<PAGE>
As filed with SEC on March 2, 1998 Registration No. 33-73882
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /_/
Pre-Effective Amendment No. /_/
Post-Effective Amendment No. 5 /x/
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /_/
Amendment No. 8 /x/
(Check appropriate box or boxes)
----------------
THE PALLADIAN TRUST
(Exact name of registrant as specified in charter)
440 Lincoln Street
Worcester, MA 10653
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (508) 855-3590
George Boyd
440 Lincoln Street
Worcester, MA 10653
(Name and Address of Agent for Service of Process)
copies to:
Jeffrey C. Martin
Christopher E. Palmer
Shea & Gardner
1800 Massachusetts Avenue, N.W.
Washington, D.C. 20036
--------------------
It is proposed that this filing will become effective (check appropriate box)
/ / immediately upon filing pursuant to paragraph (b)
/ / on May 1, 1997 pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/X/ on May 1, 1998 pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / on (date) pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
/ / this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment.
<PAGE>
CROSS REFERENCE SHEET
FOR PROSPECTUS AND SAI
(as required by Rule 495)
Form N-1A Item No. Caption in Part A Prospectus
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Item 1. Cover Page Cover Page
Item 2. Synopsis Summary of Expenses
Item 3. Condensed Financial Performance Information
Item 4. General Description
of Registrant General Information; Investment
Objectives and Policies;
Description of Securities and
Investment Techniques
Item 5. Management of the Fund Management of the Trust
Item 6. Capital Stock and Other Dividends, Distributions,
Securities and Taxes; Other Information
Item 7. Purchase of Securities Being Investment in the Trust
Offered
Item 8. Redemption of Repurchase Investment in the Trust
Item 9. Pending Legal Proceedings Not Applicable
<PAGE>
Caption in Part B Statement
Form N-1A Item No. of Additional Information
------------------ -----------------------------
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information Not Applicable
and History
Item 13. Investment Objectives Description of Securities and
and Policies Investment Techniques;
Investment Restrictions;
Appendix
Item 14. Management of the Fund Management of the Trust
Item 15. Control Person and Principal Management of the Trust
Holders of Securities
Item 16. Investment Advisory and Management of the Trust
Other Services
Item 17. Brokerage Allocation and Portfolio Transactions
Other Practices and Brokerage
Item 18. Capital Stock and Other Capitalization
Securities
Item 19. Purchase, Redemption and Not Applicable
Pricing of Securities Being
Offered
Item 20. Tax Status Taxation
Item 21. Underwriters Not Applicable
Item 22. Calculations of Performance Performance Information
Data
Item 23. Financial Statements Financial Statements
Part C
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Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to this Registration Statement.
ii
<PAGE>
PROSPECTUS
for
The Value Portfolio
The Growth Portfolio
The International Growth Portfolio
The Global Strategic Income Portfolio, and
The Global Interactive/Telecomm Portfolio
of
THE PALLADIAN TRUST
440 Lincoln Street
Worcester, Massachusetts 01653
(___) ___-____
May 1, 1998
This prospectus offers shares of five portfolios (each individually a
"Portfolio" or collectively the "Portfolios") of The Palladian Trust (the
"Trust"), which is an open-end, management investment company. Each Portfolio
has its own investment objective or objectives and investment policies. Shares
of the Portfolios may be sold only to: (1) life insurance company separate
accounts (the "Separate Accounts") to serve as the underlying investment medium
for variable annuity and variable life insurance contracts; (2) qualified
retirement plans, as permitted by Treasury Regulations; and (3) life insurance
companies and advisers to the Portfolios and their affiliates. Shares will not
be offered directly to the public.
Allmerica Investment Management Company, Inc. ("AIMCO") serves as overall
manager of the Portfolios. AIMCO manages the operations of the Trust and
monitors the investment advisers that provide day-to-day management of the
Portfolios (the "Portfolio Managers").
The five Portfolios and their respective Portfolio Managers are as follows:
<TABLE>
<CAPTION>
PORTFOLIO PORTFOLIO MANAGER
- ---------------------------------------------------------------------------------
<S> <C>
The Value Portfolio GAMCO Investors, Inc.
The Growth Portfolio Stonehill Capital Management, Inc.
The International Growth Portfolio Bee & Associates Incorporated
The Global Strategic Income Portfolio Fischer Francis Trees & Watts, Inc.
(subject to change, see page __)
The Global Interactive/Telecomm Portfolio GAMCO Investors, Inc.
</TABLE>
Information about the investment objectives and policies of each Portfolio,
along with a detailed description of the types of securities and other assets in
which each Portfolio may invest, are set forth in this prospectus. There can be
no assurance that the investment objective for any Portfolio will be achieved.
The Global Strategic Income Portfolio may invest up to 50% of its assets in
bonds rated below investment grade (commonly referred to as "junk bonds" or
"high yield/high risk bonds"). High yield/high risk bonds involve significant
risks. See page 14.
This prospectus sets forth concisely the information a prospective
purchaser of a variable contract or a participant in a qualified retirement plan
should know before directing that contributions or amounts credited to him or
her be invested in the Portfolios. A Statement of Additional Information (the
"SAI") dated May 1, 1998 containing additional and more detailed information
about the Portfolios has been filed with the Securities and Exchange Commission
and is hereby incorporated by reference into this prospectus. It is available
without charge and can be obtained by writing or calling the Trust at the
address and telephone number printed above.
------------------
<PAGE>
PROSPECTIVE PURCHASERS OF A VARIABLE CONTRACT SHOULD READ THIS PROSPECTUS IN
CONJUNCTION WITH THE PROSPECTUS FOR THE SEPARATE ACCOUNT. BOTH PROSPECTUSES
SHOULD BE READ CAREFULLY AND RETAINED FOR FUTURE REFERENCE.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
2
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
<S> <C>
SUMMARY OF EXPENSES 5
FINANCIAL HIGHLIGHTS 8
GENERAL INFORMATION 9
The Palladian Trust 9
The Manager and Portfolio Managers 9
Investment Objectives 9
MANAGEMENT OF THE TRUST 10
Manager 10
Portfolio Managers 11
Management and Portfolio Management Investment Advisory Fees 12
Expense Limitations 12
Custodian and Transfer Agent 14
INVESTMENT OBJECTIVES AND POLICIES 14
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES 18
U.S. Government Securities 18
Debt Securities 19
Mortgage-Backed Securities 19
Other Asset-Backed Securities 20
Variable and Floating Rate Securities 20
Banking Industry and Savings Industry Obligations 20
Commercial Paper 21
Repurchase Agreements 21
Reverse Repurchase Agreements 21
Lending Portfolio Securities 21
Illiquid Securities 21
Warrants 22
Other Investment Companies 22
Short Sales 22
Short Sales Against the Box 23
Foreign Securities 23
Investment in Gold and Other Precious Metals 24
Futures Contracts 24
Options 25
Foreign Currency Transactions 26
Leverage 26
Indexed Securities 27
INVESTMENT IN THE TRUST 27
Principal Underwriter 27
Determination of Net Asset Value 27
Purchase of Shares 28
Redemption of Shares 28
3
<PAGE>
<CAPTION>
PAGE
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<S> <C>
DIVIDENDS, DISTRIBUTIONS, AND TAXES 29
OTHER INFORMATION 29
Capitalization 29
Voting Rights 30
Portfolio Brokerage 30
Performance Information 30
Performance Data for the Portfolio Managers 31
APPENDIX A 37
APPENDIX B 38
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFERING CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS BEING AUTHORIZED BY
THE TRUST. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY THE TRUST TO SELL
SHARES IN ANY STATE TO ANY PERSON TO WHOM IT IS UNLAWFUL FOR THE TRUST TO MAKE
SUCH AN OFFER IN SUCH STATE.
4
<PAGE>
SUMMARY OF EXPENSES
The following tables show the expenses that will be incurred by each Portfolio,
expressed as a percentage of average net assets during the year. If you have
been given this prospectus because you are considering the purchase of a
variable contract, you should refer to the variable contract prospectus for more
information about expenses under the variable contract, which are in addition to
expenses of the Portfolios.
Shareholder Transactions Expenses (for each Portfolio)
- ----------------------------------------------------------
Sales Load on Purchases None
Sales Load on Reinvested Dividends None
Deferred Sales Load Imposed on Redemption None
Exchange Fees None
Annual Fund Operating Expenses
(as a percentage of average net assets)
- ---------------------------------------
Each Portfolio has a performance-based advisory fee. The base fee is 2.00%, but
the total fee may vary from between 0.00% to 4.00%, depending on the Portfolio's
performance. The base fee of 2.00% would be paid if Portfolio performance (net
of all fees and expenses, including the advisory fee) is between 1.5 and 3.0
percentage points better than the benchmark index. A fee of 4.00% would be paid
only if Portfolio performance (net of all fees and expenses, including the
advisory fee) was at least 7.5 percentage points better than the benchmark
index. No fee will apply if the Portfolio's performance is more than 3.0
percentage points lower than the benchmark index. See "Management and Portfolio
Management Investment Advisory Fees," pages ____. Because of this variation, we
show below expense information assuming fees of 0.00%, 2.00% and 4.00%. You
should note, however, that the fee could be any figure between 0.00% and 4.00%.
For each of the three fee levels shown -- 0.00%, 2.00% and 4.00% -- we have
included an example prepared in accordance with the requirements of the
Securities and Exchange Commission. The purpose of the examples is to assist
investors in understanding the various costs and expenses that an investor in
the Portfolios will bear directly or indirectly. They show the total expenses
that would be payable if you redeemed your shares after having held them for one
and three year periods respectively. Each example assumes a 5% annual rate of
return pursuant to requirements of the Securities and Exchange Commission. This
hypothetical rate of return is not intended to be representative of past or
future performance. The amounts shown are based upon estimates. Actual
expenses may be greater than or less than those shown.
1. ASSUMING MANAGEMENT FEE OF 0%
An advisory fee of 0% would be paid if the Portfolio's performance (net of all
fees and expenses) was more than 3.0 percentage points lower than the benchmark
index.
<TABLE>
<CAPTION>
OTHER EXPENSES
(AFTER ANY
MANAGEMENT APPLICABLE TOTAL OPERATING
FUND FEES REIMBURSEMENT) EXPENSES
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Value Portfolio 0% (1) 1.00% (2) 1.00%
Growth Portfolio 0% (1) 1.00% (2) 1.00%
International Growth 0% (1) 1.20% (2) 1.20%
Portfolio
Global Strategic Income 0% (1) 1.20% (2) 1.20%
Portfolio
Global Interactive/ 0% (1) 1.20% (2) 1.20%
</TABLE>
5
<PAGE>
Telecomm Portfolio
EXAMPLE. A shareholder would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return, (2) an advisory fee of 0%,
and (3) redemption at the end of each time period.
<TABLE>
<CAPTION>
1 Year 3 Years
<S> <C> <C>
Value Portfolio $10.00 $31.22
Growth Portfolio $10.00 $31.22
International Growth Portfolio $12.00 $37.39
Global Strategic Income Portfolio $12.00 $37.39
Global Interactive/Telecomm Portfolio $12.00 $37.39
</TABLE>
2. ASSUMING MANAGEMENT FEE OF 2.00%
An advisory fee of 2.00% would be paid if the Portfolio's performance (net of
all fees and expenses, including the 2.00% advisory fee) was between 1.5 and 3.0
percentage points better than the benchmark index.
<TABLE>
<CAPTION>
OTHER EXPENSES
(AFTER ANY
MANAGEMENT APPLICABLE TOTAL OPERATING
FUND FEES REIMBURSEMENT) EXPENSES
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Value Portfolio 2.00% (1) 1.00% (2) 3.00%
Growth Portfolio 2.00% (1) 1.00% (2) 3.00%
International Growth 2.00% (1) 1.20% (2) 3.20%
Portfolio
Global Strategic
Income 2.00% (1) 1.20% (2) 3.20%
Portfolio
Global Interactive/
Telecomm 2.00% (1) 1.20% (2) 3.20%
Portfolio
</TABLE>
EXAMPLE. A shareholder would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return, (2) an advisory fee of 2%,
and (3) redemption at the end of each time period.
<TABLE>
<CAPTION>
1 Year 3 Years
<S> <C> <C>
Value Portfolio $30.00 $91.81
Growth Portfolio $30.00 $91.81
International Growth Portfolio $32.00 $97.74
Global Strategic Income Portfolio $32.00 $97.74
Global Interactive/Telecomm Portfolio $32.00 $97.74
</TABLE>
3. ASSUMING MANAGEMENT FEE OF 4.00%
An advisory fee of 4.00% would be paid if the Portfolio's performance (net of
all fees and expenses, including the 4.00% advisory fee) was at least 7.5
percentage points better than the benchmark index.
<TABLE>
<CAPTION>
OTHER EXPENSES
(AFTER ANY
MANAGEMENT APPLICABLE TOTAL OPERATING
FUND FEES REIMBURSEMENT) EXPENSES
- -----------------------------------------------------------------------------
6
<PAGE>
<S> <C> <C> <C>
Value Portfolio 4.00% (1) 1.00% (2) 5.00%
Growth Portfolio 4.00% (1) 1.00% (2) 5.00%
International Growth 4.00% (1) 1.20% (2) 5.20%
Portfolio
Global Strategic Income 4.00% (1) 1.20% (2) 5.20%
Portfolio
Global Interactive/Telecomm 4.00% (1) 1.20% (2) 5.20%
Portfolio
</TABLE>
EXAMPLE. A shareholder would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return, (2) an advisory fee of 4%,
and (3) redemption at the end of each time period. In order to have
both a 5% annual return and an advisory fee of 4%, the Portfolio's
performance would have to be 9% before deduction of the 4% fee
(resulting in performance of 5%) and the benchmark index would have to
DECREASE at least 2.5 percentage points (meaning that the Portfolio's
performance after fees and expenses was at least 7.5 percentage points
better than the benchmark index).
<TABLE>
<CAPTION>
1 Year 3 Years
<S> <C> <C>
Value Portfolio $50.00 $150.00
Growth Portfolio $50.00 $150.00
International Growth Portfolio $52.00 $155.69
Global Strategic Income Portfolio $52.00 $155.69
Global Interactive/Telecomm Portfolio $52.00 $155.69
</TABLE>
(1) A performance-based advisory fee is in effect. See "Management and
Portfolio Management Investment Advisory Fees," pages _____.
(2) Restated to reflect the expense limitation in effect during 1998. As
explained in more detail on pages _______, Allmerica Financial has agreed to
limit operating expenses and reimburse those expenses to the extent that each
Portfolio's 1998 "other expenses" (I.E., expenses other than management) 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%; Global Strategic Income Portfolio, 1.20%;
Global Interactive/Telecomm Portfolio, 1.20%. The 1997 "other expense" ratios
would have been the following without the expense limitation arrangement that
was in effect: Value Portfolio, 4.04%; Growth Portfolio, 5.48%; International
Growth Portfolio, 6.10%; Global Strategic Income Portfolio, 5.31%; Global
Interactive/Telecomm Portfolio, 6.28%.
7
<PAGE>
FINANCIAL HIGHLIGHTS
[to be added by post-effective amendment]
8
<PAGE>
GENERAL INFORMATION
THE PALLADIAN TRUST
This Prospectus offers shares of five Portfolios (the "Portfolios") of The
Palladian Trust (the "Trust"), each with its own investment objective and
investment policies. The Trust was established as a Massachusetts business
trust and is registered under the Investment Company Act of 1940 (the "1940
Act") as an open-end management investment company.
THE MANAGER AND PORTFOLIO MANAGERS
Allmerica Investment Management Company, Inc. ("AIMCO") serves as overall
manager of the Portfolios. AIMCO manages the operations of the Trust and
monitors the investment advisers that provide day-to-day management of the
Portfolios (the "Portfolio Managers"). The five Portfolios and their respective
Portfolio Managers are as follows:
<TABLE>
<CAPTION>
PORTFOLIO PORTFOLIO MANAGER
- ----------------------------------------------------------------------------------------
<S> <C>
The Value Portfolio GAMCO Investors, Inc.
The Growth Portfolio Stonehill Capital Management, Inc.
The International Growth Portfolio Bee & Associates Incorporated
The Global Strategic Income Portfolio Fischer Francis Trees & Watts, Inc.
(subject to change, see page __)
The Global Interactive/Telecomm Portfolio GAMCO Investors, Inc.
</TABLE>
Each Portfolio Manager is paid on an incentive fee basis, which could
result in either higher than average advisory fees or possibly no advisory fee
at all, depending on how well each Portfolio Manager performs for you.
GAMCO Investors, Inc., the Portfolio Manager for the Value Portfolio and
the Global Interactive/Telecomm Portfolio, has invested $1 million in the
Portfolios it manages ($500,000 in each Portfolio). The Portfolio Managers for
the International Growth Portfolio (Bee & Associates Incorporated) and the
Growth Portfolio (Stonehill Capital Management, Inc.) have each agreed that it
or its principals will invest $1 million (directly or through qualified plans)
in its Portfolio when it reaches $10 million in total assets. Although a
Portfolio Manager is permitted by law to sell its shares at any time, each of
these three Portfolio Managers currently intend to maintain that investment as
long as it manages the Portfolio. Once a Portfolio Manager makes that
investment, and for as long as it maintains the investment, the Portfolio
Manager will be managing a portion of their own money along with your money.
The Portfolio Manager for the Global Strategic Income Portfolio (Fischer Francis
Trees & Watts, Inc.) no longer maintains an investment in its Portfolio.
There can be no assurance that any particular Portfolio investment
objective will be attained. The Board of Trustees may establish additional
Portfolios at any time and may discontinue offering a Portfolio at any time.
INVESTMENT OBJECTIVES
The Trust is currently offering shares of five separate Portfolios. Each
Portfolio has a different investment objective which it pursues through
different investment policies as described below. Since the Portfolios have
different investment objectives, each can be expected to have different
investment results and incur different market and financial risks. There can be
no assurance that any of these objectives will be met.
The investment objectives of the Portfolios are fundamental, which means
they may not be changed without shareholder approval as required by the 1940
Act.
THE VALUE PORTFOLIO seeks to make money for investors by investing
primarily in companies that the Portfolio Manager believes are undervalued and
that by virtue of anticipated developments may, in the Portfolio Manager's
judgment, achieve significant capital appreciation.
THE GROWTH PORTFOLIO seeks to make money for investors by investing
primarily in securities selected for their long-term growth prospects.
THE INTERNATIONAL GROWTH PORTFOLIO seeks to make money for investors by
investing internationally for long-term capital appreciation, primarily in
equity securities.
9
<PAGE>
THE GLOBAL STRATEGIC INCOME PORTFOLIO seeks to make money for investors by
investing for high current income and capital appreciation in a variety of
domestic and foreign fixed-income securities.
THE GLOBAL INTERACTIVE/TELECOMM PORTFOLIO seeks to make money for investors
primarily by investing globally in equity securities of companies engaged in the
development, manufacture or sale of interactive and/or telecommunications
services and products.
MANAGEMENT OF THE TRUST
The business and affairs of the Trust are managed under the direction of
the Board of Trustees. Additional information about the trustees and officers
of the Trust may be found in the Statement of Additional Information under the
heading "Management of the Trust."
The Trust is responsible for the payment of certain fees and expenses
including, among others, the following: (1) fees of the Manager and the
Portfolio Managers; (2) custodial, accounting, auditing, legal and transfer
agency fees; (3) fees of independent trustees; (4) brokerage fees and
commissions in connection with the purchase and sale of Portfolio securities;
(5) taxes; (6) the reimbursement of organizational expenses; and (7) expenses of
printing and mailing prospectuses, proxy statements and shareholder
communications.
MANAGER
Allmerica Investment Management Company, Inc. ("AIMCO" or the "Manager")
serves as overall Manager of the Trust. As Manager, AIMCO is responsible for
general administration of the Trust as well as monitoring and evaluating the
performance of the Portfolio Managers. AIMCO, a Massachusetts corporation,
is registered with the Securities and Exchange Commission as an investment
adviser. AIMCO is located at 440 Lincoln Street, Worcester, Massachusetts
01653. AIMCO is an indirect, wholly-owned subsidiary of Allmerica
Financial Corporation ("AFC"). AFC is the parent company of the two life
insurance companies currently utilizing the Trust as an underlying fund for
its variable contracts, Allmerica Financial Life Insurance and Annuity Company
("Allmerica Financial") and First Allmerica Financial Life Insurance Company.
AIMCO's advisory agreement will remain in effect past June 11, 1998 only if
approved by shareholders. The Board of Trustees has called a shareholder
meeting for _______, 1998, to seek the required shareholder approval. Proxy
materials will be issued to contract owners with funds invested in the Trust as
of the record date of _________, 1998.
Prior to February 12, 1998, Palladian Advisors, Inc. ("PAI") served as
Manager of the Trust, and Tremont Partners, Inc. ("Tremont") served as Portfolio
Advisor to the Trust. AIMCO now serves as Manager of the Trust, and there is no
Portfolio Adviser. Tremont was previously paid by PAI (not the Trust). Thus,
overall advisory fees were not changed as a result of the switch from PAI and
Tremont to AIMCO.
PORTFOLIO MANAGERS
Each Portfolio Manager makes specific investments on behalf of a Portfolio
in accordance with the particular Portfolio's objective and the Portfolio
Manager's investment approach and strategies. The Portfolio Managers designated
for each Portfolio are listed and described below.
Selection and retention criteria for Portfolio Managers include: (1) their
historical performance records relative to their respective markets and peer
groups; (2) consistent performance in the context of the markets and
preservation of capital in declining markets; (3) organizational stability and
reputation; (4) the quality and depth of investment personnel; (5) the ability
of the Portfolio Manager to apply its approach consistently; and (6) a
willingness to work on an incentive fee basis. Each Portfolio Manager will not
necessarily exhibit all of the criteria to the same degree. Short-term
investment performance, by itself, is not a significant factor in selecting or
terminating a Portfolio Manager. It should be noted, however, that there can be
no certainty that any Portfolio Manager will obtain superior results at any
given time.
The Portfolio Managers activities are subject to general oversight by the
Trustees and AIMCO. Although the Trustees and AIMCO do not evaluate the
investment merits of the Portfolio Managers' specific securities selections,
they do review the performance of each Portfolio Manager relative to the
selection criteria.
10
<PAGE>
The Portfolio Managers for the Portfolios are as follows:
THE VALUE PORTFOLIO. GAMCO Investors, Inc. ("GAMCO"), One Corporate
Center, Rye, New York 10580-1434, acts as investment adviser for individuals,
pension trusts, profit-sharing trusts and endowments. GAMCO is a majority-owned
subsidiary of Gabelli Funds, Inc. As of December 31, 1997, GAMCO managed assets
of approximately $__ billion. Mario J. Gabelli may be deemed a "controlling
person" of GAMCO on the basis of his ownership of stock of Gabelli Funds, Inc.
Mario J. Gabelli is primarily responsible for the day-to-day investment
management of the Portfolio. Mr. Gabelli has been the Chief Investment Officer
of GAMCO since its organization in 1980.
THE GROWTH PORTFOLIO. Stonehill Capital Management, Inc. ("Stonehill
Capital"), 277 Park Avenue, New York, New York 10172, is owned by its founder
Robert L. Emerson. As of December 31, 1997, Stonehill Capital managed assets
of approximately $__ million. Mr. Emerson is primarily responsible for the
day-to-day investment management of the Portfolio, and has been President of
Stonehill Capital for the past five years.
THE INTERNATIONAL GROWTH PORTFOLIO. Bee & Associates Incorporated ("BAI"),
370 17th Street, Suite 5150, Denver, Colorado 80202, was formed in 1989 to
provide global equity management expertise to individuals, retirement plan
sponsors, foundations, endowments and other entities. As of December 31, 1997,
BAI managed assets of approximately $__ million. Bruce B. Bee is primarily
responsible for the day-to-day investment management of the Portfolio. Since
BAI's organization in 1989, Mr. Bee has been the firm's controlling person and
principal portfolio manager.
THE GLOBAL STRATEGIC INCOME PORTFOLIO. Fischer Francis Trees & Watts, Inc.
("Fisher Francis"), 200 Park Avenue, 46th Floor, New York, New York 10166, was
formed in 1972 to provide global fixed income management expertise to
individuals, central banks, government institutions, commercial banks and
private corporations. As of December 31, 1997, Fischer Francis managed assets
of approximately $__ billion. Liaquat Ahamed is primarily responsible for the
day-to-day investment management of the Portfolio. Since 1988, Mr. Ahamed has
served as the firm's Chief Investment Officer for global strategy and head of
the firm's London office. Prior to 1988, he worked for nine years at the World
Bank and was in charge of the Bank's non-dollar government bond investments.
