<PAGE>
THE FULCRUM TRUST
PROSPECTUS
May 1, 2000
This prospectus offers shares of four investment
Portfolios of the Trust designed to provide the
underlying investment vehicles for insurance
contracts and qualified retirement plan
accounts:
THE GLOBAL INTERACTIVE/TELECOMM PORTFOLIO
THE INTERNATIONAL GROWTH PORTFOLIO
THE GROWTH PORTFOLIO
THE VALUE PORTFOLIO
This Prospectus explains what you should know about each of the Portfolios
before you invest. Please read it carefully before you invest.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED ON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE
FULCRUM
TRUST
440 Lincoln Street
Worcester, Massachusetts 01653
(800) 917-1909
<PAGE>
TABLE OF CONTENTS
PORTFOLIO SUMMARIES 3
Objectives, Strategies and Risks 4
The Global Interactive/Telecomm Portfolio 4
The International Growth Portfolio 5
The Growth Portfolio 6
The Value Portfolio 7
EXPENSE SUMMARY 8
DESCRIPTION OF PRINCIPAL INVESTMENT RISKS 12
OTHER INVESTMENT STRATEGIES 15
MANAGEMENT OF THE PORTFOLIOS 17
MANAGEMENT AND PORTFOLIO MANAGEMENT 20
INVESTMENT ADVISORY FEES
EXPENSE LIMITATIONS 23
PRICING, PURCHASE AND REDEMPTION 24
DISTRIBUTIONS AND TAXES 25
FINANCIAL HIGHLIGHTS 27
APPENDIX 30
LEGEND
Performance [GRAPHIC]
Investment [GRAPHIC]
Objectives
Financial [GRAPHIC]
Information
Management [GRAPHIC]
of Fund
Risk [GRAPHIC]
Investment [GRAPHIC]
Strategies
The Fulcrum Trust 2
<PAGE>
PORTFOLIO SUMMARIES
The Fulcrum Trust provides a range of investment options through the four
separate investment Portfolios described in this Prospectus. Shares of the
Portfolios of the Trust are sold exclusively to (1) life insurance company
separate accounts (the "Separate Accounts") to serve as the underlying
investment medium for variable annuity and variable life insurance contracts;
(2) qualified retirement plans, as permitted by Treasury Regulations; and (3)
life insurance companies and advisers to the Portfolios and their affiliates.
Shares will not be offered directly to the public. As of the date of this
prospectus, The Fulcrum Trust offers a fifth investment Portfolio, the Strategic
Income Portfolio. That Portfolio, which is expected to be liquidated this year,
is described in a separate prospectus.
Allmerica Financial Investment Management Services, Inc. as Manager is
responsible for managing the Trust's daily business and has general
responsibility for the management of the investments of the Portfolios. The
Portfolio Managers have been hired to manage the investments of the Portfolios.
The following summaries describe each Portfolio's investment objective and
principal investment strategies and identify the principal risks of investing in
the Portfolio. The principal risks are discussed in more detail under
"Description of Principal Investment Risks". The bar charts show how investment
returns of the shares of a Portfolio have varied for the life of the Portfolio.
The table following each bar chart shows how the Portfolio's average annual
returns for the last one year and life of the Portfolio compare to those of a
broad-based securities market index. PAST PERFORMANCE DOES NOT NECESSARILY
INDICATE HOW THE PORTFOLIO WILL PERFORM IN THE FUTURE. The bar charts and tables
give some indication of the risks of investing in each Portfolio by showing
changes in the Portfolio's performance. The bar charts and tables do not reflect
expenses associated with the variable insurance product that you are purchasing.
If those expenses had been reflected, the performance shown would have been
lower.
The Fulcrum Trust 3
<PAGE>
OBJECTIVES, STRATEGIES AND RISKS
THE GLOBAL INTERACTIVE/
TELECOMM PORTFOLIO
[GRAPHIC] PORTFOLIO MANAGER: GAMCO INVESTORS, INC.
[GRAPHIC] INVESTMENT OBJECTIVE: The Portfolio seeks to make money for investors
primarily by investing globally in equity securities of companies engaged in the
development, manufacture or sale of interactive and/or telecommunications
services and products.
[GRAPHIC] PRINCIPAL INVESTMENT STRATEGIES: The Portfolio normally invests
primarily in common stocks and other equity securities of companies
participating in technological advances in interactive services, companies
providing products that are accessible in the home or office through consumer
electronics devices, telecommunications companies, and companies outside of the
telecommunications industry which are expected to benefit from development in
the telecommunications industry. The Portfolio may also invest in debt
securities.
In analyzing companies for investment, the Portfolio Manager looks for several
characteristics including: above-average per share earnings growth; sound
financial and accounting policies; strong competitive advantages; and effective
research, product development and marketing.
The Portfolio normally invests in at least three different countries, including
the United States. No more than 40% of the Portfolio's assets will be invested
in any one country except the United States.
[GRAPHIC] PRINCIPAL RISKS:
- - Company Risk
- - Currency Risk
- - Derivatives Risk
- - Emerging Markets Risk
- - Foreign Investment Risk
- - Investment Management Risk
- - Liquidity Risk
- - Market Risk
- - Technology Risk
See "Description of Principal Investment Risks."
The bar chart and table below do not reflect expenses at the insurance product
level, and if they did, the performance shown would have been lower.
ANNUAL TOTAL RETURN [GRAPHIC]
[GRAPH]
1997 - 40.24%
1998 - 30.27%
1999 - 56.89%
During the period shown above, the highest quarterly return was 22.54% for the
quarter ended December 31, 1998 and the lowest was (12.48%) for the quarter
ended September 30, 1998.
PERFORMANCE TABLE
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ending PAST SINCE INCEPTION
December 31, 1999) ONE YEAR (FEBRUARY 1, 1996)
- ------------------ -------- ------------------
Portfolio Shares 56.89% 31.03%
- ---------------- ------ ------
S&P 500 Index* 21.03% 25.94%
- -------------- ------ ------
* The S&P 500-Registered Trademark- Index, reflecting reinvestment of dividends,
is an unmanaged index of 500 leading stocks. S&P 500 Index is a registered
trademark of the Standard & Poor's Corporation.
4 The Fulcrum Trust
<PAGE>
OBJECTIVES, STRATEGIES AND RISKS
THE INTERNATIONAL GROWTH PORTFOLIO
[GRAPHIC] PORTFOLIO MANAGER: BEE & ASSOCIATES, INCORPORATED
[GRAPHIC] INVESTMENT OBJECTIVE: The Portfolio seeks to make money for investors
by investing internationally for long-term capital appreciation, primarily in
equity securities.
[GRAPHIC] PRINCIPAL INVESTMENT STRATEGIES: The Portfolio normally invests
primarily in common stocks and other equity securities of foreign companies. The
Portfolio currently concentrates on companies with market capitalization under
$1 billion. The Portfolio may also invest in debt securities.
The Portfolio generally invests in securities from at least three different
countries. The Portfolio generally does not invest more than 20% of its assets
in any one foreign country, except that it may invest up to 35% of its assets in
each of the following countries: Australia, Canada, France, Germany, Mexico, the
United Kingdom and the United States. The Portfolio currently concentrates in
securities from the more developed countries in the Americas, the Far East and
the Pacific Basin, Australia and Western Europe. The Portfolio, however, can
invest in emerging market countries.
[GRAPHIC] PRINCIPAL RISKS:
- - Company Risk
- - Currency Risk
- - Derivatives Risk
- - Emerging Markets Risk
- - Foreign Investment Risk
- - Investment Management Risk
- - Liquidity Risk
- - Market Risk
See "Description of Principal Investment Risks."
The bar chart and table below do not reflect expenses at the insurance product
level, and if they did, the performance shown would have been lower.
ANNUAL TOTAL RETURN [GRAPHIC]
[GRAPH]
1997 - (5.25)%
1998 - (8.02)%
1999 - 37.26%
During the period shown above, the highest quarterly return was 15.21% for the
quarter ended December 31, 1998 and the lowest was (25.02)% for the quarter
ended September 30, 1998.
PERFORMANCE TABLE
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ending PAST SINCE INCEPTION
December 31, 1999) ONE YEAR (MARCH 26, 1996)
- ------------------ -------- ----------------
Portfolio Shares 37.26% 6.28%
- ---------------- ------ -----
Morgan Stanley 27.31 13.63
EAFE Index*
- ----------
Morgan Stanley
EAFE Small Cap Index** 17.65% ( 3.34%)
- ---------------------- ----- -------
* The Morgan Stanley EAFE Index is an unmanaged index of European, Australian
and Far East stocks.
** Effective December 1, 1999, the Morgan Stanley EAFE Small Cap Index replaced
the Morgan Stanley EAFE Index as the performance benchmark for the Portfolio.
The Morgan Stanley EAFE Small Cap Index is an unmanaged index of European,
Australian and Far East stocks having a market capitalization of between $200
million and $800 million. The Morgan Stanley EAFE index has an average market
cap of more than $6 billion.
The Fulcrum Trust 5
<PAGE>
OBJECTIVES, STRATEGIES AND RISKS
THE GROWTH PORTFOLIO
[GRAPHIC] PORTFOLIO MANAGER: ANALYTIC INVESTORS, INC.
[GRAPHIC] INVESTMENT OBJECTIVE: The Portfolio seeks to make money for investors
by investing primarily in domestic securities selected for their long-term
growth prospects.
[GRAPHIC] PRINCIPAL INVESTMENT STRATEGIES: The Portfolio normally invests
primarily in common stocks and other equity securities of U.S. corporations. The
Portfolio may also invest in foreign equity securities and debt securities.
The Portfolio Manager currently uses a proprietary computer model designed to
build a portfolio of stocks. When viewed as a group, the stocks have fundamental
characteristics that the Portfolio Manager considers to be superior to the 500
stocks included in the Standard & Poor's 500 Composite Stock Price Index. The
model seeks to identify a portfolio of stocks with, among other characteristics,
higher than average return on equity and earnings growth at a reasonable price
and positive price momentum over the last 6 to 12 months. The model focuses on
the characteristics of the aggregate portfolio rather than screening for
individual stocks that meet all the desired characteristics. While the Growth
Portfolio may invest in stocks of any company, it normally invests in stocks of
medium to large companies in the S&P 500 (that is, typically companies with a
market capitalization of $15 billion or higher).
[GRAPHIC] PRINCIPAL RISKS:
- - Company Risk
- - Derivatives Risk
- - Investment Management Risk
- - Market Risk
See "Description of Principal Investment Risks."
The bar chart and table below do not reflect expenses at the insurance product
level, and if they did, the performance shown would have been lower.
ANNUAL TOTAL RETURN [GRAPHIC]
[GRAPH]
1997 - 10.24%
1998 - 0.50%
1999 - 20.07%
During the period shown above, the highest quarterly return was 17.98% for the
quarter ended December 31, 1998 and the lowest was (14.95%) for the quarter
ended September 30, 1998.
Analytic Investors, Inc. became the Portfolio Manager of the Portfolio on August
1, 1998. Performance before that date is based on the performance of the
Portfolio's previous Portfolio Manager.
PERFORMANCE TABLE
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ending PAST SINCE INCEPTION
December 31, 1999) ONE YEAR (FEBRUARY 1, 1996)
- ------------------ -------- ------------------
Portfolio Shares 20.07% 9.80%
- ---------------- ------ -----
S&P 500 Index* 21.03% 25.94%
- -------------- ------ ------
* The S&P 500-Registered Trademark- Index, reflecting reinvestment of dividends,
is an unmanaged index of 500 leading stocks. S&P 500-Registered Trademark- Index
is a registered trademark of the Standard & Poor's Corporation.
6 The Fulcrum Trust
<PAGE>
OBJECTIVES, STRATEGIES AND RISKS
THE VALUE PORTFOLIO
[GRAPHIC] PORTFOLIO MANAGER: GAMCO INVESTORS, INC.
[GRAPHIC] INVESTMENT OBJECTIVE: The Portfolio seeks to make money for investors
by investing primarily in companies that the Portfolio Manager believes are
undervalued and that by virtue of anticipated developments may, in the Portfolio
Manager's judgment, achieve significant capital appreciation.
[GRAPHIC] PRINCIPAL INVESTMENT STRATEGIES: The Portfolio normally invests
primarily in common stocks and other equity securities of companies that the
Portfolio Manager believes are selling in the public market at a significant
discount to their private market value. The Portfolio Manager believes a company
may be undervalued when investors fail to recognize the underlying value of its
fixed assets, changes in the economic environment affecting the company,
technological developments affecting the company's products, or other similar
factors. The Portfolio may also invest in debt securities.
[GRAPHIC] PRINCIPAL RISKS:
- - Company Risk
- - Derivatives Risk
- - Investment Management Risk
- - Liquidity Risk
- - Market Risk
See "Description of Principal Investment Risks."
The bar chart and table below do not reflect expenses at the insurance product
level, and if they did, the performance shown would have been lower.
ANNUAL TOTAL RETURN [GRAPHIC]
[GRAPH]
1997 - 32.36%
1998 - 7.49%
1999 - 8.17%
During the period shown above, the highest quarterly return was 14.02% for the
quarter ended December 31, 1998 and the lowest was (15.21%) for the quarter
ended September 30, 1998.
PERFORMANCE TABLE
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ending PAST SINCE INCEPTION
December 31, 1999) ONE YEAR (FEBRUARY 1, 1996)
- ------------------ -------- ------------------
Portfolio Shares 8.17% 15.73%
- ---------------- ----- ------
S&P 500 Index* 21.03% 25.94%
- -------------- ------ ------
* The S&P 500-Registered Trademark- Index, reflecting reinvestment of dividends,
is an unmanaged index of 500 leading stocks. S&P 500-Registered Trademark- Index
is a registered trademark of the Standard & Poor's Corporation.
The Fulcrum Trust 7
<PAGE>
<PAGE>
EXPENSE SUMMARY
The following tables describe the fees and expenses that you may pay if you
invest in the Portfolios. The expenses listed below are not the only expenses if
you are purchasing a variable insurance contract. You should refer to the
variable insurance contract prospectus for more information relating to fees and
expenses, which are in addition to the expenses of the Portfolios.
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES DEDUCTED FROM PORTFOLIO ASSETS)
For the first 12 full calendar months after a new Portfolio Manager is hired
(or, in the case of a Portfolio that has had only one Portfolio Manager, for the
first 12 full calendar months of operations), the advisory agreements set the
management fee at an annual rate of 0.80% of the Portfolio's average daily net
assets.
After the initial 12-month period described above, each Portfolio has a
performance-based advisory fee. As of the date of this prospectus, this fee is
in effect for all Portfolios . See "Management and Portfolio Management
Investment Advisory Fees," pages 20-22.
Shown below is expense information first using the fees that actually applied
during 1999. Also shown below is expense information assuming fees of 0.00%,
2.00% and 4.00%, because the fees in 2000 and future years may vary. You should
note, however, that the fee could be any figure between 0.00% and 4.00%, not
just the specific figures shown below.
For each of the fee levels shown, we have included an example prepared in
accordance with the requirements of the Securities and Exchange Commission
("SEC"). The purpose of the examples is to assist investors in comparing the
cost of investing in a Portfolio with the cost of investing in other mutual
funds. The example assumes that you invest $10,000 in a Portfolio for the time
periods indicated and then redeem all of your shares at the end of those
periods. The example also assumes that your investment earns a 5% return each
year and that the Portfolio's operating expenses remain the same. Your actual
costs may be higher or lower.
The Fulcrum Trust 8
<PAGE>
1. USING 1999 MANAGEMENT FEES
<TABLE>
<CAPTION>
SHAREHOLDER TOTAL ANNUAL
FEES MANAGEMENT DISTRIBUTION OTHER FUND
(FEES PAID DIRECTLY FEES (12B-1) FEES EXPENSES(1,2) OPERATING
FROM YOUR INVESTMENT) EXPENSES(1,2)
--------------------- -------------
<S> <C> <C> <C> <C> <C>
The Global Interactive/ None 2.47% None 1.75% 4.22%
Telecomm Portfolio
------------------
The International Growth Portfolio None 1.21% None 4.06% 5.27%
- ---------------------------------- ---- ----- ---- ----- -----
The Growth Portfolio None 0.36% None 2.55% 2.91%
- -------------------- ---- ----- ---- ----- -----
The Value Portfolio None 0% None 1.76% 1.76%
- ------------------- ---- -- ---- ----- -----
</TABLE>
EXAMPLE. The purpose of this example is to assist investors in comparing the
cost of investing in a Portfolio with the cost of investing in other mutual
funds. Your actual costs may be higher or lower. A shareholder would pay the
following expenses on a $10,000 investment, assuming (1) 5% annual return, (2)
the advisory fees in the above chart, and (3) redemption at the end of each time
period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
The Global Interactive/Telecomm Portfolio $433 $1,306 $2,192 $4,459
- ----------------------------------------- ---- ------ ------ ------
The International Growth Portfolio $540 $1,614 $2,679 $5,305
- ---------------------------------- ---- ------ ------ ------
The Growth Portfolio $298 $913 $1,553 $3,269
- -------------------- ---- ---- ------ ------
The Value Portfolio $180 $559 $ 962 $2,087
- ------------------- ---- ---- ------ ------
</TABLE>
2. ASSUMING MANAGEMENT FEE OF 0%
An advisory fee of 0% would be paid if the Portfolio's performance (net of all
fees and expenses) was more than 3.0 percentage points lower than the benchmark
index.
<TABLE>
<CAPTION>
SHAREHOLDER TOTAL ANNUAL
FEES FUND
(FEES PAID DIRECTLY MANAGEMENT DISTRIBUTION OTHER OPERATING
FROM YOUR INVESTMENT) FEES (12B-1) FEES EXPENSES(1,2) EXPENSES
--------------------- ---- ------------ ------------- --------
<S> <C> <C> <C> <C> <C>
The Global Interactive/ None 0.00% None 1.75% 1.75%
Telecomm Portfolio
------------------
The International Growth Portfolio None 0.00% None 4.06% 4.06%
---------------------------------- ---- ----- ---- ----- -----
The Growth Portfolio None 0.00% None 2.55% 2.55%
-------------------- ---- ----- ---- ----- -----
The Value Portfolio None 0.00% None 1.76% 1.76%
------------------- ---- ----- ---- ----- -----
</TABLE>
9 The Fulcrum Trust
<PAGE>
EXAMPLE. The purpose of this example is to assist investors in comparing the
cost of investing in a Portfolio with the cost of investing in other mutual
funds. Your actual costs may be higher or lower. A shareholder would pay the
following expenses on a $10,000 investment, assuming (1) 5% annual return, (2)
an advisory fee of 0%, and (3) redemption at the end of each time period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
The Global Interactive/Telecomm Portfolio $179 $556 $956 $2,076
- ----------------------------------------- ---- ---- ---- ------
The International Growth Portfolio $416 $1,259 $2,116 $4,322
- ---------------------------------- ---- ------ ------ ------
The Growth Portfolio $261 $803 $1,371 $2,913
- -------------------- ---- ---- ------ ------
The Value Portfolio $180 $559 $962 $2,087
- ------------------- ---- ---- ---- ------
</TABLE>
3. ASSUMING MANAGEMENT FEE OF 2.00% An advisory fee of 2.00% would be paid if
the Portfolio's performance (net of all fees and expenses, including the 2.00%
advisory fee) was between 1.5 and 3.0 percentage points better than the
benchmark index.
<TABLE>
<CAPTION>
SHAREHOLDER TOTAL ANNUAL
FEES FUND
(FEES PAID DIRECTLY MANAGEMENT DISTRIBUTION OTHER OPERATING
FROM YOUR INVESTMENT) FEES (12B-1) FEES EXPENSES(1,2) EXPENSES(1,2)
--------------------- ---- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
The Global Interactive/ None 2.00% None 1.75% 3.75%
Telecomm Portfolio
-----------------
The International Growth Portfolio None 2.00% None 4.06% 6.06%
- ---------------------------------- ---- ----- ---- ----- -----
The Growth Portfolio None 2.00% None 2.55% 4.55%
- -------------------- ---- ----- ---- ----- -----
The Value Portfolio None 2.00% None 1.76% 3.76%
- ------------------- ---- ----- ---- ----- -----
</TABLE>
EXAMPLE. The purpose of this example is to assist investors in comparing the
cost of investing in a Portfolio with the cost of investing in other mutual
funds. Your actual costs may be higher or lower. A shareholder would pay the
following expenses on a $10,000 investment, assuming (1) 5% annual return, (2)
an advisory fee of 2%, and (3) redemption at the end of each time period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
The Global Interactive/Telecomm Portfolio $384 $1,167 $1,967 $4,050
- ----------------------------------------- ---- ------ ------ ------
The International Growth Portfolio $621 $1,841 $3,031 $5,884
- ---------------------------------- ---- ------ ------ ------
The Growth Portfolio $466 $1,404 $2,348 $4,735
- -------------------- ---- ------ ------ ------
The Value Portfolio $385 $1,170 $1,972 $4,059
- ------------------- ---- ------ ------ ------
</TABLE>
The Fulcrum Trust 10
<PAGE>
4. ASSUMING MANAGEMENT FEE OF 4.00%
An advisory fee of 4.00% would be paid if the Portfolio's performance (net of
all fees and expenses, including the 4.00% advisory fee) was at least 7.5
percentage points better than the benchmark index.
<TABLE>
<CAPTION>
SHAREHOLDER TOTAL ANNUAL
FEES FUND
(FEES PAID DIRECTLY MANAGEMENT DISTRIBUTION OTHER OPERATING
FROM YOUR INVESTMENT) FEES (12B-1) FEES EXPENSES(1,2) EXPENSES
--------------------- ---- ------------ ------------- --------
<S> <C> <C> <C> <C> <C>
The Global Interactive/ None 4.00% None 1.75% 5.75%
Telecomm Portfolio
------------------
The International Growth Portfolio None 4.00% None 4.06% 8.06%
- ---------------------------------- ---- ----- ---- ----- -----
The Growth Portfolio None 4.00% None 2.55% 6.55%
- -------------------- ---- ----- ---- ----- -----
The Value Portfolio None 4.00% None 1.76% 5.76%
- ------------------- ---- ----- ---- ----- -----
</TABLE>
EXAMPLE. The purpose of this example is to assist investors in comparing the
cost of investing in a Portfolio with the cost of investing in other mutual
funds. Your actual costs may be higher or lower. A shareholder would pay the
following expenses on a $10,000 investment, assuming (1) 5% annual return, (2)
an advisory fee of 4%, and (3) redemption at the end of each time period.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
The Global Interactive/Telecomm Portfolio $589 $1,752 $2,895 $5,662
- ----------------------------------------- ---- ------ ------ ------
The International Growth Portfolio $826 $2,398 $3,870 $7,149
- ---------------------------------- ---- ------ ------ ------
The Growth Portfolio $671 $1,980 $3,244 $6,219
- -------------------- ---- ------ ------ ------
The Value Portfolio $590 $1,755 $2,899 $5,670
- ------------------- ---- ------ ------ ------
</TABLE>
(1) Actual 1999 "other expenses" were less than these shown in the above charts
because of a voluntary expense limitation agreed to by Allmerica Financial
Investment Management Services, Inc. ("AFIMS"), investment manager of the Trust.
AFIMS currently limits the "other expenses" to an annual rate of 1.50% of
average daily net assets for The Global Interactive/Telecomm Portfolio and The
International Growth Portfolio and an annual rate of 1.20% of average daily net
assets for The Growth Portfolio and The Value Portfolio. The Manager has agreed
to continue these voluntary expense limitations through June 30, 2000. AFIMS has
agreed to keep their limitation in place through June 30, 2000, but it may
discontinue this limitation at any time after that date.
(2) Each Portfolio is obligated to reimburse AFIMS for any portfolio expenses
AFIMS reimburses subject to certain limitations discussed in "Expense
Limitations", page 23.
11 The Fulcrum Trust
<PAGE>
[GRAPHIC] DESCRIPTION OF PRINCIPAL INVESTMENT RISKS
The principal risks of investing in a Portfolio and the factors likely to cause
the value of your investment in the Portfolio to decline are described below.
The principal risks applicable to each Portfolio are identified under "Portfolio
Summaries - Objectives, Strategies and Risks." There are also many factors that
could cause the value of your investment in a Portfolio to decline which are not
described here. The price per share of each Portfolio will change daily based on
market conditions and other factors. It is important to remember that there is
no guarantee that the Portfolios will achieve their investment objective, and an
investor in any of the Portfolios could lose money.
COMPANY RISK
A Portfolio's equity and fixed income investments in a company often fluctuate
based on:
- - The firm's actual and anticipated earnings,
- - Changes in management, product offerings and overall financial strength and
- - The potential for takeovers and acquisitions.
This is due to the fact that prices of securities react to the fiscal and
business conditions of the company that issued the securities. Factors affecting
a company's particular industry, such as increased production costs, also may
affect the value of its securities. With respect to the Global
Interactive/Telecomm Portfolio, adverse changes in global economic conditions or
the interactive/telecommunications industry may cause the value of the
Portfolio's shares to fall sharply. A downturn in the interactive/
telecommunications industry also would have more of an impact on the
Portfolio than on a fund that was diversified among many different industries.
Smaller companies with market capitalizations of less than $1 billion or so are
more likely than larger companies to have limited lines or smaller markets for
their products and services. Small company stocks may not trade very actively,
and their prices may fluctuate more than stocks of other companies as a result
of lower liquidity. They may depend on a small or inexperienced management
group. Stocks of smaller companies also may be more vulnerable to negative
changes than stocks of larger companies.
CURRENCY RISK
This is the risk that foreign currencies will decline in value relative to the
U.S. dollar. Portfolios that invest in securities denominated in or are
receiving revenues in foreign currencies are subject to currency risk. There is
often a greater risk of currency fluctuations and devaluations in emerging
market countries.
DERIVATIVES RISK
A Portfolio may use derivatives to hedge against an opposite position that the
Portfolio also holds. While hedging can reduce or eliminate losses, it can also
reduce or eliminate gains. When a Portfolio uses derivatives to hedge, it takes
the risk that changes in the value of the derivative will not match those of the
asset being hedged. Incomplete correlation can result in unanticipated losses. A
Portfolio may also use derivatives as an investment vehicle to gain market
exposure. Gains or losses from derivative investments may be substantially
greater than the derivative's original cost. When a Portfolio uses derivatives,
it is also subject to the risk that the other party to the agreement will not be
able to perform. Additional risks associated with derivatives include mispricing
and improper valuation.
The Fulcrum Trust 12
<PAGE>
EMERGING MARKETS RISK
Investments in emerging markets securities involve all of the risks of
investments in foreign securities, and also have additional risks. The markets
of developing countries have been more volatile than the markets of developed
countries with more mature economies. Many emerging markets companies in the
early stages of development are dependent on a small number of products and lack
substantial capital reserves. In addition, emerging markets often have less
developed legal and financial systems. These markets often have provided
significantly higher or lower rates of return than developed markets and usually
carry higher risks to investors than securities of companies in developed
countries.
