<PAGE>
As filed with the SEC on August 31, 1998
Reg. No. 33-73882
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / /
Pre-Effective Amendment No. / /
Post-Effective Amendment No. 8 /x/
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 / /
Amendment No. 11 /x/
(Check appropriate box or boxes)
------------------
THE PALLADIAN TRUST
(Exact name of registrant as specified in charter)
440 Lincoln Street
Worcester, MA 01653
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (800) 917-1909
George Boyd
440 Lincoln Street
Worcester, MA 01653
(Name and Address of Agent for Service of Process)
copies to:
Christopher E. Palmer
Shea & Gardner
1800 Massachusetts Avenue, NW
Washington, DC 20036
-----------------------
<PAGE>
Approximate Date of Public Offering: Continuous.
It is proposed that this filing will become effective (check appropriate box)
/ / immediately upon filing pursuant to paragraph (b)
/x/ on September 1, 1998 pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/ / on (date) pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / on (date) pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
/ / this post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
Title of Securities Being Registered: Portfolio shares
<PAGE>
CROSS REFERENCE SHEET
FOR PROSPECTUS AND SAI
(as required by Rule 495)
<TABLE>
<CAPTION>
Form N-1A Item No. Caption in Part A Prospectus
------------------ ----------------------------
<S> <C> <C>
Item 1. Cover Page Cover Page
Item 2. Synopsis Summary of Expenses
Item 3. Condensed Financial Performance Information
Item 4. General Description of General Information; Investment
Registrant Objectives and Policies;
Description of Securities and
Investment Techniques
Item 5. Management of the Fund Management of the Trust
Item 6. Capital Stock and Other Dividends, Distributions,
Securities and Taxes; Other Information
Item 7. Purchase of Securities Being Investment in the Trust
Offered
Item 8. Redemption of Repurchase Investment in the Trust
Item 9. Pending Legal Proceedings Not Applicable
<PAGE>
<CAPTION>
Caption in Part B Statement
Form N-1A Item No. of Additional Information
------------------ ----------------------------
<S> <C> <C>
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information Not Applicable
and History
Item 13. Investment Objectives Description of Securities and
and Policies Investment Techniques;
Investment Restrictions;
Appendix
Item 14. Management of the Fund Management of the Trust
Principal Shareholders
Item 15. Control Person and Principal Management of the Trust
Holders of Securities
Item 16. Investment Advisory and Management of the Trust
Other Services
Item 17. Brokerage Allocation and Portfolio Transactions
Other Practices and Brokerage
Item 18. Capital Stock and Other Capitalization
Securities
Item 19. Purchase, Redemption and Not Applicable
Pricing of Securities Being
Offered
Item 20. Tax Status Taxation
Item 21. Underwriters Not Applicable
Item 22. Calculations of Performance Performance Information
Data
Item 23. Financial Statements Financial Statements
</TABLE>
<PAGE>
Part C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to this Registration Statement.
<PAGE>
PROSPECTUS
FOR
THE VALUE PORTFOLIO
THE GROWTH PORTFOLIO
THE INTERNATIONAL GROWTH PORTFOLIO
THE STRATEGIC INCOME PORTFOLIO, AND
THE GLOBAL INTERACTIVE/TELECOMM PORTFOLIO
OF
THE FULCRUM TRUST
440 LINCOLN STREET
WORCESTER, MASSACHUSETTS 01653
(800) 917-1909
September 1, 1998
This prospectus offers shares of five portfolios (each individually a
"Portfolio" or collectively the "Portfolios") of The Fulcrum Trust (the
"Trust"), which is an open-end, management investment company. Each Portfolio
has its own investment objective or objectives and investment policies. Shares
of the Portfolios may be sold only to: (1) life insurance company separate
accounts (the "Separate Accounts") to serve as the underlying investment medium
for variable annuity and variable life insurance contracts; (2) qualified
retirement plans, as permitted by Treasury Regulations; and (3) life insurance
companies and advisers to the Portfolios and their affiliates. Shares will not
be offered directly to the public.
Allmerica Financial Investment Management Services, Inc. ("AFIMS") serves as
overall manager of the Portfolios. AFIMS manages the operations of the Trust and
monitors the investment advisers that provide day-to-day management of the
Portfolios (the "Portfolio Managers").
The five Portfolios and their respective Portfolio Managers are as follows:
<TABLE>
<CAPTION>
PORTFOLIO PORTFOLIO MANAGER
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
The Value Portfolio GAMCO Investors, Inc.
The Growth Portfolio Pilgrim Baxter Analytic Investors, Inc.
The International Growth Portfolio Bee & Associates Incorporated
The Strategic Income Portfolio Allmerica Asset Management, Inc.
The Global Interactive/Telecomm Portfolio GAMCO Investors, Inc.
</TABLE>
Information about the investment objectives and policies of each Portfolio,
along with a detailed description of the types of securities and other assets in
which each Portfolio may invest, are set forth in this prospectus. There can be
no assurance that the investment objective for any Portfolio will be achieved.
The Strategic Income Portfolio (formerly known as the Global Strategic
Income Portfolio) may invest up to 50% of its assets in bonds rated below
investment grade (commonly referred to as "junk bonds" or "high yield/high risk
bonds"). High yield/high risk bonds involve significant risks. See page 21.
This prospectus sets forth concisely the information a prospective purchaser
of a variable contract or a participant in a qualified retirement plan should
know before directing that contributions or amounts credited to him or her be
invested in the Portfolios. A Statement of Additional Information (the "SAI")
dated September 1, 1998 containing additional and more detailed information
about the Portfolios has been filed with the Securities and Exchange Commission
and is hereby incorporated by reference into this prospectus. It is available
without charge and can be obtained by writing or calling the Trust at the
address and telephone number printed above.
------------------------
PROSPECTIVE PURCHASERS OF A VARIABLE CONTRACT SHOULD READ THIS PROSPECTUS IN
CONJUNCTION WITH THE PROSPECTUS FOR THE SEPARATE ACCOUNT. BOTH PROSPECTUSES
SHOULD BE READ CAREFULLY AND RETAINED FOR FUTURE REFERENCE.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
SUMMARY OF EXPENSES....................................................................................... 4
FINANCIAL HIGHLIGHTS...................................................................................... 8
GENERAL INFORMATION....................................................................................... 10
The Fulcrum Trust..................................................................................... 10
The Manager and Portfolio Managers.................................................................... 10
Investment Objectives................................................................................. 10
MANAGEMENT OF THE TRUST................................................................................... 11
Manager............................................................................................... 11
Portfolio Managers.................................................................................... 11
Management and Portfolio Management Investment Advisory Fees.......................................... 13
Expense Limitations................................................................................... 15
Custodian and Transfer Agent.......................................................................... 16
INVESTMENT OBJECTIVES AND POLICIES........................................................................ 16
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES....................................................... 20
U.S. Government Securities............................................................................ 20
Debt Securities....................................................................................... 21
Mortgage-Backed Securities............................................................................ 21
Other Asset-Backed Securities......................................................................... 22
Variable and Floating Rate Securities................................................................. 22
Banking Industry and Savings Industry Obligations..................................................... 22
Commercial Paper...................................................................................... 23
Repurchase Agreements................................................................................. 23
Reverse Repurchase Agreements......................................................................... 23
Lending Portfolio Securities.......................................................................... 23
Illiquid Securities................................................................................... 24
Warrants.............................................................................................. 24
Other Investment Companies............................................................................ 24
Short Sales........................................................................................... 24
Short Sales Against the Box........................................................................... 25
Foreign Securities.................................................................................... 25
Investment in Gold and Other Precious Metals.......................................................... 27
Futures Contracts..................................................................................... 27
Options............................................................................................... 28
Foreign Currency Transactions......................................................................... 30
Leverage.............................................................................................. 30
Indexed Securities.................................................................................... 30
INVESTMENT IN THE TRUST................................................................................... 30
Determination of Net Asset Value...................................................................... 30
Purchase of Shares.................................................................................... 31
Redemption of Shares.................................................................................. 32
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
DIVIDENDS, DISTRIBUTIONS, AND TAXES....................................................................... 32
OTHER INFORMATION......................................................................................... 33
Capitalization........................................................................................ 33
Voting Rights......................................................................................... 33
Portfolio Brokerage................................................................................... 34
Year 2000............................................................................................. 34
Performance Information............................................................................... 34
APPENDIX A................................................................................................ 36
APPENDIX B................................................................................................ 37
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFERING CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS BEING AUTHORIZED BY
THE TRUST. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY THE TRUST TO SELL
SHARES IN ANY STATE TO ANY PERSON TO WHOM IT IS UNLAWFUL FOR THE TRUST TO MAKE
SUCH AN OFFER IN SUCH STATE.
3
<PAGE>
SUMMARY OF EXPENSES
The following tables show the expenses that will be incurred by each
Portfolio, expressed as a percentage of average net assets during the year. If
you have been given this prospectus because you are considering the purchase of
a variable contract, you should refer to the variable contract prospectus for
more information about expenses under the variable contract, which are in
addition to expenses of the Portfolios.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTIONS EXPENSES (FOR EACH PORTFOLIO)
- ------------------------------------------------------------
<S> <C>
Sales Load on Purchases................................. None
Sales Load on Reinvested Dividends...................... None
Deferred Sales Load Imposed on Redemption............... None
Exchange Fees........................................... None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
</TABLE>
For the first 12 full calendar months after a new Portfolio Manager is hired
(or, in the case of a Portfolio that has had only one Portfolio Manager, for the
first 12 full calendar months of operations), the advisory agreements set the
management fee at an annual rate of 0.80% of the Portfolio's average daily net
assets. As of the date of this prospectus, this initial fee is relevant for only
two of the Portfolios--the Strategic Income Portfolio and the Growth Portfolio.
The Strategic Income Portfolio has a new Portfolio Manager effective April 13,
1998 and the Growth Portfolio has a new Portfolio Manager effective August 1,
1998. Thus, the initial fee is applicable through April 30, 1999 for the
Strategic Income Portfolio and through July 31, 1999 for the Growth Portfolio.
Those fees are subject to additional limitations set forth in notes (1) and (2)
to the charts below.
After the initial 12-month period described above, each Portfolio has a
performance-based advisory fee. As of the date of this prospectus, this fee is
in effect for all Portfolios other than the Strategic Income Portfolio and the
Growth Portfolio. The base fee is 2.00%, but the total fee may vary from between
0.00% to 4.00%, depending on the Portfolio's performance. The base fee of 2.00%
would be paid if Portfolio performance (net of all fees and expenses, including
the advisory fee) is between 1.5 and 3.0 percentage points better than the
benchmark index. A fee of 4.00% would be paid only if Portfolio performance (net
of all fees and expenses, including the advisory fee) was at least 7.5
percentage points better than the benchmark index. No fee will apply if the
Portfolio's performance is more than 3.0 percentage points lower than the
benchmark index. See "Management and Portfolio Management Investment Advisory
Fees," pages 13-15.
We show below expense information first using the fees that actually applied
during 1997, with the caveat that the fee for the Strategic Income Portfolio has
been restated to 0.40% to reflect the current fee arrangement described in note
(1) to the charts below.
We also show below expense information assuming fees of 0.00%, 2.00% and
4.00%, because the fee in 1998 and future years may vary. You should note,
however, that the fee could be any figure between 0.00% and 4.00%, not just the
specific figures shown below.
For each of the fee levels shown, we have included an example prepared in
accordance with the requirements of the Securities and Exchange Commission. The
purpose of the examples is to assist investors in understanding the various
costs and expenses that an investor in the Portfolios will bear directly or
indirectly. They show the total expenses that would be payable if you redeemed
your shares after having held them for one, three, five and ten year periods
respectively. Each example assumes a 5% annual rate of return pursuant to
requirements of the Securities and Exchange Commission. This
4
<PAGE>
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. USING 1997 MANAGEMENT FEES(1)
<TABLE>
<CAPTION>
OTHER EXPENSES
(AFTER ANY
APPLICABLE TOTAL OPERATING
FUND MANAGEMENT FEES REIMBURSEMENT) EXPENSES
- --------------------------------------------------------- ---------------- ------------------ -----------------
<S> <C> <C> <C>
Value Portfolio........................................ 0.14%(2) 1.00%(3) 1.14%
Growth Portfolio....................................... 0.20%(2) 1.00%(3) 1.20%
International Growth Portfolio......................... 0.58%(2) 1.20%(3) 1.78%
Strategic Income Portfolio............................. 0.40%(1) 1.20%(3) 1.60%
Global Interactive/Telecomm Portfolio.................. 0.27%(2) 1.20%(3) 1.47%
</TABLE>
EXAMPLE. A shareholder would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return, (2) the advisory fees in the
above chart, and (3) redemption at the end of each time period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Value Portfolio.................................................... $ 11 $ 36 $ 63 $ 139
Growth Portfolio................................................... $ 12 $ 37 $ 66 $ 145
International Growth Portfolio..................................... $ 18 $ 55 $ 96 $ 209
Strategic Income Portfolio......................................... $ 16 $ 50 $ 87 $ 190
Global Interactive/Telecomm Portfolio.............................. $ 15 $ 46 $ 80 $ 176
</TABLE>
2. ASSUMING MANAGEMENT FEE OF 0%
An advisory fee of 0% would be paid if the Portfolio's performance (net of
all fees and expenses) was more than 3.0 percentage points lower than the
benchmark index.
<TABLE>
<CAPTION>
OTHER EXPENSES
(AFTER ANY
APPLICABLE TOTAL OPERATING
FUND MANAGEMENT FEES REIMBURSEMENT) EXPENSES
- --------------------------------------------------------- ---------------- ------------------ -----------------
<S> <C> <C> <C>
Value Portfolio........................................ 0%(2) 1.00%(3) 1.00%
Growth Portfolio....................................... 0%(2) 1.00%(3) 1.00%
International Growth Portfolio......................... 0%(2) 1.20%(3) 1.20%
Strategic Income Portfolio............................. 0%(2) 1.20%(3) 1.20%
Global Interactive/Telecomm Portfolio.................. 0%(2) 1.20%(3) 1.20%
</TABLE>
EXAMPLE. A shareholder would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return, (2) an advisory fee of 0%, and
(3) redemption at the end of each time period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Value Portfolio.................................................... $ 10 $ 31 $ 55 $ 122
Growth Portfolio................................................... $ 10 $ 31 $ 55 $ 122
International Growth Portfolio..................................... $ 12 $ 37 $ 66 $ 145
Strategic Income Portfolio......................................... $ 12 $ 37 $ 66 $ 145
Global Interactive/Telecomm Portfolio.............................. $ 12 $ 37 $ 66 $ 145
</TABLE>
5
<PAGE>
3. ASSUMING MANAGEMENT FEE OF 2.00%
An advisory fee of 2.00% would be paid if the Portfolio's performance (net
of all fees and expenses, including the 2.00% advisory fee) was between 1.5 and
3.0 percentage points better than the benchmark index.
<TABLE>
<CAPTION>
OTHER EXPENSES
(AFTER ANY
APPLICABLE TOTAL OPERATING
FUND MANAGEMENT FEES REIMBURSEMENT) EXPENSES
- --------------------------------------------------------- ---------------- ------------------ -----------------
<S> <C> <C> <C>
Value Portfolio........................................ 2.00%(2) 1.00%(3) 3.00%
Growth Portfolio....................................... 2.00%(2) 1.00%(3) 3.00%
International Growth Portfolio......................... 2.00%(2) 1.20%(3) 3.20%
Strategic Income Portfolio............................. 2.00%(2) 1.20%(3) 3.20%
Global Interactive/Telecomm Portfolio.................. 2.00%(2) 1.20%(3) 3.20%
</TABLE>
EXAMPLE. A shareholder would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return, (2) an advisory fee of 2%, and
(3) redemption at the end of each time period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Value Portfolio.................................................... $ 30 $ 92 $ 158 $ 332
Growth Portfolio................................................... $ 30 $ 92 $ 158 $ 332
International Growth Portfolio..................................... $ 32 $ 98 $ 167 $ 350
Strategic Income Portfolio......................................... $ 32 $ 98 $ 167 $ 350
Global Interactive/Telecomm Portfolio.............................. $ 32 $ 98 $ 167 $ 350
</TABLE>
4. ASSUMING MANAGEMENT FEE OF 4.00%
An advisory fee of 4.00% would be paid if the Portfolio's performance (net
of all fees and expenses, including the 4.00% advisory fee) was at least 7.5
percentage points better than the benchmark index.
<TABLE>
<CAPTION>
OTHER EXPENSES
(AFTER ANY
APPLICABLE TOTAL OPERATING
FUND MANAGEMENT FEES REIMBURSEMENT) EXPENSES
- --------------------------------------------------------- ---------------- ------------------ -----------------
<S> <C> <C> <C>
Value Portfolio........................................ 4.00%(2) 1.00%(3) 5.00%
Growth Portfolio....................................... 4.00%(2) 1.00%(3) 5.00%
International Growth Portfolio......................... 4.00%(2) 1.20%(3) 5.20%
Strategic Income Portfolio............................. 4.00%(2) 1.20%(3) 5.20%
Global Interactive/Telecomm Portfolio.................. 4.00%(2) 1.20%(3) 5.20%
</TABLE>
EXAMPLE. A shareholder would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return, (2) an advisory fee of 4%, and
(3) redemption at the end of each time period. In order to have both a 5%
annual return and an advisory fee of 4%, the Portfolio's performance would
have to be 9% before deduction of the 4% fee (resulting in performance of
5%) and the benchmark index would have to DECREASE at least 2.5 percentage
points (meaning that the Portfolio's
6
<PAGE>
performance after fees and expenses was at least 7.5 percentage points
better than the benchmark index).
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Value Portfolio.................................................... $ 50 $ 150 $ 250 $ 500
Growth Portfolio................................................... $ 50 $ 150 $ 250 $ 500
International Growth Portfolio..................................... $ 52 $ 156 $ 259 $ 515
Strategic Income Portfolio......................................... $ 52 $ 156 $ 259 $ 515
Global Interactive/Telecomm Portfolio.............................. $ 52 $ 156 $ 259 $ 515
</TABLE>
- ------------------------
(1) The actual management fee for the Strategic Income Portfolio for 1997 was
0.41%. The fee listed in the first table has been restated to 0.40% because,
effective April 13, 1998, a new Portfolio Manager is in place. Although the
current Portfolio Manager Agreement sets the fee at 0.80% through April 30,
1999, the fee is subject to two important limitations. First, from April 13,
1998 through June 8, 1998, the fee was calculated at the lesser of the
following two rates: (1) 0.80%; and (2) the rate that would have applied
under the old advisory agreement. The latter rate varies based on prior
performance, but as noted above was 0.41% for 1997. Second, the Manager and
the Portfolio Manager have voluntarily agreed to limit their fee from June
9, 1998 through April 30, 1999 to an annual rate of 0.40%. See "Management
and Portfolio Management Investment Advisory Fees," pages 13-15.
(2) See "Management and Portfolio Management Investment Advisory Fees," pages
13-15, for a complete description of the advisory fee. Effective August 1,
1998, a new Portfolio Manager is in place for the Growth Portfolio. The
Manager and the Portfolio Manager have voluntarily agreed to limit their fee
from August 1, 1998 through July 31, 1999 to the lesser of the following two
rates: (1) 0.80%, the rate specified in the Portfolio Manager Agreement; or
(2) the rate that would have applied under the prior Portfolio Manager
Agreement with the prior Portfolio Manager. The latter rate varies based on
prior performance.
(3) Restated to reflect the expense limitation in effect during 1998. Allmerica
Financial Life Insurance and Annuity Company has agreed to limit operating
expenses and reimburse those expenses to the extent that each Portfolio's
1998 "other expenses" (I.E., expenses other than management fees) exceed the
following expense limitations (expressed as an annualized percentage of
average daily net assets): Value Portfolio, 1.00%; Growth Portfolio, 1.00%;
International Growth Portfolio, 1.20%; Strategic Income Portfolio, 1.20%;
Global Interactive/Telecomm Portfolio, 1.20%. There was a different expense
limitation in effect during 1997. See "Expense Limitations," pages 15-16.
Without that expense limitation, the 1997 "other expense" ratios would have
been the following: Value Portfolio, 4.04%; Growth Portfolio, 5.48%;
International Growth Portfolio, 6.10%; Strategic Income Portfolio, 5.31%;
Global Interactive/Telecomm Portfolio, 6.28%.
7
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights for the periods indicated have been audited by
PricewaterhouseCoopers LLP, independent accountants, whose report thereon
appears in the Trust's annual report and in the Statement of Additional
Information. The financial highlights should be read in conjunction with the
financial statements. The annual report and Statement of Additional Information
contain additional information and are available upon request and without
charge. The information presented is for a share of beneficial interest
outstanding through the periods ended December 31, except as noted.
<TABLE>
<CAPTION>
VALUE PORTFOLIO GROWTH PORTFOLIO
------------------------------------- --------------------------------------
FOR THE YEAR FOR THE PERIOD FOR THE YEAR FOR THE PERIOD
ENDED ENDED ENDED ENDED
DEC. 31, 1997 DEC. 31, 1996* DEC. 31, 1997 DEC. 31, 1996*
<S> <C> <C> <C> <C>
------------------------------------- --------------------------------------
Net asset value, beginning of
period............................ $ 10.88 $ 10.00 $ 10.84 $ 10.00
-------------- --------------- -------------- ---------------
INCOME/(LOSS) FROM INVESTMENT
OPERATIONS:
Net investment income/(loss)....... 0.17(1),(4) (0.64)(1),(2) (0.02)(1),(4) (2.96)(1),(2)
Net realized and unrealized
gain/(loss) on investments........ 3.35 2.15 1.13 3.80
-------------- --------------- -------------- ---------------
Total from investment operations... 3.52 1.51 1.11 0.84
-------------- --------------- -------------- ---------------
LESS DISTRIBUTIONS:
Net Investment Income.............. (0.09) -- -- --
Net Realized Gain from Investment
Transactions...................... (0.81) -- -- --
Distributions from capital......... -- (0.63) -- --
-------------- --------------- -------------- ---------------
Total distributions................ (0.90) (0.63) -- --
-------------- --------------- -------------- ---------------
Net asset value, end of period..... $ 13.50 $ 10.88 $ 11.95 $ 10.84
-------------- --------------- -------------- ---------------
-------------- --------------- -------------- ---------------
Total Return....................... 32.36%(4) 15.13%(2),(3) 10.24%(4) 8.40%(2),(3)
-------------- --------------- -------------- ---------------
-------------- --------------- -------------- ---------------
RATIOS TO AVERAGE NET
ASSETS/SUPPLEMENTAL DATA:
Net assets, end of reporting
period............................ $ 6,584,652 $ 900,331 $ 4,463,531 $ 148,404
Ratio of operating expenses to
average net assets................ 0.84%(4) 8.19%(2),*** 0.90%(4) 34.15%(2),***
Ratio of net investment
income/(loss) to average net
assets............................ 1.30%(4) (6.55%)(2),*** (0.16%)(4) (31.31%)(2),***
Portfolio turnover rate............ 176.79% 73.63% 208.68% 580.48%
Average commission per share....... $0.0398 $0.0607 $0.0529 $0.0344
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
INTERNATIONAL GROWTH PORTFOLIO GLOBAL STRATEGIC INCOME PORTFOLIO****
-------------------------------------- --------------------------------------
FOR THE YEAR FOR THE PERIOD FOR THE YEAR FOR THE PERIOD
ENDED ENDED ENDED ENDED
DEC. 31, 1997 DEC. 31, 1996** DEC. 31, 1997 DEC. 31, 1996*
-------------------------------------- --------------------------------------
<S> <C> <C> <C> <C>
-------------------------------------- --------------------------------------
Net asset value, beginning of
period............................ $ 10.33 $ 10.00 $ 9.98 $ 10.00
-------------- ------- -------------- ---------------
INCOME/(LOSS) FROM INVESTMENT
OPERATIONS:
Net investment income/(loss)....... 0.10(1)(4) (4.16)(1)(2) 0.36(1),(4) (0.19)(1),(2)
Net realized and unrealized
gain/(loss) on investments........ (0.63) 4.67 (0.30) 0.23
-------------- ------- -------------- ---------------
Total from investment operations... (.53) 0.51 0.06 0.04
-------------- ------- -------------- ---------------
LESS DISTRIBUTIONS:
Net Investment Income.............. (0.05) -- (0.11) --
Net Realized Gain from Investment
Transactions...................... (0.03) -- (0.05) --
Distributions from capital......... -- (0.18) -- (0.06)
-------------- ------- -------------- ---------------
Total distributions................ (0.08) (0.18) (0.16) (0.06)
-------------- ------- -------------- ---------------
Net asset value, end of period..... $ 9.72 $ 10.33 $ 9.88 $ 9.98
-------------- ------- -------------- ---------------
-------------- ------- -------------- ---------------
Total Return....................... (5.25)(4) 5.13%(2)(3) 0.60%(4) 0.44%(2),(3)
-------------- ------- -------------- ---------------
-------------- ------- -------------- ---------------
RATIOS TO AVERAGE NET
ASSETS/SUPPLEMENTAL DATA:
Net assets, end of reporting
period............................ $ 3,207,002 $ 97,387 $ 2,699,938 $ 1,106,697
Ratio of operating expenses to
average net assets................ 1.78%(4) 67.76%(2) 1.61%(4) 7.37%(2),***
Ratio of net investment
income/(loss) to average net
assets............................ 0.97%(4) (56.37%)(2) 3.67%(4) (2.15%)(2),***
Portfolio turnover rate............ 13.02% 116.21% 713.04% 212.36%
Average commission per share....... $0.0110 $0.0101 n/a n/a
<CAPTION>
GLOBAL INTERACTIVE/TELECOMM PORTFOLIO
--------------------------------------
FOR THE YEAR FOR THE PERIOD
ENDED ENDED
DEC. 31, 1997 DEC. 31, 1996*
--------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of
period............................ $ 10.00 $ 10.00
-------------- ---------------
INCOME/(LOSS) FROM INVESTMENT
OPERATIONS:
Net investment income/(loss)....... 0.08(1),(4) (0.75)(1),(2)
Net realized and unrealized
gain/(loss) on investments........ 3.95 0.80
-------------- ---------------
Total from investment operations... 4.03 0.05
-------------- ---------------
LESS DISTRIBUTIONS:
Net Investment Income.............. (0.04) --
Net Realized Gain from Investment
Transactions...................... (0.67) --
Distributions from capital......... -- (0.05)
-------------- ---------------
Total distributions................ (0.71) (0.05)
-------------- ---------------
Net asset value, end of period..... $ 13.32 $ 10.00
-------------- ---------------
-------------- ---------------
Total Return....................... 40.24%(4) 0.49%(2),(3)
-------------- ---------------
-------------- ---------------
RATIOS TO AVERAGE NET
ASSETS/SUPPLEMENTAL DATA:
Net assets, end of reporting
period............................ $ 3,016,441 $ 594,315
Ratio of operating expenses to
average net assets................ 1.47%(4) 9.83%(2),***
Ratio of net investment
income/(loss) to average net
assets............................ 0.64%(4) (8.32%)(2),***
Portfolio turnover rate............ 114.11% 71.44%
Average commission per share....... $0.0509 $0.0659
</TABLE>
- ------------------------------
*Commencement of operations February 1, 1996
**Commencement of operations March 26, 1996
***Annualized
****Effective June 8, 1998, renamed Strategic Income Portfolio
1. This information was prepared using the average number of shares outstanding
during the period.
2. The total return, ratio of operating expenses and the ratio of net
investment loss for the period ended December 31, 1996 reflect the impact of
an expense reimbursement totaling $169,554, allocated to each portfolio
following stipulated criteria (See Note 10 to the financial statements).
Absent the reimbursement, net investment loss per share, and the ratios of
expenses and net investment loss to average net assets for the Value
Portfolio, the Growth Portfolio, the International Growth Portfolio, the
Global Strategic Income Portfolio and the Global Interactive/Telecomm
Portfolio shares would have been ($1.22), ($5.61), ($7.56), ($0.63) and,
($1.34), respectively, 14.13%, 63.54%, 126.26%,12.30%, and 16.45%,
respectively, (12.40%), (58.37%), (92.05%), (7.02%), and (14.82%),
respectively.
3. Total return measures the change in the value of an investment for the year
indicated. For the period ended December 31, 1996 the total return includes
a capital infusion totaling $228,823 (See Note 9 to the financial statements
concerning amount allocated to each Portfolio). Absent the infusion, total
return for the Value Portfolio, the Growth Portfolio, the International
Growth Portfolio, the Global Strategic Income Portfolio and Global
Interactive /Telecomm Portfolio would have been 7.64%, (41.75%), (46.50%),
(4.49%), and (6.68%), respectively.
4. The total return, ratio of operating expenses and the ratio of net
investment loss for the period ended December 31, 1997 reflect the impact of
an expense reimbursement totaling $493,393, allocated to each portfolio
following stipulated criteria (See Note 10 to the financial statements).
Absent the reimbursement, net investment loss per share, and the ratios of
expenses and net investment loss to average net assets for the Value
Portfolio, the Growth Portfolio, the International Growth Portfolio, the
Global Strategic Income Portfolio and the Global Interactive/Telecomm
Portfolio shares would have been ($0.34), ($0.68), ($0.45), ($0.14) and,
($0.62), respectively, 4.75%, 6.12%, 7.11%, 6.68%, and 7.26%, respectively,
(2.60%), (5.38%), (4.36%), (1.39%), and (5.14%), respectively.
9
<PAGE>
GENERAL INFORMATION
THE FULCRUM TRUST
This Prospectus offers shares of five Portfolios (the "Portfolios") of The
Fulcrum Trust (the "Trust"), each with its own investment objective and
investment policies. The Trust was established as a Massachusetts business trust
and is registered under the Investment Company Act of 1940 (the "1940 Act") as
an open-end management investment company. The Trust was formerly named The
Palladian Trust.
THE MANAGER AND PORTFOLIO MANAGERS
Allmerica Financial Investment Management Services, Inc. ("AFIMS") serves as
overall manager of the Portfolios. AFIMS manages the operations of the Trust and
monitors the investment advisers that provide day-to-day management of the
Portfolios (the "Portfolio Managers"). The five Portfolios and their respective
Portfolio Managers are as follows:
<TABLE>
<CAPTION>
PORTFOLIO PORTFOLIO MANAGER
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
The Value Portfolio................................... GAMCO Investors, Inc.
The Growth Portfolio.................................. Pilgrim Baxter Analytic Investors, Inc.
The International Growth Portfolio.................... Bee & Associates Incorporated
The Strategic Income Portfolio........................ Allmerica Asset Management, Inc.
The Global Interactive/Telecomm Portfolio............. GAMCO Investors, Inc.
</TABLE>
Each Portfolio Manager is paid on an incentive fee basis, which could result
in either higher than average advisory fees or possibly no advisory fee at all,
depending on how well each Portfolio Manager performs for you.
GAMCO Investors, Inc., the Portfolio Manager for the Value Portfolio and the
Global Interactive/ Telecomm Portfolio, has invested approximately $1 million in
the Portfolios it manages (approximately $500,000 in each Portfolio). The
Portfolio Manager for the International Growth Portfolio (Bee & Associates
Incorporated) has agreed that it or its principals will invest $1 million
(directly or through qualified plans) in its Portfolio when it reaches $10
million in total assets. Although a Portfolio Manager is permitted by law to
sell its shares at any time, each of these Portfolio Managers currently intend
to maintain that investment as long as it manages the Portfolio. Once a
Portfolio Manager makes that investment, and for as long as it maintains the
investment, the Portfolio Manager will be managing a portion of their own money
along with your money. The Portfolio Manager for the Growth Portfolio and the
Strategic Income Portfolio do not currently have investments in their
Portfolios.
There can be no assurance that any particular Portfolio investment objective
will be attained. The Board of Trustees may establish additional Portfolios at
any time and may discontinue offering a Portfolio at any time.
INVESTMENT OBJECTIVES
The Trust is currently offering shares of five separate Portfolios. Each
Portfolio has a different investment objective which it pursues through
different investment policies as described below. Since the Portfolios have
different investment objectives, each can be expected to have different
investment results and incur different market and financial risks. There can be
no assurance that any of these objectives will be met.
The investment objectives of the Portfolios are fundamental, which means
they may not be changed without shareholder approval as required by the 1940
Act.
10
<PAGE>
THE VALUE PORTFOLIO seeks to make money for investors by investing primarily
in companies that the Portfolio Manager believes are undervalued and that by
virtue of anticipated developments may, in the Portfolio Manager's judgment,
achieve significant capital appreciation.
THE GROWTH PORTFOLIO seeks to make money for investors by investing
primarily in securities selected for their long-term growth prospects.
THE INTERNATIONAL GROWTH PORTFOLIO seeks to make money for investors by
investing internationally for long-term capital appreciation, primarily in
equity securities.
THE STRATEGIC INCOME PORTFOLIO seeks to make money for investors by
investing for high current income and capital appreciation in a variety of
fixed-income securities.
THE GLOBAL INTERACTIVE/TELECOMM PORTFOLIO seeks to make money for investors
primarily by investing globally in equity securities of companies engaged in the
development, manufacture or sale of interactive and/or telecommunications
services and products.
MANAGEMENT OF THE TRUST
The business and affairs of the Trust are managed under the direction of the
Board of Trustees. Additional information about the trustees and officers of the
Trust may be found in the Statement of Additional Information under the heading
"Management of the Trust."
The Trust is responsible for the payment of certain fees and expenses
including, among others, the following: (1) fees of the Manager and the
Portfolio Managers; (2) custodial, accounting, auditing, legal and transfer
agency fees; (3) fees of independent trustees; (4) brokerage fees and
commissions in connection with the purchase and sale of Portfolio securities;
(5) taxes; (6) the reimbursement of organizational expenses; and (7) expenses of
printing and mailing prospectuses, proxy statements and shareholder
communications.
MANAGER
Allmerica Financial Investment Management Services, Inc. ("AFIMS" or the
"Manager") serves as overall Manager of the Trust. As Manager, AFIMS is
responsible for general administration of the Trust as well as monitoring and
evaluating the performance of the Portfolio Managers. AFIMS, a Massachusetts
corporation, is registered with the Securities and Exchange Commission as an
investment adviser. AFIMS is located at 440 Lincoln Street, Worcester,
Massachusetts 01653. AFIMS is an indirect, wholly-owned subsidiary of Allmerica
Financial Corporation ("AFC"). AFC is the parent company of the two life
insurance companies currently utilizing the Trust as an underlying fund for
their variable contracts, Allmerica Financial Life Insurance and Annuity Company
("Allmerica Financial") and First Allmerica Financial Life Insurance Company.
The advisory agreement under which AFIMS serves as Manager was approved by
shareholders at a meeting on June 8, 1998.
Prior to February 12, 1998, Palladian Advisors, Inc. ("PAI") served as
Manager of the Trust, and Tremont Partners, Inc. ("Tremont") served as Portfolio
Advisor to the Trust. AFIMS now serves as Manager of the Trust, and there is no
Portfolio Advisor. Tremont was previously paid by PAI (not the Trust). Thus,
overall advisory fees were not changed as a result of the switch from PAI and
Tremont to AFIMS.
PORTFOLIO MANAGERS
Each Portfolio Manager makes specific investments on behalf of a Portfolio
in accordance with the particular Portfolio's objective and the Portfolio
Manager's investment approach and strategies. The Portfolio Managers designated
for each Portfolio are listed and described below.
11
<PAGE>
Selection and retention criteria for Portfolio Managers include: (1) their
historical performance records relative to their respective markets and peer
groups; (2) consistent performance in the context of the markets and
preservation of capital in declining markets; (3) organizational stability and
reputation; (4) the quality and depth of investment personnel; (5) the ability
of the Portfolio Manager to apply its approach consistently; and (6) a
willingness to work on an incentive fee basis. Each Portfolio Manager will not
necessarily exhibit all of the criteria to the same degree. Short-term
investment performance, by itself, is not a significant factor in selecting or
terminating a Portfolio Manager. It should be noted, however, that there can be
no certainty that any Portfolio Manager will obtain superior results at any
given time.
The Portfolio Managers activities are subject to general oversight by the
Trustees and AFIMS. Although the Trustees and AFIMS do not evaluate the
investment merits of the Portfolio Managers' specific securities selections,
they do review the performance of each Portfolio Manager relative to the
selection criteria.
The Portfolio Managers for the Portfolios are as follows:
THE VALUE PORTFOLIO. GAMCO Investors, Inc. ("GAMCO"), One Corporate Center,
Rye, New York 10580-1434, acts as investment adviser for individuals, pension
trusts, profit-sharing trusts and endowments. GAMCO is a wholly-owned subsidiary
of Gabelli Funds, Inc. As of June 30, 1998, GAMCO managed assets of
approximately $7.3 billion. Mario J. Gabelli may be deemed a "controlling
person" of GAMCO on the basis of his ownership of stock of Gabelli Funds, Inc.
Mr. Gabelli is primarily responsible for the day-to-day investment management of
the Portfolio. Mr. Gabelli has been the Chief Investment Officer of GAMCO since
its organization in 1978.
THE GROWTH PORTFOLIO. Pilgrim Baxter Analytic Investors, Inc. ("Pilgrim
Baxter Analytic"), 700 South Flower Street, Suite 2400, Los Angeles, California
90017 is an indirect wholly-owned subsidiary of United Asset Management
Corporation, a publicly traded company. It was formed in 1970 to provide
management of investment advisory accounts to individuals, banks/thrift
institutions, investment companies, pension and profit sharing plans, trusts,
estates or charitable organizations and other corporations. As of June 30, 1998,
Pilgrim Baxter Analytic managed assets totaling approximately $500 million.
Harindra de Silva and Dennis Bein are primarily responsible for the day-to-day
investment management of the Portfolio. Mr. de Silva is a Chartered Financial
Analyst and has served as President of Pilgrim Baxter Analytic since April 1998.
As President, he is responsible for the firm's strategic direction and the
ongoing development of its investment processes. He also serves as co-manager of
the Analytic Enhanced Equity mutual fund. Mr. de Silva was formerly Managing
Director of Pilgrim Baxter Analytic from October 1996 to April 1998. From 1986
to 1998, he concurrently served as a Principal of Analysis Group, Inc., an
economic research firm, where he was responsible for providing economic research
services to institutional investors including investment managers, large pension
funds, and endowments. This included the development of new investment products,
performance attribution, as well as enhancing the value added from current
strategies. Mr. Bein has been a member of the portfolio management and research
team for Pilgrim Baxter Analytic since August 1995. He concurrently served as a
senior associate for Analysis Group, Inc. from 1990 until 1998.
On June 17, 1998, the Portfolio Manager Agreement under which Pilgrim Baxter
Analytic serves as Portfolio Manager was approved by the Board of Trustees.
Under the rules of the SEC, shareholder approval of the agreement is required so
that Pilgrim Baxter Analytic may continue as Portfolio Manager past October 29,
1998. Contract owners invested in the Portfolio as of July 17, 1998 will have an
opportunity to vote in person or by proxy on this agreement with Pilgrim Baxter
Analytic at a meeting scheduled for September 15, 1998. If shareholders approve
the agreement, Pilgrim Baxter Analytic will continue to serve as Portfolio
Manager. If not, the Board will meet to consider its options and a supplement to
the prospectus will be provided.
THE INTERNATIONAL GROWTH PORTFOLIO. Bee & Associates Incorporated ("BAI"),
370 17th Street, Suite 3560, Denver, Colorado 80202, was formed in 1989 to
provide global equity management expertise to
12
<PAGE>
individuals, retirement plan sponsors, foundations, endowments and other
entities. As of June 30, 1998, BAI managed assets of approximately $500 million.
Bruce B. Bee is primarily responsible for the day-to-day investment management
of the Portfolio. Since BAI's organization in 1989, Mr. Bee has been the firm's
controlling person and principal portfolio manager.
THE STRATEGIC INCOME PORTFOLIO. Allmerica Asset Management, Inc. ("AAM"),
like AFIMS (the Trust's Manager), is an indirect, wholly-owned subsidiary of
Allmerica Financial Corporation ("AFC"), a publicly traded company. AAM is
located at 440 Lincoln Street, Worcester, Massachusetts 01653. As of June 30,
1998, AAM managed assets of approximately $11.4 billion. Lisa M. Coleman is
primarily responsible for the day-to-day investment management of the Portfolio.
Since 1994, Ms. Coleman has served as a portfolio manager for AAM. From 1989
through 1994, she served as a Deputy Manager, Portfolio Management, for Brown
Brothers Harriman & Company.
THE GLOBAL INTERACTIVE/TELECOMM PORTFOLIO. GAMCO manages this Portfolio, as
well as the Value Portfolio. Mario J. Gabelli is primarily responsible for the
day-to-day investment management of the Global Interactive/Telecomm Portfolio.
Mr. Gabelli has been Chief Investment Officer of GAMCO since its organization in
1978.
MANAGEMENT AND PORTFOLIO MANAGEMENT INVESTMENT ADVISORY FEES
As explained in more detail above, AFIMS serves as the overall manager of
the Portfolios, and the Portfolio Managers handle the day-to-day investment
management of the Portfolios. For these services, each Portfolio pays an overall
management fee, computed and accrued daily and paid monthly, based on its
average daily net assets. The overall fee varies based on the performance of
that Portfolio (after expenses) compared to that of an appropriate benchmark.
The overall advisory fee is split among the various advisers in the following
manner. The Portfolio Manager receives 80% of the fee, and AFIMS receives the
remaining 20%.
FIXED ADVISORY FEE FOR THE 12 FULL CALENDAR MONTHS. For the period
beginning on the effective date of a Portfolio Manager Agreement with a new
Portfolio Manager (or, in the case of a Portfolio that has had only one
Portfolio Manager, the day on which the Portfolio commenced investment
operations) and ending with the last day of the twelfth full calendar month
thereafter, each Portfolio will be paid a monthly advisory fee calculated at an
annual rate of 0.80% of the Portfolio's average daily net assets. As of the date
of this prospectus, this initial fee is applicable to the Growth Portfolio and
the Strategic Income Portfolio. In addition, the fees for those Portfolios are
subject to certain limitations described in notes (1) and (2) to the charts on
pages 4-7.
PERFORMANCE-BASED FEE. After the first 12 full calendar months with a new
Portfolio Manager as described above, each Portfolio pays, at the end of each
month, a monthly advisory fee equal to a Basic Fee plus or minus an Incentive
Fee. (As explained below, the fee might be reduced if absolute performance is
negative.) The monthly Basic Fee equals one-twelfth of the annual Basic Fee rate
of 2.0% multiplied by average daily net assets over the previous 12 months. The
Incentive Fee rate ranges from -2.0% to +2.0% on an annual basis, depending on a
comparison of the Portfolio's performance (reflecting a deduction of Portfolio
expenses) and the performance of a selected benchmark index over the past 12
months. The monthly Incentive Fee, like the monthly Basic Fee, is calculated by
multiplying one-twelfth of the Incentive Fee rate on an annual basis by the
average daily net assets over the previous 12 months. Accordingly, the Total Fee
could range from 0.0% to an annual rate of 4.0%, depending on performance.
As noted above, performance of both the Portfolio and the selected benchmark
index is calculated on a rolling 12-month period (I.E., the previous 12 months,
including the month for which the fee is being calculated). The performance of a
Portfolio is calculated by first determining the change in the Portfolio's net
asset value per share during the period, assuming the reinvestment of
distributions during that period, and then expressing this amount as a
percentage of the net asset value per share at the beginning of the
13
<PAGE>
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) INCENTIVE FEE TOTAL ADVISORY
AND CHANGE IN SELECTED BENCHMARK INDEX BASIC FEE (%) (%) FEE
- ------------------------------------------------- --------------- --------------- ---------------
<S> <C> <C> <C>
+7.5 or greater.................................. 2.0 2.0 4.0
+6.0 or greater, but less than +7.5.............. 2.0 1.5 3.5
+4.5 or greater, but less than +6.0.............. 2.0 1.0 3.0
+3.0 or greater, but less than +4.5.............. 2.0 0.5 2.5
+1.5 or greater, but less than +3.0.............. 2.0 0.0 2.0
0.0 or greater, but less than +1.5............... 2.0 -0.5 1.5
- -1.5 or greater, but less than 0.0............... 2.0 -1.0 1.0
- -3.0 or greater, but less than -1.5.............. 2.0 -1.5 0.5
Less than -3.0................................... 2.0 -2.0 0.0
</TABLE>
MAXIMUM FEE IF PERFORMANCE IS NEGATIVE. Notwithstanding the above schedule,
if the absolute performance of a Portfolio (after payment of all expenses,
including the Basic Fee and any Incentive Fee) is negative, the monthly advisory
fee will be the lesser of the fee calculated pursuant to the above schedule or
the alternative monthly advisory fee described below, which under certain
circumstances results in the Portfolios paying either no advisory fee or a lower
monthly advisory fee than under the performance fee schedule above. If a
Portfolio's performance (after payment of all expenses including advisory fees)
is negative and does not exceed the selected benchmark by six percentage points
(on an annual basis), no monthly advisory fee will be paid. If the Portfolio's
performance (after payment of all expenses including advisory fees) is negative
and does not exceed the selected benchmark by twelve percentage points but does
exceed the selected benchmark by six percentage points (on an annual basis), the
alternate monthly advisory fee will be based on an annual rate of 1.0% of
average daily net assets over the previous 12 months. If, on the other hand, the
performance of a Portfolio (after payment of all expenses including advisory
fees) is negative but exceeds the selected benchmark by twelve percentage points
or more (on an annual basis), the alternative monthly advisory fee will be based
on an annual rate of 2.0% of average daily net assets over the previous 12
months.
SIZE OF FEE. The Basic Fee payable by the Portfolios is at a rate higher
than the investment advisory fees paid by most other investment companies. If a
Portfolio outperforms the selected benchmark by 3.0 percentage points or more,
the advisory fee payable by a Portfolio may further exceed those paid by other
investment companies. On the other hand, if a Portfolio underperforms the
selected benchmark, the advisory fee paid by the Portfolio may be less than
those paid by other investment companies. If, during the applicable performance
period, a Portfolio underperforms the selected benchmark by three or more
percentage points, the Portfolio will not pay any advisory fee, although the
Manager and Portfolio Managers will remain obligated to provide the Portfolio
with the services contemplated herein as long as they are in effect.
14
<PAGE>
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 Strategic Income Portfolio........................ Lehman Brothers Aggregate Bond Index
The Global Interactive/Telecomm Portfolio............. S&P 500
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
EXPENSE LIMITATIONS
EXPENSE LIMITATIONS FOR 1998 EXPENSES. Allmerica Financial has agreed to
limit operating expenses and reimburse those expenses to the extent that each
Portfolio's 1998 "other expenses" (I.E., expenses other than management fees)
exceed the following expense limitations (expressed as an annualized percentage
of average daily net assets): Value Portfolio, 1.00%; Growth Portfolio, 1.00%;
International Growth Portfolio, 1.20%; Strategic Income Portfolio, 1.20%; Global
Interactive/Telecomm Portfolio, 1.20%. Allmerica Financial has agreed to pay any
amount due for a calendar month not later than the 15th day of the following
calendar month (with any final adjustment to be made not later than January 15,
1999). Allmerica Financial, if agreed to by the Board, may continue this
voluntary expense limitation past December 31, 1998. This expense limitation was
implemented effective February 13, 1998. In addition, on February 24, 1998,
Allmerica Financial voluntarily contributed to the Portfolios the following
amounts as capital: Value Portfolio, $8,469.29; Growth Portfolio, $10,350.93;
International Growth Portfolio, $7,723.73; Strategic Income Portfolio,
$7,936.72; Global Interactive/Telecomm Portfolio, $6,618.72. These amounts were
contributed to offset expenses accrued to the Portfolios in excess of the
expense limitations during the period January 1, 1998 through February 12, 1998.
Allmerica Financial received no shares of beneficial interest or other
consideration in exchange for these contributions. These capital contributions
resulted in an increase in paid in capital for each Portfolio.
REIMBURSEMENT PROVISION FOR 1998 EXPENSES. For the two years following the
date that the Allmerica Financial expense limitation ends, each Portfolio will
reimburse Allmerica Financial for any Portfolio expenses it reimbursed pursuant
to the expense limitation, provided that such reimbursement to Allmerica
Financial does not cause the Portfolio's "other expense" ratio to exceed the
limitation for that Portfolio set forth above. This reimbursement for the 1998
expenses will not commence until the Payment Group has been fully reimbursed for
the 1996 and 1997 expenses, as discussed below. After the two year period after
the Allmerica Financial expense limitation ends, the Portfolios' obligation to
reimburse Allmerica Financial will cease.
