<PAGE>
As filed with the SEC on May 1, 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. 6 /x/
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 / /
Amendment No. 9 /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 May 1, 1998 pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/ / on May 1, 1998 pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / on (date) pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
/ / this post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
Title of Securities Being Registered: Portfolio shares
<PAGE>
CROSS REFERENCE SHEET
FOR PROSPECTUS AND SAI
(as required by Rule 495)
<TABLE>
<CAPTION>
Form N-1A Item No. Caption in Part A Prospectus
------------------ ----------------------------
<S> <C> <C>
Item 1. Cover Page Cover Page
Item 2. Synopsis Summary of Expenses
Item 3. Condensed Financial Performance Information
Item 4. General Description of General Information; Investment
Registrant Objectives and Policies;
Description of Securities and
Investment Techniques
Item 5. Management of the Fund Management of the Trust
Item 6. Capital Stock and Other Dividends, Distributions,
Securities and Taxes; Other Information
Item 7. Purchase of Securities Being Investment in the Trust
Offered
Item 8. Redemption of Repurchase Investment in the Trust
Item 9. Pending Legal Proceedings Not Applicable
<PAGE>
<CAPTION>
Caption in Part B Statement
Form N-1A Item No. of Additional Information
------------------ ----------------------------
<S> <C> <C>
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information Not Applicable
and History
Item 13. Investment Objectives Description of Securities and
and Policies Investment Techniques;
Investment Restrictions;
Appendix
Item 14. Management of the Fund Management of the Trust
Item 15. Control Person and Principal Management of the Trust
Holders of Securities
Item 16. Investment Advisory and Management of the Trust
Other Services
Item 17. Brokerage Allocation and Portfolio Transactions
Other Practices and Brokerage
Item 18. Capital Stock and Other Capitalization
Securities
Item 19. Purchase, Redemption and Not Applicable
Pricing of Securities Being
Offered
Item 20. Tax Status Taxation
Item 21. Underwriters Not Applicable
Item 22. Calculations of Performance Performance Information
Data
Item 23. Financial Statements Financial Statements
</TABLE>
<PAGE>
Part C
Information required to be included in Part C is set forth under the
appropriate item, so numbered, in Part C to this Registration Statement.
<PAGE>
PROSPECTUS
for
The Value Portfolio
The Growth Portfolio
The International Growth Portfolio
The Global Strategic Income Portfolio, and
The Global Interactive/Telecomm Portfolio
of
THE PALLADIAN TRUST
440 Lincoln Street
Worcester, Massachusetts 01653
(800) 917-1909
May 1, 1998
This prospectus offers shares of five portfolios (each individually a
"Portfolio" or collectively the "Portfolios") of The Palladian Trust (the
"Trust"), which is an open-end, management investment company. Each Portfolio
has its own investment objective or objectives and investment policies.
Shares of the Portfolios may be sold only to: (1) life insurance company
separate accounts (the "Separate Accounts") to serve as the underlying
investment medium for variable annuity and variable life insurance contracts;
(2) qualified retirement plans, as permitted by Treasury Regulations; and (3)
life insurance companies and advisers to the Portfolios and their affiliates.
Shares will not be offered directly to the public.
Allmerica 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 Stonehill Capital Management, Inc.
The International Growth Portfolio Bee & Associates Incorporated
The Global 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 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 __.
This prospectus sets forth concisely the information a prospective
purchaser of a variable contract or a participant in a qualified retirement
plan should know before directing that contributions or amounts credited to
him or her be invested in the Portfolios. A Statement of Additional
Information (the "SAI") dated May 1, 1998 containing additional and more
detailed information about the Portfolios has been filed with the Securities
and Exchange Commission and is hereby incorporated by reference into this
prospectus. It is available without charge and can be obtained by writing or
calling the Trust at the address and telephone number printed above.
------------------
<PAGE>
PROSPECTIVE PURCHASERS OF A VARIABLE CONTRACT SHOULD READ THIS PROSPECTUS IN
CONJUNCTION WITH THE PROSPECTUS FOR THE SEPARATE ACCOUNT. BOTH
PROSPECTUSES SHOULD BE READ CAREFULLY AND RETAINED FOR FUTURE REFERENCE.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY OF EXPENSES 5
FINANCIAL HIGHLIGHTS 8
GENERAL INFORMATION 9
The Palladian Trust 9
The Manager and Portfolio Managers 9
Investment Objectives 9
MANAGEMENT OF THE TRUST 10
Manager 10
Portfolio Managers 11
Management and Portfolio Management Investment Advisory Fees 12
Expense Limitations 12
Custodian and Transfer Agent 14
INVESTMENT OBJECTIVES AND POLICIES 14
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES 18
U.S. Government Securities 18
Debt Securities 19
Mortgage-Backed Securities 19
Other Asset-Backed Securities 20
Variable and Floating Rate Securities 20
Banking Industry and Savings Industry Obligations 20
Commercial Paper 21
Repurchase Agreements 21
Reverse Repurchase Agreements 21
Lending Portfolio Securities 21
Illiquid Securities 21
Warrants 22
Other Investment Companies 22
Short Sales 22
Short Sales Against the Box 23
Foreign Securities 23
Investment in Gold and Other Precious Metals 24
Futures Contracts 24
Options 25
Foreign Currency Transactions 26
Leverage 26
Indexed Securities 27
INVESTMENT IN THE TRUST 27
Principal Underwriter 27
Determination of Net Asset Value 27
Purchase of Shares 28
Redemption of Shares 28
3
<PAGE>
<CAPTION>
PAGE
----
<S> <C>
DIVIDENDS, DISTRIBUTIONS, AND TAXES 29
OTHER INFORMATION 29
Capitalization 29
Voting Rights 30
Portfolio Brokerage 30
Year 2000 30
Performance Information 30
APPENDIX A 31
APPENDIX B 32
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFERING CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS BEING AUTHORIZED BY
THE TRUST. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY THE TRUST TO SELL
SHARES IN ANY STATE TO ANY PERSON TO WHOM IT IS UNLAWFUL FOR THE TRUST TO MAKE
SUCH AN OFFER IN SUCH STATE.
4
<PAGE>
SUMMARY OF EXPENSES
The following tables show the expenses that will be incurred by each
Portfolio, expressed as a percentage of average net assets during the year.
If you have been given this prospectus because you are considering the
purchase of a variable contract, you should refer to the variable contract
prospectus for more information about expenses under the variable contract,
which are in addition to expenses of the Portfolios.
SHAREHOLDER TRANSACTIONS EXPENSES (FOR EACH PORTFOLIO)
Sales Load on Purchases None
Sales Load on Reinvested Dividends None
Deferred Sales Load Imposed on Redemption None
Exchange Fees None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
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 one Portfolio -- the Global Strategic Income Portfolio.
That Portfolio has a new Portfolio Manager effective April 13, 1998. Thus,
the initial fee is applicable through April 30, 1999. That fee is subject to
additional limitations set forth in note (1) 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 Global Strategic Income
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 ____.
We show below expense information first using the fees that actually applied
during 1997, with the caveat that the fee for the Global Strategic Income
Portfolio has been restated to 0.40% to reflect the current fee arrangment
described in note (1) to the charts below.
We also show below expense information assuming fees of 0.00%, 2.00% and
4.00%, because the fee in 1998 and future years may vary. You should note,
however, that the fee could be any figure between 0.00% and 4.00%, not just
the specific figures shown below.
For each of the fee levels shown, we have included an example prepared in
accordance with the requirements of the Securities and Exchange Commission.
The purpose of the examples is to assist investors in understanding the
various costs and expenses that an investor in the Portfolios will bear
directly or indirectly. They show the total expenses that would be payable
if you redeemed your shares after having held them for one and three year
periods respectively. Each example assumes a 5% annual rate of return
pursuant to requirements of the Securities and Exchange Commission. This
hypothetical rate 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)
5
<PAGE>
<TABLE>
<CAPTION>
OTHER EXPENSES
(AFTER ANY TOTAL
MANAGEMENT APPLICABLE OPERATING
FUND 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 0.58% (2) 1.20% (3) 1.78%
Portfolio
Global Strategic Income 0.40% (1) 1.20% (3) 1.60%
Portfolio
Global Interactive/ 0.27% (2) 1.20% (3) 1.47%
Telecomm Portfolio
</TABLE>
EXAMPLE. A shareholder would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return, (2) the advisory fees in
the above chart, and (3) redemption at the end of each time period.
<TABLE>
<CAPTION>
1 Year 3 Years
<S> <C> <C>
Value Portfolio $ 11 $ 36
Growth Portfolio $ 12 $ 37
International Growth Portfolio $ 18 $ 55
Global Strategic Income Portfolio $ 16 $ 50
Global Interactive/Telecomm Portfolio $ 15 $ 46
</TABLE>
2. ASSUMING MANAGEMENT FEE OF 0%
An advisory fee of 0% would be paid if the Portfolio's performance (net of
all fees and expenses) was more than 3.0 percentage points lower than the
benchmark index.
<TABLE>
<CAPTION>
OTHER EXPENSES
(AFTER ANY TOTAL
MANAGEMENT APPLICABLE OPERATING
FUND 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 0% (2) 1.20% (3) 1.20%
Portfolio
Global Strategic Income 0% (2) 1.20% (3) 1.20%
Portfolio
Global Interactive/ 0% (2) 1.20% (3) 1.20%
Telecomm Portfolio
</TABLE>
EXAMPLE. A shareholder would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return, (2) an advisory fee of 0%,
and (3) redemption at the end of each time period.
<TABLE>
<CAPTION>
1 Year 3 Years
<S> <C> <C>
Value Portfolio $10.00 $31.22
Growth Portfolio $10.00 $31.22
International Growth Portfolio $12.00 $37.39
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
1 Year 3 Years
<S> <C> <C>
Global Strategic Income Portfolio $12.00 $37.39
Global Interactive/Telecomm Portfolio $12.00 $37.39
</TABLE>
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 TOTAL
MANAGEMENT APPLICABLE OPERATING
FUND 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 2.00% (2) 1.20% (3) 3.20%
Portfolio
Global Strategic Income 2.00% (2) 1.20% (3) 3.20%
Portfolio
Global Interactive/Telecomm 2.00% (2) 1.20% (3) 3.20%
Portfolio
</TABLE>
EXAMPLE. A shareholder would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return, (2) an advisory fee of 2%,
and (3) redemption at the end of each time period.
<TABLE>
<CAPTION>
1 Year 3 Years
<S> <C> <C>
Value Portfolio $30.00 $91.81
Growth Portfolio $30.00 $91.81
International Growth Portfolio $32.00 $97.74
Global Strategic Income Portfolio $32.00 $97.74
Global Interactive/Telecomm Portfolio $32.00 $97.74
</TABLE>
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 TOTAL
MANAGEMENT APPLICABLE OPERATING
FUND 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 4.00% (2) 1.20% (3) 5.20%
Portfolio
Global Strategic Income 4.00% (2) 1.20% (3) 5.20%
Portfolio
Global Interactive/Telecomm 4.00% (2) 1.20% (3) 5.20%
Portfolio
</TABLE>
7
<PAGE>
EXAMPLE. A shareholder would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return, (2) an advisory fee of 4%,
and (3) redemption at the end of each time period. In order to have
both a 5% annual return and an advisory fee of 4%, the Portfolio's
performance would have to be 9% before deduction of the 4% fee
(resulting in performance of 5%) and the benchmark index would have to
DECREASE at least 2.5 percentage points (meaning that the Portfolio's
performance after fees and expenses was at least 7.5 percentage points
better than the benchmark index).
<TABLE>
<CAPTION>
1 Year 3 Years
<S> <C> <C>
Value Portfolio $50.00 $150.00
Growth Portfolio $50.00 $150.00
International Growth Portfolio $52.00 $155.69
Global Strategic Income Portfolio $52.00 $155.69
Global Interactive/Telecomm Portfolio $52.00 $155.69
</TABLE>
(1) The actual management fee for the Global 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 Management Agreement sets the fee at 0.80%
through April 30, 1999, the fee is subject to two important limitations.
First, until June 8, 1998, when the Portfolio Management Agreement is to be
presented at a shareholder meeting for approval, the fee will be calculated
at the lesser of the following two rates: (1) 0.80%; and (2) the rate that
would have applied under the old advisory agreement. The latter rate varies
based on prior performance, but as noted above was 0.41% for 1997. Second,
the Manager and the Portfolio Manager have voluntarily agreed to limit their
fee from June 9, 1998 through April 30, 1999 to annual rate of 0.40%. See
"Management and Portfolio Management Investment Advisory Fees," pages _____.
(2) A performance-based advisory fee is in effect. See "Management and
Portfolio Management Investment Advisory Fees," pages _____.
(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%; Global Strategic
Income Portfolio, 1.20%; Global Interactive/Telecomm Portfolio, 1.20%. There
was a different expense limitation in effect during 1997. See "Expense
Limitations," page __. 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%; Global
Strategic Income Portfolio, 5.31%; Global Interactive/Telecomm Portfolio,
6.28%.
8
<PAGE>
FINANCIAL HIGHLIGHTS
9
<PAGE>
FOR THE PERIOD ENDED DECEMBER 31, 1997
The financial highlights for the periods indicated have been audited by
Coopers & Lybrand L.L.P., independent accountants, whose report thereon
appears in the Trust's annual report and in the Statement of Additional
Information. The financial highlights should be read in conjunction with the
financial statements. The annual report and Statement of Additional
Information contain additional information and are available upon request and
without charge. The information presented is for a share of beneficial
interest outstanding through the periods ended December 31, except as noted.
<TABLE>
<CAPTION>
VALUE PORTFOLIO GROWTH PORTFOLIO
---------------------------------- -----------------------------------
FOR THE 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
5
<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
- --------------------------------------------------------------------------------
1. This information was prepared using the average number of shares outstanding
during the period.
2. The total return, ratio of operating expenses and the ratio of net investment
loss for the period ended December 31, 1996 reflect the impact of an expense
reimbursement totaling $169,554, allocated to each portfolio following
stipulated criteria (See Note 10 to the financial statements). Absent the
reimbursement, net investment loss per share, and the ratios of expenses and
net investment loss to average net assets for the Value Portfolio, the Growth
Portfolio, the International Growth Portfolio, the Global Strategic Income
Portfolio and the Global Interactive /Telecomm Portfolio shares would have
been ($1.22), ($5.61), ($7.56), ($0.63) and, ($1.34), respectively, 14.13%,
63.54%, 126.26%,12.30%, and 16.45%, respectively, (12.40%), (58.37%),
(92.05%), (7.02%), and (14.82%), respectively.
3. Total return measures the change in the value of an investment for the year
indicated. For the period ended December 31, 1996 the total return includes
a capital infusion totaling $228,823 (See Note 9 to the financial statements
concerning amount allocated to each Portfolio). Absent the infusion, total
return for the Value Portfolio, the Growth Portfolio, the International
Growth Portfolio, the Global Strategic Income Portfolio and Global
Interactive /Telecomm Portfolio would have been 7.64%, (41.75%), (46.50%),
(4.49%), and (6.68%), respectively.
4. The total return, ratio of operating expenses and the ratio of net investment
loss for the period ended December 31, 1997 reflect the impact of an expense
reimbursement totaling $587,996, allocated to each portfolio following
stipulated criteria (See Note 10 to the financial statements). Absent the
reimbursement, net investment loss per share, and the ratios of expenses and
net investment loss to average net assets for the Value Portfolio, the Growth
Portfolio, the International Growth Portfolio, the Global Strategic Income
Portfolio and the Global Interactive /Telecomm Portfolio shares would have
been ($0.34), ($0.68), ($0.45), ($0.14) and, ($0.62), respectively, 4.75%,
6.12%, 7.11%, 6.68%, and 7.26%, respectively, (2.60%), (5.38%), (4.36%),
(1.39%), and (5.14%), respectively.
6
<PAGE>
GENERAL INFORMATION
THE PALLADIAN TRUST
This Prospectus offers shares of five Portfolios (the "Portfolios") of
The Palladian Trust (the "Trust"), each with its own investment objective and
investment policies. The Trust was established as a Massachusetts business
trust and is registered under the Investment Company Act of 1940 (the "1940
Act") as an open-end management investment company.
THE MANAGER AND PORTFOLIO MANAGERS
Allmerica 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 Stonehill Capital Management, Inc.
The International Growth Portfolio Bee & Associates Incorporated
The Global 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 Managers for the International Growth Portfolio
(Bee & Associates Incorporated) and the Growth Portfolio (Stonehill Capital
Management, Inc.) have each agreed that it or its principals will invest $1
million (directly or through qualified plans) in its Portfolio when it
reaches $10 million in total assets. Although a Portfolio Manager is
permitted by law to sell its shares at any time, each of these three
Portfolio Managers currently intend to maintain that investment as long as it
manages the Portfolio. Once a Portfolio Manager makes that investment, and
for as long as it maintains the investment, the Portfolio Manager will be
managing a portion of their own money along with your money. The Portfolio
Manager for the Global Strategic Income Portfolio does not currently have an
investment in its Portfolio.
There can be no assurance that any particular Portfolio investment
objective will be attained. The Board of Trustees may establish additional
Portfolios at any time and may discontinue offering a Portfolio at any time.
INVESTMENT OBJECTIVES
The Trust is currently offering shares of five separate Portfolios. Each
Portfolio has a different investment objective which it pursues through
different investment policies as described below. Since the Portfolios have
different investment objectives, each can be expected to have different
investment results and incur different market and financial risks. There can
be no assurance that any of these objectives will be met.
The investment objectives of the Portfolios are fundamental, which means
they may not be changed without shareholder approval as required by the 1940
Act.
THE VALUE PORTFOLIO seeks to make money for investors by investing
primarily in companies that the Portfolio Manager believes are undervalued
and that by virtue of anticipated developments may, in the Portfolio
Manager's judgment, achieve significant capital appreciation.
THE GROWTH PORTFOLIO seeks to make money for investors by investing
primarily in securities selected for their long-term growth prospects.
THE INTERNATIONAL GROWTH PORTFOLIO seeks to make money for investors by
investing internationally for long-term capital appreciation, primarily in
equity securities.
10
<PAGE>
THE GLOBAL STRATEGIC INCOME PORTFOLIO seeks to make money for investors
by investing for high current income and capital appreciation in a variety of
domestic and foreign fixed-income securities.
THE GLOBAL INTERACTIVE/TELECOMM PORTFOLIO seeks to make money for
investors primarily by investing globally in equity securities of companies
engaged in the development, manufacture or sale of interactive and/or
telecommunications services and products.
MANAGEMENT OF THE TRUST
The business and affairs of the Trust are managed under the direction of
the Board of Trustees. Additional information about the trustees and
officers of the Trust may be found in the Statement of Additional Information
under the heading "Management of the Trust."
The Trust is responsible for the payment of certain fees and expenses
including, among others, the following: (1) fees of the Manager and the
Portfolio Managers; (2) custodial, accounting, auditing, legal and transfer
agency fees; (3) fees of independent trustees; (4) brokerage fees and
commissions in connection with the purchase and sale of Portfolio securities;
(5) taxes; (6) the reimbursement of organizational expenses; and (7) expenses
of printing and mailing prospectuses, proxy statements and shareholder
communications.
MANAGER
Allmerica 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 its 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 will remain
in effect past June 11, 1998 only if approved by shareholders. The Board of
Trustees has called a shareholder meeting for June 8, 1998, to seek the
required shareholder approval. Proxy materials will be issued to contract
owners with funds invested in the Trust as of the record date of April 9,
1998.
Prior to February 12, 1998, Palladian Advisors, Inc. ("PAI") served as
Manager of the Trust, and Tremont Partners, Inc. ("Tremont") served as
Portfolio Adviser to the Trust. AFIMS now serves as Manager of the Trust,
and there is no Portfolio Adviser. Tremont was previously paid by PAI (not
the Trust). Thus, overall advisory fees were not changed as a result of the
switch from PAI and Tremont to 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.
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.
11
<PAGE>
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 December 31, 1997,
GAMCO managed assets of approximately $6.1 billion. Mario J. Gabelli may be
deemed a "controlling person" of GAMCO on the basis of his ownership of stock
of Gabelli Funds, Inc. Mario J. Gabelli is primarily responsible for the
day-to-day investment management of the Portfolio. Mr. Gabelli has been the
Chief Investment Officer of GAMCO since its organization in 1978.
THE GROWTH PORTFOLIO. Stonehill Capital Management, Inc. ("Stonehill
Capital"), 767 Third Avenue, New York, New York 10017, is owned by its founder
Robert L. Emerson. As of December 31, 1997, Stonehill Capital managed assets
of approximately $11.6 million. Mr. Emerson is primarily responsible for the
day-to-day investment management of the Portfolio, and has been President of
Stonehill Capital for the past five years.
THE INTERNATIONAL GROWTH PORTFOLIO. Bee & Associates Incorporated
("BAI"), 370 17th Street, Suite 3560, Denver, Colorado 80202, was formed in
1989 to provide global equity management expertise to individuals, retirement
plan sponsors, foundations, endowments and other entities. As of December
31, 1997, BAI managed assets of approximately $490 million. Bruce B. Bee is
primarily responsible for the day-to-day investment management of the
Portfolio. Since BAI's organization in 1989, Mr. Bee has been the firm's
controlling person and principal portfolio manager.
THE GLOBAL STRATEGIC INCOME PORTFOLIO. Allmerica Asset Management, Inc.
("AAM"), like AFIMS (the Trust's Manager), is an indirect, wholly-owned
subsidiary of Allmerica Financial Corporation ("AFC"). AAM is located at
440 Lincoln Street, Worcester, Massachusetts 01653. As of December 31,
1997, AAM managed assets of approximately $11 billion. Lisa M. Coleman is
primarily responsible for the day-to-day investment management of the
Portfolio. Since 1994, Ms. Coleman has served as a portfolio manager for
AAM. From 1989 through 1994, she served as a Deputy Manager, Portfolio
Management, for Brown Brothers Harriman & Company.
THE GLOBAL INTERACTIVE/TELECOMM PORTFOLIO. GAMCO manages this
Portfolio, as well as the Value Portfolio. Mario J. Gabelli is primarily
responsible for the day-to-day investment management of the Global
Interactive/Telecomm Portfolio. Mr. Gabelli has been Chief Investment
Officer of GAMCO since its organization in 1978.