Fischer Francis has submitted its resignation as Portfolio Manager of the
Global Strategic Income Portfolio. It is expected that the resignation will be
effective on or about April 4, 1998. Fischer Francis has withdrawn its $1
million investment in the Portfolio. The Trust and AIMCO are considering
seeking a new Portfolio Manager or winding down the operations of this Portfolio
through a merger, substitution or other approach. If at any time there is no
Portfolio Manager in place for any Portfolio, under the current advisory
agreements, the Manager would be responsible for managing that Portfolio.
THE GLOBAL INTERACTIVE/TELECOMM PORTFOLIO. GAMCO manages this Portfolio,
as well as the Value Portfolio. Mario J. Gabelli is primarily responsible for
the day-to-day investment management of the Global Interactive/Telecomm
Portfolio. Mr. Gabelli has been Chief Investment Officer of GAMCO since its
organization in 1980.
MANAGEMENT AND PORTFOLIO MANAGEMENT INVESTMENT ADVISORY FEES
As explained in more detail above, AIMCO serves as the overall manager of
the Portfolios, and the Portfolio Managers handle the day-to-day investment
management of the Portfolios. For these services, each Portfolio pays an
overall management fee, computed and accrued daily and paid monthly, based on
its average daily net assets. The overall fee varies based on the performance
of that Portfolio (after expenses) compared to that of an appropriate benchmark.
The overall advisory fee is split among the various advisers in the following
manner. The Portfolio Manager receives 80% of the fee, and AIMCO receives the
remaining 20%.
FIXED ADVISORY FEE FOR THE FIRST YEAR. For the period beginning with the
day on which the Portfolio commenced investment operations and ending with the
last day of the twelfth full calendar month thereafter, each Portfolio will be
paid a monthly advisory fee calculated at an annual rate of 0.80% of the
Portfolio's average daily net assets. The Portfolios commenced operations in
February and March 1996. Therefore, this fixed fee is no longer applicable.
Instead, the Portfolios pay the performance-based fees described below.
CURRENT PERFORMANCE-BASED FEE. Each Portfolio pays, at the end of each
month, a monthly advisory fee equal to a Basic Fee plus or minus an Incentive
Fee. (As explained below, the fee might be reduced if absolute performance is
negative.) The monthly Basic Fee equals one-twelfth of the annual Basic Fee
rate of 2.0% multiplied by average daily net assets over the
11
<PAGE>
previous 12 months. The Incentive Fee rate ranges from -2.0% to +2.0% on an
annual basis, depending on a comparison of the Portfolio's performance
(reflecting a deduction of Portfolio expenses) and the performance of a
selected benchmark index over the past 12 months. The monthly Incentive Fee,
like the monthly Basic Fee, is calculated by multiplying one-twelfth of the
Incentive Fee rate on an annual basis by the average daily net assets over
the previous 12 months. Accordingly, the Total Fee could range from 0.0% to
an annual rate of 4.0%, depending on performance.
As noted above, performance of both the Portfolio and the selected
benchmark index is calculated on a rolling 12-month period (i.e., the previous
12 months, including the month for which the fee is being calculated). The
performance of a Portfolio is calculated by first determining the change in the
Portfolio's net asset value per share during the period, assuming the
reinvestment of distributions during that period, and then expressing this
amount as a percentage of the net asset value per share at the beginning of the
period. Net asset value per share is calculated by dividing the value of the
securities held by the Portfolio plus any cash or other assets minus all
liabilities including accrued advisory fees and the other expenses, by the total
number of shares outstanding at the time. The performance of the selected
benchmark index is calculated as the sum of the change in the level of the index
during the period, plus the value of any dividends or distributions made by the
companies whose securities comprise the index accumulated to the end of the
period, and then expressing that amount as a percentage of the index at the
beginning of the period.
No Incentive Fee will be paid if the Portfolio's performance equals the
targeted performance -- selected benchmark index plus 2.25 percentage points.
The maximum fee will be paid if performance is 5.25 percentage points higher
than the target (i.e., 7.5 percentage points higher than the selected benchmark
index). No fee will be paid if performance is 5.25 percentage points lower than
the target (i.e., more than 3 percentage points below the selected benchmark
index). The chart below further explains the Incentive Fee at various
performance levels.
<TABLE>
<CAPTION>
PERCENTAGE POINT DIFFERENCE BETWEEN PERFORMANCE OF THE PORTFOLIO
(NET OF EXPENSES INCLUDING BASIC FEE AND INCENTIVE FEE) TOTAL
AND CHANGE IN SELECTED BENCHMARK INDEX BASIC FEE (%) INCENTIVE FEE (%) ADVISORY FEE
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
+7.5 or greater 2.0 2.0 4.0
+6.0 or greater, but less than +7.5 2.0 1.5 3.5
+4.5 or greater, but less than +6.0 2.0 1.0 3.0
+3.0 or greater, but less than +4.5 2.0 0.5 2.5
+1.5 or greater, but less than +3.0 2.0 0.0 2.0
0.0 or greater, but less than +1.5 2.0 -0.5 1.5
- -1.5 or greater, but less than 0.0 2.0 -1.0 1.0
- -3.0 or greater, but less than -1.5 2.0 -1.5 0.5
Less than -3.0 2.0 -2.0 0.0
- --------------------------------------------------------------------------------------------------------
</TABLE>
MAXIMUM FEE IF PERFORMANCE IS NEGATIVE. Notwithstanding the above
schedule, if the absolute performance of a Portfolio (after payment of all
expenses, including the Basic Fee and any Incentive Fee) is negative, the
monthly advisory fee will be the lesser of the fee calculated pursuant to the
above schedule or the alternative monthly advisory fee described below, which
under certain circumstances results in the Portfolios paying either no advisory
fee or a lower monthly advisory fee than under the performance fee schedule
above. If a Portfolio's performance (after payment of all expenses including
advisory fees) is negative and does not exceed the selected benchmark by six
percentage points (on an annual basis), no monthly advisory fee will be paid. If
the Portfolio's performance (after payment of all expenses including advisory
fees) is negative and does not exceed the selected benchmark by twelve
percentage points but does exceed the selected benchmark by six percentage
points (on an annual basis), the alternate monthly advisory fee will be based on
an annual rate of 1.0% of average daily net assets over the previous 12 months.
If, on the other hand, the performance of a Portfolio (after payment of all
expenses including advisory fees) is negative but exceeds the selected benchmark
by twelve percentage points or more (on an annual basis), the alternative
monthly advisory fee will be based on an annual rate of 2.0% of average daily
net assets over the previous 12 months.
SIZE OF FEE. The Basic Fee payable by the Portfolios is at a rate higher
than the investment advisory fees paid by most other investment companies. If a
Portfolio outperforms the selected benchmark by 3.0 percentage points or more,
the advisory fee payable by a Portfolio may further exceed those paid by other
investment companies. On the other hand, if a Portfolio underperforms the
selected benchmark, the advisory fee paid by the Portfolio may be less than
those paid by other investment companies. If, during the applicable performance
period, a Portfolio underperforms the selected benchmark by three or more
12
<PAGE>
percentage points, the Portfolio will not pay any advisory fee, although the
Manager, Portfolio Advisor and Portfolio Managers will remain obligated to
provide the Portfolio with the services contemplated herein as long as they are
in effect.
PERFORMANCE BENCHMARKS. As described above, total advisory fees paid to
each Portfolio Manager for advising the Portfolios are based on the performance
of the Portfolio they manage relative to a market benchmark selected in light of
the investment objective and policies of the Portfolio. The performance
benchmarks selected for the Portfolios are listed below and described in more
detail in Appendix A.
<TABLE>
<CAPTION>
Portfolio Performance Benchmark
- --------------------------------------------------------------------------------
<S> <C>
The Value Portfolio S&P 500
The Growth Portfolio S&P 500
The International Growth Portfolio MSCI - Europe, Australia, Far East
(EAFE) Index
The Global Strategic Income Portfolio JP Morgan Global Government Bond
Index, Unhedged
The Global Interactive/Telecomm Portfolio S&P 500
- ---------------------------------------------------------------------------------
</TABLE>
EXPENSE LIMITATIONS
EXPENSE LIMITATIONS FOR 1998 EXPENSES. Allmerica Financial has agreed to
limit operating expenses and reimburse those expenses to the extent that each
Portfolio's 1998 "other expenses" (I.E., expenses other than management fees)
exceed the following expense limitations (expressed as an annualized percentage
of average daily net assets): Value Portfolio, 1.00%; Growth Portfolio, 1.00%;
International Growth Portfolio, 1.20%; Global Strategic Income Portfolio, 1.20%;
Global Interactive/Telecomm Portfolio, 1.20%. Allmerica Financial has agreed to
pay any amount due for a calendar month not later than the 15th day of the
following calendar month (with any final adjustment to be made not later than
January 15, 1999). Allmerica Financial, if agreed to by the Board , may
continue this voluntary expense limitation past December 31, 1998. This expense
limitation was implemented effective February 13, 1998. In addition, on
February __, 1998, Allmerica Financial voluntarily contributed to the Portfolios
the following amounts as capital: Value Portfolio, $___; Growth Portfolio,
$___; International Growth Portfolio, $___; Global Strategic Income Portfolio,
$____; Global Interactive/Telecomm Portfolio, $___. These amounts were
contributed to offset expenses accrued to the Portfolios in excess of the
expense limitations during the period January 1, 1998 through February 12, 1998.
Allmerica Financial received no shares of beneficial interest or other
consideration in exchange for these contributions. These capital contributions
resulted in an increase in paid in capital for each Portfolio.
REIMBURSEMENT PROVISION FOR 1998 EXPENSES. For the two years following the
date that the Allmerica Financial expense limitation ends, each Portfolio will
reimburse Allmerica Financial for any Portfolio expenses it reimbursed pursuant
to the expense limitation, provided that such reimbursement to Allmerica
Financial does not cause the Portfolio's "other expense" ratio to exceed the
limitation for that Portfolio set forth above. This reimbursement for the 1998
expenses will not commence until the Payment Group has been fully reimbursed for
the 1996 and 1997 expenses, as discussed below. After the two year period after
the Allmerica Financial expense limitation ends, the Portfolios' obligation to
reimburse Allmerica Financial will cease.
EXPENSE LIMITATIONS FOR 1996 AND 1997 EXPENSES. The former Manager of the
Trust, Palladian Advisors, Inc. ("PAI") agreed to limit operating expenses and
reimburse those expenses to the extent that each Portfolio's "other expenses"
(I.E., expenses other than management fees) from September 11, 1996 through
December 31, 1997 exceed the following expense limitations (expressed as an
annualized percentage of average daily net assets): Value Portfolio, 0.70%;
Growth Portfolio, 0.70%; International Growth Portfolio, 1.20%; Global Strategic
Income Portfolio, 1.20%; Global Interactive/Telecomm Portfolio, 1.20%. In
addition, PAI voluntarily contributed to the Portfolios the following amounts as
capital: Value Portfolio, $51,906.35; Growth Portfolio, $49,230.63;
International Growth Portfolio, $34,947.29; Global Strategic Income Portfolio,
$52,077.06; and Global Interactive/Telecomm Portfolio, $40,662.47. The amounts
were contributed to offset expenses accrued to the Portfolios in excess of the
expense limitations set forth above during the period from the commencement of
operations to September 10, 1996 when the expense limitations became effective.
At the request of the Board of Trustees, PAI committed to pay all amounts
due under the expense reimbursement arrangement on or about December 31, 1997.
In January 1998, however, PAI advised the Board of Trustees that it did not have
sufficient assets to make the required payment. Accordingly, the Board of
Trustees and PAI pursued and considered other options under which the payment
could be made. The Board of Trustees determined that it was in the best
interests of shareholders to
13
<PAGE>
accept an offer from a group (the "Payment Group") willing to immediately pay
to the Trust the full amount due under the expense limitation. The Payment
Group includes Allmerica Financial Life Insurance and Annuity Company
("Allmerica Financial"), the issuer of a variable annuity contract utilizing
the Portfolios as investment options, certain principals of PAI or entities
selling the variable contracts (H. Michael Schwartz, Lesta Summerfield-Stacom,
Andrew Westhem, and David Westhem). Summerfield-Stacom, Andrew Westhem, and
David Westhem).
On January 28, 1998, the Payment Group paid the Portfolios the following
amounts, which were the full amounts due under the expense limitation
arrangement: Value Portfolio, $128,362.72; Growth Portfolio, $114,448.91;
International Growth Portfolio, $89,895.43; Global Strategic Income Portfolio,
$103,436.57; Global Interactive/Telecomm Portfolio, $88,983.02. Accordingly,
the Trust has been fully reimbursed for amounts owed under the expense
limitation arrangement.
REIMBURSEMENT PROVISION FOR 1996 AND 1997 EXPENSES. Through December 31,
1999, each Portfolio must reimburse the Payment Group for the payment described
above, any fees provided that such reimbursement does not cause the Portfolio's
"other expense" ratio to exceed the previous expense limitation for that
Portfolio under the Manager's expense limitation arrangement. (Those
limitations are listed above.) This reimbursement obligation is the same as the
reimbursement obligation that was in place for PAI. After December 31, 1999,
the Portfolios' reimbursement liability to the Payment Group will cease.
CUSTODIAN AND TRANSFER AGENT
The custodian and transfer agent for the Trust is Investors Bank & Trust
Company, 89 South Street, Boston, MA 02111.
INVESTMENT OBJECTIVES AND POLICIES
Each of the Portfolios has a different investment objective, described
below. Each Portfolio is managed by its own Portfolio Manager. There can be no
assurance that any of the Portfolios will achieve their investment objective.
Each Portfolio is subject to the risk of changing economic, business, and
financial conditions, as well as the risk the Portfolio Manager will not
accurately anticipate those changes. As with any security, a risk of loss is
inherent in an investment in a Portfolio's shares.
The different types of securities and investment techniques used by the
individual Portfolio Managers all have attendant risks of varying degrees. For
example, with respect to equity securities, there can be no assurance of capital
appreciation and there is a substantial risk of decline. With respect to debt
securities, there exists the risk that the issuer of a security may not be able
to meet its obligations on interest or principal payments at the time called for
by the instrument. In addition, the value of debt instruments generally rises
and falls inversely with interest rates.
Certain types of investments and investment techniques common to one or
more Portfolios are described in greater detail, including the risks of each,
under "Description of Securities and Investment Techniques" in this Prospectus
and in the Statement of Additional Information.
The investment objectives of the Portfolios are fundamental, which means
that they may be changed only with shareholder approval in accordance with the
1940 Act. Unless otherwise indicated, each Portfolio's practices, policies, and
programs for achieving its objectives are not fundamental and thus may be
changed by the Board of Trustees without shareholder approval. The Statement of
Additional Information sets forth certain investment restrictions which are
fundamental, and, like the investment objectives, may be changed only with
shareholder approval.
THE VALUE PORTFOLIO
The Value Portfolio seeks to make money for investors by investing
primarily in companies that the Portfolio Manager believes are undervalued and
that by virtue of anticipated developments may, in the Portfolio Manager's
judgment, achieve significant capital appreciation.
In identifying such companies, the Portfolio Manager seeks to invest in
companies that, in the public market, are selling at a significant discount to
their private market value, the value the Portfolio Manager believes informed
industrialists would be willing to pay to acquire companies with similar
characteristics. If investor attention is focused on the underlying asset values
of these companies through an emerging or anticipated development or other
catalyst, an investment opportunity to realize this private market value may
exist. Undervaluation of a company can result from a variety of factors, such as
a lack of investor recognition of (1) the underlying value of a company's fixed
assets, (2) the value of a consumer or commercial franchise, (3) changes in the
economic or financial environment particularly affecting a company, (4) new,
improved or unique products or
14
<PAGE>
services, (5) new or rapidly expanding markets, (6) technological
developments or advancements affecting a company or its products, or (7)
changes in government regulations, political climate or competitive
conditions. The actual developments or catalysts particularly applicable to a
given company that may, in the Portfolio Manager's judgment, lead to
significant appreciation of that company's securities include: a change in
management or management policies; the acquisition of a significant equity
position by an investor or group of investors acting in concert; a merger,
reorganization, sale of a division, or a third-party or issuer tender offer,
the spin-off to shareholders of a subsidiary, division or other substantial
assets; or a recapitalization, an internal reorganization or the retirement
or death of a senior officer or substantial shareholder. In addition to the
foregoing factors, developments and catalysts, the Portfolio Manager, in
selecting investments, also considers the market price of the issuer's
securities, its balance sheet characteristics and the perceived strength of
its management.
The Portfolio seeks to achieve its objective by investing primarily in a
portfolio of common stocks, preferred stocks and other securities convertible
into, or exchangeable for, common stocks. The Portfolio may invest up to 5% of
its assets in high yield/high risk debt securities. See "Debt Securities," page
19. When the Portfolio Manager believes that a defensive investment posture is
warranted or when opportunities for capital appreciation do not appear
attractive, the Portfolio may temporarily invest all or a portion of its assets
in short-term money market instruments, such as obligations of the U.S.
Government and its agencies and instrumentalities, high-quality commercial paper
and bank certificates of deposit and time deposits and repurchase agreements
with respect to such instruments.
THE GROWTH PORTFOLIO
The Growth Portfolio seeks to make money for investors by investing
primarily in securities selected for their long-term growth prospects.
In considering securities for the Portfolio, the Portfolio Manager reviews
on a weekly basis the projected annual earnings, sales growth, quarterly profit
outlook and valuations of a universe of approximately 200 companies. These
companies are, for the most part, involved in the retail, food service,
healthcare, technology and financial services industries and typically have high
returns on equity, strong brand names, rapid unit volume sales growth and, with
the exception of financial companies, balance sheets with little or no debt. The
Portfolio Manager usually seeks to select companies that enjoy market dominance,
which, in turn, confers pricing power within a growing market niche. Such
pricing control normally produces high returns on investment which allows
companies to fund superior growth without the need for dilutive financing.
The Portfolio Manager's 200 stock universe is constantly being modified and
updated with an active and ongoing effort to find more attractive stocks.
Additions to the list are made when the Portfolio Manager finds a company with
financial characteristics superior to the least attractive stocks in the current
universe. Deletions are made when a company's fundamental prospects
deteriorate.
From the Portfolio Manager's 200 stock universe, investments are made in
those stocks which meet all of the following criteria: (1) accelerating near-
term profit growth; (2) valuation in the lower half of the stock's historic
range; and (3) price momentum superior to that of the overall market. Normally,
60 to 80 stocks from the Portfolio Manager's universe meet these tests.
Stocks will typically be sold whenever any of the following occurs: (1) a
reduction in quarterly or annual earnings estimates; (2) a company's long-term
competitive position is called into question; (3) the stock's valuation on the
next 12 months' earnings moves into the upper 10% of its historic range; or (4)
the stock price experiences an unexpected decline.
The Portfolio's policy stresses flexibility and adaptability in arranging
its Portfolio to seek the desired results. Common stocks will generally
constitute all or most of the Portfolio, but the Portfolio may invest in
preferred stocks, debt securities and cash instruments when, in the judgment of
the Portfolio Manager, a more conservative investment position seems appropriate
in light of anticipated market conditions. The Portfolio may invest up to 5% of
its assets in high yield/high risk debt securities. See "Debt Securities," page
19. The Portfolio will not invest for purposes of exercising management or
control.
The Portfolio will be subject to the risks of investment in equity
securities, i.e., there is no assurance of capital appreciation and there is a
substantial risk of decline. Investment in the securities of new companies may
in some instances involve a higher degree of risk than investments in securities
of companies with longer operating histories. The Portfolio does not intend to
invest in securities of companies with no operating history. Any current income
from dividends received from such securities will be entirely incidental.
15
<PAGE>
THE INTERNATIONAL GROWTH PORTFOLIO
The International Growth Portfolio seeks to make money for investors by
investing internationally for long-term capital appreciation, primarily in
equity securities.
Foreign securities are defined as securities of issuers whose principal
activities are outside of the United States. In determining whether an issuer's
principal activities and interests are outside the United States, the Portfolio
Manager will look at such factors as the location of its assets, personnel,
sales and earnings.
Normally, at least 65% of the Portfolio's total assets will be invested in
securities of issuers from at least three different countries outside of North
America. Although the Portfolio may invest up to 35% in securities of issuers
from Canada, Mexico and the United States, the Portfolio Manager currently does
not expect to invest in a significant part of this amount in securities of U.S.
issuers. No more than 20% of the Portfolio's net assets may be invested in the
securities of any one foreign country, except that the Portfolio may invest up
to 35% of net assets in securities of issuers located in any one of the
following countries: Australia, Canada, France, Japan, the United Kingdom or
Germany.
In considering securities for the Portfolio, the Portfolio Manager will
concentrate on companies with market capitalization of under $1 billion. When
allocating the Portfolio's investments among geographic regions and individual
countries, the Portfolio Manager considers various criteria, such as prospects
for relative economic growth among countries, expected levels of inflation,
government policies influencing business conditions, and the outlook for
currency relationships. The Portfolio Manager expects to invest most of the
Portfolio's assets in securities of issuers located in developed countries in
these general geographic areas: the Americas (other than the United States),
the Far East and Pacific Basin, Australia, Scandinavia and Western Europe.
The Portfolio Manager may invest the Portfolio's assets in all types of
securities, most of which are denominated in foreign currencies. The Portfolio
Manager expects that opportunities for long term growth of capital will come
primarily from common stock, securities such as warrants or rights that are
convertible into common stock, preferred stock, and depository receipts for
those securities. The Portfolio may invest up to 5% of its assets in high
yield/high risk debt securities. See "Debt Securities," page 19. The Portfolio
does not place any emphasis on dividends or interest income except when the
Portfolio Manager believes this income will have a favorable influence on the
market value of the security. The Portfolio may invest in indexed securities
whose value depends on the price of foreign currencies, commodities, securities
indices, or other financial indicators. In the normal course of managing the
Portfolio, the Portfolio Manager may invest a portion of the Portfolio's assets
in U.S. and foreign government obligations and money market securities
(including repurchase agreements) when the Portfolio has monies not yet
invested, it has sold one security and is waiting to buy another one, so that it
will be prepared to meet redemption requests, or to earn a return on available
cash balances. When market conditions warrant, the Portfolio Manager can make
substantial temporary defensive investments in U.S. government obligations or
investment-grade obligations of companies incorporated in and having principal
business activities in the United States.
THE GLOBAL STRATEGIC INCOME PORTFOLIO
The Global Strategic Income Portfolio seeks to make money for investors by
investing for high current income and capital appreciation in a variety of
domestic and foreign fixed-income securities.
The Global Strategic Income Portfolio allocates its assets among debt
securities of issuers in three separate areas: (1) the United States, (2)
developed foreign countries, and (3) emerging markets. The Portfolio will select
particular debt securities in each sector based on their relative investment
merits. Within each area, the Portfolio selects debt securities from those
issued by governments and their agencies and instrumentalities; central banks;
and commercial banks and other corporate entities.
The Portfolio Manager will actively manage both the allocation of assets
among the major markets and the currencies underlying the fixed income
securities purchased for the Portfolio. In doing so, the Portfolio Manager
will rely on its proprietary technical and fundamental global fixed income
and multi-currency systems which allow the Portfolio Manager to identify
market changes. The Portfolio Manager does not use its system to forecast
market changes or for market timing purposes.
Debt securities in which the Global Strategic Income Portfolio may invest
include bonds, notes, debentures, and other similar instruments. The Portfolio
normally invests at least 50% of its total assets in U.S. and foreign debt and
other fixed income securities that, at the time of purchase, are rated at least
investment grade, or, if unrated, are determined by the Portfolio Manager
16
<PAGE>
to be of comparable quality. No more than 50% of the Portfolio's assets may
be invested in securities of below investment grade quality (also called high
yield/high risk bonds), which involve a high degree of risk and are
predominantly speculative. See "Debt Securities", page 19. Consistent with
the foregoing percentage limitations, the Portfolio may invest in securities
that are in default in payment of principal and/or interest.
