<PAGE>
=============
Allmerica Financial Services Annual Report
- --------------------------------------------------------------------------------
DECEMBER 31, 1998
The Fulcrum Fund(SM)
Variable Annuity
o The Fulcrum Trust
1998
The Fulcrum Fund(SM)
[GRAPHIC]
[LOGO]
ALLMERICA
FINANCIAL(R)
<PAGE>
Table of Contents
General Information ....................................................... 2
A Letter from the Chairman ................................................ 3
Portfolio Performance Summary ............................................. 4
Product Performance Summaries ............................................. 6
The Fulcrum Fund Variable Annuity (FAFLIC) ................................ 6
The Fulcrum Fund Variable Annuity (AFLIAC) ................................ 7
Domestic & International Equity Market Overview ........................... 8
The Global Interactive/Telecomm Portfolio ................................. 10
The International Growth Portfolio ........................................ 11
The Growth Portfolio ...................................................... 12
The Value Portfolio ....................................................... 13
Bond & Money Market Overview .............................................. 14
The Strategic Income Portfolio ............................................ 16
Financials ................................................................ F-1
For further information, see the accompanying annual reports.
See Client Notices on page F-24.
1
<PAGE>
================================================================================
General Information
================================================================================
Officers of First Allmerica Financial Life Insurance
Company (FAFLIC) and Allmerica Financial Life
Insurance and Annuity Company (AFLIAC)
John F. O'Brien, President, CEO (FAFLIC) and
Chairman of the Board (AFLIAC)
Richard M. Reilly, President and CEO (AFLIAC)
Edward J. Parry, III, Vice President, CFO and Treasurer
Abigail M. Armstrong, Secretary and Counsel
Investment Manager
Allmerica Financial Investment Management Services, Inc.
440 Lincoln Street, Worcester, MA 01653
General Distributor
Allmerica Investments, Inc.
440 Lincoln Street, Worcester, MA 01653
Independent Accountants
PricewaterhouseCoopers LLP
160 Federal Street, Boston, MA 02110
Administrator, Custodian, Transfer Agent
Investors Bank & Trust Company
200 Clarendon Street, Boston, MA 02116
Legal Counsel
Shea & Gardner
1800 Massachusetts Avenue, N.W., Washington D.C. 20036
Officers of The Fulcrum Trust
George J. Sullivan, Jr., President
David J. Mueller, Vice President
George M. Boyd, Secretary
Board of Trustees of The Fulcrum Trust
George J. Sullivan, Jr. Chairman(1)
Tom N. Dallape(1)
Gordon Holmes(1)
Portfolio Managers
Allmerica Asset Management, Inc.
440 Lincoln Street, Worcester, MA 01653
The Strategic Income Portfolio
Bee & Associates, Inc.
370 17th Street, Suite 3560, Denver, CO 80202
The International Growth Portfolio
GAMCO Investors, Inc.
One Corporate Center, Rye, NY 10570-1434
The Value Portfolio
The Global Interactive/Telecomm Portfolio
Pilgrim Baxter Analytic Investors, Inc.
700 Flower Street, Suite 2400
Los Angeles, CA 90017
The Growth Portfolio
(1) Independent Trustees
2
<PAGE>
================================================================================
A Letter from the Chairman
================================================================================
[PHOTO]
Dear Client:
1998 marked an unprecedented fourth straight year of returns greater than 20% as
measured by the S&P500(R) Index.
The final year-end numbers though, mask the high drama investors experienced
during the course of the year. The S&P 500(R) Index had one of its most volatile
years, rising over 20% through June, plummeting 19% during the next two months,
and rallying to record the strongest fourth quarter return since 1926. Even
while the S&P500(R) Index increased 28.6% for the year, it was driven by a
narrow group of stocks. Fifteen stocks represented half of the gain of the
entire index, while the average stock in the S&P500(R) increased only 13.9%.
Stocks of smaller companies fared even worse, declining 2.6% as measured by the
Russell 2000 Index.
Overseas markets struggled with their own issues. The European community
prepared to introduce a common currency on January 1, 1999. Russia devalued the
ruble causing a broad decline in many emerging markets, and Japan continued to
struggle with a stubborn recession.
The bond market offered few places to hide. Russia's devaluation spurred fixed
income investors to sell otherwise solid credits and fly to the safety of U.S.
Treasuries. It was only after the Federal Reserve lowered interest rates three
times that investors began buying again and both the U.S. stock and bond markets
rallied.
Throughout the year, your Board continued to carefully analyze the growth and
development of The Fulcrum Trust while paying close attention to the market
environment as just discussed. We are pleased with the two changes in the
portfolio managers for the Growth and Strategic Income Portfolios that were
initiated earlier in the year. After reconstructing the funds according to their
own investment style and strategy, the new investment managers have produced
competitive investment returns during the second half of the year. A new
marketing effort was also initiated with the Financial Marketing Group which we
believe should provide ongoing growth in the Trust.
In many ways, 1998 was a year of transition for The Fulcrum Trust. We have made
significant improvements in many areas and look forward to building on this
solid foundation during the coming years. Once again, we urge you to work
closely with your financial advisor to build a diversified portfolio which seeks
not only growth during good times, but protection in bad times.
On behalf of the Board of Trustees,
/s/ George J. Sullivan, Jr.
George J. Sullivan, Jr.
Chairman of the Board
The Fulcrum Trust
3
<PAGE>
================================================================================
Portfolio Performance Summary
================================================================================
The Fulcrum Trust
- --------------------------------------------------------------------------------
Average Annual Total Returns as of 12/31/98
For easy reference, the total returns for the Portfolios are summarized below.
Keep in mind that these returns reflect all Portfolio charges but do not include
any insurance product fees or expenses. For returns that reflect the deduction
of product charges, please refer to the Product Performance Summaries beginning
on page 6.
<TABLE>
<CAPTION>
Portfolio
Inception 1 Life of
Portfolios Date Year Portfolio
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
The Fulcrum Trust
The Global Interactive/Telecomm Portfolio 2/1/96 30.27% 23.18%
The International Growth Portfolio 3/26/96 -8.02% -3.09%
The Growth Portfolio 2/1/96 .50% 6.48%
The Value Portfolio 2/1/96 7.49% 18.44%
The Strategic Income Portfolio 2/1/96 6.53% 2.55%
</TABLE>
Portfolio performance returns given above reflect an investment in the
underlying Portfolios listed on the date of inception of each Portfolio.
Portfolio performance returns in this report are historical and are not
indicative of future results. The investment return and principal value of an
investment will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost.
4
<PAGE>
- --------------------------------------------------------------------------------
Performance
- --------------------------------------------------------------------------------
<PAGE>
================================================================================
Product Performance Summary
================================================================================
The Fulcrum Fund(SM) Variable Annuity (FAFLIC)
- --------------------------------------------------------------------------------
Average Annual Total Returns as of 12/31/98
For easy reference, the total returns for The Fulcrum Fund(SM) Variable Annuity
sub-accounts of FAFLIC are summarized below. Keep in mind that these returns are
net of all product charges. For returns that do not reflect the deduction of
product charges, please refer to the Individual Portfolio Reviews beginning on
page 10.
<TABLE>
<CAPTION>
Without Surrender Charge With Surrender Charge
And Contract Fee And Contract Fee
Sub- Since Since
Account Inception Inception
Inception 1 Life of of Sub- 1 Life of of Sub-
Sub-Accounts Date Year Portfolio Account Year Portfolio Account
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
The Fulcrum Trust
The Global Interactive/Telecomm Portfolio 9/30/97 28.52% 21.43% 32.34% 20.69% 19.44% 26.48%
The International Growth Portfolio 10/3/97 -9.25% -4.48% -16.44% -15.86% -6.55% -20.97%
The Growth Portfolio 9/30/97 -0.94% 4.96% -11.48% -7.52% 2.76% -16.36%
The Value Portfolio 9/30/97 5.96% 16.75% 8.79% -1.17% 14.69% 2.92%
The Strategic Income Portfolio 10/3/97 5.02% 1.09% 3.87% -1.38% -0.59% -0.66%
</TABLE>
Performance returns given above are for the The Fulcrum Fund Variable Annuity
sub-accounts of FAFLIC, and except in the columns designated as "Life of
Sub-Account", assume an investment in the underlying portfolios listed above on
the date of inception of each Fund. Performance returns designated as "Life of
Sub-Account" assume an investment in the portfolios listed on the date of
inception of each Sub-Account. All full surrenders or withdrawals in excess of
the free amount may be subject to a declining sales charge. The maximum
contingent deferred sales charge is 7.0%. Please refer to the product prospectus
for the assumptions used to calculate performance.
Performance returns in this report are historical and are not indicative of
future results. The investment return and principal value of an Investment will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost.
6
<PAGE>
================================================================================
Product Performance Summary
================================================================================
The Fulcrum Fund(SM) Variable Annuity (AFLIAC)
- --------------------------------------------------------------------------------
Average Annual Total Returns as of 12/31/98
For easy reference, the total returns for The Fulcrum Fund(SM) Variable Annuity
sub-accounts of AFLIAC are summarized below. Keep in mind that these returns are
net of all product charges. For returns that do not reflect the deduction of
product charges, please refer to the Individual Portfolio Reviews beginning on
page 10.
<TABLE>
<CAPTION>
Without Surrender Charge With Surrender Charge
And Contract Fee And Contract Fee
Sub- Since Since
Account Inception Inception
Inception 1 Life of of Sub- 1 Life of of Sub-
Sub-Accounts Date Year Portfolio Account Year Portfolio Account
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
The Fulcrum Trust
The Global Interactive/Telecomm Portfolio 3/13/97 28.52% 21.43% 32.68% 21.02% 19.80% 29.51%
The International Growth Portfolio 3/13/97 -9.25% -4.48% -10.22% -15.20% -6.60% -13.43%
The Growth Portfolio 3/13/97 -0.94% 4.96% 2.47% -7.54% 2.71% -1.22%
The Value Portfolio 3/13/97 5.96% 16.75% 16.52% -1.11% 14.76% 12.74%
The Strategic Income Portfolio 3/13/97 5.02% 1.09% 4.36% -1.49% -0.71% 1.08%
</TABLE>
Performance returns given above are for the The Fulcrum Fund Variable Annuity
sub-accounts of AFLIAC, and except in the columns designated as "Life of
Sub-Account", assume an investment in the underlying portfolios listed above on
the date of inception of each Fund. Performance returns designated as "Life of
Sub-Account" assume an investment in the portfolios listed on the date of
inception of each Sub-Account. All full surrenders or withdrawals in excess of
the free amount may be subject to a declining sales charge. The maximum
contingent deferred sales charge is 7.0%. Please refer to the product prospectus
for the assumptions used to calculate performance.
Performance returns in this report are historical and are not indicative of
future results. The investment return and principal value of an Investment will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost.
7
<PAGE>
================================================================================
Domestic & International Equity Market Overview
================================================================================
1994: Federal Reserve Board raises interest rates six times, stalling equity
markets even while corporate earnings continued to grow.
1995: Favorable economic conditions result in large gains for the U.S. equity
markets. Europe turns in strongest performance of international equity markets.
1996: Despite a volatile marketplace, the U.S. stock market performs well.
Internationally, European countries post the most impressive gains.
1997: Robust economic growth, declining interest rates and low unemployment
produce a third consecutive year of unprecedented gains for the U.S. stock
market.
1998: Worldwide economic problems cause considerable volatility for stocks. Yet,
the market posts its fourth consecutive year of double-digit gains.
1998 proved to be one of the most volatile years for the stock market since the
crash of 1987. Widely expected by many investors to be a cooling off period for
stocks, the past year brought a series of ups and downs -- and double-digit
gains -- to the market. In fact, it proved to be the fourth straight year of
plus-20% returns for the S&P 500(R) Index.
The roller coaster ride for stocks began mid-year as economic turmoil in Asia,
Russia and Latin America resulted in increased investor concern. This turmoil
produced a third quarter of market extremes. In July, the market posted an
all-time high. But August brought a severe correction as investors feared lower
worldwide demand for goods and services would lead to slower earnings growth for
U.S. corporations.
But slower earnings growth proved not to deter investors altogether. While they
fled investments exposed to international market risk, they favored the safety
and predictability of large-company U.S. stocks -- regardless of how vastly
overpriced they seemed.
Once the Federal Reserve cut interest rates for the third time in November,
investors returned to the market in full force. They poured money into a small
group of large-company stocks, sending broad market indexes soaring to another
year of strong performance. In fact, S&P 500(R) performance was dominated
throughout the year by only a few high-powered names such as Microsoft Corp.,
Dell Computer Corp., Intel Corp.
While large-cap gains outpaced both small- and mid-cap stocks and drove overall
market performance, technology led sector performance for the year.
Internet-related stocks, in particular, drove results even higher. Specifically,
companies such as Amazon.com, an on-line book seller and eBay.com, an on-line
auction service, saw their market values explode. Although these Internet stocks
are not included in the S&P 500(R) Index, they helped bolster the entire
technology sector. Investors seemed to feel that any company involved in
computers would benefit from an Internet-driven surge in demand.