MANAGEMENT AND PORTFOLIO MANAGEMENT INVESTMENT ADVISORY FEES
As explained in more detail above, AFIMS serves as the overall manager
of the Portfolios, and the Portfolio Managers handle the day-to-day
investment management of the Portfolios. For these services, each Portfolio
pays an overall management fee, computed and accrued daily and paid monthly,
based on its average daily net assets. The overall fee varies based on the
performance of that Portfolio (after expenses) compared to that of an
appropriate benchmark. The overall advisory fee is split among the various
advisers in the following manner. The Portfolio Manager receives 80% of the
fee, and AFIMS receives the remaining 20%.
FIXED ADVISORY FEE FOR THE 12 FULL CALENDAR MONTHS. For the period
beginning on the effective date of a Portfolio Management Agreement with a
new Portfolio Manager (or, in the case of a Portfolio that has had only one
Portfolio Manager, the day on which the Portfolio commenced investment
operations) and ending with the last day of the twelfth full calendar month
thereafter, each Portfolio will be paid a monthly advisory fee calculated at
an annual rate of 0.80% of the Portfolio's average daily net assets. As of
the date of this prospectus, this initial fee is applicable only to the
Global Strategic Income Portfolio. In addition, the fee for that Portfolio
is subject to certain limitations described in note (1) to the charts on page
__.
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-
12
<PAGE>
twelfth of the annual Basic Fee rate of 2.0% multiplied by average daily net
assets over the previous 12 months. The Incentive Fee rate ranges from -2.0%
to +2.0% on an annual basis, depending on a comparison of the Portfolio's
performance (reflecting a deduction of Portfolio expenses) and the
performance of a selected benchmark index over the past 12 months. The
monthly Incentive Fee, like the monthly Basic Fee, is calculated by
multiplying one- twelfth of the Incentive Fee rate on an annual basis by the
average daily net assets over the previous 12 months. Accordingly, the Total
Fee could range from 0.0% to an annual rate of 4.0%, depending on performance.
As noted above, performance of both the Portfolio and the selected
benchmark index is calculated on a rolling 12-month period (i.e., the
previous 12 months, including the month for which the fee is being
calculated). The performance of a Portfolio is calculated by first
determining the change in the Portfolio's net asset value per share during
the period, assuming the reinvestment of distributions during that period,
and then expressing this amount as a percentage of the net asset value per
share at the beginning of the period. Net asset value per share is
calculated by dividing the value of the securities held by the Portfolio plus
any cash or other assets minus all liabilities including accrued advisory
fees and the other expenses, by the total number of shares outstanding at the
time. The performance of the selected benchmark index is calculated as the
sum of the change in the level of the index during the period, plus the value
of any dividends or distributions made by the companies whose securities
comprise the index accumulated to the end of the period, and then expressing
that amount as a percentage of the index at the beginning of the period.
No Incentive Fee will be paid if the Portfolio's performance equals the
targeted performance -- selected benchmark index plus 2.25 percentage points.
The maximum fee will be paid if performance is 5.25 percentage points higher
than the target (i.e., 7.5 percentage points higher than the selected
benchmark index). No fee will be paid if performance is 5.25 percentage
points lower than the target (i.e., more than 3 percentage points below the
selected benchmark index). The chart below further explains the Incentive
Fee at various performance levels.
<TABLE>
<CAPTION>
PERCENTAGE POINT DIFFERENCE BETWEEN PERFORMANCE OF THE PORTFOLIO
(NET OF EXPENSES INCLUDING BASIC FEE AND INCENTIVE FEE) TOTAL
AND CHANGE IN SELECTED BENCHMARK INDEX BASIC FEE (%) INCENTIVE FEE (%) ADVISORY FEE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
+7.5 or greater 2.0 2.0 4.0
+6.0 or greater, but less than +7.5 2.0 1.5 3.5
+4.5 or greater, but less than +6.0 2.0 1.0 3.0
+3.0 or greater, but less than +4.5 2.0 0.5 2.5
+1.5 or greater, but less than +3.0 2.0 0.0 2.0
0.0 or greater, but less than +1.5 2.0 -0.5 1.5
- -1.5 or greater, but less than 0.0 2.0 -1.0 1.0
- -3.0 or greater, but less than -1.5 2.0 -1.5 0.5
Less than -3.0 2.0 -2.0 0.0
- --------------------------------------------------------------------------------------------------------------
</TABLE>
MAXIMUM FEE IF PERFORMANCE IS NEGATIVE. Notwithstanding the above
schedule, if the absolute performance of a Portfolio (after payment of all
expenses, including the Basic Fee and any Incentive Fee) is negative, the
monthly advisory fee will be the lesser of the fee calculated pursuant to the
above schedule or the alternative monthly advisory fee described below, which
under certain circumstances results in the Portfolios paying either no
advisory fee or a lower monthly advisory fee than under the performance fee
schedule above. If a Portfolio's performance (after payment of all expenses
including advisory fees) is negative and does not exceed the selected
benchmark by six percentage points (on an annual basis), no monthly advisory
fee will be paid. If the Portfolio's performance (after payment of all
expenses including advisory fees) is negative and does not exceed the
selected benchmark by twelve percentage points but does exceed the selected
benchmark by six percentage points (on an annual basis), the alternate
monthly advisory fee will be based on an annual rate of 1.0% of average daily
net assets over the previous 12 months. If, on the other hand, the
performance of a Portfolio (after payment of all expenses including advisory
fees) is negative but exceeds the selected benchmark by twelve percentage
points or more (on an annual basis), the alternative monthly advisory fee
will be based on an annual rate of 2.0% of average daily net assets over the
previous 12 months.
SIZE OF FEE. The Basic Fee payable by the Portfolios is at a rate
higher than the investment advisory fees paid by most other investment
companies. If a Portfolio outperforms the selected benchmark by 3.0
percentage points or more, the advisory fee payable by a Portfolio may
further exceed those paid by other investment companies. On the other hand,
if a
13
<PAGE>
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, Portfolio Advisor and
Portfolio Managers will remain obligated to provide the Portfolio with the
services contemplated herein as long as they are in effect.
PERFORMANCE BENCHMARKS. As described above, total advisory fees paid to
each Portfolio Manager for advising the Portfolios are based on the
performance of the Portfolio they manage relative to a market benchmark
selected in light of the investment objective and policies of the Portfolio.
The performance benchmarks selected for the Portfolios are listed below and
described in more detail in Appendix A.
<TABLE>
<CAPTION>
Portfolio Performance Benchmark
- --------------------------------------------------------------------------------
<S> <C>
The Value Portfolio S&P 500
The Growth Portfolio S&P 500
The International Growth Portfolio MSCI - Europe, Australia, Far East
(EAFE) Index
The Global Strategic Income Portfolio JP Morgan Global Government Bond
Index, Unhedged
The Global Interactive/Telecomm Portfolio S&P 500
- --------------------------------------------------------------------------------
</TABLE>
EXPENSE LIMITATIONS
EXPENSE LIMITATIONS FOR 1998 EXPENSES. Allmerica Financial has agreed
to limit operating expenses and reimburse those expenses to the extent that
each Portfolio's 1998 "other expenses" (I.E., expenses other than management
fees) exceed the following expense limitations (expressed as an annualized
percentage of average daily net assets): Value Portfolio, 1.00%; Growth
Portfolio, 1.00%; International Growth Portfolio, 1.20%; Global Strategic
Income Portfolio, 1.20%; Global Interactive/Telecomm Portfolio, 1.20%.
Allmerica Financial has agreed to pay any amount due for a calendar month not
later than the 15th day of the following calendar month (with any final
adjustment to be made not later than January 15, 1999). Allmerica Financial,
if agreed to by the Board, may continue this voluntary expense limitation
past December 31, 1998. This expense limitation was implemented effective
February 13, 1998. In addition, on February 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; Global 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%; Global Strategic Income Portfolio, 1.20%; Global
Interactive/Telecomm Portfolio, 1.20%. In addition, PAI voluntarily
contributed to the Portfolios the following amounts as capital: Value
Portfolio, $51,906.35; Growth Portfolio, $49,230.63; International Growth
Portfolio, $34,947.29; Global Strategic Income Portfolio, $52,077.06; and
Global Interactive/Telecomm Portfolio, $40,662.47. The amounts were
14
<PAGE>
contributed to offset expenses accrued to the Portfolios in excess of the
expense limitations set forth above during the period from the commencement
of operations to September 10, 1996 when the expense limitations became
effective.
At the request of the Board of Trustees, PAI committed to pay all
amounts due under the expense reimbursement arrangement on or about December
31, 1997. In January 1998, however, PAI advised the Board of Trustees that it
did not have sufficient assets to make the required payment. Accordingly, the
Board of Trustees and PAI pursued and considered other options under which
the payment could be made. The Board of Trustees determined that it was in
the best interests of shareholders to 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; Global 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, any fees provided that such reimbursement does not
cause the Portfolio's "other expense" ratio to exceed the previous expense
limitation for that Portfolio under the Manager's expense limitation
arrangement. (Those limitations are listed above.) This reimbursement
obligation is the same as the reimbursement obligation that was in place for
PAI. After December 31, 1999, the Portfolios' reimbursement liability to the
Payment Group will cease.
CUSTODIAN AND TRANSFER AGENT
The custodian and transfer agent for the Trust is Investors Bank & Trust
Company, 89 South Street, Boston, MA 02111.
INVESTMENT OBJECTIVES AND POLICIES
Each of the Portfolios has a different investment objective, described
below. Each Portfolio is managed by its own Portfolio Manager. There can be
no assurance that any of the Portfolios will achieve their investment
objective. Each Portfolio is subject to the risk of changing economic,
business, and financial conditions, as well as the risk the Portfolio Manager
will not accurately anticipate those changes. As with any security, a risk
of loss is inherent in an investment in a Portfolio's shares.
The different types of securities and investment techniques used by the
individual Portfolio Managers all have attendant risks of varying degrees.
For example, with respect to equity securities, there can be no assurance of
capital appreciation and there is a substantial risk of decline. With respect
to debt securities, there exists the risk that the issuer of a security may
not be able to meet its obligations on interest or principal payments at the
time called for by the instrument. In addition, the value of debt instruments
generally rises and falls inversely with interest rates.
Certain types of investments and investment techniques common to one or
more Portfolios are described in greater detail, including the risks of each,
under "Description of Securities and Investment Techniques" in this
Prospectus and in the Statement of Additional Information.
The investment objectives of the Portfolios are fundamental, which means
that they may be changed only with shareholder approval in accordance with
the 1940 Act. Unless otherwise indicated, each Portfolio's practices,
policies, and programs for achieving its objectives are not fundamental and
thus may be changed by the Board of Trustees without
15
<PAGE>
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 __. When the Portfolio Manager believes that a defensive
investment posture is warranted or when opportunities for capital
appreciation do not appear attractive, the Portfolio may temporarily invest
all or a portion of its assets in short-term money market instruments, such
as obligations of the U.S. Government and its agencies and instrumentalities,
high-quality commercial paper and bank certificates of deposit and time
deposits and repurchase agreements with respect to such instruments.
THE GROWTH PORTFOLIO
The Growth Portfolio seeks to make money for investors by investing
primarily in securities selected for their long-term growth prospects.
In considering securities for the Portfolio, the Portfolio Manager
reviews on a weekly basis the projected annual earnings, sales growth,
quarterly profit outlook and valuations of a universe of approximately 200
companies. These companies are, for the most part, involved in the retail,
food service, healthcare, technology and financial services industries and
typically have high returns on equity, strong brand names, rapid unit volume
sales growth and, with the exception of financial companies, balance sheets
with little or no debt. The Portfolio Manager usually seeks to select
companies that enjoy market dominance, which, in turn, confers pricing power
within a growing market niche. Such pricing control normally produces high
returns on investment which allows companies to fund superior growth without
the need for dilutive financing.
The Portfolio Manger's 200 stock universe is constantly being modified
and updated with an active and ongoing effort to find more attractive stocks.
Additions to the list are made when the Portfolio Manager finds a company
with financial characteristics superior to the least attractive stocks in the
current universe. Deletions are made when a company's fundamental prospects
deteriorate.
From the Portfolio Manager's 200 stock universe, investments are made in
those stocks which meet all of the following criteria: (1) accelerating
near- term profit growth; (2) valuation in the lower half of the stock's
historic range; and
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(3) price momentum superior to that of the overall market. Normally, 60 to
80 stocks from the Portfolio Manager's universe meet these tests.
Stocks will typically be sold whenever any of the following occurs:
(1) a reduction in quarterly or annual earnings estimates; (2) a company's
long-term competitive position is called into question; (3) the stock's
valuation on the next 12 months' earnings moves into the upper 10% of its
historic range; or (4) the stock price experiences a unexpected decline.
The Portfolio's policy stresses flexibility and adaptability in
arranging its Portfolio to seek the desired results. Common stocks will
generally constitute all or most of the Portfolio, but the Portfolio may
invest in preferred stocks, debt securities and cash instruments when, in the
judgment of the Portfolio Manager, a more conservative investment position
seems appropriate in light of anticipated market conditions. The Portfolio
may invest up to 5% of its assets in high yield/high risk debt securities.
See "Debt Securities," page __. The Portfolio will not invest for purposes
of exercising management or control.
The Portfolio will be subject to the risks of investment in equity
securities, i.e., there is no assurance of capital appreciation and there is
a substantial risk of decline. Investment in the securities of new companies
may in some instances involve a higher degree of risk than investments in
securities of companies with longer operating histories. The Portfolio does
not intend to invest in securities of companies with no operating history.
Any current income from dividends received from such securities will be
entirely incidental.
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 __. 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
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prepared to meet redemption requests, or to earn a return on available cash
balances. When market conditions warrant, the Portfolio Manager can make
substantial temporary defensive investments in U.S. government obligations or
investment-grade obligations of companies incorporated in and having
principal business activities in the United States.
THE GLOBAL STRATEGIC INCOME PORTFOLIO
The Global Strategic Income Portfolio seeks to make money for investors
by investing for high current income and capital appreciation in a variety of
domestic and foreign fixed-income securities.
The Global Strategic Income Portfolio allocates its assets among debt
securities of issuers in three separate areas: (1) the United States,
(2) developed foreign countries, and (3) emerging markets. The Portfolio will
select particular debt securities in each sector based on their relative
investment merits. Within each area, the Portfolio selects debt securities
from those issued by governments and their agencies and instrumentalities;
central banks; and commercial banks and other corporate entities.
The Portfolio Manager will actively manage both the allocation of assets
among the major markets and the currencies underlying the fixed income
securities purchased for the Portfolio. In doing so, the Portfolio Manager
will rely on its proprietary technical and fundamental global fixed income
and multi-currency systems which allow the Portfolio Manager to identify
market changes. The Portfolio Manager does not use its system to forecast
market changes or for market timing purposes.
Debt securities in which the Global Strategic Income Portfolio may
invest include bonds, notes, debentures, and other similar instruments. The
Portfolio normally invests at least 50% of its total assets in U.S. and
foreign debt and other fixed income securities that, at the time of purchase,
are rated at least investment grade, or, if unrated, are determined by the
Portfolio Manager to be of comparable quality. No more than 50% of the
Portfolio's assets may be invested in securities of below investment grade
quality (also called high yield/high risk bonds), which involve a high degree
of risk and are predominantly speculative. See "Debt Securities", page __.
Consistent with the foregoing percentage limitations, the Portfolio may
invest in securities that are in default in payment of principal and/or
interest.
For purposes of the Portfolio's operations, "emerging markets" consist
of all countries determined by Portfolio Manager to have developing or
emerging economies and markets. These countries generally are expected to
include every country in the world except the United States, and the
developed foreign countries of Canada, Japan, Australia, New Zealand and most
countries in Western Europe. The Global Strategic Income Portfolio considers
investment in the following emerging markets: Algeria, Argentina, Bolivia,
Botswana, Brazil, Chile, China, Colombia, Costa Rica, Czechoslovakia,
Ecuador, Egypt, Finland, Greece, Hong Kong, Hungary, India, Indonesia,
Israel, Ivory Coast, Jamaica, Jordan, Kenya, Malaysia, Mexico, Morocco,
Nicaragua, Nigeria, Pakistan, Panama, Peru, Philippines, Poland, Portugal,
Russia, Singapore, South Korea, Sri Lanka, Taiwan, Thailand, Turkey, Uruguay,
Venezuela, Zimbabwe.
The Global Strategic Income Portfolio's investments in emerging market
securities will consist substantially of debt securities issued by emerging
market governments that are traded in the markets of developed countries or
groups of developed countries. The Portfolio Manager may invest in debt
securities of emerging market issuers that it determines to be suitable
investments for the Portfolio without regard to ratings. Currently,
substantially all emerging market debt securities are of below investment
grade quality. Because the Global Strategic Income Portfolio's investment in
debt securities rated below investment grade (i.e., high yield/high risk
bonds) is limited to 50% of its total assets, its investment in emerging
market debt securities is therefore effectively limited to 50% of its assets
as well. Emerging market securities are subject to greater risks than
securities from developed nations. See "Foreign Securities," page __.
The Global Strategic Income Portfolio also may consider making carefully
selected investments in below investment grade debt securities of corporate
issuers in the United States and in developed foreign markets, subject to the
overall 50% limitation on high yield/high risk bonds. The Global Strategic
Income Portfolio also may invest up to 5% of its assets in loan
participations and assignments. More information is included in the
Statement of Additional Information.
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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 __.
When the Portfolio Manager believes that a defensive investment posture is
warranted or when opportunities for capital appreciation do not appear
attractive, the Portfolio may temporarily invest all or a portion of its
assets in short-term money market instruments, such as obligations of the
U.S. Government and its agencies and instrumentalities, high-quality
commercial paper and bank certificates of deposit and time deposits and
repurchase agreements with respect to such instruments.
For example, the Portfolio may invest in companies involved in the
following products and services: emerging technologies combining television,
telephone and computer systems; regular telephone service; wireless
communications services and equipment, including cellular telephone data and
voice transmission; electronic components and communications equipment; video
conferencing; electronic mail; local and wide area networking; linkage of
data and word processing systems; publishing and information systems;
broadcasting, including television and radio; cable television systems and
networks; wireless cable television and other emerging distribution
technologies; the creation, packaging, distribution, and ownership of
entertainment programming; computer hardware and software and other equipment
used in the creation and distribution of entertainment programming;
interactive and multimedia programming including home shopping and
multiplayer games; and advertising agencies and niche advertising mediums
such as in-store or direct mail.
In analyzing companies for investment, the Portfolio Manager ordinarily
looks for several of the following characteristics: above-average per share
earnings growth; high return on invested capital; a healthy balance sheet;
sound financial and accounting policies and overall financial strength;
strong competitive advantages; and effective research and product development
and marketing.
The Portfolio Manager will allocate the Portfolio's assets among
securities of countries and in currency denominations and industry sectors
where opportunities for meeting the Portfolio's investment objective are
expected to be the most attractive. The Portfolio may invest substantially
in securities denominated in one or more foreign currencies. Under normal
conditions, the Portfolio will invest in at least three different countries,
including the United States; issuers in any one country, other than the U.S.,
will represent no more than 40% of the Portfolio's assets.
The governments of some foreign countries have been engaged in programs
of selling part or all of their stakes in government owned or controlled
enterprises ("privatizations"). The Portfolio Manager believes that
privatizations in the telecommunications industry may offer opportunities for
significant capital appreciation and intends to invest assets of the
Portfolio in privatizations in appropriate circumstances. In certain foreign
countries, the ability of foreign entities such as the Portfolio to
participate in privatizations may be limited by local law and/or the terms on
which the Portfolio may be permitted to participate may be less advantageous
than those afforded local investors. There can be no assurance that foreign
governments will continue to sell companies currently owned or controlled by
them or that privatization programs will be successful.
DESCRIPTION OF SECURITIES AND INVESTMENT TECHNIQUES
The following discussion describes in greater detail different types of
securities and investment techniques used by the individual Portfolios, as
described in "Investment Objectives and Policies" as well as the risks
associated with such securities and techniques.
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U.S. GOVERNMENT SECURITIES
All of the Portfolios may invest in U.S. Government securities.
U.S. Government securities are obligations of, or are guaranteed by, the
U.S. Government, its agencies or instrumentalities. Treasury bills, notes, and
bonds are direct obligations of the U.S. Treasury. Securities guaranteed by
the U.S. Government include federal agency obligations guaranteed as to
principal and interest by the U.S. Treasury (such as Government National
Mortgage Association ("GNMA") certificates, described in the section on
"Mortgage-Backed Securities," and Federal Housing Administration debentures).
In guaranteed securities, the payment of principal and interest is
unconditionally guaranteed by the U.S. Government, and thus they are of the
highest credit quality. Such direct obligations or guaranteed securities are
subject to variations in market value due to fluctuations in interest rates,
but, if held to maturity, the U.S. Government is obligated to or guarantees
to pay them in full.
Securities issued by U.S. Government instrumentalities and certain
federal agencies are neither direct obligations of nor guaranteed by the
Treasury. However, they involve federal sponsorship in one way or another:
some are backed by specific types of collateral; some are supported by the
issuer's right to borrow from the Treasury; some are supported by the
discretionary authority of the Treasury to purchase certain obligations of
the issuer; others are supported only by the credit of the issuing government
agency or instrumentality. These agencies and instrumentalities include, but
are not limited to, Federal Land Banks, Farmers Home Administration, Federal
National Mortgage Association ("FNMA"), Federal Home Loan Mortgage
Corporation ("FHLMC"), Student Loan Mortgage Association, Central Bank for
Cooperatives, Federal Intermediate Credit Banks, and Federal Home Loan Banks.
DEBT SECURITIES
All Portfolios may invest in debt securities of domestic or foreign
issuers (both U.S. dollar denominated and non-U.S. dollar denominated). All
Portfolios may also invest in obligations of international organizations such
as the International Bank for Reconstruction and Development (the World
Bank). Each Portfolio may only invest in (1) debt securities which meet the
minimum ratings criteria set forth for that particular Portfolio and
(2) unrated debt securities that are, in the Portfolio Manager's
determination, comparable in quality to the rated debt securities in which
the Portfolio may invest.
