<PAGE>
As filed with the Securities and Exchange Commission on April 30, 1999
File Nos. 811-08278 and 033-73882
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. ____ [ ]
Post-Effective Amendment No. 10 [ X ]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 13 [ X ]
THE FULCRUM TRUST
(Name of Registrant)
440 Lincoln Street
WORCESTER, MASSACHUSETTS 01653
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code:
(800) 917-1909
(Names and Addresses of Agents for Service:)
George M. Boyd, Esq. Christopher E. Palmer, Esq.
Allmerica Financial Shea & Gardner
440 Lincoln Street 1800 Massachusetts Avenue, NW
Worcester, MA 01653 Washington, DC 20036
Approximate Date of Proposed Public Offering CONTINUOUS
It is proposed that this filing will become effective:
___ immediately upon filing pursuant to paragraph (b)
_X_ on May 1, 1999 pursuant to paragraph (b)
___ 60 days after filing pursuant to paragraph (a)(1)
___ on (date) pursuant to paragraph (a)(1)
___ 75 days after filing pursuant to paragraph (a)(2)
___ on (date) pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
___ This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
THE FULCRUM TRUST
PROSPECTUS
May 1, 1999
This prospectus offers shares of five investment Portfolios of
the Trust designed to provide the underlying investment vehicles
for insurance contracts and qualified retirement plan accounts:
THE GLOBAL INTERACTIVE/TELECOMM PORTFOLIO
THE INTERNATIONAL GROWTH PORTFOLIO
THE GROWTH PORTFOLIO
THE VALUE PORTFOLIO
THE STRATEGIC INCOME PORTFOLIO
This Prospectus explains what you should know about each of the
Portfolios before you invest. Please read it carefully before
you invest.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES
OR PASSED ON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE
FULCRUM
TRUST
440 Lincoln Street
Worcester, Massachusetts 01653
(800) 917-1909
<PAGE>
TABLE OF CONTENTS
PORTFOLIO SUMMARIES 3
Objectives, Strategies and Risks 4
The Global Interactive/Telecomm Portfolio 4
The International Growth Portfolio 5
The Growth Portfolio 6
The Value Portfolio 7
The Strategic Income Portfolio 8
EXPENSE SUMMARY 9
DESCRIPTION OF PRINCIPAL INVESTMENT RISKS 13
OTHER INVESTMENT STRATEGIES 15
MANAGEMENT OF THE PORTFOLIOS 17
MANAGEMENT AND PORTFOLIO MANAGEMENT 20
INVESTMENT ADVISORY FEES
EXPENSE LIMITATIONS 23
PRICING, PURCHASE AND REDEMPTION 24
DISTRIBUTIONS AND TAXES 25
YEAR 2000 25
FINANCIAL HIGHLIGHTS 27
APPENDIX 30
LEGEND
Performance [GRAPHIC]
Investment [GRAPHIC]
Objectives
Financial [GRAPHIC]
Information
Management [GRAPHIC]
of Fund
Risk [GRAPHIC]
Investment [GRAPHIC]
Strategies
The Fulcrum Trust 1
<PAGE>
PORTFOLIO SUMMARIES
The Fulcrum Trust provides a range of investment options through five separate
investment Portfolios. Shares of the Portfolios are sold exclusively 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. as Manager is
responsible for managing the Trust's daily business and has general
responsibility for the management of the investments of the Portfolios. The
Portfolio Managers have been hired to manage the investments of the Portfolios.
The following summaries describe each Portfolio's investment objective and
principal investment strategies and identify the principal risks of investing in
the Portfolio. The principal risks are discussed in more detail under
"Description of Principal Investment Risks". The bar charts show how investment
returns of the shares of a Portfolio have varied for the life of the Portfolio.
The table following each bar chart shows how the Portfolio's average annual
returns for the last one year and life of the Portfolio compare to those of a
broad-based securities market index. PAST PERFORMANCE DOES NOT NECESSARILY
INDICATE HOW THE PORTFOLIO WILL PERFORM IN THE FUTURE. The bar charts and tables
give some indication of the risks of investing in each Portfolio by showing
changes in the Portfolio's performance. The bar charts and tables do not reflect
expenses associated with the variable insurance product that you are purchasing.
If those expenses had been reflected, the performance shown would have been
lower.
The Fulcrum Trust 3
<PAGE>
OBJECTIVES, STRATEGIES AND RISKS
THE GLOBAL INTERACTIVE/
TELECOMM PORTFOLIO
[GRAPHIC] PORTFOLIO MANAGER: GAMCO INVESTORS, INC.
[GRAPHIC] INVESTMENT OBJECTIVE: The 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.
[GRAPHIC] PRINCIPAL INVESTMENT STRATEGIES: The Portfolio normally invests
primarily in common stocks and other equity securities of companies
participating in technological advances in interactive services, companies
providing products that are accessible in the home or office through consumer
electronics devices, telecommunications companies, and companies outside of
the telecommunications industry which are expected to benefit from
development in the telecommunications industry. The Portfolio may also invest
in debt securities.
In analyzing companies for investment, the Portfolio Manager looks for several
characteristics including: above-average per share earnings growth; sound
financial and accounting policies; strong competitive advantages; and effective
research, product development and marketing.
The Portfolio normally invests in at least three different countries, including
the United States. No more than 40% of the Portfolio's assets will be invested
in any one country except the United States.
[GRAPHIC] PRINCIPAL RISKS:
- - Company Risk
- - Currency Risk
- - Derivatives Risk
- - Emerging Markets Risk
- - Foreign Investment Risk
- - Investment Management Risk
- - Liquidity Risk
- - Market Risk
See "Description of Principal Investment Risks."
The bar chart and table below do not reflect expenses at the insurance product
level, and if they did, the performance shown would have been lower.
ANNUAL TOTAL RETURN [GRAPHIC]
[GRAPH]
During the period shown above, the highest quarterly return was 22.54% for the
quarter ended December 31, 1998 and the lowest was (12.48%) for the quarter
ended September 30, 1998.
PERFORMANCE TABLE
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ending PAST SINCE INCEPTION
December 31, 1998) ONE YEAR (FEBRUARY 1, 1996)
- ------------------------------------------------------------
Portfolio Shares 30.27% 23.18%
- ------------------------------------------------------------
S&P 500 Index* 28.58% 27.69%
- ------------------------------------------------------------
* The S&P 500-Registered Trademark- Index, reflecting reinvestment of
dividends, is an unmanaged index of 500 leading stocks. S&P 500 Index is a
registered trademark of the Standard & Poor's Corporation.
4 The Fulcrum Trust
<PAGE>
OBJECTIVES, STRATEGIES AND RISKS
THE INTERNATIONAL GROWTH PORTFOLIO
[GRAPHIC] PORTFOLIO MANAGER: BEE & ASSOCIATES, INCORPORATED
[GRAPHIC] INVESTMENT OBJECTIVE: The Portfolio seeks to make money for
investors by investing internationally for long-term capital appreciation,
primarily in equity securities.
[GRAPHIC] PRINCIPAL INVESTMENT STRATEGIES: The Portfolio normally invests
primarily in common stocks and other equity securities of foreign companies.
The Portfolio currently concentrates on companies with market capitalization
under $1 billion. The Portfolio may also invest in debt securities.
The Portfolio generally invests in securities from at least three
different countries. The Portfolio generally does not invest more than 20% of
its assets in any one foreign country, except that it may invest up to 35% of
its assets in each of the following countries: Australia, Canada, France,
Germany, Mexico, the United Kingdom and the United States. The Portfolio
currently concentrates in securities from the more developed countries in the
Americas, the Far East and the Pacific Basin, Australia and Western Europe. The
Portfolio, however, can invest in emerging market countries.
[GRAPHIC] PRINCIPAL RISKS:
- - Company Risk
- - Currency Risk
- - Derivatives Risk
- - Emerging Markets Risk
- - Foreign Investment Risk
- - Investment Management Risk
- - Liquidity Risk
- - Market Risk
See "Description of Principal Investment Risks."
The bar chart and table below do not reflect expenses at the insurance product
level, and if they did, the performance shown would have been lower.
ANNUAL TOTAL RETURN [GRAPHIC]
[GRAPH]
During the period shown above, the highest quarterly return was 15.21% for the
quarter ended December 31, 1998 and the lowest was (25.02)% for the quarter
ended September 30, 1998.
PERFORMANCE TABLE
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ending PAST SINCE INCEPTION
December 31, 1998) ONE YEAR (MARCH 26, 1996)
- -----------------------------------------------------------------
Portfolio Shares (8.02%) (3.09%)
- -----------------------------------------------------------------
Morgan Stanley
EAFE Index* 18.23% 7.32%
- -----------------------------------------------------------------
* The Morgan Stanley EAFE Index is an unmanaged index of European, Australian
and Far East stocks.
The Fulcrum Trust 5
<PAGE>
OBJECTIVES, STRATEGIES AND RISKS
THE GROWTH PORTFOLIO
[GRAPHIC] PORTFOLIO MANAGER: ANALYTIC INVESTORS, INC.
[GRAPHIC] INVESTMENT OBJECTIVE: The Portfolio seeks to make money for
investors by investing primarily in domestic securities selected for their
long-term growth prospects.
[GRAPHIC] PRINCIPAL INVESTMENT STRATEGIES: The Portfolio normally invests
primarily in common stocks and other equity securities of U.S. corporations.
The Portfolio may also invest in foreign equity securities and debt
securities.
The Portfolio Manager currently uses a proprietary computer model designed to
build a portfolio of stocks. When viewed as a group, the stocks have
fundamental characteristics that are considered to be superior to the 500
stocks included in the Standard & Poor's 500 Composite Stock Price Index. The
model seeks to identify a portfolio of stocks with, among other
characteristics, higher than average return on equity and earnings growth at
a reasonable price and positive price momentum over the last 6 to 12 months.
The model focuses on the characteristics of the aggregate portfolio rather
than screening for individual stocks that meet all the desired
characteristics. While the Growth Portfolio may invest in stocks of any
company, it normally invests in stocks of medium to large companies in the
S&P 500 (that is, typically companies with a market capitalization of $15
billion or higher).
[GRAPHIC] PRINCIPAL RISKS:
- - Company Risk
- - Derivatives Risk
- - Investment Management Risk
- - Market Risk
See "Description of Principal Investment Risks."
The bar chart and table below do not reflect expenses at the insurance product
level, and if they did, the performance shown would have been lower.
ANNUAL TOTAL RETURN [GRAPHIC]
[GRAPH]
During the period shown above, the highest quarterly return was 17.98% for the
quarter ended December 31, 1998 and the lowest was (14.95%) for the quarter
ended September 30, 1998.
Analytic Investors, Inc. became the Portfolio Manager of the Portfolio on
August 1, 1998. Performance before that date is based on the performance of
the Portfolio's previous Portfolio Manager.
PERFORMANCE TABLE
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ending PAST SINCE INCEPTION
December 31, 1998) ONE YEAR (FEBRUARY 1, 1996)
- ----------------------------------------------------------------
Portfolio Shares 0.50% 6.48%
- ----------------------------------------------------------------
S&P 500 Index* 28.58% 27.69%
- ----------------------------------------------------------------
* The S&P 500-Registered Trademark- Index, reflecting reinvestment of
dividends, is an unmanaged index of 500 leading stocks. S&P 500-Registered
Trademark- Index is a registered trademark of the Standard & Poor's Corporation.
6 The Fulcrum Trust
<PAGE>
OBJECTIVES, STRATEGIES AND RISKS
THE VALUE PORTFOLIO
[GRAPHIC] PORTFOLIO MANAGER: GAMCO INVESTORS, INC.
[GRAPHIC] INVESTMENT OBJECTIVE: The 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.
[GRAPHIC] PRINCIPAL INVESTMENT STRATEGIES: The Portfolio normally invests
primarily in common stocks and other equity securities of companies that the
Portfolio Manager believes are selling in the public market at a significant
discount to their private market value. The Portfolio Manager believes a
company may be undervalued when investors fail to recognize the underlying
value of its fixed assets, changes in the economic environment affecting the
company, technological developments affecting the company's products, or
other similar factors. The Portfolio may also invest in debt securities.
[GRAPHIC] PRINCIPAL RISKS:
- - Company Risk
- - Derivatives Risk
- - Investment Management Risk
- - Liquidity Risk
- - Market Risk
See "Description of Principal Investment Risks."
The bar chart and table below do not reflect expenses at the insurance product
level, and if they did, the performance shown would have been lower.
ANNUAL TOTAL RETURN [GRAPHIC]
[GRAPH]
During the period shown above, the highest quarterly return was 14.02% for the
quarter ended December 31, 1998 and the lowest was (15.21%) for the quarter
ended September 30, 1998.
PERFORMANCE TABLE
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ending PAST SINCE INCEPTION
December 31, 1998) ONE YEAR (FEBRUARY 1, 1996)
- --------------------------------------------------------------------
Portfolio Shares 7.49% 18.44%
- --------------------------------------------------------------------
S&P 500 Index* 28.58% 27.69%
- --------------------------------------------------------------------
* The S&P 500-Registered Trademark- Index, reflecting reinvestment of dividends,
is an unmanaged index of 500 leading stocks. S&P 500-Registered Trademark- Index
is a registered trademark of the Standard & Poor's Corporation.
The Fulcrum Trust 7
<PAGE>
OBJECTIVES, STRATEGIES AND RISKS
THE STRATEGIC INCOME PORTFOLIO
[GRAPHIC] PORTFOLIO MANAGER: ALLMERICA ASSET MANAGEMENT, INC.
[GRAPHIC] INVESTMENT OBJECTIVE: The Portfolio seeks to make money for
investors by investing for high current income and capital appreciation in a
variety of fixed-income securities.
[GRAPHIC] PRINCIPAL INVESTMENT STRATEGIES: The Portfolio invests primarily in
investment grade corporate debt securities and securities issued or
guaranteed as to principal or interest by the U.S. Government or its agencies
or instrumentalities; below investment-grade corporate debt securities; and
foreign securities which include government debt of developed and emerging
markets, corporate obligations of foreign companies, and debt obligations of
supranational entities.
Debt securities in which the Portfolio may invest include bonds, notes,
debentures, mortgage-backed and asset-backed securities, and other similar
instruments. Securities are selected based on their relative value merits.
The Portfolio normally invests at least 50% of its total assets in
U.S. and foreign debt and other fixed-income securities that, at the time of
purchase, are investment grade. No more that 50% of the Portfolio's assets may
be invested in below investment grade securities, or junk bonds.
[GRAPHIC] PRINCIPAL RISKS:
- - Credit Risk
- - Emerging Markets Risk
- - Foreign Investment Risk
- - Interest Rate Risk
- - Investment Management Risk
- - Liquidity Risk
- - Market Risk
- - Prepayment Risk
See "Description of Principal Investment Risks."
The bar chart and table below do not reflect expenses at the insurance product
level, and if they did, the performance shown would have been lower.
ANNUAL TOTAL RETURN [GRAPHIC]
[GRAPH]
During the period shown above, the highest quarterly return was 4.44% for the
quarter ended September 30, 1998 and the lowest was (3.11)% for the quarter
ended March 31, 1997.
Allmerica Asset Management, Inc. became the Portfolio Manager of the
Portfolio on April 11, 1998. Performance before that date is based on the
performance of the Portfolio's previous Portfolio Manager.
PERFORMANCE TABLE
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ending PAST SINCE INCEPTION
December 31, 1998) ONE YEAR (FEBRUARY 1, 1996)
- -----------------------------------------------------------------------
Portfolio Shares 6.53% 2.55%
- -----------------------------------------------------------------------
Lehman Brothers
Aggregate Bond Index* 8.67% 7.26%
- -----------------------------------------------------------------------
* Lehman Brothers Aggregate Bond Index-Registered Trademark- is an unmanaged
index of all fixed rate debt issues with an invested grade rating at least one
year to maturity and an outstanding par value of at least $25 million.
8 The Fulcrum Trust
<PAGE>
EXPENSE SUMMARY
The following tables describe the fees and expenses that you may pay if you
invest in the Portfolios. The expenses listed below are not the only expenses if
you are purchasing a variable insurance contract. You should refer to the
variable insurance contract prospectus for more information relating to fees and
expenses, which are in addition to the expenses of the Portfolios.
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES DEDUCTED FROM PORTFOLIO 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
The Growth Portfolio. The initial fee is in effect for The Growth Portfolio
through July 31, 1999. For this period, the Manager and the Portfolio Manager
have agreed to limit the fee to an annual rate of 0.40% rather than the 0.80%
set forth in the agreements.
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 Growth Portfolio. See
"Management and Portfolio Management Investment Advisory Fees," pages 20-22.
Shown below is expense information first using the fees that actually applied
during 1998. Also shown below is expense information assuming fees of 0.00%,
2.00% and 4.00%, because the fee in 1999 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
("SEC"). The purpose of the examples is to assist investors in comparing the
cost of investing in a Portfolio with the cost of investing in other mutual
funds. The example assumes that you invest $10,000 in a Portfolio for the
time periods indicated and then redeem all of your shares at the end of those
periods. The example also assumes that your investment earns a 5% return each
year and that the Portfolio's operating expenses remain the same. Your actual
costs may be higher or lower.
