<PAGE>
------------------------------
ALLMERICA FINANCIAL SERVICES Semi-Annual Report
- --------------------------------------------------------------------------------
JUNE 30, 1998
THE FULCRUM FUND (SM)
[LOGO]
1998
[LOGO OF ALLMERICA FINANCIAL]
<PAGE>
Table of Contents
GENERAL INFORMATION ................................................... 2
A LETTER FROM THE CHAIRMAN ............................................ 3
PORTFOLIO PERFORMANCE SUMMARY ......................................... 4
PRODUCT PERFORMANCE SUMMARY ........................................... 6
DOMESTIC & INTERNATIONAL EQUITY MARKET OVERVIEW ....................... 8
The Global Interactive/Telecomm Portfolio ............................. 10
The International Growth Portfolio .................................... 11
The Growth Portfolio .................................................. 12
The Value Portfolio ................................................... 13
BOND & MONEY MARKET OVERVIEW .......................................... 14
The Strategic Income Portfolio/1/...................................... 16
FINANCIALS ............................................................ F-1
For further information, see the accompanying semi-annual report.
See Client Notices on page F-21.
/1/ Formerly The Global Strategic Income Portfolio. The Strategic Income
Portfolio effective June 8, 1998.
1
<PAGE>
GENERAL INFORMATION
OFFICERS OF FIRST ALLMERICA FINANCIAL LIFE INSURANCE
COMPANY (FAFLIC) AND ALLMERICA FINANCIAL LIFE
INSURANCE AND ANNUITY COMPANY (AFLIAC)
John F. O'Brien, President, CEO (FAFLIC) and
Chairman of the Board (AFLIAC)
Richard M. Reilly, President and CEO (AFLIAC)
Edward J. Parry, III, Vice President, CFO and Treasurer
Abigail M. Armstrong, Secretary and Counsel
INVESTMENT MANAGER
Allmerica Financial Investment Management Services, Inc.1
440 Lincoln Street, Worcester, MA 01653
GENERAL DISTRIBUTOR
Allmerica Investments, Inc.
440 Lincoln Street, Worcester, MA 01653
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
250 West Pratt Street, Baltimore, MD 21201-2304
ADMINISTRATOR, CUSTODIAN, TRANSFER AGENT
Investors Bank & Trust Company
200 Clarendon Street, Boston, MA 02116
LEGAL COUNSEL
Shea & Gardner
1800 Massachusetts Avenue, N.W., Washington D.C. 20036
OFFICERS OF THE PALLADIAN TRUST
George J. Sullivan, Jr., President
David J. Mueller, Vice President
Thomas P. Cunningham, Treasurer
George M. Boyd, Secretary
BOARD OF TRUSTEES OF THE PALLADIAN TRUST
George J. Sullivan, Jr. Chairman/2/
Tom N. Dallape/2/
Gordon Holmes/2/
PORTFOLIO MANAGERS
Allmerica Asset Management, Inc.
440 Lincoln Street, Worcester, MA 01653
The Strategic Income Portfolio3
Bee & Associates, Inc.
370 17/th/ Street, Suite 3560, Denver, CO 80202
The International Growth Portfolio
GAMCO Investors, Inc.
One Corporate Center, Rye, NY 10570-1434
The Value Portfolio
The Global Interactive/Telecomm Portfolio
Stonehill Capital Management, Inc./4/
767 Third Avenue, New York, NY 10017
The Growth Portfolio
/1/ Replaced Allmerica Investment Management Company, Inc. as Investment Manager
effective April 16, 1998.
/2/ Independent Trustees
/3/ Formerly The Global Strategic Income Portfolio.
The Strategic Income Portfolio effective June 8, 1998
/4/ Effective August 1, 1998, Pilgrim Baxter Analytic Investors, Inc. assumed
portfolio manager responsibilities.
2
<PAGE>
A Letter from the Chairman
[PHOTO APPEARS HERE]
Dear Client:
The first half of 1998 was marked by considerable divergence in the investment
world. European stock markets produced very strong investment returns while
Japan struggled and the emerging markets declined precipitously. The U.S.
exhibited very strong economic growth in the first quarter which led to a
continued rise in our stock market. As signs of slower economic growth developed
in the second quarter, the bond market rallied and long term interest rates
dropped to their lowest level in almost 30 years.
Even as the market continues to advance, many managers have noted that it is
being carried by relatively few stocks. For example, during the second quarter,
14 of the largest stocks increased over 20% while the remaining 486 stocks in
the S&P 500(R) actually declined almost 2%. These 14 stocks have an average P/E
ratio of over 42x trailing earnings and are thought to be highly overvalued by
some managers. These kinds of figures help explain the apparent poor performance
of many small- and mid-cap managers, as well as those who pursue a value style
of investing, compared to large-cap growth managers.
As investment professionals, we know that markets do not increase forever and
that different investment styles go in and out of favor. That is why we offer a
broad range of investment options and urge you to maintain a diversified
portfolio. With this in mind, we continue to look at ways to enhance the array
of investment managers and fund options available within the Trust.
Your Board has recommended several significant changes regarding the Trust since
we last reported to you. Most significantly, we have recommended, and
shareholders have approved, replacing the Trust's manager, Palladian Advisors,
Inc., with Allmerica Financial Investment Management Services, Inc. ("AFIMS").
We believe AFIMS brings a greater depth of talent and financial strength to
support the further growth and development of the Trust.
AFIMS, in turn, has worked closely with the Board to review all aspects of the
Trust and has recommended two changes to date. First, following shareholder
approval at the June 8, 1998 meeting, the name of The Global Strategic Income
Portfolio was changed to The Strategic Income Portfolio and the investment focus
was shifted from global bonds to predominantly U.S. fixed income securities. The
meeting also approved the contract with the new portfolio manager, Allmerica
Asset Management, Inc. Second, the portfolio manager to The Growth Portfolio was
replaced by Pilgrim Baxter Analytic Investors, Inc. effective August 1, 1998. We
are delighted with the selection of these new managers and look forward to
developing a strong partnership as the Trust continues to grow.
While replacing an Advisor or portfolio manager is never easy, your Board is
committed to making the necessary changes to provide you with high quality
investment services and to enhance those services whenever possible. We are
excited to work with AFIMS and will continue to look for ways to serve you
better.
On behalf of the Board of Trustees,
/s/ George J. Sullivan
George J. Sullivan, Jr.
Chairman of the Board
The Palladian Trust
3
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Portfolio Performance Summary
THE PALLADIAN TRUST
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AVERAGE ANNUAL TOTAL RETURNS AS OF 6/30/98
For easy reference, the total returns for the Portfolios are summarized below.
Keep in mind that these returns are net of all Portfolio charges. For returns
that reflect the deduction of product charges, please refer to the Product
Performance Summary on page 6.
<TABLE>
<CAPTION>
PORTFOLIO
INCEPTION 1 LIFE OF
PORTFOLIOS DATE YEAR PORTFOLIO
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
The Palladian Trust
The Global Interactive/Telecomm Portfolio 2/1/96 48.56% 24.99%
The International Growth Portfolio 3/26/96 -3.09% 2.66%
The Growth Portfolio 2/1/96 -1.56% 7.74%
The Value Portfolio 2/1/96 27.77% 24.43%
The Strategic Income Portfolio 2/1/96 4.59% 1.38%
</TABLE>
Portfolio performance returns given above reflect an investment in the
underlying Portfolios listed on the date of inception of each Portfolio.
Portfolio performance returns in this report are historical and are not
indicative of future results. The investment return and principal value of an
investment will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost.
4
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Performance
5
<PAGE>
Product Performance Summary
THE FULCRUM FUND(SM) VARIABLE ANNUITY
- -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS AS OF 6/30/98
For easy reference, the total returns for The Fulcrum Fund(SM) Variable Annuity
sub-accounts of FAFLIC and AFLIAC are summarized below. Keep in mind that these
returns are net of all product charges except for the annual contract fee. For
returns that do not reflect the deduction of product charges, please refer to
the Individual Portfolio Reviews beginning on page 10.
<TABLE>
<CAPTION>
WITHOUT SURRENDER AND WITH SURRENDER AND
MONTHLY POLICY CHARGES MONTHLY POLICY CHARGES
PORTFOLIO
INCEPTION 1 LIFE OF 1 LIFE OF
SUB-ACCOUNTS DATE YEAR PORTFOLIO YEAR PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
The Palladian Trust
The Global Interactive/Telecomm Portfolio 2/1/96 46.49% 23.17% 39.49% 21.61%
The International Growth Portfolio 3/26/96 -4.47% 1.17% -10.15% -0.76%
The Growth Portfolio 2/1/96 -2.96% 6.17% -8.73% 4.28%
The Value Portfolio 2/1/96 25.97% 2.62% 18.97% 21.05%
The Strategic Income Portfolio 2/1/96 3.11% -0.09% -3.02% -1.88%
</TABLE>
Performance returns given above are for The Fulcrum Fund(SM) Variable Annuity
sub-accounts of FAFLIC and AFLIAC and assume an investment in the underlying
portfolios listed on the date of inception of each Portfolio. All full
surrenders or withdrawals in excess of the free amount may be subject to a
declining sales charge. The maximum contingent deferred sales charge is 7.0%
Performance returns in this report are historical and are not indicative of
future results. The investment return and principal value of an investment will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost.
6
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Overview
7
<PAGE>
Domestic & International Equity Market Overview
1996: Despite a volatile marketplace, the U.S. stock market performs well.
Internationally, European countries post the most impressive gains.
1997: Robust economic growth, declining interest rates and low unemployment
produce a third consecutive year of unprecedented gains for the U.S.stock
market.
1998: Economic problems throughout Asia have drastically different effects on
both U.S. and international equity markets for the first half of 1998.
Entering 1998, a steady U.S. economy marked by low-to-declining interest rates,
little inflation and strong economic growth boded well for stocks overall.
However, economic problems throughout Asia had drastically different effects on
the market and now Asian markets are beginning to exert a restraining influence
on the U.S. and Europe as well.
During the first six months of 1998, the Asian crisis precipitated a flight to
quality as investors sought safety in big U.S. stocks. While this flight to
quality produced strong returns, especially for those companies with excellent
earnings and very little exposure to Asia, it also caused the market's
performance to become extremely tiered. Only a small number of stocks actually
earned sizable returns while most were relatively flat or posted losses. In
fact, during the second quarter, only a handful of stocks accounted for 100% of
the gain in S&P 500(R) Index.
The flight to quality also caused large-cap stocks to clearly beat out their
small- and mid-cap counterparts as investors sought out consistent earnings and
highly liquid stocks. Curiously, investors held fast to their large-cap bias
even in the face of rising valuations, as the average stock price rose to nearly
30 times company earnings.
But not all large caps stocks benefited. Performance was specifically
concentrated in the growth- oriented arena as different indices produced vastly
different results. The Russell 1000 Growth Index, for example, outperformed the
Russell 1000 Value Index 20.4% to 12.2%, respectively.
Sector performance was also mixed for the first part of 1998. Motor Vehicles was
a top performer as U.S. auto sales sped to record highs. Auto stocks also
benefited from corporate restructuring initiatives as Ford Motor Company,
spun-off Associates First Capital Corp., and Chrysler agreed to
A steady economy marked by low interest rates and strong economic growth
bodes well for stocks.
[PICTURE APPEARS HERE]
Declining commodity prices in oil, copper and coffee cause emerging
markets of Latin America to suffer.
JAN FEB MAR
- --------------------------------------------------------------------------------
1998
[PICTURE APPEARS HERE]
Uncertain about the effects of the Asian crisis, the Federal Reserve adopts a
wait and see approach to interest rates.
U.S. manufacturing suffers due to decreased demand from Asia.
8
<PAGE>
Domestic & International Market Overview
merge with Daimler Benz. PC manufacturers also benefited as corporate spending
both in the U.S. and Europe appeared to be on the rise.
But the economic turmoil in Asia also decreased the overall demand for U.S.
goods and services. This lower demand seemed to cause other sectors of the
market, particularly manufacturing, to suffer as the National Association of
Purchasing Management Index fell below 50 for the first time since 1996.