For purposes of the Portfolio's operations, "emerging markets" consist of
all countries determined by Portfolio Manager to have developing or emerging
economies and markets. These countries generally are expected to include every
country in the world except the United States, and the developed foreign
countries of Canada, Japan, Australia, New Zealand and most countries in Western
Europe. The Global Strategic Income Portfolio considers investment in the
following emerging markets: Algeria, Argentina, Bolivia, Botswana, Brazil,
Chile, China, Colombia, Costa Rica, Czechoslovakia, Ecuador, Egypt, Finland,
Greece, Hong Kong, Hungary, India, Indonesia, Israel, Ivory Coast, Jamaica,
Jordan, Kenya, Malaysia, Mexico, Morocco, Nicaragua, Nigeria, Pakistan, Panama,
Peru, Philippines, Poland, Portugal, Russia, Singapore, South Korea, Sri Lanka,
Taiwan, Thailand, Turkey, Uruguay, Venezuela, Zimbabwe.
The Global Strategic Income Portfolio's investments in emerging market
securities will consist substantially of debt securities issued by emerging
market governments that are traded in the markets of developed countries or
groups of developed countries. The Portfolio Manager may invest in debt
securities of emerging market issuers that it determines to be suitable
investments for the Portfolio without regard to ratings. Currently,
substantially all emerging market debt securities are of below investment grade
quality. Because the Global Strategic Income Portfolio's investment in debt
securities rated below investment grade (i.e., high yield/high risk bonds) is
limited to 50% of its total assets, its investment in emerging market debt
securities is therefore effectively limited to 50% of its assets as well.
Emerging market securities are subject to greater risks than securities from
developed nations. See "Foreign Securities," page 23.
The Global Strategic Income Portfolio also may consider making carefully
selected investments in below investment grade debt securities of corporate
issuers in the United States and in developed foreign markets, subject to the
overall 50% limitation on high yield/high risk bonds. The Global Strategic
Income Portfolio also may invest up to 5% of its assets in loan participations
and assignments. More information is included in the Statement of Additional
Information.
17
<PAGE>
THE GLOBAL INTERACTIVE/TELECOMM PORTFOLIO
The Global Interactive/Telecomm Portfolio seeks to make money for investors
primarily by investing globally in equity securities of companies engaged in the
development, manufacture or sale of interactive and/or telecommunications
services and products.
Under normal circumstances, at least 65% of the Portfolio's total assets
will be invested in common and preferred stocks of (1) companies participating
in emerging technological advances in interactive services and products that are
accessible to individuals in their homes or offices through consumer electronics
devices; (2) telecommunications companies; and (3) companies outside of the
telecommunications industry which, in the opinion of the Portfolio Manager,
stand to benefit from development in the telecommunications industry. The
Portfolio may invest up to 5% of its assets in high yield/high risk debt
securities. See "Debt Securities," page 19. When the Portfolio Manager
believes that a defensive investment posture is warranted or when opportunities
for capital appreciation do not appear attractive, the Portfolio may temporarily
invest all or a portion of its assets in short-term money market instruments,
such as obligations of the U.S. Government and its agencies and
instrumentalities, high-quality commercial paper and bank certificates of
deposit and time deposits and repurchase agreements with respect to such
instruments.
For example, the Portfolio may invest in companies involved in the
following products and services: emerging technologies combining television,
telephone and computer systems; regular telephone service; wireless
communications services and equipment, including cellular telephone data and
voice transmission; electronic components and communications equipment; video
conferencing; electronic mail; local and wide area networking; linkage of data
and word processing systems; publishing and information systems; broadcasting,
including television and radio; cable television systems and networks; wireless
cable television and other emerging distribution technologies; the creation,
packaging, distribution, and ownership of entertainment programming; computer
hardware and software and other equipment used in the creation and distribution
of entertainment programming; interactive and multimedia programming including
home shopping and multiplayer games; and advertising agencies and niche
advertising mediums such as in-store or direct mail.
In analyzing companies for investment, the Portfolio Manager ordinarily
looks for several of the following characteristics: above-average per share
earnings growth; high return on invested capital; a healthy balance sheet; sound
financial and accounting policies and overall financial strength; strong
competitive advantages; and effective research and product development and
marketing.
The Portfolio Manager will allocate the Portfolio's assets among securities
of countries and in currency denominations and industry sectors where
opportunities for meeting the Portfolio's investment objective are expected to
be the most attractive. The Portfolio may invest substantially in securities
denominated in one or more foreign currencies. Under normal conditions, the
Portfolio will invest in at least three different countries, including the
United States; issuers in any one country, other than the U.S., will represent
no more than 40% of the Portfolio's assets.
The governments of some foreign countries have been engaged in programs of
selling part or all of their stakes in government owned or controlled
enterprises ("privatizations"). The Portfolio Manager believes that
privatizations in the telecommunications industry may offer opportunities for
significant capital appreciation and intends to invest assets of the Portfolio
in privatizations in appropriate circumstances. In certain foreign countries,
the ability of foreign entities such as the Portfolio to participate in
privatizations may be limited by local law and/or the terms on which the
Portfolio may be permitted to participate may be less advantageous than those
afforded local investors. There can be no assurance that foreign governments
will continue to sell companies currently owned or controlled by them or that
privatization programs will be successful.
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
The following discussion describes in greater detail different types of
securities and investment techniques used by the individual Portfolios, as
described in "Investment Objectives and Policies" as well as the risks
associated with such securities and techniques.
18
<PAGE>
U.S. GOVERNMENT SECURITIES
All of the Portfolios may invest in U.S. Government securities. U.S.
Government securities are obligations of, or are guaranteed by, the U.S.
Government, its agencies or instrumentalities. Treasury bills, notes, and bonds
are direct obligations of the U.S. Treasury. Securities guaranteed by the U.S.
Government include federal agency obligations guaranteed as to principal and
interest by the U.S. Treasury (such as Government National Mortgage Association
("GNMA") certificates, described in the section on "Mortgage-Backed Securities,"
and Federal Housing Administration debentures). In guaranteed securities, the
payment of principal and interest is unconditionally guaranteed by the U.S.
Government, and thus they are of the highest credit quality. Such direct
obligations or guaranteed securities are subject to variations in market value
due to fluctuations in interest rates, but, if held to maturity, the U.S.
Government is obligated to or guarantees to pay them in full.
Securities issued by U.S. Government instrumentalities and certain federal
agencies are neither direct obligations of nor guaranteed by the Treasury.
However, they involve federal sponsorship in one way or another: some are backed
by specific types of collateral; some are supported by the issuer's right to
borrow from the Treasury; some are supported by the discretionary authority of
the Treasury to purchase certain obligations of the issuer; others are supported
only by the credit of the issuing government agency or instrumentality. These
agencies and instrumentalities include, but are not limited to, Federal Land
Banks, Farmers Home Administration, Federal National Mortgage Association
("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC"), Student Loan
Mortgage Association, Central Bank for Cooperatives, Federal Intermediate Credit
Banks, and Federal Home Loan Banks.
DEBT SECURITIES
All Portfolios may invest in debt securities of domestic or foreign issuers
(both U.S. dollar denominated and non-U.S. dollar denominated). All Portfolios
may also invest in obligations of international organizations such as the
International Bank for Reconstruction and Development (the World Bank). Each
Portfolio may only invest in (1) debt securities which meet the minimum ratings
criteria set forth for that particular Portfolio and (2) unrated debt securities
that are, in the Portfolio Manager's determination, comparable in quality to the
rated debt securities in which the Portfolio may invest.
The investment return on a corporate debt security reflects interest
earnings and changes in the market value of the security. The market value of
corporate debt obligations may be expected to rise and fall inversely with
interest rates generally. There also exists the risk that the issuers of the
securities may not be able to meet their obligations on interest or principal
payments at the time called for by an instrument. Bonds rated BBB or Baa, which
are considered medium-grade category bonds, do not have economic characteristics
that provide the high degree of security with respect to payment of principal
and interest associated with higher rated bonds, and generally have some
speculative characteristics. A bond will be placed in this rating category where
interest payments and principal security appear adequate for the present, but
economic characteristics that provide longer term protection may be lacking. Any
bond, and particularly those rated BBB or Baa, may be susceptible to changing
conditions, particularly to economic downturns, which could lead to a weakened
capacity to pay interest and principal.
The Global Strategic Income Portfolio may invest up to 50% of its assets in
debt securities that are below investment grade (i.e., rated BB or lower by
Standards & Poor's, rated Ba or lower by Moody's, or unrated but determined by
the Portfolio Manager to be of similar quality). These securities are commonly
referred to as "junk bonds" or "high yield/high risk debt securities." The
Value, Growth, International Growth and Global Interactive/Telecomm Portfolios
may each invest up to 5% of assets in high yield/high risk debt securities.
High yield/high risk debt securities involve significant risks. They are
considered predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the obligation.
The market value of the securities also tend to be more sensitive than higher
rated securities to news about the issuer and changes in overall economic
conditions. In addition, markets for lower-rated securities may be more limited
than for higher-rated securities.
New issues of certain debt securities are often offered on a when-issued or
firm-commitment basis; that is, the payment obligation and the interest rate are
fixed at the time the buyer enters into the commitment, but delivery and payment
for the securities normally take place after the customary settlement time. The
value of when-issued securities or securities purchased on a firm-commitment
basis may vary prior to and after delivery depending on market conditions and
changes in interest rate levels. However, the Portfolios will not accrue any
income on these securities prior to delivery. The Portfolios will maintain in a
segregated account with its custodian an amount of cash or high quality debt
securities equal (on a daily marked-to-market basis) to the amount of its
commitment to purchase the when-issued securities or securities purchased on a
firm-commitment basis.
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Many securities of foreign issuers are not rated by Moody's or Standard and
Poor's; therefore, the selection of such issuers depends, to a large extent, on
the credit analysis performed or used by the Portfolio Manager.
MORTGAGE-BACKED SECURITIES
All Portfolios may invest in mortgage-backed securities issued by the
Government National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA"), and the Federal Home Loan Mortgage Corporation ("FHLMC").
These securities represent an interest in a pool of mortgages, such as 30-year
and 15-year fixed mortgages and adjustable rate mortgages. For GNMA securities,
the payment of principal and interest on the underlying mortgages is guaranteed
by the full faith and credit of the U.S.; for FNMA and FHLMC securities the
payment of principal and interest is guaranteed by the issuing agency but not
the U.S. The guarantees, however, do not extend to the securities' value or
yield, which are likely to fluctuate inversely with fluctuations in interest
rates. Because the prepayment characteristics of the underlying mortgages vary,
it is not possible to predict accurately the average life of a particular issue
of mortgage-backed securities.
The Portfolios may invest in mortgage-backed securities issued by private
entities, such as commercial or mortgage banks, savings and loan associations,
or broker-dealers, that meet the quality standards discussed above for debt
securities.
The Portfolios may invest in collateralized mortgage obligations ("CMOs").
A CMO is a security issued by a corporation or a U.S. government instrumentality
that is backed by a portfolio of mortgages or mortgage-backed securities. The
issuer's obligation to make interest and principal payments is secured by the
underlying portfolio of mortgages or mortgage-backed securities. CMOs are
partitioned into several classes with a ranked priority by which classes of
obligations are redeemed.
OTHER ASSET-BACKED SECURITIES
All Portfolios may invest in asset-backed securities, which represent a
participation in, or are secured by and payable from, a stream of payments
generated by particular assets, such as automobile or credit card receivables.
Asset-backed securities present certain risks, including the risk that the
underlying obligor on the asset, such as the automobile purchaser or the credit
card holder, may default on his or her obligation. In addition, asset-backed
securities often do not provide a security interest in the related collateral.
For example, credit card receivables are generally unsecured, and the pool of
automobile receivables may not include the security interests in those
automobiles. In general, however, these type of loans have a shorter average
life than mortgage loans and are less likely to have substantial prepayments.
VARIABLE AND FLOATING RATE SECURITIES
All Portfolios may invest in variable and floating rate securities.
Variable rate securities provide for automatic establishment of a new
interest rate at fixed intervals (e.g., daily, monthly, semi-annually, etc.).
Floating rate securities provide for automatic adjustment of the interest rate
whenever some specified interest rate index changes. The interest rate on
variable or floating rate securities is ordinarily determined by reference to or
is a percentage of a bank's prime rate, the 90-day U.S. Treasury bill rate, the
rate of return on commercial paper or bank certificates of deposit, an index of
short-term interest rates, or some other objective measure.
Variable or floating rate securities frequently include a demand feature
entitling the holder to sell the securities to the issuer at par value. In many
cases, the demand feature can be exercised at any time on 7 days' notice; in
other cases, the demand feature is exercisable at any time on 30 days' notice or
on similar notice at intervals of not more than one year. Some securities which
do not have variable or floating interest rates may be accompanied by puts
producing similar results and price characteristics.
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BANKING INDUSTRY AND SAVINGS INDUSTRY OBLIGATIONS
All Portfolios may invest in certificates of deposit, time deposits,
bankers' acceptances, and other short-term debt obligations issued by commercial
banks and in certificates of deposit, time deposits, and other short-term
obligations issued by savings and loan associations ("S&Ls"). Certificates of
deposit are receipts from a bank or an S&L for funds deposited for a specified
period of time at a specified rate of return. Time deposits in banks or S&Ls are
generally similar to certificates of deposit, but are uncertificated. Bankers'
acceptances are time drafts drawn on commercial banks by borrowers, usually in
connection with international commercial transactions. Each Portfolio may also
invest in obligations of foreign branches of commercial banks and foreign banks
so long as the securities are U.S. dollar-denominated. See "Foreign Securities"
on page 23 and "Banking Industry and Savings Industry Obligations" in the
Statement of Additional Information regarding risks attending investment in
foreign instruments generally and foreign bank instruments in particular.
The Portfolios will not invest in obligations issued by a commercial bank
or S&L unless:
(i) the bank or S&L has total assets of at least $1 billion, or the
equivalent in other currencies, and the institution has outstanding securities
rated A or better by Moody's or Standard and Poor's, or, if the institution has
no outstanding securities rated by Moody's or Standard & Poor's, it has, in the
determination of the Portfolio Manager, similar creditworthiness to institutions
having outstanding securities so rated;
(ii) in the case of a U.S. bank or S&L, its deposits are insured by the
Federal Deposit Insurance Corporation or the Savings Association Insurance Fund,
as the case may be; and
(iii) in the case of a foreign bank, the security is, in the determination
of the Portfolios' Portfolio Manager, of an investment quality comparable with
other debt securities which may be purchased by the Portfolios. These
limitations do not prohibit investments in securities issued by foreign branches
of U.S. banks, provided such U.S. banks meet the foregoing requirements.
COMMERCIAL PAPER
All Portfolios may invest in commercial paper, which includes short-term
unsecured promissory notes, variable rate demand notes, and variable note master
demand notes issued by domestic and foreign bank holding companies,
corporations, and financial institutions, as well as similar taxable instruments
issued by government agencies and instrumentalities. All commercial paper
purchased by the Portfolios must be, the time of investment, (i) rated "P-l" by
Moody's or "A-l" by S&P, (ii) issued or guaranteed as to principal and interest
by issuers having an existing debt security rating of "Aa" or better by Moody's
or "AA" by S&P, or (iii) securities which, if not rated, are in the opinion of
the Portfolio Manager of an investment quality comparable to rated commercial
paper in which the Portfolio may invest. See Appendix B for description of
these ratings.
REPURCHASE AGREEMENTS
All Portfolios may enter into repurchase agreements with banks and
broker-dealers under which they acquire securities subject to an agreement
with the seller to repurchase the securities at an agreed-upon time and
price. If the seller should default on its obligation to repurchase the
securities, the Portfolio may experience delays or difficulties in exercising
its right to realize a gain upon the securities held as collateral and might
incur a loss if the value of the securities should decline.
REVERSE REPURCHASE AGREEMENTS
All Portfolios may enter into reverse repurchase agreements with banks and
broker-dealers. Those agreements have the characteristics of borrowing and
involve the sale of securities held by a Portfolio with an agreement to
repurchase the securities at an agreed-upon price and date, which reflect a rate
of interest paid for the use of funds for the period. Generally, the effect of
such a transaction is that a Portfolio can recover all or most of the cash
invested in the securities involved during the term of the reverse repurchase
agreement, while in many cases it will be able to keep some of the interest
income associated with those securities. Such transactions are only
advantageous if the Portfolio has an opportunity to earn a greater rate of
interest on the cash derived from the transaction than the interest cost of
obtaining that cash. A Portfolio may be unable to realize a return from the use
of the proceeds equal to or greater than the interest required to be paid.
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LENDING PORTFOLIO SECURITIES
For the purpose of realizing additional income, each Portfolio may lend
securities with a value of up to 33% of its total assets to unaffiliated
broker-dealers or institutional investors. Any such loan will be
continuously secured by collateral at least equal to the value of the
security loaned. Although the risk of lending portfolio securities are
believed to be slight, as with other extensions of secured credit, such
lending could result in delays in receiving additional collateral or in the
recovery of the securities or possible loss of rights in the collateral
should the borrower fail financially. Loans will only be made to firms
deemed to be of good standing and will not be made unless the consideration
to be earned from such loans would justify the risk.
ILLIQUID SECURITIES
Each Portfolio may invest up to 15% of its net assets in securities for
which there is no readily available market ("illiquid securities"), which would
include repurchase agreements having more than 7 days to maturity. A
considerable period of time may elapse between a Portfolio's decision to dispose
of such securities and the time when the Portfolio is able to dispose of them,
during which time the value of the securities could decline. The SEC has
adopted Rule 144A which permits resale among certain institutional investors of
certain unregistered securities. As a result, a significant institutional
trading market has developed in many unregistered securities relying on this
rule. In determining whether such securities should be considered liquid, the
Portfolios will consider the following factors, among others: (1) the frequency
of the trades and the quotes for the security; (2) the number of dealers willing
to purchase or sell the security and the number of potential purchasers; (3)
dealer undertakings to make a market in the security; and (4) the nature of the
security and the nature of the marketplace trades (for example, the time needed
to dispose of the security, the method of soliciting offers, and the mechanics
of the transfer).
WARRANTS
Each Portfolio may invest up to 5% of its net assets in warrants (not
including those that have been acquired in units or attached to other
securities), measured at the time of acquisition. No Portfolio may acquire a
warrant not listed on the New York or American Stock Exchanges if, after the
purchase, more than 2% of the Portfolio's assets would be invested in such
warrants.
The holder of a warrant has the right to purchase a given number of shares
of a particular issuer at a specified price until expiration of the warrant.
Such investments can provide a greater potential for profit or loss than an
equivalent investment in the underlying security. Prices of warrants do not
necessarily move in tandem with the prices of the underlying securities, and are
speculative investments. They pay no dividends and confer no rights other than a
purchase option. If a warrant is not exercised by the date of its expiration,
the Portfolio will lose its entire investment in such warrant.
OTHER INVESTMENT COMPANIES
All Portfolios may invest in shares issued by other investment companies. A
Portfolio is limited in the degree to which it may invest in shares of another
investment company in that it may not, at the time of the purchase, (1) acquire
more than 3% of the outstanding voting shares of the investment company, (2)
invest more than 5% of the Portfolios' total assets in the investment company,
or (3) invest more than 10% of the Portfolios' total assets in all investment
company holdings. As a shareholder in any investment company, a Portfolio will
bear its ratable share of the investment company's expenses, including
management fees in the case of a management investment company.
SHORT SALES
All Portfolios may make short sales of securities. A short sale is a
transaction in which the Portfolio sells a security it does not own (but has
borrowed) in anticipation of a decline in the market price of the security. A
Portfolio may make short sales to offset a potential decline in a long position
or a group of long positions, or if the Portfolio Manager believes that a
decline in the price of a particular security or group of securities is likely.
When a Portfolio makes a short sale, the proceeds it receives are retained
by the broker until the Portfolio replaces the borrowed security. In order to
deliver the security to the buyer, the Portfolio must arrange through a broker
to borrow the security and, in so doing, the Portfolio becomes obligated to
replace the security borrowed at its market price at the time of replacement,
whatever that price may be. The Portfolio may have to pay a premium to borrow
the security. The Portfolio must also pay any dividends or interest payable on
the security until the Portfolio replaces the security.
The Portfolios' obligation to replace the security borrowed in connection
with the short sale will be secured by collateral deposited with the broker,
consisting of cash or U.S. Government securities or other securities acceptable
to the broker. In addition, with respect to any short sale, other than short
sales against the box, as discussed below, the Portfolios will be required to
deposit collateral consisting of cash, cash items, or U.S. Government securities
in a segregated account with its custodian in an
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amount such that the value of the sum of both collateral deposits is at all
times equal to at least 100% of the current market value of the securities
sold short. The deposits do not necessarily limit the Portfolios' potential
loss on a short sale, which may exceed the entire amount of the collateral.
If the price of the security sold short increases between the time of the
short sale and the time the Portfolios replaces the borrowed security, the
Portfolio will incur a loss, and if the price declines during this period, the
Portfolio will realize a capital gain. Any realized gain will be decreased, and
any incurred loss increased, by the amount of transactional costs and any
premium, dividend, or interest which the Portfolios may have to pay in
connection with such short sale.
A Portfolio may make a short sale only if, at the time the short sale is
made and after giving effect thereto, the market value of all securities sold
short is 25% or less of the value of its net assets and the market value of
securities sold short which are not listed on a national securities exchange
does not exceed 10% of the Portfolio's net assets. In addition, a Portfolio will
not make short sales of the securities of any one issuer to the extent of more
than 2% of the Portfolio's net assets, nor will a Portfolio make short sales of
more than 2% of the outstanding securities of one class of any issuer. The
Portfolios are not required to liquidate an existing short sale position solely
because a change in market values has caused one or more of these percentage
limitations to be exceeded.
SHORT SALES AGAINST THE BOX
All Portfolios may make short sales "against the box." A short sale
"against the box" is a short sale where, at the time of the short sale, a
Portfolio owns or has the immediate and unconditional right, at no added cost,
to obtain the identical security. The Portfolios would enter into such a
transaction to defer a gain or loss for Federal income tax purposes on the
security owned by the Portfolio or to receive a portion of the interest earned
by the executing broker from the proceeds of the sale. Short sales against the
box are not subject to the percentage limitations on short sales described
above.
FOREIGN SECURITIES
All Portfolios, except the Global Strategic Income Portfolio, may invest in
equity securities of foreign issuers. Each of the Portfolios may invest in
American Depository Receipts ("ADRs"), which are described below. All
Portfolios may invest in foreign government securities that are denominated in
U.S. dollars, and none of these Portfolios except for the International Growth
and Global Interactive/Telecomm Portfolios, will purchase foreign government
securities if, as a result, more than 10% of the value of its total assets would
be invested in such securities. The Portfolios may invest in foreign branches
of commercial banks and foreign banks. See the "Banking Industry and Savings
Industry Obligations" discussion in this section for further description of
these securities.
Each Portfolio is subject to the following guidelines for diversification
of foreign security investments. If a Portfolio has less than 20% of its assets
in foreign issuers, then all of such investment may be in issuers domiciled or
primarily traded in one country. If a Portfolio has at least 20% but less than
40% of its assets in foreign issuers, then such investment must be allocated to
issuers domiciled or primarily traded in at least two different countries.
Similarly, if a Portfolio has at least 40% but less than 60% of its assets in
foreign issuers, such investment must be allocated in at least three different
countries. Foreign investments must be allocated to at least four different
countries if at least 60% of a Portfolios' assets is in foreign issuers, and to
at least five different countries if at least 80% is in foreign issuers.
A Portfolio may have no more than 20% of its net asset value invested in
securities of issuers domiciled or primarily traded in any one foreign country,
except that a Portfolio may have up to 35% of its net asset value invested in
securities of issuers domiciled or primarily traded in any one of the following
countries: Australia, Canada, France, Japan, The United Kingdom, or West
Germany.
Investments in foreign securities offer potential benefits not available
solely in securities of domestic issuers by offering the opportunity to invest
in foreign issuers that appear to offer growth potential, or in foreign
countries with economic policies or business cycles different from those of the
United States, or to reduce fluctuations in portfolio value by taking advantage
of foreign stock markets that may not move in a manner parallel to U.S. markets.
Investments in securities of foreign issuers involve certain risks not
ordinarily associated with investments in securities of domestic issuers. Such
risks include fluctuations in foreign exchange rates, future political and
economic developments, and the possible imposition of exchange controls or other
foreign governmental laws or restrictions. Since each of these Portfolios may
invest in securities denominated or quoted in currencies other than the U.S.
dollar, changes in foreign currency exchange rates will affect the value of
securities in the portfolio and the unrealized appreciation or depreciation of
investments so far as U.S. investors are concerned. In addition, with respect to
certain
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countries, there is the possibility of expropriation of assets, confiscatory
taxation, other foreign taxation, political or social instability, or
diplomatic developments that could adversely affect investments in those
countries.