The Fulcrum Trust 9
<PAGE>
1. USING 1998 MANAGEMENT FEES
<TABLE>
<CAPTION>
SHAREHOLDER TOTAL ANNUAL
FEES MANAGEMENT DISTRIBUTION OTHER FUND
(FEES PAID DIRECTLY FEES (12B-1) FEES EXPENSES(1,2) OPERATING
FROM YOUR INVESTMENT) EXPENSES
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
The Global Interactive/ None 1.96% None 3.69% 5.65%
Telecomm Portfolio
- -----------------------------------------------------------------------------------------------------------------------
The International Growth Portfolio None 0.05% None 5.09% 5.14%
- -----------------------------------------------------------------------------------------------------------------------
The Growth Portfolio None 0.00% None 5.04% 5.04%
- -----------------------------------------------------------------------------------------------------------------------
The Value Portfolio None 0.30% None 3.00% 3.30%
- -----------------------------------------------------------------------------------------------------------------------
The Strategic Income Portfolio None 0.67% None 6.49% 7.16%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
EXAMPLE. The purpose of this example is to assist investors in comparing the
cost of investing in a Portfolio with the cost of investing in other mutual
funds. Your actual costs may be higher or lower. A shareholder would pay the
following expenses on a $10,000 investment, assuming (1) 5% annual return, (2)
the advisory fees in the above chart, and (3) redemption at the end of each time
period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
The Global Interactive/Telecomm Portfolio $563 $1,679 $2,779 $5,470
- ---------------------------------------------------------------------------------------------
The International Growth Portfolio $514 $1,539 $2,561 $5,104
- ---------------------------------------------------------------------------------------------
The Growth Portfolio $504 $1,511 $2,517 $5,030
- ---------------------------------------------------------------------------------------------
The Value Portfolio $333 $1,015 $1,722 $3,595
- ---------------------------------------------------------------------------------------------
The Strategic Income Portfolio $708 $2,079 $3,392 $6,432
- ---------------------------------------------------------------------------------------------
</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>
SHAREHOLDER TOTAL ANNUAL
FEES FUND
(FEES PAID DIRECTLY MANAGEMENT DISTRIBUTION OTHER OPERATING
FROM YOUR INVESTMENT) FEES (12B-1) FEES EXPENSES(1,2) EXPENSES
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
The Global Interactive/ None 0.00% None 3.69% 3.69%
Telecomm Portfolio
- ------------------------------------------------------------------------------------------------------------
The International Growth Portfolio None 0.00% None 5.09% 5.09%
- ------------------------------------------------------------------------------------------------------------
The Growth Portfolio None 0.00% None 5.04% 5.04%
- ------------------------------------------------------------------------------------------------------------
The Value Portfolio None 0.00% None 3.00% 3.00%
- ------------------------------------------------------------------------------------------------------------
The Strategic Income Portfolio None 0.00% None 6.49% 6.49%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
10 The Fulcrum Trust
<PAGE>
EXAMPLE. The purpose of this example is to assist investors in comparing the
cost of investing in a Portfolio with the cost of investing in other mutual
funds. Your actual costs may be higher or lower. A shareholder would pay the
following expenses on a $10,000 investment, assuming (1) 5% annual return, (2)
an advisory fee of 0%, and (3) redemption at the end of each time period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
The Global Interactive/Telecomm Portfolio $371 $1,129 $ 1,906 $3,941
- ---------------------------------------------------------------------------------------------
The International Growth Portfolio $509 $1,525 $ 2,539 $5,067
- ---------------------------------------------------------------------------------------------
The Growth Portfolio $504 $1,511 $ 2,517 $5,030
- ---------------------------------------------------------------------------------------------
The Value Portfolio $303 $927 $ 1,577 $3,318
- ---------------------------------------------------------------------------------------------
The Strategic Income Portfolio $644 $1,904 $ 3,126 $6,026
- ---------------------------------------------------------------------------------------------
</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>
SHAREHOLDER TOTAL ANNUAL
FEES FUND
(FEES PAID DIRECTLY MANAGEMENT DISTRIBUTION OTHER OPERATING
FROM YOUR INVESTMENT) FEES (12B-1) FEES EXPENSES(1,2) EXPENSES
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
The Global Interactive/ None 2.00% None 3.69% 5.69%
Telecomm Portfolio
- -----------------------------------------------------------------------------------------------------------------
The International Growth Portfolio None 2.00% None 5.09% 7.09%
- -----------------------------------------------------------------------------------------------------------------
The Growth Portfolio None 2.00% None 5.04% 7.04%
- -----------------------------------------------------------------------------------------------------------------
The Value Portfolio None 2.00% None 3.00% 5.00%
- -----------------------------------------------------------------------------------------------------------------
The Strategic Income Portfolio None 2.00% None 6.49% 8.49%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
EXAMPLE. The purpose of this example is to assist investors in comparing the
cost of investing in a Portfolio with the cost of investing in other mutual
funds. Your actual costs may be higher or lower. A shareholder would pay the
following expenses on a $10,000 investment, assuming (1) 5% annual return, (2)
an advisory fee of 2%, and (3) redemption at the end of each time period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
The Global Interactive/Telecomm Portfolio $567 $1,689 $2,796 $5,498
- ------------------------------------------------------------------------------------------------
The International Growth Portfolio $702 $2,061 $3,364 $6,392
- ------------------------------------------------------------------------------------------------
The Growth Portfolio $697 $2,048 $3,345 $6,362
- ------------------------------------------------------------------------------------------------
The Value Portfolio $500 $1,500 $2,500 $5,000
- ------------------------------------------------------------------------------------------------
The Strategic Income Portfolio $834 $2,416 $3,890 $7,147
- ------------------------------------------------------------------------------------------------
</TABLE>
The Fulcrum Trust 11
<PAGE>
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>
SHAREHOLDER TOTAL ANNUAL
FEES FUND
(FEES PAID DIRECTLY MANAGEMENT DISTRIBUTION OTHER OPERATING
FROM YOUR INVESTMENT) FEES (12B-1) FEES EXPENSES(1,2) EXPENSES
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
The Global Interactive/ None 4.00% None 3.69% 7.69%
Telecomm Portfolio
- ---------------------------------------------------------------------------------------------------------------------------------
The International Growth Portfolio None 4.00% None 5.09% 9.09%
- ---------------------------------------------------------------------------------------------------------------------------------
The Growth Portfolio None 4.00% None 5.04% 9.04%
- ---------------------------------------------------------------------------------------------------------------------------------
The Value Portfolio None 4.00% None 3.00% 7.00%
- ---------------------------------------------------------------------------------------------------------------------------------
The Strategic Income Portfolio None 4.00% None 6.49% 10.49%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
EXAMPLE. The purpose of this example is to assist investors in comparing the
cost of investing in a Portfolio with the cost of investing in other mutual
funds. Your actual costs may be higher or lower. A shareholder would pay the
following expenses on a $10,000 investment, assuming (1) 5% annual return, (2)
an advisory fee of 4%, and (3) redemption at the end of each time period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
The Global Interactive/Telecomm Portfolio $759 $2,215 $3,595 $6,731
- -------------------------------------------------------------------------------------------
The International Growth Portfolio $890 $2,563 $4,102 $7,432
- -------------------------------------------------------------------------------------------
The Growth Portfolio $886 $2,551 $4,085 $7,409
- -------------------------------------------------------------------------------------------
The Value Portfolio $693 $2,038 $3,329 $6,338
- -------------------------------------------------------------------------------------------
The Strategic Income Portfolio $1,020 $2,896 $4,571 $8,017
- -------------------------------------------------------------------------------------------
</TABLE>
(1) Allmerica Financial Investment Management Services, Inc. ("AFIMS"),
investment manager of the Trust, has agreed to the following voluntary
expense limitations on the "other expenses" for each Portfolio of the Trust:
an annual rate of 1.50% of average daily net assets for The Global
Interactive/Telecomm Portfolio, The International Growth Portfolio and The
Strategic Income Portfolio and an annual rate of 1.20% of average daily net
assets for The Growth Portfolio and The Value Portfolio.
(2) Each Portfolio will reimburse AFIMS for any portfolio expenses it
reimbursed pursuant to the expense limitation for the two years following the
date that the AFIMS expense limitation ends. Through December 31, 1999, the
Portfolios are required to reimburse AFIMS or First Allmerica Financial Life
Insurance Company ("FAFLIC") for payments made to limit 1996 and 1997
expenses if those reimbursements can be made while still keeping "other
expenses" under the 1998 expense limitations (which are an annual rate of
1.20% of average daily net assets for The Global Interactive/Telecomm
Portfolio, The International Growth Portfolio and The Strategic Income
Portfolio and an annual rate of 1.00% of average daily net assets for The
Growth Portfolio and The Value Portfolio). The Portfolios obligation to
reimburse AFIMS or FAFLIC for the 1996 and 1997 expense limitations will
expire on December 31, 1999, even if the reimbursement has not been made.
12 The Fulcrum Trust
<PAGE>
[GRAPHIC] DESCRIPTION OF PRINCIPAL INVESTMENT RISKS
The principal risks of investing in a Portfolio and the factors likely to
cause the value of your investment in the Portfolio to decline are described
below. The principal risks applicable to each Portfolio are identified under
"Portfolio Summaries - Objectives, Strategies and Risks." There are also many
factors that could cause the value of your investment in a Portfolio to
decline which are not described here. The price per share of each Portfolio
will change daily based on market conditions and other factors. It is
important to remember that there is no guarantee that the Portfolios will
achieve their investment objective, and an investor in any of the Portfolios
could lose money.
COMPANY RISK
A Portfolio's equity and fixed income investments in a company often fluctuate
based on:
- - The firm's actual and anticipated earnings,
- - Changes in management, product offerings and overall financial strength and
- - The potential for takeovers and acquisitions.
This is due to the fact that prices of securities react to the fiscal and
business conditions of the company that issued the securities. Factors
affecting a company's particular industry, such as increased production
costs, also may affect the value of its securities. With respect to the
Global Interactive/Telecomm Portfolio, adverse changes in global economic
conditions or the interactive/telecommunications industry may cause the value
of the Portfolio's shares to fall sharply. A downturn in the
interactive/telecommunications industry also would have more of an impact on
the Portfolio than on a fund that was diversified among many different
industries.
Smaller companies with market capitalizations of less than $1 billion or so
are more likely than larger companies to have limited lines or smaller
markets for their products and services. Small company stocks may not trade
very actively, and their prices may fluctuate more than stocks of other
companies as a result of lower liquidity. They may depend on a small or
inexperienced management group. Stocks of smaller companies also may be more
vulnerable to negative changes than stocks of larger companies.
CREDIT RISK
Credit Risk is the risk that the issuer of a fixed income security will not
be able to pay principal and interest when due. There are different levels of
credit risk. Portfolios that invest in lower-rated securities have higher
levels of credit risk. Lower-rated or unrated securities of equivalent
quality, generally known as junk bonds, have very high levels of credit risk.
Junk bonds are considered to be speculative in their capacity to pay interest
and repay principal. During periods of market declines, junk bonds could
become less liquid, meaning that they will be harder to value or sell at a
fair price. Securities that are highly rated have lower levels of credit
risk. The price of a fixed income security can be expected to fall if the
issuer defaults on its obligations to pay principal or interest, the rating
agencies downgrade the issuer's credit rating or there is negative news that
affects the market's perception of the issuer's credit risk.
CURRENCY RISK
This is the risk that foreign currencies will decline in value relative to
the U.S. dollar. Portfolios that invest in securities denominated in or are
receiving revenues in foreign currencies are subject to currency risk. There
is often a greater risk of currency fluctuations and devaluations in emerging
market countries.
DERIVATIVES RISK
A Portfolio may use derivatives to hedge against an opposite position that
the Portfolio also holds. While hedging can reduce or eliminate losses, it
can also reduce or eliminate gains. When a Portfolio uses derivatives to
hedge, it takes the risk that changes in the value of the derivative will not
match those of the asset being hedged. Incomplete correlation can result in
unanticipated losses. A Portfolio may also use derivatives as an investment
vehicle to gain market exposure. Gains or losses from derivative investments
may be substantially greater than the derivative's original cost. When a
Portfolio uses derivatives, it is also subject to the risk that the other
party to the agreement will not be able to perform. Additional risks
associated with derivatives include mispricing and improper valuation.
The Fulcrum Trust 13
<PAGE>
EMERGING MARKETS RISK
Investments in emerging markets securities involve all of the risks of
investments in foreign securities, and also have additional risks. The
markets of developing countries have been more volatile than the markets of
developed countries with more mature economies. Many emerging markets
companies in the early stages of development are dependent on a small number
of products and lack substantial capital reserves. In addition, emerging
markets often have less developed legal and financial systems. These markets
often have provided significantly higher or lower rates of return than
developed markets and usually carry higher risks to investors than securities
of companies in developed countries.
FOREIGN INVESTMENT RISK
Investing in foreign securities involves risks relating to political, social
and economic developments abroad, as well as risks resulting from the
differences between the regulations to which U.S. and foreign issuers and
markets are subject. These risks may include the seizure by the government of
company assets, excessive taxation, withholding taxes on dividends and
interest, limitations on the use or transfer of portfolio assets, and
political or social instability. In the event of nationalization,
expropriation or other confiscation, a Portfolio could lose its entire
investment. Portfolios investing in foreign securities may experience rapid
changes in value. One reason for this volatility is that the securities
markets of many foreign countries are relatively small, with a limited number
of companies representing a small number of industries. Enforcing legal
rights may be difficult, costly and slow in foreign countries. Also, foreign
companies may not be subject to governmental supervision or accounting
standards comparable to those applicable to U.S. companies, and there may be
less public information about their operations. The conversion of certain
European currencies to the "euro" may present additional risks to those
Portfolios exposed to such currencies.
INTEREST RATE RISK
When interest rates rise, the prices of fixed income securities held by a
Portfolio will generally fall. Conversely, when interest rates fall, the
prices of fixed income securities will generally rise. Even Portfolios that
invest in the highest quality debt securities are subject to interest rate
risk. Interest rate risk usually will affect the price of a fixed income
security more if the security has a longer maturity. Fixed income securities
with longer maturities will therefore be more volatile than other fixed
income securities with shorter maturities.
INVESTMENT MANAGEMENT RISK
Investment management risk is the risk that a Portfolio does not achieve its
investment objective, even though the Portfolio Manager uses various
investment strategies and techniques.
LIQUIDITY RISK
This is the risk that a Portfolio will not be able to sell a security at a
reasonable price because there are too few people who actively buy and sell,
or trade, that security on a regular basis. Liquidity risk increases for
Portfolios investing in foreign investments (especially emerging markets
securities), smaller companies, lower credit quality bonds (also called junk
bonds), restricted securities, over-the-counter securities and derivatives.
MARKET RISK
This is the risk that the price of a security held by a Portfolio will fall
due to changing economic, political or market conditions or to factors
affecting investor psychology.
PREPAYMENT RISK
Mortgage-backed securities may not have a stated maturity, and their expected
maturities may vary when interest rates rise or fall. When interest rates
fall, homeowners are more likely to prepay their mortgage loans which may
result in an unforeseen loss of future interest income to a Portfolio. Also,
because prepayments increase when interest rates fall, the prices of
mortgage-backed securities do not increase as much as other fixed income
securities when interest rates fall. When interest rates rise, homeowners are
less likely to prepay their mortgage loans which may lengthen the expected
maturity of mortgage-backed securities causing the price of mortgage-backed
securities to decrease more than prices of other fixed income securities.
Asset-backed securities have prepayment risks similar to mortgage-backed
securities. By investing in collateralized mortgage obligations ("CMOs"), a
Portfolio may manage the prepayment risk of mortgage-backed securities.
However, prepayments may cause the actual maturity of a CMO to be
substantially shorter than its stated maturity.
14 The Fulcrum Trust
<PAGE>
[GRAPHIC] OTHER INVESTMENT STRATEGIES
The Portfolio Summaries starting on page 3 describe the investment objective
and the principal investment strategies and risks of each Portfolio. The
investment objectives of the Portfolios are fundamental, which means that
they may be changed only with shareholder approval. Unless otherwise
indicated, each Portfolio's practices, policies and programs for achieving
its objectives are not fundamental and thus may be changed by the Board of
Trustees without shareholder approval. The Statement of Additional
Information sets forth certain investment restrictions which are fundamental,
and, like the investment objectives, may be changed only with shareholder
approval. There is no guarantee that the Portfolios will achieve their
objective and an investor in any of the Portfolios could lose money. Attached
is an Appendix illustrating various investment techniques and strategies that
the Portfolio Managers of the Portfolios may utilize. The Portfolios may at
times use the following strategies:
DERIVATIVE INVESTMENTS. Instead of investing in the types of portfolio
securities described in the Summary, each Portfolio may buy or sell a variety
of "derivative" investments to gain exposure to particular securities or
markets. Derivatives are financial contracts whose value depends on, or is
derived from, the value of an underlying asset, reference rate or index. A
Portfolio's Portfolio Manager will sometimes use derivatives as part of a
strategy designed to reduce other risks and sometimes will use derivatives
for leverage, which increases opportunities for gain but also involves
greater risk.
FOREIGN SECURITIES. Each Portfolio may invest all or a substantial part of
its portfolio in securities of companies that are located or primarily doing
business in a foreign country. A company is considered to be located in a
foreign country if it is organized under the laws of, or has a principal
office in, that country. A company is considered as primarily doing business
in a country if (i) the company derives at least 50% of its gross revenues or
profits from either goods or services produced or sold in the country or (ii)
at least 50% of the company's assets are situated in the country. A Portfolio
may invest in foreign securities either directly or indirectly through the
use of depository receipts, such as American Depository Receipts or ADRs.
Depository receipts are generally issued by banks or trust companies and
evidence ownership of underlying foreign securities. An ADR may be sponsored
by the issuer of the underlying foreign security or it may be issued in
unsponsored form. The holder of a sponsored ADR is likely to receive more
frequent and extensive financial disclosure concerning the foreign issuer
than the holder of an unsponsored ADR and generally will bear lower
transaction charges.
DEBT SECURITIES. All Portfolios may invest in corporate debt securities of
domestic or foreign issuers. Each Portfolio may only invest in debt
securities which meet the minimum ratings criteria set forth for that
particular Portfolio and unrated debt securities that are comparable in
quality to the rated debt securities in which the Portfolio may invest.
The Strategic Income Portfolio may invest up to 50% of its assets in debt
securities that are below investment grade (i.e., rated BB or lower by
Standard & 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 securities. The Global
Interactive/Telecomm, International Growth, Growth, and Value Portfolios may
each invest up to 5% of assets in high yield securities. These securities are
considered to be speculative with respect to the issuer's capacity to pay
interest and repay principal.
The Fulcrum Trust 15
<PAGE>
LENDING PORTFOLIO SECURITIES. To realize 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 loan will be
secured by collateral at least equal to the value of the security loaned.
While any such loan is outstanding, a Portfolio will continue to receive
amounts equal to the interest or dividends paid by the issuer on the
securities, as well as interest (less any rebates to be paid to the borrower)
on the investment of the collateral or a fee from the borrower. Each
Portfolio will have the right to call each loan and obtain the securities.
Lending portfolio securities involves possible delays in receiving additional
collateral or in the recovery of the securities or possible loss of rights in
the collateral.
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
which have been deemed liquid.