Separately, Energy Services, which was hurt by a drop in oil prices, also lost
ground.
International equity markets produced divergent results with developed markets
faring better than emerging markets. Europe, for instance, remained fairly
immune from the Asia crisis as it moved closer to monetary union. With key
European economies adopting stronger fiscal measures and companies embracing
U.S.-style efficiencies, a bull market is developing in many countries.
The Mediterranean region in particular generated strong results, although some
investors avoided Italy and Portugal where concerns about local inflation
surfaced. Overall, Germany and France led the pack in Europe as they both showed
signs of continued economic recovery. And the U.K. stock market performed well
as steady growth continued -- in the absence of inflation.
In contrast, the markets of Asia continued to struggle for the first six months
of the year. In Japan, a range of problems plagued the economy. While the stock
market started the year optimistically, decreasing demand for Japanese exports
from Pacific Basin countries, rising unemployment, growing corporate
bankruptcies and worsening banking problems, all drove the market lower by the
end of the second quarter.
But while the financial problems in this corner of the world were certainly
damaging, not all economies were affected equally. China, for example,
experienced a slowdown, but its currency along with the Hong Kong dollar
remained stable during the first half of the year.
Simultaneously with Asia's problems, Latin America had a rough time as well. Not
only has this part of the world felt the effects of the flight to quality by
foreign investors, but declining commodity prices in oil, coffee and copper have
particularly hurt the economies of Mexico, Brazil, Columbia and Chile.
Heading into the second half of 1998, low inflation, low interest rates and
generally sound economies bode well for U.S. and European equity markets.
At the same time, investors are worried about slower earnings growth in the U.S.
and the effects the financial turmoil in the Far East will have throughout the
world.
Many European [PICTURE APPEARS HERE] Auto stocks
stock markets fare well
benefit from from corporate
a developing restructuring.
bull market.
APR MAY JUN
- --------------------------------------------------------------------------------
[PICTURE APPEARS HERE] Large-cap U.S. [PICTURE APPEARS HERE] Investors remain
growth stocks cautious about
benefit from the effect the
the flight to financial turmoil
quality due in Asia will
to renewed have throughout
concerns in the world.
Asian markets.
9
<PAGE>
The Global Interactive/Telecomm Portfolio
With a return of 21.47% for the six-month period ended June 30, 1998, The Global
Interactive/Telecomm Portfolio outpaced the 17.72% return of the S&P 500(R)
Index for the same period.
For the first half of the year, positive performance for the Portfolio was
generated by media and telecommunications holdings. Specifically, industry
leader, Time Warner was rewarded for expanding its global franchises. And Viacom
benefited from its decision to sell its publishing division, Simon & Schuster
for $3.6 billion.
The Portfolio's cable television holdings also soared during the first six
months. Spurred by deregulation and technology, the global telecommunications
industry is being transformed as the telephone, computer and television all
converge into one all-purpose interactive entertainment instrument. Evidence of
this transformation was the prospective merger of AT&T and cable television
giant Tele-Communications, Inc., which added to results.
Longer-term, however, this deal creates further opportunity in an already
burgeoning field. Not only does it give AT&T the digital platform to compete in
the local telephone business, it also puts increasing pressure on every global
telecommunications company to create business combinations that will allow them
to provide a full range of services to their clients.
Given the rapid evolution of telephone and cable industry, the managers remain
convinced that focusing the portfolio's assets in the global markets makes sense
- -- and more importantly, should prove rewarding to shareholders over the
long-term.
INVESTMENT SUB-ADVISER
GAMCO Investors, Inc.
ABOUT THE FUND
Seeks to make money by investing globally in equity securities of companies that
develop, manufacture or sell interactive and/or telecommunications services and
products.
Average Annual Total Returns
PERIOD ENDED JUNE 30, 1998 1 YEAR LIFE OF FUND
The Global Interactive/Telecomm Portfolio 48.56% 24.99%
S&P 500(R)Index 30.16% 29.55%
Portfolio Composition
As of June 30, 1998, the sector allocation of net assets was:
Telephone Systems 21% [PICTURE APPEARS HERE]
Media-Broadcasting 18%
Entertainment & Leisure 17%
Publishing 15%
Cable 11%
Other 18%
Growth of a $10,000 Investment Since 1996
[GRAPH APPEARS HERE]
The Global Interactive/Telecomm Portfolio is a portfolio of The Palladian Trust.
Portfolio composition will vary over time.
Past performance is no guarantee of future results. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
The S&P 500(R) Index is an unmanaged index of 500 leading stocks. S&P500(R) is a
registered trademark of the Standard & Poor's Corporation. Performance numbers
are net of all fund operating expenses, but do not include insurance charges. If
performance information included the effect of these additional charges, it
would have been lower.
10
<PAGE>
The International Growth Portfolio
The International Growth Portfolio returned 6.48% for the six-month period ended
June 30, 1998, significantly lagging the 15.10% return of the Morgan Stanley
EAFE Index for the same period.
The Portfolio's disappointing performance stemmed from the ongoing economic
problems in Asia, which dragged down the performance of the Portfolio's
technology holdings. Specifically, this affected Electronic Resources, although
the manager believes that fundamentals of this company remain strong.
Another source of disappointment came from just one holding, Regent Inns, a U.K.
pub operator. During the first six months, this firm shocked the market by
changing the way it discloses performance information. The new method showed
business in a different light than was anticipated and its price suffered as a
result.
Despite these setbacks, the manager believes that the fundamentals of the
Portfolio are strong and over time investors will recognize their value. A case
in point is Physio Control International. Medtronic, another U.S. medical device
company, recently agreed to purchase Physio Control at a price which was 75%
higher than the manager's cost.
Selecta, a Swiss vending machine operator also provided strong performance. Up
more than 25% during the second quarter, this company is expanding through
acquisitions and joint ventures and is led by a capable management team.
Going forward, the managers remain cautious about Asian markets overall and
continue to stress investments in those companies that are well-run,
well-positioned and well-priced.
Average Annual Total Returns
PERIOD ENDED JUNE 30, 1998 1 YEAR LIFE OF FUND
The International Growth Portfolio -3.09% 2.66%
Morgan Stanley EAFE Index 4.55% 7.74%
INVESTMENT SUB-ADVISER
Bee & Associates, Inc.
ABOUT THE FUND
Seeks to make money by investing internationally for long-term capital
appreciation, primarily in equity securities.
Growth of a $10,000 Investment Since 1996
[GRAPH APPEARS HERE]
The International Growth Portfolio is a portfolio of The Palladian Trust.
Portfolio composition will vary over time.
Past performance is no guarantee of future results. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
The Morgan Stanley EAFE Index is an unmanaged index of European, Australian &
Far East stocks. Performance numbers are net of all fund operating expenses, but
do not include insurance charges. If performance information included the effect
of these additional charges, it would have been lower.
Portfolio Composition:
As of June 30, 1998, the country allocation of net assets was:
[GRAPH APPEARS HERE] United Kingdom 16%
Sweden 15%
Switzerland 14%
Norway 6%
Hong Kong 6%
Other 43%
11
<PAGE>
The Growth Portfolio
For the six-month period ended June 30, 1998, The Growth Portfolio increased
0.17% compared to the 17.72% return of the S&P 500(R) Index for the same period.
The key factor in this underperformance was the ongoing shift in investor
preference for liquid, large capitalization stocks, despite earnings concerns at
the expense of smaller companies. Unfortunately, the managers of the Fund
underestimated the effect of this flight to quality. Instead, they believed that
the strength in the dollar would penalize reported sales and profits of large
U.S. multinationals yet benefit domestic retail, service and restaurant
companies.
In positioning the Portfolio's assets, the managers reduced exposure in certain
sectors while increasing its exposure to others. Specifically, exposure was
reduced in the energy sector due to continuing pressure on oil prices.
Technology holdings were also reduced because of their considerable
vulnerability to Asian markets.
The managers selectively increased investments in restaurant stocks, believing
that this industry is undergoing consolidation and revitalization. Stocks such
as Au Bon Pain, Wall Street Deli and Landry's Seafood, while not helping
short-term performance, remain deeply undervalued. As such, the managers believe
they are likely candidates for either restructuring or strong price appreciation
due to their above-average growth potential.
For the remainder of the year, the managers anticipate a gradual shift from
overvalued large-cap stocks toward small-cap growth companies. While the exact
timing and impetus for this shift will be difficult to forecast, such a move
should benefit the Portfolio's holdings.
INVESTMENT SUB-ADVISER
Stonehill Capital Management, Inc.
ABOUT THE FUND
Seeks to make money by investing primarily in securities selected for their
long-term growth prospects.
Average Annual Total Returns
PERIOD ENDED JUNE 30, 1998 1 YEAR LIFE OF FUND
The Growth Portfolio -1.56% 7.74%
S&P 500(R)Index 30.16% 29.55%
Portfolio Composition
As of June 30, 1998, the sector allocation of net assets was:
Computer Software & [GRAPH APPEARS HERE]
Processing 15%
Restaurants 10%
Computers & Information 8%
Financial Services 7%
Telephone Systems 6%
Other 54%
Growth of a $10,000 Investment Since 1996
[GRAPH APPEARS HERE]
The Growth Portfolio is a portfolio of The Palladian Trust.
Portfolio composition will vary over time.
Past performance is no guarantee of future results. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
The S&P 500(R) Index is an unmanaged index of 500 leading stocks. S&P500(R) is a
registered trademark of the Standard & Poor's Corporation. Performance numbers
are net of all fund operating expenses, but do not include insurance charges. If
performance information included the effect of these additional charges, it
would have been lower.
12
<PAGE>
The Value Portfolio
For the six-month period ended June 30, 1998, The Value Portfolio posted an
11.10% return, trailing the 17.72% return of the S&P 500(R) Index for the same
period.
During the first half of the year, media, telecommunications and financial
holdings posted positive returns for the Portfolio. Leading media companies like
Time Warner benefited from moves to extend its global franchises. And cable
television stocks like Cablevision soared following the announcement of the
AT&T/TCI deal.
In managing the Fund, the managers follow a value-oriented strategy in
identifying industry and sector trends. They anticipate that the trend toward
consolidation will remain strong in many industry groups, particularly in
telecommunications. Here the biggest players are expected to jockey for position
in this globally de-regulated business. In the media sector, they also look
forward to big deals as leaders in this industry also move to extend their
global reach.
Looking ahead, the managers predict that the U.S. economy will be resistant,
though not immune, to the continuing Asian economic crisis. In fact, they even
suggest that Asia's problems may prolong investment uncertainty and restrain
stock prices, perhaps for the remainder of the year. Nonetheless, they believe
equities still offer investors superior risk adjusted returns relative to other
asset classes and that a value discipline will continue to reward shareholders.
AVERAGE ANNUAL TOTAL RETURNS
PERIOD ENDED JUNE 30, 1998 1 YEAR LIFE OF FUND
The Value Portfolio 27.77% 24.43%
S&P 500(R)Index 30.16% 29.55%
INVESTMENT SUB-ADVISER
GAMCO Investors, Inc.
ABOUT THE FUND
Seeks to make money by investing in companies that are believed to be
undervalued and may achieve significant capital appreciation.
GROWTH OF A $10,000 INVESTMENT SINCE 1996
[GRAPH APPEARS HERE]
The Value Portfolio is a portfolio of The Palladian Trust.
Portfolio composition will vary over time.
Past performance is no guarantee of future results. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
The S&P 500(R) Index is an unmanaged index of 500 leading stocks. S&P 500(R) is
a registered trademark of the Standard & Poor's Corporation. Performance numbers
are net of all fund operating expenses, but do not include insurance charges. If
performance information included the effect of these additional charges, it
would have been lower.
PORTFOLIO COMPOSITION:
As of June 30, 1998, the sector allocation of net assets was:
[GRAPH APPEARS HERE] Beverage, Food, & Tobacco 14%
Heavy Machinery 9%
Media-Broadcasting 7%
Insurance 7%
Entertainment & Leisure 6%
Other 57%
13
<PAGE>
Bond & Money Mark Overview
1996: Outlook for Federal Reserve policy affects U.S. bond market.