FOREIGN INVESTMENT RISK
Investing in foreign securities involves risks relating to political, social and
economic developments abroad, as well as risks resulting from the differences
between the regulations to which U.S. and foreign issuers and markets are
subject. These risks may include the seizure by the government of company
assets, excessive taxation, withholding taxes on dividends and interest,
limitations on the use or transfer of portfolio assets, and political or social
instability. In the event of nationalization, expropriation or other
confiscation, a Portfolio could lose its entire investment. Portfolios investing
in foreign securities may experience rapid changes in value. One reason for this
volatility is that the securities markets of many foreign countries are
relatively small, with a limited number of companies representing a small number
of industries. Enforcing legal rights may be difficult, costly and slow in
foreign countries. Also, foreign companies may not be subject to governmental
supervision or accounting standards comparable to those applicable to U.S.
companies, and there may be less public information about their operations.
INVESTMENT MANAGEMENT RISK
Investment management risk is the risk that a Portfolio does not achieve its
investment objective, even though the Portfolio Manager uses various investment
strategies and techniques.
LIQUIDITY RISK
This is the risk that a Portfolio will not be able to sell a security at a
reasonable price because there are too few people who actively buy and sell, or
trade, that security on a regular basis. Liquidity risk increases for Portfolios
investing in foreign investments (especially emerging markets securities),
smaller companies, lower credit quality bonds (also called junk bonds),
restricted securities, over-the-counter securities and derivatives.
MARKET RISK
This is the risk that the price of a security held by a Portfolio will fall due
to changing economic, political or market conditions or to factors affecting
investor psychology.
TECHNOLOGY RISK
Investments in the technology industries, even though representing interests in
different companies within these industries, may be affected by common economic
forces and other factors. In addition, stock prices of companies in technology
industries have historically been more volatile than those of companies in other
industries.
13 The Fulcrum Trust
<PAGE>
[GRAPHIC] OTHER INVESTMENT STRATEGIES
The Portfolio Summaries starting on page 3 describe the investment objective and
the principal investment strategies and risks of each Portfolio. The investment
objectives of the Portfolios are fundamental, which means that they may be
changed only with shareholder approval. Unless otherwise indicated, each
Portfolio's practices, policies and programs for achieving its objectives are
not fundamental and thus may be changed by the Board of Trustees without
shareholder approval. The Statement of Additional Information sets forth certain
investment restrictions which are fundamental, and, like the investment
objectives, may be changed only with shareholder approval. There is no guarantee
that the Portfolios will achieve their objective and an investor in any of the
Portfolios could lose money. Attached is an Appendix illustrating various
investment techniques and strategies that the Portfolio Managers of the
Portfolios may utilize. The Portfolios may at times use the following
strategies:
DERIVATIVE INVESTMENTS. Instead of investing in the types of portfolio
securities described in the Summary, each Portfolio may buy or sell a variety of
"derivative" investments to gain exposure to particular securities or markets.
Derivatives are financial contracts whose value depends on, or is derived from,
the value of an underlying asset, reference rate or index. A Portfolio's
Portfolio Manager will sometimes use derivatives as part of a strategy designed
to reduce other risks and sometimes will use derivatives for leverage, which
increases opportunities for gain but also involves greater risk.
FOREIGN SECURITIES. Each Portfolio may invest all or a substantial part of its
portfolio in securities of companies that are located or primarily doing
business in a foreign country. A company is considered to be located in a
foreign country if it is organized under the laws of, or has a principal office
in, that country. A company is considered as primarily doing business in a
country if (i) the company derives at least 50% of its gross revenues or profits
from either goods or services produced or sold in the country or (ii) at least
50% of the company's assets are situated in the country. A Portfolio may invest
in foreign securities either directly or indirectly through the use of
depository receipts, such as American Depository Receipts or ADRs. Depository
receipts are generally issued by banks or trust companies and evidence ownership
of underlying foreign securities. An ADR may be sponsored by the issuer of the
underlying foreign security or it may be issued in unsponsored form. The holder
of a sponsored ADR is likely to receive more frequent and extensive financial
disclosure concerning the foreign issuer than the holder of an unsponsored ADR
and generally will bear lower transaction charges.
DEBT SECURITIES. All Portfolios may invest in corporate debt securities of
domestic or foreign issuers. Each Portfolio may only invest in debt securities
which meet the minimum ratings criteria set forth for that particular Portfolio
and unrated debt securities that are comparable in quality to the rated debt
securities in which the Portfolio may invest. Debt securities are subject to
credit risk (the risk that the issuer may not be able to pay principal and
interest when due) and interest rate risk (the risk that the values may decrease
as interest rates increase).
The Global Interactive/Telecomm, International Growth, Growth, and Value
Portfolios may each invest up to 5% of assets in high yield securities. These
securities are considered to be speculative with respect to the issuer's
capacity to pay interest and repay principal.
The Fulcrum Trust 15
<PAGE>
LENDING PORTFOLIO SECURITIES. To realize additional income, each Portfolio may
lend securities with a value of up to 33% of its total assets to unaffiliated
broker-dealers or institutional investors. Any loan will be secured by
collateral at least equal to the value of the security loaned. While any such
loan is outstanding, a Portfolio will continue to receive amounts equal to the
interest or dividends paid by the issuer on the securities, as well as interest
(less any rebates to be paid to the borrower) on the investment of the
collateral or a fee from the borrower. Each Portfolio will have the right to
call each loan and obtain the securities. Lending portfolio securities involves
possible delays in receiving additional collateral or in the recovery of the
securities or possible loss of rights in the collateral.
ILLIQUID SECURITIES. Each Portfolio may invest up to 15% of its net assets in
securities for which there is no readily available market ("illiquid
securities"), which would include repurchase agreements having more than 7 days
to maturity. A considerable period of time may elapse between a Portfolio's
decision to dispose of such securities and the time when the Portfolio is able
to dispose of them, during which time the value of the securities could decline.
The SEC has adopted Rule 144A which permits resale among certain institutional
investors of certain unregistered securities which have been deemed liquid.
TEMPORARY DEFENSIVE STRATEGIES. At times a Portfolio Manager may determine that
market conditions make it desirable temporarily to suspend a Portfolio's normal
investment activities. This is when the Portfolio may temporarily invest in a
variety of lower-risk securities, such as U.S. Government and other high quality
bonds and short-term debt obligations. Such strategies attempt to reduce changes
in the value of the Portfolio's shares. The Portfolio may fail to profit from
favorable developments affecting its normal investments while these strategies
are in effect.
FREQUENT TRADING. Certain Portfolios from time to time may engage in active and
frequent trading to achieve their investment objective. Frequent trading
increases transaction costs, which could decrease the Portfolio's performance.
16 The Fulcrum Trust
<PAGE>
[GRAPHIC] MANAGEMENT OF THE PORTFOLIOS
THE TRUST. The business and affairs of the Trust are managed under the direction
of the Board of Trustees.
MANAGER. Allmerica Financial Investment Management Services, Inc. ("AFIMS" or
the "Manager") serves as overall Manager of the Trust. As Manager, AFIMS is
responsible for general administration of the Trust as well as monitoring and
evaluating the performance of the Portfolio Managers. AFIMS, a Massachusetts
corporation, is registered with the Securities and Exchange Commission as an
investment adviser. AFIMS is located at 440 Lincoln Street, Worcester,
Massachusetts 01653 and is an indirect, wholly-owned subsidiary of Allmerica
Financial Corporation ("AFC"). AFC is the parent company of the two life
insurance companies, Allmerica Financial Life Insurance and Annuity Company and
First Allmerica Financial Life Insurance Company ("FAFLIC"), which utilize the
Trust as an underlying fund for their variable contracts.
PORTFOLIO MANAGERS. Portfolio Managers have been hired to manage the investments
of the Portfolios.
The Portfolio Managers' activities are subject to general oversight by the
Trustees and AFIMS. Although the Trustees and AFIMS do not evaluate the
investment merits of the Portfolio Managers' specific securities selections,
they do review each Portfolio Manager's overall performance.
The following table provides information about each Portfolio's Portfolio
Manager:
<TABLE>
<CAPTION>
PORTFOLIO,
PORTFOLIO MANAGER NAME AND ADDRESS EXPERIENCE
- ---------------------------------- ----------
<S> <C>
GLOBAL INTERACTIVE/TELECOMM PORTFOLIO - Organized in 1978
GAMCO Investors, Inc. - $9.3 billion assets under management
One Corporate Center as of December 31, 1999
Rye, NY 10580-1434 - Acts as investment adviser for
individuals, pension trusts,
profit-sharing trusts and endowments
------------------------------------
INTERNATIONAL GROWTH PORTFOLIO - Established in 1989
Bee & Associates, Incorporated - Over $475 million assets under
370 17th Street, Suite 3560 management as of March 31, 2000
Denver, CO 80202 - Provides global equity management
expertise to individual retirement
plan sponsors, foundations,
endowments and other entities
-----------------------------
</TABLE>
The Fulcrum Trust 17
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO,
PORTFOLIO MANAGER NAME AND ADDRESS EXPERIENCE
- ---------------------------------- ----------
<S> <C>
GROWTH PORTFOLIO - Founded in 1970
Analytic Investors, Inc. - Manages assets totaling approximately
700 South Flower Street, Suite 2400 $1.5 billion as of December 31, 1999
Los Angeles, CA 90017 - Provides management of investment
advisory accounts to individuals,
banks/thrift institutions,
investment companies, pension
and profit sharing plans,
trusts, estates or charitable
organizations and other corporations
------------------------------------
VALUE PORTFOLIO Refer to Global Interactive/ Telecomm
GAMCO Investors, Inc. Portfolio above
One Corporate Center
Rye, NY 10580-1434
- ------------------
</TABLE>
18 The Fulcrum Trust
<PAGE>
The following individuals or groups of individuals are primarily responsible for
the day-to-day management of the Portfolios:
<TABLE>
<CAPTION>
PORTFOLIO NAME, NAME AND TITLE OF
PORTFOLIO MANAGER INDIVIDUAL PORTFOLIO MANAGED BUSINESS EXPERIENCE
NAME MANAGER(S) PORTFOLIO SINCE FOR THE PAST FIVE YEARS
- ---- ---------- --------------- -----------------------
<S> <C> <C> <C>
GLOBAL INTERACTIVE/TELECOMM Mario J. Gabelli, 1996 Mr. Gabelli has more than
PORTFOLIO Chief Investment Officer 26 years of experience in
GAMCO Investors, the investment industry and
Inc. ("GAMCO") has been chief investment
officer of GAMCO since its
inception.
----------
INTERNATIONAL GROWTH PORTFOLIO Adam D. Schor, Chief 1999 Mr. Schor has served as
Bee & Associates Incorporated Investment Officer Chief Investment Officer
("Bee & Associates") Principal Portfolio Manager since August 1999; from
- -------------------- --------------------------- 1997 to 1999 he was a member
of the portfolio management
team; from 1993 to 1997,
Mr. Schor worked at Harris
Associates, where he covered
various geographic regions for
the Oakmark International Fund.
He also Co-managed two funds,
the Oakmark International Small
Cap Fund and the Growth
Fund of Israel.
Jason P. Yee, 1999 Mr. Yee has served as a Principal
Managing Director of Bee & Associates since July
1999; he joined the firm in
1996 from Janus Capital
Corporation where he served
as an equity research analyst.
GROWTH PORTFOLIO Harindra de Silva, President 1998 Mr. de Silva has served as
Analytic Investors, President of Analytic
Inc. ("Analytic") since April 1998; from 1986
to 1998, he served as
Principal of Analysis Group, Inc. He
has been a member of the
portfolio management team of
Analytic since 1995.
Dennis Bein, Portfolio Manager 1998 Mr. Bein has been a member
of the portfolio management
and research team of Analytic
since August 1995; he served
as a senior associate for
Analysis Group, Inc. from
1990 to 1998.
-------------
Steve Sapra, Portfolio Manager 1999 Mr. Sapra has been a member
of the portfolio management
and research team of Analytic
since September 1999; he served
as Senior Consultant at BARRA, Inc.
from July 1997 to August 1999.
From September 1995 to June 1997,
Mr. Sapra was earning his Masters in
Economics from the University
of Southern California.
VALUE PORTFOLIO Refer to Global Interactive/
GAMCO Investors, Inc. ("GAMCO") Telecomm Portfolio above
- ------------------------------- ------------------------
</TABLE>
The Fulcrum Trust 19
<PAGE>
MANAGEMENT AND PORTFOLIO MANAGEMENT
INVESTMENT ADVISORY FEES
AFIMS serves as the overall manager of the Portfolios, and the Portfolio
Managers handle the day-to-day investment management of the Portfolios. For
these services, each Portfolio pays an overall management fee, computed and
accrued daily and paid monthly, based on its average daily net assets. The
overall fee varies based on the performance of that Portfolio (after expenses)
compared to that of an appropriate benchmark. The Portfolio Manager receives 80%
of the fee, and AFIMS receives the remaining 20%.
FIXED ADVISORY FEE FOR THE FIRST 12 FULL CALENDAR MONTHS. For the period
beginning on the effective date of a Portfolio Manager Agreement with a new
Portfolio Manager (or, in the case of a Portfolio that has had only one
Portfolio Manager, the day on which the Portfolio began investment operations)
and ending with the last day of the twelfth full calendar month thereafter,
- each Portfolio Manager will be paid a monthly advisory fee calculated at an
annual rate of 0.80% of the Portfolio's average daily net assets.
PERFORMANCE-BASED FEE. After the first 12 full calendar months with a new
Portfolio Manager as described above, each Portfolio pays, at the end of each
month:
- a monthly advisory fee equal to a BASIC FEE plus or minus an INCENTIVE FEE.
(As explained below, the fee might be reduced if absolute performance is
negative.)
The monthly basic fee equals one-twelfth of the annual Basic Fee rate of 2.0%
multiplied by average daily net assets over the previous 12 months. The
incentive fee rate ranges from -2.0% to +2.0% on an annual basis, depending
on a comparison of the Portfolio's performance (reflecting a deduction of
Portfolio expenses) and the performance of a selected benchmark index over
the past 12 months. The monthly Incentive Fee, like the monthly Basic Fee, is
calculated by multiplying one-twelfth of the Incentive Fee rate on an annual
basis by the average daily net assets over the previous 12 months.
Accordingly, the Total Fee could range from 0.0% to an annual rate of 4.0%,
depending on performance.
- The PERFORMANCE OF A PORTFOLIO is calculated by first determining the
change in the Portfolio's net asset value per share during the previous 12
months, assuming the reinvestment of distributions during that period, and
then expressing this amount as a percentage of the net asset value per share
at the beginning of the period. Net asset value per share is calculated by
dividing the value of the securities held by the Portfolio plus any cash or
other assets minus all liabilities including accrued advisory fees and the
other expenses, by the total number of shares outstanding at the time.
- The PERFORMANCE OF THE SELECTED BENCHMARK INDEX is calculated as the sum of
the change in the level of the index during the previous 12 months, plus the
value of any dividends or distributions made by the companies whose
securities comprise the index accumulated to the end of the period, and then
expressing that amount as a percentage of the index at the beginning of the
period.
No Incentive Fee will be paid if the Portfolio's performance equals the
targeted performance-selected benchmark index plus 2.25 percentage points.
The maximum fee will be paid if performance is 5.25 percentage points higher
than the target (i.e., 7.5 percentage points higher than the selected
benchmark index). No fee will be paid if performance is 5.25 percentage
points lower than the target, (i.e., more than 3 percentage points below the
selected benchmark index). The chart below further explains the Incentive Fee
at various performance levels.
20 The Fulcrum Trust
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE POINT DIFFERENCE BETWEEN PERFORMANCE OF THE PORTFOLIO
(NET OF EXPENSES INCLUDING BASIC FEE AND INCENTIVE FEE)
AND CHANGE IN SELECTED BENCHMARK INDEX TOTAL
BASIC FEE (%) INCENTIVE FEE ADVISORY FEE
------------- ------------- ------------
<S> <C> <C> <C>
+7.5 or greater 2.0 2.0 4.0
--------------- --- --- ---
+6.0 or greater, but less than +7.5 2.0 1.5 3.5
----------------------------------- --- --- ---
+4.5 or greater, but less than +6.0 2.0 1.0 3.0
----------------------------------- --- --- ---
+3.0 or greater, but less than +4.5 2.0 0.5 2.5
----------------------------------- --- --- ---
+1.5 or greater, but less than +3.0 2.0 0.0 2.0
----------------------------------- --- --- ---
0.0 or greater, but less than +1.5 2.0 -0.5 1.5
---------------------------------- --- ---- ---
-1.5 or greater, but less than 0.0 2.0 -1.0 1.0
---------------------------------- --- ---- ---
-3.0 or greater, but less than -1.5 2.0 -1.5 0.5
----------------------------------- --- ---- ---
Less than -3.0 2.0 -2.0 0.0
-------------- --- ---- ---
</TABLE>
MAXIMUM FEE IF PERFORMANCE IS NEGATIVE.
- IF THE ABSOLUTE PERFORMANCE OF A PORTFOLIO (AFTER PAYMENT OF ALL EXPENSES,
INCLUDING THE BASIC FEE AND ANY INCENTIVE FEE) IS NEGATIVE, the monthly
advisory fee will be the lesser of the fee calculated pursuant to the above
schedule or the alternative monthly advisory fee described below, which under
certain circumstances results in the Portfolios paying either no advisory fee
or a lower monthly advisory fee than under the performance fee schedule
above.
- IF A PORTFOLIO'S PERFORMANCE (AFTER PAYMENT OF ALL EXPENSES INCLUDING
ADVISORY FEES) IS NEGATIVE AND DOES NOT EXCEED THE SELECTED BENCHMARK BY SIX
PERCENTAGE POINTS (on an annual basis), no monthly advisory fee will be paid.
- IF THE PORTFOLIO'S PERFORMANCE (AFTER PAYMENT OF ALL EXPENSES INCLUDING
ADVISORY FEES) IS NEGATIVE AND DOES NOT EXCEED THE SELECTED BENCHMARK BY
TWELVE PERCENTAGE POINTS BUT DOES EXCEED THE SELECTED BENCHMARK BY SIX
PERCENTAGE POINTS (on an annual basis), the alternate monthly advisory fee will
be based on an annual rate of 1.0% of average daily net assets over the previous
12 months.
- - IF THE PERFORMANCE OF A PORTFOLIO (AFTER PAYMENT OF ALL EXPENSES INCLUDING
ADVISORY FEES) IS NEGATIVE BUT EXCEEDS THE SELECTED BENCHMARK BY TWELVE
PERCENTAGE POINTS OR MORE (on an annual basis), the alternative monthly
advisory fee will be based on an annual rate of 2.0% of average daily net
assets over the previous 12 months.
SIZE OF FEE.
- The Basic Fee payable by the Portfolios is at a rate higher than the
investment advisory fees paid by most other investment companies. If a
Portfolio OUTPERFORMS the selected benchmark by 3.0 percentage points or
more, the advisory fee payable by a Portfolio may further exceed those paid
by other investment companies.
- If a Portfolio UNDERPERFORMS the selected benchmark, the advisory fee paid
by the Portfolio may be less than those paid by other investment companies.
- If, during the applicable performance period, a Portfolio UNDERPERFORMS the
selected benchmark by three or more percentage points, the Portfolio will not
pay any advisory fee.
PERFORMANCE BENCHMARKS.
As described above, total advisory fees paid to each Portfolio Manager for
advising the Portfolios are based on the performance of the Portfolio they
manage relative to a market benchmark selected in light of the investment
objective and policies of the Portfolio. The performance benchmarks selected for
the Portfolios are listed below and described in more detail on pages 4-7.
The Fulcrum Trust 21
<PAGE>
PORTFOLIO PERFORMANCE BENCHMARK
The Global Interactive/Telecomm Portfolio S&P 500
The International Growth Portfolio Morgan Stanley EAFE Index
Morgan Stanley EAFE Small Cap Index*
The Growth Portfolio S&P 500
The Value Portfolio S&P 500
*Effective December 1, 1999, the Morgan Stanley EAFE Small Cap Index replaced
the Morgan Stanley EAFE Index as the performance benchmark for the International
Growth Portfolio. For the period beginning December 1, 1999 and ending November
30, 2000, the payment of the Portfolio's advisory fee will be based on the
lesser of two fee calculations, one using the new benchmark and the other using
the old benchmark. Starting December 1, 2000 only the Morgan Stanley EAFE Small
Cap Index will be used to calculate the fee.
22 The Fulcrum Trust
<PAGE>
EXPENSE LIMITATIONS
EXPENSE LIMITATIONS. AFIMS has agreed to limit operating expenses through at
least June 30, 2000. While this limitation is in effect, AFIMS will reimburse
each Portfolio to the extent that its "other expenses" (i.e., expenses other
than management fees) exceed the expense limitations (expressed as an annualized
percentage of average daily net assets) in the following table. There is no
guarantee that any expense limitation will be in place after June 30, 2000.
<TABLE>
<CAPTION>
PORTFOLIO CURRENT "OTHER EXPENSES" LIMITATION
--------- -----------------------------------
<S> <C>
The Global Interactive/ 1.50%
Telecomm Portfolio
- ------------------
The International 1.50%
Growth Portfolio
- ----------------
The Growth Portfolio 1.20%
- --------------------
The Value Portfolio 1.20%
- -------------------
</TABLE>
AFIMS has agreed to pay any amount due for a calendar month not later than the
15th day of the following calendar month (with any annual adjustment to be made
not later than January 15 of the following calendar year).
REIMBURSEMENT PROVISION. Each Portfolio is obligated to reimburse AFIMS for any
payments it made to the Portfolio under these expense limitations and other
expense limitations that were in place in previous years, provided that the
Portfolio need only reimburse AFIMS (1) to the extent it can do so and still
keep "other expenses" under the limitations that were in place and (2) during
the two calendar years after the expense limitation payments were made by AFIMS.
In particular, reimbursement for any payments due to the expense limitation in
effect during 1998 shall be paid by a Portfolio only to the extent that the
Portfolio can do so prior to December 31, 2000 without causing its "other
expenses" to exceed the following percentage applicable to that Portfolio
(expressed as an annualized percentage of the Portfolio's average daily net
assets): the Value Portfolio (1.00%); the Growth Portfolio (1.00%); the
International Growth Portfolio (1.20%); and the Global Interactive/Telecomm
Portfolio (1.20%). Reimbursement for any payments due to the expense limitation
in effect during 1999 shall be paid by a Portfolio only to the extent that the
Portfolio can do so prior to December 31, 2001 without causing its "other
expenses" to exceed the current expense limitation applicable to that Portfolio
(see chart above). Reimbursement for any payments due to the expense limitation
in effect during 2000 shall be paid by a Portfolio only to the extent that the
Portfolio can do so prior to December 31, 2002 without causing its "other
expenses" to exceed the current expense limitation applicable to that Portfolio
(see chart above).
The Fulcrum Trust 23
<PAGE>
PRICING, PURCHASE AND REDEMPTION
PRICING OF SHARES
The price of one share of each Portfolio is equal to the Portfolio's "net asset
value" or "NAV" per share. NAV is computed once daily at the close of regular
trading on the New York Stock Exchange each day the Exchange is open - normally
4:00 p.m. Eastern Time. Net asset value per share is calculated by dividing the
aggregate value of each Portfolio's assets less all liabilities by the number of
each Portfolio's outstanding shares.
Each Portfolio's assets are valued primarily on the basis of market quotations.
Short-term debt securities with remaining maturities of 60 days or less are
valued on the basis of amortized cost. Other debt securities are generally
valued based on price quotes obtained from pricing services or broker-dealers.
Foreign securities are valued on the basis of quotations from the primary market
on which they are traded, and are translated from the local currency into U.S.
dollars using current exchange rates. In addition, if quotations are not
available for any security, or if the values of foreign securities have been
materially affected by events occurring after the closing of a foreign market,
assets may be valued by another method that the Board of Trustees believes
accurately reflects fair value.
PURCHASE OF SHARES
Shares of each Portfolio are sold at the first net asset value per share
calculated after the Trust (or its agent) receives the purchase order. The Trust
does not charge any sales charge or sales load. The Trust is intended to be a
funding vehicle for variable annuity and variable life insurance contracts
offered by both affiliated and unaffiliated insurance companies and for certain
qualified pension and retirement plans. Because of differences in tax treatment
and other considerations, however, it is possible that the interests of contract
owners and plan participants might at some time be in conflict. Accordingly, the
Board of Trustees will monitor events to identify any material irreconcilable
conflicts and to determine what action, if any, should be taken in response to
any such conflict.
REDEMPTION OF SHARES
Shares of the Portfolios may be redeemed on any business day. The Trust does not
charge any sales charge or sales load. Shares of each Portfolio are redeemed at
the first net asset value per share calculated after the Trust (or its agent)
receives a proper redemption request or sooner if required by law. The right of
redemption may be suspended by the Trust or the payment date postponed beyond
seven days:
- - when the New York Stock Exchange is closed (other than customary weekend and
holiday closings);
- - when an emergency exists, as determined by the Securities and Exchange
Commission; or
- - whenever the Securities and Exchange Commission has by order allowed such
suspension or postponement for the protection of shareholders.
If the Board of Trustees determines that it would be detrimental to the best
interests of the remaining shareholders of the Portfolios to make payment wholly
or partly in cash, the Portfolios may:
- pay the redemption price in whole or in part by a distribution in kind of
securities from the portfolios, in lieu of cash. (If shares are redeemed in
kind, the redeeming shareholder might incur brokerage costs in converting the
assets into cash.)
24 The Fulcrum Trust
<PAGE>
DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
At least annually, each Portfolio declares as dividends substantially all of its
net income, if any, and distributes all of its net realized capital gains. All
dividends and distributions are automatically reinvested in additional shares of
the Portfolio.
FEDERAL INCOME TAXES
The Trust seeks to comply with the provisions of the Internal Revenue Code
applicable to regulated investment companies so that the Trust will not be
subject to federal income tax. Under current tax law, dividend or capital gain
distributions from the Portfolio are not currently taxable when left to
accumulate within a variable annuity or variable life insurance contract.
Withdrawals from a contract generally are subject to ordinary income tax and, in
many cases, to an additional 10% penalty tax on withdrawals before age 59 1/2.
If you own or are considering buying a variable contract that invests in the
Portfolios, you should consult the variable contract prospectus for a discussion
of the tax considerations relevant to investing in the Portfolios through that
variable contract.
The tax laws and regulations that apply to qualified retirement plans are
complex and vary according to the type of plan and its terms and conditions. If
you participate in a qualified retirement plan that invests in the Portfolios,
you should consult a qualified tax adviser to learn about your specific tax
situation before investing in the Portfolios or redeeming Portfolio shares.