TEMPORARY DEFENSIVE STRATEGIES. At times a Portfolio Manager may determine
that market conditions make it desirable temporarily to suspend a Portfolio's
normal investment activities. This is when the Portfolio may temporarily
invest in a variety of lower-risk securities, such as U.S. Government and
other high quality bonds and short-term debt obligations. Such strategies
attempt to reduce changes in the value of the Portfolio's shares. The
Portfolio may fail to profit from favorable developments affecting its normal
investments while these strategies are in effect.
FREQUENT TRADING. Certain Portfolios from time to time may engage in active and
frequent trading to achieve their investment objective. Frequent trading
increases transaction costs, which could detract from the Portfolio's
performance.
16 The Fulcrum Trust
<PAGE>
[GRAPHIC] MANAGEMENT OF THE PORTFOLIOS
THE TRUST. The business and affairs of the Trust are managed under the direction
of the Board of Trustees.
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 and is an indirect, wholly-owned subsidiary of Allmerica
Financial Corporation ("AFC"). AFC is the parent company of the two life
insurance companies, Allmerica Financial Life Insurance and Annuity Company
and First Allmerica Financial Life Insurance Company ("FAFLIC"), which utilize
the Trust as an underlying fund for their variable contracts.
PORTFOLIO MANAGERS. Portfolio Managers have been hired to manage the
investments of the Portfolios.
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 each Portfolio Manager's overall performance.
The following table provides information about each Portfolio's Portfolio
Manager:
<TABLE>
<CAPTION>
PORTFOLIO,
PORTFOLIO MANAGER NAME AND ADDRESS EXPERIENCE
---------------------------------------------------------------------------------
<S> <C>
GLOBAL INTERACTIVE/TELECOMM PORTFOLIO - Organized in 1978
GAMCO Investors, Inc. - $7.2 billion assets under management
One Corporate Center as of December 31, 1998
Rye, NY 10580-1434 - Acts as investment adviser for
individuals, pension trusts,
profit-sharing trusts and endowments
----------------------------------------------------------------------------------
INTERNATIONAL GROWTH PORTFOLIO - Established in 1989
Bee & Associates, Incorporated - Over $450 million assets under
370 17th Street, Suite 3560 managementas of December 31, 1998
Denver, CO 80202 - Provides global equity management
expertise to individual retirement
plan sponsors, foundations,
endowments and other entities
----------------------------------------------------------------------------------
</TABLE>
The Fulcrum Trust 17
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO,
PORTFOLIO MANAGER NAME AND ADDRESS EXPERIENCE
-----------------------------------------------------------------------------------------
<S> <C>
GROWTH PORTFOLIO - Founded in 1970
Analytic Investors, Inc. - Manages assets totaling approximately
700 South Flower Street, Suite 2400 $1 billion as of December 31, 1998
Los Angeles, CA 90017 - Provides management of investment
advisory accounts to individuals,
banks/thrift institutions, investment
companies, pension and profit sharing
plans, trusts, estates or charitable
organizations and other corporations
-----------------------------------------------------------------------------------------
VALUE PORTFOLIO Refer to Global Interactive/ Telecomm
GAMCO Investors, Inc. Portfolio above
One Corporate Center
Rye, NY 10580-1434
-----------------------------------------------------------------------------------------
STRATEGIC INCOME PORTFOLIO - Began operations in 1967
Allmerica Asset Management, Inc. - Manages assets of approximately $13.1
440 Lincoln Street billion as of December 31, 1998
Worcester, MA 01653 - Provides investment management services
to insurance companies, pension plans
and investment companies or mutual funds
backing variable insurance products
-----------------------------------------------------------------------------------------
</TABLE>
18 The Fulcrum Trust
<PAGE>
The following individuals or groups of individuals are primarily responsible
for the day-to-day management of the Portfolios:
<TABLE>
<CAPTION>
PORTFOLIO NAME, NAME AND TITLE OF
PORTFOLIO MANAGER INDIVIDUAL PORTFOLIO MANAGED BUSINESS EXPERIENCE
NAME MANAGER(S) PORTFOLIO SINCE FOR THE PAST FIVE YEARS
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
GLOBAL INTERACTIVE/TELECOMM Mario J. Gabelli, 1996 Mr. Gabelli has more than
PORTFOLIO Chief Investment Officer 26 years of experience in
GAMCO Investors, the investment industry and
Inc. ("GAMCO") has been chief investment
officer of GAMCO since its
inception.
- -------------------------------------------------------------------------------------------------------------
INTERNATIONAL GROWTH PORTFOLIO Bruce B. Bee, 1996 President of Bee & Associates
Bee & Associates Incorporated Controlling Person and since 1989.
("Bee & Associates") principal portfolio manager
- -------------------------------------------------------------------------------------------------------------
GROWTH PORTFOLIO Harindra de Silva, President 1998 Mr. de Silva has served as
Analytic Investors, President of Analytic
Inc. ("Analytic") since April 1998; from 1986
to 1998, he served as Principal
of Analysis Group, Inc. He
has been a member of the
portfolio management team
of Analytic since 1995.
Dennis Bein, portfolio manager 1998 Mr. Bein has been a member
of the portfolio management
and research team of Analytic
since August 1995; he served
as a senior associate for
Analysis Group, Inc. from
1990 to 1998.
- -------------------------------------------------------------------------------------------------------------
VALUE PORTFOLIO Refer to Global Interactive/
GAMCO Investors, Inc. ("GAMCO") Telecomm Portfolio above
- -------------------------------------------------------------------------------------------------------------
STRATEGIC INCOME PORTFOLIO Lisa M. Coleman, 1998 Ms. Coleman has served as
Allmerica Asset portfolio manager portfolio manager at
Management, Inc. AAM since 1994. From 1989
("AAM") through 1994, she served as
a Deputy Manager, Portfolio
Management, for Brown
Brothers Harriman &
Company.
- -------------------------------------------------------------------------------------------------------------
</TABLE>
The Fulcrum Trust 19
<PAGE>
MANAGEMENT AND PORTFOLIO MANAGEMENT
INVESTMENT ADVISORY FEES
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 Portfolio Manager
receives 80% of the fee, and AFIMS receives the remaining 20%.
FIXED ADVISORY FEE FOR THE FIRST 12 FULL CALENDAR MONTHS. For the period
beginning on the effective date of a Portfolio Manager Agreement with a new
Portfolio Manager (or, in the case of a Portfolio that has had only one
Portfolio Manager, the day on which the Portfolio began investment
operations) and ending with the last day of the twelfth full calendar month
thereafter,
- - each Portfolio Manager will be paid a monthly advisory fee calculated at an
annual rate of 0.80% of the Portfolio's average daily net assets. The
initial fee is in effect for The Growth Portfolio through July 31, 1999. The
Manager and the Portfolio Manager have agreed to limit the initial fee in
effect for The Growth Portfolio to an annual rate of 0.40% rather than the
0.80% set forth in the agreements.
PERFORMANCE-BASED FEE. After the first 12 full calendar months with a new
Portfolio Manager as described above, each Portfolio pays, at the end of each
month:
- - a monthly advisory fee equal to a BASIC FEE plus or minus an INCENTIVE FEE.
(As explained below, the fee might be reduced if absolute performance is
negative.)
The monthly basic fee equals one-twelfth of the annual Basic Fee rate of 2.0%
multiplied by average daily net assets over the previous 12 months. The
incentive fee rate ranges from -2.0% to +2.0% on an annual basis, depending
on a comparison of the Portfolio's performance (reflecting a deduction of
Portfolio expenses) and the performance of a selected benchmark index over
the past 12 months. The monthly Incentive Fee, like the monthly Basic Fee, is
calculated by multiplying one-twelfth of the Incentive Fee rate on an annual
basis by the average daily net assets over the previous 12 months.
Accordingly, the Total Fee could range from 0.0% to an annual rate of 4.0%,
depending on performance.
- - The PERFORMANCE OF A PORTFOLIO is calculated by first determining the change
in the Portfolio's net asset value per share during the previous 12 months,
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 previous 12 months, 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.
20 The Fulcrum Trust
<PAGE>
<TABLE>
PERCENTAGE POINT DIFFERENCE BETWEEN PERFORMANCE OF THE PORTFOLIO
(NET OF EXPENSES INCLUDING BASIC FEE AND INCENTIVE FEE)
AND CHANGE IN SELECTED BENCHMARK INDEX TOTAL
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.
- - 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 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.
- - If a Portfolio UNDERPERFORMS the selected benchmark, the advisory fee paid
by the Portfolio may be less than those paid by other investment companies.
- - If, during the applicable performance period, a Portfolio UNDERPERFORMS the
selected benchmark by three or more percentage points, the Portfolio will not
pay any advisory fee.
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 on pages 4-8.
The Fulcrum Trust 21
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
PORTFOLIO PERFORMANCE BENCHMARK
The Global Interactive/Telecomm Portfolio S&P 500
The International Growth Portfolio Morgan Stanley EAFE Index
The Growth Portfolio S&P 500
The Value Portfolio S&P 500
The Strategic Income Portfolio Lehman Brothers Aggregate Bond Index
</TABLE>
22 The Fulcrum Trust
<PAGE>
EXPENSE LIMITATIONS
EXPENSE LIMITATIONS FOR 1998-99 EXPENSES. AFIMS has agreed to limit operating
expenses and reimburse those expenses to the extent that each Portfolio's
1999 "other expenses" (i.e., expenses other than management fees) exceed the
expense limitations (expressed as an annualized percentage of average daily
net assets) in the following table. The table also lists the limitations on 1998
"other expenses".
<TABLE>
<CAPTION>
PORTFOLIO 1999 "OTHER EXPENSES" 1998 "OTHER EXPENSES"
- ------------------------------------------------------------------------------------
<S> <C> <C>
The Global Interactive/ 1.50% 1.20%
Telecomm Portfolio
- ------------------------------------------------------------------------------------
The International 1.50% 1.20%
Growth Portfolio
- ------------------------------------------------------------------------------------
The Growth Portfolio 1.20% 1.00%
- ------------------------------------------------------------------------------------
The Value Portfolio 1.20% 1.00%
- ------------------------------------------------------------------------------------
The Strategic Income Portfolio 1.50% 1.20%
- ------------------------------------------------------------------------------------
</TABLE>
AFIMS has agreed to pay any amount due for a calendar month not later than
the 15th day of the following calendar month (with any annual adjustment to
be made not later than January 15). AFIMS, if agreed to by the Board, may
continue this voluntary expense limitation past December 31, 1999. This
expense limitation was implemented effective February 13, 1998. In addition,
on February 24, 1998, AFIMS voluntarily contributed to the Portfolios the
amount necessary to offset expenses accrued to the Portfolios in excess of
the expense limitations during the period January 1, 1998 through February
12, 1998.
REIMBURSEMENT PROVISION. For the two years following the date that the AFIMS
expense limitation ends, each Portfolio will reimburse AFIMS for any
Portfolio expenses it reimbursed pursuant to the expense limitation. That
reimbursement will be made, however, only to the extent that it does not
cause the Portfolio's "other expense" ratio to exceed the applicable
limitation in the chart above. In addition, through December 31, 1999, the
Portfolios are obligated to reimburse AFIMS or FAFLIC for payments made to
limit 1996 and 1997 expenses if those reimbursements can be made while still
keeping "other expenses" under the 1998 limitations set forth in the chart
above. The Portfolios' obligation to reimburse AFIMS or FAFLIC for the 1996
and 1997 expense limitations will expire on December 31, 1999, even if the
reimbursement has not been made.
The Fulcrum Trust 23
<PAGE>
PRICING, PURCHASE AND REDEMPTION
PRICING OF SHARES
The price of one share of each Portfolio is equal to the Portfolio's "net
asset value" or "NAV" per share. NAV is computed once daily at the close of
regular trading on the New York Stock Exchange each day the Exchange is
open - normally 4:00 p.m. Eastern Time. 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.
Each Portfolio's assets are valued primarily on the basis of market
quotations. Short-term debt securities with remaining maturities of 60 days
or less are valued on the basis of amortized cost. Other debt securities are
generally valued based on price quotes obtained from pricing services or
broker-dealers. Foreign securities are valued on the basis of quotations from
the primary market on which they are traded, and are translated from the
local currency into U.S. dollars using current exchange rates. In addition,
if quotations are not available for any security, or if the values of foreign
securities have been materially affected by events occurring after the
closing of a foreign market, assets may be valued by another method that the
Board of Trustees believes accurately reflects fair value.
PURCHASE OF SHARES
Shares of each Portfolio are sold at the first net asset value per share
calculated after the Trust (or its agent) receives the purchase order. The
Trust does not charge any sales charge or sales load. The Trust is intended
to be a funding vehicle for variable annuity and variable life insurance
contracts offered by both affiliated and unaffiliated insurance companies and
for certain qualified pension and retirement 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 to identify
any material irreconcilable conflicts and to determine what action, if any,
should be taken in response to any such conflict.
REDEMPTION OF SHARES
Shares of the Portfolios may be redeemed on any business day. The Trust does
not charge any sales charge or sales load. Shares of each Portfolio are
redeemed at the first net asset value per share calculated after the Trust
(or its agent) receives a proper redemption request 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);
- - when an emergency exists, as determined by the Securities and Exchange
Commission; or
- - whenever the Securities and Exchange Commission has by order allowed such
suspension or postponement for the protection of shareholders.
If the Board of Trustees determines 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, in lieu of cash. (If shares are redeemed in
kind, the redeeming shareholder might incur brokerage costs in converting the
assets into cash.)
24 The Fulcrum Trust
<PAGE>
DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
At least annually, each Portfolio declares as dividends substantially all of
its net income, if any, and distributes all of its net realized capital
gains. All dividends and distributions are automatically reinvested in
additional shares of the Portfolio.
FEDERAL INCOME TAXES
The Trust seeks to comply with the provision of the Internal Revenue Code
applicable to regulated investment companies so that the Trust will not be
subject to federal income tax. Under current tax law, dividend or capital
gain distributions from the Portfolio are not currently taxable when left to
accumulate within a variable annuity or variable life insurance contract.
Withdrawals from a contract generally are subject to ordinary income tax and,
in many cases, to an additional 10% penalty tax on withdrawals before age
59 1/2.
If you own or are considering buying a variable contract that invests in the
Portfolios, you should consult the variable contract prospectus for a
discussion of the tax considerations relevant to investing in the Portfolios
through that variable contract.
The tax laws and regulations that apply to qualified retirement plans are
complex and vary according to the type of plan and its terms and conditions.
If you participate in a qualified retirement plan that invests in the
Portfolios, you should consult a qualified tax adviser to learn about your
specific tax situation before investing in the Portfolios or redeeming
Portfolio shares.
YEAR 2000
Some computer software cannot distinguish between dates in the year 2000 and
dates in the year 1900 because of the way that dates are encoded and
calculated. The services provided to the Trust by the Manager, Portfolio
Managers, the Custodian and other external service providers depend on the
proper functioning of their computer software. Failure to correct or replace
any non-compliant software could adversely affect, among other things, the
handling of securities trades, the payment of interest and dividends, the
pricing of the Trust's securities and of the Trust's shares, and account
services. The Trust has requested information from its service providers with
respect to their plans to be Year 2000 compliant. The Trust has been advised
by its service providers that they either are Year 2000 compliant now or
expect to be compliant prior to December 31, 1999. However, there can be no
guarantee that the Trust's operations will not be adversely affected by
non-compliant systems of its service providers or of other third parties
which interact with such service providers. The Year 2000 problem could also
have an adverse effect on issuers, including foreign issuers, whose
securities are owned by the Portfolios, potentially decreasing the value of
such securities.
The Fulcrum Trust 25
<PAGE>
This page is intentionally left blank.
26 The Fulcrum Trust
<PAGE>
[GRAPHIC ]FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand each
Portfolio's financial performance for the life of the Portfolio. Certain
information reflects financial results for a single Portfolio share. The
total returns in the tables represent the rate that an investor would have
earned or lost on an investment in a Portfolio (assuming reinvestment of all
dividends and distributions). This information has been audited by
PricewaterhouseCoopers LLP, whose report, along with each Portfolio's
financial statements, are included in the Statement of Additional Information
or annual report, which is available upon request.
The Fulcrum Trust 27
<PAGE>
THE FULCRUM TRUST
FINANCIAL HIGHLIGHTS - FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
<TABLE>
<CAPTION>
--------INCOME FROM INVESTMENT OPERATIONS-------- --------LESS DISTRIBUTIONS--------
NET REALIZED
NET AND DISTRIBUTIONS
ASSET NET UNREALIZED DIVIDENDS FROM NET
VALUE INVESTMENT GAIN (LOSS) TOTAL FROM FROM NET REALIZED
YEAR ENDED BEGINNING INCOME ON INVESTMENT INVESTMENT CAPITAL RETURN OF TOTAL
DECEMBER 31, OF YEAR (LOSS)(2) INVESTMENTS OPERATIONS INCOME GAINS CAPITAL DISTRIBUTIONS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GLOBAL
INTERACTIVE/
TELECOMM
PORTFOLIO(1)
1998(3) $13.32 $(0.23) $4.26 $4.03 $ - $(1.49) $ - $(1.49)
1997 10.00 0.08 3.95 4.03 (0.04) (0.67) - (0.71)
1996(4) 10.00 (0.75) 0.80 0.05 - - (0.05) (0.05)
- -----------------------------------------------------------------------------------------------------------------------
INTERNATIONAL
GROWTH
PORTFOLIO(1)
1998(3) 9.72 0.05 (0.83) (0.78) - - - -
1997 10.33 0.10 (0.63) (0.53) (0.05) (0.03) - (0.08)
1996(4) 10.00 (4.16) 4.67 0.51 - - (0.18) (0.18)
- -----------------------------------------------------------------------------------------------------------------------
GROWTH
PORTFOLIO(1)
1998(3) 11.95 (0.05) 0.11 0.06 - - - -
1997 10.84 (0.02) 1.13 1.11 - - - -
1996(4) 10.00 (2.96) 3.80 0.84 - - - -
- -----------------------------------------------------------------------------------------------------------------------
VALUE
PORTFOLIO(1)
1998(3) 13.50 0.00 1.01 1.01 - (0.99) - (0.99)
1997 10.88 0.17 3.35 3.52 (0.09) (0.81) - (0.90)
1996(4) 10.00 (0.64) 2.15 1.51 - - (0.63) (0.63)
- -----------------------------------------------------------------------------------------------------------------------
STRATEGIC
INCOME
PORTFOLIO(1)
1998(3) 9.88 0.25 0.39 0.64 (0.02) (0.28) - (0.30)
1997 9.98 0.36 (0.30) 0.06 (0.11) (0.05) - (0.16)
1996(4) 10.00 (0.19) 0.23 0.04 - - (0.06) (0.06)
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized
** Not annualized
+ Figure is net of the voluntary expense waiver by the Adviser. Excluding
this waiver, the ratio of management fees to average net assets would have
been 0.67% for the year ended December 31, 1998.