Long-predicted interest rate cuts, which would have fueled this market, never
occur.
1997: Low inflation and declining interest rates fuel the bond market, which
enjoys its best returns since 1995.
1998: Performance of the
U.S. bond market is significantly affected by the turmoil in Asia
for the first half of 1998.
In much the same fashion as the equity market, the performance of the U.S. bond
market was significantly affected by the turmoil in Asia during the first half
of 1998. Given this backdrop, some sectors of the market fared well, while
others struggled.
Starting off on a positive note, the U.S. economy appeared strong with Gross
Domestic Product (GDP) rising nearly 5.4% in the first quarter. Low inflation,
favorable credit conditions and higher equity valuations all drove this strong
economic growth and price stability. As growth continued, fixed income investors
grew nervous and anticipated that the Federal Reserve would raise interest rates
to ward off inflation.
But, as Asia's markets grew weaker, growth in the U.S. slowed. So, the Federal
Reserve adopted a "wait and see" approach regarding any moves toward tightening
or relaxing monetary policy.
Bond investors, on the other hand, quickly reacted to these developments.
Initially content, they worried that the economy was growing too fast only to
gain comfort from the slowing effect of the Asian crisis. Their concerns drove
interest rates which rose during the first quarter only to fall to new lows
during the second quarter.
Corporate credit issues also went on a roller coaster ride. The volatility in
foreign exchanges and global markets, caused a flight to quality preference for
U.S. Treasuries. Coupled with concerns about future growth of the U.S. economy
and the expected level of corporate profits, corporate bond spreads widened
causing investment grade corporates to lag comparable duration Treasuries by 24
basis points for the first six months of the year. Although spreads initially
narrowed from their levels in January, they reversed course again in June,
Ongoing financial crisis [PICTURE APPEAR HERES] Long-term U.S.
in Asia causes a flight Treasuries deliver
to quality for both their best performance
stock and bond investors. in years as investors
favor their inherent safety.
1998 JAN FEB MAR
- --------------------------------------------------------------------------------
[PICTURE APPEARS HERE] Uncertain about the
potential effects of
the Asian crisis on the
U.S., the Federal Reserve
adopts a wait and see
approach to changing
interest rates.
14
<PAGE>
BOND & MONEY MARKET OVERVIEW
widening to levels not seen in six years. Surprisingly, the actual credit
quality of U.S. issuers remained at its best level in years, as ratings upgrades
outpaced downgrades in the market, unlike previous periods of under-performance
in this sector.
The yield on the 30-year bond fell to 5.62%, its lowest level in decades. But it
fell only modestly for shorter term issues. Overall, Treasuries outperformed
selected fixed income instruments and contributed to the overall 3.93% gain in
the market as measured by the Lehman Aggregate Bond Index.
Despite a poor showing in the second quarter, the high yield market remained the
best-performing fixed income sector for the first half of 1998. As with
investment grade corporate bonds, high yield issues suffered during the second
quarter in part from the renewed uncertainty surrounding emerging markets as
well as from the diminished flows of cash into high yield bond funds.
The significant declines in long-term interest rates had a major impact on the
mortgage market. With some of the lowest rates in years, homeowners refinanced
in record numbers, causing prepayments on mortgage-backed securities to
increase, adversely affecting their returns.
Entering the second half of 1998, solid fundamentals remain firmly in place for
the U.S. bond market. As investors continue to watch for signs of recovery in
Asia, the Federal Reserve is likely to maintain its neutral monetary policy.
Given this scenario, the outlook for Treasuries and highly rated corporates
should remain particularly favorable.
[PICTURE APPEARS HERE] Mortgage-backed [PICTURE APPEARS HERE] Investors
securities lose continue to
ground amid watch of for
record mortgage signs recovery
refinancing. in Asia, causing
the outlook for
U.S. Treasuries
to remain
favorable.
APR MAY JUN
- --------------------------------------------------------------------------------
Investors flight [PICTURE APPEARS HERE] High-yield issues
to quality benefits suffer due to
highly rated renewed uncertainty
corporate bonds. in the emerging markets.
15
<PAGE>
The Strategic Income Portfolio
For the six-month period ended June 30, 1998, The Strategic Income Portfolio
posted a total return of 2.33% compared to the 3.27% return of the J.P. Morgan
Global Government Bond Index and the 3.92% return of the Lehman Brothers
Aggregate Bond Index for the same period.
During the first half of 1998, the bond market posted solid returns as interest
rates declined throughout most of the world. In Europe, rates generally declined
as fiscal policies moved toward the standard required for joining the European
Monetary Union (EMU). The U.S. economy stayed strong despite the economic,
fiscal and monetary crises which buffeted much of Asia. Against this backdrop,
U.S. Treasuries performed particularly well as investors sought the safety and
liquidity of high-quality U.S. investments.
As of April 1, 1998, Allmerica Asset Management, Inc. assumed sub-advisory
responsibilities for this Portfolio. At the same time, it was repositioned from
a global bond fund to one that invests predominantly in the U.S. The emphasis
will be on U.S. Treasuries, mortgage-backed securities and investment grade
corporate bonds. In addition, below investment grade bonds will be used for a
portion of the Portfolio as attractive opportunities arise.
Reflecting this new focus on domestic bond management, most foreign currency and
government bond holdings were sold off in the second quarter and the proceeds
were invested in U.S. Treasuries, Agency debentures, and Agency pass-through
mortgages.
As the size of the Portfolio increases, the managers plan to further diversify
assets into all sectors of the fixed income market.
INVESTMENT SUB-ADVISER
Allmerica Asset Management, Inc.
ABOUT THE FUND
Seeks to make money by investing for high current income and capital
appreciation in a variety of domestic and foreign fixed-income securities.
AVERAGE ANNUAL TOTAL RETURNS
PERIOD ENDED JUNE 30, 1998 1 YEAR LIFE OF FUND
The Strategic Income Portfolio 4.59% 1.38%
J.P. Morgan Global Government Bond Index, Unhedged 5.87% 4.22%
Portfolio Composition
As of June 30, 1998, the sector allocation of net assets was:
U.S. Government [GRAPH APPEARS HERE]
and Agency Obligations 97%
Other 3%
GROWTH OF A $10,000 INVESTMENT SINCE 1996
[GRAPH APPEARS HERE]
The Strategic Income Portfolio is a portfolio of The Palladian Trust.
Portfolio composition will vary over time.
Past performance is no guarantee of future results. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
The J.P. Morgan Global Government Bond Index, Unhedged, measures the global
government bond market of 13 countries. This index is weighted by market
capitalization. In the unhedged index, foreign currencies are converted into
dollars at spot rates. This gives the index exposure to both bond and currency
markets. Performance numbers are net of all fund operating expenses, but do not
include insurance charges. If performance information included the effect of
these additional charges, it would have been lower.
16
<PAGE>
THE VALUE PORTFOLIO
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS * June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
VALUE
SHARES (NOTE 2)
- --------------------------------------------------------------------------------
<S> <C>
COMMON STOCKS - 97.1%
BEVERAGES, FOOD & TOBACCO - 14.0%
6,000 Archer-Daniels-Midland Co. $ 116,250
1,877 Buenos Aires Embotelladora SA ADR * 2,581
4,000 Celestial Seasonings, Inc. * 198,000
4,000 Corn Products International, Inc. * 135,500
1,000 DEKALB Genetics Corp., Class B 94,625
8,000 General Cigar Holdings, Inc. * 79,000
1,501 General Cigar Holdings, Inc., Class B * 14,822
2,000 H.J. Heinz Co. 112,250
3,000 Kellogg Co. 112,688
7,000 Pepsi-Cola Puerto Rico Bottling Co. * 52,500
2,000 The Seagram Company, Ltd. 81,875
8,000 Whitman Corp. 183,500
-------------
1,183,591
-------------
HEAVY MACHINERY - 8.6%
3,000 Ampco-Pittsburgh Corp. 46,125
10,000 Baldwin Technology Co., Class A * 58,750
3,000 Banner Aerospace, Inc. * 38,625
3,000 Fedders Corp. 20,063
2,000 Fedders Corp., Class A 12,750
5,000 Flowserve Corp. * 123,125
5,000 Hussmann International, Inc. 92,813
1,000 IDEX Corp. 34,500
1,000 Modine Manufacturing Co. 34,625
4,500 SPS Technologies, Inc. * 263,250
-------------
724,626
-------------
MEDIA - BROADCASTING - 7.3%
6,000 BET Holdings, Inc., Class A * 377,625
2,000 Gray Communications Systems, Inc., Class B 61,750
3,000 Viacom, Inc., Class A * 175,500
-------------
614,875
-------------
INSURANCE - 6.9%
3,000 ALLIED Group, Inc. 140,438
2,500 American Bankers Insurance Group, Inc. 150,313
5,000 The Liberty Corp. 251,563
1,500 The Midland Co. 34,313
-------------
576,627
-------------
ENTERTAINMENT & LEISURE - 5.6%
3,000 Gaylord Entertainment Co. 96,750
2,000 GC Companies, Inc. * 103,750
1,500 Liberty Media Group, Class A * 58,219
5,000 Nashua Corp. * 78,125
5,000 Spelling Entertainment Group, Inc. * 46,875
1,000 Time Warner, Inc. 85,438
-------------
469,157
-------------
AUTOMOTIVE - 4.9%
500 A.O. Smith Corp. 25,844
10,000 Earl Scheib, Inc. * 77,500
4,000 ITT Industries, Inc. 149,500
1,000 Meritor Automotive, Inc. 24,000
1,000 Standard Motor Products, Inc. 22,250
6,000 Wynn's International, Inc. 115,500
-------------
414,594
-------------
OIL & GAS - 4.7%
1,000 Daniel Industries 19,000
3,000 Pennzoil Co. 151,875
1,000 RPC, Inc. 12,500
5,000 Southwest Gas Corp. 122,188
4,000 WICOR, Inc. 92,500
-------------
398,063
-------------
TELEPHONE SYSTEMS - 4.4%
4,000 Centennial Cellular Corp., Class A * 149,250
2,000 Frontier Corp. 63,000
4,000 Telephone and Data Systems, Inc. 157,500
1 U.S. West, Inc. * 40
-------------
369,790
-------------
CABLE - 4.0%
4,000 Cablevision Systems Corp. * 334,000
-------------
TRANSPORTATION - 3.9%
4,000 GATX Corp. 175,500
3,000 Hudson General Corp. 151,875
-------------
327,375
-------------
AEROSPACE & DEFENSE - 3.5%
2,500 Sequa Corp., Class B * 197,500
5,000 The Fairchild Corp., Class A * 100,938
-------------
298,438
-------------
MEDIA - BROADCASTING & PUBLISHING - 3.5%
6,000 MediaOne Group, Inc. * 263,625
500 The Times Mirror Co., Class A 31,438
-------------
295,063
-------------
COMMERCIAL SERVICES - 3.0%
3,571 EnviroSource, Inc. * 62,500
1,000 H&R Block, Inc. 42,125
7,000 Rollins, Inc. 143,500
-------------
248,125
-------------
RETAILERS - 2.9%
8,000 Lillian Vernon Corp. 133,000
2,500 The Neiman Marcus Group, Inc. * 108,594
-------------
241,594
-------------
</TABLE>
See Notes to Financial Statements.