The Fulcrum Trust 25
<PAGE>
This page is intentionally left blank.
26 The Fulcrum Trust
<PAGE>
[GRAPHIC ]FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand each
Portfolio's financial performance for the life of the Portfolio. Certain
information reflects financial results for a single Portfolio share. The total
returns in the tables represent the rate that an investor would have earned or
lost on an investment in a Portfolio (assuming reinvestment of all dividends and
distributions). This information has been audited by PricewaterhouseCoopers LLP,
whose report, along with each Portfolio's financial statements, are included in
the Statement of Additional Information and annual report, which is available
upon request.
The Fulcrum Trust 27
<PAGE>
THE FULCRUM TRUST
FINANCIAL HIGHLIGHTS - FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
<TABLE>
<CAPTION>
INCOME FROM INVESTMENT OPERATIONS LESS DISTRIBUTIONS
------------------------------------------------- --------------------------------------------------
NET REALIZED
NET AND DISTRIBUTIONS
ASSET NET UNREALIZED DIVIDENDS FROM NET
VALUE INVESTMENT GAIN (LOSS) TOTAL FROM FROM NET REALIZED
YEAR ENDED BEGINNING INCOME ON INVESTMENT INVESTMENT CAPITAL RETURN OF TOTAL
DECEMBER 31, OF YEAR (LOSS)/(2)/ INVESTMENTS OPERATIONS INCOME GAINS CAPITAL DISTRIBUTIONS
- ------------ ------- --------- ----------- ---------- ------ ----- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GLOBAL
INTERACTIVE/
TELECOMM
PORTFOLIO/(1)/
1999 $15.86 $(0.52) $9.43 $8.91 $-/(5)/ $(2.89) $- $(2.89)
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)/
1999 8.94 (0.05) 3.37 3.32 (0.04) - - (0.04)
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)/
1999 12.01 0.03 2.38 2.41 - - - -
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)/
1999 13.52 0.01 1.07 1.08 (0.01) (1.74) - (1.75)
1998/(3)/ 13.50 - 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)
</TABLE>
- --------------------------
* Annualized
** Not annualized
(A) Including reimbursements and waivers of certain operating expenses.
(B) Excluding reimbursements and waivers of certain operating expenses.
(1) The Value Portfolio, Growth Portfolio, and Global Interactive/Telecomm
Portfolio all commenced operation on February 1, 1996. The International
Growth Portfolio commenced operation on March 26, 1996.
(2) Net investment income (loss) per share before reimbursement of certain
operating expenses by the investment advisers were $(0.58) for the year
ended December 31, 1999, $(0.50) in 1998, ($0.62) in 1997 and $(1.34) in
1996 for Global Interactive/Telecomm Portfolio; $(0.40) for the year ended
December 31, 1999, ($0.29) in 1998, $(0.45) in 1997, and $(7.56) in 1996 for
the International Growth Portfolio; $(0.17) for the year ended December 31,
1999, $(0.52) in 1998, $(0.68) in 1997, and $(5.61) in 1996 for the Growth
Portfolio; and $(0.08) for the year ended December 31, 1999, $(0.22) in
1998, $(0.34) in 1997, and $(1.22) in 1996 for the Value Portfolio.
(3) Total return measures the change in the value of an investment for the
period indicated. For the year ended December 31, 1998, the total return
includes capital infusions. Absent the infusions, total returns for the
Global/Interactive Telecomm Portfolio, the International Growth Portfolio,
the Growth Portfolio and the Value Portfolio would have been 30.11%,
(8.23)%, 0.33% and 7.33%, respectively.
(4) For the period ended, December 31, 1996, the total return includes capital
infusions. Absent the infusions, total returns for the Global
Interactive/Telecomm Portfolio, the International Growth Portfolio, the
Growth Portfolio and the Value Portfolio would have been (6.68)%, (46.50)%,
(41.75)% and 7.64%, respectively.
(5) Distribution is less than $0.005 per share.
28 The Fulcrum Trust
<PAGE>
THE FULCRUM TRUST
<TABLE>
<CAPTION>
RATIOS/SUPPLEMENTAL DATA
------------------------
NET RATIOS TO AVERAGE NET ASSETS
INCREASE NET ASSET NET ASSETS -----------------------------------------------------------------------
(DECREASE) VALUE TOTAL END OF NET INVESTMENT PORTFOLIO
IN NET END OF RETURNS YEAR INCOME (LOSS) OPERATING EXPENSES MANAGEMENT TURNOVER
ASSET VALUE PERIOD (3) (4) (000'S) (A) (B) (A) (B) FEE RATE
- ----------- ------ ------- ------- --- --- --- --- --- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$6.02 $21.88 56.89% $8,782 (2.95)% (3.25)% 1.45% 1.75% 2.47% 45%
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%
3.28 12.22 37.26% 2,937 (0.42)% (2.97)% 1.50% 4.06% 1.21% 57%
(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%
2.41 14.42 20.07% 4,703 0.21% (1.14)% 1.20% 2.55% 0.36% 351%
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%
(0.67) 12.85 8.17% 7,873 0.05% (0.52)% 1.20% 1.76% 0.00% 15%
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%
</TABLE>
The Fulcrum Trust 29
<PAGE>
APPENDIX [GRAPHIC]
INVESTMENT TECHNIQUES AND STRATEGIES
In managing its portfolios of investments, the Trust may make use of the
following investment techniques and strategies:
BANKING INDUSTRY AND SAVINGS INDUSTRY OBLIGATIONS
COMMERCIAL PAPER
DEBT SECURITIES
FOREIGN CURRENCY TRANSACTIONS
FOREIGN SECURITIES
FUTURES CONTRACTS
ILLIQUID SECURITIES
INDEXED SECURITIES
INVESTMENTS IN GOLD AND OTHER PRECIOUS METALS
LENDING PORTFOLIO SECURITIES
LEVERAGE
MORTGAGE-BACKED SECURITIES
OPTIONS
OTHER ASSET-BACKED SECURITIES
OTHER INVESTMENT COMPANIES
REPURCHASE AGREEMENTS
RESTRICTED SECURITIES
REVERSE REPURCHASE AGREEMENTS
SHORT SALES AGAINST THE BOX
SHORT SALES
U.S. GOVERNMENT SECURITIES
VARIABLE AND FLOATING RATE SECURITIES
WARRANTS
30 The Fulcrum Trust
<PAGE>
THE FULCRUM TRUST
THE GLOBAL INTERACTIVE/TELECOMM PORTFOLIO
THE INTERNATIONAL GROWTH PORTFOLIO
THE GROWTH PORTFOLIO
THE VALUE PORTFOLIO
THE STRATEGIC INCOME PORTFOLIO
The Trust's Statement of Additional Information (SAI) and annual and semi-annual
reports to shareholders include additional information about the Portfolios. The
SAI and the financial statements included in the Portfolio's most recent annual
report to shareholders are incorporated by reference into this Prospectus, which
means they are part of this Prospectus for legal purposes. The Trust's annual
report discusses the market conditions and investment strategies that
significantly affected each Portfolio's performance during its last fiscal year.
You may get free copies of these materials, request other information about the
Trust or make shareholder inquiries by calling 1-800-917-1909.
You may review and copy information about the Trust, including its SAI, at the
Securities and Exchange Commission's public reference room in Washington, D.C.
You may call the Commission at 1-800-SEC-0330 for information about the
operation of the public reference room. You may also access reports and other
information about the Trust on the Commission's Internet site at
http://www.sec.gov. You may get copies of this information, with payment of a
duplication fee, by writing the Public Reference Section of the Commission,
Washington, D.C. 20549-6009. You may need to refer to the Trust's file number
under the Investment Company Act, which is 811-08278. THIS PROSPECTUS IS
INTENDED FOR USE WITH A VARIABLE CONTRACT OR QUALIFIED PLAN.
THE
FULCRUM
TRUST
440 Lincoln Street, Worcester, Massachusetts 01653
(800) 917-1909
<PAGE>
THE FULCRUM TRUST
PROSPECTUS
May 1, 2000
The Strategic Income Portfolio is a separate portfolio of the Trust which serves
as the underlying investment vehicle for insurance contracts and qualified
retirement plan accounts.
Allmerica Financial Investment Management Services, Inc. as manager is
responsible for managing the Trust's daily business and has general
responsibility for the management of the investments of the Portfolio.
Allmerica Asset Management, Inc., The Portfolio Manager, has been hired to
manage the investments of the Portfolio.
This Prospectus explains what you should know about the Portfolio. Please read
it carefully before you invest.
On or about July 1, 2000, subject to regulatory approval, shares of the Select
Investment Grade Income Fund (the "Fund") of the Allmerica Investment Trust
("AIT") will be substituted for shares of the Portfolio. As of the substitution
date, shares of the Fund will be available and shares of the Portfolio will no
longer be offered.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED ON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE
FULCRUM
TRUST
440 Lincoln Street
Worcester, Massachusetts 01653
(800) 917-1909
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
OBJECTIVE, STRATEGIES AND RISKS 3
EXPENSE SUMMARY 4
DESCRIPTION OF PRINCIPAL INVESTMENT RISKS 8
OTHER INVESTMENT STRATEGIES 10
MANAGEMENT OF THE PORTFOLIO 12
MANAGEMENT AND PORTFOLIO MANAGEMENT 14
INVESTMENT ADVISORY FEES
EXPENSE LIMITATIONS 16
PRICING, PURCHASE AND REDEMPTION 17
DISTRIBUTIONS AND TAXES 18
FINANCIAL HIGHLIGHTS 21
APPENDIX 22
</TABLE>
LEGEND
Performance [GRAPHIC]
Investment [GRAPHIC]
Objectives
Financial [GRAPHIC]
Information
Management [GRAPHIC]
of Fund
Risk [GRAPHIC]
Investment [GRAPHIC]
Strategies
2 The Fulcrum Trust
<PAGE>
OBJECTIVE, STRATEGIES AND RISKS
THE STRATEGIC INCOME PORTFOLIO
[GRAPHIC] PORTFOLIO MANAGER: ALLMERICA ASSET MANAGEMENT, INC.
[GRAPHIC] INVESTMENT OBJECTIVE: The Portfolio seeks to make money for investors
by investing for high current income and capital appreciation in a variety of
fixed-income securities.
[GRAPHIC] PRINCIPAL INVESTMENT STRATEGY: The Portfolio invests primarily in
investment grade corporate debt securities and securities issued or guaranteed
as to principal or interest by the U.S. Government or its agencies or
instrumentalitites; below investment-grade corporate debt securities; and
foreign securities which include government debt of developed and emerging
markets, corporate obligations of foreign companies, and debt obligations of
supranational entities.
Debt securities in which the Portfolio may invest include bonds, notes,
debentures, mortgage-backed and asset-backed securities, and other similar
instruments. Securities are selected based on their relative value merits.
The Portfolio normally invests at least 50% of its total assets in U.S. and
foreign debt and other fixed-income securities that, at the time of purchase,
are investment grade. No more than 50% of the Portfolio's assets may be
invested in below investment grade securities, or junk bonds.
[GRAPHIC] PRINCIPAL RISKS:
- - Credit Risk
- - Emerging Markets Risk
- - Foreign Investment Risk
- - Interest Rate Risk
- - Investment Management Risk
- - Liquidity Risk
- - Market Risk
- - Prepayment Risk
See "Description of Principal Investment Risks."
The bar chart shows how investment returns of the shares of the Portfolio have
varied for the life of the Portfolio. The table following the bar chart shows
how the Portfolio's average annual returns for the last one year and life of the
Portfolio compare to those of a broad-based securities market index. PAST
PERFORMANCE DOES NOT NECESSARILY INDICATE HOW THE PORTFOLIO WILL PERFORM IN THE
FUTURE. The bar chart and table give some indication of the risks of investing
in the Portfolio by showing changes in the Portfolio's performance. The bar
chart and table do not reflect expenses associated with the variable insurance
product that you are purchasing. If those expenses had been reflected, the
performance shown would have been lower.
ANNUAL TOTAL RETURN [GRAPHIC]
Bar Chart
- ---------
1997-- .60%
1998-- 6.53%
1999--(3.12%)
[GRAPH]
During the period shown above, the highest quarterly return was 4.44% for the
quarter ended September 30, 1998 and the lowest was (3.11)% for the quarter
ended March 31, 1997.
Allmerica Asset Management, Inc. became the Portfolio Manager of the Portfolio
on April 11, 1998. Performance before that date is based on the performance of
the Portfolio's previous Portfolio Manager.
PERFORMANCE TABLE
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ending PAST SINCE INCEPTION
December 31, 1999) ONE YEAR (FEBRUARY 1, 1996)
- ---------------------- -------- ------------------
Portfolio Shares (3.12%) 1.07%
- ---------------- ------ ------
Lehman Brothers
Aggregate Bond Index* (0.83%) 5.14%
- --------------------- ------ ------
*Lehman Brothers Aggregate Bond Index - Registered Trademark - is an unmanaged
index of all fixed rate debt issues with an invested grade rating at least one
year to maturity and an outstanding par value of at least $25 million.
The Fulcrum Trust 3
<PAGE>
EXPENSE SUMMARY
The following tables describe the fees and expenses that you may pay if you
invest in the Portfolio. The expenses listed below are not the only expenses if
you are purchasing a variable insurance contract. You should refer to the
variable insurance contract prospectus for more information relating to fees and
expenses, which are in addition to the expenses of the Portfolio.
ANNUAL PORTFOLIO OPERATING EXPENSES (EXPENSES DEDUCTED FROM PORTFOLIO ASSETS)
For the first 12 full calendar months after a new Portfolio Manager is hired
(or, in the case of a Portfolio that has had only one Portfolio Manager, for the
first 12 full calendar months of operations), the advisory agreements set the
management fee at an annual rate of 0.80% of the Portfolio's average daily net
assets.
After the initial 12-month period described above, the Portfolio has a
performance-based advisory fee. See "Management and Portfolio Management
Investment Advisory Fees." This fee is in effect for the Strategic Income
Portfolio.
Shown below is expense information first using the fees that actually applied
during 1999. Also shown below is expense information assuming fees of 0.00%,
2.00% and 4.00%, because the fee in 2000 and future years may vary. You should
note, however, that the fee could be any figure between 0.00% and 4.00%, not
just the specific figures shown below.
For each of the fee levels shown, we have included an example prepared in
accordance with the requirements of the Securities and Exchange Commission
("SEC"). The purpose of the examples is to assist investors in comparing the
cost of investing in the Portfolio with the cost of investing in other mutual
funds. The example assumes that you invest $10,000 in the Portfolio for the time
periods indicated and then redeem all of your shares at the end of those
periods. The example also assumes that your investment earns a 5% return each
year and that the Portfolio's operating expenses remain the same. Your actual
costs may be higher or lower.
4 The Fulcrum Trust
<PAGE>
1. USING 1999 MANAGEMENT FEES
<TABLE>
<CAPTION>
SHAREHOLDER TOTAL ANNUAL
FEES MANAGEMENT DISTRIBUTION OTHER FUND
(FEES PAID DIRECTLY FEES (12B-1) FEES EXPENSES(1,2) OPERATING
FROM YOUR INVESTMENT) EXPENSES
- --------------------- --------
<S> <C> <C> <C> <C>
None 0.35% None 3.48% 3.83%
---- ---- ---- ---- ----
</TABLE>
EXAMPLE. The purpose of this example is to assist investors in comparing the
cost of investing in the Portfolio with the cost of investing in other mutual
funds. Your actual costs may be higher or lower. A shareholder would pay the
following expenses on a $10,000 investment, assuming (1) 5% annual return, (2)
the advisory fees in the above chart, and (3) redemption at the end of each time
period.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- --------
$393 $1,190 $2,006 $4,121
---- ------ ------ ------
2. ASSUMING MANAGEMENT FEE OF 0%
An advisory fee of 0% would be paid if the Portfolio's performance (net of all
fees and expenses) was more than 3.0 percentage points lower than the benchmark
index.
<TABLE>
<CAPTION>
SHAREHOLDER TOTAL ANNUAL
FEES FUND
(FEES PAID DIRECTLY MANAGEMENT DISTRIBUTION OTHER OPERATING
FROM YOUR INVESTMENT) FEES (12B-1) FEES EXPENSES(1,2) EXPENSES
- --------------------- ---- ------------ ------------- --------
<S> <C> <C> <C> <C>
None 0.00% None 3.48% 3.48%
---- ---- ---- ---- ----
</TABLE>
The Fulcrum Trust 5
<PAGE>
EXAMPLE. The purpose of this example is to assist investors in comparing the
cost of investing in the Portfolio with the cost of investing in other mutual
funds. Your actual costs may be higher or lower. A shareholder would pay the
following expenses on a $10,000 investment, assuming (1) 5% annual return, (2)
an advisory fee of 0%, and (3) redemption at the end of each time period.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
$357 $1,086 $1,835 $3,806
---- ------ ------ ------
3. ASSUMING MANAGEMENT FEE OF 2.00% An advisory fee of 2.00% would be paid if
the Portfolio's performance (net of all fees and expenses, including the 2.00%
advisory fee) was between 1.5 and 3.0 percentage points better than the
benchmark index.
<TABLE>
<CAPTION>
SHAREHOLDER TOTAL ANNUAL
FEES FUND
(FEES PAID DIRECTLY MANAGEMENT DISTRIBUTION OTHER OPERATING
FROM YOUR INVESTMENT) FEES (12B-1) FEES EXPENSES(1,2) EXPENSES
- --------------------- ---- ------------ ------------- --------
<S> <C> <C> <C> <C>
None 2.00% None 3.48% 5.48%
---- ----- ---- ----- -----
</TABLE>
EXAMPLE. The purpose of this example is to assist investors in comparing the
cost of investing in the Portfolio with the cost of investing in other mutual
funds. Your actual costs may be higher or lower. A shareholder would pay the
following expenses on a $10,000 investment, assuming (1) 5% annual return, (2)
an advisory fee of 2%, and (3) redemption at the end of each time period.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- --------
$562 $1,675 $2,774 $5,464
---- ------ ------ ------
6 The Fulcrum Trust
<PAGE>
4. ASSUMING MANAGEMENT FEE OF 4.00%
An advisory fee of 4.00% would be paid if the Portfolio's performance (net of
all fees and expenses, including the 4.00% advisory fee) was at least 7.5
percentage points better than the benchmark index.
<TABLE>
<CAPTION>
SHAREHOLDER TOTAL ANNUAL
FEES FUND
(FEES PAID DIRECTLY MANAGEMENT DISTRIBUTION OTHER OPERATING
FROM YOUR INVESTMENT) FEES (12B-1) FEES EXPENSES(1,2) EXPENSES
- --------------------- ---- ------------ ------------- --------
<S> <C> <C> <C> <C>
None 4.00% None 3.48% 7.48%
---- ----- ---- ----- -----
</TABLE>
EXAMPLE. The purpose of this example is to assist investors in comparing the
cost of investing in the Portfolio with the cost of investing in other mutual
funds. Your actual costs may be higher or lower. A shareholder would pay the
following expenses on a $10,000 investment, assuming (1) 5% annual return, (2)
an advisory fee of 4%, and (3) redemption at the end of each time period.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------ ------- ------- --------
$767 $2,239 $3,634 $6,809
---- ------ ------ ------
(1) Actual 1999 "other expense" were less than these shown in the above charts
because of a voluntary expense limitation agreed to by Allmerica Financial
Investment Management Services, Inc. ("AFIMS"), investment manager of the Trust.
AFIMS currently limits the "other expenses" to an annual rate of 1.50% of
average daily net assets for the Portfolio through July 1, 2000. AFIMS has
agreed to keep its limitation in place through June 30, 2000, but it may
discontinue this limitation at any time after that date.
(2) Subject to certain limitations discussed in "Expense Limitations", the
Portfolio will reimburse AFIMS for any portfolio expenses it reimbursed pursuant
to the expense limitation for the two years following the date that the AFIMS
expense limitation ends. The Portfolio's obligation to reimburse AFIMS for 2000
Expense Limitations will expire on July 1, 2002.
The Fulcrum Trust 7
<PAGE>
[GRAPHIC] DESCRIPTION OF PRINCIPAL INVESTMENT RISKS
The principal risks of investing in the Portfolio and the factors likely to
cause the value of your investment in the Portfolio to decline are described
below. The principal risks applicable to the Portfolio are identified under
"Objective, Strategies and Risks." There are also many factors that could cause
the value of your investment in the Portfolio to decline which are not described
here. The price per share of the Portfolio will change daily based on market
conditions and other factors. It is important to remember that there is no
guarantee that the Portfolio will achieve its investment objective, and an
investor in the Portfolio could lose money.
CREDIT RISK
Credit Risk is the risk that the issuer of a fixed income security will not be
able to pay principal and interest when due. There are different levels of
credit risk. A Portfolio that invests in lower-rated securities has a higher
level of credit risk. Lower-rated or unrated securities of equivalent quality,
generally known as junk bonds, have very high levels of credit risk. Junk bonds
are considered to be speculative in their capacity to pay interest and repay
principal. During periods of market declines, junk bonds could become less
liquid, meaning that they will be harder to value or sell at a fair price.
Securities that are highly rated have lower levels of credit risk. The price of
a fixed income security can be expected to fall if the issuer defaults on its
obligations to pay principal or interest, the rating agencies downgrade the
issuer's credit rating or there is negative news that affects the market's
perception of the issuer's credit risk.
8 The Fulcrum Trust
<PAGE>
EMERGING MARKETS RISK
Investments in emerging markets securities involve all of the risks of
investments in foreign securities, and also have additional risks. The markets
of developing countries have been more volatile than the markets of developed
countries with more mature economies. Many emerging markets companies in the
early stages of development are dependent on a small number of products and lack
substantial capital reserves. In addition, emerging markets often have less
developed legal and financial systems. These markets often have provided
significantly higher or lower rates of return than developed markets and usually
carry higher risks to investors than securities of companies in developed
countries.
FOREIGN INVESTMENT RISK
Investing in foreign securities involves risks relating to political, social and
economic developments abroad, as well as risks resulting from the differences
between the regulations to which U.S. and foreign issuers and markets are
subject. These risks may include the seizure by the government of company
assets, excessive taxation, withholding taxes on dividends and interest,
limitations on the use or transfer of portfolio assets, and political or social
instability. In the event of nationalization, expropriation or other
confiscation, a Portfolio could lose its entire investment. A Portfolio
investing in foreign securities may experience rapid changes in value. One
reason for this volatility is that the securities markets of many foreign
countries are relatively small, with a limited number of companies representing
a small number of industries. Enforcing legal rights may be difficult, costly
and slow in foreign countries. Also, foreign companies may not be subject to
governmental supervision or accounting standards comparable to those applicable
to U.S. companies, and there may be less public information about their
operations.
INTEREST RATE RISK
When interest rates rise, the prices of fixed income securities held by a
Portfolio will generally fall. Conversely, when interest rates fall, the prices
of fixed income securities will generally rise. Even a Portfolio that invests in
the highest quality debt securities is subject to interest rate risk. Interest
rate risk usually will affect the price of a fixed income security more if the
security has a longer maturity. Fixed income securities with longer maturities
will therefore be more volatile than other fixed income securities with shorter
maturities.
INVESTMENT MANAGEMENT RISK
Investment management risk is the risk that a Portfolio does not achieve its
investment objective, even though the Portfolio Manager uses various investment
strategies and techniques.
LIQUIDITY RISK
This is the risk that a Portfolio will not be able to sell a security at a
reasonable price because there are too few people who actively buy and sell, or
trade, that security on a regular basis. Liquidity risk increases for a
Portfolio investing in foreign investments (especially emerging markets
securities), smaller companies, lower credit quality bonds (also called junk
bonds), restricted securities, over-the-counter securities and derivatives.
MARKET RISK
This is the risk that the price of a security held by a Portfolio will fall due
to changing economic, political or market conditions or to factors affecting
investor psychology.
PREPAYMENT RISK
Mortgage-backed securities may not have a stated maturity, and their expected
maturities may vary when interest rates rise or fall. When interest rates fall,
homeowners are more likely to prepay their mortgage loans which may result in an
unforeseen loss of future interest income to a Portfolio. Also, because
prepayments increase when interest rates fall, the prices of mortgage-backed
securities do not increase as much as other fixed income securities when
interest rates fall. When interest rates rise, homeowners are less likely to
prepay their mortgage loans which may lengthen the expected maturity of
mortgage-backed securities causing the price of mortgage-backed securities to
decrease more than prices of other fixed income securities. Asset-backed
securities have prepayment risks similar to mortgage-backed securities. By
investing in collateralized mortgage obligations ("CMOs"), a Portfolio may
manage the prepayment risk of mortgage-backed securities. However, prepayments
may cause the actual maturity of a CMO to be substantially shorter than its
stated maturity.
The Fulcrum Trust 9
<PAGE>
[GRAPHIC] OTHER INVESTMENT STRATEGIES
The section entitled "Objective, Strategies and Risks" describes the investment
objective and the principal investment strategies and risks of the Portfolio.
The investment objective of the Portfolio is fundamental, which means that it
may be changed only with shareholder approval. Unless otherwise indicated, the
Portfolio's practices, policies and programs for achieving its objectives are
not fundamental and thus may be changed by the Board of Trustees without
shareholder approval. The Statement of Additional Information sets forth certain
investment restrictions which are fundamental, and, like the investment
objectives, may be changed only with shareholder approval. There is no guarantee
that the Portfolio will achieve its objective and an investor in the Portfolio
could lose money. Attached is an Appendix illustrating various investment
techniques and strategies that the Portfolio Manager of the Portfolio may
utilize. The Portfolio may at times use the following strategies:
DERIVATIVE INVESTMENTS. Instead of investing in the types of portfolio
securities described in the section entitled "Objective, Strategies and Risks",
the Portfolio may buy or sell a variety of "derivative" investments to gain
exposure to particular securities or markets. Derivatives are financial
contracts whose value depends on, or is derived from, the value of an underlying
asset, reference rate or index. The Portfolio's Portfolio Manager will sometimes
use derivatives as part of a strategy designed to reduce other risks and
sometimes will use derivatives for leverage, which increases opportunities for
gain but also involves greater risk.
FOREIGN SECURITIES. The Portfolio may invest all or a substantial part of its
portfolio in securities of companies that are located or primarily doing
business in a foreign country. A company is considered to be located in a
foreign country if it is organized under the laws of, or has a principal office
in, that country. A company is considered as primarily doing business in a
country if (i) the company derives at least 50% of its gross revenues or profits
from either goods or services produced or sold in the country or (ii) at least
50% of the company's assets are situated in the country. The Portfolio may
invest in foreign securities either directly or indirectly through the use of
depository receipts, such as American Depository Receipts or ADRs. Depository
receipts are generally issued by banks or trust companies and evidence ownership
of underlying foreign securities. An ADR may be sponsored by the issuer of the
underlying foreign security or it may be issued in unsponsored form. The holder
of a sponsored ADR is likely to receive more frequent and extensive financial
disclosure concerning the foreign issuer than the holder of an unsponsored ADR
and generally will bear lower transaction charges.
