<PAGE>
As filed with the Securities and Exchange Commission on December 23, 1997
Registration No. 333-35883
811-08361
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [x]
Pre-Effective Amendment No. 1 [x]
Post-Effective Amendment No. __ [ ]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [x]
Amendment No. 1 [ ]
--------------------------------
GOLDMAN SACHS VARIABLE INSURANCE TRUST
(Exact Name of Registrant as Specified in Charter)
4900 Sears Tower
Chicago, Illinois 60606
(Address of Principal Executive Offices)
Registrant's Telephone Number, including area code: (312) 993-4400
Michael J. Richman
Goldman, Sachs & Co.
85 Broad Street - 12th Floor
New York, New York 10004
(Name and Address of Agent for Service)
copies to:
Jeffrey A. Dalke, Esq.
Drinker Biddle & Reath LLP
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, Pennsylvania 19107-3496
Approximate date of proposed offering: As soon as practicable after the
effective date of the Registration Statement
[ ] Immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (a)(i)
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Title of Securities Being Registered: Shares of Beneficial Interest
Pursuant to the provisions of Rule 24f-2 under the Investment Company Act of
1940, the Registrant has registered an indefinite number of Shares of
beneficial interest, no par value per share, of all series and classes of the
Registrant, now existing or hereafter created.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
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<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
(Goldman Sachs Growth and Income Fund, Goldman Sachs CORE U.S. Equity Fund,
Goldman Sachs CORE Large Cap Growth Fund, Goldman Sachs CORE Small Cap Equity
Fund, Goldman Sachs Capital Growth Fund, Goldman Sachs Mid Cap Equity Fund,
Goldman Sachs International Equity Fund, Goldman Sachs Global Income Fund and
Goldman Sachs High Yield Fund)
Cross Reference Sheet
Form N-1A Item Prospectus Caption
-------------- ------------------
1. Cover Page ................. Cover Page.
2. Synopsis.................... Not Applicable.
3. Condensed Financial
Information................. Not Applicable.
4. General Description of
Registrant.................. Cover Page; Fund Highlights; Overview of
Investment Styles; Investment Objectives
and Policies; Investment Techniques; Risk
Factors; Investment Restrictions; Portfolio
Turnover.
5. Management of the Fund...... Management.
5A. Management's Discussion
of Fund Performance......... Not Applicable.
6. Capital Stock and Other
Securities.................. Shares of the Trust; Taxation; Additional
Information; Dividends.
7. Purchase of Securities
Being Offered............... Purchase and Redemption of Shares; Net
Asset Value.
8. Redemption or Repurchase.... Purchase and Redemption of Shares.
9. Pending Legal Proceedings... Not Applicable.
<PAGE>
GOLDMAN VARIABLE INSURANCE TRUST
(Goldman Sachs Growth and Income Fund, Goldman Sachs Core U.S. Equity Fund,
Goldman Sachs Core Large Cap Growth Fund, Goldman Sachs Core Small Cap
Equity Fund, Goldman Sachs Capital Growth Fund, Goldman Sachs Mid Cap
Equity Fund, Goldman Sachs International Equity Fund, Goldman Sachs Global
Income Fund and Goldman Sachs High Yield Fund)
Cross Reference Sheet
Form N-1A Item Heading
10. Cover Page........................ Cover Page.
11. Table of Contents................. Table of Contents.
12. General Information and History... Introduction.
13. Investment Objectives and Policies Investment Objectives
and Policies;
Investment
Restrictions.
14. Management of the Registrant...... Management.
15. Control Persons and Principal
Holders of Securities............. Not Applicable.
16. Investment Advisory and Other
Services.......................... Management.
17. Brokerage Allocation.............. Portfolio Transactions
and Brokerage.
18. Capital Stock and other Securities Shares of the Trust.
19. Purchase, Redemption and Pricing
of Securities Being Offered....... Other Information.
20. Tax Status........................ Taxation.
21. Underwriters...................... Management.
22. Calculation of Performance Data... Performance Information.
23. Financial Statements.............. Financial Statements.
<PAGE>
Part C
Information to be included in Part C is set forth under the appropriate Item, so
numbered in Part C to this Registration Statement.
<PAGE>
Prospectus
January 1, 1998
Goldman Sachs Variable Insurance Trust
The Goldman Sachs Variable Insurance Trust (the "Trust") is an open-end,
management investment company (mutual fund) providing a series of equity and
fixed income investment options. Shares of the Trust may be purchased and held
by the separate accounts ("Separate Accounts") of participating life insurance
companies ("Participating Insurance Companies") for the purpose of funding
variable annuity contracts and variable life insurance policies. Shares of
the Trust are not offered directly to the general public.
GOLDMAN SACHS GROWTH AND INCOME FUND
Seeks long-term growth of capital and growth of income through investments in
equity securities that are considered to have favorable prospects for capital
appreciation and/or dividend paying ability.
GOLDMAN SACHS CORE U.S. EQUITY FUND
Seeks long-term growth of capital and dividend income through a broadly
diversified portfolio of large cap and blue chip equity securities representing
all major sectors of the U.S. economy.
GOLDMAN SACHS CORE LARGE CAP GROWTH FUND
Seeks long-term growth of capital through a broadly diversified portfolio of
equity securities of large cap U.S. issuers that are expected to have better
prospects for earnings growth than the growth rate of the general domestic
economy. Dividend income is a secondary consideration.
GOLDMAN SACHS CORE SMALL CAP EQUITY FUND
Seeks long-term growth of capital through a broadly diversified portfolio of
equity securities of U.S. issuers which are included in the Russell 2000 Index
at the time of investment.
GOLDMAN SACHS CAPITAL GROWTH FUND
Seeks long-term growth of capital through diversified investments in equity
securities of companies that are considered to have long-term capital
appreciation potential.
GOLDMAN SACHS MID CAP EQUITY FUND
Seeks long-term capital appreciation primarily through investments in equity
securities of companies with public stock market capitalizations of between $500
million and $10 billion at the time of investment.
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<PAGE>
GOLDMAN SACHS INTERNATIONAL EQUITY FUND
Seeks long-term capital appreciation through investments in equity securities of
companies that are organized outside the U.S. or whose securities are
principally traded outside the U.S.
GOLDMAN SACHS GLOBAL INCOME FUND
Seeks a high total return, emphasizing current income and, to a lesser extent,
providing opportunities for capital appreciation. The Fund invests primarily in
a portfolio of high quality fixed-income securities of U.S. and foreign
issuers and foreign currencies.
GOLDMAN SACHS HIGH YIELD FUND
Seeks a high level of current income and secondarily, capital appreciation. The
Fund invests primarily in fixed-income securities rated below investment grade.
--------------------
Goldman Sachs Asset Management ("GSAM"), New York, New York, a separate
operating division of Goldman, Sachs & Co. ("Goldman Sachs"), serves as
investment adviser to the Growth and Income, CORE U.S. Equity, CORE Large Cap
Growth, CORE Small Cap Equity, Capital Growth, Mid Cap Equity and High Yield
Funds. Goldman Sachs Asset Management International ("GSAMI"), London, England,
an affiliate of Goldman Sachs, serves as investment adviser to the International
Equity and Global Income Funds. GSAM and GSAMI are each referred to in this
Prospectus as the "Investment Adviser." Goldman Sachs serves as each Fund's
distributor.
Shares of the Funds may be purchased by the Separate Accounts of
Participating Insurance Companies for the purpose of funding variable annuity
contracts and variable life insurance policies. A particular Fund may not be
available under the variable annuity contract or variable life insurance policy
which you have chosen. The prospectus of your specific insurance product will
indicate which Funds are available and should be read in conjunction with this
Prospectus. Inclusion in this Prospectus of a Fund which is not available under
your contract or policy is not to be considered a solicitation.
This Prospectus provides information about the Trust and the Funds that
a prospective investor should understand before investing. This Prospectus
should be retained for future reference. A Statement of Additional Information
(the "Additional Statement"), dated January 1, 1998, containing further
information about the Trust and the Funds which may be of interest to investors,
has been filed with the Securities and Exchange Commission ("SEC"), is
incorporated herein by reference in its entirety, and may be obtained without
charge from Goldman Sachs by calling the telephone number, or writing to one of
the addresses, listed on the back cover of this Prospectus. The SEC maintains a
Web site (http://www.sec.gov) that contains the Additional Statement and other
information regarding the Trust.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD
OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN A FUND INVOLVES INVESTMENT
RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
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<PAGE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
A FUND'S INVESTMENTS IN SECURITIES OF FOREIGN ISSUERS AND FOREIGN
CURRENCIES ENTAIL CERTAIN RISKS NOT CUSTOMARILY ASSOCIATED WITH INVESTING IN
SECURITIES OF U.S. ISSUERS QUOTED IN U.S. DOLLARS. IN PARTICULAR, THE SECURITIES
MARKETS OF ASIAN, LATIN AMERICAN, EASTERN EUROPEAN, AFRICAN AND OTHER EMERGING
COUNTRIES IN WHICH THE INTERNATIONAL EQUITY FUND MAY INVEST WITHOUT LIMIT, AND
IN WHICH OTHER FUNDS CAN INVEST A PORTION OF THEIR ASSETS, ARE LESS LIQUID,
SUBJECT TO GREATER PRICE VOLATILITY, HAVE SMALLER MARKET CAPITALIZATIONS, HAVE
LESS GOVERNMENT REGULATION AND ARE NOT SUBJECT TO AS EXTENSIVE AND FREQUENT
ACCOUNTING, FINANCIAL AND OTHER REPORTING REQUIREMENTS AS THE SECURITIES MARKETS
OF MORE DEVELOPED COUNTRIES. FURTHER, INVESTMENT IN EQUITY SECURITIES OF ISSUERS
LOCATED IN RUSSIA AND CERTAIN OTHER EMERGING COUNTRIES INVOLVES RISK OF LOSS
RESULTING FROM PROBLEMS IN SHARE REGISTRATION AND CUSTODY, WHICH RISKS ARE NOT
NORMALLY ASSOCIATED WITH INVESTMENT IN MORE DEVELOPED COUNTRIES. SEE
"DESCRIPTION OF SECURITIES" AND "RISK FACTORS."
THE HIGH YIELD FUND INVESTS PRIMARILY IN HIGH YIELD, FIXED-INCOME
SECURITIES RATED BELOW INVESTMENT GRADE THAT ARE CONSIDERED SPECULATIVE AND
GENERALLY INVOLVE GREATER PRICE VOLATILITY AND GREATER RISK OF LOSS OF PRINCIPAL
AND INTEREST THAN INVESTMENTS IN HIGHER RATED FIXED-INCOME SECURITIES.
INVESTORS SHOULD CONSIDER THE RISKS ASSOCIATED WITH INVESTMENT IN A
FUND INVESTING IN FOREIGN AND OR HIGH YIELD SECURITIES AND/OR EMERGING MARKETS.
THESE FUNDS ARE INTENDED FOR INVESTORS WHO CAN ACCEPT THE RISKS ASSOCIATED WITH
THESE INVESTMENTS AND MAY NOT BE SUITABLE FOR ALL INVESTORS. SEE "DESCRIPTION OF
SECURITIES" AND "RISK FACTORS."
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<PAGE>
TABLE OF CONTENTS
Page
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FUND HIGHLIGHTS......................................................... 5
OVERVIEW OF INVESTMENT STYLES........................................... 10
INVESTMENT OBJECTIVES AND POLICIES...................................... 13
DESCRIPTION OF SECURITIES............................................... 20
INVESTMENT TECHNIQUES................................................... 32
RISK FACTORS............................................................ 38
INVESTMENT RESTRICTIONS................................................. 44
PORTFOLIO TURNOVER...................................................... 45
MANAGEMENT.............................................................. 46
NET ASSET VALUE......................................................... 52
PERFORMANCE INFORMATION................................................. 53
SHARES OF THE TRUST..................................................... 54
EXPENSES............................................................... 55
TAXATION............................................................... 56
ADDITIONAL INFORMATION................................................. 57
DIVIDENDS.............................................................. 57
PURCHASE AND REDEMPTION OF SHARES...................................... 57
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<PAGE>
FUND HIGHLIGHTS
The following is intended to highlight certain information and is
qualified in its entirety by the more detailed information contained in this
Prospectus.
WHAT IS THE GOLDMAN SACHS VARIABLE INSURANCE TRUST?
The Goldman Sachs Variable Insurance Trust is an open-end management
investment company that offers shares in several investment funds (mutual
funds). Each Fund sells shares to Separate Accounts of Participating Insurance
Companies for the purpose of funding variable annuity contracts and variable
life insurance policies. The Participating Insurance Companies, not the owners
of the variable annuity contracts or variable life insurance policies or
participants therein, are shareholders of a Fund. Each Fund pools the monies of
these Separate Accounts and invests these monies in a portfolio of securities
designed to achieve that Fund's stated investment objectives.
WHAT ARE THE INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS?
Each Fund has distinct investment objectives and policies. There can be
no assurance that a Fund's objectives will be achieved. For a complete
description of each Fund's investment objectives and policies, see "Investment
Objectives and Policies," "Description of Securities" and "Investment
Techniques."
<TABLE>
<CAPTION>
==================================================================================================================================
Fund Name Investment Objectives Investment Criteria Benchmark
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<S> <C> <C> <C>
Growth and Income Long-term growth of At least 65% of total assets in equity Standard & Poor's Index
Fund capital and growth of securities that the investment adviser 500 Common Stocks
income. considers to have favorable prospects ("S&P 500 Index")
for capital appreciation and/or dividend
paying ability.
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CORE U.S. Equity Long-term growth of At least 90% of total assets in equity securities S&P 500 Index
Fund capital and dividend of U.S. issuers. The Fund seeks to achieve its
income. objective through a broadly diversified portfolio
of large cap and blue chip equity securities
representing all major sectors of the U.S.
economy. The Fund's investments are selected
using both a variety of quantitative techniques
and fundamental research in seeking to maximize
the Fund's expected return, while maintaining
risk, style, capitalization and industry
characteristics similar to the S&P 500 Index.
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CORE Large Cap Long-term growth of At least 90% of total assets in equity Russell 1000 Growth Index
Growth Fund Capital. Dividend income securities of U.S. issuers, including
is a secondary certain foreign issuers traded in the U.S.
consideration. The Fund seeks to achieve its
objective through a broadly diversified
portfolio of equity securities
of large cap U.S. issuers that are
expected to have better
prospects for earnings growth
than the growth rate of the
general domestic economy. The
Fund's investments are
selected using both a variety
of quantitative techniques and
fundamental research in
seeking to maximize the Fund's
expected return, while
maintaining risk, style,
capitalization and industry
characteristics similar to the
Russell 1000 Growth Index.
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</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Fund Name Investment Objectives Investment Criteria Benchmark
====================================================================================================================================
<S> <C> <C> <C>
CORE Small Cap Long-term growth of At least 90% of total assets in equity securities Russell 2000 Index
Equity Fund capital. of U.S. issuers, including certain foreign issuers
traded in the U.S. The Fund seeks to achieve its
investment objective through a broadly diversified
portfolio of equity securities of U.S. issuers
which are included in the Russell 2000 Index at
the time of investment. The Fund's investments
are selected using both a variety of quantitative
techniques and fundamental research in seeking to
maximize the Fund's expected return, while
maintaining risk, style, capitalization and
industry characteristics similar to the Russell
2000 Index.
====================================================================================================================================
Capital Growth Long-term capital growth. At least 90% of total assets in a diversified S&P 500 Index
Fund portfolio of equity securities. The Investment
Adviser considers long-term
capital appreciation potential
in selecting investments.
====================================================================================================================================
Mid Cap Equity Long-term capital At least 65% of total assets in equity securities Russell Midcap Index
Fund appreciation. of companies with public stock market
capitalizations of between $500 million and $10
billion at the time of investment ("Mid-Cap
Companies").
====================================================================================================================================
International Long-term capital Substantially all, and at least 65%, of total FT/S&P Actuaries Europe
Equity Fund appreciation. assets in equity securities of companies organized and Pacific Index (unhedged)
outside the United States or whose securities are
(unhedged) principally traded outside the United
States. The Fund may employ currency management
techniques.
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<CAPTION>
====================================================================================================================================
Fund Name Investment Duration Approximate Investment Credit Other Benchmark
Objectives Interest Sector Quality Investments
Rate
Sensitivity
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<S> <C> <C> <C> <C> <C> <C> <C>
Global Income A high Target = 6-year bond Securities Minimum = Mortgage and J.P. Morgan Global
Fund total J.P. Morgan of U.S. and BBB/Baa asset-backed Government Bond Index
return, Global foreign At least securities, (hedged)
emphasizing Government governments 50% = foreign
current Bond Index and AAA/Aaa currencies and
income (hedged) corporations. repurchase
and, to a plus or agreements
lesser minus 2.5 collateralized
extent, years by
providing Maximum = U.S.Government
opportunities 7.5 years* Securities or
for capital certain foreign
appreciation. government
securities.
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High Yield A high Target = 6-year bond At least At least Mortgage-backed Lehman Brothers High
Fund level of Lehman 65% of 65% = BB/Ba and Yield Bond Index.
current Brothers assets in or below asset-backed
income and High Yield fixed-income securities,
secondarily, Bond Index securities U.S. Government
capital plus or rated below Securities,
appreciation. minus 2.5 investment investment
years grade, grade corporate
Maximum = including fixed-income
7.5 years* U.S. and securities,
non-U.S. structured
dollar securities,
corporate foreign
debt, currencies and
foreign repurchase
government agreements
securities, collateralized
convertible by U.S.
securities Government
and Securities.
preferred
stock.
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</TABLE>
Under normal interest rate conditions.
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<PAGE>
WHAT ARE THE RISK FACTORS AND SPECIAL CHARACTERISTICS THAT I SHOULD CONSIDER
BEFORE INVESTING?
Each Fund's share price will fluctuate with market, economic and, to
the extent applicable, foreign exchange conditions, so that an investment in any
of the Funds may be worth more or less when redeemed than when purchased. None
of the Funds should be relied upon as a complete investment program. There can
be no assurance that a Fund's investment objectives will be achieved. See "Risk
Factors."
RISKS OF INVESTING IN SMALL CAPITALIZATION COMPANIES. To the extent
that a Fund invests in the securities of small market capitalization companies,
the Fund may be exposed to a higher degree of risk and price volatility.
Securities of such issuers may lack sufficient market liquidity to enable a Fund
to effect sales at an advantageous time or without a substantial drop in price.
FOREIGN RISKS. Investments in securities of foreign issuers and
currencies involve risks that are different from those associated with
investments in domestic securities. The risks associated with foreign
investments and currencies include changes in relative currency exchange rates,
political and economic developments, the imposition of exchange controls,
confiscation and other governmental restrictions. Generally, there is less
availability of data on foreign companies and securities markets as well as less
regulation of foreign stock exchanges, brokers and issuers. A Fund's investments
in emerging markets and countries ("Emerging Countries") involve greater risks
than investments in the developed countries of Western Europe, the United
States, Canada, Australia, New Zealand and Japan. In addition, because the
International Equity and Global Income Funds invest primarily outside the United
States, these Funds may involve greater risks, since the securities markets of
foreign countries are generally less liquid and subject to greater price
volatility. The securities markets of emerging countries, including those in
Asia, Latin America, Eastern Europe and Africa are marked by a high
concentration of market capitalization and trading volume in a small number of
issuers representing a limited number of industries, as well as a high
concentration of ownership of such securities by a limited number of investors.
To the extent that a Fund invests in fixed income securities, it will
be susceptible to the following risks:
INTEREST RATE RISK. When interest rates decline, the market value of
fixed-income securities tends to increase. Conversely, when interest rates
increase, the market
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<PAGE>
value of fixed-income securities tends to decline. Volatility of a security's
market value will differ depending upon the security's duration, the issuer and
the type of instrument.
DEFAULT RISK/CREDIT RISK. Investments in fixed-income securities are
subject to the risk that the issuer could default on its obligations and a Fund
could sustain losses on such investments. A default could impact both interest
and principal payments.
CALL RISK AND EXTENSION RISK. Fixed-income securities may be subject to
both call risk and extension risk. Call risk (i.e., where the issuer exercises
its rights to pay principal on an obligation earlier than scheduled) causes cash
flow to be returned earlier than expected. This typically results when interest
rates have declined, and a Fund may be unable to recoup all of its initial
investments and will also suffer from having to reinvest in lower yielding
securities. Extension risk (i.e., where the issuer exercises its right to pay
principal on an obligation later than scheduled) causes cash flows to be
returned later than expected. This typically results when interest rates have
increased and a Fund will suffer from the inability to invest in higher yielding
securities. The investment characteristics of mortgage-backed securities
(including adjustable rate mortgage securities) and asset-backed securities
differ from those of traditional fixed-income securities because they generally
have both call risk (also known as prepayment risk) and extension risk.
RISKS OF INVESTING IN NON-INVESTMENT GRADE FIXED-INCOME SECURITIES.
Non-investment grade fixed-income securities (commonly referred to as "junk
bonds") are subject to greater volatility and risk of loss and are less liquid
than securities which are perceived to be of higher credit quality. Such
securities, also referred to as high yield securities, are considered to be
speculative by traditional investment standards. High yield securities are
subject to increased risk of an issuer's inability to meet principal and
interest payments. The High Yield Fund may invest in securities which are in
default at the time of investment. The market for non-investment grade
securities tends to be concentrated in a limited number of market makers, which
may affect liquidity. In addition, the market price of such securities tends to
reflect individual corporate developments to a greater extent than that of
higher rated securities which react primarily to the general level of interest
rates.
NON-DIVERSIFIED. Global Income Fund is a "non-diversified" fund as
defined under the Investment Company Act of 1940, as amended (the "Act"), and
is, therefore, subject only to certain federal tax diversification requirements
(to which the other Funds are also subject), in addition to the policies adopted
by the Investment Adviser. To the extent that the Fund is not diversified under
the Act, it will be more susceptible to adverse
-8-
<PAGE>
developments affecting any single issuer of portfolio securities. See
"Investment Restrictions."
OTHER. A Fund's use of certain investment techniques, including
derivatives, forward contracts, options, futures, and swap transactions will
subject the Fund to greater risk than funds that do not employ such techniques.
WHO MANAGES THE FUNDS?
GSAM serves as Investment Adviser to the Growth and Income, CORE U.S.
Equity, CORE Large Cap Growth, Capital Growth, CORE Small Cap Equity, Mid Cap
Equity and High Yield Funds. GSAMI serves as Investment Adviser to the
International Equity and Global Income Funds. As of October 24, 1997, the
Investment Advisers, together with their affiliates, acted as investment adviser
for assets in excess of $128 billion.
WHO DISTRIBUTES THE FUNDS' SHARES?
Goldman Sachs acts as distributor of each Fund's shares.
HOW DO I PURCHASE OR REDEEM SHARES?
Investors may purchase or redeem shares of the Funds in connection with
variable annuity contracts and variable life insurance policies offered through
the Separate Accounts of Participating Insurance Companies. You should refer to
the prospectus of your Participating Insurance Company's Separate Account for
information on how to purchase a variable annuity contract or variable life
insurance policy, how to select specific Funds as investment options for your
contract or policy and how to redeem monies from the Trust. See "Purchase and
Redemption of Shares."
WHEN ARE DIVIDENDS AND DISTRIBUTIONS PAID?
Investment income dividends and capital gains distributions are paid at
least annually.
All dividends and capital gain distributions will be automatically
reinvested in additional shares of a Fund at the
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<PAGE>
net asset value of such shares on the payment date, unless a Separate Account is
permitted to hold cash and elects to receive payment in cash. For further
information concerning dividends, see "Dividends."
OVERVIEW OF INVESTMENT STYLES
EQUITY FUNDS - GROWTH AND INCOME, CORE U.S. EQUITY, CORE LARGE CAP GROWTH, CORE
SMALL CAP EQUITY, CAPITAL GROWTH, MID CAP EQUITY AND INTERNATIONAL EQUITY FUNDS
The Investment Advisers may purchase for these Equity Funds common
stocks, preferred stocks, interests in real estate investment trusts,
convertible debt obligations, convertible preferred stocks, equity interests in
trusts, partnerships, joint ventures, limited liability companies and similar
enterprises, warrants and stock purchase rights ("equity securities"). In
choosing a Fund's securities, the Investment Advisers utilize first-hand
fundamental research, including visiting company facilities to assess operations
and to meet decision-makers. The Investment Advisers may also use macro analysis
of numerous economic and valuation variables to anticipate changes in company
earnings and the overall investment climate. Except as discussed in "Activities
of Goldman Sachs and its Affiliates and Other Accounts Managed by Goldman
Sachs," the Investment Advisers are able to draw on the research and market
expertise of the Goldman Sachs Global Investment Research Department and other
affiliates of the Investment Advisers, as well as information provided by other
securities dealers. Equity securities in a Fund's portfolio will generally be
sold when the Investment Adviser believes that the market price fully reflects
or exceeds the securities' fundamental valuation or when other more attractive
investments are identified.
VALUE STYLE. The Growth and Income and Mid Cap Equity Funds are managed
using a value-oriented approach. The Investment Adviser evaluates securities
using fundamental analysis and intends to purchase equity securities that are,
in its view, underpriced relative to a combination of such companies' long-term
earnings prospects, growth rate, free cash flow and/or dividend-paying ability.
Consideration will be given to the business quality of the issuer.
Factors positively affecting the Investment Adviser's view of that quality
include the competitiveness and degree of regulation in the markets in which the
company operates, the existence of a management team with a record of success,
the position of the company in the markets in which it operates, the level of
the company's financial leverage and the sustainable return on capital invested
in the business. The Funds may also purchase securities of companies that have
experienced
-10-
<PAGE>
difficulties and that, in the opinion of the Investment Adviser, are available
at attractive prices.
GROWTH STYLE. The Capital Growth and International Equity Funds are
managed using a growth oriented approach. Equity securities for these Funds are
selected based on their prospects for above average growth. The Investment
Adviser will select securities of growth companies trading, in the Investment
Adviser's opinion, at a reasonable price relative to other industries,
competitors and historical price/earnings multiples. These Funds will generally
invest in companies whose earnings are believed to be in a relatively strong
growth trend, or, to a lesser extent, in companies in which significant further
growth is not anticipated but whose market value per share is thought to be
undervalued. In order to determine whether a security has favorable growth
prospects, the Investment Adviser ordinarily looks for one or more of the
following characteristics in relation to the security's prevailing price:
prospects for above average sales and earnings growth per share; high return on
invested capital; free cash flow generation; sound balance sheet, financial and
accounting policies, and overall financial strength; strong competitive
advantages; effective research, product development, and marketing; pricing
flexibility; strength of management; and general operating characteristics that
will enable the company to compete successfully in its marketplace.
QUANTITATIVE STYLE. The CORE U.S. Equity, CORE Large Cap Growth and
CORE Small Cap Equity Funds (the "CORE Funds") are managed using both
quantitative and fundamental techniques. CORE is an acronym for
"Computer-Optimized, Research-Enhanced," which reflects the Funds' investment
process. This investment process and the proprietary multifactor model used to
implement it are discussed below.
CORE Investment Process. The Investment Adviser begins with a broad
-----------------------
universe of U.S. equity securities for the CORE Funds. The Investment Adviser
uses a proprietary multifactor model (the "Multifactor Model") to assign each
equity security a rating. In the case of a security followed by the Goldman
Sachs Global Investment Research Department (the "Research Department"), a
second rating is assigned based upon the Research Department's evaluation. In
the discretion of the Investment Adviser, such ratings may also be assigned to
securities based on research ratings obtained from other industry sources.
In building a diversified portfolio for each CORE Fund, the Investment
Adviser utilizes optimization techniques to seek to maximize the Fund's expected
return, while maintaining a risk profile similar to the Fund's benchmark. Each
portfolio is primarily comprised of securities rated highest by the foregoing
investment process and has risk characteristics and industry weightings similar
to the relevant Fund's benchmark.
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Multifactor Model. The Multifactor Model is a rigorous computerized
-----------------
rating system for forecasting the returns of individual equity securities
according to fundamental investment characteristics. The Multifactor Model
incorporates common variables covering measures of value, growth, momentum and
risk (e.g., book/price ratio, earnings/price ratio, price momentum, price
volatility, consensus growth forecasts, earnings estimate revisions and earnings
stability). All of the factors used in the Multifactor Model have been shown to
significantly impact the performance of the securities and markets they were
designed to forecast.
The weightings assigned to the factors in the Multifactor Model used by
the CORE Funds are derived using a statistical formulation that considers each
factor's historical performance in different market environments. As such, the
Multifactor Model is designed to evaluate each security using only the factors
that are statistically related to returns in the anticipated market environment.
Because it includes many disparate factors, the Investment Adviser believes that
the Multifactor Model is broader in scope and provides a more thorough
evaluation than most conventional, quantitative models. Securities and markets
ranked highest by the Multifactor Model do not have one dominant investment
characteristic; rather, they possess an attractive combination of investment
characteristics.
Research Department. In assigning ratings to equity securities, the
-------------------
Research Department uses a four category rating system ranging from "recommended
for purchase" to "likely to underperform." The ratings reflect the analyst's
judgment as to the investment results of a specific security and incorporate
economic outlook, valuation, risk and a variety of other factors.
By employing both a quantitative (i.e., the Multifactor Model) and a
qualitative (i.e., research enhanced) method of selecting securities, each CORE
Fund seeks to capitalize on the strengths of each discipline.
FIXED-INCOME FUNDS - GLOBAL INCOME AND HIGH YIELD FUNDS
The Investment Adviser of the Global Income and High Yield Funds may in
accordance with the respective Funds' investment objectives and policies,
purchase all types of fixed income securities, including U.S. and foreign
government securities, and senior and subordinated corporate debt obligations
such as bonds, debentures, notes and commercial paper.
As stated above, each of these two Funds has a target duration. A
Fund's duration approximates its price sensitivity to changes in interest rates.
Maturity measures the time until final payment is due; it takes no account of
the pattern of a security's cash flows over time. In computing portfolio
duration, a Fund will estimate the duration of obligations that
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are subject to prepayment or redemption by the issuer taking into account the
influence of interest rates on prepayments and coupon flows. This method of
computing duration is known as "option-adjusted" duration. A Fund will not be
limited as to its maximum weighted average portfolio maturity or the maximum
stated maturity with respect to individual securities unless otherwise noted.
A Fund will deem a security to have met its minimum credit rating
requirement if the security receives the minimum required long-term rating (or
the equivalent short-term credit rating) at the time of purchase from at least
one rating organization (including, but not limited to, Standard & Poor's
Ratings Group ("S&P") and Moody's Investors Service, Inc. ("Moody's")) even
though it has been rated below the minimum rating by one or more other rating
organizations, or, if unrated by a rating organization, is determined by the
Investment Adviser to be of comparable quality. If a security satisfies a Fund's
minimum rating criteria at the time of purchase and is subsequently downgraded
below such rating, the Fund will not be required to dispose of such security. If
a downgrade occurs, the Investment Adviser will consider what action, including
the sale of such security, is in the best interest of a Fund and its
shareholders.
Except as discussed in "Activities of Goldman Sachs and its Affiliates
and Other Accounts Managed by Goldman Sachs," the Investment Adviser will have
access to the research of, and proprietary technical models developed by,
Goldman Sachs and will apply quantitative and qualitative analysis in
determining the appropriate allocations among the categories of issuers and
types of securities.
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and principal investment policies of each
Fund are described below. Other investment practices and management techniques,
which involve certain risks, are described under "Description of Securities,"
"Risk Factors" and "Investment Techniques." There can be no assurance that a
Fund's investment objectives will be achieved.
GROWTH AND INCOME FUND
Objectives. The Fund's investment objectives are to provide investors
----------
with long-term growth of capital and growth of income.
Primary Investment Focus. The Fund invests, under normal circumstances,
------------------------
at least 65% of its total assets in equity securities that the Investment
Adviser considers to have favorable prospects for capital appreciation and/or
dividend-paying ability.
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Other. The Fund may invest up to 35% of its total assets in fixed
-----
income securities that, in the opinion of the Investment Adviser, offer the
potential to further the Fund's investment objectives. In addition, although the
Fund will invest primarily in publicly traded U.S. securities, it may invest up
to 25% of its total assets in foreign securities, including securities of
issuers in Emerging Countries and securities quoted in foreign currencies.
CORE U.S. EQUITY FUND
Objective. The Fund's investment objective is to provide investors with
---------
long-term growth of capital and dividend income. The Fund seeks to achieve its
objective through a broadly diversified portfolio of large cap and blue chip
equity securities representing all major sectors of the U.S. economy.
Primary Investment Focus. The Fund invests, under normal circumstances,
------------------------
at least 90% of its total assets in equity securities of U.S. issuers. The Fund
may invest in equity securities of foreign issuers that are traded in the United
States and that comply with U.S. accounting standards. The Fund's investments
are selected using both a variety of quantitative techniques and fundamental
research in seeking to maximize the Fund's expected return, while maintaining
risk, style, capitalization and industry characteristics similar to the S&P 500
Index. The Fund seeks a broad representation in most major sectors of the U.S.
economy and a portfolio comprised of companies with average long-term earnings
growth expectations and dividend yields. The Fund may invest only in fixed
income securities that are considered cash equivalents.
For a description of the investment process of the Fund, see "Overview
of Investment Styles."
CORE LARGE CAP GROWTH FUND
Objective. The Fund's investment objective is to provide investors with
---------
long-term growth of capital. The Fund seeks to achieve its objective through a
broadly diversified portfolio of equity securities of large cap U.S. issuers
that are expected to have better prospects for earnings growth than the growth
rate of the general domestic economy. Dividend income is a secondary
consideration.
Primary Investment Focus. The Fund invests, under normal circumstances,
------------------------
at least 90% of its total assets in equity securities of U.S. issuers, including
foreign issuers that are traded in the United States and that comply with U.S.
accounting standards. The Investment Adviser emphasizes a company's growth
prospects in analyzing equity securities to be purchased by the Fund. The Fund's
investments are selected using both a variety of quantitative techniques and
fundamental research in seeking to
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maximize the Fund's expected return, while maintaining risk, style,
capitalization and industry characteristics similar to the Russell 1000 Growth
Index. The Fund seeks a portfolio comprised of companies with above average
capitalizations and earnings growth expectations and below average dividend
yields. The Fund may invest only in fixed income securities that are considered
cash equivalents.
For a description of the investment process of the Fund, see "Overview
of Investment Styles."
CORE SMALL CAP EQUITY FUND
Objective. The Fund's investment objective is to provide investors with
---------
long-term growth of capital. The Fund seeks to achieve its objective through a
broadly diversified portfolio of equity securities of U.S. issuers which are
included in the Russell 2000 Index at the time of investment.
Primary Investment Focus. The Fund invests, under normal circumstances,
------------------------
at least 90% of its total assets in equity securities of U.S. issuers, including
foreign issuers that are traded in the United States and that comply with U.S.
accounting standards. The Fund's investments are selected using both a variety
of quantitative techniques and fundamental research in seeking to maximize the
Fund's expected return, while maintaining risk, style, capitalization and
industry characteristics similar to the Russell 2000 Index. The Fund seeks a
portfolio comprised of companies with small market capitalizations, strong
expected earnings growth and momentum, and better valuation and risk
characteristics than the Russell 2000 Index. The Fund may invest only in fixed
income securities that are considered cash equivalents.
The Investment Adviser believes that companies in which the Fund may
invest offer greater opportunity for growth of capital than larger, more mature
better known companies. Investments in small market capitalization issuers
involve special risks. See "Description of Securities" and "Risk Factors." If
the issuer of a portfolio security held by the Fund is no longer included in the
Russell 2000 Index, the Fund may, but is not required to, sell the security.
For a description of the investment process of the Fund, see "Overview
of Investment Styles."
CAPITAL GROWTH FUND
Objective. The Fund's investment objective is to provide investors with
---------
long-term growth of capital.
Primary Investment Focus. The Fund invests, under normal circumstances,
------------------------
at least 90% of its total assets in equity
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<PAGE>
securities. The Fund seeks to achieve its investment objective by investing in a
diversified portfolio of equity securities that are considered by the Investment
Adviser to have long-term capital appreciation potential.
Other. Although the Fund will invest primarily in publicly traded U.S.
-----
securities, it may invest up to 10% of its total assets in foreign securities,
including securities of issuers in Emerging Countries and securities quoted in
foreign currencies.
MID CAP EQUITY FUND
Objective. The Fund's investment objective is to provide investors with
---------
long-term capital appreciation.
Primary Investment Focus. The Fund invests, under normal circumstances,
------------------------
substantially all of its assets in equity securities and at least 65% of its
total assets in equity securities of Mid Cap Companies with public stock market
capitalizations (based upon shares available for trading on an unrestricted
basis) of between $500 million and $10 billion at the time of investment. If the
company's capitalization of an issuer increases above $10 billion after purchase
of such issuer's securities, the Fund may, but is not required to, sell the
securities. Dividend income, if any, is an incidental consideration.
Other. The Fund may invest up to 35% of its total assets in fixed
-----
income securities. In addition, although the Fund will invest primarily in
publicly traded U.S. securities, it may invest up to 25% of its total assets in
foreign securities, including securities of issuers in Emerging Countries and
securities quoted in foreign currencies.
INTERNATIONAL EQUITY FUND
Objective. The Fund's investment objective is to provide investors with
---------
long-term capital appreciation.
Primary Investment Focus. The Fund invests, under normal circumstances,
------------------------
substantially all, and at least 65%, of its total assets in equity securities of
companies that are organized outside the United States or whose securities are
principally traded outside the United States. The Fund may allocate its assets
among countries as determined by the Investment Adviser from time to time
provided that the Fund's assets are invested in at least three foreign
countries. The Fund expects to invest a substantial portion of its assets in the
securities of issuers located in the developed countries of Western Europe and
in Japan. However, the Fund may also invest in the securities of issuers located
in Australia, Canada, New Zealand and in Emerging Countries such as Argentina,
Botswana, Brazil, Chile, China, Colombia, the Czech Republic, Egypt, Greece,
Hong Kong, Hungary,
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India, Indonesia, Israel, Jordan, Kenya, Malaysia, Mexico, Morocco, Pakistan,
Peru, the Philippines, Poland, Portugal, Russia, Singapore, South Africa, South
Korea, Sri Lanka, Taiwan, Thailand, Turkey, Venezuela and Zimbabwe. Many of the
countries in which the Fund may invest have emerging markets or economies which
involve certain risks, as described below under "Risk Factors-Special Risks of
Investments in Emerging Markets," which are not present in investments in more
developed countries.
Other. The Fund may employ certain currency techniques to seek to hedge
-----
against currency exchange rate fluctuations or to seek to increase total return.
When used to seek to enhance return, these management techniques are considered
speculative. Such currency management techniques involve risks different from
those associated with investing solely in securities of U.S. issuers quoted in
U.S. dollars. To the extent that the Fund is fully invested in foreign
securities while also maintaining currency positions, it may be exposed to
greater combined risk. The Fund's net currency positions may expose it to risks
independent of its securities positions. See "Description of Securities,"
"Investment Techniques" and "Risk Factors." Up to 35% of the Fund's total assets
may be invested in fixed income securities.
GLOBAL INCOME FUND
Objective. The Fund's investment objective is to provide investors with
---------
a high total return, emphasizing current income and, to a lesser extent,
providing opportunities for capital appreciation.
Duration. Under normal interest rate conditions, the Fund's duration is
--------
expected to be equal to that of the Fund's benchmark, the J.P. Morgan Global
Government Bond Index (hedged), plus or minus 2.5 years. In addition, under
normal interest rate conditions, the Fund's maximum duration will not exceed 7.5
years. The approximate interest rate sensitivity of the Fund is expected to be
comparable to a six-year bond.
Investment Sector. The Fund invests primarily in a portfolio of high
-----------------
quality fixed-income securities of U.S. and foreign issuers and enters into
transactions in foreign currencies. Under normal market conditions, the Fund
will (i) have at least 30% of its total assets, after considering the effect of
currency positions, denominated in U.S. dollars and (ii) invest in securities of
issuers in at least three countries. The Fund may also invest up to 10% of its
total assets in issuers in countries with emerging markets and economies. The
Fund seeks to meet its investment objective by pursuing investment opportunities
in foreign and domestic fixed-income securities markets and by engaging in
currency transactions to seek to enhance returns and to seek to hedge its
portfolio against currency exchange rate fluctuations.
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The fixed-income securities in which the Fund may invest include: (i)
U.S. Government Securities and custodial receipts therefor; (ii) securities
issued or guaranteed by a foreign government or any of its political
subdivisions, authorities, agencies, instrumentalities or by supranational
entities (i.e., international organizations designated or supported by
governmental entities to promote economic reconstruction or development, such as
the World Bank); (iii) corporate debt securities; (iv) certificates of deposit
and bankers' acceptances issued or guaranteed by, or time deposits maintained
at, U.S. or foreign banks (and their branches wherever located) having total
assets of more than $1 billion; (v) commercial paper; and (vi) mortgage-backed
and asset-backed securities.
Credit Quality. All securities purchased by the Fund will be rated, at
--------------
the time of investment, at least BBB by S&P or Baa by Moody's. The Fund will
invest at least 50% of its total assets in securities rated, at the time of
investment, AAA by S&P or Aaa by Moody's.
Unrated securities will be determined to be of comparable quality by
the Investment Adviser. Fixed-income securities rated BBB or Baa are considered
medium-grade obligations with speculations characteristics, and adverse economic
conditions or changing conditions may weaken their issuers' capacity to pay
interest and repay prinicipal.
Other. The Fund may employ certain active management techniques to
-----
manage its duration and term structure, to seek to hedge its exposure to foreign
currencies and to seek to enhance returns. These techniques include, but are not
limited to, the use of financial futures contracts, option contracts (including
options on futures), forward foreign currency exchange contracts, currency
options and futures, currency, mortgage and interest rate swaps and interest
rate floors, caps and collars. Currency management techniques involve risks
different from those associated with investing solely in U.S. dollar-denominated
fixed-income securities of U.S. issuers. It is expected that the Fund will use
certain currency techniques to seek to hedge against currency exchange rate
fluctuations or to seek to increase total return. While the Fund will have both
long and short currency positions, its net long and short foreign currency
exposure will not exceed the value of the Fund's total assets. To the extent
that the Fund is fully invested in foreign securities while also maintaining
currency positions, it may be exposed to greater combined risk. The Fund's net
currency positions may expose it to risks independent of its securities
positions. The Fund may also employ other investment techniques to seek to
enhance returns, such as lending portfolio securities and entering into mortgage
dollar rolls, repurchase agreements and other investment practices described
under "Investment Techniques."
The Fund may invest more than 25% of its total assets in the securities
of corporate and governmental issuers located in each of Canada, Germany, Japan,
and the United Kingdom as well as in the securities of U.S. issuers.
Concentration of the Fund's investments in such issuers will subject the Fund,
to a greater extent than if investment was more limited, to the risks of adverse
securities markets, exchange rates and social, political
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or economic events which may occur in those countries. Not more than 25% of the
Fund's total assets will be invested in securities of issuers in any other
single foreign country.
HIGH YIELD FUND
Objective. The Fund's investment objective is to provide investors with
---------
a high level of current income. Secondarily, the Fund may, in seeking current
income, also consider the potential for capital appreciation.
Duration. Under normal interest rate conditions, the Fund's duration is
--------
expected to be equal to that of the Fund's benchmark, the Lehman Brothers High
Yield Bond Index, plus or minus 2.5 years. In addition, under normal interest
rate conditions, the Fund's maximum duration will not exceed 7.5 years. The
approximate interest rate sensitivity of the Fund is expected to be comparable
to a 6-year bond.
Investment Sector. The Fund invests, under normal circumstances, at
-----------------
least 65% of its total assets in high yield, fixed-income securities rated, at
the time of investment, below investment grade. Non-investment grade securities
are securities rated BB or below by S&P, Ba or below by Moody's, an equivalent
rating by another rating organization, or if unrated by a rating organization,
determined by the Investment Adviser to be of comparable quality. The Fund may
invest in all types of fixed-income securities, including senior and
subordinated corporate debt obligations (such as bonds, debentures, notes and
commercial paper), convertible and non-convertible corporate debt obligations,
loan participations, custodial receipts, municipal securities and preferred
stock. The Fund may invest up to 25% of its total assets in obligations of
domestic and foreign issuers (including securities of issuers located in
countries with emerging markets and economies) which are denominated in
currencies other than the U.S. dollar. Under normal market conditions, the Fund
may invest up to 35% of its total assets in investment grade fixed-income
securities, including U.S. Government securities, asset-backed and mortgage-
backed securities and corporate securities. The Fund may also invest in common
stocks, warrants, rights and other equity securities, but will generally hold
such equity investments only when debt or preferred stock of the issuer of such
equity securities is held by the Fund. A number of investment strategies are
used to seek to achieve the Fund's investment objective, including market sector
selection, determination of yield curve exposure, and issuer selection. In
addition, the Investment Adviser will attempt to take advantage of pricing
inefficiencies in the fixed-income markets.
Credit Quality. The Fund invests primarily in high yield, fixed income
--------------
securities rated below investment grade, including securities of issuers in
default. Non-investment grade
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<PAGE>
securities (commonly known as "junk bonds") tend to offer higher yields than
higher rated securities with similar maturities. Non-investment grade securities
are, however, considered speculative and generally involve greater price
volatility and greater risk of loss of principal and interest than higher rated
securities. See "Description of Securities." A description of the corporate bond
and preferred stock ratings is contained in Appendix B to the Additional
Statement.
Other. The Fund may employ certain active management techniques to
-----
manage its duration and term structure, to seek to hedge its exposure to foreign
securities and to seek to enhance returns. These techniques include, but are not
limited to, the use of financial futures contracts, option contracts (including
options on futures), forward foreign currency exchange contracts, currency
options and futures, currency, mortgage and interest rate swaps, and interest
rate floors, caps and collars. Currency management techniques involve risks
different from those associated with investing solely in U.S. dollar-denominated
fixed-income securities of U.S. issuers. It is expected that the Fund will use
certain currency techniques to seek to hedge against currency exchange rate
fluctuations or to seek to increase total return. The Fund may also employ other
investment techniques to seek to enhance returns, such as lending portfolio
securities and entering into repurchase agreements and other investment
practices described under "Investment Techniques."
DESCRIPTION OF SECURITIES
CONVERTIBLE SECURITIES
Each Fund, except the Global Income Fund, may invest in convertible
securities, including debt obligations and preferred stock of the issuer
convertible at a stated exchange rate into common stock of the issuer.
Convertible securities generally offer lower interest or dividend yields than
non-convertible securities of similar quality. As with all fixed income
securities, the market value of convertible securities tends to decline as
interest rates increase and, conversely, to increase as interest rates decline.
However, when the market price of the common stock underlying a convertible
security exceeds the conversion price, the convertible security tends to reflect
the market price of the underlying common stock. As the market price of the
underlying common stock declines, the convertible security tends to trade
increasingly on a yield basis, and thus may not decline in price to the same
extent as the underlying common stock. Convertible securities rank senior to
common stocks in an issuer's capital structure and consequently entail less risk
than the issuer's common stock. In evaluating a convertible security, the
Investment Advisers will give primary emphasis to the
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attractiveness of the underlying common stock. The convertible securities in
which the CORE Funds invest are not subject to any minimum rating criteria. The
convertible debt securities in which the other Funds may invest are subject to
the same rating criteria as a Fund's investments in non-convertible debt
securities. Except for the High Yield Fund, convertible debt securities are
equity investments for purposes of each Fund's investment policies.
PREFERRED STOCK, WARRANTS AND RIGHTS
Each Fund, except the Global Income Fund, may invest in preferred
stock, warrants and rights. Preferred stocks are securities that represent an
ownership interest providing the holder with claims on the issuer's earnings and
assets before common stock owners but after bond owners. Unlike debt securities,
the obligations of an issuer of preferred stock, including dividend and other
payment obligations, may not typically be accelerated by the holders of such
preferred stock on the occurrence of an event of default (such as a covenant
default or filing of a bankruptcy petition) or other non-compliance by the
issuer with the terms of the preferred stock. Often, however, on the occurrence
of any such event of default or non-compliance by the issuer, preferred
stockholders will be entitled to gain representation on the issuer's board of
directors or increase their existing board representation. In addition,
preferred stockholders may be granted voting rights with respect to certain
issues on the occurrence of any event of default.
Warrants and other rights are options to buy a stated number of shares
of common stock at a specified price at any time during the life of the warrant.
The holders of warrants and rights have no voting rights, receive no dividends
and have no rights with respect to the assets of the issuer.
REAL ESTATE INVESTMENT TRUSTS ("REITS")
Each Fund, except the Global Income and High Yield Funds, may invest in
REITs, which are pooled investment vehicles that invest primarily in either real
estate or real estate related loans. The value of a REIT is affected by changes
in the value of the properties owned by the REIT or securing mortgage loans held
by the REIT. REITs are dependant upon cash flow from their investments to repay
financing costs and the ability of the REITs' manager. REITs are also subject to
risks generally associated with investments in real estate. A Fund will
indirectly bear its proportionate share of any expenses, including management
fees, paid by a REIT in which it invests.
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FOREIGN INVESTMENTS
Foreign Securities. Each Equity Fund may invest in the securities of
------------------
foreign issuers (provided that the CORE Funds may only invest in equity
securities of foreign issuers that are traded in the U.S. and comply with U.S.
accounting standards). The Global Income Fund will, and the High Yield Fund may,
invest in fixed-income securities of foreign issuers denominated in any
currency. However, the High Yield Fund will limit its investments in non-U.S.
dollar-denominated fixed-income securities to 25% of its total assets.
Investments in foreign securities may offer potential benefits that are not
available from investments exclusively in securities of domestic issuers.
Foreign countries may have economic policies or business cycles different from
those of the U.S. and markets for foreign securities do not necessarily move in
a manner parallel to U.S. markets.
Investing in the securities of foreign issuers involves risks that are
not typically associated with investing in fixed income and equity securities of
domestic issuers quoted in U.S. dollars. Such investments may be affected by
changes in currency rates, changes in foreign or U.S. laws or restrictions
applicable to such investments and in exchange control regulations (e.g.,
currency blockage). A decline in the exchange rate of the currency (i.e.,
weakening of the currency against the U.S. dollar) in which a portfolio security
is quoted or denominated relative to the U.S. dollar would reduce the value of
the portfolio security. In addition, if the currency in which a Fund receives
dividends, interest or other payments declines in value against the U.S. dollar
before such income is distributed as dividends to shareholders or converted to
U.S. dollars, the Fund may have to sell portfolio securities to obtain
sufficient cash to pay such dividends. Commissions on transactions in foreign
securities may be higher than those for similar transactions on domestic stock
markets. In addition, clearance and settlement procedures may be different in
foreign countries and, in certain markets, such procedures have been unable to
keep pace with the volume of securities transactions, thus making it difficult
to conduct such transactions.
Foreign issuers are not generally subject to uniform accounting,
auditing and financial reporting standards comparable to those applicable to
U.S. issuers. There may be less publicly available information about a foreign
issuer than about a U.S. issuer. In addition, there is generally less government
regulation of foreign markets, companies and securities dealers than in the
United States. Foreign securities markets may have substantially less volume
than U.S. securities markets and securities of many foreign issuers are less
liquid and more volatile than securities of comparable domestic issuers.
Furthermore, with respect to certain foreign countries, there is a possibility
of nationalization, expropriation or confiscatory
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taxation, imposition of withholding or other taxes on dividend or interest
payments (or, in some cases, capital gains), limitations on the removal of funds
or other assets of the Funds, political or social instability or diplomatic
developments which could affect investments in those countries.
Each Fund other than the CORE U.S. Equity, CORE Large Cap Growth and
CORE Small Cap Equity Funds may invest in an issuer domiciled in one country yet
issuing the security in the currency of another country. The Funds may also
invest in debt securities denominated in the European Currency Unit ("ECU"),
which is a "basket" consisting of specified amounts in the currencies of certain
of the twelve member states of the European Community. The specific amounts of
currencies comprising the ECU may be adjusted by the Council of Ministers of the
European Community from time to time to reflect changes in relative values of
the underlying currencies. In addition, the Funds may invest in securities
denominated in other currency "baskets."
Investments in ADRs, EDRs and GDRs. Each Fund, except the Global Income
----------------------------------
and High Yield Funds, may invest in foreign securities which take the form of
sponsored and unsponsored American Depository Receipts ("ADRs") and Global
Depository Receipts ("GDRs") and each Fund, other than the Global Income, High
Yield and CORE Funds, may also invest in European Depository Receipts ("EDRs")
or other similar instruments representing securities of foreign issuers
(together, "Depository Receipts"). ADRs represent the right to receive
securities of foreign issuers deposited in a domestic bank or a correspondent
bank. Prices of ADRs are quoted in U.S. dollars, and ADRs are traded in the
United States on exchanges or over-the-counter and are sponsored and issued by
domestic banks. EDRs and GDRs are receipts evidencing an arrangement with a
non-U.S. bank. EDRs and GDRs are not necessarily quoted in the same currency as
the underlying security. To the extent a Fund acquires Depository Receipts
through banks which do not have a contractual relationship with the foreign
issuer of the security underlying the Depository Receipts to issue and service
such Depository Receipts (unsponsored Depository Receipts), there may be an
increased possibility that the Fund would not become aware of and be able to
respond to corporate actions, such as stock splits or rights offerings involving
the foreign issuer, in a timely manner. In addition, the lack of information may
result in inefficiencies in the valuation of such instruments. Investment in
Depository Receipts does not eliminate all the risks inherent in investing in
securities of non-U.S. issuers. The market value of Depository Receipts is
dependent upon the market value of the underlying securities and fluctuations in
the relative value of the currencies in which the Depository Receipt and the
underlying securities are quoted. However, by investing in Depository Receipts,
such as ADRs, that are quoted in U.S. dollars, a Fund will avoid currency risks
during the settlement period for purchases and sales.
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Foreign Currency Transactions. Because investment in foreign issuers
-----------------------------
will usually involve currencies of foreign countries, and because the
International Equity, Global Income and High Yield Funds may have currency
exposure independent of their securities positions, the value of the assets of a
Fund as measured in U.S. dollars will be affected by changes in foreign currency
exchange rates. A Fund may, to the extent it invests in foreign securities,
purchase or sell foreign currencies on a spot basis and may also purchase or
sell forward foreign currency exchange contracts for hedging purposes and to
seek to protect against anticipated changes in future foreign currency exchange
rates. In addition, the International Equity, Global Income and High Yield Funds
may enter into such contracts to seek to increase total return when the
Investment Adviser anticipates that the foreign currency will appreciate or
depreciate in value, but securities denominated or quoted in that currency do
not present attractive investment opportunities and are not held in the Fund's
portfolio. When entered into to seek to enhance return, forward foreign currency
exchange contracts are considered speculative. The International Equity, Global
Income and High Yield Funds may also engage in cross-hedging by using forward
contracts in a currency different from that in which the hedged security is
denominated or quoted if the Investment Adviser determines that there is a
pattern of correlation between the two currencies. If a Fund enters into a
forward foreign currency exchange contract to buy foreign currency for any
purpose or enters into forward foreign currency exchange contracts to sell
foreign currency to seek to increase total return, the Fund will be required to
place cash or liquid assets in a segregated account with the Fund's custodian in
an amount equal to the value of the Fund's total assets committed to the
consummation of the forward contract. A Fund will incur costs in connection with
conversions between various currencies. A Fund may hold foreign currency
received in connection with investments in foreign securities when, in the
judgment of the Investment Adviser, it would be beneficial to convert such
currency into U.S. dollars at a later date, based on anticipated changes in the
relevant exchange rate.
Currency exchange rates may fluctuate significantly over short periods
of time causing, along with other factors, a Fund's net asset value to
fluctuate. Currency exchange rates generally are determined by the forces of
supply and demand in the foreign exchange markets and the relative merits of
investments in different countries, actual or anticipated changes in interest
rates and other complex factors, as seen from an international perspective.
Currency exchange rates also can be affected unpredictably by the intervention
of U.S. or foreign governments or central banks or the failure to intervene or
by currency controls or political developments in the U.S. or abroad. To the
extent that a substantial portion of a Fund's total assets, adjusted to reflect
the Fund's net position after giving effect to currency transactions, is
denominated or quoted in the currencies of foreign countries, the Fund will be
more
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<PAGE>
susceptible to the risk of adverse economic and political developments within
those countries.
The market in forward foreign currency exchange contracts, currency
swaps and other privately negotiated currency instruments offers less protection
against defaults by the other party to such instruments than is available for
currency instruments traded on an exchange. Such contracts are subject to the
risk that the counterparty to the contract will default on its obligations.
Since these contracts are not guaranteed by an exchange or clearinghouse, a
default on the contract would deprive the Fund of unrealized profits,
transaction costs or the benefits of a currency hedge or force the Fund to cover
its purchase or sale commitments, if any, at the current market price. A Fund
will not enter into forward foreign currency exchange contracts, currency swaps
or other privately negotiated currency instruments unless the credit quality of
the unsecured senior debt or the claims-paying ability of the counterparty is
considered to be investment grade by the Investment Adviser.
The Funds may also engage in a variety of foreign currency management
techniques. Due to the limited market for instruments in emerging markets, the
Investment Adviser does not currently anticipate that a significant portion of
the Funds' currency exposure in emerging markets, if any, will be covered by
such instruments.
FIXED INCOME SECURITIES
U.S. Government Securities. Each Fund may invest in U.S. Government
--------------------------
securities. Generally, these securities include U.S. Treasury obligations and
obligations issued or guaranteed by U.S. Government agencies, instrumentalities
or sponsored enterprises which are supported by (a) the full faith and credit of
the U.S. Treasury (such as the Government National Mortgage Association ("Ginnie
Mae")), (b) the right of the issuer to borrow from the U.S. Treasury (such as
securities of the Student Loan Marketing Association), (c) the discretionary
authority of the U.S. Government to purchase certain obligations of the issuer
(such as the Federal National Mortgage Association ("Fannie Mae") and Federal
Home Loan Mortgage Corporation ("Freddie Mac")), or (d) only the credit of the
issuer. No assurance can be given that the U.S. Government will provide
financial support to U.S. Government agencies, instrumentalities or sponsored
enterprises in the future.
U.S. Government securities also include Treasury receipts and other
stripped U.S. Government securities, where the interest and principal components
of stripped U.S. Government securities are traded independently. The most widely
recognized program is the Separate Trading of Registered Interest and Principal
of Securities Program. A Fund may also invest in zero coupon U.S. Treasury
securities and in zero coupon securities issued by
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financial institutions, which represent a proportionate interest in underlying
U.S. Treasury securities.
Foreign Government Securities. The International Equity, Global Income
-----------------------------
and High Yield Funds may invest in debt obligations of foreign governments and
governmental agencies, including those of Emerging Countries. Investment in
sovereign debt obligations involves special risks not present in debt
obligations of corporate issuers. The issuer of the debt or the governmental
authorities that control the repayment of the debt may be unable or unwilling to
repay principal or interest when due in accordance with the terms of such debt,
and a Fund may have limited recourse in the event of a default. Periods of
economic uncertainty may result in the volatility of market prices of sovereign
debt, and in turn a Fund's net asset value, to a greater extent than the
volatility inherent in debt obligations of U.S. issuers. A sovereign debtor's
willingness or ability to repay principal and pay interest in a timely manner
may be affected by, among other factors, its cash flow situation, the extent of
its foreign currency reserves, the availability of sufficient foreign exchange
on the date a payment is due, the relative size of the debt service burden to
the economy as a whole, the sovereign debtor's policy toward international
lenders and the political constraints to which a sovereign debtor may be
subject.
Asset-Backed Securities. Each Fund (other than the CORE Funds) may also
-----------------------
invest in asset-backed securities ("Asset-Backed Securities"). The principal and
interest payments on Asset-Backed Securities are collateralized by pools of
assets such as auto loans, credit card receivables, leases, installment
contracts and personal property. Such asset pools are securitized through the
use of special purpose trusts or corporations. Principal and interest payments
may be credit enhanced by a letter of credit, a pool insurance policy or a
senior/subordinated structure.
Loan Participations. The High Yield Fund may invest in loan
-------------------
participations. Such loans must be to issuers in whose obligations the High
Yield Fund may invest. A loan participation is an interest in a loan to a U.S.
or foreign company or other borrower which is administered and sold by a
financial intermediary. In a typical corporate loan syndication, a number of
lenders, usually banks (co-lenders), lend a corporate borrower a specified sum
pursuant to the terms and conditions of a loan agreement. One of the co-lenders
usually agrees to act as the agent bank with respect to the loan.
Participation interests acquired by the High Yield Fund may take the
form of a direct or co-lending relationship with the corporate borrower, an
assignment of an interest in the loan by a co-lender or another participant, or
a participation in the seller's share of the loan. When the High Yield Fund acts
as co-
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<PAGE>
lender in connection with a participation interest or when the High Yield Fund
acquires certain participation interests, the High Yield Fund will have direct
recourse against the borrower if the borrower fails to pay scheduled principal
and interest. In cases where the High Yield Fund lacks direct recourse, it will
look to the agent bank to enforce appropriate credit remedies against the
borrower. In these cases, the High Yield Fund may be subject to delays, expenses
and risks that are greater than those that would have been involved if the Fund
had purchased a direct obligation (such as commercial paper) of such borrower.
For example, in the event of the bankruptcy or insolvency of the corporate
borrower, a loan participation may be subject to certain defenses by the
borrower as a result of improper conduct by the agent bank. Moreover, under the
terms of the loan participation, the High Yield Fund may be regarded as a
creditor of the agent bank (rather than of the underlying corporate borrower),
so that the High Yield Fund may also be subject to the risk that the agent bank
may become insolvent. The secondary market, if any, for these loan
participations is limited and any loan participations purchased by the High
Yield Fund will be regarded as illiquid.
For purposes of certain investment limitations pertaining to
diversification of the High Yield Fund's portfolio investments, the issuer of a
loan participation will be the underlying borrower. However, in cases where the
High Yield Fund does not have recourse directly against the borrower, both the
borrower and each agent bank and co-lender interposed between the High Yield
Fund and the borrower will be deemed issuers of a loan participation.
Municipal Securities. The High Yield Fund may make limited investments
--------------------
in instruments issued by state and local governmental issuers. The securities
may include private activity bonds, municipal leases, certificates of
participation and "auction rate" securities.