EXPENSE LIMITATIONS FOR 1996 AND 1997 EXPENSES. The former Manager of the
Trust, Palladian Advisors, Inc. ("PAI") agreed to limit operating expenses and
reimburse those expenses to the extent that each Portfolio's "other expenses"
(I.E., expenses other than management fees) from September 11, 1996 through
December 31, 1997 exceed the following expense limitations (expressed as an
annualized percentage of average daily net assets): Value Portfolio, 0.70%;
Growth Portfolio, 0.70%; International Growth Portfolio, 1.20%; Strategic Income
Portfolio, 1.20%; Global Interactive/Telecomm Portfolio, 1.20%. In addition, PAI
voluntarily contributed to the Portfolios the following amounts as capital:
Value Portfolio, $51,906.35; Growth Portfolio, $49,230.63; International Growth
Portfolio, $34,947.29; Strategic Income Portfolio, $52,077.06; and Global
Interactive/Telecomm Portfolio, $40,662.47. The amounts were contributed to
offset expenses accrued to the Portfolios in excess of the expense limitations
set forth above during
15
<PAGE>
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 accept an offer from a group (the "Payment Group")
willing to immediately pay to the Trust the full amount due under the expense
limitation. The Payment Group currently includes Allmerica Financial, the issuer
of a variable annuity contract utilizing the Portfolios as investment options,
certain principals of PAI or entities selling the variable contracts (H. Michael
Schwartz, Lesta Summerfield-Stacom, and Andrew Westhem).
On January 28, 1998, the Payment Group paid the Portfolios the full amounts
then due under the expense limitation arrangement. Subsequent adjustments were
made during the audit and Allmerica Financial paid the Portfolios additional
amounts due under the expense limitation arrangement. Combining these payments,
the following amounts have been paid to the Trust: Value Portfolio, $146,510;
Growth Portfolio, $123,531; International Growth Portfolio, $96,868; Strategic
Income Portfolio, $121,760; Global Interactive/Telecomm Portfolio, $99,327.
Accordingly, the Trust has been fully reimbursed for amounts owed under the
expense limitation arrangement.
REIMBURSEMENT PROVISION FOR 1996 AND 1997 EXPENSES. Through December 31,
1999, each Portfolio must reimburse the Payment Group for the payment described
above, provided that such reimbursement does not cause the Portfolio's "other
expense" ratio to exceed the previous expense limitation for that Portfolio
under the Manager's expense limitation arrangement. (Those limitations are
listed above.) This reimbursement obligation is the same as the reimbursement
obligation that was in place for PAI. After December 31, 1999, the Portfolios'
reimbursement liability to the Payment Group will cease.
CUSTODIAN AND TRANSFER AGENT
The custodian and transfer agent for the Trust is Investors Bank & Trust
Company, 200 Clarendon Street, Boston, MA 02116.
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
16
<PAGE>
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 services, (5) new or rapidly expanding markets,
(6) technological developments or advancements affecting a company or its
products, or (7) changes in government regulations, political climate or
competitive conditions. The actual developments or catalysts particularly
applicable to a given company that may, in the Portfolio Manager's judgment,
lead to significant appreciation of that company's securities include: a change
in management or management policies; the acquisition of a significant equity
position by an investor or group of investors acting in concert; a merger,
reorganization, sale of a division, or a third-party or issuer tender offer, the
spin-off to shareholders of a subsidiary, division or other substantial assets;
or a recapitalization, an internal reorganization or the retirement or death of
a senior officer or substantial shareholder. In addition to the foregoing
factors, developments and catalysts, the Portfolio Manager, in selecting
investments, also considers the market price of the issuer's securities, its
balance sheet characteristics and the perceived strength of its management.
The Portfolio seeks to achieve its objective by investing primarily in a
portfolio of common stocks, preferred stocks and other securities convertible
into, or exchangeable for, common stocks. The Portfolio may invest up to 5% of
its assets in high yield/high risk debt securities. See "Debt Securities," page
21. When the Portfolio Manager believes that a defensive investment posture is
warranted or when opportunities for capital appreciation do not appear
attractive, the Portfolio may temporarily invest all or a portion of its assets
in short-term money market instruments, such as obligations of the U.S.
Government and its agencies and instrumentalities, high-quality commercial paper
and bank certificates of deposit and time deposits and repurchase agreements
with respect to such instruments.
THE GROWTH PORTFOLIO
The Growth Portfolio seeks to make money for investors by investing
primarily in securities selected for their long-term growth prospects.
To achieve its objective, the Portfolio generally invests at least 65% of
its assets in the common stocks of U.S. domiciled corporations and equity-type
investments that relate to U.S. domiciled corporations. Equity-type investments
include preferred stock, warrants and convertible securities. The Portfolio may
also invest in foreign equity securities, foreign equity-type investments,
investment grade debt securities, high yield/high risk debt securities (up to 5%
of assets), futures contracts and options, money market investments and other
securities described on pages 20-30 of the prospectus. For temporary defensive
purposes, the Portfolio may invest all or part of its assets in investment grade
debt securities or money market instruments.
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The Portfolio Manager currently uses a proprietary computer model designed
to build a portfolio of stocks that, when viewed as a group, have fundamental
characteristics that are considered to be superior to the 500 stocks included in
the Standard & Poor's 500 Composite Stock Price Index. The model seeks to
identify a portfolio of stocks with, among other characteristics, higher than
average return on equity and earnings growth at a reasonable price and positive
price momentum over the last 6 to 12 months. The model focuses on the
characteristics of the aggregate portfolio rather than screening for individual
stocks that meet all the desired characteristics. While the Growth Portfolio may
invest in stocks of any company, it is anticipated that it will invest primarily
in stocks of medium to large companies in the S&P 500 (that is, typically
companies with a market capitalization of $15 billion or higher).
THE INTERNATIONAL GROWTH PORTFOLIO
The International Growth Portfolio seeks to make money for investors by
investing internationally for long-term capital appreciation, primarily in
equity securities.
Foreign securities are defined as securities of issuers whose principal
activities are outside of the United States. In determining whether an issuer's
principal activities and interests are outside the United States, the Portfolio
Manager will look at such factors as the location of its assets, personnel,
sales and earnings.
Normally, at least 65% of the Portfolio's total assets will be invested in
securities of issuers from at least three different countries outside of North
America. Although the Portfolio may invest up to 35% in securities of issuers
from Canada, Mexico and the United States, the Portfolio Manager currently does
not expect to invest in a significant part of this amount in securities of U.S.
issuers. No more than 20% of the Portfolio's net assets may be invested in the
securities of any one foreign country, except that the Portfolio may invest up
to 35% of net assets in securities of issuers located in any one of the
following countries: Australia, Canada, France, Japan, the United Kingdom or
Germany.
In considering securities for the Portfolio, the Portfolio Manager will
concentrate on companies with market capitalization of under $1 billion. When
allocating the Portfolio's investments among geographic regions and individual
countries, the Portfolio Manager considers various criteria, such as prospects
for relative economic growth among countries, expected levels of inflation,
government policies influencing business conditions, and the outlook for
currency relationships. The Portfolio Manager expects to invest most of the
Portfolio's assets in securities of issuers located in developed countries in
these general geographic areas: the Americas (other than the United States), the
Far East and Pacific Basin, Australia, Scandinavia and Western Europe.
The Portfolio Manager may invest the Portfolio's assets in all types of
securities, most of which are denominated in foreign currencies. The Portfolio
Manager expects that opportunities for long term growth of capital will come
primarily from common stock, securities such as warrants or rights that are
convertible into common stock, preferred stock, and depository receipts for
those securities. The Portfolio may invest up to 5% of its assets in high
yield/high risk debt securities. See "Debt Securities," page 21. The Portfolio
does not place any emphasis on dividends or interest income except when the
Portfolio Manager believes this income will have a favorable influence on the
market value of the security. The Portfolio may invest in indexed securities
whose value depends on the price of foreign currencies, commodities, securities
indices, or other financial indicators. In the normal course of managing the
Portfolio, the Portfolio Manager may invest a portion of the Portfolio's assets
in U.S. and foreign government obligations and money market securities
(including repurchase agreements) when the Portfolio has monies not yet
invested, it has sold one security and is waiting to buy another one, so that it
will be prepared to meet redemption requests, or to earn a return on available
cash balances. When market conditions warrant, the Portfolio Manager can make
substantial temporary defensive investments in U.S. government obligations or
investment-grade obligations of companies incorporated in and having principal
business activities in the United States.
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THE STRATEGIC INCOME PORTFOLIO
The Strategic Income Portfolio seeks to make money for investors by
investing for high current income and capital appreciation in a variety of
fixed-income securities.
The Portfolio allocates its assets among debt securities in three separate
areas: (1) investment grade corporate debt securities and securities issued or
guaranteed as to principal or interest by the U.S. Government or its agencies or
instrumentalities; (2) below investment-grade corporate debt securities; and (3)
foreign securities which include government debt of developed and emerging
markets, corporate obligations of foreign companies, and debt obligations of
supranational entities. The Portfolio will select particular debt securities
based on their relative value merits.
Debt securities in which the Strategic Income Portfolio may invest include
bonds, notes, debentures, mortgage-backed and asset-backed securities, and other
similar instruments. The Portfolio normally invests at least 50% of its total
assets in U.S. and foreign debt and other fixed-income securities that, at the
time of purchase, are investment grade. The Strategic Income Portfolio may
consider making carefully selected investments in below investment-grade debt
securities of issuers in the United States and in foreign markets. No more than
50% of the Portfolio's assets may be invested in securities below investment
grade quality (also called high yield or junk bonds), which involve a high
degree of risk and are predominantly speculative. Consistent with the foregoing
percentage limitations, the Portfolio may invest in securities that are in
default in payment of principal and/or interest.
Investments in foreign markets involve substantial risks typically not
associated with investing in the United States. Emerging market securities
generally are subject to greater risk than securities from developed nations.
For purposes of the Portfolio's operations, "emerging markets" consist of all
countries determined by the Portfolio Manager to have developing or emerging
economies and markets.
The Strategic Income Portfolio also may invest up to 5% of its assets in
loan participations and assignments.
THE GLOBAL INTERACTIVE/TELECOMM PORTFOLIO
The Global Interactive/Telecomm Portfolio seeks to make money for investors
primarily by investing globally in equity securities of companies engaged in the
development, manufacture or sale of interactive and/or telecommunications
services and products.
Under normal circumstances, at least 65% of the Portfolio's total assets
will be invested in common and preferred stocks of (1) companies participating
in emerging technological advances in interactive services and products that are
accessible to individuals in their homes or offices through consumer electronics
devices; (2) telecommunications companies; and (3) companies outside of the
telecommunications industry which, in the opinion of the Portfolio Manager,
stand to benefit from development in the telecommunications industry. The
Portfolio may invest up to 5% of its assets in high yield/high risk debt
securities. See "Debt Securities," page 21. When the Portfolio Manager believes
that a defensive investment posture is warranted or when opportunities for
capital appreciation do not appear attractive, the Portfolio may temporarily
invest all or a portion of its assets in short-term money market instruments,
such as obligations of the U.S. Government and its agencies and
instrumentalities, high-quality commercial paper and bank certificates of
deposit and time deposits and repurchase agreements with respect to such
instruments.
For example, the Portfolio may invest in companies involved in the following
products and services: emerging technologies combining television, telephone and
computer systems; regular telephone service; wireless communications services
and equipment, including cellular telephone data and voice transmission;
electronic components and communications equipment; video conferencing;
electronic mail; local and wide area networking; linkage of data and word
processing systems; publishing and information systems; broadcasting, including
television and radio; cable television systems and networks; wireless cable
television and other emerging distribution technologies; the creation,
packaging, distribution, and ownership of
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entertainment programming; computer hardware and software and other equipment
used in the creation and distribution of entertainment programming; interactive
and multimedia programming including home shopping and multiplayer games; and
advertising agencies and niche advertising mediums such as in-store or direct
mail.
In analyzing companies for investment, the Portfolio Manager ordinarily
looks for several of the following characteristics: above-average per share
earnings growth; high return on invested capital; a healthy balance sheet; sound
financial and accounting policies and overall financial strength; strong
competitive advantages; and effective research and product development and
marketing.
The Portfolio Manager will allocate the Portfolio's assets among securities
of countries and in currency denominations and industry sectors where
opportunities for meeting the Portfolio's investment objective are expected to
be the most attractive. The Portfolio may invest substantially in securities
denominated in one or more foreign currencies. Under normal conditions, the
Portfolio will invest in at least three different countries, including the
United States; issuers in any one country, other than the U.S., will represent
no more than 40% of the Portfolio's assets.
The governments of some foreign countries have been engaged in programs of
selling part or all of their stakes in government owned or controlled
enterprises ("privatizations"). The Portfolio Manager believes that
privatizations in the telecommunications industry may offer opportunities for
significant capital appreciation and intends to invest assets of the Portfolio
in privatizations in appropriate circumstances. In certain foreign countries,
the ability of foreign entities such as the Portfolio to participate in
privatizations may be limited by local law and/or the terms on which the
Portfolio may be permitted to participate may be less advantageous than those
afforded local investors. There can be no assurance that foreign governments
will continue to sell companies currently owned or controlled by them or that
privatization programs will be successful.
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
The following discussion describes in greater detail different types of
securities and investment techniques used by the individual Portfolios, as
described in "Investment Objectives and Policies" as well as the risks
associated with such securities and techniques.
U.S. GOVERNMENT SECURITIES
All of the Portfolios may invest in U.S. Government securities. U.S.
Government securities are obligations of, or are guaranteed by, the U.S.
Government, its agencies or instrumentalities. Treasury bills, notes, and bonds
are direct obligations of the U.S. Treasury. Securities guaranteed by the U.S.
Government include federal agency obligations guaranteed as to principal and
interest by the U.S. Treasury (such as Government National Mortgage Association
("GNMA") certificates, described in the section on "Mortgage-Backed Securities,"
and Federal Housing Administration debentures). In guaranteed securities, the
payment of principal and interest is unconditionally guaranteed by the U.S.
Government, and thus they are of the highest credit quality. Such direct
obligations or guaranteed securities are subject to variations in market value
due to fluctuations in interest rates, but, if held to maturity, the U.S.
Government is obligated to or guarantees to pay them in full.
Securities issued by U.S. Government instrumentalities and certain federal
agencies are neither direct obligations of nor guaranteed by the Treasury.
However, they involve federal sponsorship in one way or another: some are backed
by specific types of collateral; some are supported by the issuer's right to
borrow from the Treasury; some are supported by the discretionary authority of
the Treasury to purchase certain obligations of the issuer; others are supported
only by the credit of the issuing government agency or instrumentality. These
agencies and instrumentalities include, but are not limited to, Federal Land
Banks, Farmers Home Administration, Federal National Mortgage Association
("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC"), Student Loan
Mortgage Association, Central Bank for Cooperatives, Federal Intermediate Credit
Banks, and Federal Home Loan Banks.
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DEBT SECURITIES
All Portfolios may invest in debt securities of domestic or foreign issuers
(both U.S. dollar denominated and non-U.S. dollar denominated). All Portfolios
may also invest in obligations of international organizations such as the
International Bank for Reconstruction and Development (the World Bank). Each
Portfolio may only invest in (1) debt securities which meet the minimum ratings
criteria set forth for that particular Portfolio and (2) unrated debt securities
that are, in the Portfolio Manager's determination, comparable in quality to the
rated debt securities in which the Portfolio may invest.
The investment return on a corporate debt security reflects interest
earnings and changes in the market value of the security. The market value of
corporate debt obligations may be expected to rise and fall inversely with
interest rates generally. There also exists the risk that the issuers of the
securities may not be able to meet their obligations on interest or principal
payments at the time called for by an instrument. Bonds rated BBB or Baa, which
are considered medium-grade category bonds, do not have economic characteristics
that provide the high degree of security with respect to payment of principal
and interest associated with higher rated bonds, and generally have some
speculative characteristics. A bond will be placed in this rating category where
interest payments and principal security appear adequate for the present, but
economic characteristics that provide longer term protection may be lacking. Any
bond, and particularly those rated BBB or Baa, may be susceptible to changing
conditions, particularly to economic downturns, which could lead to a weakened
capacity to pay interest and principal.
The Strategic Income Portfolio may invest up to 50% of its assets in debt
securities that are below investment grade (I.E., rated BB or lower by Standards
& Poor's, rated Ba or lower by Moody's, or unrated but determined by the
Portfolio Manager to be of similar quality). These securities are commonly
referred to as "junk bonds" or "high yield/high risk debt securities." The
Value, Growth, International Growth and Global Interactive/Telecomm Portfolios
may each invest up to 5% of assets in high yield/high risk debt securities.
High yield/high risk debt securities involve significant risks. They are
considered predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the obligation.
The market value of the securities also tend to be more sensitive than higher
rated securities to news about the issuer and changes in overall economic
conditions. In addition, markets for lower-rated securities may be more limited
than for higher-rated securities.
New issues of certain debt securities are often offered on a when-issued or
firm-commitment basis; that is, the payment obligation and the interest rate are
fixed at the time the buyer enters into the commitment, but delivery and payment
for the securities normally take place after the customary settlement time. The
value of when-issued securities or securities purchased on a firm-commitment
basis may vary prior to and after delivery depending on market conditions and
changes in interest rate levels. However, the Portfolios will not accrue any
income on these securities prior to delivery. The Portfolios will maintain in a
segregated account with its custodian an amount of cash or high quality debt
securities equal (on a daily marked-to-market basis) to the amount of its
commitment to purchase the when-issued securities or securities purchased on a
firm-commitment basis.
Many securities of foreign issuers are not rated by Moody's or Standard and
Poor's; therefore, the selection of such issuers depends, to a large extent, on
the credit analysis performed or used by the Portfolio Manager.
MORTGAGE-BACKED SECURITIES
All Portfolios may invest in mortgage-backed securities issued by the
Government National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA"), and the Federal Home Loan Mortgage Corporation ("FHLMC").
These securities represent an interest in a pool of mortgages, such as 30-year
and 15-year fixed mortgages and adjustable rate mortgages. For GNMA securities,
the payment of principal and interest on the underlying mortgages is guaranteed
by the full faith and credit of
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the U.S.; for FNMA and FHLMC securities the payment of principal and interest is
guaranteed by the issuing agency but not the U.S. The guarantees, however, do
not extend to the securities' value or yield, which are likely to fluctuate
inversely with fluctuations in interest rates. Because the prepayment
characteristics of the underlying mortgages vary, it is not possible to predict
accurately the average life of a particular issue of mortgage-backed securities.
The Portfolios may invest in mortgage-backed securities issued by private
entities, such as commercial or mortgage banks, savings and loan associations,
or broker-dealers, that meet the quality standards discussed above for debt
securities.
The Portfolios may invest in collateralized mortgage obligations ("CMOs"). A
CMO is a security issued by a corporation or a U.S. government instrumentality
that is backed by a portfolio of mortgages or mortgage-backed securities. The
issuer's obligation to make interest and principal payments is secured by the
underlying portfolio of mortgages or mortgage-backed securities. CMOs are
partitioned into several classes with a ranked priority by which classes of
obligations are redeemed.
OTHER ASSET-BACKED SECURITIES
All Portfolios may invest in asset-backed securities, which represent a
participation in, or are secured by and payable from, a stream of payments
generated by particular assets, such as automobile or credit card receivables.
Asset-backed securities present certain risks, including the risk that the
underlying obligor on the asset, such as the automobile purchaser or the credit
card holder, may default on his or her obligation. In addition, asset-backed
securities often do not provide a security interest in the related collateral.
For example, credit card receivables are generally unsecured, and the pool of
automobile receivables may not include the security interests in those
automobiles. In general, however, these type of loans have a shorter average
life than mortgage loans and are less likely to have substantial prepayments.
VARIABLE AND FLOATING RATE SECURITIES
All Portfolios may invest in variable and floating rate securities.
Variable rate securities provide for automatic establishment of a new
interest rate at fixed intervals (E.G., daily, monthly, semi-annually, etc.).
Floating rate securities provide for automatic adjustment of the interest rate
whenever some specified interest rate index changes. The interest rate on
variable or floating rate securities is ordinarily determined by reference to or
is a percentage of a bank's prime rate, the 90-day U.S. Treasury bill rate, the
rate of return on commercial paper or bank certificates of deposit, an index of
short-term interest rates, or some other objective measure.
Variable or floating rate securities frequently include a demand feature
entitling the holder to sell the securities to the issuer at par value. In many
cases, the demand feature can be exercised at any time on 7 days' notice; in
other cases, the demand feature is exercisable at any time on 30 days' notice or
on similar notice at intervals of not more than one year. Some securities which
do not have variable or floating interest rates may be accompanied by puts
producing similar results and price characteristics.
BANKING INDUSTRY AND SAVINGS INDUSTRY OBLIGATIONS
All Portfolios may invest in certificates of deposit, time deposits,
bankers' acceptances, and other short-term debt obligations issued by commercial
banks and in certificates of deposit, time deposits, and other short-term
obligations issued by savings and loan associations ("S&Ls"). Certificates of
deposit are receipts from a bank or an S&L for funds deposited for a specified
period of time at a specified rate of return. Time deposits in banks or S&Ls are
generally similar to certificates of deposit, but are uncertificated. Bankers'
acceptances are time drafts drawn on commercial banks by borrowers, usually in
connection with international commercial transactions. Each Portfolio may also
invest in obligations of foreign branches of commercial banks and foreign banks
so long as the securities are U.S. dollar-denominated. See "Foreign Securities"
on pages 25-27 and "Banking Industry and Savings Industry Obligations" in the
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Statement of Additional Information regarding risks attending investment in
foreign instruments generally and foreign bank instruments in particular.
The Portfolios will not invest in obligations issued by a commercial bank or
S&L unless:
(i) the bank or S&L has total assets of at least $1 billion, or the
equivalent in other currencies, and the institution has outstanding
securities rated A or better by Moody's or Standard and Poor's, or, if the
institution has no outstanding securities rated by Moody's or Standard &
Poor's, it has, in the determination of the Portfolio Manager, similar
creditworthiness to institutions having outstanding securities so rated;
(ii) in the case of a U.S. bank or S&L, its deposits are insured by the
Federal Deposit Insurance Corporation or the Savings Association Insurance
Fund, as the case may be; and
(iii) in the case of a foreign bank, the security is, in the
determination of the Portfolios' Portfolio Manager, of an investment quality
comparable with other debt securities which may be purchased by the
Portfolios. These limitations do not prohibit investments in securities
issued by foreign branches of U.S. banks, provided such U.S. banks meet the
foregoing requirements.
COMMERCIAL PAPER
All Portfolios may invest in commercial paper, which includes short-term
unsecured promissory notes, variable rate demand notes, and variable note master
demand notes issued by domestic and foreign bank holding companies,
corporations, and financial institutions, as well as similar taxable instruments
issued by government agencies and instrumentalities. All commercial paper
purchased by the Portfolios must be, at the time of investment, (i) rated "P-1"
by Moody's or "A-1" by S&P, (ii) issued or guaranteed as to principal and
interest by issuers having an existing debt security rating of "Aa" or better by
Moody's or "AA" or better by S&P, or (iii) securities which, if not rated, are
in the opinion of the Portfolio Manager of an investment quality comparable to
rated commercial paper in which the Portfolio may invest. See Appendix B for
description of these ratings.
REPURCHASE AGREEMENTS
All Portfolios may enter into repurchase agreements with banks and
broker-dealers under which they acquire securities subject to an agreement with
the seller to repurchase the securities at an agreed-upon time and price. If the
seller should default on its obligation to repurchase the securities, the
Portfolio may experience delays or difficulties in exercising its right to
realize a gain upon the securities held as collateral and might incur a loss if
the value of the securities should decline.
REVERSE REPURCHASE AGREEMENTS
All Portfolios may enter into reverse repurchase agreements with banks and
broker-dealers. Those agreements have the characteristics of borrowing and
involve the sale of securities held by a Portfolio with an agreement to
repurchase the securities at an agreed-upon price and date, which reflect a rate
of interest paid for the use of funds for the period. Generally, the effect of
such a transaction is that a Portfolio can recover all or most of the cash
invested in the securities involved during the term of the reverse repurchase
agreement, while in many cases it will be able to keep some of the interest
income associated with those securities. Such transactions are only advantageous
if the Portfolio has an opportunity to earn a greater rate of interest on the
cash derived from the transaction than the interest cost of obtaining that cash.
A Portfolio may be unable to realize a return from the use of the proceeds equal
to or greater than the interest required to be paid.
LENDING PORTFOLIO SECURITIES
For the purpose of realizing additional income, each Portfolio may lend
securities with a value of up to 33% of its total assets to unaffiliated
broker-dealers or institutional investors. Any such loan will be
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continuously secured by collateral at least equal to the value of the security
loaned. Although the risk of lending portfolio securities are believed to be
slight, as with other extensions of secured credit, such lending could result in
delays in receiving additional collateral or in the recovery of the securities
or possible loss of rights in the collateral should the borrower fail
financially. Loans will only be made to firms deemed to be of good standing and
will not be made unless the consideration to be earned from such loans would
justify the risk.
ILLIQUID SECURITIES
Each Portfolio may invest up to 15% of its net assets in securities for
which there is no readily available market ("illiquid securities"), which would
include repurchase agreements having more than 7 days to maturity. A
considerable period of time may elapse between a Portfolio's decision to dispose
of such securities and the time when the Portfolio is able to dispose of them,
during which time the value of the securities could decline. The SEC has adopted
Rule 144A which permits resale among certain institutional investors of certain
unregistered securities. As a result, a significant institutional trading market
has developed in many unregistered securities relying on this rule. In
determining whether such securities should be considered liquid, the Portfolios
will consider the following factors, among others: (1) the frequency of the
trades and the quotes for the security; (2) the number of dealers willing to
purchase or sell the security and the number of potential purchasers; (3) dealer
undertakings to make a market in the security; and (4) the nature of the
security and the nature of the marketplace trades (for example, the time needed
to dispose of the security, the method of soliciting offers, and the mechanics
of the transfer).
WARRANTS
Each Portfolio may invest up to 5% of its net assets in warrants (not
including those that have been acquired in units or attached to other
securities), measured at the time of acquisition. No Portfolio may acquire a
warrant not listed on the New York or American Stock Exchanges if, after the
purchase, more than 2% of the Portfolio's assets would be invested in such
warrants.
The holder of a warrant has the right to purchase a given number of shares
of a particular issuer at a specified price until expiration of the warrant.
Such investments can provide a greater potential for profit or loss than an
equivalent investment in the underlying security. Prices of warrants do not
necessarily move in tandem with the prices of the underlying securities, and are
speculative investments. They pay no dividends and confer no rights other than a
purchase option. If a warrant is not exercised by the date of its expiration,
the Portfolio will lose its entire investment in such warrant.
OTHER INVESTMENT COMPANIES
All Portfolios may invest in shares issued by other investment companies. A
Portfolio is limited in the degree to which it may invest in shares of another
investment company in that it may not, at the time of the purchase, (1) acquire
more than 3% of the outstanding voting shares of the investment company, (2)
invest more than 5% of the Portfolios' total assets in the investment company,
or (3) invest more than 10% of the Portfolios' total assets in all investment
company holdings. As a shareholder in any investment company, a Portfolio will
bear its ratable share of the investment company's expenses, including
management fees in the case of a management investment company.
SHORT SALES
All Portfolios may make short sales of securities. A short sale is a
transaction in which the Portfolio sells a security it does not own (but has
borrowed) in anticipation of a decline in the market price of the security. A
Portfolio may make short sales to offset a potential decline in a long position
or a group of long positions, or if the Portfolio Manager believes that a
decline in the price of a particular security or group of securities is likely.
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When a Portfolio makes a short sale, the proceeds it receives are retained
by the broker until the Portfolio replaces the borrowed security. In order to
deliver the security to the buyer, the Portfolio must arrange through a broker
to borrow the security and, in so doing, the Portfolio becomes obligated to
replace the security borrowed at its market price at the time of replacement,
whatever that price may be. The Portfolio may have to pay a premium to borrow
the security. The Portfolio must also pay any dividends or interest payable on
the security until the Portfolio replaces the security.
The Portfolios' obligation to replace the security borrowed in connection
with the short sale will be secured by collateral deposited with the broker,
consisting of cash or U.S. Government securities or other securities acceptable
to the broker. In addition, with respect to any short sale, other than short
sales against the box, as discussed below, the Portfolios will be required to
deposit collateral consisting of cash, U.S. Government securities or other
liquid assets in a segregated account with its custodian in an amount such that
the value of the sum of both collateral deposits is at all times equal to at
least 100% of the current market value of the securities sold short. The
deposits do not necessarily limit the Portfolios' potential loss on a short
sale, which may exceed the entire amount of the collateral.
If the price of the security sold short increases between the time of the
short sale and the time the Portfolios replaces the borrowed security, the
Portfolio will incur a loss, and if the price declines during this period, the
Portfolio will realize a capital gain. Any realized gain will be decreased, and
any incurred loss increased, by the amount of transactional costs and any
premium, dividend, or interest which the Portfolios may have to pay in
connection with such short sale.
A Portfolio may make a short sale only if, at the time the short sale is
made and after giving effect thereto, the market value of all securities sold
short is 25% or less of the value of its net assets and the market value of
securities sold short which are not listed on a national securities exchange
does not exceed 10% of the Portfolio's net assets. In addition, a Portfolio will
not make short sales of the securities of any one issuer to the extent of more
than 2% of the Portfolio's net assets, nor will a Portfolio make short sales of
more than 2% of the outstanding securities of one class of any issuer. The
Portfolios are not required to liquidate an existing short sale position solely
because a change in market values has caused one or more of these percentage
limitations to be exceeded.
SHORT SALES AGAINST THE BOX
All Portfolios may make short sales "against the box." A short sale "against
the box" is a short sale where, at the time of the short sale, a Portfolio owns
or has the immediate and unconditional right, at no added cost, to obtain the
identical security. The Portfolios would enter into such a transaction to defer
a gain or loss for Federal income tax purposes on the security owned by the
Portfolio or to receive a portion of the interest earned by the executing broker
from the proceeds of the sale. Short sales against the box are not subject to
the percentage limitations on short sales described above.
FOREIGN SECURITIES
All Portfolios, except the Strategic Income Portfolio, may invest in equity
securities of foreign issuers. Each of the Portfolios may invest in American
Depository Receipts ("ADRs"), which are described below. All Portfolios may
invest in foreign government securities, except that neither the Value nor the
Growth Portfolios will purchase foreign government securities if, as a result,
more than 10% of the value of its total assets would be invested in such
securities. The Portfolios may invest in foreign branches of commercial banks
and foreign banks. See the "Banking Industry and Savings Industry Obligations"
discussion in this section for further description of these securities.
Each Portfolio is subject to the following guidelines for diversification of
foreign security investments. If a Portfolio has less than 20% of its assets in
foreign issuers, then all of such investment may be in issuers domiciled or
primarily traded in one country. If a Portfolio has at least 20% but less than
40% of its assets in foreign issuers, then such investment must be allocated to
issuers domiciled or primarily traded in at least two different countries.
Similarly, if a Portfolio has at least 40% but less than 60% of its assets in
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foreign issuers, such investment must be allocated in at least three different
countries. Foreign investments must be allocated to at least four different
countries if at least 60% of a Portfolios' assets is in foreign issuers, and to
at least five different countries if at least 80% is in foreign issuers.
A Portfolio may have no more than 20% of its net asset value invested in
securities of issuers domiciled or primarily traded in any one foreign country,
except that a Portfolio may have up to 35% of its net asset value invested in
securities of issuers domiciled or primarily traded in any one of the following
countries: Australia, Canada, France, Japan, The United Kingdom, or Germany.
Investments in foreign securities offer potential benefits not available
solely in securities of domestic issuers by offering the opportunity to invest
in foreign issuers that appear to offer growth potential, or in foreign
countries with economic policies or business cycles different from those of the
United States, or to reduce fluctuations in portfolio value by taking advantage
of foreign stock markets that may not move in a manner parallel to U.S. markets.
Investments in securities of foreign issuers involve certain risks not
ordinarily associated with investments in securities of domestic issuers. Such
risks include fluctuations in foreign exchange rates, future political and
economic developments, and the possible imposition of exchange controls or other
foreign governmental laws or restrictions. Since each of these Portfolios may
invest in securities denominated or quoted in currencies other than the U.S.
dollar, changes in foreign currency exchange rates will affect the value of
securities in the portfolio and the unrealized appreciation or depreciation of
investments so far as U.S. investors are concerned. In addition, with respect to
certain countries, there is the possibility of expropriation of assets,
confiscatory taxation, other foreign taxation, political or social instability,
or diplomatic developments that could adversely affect investments in those
countries.
There may be less publicly available information about a foreign company
than about a U.S. company, and foreign companies may not be subject to
accounting, auditing, and financial reporting standards and requirements
comparable to or as uniform as those of U.S. companies. Foreign securities
markets, while growing in volume, have, for the most part, substantially less
volume than U.S. markets. Securities of many foreign companies are less liquid
and their prices more volatile than securities of comparable U.S. companies.
Transactional costs in non-U.S. securities markets are generally higher than in
U.S. securities markets. There is generally less government supervision and
regulation of exchanges, brokers, and issuers than there is in the U.S. A
Portfolio might have greater difficulty taking appropriate legal action with
respect to foreign investments in non-U.S. courts than with respect to domestic
issuers in U.S. courts. In addition, transactions in foreign securities may
involve greater time from the trade date until settlement than domestic
securities transactions and involve the risk of possible losses through the
holding of securities by custodians and securities depositories in foreign
countries.
Dividend and interest income from foreign securities may generally be
subject to withholding taxes by the country in which the issuer is located and
may not be recoverable by a Portfolio or its investors.
ADRs are certificates issued by a U.S. bank or trust company representing
the right to receive securities of a foreign issuer deposited in a foreign
subsidiary or branch or a correspondent of that bank. Generally, ADRs, in
registered form, are designed for use in U.S. securities markets and may offer
U.S. investors more liquidity than the underlying securities.
Investment in emerging markets countries presents risks in a greater degree
than, and in addition to, those presented by investment in foreign issuers in
general. A number of emerging market countries restrict, to varying degrees,
foreign investment in securities. Repatriation of investment income, capital,
and proceeds of sales by foreign investors may require governmental registration
and/or approval in some emerging market countries. A number of the currencies of
developing countries have experienced significant declines against the U.S.
dollar in recent years, and devaluation may occur subsequent to investments in
those currencies by the Portfolio. Inflation and rapid fluctuations in inflation
rates have had and may continue to have negative effects on the economies and
securities markets of certain emerging market countries.
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Many of the emerging securities markets are relatively small, have low
trading volumes, suffer periods of relative illiquidity, and are characterized
by significant price volatility. There is a risk in emerging market countries
that a future economic or political crisis could lead to price controls, forced
mergers of companies, expropriation or confiscatory taxation, seizure,
nationalization, foreign exchange controls (which may include suspension of the
ability to transfer currency from a given country) or creation of government
monopolies, any of which may have a detrimental effect on a Portfolio's
investment.
INVESTMENT IN GOLD AND OTHER PRECIOUS METALS
All Portfolios may invest up to 10% of its total assets, in gold bullion and
coins and other precious metals (silver or platinum) bullion and in futures
contracts with respect to such metals. Each Portfolio may also engage in gold
futures contracts. (See "Futures Contracts" for further explanation of this
investment technique.) The Portfolios will further restrict the level of their
metal investments if necessary in order to comply with applicable regulatory
requirements. In order to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), each
Portfolio intends to manage its metal investments and/or futures contracts on
metals so that less than 10% of its gross income for tax purposes during any
fiscal year (the current limit on so-called non-qualifying income) is derived
from these and other sources that produce such non-qualifying income.
Metals will not be purchased in any form that is not readily marketable, and
gold coins will be purchased for their intrinsic value only, I.E., coins will
not be purchased for their numismatic value. Any metals purchased by the
Portfolios will be delivered to and stored with a qualified custodian bank.
Metal investments do not generate interest or dividend income and will subject
the Portfolios to higher custody and transactional costs than are normally
associated with the ownership of securities or futures contracts on precious
metals.
Metal investments are considered speculative and are affected by various
worldwide economic, financial, and political factors. Prices may fluctuate
sharply over short time periods due to changes in inflation expectations in
various countries, metal sales by central banks of governments or international
agencies, speculation, changes in industrial and commercial demand, and
governmental prohibitions or restriction on the private ownership of certain
precious metals or minerals. At the present time, there are four major producers
of gold bullion: the Republic of South Africa, the United States, Canada, and
Australia. Political and economic conditions in these countries will have a
direct effect on the mining and distribution of gold and, consequently, on its
price.
FUTURES CONTRACTS
All Portfolios may purchase and sell (i) interest rate and other debt
related futures contracts, (ii) stock index and other equity related futures
contracts, (iii) foreign currency futures contracts, (iv) futures contracts on
gold and other precious metals, and (v) options on these futures contracts. A
futures contract provides for the future sale by one party and purchase by the
other party of a specified amount of a particular financial instrument or
commodity for a specified price at a designated date, time, and place.
All Portfolios may use futures contracts for the purpose of hedging
positions with respect to securities, interest rates, foreign currencies, and
gold and other precious metals. In addition, the Growth Portfolio may also use
futures contracts for non-hedging purposes (in other words, for investment
purposes). For example, the Portfolio Manager may invest in futures contracts
rather than investing directly in securities. The initial margins and premiums
associated with futures contracts used for non-hedging purposes will not exceed
5% of the fair market value of the Portfolio's assets, taking into account
unrealized profits and losses on such futures contracts. The Portfolio may not
purchase or sell a futures contract for non-hedging purposes if immediately
thereafter the sum of the amount of margin deposits and premiums paid for
related options would exceed 5% of the market value of the Portfolio's total
assets.
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An option on a futures contract gives the purchaser or holder the right, but
not the obligation, to assume a position in a futures contract (a long position
if the option is a call and a short position if the option is a put) at a
specified price at any time during the option exercise period. The Portfolios
will utilize options on futures contracts for the same purposes that they use
the underlying futures contracts.
There are several risks associated with the use of futures and futures
options. While a Portfolio's hedging transactions may protect it against adverse
movements in the general level of interest rates or other economic conditions,
such transactions could also preclude a Portfolio from the opportunity to
benefit from favorable movements in the level of interest rates or other
economic conditions. There can be no guarantee that there will be correlation
between price movements in the hedging vehicle and in the securities or other
assets being hedged. An incorrect correlation could result in a loss on both the
hedged assets and the hedging vehicle so that the Portfolio's return might have
been better if hedging had not been attempted. The degree of imperfection of
correlation depends on circumstances such as variations in speculative market
demand for futures and futures options, including technical influences in
futures trading and futures options, and differences between the financial
instruments being hedged and the instruments underlying the standard contracts
available for trading in such respects as interest rate levels, maturities, and
creditworthiness of issuers. A decision as to whether, when, and how to hedge
involves the exercise of skill and judgment and even a well-conceived hedge may
be unsuccessful to some degree because of market behavior or unexpected market
trends. Successful use of futures contracts for investment purposes, like
successful investment in securities, depends on the ability of the Portfolio
Manager to predict correctly movements in the relevant markets.
There can be no assurance that a liquid market will exist at a time when a
Portfolio seeks to close out a futures contract or a futures option position.
Most futures exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single day; once the daily limit
has been reached on a particular contract, no trades may be made that day at a
price beyond that limit. In addition, certain of these instruments are
relatively new and without a significant trading history. As a result, there is
no assurance that an active secondary market will develop or continue to exist.
The daily limit governs only price movements during a particular trading day and
therefore does not limit potential losses because the limit may work to prevent
the liquidation of unfavorable positions. For example, futures prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of positions and
subjecting some holders of futures contracts to substantial losses. Lack of a
liquid market for any reason may prevent the Portfolios from liquidating an
unfavorable position and the Portfolios would remain obligated to meet margin
requirements and continue to incur losses until the position is closed.
A Portfolio will only enter into futures contracts or futures options which
are standardized and traded on a U.S. exchange or board of trade, or, in the
case of futures options, for which an established over-the-counter market
exists.
OPTIONS
The Portfolios may purchase and sell (I.E., write) put and call options on
equity securities, debt securities, securities indices, and foreign currencies.
An option gives the owner the right to buy or sell securities at a predetermined
exercise price for a given period of time.
Although options will be primarily used to minimize principal fluctuations
or to generate additional premium income, they do involve certain risks. The
Portfolio Manager may not correctly anticipate movements in the relevant
markets, thus causing losses on the Portfolio's options positions.
A position in an exchange-traded option may be closed out only on an
exchange, board of trade or other trading facility which provides a secondary
market for an option of the same series. Although the Portfolios will generally
purchase or write only those exchange-traded options for which there appears to
be an active secondary market, there is no assurance that a liquid secondary
market on an exchange will
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exist for any particular option, or at any particular time, and for some options
no secondary market on an exchange or otherwise may exist. In such event it
might not be possible to effect closing transactions in particular options, with
the result that the Portfolio would have to exercise its options in order to
realize any profit and would incur brokerage commissions upon the exercise of
such options and upon the subsequent disposition of underlying securities
acquired through the exercise of call options or upon the purchase of underlying
securities for the exercise of put options. If a Portfolio as a covered call
option writer is unable to effect a closing purchase transaction in a secondary
market, it will not be able to sell the underlying security until the option
expires or it delivers the underlying security upon exercise.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions imposed by an exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (v) the facilities of an exchange or
a clearing corporation may not at all times be adequate to handle current
trading volume; or (vi) one or more exchanges could, for economic or other
reasons, decide to be compelled at some future date to discontinue the trading
of options (or a particular class or series of options), in which event the
secondary market on that exchange (or in the class or series of options) would
cease to exist, although outstanding options on that exchange that had been
issued by a clearing corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms. There is no assurance
that higher than anticipated trading activity or other unforeseen events might
not, at times, render certain of the facilities of any of the clearing
corporations inadequate, and thereby result in the institution by an exchange of
special procedures which may interfere with the timely execution of customers'
orders.
The purchase and sale of over-the-counter ("OTC") options will also be
subject to certain risks. Unlike exchange-traded options, OTC options generally
do not have a continuous liquid market. Consequently, a Portfolio will generally
be able to realize the value of an OTC option it has purchased only by
exercising it or reselling it to the dealer who issued it. Similarly, when a
Portfolio writes an OTC option, it generally will be able to close out the OTC
option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which the Portfolio originally wrote the OTC
option. There can be no assurance that a Portfolio will be unable to liquidate
an OTC option at a favorable price at any time prior to expiration. In the event
of insolvency of the other party, the Portfolio may be unable to liquidate an
OTC option.
The distinctive characteristics of options on stock indices create certain
risks that are not present with stock options. Index prices may be distorted if
trading of certain stocks included in the index is interrupted. Trading in the
index options also may be interrupted in certain circumstances, such as if
trading were halted in a substantial number of stocks included in the index. If
this occurred, a Portfolio would not be able to close out options which it had
purchased or written and, if restrictions on exercise were imposed, may be
unable to exercise an option it holds, which could result in substantial losses
to the Portfolio. Price movements in a Portfolio's equity security holdings
probably will not correlate precisely with movements in the level of the index
and, therefore, in writing a call on a stock index a Portfolio bears the risk
that the price of the securities held by the Portfolio may not increase as much
as the index. In such event, the Portfolio would bear a loss on the call which
is not completely offset by movement in the price of the Portfolio's equity
securities. It is also possible that the index may rise when the Portfolio's
securities do not rise in value. If this occurred, the Portfolio would
experience a loss on the call which is not offset by an increase in the value of
its securities holdings and might also experience a loss in its securities
holdings.
A Portfolio's successful use of options on foreign currencies depends upon
the manager's ability to predict the direction of the currency exchange markets
and political conditions, which requires different skills and techniques than
predicting changes in the securities markets generally.
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FOREIGN CURRENCY TRANSACTIONS
All Portfolios may enter into forward currency contracts and enter into
currency exchange transactions on a spot (I.E., cash) basis. A forward currency
contract is an obligation to purchase or sell a currency against another
currency at a future date and price as agreed by the parties. A Portfolio may
either accept or make delivery of the currency at the maturity of the forward
contract or, prior to maturity, enter into a closing transaction involving the
purchase or sale of an offsetting contract. A Portfolio will engage in forward
currency transactions in anticipation of or to protect itself against
fluctuations in currency exchange rates, as further described in the Statement
of Additional Information.
LEVERAGE
Each Portfolio may leverage its investments by purchasing securities with
borrowed money. In leveraging its investments, each Portfolio may borrow up to
33 1/3% of the value of its total assets (minus liabilities other than the
borrowing). Leveraging by means of borrowing will exaggerate the effect of any
increase or decrease in the value of portfolio securities on a Portfolios' net
asset value; money borrowed will be subject to interest and other costs (which
may include commitment fees and/or the cost of maintaining minimum average
balances), which may or may not exceed the income received from the securities
purchased with borrowed funds. The use of borrowing tends to result in a faster
than average movement, up or down, in the net asset value of the Portfolio's
shares. A Portfolio also may be required to maintain minimum average balances in
connection with such borrowing or to pay a commitment or other fee to maintain a
line of credit; either of these requirements would increase the cost of
borrowing over the stated interest rate.
Reverse repurchase agreements, short sales of securities, and short sales of
securities against the box will be included as borrowing subject to the
borrowing limitations described above. Securities purchased on a when-issued or
delayed delivery basis will not be subject to the Portfolio's borrowing
limitations to the extent that a Portfolio establishes and maintains liquid
assets in a segregated account with the Trust's custodian equal to the
Portfolio's obligations under the when-issued or delayed delivery arrangement.
A Portfolio may, in connection with permissible borrowings, transfer as
collateral securities it owns.
INDEXED SECURITIES
Each Portfolio may invest up to 5% of its assets in indexed securities.
Indexed securities values are linked to currencies, interest rates, commodities,
indices, or other financial indicators. Most indexed securities are short to
intermediate term fixed-income securities whose values at maturity or interest
rates rise or fall according to the change in one or more specified underlying
instruments. Indexed securities may be positively or negatively indexed (I.E.,
their value may increase or decrease if the underlying instrument appreciates),
and may have return characteristics similar to direct investments in the
underlying instrument or to one or more options on the underlying instrument.
Indexed securities may be more volatile than the underlying instrument itself.
INVESTMENT IN THE TRUST
DETERMINATION OF NET ASSET VALUE
The net asset values per share of the Portfolios are calculated as of 4:00
p.m. (New York City time), Monday through Friday, on each day that the New York
Stock Exchange is open for trading, exclusive of federal holidays. Net asset
value per share is calculated by dividing the aggregate value of each
Portfolio's assets less all liabilities by the number of each Portfolio's
outstanding shares.
The Board of Trustees has established procedures to value each Portfolio's
assets to determine net asset value. In general, these valuations are based on
actual or estimated market value, with special provisions for assets not having
readily available market quotations and short-term debt securities. The net
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asset values per share of each Portfolio will fluctuate in response to changes
in market conditions and other factors.
Portfolio securities for which market quotations are readily available are
stated at market value. Market value is determined on the basis of last reported
sales price, or, if no sales are reported, the mean between representative bid
and asked quotations obtained from a quotation reporting system or from
established market makers. In other cases, securities are valued at their fair
value as determined in good faith by the Board of Trustees, although the actual
calculations will be made by persons acting under the direction of the Board and
subject to the Board's review. Money market instruments are valued at market
value, except that instruments maturing in sixty days or less may be valued
using the amortized cost method valuation. The value of a foreign security is
determined in its national currency based upon the price on the foreign exchange
as of its close of business immediately preceding the time of valuation.
Securities traded in over-the-counter markets outside the United States are
valued at the last available price in the over-the-counter market prior to the
time of valuation.
Debt securities, including those to be purchased under firm commitment
agreements (other than obligations having a maturity sixty days or less at their
date of acquisition valued under the amortized cost method), are normally valued
on the basis of quotes obtained from brokers and dealers or pricing services,
which take into account appropriate factors such as institutional-size trading
in similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics, and other market data. Debt obligations having a
maturity of sixty days or less may be valued at amortized cost unless the
Portfolio Manager believes that amortized cost does not approximate market
value.
When a Portfolio writes a put or call option, the amount of the premium is
included in the Portfolios' assets and an equal amount is included in its
liabilities. The liability thereafter is adjusted to the current market value of
the option. The premium paid for an option purchased by the Portfolio is
recorded as an asset and subsequently adjusted to market value. Futures and
options thereon which are traded on commodities exchanges or boards of trade
will be valued at their closing settlement price on such exchange or board of
trade. Foreign securities quoted in foreign currencies generally are valued at
appropriately translated foreign market closing prices.
Trading in securities on exchanges and over-the-counter markets in European
and Pacific Basin countries is normally completed well before 4:00 p.m., New
York City time. Trading on these exchanges may not take place on all New York
business days and in addition, trading takes place in various foreign markets on
days which are not business days in New York and on which the Trust's net asset
value is not calculated. As a result, the calculation of the net asset value of
a Portfolio investing in foreign securities may not take place contemporaneously
with the determination of the prices of the securities included in the
calculation. Events that may affect the value of these securities that occur
between the time their prices are determined and the time the Portfolios' net
asset value is determined may not be reflected in the calculation of net asset
value of the Portfolio unless the Portfolio Manager, acting under authority
delegated by the Board of Trustees, deems that the particular event would
materially affect net asset value. In this event, the securities would be valued
at fair market value as determined in good faith by the Board of Trustees of the
Trust, although the actual calculations will be made by the Portfolio Manager
acting under the direction of the Board and subject to the Board's review.