BELOW INVESTMENT GRADE SECURITIES. The Portfolio may invest up to 50% of its
assets in debt securities that are below investment grade (i.e. rated BB or
lower by Standard & Poor's, rated Ba or lower by Moody's, or unrated but
determined by the Portfolio Manager to be of similar quality). These securities
are commonly referred to as "junk bonds" or high yield securities. These
securities are considered to be speculative with respect to the issuer's
capacity to pay interest and repay principal.
10 The Fulcrum Trust
<PAGE>
LENDING PORTFOLIO SECURITIES. To realize additional income, the Portfolio may
lend securities with a value of up to 33% of its total assets to unaffiliated
broker-dealers or institutional investors. Any loan will be secured by
collateral at least equal to the value of the security loaned. While any such
loan is outstanding, the Portfolio will continue to receive amounts equal to the
interest or dividends paid by the issuer on the securities, as well as interest
(less any rebates to be paid to the borrower) on the investment of the
collateral or a fee from the borrower. The Portfolio will have the right to call
each loan and obtain the securities. Lending portfolio securities involves
possible delays in receiving additional collateral or in the recovery of the
securities or possible loss of rights in the collateral.
ILLIQUID SECURITIES. The Portfolio may invest up to 15% of its net assets in
securities for which there is no readily available market ("illiquid
securities"), which would include repurchase agreements having more than 7 days
to maturity. A considerable period of time may elapse between the Portfolio's
decision to dispose of such securities and the time when the Portfolio is able
to dispose of them, during which time the value of the securities could decline.
The SEC has adopted Rule 144A which permits resale among certain institutional
investors of certain unregistered securities which have been deemed liquid.
TEMPORARY DEFENSIVE STRATEGIES. At times the Portfolio Manager may determine
that market conditions make it desirable temporarily to suspend the Portfolio's
normal investment activities. This is when the Portfolio may temporarily invest
in a variety of lower-risk securities, such as U.S. Government and other high
quality bonds and short-term debt obligations. Such strategies attempt to reduce
changes in the value of the Portfolio's shares. The Portfolio may fail to profit
from favorable developments affecting its normal investments while these
strategies are in effect.
FREQUENT TRADING. The Portfolio from time to time may engage in active and
frequent trading to achieve its investment objective. Frequent trading increases
transaction costs, which could detract from the Portfolio's performance.
The Fulcrum Trust 11
<PAGE>
[GRAPHIC] MANAGEMENT OF THE PORTFOLIO
THE TRUST. The business and affairs of the Trust are managed under the direction
of the Board of Trustees.
MANAGER. Allmerica Financial Investment Management Services, Inc. ("AFIMS" or
the "Manager") serves as overall Manager of the Trust. As Manager, AFIMS is
responsible for general administration of the Trust as well as monitoring and
evaluating the performance of the Portfolio Manager. AFIMS, a Massachusetts
corporation, is registered with the Securities and Exchange Commission as an
investment adviser. AFIMS is located at 440 Lincoln Street, Worcester,
Massachusetts 01653 and is an indirect, wholly-owned subsidiary of Allmerica
Financial Corporation ("AFC"). AFC is the parent company of the two life
insurance companies, Allmerica Financial Life Insurance and Annuity Company and
First Allmerica Financial Life Insurance Company ("FAFLIC"), which utilize the
Trust as an underlying fund for their variable contracts.
PORTFOLIO MANAGER. The Portfolio Manager has been hired to manage the
investments of the Portfolio.
The Portfolio Manager's activities are subject to general oversight by the
Trustees and AFIMS. Although the Trustees and AFIMS do not evaluate the
investment merits of the Portfolio Manager specific securities selections, they
do review the Portfolio Manager's overall performance.
The following table provides information about the Portfolio's Portfolio
Manager:
PORTFOLIO MANAGER NAME AND ADDRESS EXPERIENCE
---------------------------------- ----------
STRATEGIC INCOME PORTFOLIO - Began operations in 1967
Allmerica Asset Management, Inc. - Manages assets of approximately
440 Lincoln Street $13.3 billion as of December
Worcester, MA 01653 31, 1999
- Provides investment management
services to insurance
companies, pension plans and
investment companies or mutual
funds backing variable
insurance products
------------------
12 The Fulcrum Trust
<PAGE>
The following individual is primarily responsible for the day-to-day management
of the Portfolio:
<TABLE>
<CAPTION>
PORTFOLIO NAME, NAME AND TITLE OF
PORTFOLIO MANAGER INDIVIDUAL PORTFOLIO MANAGED BUSINESS EXPERIENCE
NAME MANAGER(S) PORTFOLIO SINCE FOR THE PAST FIVE YEARS
- ---- ---------- --------------- -----------------------
<S> <C> <C> <C>
STRATEGIC INCOME PORTFOLIO Richard J. Litchfield 2000 Mr. Litchfield has served as
a portfolio manager at Allmerica
Asset Management, Inc. since 1995. He
was previously an analyst at Keystone
Investments, Inc. from 1989-1995.
</TABLE>
The Fulcrum Trust 13
<PAGE>
MANAGEMENT AND PORTFOLIO MANAGEMENT
INVESTMENT ADVISORY FEES
AFIMS serves as the overall manager of the Portfolio, the Portfolio Manager
handles the day-to-day investment management of the Portfolio. For these
services, the Portfolio pays an overall management fee, computed and accrued
daily and paid monthly, based on its average daily net assets. The overall fee
varies based on the performance of the Portfolio (after expenses) compared to
that of an appropriate benchmark. The Portfolio Manager receives 80% of the fee,
and AFIMS receives the remaining 20%.
FIXED ADVISORY FEE FOR THE FIRST 12 FULL CALENDAR MONTHS. For the period
beginning on the effective date of a Portfolio Manager Agreement with a new
Portfolio Manager (or, in the case of a Portfolio that has had only one
Portfolio Manager, the day on which the Portfolio began investment operations)
and ending with the last day of the twelfth full calendar month thereafter,
- the Portfolio Manager will be paid a monthly advisory fee calculated at an
annual rate of 0.80% of the Portfolio's average daily net assets.
PERFORMANCE-BASED FEE. After the first 12 full calendar months with a new
Portfolio Manager as described above, the Portfolio pays, at the end of each
month:
- a monthly advisory fee equal to a BASIC FEE plus or minus an INCENTIVE FEE.
(As explained below, the fee might be reduced if absolute performance is
negative.)
The monthly Basic Fee equals one-twelfth of the annual Basic Fee rate of 2.0%
multiplied by average daily net assets over the previous 12 months. The
incentive fee rate ranges from -2.0% to +2.0% on an annual basis, depending on
a comparison of the Portfolio's performance (reflecting a deduction of the
Portfolio expenses) and the performance of a selected benchmark index over the
past 12 months. The monthly Incentive Fee, like the monthly Basic Fee, is
calculated by multiplying one-twelfth of the Incentive Fee rate on an annual
basis by the average daily net assets over the previous 12 months.
Accordingly, the Total Fee could range from 0.0% to an annual rate of 4.0%,
depending on performance.
- The PERFORMANCE OF THE PORTFOLIO is calculated by first determining the
change in the Portfolio's net asset value per share during the previous 12
months, assuming the reinvestment of distributions during that period, and
then expressing this amount as a percentage of the net asset value per share
at the beginning of the period. Net asset value per share is calculated by
dividing the value of the securities held by the Portfolio plus any cash or
other assets minus all liabilities including accrued advisory fees and the
other expenses, by the total number of shares outstanding at the time.
- The PERFORMANCE OF THE SELECTED BENCHMARK INDEX is calculated as the sum of
the change in the level of the index during the previous 12 months, plus the
value of any dividends or distributions made by the companies whose securities
comprise the index accumulated to the end of the period, and then expressing
that amount as a percentage of the index at the beginning of the period.
No Incentive Fee will be paid if the Portfolio's performance equals the
targeted performance-selected benchmark index plus 2.25 percentage points. The
maximum fee will be paid if performance is 5.25 percentage points higher than
the target (i.e., 7.5 percentage points higher than the selected benchmark
index). No fee will be paid if performance is 5.25 percentage points lower
than the target, (i.e., more than 3 percentage points below the selected
benchmark index). The chart below further explains the Incentive Fee at
various performance levels.
14 The Fulcrum Trust
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE POINT DIFFERENCE BETWEEN PERFORMANCE OF THE PORTFOLIO
(NET OF EXPENSES INCLUDING BASIC FEE AND INCENTIVE FEE)
AND CHANGE IN SELECTED BENCHMARK INDEX TOTAL
BASIC FEE (%) INCENTIVE FEE ADVISORY FEE
----------- ------------- ------------
<S> <C> <C> <C>
+7.5 or greater 2.0 2.0 4.0
--------------- --- ---- ---
+6.0 or greater, but less than +7.5 2.0 1.5 3.5
----------------------------------- --- ---- ---
+4.5 or greater, but less than +6.0 2.0 1.0 3.0
----------------------------------- --- ---- ---
+3.0 or greater, but less than +4.5 2.0 0.5 2.5
----------------------------------- --- ---- ---
+1.5 or greater, but less than +3.0 2.0 0.0 2.0
----------------------------------- --- ---- ---
0.0 or greater, but less than +1.5 2.0 -0.5 1.5
---------------------------------- --- ---- ---
-1.5 or greater, but less than 0.0 2.0 -1.0 1.0
---------------------------------- --- ---- ---
-3.0 or greater, but less than -1.5 2.0 -1.5 0.5
----------------------------------- --- ---- ---
Less than -3.0 2.0 -2.0 0.0
-------------- --- ---- ---
</TABLE>
MAXIMUM FEE IF PERFORMANCE IS NEGATIVE.
- IF THE ABSOLUTE PERFORMANCE OF THE PORTFOLIO (AFTER PAYMENT OF ALL EXPENSES,
INCLUDING THE BASIC FEE AND ANY INCENTIVE FEE) IS NEGATIVE, the monthly
advisory fee will be the lesser of the fee calculated pursuant to the above
schedule or the alternative monthly advisory fee described below, which under
certain circumstances results in the Portfolio paying either no advisory fee or
a lower monthly advisory fee than under the performance fee schedule above.
- IF THE PORTFOLIO'S PERFORMANCE (AFTER PAYMENT OF ALL EXPENSES INCLUDING
ADVISORY FEES) IS NEGATIVE AND DOES NOT EXCEED THE SELECTED BENCHMARK BY SIX
PERCENTAGE POINTS (on an annual basis), no monthly advisory fee will be paid.
- IF THE PORTFOLIO'S PERFORMANCE (AFTER PAYMENT OF ALL EXPENSES INCLUDING
ADVISORY FEES) IS NEGATIVE AND DOES NOT EXCEED THE SELECTED BENCHMARK BY
TWELVE PERCENTAGE POINTS BUT DOES EXCEED THE SELECTED BENCHMARK BY SIX
PERCENTAGE POINTS (on an annual basis), the alternate monthly advisory fee will
be based on an annual rate of 1.0% of average daily net assets over the previous
12 months.
- - IF THE PERFORMANCE OF THE PORTFOLIO (AFTER PAYMENT OF ALL EXPENSES INCLUDING
ADVISORY FEES) IS NEGATIVE BUT EXCEEDS THE SELECTED BENCHMARK BY TWELVE
PERCENTAGE POINTS OR MORE (on an annual basis), the alternative monthly
advisory fee will be based on an annual rate of 2.0% of average daily net
assets over the previous 12 months.
SIZE OF FEE.
- The Basic Fee payable by the Portfolio is at a rate higher than the
investment advisory fees paid by most other investment companies. If the
Portfolio OUTPERFORMS the selected benchmark by 3.0 percentage points or more,
the advisory fee payable by the Portfolio may further exceed those paid by
other investment companies.
- If the Portfolio UNDERPERFORMS the selected benchmark, the advisory fee paid
by the Portfolio may be less than those paid by other investment companies.
- If, during the applicable performance period, the Portfolio UNDERPERFORMS the
selected benchmark by three or more percentage points, the Portfolio will not
pay any advisory fee.
PERFORMANCE BENCHMARK.
As described above, total advisory fees paid to the Portfolio Manager for
advising the Portfolio is based on the performance of the Portfolio managed
relative to a market benchmark selected in light of the investment objective and
policies of the Portfolio. The performance benchmark selected for the Portfolio
is the Lehman Brothers Aggregate Bond Index, which is described in more detail
in the section entitled, "Objective, Strategies and Risks".
The Fulcrum Trust 15
<PAGE>
EXPENSE LIMITATIONS
EXPENSE LIMITATIONS. AFIMS has agreed to limit operating expenses through June
30, 2000. While this limitation is in effect, AFIMS will reimburse the
Portfolio to the extent that its "other expenses" (i.e., expenses other than
management fees) exceed the expense limitation of 1.50% (expressed as an
annualized percentage of average daily net assets). There is no guarantee that
any expense limitation will be in place after June 30, 2000.
AFIMS has agreed to pay any amount due for a calendar month not later than the
15th day of the following calendar month (with any annual adjustment to be made
not later than January 15).
REIMBURSEMENT PROVISION. The Portfolio is obligated to reimburse AFIMS for any
payments it made to the Portfolio under the expense limitation and other expense
limitations in place in previous years, provided that the Portfolio need only
reimburse AFIMS (1) to the extent it can do so and still keep "other expenses"
under the limitations that were in place and (2) during the two calendar years
after the expense limitation payments were made by AFIMS. In particular,
reimbursement for any payments due to the expense limitation in effect during
the 1998 shall be paid by the Portfolio only to the extent that the Portfolio
can do so prior to December 31, 2000 without causing its "other expenses" to
exceed 1.20% as an annualized percentage of the Portfolio's average daily net
assets. Reimbursement for any payments due to the expense limitation in effect
during 1999 shall be paid by the Portfolio only to the extent that the Portfolio
can do so prior to December 31, 2001 without causing its "other expenses" to
exceed the current expense limitation of 1.50%. Reimbursement for any
payments due to the expense limitation in effect during 2000 shall be paid by
the Portfolio only to the extent that the Portfolio can do so prior to December
31, 2002 without causing its "other expenses" to exceed the current expense
limitation of 1.50%.
16 The Fulcrum Trust
<PAGE>
PRICING, PURCHASE AND REDEMPTION
PRICING OF SHARES
The price of one share of the Portfolio is equal to the Portfolio's "net asset
value" or "NAV" per share. NAV is computed once daily at the close of regular
trading on the New York Stock Exchange each day the Exchange is open - normally
4:00 p.m. Eastern Time. Net asset value per share is calculated by dividing the
aggregate value of each Portfolio's assets less all liabilities by the number of
each Portfolio's outstanding shares.
The Portfolio's assets are valued primarily on the basis of market quotations.
Short-term debt securities with remaining maturities of 60 days or less are
valued on the basis of amortized cost. Other debt securities are generally
valued based on price quotes obtained from pricing services or broker-dealers.
Foreign securities are valued on the basis of quotations from the primary market
on which they are traded, and are translated from the local currency into U.S.
dollars using current exchange rates. In addition, if quotations are not
available for any security, or if the values of foreign securities have been
materially affected by events occurring after the closing of a foreign market,
assets may be valued by another method that the Board of Trustees believes
accurately reflects fair value.
PURCHASE OF SHARES
Shares of the Portfolio are sold at the first net asset value per share
calculated after the Trust (or its agent) receives the purchase order. The Trust
does not charge any sales charge or sales load. The Trust is intended to be a
funding vehicle for variable annuity and variable life insurance contracts
offered by both affiliated and unaffiliated insurance companies and for certain
qualified pension and retirement plans. Because of differences in tax treatment
and other considerations, however, it is possible that the interests of contract
owners and plan participants might at some time be in conflict. Accordingly, the
Board of Trustees will monitor events to identify any material irreconcilable
conflicts and to determine what action, if any, should be taken in response to
any such conflict.
REDEMPTION OF SHARES
Shares of the Portfolio may be redeemed on any business day. The Trust does not
charge any sales charge or sales load. Shares of the Portfolio are redeemed at
the first net asset value per share calculated after the Trust (or its agent)
receives a proper redemption request or sooner if required by law. The right of
redemption may be suspended by the Trust or the payment date postponed beyond
seven days:
- - when the New York Stock Exchange is closed (other than customary weekend and
holiday closings);
- - when an emergency exists, as determined by the Securities and Exchange
Commission; or
- - whenever the Securities and Exchange Commission has by order allowed such
suspension or postponement for the protection of shareholders.
If the Board of Trustees determines that it would be detrimental to the best
interests of the remaining shareholders of the Portfolio to make payment wholly
or partly in cash, the Portfolio may:
- pay the redemption price in whole or in part by a distribution in kind of
securities from the portfolios, in lieu of cash. (If shares are redeemed in
kind, the redeeming shareholder might incur brokerage costs in converting the
assets into cash.)
The Fulcrum Trust 17
<PAGE>
DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
At least annually, the Portfolio declares as dividends substantially all of its
net income, if any, and distributes all of its net realized capital gains. All
dividends and distributions are automatically reinvested in additional shares of
the Portfolio.
FEDERAL INCOME TAXES
The Trust seeks to comply with the provision of the Internal Revenue Code
applicable to regulated investment companies so that the Trust will not be
subject to federal income tax. Under current tax law, dividend or capital gain
distributions from the Portfolio are not currently taxable when left to
accumulate within a variable annuity or variable life insurance contract.
Withdrawals from a contract generally are subject to ordinary income tax and, in
many cases, to an additional 10% penalty tax on withdrawals before age 59 1/2.
If you own or are considering buying a variable contract that invests in the
Portfolio, you should consult the variable contract prospectus for a discussion
of the tax considerations relevant to investing in the Portfolio through that
variable contract.
The tax laws and regulations that apply to qualified retirement plans are
complex and vary according to the type of plan and its terms and conditions. If
you participate in a qualified retirement plan that invests in the Portfolio,
you should consult a qualified tax adviser to learn about your specific tax
situation before investing in the Portfolio or redeeming Portfolio shares.
18 The Fulcrum Trust
<PAGE>
[GRAPHIC] FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand the
Portfolio's financial performance for the life of the Portfolio. Certain
information reflects financial results for a single Portfolio share. The total
returns in the tables represent the rate that an investor would have earned or
lost on an investment in the Portfolio (assuming reinvestment of all dividends
and distributions). This information has been audited by PricewaterhouseCoopers
LLP, whose report, along with the Portfolio's financial statements, are included
in the Statement of Additional Information or annual report, which is available
upon request.
The Fulcrum Trust 19
<PAGE>
The Fulcrum Trust
FINANCIAL HIGHLIGHTS - For a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Income from Investment Operations Less Distributions
--------------------------------------------- -------------------------------------------------------
Net Realized
and
Net Asset Net Unrealized Dividends Distributions
Value Investment Gain (Loss) Total from from Net from Net
Beginning Income on Investment Investment Realized Return of Total
Year Ended December 31, of Year (Loss)(/2/) Investments Operations Income Capital Gains Capital Distributions
- ----------------------- --------- ----------- ------------ ---------- ---------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Strategic Income
Portfolio(/1/)
1999 $10.22 $0.45 $(0.77) $(0.32) $(0.45) $ -- (/5/) $ -- $(0.45)
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 0.35% and 0.67% for the years ended December 31, 1999 and December 31,
1998, respectively.
(A) Including reimbursements and waivers of certain operating expenses.
(B) Excluding reimbursements and waivers of certain operating expenses.
(1) The Strategic Income Portfolio commenced operation on February 1, 1996.
(2) Net investment income (loss) per share before reimbursement of certain
operating expenses by the investment adviser were ($0.26) for the year
ended December 31, 1999, ($0.11) in 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 year ended December 31, 1998, the total return
includes a capital infusion. Absent the infusion, the total return for the
Strategic Income Portfolio would have been 6.12%.
(4) For the period ended December 31, 1996, the total return includes a capital
infusion. Absent the infusion, the total return for the Strategic Income
Portfolio would have been (4.49)%.
(5) Distribution is less than $0.005 per share.
------------------------------------------------------
F-16
<PAGE>
The Fulcrum Trust
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Ratios/Supplemental Data
-----------------------------------------------------------------------
Ratios To Average Net Assets
-----------------------------------------------
Net
Increase
(Decrease) Net Asset Net Assets Net
in Value End of Investment Operating Portfolio
Net Asset End of Total Year Income (Loss) Expenses Management Turnover
Value Year Returns(/3/)(/4/) (000's) (A) (B) (A) (B) Fee Rate
- ---------- --------- ----------------- ---------- ------ ------ ----- ------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$(0.77) $9.45 (3.12)% $1,540 4.15% 2.04% 1.50% 3.48% 0.23%+ 136%
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-17
<PAGE>
APPENDIX [GRAPHIC]
INVESTMENT TECHNIQUES AND STRATEGIES
In managing the Portfolios of investments, the Trust may make use of the
following investment techniques and strategies:
BANKING INDUSTRY AND SAVINGS INDUSTRY OBLIGATIONS
COMMERCIAL PAPER
DEBT SECURITIES
FOREIGN CURRENCY SECURITIES
FOREIGN SECURITIES
FUTURES CONTRACTS
ILLIQUID SECURITIES
INDEXED SECURITIES
INVESTMENTS IN GOLD AND OTHER PRECIOUS METALS
LENDING PORTFOLIO SECURITIES
LEVERAGE
MORTGAGE-BACKED SECURITIES
OPTIONS
OTHER ASSET-BACKED SECURITIES
OTHER INVESTMENT COMPANIES
REPURCHASE AGREEMENTS
RESTRICTED SECURITIES
REVERSE REPURCHASE AGREEMENTS
SHORT SALES AGAINST THE BOX
SHORT SALES
U.S. GOVERNMENT SECURITIES
VARIABLE AND FLOATING RATE SECURITIES
WARRANTS
22 The Fulcrum Trust
<PAGE>
This page is intentionally left blank.
<PAGE>
- --------------------------------------------------------------------------------
The Fulcrum Trust
The Strategic Income Portfolio
The Trust's Statement of Additional Information (SAI) and annual and semi-annual
reports to shareholders include additional information about the Portfolio. The
SAI and the financial statements included in the Portfolio's most recent annual
report to shareholders are incorporated by reference into this Prospectus, which
means they are part of this Prospectus for legal purposes. The Trust's annual
report discusses the market conditions and investment strategies that
significantly affected each Portfolio's performance during its last fiscal
year. You may get free copies of these materials, request other information
about the Trust or make shareholder inquiries by calling 1-800-917-1909.
You may review and copy information about the Trust, including its SAI, at the
Securities and Exchange Commission's public reference room in Washington, D.C.
You may call the Commission at 1-800-SEC-0330 for information about the
operation of the public reference room. You may also access reports and other
information about the Trust on the Commission's Internet site at
http://www.sec.gov. You may get copies of this information, with payment of a
duplication fee, by writing the Public Reference Section of the Commission,
Washington, D.C. 20549-6009. You may need to refer to the Trust's file number
under the Investment Company Act, which is 811-08278. This Prospectus is
intended for use with a variable contract or qualified plan.
THE
FULCRUM
TRUST
440 Lincoln Street, Worcester, Massachusetts 01653
(800) 917-1909
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION ("SAI")
THE GLOBAL INTERACTIVE/TELECOMM PORTFOLIO
THE INTERNATIONAL GROWTH PORTFOLIO
THE GROWTH PORTFOLIO
THE VALUE PORTFOLIO
THE STRATEGIC INCOME PORTFOLIO
THE FULCRUM TRUST
440 Lincoln Street
Worcester, Massachusetts 01653
(800) 917-1909
This Statement of Additional Information is intended to supplement the
information provided to investors in the Trust's Prospectus dated May 1, 2000.
It has been filed with the Securities and Exchange Commission as part of the
Trust's Registration Statement. The contents of this Statement of Additional
Information are incorporated by reference in the Prospectus in their entirety. A
copy of the prospectus may be obtained free of charge from the Trust at the
address and telephone number listed above.
INVESTORS SHOULD NOTE THAT THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT
ITSELF A PROSPECTUS AND SHOULD BE READ CAREFULLY IN CONJUNCTION WITH THE
PROSPECTUS FOR THE PORTFOLIOS AND RETAINED FOR FUTURE REFERENCE.
The Trust's Financial Statements and related notes and the report of the
independent accountants for the fiscal year ended December 31, 1999 are included
in the Trust's Annual Report to Shareholders, which is incorporated by reference
into this Statement of Additional Information. The Annual Report to Shareholders
is available, without charge, upon request, from the Trust at the address and
telephone numbers listed above.
DATED: MAY 1, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
TRUST HISTORY..................................................................................................... 3
DESCRIPTION OF THE PORTFOLIOS AND THEIR INVESTMENTS AND RISKS..................................................... 3
INVESTMENT RESTRICTIONS AND POLICIES...................................................................... 4
INVESTMENT STRATEGIES AND TECHNIQUES...................................................................... 6
PORTFOLIO TURNOVER........................................................................................ 20
MANAGEMENT OF THE TRUST........................................................................................... 21
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES............................................................... 22
INVESTMENT MANAGEMENT AND OTHER SERVICES.......................................................................... 23
BROKERAGE ALLOCATION AND OTHER PRACTICES.......................................................................... 26
CAPITAL STOCK AND OTHER SECURITIES................................................................................ 28
PURCHASE, REDEMPTION AND PRICING OF SHARES........................................................................ 29
TAXATION OF THE FUNDS OF THE TRUST................................................................................ 29
UNDERWRITER....................................................................................................... 30
CALCULATION OF PERFORMANCE DATA................................................................................... 30
FINANCIAL STATEMENTS.............................................................................................. 32
APPENDIX A (DESCRIPTION OF RATINGS)............................................................................... 33
</TABLE>
<PAGE>
INTRODUCTION
TRUST HISTORY
This Statement of Additional Information discusses the Global Interactive/
Telecomm Portfolio, the International Growth Portfolio, the Growth Portfolio,
and the Value Portfolio and the Strategic Income Portfolio (the "Portfolios") of
The Fulcrum Trust (the "Trust"), which is an open-end management investment
company. The Trust was organized as a Massachusetts business trust on September
8, 1993 and commenced operations on February 1, 1996. Prior to September 1,
1998, the Trust's name was "The Palladian Trust."
DESCRIPTION OF THE PORTFOLIOS OF THE TRUST AND THEIR INVESTMENTS AND RISKS
The Trust is a diversified open-end management investment company. The Trust
currently offers shares of five different "series" or Portfolios. It is expected
that one Portfolio will be dissolved on or about July 1, 2000. Each Portfolio
is, for investment purposes, a separate investment fund.