Corporate Debt Obligations. Each Fund may invest in corporate debt
--------------------------
obligations. In addition to obligations of corporations, corporate debt
obligations include securities issued by banks and other financial institutions.
Corporate debt obligations are subject to the risk of an issuer's inability to
meet principal and interest payments on the obligations.
Bank Obligations. Each Fund may invest in obligations issued or
----------------
guaranteed by U.S. or foreign banks. Bank obligations, including without
limitation time deposits, bankers' acceptances and certificates of deposit, may
be general obligations of the parent bank or may be limited to the issuing
branch by the terms of the specific obligations or by government regulation.
Banks are subject to extensive but different governmental regulations which may
limit both the amount and types of loans which may be made and interest rates
which may be charged. In addition, the
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<PAGE>
profitability of the banking industry is largely dependent upon the availability
and cost of funds for the purpose of financing lending operations under
prevailing money market conditions. General economic conditions as well as
exposure to credit losses arising from possible financial difficulties of
borrowers play an important part in the operation of this industry.
Structured Securities. Each Fund may invest in structured securities.
---------------------
The value of the principal of and/or interest on such securities is determined
by reference to changes in the value of specific currencies, interest rates,
commodities, indices or other financial indicators (the "Reference") or the
relative change in two or more References. The interest rate or the principal
amount payable upon maturity or redemption may be increased or decreased
depending upon changes in the applicable Reference. The terms of the structured
securities may provide that in certain circumstances no principal is due at
maturity and, therefore, result in the loss of a Fund's investment. Structured
securities may be positively or negatively indexed, so that appreciation of the
Reference may produce an increase or decrease in the interest rate or value of
the security at maturity. In addition, changes in the interest rates or the
value of the security at maturity may be a multiple of changes in the value of
the Reference. Consequently, structured securities may entail a greater degree
of market risk than other types of fixed-income securities. Structured
securities may also be more volatile, less liquid and more difficult to
accurately price than less complex securities.
Rating Criteria. The rating criteria for the Global Income and High
---------------
Yield Funds are stated above. Except as noted below, each Equity Fund (other
than the CORE Funds, which only invest in debt instruments that are cash
equivalents) may invest in debt securities rated at least investment grade at
the time of investment. Investment grade debt securities are securities rated
BBB or higher by Standard & Poor's or Baa or higher by Moody's. A security will
be deemed to have met a rating requirement if it receives the minimum required
rating from at least one such rating organization even though it has been rated
below the minimum rating by one or more other rating organizations, or if
unrated by such rating organizations, determined by the Investment Adviser to be
of comparable credit quality. The Growth and Income, Capital Growth and
International Equity Funds may invest up to 10%, 10% and 35%, respectively, of
their total assets in debt securities which are unrated or rated in the lowest
rating categories by Standard & Poor's or Moody's (i.e., BB or lower by Standard
& Poor's or Ba or lower by Moody's), including securities rated D by Moody's or
Standard & Poor's. The Mid Cap Equity Fund may invest up to 10% of its total
assets in below investment grade debt securities rated B or higher by Standard &
Poor's or B or higher by Moody's. Fixed income securities rated BBB or Baa are
considered medium-grade obligations with speculative characteristics, and
adverse
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<PAGE>
economic conditions or changing circumstances may weaken their issuers'
capacity to pay interest and repay principal. Fixed income securities rated BB
or Ba or below (or comparable unrated securities) are commonly referred to as
"junk bonds," are considered predominately speculative and may be questionable
as to principal and interest payments as described further below under "Risk
Factors - Risks of Investing in Non-Investment Grade Fixed-Income Securities."
As a result, investment in such bonds will entail greater speculative risks than
those associated with investment in investment grade bonds. Also, to the extent
that the rating assigned to a security in a Fund's portfolio is downgraded by a
rating organization, the market price and liquidity of such security may be
adversely affected. See Appendix A to the Additional Statement for a description
of the corporate bond ratings assigned by Standard & Poor's and Moody's.
Zero Coupon, Deferred Interest, Pay-In-Kind and Capital Appreciation
--------------------------------------------------------------------
Bonds. The Equity and Fixed Income Funds may invest in zero coupon bonds and the
- -----
Fixed Income Funds may invest in deferred interest, pay-in-kind and capital
appreciation bonds. Zero coupon, deferred interest and capital appreciation
bonds are securities issued at a discount from their face value because interest
payments are typically postponed until maturity. The amount of the discount rate
varies depending on factors including the time remaining until maturity,
prevailing interest rates, the security's liquidity and the issuer's credit
quality. These securities also may take the form of debt securities that have
been stripped of their interest payments. Pay-in-kind securities are securities
that have interest payable by the delivery of additional securities. The market
prices of zero coupon, deferred interest, pay-in-kind and capital appreciation
bonds generally are more volatile than the market prices of interest-bearing
securities and are likely to respond to a greater degree to changes in interest
rates than interest-bearing securities having similar maturities and credit
quality. A Fund's investments in zero coupon, deferred interest, pay-in-kind and
capital appreciation bonds may require the Fund to sell certain of its portfolio
securities to generate sufficient cash to satisfy certain income distribution
requirements. See "Taxation" in the Additional Statement.
MORTGAGE-BACKED SECURITIES
Each Fund (other than the CORE Funds) may invest in mortgage-backed
securities ("Mortgage-Backed Securities"), which represent direct or indirect
participations in, or are collateralized by and payable from, mortgage loans
secured by real property. Mortgagors can generally prepay interest or principal
on their mortgage whenever they choose. Therefore, Mortgage-Backed Securities
are often subject to more rapid repayment than their stated maturity date would
indicate as a result of principal prepayments on the underlying loans. This can
result in significantly greater price and yield volatility
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<PAGE>
than is the case with traditional fixed-income securities. During periods of
declining interest rates, prepayments can be expected to accelerate, and thus
impair a Fund's ability to reinvest the returns of principal at comparable
yields. Conversely, in a rising interest rate environment, a declining
prepayment rate will extend the average life of many Mortgage-Backed Securities
and prevent a Fund from taking advantage of such higher yields.
Fixed-Rate Mortgage Loans. Generally, fixed-rate mortgage loans pay
-------------------------
interest at fixed annual rates and have original terms to maturity ranging from
5 to 40 years. Fixed-rate mortgage loans typically provide for monthly payments
of principal and interest in substantially equal installments for the term of
the mortgage note in sufficient amounts to fully amortize principal by maturity,
although certain fixed-rate mortgage loans provide for a large final "balloon"
payment upon maturity.
Adjustable Rate Mortgage Loans ("ARMs"). ARMs are pass-through mortgage
---------------------------------------
securities collateralized by mortgages with adjustable rather than fixed coupon
rates. ARMs generally provide for a fixed initial mortgage interest rate for a
set period. Thereafter, the interest rates are subject to periodic adjustments
based on changes to a designated benchmark index.
ARMs allow a Fund to participate in increases in interest rates through
periodic increases in the securities' coupon rates. During periods of declining
interest rates, coupon rates may readjust downward resulting in lower yields to
a Fund. Therefore, the value of an ARM is unlikely to rise during periods of
declining interest rates to the same extent as fixed-rate securities. Interest
rate declines may result in accelerated prepayment of mortgages with the result
that proceeds from prepayments will be reinvested at lower interest rates.
During periods of rising interest rates, changes in the coupon rate will lag
behind changes in the market rate. ARMs are also typically subject to maximum
increases and decreases in the interest rate adjustment which can be made on any
one adjustment date, in any one year, or during the life of the security. In the
event of dramatic increases or decreases in prevailing market interest rates,
the value of a Fund's investments in ARMs may fluctuate more substantially since
these limits may prevent the security from fully adjusting its interest rate to
the prevailing market rates.
U.S. Government Guaranteed Mortgage-Backed Securities. Certain
-----------------------------------------------------
Mortgage-Backed Securities are issued or guaranteed by the U.S. Government, its
agencies, instrumentalities or sponsored enterprises. Such issuers include, but
are not limited to, Ginnie Mae, Fannie Mae and Freddie Mac. See "U.S. Government
Securities."
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<PAGE>
Privately Issued Mortgage-Backed Securities. Certain Mortgage-Backed
-------------------------------------------
Securities are issued or sponsored by non-governmental entities. Privately
issued Mortgage-Backed Securities are generally backed by pools of conventional
(i.e., non-government guaranteed or insured) mortgage loans. Since such
Mortgage-Backed Securities normally are not guaranteed by an entity having the
credit standing of Ginnie Mae, Fannie Mae or Freddie Mac, in order to receive a
high quality rating from the rating organizations (i.e., S&P or Moody's), they
normally are structured with one or more types of "credit enhancement."
Multiple Class Mortgage-Backed Securities and Collateralized Mortgage
---------------------------------------------------------------------
Obligations. Mortgage-Backed Securities also include multiple class securities,
- -----------
including collateralized mortgage obligations ("CMOs") and Real Estate Mortgage
Investment Conduit ("REMIC") pass-through or participation certificates. CMOs
provide an investor with a specified interest in the cash flow from a pool of
underlying mortgages or of other Mortgage-Backed Securities. CMOs are issued in
multiple classes, each with a specified fixed or floating interest rate and a
final scheduled distribution date. In most cases, payments of principal are
applied to the CMO classes in the order of their respective stated maturities,
so that no principal payments will be made on a CMO class until all other
classes having an earlier stated maturity date are paid in full. A REMIC is a
CMO that qualifies for special tax treatment under the Internal Revenue Code of
1986, as amended (the "Code"), and invests in certain mortgages principally
secured by interests in real property and other permitted investments. The Funds
do not intend to purchase residual interests in REMICs.
Stripped Mortgage-Backed Securities. The Global Income and High Yield
-----------------------------------
Funds may invest in Stripped Mortgage-Backed Securities ("SMBS") which are
derivative multiple class Mortgage-Backed Securities. SMBS are usually
structured with two different classes: one that receives 100% of the interest
payments and the other that receives 100% of the principal payments from a pool
of mortgage loans. If the underlying mortgage loans experience different than
anticipated prepayments of principal, a Fund may fail to fully recoup its
initial investment in these securities. The market value of the class consisting
entirely of principal payments generally is unusually volatile in response to
changes in interest rates. The yields on a class of SMBS that receives all or
most of the interest from mortgage loans are generally higher than prevailing
market yields on other Mortgage-Backed Securities because their cash flow
patterns are more volatile and there is a greater risk that the initial
investment will not be fully recouped.
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<PAGE>
INVESTMENT TECHNIQUES
OPTIONS ON SECURITIES AND SECURITIES INDICES
Each Fund (other than the CORE U.S. Equity and CORE Large Cap Growth
Funds) may write (sell) covered call and put options and purchase call and put
options on any securities in which it may invest or on any securities index
comprised of securities in which it may invest. The writing and purchase of
options is a highly specialized activity which involves investment techniques
and risks different from those associated with ordinary portfolio securities
transactions. The use of options to seek to increase total return involves the
risk of loss if the Investment Adviser is incorrect in its expectation of
fluctuations in securities prices or interest rates.
The successful use of options for hedging purposes also depends in part
on the ability of the Investment Adviser to manage future price fluctuations and
the degree of correlation between the options and securities markets. If the
Investment Adviser is incorrect in its expectation of changes in securities
prices or determination of the correlation between the securities indices on
which options are written and purchased and the securities in a Fund's
investment portfolio, the investment performance of the Fund will be less
favorable than it would have been in the absence of such options transactions.
The writing of options could significantly increase a Fund's portfolio turnover
rate and, therefore, associated brokerage commissions or spreads.
OPTIONS ON FOREIGN CURRENCIES
A Fund may, to the extent it invests in foreign securities, purchase
and sell (write) call and put options on foreign currencies for the purpose of
protecting against declines in the U.S. dollar value of foreign portfolio
securities and anticipated dividends on such securities and against increases in
the U.S. dollar cost of foreign securities to be acquired.
In addition, the International Equity, Global Income and High Yield
Funds may use options on currency to cross-hedge, which involves writing or
purchasing options on one currency to hedge against changes in exchange rates
for a different currency, if there is a pattern of correlation between the two
currencies. As with other kinds of options transactions, however, the writing of
an option on a foreign currency will constitute only a partial hedge, up to the
amount of the premium received. If an option that a Fund has written is
exercised, the Fund could be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses.
The purchase of an option on foreign currency may constitute an
effective hedge against exchange rate fluctuations; however,
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<PAGE>
in the event of exchange rate movements adverse to a Fund's position, the Fund
may forfeit the entire amount of the premium plus related transaction costs. In
addition to purchasing call and put options for hedging purposes, the
International Equity, Global Income and High Yield Funds may purchase call or
put options on currency to seek to increase total return when the Investment
Adviser anticipates that the currency will appreciate or depreciate in value,
but the securities quoted or denominated in that currency do not present
attractive investment opportunities and are not held in the Fund's portfolio.
When purchased or sold to seek to increase total return, options on currencies
are considered speculative. Options on foreign currencies written or purchased
by the Funds are traded on U.S. and foreign exchanges or over-the-counter.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
To seek to increase total return or to hedge against changes in
interest rates, securities prices or currency exchange rates, a Fund may
purchase and sell various kinds of futures contracts, and purchase and write
call and put options on any of such futures contracts. Each Fund may also enter
into closing purchase and sale transactions with respect to any such contracts
and options. The futures contracts may be based on various securities (such as
U.S. Government securities), foreign currencies, securities indices and other
financial instruments and indices. The CORE U.S. Equity, CORE Large Cap Growth
and CORE Small Cap Equity Funds may enter into such transactions only with
respect to the S&P 500 Index in the case of the CORE U.S. Equity Fund and a
representative index in the case of the CORE Large Cap Growth and CORE Small Cap
Equity Funds.
A Fund will engage in futures and related options transactions for bona
fide hedging purposes as defined in regulations of the Commodity Futures Trading
Commission or to seek to increase total return to the extent permitted by such
regulations. A Fund may not purchase or sell futures contracts or purchase or
sell related options to seek to increase total return, except for closing
purchase or sale transactions, if immediately thereafter the sum of the amount
of initial margin deposits and premiums paid on the Fund's outstanding positions
in futures and related options entered into for the purpose of seeking to
increase total return would exceed 5% of the market value of the Fund's net
assets. These transactions involve brokerage costs, require margin deposits and,
in the case of contracts and options obligating a Fund to purchase securities or
currencies, require the Fund to segregate and maintain cash or liquid assets
with a value equal to the amount of the Fund's obligations or to otherwise cover
the obligations in a manner permitted by the SEC.
While transactions in futures contracts and options on futures may
reduce certain risks, such transactions themselves entail certain other risks.
See "Investment Objectives and
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<PAGE>
Policies-Futures Contracts and Options on Future Contracts" in the Additional
Statement. Thus, while a Fund may benefit from the use of futures and options on
futures, unanticipated changes in interest rates, securities prices or currency
exchange rates may result in poorer overall performance than if the Fund had not
entered into any futures contracts or options transactions. Because perfect
correlation between a futures position and portfolio position that is intended
to be protected is impossible to achieve, the desired protection may not be
obtained and a Fund may be exposed to risk of loss.
The loss incurred by a Fund in entering into futures contracts and in
writing call options on futures is potentially unlimited and may exceed the
amount of the premium received. Futures markets are highly volatile and the use
of futures may increase the volatility of a Fund's net asset value. The
profitability of a Fund's trading in futures to seek to increase total return
depends upon the ability of the Investment Adviser to correctly analyze the
futures markets. In addition, because of the low margin deposits normally
required in futures trading, a relatively small price movement in a futures
contract may result in substantial losses to a Fund. Further, futures contracts
and options on futures may be illiquid, and exchanges may limit fluctuations in
futures contract prices during a single day.
CURRENCY SWAPS
The International Equity, Global Income and High Yield Funds may enter
into currency swaps for hedging purposes or to seek to increase total return.
Currency swaps involve the exchange by a Fund with another party of their
respective rights to make or receive payments in specified currencies. Currency
swaps usually involve the delivery of a gross payment stream in one designated
currency in exchange for the gross payment stream in another designated
currency. Therefore, the entire payment stream under a currency swap is subject
to the risk that the other party to the swap will default on its contractual
delivery obligations.
A Fund will not enter into swap transactions unless the unsecured
commercial paper, senior debt or claims-paying ability of the other party
thereto is rated either AA or A-1 or better by S&P or Aa or P-1 or better by
Moody's, or, if unrated by such rating organizations, determined to be of
comparable quality by the Investment Adviser. The use of currency swaps is a
highly specialized activity which involves investment techniques and risks
different from those associated with ordinary portfolio securities transactions.
If the Investment Adviser is incorrect in its forecasts of currency
exchange rates, the investment performance of a Fund would be less favorable
than it would have been if this investment technique were not used. The staff of
the SEC
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<PAGE>
currently takes the position that swaps are illiquid and thus subject to a
Fund's limitation on investments in illiquid securities.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
Each Fund may purchase when-issued securities. When-issued transactions
arise when securities are purchased by a Fund with payment and delivery taking
place in the future in order to secure what is considered to be an advantageous
price and yield to the Fund at the time of entering into the transaction. Each
Fund may also purchase securities on a forward commitment basis; that is, make
contracts to purchase securities for a fixed price at a future date beyond the
customary three-day settlement period. A Fund is required to hold and maintain
in a segregated account with the Fund's custodian until three days prior to the
settlement date, cash or liquid assets in an amount sufficient to meet the
purchase price. Alternatively, each Fund may enter into offsetting contracts for
the forward sale of other securities that it owns. The purchase of securities on
a when-issued or forward commitment basis involves a risk of loss if the value
of the security to be purchased declines prior to the settlement date. Although
a Fund would generally purchase securities on a when-issued or forward
commitment basis with the intention of acquiring securities for its portfolio, a
Fund may dispose of when-issued securities or forward commitments prior to
settlement if its Investment Adviser deems it appropriate to do so.
ILLIQUID AND RESTRICTED SECURITIES
A Fund will not invest more than 15% of its net assets in illiquid
investments, which include securities (both foreign and domestic) that are not
readily marketable, certain SMBS, repurchase agreements maturing in more than
seven days, time deposits with a notice or demand period of more than seven
days, certain over-the-counter options and certain restricted securities, unless
it is determined, based upon the continuing review of the trading markets for a
specific restricted security, that such restricted security is eligible for
resale under Rule 144A under the Securities Act of 1933 and, therefore, is
liquid.
The Trustees have adopted guidelines and delegated to the Investment
Advisers the daily function of determining and monitoring the liquidity of
portfolio securities. The Trustees, however, retain oversight focusing on
factors such as valuation, liquidity and availability of information and are
ultimately responsible for each determination. Investing in restricted
securities eligible for resale pursuant to Rule 144A may decrease the liquidity
of a Fund's portfolio to the extent that qualified institutional buyers become
for a time uninterested in purchasing these restricted securities. The purchase
price and subsequent valuation of restricted and illiquid securities normally
reflect
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<PAGE>
a discount, which may be significant, from the market price of comparable
securities for which a liquid market exists.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with dealers in U.S.
Government securities and member banks of the Federal Reserve System which
furnish collateral at least equal in value or market price to the amount of
their repurchase obligation. The International Equity, Global Income and High
Yield Funds may also enter into repurchase agreements involving certain foreign
government securities. If the other party or "seller" defaults, a Fund might
suffer a loss to the extent that the proceeds from the sale of the underlying
securities and other collateral held by the Fund in connection with the related
repurchase agreement are less than the repurchase price. In addition, in the
event of bankruptcy of the seller or failure of the seller to repurchase the
securities as agreed, a Fund could suffer losses, including loss of interest on
or principal of the security and costs associated with delay and enforcement of
the repurchase agreement.
The Trustees have reviewed and approved certain counterparties whom they believe
to be creditworthy and have authorized the Funds to enter into repurchase
agreements with such counterparties. In addition, each Fund, together with other
registered investment companies having management agreements with an Investment
Adviser, may transfer uninvested cash balances into a single joint account, the
daily aggregate balance of which will be invested in one or more repurchase
agreements.
LENDING OF PORTFOLIO SECURITIES
Each Fund may also seek to increase its income by lending portfolio
securities. Under present regulatory policies, such loans may be made to
institutions, such as certain broker-dealers, and are required to be secured
continuously by collateral in cash, cash equivalents, or U.S. Government
securities maintained on a current basis in an amount at least equal to the
market value of the securities loaned. Cash collateral may be invested in cash
equivalents. If an Investment Adviser determines to make securities loans, the
value of the securities loaned may not exceed 33-1/3% of the value of the total
assets of a Fund. A Fund may experience a loss or delay in the recovery of its
securities if the institution with which it has engaged in a portfolio loan
transaction breaches its agreement with the Fund.
SHORT SALES AGAINST THE BOX
Each Fund (other than the CORE and Fixed Income Funds) may make short
sales of securities or maintain a short position, provided that at all times
when a short position is open the Fund
-36-
<PAGE>
owns or has the right to obtain an equal amount of such securities or securities
convertible into or exchangeable, without payment of any further consideration,
for an equal amount of the securities of the same issuer as the securities sold
short (a short sale against the box). A short sale against the box will defer
recognition of gain for federal income tax purposes only if the Fund
subsequently closes the short position by making a purchase of the relevant
securities no later than 30 days after the end of the taxable year. Not more
than 25% of a Fund's net assets (determined at the time of the short sale) may
be subject to such short sales. As a result of recent tax legislation, short
sales may not be used to defer the recognition of gain for tax purposes with
respect to appreciated securities in a Fund's portfolio.
MORTGAGE DOLLAR ROLLS
The Global Income Fund may enter into mortgage "dollar rolls" in which
a Fund sells securities for delivery in the current month and simultaneously
contracts with the same counterparty to repurchase substantially similar (same
type, coupon and maturity) but not identical securities on a specified future
date. During the roll period, the Fund loses the right to receive principal and
interest paid on the securities sold. However, the Fund would benefit to the
extent of any difference between the price received for the securities sold and
the lower forward price for the future purchase or fee income plus the interest
earned on the cash proceeds of the securities sold until the settlement date for
the forward purchase. Unless such benefits exceed the income, capital
appreciation and gain or loss due to mortgage prepayments that would have been
realized on the securities sold as part of the mortgage dollar roll, the use of
this technique will diminish the investment performance of the Fund. Successful
use of mortgage dollar rolls depends upon the Investment Adviser's ability to
predict correctly interest rates and mortgage prepayments. There is no assurance
that mortgage dollar rolls can be successfully employed. The Fund will hold and
maintain in a segregated account until the settlement date cash or liquid assets
in an amount equal to the forward purchase price. For financial reporting and
tax purposes, the Fund treats mortgage dollar rolls as two separate
transactions; one involving the purchase of a security and a separate
transaction involving a sale. The Fund does not currently intend to enter into
mortgage dollar rolls that are accounted for as a financing.
TEMPORARY INVESTMENTS
Each Fund may, for temporary defensive purposes, invest 100% of its
total assets (except that the CORE Funds may only hold up to 35% of their
respective total assets) in U.S. Government securities and repurchase agreements
collateralized by U.S. Government securities. The Equity Funds may also, for
temporary defensive purposes invest 100% of their respective total assets
-37-
<PAGE>
(except the CORE Funds which may only hold up to 35% of their respective total
assets) in commercial paper rated at least A-2 by Standard & Poor's or P-2 by
Moody's, certificates of deposit, bankers' acceptances, repurchase agreements,
non-convertible preferred stocks, non-convertible corporate bonds with a
remaining maturity of less than one year or, subject to certain tax
restrictions, foreign currencies. The High Yield Fund may for temporary purposes
invest in investment grade securities. When a Fund's assets are invested in such
instruments, the Fund may not be achieving its investment objective.
MISCELLANEOUS TECHNIQUES
In addition to the techniques and investments described above, each
Fund may, with respect to no more than 5% of its net assets, engage in the
following techniques and investments: (i) other investment companies including
World Equity Benchmark Shares and Standard & Poor's Depository Receipts, (ii)
warrants, stock purchase rights and unseasoned companies (Equity Funds only),
(iii) mortgage swaps and interest rate swaps, caps, floors and collars (Global
Income and High Yield Funds only), (iv) yield curve options and inverse
floating-rate securities (Global Income and High Yield Funds only), (v)
portfolio securities lending (Global Income and High Yield Funds only), (vi)
custodial receipts, and (vii) currency swaps (International Equity Fund
only).
In addition, each Fund may borrow up to 33-1/3% of its total assets
from banks for temporary or emergency purposes. A Fund may not make additional
investments if borrowings (excluding covered mortgage dollar rolls) exceed 5% of
its total assets. For more information see the Additional Statement.
RISK FACTORS
Risks of Investing in Small Capitalization Companies. Investing in the
----------------------------------------------------
securities of such companies involves greater risk and the possibility of
greater portfolio price volatility. Historically, small market capitalization
stocks and stocks of recently organized companies have been more volatile in
price than the larger market capitalization stocks included in the S&P 500
Index. Among the reasons for the greater price volatility of these small company
and unseasoned stocks are the less certain growth prospects of smaller firms and
the lower degree of liquidity in the markets for such stocks.
Special Risks of Investments in Emerging Markets. Investing in the
------------------------------------------------
securities of issuers in Emerging Countries involves risks in addition to those
discussed under "Description of Securities - Foreign Investments." The
International Equity Fund may invest without limit in the securities of issuers
in Emerging Countries. The High Yield Fund may invest up to 25%, the Growth and
Income
-38-
<PAGE>
and Mid Cap Equity Funds may each invest up to 15% and the Capital Growth and
Global Income Funds may invest up to 10% of their total assets in securities of
issuers in Emerging Countries.
Emerging Countries are generally located in the Asia-Pacific region,
Eastern Europe, Latin and South America and Africa. A Fund's purchase and sale
of portfolio securities in certain Emerging Countries may be constrained by
limitations as to daily changes in the prices of listed securities, periodic
trading or settlement volume and/or limitations on aggregate holdings of foreign
investors. Such limitations may be computed based on the aggregate trading
volume by or holdings of a Fund, the Investment Adviser, its affiliates and
their respective clients and other service providers.
A Fund may not be able to sell securities in circumstances where price,
trading or settlement volume limitations have been reached. Foreign investment
in the securities markets of certain Emerging Countries is restricted or
controlled to varying degrees which may limit investment in such countries or
increase the administrative costs of such investments. For example, certain
Asian countries require governmental approval prior to investments by foreign
persons or limit investment by foreign persons to only a specified percentage of
an issuer's outstanding securities or a specific class of securities which may
have less advantageous terms (including price) than securities of the issuer
available for purchase by nationals.
In addition, certain countries may restrict or prohibit investment
opportunities in issuers or industries deemed important to national interests.
Such restrictions may affect the market price, liquidity and rights of
securities that may be purchased by a Fund. The repatriation of both investment
income and capital from certain Emerging Countries is subject to restrictions
such as the need for governmental consents. Due to restrictions on direct
investment in equity securities in certain Asian countries, such as Taiwan, it
is anticipated that a Fund may invest in such countries only through other
investment funds in such countries. See "Other Investment Companies" in the
Additional Statement.
Many Emerging Countries may be subject to a greater degree of economic,
political and social instability than is the case in Western Europe, the United
States, Canada, Australia, New Zealand and Japan. Many Emerging Countries do not
have fully democratic governments. For example, governments of some Emerging
Countries are authoritarian in nature or have been installed or removed as a
result of military coups, while governments in other Emerging Countries have
periodically used force to suppress civil dissent. Disparities of wealth, the
pace and success of democratization, and ethnic, religious and racial
disaffection, among other factors, have also led to social unrest, violence
and/or labor
-39-
<PAGE>
unrest in some Asian and other Emerging Countries. Unanticipated political or
social developments may affect the values of a Fund's investments. Investing in
Emerging Countries involves the risk of loss due to expropriation,
nationalization, confiscation of assets and property or the imposition of
restrictions on foreign investments and on repatriation of capital invested.
Economies in individual Emerging Countries may differ favorably or unfavorably
from the U.S. economy in such respects as growth of gross domestic product,
rates of inflation, currency valuation, capital reinvestment, resource self-
sufficiency and balance of payments positions. Many Emerging Countries have
experienced currency devaluations and substantial and, in some cases, extremely
high rates of inflation, which have a negative effect on the economies and
securities markets of such Emerging Countries. Economies in Emerging Countries
generally are dependent heavily upon commodity prices and international trade
and, accordingly, have been and may continue to be affected adversely by the
economies of their trading partners, trade barriers, exchange controls, managed
adjustments in relative currency values and other protectionist measures imposed
or negotiated by the countries with which they trade.
Brokerage commissions, custodial services and other costs relating to
investment in international securities markets generally are more expensive than
in the United States. A Fund's investment in Emerging Countries may also be
subject to withholding or other taxes, which may be significant and may reduce
the return from an investment in such country to the Fund. Settlement procedures
in Emerging Countries are frequently less developed and reliable than those in
the United States and may involve a Fund's delivery of securities before receipt
of payment for their sale. In addition, significant delays are common in certain
markets in registering the transfer of securities. Settlement or registration
problems may make it more difficult for a Fund to value its portfolio securities
and could cause the Fund to miss attractive investment opportunities, to have a
portion of its assets uninvested or to incur losses due to the failure of a
counterparty to pay for securities the Fund has delivered or the Fund's
inability to complete its contractual obligations.
Currently, there is no market or only a limited market for many of the
management techniques and instruments with respect to the currencies and
securities markets of the Emerging Countries. Consequently, there can be no
assurance that suitable instruments for hedging currency and market-related
risks will be available at the times when a Fund wishes to use them.
Interest Rate Risk. When interest rates decline, the market value of
------------------
fixed-income securities tends to increase. Conversely, when interest rates
increase, the market value of fixed-income securities tends to decline.
Volatility of a security's market
-40-
<PAGE>
value will differ depending upon the security's duration, the issuer and the
type of instrument.
Default Risk/Credit Risk. Investments in fixed-income securities are
------------------------
subject to the risk that the issuer could default on its obligations and a Fund
could sustain losses on such investments. A default could impact both interest
and principal payments.
Call Risk and Extension Risk. Fixed-income securities may be subject to
----------------------------
both call risk and extension risk. Call risk (i.e., where the issuer exercises
its right to pay principal on an obligation earlier than scheduled) causes cash
flow to be returned earlier than expected. This typically results when interest
rates have declined, and a Fund may be unable to recoup all of its initial
investment and will also suffer from having to reinvest in lower yielding
securities. Extension risk (i.e., where the issuer exercises its right to pay
principal on an obligation later than scheduled) causes cash flows to be
returned later than expected. This typically results when interest rates have
increased and a Fund will suffer from the inability to invest in higher yielding
securities. Certain types of U.S. Government, Asset-Backed, corporate, foreign,
Mortgage-Backed and municipal securities have this call and/or extension risk.
The investment characteristics of Mortgage-Backed Securities and
Asset-Backed Securities differ from those of traditional fixed-income securities
because they generally have both call risk (also known as prepayment risk) and
extension risk. Homeowners have the option to prepay their mortgage. Therefore,
the duration of a security backed by home mortgages can either shorten (call
risk) or lengthen (extension risk). Investors are exposed to the fluctuating
principal and interest payments associated with such securities. In general, if
interest rates on new mortgage loans fall sufficiently below the interest rates
on existing outstanding mortgage loans, the rate of prepayment would be expected
to increase. Conversely, if mortgage loan interest rates rise above the interest
rates on existing outstanding mortgage loans, the rate of prepayment would be
expected to decrease.
ARMs also have the risk of prepayments. The rate of principal
prepayments with respect to ARMs has fluctuated in recent years. As with
fixed-rate mortgage loans, ARMs may be subject to a greater rate of principal
repayments in a declining interest rate environment. For example, if prevailing
interest rates fall significantly, ARMs could be subject to higher prepayment
rates (than if prevailing interest rates remain constant or increase) because
the availability of low fixed-rate mortgages may encourage mortgagors to
refinance their ARMs to "lock-in" a fixed-rate mortgage. Conversely, if
prevailing interest rates rise significantly, ARMs may prepay more slowly. As
with fixed-rate mortgages, ARM prepayment rates vary in both stable and changing
interest rate environments. There are
-41-
<PAGE>
certain ARMs where the homeowner's payments do not fully cover interest, so the
principal balance increases over time. These "negative amortizing" ARMs may be
subject to greater default risk.
Derivative Mortgage-Backed Securities. Because derivative
-------------------------------------
Mortgage-Backed Securities (such as principal-only (POs), interest-only (IOs) or
inverse floating rate securities) are more exposed to mortgage prepayments, they
generally involve a greater amount of risk. Small changes in prepayments can
significantly impact the cash flow and the market value of these securities. The
risk of faster than anticipated prepayments generally adversely affects IOs,
super floaters and premium priced Mortgage-Backed Securities. The risk of slower
than anticipated prepayments generally adversely affects POs, floating-rate
securities subject to interest rate caps, support tranches and discount priced
Mortgage-Backed Securities. In addition, particular derivative securities may be
leveraged such that their exposure (i.e., price sensitivity) to interest rate
and/or prepayment risk is magnified.
Risks of Investing in Non-Investment Grade Fixed-Income Securities.
------------------------------------------------------------------
Non-investment grade fixed-income securities are considered predominantly
speculative by traditional investment standards. In some cases, these
obligations may be highly speculative and have poor prospects for reaching
investment grade standing. Non-investment grade fixed-income securities and
unrated securities of comparable credit quality (commonly known as "junk bonds")
are subject to the increased risk of an issuer's inability to meet principal and
interest obligations. These securities, also referred to as high yield
securities, may be subject to greater price volatility due to such factors as
specific corporate developments, interest rate sensitivity, negative perceptions
of the junk bond markets generally and less secondary market liquidity.
Non-investment grade fixed-income securities are often issued in
connection with a corporate reorganization or restructuring or as part of a
merger, acquisition, takeover or similar event. They are also issued by less
established companies seeking to expand. Such issuers are often highly leveraged
and generally less able than more established or less leveraged entities to make
scheduled payments of principal and interest in the event of adverse
developments or business conditions.
The market value of non-investment grade fixed-income securities tends
to reflect individual corporate developments to a greater extent than that of
higher rated securities which react primarily to fluctuations in the general
level of interest rates. As a result, a Fund's ability to achieve its investment
objectives may depend to a greater extent on the Investment Adviser's judgment
concerning the creditworthiness of issuers
-42-
<PAGE>
than funds which invest in higher-rated securities. Issuers of non-investment
grade fixed-income securities may not be able to make use of more traditional
methods of financing and their ability to service debt obligations may be more
adversely affected than issuers of higher-rated securities by economic
downturns, specific corporate developments or the issuer's inability to meet
specific projected business forecasts. Negative publicity about the junk bond
market and investor perceptions regarding lower rated securities, whether or not
based on fundamental analysis, may depress the prices for such securities.
A holder's risk of loss from default is significantly greater for
non-investment grade fixed-income securities than is the case for holders of
other debt securities because such non-investment grade securities are generally
unsecured and are often subordinated to the rights of other creditors of the
issuers of such securities. Investment by a Fund in defaulted securities poses
additional risk of loss should nonpayment of principal and interest continue in
respect of such securities. Even if such securities are held to maturity,
recovery by a Fund of its initial investment and any anticipated income or
appreciation is uncertain.
The secondary market for non-investment grade fixed-income securities
is concentrated in relatively few market makers and is dominated by
institutional investors, including mutual funds, insurance companies and other
financial institutions. Accordingly, the secondary market for such securities is
not as liquid as, and is more volatile than, the secondary market for
higher-rated securities. In addition, market trading volume for high yield
fixed-income securities is generally lower and the secondary market for such
securities could contract under adverse market or economic conditions,
independent of any specific adverse changes in the condition of a particular
issuer. These factors may have an adverse effect on the market price and a
Fund's ability to dispose of particular portfolio investments. A less liquid
secondary market also may make it more difficult for a Fund to obtain precise
valuations of the high yield securities in its portfolio.
Credit ratings issued by credit rating agencies are designed to
evaluate the safety of principal and interest payments of rated securities. They
do not, however, evaluate the market value risk of non-investment grade
securities and, therefore, may not fully reflect the true risks of an
investment. In addition, credit rating agencies may or may not make timely
changes in a rating to reflect changes in the economy or in the conditions of
the issuer that affect the market value of the security. Consequently, credit
ratings are used only as a preliminary indicator of investment quality.
Investments in non-investment grade and comparable unrated obligations will be
more dependent on the Investment Adviser's credit analysis than would be the
-43-
<PAGE>
case with investments in investment-grade debt obligations. The Investment
Adviser employs its own credit research and analysis, which includes a study of
existing debt, capital structure, ability to service debt and to pay dividends,
the issuer's sensitivity to economic conditions, its operating history and the
current trend of earnings. The Investment Adviser continually monitors the
investments in a Fund's portfolio and evaluates whether to dispose of or to
retain non-investment grade and comparable unrated securities whose credit
ratings or credit quality may have changed.
Other Risks. Floating-rate derivative debt securities present more
-----------
complex types of interest rate risks. For example, range floaters are subject to
the risk that the coupon will be reduced below market rates if a designated
interest rate floats outside of a specified interest rate band or collar. Dual
index or yield curve floaters are subject to lower prices in the event of an
unfavorable change in the spread between two designated interest rates.
Asset-Backed Securities present certain credit risks that are not
presented by Mortgage-Backed Securities because Asset-Backed Securities
generally do not have the benefit of a security interest in collateral that is
comparable to mortgage assets. There is the possibility that, in some cases,
recoveries on repossessed collateral may not be available to support payments on
these securities.
Risks of Derivative Transactions. A Fund's transactions, if any, in
--------------------------------
options, futures, options on futures, swap transactions, structured securities
and currency transactions involve certain risks, including a possible lack
of correlation between changes in the value of hedging instruments and the
portfolio assets being hedged, the potential illiquidity of the markets for
derivative instruments, the risks arising from margin requirements and related
leverage factors associated with such transactions. The use of these management
techniques to seek to increase total return may be regarded as a speculative
practice and involves the risk of loss if the Investment Adviser is incorrect in
its expectation of fluctuations in securities prices, interest rates or currency
prices.
Foreign Risks. See "Foreign Investments" for a description of the risks
-------------
of investing in foreign securities and currencies.
INVESTEMENT RESTRICTIONS
Each Fund is subject to certain investment restrictions that are
described in detail under "Investment Restrictions" in the Additional Statement.
Fundamental investment restrictions of a Fund cannot be changed without approval
of a majority of the outstanding shares of that Fund. Each Fund's investment
objectives and all policies not specifically designated as
-44-
<PAGE>
fundamental are non-fundamental and may be changed without shareholder approval.
If there is a change in a Fund's investment objectives, shareholders should
consider whether that Fund remains an appropriate investment in light of their
then current financial positions and needs.
"Diversified"/Non-Diversified Status. Each Fund, except the Global
-----------------------------------
Income Fund is a "diversified" fund under the Act. Since the Global Income Fund
is "non-diversified" under the Act, it is subject only to certain federal tax
diversification requirements under Subchapter M as well as under Section 817(h)
(including applicable Treasury Regulations) of the Internal Revenue Code of
1986, as amended (the "Code"). Under Subchapter M of the Code, the Global Income
Fund may, with respect to 50% of its total assets, invest up to 25% of its total
assets in the securities of any issuer (except that this limitation does not
apply to U.S. Government Securities). With respect to the remaining 50% of the
Fund's total assets, (1) the Fund may not invest more than 5% of its total
assets in the securities of any one issuer (other than the U.S. government), and
(2) the Fund may not acquire more than 10% of the outstanding voting securities
of any one issuer. These tests apply at the end of each quarter of its taxable
year and are subject to certain conditions and limitations under the Code. Since
the Global Income Fund is not diversified under the Act, it will be more
susceptible to adverse developments affecting any single issuer. The Growth and
Income, CORE U.S. Equity, CORE Large, Cap Growth, CORE Small Cap Equity, Capital
Growth, Mid Cap Equity, International Equity and High Yield Funds are, in
addition to these tax diversification requirements, also subject to the
diversification requirements arising out of their diversified status under the
Act.
PORTFOLIO TURNOVER
A high rate of portfolio turnover (100% or more) involves
correspondingly greater transaction and related expenses which must be borne by
a Fund and its shareholders. It is anticipated that the annual portfolio
turnover rates of the Growth and Income, CORE U.S. Equity, CORE Large Cap
Growth, CORE Small Cap Equity, Capital Growth, Mid Cap Equity, International
Equity, Global Income and High Yield Funds will generally not exceed 40%, 55%,
80%, 65%, 30%, 40%, 45%, 200% and 100%, respectively. It is anticipated that the
portfolio turnover rate of each Fund will vary from year to year. The portfolio
turnover rate is calculated by dividing the lesser of the dollar amount of sales
or purchases of portfolio securities by the average monthly value of a Fund's
portfolio securities, excluding securities having a maturity at the date of
purchase of one year or less. The Investment Adviser will not consider the
portfolio turnover rate a limiting factor in making investment decisions for a
Fund consistent with the Fund's
-45-
<PAGE>
investment objectives and portfolio management policies. For the Fixed Income
Funds, the portfolio turnover rate includes the effect of entering into mortgage
dollar rolls.
MANAGEMENT
TRUSTEES AND OFFICERS
The Trustees are responsible for deciding matters of general policy and
reviewing the actions of the Investment Advisers, distributor and transfer
agent. The officers of the Trust conduct and supervise the Funds' daily business
operations. The Additional Statement contains information as to the identity of,
and other information about, the Trustees and officers of the Trust.
INVESTMENT ADVISERS
Investment Advisers. Goldman Sachs Asset Management ("GSAM"), One New
-------------------
York Plaza, New York, New York 10004, a separate operating division of Goldman
Sachs, serves as the investment adviser to the CORE Large Cap Growth, CORE Small
Cap Equity, CORE U.S. Equity, Growth and Income, Capital Growth, Mid Cap Equity
and High Yield Funds. Goldman Sachs registered as an investment adviser in 1981.
Goldman Sachs Asset Management International ("GSAMI"), 133 Peterborough Court,
London EC4A 2BB, England, an affiliate of Goldman Sachs, serves as the
investment adviser to the International Equity and Global Income Funds. GSAMI
became a member of the Investment Management Regulatory Organization Limited in
1990 and registered as an investment adviser in 1991. As of October 24, 1997,
GSAM and GSAMI, together with their affiliates, acted as investment adviser or
distributor for assets in excess of $128 billion.
Under a Management Agreement with each Fund, the applicable Investment
Adviser, subject to the general supervision of the Trustees, provides day-to-day
advice as to the Fund's portfolio transactions. Goldman Sachs has agreed to
permit the Funds to use the name "Goldman Sachs" or a derivative thereof as part
of each Fund's name for as long as a Fund's Management Agreement is in effect.
In performing its investment advisory services, each Investment
Adviser, while remaining ultimately responsible for the management of the Funds,
may rely upon the asset management division of its Singapore and Tokyo
affiliates for portfolio decisions and management with respect to certain
portfolio securities and is able to draw upon the research and expertise of its
other affiliate offices. In addition, the Investment Advisers will have access
to the research of, and proprietary technical models developed by, Goldman Sachs
and may apply quantitative and qualitative analysis in determining the
-46-
<PAGE>
appropriate allocations among the categories of issuers and types of securities.
Under the Management Agreement, each Investment Adviser also: (i)
supervises all non-advisory operations of each Fund that it advises; (ii)
provides personnel to perform such executive, administrative and clerical
services as are reasonably necessary to provide effective administration of each
Fund; (iii) arranges for at each Fund's expense (a) the preparation of all
required tax returns, (b) the preparation and submission of reports to existing
shareholders, (c) the periodic updating of prospectuses and statements of
additional information and (d) the preparation of reports to be filed with the
SEC and other regulatory authorities; (iv) maintains each Fund's records; and
(v) provides office space and all necessary office equipment and services.
FUND MANAGERS
<TABLE>
<CAPTION>
=============================================================================================================================
Years Primarily Five Year
Name and Title Fund Responsibility Responsible Employment History
=============================================================================================================================
<S> <C> <C> <C>
George D. Adler Portfolio Manager- Since 1997 Mr. Adler joined the Investment Adviser in
Vice President Capital Growth 1997. Prior to 1997, he was a portfolio manager
at Investment Management, Inc. and its
predecessor firm ("Liberty").
- -----------------------------------------------------------------------------------------------------------------------------
G. Lee Anderson Portfolio Manager- Since 1997 Mr. Anderson joined the Investment Adviser in
Vice President Growth and Income 1992. Prior to 1992, he was a research analyst
Mid Cap Equity in the Growth and Income Mid Cap Equity
Investment Research Department of Goldman, Sachs
& Co.
- -----------------------------------------------------------------------------------------------------------------------------
Eileen A. Aptman Portfolio Manager- Since 1997 Since Ms. Aptman joined the Investment Adviser
Vice President Mid Cap Equity in 1993. Prior to 1993, she was an equity
Growth and Income analyst at Delphi Management.
- -----------------------------------------------------------------------------------------------------------------------------
Richard Buckholz Portfolio Manager- Since 1997 Mr. Buckholz joined the Investment Adviser in
Vice President High Yield 1994. Prior to joining the Investment Adviser,
Mr. Buckholz was Head of Emerging Market Fixed
Income Research at Bear Stearns & Company and
previously in a similar position at Citibank.
- -----------------------------------------------------------------------------------------------------------------------------
Kent A. Clark Portfolio Manager- Since 1997 Mr. Clark joined the Investment Adviser in
Vice President CORE U.S. Equity 1992. Prior to 1992, he was studying for a
CORE Large-Cap Growth Ph.D. in finance at the University of Chicago.
CORE Small Cap Equity
- -----------------------------------------------------------------------------------------------------------------------------
Robert G. Collins Portfolio Manager- Since 1997 Mr. Collins joined the Investment Adviser in
Vice President Capital Growth 1997. Prior to 1997, he was a portfolio manager
at Liberty.
- -----------------------------------------------------------------------------------------------------------------------------
Herbert E. Ehlers Senior Portfolio Manager- Since 1997 Mr. Ehlers joined the Investment Adviser in
Managing Director Capital Growth 1997. Prior to 1997, he was the Chief
Investment Officer of Liberty.
- -----------------------------------------------------------------------------------------------------------------------------
Gregory H. Ekizian Portfolio Manager- Since 1997 Mr. Ekizian joined the Investment Adviser in
Vice President Capital Growth 1997. Prior to 1997, he was a portfolio manager
at Liberty.
- -----------------------------------------------------------------------------------------------------------------------------
Ivor H. Farman Portfolio Manager- Since 1997 Mr. Farman joined the Investment Adviser in
Executive Director International Equity 1996. Prior to 1996, he was responsible for
originating and marketing French equity ideas at
Exane in Paris.
=============================================================================================================================]
</TABLE>
-47-
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================================================
Years Primarily Five Year
Name and Title Fund Responsibility Responsible Employment History
=============================================================================================================================
<S> <C> <C> <C>
Stephen Fitzgerald Portfolio Manager- Since 1997 Mr. Fitzgerald joined the Investment Adviser in
Executive Director and Global Income 1992. Prior to 1992, he spent two years
Chief Investment managing multi-currency fixed-income and
Officer balanced portfolios at Invesco MIM Limited,
where he was a senior member of the derivative
products group.
- -----------------------------------------------------------------------------------------------------------------------------
Ronald E. Gutfleish Senior Portfolio Manager- Since 1997 Mr. Gutfleish joined the Investment Adviser in
Managing Director Growth and Income 1993. Prior to 1993, he was a principal of
Mid Cap Equity Sanford Bernstein & Co. in its Investment
Management Research Department.
- -----------------------------------------------------------------------------------------------------------------------------
Andrew Jessop Portfolio Manager- Since 1997 Mr. Jessop joined the Investment Adviser in
Vice President High Yield Fund 1997. Prior to joining the Investment Adviser,
Mr. Jessop spent six years managing high yield
portfolios at Saudi International Bank in London.
Prior to that, he worked for the bank on the
interest rate swap desk and served as an
investment analyst in New York.
- -----------------------------------------------------------------------------------------------------------------------------
Robert C. Jones Senior Portfolio Manager- Since 1997 Mr. Jones joined the Investment Adviser in 1989.
Managing Director CORE U.S. Equity
CORE Large Cap Growth
CORE Small Cap Equity
- -----------------------------------------------------------------------------------------------------------------------------
Allessandro P.G. Lunghi Portfolio Manager- Since 1997 Mr. Lunghi joined the Investment Adviser in
Executive Director International Equity 1996. Prior to 1996, he was at CINMan for five
years.
- -----------------------------------------------------------------------------------------------------------------------------
Shogo Maeda Portfolio Manager- Since 1997 Mr. Maeda joined the Investment Adviser in
Managing Director International Equity 1994. Prior to 1994, he worked at Nomura
Investment Management Incorporated and for a
period at Manufacturers Hanover Bank in New York.
- -----------------------------------------------------------------------------------------------------------------------------
Warwick M. Negus Senior Portfolio Manager- Since 1997 Mr. Negus joined the Investment Adviser in
Managing Director International Equity 1994. Prior to 1994, he was a vice president of
Bankers Trust Australia Ltd.
- -----------------------------------------------------------------------------------------------------------------------------
Michael L. Pasternak Portfolio Manager- Since 1997 Mr. Pasternak joined the Investment Adviser in
Vice President High Yield 1997. Prior to joining GSAM, Mr. Pasternak spent eight
years managing high yield corporate bond and loan
portfolios at Saudi International Bank (an affiliate of
JP Morgan) in London. Prior to that, he was an officer of
the bank in Eurocurrency Lending and Syndications and
served as an investment analyst in New York.
- -----------------------------------------------------------------------------------------------------------------------------
Victor H. Pinter Portfolio Manager- Since 1997 Mr. Pinter joined the Investment Adviser in 1990.
Vice President CORE U.S. Equity
CORE Large Cap Growth
CORE Small Cap Equity
- -----------------------------------------------------------------------------------------------------------------------------
David G. Shell Portfolio Manager- Since 1997 Mr. Shell joined the Investment Adviser in
Vice President Capital Growth 1997. Prior to 1997, he was a portfolio manager
at Liberty.
- -----------------------------------------------------------------------------------------------------------------------------
Ernest C. Segundo, Jr. Portfolio Manager- Since 1997 Mr. Segundo joined the Investment Adviser in
Vice President Capital Growth 1997. Prior to 1997, he was a portfolio manager
at Liberty.
- -----------------------------------------------------------------------------------------------------------------------------
Christopher Testa Portfolio Manager- Since 1997 Mr. Testa joined the Investment Adviser in
Vice President and High Yield 1994. Prior to joining the Investment Adviser,
Director of Credit Mr. Testa was a credit analyst with CS First
Research Boston and prior to that he was an analyst for
Metropolitan Life Insurance Company investing in private
placements and public debt.
- -----------------------------------------------------------------------------------------------------------------------------
Danny Truell Portfolio Manager- Since 1997 Mr. Truell joined the Investment Adviser in
Executive Director International Equity 1996. Prior to 1996, he was at CINMan for six
years.
- -----------------------------------------------------------------------------------------------------------------------------
Andrew Wilson Portfolio Manager- Since 1997 Mr. Wilson joined the Investment Adviser in
Executive Director for Global Income 1995. Prior to joining the GSAMI, he spent
International Fixed three years as an Assistant Director at
Income Rothschild Asset Management where he was responsible for
managing global and international bond portfolios, with
specific focus on the U.S., Canadian, Australian and
Japanese economies. Prior to his employment at
Rothschild, Mr. Wilson spent seven years at the Reserve
Bank of New Zealand, his most recent position as Trading
Manager of foreign reserves management.
===================================================================================================================================
</TABLE>
-48-
<PAGE>
It is the responsibility of the Investment Adviser to make investment
decisions for a Fund and to place the purchase and sale orders for the Fund's
portfolio transactions in the U.S. and foreign markets. Such orders may be
directed to any broker including, to the extent and in the manner permitted by
applicable law, Goldman Sachs or its affiliates. In effecting purchases and
sales of portfolio securities for the Funds, the Investment Advisers will seek
the best price and execution of a Fund's orders.
In doing so, where two or more brokers or dealers offer comparable
prices and execution for a particular trade, consideration may be given to
whether the broker or dealer provides investment research or brokerage services
or sells shares of any Goldman Sachs Fund. See the Additional Statement for a
further description of the Investment Advisers' brokerage allocation practices.
As compensation for its services rendered and assumption of certain
expenses pursuant to separate Management Agreements, GSAM and GSAMI are entitled
to the following fees, computed daily and payable monthly at the annual rates
listed below:
Contractual
Rate
--------------------
Growth and Income....................... .75
CORE U.S. Equity........................ .70
CORE Large Cap Growth................... .70
CORE Small Cap Equity................... .75
Capital Growth.......................... .75
Mid Cap Equity.......................... .80
International Equity.................... 1.00
Global Income........................... .90
-49-
<PAGE>
High Yield.............................. .70
The Investment Advisers to the Growth and Income, CORE U.S. Equity,
CORE Large Cap Growth, CORE Small Cap Equity, Capital Growth, Mid Cap Equity,
International Equity, Global Income and High Yield Funds have voluntarily agreed
to reduce or limit certain "Other Expenses" of such Funds (excluding management
fees, taxes, interest and brokerage fees and litigation, indemnification and
other extraordinary expenses to the extent such expenses exceed .15%, .10%,
.10%, .15%, .15%, .15%, .25%, .15% and .15% per annum of such Funds' average
daily net assets, respectively. Such reductions or limits, if any, are
calculated monthly on a cumulative basis and may be discontinued or modified by
the applicable Investment Adviser in its discretion at any time.
Activities of Goldman Sachs and its Affiliates and Other Accounts
-----------------------------------------------------------------
Managed by Goldman Sachs. The involvement of the Investment Advisers, Goldman
- ------------------------
Sachs and their affiliates in the management of, or their interest in, other
accounts and other activities of Goldman Sachs may present conflicts of interest
with respect to a Fund or limit a Fund's investment activities. Goldman Sachs
and its affiliates engage in proprietary trading and advise accounts and funds
which have investment objectives similar to those of the Funds and/or which
engage in and compete for transactions in the same type of securities,
currencies and instruments as the Funds. Goldman Sachs and its affiliates will
not have any obligation to make available any information regarding their
proprietary activities or strategies, or the activities or strategies used for
other accounts managed by them, for the benefit of the management of the Funds
and in general it is not anticipated that the Investment Advisers will have
access to proprietary information for the purpose of managing a Fund. The
results of a Fund's investment activities, therefore, may differ from those of
Goldman Sachs and its affiliates and it is possible that a Fund could sustain
losses during periods in which Goldman Sachs and its affiliates and other
accounts achieve significant profits on their trading for proprietary or other
accounts. From time to time, a Fund's activities may be limited because of
regulatory restrictions applicable to Goldman Sachs and its affiliates, and/or
their internal policies designed to comply with such restrictions. See
"Management-Activities of Goldman Sachs and its Affiliates and Other Accounts
Managed by Goldman Sachs" in the Additional Statement for further information.
PERFORMANCE OF SIMILARLY MANAGED MUTUAL FUNDS BY THE INVESTMENT ADVISER
-50-
<PAGE>
Each Fund is newly organized and does not yet have its own performance
record. The Growth and Income, CORE U.S. Equity, CORE Large Cap Growth, CORE
Small Cap Equity, Capital Growth, Mid Cap Equity, International Equity, Global
Income and High Yield Funds, however, have substantially the same investment
objectives, policies, strategies and restrictions as existing investment
portfolios of Goldman Sachs Trust, another registered open-end investment
company managed by the Investment Advisers.
The following performance is included to provide investors with a
performance record for the Investment Advisers in managing investment portfolios
substantially similar to those of the Funds. The figures do not reflect the
deduction of any insurance fees or charges that are imposed by the insurance
company in connection with its sale of the variable annuity contracts and
variable life insurance policies. Investors should refer to the separate account
prospectuses describing the variable annuity contracts and variable life
insurance policies for information pertaining to those insurance fees and
charges. The insurance separate account fees will reduce the performance of the
Funds. The performance of the Class A Shares of the Growth and Income, CORE U.S.
Equity, CORE Large Cap Growth, CORE Small Cap Equity, Capital Growth,
International Equity, Global Income and High Yield Funds and Institutional
Shares of the Mid Cap Equity Fund of the Goldman Sachs Trust reflects the
deduction of the historical fees and expenses paid by the respective classes of
such funds and not those of the Funds of the Trust. Class A Shares of the
Goldman Sachs Trust are subject to a front end sales load. All performance
quotations are at net asset value. Class A Shares of the Goldman Sachs Trust,
unlike Shares of the Trust, have a .25% Authorized Dealer Service Fee and a 12b-
1 fee of up to .25% which reduce performance. Performance of the CORE Large Cap
Growth Fund for the period from November 1, 1991 to May 1, 1997 is represented
by the performance of a predecessor separate account which was managed by the
Adviser during such period. The performance record of the separate account has
been restated to reflect the expenses applicable to Class A Shares. Prior to May
1, 1997, the separate account was a separate investment advisory account under
discretionary management by the Adviser and had substantially similar investment
objectives, policies and strategies as the Fund. Unlike the Fund, the separate
account was not registered as a investment company under the 1940 Act and
therefore was not subject to certain investment restrictions and operational
requirements that are imposed on investment companies by the 1940 Act. If the
separate account had been registered as an investment company under the 1940
Act, the separate account's performance may have been adversely affected by such
restrictions and requirements. On May 1, 1997, the separate account transferred
a portion of its assets to the Fund in exchange for Fund shares.
-51-
<PAGE>
The results shown below reflect the reinvestment of dividends and
distributions, and were calculated in the same manner that will be used by each
Fund to calculate its own performance. Performance reflects fee waivers. In the
absence of fee waivers, performance would be reduced. The investment return and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost. Past
performance is no guarantee of future results and investors should not consider
this performance data as an indication of or substitute for past or future
performance of the Funds of the Trust.
<TABLE>
<CAPTION>
=================================================================================================================
AVERAGE ANNUAL TOTAL RETURN*
- -----------------------------------------------------------------------------------------------------------------
Average Annual Average Annual SINCE INCEPTION
PORTFOLIO OF GOLDMAN SACHS TRUST Total Return Total Return (INCEPTION DATE)
1 YEAR 5 YEARS
------ -------
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Growth and Income (Class A) 39.35% N/A 20.71% (February 5, 1993)
- -----------------------------------------------------------------------------------------------------------------
CORE U.S. Equity (Class A) 30.71% 19.78% 15.73% (May 24, 1991)
=================================================================================================================
- -----------------------------------------------------------------------------------------------------------------
CORE Large Cap Growth (Class A) 36.13% 23.76% 20.84% (November 11, 1991)
- -----------------------------------------------------------------------------------------------------------------
Mid Cap Equity (Institutional) 52.43% N/A 27.91% (August 1, 1995)
- -----------------------------------------------------------------------------------------------------------------
CORE Small Cap Equity (Class A) N/A N/A 4.70% (August 15, 1997)**
- -----------------------------------------------------------------------------------------------------------------
Capital Growth (Class A) 35.29% 19.32% 17.41% (April 20, 1990)
- -----------------------------------------------------------------------------------------------------------------
International Equity (Class A) 10.86% N/A 11.29% (December 1, 1992)
- -----------------------------------------------------------------------------------------------------------------
Global Income (Class A) 9.66% 8.19% 8.28% (August 2, 1991)
- -----------------------------------------------------------------------------------------------------------------
High Yield (Class A) N/A N/A 1.50% (August 1, 1997)**
=================================================================================================================
</TABLE>
* Average annual total return calculations are for periods ended
October 31, 1997.
** Cumulative total return calculations are for periods ended October 31, 1997.
DISTRIBUTOR
Goldman Sachs, 85 Broad Street, New York, New York 10004, serves as the
exclusive distributor (the "Distributor") of each Fund's shares at no cost to
the Funds.
-52-
<PAGE>
CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company, 1776 Heritage Drive, North Quincy,
Massachusetts 02110 provides custodial services for the Funds and Goldman Sachs
provides transfer agency services for the Funds.
NET ASSET VALUE
The net asset value per share of each Fund is calculated by the Fund's
custodian as of the close of regular trading on the New York Stock Exchange
(normally, but not always, 4:00 p.m. New York time), on each Business Day (as
such term is defined under "Additional Information"). Net asset value per share
of each Fund is calculated by determining the net assets belonging to the Fund
and dividing by the number of outstanding shares of the Fund.
Each Fund's portfolio securities for which accurate market quotations
are readily available are valued on the basis of quotations, which may be
furnished by a pricing service or provided by dealers in such securities, and
other portfolio securities are valued at fair value, based on yield equivalents,
a pricing matrix or other sources, under valuation procedures established by the
Trustees. Debt obligations with a remaining maturity of 60 days or less are
valued at amortized cost. The Board of Trustees has determined that the
amortized cost of such securities approximates fair market value.
-53-
<PAGE>
PERFORMANCE INFORMATION
From time to time each Fund may publish average annual total return and
the Growth and Income, Global Income and High Yield Funds may publish their
yield and distribution rates in advertisements and communications to
shareholders or prospective investors. Average annual total return is determined
by computing the average annual percentage change in value of $1,000 invested at
the maximum public offering price for specified periods ending with the most
recent calendar quarter, assuming reinvestment of all dividends and
distributions at net asset value. The total return calculation assumes a
complete redemption of the investment at the end of the relevant period. Each
Fund may also from time to time advertise total return on a cumulative, average,
year-by-year or other basis for various specified periods by means of
quotations, charts, graphs or schedules. In addition to the above, each Fund may
from time to time advertise its performance relative to certain averages,
performance rankings, indices, other information prepared by recognized mutual
fund statistical services and investments for which reliable performance data is
available.
The Growth and Income, Global Income and High Yield Funds compute their
yield by dividing net investment income earned during a recent thirty-day period
by the product of the average daily number of shares outstanding and entitled to
receive dividends during the period and the maximum offering price per share on
the last day of the relevant period. The results are compounded on a bond
equivalent (semiannual) basis and then annualized. Net investment income per
share is equal to the dividends and interest earned during the period, reduced
by accrued expenses for the period. The calculation of net investment income for
these purposes may differ from the net investment income determined for
accounting purposes. The Growth and Income, Global Income and High Yield Funds'
quotations of distribution rate are calculated by analyzing the most recent
distribution of net investment income for a monthly, quarterly or other relevant
period and dividing this amount by the net asset value per share on the last day
of the period for which the distribution rates are being calculated.