There may be less publicly available information about a foreign company
than about a U.S. company, and foreign companies may not be subject to
accounting, auditing, and financial reporting standards and requirements
comparable to or as uniform as those of U.S. companies. Foreign securities
markets, while growing in volume, have, for the most part, substantially less
volume than U.S. markets. Securities of many foreign companies are less liquid
and their prices more volatile than securities of comparable U.S. companies.
Transactional costs in non-U.S. securities markets are generally higher than in
U.S. securities markets. There is generally less government supervision and
regulation of exchanges, brokers, and issuers than there is in the U.S. A
Portfolio might have greater difficulty taking appropriate legal action with
respect to foreign investments in non-U.S. courts than with respect to domestic
issuers in U.S. courts. In addition, transactions in foreign securities may
involve greater time from the trade date until settlement than domestic
securities transactions and involve the risk of possible losses through the
holding of securities by custodians and securities depositories in foreign
countries.
Dividend and interest income from foreign securities may generally be
subject to withholding taxes by the country in which the issuer is located and
may not be recoverable by a Portfolio or its investors.
ADRs are certificates issued by a U.S. bank or trust company representing
the right to receive securities of a foreign issuer deposited in a foreign
subsidiary or branch or a correspondent of that bank. Generally, ADRs, in
registered form, are designed for use in U.S. securities markets and may offer
U.S. investors more liquidity than the underlying securities.
Investment in emerging markets countries presents risks in a greater degree
than, and in addition to, those presented by investment in foreign issuers in
general. A number of emerging market countries restrict, to varying degrees,
foreign investment in securities. Repatriation of investment income, capital,
and proceeds of sales by foreign investors may require governmental registration
and/or approval in some emerging market countries. A number of the currencies
of developing countries have experienced significant declines against the U.S.
dollar in recent years, and devaluation may occur subsequent to investments in
those currencies by the Portfolio. Inflation and rapid fluctuations in
inflation rates have had and may continue to have negative effects on the
economies and securities markets of certain emerging market countries.
Many of the emerging securities markets are relatively small, have low
trading volumes, suffer periods of relative illiquidity, and are characterized
by significant price volatility. There is a risk in emerging market countries
that a future economic or political crisis could lead to price controls, forced
mergers of companies, expropriation or confiscatory taxation, seizure,
nationalization, foreign exchange controls (which may include suspension of the
ability to transfer currency from a given country) or creation of government
monopolies, any of which may have a detrimental effect on a Portfolio's
investment.
INVESTMENT IN GOLD AND OTHER PRECIOUS METALS
All Portfolios may invest up to 10% of its total assets, in gold bullion
and coins and other precious metals (silver or platinum) bullion and in futures
contracts with respect to such metals. Each Portfolio may also engage in gold
futures contracts. (See "Futures Contracts" for further explanation of this
investment technique.) The Portfolios will further restrict the level of their
metal investments if necessary in order to comply with applicable regulatory
requirements. In order to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), each
Portfolio intends to manage its metal investments and/or futures contracts on
metals so that less than 10% of its gross income for tax purposes during any
fiscal year (the current limit on so-called non-qualifying income) is derived
from these and other sources that produce such non-qualifying income.
Metals will not be purchased in any form that is not readily marketable,
and gold coins will be purchased for their intrinsic value only, i.e., coins
will not be purchased for their numismatic value. Any metals purchased by the
Portfolios will be delivered to and stored with a qualified custodian bank.
Metal investments do not generate interest or dividend income and will subject
the Portfolios to higher custody and transactional costs than are normally
associated with the ownership of securities or futures contracts on precious
metals.
Metal investments are considered speculative and are affected by various
worldwide economic, financial, and political factors. Prices may fluctuate
sharply over short time periods due to changes in inflation expectations in
various countries, metal sales by central banks of governments or international
agencies, speculation, changes in industrial and commercial demand, and
governmental prohibitions or restriction on the private ownership of certain
precious metals or minerals. At the present time,
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there are four major producers of gold bullion: the Republic of South Africa,
the United States, Canada, and Australia. Political and economic conditions
in these countries will have a direct effect on the mining and distribution
of gold and, consequently, on its price.
FUTURES CONTRACTS
All Portfolios may purchase and sell (i) interest rate futures contracts,
(ii) stock index futures contracts, (iii) foreign currency futures contracts,
(iv) futures contracts on gold and other precious metals, and (v) options on
these futures contracts. A futures contract provides for the future sale by one
party and purchase by the other party of a specified amount of a particular
financial instrument or commodity for a specified price at a designated date,
time, and place.
The Portfolios will use futures contracts solely for the purpose of hedging
positions with respect to securities, interest rates, foreign currencies, and
gold and other precious metals.
An option on a futures contract gives the purchaser or holder the right,
but not the obligation, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at
a specified price at any time during the option exercise period. The Portfolios
will utilize options on futures contracts for the same purposes that they use
the underlying futures contracts.
There are several risks associated with the use of futures and futures
options for hedging purposes. While a Portfolio's hedging transactions may
protect it against adverse movements in the general level of interest rates or
other economic conditions, such transactions could also preclude a Portfolio
from the opportunity to benefit from favorable movements in the level of
interest rates or other economic conditions. There can be no guarantee that
there will be correlation between price movements in the hedging vehicle and in
the securities or other assets being hedged. An incorrect correlation could
result in a loss on both the hedged assets and the hedging vehicle so that the
Portfolio's return might have been better if hedging had not been attempted. The
degree of imperfection of correlation depends on circumstances such as
variations in speculative market demand for futures and futures options,
including technical influences in futures trading and futures options, and
differences between the financial instruments being hedged and the instruments
underlying the standard contracts available for trading in such respects as
interest rate levels, maturities, and creditworthiness of issuers. A decision as
to whether, when, and how to hedge involves the exercise of skill and judgment
and even a well-conceived hedge may be unsuccessful to some degree because of
market behavior or unexpected market trends.
There can be no assurance that a liquid market will exist at a time when a
Portfolio seeks to close out a futures contract or a futures option position.
Most futures exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single day; once the daily limit
has been reached on a particular contract, no trades may be made that day at a
price beyond that limit. In addition, certain of these instruments are
relatively new and without a significant trading history. As a result, there is
no assurance that an active secondary market will develop or continue to exist.
The daily limit governs only price movements during a particular trading day and
therefore does not limit potential losses because the limit may work to prevent
the liquidation of unfavorable positions. For example, futures prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of positions and
subjecting some holders of futures contracts to substantial losses. Lack of a
liquid market for any reason may prevent the Portfolios from liquidating an
unfavorable position and the Portfolios would remain obligated to meet margin
requirements and continue to incur losses until the position is closed.
A Portfolio will only enter into futures contracts or futures options which
are standardized and traded on a U.S. exchange or board of trade, or, in the
case of futures options, for which an established over-the-counter market
exists.
OPTIONS
The Portfolios may purchase and sell (i.e., write) put and call options on
equity securities, debt securities, securities indices, and foreign currencies.
An option gives the owner the right to buy or sell securities at a predetermined
exercise price for a given period of time.
Although options will be primarily used to minimize principal fluctuations
or to generate additional premium income, they do involve certain risks. The
Portfolio Manager may not correctly anticipate movements in the relevant
markets, thus causing losses on the Portfolio's options positions.
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A position in an exchange-traded option may be closed out only on an
exchange, board of trade or other trading facility which provides a secondary
market for an option of the same series. Although the Portfolios will generally
purchase or write only those exchange-traded options for which there appears to
be an active secondary market, there is no assurance that a liquid secondary
market on an exchange will exist for any particular option, or at any particular
time, and for some options no secondary market on an exchange or otherwise may
exist. In such event it might not be possible to effect closing transactions in
particular options, with the result that the Portfolio would have to exercise
its options in order to realize any profit and would incur brokerage commissions
upon the exercise of such options and upon the subsequent disposition of
underlying securities acquired through the exercise of call options or upon the
purchase of underlying securities for the exercise of put options. If a
Portfolio as a covered call option writer is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (v) the facilities of an exchange or
a clearing corporation may not at all times be adequate to handle current
trading volume; or (vi) one or more exchanges could, for economic or other
reasons, decide to be compelled at some future date to discontinue the trading
of options (or a particular class or series of options), in which event the
secondary market on that exchange (or in the class or series of options) would
cease to exist, although outstanding options on that exchange that had been
issued by a clearing corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms. There is no
assurance that higher than anticipated trading activity or other unforeseen
events might not, at times, render certain of the facilities of any of the
clearing corporations inadequate, and thereby result in the institution by an
exchange of special procedures which may interfere with the timely execution of
customers' orders.
The purchase and sale of over-the-counter ("OTC") options will also be
subject to certain risks. Unlike exchange-traded options, OTC options generally
do not have a continuous liquid market. Consequently, a Portfolio will
generally be able to realize the value of an OTC option it has purchased only by
exercising it or reselling it to the dealer who issued it. Similarly, when a
Portfolio writes an OTC option, it generally will be able to close out the OTC
option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the Portfolio originally wrote the OTC
option. There can be no assurance that a Portfolio will be unable to liquidate
an OTC option at a favorable price at any time prior to expiration. In the
event of insolvency of the other party, the Portfolio may be unable to liquidate
an OTC option.
The distinctive characteristics of options on stock indices create certain
risks that are not present with stock options. Index prices may be distorted if
trading of certain stocks included in the index is interrupted. Trading in the
index options also may be interrupted in certain circumstances, such as if
trading were halted in a substantial number of stocks included in the index. If
this occurred, a Portfolio would not be able to close out options which it had
purchased or written and, if restrictions on exercise were imposed, may be
unable to exercise an option it holds, which could result in substantial losses
to the Portfolio. Price movements in a Portfolio's equity security holdings
probably will not correlate precisely with movements in the level of the index
and, therefore, in writing a call on a stock index a Portfolio bears the risk
that the price of the securities held by the Portfolio may not increase as much
as the index. In such event, the Portfolio would bear a loss on the call which
is not completely offset by movement in the price of the Portfolio's equity
securities. It is also possible that the index may rise when the Portfolio's
securities do not rise in value. If this occurred, the Portfolio would
experience a loss on the call which is not offset by an increase in the value of
its securities holdings and might also experience a loss in its securities
holdings.
A Portfolio's successful use of options on foreign currencies depends upon
the manager's ability to predict the direction of the currency exchange markets
and political conditions, which requires different skills and techniques than
predicting changes in the securities markets generally.
FOREIGN CURRENCY TRANSACTIONS
All Portfolios may enter into forward currency contracts and enter into
currency exchange transactions on a spot (i.e., cash) basis. A forward currency
contract is an obligation to purchase or sell a currency against another
currency at a future date and price as agreed by the parties. A Portfolio may
either accept or make delivery of the currency at the maturity of the forward
contract or, prior to maturity, enter into a closing transaction involving the
purchase or sale of an offsetting contract. A Portfolio will engage in forward
currency transactions in anticipation of or to protect itself against
fluctuations in currency exchange rates, as further described in the Statement
of Additional Information.
26
<PAGE>
LEVERAGE
Each Portfolio may leverage its investments by purchasing securities with
borrowed money. In leveraging its investments, each Portfolio may borrow up to
33 1/3% of the value of its total assets (minus liabilities other than the
borrowing). Leveraging by means of borrowing will exaggerate the effect of any
increase or decrease in the value of portfolio securities on a Portfolios' net
asset value; money borrowed will be subject to interest and other costs (which
may include commitment fees and/or the cost of maintaining minimum average
balances), which may or may not exceed the income received from the securities
purchased with borrowed funds. The use of borrowing tends to result in a faster
than average movement, up or down, in the net asset value of the Portfolio's
shares. A Portfolio also may be required to maintain minimum average balances in
connection with such borrowing or to pay a commitment or other fee to maintain a
line of credit; either of these requirements would increase the cost of
borrowing over the stated interest rate.
Reverse repurchase agreements, short sales of securities, and short sales
of securities against the box will be included as borrowing subject to the
borrowing limitations described above. Securities purchased on a when-issued or
delayed delivery basis will not be subject to the Portfolio's borrowing
limitations to the extent that a Portfolio establishes and maintains liquid
assets in a segregated account with the Trust's custodian equal to the
Portfolio's obligations under the when-issued or delayed delivery arrangement.
A Portfolio may, in connection with permissible borrowings, transfer as
collateral securities it owns.
INDEXED SECURITIES
Each Portfolio may invest up to 5% of its assets in indexed securities.
Indexed securities values are linked to currencies, interest rates, commodities,
indices, or other financial indicators. Most indexed securities are short to
intermediate term fixed-income securities whose values at maturity or interest
rates rise or fall according to the change in one or more specified underlying
instruments. Indexed securities may be positively or negatively indexed (i.e.,
their value may increase or decrease if the underlying instrument appreciates),
and may have return characteristics similar to direct investments in the
underlying instrument or to one or more options on the underlying instrument.
Indexed securities may be more volatile than the underlying instrument itself.
INVESTMENT IN THE TRUST
PRINCIPAL UNDERWRITER
Western Capital Financial Group, Inc., 701 Palomar Airport Road, Suite
300, Carlsbad, CA 92009, serves as the principal underwriter of the shares of
the Portfolios. H. Michael Schwartz, an officer of the Trust, is also the
President and sole shareholder of the principal underwriter. For more
information about the principal underwriter of a particular variable contract,
see the prospectus for the contract.
27
<PAGE>
DETERMINATION OF NET ASSET VALUE
The net asset values per share of the Portfolios are calculated as of 4:00
p.m. (New York City time), Monday through Friday, on each day that the New York
Stock Exchange is open for trading, exclusive of federal holidays. Net asset
value per share is calculated by dividing the aggregate value of each
Portfolio's assets less all liabilities by the number of each Portfolio's
outstanding shares.
The Board of Trustees has established procedures to value each Portfolio's
assets to determine net asset value. In general, these valuations are based on
actual or estimated market value, with special provisions for assets not having
readily available market quotations and short-term debt securities. The net
asset values per share of each Portfolio will fluctuate in response to changes
in market conditions and other factors.
Portfolio securities for which market quotations are readily available are
stated at market value. Market value is determined on the basis of last reported
sales price, or, if no sales are reported, the mean between representative bid
and asked quotations obtained from a quotation reporting system or from
established market makers. In other cases, securities are valued at their fair
value as determined in good faith by the Board of Trustees, although the actual
calculations will be made by persons acting under the direction of the Board and
subject to the Board's review. Money market instruments are valued at market
value, except that instruments maturing in sixty days or less may be valued
using the amortized cost method valuation. The value of a foreign security is
determined in its national currency based upon the price on the foreign exchange
as of its close of business immediately preceding the time of valuation.
Securities traded in over-the-counter markets outside the United States are
valued at the last available price in the over-the-counter market prior to the
time of valuation.
Debt securities, including those to be purchased under firm commitment
agreements (other than obligations having a maturity sixty days or less at their
date of acquisition valued under the amortized cost method), are normally valued
on the basis of quotes obtained from brokers and dealers or pricing services,
which take into account appropriate factors such as institutional-size trading
in similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics, and other market data. Debt obligations having a
maturity of sixty days or less may be valued at amortized cost unless the
Portfolio Manager believes that amortized cost does not approximate market
value.
When a Portfolio writes a put or call option, the amount of the premium is
included in the Portfolios' assets and an equal amount is included in its
liabilities. The liability thereafter is adjusted to the current market value of
the option. The premium paid for an option purchased by the Portfolio is
recorded as an asset and subsequently adjusted to market value. Futures and
options thereon which are traded on commodities exchanges or boards of trade
will be valued at their closing settlement price on such exchange or board of
trade. Foreign securities quoted in foreign currencies generally are valued at
appropriately translated foreign market closing prices.
Trading in securities on exchanges and over-the-counter markets in European
and Pacific Basin countries is normally completed well before 4:00 p.m., New
York City time. Trading on these exchanges may not take place on all New York
business days and in addition, trading takes place in various foreign markets on
days which are not business days in New York and on which the Trust's net asset
value is not calculated. As a result, the calculation of the net asset value of
a Portfolio investing in foreign securities may not take place contemporaneously
with the determination of the prices of the securities included in the
calculation. Events that may affect the value of these securities that occur
between the time their prices are determined and the time the Portfolios' net
asset value is determined may not be reflected in the calculation of net asset
value of the Portfolio unless the Portfolio Manager, acting under authority
delegated by the Board of Trustees, deems that the particular event would
materially affect net asset value. In this event, the securities would be valued
at fair market value as determined in good faith by the Board of Trustees of the
Trust, although the actual calculations will be made by the Portfolio Manager
acting under the direction of the Board and subject to the Board's review.
PURCHASE OF SHARES
The Trust is intended to be a funding vehicle for variable annuity and
variable life insurance contracts offered by various insurance companies and for
certain qualified pension and retirement plans. The Trust currently does not
foresee any disadvantages to variable contract owners or retirement plan
participants arising from offering the Trust's shares to separate accounts of
unaffiliated insurers, to separate accounts funding both life insurance
contracts and annuity contracts, and to qualified plans. Because of differences
in tax treatment and other considerations, however, it is possible that the
interests of contract owners and plan participants might at some time be in
conflict. Accordingly, the Board of Trustees will monitor events in order
28
<PAGE>
to identify the existence of any material irreconcilable conflicts and to
determine what action, if any, should be taken in response to any such
conflict.
Shares of the Portfolios are sold at their respective net asset values
(without a sales charge) next computed after receipt of a purchase order. The
Portfolios reserve the right to cease offering its shares at any time.
REDEMPTION OF SHARES
Shares of the Portfolios may be redeemed on any business day. Redemptions
are effected at the net asset value per share next determined after receipt of
the redemption request. Redemption proceeds normally will be paid within seven
days following receipt of instructions in proper form, or sooner if required by
law.
The right of redemption may be suspended by the Trust or the payment date
postponed beyond seven days when the New York Stock Exchange is closed (other
than customary weekend and holiday closings) or for any period during which
trading thereon is restricted because an emergency exists, as determined by the
Securities and Exchange Commission, making disposal of portfolio securities or
valuation of net assets not reasonably practicable, and whenever the Securities
and Exchange Commission has by order permitted such suspension or postponement
for the protection of shareholders.
If the Board of Trustees should determine that it would be detrimental to
the best interests of the remaining shareholders of the Portfolios to make
payment wholly or partly in cash, the Portfolios may pay the redemption price in
whole or in part by a distribution in kind of securities from the portfolios of
the Portfolios, in lieu of cash, in conformity with applicable rules of the
Securities and Exchange Commission. If shares are redeemed in kind, the
redeeming shareholder might incur brokerage costs in converting the assets into
cash.
DIVIDENDS, DISTRIBUTIONS, AND TAXES
The Trust intends that the Portfolios will qualify to be treated as
regulated investment companies under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"). In any year in which the Portfolios qualify as
regulated investment companies and distribute substantially all of their net
investment income and their net capital gains, the Portfolios generally will not
be subject to federal income tax to the extent they distributes to shareholders
such income and capital gains in the manner required under the Code.
Tax consequences to the Variable Contract owners are described in the
prospectus for the pertinent Variable Contract.
The provisions of the Code and the Treasury Regulations that apply to
qualified retirement plans are complex and vary according to the type of plan
and its terms and conditions. Accordingly, this prospectus provides only
general tax information, and participants in qualified retirement plans that
invest directly in the Portfolios should consult a qualified tax adviser before
purchasing or redeeming any Portfolio shares. In general, assuming that a plan
adheres to the applicable limitations of the Code and Treasury Regulations,
payments for the purchase of Portfolio shares (other than after-tax employee
payments) will be deductible (or not includable in income) up to certain amounts
each year. Federal income tax currently is not imposed upon the investment
income and realized gains until redemption. When Portfolio shares are redeemed
for the purpose of making payments to plan participants, all or a portion of the
payment is normally taxable as ordinary income. Some redemptions may also be
subject to penalty tax. For more information contact a qualified tax adviser.
The Portfolios intend to declare as a dividend and to distribute net
investment income quarterly. The Portfolios will distribute any net realized
capital gains at least once annually. All dividends and distributions will be
reinvested automatically at net asset value in additional shares of the
Portfolios. Dividends declared in October, November, or December to
shareholders of record in such month and paid during the following January will
be treated as having been distributed and received by shareholders on December
31.
Regulations under Section 817(h) of the Code contain certain
diversification requirements. Generally, under those regulations, the Portfolios
will be required to diversify its investments so that, on the last day of each
quarter of a calendar year, no more than 55% of the value of its assets will be
represented by any one investment, no more than 70% will be represented by any
two investments, no more than 80% will be represented by any three investments,
and no more than 90% will be represented by any four investments. For this
purpose, all securities of a given issuer are treated as a single investment,
but, each U.S.
29
<PAGE>
Government agency and instrumentality is treated as a separate issuer. In
addition, any security issued, guaranteed, or insured (to the extent so
guaranteed or insured) by the United States or an instrumentality of the U.S.
will be treated as a security issued by the U.S. Government or its
instrumentality, whichever is applicable.
OTHER INFORMATION
CAPITALIZATION
The Trust was organized as a Massachusetts business trust on September 8,
1993. The Trust currently issues shares of the five portfolios described in this
prospectus. The Agreement and Declaration of Trust established three other
portfolios, and the Board of Trustees may establish additional portfolios in the
future. The capitalization of the Trust consists solely of an unlimited number
of shares of beneficial interest with a par value of $0.001 each. When issued in
accordance with the Trust's Agreement and Declaration of Trust, shares of the
Portfolios are fully paid, redeemable, freely transferable, and non-assessable
by the Trust.
Under Massachusetts law, shareholders could, under certain circumstances,
be held personally liable for the obligations of the Trust. However, the
Declaration of Trust disclaims liability of the shareholders, Trustees or
officers of the Trust for acts or obligations of the Trust, which are binding
only on the assets and property of the Trust, and requires that notice of the
disclaimer be given in each contract or obligation entered into or executed by
the Trust or the Trustees. The Declaration of Trust provides for indemnification
out of Trust property for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust. The risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Trust itself would be unable to meet its obligations,
and should be considered remote.
VOTING RIGHTS
Shareholders of the Trust are given certain voting rights. Each share of
the Portfolios will be given one vote, unless otherwise required by law.
Massachusetts business trust law does not require the Trust to hold annual
shareholder meetings, although special meetings may be called for the Portfolio,
or for the Trust as a whole, for purposes such as electing or removing Trustees,
changing fundamental policies, or approving a contract for investment advisory
services. In accordance with current laws, it is anticipated that an insurance
company issuing a Variable Contract that participates in the Trust will request
voting instructions from Variable Contract owners and will vote shares or other
voting interests in the Separate Account in proportion to the voting
instructions received.
As explained in "The Manager and Portfolio Managers" page 9, some Portfolio
Managers invested or agreed to invest in the Portfolios they manage. Each
Portfolio Manager has agreed to vote its shares in the same proportion as all
Contract owners having voting rights with respect to the Portfolio or in such
other manner as may be required by the SEC or its staff.
PORTFOLIO BROKERAGE
A Portfolio Manager may employ an affiliated broker to execute brokerage
transactions on behalf of the Portfolio as long as the commissions are
reasonable and fair compared to the commissions received by other brokers in
connection with comparable transactions involving similar securities being
purchased or sold on a securities exchange during a comparable period of time.
GAMCO, the Portfolio Manager for the Value and Global Interactive Telecomm
Portfolios, uses an affiliated broker (Gabelli & Company, Inc.) to execute most
brokerage transactions on behalf of those two Portfolios. The Portfolios may
not engage in any transactions in which a Portfolio Manager or its affiliates
acts as principal, including over-the-counter purchases and negotiated trades in
which such party acts as a principal.
PERFORMANCE INFORMATION
The Trust may, from time to time, include quotations of each Portfolio's
total return in advertisements or reports to shareholders or prospective
investors. Performance information for the Portfolios will not be advertised or
included in sales literature for Variable Contracts unless accompanied by
comparable performance information for a separate account to which the
Portfolios offer their shares. Quotations of total return will be expressed in
terms of the average annual compounded rate of return of a hypothetical
investment in the Portfolios over periods of 1, 5 and 10 years (up to the life
of the Portfolios). All total return figures will reflect the deduction of a
proportional share of each Portfolio's expenses on an annual basis, and will
assume that all dividends and distributions are reinvested when paid. Quotations
of total return reflect only the performance of a hypothetical
30
<PAGE>
investment in the Portfolios during the particular time period on which the
calculations are based. Total return for the Portfolios will vary based on
changes in market conditions and the level of each Portfolio's expenses, and
no reported performance figure should be considered an indication of
performance which may be expected in the future.