- ---------------------------------------------------------
F-1
<PAGE>
THE VALUE PORTFOLIO
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS, Continued * June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
VALUE
SHARES (NOTE 2)
- --------------------------------------------------------------------------------
<S> <C>
PHARMACEUTICALS - 2.8%
8,000 Carter-Wallace, Inc. $ 144,500
10,000 IVAX Corp. * 92,500
-------------
237,000
-------------
ELECTRICAL EQUIPMENT - 2.3%
1,500 Aeroquip-Vickers, Inc. 87,563
1,000 AMETEK, Inc. 29,313
3,000 Kollmorgen Corp. 60,188
2,000 The Lamson & Sessions Co. * 12,375
-------------
189,439
-------------
FOOD RETAILERS - 2.1%
2,000 Giant Food, Inc., Class A 86,125
6,000 Ingles Markets, Inc., Class A 87,000
-------------
173,125
-------------
CHEMICALS - 1.6%
1,000 ARCO Chemical Co. * 57,375
750 Ferro Corp. 18,984
1,000 Monsanto Co. 55,875
-------------
132,234
-------------
FOREST PRODUCTS & PAPER - 1.4%
3,200 Greif Brothers Corp. 119,600
-------------
COMMUNICATIONS - 1.3%
4,000 COMSAT Corp. 113,250
-------------
LODGING - 1.3%
4,000 Aztar Corp. * 27,250
1,000 Hilton Hotels Corp. 28,500
7,000 Trump Hotels & Casino Resorts, Inc. * 49,438
-------------
105,188
-------------
ADVERTISING - 1.2%
5,000 Ackerley Group, Inc. 105,000
-------------
ELECTRIC UTILITIES - 1.2%
10,176 Citizens Utilities Co., Class B * 97,934
-------------
WATER COMPANIES - 1.1%
5,000 United Water Resources, Inc. 90,000
-------------
PUBLISHING - 1.1%
1,000 Lee Enterprises, Inc. 30,625
500 Media General, Inc., Class A 24,375
1,000 The McClatchy Company, Class A 34,625
-------------
89,625
-------------
METALS - 0.9%
2,000 Curtiss-Wright Corp. 78,375
-------------
REAL ESTATE - 0.8%
4,000 Catellus Development Corp. * 70,750
-------------
FINANCIAL SERVICES - 0.8%
2,500 The Pioneer Group, Inc. 65,781
-------------
TOTAL COMMON STOCKS 8,163,219
-------------
(Cost $7,183,554)
CONVERTIBLE PREFERRED STOCKS - 0.6%
TELEPHONE SYSTEMS - 0.6%
1,000 Sprint, 8.25% 57,813
-------------
TOTAL CONVERTIBLE PREFERRED STOCKS 57,813
-------------
(Cost $42,800)
TOTAL INVESTMENTS - 97.7% 8,221,032
-------------
(Cost $7,226,354)
NET OTHER ASSETS AND LIABILITIES - 2.3% 189,786
-------------
NET ASSETS - 100.0% $ 8,410,818
=============
</TABLE>
- --------------------------------------------------
ADR American Depositary Receipt
* Non income producing security.
FEDERAL INCOME TAX INFORMATION (NOTE 2)
At June 30, 1998, the aggregate cost of investment securities for tax purposes
was $7,226,354. Net unrealized appreciation (depreciation) aggregated $994,678,
of which $1,323,738 related to appreciated investment securities and $(329,060)
related to depreciated investment securities.
OTHER INFORMATION
For the six months ended June 30, 1998, the aggregate cost of purchases and the
proceeds of sales, other than from short-term investments, amounted to
$5,259,605 and $2,981,092 of non-governmental issuers, respectively.
See Notes to Financial Statements.
---------------------------------------------------------
F-2
<PAGE>
THE GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS . June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
VALUE
SHARES (NOTE 2)
- --------------------------------------------------------------------------------
COMMON STOCKS - 110.1%
<S> <C> <C>
COMPUTER SOFTWARE & PROCESSING - 15.2%
2,000 4Front Technologies, Inc. * $ 25,750
3,800 Applied Voice Technology, Inc. * 87,400
627 CBT Group PLC ADR * 33,545
4,000 Data Dimensions, Inc. * 68,250
2,000 FileNet Corp. * 57,750
1,000 Lason, Inc. * 54,500
1,000 Leasing Solutions, Inc. * 28,750
5,000 Meridian Data, Inc. * 24,375
4,000 NetSpeak Corp. * 49,750
4,000 Platinum Technology, Inc. * 114,250
4,200 Powerhouse Technologies, Inc. * 41,213
22,400 Registry Magic, Inc. * 176,400
1,000 Rogue Wave Software, Inc. * 7,875
----------
769,808
----------
RESTAURANTS - 10.0%
50 CKE Restaurants, Inc. 2,063
3,900 Landry's Seafood Restaurants, Inc. * 70,565
3,000 Logan's Roadhouse, Inc. * 62,250
15,375 New York Restaurant Group (A) * 148,369
22,000 Total Entertainment Restaurant Corp. * 105,875
27,300 Wall Street Deli, Inc. * 117,731
----------
506,853
----------
COMPUTERS & INFORMATION - 8.4%
2,500 Apex PC Solutions, Inc. * 69,688
1,000 Cisco Systems, Inc. * 92,063
4,000 DAOU Systems, Inc. * 91,500
1,000 Dell Computer Corp. * 92,813
2,000 NeoMagic Corp. * 31,000
3,500 SMART Modular Technologies, Inc. * 51,188
----------
428,252
----------
FINANCIAL SERVICES - 6.5%
4,000 Delta Financial Corp. * 73,500
1,000 Hambrecht & Quist Group * 36,313
14,000 Southern Pacific Funding Corp. * 219,625
----------
329,438
----------
TELEPHONE SYSTEMS - 6.0%
2,000 Brightpoint, Inc. * 29,000
1,000 Sprint Corp. 70,500
14,000 Tel-Save Holdings, Inc. * 206,500
----------
306,000
----------
FOOD RETAILERS - 5.6%
26,000 Au Bon Pain Co., Inc., Class A * 286,000
----------
TEXTILES, CLOTHING & FABRICS - 5.4%
25,000 Frisby Technologies, Inc. * 162,500
2,000 Jones Apparel Group, Inc. * 73,125
2,000 Maxwell Shoe Company, Inc. * 39,750
----------
275,375
----------
TRANSPORTATION - 5.2%
2,000 Coach USA, Inc. * 91,250
2,000 Fleetwood Enterprises, Inc. * 80,000
12,500 Transit Group, Inc. * 95,313
----------
266,563
----------
COMMERCIAL SERVICES - 5.2%
3,000 Forensic Technologies International Corp. * 51,000
3,000 Labor Ready, Inc. * 90,563
3,000 Pittston Brink's Group 110,625
500 Tetra Tech, Inc. * 12,125
----------
264,313
----------
HEAVY MACHINERY - 4.7%
2,500 Advanced Energy Industries, Inc. * 29,063
1,000 Terex Corp. * 28,500
19,900 TurboChef, Inc. * 179,100
----------
236,663
----------
BANKING - 4.5%
3,000 The Chase Manhattan Corp. * 226,500
----------
PHARMACEUTICALS - 4.4%
1,000 Aviron * 31,188
2,000 BioChem Pharma, Inc. ADR * 53,000
7,000 The Immune Response Corp. * 105,000
5,000 Zila, Inc. * 36,250
----------
225,438
----------
ENTERTAINMENT & LEISURE - 4.4%
1,000 Anchor Gaming * 77,625
4,500 Family Golf Centers, Inc. * 113,899
2,000 Grand Casinos, Inc. * 33,500
----------
225,024
----------
METALS - 3.5%
7,000 Mobile Mini, Inc. * 70,000
2,000 Texas Industries, Inc. 106,000
----------
176,000
----------
ELECTRONICS - 3.4%
300 Flextronics International, Ltd. * 13,050
4,000 Micron Technology, Inc. * 99,250
2,000 World Access, Inc. * 60,000
----------
172,300
----------
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE>
THE GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS, Continued. June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value
Shares (Note 2)
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMUNICATIONS - 3.3%
4,000 ECI Telecommunications, Ltd., Ordinary Shares $ 151,500
1,500 P-COM, Inc.* 13,734
-----------
165,234
-----------
AUTOMOTIVE - 3.1%
6,000 Coachmen Industries, Inc. * 156,750
-----------
MEDICAL SUPPLIES - 2.3%
24,000 LaserSight, Inc. * 114,749
-----------
MEDIA - BROADCASTING & PUBLISHING - 2.0%
2,300 Metro Networks, Inc. * 99,188
-----------
HOME CONSTRUCTION, FURNISHINGS & APPLIANCES - 1.9%
2,000 Maytag Corp. 98,750
-----------
RETAILERS - 1.7%
3,500 Garden Ridge Corp. * 67,813
1,000 The Maxim Group, Inc. * 19,875
-----------
87,688
-----------
INDUSTRIAL - DIVERSIFIED - 1.2%
16,000 Ontro, Inc. * 62,000
-----------
AIRLINES - 1.2%
1,000 Continental Airlines, Inc., Class B * 60,875
-----------
APPAREL RETAILERS - 1.0%
1,500 Pacific Sunwear of California * 52,500
-----------
TOTAL COMMON STOCKS 5,592,261
-----------
(Cost $5,627,304)
WARRANTS - 0.5%
INDUSTRIAL - DIVERSIFIED - 0.5%
36,000 Ontro, Inc., expires 05/12/2001 * $ 24,750
-----------
COMPUTER SOFTWARE & PROCESSING - 0.0%
5,000 Marine Management Systems, Inc., expires
04/08/2002 * 469
-----------
TOTAL WARRANTS 25,219
-----------
(Cost $4,100)
TOTAL INVESTMENTS - 110.6% 5,617,480
-----------
(Cost $5,631,404)
NET OTHER ASSETS AND LIABILITIES - (10.6)% (537,276)
-----------
NET ASSETS - 100.0% $ 5,080,204
===========
</TABLE>
- ---------------------------------------------------
ADR American Depositary Receipt
(A) Security is fair valued by management (Note 2).
* Non income producing security.
FEDERAL INCOME TAX INFORMATION (NOTE 2)
At June 30, 1998, the aggregate cost of investment securities for tax purposes
was $5,631,404. Net unrealized appreciation (depreciation) aggregated $(13,924),
of which $327,312 related to appreciated investment securities and $(341,236)
related to depreciated investment securities.
OTHER INFORMATION
For the six months ended June 30, 1998, the aggregate cost of purchases and the
proceeds of sales, other than from short-term investments, amounted to
$18,648,055 and $17,270,683 of non-governmental issuers, respectively.
See Notes to Financial Statements.
F-4
<PAGE>
THE INTERNATIONAL GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS . June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 2)
- --------------------------------------------------------------------------------
COMMON STOCKS - 85.6%
<S> <C> <C>
UNITED KINGDOM - 15.5%
17,500 JBA Holdings PLC $ 181,162
46,000 McBride PLC 133,259
45,200 Victrex PLC 155,846
-----------
470,267
-----------
SWEDEN - 14.8%
8,200 Investment AB Bure 130,632
10,500 IRO AB 138,297
12,325 Nobel Biocare AB 183,979
-----------
452,908
-----------
SWITZERLAND - 13.9%
460 PubliGroupe SA 142,885
95 Stratec Holding AB, Class B - Registered 133,732
675 The Selecta Group - Registered 144,538
-----------
421,155
-----------
NORWAY - 6.2%
20,000 Norsk Lotteridrift ASA * 67,876
25,000 P4 Radio Hele Norge ASA 119,110
-----------
186,986
-----------
HONG KONG - 5.7%
512,750 Lung Kee (Bermuda) Holdings 100,591
1,833,000 Sinocan Holdings, Ltd. 73,339
-----------
173,930
-----------
PORTUGAL - 5.5%
3,600 Investec-Consultoria Internacional, SA 165,744
-----------
ISRAEL - 4.8%
4,000 Orbotech, Ltd. * $ 145,500
-----------
UNITED STATES - 4.6%
5,300 Physio-Control International Corp. * 139,457
-----------
NETHERLANDS - 4.4%
1,875 Van Melle NV 135,174
-----------
CANADA - 3.9%
18,000 Danier Leather, Inc. * 117,717
-----------
ITALY - 3.2%
6,400 Fila Holdings SPA ADR * 96,000
-----------
SINGAPORE - 2.9%
130,000 Electronic Resources, Ltd. 88,777
-----------
INDONESIA - 0.2%
180,000 Pt Davomas Abadi 6,143
-----------
TOTAL COMMON STOCKS 2,599,758
-----------
(Cost $2,927,622)
TOTAL INVESTMENTS - 85.6% 2,599,758
-----------
(Cost $2,927,622)
NET OTHER ASSETS AND LIABILITIES - 14.4% 438,135
-----------
NET ASSETS - 100.0% $ 3,037,893
===========
</TABLE>
- ----------------------------------
ADR American Depositary Receipt
* Non income producing security.