(A) Including reimbursements and waivers of certain operating expenses.
(B) Excluding reimbursements and waivers of certain operating expenses.
(1) The Value Portfolio, Growth Portfolio, Strategic Income Portfolio, and
Global Interactive/Telecomm Portfolio all commenced operations on
February 1, 1996. The International Growth Portfolio commenced operations
on March 26, 1996.
(2) Net investment income (loss) per share before reimbursement of certain
operating expenses by the investment adviser were ($0.50) at December 31,
1998, ($0.62) in 1997 and ($1.34) in 1996 for Global Interactive/Telecomm
Portfolio; ($0.29) at December 31, 1998, ($0.45) in 1997, and ($7.56) in
1996 for the International Growth Portfolio; ($0.52) at December 31, 1998,
($0.68) in 1997, and ($5.61) in 1996 for the Growth Portfolio; ($0.22) at
December 31, 1998, ($0.34) in 1997, and ($1.22) in 1996 for the Value
Portfolio; and ($0.11) at December 31, 1998, ($0.14) in 1997, and ($0.63)
in 1996 for the Strategic Income Portfolio.
(3) Total return measures the change in the value of an investment for the
period indicated. For the period ended December 31, 1998, the total return
includes capital infusions totaling $41,096. Absent the infusions, total
return for the Global Interactive/Telecomm Portfolio, the International
Growth Portfolio, the Growth Portfolio, the Value Portfolio and the
Strategic Income Portfolio would have been 30.11%, (8.23)%, 0.33%, 7.33%,
and 6.12%, respectively.
(4) For the period ended, December 31, 1996, the total return includes
capital infusions totaling $228,823. Absent the infusions, total return for
the Global Interactive/Telecomm Portfolio, the International Growth
Portfolio, the Growth Portfolio, the Value Portfolio and the Strategic
Income Portfolio would have been (6.68)%, (46.50%), (41.75%), 7.64%, and
(4.49%), respectively.
28 The Fulcrum Trust
<PAGE>
THE FULCRUM TRUST
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
------------------------------------------
RATIOS TO AVERAGE NET ASSETS
NET
INCREASE NET ASSET NET ASSETS
(DECREASE) VALUE TOTAL END OF NET INVESTMENT PORTFOLIO
IN NET END OF RETURN PERIOD INCOME (LOSS OPERATING EXPENSES MANAGEMENT TURNOVER
ASSET VALUE PERIOD (3) (4) (000'S) (A) (B) (A) (B) FEE RATE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$2.54 $15.86 30.27% $5,433 (2.06)% (4.38)% 3.33% 5.65% 1.96% 65%
3.32 13.32 40.24% 3,016 0.64% (5.14)% 1.47% 7.26% 0.27% 114%
- 10.00 0.49%** 594 (8.32)%* (14.82)%* 9.83%* 16.45%* 0.80%* 71%
- ---------------------------------------------------------------------------------------------------------------------
(0.78) 8.94 (8.02)% 2,664 0.55% (3.06)% 1.53% 5.14% 0.05% 60%
(0.61) 9.72 (5.25)% 3,207 0.97% (4.36)% 1.78% 7.11% 0.58% 13%
0.33 10.33 5.13%** 97 (56.37)%* (92.05)%* 67.76%* 126.26%* 0.80%* 116%
- ---------------------------------------------------------------------------------------------------------------------
0.06 12.01 0.50% 4,671 (0.39)% (4.21)% 1.22% 5.04% 0.00% 573%
1.11 11.95 10.24% 4,464 (0.16)% (5.38)% 0.90% 6.12% 0.20% 209%
0.84 10.84 8.40%** 148 (31.31)%* (58.37)%* 34.15%* 63.54%* 0.80%* 580%
- ---------------------------------------------------------------------------------------------------------------------
0.02 13.52 7.49% 8,989 0.01% (1.88)% 1.41% 3.30% 0.30% 70%
2.62 13.50 32.36% 6,585 1.30% (2.60)% 0.84% 4.75% 0.14% 177%
0.88 10.88 15.13%** 900 (6.55)%* (12.40)%* 8.19%* 14.13%* 0.80%* 74%
- ---------------------------------------------------------------------------------------------------------------------
0.34 10.22 6.53% 2,119 3.24% (1.74)% 2.18% 7.16% 0.47%+ 407%
(0.10) 9.88 0.60% 2,700 3.67% (1.39)% 1.61% 6.68% 0.41% 713%
(0.02) 9.98 0.44%** 1,107 (2.15)%* (7.02)%* 7.37%* 12.30%* 0.80%* 212%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The Fulcrum Trust 29
<PAGE>
APPENDIX [GRAPHIC]
INVESTMENT TECHNIQUES AND STRATEGIES
In managing its portfolios of investments, the Trust may make
use of the following investment techniques and strategies,
except The Strategic Income Portfolio may not invest in
foreign equity securities:
BANKING INDUSTRY AND SAVINGS INDUSTRY OBLIGATIONS
COMMERCIAL PAPER
DEBT SECURITIES
FOREIGN CURRENCY TRANSACTIONS
FOREIGN SECURITIES
FUTURES CONTRACTS
ILLIQUID SECURITIES
INDEXED SECURITIES
INVESTMENTS IN GOLD AND OTHER PRECIOUS METALS
LENDING PORTFOLIO SECURITIES
LEVERAGE
MORTGAGE-BACKED SECURITIES
OPTIONS
OTHER ASSET-BACKED SECURITIES
OTHER INVESTMENT COMPANIES
REPURCHASE AGREEMENTS
RESTRICTED SECURITIES
REVERSE REPURCHASE AGREEMENTS
SHORT SALES AGAINST THE BOX
SHORT SALES
U.S. GOVERNMENT SECURITIES
VARIABLE AND FLOATING RATE SECURITIES
WARRANTS
30 The Fulcrum Trust
<PAGE>
- -------------------------------------------------------------------------------
THE FULCRUM TRUST
THE GLOBAL INTERACTIVE/TELECOMM PORTFOLIO
THE INTERNATIONAL GROWTH PORTFOLIO
THE GROWTH PORTFOLIO
THE VALUE PORTFOLIO
THE STRATEGIC INCOME PORTFOLIO
The Trust's Statement of Additional Information (SAI) and annual and
semi-annual reports to shareholders include additional information about the
Portfolios. The SAI and the financial statements included in the Portfolio's
most recent annual report to shareholders are incorporated by reference into
this Prospectus, which means they are part of this Prospectus for legal
purposes. The Trust's annual report discusses the market conditions and
investment strategies that significantly affected each Portfolio's
performance during its last fiscal year. You may get free copies of these
materials, request other information about the Trust or make shareholder
inquiries by calling 1-800-917-1909.
You may review and copy information about the Trust, including its SAI, at
the Securities and Exchange Commission's public reference room in Washington,
D.C. You may call the Commission at 1-800-SEC-0330 for information about the
operation of the public reference room. You may also access reports and other
information about the Trust on the Commission's Internet site at
http://www.sec.gov. You may get copies of this information, with payment of a
duplication fee, by writing the Public Reference Section of the Commission,
Washington, D.C. 20549-6009. You may need to refer to the Trust's file number
under the Investment Company Act, which is 811-08278. THIS PROSPECTUS IS
INTENDED FOR USE WITH A VARIABLE CONTRACT OR QUALIFIED PLAN.
THE
FULCRUM
TRUST
440 Lincoln Street, Worcester, Massachusetts 01653
(800) 917-1909
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION ("SAI")
THE GLOBAL INTERACTIVE/TELECOMM PORTFOLIO
THE INTERNATIONAL GROWTH PORTFOLIO
THE GROWTH PORTFOLIO
The Value Portfolio
The Strategic Income Portfolio
THE FULCRUM TRUST
440 Lincoln Street
Worcester, Massachusetts 01653
(800) 917-1909
This Statement of Additional Information is intended to supplement the
information provided to investors in the Trust's Prospectus dated May 1,
1999. It has been filed with the Securities and Exchange Commission as part
of the Trust's Registration Statement. The contents of this Statement of
Additional Information are incorporated by reference in the Prospectus in
their entirety. A copy of the prospectus may be obtained free of charge from
the trust at the address and telephone number listed above.
INVESTORS SHOULD NOTE 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 Trust's Financial Statements and related notes and the report of the
independent accountants for the fiscal year ended December 31, 1998 are
included in the Trust's Annual Report to Shareholders, which is incorporated
by reference into this Statement of Additional Information. The Annual
Report to Shareholders is available, without charge, upon request, from the
Trust at the address and telephone numbers listed above.
DATED: MAY 1, 1999
<PAGE>
TABLE OF CONTENTS
PAGE
TRUST HISTORY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
DESCRIPTION OF THE PORTFOLIOS AND THEIR INVESTMENTS AND RISKS. . . . . . . .3
INVESTMENT RESTRICTIONS AND POLICIES. . . . . . . . . . . . . . . . . .5
INVESTMENT STRATEGIES AND TECHNIQUES. . . . . . . . . . . . . . . . . .6
PORTFOLIO TURNOVER. . . . . . . . . . . . . . . . . . . . . . . . . . 21
MANAGEMENT OF THE TRUST. . . . . . . . . . . . . . . . . . . . . . . . . . 22
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES. . . . . . . . . . . . 23
INVESTMENT MANAGEMENT AND OTHER SERVICES . . . . . . . . . . . . . . . . . 25
BROKERAGE ALLOCATION AND OTHER PRACTICES . . . . . . . . . . . . . . . . . 27
CAPITAL STOCK AND OTHER SECURITIES . . . . . . . . . . . . . . . . . . . . 29
PURCHASE, REDEMPTION AND PRICING OF SHARES . . . . . . . . . . . . . . . . 30
TAXATION OF THE FUNDS OF THE TRUST . . . . . . . . . . . . . . . . . . . . 31
UNDERWRITER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
CALCULATION OF PERFORMANCE DATA. . . . . . . . . . . . . . . . . . . . . . 32
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
<PAGE>
INTRODUCTION
TRUST HISTORY
This Statement of Additional Information discusses the Global
Interactive/ Telecomm Portfolio, the International Growth Portfolio, the
Growth Portfolio, the Value Portfolio and the Strategic Income Portfolio (the
"Portfolios") of The Fulcrum Trust (the "Trust"), which is an open-end
management investment company. The Trust was organized as a Massachusetts
business trust on September 8, 1993 and commenced operations on February 1,
1996. Prior to September 1, 1998, the Trust's name was "The Palladian
Trust."
DESCRIPTION OF THE PORTFOLIOS OF THE TRUST AND THEIR INVESTMENTS AND RISKS
The Trust is a diversified open-end management investment company. The
Trust currently offers shares of five different "series" or Portfolios. Each
Portfolio is, for investment purposes, a separate investment fund.
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 designed to
elaborate upon the discussion of certain securities and investment techniques
which are described in the Trust's 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 in this SAI. Captions and defined terms in
this SAI generally correspond to like captions and terms in the Portfolios'
Prospectus.
For a description of the Portfolios' principal investment strategies and
risks, types of investments each Portfolio may acquire and certain investment
techniques it may utilize, see "Principal Investment Strategies and Risks"
and "Other Investment Strategies and Risks" in the Trust Prospectus.
Following are descriptions of additional Portfolio strategies, policies and
restrictions.
ADDITIONAL INFORMATION ABOUT THE PORTFOLIOS
THE GLOBAL INTERACTIVE/TELECOMM PORTFOLIO
The Portfolio may invest up to 5% of its assets in high yield/high risk
debt securities. 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
Portfolio may not achieve its investment objective while using a temporary
defensive policy.
Examples of companies in which the Portfolio may invest are those
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.
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.
3
<PAGE>
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.
THE INTERNATIONAL GROWTH PORTFOLIO
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 may invest the Portfolio's assets in all types of
securities, most of which are denominated foreign currencies. The Portfolio
does not place any emphasis on dividends or interest income except when the
Portfolio Manager believes this income will have a favorable influence on the
market value of the security. The Portfolio may invest in indexed securities
whose value depends on the price of foreign currencies, commodities,
securities indices, or other financial indicators. In the normal course of
managing the Portfolio, the Portfolio Manager may invest a portion of the
Portfolio's assets in U.S. and foreign government obligations and money
market securities (including repurchase agreements) when the Portfolio has
monies not yet invested, it has sold one security and is waiting to buy
another one, so that it will be prepared to meet redemption requests, or to
earn a return on available cash balances. When market conditions warrant, the
Portfolio Manager can make substantial temporary defensive investments in
U.S. government obligations or investment-grade obligations of companies
incorporated in and having principal business activities in the United
States. The Portfolio may not achieve its investment objective while using a
temporary defensive policy.
THE GROWTH PORTFOLIO
The Portfolio may also invest in foreign equity securities, foreign
equity-type investments, investment grade debt securities, high yield/high
risk debt securities (up to 5% of assets), futures contracts and options,
money market investments and other securities. For temporary defensive
purposes, the Portfolio may invest all or part of its assets in investment
grade debt securities or money market instruments. The Portfolio may not
achieve its investment objective while using a temporary defensive policy.
THE VALUE PORTFOLIO
The Portfolio may invest up to 5% of its assets in high yield/high risk
debt securities. 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
Portfolio may not achieve its investment objective while using a temporary
defensive policy.
STRATEGIC INCOME PORTFOLIO
The Strategic Income Portfolio may consider making carefully selected
investments in below investment-grade debt securities of issuers in the
United States and in foreign markets.
The Strategic Income Portfolio also may invest up to 5% of its assets in
loan participations and assignments. 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 Portfolio may not achieve its investment objective while
using a temporary defensive policy.
INVESTMENT RESTRICTIONS
Each Portfolio's investment objective as set forth under "Objectives,
Strategies and Risks" 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
4
<PAGE>
the outstanding voting securities of a Portfolio means the vote, at an annual
or special meeting, of the lesser of (a) 67% or more of the voting securities
present at such meeting, if the holders of more than 50% of the outstanding
voting securities of such Portfolio are present or represented by proxy; or
(b) more than 50% of the outstanding voting securities of such Portfolio.
None of the Portfolios will:
(1) Make an investment unless, when considering all its other investments,
75% of the value of a Portfolio's assets would consist of cash, cash
items, obligations of the United States government, its agencies or
instrumentalities, securities of other investment companies, and other
securities. For purposes of this restriction, "other securities" are
limited for each issuer to not more than 5% of the value of a Portfolio's
assets and to not more than 10% of the issuer's outstanding voting
securities held by the 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
(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
accordance 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
5
<PAGE>
(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.
INVESTMENT STRATEGIES AND TECHNIQUES
The Portfolios may invest in the following securities and make use of the
following investment strategies and techniques:
DEBT SECURITIES (APPLICABLE TO ALL PORTFOLIOS)
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).
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.
High yield/high risk debt securities involve significant risks. They are
considered predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the
obligation. The market value of the securities also tend to be more sensitive
than higher rated securities to news about the issuer and changes in overall
economic conditions. In addition, markets for lower-rated securities may be
more limited than for higher-rated securities.
New issues of certain debt securities are often offered on a when-issued
or firm-commitment basis; that is, the payment obligation and the interest
rate are fixed at the time the buyer enters into the commitment, but delivery
and payment for the securities normally take place after the customary
settlement time. The value of when-issued securities or securities purchased
on a firm-commitment basis may vary prior to and after delivery depending on
market conditions and changes in interest rate levels. However, the
Portfolios will not accrue any income on these securities prior to delivery.
The Portfolios will maintain in a segregated account with its custodian an
amount of cash or high quality debt securities equal (on a daily
marked-to-market basis) to the amount of its commitment to purchase the
when-issued securities or securities purchased on a firm-commitment basis.
Many securities of foreign issuers are not rated by Moody's or Standard
and Poor's; therefore, the selection of such issuers depends, to a large
extent, on the credit analysis performed or used by the Portfolio Manager.
MORTGAGE-BACKED SECURITIES (APPLICABLE TO ALL PORTFOLIOS)
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.
6
<PAGE>
Interests in pools of mortgage-backed securities differ from other forms
of debt securities, which normally provide for periodic payment of interest
in fixed amounts with principal payments at maturity or specified call dates.
Instead, these securities provide a periodic payment which consists of both
interest and principal payments. In effect, these payments are a
"pass-through" of the periodic payments made by the individual borrowers on
the residential mortgage loans, net of any fees paid to the issuer or
guarantor of such securities. Additional payments are caused by repayments
of principal resulting from the sale of the underlying residential property,
refinancing or foreclosure, net of fees or costs which may be incurred.
Mortgage-backed securities issued by GNMA are described as "modified
pass-through" securities. These securities entitle the holder to receive all
interest and principal payments owed on the mortgage pool, net of certain
fees, at the scheduled payment dates, regardless of whether or not the
mortgagor actually makes the payment. Although GNMA guarantees timely payment
even if homeowners delay or default, tracking the "pass-through" payments
may, at times, be difficult. Expected payments may be delayed due to the
delays in registering the newly traded paper securities. The custodian's
policies for crediting missed payments while errant receipts are tracked down
may vary. Other mortgage-backed securities, such as those of the Federal Home
Loan Mortgage Corporation ("FHLMC") and the Federal National Mortgage
Association ("FNMA"), trade in book-entry form and should not be subject to
the risk of delays in timely payment of income.