PURCHASE OF SHARES
The Trust is intended to be a funding vehicle for variable annuity and
variable life insurance contracts offered by various insurance companies and for
certain qualified pension and retirement plans. The Trust currently does not
foresee any disadvantages to variable contract owners or retirement plan
participants arising from offering the Trust's shares to separate accounts of
unaffiliated insurers, to separate accounts funding both life insurance
contracts and annuity contracts, and to qualified plans. Because of differences
in tax treatment and other considerations, however, it is possible that the
interests of contract owners and
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plan participants might at some time be in conflict. Accordingly, the Board of
Trustees will monitor events in order to identify the existence of any material
irreconcilable conflicts and to determine what action, if any, should be taken
in response to any such conflict.
Shares of the Portfolios are sold at their respective net asset values
(without a sales charge) next computed after receipt of a purchase order. The
Portfolios reserve the right to cease offering their shares at any time.
REDEMPTION OF SHARES
Shares of the Portfolios may be redeemed on any business day. Redemptions
are effected at the net asset value per share next determined after receipt of
the redemption request. Redemption proceeds normally will be paid within seven
days following receipt of instructions in proper form, or sooner if required by
law.
The right of redemption may be suspended by the Trust or the payment date
postponed beyond seven days when the New York Stock Exchange is closed (other
than customary weekend and holiday closings) or for any period during which
trading thereon is restricted because an emergency exists, as determined by the
Securities and Exchange Commission, making disposal of portfolio securities or
valuation of net assets not reasonably practicable, and whenever the Securities
and Exchange Commission has by order permitted such suspension or postponement
for the protection of shareholders.
If the Board of Trustees should determine that it would be detrimental to
the best interests of the remaining shareholders of the Portfolios to make
payment wholly or partly in cash, the Portfolios may pay the redemption price in
whole or in part by a distribution in kind of securities from the portfolios of
the Portfolios, in lieu of cash, in conformity with applicable rules of the
Securities and Exchange Commission. If shares are redeemed in kind, the
redeeming shareholder might incur brokerage costs in converting the assets into
cash.
DIVIDENDS, DISTRIBUTIONS, AND TAXES
The Trust intends that the Portfolios will qualify to be treated as
regulated investment companies under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code"). In any year in which the Portfolios qualify as
regulated investment companies and distribute substantially all of their net
investment income and their net capital gains, the Portfolios generally will not
be subject to federal income tax to the extent they distribute to shareholders
such income and capital gains in the manner required under the Code.
Tax consequences to the Variable Contract owners are described in the
prospectus for the pertinent Variable Contract.
The provisions of the Code and the Treasury Regulations that apply to
qualified retirement plans are complex and vary according to the type of plan
and its terms and conditions. Accordingly, this prospectus provides only general
tax information, and participants in qualified retirement plans that invest
directly in the Portfolios should consult a qualified tax adviser before
purchasing or redeeming any Portfolio shares. In general, assuming that a plan
adheres to the applicable limitations of the Code and Treasury Regulations,
payments for the purchase of Portfolio shares (other than after-tax employee
payments) will be deductible (or not includable in income) up to certain amounts
each year. Federal income tax currently is not imposed upon the investment
income and realized gains until redemption. When Portfolio shares are redeemed
for the purpose of making payments to plan participants, all or a portion of the
payment is normally taxable as ordinary income. Some redemptions may also be
subject to penalty tax. For more information contact a qualified tax adviser.
The Portfolios will declare as a dividend and distribute net investment
income at least once annually. The Portfolios will distribute any net realized
capital gains at least once annually. All dividends and
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distributions will be reinvested automatically at net asset value in additional
shares of the Portfolios. Dividends declared in October, November, or December
to shareholders of record in such month and paid during the following January
will be treated as having been distributed and received by shareholders on
December 31.
Regulations under Section 817(h) of the Code contain certain diversification
requirements. Generally, under those regulations, a Portfolio will be required
to diversify its investments so that, on the last day of each quarter of a
calendar year, no more than 55% of the value of its assets will be represented
by any one investment, no more than 70% will be represented by any two
investments, no more than 80% will be represented by any three investments, and
no more than 90% will be represented by any four investments. For this purpose,
all securities of a given issuer are treated as a single investment, but, each
U.S. Government agency and instrumentality is treated as a separate issuer. In
addition, any security issued, guaranteed, or insured (to the extent so
guaranteed or insured) by the United States or an instrumentality of the U.S.
will be treated as a security issued by the U.S. Government or its
instrumentality, whichever is applicable.
OTHER INFORMATION
CAPITALIZATION
The Trust was organized as a Massachusetts business trust on September 8,
1993. The Trust currently issues shares of the five portfolios described in this
prospectus. The Agreement and Declaration of Trust established three other
portfolios, and the Board of Trustees may establish additional portfolios in the
future. The capitalization of the Trust consists solely of an unlimited number
of shares of beneficial interest with a par value of $0.001 each. When issued in
accordance with the Trust's Agreement and Declaration of Trust, shares of the
Portfolios are fully paid, redeemable, freely transferable, and non-assessable
by the Trust.
Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the Trust. However, the
Declaration of Trust disclaims liability of the shareholders, Trustees or
officers of the Trust for acts or obligations of the Trust, which are binding
only on the assets and property of the Trust, and requires that notice of the
disclaimer be given in each contract or obligation entered into or executed by
the Trust or the Trustees. The Declaration of Trust provides for indemnification
out of Trust property for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust. The risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Trust itself would be unable to meet its obligations,
and should be considered remote.
VOTING RIGHTS
Shareholders of the Trust are given certain voting rights. Each share of the
Portfolios will be given one vote, unless otherwise required by law.
Massachusetts business trust law does not require the Trust to hold annual
shareholder meetings, although special meetings may be called for the Portfolio,
or for the Trust as a whole, for purposes such as electing or removing Trustees,
changing fundamental policies, or approving a contract for investment advisory
services. In accordance with current laws, it is anticipated that an insurance
company issuing a Variable Contract that participates in the Trust will request
voting instructions from Variable Contract owners and will vote shares or other
voting interests in the Separate Account in proportion to the voting
instructions received.
As explained in "The Manager and Portfolio Managers" page 10, some Portfolio
Managers invested or agreed to invest in the Portfolios they manage. Each of
those Portfolio Managers has agreed to vote its
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shares in the same proportion as all Contract owners having voting rights with
respect to the Portfolio or in such other manner as may be required by the SEC
or its staff.
PORTFOLIO BROKERAGE
A Portfolio Manager may employ an affiliated broker to execute brokerage
transactions on behalf of the Portfolio as long as the commissions are
reasonable and fair compared to the commissions received by other brokers in
connection with comparable transactions involving similar securities being
purchased or sold on a securities exchange during a comparable period of time.
GAMCO, the Portfolio Manager for the Value and Global Interactive Telecomm
Portfolios, uses an affiliated broker (Gabelli & Company, Inc.) to execute most
brokerage transactions on behalf of those two Portfolios. The Portfolios may not
engage in any transactions in which a Portfolio Manager or its affiliates acts
as principal, including over-the-counter purchases and negotiated trades in
which such party acts as a principal.
YEAR 2000
The services provided to the Trust and its shareholders by the Manager, the
Portfolio Managers, and the custodian depend on the smooth functioning of their
respective computer systems and their outside service providers' computer
systems. Some computer software currently in use cannot distinguish the year
2000 from the year 1900 because of the way that dates are encoded and
calculated. Failure to correct or replace this type of software could adversely
affect, among other things, the handling of securities trades, the payment of
interest and dividends, the pricing of the Portfolios' securities and of the
Portfolios' shares, and account services. Although there is a possibility of the
Portfolios suffering some adverse impact because of this "Year 2000" issue, the
Manager, the Portfolio Managers, and the custodian have advised the Trust that
they are taking steps to prepare for the year 2000, and that they expect that
they will have put in place the necessary changes to their computer systems in
time to prevent adverse impact to the Portfolios.
PERFORMANCE INFORMATION
The Trust may, from time to time, include quotations of each Portfolio's
total return in advertisements or reports to shareholders or prospective
investors. Performance information for the Portfolios will not be advertised or
included in sales literature for Variable Contracts unless accompanied by
comparable performance information for a separate account to which the
Portfolios offer their shares. Quotations of total return will be expressed in
terms of the average annual compounded rate of return of a hypothetical
investment in the Portfolios over periods of 1, 5 and 10 years (up to the life
of the Portfolios). All total return figures will reflect the deduction of a
proportional share of each Portfolio's expenses on an annual basis, and will
assume that all dividends and distributions are reinvested when paid. Quotations
of total return reflect only the performance of a hypothetical investment in the
Portfolios during the particular time period on which the calculations are
based. Total return for the Portfolios will vary based on changes in market
conditions and the level of each Portfolio's expenses, and no reported
performance figure should be considered an indication of performance which may
be expected in the future.
Quotations of total return for the Portfolios will not take into account
charges or deductions against any Separate Account to which the Portfolio shares
are sold or charges and deductions against the pertinent Variable Contract,
although comparable performance information for the Separate Account will take
such charges into account. A person considering the purchase of a Variable
Contract should not compare a Portfolio's total return with the total returns of
mutual funds that sell their shares directly to the public since the Portfolio's
figures do not reflect charges against the separate accounts or the Variable
Contracts.
Reports and promotional literature may also contain other information,
including the effect of tax deferred compounding on each Portfolio's investment
returns, or returns in general, which may be
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illustrated by graphs, charts, or otherwise, and which may include a comparison,
at various points in time, of the return from an investment in the Portfolio (or
returns in general) on a tax-deferred basis (assuming one or more tax rates)
with the return on a taxable basis. For a more detailed description of the
methods used to calculate each Portfolio's total return, see the SAI.
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APPENDIX A
DESCRIPTION OF INDICES
The following information as to each index has been supplied by the
respective preparer of the index or has been obtained from other
publicly-available information.
S&P 500 COMPOSITE STOCK PRICE INDEX
The purpose of the S&P 500 Composite Stock Price Index is to portray the
pattern of common stock price movement. Construction of the index proceeds from
industry groups to the whole. Currently there are four groups: 400 Industrials,
40 Utilities, 20 Transportation and 40 Financial. Since some industries are
characterized by companies of relatively small stock capitalization, the index
does not comprise the 500 largest companies listed on the New York Stock
Exchange.
Component stocks are chosen solely with the aim of achieving a distribution
by broad industry groupings that approximates the distribution of these
groupings in the New York Stock Exchange common stock population, taken as the
assumed model for the composition of the total market. Each stock added to the
index must represent a viable enterprise and must be representative of the
industry group to which it is assigned. Its market price movements must in
general be responsive to changes in industry affairs.
The formula adopted by S&P is generally defined as a "base-weighted
aggregative" expressed in relatives with the average value for the base period
(1941-1943) equal to 10. Each component stock is weighted so that it will
influence the index in proportion to its respective market importance. The most
suitable weighting factor for this purpose is the number of shares outstanding.
The price of any stock multiplied by number of shares outstanding gives the
current market value for that particular issue. This market value determines the
relative importance of the security.
Market values for individual stocks are added together to obtain their
particular group market value. These group values are expressed as a relative,
or index number, to the base period (1941-1943) market value. As the base period
market value is relatively constant, the index number reflects only fluctuations
in current market values.
MORGAN STANLEY CAPITAL INTERNATIONAL EUROPE, AUSTRALIA, AND THE FAR EAST INDEX
The Morgan Stanley EAFE index measures the performance in Europe, Australia,
and the Far East (EAFE). EAFE contains 20 countries, excluding the U.S. and the
emerging markets of Latin America. Japan represents approximately 46% of the
Index value. EAFE is divided into 8 economic sectors and 38 industry groups.
Banking, utilities, and health care are the largest groups.
LEHMAN BROTHERS AGGREGATE BOND INDEX
The Lehman Brothers Aggregate Bond Index measures the overall domestic bond
market and combines four other indices: the Lehman Brothers Government Bond
Index, which tracks the returns of U.S. Treasuries, agency bonds, and one- to
three-year U.S. government obligations; the Lehman Brothers Corporate Bond
Index, which tracks the returns of all publicly issued, fixed-rate,
nonconvertible, dollar-denominated, investment-grade corporate debt registered
with the Securities and Exchange Commission; the Lehman Brothers Mortgage-Backed
Securities Index, which includes 15- and 30-year fixed-rate securities backed by
mortgage pools issued by GNMA, FNMA, and FHLMC; and the Lehman Brothers
Asset-Backed Securities Index, which tracks fixed-income securities that
represent a participation in, or are secured by and payable from, a stream of
payments generated by particular assets (for example, trade receivables).
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APPENDIX B
DESCRIPTION OF RATINGS
CERTAIN RATINGS OF CORPORATE DEBT SECURITIES
MOODY'S INVESTORS SERVICE INC.
AAA--Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged."
AA--Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
A--Bonds rated A possess many favorable investment attributes and are generally
considered as upper-medium-grade obligations.
BAA--Bonds rated Baa are considered medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
BA--Bonds rated Ba are judged to have speculative elements; their future cannot
be considered as well-assured. Often the protection of interest and principal
payments may be very moderate and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position characterize bonds in
this class.
B--Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
CAA--Bonds rated Caa are of poor standing. Such issues may be in default or
elements of danger with respect to principal or interest may be present.
CA--Bonds rated Ca represent obligations which are speculative in a high degree.
Such issues are often in default or have other marked short comings.
STANDARD & POOR'S CORPORATION
AAA--Bonds rated AAA have the highest rating assigned by Standard & Poor's to a
debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA--Bonds rated AA have a very strong capacity to pay interest and repay
principal, and differ from the highest rated issues in small degree.
A--Bonds rated A have a strong capacity to pay interest and repay principal,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
BBB--Bonds rated BBB are regarded as having adequate capacity to pay interest
and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in the higher rated categories.
BB, B, CCC, CC--Bonds rated BB, B, CCC, and CC are regarded on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
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RATINGS OF COMMERCIAL PAPER
MOODY'S INVESTORS SERVICE, INC.
Prime-1 is the highest commercial paper rating assigned by Moody's. Issuers
rated Prime-1 (or supporting institutions) are considered to have a superior
capacity for repayment of short-term promissory obligations. Issuers rated
Prime-2 (or supporting institutions) are considered to have a strong capacity
for repayment of short-term promissory obligations. This will normally be
evidenced by many of the characteristics of issuers rated Prime-1 but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate
may be more affected by external conditions. Ample alternative liquidity is
maintained.
STANDARD & POOR'S CORPORATION
Commercial paper rated A-1 by S&P indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Capacity for
timely payment on commercial paper rated A-2 is strong, but the relative degree
of safety is not as high as for issues designated A-1.
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STATEMENT OF ADDITIONAL INFORMATION
for
The Value Portfolio,
The Growth Portfolio,
The International Growth Portfolio,
The Strategic Income Portfolio, and
The Global Interactive/Telecomm Portfolio
of
THE FULCRUM TRUST
440 Lincoln Street
Worcester, Massachusetts 01653
(800) 917-1909
September 1, 1998
This Statement of Additional Information discusses five portfolios
listed above (the "Portfolios") of The Fulcrum Trust (the "Trust"), which
is an open-end management investment company.
Shares of the Portfolios may be sold only to: (1) life insurance
company separate accounts (the "Separate Accounts") to serve as the
underlying investment medium for variable annuity and variable life insurance
contracts; (2) qualified retirement plans, as permitted by Treasury
Regulations; and (3) life insurance companies and advisers to the Portfolios
and their affiliates.
This Statement of Additional Information is intended to supplement the
information provided to investors in the Trust's Prospectus dated September 1,
1998. It has been filed with the Securities and Exchange Commission as
part of the Trust's Registration Statement. Investors should note, however,
that this Statement of Additional Information is not itself a prospectus and
should be read carefully in conjunction with the Prospectus for the
Portfolios and retained for future reference. The contents of this Statement
of Additional Information are incorporated by reference in the Prospectus in
their entirety. A copy of the Prospectus may be obtained free of charge from
the Trust at the address and telephone number listed above.
Manager:
Allmerica Financial Investment Management Services, Inc.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INTRODUCTION 4
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES 4
Mortgage-Backed Securities 4
GNMA Certificates 4
FNMA and FHLMC Mortgage-Backed Obligations 5
Collateralized Mortgage Obligations (CMOs) 6
Other Mortgage-Backed Securities 6
Asset-Backed Securities 7
Banking Industry and Savings Industry Obligations 8
Commercial Paper 9
Repurchase Agreements 9
Options on Equity Securities 10
Options on Debt Securities 11
Options on Stock Indices 12
Options on Foreign Currencies 14
Futures Contracts 15
Options on Futures Contracts 15
When-Issued or Delayed Delivery Securities 16
Foreign Currency Transactions 16
INVESTMENT RESTRICTIONS 18
MANAGEMENT OF THE TRUST 21
Trustees and Officers 21
Service Providers 23
Principal Shareholders 24
PORTFOLIO TRANSACTIONS AND BROKERAGE 24
Investment Decisions 24
Brokerage and Research Services 24
PERFORMANCE INFORMATION 27
TAXATION 28
OTHER INFORMATION 29
Capitalization 29
Organization Expenses 30
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Registration Statement 30
FINANCIAL STATEMENTS 32
</TABLE>
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INTRODUCTION
This Statement of Additional Information is designed to elaborate upon
the discussion of certain securities and investment techniques which are
described in the Portfolios' Prospectus. The more detailed information
contained herein is intended solely for investors who have read the
Prospectus and are interested in a more detailed explanation of certain
aspects of some of the Portfolios' securities and some investment techniques.
Some of the Portfolios' investment techniques are described only in the
Prospectus and are not repeated herein. Captions and defined terms in this
Statement of Additional Information generally correspond to like captions and
terms in the Portfolios' Prospectus.
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
MORTGAGE-BACKED SECURITIES
All Portfolios may invest in mortgage-backed securities.
GNMA CERTIFICATES. Government National Mortgage Association ("GNMA")
certificates are mortgage-backed securities representing part ownership of a
pool of mortgage loans on which timely payment of interest and principal is
guaranteed by the full faith and credit of the U.S. Government. GNMA is a
wholly owned U.S. Government corporation within the Department of Housing and
Urban Development. GNMA is authorized to guarantee, with the full faith and
credit of the U.S. Government, the timely payment of principal and interest
on securities issued by institutions approved by GNMA (such as savings and
loan institutions, commercial banks, and mortgage bankers) and backed by
pools of FHA-insured or VA-guaranteed mortgages.
Interests in pools of mortgage-backed securities differ from other forms
of debt securities, which normally provide for periodic payment of interest
in fixed amounts with principal payments at maturity or specified call dates.
Instead, these securities provide a periodic payment which consists of both
interest and principal payments. In effect, these payments are a
"pass-through" of the periodic payments made by the individual borrowers on
the residential mortgage loans, net of any fees paid to the issuer or
guarantor of such securities. Additional payments are caused by repayments
of principal resulting from the sale of the underlying residential property,
refinancing or foreclosure, net of fees or costs which may be incurred.
Mortgage-backed securities issued by GNMA are described as "modified
pass-through" securities. These securities entitle the holder to receive all
interest and principal payments owed on the mortgage pool, net of certain
fees, at the scheduled payment dates, regardless of whether or not the
mortgagor actually makes the payment. Although GNMA guarantees timely payment
even if homeowners delay or default, tracking the "pass-through" payments
may, at
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times, be difficult. Expected payments may be delayed due to the delays in
registering the newly traded paper securities. The custodian's policies for
crediting missed payments while errant receipts are tracked down may vary.
Other mortgage-backed securities, such as those of the Federal Home Loan
Mortgage Corporation ("FHLMC") and the Federal National Mortgage Association
("FNMA"), trade in book-entry form and should not be subject to the risk of
delays in timely payment of income.
Although the mortgage loans in the pool will have maturities of up to 30
years, the actual average life of the GNMA certificates typically will be
substantially less because the mortgages will be subject to normal principal
amortization and may be prepaid prior to maturity. Early repayments of
principal on the underlying mortgages may expose a Portfolio to a lower rate
of return upon reinvestment of principal. Prepayment rates vary widely and
may be affected by changes in market interest rates. In periods of falling
interest rates, the rate of prepayment tends to increase, thereby shortening
the actual average life of the GNMA certificates. Conversely, when interest
rates are rising, the rate of prepayment tends to decrease, thereby
lengthening the actual average life of the GNMA certificates. Accordingly,
it is not possible to accurately predict the average life of a particular
pool. Reinvestment of prepayments may occur at higher or lower rates than
the original yield on the certificates. Due to the prepayment feature and
the need to reinvest prepayments of principal at current rates, GNMA
certificates can be less effective than typical bonds of similar maturities
at "locking in" yields during periods of declining interest rates, although
they may have comparable risks of decline in value during periods of rising
interest rates.
FNMA AND FHLMC MORTGAGE-BACKED OBLIGATIONS. Government-related
guarantors (i.e., not backed by the full faith and credit of the U.S.
Government) include the FNMA and the FHLMC. FNMA, a federally chartered and
privately owned corporation, issues pass-through securities representing
interests in a pool of conventional mortgage loans. FNMA guarantees the
timely payment of principal and interest, but this guarantee is not backed by
the full faith and credit of the U.S. Government. FNMA also issues REMIC
Certificates, which represent an interest in a trust funded with FNMA
Certificates. REMIC Certificates are guaranteed by FNMA, and not by the full
faith and credit of the U.S. Government.
FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of
Housing and Urban Development. FNMA purchases conventional (i.e., not
insured or guaranteed by any government agency) residential mortgages from a
list of approved seller/servicers which include state and federally chartered
savings and loan associations, mutual savings banks, commercial banks, credit
unions, and mortgage bankers. FHLMC, a corporate instrumentality of the
United States, was created by Congress in 1970 for the purpose of increasing
the availability of mortgage credit for residential housing. Its stock is
owned by the twelve Federal Home Loan Banks. FHLMC
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issues Participation Certificates ("PCS") which represent interests in
conventional mortgages from FHLMC's national portfolio. FHLMC guarantees the
timely payment of interest and ultimate collection of principal and maintains
reserves to protect holders against losses due to default. PCS are not
backed by the full faith and credit of the U.S. Government. As is the case
with GNMA certificates, the actual maturity and realized yield on particular
FNMA and FHLMC pass-through securities will vary based on the prepayment
experience of the underlying pool of mortgages.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS). A CMO is a hybrid between a
mortgage-backed bond and a mortgage pass-through security. Similar to a
bond, interest and prepaid principal are paid, in most cases, semiannually.
CMOs may be collateralized by whole mortgage loans, but are more typically
collateralized by portfolios of mortgage pass-through securities guaranteed
by GNMA, FHLMC, or FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. CMOs provide for a modified form of
call protection through a de facto breakdown of the underlying pool of
mortgages according to how quickly the loans are repaid. Monthly payment of
principal received from the pool of underlying investors, including
prepayments, is first returned to investors holding the shortest maturity
class. Investors holding the longer maturity classes receive principal only
after the first class has been retired. An investor is partially guarded
against a sooner-than-desired return of principal because of the sequential
payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple
Series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond
offering are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third-party trustee as
security for the Bonds. Principal and interest payments from the Collateral
are used to pay principal on the Bonds in the order A, B, C, Z. The Series
A, B, and C Bonds all bear current interest. Interest on the Series Z Bond
is accrued and added to the principal; a like amount is paid as principal on
the Series A, B, or C Bond currently being paid off. When the Series A, B,
and C Bonds are paid in full, interest and principal on the Series Z Bond
begin to be paid currently. With some CMOs, the issuer serves as a conduit to
allow loan originators (primarily builders or savings and loan associations)
to borrow against their loan portfolios.
OTHER MORTGAGE-BACKED SECURITIES. Commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers, and
other secondary market issuers also create pass-through pools of conventional
residential mortgage loans. In addition, such issuers may be the originators
and/or servicers of the underlying mortgage loans as well as the guarantors
of the mortgage-backed securities. Pools created by such non-
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governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or
indirect government or agency guarantees of payments in the former pools.
Timely payment of interest and principal of these pools may be supported by
various forms of insurance or guarantees, including individual loan, title,
pool and hazard insurance, and letters of credit. The insurance and
guarantees are issued by governmental entities, private insurers, and the
mortgage poolers. Such insurance, guarantees, and the creditworthiness of
the issuers thereof will be considered in determining whether a
mortgage-backed security meets a Portfolio's investment quality standards.
There can be no assurance that the private insurers or guarantors can meet
their obligations under the insurance policies or guarantee arrangements.
All Portfolios may buy mortgage-backed securities without insurance or
guarantees, if the Portfolio Manager determines that the securities meet a
Portfolio's quality standards. Although the market for such securities is
becoming increasingly liquid, securities issued by certain private
organizations may not be readily marketable. A Portfolio will not purchase
mortgage-backed securities or any other assets which, in the opinion of the
Portfolio Manager, are illiquid if, as a result, more than 15% of the value
of a Portfolio's total assets will be illiquid. As new types of
mortgage-backed securities are developed and offered to investors, the
Portfolio Manager will, consistent with a Portfolio's investment objectives,
policies, and quality standards, consider making investments in such new
types of mortgage-backed securities.
ASSET-BACKED SECURITIES
All Portfolios may purchase asset-backed securities. Two such
securities are "CARS-SM-" ("Certificates for Automobile Receivables-SM-") and
Credit Card Receivable Securities.
CARS-SM-, represent undivided fractional interests in a trust ("trust")
whose assets consist of a pool of motor vehicle retail installment sales
contracts and security interests in the vehicles securing the contracts.
Payments of principal and interest on CARS-SM- are "passed-through" monthly
to certificate holders, and are guaranteed up to certain amounts by a letter
of credit issued by a financial institution unaffiliated with the trustee or
originator of the trust. Underlying sales contracts are subject to
prepayment, which may reduce the overall return to certificate holders.
Certificate holders may also experience delays in payment or losses on
CARS-SM- if the full amounts due on underlying sales contracts are not
realized by the trust because of unanticipated legal or administrative costs
of enforcing the contracts, or because of depreciation, damage, or loss of
the vehicles securing the contracts, or other factors.
Credit Card Receivable Securities are asset-backed securities backed by
receivables from revolving credit card agreements. Credit balances on
revolving credit card agreements ("Accounts") are generally paid down more
rapidly than are Automobile Contracts. Most of
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the Credit Card Receivable Securities issued publicly to date have been
Pass-Through Certificates. In order to lengthen the maturity of Credit Card
Receivable Securities, most such securities provide for a fixed period during
which only interest payments on the underlying Accounts are passed through to
the security holder and principal payments received on such Accounts are used
to fund the transfer to the pool of assets supporting the related Credit Card
Receivable Securities of additional credit card charges made on an Account.
The initial fixed period usually may be shortened upon the occurrence of
specified events which signal a potential deterioration in the quality of the
assets backing the security, such as the imposition of a cap on interest
rates. The ability of the issuer to extend the life of an issue of Credit
Card Receivable Securities thus depends upon the continued generation of
additional principal amounts in the underlying Accounts during the initial
period and the non-occurrence of specified events. An acceleration in
cardholders' payment rates or any other event which shortens the period
during which additional credit card charges on an Account may be transferred
to the pool of assets supporting the related Credit Card Receivable Security
could shorten the expected weighted average life of the security and thus
reduce its yield. Credit card holders are entitled to the protection of a
number of state and federal consumer credit laws, many of which give such
holder the right to set off certain amounts against balances owed on the
credit card, thereby reducing amounts paid on Accounts. In addition, unlike
many other asset-backed securities, Accounts are unsecured obligations of the
cardholder.
BANKING INDUSTRY AND SAVINGS INDUSTRY OBLIGATIONS
Obligations of foreign banks involve somewhat different investment risks
than those affecting obligations of U.S. banks, which include: (i) the
possibility that their liquidity could be impaired because of future
political and economic developments; (ii) their obligations may be less
marketable than comparable obligations of U.S. banks; (iii) a foreign
jurisdiction might impose withholding taxes on interest income payable on
those obligations; (iv) foreign deposits may be seized or nationalized; (v)
foreign governmental restrictions, such as exchange controls, may be adopted
which might adversely affect the payment of principal and interest on those
obligations; and (vi) the selection of those obligations may be more
difficult because there may be less publicly available information concerning
foreign banks and/or because the accounting, auditing, and financial
reporting standards, practices and requirements applicable to foreign banks
may differ from those applicable to U.S. banks. Foreign banks are not
generally subject to examination by any U.S. Government agency or
instrumentality.
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COMMERCIAL PAPER
Commercial paper obligations may include variable amount master demand
notes. These notes are obligations that permit the investment of fluctuating
amounts at varying rates of interest pursuant to direct arrangements between
a Portfolio, as lender, and the borrower. These notes permit daily changes
in the amounts borrowed. The lender has the right to increase or to decrease
the amount under the note at any time up to the full amount provided by the
note agreement; and the borrower may prepay up to the full amount of the note
without penalty. Because variable amount master demand notes are direct
lending arrangements between the lender and borrower, and because no
secondary market exists for those notes, such instruments will probably not
be traded. However, the notes are redeemable (and thus immediately repayable
by the borrower) at face value, plus accrued interest, at any time. In
connection with master demand note arrangements, the Portfolio Manager will
monitor, on an ongoing basis, the earning power, cash flow, and other
liquidity ratios of the borrower and its ability to pay principal and
interest on demand. The Portfolio Manager also will consider the extent to
which the variable amount master demand notes are backed by bank letters of
credit. These notes generally are not rated by Moody's or S&P; the Portfolio
may invest in them only if the Portfolio Manager believes that at the time of
investment the notes are of comparable quality to the other commercial paper
in which the Portfolio may invest. Master demand notes are considered by the
Portfolio to have a maturity of one day, unless the Portfolio Manager has
reason to believe that the borrower could not make immediate repayment upon
demand. See Appendix B to the Prospectus for a description of Moody's and
S&P ratings applicable to commercial paper.
REPURCHASE AGREEMENTS
The term of a repurchase agreement is generally quite short, possibly
overnight or for a few days, although it may extend over a number of months
(up to one year) from the date of delivery. The resale price is in excess of
the purchase price by an amount which reflects an agreed-upon market rate of
return, effective for the period of time the Portfolio is invested in the
security. This results in a fixed rate of return protected from market
fluctuations during the period of the agreement. This rate is not tied to
the coupon rate on the security subject to the repurchase agreement.
A Portfolio may engage in repurchase transactions in accordance with
guidelines approved by the Board of Trustees of the Trust, which include
monitoring the creditworthiness of the parties with which a Portfolio engages
in repurchase transactions, obtaining collateral at least equal in value to
the repurchase obligation, and marking the collateral to market on a daily
basis.
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A Portfolio may not enter into a repurchase agreement having more than
seven days remaining to maturity if, as a result, such agreements together
with any other securities that are not readily marketable, would exceed 15%
of the net assets of the Portfolio. If the seller should become bankrupt or
default on its obligations to repurchase the securities, a Portfolio may
experience delay or difficulties in exercising its rights to the securities
held as collateral and might incur a loss if the value of the securities
should decline. A Portfolio also might incur disposition costs in connection
with liquidating the securities.
OPTIONS ON EQUITY SECURITIES
The Portfolios may purchase and write (i.e., sell) put and call options
on equity securities that are traded on U.S. securities exchanges, are listed
on the National Association of Securities Dealers Automated Quotation System
("NASDAQ"), or that result from privately negotiated transactions with
broker-dealers ("OTC options"). A call option is a short-term contract
pursuant to which the purchaser or holder, in return for a premium paid, has
the right to buy the security underlying the option at a specified exercise
price at any time during the term of the option. The writer of the call
option, who receives the premium, has the obligation, upon exercise of the
option, to deliver the underlying security against payment of the exercise
price. A put option is a similar contract which gives the purchaser or
holder, in return for a premium, the right to sell the underlying security at
a specified price during the term of the option. The writer of the put, who
receives the premium, has the obligation to buy the underlying security at
the exercise price upon exercise by the holder of the put.
A Portfolio will write only "covered" options on stocks. A call option
is covered if: (1) the Portfolio owns the security underlying the option; or
(2) the Portfolio has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional
consideration held in a segregated account by its custodian) upon conversion
or exchange of other securities it holds; or (3) the Portfolio holds on a
share-for-share basis a call on the same security as the call written where
the exercise price of the call held is equal to or less than the exercise
price of the call written or greater than the exercise price of the call
written if the difference is maintained by the Portfolio in cash, Government
securities or other liquid assets in a segregated account with its custodian.
A put option is covered if: (1) the Portfolio deposits and maintains with its
custodian in a segregated account cash, U.S. Government securities or other
liquid assets having a value equal to or greater than the exercise price of
the option; or (2) the Portfolio holds on a share-for-share basis a put on
the same security as the put written where the exercise price of the put held
is equal to or greater than the exercise price of the put written or less
than the exercise price if the difference is maintained by the Portfolio in
cash, Government securities or other liquid assets in a segregated account
with its custodian.
10
<PAGE>
A Portfolio may also purchase "protective puts" (i.e., put options
acquired for the purpose of protecting a Portfolio security from a decline in
market value). The loss to the Portfolio is limited to the premium paid for,
and transaction costs in connection with, the put plus the initial excess, if
any, of the market price of the underlying security over the exercise price.
However, if the market price of the security underlying the put rises, the
profit the Portfolio realizes on the sale of the security will be reduced by
the premium paid for the put option less any amount (net of transaction
costs) for which the put may be sold.
A Portfolio may also purchase putable and callable equity securities,
which are securities coupled with a put or call option provided by the issuer.
A Portfolio may purchase call options for hedging and investment
purposes. No Portfolio intends to invest more than 5% of its net assets at
any one time in the purchase of call options on stocks.
If the writer of an exchange-traded option wishes to terminate the
obligation, he or she may effect a "closing purchase transaction" by buying
an option of the same series as the option previously written. Similarly,
the holder of an option may liquidate his or her position by exercise of the
option or by effecting a "closing sale transaction" by selling an option of
the same series as the option previously purchased. There is no guarantee
that closing purchase or closing sale transactions can be effected.
OPTIONS ON DEBT SECURITIES
The Portfolios may purchase and write exchange-traded and OTC put and
call options on debt securities. Options on debt securities are similar to
options on stock, except that the option holder has the right to take or make
delivery of a debt security, rather than stock.
A Portfolio will write only "covered" options. Options on debt
securities are covered in the same manner as options on stocks, discussed
above, except that, in the case of call options on U.S. Treasury Bills, the
Portfolio might own U.S. Treasury Bills of a different series from those
underlying the call option, but with a principal amount and value
corresponding to the option contract amount and a maturity date no later than
that of the securities deliverable under the call option.
A Portfolio may also write straddles (i.e., a combination of a call and
a put written on the same security at the same strike price where the same
issue of the security is considered as the cover for both the put and the
call). In such cases, the Portfolio will also segregate or deposit for the
benefit of the Portfolio's broker cash, U.S. Government securities or other
liquid assets equivalent to the amount, if any, by which the put is "in the
money." It is contemplated that each Portfolio's use of straddles will be
limited to 5% of the Portfolio's net assets (meaning
11
<PAGE>
that the securities used for cover or segregated as described above will not
exceed 5% of the Portfolio's net assets at the time the straddle is written).
A Portfolio may purchase "protective puts" in an effort to protect the
value of a security that it owns against a substantial decline in market
value. Protective puts are described in OPTIONS ON EQUITY SECURITIES above.
A Portfolio may wish to protect certain securities against a decline in
market value at a time when put options on those particular securities are
not available for purchase. A Portfolio may therefore purchase a put option
on securities it does not hold. While changes in the value of the put should
generally offset changes in the value of the securities being hedged, the
correlation between the two values may not be as close in these transactions
as in transactions in which the Portfolio purchases a put option on an
underlying security it owns.
A Portfolio may also purchase call options on debt securities for
hedging or investment purposes. No Portfolio currently intends to invest
more than 5% of its net assets at any one time in the purchase of call
options on debt securities.
A Portfolio may also purchase putable and callable debt securities,
which are securities coupled with a put or call option provided by the issuer.
A Portfolio may enter into closing purchase or sale transactions in a
manner similar to that discussed above in connection with options on equity
securities.
OPTIONS ON STOCK INDICES
The Portfolios may purchase and sell put and call options on stock
indices traded on national securities exchanges, listed on NASDAQ or that
result from privately negotiated transactions with broker-dealers ("OTC
options"). Options on stock indices are similar to options on stock except
that, rather than the right to take or make delivery of stock at a specified
price, an option on a stock index gives the holder the right to receive, upon
exercise of the option, an amount of cash if the closing level of the stock
index upon which the option is based is greater than in the case of a call,
or less than, in the case of a put, the strike price of the option. This
amount of cash is equal to such difference between the closing price of the
index and the strike price of the option times a specified multiple (the
"multiplier"). If the option is exercised, the writer is obligated, in
return for the premium received, to make delivery of this amount. Unlike
stock options, all settlements are in cash, and gain or loss depends on price
movements in the stock market generally (or in a particular industry or
segment of the market) rather than price movements in individual stocks.
A Portfolio will write only "covered" options on stock indices. A call
option is covered if the Fund follows the segregation requirements set forth
in this paragraph. When a Portfolio
12
<PAGE>
writes a call option on a broadly based stock market index, it will segregate
or put into escrow with its custodian or pledge to a broker as collateral for
the option, cash, Government securities or other liquid assets, or "qualified
securities" (defined below) with a market value at the time the option is
written of not less than 100% of the current index value times the multiplier
times the number of contracts. A "qualified security" is an equity security
which is listed on a national securities exchange or listed on NASDAQ against
which the Portfolio has not written a stock call option and which has not
been hedged by the Portfolio by the sale of stock index futures. When a
Portfolio writes a call option on an industry or market segment index, it
will segregate or put into escrow with its custodian or pledge to a broker as
collateral for the option, cash, Government securities or other liquid
assets, or at least five qualified securities, all of which are stocks of
issuers in such industry or market segment, with a market value at the time
the option is written of not less than 100% of the current index value times
the multiplier times the number of contracts. Such stocks will include
stocks which represent at least 50% of the weighting of the industry or
market segment index and will represent at least 50% of the Portfolio's
holdings in that industry or market segment. No individual security will
represent more than 15% of the amount so segregated, pledged or escrowed in
the case of broadly based stock market stock options or 25% of such amount in
the case of industry or market segment index options. If at the close of
business on any day the market value of such qualified securities so
segregated, escrowed, or pledged falls below 100% of the current index value
times the multiplier times the number of contracts, the fund will so
segregate, escrow, or pledge an amount in cash, Government securities, or
other liquid assets equal in value to the difference. In addition, when a
Portfolio writes a call on an index which is in-the-money at the time the
call is written, it will segregate with its custodian or pledge to the broker
as collateral, cash, U.S. government securities or other liquid assets equal
in value to the amount by which the call is in-the-money times the multiplier
times the number of contracts. Any amount segregated pursuant to the
foregoing sentence may be applied to the Portfolio's obligation to segregate
additional amounts in the event that the market value of the qualified
securities falls below 100% of the current index value times the multiplier
times the number of contracts.
A call option is also covered if the Portfolio holds a call on the same
index as the call written where the strike price of the call held is equal to
or less than the strike price of the call written or greater than the strike
price of the call written if the difference is maintained by the Portfolio in
cash, Government securities or other liquid assets in a segregated account
with its custodian.
A put option is covered if: (1) the Portfolio holds in a segregated
account cash, Government securities or other liquid assets of a value equal
to the strike price times the multiplier times the number of contracts; or
(2) the Portfolio holds a put on the same index as the put written where the
strike price of the put held is equal to or greater than the strike price of
the put written or less than the strike price of the put written if the
difference is maintained
13
<PAGE>
by the Portfolio in cash, Government securities or other liquid assets in a
segregated account with its custodian.
A Portfolio may purchase put and call options for hedging and investment
purposes. No Portfolio intends to invest more than 5% of its net assets at
any one time in the purchase of puts and calls on stock indices. A Portfolio
may effect closing sale and purchase transactions involving options on stock
indices, as described above in connection with stock options.
The prospectus details certain risks particular to options on stock
indices. In addition, when a Portfolio has written a call, there is also a
risk that the market may decline between the time the Portfolio has a call
exercised against it, at a price which is fixed as of the closing level of
the index on the date of exercise, and the time the Portfolio is able to sell
stocks in its Portfolio. As with stock options, the Portfolio will not learn
that an index option has been exercised until the day following the exercise
date but, unlike a call on stock where the Portfolio would be able to deliver
the underlying securities in settlement, the Portfolio may have to sell part
of its stock Portfolio in order to make settlement in cash, and the price of
such stocks might decline before they can be sold. This timing risk makes
certain strategies involving more than one option substantially more risky
with options in stock indices than with stock options.
There are also certain special risks involved in purchasing put and call
options on stock indices. If a Portfolio holds an index option and exercises
it before final determination of the closing index value for that day, it
runs the risk that the level of the underlying index may change before
closing. If such a change causes the exercise option to fall out
of-the-money, the Portfolio will be required to pay the difference between
the closing index value and the strike price of the option (times the
applicable multiplier) to the assigned writer. Although a Portfolio may be
able to minimize the risk by withholding exercise instructions until just
before the daily cutoff time or by selling rather than exercising an option
when the index level is close to the exercise price, it may not be possible
to eliminate this risk entirely because the cutoff times for index options
may be earlier than those fixed for other types of options and may occur
before definitive closing index values are announced.
OPTIONS ON FOREIGN CURRENCIES
The Portfolios may purchase and write put and call options on foreign
currencies traded on U.S. or foreign securities exchanges or boards of trade.
Options on foreign currencies are similar to options on stock, except that
the option holder has the right to take or make delivery of a specified
amount of foreign currency, rather than stock.
14
<PAGE>
FUTURES CONTRACTS
The Portfolios may purchase and sell stock index futures contracts. A
stock index futures contract is an agreement in which the seller of the
contract agrees to deliver to the buyer an amount of cash equal to a specific
dollar amount times the difference between the value of a specific stock
index at the close of the last trading day of the contract and the price at
which the agreement is made. No physical delivery of the underlying stocks
in the index is made. In addition, the Portfolios may, for hedging purposes,
purchase and sell (a) futures contracts on interest-bearing securities (such
as U.S. Treasury bonds and notes) or interest rate indices (referred to
collectively as "interest rate futures contracts"); (2) futures contracts on
foreign currencies or groups of foreign currencies; and (3) futures contracts
on gold and other precious metals.
When the futures contract is entered into, each party deposits with a
broker or in a segregated custodial account approximately 5% of the contract
amount, called the "initial margin." Subsequent payments to and from the
broker, called the "variation margin," will be made on a daily basis as the
underlying security, index or rate fluctuates making the long and short
positions in the futures contracts more or less valuable, a process known as
"marking to the market."
OPTIONS ON FUTURES CONTRACTS
The Portfolios may enter into certain transactions involving options on
futures contracts. An option on a futures contract gives the purchaser or
holder the right, but not the obligation, to assume a position in a futures
contract (a long position if the option is a call and a short position if the
option is a put) at a specified price at any time during the option exercise
period. The writer of the option is required upon exercise to assume an
offsetting futures position (a short position if the option is a call and long
position if the option is a put). Upon exercise of the option, the assumption
of offsetting futures positions by the writer and holder of the option will be
accomplished by delivery of the accumulated balance in the writer's futures
margin account which represents the amount by which the market price of the
futures contract, at exercise, exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option on the futures contract.
As an alternative to exercise, the holder or writer of an option may terminate a
position by selling or purchasing an option of the same series. There is no
guarantee that such closing transactions can be effected. The Portfolios intend
to utilize options on futures contracts for the same purposes that they use the
underlying futures contracts.
Options on futures contracts are subject to risks similar to those
described above with respect to options on securities, options on stock indices,
and futures contracts. These risks
15
<PAGE>
include the risk that the Portfolio manager may not correctly predict changes
in the market, the risk of imperfect correlation between the option and the
securities being hedged, and the risk that there might not be a liquid
secondary market for the option. There is also the risk of imperfect
correlation between the option and the underlying futures contract. If there
were no liquid secondary market for a particular option on a futures
contract, the Portfolio might have to exercise an option it held in order to
realize any profit and might continue to be obligated under an option it had
written until the option expired or was exercised. If a Portfolio were
unable to close out an option it had written on a futures contract, it would
continue to be required to maintain initial margin and make variation margin
payments with respect to the option position until the option expired or was
exercised against the Portfolio.
WHEN-ISSUED OR DELAYED DELIVERY SECURITIES
All Portfolios may purchase securities on a when-issued or delayed
delivery basis if the Portfolio holds, and maintains until the settlement
date in a segregated account, cash, U.S. Government securities, or high-grade
debt obligations in an amount sufficient to meet the purchase price, or if
the Portfolio enters into offsetting contracts for the forward sale of other
securities it owns. Purchasing securities on a when-issued or delayed
delivery basis involves a risk of loss if the value of the security to be
purchased declines prior to the settlement date, which risk is in addition to
the risk of decline in value of the Portfolios' other assets. Although a
Portfolio would generally purchase securities on a when-issued basis or enter
into forward commitments with the intention of acquiring securities, the
Portfolio may dispose of a when-issued or delayed delivery security prior to
settlement if the Portfolio Manager deems it appropriate to do so. The
Portfolio may realize short-term profits or losses upon such sales.
FOREIGN CURRENCY TRANSACTIONS
The Portfolios may enter into forward currency contracts and enter into
currency exchange transactions on a spot (i.e. cash) basis. A forward
currency contract is an obligation to purchase or sell a currency against
another currency at a future date and price as agreed upon by the parties. A
Portfolio may either accept or make delivery of the currency at the maturity
of the forward contract or, prior to maturity, enter into a closing
transaction involving the purchase or sale of an offsetting contract. A
Portfolio will engage in forward currency transactions in anticipation of or
to protect itself against fluctuations in currency exchange rates.
A Portfolio may enter into forward foreign currency contracts in two
circumstances. First, when a Portfolio enters into a contract for the
purchase or sale of a security denominated in a foreign currency, the
Portfolio may desire to "lock in" the U.S. dollar price of the security. By
entering into a forward contract for a fixed amount of dollars for the
purchase or sale of the amount of foreign currency involved in the underlying
transactions, the Portfolio will be able
16
<PAGE>
to protect itself against a possible loss resulting from an adverse change in
the relationship between the U.S. dollar and such foreign currency during the
period between the date on which the security is purchased or sold and the
date on which payment is made or received.
Second, when the Portfolio Manager believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract for a fixed amount of dollars to
sell the amount of foreign currency approximating the value of some or all of
the Portfolios securities denominated in such foreign currency. The precise
matching of the forward contract amounts and the value of the securities
involved will not generally be possible since the future value of securities
in foreign currencies will change as a consequence of market movements in the
value of these securities between the date on which the forward contract is
entered into and the date it matures. The projection of short-term currency
market movement is extremely difficult, and the successful execution of a
short-term hedging strategy is highly uncertain. None of the Portfolios will
enter into such forward contracts or maintain a net exposure to such
contracts where the consummation of the contracts would obligate the
Portfolios to deliver an amount of foreign currency in excess of the value of
the Portfolios securities or other assets denominated in that currency.
A Portfolio's custodian will place cash, Government securities or other
liquid assets into a segregated account of the Portfolio in an amount equal
to the value of the Portfolio's total assets committed to the consummation of
forward foreign currency exchange contracts. If the value of the assets
placed in the segregated account declines, additional cash or securities will
be placed in the account on a daily basis so that the value of the account
will equal the amount of the Portfolio's commitments with respect to such
contracts.
At the maturity of a forward contract, a Portfolio may either sell the
portfolio security and make delivery of the foreign currency, or it may
retain the security and terminate its contractual obligation to deliver the
foreign currency by purchasing an "offsetting" contract with the same
currency trader obligating it to purchase, on the same maturity date, the
same amount of the foreign currency.
It is impossible to forecast the market value of a particular portfolio
security at the expiration of the contract. Accordingly, if a decision is
made to sell the security and make delivery of the foreign currency, it may
be necessary for the Portfolio to purchase additional foreign currency on the
spot market (and bear the expense of such purchase) if the market value of
the security is less than the amount of foreign currency that the Portfolio
is obligated to deliver.
If the Portfolio retains the portfolio security and engages in an
offsetting transaction, it will incur a gain or a loss (as described below)
to the extent that there has been movement in forward contract prices.
Should forward prices decline during the period between the
17
<PAGE>
Portfolios entering into a forward contract for the sale of a foreign
currency and the date it enters into an offsetting contract for the purchase
of the foreign currency, the Portfolio will realize a gain to the extent that
the price of the currency it has agreed to sell exceeds the price of the
currency it has agreed to purchase. Should forward prices increase, the
Portfolio will suffer a loss to the extent that the price of the currency it
has agreed to purchase exceeds the price of the currency it has agreed to
sell.
Forward contracts are not traded on regulated commodities exchanges.
There can be no assurance that a liquid market will exist when a Portfolio
seeks to close out a forward currency position, and in such an event, a
Portfolio might not be able to effect a closing purchase transaction at any
particular time. In addition, a Portfolio entering into a forward foreign
currency contract incurs the risk of default by the counter party to the
transaction. The CFTC has indicated that it may in the future assert
jurisdiction over certain types of forward contracts in foreign currencies
and attempt to prohibit certain entities from engaging in such foreign
currency forward transactions.