The investment return on a corporate debt security reflects interest
earnings and changes in the market value of the security. The market value of
corporate debt obligations may be expected to rise and fall inversely with
interest rates generally. There also exists the risk that the issuers of the
securities may not be able to meet their obligations on interest or principal
payments at the time called for by an instrument. Bonds rated BBB or Baa,
which are considered medium-grade category bonds, do not have economic
characteristics that provide the high degree of security with respect to
payment of principal and interest associated with higher rated bonds, and
generally have some speculative characteristics. A bond will be placed in
this rating category where interest payments and principal security appear
adequate for the present, but economic characteristics that provide longer
term protection may be lacking. Any bond, and particularly those rated BBB or
Baa, may be susceptible to changing conditions, particularly to economic
downturns, which could lead to a weakened capacity to pay interest and
principal.
The Global Strategic Income Portfolio may invest up to 50% of its assets
in debt securities that are below investment grade (i.e., rated BB or lower
by Standards & Poor's, rated Ba or lower by Moody's, or unrated but
determined by the Portfolio Manager to be of similar quality). These
securities are commonly referred to as "junk bonds" or "high yield/high risk
debt securities." The Value, Growth, International Growth and Global
Interactive/Telecomm Portfolios may each invest up to 5% of assets in high
yield/high risk debt securities.
High yield/high risk debt securities involve significant risks. They
are considered predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with the terms of
the obligation. The market value of the securities also tend to be more
sensitive than higher rated securities to news about the issuer and changes
in overall economic conditions. In addition, markets for lower-rated
securities may be more limited than for higher-rated securities.
New issues of certain debt securities are often offered on a when-issued
or firm-commitment basis; that is, the payment obligation and the interest
rate are fixed at the time the buyer enters into the commitment, but delivery
and payment for the securities normally take place after the customary
settlement time. The value of when-issued securities or securities purchased
on a firm-commitment basis may vary prior to and after delivery depending on
market conditions and changes in
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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 the U.S.; for FNMA
and FHLMC securities the payment of principal and interest is guaranteed by
the issuing agency but not the U.S. The guarantees, however, do not extend
to the securities' value or yield, which are likely to fluctuate inversely
with fluctuations in interest rates. Because the prepayment characteristics
of the underlying mortgages vary, it is not possible to predict accurately
the average life of a particular issue of mortgage-backed securities.
The Portfolios may invest in mortgage-backed securities issued by
private entities, such as commercial or mortgage banks, savings and loan
associations, or broker-dealers, that meet the quality standards discussed
above for debt securities.
The Portfolios may invest in collateralized mortgage obligations
("CMOs"). A CMO is a security issued by a corporation or a U.S. government
instrumentality that is backed by a portfolio of mortgages or mortgage-backed
securities. The issuer's obligation to make interest and principal payments
is secured by the underlying portfolio of mortgages or mortgage-backed
securities. CMOs are partitioned into several classes with a ranked priority
by which classes of obligations are redeemed.
OTHER ASSET-BACKED SECURITIES
All Portfolios may invest in asset-backed securities, which represent a
participation in, or are secured by and payable from, a stream of payments
generated by particular assets, such as automobile or credit card
receivables. Asset-backed securities present certain risks, including the
risk that the underlying obligor on the asset, such as the automobile
purchaser or the credit card holder, may default on his or her obligation. In
addition, asset-backed securities often do not provide a security interest in
the related collateral. For example, credit card receivables are generally
unsecured, and the pool of automobile receivables may not include the
security interests in those automobiles. In general, however, these type of
loans have a shorter average life than mortgage loans and are less likely to
have substantial prepayments.
VARIABLE AND FLOATING RATE SECURITIES
All Portfolios may invest in variable and floating rate securities.
Variable rate securities provide for automatic establishment of a new
interest rate at fixed intervals (e.g., daily, monthly, semi-annually, etc.).
Floating rate securities provide for automatic adjustment of the interest
rate whenever some specified interest rate index changes. The interest rate
on variable or floating rate securities is ordinarily determined by reference
to or is a percentage of a bank's prime rate, the 90-day U.S. Treasury bill
rate, the rate of return on commercial paper or bank certificates of deposit,
an index of short-term interest rates, or some other objective measure.
Variable or floating rate securities frequently include a demand feature
entitling the holder to sell the securities to the issuer at par value. In
many cases, the demand feature can be exercised at any time on 7 days'
notice; in other cases, the demand feature is exercisable at any time on
30 days' notice or on similar notice at intervals of not more than one year.
Some securities which do not have variable or floating interest rates may be
accompanied by puts producing similar results and price characteristics.
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BANKING INDUSTRY AND SAVINGS INDUSTRY OBLIGATIONS
All Portfolios may invest in certificates of deposit, time deposits,
bankers' acceptances, and other short-term debt obligations issued by
commercial banks and in certificates of deposit, time deposits, and other
short-term obligations issued by savings and loan associations ("S&Ls").
Certificates of deposit are receipts from a bank or an S&L for funds
deposited for a specified period of time at a specified rate of return. Time
deposits in banks or S&Ls are generally similar to certificates of deposit,
but are uncertificated. Bankers' acceptances are time drafts drawn on
commercial banks by borrowers, usually in connection with international
commercial transactions. Each Portfolio may also invest in obligations of
foreign branches of commercial banks and foreign banks so long as the
securities are U.S. dollar-denominated. See "Foreign Securities" on page __
and "Banking Industry and Savings Industry Obligations" in the Statement of
Additional Information regarding risks attending investment in foreign
instruments generally and foreign bank instruments in particular.
The Portfolios will not invest in obligations issued by a commercial
bank or S&L unless:
(i) the bank or S&L has total assets of at least $1 billion, or the
equivalent in other currencies, and the institution has outstanding
securities rated A or better by Moody's or Standard and Poor's, or, if the
institution has no outstanding securities rated by Moody's or Standard &
Poor's, it has, in the determination of the Portfolio Manager, similar
creditworthiness to institutions having outstanding securities so rated;
(ii) in the case of a U.S. bank or S&L, its deposits are insured by the
Federal Deposit Insurance Corporation or the Savings Association Insurance
Fund, as the case may be; and
(iii) in the case of a foreign bank, the security is, in the
determination of the Portfolios' Portfolio Manager, of an investment quality
comparable with other debt securities which may be purchased by the
Portfolios. These limitations do not prohibit investments in securities
issued by foreign branches of U.S. banks, provided such U.S. banks meet the
foregoing requirements.
COMMERCIAL PAPER
All Portfolios may invest in commercial paper, which includes short-term
unsecured promissory notes, variable rate demand notes, and variable note
master demand notes issued by domestic and foreign bank holding companies,
corporations, and financial institutions, as well as similar taxable
instruments issued by government agencies and instrumentalities. All
commercial paper purchased by the Portfolios must be, the time of investment,
(i) rated "P-1" by Moody's or "A-1" by S&P, (ii) issued or guaranteed as to
principal and interest by issuers having an existing debt security rating of
"Aa" or better by Moody's or "AA" by S&P, or (iii) securities which, if not
rated, are in the opinion of the Portfolio Manager of an investment quality
comparable to rated commercial paper in which the Portfolio may invest. See
Appendix B for description of these ratings.
REPURCHASE AGREEMENTS
All Portfolios may enter into repurchase agreements with banks and
broker-dealers under which they acquire securities subject to an agreement
with the seller to repurchase the securities at an agreed-upon time and
price. If the seller should default on its obligation to repurchase the
securities, the Portfolio may experience delays or difficulties in exercising
its right to realize a gain upon the securities held as collateral and might
incur a loss if the value of the securities should decline.
REVERSE REPURCHASE AGREEMENTS
All Portfolios may enter into reverse repurchase agreements with banks
and broker-dealers. Those agreements have the characteristics of borrowing
and involve the sale of securities held by a Portfolio with an agreement to
repurchase the securities at an agreed-upon price and date, which reflect a
rate of interest paid for the use of funds for the period. Generally, the
effect of such a transaction is that a Portfolio can recover all or most of
the cash invested in the securities involved during the term of the reverse
repurchase agreement, while in many cases it will be able to keep some of the
interest income associated with those securities. Such transactions are only
advantageous if the Portfolio has an opportunity to earn a greater rate of
interest on the cash derived from the transaction than the interest cost of
obtaining that cash. A Portfolio may be unable to realize a return from the
use of the proceeds equal to or greater than the interest required to be paid.
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LENDING PORTFOLIO SECURITIES
For the purpose of realizing additional income, each Portfolio may lend
securities with a value of up to 33% of its total assets to unaffiliated
broker-dealers or institutional investors. Any such loan will be
continuously secured by collateral at least equal to the value of the
security loaned. Although the risk of lending portfolio securities are
believed to be slight, as with other extensions of secured credit, such
lending could result in delays in receiving additional collateral or in the
recovery of the securities or possible loss of rights in the collateral
should the borrower fail financially. Loans will only be made to firms
deemed to be of good standing and will not be made unless the consideration
to be earned from such loans would justify the risk.
ILLIQUID SECURITIES
Each Portfolio may invest up to 15% of its net assets in securities for
which there is no readily available market ("illiquid securities"), which
would include repurchase agreements having more than 7 days to maturity. A
considerable period of time may elapse between a Portfolio's decision to
dispose of such securities and the time when the Portfolio is able to dispose
of them, during which time the value of the securities could decline. The
SEC has adopted Rule 144A which permits resale among certain institutional
investors of certain unregistered securities. As a result, a significant
institutional trading market has developed in many unregistered securities
relying on this rule. In determining whether such securities should be
considered liquid, the Portfolios will consider the following factors, among
others: (1) the frequency of the trades and the quotes for the security; (2)
the number of dealers willing to purchase or sell the security and the number
of potential purchasers; (3) dealer undertakings to make a market in the
security; and (4) the nature of the security and the nature of the
marketplace trades (for example, the time needed to dispose of the security,
the method of soliciting offers, and the mechanics of the transfer).
WARRANTS
Each Portfolio may invest up to 5% of its net assets in warrants (not
including those that have been acquired in units or attached to other
securities), measured at the time of acquisition. No Portfolio may acquire a
warrant not listed on the New York or American Stock Exchanges if, after the
purchase, more than 2% of the Portfolio's assets would be invested in such
warrants.
The holder of a warrant has the right to purchase a given number of
shares of a particular issuer at a specified price until expiration of the
warrant. Such investments can provide a greater potential for profit or loss
than an equivalent investment in the underlying security. Prices of warrants
do not necessarily move in tandem with the prices of the underlying
securities, and are speculative investments. They pay no dividends and confer
no rights other than a purchase option. If a warrant is not exercised by the
date of its expiration, the Portfolio will lose its entire investment in such
warrant.
OTHER INVESTMENT COMPANIES
All Portfolios may invest in shares issued by other investment
companies. A Portfolio is limited in the degree to which it may invest in
shares of another investment company in that it may not, at the time of the
purchase, (1) acquire more than 3% of the outstanding voting shares of the
investment company, (2) invest more than 5% of the Portfolios' total assets
in the investment company, or (3) invest more than 10% of the Portfolios'
total assets in all investment company holdings. As a shareholder in any
investment company, a Portfolio will bear its ratable share of the investment
company's expenses, including management fees in the case of a management
investment company.
SHORT SALES
All Portfolios may make short sales of securities. A short sale is a
transaction in which the Portfolio sells a security it does not own (but has
borrowed) in anticipation of a decline in the market price of the security. A
Portfolio may make short sales to offset a potential decline in a long
position or a group of long positions, or if the Portfolio Manager believes
that a decline in the price of a particular security or group of securities
is likely.
When a Portfolio makes a short sale, the proceeds it receives are
retained by the broker until the Portfolio replaces the borrowed security. In
order to deliver the security to the buyer, the Portfolio must arrange
through a broker to borrow the security and, in so doing, the Portfolio
becomes obligated to replace the security borrowed at its market price at the
time of replacement, whatever that price may be. The Portfolio may have to
pay a premium to borrow the security. The Portfolio must also pay any
dividends or interest payable on the security until the Portfolio replaces
the security.
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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 Global Strategic Income Portfolio, may invest
in equity securities of foreign issuers. Each of the Portfolios may invest in
American Depository Receipts ("ADRs"), which are described below. All
Portfolios may invest in foreign government securities that are denominated
in U.S. dollars, and none of these Portfolios except for the International
Growth and Global Interactive/Telecomm Portfolios, will purchase foreign
government securities if, as a result, more than 10% of the value of its
total assets would be invested in such securities. The Portfolios may invest
in foreign branches of commercial banks and foreign banks. See the "Banking
Industry and Savings Industry Obligations" discussion in this section for
further description of these securities.
Each Portfolio is subject to the following guidelines for
diversification of foreign security investments. If a Portfolio has less than
20% of its assets in foreign issuers, then all of such investment may be in
issuers domiciled or primarily traded in one country. If a Portfolio has at
least 20% but less than 40% of its assets in foreign issuers, then such
investment must be allocated to issuers domiciled or primarily traded in at
least two different countries. Similarly, if a Portfolio has at least 40% but
less than 60% of its assets in foreign issuers, such investment must be
allocated in at least three different countries. Foreign investments must be
allocated to at least four different countries if at least 60% of a
Portfolios' assets is in foreign issuers, and to at least five different
countries if at least 80% is in foreign issuers.
A Portfolio may have no more than 20% of its net asset value invested in
securities of issuers domiciled or primarily traded in any one foreign
country, except that a Portfolio may have up to 35% of its net asset value
invested in securities of issuers domiciled or primarily traded in any one of
the following countries: Australia, Canada, France, Japan, The United
Kingdom, or West Germany.
Investments in foreign securities offer potential benefits not available
solely in securities of domestic issuers by offering the opportunity to
invest in foreign issuers that appear to offer growth potential, or in
foreign countries with economic policies or business cycles different from
those of the United States, or to reduce fluctuations in portfolio value by
taking advantage of foreign stock markets that may not move in a manner
parallel to U.S. markets. Investments in securities
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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.
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.
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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 futures
contracts, (ii) stock index futures contracts, (iii) foreign currency futures
contracts, (iv) futures contracts on gold and other precious metals, and (v)
options on these futures contracts. A futures contract provides for the
future sale by one party and purchase by the other party of a specified
amount of a particular financial instrument or commodity for a specified
price at a designated date, time, and place.
The Portfolios will use futures contracts solely for the purpose of
hedging positions with respect to securities, interest rates, foreign
currencies, and gold and other precious metals.
An option on a futures contract gives the purchaser or holder the right,
but not the obligation, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put)
at a specified price at any time during the option exercise period. The
Portfolios will utilize options on futures contracts for the same purposes
that they use the underlying futures contracts.
There are several risks associated with the use of futures and futures
options for hedging purposes. While a Portfolio's hedging transactions may
protect it against adverse movements in the general level of interest rates
or other economic conditions, such transactions could also preclude a
Portfolio from the opportunity to benefit from favorable movements in the
level of interest rates or other economic conditions. There can be no
guarantee that there will be correlation between price movements in the
hedging vehicle and in the securities or other assets being hedged. An
incorrect correlation could result in a loss on both the hedged assets and
the hedging vehicle so that the Portfolio's return might have been better if
hedging had not been attempted. The degree of imperfection of correlation
depends on circumstances such as variations in speculative market demand for
futures and futures options, including technical influences in futures
trading and futures options, and differences between the financial
instruments being hedged and the instruments underlying the standard
contracts available for trading in such respects as interest rate levels,
maturities, and creditworthiness of issuers. A decision as to whether, when,
and how to hedge involves the exercise of skill and judgment and even a
well-conceived hedge may be unsuccessful to some degree because of market
behavior or unexpected market trends.
There can be no assurance that a liquid market will exist at a time when
a Portfolio seeks to close out a futures contract or a futures option
position. Most futures exchanges and boards of trade limit the amount of
fluctuation permitted in futures contract prices during a single day; once
the daily limit has been reached on a particular contract, no trades may be
made that day at a price beyond that limit. In addition, certain of these
instruments are relatively new and without a significant trading history. As
a result, there is no assurance that an active secondary market will develop
or continue to exist. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses because
the limit may work to prevent the liquidation of unfavorable positions. For
example, futures prices have occasionally moved to the daily limit for
several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of positions and subjecting some holders of
futures contracts to substantial losses. Lack of a liquid market for any
reason may prevent the Portfolios from liquidating an unfavorable position
and the Portfolios would remain obligated to meet margin requirements and
continue to incur losses until the position is closed.
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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 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
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index may rise when the Portfolio's securities do not rise in value. If this
occurred, the Portfolio would experience a loss on the call which is not
offset by an increase in the value of its securities holdings and might also
experience a loss in its securities holdings.
A Portfolio's successful use of options on foreign currencies depends
upon the manager's ability to predict the direction of the currency exchange
markets and political conditions, which requires different skills and
techniques than predicting changes in the securities markets generally.
FOREIGN CURRENCY TRANSACTIONS
All Portfolios may enter into forward currency contracts and enter into
currency exchange transactions on a spot (i.e., cash) basis. A forward
currency contract is an obligation to purchase or sell a currency against
another currency at a future date and price as agreed by the parties. A
Portfolio may either accept or make delivery of the currency at the maturity
of the forward contract or, prior to maturity, enter into a closing
transaction involving the purchase or sale of an offsetting contract. A
Portfolio will engage in forward currency transactions in anticipation of or
to protect itself against fluctuations in currency exchange rates, as further
described in the Statement of Additional Information.
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
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DETERMINATION OF NET ASSET VALUE
The net asset values per share of the Portfolios are calculated as of
4:00 p.m. (New York City time), Monday through Friday, on each day that the
New York Stock Exchange is open for trading, exclusive of federal holidays.
Net asset value per share is calculated by dividing the aggregate value of
each Portfolio's assets less all liabilities by the number of each
Portfolio's outstanding shares.
The Board of Trustees has established procedures to value each
Portfolio's assets to determine net asset value. In general, these valuations
are based on actual or estimated market value, with special provisions for
assets not having readily available market quotations and short-term debt
securities. The net asset values per share of each Portfolio will fluctuate
in response to changes in market conditions and other factors.
Portfolio securities for which market quotations are readily available
are stated at market value. Market value is determined on the basis of last
reported sales price, or, if no sales are reported, the mean between
representative bid and asked quotations obtained from a quotation reporting
system or from established market makers. In other cases, securities are
valued at their fair value as determined in good faith by the Board of
Trustees, although the actual calculations will be made by persons acting
under the direction of the Board and subject to the Board's review. Money
market instruments are valued at market value, except that instruments
maturing in sixty days or less may be valued using the amortized cost method
valuation. The value of a foreign security is determined in its national
currency based upon the price on the foreign exchange as of its close of
business immediately preceding the time of valuation. Securities traded in
over-the-counter markets outside the United States are valued at the last
available price in the over-the-counter market prior to the time of valuation.
Debt securities, including those to be purchased under firm commitment
agreements (other than obligations having a maturity sixty days or less at
their date of acquisition valued under the amortized cost method), are
normally valued on the basis of quotes obtained from brokers and dealers or
pricing services, which take into account appropriate factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics, and other
market data. Debt obligations having a maturity of sixty days or less may be
valued at amortized cost unless the Portfolio Manager believes that amortized
cost does not approximate market value.
When a Portfolio writes a put or call option, the amount of the premium
is included in the Portfolios' assets and an equal amount is included in its
liabilities. The liability thereafter is adjusted to the current market value
of the option. The premium paid for an option purchased by the Portfolio is
recorded as an asset and subsequently adjusted to market value. Futures and
options thereon which are traded on commodities exchanges or boards of trade
will be valued at their closing settlement price on such exchange or board of
trade. Foreign securities quoted in foreign currencies generally are valued
at appropriately translated foreign market closing prices.
Trading in securities on exchanges and over-the-counter markets in
European and Pacific Basin countries is normally completed well before 4:00
p.m., New York City time. Trading on these exchanges may not take place on
all New York business days and in addition, trading takes place in various
foreign markets on days which are not business days in New York and on which
the Trust's net asset value is not calculated. As a result, the calculation
of the net asset value of a Portfolio investing in foreign securities may not
take place contemporaneously with the determination of the prices of the
securities included in the calculation. Events that may affect the value of
these securities that occur between the time their prices are determined and
the time the Portfolios' net asset value is determined may not be reflected
in the calculation of net asset value of the Portfolio unless the Portfolio
Manager, acting under authority delegated by the Board of Trustees, deems
that the particular event would materially affect net asset value. In this
event, the securities would be valued at fair market value as determined in
good faith by the Board of Trustees of the Trust, although the actual
calculations will be made by the Portfolio Manager acting under the direction
of the Board and subject to the Board's review.
PURCHASE OF SHARES
The Trust is intended to be a funding vehicle for variable annuity and
variable life insurance contracts offered by various insurance companies and
for certain qualified pension and retirement plans. The Trust currently does
not foresee any disadvantages to variable contract owners or retirement plan
participants arising from offering the Trust's shares to separate accounts of
unaffiliated insurers, to separate accounts funding both life insurance
contracts and annuity contracts, and to qualified plans. Because of
differences in tax treatment and other considerations, however, it is
possible that the interests of contract owners and plan participants might at
some time be in conflict. Accordingly, the Board of Trustees will monitor
events in order
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to identify the existence of any material irreconcilable conflicts and to
determine what action, if any, should be taken in response to any such
conflict.
Shares of the Portfolios are sold at their respective net asset values
(without a sales charge) next computed after receipt of a purchase order. The
Portfolios reserve the right to cease offering its shares at any time.
REDEMPTION OF SHARES
Shares of the Portfolios may be redeemed on any business day.
Redemptions are effected at the net asset value per share next determined
after receipt of the redemption request. Redemption proceeds normally will
be paid within seven days following receipt of instructions in proper form,
or sooner if required by law.
The right of redemption may be suspended by the Trust or the payment
date postponed beyond seven days when the New York Stock Exchange is closed
(other than customary weekend and holiday closings) or for any period during
which trading thereon is restricted because an emergency exists, as
determined by the Securities and Exchange Commission, making disposal of
portfolio securities or valuation of net assets not reasonably practicable,
and whenever the Securities and Exchange Commission has by order permitted
such suspension or postponement for the protection of shareholders.
If the Board of Trustees should determine that it would be detrimental
to the best interests of the remaining shareholders of the Portfolios to make
payment wholly or partly in cash, the Portfolios may pay the redemption price
in whole or in part by a distribution in kind of securities from the
portfolios of the Portfolios, in lieu of cash, in conformity with applicable
rules of the Securities and Exchange Commission. If shares are redeemed in
kind, the redeeming shareholder might incur brokerage costs in converting the
assets into cash.