Industry Concentration of Common Stocks
---------------------------------------
as a Percentage of Net Assets:
------------------------------
Medical Supplies 15.0%
Media - Broadcasting & Publishing 9.4
Miscellaneous 7.9
Electronics 7.7
Computer Software & Processing 6.0
Chemicals 5.1
Food Retailers 4.8
Advertising 4.7
Beverages, Food & Tobacco 4.7
Household Products 4.4
Financial Services 4.3
Retailers 3.9
Textiles, Clothing & Fabrics 3.2
Forest Products & Paper 2.4
Entertainment & Leisure 2.1
----
85.6%
====
FEDERAL INCOME TAX INFORMATION (NOTE 2)
At June 30, 1998, the aggregate cost of investment securities for tax purposes
was $2,927,622. Net unrealized appreciation (depreciation) aggregated
$(327,864), of which $335,337 related to appreciated investment securities and
$(663,201) related to depreciated investment securities.
OTHER INFORMATION
For the six months ended June 30, 1998, the aggregate cost of purchases and the
proceeds of sales, other than from short-term investments, amounted to $844,524
and $1,446,670 of non-governmental issuers, respectively.
See Notes to Financial Statements.
F-5
<PAGE>
THE INTERNATIONAL GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS, Continued . June 30, 1998 (Unaudited)
FORWARD FOREIGN CURRENCY CONTRACT SOLD:
<TABLE>
UNREALIZED
CURRENCY CONTRACT TO SETTLEMENT CONTRACT AT IN EXCHANGE APPRECIATION
VALUE DELIVER DATE VALUE FOR U.S.$ (DEPRECIATION)
------- --------- --------- --------- ---------- --------------
<S> <C> <C> <C> <C> <C>
36,593 GBP 07/06/98 $61,079 $60,978 $(101)
</TABLE>
- -----------------
GBP British Pound
See Notes to Financial Statements.
F-6
<PAGE>
THE STRATEGIC INCOME PORTFOLIO
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS * June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
MOODY'S VALUE
PAR VALUE RATINGS (NOTE 2)
- --------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS - 97.3%
U.S. TREASURY NOTES - 29.6%
$ 75,000 5.63%, 02/28/2001 Aaa $ 75,199
15,000 5.75%, 08/15/2003 Aaa 15,166
230,000 5.88%, 09/30/2002 Aaa 232,947
90,000 6.63%, 05/15/2007 Aaa 96,750
----------
420,062
----------
U.S. TREASURY BOND - 14.2%
160,000 7.63%, 02/15/2025 Aaa 201,500
----------
FEDERAL AGRICULTURE MORTGAGE
CORPORATION - 10.9%
150,000 6.92%, 02/10/2001 Aaa 154,500
----------
TENNESSEE VALLEY AUTHORITY - 10.8%
150,000 6.50%, 08/20/2001 AAA (A) 153,540
----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 10.7%
150,000 7.00%, 08/13/1998 Aaa 151,828
----------
STUDENT LOAN MARKETING ASSOCIATION - 10.6%
150,000 6.05%, 09/14/2000 Aaa $ 151,078
----------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 10.5%
150,000 6.50%, 08/19/1998 Aaa 149,297
----------
TOTAL U.S. GOVERNMENT
AND AGENCY OBLIGATIONS 1,381,805
----------
(Cost $1,371,031)
TOTAL INVESTMENTS - 97.3% 1,381,805
----------
(Cost $1,371,031)
NET OTHER ASSETS AND LIABILITIES - 2.7% 38,456
----------
NET ASSETS - 100.0% $1,420,261
==========
</TABLE>
FEDERAL INCOME TAX INFORMATION (NOTE 2)
At June 30, 1998, the aggregate cost of investment securities for tax purposes
was $1,371,031. Net unrealized appreciation (depreciation) aggregated $10,774,
of which $11,512 related to appreciated investment securities and $(738) related
to depreciated investment securities.
OTHER INFORMATION
For the six months ended June 30, 1998, the aggregate cost of purchases and the
proceeds of sales, other than from short-term investments, amounted to
$2,035,594 and $3,293,977 of non-U.S. governmental issuers, respectively, and
$2,118,925 and $1,749,725 of U.S. Government and Agency issuers, respectively.
Moody's Ratings: Aaa 90%
Standard & Poor's Ratings: AAA 10%
---
100%
- -------------------------------
(A) Standard & Poor's credit ratings are used in the absence of a rating by
Moody's Investors Service, Inc.
See Notes to Financial Statements.
- -----------------------------------------------------------
F-7
<PAGE>
THE GLOBAL INTERACTIVE/TELECOMM PORTFOLIO
PORTFOLIO OF INVESTMENTS . June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 2)
- --------------------------------------------------------------------------------
<S> <C>
COMMON STOCKS - 99.0%
TELEPHONE SYSTEMS - 20.7%
500 BC Telecom, Inc. $ 18,685
1,000 Cable & Wireless PLC ADR 36,875
4,000 Centennial Cellular Corp., Class A* 149,250
1,500 Century Communications Corp., Class A * 28,125
1,500 Century Telephone Enterprises, Inc. 68,813
1,800 Cia. de Telecomunicaciones de Chile SA ADR 36,563
4,000 Frontier Corp 126,000
1,000 GST Telecommunications, Inc. * 14,438
500 Iridium World Communications Ltd. * 26,594
2,000 Loral Space & Communications Ltd. * 56,500
5,000 Rogers Cantel Mobile Communications, Inc.,
Class B ADR * 62,500
1,000 Southern New England Telecommunications Corp. 65,500
4,000 Telephone and Data Systems, Inc. 157,500
1 U.S. West, Inc. * 11
----------
847,354
----------
MEDIA - BROADCASTING - 18.2%
2,500 BET Holdings, Inc., Class A * 157,344
1,530 Chris-Craft Industries, Inc. * 83,672
1,000 Granite Broadcasting Corp. 60,250
1,500 Gray Communications Systems, Inc., Class B 46,313
1,000 Time Warner, Inc. 85,438
4,378 USA Networks, Inc. * 109,997
3,500 Viacom, Inc., Class A * 204,750
----------
747,764
----------
ENTERTAINMENT & LEISURE - 16.5%
5,000 Ascent Entertainment Group, Inc. * 55,625
2,000 GC Companies, Inc. * 103,750
2,400 King World Productions, Inc. * 61,200
4,500 Liberty Media Group, Class A * 174,656
800 Pathe SA 156,792
1,500 PolyGram NV, NY Shares 76,313
5,000 Spelling Entertainment Group, Inc. * 46,875
----------
675,211
----------
PUBLISHING - 15.2%
2,000 Lee Enterprises, Inc. 61,250
2,000 Media General, Inc., Class A 97,500
2,000 Pulitzer Publishing Co. 178,500
2,000 The McClatchy Company, Class A 69,250
1,000 The McGraw-Hill Companies, Inc. 81,563
500 The Times Mirror Co., Class A * 31,438
1,500 Tribune Co. 103,219
----------
622,720
----------
CABLE - 10.6%
2,000 Cablevision Systems Corp. * 167,000
4,000 MediaOne Group, Inc. * 175,750
2,000 Tele-Communications, Inc., Class A * 76,875
1,000 United International Holdings, Inc. * 16,000
----------
435,625
----------
COMMUNICATIONS - 5.9%
1,000 American Tower Systems Corp., Class A * 24,938
1,000 COMSAT Corp. 28,313
1,000 Globalstar Telecommunications, Ltd. * 27,000
3,500 Price Communications Corp. * 53,594
12,000 Rogers Communications, Inc., Class B * 108,000
----------
241,845
----------
FINANCIAL SERVICES - 2.9%
6,000 Tele-Communications TCI Ventures Group,
Class A * 120,375
----------
INSURANCE - 2.5%
2,000 The Liberty Corp. 100,625
----------
RETAILERS - 2.4%
800 CDnow, Inc. * 16,100
5,000 Lillian Vernon Corp. 83,125
----------
99,225
----------
ADVERTISING - 2.1%
3,500 Ackerley Group, Inc. 73,500
500 Havas SA ADR 10,606
----------
84,106
----------
ELECTRIC UTILITIES - 1.4%
6,045 Citizens Utilities Co., Class B * 58,183
----------
ELECTRONICS - 0.6%
300 Sony Corp. ADR 25,819
----------
TOTAL COMMON STOCKS 4,058,852
----------
(Cost $3,219,544)
</TABLE>
F-8 See Notes to Financial Statements.
<PAGE>
THE GLOBAL INTERACTIVE/TELECOMM PORTFOLIO
PORTFOLIO OF INVESTMENTS, Continued . June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 2)
- --------------------------------------------------------------------------------
<S> <C>
CONVERTIBLE PREFERRED STOCKS - 2.6%
TELEPHONE SYSTEMS - 1.4%
1,000 Sprint, 8.25% $ 57,813
----------
ELECTRIC UTILITIES - 1.2%
1,000 Citizens Utilities Co., 5.00% 47,250
----------
TOTAL CONVERTIBLE PREFERRED STOCKS 105,063
----------
(Cost $84,049)
RIGHTS - 0.0%
TELEPHONE SYSTEMS - 0.0%
95 Cia. de Telecomunicaciones de Chile SA ADR * $ 32
----------
TOTAL RIGHTS 32
----------
(Cost $0)
TOTAL INVESTMENTS - 101.6% 4,163,947
----------
(Cost $3,303,593)
NET OTHER ASSETS AND LIABILITIES - (1.6)% (65,949)
----------
NET ASSETS - 100.0% $ 4,097,998
==========
</TABLE>
______________________________________
ADR American Depositary Receipt
* Non income producing security.
FEDERAL INCOME TAX INFORMATION (NOTE 2)
At June 30, 1998, the aggregate cost of investment securities for tax purposes
was $3,303,593. Net unrealized appreciation (depreciation) aggregated $860,354,
of which $935,524 related to appreciated investment securities and $(75,170)
related to depreciated investment securities.
OTHER INFORMATION
For the six months ended June 30, 1998, the aggregate cost of purchases and the
proceeds of sales, other than from short-term investments, amounted to
$2,402,375 and $1,205,147 of non-governmental issuers, respectively.
______________________________________ F-9
<PAGE>
THE PALLADIAN TRUST
STATEMENTS OF ASSETS AND LIABILITIES . June 30, 1998 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Global
International Strategic Interactive /
Value Growth Growth Income Telecomm
Portfolio Portfolio Portfolio Portfolio Portfolio
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments (Note 2):
Investments at cost......................... $ 7,226,354 $ 5,631,404 $ 2,927,622 $ 1,371,031 $ 3,303,593
Net unrealized appreciation (depreciation).. 994,678 (13,924) (327,864) 10,774 860,354
------------- ------------- ------------- ------------- ------------
Total investments at value.......... 8,221,032 5,617,480 2,599,758 1,381,805 4,163,947
Cash (interest bearing)........................ 182,398 -- 344,937 158,189 --
Foreign currency (Cost $795) (Note 2)......... -- -- -- 920 --
Receivable for investments sold................ 131,206 527,434 105,829 351,078 129,161
Receivable for expense reimbursement (Note 5).. 6,986 8,653 6,439 6,782 4,921
Interest and dividend receivables.............. 9,040 532 7,070 21,506 4,356
Deferred organizational expense (Note 2)....... 12,320 12,320 12,977 -- 12,320
Dividend tax reclaim receivables............... -- -- 2,228 -- 546
Prepaid insurance expense...................... 1,933 1,933 1,933 1,933 1,933
------------- ------------- ------------- ------------- ------------
Total Assets ............................ 8,564,915 6,168,352 3,081,171 1,922,213 4,317,184
------------- ------------- ------------- ------------- ------------
LIABILITIES:
Payable for investments purchased.............. 79,207 416,584 -- 460,176 90,653
Payable to custodian........................... -- 621,649 -- -- 74,920
Advisory fee payable (Note 3).................. 2,951 -- 1,455 3,534 10,341
Unrealized depreciation on forward
foreign currency contract (Note 2).......... -- -- 101 -- --
Accrued expenses and other payables............ 71,939 49,915 41,722 38,242 43,272
------------- ------------- ------------- ------------- ------------
Total Liabilities .......................... 154,097 1,088,148 43,278 501,952 219,186
------------- ------------- ------------- ------------- ------------
NET ASSETS..................................... $ 8,410,818 $ 5,080,204 $ 3,037,893 $ 1,420,261 $ 4,097,998
============= ============= ============= ============= ============
NET ASSETS consist of:
Paid-in capital (Note 1 and Note 5)............ $ 7,058,620 $ 5,211,661 $ 3,163,082 $ 1,407,634 $ 3,037,927
Undistributed (distribution in excess of)
net investment income (loss)................ (6,772) (31,987) 3,402 21,917 (37,965)
Accumulated (distribution in excess of) net
realized gain (loss) on investments sold,
forward foreign currency contracts,
and foreign currency transactions........... 364,292 (85,546) 199,442 (20,189) 237,683
Net unrealized appreciation (depreciation) of
investments and assets and liabilities in
foreign currency............................ 994,678 (13,924) (328,033) 10,899 860,353
------------- ------------- ------------- ------------- ------------
TOTAL NET ASSETS............................... $ 8,410,818 $ 5,080,204 $ 3,037,893 $ 1,420,261 $ 4,097,998
============= ============= ============= ============= ============
Shares of beneficial interest outstanding ..... 560,199 424,234 293,493 140,544 253,300
(unlimited authorization, $0.001 par value)
NET ASSET VALUE,
Offering and redemption price per share
(Net Assets/Shares Outstanding)............. $ 15.01 $ 11.98 $ 10.35 $ 10.11 $ 16.18
============= ============= ============= ============= ============
</TABLE>
F-10 See Notes to Financial Statements.