Although the Portfolios value their assets daily in terms of U.S.
dollars, they do not intend physically to convert their holdings of foreign
currencies into U.S. dollars on a daily basis. They will do so from time to
time, and investors should be aware of the costs of currency conversion.
Although foreign exchange dealers do not charge a fee for conversion, they do
realize a profit based on the difference (the "spread") between the prices at
which they are buying and selling various currencies. Thus, a dealer may
offer to sell a foreign currency to a Portfolio at one rate, while offering a
lesser rate of exchange should the Portfolio desire to resell that currency
to the dealer.
INVESTMENT RESTRICTIONS
Each Portfolio's investment objective as set forth under "Investment
Objectives and Policies" in the Prospectus, together with the investment
restrictions set forth below, are, fundamental and may not be changed with
respect to any Portfolio without the approval of a majority of the
outstanding voting shares of that Portfolio. The vote of a majority of the
outstanding voting securities of a Portfolio means the vote, at an annual or
special meeting, of the lesser of (a) 67% or more of the voting securities
present at such meeting, if the holders of more than 50% of the outstanding
voting securities of such Portfolio are present or represented by proxy; or
(b) more than 50% of the outstanding voting securities of such Portfolio.
None of the Portfolios will:
(1) Make an investment unless, when considering all its other
investments, 75% of the value of a Portfolio's assets would consist of
cash, cash items, obligations of the United States government, its
agencies or instrumentalities, securities of other investment companies,
and other securities. For purposes of this restriction, "other securities"
are
18
<PAGE>
limited for each issuer to not more than 5% of the value of a
Portfolio's assets and to not more than 10% of the issuer's outstanding
voting securities held by the Fulcrum Trust as a whole. Some uncertainty
exists as to whether certain of the types of bank obligations in which a
Portfolio may invest, such as certificates of deposit and bankers'
acceptances, should be classified as "cash items" rather than "other
securities" for purposes of this restriction, which is a diversification
requirement under the 1940 Act. Interpreting most bank obligations as
"other securities" limits the amount a Portfolio may invest in the
obligations of any one bank to 5% of its total assets. If there is an
authoritative decision that any of these obligations are not "securities"
for purposes of this diversification test, this limitation would not apply
to the purchase of such obligations.
(2) Invest in a security if more than 25% of its total assets (taken
at market value at the time of such investment) would be invested in the
securities of issuers in any particular industry, except (a) that this
restriction does not apply to securities issued or guaranteed by the
U.S. Government or its agencies or instrumentalities (or repurchase
agreements with respect thereto), and to securities or obligations
issued by banks, as permitted by the SEC; and (b) that the Global
Interactive/Telecomm Portfolio may invest more than 25% of its total
assets in the public utilities industry and may invest more than 25% of
its total assets in the telecommunications industry.
(3) Purchase or sell real estate, except that a Portfolio may invest
in securities secured by real estate or real estate interests or issued by
companies in the real estate industry or which invest in real estate or
real estate interests;
(4) Buy or sell commodities or commodity contracts, except that the
Portfolio may purchase and sell futures contracts and related options,
foreign currency, forward foreign currency exchange contracts, and gold
and other precious metals.
(5) Purchase securities on margin (except for use of short-term
credit necessary for clearance of purchases and sales of portfolio
securities), except a Portfolio engaged in transactions in options,
futures, and options on futures may make margin deposits in connection
with those transactions, except that effecting short sales will be
deemed not to constitute a margin purchase for purposes of this
restriction.
(6) Lend any funds or other assets, except that a Portfolio may,
consistent with its investment objective and policies:
(a) invest in debt obligations, even though the purchase of such
obligations may be deemed to be the making of loans;
(b) enter into repurchase agreements; and
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<PAGE>
(c) lend its portfolio securities in accordance with applicable
guidelines established by the Board of Trustees;
(7) Issue senior securities, except insofar as a Portfolio may be
deemed to have issued a senior security by reason of borrowing money in
according with that Portfolio's borrowing policies, or in connection
with any repurchase agreement, and except, for purposes of this
investment restriction, collateral or escrow arrangements with respect
to the making of short sales, purchase or sale of futures contracts or
related options, purchase or sale of forward currency contracts, writing
of options, and collateral arrangements with respect to margin or other
deposits respecting futures contracts, related options, and forward
currency contracts are not deemed to be an issuance of a senior security;
(8) Act as an underwriter of securities of other issuers, except,
when in connection with the disposition of portfolio securities, a
Portfolio may be deemed to be an underwriter under the federal
securities laws; and
(9) Borrow money or pledge, mortgage, or hypothecate its assets,
except that a Portfolio may: (a) borrow from banks, but only if
immediately after each borrowing and continuing thereafter there is
asset coverage of 300%; and (b) enter into reverse repurchase agreements
and transactions in options, futures, options on futures, and forward
currency contracts.
20
<PAGE>
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
Set forth below is a list of the Trustees of the Trust, their business
addresses, and principal occupations during the past five years:
<TABLE>
<CAPTION>
Principal Occupations During
Name and Address Position with the Trust Past Five Years
---------------- ----------------------- ---------------
<S> <C> <C>
George J. Sullivan, Jr. Chairman of the Board; Chief Executive Officer, Newfound
Newfound Consultants, Inc. c/o c3 President Consultants, Inc. (financial consulting),
260 Franklin Street Suite 260 1995-present; Chief Operating Officer,
Boston, MA 02110 Noble Partners, L.P. (investment advisory
services), 1991-1995.
Tom N. Dallape Trustee; Commercial Land Broker, The
18881 Von Karman Avenue Vice President Hoffman Company (Partner since
Suite 1225 January 1997; Senior Associate prior to
Irvine, CA 92612 January 1997).
Gordon Holmes Trustee Lecturer and Executive in Residence,
Boston University School Boston University, 1997-present; Certified
of Management Public Accountant and Partner with Tofias, Fleishman,
595 Commonwealth Avenue Shapiro and Co., P.C., prior to 1997.
Boston, MA 02215
</TABLE>
Set forth below is a list of the Officers of the Trust, their business
addresses, and principal occupations during the past five years:
<TABLE>
<CAPTION>
Principal Occupations During
Name and Address Position with the Trust Past Five Years
---------------- ----------------------- ---------------
<S> <C> <C>
David J. Mueller Vice President Vice President, First Allmerica
440 Lincoln Street Financial Life Insurance Company
Worcester, MA 01653 since 1996; Assistant Vice
President, First Allmerica 1995-
1996; Business Analyst, First
Allmerica 1993-1995; Manager,
Coopers & Lybrand 1987-1993
Lisa M. Coleman Vice President Vice President of Allmerica Asset
440 Lincoln Street Management, Inc. since 1994; Deputy
Worcester, MA 01653 Manager at Brown Brothers Harriman,
1989-1994
Stephen W. Bright Vice President Vice President of Allmerica Asset
440 Lincoln Street Management, Inc. since 1996; Client
Worcester, MA 01653 Relationship Manager, Connecticut Mutual,
1994-1995; Investment Officer, Travelers,
1986-1994
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Principal Occupations During
Name and Address Position with the Trust Past Five Years
---------------- ----------------------- ---------------
<S> <C> <C>
Thomas P. Cunningham Treasurer Investment Product Manager, First
440 Lincoln Street Allmerica Financial Life
Worcester, MA 01653 Insurance Company since March
1996; Vice President, First Data
Investor Services Group, Inc.
1994-1995; Vice President,
Fidelity Investments 1990-1993
George M. Boyd Secretary Counsel, First Allmerica
440 Lincoln Street Financial Life Insurance Company
Worcester, MA 10653 since January 1997; Director,
Mutual Fund Administration -
Legal and Regulatory, Investors
Bank and Trust Company 1995-1996;
Vice President and Counsel, 440
Financial Group and First Data
Investor Services Group 1992-1995
Joseph W. MacDougall, Jr. Assistant Secretary Vice President and Associate General
440 Lincoln Street Counsel, First Allmerica Financial
Worcester, MA 01653 Life Insurance Company, 1986-present
</TABLE>
None of the trustees or officers directly owns shares of the Portfolios.
In addition, as of the date of this Statement of Additional Information, the
Trustees and Officers in the aggregate
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<PAGE>
owned variable contracts that entitled them to give voting instructions with
respect to less than one percent of the outstanding shares of the Portfolios.
Trustees other than those affiliated with the Manager receive $1,500 for
each Board meeting and are reimbursed for any expenses incurred in attending
such meetings or otherwise in carrying out their responsibilities as trustees.
SERVICE PROVIDERS
For information about the custodian and transfer agent, and the
principal underwriter, see the prospectus.
For 1996, the Value Portfolio accrued fees to 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 $947, of which the Portfolio paid PAI $53. PAI paid Tremont $53.
For 1996, the Growth Portfolio accrued fees to PAI of $129, of which the
Portfolio paid PAI $35. PAI paid Tremont $32. For 1997, the Growth
Portfolio accrued fees to PAI of $838, of which the Portfolio paid PAI $271.
PAI paid Tremont $271.
For 1996, the International Growth Portfolio accrued fees to PAI of $67,
of which the Portfolio paid PAI $17. PAI paid Tremont $17. For 1997, the
International Growth Portfolio accrued fees to PAI of $1,848, of which the
Portfolio paid PAI $524. PAI paid Tremont $524.
For 1996, the Strategic Income Portfolio accrued fees to PAI of
$1525, of which the Portfolio paid PAI $634. PAI paid Tremont $381. For
1997, the Strategic Income Portfolio accrued fees to PAI of $1,508, of
which the Portfolio paid PAI $432. PAI paid Tremont $432.
For 1996, the Global Interactive/Telecomm Portfolio accrued fees to PAI
of $798, of which the Portfolio paid PAI $321. PAI paid Tremont $200. For
1997, the Global Interactive/Telecomm Portfolio accrued fees to PAI of $810,
of which the Portfolio paid PAI $24. PAI paid Tremont $24.
For 1996 the Portfolios paid the following fees to the Portfolio
Managers: Value ($4,127); Growth ($517); International Growth ($269);
Strategic Income ($6,097); Global Interactive/Telecomm ($3,193). For 1997
the Portfolios paid the following fees to the Portfolio Managers: Value
($3,787); Growth ($3,354); International Growth ($7,394); Strategic
Income ($6,030); Global Interactive/Telecomm ($3,240).
23
<PAGE>
PricewaterhouseCoopers LLP, 250 W. Pratt Street, Baltimore, MD 21201,
serves as independent accountants for the Trust.
Investors Bank & Trust Company ("IBT"), 200 Clarendon Street, Boston,
Massachusetts 02116 provides fund accounting and transfer agency services.
The fee for each Portfolio is based on an annual rate of 0.05% of net assets
for the first $600 million in net assets and an annual rate of 0.03% of net
assets for net assets in excess of $600 million. In addition, each Portfolio
will reimburse IBT for out-of-pocket expenses such as pricing services.
There is currently a minimum annual fee of $48,500 per Portfolio. For fund
accounting services during 1996, each Portfolio paid $35,000 to IBT. For
fund accounting and transfer agency services during 1997, each Portfolio paid
$49,459 to IBT.
PRINCIPAL SHAREHOLDERS
Shares of the Portfolios may be sold only to: (1) life insurance company
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. Listed below are the
approximate percentage ownerships as of August 14, 1998 for those
shareholders of record owing 5% or more of the outstanding shares of a
Portfolio. For information about voting rights, see "Voting Rights" in the
prospectus.
Fulcrum Separate Account
of Allmerica Financial Life Insurance and Annuity Company,
440 Lincoln Street, Worcester, MA 01653
Value Portfolio 86.82%
-----
Growth Portfolio 92.39%
-----
International Growth Portfolio 96.56%
-----
Strategic Income Portfolio 95.04%
-----
Global Interactive/Telecomm Portfolio 75.34%
-----
Fulcrum Separate Account
of First Allmerica Financial Life Insurance Company,
440 Lincoln Street, Worcester, MA 01653
Value Portfolio 10.11%
-----
Growth Portfolio 7.36%
-----
Strategic Income Portfolio 5.00%
-----
Global Interactive/Telecomm Portfolio 12.85%
-----
GAMCO Investors, Inc.
One Corporate Center, Rye, NY 10580
Global Interactive/Telecomm Portfolio 11.41%
-----
PORTFOLIO TRANSACTIONS AND BROKERAGE
INVESTMENT DECISIONS
Investment decisions for each Portfolio are made by the Portfolio
Manager of each Portfolio. Each Portfolio Manager has investment advisory
clients other than the Portfolio. A particular security may be bought or
sold by a Portfolio Manager for certain clients even though it could have
been bought or sold for other clients at the same time. It also sometimes
happens that two or more clients simultaneously purchase or sell the same
security, in which event each day's transactions in such security are,
insofar as possible, allocated between such clients in a manner deemed fair
and reasonable by the Portfolio Manager. Although there is no specified
formula for allocating such transactions, the various allocation methods used
by the Portfolio Manager, and the results of such allocations, are subject to
periodic review by the Trust's Manager and Board of Trustees. There may be
circumstances when purchases or sales of portfolio securities for one or more
clients will have an adverse effect on other clients.
BROKERAGE AND RESEARCH SERVICES
Each Portfolio Manager is responsible for the selection of brokers and
dealers to effect that Portfolio's transactions and the negotiation of brokerage
commissions, if any. Transactions on a stock exchange in equity securities will
be executed primarily through brokers who will receive a commission paid by the
Portfolio. In the United States, commissions are usually negotiated; in other
countries, the commissions are usually fixed. Equity securities traded in the
over-the-counter ("OTC") markets are generally traded on a "net" basis with a
dealer acting as principal for its own account without a stated commission,
although the price of the security usually includes a profit to the dealer in
the form of the spread between the bid and asked prices. In some instances, the
Portfolio Managers may execute OTC transactions on an agency basis through a
broker who is not a market marker in the particular security, and in those
transactions
24
<PAGE>
the Portfolio will also pay a brokerage commission. Fixed income securities
are generally traded on a "net" basis. In underwritten offerings, securities
are purchased at a fixed price that includes an amount of compensation to the
underwriter, generally referred to as the underwriter's concession or
discount. On occasion, certain of these securities may be purchased directly
from an issuer, in which case neither commissions nor discounts are paid.
In purchasing and selling securities, it is the policy of each Portfolio
Manager to seek the best execution for the Portfolio taking into account such
factors as price (including the applicable brokerage commission or dollar
spread), size of order, the nature of the market for the security, the timing
of the transaction, the reputation, experience and financial stability of the
broker-dealer involved, the quality of the service, the difficulty of the
execution, the operational facilities of the firms involved, and the firm's
risk in positioning a block of securities.
Notwithstanding the above, under certain conditions, the Portfolios are
authorized to pay higher brokerage commissions in return for brokerage and
research services. A Portfolio Manager may cause a Portfolio to pay a
broker-dealer who furnishes brokerage and/or research services a commission
or price for executing a transaction that is in excess of the commission or
price another broker would have received for executing the transaction if it
is determined that such commission or price is reasonable in relation to the
value of the brokerage and/or research services which have been provided. In
some cases, research services are generated by third parties, but are
provided to the Portfolio Manager or through broker-dealers.
The Portfolio Managers may receive a wide range of research services
from broker-dealers, including information on securities markets, the
economy, individual companies, statistical information, accounting and tax
law interpretations, technical market action, pricing and appraisal services,
and credit analyses. Research services may be in the form of written
reports, telephone contacts, personal meetings with security analysts,
corporate and industry spokespersons, economists, academicians, and
government representatives, and access to various computer-generated data.
Research services received from broker-dealers are supplemental to each
Portfolio Manager's own research efforts and, when utilized, are subject to
internal analysis before being incorporated into the investment process.
In allocating brokerage, a Portfolio Manager may periodically assess the
contribution of the brokerage and research services provided by
broker-dealers, and allocate a portion of the brokerage business of its
clients on the basis of these assessments. In addition, broker-dealers
sometimes suggest a level of business they would like to receive in return
for the various brokerage and research services they provide. Actual
brokerage received by any firm may be less than the suggested allocations,
but can (and often does) exceed the suggestions because total brokerage is
allocated on the basis of all the considerations described above. Net prices
and
25
<PAGE>
commissions are periodically reviewed to determine whether they are
reasonable in relation to the services provided. In some instances, the
Portfolio Managers receive research services they might otherwise have had to
perform for themselves. The research services provided by broker-dealers can
be useful to the Portfolio Managers in serving other clients, as well as the
Portfolios.
Paying commission amounts greater than otherwise available to obtain
research services poses potential conflicts of interest for the Portfolio
Manager. The Portfolio Manager may have an incentive to pay increased
commissions to obtain research services instead of paying for those services
from its own operating revenues. In addition, the Portfolio Manager may have
an incentive to select a broker-dealer based on the research services it
provides rather than the quality of trade execution. PAI and the Trust Board
will monitor the Portfolio Managers' use of soft dollar arrangements.
GAMCO, the Portfolio Manager for the Value and Global
Interactive/Telecomm Portfolios, uses an affiliated broker-dealer, Gabelli &
Company, Inc., for most of its transactions. GAMCO is not authorized to pay
higher brokerage commissions to Gabelli & Company, Inc. in return for
research services.
During 1996, the Value Portfolio paid total
commissions of $5,086. No commissions were paid to brokers because of
research services provided to the Portfolio Manager pursuant to any agreement
or internal allocation procedure. All commissions were paid to Gabelli &
Company, Inc., a broker affiliated with the Portfolio Manager. During 1997,
the Value Portfolio paid total commissions of $19,112. No commissions were
paid to brokers because of research services provided to the Portfolio
Manager pursuant to any agreement or internal allocation procedure. $17,367
of commissions (90.9% of total commissions) were paid to Gabelli & Company,
Inc., a broker affiliated with the Portfolio Manager. Those commissions paid
to Gabelli & Company,
26
<PAGE>
Inc. related to transactions representing 91.5% of the aggregate dollar amount
of transactions involving payment of commissions.
During 1996, the Growth Portfolio paid total commissions of $2,514.
During 1997, the Growth Portfolio paid total commissions of $36,181. All
commissions were paid to brokers because of research services provided to the
Portfolio Manager that managed the Portfolio during 1996 and 1997. No
commissions were paid to brokers affiliated with the Trust or the Portfolio
Manager.
During 1996, the International Growth Portfolio paid total commissions
of $516. During 1997, the International Growth Portfolio paid total
commissions of $10,780. No commissions were paid to brokers because of
research services provided to the Portfolio Manager pursuant to any agreement
or internal allocation procedure. No commissions were paid to brokers
affiliated with the Trust or the Portfolio Manager.
The Strategic Income Portfolio did not pay any commissions in
1996 or 1997.
During 1996, the Global Interactive/Telecomm Portfolio paid total
commissions of $3,205. During 1997, the Global Interactive/Telecomm
Portfolio paid total commissions of $5,693. No commissions were paid to
brokers because of research services provided to the Portfolio Manager
pursuant to any agreement or internal allocation procedure. All commissions
were paid to Gabelli & Company, Inc., a broker affiliated with the Portfolio
Manager.
PERFORMANCE INFORMATION
The Trust may, from time to time, include the total return of the
Portfolios in advertisements or sales literature.
Quotations of average annual total return for a Portfolio will be
expressed in terms of the average annual compounded rate of return of a
hypothetical investment in the Portfolio over certain periods that will
include periods of one, five, and ten years (or, if less, up to the life of
the Portfolio), calculated pursuant to the following formula:
n
P(1+T) = ERV (where P = a hypothetical initial payment of $1,000, T = the
average annual total return, n = the number of years, and ERV = the ending
redeemable value of a hypothetical $1,000 payment made at the beginning of
the period). Quotations of total return may also be shown for other periods.
All total return figures reflect the deduction of a proportional share of
Portfolio expenses on an annual basis, and assume that all dividends and
distributions are reinvested when paid.
AVERAGE ANNUAL RETURNS are calculated by determining the change in value of a
hypothetical investment in the Portfolio over a stated period, and
calculating the annually compounded percentage rate that would have produced
the same result if the rate of growth or decline in value has been constant
over the period. Average annual returns covering periods of less than one
year are calculated by determining the Portfolio's total return for the
period, extrapolating that return for a full year, and stating the result as
an annual return. Because this method assumes that performance will remain
constant for the entire year when in fact it is unlikely that performance
will remain constant, average annual returns for a partial year must be
viewed as strictly theoretical information.
INVESTORS ALSO SHOULD BE AWARE THAT A PORTFOLIO'S PERFORMANCE IS NOT CONSTANT
OVER TIME, BUT VARIES FROM YEAR TO YEAR. AVERAGE ANNUAL RETURN REPRESENTS
AVERAGED FIGURES AS OPPOSED TO THE ACTUAL PERFORMANCE OF THE PORTFOLIO.
A Portfolio also may quote cumulative total returns which reflect the simple
change in value of an investment over a stated period. Average annual total
returns and cumulative total returns may be quoted as a percentage or as a
dollar amount. They may be calculated for a single investment, for a series
of investments or for a series of redemptions over any time period. Total
returns may be broken down into their components of income and capital in
order to show their respective contributions to total return. Performance
information may be quoted numerically or in a table, graph or similar
illustration.
YIELDS OF THE PORTFOLIOS
The 30-day (or one month) standard yields of the Portfolios are calculated as
follows:
6
YIELD = 2[(a - b + 1) - 1)]
-----
cd
Where: a = dividends and interest earned by a Portfolio during the period;
b = expenses accrued for the period (not of reimbursements);
c = average daily number of shares outstanding during the period
entitled to receive dividends; and
d = maximum offering price per share on the last day of the period.
For the purpose of determining net investment income earned during the period
(variable "a" in the formula), dividend income on equity securities held by a
Portfolio is recognized by accruing 1/360 of the stated dividend rate of the
security each day that the security is in the Portfolio. Except as noted
below, interest earned on debt obligations held by a Portfolio is calculated
by computing the yield to maturity of each obligation based on the market
value of the obligation (including actual accrued interest) at the close of
business on the last business day of each month, or, with respect to
obligations purchased during the month, the purchase price (plus actual
accrued interest) and dividing the result by 360 and multiplying the quotient
by the market value of the obligation (including actual accrued interest) in
order to determine the interest income on the obligation for each day of the
subsequent month that the obligation is held by the Portfolio. For purposes
of this calculation, it is assumed that each month contains 30 days. The
maturity of an obligation with a call provision is the next call date on
which the obligation reasonably may be expected to be called or, if none, the
maturity date. With respect to debt obligations purchased at a discount or
premium, the formula generally calls for amortization of the discount or
premium. The amortization schedule will be adjusted monthly to reflect
changes in the market value of such debt obligations. Expenses accrued for
the period (variable "b" in the formula) include all recurring fees charged
by a Portfolio to all shareholder accounts in proportion to the length of the
base period and the Portfolio's mean (or median) account size. Undeclared
earned income will be subtracted from the offering price per share (variable
"d" in the formula).
27
<PAGE>
Performance information for a Portfolio may be compared, in
advertisements, sales literature, and reports to shareholders to: (i) the
Standard & Poor's 500 Stock Index ("S & P 500"), the Dow Jones Industrial
Average ("DJIA"), the Lehman Brothers Government Bond Index, the Donoghue
Money Market Institutional Averages, the Lehman Brothers Government Corporate
Index, the Salomon High Yield Index, or other indices that measure
performance of a pertinent group of securities, (ii) other groups of mutual
funds tracked by Lipper Analytical Services, a widely used independent
research firm which ranks mutual funds by overall performance, investment
objectives, and assets, or tracked by other services, companies,
publications, or persons who rank mutual funds on overall performance or
other criteria; and (iii) the Consumer Price Index (measure for inflation) to
assess the real rate of return from an investment in the Portfolio. Unmanaged
indices may assume the reinvestment of dividends but generally do not reflect
deductions for administrative and management costs and expenses.
Performance information for any Portfolio reflects only the performance
of a hypothetical investment in the Portfolio during the particular time
period on which the calculations are based. Performance information should
be considered in light of the Portfolio's investment objective or objectives
and investment policies and the market conditions during the given time
period. Performance information should not be considered as a representation
of what may be achieved in the future.
PERFORMANCE INFORMATION FOR PERIOD ENDED DECEMBER 31, 1997
Set forth below are average annual total return information for the Value
Portfolio, Growth Portfolio, International Growth Portfolio, Strategic Income
Portfolio and Global Interactive/Telecomm Portfolio for the 1 year and/or
since inception periods ended December 31, 1997 and yield for the Strategic
Income Portfolio for the 30-day period ended December 31, 1997.
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1 YEAR PERIOD* SINCE INCEPTION**
------------- -----------------
<S> <C> <C>
Value Portfolio 32.36% 24.55%
Growth Portfolio 10.24% 9.73%
International Growth Portfolio -5.25% -0.19%
Strategic Income Portfolio 0.60% 0.53%
Global Interactive/Telecomm Portfolio 40.24% 19.61%
</TABLE>
* The total return for the one-year period ended December 31, 1997 reflects
the impact of an expense reimbursement totaling $493,393, allocated among
each Portfolio.
** The total return since inception includes the impact of expense
reimbursements totaling $662,947 and a capital infusion totaling $228,823,
allocated to each Portfolio.
The Value Portfolio, Growth Portfolio, Strategic Income Portfolio and Global
Interactive/Telecomm Portfolio began business operations on February 1, 1996.
The International Growth Portfolio began operations on March 26, 1996.
YIELD FOR 30 DAY PERIOD
-----------------------
ENDED DECEMBER 31, 1997
-----------------------
(UNAUDITED)
Strategic Income Portfolio 3.83%
Quotations of total return for a Portfolio will not take into account
charges and deductions against any Variable Accounts to which the Portfolio's
shares are sold. Performance for the Variable Accounts will therefore be
lower than performance of the Portfolios. Performance information of the
Portfolios will be accompanied by performance information for the applicable
Variable Account.
TAXATION
The requirements applicable to a Portfolios' qualification as a
regulated investment company may limit the extent to which a Portfolio will
be able to engage in transactions in options, futures contracts or forward
contracts.
Income received by a Portfolio from sources within a foreign country may
be subject to withholding and other taxes imposed by that country. Tax
conventions between certain countries and the U.S. may reduce or eliminate
such taxes.
To comply with regulations under Section 817(h) of the Code, each
Portfolio of the Trust will be required to diversify its investments so that
on the last day of each quarter of a calendar year, no more than 55% of the
value of its assets is represented by any one investment, no
28
<PAGE>
more than 70% is represented by any two investments, no more than 80% is
represented by any three investments, and no more than 90% is represented by
any four investments.
Generally, securities of a single issuer are treated as one investment
and obligations of each U.S. Government agency and instrumentality (such as
the Government National Mortgage Association) are treated for purposes of
Section 817(h) as issued by separate issuers.
In connection with the issuance of the diversification regulations, the
Treasury Department announced that it would issue future regulations or
rulings addressing the circumstances in which a variable contract owner's
control of the investments of a separate account may cause the contract
owner, rather than the insurance company, to be treated as the owner of the
assets held by the separate account. If the variable contract owner is
considered the owner of the securities underlying the separate account,
income and gains produced by those securities would be included currently in
the contract owner's gross income. Among the areas in which Treasury has
indicated informally that it is concerned that there may be too much contract
owner control is where a mutual fund (or Portfolio) underlying a separate
account invests solely in securities issued by companies in a specific
industry.
These future rules and regulations proscribing investment control may
adversely affect the ability of certain Portfolios of the Trust to operate as
described in this Prospectus. There is, however, no certainty as to what
standards, if any, Treasury will ultimately adopt.
In the event that unfavorable rules or regulations are adopted, there
can be no assurance that the Portfolios will be able to operate as currently
described in the Prospectus, or that a Portfolio will not have to change its
investment objective or objectives, investment policies, or investment
restrictions. While a Portfolios' investment objective is fundamental and
may be changed only by a vote of a majority of its outstanding shares, the
Trustees have reserved the right to modify the investment policies of a
Portfolio as necessary to prevent any such prospective rules and regulations
from causing the Variable Contract Owners to be considered the owners of the
assets underlying the Variable Accounts.
OTHER INFORMATION
CAPITALIZATION
The Trust is a Massachusetts business trust established under an
Agreement and Declaration of Trust dated September 8, 1993. Effective
September 1, 1998, the Trust changed its name to the Fulcrum Trust. The Trust
is currently offering to Separate Accounts shares of five different "series"
or Portfolios. Each Portfolio is, for investment purposes, a separate
investment fund, and each issues a separate class of capital stock with a par
value of $0.001 per share. Each share of stock issued with respect to a
Portfolio has a pro
29
<PAGE>
rata interest in the assets of that Portfolio and has no interest in the
assets of any other Portfolio. Each Portfolio bears its own liabilities and
also its proportionate share of the general liabilities of the Trust. This
Statement of Additional Information discusses the initial five Portfolios,
which issue the following five shares: Value Portfolio shares, Growth
Portfolio shares, International Growth Portfolio shares, Strategic
Income Portfolio shares, and Global Interactive/Telecomm Portfolio shares.
The Agreement and Declaration of Trust established three other
Portfolios, and the Board of Trustees may establish additional Portfolios
(with different investment objectives and policies) at any time in the
future. The Trust has sold 1,000 shares of one of those Portfolios (the
Balanced Opportunity Portfolio) to provide part of the Trust's initial
capitalization, but the Trust is not now offering shares of that Portfolio to
Separate Accounts or qualified plans. Establishment and offering of
additional Portfolios will not alter the rights of the Trust's shareholders.
When issued in accordance with the terms of the Agreement and Declaration of
Trust, shares are fully paid, redeemable, freely transferable, and
non-assessable by the Trust. Shares do not have preemptive rights or
subscription rights. In liquidation of a Portfolio of the Trust, each
shareholder is entitled to receive his or her pro rata share of the net
assets of that Portfolio.
ORGANIZATION EXPENSES
Certain of the expenses incurred by the Portfolios in connection with
its organization, its registration with the Securities and Exchange
Commission, and the public offering of its shares were advanced on behalf of
the Trust by the previous Manager. These organizational expenses are
deferred and amortized by the Portfolio over a period not exceeding 60 months
from the date of the Portfolio's commencement of operations.
REGISTRATION STATEMENT
This Statement of Additional Information and the prospectus do not
contain all the information included in the Trust's registration statement
filed with the Securities and Exchange Commission under the Securities Act of
1933 with respect to the securities offered by the prospectus. Certain
portions of the registration statement have been omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. The
registration statement, including the exhibits filed therewith, may be
examined at the offices of the Securities and Exchange Commission in
Washington, D.C.
Statements contained herein and in the prospectus as to the contents of
any contract or other documents referred to are not necessarily complete,
and, in each instance, reference is made to
30
<PAGE>
the copy of such contract or other documents filed as an exhibit to the
registration statement, each such statement being qualified in all respects
by such reference.
31
<PAGE>
FINANCIAL STATEMENTS
32
<PAGE>
THE PALLADIAN TRUST
STATEMENTS OF ASSETS AND LIABILITIES
AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
GLOBAL GLOBAL
INTERNATIONAL STRATEGIC INTERACTIVE/
VALUE GROWTH GROWTH INCOME TELECOMM
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments:
At identified cost. . . . . . . . . . . . . . . . $4,548,152 $3,928,673 $3,320,007 $2,219,986 $1,836,313
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
At value. . . . . . . . . . . . . . . . . . . . . $5,095,033 $4,205,105 $3,044,332 $2,241,944 $2,234,365
Cash (Interest bearing account). . . . . . . . . . . 1,722,459 124,945 82,734 582,113 905,389
Foreign Cash . . . . . . . . . . . . . . . . . . . . ---- ---- 3,970 16,965 ----
Receivables:
Interest and dividends . . . . . . . . . . . . . 11,169 553 3,822 68,710 7,184
Investments sold . . . . . . . . . . . . . . . . 61,510 20,119 ---- ---- ----
Forward foreign exchange contracts to buy . . . . ---- ---- ---- 1,077,624 ----
Forward foreign exchange contracts to sell . . . ---- ---- 3,969 701,879 ----
Expense reimbursements . . . . . . . . . . . . . 146,510 123,531 96,868 121,760 99,327
Shares of beneficial interest purchased . . . . . 5,115 6,106 7,304 ---- 8,731
Unamortized organization costs . . . . . . . . . . . 14,678 14,678 15,330 ---- 14,678
------------- ------------- ------------- ------------- -------------
Total Assets . . . . . . . . . . . . . . . . . . $7,056,474 $4,495,037 $3,258,329 $4,810,995 $3,269,674
------------- ------------- ------------- ------------- -------------
LIABILITIES
Payables:
Investments purchased . . . . . . . . . . . . . . $429,049 ---- $21,968 $282,738 $230,802
Forward foreign exchange contracts to buy . . . . ---- ---- ---- 1,119,231 ----
Forward foreign exchange contracts to sell . . . ---- ---- 3,969 682,582 ----
Shares of beneficial interest repurchased . . . . ---- $322 91 2,044 269
Accrued expenses . . . . . . . . . . . . . . . . 42,773 31,184 25,299 24,462 22,162
------------- ------------- ------------- ------------- -------------
Total Liabilities . . . . . . . . . . . . . . . . 471,822 31,506 51,327 2,111,057 253,233
------------- ------------- ------------- ------------- -------------
NET ASSETS . . . . . . . . . . . . . . . . . . . . . $6,584,652 $4,463,531 $3,207,002 $2,699,938 $3,016,441
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
NET ASSETS CONSIST OF:
Undistributed net investment income / (loss) . . . $23 ---- ($94) $1,131 ($89)
Net unrealized appreciation (depreciation)
of investments. . . . . . . . . . . . . . . . . . 546,881 $276,432 (275,675) (27,404) 398,052
Accumulated net realized gain / (loss) . . . . . . . 15,203 (381,286) (7,211) 9,981 (9,487)
Capital shares . . . . . . . . . . . . . . . . . . . 6,022,545 4,568,385 3,489,982 2,716,230 2,627,965
------------- ------------- ------------- ------------- -------------
Total Net Assets. . . . . . . . . . . . . . . . . $6,584,652 $4,463,531 $3,207,002 $2,699,938 $3,016,441
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Shares of beneficial interest outstanding . . . . 487,816 373,580 329,943 273,302 226,425
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
NET ASSET VALUE, offering price and redemption
price per share of beneficial interest
outstanding . . . . . . . . . . . . . . . . . . . $13.50 $11.95 $9.72 $9.88 $13.32
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
1
<PAGE>
THE PALLADIAN TRUST
STATEMENTS OF OPERATIONS
FOR THE PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
GLOBAL GLOBAL
INTERNATIONAL STRATEGIC INTERACTIVE/
VALUE GROWTH GROWTH INCOME TELECOMM
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends (Net of foreign withholding taxes of
$1,577 and and $75 for the International Growth
and Global Interactive / Telecomm) portfolio. . . $21,839 $2,085 $20,929 ---- $11,128
Interest . . . . . . . . . . . . . . . . . . . . . . 46,168 13,171 22,778 $99,446 18,494
------------- ------------- ------------- ------------- -------------
Total Investment Income . . . . . . . . . . . . . 68,007 15,256 43,707 99,446 29,622
------------- ------------- ------------- ------------- -------------
EXPENSES
Amortization of organization costs . . . . . . . . . 4,756 4,756 4,745 2,723 4,756
Auditing fees. . . . . . . . . . . . . . . . . . . . 27,405 17,688 13,814 16,269 11,764
Custodian fees . . . . . . . . . . . . . . . . . . . 14,942 23,337 12,158 9,855 6,115
Insurance. . . . . . . . . . . . . . . . . . . . . . 3,756 3,756 3,755 3,755 3,756
Legal fees . . . . . . . . . . . . . . . . . . . . . 29,957 15,799 13,131 23,766 14,339
Management and advisory fees . . . . . . . . . . . . 4,734 4,192 9,242 7,538 4,050
Other. . . . . . . . . . . . . . . . . . . . . . . . 463 302 237 298 200
Portfolio accounting fees. . . . . . . . . . . . . . 49,459 49,459 49,459 49,459 49,459
Registration and filing fees . . . . . . . . . . . . 6,176 4,028 3,155 3,969 2,672
Shareholders' expenses . . . . . . . . . . . . . . . 463 302 237 298 200
Trustees' fees and expenses. . . . . . . . . . . . . 8,518 3,495 2,924 7,746 4,389
------------- ------------- ------------- ------------- -------------
Total Expenses. . . . . . . . . . . . . . . . . . 150,629 127,114 112,857 125,676 101,700
Less expense reimbursements. . . . . . . . . . . . . (123,916) (108,474) (84,536) (95,354) (81,113)
------------- ------------- ------------- ------------- -------------
Net Expenses. . . . . . . . . . . . . . . . . . . 26,713 18,640 28,321 30,322 20,587
------------- ------------- ------------- ------------- -------------
NET INVESTMENT INCOME / (LOSS) . . . . . . . . . . . 41,294 (3,384) 15,386 69,124 9,035
------------- ------------- ------------- ------------- -------------
REALIZED AND UNREALIZED GAIN /
(LOSS) ON INVESTMENTS:
Net realized gain / (loss) from:
Security transactions . . . . . . . . . . . . . . 384,615 (374,694) (3,799) (25,984) 142,691
Forward foreign exchange contracts. . . . . . . . ---- ---- (11,495) (6,113) ----
Forward currency transactions . . . . . . . . . . ---- ---- 19,827 4,212 ----
Net change in unrealized appreciation/
(depreciation) on:
Security transactions . . . . . . . . . . . . . . 494,905 267,942 (278,769) 46,407 395,112
Forward foreign exchange contracts. . . . . . . . ---- ---- ---- (21,221) ----
Foreign currency transactions . . . . . . . . . . ---- ---- (156) (16,367) 1
------------- ------------- ------------- ------------- -------------
Net realized and unrealized gain / (loss)
on investments. . . . . . . . . . . . . . . . . . 879,520 (106,752) (274,392) (19,066) 537,804
------------- ------------- ------------- ------------- -------------
NET INCREASE / (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS . . . . . . . . . . . . 920,814 (110,136) (259,006) 50,058 546,839
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
2
<PAGE>
THE PALLADIAN TRUST
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
GLOBAL GLOBAL
INTERNATIONAL STRATEGIC INTERACTIVE/
VALUE GROWTH GROWTH INCOME TELECOMM
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income / (loss) . . . . . . . . . . . $41,294 ($3,384) $15,386 $69,124 $9,035
Net realized gain / (loss) on securities,
forward foreign exchange contracts and
foreign currency transactions . . . . . . . . . . 384,615 (374,694) 4,533 (27,885) 142,691
Net unrealized gain / (loss) on securities,
forward foreign exchange contracts and
other assets and liabilities denominated
in foreign currencies . . . . . . . . . . . . . . 494,905 267,942 (278,925) 8,819 395,113
------------- ------------- ------------- ------------- -------------
Net increase / (decrease) in net assets
resulting from operations . . . . . . . . . . . . $920,814 ($110,136) ($259,006) $50,058 $546,839
Distributions to shareholders from:
Net investment income . . . . . . . . . . . . . . ($41,271) ---- ($15,480) ($29,924) ($9,124)
Net realized gain from investment
transactions. . . . . . . . . . . . . . . . . . . (369,412) ---- (8,333) (12,484) (142,691)
NET INCREASE
FROM TRANSACTIONS IN SHARES
OF BENEFICIAL INTEREST . . . . . . . . . . . . . 5,174,190 4,425,263 3,392,434 1,585,590 2,027,102
------------- ------------- ------------- ------------- -------------
NET INCREASE IN NET ASSETS . . . . . . . . . . . . . 5,684,321 4,315,127 3,109,615 1,593,240 2,422,126
NET ASSETS:
Beginning of period. . . . . . . . . . . . . . . . . 900,331 148,404 97,387 1,106,698 594,315
------------- ------------- ------------- ------------- -------------
End of period. . . . . . . . . . . . . . . . . . . . $6,584,652 $4,463,531 $3,207,002 $2,699,938 $3,016,441
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
<PAGE>
THE PALLADIAN TRUST
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE PERIOD ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
GLOBAL GLOBAL
INTERNATIONAL STRATEGIC INTERACTIVE/
VALUE GROWTH GROWTH INCOME TELECOMM
PORTFOLIO* PORTFOLIO* PORTFOLIO** PORTFOLIO* PORTFOLIO*
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income / (loss) . . . . . . . . . . . ($44,718) ($29,053) ($28,209) ($20,549) ($42,738)
Net realized gain / (loss) on securities,
forward foreign exchange contracts and
foreign currency transactions . . . . . . . . . . 49,534 (6,592) 1,702 7,097 2,887
Net unrealized gain / (loss) on securities,
forward foreign exchange contracts and
other assets and liabilities denominated
in foreign currencies . . . . . . . . . . . . . . 51,976 8,490 3,249 (36,223) 2,939
------------- ------------- ------------- ------------- -------------
Net increase / (decrease) in net assets
resulting from operations . . . . . . . . . . . . 56,792 (27,155) (23,258) (49,675) (36,912)
Distributions to shareholders from:
Distribution from capital . . . . . . . . . . . . (49,534) ---- (1,702) (7,097) (2,887)
NET INCREASE
FROM TRANSACTIONS IN SHARES
OF BENEFICIAL INTEREST . . . . . . . . . . . . . 831,167 116,328 77,400 1,061,393 583,452
Capital contribution from advisor. . . . . . . . . . 51,906 49,231 34,947 52,077 40,662
------------- ------------- ------------- ------------- -------------
NET INCREASE IN NET ASSETS . . . . . . . . . . . . . 890,331 138,404 87,387 1,056,698 584,315
NET ASSETS:
Beginning of period. . . . . . . . . . . . . . . . . 10,000 10,000 10,000 50,000 10,000
------------- ------------- ------------- ------------- -------------
End of period. . . . . . . . . . . . . . . . . . . . $900,331 $148,404 $97,387 $1,106,698 $594,315
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
* COMMENCEMENT OF OPERATIONS FEBRUARY 1, 1996
** COMMENCEMENT OF OPERATIONS MARCH 26, 1996
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
<PAGE>
FINANCIAL HIGHLIGHTS
<PAGE>
<TABLE>
<CAPTION>
VALUE PORTFOLIO GROWTH PORTFOLIO
---------------------------------- -----------------------------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED
DEC. 31, 1997 DEC. 31, 1996* DEC. 31, 1997 DEC. 31, 1996*
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period . . . . $10.88 $10.00 $10.84 $10.00
------------- ------------- ------------- -------------
INCOME/(LOSS) FROM INVESTMENT
OPERATIONS:
Net investment income/(loss) . . . . . . . . 0.17(1),(4) (0.64)(1),(2) (0.02)(1),(4) (2.96)(1),(2)
Net realized and unrealized gain/
(loss) on investments. . . . . . . . . . 3.35 2.15 1.13 3.80
------------- ------------- ------------- -------------
Total from investment operations . . . . . . 3.52 1.51 1.11 0.84
------------- ------------- ------------- -------------
LESS DISTRIBUTIONS:
Net Investment Income. . . . . . . . . . . . (0.09) ---- ---- ----
Net Realized Gain from Investment. . . . . .
Transactions. . . . . . . . . . . . . . . (0.81) ---- ---- ----
Distributions form capital . . . . . . . . . ---- (0.63) ---- ----
Total distributions. . . . . . . . . . . . . (0.90) (0.63) ---- ----
------------- ------------- ------------- -------------
Net asset value, end of period . . . . . . . $13.50 $10.88 $11.95 $10.84
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Total Return . . . . . . . . . . . . . . . . 32.36%(4) 15.13%(2),(3) 10.24%(4) 8.40%(2),(3)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
RATIOS TO AVERAGE NET ASSETS/
SUPPLEMENTAL DATA:
Net assets, end of reporting period. . . . . $6,584,652 $900,331 $4,463,531 $148,404
Ratio of operating expenses to
average net assets. . . . . . . . . . . . 0.84%(4) 8.19%(2),*** 0.90%(4) 34.15%(2),***
Ratio of net investment income/(loss)
to average net assets . . . . . . . . . . 1.30%(4) (6.55%)(2),*** (0.16%)(4) (31.31%)(2),***
Portfolio turnover rate. . . . . . . . . . . 176.79% 73.63% 208.68% 580.48%
Average commission per share . . . . . . . . $0.0398 $0.0607 $0.0529 $0.0344
</TABLE>
* Commencement of operations February 1, 1996
** Commencement of operations March 26, 1996
*** Annualized
<TABLE>
<CAPTION>
INTERNATIONAL GROWTH PORTFOLIO
------------------------------------
FOR THE FOR THE
YEAR ENDED PERIOD ENDED
DEC. 31, 1997 DEC. 31, 1996**
- ---------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of period . . . . $10.33 $10.00
------------- -------------
INCOME/(LOSS) FROM INVESTMENT
OPERATIONS:
Net investment income/(loss) . . . . . . . . 0.10(1)(4) (4.16)(1)(2)
Net realized and unrealized gain/
(loss) on investments. . . . . . . . . . (0.63) 4.67
------------- -------------
Total from investment operations . . . . . . (.53) 0.51
------------- -------------
LESS DISTRIBUTIONS:
Net Investment Income. . . . . . . . . . . . (0.05) ----
Net Realized Gain from Investment. . . . . .
Transactions. . . . . . . . . . . . . . . (0.03) ----
Distributions form capital . . . . . . . . . ---- (0.18)
Total distributions. . . . . . . . . . . . . (0.08) (0.18)
------------- -------------
Net asset value, end of period . . . . . . . $9.72 $10.33
------------- -------------
------------- -------------
Total Return . . . . . . . . . . . . . . . . (5.25)(4) 5.13%(2)(3)
------------- -------------
------------- -------------
RATIOS TO AVERAGE NET ASSETS/
SUPPLEMENTAL DATA:
Net assets, end of reporting period. . . . . $3,207,002 $97,387
Ratio of operating expenses to
average net assets. . . . . . . . . . . . 1.78%(4) 67.76%(2)
Ratio of net investment income/(loss)
to average net assets . . . . . . . . . . 0.97%(4) (56.37%)(2)
Portfolio turnover rate. . . . . . . . . . . 13.02% 116.21%
Average commission per share . . . . . . . . $0.0110 $0.0101
</TABLE>
* Commencement of operations February 1, 1996
** Commencement of operations March 26, 1996
*** Annualized
6
<PAGE>
THE PALLADIAN TRUST
FINANCIAL HIGHLIGHTS
FOR THE PERIOD ENDED
<TABLE>
<CAPTION>
GLOBAL STRATEGIC INCOME PORTFOLIO**** GLOBAL INTERACTIVE/TELECOMM PORTFOLIO
------------------------------------- -------------------------------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED
DEC. 31, 1997 DEC. 31, 1996* DEC. 31, 1997 DEC. 31, 1996*
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period . . . . $9.98 $10.00 $10.00 $10.00
------------- ------------- ------------- -------------
INCOME/(LOSS) FROM INVESTMENT
OPERATIONS:
Net investment income/(loss) . . . . . . . . 0.36(1),(4) (0.19)(1),(2) 0.08(1),(4) (0.75)(1),(2)
Net realized and unrealized gain/
(loss) on investments. . . . . . . . . . (0.30) 0.23 3.95 0.80
------------- ------------- ------------- -------------
Total from investment operations . . . . . . 0.06 0.04 4.03 0.05
------------- ------------- ------------- -------------
LESS DISTRIBUTIONS:
Net Investment Income. . . . . . . . . . . . (0.11) ---- (0.04) ----
Net Realized Gain from Investment
Transactions. . . . . . . . . . . . . . . (0.05) ---- (0.67) ----
Distributions form capital . . . . . . . . . ---- (0.06) ---- (0.05)
------------- ------------- ------------- -------------
Total distributions. . . . . . . . . . . . . (0.16) (0.06) (0.71) (0.05)
------------- ------------- ------------- -------------
Net asset value, end of period . . . . . . . $9.88 $9.98 $13.32 $10.00
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Total Return . . . . . . . . . . . . . . . . 0.60%(4) 0.44%(2),(3) 40.24%(4) 0.49%(2),(3)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
RATIOS TO AVERAGE NET ASSETS/
SUPPLEMENTAL DATA:
Net assets, end of reporting period. . . . . $2,699,938 $1,106,697 $3,016,441 $594,315
Ratio of operating expenses to
average net assets. . . . . . . . . . . . 1.61%(4) 7.37%(2),*** 1.47%(4) 9.83%(2),***
Ratio of net investment income/(loss)
to average net assets . . . . . . . . . . 3.67%(4) (2.15%)(2),*** 0.64%(4) (8.32%)(2),***
Portfolio turnover rate. . . . . . . . . . . 713.04% 212.36% 114.11% 71.44%
Average commission per share . . . . . . . . n/a n/a $0.0509 $0.0659
</TABLE>
* Commencement of operations February 1, 1996
** Commencement of operations March 26, 1996
*** Annualized
**** Effective June 8, 1998, renamed Strategic Income Portfolio
- --------------------------------------------------------------------------------
1. This information was prepared using the average number of shares outstanding
during the period.
