTMENTS-AT-VALUE> 4,205,105
<RECEIVABLES> 143,650
<ASSETS-OTHER> 146,282
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 4,495,037
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 31,506
<TOTAL-LIABILITIES> 31,506
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 373,580
<SHARES-COMMON-PRIOR> 133,074
<ACCUMULATED-NII-CURRENT> (3,384)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (374,694)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 267,942
<NET-ASSETS> 4,463,531
<DIVIDEND-INCOME> 2,085
<INTEREST-INCOME> 13,171
<OTHER-INCOME> 0
<EXPENSES-NET> 18,640
<NET-INVESTMENT-INCOME> (3,384)
<REALIZED-GAINS-CURRENT> (374,694)
<APPREC-INCREASE-CURRENT> 267,942
<NET-CHANGE-FROM-OPS> (110,136)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 391,597
<NUMBER-OF-SHARES-REDEEMED> 31,707
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 4,315,127
<ACCUMULATED-NII-PRIOR> 1,792
<ACCUMULATED-GAINS-PRIOR> 1,898
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4,192
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 127,114
<AVERAGE-NET-ASSETS> 2,077,862
<PER-SHARE-NAV-BEGIN> 10.84
<PER-SHARE-NII> (.02)
<PER-SHARE-GAIN-APPREC> 1.13
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.95
<EXPENSE-RATIO> .90
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> INTERNATIONAL GROWTH
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 3,320,007
<INVESTMENTS-AT-VALUE> 3,044,374
<RECEIVABLES> 0
<ASSETS-OTHER> 213,955
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 3,258,329
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 51,327
<TOTAL-LIABILITIES> 51,327
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 329,943
<SHARES-COMMON-PRIOR> 9,431
<ACCUMULATED-NII-CURRENT> 15,386
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (274,392)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (278,863)
<NET-ASSETS> 3,207,043
<DIVIDEND-INCOME> 20,929
<INTEREST-INCOME> 22,778
<OTHER-INCOME> 0
<EXPENSES-NET> 28,320
<NET-INVESTMENT-INCOME> 15,386
<REALIZED-GAINS-CURRENT> 4,533
<APPREC-INCREASE-CURRENT> (278,925)
<NET-CHANGE-FROM-OPS> (259,006)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 15,480
<DISTRIBUTIONS-OF-GAINS> 8,333
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 347,778
<NUMBER-OF-SHARES-REDEEMED> 29,718
<SHARES-REINVESTED> 2,452
<NET-CHANGE-IN-ASSETS> 3,109,615
<ACCUMULATED-NII-PRIOR> 1,792
<ACCUMULATED-GAINS-PRIOR> 1,898
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 9,242
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 112,857
<AVERAGE-NET-ASSETS> 1,587,484
<PER-SHARE-NAV-BEGIN> 10.33
<PER-SHARE-NII> .10
<PER-SHARE-GAIN-APPREC> (.63)
<PER-SHARE-DIVIDEND> (.05)
<PER-SHARE-DISTRIBUTIONS> (.03)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.72
<EXPENSE-RATIO> 1.78
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> GLOBAL STRATEGIC INCOME
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 2,219,985
<INVESTMENTS-AT-VALUE> 2,241,944
<RECEIVABLES> 0
<ASSETS-OTHER> 2,569,051
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 4,810,995
<PAYABLE-FOR-SECURITIES> 282,738
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,417,200
<TOTAL-LIABILITIES> 2,699,938
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 273,302
<SHARES-COMMON-PRIOR> 110,919
<ACCUMULATED-NII-CURRENT> 69,124
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (27,404)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 9,981
<NET-ASSETS> 2,699,938
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 99,446
<OTHER-INCOME> 0
<EXPENSES-NET> 30,322
<NET-INVESTMENT-INCOME> 69,124
<REALIZED-GAINS-CURRENT> (27,885)
<APPREC-INCREASE-CURRENT> 8,819
<NET-CHANGE-FROM-OPS> 50,058
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 29,924
<DISTRIBUTIONS-OF-GAINS> 12,484
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 181,202
<NUMBER-OF-SHARES-REDEEMED> 23,111
<SHARES-REINVESTED> 4,292
<NET-CHANGE-IN-ASSETS> 1,585,590
<ACCUMULATED-NII-PRIOR> 49,636
<ACCUMULATED-GAINS-PRIOR> (36,223)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 7,538
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 125,676
<AVERAGE-NET-ASSETS> 1,881,585
<PER-SHARE-NAV-BEGIN> 9.98
<PER-SHARE-NII> .36
<PER-SHARE-GAIN-APPREC> (.30)
<PER-SHARE-DIVIDEND> .11
<PER-SHARE-DISTRIBUTIONS> .05
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.88
<EXPENSE-RATIO> 3.67
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 5
<NAME> GLOBAL TELECOMM/PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 1,836,313
<INVESTMENTS-AT-VALUE> 2,234,365
<RECEIVABLES> 0
<ASSETS-OTHER> 1,035,309
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 3,269,674
<PAYABLE-FOR-SECURITIES> 230,802
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 22,431
<TOTAL-LIABILITIES> 253,233
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 226,425
<SHARES-COMMON-PRIOR> 59,414
<ACCUMULATED-NII-CURRENT> 9,035
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (9,487)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 398,052
<NET-ASSETS> 3,016,441
<DIVIDEND-INCOME> 11,128
<INTEREST-INCOME> 18,494
<OTHER-INCOME> 0
<EXPENSES-NET> 20,587
<NET-INVESTMENT-INCOME> 9,035
<REALIZED-GAINS-CURRENT> 142,691
<APPREC-INCREASE-CURRENT> 395,113
<NET-CHANGE-FROM-OPS> 537,804
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 9,124
<DISTRIBUTIONS-OF-GAINS> 142,692
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 174,816
<NUMBER-OF-SHARES-REDEEMED> 19,211
<SHARES-REINVESTED> 11,406
<NET-CHANGE-IN-ASSETS> 2,422,126
<ACCUMULATED-NII-PRIOR> (42,738)
<ACCUMULATED-GAINS-PRIOR> 5826
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4,050
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 101,700
<AVERAGE-NET-ASSETS> 1,401,781
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .08
<PER-SHARE-GAIN-APPREC> 3.95
<PER-SHARE-DIVIDEND> .04
<PER-SHARE-DISTRIBUTIONS> .67
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.32
<EXPENSE-RATIO> 1.47
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>