Although the mortgage loans in the pool will have maturities of up to 30
years, the actual average life of the GNMA certificates typically will be
substantially less because the mortgages will be subject to normal principal
amortization and may be prepaid prior to maturity. Early repayments of
principal on the underlying mortgages may expose a Portfolio to a lower rate
of return upon reinvestment of principal. Prepayment rates vary widely and
may be affected by changes in market interest rates. In periods of falling
interest rates, the rate of prepayment tends to increase, thereby shortening
the actual average life of the GNMA certificates. Conversely, when interest
rates are rising, the rate of prepayment tends to decrease, thereby
lengthening the actual average life of the GNMA certificates. Accordingly,
it is not possible to accurately predict the average life of a particular
pool. Reinvestment of prepayments may occur at higher or lower rates than
the original yield on the certificates. Due to the prepayment feature and
the need to reinvest prepayments of principal at current rates, GNMA
certificates can be less effective than typical bonds of similar maturities
at "locking in" yields during periods of declining interest rates, although
they may have comparable risks of decline in value during periods of rising
interest rates.
FNMA AND FHLMC MORTGAGE-BACKED OBLIGATIONS. Government-related
guarantors (i.e., not backed by the full faith and credit of the U.S.
Government) include the FNMA and the FHLMC. FNMA, a federally chartered and
privately owned corporation, issues pass-through securities representing
interests in a pool of conventional mortgage loans. FNMA guarantees the
timely payment of principal and interest, but this guarantee is not backed by
the full faith and credit of the U.S. Government. FNMA also issues REMIC
Certificates, which represent an interest in a trust funded with FNMA
Certificates. REMIC Certificates are guaranteed by FNMA, and not by the full
faith and credit of the U.S. Government.
FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of
Housing and Urban Development. FNMA purchases conventional (i.e., not
insured or guaranteed by any government agency) residential mortgages from a
list of approved seller/servicers which include state and federally chartered
savings and loan associations, mutual savings banks, commercial banks, credit
unions, and mortgage bankers. FHLMC, a corporate instrumentality of the
United States, was created by Congress in 1970 for the purpose of increasing
the availability of mortgage credit for residential housing. Its stock is
owned by the twelve Federal Home Loan Banks. FHLMC issues Participation
Certificates ("PCS") which represent interests in conventional mortgages from
FHLMC's national portfolio. FHLMC guarantees the timely payment of interest
and ultimate collection of principal and maintains reserves to protect
holders against losses due to default. PCS are not backed by the full faith
and credit of the U.S. Government. The guarantees for both FNMA and FHLMC do
not extend to the securities value or yield, which are likely to fluctuate
inversely with fluctuations in interest rate. 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. 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. 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
7
<PAGE>
typically collateralized by portfolios of mortgage pass-through securities
guaranteed by GNMA, FHLMC, or FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. CMOs provide for a modified form of
call protection through a de facto breakdown of the underlying pool of
mortgages according to how quickly the loans are repaid. Monthly payment of
principal received from the pool of underlying investors, including
prepayments, is first returned to investors holding the shortest maturity
class. Investors holding the longer maturity classes receive principal only
after the first class has been retired. An investor is partially guarded
against a sooner-than-desired return of principal because of the sequential
payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple
Series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond
offering are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third-party trustee as
security for the Bonds. Principal and interest payments from the Collateral
are used to pay principal on the Bonds in the order A, B, C, Z. The Series
A, B, and C Bonds all bear current interest. Interest on the Series Z Bond
is accrued and added to the principal; a like amount is paid as principal on
the Series A, B, or C Bond currently being paid off. When the Series A, B,
and C Bonds are paid in full, interest and principal on the Series Z Bond
begin to be paid currently. With some CMOs, the issuer serves as a conduit to
allow loan originators (primarily builders or savings and loan associations)
to borrow against their loan portfolios.
OTHER MORTGAGE-BACKED SECURITIES. Commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers, and
other secondary market issuers also create pass-through pools of conventional
residential mortgage loans. In addition, such issuers may be the originators
and/or servicers of the underlying mortgage loans as well as the guarantors
of the mortgage-backed securities. Pools created by such non-governmental
issuers generally offer a higher rate of interest than government and
government-related pools because there are no direct or indirect government
or agency guarantees of payments in the former pools. Timely payment of
interest and principal of these pools may be supported by various forms of
insurance or guarantees, including individual loan, title, pool and hazard
insurance, and letters of credit. The insurance and guarantees are issued by
governmental entities, private insurers, and the mortgage poolers. Such
insurance, guarantees, and the creditworthiness of the issuers thereof will
be considered in determining whether a mortgage-backed security meets a
Portfolio's investment quality standards. There can be no assurance that the
private insurers or guarantors can meet their obligations under the insurance
policies or guarantee arrangements.
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 net 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 (APPLICABLE TO ALL PORTFOLIOS)
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. Two types of asset-backed securities are
"CARS-SM-" ("Certificates for Automobile Receivables-SM-") and Credit Card
Receivable Securities.
VARIABLE AND FLOATING RATE SECURITIES (APPLICABLE TO ALL PORTFOLIOS)
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
8
<PAGE>
specified interest rate index changes. The interest rate on variable or
floating rate securities is ordinarily determined by reference to or is a
percentage of a bank's prime rate, the 90-day U.S. Treasury bill rate, the
rate of return on commercial paper or bank certificates of deposit, an index
of short-term interest rates, or some other objective measure.
Variable or floating rate securities frequently include a demand feature
entitling the holder to sell the securities to the issuer at par value. In
many cases, the demand feature can be exercised at any time on 7 days'
notice; in other cases, the demand feature is exercisable at any time on 30
days' notice or on similar notice at intervals of not more than one year.
Some securities which do not have variable or floating interest rates may be
accompanied by puts producing similar results and price characteristics.
BANKING INDUSTRY AND SAVINGS INDUSTRY OBLIGATIONS (APPLICABLE TO ALL
PORTFOLIOS)
All Portfolios may invest in certificates of deposit, time deposits,
bankers' acceptances, and other short-term debt obligations issued by
commercial banks or 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.
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.
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.
COMMERCIAL PAPER (APPLICABLE TO ALL PORTFOLIOS)
Commercial paper 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.
Variable amount master demand 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
9
<PAGE>
daily changes in the amounts borrowed. The lender has the right to increase
or to decrease the amount under the note at any time up to the full amount
provided by the note agreement; and the borrower may prepay up to the full
amount of the note without penalty. Because variable amount master demand
notes are direct lending arrangements between the lender and borrower, and
because no secondary market exists for those notes, such instruments will
probably not be traded. However, the notes are redeemable (and thus
immediately repayable by the borrower) at face value, plus accrued interest,
at any time. In connection with master demand note arrangements, the
Portfolio Manager will monitor, on an ongoing basis, the earning power, cash
flow, and other liquidity ratios of the borrower and its ability to pay
principal and interest on demand. The Portfolio Manager also will consider
the extent to which the variable amount master demand notes are backed by
bank letters of credit. These notes generally are not rated by Moody's or
S&P; the Portfolio may invest in them only if the Portfolio Manager believes
that at the time of investment the notes are of comparable quality to the
other commercial paper in which the Portfolio may invest. Master demand
notes are considered by the Portfolio to have a maturity of one day, unless
the Portfolio Manager has reason to believe that the borrower could not make
immediate repayment upon demand. See Appendix A herein for a description of
Moody's and S&P ratings applicable to commercial paper.
REPURCHASE AGREEMENTS (APPLICABLE TO ALL PORTFOLIOS)
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.
The term of a repurchase agreement is generally quite short, possibly
overnight or for a few days, although it may extend over a number of months
(up to one year) from the date of delivery. The resale price is in excess of
the purchase price by an amount which reflects an agreed-upon market rate of
return, effective for the period of time the Portfolio is invested in the
security. This results in a fixed rate of return protected from market
fluctuations during the period of the agreement. This rate is not tied to
the coupon rate on the security subject to the repurchase agreement.
A Portfolio may engage in repurchase transactions in accordance with
guidelines approved by the Board of Trustees of the Trust, which include
monitoring the creditworthiness of the parties with which a Portfolio engages
in repurchase transactions, obtaining collateral at least equal in value to
the repurchase obligation, and marking the collateral to market on a daily
basis.
A Portfolio may not enter into a repurchase agreement having more than
seven days remaining to maturity if, as a result, such agreements together
with any other securities that are not readily 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.
REVERSE REPURCHASE AGREEMENTS (APPLICABLE TO ALL PORTFOLIOS)
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.
10
<PAGE>
OPTIONS (APPLICABLE TO ALL PORTFOLIOS)
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.
OPTIONS ON EQUITY SECURITIES (APPLICABLE TO ALL PORTFOLIOS)
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) upon conversion or exchange of
other securities it holds; or (3) the Portfolio holds on a share-for-share
basis a call on the
11
<PAGE>
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 liquid assets in a segregated account. A put option is
covered if: (1) the Portfolio deposits and maintains with in a segregated
account 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 liquid assets in a segregated account.
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 (APPLICABLE TO ALL PORTFOLIOS)
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 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 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.
12
<PAGE>
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 (APPLICABLE TO ALL PORTFOLIOS)
The Portfolios may purchase and sell put and call options on stock
indices traded on national securities exchanges, listed on NASDAQ or that
result from privately negotiated transactions with broker-dealers ("OTC
options"). Options on stock indices are similar to options on stock except
that, rather than the right to take or make delivery of stock at a specified
price, an option on a stock index gives the holder the right to receive, upon
exercise of the option, an amount of cash if the closing level of the stock
index upon which the option is based is greater than in the case of a call,
or less than, in the case of a put, the strike price of the option. This
amount of cash is equal to such difference between the closing price of the
index and the strike price of the option times a specified multiple (the
"multiplier"). If the option is exercised, the writer is obligated, in
return for the premium received, to make delivery of this amount. Unlike
stock options, all settlements are in cash, and gain or loss depends on price
movements in the stock market generally (or in a particular industry or
segment of the market) rather than price movements in individual stocks.
A Portfolio will write only "covered" options on stock indices. A call
option is covered if the Fund follows the segregation requirements set forth
in this paragraph. When a Portfolio writes a call option on a broadly based
stock market index, it will segregate or put into escrow with its custodian
or pledge to a broker as collateral for the option, cash, 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 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 or pledged or 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 or pledged falls below 100% of the current index value times the
multiplier times the number of contracts, the fund will so segregate 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 or pledge to the broker as 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
liquid assets in a segregated account.
A put option is covered if: (1) the Portfolio holds in a segregated
account 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
13
<PAGE>
strike price of the put written or less than the strike price of the put
written if the difference is maintained by the Portfolio in liquid assets in
a segregated account.
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 distinctive characteristics of options on stock indices create
certain risks that are not present with stock options. Index prices may be
distorted if trading of certain stocks included in the index is interrupted.
Trading in the index options also may be interrupted in certain
circumstances, such as if trading were halted in a substantial number of
stocks included in the index. If this occurred, a Portfolio would not be able
to close out options which it had purchased or written and, if restrictions
on exercise were imposed, may be unable to exercise an option it holds, which
could result in substantial losses to the Portfolio. Price movements in a
Portfolio's equity security holdings probably will not correlate precisely
with movements in the level of the index and, therefore, in writing a call on
a stock index a Portfolio bears the risk that the price of the securities
held by the Portfolio may not increase as much as the index. In such event,
the Portfolio would bear a loss on the call which is not completely offset by
movement in the price of the Portfolio's equity securities. It is also
possible that the index may rise when the Portfolio's securities do not rise
in value. If this occurred, the Portfolio would experience a loss on the call
which is not offset by an increase in the value of its securities holdings
and might also experience a loss in its securities holdings.
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 (APPLICABLE TO ALL PORTFOLIOS)
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. 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.
FUTURES CONTRACTS (APPLICABLE TO ALL PORTFOLIOS)
All Portfolios may purchase and sell (i) interest rate and other debt
related futures contracts, (ii) stock index and other equity related futures
contracts, (iii) foreign currency futures contracts, (iv) futures contracts
on gold and other precious metals, and (v) options on these futures
contracts. A futures contract provides for the future sale by one party and
purchase by the other party of a specified amount of a particular financial
instrument or commodity for a specified price at a designated date, time, and
place.
14
<PAGE>
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."
All Portfolios may use futures contracts for the purpose of hedging
positions with respect to securities, interest rates, foreign currencies, and
gold and other precious metals. In addition, the Growth Portfolio may also
use futures contracts for non-hedging purposes (in other words, for
investment purposes). For example, the Portfolio Manager may invest in
futures contracts rather than investing directly in securities. The initial
margins and premiums associated with futures contracts used for non-hedging
purposes will not exceed 5% of the fair market value of the Portfolio's
assets, taking into account unrealized profits and losses on such futures
contracts. The Portfolio may not purchase or sell a futures contract for
non-hedging purposes if immediately thereafter the sum of the amount of
margin deposits and premiums paid for related options would exceed 5% of the
market value of the Portfolio's total assets.
OPTIONS ON FUTURES CONTRACTS (APPLICABLE TO ALL PORTFOLIOS)
The Portfolios may enter into certain transactions involving options on
futures contracts. An option on a futures contract gives the purchaser or
holder the right, but not the obligation, to assume a position in a futures
contract (a long position if the option is a call and a short position if the
option is a put) at a specified price at any time during the option exercise
period. The writer of the option is required upon exercise to assume an
offsetting futures position (a short position if the option is a call and
long position if the option is a put). Upon exercise of the option, the
assumption of offsetting futures positions by the writer and holder of the
option will be accomplished by delivery of the accumulated balance in the
writer's futures margin account which represents the amount by which the
market price of the futures contract, at exercise, exceeds, in the case of a
call, or is less than, in the case of a put, the exercise price of the option
on the futures contract. As an alternative to exercise, the holder or writer
of an option may terminate a position by selling or purchasing an option of
the same series. There is no guarantee that such closing transactions can be
effected. The Portfolios intend to utilize options on futures contracts for
the same purposes that they use the underlying futures contracts.
Options on futures contracts are subject to risks similar to those
described above with respect to options on securities, options on stock
indices, and futures contracts. These risks include the risk that the
Portfolio Manager may not correctly predict changes in the market, the risk
of imperfect correlation between the option and the securities being hedged,
and the risk that there might not be a liquid secondary market for the
option. There is also the risk of imperfect correlation between the option
and the underlying futures contract. If there were no liquid 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 (APPLICABLE TO ALL PORTFOLIOS)
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, liquid assets 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
15
<PAGE>
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 SECURITIES (APPLICABLE TO ALL PORTFOLIOS EXCEPT THE STRATEGIC INCOME
PORTFOLIO MAY NOT INVEST IN EQUITY SECURITIES OF FOREIGN ISSUERS)
All Portfolios, except the Strategic Income Portfolio, may invest in
equity securities of foreign issuers. All Portfolios may invest in American
Depository Receipts ("ADRs"), which are described below. All Portfolios may
invest in foreign government securities and foreign debt securities. The
Portfolios may invest in obligations of foreign branches of commercial banks
and foreign banks. See the "Banking Industry and Savings Industry
Obligations" discussion in this section.
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 Germany.
Investments in foreign securities offer potential benefits not available
solely in securities of domestic issuers by offering the opportunity to
invest in foreign issuers that appear to offer growth potential, or in
foreign countries with economic policies or business cycles different from
those of the United States, or to reduce fluctuations in portfolio value by
taking advantage of foreign stock markets that may not move in a manner
parallel to U.S. markets. Investments in securities of foreign issuers
involve certain risks not ordinarily associated with investments in
securities of domestic issuers. Such risks include fluctuations in foreign
exchange rates, future political and economic developments, and the possible
imposition of exchange controls or other foreign governmental laws or
restrictions. Since each of these Portfolios may invest in securities
denominated or quoted in currencies other than the U.S. dollar, changes in
foreign currency exchange rates will affect the value of securities in the
portfolio and the unrealized appreciation or depreciation of investments so
far as U.S. investors are concerned. In addition, with respect to certain
countries, there is the possibility of expropriation of assets, confiscatory
taxation, other foreign taxation, political or social instability, or
diplomatic developments that could adversely affect investments in those
countries.
There may be less publicly available information about a foreign company
than about a U.S. company, and foreign companies may not be subject to
accounting, auditing, and financial reporting standards and requirements
comparable to or as uniform as those of U.S. companies. Foreign securities
markets, while growing in volume, have, for the most part, substantially less
volume than U.S. markets. Securities of many foreign companies are less
liquid and their prices more volatile than securities of comparable U.S.
companies. Transactional costs in non-U.S. securities markets are generally
higher than in U.S. securities markets. There is generally less government
supervision and regulation of exchanges, brokers, and issuers than there is
in the U.S. A Portfolio might have greater difficulty taking appropriate
legal action with respect to foreign investments in non-U.S. courts than with
respect to domestic issuers in U.S. courts. In addition, transactions in
foreign securities may involve greater time from the trade date until
settlement than domestic securities transactions and involve the risk of
possible losses through the holding of securities by custodians and
securities depositories in foreign countries.
Dividend and interest income from foreign securities may generally be
subject to withholding taxes by the country in which the issuer is located
and may not be recoverable by a Portfolio or its investors.
ADRs are certificates issued by a U.S. bank or trust company
representing the right to receive securities of a foreign issuer deposited in
a foreign subsidiary or branch or a correspondent of that bank. Generally,
ADRs, in registered form, are designed for use in U.S. securities markets and
may offer U.S. investors more liquidity than the underlying securities.
16
<PAGE>
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.
FOREIGN CURRENCY TRANSACTIONS (APPLICABLE TO ALL PORTFOLIOS)
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 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 will place 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
17
<PAGE>
for the Portfolio to purchase additional foreign currency on the spot market
(and bear the expense of such purchase) if the market value of the security
is less than the amount of foreign currency that the Portfolio is obligated
to deliver.
If the Portfolio retains the portfolio security and engages in an
offsetting transaction, it will incur a gain or a loss (as described below)
to the extent that there has been movement in forward contract prices.
Should forward prices decline during the period between the Portfolios
entering into a forward contract for the sale of a foreign currency and the
date it enters into an offsetting contract for the purchase of the foreign
currency, the Portfolio will realize a gain to the extent that the price of
the currency it has agreed to sell exceeds the price of the currency it has
agreed to purchase. Should forward prices increase, the Portfolio will
suffer a loss to the extent that the price of the currency it has agreed to
purchase exceeds the price of the currency it has agreed to sell.
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.
ILLIQUID SECURITIES (APPLICABLE TO ALL PORTFOLIOS)
A significant institutional trading market has developed in many
unregistered securities relying on Rule 144A, which permits resale among
certain institutional investors of certain unregistered securities. 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 (APPLICABLE TO ALL PORTFOLIOS)
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 (APPLICABLE TO ALL PORTFOLIOS)
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.