DIVIDENDS, DISTRIBUTIONS, AND TAXES
The Trust intends that the Portfolios will qualify to be treated as
regulated investment companies under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"). In any year in which the Portfolios
qualify as regulated investment companies and distribute substantially all of
their net investment income and their net capital gains, the Portfolios
generally will not be subject to federal income tax to the extent they
distributes to shareholders such income and capital gains in the manner
required under the Code.
Tax consequences to the Variable Contract owners are described in the
prospectus for the pertinent Variable Contract.
The provisions of the Code and the Treasury Regulations that apply to
qualified retirement plans are complex and vary according to the type of plan
and its terms and conditions. Accordingly, this prospectus provides only
general tax information, and participants in qualified retirement plans that
invest directly in the Portfolios should consult a qualified tax adviser
before purchasing or redeeming any Portfolio shares. In general, assuming
that a plan adheres to the applicable limitations of the Code and Treasury
Regulations, payments for the purchase of Portfolio shares (other than
after-tax employee payments) will be deductible (or not includable in income)
up to certain amounts each year. Federal income tax currently is not imposed
upon the investment income and realized gains until redemption. When
Portfolio shares are redeemed for the purpose of making payments to plan
participants, all or a portion of the payment is normally taxable as ordinary
income. Some redemptions may also be subject to penalty tax. For more
information contact a qualified tax adviser.
The Portfolios 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
distributions will be reinvested automatically at net asset value in
additional shares of the Portfolios. Dividends declared in October,
November, or December to shareholders of record in such month and paid during
the following January will be treated as having been distributed and received
by shareholders on December 31.
Regulations under Section 817(h) of the Code contain certain
diversification requirements. Generally, under those regulations, the
Portfolios will be required to diversify its investments so that, on the last
day of each quarter of a calendar
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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 __, some
Portfolio Managers invested or agreed to invest in the Portfolios they
manage. Each of those Portfolio Managers has agreed to vote its shares in the
same proportion as all Contract owners having voting rights with respect to
the Portfolio or in such other manner as may be required by the SEC or its
staff.
PORTFOLIO BROKERAGE
A Portfolio Manager may employ an affiliated broker to execute brokerage
transactions on behalf of the Portfolio as long as the commissions are
reasonable and fair compared to the commissions received by other brokers in
connection with comparable transactions involving similar securities being
purchased or sold on a securities exchange during a comparable period of
time. GAMCO, the Portfolio Manager for the Value and Global Interactive
Telecomm Portfolios, uses an affiliated broker (Gabelli & Company, Inc.) to
execute most brokerage transactions on behalf of those two Portfolios. The
Portfolios may not engage in any transactions in which a Portfolio Manager or
its affiliates acts as principal, including over-the-counter purchases and
negotiated trades in which such party acts as a principal.
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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 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.
JP MORGAN GLOBAL GOVERNMENT BOND INDEX, UNHEDGED
The J.P. Morgan Global Government Bond Index, Unhedged, measures the
global government bond market of 13 countries. This index is weighted by
market capitalization ($3,053 billion-US) and is comprised of 424 bonds with
maturities greater than one year. In the unhedged index, foreign currencies
are converted into dollars at spot rates. This gives the index exposure to
both bond and currency markets. As of February 1995, the index was comprised
of the following countries and country weights: Australia (1.2%), Belgium
(3.2%), Canada (2.7%), Denmark (1.7%), France (7.0%), Germany (9.3%), Italy
(4.5%), Japan (13.5%), the Netherlands (3.5%), Spain (2.6%), Sweden (1.5%),
United Kingdom (6.2%) and the United States (43.1%).
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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
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speculation and CC the highest degree of speculation. While such bonds will
likely have some quality and protective characteristics, these are outweighed
by large uncertainties or major risk exposures to adverse conditions.
RATINGS OF COMMERCIAL PAPER
MOODY'S INVESTORS SERVICE, INC.
Prime-1 is the highest commercial paper rating assigned by Moody's.
Issuers rated Prime-1 (or supporting institutions) are considered to have a
superior capacity for repayment of short-term promissory obligations. Issuers
rated Prime-2 (or supporting institutions) are considered to have a strong
capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics of issuers rated Prime-1
but to a lesser degree. Earnings trends and coverage ratios, while sound,
will be more subject to variation. Capitalization characteristics, while
still appropriate may be more affected by external conditions. Ample
alternative liquidity is maintained.
STANDARD & POOR'S CORPORATION
Commercial paper rated A-1 by S&P indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Capacity for
timely payment on commercial paper on commercial paper rated A-2 is strong,
but the relative degree of safety is not as high as for issues designated A-1.
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STATEMENT OF ADDITIONAL INFORMATION
for
The Value Portfolio,
The Growth Portfolio,
The International Growth Portfolio,
The Global Strategic Income Portfolio, and
The Global Interactive/Telecomm Portfolio
of
THE PALLADIAN TRUST
440 Lincoln Street
Worcester, Massachusetts 01653
(800) 917-1909
May 1, 1998
This Statement of Additional Information discusses five portfolios
listed above (the "Portfolios") of The Palladian Trust (the "Trust"), which
is an open-end management investment company.
Shares of the Portfolios may be sold only to: (1) life insurance
company separate accounts (the "Separate Accounts") to serve as the
underlying investment medium for variable annuity and variable life insurance
contracts; (2) qualified retirement plans, as permitted by Treasury
Regulations; and (3) life insurance companies and advisers to the Portfolios
and their affiliates.
This Statement of Additional Information is intended to supplement the
information provided to investors in the Trust's Prospectus dated May 1,
1998. It has been filed with the Securities and Exchange Commission as part
of the Trust's Registration Statement. Investors should note, however, that
this Statement of Additional Information is not itself a prospectus and
should be read carefully in conjunction with the Prospectus for the
Portfolios and retained for future reference. The contents of this Statement
of Additional Information are incorporated by reference in the Prospectus in
their entirety. A copy of the Prospectus and the Prospectus Supplement may be
obtained free of charge from the Trust at the address and telephone number
listed above.
Manager:
Allmerica 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 22
PORTFOLIO TRANSACTIONS AND BROKERAGE 23
Investment Decisions 23
Brokerage and Research Services 24
PERFORMANCE INFORMATION 26
TAXATION 27
OTHER INFORMATION 28
Capitalization 28
Organization Expenses 28
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Registration Statement 29
FINANCIAL STATEMENTS 30
</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. The Tax Reform Act of
1986, pursuant to which a taxpayer's ability to deduct consumer interest in
his or her federal income tax calculation was completely phased out for
taxable years beginning in 1991, as well as competitive and general economic
factors, could adversely affect the rate at which new receivables are created
in an Account and conveyed to an issuer, shortening the expected weighted
average life of the related Credit Card Receivable Security, and reducing its
yield. An acceleration in cardholders' payment rates or any other event
which shortens the period during which additional credit card charges on an
Account may be transferred to the pool of assets supporting the related
Credit Card Receivable Security could have a similar effect on the weighted
average life and yield. Credit card holders are entitled to the protection of
a number of state and federal consumer credit laws, many of which give such
holder the right to set off certain amounts against balances owed on the
credit card, thereby reducing amounts paid on Accounts. In addition, unlike
many other asset-backed securities, Accounts are unsecured obligations of the
cardholder.
BANKING INDUSTRY AND SAVINGS INDUSTRY OBLIGATIONS
Obligations of foreign banks involve somewhat different investment risks
than those affecting obligations of U.S. banks, which include: (i) the
possibility that their liquidity could be impaired because of future
political and economic developments; (ii) their obligations may be less
marketable than comparable obligations of U.S. banks; (iii) a foreign
jurisdiction might impose withholding taxes on interest income payable on
those obligations; (iv) foreign deposits may be seized or nationalized; (v)
foreign governmental restrictions, such as exchange controls, may be adopted
which might adversely affect the payment of principal and interest on those
obligations; and (vi) the selection of those obligations may be more
difficult because there may be less publicly available information concerning
foreign banks and/or because the accounting, auditing, and financial
reporting standards, practices and requirements applicable to foreign banks
may differ from those applicable to U.S. banks. Foreign banks are not
generally subject to examination by any U.S. Government agency or
instrumentality.
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COMMERCIAL PAPER
Commercial paper obligations may include variable amount master demand
notes. These notes are obligations that permit the investment of fluctuating
amounts at varying rates of interest pursuant to direct arrangements between
a Portfolio, as lender, and the borrower. These notes permit daily changes
in the amounts borrowed. The lender has the right to increase or to decrease
the amount under the note at any time up to the full amount provided by the
note agreement; and the borrower may prepay up to the full amount of the note
without penalty. Because variable amount master demand notes are direct
lending arrangements between the lender and borrower, and because no
secondary market exists for those notes, such instruments will probably not
be traded. However, the notes are redeemable (and thus immediately repayable
by the borrower) at face value, plus accrued interest, at any time. In
connection with master demand note arrangements, the Portfolio Manager will
monitor, on an ongoing basis, the earning power, cash flow, and other
liquidity ratios of the borrower and its ability to pay principal and
interest on demand. The Portfolio Manager also will consider the extent to
which the variable amount master demand notes are backed by bank letters of
credit. These notes generally are not rated by Moody's or S&P; the Portfolio
may invest in them only if the Portfolio Manager believes that at the time of
investment the notes are of comparable quality to the other commercial paper
in which the Portfolio may invest. Master demand notes are considered by the
Portfolio to have a maturity of one day, unless the Portfolio Manager has
reason to believe that the borrower could not make immediate repayment upon
demand. See the Appendix for a description of Moody's and S&P ratings
applicable to commercial paper.
REPURCHASE AGREEMENTS
The term of a repurchase agreement is generally quite short, possibly
overnight or for a few days, although it may extend over a number of months
(up to one year) from the date of delivery. The resale price is in excess of
the purchase price by an amount which reflects an agreed-upon market rate of
return, effective for the period of time the Portfolio is invested in the
security. This results in a fixed rate of return protected from market
fluctuations during the period of the agreement. This rate is not tied to
the coupon rate on the security subject to the repurchase agreement.
A Portfolio may engage in repurchase transactions in accordance with
guidelines approved by the Board of Trustees of the Trust, which include
monitoring the creditworthiness of the parties with which a Portfolio engages
in repurchase transactions, obtaining collateral at least equal in value to
the repurchase obligation, and marking the collateral to market on a daily
basis.
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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 for
hedging purposes. A stock index futures contract is an agreement in which the
seller of the contract agrees to deliver to the buyer an amount of cash equal to
a specific dollar amount times the difference between the value of a specific
stock index at the close of the last trading day of the contract and the price
at which the agreement is made. No physical delivery of the underlying stocks
in the index is made. In addition, the Portfolios may, for hedging purposes,
purchase and sell (a) futures contracts on interest-bearing securities (such as
U.S. Treasury bonds and notes) or interest rate indices (referred to
collectively as "interest rate futures contracts"); (2) futures contracts on
foreign currencies or groups of foreign currencies; and (3) futures contracts on
gold and other precious metals.
When the futures contract is entered into, each party deposits with a
broker or in a segregated custodial account approximately 5% of the contract
amount, called the "initial margin." Subsequent payments to and from the
broker, called the "variation margin," will be made on a daily basis as the
underlying security, index or rate fluctuates making the long and short
positions in the futures contracts more or less valuable, a process known as
"marking to the market."
OPTIONS ON FUTURES CONTRACTS
The Portfolios may enter into certain transactions involving options on
futures contracts. An option on a futures contract gives the purchaser or
holder the right, but not the obligation, to assume a position in a futures
contract (a long position if the option is a call and a short position if the
option is a put) at a specified price at any time during the option exercise
period. The writer of the option is required upon exercise to assume an
offsetting futures position (a short position if the option is a call and long
position if the option is a put). Upon exercise of the option, the assumption
of offsetting futures positions by the writer and holder of the option will be
accomplished by delivery of the accumulated balance in the writer's futures
margin account which represents the amount by which the market price of the
futures contract, at exercise, exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option on the futures contract.
As an alternative to exercise, the holder or writer of an option may terminate a
position by selling or purchasing an option of the same series. There is no
guarantee that such closing transactions can be effected. The Portfolios intend
to utilize options on futures contracts for the same purposes that they use the
underlying futures contracts.
Options on futures contracts are subject to risks similar to those
described above with respect to options on securities, options on stock indices,
and futures contracts. These risks
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
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<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 Palladian Trust as a whole. Some uncertainty
exists as to whether certain of the types of bank obligations in which a
Portfolio may invest, such as certificates of deposit and bankers'
acceptances, should be classified as "cash items" rather than "other
securities" for purposes of this restriction, which is a diversification
requirement under the 1940 Act. Interpreting most bank obligations as
"other securities" limits the amount a Portfolio may invest in the
obligations of any one bank to 5% of its total assets. If there is an
authoritative decision that any of these obligations are not "securities"
for 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>
Matthew J. Stacom Chairman of the Board; Vice Chairman, Cushman & Wakefield;
601 Brickell Key Drive President Chairman, Palladian Advisors, Inc.
Suite 600
Miami, FL 33131
Tom N. Dallape Trustee; Commercial Land Broker, The
18881 Von Karman Avenue Vice President Hoffman Company (Partner since
Suite 1225 January 1997; Senior Associate prior to
Irvine, CA 92612 January 1997).
</TABLE>
Set forth below is a list of the Officers of the Trust, their business
addresses, and principal occupations during the past five years:
<TABLE>
<CAPTION>
Principal Occupations During
Name and Address Position with the Trust Past Five Years
---------------- ----------------------- ---------------
<S> <C> <C>
David J. Mueller Vice President Vice President, First Allmerica
440 Lincoln Street Financial Life Insurance Company
Worcester, MA 01653 since 1996; Assistant Vice
President, First Allmerica 1995-
1996; Business Analyst, First
Allmerica 1993-1995; Manager,
Coopers & Lybrand 1987-1993
21
<PAGE>
<CAPTION>
Principal Occupations During
Name and Address Position with the Trust Past Five Years
---------------- ----------------------- ---------------
<S> <C> <C>
H. Michael Schwartz Secretary President and Director, Palladian
701 Palomar Airport Road Advisors, Inc.;
Suite 300 President, Western Capital
Carlsbad, CA 92009 Financial Group, Inc., April 1994
to present;
Chief Financial Officer, Western
Capital Financial Group, Inc,
prior to April 1994;
Vice President and Chief
Financial Officer,
Protean Financial Companies,
prior to September 1997;
Chief Financial Officer, Western
Capital Financial & Insurance
Services, Inc., prior to
September 1997
Thomas P. Cunningham Treasurer Investment Product Manager, First
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 Boyd Assistant 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
</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 Global Strategic Income Portfolio accrued fees to PAI of
$1525, of which the Portfolio paid PAI $634. PAI paid Tremont $381. For
1997, the Global Strategic Income Portfolio accrued fees to PAI of $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); Global
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); Global Strategic
Income ($6,030); Global Interactive/Telecomm ($3,240).
23
<PAGE>
Coopers & Lybrand, L.L.P., 250 W. Pratt Street, Baltimore, MD 21201,
serves as independent accountants for the Trust.
Investors Bank & Trust Company ("IBT"), 200 Clarendon Street, Boston,
Massachusetts 02116 provides fund accounting and transfer agency services.
The fee for each Portfolio is based on an annual rate of 0.05% of net assets
for the first $600 million in net assets and an annual rate of 0.03% of net
assets for net assets in excess of $600 million. In addition, each Portfolio
will reimburse IBT for out-of-pocket expenses such as pricing services.
There is currently a minimum annual fee of $48,500 per Portfolio. For fund
accounting services during 1996, each Portfolio paid $35,000 to IBT. For
fund accounting and transfer agency services during 1997, each Portfolio paid
$49,459 to IBT.
PORTFOLIO TRANSACTIONS AND BROKERAGE
INVESTMENT DECISIONS
Investment decisions for each Portfolio are made by the Portfolio
Manager of each Portfolio. Each Portfolio Manager has investment advisory
clients other than the Portfolio. A particular security may be bought or
sold by a Portfolio Manager for certain clients even though it could have
been bought or sold for other clients at the same time. It also sometimes
happens that two or more clients simultaneously purchase or sell the same
security, in which event each day's transactions in such security are,
insofar as possible, allocated between such clients in a manner deemed fair
and reasonable by the Portfolio Manager. Although there is no specified
formula for allocating such transactions, the various allocation methods used
by the Portfolio Manager, and the results of such allocations, are subject to
periodic review by the Trust's Manager and Board of Trustees. There may be
circumstances when purchases or sales of portfolio securities for one or more
clients will have an adverse effect on other clients.
BROKERAGE AND RESEARCH SERVICES
Each Portfolio Manager is responsible for the selection of brokers and
dealers to effect that Portfolio's transactions and the negotiation of brokerage
commissions, if any. Transactions on a stock exchange in equity securities will
be executed primarily through brokers who will receive a commission paid by the
Portfolio. In the United States, commissions are usually negotiated; in other
countries, the commissions are usually fixed. Equity securities traded in the
over-the-counter ("OTC") markets are generally traded on a "net" basis with a
dealer acting as principal for its own account without a stated commission,
although the price of the security usually includes a profit to the dealer in
the form of the spread between the bid and asked prices. In some instances, the
Portfolio Managers may execute OTC transactions on an agency basis through a
broker who is not a market marker in the particular security, and in those
transactions
24
<PAGE>
the Portfolio will also pay a brokerage commission. Stonehill Capital, the
Portfolio Manager for the Growth Portfolio, executes most of its OTC
transactions on an agency basis through brokers with whom it has "soft
dollar" arrangements (described below). Fixed income securities are
generally traded on a "net" basis. In underwritten offerings, securities are
purchased at a fixed price that includes an amount of compensation to the
underwriter, generally referred to as the underwriter's concession or
discount. On occasion, certain of these securities may be purchased directly
from an issuer, in which case neither commissions nor discounts are paid.
In purchasing and selling securities, it is the policy of each Portfolio
Manager to seek the best execution for the Portfolio taking into account such
factors as price (including the applicable brokerage commission or dollar
spread), size of order, the nature of the market for the security, the timing
of the transaction, the reputation, experience and financial stability of the
broker-dealer involved, the quality of the service, the difficulty of the
execution, the operational facilities of the firms involved, and the firm's
risk in positioning a block of securities.
Notwithstanding the above, under certain conditions, the Portfolios are
authorized to pay higher brokerage commissions in return for brokerage and
research services. A Portfolio Manager may cause a Portfolio to pay a
broker-dealer who furnishes brokerage and/or research services a commission
or price for executing a transaction that is in excess of the commission or
price another broker would have received for executing the transaction if it
is determined that such commission or price is reasonable in relation to the
value of the brokerage and/or research services which have been provided. In
some cases, research services are generated by third parties, but are
provided to the Portfolio Manager or through broker-dealers.
The Portfolio Managers may receive a wide range of research services
from broker-dealers, including information on securities markets, the
economy, individual companies, statistical information, accounting and tax
law interpretations, technical market action, pricing and appraisal services,
and credit analyses. Research services may be in the form of written
reports, telephone contacts, personal meetings with security analysts,
corporate and industry spokespersons, economists, academicians, and
government representatives, and access to various computer-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.
Stonehill Capital, the Portfolio Manager for the Growth Portfolio,
executes most of its transactions through broker-dealers with which it has
certain "soft dollar" arrangements. Under those arrangements, the
broker-dealer provides research services to Stonehill Capital in return for
executing transactions through the broker-dealer that generate at least a
certain amount of commissions. Commissions paid on those transactions may be
greater than commissions charged by other broker-dealers who provide only
execution services. The research services provided to Stonehill Capital
include on-line computer services that serve as the primary source of
Stonehill Capital's outside research information. Those on-line services
provide price quotations, historical market data, research reports, price and
market projections, company data (including profitability, earnings
estimates, valuation and balance sheet information), and other research
information. One service also provides screening and searching capabilities
used to implement Stonehill Capital's investment approach, which is explained
in the prospectus section titled "Investment Objectives and Policies."
Paying commission amounts greater than otherwise available to obtain
research services poses potential conflicts of interest for the Portfolio
Manager. The Portfolio Manager may have an incentive to pay increased
commissions to obtain research services instead of paying for those services
from its own operating revenues. In addition, the Portfolio Manager may have
an incentive to select a broker-dealer based on the research services it
provides rather than the quality of trade execution. PAI and the Trust Board
will monitor the Portfolio Managers' use of soft dollar arrangements.
GAMCO, the Portfolio Manager for the Value and Global
Interactive/Telecomm Portfolios, uses an affiliated broker-dealer, Gabelli &
Company, Inc., for most of its transactions. GAMCO is not authorized to pay
higher brokerage commissions to Gabelli & Company, Inc. in return for
research services.
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. 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 Global Strategic Income Portfolio did not pay any commissions in
1996 or 1997.
During 1996, the Global Interactive/Telecomm Portfolio paid total
commissions of $3,205. During 1997, the Global Interactive/Telecomm
Portfolio paid total commissions of $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.
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.
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. 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, Global Strategic
Income Portfolio shares, and Global Interactive/Telecomm Portfolio shares.
The Agreement and Declaration of Trust established three other
Portfolios, and the Board of Trustees may establish additional Portfolios
(with different investment objectives and policies) at any time in the
future. The Trust has sold 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 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>
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
-------------
5
<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
-------------
6
<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.
7
<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
<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
<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.
8
<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
-------------
<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.