Despite the ongoing Asian Encouraged by the upcoming
crisis, stocks benefit from [GRAPHIC] monetary union, Europe leads [GRAPHIC]
low interest rates and a global performance.
steady economy.
1998 JAN FEB MAR APR MAY JUN
- --------------------------------------------------------------------------------
Technology, led by Massive economic
Internet-related problems in Russia,
[GRAPHIC] stocks, is the send shock waves
best-performing through the world's
industry sector for financial markets.
the year.
8
<PAGE>
================================================================================
Domestic & International Equity Market Overview
================================================================================
Other top-performing industry groups in 1998 were telecommunications which
benefited from merger and acquisition activity, and retailers, which fared well
as a result of strong consumer spending. On the other hand, market laggards were
dominated by oil services, which felt the painful effects of sharply declining
crude oil prices.
On the international front, Europe performed well in 1998, encouraged by the
anticipated monetary union. In fact, Greece's stock market, led all global
performers with a smashing 86% return. Countries such as Italy and Belgium also
performed particularly well in this region.
However, results from emerging market countries weren't as rosy. Currency
concerns plagued Asia for much of 1998. While Japan's stock market went through
a series of ups and downs, countries like Thailand and Korea started taking
serious measures to turn their economies around -- and it definitely made a
difference. South Korea proved to be one of the top-performing countries during
1998.
Russia, however, wasn't so favored. By mid-year, massive economic problems and a
large devaluation in the ruble caused investors to flee Russian stocks and
bonds, sending shock waves throughout the world's financial markets.
As a result of Russia's economic collapse, investors grew more concerned about
what the impact would be on other emerging markets. These worries particularly
affected Brazil, which unlike Russia, managed to keep currency devaluation at
bay thanks to support from the U.S., promises of reform and higher interest
rates. Unfortunately, the higher cost of borrowing stunted economic growth and
sent Brazil's economy into a recession.
Economic problems weren't confined to just Brazil, however. Slumping prices for
crude oil and other commodities curbed economic growth in other parts of Latin
America as well. Because oil prices make up about 70% of the government's
revenue, Venezuela was particularly hard hit. Political concerns also were a
factor here and combined to produce one of the worst-performing markets for the
year.
Currently, uncertainty exists throughout the world's stock markets. In the U.S.,
stable interest rates and low inflation bode well for the stock market, but
slower corporate earnings growth continues to be a concern. In Europe, the
introduction of the Euro, the new single currency for Europe, should benefit the
region. However, slower earnings growth remains a concern. And although Japan
and most of Asia appear to be on the road to economic recovery, great
uncertainty still exists in these markets.
Given the unsettled nature of the global economy, it will be difficult for the
U.S. stock market to continue its four-year string of outstanding returns.
As a result of Sharply declining
worldwide economic oil prices cause the
[GRAPHIC] unrest, investors [GRAPHIC] emerging markets of
favor the safety of Latin America to
large-company suffer.
stocks, which drive
performance for the
year.
JUL AUG SEP OCT NOV DEC
- --------------------------------------------------------------------------------
The Federal Reserve Uncertainty exists
cuts interest rates throughout the
[GRAPHIC] three times world's stock
prompting investors markets as investors
to favor a small predict a slower
group of year for corporate
large-company earnings -- and more
stocks. normal results from
the stock market.
9
<PAGE>
================================================================================
The Global Interactive/Telecomm Portfolio
================================================================================
For the one-year period ended December 31, 1998, the Global Interactive/Telecomm
Portfolio delivered a total return of 30.27% versus the 28.58% return of the S&P
500(R)Index for the same period.
During 1998, this Portfolio delivered strong returns despite a challenging
market for small- and mid-cap stocks. As value-oriented investors, the
Portfolio's managers looked for bargains and focused on good-quality companies
at bargain prices.
For example, shares of Gaylord Entertainment Company seemed undervalued and were
added to the Portfolio. At $28 per share, the value of its Dallas CBS affiliate,
which is worth about $400 million, did not appear to be reflected in its
stockprice.
Shares of Telephone & Data Systems (TDS) were also added to the Portfolio.
Because the company owns local, cellular and PCS franchises, the Portfolio's
managers believes the company is well-positioned, and significantly undervalued,
as technologies begin to converge.
In addition, investments made in Time Warner and Cablevision were rewarded as
the convergence of the telephone, television and computer created new products
and benefits for the consumer -- and enhanced company cash flows.
Heading into 1999, the Portfolio's managers see little change in the global
investment landscape. Nonetheless, they believe attractive investment
opportunities exist for value-oriented stock pickers.
- --------------------------------------------------------------------------------
Investment Manager
- --------------------------------------------------------------------------------
GAMCO Investors, Inc.
About The Fund
Seeks to make money by investing globally in equity securities of companies that
develop, manufacture or sell interactive and/or telecommunications services and
products.
- --------------------------------------------------------------------------------
Portfolio Composition
- --------------------------------------------------------------------------------
As of December 31, 1998, the sector allocation of net assets was:
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<S> <C>
Telephone Systems 22%
Entertainment & Leisure 15%
Publishing 11%
Communications 8%
Media-Broadcasting 7%
Other 37%
</TABLE>
- --------------------------------------------------------------------------------
Average Annual Total Returns
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period ended December 31, 1998 1 Year Life of Fund
<S> <C> <C>
The Global Interactive/Telecomm Portfolio 30.27% 23.18%
S&P 500(R) Index 28.58% 27.69%
</TABLE>
- --------------------------------------------------------------------------------
Growth of a $10,000 Investment Since 1996
- --------------------------------------------------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
The Global/Interactive
Telecomm Portfolio S&P 500(R) Index
<S> <C> <C>
2/96 $10,000 $10,000
12/98 $18,364 $20,392
</TABLE>
The Global Interactive/Telecomm Portfolio is a portfolio of The Fulcrum Trust.
Portfolio composition will vary over time.
Past performance is no guarantee of future results. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
The S&P 500(R) Index is an unmanaged index of 500 leading stocks. S&P 500(R) is
a registered trademark of the Standard & Poor's Corporation. Performance numbers
are net of all fund operating expenses, but do not include insurance charges. If
performance information included the effect of these additional charges, it
would have been lower.
10
<PAGE>
================================================================================
The International Growth Portfolio
================================================================================
The International Growth Portfolio returned -8.02% for the one-year period ended
December 31, 1998, trailing the Morgan Stanley EAFE Index and the MSCI EAFE
Small Cap Index which returned 18.23% and 5.44% respectively for the same
period.
During 1998, the unprecedented gains of large-cap stocks once again drove market
performance and significantly outpaced small-cap stocks.
In keeping with the Portfolio's investment objective, however, the managers
invested primarily in small-cap foreign securities which explains much of the
Portfolio's 1998 performance.
Currently, the Portfolio's managers note that U.S. small-cap stocks are selling
at their greatest discount to the S&P 500(R) in more than 20 years and a similar
pattern is evident overseas. They further believe that the economic environment
which traditionally supports outperformance by smaller companies is in place --
and should benefit the Portfolio's top holdings, including: Technomatix,
Orbotech, Nobel Biocare and Selecta.
Heading into the new year, the Portfolio's managers expect corporate earnings of
large-cap stocks to slow while many smaller companies continue to produce strong
earnings growth.
As a result, they expect interest in small-cap stocks to increase either from
investors or from companies in the form of acquisitions. One holding where this
is already evident is with Singapore's Electronic Resources which recently
announced that it was being acquired by the largest company in the industry --
Ingram Micro of the U.S.
- --------------------------------------------------------------------------------
Average Annual Total Returns
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period ended December 31, 1998 1 Year Life of Fund
<S> <C> <C>
The International Growth Portfolio -8.02% -3.09%
Morgan Stanley EAFE Index 18.23% 7.32%
</TABLE>
- --------------------------------------------------------------------------------
Growth of a $10,000 Investment Since 1996
- --------------------------------------------------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
The International Morgan Stanley
Growth Porfolio EAFE Index
<S> <C> <C>
3/96 $10,000 $10,000
12/98 $ 9,168 $12,161
</TABLE>
- --------------------------------------------------------------------------------
Investment Manager
- --------------------------------------------------------------------------------
Bee & Associates, Inc.
About The Fund
Seeks to make money by investing internationally for long-term capital
appreciation, primarily in equity securities.
- --------------------------------------------------------------------------------
Portfolio Composition:
- --------------------------------------------------------------------------------
As of December 31, 1998 the country allocation of net assets was:
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
<S> <C>
Israel 15%
Switzerland 15%
Sweden 14%
United Kingdom 10%
Norway 5%
Other 41%
</TABLE>
The International Growth Portfolio is a portfolio of The Fulcrum Trust.
Portfolio composition will vary over time.
Past performance is no guarantee of future results. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
The Morgan Stanley EAFE Index is an unmanaged index of European, Australian &
Far East stocks. Performance numbers are net of all fund operating expenses, but
do not include insurance charges. If performance information included the effect
of these additional charges, it would have been lower.
11
<PAGE>
================================================================================
The Growth Portfolio
================================================================================
For the one-year period ended December 31, 1998, the Growth Portfolio posted a
total return of 0.50% versus the 28.58% return of the S&P 500(R) Index for the
same period.
At mid-year, the manager for the Portfolio was replaced by Pilgrim Baxter
Analytic Investors, Inc. and the Portfolio was repositioned from smaller cap
stocks to a very disciplined quantitative investment process which focuses on
stocks in the S&P 500(R) Index. As a result, virtually all of the assets turned
over into a portfolio of approximately 75 stocks, all of which belong to the S&P
500(R) Index. During the fourth quarter, the Portfolio returned 18.0% compared
to 21.3% for the index.
Overall, the move to emphasize larger companies benefited the Portfolio as
large-cap stocks in general outperformed small-cap stocks. For example, the
Russell 2000 Index returned 16.5% during the fourth quarter versus the 21.3%
return of the S&P 500(R). Furthermore, from August to December, large-cap stocks
outperformed small-caps by nearly 9.3%.
Also contributing to the Portfolio's results was savvy stock selection. Holdings
such as Microsoft Corp, General Electric, Dell Computers and Lucent Technologies
led market performance for the year -- and comprised more than 11% of the
Portfolio's assets.
Going forward, the Portfolio's managers are committed to providing investment
results consistent with investor expectations as they remain committed to their
long-term goal of outperforming the S&P 500(R).
- --------------------------------------------------------------------------------
Investment Manager
- --------------------------------------------------------------------------------
Pigrim Baxter Analytic Investors, Inc.*
About The Fund
Seeks to make money by investing primarily in securities selected for their
long-term growth prospects.
* Pilgrim Baxter Analytic Investors, Inc. replaced Stonehill Capital Management,
Inc. as portfolio manager effective August 1, 1998.
- --------------------------------------------------------------------------------
Portfolio Composition
- --------------------------------------------------------------------------------
As of December 31, 1998 the country allocation of net assets was:
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<S> <C>
Telephone Systems 8%
Computers & Information 8%
Pharmaceuticals 8%
Oil & Gas 7%
Beverage, Food & Tobacco 7%
Other 62%
</TABLE>
- --------------------------------------------------------------------------------
Average Annual Total Returns
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period ended December 31, 1998 1 Year Life of Fund
<S> <C> <C>
The Growth Portfolio 0.50% 6.48%
S&P 500(R) Index 28.58% 27.69%
</TABLE>
- --------------------------------------------------------------------------------
Growth of a $10,000 Investment Since 1996
- --------------------------------------------------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
The Growth Porfolio S&P 500(R) Index
<S> <C> <C>
2/96 $10,000 $10,000
12/98 $12,010 $20,392
</TABLE>
The Growth Portfolio is a portfolio of The Fulcrum Trust.
Portfolio composition will vary over time.
Past performance is no guarantee of future results. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
The S&P 500(R) Index is an unmanaged index of 500 leading stocks. S&P 500(R) is
a registered trademark of the Standard & Poor's Corporation. Performance numbers
are net of all fund operating expenses, but do not include insurance charges. If
performance information included the effect of these additional charges, it
would have been lower.
12
<PAGE>
================================================================================
The Value Portfolio
================================================================================
The Value Portfolio returned 7.49% for the one-year period ended December 31,
1998 compared to the 28.58% return of the S&P 500(R) Index for the same period.
During the past year, the managers primarily focused on companies which not only
appeared to be undervalued but also exhibited a significant margin of safety.
These companies included Telephone & Data Systems (TDS), Liberty Corp. and
Aeroquip-Vickers.
As one of the biggest operators in rural cellular, TDS has about 550,000 access
lines -- and mergers with regional Bell operating companies (RBOC) could create
more new customers. But its stock price remained down for much of the year due
to clumsy financial management.
Liberty Corp., another Portfolio holding, has two businesses -- insurance and
broadcasting. Currently undervalued, the Portfolio's managers feel that its
market price will rise due to its recent acquisition of several East coast
television stations.
Aeroquip-Vickers is an example of a company that also represents value to the
Portfolio. Although it is currently caught up in an industry slowdown, the
managers believe the business is well-run and the stock offers a great buying
opportunity.