Shares of the Portfolios may be sold only to: (1) life insurance company
separate accounts (the "Separate Accounts") to serve as the underlying
investment medium for variable annuity and variable life insurance contracts;
(2) qualified retirement plans, as permitted by Treasury Regulations; and (3)
life insurance companies and advisers to the Portfolios and their affiliates.
This Statement of Additional Information is designed to elaborate upon the
discussion of certain securities and investment techniques which are described
in the Trust's Prospectus. The more detailed information contained herein is
intended solely for investors who have read the Prospectus and are interested in
a more detailed explanation of certain aspects of some of the Portfolios'
securities and some investment techniques. Some of the Portfolios' investment
techniques are described only in the Prospectus and are not repeated in this
SAI. Captions and defined terms in this SAI generally correspond to like
captions and terms in the Portfolios' Prospectus.
For a description of the Portfolios' principal investment strategies and risks,
types of investments each Portfolio may acquire and certain investment
techniques it may utilize, see "Principal Investment Strategies and Risks" and
"Other Investment Strategies and Risks" in the Trust Prospectus. Following are
descriptions of additional Portfolio strategies, policies and restrictions.
ADDITIONAL INFORMATION ABOUT THE PORTFOLIOS
THE GLOBAL INTERACTIVE/TELECOMM PORTFOLIO
The Portfolio may invest up to 5% of its assets in high yield/high risk debt
securities. When the Portfolio Manager believes that a defensive investment
posture is warranted or when opportunities for capital appreciation do not
appear attractive, the Portfolio may temporarily invest all or a portion of its
assets in short-term money market instruments, such as obligations of the U.S.
Government and its agencies and instrumentalities, high-quality commercial paper
and bank certificates of deposit and time deposits and repurchase agreements
with respect to such instruments. The Portfolio may not achieve its investment
objective while using a temporary defensive policy.
Examples of companies in which the Portfolio may invest are those involved in
the following products and services: emerging technologies combining television,
telephone and computer systems; regular telephone service; wireless
communications services and equipment, including cellular telephone data and
voice transmission; electronic components and communications equipment; video
conferencing; electronic mail; local and wide area networking; linkage of data
and word processing systems; publishing and information systems; broadcasting,
including television and radio; cable television systems and networks; wireless
cable television and other emerging distribution technologies; the creation,
packaging, distribution, and ownership of entertainment programming; computer
hardware and software and other equipment used in the creation and distribution
of entertainment programming; interactive and multimedia programming including
home shopping and multiplayer games; and advertising agencies and niche
advertising mediums such as in-store or direct mail.
The Portfolio Manager will allocate the Portfolio's assets among securities of
countries and in currency denominations and industry sectors where opportunities
for meeting the Portfolio's investment objective are expected to be the most
attractive. The Portfolio may invest substantially in securities denominated in
one or more foreign currencies.
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The governments of some foreign countries have been engaged in programs of
selling part or all of their stakes in government owned or controlled
enterprises ("privatizations"). The Portfolio Manager believes that
privatizations in the telecommunications industry may offer opportunities for
significant capital appreciation and intends to invest assets of the Portfolio
in privatizations in appropriate circumstances. In certain foreign countries,
the ability of foreign entities such as the Portfolio to participate in
privatizations may be limited by local law and/or the terms on which the
Portfolio may be permitted to participate may be less advantageous than those
afforded local investors. There can be no assurance that foreign governments
will continue to sell companies currently owned or controlled by them or that
privatization programs will be successful.
THE INTERNATIONAL GROWTH PORTFOLIO
When allocating the Portfolio's investments among geographic regions and
individual countries, the Portfolio Manager considers various criteria, such as
prospects for relative economic growth among countries, expected levels of
inflation, government policies influencing business conditions, and the outlook
for currency relationships.
The Portfolio Manager may invest the Portfolio's assets in all types of
securities, most of which are denominated foreign currencies. The Portfolio does
not place any emphasis on dividends or interest income except when the Portfolio
Manager believes this income will have a favorable influence on the market value
of the security. The Portfolio may invest in indexed securities whose value
depends on the price of foreign currencies, commodities, securities indices, or
other financial indicators. In the normal course of managing the Portfolio, the
Portfolio Manager may invest a portion of the Portfolio's assets in U.S. and
foreign government obligations and money market securities (including repurchase
agreements) when the Portfolio has monies not yet invested, it has sold one
security and is waiting to buy another one, so that it will be prepared to meet
redemption requests, or to earn a return on available cash balances. When market
conditions warrant, the Portfolio Manager can make substantial temporary
defensive investments in U.S. government obligations or investment-grade
obligations of companies incorporated in and having principal business
activities in the United States. The Portfolio may not achieve its investment
objective while using a temporary defensive policy.
THE GROWTH PORTFOLIO
The Portfolio may also invest in foreign equity securities, foreign equity-type
investments, investment grade debt securities, high yield/high risk debt
securities (up to 5% of assets), futures contracts and options, money market
investments and other securities. For temporary defensive purposes, the
Portfolio may invest all or part of its assets in investment grade debt
securities or money market instruments. The Portfolio may not achieve its
investment objective while using a temporary defensive policy.
THE VALUE PORTFOLIO
The Portfolio may invest up to 5% of its assets in high yield/high risk debt
securities. When the Portfolio Manager believes that a defensive investment
posture is warranted or when opportunities for capital appreciation do not
appear attractive, the Portfolio may temporarily invest all or a portion of its
assets in short-term money market instruments, such as obligations of the U.S.
Government and its agencies and instrumentalities, high-quality commercial paper
and bank certificates of deposit and time deposits and repurchase agreements
with respect to such instruments. The Portfolio may not achieve its investment
objective while using a temporary defensive policy.
STRATEGIC INCOME PORTFOLIO
The Strategic Income Portfolio may consider making carefully selected
investments in below investment-grade debt securities of issuers in the United
States and in foreign markets.
The Strategic Income Portfolio also may invest up to 5% of its assets in loan
participations and assignments. When the Portfolio Manger believes that a
defensive investment posture is warranted or when opportunities for capital
appreciation do not appear attractive, the Portfolio may temporarily invest all
or a portion of its assets in short-term money market instruments, such as
obligations and time deposits and repurchase agreements with respect to such
instruments. The Portfolio may not achieve its investment objective while using
a temporary defensive policy.
INVESTMENT RESTRICTIONS
Each Portfolio's investment objective as set forth under "Objectives, Strategies
and Risks" in the Prospectus, together with the investment restrictions set
forth below, are fundamental and may not be changed with respect to any
Portfolio without the approval of a majority of the outstanding voting shares of
that Portfolio. The vote of a majority of
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the outstanding voting securities of a Portfolio means the vote, at an annual or
special meeting, of the lesser of (a) 67% or more of the voting securities
present at such meeting, if the holders of more than 50% of the outstanding
voting securities of such Portfolio are present or represented by proxy; or (b)
more than 50% of the outstanding voting securities of such Portfolio. None of
the Portfolios will:
(1) Make an investment unless, when considering all its other
investments, 75% of the value of a Portfolio's assets would consist of
cash, cash items, obligations of the United States government, its
agencies or instrumentalities, securities of other investment companies,
and other securities. For purposes of this restriction, "other
securities" are limited for each issuer to not more than 5% of the value
of a Portfolio's assets and to not more than 10% of the issuer's
outstanding voting securities held by the Trust as a whole. Some
uncertainty exists as to whether certain of the types of bank obligations
in which a Portfolio may invest, such as certificates of deposit and
bankers' acceptances, should be classified as "cash items" rather than
"other securities" for purposes of this restriction, which is a
diversification requirement under the 1940 Act. Interpreting most bank
obligations as "other securities" limits the amount a Portfolio may
invest in the obligations of any one bank to 5% of its total assets. If
there is an authoritative decision that any of these obligations are not
"securities" for purposes of this diversification test, this limitation
would not apply to the purchase of such obligations;
(2) Invest in a security if more than 25% of its total assets (taken at
market value at the time of such investment) would be invested in the
securities of issuers in any particular industry, except (a) that this
restriction does not apply to securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities (or repurchase agreements
with respect thereto), and to securities or obligations issued by banks,
as permitted by the SEC; and (b) that the Global Interactive/Telecomm
Portfolio may invest more than 25% of its total assets in the public
utilities industry and may invest more than 25% of its total assets in
the telecommunications industry;
(3) Purchase or sell real estate, except that a Portfolio may invest in
securities secured by real estate or real estate interests or issued by
companies in the real estate industry or which invest in real estate or
real estate interests;
(4) Buy or sell commodities or commodity contracts, except that the
Portfolio may purchase and sell futures contracts and related options,
foreign currency, forward foreign currency exchange contracts, and gold
and other precious metals;
(5) Purchase securities on margin (except for use of short-term credit
necessary for clearance of purchases and sales of portfolio securities),
except a Portfolio engaged in transactions in options, futures, and
options on futures may make margin deposits in connection with those
transactions, except that effecting short sales will be deemed not to
constitute a margin purchase for purposes of this restriction;
(6) Lend any funds or other assets, except that a Portfolio may,
consistent with its investment objective and policies:
(a) invest in debt obligations, even though the purchase of such
obligations may be deemed to be the making of loans;
(b) enter into repurchase agreements; and
(c) lend its portfolio securities in accordance with applicable
guidelines established by the Board of Trustees;
(7) Issue senior securities, except insofar as a Portfolio may be deemed
to have issued a senior security by reason of borrowing money in
accordance with that Portfolio's borrowing policies, or in connection
with any repurchase agreement, and except, for purposes of this
investment restriction, collateral or escrow arrangements with respect to
the making of short sales, purchase or sale of futures contracts or
related options, purchase or sale of forward currency contracts, writing
of options, and collateral arrangements with respect to margin or other
deposits respecting futures contracts, related options, and forward
currency contracts are not deemed to be an issuance of a senior security;
(8) Act as an underwriter of securities of other issuers, except, when in
connection with the disposition of portfolio securities, a Portfolio may
be deemed to be an underwriter under the federal securities laws; and
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(9) Borrow money or pledge, mortgage, or hypothecate its assets, except
that a Portfolio may: (a) borrow from banks, but only if immediately
after each borrowing and continuing thereafter there is asset coverage of
300%; and (b) enter into reverse repurchase agreements and transactions
in options, futures, options on futures, and forward currency contracts.
INVESTMENT STRATEGIES AND TECHNIQUES
The Portfolios may invest in the following securities and make use of the
following investment strategies and techniques:
DEBT SECURITIES (APPLICABLE TO ALL PORTFOLIOS)
All Portfolios may invest in debt securities of domestic or foreign issuers
(both U.S. dollar denominated and non-U.S. dollar denominated). All Portfolios
may also invest in obligations of international organizations such as the
International Bank for Reconstruction and Development (the World Bank).
The investment return on a corporate debt security reflects interest earnings
and changes in the market value of the security. The market value of corporate
debt obligations may be expected to rise and fall inversely with interest rates
generally. There also exists the risk that the issuers of the securities may not
be able to meet their obligations on interest or principal payments at the time
called for by an instrument. Bonds rated BBB or Baa, which are considered
medium-grade category bonds, do not have economic characteristics that provide
the high degree of security with respect to payment of principal and interest
associated with higher rated bonds, and generally have some speculative
characteristics. A bond will be placed in this rating category where interest
payments and principal security appear adequate for the present, but economic
characteristics that provide longer term protection may be lacking. Any bond,
and particularly those rated BBB or Baa, may be susceptible to changing
conditions, particularly to economic downturns, which could lead to a weakened
capacity to pay interest and principal.
High yield/high risk debt securities involve significant risks. They are
considered predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the obligation.
The market value of the securities also tend to be more sensitive than higher
rated securities to news about the issuer and changes in overall economic
conditions. In addition, markets for lower-rated securities may be more limited
than for higher-rated securities.
New issues of certain debt securities are often offered on a when-issued or
firm-commitment basis; that is, the payment obligation and the interest rate are
fixed at the time the buyer enters into the commitment, but delivery and payment
for the securities normally take place after the customary settlement time. The
value of when-issued securities or securities purchased on a firm-commitment
basis may vary prior to and after delivery depending on market conditions and
changes in interest rate levels. However, the Portfolios will not accrue any
income on these securities prior to delivery. The Portfolios will maintain in a
segregated account with its custodian an amount of cash or high quality debt
securities equal (on a daily marked-to-market basis) to the amount of its
commitment to purchase the when-issued securities or securities purchased on a
firm-commitment basis.
Many securities of foreign issuers are not rated by Moody's or Standard and
Poor's; therefore, the selection of such issuers depends, to a large extent, on
the credit analysis performed or used by the Portfolio Manager.
MORTGAGE-BACKED SECURITIES (APPLICABLE TO ALL PORTFOLIOS)
GNMA CERTIFICATES. Government National Mortgage Association ("GNMA")
certificates are mortgage-backed securities representing part ownership of a
pool of mortgage loans on which timely payment of interest and principal is
guaranteed by the full faith and credit of the U.S. Government. GNMA is a wholly
owned U.S. Government corporation within the Department of Housing and Urban
Development. GNMA is authorized to guarantee, with the full faith and credit of
the U.S. Government, the timely payment of principal and interest on securities
issued by institutions approved by GNMA (such as savings and loan institutions,
commercial banks, and mortgage bankers) and backed by pools of FHA-insured or
VA-guaranteed mortgages.
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Interests in pools of mortgage-backed securities differ from other forms of debt
securities, which normally provide for periodic payment of interest in fixed
amounts with principal payments at maturity or specified call dates. Instead,
these securities provide a periodic payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
periodic payments made by the individual borrowers on the residential mortgage
loans, net of any fees paid to the issuer or guarantor of such securities.
Additional payments are caused by repayments of principal resulting from the
sale of the underlying residential property, refinancing or foreclosure, net of
fees or costs which may be incurred. Mortgage-backed securities issued by GNMA
are described as "modified pass-through" securities. These securities entitle
the holder to receive all interest and principal payments owed on the mortgage
pool, net of certain fees, at the scheduled payment dates, regardless of whether
or not the mortgagor actually makes the payment. Although GNMA guarantees timely
payment even if homeowners delay or default, tracking the "pass-through"
payments may, at times, be difficult. Expected payments may be delayed due to
the delays in registering the newly traded paper securities. The custodian's
policies for crediting missed payments while errant receipts are tracked down
may vary. Other mortgage-backed securities, such as those of the Federal Home
Loan Mortgage Corporation ("FHLMC") and the Federal National Mortgage
Association ("FNMA"), trade in book-entry form and should not be subject to the
risk of delays in timely payment of income.
Although the mortgage loans in the pool will have maturities of up to 30 years,
the actual average life of the GNMA certificates typically will be substantially
less because the mortgages will be subject to normal principal amortization and
may be prepaid prior to maturity. Early repayments of principal on the
underlying mortgages may expose a Portfolio to a lower rate of return upon
reinvestment of principal. Prepayment rates vary widely and may be affected by
changes in market interest rates. In periods of falling interest rates, the rate
of prepayment tends to increase, thereby shortening the actual average life of
the GNMA certificates. Conversely, when interest rates are rising, the rate of
prepayment tends to decrease, thereby lengthening the actual average life of the
GNMA certificates. Accordingly, it is not possible to accurately predict the
average life of a particular pool. Reinvestment of prepayments may occur at
higher or lower rates than the original yield on the certificates. Due to the
prepayment feature and the need to reinvest prepayments of principal at current
rates, GNMA certificates can be less effective than typical bonds of similar
maturities at "locking in" yields during periods of declining interest rates,
although they may have comparable risks of decline in value during periods of
rising interest rates.
FNMA AND FHLMC MORTGAGE-BACKED OBLIGATIONS. Government-related guarantors (i.e.,
not backed by the full faith and credit of the U.S. Government) include the FNMA
and the FHLMC. FNMA, a federally chartered and privately owned corporation,
issues pass-through securities representing interests in a pool of conventional
mortgage loans. FNMA guarantees the timely payment of principal and interest,
but this guarantee is not backed by the full faith and credit of the U.S.
Government. FNMA also issues REMIC Certificates, which represent an interest in
a trust funded with FNMA Certificates. REMIC Certificates are guaranteed by
FNMA, and not by the full faith and credit of the U.S. Government.
FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of Housing
and Urban Development. FNMA purchases conventional (i.e., not insured or
guaranteed by any government agency) residential mortgages from a list of
approved seller/servicers which include state and federally chartered savings
and loan associations, mutual savings banks, commercial banks, credit unions,
and mortgage bankers. FHLMC, a corporate instrumentality of the United States,
was created by Congress in 1970 for the purpose of increasing the availability
of mortgage credit for residential housing. Its stock is owned by the twelve
Federal Home Loan Banks. FHLMC issues Participation Certificates ("PCS") which
represent interests in conventional mortgages from FHLMC's national portfolio.
FHLMC guarantees the timely payment of interest and ultimate collection of
principal and maintains reserves to protect holders against losses due to
default. PCS are not backed by the full faith and credit of the U.S. Government.
The guarantees for both FNMA and FHLMC do not extend to the securities value or
yield, which are likely to fluctuate inversely with fluctuations in interest
rate. As is the case with GNMA certificates, the actual maturity and realized
yield on particular FNMA and FHLMC pass-through securities will vary based on
the prepayment experience of the underlying pool of mortgages.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOs). A CMO is a hybrid between a
mortgage-backed bond and a mortgage pass-through security. A CMO is a security
issued by a corporation or a U.S. government instrumentality that is backed by a
portfolio of mortgages or mortgage-backed securities. The issuer's obligation to
make interest and principal payments is secured by the underlying portfolio of
mortgages or mortgage-backed securities. CMOs are partitioned into several
classes with a ranked priority by which classes of obligations are redeemed.
Similar to a bond, interest and prepaid principal are paid, in most cases,
semiannually. CMOs may be collateralized by whole mortgage loans, but are more
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typically collateralized by portfolios of mortgage pass-through securities
guaranteed by GNMA, FHLMC, or FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life will depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying investors, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner-than-desired return
of principal because of the sequential payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple Series
(e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering are
used to purchase mortgages or mortgage pass-through certificates ("Collateral").
The Collateral is pledged to a third-party trustee as security for the Bonds.
Principal and interest payments from the Collateral are used to pay principal on
the Bonds in the order A, B, C, Z. The Series A, B, and C Bonds all bear current
interest. Interest on the Series Z Bond is accrued and added to the principal; a
like amount is paid as principal on the Series A, B, or C Bond currently being
paid off. When the Series A, B, and C Bonds are paid in full, interest and
principal on the Series Z Bond begin to be paid currently. With some CMOs, the
issuer serves as a conduit to allow loan originators (primarily builders or
savings and loan associations) to borrow against their loan portfolios.
OTHER MORTGAGE-BACKED SECURITIES. Commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers, and other
secondary market issuers also create pass-through pools of conventional
residential mortgage loans. In addition, such issuers may be the originators
and/or servicers of the underlying mortgage loans as well as the guarantors of
the mortgage-backed securities. Pools created by such non-governmental issuers
generally offer a higher rate of interest than government and government-related
pools because there are no direct or indirect government or agency guarantees of
payments in the former pools. Timely payment of interest and principal of these
pools may be supported by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance, and letters of credit. The
insurance and guarantees are issued by governmental entities, private insurers,
and the mortgage poolers. Such insurance, guarantees, and the creditworthiness
of the issuers thereof will be considered in determining whether a
mortgage-backed security meets a Portfolio's investment quality standards. There
can be no assurance that the private insurers or guarantors can meet their
obligations under the insurance policies or guarantee arrangements.
All Portfolios may buy mortgage-backed securities without insurance or
guarantees, if the Portfolio Manager determines that the securities meet a
Portfolio's quality standards. Although the market for such securities is
becoming increasingly liquid, securities issued by certain private organizations
may not be readily marketable. A Portfolio will not purchase mortgage-backed
securities or any other assets which, in the opinion of the Portfolio Manager,
are illiquid if, as a result, more than 15% of the value of a Portfolio's net
assets will be illiquid. As new types of mortgage-backed securities are
developed and offered to investors, the Portfolio Manager will, consistent with
a Portfolio's investment objectives, policies, and quality standards, consider
making investments in such new types of mortgage-backed securities.
ASSET--BACKED SECURITIES (APPLICABLE TO ALL PORTFOLIOS)
All Portfolios may invest in asset-backed securities, which represent a
participation in, or are secured by and payable from, a stream of payments
generated by particular assets, such as automobile or credit card receivables.
Asset-backed securities present certain risks, including the risk that the
underlying obligor on the asset, such as the automobile purchaser or the credit
card holder, may default on his or her obligation. In addition, asset-backed
securities often do not provide a security interest in the related collateral.
For example, credit card receivables are generally unsecured, and the pool of
automobile receivables may not include the security interests in those
automobiles. In general, however, these type of loans have a shorter average
life than mortgage loans and are less likely to have substantial prepayments.
Two types of asset-backed securities are "CARS-SM-" ("Certificates for
Automobile Receivables-SM-") and Credit Card Receivable Securities.
VARIABLE AND FLOATING RATE SECURITIES (APPLICABLE TO ALL PORTFOLIOS)
Variable rate securities provide for automatic establishment of a new interest
rate at fixed intervals (E.G., daily, monthly, semi-annually, etc.). Floating
rate securities provide for automatic adjustment of the interest rate whenever
some
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specified interest rate index changes. The interest rate on variable or floating
rate securities is ordinarily determined by reference to or is a percentage of a
bank's prime rate, the 90-day U.S. Treasury bill rate, the rate of return on
commercial paper or bank certificates of deposit, an index of short-term
interest rates, or some other objective measure.
Variable or floating rate securities frequently include a demand feature
entitling the holder to sell the securities to the issuer at par value. In many
cases, the demand feature can be exercised at any time on 7 days' notice; in
other cases, the demand feature is exercisable at any time on 30 days' notice or
on similar notice at intervals of not more than one year. Some securities which
do not have variable or floating interest rates may be accompanied by puts
producing similar results and price characteristics.
BANKING INDUSTRY AND SAVINGS INDUSTRY OBLIGATIONS (APPLICABLE TO ALL PORTFOLIOS)
All Portfolios may invest in certificates of deposit, time deposits, bankers'
acceptances, and other short-term debt obligations issued by commercial banks or
savings and loan associations ("S&Ls"). Certificates of deposit are receipts
from a bank or an S&L for funds deposited for a specified period of time at a
specified rate of return. Time deposits in banks or S&Ls are generally similar
to certificates of deposit, but are uncertificated. Bankers' acceptances are
time drafts drawn on commercial banks by borrowers, usually in connection with
international commercial transactions. Each Portfolio may also invest in
obligations of foreign branches of commercial banks and foreign banks so long as
the securities are U.S. dollar-denominated.
The Portfolios will not invest in obligations issued by a commercial bank or S&L
unless:
(i) the bank or S&L has total assets of at least $1 billion, or the
equivalent in other currencies, and the institution has outstanding
securities rated A or better by Moody's or Standard and Poor's, or,
if the institution has no outstanding securities rated by Moody's
or Standard & Poor's, it has, in the determination of the Portfolio
Manager, similar creditworthiness to institutions having
outstanding securities so rated;
(ii) in the case of a U.S. bank or S&L, its deposits are insured
by the Federal Deposit Insurance Corporation or the Savings
Association Insurance Fund, as the case may be; and
(iii) in the case of a foreign bank, the security is, in the
determination of the Portfolios' Portfolio Manager, of an investment
quality comparable with other debt securities which may be purchased by
the Portfolios. These limitations do not prohibit investments in
securities issued by foreign branches of U.S. banks, provided such U.S.
banks meet the foregoing requirements.
Obligations of foreign banks involve somewhat different investment risks than
those affecting obligations of U.S. banks, which include: (i) the possibility
that their liquidity could be impaired because of future political and economic
developments; (ii) their obligations may be less marketable than comparable
obligations of U.S. banks; (iii) a foreign jurisdiction might impose withholding
taxes on interest income payable on those obligations; (iv) foreign deposits may
be seized or nationalized; (v) foreign governmental restrictions, such as
exchange controls, may be adopted which might adversely affect the payment of
principal and interest on those obligations; and (vi) the selection of those
obligations may be more difficult because there may be less publicly available
information concerning foreign banks and/or because the accounting, auditing,
and financial reporting standards, practices and requirements applicable to
foreign banks may differ from those applicable to U.S. banks. Foreign banks are
not generally subject to examination by any U.S. Government agency or
instrumentality.
COMMERCIAL PAPER (APPLICABLE TO ALL PORTFOLIOS)
Commercial paper includes short-term unsecured promissory notes, variable rate
demand notes, and variable note master demand notes issued by domestic and
foreign bank holding companies, corporations, and financial institutions, as
well as similar taxable instruments issued by government agencies and
instrumentalities. All commercial paper purchased by the Portfolios must be, the
time of investment, (i) rated "P-1" by Moody's or "A-1" by S&P, (ii) issued or
guaranteed as to principal and interest by issuers having an existing debt
security rating of "Aa" or better by Moody's or "AA" by S&P, or (iii) securities
which, if not rated, are in the opinion of the Portfolio Manager of an
investment quality comparable to rated commercial paper in which the Portfolio
may invest.
Variable amount master demand notes are obligations that permit the investment
of fluctuating amounts at varying rates of interest pursuant to direct
arrangements between a Portfolio, as lender, and the borrower. These notes
permit
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daily changes in the amounts borrowed. The lender has the right to increase or
to decrease the amount under the note at any time up to the full amount provided
by the note agreement; and the borrower may prepay up to the full amount of the
note without penalty. Because variable amount master demand notes are direct
lending arrangements between the lender and borrower, and because no secondary
market exists for those notes, such instruments will probably not be traded.
However, the notes are redeemable (and thus immediately repayable by the
borrower) at face value, plus accrued interest, at any time. In connection with
master demand note arrangements, the Portfolio Manager will monitor, on an
ongoing basis, the earning power, cash flow, and other liquidity ratios of the
borrower and its ability to pay principal and interest on demand. The Portfolio
Manager also will consider the extent to which the variable amount master demand
notes are backed by bank letters of credit. These notes generally are not rated
by Moody's or S&P; the Portfolio may invest in them only if the Portfolio
Manager believes that at the time of investment the notes are of comparable
quality to the other commercial paper in which the Portfolio may invest. Master
demand notes are considered by the Portfolio to have a maturity of one day,
unless the Portfolio Manager has reason to believe that the borrower could not
make immediate repayment upon demand. See Appendix A herein for a description of
Moody's and S&P ratings applicable to commercial paper.
REPURCHASE AGREEMENTS (APPLICABLE TO ALL PORTFOLIOS)
All Portfolios may enter into repurchase agreements with banks and
broker-dealers under which they acquire securities subject to an agreement with
the seller to repurchase the securities at an agreed-upon time and price. If the
seller should default on its obligation to repurchase the securities, the
Portfolio may experience delays or difficulties in exercising its right to
realize a gain upon the securities held as collateral and might incur a loss if
the value of the securities should decline.