The investment results of a Fund will fluctuate over time and any
presentation of investment results for any prior period should not be considered
a representation of what an investment may earn or what the Fund's performance
may be in any future period. In addition to information provided in shareholder
reports, the Funds may, in their discretion, from time to time make a list of
their holdings available to investors upon request.
-54-
<PAGE>
SHARES OF THE TRUST
Each Fund is a series of Goldman Sachs Variable Insurance Trust, which
was formed under the laws of the State of Delaware on September 16, 1997. The
Trustees have authority under the Trust's Declaration of Trust to create and
classify shares of beneficial interests in separate series, without further
action by shareholders. Additional series may be added in the future. The
Trustees also have authority to classify and reclassify any series or portfolio
of shares into one or more classes.
When issued, shares are fully paid and non-assessable. In the event of
liquidation, shareholders are entitled to share pro rata in the net assets of
the applicable Fund available for distribution to such shareholders. Shares have
no preemptive, subscription or conversion rights. Shareholders are entitled to
one vote per share, provided that, at the option of the Trustees, shareholders
will be entitled to a number of votes based upon the net asset values
represented by their shares. Shares of the Trust are not offered directly to the
general public. The Participating Insurance Companies, not the owners of the
variable annuity contracts or variable life insurance policies or participants
therein, are shareholders of a Fund. However, to the extent required by law, (a)
the Participating Insurance Companies will vote Fund shares held in the Separate
Accounts in a manner consistent with timely voting instructions received from
the holders of variable annuity contracts and variable life insurance policies
and (b) the Participating Insurance Companies will vote Fund shares held in the
Separate Accounts for which no timely instructions are received from the holders
of variable annuity contracts and variable life insurance policies, as well as
shares they own, in the same proportion as those shares for which voting
instructions are received. Fund shares held by unregistered Separate Accounts or
qualified plans will be voted for or against any proposition in the same
proportion as all other Fund shares are voted unless the unregistered Separate
Account's Participating Insurance Company or the plan makes other arrangements.
Additional information concerning voting rights of the participants in the
Separate Accounts are more fully set forth in the Prospectus relating to those
accounts issued by the Participating Insurance Companies.
Inquiries regarding the Trust may be made in writing to the Trust's
office c/o Goldman Sachs, 85 Broad Street, New York, New York 10004. Holders of
variable annuity contracts and variable life insurance policies issued by
Participating Insurance Companies for which shares of the Funds are the
investment vehicle will receive from the Participating Insurance Companies
unaudited semi-annual financial statements and year-end financial statements
audited by the Trust's independent public accountants. Each report will show the
investments owned by the Funds and the market values of the investments and will
provide other information about the Funds and their operations.
-55-
<PAGE>
The Trust does not intend to hold annual meetings of shareholders.
However, pursuant to the Trust's By-Laws, the recordholders of at least 10% of
the shares outstanding and entitled to vote at a special meeting may require the
Trust to hold such special meeting of shareholders for any purpose and
recordholders may, under certain circumstances, as permitted by the Act,
communicate with other shareholders in connection with requiring a special
meeting of shareholders. The Trustees will call a special meeting of
shareholders for the purpose of electing Trustees if, at any time, less than a
majority of Trustees holding office at the time were elected by shareholders.
In the interest of economy and convenience, the Trust does not issue
certificates representing the Funds' shares. Instead, the Transfer Agent
maintains a record of each shareholder's ownership. Each shareholder receives
confirmation of purchase and redemption orders from the Transfer Agent. Fund
shares and any dividends and distributions paid by the Fund are reflected in
account statements from the Transfer Agent.
EXPENSES
The Trust is responsible for the payment of its expenses. The expenses
include, without limitation, the fees payable to the Investment Advisers, the
fees and expenses payable to the Trust's custodian and any subcustodians,
transfer agent fees, brokerage fees and commissions, filing fees for the
registration or qualification of the Trust's shares under federal or state
securities laws, expenses of the organization of the Trust, fees and expenses
incurred by the Trust in connection with membership in investment company
organizations, taxes, interest, costs of liability insurance, fidelity bonds or
indemnification, any costs, expenses or losses arising out of any liability of,
or claim for damages or other relief asserted against, the Trust for violation
of any law, legal and auditing fees, expenses of preparing and setting in type
prospectuses, statements of additional information, proxy material, reports and
notices and the printing and distributing of the same to the Trust's
shareholders and regulatory authorities, compensation and expenses of its "non-
interested" Trustees and extraordinary expenses, if any, incurred by the
Trust.
The imposition of the management fee, as well as other operating
expenses, will have the effect of reducing the total return to investors. From
time to time, an Investment Adviser may waive receipt of its fees and/or
voluntarily assume certain expenses of a Fund, which would have the effect of
lowering that Fund's overall expense ratio and increasing total return to
investors at the time such amounts are waived or assumed, as the case may be.
The Fund will not pay the Investment Adviser at a later time for any amounts
which may be waived, nor will the Fund
-56-
<PAGE>
reimburse the Investment Adviser for any amounts which may be assumed.
TAXATION
Federal Taxes. Each Fund is treated as a separate corporate entity for
-------------
tax purposes. Each Fund intends to elect to be treated as a regulated investment
company and each Fund intends to qualify for such treatment for each taxable
year under Subchapter M of the Code. To qualify as such, a Fund must satisfy
certain requirements relating to the sources of its income, diversification of
its assets and distribution of its income to shareholders. As a regulated
investment company, a Fund will not be subject to federal income or excise tax
on any net investment income and net realized capital gains that are distributed
to its shareholders in accordance with certain timing requirements of the Code.
If for any taxable year a Fund does not qualify for the special federal tax
treatment afforded regulated investment companies, all of the Fund's taxable
income would be subject to tax at regular corporate rates without any deduction
for distributions to shareholders. In such event, a Fund's distributions to
Separate Accounts holding shares of the Fund would be taxable as ordinary income
to the extent of the Fund's current and accumulated earnings and profits. A
failure of a Fund to qualify as a regulated investment company also could result
in the loss of the tax-favored status of variable annuity contracts and variable
life insurance policies that are funded by a Separate Account which invests in
the Fund.
Under Code Section 817(h), a Separate Account upon which a variable
annuity contract or variable life insurance policy is based must be "adequately
diversified." A Separate Account will be adequately diversified if it complies
with certain diversification tests set forth in Treasury regulations. If a
regulated investment company satisfies certain conditions relating to the
ownership of its shares, a Separate Account investing in such investment company
will be entitled to treat its pro rata portion of each asset of the investment
company as an asset for purposes of these diversification tests. Each Fund
intends to meet these ownership conditions and to comply with the
diversification tests noted above. Accordingly, a Separate Account investing
solely in shares of a Fund will be adequately diversified. However, a failure of
a Fund to meet such conditions and to comply with such tests could cause the
owners of variable annuity contracts and variable life insurance policies based
on such Account to recognize ordinary income each year in the amount of any net
appreciation of such contract or policy during the year (including the annual
cost of life insurance, if any, provided under such policy). For additional
discussion regarding Separate Account diversification see the Additional
Statement.
-57-
<PAGE>
Provided that a Fund and a Separate Account investing in the Fund
satisfy the above requirements, any distributions from the Fund to such Account
will be exempt from current federal income taxation to the extent that such
distributions accumulate in a variable annuity contract or a variable life
insurance contract.
Persons investing in a variable annuity or variable life insurance
contract should refer to the prospectus with respect to such contract for
further tax information.
The foregoing discussion of federal income tax consequences is based on
tax laws and regulations in effect on the date of this Prospectus and is subject
to change by legislative or administrative action. Each prospective investor
should consult his or her own tax adviser as to the tax consequences of
investments in the Funds.
ADDITIONAL INFORMATION
The term "a vote of the majority of the outstanding shares" of a Fund
means the vote of the lesser of (i) 67% or more of the shares present at a
meeting, if the holders of more than 50% of the outstanding shares of the Fund
are present or represented by proxy, or (ii) more than 50% of the outstanding
shares of the Fund.
As used in this Prospectus, the term "Business Day" means any day the
New York Stock Exchange is open for trading, which is Monday through Friday
except for holidays. The New York Stock Exchange is closed on the following
holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day
(observed), Good Friday, Memorial Day (observed), Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
DIVIDENDS
Dividends from net investment income are declared and paid by each Fund
at least annually. Over the course of the fiscal year, dividends accrued and
paid will constitute all or substantially all of each Fund's net investment
income. Each Fund will pay dividends from net realized capital gains, reduced by
available capital losses, at least annually. All dividends and capital gain
distributions will be automatically reinvested in additional shares of a Fund at
the net asset value of such shares on the payment date, unless a Separate
Account is permitted to hold cash and elects to receive payment in cash. From
time to time, a portion of a Fund's dividends may constitute a return of
capital.
PURCHASE AND REDEMPTION OF SHARES
Investors may purchase or redeem shares of the Funds through variable
annuity contracts and variable life insurance policies
-58-
<PAGE>
offered through the Separate Accounts of Participating Insurance Companies. You
should refer to the prospectus of the Participating Insurance Company's Separate
Account for information on how to purchase a variable annuity contract or
variable life insurance policy, how to select specific Funds of the Trust as
investment options for your contract or policy and how to redeem monies from the
Trust.
The Separate Accounts of the Participating Insurance Companies place
orders to purchase and redeem shares of the Funds based on, among other things,
the amount of premium payments to be invested and the amount of surrender and
transfer requests (as defined in the prospectus describing the variable annuity
contracts and variable life insurance policies issued by the Participating
Insurance Companies) to be effected on that day pursuant to variable annuity
contracts and variable life insurance policies. Orders received by the Trust are
effected on Business Days. The Separate Accounts purchase and redeem shares of
each Fund at the Fund's net asset value per share calculated as of that same day
although such purchases and redemptions may be executed the next morning.
Redemption proceeds paid by wire transfer will normally be wired in federal
funds on the next business day after the Trust receives actual notice of the
redemption order, but may be paid up to three business days after receipt of
actual notice of the order. The Trust may suspend the right of redemption under
certain extraordinary circumstances in accordance with the rules of the SEC. In
addition, each Fund reserves the right to suspend the offering of its shares for
a period of time, and reserves the right to reject any specific purchase
order.
The Funds do not assess any fees when they sell or redeem their shares.
Surrender charges, mortality and expense risk fees and other charges may be
assessed by Participating Insurance Companies under the variable annuity
contracts or variable life insurance policies. These fees should be described in
the Participating Insurance Companies' prospectuses.
In the future, the Trust may offer shares of one or more of the Funds
(including new Funds that might be added to the Trust) to unregistered Separate
Accounts of various Participating Insurance Companies, to variable annuity
contracts and variable life insurance policies sold solely to qualified pension
and profit-sharing plans and/or sold in non-public offerings. The Trust may
also, in the future, offer shares of one or more of the Funds directly to
qualified pension and profit-sharing plans.
Shares of the Funds may be sold to and held by Separate Accounts that
fund variable annuity and variable life insurance contracts issued by
unaffiliated Participating Insurance Companies. The Trust's shares may be
offered in connection with mixed funding, extended mixed funding and shared
funding. Mixed funding, extended funding and shared funding may present certain
conflicts of interests between variable annuity owners, variable
-59-
<PAGE>
life insurance policy owners and plan investors. The Trust's Board of Trustees
will monitor the Trust for the existence of any material irreconcilable conflict
of interest. The Trust does not currently anticipate offering shares in
connection with extended mixed funding. In addition, the Trust currently does
not foresee any disadvantages to the holders of variable annuity contracts and
variable life insurance policies arising from the fact that interests of the
holders of variable annuity contracts and variable life insurance policies may
differ due to differences of tax treatment or other considerations or due to
conflicts among the unaffiliated Participating Insurance Companies. If, however,
a material unreconcilable conflict arises between the holders of variable
annuity contracts and variable life insurance policies of unaffiliated
Participating Insurance Companies, a Participating Insurance Company may be
required to withdraw the assets allocable to some or all of the Separate
Accounts from the Funds. Any such withdrawal could disrupt orderly portfolio
management to the potential detriment of such holders. The variable annuity
contracts and variable life insurance policies are described in the separate
prospectuses issued by the Participating Insurance Companies.
The Funds and Goldman Sachs each reserves the right to reject any
specific purchase order (including exchanges) or to restrict purchases or
exchanges by a particular purchaser (or group of related purchasers). This may
occur, for example, when a purchaser or a group of purchasers' pattern of
frequent purchases, sales or exchanges of shares of a Fund is evident, or if
purchases sales, or exchanges are, or a subsequent abrupt redemption might be,
of a size that would disrupt management of a Fund.
-60-
<PAGE>
GOLDMAN SACHS ASSET
MANAGEMENT
One New York Plaza
New York, New York 10004
GOLDMAN SACHS ASSET
MANAGEMENT INTERNATIONAL
133 Peterborough Court
London, England EC4A 2BB
GOLDMAN, SACHS & CO.
Distributor
85 Broad Street
New York, New York 10004
GOLDMAN, SACHS & CO.
Transfer Agent
4900 Sears Tower
Chicago, Illinois 60606
STATE STREET BANK AND TRUST COMPANY
Custodian
1776 Heritage Drive
North Quincy, Massachusetts 02110
ARTHUR ANDERSEN LLP
Independent Public Accountants
225 Franklin Street
Boston, Massachusetts 02110
Independent Public Accountants
Toll Free (in U.S.): 800-292-4726
Prospectus
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
GOLDMAN SACHS GROWTH AND INCOME FUND
GOLDMAN SACHS CORE U.S. EQUITY FUND
GOLDMAN SACHS CORE LARGE CAP GROWTH FUND
GOLDMAN SACHS CORE SMALL CAP EQUITY FUND
GOLDMAN SACHS CAPITAL GROWTH FUND
GOLDMAN SACHS MID CAP EQUITY FUND
GOLDMAN SACHS INTERNATIONAL EQUITY FUND
GOLDMAN SACHS GLOBAL INCOME FUND
GOLDMAN SACHS HIGH YIELD FUND
(PORTFOLIOS OF GOLDMAN SACHS VARIABLE INSURANCE TRUST)
One New York Plaza
New York, New York 10004
This Statement of Additional Information (the "Additional Statement") is not a
Prospectus. This Additional Statement should be read in conjunction with the
prospectus for Goldman Sachs Growth and Income Fund, Goldman Sachs CORE U.S.
Equity Fund, Goldman Sachs CORE Large Cap Growth Fund, Goldman Sachs CORE Small
Cap Equity Fund, Goldman Sachs Capital Growth Fund, Goldman Sachs Mid Cap
Equity Fund, Goldman Sachs International Equity Fund, Goldman Sachs Global
Income Fund and Goldman Sachs High Yield Fund dated January 1, 1998 as amended
and/or supplemented from time to time (the "Prospectus"), which may be obtained
without charge from Goldman, Sachs & Co. by calling the telephone number, or
writing to one of the addresses, listed below.
The date of this Additional Statement is January 1, 1998.
B-1
<PAGE>
TABLE OF CONTENTS
Page
----
Introduction........................................... B-4
Investment Objectives and Policies..................... B-5
Investment Restrictions................................ B-60
Management............................................. B-62
Portfolio Transactions and Brokerage................... B-77
Net Asset Value........................................ B-79
Performance Information................................ B-82
Shares of the Trust.................................... B-87
Taxation............................................... B-90
Other Information...................................... B-100
Financial Statements................................... B-102
Appendix A............................................. A-1
Appendix B............................................. B-1
B-2
<PAGE>
GOLDMAN SACHS ASSET MANAGEMENT GOLDMAN, SACHS & CO.
Adviser to: Distributor
Goldman Sachs Growth and Income Fund 85 Broad Street
Goldman Sachs CORE U.S. Equity Fund New York, New York 10004
Goldman Sachs CORE Large Cap Growth Fund
Goldman Sachs CORE Small Cap Equity Fund GOLDMAN SACHS ASSET
Goldman Sachs Capital Growth Fund MANAGEMENT INTERNATIONAL
Goldman Sachs Mid Cap Equity Fund Adviser to:
Goldman Sachs High Yield Fund Goldman Sachs International
One New York Plaza Equity Fund
New York, New York 10004 Goldman Sachs Global Income
Fund
133 Peterborough Court
London, England EC4A 2BB
Goldman, Sachs & Co.
Transfer Agent
4900 Sears Tower
Chicago, IL 60606
Toll free.......800-292-4726
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INTRODUCTION
Goldman Sachs Variable Insurance Trust (the "Trust") is an open-end,
management investment company. Shares of the Trust may be purchased and held by
the separate accounts ("Separate Accounts") of participating life insurance
companies ("Participating Insurance Companies") for the purpose of funding
variable annuity contracts and variable life insurance policies. Shares of the
Trust are not offered to the general public. The following series of the Trust
are described in this Additional Statement: Goldman Sachs Growth and Income
Fund ("Growth and Income Fund"), CORE U.S. Equity Fund ("CORE U.S. Equity
Fund"), Goldman Sachs CORE Large Cap Growth Fund ("CORE Large Cap Growth Fund"),
Goldman Sachs CORE Small Cap Equity Fund ("CORE Small Cap Equity Fund"), Goldman
Sachs Mid Cap Equity Fund ("Mid Cap Equity Fund"), Goldman Sachs Capital Growth
Fund ("Capital Growth Fund"), Goldman Sachs International Equity Fund
("International Equity Fund"), (collectively referred to herein as the "Equity
Funds"), Goldman Sachs Global Income Fund ("Global Income Fund") and Goldman
Sachs High Yield Fund ("High Yield Fund") (collectively referred to herein as
the "Fixed Income Funds" and collectively with the Equity Funds referred to
herein as the "Funds").
Each Fund is a series of Goldman Sachs Variable Insurance Trust, which was
formed under the laws of the state of Delaware on September 16, 1997. The
Trustees have authority under the Trust's charter to create and classify shares
of beneficial interests in separate series and to classify and reclassify any
series or portfolio of shares into one or more classes, without further action
by shareholders. Additional series may be added in the future.
Goldman Sachs Asset Management, ("GSAM") a separate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), serves as investment adviser to the
Growth and Income, CORE U.S. Equity, CORE Large Cap Growth, CORE Small Cap
Equity, Capital Growth, Mid Cap Equity and High Yield Funds. Goldman Sachs
Asset Management International ("GSAMI"), an affiliate of Goldman Sachs, serves
as investment adviser to the International Equity and Global Income Funds. GSAM
and GSAMI are sometimes referred to collectively herein as the "Advisers."
Goldman Sachs serves as each Fund's distributor and transfer agent. Each Fund's
custodian is State Street Bank and Trust Company ("State Street").
The following information relates to and supplements the description of each
Fund's investment policies contained in the Prospectus. See the Prospectus for
a fuller description of the Funds' investment objectives and policies. There is
no assurance that each Fund will achieve its objective.
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INVESTMENT OBJECTIVES AND POLICIES
Each Fund's share price will fluctuate with market, economic and, to the
extent applicable, foreign exchange conditions, so that an investment in any of
the Funds may be worth more or less when redeemed than when purchased. None of
the Funds should be relied upon as a complete investment program.
CORE U.S. EQUITY, CORE LARGE CAP GROWTH AND CORE SMALL CAP EQUITY FUNDS
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Under normal circumstances, the Funds will invest at least 90% of their
total assets in equity securities. The investment strategy of the CORE U.S.
Equity, CORE Large Cap Growth and CORE Small Cap Equity Funds will be
implemented to the extent it is consistent with maintaining a Fund's
qualification as a regulated investment company under the Internal Revenue Code.
Since normal settlement for equity securities is three trading days (for
certain international markets settlement may be longer), the Funds will need to
hold cash balances to satisfy shareholder redemption requests. Such cash
balances will normally range from 2% to 5% of a Fund's net assets. The Funds
may purchase futures contracts only with respect to the S&P 500 Index (in the
case of CORE U.S. Equity Fund) and a representative index (in the case of CORE
Large Cap Growth and CORE Small Cap Equity Funds) in order to keep a Fund's
effective equity exposure close to 100%. For example, if cash balances are
equal to 10% of the net assets, the Fund may enter into long futures contracts
covering an amount equal to 10% of the Fund's net assets. As cash balances
fluctuate based on new contributions or withdrawals, a Fund may enter into
additional contracts or close out existing positions.
THE MULTIFACTOR MODEL. The Multifactor Model is a rigorous computerized
rating system for evaluating equity securities according to a variety of
investment characteristics (or factors). The factors used by the Multifactor
Model incorporate many variables studied by traditional fundamental analysts and
cover measures of value, growth, momentum, risk (e.g. price/earnings ratio,
book/price ratio, growth forecasts, earning estimate revisions, price momentum,
volatility and earnings stability). All of these factors have been shown to
significantly impact the performance of equity securities.
Because it includes many disparate factors, the Adviser believes that the
Multifactor Model is broader in scope and provides a more thorough evaluation
than most conventional, value-oriented quantitative models. As a result, the
securities ranked highest by the Multifactor Model do not have one dominant
investment characteristic (such as a low price/earnings ratio); rather, such
securities possess many different investment
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characteristics. By using a variety of relevant factors to select securities,
the Adviser believes that the Fund will be better balanced and have more
consistent performance than an investment portfolio that uses only one or two
factors to select securities.
The Adviser will monitor, and may occasionally suggest and make changes to,
the method by which securities are selected for or weighted in the Fund. Such
changes (which may be the result of changes in the Multifactor Model or the
method of applying the Multifactor Model) may include: (i) evolutionary changes
to the structure of the Multifactor Model (e.g., the addition of new factors or
a new means of weighting the factors); (ii) changes in trading procedures (e.g.,
trading frequency or the manner in which the Fund uses futures); or (iii)
changes in the method by which securities are weighted in the Fund. Any such
changes will preserve the Fund's basic investment philosophy of combining
qualitative and quantitative methods of selecting securities using a disciplined
investment process.
INTERNATIONAL EQUITY FUND
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International Equity Fund will seek to achieve its investment objective by
investing primarily in equity and equity-related securities of issuers that are
organized outside the United States or whose securities are principally traded
outside the United States. Because research coverage outside the United States
is fragmented and relatively unsophisticated, many foreign companies that are
well-positioned to grow and prosper have not come to the attention of investors.
GSAMI believes that the high historical returns and less efficient pricing of
foreign markets create favorable conditions for International Equity Fund's
highly focused investment approach. For a description of the risks of the
International Equity Fund's investments in Asia, see "Investing in Emerging
Markets, including Asia."
A RIGOROUS PROCESS OF STOCK SELECTION. Using fundamental industry and
company research, GSAMI's equity team in London, Singapore and Tokyo seeks to
identify companies that may achieve superior long-term returns. Stocks are
carefully selected for International Equity Fund's portfolio through a three-
stage investment process. Because International Equity Fund is a long-term
holder of stocks, the portfolio managers adjust International Equity Fund's
portfolio only when expected returns fall below acceptable levels or when the
portfolio managers identify substantially more attractive investments.
Using the research of Goldman Sachs as well as information gathered from
other sources in Europe and the Asia-Pacific region, the Adviser seeks to
identify attractive industries around the world. Such industries are expected
to have favorable underlying economics and allow companies to generate
sustainable and
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predictable high returns. As a rule, they are less economically sensitive,
relatively free of regulation and favor strong franchises.
Within these industries the Adviser seeks to identify well-run companies
that enjoy a stable competitive advantage and are able to benefit from the
favorable dynamics of the industry. This stage includes analyzing the current
and expected financial performance of the company; contacting suppliers,
customers and competitors; and meeting with management. In particular, the
portfolio managers look for companies whose managers have a strong commitment to
both maintaining the high returns of the existing business and reinvesting the
capital generated at high rates of return. Management should act in the
interests of the owners and seek to maximize returns to all stockholders.
GSAMI's currency team manages the foreign exchange risk embedded in foreign
equities by means of a currency overlay program. The program may be utilized to
protect the value of foreign investments in sustained periods of dollar
appreciation and to add returns by seeking to take advantage of foreign exchange
fluctuations.
The members of GSAMI's international equity team bring together years of
experience in analyzing and investing in companies in Europe and the Asia-
Pacific region. Their expertise spans a wide range of skills including
investment analysis, investment management, investment banking and business
consulting. GSAMI's worldwide staff of over 300 professionals includes portfolio
managers based in London, Singapore and Tokyo who bring firsthand knowledge of
their local markets and companies to every investment decision.
GLOBAL INCOME FUND
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Global Income Fund is designed for investors seeking a combination of high
income, capital appreciation, stability of principal, experienced professional
management, flexibility and liquidity. However, investing in the Fund involves
certain risks and there is no assurance that the Fund will achieve its
investment objective.
In selecting securities for the Fund, portfolio managers consider such
factors as the security's duration, sector and credit quality rating as well as
the security's yield and prospects for capital appreciation. In determining the
countries and currencies in which the Fund will invest, the Fund's portfolio
mangers form opinions based primarily on the views of Goldman Sachs' economists
as well as information provided by securities dealers, including information
relating to factors such as interest rates, inflation, monetary and fiscal
policies, taxation,
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and political climate. The portfolio managers apply the Black-Litterman Model
(the "Model") to their views to develop a portfolio that produces, in the view
of the Adviser, the optimal expected return for a given level of risk. The Model
factors in the opinions of the portfolio managers, adjusting for their level of
confidence in such opinions, with the views implied by an international capital
asset pricing formula. The Model is also used to maintain the level of portfolio
risk within the guidelines established by the Adviser.
HIGH INCOME. Global Income Fund's portfolio managers will seek out the
highest yielding bonds in the global fixed-income market that meet the Global
Income Fund's credit quality standards and certain other criteria.
CAPITAL APPRECIATION. Investing in the foreign bond markets offers the
potential for capital appreciation due to both interest rate and currency
exchange rate fluctuations. The portfolio managers attempt to identify
investments with appreciation potential by carefully evaluating trends affecting
a country's currency as well as a country's fundamental economic strength.
However, there is a risk of capital depreciation as a result of unanticipated
interest rate and currency fluctuations.
PORTFOLIO MANAGEMENT FLEXIBILITY. Global Income Fund is actively managed.
The Fund's portfolio managers invest in countries that, in their judgment, meet
the Fund's investment guidelines and often have strong currencies and stable
economies and in securities that they believe offer favorable performance
prospects.
RELATIVE STABILITY OF PRINCIPAL. Global Income Fund may be able to reduce
principal fluctuation by investing in foreign countries with economic policies
or business cycles different from those of the United States and in foreign
securities markets that do not necessarily move in the same direction or
magnitude as the U.S. market. Investing in a broad range of U.S. and foreign
fixed-income securities and currencies reduces the dependence of the Fund's
performance on developments in any particular market to the extent that adverse
events in one market are offset by favorable events in other markets. The
Fund's policy of investing primarily in high quality securities may also reduce
principal fluctuation. However, there is no assurance that these strategies
will always be successful.
PROFESSIONAL MANAGEMENT. Individual U.S. investors may prefer professional
management of their global bond and currency portfolios because a well-
diversified portfolio requires a large amount of capital and because the size of
the global market requires access to extensive resources and a substantial
commitment of time.
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HIGH YIELD FUND
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HIGH YIELD FUND'S INVESTMENT PROCESS. GSAM starts the investment process
with economic analysis based on research generated by the Goldman Sachs Global
Economic Research Group and others to determine broad growth trends, industry-
specific events and market forecasts. The market value of non-investment grade
fixed income securities tends to reflect individual developments within a
company to a greater extent than higher rated corporate debt or Treasury bonds
that react primarily to fluctuations in interest rates. Therefore, determining
the creditworthiness of issuers is critical. To that end, the High Yield Fund's
portfolio managers have access to Goldman, Sachs & Co.'s highly regarded Credit
Research and Global Investment Research Departments, as well as analysis from
the firm's High Yield Research Group, a dedicated group of 14 professionals in
the high yield and emerging market corporate bond research area, consisting of
industry and regional market specialists. In addition, the Fund's portfolio
managers may review the opinions of the two largest independent credit rating
agencies, Standard & Poor's Ratings Group and Moody's Investors Services, Inc.
High Yield Fund's portfolio managers and credit analysts also conduct their own
in-depth analysis of each issue considered for inclusion in the Fund's
portfolio. The portfolio managers and credit analysts evaluate such factors as
a company's competitive position, the strength of its balance sheet, its ability
to withstand economic downturns and its potential to generate ample cash flow to
service its debt. The ability to accurately analyze a company's future cash flow
by correctly anticipating the impact of economic, industry-wide and specific
events are critical to successful high yield investing. GSAM's goal is to
identify companies with the potential to strengthen their balance sheets by
increasing their earnings, reducing their debt or effecting a turnaround. GSAM
analyzes trends in a company's debt picture (i.e., the level of its interest
coverage) as well as new developments in its capital structure on an ongoing
basis. GSAM believes that this constant reassessment is more valuable than
relying on a "snapshot" view of a company's ability to service debt at one or
two points in time.
High Yield Fund's portfolio is diversified among different sectors and
industries on a global basis in an effort to reduce overall risk. While GSAM
will avoid excessive concentration in any one industry, the Fund's specific
industry weightings are the result of individual security selection. Emerging
market debt considered for the High Yield Fund's portfolio will be selected by
specialists knowledgeable about the political and economic structure of those
economies.
RETURN ON AND RISKS OF HIGH YIELD SECURITIES. Over the past decade, high
yield bonds have delivered consistently higher yields
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and total return (and higher volatility) than either investment grade corporate
bonds or U.S. Treasury bonds. However, because these non-investment grade
securities involve higher risks in return for higher income, they are best
suited to long-term investors who are financially secure enough to withstand
volatility and the risks associated with such investments. Different types of
fixed income securities may react differently to changes in the economy. High
yield bonds, like stocks, tend to perform best when the economy is strong,
inflation is low and companies experience healthy profits, which can lead to
higher stock prices and higher credit ratings. Government bonds are likely to
appreciate more in a weaker economy when interest rates are declining. In
certain types of markets, adding some diversification in the high yield asset
class may help to increase returns and decrease overall portfolio risk.
For high yield, non-investment grade securities, as for most investments,
there is a direct relationship between risk and return. Along with their
potential to deliver higher yields and greater capital appreciation than most
other types of fixed income securities, high yield securities are subject to
higher risk of loss, greater volatility and are considered speculative by
traditional investment standards. The most significant risk associated with
high yield securities is credit risk: the risk that the company issuing a high
yield security may have difficulty in meeting its principal and/or interest
payments on a timely basis. As a result, extensive credit research and
diversification are essential factors in managing risk in the high yield arena.
To a lesser extent, high yield bonds are also subject to interest rate risk:
when interest rates increase, the value of fixed income securities tends to
decline.
CORPORATE DEBT OBLIGATIONS
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Each Fund may, under normal market conditions, invest in corporate debt
obligations, including obligations of industrial, utility and financial issuers.
CORE U.S. Equity, CORE Large Cap Growth and CORE Small Cap Equity Funds may only
invest in debt securities that are cash equivalents. Corporate debt obligations
are subject to the risk of an issuer's inability to meet principal and interest
payments on the obligations and may also be subject to price volatility due to
such factors as market interest rates, market perception of the creditworthiness
of the issuer and general market liquidity.
Medium to lower rated and comparable non-rated securities tend to offer
higher yields than higher rated securities with the same maturities because the
historical financial condition of the issuers of such securities may not have
been as strong as that of other issuers. Since medium to lower rated securities
generally involve greater risks of loss of income and principal than higher
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rated securities, investors should consider carefully the relative risks
associated with investment in securities which carry medium to lower ratings and
in comparable unrated securities. In addition to the risk of default, there are
the related costs of recovery on defaulted issues. The Advisers will attempt to
reduce these risks through portfolio diversification and by analysis of each
issuer and its ability to make timely payments of income and principal, as well
as broad economic trends and corporate developments.
HIGH YIELD SECURITIES. Bonds rated BB or below by Standard & Poor's Ratings
Group (Standard & Poor's) or Ba or below by Moody's Investor Service, Inc.
("Moody's") (or comparable rated and unrated securities) are commonly referred
to as "junk bonds" and are considered speculative; the ability of their issuers
to make principal and interest payments may be questionable. In some cases,
such bonds may be highly speculative, have poor prospects for reaching
investment grade standing and be in default. As a result, investment in such
bonds will entail greater risks than those associated with investment grade
bonds (i.e., bonds rated AAA, AA, A or BBB by Standard and Poor's or Aaa, Aa, A
or Baa by Moody's). Analysis of the creditworthiness of issuers of high yield
securities may be more complex than for issuers of higher quality debt
securities, and the ability of a Fund to achieve its investment objective may,
to the extent of its investments in high yield securities, be more dependent
upon such creditworthiness analysis than would be the case if the Fund were
investing in higher quality securities. See Appendix B for a description of the
corporate bond and preferred stock ratings by Standard & Poor's, Moody's, Fitch
Investors Service Corp. and Duff & Phelps.
The amount of high yield, fixed income securities proliferated in the 1980s
and early 1990s as a result of increased merger and acquisition and leveraged
buyout activity. Such securities are also issued by less-established
corporations desiring to expand. Risks associated with acquiring the securities
of such issuers generally are greater than is the case with higher rated
securities because such issuers are often less creditworthy companies or are
highly leveraged and generally less able than more established or less leveraged
entities to make scheduled payments of principal and interest.
The market values of high yield, fixed income securities tend to reflect
those individual corporate developments to a greater extent than do those of
higher rated securities, which react primarily to fluctuations in the general
level of interest rates. Issuers of such high yield securities may not be able
to make use of more traditional methods of financing and their ability to
service debt obligations may be more adversely affected than issuers of higher
rated securities by economic downturns, specific corporate developments or the
issuers' inability to meet specific
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projected business forecasts. These non-investment grade securities also tend to
be more sensitive to economic conditions than higher-rated securities. Negative
publicity about the junk bond market and investor perceptions regarding lower-
rated securities, whether or not based on fundamental analysis, may depress the
prices for such securities.
Since investors generally perceive that there are greater risks associated
with non-investment grade securities of the type in which the Growth and Income,
Capital Growth, International Equity, Global Income and High Yield Funds invest,
the yields and prices of such securities may tend to fluctuate more than those
for higher-rated securities. In the lower quality segments of the fixed-income
securities market, changes in perceptions of issuers' creditworthiness tend to
occur more frequently and in a more pronounced manner than do changes in higher
quality segments of the fixed-income securities market, resulting in greater
yield and price volatility.
Another factor which causes fluctuations in the prices of fixed-income
securities is the supply and demand for similarly rated securities. In
addition, the prices of fixed-income securities fluctuate in response to the
general level of interest rates. Fluctuations in the prices of portfolio
securities subsequent to their acquisition will not affect cash income from such
securities but will be reflected in a Fund's net asset value.
The risk of loss from default for the holders of high yield, fixed-income
securities is significantly greater than is the case for holders of other debt
securities because such high yield, fixed-income securities are generally
unsecured and are often subordinated to the rights of other creditors of the
issuers of such securities. Investment by a Fund in already defaulted
securities poses an additional risk of loss should nonpayment of principal and
interest continue in respect of such securities. Even if such securities are
held to maturity, recovery by a Fund of its initial investment and any
anticipated income or appreciation is uncertain. A Fund may be required to
liquidate other portfolio securities to satisfy a Fund's annual distribution
obligations in respect of accrued interest income on securities which are
subsequently written off, even though the Fund has not received any cash
payments of such interest.
The secondary market for high yield, fixed-income securities is concentrated
in relatively few markets and is dominated by institutional investors, including
mutual funds, insurance companies and other financial institutions.
Accordingly, the secondary market for such securities is not as liquid as and is
more volatile than the secondary market for higher-rated securities. In
addition, the trading volume for high-yield, fixed-income securities is
generally lower than that of higher
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rated securities and the secondary market for high yield, fixed-income
securities could contract under adverse market or economic conditions
independent of any specific adverse changes in the condition of a particular
issuer. These factors may have an adverse effect on a Fund's ability to dispose
of particular portfolio investments. Prices realized upon the sale of such lower
rated or unrated securities, under these circumstances, may be less than the
prices used in calculating a Fund's net asset value. A less liquid secondary
market also may make it more difficult for a Fund to obtain precise valuations
of the high yield securities in its portfolio.
Certain proposed and recently enacted federal laws could adversely affect
the secondary market for high yield securities and the financial condition of
issuers of these securities. The form of proposed legislation and the
probability of such legislation being enacted is uncertain.
Non-investment grade or high-yield, fixed-income securities also present
risks based on payment expectations. High yield, fixed-income securities
frequently contain "call" or buy-back features which permit the issuer to call
or repurchase the security from its holder. If an issuer exercises such a "call
option" and redeems the security, a Fund may have to replace such security with
a lower-yielding security, resulting in a decreased return for investors. In
addition, if a Fund experiences unexpected net redemptions of a Fund's shares,
it may be forced to sell its higher-rated securities, resulting in a decline in
the overall credit quality of the Fund's portfolio and increasing the exposure
of the Fund to the risks of high yield securities. A Fund may also incur
additional expenses to the extent that it is required to seek recovery upon a
default in the payment of principal or interest on a portfolio security.
Credit ratings issued by credit rating agencies are designed to evaluate the
safety of principal and interest payments of rated securities. They do not,
however, evaluate the market value risk of non-investment grade securities and,
therefore, may not fully reflect the true risks of an investment. In addition,
credit rating agencies may or may not make timely changes in a rating to reflect
changes in the economy or in the conditions of the issuer that affect the market
value of the security. Consequently, credit ratings are used only as a
preliminary indicator of investment quality. Investments in non-investment
grade and comparable unrated obligations will be more dependent on the Adviser's
credit analysis than would be the case with investments in investment-grade debt
obligations. The Adviser employs its own credit research and analysis, which
includes a study of existing debt, capital structure, ability to service debt
and to pay dividends, the issuer's sensitivity to economic conditions, its
operating history and the current trend of earnings. The Adviser
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continually monitors the investments in a Fund's portfolio and evaluates whether
to dispose of or to retain non-investment grade and comparable unrated
securities whose credit ratings or credit quality may have changed.
OBLIGATIONS OF THE UNITED STATES, ITS AGENCIES, INSTRUMENTALITIES AND SPONSORED
- -------------------------------------------------------------------------------
ENTERPRISES
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Each Fund may invest in U.S. government securities ("U.S. Government
Securities"), which are obligations issued or guaranteed by the U.S. government
and its agencies, instrumentalities or sponsored enterprises. Some U.S.
Government Securities (such as Treasury bills, notes and bonds, which differ
only in their interest rates, maturities and times of issuance) are supported by
the full faith and credit of the United States of America. Others, such as
obligations issued or guaranteed by U.S. government agencies, instrumentalities
or sponsored enterprises, are supported either by (a) the right of the issuer to
borrow from the Treasury (such as securities of Federal Home Loan Banks), (b)
the discretionary authority of the U.S. government to purchase the agency's
obligations (such as securities of Federal National Mortgage Association
("Fannie Mae")) or (c) only the credit of the issuer (such as securities of the
Financing Corporation). The U.S. government is under no legal obligation, in
general, to purchase the obligations of its agencies, instrumentalities or
sponsored enterprises. No assurance can be given that the U.S. government will
provide financial support to the U.S. government agencies, instrumentalities or
sponsored enterprises in the future.
U.S. Government Securities include (to the extent consistent with the
Investment Company Act of 1940, as amended (the "Act")) securities for which the
payment of principal and interest is backed by an irrevocable letter of credit
issued by the U.S. government, or its agencies, instrumentalities or sponsored
enterprises. U.S. Government Securities also include (to the extent consistent
with the Act) participations in loans made to foreign governments or their
agencies that are guaranteed as to principal and interest by the U.S. government
or its agencies, instrumentalities or sponsored enterprises. The secondary
market for certain of these participations is extremely limited. In the absence
of a substantial secondary market, such participations are regarded as illiquid.
Each Fund may also purchase U.S. Government Securities in private placements,
subject to the Fund's limitation on investment in illiquid securities.
The Funds may also invest in separately traded principal and interest
components of securities guaranteed or issued by the U.S. Treasury if such
components are traded independently under the separate trading of registered
interest and principal of securities program ("STRIPS").
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BANK OBLIGATIONS
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Each Fund may each invest in obligations issued or guaranteed by United
States and foreign banks. Bank obligations, including without limitation time
deposits, bankers' acceptances and certificates of deposit, may be general
obligations of the parent bank or may be obligations only of the issuing branch
pursuant to the terms of the specific obligations or government regulation.
Banks are subject to extensive governmental regulations which may limit both
the amount and types of loans which may be made and interest rates which may be
charged. Foreign banks are subject to different regulations and are generally
permitted to engage in a wider variety of activities than U.S. banks. In
addition, the profitability of the banking industry is largely dependent upon
the availability and cost of funds for the purpose of financing lending
operations under prevailing money market conditions. General economic
conditions as well as exposure to credit losses arising from possible financial
difficulties of borrowers play an important part in the operations of this
industry.
DEFERRED INTEREST, PAY-IN-KIND AND CAPITAL APPRECIATION BONDS
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The Global Income and High Yield Funds may invest in deferred interest and
capital appreciation bonds and pay-in-kind ("PIK") securities. Deferred
interest and capital appreciation bonds are debt securities issued or sold at a
discount from their face value and which do not entitle the holder to any
periodic payment of interest prior to maturity or a specified date. The
original issue discount varies depending on the time remaining until maturity or
cash payment date, prevailing interest rates, the liquidity of the security and
the perceived credit quality of the issuer. These securities also may take the
form of debt securities that have been stripped of their unmatured interest
coupons, the coupons themselves or receipts or certificates representing
interests in such stripped debt obligations or coupons. The market prices of
deferred interest, capital appreciation bonds and PIK securities generally are
more volatile than the market prices of interest bearing securities and are
likely to respond to a greater degree to changes in interest rates than interest
bearing securities having similar maturities and credit quality.
PIK securities may be debt obligations or preferred shares that provide the
issuer with the option of paying interest or dividends on such obligations in
cash or in the form of additional securities rather than cash. Similar to zero
coupon bonds and deferred interest bonds, PIK securities are designed to give an
issuer flexibility in managing cash flow. PIK securities that are debt
securities can either be senior or subordinated debt and
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generally trade flat (i.e., without accrued interest). The trading price of PIK
debt securities generally reflects the market value of the underlying debt plus
an amount representing accrued interest since the last interest payment.
Deferred interest, capital appreciation and PIK securities involve the
additional risk that, unlike securities that periodically pay interest to
maturity, a Fund will realize no cash until a specified future payment date
unless a portion of such securities is sold and, if the issuer of such
securities defaults, a Fund may obtain no return at all on its investment. In
addition, even though such securities do not provide for the payment of current
interest in cash, the Funds are nonetheless required to accrue income on such
investments for each taxable year and generally are required to distribute such
accrued amounts (net of deductible expenses, if any) to avoid being subject to
tax. Because no cash is generally received at the time of the accrual, a Fund
may be required to liquidate other portfolio securities to obtain sufficient
cash to satisfy federal tax distribution requirements applicable to the Fund.
See "Taxation."
ZERO COUPON BONDS
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A Fund's investments in fixed income securities may include zero coupon
bonds, which are debt obligations issued or purchased at a significant discount
from face value. The discount approximates the total amount of interest the
bonds would have accrued and compounded over the period until maturity. Zero
coupon bonds do not require the periodic payment of interest. Such investments
benefit the issuer by mitigating its need for cash to meet debt service but also
require a higher rate of return to attract investors who are willing to defer
receipt of such cash. Such investments may experience greater volatility in
market value than debt obligations which provide for regular payments of
interest. In addition, if an issuer of zero coupon bonds held by a Fund
defaults, the Fund may obtain no return at all on its investment. Each Fund
will accrue income on such investments for each taxable year which (net of
deductible expenses, if any) is distributable to shareholders and which, because
no cash is generally received at the time of accrual, may require the
liquidation of other portfolio securities to obtain sufficient cash to satisfy
the Fund's distribution obligations. See "Taxation."
VARIABLE AND FLOATING RATE SECURITIES
- -------------------------------------
The interest rates payable on certain fixed income securities in which a
Fund may invest are not fixed and may fluctuate based upon changes in market
rates. A variable rate obligation has an interest rate which is adjusted at
predesignated periods in response to changes in the market rate of interest on
which the
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interest rate is based. Variable and floating rate obligations are less
effective than fixed rate instruments at locking in a particular yield.
Nevertheless, such obligations may fluctuate in value in response to interest
rate changes if there is a delay between changes in market interest rates and
the interest reset date for the obligation.
The Global Income and High Yield Funds may invest in "leveraged" inverse
floating rate debt instruments ("inverse floaters"), including "leveraged
inverse floaters." The interest rate on inverse floaters resets in the opposite
direction from the market rate of interest to which the inverse floater is
indexed. An inverse floater may be considered to be leveraged to the extent
that its interest rate varies by a magnitude that exceeds the magnitude of the
change in the index rate of interest. The higher the degree of leverage of an
inverse floater, the greater the volatility of its market value. Accordingly,
the duration of an inverse floater may exceed its stated final maturity.
Certain inverse floaters may be deemed to be illiquid securities for purposes of
each Fund's limitation on illiquid investments.
CUSTODIAL RECEIPTS
- ------------------
Each Fund may, with respect to no more than 5% of net assets, invest in
custodial receipts in respect of securities issued or guaranteed as to principal
and interest by the U.S. Government, its agencies, instrumentalities, political
subdivisions or authorities. Such custodial receipts evidence ownership of
future interest payments, principal payments or both on certain notes or bonds
issued by the U.S. Government, its agencies, instrumentalities, political
subdivisions or authorities. These custodial receipts are known by various
names, including "Treasury Receipts," "Treasury Investors Growth Receipts"
("TIGRs"), and "Certificates of Accrual on Treasury Securities" ("CATs"). For
certain securities law purposes, custodial receipts are not considered U.S.
Government securities.
MUNICIPAL SECURITIES
- --------------------
The High Yield Fund may invest in municipal securities. Municipal
securities consist of bonds, notes and other instruments issued by or on behalf
of states, territories and possessions of the United States (including the
District of Columbia) and their political subdivisions, agencies or
instrumentalities, the interest on which is exempt from regular federal income
tax. Municipal securities also include "public activity bonds" or industrial
development bonds, which are issued by or on behalf of public authorities to
obtain funds for privately operated facilities, such as airports and waste
disposal facilities, and, in some cases, commercial and industrial
facilities.
B-17
<PAGE>
The yields and market values of municipal securities are determined
primarily by the general level of interest rates, the creditworthiness of the
issuers of municipal securities and economic and political conditions affecting
such issuers. Due to their tax exempt status, the yields and market prices of
municipal securities may be adversely affected by changes in tax rates and
policies, which may have less effect on the market for taxable fixed-income
securities. Moreover, certain types of municipal securities, such as housing
revenue bonds, involve prepayment risks which could affect the yield on such
securities.
Investments in municipal securities are subject to the risk that the issuer
could default on its obligations. Such a default could result from the
inadequacy of the sources or revenues from which interest and principal payments
are to be made or the assets collateralizing such obligations. Revenue bonds,
including private activity bonds, are backed only by specific assets or revenue
sources and not by the full faith and credit of the governmental issuer.
MORTGAGE LOANS AND MORTGAGE-BACKED SECURITIES
- ---------------------------------------------
GENERAL CHARACTERISTICS. Each Fund (other than CORE U.S. Equity, CORE Large
Cap Growth and CORE Small Cap Equity Funds) may invest in Mortgage-Backed
Securities. Each mortgage pool underlying mortgage-backed securities consists
of mortgage loans evidenced by promissory notes secured by first mortgages or
first deeds of trust or other similar security instruments creating a first
lien on owner occupied and non-owner occupied one-unit to four-unit residential
properties, multifamily (i.e., five or more) properties, agriculture properties,
commercial properties and mixed use properties (the "Mortgaged Properties").
The Mortgaged Properties may consist of detached individual dwelling units,
multifamily dwelling units, individual condominiums, townhouses, duplexes,
triplexes, fourplexes, row houses, individual units in planned unit developments
and other attached dwelling units. The Mortgaged Properties may also include
residential investment properties and second homes.
The investment characteristics of adjustable and fixed rate mortgage-backed
securities differ from those of traditional fixed income securities. The major
differences include the payment of interest and principal on mortgage-backed
securities on a more frequent (usually monthly) schedule, and the possibility
that principal may be prepaid at any time due to prepayments on the underlying
mortgage loans or other assets. These differences can result in significantly
greater price and yield volatility than is the case with traditional fixed
income securities. As a result, if a Fund purchases mortgage-backed securities
at a premium, a faster than expected prepayment rate will reduce both the market
value and the yield to maturity from those which were anticipated.
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<PAGE>
A prepayment rate that is slower than expected will have the opposite effect of
increasing yield to maturity and market value. Conversely, if a Fund purchases
mortgage-backed securities at a discount, faster than expected prepayments will
increase, while slower than expected prepayments will reduce yield to maturity
and market values. To the extent that a Fund invests in mortgage-backed
securities, the Advisers may seek to manage these potential risks by investing
in a variety of mortgage-backed securities and by using certain hedging
techniques.
ADJUSTABLE RATE MORTGAGE LOANS ("ARMS"). ARMs generally provide for a fixed
initial mortgage interest rate for a specified period of time. Thereafter, the
interest rates (the "Mortgage Interest Rates") may be subject to periodic
adjustment based on changes in the applicable index rate (the "Index Rate"). The
adjusted rate would be equal to the Index Rate plus a fixed percentage spread
over the Index Rate established for each ARM at the time of its origination.
Adjustable interest rates can cause payment increases that some mortgagors
may find difficult to make. However, certain ARMs may provide that the Mortgage
Interest Rate may not be adjusted to a rate above an applicable lifetime maximum
rate or below an applicable lifetime minimum rate for such ARM. Certain ARMs
may also be subject to limitations on the maximum amount by which the Mortgage
Interest Rate may adjust for any single adjustment period (the "Maximum
Adjustment"). Other ARMs ("Negatively Amortizing ARMs") may provide instead or
as well for limitations on changes in the monthly payment on such ARMs.
Limitations on monthly payments can result in monthly payments which are greater
or less than the amount necessary to amortize a Negatively Amortizing ARM by its
maturity at the Mortgage Interest Rate in effect in any particular month. In
the event that a monthly payment is not sufficient to pay the interest accruing
on a Negatively Amortizing ARM, any such excess interest is added to the
principal balance of the loan, causing negative amortization, and will be repaid
through future monthly payments. It may take borrowers under Negatively
Amortizing ARMs longer periods of time to build up equity and may increase the
likelihood of default by such borrowers. In the event that a monthly payment
exceeds the sum of the interest accrued at the applicable Mortgage Interest Rate
and the principal payment which would have been necessary to amortize the
outstanding principal balance over the remaining term of the loan, the excess
(or "accelerated amortization") further reduces the principal balance of the
ARM. Negatively Amortizing ARMs do not provide for the extension of their
original maturity to accommodate changes in their Mortgage Interest Rate. As a
result, unless there is a periodic recalculation of the payment amount (which
there generally is), the final payment may be substantially larger than the
other payments. These limitations on periodic increases in interest rates and
on changes in monthly payments
B-19
<PAGE>
protect borrowers from unlimited interest rate and payment increases.
There are two main categories of indices which provide the basis for rate
adjustments on ARMs: those based on U.S. Treasury securities and those derived
from a calculated measure, such as a cost of funds index or a moving average of
mortgage rates. Commonly utilized indices include the one-year, three-year and
five-year constant maturity Treasury rates, the three-month Treasury bill rate,
the 180-day Treasury bill rate, rates on longer-term Treasury securities, the
11th District Federal Home Loan Bank Cost of Funds, the National Median Cost of
Funds, the one-month, three-month, six-month or one-year London Interbank
Offered Rate, the prime rate of a specific bank or commercial paper rates. Some
indices, such as the one-year constant maturity Treasury rate, closely mirror
changes in market interest rate levels. Others, such as the 11th District
Federal Home Loan Bank Cost of Funds index, tend to lag behind changes in market
rate levels and tend to be somewhat less volatile. The degree of volatility in
the market value of each Fund's portfolio and therefore in the net asset value
of each Fund's shares will be a function of the length of the interest rate
reset periods and the degree of volatility in the applicable indices.
FIXED-RATE MORTGAGE LOANS. Generally, fixed-rate mortgage loans included in
a mortgage pool (the "Fixed-Rate Mortgage Loans") will bear simple interest at
fixed annual rates and have original terms to maturity ranging from 5 to 40
years. Fixed-Rate Mortgage Loans generally provide for monthly payments of
principal and interest in substantially equal installments for the term of the
mortgage note in sufficient amounts to fully amortize principal by maturity,
although certain Fixed-Rate Mortgage Loans provide for a large final "balloon"
payment upon maturity.
LEGAL CONSIDERATIONS OF MORTGAGE LOANS. The following is a discussion of
certain legal and regulatory aspects of the mortgage loans in which the Funds
may invest. These regulations may impair the ability of a mortgage lender to
enforce its rights under the mortgage documents. These regulations may adversely
affect the Funds' investments in Mortgage-Backed Securities (including those
issued or guaranteed by the U.S. government, its agencies or instrumentalities)
by delaying the Funds' receipt of payments derived from principal or interest on
mortgage loans affected by such regulations.
1. Foreclosure. A foreclosure of a defaulted mortgage loan may be delayed due
-----------
to compliance with statutory notice or service of process provisions,
difficulties in locating necessary parties or legal challenges to the
mortgagee's right to foreclose. Depending upon market conditions, the
ultimate
B-20
<PAGE>
proceeds of the sale of foreclosed property may not equal the amounts owed
on the Mortgage-Backed Securities.
Furthermore, courts in some cases have imposed general equitable principles
upon foreclosure generally designed to relieve the borrower from the legal
effect of default and have required lenders to undertake affirmative and
expensive actions to determine the causes for the default and the likelihood
of loan reinstatement.
2. Rights of Redemption. In some states, after foreclosure of a mortgage loan,
--------------------
the borrower and foreclosed junior lienors are given a statutory period in
which to redeem the property, which right may diminish the mortgagee's
ability to sell the property.
3. Legislative Limitations. In addition to anti-deficiency and related
-----------------------
legislation, numerous other federal and state statutory provisions,
including the federal bankruptcy laws and state laws affording relief to
debtors, may interfere with or affect the ability of a secured mortgage
lender to enforce its security interest. For example, a bankruptcy court
may grant the debtor a reasonable time to cure a default on a mortgage loan,
including a payment default. The court in certain instances may also
reduce the monthly payments due under such mortgage loan, change the rate of
interest, reduce the principal balance of the loan to the then-current
appraised value of the related mortgaged property, alter the mortgage loan
repayment schedule and grant priority of certain liens over the lien of the
mortgage loan. If a court relieves a borrower's obligation to repay amounts
otherwise due on a mortgage loan, the mortgage loan servicer will not be
required to advance such amounts, and any loss may be borne by the holders
of securities backed by such loans. In addition, numerous federal and
state consumer protection laws impose penalties for failure to comply with
specific requirements in connection with origination and servicing of
mortgage loans.
4. "Due-on-Sale" Provisions. Fixed-rate mortgage loans may contain a so-called
------------------------
"due-on-sale" clause permitting acceleration of the maturity of the mortgage
loan if the borrower transfers the property. The Garn-St. Germain
Depository Institutions Act of 1982 sets forth nine specific instances in
which no mortgage lender covered by that Act may exercise a "due-on-sale"
clause upon a transfer of property. The inability to enforce a "due-on-sale"
clause or the lack of such a clause in mortgage loan documents may result in
a mortgage loan being assumed by a purchaser of the property that bears an
interest rate below the current market rate.
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<PAGE>
5. Usury Laws. Some states prohibit charging interest on mortgage loans in
----------
excess of statutory limits. If such limits are exceeded, substantial
penalties may be incurred and, in some cases, enforceability of the
obligation to pay principal and interest may be affected.
GOVERNMENT GUARANTEED MORTGAGE-BACKED SECURITIES. There are several types
of guaranteed mortgage-backed securities currently available, including
guaranteed mortgage pass-through certificates and multiple class securities,
which include guaranteed Real Estate Mortgage Investment Conduit Certificates
("REMIC Certificates"), collateralized mortgage obligations and stripped
mortgage-backed securities. A Fund is permitted to invest in other types of
mortgage-backed securities that may be available in the future to the extent
consistent with its investment policies and objective.
A Fund's investments in mortgage-backed securities may include securities
issued or guaranteed by the U.S. Government or one of its agencies, authorities,
instrumentalities or sponsored enterprises, such as the Government National
Mortgage Association ("Ginnie Mae"), the Federal National Mortgage Association
("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac").
GINNIE MAE CERTIFICATES. Ginnie Mae is a wholly-owned corporate
instrumentality of the United States. Ginnie Mae is authorized to guarantee the
timely payment of the principal of and interest on certificates that are based
on and backed by a pool of mortgage loans insured by the Federal Housing
Administration ("FHA Loans"), or guaranteed by the Veterans Administration ("VA
Loans"), or by pools of other eligible mortgage loans. In order to meet its
obligations under any guaranty, Ginnie Mae is authorized to borrow from the
United States Treasury in an unlimited amount.
FANNIE MAE CERTIFICATES. Fannie Mae is a stockholder-owned corporation
chartered under an act of the United States Congress. Each Fannie Mae
Certificate is issued and guaranteed by Fannie Mae and represents an undivided
interest in a pool of mortgage loans (a "Pool") formed by Fannie Mae. Each Pool
consists of residential mortgage loans ("Mortgage Loans") either previously
owned by Fannie Mae or purchased by it in connection with the formation of the
Pool. The Mortgage Loans may be either conventional Mortgage Loans (i.e., not
insured or guaranteed by any U.S. Government agency) or Mortgage Loans that are
either insured by the Federal Housing Administration ("FHA") or guaranteed by
the Veterans Administration ("VA"). However, the Mortgage Loans in Fannie Mae
Pools are primarily conventional Mortgage Loans. The lenders originating and
servicing the Mortgage Loans are subject to certain eligibility requirements
established by Fannie Mae.
B-22
<PAGE>
Fannie Mae has certain contractual responsibilities. With respect to each
Pool, Fannie Mae is obligated to distribute scheduled monthly installments of
principal and interest after Fannie Mae's servicing and guaranty fee, whether or
not received, to Certificate holders. Fannie Mae also is obligated to
distribute to holders of Certificates an amount equal to the full principal
balance of any foreclosed Mortgage Loan, whether or not such principal balance
is actually recovered. The obligations of Fannie Mae under its guaranty of the
Fannie Mae Certificates are obligations solely of Fannie Mae.
FREDDIE MAC CERTIFICATES. Freddie Mac is a publicly held U.S. Government
sponsored enterprise. The principal activity of Freddie Mac currently is the
purchase of first lien, conventional, residential mortgage loans and
participation interests in such mortgage loans and their resale in the form of
mortgage securities, primarily Freddie Mac Certificates. A Freddie Mac
Certificate represents a pro rata interest in a group of mortgage loans or
participation in mortgage loans (a "Freddie Mac Certificate group") purchased by
Freddie Mac.
Freddie Mac guarantees to each registered holder of a Freddie Mac
Certificate the timely payment of interest at the rate provided for by such
Freddie Mac Certificate (whether or not received on the underlying loans).
Freddie Mac also guarantees to each registered Certificate holder ultimate
collection of all principal of the related mortgage loans, without any offset or
deduction, but does not, generally, guarantee the timely payment of scheduled
principal. The obligations of Freddie Mac under its guaranty of Freddie Mac
Certificates are obligations solely of Freddie Mac.
The mortgage loans underlying the Freddie Mac and Fannie Mae Certificates
consist of adjustable rate or fixed rate mortgage loans with original terms to
maturity of between five and thirty years. Substantially all of these mortgage
loans are secured by first liens on one-to-four-family residential properties or
multifamily projects. Each mortgage loan must meet the applicable standards set
forth in the law creating Freddie Mac or Fannie Mae. A Freddie Mac Certificate
group may include whole loans, participation interests in whole loans and
undivided interests in whole loans and participations comprising another Freddie
Mac Certificate group.
CONVENTIONAL MORTGAGE LOANS. The conventional mortgage loans underlying the
Freddie Mac and Fannie Mae Certificates consist of adjustable rate or fixed-rate
mortgage loans with original terms to maturity of between five and thirty years.
Substantially all of these mortgage loans are secured by first liens on one- to
four-family residential properties or multi-family projects. Each
B-23
<PAGE>
mortgage loan must meet the applicable standards set forth in the law creating
Freddie Mac or Fannie Mae. A Freddie Mac Certificate group may include whole
loans, participation interests in whole loans, undivided interests in whole
loans and participations comprising another Freddie Mac Certificate group.
MORTGAGE PASS-THROUGH SECURITIES. Each Fund (other than CORE U.S. Equity,
CORE Large Cap Growth, CORE Small Cap Equity and Mid Cap Equity Funds) may
invest in both government guaranteed and privately issued mortgage pass-through
securities ("Mortgage Pass-Throughs"); that is, fixed or adjustable rate
mortgage-backed securities which provide for monthly payments that are a "pass-
through" of the monthly interest and principal payments (including any
prepayments) made by the individual borrowers on the pooled mortgage loans, net
of any fees or other amounts paid to any guarantor, administrator and/or
servicer of the underlying mortgage loans.
The following discussion describes only a few of the wide variety of
structures of Mortgage Pass-Throughs that are available or may be issued.
DESCRIPTION OF CERTIFICATES. Mortgage Pass-Throughs may be issued in
one or more classes of senior certificates and one or more classes of
subordinate certificates. Each such class may bear a different pass-through
rate. Generally, each certificate will evidence the specified interest of the
holder thereof in the payments of principal or interest or both in respect of
the mortgage pool comprising part of the trust fund for such certificates.
Any class of certificates may also be divided into subclasses entitled to
varying amounts of principal and interest. If a REMIC election has been made,
certificates of such subclasses may be entitled to payments on the basis of a
stated principal balance and stated interest rate, and payments among different
subclasses may be made on a sequential, concurrent, pro rata or disproportionate
--- ----
basis, or any combination thereof. The stated interest rate on any such
subclass of certificates may be a fixed rate or one which varies in direct or
inverse relationship to an objective interest index.