Heading into 1999, the Portfolio's managers believe that companies with big
operations in Europe may get a benefit from the introduction of the Euro. In
managing the Portfolio for future results, they intend to focus on companies
with strong European operations and favorable merger potential.
- --------------------------------------------------------------------------------
Average Annual Total Returns
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period ended December 31, 1998 1 Year Life of Fund
<S> <C> <C>
The Value Portfolio 7.49% 18.44%
S&P 500(R) Index 28.58% 27.69%
</TABLE>
- --------------------------------------------------------------------------------
Growth of a $10,000 Investment Since 1996
- --------------------------------------------------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
The Value Portfolio S&P 500(R) Index
<S> <C> <C>
2/96 $10,000 $10,000
12/98 $16,377 $20,392
</TABLE>
- --------------------------------------------------------------------------------
Investment Manager
- --------------------------------------------------------------------------------
GAMCO Investors, Inc.
About The Fund
Seeks to make money by investing in companies that are believed to be
undervalued and may achieve significant capital appreciation.
- --------------------------------------------------------------------------------
Portfolio Composition
- --------------------------------------------------------------------------------
As of December 31, 1998 the sector allocation of net assets was:
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<S> <C>
Beverage, Food, & Tobacco 17%
Telephone Systems 7%
Heavy Machinery 7%
Entertainment & Leisure 6%
Oil & Gas 6%
Other 57%
</TABLE>
The Value Portfolio is a portfolio of The Fulcrum Trust.
Portfolio composition will vary over time.
Past performance is no guarantee of future results. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
The S&P 500(R) Index is an unmanaged index of 500 leading stocks. S&P 500(R) is
a registered trademark of the Standard & Poor's Corporation. Performance numbers
are net of all fund operating expenses, but do not include insurance charges. If
performance information included the effect of these additional charges, it
would have been lower.
13
<PAGE>
================================================================================
Bond & Money Market Overview
================================================================================
1994: Federal Reserve Board raises interest rates six times in an effort to slow
down the economy and keep inflation in check, sending bond prices sharply lower.
1995: U.S. bond market enjoys its third best performance in 30 years, thanks to
strong total returns from 30-year U.S. Treasuries and corporate issues.
1996: Outlook for Federal Reserve policy affects U.S. bond market.
Long-predicted interest rate cuts, which would have fueled this market, never
occur.
1997: Low inflation and declining interest rates fuel the bond market, which
enjoys its best returns since 1995.
1998: During 1998, bond investments produced widely divergent results as a
series of dramatic swings either left them highly in favor or badly battered.
During 1998, bond investments produced widely divergent results as they
experienced a series of dramatic swings that left them either highly in favor or
badly battered.
Starting off 1998, investors sought more attractive yields by investing in all
types of riskier bonds. But as global markets experienced continued volatility
- -- most notably in Russia, Latin America and Asia -- investors fled these
riskier investments and, by late summer, favored U.S. Treasury bonds.
But what was a boon for Treasuries was not at all good for non-government
issues. The Russian currency crisis, President Clinton's problems, and concerns
about Japan's economy all caused non-government issues to deteriorate by August.
Further aggravated by the collapse of the highly leveraged Long-Term Capital
Management, this segment, particularly corporate and high-yield bonds, suffered.
Because investors stayed away from these types of securities, the corporate new
issues market dried up. In fact, fewer investment grade and high-yield bonds
were sold in August and September combined than in the month of July.
However, a year-end rally was sparked by a series of three 0.25% interest rate
cuts by the Federal Reserve. These moves not only pushed the Federal Funds Rates
down to 4.75%, they spurred bond investors to leave the safety of U.S.
Treasuries and return to those securities which had the potential to offer them
higher yields.
Given this environment, safer credits generally fared much better for the year
than those bonds which had more risk attached to them.
Finishing the year on top, U.S. Treasuries significantly outpaced all other
sectors of the bond market for the first time in almost a decade -- with the
30-year bond posting a total return of 17.10% for the year. By comparison, the
Lehman
Given low interest rates, Stable-to-low interest rates
investors seek more [GRAPHIC] cause record refinancing --
attractive yields by investing and mortgage-backed securities
in all types of bonds. to suffer.
1998 JAN FEB MAR APR MAY JUN
- --------------------------------------------------------------------------------
Uncertain about the Worldwide economic
effects of the Asian unrest causes
[GRAPHIC] crisis, the Federal [GRAPHIC] investors to flee
Reserve adopts a foreign investments
"wait and see" for super-safe U.S.
approach to changing Treasuries, which
interest rates. deliver their best
performance in
years.
14
<PAGE>
================================================================================
Bond & Money Market Overview
================================================================================
Brothers Aggregate Bond Index, a benchmark commonly used for all types of
bonds, returned only 8.67%.
In contrast, 1998 will also be remembered as the worst year for corporate bonds.
Investment grade corporates trailed comparable duration Treasuries by 2.27% for
the year. Much of the underperformance occurred from late August to mid October
as liquidity, rather than credit, concerns drove the unprecedented spread
widening. However, a two-tiered market still exists for corporate credits.
Benchmark names such as IBM, Ford and Worldcom trade with little or no liquidity
concession, while second-tier names command a much larger liquidity premium.
While it was a year of turmoil for investment grade corporate bonds, it proved
to be disastrous for high-yield corporates, which lagged BBB or higher rated
bonds by nearly five percentage points. Suffering the most from the year's
volatility, lower-rated high-yield issues finished last for 1998 with a meager
3.66% total return, as measured by the Merrill Lynch High Yield Master Index.
Reflecting the market in general, mortgage-backed securities also had a
tumultuous year. Early in the year, this sector struggled with fears of
prepayments as interest rates dipped to historic lows. Even so, these securities
managed to modestly outperform Treasuries for the first half of the year. Then,
the same liquidity concerns that troubled corporate bonds later in the year also
severely affected mortgage-backeds. As a result, this sector posted a total
return of 7.20% for the year.
Results in the money market also mirrored the overall turbulence occurring in
the bond market. While yields hovered around 5.00% before the interest rate cuts
taken by the Federal Reserve, yields on the average one-year CD fell from 4.87%
to 4.16% by year-end.
Diminishing returns, however, did not seem to sway investors. Money funds in
general posted record inflows of cash as investors sought shelter from market
volatility and parked their assets in the relative safety of money market funds.
Moving into 1999, volatility remains on the horizon for the U.S. bond market.
However, given low inflation and low interest rates, government and high-grade
corporates could appeal to investors looking for safe havens from riskier
alternatives. In addition, slower corporate earnings could restrain the stock
market in the coming year, helping to narrow the performance gap between
equities and fixed income investments.
Liquidity concerns The Federal Reserve
stunt the [GRAPHIC] cuts interest rates [GRAPHIC]
performance of both three times,
corporate and sparking a year-end
high-yield bonds. bond rally.
JUL AUG SEP OCT NOV DEC
- --------------------------------------------------------------------------------
A currency crisis in Uncertainty -- and
Russian spurs a [GRAPHIC] volatility -- remain
flight to quality by on the horizon for
investors. the U.S. bond
market.
15
<PAGE>
================================================================================
The Strategic Income Portfolio
================================================================================
For the one-year period ended December 31, 1998, the Strategic Income Portfolio
posted a total return of 6.53% compared to the 8.67% return of the Lehman
Brothers Aggregate Bond Index for the same period.
1998 proved to be a disappointing year for both corporate bond and
mortgage-backed securities (MBS) performance. Much of the deterioration occurred
between late-August and mid-October as a global financial crisis developed and
investors fled to safety and liquidity in the form of super-safe U.S.
Treasuries.
Fortunately, this Fund benefited from an underweighting in corporate bonds
relative to the benchmark. However, as the Fund continues to increase in size,
the managers plan to increase exposure to the higher yielding corporate sector,
investing in large, liquid benchmark sectors.
As with the corporate bond market, liquidity concerns caused mortgage-backed
securities to suffer during the second half of the year. The Fund's managers,
however, maintained their position in these securities as Treasury yields
started to rise and the threat of massive prepayments subsided.
Moving into the new year, the Fund's managers expect to retain their current
positions in corporate bonds and mortgage-backed securities as they seek high
current income and capital appreciation for the Portfolio.
- --------------------------------------------------------------------------------
Investment Manager
- --------------------------------------------------------------------------------
Allmerica Asset Management, Inc.
About The Fund
Seeks to make money for investors by investing for high current income and
capital appreciation in a variety of fixed-income securities.
- --------------------------------------------------------------------------------
Portfolio Composition
- --------------------------------------------------------------------------------
As of December 31, 1998 the sector allocation of net assets was:
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<S> <C>
U.S. Government
and Agency Obligations 89%
Other 11%
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Average Annual Total Returns
- --------------------------------------------------------------------------------
Period ended December 31, 1998 1 Year Life of Fund
<S> <C> <C>
The Strategic Income Portfolio 6.53% 2.55%
J.P. Morgan Global Government Bond Index, Unhedged 15.31% 7.47%
Lehman Brothers Aggregate Bond Index 8.67% 7.26%
</TABLE>
- --------------------------------------------------------------------------------
Growth of a $10,000 Investment Since 1996
- --------------------------------------------------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
J.P. Morgan
Global Goverment Lehman Brothers
The Strategic Bond Index, Aggregate
Income Portfolio Unhedged Bond Index
<S> <C> <C> <C>
2/96 $10,000 $10,000 $10,000
12/98 10,762 12,338 12,268
</TABLE>
The Strategic Income Portfolio is a portfolio of The Fulcrum Trust.
Portfolio composition will vary over time.
Past performance is no guarantee of future results. Investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
In 1998, the benchmark for the Strategic Income Portfolio was changed
retroactively from J.P. Morgan Global Government Bond Index, unhedged to the
Lehman Brothers Aggregate Bond Index. The new index better reflects the
investment style of the Portfolio. A comparison of the prior benchmark has also
been provided.
The J.P. Morgan Global Government Bond Index, Unhedged, measures
the global government bond market of 13 countries. The Lehman Brothers Aggregate
Bond Index is an unmanaged index of all fixed rate debt issues with an
investment grade rating at least one year to maturity and an outstanding par
value of at least $25 million. Performance numbers are net of all fund operating
expenses, but do not include insurance charges. If performance information
included the effect of these additional charges, it would have been lower.
16
<PAGE>
================================================================================
THE GLOBAL INTERACTIVE/TELECOMM PORTFOLIO
================================================================================
PORTFOLIO OF INVESTMENTS o December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Value
Shares (Note 2)
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS - 85.7%
Telephone Systems - 22.2%
500 BC Telecom, Inc. $ 13,607
1,000 Cable & Wireless Plc ADR 36,750
3,000 Centennial Cellular Corp., Class A * 123,000
1,500 Century Communications Corp., Class A * 47,578
500 Century Telephone Enterprises, Inc. 33,750
2,000 Cia. de Telecomunicaciones de Chile SA ADR 41,375
2,000 Cincinnati Bell, Inc. 75,625
1,500 CommNet Cellular, Inc. * 18,375
5,210 Commonwealth Telephone Enterprises, Inc. * 174,535
4,000 Frontier Corp. 136,000
2,000 GST Telecommunications, Inc. * 13,125
800 Iridium World Communications, Ltd. * 31,650
4,000 Loral Space & Communications, Ltd. * 71,250
10,000 Rogers Cantel Mobile Communications, Inc., Class B ADR * 121,875
2,000 Rural Cellular Corp., Class A * 21,000
5,000 Telephone and Data Systems, Inc. 224,688
1,000 Viatel, Inc. * 22,875
----------
1,207,058
----------
Entertainment & Leisure - 15.4%
5,000 Ascent Entertainment Group, Inc. * 36,875
3,000 Gaylord Entertainment Co. 90,375
2,000 GC Companies, Inc. * 83,250
2,900 King World Productions, Inc. * 85,369
4,500 Liberty Media Group, Class A * 207,281
800 Pathe SA 223,415
5,000 Spelling Entertainment Group, Inc. * 37,500
1,200 Time Warner, Inc. 74,475
----------
838,540
----------
Publishing - 11.0%
2,000 Lee Enterprises, Inc. 63,000
2,000 Media General, Inc., Class A 106,000
2,000 Pulitzer Publishing Co. 173,250
1,500 The McClatchy Company, Class A 53,063
1,000 The McGraw-Hill Companies, Inc. 101,875
1,500 Tribune Co. 99,000
----------
596,188
----------
Communications - 7.5%
1,000 American Tower Corp., Class A * 29,563
3,500 COMSAT Corp. 126,000
2,400 Globalstar Telecommunications, Ltd. * 48,300
6,000 Price Communications Corp. * 77,625
12,000 Rogers Communications, Inc., Class B * 106,500
1,500 U.S. Satellite Broadcasting Co., Inc. * 20,625
----------
408,613
----------
Media - Broadcasting - 6.9%
1,530 Chris-Craft Industries, Inc. * 73,724
1,000 Granite Broadcasting Corp. 34,000
2,250 Gray Communications Systems, Inc., Class B 30,797
3,500 USA Networks, Inc. * 115,938
1,600 Viacom, Inc., Class A * 117,700
----------
372,159
----------
Media - Broadcasting & Publishing - 6.2%
500 Audiofina 21,396
1,500 Fisher Companies, Inc. 102,750
600 Fox Entertainment Group, Inc. * 15,113
3,000 MediaOne Group, Inc. * 141,000
1,000 The Times Mirror Co., Class A 56,000
----------
336,259
----------
Cable - 5.4%
1,000 Cablevision Systems Corp. * 50,188
6,000 Tele-Communications TCI Ventures Group, Class A * 141,375
1,500 Tele-Communications, Inc., Class A * 82,969
1,000 United International Holdings, Inc., Class A * 19,250
----------
293,782
----------
Insurance - 2.7%
3,000 The Liberty Corp. 147,750
----------
Retailers - 2.2%
1,200 CDnow, Inc. * 21,600
6,000 Lillian Vernon Corp. 99,000
----------
120,600
----------
Commercial Services - 1.4%
4,000 Cendant Corp. * 76,250
----------
Advertising - 1.2%
3,500 Ackerley Group, Inc. 63,875
----------
Transportation - 1.1%
2,000 Travel Services International, Inc. * 61,000
----------
Electric Utilities - 0.9%
6,045 Citizens Utilities Co., Class B * 49,116
----------
Beverages, Food & Tobacco - 0.8%
1,200 The Seagram Company, Ltd. 45,600
----------
Electronics - 0.4%
300 Sony Corp. ADR 21,525
----------
Lodging - 0.4%
1,000 Hilton Hotels Corp. 19,125
----------
Total Common Stocks 4,657,440
----------
(Cost $3,708,839)
</TABLE>
See Notes to Financial Statements.