Quotations of total return for the Portfolios will not take into account
charges or deductions against any Separate Account to which the Portfolio shares
are sold or charges and deductions against the pertinent Variable Contract,
although comparable performance information for the Separate Account will take
such charges into account. A person considering the purchase of a Variable
Contract should not compare a Portfolio's total return with the total returns of
mutual funds that sell their shares directly to the public since the Portfolio's
figures do not reflect charges against the separate accounts or the Variable
Contracts.
Reports and promotional literature may also contain other information,
including the effect of tax deferred compounding on each Portfolio's
investment returns, or returns in general, which may be illustrated by
graphs, charts, or otherwise, and which may include a comparison, at various
points in time, of the return from an investment in the Portfolio (or returns
in general) on a tax-deferred basis (assuming one or more tax rates) with the
return on a taxable basis. For a more detailed description of the methods
used to calculate each Portfolio's total return, see the SAI.
PERFORMANCE DATA FOR THE PORTFOLIO MANAGERS
The following tables include historical performance data relating to each
Portfolio Manager. There are two charts for each Portfolio. The first provides
performance data about the Portfolio. The second provides longer-term past
performance in managing accounts, portfolios, and/or investment companies with
investment objectives and techniques similar to the Portfolio of the Trust that
the Portfolio Manager manages.
The performance figures for other accounts have been adjusted to reflect a
deduction of an estimate of the investment management fee applicable to the
Portfolios -- 0.80% of average daily net assets for a start-up period, and
thereafter an incentive fee ranging from 0.00% to 4.00% of average daily net
assets depending on performance. For more information on the Portfolios' fees,
see "Management and Portfolio Management Investment Advisory Fees, " page 12.
Because of limitations on the ability to precisely apply the Portfolios' fee
structure to past performance, several adjustments and appropriations were made.
For example, since performance figures were recorded on an annual basis, the
incentive fee was applied beginning with the January 1 following the first 12
months of operations. Thus, the 0.80% fee was applied for between 12 and 24
months, rather than the 12 months called for under the Portfolios' fee schedule.
In addition, performance fees were calculated on an annual basis, rather than
the monthly basis called for by the Portfolios' schedule. Thus, precise
application of the fee structure may have resulted in numbers different than the
approximations in the tables.
In addition, the performance figures have been adjusted to reflect a
deduction of the estimated "other expenses" at the rate set forth in the
"Summary of Expenses," page 5.
All returns include the impact of capital appreciation as well as the
reinvestment of interest and dividends.
The performance figures rely on data supplied by the Portfolio Managers or
from statistical services, reports or other sources believed by the Manager to
be reliable. However, the data has not been verified and the performance
figures are unaudited. The performance figures for each Portfolio Manager do
not reflect all of the assets under its management and may not accurately
reflect the performance of all accounts it has managed.
INVESTORS SHOULD NOT CONSIDER THIS PERFORMANCE DATA AS AN INDICATION OF THE
FUTURE PERFORMANCE OF ANY OF THE PORTFOLIOS.
GAMCO INVESTORS, INC.
THE VALUE PORTFOLIO MANAGER
PERFORMANCE OF THE PORTFOLIO
(AFTER PORTFOLIO FEES AND EXPENSES):
<TABLE>
<CAPTION>
Time Period Value Portfolio S&P 500(1)
<S> <C> <C>
- ------------------------------------------------------------------------
31
<PAGE>
10 Years: 1988-1997................
5 Years: 1993-1997................
3 Years: 1995-1997................
1 Years: 1997.........................
Inception: February 1, 1996-
December 31, 1997
- -------------------------------------------------------------------------
</TABLE>
(1) Standard & Poors 500 is a capital-weighted index representing the
aggregate market value of the common equity of 500 stock primarily
traded on the NYSE. These 500 stocks are composed of 400 industrial,
40 utility, 40 financial and 20 transportation companies. The weight
of each stock in the index is proportional to its price time the number
of shares outstanding. The Standard & Poors 500 is an unmanaged index
and includes there investment of all dividends.
PAST PERFORMANCE SHOULD NOT BE INTERPRETED AS INDICATIVE OF FUTURE
PERFORMANCE.
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<PAGE>
GAMCO INVESTORS, INC.
THE VALUE PORTFOLIO MANAGER
ANNUALIZED PERFORMANCE OF OTHER SIMILARLY-MANAGED ACCOUNTS(1)
(AFTER ADJUSTMENT FOR PORTFOLIO FEES):
<TABLE>
<CAPTION>
Time Period Gabelli(2) S&P 500(3)
<S> <C> <C>
- --------------------------------------------------------------------------------
10 Years: 1988-1997................
5 Years: 1993-1997................
3 Years: 1995-1997................
1 Years: 1997.........................
Inception: September 29, 1989 - 1997
- --------------------------------------------------------------------------------
</TABLE>
(1) This table does not reflect performance of the Portfolio itself.
(2) GAMCO Investors, Inc. ("GAMCO") results are based on The Gabelli Value
Fund, Inc. (the "Fund"), a publicly available mutual fund whose management
experience, investment objectives and techniques are similar to that of the
Value Portfolio. The Fund is managed by GAMCO's parent company, Gabelli
Funds, Inc., and had assets of $___ million as of December 31, 1997. Mario
Gabelli is primarily responsible for day-to-day investment management of
the Value Portfolio and the Fund. As of December 31, 1996, GAMCO had in
excess of $___ billion under management. These figures were calculated by:
(1) taking the total return of the Fund; (2) increasing that return by the
advisory fees and operating expenses of the Fund to create an estimate of
the gross return of the Fund; (3) reducing that return by an investment
management fee of 0.80% of average daily net assets for 1989 and 1990 and
thereafter an incentive fee ranging from 0.00% to 4.00% of average daily
net assets depending on Fund performance (calculated annually); and
(4) reducing that return by the estimated "other expenses" at the rate set
forth in the "Summary of Expenses," page 5. For more information, see the
introduction to these tables.
(3) Standard & Poors 500 is a capital-weighted index representing the
aggregate market value of the common equity of 500 stock primarily traded
on the NYSE. These 500 stocks are composed of 400 industrial, 40 utility,
40 financial and 20 transportation companies. The weight of each stock
in the index is proportional to its price time the number of shares
outstanding. The Standard & Poors 500 is an unmanaged index and includes
there investment of all dividends.
THESE FIGURES ARE UNAUDITED ESTIMATES. OF COURSE, PAST PERFORMANCE SHOULD
NOT BE INTERPRETED AS INDICATIVE OF FUTURE PERFORMANCE.
33
<PAGE>
STONEHILL CAPITAL MANAGEMENT, INC.
THE GROWTH PORTFOLIO MANAGER
PERFORMANCE OF THE PORTFOLIO
(AFTER PORTFOLIO FEES AND EXPENSES):
<TABLE>
<CAPTION>
Time Period Growth Portfolio S&P 500(1)
<S> <C> <C>
- -------------------------------------------------------------------------------
10 Years: 1988-1997................
5 Years: 1993-1997................
3 Years: 1995-1997................
1 Years: 1997.........................
Inception: February 1, 1996 -
December 31, 1997
- --------------------------------------------------------------------------------
</TABLE>
(1) Standard & Poors 500 is a capital-weighted index representing the
aggregate market value of the common equity of 500 stock primarily
traded on the NYSE. These 500 stocks are composed of 400 industrial,
40 utility, 40 financial and 20 transportation companies. The weight
of each stock in the index is proportional to its price time the
number of shares outstanding. The Standard & Poors 500 is an unmanaged
index and includes there investment of all dividends.
PAST PERFORMANCE SHOULD NOT BE INTERPRETED AS INDICATIVE OF FUTURE
PERFORMANCE.
34
<PAGE>
STONEHILL CAPITAL MANAGEMENT, INC.
THE GROWTH PORTFOLIO MANAGER
ANNUALIZED PERFORMANCE OF OTHER SIMILARLY-MANAGED ACCOUNTS(1)
(AFTER ADJUSTMENT FOR PORTFOLIO FEES):
<TABLE>
<CAPTION>
Time Period Stonehill(2) S&P 500(3)
<S> <C> <C>
- ----------------------------------------------------------------------------------------
10 Years: 1988-1997................
5 Years: 1993-1997................
3 Years: 1995-1997................
1 Years: 1997.........................
Inception: May 17, 1989 - 1997
- -----------------------------------------------------------------------------------------
</TABLE>
(1) This table does not reflect performance of the Portfolio itself.
(2) Stonehill Capital Management, Inc. ("Stonehill") results are based on
a time weighted composite of two fully discretionary portfolios whose
investment objectives and techniques are similar to that of the Growth
Portfolio (the "Investment Strategy"). The first is Stonehill Capital
Partnership, L.P. (the "Partnership"), which Stonehill managed from May 17,
1989 to date. As of December 31, 1997, the Partnership's assets were
approximately $__ million. The second is the Common Fund (the "Fund"),
which Stonehill managed from November 1, 1989 to February 5, 1996.
As of December 31, 1995, the Fund's assets were approximately $21 million.
Other than the Growth Portfolio, the Partnership is the only other assets
under Stonehill's management as of December 31, 1997. These figures
were calculated by: (1) taking the gross performance figures for
each portfolio (i.e., without deduction of advisory fees and other
expenses) calculated by the Portfolio Manager; (2) creating a 50/50
composite gross return, which took into account the fact that the two
accounts operated different numbers of days in 1989 and 1996;
(3) deducting an investment management fee of 0.80% of average daily
net assets of the accounts for 1989 and 1990 and thereafter an incentive
fee ranging from 0.00% to 4.00% of average daily net assets depending on
performance of the portfolios collectively (calculated annually); and (4)
deducting the estimated "other expenses" at the rate set forth in the
"Summary of Expenses," page 5. For more information, see the introduction
to these tables.
The Partnership and the Fund are not subject to certain investment
limitations, diversification requirements, and other restrictions imposed
by the Investment Company Act of 1940 and the Internal Revenue Code, which,
if applicable, may have adversely affected their performance results.
(3) Standard & Poors 500 is a capital-weighted index representing the
aggregate market value of the common equity of 500 stock primarily
traded on the NYSE. These 500 stocks are composed of 400 industrial,
40 utility, 40 financial and 20 transportation companies. The weight
of each stock in the index is proportional to its price time the number
of shares outstanding. The Standard & Poors 500 is an unmanaged index and
includes there investment of all dividends.
THESE FIGURES ARE UNAUDITED ESTIMATES. OF COURSE, PAST PERFORMANCE SHOULD
NOT BE INTERPRETED AS INDICATIVE OF FUTURE PERFORMANCE.
35
<PAGE>
BEE & ASSOCIATES INCORPORATED
THE INTERNATIONAL GROWTH PORTFOLIO MANAGER
PERFORMANCE OF THE PORTFOLIO
(AFTER PORTFOLIO FEES AND EXPENSES):
<TABLE>
<CAPTION>
Time Period International Growth MSCI -- EAFE(1)
<S> <C> <C>
- -------------------------------------------------------------------------------------
10 Years: 1988-1997................
5 Years: 1993-1997................
3 Years: 1995-1997................
1 Years: 1997.........................
Inception: February 1, 1996 -
December 31, 1997
- ---------------------------------------------------------------------------------------
</TABLE>
(1) The Morgan Stanley Capital International -- Europe, Australia, Far
East Index (EAFE) is a widely recognized unmanaged index of non-U.S.
companies which assumes the reinvestment of dividends. These non-U.S.
companies are listed on one of 20 countries and is divided into 8
economic sectors and 38 industry groups.
PAST PERFORMANCE SHOULD NOT BE INTERPRETED AS INDICATIVE OF FUTURE
PERFORMANCE.
36
<PAGE>
BEE & ASSOCIATES INCORPORATED
THE INTERNATIONAL GROWTH PORTFOLIO MANAGER
ANNUALIZED PERFORMANCE OF OTHER SIMILARLY-MANAGED ACCOUNTS(1)
(AFTER ADJUSTMENT FOR PORTFOLIO FEES):
<TABLE>
<CAPTION>
Time Period BAI(2) MSCI -- EAFE(3)
<S> <C> <C>
- -------------------------------------------------------------------------------------------
10 Years: 1988-1997................
5 Years: 1993-1997................
3 Years: 1995-1997................
1 Years: 1997.........................
Inception: April 1, 1989 - 1997
- ---------------------------------------------------------------------------------------------
</TABLE>
(1) This table does not reflect performance of the Portfolio itself.
(2) Bee & Associates Incorporated results are based on a dollar weighted
composite of all fully discretionary managed accounts (with at least
3 months of experience) whose investment objectives and techniques are
similar to that of the International Growth Portfolio (the "Investment
Strategy"). These figures were calculated by: (1) taking the gross
performance figures for the subject managed accounts (i.e., without
deduction of advisory fees and other expenses) calculated by the Portfolio
Manager according to the formula recommended by the Association for
Investment Management and Research Standards (dated 1993); (2) deducting an
investment management fee of 0.80% of average daily net assets of the
accounts for 1989 and 1990 and thereafter an incentive fee ranging from
0.00% to 4.00% of average daily net assets depending on performance of the
accounts collectively (calculated annually); and (3) deducting the
estimated "other expenses" at the rate set forth in the "Summary of
Expenses," page 5. For more information, see the introduction to these
tables.
As of December 31, 1996, Bee & Associates Incorporated had approximately
$___ million under management, $___ million of which used the Investment
Strategy. The composite results reflected above consist of 100% of the
managed accounts and 100% of the assets under management which used the
Investment Strategy. These managed accounts are not subject to certain
investment limitations, diversification requirements, and other
restrictions imposed by the Investment Company Act of 1940 and the Internal
Revenue Code, which, if applicable, may have adversely affected the
performance results of those managed accounts.
(3) The Morgan Stanley Capital International -- Europe, Australia, Far
East Index (EAFE) is a widely recognized unmanaged index of non-U.S.
companies which assumes the reinvestment of dividends. These non-U.S.
companies are listed on one of 20 countries and is divided into 8 economic
sectors and 38 industry groups.
THESE FIGURES ARE UNAUDITED ESTIMATES. OF COURSE, PAST PERFORMANCE SHOULD
NOT BE INTERPRETED AS INDICATIVE OF FUTURE PERFORMANCE.
37
<PAGE>
FISHER FRANCIS TREES & WATTS, INC.
THE GLOBAL STRATEGIC INCOME PORTFOLIO MANAGER
PERFORMANCE OF THE PORTFOLIO
(AFTER PORTFOLIO FEES AND EXPENSES):
<TABLE>
<CAPTION>
Global J.P. Morgan Global
Strategic Government Bond Index,
Time Period Income Unhedged(1)
<S> <C> <C>
- -------------------------------------------------------------------------------------
10 Years: 1988-1997................
5 Years: 1993-1997................
3 Years: 1995-1997................
1 Years: 1997.........................
Inception: February 1, 1996 -
December 31, 1997
- ---------------------------------------------------------------------------------------
</TABLE>
(1) The JP Morgan Global Government Bond Index, Unhedged is a widely
recognized index that measures the global government bond market of 13
countries. This index is weighted by market capitalization ($3,053
billion-US) and is comprised of 424 bonds with maturities greater than
one year. In the unhedged index, foreign currencies are converted
into dollars at spot rates. This gives the index exposure to both
bond and currency markets.
PAST PERFORMANCE SHOULD NOT BE INTERPRETED AS INDICATIVE OF FUTURE
PERFORMANCE.
38
<PAGE>
FISHER FRANCIS TREES & WATTS, INC.
THE GLOBAL STRATEGIC INCOME PORTFOLIO MANAGER
ANNUALIZED PERFORMANCE OF OTHER SIMILARLY-MANAGED ACCOUNTS(1)
(AFTER ADJUSTMENT FOR PORTFOLIO FEES):
<TABLE>
<CAPTION>
J.P. Morgan Global
Government Bond Index,
Time Period FFTW(2) Unhedged(3)
<S> <C> <C>
- -----------------------------------------------------------------------------------------
10 Years: 1988-1997................
5 Years: 1993-1997................
3 Years: 1995-1997................
1 Years: 1997.........................
Inception: December 1, 1989 - 1997
- ------------------------------------------------------------------------------------------
</TABLE>
(1) This table does not reflect performance of the Portfolio itself.
(2) Fischer Francis Trees & Watts results are based on a gross,
time-weighted rates of return of its fully discretionary portfolios
(with at least one month of experience) whose investment objectives
and techniques are similar to that of the Global Strategic Income Portfolio
(the "Investment Strategy"). These figures were calculated by: (1) taking
the gross performance figures for the subject portfolios (i.e., without
deduction of advisory fees and other expenses) calculated by the Portfolio
Manager according to the formula recommended by the Association for
Investment Management and Research Standards (dated 1993); (2) deducting
an investment management fee of 0.80% of average daily net assets of the
accounts for 1989 and 1990 and thereafter an incentive fee ranging from
0.00% to 4.00% of average daily net assets depending on performance of
the accounts collectively (calculated annually); and (3) deducting the
estimated "other expenses" at the rate set forth in the "Summary of
Expenses," page 5. For more information, see the introduction to these
tables.
As of December 31, 1997, Fischer Francis Trees & Watts had $____ billion
under management, $___ million of which was managed using the Investment
Strategy. The composite results reflected above consist of 100% of the
managed accounts and 100% of the assets under management which used the
Investment Strategy. These managed accounts are not subject to certain
investment limitations, diversification requirements, and other
restrictions imposed by the Investment Company Act of 1940 and the Internal
Revenue Code, which, if applicable, may have adversely affected the
performance results of those managed accounts.
(3) The JP Morgan Global Government Bond Index, Unhedged is a widely
recognized index that measures the global government bond market of 13
countries. This index is weighted by market capitalization ($3,053
billion-US) and is comprised of 424 bonds with maturities greater
than one year. In the unhedged index, foreign currencies are converted
into dollars at spot rates. This gives the index exposure to both bond
and currency markets.
THESE FIGURES ARE UNAUDITED ESTIMATES. OF COURSE, PAST PERFORMANCE SHOULD
NOT BE INTERPRETED AS INDICATIVE OF FUTURE PERFORMANCE.
39
<PAGE>
GAMCO INVESTORS, INC.
THE GLOBAL INTERACTIVE / TELECOMM PORTFOLIO MANAGER
PERFORMANCE OF THE PORTFOLIO
(AFTER PORTFOLIO FEES AND EXPENSES):
<TABLE>
<CAPTION>
Global
Time Period Interactive S&P 500(1) Telecomm S&P 500(1)
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------
10 Years: 1988-1997................
5 Years: 1993-1997................
3 Years: 1995-1997................
1 Years: 1997.........................
Inception: February 1, 1996 -
December 31, 1997
- ------------------------------------------------------------------------------------
</TABLE>
(1) Standard & Poors 500 is a capital-weighted index representing the
aggregate market value of the common equity of 500 stock primarily
traded on the NYSE. These 500 stocks are composed of 400 industrial,
40 utility, 40 financial and 20 transportation companies. The weight
of each stock in the index is proportional to its price time the
number of shares outstanding. The Standard & Poors 500 is an unmanaged
index and includes the reinvestment of all dividends.
PAST PERFORMANCE SHOULD NOT BE INTERPRETED AS INDICATIVE OF FUTURE
PERFORMANCE.
40
<PAGE>
GAMCO INVESTORS, INC.
THE GLOBAL INTERACTIVE / TELECOMM PORTFOLIO MANAGER
ANNUALIZED PERFORMANCE OF OTHER SIMILARLY-MANAGED ACCOUNTS(1)
(AFTER ADJUSTMENT FOR PORTFOLIO FEES):
<TABLE>
<CAPTION>
Gabelli Gabelli
Time Period Interactive(2) S&P 500(3) Telecomm(2) S&P 500(3)
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------
10 Years: 1988-1997................
5 Years: 1993-1997................
3 Years: 1995-1997................
1 Years: 1997.........................
Inception:
- --------------------------------------------------------------------------------------
</TABLE>
(1) This table does not reflect performance of the Portfolio itself.
(2) GAMCO Investors, Inc. ("GAMCO") results are based upon two publicly
available mutual funds, The Gabelli Global Interactive Couch
Potato-Registered Trademark- Fund (the "Interactive Fund") and The
Gabelli Global Telecommunications Fund (the "Telecomm Fund"). The
Portfolio is managed combining the investment objectives and techniques
of these two Funds. The Funds are managed by GAMCO's parent company,
Gabelli Funds, Inc. Mario Gabelli is primarily responsible for the
day-to-day investment management of the Funds and the Global
Interactive/Telecomm Portfolio. As of December 31, 1997, GAMCO
had in excess of $___ billion under management. As of that date, the
Interactive Fund (which commenced operations on February 7, 1994) had
assets of $____ million, and the Telecomm Fund (which commenced operations
on November 1, 1993) had assets of $____ million. For each Fund, these
figures were calculated by: (1) taking the total return of the Fund;
(2) increasing that return by the advisory fees and operating expenses
of the Fund to create an estimate of the gross return of the Fund; and
(3) reducing that return by an investment management fee of 0.80% of
average daily net assets of the Fund until one full calendar year of
operations was completed (12/31/95 for the Interactive Fund and 12/31/96
for the Interactive Fund) and thereafter an incentive fee ranging from
0.00% to 4.00% of average daily net assets depending on performance
(calculated annually); and (4) reducing that return by the estimated
"other expenses" at the rate set forth in the "Summary of Expenses,"
page 5.
(3) Standard & Poors 500 is a capital-weighted index representing the
aggregate market value of the common equity of 500 stock primarily traded
on the NYSE. These 500 stocks are composed of 400 industrial, 40 utility,
40 financial and 20 transportation companies. The weight of each stock in
the index is proportional to its price time the number of shares
outstanding. The Standard & Poors 500 is an unmanaged index and includes
the reinvestment of all dividends.
THESE FIGURES ARE UNAUDITED ESTIMATES. OF COURSE, PAST PERFORMANCE SHOULD
NOT BE INTERPRETED AS INDICATIVE OF FUTURE PERFORMANCE.
41
<PAGE>
APPENDIX A
DESCRIPTION OF INDICES
The following information as to each index has been supplied by the
respective preparer of the index or has been obtained from other
publicly-available information.
S&P 500 COMPOSITE
STOCK PRICE INDEX
The purpose of the S&P 500 Composite Stock Price Index is to portray the
pattern of common stock price movement. Construction of the index proceeds from
industry groups to the whole. Currently there are four groups: 400 Industrials,
40 Utilities, 20 Transportation and 40 Financial. Since some industries are
characterized by companies of relatively small stock capitalization, the index
does not comprise the 500 largest companies listed on the New York Stock
Exchange.
Component stocks are chosen solely with the aim of achieving a distribution
by broad industry groupings that approximates the distribution of these
groupings in the New York Stock Exchange common stock population, taken as the
assumed model for the composition of the total market. Each stock added to the
index must represent a viable enterprise and must be representative of the
industry group to which it is assigned. Its market price movements must in
general be responsive to changes in industry affairs.
The formula adopted by S&P is generally defined as a "base-weighted
aggregative" expressed in relatives with the average value for the base period
(1941-1943) equal to 10. Each component stock is weighted so that it will
influence the index in proportion to its respective market importance. The most
suitable weighting factor for this purpose is the number of shares outstanding.
The price of any stock multiplied by number of shares outstanding gives the
current market value for that particular issue. This market value determines the
relative importance of the security.
Market values for individual stocks are added together to obtain their
particular group market value. These group values are expressed as a relative,
or index number, to the base period (1941-1943) market value. As the base period
market value is relatively constant, the index number reflects only fluctuations
in current market values.
MORGAN STANLEY CAPITAL INTERNATIONAL
EUROPE, AUSTRALIA, AND THE FAR EAST INDEX
The Morgan Stanley EAFE index measures the performance in Europe,
Australia, and the Far East (EAFE). EAFE contains 20 countries, excluding the
U.S. and the emerging markets of Latin America. Japan represents approximately
46% of the Index value. EAFE is divided into 8 economic sectors and 38 industry
groups. Banking, utilities, and health care are the largest groups.