2. The total return, ratio of operating expenses and the ratio of net investment
loss for the period ended December 31, 1996 reflect the impact of an expense
reimbursement totaling $169,554, allocated to each portfolio following
stipulated criteria (See Note 10 to the financial statements). Absent the
reimbursement, net investment loss per share, and the ratios of expenses and
net investment loss to average net assets for the Value Portfolio, the Growth
Portfolio, the International Growth Portfolio, the Global Strategic Income
Portfolio and the Global Interactive /Telecomm Portfolio shares would have
been ($1.22), ($5.61), ($7.56), ($0.63) and, ($1.34), respectively, 14.13%,
63.54%, 126.26%,12.30%, and 16.45%, respectively, (12.40%), (58.37%),
(92.05%), (7.02%), and (14.82%), respectively.
3. Total return measures the change in the value of an investment for the year
indicated. For the period ended December 31, 1996 the total return includes
a capital infusion totaling $228,823 (See Note 9 to the financial statements
concerning amount allocated to each Portfolio). Absent the infusion, total
return for the Value Portfolio, the Growth Portfolio, the International
Growth Portfolio, the Global Strategic Income Portfolio and Global
Interactive /Telecomm Portfolio would have been 7.64%, (41.75%), (46.50%),
(4.49%), and (6.68%), respectively.
4. The total return, ratio of operating expenses and the ratio of net investment
loss for the period ended December 31, 1997 reflect the impact of an expense
reimbursement totaling $493,393, allocated to each portfolio following
stipulated criteria (See Note 10 to the financial statements). Absent the
reimbursement, net investment loss per share, and the ratios of expenses and
net investment loss to average net assets for the Value Portfolio, the Growth
Portfolio, the International Growth Portfolio, the Global Strategic Income
Portfolio and the Global Interactive /Telecomm Portfolio shares would have
been ($0.34), ($0.68), ($0.45), ($0.14) and, ($0.62), respectively, 4.75%,
6.12%, 7.11%, 6.68%, and 7.26%, respectively, (2.60%), (5.38%), (4.36%),
(1.39%), and (5.14%), respectively.
7
<PAGE>
THE PALLADIAN TRUST
THE VALUE PORTFOLIO
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- ------ --------
<S> <C>
COMMON STOCKS 77.4%
AEROSPACE 6.1%
1,000 Curtiss Wright Corp. . . . . . . . . . . . . . . . 36,313
5,000 Fairchild Corp. Class A * . . . . . . . . . . . . . 124,375
1,500 Sequa Corp., Class B * . . . . . . . . . . . . . . 111,750
3,000 SPS Technologies, Inc. * . . . . . . . . . . . . . 130,875
-------------
403,313
-------------
AUTOMOTIVE 8.0%
8,000 Earl Scheib, Inc. * . . . . . . . . . . . . . . . . $64,000
3,000 Echlin Inc. . . . . . . . . . . . . . . . . . . . . 108,562
500 Federal-Mogul Corp. . . . . . . . . . . . . . . . . 20,250
1,000 ITT Industries Inc. . . . . . . . . . . . . . . . . 31,375
3,000 Kollmorgen . . . . . . . . . . . . . . . . . . . . 54,937
3,000 Meritor Automotive, Inc. . . . . . . . . . . . . . 63,188
1,000 Modine MFG Co. . . . . . . . . . . . . . . . . . . 34,125
1,000 Standard Motor Products . . . . . . . . . . . . . . 22,563
4,000 Wynn's International, Inc. . . . . . . . . . . . . 127,500
-------------
526,500
-------------
BEVERAGES 3.1%
4,000 Celestial Seasonings, Inc. * . . . . . . . . . . . 126,000
1,500 Chock Full O'Nuts * . . . . . . . . . . . . . . . . 10,500
2,000 Seagram . . . . . . . . . . . . . . . . . . . . . . 64,624
-------------
201,124
-------------
BROADCASTING & CABLE 4.7%
5,000 Ackerly Communications. . . . . . . . . . . . . . . 84,688
2,000 Gray Communications Sys., Class B . . . . . . . . . 51,500
6,000 US West Media Group * . . . . . . . . . . . . . . 173,250
-------------
309,438
-------------
CHEMICAL 1.6%
2,500 Monsanto Co. . . . . . . . . . . . . . . . . . . . 105,000
-------------
CONSUMER SERVICES 4.3%
1,000 General Cigar Holdings, Inc., Class A * . . . . . . 21,312
1,500 General Cigar Holdings, Inc., Class B * . . . . . . 33,210
3,000 Hudson General Corp. . . . . . . . . . . . . . . . 144,000
1,000 H&R Block, Inc. . . . . . . . . . . . . . . . . . . 44,813
2,000 Rollins, Inc. . . . . . . . . . . . . . . . . . . . 40,500
-------------
283,835
-------------
DEPARTMENT STORES 2.3%
5,000 Neiman Marcus Group, Inc. * . . . . . . . . . . . . 151,250
-------------
8
<PAGE>
ENTERTAINMENT 11.0%
3,000 BET Holdings, Inc., Class A * . . . . . . . . . . . 163,875
2,000 Cablevision Systems Corp. * . . . . . . . . . . . . 191,500
3,000 Gaylord Entertainment . . . . . . . . . . . . . . . 95,827
1,000 Liberty Media Group, Class A * . . . . . . . . . . 36,250
1,000 Time Warner, Inc. . . . . . . . . . . . . . . . . . 62,000
8,000 Trump Hotels & Casino Resorts * . . . . . . . . . . 53,500
3,000 Viacom, Inc. * . . . . . . . . . . . . . . . . . . 122,625
-------------
725,577
-------------
FINANCIAL SERVICES 2.2%
2,000 GATX Corp. . . . . . . . . . . . . . . . . . . . . 145,125
-------------
GAMING 6.3%
5,000 ITT Corp. * . . . . . . . . . . . . . . . . . . . . 414,375
-------------
GROCERY STORES 0.7%
7,000 Bruno's Inc. * . . . . . . . . . . . . . . . . . . 14,438
1,000 Giant Food Inc. . . . . . . . . . . . . . . . . . . 33,688
-------------
48,126
-------------
INDUSTRIAL 3.0%
500 Midland Co. . . . . . . . . . . . . . . . . . . . . 31,500
7,000 Pacific Scientific Co. . . . . . . . . . . . . . . 167,875
-------------
199,375
-------------
INDUSTRIAL EQUIPMENT & SUPPLIES 0.9%
3,000 AMPCO - Pittsburgh Corp. . . . . . . . . . . . . . 58,687
-------------
LABORATORY APPARATUS 0.4%
1,000 Ametek Inc. . . . . . . . . . . . . . . . . . . . . 27,000
-------------
METALS & MINING 1.0%
2,000 Handy & Harman . . . . . . . . . . . . . . . . . . 69,000
-------------
MISCELLANEOUS 5.2%
6,000 Carter-Wallace . . . . . . . . . . . . . . . . . . 101,500
20,000 Envirosource, Inc. * . . . . . . . . . . . . . . . 60,000
2,000 Fedders Corp. Class A . . . . . . . . . . . . . . . 12,250
5,000 Trimas Corp. . . . . . . . . . . . . . . . . . . . 171,875
-------------
345,625
-------------
NEWSPAPERS / PUBLISHING 0.6%
1,000 Media General Inc., Class A . . . . . . . . . . . . 41,812
-------------
OIL & GAS 7.7%
4,000 Pennzoil. . . . . . . . . . . . . . . . . . . . . . 267,250
2,000 RPC, Inc. . . . . . . . . . . . . . . . . . . . . . 23,625
5,000 Southwest Gas Co. . . . . . . . . . . . . . . . . . 93,437
2,000 Tejas Gas Corp. / De *. . . . . . . . . . . . . . . 122,500
-------------
506,812
-------------
PAPER & PLASTIC PRODUCTS 0.9%
750 Ferro Corp. . . . . . . . . . . . . . . . . . . . . 18,234
1,200 Greif Bros. Corp. . . . . . . . . . . . . . . . . . 40,200
-------------
58,434
-------------
9
<PAGE>
PHARMACEUTICALS 0.9%
5,000 Ivax Corporation * . . . . . . . . . . . . . . . . 33,750
1,000 Twinlab Corp. * . . . . . . . . . . . . . . . . . . 24,750
-------------
58,500
-------------
RETAILING 0.8%
3,000 Lillian Vernon Corporation . . . . . . . . . . . . 49,875
-------------
TELECOMMUNICATIONS 5.7%
3,000 Centennial Cellular Corp.*. . . . . . . . . . . . . 61,500
10,000 Citizens Utilities, Class B . . . . . . . . . . . . 96,250
1,000 Frontier Corporation. . . . . . . . . . . . . . . . 24,062
1,000 Sprint - 8.25% 3/31/00 . . . . . . . . . . . . . . 44,750
3,000 Telephone & Data System . . . . . . . . . . . . . . 139,688
-------------
366,250
-------------
TOTAL INVESTMENTS (COST $4,548,152) ** 77.4% 5,095,033
- -------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (Net) 22.6% 1,489,619
- -------------------------------------------------------------------------------
NET ASSETS 100.0% $6,584,652
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
* NON-INCOME PRODUCING SECURITY
** APPROXIMATES AGGREGATE COST FOR FEDERAL TAX PURPOSES
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
10
<PAGE>
THE PALLADIAN TRUST
THE GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- ------ --------
<S> <C>
COMMON STOCKS 94.2%
APPAREL 5.4%
2,500 Gucci Group . . . . . . . . . . . . . . . . . . . . $104,687
800 Nautica Enterprises, Inc. * . . . . . . . . . . . . 18,600
3,200 North Face, Inc. * . . . . . . . . . . . . . . . . 70,400
2,000 Polo Ralph Lauren Corp. * . . . . . . . . . . . . . 48,625
-------------
242,312
-------------
BANKS & FINANCIAL SERVICES 8.4%
2,200 Amerin Corporation * . . . . . . . . . . . . . . . 61,600
550 Bank of New York - Warrants . . . . . . . . . . . . 93,087
500 BankBoston Corporation . . . . . . . . . . . . . . 46,969
1,200 Charles Schwab & Co., Inc. . . . . . . . . . . . . 50,325
2,000 Leasing Solutions, Inc. * . . . . . . . . . . . . . 47,750
1,900 Paine Webber Group, Inc. . . . . . . . . . . . . . 65,669
1,000 Southern Pacific Funding Cr. * . . . . . . . . . . 13,125
-------------
378,525
-------------
CAPITAL EQUIPMENT & GOODS 2.1%
1,000 Applied Science & Technology * . . . . . . . . . . 11,250
2,200 ATMI, Inc. * . . . . . . . . . . . . . . . . . . . 53,350
600 Tyco International, LTD . . . . . . . . . . . . . . 27,037
-------------
91,637
-------------
CHEMICALS 0.4%
1,200 Brunswick Technologies * . . . . . . . . . . . . . 17,550
-------------
COMMUNICATIONS 8.9%
400 Harte-Hanks Communications . . . . . . . . . . . . 14,850
3,000 ICT Group, Inc. * . . . . . . . . . . . . . . . . . 13,500
1,400 IDT Corporation * . . . . . . . . . . . . . . . . . 28,350
500 Metro Networks, Inc. * . . . . . . . . . . . . . . 16,375
3,500 Mindspring Enterprises, Inc. * . . . . . . . . . . 117,688
1,000 Premiere Technologies, Inc. * . . . . . . . . . . . 27,625
1,500 Smartalk Teleservices * . . . . . . . . . . . . . . 34,125
1,000 Transcrypt International, Inc. * . . . . . . . . . 24,875
1,340 Worldcom, Inc. . . . . . . . . . . . . . . . . . . 40,535
2,000 Xlconnect Solutions, Inc. * . . . . . . . . . . . . 34,000
1,500 Xpedite Systems, Inc. * . . . . . . . . . . . . . . 45,750
-------------
397,673
-------------
COMPUTER SOFTWARE 7.7%
1,000 Datastream Systems, Inc. * . . . . . . . . . . . . 31,000
2,000 Elcom International, Inc. * . . . . . . . . . . . . 14,000
1,000 Hyperion Software Corp. * . . . . . . . . . . . . . 35,750
2,000 Infinity Financial Tech., Inc. * . . . . . . . . . 41,875
11
<PAGE>
3,500 Intersolv, Inc. * . . . . . . . . . . . . . . . . . 70,875
2,000 Int'l Microcomputer Software . . . . . . . . . . . 28,250
1,000 Legato Systems, Inc. * . . . . . . . . . . . . . . 44,000
2,300 Lightbridge, Inc. * . . . . . . . . . . . . . . . . 43,700
1,000 Mercury Interactive Corp. * . . . . . . . . . . . . 26,750
500 Remedy Corp. * . . . . . . . . . . . . . . . . . . 10,500
-------------
346,700
-------------
ENERGY 4.8%
1,100 Cliffs Drilling Co. * . . . . . . . . . . . . . . . 54,863
2,500 Evergreen Resources, Inc. * . . . . . . . . . . . . 38,750
1,600 Global Marine Inc. * . . . . . . . . . . . . . . . 39,200
900 Noble Drilling Corp. * . . . . . . . . . . . . . . 27,563
1,800 Trico Marine Services, Inc. * . . . . . . . . . . . 52,875
-------------
213,251
-------------
FOOD & BEVERAGE 0.8%
1,000 Pepsico, Inc. . . . . . . . . . . . . . . . . . . . 36,438
-------------
HEALTHCARE 2.8%
1,500 American Oncology Resources * . . . . . . . . . . . 24,000
2,000 Intensiva Healthcare Corp. * . . . . . . . . . . . 15,000
2,500 Pharmerica, Inc. * . . . . . . . . . . . . . . . . 25,938
1,060 Safeskin Corp. . . . . . . . . . . . . . . . . . . 60,155
-------------
125,093
-------------
HOUSING 2.6%
120 Continental Homes Holding Corp. . . . . . . . . . . 4,830
3,500 D.R. Horton, Inc. . . . . . . . . . . . . . . . . . 60,813
1,500 Oakwood Homes Corp. . . . . . . . . . . . . . . . . 49,781
-------------
115,424
-------------
LEISURE 3.7%
721 Cendant Corp. * . . . . . . . . . . . . . . . . . . 24,781
1,600 DM Management Company * . . . . . . . . . . . . . . 25,000
1,000 Equity Marketing, Inc. * . . . . . . . . . . . . . 25,000
3,600 Grand Casinos, Inc. * . . . . . . . . . . . . . . . 49,050
3,000 Suburban Lodges of America * . . . . . . . . . . . 39,937
-------------
163,768
-------------
POLLUTION CONTROL 1.9%
1,500 KTI, Inc. . . . . . . . . . . . . . . . . . . . . . 24,563
4,000 Stericycle, Inc. * . . . . . . . . . . . . . . . . 58,500
-------------
83,063
-------------
RESTAURANTS 14.9%
600 Dave & Buster's Inc. . . . . . . . . . . . . . . . 13,500
3,000 Fresh America Corp. * . . . . . . . . . . . . . . . 57,750
6,000 Friendly Ice Cream Corp. * . . . . . . . . . . . . 69,750
2,000 Garden Fresh Restaurant Corp. * . . . . . . . . . . 28,750
2,900 Landry's Seafood Restaurant * . . . . . . . . . . . 69,600
2,500 Morton's Restaurant Group Inc. * . . . . . . . . . 50,625
15,375 New York Restaurant Group *** . . . . . . . . . . . 148,368
1,000 Papa John's Intl. Inc. * . . . . . . . . . . . . . 34,875
3,000 PJ America, Inc. * . . . . . . . . . . . . . . . . 45,000
1,000 Rainforest Cafe, Inc. * . . . . . . . . . . . . . . 33,000
3,000 Showbiz Pizza Time * . . . . . . . . . . . . . . . 69,000
2,000 Total Entertainment Restaurant *. . . . . . . . . . 9,125
2,000 Unique Casual Restaurant, Inc. * . . . . . . . . . 14,000
12
<PAGE>
6,000 Wall Street Deli, Inc. * . . . . . . . . . . . . . 20,250
-------------
663,593
-------------
RESTAURANT EQUIPMENT 2.5%
15,200 Turbochef, Inc. * . . . . . . . . . . . . . . . . . 110,200
-------------
RETAIL 7.4%
700 Borders Group Inc.* . . . . . . . . . . . . . . . . 21,918
500 Central Garden & Pet Co. * . . . . . . . . . . . . 13,125
2,000 Gymboree * . . . . . . . . . . . . . . . . . . . . 54,750
2,500 Hot Topic, Inc. * . . . . . . . . . . . . . . . . . 56,875
2,500 Party City Corp. * . . . . . . . . . . . . . . . . 80,625
3,500 Travis Boats & Motors Inc. * . . . . . . . . . . . 84,437
5,000 US Home & Garden, Inc. * . . . . . . . . . . . . . 20,625
-------------
332,355
-------------
SERVICES 8.6%
1,200 Accustaff, Inc. * . . . . . . . . . . . . . . . . . 27,600
500 Corestaff Inc. * . . . . . . . . . . . . . . . . . 13,250
2,200 Detection Systems Inc. * . . . . . . . . . . . . . 30,663
6,000 Forensic Technologies Intl. * . . . . . . . . . . . 75,000
3,000 Labor Ready, Inc. . . . . . . . . . . . . . . . . . 57,750
1,000 Meta Group, Inc. * . . . . . . . . . . . . . . . . 22,000
1,000 Personnel Group of America Inc. * . . . . . . . . . 33,000
1,700 Prepaid Legal Services, Inc. * . . . . . . . . . . 58,119
1,000 Service Experts, Inc. * . . . . . . . . . . . . . . 28,625
2,000 SOS Staffing Svcs. Inc. * . . . . . . . . . . . . . 37,750
-------------
383,757
-------------
TECHNOLOGY 7.9%
1,500 CMC Industries, Inc. * . . . . . . . . . . . . . . 8,813
1,750 Compaq Computer * . . . . . . . . . . . . . . . . . 98,766
1,500 Dell Computer Corp. * . . . . . . . . . . . . . . . 126,000
2,000 Intel Corp. - Warrants . . . . . . . . . . . . . . 98,937
5,000 Marine Management Systems - Warrants . . . . . . . 1,562
2,000 Object Design, Inc. * . . . . . . . . . . . . . . . 16,750
-------------
350,828
-------------
TRANSPORTATION 3.4%
2,000 Dynamex, Inc. * . . . . . . . . . . . . . . . . . . 22,500
1,000 Kellstrom Industries, Inc. * . . . . . . . . . . . 24,750
2,000 Smithway Motor Express * . . . . . . . . . . . . . 26,000
12,500 Transit Group, Inc. * . . . . . . . . . . . . . . . 79,688
-------------
152,938
-------------
TOTAL INVESTMENTS (COST $3,928,673) ** 94.2% 4,205,105
- -------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (Net) 5.8% 258,426
- -------------------------------------------------------------------------------
NET ASSETS 100.0% $4,463,531
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
* NON-INCOME PRODUCING SECURITY
** APPROXIMATES AGGREGATE COST FOR FEDERAL TAX PURPOSES
*** PRIVATE PLACEMENT/ILLIQUID SECURITY AND FAIR VALUE BY MANAGEMENT
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
13
<PAGE>
THE PALLADIAN TRUST
THE INTERNATIONAL GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- ------ --------
<S> <C>
COMMON STOCKS 94.9%
DENMARK 0.2%
250 Inwear Group. . . . . . . . . . . . . . . . . . . . $7,735
-------------
ENGLAND 21.2%
10,000 JBA Holdings PLC. . . . . . . . . . . . . . . . . . 170,108
60,000 McBride PLC . . . . . . . . . . . . . . . . . . . . 174,545
30,000 Regent Inns PLC . . . . . . . . . . . . . . . . . . 161,233
45,200 Victrex PLC . . . . . . . . . . . . . . . . . . . . 174,578
-------------
680,464
-------------
FINLAND 0.1%
250 Benefon OY . . . . . . . . . . . . . . . . . . . . 2,848
-------------
FRANCE 3.5%
875 Atos . . . . . . . . . . . . . . . . . . . . . . . 112,818
-------------
HONG KONG 7.9%
512,750 Lung Kee (Bermuda) Holdings . . . . . . . . . . . . 138,957
413,000 Sinocan Holdings Limited . . . . . . . . . . . . . 114,589
-------------
253,546
-------------
INDONESIA 1.0%
180,000 Davomas Abadi-Foreign . . . . . . . . . . . . . . . 32,727
-------------
JAPAN 4.9%
12,500 Justsystem Corporation *. . . . . . . . . . . . . . 158,010
-------------
NORWAY 6.8%
20,000 Norsk Lotteridrift ASA * . . . . . . . . . . . . . 81,236
15,500 Radio P4. . . . . . . . . . . . . . . . . . . . . . 136,410
-------------
217,646
-------------
PORTUGAL 4.9%
5,350 Investec-Consultoria Intl. * . . . . . . . . . . . 158,421
-------------
SINGAPORE 4.1%
127,000 Electronic Resources, LTD . . . . . . . . . . . . . 129,153
-------------
14
<PAGE>
SWEDEN 12.9%
8,200 Investment AB Bure. . . . . . . . . . . . . . . . . 107,924
11,500 IRO AB . . . . . . . . . . . . . . . . . . . . . . 168,012
10,600 Nobel Biocare AB . . . . . . . . . . . . . . . . . 138,843
-------------
414,779
-------------
SWITZERLAND 13.3%
685 Publicitas Holding SA-R . . . . . . . . . . . . . . 149,539
1,100 Selecta Group-Reg * . . . . . . . . . . . . . . . . 147,545
95 Stratec Holding AB. . . . . . . . . . . . . . . . . 127,425
-------------
424,509
-------------
UNITED STATES 14.1%
6,400 Fila Holdings SPA - ADR . . . . . . . . . . . . . . 128,800
5,000 Pfeiffer Vacuum Tech.- ADR *. . . . . . . . . . . . 140,313
11,500 Physio-Control Intl. Corp. * . . . . . . . . . . . 182,563
-------------
451,676
-------------
TOTAL INVESTMENTS (COST $3,320,007) ** 94.9% 3,044,332
- -------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (NET) 5.1% 162,670
- -------------------------------------------------------------------------------
NET ASSETS 100.0% $3,207,002
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
* NON-INCOME PRODUCING SECURITY
** APPROXIMATES AGGREGATE COST FOR FEDERAL TAX PURPOSES
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
15
<PAGE>
THE PALLADIAN TRUST
THE GLOBAL STRATEGIC INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
FACE VALUE (NOTE 1)
- ---------- --------
<S> <C>
UNITED STATES DOLLAR BONDS 37.0%
50,000 U.S. Treasury Bond
7.625% due 2/15/25 . . . . . . . . . . . . . . $60,687
170,000 U.S. Treasury Bond
6.50% due 11/15/26 . . . . . . . . . . . . . . 181,528
80,000 U.S. Treasury Note
6.250% due 2/15/07 . . . . . . . . . . . . . . 82,600
110,000 U.S. Treasury Note
6.625% due 5/15/07 . . . . . . . . . . . . . . 116,496
50,000 U.S. Treasury Note
6.125% due 8/15/07 . . . . . . . . . . . . . . 51,406
230,000 U.S. Treasury Note
5.875% due 9/30/02 . . . . . . . . . . . . . . 231,437
110,000 U.S. Treasury Note
5.750% due 10/31/02 . . . . . . . . . . . . . . 110,171
110,000 U.S. Treasury Note
5.750% due 11/30/02 . . . . . . . . . . . . . . 110,139
50,000 U.S. Treasury Note
7.000% due 7/15/06 . . . . . . . . . . . . . . 54,000
-------------
998,464
-------------
ITALIAN LIRA BOND 4.8%
190,000,000 Italy BTPS
8.750% due 7/1/06 . . . . . . . . . . . . . . 129,960
-------------
GERMAN DEUTSCHE MARK BOND 27.2%
1,120,000 Deutschland Republic
7.375% due 1/3/05 . . . . . . . . . . . . . . 703,689
50,000 Deutschland Republic
6.500% due 7/04/27 . . . . . . . . . . . . . . 30,122
-------------
733,811
-------------
JAPANESE YEN BOND . . . . . . . . . . . . . .7.5%
24,400,000 JAPAN - 184 (10 Year Issue)
2.900% due 12/20/05 . . . . . . . . . . . . . 203,496
-------------
BRITISH POUND BOND 6.5%
100,000 United Kingdom Treasury
7.250% due 12/07/07 . . . . . . . . . . . . . 176,213
-------------
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
TOTAL INVESTMENTS (COST $2,219,986) ** 83.0% 2,241,944
OTHER ASSETS AND LIABILITIES (NET) 17.0% 457,994
NET ASSETS 100.0% $2,699,938
- ----------------------------------------------------------------------------
</TABLE>
17
<PAGE>
SCHEDULE OF FORWARD FOREIGN EXCHANGE CONTRACTS
<TABLE>
<CAPTION>
CONTRACT MARKET
VALUE VALUE
FACE VALUE DATE (NOTE 1)
- ---------- ---- --------
<S> <C> <C>
FORWARD FOREIGN EXCHANGE CONTRACTS TO BUY
30,000 Australian Dollar . . . . . . 02/25/98 $ 19,509
20,000 British Pound. . . . . . . . . 02/25/98 32,783
105,406 Canadian Dollar. . . . . . . . 02/25/98 73,886
200,000 Finnish Markka . . . . . . . . 02/25/98 36,819
400,000 French Franc . . . . . . . . . 02/25/98 66,678
28,896 German Deutsche. . . . . . . . 02/25/98 16,115
70,000 German Deutsche. . . . . . . . 02/25/98 39,037
30,000 German Deutsche. . . . . . . . 02/25/98 16,730
70,000 German Deutsche. . . . . . . . 02/25/98 39,037
20,926 German Deutsche. . . . . . . . 02/25/98 11,670
146,906 German Deutsche. . . . . . . . 02/25/98 81,926
40,000 German Deutsche. . . . . . . . 02/25/98 22,307
1,441,390 Japanese Yen . . . . . . . . . 02/25/98 11,133
5,029,500 Japanese Yen . . . . . . . . . 02/25/98 38,846
7,165,490 Japanese Yen . . . . . . . . . 02/25/98 55,343
1,440,400 Japanese Yen . . . . . . . . . 02/25/98 11,125
5,747,760 Japanese Yen . . . . . . . . . 02/25/98 44,394
26,753,726 Japanese Yen . . . . . . . . . 02/25/98 206,636
14,241,693 Japanese Yen . . . . . . . . . 02/25/98 109,998
12,258,500 Spanish Peseta . . . . . . . . 02/25/98 80,580
500,000 Swedish Krona. . . . . . . . . 02/25/98 63,072
- ---------------------------------------------------------------------------
TOTAL FORWARD FOREIGN EXCHANGE CONTRACTS TO BUY
(CONTRACT AMOUNT $1,119,232) ** $1,077,624
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CONTRACT MARKET
VALUE VALUE
FACE VALUE DATE (NOTE 1)
- ---------- ---- --------
<S> <C> <C>
FORWARD FOREIGN EXCHANGE CONTRACTS TO SELL
50,000 British Pound . . . . . . . . . 02/25/98 81,957
70,688 German Deutsche . . . . . . . . 02/25/98 39,421
70,000 German Deutsche . . . . . . . . 02/25/98 39,037
80,000 German Deutsche . . . . . . . . 02/25/98 44,614
100,000 German Deutsche . . . . . . . . 02/25/98 55,767
20,000 German Deutsche . . . . . . . . 02/25/98 11,154
20,000 German Deutsche . . . . . . . . 02/25/98 11,154
18
<PAGE>
86,113 German Deutsche . . . . . . . . 02/25/98 48,023
224,034 German Deutsche . . . . . . . . 02/25/98 124,939
130,452,090 Italian Lira. . . . . . . . . . 02/25/98 73,717
5,117,420 Japanese Yen. . . . . . . . . . 02/25/98 39,525
5,117,280 Japanese Yen. . . . . . . . . . 02/25/98 39,524
2,181,000 Japanese Yen. . . . . . . . . . 02/25/98 16,845
2,908,260 Japanese Yen. . . . . . . . . . 02/25/98 22,462
50,000 Swiss Franc . . . . . . . . . . 02/25/98 34,443
- ---------------------------------------------------------------------------
TOTAL FORWARD FOREIGN EXCHANGE CONTRACTS TO SELL
(CONTRACT AMOUNT $701,879) ** $682,582
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
</TABLE>
* NON-INCOME PRODUCING SECURITY
** APPROXIMATES AGGREGATE COST FOR FEDERAL TAX PURPOSES
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
19
<PAGE>
THE PALLADIAN TRUST
THE GLOBAL INTERACTIVE / TELECOMM PORTFOLIO
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- ------ --------
<S> <C>
COMMON STOCKS 74.1%
CANADA 0.5%
500 British Columbia Telecomm . . . . . . . . . . . . . $15,568
------------
FOREIGN 0.3%
500 Havas S.A. Spons, ADR . . . . . . . . . . . . . . . 8,997
------------
UNITED STATES 73.3%
BROADCASTING, MEDIA, PRODUCTION & RADIO 17.6%
2,500 Ackerly Communications . . . . . . . . . . . . . . 42,344
1,000 Granite Broadcasting Corp - Conv. Pref. . . . . . . 48,500
500 Kingworld Productions, Inc. . . . . . . . . . . . . 28,875
500 Lee Enterprises . . . . . . . . . . . . . . . . . . 14,782
3,000 Lin Television Corp. * . . . . . . . . . . . . . . 163,500
2,500 Media General, Inc. - Class A . . . . . . . . . . . 104,531
1,000 Time Warner, Inc. . . . . . . . . . . . . . . . . . 62,000
600 United Television, Inc. . . . . . . . . . . . . . 62,325
------------
526,857
------------
CABLE 17.9%
2,000 BET Holdings Inc. Class A * . . . . . . . . . . . . 109,250
1,000 Cablevision Systems Corp. * . . . . . . . . . . . . 95,750
1,500 Century Communications * . . . . . . . . . . . . . 14,626
1,000 Home Shopping Network, Inc. * . . . . . . . . . . . 51,500
2,000 Tele-Communications, Inc. . . . . . . . . . . . . . 55,875
1,000 United International Holding, Class A * . . . . . . 11,500
2,000 US West Media Group * . . . . . . . . . . . . . . . 57,750
3,500 Viacom Inc Class A * . . . . . . . . . . . . . . . 143,063
------------
539,314
------------
COMMUNICATION SERVICES 1.8%
500 Comsat Corp. . . . . . . . . . . . . . . . . . . . 12,125
2,000 Loral Space & Communiation * . . . . . . . . . . . 42,875
------------
55,000
------------
DIVERSIFIED 0.9%
300 Sony Corp., ADR . . . . . . . . . . . . . . . . . . 27,225
------------
ENTERTAINMENT 4.0%
5,000 Ascent Entertainment Group * . . . . . . . . . . . 51,875
500 ITT Corp. * . . . . . . . . . . . . . . . . . . . . 41,438
1,000 Telecom-TCI Ventures * . . . . . . . . . . . . . . 28,312
------------
121,625
------------
20
<PAGE>
INTERNET 0.4%
500 AT Home Corp. * . . . . . . . . . . . . . . . . . . 12,563
------------
MISCELLANEOUS 7.2%
1,500 American Radio Systems Corp. * . . . . . . . . . . 79,969
3,000 Liberty Media Group, Class A. . . . . . . . . . . . 108,750
2,000 Shared Tech. Fairchid, Inc. * . . . . . . . . . . . 29,250
------------
217,969
TELECOMMUNICATIONS 22.8%
1,000 Cable & Wireless PLC - ADR . . . . . . . . . . . . 27,187
1,000 Century Telephone Enterprises . . . . . . . . . . . 49,812
500 Chris-Craft Industries, Inc. * . . . . . . . . . . 26,156
5,000 Citizens Utilities, Class B * . . . . . . . . . . . 48,125
1,000 Citizens Utilities, Preferred 5% CV . . . . . . . . 47,750
1,000 Frontier Corporation . . . . . . . . . . . . . . . 24,062
6,000 GST Telecommunications * . . . . . . . . . . . . . 71,250
2,000 MCI Communications Corp. . . . . . . . . . . . . . 85,625
1,600 So. New England Telecomm. . . . . . . . . . . . . . 80,500
3,000 Sprint . . . . . . . . . . . . . . . . . . . . . . 134,250
2,000 Telephone Data Systems . . . . . . . . . . . . . . 93,125
------------
687,842
WIRELESS COMMUNICATIONS 0.7%
2,500 Price Communcations * . . . . . . . . . . . . . . . 21,405
------------
TOTAL INVESTMENTS (COST $1,836,313) ** 74.1% 2,234,365
- -------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (NET) 25.9% 782,076
- -------------------------------------------------------------------------------
NET ASSETS 100.0% $3,016,441
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
* NON-INCOME PRODUCING SECURITY
** APPROXIMATES AGGREGATE COST FOR FEDERAL TAX PURPOSES
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
21
<PAGE>
The Palladian Trust
Notes to Financial Statements
1. ORGANIZATION
The Palladian Trust (the "Trust") is registered under the Investment Company Act
of 1940, as amended, (the "Act") as an open-end management investment company
organized as a Massachusetts business trust. The Trust is comprised of five
portfolios: Value Portfolio, Growth Portfolio, International Growth Portfolio,
Global Strategic Income Portfolio and Global Interactive/Telecomm Portfolio
(collectively the "Portfolios"). The Trust is intended to serve as an investment
medium for (i) variable life insurance policies and variable annuity contracts
offered by insurance companies, (ii) certain qualified pension and retirement
plans, as permitted by Treasury Regulations; and (iii) advisers to the
Portfolios and their affiliates.
2. SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts and disclosures in financial statements. Actual
results could differ from those estimates. The following is a summary of
significant accounting policies consistently followed by the Portfolios in the
preparation of their financial statements.
PORTFOLIO VALUATION: Domestic and foreign portfolio securities, except as noted
below, for which market quotations are readily available are stated at market
value. Market value is determined on the basis of the last reported sales price
in the principal market where such securities are traded or, if no sales are
reported, the mean between representative bid and asked quotations obtained from
a quotation reporting system or from established market makers.
Long-term debt securities, including those to be purchased under firm commitment
agreements, are normally valued on the basis of quotes obtained from brokers and
dealers or pricing services, which take into account appropriate factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics, and other market
data. Under certain circumstances, long-term debt securities having a maturity
of sixty days or less may be valued at amortized cost. Debt securities with a
maturity date at time of purchase of 60 days or less are valued at amortized
cost which approximates fair value.
Securities for which market quotations are not readily available are valued at
fair market value as determined in good faith by, or under the direction of the
Board of Trustees. In determining fair value, management considers all relevant
qualitative and quantitative information available. These factors are subject
to change over time and are reviewed periodically. The values assigned to fair
value investments are based on available information and do not necessarily
represent an amount that might ultimately be realized, since such amounts
depend on future developments inherent in long-term investments. However,
because of the inherent uncertainty of valuation, those estimated values may
differ significantly from the values that would have been used had a ready
market of the investments existed, and the differences could be material to
the investment.
At December 31, 1997, $148,368 or 3.3% of net assets of the Growth Portfolio
were valued by management under the direction of the Board of Trustees.
22
<PAGE>
FOREIGN CURRENCY. The books and records of the Portfolios are maintained in
U.S. dollars. Foreign currencies, investments and other assets and liabilities
are translated into U.S. dollars at the exchange rates prevailing at the end of
the period, and purchases and sales of investment securities, income and
expenses are translated on the respective dates of such transactions.
Unrealized gains and losses, not relating to securities, which result from
changes in foreign currency exchange rates have been included in unrealized
appreciation/(depreciation) of foreign currency transactions. Unrealized gains
and losses of securities, which result from changes in forward currency exchange
rates as well as changes in market prices of securities, have been included in
unrealized appreciation/(depreciation) of securities. Net realized foreign
currency gains and losses resulting from changes in exchange rates include
foreign currency gains and losses between trade date and settlement date on
investment securities transactions, gains and losses on foreign currency
transactions and the difference between the amounts of interest and dividends
recorded on the books of the Portfolios and the amount actually received. The
portion of foreign currency gains and losses related to fluctuations in exchange
rates between the initial purchase trade date and subsequent sale trade is
included in realized gain/(loss) from investment securities sold.
FORWARD FOREIGN CURRENCY CONTRACTS. All portfolios may enter into forward
foreign currency contracts. Foreign currency contracts are agreements to
exchange one currency for another at a future date and at a specified price.
The Portfolios may use forward foreign currency contracts to facilitate
transactions in foreign securities and to manage the Portfolios' foreign
currency exposure. The U.S. dollar market value, contract value and the foreign
currencies the Portfolios have committed to buy or sell are shown in the
Portfolio of Investments under the caption "Schedule of Forward Foreign Currency
Contracts." These amounts represent the aggregate exposure to each foreign
currency the Portfolios have acquired or hedged through currency contracts at
December 31, 1997. Forward foreign currency contracts that have been offset
with different counterparties are reflected as both a forward foreign currency
contract to buy and a forward foreign currency contract to sell. Forward
foreign currency contracts to buy generally are used to acquire exposure to
foreign currencies, while forward foreign currency contracts to sell are used to
hedge the Portfolios' investments against currency fluctuations. Also, a
forward foreign currency contract to buy or sell can offset a previously
acquired opposite forward foreign currency contract.
Forward foreign currency contracts are marked-to-market daily using foreign
currency exchange rates supplied by an independent pricing service. The change
in a contract's market value is recorded by the Portfolios as an unrealized gain
or loss. When the contract is closed or delivery is taken, the Portfolios
record a realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed.
The use of forward foreign currency contracts does not eliminate fluctuations in
the underlying prices of the Portfolio's securities, but it does establish a
rate of exchange that can be achieved in the future. Although forward foreign
currency contracts used for hedging purposes limit the risk of loss due to a
decline in the value of the hedged currency, they also limit any potential gain
that might result should the value of the currency increase. In addition, the
Portfolios could be exposed to risks if the counterparties to the contracts are
unable to meet the terms of their contracts.
FEDERAL INCOME TAXES. Each Portfolio of the Trust is a separate entity for
Federal income tax purposes. No provision for Federal income taxes has been
made since each Portfolio of the Trust, has complied and intends to
23
<PAGE>
continue to comply with the provisions of Sub Chapter M of the Internal
Revenue Code available to regulated investment companies and to distribute
its taxable income to shareholders sufficient to relieve it from all or
substantially all federal income taxes.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME. Investment transactions are
recorded on trade date. Dividend income and distributions to shareholders
are recorded on the ex-dividend date. Interest income (including
amortization of premium and discount on securities) and expenses are accrued
daily. Realized gains and losses from investment transactions are recorded
on an identified cost basis which is the same basis the Trust uses for
Federal income tax purposes. Purchases of securities under agreements to
resell are carried at cost, and the related accrued interest is included in
interest receivable.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS. Dividends from net investment
income are declared and paid quarterly for all portfolios. Net realized
capital gains, if any, are distributed at least annually.
Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles. Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital.
Undistributed net investment income may include temporary book and tax basis
differences which will reverse in a subsequent period.
ORGANIZATION EXPENSE. Organization expenses were deferred and are being
amortized by each Portfolio on a straight-line basis over a five-year period
from commencement of operations. The amount paid by the Trust on any
redemption by Palladian Advisors, Inc. ("PAI") or, any other then-current
holder of the organizational seed capital shares ("Initial Shares") of the
Portfolio, will be reduced by a portion of any unamortized organization
expenses of the Portfolio determined by the proportion of the number of the
Initial Shares of the Portfolio redeemed to the number of the Initial Shares
of the Portfolio outstanding after taking into account any prior redemptions
of the Initial Shares of the Portfolio.
During the year ended December 31, 1997, all of the Initial Shares of the
Global Strategic Income Portfolio were withdrawn. Accordingly, the proceeds
paid upon withdrawal were reduced by the unamortized organization expenses of
$16,710.
TRUSTEES. Each Trustee who is not an "interested person" (as defined in the
Act) of the Trust, receives $1,500 per meeting attended, as well as
reimbursement for reasonable out-of-pocket expenses, from the Trust.
3. MANAGER, PORTFOLIO ADVISOR, PORTFOLIO MANAGERS, ADMINISTRATION FEES AND
OTHER TRANSACTIONS.
PAI provided general supervision over the Trust, recommended investment
advisors to serve as portfolio managers, assessed their performance and made
periodic reports to the Trust. In performing these responsibilities, PAI
relies upon Tremont Partners, Inc. as Portfolio Advisor. PAI, not the Trust,
paid the fees of the Portfolio Advisor.
The Trust and PAI entered into portfolio management agreements with various
Portfolio Managers. The Portfolio Managers for the Portfolios are as
follows: GAMCO Investors, Inc. serves as the Portfolio Manager for The Value
Portfolio and The Global Interactive/Telecomm Portfolio; Stonehill Capital
Management, Inc. serves as the Portfolio Manager of The Growth Portfolio; Bee
& Associates Incorporated serves as the Portfolio Manager of The
International Growth Portfolio, and Fischer Francis Trees & Watts serves as
the Portfolio Manager of The Global
24
<PAGE>
Strategic Income Portfolio. Subsequent to December 31, 1997 Fischer Francis
Trees & Watts submitted its resignation as Portfolio Manager (see note 10).
Investors Bank & Trust Company provides transfer agency, portfolio accounting
and custody services for the Trust. The transfer agency and portfolio
accounting fees are the greater of $40,000 or .05% of net assets for the first
$600 million and .03% of the net assets in excess of $600 million. Custody fees
are separated between domestic and global.
Western Capital Financial Group, Inc. (the "Distributor") serves as the
principal underwriter and distributor of the shares of the Trust. The
Distributor does not currently charge any fees for serving in this capacity.
Certain officers of the Trust were also officers of PAI and the Distributor.
Mario J. Gabelli, together with certain affiliated entities, owns a majority
interest in the parent company of Tremont. The individual is also an officer of
GAMCO Investors, Inc. selected by Tremont to provide investment advisory
services to two Portfolios of the Trust.
An officer and sole shareholder of the Distributor is also an officer of PAI,
and a trustee and officer of the Trust. Certain officers of PAI were also
trustees and officers of the Trust.
The Value Portfolio and The Global Interactive/Telecomm Portfolio placed a
significant portion of their portfolio transactions through Gabelli & Co., an
affiliated entity of both portfolios and the Sub-Advisor, GAMCO Investors, Inc.
Total commissions paid to Gabelli & Co. were as follows:
<TABLE>
<CAPTION>
Portfolio 1997 1996
--------- ---- ----
<S> <C> <C>
Value $16,396 $4,896
Global Interactive / Telecomm $4,568 $3,200
</TABLE>
4. MANAGEMENT FEES
Each Portfolio paid an overall management fee, computed and accrued daily and
paid monthly, based on its average daily net assets. For the first twelve
months of operations, the management fee was .80% of average net assets.
Each Portfolio began paying at the end of each month starting on February 1,
1997 for the Value Portfolio, Growth Portfolio, Global Strategic Income
Portfolio and Global Interactive/Telecomm ) and on March 26, 1997 for the
International Growth Portfolio, a monthly advisory fee equal to a Basic Fee
plus or minus an Incentive Fee. (As explained below, the fee might be
reduced if absolute performance is negative.) The monthly Basic Fee will
equal one-twelfth of the annual Basic Fee rate of 2.0% multiplied by average
daily net assets over the previous 12 months. The Incentive Fee rate ranges
from -2.0% to +2.0% on an annual basis, depending on a comparison of the
Portfolio's performance (reflecting a deduction of Portfolio expenses) and
the performance of a selected benchmark index over the past 12 months. The
monthly Incentive Fee, like the monthly Basic Fee, is calculated by
multiplying one-twelfth of the Incentive Fee rate on an annual basis by the
average daily net assets over the previous 12 months. Accordingly, the Total
Fee could range from 0.0% to an annual rate of 4.0%, depending on
25
<PAGE>
performance. Each Portfolio Manager has received 80% of the fee, and PAI has
received the remaining 20%. PAI was responsible for paying the fee of
Tremont, which equals 32.5% of the fee received by PAI. Effective at the
close of business on February 11, 1998 the management agreement between PAI
and the Trust was terminated (see note 10).
No Incentive Fee will be paid if the Portfolio's performance equals the targeted
performance -- selected benchmark index plus 2.25 percentage points. The maximum
fee will be paid if performance is 5.25 percentage points higher than the target
(i.e., 7.5 percentage points higher than the selected benchmark index). No fee
will be paid if performance is 5.25 percentage points lower than the target
(i.e., more than 3 percentage points below the selected benchmark index). The
chart below further explains the Incentive Fee at various performance levels.
<TABLE>
<CAPTION>
PERCENTAGE POINT DIFFERENCE BETWEEN ACTUAL PERFORMANCE OF THE PORTFOLIO
(NET OF EXPENSES INCLUDING BASIC FEE AND INCENTIVE FEE) AND THE TOTAL
% CHANGE IN THE SELECTED BENCHMARK INDEX FOR THE PERIOD BASIC FEE (%) INCENTIVE FEE (%) ADVISORY FEE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
+7.5 or greater 2.0 2.0 4.0
+6.0 or greater, but less than +7.5 2.0 1.5 3.5
+4.5 or greater, but less than +6.0 2.0 1.0 3.0
+3.0 or greater, but less than +4.5 2.0 0.5 2.5
+1.5 or greater, but less than +3.0 2.0 0.0 2.0
0.0 or greater, but less than +1.5 2.0 -0.5 1.5
- -1.5 or greater, but less than 0.0 2.0 -1.0 1.0
- -3.0 or greater, but less than -1.5 2.0 -1.5 0.5
Less than -3.0 2.0 -2.0 0.0
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
MAXIMUM FEE IF PERFORMANCE IS NEGATIVE. Notwithstanding the above schedule, if
the absolute performance of a Portfolio (after payment of all expenses,
including the Basic Fee and any Incentive Fee) is negative, the monthly advisory
fee will be the lesser of the fee calculated pursuant to the above schedule or
the alternative monthly advisory fee described below, which under certain
circumstances results in the Portfolios paying either no advisory fee or a lower
monthly advisory fee than under the performance fee schedule above. If a
Portfolio's performance (after payment of all expenses including advisory fees)
is negative and does not exceed the selected benchmark by six percentage points
(on an annual basis), no monthly advisory fee will be paid. If the Portfolio's
performance (after payment of all expenses including advisory fees) is negative
and does not exceed the selected benchmark by twelve percentage points but does
exceed the selected benchmark by six percentage points (on an annual basis), the
alternate monthly advisory fee will be based on an annual rate of 1.0% of
average daily net assets over the previous 12 months. If, on the other hand, the
performance of a Portfolio (after payment of all expenses including advisory
fees) is negative but exceeds the selected benchmark by twelve percentage points
or more (on an annual basis), the alternative monthly advisory fee will be based
on an annual rate of 2.0% of average daily net assets over the previous 12
months.
5. PORTFOLIO MANAGER INVESTMENT
Each Portfolio Manager has contractually agreed that it or an affiliate (either
directly or through a qualified plan) will invest a minimum total of $1 million
in the Portfolio or Portfolios it manages. The Portfolio Manager for the Global
Strategic Income Portfolio made the investment shortly after the Portfolio
commenced operations. The Portfolio Managers for the International Growth
Portfolio (Bee & Associates Incorporated) and the Growth Portfolio (Stonehill
Capital Management, Inc.) have each agreed that it or its principals will make
the investment (directly or through qualified plans) when that Portfolio reaches
$10 million in total assets. Since GAMCO
26
<PAGE>
Investors, Inc. manages both the Value Portfolio and the Global
Interactive/Telecomm Portfolio, it agreed to invest $500,000 in each
Portfolio. GAMCO Investors, Inc. made those investments shortly after the
Portfolios commenced operations. Although a Portfolio Manager is permitted
by law to sell its shares at any time, each Portfolio Manager currently
intends to maintain that investment as long as it manages the Portfolio.
Subsequent to year-end the Portfolio Manager of the Global Strategic Income
Portfolio withdrew their investment. See note 9 for further information.
6. PURCHASES AND SALES OF SECURITIES. The aggregate cost of purchases and
proceeds from sales of securities, excluding U.S. Government and short-term
investments, were as follows for the periods ended:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
Portfolio Purchases Sales
--------- --------- -----
<S> <C> <C>
Value $7,425,131 $3,913,037
Growth 7,952,647 3,760,971
International Growth 3,417,583 147,526
Global Strategic Income 10,884,962 9,451,882
Global Telecomm / Interactive 2,420,919 1,127,581
<CAPTION>
DECEMBER 31, 1996
Portfolio Purchases Sales
--------- --------- -----
<S> <C> <C>
Value $1,108,875 $506,966
Growth 945,895 834,937
International Growth 104,657 54,690
Global Strategic Income 2,038,929 1,668,243
Global Telecomm / Interactive 758,380 360,983
</TABLE>
The aggregate cost of purchases and proceeds from sales of long-term U.S.