- ---------------------------------------------------------
F-1
<PAGE>
================================================================================
THE GLOBAL INTERACTIVE/TELECOMM PORTFOLIO
================================================================================
PORTFOLIO OF INVESTMENTS, Continued o December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Value
Shares (Note 2)
- --------------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE PREFERRED STOCKS - 2.3%
Telephone Systems - 1.5%
1,000 Sprint, 8.25% $ 82,500
----------
Electric Utilities - 0.8%
1,000 Citizens Utilities Co., 5.00% 42,625
----------
Total Convertible Preferred Stocks 125,125
----------
(Cost $84,049)
Total Investments - 88.0% $4,782,565
----------
(Cost $3,792,888)
Net Other Assets and Liabilities - 12.0% 650,684
----------
Net Assets - 100.0% $5,433,249
==========
</TABLE>
- ----------
ADR American Depositary Receipt
* Non-income producing security.
FEDERAL INCOME TAX INFORMATION (NOTE 2)
At December 31, 1998, the aggregate cost of investment securities for tax
purposes was $3,805,168. Net unrealized appreciation (depreciation) aggregated
$977,397, of which $1,091,279 related to appreciated investment securities and
$(113,882) related to depreciated investment securities.
Distributions from long-term capital gains for the year ended December 31, 1998
were $280,918 (unaudited).
OTHER INFORMATION
For the year ended December 31, 1998, the aggregate cost of purchases and the
proceeds of sales, other than from short-term investments, included $3,671,566
and $2,298,005 of non-governmental issuers, respectively.
See Notes to Financial Statements.
---------------------------------------------------------
F-2
<PAGE>
================================================================================
THE INTERNATIONAL GROWTH PORTFOLIO
================================================================================
PORTFOLIO OF INVESTMENTS o December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Value
Shares (Note 2)
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS - 92.1%
Israel - 15.3%
4,250 Orbotech, Ltd. * $ 201,344
12,000 Tecnomatix Technologies, Ltd. * 210,000
----------
411,344
----------
Switzerland - 15.1%
460 PubliGroupe SA 140,611
90 Stratec Holding AB, Class B - Registered 124,454
500 The Selecta Group - Registered 138,282
----------
403,347
----------
Sweden - 14.2%
8,800 Investment AB Bure 124,558
10,500 IRO AB 105,972
10,825 Nobel Biocare AB 146,558
----------
377,088
----------
United Kingdom - 10.3%
22,500 JBA Holdings Plc 69,125
46,000 McBride Plc 76,390
45,200 Victrex Plc 128,355
----------
273,870
----------
Norway - 5.1%
1,250 Electric Farm ASA * 0
20,000 Norsk Lotteridrift ASA * 52,642
25,000 P4 Radio Hele Norge ASA 82,254
----------
134,896
----------
Japan - 4.8%
1,500 Fancl Corp. * $128,458
----------
Netherlands - 4.8%
1,875 Van Melle NV 126,730
----------
Portugal - 4.7%
3,600 Investec-Consultoria Internacional, SA 124,040
----------
France - 4.6%
18,000 Lectra Systemes * 121,652
----------
Hong Kong - 4.5%
1,030,750 Lung Kee (Bermuda) Holdings 119,748
----------
Singapore - 4.4%
130,000 Electronic Resources, Ltd. 118,110
----------
Canada - 4.3%
20,000 Danier Leather, Inc. * 115,558
----------
Total Common Stocks 2,454,841
----------
(Cost $2,704,921)
Total Investments - 92.1% 2,454,841
----------
(Cost $2,704,901)
Net Other Assets and Liabilities - 7.9% 209,613
----------
Net Assets - 100.0% $2,664,454
==========
</TABLE>
- ----------
* Non-income producing security.
Industry Concentration of Common Stocks
as a Percentage of Net Assets (Unaudited):
<TABLE>
<S> <C>
Computer Software & Processing 14.9%
Electronics 12.0
Medical Supplies 10.2
Miscellaneous 8.5
Media - Broadcasting & Publishing 7.7
Advertising 5.3
Food Retailers 5.2
Cosmetics & Personal Care 4.8
Chemicals 4.8
Beverages, Food & Tobacco 4.8
Financial Services 4.7
Retailers 4.3
Household Products 2.9
Entertainment & Leisure 2.0
----
92.1%
====
</TABLE>
FEDERAL INCOME TAX INFORMATION (NOTE 2)
At December 31, 1998, the aggregate cost of investment securities for tax
purposes was $2,707,141. Net unrealized appreciation (depreciation) aggregated
$(252,300), of which $282,735 related to appreciated investment securities and
$(535,035) related to depreciated investment securities.
As of December 31, 1998, the Portfolio had capital loss carryforwards which
expire as follows: $5,735 in 2005; and $221,574 in 2006.
For the year ended December 31, 1998, the Portfolio has elected to defer $66,509
of capital losses attributable to post-October losses.
OTHER INFORMATION
For the year ended December 31, 1998, the aggregate cost of purchases and the
proceeds of sales, other than from short-term investments, included $1,580,448
and $1,897,838 of non-governmental issuers, respectively.
See Notes to Financial Statements.
- ---------------------------------------------------------
F-3
<PAGE>
================================================================================
THE GROWTH PORTFOLIO
================================================================================
PORTFOLIO OF INVESTMENTS o December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Value
Shares (Note 2)
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS - 95.2%
Telephone Systems - 8.3%
1,351 Ameritech Corp. $85,620
68 AT&T Corp. 5,117
1,356 Bell Atlantic Corp. 71,868
1,008 BellSouth Corp. 50,274
1,266 GTE Corp. 82,290
1,648 SBC Communications, Inc. 88,374
-------
383,543
-------
Computers & Information - 7.8%
1,048 Cisco Systems, Inc. * 97,268
1,243 Dell Computer Corp. * 90,972
992 EMC Corp. * 84,320
499 International Business Machines Corp. 92,188
-------
364,748
-------
Pharmaceuticals - 7.5%
1,559 American Home Products Corp. 87,791
172 Bristol-Myers Squibb Co. 23,016
680 Pfizer, Inc. 85,298
1,498 Schering-Plough Corp. 82,765
952 Warner-Lambert Co. 71,579
-------
350,449
-------
Oil & Gas - 6.8%
389 Chevron Corp. 32,263
1,147 Exxon Corp. 83,874
772 Phillips Petroleum Co. 32,907
442 Royal Dutch Petroleum Co. ADR 21,161
966 Schlumberger, Ltd. 44,557
1,077 Texaco, Inc. 56,946
1,298 The Coastal Corp. 45,349
-------
317,057
-------
Beverages, Food & Tobacco - 6.5%
1,163 Bestfoods 61,930
1,257 Campbell Soup Co. 69,135
211 Philip Morris Companies, Inc. 11,289
1,189 The Coca-Cola Co. 79,514
993 Unilever NV ADR 82,357
-------
304,225
-------
Financial Services - 5.5%
824 American Express Co. 84,254
31 Berkshire Hathaway, Inc., Class B * 72,051
341 Fannie Mae 25,234
330 Providian Financial Corp. 24,750
444 Transamerica Corp. 51,282
-------
257,571
-------
Automotive - 5.1%
1,455 Ford Motor Co. $85,390
1,183 General Motors Corp. 84,658
2,336 Navistar International Corp. * 66,576
-------
236,624
-------
Industrial - Diversified - 5.0%
1,410 General Electric Co. 143,908
1,177 Tyco International, Ltd. 88,790
-------
232,698
-------
Restaurants - 4.9%
1,075 McDonald's Corp. 82,372
15,375 New York Restaurant Group (A) * 148,369
-------
230,741
-------
Insurance - 4.5%
132 American General Corp. 10,296
870 American International Group, Inc. 84,064
440 SunAmerica, Inc. 35,695
417 The Allstate Corp. 16,107
1,178 The Hartford Financial Services Group, Inc. 64,643
-------
210,805
-------
Computer Software & Processing - 3.5%
281 Electronic Data Systems Corp. 14,120
1,043 Microsoft Corp. * 144,648
239 PeopleSoft, Inc. * 4,526
-------
163,294
-------
Banking - 3.3%
579 Capital One Financial Corp. 66,585
2,210 Wells Fargo Co. 88,262
-------
154,847
-------
Electric Utilities - 3.2%
96 Central & South West Corp. 2,634
378 Duke Energy Corp. 24,216
2,116 Edison International 58,984
2,085 PG&E Corp. 65,678
-------
151,512
-------
Medical Supplies - 3.0%
1,316 Becton, Dickinson & Co. 56,177
1,004 Johnson & Johnson 84,211
-------
140,388
-------
Apparel Retailers - 2.4%
720 The Gap, Inc. 40,500
2,380 The Limited, Inc. 69,318
-------
109,818
-------
</TABLE>
See Notes to Financial Statements.
---------------------------------------------------------
F-4
<PAGE>
================================================================================
THE GROWTH PORTFOLIO
================================================================================
PORTFOLIO OF INVESTMENTS, Continued o December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Value
Shares (Note 2)
- --------------------------------------------------------------------------------
<S> <C> <C>
Media - Broadcasting & Publishing - 2.2%
453 MediaOne Group, Inc. * $ 21,291
1,105 Viacom, Inc., Class B * 81,770
----------
103,061
----------
Communications - 2.0%
857 Lucent Technologies, Inc. 94,270
----------
Heavy Machinery - 2.0%
1,373 McDermott International, Inc. 33,896
626 NACCO Industries, Inc., Class A 57,592
----------
91,488
----------
Electronics - 1.7%
103 Intel Corp. 12,212
1,261 Raytheon Co., Class B 67,148
----------
79,360
----------
Aerospace & Defense - 1.6%
2,304 The Boeing Co. 75,168
----------
Chemicals - 1.5%
766 The Dow Chemical Co. 69,658
----------
Cosmetics & Personal Care - 1.4%
614 Colgate-Palmolive Co. 57,025
111 The Procter & Gamble Co. 10,136
----------
67,161
----------
Airlines - 1.2%
110 AMR Corp. * 6,531
970 U S Airways Group, Inc. * 50,440
----------
56,971
----------
Entertainment & Leisure - 0.9%
575 Eastman Kodak Co. 41,400
----------
Electrical Equipment - 0.7%
542 Emerson Electric Co. 32,791
----------
Commercial Services - 0.7%
987 The Dun & Bradstreet Corp. 31,152
----------
Forest Products & Paper - 0.6%
494 Georgia-Pacific Group 28,930
----------
Textiles, Clothing & Fabrics - 0.6%
650 Springs Industries, Inc., Class A 26,934
----------
Containers & Packaging - 0.5%
778 Crown Cork & Seal Co., Inc. 23,972
----------
Transportation - 0.3%
465 Burlington Northern Santa Fe Corp. 15,694
----------
Total Common Stocks 4,446,330
----------
(Cost $3,982,494)
Total Investments - 95.2% 4,446,330
----------
(Cost $3,982,494)
Net Other Assets and Liabilities - 4.8% 224,965
----------
Net Assets - 100.0% $4,671,295
==========
</TABLE>
- ----------
ADR American Depositary Receipt
(A) Security is fair valued by management (Note 2).
* Non-income producing security.