The term of a repurchase agreement is generally quite short, possibly overnight
or for a few days, although it may extend over a number of months (up to one
year) from the date of delivery. The resale price is in excess of the purchase
price by an amount which reflects an agreed-upon market rate of return,
effective for the period of time the Portfolio is invested in the security. This
results in a fixed rate of return protected from market fluctuations during the
period of the agreement. This rate is not tied to the coupon rate on the
security subject to the repurchase agreement.
A Portfolio may engage in repurchase transactions in accordance with guidelines
approved by the Board of Trustees of the Trust, which include monitoring the
creditworthiness of the parties with which a Portfolio engages in repurchase
transactions, obtaining collateral at least equal in value to the repurchase
obligation, and marking the collateral to market on a daily basis.
A Portfolio may not enter into a repurchase agreement having more than seven
days remaining to maturity if, as a result, such agreements together with any
other securities that are not readily marketable, would exceed 15% of the net
assets of the Portfolio. If the seller should become bankrupt or default on its
obligations to repurchase the securities, a Portfolio may experience delay or
difficulties in exercising its rights to the securities held as collateral and
might incur a loss if the value of the securities should decline. A Portfolio
also might incur disposition costs in connection with liquidating the
securities.
REVERSE REPURCHASE AGREEMENTS (APPLICABLE TO ALL PORTFOLIOS)
All Portfolios may enter into reverse repurchase agreements with banks and
broker-dealers. Those agreements have the characteristics of borrowing and
involve the sale of securities held by a Portfolio with an agreement to
repurchase the securities at an agreed-upon price and date, which reflect a rate
of interest paid for the use of funds for the period. Generally, the effect of
such a transaction is that a Portfolio can recover all or most of the cash
invested in the securities involved during the term of the reverse repurchase
agreement, while in many cases it will be able to keep some of the interest
income associated with those securities. Such transactions are only advantageous
if the Portfolio has an opportunity to earn a greater rate of interest on the
cash derived from the transaction than the interest cost of obtaining that cash.
A Portfolio may be unable to realize a return from the use of the proceeds equal
to or greater than the interest required to be paid.
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OPTIONS (APPLICABLE TO ALL PORTFOLIOS)
The Portfolios may purchase and sell (I.E., write) put and call options on
equity securities, debt securities, securities indices, and foreign currencies.
An option gives the owner the right to buy or sell securities at a predetermined
exercise price for a given period of time.
Although options will be primarily used to minimize principal fluctuations or to
generate additional premium income, they do involve certain risks. The Portfolio
Manager may not correctly anticipate movements in the relevant markets, thus
causing losses on the Portfolio's options positions.
A position in an exchange-traded option may be closed out only on an exchange,
board of trade or other trading facility which provides a secondary market for
an option of the same series. Although the Portfolios will generally purchase or
write only those exchange-traded options for which there appears to be an active
secondary market, there is no assurance that a liquid secondary market on an
exchange will exist for any particular option, or at any particular time, and
for some options no secondary market on an exchange or otherwise may exist. In
such event it might not be possible to effect closing transactions in particular
options, with the result that the Portfolio would have to exercise its options
in order to realize any profit and would incur brokerage commissions upon the
exercise of such options and upon the subsequent disposition of underlying
securities acquired through the exercise of call options or upon the purchase of
underlying securities for the exercise of put options. If a Portfolio as a
covered call option writer is unable to effect a closing purchase transaction in
a secondary market, it will not be able to sell the underlying security until
the option expires or it delivers the underlying security upon exercise.
Reasons for the absence of a liquid secondary market on an exchange include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions imposed by an exchange on opening transactions or closing
transactions or both; (iii) trading halts, suspensions or other restrictions may
be imposed with respect to particular classes or series of options or underlying
securities; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or a clearing
corporation may not at all times be adequate to handle current trading volume;
or (vi) one or more exchanges could, for economic or other reasons, decide to be
compelled at some future date to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that exchange (or in the class or series of options) would cease to exist,
although outstanding options on that exchange that had been issued by a clearing
corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms. There is no assurance that higher
than anticipated trading activity or other unforeseen events might not, at
times, render certain of the facilities of any of the clearing corporations
inadequate, and thereby result in the institution by an exchange of special
procedures which may interfere with the timely execution of customers' orders.
The purchase and sale of over-the-counter ("OTC") options will also be subject
to certain risks. Unlike exchange-traded options, OTC options generally do not
have a continuous liquid market. Consequently, a Portfolio will generally be
able to realize the value of an OTC option it has purchased only by exercising
it or reselling it to the dealer who issued it. Similarly, when a Portfolio
writes an OTC option, it generally will be able to close out the OTC option
prior to its expiration only by entering into a closing purchase transaction
with the dealer to which the Portfolio originally wrote the OTC option. There
can be no assurance that a Portfolio will be unable to liquidate an OTC option
at a favorable price at any time prior to expiration. In the event of insolvency
of the other party, the Portfolio may be unable to liquidate an OTC option.
OPTIONS ON EQUITY SECURITIES (APPLICABLE TO ALL PORTFOLIOS)
The Portfolios may purchase and write (i.e., sell) put and call options on
equity securities that are traded on U.S. securities exchanges, are listed on
the National Association of Securities Dealers Automated Quotation System
("NASDAQ"), or that result from privately negotiated transactions with
broker-dealers ("OTC options"). A call option is a short-term contract pursuant
to which the purchaser or holder, in return for a premium paid, has the right to
buy the security underlying the option at a specified exercise price at any time
during the term of the option. The writer of the call option, who receives the
premium, has the obligation, upon exercise of the option, to deliver the
underlying security against payment of the exercise price. A put option is a
similar contract which gives the purchaser or holder, in return for a premium,
the right to sell the underlying security at a specified price during the term
of the option. The writer of the put, who receives the premium, has the
obligation to buy the underlying security at the exercise price upon exercise by
the holder of the put.
A Portfolio will write only "covered" options on stocks. A call option is
covered if: (1) the Portfolio owns the security underlying the option; or (2)
the Portfolio has an absolute and immediate right to acquire that security
without additional cash consideration (or for additional consideration held in a
segregated account) upon conversion or exchange of other securities it holds; or
(3) the Portfolio holds on a share-for-share basis a call on the
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same security as the call written where the exercise price of the call held is
equal to or less than the exercise price of the call written or greater than the
exercise price of the call written if the difference is maintained by the
Portfolio liquid assets in a segregated account. A put option is covered if: (1)
the Portfolio deposits and maintains with in a segregated account liquid assets
having a value equal to or greater than the exercise price of the option; or (2)
the Portfolio holds on a share-for-share basis a put on the same security as the
put written where the exercise price of the put held is equal to or greater than
the exercise price of the put written or less than the exercise price if the
difference is maintained by the Portfolio in liquid assets in a segregated
account.
A Portfolio may also purchase "protective puts" (i.e., put options acquired for
the purpose of protecting a Portfolio security from a decline in market value).
The loss to the Portfolio is limited to the premium paid for, and transaction
costs in connection with, the put plus the initial excess, if any, of the market
price of the underlying security over the exercise price. However, if the market
price of the security underlying the put rises, the profit the Portfolio
realizes on the sale of the security will be reduced by the premium paid for the
put option less any amount (net of transaction costs) for which the put may be
sold.
A Portfolio may also purchase putable and callable equity securities, which are
securities coupled with a put or call option provided by the issuer.
A Portfolio may purchase call options for hedging and investment purposes. No
Portfolio intends to invest more than 5% of its net assets at any one time in
the purchase of call options on stocks.
If the writer of an exchange-traded option wishes to terminate the obligation,
he or she may effect a "closing purchase transaction" by buying an option of the
same series as the option previously written. Similarly, the holder of an option
may liquidate his or her position by exercise of the option or by effecting a
"closing sale transaction" by selling an option of the same series as the option
previously purchased. There is no guarantee that closing purchase or closing
sale transactions can be effected.
OPTIONS ON DEBT SECURITIES (APPLICABLE TO ALL PORTFOLIOS)
The Portfolios may purchase and write exchange-traded and OTC put and call
options on debt securities. Options on debt securities are similar to options on
stock, except that the option holder has the right to take or make delivery of a
debt security, rather than stock.
A Portfolio will write only "covered" options. Options on debt securities are
covered in the same manner as options on stocks, discussed above, except that,
in the case of call options on U.S. Treasury Bills, the Portfolio might own U.S.
Treasury Bills of a different series from those underlying the call option, but
with a principal amount and value corresponding to the option contract amount
and a maturity date no later than that of the securities deliverable under the
call option.
A Portfolio may also write straddles (i.e., a combination of a call and a put
written on the same security at the same strike price where the same issue of
the security is considered as the cover for both the put and the call). In such
cases, the Portfolio will also segregate or deposit for the benefit of the
Portfolio's broker liquid assets equivalent to the amount, if any, by which the
put is "in the money." It is contemplated that each Portfolio's use of straddles
will be limited to 5% of the Portfolio's net assets (meaning that the securities
used for cover or segregated as described above will not exceed 5% of the
Portfolio's net assets at the time the straddle is written).
A Portfolio may purchase "protective puts" in an effort to protect the value of
a security that it owns against a substantial decline in market value.
Protective puts are described in OPTIONS ON EQUITY SECURITIES above. A Portfolio
may wish to protect certain securities against a decline in market value at a
time when put options on those particular securities are not available for
purchase. A Portfolio may therefore purchase a put option on securities it does
not hold. While changes in the value of the put should generally offset changes
in the value of the securities being hedged, the correlation between the two
values may not be as close in these transactions as in transactions in which the
Portfolio purchases a put option on an underlying security it owns.
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A Portfolio may also purchase call options on debt securities for hedging or
investment purposes. No Portfolio currently intends to invest more than 5% of
its net assets at any one time in the purchase of call options on debt
securities.
A Portfolio may also purchase putable and callable debt securities, which are
securities coupled with a put or call option provided by the issuer.
A Portfolio may enter into closing purchase or sale transactions in a manner
similar to that discussed above in connection with options on equity securities.
OPTIONS ON STOCK INDICES (APPLICABLE TO ALL PORTFOLIOS)
The Portfolios may purchase and sell put and call options on stock indices
traded on national securities exchanges, listed on NASDAQ or that result from
privately negotiated transactions with broker-dealers ("OTC options"). Options
on stock indices are similar to options on stock except that, rather than the
right to take or make delivery of stock at a specified price, an option on a
stock index gives the holder the right to receive, upon exercise of the option,
an amount of cash if the closing level of the stock index upon which the option
is based is greater than in the case of a call, or less than, in the case of a
put, the strike price of the option. This amount of cash is equal to such
difference between the closing price of the index and the strike price of the
option times a specified multiple (the "multiplier"). If the option is
exercised, the writer is obligated, in return for the premium received, to make
delivery of this amount. Unlike stock options, all settlements are in cash, and
gain or loss depends on price movements in the stock market generally (or in a
particular industry or segment of the market) rather than price movements in
individual stocks.
A Portfolio will write only "covered" options on stock indices. A call option is
covered if the Fund follows the segregation requirements set forth in this
paragraph. When a Portfolio writes a call option on a broadly based stock market
index, it will segregate or put into escrow with its custodian or pledge to a
broker as collateral for the option, cash, Government securities or other liquid
assets, or "qualified securities" (defined below) with a market value at the
time the option is written of not less than 100% of the current index value
times the multiplier times the number of contracts. A "qualified security" is an
equity security which is listed on a national securities exchange or listed on
NASDAQ against which the Portfolio has not written a stock call option and which
has not been hedged by the Portfolio by the sale of stock index futures. When a
Portfolio writes a call option on an industry or market segment index, it will
segregate or pledge to a broker as collateral for the option, cash, Government
securities or other liquid assets, or at least five qualified securities, all of
which are stocks of issuers in such industry or market segment, with a market
value at the time the option is written of not less than 100% of the current
index value times the multiplier times the number of contracts. Such stocks will
include stocks which represent at least 50% of the weighting of the industry or
market segment index and will represent at least 50% of the Portfolio's holdings
in that industry or market segment. No individual security will represent more
than 15% of the amount so segregated or pledged or in the case of broadly based
stock market stock options or 25% of such amount in the case of industry or
market segment index options. If at the close of business on any day the market
value of such qualified securities so segregated or pledged falls below 100% of
the current index value times the multiplier times the number of contracts, the
fund will so segregate or pledge an amount in cash, Government securities, or
other liquid assets equal in value to the difference. In addition, when a
Portfolio writes a call on an index which is in-the-money at the time the call
is written, it will segregate or pledge to the broker as liquid assets equal in
value to the amount by which the call is in-the-money times the multiplier times
the number of contracts. Any amount segregated pursuant to the foregoing
sentence may be applied to the Portfolio's obligation to segregate additional
amounts in the event that the market value of the qualified securities falls
below 100% of the current index value times the multiplier times the number of
contracts.
A call option is also covered if the Portfolio holds a call on the same index as
the call written where the strike price of the call held is equal to or less
than the strike price of the call written or greater than the strike price of
the call written if the difference is maintained by the Portfolio in liquid
assets in a segregated account.
A put option is covered if: (1) the Portfolio holds in a segregated account
liquid assets of a value equal to the strike price times the multiplier times
the number of contracts; or (2) the Portfolio holds a put on the same index as
the put written where the strike price of the put held is equal to or greater
than the
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strike price of the put written or less than the strike price of the put written
if the difference is maintained by the Portfolio in liquid assets in a
segregated account.
A Portfolio may purchase put and call options for hedging and investment
purposes. No Portfolio intends to invest more than 5% of its net assets at any
one time in the purchase of puts and calls on stock indices. A Portfolio may
effect closing sale and purchase transactions involving options on stock
indices, as described above in connection with stock options.
The distinctive characteristics of options on stock indices create certain risks
that are not present with stock options. Index prices may be distorted if
trading of certain stocks included in the index is interrupted. Trading in the
index options also may be interrupted in certain circumstances, such as if
trading were halted in a substantial number of stocks included in the index. If
this occurred, a Portfolio would not be able to close out options which it had
purchased or written and, if restrictions on exercise were imposed, may be
unable to exercise an option it holds, which could result in substantial losses
to the Portfolio. Price movements in a Portfolio's equity security holdings
probably will not correlate precisely with movements in the level of the index
and, therefore, in writing a call on a stock index a Portfolio bears the risk
that the price of the securities held by the Portfolio may not increase as much
as the index. In such event, the Portfolio would bear a loss on the call which
is not completely offset by movement in the price of the Portfolio's equity
securities. It is also possible that the index may rise when the Portfolio's
securities do not rise in value. If this occurred, the Portfolio would
experience a loss on the call which is not offset by an increase in the value of
its securities holdings and might also experience a loss in its securities
holdings.
In addition, when a Portfolio has written a call, there is also a risk that the
market may decline between the time the Portfolio has a call exercised against
it, at a price which is fixed as of the closing level of the index on the date
of exercise, and the time the Portfolio is able to sell stocks in its Portfolio.
As with stock options, the Portfolio will not learn that an index option has
been exercised until the day following the exercise date but, unlike a call on
stock where the Portfolio would be able to deliver the underlying securities in
settlement, the Portfolio may have to sell part of its stock Portfolio in order
to make settlement in cash, and the price of such stocks might decline before
they can be sold. This timing risk makes certain strategies involving more than
one option substantially more risky with options in stock indices than with
stock options.
There are also certain special risks involved in purchasing put and call options
on stock indices. If a Portfolio holds an index option and exercises it before
final determination of the closing index value for that day, it runs the risk
that the level of the underlying index may change before closing. If such a
change causes the exercise option to fall out of-the-money, the Portfolio will
be required to pay the difference between the closing index value and the strike
price of the option (times the applicable multiplier) to the assigned writer.
Although a Portfolio may be able to minimize the risk by withholding exercise
instructions until just before the daily cutoff time or by selling rather than
exercising an option when the index level is close to the exercise price, it may
not be possible to eliminate this risk entirely because the cutoff times for
index options may be earlier than those fixed for other types of options and may
occur before definitive closing index values are announced.
OPTIONS ON FOREIGN CURRENCIES (APPLICABLE TO ALL PORTFOLIOS)
The Portfolios may purchase and write put and call options on foreign currencies
traded on U.S. or foreign securities exchanges or boards of trade. Options on
foreign currencies are similar to options on stock, except that the option
holder has the right to take or make delivery of a specified amount of foreign
currency, rather than stock. A Portfolio's successful use of options on foreign
currencies depends upon the manager's ability to predict the direction of the
currency exchange markets and political conditions, which requires different
skills and techniques than predicting changes in the securities markets
generally.
FUTURES CONTRACTS (APPLICABLE TO ALL PORTFOLIOS)
All Portfolios may purchase and sell (i) interest rate and other debt related
futures contracts, (ii) stock index and other equity related futures contracts,
(iii) foreign currency futures contracts, (iv) futures contracts on gold and
other precious metals, and (v) options on these futures contracts. A futures
contract provides for the future sale by one party and purchase by the other
party of a specified amount of a particular financial instrument or commodity
for a specified price at a designated date, time, and place.
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A stock index futures contract is an agreement in which the seller of the
contract agrees to deliver to the buyer an amount of cash equal to a specific
dollar amount times the difference between the value of a specific stock index
at the close of the last trading day of the contract and the price at which the
agreement is made. No physical delivery of the underlying stocks in the index is
made. In addition, the Portfolios may, for hedging purposes, purchase and sell
(a) futures contracts on interest-bearing securities (such as U.S. Treasury
bonds and notes) or interest rate indices (referred to collectively as "interest
rate futures contracts"); (2) futures contracts on foreign currencies or groups
of foreign currencies; and (3) futures contracts on gold and other precious
metals.
When the futures contract is entered into, each party deposits with a broker or
in a segregated custodial account approximately 5% of the contract amount,
called the "initial margin." Subsequent payments to and from the broker, called
the "variation margin," will be made on a daily basis as the underlying
security, index or rate fluctuates making the long and short positions in the
futures contracts more or less valuable, a process known as "marking to the
market."
All Portfolios may use futures contracts for the purpose of hedging positions
with respect to securities, interest rates, foreign currencies, and gold and
other precious metals. In addition, the Growth Portfolio may also use futures
contracts for non-hedging purposes (in other words, for investment purposes).
For example, the Portfolio Manager may invest in futures contracts rather than
investing directly in securities. The initial margins and premiums associated
with futures contracts used for non-hedging purposes will not exceed 5% of the
fair market value of the Portfolio's assets, taking into account unrealized
profits and losses on such futures contracts. The Portfolio may not purchase or
sell a futures contract for non-hedging purposes if immediately thereafter the
sum of the amount of margin deposits and premiums paid for related options would
exceed 5% of the market value of the Portfolio's total assets.
OPTIONS ON FUTURES CONTRACTS (APPLICABLE TO ALL PORTFOLIOS)
The Portfolios may enter into certain transactions involving options on futures
contracts. An option on a futures contract gives the purchaser or holder the
right, but not the obligation, to assume a position in a futures contract (a
long position if the option is a call and a short position if the option is a
put) at a specified price at any time during the option exercise period. The
writer of the option is required upon exercise to assume an offsetting futures
position (a short position if the option is a call and long position if the
option is a put). Upon exercise of the option, the assumption of offsetting
futures positions by the writer and holder of the option will be accomplished by
delivery of the accumulated balance in the writer's futures margin account which
represents the amount by which the market price of the futures contract, at
exercise, exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option on the futures contract. As an alternative to
exercise, the holder or writer of an option may terminate a position by selling
or purchasing an option of the same series. There is no guarantee that such
closing transactions can be effected. The Portfolios intend to utilize options
on futures contracts for the same purposes that they use the underlying futures
contracts.
Options on futures contracts are subject to risks similar to those described
above with respect to options on securities, options on stock indices, and
futures contracts. These risks include the risk that the Portfolio Manager may
not correctly predict changes in the market, the risk of imperfect correlation
between the option and the securities being hedged, and the risk that there
might not be a liquid secondary market for the option. There is also the risk of
imperfect correlation between the option and the underlying futures contract. If
there were no liquid secondary market for a particular option on a futures
contract, the Portfolio might have to exercise an option it held in order to
realize any profit and might continue to be obligated under an option it had
written until the option expired or was exercised. If a Portfolio were unable to
close out an option it had written on a futures contract, it would continue to
be required to maintain initial margin and make variation margin payments with
respect to the option position until the option expired or was exercised against
the Portfolio.
WHEN-ISSUED OR DELAYED DELIVERY SECURITIES (APPLICABLE TO ALL PORTFOLIOS)
All Portfolios may purchase securities on a when-issued or delayed delivery
basis if the Portfolio holds, and maintains until the settlement date in a
segregated account, liquid assets in an amount sufficient to meet the purchase
price, or if the Portfolio enters into offsetting contracts for the forward sale
of other securities it owns. Purchasing securities on a when-issued or delayed
delivery basis involves a risk of loss if the value of the security to be
purchased declines prior to the settlement date, which risk is in addition to
the risk of decline in value of the Portfolios' other assets. Although a
Portfolio would generally purchase securities on a when-issued basis or enter
into forward commitments with the intention of acquiring securities, the
Portfolio may
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dispose of a when-issued or delayed delivery security prior to settlement if the
Portfolio Manager deems it appropriate to do so. The Portfolio may realize
short-term profits or losses upon such sales.
FOREIGN SECURITIES (APPLICABLE TO ALL PORTFOLIOS EXCEPT THE STRATEGIC INCOME
PORTFOLIO MAY NOT INVEST IN EQUITY SECURITIES OF FOREIGN ISSUERS)
All Portfolios, except the Strategic Income Portfolio may invest in equity
securities of foreign issuers. All Portfolios may invest in American Depository
Receipts ("ADRs"). All Portfolios may also invest in foreign government
securities and foreign debt securities, including obligations of foreign
branches of commercial banks and foreign banks. See the "Banking Industry and
Savings Industry Obligations" discussion in this section.
Each Portfolio is subject to the following guidelines for diversification of
foreign security investments. If a Portfolio has less than 20% of its assets in
foreign issuers, then all of such investment may be in issuers domiciled or
primarily traded in one country. If a Portfolio has at least 20% but less than
40% of its assets in foreign issuers, then such investment must be allocated to
issuers domiciled or primarily traded in at least two different countries.
Similarly, if a Portfolio has at least 40% but less than 60% of its assets in
foreign issuers, such investment must be allocated in at least three different
countries. Foreign investments must be allocated to at least four different
countries if at least 60% of a Portfolios' assets is in foreign issuers, and to
at least five different countries if at least 80% is in foreign issuers.
A Portfolio may have no more than 20% of its net asset value invested in
securities of issuers domiciled or primarily traded in any one foreign country,
except that a Portfolio may have up to 35% of its net asset value invested in
securities of issuers domiciled or primarily traded in any one of the following
countries: Australia, Canada, France, Japan, The United Kingdom, or Germany.
Investments in foreign securities offer potential benefits not available solely
in securities of domestic issuers by offering the opportunity to invest in
foreign issuers that appear to offer growth potential, or in foreign countries
with economic policies or business cycles different from those of the United
States, or to reduce fluctuations in portfolio value by taking advantage of
foreign stock markets that may not move in a manner parallel to U.S. markets.
Investments in securities of foreign issuers involve certain risks not
ordinarily associated with investments in securities of domestic issuers. Such
risks include fluctuations in foreign exchange rates, future political and
economic developments, and the possible imposition of exchange controls or other
foreign governmental laws or restrictions. Since each of these Portfolios may
invest in securities denominated or quoted in currencies other than the U.S.
dollar, changes in foreign currency exchange rates will affect the value of
securities in the portfolio and the unrealized appreciation or depreciation of
investments so far as U.S. investors are concerned. In addition, with respect to
certain countries, there is the possibility of expropriation of assets,
confiscatory taxation, other foreign taxation, political or social instability,
or diplomatic developments that could adversely affect investments in those
countries.
There may be less publicly available information about a foreign company than
about a U.S. company, and foreign companies may not be subject to accounting,
auditing, and financial reporting standards and requirements comparable to or as
uniform as those of U.S. companies. Foreign securities markets, while growing in
volume, have, for the most part, substantially less volume than U.S. markets.
Securities of many foreign companies are less liquid and their prices more
volatile than securities of comparable U.S. companies. Transactional costs in
non-U.S. securities markets are generally higher than in U.S. securities
markets. There is generally less government supervision and regulation of
exchanges, brokers, and issuers than there is in the U.S. A Portfolio might have
greater difficulty taking appropriate legal action with respect to foreign
investments in non-U.S. courts than with respect to domestic issuers in U.S.
courts. In addition, transactions in foreign securities may involve greater time
from the trade date until settlement than domestic securities transactions and
involve the risk of possible losses through the holding of securities by
custodians and securities depositories in foreign countries.
Dividend and interest income from foreign securities may generally be subject to
withholding taxes by the country in which the issuer is located and may not be
recoverable by a Portfolio or its investors.
ADRs are certificates issued by a U.S. bank or trust company representing the
right to receive securities of a foreign issuer deposited in a foreign
subsidiary or branch or a correspondent of that bank. Generally, ADRs, in
registered form, are designed for use in U.S. securities markets and may offer
U.S. investors more liquidity than the underlying securities.
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Investment in emerging markets countries presents risks in a greater degree
than, and in addition to, those presented by investment in foreign issuers in
general. A number of emerging market countries restrict, to varying degrees,
foreign investment in securities. Repatriation of investment income, capital,
and proceeds of sales by foreign investors may require governmental registration
and/or approval in some emerging market countries. A number of the currencies of
developing countries have experienced significant declines against the U.S.
dollar in recent years, and devaluation may occur subsequent to investments in
those currencies by the Portfolio. Inflation and rapid fluctuations in inflation
rates have had and may continue to have negative effects on the economies and
securities markets of certain emerging market countries.
Many of the emerging securities markets are relatively small, have low trading
volumes, suffer periods of relative illiquidity, and are characterized by
significant price volatility. There is a risk in emerging market countries that
a future economic or political crisis could lead to price controls, forced
mergers of companies, expropriation or confiscatory taxation, seizure,
nationalization, foreign exchange controls (which may include suspension of the
ability to transfer currency from a given country) or creation of government
monopolies, any of which may have a detrimental effect on a Portfolio's
investment.
FOREIGN CURRENCY TRANSACTIONS (APPLICABLE TO ALL PORTFOLIOS)
The Portfolios may enter into forward currency contracts and enter into currency
exchange transactions on a spot (i.e. cash) basis. A forward currency contract
is an obligation to purchase or sell a currency against another currency at a
future date and price as agreed upon by the parties. A Portfolio may either
accept or make delivery of the currency at the maturity of the forward contract
or, prior to maturity, enter into a closing transaction involving the purchase
or sale of an offsetting contract. A Portfolio will engage in forward currency
transactions in anticipation of or to protect itself against fluctuations in
currency exchange rates.