Government Securities, excluding short-term investments, were as follows for the
periods ended:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
Portfolio Purchases Sales
--------- --------- -----
<S> <C> <C>
Global Strategic Income $4,348,221 $3,832,734
<CAPTION>
DECEMBER 31, 1996
Portfolio Purchases Sales
--------- --------- -----
<S> <C> <C>
Global Strategic Income $451,688 --
</TABLE>
27
<PAGE>
The aggregate gross unrealized appreciated, aggregate gross unrealized
depreciated, net unrealized appreciated (depreciated), and cost of all
securities as computed on Federal income tax basis, each portfolio for the
periods as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
Portfolio Appreciation (Depreciation)
--------- ------------ --------------
<S> <C> <C>
Value $676,695 ($129,814)
Growth 483,840 (215,813)
International Growth 168,211 (445,362)
Global Strategic Income 33,218 (11,259)
Global Telecomm / Interactive 418,760 (20,707)
</TABLE>
7. SHARES OF BENEFICIAL INTEREST. Each Portfolio of the Trust may issue an
unlimited number of shares of beneficial interest without par value.
<TABLE>
<CAPTION>
VALUE PORTFOLIO SHARES AMOUNT
- --------------------------------------------------------------------------------
<S> <C> <C>
For the period ended: December 31, 1997
Sold........................................... 432,360 $5,547,192
Issued as reinvestment of dividends ........... 30,421 410,683
Redeemed....................................... (57,726) (783,685)
------- ----------
Net Increase................................... 405,055 $5,174,190
------- ----------
------- ----------
For the period ended: December 31, 1996
Sold.......................................... 77,424 $783,945
Issued as reinvestment of dividends........... 4,552 49,532
Redeemed...................................... (215) (2,310)
------ --------
Net Increase.................................. 81,761 $831,167
------ --------
------ --------
<CAPTION>
GROWTH PORTFOLIO SHARES AMOUNT
- --------------------------------------------------------------------------------
<S> <C> <C>
For the period ended: December 31, 1997
Sold.......................................... 391,597 $4,843,510
Issued as reinvestment of dividends........... 0 0
Redeemed...................................... (31,707) (418,247)
------- ----------
Net Increase.................................. 359,890 $4,425,263
------- ----------
------- ----------
For the period ended: December 31, 1996
Sold.......................................... 15,062 $140,698
Issued as reinvestment of dividends........... 0 0
28
<PAGE>
Redeemed...................................... (2,372) (24,370)
------- --------
Net Increase.................................. 12,690 $116,328
------- --------
------- --------
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL GROWTH PORTFOLIO SHARES AMOUNT
- --------------------------------------------------------------------------------
<S> <C> <C>
For the period ended: December 31, 1997
Sold........................................... 347,778 $3,686,977
Issued as reinvestment of dividends............ 2,452 23,812
Redeemed....................................... (29,718) (318,355)
-------- ---------
Net Increase................................... 320,512 $3,392,434
-------- ----------
-------- ----------
For the period ended: December 31, 1996
Sold........................................... 9,266 $83,446
Issued as reinvestment of dividends............ 164 1,702
Redeemed....................................... (999) (7,748)
----- -------
Net Increase .................................. 8,431 $77,400
----- -------
----- -------
<CAPTION>
GLOBAL STRATEGIC INCOME PORTFOLIO SHARES AMOUNT
- --------------------------------------------------------------------------------
<S> <C> <C>
For the period ended: December 31, 1997
Sold........................................... 181,202 $1,772,206
Issued as reinvestment of dividends ........... 4,292 42,408
Redeemed....................................... (23,111) (229,024)
-------- ----------
Net Increase................................... 162,383 $1,585,590
-------- ----------
-------- ----------
For the period ended: December 31, 1996
Sold........................................... 140,820 $1,387,995
Issued as reinvestment of dividends............ 711 7,098
Redeemed....................................... (35,612) (333,700)
-------- ----------
Net Increase................................... 105,919 $1,061,393
-------- ----------
-------- ----------
<CAPTION>
GLOBAL INTERACTIVE/TELECOMM PORTFOLIO SHARES AMOUNT
- --------------------------------------------------------------------------------
<S> <C> <C>
For the period ended: December 31, 1997
Sold........................................... 174,816 $2,115,492
Issued as reinvestment of dividends............ 11,406 151,815
Redeemed....................................... (19,211) (240,205)
-------- ----------
Net Increase................................... 167,011 $2,027,102
-------- ----------
-------- ----------
For the period ended: December 31, 1996
29
<PAGE>
Sold........................................... 58,734 $586,289
Issued as reinvestment of dividends............ 288 2,886
Redeemed....................................... (608) (5,723)
------ --------
Net Increase................................... 58,414 $583,452
------ --------
------ --------
</TABLE>
8. CAPITAL LOSS CARRY FORWARD.
At December 31, 1997, the Portfolios had capital loss carry forwards.
<TABLE>
<CAPTION>
Portfolio Amount Expiration
--------- ------ ----------
<S> <C> <C>
Growth $4,913 2004
75,969 2005
International Growth $5,735 2005
</TABLE>
9. CAPITAL INFUSION.
On September 24, 1996 PAI agreed to voluntarily contribute capital to each of
Portfolios as follows:
<TABLE>
<CAPTION>
Portfolio Amount
--------- ------
<S> <C>
Value $51,906
Growth 49,231
International Growth 34,947
Global Strategic Income 52,077
Global Interactive / Telecomm 40,662
--------
$228,823
</TABLE>
The amounts were contributed to offset expenses accrued to the Portfolios in
excess of the expense limitations set forth above from the period from the
inception of the Portfolios to September 10, 1996. PAI received no shares of
beneficial interest or other consideration in exchange for these contributions.
These capital contributions resulted in an increase to paid capital for each
Portfolio. PAI made the contribution on January 31, 1997.
10. SUBSEQUENT EVENTS
EXPENSE LIMITATIONS. Under terms approved by the Board of Trustees of the
Portfolios, PAI agreed to limit operating expenses and reimburse those
expenses to the extent that each Portfolio's "other expenses" (i.e. expenses
other than management fees) from September 11, 1996 through December 31, 1997
exceed the following expense limitations (expressed as an annualized
percentage of average daily net assets): Value Portfolio, 0.70%; Growth
Portfolio, 0.70%; International Growth Portfolio, 1.20%; Global Strategic
Income Portfolio, 1.20%; Global Interactive/Telecomm Portfolio, 1.20%.
Thereafter through December 31, 1999, the Portfolios were required to
reimburse PAI for these expenses, provided that average net assets had grown
or expenses had declined sufficiently to allow reimbursement without causing
the portfolios' ratio of non-management fee expenses to average net assets
30
<PAGE>
to exceed the specified rates above. The fees waived and expense subject to
reimbursement by PAI for each Portfolio were as follows:
<TABLE>
<CAPTION>
Expense
Expense Expense Reimbursement
Reimbursement Reimbursement since
for the period ended for the year ended Commencement
Portfolio December 31, 1996 December 31, 1997 of Operations
- --------- ----------------- ----------------- -------------
<S> <C> <C> <C>
Value 40,166 123,916 $164,082
Growth 26,018 108,474 134,492
International Growth 23,053 84,536 107,589
Global Strategic Income 46,749 95,354 142,103
Global Interactive/
Telecomm 33,568 81,113 114,681
<CAPTION>
Waived Advisor fees
or cash payment made
by the Advisor for Due From
the year ended Advisor at
Portfolio December 31, 1997 December 31, 1997
- --------- ----------------- -----------------
<S> <C> <C>
Value 17,572 146,510
Growth 10,961 123,531
International Growth 10,721 96,868
Global Strategic Income 20,343 121,760
Global Interactive/
Telecomm 15,354 99,327
</TABLE>
Through December 31, 1997, PAI had waived its fees or made cash payments to
reimburse expenses for the amounts due to the Portfolios as follows: Value
Portfolio, $17,572; Growth Portfolio, $10,961; International Growth Portfolio,
$10,721; Global Strategic Income Portfolio, $20,343; Global/Telecomm Portfolio,
$15,354. No other payments were made by PAI to the Portfolios.
At the request of the Board of Trustees, PAI had committed to pay all amounts
due under the expense reimbursement arrangement on or about December 31, 1997.
In January 1998, however, PAI advised the Board of Trustees that it did not have
sufficient assets to make the required payment. Accordingly, the Board of
Trustees and PAI pursued and considered other options under which the payment
could be made. The Board of Trustees determined that it was in the best
interests of shareholders to accept an offer from a group (the "Payment Group")
willing to immediately pay to the Trust the full amount due under the expense
limitation. The Payment Group includes Allmerica Financial Life Insurance and
Annuity Company ("Allmerica Financial"), the issuer of a variable annuity
contract utilizing the Portfolios as investment options, certain principals of
PAI and entities selling the variable contracts.
31
<PAGE>
On January 28, 1998, the Payment Group paid the Portfolios the following amounts
due under the expense limitation arrangement: Value Portfolio, $128,362; Growth
Portfolio, $114,448; International Growth Portfolio, $89,895; Global Strategic
Income Portfolio, $103,436; Global Interactive/Telecomm Portfolio, $88,983. The
remaining amounts due to the portfolios will paid in March 1998 by Allmerica
Financial. Accordingly, the Trust will be fully reimbursed for amounts owed
under the expense limitation arrangement.
Through December 31, 1999, each Portfolio must reimburse the Payment Group
for the payment described above, any fees provided that such reimbursement
does not cause the Portfolio's "other expense" ratio to exceed the previous
expense limitation for that Portfolio under the Manager's expense limitation
arrangement. (Those limitations are listed above). This reimbursement
obligation is the same as the reimbursement obligation that was in place for
PAI. After December 31, 1999, the Portfolios' reimbursement liability to the
Payment Group will cease.
MANAGEMENT CHANGES. In light of the inability of PAI to pay the Trust certain
amounts due under the expense reimbursement arrangement described above, the
Board of Trustees and PAI agreed to a termination of PAI's Management Agreement
with the Trust, effective at the close of business on February 11, 1998.
Effective February 12, 1998, Allmerica Investment Management Company, Inc.
("AIMCO"), assumed the function of Manager for the Trust.
AIMCO is registered with the Securities and Exchange Commission as an investment
adviser. AIMCO is an indirect, wholly-owned subsidiary of Allmerica Financial
Corporation ("AFC"). AFC is the parent company of the two life insurance
companies currently utilizing the Trust as an underlying fund for its variable
contracts, Allmerica Financial and First Allmerica Financial Life Insurance
Company.
As Manager, AIMCO serves as overall investment adviser to the Trust. AIMCO
is currently responsible for general administration of the Trust as well as
monitoring and evaluating the performance of the Portfolio Managers.
Advisory fees remain the same as described in Note 4.
AIMCO's advisory agreement will remain in effect past June 11, 1998, only if
approved by shareholders. The Board of Trustees, Allmerica Financial, AIMCO and
the other members of the Payment Group are considering whether additional
management changes should be made in the long-term. The Board of Trustees
expects that, near term, it will determine whether to seek shareholder
approval of the current AIMCO agreement, or another advisory agreement with
AIMCO or another adviser, or whether it will propose other approaches.
PORTFOLIO ADVISOR. Effective February 12, 1998, Tremont Partners, Inc.
("Tremont" or the "Portfolio Advisor"), no longer serves as Portfolio Advisor to
the Trust. Tremont was previously paid by PAI (not the Trust). Thus, overall
advisory fees have not changed.
PORTFOLIO MANAGER. Fischer Francis Trees & Watts, Inc. ("Fischer Francis") has
submitted its resignation as Portfolio Manager of the Global Strategic Income
Portfolio. It is expected that the resignation will be effective on or about
April 4, 1998. Fischer Francis has withdrawn its $1 million investment in the
Portfolio. The Trust and AIMCO are considering seeking a new Portfolio Manager
or winding down the operations of this Portfolio through a merger, substitutions
or other approach. If at any time there is no Portfolio Manager in place for
any Portfolio, under the current advisory agreement, the Manager or an
affiliate would be responsible for managing that Portfolio.
32
<PAGE>
EXPENSE LIMITATIONS FOR 1998 EXPENSES. Allmerica Financial has agreed to
limit operating expenses and reimburse those expenses to the extent that each
Portfolio's 1998 "other expenses" (i.e., expenses other than management fees)
exceed the following expense limitation (expressed as an annualized
percentage of average daily net assets): Value Portfolio, 1.00%; Growth
Portfolio, 1.00%; International Growth Portfolio, 1.20%, Global Strategic
Income Portfolio, 1.20%; Global Interactive/Telecomm Portfolio, 1.20%. For
the three global or international Portfolios, the expense limitation for 1998
is the same percentage (1.20%) as the 1997 limitation. For the Value and
Growth Portfolios, the 1998 limitation is 1.00% rather than the 0.70% 1997
limitation. Allmerica Financial has agreed to pay any amount due for a
calendar month not later than the 15th day of the following calendar month
(with any final adjustment to be made not later than January 15, 1999).
Allmerica Financial, if agreed to by the Board, may continue this voluntary
expense limitation past December 31, 1998. This expense limitation was
implemented effective February 13, 1998. In addition, on February 24, 1998,
Allmerica Financial voluntarily contributed to the Portfolios the following
amounts as capital: Value Portfolio, $8,469; Growth Portfolio, $10,350;
International Growth Portfolio, $7,723; Global Strategic Income Portfolio,
$7,936; Global Interactive/Telecomm Portfolio, $6,618. These amounts were
contributed to offset expenses accrued to the Portfolios in excess of the
expense limitations during the period January 1, 1998 through February 12,
1998. Allmerica Financial received no shares of beneficial interest or other
consideration in exchange for these contributions. These capital
contributions resulted in an increase in paid in capital for each Portfolio.
For the two years following the date that the Allmerica Financial expenses
limitation ends, each Portfolio will reimburse Allmerica Financial for any
Portfolio expenses it reimbursed pursuant to the expense limitation provided
that such reimbursement to Allmerica Financial does not cause the Portfolio's
"other expense" ratio to exceed the limitation for that Portfolio set forth
above. This reimbursement for the 1998 expenses will not commence until the
Payment Group has been fully reimbursed for the 1996 and 1997 expenses, as
discussed above. After the two year period after the Allmerica Financial
expense limitation ends, the Portfolios' obligation to reimburse Allmerica
Financial will cease.
33
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees of
The Palladian Trust:
We have audited the accompanying statements of assets and liabilities of the
Value Portfolio, Growth Portfolio, International Growth Portfolio, Global
Strategic Income Portfolio and Global Interactive/Telecomm Portfolio (five
portfolios of the Palladian Trust and collectively the "Portfolios"),
including the portfolios of investments, as of December 31, 1997, and the
related statements of operations, statements of changes in net assets and
financial highlights for the periods indicated therein. These financial
statements and financial highlights are the responsibility of the Portfolios'
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 1997, by correspondence with
the custodian and brokers. An audit includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial positions of the Portfolios as of December
31, 1997, the results of their operations, their changes in net assets and their
financial highlights for each of the periods indicated therein, in conformity
with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Baltimore, Maryland
March 16, 1998
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS:
1. Financial Statements included in the Prospectus constituting
Part A of this Registration Statement: Financial Highlights
2. Financial Statements included in the Statement of Additional
Information constituting Part B of this Registration Statement:
Statement of Assets and Liabilities
Statement of Operations
Statement of Changes in Net Assets
Financial Highlights
Portfolio of Investments
Notes to Financial Statements
Report of Independent Accountants
(b) EXHIBITS
1. Declaration of Trust.(1)
2. By-Laws.(1)
3. Not applicable.
4. Not applicable.
5. (a) Management Agreement between the Registrant and Allmerica
Investment Management Company, Inc. ("AIMCO"), predecessor to
Allmerica Financial Investment Management Services, Inc.
("AFIMS")(2)
(b) Portfolio Manager Agreement among the Registrant, AIMCO
and Allmerica Asset Management, Inc.(2)
(c) Form of Portfolio Manager Agreement among the Registrant,
AFIMS and Pilgrim Baxter Analytic Investors, Inc.(2)
(d) Form of subadvisory agreement among the Registrant,
Palladian Advisors, Inc. and a Portfolio Manager (for all
Portfolios other than the Growth Portfolio and the Strategic
Income Portfolio).(3)
(e) Substitution agreement among the Registrant,
Palladian Advisors, Inc., AIMCO and Bee & Associates,
Incorporated with respect to the International Growth
Portfolio.(2)
(f) Substitution agreement among the Registrant,
Palladian Advisor, Inc., AIMCO and Fischer Francis Trees
and Watts, Inc. with respect to the Global Strategic Income
Portfolio.(2)
(g) Substitution agreement among the Registrant, Palladian
Advisors, Inc., AIMCO and GAMCO Investors, Inc. with respect
to the Value Portfolio.(2)
(h) Substitution agreement among the Registrant, Palladian
Advisors, Inc., AIMCO and GAMCO Investors, Inc. with respect
to the Global Interactive/Telecomm Portfolio.(2)
(i) Substitution agreement among the Registrant, Palladian
Advisors, Inc., AIMCO and Stonehill Capital Management, Inc.
with respect to the Growth Portfolio.(2)
C-1
<PAGE>
6. Not applicable.
7. Not applicable.
8. Custodial and fund accounting contract between the
Registrant and Investors Bank & Trust Company.(4)
9. (a) Transfer agency agreement between Registrant and
Investors Bank & Trust Company.(4)
(b) Portfolio Manager Investment Agreement with respect
to the International Growth Portfolio.(4)
(c) Participation Agreement among the Registrant, AIMCO,
and Allmerica Financial Life Insurance and Annuity Company.(2)
(d) Participation Agreement among the Registrant, AIMCO,
and First Allmerica Financial Life Insurance Company.(2)
(e) Portfolio Manager Investment Agreement with respect to
the Value Portfolio.(4)
(f) Portfolio Manager Investment Agreement with respect to
the Global Interactive/Telecomm Portfolio.(4)
10. Opinion of counsel.(1)
11. Consent of independent accountants.(4)
12. Not applicable.
13. Not applicable.
14. Not applicable.
15. Not applicable.
16. Schedule for Computation of Performance Quotations.(4)
18. Not applicable.
19. Powers of attorney.(2)
27. Financial Data Schedules.(4)
- -------------------------
C-2
<PAGE>
(1) Incorporated by reference to post-effective amendment No. 1, Reg. No.
33-73882, filed January 26, 1996.
(2) Incorporated by reference to post-effective amendment No. 7, Reg. No.
33-73882, filed July 2, 1998.
(3) Incorporated by reference to post-effective amendment No. 6, Reg. No.
33-73882, filed May 1, 1998.
(4) Filed herewith.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
Number of
Record Holders
Title of Class (as of 8/1/98)
-------------- --------------
<S> <C>
Value 4
Growth 3
Balanced Opportunity 1
International Growth 3
Strategic Income 2
Global Interactive/Telecomm 4
</TABLE>
ITEM 27. INDEMNIFICATION.
Section 5.4 of the Agreement and Declaration of Trust of The Fulcrum
Trust provides in part:
"The Trust shall indemnify (from the assets of the Portfolio or
Portfolio in question) each of its Trustees and officers (including
persons who serve at the Trust's request as directors, officers or
trustees of another organization in which the Trust has any interest
as a shareholder, creditor or otherwise) [hereinafter referred to as a
"Covered Person"] against all liabilities, including but not limited
to amounts paid in satisfaction of judgments, in compromise or as
fines and penalties, and expenses, including reasonable accountants'
and
C-3
<PAGE>
counsel fees, incurred by any Covered Person in connection with
the defense or disposition of any action, suit or other proceeding,
whether civil or criminal, before any court or administrative or
legislative body, in which such Covered Person may be or may have been
involved as a party or otherwise or with which such person may be or
may have been threatened, while in office or thereafter, by reason of
being or having been such a Trustee or officer, director or trustee,
except with respect to any matter as to which it has been determined
that such Covered Person (i) did not act in good faith in the
reasonable relief that such Covered Person's action was in or not
opposed to the best interests of the Trust or (ii) had acted with
willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of such Covered Person's office
(either and both of the conduct described in (i) and (ii) being
referred to hereafter as "Disabling Conduct")."
The Agreement and Declaration, Exhibit 1 hereto, provides additional terms of
this indemnification.
The agreement between the Registrant and the Manager includes the
following indemnification provision:
"The Manager shall not be liable for any loss suffered by the Trust as
the result of actions by persons other than the Manager or for any
loss suffered by the Trust as the result of any negligent act or error
of judgment of the Manager in connection with the matters to which
this Agreement relates, except a loss resulting from a breach by the
Manager of its fiduciary duty with respect to the receipt of
compensation for services (in which case any award of damages shall be
limited to the period and the amount set forth in Section 36(b)(3) of
the 1940 Act) or loss resulting from willful misfeasance, bad faith or
gross negligence on its part in the performance of its duties under
this Agreement or from reckless disregard by it of its obligations and
duties under this Agreement. The Trust shall indemnify the Manager
and hold it harmless from all cost, damage and expense, including
reasonable expenses for legal counsel, incurred by the Manager
resulting from actions for which it is relieved of responsibility by
this paragraph. The Manager shall indemnify the Trust and hold it
harmless from all cost, damage and expense, including reasonable
expenses for legal counsel, incurred by the Trust resulting from (i) a
breach by the Manager of its fiduciary duty with respect to
compensation for services paid by the Trust (in which case any award
of damages shall be limited to the period and the amount set forth in
Section 36(b)(3) of the 1940 Act); (ii) willful misfeasance, bad faith
or gross negligence by the Manager in the performance of its duties
under this Agreement; or (iii) reckless disregard by the Manager of
its obligations and duties under this Agreement."
C-4
<PAGE>
The agreements with the Portfolio Managers include substantially similar
provisions.
The Participation Agreements with the life insurance companies investing
in the Trust (each a "Life Company") include certain indemnification
provisions. Subject to certain limitations, the Life Company agrees, among
other things, to indemnify the Registrant, the Manager and the principal
underwriter for any and all losses, claims, damages, or liabilities
(including legal and other expenses) arising out of certain
misrepresentations or omissions, a failure by Life Company to substantially
provide the services required by the Participation Agreement, or a material
breach of the Participation Agreement. Subject to certain limitations, the
Manager and the principal underwriter agree, among other things, to indemnify
the Life Company against all losses, claims, damages, or liabilities
(including legal and other expenses) arising out of certain
misrepresentations or omissions, a failure by the Trust to meet certain
requirements, or a material breach of the Participation Agreement.
Participation agreements with other insurance companies include similar
provisions.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
(a) ALLMERICA FINANCIAL INVESTMENT MANAGEMENT SERVICES, INC.
See "Management of the Trust" in both Prospectuses and Statements of
Additional Information (Parts A and B) of this Registration Statement.
Information as to Allmerica Financial Investment Management Services,
Inc.'s directors and officers is included in its Form ADV filed with the
Securities and Exchange Commission (File Number 801-55463) on April 15, 1998,
the text of which is incorporated herein by reference.
(b) GAMCO INVESTORS, INC.
C-5
<PAGE>
See "Management of the Trust" both in the Prospectus and Statement of
Additional Information (Parts A and B) of this Registration Statement
relating to the Value and Global Interactive/Telecomm Portfolios.
Information as to GAMCO Investors, Inc.'s directors and executive
officers is included in its Form ADV filed with the Securities and Exchange
Commission (File No. 801-141-32), as most recently amended, the text of which
is incorporated herein by reference.
(c) Pilgrim Baxter Analytic Investors, Inc.
See "Management of the Trust" both in the Prospectus and Statement of
Additional Information (Parts A and B) of this Registration Statement
relating to the Growth Portfolio.
Information as to Pilgrim Baxter Analytic Investors, Inc.'s directors
and executive officers is included in its Form ADV filed with the Securities
and Exchange Commission (File No. 801-7082), as most recently amended, the
text of which is incorporated herein by reference.
(d) BEE & ASSOCIATES INCORPORATED
See "Management of the Trust" both in the Prospectus and Statement of
Additional Information (Parts A and B) of this Registration Statement
relating to the International Growth Portfolio.
Information as to Bee & Associates Incorporated's directors and
executive officers is included in its Form ADV filed with the Securities and
Exchange Commission (File No. 801-345-38), as most recently amended, the text
of which is incorporated herein by reference.
(e) ALLMERICA ASSET MANAGEMENT, INC.
See "Management of the Trust" both in the Prospectus and Statement of
Additional Information (Parts A and B) of this Registration Statement
relating to the Strategic Income Portfolio.
Information as to the directors and executive officers of Allmerica
Asset Management is included in its Form ADV filed with the Securities and
Exchange Commission (File No. 801-441-89), as most recently amended, the text
of which is incorporated herein by reference.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Not applicable.
(b) Not applicable.
C-6
<PAGE>
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules thereunder
are maintained at the offices of (1) the Registrant, Allmerica Financial
Investment Management Services, Inc., and Allmerica Asset Management, Inc.,
440 Lincoln Street, Worcester, MA 01653; (2) GAMCO Investors, Inc., One
Corporate Center, Rye, NY 10580; (3) Pilgrim Baxter Analytic Investors, Inc.,
700 South Flower Street, Suite 2400, Los Angeles, CA 90017; (4) Bee &
Associates Incorporated, 370 17th Street, Denver, CO 80202; and (5) Investors
Bank & Trust Company, 200 Clarendon Street, Boston, MA 02111.
ITEM 31. MANAGEMENT SERVICES
Not applicable.
ITEM 32. UNDERTAKINGS
The Registrant undertakes to furnish each person to whom a prospectus
is delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Worcester, and Commonwealth of
Massachusetts on the 27th day of August, 1998.
THE PALLADIAN TRUST
(Registrant)
By: /s/ George J. Sullivan, Jr. /s/ Thomas P. Cunningham
s------------------------------- ------------------------------
George J. Sullivan, Jr. Thomas P. Cunningham
Chairman, President and Trustee (Attorney-in-Fact)
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated and on the 27th day of August, 1998.
/s/ George J. Sullivan, Jr. /s/ Thomas P. Cunningham
- --------------------------- ------------------------------
George J. Sullivan, Jr. Thomas P. Cunningham
Chairman, President and Trustee (Attorney-in-Fact)
/s/ Thomas N. Dallape /s/ Thomas P. Cunningham
- --------------------------- ------------------------------
Thomas N. Dallape Thomas P. Cunningham
Trustee (Attorney-in-Fact)
/s/ Gordon Holmes /s/ Thomas P. Cunningham
- ---------------------------- ------------------------------
Gordon Holmes Thomas P. Cunningham
Trustee (Attorney-in-Fact)
/s/ Thomas P. Cunningham
- ---------------------------
Thomas P. Cunningham
Treasurer,
Principal Financial Officer,
Principal Accounting Officer
C-8
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
8 Custodial and fund accounting contract between the Registrant
and Investors Bank & Trust Company
9(a) Transfer agency agreement between Registrant and Investors
Bank & Trust Company
9(b) Portfolio Manager Investment Agreement with respect to the
International Growth Portfolio
9(e) Portfolio Manager Investment Agreement with respect to the
Value Portfolio
9(f) Portfolio Manager Investment Agreement with respect to the
Global Interactive/Telecomm Portfolio
11 Consent of Independent Accountants
16 Schedule for Computation of Performance Quotation
27 Financial Data Schedules
<PAGE>
CUSTODIAN AGREEMENT
Between
THE PALLADIAN TRUST
and
INVESTORS BANK & TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
Page
----
1. Bank Appointed Custodian ............................................. 1
2. Definitions .......................................................... 1
2.1 Authorized Person ...................................... 1
2.2 Security ............................................... 1
2.3 Portfolio Security ..................................... 1
2.4 Officers' Certificate .................................. 2
2.5 Book-Entry System ...................................... 2
2.6 Depository ............................................. 2
2.7 Proper Instructions .................................... 2
3. Separate Accounts .................................................... 2
4. Certification as to Authorized Persons ............................... 3
5. Custody of Cash ...................................................... 3
5.1 Purchase of Securities ................................. 3
5.2 Redemptions ............................................ 3
5.3 Distributions and Expenses of Fund ..................... 4
5.4 Payment in Respect of Securities ....................... 4
5.5 Repayment of Loans ..................................... 4
5.6 Repayment of Cash ...................................... 4
5.7 Foreign Exchange Transactions .......................... 4
5.8 Other Authorized Payments .............................. 4
5.9 Termination ............................................ 4
6. Securities ........................................................... 4
6.1 Segregation and Registration ........................... 4
6.2 Voting and Proxies ..................................... 5
6.3 Book-Entry System ...................................... 5
6.4 Use of a Depository .................................... 6
6.5 Use of Book-Entry System for Commercial Paper .......... 7
6.6 Use of Immobilization Programs ......................... 8
6.7 Eurodollar CDs ......................................... 8
6.8 Options and Futures Transactions ....................... 9
(a) Puts and Calls Traded on Securities Exchanges,
NASDAQ or Over-the-Counter ................... 9
(b) Puts, Calls, and Futures Traded
on Commodities Exchanges ..................... 9
<PAGE>
Page
----
6.9 Segregated Account ..................................... 10
6.10 Interest Bearing Call or Time Deposits ................. 11
6.11 Transfer of Securities ................................. 11
7. Redemptions .......................................................... 13
8. Merger, Dissolution, etc. of Fund .................................... 13
9. Actions of Bank Without Prior Authorization .......................... 13
10. Collections and Defaults ............................................. 14
11. Maintenance of Records and Accounting Services ....................... 14
12. Fund Evaluation ...................................................... 15
13. Concerning the Bank .................................................. 15
13.1 Performance of Duties;
Standard of Care ...................................... 15
13.2 Agents and Subcustodians with Respect to Property
of the Fund Held in the United States ................. 16
13.3 Duties of the Bank with Respect to Property
Held Outside of the United States ..................... 16
13.4 Insurance .............................................. 20
13.5 Fees and Expenses of Bank .............................. 20
13.6 Advances by Bank ....................................... 20
14. Termination .......................................................... 20
15. Confidentiality ...................................................... 21
16. Notices .............................................................. 21
17. Amendments ........................................................... 22
18. Parties .............................................................. 22
19. Governing Law ........................................................ 22
20. Counterparts ......................................................... 22
21. Limitation of Liability .............................................. 22
<PAGE>
CUSTODIAN AGREEMENT
AGREEMENT made as of this 29th day of September, 1995, between THE
PALLADIAN TRUST, a Massachusetts business trust (the "Fund") and INVESTORS
BANK & TRUST COMPANY (the "Bank").
The Fund, an open-end management investment company, desires to place
and maintain all of its portfolio securities and cash in the custody of the
Bank. The Bank has at least the minimum qualifications required by Section
17(f)(1) of the Investment Company Act of 1940 (the "1940 Act") to act as
custodian of the portfolio securities and cash of the Fund, and has indicated
its willingness to so act, subject to the terms and conditions of this
Agreement.
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements contained herein, the parties hereto agree as follows:
1. BANK APPOINTED CUSTODIAN. The Fund hereby appoints the Bank as
custodian of its portfolio securities and cash delivered to the Bank as
hereinafter described and the Bank agrees to act as such upon the terms and
conditions hereinafter set forth.
2. DEFINITIONS. Whenever used herein, the terms listed below will have
the following meaning:
2.1 AUTHORIZED PERSON. Authorized Person will mean any of the
persons duly authorized to give Proper Instructions or otherwise act on
behalf of the Fund by appropriate resolution of its Board of Directors or the
Board of Trustees as the case may be ("the Board"), and set forth in a
certificate as required by Section 4 hereof.
2.2 SECURITY. The term security as used herein will have the same
meaning as when such term is used in the Securities Act of 1933, as amended,
including, without limitation, any note, stock, treasury stock, bond,
debenture, evidence of indebtedness, certificate of interest or participation
in any profit sharing agreement, collateral-trust certificate,
preorganization certificate or subscription, transferable share, investment
contract, voting-trust certificate, certificate of deposit for a security,
fractional undivided interest in oil, gas, or other mineral rights, any put,
call, straddle, option, or privilege on any security, certificate of deposit,
or group or index of securities (including any interest therein or based on
the value thereof), or any put, call, straddle, option, or privilege entered
into on a national securities exchange relating to a foreign currency, or, in
general, any interest or instrument commonly known as a "security", or any
certificate of interest or participation in, temporary or interim certificate
for, receipt for, guarantee of, or warrant or right to subscribe to, or
option contract to purchase or sell any of the foregoing, and futures,
forward contracts and options thereon.
2.3 PORTFOLIO SECURITY. Portfolio Security will mean any Security
owned by the Fund.
<PAGE>
2
2.4 OFFICERS' CERTIFICATE. Officers' Certificate will mean, unless
otherwise indicated, any request, direction, instruction, or certification in
writing signed by any two Authorized Persons of the Fund.
2.5 BOOK-ENTRY SYSTEM. Book-Entry System shall mean the Federal
Reserve-Treasury Department Book Entry System for United States government,
instrumentality and agency securities operated by the Federal Reserve Bank,
its successor or successors and its nominee or nominees.
2.6 DEPOSITORY. Depository shall mean The Depository Trust Company
("DTC"), a clearing agency registered with the Securities and Exchange
Commission under Section 17A of the Securities Exchange Act of 1934
("Exchange Act"), its successor or successors and its nominee or nominees.
The term "Depository" shall further mean and include any other person
authorized to act as a depository under the 1940 Act, its successor or
successors and its nominee or nominees, specifically identified in a
certified copy of a resolution of the Board.
2.7 PROPER INSTRUCTIONS. Proper Instructions shall mean (i)
instructions (which may be continuing instructions) regarding the purchase or
sale of Portfolio Securities, and payments and deliveries in connection
therewith, given by an Authorized Person as shall have been designated in an
Officers' Certificate, such instructions to be given in such form and manner
as the Bank and the Fund shall agree upon from time to time, and (ii)
instructions (which may be continuing instructions) regarding other matters
signed or initialed by such one or more persons from time to time designated
in an Officers' Certificate as having been authorized by the Board. Oral
instructions will be considered Proper Instructions if the Bank reasonably
believes them to have been given by a person authorized to give such
instructions with respect to the transaction involved. The Fund shall cause
all oral instructions to be promptly confirmed in writing. The Bank shall act
upon and comply with any subsequent Proper Instruction which modifies a prior
instruction and the sole obligation of the Bank with respect to any follow-up
or confirmatory instruction shall be to make reasonable efforts to detect any
discrepancy between the original instruction and such confirmation and to
report such discrepancy to the Fund. The Fund shall be responsible, at the
Fund's expense, for taking any action, including any reprocessing, necessary
to correct any such discrepancy or error, and to the extent such action
requires the Bank to act the Fund shall give the Bank specific Proper
Instructions as to the action required. Upon receipt of an Officers'
Certificate as to the authorization by the Board accompanied by a detailed
description of procedures approved by the Fund, Proper Instructions may
include communication effected directly between electro-mechanical or
electronic devices provided that the Board and the Bank are satisfied that
such procedures afford adequate safeguards for the Fund's assets.
3. SEPARATE ACCOUNTS. If the Fund has more than one series or
portfolio, the Bank will segregate the assets of each series or portfolio to
which this Agreement relates into a separate account for each such series or
portfolio containing the assets of such series or portfolio (and all
investment earnings thereon). Unless the context otherwise requires, any
reference in this Agreement to any actions to be taken by the Fund shall be
deemed to refer to the Fund acting on behalf of one or more of its series,
any reference in this Agreement to any assets of the Fund, including, without
limitation, any Portfolio
<PAGE>
3
Securities and cash and earnings thereon, shall be deemed to refer only to
assets of the applicable series, any duty or obligation of the Bank hereunder
to the Fund shall be deemed to refer to duties and obligations with respect
to the individual series, and any obligation or liability of the Fund
hereunder shall be binding only with respect to the individual series, and
shall be discharged only out of the assets of such series.
4. CERTIFICATION AS TO AUTHORIZED PERSONS. The Secretary or Assistant
Secretary of the Fund will at all times maintain on file with the Bank his or
her certification to the Bank, in such form as may be acceptable to the Bank,
of (i) the names and signatures of the Authorized Persons and (ii) the names
of the members of the Board, it being understood that upon the occurrence of
any change in the information set forth in the most recent certification on
file (including without limitation any person named in the most recent
certification who is no longer an Authorized Person as designated therein),
the Secretary or Assistant Secretary of the Fund, will sign a new or amended
certification setting forth the change and the new, additional or omitted
names or signatures. The Bank will be entitled to rely and act upon any
Officers' Certificate given to it by the Fund which has been signed by
Authorized Persons named in the most recent certification.
5. CUSTODY OF CASH. As custodian for the Fund, the Bank will open and
maintain a separate account or accounts in the name of the Fund or in the
name of the Bank, as Custodian of the Fund, and will deposit to the account
of the Fund all of the cash of the Fund, except for cash held by a
subcustodian appointed pursuant to Section 13.2 or Section 13.3 hereof,
including borrowed funds, delivered to the Bank, subject only to draft or
order by the Bank acting pursuant to the terms of this Agreement. Upon
receipt by the Bank of Proper Instructions (which may be continuing
instructions) or in the case of payments for redemptions and repurchases of
outstanding shares of common stock of the Fund, notification from the Fund's
transfer agent as provided in Section 7, requesting such payment, designating
the payee or the account or accounts to which the Bank will release funds for
deposit, and stating that it is for a purpose permitted under the terms of
this Section 5, specifying the applicable subsection, the Bank will make
payments of cash held for the accounts of the Fund, insofar as funds are
available for that purpose, only as permitted in subsections 5.1-5.9 below.
5.1 PURCHASE OF SECURITIES. Upon the purchase of securities for the
Fund, against contemporaneous receipt of such securities by the Bank or,
against delivery of such securities to the Bank in accordance with generally
accepted settlement practices and customs in the jurisdiction or market in
which the transaction occurs, registered in the name of the Fund or in the
name of, or properly endorsed and in form for transfer to, the Bank, or a
nominee of the Bank, or receipt for the account of the Bank pursuant to the
provisions of Section 6 below, each such payment to be made at the purchase
price shown on a broker's confirmation (or transaction report in the case of
Book Entry Paper) of purchase of the securities received by the Bank before
such payment is made, as confirmed in the Proper Instructions received by the
Bank before such payment is made.
5.2 REDEMPTIONS. In such amount as may be necessary for the
repurchase or redemption of common shares of the Fund offered for repurchase
or redemption in accordance with Section 7 of this Agreement.
<PAGE>
4
5.3 DISTRIBUTIONS AND EXPENSES OF FUND. For the payment on the
account of the Fund of dividends or other distributions to shareholders as
may from time to time be declared by the Board, interest, taxes, management
or supervisory fees, distribution fees, fees of the Bank for its services
hereunder and reimbursement of the expenses and liabilities of the Bank as
provided hereunder, fees of any transfer agent, fees for legal, accounting,
and auditing services, or other operating expenses of the Fund.
5.4 PAYMENT IN RESPECT OF SECURITIES. For payments in connection
with the conversion, exchange or surrender of Portfolio Securities or
securities subscribed to by the Fund held by or to be delivered to the Bank.
5.5 REPAYMENT OF LOANS. To repay loans of money made to the Fund,
but, in the case of final payment, only upon redelivery to the Bank of any
Portfolio Securities pledged or hypothecated therefor and upon surrender of
documents evidencing the loan;
5.6 REPAYMENT OF CASH. To repay the cash delivered to the Fund for
the purpose of collateralizing the obligation to return to the Fund
certificates borrowed from the Fund representing Portfolio Securities, but
only upon redelivery to the Bank of such borrowed certificates.
5.7 FOREIGN EXCHANGE TRANSACTIONS. For payments in connection with
foreign exchange contracts or options to purchase and sell foreign currencies
for spot and future delivery which may be entered into by the Bank on behalf
of the Fund upon the receipt of Proper Instructions, such Proper Instructions
to specify the currency broker or banking institution (which may be the Bank,
or any other subcustodian or agent hereunder, acting as principal) with which
the contract or option is made, and the Bank shall have no duty with respect
to the selection of such currency brokers or banking institutions with which
the Fund deals or for their failure to comply with the terms of any contract
or option.
5.8 OTHER AUTHORIZED PAYMENTS. For other authorized transactions of
the Fund, or other obligations of the Fund incurred for proper Fund purposes;
provided that before making any such payment the Bank will also receive a
certified copy of a resolution of the Board signed by an Authorized Person
(other than the Person certifying such resolution) and certified by its
Secretary or Assistant Secretary, naming the person or persons to whom such
payment is to be made, and either describing the transaction for which
payment is to be made and declaring it to be an authorized transaction of the
Fund, or specifying the amount of the obligation for which payment is to be
made, setting forth the purpose for which such obligation was incurred and
declaring such purpose to be a proper corporate purpose.
5.9 TERMINATION: upon the termination of this Agreement as
hereinafter set forth pursuant to Section 8 and Section 14 of this Agreement.
6. SECURITIES.
6.1 SEGREGATION AND REGISTRATION. Except as otherwise provided
herein, and except for securities to be delivered to any subcustodian
appointed pursuant to Section 13.2 hereof, the Bank as custodian, will
receive and hold pursuant to the provisions hereof, in
<PAGE>
5
a separate account or accounts and physically segregated at all times from
those of other persons, any and all Portfolio Securities which may now or
hereafter be delivered to it by or for the account of the Fund. All such
Portfolio Securities will be held or disposed of by the Bank for, and subject
at all times to, the instructions of the Fund pursuant to the terms of this
Agreement. Subject to the specific provisions herein relating to Portfolio
Securities that are not physically held by the Bank, the Bank will register
all Portfolio Securities (unless otherwise directed by Proper Instructions or
an Officers' Certificate), in the name of a registered nominee of the Bank as
defined in the Internal Revenue Code and any Regulations of the Treasury
Department issued thereunder, and will execute and deliver all such
certificates in connection therewith as may be required by such laws or
regulations or under the laws of any state.
The Fund will from time to time furnish to the Bank appropriate
instruments to enable it to hold or deliver in proper form for transfer, or
to register in the name of its registered nominee, any Portfolio Securities
which may from time to time be registered in the name of the Fund.
6.2 VOTING AND PROXIES. Neither the Bank nor any nominee of the Bank
will vote any of the Portfolio Securities held hereunder, except in
accordance with Proper Instructions or an Officers' Certificate. The Bank
will execute and deliver, or cause to be executed and delivered, to the Fund
all notices, proxies and proxy soliciting materials with respect to such
Securities, such proxies to be executed by the registered holder of such
Securities (if registered otherwise than in the name of the Fund), but
without indicating the manner in which such proxies are to be voted.
6.3 BOOK-ENTRY SYSTEM. Provided (i) the Bank has received a
certified copy of a resolution of the Board specifically approving deposits
of Fund assets in the Book-Entry System, and (ii) for any subsequent changes
to such arrangements following such approval, the Board has reviewed and
approved the arrangement and has not delivered an Officer's Certificate to
the Bank indicating that the Board has withdrawn its approval:
(a) The Bank may keep Portfolio Securities in the Book-Entry
System provided that such Portfolio Securities are represented in an account
("Account") of the Bank (or its agent) in such System which shall not include
any assets of the Bank (or such agent) other than assets held as a fiduciary,
custodian, or otherwise for customers;
(b) The records of the Bank (and any such agent) with respect
to the Fund's participation in the Book-Entry System through the Bank (or any
such agent) will identify by book entry Portfolio Securities which are
included with other securities deposited in the Account and shall at all
times during the regular business hours of the Bank (or such agent) be open
for inspection by duly authorized officers, employees or agents of the Fund.
Where securities are transferred to the Fund's account, the Bank shall also,
by book entry or otherwise, identify as belonging to the Fund a quantity of
securities in fungible bulk of securities (i) registered in the name of the
Bank or its nominee, or (ii) shown on the Bank's account on the books of the
Federal Reserve Bank;
(c) The Bank (or its agent) shall pay for Portfolio Securities
purchased for the account of the Fund or shall pay cash collateral against
the return of Portfolio Securities
<PAGE>
6
loaned by the Fund upon (i) receipt of advice from the Book-Entry System that
such Portfolio Securities have been transferred to the Account, and (ii) the
making of an entry on the records of the Bank (or its agent) to reflect such
payment and transfer for the account of the Fund. The Bank (or its agent)
shall transfer securities sold or loaned for the account of the Fund upon
(i) receipt of advice from the Book-Entry System that
payment for securities sold or payment of the initial cash collateral against
the delivery of Portfolio Securities loaned by the Fund has been transferred
to the Account; and
(ii) the making of an entry on the records of the Bank (or
its agent) to reflect such transfer and payment for the account of the Fund.
Copies of all advices from the Book-Entry System of transfers of Securities
for the account of the Fund shall identify the Fund, be maintained for the
Fund by the Bank and shall be provided to the Fund at its request. The Bank
shall send the Fund a confirmation, as defined by Rule 17f-4 under the 1940
Act, of any transfers to or from the account of the Fund;
(d) The Bank will promptly provide the Fund with any report
obtained by the Bank or its agent on the Book-Entry System's accounting
system, internal accounting control and procedures for safeguarding
securities deposited in the Book-Entry System; and
(e) The Bank shall be liable to the Fund for any loss or
damage to the Fund resulting from use of the Book-Entry System by reason of
any gross negligence, willful misfeasance or bad faith of the Bank or any of
its agents or of any of its or their employees or from any reckless disregard
by the Bank or any such agent of its duty to use its best efforts to enforce
such rights as it may have against the Book-Entry System; at the election of
the Fund, it shall be entitled to be substituted for the Bank in any claim
against the Book-Entry System or any other person which the Bank or its agent
may have as a consequence of any such loss or damage if and to the extent
that the Fund has not been made whole for any loss or damage;
6.4 USE OF A DEPOSITORY. Provided (i) the Bank has received a
certified copy of a resolution of the Board specifically approving deposits
in DTC or other such Depository and (ii) for any subsequent changes to such
arrangements following such approval, the Board has reviewed and approved the
arrangement and has not delivered an Officer's Certificate to the Bank
indicating that the Board has withdrawn its approval:
(a) The Bank may use a Depository to hold, receive, exchange,
release, lend, deliver and otherwise deal with Portfolio Securities including
stock dividends, rights and other items of like nature, and to receive and
remit to the Bank on behalf of the Fund all income and other payments thereon
and to take all steps necessary and proper in connection with the collection
thereof;
(b) Registration of Portfolio Securities may be made in the
name of any nominee or nominees used by such Depository;
<PAGE>
7
(c) Payment for securities purchased and sold may be made
through the clearing medium employed by such Depository for transactions of
participants acting through it. Upon any purchase of Portfolio Securities,
payment will be made only upon delivery of the securities to or for the
account of the Fund and the Fund shall pay cash collateral against the return
of Portfolio Securities loaned by the Fund only upon delivery of the
Portfolio Securities to or for the account of the Fund; and upon any sale of
Portfolio Securities, delivery of the securities will be made only against
payment therefor or, in the event Portfolio Securities are loaned, delivery
of Portfolio Securities will be made only against receipt of the initial cash
collateral to or for the account of the Fund; and
(d) The Bank shall be liable to the Fund for any loss or
damage to the Fund resulting from use of a Depository by reason of any gross
negligence, willful misfeasance or bad faith of the Bank or its employees or
from any reckless disregard by the Bank of its duty to use its best efforts
to enforce such rights as it may have against a Depository. In this
connection, the Bank shall use its best efforts to ensure that:
(i) The Depository obtains replacement of any certificated
Portfolio Security deposited with it in the event such Security is lost,
destroyed, wrongfully taken or otherwise not available to be returned to the
Bank upon its request;
(ii) Any proxy materials received by a Depository with
respect to Portfolio Securities deposited with such Depository are forwarded
immediately to the Bank for prompt transmittal to the Fund;
(iii) Such Depository immediately forwards to the Bank
confirmation of any purchase or sale of Portfolio Securities and of the
appropriate book entry made by such Depository to the Fund's account;
(iv) Such Depository prepares and delivers to the Bank
such records with respect to the performance of the Bank's obligations and
duties hereunder as may be necessary for the Fund to comply with the
recordkeeping requirements of Section 31(a) of the 1940 Act and Rule 31(a)
thereunder; and
(v) Such Depository delivers to the Bank and the Fund all
internal accounting control reports, whether or not audited by an independent
public accountant, as well as such other reports as the Fund may reasonably
request in order to verify the Portfolio Securities held by such Depository.
6.5 USE OF BOOK-ENTRY SYSTEM FOR COMMERCIAL PAPER. Provided (i) the
Bank has received a certified copy of a resolution of the Board specifically
approving participation in a system maintained by the Bank for the holding of
commercial paper in book-entry form ("Book-Entry Paper") and (ii) for each
year following such approval the Board has received and approved the
arrangements, upon receipt of Proper Instructions and upon receipt of
confirmation from an Issuer (as defined below) that the Fund has purchased
such Issuer's Book-entry Paper, the Bank shall issue and hold in book-entry
form, on behalf of the Fund, commercial paper issued by issuers with whom the
Bank has entered
<PAGE>
8
into a book-entry agreement (the "Issuers"). In maintaining its Book-entry
Paper System, the Bank agrees that:
(a) the Bank will maintain all Book-Entry Paper held by the
Fund in an account of the Bank that includes only assets held by it for
customers;
(b) the records of the Bank with respect to the Fund's purchase
of Book-entry Paper through the Bank will identify, by book-entry, Commercial
Paper belonging to the Fund which is included in the Book-entry Paper System
and shall at all times during the regular business hours of the Bank be open
for inspection by duly authorized officers, employees or agents of the Fund;
(c) the Bank shall pay for Book-Entry Paper purchased for the
account of the Fund upon contemporaneous (i) receipt of advice from the
Issuer that such sale of Book-Entry Paper has been effected, and (ii) the
making of an entry on the records of the Bank to reflect such payment and
transfer for the account of the Fund;
(d) the Bank shall cancel such Book-Entry Paper obligation upon
the maturity thereof upon contemporaneous (i) receipt of advice that payment
for such Book-Entry Paper has been transferred to the Fund, and (ii) the
making of an entry on the records of the Bank to reflect such payment for the
account of the Fund;
(e) the Bank shall transmit to the Fund a transaction journal
confirming each transaction in Book-Entry Paper for the account of the Fund
on the next business day following the transaction; and
(f) the Bank will send to the Fund such reports on its system
of internal accounting control with respect to the Book-Entry Paper System as
the Fund may reasonably request from time to time.