9
<PAGE>
THE PALLADIAN TRUST
THE GLOBAL STRATEGIC INCOME PORTFOLIO
PORTFOLIO OF INVESTMENTS - DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE
FACE VALUE (NOTE 1)
- ---------- --------
<S> <C>
UNITED STATES DOLLAR BONDS 37.0%
50,000 U.S. Treasury Bond
7.625% due 2/15/25 . . . . . . . . . . . . . . $60,687
170,000 U.S. Treasury Bond
6.50% due 11/15/26 . . . . . . . . . . . . . . 181,528
80,000 U.S. Treasury Note
6.250% due 2/15/07 . . . . . . . . . . . . . . 82,600
110,000 U.S. Treasury Note
6.625% due 5/15/07 . . . . . . . . . . . . . . 116,496
50,000 U.S. Treasury Note
6.125% due 8/15/07 . . . . . . . . . . . . . . 51,406
230,000 U.S. Treasury Note
5.875% due 9/30/02 . . . . . . . . . . . . . . 231,437
110,000 U.S. Treasury Note
5.750% due 10/31/02 . . . . . . . . . . . . . . 110,171
110,000 U.S. Treasury Note
5.750% due 11/30/02 . . . . . . . . . . . . . . 110,139
50,000 U.S. Treasury Note
7.000% due 7/15/06 . . . . . . . . . . . . . . 54,000
-------------
998,464
-------------
ITALIAN LIRA BOND 4.8%
190,000,000 Italy BTPS
8.750% due 7/1/06 . . . . . . . . . . . . . . 129,960
-------------
GERMAN DEUTSCHE MARK BOND 27.2%
1,120,000 Deutschland Republic
7.375% due 1/3/05 . . . . . . . . . . . . . . 703,689
50,000 Deutschland Republic
6.500% due 7/04/27 . . . . . . . . . . . . . . 30,122
-------------
733,811
-------------
JAPANESE YEN BOND . . . . . . . . . . . . . .7.5%
24,400,000 JAPAN - 184 (10 Year Issue)
2.900% due 12/20/05 . . . . . . . . . . . . . 203,496
-------------
BRITISH POUND BOND 6.5%
100,000 United Kingdom Treasury
7.250% due 12/07/07 . . . . . . . . . . . . . 176,213
-------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
TOTAL INVESTMENTS (COST $2,219,986) ** 83.0% 2,241,944
OTHER ASSETS AND LIABILITIES (NET) 17.0% 457,994
NET ASSETS 100.0% $2,699,938
- ----------------------------------------------------------------------------
</TABLE>
<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
<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.
10
<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
------------
<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.
11
<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.
1
<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
2
<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
3
<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
4
<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
5
<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>
6
<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
7
<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
8
<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
9
<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.
10
<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.
11
<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.
12
<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:
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
Portfolio of Investment
Notes to Financial Statements
(b) EXHIBITS
1. Declaration of Trust.(4)
2. By-Laws.(4)
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")(6)
(b) Form of subadvisory agreement among the Registrant,
Palladian Advisors, Inc. and a Portfolio Manager (for all
Portfolios other than the Global Strategic Income Portfolio).(6)
(c) Form of substitution agreement among the Registrant,
Palladian Advisors, Inc., AIMCO and a Portfolio Manager (for all
Portfolios other than the Global Strategic Income Portfolio).(6)
C-1
<PAGE>
(d) Form of subadvisory agreement among the Registrant, AIMCO
and the Portfolio Manager (for the Global Strategic Income
Portfolio).(6)
6. Not applicable.
7. Not applicable.
8. Form of custodial and fund accounting contract between the
Registrant and Investors Bank & Trust Company.(3)
9. (a) Form of transfer agency agreement between Registrant and
Investors Bank & Trust Company.(3)
(b) Not applicable.
(c) Form of Portfolio Manager Investment Agreement.(3)
(d) Form of Participation Agreement.(3)
10. Opinion of counsel.(4)
11. Consent of independent accountants.(6)
12. Not applicable.
13. Not applicable.
14. Not applicable.
15. Not applicable.
16. Not applicable.
17. Financial Data Schedule.(6)
18. Not applicable.
19. Powers of attorney.(6)
- -------------------------
(1) Incorporated by reference to initial registration statement for The
Palladian Trust, Reg. No. 33-73882, filed January 7, 1994.
C-2
<PAGE>
(2) Incorporated by reference to pre-effective amendment no. 1, Reg. No.
33-73882, filed May 12, 1995.
(3) Incorporated by reference to pre-effective amendment no. 2, Reg. No.
33-73882, filed October 18, 1995.
(4) Incorporated by reference to post-effective amendment No. 1, Reg. No.
33-73882, filed January 26, 1996.
(5) Incorporated by reference to post-effective amendment No. 4, Reg. No.
33-73882, filed April 30, 1997.
(6) Filed herewith.
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 3/9/98)
-------------- --------------
<S> <C>
Value 4
Growth 3
Balanced Opportunity 1
International Growth 3
Global Strategic Income 2
Global Interactive/Telecomm 4
</TABLE>
ITEM 27. INDEMNIFICATION.
Section 5.4 of the Agreement and Declaration of Trust of The Palladian
Trust provides in part:
"The Trust shall indemnify (from the assets of the Portfolio or
Portfolio in question) each of its Trustees and officers (including
persons who serve at the Trust's request as directors, officers or
trustees of another organization in which the Trust has any interest
as a shareholder, creditor or otherwise) [hereinafter referred to as a
"Covered Person"] against all liabilities, including but not limited
to amounts paid in satisfaction of judgments, in compromise or as
fines and penalties, and expenses, including reasonable accountants'
and
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 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) STONEHILL CAPITAL MANAGEMENT, INC.
See "Management of the Trust" both in the Prospectus and Statement of
Additional Information (Parts A and B) of this Registration Statement
relating to the Growth Portfolio.
Information as to Stonehill Capital Management, Inc.'s directors and
executive officers is included in its Form ADV filed with the Securities and
Exchange Commission (File No. 801-39-824), as most recently amended, the text
of which is incorporated herein by reference.
(d) BEE & ASSOCIATES INCORPORATED
See "Management of the Trust" both in the Prospectus and Statement of
Additional Information (Parts A and B) of this Registration Statement
relating to the International Growth Portfolio.
Information as to Bee & Associates Incorporated's directors and
executive officers is included in its Form ADV filed with the Securities and
Exchange Commission (File No. 801-345-38), as most recently amended, the text
of which is incorporated herein by reference.
(e) 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 Global 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) Stonehill Capital Management, Inc., 767
Third Avenue, New York, NY 10017; (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 30th day of April, 1998.
THE PALLADIAN TRUST
/s/ Matthew J. Stacom By: /s/ Thomas P. Cunningham
- --------------------------- ------------------------------
Matthew J. Stacom Thomas P. Cunningham
Chairman and Vice President (Attorney-in-Fact)
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the 30th day of April, 1998.
SIGNATURE AND TITLE
/s/ Matthew J. Stacom By: /s/ Thomas P. Cunningham
- --------------------------- ------------------------------
Matthew J. Stacom Thomas P. Cunningham
Chairman and Vice President (Attorney-in-Fact)
/s/ Thomas N. Dallape By: /s/ Thomas P. Cunningham
- --------------------------- ------------------------------
Thomas N. Dallape 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
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NOS.
- ----------- -------------------------- ---------
<S> <C> <C>
5.(a) Management Agreement between
the Registrant and Allmerica
Investment Management Company,
Inc. ("AIMCO"), predecessor to
Allmerica Financial Investment
Management Services, Inc.
("AFIMS")
5.(b) Form of subadvisory agreement
among the Registrant,
Palladian Advisors, Inc. and a
Portfolio Manager (for all
Portfolios other than the
Global Strategic Income
Portfolio).
5.(c) Form of substitution agreement
among the Registrant,
Palladian Advisors, Inc.,
AIMCO and a Portfolio Manager
(for all Portfolios other than
the Global Strategic Income
Portfolio).
5.(d) Form of subadvisory agreement
among the Registrant, AIMCO
and the Portfolio Manager (for
the Global Strategic Income
Portfolio).
11. Consent of independent
accountants
19. Powers of attorney
27. Financial Data Schedule
</TABLE>
C-9
<PAGE>
DOC 2
Exhibit 5(a)
INVESTMENT MANAGEMENT AGREEMENT
Agreement, made the 12th day of February, 1998, and amended the 9th
day of April, 1998, between The Palladian Trust (the "Trust"), a
Massachusetts business trust, and Allmerica Investment Management Company,
Inc. (the "Manager"), a Massachusetts corporation.
WHEREAS, the Trust is a diversified, open-end management investment
company registered under the Investment Company Act of 1940, as amended (the
"1940 Act"); and
WHEREAS, the Manager is registered as an investment adviser under
the Investment Advisers Act of 1940; and
WHEREAS, the Trust is authorized to issue shares of beneficial
interest in separate portfolios with each such portfolio representing
interests in a separate portfolio of securities and other assets; and
WHEREAS, the Trust currently offers shares of five portfolios
designated as The Value Portfolio, The Growth Portfolio, The International
Growth Portfolio, The Global Strategic Income Portfolio, and The Global
Interactive/Telecomm Portfolio (collectively, the "Current Portfolios"); and
WHEREAS, the Trust may establish additional portfolios with respect
to which the Trust desires to retain the Manager to render management
services hereunder and with respect to which the Manager is willing to do so
(those portfolios plus the Current Portfolios are collectively referred to as
the "Portfolios"); and
WHEREAS, the Trust desires to avail itself of the services of the
Manager for the provision of advice with respect to the selection and
monitoring of portfolio managers for the Portfolios and for the provision of
other services for the Trust; and
WHEREAS, the Manager is willing to render such services to the Trust.
Therefore, the parties agree as follows:
1. APPOINTMENT. The Trust hereby appoints the Manager to provide
management services with respect to the Current Portfolios for the period and
on the terms set forth in this Agreement, subject to the direction of the
Board of Trustees of the Trust (the "Board of Trustees"). The Manager
accepts such appointment and agrees to render the services described herein
for the compensation provided in paragraph 9. In the event the Trust
establishes one or more portfolios other than
<PAGE>
the Current Portfolios with respect to which it desires to retain the Manager
to render management services pursuant to this Agreement, it shall so notify
the Manager in writing. If the Manager is willing to render such services it
shall so notify the Trust in writing, whereupon such portfolio shall become a
Portfolio as that term is used in this Agreement.
2. SERVICES OF THE MANAGER. Subject to the supervision of the Board of
Trustees, the Manager shall provide the following management services with
respect to the Portfolios:
(a) The Manager shall analyze and recommend for consideration by the
Board of Trustees investment advisory firms to be retained by the Trust to
provide day-to-day investment management of the Portfolios (the "Portfolio
Managers").
(b) The Manager shall monitor and evaluate the performance of the
Portfolio Managers and make recommendations to the Board of Trustees concerning
the renewal or termination of agreements with Portfolio Managers (the "Portfolio
Management Agreements"), although the Manager is not authorized, except as
provided in paragraph 3 of the Agreement, to make determinations with respect to
the investment of a Portfolio's assets or the purchase or sale of securities or
other investments for a Portfolio.
(c) The Manager shall monitor the Portfolio Managers for compliance
with the investment policies and restrictions of each Portfolio, the 1940 Act,
the Internal Revenue Code, and all other applicable federal and state laws and
regulations.
(d) The Manager shall coordinate all matters relating to the
functions of the Trust's Manager, Portfolio Managers, custodian, transfer agent,
accountants, attorneys, and other parties performing services or operational
functions for the Trust.
(e) The Manager shall provide the Trust and the Portfolios with the
services of a sufficient number of persons competent to perform such
administrative and clerical functions as are necessary to provide effective
supervision and administration of the Trust.
(f) The Manager shall provide the Trust with adequate office space,
communications facilities, and other facilities necessary for its operations as
contemplated in this Agreement.
Page 2
<PAGE>
(g) The Manager shall provide the Board of Trustees such periodic
and special reports as the Board may reasonably request.
(h) The Manager shall make its officers and employees available to
the Board of Trustees and officers of the Trust for consultation and
discussions regarding the administration and management of the Trust.
(i) The Manager shall provide such assistance as the Board of
Trustees shall reasonably request in connection with the conduct of meetings
of the Board or otherwise.
3. INVESTMENT MANAGEMENT AUTHORITY. In the event that a Portfolio
Management Agreement pertaining to a Portfolio is terminated or if, at any
time, no Portfolio Manager is engaged to manage the assets of a Portfolio,
then the Manager, subject to the supervision of the Board of Trustees, will
provide day-to-day investment management of any such Portfolio. The Manager
will provide investment research and conduct a continuous program of
evaluation, investment, sales, and reinvestment of the Portfolio's assets by
determining the securities and other investments that shall be purchased,
entered into, sold, closed, or exchanged for the Portfolio, when these
transactions should be executed, and what portion of the assets of the
Portfolio should be held in the various securities and other investments in
which it may invest. The Manager is hereby authorized to execute and perform
such services on behalf of the Portfolio. To the extent permitted by the
investment policies of the Portfolio, the Manager shall make decisions for
the Portfolio as to foreign currency matters and make determinations as to,
and execute and perform, foreign currency exchange contracts on behalf of the
Portfolio. The Manager will provide the services under this Agreement in
accordance with the Portfolio's investment objective or objectives, policies,
and restrictions as stated in the Trust's registration statement under the
Securities Act of 1933 and the 1940 Act as filed with the Securities and
Exchange Commission ("SEC") and amended from time to time (the "Registration
Statement"). Furthermore, under these circumstances:
(a) The Manager will use reasonable efforts to manage the
Portfolio so that it will (1) qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code, (2) comply with the
diversification requirements of Section 817(h) of the Internal Revenue Code
and regulations issued thereunder, and (3) comply with any other rules and
regulations pertaining to investment vehicles underlying variable annuity or
variable life insurance policies. In managing the Portfolio in accordance
with these
Page 3
<PAGE>
requirements, the Manager shall be entitled to receive and act upon advice of
counsel to the Trust or counsel to the Manager.
(b) On occasions when the Manager deems the purchase or sale of a
security to be in the best interest of the Portfolio as well as any other
investment advisory clients, the Manager may, to the extent permitted by
applicable laws and regulations, including, but not limited to Section 17(d)
of the 1940 Act, but shall not be obligated to, aggregate the securities to
be so sold or purchased with those of its other clients where such
aggregation is not inconsistent with the policies set forth in the
Registration Statement. In such event, allocation of the securities so
purchased or sold, as well as the expenses incurred in the transaction, will
be made by the Manager in a manner that is fair and equitable in the judgment
of the Manager in the exercise of its fiduciary obligations to the Trust and
to such other clients.
(c) In connection with the purchase and sale of securities for the
Portfolio, the Manager will arrange for the transmission to the custodian for
the Trust on a daily basis, such confirmation, trade tickets, and other
documents and information as may be reasonably necessary to enable the
custodian to perform its administrative and recordkeeping responsibilities
with respect to the Portfolio. With respect to portfolio securities to be
purchased or sold through the Depository Trust Company, the Manager will
arrange for the automatic transmission of the confirmation of such trades to
the Trust's custodian.
(d) The Manager will assist the custodian or recordkeeping agent
for the Trust in determining, consistent with the procedures and policies
stated in the Registration Statement, the value of any portfolio securities
or other assets of the Portfolio for which the custodian or recordkeeping
agent seeks assistance or review from the Manager. The Manager will monitor
on a daily basis the determination by the custodian or recordkeeping agent
for the Trust the value of portfolio securities and other assets of the
Portfolio and the determination of net asset value of the Portfolio.
(e) The Manager will regularly report to the Board of Trustees on
the investment program for the Portfolio, and will furnish the Board of
Trustees such periodic and special reports as the Board may reasonably
request.
(f) In rendering the services required under this paragraph, the
Manager may, from time to time, employ or associate with itself such person
or persons as it believes
Page 4
<PAGE>
necessary to assist it in carrying out its obligations under this Agreement.
The Manager shall be responsible for making reasonable inquiries and for
reasonably ensuring that any employee of the Manager, any person or firm that
the Manager has employed or with which it has associated, or any employee
thereof involved in any material connection with the handling of Trust
assets, has not, to the best of the Manager's knowledge:
(i) been convicted, in the last ten (10) years, of any felony
or misdemeanor arising out of conduct involving embezzlement, fraudulent
conversion, or misappropriation of funds or securities, or involving
violations of Sections 1341, 1342, or 1343 of Title 18, United States
Code; or
(ii) been found by any state regulatory authority, within the
last ten (10) years, to have violated or to have acknowledged violation of
any provision of any state insurance law involving fraud, deceit, or
knowing misrepresentation; or
(iii) been found by any federal or state regulatory authorities,
within the last ten (10) years, to have violated or to have acknowledged
violation of any provisions of federal or state securities laws involving
fraud, deceit, or knowing misrepresentation.
(g) In connection with its responsibilities under this paragraph
3, the Manager is responsible for decisions to buy and sell securities and
other investments for the Portfolio, broker-dealer selection, and negotiation
of brokerage commission rates. The Manager's primary consideration in
effecting a security transaction will be to obtain the best execution for the
Portfolio, taking into account the factors specified in the Registration
Statement. Subject to the Registration Statement and such policies as the
Board of Trustees may determine and consistent with Section 28(e) of the
Securities Exchange Act of 1934, the Manager shall not be deemed to have
acted unlawfully or to have breached any duty created by this Agreement or
otherwise solely by reason of its having caused the Portfolio to pay a
broker-dealer for effecting a portfolio investment transaction in excess of
the amount of commission another broker-dealer would have charged for
effecting that transaction, if the Manager or its affiliate determines in
good faith that such amount of commission was reasonable in relation to the
value of the brokerage and research services provided by such broker-dealer,
viewed in terms of either that particular transaction or the Manager's
overall responsibilities with
Page 5
<PAGE>
respect to the Portfolio and to its other clients as to which it exercises
investment discretion.
4. CONFORMITY WITH APPLICABLE LAW. The Manager, in the performance of
its duties and obligations under this Agreement, shall act in conformity with
the Registration Statement and with the instructions and directions of the
Board of Trustees and will conform to, and comply with, the requirements of
the 1940 Act and all other applicable federal and state laws and regulations.
5. EXCLUSIVITY. The services of the Manager under this Agreement are
not to be deemed exclusive, and the Manager, or any affiliate thereof, shall
be free to render similar services to other investment companies and other
clients (whether or not their investment objectives and policies are similar
to those of any of the Portfolios) and to engage in other activities, so long
as its services hereunder are not impaired thereby.
6. DOCUMENTS. The Trust has delivered copies of each of the following
documents to the Manager and will deliver to it all future amendments and
supplements thereto, if any:
(a) the Trust's Declaration of Trust and its by-laws;
(b) the Registration Statement; and
(c) the prospectus and statement of additional information of the
Trust as currently in effect and as amended and supplemented from time to
time.
7. RECORDS. The Manager agrees to maintain and to preserve records
relating to the Trust as required by the 1940 Act. The Manager further
agrees that all records which it maintains for the Trust are the property of
the Trust and it will promptly surrender any of such records upon request.
8. EXPENSES. During the term of this Agreement, the Manager will pay
all expenses incurred by it in connection with its activities under this
Agreement, including all rent and other expense involved in providing office
space and equipment required by the Manager and the salaries and expenses of
all personnel of the Manager. The Manager further agrees to pay all
salaries, fees and expenses of any officer or trustee of the Trust who is an
officer, director or employee of the Manager or any of its affiliates. The
Manager further agrees to pay all rent and other expense in providing office
space for the Trust. Nothing in this Agreement shall require the Manager to
bear the following expenses:
Page 6
<PAGE>
(a) Fees of the Portfolio Managers;
(b) Charges for audits by the Trust's independent public
accountants;
(c) Charges of the Trust's transfer agent, registrar, and/or
dividend disbursing agent;
(d) Charges of the Trust's custodian and/or accountant;
(e) Costs of obtaining quotations for calculating the value of
each Portfolio's net assets;
(f) Costs of maintaining the Trust's tax records;
(g) Salaries and other compensation of any of the Trust's
executive officers and employees, if any, who are not officers, directors, or
employees of the Manager, or any of its affiliates;
(h) Taxes levied against the Trust;
(i) Brokerage fees and commissions in connection with the purchase
and sale of portfolio securities for the Trust;
(j) Costs, including the interest expense, of borrowing by the Trust;
(k) Costs and/or fees incident to meetings of the Trust's
shareholders, the preparation and mailings of prospectuses, reports, proxy
statements and other communications by the Trust to its shareholders, the
filing of reports with regulatory bodies, the maintenance of the Trust's
existence, and the registration of shares with federal and state securities
or insurance authorities;
(l) The Trust's legal fees, including the legal fees related to
the registration and continued qualification of the Trust's shares for sale;
(m) Costs of printing stock certificates representing shares of
the Trust;
(n) Trustees' fees and expenses of Trustees who are not officers,
directors, or employees of the Manager or any of its affiliates;
Page 7
<PAGE>
(o) The Trust's pro rata portion of the fidelity bond required by
Section 17(g) of the 1940 Act, or other insurance premiums;
(p) Membership dues for any association of which the Trust is a
member;
(q) Extraordinary expenses of the Trust as may arise, including
expenses incurred in connection with litigation, proceedings, other claims
against the Trust (unless the Manager is responsible for such expenses under
paragraph 10 of this Agreement), and the legal obligations of the Trust to
indemnify its trustees, officers, employees, shareholders, distributors, and
agents with respect to such claims; and
(r) Organizational and offering expenses of the Trust and, if
applicable, reimbursement (with interest) of underwriting discounts and
commissions.
9. COMPENSATION.
(a) For the services provided and the expenses borne by the
Manager pursuant to this Agreement, each Portfolio will pay the Manager a fee
calculated in accordance with this paragraph 9.
(b) A Portfolio will pay the Manager 20% of the Initial Monthly
Advisory Fee or the Monthly Advisory Fee, as those terms are defined in this
paragraph, whichever is applicable; provided, however, that for any period
during which the Manager is providing the services described in paragraph 3,
a Portfolio will pay the Manager 100% of the Initial Monthly Advisory Fee or
the Monthly Advisory Fee, as those terms are defined in this paragraph,
whichever is applicable.
(c) For the period beginning with the effective date of a
Portfolio Management Agreement with a new Portfolio Manager (or, for those
Portfolios that have had only one Portfolio Manager, the day on which the
Portfolio commenced operations) and ending with the last day of the twelfth
full calendar month thereafter, the Portfolio will pay at the end of each
month, an advisory fee calculated at an annual rate of 0.80% of the
Portfolio's average daily net assets (the "Initial Monthly Advisory Fee").
(d) For the period beginning with the first day of the thirteenth
full calendar month after the effective date of a Portfolio Management
Agreement with a new Portfolio Manager (or, for those Portfolios that have
had only one Portfolio
Page 8
<PAGE>
Manager, the first day of the thirteenth full calendar month after the
Portfolio commenced operations) and continuing through the remainder of the
term of this Agreement, the Portfolio will pay at the end of each month, an
advisory fee (the "Monthly Advisory Fee"). The Monthly Advisory Fee equals
the Basic Fee (as defined in paragraph 9(e) below) plus the Incentive Fee (as
defined in paragraph 9(f) below) and adjusted, if so required, by paragraph
9(i) below.
(e) The Basic Fee equals one-twelfth of 2% multiplied by the
Portfolio's average daily net assets for the previous 12 months (including
the month for which the fee is being calculated).