JP MORGAN GLOBAL GOVERNMENT BOND INDEX, UNHEDGED
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 ($3,053 billion-US) and is comprised of 424 bonds with maturities
greater than one year. In the unhedged index, foreign currencies are converted
into dollars at spot rates. This gives the index exposure to both bond and
currency markets. As of February 1995, the index was comprised of the following
countries and country weights: Australia (1.2%), Belgium (3.2%), Canada (2.7%),
Denmark (1.7%), France (7.0%), Germany (9.3%), Italy (4.5%), Japan (13.5%), the
Netherlands (3.5%), Spain (2.6%), Sweden (1.5%), United Kingdom (6.2%) and the
United States (43.1%).
42
<PAGE>
APPENDIX B
DESCRIPTION OF RATINGS
CERTAIN RATINGS OF CORPORATE DEBT SECURITIES
MOODY'S INVESTORS SERVICE INC.
Aaa -- Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged."
Aa -- Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
A -- Bonds rated A possess many favorable investment attributes and are
generally considered as upper-medium-grade obligations.
Baa -- Bonds rated Baa are considered medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba -- Bonds rated Ba are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterize
bonds in this class.
B -- Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa -- Bonds rated Caa are of poor standing. Such issues may be in default or
elements of danger with respect to principal or interest may be present.
Ca -- Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked short comings.
STANDARD & POOR'S CORPORATION
AAA -- Bonds rated AAA have the highest rating assigned by Standard & Poor's to
a debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA -- Bonds rated AA have a very strong capacity to pay interest and repay
principal, and differ from the highest rated issues in small degree.
A -- Bonds rated A have a strong capacity to pay interest and repay principal,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
BBB -- Bonds rated BBB are regarded as having adequate capacity to pay interest
and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in the higher rated categories.
BB, B, CCC, CC -- Bonds rated BB, B, CCC, and CC are regarded on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of
43
<PAGE>
speculation and CC the highest degree of speculation. While such bonds will
likely have some quality and protective characteristics, these are outweighed
by large uncertainties or major risk exposures to adverse conditions.
RATINGS OF COMMERCIAL PAPER
MOODY'S INVESTORS SERVICE, INC.
Prime-l is the highest commercial paper rating assigned by Moody's. Issuers
rated Prime-l (or supporting institutions) are considered to have a superior
capacity for repayment of short-term promissory obligations. Issuers rated
Prime-2 (or supporting institutions) are considered to have a strong capacity
for repayment of short-term promissory obligations. This will normally be
evidenced by many of the characteristics of issuers rated Prime-l but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate
may be more affected by external conditions. Ample alternative liquidity is
maintained.
STANDARD & POOR'S CORPORATION
Commercial paper rated A-l by S&P indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Capacity for
timely payment on commercial paper on commercial paper rated A-2 is strong, but
the relative degree of safety is not as high as for issues designated A-1.
44
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
for
The Value Portfolio,
The Growth Portfolio,
The International Growth Portfolio,
The Global Strategic Income Portfolio, and
The Global Interactive/Telecomm Portfolio
of
THE PALLADIAN TRUST
440 Lincoln Street
Worcester, Massachusetts 01653
(___) ___-____
May 1, 1998
This Statement of Additional Information discusses five portfolios listed
above (the "Portfolios") of The Palladian Trust (the "Trust"), which is an
open-end management investment company.
Shares of the Portfolios may be sold only to: (1) life insurance company
separate accounts (the "Separate Accounts") to serve as the underlying
investment medium for variable annuity and variable life insurance contracts;
(2) qualified retirement plans, as permitted by Treasury Regulations; and (3)
life insurance companies and advisers to the Portfolios and their affiliates.
This Statement of Additional Information is intended to supplement the
information provided to investors in the Trust's Prospectus dated May 1, 1998.
It has been filed with the Securities and Exchange Commission as part of the
Trust's Registration Statement. Investors should note, however, that this
Statement of Additional Information is not itself a prospectus and should be
read carefully in conjunction with the Prospectus for the Portfolios and
retained for future reference. The contents of this Statement of Additional
Information are incorporated by reference in the Prospectus in their entirety.
A copy of the Prospectus and the Prospectus Supplement may be obtained free of
charge from the Trust at the address and telephone number listed above.
Manager:
Allmerica Investment Management Company, Inc.
1
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
<S> <C>
INTRODUCTION 4
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES 4
Mortgage-Backed Securities 4
GNMA Certificates 4
FNMA and FHLMC Mortgage-Backed Obligations 5
Collateralized Mortgage Obligations (CMOs) 6
Other Mortgage-Backed Securities 6
Asset-Backed Securities 7
Banking Industry and Savings Industry Obligations 8
Commercial Paper 9
Repurchase Agreements 9
Options on Equity Securities 10
Options on Debt Securities 11
Options on Stock Indices 12
Options on Foreign Currencies 14
Futures Contracts 15
Options on Futures Contracts 15
When-Issued or Delayed Delivery Securities 16
Foreign Currency Transactions 16
INVESTMENT RESTRICTIONS 18
MANAGEMENT OF THE TRUST 21
Trustees and Officers 21
Service Providers 22
PORTFOLIO TRANSACTIONS AND BROKERAGE 23
Investment Decisions 23
Brokerage and Research Services 24
PERFORMANCE INFORMATION 26
TAXATION 27
OTHER INFORMATION 28
Capitalization 28
Organization Expenses 28
Registration Statement 29
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
FINANCIAL STATEMENTS 30
</TABLE>
3
<PAGE>
INTRODUCTION
This Statement of Additional Information is designed to elaborate upon the
discussion of certain securities and investment techniques which are described
in the Portfolios' Prospectus. The more detailed information contained herein
is intended solely for investors who have read the Prospectus and are interested
in a more detailed explanation of certain aspects of some of the Portfolios'
securities and some investment techniques. Some of the Portfolios' investment
techniques are described only in the Prospectus and are not repeated herein.
Captions and defined terms in this Statement of Additional Information generally
correspond to like captions and terms in the Portfolios' Prospectus.
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
MORTGAGE-BACKED SECURITIES
All Portfolios may invest in mortgage-backed securities.
GNMA CERTIFICATES. Government National Mortgage Association ("GNMA")
certificates are mortgage-backed securities representing part ownership of a
pool of mortgage loans on which timely payment of interest and principal is
guaranteed by the full faith and credit of the U.S. Government. GNMA is a
wholly owned U.S. Government corporation within the Department of Housing and
Urban Development. GNMA is authorized to guarantee, with the full faith and
credit of the U.S. Government, the timely payment of principal and interest on
securities issued by institutions approved by GNMA (such as savings and loan
institutions, commercial banks, and mortgage bankers) and backed by pools of
FHA-insured or VA-guaranteed mortgages.
Interests in pools of mortgage-backed securities differ from other forms of
debt securities, which normally provide for periodic payment of interest in
fixed amounts with principal payments at maturity or specified call dates.
Instead, these securities provide a periodic payment which consists of both
interest and principal payments. In effect, these payments are a "pass-through"
of the periodic payments made by the individual borrowers on the residential
mortgage loans, net of any fees paid to the issuer or guarantor of such
securities. Additional payments are caused by repayments of principal resulting
from the sale of the underlying residential property, refinancing or
foreclosure, net of fees or costs which may be incurred. Mortgage-backed
securities issued by GNMA are described as "modified pass-through" securities.
These securities entitle the holder to receive all interest and principal
payments owed on the mortgage pool, net of certain fees, at the scheduled
payment dates, regardless of whether or not the mortgagor actually makes the
payment. Although GNMA guarantees timely payment even if homeowners delay or
default, tracking the "pass-through" payments may, at times, be difficult.
Expected payments may be delayed due to the delays in registering the newly
traded paper securities. The custodian's policies for crediting missed payments
while errant receipts are tracked down may vary. Other mortgage-backed
4
<PAGE>
securities, such as those of the Federal Home Loan Mortgage Corporation
("FHLMC") and the Federal National Mortgage Association ("FNMA"), trade in
book-entry form and should not be subject to the risk of delays in timely
payment of income.
Although the mortgage loans in the pool will have maturities of up to 30
years, the actual average life of the GNMA certificates typically will be
substantially less because the mortgages will be subject to normal principal
amortization and may be prepaid prior to maturity. Early repayments of
principal on the underlying mortgages may expose a Portfolio to a lower rate of
return upon reinvestment of principal. Prepayment rates vary widely and may be
affected by changes in market interest rates. In periods of falling interest
rates, the rate of prepayment tends to increase, thereby shortening the actual
average life of the GNMA certificates. Conversely, when interest rates are
rising, the rate of prepayment tends to decrease, thereby lengthening the actual
average life of the GNMA certificates. Accordingly, it is not possible to
accurately predict the average life of a particular pool. Reinvestment of
prepayments may occur at higher or lower rates than the original yield on the
certificates. Due to the prepayment feature and the need to reinvest
prepayments of principal at current rates, GNMA certificates can be less
effective than typical bonds of similar maturities at "locking in" yields during
periods of declining interest rates, although they may have comparable risks of
decline in value during periods of rising interest rates.
FNMA AND FHLMC MORTGAGE-BACKED OBLIGATIONS. Government-related guarantors
(i.e., not backed by the full faith and credit of the U.S. Government) include
the FNMA and the FHLMC. FNMA, a federally chartered and privately owned
corporation, issues pass-through securities representing interests in a pool of
conventional mortgage loans. FNMA guarantees the timely payment of principal
and interest, but this guarantee is not backed by the full faith and credit of
the U.S. Government. FNMA also issues REMIC Certificates, which represent an
interest in a trust funded with FNMA Certificates. REMIC Certificates are
guaranteed by FNMA, and not by the full faith and credit of the U.S. Government.
FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of Housing
and Urban Development. FNMA purchases conventional (i.e., not insured or
guaranteed by any government agency) residential mortgages from a list of
approved seller/servicers which include state and federally chartered savings
and loan associations, mutual savings banks, commercial banks, credit unions,
and mortgage bankers. FHLMC, a corporate instrumentality of the United States,
was created by Congress in 1970 for the purpose of increasing the availability
of mortgage credit for residential housing. Its stock is owned by the twelve
Federal Home Loan Banks. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages from FHLMC's national portfolio.
FHLMC guarantees the timely payment of interest and ultimate collection of
principal and maintains reserves to protect holders against losses due to
default. PCs are not backed by the full faith and credit of the U.S.
Government. As is the case with GNMA certificates, the actual maturity and
realized yield on particular FNMA and FHLMC pass-through securities will vary
based on the prepayment experience of the underlying pool of mortgages.
5
<PAGE>
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS). A CMO is a hybrid between a
mortgage-backed bond and a mortgage pass-through security. Similar to a bond,
interest and prepaid principal are paid, in most cases, semiannually. CMOs may
be collateralized by whole mortgage loans, but are more typically collateralized
by portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or
FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life will depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying investors, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding
the longer maturity classes receive principal only after the first class has
been retired. An investor is partially guarded against a sooner-than-desired
return of principal because of the sequential payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple
Series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering
are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third-party trustee as security
for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the Bonds in the order A, B, C, Z. The Series A, B, and C
Bonds all bear current interest. Interest on the Series Z Bond is accrued and
added to the principal; a like amount is paid as principal on the Series A, B,
or C Bond currently being paid off. When the Series A, B, and C Bonds are paid
in full, interest and principal on the Series Z Bond begin to be paid currently.
With some CMOs, the issuer serves as a conduit to allow loan originators
(primarily builders or savings and loan associations) to borrow against their
loan portfolios.
OTHER MORTGAGE-BACKED SECURITIES. Commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers, and other
secondary market issuers also create pass-through pools of conventional
residential mortgage loans. In addition, such issuers may be the originators
and/or servicers of the underlying mortgage loans as well as the guarantors of
the mortgage-backed securities. Pools created by such non-governmental issuers
generally offer a higher rate of interest than government and government-related
pools because there are no direct or indirect government or agency guarantees of
payments in the former pools. Timely payment of interest and principal of these
pools may be supported by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance, and letters of credit. The
insurance and guarantees are issued by governmental entities, private insurers,
and the mortgage poolers. Such insurance, guarantees, and the creditworthiness
of the issuers thereof will be considered in determining whether a
mortgage-backed security meets a Portfolio's investment quality standards.
There can be no assurance that the private insurers or guarantors can meet their
obligations under the insurance policies or guarantee arrangements.
6
<PAGE>
All Portfolios may buy mortgage-backed securities without insurance or
guarantees, if the Portfolio Manager determines that the securities meet a
Portfolio's quality standards. Although the market for such securities is
becoming increasingly liquid, securities issued by certain private organizations
may not be readily marketable. A Portfolio will not purchase mortgage-backed
securities or any other assets which, in the opinion of the Portfolio Manager,
are illiquid if, as a result, more than 15% of the value of a Portfolio's total
assets will be illiquid. As new types of mortgage-backed securities are
developed and offered to investors, the Portfolio Manager will, consistent with
a Portfolio's investment objectives, policies, and quality standards, consider
making investments in such new types of mortgage-backed securities.
ASSET-BACKED SECURITIES
All Portfolios may purchase asset-backed securities. Two such securities
are "CARS-SM-" ("Certificates for Automobile Receivables-SM-") and Credit Card
Receivable Securities.
CARS-SM-, represent undivided fractional interests in a trust ("trust")
whose assets consist of a pool of motor vehicle retail installment sales
contracts and security interests in the vehicles securing the contracts.
Payments of principal and interest on CARS-SM- are "passed-through" monthly to
certificate holders, and are guaranteed up to certain amounts by a letter of
credit issued by a financial institution unaffiliated with the trustee or
originator of the trust. Underlying sales contracts are subject to prepayment,
which may reduce the overall return to certificate holders. Certificate holders
may also experience delays in payment or losses on CARS-SM- if the full amounts
due on underlying sales contracts are not realized by the trust because of
unanticipated legal or administrative costs of enforcing the contracts, or
because of depreciation, damage, or loss of the vehicles securing the contracts,
or other factors.
Credit Card Receivable Securities are asset-backed securities backed by
receivables from revolving credit card agreements. Credit balances on revolving
credit card agreements ("Accounts") are generally paid down more rapidly than
are Automobile Contracts. Most of the Credit Card Receivable Securities issued
publicly to date have been Pass-Through Certificates. In order to lengthen the
maturity of Credit Card Receivable Securities, most such securities provide for
a fixed period during which only interest payments on the underlying Accounts
are passed through to the security holder and principal payments received on
such Accounts are used to fund the transfer to the pool of assets supporting the
related Credit Card Receivable Securities of additional credit card charges made
on an Account. The initial fixed period usually may be shortened upon the
occurrence of specified events which signal a potential deterioration in the
quality of the assets backing the security, such as the imposition of a cap on
interest rates. The ability of the issuer to extend the life of an issue of
Credit Card Receivable Securities thus depends upon the continued generation of
additional principal amounts in the underlying Accounts during the initial
period and the non-occurrence of specified events. The Tax Reform Act of 1986,
pursuant to which a taxpayer's ability to deduct consumer interest in his or her
federal income tax calculation was completely phased out for taxable years
beginning in 1991, as
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well as competitive and general economic factors, could adversely affect the
rate at which new receivables are created in an Account and conveyed to an
issuer, shortening the expected weighted average life of the related Credit
Card Receivable Security, and reducing its yield. An acceleration in
cardholders' payment rates or any other event which shortens the period
during which additional credit card charges on an Account may be transferred
to the pool of assets supporting the related Credit Card Receivable Security
could have a similar effect on the weighted average life and yield. Credit
card holders are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such holder the right to set off
certain amounts against balances owed on the credit card, thereby reducing
amounts paid on Accounts. In addition, unlike many other asset-backed
securities, Accounts are unsecured obligations of the cardholder.
BANKING INDUSTRY AND SAVINGS INDUSTRY OBLIGATIONS
Obligations of foreign banks involve somewhat different investment risks
than those affecting obligations of U.S. banks, which include: (i) the
possibility that their liquidity could be impaired because of future political
and economic developments; (ii) their obligations may be less marketable than
comparable obligations of U.S. banks; (iii) a foreign jurisdiction might impose
withholding taxes on interest income payable on those obligations; (iv) foreign
deposits may be seized or nationalized; (v) foreign governmental restrictions,
such as exchange controls, may be adopted which might adversely affect the
payment of principal and interest on those obligations; and (vi) the selection
of those obligations may be more difficult because there may be less publicly
available information concerning foreign banks and/or because the accounting,
auditing, and financial reporting standards, practices and requirements
applicable to foreign banks may differ from those applicable to U.S. banks.
Foreign banks are not generally subject to examination by any U.S. Government
agency or instrumentality.
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COMMERCIAL PAPER
Commercial paper obligations may include variable amount master demand
notes. These notes are obligations that permit the investment of fluctuating
amounts at varying rates of interest pursuant to direct arrangements between a
Portfolio, as lender, and the borrower. These notes permit daily changes in the
amounts borrowed. The lender has the right to increase or to decrease the
amount under the note at any time up to the full amount provided by the note
agreement; and the borrower may prepay up to the full amount of the note without
penalty. Because variable amount master demand notes are direct lending
arrangements between the lender and borrower, and because no secondary market
exists for those notes, such instruments will probably not be traded. However,
the notes are redeemable (and thus immediately repayable by the borrower) at
face value, plus accrued interest, at any time. In connection with master
demand note arrangements, the Portfolio Manager will monitor, on an ongoing
basis, the earning power, cash flow, and other liquidity ratios of the borrower
and its ability to pay principal and interest on demand. The Portfolio Manager
also will consider the extent to which the variable amount master demand notes
are backed by bank letters of credit. These notes generally are not rated by
Moody's or S&P; the Portfolio may invest in them only if the Portfolio Manager
believes that at the time of investment the notes are of comparable quality to
the other commercial paper in which the Portfolio may invest. Master demand
notes are considered by the Portfolio to have a maturity of one day, unless the
Portfolio Manager has reason to believe that the borrower could not make
immediate repayment upon demand. See the Appendix for a description of Moody's
and S&P ratings applicable to commercial paper.
REPURCHASE AGREEMENTS
The term of a repurchase agreement is generally quite short, possibly
overnight or for a few days, although it may extend over a number of months (up
to one year) from the date of delivery. The resale price is in excess of the
purchase price by an amount which reflects an agreed-upon market rate of return,
effective for the period of time the Portfolio is invested in the security. This
results in a fixed rate of return protected from market fluctuations during the
period of the agreement. This rate is not tied to the coupon rate on the
security subject to the repurchase agreement.
A Portfolio may engage in repurchase transactions in accordance with
guidelines approved by the Board of Trustees of the Trust, which include
monitoring the creditworthiness of the parties with which a Portfolio engages in
repurchase transactions, obtaining collateral at least equal in value to the
repurchase obligation, and marking the collateral to market on a daily basis.
A Portfolio may not enter into a repurchase agreement having more than
seven days remaining to maturity if, as a result, such agreements together
with any other securities that are not readily
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marketable, would exceed 15% of the net assets of the Portfolio. If the
seller should become bankrupt or default on its obligations to repurchase the
securities, a Portfolio may experience delay or difficulties in exercising
its rights to the securities held as collateral and might incur a loss if the
value of the securities should decline. A Portfolio also might incur
disposition costs in connection with liquidating the securities.
OPTIONS ON EQUITY SECURITIES
The Portfolios may purchase and write (i.e., sell) put and call options on
equity securities that are traded on U.S. securities exchanges, are listed on
the National Association of Securities Dealers Automated Quotation System
("NASDAQ"), or that result from privately negotiated transactions with
broker-dealers ("OTC options"). A call option is a short-term contract pursuant
to which the purchaser or holder, in return for a premium paid, has the right to
buy the security underlying the option at a specified exercise price at any time
during the term of the option. The writer of the call option, who receives the
premium, has the obligation, upon exercise of the option, to deliver the
underlying security against payment of the exercise price. A put option is a
similar contract which gives the purchaser or holder, in return for a premium,
the right to sell the underlying security at a specified price during the term
of the option. The writer of the put, who receives the premium, has the
obligation to buy the underlying security at the exercise price upon exercise by
the holder of the put.
A Portfolio will write only "covered" options on stocks. A call option is
covered if: (1) the Portfolio owns the security underlying the option; or (2)
the Portfolio has an absolute and immediate right to acquire that security
without additional cash consideration (or for additional cash consideration held
in a segregated account by its custodian) upon conversion or exchange of other
securities it holds; or (3) the Portfolio holds on a share-for-share basis a
call on the same security as the call written where the exercise price of the
call held is equal to or less than the exercise price of the call written or
greater than the exercise price of the call written if the difference is
maintained by the Portfolio in cash, Treasury bills or other high grade
short-term debt obligations in a segregated account with its custodian. A put
option is covered if: (1) the Portfolio deposits and maintains with its
custodian in a segregated account cash, U.S. Government securities or other
liquid high-grade debt obligations having a value equal to or greater than the
exercise price of the option; or (2) the Portfolio holds on a share-for-share
basis a put on the same security as the put written where the exercise price of
the put held is equal to or greater than the exercise price of the put written
or less than the exercise price if the difference is maintained by the Portfolio
in cash, Treasury bills or other high grade short-term debt obligations in a
segregated account with its custodian.
A Portfolio may also purchase "protective puts" (i.e., put options acquired
for the purpose of protecting a Portfolio security from a decline in market
value). The loss to the Portfolio is limited to the premium paid for, and
transaction costs in connection with, the put plus the initial excess, if any,
of the market price of the underlying security over the exercise price. However,
if the market
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price of the security underlying the put rises, the profit the Portfolio
realizes on the sale of the security will be reduced by the premium paid for
the put option less any amount (net of transaction costs) for which the put
may be sold.
A Portfolio may also purchase putable and callable equity securities,
which are securities coupled with a put or call option provided by the issuer.
A Portfolio may purchase call options for hedging and investment
purposes. No Portfolio intends to invest more than 5% of its net assets at
any one time in the purchase of call options on stocks.
If the writer of an exchange-traded option wishes to terminate the
obligation, he or she may effect a "closing purchase transaction" by buying
an option of the same series as the option previously written. Similarly,
the holder of an option may liquidate his or her position by exercise of the
option or by effecting a "closing sale transaction" by selling an option of
the same series as the option previously purchased. There is no guarantee
that closing purchase or closing sale transactions can be effected.
OPTIONS ON DEBT SECURITIES
The Portfolios may purchase and write exchange-traded and OTC put and
call options on debt securities. Options on debt securities are similar to
options on stock, except that the option holder has the right to take or make
delivery of a debt security, rather than stock.
A Portfolio will write only "covered" options. Options on debt
securities are covered in the same manner as options on stocks, discussed
above, except that, in the case of call options on U.S. Treasury Bills, the
Portfolio might own U.S. Treasury Bills of a different series from those
underlying the call option, but with a principal amount and value
corresponding to the option contract amount and a maturity date no later than
that of the securities deliverable under the call option.
A Portfolio may also write straddles (i.e., a combination of a call and
a put written on the same security at the same strike price where the same
issue of the security is considered as the cover for both the put and the
call). In such cases, the Portfolio will also segregate or deposit for the
benefit of the Portfolio's broker cash or liquid high-grade debt obligations
equivalent to the amount, if any, by which the put is "in the money." It is
contemplated that each Portfolio's use of straddles will be limited to 5% of
the Portfolio's net assets (meaning that the securities used for cover or
segregated as described above will not exceed 5% of the Portfolio's net
assets at the time the straddle is written).
A Portfolio may purchase "protective puts" in an effort to protect the
value of a security that it owns against a substantial decline in market
value. Protective puts are described in OPTIONS ON
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EQUITY SECURITIES above. A Portfolio may wish to protect certain securities
against a decline in market value at a time when put options on those
particular securities are not available for purchase. A Portfolio may
therefore purchase a put option on securities it does not hold. While
changes in the value of the put should generally offset changes in the value
of the securities being hedged, the correlation between the two values may
not be as close in these transactions as in transactions in which the
Portfolio purchases a put option on an underlying security it owns.
A Portfolio may also purchase call options on debt securities for
hedging or investment purposes. No Portfolio currently intends to invest
more than 5% of its net assets at any one time in the purchase of call
options on debt securities.
A Portfolio may also purchase putable and callable debt securities,
which are securities coupled with a put or call option provided by the issuer.
A Portfolio may enter into closing purchase or sale transactions in a
manner similar to that discussed above in connection with options on equity
securities.