<PAGE>
THE PALLADIAN TRUST
STATEMENTS OF OPERATIONS . For The Six Months Ended June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
Global
International Strategic Interactive /
Value Growth Growth Income Telecomm
Portfolio Portfolio Portfolio Portfolio Portfolio
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Interest.................................... $ 21,546 $ 574 $ 3,447 $ 42,196 $ 11,121
Dividends................................... 34,736 3,505 32,783 -- 15,664
Less net foreign taxes withheld............. -- -- (5,100) -- (293)
------------- ------------- ------------- ------------- ------------
Total Investment Income ................. 56,282 4,079 31,130 42,196 26,492
------------- ------------- ------------- ------------- ------------
EXPENSES
Investment advisory fees (Note 3)........... 16,607 -- 1,455 4,156 36,805
Custodian fees.............................. 9,541 4,983 5,238 5,259 4,658
Fund accounting fees........................ 24,229 24,229 24,229 24,229 24,229
Legal fees.................................. 58,322 36,089 28,058 22,822 23,972
Interest expense (Note 7)................... -- 18,615 1,721 -- 611
Audit fees.................................. 16,236 11,508 7,517 2,083 7,288
Trustees' fees and expenses (Note 3)........ 10,226 5,021 4,940 3,904 4,538
Reports to shareholders..................... 6,717 6,168 4,094 2,156 4,678
Registration and filing expense............. 3,405 3,527 2,580 4,255 1,016
Amortization of organization costs (Note 2). 2,358 2,358 2,353 -- 2,358
Insurance................................... 1,900 1,900 1,900 1,900 1,900
Miscellaneous.................................. 146 116 97 162 91
------------- ------------- ------------- ------------- ------------
Total expenses before reimbursements..... 149,687 114,514 84,182 70,926 112,144
Less reimbursement of expenses (Note 5).. (86,610) (78,448) (56,548) (49,516) (47,776)
------------- ------------- ------------- ------------- ------------
Total expenses net of reimbursements..... 63,077 36,066 27,634 21,410 64,368
------------- ------------- ------------- ------------- ------------
NET INVESTMENT INCOME (LOSS)................... (6,795) (31,987) 3,496 20,786 (37,876)
------------- ------------- ------------- ------------- ------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (Note 2):
Net realized gain (loss) on investments sold 349,089 295,740 209,760 45,178 247,178
Net realized gain (loss) on forward foreign
currency contracts.......................... -- -- (2,878) (94,560) (7)
Net realized gain (loss) on foreign currency
transactions................................ -- -- (229) 19,212 (1)
Net change in unrealized appreciation
(depreciation) of investments............... 447,797 (290,356) (52,189) (11,184) 462,302
Net change in unrealized appreciation
(depreciation) of forward foreign currency
contracts................................... -- -- (101) 22,310 --
Net change in unrealized appreciation
(depreciation) of assets and liabilities in
foreign currency............................ -- -- (68) 27,177 (1)
------------- ------------- ------------- ------------- ------------
NET GAIN (LOSS) ON INVESTMENTS................. 796,886 5,384 154,295 8,133 709,471
------------- ------------- ------------- ------------- ------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS............ $ 790,091 $ (26,603) $ 157,791 $ 28,919 $ 671,595
============= ============= ============= ============= ============
</TABLE>
See Notes to Financial Statements.
F-11
<PAGE>
THE PALLADIAN TRUST
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Value Growth
Portfolio Portfolio
- ------------------------------------------------------------------------------------------------------------------------------------
Six Months Six Months
Ended Year Ended Year
June 30, 1998 Ended June 30, 1998 Ended
(Unaudited) December 31, 1997 (Unaudited) December 31,1997
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSETS AT BEGINNING OF YEAR................................ $ 6,584,652 $ 900,331 $ 4,463,531 $ 148,404
----------- ----------- ----------- -----------
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS:
Net investment income (loss)................................ (6,795) 41,294 (31,987) (3,384)
Net realized gain (loss) on investments sold and foreign
currency transactions.................................... 349,089 384,615 295,740 (374,694)
Net change in unrealized appreciation (depreciation)
of investments and assets and liabilities in foreign
currency.................................................... 447,797 494,905 (290,356) 267,942
----------- ----------- ----------- -----------
Net increase (decrease) in net assets resulting from
operations............................................... 790,091 920,814 (26,603) (110,136)
----------- ----------- ----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income....................................... -- (41,271) -- --
Net realized gain on investments............................ -- (369,412) -- --
----------- ----------- ----------- -----------
Total distributions...................................... -- (410,683) -- --
----------- ----------- ----------- -----------
CAPITAL SHARE TRANSACTIONS (NOTE 3):
Net proceeds from sales of shares........................... 2,220,548 5,547,192 1,289,772 4,843,510
Issued to shareholders in reinvestment of distributions..... -- 410,683 -- --
Cost of shares repurchased.................................. (1,192,942) (783,685) (656,846) (418,247)
----------- ----------- ----------- -----------
Net increase (decrease) from capital share transactions.. 1,027,606 5,174,190 632,926 4,425,263
----------- ----------- ----------- -----------
Total increase (decrease) in net assets.................. 1,817,697 5,684,321 606,323 4,315,127
----------- ----------- ----------- -----------
CAPITAL CONTRIBUTION FROM MANAGER (NOTE 5): 8,469 -- 10,350 --
----------- ----------- ----------- -----------
NET ASSETS AT END OF YEAR (INCLUDING LINE A)................... $ 8,410,818 $ 6,584,652 $ 5,080,204 $ 4,463,531
=========== =========== =========== ===========
(A) Undistributed (distribution in excess of) net investment
income (loss)............................................... $ (6,772) $ 23 $ (31,987) $ --
=========== =========== =========== ===========
OTHER INFORMATION
SHARE TRANSACTIONS:
Sold ....................................................... 155,099 432,360 100,443 391,597
Issued to shareholders in reinvestment of distributions..... -- 30,421 -- --
Repurchased................................................. (82,716) (57,726) (49,789) (31,707)
----------- ----------- ----------- -----------
Net increase (decrease) in shares outstanding............ 72,383 405,055 50,654 359,890
=========== =========== =========== ===========
</TABLE>
See Notes to Financial Statements.
F-12
<PAGE>
<TABLE>
<CAPTION>
Global
International Strategic Interactive/
Growth Income Telecomm
Portfolio Portfolio Portfolio
- --------------------------------------------------------------------------------------------------------------------------
Six Months Six Months Six Months
Ended Year Ended Year Ended Year
June 30, 1998 Ended June 30, 1998 Ended June 30, 1998 Ended
(Unaudited) December 31, 1997 (Unaudited) December 31, 1997 (Unaudited) December 31, 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 3,207,002 $ 97,387 $ 2,699,938 $ 1,106,698 $ 3,016,441 $ 594,315
----------- ----------- ----------- ----------- ----------- -----------
3,496 15,386 20,786 69,124 (37,876) 9,035
206,653 4,533 (30,170) (27,885) 247,170 142,691
(52,358) (278,925) 38,303 8,819 462,301 395,113
----------- ----------- ----------- ----------- ----------- -----------
157,791 (259,006) 28,919 50,058 671,595 546,839
----------- ----------- ----------- ----------- ----------- -----------
-- (15,480) -- (29,924) -- (9,124)
-- (8,333) -- (12,484) -- (142,691)
----------- ----------- ----------- ----------- ----------- -----------
-- (23,813) -- (42,408) -- (151,815)
----------- ----------- ----------- ----------- ----------- -----------
462,634 3,686,977 286,724 1,772,206 1,195,237 2,115,492
-- 23,812 -- 42,408 -- 151,815
(797,257) (318,355) (1,603,256) (229,024) (791,893) (240,205)
----------- ----------- ----------- ----------- ----------- -----------
(334,623) 3,392,434 (1,316,532) 1,585,590 403,344 2,027,102
----------- ----------- ----------- ----------- ----------- -----------
(176,832) 3,109,615 (1,287,613) 1,593,240 1,074,939 2,422,126
----------- ----------- ----------- ----------- ----------- -----------
7,723 -- 7,936 -- 6,618 --
----------- ----------- ----------- ----------- ----------- -----------
$ 3,037,893 $ 3,207,002 $ 1,420,261 $ 2,699,938 $ 4,097,998 $ 3,016,441
=========== =========== =========== =========== =========== ===========
$ 3,402 $ (94) $ 21,917 $ 1,131 $ (37,965) $ (89)
=========== =========== =========== =========== =========== ===========
45,826 347,778 28,577 181,202 81,208 174,816
-- 2,452 -- 4,292 -- 11,406
(82,276) (29,718) (161,335) (23,111) (54,333) (19,211)
----------- ----------- ----------- ----------- ----------- -----------
(36,450) 320,512 (132,758) 162,383 26,875 167,011
=========== =========== =========== =========== =========== ===========
</TABLE>
See Notes to Financial Statements
F-13
<PAGE>
- --------------------------------------------------------------------------------
THE PALLADIAN TRUST
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS . FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INCOME FROM INVESTMENT OPERATIONS LESS DISTRIBUTIONS
---------------------------------------------- -----------------------------------------------------
NET REALIZED
NET AND DISTRIBUTIONS
ASSET NET UNREALIZED DIVIDENDS FROM NET
VALUE INVESTMENT GAIN (LOSS) TOTAL FROM FROM NET REALIZED
BEGINNING INCOME ON INVESTMENT INVESTMENT CAPITAL RETURN OF TOTAL
OF PERIOD (LOSS) (2) INVESTMENTS OPERATIONS INCOME GAINS CAPITAL DISTRIBUTIONS
--------- ---------- ----------- ---------- ---------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
VALUE
PORTFOLIO (1)
June 30, 1998 (Unaudited) (3) $ 13.50 $ (0.01) $ 1.52 $ 1.51 $ -- $ -- $ -- $ --
December 31, 1997 10.88 0.17 3.35 3.52 (0.09) (0.81) -- (0.90)
December 31, 1996 (4) 10.00 (0.64) 2.15 1.51 -- -- (0.63) (0.63)
GROWTH
PORTFOLIO (1)
June 30, 1998 (Unaudited) (3) 11.95 (0.08) 0.11 0.03 -- -- -- --
December 31, 1997 10.84 (0.02) 1.13 1.11 -- -- -- --
December 31, 1996 (4) 10.00 (2.96) 3.80 0.84 -- -- -- --
INTERNATIONAL
GROWTH
PORTFOLIO(1)
June 30, 1998 (Unaudited) (3) 9.72 0.01 0.62 0.63 -- -- -- --
December 31, 1997 10.33 0.10 (0.63) (0.53) (0.05) (0.03) -- (0.08)
December 31, 1996 (4) 10.00 (4.16) 4.67 0.51 -- -- (0.18) (0.18)
STRATEGIC
INCOME
PORTFOLIO(1)
June 30, 1998 (Unaudited) (3) 9.88 0.15 0.08 0.23 -- -- -- --
December 31, 1997 9.98 0.36 (0.30) 0.06 (0.11) (0.05) -- (0.16)
December 31, 1996 (4) 10.00 (0.19) 0.23 0.04 -- -- (0.06) (0.06)
GLOBAL
INTERACTIVE/
TELECOMM
PORTFOLIO(1)
June 30, 1998 (Unaudited) (3) 13.32 (0.15) 3.01 2.86 -- -- -- --
December 31, 1997 10.00 0.08 3.95 4.03 (0.04) (0.67) -- (0.71)
December 31, 1996 (4) 10.00 (0.75) 0.80 0.05 -- -- (0.05) (0.05)
</TABLE>
- ------------------------------
* Annualized
** Not annualized
(A) Including reimbursements of certain operating expenses.