(f) The Incentive Fee equals: (i) one-twelfth of the Annual
Incentive Fee set forth in the chart below based on the difference between
the Performance of the Portfolio and the Performance of the Benchmark, as
those terms are defined in paragraphs 9(g) and 9(h) below; (ii) multiplied by
the Portfolio's average daily net assets for the previous 12 months
(including the month for which the fee is being calculated).
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Annual
Percentage Point Difference Between Performance of the Portfolio Incentive
and Performance of the Benchmark Fee (%)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<S> <C>
+7.5 or greater 2.0%
- --------------------------------------------------------------------------------
+6.0 or greater, but less than +7.5 1.5
- --------------------------------------------------------------------------------
+4.5 or greater, but less than +6.0 1.0
- --------------------------------------------------------------------------------
+3.0 or greater, but less than +4.5 0.5
- --------------------------------------------------------------------------------
+1.5 or greater, but less than +3.0 0.0
- --------------------------------------------------------------------------------
0.0 or greater, but less than +1.5 -0.5
- --------------------------------------------------------------------------------
-1.5 or greater, but less than 0.0 -1.0
- --------------------------------------------------------------------------------
-3.0 or greater, but less than -1.5 -1.5
- --------------------------------------------------------------------------------
Less than -3.0 -2.0
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
(g) The Performance of the Portfolio will be calculated by first
determining the change in the Portfolio's net asset value per share during
the previous twelve months (including the month for which the fee is being
computed) assuming the reinvestment of distributions during that period, and
then expressing this amount as a percentage of the net asset value per share
at the beginning of the period. Net asset value per share is calculated by
dividing the value of
Page 9
<PAGE>
the securities held by the Portfolio plus any cash or other assets minus all
liabilities including accrued advisory fees and the other expenses, by the
total number of shares outstanding at the time. The Performance of the
Portfolios shall be calculated in accordance with SEC rules.
(h) The Performance of the Benchmark will be calculated by first
determining the change in the level of the Benchmark during the previous
twelve months (including the month for which the fee is being computed) plus
the value of any cash dividends or distributions made by the companies whose
securities comprise the Benchmark accumulated to the end of the period, and
then expressing this amount as a percentage of the Benchmark at the beginning
of the period. The Performance of the Benchmark shall be calculated in
accordance with SEC rules. The Benchmark for each Portfolio is the Benchmark
established by the agreement between the Trust and the Portfolio Manager for
that Portfolio. If any Benchmark ceases to be published, changes in any
material respect or otherwise becomes impracticable to use for purposes of
the Incentive Fee, the Monthly Advisory Fee for that Portfolio will equal the
Basic Fee (with no incentive adjustment) until such time as the Board of
Trustees approves a substitute Benchmark.
(i) Notwithstanding paragraphs 9(a)-9(h) above, if the Performance
of a Portfolio (minus payment of all expenses, including the Basic Fee and
any Incentive Fee) is negative and does not exceed the Performance of the
Benchmark by six percentage points, then the Monthly Advisory Fee will equal
zero. Notwithstanding paragraphs 9(a)-9(h) above, if the Performance of a
Portfolio (minus payment of all expenses, including the Basic Fee and any
Incentive Fee) is negative, exceeds the Performance of the Benchmark by six
percentage points, but does not exceed the Performance of the Benchmark by
twelve percentage points, then the Monthly Advisory Fee will not be greater
than one-twelfth of 1% of the Portfolio's average daily net assets for the
previous 12 months (including the month for which the fee is being
calculated). Notwithstanding paragraphs 9(a)-9(h) above, if the Performance
of a Portfolio (minus payment of all expenses, including the Basic Fee and
any Incentive Fee) is negative and exceeds the Performance of the Benchmark
by twelve percentage points, then the Monthly Advisory Fee will not be
greater than one-twelfth of 2% of the Portfolio's average daily net assets
for the previous 12 months (including the month for which the fee is being
calculated).
10. LIABILITY AND INDEMNIFICATION. The Manager and the Trust each may
rely on information reasonably believed by it to be accurate and reliable.
The Manager shall not be liable
Page 10
<PAGE>
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.
11. CONTINUATION AND TERMINATION. This Agreement shall take effect on
the date first written above, and shall continue in effect, unless sooner
terminated as provided herein, for 119 days thereafter, and provided that the
Agreement is approved by a majority of the outstanding voting shares of the
Trust by the end of such 119th day, shall continue for two years from the
date of this Agreement, and shall continue from year to year thereafter with
respect to each Portfolio so long as such continuance is specifically
approved at least annually (i) by the vote of a majority of the Board of
Trustees; or (ii) by vote of a majority of the outstanding voting shares of
the Portfolio; provided, further, in either event that continuance is also
approved by the vote of a majority of the Board of Trustees who are not
parties to this Agreement or "interested persons" (as defined in the 1940
Act) of the Trust or the Manager, cast in person at a meeting called for the
purpose of voting on such approval. Any approval of this Agreement by the
holders of a majority of the outstanding shares (as defined in the 1940 Act)
of a Portfolio shall be effective to continue this Agreement with respect to
such Portfolio notwithstanding (i) that this Agreement has not been approved
by the holders of a majority of the outstanding
Page 11
<PAGE>
shares of any other Portfolio or (ii) that this Agreement has not been
approved by the vote of a majority of the outstanding shares of the Trust,
unless such approval shall be required by any other applicable law or
otherwise. This Agreement may be terminated by the Trust at any time,
without the payment of any penalty, by vote of a majority of the entire Board
of Trustees or by a vote of a majority of the outstanding voting shares of
the Trust, or with respect to a Portfolio, by vote of a majority of the
outstanding voting shares of such Portfolio, on sixty (60) days' written
notice to the Manager, or by the Manager at any time, without the payment of
any penalty, on ninety (90) days' written notice to the Trust. This
Agreement will automatically and immediately terminate in the event of its
"assignment" (as defined in the 1940 Act).
12. INDEPENDENT CONTRACTOR. The Manager shall for all purposes herein be
deemed to be an independent contractor and shall, unless otherwise expressly
provided herein or authorized by the Board of Trustees from time to time, have
no authority to act for or represent the Trust in any way or otherwise be deemed
its agent.
13. NOTICE. Notices of any kind to be given to the Manager by the
Trust shall be in writing and shall be duly given if sent by first class mail
or delivered to the Manager at 440 Lincoln Street, Worcester, MA 01653, or at
such other address or to such individual as shall be specified by the Manager
to the Trust. Notices of any kind to be given to the Trust by the Manager
shall be in writing and shall be duly given if sent by first class mail or
delivered to 440 Lincoln Street, Worcester, MA 01653, or at such other
address or to such individual as shall be specified by the Trust to the
Manager.
14. OBLIGATION. A copy of the Trust's Agreement and Declaration of
Trust is on file with the Secretary of the Commonwealth of Massachusetts.
Notice is hereby given that this Agreement has been executed on behalf of the
Trust by a trustee of the Trust in his or her capacity as trustee and not
individually. The obligations of this Agreement shall only be binding upon
the assets and property of the Trust and shall not be binding upon any
trustee, officer, or shareholder of the Trust individually.
15. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original.
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<PAGE>
16. APPLICABLE LAW. This Agreement shall be governed by the laws of
Massachusetts, provided that nothing herein shall be construed in a manner
inconsistent with the 1940 Act, the Investment Advisers Act of 1940, or any
rules or order of the SEC thereunder.
17. SEVERABILITY. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder
of this Agreement shall not be affected thereby and, to this extent, the
provisions of this Agreement shall be deemed to be severable.
18. CAPTIONS. The captions of this Agreement are included for
convenience only and in no way define or limit any of the provisions hereof
or otherwise affect their construction or effect.
Page 13
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument
to be executed by their officers designated below on the day and year first
above written.
The Palladian Trust
By:
- ---------------------------- --------------------------
Witness George M. Boyd
Assistant Secretary
Allmerica Investment
Management Company, Inc.
By:
- ---------------------------- --------------------------
Witness
Page 14
<PAGE>
Exhibit 5(b)
PORTFOLIO MANAGER 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; and __________________ (the
"Portfolio Manager"), a __________________ corporation.
WHEREAS, the Trust is a diversified, open-end management investment
company registered under the Investment Company Act of 1940, as amended (the
"1940 Act"); and
WHEREAS, the Manager and the Portfolio Manager are both registered
as investment advisers under the Investment Advisers Act of 1940; and
WHEREAS, the Trust is authorized to issue shares of beneficial
interest in separate portfolios with each such portfolio representing
interests in a separate portfolio of securities and other assets; and
WHEREAS, the Manager has entered into a management agreement with
the Trust, pursuant to which the Manager will provide, among other services,
advice with respect to the selection and monitoring of portfolio managers to
handle the day-to-day investment management of certain portfolios; and
WHEREAS, the Trust and the Manager desire to retain the Portfolio
Manager to provide investment advisory services to the __________________
Portfolio of the Trust (the "Portfolio"), and the Portfolio Manager is
willing to render such services.
Therefore, the parties agree as follows:
1. APPOINTMENT. The Trust hereby appoints the Portfolio Manager to
provide investment advisory services with respect to the Portfolio for the
period and on the terms set forth in this Agreement, subject to the direction
of the Board of Trustees of the Trust (the "Board of Trustees"). The
Portfolio Manager accepts such appointment and agrees to render the services
described herein for the compensation provided in paragraph 13.
2. SERVICES OF THE PORTFOLIO MANAGER.
(a) Subject to the supervision of the Board of Trustees, the
Portfolio Manager will provide day-to-day investment management of the
Portfolio. The Portfolio Manager will provide investment research and
conduct a continuous program of evaluation, investment, sales, and
reinvestment of the Portfolio's assets by determining the securities and
other investments that shall be purchased, entered into, sold, closed, or
exchanged for the Portfolio, when these transactions should be executed, and
what portion of the assets of the Portfolio should
<PAGE>
be held in the various securities and other investments in which it may
invest. The Portfolio Manager is hereby authorized to execute and perform
such services on behalf of the Portfolio. To the extent permitted by the
investment policies of the Portfolio, the Portfolio Manager shall make
decisions for the Portfolio as to foreign currency matters and make
determinations as to, and execute and perform, foreign currency exchange
contracts on behalf of the Portfolio. The Portfolio Manager will provide the
services under this Agreement in accordance with the Portfolio's investment
objective or objectives, policies, and restrictions as stated in the Trust's
registration statement under the Securities Act of 1933 and the 1940 Act as
filed with the Securities and Exchange Commission ("SEC") and amended from
time to time (the "Registration Statement").
(b) The Portfolio Manager will use reasonable efforts to manage
the Portfolio so that it will (1) qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code, (2) comply with the
diversification requirements of Section 817(h) of the Internal Revenue Code
and regulations issued thereunder, and (3) comply with any other rules and
regulations pertaining to investment vehicles underlying variable annuity or
variable life insurance policies. In managing the Portfolio in accordance
with these requirements, the Portfolio Manager shall be entitled to receive
and act upon advice of counsel to the Trust or counsel to the Manager.
(c) On occasions when the Portfolio Manager deems the purchase or
sale of a security to be in the best interest of the Portfolio as well as any
other investment advisory clients, the Portfolio Manager may, to the extent
permitted by applicable laws and regulations, including, but not limited to
Section 17(d) of the 1940 Act, but shall not be obligated to, aggregate the
securities to be so sold or purchased with those of its other clients where
such aggregation is not inconsistent with the policies set forth in the
Registration Statement. In such event, allocation of the securities so
purchased or sold, as well as the expenses incurred in the transaction, will
be made by the Portfolio Manager in a manner that is fair and equitable in
the judgment of the Portfolio Manager in the exercise of its fiduciary
obligations to the Trust and to such other clients.
(d) In connection with the purchase and sale of securities for the
Portfolio, the Portfolio Manager will arrange for the transmission to the
custodian for the Trust on a daily basis, such confirmation, trade tickets,
and other documents and information as may be reasonably necessary to enable
the custodian to perform its administrative and recordkeeping
responsibilities with respect to the Portfolio. With respect to portfolio
securities to be purchased or sold through the Depository Trust Company, the
Portfolio Manager will arrange for
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the automatic transmission of the confirmation of such trades to the Trust's
custodian. The Portfolio Manager will provide to the Manager copies of the
documents and information sent to the custodian and the Depository Trust
Company as requested by the Manager.
(e) The Portfolio Manager will assist the custodian or
recordkeeping agent for the Trust in determining, consistent with the
procedures and policies stated in the Registration Statement, the value of
any portfolio securities or other assets of the Portfolio for which the
custodian or recordkeeping agent seeks assistance or review from the
Portfolio Manager. The Portfolio Manager will monitor on a daily basis the
determination by the custodian or recordkeeping agent for the Trust the value
of portfolio securities and other assets of the Portfolio and the
determination of net asset value of the Portfolio.
(f) The Portfolio Manager shall regularly report to the Board of
Trustees on the investment program for the Portfolio, and will furnish the
Board of Trustees such periodic and special reports as the Board may
reasonably request.
(g) The Portfolio Manager shall make its officers and employees
available to the Board of Trustees, officers of the Trust, and officers of
the Manager for consultation and discussions regarding the investment program
for the Portfolio.
3. BROKER-DEALER SELECTION. The Portfolio Manager is responsible for
decisions to buy and sell securities and other investments for the Portfolio,
broker-dealer selection, and negotiation of brokerage commission rates. The
Portfolio Manager's primary consideration in effecting a security transaction
will be to obtain the best execution for the Portfolio, taking into account
the factors specified in the Registration Statement. Subject to the
Registration Statement and such policies as the Board of Trustees may
determine and consistent with Section 28(e) of the Securities Exchange Act of
1934, the Portfolio Manager shall not be deemed to have acted unlawfully or
to have breached any duty created by this Agreement or otherwise solely by
reason of its having caused the Portfolio to pay a broker-dealer for
effecting a portfolio investment transaction in excess of the amount of
commission another broker-dealer would have charged for effecting that
transaction, if the Portfolio Manager determines in good faith that such
amount of commission was reasonable in relation to the value of the brokerage
and research services provided by such broker-dealer, viewed in terms of
either that particular transaction or the Portfolio Manager's overall
responsibilities with respect to the Portfolio and to its other clients as to
which it exercises investment discretion.
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<PAGE>
4. EMPLOYEES. In rendering the services required under this
Agreement, the Portfolio Manager may, from time to time, employ such person
or persons as it believes necessary to assist it in carrying out its
obligations under this Agreement. The Portfolio Manager shall be responsible
for making reasonable inquiries and for reasonably ensuring that no employee
of the Portfolio Manager:
(a) has been convicted, in the last ten (10) years, of any felony or
misdemeanor arising out of conduct involving embezzlement, fraudulent
conversion, or misappropriation of funds or securities, or involving
violations of Sections 1341, 1342, or 1343 of Title 18, United States
Code; or
(b) has been found by any state regulatory authority, within the last
ten (10) years, to have violated or to have acknowledged violation of
any provision of any state insurance law involving fraud, deceit, or
knowing misrepresentation; or
(c) has been found by any federal or state regulatory authorities,
within the last ten (10) years, to have violated or to have
acknowledged violation of any provisions of federal or state
securities laws involving fraud, deceit, or knowing misrepresentation;
or
(d) is ineligible by reason of Section 9 of the 1940 Act to serve as
an employee of an investment adviser to an investment company.
5. CONFORMITY WITH APPLICABLE LAW. The Portfolio Manager, in the
performance of its duties and obligations under this Agreement, shall act in
conformity with the Registration Statement and with the instructions and
directions of the Board of Trustees and will conform to, and comply with, the
requirements of the 1940 Act and all other applicable federal and state laws
and regulations.
6. EXCLUSIVITY. The services of the Portfolio Manager under this
Agreement are deemed exclusive with respect to managing a registered
investment company (or portfolio thereof) (1) which serves as the underlying
investment vehicle for variable life insurance policies and/or variable
annuity contracts; (2) which pays its adviser(s) fees based on investment
performance ("performance-based fees"); and (3) shares of which are purchased
by one or more of its advisers. As long as this Agreement is in effect,
neither the Portfolio Manager nor its affiliates may serve as an investment
adviser to or investment manager of a registered investment company (or
portfolio thereof)
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<PAGE>
(1) which serves as the underlying investment vehicle for variable life
insurance policies and/or variable annuity contracts; (2) which pays
performance-based fees to some or all of its advisers; and (3) shares of
which are purchased by one or more of its advisers. Notwithstanding the
foregoing exclusivity, nothing in this Agreement shall prevent the Portfolio
Manager (or its affiliates) from engaging in the following activities,
provided that the Portfolio Manager's services to the Portfolio are not
impaired thereby: (1) serving as investment adviser to or investment manager
of a registered investment company (or portfolio thereof) which does not
serve as the underlying investment vehicle for variable life insurance
policies and/or variable annuity contracts; or (2) serving as investment
adviser to or investment manager of a registered investment company (or
portfolio thereof) which does not pay any of its advisers a performance-based
fee; or (3) serving as investment adviser to an investment manager of a
registered investment company (or portfolio thereof) which does not offer its
shares to any of its advisers.
7. DOCUMENTS. The Trust has delivered copies of each of the following
documents to the Portfolio Manager and will deliver to it all future
amendments and supplements thereto, if any:
(a) the Trust's Declaration of Trust and its by-laws;
(b) the Registration Statement; and
(c) the prospectus and statement of additional information of the
Trust as currently in effect and as amended and supplemented from time to
time.
8. RECORDS. The Portfolio Manager agrees to maintain and to preserve
records relating to the Trust as required by the 1940 Act. The Portfolio
Manager further agrees that all records which it maintains for the Trust are
the property of the Trust and it will promptly surrender any of such records
upon request.
9. DISCLOSURE BY PORTFOLIO MANAGER. The Portfolio Manager will not
disclose or use any records or information obtained pursuant to this
Agreement (excluding investment research and investment advice) in any manner
whatsoever except as required to carry out its duties as investment adviser
or in the ordinary course of business in connection with placing orders for
the purchase and sale of securities, and will keep confidential any
information obtained pursuant to this Agreement, and disclose such
information only if the Board of Trustees has authorized such disclosure, or
if such disclosure is expressly required by
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<PAGE>
applicable federal or state law or regulations or regulatory authorities
having the requisite authority.
10. DISCLOSURE ABOUT PORTFOLIO MANAGER. The Portfolio Manager has
reviewed pre-effective amendment number 3 to the Trust's registration
statement and represents and warrants that, with respect to the disclosure
relating to the Portfolio Manager, such pre-effective amendment contains, as
of the date hereof, no untrue statement of any material fact and does not
omit any statement of a material fact regarding the investment objectives and
policies of the Portfolio which was required to be stated therein or
necessary to make the statements contained therein not misleading. The
Portfolio Manager further represents and warrants that it is a duly
registered investment adviser under the Investment Advisers Act of 1940 and a
duly registered investment adviser in all states in which the Portfolio
Manager is required to be registered.
11. COMPLIANCE. The Portfolio Manager agrees that it shall immediately
notify the Manager and the Trust in the event that:
(a) the SEC has censured the Portfolio Manager; placed limitations
upon its activities, functions or operations; suspended or revoked its
registration as an investment adviser; or commenced proceedings or an
investigation that may result in any of these actions; or
(b) the Portfolio Manager has a reasonable basis for believing
that the Portfolio has ceased to qualify or might not qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code; or
(c) the Portfolio Manager has a reasonable basis for believing
that the Portfolio has ceased to comply or might not comply with the
diversification provisions of Section 817(h) of the Internal Revenue Code or
the regulations thereunder; or
(d) the Portfolio Manager has become aware of a material fact that
is not contained in the Registration Statement or prospectus for the Trust,
or any amendment or supplement thereto, or that any statement contained
therein that has become untrue or misleading in any material respect.
12. EXPENSES. During the term of this Agreement, the Portfolio Manager
will pay all expenses incurred by it in connection with its activities under
this Agreement, including all rent and other expenses involved in providing
office space and equipment required by the Portfolio Manager and the salaries
and expenses of all personnel of the Portfolio Manager. The
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<PAGE>
Portfolio Manager further agrees to pay all salaries, fees and expenses of
any officer or trustee of the Trust who is an officer, director or employee
of the Portfolio Manager or any of its affiliates. Nothing in this Agreement
shall require the Portfolio Manager to bear the following expenses:
(a) Fees of the Manager and the Portfolio Advisor;
(b) Charges for audits by the Trust's independent public accountants;
(c) Charges of the Trust's transfer agent, registrar, and/or dividend
disbursing agent;
(d) Charges of the Trust's custodian and/or accountant;
(e) Costs of obtaining quotations for calculating the value of each
Portfolio's net assets;
(f) Costs of maintaining the Trust's tax records;
(g) Salaries and other compensation of any of the Trust's executive
officers and employees, if any, who are not officers, directors, or employees of
the Portfolio Manager or any of its affiliates;
(h) Taxes levied against the Trust;
(i) Brokerage fees and commissions in connection with the purchase
and sale of portfolio securities for the Trust;
(j) Costs, including the interest expense, of borrowing by the Trust;
(k) Costs and/or fees incident to meetings of the Trust's
shareholders, the preparation and mailings of prospectuses, reports, proxy
statements and other communications by the Trust to its shareholders, the filing
of reports with regulatory bodies, the maintenance of the Trust's existence, and
the registration of shares with federal and state securities or insurance
authorities;
(l) The Trust's legal fees, including the legal fees related to the
registration and continued qualification of the Trust's shares for sale;
(m) Costs of printing stock certificates representing shares of the
Trust;
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<PAGE>
(n) Trustees' fees and expenses of Trustees who are not officers,
directors, or employees of the Portfolio Manager or any affiliates;
(o) Trust's pro rata portion of the fidelity bond required by Section
17(g) of the 1940 Act, or other insurance premiums;
(p) Membership dues for any association of which the Trust is a
member;
(q) Extraordinary expenses of the Trust as may arise, including
expenses incurred in connection with litigation, proceedings, other claims
against the Trust (unless the Portfolio Manager is responsible for such expenses
under paragraph 14 of this Agreement), and the legal obligations of the Trust to
indemnify its trustees, officers, employees, shareholders, distributors, and
agents with respect to such claims; and
(r) Organizational and offering expenses of the Trust and, if
applicable, reimbursement (with interest) of underwriting discounts and
commissions.