FEDERAL INCOME TAX INFORMATION (NOTE 2)
At December 31, 1998, the aggregate cost of investment securities for tax
purposes was $3,988,313. Net unrealized appreciation (depreciation) aggregated
$458,017, of which $506,610 related to appreciated investment securities and
$(48,593) related to depreciated investment securities.
As of December 31, 1998, the Portfolio had capital loss carryforwards which
expire as follows: $4,913 in 2004; and $75,969 in 2005; and $512,084 in 2006.
OTHER INFORMATION
For the year ended December 31, 1998, the aggregate cost of purchases and the
proceeds of sales, other than from short-term investments, included $27,186,647
and $26,942,043 of non-governmental issuers, respectively.
See Notes to Financial Statements.
- ---------------------------------------------------------
F-5
<PAGE>
================================================================================
THE VALUE PORTFOLIO
================================================================================
PORTFOLIO OF INVESTMENTS o December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Value
Shares (Note 2)
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS - 95.8%
Beverages, Food & Tobacco - 17.3%
11,000 Archer-Daniels-Midland Co. $ 189,062
1,877 Buenos Aires Embotelladora SA ADR 0
700 Bush Boake Allen, Inc. * 24,675
7,000 Celestial Seasonings, Inc. * 194,688
6,000 Corn Products International, Inc. 182,250
20,000 General Cigar Holdings, Inc. * 173,750
1,501 General Cigar Holdings, Inc., Class B * 13,040
2,000 H.J. Heinz Co. 113,250
6,000 Kellogg Co. 204,750
5,000 Pepsi-Cola Puerto Rico Bottling Co. * 25,938
3,000 The Seagram Company, Ltd. 114,000
10,000 The Topps Co., Inc. * 50,000
10,000 Weider Nutrition International, Inc. 63,750
8,000 Whitman Corp. 203,000
----------
1,552,153
----------
Telephone Systems - 7.3%
4,000 Centennial Cellular Corp., Class A * 164,000
3,000 Frontier Corp. 102,000
4,500 Telephone and Data Systems, Inc. 202,219
5,000 United States Cellular Corp. * 190,000
----------
658,219
----------
Heavy Machinery - 7.2%
3,000 Ampco-Pittsburgh Corp. 32,625
10,000 Baldwin Technology Co., Class A * 56,250
3,000 Banner Aerospace, Inc. * 28,313
5,000 Fedders Corp. 29,062
2,000 Fedders Corp., Class A 10,500
5,000 Flowserve Corp. 82,812
5,000 Hussmann International, Inc. 96,875
2,000 IDEX Corp. 49,000
1,000 Modine Manufacturing Co. 36,250
4,000 SPS Technologies, Inc. * 226,500
----------
648,187
----------
Entertainment & Leisure - 5.8%
3,000 Gaylord Entertainment Co. 90,375
2,000 GC Companies, Inc. * 83,250
3,500 Liberty Media Group, Class A * 161,219
8,000 Spelling Entertainment Group, Inc. * 60,000
2,000 Time Warner, Inc. 124,125
----------
518,969
----------
Oil & Gas - 5.6%
2,000 Daniel Industries 24,250
9,000 PennzEnergy Co. 146,813
9,000 Pennzoil-Quaker State Co. * 133,313
1,000 RPC, Inc. 7,375
4,000 Southwest Gas Corp. 107,500
4,000 WICOR, Inc. 87,250
----------
506,501
----------
Insurance - 5.6%
2,500 American Bankers Insurance Group, Inc. 120,937
2,000 Argonaut Group, Inc. 49,000
6,000 The Liberty Corp. 295,500
1,500 The Midland Co. 36,187
----------
501,624
----------
Automotive - 3.7%
750 A.O. Smith Corp. 18,422
20,000 Earl Scheib, Inc. * 110,000
1,000 Meritor Automotive, Inc. 21,187
1,000 Standard Motor Products, Inc. 24,250
7,000 Wynn's International, Inc. 154,875
----------
328,734
----------
Commercial Services - 3.6%
2,000 Borg-Warner Security Corp. * 37,500
12,571 EnviroSource, Inc. * 64,426
1,000 H&R Block, Inc. 45,000
10,000 Rollins, Inc. 175,000
----------
321,926
----------
Pharmaceuticals - 3.6%
10,000 Carter-Wallace, Inc. 196,250
10,000 IVAX Corp. * 124,375
----------
320,625
----------
Aerospace & Defense - 3.4%
2,500 Sequa Corp., Class B * 183,750
8,000 The Fairchild Corp., Class A * 126,000
----------
309,750
----------
Electrical Equipment - 3.2%
7,000 Aeroquip-Vickers, Inc. 209,563
1,000 AMETEK, Inc. 22,312
3,000 Kollmorgen Corp. 45,750
2,000 The Lamson & Sessions Co. * 10,250
----------
287,875
----------
</TABLE>
See Notes to Financial Statements.
---------------------------------------------------------
F-6
<PAGE>
================================================================================
THE VALUE PORTFOLIO
================================================================================
PORTFOLIO OF INVESTMENTS, Continued o December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Value
Shares (Note 2)
- --------------------------------------------------------------------------------
<S> <C> <C>
Transportation - 3.2%
2,500 GATX Corp. $ 94,687
3,000 Hudson General Corp. 189,000
--------
283,687
--------
Media - Broadcasting - 2.8%
5,000 Gray Communications Systems, Inc., Class B 68,438
2,500 Viacom, Inc., Class A * 183,906
--------
252,344
--------
Forest Products & Paper - 2.7%
3,200 Greif Brothers Corp. 93,400
11,000 Nashua Corp.* 146,438
--------
239,838
--------
Retailers - 2.5%
9,000 Lillian Vernon Corp. 148,500
3,000 The Neiman Marcus Group, Inc. * 74,813
--------
223,313
--------
Lodging - 2.3%
6,000 Aztar Corp. * 30,375
6,000 Hilton Hotels Corp. 114,750
3,000 Mirage Resorts, Inc. * 44,813
5,000 Trump Hotels & Casino Resorts, Inc. * 18,750
--------
208,688
--------
Cable - 2.0%
3,500 Cablevision Systems Corp. * 175,656
--------
Media - Broadcasting & Publishing - 1.6%
2,500 MediaOne Group, Inc. * 117,500
500 The Times Mirror Co., Class A 28,000
--------
145,500
--------
Communications - 1.6%
4,000 COMSAT Corp. 144,000
--------
Financial Services - 1.5%
7,000 The Pioneer Group, Inc. 138,250
--------
Advertising - 1.5%
5,000 Ackerley Group, Inc. 91,250
2,000 Penton Media, Inc. 40,500
----------
131,750
----------
Water Companies - 1.3%
5,000 United Water Resources, Inc. 119,687
----------
Metals - 1.2%
2,000 Curtiss-Wright Corp. 76,250
3,000 General Housewares Corp. 36,000
----------
112,250
----------
Publishing - 1.1%
2,000 Lee Enterprises, Inc. 63,000
1,000 The McClatchy Company, Class A 35,375
----------
98,375
----------
Electronics - 1.0%
1,000 AMP, Inc. 52,062
10,000 Oak Technology, Inc. * 35,000
----------
87,062
----------
Electric Utilities - 0.9%
10,176 Citizens Utilities Co., Class B * 82,678
----------
Chemicals - 0.8%
750 Ferro Corp. 19,500
4,000 Sybron Chemicals, Inc. * 54,000
----------
73,500
----------
Real Estate - 0.8%
5,000 Catellus Development Corp. * 71,563
----------
Food Retailers - 0.7%
6,000 Ingles Markets, Inc., Class A 65,625
----------
Total Common Stocks 8,608,329
----------
(Cost $8,109,886)
</TABLE>
See Notes to Financial Statements.
- ---------------------------------------------------------
F-7
<PAGE>
================================================================================
THE VALUE PORTFOLIO
================================================================================
PORTFOLIO OF INVESTMENTS, Continued o December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Value
Shares (Note 2)
- --------------------------------------------------------------------------------
<S> <C> <C>
CONVERTIBLE PREFERRED STOCKS - 0.9%
Telephone Systems - 0.9%
1,000 Sprint, 8.25% $ 82,500
----------
Total Convertible Preferred Stocks 82,500
----------
(Cost $42,800)
RIGHTS - 0.0%
Beverages, Food & Tobacco - 0.0%
91,973 Buenos Aires Embolelladora SA ADR* 0
----------
Total Rights 0
----------
(Cost $0)
Total Investments - 96.7% 8,690,829
----------
(Cost $8,152,686)
Net Other Assets and Liabilities - 3.3% 298,097
----------
Net Assets - 100.0% $8,988,926
==========
</TABLE>
- ----------
ADR American Depositary Receipt
* Non-income producing security.
FEDERAL INCOME TAX INFORMATION (NOTE 2)
At December 31, 1998, the aggregate cost of investment securities for tax
purposes was $8,223,005. Net unrealized appreciation (depreciation) aggregated
$467,824, of which $1,215,594 related to appreciated investment securities and
$(747,770) related to depreciated investment securities.
Distributions from long-term capital gains for the year ended December 31, 1998
were $196,004 (unaudited).
OTHER INFORMATION
For the year ended December 31, 1998, the aggregate cost of purchases and the
proceeds of sales, other than from short-term investments, included $8,153,398
and $5,131,531 of non-governmental issuers, respectively.
See Notes to Financial Statements.
---------------------------------------------------------
F-8
<PAGE>
================================================================================
THE STRATEGIC INCOME PORTFOLIO
================================================================================
PORTFOLIO OF INVESTMENTS o December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Moody's Ratings Value
Par Value (unaudited) (Note 2)
- --------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS - 88.6%
U.S. Treasury Notes - 28.2%
$ 75,000 5.63%, 02/28/2001 Aaa $ 76,547
265,000 5.75%, 08/15/2003 Aaa 276,677
130,000 6.25%, 02/15/2007 Aaa 142,634
90,000 6.63%, 05/15/2007 Aaa 101,250
----------
597,108
----------
Federal National Mortgage Association - 19.0%
25,000 6.00%, 02/01/2029, TBA Aaa 24,724
148,500 7.00%, 11/01/2028 Aaa 151,563
74,220 6.50%, 10/01/2028 Aaa 74,730
97,681 6.50%, 06/01/2013 Aaa 99,116
50,364 7.50%, 03/01/2028 Aaa 51,765
----------
401,898
----------
U.S. Treasury Bonds - 16.0%
145,000 7.63%, 02/15/2025 Aaa 190,947
120,000 7.13%, 02/15/2023 Aaa 148,088
----------
339,035
----------
Federal Agriculture Mortgage Corporation - 7.3%
150,000 6.92%, 02/10/2001 Aaa 155,772
----------
Tennessee Valley Authority - 7.3%
150,000 6.50%, 08/20/2001 AAA (+) 155,492
----------
Student Loan Marketing Association - 7.2%
150,000 6.05%, 09/14/2000 Aaa 152,568
----------
Government National Mortgage Association - 3.6%
75,681 6.50%, 11/15/2028 Aaa 76,509
----------
Total U.S. Government
and Agency Obligations 1,878,382
----------
(Cost $1,854,453)
CORPORATE DEBT - 0.8%
IBM Corp. - 0.8%
$ 15,000 6.50%, 01/15/2028 A 15,880
----------
Total Corporate Debt 15,880
(Cost $15,158) ----------
Total Investments - 89.4% 1,894,262
----------
(Cost $1,869,611)
Net Other Assets and Liabilities - 10.6% 225,098
----------
Net Assets - 100.0% $2,119,360
==========
</TABLE>
- ----------
TBA Forward commitment (Note 2)
FEDERAL INCOME TAX INFORMATION (NOTE 2)
At December 31, 1998, the aggregate cost of investment securities for tax
purposes was $1,869,611. Net unrealized appreciation (depreciation) aggregated
$24,651, of which $30,101 related to appreciated investment securities and
$(5,450) related to depreciated investment securities.
Distritutions from long-term capital gains for the year ended December 31, 1998
were $6,782.
For the year ended December 31, 1998, the Portfolio has elected to defer $4,886
of capital losses attributable to post-October losses.
OTHER INFORMATION
For the year ended December 31, 1998, the aggregate cost of purchases and the
proceeds of sales, other than from short-term investments, included $2,050,754
and $3,293,977 of non-U.S. governmental issuers, respectively, and $4,476,875
and $3,639,295 of U.S. Government and Agency issuers, respectively.
The composition of ratings of debt holdings as a percentage of total value of
investments in securities is as follows:
<TABLE>
<CAPTION>
Ratings (unaudited)
<S> <C> <C>
Moody's Ratings: Aaa 91.0%
A 0.8%
Standard & Poor's Ratings: AAA 8.2%
-------
100.00%
</TABLE>
- ----------
(+) Standard & Poor's credit ratings are used in the absence of a rating by
Moody's Investors Service, Inc.
See Notes to Financial Statements.