OPTIONS ON STOCK INDICES
The Portfolios may purchase and sell put and call options on stock
indices traded on national securities exchanges, listed on NASDAQ or that
result from privately negotiated transactions with broker-dealers ("OTC
options"). Options on stock indices are similar to options on stock except
that, rather than the right to take or make delivery of stock at a specified
price, an option on a stock index gives the holder the right to receive, upon
exercise of the option, an amount of cash if the closing level of the stock
index upon which the option is based is greater than in the case of a call,
or less than, in the case of a put, the strike price of the option. This
amount of cash is equal to such difference between the closing price of the
index and the strike price of the option times a specified multiple (the
"multiplier"). If the option is exercised, the writer is obligated, in
return for the premium received, to make delivery of this amount. Unlike
stock options, all settlements are in cash, and gain or loss depends on price
movements in the stock market generally (or in a particular industry or
segment of the market) rather than price movements in individual stocks.
A Portfolio will write only "covered" options on stock indices. A call
option is covered if the Fund follows the segregation requirements set forth
in this paragraph. When a Portfolio writes a call option on a broadly based
stock market index, it will segregate or put into escrow with its custodian
or pledge to a broker as collateral for the option, cash, Treasury bills or
other liquid high-grade short-term debt obligations, or "qualified
securities" (defined below) with a market value at the time the option is
written of not less than 100% of the current index value times the multiplier
times the number of contracts. A "qualified security" is an equity security
which is listed on a national securities exchange or listed on NASDAQ against
which the Portfolio has not written a stock call option and which has not
been hedged by the Portfolio by the sale of stock index futures. When a
Portfolio writes a call option on an industry or market segment index, it
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will segregate or put into escrow with its custodian or pledge to a broker as
collateral for the option, cash, Treasury bills or other liquid high-grade
short-term debt obligations, or at least five qualified securities, all of
which are stocks of issuers in such industry or market segment, with a market
value at the time the option is written of not less than 100% of the current
index value times the multiplier times the number of contracts. Such stocks
will include stocks which represent at least 50% of the weighting of the
industry or market segment index and will represent at least 50% of the
Portfolio's holdings in that industry or market segment. No individual
security will represent more than 15% of the amount so segregated, pledged or
escrowed in the case of broadly based stock market stock options or 25% of
such amount in the case of industry or market segment index options. If at
the close of business on any day the market value of such qualified
securities so segregated, escrowed, or pledged falls below 100% of the
current index value times the multiplier times the number of contracts, the
fund will so segregate, escrow, or pledge an amount in cash, Treasury bills,
or other liquid high-grade short-term debt obligations equal in value to the
difference. In addition, when a Portfolio writes a call on an index which is
in-the-money at the time the call is written, it will segregate with its
custodian or pledge to the broker as collateral, cash or U.S. government or
other liquid high-grade short-term obligations equal in value to the amount
by which the call is in-the-money times the multiplier times the number of
contracts. Any amount segregated pursuant to the foregoing sentence may be
applied to the Portfolio's obligation to segregate additional amounts in the
event that the market value of the qualified securities falls below 100% of
the current index value times the multiplier times the number of contracts.
A call option is also covered if the Portfolio holds a call on the same
index as the call written where the strike price of the call held is equal to
or less than the strike price of the call written or greater than the strike
price of the call written if the difference is maintained by the Portfolio in
cash, Treasury bills or other high-grade short-term obligations in a
segregated account with its custodian.
A put option is covered if: (1) the Portfolio holds in a segregated
account cash, Treasury bills or other high-grade short-term debt obligations
of a value equal to the strike price times the multiplier times the number of
contracts; or (2) the Portfolio holds a put on the same index as the put
written where the strike price of the put held is equal to or greater than
the strike price of the put written or less than the strike price of the put
written if the difference is maintained by the Portfolio in cash, Treasury
bills or other high-grade short-term debt obligations in a segregated account
with its custodian.
A Portfolio may purchase put and call options for hedging and investment
purposes. No Portfolio intends to invest more than 5% of its net assets at
any one time in the purchase of puts and calls on stock indices. A Portfolio
may effect closing sale and purchase transactions involving options on stock
indices, as described above in connection with stock options.
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The prospectus details certain risks particular to options on stock
indices. In addition, when a Portfolio has written a call, there is also a
risk that the market may decline between the time the Portfolio has a call
exercised against it, at a price which is fixed as of the closing level of
the index on the date of exercise, and the time the Portfolio is able to sell
stocks in its Portfolio. As with stock options, the Portfolio will not learn
that an index option has been exercised until the day following the exercise
date but, unlike a call on stock where the Portfolio would be able to deliver
the underlying securities in settlement, the Portfolio may have to sell part
of its stock Portfolio in order to make settlement in cash, and the price of
such stocks might decline before they can be sold. This timing risk makes
certain strategies involving more than one option substantially more risky
with options in stock indices than with stock options.
There are also certain special risks involved in purchasing put and call
options on stock indices. If a Portfolio holds an index option and exercises
it before final determination of the closing index value for that day, it
runs the risk that the level of the underlying index may change before
closing. If such a change causes the exercise option to fall out
of-the-money, the Portfolio will be required to pay the difference between
the closing index value and the strike price of the option (times the
applicable multiplier) to the assigned writer. Although a Portfolio may be
able to minimize the risk by withholding exercise instructions until just
before the daily cutoff time or by selling rather than exercising an option
when the index level is close to the exercise price, it may not be possible
to eliminate this risk entirely because the cutoff times for index options
may be earlier than those fixed for other types of options and may occur
before definitive closing index values are announced.
OPTIONS ON FOREIGN CURRENCIES
The Portfolios may purchase and write put and call options on foreign
currencies traded on U.S. or foreign securities exchanges or boards of trade.
Options on foreign currencies are similar to options on stock, except that
the option holder has the right to take or make delivery of a specified
amount of foreign currency, rather than stock.
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FUTURES CONTRACTS
The Portfolios may purchase and sell stock index futures contracts for
hedging purposes. A stock index futures contract is an agreement in which
the seller of the contract agrees to deliver to the buyer an amount of cash
equal to a specific dollar amount times the difference between the value of a
specific stock index at the close of the last trading day of the contract and
the price at which the agreement is made. No physical delivery of the
underlying stocks in the index is made. In addition, the Portfolios may, for
hedging purposes, purchase and sell (a) futures contracts on interest-bearing
securities (such as U.S. Treasury bonds and notes) or interest rate indices
(referred to collectively as "interest rate futures contracts"); (2) futures
contracts on foreign currencies or groups of foreign currencies; and (3)
futures contracts on gold and other precious metals.
When the futures contract is entered into, each party deposits with a
broker or in a segregated custodial account approximately 5% of the contract
amount, called the "initial margin." Subsequent payments to and from the
broker, called the "variation margin," will be made on a daily basis as the
underlying security, index or rate fluctuates making the long and short
positions in the futures contracts more or less valuable, a process known as
"marking to the market."
OPTIONS ON FUTURES CONTRACTS
The Portfolios may enter into certain transactions involving options on
futures contracts. An option on a futures contract gives the purchaser or
holder the right, but not the obligation, to assume a position in a futures
contract (a long position if the option is a call and a short position if the
option is a put) at a specified price at any time during the option exercise
period. The writer of the option is required upon exercise to assume an
offsetting futures position (a short position if the option is a call and
long position if the option is a put). Upon exercise of the option, the
assumption of offsetting futures positions by the writer and holder of the
option will be accomplished by delivery of the accumulated balance in the
writer's futures margin account which represents the amount by which the
market price of the futures contract, at exercise, exceeds, in the case of a
call, or is less than, in the case of a put, the exercise price of the option
on the futures contract. As an alternative to exercise, the holder or writer
of an option may terminate a position by selling or purchasing an option of
the same series. There is no guarantee that such closing transactions can be
effected. The Portfolios intend to utilize options on futures contracts for
the same purposes that they use the underlying futures contracts.
Options on futures contracts are subject to risks similar to those
described above with respect to options on securities, options on stock
indices, and futures contracts. These risks include the risk that the
Portfolio manager may not correctly predict changes in the market, the risk
of imperfect correlation between the option and the securities being hedged,
and the risk that there might not be a liquid secondary market for the
option. There is also the risk of imperfect correlation between the option
and the underlying futures contract. If there were no liquid
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secondary market for a particular option on a futures contract, the Portfolio
might have to exercise an option it held in order to realize any profit and
might continue to be obligated under an option it had written until the
option expired or was exercised. If a Portfolio were unable to close out an
option it had written on a futures contract, it would continue to be required
to maintain initial margin and make variation margin payments with respect to
the option position until the option expired or was exercised against the
Portfolio.
WHEN-ISSUED OR DELAYED DELIVERY SECURITIES
All Portfolios may purchase securities on a when-issued or delayed
delivery basis if the Portfolio holds, and maintains until the settlement
date in a segregated account, cash, U.S. Government securities, or high-grade
debt obligations in an amount sufficient to meet the purchase price, or if
the Portfolio enters into offsetting contracts for the forward sale of other
securities it owns. Purchasing securities on a when-issued or delayed
delivery basis involves a risk of loss if the value of the security to be
purchased declines prior to the settlement date, which risk is in addition to
the risk of decline in value of the Portfolios' other assets. Although a
Portfolio would generally purchase securities on a when-issued basis or enter
into forward commitments with the intention of acquiring securities, the
Portfolio may dispose of a when-issued or delayed delivery security prior to
settlement if the Portfolio Manager deems it appropriate to do so. The
Portfolio may realize short-term profits or losses upon such sales.
FOREIGN CURRENCY TRANSACTIONS
The Portfolio's may enter into forward currency contracts and enter into
currency exchange transactions on a spot (i.e. cash) basis. A forward
currency contract is an obligation to purchase or sell a currency against
another currency at a future date and price as agreed upon by the parties. A
Portfolio may either accept or make delivery of the currency at the maturity
of the forward contract or, prior to maturity, enter into a closing
transaction involving the purchase or sale of an offsetting contract. A
Portfolio will engage in forward currency transactions in anticipation of or
to protect itself against fluctuations in currency exchange rates.
A Portfolio may enter into forward foreign currency contracts in two
circumstances. First, when a Portfolio enters into a contract for the
purchase or sale of a security denominated in a foreign currency, the
Portfolio may desire to "lock in" the U.S. dollar price of the security. By
entering into a forward contract for a fixed amount of dollars for the
purchase or sale of the amount of foreign currency involved in the underlying
transactions, the Portfolio will be able to protect itself against a possible
loss resulting from an adverse change in the relationship between the U.S.
dollar and such foreign currency during the period between the date on which
the security is purchased or sold and the date on which payment is made or
received.
Second, when the Portfolio Manager believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract for a
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fixed amount of dollars to sell the amount of foreign currency approximating
the value of some or all of the Portfolios securities denominated in such
foreign currency. The precise matching of the forward contract amounts and
the value of the securities involved will not generally be possible since the
future value of securities in foreign currencies will change as a consequence
of market movements in the value of these securities between the date on
which the forward contract is entered into and the date it matures. The
projection of short-term currency market movement is extremely difficult, and
the successful execution of a short-term hedging strategy is highly
uncertain. None of the Portfolios will enter into such forward contracts or
maintain a net exposure to such contracts where the consummation of the
contracts would obligate the Portfolios to deliver an amount of foreign
currency in excess of the value of the Portfolios securities or other assets
denominated in that currency.
A Portfolio's custodian will place cash or liquid, high-grade equity or
debt securities into a segregated account of the Portfolio in an amount equal
to the value of the Portfolio's total assets committed to the consummation of
forward foreign currency exchange contracts. If the value of the securities
placed in the segregated account declines, additional cash or securities will
be placed in the account on a daily basis so that the value of the account
will equal the amount of the Portfolio's commitments with respect to such
contracts.
At the maturity of a forward contract, a Portfolio may either sell the
portfolio security and make delivery of the foreign currency, or it may
retain the security and terminate its contractual obligation to deliver the
foreign currency by purchasing an "offsetting" contract with the same
currency trader obligating it to purchase, on the same maturity date, the
same amount of the foreign currency.
It is impossible to forecast the market value of a particular portfolio
security at the expiration of the contract. Accordingly, if a decision is
made to sell the security and make delivery of the foreign currency, it may
be necessary for the Portfolio to purchase additional foreign currency on the
spot market (and bear the expense of such purchase) if the market value of
the security is less than the amount of foreign currency that the Portfolio
is obligated to deliver.
If the Portfolio retains the portfolio security and engages in an
offsetting transaction, it will incur a gain or a loss (as described below)
to the extent that there has been movement in forward contract prices.
Should forward prices decline during the period between the Portfolios
entering into a forward contract for the sale of a foreign currency and the
date it enters into an offsetting contract for the purchase of the foreign
currency, the Portfolio will realize a gain to the extent that the price of
the currency it has agreed to sell exceeds the price of the currency it has
agreed to purchase. Should forward prices increase, the Portfolio will
suffer a loss to the extent that the price of the currency it has agreed to
purchase exceeds the price of the currency it has agreed to sell.
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Forward contracts are not traded on regulated commodities exchanges.
There can be no assurance that a liquid market will exist when a Portfolio
seeks to close out a forward currency position, and in such an event, a
Portfolio might not be able to effect a closing purchase transaction at any
particular time. In addition, a Portfolio entering into a forward foreign
currency contract incurs the risk of default by the counter party to the
transaction. The CFTC has indicated that it may in the future assert
jurisdiction over certain types of forward contracts in foreign currencies
and attempt to prohibit certain entities from engaging in such foreign
currency forward transactions.
Although the Portfolios value their assets daily in terms of U.S.
dollars, they do not intend physically to convert their holdings of foreign
currencies into U.S. dollars on a daily basis. They will do so from time to
time, and investors should be aware of the costs of currency conversion.
Although foreign exchange dealers do not charge a fee for conversion, they do
realize a profit based on the difference (the "spread") between the prices at
which they are buying and selling various currencies. Thus, a dealer may
offer to sell a foreign currency to a Portfolio at one rate, while offering a
lesser rate of exchange should the Portfolio desire to resell that currency
to the dealer.
INVESTMENT RESTRICTIONS
Each Portfolio's investment objective as set forth under "Investment
Objectives and Policies" in the Prospectus, together with the investment
restrictions set forth below, are, fundamental and may not be changed with
respect to any Portfolio without the approval of a majority of the
outstanding voting shares of that Portfolio. The vote of a majority of the
outstanding voting securities of a Portfolio means the vote, at an annual or
special meeting, of the lesser of (a) 67% or more of the voting securities
present at such meeting, if the holders of more than 50% of the outstanding
voting securities of such Portfolio are present or represented by proxy; or
(b) more than 50% of the outstanding voting securities of such Portfolio.
None of the Portfolios will:
(1) Make an investment unless, when considering all its other
investments, 75% of the value of a Portfolio's assets would consist of
cash, cash items, obligations of the United States government, its
agencies or instrumentalities, securities of other investment companies,
and other securities. For purposes of this restriction, "other
securities" are limited for each issuer to not more than 5% of the value
of a Portfolio's assets and to not more than 10% of the issuer's
outstanding voting securities held by the Palladian Trust as a whole.
Some uncertainty exists as to whether certain of the types of bank
obligations in which a Portfolio may invest, such as certificates of
deposit and bankers' acceptances, should be classified as "cash items"
rather than "other securities" for purposes of this restriction, which
is a diversification requirement under the 1940 Act. Interpreting most
bank obligations as "other securities" limits the amount a Portfolio may
invest in the obligations of any one bank to 5% of its total assets. If
there is an authoritative decision that any of these obligations are not
"securities" for
18
<PAGE>
purposes of this diversification test, this limitation would not apply to
the purchase of such obligations.
(2) Invest in a security if more than 25% of its total assets (taken
at market value at the time of such investment) would be invested in the
securities of issuers in any particular industry, except (a) that this
restriction does not apply to securities issued or guaranteed by the
U.S. Government or its agencies or instrumentalities (or repurchase
agreements with respect thereto), and to securities or obligations
issued by banks, as permitted by the SEC; and (b) that the Global
Interactive/Telecomm Portfolio may invest more than 25% of its total
assets in the public utilities industry and may invest more than 25% of
its total assets in the telecommunications industry.
(3) Purchase or sell real estate, except that a Portfolio may invest
in securities secured by real estate or real estate interests or issued
by companies in the real estate industry or which invest in real estate
or real estate interests;
(4) Buy or sell commodities or commodity contracts, except that the
Portfolio may purchase and sell futures contracts and related options,
foreign currency, forward foreign currency exchange contracts, and gold
and other precious metals.
(5) Purchase securities on margin (except for use of short-term
credit necessary for clearance of purchases and sales of portfolio
securities), except a Portfolio engaged in transactions in options,
futures, and options on futures may make margin deposits in connection
with those transactions, except that effecting short sales will be
deemed not to constitute a margin purchase for purposes of this
restriction.
(6) Lend any funds or other assets, except that a Portfolio may,
consistent with its investment objective and policies:
(a) invest in debt obligations, even though the purchase of
such obligations may be deemed to be the making of loans;
(b) enter into repurchase agreements; and
(c) lend its portfolio securities in accordance with applicable
guidelines established by the Board of Trustees;
(7) Issue senior securities, except insofar as a Portfolio may be
deemed to have issued a senior security by reason of borrowing money in
according with that Portfolio's borrowing policies, or in connection
with any repurchase agreement, and except, for purposes of this
investment restriction, collateral or escrow arrangements with respect
to the making of short sales, purchase or sale of futures contracts or
related options, purchase or sale of forward
19
<PAGE>
currency contracts, writing of options, and collateral arrangements with
respect to margin or other deposits respecting futures contracts, related
options, and forward currency contracts are not deemed to be an issuance
of a senior security;
(8) Act as an underwriter of securities of other issuers, except,
when in connection with the disposition of portfolio securities, a
Portfolio may be deemed to be an underwriter under the federal
securities laws; and
(9) Borrow money or pledge, mortgage, or hypothecate its assets,
except that a Portfolio may: (a) borrow from banks, but only if
immediately after each borrowing and continuing thereafter there is
asset coverage of 300%; and (b) enter into reverse repurchase agreements
and transactions in options, futures, options on futures, and forward
currency contracts.
20
<PAGE>
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
Set forth below is a list of the Trustees of the Trust, their business
addresses, and principal occupations during the past five years:
<TABLE>
<CAPTION>
Principal Occupations During
Name and Address Position with the Trust Past Five Years
- ------------------------ ----------------------- ------------------------------
<S> <C> <C>
Matthew J. Stacom Chairman of the Board; Vice Chairman, Cushman &
601 Brickell Key Drive President Wakefield; Chairman, Palladian
Suite 600 Advisors, Inc.
Miami, FL 33131
Tom N. Dallape Trustee; Commercial Land Broker, The
18881 Von Karman Avenue Vice President Hoffman Company (Partner since
Suite 1225 January 1997; Senior Associate
Irvine, CA 92612 prior to January 1997).
</TABLE>
Set forth below is a list of the Officers of the Trust, their business
addresses, and principal occupations during the past five years:
<TABLE>
<CAPTION>
Principal Occupations During
Name and Address Position with the Trust Past Five Years
- ------------------------ ----------------------- --------------------------------
<S> <C> <C>
David J. Mueller Vice President Vice President, First Allmerica
440 Lincoln Street Financial Life Insurance Company
Worcester, MA 01653 since 1996; Assistant Vice
President, First Allmerica 1995-
1996; Business Analyst, First
Allmerica 1993-1995; Manager,
Coopers & Lybrand 1987-1993
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Principal Occupations During
Name and Address Position with the Trust Past Five Years
- ------------------------ ----------------------- ----------------------------------------------------
<S> <C> <C>
H. Michael Schwartz Secretary President and Director, Palladian
701 Palomar Airport Road Advisors, Inc.; President, Western Capital
Suite 300 Financial Group, Inc., April 1994 to present;
Carlsbad, CA 92009 Chief Financial Officer, Western Capital Financial
Group, Inc, prior to April 1994; Vice President and
Chief Financial Officer, Protean Financial
Companies, prior to September 1997; Chief Financial
Officer, Western Capital Financial & Insurance
Services, Inc., prior to September 1997
Thomas P. Cunningham Treasurer Investment Product Manager, First Allmerica Financial
440 Lincoln Street Life Insurance Company since March 1996; Vice
Worcester, MA 01653 President, First Data Investor Services Group, Inc.
1994-1995; Vice President, Fidelity Investments 1990-1993
George Boyd Assistant Secretary Counsel, First Allmerica Financial Life Insurance Company
440 Lincoln Street since January 1997; Director, Mutual Fund Administration -
Worcester, MA 10653 Legal and Regulatory, Investors Bank and Trust Company
1995-1996; Vice President and Counsel, 440 Financial Group
and First Data Investor Services Group 1992-1995
</TABLE>
None of the trustees or officers directly owns shares of the Portfolios.
In addition, as of the date of this Statement of Additional Information, the
Trustees and Officers in the aggregate owned variable contracts that
entitled them to give voting instructions with respect to less than one
percent of the outstanding shares of the Portfolios.
22
<PAGE>
Trustees other than those affiliated with the Manager receive $1,500 for
each Board meeting and are reimbursed for any expenses incurred in attending
such meetings or otherwise in carrying out their responsibilities as trustees.
SERVICE PROVIDERS
For information about the custodian and transfer agent, and the
principal underwriter, see the prospectus.
For 1996, the Value Portfolio accrued fees to Palladian Advisors, Inc.
("PAI") of $1,031, of which the Portfolio paid PAI $379. PAI paid Tremont
Partners, Inc. ("Tremont") $121. For 1997, the Value Portfolio accrued fees
to PAI of $____, of which the Portfolio paid PAI $____. PAI paid Tremont
$____.
For 1996, the Growth Portfolio accrued fees to PAI of $129, of which the
Portfolio paid PAI $35. PAI paid Tremont $32. For 1997, the Growth
Portfolio accrued fees to PAI of $____, of which the Portfolio paid PAI
$____. PAI paid Tremont $____.
For 1996, the International Growth Portfolio accrued fees to PAI of $67,
of which the Portfolio paid PAI $17. PAI paid Tremont $17. For 1997, the
International Growth Portfolio accrued fees to PAI of $____, of which the
Portfolio paid PAI $____. PAI paid Tremont $____.
For 1996, the Global Strategic Income Portfolio accrued fees to PAI of
$1525, of which the Portfolio paid PAI $634. PAI paid Tremont $381. For
1997, the Global Strategic Income Portfolio accrued fees to PAI of $____, of
which the Portfolio paid PAI $____. PAI paid Tremont $____.
For 1996, the Global Interactive/Telecomm Portfolio accrued fees to PAI
of $798, of which the Portfolio paid PAI $321. PAI paid Tremont $200. For
1997, the Global Interactive/Telecomm Portfolio accrued fees to PAI of $____,
of which the Portfolio paid PAI $____. PAI paid Tremont $____.
For 1996 the Portfolios paid the following fees to the Portfolio
Managers: Value ($4,127); Growth ($517); International Growth ($269); Global
Strategic Income ($6,097); Global Interactive/Telecomm ($3,193). For 1997
the Portfolios paid the following fees to the Portfolio Managers: Value
($____); Growth ($____); International Growth ($____); Global Strategic
Income ($____); Global Interactive/Telecomm ($____).
Coopers & Lybrand, L.L.P., 350 South Grand Avenue, Los Angeles,
California 90071, serves as independent accountants for the Trust.
23
<PAGE>
Investors Bank & Trust Company ("IBT"), 89 South Street, Boston,
Massachusetts 02111 provides fund accounting services. The fee for each
Portfolio is based on an annual rate of 0.05% of net assets for the first
$600 million in net assets and an annual rate of 0.03% of net assets for net
assets in excess of $600 million. In addition, each Portfolio will reimburse
IBT for out-of-pocket expenses such as pricing services. For fund accounting
services during 1996, each Portfolio paid $35,000 to IBT. For fund
accounting services during 1997, each Portfolio paid $____ to IBT.
PORTFOLIO TRANSACTIONS AND BROKERAGE
INVESTMENT DECISIONS
Investment decisions for each Portfolio are made by the Portfolio
Manager of each Portfolio. Each Portfolio Manager has investment advisory
clients other than the Portfolio. A particular security may be bought or
sold by a Portfolio Manager for certain clients even though it could have
been bought or sold for other clients at the same time. It also sometimes
happens that two or more clients simultaneously purchase or sell the same
security, in which event each day's transactions in such security are,
insofar as possible, allocated between such clients in a manner deemed fair
and reasonable by the Portfolio Manager. Although there is no specified
formula for allocating such transactions, the various allocation methods used
by the Portfolio Manager, and the results of such allocations, are subject to
periodic review by the Trust's Manager and Board of Trustees. There may be
circumstances when purchases or sales of portfolio securities for one or more
clients will have an adverse effect on other clients.