13. COMPENSATION.
(a) For the services provided and the expenses borne by the Portfolio
Manager pursuant to this Agreement, the Trust will pay the Portfolio Manager 80%
of the Initial Monthly Advisory Fee or the Monthly Advisory Fee, as those terms
are defined in this paragraph, whichever is applicable.
(b) For the period beginning with the day on which the Portfolio
commences investment operations and ending with the last day of the twelfth full
calendar month thereafter, the Portfolio will pay at the end of each month, an
advisory fee calculated at an annual rate of 0.80% of the Portfolio's average
daily net assets (the "Initial Monthly Advisory Fee").
(c) For the period beginning with the first day of the thirteenth
full calendar month after which the Portfolio commences operations and
continuing through the remainder of the term of this Agreement, the Portfolio
will pay at the end of each month, an advisory fee (the "Monthly Advisory Fee").
The Monthly Advisory Fee equals the Basic Fee (as defined in paragraph 13(d)
below) plus the Incentive Fee (as defined in paragraph 13(e) below) and
adjusted, if so required, by paragraph 13(h) below.
(d) The Basic Fee equals one-twelfth of 2% multiplied by the
Portfolio's average daily net assets for the previous 12
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months (including the month for which the fee is being calculated).
(e) The Incentive Fee equals: (i) one-twelfth of the Annual
Incentive Fee set forth in the chart below based on the difference between the
Performance of the Portfolio and the Performance of the Benchmark, as those
terms are defined in paragraphs 13(f) and 13(g) below; (ii) multiplied by the
Portfolio's average daily net assets for the previous 12 months (including the
month for which the fee is being calculated).
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Annual
Percentage Point Difference Between Performance of the Portfolioand Performance of the Incentive Fee
Benchmark (%)
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
<S> <C>
+7.5 or greater 2.0%
- -----------------------------------------------------------------------------------------------------------
+6.0 or greater, but less than +7.5 1.5
- -----------------------------------------------------------------------------------------------------------
+4.5 or greater, but less than +6.0 1.0
- -----------------------------------------------------------------------------------------------------------
+3.0 or greater, but less than +4.5 0.5
- -----------------------------------------------------------------------------------------------------------
+1.5 or greater, but less than +3.0 0.0
- -----------------------------------------------------------------------------------------------------------
0.0 or greater, but less than +1.5 -0.5
- -----------------------------------------------------------------------------------------------------------
-1.5 or greater, but less than 0.0 -1.0
- -----------------------------------------------------------------------------------------------------------
-3.0 or greater, but less than -1.5 -1.5
- -----------------------------------------------------------------------------------------------------------
Less than -3.0 -2.0
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(f) The Performance of the Portfolio will be calculated by first
determining the change in the Portfolio's net asset value per share during the
previous twelve months (including the month for which the fee is being computed)
assuming the reinvestment of distributions during that period, and then
expressing this amount as a percentage of the net asset value per share at the
beginning of the period. Net asset value per share is calculated by dividing
the value of the securities held by the Portfolio plus any cash or other assets
minus all liabilities including accrued advisory fees and the other expenses, by
the total number of shares outstanding at the time. The Performance of the
Portfolios shall be calculated in accordance with SEC rules.
(g) The Performance of the Benchmark will be calculated by first
determining the change in the level of the Benchmark during the previous twelve
months (including the month for which the fee is being computed) plus the value
of any cash
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dividends or distributions made by the companies whose securities comprise
the Benchmark accumulated to the end of the period, and then expressing this
amount as a percentage of the Benchmark at the beginning of the period. The
Performance of the Benchmark shall be calculated in accordance with SEC
rules. The Benchmark is __________________________________________. If the
Benchmark ceases to be published, changes in any material respect or
otherwise becomes impracticable to use for purposes of the Incentive Fee, the
Monthly Advisory Fee will equal the Basic Fee (with no incentive adjustment)
until such time as the Board of Trustees approves a substitute Benchmark.
(h) Notwithstanding paragraphs 13(a)-13(g) above, if the Performance
of a Portfolio (minus payment of all expenses, including the Basic Fee and any
Incentive Fee) is negative and does not exceed the Performance of the Benchmark
by six percentage points, then the Monthly Advisory Fee will equal zero.
Notwithstanding paragraphs 13(a)-13(g) above, if the Performance of a Portfolio
(minus payment of all expenses, including the Basic Fee and any Incentive Fee)
is negative, exceeds the Performance of the Benchmark by six percentage points,
but does not exceed the Performance of the Benchmark by twelve percentage
points, then the Monthly Advisory Fee will not be greater than one-twelfth of 1%
of the Portfolio's average daily net assets for the previous 12 months
(including the month for which the fee is being calculated). Notwithstanding
paragraphs 13(a)-13(g) above, if the Performance of a Portfolio (minus payment
of all expenses, including the Basic Fee and any Incentive Fee) is negative and
exceeds the Performance of the Benchmark by twelve percentage points, then the
Monthly Advisory Fee will not be greater than one-twelfth of 2% of the
Portfolio's average daily net assets for the previous 12 months (including the
month for which the fee is being calculated).
14. LIABILITY AND INDEMNIFICATION. The Portfolio Manager, the Manager and
the Trust each may rely on information reasonably believed by it to be accurate
and reliable. The Portfolio Manager shall not be liable to the Trust or its
shareholders for any loss suffered by the Trust as the result of any negligent
act or error of judgment of the Portfolio Manager in connection with the matters
to which this Agreement relates, except a loss resulting from a breach by the
Portfolio Manager of its fiduciary duty with respect to the receipt of
compensation for services (in which case any award of damages shall be limited
to the period and the amount set forth in Section 36(b)(3) of the 1940 Act) or
loss resulting from willful misfeasance, bad faith or gross negligence on its
part in the performance of its duties or from reckless disregard by it of its
obligations and duties under this Agreement. The Trust shall indemnify the
Portfolio Manager and
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hold it harmless from all cost, damage and expense, including reasonable
expenses for legal counsel, incurred by the Portfolio Manager resulting from
actions for which it is relieved of responsibility by this paragraph. The
Portfolio Manager shall indemnify the Trust and hold it harmless from all
cost, damage and expense, including reasonable expenses for legal counsel,
incurred by the Trust resulting from (i) a breach by the Portfolio Manager of
its fiduciary duty with respect to compensation for services paid by the
Trust (in which case any award of damages shall be limited to the period and
the amount set forth in Section 36(b)(3) of the 1940 Act); (ii) willful
misfeasance, bad faith or gross negligence by the Portfolio Manager in the
performance of its duties under this Agreement; or (iii) reckless disregard
by the Portfolio Manager of its obligations and duties under this Agreement.
15. CONTINUATION AND TERMINATION. This Agreement shall take effect on the
date first written above, and shall continue in effect, unless sooner terminated
as provided herein, for two years from such date and shall continue from year to
year thereafter so long as such continuance is specifically approved at least
annually (i) by the vote of a majority of the Board of Trustees; or (ii) by vote
of a majority of the outstanding voting shares of the Portfolio; provided,
further, in either event that continuance is also approved by the vote of a
majority of the Board of Trustees who are not parties to this Agreement or
"interested persons" (as defined in the 1940 Act) of the Trust, the Manager or
the Portfolio Manager cast in person at a meeting called for the purpose of
voting on such approval. This Agreement may be terminated (i) by the Trust at
any time, without the payment of any penalty, by vote of a majority of the
entire Board of Trustees or by a vote of a majority of the outstanding voting
shares of the Portfolio, on sixty (60) days' written notice to the Manager and
the Portfolio Manager, (ii) by the Manager at any time, without the payment of
any penalty, on ninety (90) days' written notice to the Trust and the Portfolio
Manager, or (iii) by the Portfolio Manager at any time, without the payment of
any penalty, on ninety (90) days' written notice to the Trust and the Manager.
This Agreement will automatically and immediately terminate in the event of its
"assignment" (as defined in the 1940 Act).
16. INDEPENDENT CONTRACTOR. The Portfolio Manager shall for all purposes
herein be deemed to be an independent contractor and shall, unless otherwise
expressly provided herein or authorized by the Board of Trustees from time to
time, have no authority to act for or represent the Trust in any way or
otherwise be deemed its agent.
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<PAGE>
17. USE OF NAME. It is understood that the words "Palladian" and "Fulcrum
Fund," any derivative thereof and any design associated with those words
(collectively, the "Words and Designs") are the valuable property of the
Manager, and that the Portfolio Manager shall have the right to use the Words
and Designs only with the approval of the Manager. Upon termination of this
Agreement, the Portfolio Manager shall promptly discontinue all use of the Words
and Designs.
18. SALES LITERATURE. The Manager agrees to furnish to the Portfolio
Manager all sales literature which refers to the Portfolio Manager prior to use
thereof and not to use such sales literature if the Portfolio Manager reasonably
objects in writing five business days (or such other time as may be mutually
agreed) after receipt thereof. Sales literature may be furnished to the
Portfolio Manager by first class mail, overnight delivery service, facsimile
transmission equipment, or hand delivery.
19. NOTICE. Notices of any kind to be given to the Trust shall be in
writing and shall be duly given if sent by first class mail or delivered to
the Trust at 4225 Executive Square, Suite 355, La Jolla, CA 92037, or at such
other address or to such individual as shall be specified by the Trust (with
proper notice to the Manager and the Portfolio Manager). Notices of any kind
to be given to the Manager shall be in writing and shall be duly given if
sent by first class mail or delivered to 4225 Executive Square, Suite 355, La
Jolla, CA 92037 or at such other address or to such individual as shall be
specified by the Manager (with proper notice to the Trust and the Portfolio
Manager). Notices of any kind to be given to the Portfolio Manager shall be
in writing and shall be duly given if sent by first class mail or delivered
to ____________________________________ or at such other address or to such
individual as shall be specified by the Portfolio Manager (with proper notice
to the Trust and the Manager).
20. OBLIGATION. A copy of the Trust's Agreement and Declaration of Trust
is on file with the Secretary of the Commonwealth of Massachusetts. Notice is
hereby given that this Agreement has been executed on behalf of the Trust by a
trustee of the Trust in his or her capacity as trustee and not individually.
The obligations of this Agreement shall only be binding upon the assets and
property of the Trust and shall not be binding upon any trustee, officer, or
shareholder of the Trust individually.
21. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original.
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<PAGE>
22. 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 SEC thereunder.
23. SEVERABILITY. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby and, to this extent, the provisions
of this Agreement shall be deemed to be severable.
24. CAPTIONS. The captions of this Agreement are included for convenience
only and in no way define or limit any of the provisions hereof or otherwise
affect their construction or effect.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below on the day and year first above
written.
The Palladian Trust
By:
- ---------------------------- ------------------------------
Witness Title:
Palladian Advisors, Inc.
By:
- ---------------------------- ------------------------------
Witness Title:
[Portfolio Manager]
By:
- ---------------------------- ------------------------------
Witness Title:
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<PAGE>
Exhibit 5(c)
SUBSTITUTION AGREEMENT
Agreement, made this 11th day of February, 1998, by and among Palladian
Advisors, Inc. ("PAI"), a Delaware corporation; Allmerica Investment
Management Company, Inc. ("AIMCO"), a Massachusetts corporation; [Portfolio
Manager], a ______________ corporation (the "Portfolio Manager"); and The
Palladian Trust (the "Trust"), a Massachusetts business trust.
WHEREAS, the Trust is registered with the Securities and Exchange
Commission as an open-end management investment company under the Investment
Company Act of 1940, as amended ("Act"), and the Trust issues shares in
several different classes, each of which is known as a "Portfolio"; and
WHEREAS, PAI has served as Manager to the Trust pursuant to a Management
Agreement between the Trust and PAI dated October 12, 1995; and
WHEREAS, the Trust and PAI entered into a Portfolio Management Agreement
with the Portfolio Manager, dated October 12, 1995 (the "Portfolio Management
Agreement"), under which the Portfolio Manager currently serves as the
Portfolio Manager for the ______________ Portfolio of the Trust; and
WHEREAS, the Trust and PAI have terminated the Management Agreement with
PAI, effective at the close of business on February 11, 1998; and
WHEREAS, commencing February 12, 1998, AIMCO has agreed to serve as
Manager to the Trust pursuant to a new Management Agreement between the Trust
and AIMCO dated February 12, 1998; and
WHEREAS, the Management Agreement between AIMCO and the Trust is subject
to approval by the vote of a majority of the outstanding voting securities of
each Portfolio of the Trust, and a special meeting of shareholders must be
held within a 120-day period after February 11, 1998 for purposes of
obtaining such approval; and
WHEREAS, PAI, the Portfolio Manager, and the Trust desire to substitute
AIMCO as a party to the Portfolio Management Agreement in the place of PAI
and AIMCO desires to be substituted as a party to the Portfolio Management
Agreement in the place of PAI.
Therefore, the parties agree as follows:
1. SUBSTITUTION OF PARTY. Effective as of February 12, 1998, AIMCO is
hereby substituted as a party to the Portfolio Management Agreement in the
place of PAI. The substitution shall be effective for a period of 120 days
after February 11, 1998,
<PAGE>
2
and shall be effective thereafter subject to approval of the Management
Agreement between AIMCO and the Trust by the vote of a majority of the
outstanding voting securities of the ______________ Portfolio of the Trust at
a meeting of shareholders, which will be held within a 120-day period after
February 11, 1998. In the event that shareholders of the ______________
Portfolio do not approve the Management Agreement as provided above, the
Portfolio Management Agreement shall terminate as of the close of business on
the 120th day after February 11, 1998.
2. PERFORMANCE OF DUTIES. As of the effectiveness of the substitution
as described above, AIMCO hereby assumes and agrees to perform all of PAI's
duties and obligations under the Portfolio Management Agreement and be
subject to all of the terms and conditions of said Agreement as if they
applied to PAI. AIMCO shall not be responsible for any claim or demand
arising under the Portfolio Management Agreement from services rendered prior
to the effective date of this Substitution Agreement unless otherwise agreed
by AIMCO, and PAI shall not be responsible for any claim or demand arising
under the Portfolio Management Agreement from services rendered after the
effective date of this Substitution Agreement unless otherwise agreed by PAI.
3. REPRESENTATION OF AIMCO. AIMCO represents and warrants that it is
registered as an investment adviser under the Investment Advisers Act of 1940.
4. CONSENT. The Trust and the Portfolio Manager hereby consent to
this substitution of AIMCO as a party to the Portfolio Management Agreement
in the place of PAI and the assumption by AIMCO of PAI's interest in such
Agreement and the duties and obligations thereunder, and agree, subject to
the terms and conditions of said Agreement, to look to AIMCO for the
performance of the Manager's duties and obligations under said Agreement
after the effective date as described above.
5. INDEMNIFICATION BY AIMCO. Notwithstanding any limitation of
liability in the Portfolio Management Agreement, AIMCO shall indemnify and
hold harmless the Portfolio Manager, its affiliates and the directors,
officers, agents and employees of the foregoing (each an "Indemnified
Person") from all cost, damage and expense, including reasonable expenses for
legal counsel, incurred by an Indemnified Person as a result of the AIMCO's
actions or omissions in performing its duties under the Portfolio Management
Agreement that constitute negligence, bad faith, breach of trust or fiduciary
duty, a material violation of one or more of the Portfolio Management
Agreement, fraud, reckless or intentional misconduct, or violation of law or
regulation. In the event an Indemnified Person receives a demand, claim or
lawsuit relating to the Trust, its shares, and/or the Agreements, the
Indemnified Person shall promptly notify AIMCO and the Portfolio Manager.
<PAGE>
3
6. INDEMNIFICATION BY PORTFOLIO MANAGER. Notwithstanding any
limitation of liability in the Portfolio Management Agreement, the Portfolio
Manager shall indemnify and hold harmless AIMCO, its affiliates and the
directors, officers, agents and employees of the foregoing (each an
"Indemnified Person") from all cost, damage and expense, including reasonable
expenses for legal counsel, incurred by an Indemnified Person as a result of
the Portfolio Manager's actions or omissions in performing its duties under
the Portfolio Management Agreement that constitute negligence, bad faith,
breach of trust or fiduciary duty, a material violation of the Portfolio
Management Agreement, fraud, reckless or intentional misconduct, or violation
of law or regulation. In the event an Indemnified Person receives a demand,
claim or lawsuit relating to the Trust, its shares, and/or the Agreements,
the Indemnified Person shall promptly notify AIMCO and the Portfolio Manager.
7. NOTICE. Notices shall be in writing and shall be duly given if
sent by first class mail or delivered to the following addresses or to such
other address as shall be specified by a party with proper notice to the
other parties:
IF AS TO AIMCO:
Allmerica Investment Management
Company, Inc.
440 Lincoln Street
Worcester, MA 01653
Attn: President
IF AS TO THE TRUST:
The Palladian Trust
440 Lincoln Street
Worcester, MA 01653
Attn: President
IF AS TO PAI:
Palladian Advisors, Inc.
701 Palomar Airport Road
Suite 300
Carlsbad, CA 92009
Attn: President
IF AS TO THE PORTFOLIO MANAGER:
[address]
8. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an
<PAGE>
4
original.
9. CAPTIONS. The captions of this Agreement are included for
convenience only and in no way define or limit any of the provisions hereof
or otherwise affect their construction or effect.
IN WITNESS WHEREOF, the parties hereto have caused this Substitution
Agreement to be executed by their duly authorized officers as of the date and
year first written above.
Palladian Advisors, Inc.
________________________ By: ________________________
Witness H. Michael Schwartz
President
Allmerica Investment Management
Company, Inc.
________________________ By: ________________________
Witness
________________________
Title
____________________________
(Portfolio Manager)
________________________ By: ________________________
Witness
________________________
Title
The Palladian Trust
________________________ By: ________________________
Witness Title:
<PAGE>
Global Strategic Income Portfolio
Portfolio Manager Agreement
Exhibit 5(d)
GLOBAL STRATEGIC INCOME PORTFOLIO
PORTFOLIO MANAGER AGREEMENT
Agreement, made this ___ day of April, 1998, among The Palladian
Trust (the "Trust"), a Massachusetts business trust; Allmerica Investment
Management Company, Inc. (the "Manager"), a Massachusetts corporation; and
Allmerica Asset Management, Inc. (the "Portfolio Manager"), a Massachusetts
corporation.
WHEREAS, the Trust is a diversified, open-end management investment
company registered under the Investment Company Act of 1940, as amended (the
"1940 Act"); and
WHEREAS, the Manager and the Portfolio Manager are both registered
as investment advisers under the Investment Advisers Act of 1940; and
WHEREAS, the Trust is authorized to issue shares of beneficial
interest in separate portfolios with each such portfolio representing
interests in a separate portfolio of securities and other assets; and
WHEREAS, the Manager has entered into a management agreement with
the Trust, pursuant to which the Manager will provide, among other services,
advice with respect to the selection and monitoring of portfolio managers to
handle the day-to-day investment management of certain portfolios; and
WHEREAS, the Trust and the Manager desire to retain the Portfolio
Manager to provide investment advisory services to the Global Strategic
Income Portfolio of the Trust (the "Portfolio"), and the Portfolio Manager is
willing to render such services.
Therefore, the parties agree as follows:
1. APPOINTMENT. The Trust hereby appoints the Portfolio Manager to
provide investment advisory services with respect to the Portfolio for the
period and on the terms set forth in this Agreement, subject to the direction
of the Board of Trustees of the Trust (the "Board of Trustees"). The
Portfolio Manager accepts such appointment and agrees to render the services
described herein for the compensation provided in paragraph 13.
2. SERVICES OF THE PORTFOLIO MANAGER.
(a) Subject to the supervision of the Board of Trustees, the
Portfolio Manager will provide day-to-day investment management of the
Portfolio. The Portfolio Manager will provide investment research and
conduct a continuous program of evaluation, investment, sales, and
reinvestment of the Portfolio's assets by determining the securities and
other investments that shall be purchased, entered into, sold, closed, or
exchanged for the Portfolio, when these transactions should be executed, and
what portion of the assets of the Portfolio should be held in the various
securities and other investments in which it may invest. The Portfolio
Manager is hereby authorized to execute and perform such services on behalf
of the Portfolio. To the extent permitted by the investment policies of the
Portfolio, the Portfolio Manager shall make decisions for the Portfolio as to
foreign currency matters and make determinations as to, and execute and
perform, foreign currency exchange contracts on behalf of the Portfolio. The
Portfolio Manager will provide the services under this Agreement in
accordance with the Portfolio's investment objective or objectives, policies,
and restrictions as stated in the Trust's registration statement under the
Securities Act of 1933 and the 1940 Act as filed with the Securities and
Exchange Commission ("SEC") and amended from time to time (the "Registration
Statement").
<PAGE>
(b) The Portfolio Manager will use reasonable efforts to manage
the Portfolio so that it will (1) qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code, (2) comply with the
diversification requirements of Section 817(h) of the Internal Revenue Code
and regulations issued thereunder, and (3) comply with any other rules and
regulations pertaining to investment vehicles underlying variable annuity or
variable life insurance policies. In managing the Portfolio in accordance
with these requirements, the Portfolio Manager shall be entitled to receive
and act upon advice of counsel to the Trust or counsel to the Manager.
(c) On occasions when the Portfolio Manager deems the purchase or
sale of a security to be in the best interest of the Portfolio as well as any
other investment advisory clients, the Portfolio Manager may, to the extent
permitted by applicable laws and regulations, including, but not limited to
Section 17(d) of the 1940 Act, but shall not be obligated to, aggregate the
securities to be so sold or purchased with those of its other clients where
such aggregation is not inconsistent with the policies set forth in the
Registration Statement. In such event, allocation of the securities so
purchased or sold, as well as the expenses incurred in the transaction, will
be made by the Portfolio Manager in a manner that is fair and equitable in
the judgment of the Portfolio Manager in the exercise of its fiduciary
obligations to the Trust and to such other clients.
(d) In connection with the purchase and sale of securities for the
Portfolio, the Portfolio Manager will arrange for the transmission to the
custodian for the Trust on a daily basis, such confirmation, trade tickets,
and other documents and information as may be reasonably necessary to enable
the custodian to perform its administrative and recordkeeping
responsibilities with respect to the Portfolio. With respect to portfolio
securities to be purchased or sold through the Depository Trust Company, the
Portfolio Manager will arrange for the automatic transmission of the
confirmation of such trades to the Trust's custodian. The Portfolio Manager
will provide to the Manager copies of the documents and information sent to
the custodian and the Depository Trust Company as requested by the Manager.