(B) Excluding reimbursements of certain operating expenses.
(1) The Value Portfolio, Growth Portfolio, Strategic Income Portfolio, and
Global Interactive/Telecomm Portfolio all commenced operations on February
1, 1996. The International Growth Portfolio commenced operations on March
26, 1996.
(2) Net investment income (loss) per share before reimbursement of certain
operating expenses by the investment adviser were ($0.18) at June 30, 1998,
($0.34) in 1997 and ($1.22) in 1996 for the Value Portfolio; ($0.28) at
June 30, 1998, ($0.68) in 1997, and ($5.61) in 1996 for the Growth
Portfolio; ($0.21) at June 30, 1998, ($0.45) in 1997, and ($7.56) in 1996
for the International Growth Portfolio; ($0.26) at June 30, 1998, ($0.14)
in 1997, and ($0.63) in 1996 for Strategic Income Portfolio; and ($0.36) at
June 30, 1998, ($0.62) in 1997, and ($1.34) in 1996 for the Global
Interactive/Telecomm Portfolio.
(3) Total return measures the change in the value of an investment for the
period indicated. For the period ended June 30, 1998, the total return
includes capital infusions totaling $41,096. Absent the infusions, total
return for the Value Portfolio, the Growth Portfolio, the International
Growth Portfolio, the Strategic Income Portfolio and Global Interactive
/Telecomm Portfolio would have been 11.11%, 0.00%, 6.17%, 1.72%, and
21.25%, respectively.
(4) For the period ended, December 31, 1996, the total return includes capital
infusions totaling $228,823. Absent the infusions, total return for the
Value Portfolio, the Growth Portfolio, the International Growth Portfolio,
the Strategic Income Portfolio and Global Interactive /Telecomm Portfolio
would have been 7.64%, (41.75%), (46.50%), (4.49%), and (6.68%),
respectively.
See Notes to Financial Statements.
F-14
<PAGE>
- --------------------------------------------------------------------------------
THE PALLADIAN TRUST
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Ratios/Supplemental Data
------------------------------------------------------------------------------------------
Net Ratios To Average Net Assets
Increase -------------------------------------------------------------
(Decrease) Net Asset Net Assets Net
in Value End of Investment Operating Portfolio
Net Asset End of Total Period Income (Loss) Expenses Management Turnover
Value Period Return (3) (4) (000's) (A) (B) (A) (B) Fee Rate
- --------- --------- -------------- ---------- --- --- --- --- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 1.51 $ 15.01 11.19 %** $ 8,411 (0.18)%* (2.46)%* 1.66%* 3.94%* 0.44%* 44%
2.62 13.50 32.36 % 6,585 1.30 % (2.60)% 0.84% 4.75% 0.14% 177%
0.88 10.88 15.13 %** 900 (6.55)%* (12.40)%* 8.19%* 14.13%* 0.80%* 74%
0.03 11.98 0.17 %** 5,080 (1.24)%* (4.29)%* 1.40%* 4.45%* 0.00%* 312%
1.11 11.95 10.24 % 4,464 (0.16)% (5.38)% 0.90% 6.12% 0.20% 209%
0.84 10.84 8.40 %** 148 (31.31)%* (58.37)%* 34.15%* 63.54%* 0.80%* 580%
0.63 10.35 6.48 %** 3,038 0.23 %* (3.45)%* 1.80%* 5.47%* 0.09%* 29%
(0.61) 9.72 (5.25)% 3,207 0.97 % (4.36)% 1.78% 7.11% 0.58% 13%
0.33 10.33 5.13 %** 97 (56.37)%* (92.05)%* 67.76%* 126.26%* 0.80%* 116%
0.23 10.11 2.33 %** 1,420 2.68 %* (3.70)%* 2.76%* 9.13%* 0.54%* 250%
(0.10) 9.88 0.60 % 2,700 3.67 % (1.39)% 1.61% 6.68% 0.41% 713%
(0.02) 9.98 0.44 %** 1,107 (2.15)%* (7.02)%* 7.37%* 12.30%* 0.80%* 212%
2.86 16.18 21.47 %** 4,098 (2.17)%* (4.91)%* 3.69%* 6.43%* 2.11%* 39%
3.32 13.32 40.24 % 3,016 0.64 % (5.14)% 1.47% 7.26% 0.27% 114%
-- 10.00 0.49 %** 594 (8.32)%* (14.82)%* 9.83%* 16.45%* 0.80%* 71%
</TABLE>
See Notes to Financial Statements
F-15
<PAGE>
- --------------------------------------------------------------------------------
THE PALLADIAN TRUST
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (Unaudited)
- --------------------------------------------------------------------------------
1. ORGANIZATION
The Palladian Trust (the "Trust") is registered under the Investment Company Act
of 1940, as amended, (the "Act") as a diversified open-end management investment
company organized as a Massachusetts business trust. The Trust's Declaration of
Trust authorizes the Trustees to issue an unlimited number of shares of
beneficial interest for the Portfolios, with a par value of $0.001 per share.
The Trust is comprised of five portfolios: Value Portfolio, Growth Portfolio,
International Growth Portfolio, Strategic Income Portfolio (formerly known as
the 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) life insurance
comapnies and advisers to the Portfolios and their affiliates.
At the Trust's special meeting of shareholders held on June 8, 1998,
shareholders of Global Strategic Income Portfolio changed the Portfolio's
investment objective to reduce the global emphasis, approved new non-fundamental
investment policies consistent with the new investment objective and changed the
name of the Portfolio to the Strategic Income Portfolio.
2. SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally accepted
accounting principles requires estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates. The following is a summary of significant
accounting policies which are in conformity with generally accepted accounting
principles and consistently followed by the Trust in the preparation of its
financial statements.
SECURITY VALUATION: 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.
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 and 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 market and economic developments. 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 for the investments
existed, and the differences could be material to the investment.
At June 30, 1998, one equity security with a value of $148,369 or 2.92% of net
assets of the Growth Portfolio was valued by management under the direction of
the Board of Trustees.
FORWARD FOREIGN CURRENCY CONTRACTS: All Portfolios may enter into forward
foreign currency contracts whereby the Portfolios agree to sell a specific
currency at a specific price at a future date in an attempt to hedge against
fluctuations in the value of the underlying currency of certain portfolio
instruments. Forward foreign currency contracts are valued at the daily exchange
rate of the underlying currency with any fluctuations recorded as unrealized
gains or losses. Receivables and payables of forward foreign currency contracts
are presented on a net basis in the Statements of Assets and Liabilities. Gains
or losses on the purchase or sale of forward foreign currency contracts having
the same settlement date and broker are recognized on the date of offset,
otherwise gains and losses are recognized on the settlement date.
F-16
<PAGE>
- --------------------------------------------------------------------------------
THE PALLADIAN TRUST
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS, Continued (Unaudited)
- --------------------------------------------------------------------------------
FOREIGN CURRENCY TRANSLATION: Investment valuations, other assets and
liabilities denominated in foreign currencies are converted each business day
into U.S. dollars based upon current exchange rates. Purchases and sales of
foreign investments and income and expenses are converted into U.S. dollars
based upon exchange rates prevailing on the respective dates of such
transactions. That portion of unrealized gains or losses on investments due to
fluctuations in foreign currency exchange rates is not separately disclosed.
SECURITY TRANSACTIONS AND INVESTMENT INCOME: Security transactions are recorded
on the trade date. Net realized gains and losses from security transactions are
recorded on the basis of identified cost. Interest income is recorded on the
accrual basis and consists of interest accrued and, if applicable, discounts
earned on original issue discount bonds, zero coupon bonds, stepped-coupon bonds
and payment in kind bonds, which are accreted. Dividend income is recorded on
ex-dividend date.
FEDERAL INCOME TAXES: The Trust treats each Portfolio as a separate entity for
Federal income tax purposes. Each Portfolio intends to qualify as a "regulated
investment company" under Subchapter M of the Internal Revenue Code of 1986, as
amended. By so qualifying, each Portfolio will not be subject to Federal income
taxes to the extent it distributes all of its taxable income and net realized
gains for the tax year ending December 31. In addition, by distributing during
each calendar year substantially all of its net investment income, capital gains
and certain other amounts, if any, each Portfolio will not be subject to Federal
excise tax. Therefore, no Federal income tax provision is required. Withholding
taxes on foreign dividend income and gains have been paid or provided for in
accordance with the applicable country's tax rules and rates.
Paid-in capital, undistributed net investment income and accumulated net
realized gain (loss) have been adjusted in the Statements of Assets and
Liabilities for permanent book-tax differences for all Portfolios for the year
ended December 31, 1997.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: Dividends from net investment
income and distributions of any net realized capital gains of each Portfolio are
currently declared and paid annually and at other times as may be required to
satisfy tax or regulatory requirements. Distributions to shareholders are
recorded on ex-dividend date. Dividend and capital gain distributions are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences are primarily due to
differing book and tax treatments in the timing of the recognition of gains or
losses and forwards, including "Post-October Losses" and permanent differences
due to differing treatments for paydown gains/losses on certain securities,
foreign currency transactions, market discount, non-taxable dividends and losses
deferred due to wash sales. Any taxable income or gain remaining at fiscal year
end is distributed in the following year. 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.
Permanent book-tax differences, if any, are not included in ending undistributed
net investment income for the purposes of calculating net investment income per
share in the Financial Highlights.
ORGANIZATION COSTS: The organization expenses for each Portfolio, excluding
Strategic Income Portfolio, are deferred and are being amortized on a
straight-line basis over a five-year period from commencement of operations.
EXPENSES: The Trust accounts separately for assets, liabilities and operations
of each Portfolio. Expenses directly attributed to a Portfolio are charged to
the Portfolio, while expenses which are attributable to more than one Portfolio
of the Trust are allocated among the respective Portfolios.
3. INVESTMENT MANAGEMENT, ADMINISTRATION AND OTHER TRANSACTIONS.
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 a wholly-owned subsidiary of SMA Financial Corp.,
which in turn is a wholly-owned subsidiary of First Allmerica Financial Life
Insurance Company, a wholly owned subsidiary of Allmerica Financial Corporation
("AFC").
Effective February 12, 1998 through April 16, 1998, Allmerica Investment
Management Company, Inc. ("AIMCO"), assumed the function of Manager for the
Trust. As part of a corporate reorganization completed on April 16, 1998, AIMCO
transferred to AFIMS that portion of its business relating to registered
investment companies such as the Trust.
F-17
<PAGE>
- --------------------------------------------------------------------------------
THE PALLADIAN TRUST
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS, Continued (Unaudited)
- --------------------------------------------------------------------------------
Prior to February 12, 1998, Palladian Advisors, Inc. ("PAI") served as Manager
of the Trust, and Tremont Partners, Inc. ("Tremont" or "Portfolio Advisor")
served as Portfolio Advisor to the Trust.
The Portfolio Managers for the Portfolios are as follows: GAMCO Investors, Inc.