18
<PAGE>
SHORT SALES (APPLICABLE TO ALL PORTFOLIOS)
A short sale is a transaction in which the Portfolio sells a security it
does not own (but has borrowed) in anticipation of a decline in the market
price of the security. A Portfolio may make short sales to offset a potential
decline in a long position or a group of long positions, or if the Portfolio
Manager believes that a decline in the price of a particular security or
group of securities is likely.
When a Portfolio makes a short sale, the proceeds it receives are
retained by the broker until the Portfolio replaces the borrowed security. In
order to deliver the security to the buyer, the Portfolio must arrange
through a broker to borrow the security and, in so doing, the Portfolio
becomes obligated to replace the security borrowed at its market price at the
time of replacement, whatever that price may be. The Portfolio may have to
pay a premium to borrow the security. The Portfolio must also pay any
dividends or interest payable on the security until the Portfolio replaces
the security.
The Portfolios' obligation to replace the security borrowed in
connection with the short sale will be secured by collateral deposited with
the broker, consisting of cash or U.S. Government securities or other
securities acceptable to the broker. In addition, with respect to any short
sale, other than short sales against the box, as discussed below, the
Portfolios will be required to deposit collateral consisting of liquid assets
in a segregated account 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 (APPLICABLE TO ALL PORTFOLIOS)
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.
INVESTMENT IN GOLD AND OTHER PRECIOUS METALS (APPLICABLE TO ALL PORTFOLIOS)
All Portfolios may invest up to 10% of its total assets, in gold bullion
and coins and other precious metals (silver or platinum) bullion and in
futures contracts with respect to such metals. Each Portfolio may also engage
in gold futures contracts. (See "Futures Contracts" for further explanation
of this investment technique.) The Portfolios will further restrict the level
of their metal investments if necessary in order to comply with applicable
regulatory requirements. In order to qualify as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"), each Portfolio intends to manage its metal investments and/or
futures contracts on metals so that less than 10% of its gross income for tax
purposes during any fiscal year (the current limit on so-called
non-qualifying income) is derived from these and other sources that produce
such non-qualifying income.
Metals will not be purchased in any form that is not readily marketable,
and gold coins will be purchased for their intrinsic value only, I.E., coins
will not be purchased for their numismatic value. Any metals purchased by the
Portfolios will be delivered to and stored with a qualified custodian bank.
Metal investments do not generate interest or dividend income and will
subject the Portfolios to higher custody and transactional costs than are
normally associated with the ownership of securities or futures contracts on
precious metals.
19
<PAGE>
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.
LEVERAGE (APPLICABLE TO ALL PORTFOLIOS)
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 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 (APPLICABLE TO ALL PORTFOLIOS)
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.
PORTFOLIO TURNOVER
<TABLE>
<CAPTION>
PORTFOLIO 1998 1997
<S> <C> <C>
Global Interactive/Telecomm Portfolio(1) 65% 114%
International Growth Portfolio(2) 60% 13%
Growth Portfolio(3) 573% 209%
Value Portfolio(1) 70% 177%
Strategic Income Portfolio(4) 407% 713%
</TABLE>
(1) The portfolio turnover rates for The Global Interactive/Telecomm
Portfolio and The Value Portfolio were higher in 1997 than in 1998 because
1997 asset levels were lower during the start-up of the Portfolios.
(2) The portfolio turnover rate for The International Growth Portfolio showed
variations from 1997 to 1998 as a result of adjustments in response to
diversification requirements, market changes and shareholder redemptions.
(3) A change in the Portfolio Manager of The Growth Portfolio in August 1998
resulted in variations in the portfolio turnover rate from 1997 to 1998. The
new Portfolio Manager replaced most of the portfolio securities and started a
monthly rebalancing program.
(4) A new Portfolio Manager replaced most of the portfolio securities when it
assumed its duties in April 1998. The Portfolio also has a high concentration
of foreign currency contracts which are renewed periodically. These factors
have resulted in variations in the portfolio turnover rate.
20
<PAGE>
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The Trust is managed by a Board of Trustees. The Trustees have overall
responsibility for implementation of the investment policies and operations
of the Portfolios of the Trust. The Board of Trustees of the Trust holds
regular quarterly meetings and at other times on an as needed basis. The
affairs of the Trust are conducted in accordance with the By-Laws adopted by
the Trustees and the applicable laws of the Commonwealth of Massachusetts,
the state in which the Trust is organized.
Set forth below is a list of the Trustees and Officers of the Trust,
their business addresses, and principal occupations during the past five
years:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS DURING
NAME, ADDRESS AND AGE POSITION HELD WITH TRUST PAST FIVE YEARS
<S> <C> <C>
George J. Sullivan, Jr. (56) Chairman of the Board; President Chief Executive Officer, Newfound Consultants, Inc.
Newfound Consultants, Inc. c/o c3 (financial consulting), 1995-
260 Franklin Street Suite 260 present; Chief Operating Officer, Noble Partners,
Boston, MA 02110 L.P. (investment advisory services), 1991-1995.
Tom N. Dallape (31) Trustee; Vice President Commercial Land Broker, The Hoffman Company
18881 Von Karman Avenue Suite (Partner since January 1997; Senior Associate prior
1225 Irvine, CA 92612 to January 1997).
Gordon Holmes (60) Trustee Lecturer, Bentley College, 1998 - Present, Lecturer
Boston University School of Management and Executive in Residence, Boston University, 1997
595 Commonwealth Avenue - 1998; Certified Public Accountant and Partner
Boston, MA 02215 with Tofias, Fleishman, Shapiro and Co., P.C.,
prior to 1997.
David J. Mueller (46) Vice President Vice President, First Allmerica Financial Life
440 Lincoln Street Insurance Company since 1996; Assistant
Worcester, MA 01653 Vice President, First Allmerica 1995-1996; Business
Analyst, First Allmerica 1993-1995;
Manager, Coopers & Lybrand 1987-1993
Lisa M. Coleman(39) Vice President Vice President of Allmerica Asset Management,
440 Lincoln Street Inc. since 1994; Deputy Manager at Brown
Worcester, MA 01653 Brothers Harriman, 1989-1994
Stephen W. Bright (44) Vice President Vice President of Allmerica Asset Management,
440 Lincoln Street Inc. since 1996; Client Relationship
Worcester, MA 01653 Manager, Connecticut Mutual, 1994-1995; Investment
Officer, Travelers, 1986-1994
George M. Boyd (54) Secretary Counsel, First Allmerica Financial Life Insurance
440 Lincoln Street Company since January 1997; Director,
Worcester, MA 10653 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>
21
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS DURING
NAME, ADDRESS AND AGE POSITION HELD WITH TRUST PAST FIVE YEARS
<S> <C> <C>
Joseph W. MacDougall, Jr. (55) Assistant Secretary Vice President and Associate General Counsel,
440 Lincoln Street First Allmerica Financial Life Insurance
Worcester, MA 01653 Company, 1986-present
</TABLE>
Listed below is the compensation paid to each Trustee by the Trust for the
year ended December 31, 1998. The Trust currently does not provide any
pension or retirement benefits for its Trustees or officers. Gordon Holmes
also serves as a trustee of the Allmerica Investment Trust, a mutual fund
advised by Allmerica Financial Investment Management Services, Inc.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
NAME OF PERSON AND AGGREGATE COMPENSATION TOTAL COMPENSATION FROM TRUST
POSITION FROM TRUST COMPLEX PAID TO TRUSTEES*
--------------------------------------------------------------------------------------------------------------------
<S> <C>
George J. Sullivan, Jr. $4,500
Chairman of the Board; President ($1,500 for each Board Meeting) --
--------------------------------------------------------------------------------------------------------------------
Tom N. Dallape $13,500
Trustee; Vice President --
--------------------------------------------------------------------------------------------------------------------
Gordon Holmes, Trustee $4,500 $26,500
------------------------------------------------------------------------------------------------------------------
</TABLE>
* Includes two additional investment companies, Allmerica Investment Trust and
Allmerica Securities Trust
As of December 31, 1998, none of the trustees or officers directly owns
shares of the Portfolios. In addition, as of the date of this Statement of
Additional Information, the Trustees and Officers in the aggregate owned
variable contracts that entitled them to give voting instructions with
respect to less than one percent of the outstanding shares of the Portfolios.
PRINCIPAL SHAREHOLDERS
Shares of the Portfolios may be sold only to: (1) life insurance
company separate accounts to serve as the underlying investment medium for
variable annuity and variable life insurance contracts; (2) qualified
retirement plans, as permitted by Treasury regulations; and (3) life
insurance companies and advisers to the portfolios and their affiliates.
Listed below are the approximate percentage ownerships as of February 1, 1999
for those shareholders of record or those known by the Portfolio to own 5% or
more of the outstanding shares of a Portfolio.
Fulcrum Separate Account
of Allmerica Financial Life Insurance and Annuity Company
(a Delaware insurance company),
440 Lincoln Street, Worcester, MA 01653
<TABLE>
<S> <C>
Global Interactive/Telecomm Portfolio 73.71%
International Growth Portfolio 93.92%
Growth Portfolio 89.76%
Value Portfolio 83.15%
Strategic Income Portfolio 83.14%
</TABLE>
Fulcrum Separate Account
of First Allmerica Financial Life Insurance Company
(a New York insurance company),
440 Lincoln Street, Worcester, MA 01653
22
<PAGE>
<TABLE>
<S> <C>
Global Interactive/Telecomm Portfolio 16.82%
International Growth Portfolio 5.73%
Growth Portfolio 9.98%
Value Portfolio 13.84%
Strategic Income Portfolio 16.86%
</TABLE>
GAMCO Investors, Inc. (a New York Corporation),
One Corporate Center, Rye, NY 10580
<TABLE>
<S> <C>
Global Interactive/Telecomm Portfolio 9.15%
Value Portfolio 2.81%
</TABLE>
Allmerica Financial Life Insurance and Annuity Company and First Allmerica
Financial Life Insurance Company are both wholly owned subsidiaries of
Allmerica Financial Corporation. GAMCO Investors, Inc. is a wholly owned
subsidiary of Gabelli Funds, Inc.
The officers and directors of the Trust as a group owned less than 1% of the
outstanding shares of each Portfolio as of February 1, 1999.
INVESTMENT MANAGEMENT AND OTHER SERVICES
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.
Allmerica Financial Investment Management Services, Inc. ("AFIMS" or the
"Manager") serves as overall Manager of the Trust. As Manager, AFIMS is
responsible for general administration of the Trust as well as monitoring and
evaluating the performance of the Portfolio Managers. AFIMS, a Massachusetts
corporation, is registered with the Securities and Exchange Commission as an
investment adviser. AFIMS is located at 440 Lincoln Street, Worcester,
Massachusetts 01653. AFIMS is an indirect, wholly-owned subsidiary of
Allmerica Financial Corporation ("AFC"). AFC is the parent company of the two
life insurance companies currently utilizing the Trust as an underlying fund
for their variable contracts, Allmerica Financial Life Insurance and Annuity
Company ("Allmerica Financial") and First Allmerica Financial Life Insurance
Company.
Prior to February 12, 1998, Palladian Advisors, Inc. ("PAI") served as
Manager of the Trust, and Tremont Partners, Inc. ("Tremont") served as
Portfolio Advisor to the Trust. AFIMS now serves as Manager of the Trust, and
there is no Portfolio Advisor. Tremont was previously paid by PAI (not the
Trust). Thus, overall advisory fees were not changed as a result of the
switch from PAI and Tremont to AFIMS.
The Portfolio Managers have been selected by the Manager and Trustees.
The following is information relating to control and affiliations of the
Manager and Portfolio Managers of the Trust.
AFIMS, First Allmerica and Allmerica Financial Life are indirect
wholly-owned subsidiaries of Allmerica Financial Corporation ("AFC"), a
publicly-traded Delaware holding company for a group of affiliated companies,
the largest of which is First Allmerica. First Allmerica and Allmerica
Financial Life have established Separate Accounts for the purpose of funding
variable annuity contracts and variable life insurance policies. The shares
of each of the Funds of the Trust may be purchased only through these
Separate Accounts.
GAMCO Investors, Inc. ("GAMCO"), Portfolio Manager to both the Global
Interactive/Telecomm Portfolio and the Value Portfolio. GAMCO is a
wholly-owned subsidiary of Gabelli Funds, Inc. GAMCO provides investment
advice to individuals, banks and thrift institutions, investment companies,
pension, and profit sharing plans and trust, estates or charitable
organizations. GAMCO is a wholly-owned subsidiary of Gabelli Asset Management
Inc. GAMCO provides investment advice to individuals, banks and thrift
institutions, investment companies, pension, and profit-sharing plans and
trusts, estates and charitable organizations. Gabelli Asset Management Inc.
is a New York
23
<PAGE>
Stock Exchange listed company which, through its affiliates, provides
investment advisory and brokerage services to mutual funds, institutional and
high net worth investors, primarily in the United States.
Bee and Associates Incorporated ("Bee") serves as Portfolio Manager of
the International Growth Portfolio and was formed in 1989 to provide global
equity management expertise to individuals, retirement plan sponsors,
foundations, endowments and other entities.
Analytic Investors, Inc. ("Analytic Investors") Portfolio Manager of the
Growth Portfolio is a wholly-owned subsidiary of United Asset Management
Corporation, a publicly traded company. It was formed in 1970 to provide
management of investment advisory accounts to individuals, banks/thrift
institutions, investment companies, pension and profit sharing plans, trusts,
estates or charitable organizations and other corporations. One of the
largest independent investment management organizations in the world, United
Asset Management Corporation provides a broad range of institutional quality
investment management services to institutions and high-net-worth and retail
investors. These services are offered through a diverse group of operating
firms that managed over $201 billion on December 31, 1998 for clients located
throughout the United States, Canada and abroad.
Allmerica Asset Management, Inc. ("AAM") serves as the Portfolio Manager
of the Strategic Income Portfolio. AAM is an indirect, wholly-owned
subsidiary of Allmerica Financial Corporation ("AFC"). AAM serves as an
investment adviser to First Allmerica's General Account and to a number of
affiliated insurance companies and other affiliated accounts. AFC is a
publicly-traded Delaware holding company for a group of affiliated companies.
The following is a list of persons who are affiliated persons of the
Manager and/or any Portfolio Manager and the capacities in which the person
is affiliated:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
POSITION(S) HELD WITH POSITION(S) HELD WITH THE MANAGER OR
NAME THE TRUST PORTFOLIO MANAGER OF THE TRUST
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
George M. Boyd Secretary Counsel, AFIMS
- --------------------------------------------------------------------------------------------------------
Stephen W. Bright Vice President Vice President, AFIMS;
Vice President, AAM
- --------------------------------------------------------------------------------------------------------
Lisa M. Coleman Vice President Vice President, AAM
- --------------------------------------------------------------------------------------------------------
Joseph W. MacDougall, Jr. Assistant Secretary Assistant Secretary, AFIMS;
Assistant Secretary and Counsel, AAM
- --------------------------------------------------------------------------------------------------------
David J. Mueller Vice President Vice President, AFIMS
- --------------------------------------------------------------------------------------------------------
</TABLE>
ADVISORY FEES
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 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 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.
24
<PAGE>
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 Strategic Income Portfolio accrued fees to PAI of $1525,
of which the Portfolio paid PAI $634. PAI paid Tremont $381. For 1997, the
Strategic Income Portfolio accrued fees to PAI of $1,508, of which the
Portfolio paid PAI $432. PAI paid Tremont $432.
For 1996 the Portfolios paid the following fees to the Portfolio
Managers: Value ($4,127); Growth ($517); International Growth ($269);
Strategic Income ($6,097); Global Interactive/Telecomm ($3,193). For 1997
the Portfolios paid the following fees to the Portfolio Managers: Value
($3,787); Growth ($3,354); International Growth ($7,394); Strategic Income
($6,030); Global Interactive/Telecomm ($3,240).
For 1998, the Portfolio Managers of the Trust earned the following fees:
<TABLE>
<CAPTION>
Portfolio Manager Fees Earned in 1998
- ------------------ ---------------------
<S> <C>
GAMCO Investors, Inc. $80,210.56
Bee & Associates Incorporated $ 1,164.37
Allmerica Asset Management, Inc. $ 3,604.37
Fischer Francis Trees & Watts $ 2,177.61
</TABLE>
Set forth below is a chart with 1998 advisory fee information for PAI
and AFIMS. No fees were paid to PAI or AFIMS because of expense limitation
arrangements.
<TABLE>
<CAPTION>
1998 1998 1998
PAI AFIMS Total
Portfolio Expense Expense Expense 1998 Paid
--------- ------- ------- ------- ---------
<S> <C> <C> <C> <C>
Global Interactive/Telecomm Portfolio $1,139.31 $13,973.35 $15,112.66 $0.00
International Growth Portfolio 0.00 291.09 291.09 0.00
Growth Portfolio 0.00 0.00 0.00 0.00
Value Portfolio 940.72 3,820.37 4,761.09 0.00
Strategic Income Portfolio 100.22 1,314.83 1,415.05 0.00
--------- ---------- ---------- -----
$2,180.25 $19,399.64 $21,579.89 $0.00
</TABLE>
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers, LLP, 160 Federal Street, Boston, Massachusetts
02110, serves as independent accountants for the Trust and provides audit and
accounting services including (i) examination of the annual financial
statements, (ii) assistance and consultation with respect to the preparation
of filings with the Securities and Exchange Commission, and (iii) review of
annual income tax returns.
CUSTODIAN
Investors Bank & Trust Company ("IBT"), 200 Clarendon Street, Boston,
Massachusetts 02116 serves as the Trust's custodian. As such, it is
responsible for holding the Trust's assets.
IBT also provides fund accounting, administrative 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. For fund accounting and transfer agency services during
1998, each Portfolio paid $48,500 to IBT.
IBT also assists the manager by providing certain administrative
services, such as compliance reviews. IBT serves in this role pursuant to an
agreement with the Manager, not the Trust. The Manager paid IBT $195,555 in
1998 for these services.