(e) The Portfolio Manager will assist the custodian or
recordkeeping agent for the Trust in determining, consistent with the
procedures and policies stated in the Registration Statement, the value of
any portfolio securities or other assets of the Portfolio for which the
custodian or recordkeeping agent seeks assistance or review from the
Portfolio Manager. The Portfolio Manager will monitor on a daily basis the
determination by the custodian or recordkeeping agent for the Trust the value
of portfolio securities and other assets of the Portfolio and the
determination of net asset value of the Portfolio.
(f) The Portfolio Manager shall regularly report to the Board of
Trustees on the investment program for the Portfolio, and will furnish the
Board of Trustees such periodic and special reports as the Board may
reasonably request.
(g) The Portfolio Manager shall make its officers and employees
available to the Board of Trustees, officers of the Trust, and officers of
the Manager for consultation and discussions regarding the investment program
for the Portfolio.
3. BROKER-DEALER SELECTION. The Portfolio Manager is responsible for
decisions to buy and sell securities and other investments for the Portfolio,
broker-dealer selection, and negotiation of brokerage commission rates. The
Portfolio Manager's primary consideration in effecting a security transaction
will be to obtain the best execution for the Portfolio, taking into account
the factors specified in the Registration Statement. Subject to the
Registration Statement and such policies as the Board of Trustees may
determine and consistent with Section 28(e) of the Securities Exchange Act of
1934, the Portfolio Manager shall not be deemed to have acted unlawfully or
to have breached any duty created by this Agreement or otherwise solely by
reason of its having caused the Portfolio to pay a broker-dealer for
effecting a portfolio investment transaction in excess of the amount of
commission another broker-dealer would have charged for effecting that
transaction, if the Portfolio Manager determines in good faith that such
amount of commission was reasonable in relation to the value of the brokerage
and research services provided by such broker-dealer, viewed in terms of
either that particular transaction or the Portfolio Manager's overall
responsibilities with respect to the Portfolio and to its other clients as to
which it exercises investment discretion.
<PAGE>
4. EMPLOYEES. In rendering the services required under this
Agreement, the Portfolio Manager may, from time to time, employ such person
or persons as it believes necessary to assist it in carrying out its
obligations under this Agreement. The Portfolio Manager shall be responsible
for making reasonable inquiries and for reasonably ensuring that no employee
of the Portfolio Manager:
(a) has been convicted, in the last ten (10) years, of any felony or
misdemeanor arising out of conduct involving embezzlement, fraudulent
conversion, or misappropriation of funds or securities, or involving
violations of Sections 1341, 1342, or 1343 of Title 18, United States
Code; or
(b) has been found by any state regulatory authority, within the last
ten (10) years, to have violated or to have acknowledged violation of
any provision of any state insurance law involving fraud, deceit, or
knowing misrepresentation; or
(c) has been found by any federal or state regulatory authorities,
within the last ten (10) years, to have violated or to have
acknowledged violation of any provisions of federal or state
securities laws involving fraud, deceit, or knowing misrepresentation;
or
(d) is ineligible by reason of Section 9 of the 1940 Act to serve as
an employee of an investment adviser to an investment company.
5. CONFORMITY WITH APPLICABLE LAW. The Portfolio Manager, in the
performance of its duties and obligations under this Agreement, shall act in
conformity with the Registration Statement and with the instructions and
directions of the Board of Trustees and will conform to, and comply with, the
requirements of the 1940 Act and all other applicable federal and state laws
and regulations.
6. EXCLUSIVITY. The services of the Portfolio Manager under this
Agreement are not deemed exclusive, and the Portfolio Manager, or any
affiliate thereof, shall be free to render similar services to other
investment companies and other clients and to engage in other activities, so
long as its services hereunder are not impaired thereby.
7. DOCUMENTS. The Trust has delivered copies of each of the following
documents to the Portfolio Manager and will deliver to it all future
amendments and supplements thereto, if any:
(a) the Trust's Declaration of Trust and its by-laws;
(b) the Registration Statement; and
(c) the prospectus and statement of additional information of the
Trust as currently in effect and as amended and supplemented from time to
time.
8. RECORDS. The Portfolio Manager agrees to maintain and to preserve
records relating to the Trust as required by the 1940 Act. The Portfolio
Manager further agrees that all records which it maintains for the Trust are
the property of the Trust and it will promptly surrender any of such records
upon request.
<PAGE>
9. DISCLOSURE BY PORTFOLIO MANAGER. The Portfolio Manager will not
disclose or use any records or information obtained pursuant to this
Agreement (excluding investment research and investment advice) in any manner
whatsoever except as required to carry out its duties as investment adviser
or in the ordinary course of business in connection with placing orders for
the purchase and sale of securities, and will keep confidential any
information obtained pursuant to this Agreement, and disclose such
information only if the Board of Trustees has authorized such disclosure, or
if such disclosure is expressly required by applicable federal or state law
or regulations or regulatory authorities having the requisite authority.
10. DISCLOSURE ABOUT PORTFOLIO MANAGER. The Portfolio Manager will
cooperate with the Trust and the Manager by providing and reviewing
information relating to the Portfolio Manager and the Portfolio for use in
the Registration Statement, shareholder reports and other documents. The
Portfolio Manager represents and warrants that it is a duly registered
investment adviser under the Investment Advisers Act of 1940 and a duly
registered investment adviser in all states in which the Portfolio Manager is
required to be registered.
11. COMPLIANCE. The Portfolio Manager agrees that it shall immediately
notify the Manager and the Trust in the event that:
(a) the SEC has censured the Portfolio Manager; placed limitations
upon its activities, functions or operations; suspended or revoked its
registration as an investment adviser; or commenced proceedings or an
investigation that may result in any of these actions; or
(b) the Portfolio Manager has a reasonable basis for believing
that the Portfolio has ceased to qualify or might not qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code; or
(c) the Portfolio Manager has a reasonable basis for believing
that the Portfolio has ceased to comply or might not comply with the
diversification provisions of Section 817(h) of the Internal Revenue Code or
the regulations thereunder; or
(d) the Portfolio Manager has become aware of a material fact that
is not contained in the Registration Statement or prospectus for the Trust,
or any amendment or supplement thereto, or that any statement contained
therein that has become untrue or misleading in any material respect.
12. EXPENSES. During the term of this Agreement, the Portfolio Manager
will pay all expenses incurred by it in connection with its activities under
this Agreement, including all rent and other expenses involved in providing
office space and equipment required by the Portfolio Manager and the salaries
and expenses of all personnel of the Portfolio Manager. The Portfolio
Manager further agrees to pay all salaries, fees and expenses of any officer
or trustee of the Trust who is an officer, director or employee of the
Portfolio Manager or any of its affiliates. Nothing in this Agreement shall
require the Portfolio Manager to bear the following expenses:
(a) Fees of the Manager and the Portfolio Advisor;
(b) Charges for audits by the Trust's independent public accountants;
(c) Charges of the Trust's transfer agent, registrar, and/or dividend
disbursing agent;
(d) Charges of the Trust's custodian and/or accountant;
(e) Costs of obtaining quotations for calculating the value of each
Portfolio's net assets;
(f) Costs of maintaining the Trust's tax records;
(g) Salaries and other compensation of any of the Trust's
executive officers and employees, if any, who are not officers, directors, or
employees of the Portfolio Manager or any of its affiliates;
(h) Taxes levied against the Trust;
(i) Brokerage fees and commissions in connection with the purchase
and sale of portfolio securities for the Trust;
(j) Costs, including the interest expense, of borrowing by the Trust;
<PAGE>
(k) Costs and/or fees incident to meetings of the Trust's
shareholders, the preparation and mailings of prospectuses, reports, proxy
statements and other communications by the Trust to its shareholders, the
filing of reports with regulatory bodies, the maintenance of the Trust's
existence, and the registration of shares with federal and state securities
or insurance authorities;
(l) The Trust's legal fees, including the legal fees related to
the registration and continued qualification of the Trust's shares for sale;
(m) Costs of printing stock certificates representing shares of
the Trust;
(n) Trustees' fees and expenses of Trustees who are not officers,
directors, or employees of the Portfolio Manager or any affiliates;
(o) Trust's pro rata portion of the fidelity bond required by
Section 17(g) of the 1940 Act, or other insurance premiums;
(p) Membership dues for any association of which the Trust is a
member;
(q) Extraordinary expenses of the Trust as may arise, including
expenses incurred in connection with litigation, proceedings, other claims
against the Trust (unless the Portfolio Manager is responsible for such
expenses under paragraph 14 of this Agreement), and the legal obligations of
the Trust to indemnify its trustees, officers, employees, shareholders,
distributors, and agents with respect to such claims; and
(r) Organizational and offering expenses of the Trust and, if
applicable, reimbursement (with interest) of underwriting discounts and
commissions.
13. COMPENSATION.
(a) For the services provided and the expenses borne by the
Portfolio Manager pursuant to this Agreement, the Trust will pay the
Portfolio Manager 80% of the Initial Monthly Advisory Fee or the Monthly
Advisory Fee, as those terms are defined in this paragraph, whichever is
applicable.
(b) For the period beginning with the effective date of this
Agreement and ending with the last day of the twelfth full calendar month
thereafter, the Portfolio will pay at the end of each month, an advisory fee
calculated at an annual rate of 0.80% of the Portfolio's average daily net
assets (the "Initial Monthly Advisory Fee").
(c) For the period beginning with the first day of the thirteenth
full calendar month after the effective date of this Agreement and continuing
through the remainder of the term of this Agreement, the Portfolio will pay
at the end of each month, an advisory fee (the "Monthly Advisory Fee"). The
Monthly Advisory Fee equals the Basic Fee (as defined in paragraph 13(d)
below) plus the Incentive Fee (as defined in paragraph 13(e) below) and
adjusted, if so required, by paragraph 13(h) below.
(d) The Basic Fee equals one-twelfth of 2% multiplied by the
Portfolio's average daily net assets for the previous 12 months (including
the month for which the fee is being calculated).
(e) The Incentive Fee equals: (i) one-twelfth of the Annual
Incentive Fee set forth in the chart below based on the difference between
the Performance of the Portfolio and the Performance of the Benchmark, as
those terms are defined in paragraphs 13(f) and 13(g) below; (ii) multiplied
by the Portfolio's average daily net assets for the previous 12 months
(including the month for which the fee is being calculated).
<PAGE>
<TABLE>
<CAPTION>
Annual
Percentage Point Difference Between Performance of the Portfolio Incentive
and Performance of the Benchmark Fee (%)
- ------------------------------------------------------------------------------------
<S> <C>
+7.5 or greater 2.0%
+6.0 or greater, but less than +7.5 1.5
+4.5 or greater, but less than +6.0 1.0
+3.0 or greater, but less than +4.5 0.5
+1.5 or greater, but less than +3.0 0.0
0.0 or greater, but less than +1.5 -0.5
-1.5 or greater, but less than 0.0 -1.0
-3.0 or greater, but less than -1.5 -1.5
Less than -3.0 -2.0
</TABLE>
(f) The Performance of the Portfolio will be calculated by first
determining the change in the Portfolio's net asset value per share during
the previous twelve months (including the month for which the fee is being
computed) assuming the reinvestment of distributions during that period, and
then expressing this amount as a percentage of the net asset value per share
at the beginning of the period. Net asset value per share is calculated by
dividing the value of the securities held by the Portfolio plus any cash or
other assets minus all liabilities including accrued advisory fees and the
other expenses, by the total number of shares outstanding at the time. The
Performance of the Portfolios shall be calculated in accordance with SEC
rules.
(g) The Performance of the Benchmark will be calculated by first
determining the change in the level of the Benchmark during the previous
twelve months (including the month for which the fee is being computed) plus
the value of any cash dividends or distributions made by the companies whose
securities comprise the Benchmark accumulated to the end of the period, and
then expressing this amount as a percentage of the Benchmark at the beginning
of the period. The Performance of the Benchmark shall be calculated in
accordance with SEC rules. The Benchmark is _____________________________.
If the Benchmark ceases to be published, changes in any material respect or
otherwise becomes impracticable to use for purposes of the Incentive Fee, the
Monthly Advisory Fee will equal the Basic Fee (with no incentive adjustment)
until such time as the Board of Trustees approves a substitute Benchmark.
<PAGE>
(h) Notwithstanding paragraphs 13(a)-13(g) above, if the
Performance of a Portfolio (minus payment of all expenses, including the
Basic Fee and any Incentive Fee) is negative and does not exceed the
Performance of the Benchmark by six percentage points, then the Monthly
Advisory Fee will equal zero. Notwithstanding paragraphs 13(a)-13(g) above,
if the Performance of a Portfolio (minus payment of all expenses, including
the Basic Fee and any Incentive Fee) is negative, exceeds the Performance of
the Benchmark by six percentage points, but does not exceed the Performance
of the Benchmark by twelve percentage points, then the Monthly Advisory Fee
will not be greater than one-twelfth of 1% of the Portfolio's average daily
net assets for the previous 12 months (including the month for which the fee
is being calculated). Notwithstanding paragraphs 13(a)-13(g) above, if the
Performance of a Portfolio (minus payment of all expenses, including the
Basic Fee and any Incentive Fee) is negative and exceeds the Performance of
the Benchmark by twelve percentage points, then the Monthly Advisory Fee will
not be greater than one-twelfth of 2% of the Portfolio's average daily net
assets for the previous 12 months (including the month for which the fee is
being calculated).
14. LIABILITY AND INDEMNIFICATION. The Portfolio Manager, the Manager
and the Trust each may rely on information reasonably believed by it to be
accurate and reliable. The Portfolio Manager shall not be liable to the
Trust or its shareholders for any loss suffered by the Trust as the result of
any negligent act or error of judgment of the Portfolio Manager in connection
with the matters to which this Agreement relates, except a loss resulting
from a breach by the Portfolio Manager of its fiduciary duty with respect to
the receipt of compensation for services (in which case any award of damages
shall be limited to the period and the amount set forth in Section 36(b)(3)
of the 1940 Act) or loss resulting from willful misfeasance, bad faith or
gross negligence on its part in the performance of its duties or from
reckless disregard by it of its obligations and duties under this Agreement.
The Trust shall indemnify the Portfolio Manager and hold it harmless from all
cost, damage and expense, including reasonable expenses for legal counsel,
incurred by the Portfolio Manager resulting from actions for which it is
relieved of responsibility by this paragraph. The Portfolio Manager shall
indemnify the Trust and hold it harmless from all cost, damage and expense,
including reasonable expenses for legal counsel, incurred by the Trust
resulting from (i) a breach by the Portfolio Manager of its fiduciary duty
with respect to compensation for services paid by the Trust (in which case
any award of damages shall be limited to the period and the amount set forth
in Section 36(b)(3) of the 1940 Act); (ii) willful misfeasance, bad faith or
gross negligence by the Portfolio Manager in the performance of its duties
under this Agreement; or (iii) reckless disregard by the Portfolio Manager of
its obligations and duties under this Agreement.
15. CONTINUATION AND TERMINATION. This Agreement shall take effect on
the date first written above, and shall continue in effect, unless sooner
terminated as provided herein, for 119 days thereafter, and provided that the
Agreement is approved by a majority of the outstanding voting shares of the
Portfolio by the end of such 119th day, shall continue for two years from the
date of this Agreement and shall continue from year to year thereafter so
long as such continuance is specifically approved at least annually (i) by
the vote of a majority of the Board of Trustees; or (ii) by vote of a
majority of the outstanding voting shares of the Portfolio; provided,
further, in either event that continuance is also approved by the vote of a
majority of the Board of Trustees who are not parties to this Agreement or
"interested persons" (as defined in the 1940 Act) of the Trust, the Manager
or the Portfolio Manager cast in person at a meeting called for the purpose
of voting on such approval. This Agreement may be terminated (i) by the
Trust at any time, without the payment of any penalty, by vote of a majority
of the entire Board of Trustees or by a vote of a majority of the outstanding
voting shares of the Portfolio, on sixty (60) days' written notice to the
Manager and the Portfolio Manager, (ii) by the Manager at any time, without
the payment of any penalty, on ninety (90) days' written notice to the Trust
and the Portfolio Manager, or (iii) by the Portfolio Manager at any time,
without the payment of any penalty, on ninety (90) days' written notice to
the Trust and the Manager. This Agreement will automatically and immediately
terminate in the event of its "assignment" (as defined in the 1940 Act).
<PAGE>
16. INDEPENDENT CONTRACTOR. The Portfolio Manager shall for all
purposes herein be deemed to be an independent contractor and shall, unless
otherwise expressly provided herein or authorized by the Board of Trustees
from time to time, have no authority to act for or represent the Trust in any
way or otherwise be deemed its agent.
17. USE OF NAME. It is understood that the words "Palladian" and
"Fulcrum Fund," any derivative thereof and any design associated with those
words (collectively, the "Words and Designs") are the valuable property of
the Trust, and that the Portfolio Manager shall have the right to use the
Words and Designs only with the approval of the Trust. Upon termination of
this Agreement, the Portfolio Manager shall promptly discontinue all use of
the Words and Designs.
18. SALES LITERATURE. The Manager agrees to furnish to the Portfolio
Manager all sales literature which refers to the Portfolio Manager prior to
use thereof and not to use such sales literature if the Portfolio Manager
reasonably objects in writing five business days (or such other time as may
be mutually agreed) after receipt thereof. Sales literature may be furnished
to the Portfolio Manager by first class mail, overnight delivery service,
facsimile transmission equipment, or hand delivery.
19. NOTICE. Notices of any kind to be given to the Trust shall be in
writing and shall be duly given if sent by first class mail or delivered to
the Trust at 440 Lincoln Street, Worcester, MA 01653, or at such other
address or to such individual as shall be specified by the Trust (with proper
notice to the Manager and the Portfolio Manager). Notices of any kind to be
given to the Manager shall be in writing and shall be duly given if sent by
first class mail or delivered to the Manager at 440 Lincoln Street,
Worcester, MA 01653, or at such other address or to such individual as shall
be specified by the Manager (with proper notice to the Trust and the
Portfolio Manager). Notices of any kind to be given to the Portfolio Manager
shall be in writing and shall be duly given if sent by first class mail or
delivered to the Portfolio Manager at 440 Lincoln Street, Worcester, MA
01653, or at such other address or to such individual as shall be specified
by the Portfolio Manager (with proper notice to the Trust and the Manager).
20. OBLIGATION. A copy of the Trust's Agreement and Declaration of
Trust is on file with the Secretary of the Commonwealth of Massachusetts.
Notice is hereby given that this Agreement has been executed on behalf of the
Trust by a trustee of the Trust in his or her capacity as trustee and not
individually. The obligations of this Agreement shall only be binding upon
the assets and property of the Trust and shall not be binding upon any
trustee, officer, or shareholder of the Trust individually.
21. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original.
22. APPLICABLE LAW. This Agreement shall be governed by the laws of
Massachusetts, provided that nothing herein shall be construed in a manner
inconsistent with the 1940 Act, the Investment Advisers Act of 1940, or any
rules or order of the SEC thereunder.
23. SEVERABILITY. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder
of this Agreement shall not be affected thereby and, to this extent, the
provisions of this Agreement shall be deemed to be severable.
24. CAPTIONS. The captions of this Agreement are included for
convenience only and in no way define or limit any of the provisions hereof
or otherwise affect their construction or effect.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument
to be executed by their officers designated below on the day and year first
above written.
The Palladian Trust
By: Witness
- ---------------------- ----------------------
George M. Boyd Assistant Secretary
Allmerica Investment Management
Company, Inc.
By:
- ---------------------- ----------------------
Witness Name:
Title:
Allmerica Asset Management, Inc.
By:
- ---------------------- ----------------------
Witness Name:
Title:
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in Post-Effective Amendment No. 6 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 included in the Post-Effective Amendment to the Registration
Statement. We also consent to the reference to our Firm in the Prospectus
under the caption "Financial Highlights" and the Statement of Additional
Information under the caption "Service Providers"
Baltimore, Maryland COOPERS & LYBRAND L.L.P.
May 1, 1998
<PAGE>
Exhibit 19
Page 1 of 2
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS:
That I, Matthew J. Stacom, of Fisher Island, Florida, as a trustee of THE
PALLADIAN TRUST, do hereby make, constitute and appoint as my true and lawful
attorneys in fact Thomas P. Cunningham, George M. Boyd and Christopher E.
Palmer, or any one of them alone, for me and in my name, place and stead to sign
registration statements under the Securities Act of 1933 and/or the Investment
Company Act of 1940 and any and all amendments thereto executed on behalf of THE
PALLADIAN TRUST, and filed with the Securities and Exchange Commission.
IN WITNESS WHEREOF, I have hereunto set my hand this 9th day of April,
1998.
/s/ Matthew J. Stacom
------------------------------
Signature
On this 9th day of April, 1998, before me personally appeared Matthew J.
Stacom, to me known and known to me to be the person mentioned and described in
and who executed the foregoing instrument and he duly acknowledged to me that he
executed the same.
/s/
------------------------------
Notary Public
<PAGE>
Exhibit 19
Page 2 of 2
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS:
That I, Thomas N. Dallape, of Irvine, California, as a trustee of THE
PALLADIAN TRUST, do hereby make, constitute and appoint as my true and lawful
attorneys in fact Thomas P. Cunningham, George M. Boyd and Christopher E.
Palmer, or any one of them alone, for me and in my name, place and stead to sign
registration statements under the Securities Act of 1933 and/or the Investment
Company Act of 1940 and any and all amendments thereto executed on behalf of THE
PALLADIAN TRUST, and filed with the Securities and Exchange Commission.
IN WITNESS WHEREOF, I have hereunto set my hand this 9th day of April,
1998.
/s/ Thomas N. Dallape
------------------------------
Signature
On this 9th day of April, 1998, before me personally appeared Thomas N.
Dallape, to me known and known to me to be the person mentioned and described in
and who executed the foregoing instrument and he duly acknowledged to me that he
executed the same.
/s/
------------------------------
Notary Public
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<PAGE>
<ARTICLE> 6
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<NAME> VALUE PORTFOLIO
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<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> INTERNATIONAL GROWTH
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<PERIOD-START> JAN-01-1997
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<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> GLOBAL STRATEGIC INCOME
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<PER-SHARE-GAIN-APPREC> (.30)
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
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<NAME> GLOBAL TELECOMM/PORTFOLIO
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</TABLE>