Generally, each registered holder of a certificate will be entitled to
receive its pro rata share of monthly distributions of all or a portion of
--- ----
principal of the underlying mortgage loans or of interest on the principal
balances thereof, which accrues at the applicable mortgage pass-through rate, or
both. The difference between the mortgage interest rate and the related
mortgage pass-through rate (less the amount, if any, of retained yield) with
respect to each mortgage loan will generally be paid to the servicer as a
servicing fee. Since certain adjustable rate
B-24
<PAGE>
mortgage loans included in a mortgage pool may provide for deferred interest
(i.e., negative amortization), the amount of interest actually paid by a
mortgagor in any month may be less than the amount of interest accrued on the
outstanding principal balance of the related mortgage loan during the relevant
period at the applicable mortgage interest rate. In such event, the amount of
interest that is treated as deferred interest will be added to the principal
balance of the related mortgage loan and will be distributed pro rata to
--- ----
certificate-holders as principal of such mortgage loan when paid by the
mortgagor in subsequent monthly payments or at maturity.
RATINGS. The ratings assigned by a rating organization to Mortgage
Pass-Throughs address the likelihood of the receipt of all distributions on the
underlying mortgage loans by the related certificate-holders under the
agreements pursuant to which such certificates are issued. A rating
organization's ratings take into consideration the credit quality of the related
mortgage pool, including any credit support providers, structural and legal
aspects associated with such certificates, and the extent to which the payment
stream on such mortgage pool is adequate to make payments required by such
certificates. A rating organization's ratings on such certificates do not,
however, constitute a statement regarding frequency of prepayments on the
related mortgage loans. In addition, the rating assigned by a rating
organization to a certificate does not address the remote possibility that, in
the event of the insolvency of the issuer of certificates where a subordinated
interest was retained, the issuance and sale of the senior certificates may be
recharacterized as a financing and, as a result of such recharacterization,
payments on such certificates may be affected.
CREDIT ENHANCEMENT. Credit support falls generally into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from default by an obligor on the underlying assets. Liquidity
protection refers to the provision of advances, generally by the entity
administering the pools of
mortgages, the provision of a reserve fund, or a combination thereof, to ensure,
subject to certain limitations, that scheduled payments on the underlying pool
are made in a timely fashion. Protection against losses resulting from default
ensures ultimate payment of the obligations on at least a portion of the assets
in the pool. Such credit support can be provided by among other things, payment
guarantees, letters of credit, pool insurance, subordination, or any combination
thereof.
SUBORDINATION; SHIFTING OF INTEREST; RESERVE FUND. In order to achieve
ratings on one or more classes of Mortgage Pass-Throughs, one or more classes of
certificates may be subordinate certificates which provide that the rights of
the subordinate certificate-holders to receive any or a specified portion of
B-25
<PAGE>
distributions with respect to the underlying mortgage loans may be subordinated
to the rights of the senior certificate-holders. If so structured, the
subordination feature may be enhanced by distributing to the senior certificate-
holders on certain distribution dates, as payment of principal, a specified
percentage (which generally declines over time) of all principal payments
received during the preceding prepayment period ("shifting interest credit
enhancement"). This will have the effect of accelerating the amortization of
the senior certificates while increasing the interest in the trust fund
evidenced by the subordinate certificates. Increasing the interest of the
subordinate certificates relative to that of the senior certificates is intended
to preserve the availability of the subordination provided by the subordinate
certificates. In addition, because the senior certificate-holders in a shifting
interest credit enhancement structure are entitled to receive a percentage of
principal prepayments which is greater than their proportionate interest in the
trust fund, the rate of principal prepayments on the mortgage loans will have an
even greater effect on the rate of principal payments and the amount of interest
payments on, and the yield to maturity of, the senior certificates.
In addition to providing for a preferential right of the senior certificate-
holders to receive current distributions from the mortgage pool, a reserve fund
may be established relating to such certificates (the "Reserve Fund"). The
Reserve Fund may be created with an initial cash deposit by the originator or
servicer and augmented by the retention of distributions otherwise available to
the subordinate certificate-holders or by excess servicing fees until the
Reserve Fund reaches a specified amount.
The subordination feature, and any Reserve Fund, are intended to enhance the
likelihood of timely receipt by senior certificate-
holders of the full amount of scheduled monthly payments of principal and
interest due them and will protect the senior certificate-holders against
certain losses; however, in certain circumstances the Reserve Fund could be
depleted and temporary shortfalls could result. In the event the Reserve Fund
is depleted before the subordinated amount is reduced to zero, senior
certificate-holders will nevertheless have a preferential right to receive
current distributions from the mortgage pool to the extent of the then
outstanding subordinated amount. Unless otherwise specified, until the
subordinated amount is reduced to zero, on any distribution date any amount
otherwise distributable to the subordinate certificates or, to the extent
specified, in the Reserve Fund will generally be used to offset the amount of
any losses realized with respect to the mortgage loans ("Realized Losses").
Realized Losses remaining after application of such amounts will generally be
applied to reduce the ownership interest of the subordinate certificates in the
mortgage pool. If the subordinated amount has been reduced to zero, Realized
Losses
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<PAGE>
generally will be allocated pro rata among all certificate-holders in
--- ----
proportion to their respective outstanding interests in the mortgage pool.
ALTERNATIVE CREDIT ENHANCEMENT. As an alternative, or in addition to
the credit enhancement afforded by subordination, credit enhancement for
Mortgage Pass-Throughs may be provided by mortgage insurance, hazard insurance,
by the deposit of cash, certificates of deposit, letters of credit, a limited
guaranty or by such other methods as are acceptable to a rating agency. In
certain circumstances, such as where credit enhancement is provided by
guarantees or a letter of credit, the security is subject to credit risk because
of its exposure to an external credit enhancement provider.
VOLUNTARY ADVANCES. Generally, in the event of delinquencies in
payments on the mortgage loans underlying the Mortgage Pass-Throughs, the
servicer agrees to make advances of cash for the benefit of certificate-holders,
but only to the extent that it determines such voluntary advances will be
recoverable from future payments and collections on the mortgage loans or
otherwise.
OPTIONAL TERMINATION. Generally, the servicer may, at its option with
respect to any certificates, repurchase all of the underlying mortgage loans
remaining outstanding at such time as the aggregate outstanding principal
balance of such mortgage loans is less than a specified percentage (generally 5-
10%) of the aggregate outstanding principal balance of the mortgage loans as of
the cut-off date specified with respect to such series.
MULTIPLE CLASS MORTGAGE-BACKED SECURITIES AND COLLATERALIZED MORTGAGE
OBLIGATIONS. A Fund may invest in multiple class securities including
collateralized mortgage obligations ("CMOs") and REMIC Certificates. These
securities may be issued by U.S. Government agencies and instrumentalities such
as Fannie Mae or Freddie Mac or by trusts formed by private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage
bankers, commercial banks, insurance companies, investment banks and special
purpose subsidiaries of the foregoing. In general, CMOs are debt obligations of
a legal entity that are collateralized by, and multiple class mortgage-backed
securities represent direct ownership interests in, a pool of mortgage loans or
mortgage-backed securities the payments on which are used to make payments on
the CMOs or multiple class mortgage-backed securities.
Fannie Mae REMIC Certificates are issued and guaranteed as to timely
distribution of principal and interest by Fannie Mae. In addition, Fannie Mae
will be obligated to distribute the principal
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<PAGE>
balance of each class of REMIC Certificates in full, whether or not sufficient
funds are otherwise available.
Freddie Mac guarantees the timely payment of interest on Freddie Mac REMIC
Certificates and also guarantees the payment of principal as payments are
required to be made on the underlying mortgage participation certificates
("PCs"). PCs represent undivided interests in specified level payment,
residential mortgages or participations therein purchased by Freddie Mac and
placed in a PC pool. With respect to principal payments on PCs, Freddie Mac
generally guarantees ultimate collection of all principal of the related
mortgage loans without offset or deduction. Freddie Mac also guarantees timely
payment of principal of certain PCs.
CMOs and guaranteed REMIC Certificates issued by Fannie Mae and Freddie Mac
are types of multiple class mortgage-backed securities. Investors may purchase
beneficial interests in REMICs, which are known as "regular" interests or
"residual" interests. The Funds do not intend to purchase residual interests in
REMICs. The REMIC Certificates represent beneficial ownership interests in a
REMIC trust, generally consisting of mortgage loans or Fannie Mae, Freddie Mac
or Ginnie Mae guaranteed mortgage- backed securities (the "Mortgage Assets").
The obligations of Fannie Mae or Freddie Mac under their respective guaranty of
the REMIC Certificates are obligations solely of Fannie Mae or Freddie Mac,
respectively.
CMOs and REMIC Certificates are issued in multiple classes. Each class of
CMOs or REMIC Certificates, often referred to as a "tranche," is issued at a
specific adjustable or fixed interest rate and must be fully retired no later
than its final distribution date. Principal prepayments on the Mortgage Loans
or the Mortgage Assets underlying the CMOs or REMIC Certificates may cause some
or all of the classes of CMOs or REMIC Certificates to be retired substantially
earlier than their final distribution dates. Generally, interest is paid or
accrues on all classes of CMOs or REMIC Certificates on a monthly basis.
The principal of and interest on the Mortgage Assets may be allocated among
the several classes of CMOs or REMIC Certificates in various ways. In certain
structures (known as "sequential pay" CMOs or REMIC Certificates), payments of
principal, including any principal prepayments, on the Mortgage Assets generally
are applied to the classes of CMOs or REMIC Certificates in the order of their
respective final distribution dates. Thus, no payment of principal will be made
on any class of sequential pay CMOs or REMIC Certificates until all other
classes having an earlier final distribution date have been paid in full.
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<PAGE>
Additional structures of CMOs and REMIC Certificates include, among others,
"parallel pay" CMOs and REMIC Certificates. Parallel pay CMOs or REMIC
Certificates are those which are structured to apply principal payments and
prepayments of the Mortgage Assets to two or more classes concurrently on a
proportionate or disproportionate basis. These simultaneous payments are taken
into account in calculating the final distribution date of each class.
A wide variety of REMIC Certificates may be issued in parallel pay or
sequential pay structures. These securities include accrual certificates (also
known as "Z-Bonds"), which only accrue interest at a specified rate until all
other certificates having an earlier final distribution date have been retired
and are converted thereafter to an interest-paying security, and planned
amortization class ("PAC") certificates, which are parallel pay REMIC
Certificates that generally require that specified amounts of principal be
applied on each payment date to one or more classes or REMIC Certificates (the
"PAC Certificates"), even though all other principal payments and prepayments of
the Mortgage Assets are then required to be applied to one or more other classes
of the Certificates. The scheduled principal payments for the PAC Certificates
generally have the highest priority on each payment date after interest due has
been paid to all classes entitled to receive interest currently. Shortfalls, if
any, are added to the amount payable on the next payment date. The PAC
Certificate payment schedule is taken into account in calculating the final
distribution date of each class of PAC. In order to create PAC tranches, one or
more tranches generally must be created that absorb most of the volatility in
the underlying mortgage assets. These tranches tend to have market prices and
yields that are much more volatile than other PAC classes.
STRIPPED MORTGAGE-BACKED SECURITIES. The Global Income and High Yield Funds
may invest in stripped mortgage-backed securities ("SMBS"), which are derivative
multiclass mortgage securities, issued or guaranteed by the U.S. Government, its
agencies or instrumentalities or by private issuers. Although the market for
such securities is increasingly liquid, privately issued SMBS may not be readily
marketable and will be considered illiquid for purposes of the Fund's limitation
on investments in illiquid securities. A Fund's investment adviser may
determine that SMBS which are U.S. Government Securities are liquid for purposes
of each Fund's limitation on investments in illiquid securities. The market
value of the class consisting entirely of principal payments generally is
unusually volatile in response to changes in interest rates. The yields on a
class of SMBS that receives all or most of the interest from Mortgage Assets are
generally higher than prevailing market yields on other Mortgage-Backed
Securities because their cash flow patterns are more volatile and there is a
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greater risk that the initial investment will not be fully recouped.
ASSET-BACKED SECURITIES
- -----------------------
Asset-backed securities represent participation in, or are secured by and
payable from, assets such as motor vehicle installment sales, installment loan
contracts, leases of various types of real and personal property, receivables
from revolving credit (credit card) agreements and other categories of
receivables. Such assets are securitized through the use of trusts and special
purpose corporations. Payments or distributions of principal and interest may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit or a pool insurance policy issued by a financial institution unaffiliated
with the trust or corporation, or other credit enhancements may be present.
Like Mortgage-Backed Securities, asset-backed securities are often subject
to more rapid repayment than their stated maturity date would indicate as a
result of the pass-through of prepayments of principal on the underlying loans.
During periods of declining interest rates, prepayment of loans underlying
asset-backed securities can be expected to accelerate. Accordingly, a Fund's
ability to maintain positions in such securities will be affected by reductions
in the principal amount of such securities resulting from prepayments, and its
ability to reinvest the returns of principal at comparable yields is subject to
generally prevailing interest rates at that time. To the extent that a Fund
invests in asset-backed securities, the values of such Fund's portfolio
securities will vary with changes in market interest rates generally and the
differentials in yields among various kinds of asset-backed securities.
Asset-backed securities present certain additional risks that are not
presented by Mortgage-Backed Securities because asset-backed securities
generally do not have the benefit of a security interest in collateral that is
comparable to Mortgage Assets. Credit card receivables are generally unsecured
and the debtors on such receivables are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set-off certain amounts owed on the credit cards, thereby reducing the
balance due. Automobile receivables generally are secured, but by automobiles
rather than residential real property. Most issuers of automobile receivables
permit the loan servicers to retain possession of the underlying obligations.
If the servicer were to sell these obligations to another party, there is a risk
that the purchaser would acquire an interest superior to that of the holders of
the asset-backed securities. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under
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state laws, the trustee for the holders of the automobile receivables may not
have a proper security interest in the underlying automobiles. Therefore, there
is the possibility that, in some cases, recoveries on repossessed collateral may
not be available to support payments on these securities.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
- --------------------------------------------------
Each Fund may purchase and sell futures contracts and may also purchase and
write options on futures contracts. CORE U.S. Equity, CORE Large Cap Growth and
CORE Small Cap Equity Funds may only enter into such transactions with respect
to the S&P 500 Index, for the CORE U.S. Equity Fund and a representative index
in the case of the CORE Large Cap Growth and CORE Small Cap Equity Funds. The
other Funds may purchase and sell futures contracts based on various securities
(such as U.S. Government securities), securities indices, foreign currencies and
other financial instruments and indices. Each Fund will engage in futures and
related options transactions, only for bona fide hedging purposes as defined
below or for purposes of seeking to increase total return to the extent
permitted by regulations of the Commodity Futures Trading Commission ("CFTC").
All futures contracts entered into by a Fund are traded on U.S. exchanges or
boards of trade that are licensed and regulated by the CFTC or on foreign
exchanges.
FUTURES CONTRACTS. A futures contract may generally be described as an
agreement between two parties to buy and sell particular financial instruments
or currencies for an agreed price during a designated month (or to deliver the
final cash settlement price, in the case of a contract relating to an index or
otherwise not calling for physical delivery at the end of trading in the
contract).
When interest rates are rising or securities prices are falling, a Fund can
seek through the sale of futures contracts to offset a decline in the value of
its current portfolio securities. When rates are falling or prices are rising, a
Fund, through the purchase of futures contracts, can attempt to secure better
rates or prices than might later be available in the market when it effects
anticipated purchases. Similarly, each Fund (other than CORE U.S. Equity, CORE
Large Cap Growth and CORE Small Cap Equity Funds) can sell futures contracts on
a specified currency to protect against a decline in the value of such currency
and its portfolio securities which are quoted or denominated in such currency.
Each Fund (other than CORE U.S. Equity, CORE Large Cap Growth and CORE Small Cap
Equity Funds) can purchase futures contracts on foreign currency to establish
the price in U.S. dollars of a security quoted or denominated in such currency
that such Fund has acquired or expects to acquire.
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Positions taken in the futures market are not normally held to maturity, but
are instead liquidated through offsetting transactions which may result in a
profit or a loss. While each Fund will usually liquidate futures contracts on
securities or currency in this manner, a Fund may instead make or take delivery
of the underlying securities or currency whenever it appears economically
advantageous for the Fund to do so. A clearing corporation associated with the
exchange on which futures are traded guarantees that, if still open, the sale or
purchase will be performed on the settlement date.
HEDGING STRATEGIES. Hedging, by use of futures contracts, seeks to
establish with more certainty than would otherwise be possible the effective
price, rate of return or currency exchange rate on portfolio securities or
securities that a Fund owns or proposes to acquire. A Fund may, for example,
take a "short" position in the futures market by selling futures contracts to
seek to hedge against an anticipated rise in interest rates or a decline in
market prices or (other than CORE U.S. Equity, CORE Large Cap Growth and CORE
Small Cap Equity Funds) foreign currency rates that would adversely affect the
dollar value of such Fund's portfolio securities. Similarly, each Fund (other
than CORE U.S. Equity, CORE Large Cap Growth and CORE Small Cap Equity Funds)
may sell futures contracts on a currency in which its portfolio securities are
quoted or denominated or in one currency to seek to hedge against fluctuations
in the value of securities quoted or denominated in a different currency if
there is an established historical pattern of correlation between the two
currencies. If, in the opinion of the applicable Adviser, there is a sufficient
degree of correlation between price trends for a Fund's portfolio securities and
futures contracts based on other financial instruments, securities indices or
other indices, a Fund may also enter into such futures contracts as part of its
hedging strategy. Although under some circumstances prices of securities in a
Fund's portfolio may be more or less volatile than prices of such futures
contracts, the Advisers will attempt to estimate the extent of this volatility
difference based on historical patterns and compensate for any such differential
by having a Fund enter into a greater or lesser number of futures contracts or
by attempting to achieve only a partial hedge against price changes affecting a
Fund's securities portfolio. When hedging of this character is successful, any
depreciation in the value of portfolio securities will be substantially offset
by appreciation in the value of the futures position. On the other hand, any
unanticipated appreciation in the value of a Fund's portfolio securities would
be substantially offset by a decline in the value of the futures position.
On other occasions, a Fund may take a "long" position by purchasing such
futures contracts. This would be done, for example, when a Fund anticipates the
subsequent purchase of
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particular securities when it has the necessary cash, but expects the prices or
currency exchange rates then available in the applicable market to be less
favorable than prices or rates that are currently available.
OPTIONS ON FUTURES CONTRACTS. The acquisition of put and call options on
futures contracts will give a Fund the right (but not the obligation), for a
specified price, to sell or to purchase, respectively, the underlying futures
contract at any time during the option period. As the purchaser of an option on
a futures contract, a Fund obtains the benefit of the futures position if prices
move in a favorable direction but limits its risk of loss in the event of an
unfavorable price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium which
may partially offset a decline in the value of a Fund's assets. By writing a
call option, a Fund becomes obligated, in exchange for the premium, (upon
exercise of the option) to sell a futures contract if the option is exercised,
which may have a value higher than the exercise price. Conversely, the writing
of a put option on a futures contract generates a premium, which may partially
offset an increase in the price of securities that a Fund intends to purchase.
However, a Fund becomes obligated (upon exercise of the option) to purchase a
futures contract if the option is exercised, which may have a value lower than
the exercise price. Thus, the loss incurred by a Fund in writing options on
futures is potentially unlimited and may exceed the amount of the premium
received. A Fund will incur transaction costs in connection with the writing of
options on futures.
The holder or writer of an option on a futures contract may terminate its
position by selling or purchasing an offsetting option on the same financial
instrument. There is no guarantee that such closing transactions can be
effected. A Fund's ability to establish and close out positions on such options
will be subject to the development and maintenance of a liquid market.
OTHER CONSIDERATIONS. Each Fund will engage in futures transactions and
will engage in related options transactions only for bona fide hedging as
defined in the regulations of the CFTC or to seek to increase total return to
the extent permitted by such regulations. A Fund will determine that the price
fluctuations in the futures contracts and options on futures used for hedging
purposes are substantially related to price fluctuations in securities held by
the Fund or which it expects to purchase. Except as stated below, each Fund's
futures transactions will be entered into for traditional hedging purposes --
i.e., futures contracts will be sold to protect against a decline in the price
of securities (or the currency in which they are quoted or denominated) that the
Fund owns, or futures contracts will be purchased to protect the Fund against an
increase in the price of securities (or the currency in which they are quoted or
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<PAGE>
denominated) it intends to purchase. As evidence of this hedging intent, each
Fund expects that on 75% or more of the occasions on which it takes a long
futures or option position (involving the purchase of futures contracts), the
Fund will have purchased, or will be in the process of purchasing, equivalent
amounts of related securities (or assets quoted or denominated in the related
currency) in the cash market at the time when the futures or options position is
closed out. However, in particular cases, when it is economically advantageous
for a Fund to do so, a long futures position may be terminated or an option may
expire without the corresponding purchase of securities or other assets.
As an alternative to literal compliance with the bona fide hedging
definition, a CFTC regulation permits a Fund to elect to comply with a different
test. Under this test the aggregate initial margin and premiums required to
establish positions in futures contracts and options on futures to seek to
increase total return may not exceed 5% of the net asset value of such Fund's
portfolio, after taking into account unrealized profits and losses on any such
positions and excluding the amount by which such options were in-the-money at
the time of purchase. To the extent consistent with the requirements of the
Code for maintaining qualification as a regulated investment company for federal
income tax purposes, a Fund will engage in transactions in currency forward
contracts, futures contracts and, for a Fund permitted to do so, related options
transactions only. (see "Taxation")
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in the case of contracts and options
obligating a Fund to purchase securities or currencies, require the Fund to
segregate with its custodian cash or liquid assets in an amount equal to the
underlying value of such contracts and options.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. Thus,
unanticipated changes in interest rates, securities prices or currency exchange
rates may result in a poorer overall performance for a Fund than if it had not
entered into any futures contracts or options transactions. In the event of an
imperfect correlation between a futures position and a portfolio position which
is intended to be protected, the desired protection may not be obtained and a
Fund may be exposed to risk of loss.
Perfect correlation between a Fund's futures positions and portfolio
positions will be difficult to achieve because no futures contracts based on
individual equity or corporate fixed-
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income securities are currently available. The only futures contracts available
to hedge a Fund's portfolio are various futures on U.S. Government securities,
securities indices and foreign currencies. In addition, it is not possible for a
Fund to hedge fully or perfectly against currency fluctuations affecting the
value of securities quoted or denominated in foreign currencies because the
value of such securities is likely to fluctuate as a result of independent
factors not related to currency fluctuations.
OPTIONS ON SECURITIES AND SECURITIES INDICES
- --------------------------------------------
WRITING COVERED OPTIONS. Each Fund may write (sell) covered call and put
options on any securities in which it may invest (other than CORE U.S. Equity
and CORE Large Cap Growth Funds). A Fund may purchase and write such options on
securities that are listed on national domestic securities exchanges or foreign
securities exchanges or traded in the over-the-counter market. A call option
written by a Fund obligates such Fund to sell specified securities to the holder
of the option at a specified price if the option is exercised at any time before
the expiration date. All call options written by a Fund are covered, which
means that such Fund will own the securities subject to the option as long as
the option is outstanding or such Fund will use the other methods described
below. A Fund's purpose in writing covered call options is to realize greater
income than would be realized on portfolio securities transactions alone.
However, a Fund may forego the opportunity to profit from an increase in the
market price of the underlying security.
A put option written by a Fund would obligate such Fund to purchase
specified securities from the option holder at a specified price if the option
is exercised at any time before the expiration date. All put options written by
a Fund would be covered, which means that such Fund would have deposited with
its custodian cash or liquid assets with a value at least equal to the exercise
price of the put option. The purpose of writing such options is to generate
additional income for the Fund. However, in return for the option premium, each
Fund accepts the risk that it may be required to purchase the underlying
securities at a price in excess of the securities' market value at the time of
purchase.
Call and put options written by a Fund will also be considered to be covered
to the extent that the Fund's liabilities under such options are wholly or
partially offset by its rights under call and put options purchased by the Fund
or by an offsetting forward commitment.
In addition, a written call option or put option may be covered by
maintaining cash or liquid assets (either of which may
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<PAGE>
be quoted or denominated in any currency) in a segregated account, by entering
into an offsetting forward contract and/or by purchasing an offsetting option
which, by virtue of its exercise price or otherwise, reduces a Fund's net
exposure on its written option position.
A Fund may also write (sell) covered call and put options on any securities
index composed of securities in which it may invest. Options on securities
indices are similar to options on securities, except that the exercise of
securities index options requires cash payments and does not involve the actual
purchase or sale of securities. In addition, securities index options are
designed to reflect price fluctuations in a group of securities or segment of
the securities market rather than price fluctuations in a single security.
A Fund may cover call options on a securities index by owning securities
whose price changes are expected to be similar to those of the underlying index,
or by having an absolute and immediate right to acquire such securities without
additional cash consideration (or for additional cash consideration held in a
segregated account by its custodian) upon conversion or exchange of other
securities in its portfolio. A Fund may cover call and put options on a
securities index by maintaining cash or liquid assets with a value equal to the
exercise price in a segregated account with its custodian or using the other
methods described above.
A Fund may terminate its obligations under an exchange-traded call or put
option by purchasing an option identical to the one it has written. Obligations
under over-the-counter options may be terminated only by entering into an
offsetting transaction with the counterparty to such option. Such purchases are
referred to as "closing purchase transactions."
PURCHASING OPTIONS. Each Fund (other than the CORE U.S. Equity and CORE
Large Cap Growth Funds) may purchase put and call options on any securities in
which it may invest or options on any securities index composed of securities in
which it may invest. A Fund would also be able to enter into closing sale
transactions in order to realize gains or minimize losses on options it had
purchased.
A Fund would normally purchase call options in anticipation of an increase
in the market value of securities of the type in which it may invest. The
purchase of a call option would entitle a Fund, in return for the premium paid,
to purchase specified securities at a specified price during the option period.
A Fund would ordinarily realize a gain if, during the option period, the value
of such securities exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise such a Fund
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<PAGE>
would realize either no gain or a loss on the purchase of the call option.
A Fund would normally purchase put options in anticipation of a decline in
the market value of securities in its portfolio ("protective puts") or in
securities in which it may invest. The purchase of a put option would entitle a
Fund, in exchange for the premium paid, to sell specified securities at a
specified price during the option period. The purchase of protective puts is
designed to offset or hedge against a decline in the market value of a Fund's
securities. Put options may also be purchased by a Fund for the purpose of
affirmatively benefiting from a decline in the price of securities which it does
not own. A Fund would ordinarily realize a gain if, during the option period,
the value of the underlying securities decreased below the exercise price
sufficiently to more than cover the premium and transaction costs; otherwise
such a Fund would realize either no gain or a loss on the purchase of the put
option. Gains and losses on the purchase of protective put options would tend
to be offset by countervailing changes in the value of the underlying portfolio
securities.
A Fund would purchase put and call options on securities indices for the
same purposes as it would purchase options on individual securities. For a
description of options on securities indices, see "Writing Covered Options"
above.
YIELD CURVE OPTIONS. Global Income and High Yield Funds, with respect to up
to 5% of their net assets, may enter into options on the yield "spread" or
differential between two securities. Such transactions are referred to as
"yield curve" options. In contrast to other types of options, a yield curve
option is based on the difference between the yields of designated securities,
rather than the prices of the individual securities, and is settled through cash
payments. Accordingly, a yield curve option is profitable to the holder if this
differential widens (in the case of a call) or narrows (in the case of a put),
regardless of whether the yields of the underlying securities increase or
decrease.
Global Income and High Yield Funds may purchase or write yield curve options
for the same purposes as other options on securities. For example, Global
Income and High Yield Funds may purchase a call option on the yield spread
between two securities if either Fund owns one of the securities and anticipates
purchasing the other security and wants to hedge against an adverse change in
the yield spread between the two securities. Global Income and High Yield Funds
may also purchase or write yield curve options in an effort to increase their
current income if, in the judgment of the Adviser, the Funds will be able to
profit from movements in the spread between the yields of the
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<PAGE>
underlying securities. The trading of yield curve options is subject to all of
the risks associated with the trading of other types of options. In addition,
however, such options present risk of loss even if the yield of one of the
underlying securities remains constant, or if the spread moves in a direction or
to an extent which was not anticipated.
Yield curve options written by the Global Income and High Yield Funds will
be "covered." A call (or put) option is covered if a Fund holds another call
(or put) option on the spread between the same two securities and maintains in a
segregated account with its custodian cash or liquid assets sufficient to cover
the Fund's net liability under the two options. Therefore, a Fund's liability
for such a covered option is generally limited to the difference between the
amount of the Fund's liability under the option written by the Fund less the
value of the option held by the Fund. Yield curve options may also be covered
in such other manner as may be in accordance with the requirements of the
counterparty with which the option is traded and applicable laws and
regulations. Yield curve options are traded over-the-counter, and because they
have been only recently introduced, established trading markets for these
options have not yet developed.
RISKS ASSOCIATED WITH OPTIONS TRANSACTIONS. There is no assurance that a
liquid secondary market on a domestic or foreign options exchange will exist for
any particular exchange-traded option or at any particular time. If a Fund is
unable to effect a closing purchase transaction with respect to covered options
it has written, the Fund will not be able to sell the underlying securities or
dispose of assets held in a segregated account until the options expire or are
exercised. Similarly, if a Fund is unable to effect a closing sale transaction
with respect to options it has purchased, it will have to exercise the options
in order to realize any profit and will incur transaction costs upon the
purchase or sale of underlying securities.
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 may be imposed by an exchange on opening or closing
transactions or both; (iii) trading halts, suspensions or other restrictions may
be imposed with respect to particular classes or series of options; (iv) unusual
or unforeseen circumstances may interrupt normal operations on an exchange; (v)
the facilities of an exchange or the Options 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 or 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
that class or series of options) would cease to exist, although outstanding
options on
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that exchange that had been issued by the Options Clearing Corporation as a
result of trades on that exchange would continue to be exercisable in accordance
with their terms.
Each Fund may purchase and sell both options that are traded on U.S. and
foreign exchanges and options traded over-the-counter with broker-dealers who
make markets in these options. The ability to terminate over-the-counter
options is more limited than with exchange-traded options and may involve the
risk that broker-dealers participating in such transactions will not fulfill
their obligations. Until such time as the staff of the Securities and Exchange
Commission ("SEC") changes its position, each Fund will treat purchased over-
the-counter options and all assets used to cover written over-the-counter
options as illiquid securities, except that with respect to options written with
primary dealers in U.S. Government securities pursuant to an agreement requiring
a closing purchase transaction at a formula price, the amount of illiquid
securities may be calculated with reference to the formula.
Transactions by each Fund in options on securities and indices will be
subject to limitations established by each of the exchanges, boards of trade or
other trading facilities on which such options are traded governing the maximum
number of options in each class which may be written or purchased by a single
investor or group of investors acting in concert regardless of whether the
options are written or purchased on the same or different exchanges, boards of
trade or other trading facilities or are held or written in one or more accounts
or through one or more brokers. Thus, the number of options which a Fund may
write or purchase may be affected by options written or purchased by other
investment advisory clients of the Advisers. An exchange, board of trade or
other trading facility may order the liquidation of positions found to be in
excess of these limits, and it may impose certain other sanctions.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The successful use of protective
puts for hedging purposes depends in part on the Adviser's ability to predict
future price fluctuations and the degree of correlation between the options and
securities markets.
REAL ESTATE INVESTMENT TRUSTS
- -----------------------------
Each Fund other than the Global Income and High Yield Funds may invest in
shares of REITs. REITs are pooled investment vehicles which invest primarily in
income producing real estate or real estate related loans or interest. REITs
are generally classified as equity REITs, mortgage REITs or a combination of
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equity and mortgage REITs. Equity REITs invest the majority of their assets
directly in real property and derive income primarily from the collection of
rents. Equity REITs can also realize capital gains by selling properties that
have appreciated in value. Mortgage REITs invest the majority of their assets
in real estate mortgages and derive income from the collection of interest
payments. Like regulated investment companies such as the Funds, REITs are not
taxed on income distributed to shareholders provided they comply with certain
requirements under the Code. A Fund will indirectly bear its proportionate
share of any expenses paid by REITs in which it invests in addition to the
expenses paid by a Fund.
Investing in REITs involves certain unique risks. Equity REITs may be
affected by changes in the value of the underlying property owned by such REITs,
while mortgage REITs may be affected by the quality of any credit extended.
REITs are dependent upon management skills, are not diversified (except to the
extent the Code requires), and are subject to the risks of financing projects.
REITs are subject to heavy cash flow dependency, default by borrowers, self-
liquidation, and the possibilities of failing to qualify for the exemption from
tax for distributed income under the Code and failing to maintain their
exemptions from the Investment Company Act of 1940, as amended (the "Act").
REITs (especially mortgage REITs) are also subject to interest rate risks.
WARRANTS AND STOCK PURCHASE RIGHTS
- ----------------------------------
Each Fund other than the Global Income Fund may invest up to 5% of its net
assets, calculated at the time of purchase, in warrants or rights (other than
those acquired in units or attached to other securities) which entitle the
holder to buy equity securities at a specific price for a specific period of
time. A Fund will invest in warrants and rights only if such equity securities
are deemed appropriate by the Adviser for investment by the Fund. CORE U.S.
Equity, CORE Large Cap Growth and CORE Small Cap Equity Funds have no present
intention of acquiring warrants or rights. Warrants and rights have no voting
rights, receive no dividends and have no rights with respect to the assets of
the issuer.
FOREIGN SECURITIES
- ------------------
Investments in foreign securities may offer potential benefits not available
from investments solely in U.S. dollar-denominated or quoted securities of
domestic issuers. Such benefits may include the opportunity to invest in
foreign issuers that appear, in the opinion of the applicable Adviser, to offer
better opportunity for long-term growth of capital and income than investments
in U.S. securities, the opportunity to invest in
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foreign countries with economic policies or business cycles different from those
of the United States and the opportunity to reduce fluctuations in portfolio
value by taking advantage of foreign stock markets that do not necessarily move
in a manner parallel to U.S. markets.
Investing in foreign securities involves certain special considerations,
including those set forth below, which are not typically associated with
investing in U.S. dollar-denominated or quoted securities of U.S. issuers.
Investments in foreign securities usually involve currencies of foreign
countries. Accordingly, any Fund that invests in foreign securities may be
affected favorably or unfavorably by changes in currency rates and in exchange
control regulations and may incur costs in connection with conversions between
various currencies. International Equity, Global Income and High Yield Funds
may be subject to currency exposure independent of their securities positions.
Currency exchange rates may fluctuate significantly over short periods of
time. They generally are determined by the forces of supply and demand in the
foreign exchange markets and the relative merits of investments in different
countries, actual or anticipated changes in interest rates and other complex
factors, as seen from an international perspective. Currency exchange rates
also can be affected unpredictably by intervention by U.S. or foreign
governments or central banks or the failure to intervene or by currency controls
or political developments in the United States or abroad.
Since foreign issuers generally are not subject to uniform accounting,
auditing and financial reporting standards, practices and requirements
comparable to those applicable to U.S. companies, there may be less publicly
available information about a foreign company than about a U.S. company. Volume
and liquidity in most foreign securities markets are less than in the United
States and securities of many foreign companies are less liquid and more
volatile than securities of comparable U.S. companies. Fixed commissions on
foreign securities exchanges are generally higher than negotiated commissions on
U.S. exchanges, although each Fund endeavors to achieve the most favorable net
results on its portfolio transactions. There is generally less government
supervision and regulation of foreign securities exchanges, brokers, dealers and
listed and unlisted companies than in the United States. Mail service between
the United States and foreign countries may be slower or less reliable than
within the United States, thus increasing the risk of delayed settlement of
portfolio transactions or loss of certificates for portfolio securities.
Foreign markets also have different clearance and settlement procedures, and
in certain markets there have been times when
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settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Such delays in
settlement could result in temporary periods when some of a Fund's assets are
uninvested and no return is earned on such assets. The inability of a Fund to
make intended security purchases due to settlement problems could cause the Fund
to miss attractive investment opportunities. Inability to dispose of portfolio
securities due to settlement problems could result either in losses to the Fund
due to subsequent declines in value of the portfolio securities or, if the Fund
has entered into a contract to sell the securities, could result in possible
liability to the purchaser. In addition, with respect to certain foreign
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, or diplomatic developments which could affect a
Fund's investments in those countries. Moreover, individual foreign economies
may differ favorably or unfavorably from the U.S. economy in such respects as
growth of gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position.
Each Fund other than the Global Income and High Yield Funds may invest in
foreign securities which take the form of sponsored and unsponsored American
Depository Receipts ("ADRs") and Global Depository Receipts ("GDRs") and (except
for CORE U.S. Equity, CORE Large Cap Growth, CORE Small Cap Equity, Global
Income and High Yield Funds) may also invest in European Depository Receipts
("EDRs") or other similar instruments representing securities of foreign issuers
(together, "Depository Receipts").
ADRs represent the right to receive securities of foreign issuers deposited
in a domestic bank or a correspondent bank. ADRs are traded on domestic
exchanges or in the U.S. over-the-counter market and, generally, are in
registered form. EDRs and GDRs are receipts evidencing an arrangement with a
non-U.S. bank similar to that for ADRs and are designed for use in the non-U.S.
securities markets. EDRs and GDRs are not necessarily quoted in the same
currency as the underlying security.
To the extent a Fund acquires Depository Receipts through banks which do not
have a contractual relationship with the foreign issuer of the security
underlying the Depository Receipts to issue and service such Depository Receipts
(unsponsored), there may be an increased possibility that the Fund would not
become aware of and be able to respond to corporate actions such as stock splits
or rights offerings involving the foreign issuer in a timely manner. In
addition, the lack of information may result in inefficiencies in the valuation
of such instruments.
Each Fund (except CORE U.S. Equity, CORE Large Cap Growth and CORE Small Cap
Equity Funds) may invest in countries with emerging
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economies or securities markets. Political and economic structures in many of
such countries may be undergoing significant evolution and rapid development,
and such countries may lack the social, political and economic stability
characteristic of more developed countries. Certain of such countries may have
in the past failed to recognize private property rights and have at times
nationalized or expropriated the assets of private companies. As a result, the
risks described above, including the risks of nationalization or expropriation
of assets, may be heightened. See "Investing in Emerging Markets" below.
A Fund (other than CORE U.S. Equity, CORE Large Cap Growth and CORE Small
Cap Equity Funds) may invest in securities of issuers domiciled in a country
other than the country in whose currency the instrument is denominated or
quoted. The Funds may also invest in securities quoted or denominated in the
European Currency Unit ("ECU"), which is a "basket" consisting of specified
amounts of the currencies of certain of the member states of the European
Community. The specific amounts of currencies comprising the ECU may be
adjusted by the Council of Ministers of the European Community from time to time
to reflect changes in relative values of the underlying currencies. In
addition, the Funds may invest in securities quoted or denominated in other
currency "baskets."
INVESTING IN EMERGING MARKETS. International Equity Fund is intended for
long-term investors who can accept the risks associated with investing primarily
in equity and equity-related securities of foreign issuers, including Emerging
Countries issuers, as well as the risks associated with investments quoted or
denominated in foreign currencies. Growth and Income, Mid Cap Equity and
Capital Growth Funds may invest, to a lesser extent, in equity and equity-
related securities of foreign issuers; including Emerging Countries issuers.
The Global Income and High Yield Funds may invest in debt securities of foreign
issuers; including Emerging Markets. In addition, certain of International
Equity and High Yield Funds' potential investment and management techniques
entail special risks.
The pace of change in many Emerging Countries, and in particular those in
Asia, over the last 10 years has been rapid. Accelerating economic growth in the
region has combined with capital market development, high government
expenditure, increasing consumer wealth and taxation policies favoring company
expansion. As a result, stock market returns in many Emerging Countries have
been relatively attractive. See "Risk Factors" in the Prospectus.
Each of the securities markets of the Emerging Countries is less liquid and
subject to greater price volatility and has a smaller market capitalization than
the U.S. securities markets.
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Issuers and securities markets in such countries are not subject to as extensive
and frequent accounting, financial and other reporting requirements or as
comprehensive government regulations as are issuers and securities markets in
the U.S. In particular, the assets and profits appearing on the financial
statements of Emerging Country issuers may not reflect their financial position
or results of operations in the same manner as financial statements for U.S.
issuers. Substantially less information may be publicly available about Emerging
Country issuers than is available about issuers in the United States.
Certain of the Emerging Country securities markets are marked by a high
concentration of market capitalization and trading volume in a small number of
issuers representing a limited number of industries, as well as a high
concentration of ownership of such securities by a limited number of investors.
The markets for securities in certain Emerging Countries are in the earliest
stages of their development. Even the markets for relatively widely traded
securities in Emerging Countries may not be able to absorb, without price
disruptions, a significant increase in trading volume or trades of a size
customarily undertaken by institutional investors in the securities markets of
developed countries. Additionally, market making and arbitrage activities are
generally less extensive in such markets, which may contribute to increased
volatility and reduced liquidity of such markets. The less liquid the market,
the more difficult it may be for the Fund to accurately price its portfolio
securities or to dispose of such securities at the times determined to be
appropriate. The risks associated with reduced liquidity may be particularly
acute to the extent that a Fund needs cash to meet redemption requests, to pay
dividends and other distributions or to pay its expenses.
Transaction costs, including brokerage commissions or dealer mark-ups, in
Emerging Countries may be higher than in the United States and other developed
securities markets. In addition, existing laws and regulations are often
inconsistently applied. As legal systems in Emerging Countries develop, foreign
investors may be adversely affected by new or amended laws and regulations. In
circumstances where adequate laws exist, it may not be possible to obtain swift
and equitable enforcement of the law.
Foreign investment in the securities markets of several of the Asian
countries is restricted or controlled to varying degrees. These restrictions may
limit a Fund's investment in certain of the Asian countries and may increase the
expenses of the Fund. Certain Emerging Countries require governmental approval
prior to investments by foreign persons or limit investment by foreign persons
to only a specified percentage of an issuer's outstanding securities or a
specific class of securities which may have less advantageous terms (including
price) than securities of the company available for purchase by nationals.
In addition, the
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repatriation of both investment income and capital from several of the Emerging
Countries is subject to restrictions such as the nee for certain governmental
consents. Even where there is no outright restriction on repatriation of
capital, the mechanics of repatriation may affect certain aspects of the
operation of a Fund. A Fund may be required to establish special custodial or
other arrangements before investing in certain emerging countries.
Each of the Emerging Countries may be subject to a greater degree of
economic, political and social instability than is the case in the United
States, Japan and most Western European countries. Such instability may result
from, among other things, the following: (i) authoritarian governments or
military involvement in political and economic decision making, including
changes or attempted changes in governments through extra-constitutional means;
(ii) popular unrest associated with demands for improved political, economic or
social conditions; (iii) internal insurgencies; (iv) hostile relations with
neighboring countries; and (v) ethnic, religious and racial disaffection or
conflict. Such economic, political and social instability could disrupt the
principal financial markets in which the Funds may invest and adversely affect
the value of the Funds' assets.
The economies of Emerging Countries may differ unfavorably from the U.S.
economy in such respects as growth of gross domestic product, rate of inflation,
capital reinvestment, resources, self-sufficiency and balance of payments. Many
Emerging Countries have experienced in the past, and continue to experience,
high rates of inflation. In certain countries inflation has at times
accelerated rapidly to hyperinflationary levels, creating a negative interest
rate environment and sharply eroding the value of outstanding financial assets
in those countries. The economies of many Emerging Countries are heavily
dependent upon international trade and are accordingly affected by protective
trade barriers and the economic conditions of their trading partners. In
addition, the economies of some Emerging Countries are vulnerable to weakness in
world prices for their commodity exports.
A Fund's income and, in some cases, capital gains from foreign stocks and
securities will be subject to applicable taxation in certain of the countries in
which it invests, and treaties between the U.S. and such countries may not be
available in some cases to reduce the otherwise applicable tax rates. See
"Taxation."
Securities markets of emerging markets may also have less efficient
clearance and settlement procedures than U.S. markets, making it difficult to
conduct and complete transactions. Delays in the settlement could result in
temporary periods when a portion of a Fund's assets is uninvested and settlement
could result in temporary periods when a portion of the Fund's assets is
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uninvested and no return is earned thereon. Inability to make intended security
purchases could cause the Fund to miss attractive investment opportunities.
Inability to dispose of portfolio securities could result either in losses to
the Fund due to subsequent declines in value of the portfolio security or, if
the Fund has entered into a contract to sell the security, could result in
possible liability of the Fund to the purchaser.
SOVEREIGN DEBT OBLIGATIONS. The International Equity, Global Income and
High Yield Funds may invest in sovereign debt obligations. Investments in
sovereign debt obligations involves special risks not present in corporate debt
obligations. The issuer of the sovereign debt or the governmental authorities
that control the repayment of the debt may be unable or unwilling to repay
principal or interest when due, and a Fund may have limited recourse in the
event of a default. During periods of economic uncertainty, the market prices
of sovereign debt, and a Fund's net asset value, may be more volatile than
prices of debt obligations of U.S. issuers. In the past, the governments of
certain emerging markets have encountered difficulties in servicing their debt
obligations, withheld payments of principal and interest and declared moratoria
on the payment of principal and interest on their sovereign debts.
A sovereign debtor's willingness or ability to repay principal and pay
interest in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its foreign currency reserves, the availability of
sufficient foreign exchange, the relative size of the debt service burden, the
sovereign debtor's policy toward principal international lenders and local
political constraints. Sovereign debtors may also be dependent on expected
disbursements from foreign governments, multinational agencies and other
entities to reduce principal and interest arrearages on their debt. The failure
of a sovereign debtor to implement economic reforms, achieve specified levels of
economic performance or repay principal or interest when due may result in the
cancellation of the third parties' commitments to lend funds to the sovereign
debtor, which may further impair such debtor's ability or willingness to timely
service its debts.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Growth and Income, Mid Cap
Equity and Capital Growth Funds may enter into forward foreign currency exchange
contracts for hedging purposes. International Equity, Global Income and High
Yield Funds may enter into forward foreign currency exchange contracts for
hedging purposes and to seek to increase total return. A forward foreign
currency exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. These contracts are traded in the interbank market conducted directly
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between currency traders (usually large commercial banks) and their customers. A
forward contract generally has no deposit requirement, and no commissions are
generally charged at any stage for trades.
At the maturity of a forward contract a Fund may either accept or make
delivery of the currency specified in the contract or, at or prior to maturity,
enter into a closing transaction involving the purchase or sale of an offsetting
contract. Closing transactions with respect to forward contracts are usually
effected with the currency trader who is a party to the original forward
contract.
A Fund may enter into forward foreign currency exchange contracts in several
circumstances. First, when a Fund enters into a contract for the purchase or
sale of a security denominated or quoted in a foreign currency, or when a Fund
anticipates the receipt in a foreign currency of dividend or interest payments
on such a security which it holds, the Fund may desire to "lock in" the U.S.
dollar price of the security or the U.S. dollar equivalent of such dividend or
interest payment, as the case may be. By entering into a forward contract for
the purchase or sale, for a fixed amount of dollars, of the amount of foreign
currency involved in the underlying transactions, the Fund will attempt to
protect itself against an adverse change in the relationship between the U.S.
dollar and the subject foreign currency during the period between the date on
which the security is purchased or sold, or on which the dividend or interest
payment is declared, and the date on which such payments are made or received.
Additionally, when the Adviser 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 to sell, for a fixed amount of U.S. dollars, the
amount of foreign currency approximating the value of some or all of such Fund's
portfolio securities quoted or 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 because the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the
contract is entered into and the date it matures. Using forward contracts to
protect the value of a Fund's portfolio securities against a decline in the
value of a currency does not eliminate fluctuations in the underlying prices of
the securities. It simply establishes a rate of exchange which a Fund can
achieve at some future point in time. The precise projection of short-term
currency market movements is not possible, and short-term hedging provides a
means of fixing the U.S. dollar value of only a portion of a Fund's foreign
assets.
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The International Equity, Global Income and High Yield Funds may engage in
cross-hedging by using forward contracts in one currency to hedge against
fluctuations in the value of securities quoted or denominated in a different
currency if the Adviser determines that there is a pattern of correlation
between the two currencies. International Equity, Global Income and High Yield
Funds may also purchase and sell forward contracts to seek to increase total
return when the Adviser anticipates that the foreign currency will appreciate or
depreciate in value, but securities quoted or denominated in that currency do
not present attractive investment opportunities and are not held in the Fund's
portfolio.
A Fund's custodian will place cash or liquid assets into a segregated
account of such Fund in an amount equal to the value of the Fund's total assets
committed to the consummation of forward foreign currency exchange contracts
requiring the Fund to purchase foreign currencies and forward contracts entered
into to seek to increase total return. If the value of the securities placed in
the segregated account declines, additional cash or liquid assets will be placed
in the account on a daily basis so that the value of the account will equal the
amount of a Fund's commitments with respect to such contracts. The segregated
account will be marked-to-market on a daily basis. Although the contracts are
not presently regulated by the CFTC, the CFTC may in the future assert authority
to regulate these contracts. In such event, a Fund's ability to utilize forward
foreign currency exchange contracts may be restricted. The Global Income and
High Yield Funds will not enter into a forward contract with a term of greater
than one year.
While a Fund will enter into forward contracts to reduce currency exchange
rate risks, transactions in such contracts involve certain other risks. Thus,
while the Fund may benefit from such transactions, unanticipated changes in
currency prices may result in a poorer overall performance for the Fund than if
it had not engaged in any such transactions. Moreover, there may be
imperfect correlation between a Fund's portfolio holdings of securities quoted
or denominated in a particular currency and forward contracts entered into by
such Fund. Such imperfect correlation may cause a Fund to sustain losses which
will prevent the Fund from achieving a complete hedge or expose the Fund to risk
of foreign exchange loss.
Markets for trading foreign forward currency contracts offer less protection
against defaults than is available when trading in currency instruments on an
exchange. Since a forward foreign currency exchange contract is not guaranteed
by an exchange or clearinghouse, a default on the contract would deprive a Fund
of unrealized profits or force the Fund to cover its commitments for purchase or
resale, if any, at the current market price.
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Forward contracts are subject to the risk that the counterparty to such
contract will default on its obligations. Since a forward foreign currency
exchange contract is not guaranteed by an exchange or clearinghouse, a default
on the contract would deprive a Fund of unrealized profits, transaction costs or
the benefits of a currency hedge or force the Fund to cover its purchase or sale
commitments, if any, at the current market price. A Fund will not enter into
such transactions unless the credit quality of the unsecured senior debt or the
claims-paying ability of the counterparty is considered to be investment grade
by the Adviser.
WRITING AND PURCHASING CURRENCY CALL AND PUT OPTIONS. Each Fund (except CORE
U.S. Equity, CORE Large Cap Growth and CORE Small Cap Equity Funds) may write
covered put and call options and purchase put and call options on foreign
currencies for the purpose of protecting against declines in the U.S. dollar
value of portfolio securities and against increases in the U.S. dollar cost of
securities to be acquired. As with other kinds of option transactions, however,
the writing of an option on foreign currency will constitute only a partial
hedge, up to the amount of the premium received. If and when a Fund seeks to
close out an option, the Fund could be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on foreign currency may constitute an effective hedge
against exchange rate fluctuations; however, in the event of exchange rate
movements adverse to a Fund's position, the Fund may forfeit the entire amount
of the premium plus related transaction costs. Options on foreign currencies to
be written or purchased by a Fund will be traded on U.S. and foreign exchanges
or over-the-counter.
International Equity, Global Income and High Yield Funds may use options on
currency to cross-hedge, which involves writing or purchasing options on one
currency to hedge against changes in exchange rates for a different currency
with a pattern of correlation. In addition, International Equity, Global Income
and High Yield Funds may purchase call options on currency to seek to increase
total return when the Adviser anticipates that the currency will appreciate in
value, but the securities quoted or denominated in that currency do not present
attractive investment opportunities and are not included in the Fund's
portfolio.
A call option written by a Fund obligates a Fund to sell specified currency
to the holder of the option at a specified price if the option is exercised
before the expiration date. A put option written by a Fund would obligate a
Fund to purchase specified currency from the option holder at a specified price
if the option is exercised at any time before the expiration date. The writing
of currency options involves a risk that a Fund will,
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upon exercise of the option, be required to sell currency subject to a call at a
price that is less than the currency's market value or be required to purchase
currency subject to a put at a price that exceeds the currency's market value.
For a description of how to cover written put and call options, see "Writing
Covered Options" above.
A Fund may terminate its obligations under a call or put option by
purchasing an option identical to the one it has written. Such purchases are
referred to as "closing purchase transactions." A Fund would also be able to
enter into closing sale transactions in order to realize gains or minimize
losses on options purchased by the Fund.
A Fund would normally purchase call options on foreign currency in
anticipation of an increase in the U.S. dollar value of currency in which
securities to be acquired by a Fund are quoted or denominated. The purchase of
a call option would entitle the Fund, in return for the premium paid, to
purchase specified currency at a specified price during the option period. A
Fund would ordinarily realize a gain if, during the option period, the value of
such currency exceeded the sum of the exercise price, the premium paid and
transaction costs; otherwise the Fund would realize either no gain or a loss on
the purchase of the call option.
A Fund would normally purchase put options in anticipation of a decline in
the U.S. dollar value of currency in which securities in its portfolio are
quoted or denominated ("protective puts"). The purchase of a put option would
entitle a Fund, in exchange for the premium paid, to sell specified currency at
a specified price during the option period. The purchase of protective puts is
designed merely to offset or hedge against a decline in the dollar value of a
Fund's portfolio securities due to currency exchange rate fluctuations. A Fund
would ordinarily realize a gain if, during the option period, the value of the
underlying currency decreased below the exercise price sufficiently to more than
cover the premium and transaction costs; otherwise the Fund would realize either
no gain or a loss on the purchase of the put option. Gains and losses on the
purchase of protective put options would tend to be offset by countervailing
changes in the value of underlying currency or portfolio securities.
In addition to using options for the hedging purposes described above,
International Equity, Global Income and High Yield Funds may use options on
currency to seek to increase total return. International Equity, Global Income
and High Yield Funds may write (sell) covered put and call options on any
currency in order to realize greater income than would be realized on portfolio
securities transactions alone. However, in writing covered call options for
additional income, International Equity,
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Global Income and High Yield Funds may forego the opportunity to profit from an
increase in the market value of the underlying currency. Also, when writing put
options, International Equity, Global Income and High Yield Funds accept, in
return for the option premium, the risk that they may be required to purchase
the underlying currency at a price in excess of the currency's market value at
the time of purchase.
The International Equity, Global Income and High Yield Funds would normally
purchase call options to seek to increase total return in anticipation of an
increase in the market value of a currency. The International Equity, Global
Income and High Yield Funds would ordinarily realize a gain if, during the
option period, the value of such currency exceeded the sum of the exercise
price, the premium paid and transaction costs. Otherwise the International
Equity, Global Income and High Yield Funds would realize either no gain or a
loss on the purchase of the call option. Put options may be purchased by a Fund
for the purpose of benefiting from a decline in the value of currencies which it
does not own. A Fund would ordinarily realize a gain if, during the option
period, the value of the underlying currency decreased below the exercise price
sufficiently to more than cover the premium and transaction costs. Otherwise
the Fund would realize either no gain or a loss on the purchase of the put
option.
SPECIAL RISKS ASSOCIATED WITH OPTIONS ON CURRENCY. An exchange traded
options position may be closed out only on an options exchange which provides a
secondary market for an option of the same series. There is no assurance that a
liquid secondary market on an exchange will exist for any particular option, or
at any particular time. In such event, it might not be possible to effect
closing transactions in particular options, with the result that a Fund would
have to exercise its options in order to realize any profit and would incur
transaction costs upon the sale of underlying securities pursuant to the
exercise of put options. If a Fund 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 currency (or security quoted or denominated in that
currency) until the option expires or it delivers the underlying currency upon
exercise.
There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain of the facilities of the
Options Clearing Corporation inadequate, and thereby result in the institution
by an exchange of special procedures which may interfere with the timely
execution of customers' orders.
A Fund may purchase and write over-the-counter options to the extent
consistent with its limitation on investments in illiquid securities. Trading
in over-the-counter options is subject to the
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risk that the other party will be unable or unwilling to close out options
purchased or written by a Fund.
The amount of the premiums which a Fund may pay or receive may be adversely
affected as new or existing institutions, including other investment companies,
engage in or increase their option purchasing and writing activities.
MORTGAGE DOLLAR ROLLS
- ---------------------
The Global Income Fund may enter into mortgage "dollar rolls" in which a
Fund sells securities for delivery in the current month and simultaneously
contracts with the same counterparty to repurchase similar (same type, coupon
and maturity), but not identical securities on a specified future date. During
the roll period, a Fund loses the right to receive principal and interest paid
on the securities sold. However, a Fund would benefit to the extent of any
difference between the price received for the securities sold and the lower
forward price for the future purchase (often referred to as the "drop") or fee
income plus the interest earned on the cash proceeds of the securities sold
until the settlement date of the forward purchase. Unless such benefits exceed
the income, capital appreciation and gain or loss due to mortgage prepayments
that would have been realized on the securities sold as part of the mortgage
dollar roll, the use of this technique will diminish the investment performance
of a Fund compared with what such performance would have been without the use of
mortgage dollar rolls. All cash proceeds will be invested in instruments that
are permissible investments for the applicable Fund. Each Fund will hold and
maintain in a segregated account until the settlement date cash or liquid
assets, as permitted by applicable law, in an amount equal to its forward
purchase price.
For financial reporting and tax purposes, the Global Income Fund treats
mortgage dollar rolls as two separate transactions; one involving the purchase
of a security and a separate transaction involving a sale. The Global Income
Fund does not currently intend to enter into mortgage dollar rolls that are
accounted for as a financing.
Mortgage dollar rolls involve certain risks including the following: if the
broker-dealer to whom a Fund sells the security becomes insolvent, a Fund's
right to purchase or repurchase the mortgage-related securities subject to the
mortgage dollar roll may be restricted and the instrument which a Fund is
required to repurchase may be worth less than an instrument which a Fund
originally held. Successful use of mortgage dollar rolls will depend upon the
Adviser's ability to manage a Fund's interest rate and mortgage prepayments
exposure. For these reasons, there is no assurance that mortgage dollar rolls
can be successfully employed.
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CONVERTIBLE SECURITIES
- ----------------------
Convertible securities include corporate notes or preferred stock but are
ordinarily long-term debt obligation of the issuer convertible at a stated
exchange rate into common stock of the issuer. As with all debt securities, the
market value of convertible securities tends to decline as interest rates
increase and, conversely, to increase as interest rates decline. Convertible
securities generally offer lower interest or dividend yields than non-
convertible securities of similar quality. However, when the market price of
the common stock underlying a convertible security exceeds the conversion price,
the price of the convertible security tends to reflect the value of the
underlying common stock. As the market price of the underlying common stock
declines, the convertible security tends to trade increasingly on a yield basis,
and thus may not depreciate to the same extent as the underlying common stock.
CURRENCY SWAPS, MORTGAGE SWAPS, INDEX SWAPS AND INTEREST RATE SWAPS, CAPS,
- --------------------------------------------------------------------------
FLOORS AND COLLARS
- ------------------
The International Equity Fund, with respect to up to 5% of its net assets,
and the Global Income and High Yield Funds may enter into currency swaps for
both hedging purposes and to seek to increase total return. In addition, the
Global Income and High Yield Funds may, with respect to no more than 5% of net
assets, enter into mortgage and interest rate swaps and other interest rate swap
arrangements such as rate caps, floors and collars, for hedging purposes or to
seek to increase total return. Currency swaps involve the exchange by a Fund
with another party of their respective rights to make or receive payments in
specified currencies. Interest rate swaps involve the exchange by a Fund with
another party of their respective commitments to pay or receive interest, such
as an exchange of fixed rate payments for floating rate payments. Mortgage
swaps are similar to interest rate swaps in that they represent commitments to
pay and receive interest. The notional principal amount, however, is tied to a
reference pool or pools of mortgages. Index swaps involve the exchange by a
Fund with another party of the respective amounts payable with respect to a
notional principal amount at interest rates equal to two specified indices. The
purchase of an interest rate cap entitles the purchaser, to the extent that a
specified index exceeds a predetermined interest rate, to receive payment of
interest on a notional principal amount from the party selling such interest
rate cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a notional principal amount from the party
selling the interest rate floor. An interest rate collar is the combination
of a cap and a floor that preserves a certain return within a predetermined
range of interest rates. Since interest rate,
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mortgage and currency swaps and interest rate caps, floors and collars are
individually negotiated, each Fund expects to achieve an acceptable degree of
correlation between its portfolio investments and its swap, cap, floor and
collar positions.
A Fund will enter into interest rate, mortgage and index swaps only on a net
basis, which means that the two payment streams are netted out, with the Fund
receiving or paying, as the case may be, only the net amount of the two
payments. Interest rate, index and mortgage swaps do not involve the delivery
of securities, other underlying assets or principal. Accordingly, the risk of
loss with respect to interest rate, index and mortgage swaps is limited to the
net amount of interest payments that the Fund is contractually obligated to
make. If the other party to an interest rate, index or mortgage swap defaults,
the Fund's risk of loss consists of the net amount of interest payments that the
Fund is contractually entitled to receive, if any. In contrast, currency swaps
usually involve the delivery of a gross payment stream in one designated
currency in exchange for the gross payment stream in another designated
currency. Therefore, the entire payment stream under a currency swap is subject
to the risk that the other party to the swap will default on its contractual
delivery obligations. To the extent that the net amount payable under an
interest rate, index or mortgage swap and the entire amount of the payment
stream payable by a Fund under a currency swap or an interest rate floor, cap or
collar is held in a segregated account consisting of cash or liquid assets the
Funds and the Advisers believe that transactions do not constitute senior
securities under the Act and, accordingly, will not treat them as being subject
to a Fund's borrowing restrictions.