EXPENSE LIMITATIONS FOR 1996 AND 1997 EXPENSES. The former Manager of
the Trust, Palladian Advisors, Inc. ("PAI") agreed to limit operating
expenses and reimburse those expenses to the extent that each Portfolio's
"other expenses" (I.E., expenses other than management fees) from September
11, 1996 through December 31, 1997 exceed the following expense limitations
(expressed as an annualized percentage of average daily net assets): Value
Portfolio, 0.70%; Growth Portfolio, 0.70%; International Growth Portfolio,
1.20%; Strategic Income Portfolio, 1.20%; Global Interactive/Telecomm
Portfolio, 1.20%. In addition, PAI voluntarily contributed to the Portfolios
the following amounts as capital: Value Portfolio, $51,906.35; Growth
Portfolio, $49,230.63; International Growth Portfolio, $34,947.29; Strategic
Income Portfolio, $52,077.06; and Global Interactive/Telecomm Portfolio,
$40,662.47. The amounts were contributed to offset expenses
25
<PAGE>
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 included Allmerica Financial
Life Insurance and Annuity Company, the issuer of a variable annuity contract
utilizing the Portfolios as investment options, certain principals of PAI or
entities selling the variable contracts.
On January 28, 1998, the Payment Group paid the Portfolios the full
amounts then due under the expense limitation arrangement. Subsequent
adjustments were made during the audit and Allmerica Financial paid the
Portfolios additional amounts due under the expense limitation arrangement.
Combining these payments, the following amounts have been paid to the Trust:
Value Portfolio, $146,510; Growth Portfolio, $123,531; International Growth
Portfolio, $96,868; Strategic Income Portfolio, $121,760; Global
Interactive/Telecomm Portfolio, $99,327. Accordingly, the Trust has been
fully reimbursed for amounts owed under the expense limitation arrangement.
REIMBURSEMENT PROVISION FOR 1996 AND 1997 EXPENSES. Through December 31,
1999, each Portfolio must reimburse AFIMS and Financial Marketing Group, Inc.
("FMG") for the payment described above, provided that such reimbursement
does not cause the Portfolio's "other expense" ratio to exceed the previous
expense limitation for that Portfolio under the Manager's expense limitation
arrangement. FMG has been the distributor and wholesaler of the Fulcrum
Variable Annuity Product since early 1998. (AFIMS and FMG have paid the other
members of the Payment Group, so any payment by the Trust will be made to
AFIMS and FMG only.) 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.
BROKERAGE ALLOCATION AND OTHER PRACTICES
BROKERAGE SELECTION
Each Portfolio Manager is responsible for the selection of brokers and
dealers to effect that Portfolio's transactions and the negotiation of
brokerage commissions, if any. Transactions on a stock exchange in equity
securities will be executed primarily through brokers who will receive a
commission paid by the Portfolio. In the United States, commissions are
usually negotiated; in other countries, the commissions are usually fixed.
Equity securities traded in the over-the-counter ("OTC") markets are
generally traded on a "net" basis with a dealer acting as principal for its
own account without a stated commission, although the price of the security
usually includes a profit to the dealer in the form of the spread between the
bid and asked prices. In some instances, the Portfolio Managers may execute
OTC transactions on an agency basis through a broker who is not a market
marker in the particular security, and in those transactions the Portfolio
will also pay a brokerage commission. 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.
26
<PAGE>
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 commissions are periodically reviewed to determine whether they are
reasonable in relation to the services provided. In some instances, the
Portfolio Managers receive research services they might otherwise have had to
perform for themselves. The research services provided by broker-dealers can
be useful to the Portfolio Managers in serving other clients, as well as the
Portfolios.
Paying commission amounts greater than otherwise available to obtain
research services poses potential conflicts of interest for the Portfolio
Manager. The Portfolio Manager may have an incentive to pay increased
commissions to obtain research services instead of paying for those services
from its own operating revenues. In addition, the Portfolio Manager may have
an incentive to select a broker-dealer based on the research services it
provides rather than the quality of trade execution. The Manager and the
Trust Board will monitor the Portfolio Managers' use of soft dollar
arrangements.
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.
COMMISSIONS
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.
("Gabelli"), 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. GAMCO is not authorized to pay higher brokerage commissions to
Gabelli in return for research services.
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. All 1996 and 1997 commissions
were paid to Gabelli. In 1998, Global Interactive/Telecomm Portfolio paid
total commissions of $8,762, $6,773 of which was paid to Gabelli. The
percentage of the Portfolio's aggregate brokerage commissions paid to Gabelli
during 1998 was 77.30%. The percentage of the Portfolio's aggregate dollar
amount of transactions involving the payment of commissions effected through
Gabelli during 1998 was 76.27%.
During 1996, the International Growth Portfolio paid total commissions
of $516. During 1997, the International Growth Portfolio paid total
commissions of $10,780. In 1998, the International Growth Portfolio paid
total commissions of $5,984.79. No commissions were paid to brokers
affiliated with the Trust or the Portfolio Manager.
27
<PAGE>
During 1996, the Growth Portfolio paid total commissions of $2,514.
During 1997, the Growth Portfolio paid total commissions of $36,181. In 1998,
the Growth Portfolio paid total commissions of $114,986.00. No commissions
were paid to brokers affiliated with the Trust or the Portfolio Manager. The
total commissions paid between 1996 and 1997 and 1998 differed due to several
factors, including growth in Portfolio assets, a change in the Portfolio
Manager in 1998 and a strategy pursued by the new Portfolio Management that
involved a high portfolio turnover rate.
During 1996, the Value Portfolio paid total commissions of $5,086. All
1996 commissions were paid to Gabelli. During 1997, the Value Portfolio paid
total commissions of $19,112. $17,367 of 1997 commissions were paid to
Gabelli. In 1998, the Value Portfolio paid total commissions of $21,387,
$19,006 of which was paid to Gabelli. The percentage of the Portfolio's
aggregate brokerage commissions paid to Gabelli during 1998 was 88.87%.
The percentage of the Portfolio's aggregate dollar amount of transactions
involving the payment of commissions effected through the broker during
1998 was 93.76%.
The Strategic Income Portfolio did not pay any commissions in 1996, 1997
and 1998.
CAPITAL STOCK AND OTHER SECURITIES
CAPITAL STOCK
The Trust is a Massachusetts business trust established under an
Agreement and Declaration of Trust dated September 8, 1993. Effective
September 1, 1998, the Trust changed its name to The Fulcrum Trust. The Trust
is currently offering to Separate Accounts shares of five different "series"
or Portfolios. Each Portfolio is, for investment purposes, a separate
investment fund, and each issues a separate class of capital stock with a par
value of $0.001 per share. Each share of stock issued with respect to a
Portfolio has a pro-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 SAI discusses the initial five Portfolios, which issue the
following five shares: Value Portfolio shares, Growth Portfolio shares,
International Growth Portfolio shares, Strategic Income Portfolio shares, and
Global Interactive/Telecomm Portfolio shares.
The Agreement and Declaration of Trust established three other
Portfolios, and the Board of Trustees may establish additional Portfolios
(with different investment objectives and policies) at any time in the
future. The Trust has sold 1,000 shares of one of those Portfolios (the
Balanced Opportunity Portfolio) to provide part of the Trust's initial
capitalization, but the Trust is not now offering shares of that Portfolio to
Separate Accounts or qualified plans. Establishment and offering of
additional Portfolios will not alter the rights of the Trust's shareholders.
When issued in accordance with the terms of the Agreement and Declaration of
Trust, shares are fully paid, redeemable, freely transferable, and
non-assessable by the Trust. Shares do not have preemptive rights or
subscription rights. In liquidation of a Portfolio of the Trust, each
shareholder is entitled to receive his or her pro rata share of the net
assets of that Portfolio.
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.
28
<PAGE>
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.
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.
PURCHASE, REDEMPTION AND PRICING OF SHARES
The prospectus provides information about the purchase, redemption and
pricing of Trust shares.
TAXATION OF THE PORTFOLIOS
The Trust intends to qualify under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"). In any year in which the Portfolios
qualify as regulated investment companies and distribute substantially all of
their net investment income and their net capital gains, the Portfolios
generally will not be subject to federal income tax to the extent they
distribute to shareholders such income and capital gains in the manner
required under the Code. If the Trust does not qualify under Subchapter M of
the Code, the Portfolios will be subject to Federal income tax.
The requirements applicable to a Portfolio's 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 which
contains certain diversification requirements, each Portfolio of the Trust
will be required to diversify its investments so that on the last day of each
quarter of a calendar year, no more than 55% of the value of its assets is
represented by any one investment, no more than 70% is represented by any two
investments, no more than 80% is represented by any three investments, and no
more than 90% is represented by any four investments. Generally, securities
of a single issuer are treated as one investment and obligations of each U.S.
Government agency and instrumentality (such as the Government National
Mortgage Association) are treated for purposes of Section 817(h) as issued by
separate issuers. In 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.
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,
29
<PAGE>
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 Portfolio's
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.
UNDERWRITER
The Trust does not presently utilize an underwriter.
CALCULATION OF PERFORMANCE DATA
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) calculated pursuant to the following formula:
(n)
P(1+T) = ERV (where P = a hypothetical initial payment of $1,000, T = the
average annual total return, n = the number of years, and ERV = the ending
redeemable value of a hypothetical $1,000 payment made at the beginning of
the period). Quotations of total return may also be shown for other periods.
All total return figures reflect the deduction of a proportional share of
Portfolio expenses on an annual basis, and assume that all dividends and
distributions are reinvested when paid. AVERAGE ANNUAL RETURNS are
calculated by determining the change in value of a hypothetical investment in
the Portfolio over a stated period, and calculating the annually compounded
percentage rate that would have produced the same result if the rate of
growth or decline in value has been constant over the period. Average annual
returns covering periods of less than one year are calculated by determining
the Portfolio's total return for the period, extrapolating that return for a
full year, and stating the result as an annual return. Because this method
assumes that performance will remain constant for the entire year when in
fact it is unlikely that performance will remain constant, average annual
returns for a partial year must be viewed as strictly theoretical information.
INVESTORS ALSO SHOULD BE AWARE THAT A PORTFOLIO'S PERFORMANCE IS NOT CONSTANT
OVER TIME, BUT VARIES FROM YEAR TO YEAR. AVERAGE ANNUAL RETURN REPRESENTS
AVERAGED FIGURES AS OPPOSED TO THE ACTUAL PERFORMANCE OF THE PORTFOLIO.
A Portfolio also may quote cumulative total returns which reflect the simple
change in value of an investment over a stated period. Average annual total
returns and cumulative total returns may be quoted as a percentage or as a
dollar amount. They may be calculated for a single investment, for a series
of investments or for a series of redemptions over any time period. Total
returns may be broken down into their components of income and capital in
order to show their respective contributions to total return. Performance
information may be quoted numerically or in a table, graph or similar
illustration.
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
30
<PAGE>
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.
YIELD QUOTATION
The 30-day (or one month) standard yields of the Portfolios are calculated as
follows:
(6)
YIELD = 2[(a - b + 1) - 1)]
-----
cd
Where: a = dividends and interest earned by a Portfolio during the period;
b = expenses accrued for the period (not of reimbursements);
c = average daily number of shares outstanding during the period
entitled to receive dividends; and
d = maximum offering price per share on the last day of the period.
For the purpose of determining net investment income earned during the
period (variable "a" in the formula), dividend income on equity securities
held by a Portfolio is recognized by accruing 1/360 of the stated dividend
rate of the security each day that the security is in the Portfolio. Except
as noted below, interest earned on debt obligations held by a Portfolio is
calculated by computing the yield to maturity of each obligation based on the
market value of the obligation (including actual accrued interest) at the
close of business on the last business day of each month, or, with respect to
obligations purchased during the month, the purchase price (plus actual
accrued interest) and dividing the result by 360 and multiplying the quotient
by the market value of the obligation (including actual accrued interest) in
order to determine the interest income on the obligation for each day of the
subsequent month that the obligation is held by the Portfolio. For purposes
of this calculation, it is assumed that each month contains 30 days. The
maturity of an obligation with a call provision is the next call date on
which the obligation reasonably may be expected to be called or, if none, the
maturity date. With respect to debt obligations purchased at a discount or
premium, the formula generally calls for amortization of the discount or
premium. The amortization schedule will be adjusted monthly to reflect
changes in the market value of such debt obligations. Expenses accrued for
the period (variable "b" in the formula) include all recurring fees charged
by a Portfolio to all shareholder accounts in proportion to the length of the
base period and the Portfolio's mean (or median) account size. Undeclared
earned income will be subtracted from the offering price per share (variable
"d" in the formula).
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.
31
<PAGE>
PERFORMANCE INFORMATION FOR PERIOD ENDED DECEMBER 31, 1998
Set forth below are average annual total return information for the
Global Interactive/Telecomm Portfolio, International Growth Portfolio, Growth
Portfolio, Value Portfolio, and Strategic Income Portfolio and for the 1 year
and/or since inception periods ended December 31, 1998 and yield for the
Strategic Income Portfolio for the 30-day period ended December 31, 1998.
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED
DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1 YEAR PERIOD* SINCE INCEPTION**
<S> <C> <C>
Global Interactive/Telecomm Portfolio 30.27% 23.18%
International Growth Portfolio (8.02%) (3.09%)
Growth Portfolio 0.50% 6.48%
Value Portfolio 7.49% 18.44%
Strategic Income Portfolio 6.53% 2.55%
</TABLE>
* The total return for the one-year period ended December 31, 1998
reflects the impact of an expense reimbursement totaling $595,526, allocated
among each Portfolio.
** The total return since inception includes the impact of expense
reimbursements totaling $1,258,473 and a capital infusion totaling $269,919,
allocated to each Portfolio.
The Global Interactive/Telecomm Portfolio, Growth Portfolio, Value Portfolio
and Strategic Income Portfolio began business operations on February 1, 1996.
The International Growth Portfolio began operations on March 26, 1996.
YIELD FOR 30 DAY PERIOD
-----------------------
ENDED DECEMBER 31, 1998
-----------------------
(UNAUDITED)
Strategic Income Portfolio 3.3756%
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.
FINANCIAL STATEMENTS
The Trust's Financial Statements and related notes and the report of the
independent accountants contained in the Trust's annual report for the fiscal
year ended December 31, 1998 are incorporated by reference into this Statement
of Additional Information.
32
<PAGE>
APPENDIX A
DESCRIPTION OF RATINGS
CERTAIN RATINGS OF CORPORATE DEBT SECURITIES
MOODY'S INVESTORS SERVICE INC.
Aaa-Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged."
Aa-Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade
bonds.
A-Bonds rated A possess many favorable investment attributes and are
generally considered as upper-medium-grade obligations.
Baa-Bonds rated Baa are considered medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may
be lacking or may be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba-Bonds rated Ba are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterize bonds in this class.
B-Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small.
Caa-Bonds rated Caa are of poor standing. Such issues may be in default or
elements of danger with respect to principal or interest may be present.
Ca-Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked short comings.
STANDARD & POOR'S CORPORATION
AAA-Bonds rated AAA have the highest rating assigned by Standard & Poor's to
a debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA-Bonds rated AA have a very strong capacity to pay interest and repay
principal, and differ from the highest rated issues in small degree.
A-Bonds rated A have a strong capacity to pay interest and repay principal,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than bonds in higher rated
categories.
BBB-Bonds rated BBB are regarded as having adequate capacity to pay interest
and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in the higher rated categories.
BB, B, CCC, CC-Bonds rated BB, B, CCC, and CC are regarded on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures to
adverse conditions.
33
<PAGE>
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.
34
<PAGE>
PART C. OTHER INFORMATION
Item 23. EXHIBITS
Exhibit 1 Agreement and Declaration of Trust. (1)
Exhibit 2 By-Laws. (1)
Exhibit 3 See exhibits (1.) and (2.) above.
Exhibit 4(a) Management Agreement (the "Management Agreement") between
Registrant and Allmerica Investment Management Company, Inc.
("AIMCO"), predecessor to Allmerica Financial Investment
Management Services, Inc. ("AFIMS") (the "Manager") dated
February 12, 1998. (2)
Exhibit 4(b) Portfolio Manager Agreement among Registrant, Palladian
Advisors, Inc. and GAMCO Investors, Inc. with respect to the
Global Interactive/Telecomm Portfolio dated October 12,
1995. (3)
Exhibit 4(c) Portfolio Manager Agreement among Registrant, Palladian
Advisors, Inc. and Bee & Associates, Incorporated with
respect to the International Growth Portfolio dated October
12, 1995. (3)
Exhibit 4(d) Portfolio Manager Agreement among the Registrant, AFIMS and
Pilgrim Baxter Analytic Investors, Inc. with respect to the
Growth Portfolio dated August 1, 1998. (3)
Exhibit 4(e) Portfolio Manager Agreement among Registrant, Palladian
Advisors, Inc. and GAMCO Investors, Inc. with respect to the
Value Portfolio dated October 12, 1995. (3)
Exhibit 4(f) Portfolio Manager Agreement among the Registrant, AIMCO and
Allmerica Asset Management, Inc. with respect to the
Strategic Income Portfolio dated April 11, 1998. (2)
Exhibit 4(g) Substitution Agreement among the Registrant, Palladian
Advisors, Inc., AIMCO and GAMCO Investors, Inc. with respect
to the Global Interactive/Telecomm Portfolio dated February
11, 1998. (2)
Exhibit 4(h) Substitution Agreement among the Registrant, Palladian
Advisors, Inc., AIMCO and Bee & Associates, Incorporated
with respect to the International Growth Portfolio dated
February 11, 1998. (2)
Exhibit 4(i) Substitution Agreement among the Registrant, Palladian
Advisors, Inc., AIMCO and GAMCO Investors, Inc. with respect
to the Value Portfolio dated February 11, 1998. (2)
Exhibit 5 Not applicable.
Exhibit 6 Not applicable.
Exhibit 7 Custodian Agreement between the Registrant and Investors
Bank & Trust Company dated September 29, 1995. (4)
<PAGE>
Exhibit 8(a) Transfer Agency and Service Agreement between Registrant and
Investors Bank & Trust Company dated September 29, 1995.