A Portfolio may enter into forward foreign currency contracts in two
circumstances. First, when a Portfolio enters into a contract for the purchase
or sale of a security denominated in a foreign currency, the Portfolio may
desire to "lock in" the U.S. dollar price of the security. By entering into a
forward contract for a fixed amount of dollars for the purchase or sale of the
amount of foreign currency involved in the underlying transactions, the
Portfolio will be able to protect itself against a possible loss resulting from
an adverse change in the relationship between the U.S. dollar and such foreign
currency during the period between the date on which the security is purchased
or sold and the date on which payment is made or received.
Second, when the Portfolio Manager believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar, it may
enter into a forward contract for a fixed amount of dollars to sell the amount
of foreign currency approximating the value of some or all of the Portfolios
securities denominated in such foreign currency. The precise matching of the
forward contract amounts and the value of the securities involved will not
generally be possible since the future value of securities in foreign currencies
will change as a consequence of market movements in the value of these
securities between the date on which the forward contract is entered into and
the date it matures. The projection of short-term currency market movement is
extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain. None of the Portfolios will enter into such
forward contracts or maintain a net exposure to such contracts where the
consummation of the contracts would obligate the Portfolios to deliver an amount
of foreign currency in excess of the value of the Portfolios securities or other
assets denominated in that currency.
A Portfolio will place liquid assets into a segregated account of the Portfolio
in an amount equal to the value of the Portfolio's total assets committed to the
consummation of forward foreign currency exchange contracts. If the value of the
assets placed in the segregated account declines, additional cash or securities
will be placed in the account on a daily basis so that the value of the account
will equal the amount of the Portfolio's commitments with respect to such
contracts.
At the maturity of a forward contract, a Portfolio may either sell the portfolio
security and make delivery of the foreign currency, or it may retain the
security and terminate its contractual obligation to deliver the foreign
currency by purchasing an "offsetting" contract with the same currency trader
obligating it to purchase, on the same maturity date, the same amount of the
foreign currency.
It is impossible to forecast the market value of a particular portfolio security
at the expiration of the contract. Accordingly, if a decision is made to sell
the security and make delivery of the foreign currency, it may be necessary
17
<PAGE>
for the Portfolio to purchase additional foreign currency on the spot market
(and bear the expense of such purchase) if the market value of the security is
less than the amount of foreign currency that the Portfolio is obligated to
deliver.
If the Portfolio retains the portfolio security and engages in an offsetting
transaction, it will incur a gain or a loss (as described below) to the extent
that there has been movement in forward contract prices. Should forward prices
decline during the period between the Portfolios entering into a forward
contract for the sale of a foreign currency and the date it enters into an
offsetting contract for the purchase of the foreign currency, the Portfolio will
realize a gain to the extent that the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, the Portfolio will suffer a loss to the extent that the price
of the currency it has agreed to purchase exceeds the price of the currency it
has agreed to sell.
Forward contracts are not traded on regulated commodities exchanges. There can
be no assurance that a liquid market will exist when a Portfolio seeks to close
out a forward currency position, and in such an event, a Portfolio might not be
able to effect a closing purchase transaction at any particular time. In
addition, a Portfolio entering into a forward foreign currency contract incurs
the risk of default by the counter party to the transaction. The CFTC has
indicated that it may in the future assert jurisdiction over certain types of
forward contracts in foreign currencies and attempt to prohibit certain entities
from engaging in such foreign currency forward transactions.
Although the Portfolios value their assets daily in terms of U.S. dollars, they
do not intend physically to convert their holdings of foreign currencies into
U.S. dollars on a daily basis. They will do so from time to time, and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the difference (the "spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to a Portfolio at one rate, while offering a lesser rate of exchange should the
Portfolio desire to resell that currency to the dealer.
ILLIQUID SECURITIES (APPLICABLE TO ALL PORTFOLIOS)
A significant institutional trading market has developed in many unregistered
securities relying on Rule 144A, which permits resale among certain
institutional investors of certain unregistered securities. In determining
whether such securities should be considered liquid, the Portfolios will
consider the following factors, among others: (1) the frequency of the trades
and the quotes for the security; (2) the number of dealers willing to purchase
or sell the security and the number of potential purchasers; (3) dealer
undertakings to make a market in the security; and (4) the nature of the
security and the nature of the marketplace trades (for example, the time needed
to dispose of the security, the method of soliciting offers, and the mechanics
of the transfer).
WARRANTS (APPLICABLE TO ALL PORTFOLIOS)
Each Portfolio may invest up to 5% of its net assets in warrants (not including
those that have been acquired in units or attached to other securities),
measured at the time of acquisition. No Portfolio may acquire a warrant not
listed on the New York or American Stock Exchanges if, after the purchase, more
than 2% of the Portfolio's assets would be invested in such warrants.
The holder of a warrant has the right to purchase a given number of shares of a
particular issuer at a specified price until expiration of the warrant. Such
investments can provide a greater potential for profit or loss than an
equivalent investment in the underlying security. Prices of warrants do not
necessarily move in tandem with the prices of the underlying securities, and are
speculative investments. They pay no dividends and confer no rights other than a
purchase option. If a warrant is not exercised by the date of its expiration,
the Portfolio will lose its entire investment in such warrant.
OTHER INVESTMENT COMPANIES (APPLICABLE TO ALL PORTFOLIOS)
All Portfolios may invest in shares issued by other investment companies. A
Portfolio is limited in the degree to which it may invest in shares of another
investment company in that it may not, at the time of the purchase, (1) acquire
more than 3% of the outstanding voting shares of the investment company, (2)
invest more than 5% of the Portfolios' total assets in the investment company,
or (3) invest more than 10% of the Portfolios' total assets in all investment
company holdings. As a shareholder in any investment company, a Portfolio will
bear its ratable share of the investment company's expenses, including
management fees in the case of a management investment company.
18
<PAGE>
SHORT SALES (APPLICABLE TO ALL PORTFOLIOS)
A short sale is a transaction in which the Portfolio sells a security it does
not own (but has borrowed) in anticipation of a decline in the market price of
the security. A Portfolio may make short sales to offset a potential decline in
a long position or a group of long positions, or if the Portfolio Manager
believes that a decline in the price of a particular security or group of
securities is likely.
When a Portfolio makes a short sale, the proceeds it receives are retained by
the broker until the Portfolio replaces the borrowed security. In order to
deliver the security to the buyer, the Portfolio must arrange through a broker
to borrow the security and, in so doing, the Portfolio becomes obligated to
replace the security borrowed at its market price at the time of replacement,
whatever that price may be. The Portfolio may have to pay a premium to borrow
the security. The Portfolio must also pay any dividends or interest payable on
the security until the Portfolio replaces the security.
The Portfolios' obligation to replace the security borrowed in connection with
the short sale will be secured by collateral deposited with the broker,
consisting of cash or U.S. Government securities or other securities acceptable
to the broker. In addition, with respect to any short sale, other than short
sales against the box, as discussed below, the Portfolios will be required to
deposit collateral consisting of liquid assets in a segregated account in an
amount such that the value of the sum of both collateral deposits is at all
times equal to at least 100% of the current market value of the securities sold
short. The deposits do not necessarily limit the Portfolios' potential loss on a
short sale, which may exceed the entire amount of the collateral.
If the price of the security sold short increases between the time of the short
sale and the time the Portfolios replaces the borrowed security, the Portfolio
will incur a loss, and if the price declines during this period, the Portfolio
will realize a capital gain. Any realized gain will be decreased, and any
incurred loss increased, by the amount of transactional costs and any premium,
dividend, or interest which the Portfolios may have to pay in connection with
such short sale.
A Portfolio may make a short sale only if, at the time the short sale is made
and after giving effect thereto, the market value of all securities sold short
is 25% or less of the value of its net assets and the market value of securities
sold short which are not listed on a national securities exchange does not
exceed 10% of the Portfolio's net assets. In addition, a Portfolio will not make
short sales of the securities of any one issuer to the extent of more than 2% of
the Portfolio's net assets, nor will a Portfolio make short sales of more than
2% of the outstanding securities of one class of any issuer. The Portfolios are
not required to liquidate an existing short sale position solely because a
change in market values has caused one or more of these percentage limitations
to be exceeded.
SHORT SALES AGAINST THE BOX (APPLICABLE TO ALL PORTFOLIOS)
A short sale "against the box" is a short sale where, at the time of the short
sale, a Portfolio owns or has the immediate and unconditional right, at no added
cost, to obtain the identical security. The Portfolios would enter into such a
transaction to defer a gain or loss for Federal income tax purposes on the
security owned by the Portfolio or to receive a portion of the interest earned
by the executing broker from the proceeds of the sale. Short sales against the
box are not subject to the percentage limitations on short sales described
above.
INVESTMENT IN GOLD AND OTHER PRECIOUS METALS (APPLICABLE TO ALL PORTFOLIOS)
All Portfolios may invest up to 10% of its total assets, in gold bullion and
coins and other precious metals (silver or platinum) bullion and in futures
contracts with respect to such metals. Each Portfolio may also engage in gold
futures contracts. (See "Futures Contracts" for further explanation of this
investment technique.) The Portfolios will further restrict the level of their
metal investments if necessary in order to comply with applicable regulatory
requirements. In order to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), each
Portfolio intends to manage its metal investments and/or futures contracts on
metals so that less than 10% of its gross income for tax purposes during any
fiscal year (the current limit on so-called non-qualifying income) is derived
from these and other sources that produce such non-qualifying income.
Metals will not be purchased in any form that is not readily marketable, and
gold coins will be purchased for their intrinsic value only, I.E., coins will
not be purchased for their numismatic value. Any metals purchased by the
Portfolios will be delivered to and stored with a qualified custodian bank.
Metal investments do not generate interest or dividend income and will subject
the Portfolios to higher custody and transactional costs than are normally
associated with the ownership of securities or futures contracts on precious
metals.
19
<PAGE>
Metal investments are considered speculative and are affected by various
worldwide economic, financial, and political factors. Prices may fluctuate
sharply over short time periods due to changes in inflation expectations in
various countries, metal sales by central banks of governments or international
agencies, speculation, changes in industrial and commercial demand, and
governmental prohibitions or restriction on the private ownership of certain
precious metals or minerals. At the present time, there are four major producers
of gold bullion: the Republic of South Africa, the United States, Canada, and
Australia. Political and economic conditions in these countries will have a
direct effect on the mining and distribution of gold and, consequently, on its
price.
LEVERAGE (APPLICABLE TO ALL PORTFOLIOS)
Each Portfolio may leverage its investments by purchasing securities with
borrowed money. In leveraging its investments, each Portfolio may borrow up to
33-1/3% of the value of its total assets (minus liabilities other than the
borrowing). Leveraging by means of borrowing will exaggerate the effect of any
increase or decrease in the value of portfolio securities on a Portfolios' net
asset value; money borrowed will be subject to interest and other costs (which
may include commitment fees and/or the cost of maintaining minimum average
balances), which may or may not exceed the income received from the securities
purchased with borrowed funds. The use of borrowing tends to result in a faster
than average movement, up or down, in the net asset value of the Portfolio's
shares. A Portfolio also may be required to maintain minimum average balances in
connection with such borrowing or to pay a commitment or other fee to maintain a
line of credit; either of these requirements would increase the cost of
borrowing over the stated interest rate.
Reverse repurchase agreements, short sales of securities, and short sales of
securities against the box will be included as borrowing subject to the
borrowing limitations described above. Securities purchased on a when-issued or
delayed delivery basis will not be subject to the Portfolio's borrowing
limitations to the extent that a Portfolio establishes and maintains liquid
assets in a segregated account equal to the Portfolio's obligations under the
when-issued or delayed delivery arrangement.
A Portfolio may, in connection with permissible borrowings, transfer as
collateral securities it owns.
INDEXED SECURITIES (APPLICABLE TO ALL PORTFOLIOS)
Each Portfolio may invest up to 5% of its assets in indexed securities. Indexed
securities values are linked to currencies, interest rates, commodities,
indices, or other financial inb dicators. Most indexed securities are short to
intermediate term fixed-income securities whose values at maturity or interest
rates rise or fall according to the change in one or more specified underlying
instruments. Indexed securities may be positively or negatively indexed (I.E.,
their value may increase or decrease if the underlying instrument appreciates),
and may have return characteristics similar to direct investments in the
underlying instrument or to one or more options on the underlying instrument.
Indexed securities may be more volatile than the underlying instrument itself.
PORTFOLIO TURNOVER
PORTFOLIO 1999 1998
Global Interactive/Telecomm Portfolio 45% 65%
International Growth Portfolio 57% 60%
Growth Portfolio 351% 573%
Value Portfolio 15% 70%
Strategic Income Portfolio 136% 407%
The Portfolio turnover for the Growth Portfolio was higher in 1998 than in 1999
because of a change in portfolio managers.
The Portfolio turnover for the Strategic Income Portfolio was higher in 1998
than in 1999 because of a change in portfolio managers.
20
<PAGE>
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The Trust is managed by a Board of Trustees. The Trustees have overall
responsibility for implementation of the investment policies and operations of
the Portfolios of the Trust. The Board of Trustees of the Trust holds regular
quarterly meetings and at other times on an as needed basis. The affairs of the
Trust are conducted in accordance with the By-Laws adopted by the Trustees and
the applicable laws of the Commonwealth of Massachusetts, the state in which the
Trust is organized.
Set forth below is a list of the Trustees and Officers of the Trust, their
business addresses, and principal occupations during the past five years:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS DURING
NAME, ADDRESS AND AGE POSITION HELD WITH TRUST PAST FIVE YEARS
<S> <C> <C>
George J. Sullivan, Jr. (57) Chairman of the Board; President Chief Executive Officer, Newfound Consultants, Inc.
Newfound Consultants, Inc. (financial consulting), 1995-
313 Congress Street, 2nd Floor C3 present; Chief Operating Officer, Noble Partners,
Boston, MA 02210 L.P. (investment advisory services), 1991-1995.
Tom N. Dallape (32)
Trustee; Vice President Vice President, The Hoffman Company Vice President/Partner (Real Estate).
18881 Von Karman Avenue Suite 150
Gordon Holmes (62) Trustee Lecturer, Bentley College, 1998 - Present, Lecturer
Bentley College - Dept of Accountancy and Executive in Residence, Boston University, 1997
Waltham, MA 02452 - 1998; Certified Public Accountant and Partner
with Tofias, Fleishman, Shapiro and Co., P.C.,
prior to 1997.
Paul T. Kane (43) Assistant Vice President Assistant Vice President, First Allmerica
440 Lincoln Street Treasurer (Principal Financial Life Insurance Company, since
Worcester, MA 01653 Accounting Officer) June 1999; Vice President/Treasurer
of Tax and Financial Services, BISYS Fund
Services, 1997- 999; Director of
Shareholder Reporting, Fidelity
Investments, 1992-1997
Ann K. Tripp (41) Vice President Vice President of Allmerica Asset Management,
440 Lincoln Street Inc. since 1994; Deputy Manager at Brown
Worcester, MA 01653 Brothers Harriman, 1989-1994
George M. Boyd (55) Secretary Counsel, First Allmerica since
440 Lincoln Street January 1997; Director, Mutual Fund
Worcester, MA 10653 Administration - Legal and Regulatory,
Investors Bank and Trust Company 1995-1996; Vice
President and Counsel, 440 Financial Group and First
Data Investor Services Group 1992-1995
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS DURING
NAME, ADDRESS AND AGE POSITION HELD WITH TRUST PAST FIVE YEARS
<S> <C> <C>
Joseph W. MacDougall, Jr. (56) Assistant Secretary Vice President and Associate General Counsel,
440 Lincoln Street First Allmerica , 1986 - present
Worcester, MA 01653
</TABLE>
Listed below is the compensation paid to each Trustee by the Trust for the year
ended December 31, 1999. The Trust currently does not provide any pension or
retirement benefits for its Trustees or officers. Gordon Holmes also serves as a
trustee of the Allmerica Investment Trust, a mutual fund advised by Allmerica
Financial Investment Management Services, Inc.
<TABLE>
<CAPTION>
NAME OF PERSON AND AGGREGATE COMPENSATION TOTAL COMPENSATION FROM TRUST
POSITION FROM TRUST COMPLEX PAID TO TRUSTEES*
-------- ---------- -------------------------
<S> <C> <C>
George J. Sullivan, Jr. $7,500
Chairman of the Board; President ($1,500 for each Board Meeting) --
-------------------------------- ------------------------------- --
Tom N. Dallape $7,500
Trustee; Vice President --
----------------------- --
Gordon Holmes, Trustee $7,500 $29,500
---------------------- ------ -------
</TABLE>
* Includes two additional investment companies, Allmerica Investment Trust
and Allmerica Securities Trust
As of December 31, 1999, none of the trustees or officers directly owns shares
of the Portfolios. In addition, as of the date of this Statement of Additional
Information, the Trustees and Officers in the aggregate owned variable contracts
that entitled them to give voting instructions with respect to less than one
percent of the outstanding shares of the Portfolios.
Codes of Ethics
The Trust, Analytic Investors, Inc., Bee & Associates, Incorporated, and Gabelli
Asset Management, Inc. have each adopted codes of ethics, as required by Rule
17-1 under the Investment Company Act of 1940. These codes of ethics do not
prohibit personnel subject to the codes from trading for their personal
accounts, but do impose certain restrictions on such trading.
PRINCIPAL SHAREHOLDERS
Shares of the Portfolios may be sold only to: (1) life insurance company
separate accounts to serve as the underlying investment medium for variable
annuity and variable life insurance contracts; (2) qualified retirement plans,
as permitted by Treasury regulations; and (3) life insurance companies and
advisers to the portfolios and their affiliates. Listed below are the
approximate percentage ownerships as of February 1, 2000 for those shareholders
of record or those known by the Portfolio to own 5% or more of the outstanding
shares of a Portfolio.
Fulcrum Separate Account
of Allmerica Financial Life Insurance and Annuity Company (a Delaware
insurance company), 440 Lincoln Street, Worcester, MA 01653
Global Interactive/Telecomm Portfolio 75.59%
International Growth Portfolio 87.93%
Growth Portfolio 82.72%
Value Portfolio 78.90%
Strategic Income Portfolio 71.45%
Fulcrum Separate Account
of First Allmerica Financial Life Insurance Company (a New York insurance
company), 440 Lincoln Street, Worcester, MA 01653
22
<PAGE>
Global Interactive/Telecomm Portfolio 20.39%
International Growth Portfolio 11.65%
Growth Portfolio 16.97%
Value Portfolio 18.98%
Strategic Income Portfolio 28.55%
GAMCO Investors, Inc. (a New York Corporation), One Corporate Center, Rye, NY
10580
Global Interactive/Telecomm Portfolio 3.69%
Value Portfolio 1.90%
Allmerica Financial Life Insurance and Annuity Company and First Allmerica
Financial Life Insurance Company are both wholly owned subsidiaries of Allmerica
Financial Corporation. GAMCO Investors, Inc. is a wholly owned subsidiary of
Gabelli Funds, Inc.
The officers and directors of the Trust as a group owned less than 1% of the
outstanding shares of each Portfolio as of February 1, 2000.
INVESTMENT MANAGEMENT AND OTHER SERVICES
The Trust is responsible for the payment of certain fees and expenses including,
among others, the following: (1) fees of the Manager and the Portfolio Managers;
(2) custodial, accounting, auditing, legal and transfer agency fees; (3) fees of
independent trustees; (4) brokerage fees and commissions in connection with the
purchase and sale of Portfolio securities; (5) taxes; (6) the reimbursement of
organizational expenses; and (7) expenses of printing and mailing prospectuses,
proxy statements and shareholder communications.
Allmerica Financial Investment Management Services, Inc. ("AFIMS" or the
"Manager") serves as overall Manager of the Trust. As Manager, AFIMS is
responsible for general administration of the Trust as well as monitoring and
evaluating the performance of the Portfolio Managers. AFIMS, a Massachusetts
corporation, is registered with the Securities and Exchange Commission as an
investment adviser. AFIMS is located at 440 Lincoln Street, Worcester,
Massachusetts 01653. AFIMS is an indirect, wholly-owned subsidiary of Allmerica
Financial Corporation ("AFC"). AFC is the parent company of the two life
insurance companies currently utilizing the Trust as an underlying fund for
their variable contracts, Allmerica Financial Life Insurance and Annuity Company
("Allmerica Financial") and First Allmerica Financial Life Insurance Company.
Prior to February 12, 1998, Palladian Advisors, Inc. ("PAI") served as Manager
of the Trust, and Tremont Partners, Inc. ("Tremont") served as Portfolio Advisor
to the Trust. AFIMS now serves as Manager of the Trust, and there is no
Portfolio Advisor. Tremont was previously paid by PAI (not the Trust). Thus,
overall advisory fees were not changed as a result of the switch from PAI and
Tremont to AFIMS.
The Portfolio Managers have been selected by the Manager and Trustees. The
following is information relating to control and affiliations of the Manager and
Portfolio Managers of the Trust.
AFIMS, First Allmerica and Allmerica Financial Life are direct or indirect
wholly-owned subsidiaries of Allmerica Financial Corporation ("AFC"), a
publicly-traded Delaware holding company for a group of affiliated companies,
the largest of which is First Allmerica. First Allmerica and Allmerica Financial
Life have established Separate Accounts for the purpose of funding variable
annuity contracts and variable life insurance policies. The shares of each of
the Funds of the Trust may be purchased only through these Separate Accounts.
GAMCO Investors, Inc. ("GAMCO"), Portfolio Manager to both the Global
Interactive/Telecomm Portfolio and the Value Portfolio. GAMCO is a wholly-owned
subsidiary of Gabelli Asset Management Inc. GAMCO provides investment advice to
individuals, investment companies, pension, and profit sharing plans and trust,
estates or charitable organizations. Gabelli Asset Management Inc. is a New York
23
<PAGE>
Stock Exchange listed company which, through its affiliates, provides investment
management and brokerage services to mutual funds, institutional and high net
worth investors, primarily in the United States.
Bee & Associates Incorporated ("Bee") serves as Portfolio Manager of the
International Growth Portfolio. It was formed in 1989 to provide global equity
management expertise to individuals, retirement plan sponsors, foundations,
endowments and other entities. The firm's company ownership has been held by the
managing principals. Bee is expected to be acquired by Denver Investment
Advisors LLC on or about April 30, 2000. Bee will operate as Bee & Associates, a
division of Denver Investment Advisors. Since 1958, Denver Investment Advisors
has provided investment management services to institutional and private
investors worldwide. Assets under management at Denver Investment Advisors were
approximately $9 billion, as of the date of this SAI.
Analytic Investors, Inc. ("Analytic Investors") Portfolio Manager of the Growth
Portfolio is a wholly-owned subsidiary of United Asset Management Corporation, a
publicly traded company. It was formed in 1970 to provide management of
investment advisory accounts to individuals, banks/thrift institutions,
investment companies, pension and profit sharing plans, trusts, estates or
charitable organizations and other corporations. One of the largest independent
investment management organizations in the world, United Asset Management
Corporation provides a broad range of institutional quality investment
management services to institutions and high-net-worth and retail investors.
These services are offered through a diverse group of operating firms that
managed over $201 billion on December 31, 1999 for clients located throughout
the United States, Canada and abroad.
Allmerica Asset Management, Inc. ("AAM") serves as the Portfolio Manager of the
Strategic Income Portfolio. AAM is a direct, wholly-owned subsidiary of
Allmerica Financial Corporation ("AFC"). AAM serves as an investment adviser to
First Allmerica's General Account and to a number of affiliated insurance
companies and other affiliated accounts. AFC is a publicly-traded Delaware
holding company for a group of affiliated companies.
The following is a list of persons who are affiliated persons of the Manager
and/or any Portfolio Manager and the capacities in which the person is
affiliated:
<TABLE>
<CAPTION>
POSITION(S) HELD WITH POSITION(S) HELD WITH THE MANAGER OR
NAME THE TRUST PORTFOLIO MANAGER OF THE TRUST
---- --------- ------------------------------
<S> <C> <C>
George M. Boyd Secretary Counsel, AFIMS
- -------------- --------- --------------
Ann K. Tripp Vice President Vice President, AAM
- ------------ -------------- -------------------
Joseph W. MacDougall, Jr. Assistant Secretary Assistant Secretary, AFIMS;
Assistant Secretary and Counsel, AAM
Paul T. Kane Vice President Vice President, AFIMS
- ------------ -------------- ---------------------
</TABLE>
ADVISORY FEES
For 1997, the Global Interactive/Telecomm Portfolio accrued fees to Palladian
Advisors, Inc. ("PAI") of $810, of which the Portfolio paid PAI $24. PAI paid
Tremont Partners, Inc. ("Tremont") $24.
For 1997, the International Growth Portfolio accrued fees to PAI of
$1,848, of which the Portfolio paid PAI $524. PAI paid Tremont $524.
For 1997, the Growth Portfolio accrued fees to PAI of $838, of which the
Portfolio paid PAI $271. PAI paid Tremont $271.
24
<PAGE>
For 1997, the Value Portfolio accrued fees to PAI of $947, of which the
Portfolio paid PAI $53. PAI paid Tremont $53.
For 1997, the Strategic Income Portfolio accrued fees to PAI of $1,508, of which
the Portfolio paid PAI $432. PAI paid Tremont $432.
For 1997 the Portfolios paid the following fees to the Portfolio Managers: Value
($3,787); Growth ($3,354); International Growth ($7,394); Strategic Income
($6,030); Global Interactive/Telecomm ($3,240).
The Portfolio Managers of the Trust earned the following fees:
Portfolio Manager Fees Earned in 1998
- ---------------- -------------------
GAMCO Investors, Inc. $80,210.56
Bee & Associates Incorporated $ 1,164.37
Allmerica Asset Management $ 3,604.37
Fischer Francis Trees & Watts $ 2,177.61
For 1999, the Portfolio Managers of the Trust earned the following fees:
Portfolio Manager Fees Earned in 1999
- ---------------- -------------------
GAMCO Investors, Inc. $ 140,989
Bee & Associates Incorporated $ 28,046
Allmerica Asset Management, Inc. (net of waiver of $2,788) $ 3,998
Analytic Investors, Inc. $ 14,130
Set forth below is a chart with advisory fee information for PAI and AFIMS.
Excluding Global Interactive/Telecomm Portfolio, no fees were paid to PAI or
AFIMS because of expense limitation arrangements.