24
<PAGE>
BROKERAGE AND RESEARCH SERVICES
Each Portfolio Manager is responsible for the selection of brokers
and dealers to effect that Portfolio's transactions and the negotiation of
brokerage commissions, if any. Transactions on a stock exchange in equity
securities will be executed primarily through brokers who will receive a
commission paid by the Portfolio. In the United States, commissions are
usually negotiated; in other countries, the commissions are usually fixed.
Equity securities traded in the over-the-counter ("OTC") markets are
generally traded on a "net" basis with a dealer acting as principal for its
own account without a stated commission, although the price of the security
usually includes a profit to the dealer in the form of the spread between the
bid and asked prices. In some instances, the Portfolio Managers may execute
OTC transactions on an agency basis through a broker who is not a market
marker in the particular security, and in those transactions the Portfolio
will also pay a brokerage commission. Stonehill Capital, the Portfolio
Manager for the Growth Portfolio, executes most of its OTC transactions on an
agency basis through brokers with whom it has "soft dollar" arrangements
(described below). Fixed income securities are generally traded on a "net"
basis. In underwritten offerings, securities are purchased at a fixed price
that includes an amount of compensation to the underwriter, generally
referred to as the underwriter's concession or discount. On occasion,
certain of these securities may be purchased directly from an issuer, in
which case neither commissions nor discounts are paid.
In purchasing and selling securities, it is the policy of each Portfolio
Manager to seek the best execution for the Portfolio taking into account such
factors as price (including the applicable brokerage commission or dollar
spread), size of order, the nature of the market for the security, the timing
of the transaction, the reputation, experience and financial stability of the
broker-dealer involved, the quality of the service, the difficulty of the
execution, the operational facilities of the firms involved, and the firm's
risk in positioning a block of securities.
Notwithstanding the above, under certain conditions, the Portfolios are
authorized to pay higher brokerage commissions in return for brokerage and
research services. A Portfolio Manager may cause a Portfolio to pay a
broker-dealer who furnishes brokerage and/or research services a commission
or price for executing a transaction that is in excess of the commission or
price another broker would have received for executing the transaction if it
is determined that such commission or price is reasonable in relation to the
value of the brokerage and/or research services which have been provided. In
some cases, research services are generated by third parties, but are
provided to the Portfolio Manager or through broker-dealers.
The Portfolio Managers may receive a wide range of research services
from broker-dealers, including information on securities markets, the
economy, individual companies, statistical information, accounting and tax
law interpretations, technical market action, pricing and appraisal services,
and credit analyses. Research services may be in the form of written
reports, telephone contacts, personal meetings with security analysts,
corporate and industry spokespersons, economists, academicians, and
government representatives, and access to various computer-
25
<PAGE>
generated data. Research services received from broker-dealers are
supplemental to each Portfolio Manager's own research efforts and, when
utilized, are subject to internal analysis before being incorporated into the
investment process.
In allocating brokerage, a Portfolio Manager may periodically assess the
contribution of the brokerage and research services provided by
broker-dealers, and allocate a portion of the brokerage business of its
clients on the basis of these assessments. In addition, broker-dealers
sometimes suggest a level of business they would like to receive in return
for the various brokerage and research services they provide. Actual
brokerage received by any firm may be less than the suggested allocations,
but can (and often does) exceed the suggestions because total brokerage is
allocated on the basis of all the considerations described above. Net prices
and commissions are periodically reviewed to determine whether they are
reasonable in relation to the services provided. In some instances, the
Portfolio Managers receive research services they might otherwise have had to
perform for themselves. The research services provided by broker-dealers can
be useful to the Portfolio Managers in serving other clients, as well as the
Portfolios.
Stonehill Capital, the Portfolio Manager for the Growth Portfolio,
executes most of its transactions through broker-dealers with which it has
certain "soft dollar" arrangements. Under those arrangements, the
broker-dealer provides research services to Stonehill Capital in return for
executing transactions through the broker-dealer that generate at least a
certain amount of commissions. Commissions paid on those transactions may be
greater than commissions charged by other broker-dealers who provide only
execution services. The research services provided to Stonehill Capital
include on-line computer services that serve as the primary source of
Stonehill Capital's outside research information. Those on-line services
provide price quotations, historical market data, research reports, price and
market projections, company data (including profitability, earnings
estimates, valuation and balance sheet information), and other research
information. One service also provides screening and searching capabilities
used to implement Stonehill Capital's investment approach, which is explained
in the prospectus section titled "Investment Objectives and Policies."
Paying commission amounts greater than otherwise available to obtain
research services poses potential conflicts of interest for the Portfolio
Manager. The Portfolio Manager may have an incentive to pay increased
commissions to obtain research services instead of paying for those services
from its own operating revenues. In addition, the Portfolio Manager may have
an incentive to select a broker-dealer based on the research services it
provides rather than the quality of trade execution. PAI and the Trust Board
will monitor the Portfolio Managers' use of soft dollar arrangements.
GAMCO, the Portfolio Manager for the Value and Global
Interactive/Telecomm Portfolios, uses an affiliated broker-dealer, Gabelli &
Company, Inc., for most of its transactions. GAMCO is not authorized to pay
higher brokerage commissions to Gabelli & Company, Inc. in return for
research services.
26
<PAGE>
During 1996, the Value Portfolio paid total commissions of $5,086.
During 1997, the Value Portfolio paid total commissions of $____. None of
those commissions were paid to brokers because of research services provided
to the Portfolio Manager pursuant to any agreement or internal allocation
procedure. All of those commissions were paid to Gabelli & Company, Inc., a
broker affiliated with the Portfolio Manager.
During 1996, the Growth Portfolio paid total commissions of $2,514. During
1997, the Growth Portfolio paid total commissions of $____. All of those
commissions were paid to brokers because of research services provided to the
Portfolio Manager. None of those commissions were paid to brokers affiliated
with the Trust or the Portfolio Manager.
During 1996, the International Growth Portfolio paid total commissions of
$516. During 1997, the International Growth Portfolio paid total commissions of
$____. None of those commissions were paid to brokers because of research
services provided to the Portfolio Manager pursuant to any agreement or internal
allocation procedure. None of those commissions were paid to brokers affiliated
with the Trust or the Portfolio Manager.
The Global Strategic Income Portfolio did not pay any commissions in 1996
or 1997.
During 1996, the Global Interactive/Telecomm Portfolio paid total
commissions of $3,205. During 1997, the Global Interactive/Telecomm Portfolio
paid total commissions of $____. None of those commissions were paid to brokers
because of research services provided to the Portfolio Manager pursuant to any
agreement or internal allocation procedure. All of those commissions were paid
to Gabelli & Company, Inc., a broker affiliated with the Portfolio Manager.
PERFORMANCE INFORMATION
The Trust may, from time to time, include the total return of the
Portfolios in advertisements or sales literature.
Quotations of average annual total return for a Portfolio will be
expressed in terms of the average annual compounded rate of return of a
hypothetical investment in the Portfolio over certain periods that will
include periods of one, five, and ten years (or, if less, up to the life of
the Portfolio), calculated pursuant to the following formula:
P(1+T)N=ERV (where P = a hypothetical initial payment of $1,000, T = the
average annual total return, n = the number of years, and ERV = the ending
redeemable value of a hypothetical $1,000 payment made at the beginning of
the period). Quotations of total return may also be shown for other periods.
All total return figures reflect the deduction of a proportional share of
Portfolio expenses on an annual basis, and assume that all dividends and
distributions are reinvested when paid.
27
<PAGE>
Performance information for a Portfolio may be compared, in advertisements,
sales literature, and reports to shareholders to: (i) the Standard & Poor's 500
Stock Index ("S & P 500"), the Dow Jones Industrial Average ("DJIA"), the Lehman
Brothers Government Bond Index, the Donoghue Money Market Institutional
Averages, the Lehman Brothers Government Corporate Index, the Salomon High Yield
Index, or other indices that measure performance of a pertinent group of
securities, (ii) other groups of mutual funds tracked by Lipper Analytical
Services, a widely used independent research firm which ranks mutual funds by
overall performance, investment objectives, and assets, or tracked by other
services, companies, publications, or persons who rank mutual funds on overall
performance or other criteria; and (iii) the Consumer Price Index (measure for
inflation) to assess the real rate of return from an investment in the
Portfolio. Unmanaged indices may assume the reinvestment of dividends but
generally do not reflect deductions for administrative and management costs and
expenses.
Quotations of total return for a Portfolio will not take into account
charges and deductions against any Variable Accounts to which the Portfolios
shares are sold. Performance information for any Portfolio reflects only the
performance of a hypothetical investment in the Portfolio during the particular
time period on which the calculations are based. Performance information should
be considered in light of the Portfolio's investment objective or objectives and
investment policies and the market conditions during the given time period.
Performance information should not be considered as a representation of what may
be achieved in the future.
28
<PAGE>
TAXATION
The requirements applicable to a Portfolios' qualification as a regulated
investment company may limit the extent to which a Portfolio will be able to
engage in transactions in options, futures contracts or forward contracts.
Income received by a Portfolio from sources within a foreign country may be
subject to withholding and other taxes imposed by that country. Tax conventions
between certain countries and the U.S. may reduce or eliminate such taxes.
To comply with regulations under Section 817(h) of the Code, each Portfolio
of the Trust will be required to diversify its investments so that on the last
day of each quarter of a calendar year, no more than 55% of the value of its
assets is represented by any one investment, no more than 70% is represented by
any two investments, no more than 80% is represented by any three investments,
and no more than 90% is represented by any four investments.
Generally, securities of a single issuer are treated as one investment and
obligations of each U.S. Government agency and instrumentality (such as the
Government National Mortgage Association) are treated for purposes of Section
817(h) as issued by separate issuers.
In connection with the issuance of the diversification regulations, the
Treasury Department announced that it would issue future regulations or rulings
addressing the circumstances in which a variable contract owner's control of the
investments of a separate account may cause the contract owner, rather than the
insurance company, to be treated as the owner of the assets held by the separate
account. If the variable contract owner is considered the owner of the
securities underlying the separate account, income and gains produced by those
securities would be included currently in the contract owner's gross income.
Among the areas in which Treasury has indicated informally that it is concerned
that there may be too much contract owner control is where a mutual fund (or
Portfolio) underlying a separate account invests solely in securities issued by
companies in a specific industry.
These future rules and regulations proscribing investment control may
adversely affect the ability of certain Portfolios of the Trust to operate as
described in this Prospectus. There is, however, no certainty as to what
standards, if any, Treasury will ultimately adopt.
In the event that unfavorable rules or regulations are adopted, there can
be no assurance that the Portfolios will be able to operate as currently
described in the Prospectus, or that a Portfolio will not have to change its
investment objective or objectives, investment policies, or investment
restrictions. While a Portfolios' investment objective is fundamental and may
be changed only by a vote of a majority of its outstanding shares, the Trustees
have reserved the right to modify the investment policies of a Portfolio as
necessary to prevent any such prospective rules and
29
<PAGE>
regulations from causing the Variable Contract Owners to be considered the
owners of the assets underlying the Variable Accounts.
OTHER INFORMATION
CAPITALIZATION
The Trust is a Massachusetts business trust established under an
Agreement and Declaration of Trust dated September 8, 1993. The Trust is
currently offering to Separate Accounts shares of five different "series" or
Portfolios. Each Portfolio is, for investment purposes, a separate investment
fund, and each issues a separate class of capital stock with a par value of
$0.001 per share. Each share of stock issued with respect to a Portfolio has
a pro rata interest in the assets of that Portfolio and has no interest in
the assets of any other Portfolio. Each Portfolio bears its own liabilities
and also its proportionate share of the general liabilities of the Trust.
This Statement of Additional Information discusses the initial five
Portfolios, which issue the following five shares: Value Portfolio shares,
Growth Portfolio shares, International Growth Portfolio shares, Global
Strategic Income Portfolio shares, and Global Interactive/Telecomm Portfolio
shares.
The Agreement and Declaration of Trust established three other
Portfolios, and the Board of Trustees may establish additional Portfolios
(with different investment objectives and policies) at any time in the
future. The Trust has sold 2,000 shares of one of those Portfolios (the
Balanced Opportunity Portfolio) to provide part of the Trust's initial
capitalization, but the Trust is not now offering shares of that Portfolio to
Separate Accounts or qualified plans. Establishment and offering of
additional Portfolios will not alter the rights of the Trust's shareholders.
When issued in accordance with the terms of the Agreement and Declaration of
Trust, shares are fully paid, redeemable, freely transferable, and
non-assessable by the Trust. Shares do not have preemptive rights or
subscription rights. In liquidation of a Portfolio of the Trust, each
shareholder is entitled to receive his or her pro rata share of the net
assets of that Portfolio.
ORGANIZATION EXPENSES
Certain of the expenses incurred by the Portfolios in connection with
its organization, its registration with the Securities and Exchange
Commission, and the public offering of its shares were advanced on behalf of
the Trust by the Manager. These organizational expenses are deferred and
amortized by the Portfolio over a period not exceeding 60 months from the
date of the Portfolio's commencement of operations.
REGISTRATION STATEMENT
30
<PAGE>
This Statement of Additional Information and the prospectus do not
contain all the information included in the Trust's registration statement
filed with the Securities and Exchange Commission under the Securities Act of
1933 with respect to the securities offered by the prospectus. Certain
portions of the registration statement have been omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. The
registration statement, including the exhibits filed therewith, may be
examined at the offices of the Securities and Exchange Commission in
Washington, D.C.
Statements contained herein and in the prospectus as to the contents of
any contract or other documents referred to are not necessarily complete,
and, in each instance, reference is made to the copy of such contract or
other documents filed as an exhibit to the registration statement, each such
statement being qualified in all respects by such reference.
31
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS:
1. Financial Statements included in the Prospectus constituting Part
A of this Registration Statement:
2. Financial Statements included in the Statement of Additional
Information constituting Part B of this Registration Statement:
[To be filed by post-effective amendment]
(b) EXHIBITS
1. Declaration of Trust.4/
2. By-Laws.4/
3. Not Applicable.
4. Not Applicable.
5. (a) Form of management agreement between the Registrant and
Allmerica Investment Management Company, Inc.7/
(b) Form of subadvisory agreement among the Registrant,
Palladian Advisors, Inc. and a Portfolio Manager.7/
(c) Form of substitution agreement among the Registrant,
Palladian Advisors, Inc., AIMCO and a Portfolio Manager.7/
6. Form of distribution agreement between the Registrant and Western
Capital Financial Group, Inc.3/
7. Not Applicable.
8. Form of custodial and fund accounting contract between the
Registrant and Investors Bank & Trust Company.3/
C-1
<PAGE>
9. (a) Form of transfer agency agreement between Registrant and
Investors Bank & Trust Company.3/
(b) Form of indemnification agreement among Palladian Advisors,
Inc., Tremont Partners, Inc., and a Portfolio Manager.3/
(c) Form of Portfolio Manager Investment Agreement.3/
(d) Form of Participation Agreement among Registrant, Security
Life of Denver Insurance Company [and First ING Life Insurance
Company of New York], Western Capital Financial Group, Inc., and
Palladian Advisors, Inc.3/
10. Opinion of counsel.4/
11. Consent of independent accountants.7/
12. Not Applicable.
13. Not Applicable.
14. Not Applicable.
15. Not Applicable.
16. Not Applicable.
17. Not Applicable.
18. Powers of attorney.3/
_________________________
1/ Incorporated by reference to initial registration statement for The
Palladian Trust, Reg. No. 33-73882, filed January 7, 1994.
2/ Incorporated by reference to pre-effective amendment no. 1, Reg. No. 33-
73882, filed May 12, 1995.
3/ Incorporated by reference to pre-effective amendment no. 2, Reg. No. 33-
73882, filed October 18, 1995.
4/ Incorporated by reference to post-effective amendment No. 1, Reg. No.
33-73882, filed January 26, 1996.
5/ Incorporated by reference to post-effective amendment No. 4, Reg. No.
33-73882, filed April 30, 1997.
6/ Filed herewith.
7/ To be filed by amendment.
C-2
<PAGE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not Applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
Number of
Title of Class Record Holders
-------------- --------------
Value 3
Growth 2
Balanced Opportunity 2
International Growth 2
Global Strategic Income 3
Global Interactive/Telecomm 3
ITEM 27. INDEMNIFICATION.
Section 5.4 of the Agreement and Declaration of Trust of The Palladian
Trust provides in part:
"The Trust shall indemnify (from the assets of the Portfolio or
Portfolio in question) each of its Trustees and officers (including
persons who serve at the Trust's request as directors, officers or
trustees of another organization in which the Trust has any interest
as a shareholder, creditor or otherwise) [hereinafter referred to as a
"Covered Person"] against all liabilities, including but not limited
to amounts paid in satisfaction of judgments, in compromise or as
fines and penalties, and expenses, including reasonable accountants'
and counsel fees, incurred by any Covered Person in connection with
the defense or disposition of any action, suit or other proceeding,
whether civil or criminal, before any court or administrative or
legislative body, in which such Covered Person may be or may have been
involved as a party or otherwise or with which such person may be or
may have been threatened, while in office or thereafter, by reason of
being or having been such a Trustee or officer, director or trustee,
except with respect to any matter as to which it has been determined
that such Covered Person (i) did not act in good faith in the
reasonable relief that such Covered Person's action was in or not
opposed to the best interests of the Trust or (ii) had acted with
willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of such Covered Person's office
(either and both of the conduct described in (i) and (ii) being
referred to hereafter as "Disabling Conduct")."
C-3
<PAGE>
The Agreement and Declaration, Exhibit 1 hereto, provides additional terms of
this indemnification.
The agreement between the Registrant and the Manager includes the following
indemnification provision:
"The Manager shall not be liable for any loss suffered by the Trust as
the result of actions by persons other than the Manager or for any
loss suffered by the Trust as the result of any negligent act or error
of judgment of the Manager in connection with the matters to which
this Agreement relates, except a loss resulting from a breach by the
Manager of its fiduciary duty with respect to the receipt of
compensation for services (in which case any award of damages shall be
limited to the period and the amount set forth in Section 36(b)(3) of
the 1940 Act) or loss resulting from willful misfeasance, bad faith or
gross negligence on its part in the performance of its duties under
this Agreement or from reckless disregard by it of its obligations and
duties under this Agreement. The Trust shall indemnify the Manager
and hold it harmless from all cost, damage and expense, including
reasonable expenses for legal counsel, incurred by the Manager
resulting from actions for which it is relieved of responsibility by
this paragraph. The Manager shall indemnify the Trust and hold it
harmless from all cost, damage and expense, including reasonable
expenses for legal counsel, incurred by the Trust resulting from (i) a
breach by the Manager of its fiduciary duty with respect to
compensation for services paid by the Trust (in which case any award
of damages shall be limited to the period and the amount set forth in
Section 36(b)(3) of the 1940 Act); (ii) willful misfeasance, bad faith
or gross negligence by the Manager in the performance of its duties
under this Agreement; or (iii) reckless disregard by the Manager of
its obligations and duties under this Agreement."
The agreements with the Portfolio Managers include substantially similar
provisions.
The Participation Agreements with Security Life of Denver Insurance Company
and First ING Life Insurance Company of New York include certain indemnification
provisions. Subject to certain limitations, the Life Company agrees, among
other things,
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to indemnify the Registrant, the Manager and the principal underwriter for any
and all losses, claims, damages, or liabilities (including legal and other
expenses) arising out of certain misrepresentations or omissions, a failure by
Life Company to substantially provide the services required by the Participation
Agreement, or a material breach of the Participation Agreement. Subject to
certain limitations, the Manager and the principal underwriter agree, among
other things, to indemnify the Life Company against all losses, claims, damages,
or liabilities (including legal and other expenses) arising out of certain
misrepresentations or omissions, a failure by the Trust to meet certain
requirements, or a material breach of the Participation Agreement. Participation
agreements with other insurance companies include similar provisions.
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
(a) ALLMERICA INVESTMENT MANAGEMENT COMPANY, INC.
See "Management of the Trust" in both Prospectuses and Statements of
Additional Information (Parts A and B) of this Registration Statement.
Information as to Allmerica Investment Management Company, Inc.'s
directors and officers is included in its Form ADV filed with the Securities
and Exchange Commission (Filed No. 801-26516), as most recently amended, the
text of which is incorporated herein by reference.
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(b) GAMCO INVESTORS, INC.
See "Management of the Trust" both in the Prospectus and Statement of
Additional Information (Parts A and B) of this Registration Statement relating
to the Value and Global Interactive/Telecomm Portfolios.
Information as to GAMCO Investors, Inc.'s directors and executive officers
is included in its Form ADV filed with the Securities and Exchange Commission
(File No. 801-141-32), as most recently amended, the text of which is
incorporated herein by reference.
(c) STONEHILL CAPITAL MANAGEMENT, INC.
See "Management of the Trust" both in the Prospectus and Statement of
Additional Information (Parts A and B) of this Registration Statement relating
to the Growth Portfolio.
Information as to Stonehill Capital Management, Inc.'s directors and
executive officers is included in its Form ADV filed with the Securities and
Exchange Commission (File No. 801-39-824), as most recently amended, the text of
which is incorporated herein by reference.
(d) BEE & ASSOCIATES INCORPORATED
See "Management of the Trust" both in the Prospectus and Statement of
Additional Information (Parts A and B) of this Registration Statement relating
to the International Growth Portfolio.
Information as to Bee & Associates Incorporated's directors and executive
officers is included in its Form ADV filed with the Securities and Exchange
Commission (File No. 801-345-38), as most recently amended, the text of which is
incorporated herein by reference.
(e) FISCHER FRANCIS TREES & WATTS, INC.
See "Management of the Trust" both in the Prospectus and Statement of
Additional Information (Parts A and B) of this Registration Statement relating
to the Global Strategic Income Portfolio.
Information as to Fischer Francis Trees & Watts, Inc.'s directors and
executive officers is included in its Form ADV filed with the Securities and
Exchange Commission (File No. 801-105-07), as most recently amended, the text of
which is incorporated herein by reference.
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ITEM 29. PRINCIPAL UNDERWRITERS
(a) The principal underwriter does not act as principal underwriter,
depositor or investment adviser of any other investment company.
(b) Information concerning the directors and officers of Western Capital
Financial Group, Inc. is set forth below. The address of each person is 701
Palomar Airport Road, Suite 300, Carlsbad, CA 92009.
Positions and Positions and
Offices with Offices with
Name Underwriter Registrant
- ---- ------------ -------------
H. Michael Schwartz President and Trustee, President,
Director Secretary and
Treasurer
Dan Dubois Senior Vice None
President
Richard Zak Senior Vice None
President
(c) Registrant has no principal underwriter who is not an affiliated
person of the Registrant.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules thereunder
are maintained at the offices of (1) the Registrant and Allmerica Investment
Management Company, Inc., 440 Lincoln Street, Worcester, Ma 01653; (2) GAMCO
Investors, Inc., One Corporate Center, Rye, NY 10580; (3) Stonehill Capital
Management, Inc., 277 Park Avenue, New York, NY 10172; (4) Bee & Associates
Incorporated, 370 17th Street, Denver, CO 80202; (5) Fischer Francis Trees &
Watts, Inc., 200 Park Avenue, 46th Floor, New York, NY 10166; (6) Investors
Bank & Trust Company, 89 South Street, Boston, MA 02111; and (7) Palladian
Advisors, Inc., 701 Palomar Airport Road, Suite 300, Carlsbad, CA 92009.
ITEM 31. MANAGEMENT SERVICES
Not Applicable.
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ITEM 32. UNDERTAKINGS
Not applicable.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Carlsbad, and State of California
on the 26th day of February, 1998.
THE PALLADIAN TRUST
/s/ Matthew J. Stacom By: /s/ H. Michael Schwartz
- ------------------------------ --------------------------------
Matthew J. Stacom H. Michael Schwartz
Chairman and President (Attorney-in-Fact)
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the 26th day of February, 1998.
SIGNATURE AND TITLE
/s/ Matthew J. Stacom By: /s/ H. Michael Schwartz
- ------------------------------ --------------------------------
Matthew J. Stacom H. Michael Schwartz
Chairman and President (Attorney-in-Fact)
/s/ Tom N. Dallape By: /s/ H. Michael Schwartz
- ------------------------------ ---------------------------------
Tom N. Dallape H. Michael Schwartz
Trustee (Attorney-in-Fact)
/s/ Thomas P. Cunningham
- ------------------------------
Thomas P. Cunningham
Treasurer,
Principal Financial Officer,
Principal Accounting Officer
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