- ---------------------------------------------------------
F-9
<PAGE>
================================================================================
THE FULCRUM TRUST
================================================================================
STATEMENTS OF ASSETS AND LIABILITIES o December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Global
Interactive/ International Strategic
Telecomm Growth Growth Value Income
Portfolio Portfolio Portfolio Portfolio Portfolio
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments (Note 2):
Investments at cost ................................... $ 3,792,888 $ 2,704,921 $ 3,982,494 $ 8,152,686 $ 1,869,611
Net unrealized appreciation (depreciation) ............ 989,677 (250,080) 463,836 538,143 24,651
----------- ----------- ----------- ----------- -----------
Total investments at value ...................... 4,782,565 2,454,841 4,446,330 8,690,829 1,894,262
Cash (interest bearing) .................................. 660,004 212,220 177,641 326,512 238,269
Receivable for shares sold ............................... 26,992 -- 46,962 4,099 --
Receivable for expense reimbursement (Note 5) ............ 15,140 15,154 34,445 24,606 7,653
Interest and dividend receivables ........................ 6,511 7,969 6,304 9,456 32,807
Deferred organizational expense (Note 2) ................. 9,922 10,585 9,922 9,922 --
Dividend tax reclaim receivables ......................... 545 2,372 -- -- --
----------- ----------- ----------- ----------- -----------
Total Assets .................................... 5,501,679 2,703,141 4,721,604 9,065,424 2,172,991
----------- ----------- ----------- ----------- -----------
LIABILITIES:
Payable for investments purchased ........................ 13,296 -- -- -- 24,542
Payable for shares repurchased ........................... 1,119 3,145 503 9,066 2,488
Advisory fee payable (Note 3) ............................ 18,642 1,801 663 6,343 4,163
Accrued expenses and other payables ...................... 35,373 33,741 49,143 61,089 22,438
----------- ----------- ----------- ----------- -----------
Total Liabilities ..................................... 68,430 38,687 50,309 76,498 53,631
----------- ----------- ----------- ----------- -----------
NET ASSETS ............................................... $ 5,433,249 $ 2,664,454 $ 4,671,295 $ 8,988,926 $ 2,119,360
=========== =========== =========== =========== ===========
NET ASSETS consist of:
Paid-in capital (Note 1 and Note 5) ...................... $ 4,437,756 $ 3,197,592 $ 4,806,200 $ 8,514,734 $ 2,098,476
Undistributed (distribution in excess of)
net investment income (loss) .......................... -- 13,007 -- 399 --
Accumulated (distribution in excess of) net realized
gain (loss) on investments sold, forward
foreign currency contracts, and foreign
currency transactions ................................. 5,816 (296,037) (598,741) (64,350) (3,767)
Net unrealized appreciation (depreciation) of
investments and assets and liabilities in
foreign currency ...................................... 989,677 (250,108) 463,836 538,143 24,651
----------- ----------- ----------- ----------- -----------
TOTAL NET ASSETS ......................................... $ 5,433,249 $ 2,664,454 $ 4,671,295 $ 8,988,926 $ 2,119,360
=========== =========== =========== =========== ===========
Shares of beneficial interest outstanding ................ 342,587 297,947 388,852 664,986 207,348
(unlimited authorization, par value of
$0.001 per share)
NET ASSET VALUE,
Offering and redemption price per share
(Net Assets/Shares Outstanding) .......................... $ 15.86 $ 8.94 $ 12.01 $ 13.52 $ 10.22
=========== =========== =========== =========== ===========
</TABLE>
See Notes to Financial Statements.
---------------------------------------------------------
F-10
<PAGE>
================================================================================
THE FULCRUM TRUST
================================================================================
STATEMENTS OF OPERATIONS o For The Year Ended December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Global
Interactive/ International Strategic
Telecomm Growth Growth Value Income
Portfolio Portfolio Portfolio Portfolio Portfolio
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Interest .................................................. $ 18,996 $ 8,121 $ 7,641 $ 28,434 $ 84,097
Dividends ................................................. 30,989 57,608 31,707 82,706 --
Less net foreign taxes withheld ........................... (531) (7,146) (47) -- --
---------- ----------- ----------- ----------- ----------
Total Investment Income ................................ 49,454 58,583 39,301 111,140 84,097
---------- ----------- ----------- ----------- ----------
EXPENSES
Investment advisory fees (Note 3) ......................... 76,082 1,485 -- 23,869 10,354
Custodian fees ............................................ 8,895 14,363 37,023 21,366 8,155
Fund accounting fees ...................................... 48,500 48,500 48,500 48,500 48,500
Legal fees ................................................ 30,245 28,325 53,221 66,665 14,619
Interest expense (Note 7) ................................. -- -- 19,853 -- --
Audit fees ................................................ 21,217 21,461 32,824 46,797 9,161
Trustees' fees and expenses (Note 3) ...................... 7,581 6,609 10,542 16,375 4,570
Reports to shareholders ................................... 16,606 12,419 24,853 21,517 7,283
Registration and filing expense ........................... 1,466 2,864 4,100 4,316 4,376
Amortization of organization costs (Note 2) ............... 4,756 4,745 4,756 4,756 --
Insurance ................................................. 3,832 3,832 3,832 3,832 3,832
Miscellaneous ............................................. 240 240 240 240 240
---------- ----------- ----------- ----------- ----------
Total expenses before reimbursements ................... 219,420 144,843 239,744 258,233 111,090
Less expense reimbursements (Note 5) ................... (90,165) (101,848) (181,834) (147,492) (74,187)
Less expenses waived (Note 4) .......................... -- -- -- -- (3,099)
---------- ----------- ----------- ----------- ----------
Total expenses net of expense reimbursements ........... 129,255 42,995 57,910 110,741 33,804
---------- ----------- ----------- ----------- ----------
NET INVESTMENT INCOME (LOSS) ................................. (79,801) 15,588 (18,609) 399 50,293
---------- ----------- ----------- ----------- ----------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (Note 2):
Net realized gain (loss) on investments sold .............. 560,139 (288,827) (217,499) 532,066 62,667
Net realized gain (loss) on forward foreign currency
contracts ................................................. (7) 111 -- -- (94,435)
Net realized gain (loss) on foreign currency transactions. (1) (2,597) -- -- 19,212
Net change in unrealized appreciation (depreciation)
of investments ............................................ 591,625 25,595 187,404 (8,738) 2,694
Net change in unrealized appreciation (depreciation)
of forward foreign currency contracts ..................... -- -- -- -- 22,310
Net change in unrealized appreciation (depreciation)
of assets and liabilities in foreign currency ............. -- (28) -- -- 27,051
---------- ----------- ----------- ----------- ----------
NET GAIN (LOSS) ON INVESTMENTS ............................... 1,151,756 (265,746) (30,095) 523,328 39,499
---------- ----------- ----------- ----------- ----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS........................... $1,071,955 $ (250,158) $ (48,704) $ 523,727 $ 89,792
========== =========== =========== =========== ==========
</TABLE>
See Notes to Financial Statements.
- ---------------------------------------------------------
F-11
<PAGE>
================================================================================
THE FULCRUM TRUST
================================================================================
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Global
Interactive/ International
Telecomm Growth
Portfolio Portfolio
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, Year Ended December 31,
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSETS at beginning of year .......................................... $ 3,016,441 $ 594,315 $ 3,207,002 $ 97,387
----------- ----------- ----------- -----------
Increase in net assets resulting from operations:
Net investment income (loss) .......................................... (79,801) 9,035 15,588 15,386
Net realized gain (loss) on investments sold and foreign
currency transactions .............................................. 560,131 142,691 (291,313) 4,533
Net change in unrealized appreciation (depreciation)
of investments and assets and liabilities in foreign currency ...... 591,625 395,113 25,567 (278,925)
----------- ----------- ----------- -----------
Net increase (decrease) in net assets resulting from operations ....... 1,071,955 546,839 (250,158) (259,006)
----------- ----------- ----------- -----------
Distributions to shareholders from:
Net investment income ................................................. -- (9,124) -- (15,480)
Net realized gain on investments ...................................... (464,938) (142,691) -- (8,333)
----------- ----------- ----------- -----------
Total distributions ................................................ (464,938) (151,815) -- (23,813)
----------- ----------- ----------- -----------
Capital share transactions (Note 3):
Net proceeds from sales of shares ..................................... 2,941,300 2,115,492 900,378 3,686,977
Issued to shareholders in reinvestment of distributions ............... 464,938 151,815 -- 23,813
Cost of shares repurchased ............................................ (1,603,065) (240,205) (1,200,491) (318,356)
----------- ----------- ----------- -----------
Net increase (decrease) from capital share transactions ............ 1,803,173 2,027,102 (300,113) 3,392,434
----------- ----------- ----------- -----------
Total increase (decrease) in net assets ............................ 2,410,190 2,422,126 (550,271) 3,109,615
----------- ----------- ----------- -----------
Capital contribution from manager (Note 5): .............................. 6,618 -- 7,723 --
----------- ----------- ----------- -----------
NET ASSETS at end of year (including line A) ............................. $ 5,433,249 $ 3,016,441 $ 2,664,454 $ 3,207,002
=========== =========== =========== ===========
(A) Undistributed (distribution in excess of) net investment income (loss) $ -- $ (89) $ 13,007 $ (94)
=========== =========== =========== ===========
OTHER INFORMATION Share transactions:
Sold .................................................................. 195,105 174,816 95,378 347,778
Issued to shareholders in reinvestment of distributions ............... 29,315 11,406 -- 2,452
Repurchased ........................................................... (108,258) (19,211) (127,374) (29,718)
----------- ----------- ----------- -----------
Net increase (decrease) in shares outstanding ...................... 116,162 167,011 (31,996) 320,512
=========== =========== =========== ===========
</TABLE>
See Notes to Financial Statements.
---------------------------------------------------------
F-12
<PAGE>
================================================================================
THE FULCRUM TRUST
================================================================================
<TABLE>
<CAPTION>
Strategic
Growth Value Income
Portfolio Portfolio Portfolio
- --------------------------------------------------------------------------------------
Year Ended December 31, Year Ended December 31, Year Ended December 31,
1998 1997 1998 1997 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 4,463,531 $ 148,404 $ 6,584,652 $ 900,331 $ 2,699,938 $ 1,106,698
- ----------- ----------- ----------- ----------- ----------- -----------
(18,609) (3,384) 399 41,294 50,293 69,124
(217,499) (374,694) 532,066 384,615 (12,556) (27,885)
187,404 267,942 (8,738) 494,905 52,055 8,819
- ----------- ----------- ----------- ----------- ----------- -----------
(48,704) (110,136) 523,727 920,814 89,792 50,058
- ----------- ----------- ----------- ----------- ----------- -----------
-- -- -- (41,271) (2,856) (29,924)
-- -- (611,642) (369,412) (49,760) (12,484)
- ----------- ----------- ----------- ----------- ----------- -----------
-- -- (611,642) (410,683) (52,616) (42,408)
- ----------- ----------- ----------- ----------- ----------- -----------
2,072,492 4,843,510 4,655,108 5,547,192 1,149,135 1,772,206
-- -- 611,642 410,683 52,616 42,408
(1,826,374) (418,247) (2,783,030) (783,685) (1,827,441) (229,024)
- ----------- ----------- ----------- ----------- ----------- -----------
246,118 4,425,263 2,483,720 5,174,190 (625,690) 1,585,590
- ----------- ----------- ----------- ----------- ----------- -----------
197,414 4,315,127 2,395,805 5,684,321 (588,514) 1,593,240
- ----------- ----------- ----------- ----------- ----------- -----------
10,350 -- 8,469 -- 7,936 --
- ----------- ----------- ----------- ----------- ----------- -----------
$ 4,671,295 $ 4,463,531 $ 8,988,926 $ 6,584,652 $ 2,119,360 $ 2,699,938
=========== =========== =========== =========== =========== ===========
$ -- -- $ 399 $ 23 $ -- $ 1,131
=========== =========== =========== =========== =========== ===========
171,896 391,597 330,785 432,360 112,047 181,202
-- -- 45,339 30,421 5,152 4,292
(156,624) (31,707) (198,954) (57,726) (183,153) (23,111)
- ----------- ----------- ----------- ----------- ----------- -----------
15,272 359,890 177,170 405,055 (65,954) 162,383
=========== =========== =========== =========== =========== ===========
</TABLE>
- ---------------------------------------------------------
F-13
<PAGE>
================================================================================
THE FULCRUM TRUST
================================================================================
FINANCIAL HIGHLIGHTS o 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 Period (Loss) (2) Investments Operations Income Gains Capital Distributions
- ------------- --------- ---------- ----------- ---------- ------ ----- ------- -------------
<S> <C> <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 Strategic Income Portfolio
would have been (6.68)%, (46.50%), (41.75%), 7.64%, and (4.49%),
respectively.
See Notes to Financial Statements.