The International Equity Fund will not enter into swap transactions unless
the unsecured commercial paper, senior debt or claims paying ability of the
other party thereto is considered to be investment grade by the Adviser. The
Global Income and High Yield Funds will not enter into any swap transactions
unless the unsecured commercial paper, senior debt or claims-paying ability of
the other party is rated either AA or A-1 or better by Standard & Poor's or Aa
or P-1 or better by Moody's or their equivalent ratings. If there is a default
by the other party to such a transaction, a Fund will have contractual remedies
pursuant to the agreements related to the transaction. The swap market has
grown substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid in
comparison with the markets for other similar instruments which are traded in
the interbank market. The investment advisers, under the supervision of the
Board of Trustees, are responsible for determining and monitoring the liquidity
of the Funds' transactions in swaps, caps, floors and collars.
B-54
<PAGE>
The use of interest rate, mortgage, index and currency swaps, as well as
interest rate caps, floors and collars, is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If an Adviser is incorrect in its
forecasts of market values, interest rates and currency exchange rates, the
investment performance of a Fund would be less favorable than it would have been
if this investment technique were not used.
LENDING OF PORTFOLIO SECURITIES
- -------------------------------
Each Fund may lend portfolio securities. The Global Income and High Yield
Funds may not engage in portfolio securities lending in excess of 5% of net
assets. Under present regulatory policies, such loans may be made to
institutions such as brokers or dealers and would be required to be secured
continuously by collateral in cash, cash equivalents or U.S. Government
securities maintained on a current basis at an amount at least equal to the
market value of the securities loaned. A Fund would be required to have the
right to call a loan and obtain the securities loaned at any time on five days'
notice. For the duration of a loan, a Fund would continue to receive the
equivalent of the interest or dividends paid by the issuer on the securities
loaned and would also receive compensation from investment of the collateral. A
Fund would not have the right to vote any securities having voting rights during
the existence of the loan, but a Fund would call the loan in anticipation of an
important vote to be taken among holders of the securities or the giving or
withholding of their consent on a material matter affecting the investment. As
with other extensions of credit there are risks of delay in recovering, or even
loss of rights in, the collateral should the borrower of the securities fail
financially. However, the loans would be made only to firms deemed by the
Advisers to be of good standing, and when, in the judgment of the Advisers, the
consideration which can be earned currently from securities loans of this type
justifies the attendant risk. If the Advisers determine to make securities
loans, it is intended that the value of the securities loaned would not exceed
one-third of the value of the total assets of a Fund.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
- ----------------------------------------------
Each Fund may purchase securities on a when-issued basis or purchase or sell
securities on a forward commitment basis. These transactions involve a
commitment by a Fund to purchase or sell securities at a future date. The price
of the underlying securities (usually expressed in terms of yield) and the date
when the securities will be delivered and paid for (the settlement date) are
fixed at the time the transaction is negotiated. When-issued purchases and
forward commitment transactions are
B-55
<PAGE>
negotiated directly with the other party, and such commitments are not traded on
exchanges. A Fund will purchase securities on a when-issued basis or purchase or
sell securities on a forward commitment basis only with the intention of
completing the transaction and actually purchasing or selling the securities. If
deemed advisable as a matter of investment strategy, however, a Fund may dispose
of or negotiate a commitment after entering into it. A Fund may also sell
securities it has committed to purchase before those securities are delivered to
the Fund on the settlement date. The Funds may also realize a capital gain or
loss in connection with these transactions. For purposes of determining a Fund's
duration, the maturity of when-issued or forward commitment securities will be
calculated from the commitment date. A Fund is required to hold and maintain in
a segregated account with the Fund's custodian until three days prior to the
settlement date, cash and liquid assets in an amount sufficient to meet the
purchase price. Alternatively, a Fund may enter into offsetting contracts for
the forward sale of other securities that it owns. Securities purchased or sold
on a when-issued or forward commitment basis involve a risk of loss if the value
of the security to be purchased declines prior to the settlement date or if the
value of the security to be sold increases prior to the settlement date.
INVESTMENT IN UNSEASONED COMPANIES
- ----------------------------------
Each Fund, other than Global Income and High Yield Funds, may invest up to
5% of its net assets, calculated at the time of purchase, in companies
(including predecessors) which have operated less than three years, except that
this limitation does not apply to debt securities which have been rated
investment grade or better by at least one nationally recognized statistical
rating organization. The securities of such companies may have limited
liquidity, which can result in their being priced higher or lower than might
otherwise be the case. In addition, investments in unseasoned companies are
more speculative and entail greater risk than do investments in companies with
an established operating record.
OTHER INVESTMENT COMPANIES
- --------------------------
Each Equity Fund reserves the right to invest up to 5% of its net and each
Fixed Income Fund reserves the right to invest up to 10% of its total assets,
calculated at the time of investment in the securities of other investment
companies. Fixed Income Funds may not invest more than 5% of its total assets
in the securities of any one investment company. No Fund may acquire more than
3% of the voting securities of any other investment company. Pursuant to an
exemptive order obtained from the SEC, the Funds may invest in money market
funds for which an Adviser or any of its affiliates serves as investment
adviser. A Fund will indirectly
B-56
<PAGE>
bear its proportionate share of any management fees and other expenses paid by
investment companies in which it invests in addition to the advisory and
administration fees paid by the Fund. However, to the extent that the Fund
invests in a money market fund for which an Adviser or any of its affiliates
acts as adviser, the advisory and administration fees payable by the Fund to an
Adviser will be reduced by an amount equal to the Fund's proportionate share of
the advisory and administration fees paid by such money market fund to the
Adviser or any of its affiliates.
Each Equity Fund may also invest in SPDRs. SPDRs are interests in a unit
investment trust ("UIT") that may be obtained from the UIT or purchased in the
secondary market (SPDRs are listed on the American Stock Exchange).
The UIT will issue SPDRs in aggregations known as "Creation Units" in
exchange for a "Portfolio Deposit" consisting of (a) a portfolio of securities
substantially similar to the component securities ("Index Securities") of the
Standard & Poor's 500 Composite Stock Price Index (the "S&P Index"), (b) a cash
payment equal to a pro rata portion of the dividends accrued on the UIT's
portfolio securities since the last dividend payment by the UIT, net of expenses
and liabilities, and (c) a cash payment or credit ("Balancing Amount") designed
to equalize the net asset value of the S&P Index and the net asset value of a
Portfolio Deposit.
SPDRs are not individually redeemable, except upon termination of the UIT.
To redeem, the Portfolio must accumulate enough SPDRs to reconstitute a Creation
Unit. The liquidity of small holdings of SPDRs, therefore, will depend upon the
existence of a secondary market. Upon redemption of a Creation Unit, the
Portfolio will receive Index Securities and cash identical to the Portfolio
Deposit required of an investor wishing to purchase a Creation Unit that day.
The price of SPDRs is derived from and based upon the securities held by the
UIT. Accordingly, the level of risk involved in the purchase or sale of a SPDR
is similar to the risk involved in the purchase or sale of traditional common
stock, with the exception that the pricing mechanism for SPDRs is based on a
basket of stocks. Disruptions in the markets for the securities underlying
SPDRs purchased or sold by the Funds could result in losses on SPDRs. Trading
in SPDRs involves risks similar to those risks, described under "Risks
Associated with Options Transactions," involved in the writing of options on
securities.
Each Fund (other then CORE U.S. Equity, CORE Large Cap Growth and CORE Small
Cap Equity Funds) may also purchase shares of investment companies investing
primarily in foreign securities, including "country funds." Country Funds have
portfolios consisting primarily of securities of issuers located in one
B-57
<PAGE>
foreign country or region. Each Fund (other than CORE U.S. Equity, CORE Large
Cap Growth and CORE Small Cap Equity Funds) may invest in World Equity Benchmark
Shares ("WEBS") and similar securities that invest in securities included in
foreign securities indices.
REPURCHASE AGREEMENTS
- ---------------------
Each Fund may enter into repurchase agreements with selected broker-dealers,
banks or other financial institutions. A repurchase agreement is an arrangement
under which a Fund purchases securities and the seller agrees to repurchase the
securities within a particular time and at a specified price. Custody of the
securities is maintained by a Fund's custodian. The repurchase price may be
higher than the purchase price, the difference being income to a Fund, or the
purchase and repurchase prices may be the same, with interest at a stated rate
due to a Fund together with the repurchase price on repurchase. In either case,
the income to a Fund is unrelated to the interest rate on the security subject
to the repurchase agreement.
For purposes of the Act and generally for tax purposes, a repurchase
agreement is deemed to be a loan from a Fund to the seller of the security. For
other purposes, it is not clear whether a court would consider the security
purchased by a Fund subject to a repurchase agreement as being owned by a Fund
or as being collateral for a loan by a Fund to the seller. In the event of
commencement of bankruptcy or insolvency proceedings with respect to the seller
of the security before repurchase of the security under a repurchase agreement,
a Fund may encounter delay and incur costs before being able to sell the
security. Such a delay may involve loss of interest or a decline in price of the
security. If the court characterizes the transaction as a loan and a Fund has
not perfected a security interest in the security, a Fund may be required to
return the security to the seller's estate and be treated as an unsecured
creditor of the seller. As an unsecured creditor, a Fund would be at risk of
losing some or all of the principal and interest involved in the transaction.
As with any unsecured debt instrument purchased for a Fund, the Advisers
seek to minimize the risk of loss from repurchase agreements by analyzing the
creditworthiness of the obligor, in this case the seller of the security. Apart
from the risk of bankruptcy or insolvency proceedings, there is also the risk
that the seller may fail to repurchase the security. However, if the market
value of the security subject to the repurchase agreement becomes less than the
repurchase price (including accrued interest), a Fund will direct the seller of
the security to deliver additional securities so that the market value of all
securities subject to the repurchase agreement equals or exceeds the repurchase
price. Certain repurchase agreements which provide
B-58
<PAGE>
for settlement in more than seven days can be liquidated before the nominal
fixed term on seven days or less notice. Such repurchase agreements will be
regarded as liquid instruments.
In addition, a Fund, together with other registered investment companies
having advisory agreements with the Advisers or their affiliates, may transfer
uninvested cash balances into a single joint account, the daily aggregate
balance of which will be invested in one or more repurchase agreements.
RESTRICTED AND ILLIQUID SECURITIES
- ----------------------------------
Each Fund may purchase securities that are not registered or offered in an
exempt non-public offering ("Restricted Securities") under the Securities Act of
1933, as amended ("1933 Act"), including securities eligible for resale to
"qualified institutional buyers" pursuant to Rule 144A under the 1933 Act.
However, a Fund will not invest more than 15% of its net assets in illiquid
investments, which includes repurchase agreements maturing in more than seven
days, interest rate, currency and mortgage swaps, interest rate caps, floors and
collars, certain SMBS, municipal leases, certain over-the-counter options,
securities that are not readily marketable and Restricted Securities, unless the
Board of Trustees determines, based upon a continuing review of the trading
markets for the specific Restricted Securities, that such Restricted Securities
are liquid. Certain commercial paper issued in reliance on Section 4(2) of the
1933 Act is treated like Rule 144A Securities. The Trustees have adopted
guidelines and delegated to the Advisers the daily function of determining and
monitoring the liquidity of the Funds' portfolio securities. The Board of
Trustees, however, will retain sufficient oversight and be ultimately
responsible for the determinations. Since it is not possible to predict with
assurance exactly how the market for Restricted Securities sold and offered
under Rule 144A or Section 4(2) will develop, the Trustees will carefully
monitor the Funds' investments in these securities, focusing on such important
factors, among others, as valuation, liquidity and availability of information.
This investment practice could have the effect of increasing the level of
illiquidity in a Fund to the extent that qualified institutional buyers become
for a time uninterested in purchasing these Restricted Securities.
The purchase price and subsequent valuation of Restricted Securities
normally reflect a discount from the price at which such securities trade when
they are not restricted, since the restriction makes them less liquid. The
amount of the discount from the prevailing market price is expected to vary
depending upon the type of security, the character of the issuer, the party who
will bear the expenses of registering the Restricted Securities and prevailing
supply and demand conditions.
B-59
<PAGE>
INVESTMENT RESTRICTIONS
The following investment restrictions have been adopted by the Trust as
fundamental policies that cannot be changed without the affirmative vote of the
holders of a majority (as defined in the Act) of the outstanding voting
securities of the affected Fund. The investment objective of each Fund and all
other investment policies or practices of each Fund are considered by the Trust
not to be fundamental and accordingly may be changed without shareholder
approval. See "Investment Objectives and Policies" in the Prospectus. For
purposes of the Act, "majority" means the lesser of (a) 67% or more of the
shares of the Trust or a Fund present at a meeting, if the holders of more than
50% of the outstanding shares of the Trust or a Fund are present or represented
by proxy, or (b) more than 50% of the shares of the Trust or a Fund. For
purposes of the following limitations, any limitation which involves a maximum
percentage shall not be considered violated unless an excess over the percentage
occurs immediately after, and is caused by, an acquisition or encumbrance of
securities or assets of, or borrowings by, a Fund. With respect to the Funds'
fundamental investment restriction no. 3, asset coverage of at least 300% (as
defined in the Act), inclusive of any amounts borrowed, must be maintained at
all times.
A Fund may not:
(1) make any investment inconsistent with the Fund's classification as
a diversified company under the Investment Company Act of 1940, as
amended (the "Act"). This restriction does not, however, apply to
any Fund classified as a non-diversified company under the Act;
(2) invest 25% or more of its total assets in the securities of one or
more issuers conducting their principal business activities in the
same industry (excluding the U.S. Government or any of its
agencies or instrumentalities). (For the purposes of this
restriction, state and municipal governments and their agencies,
authorities and instrumentalities are not deemed to be industries;
telephone companies are considered to be a separate industry from
water, gas or electric utilities; personal credit finance
companies and business credit finance companies are deemed to be
separate industries; and wholly-owned finance companies are
considered to be in the industry of their parents if their
activities are primarily related to financing the activities of
their parents). This restriction does not apply to investments in
municipal securities which have been pre-refunded
B-60
<PAGE>
by the use of obligations of the U.S. government or any of its
agencies or instrumentalities;
(3) borrow money, except (a) the Fund may borrow from banks (as
defined in the Act) or through reverse repurchase agreements in
amounts up to 33-1/3% of its total assets (including the amount
borrowed), (b) the Fund may, to the extent permitted by applicable
law, borrow up to an additional 5% of its total assets for
temporary purposes, (c) the Fund may obtain such short-term
credits as may be necessary for the clearance of purchases and
sales of portfolio securities, (d) the Fund may purchase
securities on margin to the extent permitted by applicable law and
(e) the Fund may engage transactions in mortgage dollar rolls
which are accounted for as financings;
(4) make loans, except through (a) the purchase of debt obligations in
accordance with the Fund's investment objective and policies, (b)
repurchase agreements with banks, brokers, dealers and other
financial institutions, and (c) loans of securities as permitted
by applicable law;
(5) underwrite securities issued by others, except to the extent that
the sale of portfolio securities by the Fund may be deemed to be
an underwriting;
(6) purchase, hold or deal in real estate, although a Fund may
purchase and sell securities that are secured by real estate or
interests therein, securities of real estate investment trusts and
mortgage-related securities and may hold and sell real estate
acquired by a Fund as a result of the ownership of securities;
(7) invest in commodities or commodity contracts, except that the Fund
may invest in currency and financial instruments and contracts
that are commodities or commodity contracts; or
(8) issue senior securities to the extent such issuance would violate
applicable law.
Each Fund may, notwithstanding any other fundamental investment restriction
or policy, invest some or all of its assets in a single open-end investment
company or series thereof with substantially the same investment objective,
restrictions and policies as the Fund.
B-61
<PAGE>
In addition to the fundamental policies mentioned above, the Trustees have
adopted the following non-fundamental policies which can be changed or amended
by action of the Trustees without approval of shareholders.
A Fund may not:
(a) Invest in companies for the purpose of exercising control or
management;
(b) Invest more than 15% of the Fund's net assets in illiquid investments
including repurchase agreements maturing in more than seven days,
securities which are not readily marketable and restricted securities
not eligible for resale pursuant to Rule 144A under the 1933 Act;
(c) Purchase additional securities if the Fund's borrowings (excluding
covered mortgage dollar rolls) exceed 5% of its net assets; or
(d) Make short sales of securities, except short sales against the box.
MANAGEMENT
Information pertaining to the Trustees and officers of the Trust is set
forth below. Trustees and officers deemed to be "interested persons" of the
Trust for purposes of the Act are indicated by an asterisk.
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
Ashok N. Bakhru, 53 Chairman Executive Vice President-Finance and
1325 Ave. of Americas & Trustee Administration and Chief Financial
New York, NY 10019 Officer, Coty Inc. (since April 1996);
President, ABN Associates (June 1994 through
March 1996); Senior Vice President of Scott
Paper Company (until June 1994); Director of
Arkwright Mutual Insurance Company; Trustee
of International House of Philadelphia;
Member of Cornell University Council;
Trustee of the Walnut Street Theater.
*David B. Ford, 51 Trustee Managing Director, Goldman Sachs One
New York Plaza (since 1996); General Partner,
New York, NY 10004 Goldman Sachs (1986-1996); Co-Head
of Goldman Sachs Asset Management
(since December 1994).
B-62
<PAGE>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ------------- ---------- -------------------
*Douglas C. Grip, 35 Trustee Vice President, Goldman Sachs (since
One New York Plaza & President May 1996); President, MFS Retirement
New York, NY 10004 Services Inc., of Massachusetts Financial
Services (prior thereto).
*John P. McNulty, 44 Trustee Managing Director, Goldman Sachs One
New York Plaza (since 1996); General Partner of
New York, NY 10004 Goldman Sachs(1990-1994 and 1995-
1996); Co-Head of Goldman Sachs non
Asset Management (since November
1995); Limited Partner of Goldman
Sachs (1994 to November 1995).
Mary P. McPherson, 60 Trustee President of Bryn Mawr College
Taylor Hall (since 1978); Director of Bryn Mawr,
PA 19010 Josiah Macy, Jr., Foundation (since
1977); Director of the Philadelphia
Contributionship (since 1985);
Director of Amherst College (since
1986); Director of Dayton Hudson
Corporation (since 1988); Director
of the Spencer Foundation (since
1993); and member of PNC Advisory
Board (since 1993).
*Alan A. Shuch, 48 Trustee Limited Partner, Goldman Sachs
One New York Plaza (since 1994); Director and Vice
New York, NY 10004 President Goldman Sachs Funds Management,
Inc. (from April 1990 to November 1994);
President and Chief Operating Officer, GSAM
(from September 1988 to November 1994).
Jackson W. Smart, 66 Trustee Chairman, Executive Committee, First
One Northfield Plaza # 218 Commonwealth, Inc. (a managed dental
Northfield, IL 60093 care company, since January 1996); Chairman
and Chief Executive Officer, MSP
Communications Inc. (a company engaged in
radio broadcasting) (since November 1988),
Director, Federal Express Corporation (since
1976), Evanston Hospital Corporation (since
1980), First Commonwealth, Inc. (since 1988)
and North American Private Equity Group (a
venture capital fund).
B-63
<PAGE>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
William H. Springer, 67 Trustee Vice Chairman and Chief Financial
701 Morningside Drive and Administrative Officer, February
Lake Forest, IL 60045 1987 to June 1991) of Ameritech (a
telecommunications holding company;
Director, Walgreen Co. (a retail drug store
business); Director of Baker, Fentress & Co.
(a closed-end, non-diversified management
investment company) (April 1992 to present).
Richard P. Strubel, 57 Trustee Managing Director, Tandem Partners,
70 West Madison St. Inc. (since 1990); President and
Ste. 1400 Chief Executive Officer, Microdot,
Chicago, IL 60602 Inc. (a diversified manufacturer of
fastening systems and connectors) (January
1984 to October 1994).
*Scott M. Gilman, 37 Treasurer Director, Mutual Funds
One New York Plaza Administration, Goldman Sachs Asset
New York, NY 10004 Management (since April 1994); Assistant
Treasurer, Goldman Sachs Funds Management,
Inc. (since March 1993); Vice President,
Goldman Sachs (since March 1990).
*John M. Perlowski, 32 Assistant Vice President, Goldman Sachs (since
One New York Plaza Treasurer July 1995); Director, Investors Bank
New York, NY 10004 and Trust (November 1993 to July 1995);
Audit Manager of Arthur Andersen LLP (prior
thereto).
*John W. Mosior, 58 Vice Vice President, Goldman Sachs and
4900 Sears Tower President Manager of Shareholder Servicing of
Chicago, IL 60606 GSAM (since November 1989).
*Nancy L. Mucker, 47 Vice Vice President, Goldman Sachs (since
4900 Sears Tower President April 1985); Manager of Shareholder
Chicago, IL 60606 Servicing of GSAM since (November 1989).
*James A. Fitzpatrick Vice Vice President of Goldman Sachs
4900 Sears Tower President Asset Management (since April 1997);
Vice President and General
First Data Corporation-Investor Manager,
Services Group (prior thereto.)
B-64
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE POSITIONS PRINCIPAL OCCUPATION(S)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -------------------
<S> <C> <C>
*Michael J. Richman, 37 Secretary General Counsel of the Mutual
85 Broad Street Funds Group of Goldman Sachs Asset
New York, NY Management (since December 1997);
Associate General Counsel of Goldman
Sachs Asset Management (February 1994 to
December 1997); Vice President and Assistant
General Counsel of Goldman Sachs (since June
1992); Counsel to the Funds Group, GSAM
(since June June 1992); Partner, Hale and
Dorr (September 1991 to 1992).
*Howard B. Surloff, 32 Assistant Assistant General Counsel Goldman
85 Broad Street Secretary Sachs Asset Management and
New York, NY 10004 Associate General Counsel to the
Funds Group (since December 1997);
Assistant General Counsel and Vice
President, Goldman Sachs (since
November 1993 and May 1994 respectively);
Associate of Shereff Friedman, Hoffman &
Goodman (prior thereto).
*Valerie A. Zondorak, 32 Assistant Assistant General Counsel Goldman
85 Broad Street Secretary Sachs Asset Management and Assistant
New York, New York 10004 General Counsel Funds Group (since
December 1997); Vice President,
Goldman Sachs (since March 1997);
Associate of Shereff Friedman,
Hoffman & Goodman (prior thereto).
</TABLE>
B-65
<PAGE>
The Trustees and officers of the Trust hold comparable positions with
certain other investment companies of which Goldman Sachs, GSAM or GSFM is the
investment adviser, administrator and/or distributor.
The Trust pays each Trustee, other than those who are "interested persons"
of Goldman Sachs, a fee for each Trustee meeting attended and an annual fee.
Such Trustees are also reimbursed for travel expenses incurred in connection
with attending such meetings.
B-66
<PAGE>
The following table sets forth certain estimated information with respect to the
compensation of each Trustee of the Trust for the current fiscal year:
<TABLE>
<CAPTION>
Pension or Total
Retirement Compensation
Benefits from Goldman Sachs
Aggregate Accrued as Mutual Funds
Compensation Part of (including the
Name of Trustee from the Portfolios+ Portfolios' Expenses Portfolios)**
- ---------------------- -------------------- -------------------- ------------------
<S> <C> <C> <C>
Ashok N. Bakhru* $ 5,095 $0 $93,250
David B. Ford 0 0 0
Douglas C. Grip 0 0 0
John P. McNulty 0 0 0
Mary P. McPherson* 4,200 0 70,000
Alan A. Shuch 0 0 0
Jackson W. Smart* 4,200 0 70,000
William H. Springer* 4,200 0 70,000
Richard P. Strubel* 4,200 0 70,000
</TABLE>
______________
* Non-interested persons of the Trust.
** As of the date of this statement of Additional Information, the
Goldman Sachs Mutual Funds consisted of 94 mutual funds.
+ As of the date of this statement of Additional Information, it is
anticipated that six Portfolios of the Trust will be operational
during the current fiscal year.
B-67
<PAGE>
MANAGEMENT SERVICES
- -------------------
GSAM, One New York Plaza, New York, New York, a separate operating division of
Goldman Sachs, serves as investment adviser to Growth and Income, CORE U.S.
Equity, CORE Large Cap Growth, CORE Small Cap Equity, Capital Growth, Mid Cap
Equity and High Yield Funds. GSAMI, 133 Peterborough Court, London, England,
EC4A 2BB serves as investment adviser to International Equity and Global Income
Funds. See "Management" in the Funds' Prospectus for a description of the
applicable Adviser's duties to the Funds.
Founded in 1869, Goldman Sachs is among the oldest and largest investment
banking firms in the United States. Goldman Sachs is a leader in developing
portfolio strategies and in many fields of investing and financing,
participating in financial markets worldwide and serving individuals,
institutions, corporations and governments. Goldman Sachs is also among the
principal market sources for current and thorough information on companies,
industrial sectors, markets, economies and currencies, and trades and makes
markets in a wide range of equity and debt securities 24-hours a day. The firm
is headquartered in New York and has offices throughout the U.S. and in Beijing,
Brazil, Frankfurt, George Town, Hong Kong, London, Madrid, Mexico City, Milan,
Montreal, Osaka, Paris, Sao Paulo, Seoul, Shanghai, Singapore, Sydney, Taipei,
Tokyo, Toronto, Vancouver and Zurich. It has trading professionals throughout
the United States, as well as in London, Tokyo, Hong Kong and Singapore. The
active participation of Goldman Sachs in the world's financial markets enhances
its ability to identify attractive investments.
The Funds' investment advisers are able to draw on the substantial research
and market expertise of Goldman Sachs whose investment research effort is one of
the largest in the industry. With an annual equity research budget approaching
$200 million, the Goldman Sachs Global Investment Research Department covers
approximately 2,010 companies, including approximately 1,142 U.S. corporations
in 60 industries. The in-depth information and analyses generated by Goldman
Sachs' research analysts are available to the investment advisers. These
investment advisers manage money for some of the world's largest institutional
investors. For more than a decade, Goldman Sachs has been among the top-ranked
firms in Institutional Investor's annual "All-America Research Team" survey. In
addition, many of Goldman Sachs' economists, securities analysts, portfolio
strategists and credit analysts have consistently been highly ranked in
respected industry surveys conducted in the U.S. and abroad. Goldman Sachs is
also among the leading investment firms using quantitative analytics (now used
by a growing number of investors) to structure and evaluate portfolios. For
example, Goldman Sachs option evaluation model analyzes each security's term,
coupon and call
B-68
<PAGE>
option, providing an overall analysis of the security's value relative to its
interest risk.
In managing the Funds, the Funds' investment advisers have access to Goldman
Sachs' economics research. The Economics Research Department conducts economic,
financial and currency markets research which analyzes economic trends and
interest and exchange rate movement worldwide. The Economics Research
Department tracks factors such as inflation and money supply figures, balance of
trade figures, economic growth, commodity prices, monetary and fiscal policies,
and political events that can influence interest rates and currency trends. The
success of Goldman Sachs' international research team has brought wide
recognition to its members. The team has earned top rankings in the
Institutional Investor's annual "All British Research Team Survey" in the
following categories: Economics (U.K.) 1986-1993; Economics/International 1989-
1993; and Currency Forecasting 1986-1993. In addition, the team has also earned
top rankings in the annual "Extel Financial Survey" of U.K. investment managers
in the following categories: U.K. Economy 1989-1995; International Economies
1986, 1988-1995; International Government Bond Market 1993-1995; and Currency
Movements 1986-1993.
The High Yield Fund's investment adviser expects to utilize Goldman Sachs'
sophisticated option-adjusted analytics to help make strategic asset allocations
within the markets for U.S. government, Mortgage-Backed and other securities and
to employ this technology periodically to re-evaluate the Funds' investments as
market conditions change. Goldman Sachs has also developed a prepayment model
designed to estimate mortgage prepayments and cash flows under different
interest rate scenarios. Because a Mortgage-Backed Security incorporates the
borrower's right to prepay the mortgage, the Advisers use a sophisticated
option-adjusted spread (OAS) model to measure expected returns. A security's
OAS is a function of the level and shape of the yield curve, volatility and the
applicable Adviser's expectation of how a change in interest rates will affect
prepayment levels. Since the OAS model assumes a relationship between
prepayments and interest rates, the Advisers consider it a better way to measure
a security's expected return and absolute and relative values than yield to
maturity. In using OAS technology, the Advisers will first evaluate the absolute
level of a security's OAS considering its liquidity and its interest rate,
volatility and prepayment sensitivity. The Advisers will then analyze its value
relative to alternative investments and to its own investments. The Advisers
will also measure a security's interest rate risk by computing an option
adjusted duration (OAD). The Advisers believe a security's OAD is a better
measurement of its price sensitivity than cash flow duration, which
systematically misstates portfolio duration. The Advisers also evaluate returns
for different mortgage market sectors and evaluate the credit risk of individual
securities.
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This sophisticated technical analysis allows the Advisers to develop portfolio
and trading strategies using Mortgage-Backed Securities that are believed to be
superior investments on a risk-adjusted basis and which provide the flexibility
to meet the respective Fund's duration targets and cash flow pattern
requirements.
Because the OAS is adjusted for the differing characteristics of the
underlying securities, the OAS of different Mortgage-Backed Securities can be
compared directly as an indication of their relative value in the market. The
Advisers also expect to use OAS-based pricing methods to calculate projected
security returns under different, discrete interest rate scenarios, and Goldman
Sachs' proprietary prepayment model to generate yield estimates under these
scenarios. The OAS, scenario returns, expected returns, and yields of
securities in the mortgage market can be combined and analyzed in an optimal
risk-return matching framework.
The Advisers also expect to use OAS analytics to evaluate the mortgage market
on an ongoing basis. Changes in the relative value of various Mortgage-Backed
Securities could suggest tactical trading opportunities for the Funds. The
Advisers will have access to both current market analysis as well as historical
information on the relative value relationships among different Mortgage-Backed
Securities. Current market analysis and historical information is available in
the Goldman Sachs database for most actively traded Mortgage-Backed Securities.
Goldman Sachs has agreed to provide the Advisers, on a non-exclusive basis,
use of its mortgage prepayment model, OAS model and any other proprietary
services which it now has or may develop, to the extent such services are made
available to other similar customers. Use of these services by the Advisers
with respect to a Fund does not preclude Goldman Sachs from providing these
services to third parties or using such services as a basis for trading for its
own account or the account of others.
The fixed-income research capabilities of Goldman Sachs available to the
Advisers include the Goldman Sachs Fixed Income Research Department and the
Credit Department. The Fixed Income Research Department monitors developments in
U.S. and foreign fixed-income markets, assesses the outlooks for various sectors
of the markets and provides relative value comparisons, as well as analyzes
trading opportunities within and across market sectors. The Fixed Income
Research Department is at the forefront in developing and using computer-based
tools for analyzing fixed-income securities and markets, developing new fixed
income products and structuring portfolio strategies for investment policy and
tactical asset allocation decisions. The Credit Department tracks specific
governments, regions and industries and
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from time to time may review the credit quality of a Fund's investments.
In allocating assets among foreign countries and currencies for the Funds
which can invest in foreign securities (in particular, the International Equity
and Global Income Funds), the Advisers will have access to the Global Asset
Allocation Model. The model is based on the observation that the prices of all
financial assets, including foreign currencies, will adjust until investors
globally are comfortable holding the pool of outstanding assets. Using the
model, the Advisers will estimate the total returns from each currency sector
which are consistent with the average investor holding a portfolio equal to the
market capitalization of the financial assets among those currency sectors.
These estimated equilibrium returns are then combined with the expectations of
Goldman Sachs' research professionals to produce an optimal currency and asset
allocation for the level of risk suitable for a Fund given its investment
objectives and criteria.
Each Fund's management agreement provides that the Advisers may render similar
services to others as long as the services provided by the Advisers thereunder
are not impaired thereby.
The Funds' management agreements were approved by the Trustees, including a
majority of the Trustees who are not parties to the management agreement or
"interested persons" (as such term is defined in the Act) of any party thereto
(the "non-interested Trustees"), on October 21, 1997. These arrangements were
approved by the sole shareholder of each Fund on September 26, 1997 by consent
action to satisfy conditions imposed by the SEC in connection with the
registration of shares of the Fund under the Investment Company Act of 1940 and
the Securities Act of 1933. Each management agreement will remain in effect
until June 30, 1999 and from year to year thereafter provided such continuance
is specifically approved at least annually by (a) the vote of a majority of the
outstanding voting securities of such Fund or a majority of the Trustees, and
(b) the vote of a majority of the non-interested Trustees, cast in person at a
meeting called for the purpose of voting on such approval. Each management
agreement will terminate automatically if assigned (as defined in the Act) and
is terminable at any time without penalty by the Trustees or by vote of a
majority of the outstanding voting securities of the affected Fund on 60 days'
written notice to the Adviser and by the Adviser on 60 days' written notice to
the Trust.
Pursuant to the management agreements the Advisers are entitled to receive the
fees listed below, payable monthly of such Fund's average daily net assets.
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<TABLE>
<CAPTION>
Management
Fund Fee
- ---- ---
<S> <C>
GSAM
Growth and Income Fund .75%
CORE U.S. Equity Fund .70%
CORE Large Cap Growth Fund .70%
CORE Small Cap Equity Fund .75%
Capital Growth Fund .75%
Mid Cap Equity Fund .80%
High Yield Fund .70%
GSAMI
International Equity Fund 1.00%
Global Income Fund .90%
</TABLE>
GSAM and GSAMI may discontinue or modify the above limitations in the
future at their discretion, although they have no current intention to do so.
Under the management agreements, each Adviser also: (i) supervises all non-
advisory operations of each Fund that it advises; (ii) provides personnel to
perform such executive, administrative and clerical services as are reasonably
necessary to provide effective administration of each Fund; (iii) arranges for
at each Fund's expense (a) the preparation of all required tax returns, (b) the
preparation and submission of reports to existing shareholders, (c) the periodic
updating of prospectuses and statements of additional information and (d) the
preparation of reports to be filed with the SEC and other regulatory
authorities; (iv) maintains each Fund's records; and (v) provides office space
and all necessary office equipment and services.
ACTIVITIES OF GOLDMAN SACHS AND ITS AFFILIATES AND OTHER ACCOUNTS MANAGED
BY GOLDMAN SACHS. The involvement of the Advisers and Goldman Sachs and their
affiliates in the management of, or their interest in, other accounts and other
activities of Goldman Sachs may present conflicts of interest with respect to
the Funds or impede their investment activities.
Goldman Sachs and its affiliates, including, without limitation, the
Advisers and their advisory affiliates, have proprietary interests in, and may
manage or advise with respect to, accounts or funds (including separate accounts
and other funds and collective investment vehicles) which have investment
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objectives similar to those of the Funds and/or which engage in transactions in
the same types of securities, currencies and instruments as the Funds. Goldman
Sachs and its affiliates are major participants in the global currency,
equities, swap and fixed income markets, in each case both on a proprietary
basis and for the accounts of customers. As such, Goldman Sachs and its
affiliates are actively engaged in transactions in the same securities,
currencies and instruments in which the Funds invest. Such activities could
affect the prices and availability of the securities, currencies and instruments
in which the Funds will invest, which could have an adverse impact on each
Fund's performance. Such transactions, particularly in respect of proprietary
accounts or customer accounts other than those included in the Advisers' and
their advisory affiliates' asset management activities, will be executed
independently of the Funds' transactions and thus at prices or rates that may be
more or less favorable. When the Advisers and their advisory affiliates seek to
purchase or sell the same assets for their managed accounts, including the
Funds, the assets actually purchased or sold may be allocated among the accounts
on a basis determined in its good faith discretion to be equitable. In some
cases, this system may adversely affect the size or the price of the assets
purchased or sold for the Funds.
From time to time, the Funds' activities may be restricted because of
regulatory restrictions applicable to Goldman Sachs and its affiliates, and/or
their internal policies designed to comply with such restrictions. As a result,
there may be periods, for example, when the Advisers and/or their affiliates
will not initiate or recommend certain types of transactions in certain
securities or instruments with respect to which the Advisers and/or their
affiliates are performing services or when position limits have been reached.
In connection with their management of the Funds, the Advisers may have
access to certain fundamental analysis and proprietary technical models
developed by Goldman Sachs and other affiliates. The Advisers will not be under
any obligation, however, to effect transactions on behalf of the Funds in
accordance with such analysis and models. In addition, neither Goldman Sachs
nor any of its affiliates will have any obligation to make available any
information regarding their proprietary activities or strategies, or the
activities or strategies used for other accounts managed by them, for the
benefit of the management of the Funds and it is not anticipated that the
Advisers will have access to such information for the purpose of managing the
Funds. The proprietary activities or portfolio strategies of Goldman Sachs and
its affiliates or the activities or strategies used for accounts managed by them
or other customer accounts could conflict with the transactions and strategies
employed by the Advisers in managing the Funds.
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The results of each Fund's investment activities may differ significantly
from the results achieved by the Advisers and their affiliates for their
proprietary accounts or accounts (including investment companies or collective
investment vehicles) managed or advised by them. It is possible that Goldman
Sachs and its affiliates and such other accounts will achieve investment results
which are substantially more or less favorable than the results achieved by a
Fund. Moreover, it is possible that a Fund will sustain losses during periods
in which Goldman Sachs and its affiliates achieve significant profits on their
trading for proprietary or other accounts. The opposite result is also
possible.
The investment activities of Goldman Sachs and its affiliates for their
proprietary accounts and accounts under their management may also limit the
investment opportunities for the Fund in certain emerging markets in which
limitations are imposed upon the aggregate amount of investment, in the
aggregate or individual issuers, by affiliated foreign investors.
An investment policy committee which may include partners of Goldman Sachs
and its affiliates may develop general policies regarding a Fund's activities
but will not be involved in the day-to-day management of such Fund. In such
instances, those individuals may, as a result, obtain information regarding the
Fund's proposed investment activities which is not generally available to the
public. In addition, by virtue of their affiliation with Goldman Sachs, any such
member of an investment policy committee will have direct or indirect interests
in the activities of Goldman Sachs and its affiliates in securities and
investments similar to those in which the Fund invests.
In addition, certain principals and certain of the employees of the
Advisers are also principals or employees of Goldman Sachs or their affiliated
entities. As a result, the performance by these principals and employees of
their obligations to such other entities may be a consideration of which
investors in the Funds should be aware.
Each Adviser may enter into transactions and invest in currencies or
instruments on behalf of a Fund in which customers of Goldman Sachs serve as the
counterparty, principal or issuer. In such cases, such party's interests in the
transaction will be adverse to the interests of a Fund, and such party may have
no incentive to assure that the Funds obtain the best possible prices or terms
in connection with the transactions. Goldman Sachs and its affiliates may also
create, write or issue derivative instruments for customers of Goldman Sachs or
its affiliates, the underlying securities or instruments of which may be those
in which a Fund invests or which may be based on the performance of a
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Fund. The Funds may, subject to applicable law, purchase investments which are
the subject of an underwriting or other distribution by Goldman Sachs or its
affiliates and may also enter transactions with other clients of Goldman Sachs
or its affiliates where such other clients have interests adverse to those of
the Funds. At times, these activities may cause departments of Goldman Sachs or
its affiliates to give advice to clients that may cause these clients to take
actions adverse to the interests of the Funds. To the extent affiliated
transactions are permitted, the Funds will deal with Goldman Sachs and its
affiliates on an arms-length basis.
Each Fund will be required to establish business relationships with its
counterparties based on the Fund's own credit standing. Neither Goldman Sachs
nor its affiliates will have any obligation to allow their credit to be used in
connection with a Fund's establishment of its business relationships, nor is it
expected that a Fund's counterparties will rely on the credit of Goldman Sachs
or any of its affiliates in evaluating the Fund's creditworthiness.
It is possible that a Fund's holdings will include securities of entities
for which Goldman Sachs performs investment banking services as well as
securities of entities in which Goldman Sachs makes a market. From time to
time, Goldman Sachs' activities may limit the Funds' flexibility in purchases
and sales of securities. When Goldman Sachs is engaged in an underwriting or
other distribution of securities of an entity, the Advisers may be prohibited
from purchasing or recommending the purchase of certain securities of that
entity for the Funds.
DISTRIBUTOR
- -----------
Goldman Sachs serves as the exclusive distributor of the Funds pursuant to
a "best efforts" arrangement as provided by a distribution agreement with the
Trust on behalf of each Fund. Under the distribution agreement, each Fund is
responsible for, among other things, the payment of all fees and expenses in
connection with the preparation and filing of any registration statement and
prospectus covering the issue and sale of shares, and the registration and
qualification of shares for sale with the SEC and in the various states,
including registering the Fund as a broker or dealer. Each Fund will also pay
the fees and expenses of preparing, printing and mailing prospectuses annually
to existing shareholders and any notice, proxy statement, report, prospectus or
other communication to shareholders of the Fund, printing and mailing
confirmations of purchases of shares, any issue taxes or any initial transfer
taxes, a portion of toll-free telephone service for shareholders, wiring funds
for share purchases and redemptions (unless paid by the shareholder who
initiates the transaction), printing and postage of business reply
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envelopes and a portion of the computer terminals used by both the Fund and the
Distributor.
The Distributor will pay for, among other things, printing and distributing
prospectuses or reports prepared for its use in connection with the offering of
the shares to variable annuity and variable insurance accounts and preparing,
printing and mailing any other literature or advertising in connection with the
offering of the shares to variable annuity and variable insurance accounts. The
Distributor will pay all fees and expenses in connection with its qualification
and registration as a broker or dealer under federal and state laws, a portion
of the toll-free telephone service and of computer terminals, and of any
activity which is primarily intended to result in the sale of shares issued by
each Fund.
As agent, the Distributor currently offers shares of each Fund on a
continuous basis to the separate accounts of Participating Insurance Companies
in all states in which such Fund may from time to time be registered or where
permitted by applicable law. The underwriting agreements provide that the
Distributor accepts orders for shares at net asset value without sales
commission or load being charged. The Distributor has made no firm commitment
to acquire shares of any Fund.
Goldman Sachs serves as the Trust's transfer agent. Under its transfer
agency agreement with the Trust, Goldman Sachs has undertaken with the Trust to
(i) record the issuance, transfer and redemption of shares, (ii) provide
confirmations of purchases and redemptions, and quarterly statements, as well as
certain other statements, (iii) provide certain information to the Trust's
custodian and the relevant sub-custodian in connection with redemptions, (iv)
provide dividend crediting and certain disbursing agent services, (v) maintain
shareholder accounts, (vi) provide certain state Blue Sky and other information,
(vii) provide shareholders and certain regulatory authorities with tax related
information, (viii) respond to shareholder inquires, and (ix) render certain
other miscellaneous services.
CUSTODIAN
- ----------
State Street, P.O. Box 1713, Boston, Massachusetts 02105, is the custodian
of the Trust's portfolio securities and cash. State Street also maintains the
Trust's accounting records. State Street may appoint sub-custodians from time
to time to hold certain securities purchased by the Trust and to hold cash for
the Trust.
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INDEPENDENT PUBLIC ACCOUNTANTS
- ------------------------------
Arthur Andersen LLP, independent public accountants, 225 Franklin Street,
Boston, Massachusetts 02110, have been selected as auditors of the Trust. In
addition to audit services, Arthur Andersen LLP prepares the Trust's federal and
state tax returns, and provides consultation and assistance on accounting,
internal control and related matters.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Advisers are responsible for decisions to buy and sell securities for
the Funds, the selection of brokers and dealers to effect the transactions and
the negotiation of brokerage commissions, if any. Purchases and sales of
securities on a securities exchange are effected through brokers who charge a
commission for their services. Orders may be directed to any broker including,
to the extent and in the manner permitted by applicable law, Goldman Sachs.
In the over-the-counter market, securities are generally traded on a "net"
basis with dealers acting as principal for their own accounts without a stated
commission, although the price of a security usually includes a profit to the
dealer. In underwritten offerings, securities are purchased at a fixed price
which includes an amount of compensation to the underwriter, generally referred
to as the underwriter's concession or discount. On occasion, certain money
market instruments may be purchased directly from an issuer, in which case no
commissions or discounts are paid.
The portfolio transactions for the Fixed Income Funds are generally
effected at a net price without a broker's commission (i.e., a dealer is dealing
with a Fund as principal and receives compensation equal to the spread between
the dealer's cost for a given security and the resale price of such security).
In certain foreign countries, debt securities in which the Global Income Fund
and High Yield Fund may invest are traded on exchanges at fixed commission
rates.
In placing orders for portfolio securities of a Fund, the Advisers are
generally required to give primary consideration to obtaining the most favorable
execution and net price available. This means that an Adviser will seek to
execute each transaction at a price and commission, if any, which provides the
most favorable total cost or proceeds reasonably attainable in the
circumstances. As permitted by Section 28(e) of the Securities Exchange Act of
1934, the Fund may pay a broker which provides brokerage and research services
an amount of disclosed commission
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in excess of the commission which another broker would have charged for
effecting that transaction. Such practice is subject to (i) a good faith
determination by the Trustees that such commission is reasonable in light of the
services provided; and (ii) to such policies as the Trustees may adopt from time
to time. While the Advisers generally seek reasonably competitive spreads or
commissions, a Fund will not necessarily be paying the lowest spread or
commission available. Within the framework of this policy, the Advisers will
consider research and investment services provided by brokers or dealers who
effect or are parties to portfolio transactions of a Fund, the Advisers and
their affiliates, or their other clients. Such research and investment services
are those which brokerage houses customarily provide to institutional investors
and include research reports on particular industries and companies, economic
surveys and analyses, recommendations as to specific securities and other
products or services (e.g., quotation equipment and computer related costs and
expenses), advice concerning the value of securities, the advisability of
investing in, purchasing or selling securities, the availability of securities
or the purchasers or sellers of securities, furnishing analyses and reports
concerning issuers, industries, securities, economic factors and trends,
portfolio strategy and performance of accounts, effecting securities
transactions and performing functions incidental thereto (such as clearance and
settlement) and providing lawful and appropriate assistance to the Advisers in
the performance of their decision-making responsibilities. Such services are
used by the Advisers in connection with all of their investment activities, and
some of such services obtained in connection with the execution of transactions
for a Fund may be used in managing other investment accounts. Conversely,
brokers furnishing such services may be selected for the execution of
transactions of such other accounts, whose aggregate assets are far larger than
those of a Fund, and the services furnished by such brokers may be used by the
Advisers in providing management services for the Trust.
In circumstances where two or more broker-dealers offer comparable prices
and execution capability, preference may be given to a broker-dealer which has
sold shares of the Fund as well as shares of other investment companies or
accounts managed by the Advisers. This policy does not imply a commitment to
execute all portfolio transactions through all broker-dealers that sell shares
of the Fund.
On occasions when an Adviser deems the purchase or sale of a security to be
in the best interest of a Fund as well as its other customers (including any
other fund or other investment company or advisory account for which such
Adviser acts as investment adviser or subadviser), the Adviser, to the extent
permitted by applicable laws and regulations, may aggregate the securities to be
sold or purchased for the Fund with those to be sold or purchased for such
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other customers in order to obtain the best net price and most favorable
execution under the circumstances. In such event, allocation of the securities
so purchased or sold, as well as the expenses incurred in the transaction, will
be made by the applicable Adviser in the manner it considers to be equitable and
consistent with its fiduciary obligations to such Fund and such other customers.
In some instances, this procedure may adversely affect the price and size of the
position obtainable for a Fund.
Commission rates in the U.S. are established pursuant to negotiations with
the broker based on the quality and quantity of execution services provided by
the broker in the light of generally prevailing rates. The allocation of orders
among brokers and the commission rates paid are reviewed periodically by the
Trustees.
Subject to the above considerations, the Advisers may use Goldman Sachs as
a broker for a Fund. In order for Goldman Sachs to effect any portfolio
transactions for each Fund, the commissions, fees or other remuneration received
by Goldman Sachs must be reasonable and fair compared to the commissions, fees
or other remuneration paid to other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time. This standard would
allow Goldman Sachs to receive no more than the remuneration which would be
expected to be received by an unaffiliated broker in a commensurate arm's-length
transaction. Furthermore, the Trustees, including a majority of the Trustees who
are not "interested" Trustees, have adopted procedures which are reasonably
designed to provide that any commissions, fees or other remuneration paid to
Goldman Sachs are consistent with the foregoing standard. Brokerage transactions
with Goldman Sachs are also subject to such fiduciary standards as may be
imposed upon Goldman Sachs by applicable law.
NET ASSET VALUE
Under the Act, the Trustees are responsible for determining in good faith
the fair value of securities of each Fund. In accordance with procedures
adopted by the Trustees, the net asset value per share of each Fund is
calculated by determining the value of the net assets attributable to that Fund
and dividing by the number of outstanding shares. All securities are valued as
of the close of regular trading on the New York Stock Exchange (normally 4:00
p.m. New York time) on each Business Day (as defined in the Prospectus).
In the event that the New York Stock Exchange or the national securities
exchange on which stock options are traded adopt different trading hours on
either a permanent or temporary basis,
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the Trustees will reconsider the time at which net asset value is computed. In
addition, each Fund may compute its net asset value as of any time permitted
pursuant to any exemption, order or statement of the SEC or its staff.
Portfolio securities of a Fund (except the Global Income Fund) for which no
accurate market quotations are available are valued as follows: (a) securities
listed on any U.S. or foreign stock exchange or on the National Association of
Securities Dealers Automated Quotations System ("NASDAQ") will be valued at the
last sale price on the exchange or system in which they are principally traded,
on the valuation date. If there is no sale on the valuation day, securities
traded principally: (i) on a U.S. exchange or NASDAQ will be valued at the mean
between the closing bid and asked prices; and (ii) on a foreign exchange will be
valued at the last sale price (also referred to as the close price). The last
sale price for securities traded principally on a foreign exchange will be
determined as of the close of the London Stock Exchange or, for securities
traded on exchanges located in the Asia Pacific region, noon London time; (b)
debt securities will be valued via electronic feeds to the custodian bank
containing dealer-supplied bid quotations or bid quotations from a nationally
recognized pricing service; or using another pricing service approved by the
Trustees if such prices are believed by the investment adviser to accurately
represent market value; (c) overnight repurchase agreements will be valued by a
Fund's Investment Adviser at cost; (d) term repurchase agreements (i.e., those
whose maturity exceeds seven days) and interest rate swaps, caps, collars and
floors will be valued at the average of the bid quotations obtained daily from
at least two dealers or, for term repurchase agreements, recognized
counterparties; (e) debt securities with a remaining maturity of 60 days or less
are valued by a Fund's investment adviser at amortized cost, which the Trustees
have determined to approximate fair value; (f) spot and forward foreign currency
exchange contracts will be valued using a pricing service such as Reuters then
calculating the mean between the last bid and asked quotations supplied by
certain independent dealers in such contracts; (g) exchange-traded options and
futures contracts will be valued by the custodian bank at the last sale price on
the exchange where such contracts and options are principally traded; (h) over-
the-counter options will be valued by an independent unaffiliated broker
identified by the portfolio manager/trader and contacted by the custodian bank;
(i) money market instruments with a remaining maturity of sixty days or less
will be valued by the amortized cost method, which the Trustees have determined
approximates market value; and (j) all other securities, including those for
which a pricing service supplies no exchange quotation or a quotation that is
believed by the portfolio manager/trader to be inaccurate, will be valued at
fair value as stated in the valuation procedures which were approved by the
Board of Trustees. For all brokers used in this process, the
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custodian bank will send a letter to the broker furnishing the quotation. If
accurate quotations are not readily available, such contracts will be valued by
an independent unaffiliated broker identified by the portfolio manager/trader
and contacted by the custodian bank. If broker quotes are used, the portfolio
manager/trader will identify one independent unaffiliated broker from whom the
custodian bank will obtain prices daily and another independent unaffiliated
broker from whom the custodian bank will obtain quotes at least weekly. The
custodian bank will promptly notify the portfolio manager/trader and a member of
the GSAM Valuation Committee or a designee thereof of any deviations equal to or
greater than 3% between the weekly quote and the daily quotes for the date that
the weekly quotes were obtained. The investment adviser will promptly provide
instructions to the custodian bank. For all brokers used in this process, the
custodian bank will send a letter to the broker furnishing the quotation.
Portfolio securities of the Global Income Fund for which accurate market
quotations are available are valued as follows: (a) securities listed on any
U.S. or foreign stock exchange or on the National Association of Securities
Dealers Automated Quotations System ("NASDAQ") will be valued at the last sale
price on the exchange or system in which they are principally traded, on the
valuation date. If there is no sale on the valuation day, securities traded
principally: (i) on a U.S. exchange or NASDAQ will be valued at the mean between
the closing bid and asked prices, and (ii) on a foreign exchange will be valued
at the official bid price. The last sale price and official bid price for
securities traded principally on a foreign exchange will be determined as of the
close of the London Foreign Exchange; (b) over-the-counter securities not quoted
on NASDAQ will be valued at the last sale price on the valuation day or, if no
sale occurs, at the mean between the last bid and asked prices; (c) options and
futures contracts will be valued at the last sale price in the market where such
contract is principally traded; and (d) forward foreign currency exchange
contracts will be valued at the mean between the last bid and asked quotations
supplied by a dealer in such contracts.
The value of all assets and liabilities expressed in foreign currencies
will be converted into U.S. dollar values at current exchange rates of such
currencies against U.S. dollars last quoted by any major bank. If such
quotations are not available, the rate of exchange will be determined in good
faith by or under procedures established by the Board of Trustees.
Generally, trading in securities on European and Far Eastern securities
exchanges and on over-the-counter markets is substantially completed at various
times prior to the close of business on each Business Day in New York (i.e., a
day on which
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the New York Stock Exchange is open for trading). In addition, European or Far
Eastern securities trading generally or in a particular country or countries may
not take place on all Business Days in New York. Furthermore, trading takes
place in various foreign markets on days which are not Business Days in New York
and days on which the Funds' net asset values are not calculated. Such
calculation does not take place contemporaneously with the determination of the
prices of the majority of the portfolio securities used in such calculation.
Events affecting the values of portfolio securities that occur between the time
their prices are determined and the close of regular trading on the New York
Stock Exchange will not be reflected in a Fund's calculation of net asset values
unless the Trustees deem that the particular event would materially affect net
asset value, in which case an adjustment will be made.
The proceeds received by each Fund and each other series of the Trust from
the issue or sale of its shares, and all net investment income, realized and
unrealized gain and proceeds thereof, subject only to the rights of creditors,
will be specifically allocated to such Fund and constitute the underlying assets
of that Fund or series. The underlying assets of each Fund will be segregated
on the books of account, and will be charged with the liabilities in respect of
such Fund and with a share of the general liabilities of the Trust. Expenses of
the Trust with respect to the Funds and the other series of the Trust are
generally allocated in proportion to the net asset values of the respective
Funds or series except where allocations of direct expenses can otherwise be
fairly made.
PERFORMANCE INFORMATION
A Fund may from time to time quote or otherwise use total return, yield
and/or distribution rate information in advertisements, shareholder reports or
sales literature. Average annual total return and yield are computed pursuant
to formulas specified by the SEC.
Yield is computed by dividing net investment income earned during a recent
thirty-day period by the product of the average daily number of shares
outstanding and entitled to receive dividends during the period and the maximum
public offering price per share on the last day of the relevant period. The
results are compounded on a bond equivalent (semi-annual) basis and then
annualized. Net investment income per share is equal to the dividends and
interest earned during the period, reduced by accrued expenses for the period.
The calculation of net investment income for these purposes may differ from the
net investment income determined for accounting purposes.
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The distribution rate for a specified period is calculated by annualizing
distributions of net investment income for such period and dividing this amount
by the net asset value per share or maximum public offering price on the last
day of the period.
Average annual total return for a specified period is derived by
calculating the actual dollar amount of the investment return on a $1,000
investment made at the maximum public offering price at the beginning of the
period, and then calculating the annual compounded rate of return which would
produce that amount, assuming a redemption at the end of the period. This
calculation assumes a complete redemption of the investment. It also assumes
that all dividends and distributions are reinvested at net asset value on the
reinvestment dates during the period.
Year-by-year total return and cumulative total return for a specified
period are each derived by calculating the percentage rate required to make a
$1,000 investment (made at the maximum public offering price with all
distributions reinvested) at the beginning of such period equal to the actual
total value of such investment at the end of such period.
Occasionally statistics may be used to specify Fund volatility or risk.
Measures of volatility or risk are generally used to compare a Fund's net asset
value or performance relative to a market index. One measure of volatility is
beta. Beta is the volatility of a fund relative to the total market. A beta of
more than 1.00 indicates volatility greater than the market, and a beta of less
than 1.00 indicates volatility less than the market. Another measure of
volatility or risk is standard deviation. Standard deviation is used to measure
variability of net asset value or total return around an average, over a
specified period of time. The premise is that greater volatility connotes
greater risk undertaken in achieving performance.
From time to time the Trust may publish an indication of a Fund's past
performance as measured by independent sources such as (but not limited to)
Lipper Analytical Services, Inc., Morningstar Mutual Funds, Weisenberger
Investment Companies Service, Donoghue's Money Fund Report, Micropal, Barron's,
Business Week, Consumer's Digest, Consumer's Report, Investors Business Daily,
The New York Times, Kiplinger's Personal Finance Magazine, Changing Times,
Financial World, Forbes, Fortune, Money, Personal Investor, Sylvia Porter's
Personal Finance and The Wall Street Journal. The Trust may also advertise
information which has been provided to the NASD for publication in regional and
local newspapers. In addition, the Trust may from time to time advertise a
Fund's performance relative to certain indices and benchmark investments,
including: (a) the Lipper Analytical Services, Inc. Mutual Fund Performance
Analysis, Fixed Income Analysis and Mutual Fund Indices (which measure total
return and
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average current yield for the mutual fund industry and rank mutual fund
performance); (b) the CDA Mutual Fund Report published by CDA Investment
Technologies, Inc. (which analyzes price, risk and various measures of return
for the mutual fund industry); (c) the Consumer Price Index published by the
U.S. Bureau of Labor Statistics (which measures changes in the price of goods
and services); (d) Stocks, Bonds, Bills and Inflation published by Ibbotson
Associates (which provides historical performance figures for stocks, government
securities and inflation); (e) the Salomon Brothers' World Bond Index (which
measures the total return in U.S. dollar terms of government bonds, Eurobonds
and foreign bonds of ten countries, with all such bonds having a minimum
maturity of five years); (f) the Lehman Brothers Aggregate Bond Index or its
component indices; (g) the Standard & Poor's Bond Indices (which measure yield
and price of corporate, municipal and U.S. Government bonds); (h) the J.P.
Morgan Global Government Bond Index; (i) other taxable investments including
certificates of deposit (CDs), money market deposit accounts (MMDAs), checking
accounts, savings accounts, money market mutual funds and repurchase agreements;
(j) Donoghues' Money Fund Report (which provides industry averages for 7-day
annualized and compounded yields of taxable, tax-free and U.S. Government money
funds); (k) the Hambrecht & Quist Growth Stock Index; (l) the NASDAQ OTC
Composite Prime Return; (m) the Russell Midcap Index; (n) the Russell 2000
Index -Total Return; (o) Russell 1000 Growth Index-Total Return; (p) the Value-
Line Composite-Price Return; (q) the Wilshire 4500 Index; (r) the FT-Actuaries
Europe and Pacific Index; (s) historical investment data supplied by the
research departments of Goldman Sachs, Lehman Brothers, First Boston
Corporation, Morgan Stanley including (EAFE), and the Morgan Stanley Capital
International Combined Asia ex Japan Free Index, the Morgan Stanley Capital
International Emerging Markets Free Index, Salomon Brothers, Merrill Lynch,
Donaldson Lufkin and Jenrette or other providers of such data; (t) the FT-
Actuaries Europe and Pacific Index; (u) CDA/Wiesenberger Investment Companies
Services or Wiesenberger Investment Companies Service; (v) The Goldman Sachs
Commodities Index; and (w) information produced by Micropal, Inc. The
composition of the investments in such indices and the characteristics of such
benchmark investments are not identical to, and in some cases are very different
from, those of the Fund's portfolio. These indices and averages are generally
unmanaged and the items included in the calculations of such indices and
averages may not be identical to the formulas used by a Fund to calculate its
performance figures.
Information used in advertisements and materials furnished to present and
prospective investors may include statements or illustrations relating to the
appropriateness of certain types of securities and/or mutual funds to meet
specific financial goals. Such information may address:
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. cost associated with aging parents;
. funding a college education (including its actual and estimated cost);
. health care expenses (including actual and projected expenses);
. long-term disabilities (including the availability of, and coverage
provided by, disability insurance);
. retirement (including the availability of social security benefits, the
tax treatment of such benefits and statistics and other information
relating to maintaining a particular standard of living and outliving
existing assets);
. asset allocation strategies and the benefits of diversifying among asset
classes;
. the benefits of international and emerging market investments;
. the effects of inflation on investing and saving;
. the benefits of establishing and maintaining a regular pattern of
investing and the benefits of dollar-cost averaging; and
. measures of portfolio risk, including but not limited to, alpha, beta and
standard deviation.
The Trust may from time to time use comparisons, graphs or charts in
advertisements to depict the following types of information:
. the performance of various types of securities (common stocks, small
company stocks, taxable money market funds, U.S. Treasury securities,
adjustable rate mortgage securities, government securities and municipal
bonds) over time. However, the characteristics of these securities are
not identical to, and may be very different from, those of a Fund's
portfolio;
. the dollar and non-dollar based returns of various market indices (i.e.,
Morgan Stanley Capital International EAFE Index, FT-Actuaries Europe &
Pacific Index and the
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Standard & Poor's Index of 500 Common Stocks) over varying periods of
time;
. total stock market capitalizations of specific countries and regions on a
global basis;
. performance of securities markets of specific countries and regions;
. value of a dollar amount invested in a particular market or type of
security over different periods of time;
. volatility of total return of various market indices (i.e. Lehman
Government Bond Index, S&P 500 Index, IBC/Donoghue's Money Fund Average/
All Taxable Index) over varying periods of time;
. credit ratings of domestic government bonds in various countries;
. price volatility comparisons of types of securities over different
periods of time; and
. price and yield comparisons of a particular security over different
periods of time.
In addition, the Trust may from time to time include rankings of Goldman,
Sachs & Co.'s research department by publications such as the Institutional
Investor and the Wall Street Journal in advertisements.
From time to time, advertisements or information may include a discussion
of certain attributes or benefits to be derived by an investment in the Fund.
Such advertisements or information may include symbols, headlines or other
material which highlight or summarize the information discussed in more detail
in the communication.