("GAMCO") 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 Allmerica
Asset Management, Inc. ("AAM") serves as the Portfolio Manager of The Strategic
Income Portfolio. Prior to April 9, 1998, Fischer Francis Trees & Watts ("FFTW")
served as Portfolio Manager of The Strategic Income Portfolio.
At June 30, 1998, GAMCO has invested approximately $300,000 in The Value
Portfolio and $490,000 in The Global Interactive/Telecomm Portfolio. During the
six months ended June 30, 1998, GAMCO redeemed 22,635 shares with an aggregate
value of $323,000 and 36,427 shares with an aggregate value of $512,000 from The
Value Portfolio and the Global Interactive /Telecomm Portfolio, respectively.
The Portfolio Manager for The International Growth Portfolio (Bee & Associates
Incorporated) has agreed that it or its principals will make an investment
(directly or through qualified plans) when the Portfolio reaches $10 million in
total assets. FFTW, the former Portfolio Manager of The Strategic Income
Portfolio, redeemed 102,250 shares with an aggregate value of $1,010,229 on
January 6, 1998.
Effective August 1, 1998, Pilgrim Baxter Analytic Investors, Inc. became
Portfolio Manager of the Growth Portfolio, subject to approval by shareholders
at a special meeting to be held on September 15, 1998.
Investors Bank & Trust Company ("IBT") provides transfer agency, portfolio
accounting and custody services to the Trust and receives fees and reimbursement
of certain out-of-pocket expenses for its services. AFIMS has entered into an
Administrative Services Agreement with IBT, whereby IBT performs certain
administrative services for the Portfolios and is entitled to receive an
administrative fee and certain out-of-pocket expenses. AFIMS is solely
responsible for the payment of the administrative fee to IBT.
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 Portfolio Manager, GAMCO Investors,
Inc. Total brokerage commissions paid to Gabelli & Co. during the six months
ended June 30, 1998 amounted to $11,022 for the Value Portfolio and $4,883 for
the Global Interactive/Telecomm Portfolio.
Each Trustee who is not an "interested person" (as defined in the Act) of the
Trust, receives meeting fees and reimbursement for out-of-pocket expenses, from
the Trust.
4. MANAGEMENT FEES
Each Portfolio pays an advisory fee equal to a Basic Fee plus or minus an
Incentive Fee. The Basic Fee is at an annual rate of 2.0%. The annual Incentive
Fee rate ranges from -2.0% to +2.0%, depending on a comparison of the
Portfolio's performance and the performance of a selected benchmark index over
the past 12 months. The monthly Basic and Incentive Fee is calculated by
multiplying one-twelfth of the fee rates on an annual basis by the average daily
net assets of the previous 12 months. The aggregate annual fees rates range from
0.0% to 4.0%. Each Portfolio Manager receives 80% of the fee, and AFIMS receives
the remaining 20%.
If the absolute performance of a Portfolio is negative, the monthly advisory fee
will be the lesser of the fee calculated as described above or an alternative
monthly advisory fee, which under certain circumstances results in the
Portfolios paying either no advisory fee or a lower monthly advisory fee at the
annual rate of 1.0% or at the annual rate of 2.0% depending on a comparison of
the Portfolio's negative performance and the performance of a selected benchmark
over the past 12 months.
Effective July 1, 1998, The Strategic Income Portfolio would have paid, to AAM
during the first year as Portfolio Manager, a fixed annual fee of .80% of
average daily net assets. AFIMS and AAM have voluntarily agreed to limit their
fees until April 30, 1999 to an annual rate of .40%. Prior to July 1, 1998, AAM
was compensated in accordance with the performance based fee of FFTW.
F-18
<PAGE>
- --------------------------------------------------------------------------------
THE PALLADIAN TRUST
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS, Continued (Unaudited)
- --------------------------------------------------------------------------------
5. EXPENSE LIMITATIONS AND CONTINGENT REIMBURSEMENT OBLIGATIONS
Under terms approved by the Board of Trustees of the Trust, the former
investment manager to the Trust, PAI, agreed to limit certain operating
expenses, for the years ended December 31, 1996 and 1997, to the extent that
each Portfolio's "other expenses" (i.e. excluding management fees) exceeded 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%. For the years ending December 31, 1998
and December 31, 1999, the Portfolios are required to repay all or a portion of
any reimbursement of expenses received under this arrangement, provided that
average net assets have grown or expenses have declined sufficiently to allow
repayment without causing the Portfolios' ratio of other expenses to average
daily net assets to exceed the specified other expense limitation rates
specified above. At June 30, 1998, the aggregate amount of expenses reimbursed
subject to repayment were as follows: Value Portfolio, $164,082; Growth
Portfolio, $134,492; International Growth Portfolio, $107,589; Strategic Income
Portfolio, $142,103; Global Interactive/Telecomm Portfolio, $114,681.
Retroactive to January 1, 1998, the current investment manager to the Trust,
AFIMS, has agreed to limit certain operating expenses for the year ending
December 31, 1998 to the extent that each Portfolio's "other expenses" (i.e.
excluding 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%. This
expense limitation was implemented effective February 13, 1998. On February 24,
1998, AIMCO voluntarily contributed to the Portfolios the following amounts as
capital: Value Portfolio, $8,469; Growth Portfolio, $10,350; International
Growth Portfolio, $7,723; 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. These capital
contributions have been treated as an increase in paid in capital for each
Portfolio. For the years ending December 31, 1999 and December 31, 2000, the
Portfolios are required to repay all or a portion of any reimbursement of
expenses received under this arrangement provided that average net assets have
grown or expenses have declined sufficiently to allow repayment without causing
the Portfolio's ratio of other expenses to average daily net assets to exceed
the applicable other expense limitation rates specified above. At June 30, 1998,
the aggregate amount of expenses reimbursed subject to repayment were as
follows: Value Portfolio, $86,610; Growth Portfolio, $78,448; International
Growth Portfolio, $56,548; Strategic Income Portfolio, $49,516; Global
Interactive/Telecomm Portfolio, $47,776. Repayment of all or a portion of any
reimbursement of expenses which relate to the year ending December 31, 1998 will
not begin until all repayment obligations related to the years ended December
31, 1996 and 1997 have been met.
6. FOREIGN SECURITIES
All Portfolios may purchase securities of foreign issuers. Investing in foreign
securities involves special risks not typically associated with investing in
securities of U.S. issuers. The risks include revaluation of currencies and
future adverse political and economic developments. Moreover, securities of many
foreign issuers and their markets may be less liquid and their prices more
volatile than those of securities of comparable U.S. issuers.
7. LEVERAGE
Each Portfolio may leverage its investments by purchasing securities with
borrowed money to enhance performance. The maximum loan and the average daily
loan balances during the period for which loans were outstanding amounted to
$2,369,000 and $579,000 for The Growth Portfolio, $1,184,000 and $67,000 for The
Strategic Income Portfolio and $167,000 and $18,000 for The Global
Interactive/Telecomm Portfolio. The average interest rate was 6.50% for The
Growth Portfolio, The Strategic Income Portfolio and The Global
Interactive/Telecomm Portfolio.
F-19
<PAGE>
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THE PALLADIAN TRUST
- --------------------------------------------------------------------------------
OTHER INFORMATION
- --------------------------------------------------------------------------------
SHAREHOLDER VOTING RESULTS: (UNAUDITED)
A meeting of the Trust's shareholders was held on June 8, 1998 at which
shareholders approved five proposals. The voting results were as follows:
PROPOSAL 1 To elect as Trustees the following two nominees:
- ----------
<TABLE>
<CAPTION>
Shares Shares Percent of Shares
Shares For Against Abstaining Voted
---------- ------- ---------- -----
<S> <C> <C> <C> <C>
Gordon Holmes 1,585,033 18,564 35,479 100.00%
George J. Sullivan, Jr. 1,582,880 23,982 32,214 100.00%
</TABLE>
PROPOSAL 2 To approve a new Management Agreement under which Allmerica Financial
- ----------
Investment Management Services, Inc. ("AFIMS") will serve as Manager
of the Trust:
<TABLE>
<CAPTION>
Shares Shares Percent of Shares
Shares For Against Abstaining Voted
---------- ------- ---------- -----
<S> <C> <C> <C> <C>
Value 526,933 121 12,353 100.00%
Growth 395,909 101 6,908 100.00%
International Growth 288,240 469 8,761 100.00%
Strategic Income 157,206 -- 891 100.00%
Global Interactive/Telecomm 234,450 122 5,811 100.00%
</TABLE>
PROPOSAL 3 To approve agreements under which AFIMS is substituted for the
- ---------- previous Manager under the Portfolio Management Agreements:
<TABLE>
<CAPTION>
Shares Shares Percent of Shares
Shares For Against Abstaining Voted
---------- ------- ---------- -----
<S> <C> <C> <C> <C>
Value 525,948 121 13,338 100.00%
Growth 395,240 101 7,577 100.00%
International Growth 288,240 469 8,761 100.00%
Global Interactive/Telecomm 233,540 122 6,721 100.00%
</TABLE>
PROPOSAL 4 To approve a new Portfolio Management Agreement with Allmerica Asset
- ----------
Management, Inc. for the Strategic Income Portfolio:
<TABLE>
<CAPTION>
Shares Shares Percent of Shares
Shares For Against Abstaining Voted
---------- ------- ---------- -----
<S> <C> <C> <C> <C>
Strategic Income 157,206 -- 891 100.00%
</TABLE>
PROPOSAL 5 To approve a new investment objective for the Strategic Income
- ----------
Portfolio:
<TABLE>
<CAPTION>
Shares Shares Percent of Shares
Shares For Against Abstaining Voted
---------- ------- ---------- -----
<S> <C> <C> <C> <C>
Strategic Income 157,206 -- 891 100.00%
</TABLE>
F-20
<PAGE>
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THE PALLADIAN TRUST
- --------------------------------------------------------------------------------
REGULATORY DISCLOSURES
- --------------------------------------------------------------------------------
The performance data quoted represents past performance and the investment
return and principal value of an investment will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
This report and the financial statements contained herein are submitted for the
general information of the shareholders of the Portfolios and are not authorized
for distribution to prospective investors in The Fulcrum Fund(SM) Variable
Annuity of Allmerica Financial Life Insurance and Annuity Company or First
Allmerica Financial Life Insurance Company unless accompanied or preceded by
effective prospectuses for The Fulcrum Fund(SM) Variable Annuity of Allmerica
Financial Life Insurance and Annuity Company or First Allmerica Financial Life
Insurance Company, The Palladian Trust, and Allmerica Investment Trust, which
include important information related to charges and expenses.
CLIENT NOTICES
- --------------------------------------------------------------------------------
This semi-annual report includes financial statements for The Palladian Trust.
It does not include financial statements for the separate accounts that
correspond to the Fulcrum Fund(SM) Variable Annuity contracts. Separate account
financial statements are not provided.
F-21
<PAGE>
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<PAGE>
[INTENTIONALLY LEFT BLANK]
<PAGE>
[INTENTIONALLY LEFT BLANK]
<PAGE>
THE FULCRUM FUND(SM) VARIABLE ANNUITY
The Fulcrum Fund(SM) Variable Annuity is issued by Allmerica Financial Life
Insurance and Annuity Company (First Allmerica Financial Life Insurance company
in NY and HI) and is distributed by Allmerica Investments, Inc.
To be preceded or accompanied by the current prospectus. Read it carefully
before investing.
[LOGO OF ISMA APPEARS HERE]
[LOGO OF ALLMERICA FINANCIAL APPEARS HERE]
First Allmerica Financial Life Insurance Company . Allmerica Financial Life
Insurance and Annuity Company (licensed in all states except NY & HI) Allmerica
Trust Company, N.A. . Allmerica Investments, Inc. . Allmerica Investment
Management Company, Inc. The Hanover Insurance Company . AMGRO, Inc. . Allmerica
Financial Alliance Insurance Company Allmerica Asset Management, Inc. .
Allmerica Financial Benefit Insurance Company . Sterling Risk Management
Services, Inc. Citizens Corporation . Citizens Insurance Company of America .
Citizens Management Inc. 440 Lincoln Street, Worcester, Massachusetts 01653