(4)
Exhibit 8(b) Administration Services Agreement between AFIMS, Inc. and
Investors Bank & Trust Company dated April 15, 1998. (3)
Exhibit 8(c) Portfolio Manager Investment Agreement among Registrant,
Palladian Advisors, Inc., Western Capital Financial Group,
Inc., and GAMCO Investors, Inc. with respect to the Global
Interactive/Telecomm Portfolio dated October 12, 1995. (4)
Exhibit 8(d) Portfolio Manager Investment Agreement among Registrant,
Palladian Advisors, Inc., Western Capital Financial Group,
Inc., Bee & Associates, Incorporated and Bruce B. Bee and
Edward N. McMillan with respect to the International Growth
Portfolio dated October 12, 1995. (4)
Exhibit 8(e) Portfolio Manager Investment Agreement among Registrant,
Palladian Advisors, Inc., Western Capital Financial Group,
Inc., and GAMCO Investors, Inc. with respect to the Value
Portfolio dated October 12, 1995. (4)
Exhibit 8(f) Participation Agreement among the Registrant, AIMCO, and
Allmerica Financial Life Insurance and Annuity Company dated
April 9, 1998. (2)
Exhibit 8(g) Participation Agreement among the Registrant, AIMCO, and
First Allmerica Financial Life Insurance Company dated April
9, 1998. (2)
Exhibit 9 Opinion of counsel. (1)
Exhibit 10 Consent of independent accountants. (5)
Exhibit 11 Not applicable.
Exhibit 12 Not applicable.
Exhibit 13 Not applicable.
Exhibit 14 Not applicable.
Exhibit 15 Not applicable.
Exhibit 16 Power of Attorney dated February 16, 1999. (3)
Exhibit 27. Financial Data Schedules. (5)
(1) Incorporated by reference to post-effective amendment No. 1 Reg. No.
33-73882, filed January 26, 1996.
(2) Incorporated by reference to post-effective amendment No. 7, Reg. No.
33-73882, filed July 2, 1998.
(3) Incorporated by reference to post-effective amendment No. 9, Reg. No.
33-73882, filed February 25, 1999.
<PAGE>
(4) Incorporated by reference to post-effective amendment No. 8, Reg. No.
33-73882, filed August 31, 1998.
(5) Filed herewith.
Item 24. PERSONS UNDER COMMON CONTROL WITH REGISTRANT
Not Applicable.
Item 25. INDEMNIFICATION
Section 5.4 of the Agreement and Declaration of Trust of The Fulcrum Trust,
Exhibit 1 hereto, provides in part:
"The Trust shall indemnify (from the assets of the Portfolio or Portfolio in
question) each of its Trustees and officers (including persons who serve at
the Trust's request as directors, officers or trustees of another
organization in which the Trust has any interest as a shareholder, creditor
or otherwise) [hereinafter referred to as a "Covered Person"] against all
liabilities, including but not limited to amounts paid in satisfaction of
judgments, in compromise or as fines and penalties, and expenses, including
reasonable accountants' and counsel fees, incurred by any Covered Person in
connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, before any court or administrative or
legislative body, in which such Covered Person may be or may have been
involved as a party or otherwise or with which such person may be or may have
been threatened, while in office or thereafter, by reason of being or having
been such a Trustee or officer, director or trustee, except with respect to
any matter as to which it has been determined that such Covered Person (i)
did not act in good faith in the reasonable belief 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 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."
<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 Trust and the Manager (and their officers, directors and
certain other persons) 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 agrees, among other things, to indemnify the Life Company (and its
officers and directors and certain other persons) 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 by the Manager of the
Participation Agreement. Subject to certain limitations, the Trust agrees,
among other things, to indemnify the Life Company (and its officers and
directors and certain other persons) against all losses, claims, damages, or
liabilities (including legal and other expenses) arising out of a failure by
the Trust to meet certain requirements or a material breach by the Trust of
the Participation Agreement.
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 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT MANAGER AND PORTFOLIO
MANAGERS
(a) ALLMERICA FINANCIAL INVESTMENT MANAGEMENT SERVICES, INC.
See "Management of the Portfolios" in the Prospectus and "Investment
Management and Other Services" in the Statement of Additional Information,
(Parts A and B) of this Registration Statement.
Information as to Allmerica Financial Investment Management Services, Inc.'s
directors and executive officers is included in its Form ADV filed with the
Securities and Exchange Commission (File Number 801-55463), the text of which
is incorporated by reference.
(b) GAMCO INVESTORS, INC.
See "Management of the Portfolios" in the Prospectus and "Investment
Management and Other Services" in the Statement of Additional Information,
(Parts A and B) of this Registration Statement relating to the Global
Interactive/Telecomm and the Value Portfolios.
Information as to GAMCO Investors, Inc.'s directors and executive officers is
included in its Form ADV
<PAGE>
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) BEE & ASSOCIATES, INCORPORATED
See "Management of the Portfolios" in the Prospectus and "Investment
Management and Other Services" in the 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 by reference.
(d) ANALYTIC INVESTORS, INC.
See "Management of the Portfolios" in the Prospectus and "Investment
Management and Other Services" in the Statement of Additional Information,
(Parts A and B) of this Registration Statement relating to the Growth
Portfolio.
Information as to Analytic Investors, Inc.'s directors and executive officers
is included in its Form ADV filed with the Securities and Exchange Commission
(File No. 801-7082), as most recently amended, the text of which is
incorporated herein by reference.
(e) ALLMERICA ASSET MANAGEMENT, INC.
See "Management of the Portfolios" in the Prospectus and "Investment
Management and Other Services" in the Statement of Additional Information,
(Parts A and B) of this Registration Statement relating to the Strategic
Income Portfolio.
Information as to the directors and executive officers of Allmerica Asset
Management, Inc. 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 27. PRINCIPAL UNDERWRITERS
Not Applicable.
Item 28. 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) Bee & Associates, Incorporated, 370 17th
Street, Denver, CO 80202; (4) Analytic Investors, Inc., 700 South Flower
Street, Suite 2400, Los Angeles, CA 90017; and (5) Investors Bank & Trust
Company, 200 Clarendon Street, Boston, MA 02111.
<PAGE>
Item 29. MANAGEMENT SERVICES
Not Applicable.
Item 30. UNDERTAKINGS
Not Applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act and the Investment Company
Act, The Fulcrum Trust certifies that it meets all of the requirements for
effectiveness of this Registration Statement under Rule 485(b) under the
Securities Act and has duly caused this Registration Statement to be
signed on its behalf by the undersigned, duly authorized, in the City of
Boston, and Commonwealth of Massachusetts on the 29th day of April, 1999.
THE FULCRUM TRUST
By: /s/ George J. Sullivan, Jr.
---------------------------
George J. Sullivan, Jr.
Chairman, President and Trustee
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed below by the following persons in the capacities
and on the date(s) indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ George J. Sullivan, Jr. Chairman, President and Trustee April 29, 1999
- ---------------------------- -----------------
George J. Sullivan, Jr.
- ---------------------------- Trustee , 1999
Thomas N. Dallape -----------------
- ---------------------------- Trustee , 1999
Gordon Holmes -----------------
- ---------------------------- Treasurer , 1999
David J. Mueller Principal Accounting Officer -----------------
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act and the Investment Company
Act, The Fulcrum Trust certifies that it meets all of the requirements for
effectiveness of this Registration Statement under Rule 485(b) under the
Securities Act and has duly caused this Registration Statement to be
signed on its behalf by the undersigned, duly authorized, in the City of
Boston, and Commonwealth of Massachusetts on the ___ day of _________, 1999.
THE FULCRUM TRUST
By:
---------------------------
George J. Sullivan, Jr.
Chairman, President and Trustee
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed below by the following persons in the capacities
and on the date(s) indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
Chairman, President and Trustee
- ---------------------------- -------------------
George J. Sullivan, Jr.
/s/ Thomas N. Dallape Trustee April 29, 1999
- ---------------------------- -------------------
Thomas N. Dallape
Trustee
- ---------------------------- -------------------
Gordon Holmes
Treasurer
- ---------------------------- Principal Accounting Officer -------------------
David J. Mueller
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act and the Investment Company
Act, The Fulcrum Trust certifies that it meets all of the requirements for
effectiveness of this Registration Statement under Rule 485(b) under the
Securities Act and has duly caused this Registration Statement to be
signed on its behalf by the undersigned, duly authorized, in the City of
Boston, and Commonwealth of Massachusetts on the ___ day of ___________, 1999.
THE FULCRUM TRUST
By:
---------------------------
George J. Sullivan, Jr.
Chairman, President and Trustee
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed below by the following persons in the capacities
and on the date(s) indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
Chairman, President and Trustee
- ---------------------------- -------------------
George J. Sullivan, Jr.
- ---------------------------- Trustee -------------------
Thomas N. Dallape
/s/ Gordon Holmes Trustee April 29, 1999
- ---------------------------- -------------------
Gordon Holmes
Treasurer
- ---------------------------- Principal Accounting Officer -------------------
David J. Mueller
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act and the Investment Company
Act, The Fulcrum Trust certifies that it meets all of the requirements for
effectiveness of this Registration Statement under Rule 485(b) under the
Securities Act and has duly caused this Registration Statement to be signed on
its behalf by the undersigned, duly authorized, in the City of Boston, and
Commonwealth of Massachusetts on the ___ day of _________, 1999.
THE FULCRUM TRUST
By:
---------------------------
George J. Sullivan, Jr.
Chairman, President and Trustee
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed below by the following persons in the capacities
and on the date(s) indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
Chairman, President and Trustee
- ---------------------------- -------------------
George J. Sullivan, Jr.
- ---------------------------- Trustee -------------------
Thomas N. Dallape
- ---------------------------- Trustee -------------------
Gordon Holmes
/s/ David J. Mueller Treasurer April 29, 1999
- ---------------------------- Principal Accounting Officer -------------------
David J. Mueller
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
Exhibit 10 Consent of independent accountants
Exhibit 27 Financial Data Schedules
</TABLE>
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and the
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 10 to the registration statement on Form N-1A (the
"Registration Statement") of our report dated February 10, 1999, relating to
the financial statements and financial highlights appearing in the December
31, 1998 Annual Report to Shareholders of The Fulcrum Trust, which are also
incorporated by reference into the Registration Statement. We also consent to
the references to us under the heading "Financial Highlights" in the
Prospectus and under the headings "Independent Accountants" and "Financial
Statements" in the Statement of Additional Information.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
April 28, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FULCRUM
TRUST FORM N-SAR FOR THE PERIOD ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 5
<NAME> FULCRUM TRUST GLOBAL INTERACTIVE/TELECOMM PORTFOLIO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 3,792,888
<INVESTMENTS-AT-VALUE> 4,782,565
<RECEIVABLES> 49,188
<ASSETS-OTHER> 669,926
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 5,501,679
<PAYABLE-FOR-SECURITIES> 13,296
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 55,134
<TOTAL-LIABILITIES> 68,430
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4,437,756
<SHARES-COMMON-STOCK> 342,587
<SHARES-COMMON-PRIOR> 226,425
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 5,816
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 989,677
<NET-ASSETS> 5,433,249
<DIVIDEND-INCOME> 30,458
<INTEREST-INCOME> 18,996
<OTHER-INCOME> 0
<EXPENSES-NET> 129,255
<NET-INVESTMENT-INCOME> (79,801)
<REALIZED-GAINS-CURRENT> 560,131
<APPREC-INCREASE-CURRENT> 591,625
<NET-CHANGE-FROM-OPS> 1,071,955
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 464,938
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 195,105
<NUMBER-OF-SHARES-REDEEMED> (108,258)
<SHARES-REINVESTED> 29,315
<NET-CHANGE-IN-ASSETS> 2,410,190
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (89)
<OVERDIST-NET-GAINS-PRIOR> (9,487)
<GROSS-ADVISORY-FEES> 76,082
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 219,240
<AVERAGE-NET-ASSETS> 3,879,573
<PER-SHARE-NAV-BEGIN> 13.32
<PER-SHARE-NII> (0.23)
<PER-SHARE-GAIN-APPREC> 4.62
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 1.49
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 15.86
<EXPENSE-RATIO> 3.33
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FULCRUM
TRUST FORM N-SAR FOR THE PERIOD ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 3
<NAME> FULCRUM TRUST INTERNATIONAL GROWTH PORTFOLIO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 2,704,921
<INVESTMENTS-AT-VALUE> 2,454,841
<RECEIVABLES> 25,495
<ASSETS-OTHER> 222,805
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2,703,141
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 38,687
<TOTAL-LIABILITIES> 38,687
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3,197,592
<SHARES-COMMON-STOCK> 297,947
<SHARES-COMMON-PRIOR> 329,943
<ACCUMULATED-NII-CURRENT> 13,007
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (296,037)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (250,108)
<NET-ASSETS> 2,664,454
<DIVIDEND-INCOME> 50,462
<INTEREST-INCOME> 8,121
<OTHER-INCOME> 0
<EXPENSES-NET> 42,995
<NET-INVESTMENT-INCOME> 15,588
<REALIZED-GAINS-CURRENT> (291,313)
<APPREC-INCREASE-CURRENT> 25,567
<NET-CHANGE-FROM-OPS> (250,158)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 95,378
<NUMBER-OF-SHARES-REDEEMED> (127,374)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (550,271)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (94)
<OVERDIST-NET-GAINS-PRIOR> (7,211)
<GROSS-ADVISORY-FEES> 1,485
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 144,843
<AVERAGE-NET-ASSETS> 2,815,555
<PER-SHARE-NAV-BEGIN> 9.72
<PER-SHARE-NII> 0.05
<PER-SHARE-GAIN-APPREC> (0.83)
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 8.94
<EXPENSE-RATIO> 1.53
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FULCRUM
TRUST FORM N-SAR FOR THE PERIOD ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 2
<NAME> FULCRUM TRUST GROWTH PORTFOLIO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 3,982,494
<INVESTMENTS-AT-VALUE> 4,446,330
<RECEIVABLES> 87,711
<ASSETS-OTHER> 187,563
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 4,721,604
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 50,309
<TOTAL-LIABILITIES> 50,309
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4,806,200
<SHARES-COMMON-STOCK> 388,852
<SHARES-COMMON-PRIOR> 373,580
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (598,741)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 463,836
<NET-ASSETS> 4,671,295
<DIVIDEND-INCOME> 31,660
<INTEREST-INCOME> 7,641
<OTHER-INCOME> 07,910
<EXPENSES-NET> 57,910
<NET-INVESTMENT-INCOME> (18,609)
<REALIZED-GAINS-CURRENT> (217,499)
<APPREC-INCREASE-CURRENT> 187,404
<NET-CHANGE-FROM-OPS> (48,704)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 171,896
<NUMBER-OF-SHARES-REDEEMED> (156,624)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 197,414
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (381,286)
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 19,853
<GROSS-EXPENSE> 239,744
<AVERAGE-NET-ASSETS> 4,755,973
<PER-SHARE-NAV-BEGIN> 11.95
<PER-SHARE-NII> (0.05)
<PER-SHARE-GAIN-APPREC> 0.11
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 12.01
<EXPENSE-RATIO> 1.22
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FULCRUM
TRUST FORM N-SAR FOR THE PERIOD ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 1
<NAME> FULCRUM TRUST VALUE PORTFOLIO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 8,152,686
<INVESTMENTS-AT-VALUE> 8,690,829
<RECEIVABLES> 38,161
<ASSETS-OTHER> 336,434
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 9,065,424
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 76,498
<TOTAL-LIABILITIES> 76,498
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8,514,734
<SHARES-COMMON-STOCK> 664,986
<SHARES-COMMON-PRIOR> 487,816
<ACCUMULATED-NII-CURRENT> 399
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (64,350)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 538,143
<NET-ASSETS> 8,988,926
<DIVIDEND-INCOME> 82,706
<INTEREST-INCOME> 28,434
<OTHER-INCOME> 0
<EXPENSES-NET> 110,741
<NET-INVESTMENT-INCOME> 399
<REALIZED-GAINS-CURRENT> 532,066
<APPREC-INCREASE-CURRENT> (8,738)
<NET-CHANGE-FROM-OPS> 523,727
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 611,642
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 330,785
<NUMBER-OF-SHARES-REDEEMED> (198,954)
<SHARES-REINVESTED> 45,339
<NET-CHANGE-IN-ASSETS> 2,395,805
<ACCUMULATED-NII-PRIOR> 23
<ACCUMULATED-GAINS-PRIOR> 15,203
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 23,869
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 258,233
<AVERAGE-NET-ASSETS> 7,840,351
<PER-SHARE-NAV-BEGIN> 13.50
<PER-SHARE-NII> 0.00
<PER-SHARE-GAIN-APPREC> 1.01
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.99
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 13.52
<EXPENSE-RATIO> 1.41
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FULCRUM
TRUST FORM N-SAR FOR THE PERIOD ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 4
<NAME> FULCRUM TRUST STRATEGIC INCOME PORTFOLIO
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 1,869,611
<INVESTMENTS-AT-VALUE> 1,894,262
<RECEIVABLES> 40,460
<ASSETS-OTHER> 238,269
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2,172,991
<PAYABLE-FOR-SECURITIES> 24,542
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 29,089
<TOTAL-LIABILITIES> 53,631
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,098,476
<SHARES-COMMON-STOCK> 207,348
<SHARES-COMMON-PRIOR> 273,302
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (3,767)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 24,651
<NET-ASSETS> 2,119,360
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 84,097
<OTHER-INCOME> 0
<EXPENSES-NET> 33,804
<NET-INVESTMENT-INCOME> 50,293
<REALIZED-GAINS-CURRENT> (12,556)
<APPREC-INCREASE-CURRENT> 52,055
<NET-CHANGE-FROM-OPS> 89,792
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2,856
<DISTRIBUTIONS-OF-GAINS> 49,760
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 112,047
<NUMBER-OF-SHARES-REDEEMED> (183,153)
<SHARES-REINVESTED> 5,152
<NET-CHANGE-IN-ASSETS> (588,514)
<ACCUMULATED-NII-PRIOR> 1,131
<ACCUMULATED-GAINS-PRIOR> 9,981
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 10,354
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 111,090
<AVERAGE-NET-ASSETS> 1,551,096
<PER-SHARE-NAV-BEGIN> 9.88
<PER-SHARE-NII> 0.25
<PER-SHARE-GAIN-APPREC> 0.39
<PER-SHARE-DIVIDEND> 0.02
<PER-SHARE-DISTRIBUTIONS> 0.28
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.22
<EXPENSE-RATIO> 2.18
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