The Trust may from time to time summarize the substance of discussions
contained in shareholder reports in advertisements and publish the adviser's
views as to markets, the rationale for a Fund's investments and discussions of a
Fund's current asset allocation.
In addition, from time to time, advertisements or information may include a
discussion of asset allocation models developed by GSAM and/or its affiliates,
certain attributes or benefits to be derived from asset allocation strategies
and the Goldman Sachs mutual funds that may be offered as investment options for
the
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strategic asset allocations. Such advertisements and information may also
include GSAM's current economic outlook and domestic and international market
views to suggest periodic tactical modifications to current asset allocation
strategies. Such advertisements and information may include other materials
which highlight or summarize the services provided in support of an asset
allocation program.
A Fund's performance data will be based on historical results and will not
be intended to indicate future performance. A Fund's total return, yield and
distribution rate will vary based on market conditions, portfolio expenses,
portfolio investments and other factors. The value of a Fund's shares will
fluctuate and an investor's shares may be worth more or less than their original
cost upon redemption. The Trust may also, at its discretion, from time to time
make a list of a Fund's holdings available to investors upon request.
SHARES OF THE TRUST
Each Fund is a series of Goldman Sachs Variable Insurance Trust, which was
formed under the laws of the state of Delaware on September 16, 1997.
Certain aspects of the shares may be altered after advance notice to
shareholders if it is deemed necessary in order to satisfy certain tax
regulatory requirements.
When issued, shares are fully paid and non-assessable. In the event of
liquidation, shareholders are entitled to share pro rata in the net assets of
the applicable class of the relevant Fund available for distribution to such
shareholders. All shares entitle their holders to one vote per share, are
freely transferable and have no preemptive, subscription or conversion rights.
The Trustees have authority under the Trust's Declaration of Trust to
create and classify shares of beneficial interests in separate series, without
further action by shareholders. Additional series may be added in the future.
The Trustees also have authority to classify and reclassify any series or
portfolio of shares into one or more classes.
Rule 18f-2 under the Act provides that any matter required to be submitted
by the provisions of the Act or applicable state law, or otherwise, to the
holders of the outstanding voting securities of an investment company such as
the Trust shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each class or
series affected by such matter. Rule 18f-2 further provides that a class
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or series shall be deemed to be affected by a matter unless the interests of
each class or series in the matter are substantially identical or the matter
does not affect any interest of such class or series. However, Rule 18f-2
exempts the selection of independent public accountants, the approval of
principal distribution contracts and the election of trustees from the separate
voting requirements of Rule 18f-2.
The Trust is not required to hold annual meetings of shareholders and does
not intend to hold such meetings. In the event that a meeting of shareholders
is held, each share of the Trust will be entitled, as determined by the
Trustees, either to one vote for each share or to one vote for each dollar of
net asset value represented by such shares on all matters presented to
shareholders including the elections of Trustees (this method of voting being
referred to as "dollar based voting"). However, to the extent required by the
Act or otherwise determined by the Trustees, series and classes of the Trust
will vote separately from each other. Shareholders of the Trust do not have
cumulative voting rights in the election of Trustees. Meetings of shareholders
of the Trust, or any series or class thereof, may be called by the Trustees,
certain officers or upon the written request of holders of 10% or more of the
shares entitled to vote at such meetings. The shareholders of the Trust will
have voting rights only with respect to the limited number of matters specified
in the Declaration of Trust and such other matters as the Trustees may determine
or may be required by law.
The Declaration of Trust provides for indemnification of Trustees and
officers of the Trust unless the recipient is adjudicated (i) to be liable by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of such person's office or (ii) not to
have acted in good faith in the reasonable belief that such person's actions
were in the best interest of the Trust. The Declaration of Trust provides that,
if any shareholder or former shareholder of any series is held personally liable
solely by reason of being or having been a shareholder and not because of the
shareholder's acts or omissions or for some other reason, the shareholder or
former shareholder (or heirs, executors, administrators, legal representatives
or general successors) shall be held harmless from and indemnified against all
loss and expense arising from such liability. The Trust, acting on behalf of
any affected series, must, upon request by such shareholder, assume the defense
of any claim made against such shareholder for any act or obligation of the
series and satisfy any judgment thereon from the assets of the series.
The Declaration of Trust permits the termination of the Trust or of any
series or class of the Trust (i) by a majority of the affected shareholders at a
meeting of shareholders of the Trust,
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series or class; or (ii) by a majority of the Trustees without shareholder
approval if the Trustees determine that such action is in the best interest of
the Trust or its shareholders. The factors and events that the Trustees may take
into account in making such determination include (i) the inability of the Trust
or any successor series or class to maintain its assets at an appropriate size;
(ii) changes in laws or regulations governing the Trust, series or class or
affecting assets of the type in which it invests; or (iii) economic developments
or trends having a significant adverse impact on their business or operations.
The Declaration of Trust authorizes the Trustees without shareholder
approval to cause the Trust, or any series thereof, to merge or consolidate with
any corporation, association, trust or other organization or sell or exchange
all or substantially all of the property belonging to the Trust or any series
thereof. In addition, the Trustees, without shareholder approval, may adopt a
master-feeder structure by investing all or a portion of the assets of a series
of the Trust in the securities of another open-end investment company.
The Declaration of Trust permits the Trustees to amend the Declaration of
Trust without a shareholder vote. However, shareholders of the Trust have the
right to vote on any amendment (i) that would affect the voting rights of
shareholders; (ii) that is required by law to be approved by shareholders; (iii)
that would amend the voting provisions of the Declaration of Trust; or (iv) that
the Trustees determine to submit to shareholders.
The Trustees may appoint separate Trustees with respect to one or more
series or classes of the Trust's shares (the "Series Trustees"). Series Trustees
may, but are not required to, serve as Trustees of the Trust or any other series
or class of the Trust. The Series Trustees have, to the exclusion of any other
Trustees of the Delaware Trust, all the powers and authorities of Trustees under
the Trust Instrument with respect to any other series or class.
As of the date of this Statement of Additional Information, all of the
outstanding shares of the Trust were owned by The Goldman Sachs Group, L.P., in
connection with the Trust's initial capitalization.
SHAREHOLDER AND TRUSTEE LIABILITY
- ---------------------------------
Under Delaware law, the shareholders of the Funds are not generally subject
to liability for the debts or obligations of the Trust. Similarly, Delaware law
provides that a series of the Trust will not be liable for the debts or
obligations of any other series of the Trust. However, no similar statutory or
other authority limiting business trust shareholder liability exists in other
states. As a result, to the extent that a Delaware business trust or a
shareholder is subject to the jurisdiction of courts of such other states, the
courts may not apply Delaware law and may thereby subject the Delaware business
trust shareholders to liability. To guard against this risk, the Declaration of
Trust
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contains an express disclaimer of shareholder liability for acts or obligations
of a Fund. Notice of such disclaimer will normally be given in each agreement,
obligation or instrument entered into or executed by a series or the Trustees.
The Declaration of Trust provides for indemnification by the relevant Fund for
all loss suffered by a shareholder as a result of an obligation of the series.
The Declaration of Trust also provides that a series shall, upon request, assume
the defense of any claim made against any shareholder for any act or obligation
of the series and satisfy any judgment thereon. In view of the above, the risk
of personal liability of shareholders of a Delaware business trust is remote.
In addition to the requirements under Delaware law, the Declaration of
Trust provides that shareholders of a series may bring a derivative action on
behalf of the series only if the following conditions are met: (a) shareholders
eligible to bring such derivative action under Delaware law who hold at least
10% of the outstanding shares of the series, or 10% of the outstanding shares of
the class to which such action relates, shall join in the request for the
Trustees to commence such action; and (b) the Trustees must be afforded a
reasonable amount of time to consider such shareholder request and to
investigate the basis and to employ other advisers in considering the merits of
the request and shall require an undertaking by the shareholders making such
request to reimburse the Fund for the expense of any such advisers in the event
that the Trustees determine not to bring such action.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against liability to which he or she
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
or her office.
TAXATION
Shares of the Funds are offered only to Separate Accounts that fund
variable annuity contracts and variable insurance policies issued by
Participating Insurance Companies. See the Prospectus for such contracts for a
discussion of the special taxation of insurance companies with respect to the
Separate Accounts, the variable annuity contracts, variable insurance policies,
and the holders thereof.
The following is a summary of the principal U.S. federal income, and
certain state and local, tax considerations regarding the purchase, ownership
and disposition of shares in each Fund of the Trust. This summary does not
address special tax rules
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applicable to certain classes of investors, such as tax-exempt entities,
insurance companies and financial institutions. Each prospective shareholder is
urged to consult his own tax adviser with respect to the specific federal,
state, local and foreign tax consequences of investing in each Fund. The summary
is based on the laws in effect on the date of this Additional Statement, which
are subject to change.
GENERAL
- -------
The following is only a summary of certain additional tax considerations
generally affecting each Fund that are not described in the Prospectus. The
discussions below and in the Prospectus are not intended as substitutes for
careful tax planning.
The holders of variable life insurance policies or annuity contracts should
not be subject to tax with respect to distributions made on, or redemptions of,
Portfolio shares, assuming that the variable life insurance policies and annuity
contracts qualify under the Code, as life insurance or annuities, respectively,
and that the shareholders are treated as owners of the Fund shares. Thus, this
summary does not describe the tax consequences to a holder of a life insurance
policy or annuity contract as a result of the ownership of such policies or
contracts. Policy or contract holders must consult the prospectuses of their
respective policies or contracts for information concerning the federal income
tax consequences of owning such policies or contracts. This summary also does
not describe the tax consequences applicable to the owners of the Portfolio
shares because the Portfolio shares will be sold only to insurance companies.
Thus, purchasers of Portfolio shares must consult their own tax advisers
regarding the federal, state, and local tax consequences of owning Portfolio
shares.
Each Fund is a separate taxable entity. Each of the Funds intends to
qualify for each taxable year as a regulated investment company under Subchapter
M of the Internal Revenue Code, as amended (the "Code").
Qualification as a regulated investment company under the Code requires,
among other things, that (a) a Fund derive at least 90% of its gross income for
its taxable year from dividends, interest, payments with respect to securities
loans and gains from the sale or other disposition of stocks or securities or
foreign currencies, or other income (including but not limited to gains from
options, futures, and forward contracts) derived with respect to its business of
investing in such stock, securities or currencies (the "90% gross income test");
and (b) such Fund diversify its holdings so that, at the close of each quarter
of its taxable year, (i) at least 50% of the market value of such
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Fund's total (gross) assets is comprised of cash, cash items, U.S. Government
securities, securities of other regulated investment companies and other
securities limited in respect of any one issuer to an amount not greater in
value than 5% of the value of such Fund's total assets and to not more than 10%
of the outstanding voting securities of such issuer, and (ii) not more than 25%
of the value of its total (gross) assets is invested in the securities of any
one issuer (other than U.S. Government securities and securities of other
regulated investment companies) or two or more issuers controlled by the Fund
and engaged in the same, similar or related trades or businesses. For purposes
of the 90% gross income test, income that a Fund earns from equity interests in
certain entities that are not treated as corporations (e.g., partnerships or
trusts) for U.S. tax purposes will generally have the same character for such
Fund as in the hands of such an entity; consequently, a Fund may be required to
limit its equity investments in such entities that earn fee income, rental
income, or other nonqualifying income. In addition, future Treasury regulations
could provide that qualifying income under the 90% gross income test will not
include gains from foreign currency transactions that are not directly related
to a Fund's principal business of investing in stock or securities or options
and futures with respect to stock or securities. Using foreign currency
positions or entering into foreign currency options, futures and forward or swap
contracts for purposes other than hedging currency risk with respect to
securities in a Fund's portfolio or anticipated to be acquired may not qualify
as "directly-related" under these tests.
If a Fund complies with such provisions, then in any taxable year in which
such Fund distributes, in compliance with the Code's timing and other
requirements, at least 90% of its "investment company taxable income" (which
includes dividends, taxable interest, taxable accrued original issue discount
and market discount income, income from securities lending, any net short-term
capital gain in excess of net long-term capital loss, certain net realized
foreign exchange gains and any other taxable income other than "net capital
gain," as defined below, and is reduced by deductible expenses), and at least
90% of the excess of its gross tax-exempt interest income (if any) over certain
disallowed deductions, such Fund (but not its shareholders) will be relieved of
federal income tax on any income of the Fund, including long-term capital gains,
distributed to shareholders. However, if a Fund retains any investment company
taxable income or "net capital gain" (the excess of net long-term capital gain
over net short-term capital loss), it will be subject to a tax at regular
corporate rates on the amount retained. If the Fund retains any net capital
gain, the Fund may designate the retained amount as undistributed capital gains
in a notice to its shareholders who, if subject to U.S. federal income tax on
long-term capital gains, (i) will be required to include in income
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for federal incometax purposes, as long-term capital gain, their shares of such
undistributed amount, and (ii) will be entitled to credit their proportionate
shares of the tax paid by the Fund against their U.S. federal income tax
liabilities, if any, and to claim refunds to the extent the credit exceeds such
liabilities. For U.S. federal income tax purposes, the tax basis of shares owned
by a shareholder of the Fund will be increased by an amount equal to a
percentage of the amount of undistributed net capital gain included in the
shareholder's gross income. Each Fund intends to distribute for each taxable
year to its shareholders all or substantially all of its investment company
taxable income, net capital gain and any net tax-exempt interest. Exchange
control or other foreign laws, regulations or practices may restrict
repatriation of investment income, capital or the proceeds of securities sales
by foreign investors such as the International Equity or Global Income Funds and
may therefore make it more difficult for such a Fund to satisfy the distribution
requirements described above, as well as the excise tax distribution
requirements described below. However, each Fund generally expects to be able to
obtain sufficient cash to satisfy such requirements from new investors, the sale
of securities or other sources. If for any taxable year a Fund does not qualify
as a regulated investment company, it will be taxed on all of its investment
company taxable income and net capital gain at corporate rates, and its
distributions to shareholders will be taxable as ordinary dividends to the
extent of its current and accumulated earnings and profits.
Each Fund intends to comply with the diversification requirements imposed
by Section 817(h) of the Code and the regulations thereunder. Under Code
Section 817(h), a variable life insurance or annuity contract will not be
treated as a life insurance policy or annuity contract, respectively, under the
Code, unless the segregated asset account upon which such contract
or policy is based is "adequately diversified." A segregated asset account will
be adequately diversified if it satisfies one of two alternative tests set forth
in the Treasury Regulations. Specifically, the Treasury Regulations provide
that, except as permitted by the "safe harbor" discussed below, as of the end of
each calendar quarter (or within 30 days thereafter) no more than 55% of the
segregated asset account's total assets may be represented by any one
investment, no more than 70% by any two investments, no more than 80% by any
three investments and no more than 90% by any four investments. For this
purpose, all securities of the same issuer are considered a single investment,
and each U.S. Government agency and instrumentality is considered a separate
issuer. As a safe harbor, a segregated asset account will be treated as being
adequately diversified if the diversification requirements under Subchapter M
are satisfied and no more than 55% of the value of the account's total assets
are cash and cash items, U.S. Government securities and securities of
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other regulated investment companies. In addition, a segregated asset account
with respect to a variable life insurance contract is treated as adequately
diversified to the extent of its investment in securities issued by the United
States Treasury.
For purposes of these alternative diversification tests, a segregated asset
account investing in shares of a regulated investment company will be entitled
to "look through" the regulated investment company to its pro rata portion of
the regulated investment company's assets, provided that the shares of such
regulated investment company are held only by insurance companies and certain
fund managers (a "Closed Fund").
If the segregated asset account upon which a variable contract is based is
not "adequately diversified" under the foregoing rules for each calendar
quarter, then (a) the variable contract is not treated as a life insurance
contract or annuity contract under the Code for all subsequent periods during
which such account is not "adequately diversified" and (b) the holders of such
contract must include as ordinary income the "income on the contract" for each
taxable year. Further, the income on a life insurance contract for all prior
taxable years is treated as received or accrued during the taxable year of the
policyholder in which the contract ceases to meet the definition of a "life
insurance contract" under the Code. The "income on the contract" is, generally,
the excess of (i) the sum of the increase in the net surrender value of the
contract during the taxable year and the cost of the life insurance protection
provided under the contract during the year, over (ii) the premiums paid under
the contract during the taxable year. In addition, if a Portfolio
does not constitute a Closed Fund, the holders of the contracts and annuities
which invest in the Portfolio through a segregated asset account may be treated
as owners of Portfolio shares and may be subject to tax on distributions made by
the Portfolio.
In order to avoid a 4% federal excise tax, each Fund must distribute (or be
deemed to have distributed) by December 31 of each calendar year at least 98% of
its taxable ordinary income for such year, at least 98% of the excess of its
capital gains over its capital losses (generally computed on the basis of the
one-year period ending on October 31 of such year), and all taxable ordinary
income and the excess of capital gains over capital losses for the previous year
that were not distributed for such year and on which the Fund paid no federal
income tax. For federal income tax purposes, dividends declared by a Fund in
October, November or December to shareholders of record on a specified date in
such a month and paid during January of the following year are taxable to such
shareholders as if received on December 31 of the year declared. The Funds
anticipate that they will generally make timely distributions of income and
capital gains in compliance with these requirements so that they will
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generally not be required to pay the excise tax. For federal income tax
purposes, each Fund is permitted to carry forward a net capital loss in any year
to offset its own capital gains, if any, during the eight years following the
year of the loss.
Gains and losses on the sale, lapse, or other termination of options and
futures contracts, options thereon and certain forward contracts (except certain
foreign currency options, forward contracts and futures contracts) will
generally be treated as capital gains and losses. Certain of the futures
contracts, forward contracts and options held by a Fund will be required to be
"marked-to-market" for federal income tax purposes, that is, treated as having
been sold at their fair market value on the last day of the Fund's taxable year.
These provisions may require a Fund to recognize income or gains without a
concurrent receipt of cash. Any gain or loss recognized on actual or deemed
sales of these futures contracts, forward contracts, or options will (except for
certain foreign currency options, forward contracts, and futures contracts) be
treated as 60% long-term capital gain or loss and 40% short-term capital gain or
loss. As a result of certain hedging transactions entered into by a Fund, the
Fund may be required to defer the recognition of losses on futures contracts,
forward contracts, and options or underlying securities or foreign currencies to
the extent of any unrecognized gains on related positions held by such Fund and
the characterization of gains or losses as long-term or short-term may be
changed. The tax provisions described above applicable to options, futures and
forward contracts may affect the amount, timing and character of a Fund's
distributions to shareholders. Moreover, application of certain requirements for
qualification as a regulated investment company and/or these tax rules to
certain investment practices, such as dollar rolls, or certain derivatives such
as interest rate swaps, floors, caps and collars and currency, mortgage or index
swaps may be unclear in some respects, and a Fund may therefore be required to
limit its participation in such transactions. Certain tax elections may be
available to a Fund to mitigate some of the unfavorable consequences described
in this paragraph.
Section 988 of the Code contains special tax rules applicable to certain
foreign currency transactions and instruments that may affect the amount, timing
and character of income, gain or loss recognized by a Fund. Under these rules,
foreign exchange gain or loss realized with respect to foreign currencies and
certain futures and options thereon, foreign currency-denominated debt
instruments, foreign currency forward contracts, and foreign currency-
denominated payables and receivables will generally be treated as ordinary
income or loss, although in some cases elections may be available that would
alter this treatment. If a net foreign exchange loss treated as ordinary loss
under Section 988 of the Code were to exceed a Fund's investment company taxable
income (computed without regard to such loss) for a taxable year,
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the resulting loss would not be deductible by the Fund or its shareholders in
future years. Net loss, if any, from certain foregoing currency transactions or
instruments could exceed net investment income otherwise calculated for
accounting purposes with the result being either no dividends being paid or a
portion of a Fund's dividends being treated as a return of capital for tax
purposes, nontaxable to the extent of a shareholder's tax basis in his shares
and, once such basis is exhausted, generally giving rise to capital gains.
A Fund's investment in zero coupon securities, deferred interest
securities, certain structured securities or other securities bearing original
issue discount or, if a Fund elects to include market discount in income
currently, market discount, as well as any "mark to market" gain from certain
options, futures or forward contracts, as described above, will generally cause
it to realize income or gain prior to the receipt of cash payments with respect
to these securities or contracts. In order to obtain cash to enable it to
distribute this income or gain, maintain its qualification as a regulated
investment company and avoid federal income or excise taxes, the Fund may be
required to liquidate portfolio securities that it might otherwise have
continued to hold.
Each Fund (other than CORE U.S. Equity, CORE Large Cap Growth and CORE
Small Cap Equity Funds) anticipates that it will be subject to foreign taxes on
its income (possibly including, in some cases, capital gains) from foreign
securities. Tax conventions between certain countries and the U.S. may reduce
or eliminate such taxes in some cases. If, as may occur for International
Equity and Global Income Funds, more than 50% of a Fund's total assets at the
close of any taxable year consists of stock or securities of foreign
corporations, the Fund may file an election with the Internal Revenue Service
pursuant to which shareholders of the Fund would be required to (i) include in
ordinary gross income (in addition to taxable dividends actually received) their
pro rata shares of foreign income taxes paid by the Fund that are treated as
income taxes under U.S. tax regulations (which excludes, for example, stamp
taxes, securities transaction taxes, and similar taxes) even though not actually
received by such shareholders, and (ii) treat such respective pro rata portions
as foreign income taxes paid by them.
If the International Equity and Global Income Funds make this election,
their respective shareholders may then deduct such pro rata portions of
qualified foreign taxes in computing their taxable incomes, or, alternatively,
use them as foreign tax credits, subject to applicable limitations, against
their U.S. federal income taxes. Shareholders who do not itemize deductions for
federal income tax purposes will not, however, be able to deduct their pro rata
portion of foreign taxes paid by a Fund,
B-96
<PAGE>
although such shareholders will be required to include their shares of such
taxes in gross income if the election is made.
If a shareholder chooses to take credit for the foreign taxes deemed paid
by such shareholder as a result of any such election by International Equity or
Global Income Funds, the amount of the credit that may be claimed in any year
may not exceed the same proportion of the U.S. tax against which such credit is
taken which the shareholder's taxable income from foreign sources (but not in
excess of the shareholder's entire taxable income) bears to his entire taxable
income. For this purpose, distributions from long-term and short-term capital
gains or foreign currency gains by a Fund will generally not be treated as
income from foreign sources. This foreign tax credit limitation may also be
applied separately to certain specific categories of foreign-source income and
the related foreign taxes. As a result of these rules, which have different
effects depending upon each shareholder's particular tax situation, certain
shareholders of International Equity and Global Income Funds may not be able to
claim a credit for the full amount of their proportionate share of the foreign
taxes paid by such Fund even if the election is made by such a Fund.
Shareholders who are not liable for U.S. federal income taxes, including
tax-exempt shareholders, will ordinarily not benefit from this election. Each
year, if any, that the International Equity or Global Income Fund files the
election described above, its shareholders will be notified of the amount of (i)
each shareholder's pro rata share of qualified foreign taxes paid by a Fund and
(ii) the portion of Fund dividends which represents income from each foreign
country. The other Funds will not be entitled to elect to pass foreign taxes
and associated credits or deductions through to their shareholders because they
will not satisfy the 50% requirement described above. If a Fund cannot or does
not make this election, it may deduct such taxes in computing the amount it is
required to distribute.
If a Fund acquires stock (including, under proposed regulations, an option
to acquire stock such as is inherent in a convertible bond) in certain foreign
corporations that receive at least 75% of their annual gross income from passive
sources (such as interest, dividends, rents, royalties or capital gain) or hold
at least 50% of their assets in investments producing such passive income
("passive foreign investment companies"), the Fund could be subject to federal
income tax and additional interest charges on "excess distributions" received
from such companies or gain from the sale of stock in such companies, even if
all income or gain actually received by the Fund is timely distributed to its
shareholders. The Fund would not be able to pass through to its shareholders
any credit or deduction for such a tax. In some cases, elections may be
available that would ameliorate these
B-97
<PAGE>
adverse tax consequences, but such elections would require the Fund to include
certain amounts as income or gain (subject to the distribution requirements
described above) without a concurrent receipt of cash. Each Fund may limit
and/or manage its holdings in passive foreign investment companies to minimize
its tax liability or maximize its return from these investments.
Investments in lower-rated securities may present special tax issues for a
Fund to the extent actual or anticipated defaults may be more likely with
respect to such securities. Tax rules are not entirely clear about issues such
as when a Fund may cease to accrue interest, original issue discount, or market
discount; when and to what extent deductions may be taken for bad debts or
worthless securities; how payments received on obligations in default should be
allocated between principal and income; and whether exchanges of debt
obligations in a workout context are taxable. These and other issues will be
addressed by a Fund, in the event it invests in such securities, in order to
seek to eliminate or minimize any adverse tax consequences.
TAXABLE U.S. SHAREHOLDERS - DISTRIBUTIONS
- -----------------------------------------
For U.S. federal income tax purposes, distributions by a Fund generally
will be taxable to shareholders who are subject to tax. Shareholders receiving a
distribution in the form of newly issued shares will be treated for U.S. federal
income tax purposes as receiving a distribution in an amount equal to the amount
of cash they would have received had they elected to receive cash and will have
a cost basis in each share received equal to such amount divided by the number
of shares received.
Distributions from investment company taxable income for the year will be
taxable as ordinary income. Distributions designated as derived from a Fund's
dividend income, if any, that would be eligible for the dividends received
deduction if such Fund were not a regulated investment company may be eligible,
for the dividends received deduction for corporate shareholders. The dividends-
received deduction, if available, is reduced to the extent the shares with
respect to which the dividends are received are treated as debt-financed under
federal income tax law and is eliminated if the shares are deemed to have been
held for less than a minimum period, generally 46 days. Because eligible
dividends are limited to those a Fund receives from U.S. domestic corporations,
it is unlikely that a substantial portion of the distributions made by
International Equity and Global Income Funds will qualify for the dividends-
received deduction. The entire dividend, including the deducted amount, is
considered in determining the excess, if any, of a corporate shareholder's
adjusted current earnings over its alternative minimum taxable income, which may
increase its liability for the federal alternative minimum tax, and the dividend
may, if it is treated as
B-98
<PAGE>
an "extraordinary dividend" under the Code, reduce such shareholder's tax basis
in its shares of a Fund. Capital gain dividends (i.e., dividends from net
capital gain) if designated as such in a written notice to shareholders mailed
not later than 60 days after a Fund's taxable year closes, will be taxed to
shareholders as long-term capital gain regardless of how long shares have been
held by shareholders, but are not eligible for the dividends received deduction
for corporations. Distributions, if any, that are in excess of a Fund's current
and accumulated earnings and profits will first reduce a shareholder's tax basis
in his shares and, after such basis is reduced to zero, will generally
constitute capital gains to a shareholder who holds his shares as capital
assets.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions, and certain prohibited transactions is accorded to accounts
maintained as qualified retirement plans. Shareholders should consult their tax
advisers for more information.
TAXABLE U.S. SHAREHOLDERS - SALE OF SHARES
- ------------------------------------------
When a shareholder's shares are sold, redeemed or otherwise disposed of in
a transaction that is treated as a sale for tax purposes, the shareholder will
generally recognize gain or loss equal to the difference between the
shareholder's adjusted tax basis in the shares and the cash, or fair market
value of any property, received. Assuming the shareholder holds the shares as a
capital asset at the time of such sale, such gain or loss should be capital in
character, and will be long-term or short-term depending on the shareholder's
tax holding period for the shares subject to the rules described below.
Shareholders should consult their own tax advisers with reference to their
particular circumstances to determine whether a redemption (including an
exchange) or other disposition of Fund shares is properly treated as a sale for
tax purposes, as is assumed in this discussion. Any loss realized on a sale or
redemption of shares of a Fund may be deferred under "wash sale" rules to the
extent the shares disposed of are replaced with other shares of the same Fund
within a period of 61 days beginning 30 days before and ending 30 days after the
shares are disposed of, such as pursuant to a dividend reinvestment in shares of
such Fund. If deferred, the loss will be reflected in an adjustment to the
basis of the shares acquired.
Each Fund may be required to withhold, as "backup withholding," federal
income tax at a rate of 31% from dividends (including capital gain dividends)
and share redemption and exchange proceeds to individuals and other non-exempt
shareholders who fail to furnish such Fund with a correct taxpayer
identification number ("TIN") certified under penalties of
B-99
<PAGE>
perjury, or if the Internal Revenue Service or a broker notifies the Fund that
the payee is subject to backup withholding as a result of failing to properly
report interest or dividend income to the Internal Revenue Service or that the
TIN furnished by the payee to the Fund is incorrect, or if (when required to do
so) the payee fails to certify under penalties of perjury that it is not subject
to backup withholding. A Fund may refuse to accept an application that does not
contain any required TIN or certification that the TIN provided is correct. If
the backup withholding provisions are applicable, any such dividends and
proceeds, whether paid in cash or reinvested in additional shares, will be
reduced by the amounts required to be withheld. Any amounts withheld may be
credited against a shareholder's U.S. federal income tax liability.
STATE AND LOCAL
- ---------------
Each Fund may be subject to state or local taxes in jurisdictions in which
such Fund may be deemed to be doing business. In addition, in those states or
localities which have income tax laws, the treatment of such Fund and its
shareholders under such laws may differ from their treatment under federal
income tax laws, and investment in such Fund may have tax consequences for
shareholders different from those of a direct investment in such Fund's
portfolio securities. Shareholders should consult their own tax advisers
concerning these matters.
OTHER INFORMATION
Shares of the Funds are offered and sold on a continuous basis by the
Trust's Distributor, Goldman Sachs, acting as agent. As described in the
Prospectus, shares of the Funds are sold and redeemed at their net asset value
as next determined after receipt of the purchase or redemption order. Each
purchase is confirmed to the Separate Account in a written statement of the
number of shares purchased and the aggregate number of shares currently held.
Each Fund will redeem shares solely in cash up to the lesser of $250,000 or
1% of the net asset value of the Fund during any 90-day period for any one
shareholder. Each Fund, however, reserves the right to pay redemptions
exceeding $250,000 or 1% of the net asset value of the Fund at the time of
redemption by a distribution in kind of securities (instead of cash) from such
Fund. The securities distributed in kind would be readily marketable and would
be valued for this purpose using the same method employed in calculating the
Fund's net asset value per share. See "Net Asset Value." If a shareholder
receives redemption proceeds in kind, the shareholder should expect to
B-100
<PAGE>
incur transaction costs upon the disposition of the securities received in the
redemption.
The right of a shareholder to redeem shares and the date of payment by each
Fund may be suspended for more than seven days for any period during which the
New York Stock Exchange is closed, other than the customary weekends or
holidays, or when trading on such Exchange is restricted as determined by the
SEC; or during any emergency, as determined by the SEC, as a result of which it
is not reasonably practicable for such Fund to dispose of securities owned by it
or fairly to determine the value of its net assets; or for such other period as
the SEC may by order permit for the protection of shareholders of such Fund.
(The Trust may also suspend or postpone the recordation of the transfer of
shares upon the occurrence of any of the foregoing conditions.)
The Prospectus and this Additional Statement do not contain all the
information included in the Registration Statement filed with the SEC under the
1933 Act with respect to the securities offered by the Prospectus. Certain
portions of the Registration Statement have been omitted from the Prospectus and
this Additional Statement pursuant to the rules and regulations of the SEC. The
Registration Statement including the exhibits filed therewith may be examined at
the office of the SEC in Washington, D.C.
Statements contained in the Prospectus or in this Additional Statement as
to the contents of any contract or other document referred to are not
necessarily complete, and, in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement of which the Prospectus and this Additional Statement form a part,
each such statement being qualified in all respects by such reference.
B-101
<PAGE>
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholder and the Board of Trustees of
Goldman Sachs Variable Insurance Trust:
We have audited the accompanying Statements of Assets and Liabilities of Goldman
Sachs Variable Insurance Trust (comprising, respectively, Growth and Income
Fund, CORE U.S. Equity Fund, CORE Large Cap Growth Fund, CORE Small Cap Equity
Fund, Capital Growth Fund, Mid Cap Equity Fund, International Equity Fund,
Global Income Fund and High Yield Fund) (a Delaware business trust) as of
December 12, 1997. This financial statement is the responsibility of the Trust's
management. Our responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the Statements of Assets and Liabilities referred to above
present fairly, in all material respects, the financial position of Goldman
Sachs Variable Insurance Trust as of December 12, 1997, in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Boston, Massachusetts
December 15, 1997
B-102
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
Statement of Assets and Liabilities
December 12, 1997
<TABLE>
<CAPTION>
Growth and CORE U.S. CORE Large CORE Small Capital
Income Fund Equity Cap Growth Cap Equity Growth Fund
----------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS:
Cash $100,000 $-- $-- $-- $--
Deferred organization expenses 11,111 11,111 11,111 11,111 11,111
----------- --------- ---------- ---------- -----------
Total Assets 111,111 11,111 11,111 11,111 11,111
----------- --------- ---------- ---------- -----------
LIABILITIES:
Accrued organization expenses 11,111 11,111 11,111 11,111 11,111
----------- --------- ---------- ---------- -----------
Total Liabilities 11,111 11,111 11,111 11,111 11,111
----------- --------- ---------- ---------- -----------
NET ASSETS:
Paid-in capital $100,000 $-- $-- $-- $--
----------- --------- ---------- ---------- -----------
Net Assets $100,000 $-- $-- $-- $--
=========== ========= ========== ========== ===========
NET ASSET VALUE AND REDEMPTION
PRICE PER SHARE $10.00 $-- $-- $-- $--
=========== ========= ========== ========== ===========
SHARES OF BENEFICIAL INTEREST OUTSTANDING 10,000 -- -- -- --
(Unlimited shares authorized, no par value) =========== ========= ========== ========== ===========
<CAPTION>
Mid Cap International Global Income High Yield
Equity Fund Equity Fund Fund Fund
------------ ------------- ------------- -----------
<S> <C> <C> <C> <C>
ASSETS:
Cash $-- $-- $-- $--
Deferred organization expenses 11,111 11,111 11,111 11,111
------------ ------------- ------------- -----------
Total Assets 11,111 11,111 11,111 11,111
LIABILITIES:
Accrued organization expenses 11,111 11,111 11,111 11,111
------------ ------------- ------------- -----------
Total Liabilities 11,111 11,111 11,111 11,111
------------ ------------- ------------- -----------
NET ASSETS:
Paid-in capital $-- $-- $-- $--
------------ ------------- ------------- -----------
Net Assets $-- $-- $-- $--
============ ============= ============= ===========
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE $-- $-- $-- $--
============ ============= ============= ===========
SHARES OF BENEFICIAL INTEREST OUTSTANDING -- -- -- --
============ ============= ============= ===========
(Unlimited shares authorized, no par value)
</TABLE>
B-103
<PAGE>
THE GOLDMAN SACHS VARIABLE INSURANCE TRUST
Notes to Statement of Assets and Liabilities
December 12, 1997
NOTE 1. ORGANIZATION
The Goldman Sachs Variable Insurance Trust (the "Trust") was organized on
September 16, 1997 as a Delaware business trust and is registered under the
Investment Company Act of 1940, as amended, as an open-end management investment
company. The Trust consists of nine portfolios (the "Funds"): Growth and Income
Fund, CORE U.S. Equity Fund, CORE Large Cap Growth Fund, CORE Small Cap Equity
Fund, Capital Growth Fund, Mid Cap Equity Fund, International Equity Fund,
Global Income Fund and High Yield Fund. The Global Income Fund is a non-
diversified Fund; all other Funds are diversified.
The only transaction of the Funds has been the initial sale on December 12, 1997
of 10,000 shares of the Growth and Income Fund to The Goldman Sachs Group, L.P.
Shares of each of the Funds will be offered to the separate accounts of
unaffiliated insurance companies.
The preparation of this financial statement requires management to make
estimates and assumptions that may affect the reported amounts.
NOTE 2. ORGANIZATIONAL COSTS
The Trust has incurred organizational expenses in connection with the
start-up and initial registration of the Funds. The total estimated
organizational costs are $100,000 for the Trust. Goldman, Sachs & Co. (the
"distributor") will seek reimbursement from the remaining Funds upon
commencement of operations. Organizational costs will be amortized over 60
months on a straight-line basis beginning with the commencement of each of the
Fund's operations. If any or all of the shares held by The Goldman Sachs Group,
L.P. representing initial capital of the Funds are redeemed during the
amortization period, the redemption proceeds will be reduced by the pro rata
portion of the unamortized organizational cost balance.
NOTE 3. FEDERAL TAXES
The Trust intends to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute each year
substantially all of the investment company taxable and tax-exempt income to the
shareholders of each of the Funds. Accordingly, no federal tax provisions are
required.
NOTE 4. AGREEMENTS
The Funds have entered into a Management Agreement (the "Agreement") with
Goldman Sachs Asset Management ("GSAM"), a separate operating division of
Goldman, Sachs & Co. ("Goldman Sachs") and Goldman Sachs Asset Management
International ("GSAMI"). GSAM serves as the investment advisor to the Growth
and Income, CORE U.S. Equity, CORE Large Cap Growth, CORE Small Cap Equity,
Capital Growth, Mid Cap Equity and High Yield Funds. GSAMI serves as investment
advisor to the International Equity and Global Income Funds. Under the
Agreement, GSAM and GSAMI, subject to the general supervision of the Trust's
Board of Trustees, manage the Funds' portfolios. As compensation for the
services rendered under the Agreement, the assumption of the expenses related
thereto and administering the Funds' business affairs, including providing
facilities, GSAM and GSAMI are entitled to a fee, computed daily and payable
monthly, at an annual rate equal to:
Growth and Income Fund .75%
CORE U.S. Equity Fund .70%
CORE Large Cap Growth Fund .70%
CORE Small Cap Equity Fund .75%
Capital Growth Fund .75%
Mid Cap Equity Fund .80%
International Equity Fund 1.00%
Global Income Fund .90%
High Yield Fund .70%
B-104
<PAGE>
Goldman Sachs has voluntarily agreed to reduce or limit certain "Other Expenses"
of the Funds (excluding management, litigation and indemnification costs, taxes,
interest, brokerage commissions and extraordinary expenses) until further notice
to the extent such expenses exceed the following annual rates of each Fund's
corresponding average daily net assets:
Growth and Income Fund .15%
CORE U.S. Equity Fund .10%
CORE Large Cap Growth Fund .10%
CORE Small Cap Equity Fund .15%
Capital Growth Fund .15%
Mid Cap Equity Fund .15%
International Equity Fund .25%
Global Income Fund .15%
High Yield Fund .15%
Goldman, Sachs & Co. serves as Distributor of shares of the Funds pursuant to a
Distribution Agreement at no cost to the Funds. Goldman Sachs also serves as
transfer agent of the Funds for a fee.
B-105
<PAGE>
APPENDIX A/1/
DESCRIPTION OF BOND RATINGS, INCLUDING MUNICIPAL BONDS
MOODY'S INVESTORS SERVICE, INC.
Bond Ratings
- ------------
AAA: Bonds which are 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." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
AA: Bonds which are 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. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
BAA: Bonds which are rated Baa are considered as 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.
/1/ The rating systems described herein are believed to be the most recent
ratings systems available from Moody's Investors Service, Inc. and Standard &
Poor's Ratings Group at the date of this Additional Statement for the securities
listed. Ratings are generally given to securities at the time of issuance. While
the rating agencies may from time to time revise such ratings, they undertake no
obligation to do so.
A-1
<PAGE>
BA: Bonds which are 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 characterizes bonds in this class.
B: Bonds which are 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 which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
CA: Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
UNRATED: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies that
are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issuer was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
CON. (---): Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are
A-2
<PAGE>
rated conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
(P)...: When applied to forward delivery bonds, indicates that the
rating is provisional pending delivery of the bonds. The rating may be revised
prior to delivery if changes occur in the legal documents or the underlying
credit quality of the bonds.
NOTE: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designed by the symbols
Aa1, A1, Baa1 and B1.
Description of Ratings of Commercial Paper
- ------------------------------------------
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually senior debt obligations not having an original maturity in
excess of one year. Moody's commercial paper rating categories are as follows:
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations.
Prime-1 repayment ability will often be evidenced by many of the following
characteristics:
- Leading market positions in well established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance on
debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and
high internal cash generation.
- Well established access to a range of financial markets and
assured sources of alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of short-term debt obligations. This will normally be
evidenced by many of the
A-3
<PAGE>
characteristics cited above but to a lesser degree. Earnings trends and
coverage ratios, while sound may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The
effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require
relatively high financial leverage. Adequate alternate liquidity is
maintained.
NOT PRIME: Issuers do not fall within any of the Prime rating categories.
Description of Ratings of State and Municipal Notes
- ---------------------------------------------------
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade ("MIG") and variable rate demand obligations
are designated Variable Moody's Investment Grade ("VMIG"). Such ratings
recognize the differences between short-term credit risk and long-term risk.
Factors affecting the liquidity of the borrower and short-term cyclical elements
are critical in short-term ratings, while other factors of major importance in
bond risk, long-term secular trends for example, may be less important over the
short run. Symbols used will be as follows:
MIG-1/VMIG-1: This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad based access to the market for refinancing.
MIG-2/VMIG-2: This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
MIG-3/VMIG-3: This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
MIG-4/VMIG-4: This designation denotes adequate quality. Protection
commonly regarded as required of an investment security
A-4
<PAGE>
is present and although not distinctly or predominantly speculative, there is
specific risk.
SG: This designation denotes speculative quality. Debt instruments in
this category lack margins of protection.
STANDARD & POOR'S RATINGS GROUP
Bond Ratings
- ------------
AAA: Bonds and debt rated AAA have the highest rating assigned by Standard
& Poor's. Capacity to pay interest and repay principal is extremely strong.
AA: Bonds and debt rated AA have a very strong capacity to pay interest
and repay principal and differ from the higher rated issues only in small
degree.
A: Bonds and debt rated A have a very 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 and debt rated BBB are regarded as having an 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 in higher rated categories.
BB, B, CCC, CC, C: Bonds and debt rated BB, B, CCC, CC and C are regarded,
on balance, as predominately speculative with respect to capacity to pay
interest and repay principal. BB indicates the least degree of speculation and C
the highest. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties of major risk
exposures to adverse conditions.
BB: Bonds and debt rated BB have less near-term vulnerability to default
than other speculative issues. However, such securities face major ongoing
uncertainties or exposure to adverse business, financial, or economic conditions
which could lead to inadequate capacity to meet timely interest and principal
payments. The BB rating category is also used for bonds that are subordinated
to senior debt assigned an actual or implied BBB- rating.
B: Bonds and debt rated B have a greater vulnerability to default but
currently have the capacity to meet interest payments
A-5
<PAGE>
and principal repayments. Adverse business, financial, or economic conditions
will likely impair capacity or willingness to pay interest and repay principal.
The B rating category is also used for bonds that are subordinated to
senior debt assigned an actual or implied BB or BB- rating.
CCC: Bonds and debt rated CCC have currently identifiable vulnerability to
default, and are dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In
the event of adverse business, financial, or economic conditions, such
securities are not likely to have the capacity to pay interest and repay
principal.
The CCC rating category is also used for bonds that are subordinated to
senior debt assigned an actual or implied B or B- rating.
CC: The rating CC is typically applied to bonds and debt that are
subordinated to senior debt assigned an actual or implied CCC rating.
C: The rating C is typically applied to bonds and debt that are
subordinated to senior debt assigned an actual or implied CCC- debt rating. The
C rating may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
C1: The rating C1 is reserved for income bonds on which no interest is
being paid.
D: Bonds and debt rated D are in default and payment of interest and/or
repayment of principal is in arrears. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The D rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
R: This rating is attached to highlight derivative, hybrid, and certain
other obligations that S & P believes may experience high volatility or high
variability in expected returns due to non-credit risks. Examples of such
obligations are:
A-6
<PAGE>
securities whose principal or interest return is indexed to equities,
commodities, or currencies; certain swaps and options; and interest-only and
principal-only mortgage securities. The absence of an "r" symbol should not be
taken as an indication that an obligation will exhibit no volatility or
variability in total return.
N.R.: Not rated.
Notes: Bonds which are unrated expose the investor to risks with respect
to capacity to pay interest or repay principal which are similar to the risks of
lower-rated speculative obligations. The Fund is dependent on the Investment
Adviser's judgment, analysis and experience in the evaluation of such bonds.
Investors should note that credit factors affecting high yield, fixed
income securities change quickly and the assignment of a rating to a particular
bond by a rating service may not reflect the effect of recent developments on
the issuer's ability to make interest and principal payments.
Description of Ratings of Commercial Paper
- ------------------------------------------
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. Standard & Poor's commercial paper rating categories are as follows:
A-1: This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
A-3: Issued carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes
in circumstances than obligations carrying the higher designations.
B: Issues rated B are regarded as having only speculative capacity for
timely payment.
C: This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
A-7
<PAGE>
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes such payments
will be made during such grace period.
Description of Ratings of Municipal Notes
- -----------------------------------------
A Standard & Poor's note rating reflects the liquidity concerns and market
access risks unique to notes. Notes due in three years or less will likely
receive a note rating. Notes maturing beyond three years will most likely
receive a long-term debt rating. The following criteria will be used in making
that assessment.
- Amortization schedule (the larger the final maturity relative to other
maturities the more likely it will be treated as a note).
- Source of payment (the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note).
Note rating symbols are as follows:
SP-1: Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics
will be given a plus (+) designation.
SP-2: Satisfactory capacity to pay principal and interest with some
vulnerability to adverse financial and economic changes over the term of
the notes.
SP-3: Speculative capacity to pay principal and interest.
FITCH INVESTORS SERVICE, L.P.
Long-Term Debt and Preferred Stock
- ----------------------------------
The ratings represent Fitch's assessment of the issuer's ability to meet
the obligations of a specific debt issue or class of debt. The ratings take
into consideration special features of the issue, its relationship to other
obligations of the issuer, the current financial condition and operative
performance of the issuer and of any guarantor, as well as the political and
economic environment that might affect the issuer's future financial strength
and credit quality.
A-8
<PAGE>
AAA: Bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA: Bonds rated AA are considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issuers is generally
rated F-1+.
A: Bonds rated A are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is considered
to be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
BBB: Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds and, therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
BB: Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by adverse economic
changes. However, business and financial alternatives can be identified, which
could assist the obligor in satisfying its debt service requirements.
B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin of
safety and the need for reasonable business and economic activity throughout the
life of the issue.
CCC: Bonds have certain identifiable characteristics that, if not
remedied, may lead to default. The ability to meet obligations requires an
advantageous business and economic environment.
CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.
A-9
<PAGE>
C: Bonds are in imminent default in payment of interest or principal.
DDD, DD, AND D: Bonds are in default on interest and/or principal
payments. Such bonds are extremely speculative and should be valued on the
basis of their ultimate recovery value in liquidation or reorganization of the
obligor. DDD represents the highest potential for recovery on these bonds, and D
represents the lowest potential for recovery.
PLUS (+) AND MINUS (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category. Plus and minus signs,
however, are not used in the AAA, DDD, DD, or D Categories.
Short-Term Ratings
- ------------------
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
F-1+: Exceptionally Strong Credit Quality. Issues assigned this
rating are regarded as having the strongest degree of assurance for
timely payment.
F-1: Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated F-1+.
F-2: Good Credit Quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not
as great as for issues assigned F-1+ and F-1 ratings.
F-3: Fair Credit Quality. Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely payment is adequate;
however, near-term adverse changes could cause these securities to be
rated below investment grade.
F-S: Weak Credit Quality. Issues assigned this rating have characteristics
suggesting a minimal degree of assurance for timely payment and are
vulnerable to near-term adverse changes in financial and economic
conditions.
D: Default. Issues assigned this rating are in actual or imminent payment
default.
A-10
<PAGE>
LOC: The symbol LOC indicates that the rating is based on a letter of credit
issued by a commercial bank.
DUFF & PHELPS
-------------
Long-Term Debt and Preferred Stock
- ----------------------------------
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk is
modest but may vary slightly from time to time because of economic conditions.
A+, A, A-: Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
BBB+, BBB, BBB-: Below average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB, BB-: Below investment grade but deemed likely to meet obligations
when due. Present or prospective financial protection factors fluctuate
according to industry conditions or company fortunes. Overall quality may move
up or down frequently within this category.
B+, B, B-: Below investment grade and possessing risk that obligations
will not be met when due. Financial protection factors will fluctuate widely
according to economic cycles, industry conditions and/or company fortunes.
Potential exists for frequent changes in the rating within this category or into
a higher or lower rating grade.
CCC: Well below investment grade securities. Considerable uncertainty
exists as to timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD: Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payment.
DP: Represents preferred stock with dividend arrearages.
A-11
<PAGE>
Commercial Paper/Certificates of Deposits
- -----------------------------------------
DUFF 1 PLUS: Highest certainty of timely payment. Short-term liquidity
including internal operating factors and/or ready access to
alternative sources of funds, is clearly outstanding, and
safety is just below risk-free U.S. Treasury short-term
obligations.
DUFF 1: Very high certainty of timely payment. Liquidity factors
are excellent and supported by strong fundamental protection
factors. Risk factors are minor.
DUFF 1 MINUS: High certainty of timely payment. Liquidity factors are
strong and supported by good fundamental protection factors.
Risk factors are very small.
DUFF 2: Good certainty of timely payment. Liquidity factors and
company fundamentals are sound. Although ongoing funding
needs may enlarge total financing requirements, access to
capital markets is good. Risk factors are small.
DUFF 3: Satisfactory liquidity and other protection factors
qualify issues as to investment grade. Risk factors are
larger and subject to more variation. Nevertheless, timely
payment is expected.
DUFF 4: Speculative investment characteristics. Liquidity is not
sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high
degree of variation.
DUFF 5: Issuer failed to meet scheduled principal and/or interest
payments.
Notes: Bonds which are unrated may expose the investor to risks with respect to
capacity to pay interest or repay principal which are similar to the
risks of lower-rated bonds. The Fund is dependent on the Investment
Adviser's judgment, analysis and experience in the evaluation of such
bonds.
A-12
<PAGE>
Investors should note that the assignment of a rating to a bond by a
rating service may not reflect the effect of recent developments on the
issuer's ability to make interest and principal payments.
A-13
<PAGE>
APPENDIX B
BUSINESS PRINCIPLES OF GOLDMAN, SACHS & CO.
Goldman Sachs is noted for its Business Principles, which guide all of the
firm's activities and serve as the basis for its distinguished reputation among
investors worldwide.
OUR CLIENT'S INTERESTS ALWAYS COME FIRST. Our experience shows that if we
serve our clients well, our own success will follow.
OUR ASSETS ARE OUR PEOPLE, CAPITAL AND REPUTATION. If any of these assets
diminish, reputation is the most difficult to restore. We are dedicated to
complying fully with the letter and spirit of the laws, rules and ethical
principles that govern us. Our continued success depends upon unswerving
adherence to this standard.
WE TAKE GREAT PRIDE IN THE PROFESSIONAL QUALITY OF OUR WORK. We have an
uncompromising determination to achieve excellence in everything we undertake.
Though we may be involved in a wide variety and heavy volume of activity, we
would, if it came to a choice, rather be best than biggest.
WE STRESS CREATIVITY AND IMAGINATION IN EVERYTHING WE DO. While recognizing
that the old way may still be the best way, we constantly strive to find a
better solution to a client's problems. We pride ourselves on having pioneered
many of the practices and techniques that have become standard in the industry.
WE STRESS TEAMWORK IN EVERYTHING WE DO. While individual creativity is
always encouraged, we have found that team effort often produces the best
results. We have no room for those who put their personal interests ahead of
the interests of the firm and its clients.
INTEGRITY AND HONESTY ARE THE HEART OF OUR BUSINESS. We expect our people
to maintain high ethical standards in everything they do, both in their work for
the firm and in their personal lives.
B-1
<PAGE>
GOLDMAN, SACHS & CO.'S
INVESTMENT BANKING AND SECURITIES ACTIVITIES
Goldman, Sachs & Co. is a leading global investment banking and securities
firm with a number of distinguishing characteristics.
. Privately owned and ranked among Wall Street's best capitalized firms,
with partners' capital of approximately $5.3 billion as of November
29, 1996.
. With thirty-four offices around the world, Goldman Sachs employs over
9,000 professionals focused on opportunities in major markets.
. The number one underwriter of all international equity issuers from
1993 - 1996.
. A research budget of $200 million for 1997.
. Premier lead manager of negotiated municipal bond
offerings over the past six years (1990 - 1996)
. The number one lead manager of U.S. common stock offerings for
the past eight years (1989-1996).*
. The number one lead manger for initial public offerings
(IPOs) worldwide (1989 - 1996)
* Source: Securities Data Corporation. Common stock ranking excludes REITs,
------------------------------------
Investment Trusts and Rights.
B-2
<PAGE>
GOLDMAN, SACHS & CO.'S HISTORY OF EXCELLENCE
1865 End of Civil War
1869 Marcus Goldman opens Goldman Sachs for business
1890 Dow Jones Industrial Average first published
1896 Goldman Sachs joins New York Stock Exchange
1906 Goldman Sachs takes Sears Roebuck & Co. public (longest-standing client
relationship)
Dow Jones Industrial Average tops 100
1925 Goldman Sachs finances Warner Brothers, producer of the first talking
film
1956 Goldman Sachs co-manages Ford's public offering, the largest to date
1970 Goldman Sachs opens London office
1972 Dow Jones Industrial Average breaks 1000
1986 Goldman Sachs takes Microsoft public
1991 Goldman Sachs provides advisory services for the largest
privatization in the region of the sale of Telefonos de Mexico
1995 Dow Jones Industrial Average breaks 5000
1996 Goldman Sachs takes Deutsche Telekom public
Dow Jones Industrial Average breaks 6000
1997 Dow Jones Industrial Average breaks 7000
Goldman Sachs increases assets under management
by 100% over 1996
B-3
<PAGE>
PART C - OTHER INFORMATION
Item 24. Financial Statements and Exhibits
---------------------------------
(a) Financial Statements:
Included in Part A of the Registration Statement: None
Included in Part B of the Registration Statement: Report of
Independent Accountants
Goldman Sachs Variable Insurance Trust Statement of Assets and
Liabilities dated December 12, 1997
Notes to Financial Statements
All required financial statements are included in Part B hereof. All
other financial statements and schedules are inapplicable.
(b) Exhibits
(1) (a) Agreement and Declaration of Trust dated September 16, 1997
is incorporated herein by reference to exhibit (1) of the
Registration Statement on Form N-1A (No. 333-35883 and 811-
8854) filed with the Commission on September 18, 1997
(Accession No. 0000950130-97-004157) (the "Initial
Registration Statement").
(b) Amendment No. 1 dated October 21, 1997 to Agreement and
Declaration of Trust.
(2) By-Laws of Registrant dated September 16, 1997 are
incorporated herein by reference to exhibit (2) of the
Initial Registration Statement.
(3) Not Applicable.
(4) Not Applicable.
(5) Management Agreement among Registrant, Goldman Sachs Asset
Management and Goldman Sachs Asset Management International
on behalf of the Growth and Income, CORE U.S. Equity, CORE
Large Cap Growth, CORE Small Cap Equity, Mid Cap Equity,
Capital Growth, International Equity, Global Income and High
Yield Funds.
(6) Distribution Agreement between Registrant and Goldman, Sachs
& Co. dated October 21, 1997.
C-1
<PAGE>
(7) Not Applicable.
(8) Form of Custodian Agreement.
(9) (a) Transfer Agency Agreement between Registrant and Goldman,
Sachs & Co. dated October 21, 1997.
(b) Form of Participation Agreement.
(10) (a) Opinion and consent of counsel.
(b) Consent of Arthur Andersen LLP.
(11) Not Applicable.
(12) Not Applicable.
(13) Purchase Agreement.
(14) Not Applicable.
(15) Not Applicable.
(16) Not Applicable.
(17) Not Applicable.
(18) Not Applicable.
Item 25. Persons Controlled By or Under Common Control with Registrant
-------------------------------------------------------------
Registrant is controlled by its Board of Trustees.
Item 26. Number of Holders of Securities
-------------------------------
Registrant was organized primarily for the purpose of providing a
vehicle for the investment of assets received by separate investment accounts
("Separate Accounts") established by participating life insurance companies.
The assets in such Separate Accounts are, under state law, assets of the life
insurance companies which have established such Separate Accounts. Thus, at any
time such life insurance companies will own such of Registrant's outstanding
shares as are purchased with Separate Account assets; however, where required to
do so, such
C-2
<PAGE>
life insurance companies will vote such shares only in accordance with
instructions received from owners of the contracts pursuant to which monies are
invested in such Separate Accounts.
Number of Record Holders
Title of Class as of December 12, 1997
- ------------------------------- ------------------------
Goldman Sachs Growth and Income Fund 1
Goldman Sachs CORE U.S. Equity Fund 0
Goldman Sachs CORE Large Cap Growth Fund 0
Goldman Sachs CORE Small Cap Equity Fund 0
Goldman Sachs Capital Growth Fund 0
Goldman Sachs Mid Cap Equity Fund 0
Goldman Sachs International Equity Fund 0
Goldman Sachs Global Income Fund 0
Goldman Sachs High Yield Fund 0
Item 27. Indemnification
---------------
Article IV of the Declaration of Trust of Goldman Sachs Variable
Insurance Trust, the Delaware business trust, (incorporated herein by reference
as Exhibit 1 hereto) provides for indemnification of the Trustees and officers
of the Trust, subject to certain limitations.
Section 9 of the Distribution Agreement between the Registrant and
Goldman, Sachs & Co. (included herewith as Exhibit 6) provides that the
Registrant will indemnify Goldman, Sachs & Co. against certain liabilities.
Registrant expects that it will become a party to the mutual fund and
Trustees and officers liability policies that have been purchased jointly by
Goldman Sachs Trust, Trust for Credit Unions, The Benchmark Funds, The Commerce
Funds and Goldman, Sachs & Co. which insures such persons and their respective
trustees, partners, officers and employees, subject to the policies' coverage
limits and exclusions and varying deductibles, against loss resulting from
claims by reason of any act, error, omission, misstatement, misleading
statement, neglect or breach of duty.
Item 28. Business and Other Connections of Investment Adviser
----------------------------------------------------
The business and other connections of the officers and Managing
Directors of Goldman, Sachs & Co. and Goldman Sachs Asset Management
International are listed on their respective Forms ADV as currently filed with
the Commission (File Nos. 801-16048, 801-37591 and 801-38157, respectively) the
text of which is, in each case, hereby incorporated by reference.
C-3
<PAGE>
Item 29. Principal Underwriter
---------------------
(a) Goldman, Sachs & Co. or an affiliate or a division thereof currently
serves as investment adviser and distributor of the units of Trust for Credit
Unions and for shares of Goldman Sachs Trust. Goldman, Sachs & Co., or a
division thereof currently serves as administrator and distributor of the units
of shares of The Benchmark Funds and The Commerce Funds.
(b) Set forth below is certain information pertaining to the Managing
Directors of Goldman, Sachs & Co., the Registrant's principal underwriter, who
are members of Goldman, Sachs & Co.'s Executive Committee. None of the members
of the executive committee holds a position or office with the Registrant.
GOLDMAN SACHS EXECUTIVE COMMITTEE
Jon S. Corzine (1) Chief Executive Officer
Robert J. Hurst (1) Managing Director
Henry M. Paulson, Jr. (1) Chief Operating Officer
John A. Thain (1)(3) Chief Financial Officer
John L. Thornton (3) Managing Director
Roy J. Zuckerberg (2) Managing Director
______________________
(1) 85 Broad Street, New York, NY 10004
(2) One New York Plaza, New York, NY 10004
(3) Peterborough Court, 133 Fleet Street, London EC4A 2BB, England
(c) Not applicable.
Item 30. Location of Accounts and Records
--------------------------------
The Declaration of Trust, By-laws, minute books of the Registrant and
certain investment adviser records are in the physical possession of Goldman
Sachs Asset Management, One New York Plaza, New York, New York 10004. All
other accounts, books and other documents required to be maintained under
Section 31(a) of the Investment Company Act of 1940 and the Rule promulgated
thereunder are in the physical possession of State Street Bank and Trust
Company, P.O. Box 1713, Boston, Massachusetts 02105 except for certain transfer
agency and underwriting records which are maintained by Goldman, Sachs & Co.,
4900 Sears Tower, Chicago, Illinois 60606.
C-4
<PAGE>
Item 31. Management Services
-------------------
Not Applicable.
Item 32. Undertakings
------------
(a) Registrant undertakes to file a post-effective amendment, using
financial statements which need not be certified, within four to six months from
the effective date of this Registration Statement.
(b) Registrant undertakes to provide its Annual Report upon request
without charge to any recipient of a Prospectus for the Funds.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Pre-
Effective Amendment No. 1 to its Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
and State of New York, on the 23rd day of December, 1997.
GOLDMAN SACHS VARIABLE INSURANCE TRUST
Registrant
By: */s/ Douglas C. Grip
-----------------------
Douglas C. Grip
President
Pursuant to the requirements of the Securities Act of 1933, this Pre-
Effective Amendment No. 1 to Registrant's Registration Statement has been signed
by the following persons in the capacities and on the dates indicated:
Signature Title Date
- ---------------------------- ------------- -----------------
*/s/ Ashok N. Bakhru Chairman and December 23, 1997
- ----------------------------
Ashok N. Bakhr Trustee
*/s/ Douglas C. Grip President and December 23, 1997
- ----------------------------
Douglas C. Grip Trustee
*/s/ David B. Ford Trustee December 23, 1997
- ----------------------------
David B. Ford
*/s/ John P. McNulty Trustee December 23, 1997
- ----------------------------
John P. McNulty
*/s/ Mary P. McPherson Trustee December 23, 1997
- ----------------------------
Mary P. McPherson
*/s/ Alan A. Shuch Trustee December 23, 1997
- ----------------------------
Alan A. Shuch
*/s/ Jackson W. Smart, Jr. Trustee December 23, 1997
- ----------------------------
Jackson W. Smat, Jr.