---------------------------------------------------------
F-14
<PAGE>
================================================================================
THE FULCRUM TRUST
================================================================================
<TABLE>
<CAPTION>
Ratios/Supplemental Data
---------------------------------------------------------------------------------------
Net Ratios To Average Net Assets
Increase ---------------------------------------------------------
(Decrease) Net Asset Net Assets Net
in Value End of Investment Operating Portfolio
Net Asset End of Total Period Income (Loss) Expenses Management Turnover
Value Period Return(3)(4) (000's) (A) (B) (A) (B) Fee Rate
----- ------ ------------ ------- --- --- --- --- --- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 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>
- ---------------------------------------------------------
F-15
<PAGE>
================================================================================
THE FULCRUM TRUST
================================================================================
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION
The Fulcrum Trust (the "Trust") is registered under the Investment Company Act
of 1940, as amended, (the "Act") as a diversified open-end management investment
company organized as a Massachusetts business trust. The Trust's Declaration of
Trust authorizes the Trustees to issue an unlimited number of shares of
beneficial interest for the Portfolios, with a par value of $0.001 per share.
The Trust is comprised of five portfolios: Global Interactive / Telecomm
Portfolio, International Growth Portfolio, Growth Portfolio, Value Portfolio and
Strategic Income Portfolio (formerly known as the Global Strategic Income
Portfolio) (collectively the "Portfolios"). The Trust is intended to serve as an
investment medium for (i) variable life insurance policies and variable annuity
contracts offered by insurance companies, (ii) certain qualified pension and
retirement plans, as permitted by Treasury Regulations; and (iii) life insurance
companies and advisers to the Portfolios and their affiliates. The Trust was
formerly known as The Palladian Trust.
At the Trust's special meeting of shareholders held on June 8, 1998,
shareholders of Global Strategic Income Portfolio changed the Portfolio's
investment objective to reduce the global emphasis, approved new non-fundamental
investment policies consistent with the new investment objective and changed the
name of the Portfolio to the Strategic Income Portfolio.
2. SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally accepted
accounting principles requires estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates. The following is a summary of significant
accounting policies which are in conformity with generally accepted accounting
principles and consistently followed by the Trust in the preparation of its
financial statements.
Security Valuation: Securities, except as noted below, for which market
quotations are readily available are stated at market value. Market value is
determined on the basis of the last reported sale price in the principal market
where such securities are traded or, if no sales are reported, the mean between
representative bid and asked quotations obtained from a quotation reporting
system or from established market makers.
Debt securities, including those to be purchased under firm commitment
agreements, are normally valued on the basis of quotes obtained from brokers and
dealers or pricing services, which take into account appropriate factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics, and other market
data. Under certain circumstances, long-term debt securities having a maturity
of sixty days or less may be valued at amortized cost. Debt securities with a
maturity date at time of purchase of 60 days or less are valued at amortized
cost which approximates fair value.
Securities for which market quotations are not readily available are valued at
fair market value as determined in good faith by and under the direction of the
Board of Trustees. In determining fair value, management considers all relevant
qualitative and quantitative information available. These factors are subject to
change over time and are reviewed periodically. The values assigned to fair
value investments are based on available information and do not necessarily
represent an amount that might ultimately be realized, since such amounts depend
on future market and economic developments. However, because of the inherent
uncertainty of valuation, those estimated values may differ significantly from
the values that would have been used had a ready market for the investments
existed, and the differences could be material to the investment.
At December 31, 1998, one equity security with a value of $148,369 or 3.18% of
net assets of the Growth Portfolio was valued by management under the direction
of the Board of Trustees.
Forward Foreign Currency Contracts: All Portfolios may enter into forward
foreign currency contracts whereby the Portfolios agree to sell a specific
currency at a specific price at a future date in an attempt to hedge against
fluctuations in the value of the underlying currency of certain portfolio
instruments. Forward foreign currency contracts are valued at the daily exchange
rate of the underlying currency with any fluctuations recorded as unrealized
gains or losses. Receivables and payables of forward foreign currency contracts
are presented on a net basis in the Statements of Assets and Liabilities. Gains
or losses on the purchase or sale of forward foreign currency contracts having
the same settlement date and broker are recognized on the date of offset,
otherwise gains and losses are recognized on the settlement date.
---------------------------------------------------------
F-16
<PAGE>
================================================================================
THE FULCRUM TRUST
================================================================================
NOTES TO FINANCIAL STATEMENTS, Continued
- --------------------------------------------------------------------------------
Foreign Currency Translation: Investment valuations, other assets and
liabilities denominated in foreign currencies are converted each business day
into U.S. dollars based upon current exchange rates. Purchases and sales of
foreign investments and income and expenses are converted into U.S. dollars
based upon exchange rates prevailing on the respective dates of such
transactions. That portion of unrealized gains or losses on investments due to
fluctuations in foreign currency exchange rates is not separately disclosed.
Security Transactions and Investment Income: Security transactions are recorded
on the trade date. Net realized gains and losses from security transactions are
recorded on the basis of identified cost. Interest income is recorded on the
accrual basis and consists of interest accrued and, if applicable, discounts
earned on original issue discount bonds, zero coupon bonds, stepped-coupon bonds
and payment in kind bonds, which are accreted. Dividend income is recorded on
ex-dividend date.
Federal Income Taxes: The Trust treats each Portfolio as a separate entity for
Federal income tax purposes. Each Portfolio intends to qualify as a "regulated
investment company" under Subchapter M of the Internal Revenue Code of 1986, as
amended. By so qualifying, each Portfolio will not be subject to Federal income
taxes to the extent it distributes all of its taxable income and net realized
gains for the tax year ending December 31. In addition, by distributing during
each calendar year substantially all of its net investment income, capital gains
and certain other amounts, if any, each Portfolio will not be subject to Federal
excise tax. Therefore, no Federal income tax provision is required. Withholding
taxes on foreign dividend income and gains have been paid or provided for in
accordance with the applicable country's tax rules and rates.
Dividends and Distributions to Shareholders: Dividends from net investment
income and distributions of any net realized capital gains of each Portfolio are
currently declared and paid annually and at other times as may be required to
satisfy tax or regulatory requirements. Distributions to shareholders are
recorded on ex-dividend date. Dividend and capital gain distributions are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences are primarily due to
differing book and tax treatments in the timing of the recognition of gains or
losses and forwards, including "Post-October Losses" and permanent differences
due to differing treatments for paydown gains/losses on certain securities,
foreign currency transactions, market discount, non-taxable dividends and losses
deferred due to wash sales. Any taxable income or gain remaining at fiscal year
end is distributed in the following year. Permanent book and tax basis
differences relating to shareholder distributions will result in
reclassifications to paid in capital. Undistributed net investment income may
include temporary book and tax basis differences which will reverse in a
subsequent period.
Permanent book-tax differences, if any, are not included in ending undistributed
net investment income for the purposes of calculating net investment income per
share in the Financial Highlights.
Organization Costs: The organization expenses for each Portfolio, excluding
Strategic Income Portfolio, are deferred and are being amortized on a
straight-line basis over a five-year period from commencement of operations.
Expenses: The Trust accounts separately for assets, liabilities and operations
of each Portfolio. Expenses directly attributed to a Portfolio are charged to
the Portfolio, while expenses which are attributable to more than one Portfolio
of the Trust are allocated among the respective Portfolios.
Forward Commitments: The Strategic Income Portfolio may enter into contracts to
purchase securities for a fixed price at a specified future date beyond
customary settlement time ("forward commitments"). If the Portfolio does so, it
will maintain cash or other liquid obligations having a value in an amount at
all times sufficient to meet the purchase price. Forward commitments involve a
risk of loss if the value of the security to be purchased declines prior to the
settlement date. Although the Portfolio generally will enter into forward
commitments with the intention of acquiring securities for its portfolio, it may
dispose of a commitment prior to settlement if its Sub-Adviser deems it
appropriate to do so. At 12/31/98, the Strategic Income Portfolio designated
$25,000 as collateral for forward commitments.
- ---------------------------------------------------------
F-17
<PAGE>
================================================================================
THE FULCRUM TRUST
================================================================================
NOTES TO FINANCIAL STATEMENTS, Continued
- --------------------------------------------------------------------------------
3. INVESTMENT MANAGEMENT, ADMINISTRATION AND OTHER TRANSACTIONS
Allmerica Financial Investment Management Services, Inc. ("AFIMS" or the
"Manager") serves as overall Manager of the Trust. As Manager, AFIMS is
responsible for general administration of the Trust as well as monitoring and
evaluating the performance of the Portfolio Managers. AFIMS, a Massachusetts
corporation, is registered with the Securities and Exchange Commission as an
investment adviser. AFIMS is a wholly-owned subsidiary of SMA Financial Corp.,
which in turn is a wholly-owned subsidiary of First Allmerica Financial Life
Insurance Company, a wholly-owned subsidiary of Allmerica Financial Corporation
("AFC").
Effective February 12, 1998 through April 16, 1998, Allmerica Investment
Management Company, Inc. ("AIMCO"), assumed the function of Manager for the
Trust. As part of a corporate reorganization completed on April 16, 1998, AIMCO
transferred to AFIMS that portion of its business relating to registered
investment companies such as the Trust.
Prior to February 12, 1998, Palladian Advisors, Inc. ("PAI") served as Manager
of the Trust, and Tremont Partners, Inc. ("Tremont" or "Portfolio Advisor")
served as Portfolio Advisor to the Trust.
The Portfolio Managers for the Portfolios are as follows: GAMCO Investors, Inc.
("GAMCO") serves as the Portfolio Manager for The Global Interactive/Telecomm
Portfolio and The Value Portfolio; Bee & Associates Incorporated ("Bee") serves
as the Portfolio Manager of The International Growth Portfolio; Pilgrim Baxter
Analytic Investors, Inc. ("Analytic"), serves as the Portfolio Manager of The
Growth Portfolio, and Allmerica Asset Management, Inc. ("AAM") serves as the
Portfolio Manager of The Strategic Income Portfolio. Prior to August 1, 1998,
Stonehill Capital Management, Inc. served as Portfolio Manager of The Growth
Portfolio. Prior to April 9, 1998, Fischer Francis Trees & Watts ("FFTW") served
as Portfolio Manager of The Strategic Income Portfolio.
At December 31, 1998, GAMCO has invested approximately $490,000 in The Global
Interactive/Telecomm Portfolio and $300,000 in The Value Portfolio. During the
year ended December 31, 1998, GAMCO redeemed 22,635 shares with an aggregate
value of $323,000 and 36,427 shares with an aggregate value of $512,000 from The
Global Interactive /Telecomm Portfolio and The Value Portfolio, respectively.
FFTW, the former Portfolio Manager of The Strategic Income Portfolio, redeemed
102,250 shares with an aggregate value of $1,010,229 on January 6, 1998.
Investors Bank & Trust Company ("IBT") provides transfer agency, portfolio
accounting and custody services to the Trust and receives fees and reimbursement
of certain out-of-pocket expenses for its services. AFIMS has entered into an
Administrative Services Agreement with IBT, whereby IBT performs certain
administrative services for the Portfolios and is entitled to receive an
administrative fee and certain out-of-pocket expenses. AFIMS is solely
responsible for the payment of the administrative fee to IBT.
The Global Interactive/Telecomm Portfolio and The Value Portfolio placed a
significant portion of their portfolio transactions through Gabelli & Co., an
affiliated entity of the Portfolio Manager, GAMCO Investors, Inc. Total
brokerage commissions paid to Gabelli & Co. during the year ended December 31,
1998 amounted to $6,773 for The Global Interactive/Telecomm Portfolio and
$19,007 for The Value Portfolio.
Each Trustee who is not an "interested person" (as defined in the Act) of the
Trust, receives meeting fees and reimbursement for out-of-pocket expenses, from
the Trust.
4. MANAGEMENT FEES
Each Portfolio pays a monthly advisory fee equal to a Basic Fee plus or minus an
Incentive Fee. The Basic Fee is at an annual rate of 2.0% of average daily net
assets. The annual Incentive Fee rate ranges from -2.0% to +2.0%, depending on a
comparison of the Portfolio's performance and the performance of a selected
benchmark index over the past 12 months. The monthly Basic and Incentive Fee is
calculated by multiplying one-twelfth of the fee rates on an annual basis by the
average daily net assets of the previous 12 months. The aggregate annual fees
rates range from 0.0% to 4.0%. Each Portfolio Manager receives 80% of the fee,
and AFIMS receives the remaining 20%.
If the absolute performance of a Portfolio is negative, the monthly advisory fee
will be the lesser of the fee calculated as described above or an alternative
monthly advisory fee, which under certain circumstances results in the
Portfolios paying either no advisory fee or a lower monthly advisory fee at the
annual rate of 1.0% or at the annual rate of 2.0% of average daily net assets
depending on a comparison of the Portfolio's negative performance and the
performance of a selected benchmark over the past 12 months.
---------------------------------------------------------
F-18
<PAGE>
================================================================================
THE FULCRUM TRUST
================================================================================
NOTES TO FINANCIAL STATEMENTS, Continued
- --------------------------------------------------------------------------------
Effective August 1, 1998, the new Portfolio Manager Agreement specifies that The
Growth Portfolio will pay Analytic a monthly advisor fee calculated at an annual
rate of 0.80% of the Portfolio's average daily net assets. However, Analytic and
AFIMS have agreed that if The Growth Portfolio would have paid less than 0.80%
on an annual basis using the incentive fee schedule described above, Analytic
and AFIMS will limit their fee to the smaller amount. As a result, during the
first year of the new Portfolio Manager Agreement, the Growth Portfolio will pay
the lesser of (i) the amount the Portfolio would have paid under the old
agreement and (ii) 0.80% of the average daily net assets.