6.6 USE OF IMMOBILIZATION PROGRAMS. Provided (i) the Bank has
received a certified copy of a resolution of the Board specifically approving
the maintenance of Portfolio Securities in an immobilization program operated
by a bank which meets the requirements of Section 26(a)(1) of the 1940 Act,
and (ii) for each year following such approval the Board has reviewed and
approved the arrangement and has not delivered an Officer's Certificate to
the Bank indicating that the Board has withdrawn its approval, the Bank shall
enter into such immobilization program with such bank acting as a
subcustodian hereunder.
6.7 EURODOLLAR CDs. Any Portfolio Securities which are
Eurodollar CDs may be physically held by the European branch of the U.S.
banking institution that is the issuer of such Eurodollar CD (a "European
Branch"), provided that such Securities are identified on the books of the
Bank as belonging to the Fund and that the books of the Bank identify the
European Branch holding such Securities. Notwithstanding any other provision
of this Agreement to the contrary, except as stated in the first sentence of
this subsection 6.7, the Bank shall be under no other duty with respect to
such Eurodollar CDs belonging to the Fund, and shall have no liability to the
Fund or its shareholders with respect to the actions, inactions, whether
negligent or otherwise of such European
<PAGE>
9
Branch in connection with such Eurodollar CDs, except for any loss or damage
to the Fund resulting from the Bank's own gross negligence, willful
misfeasance or bad faith in the performance of its duties hereunder.
6.8 OPTIONS AND FUTURES TRANSACTIONS.
(a) Puts and Calls Traded on Securities Exchanges, NASDAQ
or Over-the-Counter.
1. The Bank shall take action as to put options ("puts")
and call options ("calls") purchased or sold (written) by the Fund regarding
escrow or other arrangements (i) in accordance with the provisions of any
agreement entered into upon receipt of Proper Instructions between the Bank,
any broker-dealer registered under the Exchange Act and a member of the
National Association of Securities Dealers, Inc. (the "NASD"), and, if
necessary, the Fund relating to the compliance with the rules of the Options
Clearing Corporation and of any registered national securities exchange, or
of any similar organization or organizations.
2. Unless another agreement requires it to do so, the Bank
shall be under no duty or obligation to see that the Fund has deposited or is
maintaining adequate margin, if required, with any broker in connection with
any option, nor shall the Bank be under duty or obligation to present such
option to the broker for exercise unless it receives Proper Instructions from
the Fund. The Bank shall have no responsibility for the legality of any put
or call purchased or sold on behalf of the Fund, the propriety of any such
purchase or sale, or the adequacy of any collateral delivered to a broker in
connection with an option or deposited to or withdrawn from a Segregated
Account (as defined in subsection 6.9 below). The Bank specifically, but not
by way of limitation, shall not be under any duty or obligation to: (i)
periodically check or notify the Fund that the amount of such collateral held
by a broker or held in a Segregated Account is sufficient to protect such
broker of the Fund against any loss; (ii) effect the return of any collateral
delivered to a broker; or (iii) advise the Fund that any option it holds, has
or is about to expire. Such duties or obligations shall be the sole
responsibility of the Fund.
(b) Puts, Calls and Futures Traded on Commodities Exchanges
1. The Bank shall take action as to puts, calls and
futures contracts ("Futures") purchased or sold by the Fund in accordance
with the provisions of any agreement among the Fund, the Bank and a Futures
Commission Merchant registered under the Commodity Exchange Act, relating to
compliance with the rules of the Commodity Futures Trading Commission and/or
any Contract Market, or any similar organization or organizations, regarding
account deposits in connection with transactions by the Fund.
2. The responsibilities and liabilities of the Bank as to
futures, puts and calls traded on commodities exchanges, any Futures
Commission Merchant account and the Segregated Account shall be limited as
set forth in subparagraph (a)(2) of this Section 6.8 as if such subparagraph
referred to Futures Commission Merchants rather than brokers, and Futures and
puts and calls thereon instead of options.
<PAGE>
10
6.9 SEGREGATED ACCOUNT. The Bank shall upon receipt of Proper
Instructions establish and maintain a Segregated Account or Accounts for and
on behalf of the Fund.
1. Upon receipt of Proper Instructions cash and/or Portfolio
Securities may be transferred into the Segregated Account or Accounts:
(a) in accordance with the provisions of any agreement among
the Fund, the Bank and a broker-dealer registered under the Exchange Act and
a member of the NASD or any Futures Commission Merchant registered under the
Commodity Exchange Act, relating to compliance with the rules of the Options
Clearing Corporation and of any registered national securities exchange or
the Commodity Futures Trading Commission or any registered Contract Market,
or of any similar organizations regarding escrow or other arrangements in
connection with transactions by the Fund;
(b) for the purpose of segregating cash or securities in
connection with options purchased or written by the Fund or commodity futures
purchased or written by the Fund;
(c) for the deposit of liquid assets, such as cash, U.S.
Government securities or other high grade debt obligations, having a market
value (marked to market on a daily basis) at all times equal to not less than
the aggregate purchase price due on the settlement dates of all the Fund's
then outstanding forward commitment or "when-issued" agreements relating to
the purchase of Portfolio Securities and all the Fund's then outstanding
commitments under reverse repurchase agreements entered into with
broker-dealer firms;
(d) for the deposit of any Portfolio Securities which the Fund
has agreed to sell on a forward commitment basis, all in accordance with
Investment Company Act Release No. 10666;
(e) for the purposes of compliance by the Fund with the
procedures required by Investment Company Act Release No. 10666, or any
subsequent release or releases of the Securities and Exchange Commission
relating to the maintenance of Segregated Accounts by registered investment
companies; or
(f) for other proper corporate purposes, but only, in the case
of this clause (f), upon receipt of, in addition to Proper Instructions, a
certified copy of a resolution of the Board, or of the Executive Committee
signed by an officer of the Fund and certified by the Secretary or an
Assistant Secretary, setting forth the purpose or purposes of such Segregated
Account and declaring such purposes to be proper corporate purposes.
2. Upon receipt of Proper Instructions cash and/or Portfolio
Securities may be withdrawn from the Segregated Account or Accounts.
(a) in accordance with the provisions of any agreements
referenced in (a) or (b) above;
<PAGE>
11
(b) for sale or delivery to meet the Fund's obligations
under outstanding firm commitment or when-issued agreements for
the purchase of Portfolio Securities and under reverse repurchase
agreements;
(c) for exchange for other liquid assets of equal or
greater value deposited in the Segregated Account;
(d) to the extent that the Fund's outstanding forward
commitment or when-issued agreements for the purchase of portfolio
securities or reverse repurchase agreements are sold to other
parties or the Fund's obligations thereunder are met from assets
of the Fund other than those in the Segregated Account; or
(e) for delivery upon settlement of a forward commitment
agreement for the sale of Portfolio Securities.
6.10 INTEREST BEARING CALL OR TIME DEPOSITS. The Bank shall, upon
receipt of Proper Instructions relating to the purchase by the Fund of
interest-bearing fixed-term and call deposits, transfer cash, by wire or
otherwise, in such amounts and to such bank or banks as shall be indicated in
such Proper Instructions. The Bank shall include in its records with respect
to the assets of the Fund appropriate notation as to the amount of each such
deposit, the banking institution with which such deposit is made (the
"Deposit Bank"), and shall retain such forms of advice or receipt evidencing
the deposit, if any, as may be forwarded to the Bank by the Deposit Bank.
Such deposits shall be deemed Portfolio Securities of the Fund and the
responsibility of the Bank therefore shall be the same as and no greater than
the Bank's responsibility in respect of other Portfolio Securities of the
Fund.
6.11 TRANSFER OF SECURITIES. The Bank will transfer, exchange,
deliver or release Portfolio Securities held by it hereunder, insofar as such
Securities are available for such purpose, provided that before making any
transfer, exchange, delivery or release under this Section the Bank will
receive Proper Instructions requesting such transfer, exchange or delivery
stating that it is for a purpose permitted under the terms of this Section
6.11, specifying the applicable subsection, or describing the purpose of the
transaction with sufficient particularity to permit the Bank to ascertain the
applicable subsection, only:
(a) upon sales of Portfolio Securities for the account of the
Fund, against contemporaneous receipt by the Bank of payment therefor in
full, or, against payment to the Bank in accordance with generally accepted
settlement practices and customs in the jurisdiction or market in which the
transaction occurs, each such payment to be in the amount of the sale price
shown in a broker's confirmation of sale of the Portfolio Securities received
by the Bank before such transfer is made, as confirmed in the Proper
Instructions received by the Bank before such transfer is made;
(b) in exchange for or upon conversion into other securities
alone or other securities and cash pursuant to any plan of merger,
consolidation, reorganization, share split-up, change in par value,
recapitalization or readjustment or otherwise, upon exercise of subscription,
purchase or sale or other similar rights represented by such Portfolio
<PAGE>
12
Securities, or for the purpose of tendering shares in the event of a tender
offer therefor, provided however that in the event of an offer of exchange,
tender offer, or other exercise of rights requiring the physical tender or
delivery of Portfolio Securities, the Bank shall have no liability for
failure to so tender in a timely manner unless such Proper Instructions are
received by the Bank at least two business days prior to the date required
for tender, and unless the Bank (or its agent or subcustodian hereunder) has
actual possession of such Security at least two business days prior to the
date of tender;
(c) upon conversion of Portfolio Securities pursuant to their
terms into other securities;
(d) for the purpose of redeeming in kind shares of the Fund
upon authorization from the Fund;
(e) in the case of option contracts owned by the Fund, for
presentation to the endorsing broker;
(f) when such Portfolio Securities are called, redeemed or
retired or otherwise become payable;
(g) for the purpose of effectuating the pledge of Portfolio
Securities held by the Bank in order to collateralize loans made to the Fund
by any bank, including the Bank; provided, however, that such Portfolio
Securities will be released only upon payment to the Bank for the account of
the Fund of the moneys borrowed, except that in cases where additional
collateral is required to secure a borrowing already made, and such fact is
made to appear in the Proper Instructions, further Portfolio Securities may
be released for that purpose without any such payment. In the event that any
such pledged Portfolio Securities are held by the Bank, they will be so held
for the account of the lender, and after notice to the Fund from the lender
in accordance with the normal procedures of the lender, that an event of
deficiency or default on the loan has occurred, the Bank may deliver such
pledged Portfolio Securities to or for the account of the lender;
(h) for the purpose of releasing certificates representing
Portfolio Securities, against contemporaneous receipt by the Bank of the fair
market value of such security, as set forth in the Proper Instructions
received by the Bank before such payment is made;
(i) for the purpose of delivering securities lent by the Fund
to a bank or broker dealer, but only against receipt in accordance with
street delivery custom except as otherwise provided herein, of adequate
collateral as agreed upon from time to time by the Fund and the Bank, and
upon receipt of payment in connection with any repurchase agreement relating
to such securities entered into by the Fund;
(j) for other authorized transactions of the Fund or for other
proper corporate purposes; provided that before making such transfer, the
Bank will also receive a certified copy of resolutions of the Board, signed
by an authorized officer of the Fund (other than the officer certifying such
resolution) and certified by its Secretary or Assistant Secretary, specifying
the Portfolio Securities to be delivered, setting forth the transaction in or
purpose for which such delivery is to be made, declaring such transaction to
be an
<PAGE>
13
authorized transaction of the Fund or such purpose to be a proper corporate
purpose, and naming the person or persons to whom delivery of such securities
shall be made; and
(k) upon termination of this Agreement as hereinafter set
forth pursuant to Section 8 and Section 14 of this Agreement.
As to any deliveries made by the Bank pursuant to subsections (a), (b),
(c), (e), (f), (g), (h) and (i) securities or cash receivable in exchange
therefor shall be delivered to the Bank.
7. REDEMPTIONS. In the case of payment of assets of the Fund held by
the Bank in connection with redemptions and repurchases by the Fund of
outstanding common shares, the Bank will rely on notification by the Fund's
transfer agent of receipt of a request for redemption and certificates, if
issued, in proper form for redemption before such payment is made. Payment
shall be made in accordance with the Articles and By-laws of the Fund, from
assets available for said purpose.
8. MERGER, DISSOLUTION, ETC. OF FUND. In the case of the following
transactions, not in the ordinary course of business, namely, the merger of
the Fund into or the consolidation of the Fund with another investment
company where the Fund is not the surviving entity, the sale by the Fund of
all, or substantially all, of its assets to another investment company, or
the liquidation or dissolution of the Fund and distribution of its assets,
the Bank will deliver the Portfolio Securities held by it under this
Agreement and disburse cash only upon the order of the Fund set forth in an
Officers' Certificate, accompanied by a certified copy of a resolution of the
Board authorizing any of the foregoing transactions. Upon completion of such
delivery and disbursement and the payment of the fees, disbursements and
expenses of the Bank, this Agreement will terminate.
9. ACTIONS OF BANK WITHOUT PRIOR AUTHORIZATION. Notwithstanding
anything herein to the contrary, unless and until the Bank receives an
Officers' Certificate to the contrary, it will without prior authorization or
instruction of the Fund or the transfer agent:
9.1 Endorse for collection and collect on behalf of and in the
name of the Fund all checks, drafts, or other negotiable or transferable
instruments or other orders for the payment of money received by it for the
account of the Fund and hold for the account of the Fund all income,
dividends, interest and other payments or distribution of cash with respect
to the Portfolio Securities held thereunder;
9.2 Present for payment all coupons and other income items
held by it for the account of the Fund which call for payment upon
presentation and hold the cash received by it upon such payment for the
account of the Fund;
9.3 Receive and hold for the account of the Fund all
securities received as a distribution on Portfolio Securities as a result of
a stock dividend, share split-up, reorganization, recapitalization, merger,
consolidation, readjustment, distribution of rights and similar securities
issued with respect to any Portfolio Securities held by it hereunder;
<PAGE>
14
9.4 Execute as agent on behalf of the Fund all necessary
ownership and other certificates and affidavits required by the Internal
Revenue Code or the regulations of the Treasury Department issued thereunder,
or by the laws of any state, now or hereafter in effect, inserting the Fund's
name on such certificates as the owner of the securities covered thereby, to
the extent it may lawfully do so and as may be required to obtain payment in
respect thereof. The Bank will execute and deliver such certificates in
connection with Portfolio Securities delivered to it or by it under this
Agreement as may be required under the provisions of the Internal Revenue
Code and any Regulations of the Treasury Department issued thereunder, or
under the laws of any state;
9.5 Present for payment all Portfolio Securities which are
called, redeemed, retired or otherwise become payable, and hold cash received
by it upon payment for the account of the Fund; and
9.6 Exchange interim receipts or temporary securities for
definitive securities.
10. COLLECTIONS AND DEFAULTS. The Bank will use all reasonable efforts
to collect any funds which may to its knowledge become collectible arising
from Portfolio Securities, including dividends, interest and other income,
and to transmit to the Fund notice actually received by it of any call for
redemption, offer of exchange, right of subscription, reorganization or other
proceedings affecting such Securities. If Portfolio Securities upon which
such income is payable are in default or payment is refused after due demand
or presentation, the Bank will notify the Fund in writing of any default or
refusal to pay within two business days from the day on which it receives
knowledge of such default or refusal. In addition, the Bank will send the
Fund a written report once each month showing any income on any Portfolio
Security held by it which is more than ten days overdue on the date of such
report and which has not previously been reported.
11. MAINTENANCE OF RECORDS AND ACCOUNTING SERVICES. The Bank will
maintain records with respect to transactions for which the Bank is
responsible pursuant to the terms and conditions of this Agreement, and in
compliance with the applicable rules and regulations of the 1940 Act and will
furnish the Fund daily with a statement of condition of the Fund. The Bank
will furnish to the Fund at the end of every month, and at the close of each
quarter of the Fund's fiscal year, a list of the Portfolio Securities and the
aggregate amount of cash held by it for the Fund. The books and records of
the Bank pertaining to its actions under this Agreement and reports by the
Bank or its independent accountants concerning its accounting system,
procedures for safeguarding securities and internal accounting controls will
be open to inspection and audit at reasonable times by officers of or
auditors employed by the Fund and will be preserved by the Bank in the manner
and in accordance with the applicable rules and regulations under the 1940
Act.
The Bank shall keep the books of account and render statements or
copies from time to time as reasonably requested by the Treasurer or any
executive officer of the Fund.
The Bank shall assist generally in the preparation of reports to
shareholders and others, audits of accounts, and other ministerial matters of
like nature.
<PAGE>
15
The books and records maintained by the Bank on behalf of the Fund are
the property of the Fund and will be surrendered upon request in accordance
with Section 14.
12. FUND EVALUATION. The Bank shall compute and, unless otherwise
directed by the Board, determine as of the close of business on the New York
Stock Exchange on each day on which said Exchange is open for unrestricted
trading and as of such other hours, if any, as may be authorized by the Board
the net asset value and the public offering price of a share of capital stock
of the Fund, such determination to be made in accordance with the provisions
of the Articles and By-laws of the Fund and Prospectus and Statement of
Additional Information relating to the Fund, as they may from time to time be
amended, and any applicable resolutions of the Board at the time in force and
applicable; and promptly to notify the Fund, the proper exchange and the NASD
or such other persons as the Fund may request of the results of such
computation and determination. In computing the net asset value hereunder,
the Bank may rely in good faith upon information furnished to it by any
Authorized Person in respect of (i) the manner of accrual of the liabilities
of the Fund and in respect of liabilities of the Fund not appearing on its
books of account kept by the Bank, (ii) reserves, if any, authorized by the
Board or that no such reserves have been authorized, (iii) the source of the
quotations to be used in computing the net asset value, (iv) the value to be
assigned to any security for which no price quotations are available, and (v)
the method of computation of the public offering price on the basis of the
net asset value of the shares, and the Bank shall not be responsible for any
loss occasioned by such reliance or for any good faith reliance on any
quotations received from a source pursuant to (iii) above.
13. CONCERNING THE BANK.
13.1 PERFORMANCE OF DUTIES AND STANDARD OF CARE.
In performing its duties hereunder and any other duties listed on any
Schedule hereto, if any, the Bank will be entitled to receive and act upon the
advice of independent counsel of its own selection, which may be counsel for the
Fund, and will be without liability for any action taken or thing done or
omitted to be done in accordance with this Agreement in good faith in conformity
with such advice. In the performance of its duties hereunder, the Bank will be
protected and not be liable, and will be indemnified and held harmless for any
action taken or omitted to be taken by it in good faith reliance upon the terms
of this Agreement, any Officers' Certificate, Proper Instructions, resolution of
the Board, telegram, notice, request, certificate or other instrument reasonably
believed by the Bank to be genuine and for any other loss to the Fund except in
the case of its gross negligence, willful misfeasance or bad faith in the
performance of its duties or reckless disregard of its obligations and duties
hereunder.
The Bank will be under no duty or obligation to inquire into and will
not be liable for:
(a) the validity of the issue of any Portfolio Securities
purchased by or for the Fund, the legality of the purchases thereof or the
propriety of the price incurred therefor;
(b) the legality of any sale of any Portfolio Securities by or
for the Fund or the propriety of the amount for which the same are sold;
<PAGE>
16
(c) the legality of an issue or sale of any common shares of
the Fund or the sufficiency of the amount to be received therefor;
(d) the legality of the repurchase of any common shares of the
Fund or the propriety of the amount to be paid therefor;
(e) the legality of the declaration of any dividend by the Fund
or the legality of the distribution of any Portfolio Securities as payment in
kind of such dividend; and
(f) any property or moneys of the Fund unless and until
received by it, and any such property or moneys delivered or paid by it
pursuant to the terms hereof.
Moreover, the Bank will not be under any duty or obligation to
ascertain whether any Portfolio Securities at any time delivered to or held
by it for the account of the Fund are such as may properly be held by the
Fund under the provisions of its Articles, By-laws, any federal or state
statutes or any rule or regulation of any governmental agency.
Notwithstanding anything in this Agreement to the contrary, in no event
shall the Bank be liable hereunder or to any third party:
(a) for any losses or damages of any kind resulting from acts
of God, earthquakes, fires, floods, storms or other disturbances of nature,
epidemics, strikes, riots, nationalization, expropriation, currency
restrictions, acts of war, civil war or terrorism, insurrection, nuclear
fusion, fission or radiation, the interruption, loss or malfunction of
utilities, transportation, or computers (hardware or software) and computer
facilities, the unavailability of energy sources and other similar happenings
or events except as results from the Bank's own gross negligence; or
(b) for special, punitive or consequential damages arising from
the provision of services hereunder, even if the Bank has been advised of the
possibility of such damages.
13.2 AGENTS AND SUBCUSTODIANS WITH RESPECT TO PROPERTY OF THE FUND
HELD IN THE UNITED STATES. The Bank may employ agents in the performance of
its duties hereunder and shall be responsible for the acts and omissions of
such agents as if performed by the Bank hereunder.
Upon receipt of Proper Instructions, the Bank may employ certain
subcustodians, provided that any such subcustodian meets at least the minimum
qualifications required by Section 17(f)(1) of the 1940 Act to act as a
custodian of the Fund's assets with respect to property of the Fund held in
the United States. The Bank shall have no liability to the Fund or any other
person by reason of any act or omission of such subcustodian and the Fund
shall indemnify the Bank and hold it harmless from and against any and all
actions, suits and claims, arising directly or indirectly out of the
performance of such subcustodian. Upon request of the Bank, the Fund shall
assume the entire defense of any action, suit, or claim subject to the
foregoing indemnity. The Fund shall pay all fees and expenses of such
subcustodian.
<PAGE>
17
13.3 DUTIES OF THE BANK WITH RESPECT TO PROPERTY OF THE FUND
HELD OUTSIDE OF THE UNITED STATES.
(a) APPOINTMENT OF FOREIGN SUB-CUSTODIANS. The Fund hereby
authorizes and instructs the Bank to employ as sub-custodians for the Fund's
Portfolio Securities and other assets maintained outside the United States
the foreign banking institutions and foreign securities depositories
designated on the Schedule attached hereto (each, a "Selected Foreign
Sub-Custodian"). Upon receipt of Proper Instructions, together with a
certified resolution of the Fund's Board of Trustees, the Bank and the Fund
may agree to designate additional foreign banking institutions and foreign
securities depositories to act as Selected Foreign Sub-Custodians hereunder.
Upon receipt of Proper Instructions, the Fund may instruct the Bank to cease
the employment of any one or more such Selected Foreign Sub-Custodians for
maintaining custody of the Fund's assets, and the Bank shall so cease to
employ such sub-custodian as soon as alternate custodial arrangements have
been implemented.
(b) FOREIGN SECURITIES DEPOSITORIES. Except as may otherwise
be agreed upon in writing by the Bank and the Fund, assets of the Fund shall
be maintained in foreign securities depositories only through arrangements
implemented by the foreign banking institutions serving as Selected Foreign
Sub-Custodians pursuant to the terms hereof. Where possible, such
arrangements shall include entry into agreements containing the provisions
set forth in subparagraph (d) hereof. Notwithstanding the foregoing, except
as may otherwise be agreed upon in writing by the Bank and the Fund, the Fund
authorizes the deposit in Euro-clear, the securities clearance and depository
facilities operated by Morgan Guaranty Trust Company of New York in Brussels,
Belgium, of Foreign Portfolio Securities eligible for deposit therein and to
utilize such securities depository in connection with settlements of
purchases and sales of securities and deliveries and returns of securities,
until notified to the contrary pursuant to subparagraph (a) hereunder.
(c) SEGREGATION OF SECURITIES. The Bank shall identify on its
books as belonging to the Fund the Foreign Portfolio Securities held by each
Selected Foreign Sub-Custodian. Each agreement pursuant to which the Bank
employs a foreign banking institution shall require that such institution
establish a custody account for the Bank and hold in that account, Foreign
Portfolio Securities and other assets of the Fund, and, in the event that
such institution deposits Foreign Portfolio Securities in a foreign
securities depository, that it shall identify on its books as belonging to
the Bank the securities so deposited.
(d) AGREEMENTS WITH FOREIGN BANKING INSTITUTIONS. Each of the
agreements pursuant to which a foreign banking institution holds assets of
the Fund (each, a "Foreign Sub-Custodian Agreement") shall be substantially
in the form previously made available to the Fund and shall provide that: (a)
the Fund's assets will not be subject to any right, charge, security
interest, lien or claim of any kind in favor of the foreign banking
institution or its creditors or agent, except a claim of payment for their
safe custody or administration (including, without limitation, any fees or
taxes payable upon transfers or reregistration of securities); (b) beneficial
ownership of the Fund's assets will be freely transferable without the
payment of money or value other than for custody or administration
(including, without limitation, any fees or taxes payable upon transfers or
<PAGE>
18
reregistration of securities); (c) adequate records will be maintained
identifying the assets as belonging to Bank; (d) officers of or auditors
employed by, or other representatives of the Bank, including to the extent
permitted under applicable law, the independent public accountants for the
Fund, will be given access to the books and records of the foreign banking
institution relating to its actions under its agreement with the Bank; and
(e) assets of the Fund held by the Selected Foreign Sub-Custodian will be
subject only to the instructions of the Bank or its agents.
(e) ACCESS OF INDEPENDENT ACCOUNTANTS OF THE FUND. Upon
request of the Fund, the Bank will use its best efforts to arrange for the
independent accountants of the Fund to be afforded access to the books and
records of any foreign banking institution employed as a Selected Foreign
Sub-Custodian insofar as such books and records relate to the performance of
such foreign banking institution under its Foreign Sub-Custodian Agreement.
(f) REPORTS BY BANK. The Bank will supply to the Fund from
time to time, as mutually agreed upon, statements in respect of the
securities and other assets of the Fund held by Selected Foreign
Sub-Custodians, including but not limited to an identification of entities
having possession of the Foreign Portfolio Securities and other assets of the
Fund.
(g) TRANSACTIONS IN FOREIGN CUSTODY ACCOUNT. Transactions with
respect to the assets of the Fund held by a Selected Foreign Sub-Custodian
shall be effected pursuant to Proper Instructions from the Fund to the Bank
and shall be effected in accordance with the applicable Foreign Sub-Custodian
Agreement. If at any time any Foreign Portfolio Securities shall be
registered in the name of the nominee of the Selected Foreign Sub-Custodian,
the Fund agrees to hold any such nominee harmless from any liability by
reason of the registration of such securities in the name of such nominee.
Notwithstanding any provision of this Agreement to the
contrary, settlement and payment for Foreign Portfolio Securities received
for the account of the Fund and delivery of Foreign Portfolio Securities
maintained for the account of the Fund may be effected in accordance with the
customary established securities trading or securities processing practices
and procedures in the jurisdiction or market in which the transaction occurs,
including, without limitation, delivering securities to the purchaser thereof
or to a dealer therefor (or an agent for such purchaser or dealer) against a
receipt with the expectation of receiving later payment for such securities
from such purchaser or dealer.
In connection with any action to be taken with respect to the
Foreign Portfolio Securities held hereunder, including, without limitation,
the exercise of any voting rights, subscription rights, redemption rights,
exchange rights, conversion rights or tender rights, or any other action in
connection with any other right, interest or privilege with respect to such
Securities (collectively, the "Rights"), the Bank shall promptly transmit to
the Fund such information in connection therewith as is made available to the
Bank by the Foreign Sub-Custodian, and shall promptly forward to the
applicable Foreign Sub-Custodian any instructions, forms or certifications
with respect to such Rights, and any instructions relating to the actions to
be taken in connection therewith, as the Bank shall receive from the Fund
pursuant to Proper Instructions. Notwithstanding the foregoing, the Bank
shall have no further duty or obligation with respect to such Rights,
including, without
<PAGE>
19
limitation, the determination of whether the Fund is entitled to participate
in such Rights under applicable U.S. and foreign laws, or the determination
of whether any action proposed to be taken with respect to such Rights by the
Fund or by the applicable Foreign Sub-Custodian will comply with all
applicable terms and conditions of any such Rights or any applicable laws or
regulations, or market practices within the market in which such action is to
be taken or omitted.
(h) LIABILITY OF SELECTED FOREIGN SUB-CUSTODIANS. Each Foreign
Sub-Custodian Agreement with a foreign banking institution shall require the
institution to exercise reasonable care in the performance of its duties and
to indemnify, and hold harmless, the Bank and each Fund from and against
certain losses, damages, costs, expenses, liabilities or claims arising out
of or in connection with the institution's performance of such obligations,
all as set forth in the applicable Foreign Sub-Custodian Agreement. The Fund
acknowledges that the Bank, as a participant in Euro-clear, is subject to the
Terms and Conditions Governing the Euro-Clear System, a copy of which has
been made available to the Fund. The Fund acknowledges that pursuant to such
Terms and Conditions, Morgan Guaranty Brussels shall have the sole right to
exercise or assert any and all rights or claims in respect of actions or
omissions of, or the bankruptcy or insolvency of, any other depository,
clearance system or custodian utilized by Euro-clear in connection with the
Fund's securities and other assets.
(i) LIABILITY OF BANK. The Bank shall have no more or less
responsibility or liability on account of the acts or omissions of any
Selected Foreign Sub-Custodian employed hereunder than any such Selected
Foreign Sub-Custodian has to the Bank and, without limiting the foregoing,
the Bank shall not be liable for any loss, damage, cost, expense, liability
or claim resulting from nationalization, expropriation, currency
restrictions, or acts of war or terrorism, political risk (including, but not
limited to, exchange control restrictions, confiscation, insurrection, civil
strife or armed hostilities) other losses due to Acts of God, nuclear
incident or any loss where the Selected Foreign Sub-Custodian has otherwise
exercised reasonable care.
(j) MONITORING RESPONSIBILITIES. The Bank shall furnish
annually to the Fund, information concerning the Selected Foreign
Sub-Custodians employed hereunder for use by the Fund in evaluating such
Selected Foreign Sub-Custodians to ensure compliance with the requirements of
Rule 17f-5 of the Act. In addition, the Bank will promptly inform the Fund in
the event that the Bank is notified by a Selected Foreign Sub-Custodian that
there appears to be a substantial likelihood that its shareholders' equity
will decline below $200 million (U.S. dollars or the equivalent thereof) or
that its shareholders' equity has declined below $200 million (in each case
computed in accordance with generally accepted U.S. accounting principles) or
any other capital adequacy test applicable to it by exemptive order, or if
the Bank has actual knowledge of any material loss of the assets of the Fund
held by a Foreign Sub-Custodian.
(k) TAX LAW. The Bank shall have no responsibility or
liability for any obligations now or hereafter imposed on the Fund or the
Bank as custodian of the Fund by the tax laws of any jurisdiction, and it
shall be the responsibility of the Fund to notify the Bank of the obligations
imposed on the Fund or the Bank as the custodian of the Fund by the tax law
of any non-U.S. jurisdiction, including responsibility for withholding and
<PAGE>
20
other taxes, assessments or other governmental charges, certifications and
governmental reporting. The sole responsibility of the Custodian with regard
to such tax law shall be to use reasonable efforts to assist the Fund with
respect to any claim for exemption or refund under the tax law of
jurisdictions for which the Fund has provided such information.
13.4 INSURANCE. The Bank shall use the same care with respect to the
safekeeping of Portfolio Securities and cash of the Fund held by it as it
uses in respect of its own similar property but it need not maintain any
special insurance for the benefit of the Fund.
13.5. FEES AND EXPENSES OF BANK. The Fund will pay or reimburse the
Bank from time to time for any transfer taxes payable upon transfer of
Portfolio Securities made hereunder, and for all necessary proper
disbursements, expenses and charges made or incurred by the Bank in the
performance of this Agreement (including any duties listed on any Schedule
hereto, if any) including any indemnities for any loss, liabilities or
expense to the Bank as provided above. For the services rendered by the Bank
hereunder, the Fund will pay to the Bank such compensation or fees at such
rate and at such times as shall be agreed upon in writing by the parties from
time to time. The Bank will also be entitled to reimbursement by the Fund for
all reasonable expenses incurred in conjunction with termination of this
Agreement by the Fund.
13.6 ADVANCES BY BANK. The Bank may, in its sole discretion, advance
funds on behalf of the Fund to make any payment permitted by this Agreement
upon receipt of any proper authorization required by this Agreement for such
payments by the Fund. Should such a payment or payments, with advanced funds,
result in an overdraft (due to insufficiencies of the Fund's account with the
Bank, or for any other reason) this Agreement deems any such overdraft or
related indebtedness, a loan made by the Bank to the Fund payable on demand
and bearing interest at the current rate charged by the Bank for such loans
unless the Fund shall provide the Bank with agreed upon compensating
balances. The Fund agrees that the Bank shall have a continuing lien and
security interest to the extent of any overdraft or indebtedness, in and to
any property at any time held by it for the Fund's benefit or in which the
Fund has an interest and which is then in the Bank's possession or control
(or in the possession or control of any third party acting on the Bank's
behalf). The Fund authorizes the Bank, in its sole discretion, at any time to
charge any overdraft or indebtedness, together with interest due thereon
against any balance of account standing to the credit of the Fund on the
Bank's books.
14. TERMINATION.
14.1 This Agreement may be terminated at any time by the Fund after
December 31, 1998, without penalty upon sixty days written notice delivered
by either party to the other by means of registered mail, and upon the
expiration of such sixty days this Agreement will terminate; provided,
however, that the effective date of such termination may be postponed to a
date not more than ninety days from the date of delivery of such notice (i)
by the Bank in order to prepare for the transfer by the Bank of all of the
assets of the Fund held hereunder, and (ii) by the Fund in order to give the
Fund an opportunity to make suitable arrangements for a successor custodian.
At any time after the termination of this Agreement, the Fund will, at its
request, have access to the records of the Bank relating to the performance
of its duties as custodian.
<PAGE>
21
14.2 In the event of the termination of this Agreement, the Bank
will immediately upon receipt or transmittal, as the case may be, of notice
of termination, commence and prosecute diligently to completion the transfer
of all cash and the delivery of all Portfolio Securities duly endorsed and
all records maintained under Section 11 to the successor custodian when
appointed by the Fund. The obligation of the Bank to deliver and transfer
over the assets of the Fund held by it directly to such successor custodian
will commence as soon as such successor is appointed and will continue until
completed as aforesaid. If the Fund does not select a successor custodian
within ninety (90) days from the date of delivery of notice of termination
the Bank may, subject to the provisions of subsection (14.3), deliver the
Portfolio Securities and cash of the Fund held by the Bank to a bank or trust
company of its own selection which meets the requirements of Section 17(f)(1)
of the 1940 Act and has a reported capital, surplus and undivided profits
aggregating not less than $2,000,000, to be held as the property of the Fund
under terms similar to those on which they were held by the Bank, whereupon
such bank or trust company so selected by the Bank will become the successor
custodian of such assets of the Fund with the same effect as though selected
by the Board.
14.3 Prior to the expiration of ninety (90) days after notice of
termination has been given, the Fund may furnish the Bank with an order of
the Fund advising that a successor custodian cannot be found willing and able
to act upon reasonable and customary terms and that there has been submitted
to the shareholders of the Fund the question of whether the Fund will be
liquidated or will function without a custodian for the assets of the Fund
held by the Bank. In that event the Bank will deliver the Portfolio
Securities and cash of the Fund held by it, subject as aforesaid, in
accordance with one of such alternatives which may be approved by the
requisite vote of shareholders, upon receipt by the Bank of a copy of the
minutes of the meeting of shareholders at which action was taken, certified
by the Fund's Secretary and an opinion of counsel to the Fund in form and
content satisfactory to the Bank.
15. CONFIDENTIALITY. Both parties hereto agree that any non-public
information obtained hereunder concerning the other party is confidential and
may not be disclosed to any other person without the consent of the other
party, except as may be required by applicable law or at the request of a
governmental agency. The parties further agree that a breach of this
provision would irreparably damage the other party and accordingly agree that
each of them is entitled, without bond or other security, to an injunction or
injunctions to prevent breaches of this provision.
16. NOTICES. Any notice or other instrument in writing authorized or
required by this Agreement to be given to either party hereto will be
sufficiently given if addressed to such party and mailed or delivered to it
at its office at the address set forth below; namely:
(a) In the case of notices sent to the Fund to:
The Palladian Trust
4225 Executive Square, Suite 355
La Jolla, California 92037
Attn.: President
<PAGE>
22
(b) In the case of notices sent to the Bank to:
Investors Bank & Trust Company
89 South Street
Boston, Massachusetts 02111
Attention:
or at such other place as such party may from time to time designate in
writing.
17. AMENDMENTS. This Agreement may not be altered or amended, except by
an instrument in writing, executed by both parties, and in the case of the
Fund, such alteration or amendment will be authorized and approved by its
Board.
18. PARTIES. This Agreement will be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and assigns;
provided, however, that this Agreement will not be assignable by the Fund
without the written consent of the Bank or by the Bank without the written
consent of the Fund, authorized and approved by its Board; and provided
further that termination proceedings pursuant to Section 14 hereof will not
be deemed to be an assignment within the meaning of this provision.
19. GOVERNING LAW. This Agreement and all performance hereunder will be
governed by the laws of the Commonwealth of Massachusetts.
20. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but such
counterparts shall, together, constitute only one instrument.
21. LIMITATION OF LIABILITY. A copy of the Agreement and Declaration of
Trust of the Fund is on file with the Secretary of State of the Commonwealth
of Massachusetts and notice is hereby given that this Agreement has been
executed on behalf of the Fund by an officer of the Fund as an officer and
not individually and the obligations of the Fund arising out of this
Agreement are not binding upon any of the trustees, officers, or shareholders
of the Fund individually but are binding only upon the assets and property of
the Fund.
<PAGE>
23
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their respective officers thereunto duly authorized as of the
day and year first written above.
The Palladian Trust
By: /s/ H. Michael Schwartz
------------------------------
Name: H. Michael Schwartz
Title: President
ATTEST:
/s/ Fran A. Dyre
- --------------------
Investors Bank & Trust Company
By: /s/ Henry N. Joyce
------------------------------
Name:
Title: Director
ATTEST:
- --------------------
DATE:
---------------
<PAGE>
PALLADIAN ADVISORS, INC.
ANNUAL FEE SCHEDULE
FOR THE EIGHT PALLADIAN FUNDS
MAY 11, 1995
================================================================================
FUND ACCOUNTING (INCLUDING CALCULATION OF N.A.V.) AND DOMESTIC & FOREIGN
CUSTODY
================================================================================
A. DOMESTIC CUSTODY
The annual fee for each domestic fund will be charged either basis
points or a minimum, whichever is higher. There will be no minimum fee
charge for the first twelve months after the funds are launched. The
following schedules are exclusive of transaction costs, global custody
fees and out-of-pocket expenses:
ANNUAL FEE
----------
TOTAL DOMESTIC NET ASSETS 1 BASIS POINT
The monthly minimum for each fund will be $500 for months 13 to 18 and
$1,000 for every month thereafter.
B. FUND ACCOUNTING
The annual fee for each fund (domestic or global) will be charged either
basis points or the minimum, whichever is higher. The following
schedules are exclusive of transaction costs, global custody fees and
out-of pocket expenses.
ANNUAL FEE
----------
FIRST $600 MILLION OF NET ASSETS 5 BASIS POINTS
NET ASSETS IN EXCESS OF $600 MILLION 3 BASIS POINTS
The yearly minimum fee for each fund is $40,000
C. TRANSACTION COSTS PER TRANSACTION
---------------
DTC $ 12.00
FED BOOK ENTRY 12.00
NON-DTC, BOSTON SETTLEMENTS 20.00 *
NON-DTC, NEW YORK SETTLEMENTS 35.00
NON-DTC, NEW YORK MATURITIES 10.00
GNMA SECURITIES 35.00
GOVERNMENT PAYDOWN 5.00
FUTURES 18.00
FOREIGN EXCHANGE CONTRACT 18.00
INCOMING WIRES 5.00
OUTGOING WIRES 7.50
* THERE IS NO CHARGE FOR MATURITIES OF THESE ITEMS.
<PAGE>
D. GLOBAL CUSTODY
* The following basis point fees are based on all global assets for The
International Growth Portfolio, The Global Strategic Income Portfolio
and the Global Resources Portfolio. The following basis point fees and
transaction charges vary by country according to the enclosed Band
groupings.
COUNTRY ANNUAL FEE PER TRADE
------- ---------- ---------
Band II 4 Basis Points 20
Band III 10 Basis Points 50
Band IV 12 Basis Points 120
Band V 15 Basis Points 50
Band VI 20 Basis Points 50
Band VII 22 Basis Points 100
COUNTRY ANNUAL FEE PER TRADE
------- ---------- ---------
Band VIII 27 Basis Points 110
Band IX 30 Basis Points 120
Band X 42 Basis Points 150
E. OUT OF POCKET EXPENSES
* These charges consist of:
-Pricing & Verification Services -Forms & Supplies
-Telephone -Support Equipment Rental
-Micro Rental -Third Party Audit
-Legal Fees for substantial changes to -Ad hoc reports
the Custody Contract will be paid by
Palladian Advisors
F. BALANCE CREDITS
We allow balance credit against fees (excluding out-of-pocket
charges) for collected fund balances arising out of the custody
relationships. The monthly earnings allowance is equal to 75% of the
90-day T-bill rate.
G. SECURITIES LENDING & FOREIGN EXCHANGE CONTRACTS
This fee schedule was developed with the assumption that Investors Bank
would do Securities Lending and foreign exchange contracts for
Palladian Advisors.
<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
Between
THE PALLADIAN TRUST
and
INVESTORS BANK & TRUST COMPANY
<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT effective as of the 29th day of September, 1995 by and between THE
PALLADIAN TRUST, a Massachusetts business trust (the "Company"), and INVESTORS
BANK & TRUST COMPANY, a Massachusetts trust company (the "Bank").
WITNESSETH:
WHEREAS, the Company desires to appoint the Bank as its transfer agent,
dividend disbursing agent and agent in connection with certain other activities,
and the Bank desires to accept such appointment;
WHEREAS, the Bank is duly registered as a transfer agent as provided in
Section 17A(c) of the Securities Exchange Act of 1934, as amended, (the "1934
Act");
WHEREAS, the Company is authorized to issue shares in separate series, with
each such series representing interests in a separate portfolio of securities
and other assets;
WHEREAS, the Company intends to initially offer shares in six series, (such
series, together with all other series subsequently established by the Company
and made subject to this Agreement in accordance with Article 17, being herein
referred to as the "Fund(s)");
NOW, THEREFORE, in consideration of the mutual covenants herein set forth,
the Company and the Bank agree as follows:
ARTICLE 1. TERMS OF APPOINTMENT; DUTIES OF THE BANK
1.01 Subject to the terms and conditions set forth in this Agreement, the
Company on behalf of the Funds, hereby employs and appoints the Bank to act
as, and the Bank agrees to act as, transfer agent for each of the Fund(s)'
authorized and issued shares of beneficial interest ("Shares"), dividend
disbursing agent and agent in connection with any accumulation, open-account
or similar plans provided to the shareholders of the Company ("Shareholders")
and set out in the currently effective prospectus and statement of additional
information, as each may be amended from time to time, (the "Prospectus") of
the Company, including without limitation any periodic investment plan or
periodic withdrawal program.
1.02 The Bank agrees that it will perform the following services:
(a) In connection with procedures established from time to time by
agreement between the Company and the Bank, the Bank shall:
<PAGE>
(i) Receive for acceptance, orders for the purchase of Shares, and promptly
deliver payment and appropriate documentation therefor to the custodian of the
Company appointed by the Board of Directors of the Company (the "Custodian");
(ii) Pursuant to purchase orders, issue the appropriate number of Shares and
hold such Shares in the appropriate Shareholder account;
(iii) Receive for acceptance, redemption requests and redemption directions and
deliver the appropriate documentation therefor to the Custodian;
(iv) At the appropriate time as and when it receives monies paid to it by the
Custodian with respect to any redemption, pay over or cause to be paid over in
the appropriate manner such monies as instructed by the redeeming Shareholders;
(v) Effect transfers of Shares by the registered owners thereof upon receipt of
appropriate instructions;
(vi) Prepare and transmit payments for dividends and distributions declared by
the Company on behalf of a Fund; and
(vii) Create and maintain all necessary records including those specified in
Article 10 hereof, in accordance with all applicable laws, rules and
regulations, including but not limited to records required by Section 31(a) of
the Investment Company Act of 1940, as amended (the "1940 Act"), and those
records pertaining to the various functions performed by it hereunder. All
records shall be available for inspection and use by the Company. Where
applicable, such records shall be maintained by the Bank for the periods and in
the places required by Rule 31a-2 under the 1940 Act.
(viii) Make available during regular business hours all records and other data
created and maintained pursuant to this Agreement for reasonable audit and
inspection by the Company, or any person retained by the Company. Upon
reasonable notice by the Company, the Bank shall make available during regular
business hours its facilities and premises employed in connection with its
performance of this Agreement for reasonable visitation by the Company, or any
person retained by the Company.
(ix) At the expense of and at the request of the Company, the Bank shall
maintain an adequate supply of blank share certificates for each Fund providing
for the issuance of certificates to meet the Bank's requirements therefor. Such
share certificates shall be properly signed by facsimile. The Company agrees
that, notwithstanding the death, resignation, or removal of any officer of the
Company whose signature appears on such certificates, the Bank may continue to
countersign certificates which bear such signatures until otherwise directed by
the Company. Share certificates may be issued and accounted for entirely by the
Bank and do not require any third party registrar or other endorsing party.
(x) Issue replacement share certificates in lieu of certificates which have been
lost, stolen, mutilated or destroyed, without any further action by the Board of
Directors or any officer of the Company, upon receipt by the Bank of properly
executed affidavits and lost certificate bonds, in form satisfactory to the Bank
with the Company
<PAGE>
and the Bank as obligees under the bond. At the discretion of the Bank, and at
its sole risk, the Bank may issue replacement certificates without requiring the
affidavits and lost certificate bonds described above and the Bank agrees to
indemnify the Company against any and all losses or claims which may arise by
reason of the issuance of such new certificates in the place of the ones
allegedly lost, stolen or destroyed.
(xi) Record the issuance of Shares of the Company and maintain, pursuant to Rule
l7Ad-10(e) under the 1934 Act, a record of the total number of Shares of the
Company which are authorized, based upon data provided to it by the Company, and
issued and outstanding. The Bank shall also provide the Company on a regular
basis with the total number of Shares which are authorized and issued and
outstanding and shall have no obligation, when recording the issuance of Shares,
to monitor the issuance of such Shares or to take cognizance of any laws
relating to the issue or sale of such Shares, which functions shall be the sole
responsibility of the Company.
(b) In addition to and not in lieu of the services set forth in the above
paragraph (a) or in any Schedule hereto, the Bank shall: (i) perform all of the
customary services of a transfer agent, dividend disbursing agent and, as
relevant, agent in connection with accumulation, open-account or similar plans
(including without limitation any periodic investment plan or periodic
withdrawal program); including but not limited to maintaining all Shareholder
accounts, preparing Shareholder meeting lists, mailing proxies, receiving and
tabulating proxies, mailing Shareholder reports and prospectuses to current
Shareholders, withholding taxes on all accounts, including nonresident alien
accounts, preparing and filing U.S. Treasury Department Forms 1099 and other
appropriate forms required with respect to dividends and distributions by
federal authorities for all Shareholders, preparing and mailing confirmation
forms and statements of account to Shareholders for all purchases and
redemptions of Shares and other confirmable transactions in Shareholder
accounts, responding to Shareholder telephone calls and Shareholder
correspondence, preparing and mailing activity statements for Shareholders, and
providing Shareholder account information; and (ii) provide a system which will
enable the Company to monitor the total number of shares sold in each State. The
Company shall (i) identify to the Bank in writing those transactions and assets
to be treated as exempt from blue sky reporting for each State and (ii) verify
the establishment of transactions for each State on the system prior to
activation and thereafter monitor the daily activity for each State. The
responsibility of the Bank for a Fund's blue sky state registration status is
solely limited to the initial establishment of transactions subject to blue sky
compliance by such Fund(s) and the reporting of such transactions to the Fund(s)
as provided above.
(c) Additionally, the Bank shall utilize a system to identify all share
transactions which involve purchase and redemption orders that are processed at
a time other than the time of the computation of net asset value per share next
computed after receipt of such orders, and shall compute the net effect upon the
Fund(s) of such transactions so identified on a daily and cumulative basis.