*/s/ William H. Springer Trustee December 23, 1997
- ----------------------------
William H. Springer
*/s/ Richard P. Strubel Trustee December 23, 1997
- ----------------------------
Richard P. Stabel
*By: /s/ Valerie A. Zondorak
-------------------------
Valerie A. Zondorak
Attorney-in-Fact
C-6
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
Certificate of Secretary
The following resolution was duly adopted by the Board of Trustees of
Goldman Sachs Variable Insurance Trust on October 21, 1997 and remains in effect
on the date hereof:
FURTHER RESOLVED, that the Trustees and Officers of Goldman Sachs
Variable Insurance Trust (the "Trust") who may be required to execute
any amendments to the Trust's Registration Statement be, and each
hereby is, authorized to execute a power of attorney appointing James
A. Fitzpatrick, Douglas C. Grip, Scott M. Gilman, John W. Mosior,
Nancy L. Mucker, John W. Perlowski, Michael J. Richman, Howard B.
Surloff and Valerie A. Zondorak, jointly and severally, their
attorneys-in-fact, each with power of substitution, for said Trustees
and Officers in any and all capacities to sign the Registration
Statement under the the Securities Act of 1933 and the Investment
Company Act of 1940 of the Trust and any and all amendments to such
Registration Statement, and to file the same, with exhibits thereto,
and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of
said attorneys-in-fact, or his or her substitute or substitutes, may
do or caused to be done by virtue thereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 21st day of
October, 1997.
GOLDMAN SACHS VARIABLE INSURANCE TRUST
/s/ Valerie A. Zondorak
-------------------------
Valerie A. Zondorak
Assistant Secretary
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, Richard P. Strubel, hereby
constitutes and appoints James A. Fitzpatrick, Douglas C. Grip, Scott M. Gilman,
John W. Mosior, Nancy L. Mucker, John Perlowski, Michael J. Richman, Howard B.
Surloff and Valerie A. Zondorak, jointly and severally, his attorneys-in-fact,
each with power of substitution, for him in any and all capacities to sign the
Registration Statement under the Securities Act of 1933 and the Investment
Company Act of 1940 of Goldman Sachs Variable Insurance Trust and any and all
amendments to such Registration Statement, and to file the same, with exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his or her substitute or substitutes, may do or cause to
be done by virtue thereof.
Dated: October 21, 1997
/s/ Richard P. Strubel
-------------------------------------
Richard P. Strubel
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT, that the undersigned, Douglas C. Grip, hereby
constitutes and appoints James A. Fitzpatrick, Scott M. Gilman, John W. Mosior,
Nancy L. Mucker, John Perlowski, Michael J. Richman, Howard B. Surloff and
Valerie A. Zondorak, jointly and severally, his attorneys-in-fact, each with
power of substitution, for him in any and all capacities to sign the
Registration Statement under the Securities Act of 1933 and the Investment
Company Act of 1940 of Goldman Sachs Money Market Trust and any and all
amendments to such Registration Statements, and to file the same, with exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his or her substitute or substitutes, may do or cause to
be done by virtue thereof.
Dated: October 21, 1997
/s/ Douglas C. Grip
--------------------------------------------
Douglas C. Grip
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, Ashok N. Bakhru, hereby
constitutes and appoints James A. Fitzpatrick, Douglas C. Grip, Scott M. Gilman,
John W. Mosior, Nancy L. Mucker, John Perlowski, Michael J. Richman, Howard B.
Surloff and Valerie A. Zondorak, jointly and severally, his attorneys-in-fact,
each with power of substitution, for him in any and all capacities to sign the
Registration Statement under the Securities Act of 1933 and the Investment
Company Act of 1940 of Goldman Sachs Variable Insurance Trust and any and all
amendments to such Registration Statement, and to file the same, with exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his or her substitute or substitutes, may do or cause to
be done by virtue thereof.
Dated: October 21, 1997
/s/ Ashok N. Bakhru
----------------------------------------
Ashok N. Bakhru
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, David B. Ford, hereby
constitutes and appoints James A. Fitzpatrick, Douglas C. Grip, Scott M. Gilman,
John W. Mosior, Nancy L. Mucker, John Perlowski, Michael J. Richman, Howard B.
Surloff and Valerie A. Zondorak, jointly and severally, his attorneys-in-fact,
each with power of substitution, for him in any and all capacities to sign the
Registration Statement under the Securities Act of 1933 and the Investment
Company Act of 1940 of Goldman Sachs Variable Insurance Trust and any and all
amendments to such Registration Statement, and to file the same, with exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his or her substitute or substitutes, may do or cause to
be done by virtue thereof.
Dated: October 21, 1997
/s/ David B. Ford
-------------------------------------------
David B. Ford
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, Alan A. Shuch, hereby
constitutes and appoints James A. Fitzpatrick, Douglas C. Grip, Scott M. Gilman,
John W. Mosior, Nancy L. Mucker, John Perlowski, Michael J. Richman, Howard B.
Surloff and Valerie A. Zondorak, jointly and severally, his attorneys-in-fact,
each with power of substitution, for him in any and all capacities to sign the
Registration Statement under the Securities Act of 1933 and the Investment
Company Act of 1940 of Goldman Sachs Variable Insurance Trust and any and all
amendments to such Registration Statement, and to file the same, with exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his or her substitute or substitutes, may do or cause to
be done by virtue thereof.
Dated: October 21, 1997
/s/ Alan A. Shuch
------------------------------------------
Alan A. Shuch
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, Jackson W. Smart, Jr.,
hereby constitutes and appoints James A. Fitzpatrick, Douglas C. Grip, Scott M.
Gilman, John W. Mosior, Nancy L. Mucker, John Perlowski, Michael J. Richman,
Howard B. Surloff and Valerie A. Zondorak, jointly and severally, his attorneys-
in-fact, each with power of substitution, for him in any and all capacities to
sign the Registration Statement under the Securities Act of 1933 and the
Investment Company Act of 1940 of Goldman Sachs Variable Insurance Trust and any
and all amendments to such Registration Statement, and to file the same, with
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his or her substitute or substitutes, may do
or cause to be done by virtue thereof.
Dated: October 21, 1997
/s/ Jackson W. Smart, Jr.
------------------------------------------
Jackson W. Smart, Jr.
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, William H. Springer,
hereby constitutes and appoints James A. Fitzpatrick, Douglas C. Grip, Scott M.
Gilman, John W. Mosior, Nancy L. Mucker, John Perlowski, Michael J. Richman,
Howard B. Surloff and Valerie A. Zondorak, jointly and severally, his attorneys-
in-fact, each with power of substitution, for him in any and all capacities to
sign the Registration Statement under the Securities Act of 1933 and the
Investment Company Act of 1940 of Goldman Sachs Variable Insurance Trust and any
and all amendments to such Registration Statement, and to file the same, with
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his or her substitute or substitutes, may do
or cause to be done by virtue thereof.
Dated: October 21, 1997
/s/ William H. Springer
-----------------------------------------
William H. Springer
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, John P. McNulty, hereby
constitutes and appoints James A. Fitzpatrick, Douglas C. Grip, Scott M. Gilman,
John W. Mosior, Nancy L. Mucker, John Perlowski, Michael J. Richman, Howard B.
Surloff and Valerie A. Zondorak, jointly and severally, his attorneys-in-fact,
each with power of substitution, for him in any and all capacities to sign the
Registration Statement under the Securities Act of 1933 and the Investment
Company Act of 1940 of Goldman Sachs Variable Insurance Trust and any and all
amendments to such Registration Statement, and to file the same, with exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his or her substitute or substitutes, may do or cause to
be done by virtue thereof.
Dated: October 21, 1997
/s/ John P. McNulty
----------------------------------------
John P. McNulty
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, Mary P. McPherson, hereby
constitutes and appoints James A. Fitzpatrick, Douglas C. Grip, Scott M. Gilman,
John W. Mosior, Nancy L. Mucker, John Perlowski, Michael J. Richman, Howard B.
Surloff and Valerie A. Zondorak, jointly and severally, her attorneys-in-fact,
each with power of substitution, for her in any and all capacities to sign the
Registration Statement under the Securities Act of 1933 and the Investment
Company Act of 1940 of Goldman Sachs Variable Insurance Trust and any and all
amendments to such Registration Statement, and to file the same, with exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his or her substitute or substitutes, may do or cause to
be done by virtue thereof.
Dated: October 21, 1997
/s/ Mary P. McPherson
----------------------------------------
Mary P. McPherson
<PAGE>
EXHIBIT INDEX
-------------
EXHIBIT NO.
- -----------
DESCRIPTION
-----------
1 (b) Amendment No. 1 dated October 21, 1997 to
Agreement and Declaration of Trust.
5 Management Agreement among Registrant, Goldman
Sachs Asset Management and Goldman Sachs Asset
Management International on behalf of the Growth
and Income, CORE U.S. Equity, CORE Large Cap
Growth, CORE Small Cap Equity, Mid Cap Equity,
Capital Growth, International Equity, Global
Income and High Yield Funds.
6 Distribution Agreement between Registrant and
Goldman, Sachs & Co. dated October 21, 1997.
8 Form of Custodian Agreement.
9(a) Transfer Agency Agreement between Registrant and
Goldman Sachs & Co. dated October 21, 1997.
9(b) Form of Participation Agreement.
10(a) Opinion and consent of counsel.
10(b) Consent of Arthur Andersen LLP.
13 Purchase Agreement.
<PAGE>
Exhibit 1(b)
GOLDMAN SACHS VARIABLE INSURANCE TRUST
AMENDMENT NO. 1 TO AGREEMENT
AND DECLARATION OF TRUST
The undersigned Secretary/Assistant Secretary of Goldman Sachs Variable
Insurance Trust hereby certifies that the following resolutions were duly
adopted by the Board of Trustees of said Trust on October 21, 1997:
RESOLVED, that the Agreement and Declaration of Trust be amended
as contemplated in Article V, Section 1 by establishing and designating
a class of shares off beneficial interest of Goldman Sachs Growth and
Income Fund, Goldman Sachs CORE U.S. Equity Fund, Goldman Sachs CORE
Large Cap Growth Fund, Goldman Sachs CORE Small Cap Equity Fund, Goldman
Sachs Capital Growth Fund, Goldman Sachs Mid Cap Equity Fund, Goldman
Sachs International Equity Fund, Goldman Sachs Global Income Fund and
Goldman Sachs High Yield Fund to have the relative rights and
preferences set forth in the prospectus offering such class of shares.
FURTHER RESOLVED, that the President, any Vice President, the
Secretary, any Assistant Secretary and the Treasurer of the Trust be,
and they hereby are, severally authorized to execute an instrument in
writing effecting the aforesaid amendment and to cause the same to be
filed wherever in the discretion of such officers such filing is
appropriate.
As of October 21, 1997 /s/ Valerie A. Zondorak
-----------------------
Title: Assistant Secretary
------------------
<PAGE>
EXHIBIT 5
GOLDMAN SACHS VARIABLE INSURANCE TRUST
4900 Sears Tower
Chicago, Illinois 60606
Goldman Sachs Asset Management Goldman Sachs Asset Management
One New York Plaza, International
New York, New York 10004 133 Peterborough CT
London, England
MANAGEMENT AGREEMENT
--------------------
Dear Sirs:
Goldman Sachs Variable Insurance Trust (the "Registrant") is organized as a
business trust under the laws of the State of Delaware to engage in the business
of an investment company. The shares of the Registrant ("Shares") may be
divided into multiple series ("Series"), including the Series listed on Annex A
(including any Series added to Annex A in the future, each a "Fund"). Each
Series will represent the interests in a separate portfolio of securities and
other assets. Each Series may be terminated, and additional Series established,
from time to time by action of the Trustees. The Registrant on behalf of each
Fund has selected you to act as an investment adviser and administrator of each
Fund as designated on Annex A and to provide certain services as more fully set
forth below, and you are willing to act as such investment adviser and
administrator and to perform such services under the terms and conditions
hereinafter set forth. Accordingly, the Registrant agrees with you as follows:
1. Name of Registrant. The Registrant may use any name including or derived
------------------
from the name "Goldman Sachs" in connection with a Fund only for so long as this
Agreement or any extension, renewal or amendment hereof remains in effect,
including any similar agreement with any organization which shall have succeeded
to your business as investment adviser or administrator. Upon the termination of
this Agreement, the Registrant (to the extent that it lawfully can) will cause
the Funds to cease to use such a name or any other name indicating that it is
advised by or otherwise connected with you or any organization which shall have
so succeeded to your business.
2. Affiliated Advisers and Sub-Advisers. At your discretion, you may provide
-------------------------------------
advisory and administration services through your
<PAGE>
own employees or the employees of one or more affiliated companies that are
qualified to act as investment adviser, or administrator to the Registrant under
applicable law and are under the common control of Goldman Sachs & Co. provided
that (i) all persons, when providing services hereunder, are functioning as part
of an organized group of persons; and (ii) that such organized group of persons
is managed at all times by your authorized officers. You may also engage one or
more investment advisers which are either registered as such or specifically
exempt from registration under the Investment Advisers Act of 1940, as amended,
to act as sub-advisers to provide with respect to any Fund certain services set
forth in Paragraphs 3 and 6 hereof, all as shall be set forth in a written
contract to which the Registrant, on behalf of the particular Fund, and you
shall be parties, which contract shall be subject to approval by the vote of a
majority of the Trustees who are not interested persons of you, the sub-adviser,
or of the Registrant, cast in person at a meeting called for the purpose of
voting on such approval and by the vote of a majority of the outstanding voting
securities of the Fund and otherwise consistent with the terms of the Investment
Company Act of 1940, as amended (the "1940 Act").
3. Management Services.
-------------------
(a) You will regularly provide each Fund with investment research,
advice and supervision and will furnish continuously an investment program
for each Fund consistent with the investment objectives and policies of the
Fund. You will determine from time to time what securities shall be
purchased for a Fund, what securities shall be held or sold by a Fund, and
what portion of a Fund's assets shall be held uninvested as cash, subject
always to the provisions of the Registrant's Declaration of Trust and By-
Laws and of the 1940 Act, and to the investment objectives, policies and
restrictions of the Fund, as each of the same shall be from time to time in
effect, and subject, further, to such policies and instructions as the
Trustees of the Registrant may from time to time establish.
(b) Subject to the general supervision of the Trustees of the
Registrant, you will provide certain administrative services to each Fund.
You will, to the extent such services are not required to be performed by
others pursuant to the custodian agreement (or the transfer agency
agreement to the extent that a person other than you is serving thereunder
as the Registrant's transfer agent), (i) provide supervision of all aspects
of each Fund's operations not referred to in paragraph (a) above; (ii)
provide each Fund with personnel to perform such executive, administrative
and clerical services as are reasonably necessary to provide effective
administration of the Fund; (iii) arrange for, at the Registrant's expense,
(a) the preparation for each Fund of
-2-
<PAGE>
all required tax returns, (b) the preparation and submission of reports to
existing shareholders and (c) the periodic updating of the Fund's
prospectuses and statements of additional information and the preparation
of reports filed with the Securities and Exchange Commission and other
regulatory authorities; (iv) maintain all of the Funds' records; and (v)
provide the Funds with adequate office space and all necessary office
equipment and services including telephone service, heat, utilities,
stationery supplies and similar items.
(c) You will also provide to the Registrant's Trustees such periodic
and special reports as the Trustees may reasonably request. You shall for
all purposes herein be deemed to be an independent contractor and shall,
except as otherwise expressly provided or authorized, have no authority to
act for or represent the Registrant or the Funds in any way or otherwise be
deemed an agent of the Registrant or the Funds.
(d) You will maintain all books and records with respect to the Funds'
securities transactions required by sub-paragraphs (b)(5), (6), (7), (9)
and (10) and paragraph (f) of Rule 31a-1 under the 1940 Act (other than
those records being maintained by the Fund's custodian or transfer agent)
and preserve such records for the periods prescribed therefor by Rule 31a-2
of the 1940 Act. You will also provide to the Registrant's Trustees such
periodic and special reports as the Board may reasonably request.
(e) You will notify the Registrant of any change in your membership
within a reasonable time after such change.
(f) Your services hereunder are not deemed exclusive and you shall be
free to render similar services to others.
4. Allocation of Charges and Expenses. You will pay all costs incurred by you
----------------------------------
in connection with the performance of your duties under paragraph 3. You will
pay the compensation and expenses of all personnel of yours and will make
available, without expense to the Funds, the services of such of your partners,
officers and employees as may duly be elected officers or Trustees of the
Registrant, subject to their individual consent to serve and to any limitations
imposed by law. You will not be required to pay any expenses of any Fund other
than those specifically allocated to you in this Paragraph 4. In particular,
but without limiting the generality of the foregoing, you will not be required
to pay: (i) organization expenses of the Funds; (ii) fees and expenses incurred
by the Funds in connection with membership in investment company organizations;
(iii) brokers' commissions; (iv) payment for portfolio pricing services to a
pricing agent, if any; (v) legal, auditing or accounting expenses (including an
allocable portion
-3-
<PAGE>
of the cost of your employees rendering legal and accounting services to the
Fund); (vi) taxes or governmental fees; (vii) the fees and expenses of the
transfer agent of the Registrant; (viii) the cost of preparing stock
certificates or any other expenses, including clerical expenses of issue,
redemption or repurchase of Shares of the Fund; (ix) the expenses of and fees
for registering or qualifying Shares for sale and of maintaining the
registration of the Funds and registering the Registrant as a broker or a
dealer; (x) the fees and expenses of Trustees of the Registrant who are not
affiliated with you; (xi) the cost of preparing and distributing reports and
notices to shareholders, the Securities and Exchange Commission and other
regulatory authorities; (xii) the fees or disbursements of custodians of each
Fund's assets, including expenses incurred in the performance of any obligations
enumerated by the Declaration of Trust or By-Laws of the Registrant insofar as
they govern agreements with any such custodian; or (xiii) litigation and
indemnification expenses and other extraordinary expenses not incurred in the
ordinary course of the Fund's business. You shall not be required to pay
expenses of activities which are primarily intended to result in sales of Shares
of the Funds.
5. Compensation of the Manager.
---------------------------
(a) For all services to be rendered and payments made as provided in
Paragraphs 3 and 4 hereof, the Registrant on behalf of each Fund will pay
you each month a fee at an annual rate equal to the percentage of the
average daily net assets of the Fund set forth with respect to such Fund on
Annex A. The "average daily net assets" of a Fund shall be determined on
the basis set forth in the Fund's prospectus(es) or otherwise consistent
with the 1940 Act and the regulations promulgated thereunder.
(b) In addition to the foregoing, you may from time to time agree not
to impose all or a portion of your fee otherwise payable hereunder (in
advance of the time such fee or portion thereof would otherwise accrue)
and/or undertake to pay or reimburse a Fund for all or a portion of its
expenses not otherwise required to be borne or reimbursed by you. Any such
fee reduction or undertaking may be discontinued or modified by you at any
time.
6. Avoidance of Inconsistent Position. In connection with purchases or sales
----------------------------------
of portfolio securities for the account of the Funds, neither you nor any of
your partners, officers or employees will act as a principal, except as
otherwise permitted by the 1940 Act. You or your agent shall arrange for the
placing of all orders for the purchase and sale of portfolio securities for each
Fund's account with brokers or dealers (including Goldman, Sachs & Co.) selected
by you. In the selection of such brokers or dealers (including Goldman, Sachs &
Co.) and the placing of such orders, you are directed at all times to seek for
the Funds the most favorable execution and net price available. It is also
understood that it is desirable for the Funds that you
-4-
<PAGE>
have access to supplemental investment and market research and security and
economic analyses provided by brokers who may execute brokerage transactions at
a higher cost to a Fund than may result when allocating brokerage to other
brokers on the basis of seeking the most favorable price and efficient
execution. Therefore, you are authorized to place orders for the purchase and
sale of securities for the Funds with such brokers, subject to review by the
Registrant's Trustees from time to time with respect to the extent and
continuation of this practice. It is understood that the services provided by
such brokers may be useful to you in connection with your services to other
clients. If any occasion should arise in which you give any advice to your
clients concerning the Shares of the Funds, you will act solely as investment
counsel for such clients and not in any way on behalf of any Fund. You may, on
occasions when you deem the purchase or sale of a security to be in the best
interests of a Fund as well as your other customers (including any other Series
or any other investment company or advisory account for which you or any of your
affiliates acts as an investment adviser), aggregate, to the extent permitted by
applicable laws and regulations, the securities to be sold or purchased in order
to obtain the best net price and the most favorable execution. In such event,
allocation of the securities so purchased or sold, as well as the expenses
incurred in the transaction, will be made by you in the manner you consider to
be the most equitable and consistent with your fiduciary obligations to the Fund
and to such other customers. In addition, you are authorized to take into
account the sale of Shares of the Registrant in allocating purchase and sale
orders for portfolio securities to brokers or dealers (including brokers and
dealers that are affiliated with you), provided that you believe that the
quality of the transaction and the commission is comparable to what they would
be with other qualified firms.
7. Limitation of Liability of Manager and Fund. You shall not be liable for
-------------------------------------------
any error of judgment or mistake of law or for any loss suffered by a Fund in
connection with the matters to which this Agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence on your part
in the performance of your duties or from reckless disregard by you of your
obligations and duties under this Agreement. Any person, even though also
employed by you, who may be or become an employee of and paid by the Registrant
or the Funds shall be deemed, when acting within the scope of his employment by
the Funds, to be acting in such employment solely for the Funds and not as your
employee or agent. A Fund shall not be liable for any claims against any other
Fund or Series of the Registrant.
8. Duration and Termination of this Agreement. This Agreement shall remain in
------------------------------------------
force as to each Fund until June 30, 1999 and shall continue for periods of
one year thereafter, but only so long as such continuance is specifically
approved at least annually (a) by the vote of a majority of the Trustees who are
not interested persons (as defined in the 1940 Act) of the Registrant and have
no financial interest in this Agreement, cast
-5-
<PAGE>
in person at a meeting called for the purpose of voting on such approval and
(b) by a vote of a majority of the Trustees of the Registrant or of a majority
of the outstanding voting securities of such Fund. The aforesaid requirement
that continuance of this Agreement be "specifically approved at least annually"
shall be construed in a manner consistent with the 1940 Act and the rules and
regulations thereunder. This Agreement may, on 60 days written notice to the
other party, be terminated in its entirety or as to a particular Fund at any
time without the payment of any penalty, by the Trustees of the Registrant, by
vote of a majority of the outstanding voting securities of a Fund, or by you.
This Agreement shall automatically terminate in the event of its assignment. In
interpreting the provisions of this Agreement, the definitions contained in
Section 2(a) of the 1940 Act (particularly the definitions of "interested
person," "assignment" and "majority of the outstanding voting securities"), as
from time to time amended, shall be applied, subject, however, to such
exemptions as may be granted by the Securities and Exchange Commission by any
rule, regulation or order.
9. Amendment of this Agreement. No provisions of this Agreement may be
---------------------------
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought. No amendment of this Agreement shall be
effective as to a Fund until approved by vote of the holders of a majority of
the outstanding voting securities of such Fund and by a majority of the Trustees
of the Registrant, including a majority of the Trustees who are not interested
persons (as defined in the 1940 Act) of the Registrant and have no financial
interest in this Agreement, cast in person at a meeting called for the purpose
of voting on such amendment. Notwithstanding the foregoing, this Agreement may
be amended at any time to add to a new Fund to Annex A, or for any other reason
permitted by the 1940 Act and the regulations and interpretations thereunder,
provided such amendment is approved by a majority of the Trustees of the
Registrant, including a majority of the Trustees who are not interested persons
(as defined in the 1940 Act) of the Registrant and have no financial interest in
this Agreement. This Paragraph does not apply to any agreement described in
Paragraph 5(b) hereof, which shall be effective during the period you specify in
a prospectus, sticker, or other document made available to current or
prospective shareholders.
10. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of New York.
11. Miscellaneous. The captions in this Agreement are included for convenience
-------------
of reference only and in no way define or delimit any of the provisions hereof
or otherwise affect their construction or effect. This Agreement may be
executed simultaneously in two or more counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the same
instrument.
-6-
<PAGE>
The name Goldman Sachs Variable Insurance Trust is the designation of the
Trustees for the time being under an Agreement and Declaration of Trust dated
September 16, 1997 as amended from time to time, and all persons dealing with
the Trust or a Fund must look solely to the property of the Trust or such Fund
for the enforcement of any claims as none of Trustees, officers, agents or
shareholders assume any personal liability for obligations entered into on
behalf of the Trust. No Fund shall be liable for any claims against any other
Series.
If you are in agreement with the foregoing, please sign the form of
acceptance on the Registrant counterpart of this letter and return such
counterpart to the Registrant, whereupon this letter shall become a binding
contract.
Yours very truly,
GOLDMAN SACHS VARIABLE INSURANCE TRUST
Attest: /s/ Michael J. Richman By: /s/ Douglas C. Grip
---------------------- -------------------------
Secretary of the Registrant President of the Registrant
The foregoing Agreement is hereby accepted as of the date thereof.
GOLDMAN SACHS ASSET MANAGEMENT,
A DIVISION OF GOLDMAN, SACHS & CO.
Attest: /s/ Michael J. Richman By: /s/ David B. Ford
----------------------- ----------------------------
Counsel to the Funds Group Managing Director
GOLDMAN SACHS ASSET MANAGEMENT INTERNATIONAL,
AN AFFILIATE OF GOLDMAN, SACHS & CO.
Attest: /s/ Michael J. Richman By: /s/ David B. Ford
----------------------- ----------------------------
Counsel to the Funds Group Managing Director
-7-
<PAGE>
Annex A
The division of investment adviser and administrator serevices and the
compensation for such services shall be as follows:
Goldman Sachs Asset Management Annual Rate
- ------------------------------ -----------
Goldman Sachs High Yield Fund 0.70
Goldman Sachs Growth and Income Fund 0.75
Goldman Sachs CORE Large Cap Growth Fund 0.70
Goldman Sachs Mid Cap Equity Fund 0.80
Goldman Sachs CORE Small Cap Equity Fund 0.75
Goldman Sachs CORE U.S. Equity Fund 0.70
Goldman Sachs Capital Growth Fund 0.75
Goldman Sachs Asset Management International
- --------------------------------------------
Goldman Sachs Global Income Fund 0.90
Goldman Sachs International Equity Fund 1.00
-8-
<PAGE>
EXHIBIT 6
GOLDMAN SACHS VARIABLE INSURANCE TRUST
DISTRIBUTION AGREEMENT
October 21, 1997
Goldman, Sachs & Co.
85 Broad Street
New York, New York 10004
Dear Sirs:
This is to confirm that, in consideration of the agreements hereinafter
contained, the undersigned, Goldman Sachs Variable Insurance Trust (the
"Trust"), an open-end management investment company organized as a business
-----
trust under the laws of the State of Delaware, and consisting of one or more
separate series, has appointed you, the "Distributor," and that you shall be the
-----------
exclusive distributor in connection with the offering and sale of the shares of
beneficial interest, par value $[.0001] per share (the "Shares"), corresponding
------
to each of the series of the Trust listed in Exhibit A, as the same may be
---------
supplemented from time to time (each such series, a "Fund"). Each Fund may
----
offer one or more classes of its shares (each a "Class") which Classes shall
have such relative rights and conditions and shall be sold in the manner set
forth from time to time in the Trust's Registration Statements, as defined
below. The organization, administration and policies of each Fund are described
in its respective Prospectuses and SAIs (as those terms are defined below).
(This letter, as amended from time to time, shall be referred to hereinafter as
the "Agreement".)
---------
1. DEFINITIONS. (a) The terms which follow, when used in this Agreement,
-----------
shall have the meanings indicated.
"Effective Date" shall mean the date that any Registration Statement or
--------------
any post-effective amendment thereto becomes effective.
"Preliminary Prospectus" shall mean any preliminary prospectus relating
----------------------
to the Shares of a Fund or Funds or one or more Classes included in any
Registration Statement or filed with the Securities and Exchange Commission
(the "Commission") pursuant to Rule 497(a).
"Prospectus" shall mean any prospectus relating to the Shares of a Fund
----------
or Funds or one or more Classes, filed with the Commission pursuant to Rule
497 or, if no filing pursuant to Rule 497 is required, the form of final
prospectus relating
<PAGE>
thereto included in any Registration Statement, in each case together with any
amendments or supplements thereto.
"Registration Statement" shall mean any registration statement on Form N-
----------------------
1A relating to the Shares of a Fund, including all exhibits thereto, as of the
Effective Date of the most recent post-effective amendment thereto. The
registration statements of the Trust may be separately filed with the
Commission according to its fixed income, equity and money market fund
offerings.
"Rule 497" refers to such rule (or any successor rule or rules) under the
--------
Securities Act (as defined in Section 2 below).
"SAI" shall mean any statement of additional information relating to the
---
Shares of a Fund or Funds or one or more Classes, filed with the Commission
pursuant to Rule 497 or, if no filing pursuant to Rule 497 is required, the
final statement of additional information included in any Registration
Statement.
The "Initial Acceptance Date" of any Fund shall mean the first date on
-----------------------
which the Trust sells Shares of such Fund pursuant to any Registration
Statement.
References in this Agreement to "Rules and Regulations" shall be deemed
---------------------
to be references to such rules and regulations as then in effect, and
references to this Agreement and the Fund Agreements (as defined in Section 2
below), shall be deemed to be references to such agreements as then in effect.
2. REPRESENTATIONS AND WARRANTIES. The Trust represents and warrants to and
------------------------------
agrees with you, for your benefit and the benefit of each Authorized
Dealer (as defined in Section 3 below), as set forth below in this
Section 2. Each of the representations, warranties and agreements made
in this Section 2 shall be deemed made on the date hereof, on the date of
any filing of any Prospectus pursuant to Rule 497 and any Effective Date
after the date hereof, with the same effect as if made on each such date.
(a) The Trust meets the requirements for use of Form N-1A under the
Securities Act of 1933, as amended (the "Securities Act"), the Investment
--------------
Company Act of 1940, as amended (the "Investment Company Act"), and the
----------------------
Rules and Regulations of the Commission under each such Act and in
respect of said form (or of such successor form as the Commission may
adopt). The Trust has filed with the Commission an initial Registration
Statement (File Number 33-_____) on Form N-1A with respect to an
indefinite number of Shares of the Funds and is duly registered as an
-2-
<PAGE>
open-end management investment company. The Registration Statement has
become effective and no stop order suspending its effectiveness has been
issued and no proceeding for that purpose has been initiated or
threatened by the Commission.
(b) The Trust's notification of registration on Form N-8A (as amended)
complies with the applicable requirements of the Investment Company Act
and the Rules and Regulations thereunder.
(c) Each Registration Statement, Prospectus and SAI conform, and any further
amendments or supplements to any Registration Statement, Prospectus or
SAI will conform, in all material respects, with the Securities Act and
Investment Company Act and the Rules and Regulations thereunder; the
Prospectuses and the SAIs do not include any untrue statement of a
material fact or omit to state any material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading; and, on each Effective Date, the
Registration Statements did not and will not contain any untrue statement
of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein not
misleading; provided, however, that the Trust makes no representations or
-------- -------
warranties as to the information contained in or omitted from any
Registration Statement, Prospectus or SAI in reliance upon and in
conformity with information furnished in writing to the Trust by you
(with respect to information relating solely to your role as distributor
of the Shares of the Funds) expressly for use therein.
(d) No order preventing or suspending the use of any Preliminary Prospectus
has been issued by the Commission, and each Preliminary Prospectus, at
the time of filing thereof, conformed in all material respects to the
requirements of the Securities Act and the Rules and Regulations of the
Commission thereunder, and did not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with
information furnished in writing to the Trust by you (with respect to
information relating solely to your role as the exclusive distributor of
the Shares of the Funds) expressly for use therein.
-3-
<PAGE>
(e) The Trust has been duly created and is lawfully and validly existing as a
business trust under the laws of the State of Delaware, and has, on the
date hereof, and will have, on and after the date hereof, full power and
authority to own its properties and conduct its business as described in
each Registration Statement, Prospectus and SAI, and is duly qualified to
do business under the laws of each jurisdiction which requires such
qualification wherein it owns or leases material properties or conducts
material business.
(f) The Trust's authorized capitalization is as set forth in the Registration
Statements. Issuance of the Shares of the Funds as contemplated by this
Agreement and by each Prospectus and SAI has been duly and validly
authorized, and the Shares of the Funds, when issued and paid for as
contemplated hereby and thereby, will be fully-paid and, except as
contemplated by the Prospectus and SAI, nonassessable and will conform to
the description thereof contained in the corresponding Prospectus and
SAI. The holders of outstanding shares of each Fund are not entitled to
preemptive or other rights to subscribe for the Shares of any Fund, other
than as contemplated by the Prospectus and SAI relating to each Fund.
(g) This Agreement has been duly authorized, executed and delivered by the
Trust.
(h) On or prior to the Initial Acceptance Date, all of the agreements
described in each Prospectus and SAI relating to the Fund or Funds whose
Shares are first being sold on such date (collectively, the "Fund
----
Agreements") will have been duly authorized, executed and delivered by
----------
the Trust, and will comply in all material respects with the Investment
Company Act and the Rules and Regulations thereunder.
(i) The Fund Agreements constitute or will constitute, on and after the
Initial Acceptance Date, assuming due authorization, execution and
delivery by the parties thereto other than the Trust, valid and legally
binding instruments, enforceable in accordance with their respective
terms, subject, as to enforceability, to bankruptcy, insolvency,
reorganization and other laws of general applicability relating to or
affecting creditors' rights and to general equity principles.
(j) No consent, approval, authorization or order of any court or governmental
agency or body is or shall be required, as the case may be, for the
consummation from time to time of the transactions contemplated by this
Agreement and the Fund Agreements, except such as may be required (i)
under
-4-
<PAGE>
the Securities Act, the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), the Investment Company Act, the Rules and Regulations
------------
under each of the foregoing or the Conduct Rules of the National
Association of Securities Dealers, Inc. (the "NASD") (any of which that
----
were required before offers were made will have been obtained before such
offers were made and all of which will have been obtained, with respect
to each Fund, by the Effective Date of the post-effective amendment
relating to the Fund, except for those which become required under such
acts or rules or any other law or regulation after the Fund's Effective
Date but that were not required before such Effective Date, all of which
shall be obtained in a timely manner) or (ii) state securities laws of
any jurisdiction in connection with the issuance, offer or redemption of
the Shares of each Fund by the Trust.
(k) The operations and activities of the Trust and each Fund as contemplated
by the Prospectuses and the SAIs, the performance by the Trust and each
Fund of this Agreement and the Fund Agreements, the making of the offer
or the sale of Shares of each Fund and consummation from time to time of
such sales, the redemption of Shares of each Fund, or any other
transactions contemplated herein, in the Fund Agreements, in the
Prospectuses or in the SAIs, will not conflict with, result in a breach
of, or constitute a default under, the declaration of trust or the
Trust's By-laws or, in any material respect, the terms of any other
agreement or instrument to which the Trust is a party or by which it is
bound, or any order or regulation applicable to the Trust of any court,
regulatory body, administrative agency, governmental body or arbitrator
having jurisdiction over the Trust.
(l) There is not pending, or to the best knowledge of the Trust, threatened,
any action, suit or proceeding before any court or governmental agency,
authority or body or any arbitrator to which the Trust is (or, to the
best knowledge of the Trust, is threatened to be) a party, of a character
required to be described in any Registration Statement, Prospectus or SAI
which is not described as required.
(m) There is no contract or other document of a character required to be
described in any Registration Statement, Prospectus or SAI, or to be
filed as an exhibit, which is not described or filed as required.
(n) Except as stated or contemplated in the Registration Statements,
Prospectuses and SAIs, (i) the Trust has not incurred any liabilities or
obligations, direct or contingent, or entered into any transactions,
whether or
-5-
<PAGE>
not in the ordinary course of business, that are material to the Trust,
(ii) there has not been any material adverse change, or, any development
involving a prospective material adverse change, in the condition
(financial or other) of the Trust, (iii) there has been no dividend or
distribution paid or declared in respect of the Trust, and (iv) the Trust
has not incurred any indebtedness for borrowed money.
(o) Each Fund will elect or has elected to be treated as a regulated
investment company as defined in Section 851(a) of the Internal Revenue
Code of 1986 for its first taxable year and will operate so as to qualify
as such in its current and all subsequent taxable years.
(p) Except as stated or contemplated in any Prospectus or SAI, the Trust owns
all of its assets free and clear in all material respects of all liens,
security interests, pledges, mortgages, charges and other encumbrances or
defects.
3. SELECTION OF AUTHORIZED DEALERS; OTHER SERVICES AS DISTRIBUTOR.
--------------------------------------------------------------
(a) With respect to each Class subject to a sales charge, the Distributor
shall have the right on the basis of the representations, warranties and
agreements herein contained and subject to the terms and conditions
herein set forth, to make arrangements for (i) securities dealers
(including bank-affiliated dealers) that are members in good standing of
the NASD, (ii) foreign securities dealers which are not eligible for
membership in the NASD who have agreed to comply as though they were NASD
members with the provisions of Sections 2730, IM-2730, 2740, IM-2740,
2750 and IM-2750 of the Conduct Rules of the NASD and with Section 2420
thereof as that Section applies to a non-NASD member broker or dealer in
a foreign country, or (iii) banks, as defined in Section 3(a)(6) of the
Exchange Act, which are duly organized and validly existing in good
standing under the laws of the jurisdiction in which they are organized,
to solicit orders to purchase Shares of the Funds. Such securities
dealers and banks ("Authorized Dealers") selected by you in accordance
------------------
with dealer agreements with you ("Dealer Agreements") shall solicit such
-----------------
orders pursuant to their respective Dealer Agreements. You will act only
on your own behalf as principal in entering into each such Dealer
Agreement. With respect to each Class that is not subject to a sales
charge, you shall act as Principal Underwriter of such shares.
-6-
<PAGE>
(b) You acknowledge that the only information provided to you by the Trust is
that contained in each Registration Statement, Prospectus and SAI.
Neither you nor any Authorized Dealer nor any other person is authorized
by the Trust to give any information or to make any representations,
other than those contained in the relevant Registration Statement,
Prospectus and SAI and any sales literature approved by appropriate
representatives of the Trust. You may undertake or arrange for such
advertising and promotion as you believe is reasonable in connection with
the solicitation of orders to purchase Shares of a Fund; provided,
--------
however, that you will provide the Trust with and obtain the Trust's
-------
approval of copies of any advertising and promotional materials approved,
produced or used by you prior to their use. You will file such materials
with the Commission and the NASD as may be required by the Exchange Act
and the Investment Company Act and the Rules and Regulations thereunder
and by the rules of the NASD.
(c) You agree to perform such services as are described in each Registration
Statement, Prospectus and SAI as to be performed by the Distributor
including, without limitation, distributing Account Information Forms.
(d) All of your activities as distributor of the Shares of the Funds shall
comply, in all material respects, with all applicable laws, Rules and
Regulations, including, without limitation, all rules and regulations
made or adopted by the Commission or by any securities association
registered under the Exchange Act, including the NASD, as in effect from
time to time.
4. OFFERING BY THE DISTRIBUTOR.
---------------------------
(a) You will act as agent for the Trust in the distribution of Shares of the
Funds and you agree to use your best efforts to offer and sell Shares of
the Funds subject to a sales charge at the public offering price as set
forth in the relevant Prospectus, subject to any waivers or reductions of
any applicable sales charges, dealer allowances and fees as you and each
of the Authorized Dealers, if any, shall have agreed to in writing. You
may also subscribe for Shares of a Fund as principal for resale to
investors or for resale to Authorized Dealers. You shall devote
reasonable time and effort to effect sales of Shares of the Funds, but
you shall not be obligated to sell any specific number of Shares.
Nothing contained herein shall prevent you from entering into like
distribution arrangements with other investment companies.
-7-
<PAGE>
(b) The Distributor is authorized to purchase Shares of any Fund presented to
it by Authorized Dealers at the price determined in accordance with, and
in the manner set forth in, the Prospectus for such Fund.
(c) Unless you are otherwise notified by the Trust, any right granted to you
to accept orders for Shares of any Fund or to make sales on behalf of the
Trust or to purchase Shares of any Fund for resale will not apply to (i)
Shares issued in connection with the merger or consolidation of any other
investment company with the Trust or its acquisition, by purchase or
otherwise, of all or substantially all of the assets of any investment
company or substantially all the outstanding securities of any such
company, and (ii) Shares that may be offered by the Trust to shareholders
by virtue of their being such shareholders.
5. COMPENSATION.
------------
(a) With respect to any Class which is sold subject to a sales charge, you
will be entitled to receive that portion of the sales charges applicable
to sales of Shares of such Class and not reallocated to Authorized
Dealers as set forth in the relevant Prospectus, subject to any waivers
or reductions of such sales charges, if any, in accordance with Section 4
of this Agreement. In addition, you shall be entitled to receive the
entire amount of any contingent deferred sales charge imposed and paid by
shareholders upon the redemption or repurchase of Shares of any Class
subject to such charges as set forth in the relevant Prospectus, subject
to any waivers or reductions of such sales charges that may be disclosed
in such Prospectus. With respect to any shares sold subject to a
contingent deferred sales charge, such charge shall be payable in such
amounts as disclosed in the applicable Prospectus as the same was in
effect at the time of sale. The right to receive any contingent deferred
sales charge granted hereunder shall apply to all shares sold during the
term of this Agreement, and to the extent permitted by the Investment
Company Act and other applicable laws, shall continue with respect to
such shares notwithstanding termination of this Agreement. In connection
with each transaction in which you are acting as an Authorized Dealer,
you also will be entitled to that portion of the sales charges, if any,
payable to an Authorized Dealer in such transaction.
(b) The Trust may enter into Plans of Distribution pursuant to Rule 12b-1
under the 1940 Act ("Rule 12b-1 Plans") with respect to certain classes
of certain Funds. The Trust shall pay to you as distributor of such
Classes the
-8-
<PAGE>
compensation pursuant to the Rule 12b-1 Plans as shall be set forth from
time to time in the Prospectuses and SAIs and provided for under the Rule
12b-1 Plan.
(c) The amounts payable as compensation pursuant to this Section 5 shall be
subject to the limitations in Section 2830 of the Conduct Rules of the
NASD.
6. UNDERTAKINGS. The Trust agrees with you, for your benefit, that:
------------
(a) The Trust shall sell Shares of the Funds so long as it has such Shares
available for sale and shall cause the transfer agent (the "Transfer
--------
Agent") to record on its books the ownership of such Shares registered in
-----
such names and amounts as you have requested in writing or other means,
as promptly as practicable after receipt by the Trust of the payment
therefor. The Trust will make such filings under the Investment Company
Act with, and pay such fees to, the Commission as are necessary to
register Shares of any Fund sold by you on behalf of the Trust. Prior to
the termination of this Agreement, the Trust will not file any amendment
to any Registration Statement or amendment or supplement to any
Prospectus or SAI (whether pursuant to the Securities Act, the Investment
Company Act, or otherwise) without prior notice to you; provided,
--------
however, that nothing contained in this Agreement shall in any way limit
-------
the Trust's right to file such amendments to any Registration Statement,
or amendments or supplements to any Prospectus or SAI as the Trust may
deem advisable, such right being in all respects absolute and
unconditional, it being understood that this proviso shall not relieve
the Trust of its obligation to give prior notice of any such amendment or
supplement to you. Subject to the foregoing sentence, if the filing of
any Prospectus or SAI, as the case may be, contained in any Registration
Statement at the relevant Effective Date, or any amendment or supplement
thereto, is required under Rule 497, the Trust will cause such Prospectus
or SAI, and any amendment or supplement thereto, to be filed with the
Commission pursuant to the applicable paragraph of Rule 497 within the
time period prescribed and will, if requested, provide evidence
satisfactory to you of such timely filing. The Trust will promptly
advise you (i) when such Prospectus or SAI shall have been filed (if
required) with the Commission pursuant to Rule 497, (ii) when, prior to
termination of this Agreement, any amendment to any Registration
Statement shall have been filed or become effective, (iii) of any request
by the Commission for any amendment of any Registration Statement or
amendment or supplement to any Prospectus or SAI or for any additional
information relating to or that could
-9-
<PAGE>
affect disclosure in any of the foregoing, (iv) of the issuance by the
Commission of any order suspending the effectiveness of any Registration
Statement, or suspending the registration of the Trust under the
Investment Company Act, or the institution or (to the best knowledge of
the Trust) threatening of any proceeding for that purpose, and (v) of the
receipt by the Trust of any notification with respect to the suspension
of the qualification of the offer or sale of Shares of a Fund in any
jurisdiction or the initiation or (to the best knowledge of the Trust)
threatening of any proceeding for such purpose. The Trust will use its
best efforts to prevent the issuance of any such order or suspension and,
if issued, to obtain as soon as possible the withdrawal or suspension
thereof.
(b) If, at any time when a Prospectus or SAI is required to be delivered
under the Securities Act, any event occurs as a result of which such
Prospectus or SAI would include any untrue statement of a material fact
or omit to state any material fact necessary to make the statements
therein, in the light of the circumstances under which they were made not
misleading, or if it shall be necessary to amend any Registration
Statement or amend or supplement any Prospectus or SAI to comply with the
Securities Act, the Investment Company Act or the Rules and Regulations
thereunder, the Trust will notify you promptly of any such circumstance
and promptly will prepare and file with the Commission, subject to the
third sentence of Section 6(a), an amendment or supplement which will
correct such statement or omission or effect such compliance.
(c) As soon as practicable (giving effect to the normal periodic reporting
requirements under the Investment Company Act and the Rules and
Regulations thereunder), the Trust will make generally available to its
shareholders and, subject to Section 8 of this Agreement, to you (with
sufficient copies for the Authorized Dealers), a report containing the
financial statements required to be included in such reports under
Section 30(d) of the Investment Company Act and Rule 30d-1 thereunder.
(d) Subject to Section 8 of this Agreement, the Trust will furnish to you as
many conformed copies of the Registration Statements including exhibits
thereto, on each Effective Date, as you may reasonably request for
yourself and for delivery to the Authorized Dealers and, so long as
delivery of a Prospectus or SAI by you or any Authorized Dealer may be
required by law, the number of copies of each Prospectus and each SAI as
you may reasonably request for yourself and for delivery to the
Authorized Dealers.
-10-
<PAGE>
(e) To the extent required by applicable state law, the Trust will use its
best efforts to arrange for the qualification of an appropriate number of
the Shares of the Funds for sale under the laws of such of the 50 states
of the United States, the District of Columbia, the Commonwealth of
Puerto Rico, the Territory of Guam, and such other jurisdiction as you
and the Trust may approve, and will maintain such qualifications in
effect as long as may be reasonably requested by you, provided that the
Trust shall not be required in connection herewith or as a condition
hereto to qualify as a foreign corporation or to execute a general
consent to service of process in any jurisdiction. You shall furnish
such information and other material relating to your affairs and
activities as may be required by the Trust in connection with such
qualifications.
(f) The Trust shall keep you fully informed with respect to its affairs and,
subject to Section 8 of this Agreement, the Trust, if so requested, will
furnish to you, as soon as they are available (with sufficient copies for
the Authorized Dealers), copies of all reports, communications and
financial statements sent by the Trust to its shareholders or filed by,
or on behalf of, the Trust with the Commission.
(g) On each date the Trust is required to file with the Commission a notice
under paragraph (b)(1) of Rule 24f-2 under the Investment Company Act,
the Trust, if so requested, shall furnish to you a copy of the opinion of
counsel for the Trust required by such Rule to the effect that the Shares
covered by the notice were legally issued, fully paid and nonassessable.
The Trust further agrees that if, in connection with the filing of any
post-effective amendment to any Registration Statement after the date of
this Agreement:
(i) a change is made to the statements under the caption "Shares of the Fund"
in any Prospectus or SAI that is deemed material by you, the Trust, if so
requested, shall furnish to you an opinion of counsel for the Trust,
dated the date of such post-effective amendment, to the effect of
paragraph 2 (to the extent it relates to the description of the Shares);
(ii) the Fund Agreements are amended or modified in any manner, the
Trust, if so requested, shall furnish to you an opinion of counsel
for the Trust, dated the date of such post-effective amendment; or
(iii) any change is made to the statements under the caption "Taxation" in
any Prospectus or SAI, the Trust, if so requested, shall furnish to
you an
-11-
<PAGE>
opinion of counsel for the Trust, dated the date of such post-
effective amendment.
Any opinion or statement furnished pursuant to this Section 6(g) shall be
modified as necessary to relate to this Agreement and the Fund Agreements and
the Rules and Regulations as then in effect and shall state that the
Authorized Dealers may rely on it.
(h) The Trust, if so requested, shall furnish to you on each subsequent
Effective Date with respect to an amendment of a Registration Statement
which first includes certified financial statements for the preceding
fiscal year, in respect of a Fund, a copy of the report of the Trust's
independent public accountants with respect to the financial statements
and selected per share data and ratios relating to such Fund, addressed
to you. The Trust further agrees that the Trust, if so requested, shall
furnish to you (i) on each date on which the Trust, pursuant to the
preceding sentence, furnishes to you a report of its independent public
accountants, a certificate of its treasurer or assistant treasurer in a
form reasonably satisfactory to you describing in reasonable detail how
the figures included under the captions "Portfolio Transactions" and
"Performance Information" (or similar captions) in the Prospectus or SAI
of such Fund and the figures relating to the aggregate amounts of
remuneration paid to officers, trustees and members of the advisory board
and affiliated persons thereof (as required by Section 30(d)(5) of the
Investment Company Act) were calculated and confirming that such
calculations are in conformity with the Rules and Regulations under the
Investment Company Act and (ii) on each date the Trust files with the
Commission the Trust's required semi-annual financial statements, a
certificate of its treasurer or assistant treasurer in a form reasonably
satisfactory to you, describing the manner in which such financial
statements were prepared and confirming that such financial statements
have been prepared in conformity with the Rules and Regulations under the
Investment Company Act.
7. CONDITIONS TO YOUR OBLIGATIONS AS DISTRIBUTOR AND PRINCIPAL UNDERWRITER.
-----------------------------------------------------------------------
Your obligations as distributor of the Shares of the Funds shall be
subject to the accuracy of the representations and warranties on the part
of the Trust contained herein as of the dates when made or deemed to have
been made, to the accuracy in all material respects of the statements
made in any certificates, letters or opinions delivered pursuant to the
provisions of Sections 6 or 7 of this Agreement, to the performance
-12-
<PAGE>
by the Trust of its obligations hereunder and to the following additional
conditions:
(a) If filing of any Prospectus or SAI, or any amendment or supplement to any
Prospectus or SAI, or any other document is required pursuant to any
applicable provision of Rule 497, such Prospectus or SAI, or any such
amendment or supplement and other document will be filed in the manner
and within the time period required by the applicable provision of Rule
497; and no order suspending the effectiveness of the amendment shall
have been issued and no proceedings for that purpose shall have been
instituted or, to the best knowledge of the Trust, threatened and the
Trust shall have complied with any request of the Commission for
additional information (to be included in the relevant Registration
Statement, Prospectus, SAI or as the Commission otherwise shall have
requested).
(b) At the Initial Acceptance Date with respect to each Fund, you shall have
received from counsel to the Distributors, if so requested, such opinion
or opinions, dated the Initial Acceptance Date, with respect to the
issuance and sale of the Shares, the relevant Registration Statement,
Prospectus and SAI and other related matters as you may reasonably
require, and the Trust shall have furnished to such counsel such
documents as they may request for the purpose of enabling them to pass
upon such matters. Each such opinion shall state that the Authorized
Dealers may rely on it.
(c) There shall not have been any change, or any development involving a
prospective change, in or affecting the Trust the effect of which in any
case is, in your good faith judgment, so material and adverse as to make
it impractical or inadvisable to proceed with the offering of Shares of
the Funds as contemplated by this Agreement.
(d) On or after the date hereof there shall not have occurred any of the
following: (i) a suspension or material limitation in trading in
securities generally on the New York Stock Exchange; (ii) a general
moratorium on commercial banking activities in New York declared by
either Federal or New York State authorities; (iii) the outbreak or
escalation of hostilities involving the United States or the declaration
of a national emergency or war if the effect of any such event specified
in this Clause (iii) in your judgment makes it impracticable or
inadvisable to proceed with the public offering or the delivery of the
Shares of a Fund on the terms and in the manner contemplated in any
Prospectus.
-13-
<PAGE>
(e) The Trust shall have furnished to you such further information,
certificates and documents as you may have reasonably requested.
If any of the conditions specified in this Section 7 shall not have been
fulfilled in all material respects when and as provided in this Agreement, or
if any of the opinions, certificates or letters mentioned above or elsewhere
in this Agreement shall not be in all material respects reasonably
satisfactory in form and substance to you, this Agreement and all your
obligations hereunder may be cancelled by you. In the event of such
cancellation, the Trust shall remain liable for the expenses set forth in
Section 8.
8. EXPENSES.
--------
(a) The Trust will pay (or will enter into arrangements providing that
parties other than you will pay) all fees and expenses:
(1) in connection with the preparation, setting in type and filing of the
Registration Statements (including Prospectuses and SAIs) under the
Securities Act or the Investment Company Act, or both, and any
amendments or supplements thereto that may be made from time to time;
(2) in connection with the registration and qualification of Shares of the
Funds for sale in the various jurisdictions in which it is determined
to be advisable to qualify such Shares of the Funds for sale (including
registering the Trust as a broker or dealer or any officer of the Trust
or other person as agent or salesman of the Trust in any such
jurisdictions);
(3) of preparing, setting in type, printing and mailing any notice, proxy
statement, report, Prospectus, SAI or other communication to
shareholders in their capacity as such;
(4) of preparing, setting in type, printing and mailing Prospectuses
annually, and any supplements thereto, to existing shareholders;
(5) in connection with the issue and transfer of Shares of the Funds
resulting from the acceptance by you of orders to purchase Shares of
the Funds placed with you by investors, including the expenses of
printing and mailing confirmations of such purchase orders and the
expenses of printing and mailing a Prospectus included with the
confirmation of such orders and, if requested by the purchaser, an SAI;
-14-
<PAGE>
(6) of any issue taxes or any initial transfer taxes;
(7) of WATS (or equivalent) telephone lines other than the portion
allocated to you in this Section 8;
(8) of wiring funds in payment of Share purchases or in satisfaction of
redemption or repurchase requests, unless such expenses are paid for by
the investor or shareholder who initiates the transaction;
(9) of the cost of printing and postage of business reply envelopes sent to
shareholders;
(10) of one of more CRT terminals connected with the computer facilities of
the Transfer Agent other than the portion allocated to you in this
Section 8;
(11) permitted to be paid or assumed by any Fund or Funds or any Class
thereof pursuant to (a) a Rule 12b-1 Plan adopted by such Fund or Funds
in conformity with the requirements of Rule 12b-1 under the Investment
Company Act ("Rule 12b-1") or any successor rule, notwithstanding any
----------
other provision to the contrary herein or (b) any other plan adopted by
a Fund providing for account administration or shareholder liaison
services (a "Service Plan");
(12) of the expense of setting in type, printing and postage of any periodic
newsletter to shareholders other than the portion allocated to you in
this Section 8; and
(13) of the salaries and overhead of persons employed by you as shareholder
representatives other than the portion allocated to you in this Section
8.
(b) Except as provided in any Rule 12b-1 Plan or Service Plan, you shall pay or
arrange for the payment of all fees and expenses:
(1) of printing and distributing any Prospectuses or reports prepared for
your use in connection with the offering of Shares of the Funds to the
public;
(2) of preparing, setting in type, printing and mailing any other
literature used by you in connection with the offering of Shares of the
Funds to the public;
(3) of advertising in connection with the offering of Shares of the Funds
to the public;
(4) incurred in connection with your registration as a broker or dealer or
the registration or qualification of
-15-
<PAGE>
your officers, partners, directors, agents or representatives under
Federal and state laws;
(5) of that portion of WATS (or equivalent) telephone lines allocated to
you on the basis of use by investors (but not shareholders) who request
information or Prospectuses;
(6) of that portion of the expense of setting in type, printing and postage
of any periodic newsletter to shareholders attributable to promotional
material included in such newsletter at your request concerning
investment companies other than the Trust or concerning the Trust to
the extent you are required to assume the expense thereof pursuant to
this Section 8, except such material which is limited to information,
such as listings of other investment companies and their investment
objectives, given in connection with the exchange privilege as from
time to time described in the Prospectuses;
(7) of that portion of the salaries and overhead of persons employed by you
as shareholder representatives attributable to the time spent by such
persons in responding to requests from investors, but not shareholders,
for information about the Trust;
(8) of any activity which is primarily intended to result in the sale of
Shares of any Class of a Fund, unless a 12b-1 Plan shall be in effect
which provides that shares of such Classes shall bear some or all of
such expenses, in which case such Class shall bear such expenses in
accordance with such Plan; and
(9) of that portion of one or more CRT terminals connected with the
computer facilities of the Transfer Agent attributable to your use of
such terminal(s) to gain access to such of the Transfer Agent's records
as also serve as your records.
Expenses which are to be allocated between you and the Trust shall be
allocated pursuant to reasonable procedures or formulae mutually agreed upon
from time to time, which procedures or formulae shall to the extent
practicable reflect studies of relevant empirical data.
9. INDEMNIFICATION AND CONTRIBUTION.
--------------------------------
(a) The Trust will indemnify you and hold you harmless against any losses,
claims, damages or liabilities, to which you may become subject, under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or
-16-
<PAGE>
actions in respect thereof) arise out of or are based upon an untrue
statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus, Registration Statement, Prospectus, or SAI or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statement therein not misleading, and will reimburse you for any legal or
other expenses reasonably incurred by you in connection with investigating
or defending any such action or claim; provided, however, that the Trust
-------- -------
shall not be liable in any such case to the extent that any such loss,
claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made
in any Registration Statement, any Preliminary Prospectus, or any Prospectus
or SAI in reliance upon and in conformity with written information furnished
to the Trust by you expressly for use therein.
(b) You will indemnify and hold harmless the Trust against any losses, claims,
damages or liabilities to which the Trust may become subject, under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof), arise out of or are based upon
an untrue statement or alleged untrue statement of a material fact contained
in any Registration Statement, any Preliminary Prospectus, or any Prospectus
or SAI, or arise out of or are based upon the omission or alleged omission
to state therein a material fact required to be stated therein or necessary
to make the statements therein not misleading, in each case to the extent,
but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in any Registration
Statement, any Preliminary Prospectus, or any Prospectus or SAI in reliance
upon and in conformity with written information furnished to the Trust by
you expressly for use therein; and will reimburse the Trust for any legal or
other expenses reasonably incurred by the Trust in connection with
investigating or defending any such action or claim.
(c) Promptly after receipt by an indemnified party under subsection (a) or (b)
above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the indemnifying party
shall not relieve it from any liability which it may have to any indemnified
party otherwise than under such subsection. In case any such action shall
be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof the indemnifying party shall
be entitled to participate therein and, to the extent that it shall wish,
-17-
<PAGE>
jointly with any other indemnifying party similarly notified, to assume the
defense thereof, with counsel satisfactory to such indemnified party (who
shall not, except with the consent of the indemnified party, be counsel to
the indemnifying party), and, after notice from the indemnifying party to
such indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party under such
subsection for any legal expenses of other counsel or any other expenses, in
each case subsequently incurred by such indemnified party, in connection
with the defense thereof other than reasonable costs of investigation.
(d) If the indemnification provided for in this Section 9 is unavailable to, or
insufficient to hold harmless, an indemnified party under subsection (a) or
(b) above in respect of any losses, claims, damages or liabilities (or
actions in respect thereof) referred to therein, then each indemnifying
party shall contribute to the amount paid or payable by such indemnified
party as a result of such losses, claims, damages or liabilities (or actions
in respect thereof) in such proportion as is appropriate to reflect the
relative benefits received by the Trust on the one hand and you on the other
from the offering of the Shares of the Fund or Funds in respect of which
such losses, claims, damages or liabilities (or actions in respect thereof)
arose. If, however, the allocation provided by the immediately preceding
sentence is not permitted by applicable law or if the indemnified party
failed to give the notice required under subsection (c) above, then each
indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only
such relative benefits but also the relative fault of the Trust on the one
hand and you on the other in connection with the statements or omissions
which resulted in such losses, claims, damages or liabilities (or actions in
respect thereof) as well as any other relative equitable considerations.
The relative benefits received by the Trust on the one hand and you on the
other shall be deemed to be in the same proportion as the total net proceeds
from the offering of the Shares of the relevant Funds (before deducting
expenses) received by the Trust bear to the total compensation received by
you in selling Shares of such Funds under this Agreement, including any
sales charge as set forth in the Prospectus. The relative fault shall be
determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Trust on the one hand or you on the other and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Trust and you agree that it would
-18-
<PAGE>
not be just and equitable if the contributions pursuant to this subsection
(d) were determined by pro rata allocation or by any other method of
allocation which does not take account of the equitable considerations
referred to above in this subsection (d). The amount paid or payable by an
indemnified party as a result of the losses, claims, damages or liabilities
(or actions in respect thereof) referred to above in this subsection (d)
shall be deemed to include any legal or other expenses reasonably incurred
by such indemnified party in connection with investigating or defending any
such action or claim. Notwithstanding the provisions of this subsection
(d), you shall not be required to contribute any amount in excess of the
amount by which the total price at which the Shares of the relevant Funds
sold by you and distributed to the public were offered to the public exceeds
the amount of any damages which you have otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
(e) The obligations of the Trust under this Section 9 shall be in addition to
any liability which the Trust may otherwise have and shall extend, upon the
same terms and conditions, to each person, if any, who controls you within
the meaning of the Securities Act; and your obligations under this Section 9
shall be in addition to any liability which you may otherwise have and shall
extend, upon the same terms and conditions, to each trustee or officer of
the Trust (including any person who, with his consent, is named in the
relevant Registration Statement as about to become a trustee of the Trust)
and to each person, if any, who controls the Trust within the meaning of the
Securities Act.