Effective July 1, 1998, The Strategic Income Portfolio would have paid to AAM
during the first year as Portfolio Manager a fixed annual fee of .80% of average
daily net assets. AFIMS and AAM have voluntarily agreed to limit their fees
until April 30, 1999 to an annual rate of .40%. Prior to July 1, 1998, AAM was
compensated in accordance with the performance based fee of FFTW.
5. EXPENSE LIMITATIONS AND CONTINGENT REIMBURSEMENT OBLIGATIONS
Under terms approved by the Board of Trustees of the Trust, the former
investment manager to the Trust, PAI, agreed to limit certain operating
expenses, for the years ended December 31, 1996 and 1997, to the extent that
each Portfolio's "other expenses" (i.e. excluding management fees) exceeded the
following expense limitations (expressed as an annualized percentage of average
daily net assets): Global Interactive/Telecomm Portfolio, 1.20%; International
Growth Portfolio, 1.20%; Growth Portfolio, 0.70%; Value Portfolio, 0.70%;
Strategic Income Portfolio, 1.20%. In January 1998, PAI advised the Board of
Trustees that it did not have sufficient assets to make the payments due to the
Portfolios as of December 31, 1997 relating to the reimbursement of expenses
under the existing arrangement. The Board of Trustees determined that it was in
the best interest of the shareholders to accept an offer from a group (the
"Payment Group") willing to pay to the Trust the amount due under the expense
limitation. The Payment Group includes Allmercia Financial Life Insurance and
Annuity Company, the issuer of a variable annuity contract utilizing the
portfolios as investment options, and an entity selling the variable contracts.
The aggregate amount of expenses reimbursements receivable as of December 31,
1997 were as follows: Global Interactive/Telecomm Portfolio, $99,327;
International Growth Portfolio, $96,868; Growth Portfolio, $123,531; Value
Portfolio, $146,510; Strategic Income Portfolio, $121,760.
On January 28, 1998 the Payment Group paid the Portfolios the following amounts
due under the expense limitation arrangement: Global Interactive/Telecomm
Portfolio; $88,983; International Growth Portfolio, $89,895; Growth Portfolio,
$114,448; Value Portfolio, $128,362; Strategic Income Portfolio, $103,436. In
April, 1998 AFIMS paid the remaining amounts due under the arrangement as
follows: Global Interactive/Telecomm Portfolio, $10,344; International Growth
Portfolio, $6,973; Growth Portfolio, $9,083; Value Portfolio, $18,148; Strategic
Income Portfolio, $18,324. Through December 31, 1999, the Portfolios are
required to repay all or a portion of any reimbursement of expenses received
under this arrangement, provided that average net assets have grown or expenses
have declined sufficiently to allow repayment without causing the Portfolio's
ratio of other expenses to average daily net assets to exceed the specified
expense limitation rates specified above.
Retroactive to January 1, 1998, the current investment manager to the Trust,
AFIMS, has agreed to limit certain operating expenses for the year ending
December 31, 1998 to the extent that each Portfolio's "other expenses" (i.e.
excluding management fees) exceed the following expense limitations (expressed
as an annualized percentage of average daily net assets): Global
Interactive/Telecomm Portfolio, 1.20%; International Growth Portfolio, 1.20%;
Growth Portfolio, 1.00%; Value Portfolio, 1.00%; Strategic Income Portfolio,
1.20%. This expense limitation was implemented effective February 13, 1998. On
February 24, 1998, AIMCO voluntarily contributed to the Portfolios the following
amounts as capital: Global Interactive/Telecomm Portfolio, $6,618; International
Growth Portfolio, $7,723; Growth Portfolio, $10,350; Value Portfolio, $8,469;
Strategic Income Portfolio, $7,936. These amounts were contributed to offset
expenses accrued to the Portfolios in excess of the expense limitations during
the period January 1, 1998 through February 12, 1998. These capital
contributions have been treated as an increase in paid in capital for each
Portfolio. For the year ending December 31, 1999, the Portfolios are required to
repay all or a portion of any reimbursement of expenses received under this
arrangement provided that average net assets have grown or expenses have
declined sufficiently to allow repayment without causing the Portfolio's ratio
of other expenses to average daily net assets to exceed the applicable other
expense limitation rates specified above. At December 31, 1998, the aggregate
amount of 1998 expenses reimbursed subject to repayment were as follows: Global
Interactive/Telecomm Portfolio, $90,165; International Growth Portfolio,
$101,848; Growth Portfolio, $181,834; Value Portfolio, $147,492; Strategic
Income Portfolio, $74,187. Repayment of all or a portion of any reimbursement of
expenses which relate to the year ending December 31, 1998 will not begin until
the repayment obligations to the Payment Group and AFIMS, as discussed above,
have been met. The Portfolios' reimbursement liability for 1998 expense
limitations will cease two years after the AFIMS expense limitation ends.
AFIMS has agreed to limit certain operating expenses for the year ending
December 31, 1999 to the extent that each Portfolio's "other expenses" (i.e.
excluding management fees) exceed the following expense limitations (expressed
as an annualized percentage of average daily net assets): Global
Interactive/Telecomm Portfolio, 1.50%; International Growth Portfolio, 1.50%;
Growth Portfolio, 1.20%; Value Portfolio, 1.20%; Strategic Income Portfolio,
1.50%.
- ---------------------------------------------------------
F-19
<PAGE>
================================================================================
THE FULCRUM TRUST
================================================================================
NOTES TO FINANCIAL STATEMENTS, Continued
- --------------------------------------------------------------------------------
6. FOREIGN SECURITIES
All Portfolios may purchase securities of foreign issuers. Investing in foreign
securities involves special risks not typically associated with investing in
securities of U.S. issuers. The risks include revaluation of currencies and
future adverse political and economic developments. Moreover, securities of many
foreign issuers and their markets may be less liquid and their prices more
volatile than those of securities of comparable U.S. issuers.
7. LEVERAGE
Each Portfolio may leverage its investments by purchasing securities with
borrowed money to enhance performance. The maximum loan and the average daily
loan balances during the period for which loans were outstanding amounted to
$2,369,000 and $652,000 for The Growth Portfolio. The average interest rate was
6.50%.
8. EUROPEAN ECONOMIC AND MONETARY UNION
Several European countries have participated in the European Economic and
Monetary Union, which established a common European currency for participating
countries. This currency is commonly known as the "Euro." Each participating
country replaced its existing currency with the Euro on January 1, 1999. Other
European countries may participate in the future.
---------------------------------------------------------
F-20
<PAGE>
================================================================================
THE FULCRUM TRUST
================================================================================
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of The Fulcrum Trust
In our opinion, the accompanying statements of assets and liabilities, including
the portfolios of investments, and the related statements of operations and
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of The Fulcrum Trust (formerly the
Palladian Trust), comprising of the Global Interactive/Telecomm Portfolio,
International Growth Portfolio, Growth Portfolio, Value Portfolio and Strategic
Income Portfolio (formerly the Global Strategic Income Portfolio), (the
"Portfolios"), at December 31, 1998, and the results of their operations, the
changes in their net assets and the financial highlights for the periods
indicated, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 1998 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 10, 1998
- ---------------------------------------------------------
F-21
<PAGE>
================================================================================
THE FULCRUM TRUST
================================================================================
OTHER INFORMATION
- --------------------------------------------------------------------------------
SHAREHOLDER VOTING RESULTS: (UNAUDITED)
A special meeting of the Trust's shareholders was held on September 15, 1998 at
which shareholders approved one proposal. The voting results were as follows:
Proposal 1 To approve a new Portfolio Manager Agreement, pursuant to which
Analytic Investors, Inc. would serve as Portfolio Manager to The
Growth Portfolio.
<TABLE>
<CAPTION>
Shares Shares Percent of Shares
Shares For Against Abstaining Voted
---------- ------- ---------- -----
<S> <C> <C> <C> <C>
Growth 405,014 4,350 11,994 100.00%
</TABLE>
A meeting of the Trust's shareholders was held on June 8, 1998 at which
shareholders approved five proposals. The voting results were as follows:
Proposal 1 To elect as Trustees the following two nominees:
<TABLE>
<CAPTION>
Shares Shares Percent of Shares
Shares For Against Abstaining Voted
---------- ------- ---------- -----
<S> <C> <C> <C> <C>
Gordon Holmes 1,585,033 18,564 35,479 100.00%
George J. Sullivan, Jr. 1,582,880 23,982 32,214 100.00%
</TABLE>
Proposal 2 To approve a new Management Agreement under which Allmerica
Financial Investment Management Services, Inc. ("AFIMS") will
serve as Manager of the Trust:
<TABLE>
<CAPTION>
Shares Shares Percent of Shares
Shares For Against Abstaining Voted
---------- ------- ---------- -----
<S> <C> <C> <C> <C>
Global Interactive/Telecomm 234,450 122 5,811 100.00%
International Growth 288,240 469 8,761 100.00%
Growth 395,909 101 6,908 100.00%
Value 526,933 121 12,353 100.00%
Strategic Income 157,206 -- 891 100.00%
</TABLE>
Proposal 3 To approve agreements under which AFIMS is substituted for the
previous Manager under the Portfolio Management Agreements:
<TABLE>
<CAPTION>
Shares Shares Percent of Shares
Shares For Against Abstaining Voted
---------- ------- ---------- -----
<S> <C> <C> <C> <C>
Global Interactive/Telecomm 233,540 122 6,721 100.00%
International Growth 288,240 469 8,761 100.00%
Growth 395,240 101 7,577 100.00%
Value 525,948 121 13,338 100.00%
</TABLE>
---------------------------------------------------------
F-22
<PAGE>
================================================================================
THE FULCRUM TRUST
================================================================================
OTHER INFORMATION
- --------------------------------------------------------------------------------
Proposal 4 To approve a new Portfolio Management Agreement with Allmerica
Asset Management, Inc. for the Strategic Income Portfolio:
<TABLE>
<CAPTION>
Shares Shares Percent of Shares
Shares For Against Abstaining Voted
---------- ------- ---------- -----
<S> <C> <C> <C> <C>
Strategic Income 157,206 -- 891 100.00%
</TABLE>
Proposal 5 To approve a new investment objective for the Strategic Income
Portfolio:
<TABLE>
<CAPTION>
Shares Shares Percent of Shares
Shares For Against Abstaining Voted
---------- ------- ---------- -----
<S> <C> <C> <C> <C>
Strategic Income 157,206 -- 891 100.00%
</TABLE>
- ---------------------------------------------------------
F-23
<PAGE>
================================================================================
THE FULCRUM TRUST
================================================================================
REGULATORY DISCLOSURES
- --------------------------------------------------------------------------------
The performance data quoted represents past performance and the investment
return and principal value of an investment will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
This report and the financial statements contained herein are submitted for the
general information of the shareholders of the Portfolios and are not authorized
for distribution to prospective investors in The Fulcrum Fund SM Variable
Annuity of Allmerica Financial Life Insurance and Annuity Company or First
Allmerica Financial Life Insurance Company unless accompanied or preceded by
effective prospectuses for The Fulcrum Fund SM Variable Annuity of Allmerica
Financial Life Insurance and Annuity Company or First Allmerica Financial Life
Insurance Company, and The Fulcrum Trust, which include important information
related to charges and expenses.
CLIENT NOTICES
- --------------------------------------------------------------------------------
This annual report includes financial statements for The Fulcrum Trust. It does
not include financial statements for the separate accounts that correspond to
the Fulcrum Fund SM Variable Annuity contracts. Separate account financial
statements are not provided.
YEAR 2000 (UNAUDITED)
- --------------------------------------------------------------------------------
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 Manger, Portfolio Managers, 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 computer systems of its service providers or
other third parties which interact with such service providers.
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F-24
<PAGE>
The Fulcrum Fund(SM) Variable Annuity
The Fulcrum Fund(SM) Variable Annuity is issued by Allmerica Financial Life
Insurance and Annuity Company (First Allmerica Financial Life Insurance
Company in NY and HI) and is distributed by Allmerica Investments, Inc.
To be preceded or accompanied by the current prospectus.
Read it carefully before investing.
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CONDUCT FOR
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INSURANCE AND
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ALLMERICA
FINANCIAL(R)
First Allmerica Financial Life Insurance Company o Allmerica Financial
Life Insurance and Annuity Company (licensed in all states except NY)
Allmerica Trust Company, N.A. o Allmerica Investments, Inc. o Allmerica
Investment Management Company, Inc. o The Hanover Insurance Company
o AMGRO, Inc. o Allmerica Financial Alliance Insurance Company o Allmerica
Asset Management, Inc. o Allmerica Financial Benefit Insurance
Company o Sterling Risk Management Services, Inc. o Citizens Corporation
o Citizens Insurance Company of America o Citizens Management Inc.
440 Lincoln Street, Worcester, Massachusetts 01653