ARTICLE 2. SALE OF COMPANY SHARES
2.01 Whenever the Company shall sell or cause to be sold any Shares of a
Fund, the Company shall deliver or cause to be delivered to the Bank a
document duly specifying: (i) the name of the Fund whose Shares were sold;
(ii) the number of Shares sold, trade date, and price; (iii) the amount of
money to be delivered to the Custodian for the sale of such Shares and
specifically
<PAGE>
allocated to such Fund; and (iv) in the case of a new account, a new account
application or sufficient information to establish an account.
2.02 The Bank will, upon receipt by it of a check or other payment
identified by it as an investment in Shares of one of the Funds and drawn or
endorsed to the Bank as agent for, or identified as being for the account of,
one of the Funds, promptly deposit such check or other payment to the
appropriate account postings necessary to reflect the investment. The Bank will
notify the Company, or its designee, and the Custodian of all purchases and
related account adjustments.
2.03 Under procedures as established by mutual agreement between the Company
and the Bank, the Bank shall issue to the purchaser or his authorized agent such
Shares, computed to the nearest three decimal points, as he is entitled to
receive, based on the appropriate net asset value of the Funds' Shares,
determined in accordance with the prospectus and applicable Federal law or
regulation. In issuing Shares to a purchaser or his authorized agent, the Bank
shall be entitled to rely upon the latest directions, if any, previously
received by the Bank from the purchaser or his authorized agent concerning the
delivery of such Shares.
2.04 The Bank shall not be required to issue any Shares of the Company where
it has received a written instruction from the Company or written notification
from any appropriate Federal or State authority that the sale of the Shares of
the Fund(s) in question has been suspended or discontinued, and the Bank shall
be entitled to rely upon such written instructions or written notification.
2.05 Upon the issuance of any Shares of any Fund(s) in accordance with
foregoing provisions of this Section, the Bank shall not be responsible for the
payment of any original issue or other taxes, if any, required to be paid by the
Company in connection with such issuance.
2.06 The Bank may establish such additional rules and regulations governing
the transfer or registration of Shares as it may deem advisable and consistent
with such rules and regulations generally adopted by transfer agents, or with
the written consent of the Company, any other rules and regulations.
ARTICLE 3. RETURNED CHECKS
3.01 In the event that any check or other order for the transfer of money is
returned unpaid for any reason, the Bank will take such steps as the Bank may,
in its discretion, deem appropriate to protect the Company from financial loss
or as the Company or its designee may instruct. Provided that the standard
procedures, as agreed upon from time to time, between the Company and the Bank,
regarding purchases and redemptions of Shares, are adhered to by the Bank, the
Bank shall not be liable for any loss suffered by a Fund as a result of returned
or unpaid purchase or redemption transactions. Legal or other expenses incurred
to collect amounts owed to a Fund as a consequence of returned or unpaid
purchase or redemption transactions shall be an expense of that Fund.
ARTICLE 4. REDEMPTIONS
4.01 Shares of any Fund may be redeemed in accordance with the procedures
set forth in the Prospectus of the Company and the Bank will duly process all
redemption requests.
<PAGE>
ARTICLE 5. TRANSFERS AND EXCHANGES
5.01 The Bank is authorized to review and process transfers of Shares of
each Fund, exchanges between Funds on the records of the Funds maintained by
the Bank, and exchanges between the Company and any other entity as may be
permitted by the Prospectus of the Company. If Shares to be transferred are
represented by outstanding certificates, the Bank will, upon surrender to it
of the certificates in proper form for transfer, and upon cancellation
thereof, countersign and issue new certificates for a like number of Shares
and deliver the same. If the Shares to be transferred are not represented by
outstanding certificates, the Bank will, upon an order therefor by or on
behalf of the registered holder thereof in proper form, credit the same to
the transferee on its books. If Shares are to be exchanged for Shares of
another Fund, the Bank will process such exchange in the same manner as a
redemption and sale of Shares, except that it may in its discretion waive
requirements for information and documentation.
ARTICLE 6. RIGHT TO SEEK ASSURANCES
6.01 The Bank reserves the right to refuse to transfer or redeem Shares
until it is satisfied that the requested transfer or redemption is legally
authorized, and it shall incur no liability for the refusal, in good faith,
to make transfers or redemptions which the Bank, in its judgment, deems
improper or unauthorized, or until it is satisfied that there is no basis for
any claims adverse to such transfer or redemption. The Bank may, in effecting
transfers, rely upon the provisions of the Uniform Act for the Simplification
of Fiduciary Security Transfers or the Uniform Commercial Code, as the same
may be amended from time to time, which in the opinion of legal counsel for
the Company or of its own legal counsel protect it in not requiring certain
documents in connection with the transfer or redemption of Shares of any
Fund, and the Company shall indemnify the Bank for any act done or omitted by
it in reliance upon such laws or opinions of counsel of the Company or of its
own counsel.
ARTICLE 7. DISTRIBUTIONS
7.01 The Company will promptly notify the Bank of the declaration of any
dividend or distribution. The Company shall furnish to the Bank a resolution
of the Board of Directors of the Company certified by the Secretary (a
"Certificate"): (i) authorizing the declaration of dividends on a specified
periodic basis and authorizing the Bank to rely on oral instructions or a
Certificate specifying the date of the declaration of such dividend or
distribution, the date of payment thereof, the record date as of which
Shareholders entitled to payment shall be determined and the amount payable
per share to Shareholders of record as of the date and the total amount
payable to the Bank on the payment date; or (ii) setting forth the date of
the declaration of any dividend or distribution by a Fund, the date of
payment thereof, the record date as of which Shareholders entitled to payment
shall be determined, and the amount payable per share to the Shareholders of
record as of that date and the total amount payable to the Bank on the
payment date.
7.02 The Bank, on behalf of the Company, shall instruct the Custodian to
place in a dividend disbursing account funds equal to the cash amount of any
dividend or distribution to be paid out. The Bank will calculate, prepare and
mail checks to (at the address as it appears on the records of the Bank), or
(where appropriate) credit such dividend or distribution to the account of
Fund Shareholders, and maintain and safeguard all underlying records.
<PAGE>
7.03 The Bank will replace lost checks at its discretion and in
conformity with regular business practices.
7.04 The Bank will maintain all records necessary to reflect the
crediting of dividends which are reinvested in Shares of the Company,
including without limitation daily dividends.
7.05 The Bank shall not be liable for any improper payments made in
accordance with a resolution of the Board of Directors of the Company.
7.06 If the Bank shall not receive from the Custodian sufficient cash to
make payment to all Shareholders of the Company as of the record date, the
Bank shall, upon notifying the Company, withhold payment to all Shareholders
of record as of the record date until such sufficient cash is provided to the
Bank.
ARTICLE 8. OTHER DUTIES
8.01 In addition to the duties expressly provided for herein, the Bank
shall perform such other duties and functions and shall be paid such amounts
therefor as may from time to time be agreed to in writing.
ARTICLE 9. TAXES
9.01 It is understood that the Bank shall file such appropriate
information returns concerning the payment of dividends and capital gain
distributions and tax withholding with the proper Federal, State and local
authorities as are required by law to be filed by the Company and shall
withhold such sums as are required to be withheld by applicable law.
ARTICLE 10. BOOKS AND RECORDS
10.01 The Bank shall maintain confidential records showing for each
Shareholder's account the following: (i) names, addresses and tax
identification numbers; (ii) numbers of Shares held; (iii) historical
information (as available from prior transfer agents) regarding the account
of each Shareholder, including dividends paid and date and price of all
transactions on a Shareholder's account; (iv) any stop or restraining order
placed against a Shareholder's account; (v) information with respect to
withholdings; (vi) any capital gain or dividend reinvestment order, plan
application, dividend address and correspondence relating to the current
maintenance of a Shareholder's account; (vii) certificate numbers and
denominations for any Shareholders holding certificates; (viii) any
information required in order for the Bank to perform the calculations
contemplated or required by this Agreement; and (ix) such other information
and data as may be required by applicable law.
10.02 Any records required to be maintained by Rule 31a-1 under the 1940
Act will be preserved for the periods prescribed in Rule 31a-2 under the 1940
Act. Such records may be inspected by the Company at reasonable times. The
Bank may, at its option at any time, and shall forthwith upon the Company's
demand, turn over to the Company and cease to retain in the Bank's files,
records and documents created and maintained by the Bank in performance of
its service or for its protection. At the end of the six-year retention
period, such periods and documents will either be turned over to the Company,
or destroyed in accordance with the Company's authorization.
<PAGE>
10.03 Procedures applicable to the services to be performed hereunder may
be established from time to time by agreement between the Fund(s) and the
Bank. The Bank shall have the right to utilize any shareholder accounting and
recordkeeping systems which, in its opinion, qualifies to perform any
services to be performed hereunder. The Bank shall keep records relating to
the services performed hereunder, in the form and manner as it may deem
advisable.
ARTICLE 11. FEES AND EXPENSES.
11.01 For performance by the Bank pursuant to this Agreement and a
separate custodial agreement, the Fund(s) agree to pay the Bank the fees set
out in the initial fee schedule attached hereto. Such fees and out-of-pocket
expenses and advances identified under Section 11.02 below may be changed
from time to time subject to mutual written agreement between the Fund(s) and
the Bank.
11.02 In addition to the fee paid under Section 11.01 above, the Fund(s)
agree to reimburse the Bank for out-of-pocket expenses or advances incurred
by the Bank for the items set out in the fee schedule attached hereto. In
addition, any other expenses incurred by the Bank at the request or with the
consent of the Fund(s) including, without limitation, any equipment or
supplies specifically ordered by the Company or required to be purchased by
the Company, will be reimbursed by the Fund(s).
11.03 The Fund(s) agree to pay all fees and reimbursable expenses within
thirty days following the mailing of the respective billing notice. Postage
for mailing of dividends, proxies, Fund reports and other mailings to all
shareholder accounts shall be advanced to the Bank by the Fund(s) at least
seven (7) days prior to the mailing date of such material.
ARTICLE 12. REPRESENTATIONS AND WARRANTIES OF THE BANK
The Bank represents and warrants to the Company that:
12.01 It is a trust company duly organized and existing and in good
standing under the laws of the Commonwealth of Massachusetts.
12.02 It is empowered under applicable laws and by its charter and
by-laws to enter into and perform this Agreement.
12.03 All requisite corporate proceedings have been taken to authorize it
to enter into and perform this Agreement.
12.04 It has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and obligations
under this Agreement.
ARTICLE 13. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Bank that:
13.01 It is a business trust duly organized and existing and in good
standing under the laws of the Commonwealth of Massachusetts.
<PAGE>
13.02 It is empowered under applicable laws and by its charter documents
and by-laws to enter into and perform this Agreement.
13.03 All proceedings required by said charter documents and by-laws have
been taken to authorize it to enter into and perform this Agreement.
13.04 It is an open-end investment company registered under the 1940 Act.
13.05 A registration statement on Form N-1A (including a prospectus and
statement of additional information) under the Securities Act of 1933 and the
1940 Act will be declared effective before any sales are made and will remain
effective, and appropriate state securities law filings have been made and
will continue to be made, with respect to all Shares of the Company being
offered for sale.
13.06 When Shares are hereafter issued in accordance with the terms of
the Prospectus, such Shares shall be validly issued, fully paid and
nonassessable by the Fund(s).
ARTICLE 14. INDEMNIFICATION
14.01 Except as set forth in subparagraph (f) hereof, the Bank shall not
be responsible for, and the Company shall indemnify and hold the Bank
harmless from and against, any and all losses, damages, costs, charges,
counsel fees, payments, expenses and liability arising out of or attributable
to:
(a) All actions taken or omitted to be taken by the Bank or its agent
or subcontractors in good faith in reliance on or use by the Bank or its
agents or subcontractors of information, records and documents which (i) are
received by the Bank or its agents or subcontractors and furnished to it by
or on behalf of the Fund(s), (ii) have been prepared and/or maintained by the
Fund(s) or any other person or firm on behalf of the Fund(s), and (iii) were
received by the Bank or its agents or subcontractors from a prior transfer
agent.
(b) Any action taken or omitted to be taken by the Bank in connection
with its appointment in good faith in reliance upon any law, act, regulation
or interpretation of the same even though the same may thereafter have been
altered, changed, amended or repealed.
(c) The Fund(s)' refusal or failure to comply with the terms of this
Agreement, or which arise out of the Funds' lack of good faith, negligence or
willful misconduct or which arise out of the breach of any representation or
warranty of the Fund(s) hereunder.
(d) The reliance on, or the carrying out by the Bank or its agents or
subcontractors of any instructions or requests, whether written or oral, of
the Fund(s).
(e) The offer or sale of Shares by the Company in violation of any
requirement under the federal securities laws or regulations or the
securities laws or regulations of any State that such Shares be registered in
such State or in violation of any stop order or other determination or ruling
by any federal agency or any State with respect to the offer or sale of such
Shares in such state.
(f) In addition to any other limitation provided herein, or by law,
indemnification under this Agreement shall not apply to actions or omissions
of the Bank or its directors, officers,
<PAGE>
employees, agents or subcontractors in cases its own gross negligence,
willful misconduct, bad faith, reckless disregard of its duties or their own
duties hereunder, knowing violation of law or fraud.
14.02 The Bank shall indemnify and hold the Fund(s) harmless from and
against any and all losses, damages, costs, charges, counsel fees, payments,
expenses and liability arising out of or attributed to any action or failure
or omission to act by the Bank as a result of the Bank's lack of good faith,
negligence, willful misconduct, knowing violation of law or fraud.
14.03 At any time the Bank may apply to any officer of the Company for
instructions, and may consult with legal counsel with respect to any matter
arising in connection with the services to be performed by the Bank under
this Agreement, and the Bank and its agents or subcontractors shall not be
liable and shall be indemnified by the Company for any action taken or
omitted by it in reliance upon such instructions or upon the opinion of such
counsel except for a knowing violation of law. The Bank, its agents and
subcontractors shall be protected and indemnified in acting upon any paper or
document furnished by or on behalf of the Fund(s), reasonably believed to be
genuine and to have been signed by the proper person or persons, or upon any
instruction, information, data, records or documents provided the Bank or its
agents or subcontractors by machine readable input, telex, CRT data entry or
other similar means authorized by the Fund(s), and shall not be held to have
notice of any change of authority of any person, until receipt of written
notice thereof from the Fund(s). The Bank, its agents and subcontractors
shall also be protected and indemnified in recognizing stock certificates
which are reasonably believed to bear the proper manual or facsimile
signatures of an officer of the Company, and one proper countersignature of
any former transfer agent or registrar, or of a co-transfer agent or
co-registrar.
14.04 In the event either party is unable to perform its obligations
under the terms of this Agreement because of acts of God, strikes,
interruption of electrical power or other utilities, equipment or
transmission failure or damage reasonably beyond its control, or other causes
reasonably beyond its control, such party shall not be liable to the other
for any damages resulting from such failure to perform or otherwise from such
causes.
14.05 Neither party to this Agreement shall be liable to the other party
for consequential damages under any provision of this Agreement or for any
act or failure to act hereunder as contemplated by this Agreement.
14.06 In order that the indemnification provisions contained in this
Article 14 shall apply, upon the assertion of a claim for which either party
may be required to indemnify the other, the party seeking the indemnification
shall promptly notify the other party of such assertion, and shall keep the
other party advised with respect to all developments concerning such claim.
The party who may be required to indemnify shall have the option to
participate with the party seeking indemnification in the defense of such
claim. The party seeking indemnification shall in no case confess any claim
or make any compromise in any case in which the other party may be required
to indemnify it except with the other party's prior written consent, which
consent shall not be unreasonably withheld.
<PAGE>
ARTICLE 15. COVENANTS OF THE COMPANY AND THE BANK
15.01 The Company shall promptly furnish to the Bank the following:
(a) A certified copy of the resolution of the Directors of the Company
authorizing the appointment of the Bank and the execution and delivery of
this Agreement.
(b) A copy of the charter documents and by-laws of the Company and all
amendments thereto.
(c) Copies of each vote of the Directors designating authorized
persons to give instructions to the Bank, and a Certificate providing
specimen signatures for such authorized persons.
(d) Certificates as to any change in any officer or Director of the
Company.
(e) If applicable a specimen of the certificate of Shares in each Fund
of the Company in the form approved by the Directors, with a Certificate as
to such approval.
(f) Specimens of all new certificates for Shares, accompanied by the
Directors' resolutions approving such forms.
(g) All account application forms and other documents relating to
shareholder accounts or relating to any plan, program or service offered by
the Company.
(h) A list of all Shareholders of the Fund(s) with the name, address
and tax identification number of each Shareholder, and the number of Shares
of the Fund(s) held by each, certificate numbers and denominations (if any
certificates have been issued), lists of any account against which stops have
been placed, together with the reasons for said stops, and the number of
Shares redeemed by the Fund(s).
(i) An opinion of counsel for the Company with respect to the validity
of the Shares and the status of such Shares under the Securities Act of 1933.
(j) Copies of the Fund(s) registration statement on Form N-1A as
amended and declared effective by the Securities and Exchange Commission and
all post-effective amendments thereto.
(k) Such other certificates, documents or opinions as may mutually be
deemed necessary or appropriate for the Bank in the proper performance of its
duties.
15.02 The Bank hereby agrees to establish and maintain facilities and
procedures reasonably acceptable to the Company for safekeeping of stock
certificates, check forms and facsimile signature imprinting devices, if any;
and for the preparation or use, and for keeping account of, such
certificates, forms and devices.
15.03 The Bank shall keep records relating to the services to be
performed hereunder, in the form and manner as it may deem advisable. To the
extent required by Section 31 of the 1940 Act and the Rules thereunder, the
Bank agrees that all such records prepared or maintained by the Bank relating
to the services to be performed by the Bank hereunder are the confidential
property
<PAGE>
of the Company and will be preserved, maintained and made available in
accordance with such Section and Rules, and will be surrendered to the
Company on and in accordance with its request.
15.04 The Bank and the Company agree that all books, records, information
and data pertaining to the business of the other party which are exchanged or
received pursuant to the negotiation or the carrying out of this Agreement
shall remain confidential, and shall not be voluntarily disclosed to any
other person, except as may be required by law.
15.05 In case of any requests or demands for the inspection of the
Shareholder records of the Company, the Bank will endeavor to notify the
Company and to secure instructions from an authorized officer of the Company
as to such instruction. The Bank reserves the right, however, to exhibit the
Shareholder records to any person whenever it is advised by its counsel that
it may be held liable for the failure to exhibit the Shareholder records to
such person.
ARTICLE 16. TERM OF AGREEMENT
16.01 This Agreement shall become effective on the date hereof (the
"Effective Date") and shall continue in effect for twelve months from the
Effective Date (the "Initial Term") and from year to year thereafter with
respect to each Fund, provided that subsequent to the Initial Term, this
Agreement may be terminated by either party at any time without payment of
any penalty upon ninety (90) days written notice to the other. In the event
such notice is given by the Company, it shall be accompanied by a resolution
of the Board of Directors, certified by the Secretary, electing to terminate
this Agreement and designating a successor transfer agent.
16.02 Should the Company exercise its right to terminate, all
out-of-pocket expenses associated with the movement of records and material
will be borne by the Company. Additionally, the Bank reserves the right to
charge for any other reasonable expenses associated with such termination.
ARTICLE 17. ADDITIONAL FUNDS
17.01 In the event that the Company establishes one or more series of
Shares in addition to the initial series with respect to which it desires to
have the Bank render services as transfer agent under the terms hereof, it
shall so notify the Bank in writing, and if the Bank agrees in writing to
provide such services, such series of Shares shall become a Fund hereunder.
ARTICLE 18. ASSIGNMENT
18.01 Except as provided in Section 18.03 below, neither this Agreement
nor any rights or obligations hereunder may be assigned by either party
without the written consent of the other party.
18.02 This Agreement shall inure to the benefit of and be binding upon
the parties and their respective permitted successors and assigns.
18.03 The Bank, may without further consent on the part of the Company,
subcontract for the performance of any of the services to be provided
hereunder to third parties, including any affiliate of the Bank, provided
that the Bank shall remain liable hereunder for any acts or missions of any
subcontractor as if performed by the Bank.
<PAGE>
ARTICLE 19. AMENDMENT
19.01 This Agreement may be amended or modified by a written agreement
executed by both parties.
ARTICLE 20. MASSACHUSETTS LAW TO APPLY
20.01 This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.
ARTICLE 21. MERGER OF AGREEMENT AND SEVERABILITY
21.01 This Agreement constitutes the entire agreement between the parties
hereto and supersedes any prior agreement with respect to the subject hereof
whether oral or written.
21.02 In the event any provision of this Agreement shall be held
unenforceable or invalid for any reason, the remainder of the Agreement shall
remain in full force and effect.
21.03 This Agreement may be executed in any number of counterparts, each
of which shall be deemed to be an original; but such counterparts shall
together, constitute only one instrument.
ARTICLE 22. NOTICES
22.01 Any notice or other instrument in writing authorized or required by
this Agreement to be given to either party hereto will be sufficiently given
if addressed to such party and mailed or delivered to it at its office at the
address set forth below:
For the Fund(s): The Palladian Trust
4225 Executive Square, Suite 355
La Jolla, CA 92037
Attention: President
For the Bank: Investors Bank & Trust Company
P.O. Box 1537
Boston, Massachusetts 02205-1537
Attention:
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in their names and on their behalf under their seals by and through
their duly authorized officers as of the day and the year first above written.
The Palladian Trust
/s/ H. Michael Schwartz
-----------------------------
Name: H. Michael Schwartz
Title: President
ATTEST:
/s/
- -------------------
Investors Bank & Trust Company
/s/ Henry M. Joyce
-----------------------------
Name:
Title: Director
ATTEST:
/s/ Michael J. Guthrie
- ----------------------
DATE: 10/17/95
-----------------
<PAGE>
EX. 9(b)
INTERNATIONAL GROWTH PORTFOLIO
PORTFOLIO MANAGER INVESTMENT AGREEMENT
Agreement, made this 12th day of October, 1995, among
The Palladian Trust (the "Trust"), a Massachusetts business
trust; Palladian Advisors, Inc. (the "Manager"), a Delaware
corporation; Western Capital Financial Group, Inc. (the
"Distributor"), a California corporation; Bee & Associates
Incorporated (the "Portfolio Manager"), a Colorado corporation;
and Bruce B. Bee and Edward N. McMillan, both principals in the
Portfolio Manager (the "Principals").
WHEREAS, the Trust is a diversified, open-end
management investment company registered under the Investment
Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Trust is authorized to issue shares of
beneficial interest in separate portfolios with each such
portfolio representing interests in a separate portfolio of
securities and other assets; and
WHEREAS, the Manager has entered into a management
agreement with the Trust, pursuant to which the Manager will
provide, among other services, advice with respect to the
selection and monitoring of portfolio managers to provide the
day-to-day investment management of certain portfolios; and
WHEREAS, the Trust, the Manager and the Portfolio
Manager have entered into an agreement (the "Portfolio Manager
Agreement") pursuant to which the Portfolio Manager will provide
<PAGE>
the day-to-day investment management of the International Growth
Portfolio of the Trust (the "Portfolio"); and
WHEREAS, the Trust and the Distributor have entered
into an agreement under which the Distributor will serve as
underwriter for shares of the Trust; and
WHEREAS, one of the selection and retention criteria
for Portfolio Managers used by the Manager and the Trust is a
willingness of each Portfolio Manager or an affiliate to invest
$1 million in the portfolio managed by that Portfolio Manager;
and
WHEREAS, the Trust prospectus discloses that each
Portfolio Manager has agreed that it or an affiliate (either
directly or through a qualified plan) will invest at least $1
million in the portfolio it manages and that each Portfolio
Manager currently intends to maintain that investment as long as
it continues to manage the portfolio; and
WHEREAS, that agreement is an important factor in the
Manager's decision to recommend the Portfolio Manager and the
Trust's decision to retain the Portfolio Manager.
Therefore, the parties agree as follows:
1. INVESTMENT. On or before the twentieth business day
after the Portfolio reaches total assets of ten million dollars
($10,000,000.00), the Portfolio Manager or the Principals shall
purchase Portfolio shares with a total purchase price of one
million dollars ($1,000,000.00) either directly or through a
Page 2
<PAGE>
qualified plan acceptable to the Trust and the Manager. The
Trust and the Distributor shall cause the appropriate number of
shares to be issued to the purchaser in book entry form.
2. VOTING OF PORTFOLIO SHARES. The Portfolio Manager and
the Principals agree to vote any and all shares of the Portfolio
(held directly or in a qualified plan) in the same proportion as
all contract owners having voting rights with respect to the
Portfolio; provided, however, that the Portfolio Manager and the
Principals shall vote any or all shares of the Portfolio (held
directly or in a qualified plan) in such other manner as may be
required by the Securities and Exchange Commission or its staff.
3. NOTICES. Notices shall be in writing and shall be duly
given if sent by first class mail or delivered to the following
addresses or to such other address as shall be specified by a
party with proper notice to the other parties:
If as to the Trust:
--------------------
The Palladian Trust
4225 Executive Square
Suite 355
La Jolla, CA 92037
Attn: President
If as to the Manager:
---------------------
Palladian Advisors, Inc.
4225 Executive Square
Suite 355
La Jolla, CA 92037
Attn: President
Page 3
<PAGE>
If as to the Distributor:
---------------------------
Western Capital Financial Group, Inc.
4225 Executive Square
Suite 325
La Jolla, CA 92037
Attn: President
If as to the Portfolio Manager:
------------------------------
Bee & Associates Incorporated
370 17th Street
Denver, CO 80202
Attn: President
If as to the Principals:
-----------------------------
Bee & Associates Incorporated
370 17th Street
Denver, CO 80202
Attn: Bruce B. Bee and Edward N. McMillan
4. OBLIGATION. A copy of the Trust's Agreement and
Declaration of Trust is on file with the Secretary of the
Commonwealth of Massachusetts. Notice is hereby given that this
Agreement has been executed on behalf of the Trust by a trustee
of the Trust in his or her capacity as trustee and not
individually. The obligations of this Agreement shall only be
binding upon the assets and property of the Trust and shall not
be binding upon any trustee, officer, or shareholder of the Trust
individually.
5. COUNTERPARTS. This Agreement may be executed in one or
more counterparts, each of which shall be deemed to be an
original.
6. APPLICABLE LAW. This Agreement shall be governed by
the laws of California, provided that nothing herein shall be
Page 4
<PAGE>
construed in a manner inconsistent with the 1940 Act, the
Investment Advisers Act of 1940, or any rules or order of the
Securities and Exchange Commission thereunder.
7. CAPTIONS. The captions of this Agreement are included
for convenience only and in no way define or limit any of the
provisions hereof or otherwise affect their construction or
effect.
Page 5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
instrument to be executed by their officers designated below on
the day and year first above written.
The Palladian Trust
/s/ Richard Tasiello By: /s/ H. Michael Schwartz
---------------------------- -------------------------------
Witness H. Michael Schwartz
President
Palladian Advisors, Inc.
/s/ Richard Tasiello By: /s/ H. Michael Schwartz
---------------------------- -------------------------------
Witness H. Michael Schwartz
President
Western Capital
Financial Group, Inc.
/s/ Richard Tasiello By: /s/ H. Michael Schwartz
---------------------------- -------------------------------
Witness H. Michael Schwartz
President
Bee & Associates Incorporated
/s/ Margaret Shauffer By: /s/ Bruce B. Bee
---------------------------- -------------------------------
Witness Bruce B. Bee
President
/s/ Margaret Shauffer /s/ Bruce B. Bee
---------------------------- -------------------------------
Witness Bruce B. Bee
/s/ Margaret Shauffer /s/ Edward N. McMillan
---------------------------- -------------------------------
Witness Edward N. McMillan
Page 6
<PAGE>
EX. 9(e)
VALUE PORTFOLIO
PORTFOLIO MANAGER INVESTMENT AGREEMENT
Agreement, made this 12th day of October, 1995, among
The Palladian Trust (the "Trust"), a Massachusetts business
trust; Palladian Advisors, Inc. (the "Manager"), a Delaware
corporation; Western Capital Financial Group, Inc. (the
"Distributor"), a California corporation; and GAMCO Investors,
Inc. (the "Portfolio Manager"), a New York corporation.
WHEREAS, the Trust is a diversified, open-end
management investment company registered under the Investment
Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Trust is authorized to issue shares of
beneficial interest in separate portfolios with each such
portfolio representing interests in a separate portfolio of
securities and other assets; and
WHEREAS, the Manager has entered into a management
agreement with the Trust, pursuant to which the Manager will
provide, among other services, advice with respect to the
selection and monitoring of portfolio managers to provide the
day-to-day investment management of certain portfolios; and
WHEREAS, the Trust, the Manager and the Portfolio
Manager have entered into an agreement (the "Portfolio Manager
Agreement") pursuant to which the Portfolio Manager will provide
the day-to-day investment management of the Value Portfolio of
the Trust (the "Portfolio"); and
<PAGE>
WHEREAS, the Trust and the Distributor have entered
into an agreement under which the Distributor will serve as
underwriter for shares of the Trust; and
WHEREAS, one of the selection and retention criteria
for Portfolio Managers used by the Manager and the Trust is a
willingness of each Portfolio Manager to invest a total of $1
million in the portfolio or portfolios managed by that Portfolio
Manager; and
WHEREAS, the Trust prospectus discloses that each
Portfolio Manager has agreed that it or an affiliate (either
directly or through a qualified plan) will invest at least a
total of $1 million in the portfolio or portfolios it manages and
that each Portfolio Manager currently intends to maintain that
investment as long as it continues to manage the portfolio; and
WHEREAS, that agreement is an important factor in the
Manager's decision to recommend the Portfolio Manager and the
Trust's decision to retain the Portfolio Manager.
Therefore, the parties agree as follows:
1. INVESTMENT. On or before the fifth business day after
the Portfolio commences operations, the Portfolio Manager shall
purchase Portfolio shares with a total purchase price of five
hundred thousand dollars ($500,000.00). The Trust and the
Distributor shall cause the appropriate number of shares to be
issued to the Portfolio Manager in book entry form.
Page 2
<PAGE>
2. VOTING OF PORTFOLIO SHARES. The Portfolio Manager
agrees to vote its shares of the Portfolio in the same proportion
as all contract owners having voting rights with respect to the
Portfolio; provided, however, that the Portfolio Manager shall
vote its shares of the Portfolio in such other manner as may be
required by the Securities and Exchange Commission or its staff.
3. NOTICES. Notices shall be in writing and shall be duly
given if sent by first class mail or delivered to the following
addresses or to such other address as shall be specified by a
party with proper notice to the other parties:
If as to the Trust:
---------------------
The Palladian Trust
4225 Executive Square
Suite 355
La Jolla, CA 92037
Attn: President
If as to the Manager:
--------------------------
Palladian Advisors, Inc.
4225 Executive Square
Suite 355
La Jolla, CA 92037
Attn: President
If as to the Distributor:
--------------------------
Western Capital Financial Group, Inc.
4225 Executive Square
Suite 325
La Jolla, CA 92037
Attn: President
If as to the Portfolio Manager:
--------------------------------
GAMCO Investors, Inc.
One Corporate Center
Rye, NY 10580-1434
Attn: President
Page 3
<PAGE>
4. OBLIGATION. A copy of the Trust's Agreement and
Declaration of Trust is on file with the Secretary of the
Commonwealth of Massachusetts. Notice is hereby given that this
Agreement has been executed on behalf of the Trust by a trustee
of the Trust in his or her capacity as trustee and not
individually. The obligations of this Agreement shall only be
binding upon the assets and property of the Trust and shall not
be binding upon any trustee, officer, or shareholder of the Trust
individually.
5. COUNTERPARTS. This Agreement may be executed in one or
more counterparts, each of which shall be deemed to be an
original.
6. APPLICABLE LAW. This Agreement shall be governed by
the laws of California, provided that nothing herein shall be
construed in a manner inconsistent with the 1940 Act, the
Investment Advisers Act of 1940, or any rules or order of the
Securities and Exchange Commission thereunder.
7. CAPTIONS. The captions of this Agreement are included
for convenience only and in no way define or limit any of the
provisions hereof or otherwise affect their construction or
effect.
Page 4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
instrument to be executed by their officers designated below on
the day and year first above written.
The Palladian Trust
/s/ Fran A. Dyre By: /s/ H. Michael Schwartz
------------------------ ------------------------------
Witness H. Michael Schwartz
President
Palladian Advisors, Inc.
/s/ Fran A. Dyre By: /s/ H. Michael Schwartz
------------------------ ------------------------------
Witness H. Michael Schwartz
President
Western Capital
Financial Group, Inc.
/s/ Fran A. Dyre By: /s/ H. Michael Schwartz
------------------------ ------------------------------
Witness H. Michael Schwartz
President
GAMCO Investors, Inc.
/s/ Zeidy Salar By: /s/ Douglas R. Jamieson
------------------------ ------------------------------
Witness Name: Douglas R. Jamieson
Title: EVP & COO
Page 5
<PAGE>
EX. 9(f)
GLOBAL INTERACTIVE/TELECOMM PORTFOLIO
PORTFOLIO MANAGER INVESTMENT AGREEMENT
Agreement, made this 12th day of October, 1995, among
The Palladian Trust (the "Trust"), a Massachusetts business
trust; Palladian Advisors, Inc. (the "Manager"), a Delaware
corporation; Western Capital Financial Group, Inc. (the
"Distributor"), a California corporation; and GAMCO Investors,
Inc. (the "Portfolio Manager"), a New York corporation.
WHEREAS, the Trust is a diversified, open-end
management investment company registered under the Investment
Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Trust is authorized to issue shares of
beneficial interest in separate portfolios with each such
portfolio representing interests in a separate portfolio of
securities and other assets; and
WHEREAS, the Manager has entered into a management
agreement with the Trust, pursuant to which the Manager will
provide, among other services, advice with respect to the
selection and monitoring of portfolio managers to provide the
day-to-day investment management of certain portfolios; and
WHEREAS, the Trust, the Manager and the Portfolio
Manager have entered into an agreement (the "Portfolio Manager
Agreement") pursuant to which the Portfolio Manager will provide
the day-to-day investment management of the Global Interactive/
Telecomm Portfolio of the Trust (the "Portfolio"); and
<PAGE>
WHEREAS, the Trust and the Distributor have entered
into an agreement under which the Distributor will serve as
underwriter for shares of the Trust; and
WHEREAS, one of the selection and retention criteria
for Portfolio Managers used by the Manager and the Trust is a
willingness of each Portfolio Manager to invest a total of $1
million in the portfolio or portfolios managed by that Portfolio
Manager; and
WHEREAS, the Trust prospectus discloses that each
Portfolio Manager has agreed that it or an affiliate (either
directly or through a qualified plan) will invest at least a
total of $1 million in the portfolio or portfolios it manages and
that each Portfolio Manager currently intends to maintain that
investment as long as it continues to manage the portfolio; and
WHEREAS, that agreement is an important factor in the
Manager's decision to recommend the Portfolio Manager and the
Trust's decision to retain the Portfolio Manager.
Therefore, the parties agree as follows:
1. INVESTMENT. On or before the fifth business day after
the Portfolio commences operations, the Portfolio Manager shall
purchase Portfolio shares with a total purchase price of five
hundred thousand dollars ($500,000.00). The Trust and the
Distributor shall cause the appropriate number of shares to be
issued to the Portfolio Manager in book entry form.
Page 2
<PAGE>
2. VOTING OF PORTFOLIO SHARES. The Portfolio Manager
agrees to vote its shares of the Portfolio in the same proportion
as all contract owners having voting rights with respect to the
Portfolio; provided, however, that the Portfolio Manager shall
vote its shares of the Portfolio in such other manner as may be
required by the Securities and Exchange Commission or its staff.
3. NOTICES. Notices shall be in writing and shall be duly
given if sent by first class mail or delivered to the following
addresses or to such other address as shall be specified by a
party with proper notice to the other parties:
If as to the Trust:
---------------------
The Palladian Trust
4225 Executive Square
Suite 355
La Jolla, CA 92037
Attn: President
If as to the Manager:
------------------------
Palladian Advisors, Inc.
4225 Executive Square
Suite 355
La Jolla, CA 92037
Attn: President
If as to the Distributor:
---------------------------
Western Capital Financial Group, Inc.
4225 Executive Square
Suite 325
La Jolla, CA 92037
Attn: President
If as to the Portfolio Manager:
------------------------------
GAMCO Investors, Inc.
One Corporate Center
Rye, NY 10580-1434
Attn: President
Page 3
<PAGE>
4. OBLIGATION. A copy of the Trust's Agreement and
Declaration of Trust is on file with the Secretary of the
Commonwealth of Massachusetts. Notice is hereby given that this
Agreement has been executed on behalf of the Trust by a trustee
of the Trust in his or her capacity as trustee and not
individually. The obligations of this Agreement shall only be
binding upon the assets and property of the Trust and shall not
be binding upon any trustee, officer, or shareholder of the Trust
individually.
5. COUNTERPARTS. This Agreement may be executed in one or
more counterparts, each of which shall be deemed to be an
original.
6. APPLICABLE LAW. This Agreement shall be governed by
the laws of California, provided that nothing herein shall be
construed in a manner inconsistent with the 1940 Act, the
Investment Advisers Act of 1940, or any rules or order of the
Securities and Exchange Commission thereunder.
7. CAPTIONS. The captions of this Agreement are included
for convenience only and in no way define or limit any of the
provisions hereof or otherwise affect their construction or
effect.
Page 4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
instrument to be executed by their officers designated below on
the day and year first above written.
The Palladian Trust
/s/ Fran A. Dyre By: /s/ H. Michael Schwartz
------------------------ ------------------------------
Witness H. Michael Schwartz
President
Palladian Advisors, Inc.
/s/ Fran A. Dyre By: /s/ H. Michael Schwartz
------------------------ ------------------------------
Witness H. Michael Schwartz
President
Western Capital
Financial Group, Inc.
/s/ Fran A. Dyre By: /s/ H. Michael Schwartz
------------------------ ------------------------------
Witness H. Michael Schwartz
President
GAMCO Investors, Inc.
/s/ Zeidy Salar By: /s/ Douglas R. Jamieson
------------------------ ------------------------------
Witness Name: Douglas R. Jamieson
Title: EVP & COO
Page 5
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in Post-Effective Amendment
No. 8 to the Registration Statement of The Palladian Trust on Form N-1A of
our report dated March 16, 1998 on our audit of the financial statements and
financial highlights of the Value Portfolio, Growth Portfolio, International
Growth Portfolio, Global Strategic Income Portfolio and Global
Interactive/Telecomm Portfolio (five portfolios of the Palladian Trust) which
report is included in the Annual Report to Shareholders for the year ended
December 31, 1997 which is incorporated by reference in the Post-Effective
Amendment to the Registration Statement. We also consent to the reference to
our Firm under the caption "Financial Highlights" in the Prospectus and
Service Providers in the Statement of Additional Information.
Baltimore, Maryland PricewaterhouseCoopers LLP
August 31, 1998
<PAGE>
GLOBAL STRATEGIC INCOME
<TABLE>
<S> <C> <C> <C> <C>
1 YEAR RETURN 1/01/1997-12/31/97 (10.10/10.04) [to the power of (1/365/365)-1] = .60%
SINCE INCEPTION 1/31/1996-12/31/97 (10.10/10.00) [to the power of (1/700/365)-1] = .53%
</TABLE>
GLOBAL STRATEGIC INCOME - 30 DAY YIELD
FROM DATE USED 12/1/97
TOTAL INCOME 11,440.62
TOTAL EXPENSES 3,034.74
MAXIMUM OFFERING PRICE 9.8789
SEC ADVERTISING YIELD 3.8298
GLOBAL INTERACTIVE/TELECOM
<TABLE>
<S> <C> <C> <C> <C>
1 YEAR RETURN 1/01/1997-12/31/97 (14.10/10.05) [to the power of (1/365/365)-1] = 40.24%
SINCE INCEPTION 1/31/1996-12/31/97 (14.10/10.00) [to the power of (1/700/365)-1] = 19.61%
</TABLE>
VALUE PORTFOLIO
<TABLE>
<S> <C> <C> <C> <C>
1 YEAR RETURN 1/01/1997-12/31/97 (15.24/11.51) [to the power of (1/365/365)-1] = 32.36%
SINCE INCEPTION 1/31/1996-12/31/97 (15.24/10.00) [to the power of (1/700/365)-1] = 24.55%
</TABLE>
GROWTH PORTFOLIO
<TABLE>
<S> <C> <C> <C> <C>
1 YEAR RETURN 1/01/1997-12/31/97 (11.95/10.84) [to the power of (1/365/365)-1] = 10.24%
SINCE INCEPTION 1/31/1996-12/31/97 (11.95/10.00) [to the power of (1/700/365)-1] = 9.73%
</TABLE>
INTERNATIONAL GROWTH PORTFOLIO
<TABLE>
<S> <C> <C> <C> <C>
1 YEAR RETURN 1/01/1997-12/31/97 (9.97/10.51) [to the power of (1/365/365)-1] = -5.25%
SINCE INCEPTION 3/26/1996-12/31/97 (9.97/10.00) [to the power of (1/646/365)-1] = -.19%
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> VALUE PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 4,548,152
<INVESTMENTS-AT-VALUE> 5,095,033
<RECEIVABLES> 64,510
<ASSETS-OTHER> 1,722,459
<OTHER-ITEMS-ASSETS> 174,472
<TOTAL-ASSETS> 7,056,474
<PAYABLE-FOR-SECURITIES> 429,049
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 42,773
<TOTAL-LIABILITIES> 471,822
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 487,816
<SHARES-COMMON-PRIOR> 210,566
<ACCUMULATED-NII-CURRENT> 41,294
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 546,881
<NET-ASSETS> 6,584,652
<DIVIDEND-INCOME> 21,839
<INTEREST-INCOME> 46,168
<OTHER-INCOME> 0
<EXPENSES-NET> 26,713
<NET-INVESTMENT-INCOME> 41,294
<REALIZED-GAINS-CURRENT> 384,615
<APPREC-INCREASE-CURRENT> 494,905
<NET-CHANGE-FROM-OPS> 920,814
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 41,271
<DISTRIBUTIONS-OF-GAINS> 369,412
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 432,359
<NUMBER-OF-SHARES-REDEEMED> 57,726
<SHARES-REINVESTED> 30,421
<NET-CHANGE-IN-ASSETS> 5,684,321
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 49,534
<GROSS-ADVISORY-FEES> 4,734
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 150,629
<AVERAGE-NET-ASSETS> 3,171,977
<PER-SHARE-NAV-BEGIN> 10.88
<PER-SHARE-NII> .17
<PER-SHARE-GAIN-APPREC> 3.35
<PER-SHARE-DIVIDEND> .09
<PER-SHARE-DISTRIBUTIONS> .81
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.50
<EXPENSE-RATIO> .84
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> GROWTH PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 3,928,673
<INVESTMENTS-AT-VALUE> 4,205,105
<RECEIVABLES> 143,650
<ASSETS-OTHER> 146,282
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 4,495,037
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 31,506
<TOTAL-LIABILITIES> 31,506
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 373,580
<SHARES-COMMON-PRIOR> 133,074
<ACCUMULATED-NII-CURRENT> (3,384)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (374,694)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 267,942
<NET-ASSETS> 4,463,531
<DIVIDEND-INCOME> 2,085
<INTEREST-INCOME> 13,171
<OTHER-INCOME> 0
<EXPENSES-NET> 18,640
<NET-INVESTMENT-INCOME> (3,384)
<REALIZED-GAINS-CURRENT> (374,694)
<APPREC-INCREASE-CURRENT> 267,942
<NET-CHANGE-FROM-OPS> (110,136)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 391,597
<NUMBER-OF-SHARES-REDEEMED> 31,707
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 4,315,127
<ACCUMULATED-NII-PRIOR> 1,792
<ACCUMULATED-GAINS-PRIOR> 1,898
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4,192
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 127,114
<AVERAGE-NET-ASSETS> 2,077,862
<PER-SHARE-NAV-BEGIN> 10.84
<PER-SHARE-NII> (.02)
<PER-SHARE-GAIN-APPREC> 1.13
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.95
<EXPENSE-RATIO> .90
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> INTERNATIONAL GROWTH
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 3,320,007
<INVESTMENTS-AT-VALUE> 3,044,374
<RECEIVABLES> 0
<ASSETS-OTHER> 213,955
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 3,258,329
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 51,327
<TOTAL-LIABILITIES> 51,327
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 329,943
<SHARES-COMMON-PRIOR> 9,431
<ACCUMULATED-NII-CURRENT> 15,386
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (274,392)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (278,863)
<NET-ASSETS> 3,207,043
<DIVIDEND-INCOME> 20,929
<INTEREST-INCOME> 22,778
<OTHER-INCOME> 0
<EXPENSES-NET> 28,320
<NET-INVESTMENT-INCOME> 15,386
<REALIZED-GAINS-CURRENT> 4,533
<APPREC-INCREASE-CURRENT> (278,925)
<NET-CHANGE-FROM-OPS> (259,006)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 15,480
<DISTRIBUTIONS-OF-GAINS> 8,333
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 347,778
<NUMBER-OF-SHARES-REDEEMED> 29,718
<SHARES-REINVESTED> 2,452
<NET-CHANGE-IN-ASSETS> 3,109,615
<ACCUMULATED-NII-PRIOR> 1,792
<ACCUMULATED-GAINS-PRIOR> 1,898
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 9,242
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 112,857
<AVERAGE-NET-ASSETS> 1,587,484
<PER-SHARE-NAV-BEGIN> 10.33
<PER-SHARE-NII> .10
<PER-SHARE-GAIN-APPREC> (.63)
<PER-SHARE-DIVIDEND> (.05)
<PER-SHARE-DISTRIBUTIONS> (.03)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.72
<EXPENSE-RATIO> 1.78
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> GLOBAL STRATEGIC INCOME
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 2,219,985
<INVESTMENTS-AT-VALUE> 2,241,944
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<ASSETS-OTHER> 2,569,051
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<OTHER-ITEMS-LIABILITIES> 2,417,200
<TOTAL-LIABILITIES> 2,699,938
<SENIOR-EQUITY> 0
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<SHARES-COMMON-STOCK> 273,302
<SHARES-COMMON-PRIOR> 110,919
<ACCUMULATED-NII-CURRENT> 69,124
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (27,404)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 9,981
<NET-ASSETS> 2,699,938
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 99,446
<OTHER-INCOME> 0
<EXPENSES-NET> 30,322
<NET-INVESTMENT-INCOME> 69,124
<REALIZED-GAINS-CURRENT> (27,885)
<APPREC-INCREASE-CURRENT> 8,819
<NET-CHANGE-FROM-OPS> 50,058
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 29,924
<DISTRIBUTIONS-OF-GAINS> 12,484
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 181,202
<NUMBER-OF-SHARES-REDEEMED> 23,111
<SHARES-REINVESTED> 4,292
<NET-CHANGE-IN-ASSETS> 1,585,590
<ACCUMULATED-NII-PRIOR> 49,636
<ACCUMULATED-GAINS-PRIOR> (36,223)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 7,538
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 125,676
<AVERAGE-NET-ASSETS> 1,881,585
<PER-SHARE-NAV-BEGIN> 9.98
<PER-SHARE-NII> .36
<PER-SHARE-GAIN-APPREC> (.30)
<PER-SHARE-DIVIDEND> .11
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<PER-SHARE-NAV-END> 9.88
<EXPENSE-RATIO> 3.67
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 5
<NAME> GLOBAL TELECOMM/PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 1,836,313
<INVESTMENTS-AT-VALUE> 2,234,365
<RECEIVABLES> 0
<ASSETS-OTHER> 1,035,309
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 3,269,674
<PAYABLE-FOR-SECURITIES> 230,802
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 22,431
<TOTAL-LIABILITIES> 253,233
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 226,425
<SHARES-COMMON-PRIOR> 59,414
<ACCUMULATED-NII-CURRENT> 9,035
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (9,487)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 398,052
<NET-ASSETS> 3,016,441
<DIVIDEND-INCOME> 11,128
<INTEREST-INCOME> 18,494
<OTHER-INCOME> 0
<EXPENSES-NET> 20,587
<NET-INVESTMENT-INCOME> 9,035
<REALIZED-GAINS-CURRENT> 142,691
<APPREC-INCREASE-CURRENT> 395,113
<NET-CHANGE-FROM-OPS> 537,804
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 9,124
<DISTRIBUTIONS-OF-GAINS> 142,692
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 174,816
<NUMBER-OF-SHARES-REDEEMED> 19,211
<SHARES-REINVESTED> 11,406
<NET-CHANGE-IN-ASSETS> 2,422,126
<ACCUMULATED-NII-PRIOR> (42,738)
<ACCUMULATED-GAINS-PRIOR> 5826
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 4,050
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 101,700
<AVERAGE-NET-ASSETS> 1,401,781
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .08
<PER-SHARE-GAIN-APPREC> 3.95
<PER-SHARE-DIVIDEND> .04
<PER-SHARE-DISTRIBUTIONS> .67
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.32
<EXPENSE-RATIO> 1.47
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