<TABLE>
<CAPTION>
1998 1998 1998
PAI AFIMS Total
Expense Expense Expense 1998 Paid
------- ------- ---------
<S> <C> <C> <C> <C>
Global Interactive/Telecomm Portfolio $1,139.31 $13,973.35 $15,112.66 $0.00
International Growth Portfolio 0.00 291.09 291.09 0.00
Growth Portfolio 0.00 0.00 0.00 0.00
Value Portfolio 940.72 3,820.37 4,761.09 0.00
Strategic Income Portfolio 100.22 1,314.83 1,415.05 0.00
------ -------- -------- ----
$2,180.25 $19,399.64 $21,579.89 $0.00
</TABLE>
1999
AFIMS
Expense 1999 Paid
------- ---------
Global Interactive/Telecomm Portfolio $35,247 $13,894
International Growth Portfolio 7,011 0.00
Growth Portfolio 3,533 0.00
Value Portfolio 0 0.00
Strategic Income Portfolio 999 0.00
------- ----
$46,790 $13,894
* Payment to AFIMS reduced because of expense limitation arrangement.
<PAGE>
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers, LLP, 160 Federal Street, Boston, Massachusetts 02110,
serves as independent accountants for the Trust and provides audit and
accounting services including (i) examination of the annual financial
statements, (ii) assistance and consultation with respect to the preparation of
filings with the Securities and Exchange Commission, and (iii) review of annual
income tax returns.
CUSTODIAN
Investors Bank & Trust Company ("IBT"), 200 Clarendon Street, Boston,
Massachusetts 02116 serves as the Trust's custodian. As such, it is responsible
for holding the Trust's assets.
IBT also provides fund accounting, administrative and transfer agency services.
The fee for each Portfolio is based on an annual rate of 0.05% of net assets for
the first $600 million in net assets and an annual rate of 0.03% of net assets
for net assets in excess of $600 million. In addition, each Portfolio will
reimburse IBT for out-of-pocket expenses such as pricing services. There is
currently a minimum annual fee of $48,500 per Portfolio. For custodian, fund
accounting and transfer agency services during 1997, each Portfolio paid $49,459
to IBT. For custodian, fund accounting and transfer agency services during 1998,
each Portfolio paid $48,500 to IBT. For custodian, fund accounting and transfer
agency services during 1999, the Portfolios paid the following:
Portfolio Paid to
--------- IBT
---
Global Interactive/Telecomm Portfolio $ 49,732
International Growth Portfolio 54,977
Growth Portfolio 63,762
Value Portfolio 53,559
Strategic Income Portfolio 49,531
--------
Total $271,561
IBT also assists the manager by providing certain administrative services, such
as compliance reviews. IBT serves in this role pursuant to an agreement with the
Manager, not the Trust. The Manager paid IBT $275,000 in 1997, $195,555 in 1998
and $196,250 in 1999 for these services.
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BROKERAGE ALLOCATION AND OTHER PRACTICES
BROKERAGE SELECTION
Each Portfolio Manager is responsible for the selection of brokers and dealers
to effect that Portfolio's transactions and the negotiation of brokerage
commissions, if any. Transactions on a stock exchange in equity securities will
be executed primarily through brokers who will receive a commission paid by the
Portfolio. In the United States, commissions are usually negotiated; in other
countries, the commissions are usually fixed. Equity securities traded in the
over-the-counter ("OTC") markets are generally traded on a "net" basis with a
dealer acting as principal for its own account without a stated commission,
although the price of the security usually includes a profit to the dealer in
the form of the spread between the bid and asked prices. In some instances, the
Portfolio Managers may execute OTC transactions on an agency basis through a
broker who is not a market marker in the particular security, and in those
transactions the Portfolio will also pay a brokerage commission. Fixed income
securities are generally traded on a "net" basis. In underwritten offerings,
securities are purchased at a fixed price that includes an amount of
compensation to the underwriter, generally referred to as the underwriter's
concession or discount. On occasion, certain of these securities may be
purchased directly from an issuer, in which case neither commissions nor
discounts are paid.
In purchasing and selling securities, it is the policy of each Portfolio Manager
to seek the best execution for the Portfolio taking into account such factors as
price (including the applicable brokerage commission or dollar spread), size of
order, the nature of the market for the security, the timing of the transaction,
the reputation, experience and financial stability of the broker-dealer
involved, the quality of the service, the difficulty of the execution, the
operational facilities of the firms involved, and the firm's risk in positioning
a block of securities.
Notwithstanding the above, under certain conditions, the Portfolios are
authorized to pay higher brokerage commissions in return for brokerage and
research services. A Portfolio Manager may cause a Portfolio to pay a
broker-dealer who furnishes brokerage and/or research services a commission or
price for executing a transaction that is in excess of the commission or price
another broker would have received for executing the transaction if it is
determined that such commission or price is reasonable in relation to the value
of the brokerage and/or research services which have been provided. In some
cases, research services are generated by third parties, but are provided to the
Portfolio Manager or through broker-dealers.
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The Portfolio Managers may receive a wide range of research services from
broker-dealers, including information on securities markets, the economy,
individual companies, statistical information, accounting and tax law
interpretations, technical market action, pricing and appraisal services, and
credit analyses. Research services may be in the form of written reports,
telephone contacts, personal meetings with security analysts, corporate and
industry spokespersons, economists, academicians, and government
representatives, and access to various computer-generated data. Research
services received from broker-dealers are supplemental to each Portfolio
Manager's own research efforts and, when utilized, are subject to internal
analysis before being incorporated into the investment process.
In allocating brokerage, a Portfolio Manager may periodically assess the
contribution of the brokerage and research services provided by broker-dealers,
and allocate a portion of the brokerage business of its clients on the basis of
these assessments. In addition, broker-dealers sometimes suggest a level of
business they would like to receive in return for the various brokerage and
research services they provide. Actual brokerage received by any firm may be
less than the suggested allocations, but can (and often does) exceed the
suggestions because total brokerage is allocated on the basis of all the
considerations described above. Net prices and commissions are periodically
reviewed to determine whether they are reasonable in relation to the services
provided. In some instances, the Portfolio Managers receive research services
they might otherwise have had to perform for themselves. The research services
provided by broker-dealers can be useful to the Portfolio Managers in serving
other clients, as well as the Portfolios.
Paying commission amounts greater than otherwise available to obtain research
services poses potential conflicts of interest for the Portfolio Manager. The
Portfolio Manager may have an incentive to pay increased commissions to obtain
research services instead of paying for those services from its own operating
revenues. In addition, the Portfolio Manager may have an incentive to select a
broker-dealer based on the research services it provides rather than the quality
of trade execution. The Manager and the Trust Board will monitor the Portfolio
Managers' use of soft dollar arrangements.
Investment decisions for each Portfolio are made by the Portfolio Manager of
each Portfolio. Each Portfolio Manager has investment advisory clients other
than the Portfolio. A particular security may be bought or sold by a Portfolio
Manager for certain clients even though it could have been bought or sold for
other clients at the same time. It also sometimes happens that two or more
clients simultaneously purchase or sell the same security, in which event each
day's transactions in such security are, insofar as possible, allocated between
such clients in a manner deemed fair and reasonable by the Portfolio Manager.
Although there is no specified formula for allocating such transactions, the
various allocation methods used by the Portfolio Manager, and the results of
such allocations, are subject to periodic review by the Trust's Manager and
Board of Trustees. There may be circumstances when purchases or sales of
portfolio securities for one or more clients will have an adverse effect on
other clients.
COMMISSIONS
A Portfolio Manager may employ an affiliated broker to execute brokerage
transactions on behalf of the Portfolio as long as the commissions are
reasonable and fair compared to the commissions received by other brokers in
connection with comparable transactions involving similar securities being
purchased or sold on a securities exchange during a comparable period of time.
GAMCO, the Portfolio Manager for the Value and Global Interactive Telecomm
Portfolios, uses an affiliated broker, Gabelli & Company, Inc. ("Gabelli"), to
execute most brokerage transactions on behalf of those two Portfolios. The
Portfolios may not engage in any transactions in which a Portfolio Manager or
its affiliates acts as principal, including over-the-counter purchases and
negotiated trades in which such party acts as a principal. GAMCO is not
authorized to pay higher brokerage commissions to Gabelli in return for research
services.
During 1997, the Global Interactive/Telecomm Portfolio paid total commissions of
$5,693. During 1998, the Global Interactive/Telecomm Portfolio paid total
commissions of $8,762. All 1996 and 1997 commissions were paid to Gabelli. In
1999, Global Interactive/Telecomm Portfolio paid total commissions of $12,696,
$8,368 of which was paid to Gabelli. The percentage of the Portfolio's aggregate
brokerage commissions paid to Gabelli during 1998 was 65.91%. The percentage of
the Portfolio's aggregate dollar amount of transactions involving the payment of
commissions effected through Gabelli during 1999 was 66.99%.
During 1997, the International Growth Portfolio paid total commissions of
$10,780. During 1998, the International Growth Portfolio paid total commissions
of $5,984.79. In 1999, the International Growth Portfolio paid total commissions
of $8,822. No commissions were paid to brokers affiliated with the Trust or the
Portfolio Manager.
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During 1997, the Growth Portfolio paid total commissions of $36,181. During
1998, the Growth Portfolio paid total commissions of $18,322. In 1999, the
Growth Portfolio paid total commissions of $18,322. No commissions were paid to
brokers affiliated with the Trust or the Portfolio Manager. The total
commissions paid between 1996 and 1997 and 1998 differed due to several factors,
including growth in Portfolio assets, a change in the Portfolio Manager in 1998
and a strategy pursued by the new Portfolio Management that involved a high
portfolio turnover rate.
During 1997, the Value Portfolio paid total commissions of $19,112. $17,367 of
1997 commissions were paid to Gabelli. In 1998, the Value Portfolio paid total
commissions of $21,387, $19,006 of which was paid to Gabelli. In 1999, the Value
Portfolio paid total commissions of $15,630, $14,136 of 1999 commissions were
paid to Gabelli. The percentage of the Portfolio's aggregate brokerage
commissions paid to Gabelli during 1999 was 90.44%. The percentage of the
Portfolio's aggregate dollar amount of transactions involving the payment of
commissions effected through the broker during 1999 was 91.35%.
The Strategic Income Portfolio did not pay any commissions in 1997, 1998 and
1999.
CAPITAL STOCK AND OTHER SECURITIES
CAPITAL STOCK
The Trust is a Massachusetts business trust established under an Agreement and
Declaration of Trust dated September 8, 1993. Effective September 1, 1998, the
Trust changed its name to The Fulcrum Trust. The Trust is currently offering to
Separate Accounts shares of five different "series" or Portfolios. Each
Portfolio is, for investment purposes, a separate investment fund, and each
issues a separate class of capital stock with a par value of $0.001 per share.
One series, the Strategic Income Portfolio is expected to be dissolved on or
about July 1, 2000. Each share of stock issued with respect to a Portfolio has a
pro-rata interest in the assets of that Portfolio and has no interest in the
assets of any other Portfolio. Each Portfolio bears its own liabilities and also
its proportionate share of the general liabilities of the Trust. This SAI
discusses the initial five Portfolios, which issue the following five shares:
Value Portfolio shares, Growth Portfolio shares, International Growth Portfolio
shares, Strategic Income Portfolio shares, and Global Interactive/Telecomm
Portfolio shares.
The Agreement and Declaration of Trust established three other Portfolios, and
the Board of Trustees may establish additional Portfolios (with different
investment objectives and policies) at any time in the future. The Trust has
sold 1,000 shares of one of those Portfolios (the Balanced Opportunity
Portfolio) to provide part of the Trust's initial capitalization, but the Trust
is not now offering shares of that Portfolio to Separate Accounts or qualified
plans. Establishment and offering of additional Portfolios will not alter the
rights of the Trust's shareholders. When issued in accordance with the terms of
the Agreement and Declaration of Trust, shares are fully paid, redeemable,
freely transferable, and non-assessable by the Trust. Shares do not have
preemptive rights or subscription rights. In liquidation of a Portfolio of the
Trust, each shareholder is entitled to receive his or her pro rata share of the
net assets of that Portfolio.
Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the Trust. However, the
Declaration of Trust disclaims liability of the shareholders, Trustees or
officers of the Trust for acts or obligations of the Trust, which are binding
only on the assets and property of the Trust, and requires that notice of the
disclaimer be given in each contract or obligation entered into or executed by
the Trust or the Trustees. The Declaration of Trust provides for indemnification
out of Trust property for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust. The risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Trust itself would be unable to meet its obligations,
and should be considered remote.
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VOTING RIGHTS
Shareholders of the Trust are given certain voting rights. Each share of the
Portfolios will be given one vote, unless otherwise required by law.
Massachusetts business trust law does not require the Trust to hold annual
shareholder meetings, although special meetings may be called for the Portfolio,
or for the Trust as a whole, for purposes such as electing or removing Trustees,
changing fundamental policies, or approving a contract for investment advisory
services. In accordance with current laws, it is anticipated that an insurance
company issuing a Variable Contract that participates in the Trust will request
voting instructions from Variable Contract owners and will vote shares or other
voting interests in the Separate Account in proportion to the voting
instructions received.
Some Portfolio Managers invested or agreed to invest in the Portfolios they
manage. Each of those Portfolio Managers has agreed to vote its shares in the
same proportion as all contract owners having voting rights with respect to the
Portfolio or in such other manner as may be required by the SEC or its staff.
PURCHASE, REDEMPTION AND PRICING OF SHARES
The prospectus provides information about the purchase, redemption and pricing
of Trust shares.
TAXATION OF THE PORTFOLIOS
The Trust intends to qualify under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"). In any year in which the Portfolios qualify as
regulated investment companies and distribute substantially all of their net
investment income and their net capital gains, the Portfolios generally will not
be subject to federal income tax to the extent they distribute to shareholders
such income and capital gains in the manner required under the Code. If the
Trust does not qualify under Subchapter M of the Code, the Portfolios will be
subject to Federal income tax.
The requirements applicable to a Portfolio's qualification as a regulated
investment company may limit the extent to which a Portfolio will be able to
engage in transactions in options, futures contracts or forward contracts.
Income received by a Portfolio from sources within a foreign country may be
subject to withholding and other taxes imposed by that country. Tax conventions
between certain countries and the U.S. may reduce or eliminate such taxes.
To comply with regulations under Section 817(h) of the Code which contains
certain diversification requirements, each Portfolio of the Trust will be
required to diversify its investments so that on the last day of each quarter of
a calendar year, no more than 55% of the value of its assets is represented by
any one investment, no more than 70% is represented by any two investments, no
more than 80% is represented by any three investments, and no more than 90% is
represented by any four investments. Generally, securities of a single issuer
are treated as one investment and obligations of each U.S. Government agency and
instrumentality (such as the Government National Mortgage Association) are
treated for purposes of Section 817(h) as issued by separate issuers. In
addition, any security issued, guaranteed or insured (to the extent so
guaranteed or insured) by the United States or an instrumentality of the U.S.
will be treated as a security issued by the U.S. Government or its
instrumentality, whichever is applicable.
In connection with the issuance of the diversification regulations, the Treasury
Department announced that it would issue future regulations or rulings
addressing the circumstances in which a variable contract owner's control of the
investments of a separate account may cause the contract owner, rather than the
insurance company, to be treated as the owner of the assets held by the separate
account. If the variable contract owner is considered the owner of the
securities underlying the separate account, income and gains produced by those
securities would be included currently in the contract owner's gross income.
Among the areas in which Treasury has indicated informally that it is concerned
that there may be too much contract owner control is where a mutual fund (or
Portfolio) underlying a separate account invests solely in securities issued by
companies in a specific industry.
These future rules and regulations proscribing investment control may adversely
affect the ability of certain Portfolios of the Trust to operate as described in
this Prospectus. There is, however, no certainty as to what standards,
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if any, Treasury will ultimately adopt. In the event that unfavorable rules or
regulations are adopted, there can be no assurance that the Portfolios will be
able to operate as currently described in the Prospectus, or that a Portfolio
will not have to change its investment objective or objectives, investment
policies, or investment restrictions. While a Portfolio's investment objective
is fundamental and may be changed only by a vote of a majority of its
outstanding shares, the Trustees have reserved the right to modify the
investment policies of a Portfolio as necessary to prevent any such prospective
rules and regulations from causing the Variable Contract Owners to be considered
the owners of the assets underlying the Variable Accounts.
UNDERWRITER
The Trust does not presently utilize an underwriter.
CALCULATION OF PERFORMANCE DATA
The Trust may, from time to time, include quotations of each Portfolio's total
return in advertisements or reports to shareholders or prospective investors.
Performance information for the Portfolios will not be advertised or included in
sales literature for Variable Contracts unless accompanied by comparable
performance information for a separate account to which the Portfolios offer
their shares. Quotations of total return will be expressed in terms of the
average annual compounded rate of return of a hypothetical investment in the
Portfolios over periods of 1, 5 and 10 years (up to the life of the Portfolios)
calculated pursuant to the following formula:
(n) P(1+T) = ERV (where P = a hypothetical initial payment of $1,000, T = the
average annual total return, n = the number of years, and ERV = the ending
redeemable value of a hypothetical $1,000 payment made at the beginning of the
period). Quotations of total return may also be shown for other periods. All
total return figures reflect the deduction of a proportional share of Portfolio
expenses on an annual basis, and assume that all dividends and distributions are
reinvested when paid. AVERAGE ANNUAL RETURNS are calculated by determining the
change in value of a hypothetical investment in the Portfolio over a stated
period, and calculating the annually compounded percentage rate that would have
produced the same result if the rate of growth or decline in value has been
constant over the period. Average annual returns covering periods of less than
one year are calculated by determining the Portfolio's total return for the
period, extrapolating that return for a full year, and stating the result as an
annual return. Because this method assumes that performance will remain constant
for the entire year when in fact it is unlikely that performance will remain
constant, average annual returns for a partial year must be viewed as strictly
theoretical information.
INVESTORS ALSO SHOULD BE AWARE THAT A PORTFOLIO'S PERFORMANCE IS NOT CONSTANT
OVER TIME, BUT VARIES FROM YEAR TO YEAR. AVERAGE ANNUAL RETURN REPRESENTS
AVERAGED FIGURES AS OPPOSED TO THE ACTUAL PERFORMANCE OF THE PORTFOLIO.
A Portfolio also may quote cumulative total returns which reflect the simple
change in value of an investment over a stated period. Average annual total
returns and cumulative total returns may be quoted as a percentage or as a
dollar amount. They may be calculated for a single investment, for a series of
investments or for a series of redemptions over any time period. Total returns
may be broken down into their components of income and capital in order to show
their respective contributions to total return. Performance information may be
quoted numerically or in a table, graph or similar illustration.
All total return figures will reflect the deduction of a proportional share of
each Portfolio's expenses on an annual basis, and will assume that all dividends
and distributions are reinvested when paid. Quotations of total return reflect
only the performance of a hypothetical investment in the Portfolios during the
particular time period on which the calculations are based. Total return for the
Portfolios will vary based on changes in market conditions and the level of each
Portfolio's expenses, and no reported performance figure should be considered an
indication of performance which may be expected in the future.
Quotations of total return for the Portfolios will not take into account charges
or deductions against any Separate Account to which the Portfolio shares are
sold or charges and deductions against the pertinent Variable Contract, although
comparable performance information for the Separate Account will take such
charges into account. A person considering the purchase of a Variable Contract
should not compare a Portfolio's total return with the total returns of mutual
funds that
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sell their shares directly to the public since the Portfolio's figures do not
reflect charges against the separate accounts or the Variable Contracts.
Reports and promotional literature may also contain other information, including
the effect of tax deferred compounding on each Portfolio's investment returns,
or returns in general, which may be illustrated by graphs, charts, or otherwise,
and which may include a comparison, at various points in time, of the return
from an investment in the Portfolio (or returns in general) on a tax-deferred
basis (assuming one or more tax rates) with the return on a taxable basis.
YIELD QUOTATION
The 30-day (or one month) standard yields of the Portfolios are calculated as
follows:
(6)
YIELD = 2[(a - b + 1) - 1)]
------------- -----
cd
Where: a = dividends and interest earned by a Portfolio during the
period; b = expenses accrued for the period (not of
reimbursements); c = average daily number of shares outstanding
during the period entitled to receive dividends; and d = maximum
offering price per share on the last day of the period.
For the purpose of determining net investment income earned during
the period (variable "a" in the formula), dividend income on equity
securities held by a Portfolio is recognized by accruing 1/360 of
the stated dividend rate of the security each day that the security
is in the Portfolio. Except as noted below, interest earned on debt
obligations held by a Portfolio is calculated by computing the
yield to maturity of each obligation based on the market value of
the obligation (including actual accrued interest) at the close of
business on the last business day of each month, or, with respect
to obligations purchased during the month, the purchase price (plus
actual accrued interest) and dividing the result by 360 and
multiplying the quotient by the market value of the obligation
(including actual accrued interest) in order to determine the
interest income on the obligation for each day of the subsequent
month that the obligation is held by the Portfolio. For purposes of
this calculation, it is assumed that each month contains 30 days.
The maturity of an obligation with a call provision is the next
call date on which the obligation reasonably may be expected to be
called or, if none, the maturity date. With respect to debt
obligations purchased at a discount or premium, the formula
generally calls for amortization of the discount or premium. The
amortization schedule will be adjusted monthly to reflect changes
in the market value of such debt obligations. Expenses accrued for
the period (variable "b" in the formula) include all recurring fees
charged by a Portfolio to all shareholder accounts in proportion to
the length of the base period and the Portfolio's mean (or median)
account size. Undeclared earned income will be subtracted from the
offering price per share (variable "d" in the formula).
Performance information for a Portfolio may be compared, in
advertisements, sales literature, and reports to shareholders to:
(i) the Standard & Poor's 500 Stock Index ("S & P 500"), the Dow
Jones Industrial Average ("DJIA"), the Lehman Brothers Government
Bond Index, the Donoghue Money Market Institutional Averages, the
Lehman Brothers Government Corporate Index, the Salomon High Yield
Index, or other indices that measure performance of a pertinent
group of securities, (ii) other groups of mutual funds tracked by
Lipper Analytical Services, a widely used independent research firm
which ranks mutual funds by overall performance, investment
objectives, and assets, or tracked by other services, companies,
publications, or persons who rank mutual funds on overall
performance or other criteria; and (iii) the Consumer Price Index
(measure for inflation) to assess the real rate of return from an
investment in the Portfolio. Unmanaged indices may assume the
reinvestment of dividends but generally do not reflect deductions
for administrative and management costs and expenses.
Performance information for any Portfolio reflects only the
performance of a hypothetical investment in the Portfolio during
the particular time period on which the calculations are based.
Performance information should be considered in light of the
Portfolio's investment objective or objectives and investment
policies and the market conditions during the given time period.
Performance information should not be considered as a
representation of what may be achieved in the future.
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PERFORMANCE INFORMATION FOR PERIOD ENDED DECEMBER 31, 1999
Set forth below are average annual total return information for the Global
Interactive/Telecomm Portfolio, International Growth Portfolio, Growth
Portfolio, Value Portfolio, and Strategic Income Portfolio and for the 1 year
and/or since inception periods ended December 31, 1999 and yield for the
Strategic Income Portfolio for the 30-day period ended December 31, 1999.
AVERAGE ANNUAL TOTAL RETURN FOR PERIODS ENDED
DECEMBER 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
1 YEAR PERIOD* SINCE INCEPTION**
<S> <C> <C>
Global Interactive/Telecomm Portfolio 56.89% 31.03%
International Growth Portfolio 37.26% 6.28%
Growth Portfolio 20.07% 9.80%
Value Portfolio 8.17% 15.73%
Strategic Income Portfolio (3.12%) 1.07%
</TABLE>
* The total return for the one-year period ended December 31, 1999 reflects the
impact of an expense reimbursement totaling $253,215, among each Portfolio.
Absent reimbursements, the returns would have been lower.
** The total return since inception includes the impact of expense
reimbursements totaling $1,511,688 and a capital infusion totaling $269,919,
to each Portfolio. Absent reimbursements, the returns would have been lower.
The Global Interactive/Telecomm Portfolio, Growth Portfolio Value Portfolio and
Strategic Income Portfolio began business operations on February 1, 1996. The
International Growth Portfolio began operations on March 26, 1996.
YIELD FOR 30 DAY PERIOD
-----------------------
ENDED DECEMBER 31, 1999
-----------------------
(UNAUDITED)
Strategic Income Portfolio 5.6623%
Quotations of total return for a Portfolio will not take into account charges
and deductions against any Variable Accounts to which the Portfolio's shares are
sold. Performance for the Variable Accounts will therefore be lower than
performance of the Portfolios. Performance information of the Portfolios will be
accompanied by performance information for the applicable Variable Account.
FINANCIAL STATEMENTS
The Trust's Financial Statements and related notes and the report of the
independent accountants contained in the Trust's annual report for the fiscal
year ended December 31, 1999 are incorporated by reference into this Statement
of Additional Information.
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APPENDIX A
DESCRIPTION OF RATINGS
CERTAIN RATINGS OF CORPORATE DEBT SECURITIES
MOODY'S INVESTORS SERVICE INC.
Aaa-Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged."
Aa-Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
A-Bonds rated A possess many favorable investment attributes and are generally
considered as upper-medium-grade obligations.
Baa-Bonds rated Baa are considered medium-grade obligations, i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba-Bonds rated Ba are judged to have speculative elements; their future cannot
be considered as well-assured. Often the protection of interest and principal
payments may be very moderate and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position characterize bonds in
this class.
B-Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa-Bonds rated Caa are of poor standing. Such issues may be in default or
elements of danger with respect to principal or interest may be present.
Ca-Bonds rated Ca represent obligations which are speculative in a high degree.
Such issues are often in default or have other marked short comings.
STANDARD & POOR'S CORPORATION
AAA-Bonds rated AAA have the highest rating assigned by Standard & Poor's to a
debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA-Bonds rated AA have a very strong capacity to pay interest and repay
principal, and differ from the highest rated issues in small degree.
A-Bonds rated A have a strong capacity to pay interest and repay principal,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
BBB-Bonds rated BBB are regarded as having adequate capacity to pay interest and
repay principal. Whereas they normally exhibit adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and repay principal for bonds in this
category than for bonds in the higher rated categories.
BB, B, CCC, CC-Bonds rated BB, B, CCC, and CC are regarded on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
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RATINGS OF COMMERCIAL PAPER
MOODY'S INVESTORS SERVICE, INC.
Prime-1 is the highest commercial paper rating assigned by Moody's. Issuers
rated Prime-1 (or supporting institutions) are considered to have a superior
capacity for repayment of short-term promissory obligations. Issuers rated
Prime-2 (or supporting institutions) are considered to have a strong capacity
for repayment of short-term promissory obligations. This will normally be
evidenced by many of the characteristics of issuers rated Prime-1 but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate
may be more affected by external conditions. Ample alternative liquidity is
maintained.
STANDARD & POOR'S CORPORATION
Commercial paper rated A-1 by S&P indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Capacity for timely
payment on commercial paper on commercial paper rated A-2 is strong, but the
relative degree of safety is not as high as for issues designated A-1.
34