10. TERM.
----
(a) This Agreement shall commence on the date first set forth above and continue
in effect until June 30, 1999 and then for successive annual periods after
June 30, 1999, provided such continuance after the initial term is
specifically approved at least annually by (i) the Trustees of the Trust or
(ii) a vote of a majority (as defined in the Investment Company Act) of the
Fund's outstanding voting securities, provided that in either event the
continuance is also approved by a vote of a majority of the Trustees of the
Trust who are not interested persons (as defined in the Investment Company
Act) of the Trust or any party to this Agreement, by vote cast in person at
a meeting called for the purpose of voting on such approval. The Trust
authorizes you, if and when you so determine, to assign to a third party any
payments with
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<PAGE>
respect to one or more Classes of Shares that you are entitled to receive
for your services hereunder, including any payments of initial or deferred
sales charges or payments in accordance with a Rule 12b-1 or Service Plan so
long as such Plan is in effect, free and clear of any offset, defense or
counterclaim the Trust may have against you and except to the extent that
any change or modification after the date hereof of (x) the provisions of
the Investment Company Act, the Rules and Regulations thereunder or other
applicable law or (y) any interpretation of the Investment Company Act, the
Rules and Regulations thereunder or other applicable law shall restrict your
right to make such transfer free and clear of any offset, defense or
counterclaim.
(b) The sale of Shares of the Funds in accordance with the terms of this
Agreement shall be subject to termination or suspension in the absolute
discretion of the Trust, by notice given to you as set forth in Section 12
hereof.
(c) This Agreement will terminate automatically in the event of its assignment
(as defined in the Investment Company Act).
11. REPRESENTATION AND INDEMNITIES TO SURVIVE. The respective agreements,
-----------------------------------------
representations, warranties, indemnities and other statements of the Trust
and you set forth in or made pursuant to this Agreement will, to the extent
permitted by applicable law, remain in full force and effect, regardless of
any investigation made by or on behalf of you, any Authorized Dealer or the
Trust, or any of the controlling persons referred to in Section 9 hereof,
and will survive the offer of the Shares of the Funds. The provisions of
Section 8, 9 and 11 hereof and your right to receive any contingent deferred
sale charges shall, to the extent permitted by applicable law, survive the
termination or cancellation of this Agreement.
12. NOTICES. All communications hereunder will be in writing and effective only
-------
on receipt, and, if sent to you, mailed, delivered or telegraphed and
confirmed to you at Goldman, Sachs & Co., 85 Broad Street, York, New York
10004, Attention: Registration Department (Distributors - Goldman Sachs
Funds) or, if sent to the Trust, mailed, delivered or telegraphed and
confirmed to it at Goldman Sachs Trust, 4900 Sears Tower, Chicago, Ill.
60606, Attention: Secretary.
13. AFFILIATES. The Trust recognizes that your partners, officers and employees
----------
may from time to time serve as directors, trustees, officers and employees
of corporations and business entities (including other investment
companies), and that you or your affiliates may enter into distribution or
other agreements with other corporations and business entities.
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<PAGE>
14. SUCCESSORS. This Agreement will inure to the benefit of and be binding
----------
upon the parties hereto and their respective successors and, to the extent set
forth herein, each of the officers, trustees and controlling persons referred to
in Section 9 hereof, and no other person will have any right or obligation
hereunder.
15. APPLICABLE LAW. THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED IN
--------------
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
16. MISCELLANEOUS. The captions in this Agreement are included for convenience
-------------
of reference only and in no way define or delimit any of the provisions
hereof or otherwise affect their construction or effect. This Agreement may
be executed simultaneously in two or more counterparts, each of which shall
be deemed an original, but all of which together shall constitute one and
the same instrument.
The name "Goldman Sachs Variable Insurance Trust" is the designation of the
Trustees for the time being under an Agreement and Declaration of Trust
dated September 16, 1997, as amended from time to time, and all persons
dealing with the Trust must look solely to the property of the Trust for the
enforcement of any claims against the Trust as neither the Trustees,
officers, agents or shareholders assume any personal liability for
obligations entered into on behalf of the Trust. No series of the Trust
shall be liable for any claims against any other series of the Trust.
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<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to us the enclosed duplicate hereof, whereupon this
letter and your acceptance shall represent a binding agreement between you and
the Trust, and, to the extent set forth herein, shall be for the benefit of each
Authorized Dealer.
Very truly yours,
GOLDMAN SACHS VARIABLE INSURANCE TRUST
By:/s/ Douglas C. Grip
--------------------------------
Name: Douglas C. Grip
Title: President
The foregoing Agreement is
hereby confirmed and accepted
as of the date first above
written.
/s/ David B. Ford
- -----------------------------
(Goldman, Sachs & Co.)
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<PAGE>
EXHIBIT A
---------
SERIES ("FUNDS") OF GOLDMAN SACHS VARIABLE INSURANCE TRUST, A DELAWARE BUSINESS
- -------------------------------------------------------------------------------
TRUST (THE "TRUST")
-------------------
GOLDMAN SACHS FIXED INCOME FUNDS:
- --------------------------------
Goldman Sachs Global Income Fund
Goldman Sachs High Yield Fund
GOLDMAN SACHS EQUITY FUNDS:
- --------------------------
Goldman Sachs CORE Large Cap Growth Fund
Goldman Sachs CORE U.S. Equity Fund
Goldman Sachs CORE Small Cap Equity Fund
Goldman Sachs Growth and Income Fund
Goldman Sachs Capital Growth Fund
Goldman Sachs International Equity Fund
Goldman Sachs Mid Cap Equity Fund
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<PAGE>
EXHIBIT 99.8
DRAFT OF 12/17/97
CUSTODIAN CONTRACT
Between
GOLDMAN SACHS VARIABLE INSURANCE TRUST
and
STATE STREET BANK AND TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
-----------------
Page
- ----
1. Employment of Custodian and Property to be Held By
It...................................................... 1
2. Duties of the Custodian with Respect to Property
of the Fund Held by the Custodian in the United States.. 2
2.1 Holding Securities...................................... 2
2.2 Delivery of Securities.................................. 2
2.3 Registration of Securities.............................. 4
2.4 Bank Accounts........................................... 4
2.5 Availability of Federal Funds........................... 5
2.6 Collection of Income.................................... 5
2.7 Payment of Fund Monies.................................. 5
2.8 Liability for Payment in Advance of Receipt of
Securities Purchased.................................... 6
2.9 Appointment of Agents................................... 7
2.10 Deposit of Fund Assets in U.S. Securities System........ 7
2.11 Fund Assets Held in the Custodian's Direct
Paper System............................................ 8
2.12 Segregated Account...................................... 9
2.13 Ownership Certificates for Tax Purposes................. 9
2.14 Proxies................................................. 9
2.15 Communications Relating to Portfolio
Securities.............................................. 10
3. Duties of the Custodian with Respect to Property of
the Fund Held Outside of the United States.............. 10
3.1 Appointment of Foreign Sub-Custodians................... 10
3.2 Assets to be Held....................................... 10
3.3 Foreign Securities Systems.............................. 10
3.4 Holding Securities...................................... 11
3.5 Agreements with Foreign Banking Institutions............ 11
3.6 Access of Independent Accountants of the Fund........... 11
3.7 Reports by Custodian.................................... 11
3.8 Transactions in Foreign Custody Account................. 11
3.9 Liability of Foreign Sub-Custodians..................... 12
3.10 Liability of Custodian.................................. 12
3.11 Reimbursement for Advances.............................. 13
3.12 Monitoring Responsibilities............................. 13
3.13 Branches of U.S. Banks.................................. 13
3.14 Tax Law................................................. 13
<PAGE>
4. Payments for Sales or Repurchases or Redemptions
of Shares of the Fund................................... 14
5. Proper Instructions..................................... 14
6. Actions Permitted Without Express Authority............. 14
7. Evidence of Authority................................... 15
8. Duties of Custodian With Respect to the Books of Account
and Calculation of Net Asset Value and Net Income....... 15
9. Records................................................. 15
10. Opinion of Fund's Independent Accountants............... 16
11. Reports to Fund by Independent Public Accountants....... 16
12. Compensation of Custodian............................... 16
13. Responsibility of Custodian............................. 16
14. Effective Period, Termination and Amendment........... 18
15. Successor Custodian................................... 19
16. Interpretive and Additional Provisions............... 19
17. Additional Funds..................................... 20
18. Massachusetts Law to Apply........................... 20
19. Prior Contracts...................................... 20
20. Reproduction of Documents............................ 20
21. Shareholder Communications Election.................. 20
22. Miscellaneous........................................ 21
<PAGE>
EXHIBIT 8
CUSTODIAN CONTRACT
------------------
This Contract between Goldman Sachs Variable Insurance Trust, a
business trust organized and existing under the laws of the State of Delaware,
having its principal place of business at 4900 Sears Tower, Chicago, Illinois,
60606, hereinafter called the "Fund", and State Street Bank and Trust Company, a
Massachusetts trust company, having its principal place of business at 225
Franklin Street, Boston, Massachusetts, 02110, hereinafter called the
"Custodian",
WITNESSETH:
WHEREAS, the Fund is authorized to issue shares in separate series,
with each such series representing interests in a separate portfolio of
securities and other assets; and
WHEREAS, the Fund intends to initially offer shares in nine series,
the Goldman Sachs Growth and Income Fund, the Goldman Sachs CORE U.S. Equity
Fund, the Goldman Sachs CORE Large Cap Growth Fund, the Goldman Sachs CORE Small
Cap Equity Fund, the Goldman Sachs Capital Growth Fund, the Goldman Sachs Mid
Cap Equity Fund, the Goldman Sachs International Equity Fund, the Goldman Sachs
Global Income Fund, and the Goldman Sachs High Yield Fund (such series together
with all other series subsequently established by the Fund and made subject to
this Contract in accordance with paragraph 17, being herein referred to as the
"Portfolio(s)");
NOW THEREFORE, in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
-----------------------------------------------------
The Fund hereby employs the Custodian as the custodian of the assets of the
Portfolios of the Fund, including securities which the Fund, on behalf of the
applicable Portfolio desires to be held in places within the United States
("domestic securities") and securities it desires to be held outside the United
States ("foreign securities") pursuant to the provisions of the Declaration of
Trust of the Fund dated September 16, 1997 (as amended or restated from time to
time, the "Declaration of Trust") and By-laws of the Trust. The Fund on behalf
of the Portfolio(s) agrees to deliver to the Custodian all securities and cash
of the Portfolios, and all payments of income, payments of principal or capital
distributions received by it with respect to all securities owned by the
Portfolio(s) from time to time, and the cash consideration received by it for
such new or treasury shares of beneficial interest of the Fund representing
interests in the Portfolios, ("Shares") as may be issued or sold from time to
time. The Custodian shall not be responsible for any property of a Portfolio
held or received by the Portfolio and not delivered to the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Article 5),
the Custodian shall on behalf of the applicable Portfolio(s) from time to time
employ one or more sub-custodians, located in the United States but only in
accordance with an applicable vote by the Board of Trustees of the Fund on
behalf of the applicable Portfolio(s), and provided that the
<PAGE>
Custodian shall have no more or less responsibility or liability to the Fund on
account of any actions or omissions of any sub-custodian so employed than any
such sub-custodian has to the Custodian. The Custodian may employ as sub-
custodian for the Fund's foreign securities on behalf of the applicable
Portfolio(s) the foreign banking institutions and foreign securities
depositories designated in Schedule A hereto but only in accordance with the
provisions of Article 3.
2. Duties of the Custodian with Respect to Property of the Fund Held By the
------------------------------------------------------------------------
Custodian in the United States
------------------------------
2.1 Holding Securities. The Custodian shall hold and physically segregate for
------------------
the account of each Portfolio all non-cash property, to be held by it in
the United States including all domestic securities owned by such
Portfolio, other than (a) securities which are maintained pursuant to
Section 2.10 in a clearing agency which acts as a securities depository or
in a book-entry system authorized by the U.S. Department of the Treasury
(each, a U.S. Securities System") and (b) commercial paper of an issuer for
which State Street Bank and Trust Company acts as issuing and paying agent
("Direct Paper") which is deposited and/or maintained in the Direct Paper
System of the Custodian (the "Direct Paper System") pursuant to Section
2.11.
2.2 Delivery of Securities. The Custodian shall release and deliver domestic
----------------------
securities owned by a Portfolio held by the Custodian or in a U.S.
Securities System account of the Custodian or in the Custodian's Direct
Paper book entry system account ("Direct Paper System Account") only upon
receipt of Proper Instructions from the Fund on behalf of the applicable
Portfolio, which may be continuing instructions when deemed appropriate by
the parties, and only in the following cases:
1) Upon sale of such securities for the account of the Portfolio and
receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Portfolio;
3) In the case of a sale effected through a U.S. Securities System, in
accordance with the provisions of Section 2.10 hereof;
4) To the depository agent in connection with tender or other similar
offers for securities of the Portfolio;
5) To the issuer thereof or its agent when such securities are called,
redeemed, retired or otherwise become payable; provided that, in any
such case, the cash or other consideration is to be delivered to the
Custodian;
6) To the issuer thereof, or its agent, for transfer into the name of the
Portfolio or
2
<PAGE>
into the name of any nominee or nominees of the Custodian or into the
name or nominee name of any agent appointed pursuant to Section 2.9 or
into the name or nominee name of any sub-custodian appointed pursuant
to Article 1; or for exchange for a different number of bonds,
certificates or other evidence representing the same aggregate face
amount or number of units; provided that, in any such case, the new
--------
securities are to be delivered to the Custodian;
7) Upon the sale of such securities for the account of the Portfolio, to
the broker or its clearing agent, against a receipt, for examination
in accordance with "street delivery" custom; provided that in any such
case, the Custodian shall have no responsibility or liability for any
loss arising from the delivery of such securities prior to receiving
payment for such securities except as may arise from the Custodian's
own negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of the
securities of the issuer of such securities, or pursuant to provisions
for conversion contained in such securities, or pursuant to any
deposit agreement; provided that, in any such case, the new securities
and cash, if any, are to be delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the surrender
thereof in the exercise of such warrants, rights or similar securities
or the surrender of interim receipts or temporary securities for
definitive securities; provided that, in any such case, the new
securities and cash, if any, are to be delivered to the Custodian;
10) For delivery in connection with any loans of securities made by the
Portfolio, but only against receipt of adequate collateral as agreed
--- ----
upon from time to time by the Custodian and the Fund on behalf of the
Portfolio, which may be in the form of cash or obligations issued by
the United States government, its agencies or instrumentalities, or
irrevocable letters of credit, except that in connection with any
loans for which collateral is to be credited to the Custodian's
account in the book-entry system authorized by the U.S. Department of
the Treasury, the Custodian will not be held liable or responsible for
the delivery of securities owned by the Portfolio prior to the receipt
of such collateral;
11) For delivery as security in connection with any borrowings by the Fund
on behalf of the Portfolio requiring a pledge of assets by the Fund on
behalf of the Portfolio, but only against receipt of amounts borrowed;
--- ----
12) For delivery in accordance with the provisions of any agreement among
the Fund on behalf of the Portfolio, the Custodian and a broker-dealer
registered under the Securities Exchange Act of 1934 (the "Exchange
Act") and a member of The National Association of Securities Dealers,
Inc. ("NASD"), relating to compliance
with the rules of The Options Clearing Corporation and of any
registered national securities exchange, or of any similar
organization or organizations, regarding escrow or other arrangements
in connection with transactions by the Portfolio of
3
<PAGE>
the Fund;
13) For delivery in accordance with the provisions of any agreement among
the Fund on behalf of the Portfolio, the Custodian, and a Futures
Commission Merchant registered under the Commodity Exchange Act,
relating to compliance with the rules of the Commodity Futures Trading
Commission and/or any Contract Market, or any similar organization or
organizations, regarding account deposits in connection with
transactions by the Portfolio of the Fund;
14) Upon receipt of instructions from the transfer agent ("Transfer
Agent") for the Fund, for delivery to such Transfer Agent or to the
holders of shares in connection with distributions in kind, as may be
described from time to time in the currently effective prospectus and
statement of additional information of the Fund, related to the
Portfolio ("Prospectus"), in satisfaction of requests by holders of
Shares for repurchase or redemption; and
15) For any other proper corporate purpose, but only upon receipt of, in
--- ----
addition to Proper Instructions from the Fund on behalf of the
applicable Portfolio, a certified copy of a resolution of the Board of
Trustees or of the Executive Committee signed by an officer of the
Fund and certified by the Secretary or an Assistant Secretary,
specifying the securities of the Portfolio to be delivered, setting
forth the purpose for which such delivery is to be made, declaring
such purpose to be a proper corporate purpose, and naming the person
or persons to whom delivery of such securities shall be made.
2.3 Registration of Securities. Domestic securities held by the Custodian
--------------------------
(other than bearer securities) shall be registered in the name of the
Portfolio or in the name of any nominee of the Fund on behalf of the
Portfolio or of any nominee of the Custodian which nominee shall be
assigned exclusively to the Portfolio, unless the Fund has authorized in
------
writing the appointment of a nominee to be used in common with other
registered investment companies having the same investment adviser as the
Portfolio, or in the name or nominee name of any agent appointed pursuant
to Section 2.9 or in the name or nominee name of any sub-custodian
appointed pursuant to Article 1. All securities accepted by the Custodian
on behalf of the Portfolio under the terms of this Contract shall be in
"street name" or other good delivery form. If, however, the Fund directs
the Custodian to maintain securities in "street name", the Custodian shall
utilize its best efforts only to timely collect income due the Fund on such
securities and to notify the Fund on a best efforts basis only of relevant
corporate actions including, without limitation, pendency of calls,
maturities, tender or exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
-------------
account or accounts in the United States in the name of each Portfolio of
the Fund, subject only to draft or order by the Custodian acting pursuant
to the terms of this Contract, and shall hold in such account or accounts,
subject to the provisions hereof, all cash received by
4
<PAGE>
it from or for the account of the Portfolio, other than cash maintained by
the Portfolio in a bank account established and used in accordance with
Rule 17f-3 under the Investment Company Act of 1940. Funds held by the
Custodian for a Portfolio may be deposited by it to its credit as Custodian
in the Banking Department of the Custodian or in such other banks or trust
companies as it may in its discretion deem necessary or desirable;
provided, however, that every such bank or trust company shall be qualified
to act as a custodian under the Investment Company Act of 1940 and that
each such bank or trust company and the funds to be deposited with each
such bank or trust company shall on behalf of each applicable Portfolio be
approved by vote of a majority of the Board of Trustees of the Fund. Such
funds shall be deposited by the Custodian in its capacity as Custodian and
shall be withdrawable by the Custodian only in that capacity.
2.5 Availability of Federal Funds. Upon mutual agreement between the Fund on
-----------------------------
behalf of each applicable Portfolio and the Custodian, the Custodian shall,
upon the receipt of Proper Instructions from the Fund on behalf of a
Portfolio, make federal funds available to such Portfolio as of specified
times agreed upon from time to time by the Fund and the Custodian in the
amount of checks received in payment for Shares of such Portfolio which are
deposited into the Portfolio's account.
2.6 Collection of Income. Subject to the provisions of Section 2.3, the
--------------------
Custodian shall collect on a timely basis all income and other payments
with respect to registered domestic securities held hereunder to which each
Portfolio shall be entitled either by law or pursuant to custom in the
securities business, and shall collect on a timely basis all income and
other payments with respect to bearer domestic securities if, on the date
of payment by the issuer, such securities are held by the Custodian or its
agent thereof and shall credit such income, as collected, to such
Portfolio's custodian account. Without limiting the generality of the
foregoing, the Custodian shall detach and present for payment all coupons
and other income items requiring presentation as and when they become due
and shall collect interest when due on securities held hereunder. Income
due each Portfolio on securities loaned pursuant to the provisions of
Section 2.2 (10) shall be the responsibility of the Fund. The Custodian
will have no duty or responsibility in connection therewith, other than to
provide the Fund with such information or data as may be necessary to
assist the Fund in arranging for the timely delivery to the Custodian of
the income to which the Portfolio is properly entitled.
2.7 Payment of Fund Monies. Upon receipt of Proper Instructions from the Fund
----------------------
on behalf of the applicable Portfolio, which may be continuing instructions
when deemed appropriate by the parties, the Custodian shall pay out monies
of a Portfolio in the following cases only:
1) Upon the purchase of domestic securities, options, futures contracts
or options on futures contracts for the account of the Portfolio but
only (a) against the delivery of such securities or evidence of title
to such options, futures contracts or options on futures contracts to
the Custodian (or any bank, banking firm or trust company
5
<PAGE>
doing business in the United States or abroad which is qualified under
the Investment Company Act of 1940, as amended, to act as a custodian
and has been designated by the Custodian as its agent for this
purpose) registered in the name of the Portfolio or in the name of a
nominee of the Custodian referred to in Section 2.3 hereof or in
proper form for transfer; (b) in the case of a purchase effected
through a U.S. Securities System, in accordance with the conditions
set forth in Section 2.10 hereof; (c) in the case of a purchase
involving the Direct Paper System, in accordance with the conditions
set forth in Section 2.11; (d) in the case of repurchase agreements
entered into between the Fund on behalf of the Portfolio and the
Custodian, or another bank, or a broker-dealer which is a member of
NASD, (i) against delivery of the securities either in certificate
form or through an entry crediting the Custodian's account at the
Federal Reserve Bank with such securities or (ii) against delivery of
the receipt evidencing purchase by the Portfolio of securities owned
by the Custodian along with written evidence of the agreement by the
Custodian to repurchase such securities from the Portfolio or (e) for
transfer to a time deposit account of the Fund in any bank, whether
domestic or foreign; such transfer may be effected prior to receipt of
a confirmation from a broker and/or the applicable bank pursuant to
Proper Instructions from the Fund as defined in Article 5;
2) In connection with conversion, exchange or surrender of securities
owned by the Portfolio as set forth in Section 2.2 hereof;
3) For the redemption or repurchase of Shares issued by the Portfolio as
set forth in Article 4 hereof;
4) For the payment of any expense or liability incurred by the Portfolio,
including but not limited to the following payments for the account of
the Portfolio: interest, taxes, management, accounting, transfer
agent and legal fees, and operating expenses of the Fund whether or
not such expenses are to be in whole or part capitalized or treated as
deferred expenses;
5) For the payment of any dividends on Shares of the Portfolio declared
pursuant to the governing documents of the Fund;
6) For payment of the amount of dividends received in respect of
securities sold short; and
7) For any other proper purpose, but only upon receipt of, in addition to
--- ----
Proper Instructions from the Fund on behalf of the Portfolio, a
certified copy of a resolution of the Board of Trustees or of the
Executive Committee of the Fund
signed by an officer of the Fund and certified by its Secretary or an
Assistant Secretary, specifying the amount of such payment, setting
forth the purpose for which such payment is to be made, declaring such
purpose to be a proper purpose,
6
<PAGE>
and naming the person or persons to whom such payment is to be made.
2.8 Liability for Payment in Advance of Receipt of Securities Purchased.
--------------------------------------------------------- ---------
Except as specifically stated otherwise in this Contract, in any and every
case where payment for purchase of domestic securities for the account of a
Portfolio is made by the Custodian in advance of receipt of the securities
purchased in the absence of specific written instructions from the Fund on
behalf of such Portfolio to so pay in advance, the Custodian shall be
absolutely liable to the Fund for such securities to the same extent as if
the securities had been received by the Custodian.
2.9 Appointment of Agents. The Custodian may at any time or times in its
---------------------
discretion appoint (and may at any time remove) any other bank or trust
company which is itself qualified under the Investment Company Act of 1940,
as amended, to act as a custodian, as its agent to carry out such of the
provisions of this Article 2 as the Custodian may from time to time direct;
provided, however, that the appointment of any agent shall not relieve the
--------
Custodian of its responsibilities or liabilities hereunder.
2.10 Deposit of Fund Assets in U.S. Securities Systems. The Custodian may
-------------------------------------------------
deposit and/or maintain securities owned by a Portfolio in a clearing
agency registered with the Securities and Exchange Commission under Section
17A of the Securities Exchange Act of 1934, which acts as a securities
depository, or in the book-entry system authorized by the U.S. Department
of the Treasury and certain federal agencies, collectively referred to
herein as "U.S. Securities System" in accordance with applicable Federal
Reserve Board and Securities and Exchange Commission rules and regulations,
if any, and subject to the following provisions:
1) The Custodian may keep securities of the Portfolio in a U.S.
Securities System provided that such securities are represented in an
account ("Account") of the Custodian in the U.S. Securities System
which shall not include any assets of the Custodian other than assets
held as a fiduciary, custodian or otherwise for customers;
2) The records of the Custodian with respect to securities of the
Portfolio which are maintained in a U.S. Securities System shall
identify by book-entry those securities belonging to the Portfolio;
3) The Custodian shall pay for securities purchased for the account of
the Portfolio upon (i) receipt of advice from the U.S. Securities
System that such securities have been transferred to the Account, and
(ii) the making of an entry on the records of the Custodian to reflect
such payment and transfer for the account of the Portfolio. The
Custodian shall transfer securities sold for the account of the
Portfolio upon (i) receipt of advice from the U.S. Securities System
that payment for such securities has been transferred to the Account,
and (ii) the making of an entry on the records of the Custodian to
reflect such transfer and payment for the
7
<PAGE>
account of the Portfolio. Copies of all advices from the U.S.
Securities System of transfers of securities for the account of the
Portfolio shall identify the Portfolio, be maintained for the
Portfolio by the Custodian and be provided to the Fund at its request.
Upon request, the Custodian shall furnish the Fund on behalf of the
Portfolio confirmation of each transfer to or from the account of the
Portfolio in the form of a written advice or notice and shall furnish
to the Fund on behalf of the Portfolio copies of daily transaction
sheets reflecting each day's transactions in the U.S. Securities
System for the account of the Portfolio;
4) The Custodian shall provide the Fund for the Portfolio with any report
obtained by the Custodian on the U.S. Securities System's accounting
system, internal accounting control and procedures for safeguarding
securities deposited in the U.S. Securities System;
5) The Custodian shall have received from the Fund on behalf of the
Portfolio the initial or annual certificate, as the case may be,
required by Article 14 hereof; and
6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for the benefit of the Portfolio
for any loss or damage to the Portfolio resulting from use of the U.S.
Securities System by reason of any negligence, misfeasance or
misconduct of the Custodian or any of its agents or of any of its or
their employees or from failure of the Custodian or any such agent to
enforce effectively such rights as it may have against the U.S.
Securities System; at the election of the Fund, it shall be entitled
to be subrogated to the rights of the Custodian with respect to any
claim against the U.S. Securities System or any other person which the
Custodian may have as a consequence of any such loss or damage if and
to the extent that the Portfolio has not been made whole for any such
loss or damage.
2.11 Fund Assets Held in the Custodian's Direct Paper System. The Custodian may
--------------------------------------------------------
deposit and/or maintain securities owned by a Portfolio in the Direct Paper
System of the Custodian subject to the following provisions:
1) No transaction relating to securities in the Direct Paper System will
be effected in the absence of Proper Instructions from the Fund on
behalf of the Portfolio;
2) The Custodian may keep securities of the Portfolio in the Direct Paper
System only if such securities are represented in an account
("Account") of the Custodian in the Direct Paper System which shall
not include any assets of the Custodian other than assets held as a
fiduciary, custodian or otherwise for customers;
3) The records of the Custodian with respect to securities of the
Portfolio which are maintained in the Direct Paper System shall
identify by book-entry those securities belonging to the Portfolio;
8
<PAGE>
4) The Custodian shall pay for securities purchased for the account of
the Portfolio upon the making of an entry on the records of the
Custodian to reflect such payment and transfer of securities to the
account of the Portfolio. The Custodian shall transfer securities
sold for the account of the Portfolio upon the making of an entry on
the records of the Custodian to reflect such transfer and receipt of
payment for the account of the Portfolio;
5) The Custodian shall furnish the Fund on behalf of the Portfolio
confirmation of each transfer to or from the account of the Portfolio,
in the form of a written advice or notice, of Direct Paper on the next
business day following such transfer and shall furnish to the Fund on
behalf of the Portfolio copies of daily transaction sheets reflecting
each day's transaction in the U.S. Securities System for the account
of the Portfolio; and
6) The Custodian shall provide the Fund on behalf of the Portfolio with
any report on its system of internal accounting control as the Fund
may reasonably request from time to time.
2.12 Segregated Account. The Custodian shall upon receipt of Proper
------------------
Instructions from the Fund on behalf of each applicable Portfolio establish
and maintain a segregated account or accounts for and on behalf of each
such Portfolio, into which account or accounts may be transferred cash
and/or securities, including securities maintained in an account by the
Custodian pursuant to Section 2.10 hereof, (i) in accordance with the
provisions of any agreement among the Fund on behalf of the Portfolio, the
Custodian and a broker-dealer registered under the Exchange Act and a
member of the NASD (or any futures commission merchant registered under the
Commodity Exchange Act), relating to compliance with the rules of The
Options Clearing Corporation and of any registered national securities
exchange (or the Commodity Futures Trading Commission or any registered
contract market), or of any similar organization or organizations,
regarding escrow or other arrangements in connection with transactions by
the Portfolio, (ii) for purposes of segregating cash or government
securities in connection with options purchased, sold or written by the
Portfolio or commodity futures contracts or options thereon purchased or
sold by the Portfolio, (iii) for the purposes of compliance by the
Portfolio with the procedures required by Investment Company Act Release
No. 10666, or any subsequent release or releases of the Securities and
Exchange Commission relating to the maintenance of segregated accounts by
registered investment companies and (iv) for other proper corporate
purposes, but only, in the case of clause (iv), upon receipt of, in
--- ----
addition to Proper Instructions from the Fund on behalf of the applicable
Portfolio, a certified copy of a resolution of the Board of Trustees or of
the Executive Committee signed by an officer of the Fund and certified by
the Secretary or an Assistant Secretary, setting forth the purpose or
purposes of such segregated account and declaring such purposes to be
proper corporate purposes.
2.13 Ownership Certificates for Tax Purposes. The Custodian shall execute
---------------------------------------
ownership and
9
<PAGE>
other certificates and affidavits for all federal and state tax purposes in
connection with receipt of income or other payments with respect to
domestic securities of each Portfolio held by it and in connection with
transfers of securities.
2.14 Proxies. The Custodian shall, with respect to the domestic securities held
-------
hereunder, cause to be promptly executed by the registered holder of such
securities, if the securities are registered otherwise than in the name of
the Portfolio or a nominee of the Portfolio, all proxies, without
indication of the manner in which such proxies are to be voted, and shall
promptly deliver to the Portfolio such proxies, all proxy soliciting
materials and all notices relating to such securities.
2.15 Communications Relating to Portfolio Securities. Subject to the provisions
-----------------------------------------------
of Section 2.3, the Custodian shall transmit promptly to the Fund for each
Portfolio all written information (including, without limitation, pendency
of calls and maturities of domestic securities and expirations of rights in
connection therewith and notices of exercise of call and put options
written by the Fund on behalf of the Portfolio and the maturity of futures
contracts purchased or sold by the Portfolio) received by the Custodian
from issuers of the securities being held for the Portfolio. With respect
to tender or exchange offers, the Custodian shall transmit promptly to the
Portfolio all written information received by the Custodian from issuers of
the securities whose tender or exchange is sought and from the party (or
his agents) making the tender or exchange offer. If the Portfolio desires
to take action with respect to any tender offer, exchange offer or any
other similar transaction, the Portfolio shall notify the Custodian at
least three business days prior to the date on which the Custodian is to
take such action.
3. Duties of the Custodian with Respect to Property of the Fund Held Outside
-------------------------------------------------------------------------
of the United States
--------------------
3.1 Appointment of Foreign Sub-Custodians. The Fund hereby authorizes and
-------------------------------------
instructs the Custodian to employ as sub-custodians for the Portfolio's
securities and other assets maintained outside the United States the
foreign banking institutions and foreign securities depositories designated
on Schedule A hereto ("foreign sub-custodians"). Upon receipt of "Proper
Instructions", as defined in Section 5 of this Contract, together with a
certified resolution of the Fund's Board of Trustees, the Custodian and the
Fund may agree to amend Schedule A hereto from time to time to designate
additional foreign banking institutions and foreign securities depositories
to act as sub-custodian. Upon receipt of Proper Instructions, the Fund may
instruct the Custodian to cease the employment of any one or more such sub-
custodians for maintaining custody of the Portfolio's assets.
3.2 Assets to be Held. The Custodian shall limit the securities and other
-----------------
assets maintained in the custody of the foreign sub-custodians to: (a)
"foreign securities", as defined in paragraph (c)(1) of Rule 17f-5 under
the Investment Company Act of 1940, and (b) cash and cash equivalents in
such amounts as the Custodian or the Fund may determine to be reasonably
necessary to effect the Portfolio's foreign securities transactions. The
10
<PAGE>
Custodian shall identify on its books as belonging to the Fund, the foreign
securities of the Fund held by each foreign sub-custodian.
3.3 Foreign Securities Systems. Except as may otherwise be agreed upon in
--------------------------
writing by the Custodian and the Fund, assets of the Portfolios shall be
maintained in a clearing agency which acts as a securities depository or in
a book-entry system for the central handling of securities located outside
the United States (each a "Foreign Securities System") only through
arrangements implemented by the foreign banking institutions serving as
sub-custodians pursuant to the terms hereof (Foreign Securities Systems and
U.S. Securities Systems are collectively referred to herein as the
"Securities Systems"). Where possible, such arrangements shall include
entry into agreements containing the provisions set forth in Section 3.5
hereof.
3.4 Holding Securities. The Custodian may hold securities and other non-cash
-------------------
property for all of its customers, including the Fund, with a foreign sub-
custodian in a single account that is identified as belonging to the
Custodian for the benefit of its customers, provided however, that (i) the
----------------
records of the Custodian with respect to securities and other non-cash
property of the Fund which are maintained in such account shall identify by
book-entry those securities and other non-cash property belonging to the
Fund and (ii) the Custodian shall require that securities and other non-
cash property so held by the foreign sub-custodian be held separately from
any assets of the foreign sub-custodian or of others.
3.5 Agreements with Foreign Banking Institutions. Each agreement with a
--------------------------------------------
foreign banking institution shall provide that: (a) the assets of each
Portfolio will not be subject to any right, charge, security interest, lien
or claim of any kind in favor of the foreign banking institution or its
creditors or agent, except a claim of payment for their safe custody or
administration; (b) beneficial ownership for the assets of each Portfolio
will be freely transferable without the payment of money or value other
than for custody or administration; (c) adequate records will be maintained
identifying the assets as belonging to each applicable Portfolio; (d)
officers of or auditors employed by, or other representatives of the
Custodian, including to the extent permitted under applicable law the
independent public accountants for the Fund, will be given access to the
books and records of the foreign banking institution relating to its
actions under its agreement with the Custodian; and (e) assets of the
Portfolios held by the foreign sub-custodian will be subject only to the
instructions of the Custodian or its agents.
3.6 Access of Independent Accountants of the Fund. Upon request of the Fund,
---------------------------------------------
the Custodian will use its best efforts to arrange for the independent
accountants of the Fund to be afforded access to the books and records of
any foreign banking institution employed as a foreign sub-custodian insofar
as such books and records relate to the performance of such foreign banking
institution under its agreement with the Custodian.
3.7 Reports by Custodian. The Custodian will supply to the Fund from time to
--------------------
time, as mutually agreed upon, statements in respect of the securities and
other assets of the
11
<PAGE>
Portfolio(s) held by foreign sub-custodians, including but not limited to
an identification of entities having possession of the Portfolio(s)
securities and other assets and advices or notifications of any transfers
of securities to or from each custodial account maintained by a foreign
banking institution for the Custodian on behalf of each applicable
Portfolio indicating, as to securities acquired for a Portfolio, the
identity of the entity having physical possession of such securities.
3.8 Transactions in Foreign Custody Account. (a) Except as otherwise provided
---------------------------------------
in paragraph (b) of this Section 3.8, the provision of Sections 2.2 and 2.7
of this Contract shall apply, mutatis mutandis to the foreign securities of
------- --------
the Fund held outside the United States by foreign sub-custodians.
(b) Notwithstanding any provision of this Contract to the contrary,
settlement and payment for securities received for the account of each
applicable Portfolio and delivery of securities maintained for the account
of each applicable Portfolio may be effected in accordance with the
customary established securities trading or securities processing practices
and procedures in the jurisdiction or market in which the transaction
occurs, including, without limitation, delivering securities to the
purchaser thereof or to a dealer therefor (or an agent for such purchaser
or dealer) against a receipt with the expectation of receiving later
payment for such securities from such purchaser or dealer.
(c) Securities maintained in the custody of a foreign sub-custodian may be
maintained in the name of such entity's nominee to the same extent as set
forth in Section 2.3 of this Contract, and the Fund agrees to hold any such
nominee harmless from any liability as a holder of record of such
securities.
3.9 Liability of Foreign Sub-Custodians. Each agreement pursuant to which the
-----------------------------------
Custodian employs a foreign banking institution as a foreign sub-custodian
shall require the institution to exercise reasonable care in the
performance of its duties and to indemnify, and hold harmless, the
Custodian and the Fund from and against any loss, damage, cost, expense,
liability or claim arising out of or in connection with the institution's
performance of such obligations. At the election of the Fund, it shall be
entitled to be subrogated to the rights of the Custodian with respect to
any claims against a foreign banking institution as a consequence of any
such loss, damage, cost, expense, liability or claim if and to the extent
that the Fund has not been made whole for any such loss, damage, cost,
expense, liability or claim.
3.10 Liability of Custodian. The Custodian shall be liable for the acts or
----------------------
omissions of a foreign banking institution to the same extent as set forth
with respect to sub-custodians generally in this Contract and, regardless
of whether assets are maintained in the custody of a foreign banking
institution, a foreign securities depository or a branch of a U.S. bank as
contemplated by paragraph 3.13 hereof, the Custodian shall not be liable
for any loss, damage, cost, expense, liability or claim resulting from
nationalization, expropriation, currency restrictions, or acts of war or
terrorism or any loss where the sub-custodian has
12
<PAGE>
otherwise exercised reasonable care. Notwithstanding the foregoing
provisions of this paragraph 3.10, in delegating custody duties to State
Street London Ltd., the Custodian shall not be relieved of any
responsibility to the Fund for any loss due to such delegation, except such
loss as may result from (a) political risk (including, but not limited to,
exchange control restrictions, confiscation, expropriation,
nationalization, insurrection, civil strife or armed hostilities) or (b)
other losses (excluding a bankruptcy or insolvency of State Street London
Ltd. not caused by political risk) due to Acts of God, nuclear incident or
other losses under circumstances where the Custodian and State Street
London Ltd. have exercised reasonable care.
3.11 Reimbursement for Advances. If the Fund requires the Custodian to advance
--------------------------
cash or securities for any purpose for the benefit of a Portfolio including
the purchase or sale of foreign exchange or of contracts for foreign
exchange, or in the event that the Custodian or its nominee shall incur or
be assessed any taxes, charges, expenses, assessments, claims or
liabilities in connection with the performance of this Contract, except
such as may arise from its or its nominee's own negligent action, negligent
failure to act or willful misconduct, any property at any time held for the
account of the applicable Portfolio shall be security therefor and should
the Fund fail to repay the Custodian promptly, the Custodian shall be
entitled to utilize available cash and to dispose of such Portfolio's
assets to the extent necessary to obtain reimbursement.
3.12 Monitoring Responsibilities. The Custodian shall furnish annually to the
---------------------------
Fund, during the month of June, information concerning the foreign sub-
custodians employed by the Custodian. Such information shall be similar in
kind and scope to that furnished to the Fund in connection with the initial
approval of this Contract. In addition, the Custodian will promptly inform
the Fund in the event that the Custodian learns of a material adverse
change in the financial condition of a foreign sub-custodian or any
material loss of the assets of the Fund or in the case of any foreign sub-
custodian not the subject of an exemptive order from the Securities and
Exchange Commission is notified by such foreign sub-custodian that there
appears to be a substantial likelihood that its shareholders' equity will
decline below $200 million (U.S. dollars or the equivalent thereof) or that
its shareholders' equity has declined below $200 million (in each case
computed in accordance with generally accepted U.S. accounting principles).
3.13 Branches of U.S. Banks. (a) Except as otherwise set forth in this
----------------------
Contract, the provisions hereof shall not apply where the custody of the
Portfolios assets are maintained in a foreign branch of a banking
institution which is a "bank" as defined by Section 2(a)(5) of the
Investment Company Act of 1940 meeting the qualification set forth in
Section 26(a) of said Act. The appointment of any such branch as a sub-
custodian shall be governed by paragraph 1 of this Contract.
(b) Cash held for each Portfolio of the Fund in the United Kingdom shall be
maintained in an interest bearing account established for the Fund with the
Custodian's London branch, which account shall be subject to the direction
of the Custodian, State Street
13
<PAGE>
London Ltd. or both.
3.14 Tax Law. The Custodian shall have no responsibility or liability for any
-------
obligations now or hereafter imposed on the Fund or the Custodian as
custodian of the Fund by the tax law of the United States of America or any
state or political subdivision thereof. It shall be the responsibility of
the Fund to notify the Custodian of the obligations imposed on the Fund or
the Custodian as custodian of the Fund by the tax law of jurisdictions
other than those mentioned in the above sentence, including responsibility
for withholding and other taxes, assessments or other governmental charges,
certifications and governmental reporting. The sole responsibility of the
Custodian with regard to such tax law shall be to use reasonable efforts to
assist the Fund with respect to any claim for exemption or refund under the
tax law of jurisdictions for which the Fund has provided such information.
4. Payments for Sales or Repurchases or Redemptions of Shares of the Fund
----------------------------------------------------------------------
The Custodian shall receive from the distributor for the Shares or from the
Transfer Agent of the Fund and deposit into the account of the appropriate
Portfolio such payments as are received for Shares of that Portfolio issued or
sold from time to time by the Fund. The Custodian will provide timely
notification to the Fund on behalf of each such Portfolio and the Transfer Agent
of any receipt by it of payments for Shares of such Portfolio.
From such funds as may be available for the purpose but subject to the
limitations of the Declaration of Trust and any applicable votes of the Board of
Trustees of the Fund pursuant thereto, the Custodian shall, upon receipt of
instructions from the Transfer Agent, make funds available for payment to
holders of Shares who have delivered to the Transfer Agent a request for
redemption or repurchase of their Shares. In connection with the redemption or
repurchase of Shares of a Portfolio, the Custodian is authorized upon receipt of
instructions from the Transfer Agent to wire funds to or through a commercial
bank designated by the redeeming shareholders.
5. Proper Instructions
-------------------
Proper Instructions as used throughout this Contract means a writing signed
or initialed by one or more person or persons as the Board of Trustees shall
have from time to time authorized. Each such writing shall set forth the
specific transaction or type of transaction involved, including a specific
statement of the purpose for which such action is requested. Oral instructions
will be considered Proper Instructions if the Custodian reasonably believes them
to have been given by a person authorized to give such instructions with respect
to the transaction involved. The Fund shall cause all oral instructions to be
confirmed in writing. Proper Instructions may include communications effected
directly between electro-mechanical or electronic devices. For purposes of this
Section, Proper Instructions shall include instructions received by the
Custodian pursuant to any three-party agreement which requires a segregated
asset account in accordance with Section 2.12.
14
<PAGE>
6. Actions Permitted without Express Authority
-------------------------------------------
The Custodian may in its discretion, without express authority from the
Fund on behalf of each applicable Portfolio:
1) make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under this
Contract, provided that all such payments shall be accounted for to
--------
the Fund on behalf of the Portfolio;
2) surrender securities in temporary form for securities in definitive
form;
3) endorse for collection, in the name of the Portfolio, checks, drafts
and other negotiable instruments; and
4) in general, attend to all non-discretionary details in connection with
the sale, exchange, substitution, purchase, transfer and other
dealings with the securities and property of the Portfolio except as
otherwise directed by the Board of Trustees of the Fund.
7. Evidence of Authority
---------------------
The Custodian shall be protected in acting upon any instructions, notice,
request, consent, certificate or other instrument or paper believed by it to be
genuine and to have been properly executed by or on behalf of the Fund. The
Custodian may receive and accept a certified copy of a vote of the Board of
Trustees of the Fund as conclusive evidence (a) of the authority of any person
to act in accordance with such vote or (b) of any determination or of any action
by the Board of Trustees pursuant to the Declaration of Trust or By-laws of the
Fund as described in such vote, and such vote may be considered as in full force
and effect until receipt by the Custodian of written notice to the contrary.
8. Duties of Custodian with Respect to the Books of Account and Calculation of
---------------------------------------------------------------------------
Net Asset Value and Net Income
------------------------------
The Custodian shall cooperate with and supply necessary information to the
entity or entities appointed by the Board of Trustees of the Fund to keep the
books of account of each Portfolio and/or compute the net asset value per share
of the outstanding shares of each Portfolio or, if directed in writing to do so
by the Fund on behalf of the Portfolio, shall itself keep such books of account
and/or compute such net asset value per share. If so directed, the Custodian
shall also calculate daily the net income of the Portfolio as described in the
Fund's currently effective prospectus related to such Portfolio and shall advise
the Fund and the Transfer Agent daily of the total amounts of such net income
and, if instructed in writing by an officer of the Fund to do so, shall advise
the Transfer Agent periodically of the division of such net income among its
various components. The calculations of the net asset value per share and the
daily income of each Portfolio shall be made at the time or times described from
time to time in the
15
<PAGE>
Fund's currently effective prospectus related to such Portfolio.
9. Records
-------
The Custodian shall with respect to each Portfolio create and maintain all
records relating to its activities and obligations under this Contract in such
manner as will meet the obligations of the Fund under the Investment Company Act
of 1940, with particular attention to Section 31 thereof and Rules 31a-1 and
31a-2 thereunder. All such records shall be the property of the Fund and shall
at all times during the regular business hours of the Custodian be open for
inspection by duly authorized officers, employees or agents of the Fund and
employees and agents of the Securities and Exchange Commission. The Custodian
shall, at the Fund's request, supply the Fund with a tabulation of securities
owned by each Portfolio and held by the Custodian and shall, when requested to
do so by the Fund and for such compensation as shall be agreed upon between the
Fund and the Custodian, include certificate numbers in such tabulations.
10. Opinion of Fund's Independent Accountant
----------------------------------------
The Custodian shall take all reasonable action, as the Fund on behalf of
each applicable Portfolio may from time to time request, to obtain from year to
year favorable opinions from the Fund's independent accountants with respect to
its activities hereunder in connection with the preparation of the Fund's Form
N-1A, and Form N-SAR or other annual reports to the Securities and Exchange
Commission and with respect to any other requirements of such Commission.
11. Reports to Fund by Independent Public Accountants
-------------------------------------------------
The Custodian shall provide the Fund, on behalf of each of the Portfolios
at such times as the Fund may reasonably require, with reports by independent
public accountants on the accounting system, internal accounting control and
procedures for safeguarding securities, futures contracts and options on futures
contracts, including securities deposited and/or maintained in a Securities
System, relating to the services provided by the Custodian under this Contract;
such reports shall be of sufficient scope and in sufficient detail as may
reasonably be required by the Fund to provide reasonable assurance that any
material inadequacies would be disclosed by such examination, and, if there are
no such inadequacies, the reports shall so state.
12. Compensation of Custodian
-------------------------
The Custodian shall be entitled to reasonable compensation for its services
and expenses as Custodian, as agreed upon from time to time between the Fund on
behalf of each applicable Portfolio and the Custodian.
13. Responsibility of Custodian
---------------------------
So long as and to the extent that it is in the exercise of reasonable care,
the Custodian
16
<PAGE>
shall not be responsible for the title, validity or genuineness of any property
or evidence of title thereto received by it or delivered by it pursuant to this
Contract and shall be held harmless in acting upon any notice, request, consent,
certificate or other instrument reasonably believed by it to be genuine and to
be signed by the proper party or parties, including any futures commission
merchant acting pursuant to the terms of a three-party futures or options
agreement. The Custodian shall be held to the exercise of reasonable care in
carrying out the provisions of this Contract, but shall be kept indemnified by
and shall be without liability to the Fund for any action taken or omitted by it
in good faith without negligence or misconduct; provided, however, that the
Custodian uses reasonable care to provide prompt notice to the Fund of (i) the
circumstances and all pertinent facts of which the Custodian has knowledge
giving rise to the claim for indemnification or the reasonable likelihood that
such a claim may be made, and (ii) the Custodian's claim for such
indemnification provided, however, that the failure to so advise, identify or
notify the Fund shall not in any way limit the Fund's liability for
indemnification under this Contract with respect to any such claim to the extent
that the defense thereof is not materially prejudiced by such failure. If the
Fund acknowledges in writing that the Custodian is entitled to indemnification,
the Fund shall have the option to defend the Custodian against any claim which
may be the subject of this indemnification, and in the event that the Fund so
elects, it will so notify the Custodian, and thereupon the Fund shall take over
complete defense of the claim. In the event the Fund elects to assume the
control of the defense of the claim, the Custodian may participate in such
proceeding and retain additional counsel but shall bear all fees and expenses of
such retention of such counsel, unless (i) the Fund shall have specifically
authorized the retention of such counsel, or (ii) if the Fund and the Custodian
agree that the retention of such counsel is required as a result of a conflict
of interest. In the event the Fund assumes control of any proceeding, the Fund
shall keep the Custodian notified of the progress of such proceeding and, upon
request, consult with the Custodian and counsel. The Fund will, upon request by
the Custodian, either pay in the first instance or reimburse the Custodian for
any expenses subject to indemnity hereunder. The Fund shall not settle or
compromise any proceeding without the prior written consent of the Custodian
unless (i) such settlement or compromise involves no admission of guilt,
wrongdoing, or misconduct by the Custodian, (ii) such settlement or compromise
does not impose any obligations or restrictions on the Custodian other than
obligations to pay money that are subject to indemnity under this Contract, and
(iii) the Fund shall have paid or made arrangements satisfactory to the
Custodian for payment of amounts payable by the Custodian in connection with
such settlement. The Custodian shall in no case confess any claim or make any
compromise in any case in which the Fund will be asked to indemnify the
Custodian except with the Fund's prior written consent. The Custodian shall be
entitled to rely on and may act upon advice of counsel (who may be counsel for
the Fund) on all matters, and shall be without liability for any action
reasonably taken or omitted pursuant to such advice.
Except as may arise from the Custodian's own negligence or misconduct or
failure to exercise reasonable care or the negligence or misconduct or failure
to exercise reasonable care of a sub-custodian or agent, the Custodian shall be
without liability to the Fund for any loss, liability, claim or expense
resulting from or caused by: (i) events or circumstances beyond the reasonable
control of the Custodian or any sub-custodian or Securities System or any agent
or
17
<PAGE>
nominee of any of the foregoing, including, without limitation, nationalization
or expropriation, imposition of currency controls or restrictions, the
interruption, suspension or restriction of trading on or the closure of any
securities market, power or other mechanical or technological failures or
interruptions, computer viruses or communications disruptions, acts of war or
terrorism, riots, revolutions, work stoppages, natural disasters or other
similar events or acts; (ii) errors by the Fund or the Investment Advisor in
their instructions to the Custodian provided such instructions have been in
accordance with this Contract; (iii) the insolvency of or acts or omissions by a
Securities System; (iv) any delay or failure of any broker, agent or
intermediary, central bank or other commercially prevalent payment or clearing
system to deliver to the Custodian's sub-custodian or agent securities purchased
or in the remittance or payment made in connection with securities sold; (v) any
delay or failure of any company, corporation, or other body in charge of
registering or transferring securities in the name of the Custodian, the Fund,
the Custodian's sub-custodians, nominees or agents or any consequential losses
arising out of such delay or failure to transfer such securities including non-
receipt of bonus, dividends and rights and other accretions or benefits; and
(vi) delays or inability to perform its duties due to any disorder in market
infrastructure with respect to any particular security or Securities System; and
(vii) any change in any provision of any present law or regulation or order of
the United States of America, or any state thereof, or any other country, or
political subdivision thereof or of any court of competent jurisdiction.
The Custodian shall be liable for the acts or omissions of a foreign
banking institution to the same extent as set forth with respect to sub-
custodians generally in this Contract.
If the Fund on behalf of a Portfolio requires the Custodian to take any
action with respect to securities, which action involves the payment of money or
which action may, in the opinion of the Custodian, result in the Custodian or
its nominee assigned to the Fund or the Portfolio being liable for the payment
of money or incurring liability of some other form, the Fund on behalf of the
Portfolio, as a prerequisite to requiring the Custodian to take such action,
shall provide indemnity to the Custodian in an amount and form satisfactory to
it.
If the Fund requires the Custodian, its affiliates, subsidiaries or agents,
to advance cash or securities for any purpose (including but not limited to
securities settlements, foreign exchange contracts and assumed settlement) or in
the event that the Custodian or its nominee shall incur or be assessed any
taxes, charges, expenses, assessments, claims or liabilities in connection with
the performance of this Contract, except such as may arise from its or its
nominee's own negligent action, negligent failure to act or willful misconduct,
any property at any time held for the account of the applicable Portfolio shall
be security therefor and should the Fund fail to repay the Custodian promptly,
the Custodian shall be entitled to utilize available cash and to dispose of such
Portfolio's assets to the extent necessary to obtain reimbursement.
In no event shall the Custodian be liable for indirect, special or
consequential damages.
14. Effective Period, Termination and Amendment
-------------------------------------------
18
<PAGE>
This Contract shall become effective as of its execution, shall continue in
full force and effect until terminated as hereinafter provided, may be amended
at any time by mutual agreement of the parties hereto and may be terminated by
either party by an instrument in writing delivered or mailed, postage prepaid to
the other party, such termination to take effect not sooner than thirty (30)
days after the date of such delivery or mailing; provided, however that the
--------
Custodian shall not with respect to a Portfolio act under Section 2.10 hereof in
the absence of receipt of an initial certificate of the Secretary or an
Assistant Secretary that the Board of Trustees of the Fund has approved the
initial use of a particular Securities System by such Portfolio, as required by
Rule 17f-4 under the Investment Company Act of 1940, as amended and that the
Custodian shall not with respect to a Portfolio act under Section 2.11 hereof in
the absence of receipt of an initial certificate of the Secretary or an
Assistant Secretary that the Board of Trustees has approved the initial use of
the Direct Paper System by such Portfolio; provided further, however, that the
-------- -------
Fund shall not amend or terminate this Contract in contravention of any
applicable federal or state regulations, or any provision of the Declaration of
Trust, and further provided, that the Fund on behalf of one or more of the
Portfolios may at any time by action of its Board of Trustees (i) substitute
another bank or trust company for the Custodian by giving notice as described
above to the Custodian, or (ii) immediately terminate this Contract in the event
of the appointment of a conservator or receiver for the Custodian by the
Comptroller of the Currency or upon the happening of a like event at the
direction of an appropriate regulatory agency or court of competent
jurisdiction.
Upon termination of the Contract, the Fund on behalf of each applicable
Portfolio shall pay to the Custodian such compensation as may be due as of the
date of such termination and shall likewise reimburse the Custodian for its
costs, expenses and disbursements.
15. Successor Custodian
-------------------
If a successor custodian for the Fund, or one or more of the Portfolios
shall be appointed by the Board of Trustees of the Fund, the Custodian shall,
upon termination, deliver to such successor custodian at the office of the
Custodian, duly endorsed and in the form for transfer, all securities of each
applicable Portfolio then held by it hereunder and shall transfer to an account
of the successor custodian all of the securities of each such Portfolio held in
a Securities System.
If no such successor custodian shall be appointed, the Custodian shall, in
like manner, upon receipt of a certified copy of a vote of the Board of Trustees
of the Fund, deliver at the office of the Custodian and transfer such
securities, funds and other properties in accordance with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Trustees shall have been delivered to
the Custodian on or before the date when such termination shall become
effective, then the Custodian shall have the right to deliver to a bank or trust
company, which is a "bank" as defined in the Investment Company Act of 1940,
doing business in Boston, Massachusetts, of its own selection, having an
aggregate capital, surplus, and undivided profits, as shown by its last
published report, of not less than
19
<PAGE>
$25,000,000, all securities, funds and other properties held by the Custodian on
behalf of each applicable Portfolio and all instruments held by the Custodian
relative thereto and all other property held by it under this Contract on behalf
of each applicable Portfolio and to transfer to an account of such successor
custodian all of the securities of each such Portfolio held in any Securities
System. Thereafter, such bank or trust company shall be the successor of the
Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of Trustees to appoint a successor custodian, the Custodian shall be
entitled to fair compensation for its services during such period as the
Custodian retains possession of such securities, funds and other properties and
the provisions of this Contract relating to the duties and obligations of the
Custodian shall remain in full force and effect.
16. Interpretive and Additional Provisions
--------------------------------------
In connection with the operation of this Contract, the Custodian and the
Fund on behalf of each of the Portfolios, may from time to time agree on such
provisions interpretive of or in addition to the provisions of this Contract as
may in their joint opinion be consistent with the general tenor of this
Contract. Any such interpretive or additional provisions shall be in a writing
signed by both parties and shall be annexed hereto, provided that no such
--------
interpretive or additional provisions shall contravene any applicable federal or
state regulations or any provision of the Declaration of Trust or By-laws of the
Fund. No interpretive or additional provisions made as provided in the
preceding sentence shall be deemed to be an amendment of this Contract.
17. Additional Funds
----------------
In the event that the Fund establishes one or more series of Shares in
addition to the Goldman Sachs Growth and Income Fund, the Goldman Sachs CORE
U.S. Equity Fund, the Goldman Sachs CORE Large Cap Growth Fund, the Goldman
Sachs CORE Small Cap Equity Fund, the Goldman Sachs Capital Growth Fund, the
Goldman Sachs Mid Cap Equity Fund, the Goldman Sachs International Equity Fund,
the Goldman Sachs Global Income Fund, and the Goldman Sachs High Yield Fund with
respect to which it desires to have the Custodian render services as custodian
under the terms hereof, it shall so notify the Custodian in writing, and if the
Custodian agrees in writing to provide such services, such series of Shares
shall become a Portfolio hereunder.
18. Massachusetts Law to Apply
--------------------------
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of The Commonwealth of Massachusetts.
20
<PAGE>
19. Prior Contracts
---------------
This Contract supersedes and terminates, as of the date hereof, all prior
contracts between the Fund on behalf of each of the Portfolios and the Custodian
relating to the custody of the Fund's assets.
20. Reproduction of Documents
-------------------------
This Contract and all schedules, exhibits, attachments and amendments
hereto may be reproduced by any photographic, photostatic, microfilm, micro-
card, miniature photographic or other similar process. The parties hereto each
agree that any such reproduction shall be admissible in evidence as the original
itself in any judicial or administrative proceeding, whether or not the original
is in existence and whether or not such reproduction was made by a party in the
regular course of business, and that any enlargement, facsimile or further
reproduction of such reproduction shall likewise be admissible in evidence.
21. Shareholder Communications Election
-----------------------------------
Securities and Exchange Commission Rule 14b-2 requires banks which hold
securities for the account of customers to respond to requests by issuers of
securities for the names, addresses and holdings of beneficial owners of
securities of that issuer held by the bank unless the beneficial owner has
expressly objected to disclosure of this information. In order to comply with
the rule, the Custodian needs the Fund to indicate whether it authorizes the
Custodian to provide the Fund's name, address, and share position to requesting
companies whose securities the Fund owns. If the Fund tells the Custodian "no",
the Custodian will not provide this information to requesting companies. If the
Fund tells the Custodian "yes" or does not check either "yes" or "no" below, the
Custodian is required by the rule to treat the Fund as consenting to disclosure
of this information for all securities owned by the Fund or any funds or
accounts established by the Fund. For the Fund's protection, the Rule prohibits
the requesting company from using the Fund's name and address for any purpose
other than corporate communications. Please indicate below whether the Fund
consents or objects by checking one of the alternatives below.
YES [ ] The Custodian is authorized to release the Fund's name,
address, and share positions.
NO [ X ] The Custodian is not authorized to release the Fund's name,
address, and share positions.
22. Miscellaneous
-------------
The name "Goldman Sachs Variable Insurance Trust" is the designation of the
Board of
21
<PAGE>
Trustees for the time being under the Declaration of Trust and all persons
dealing with the Fund must look solely to the property of the Fund for the
enforcement of any claims against the Fund as neither the Trustees, officers,
agents, nor shareholders of the Fund assume any personal liability for
obligations entered into on behalf of the Fund. No series of the Fund shall be
liable for any claims against any other series of the Fund.
22
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the day of ,
1997.
ATTEST GOLDMAN SACHS VARIABLE INSURANCE
TRUST
____________________________ By ________________________________
_______________
Name: Name:
Title: Title:
ATTEST STATE STREET BANK AND TRUST COMPANY
______________________________ By _________________________________
_______Thomas M. Lenz Ronald E. Logue
Vice President Executive Vice President
23
<PAGE>
EXHIBIT 9(a)
TRANSFER AGENCY AGREEMENT
AGREEMENT made as of the 21st day of October, 1997 by and between
GOLDMAN SACHS VARIABLE INSURANCE TRUST (the "Trust"), a Delaware business trust,
and GOLDMAN, SACHS & CO. ("Goldman Sachs"), a New York limited partnership.
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Trust is an open-end, diversified management investment
company registered under the Investment Company Act of 1940, as amended (the
"1940 Act");
WHEREAS, the Trust is empowered to issue shares of beneficial interest
("Shares") in separate series with each such series representing the interests
in a separate portfolio of securities and other assets (a "Fund" or collectively
the "Funds");
WHEREAS, the Trust presently offers Shares in nine funds: Goldman
Sachs Growth and Income Fund, Goldman Sachs CORE U.S. Equity Fund, Goldman Sachs
CORE Large Cap Growth Fund, Goldman Sachs CORE Small Cap Equity Fund, Goldman
Sachs Capital Growth Fund, Goldman Sachs Mid Cap Equity Fund, Goldman Sachs
International Equity Fund, Goldman Sachs Global Income Fund and Goldman Sachs
High Yield Fund; and
WHEREAS, the Trust desires to appoint Goldman Sachs as Transfer Agent
and Dividend Disbursing Agent and to perform the other services contemplated
hereby with respect to the Trust and each Fund thereof; and
WHEREAS, Goldman Sachs is a registered transfer agent and is
authorized to enter into this agreement and desires to accept appointment as
Transfer Agent and Dividend Disbursing Agent; and
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
1. APPOINTMENT
-----------
1.01. Subject to the terms set forth in this Agreement, the Trust
hereby appoints Goldman Sachs as Transfer Agent and Dividend Disbursing Agent
and to perform the other services contemplated hereby with respect to the Trust
and each Fund thereof.
1.02. Goldman Sachs hereby accepts such appointment and agrees that
it will act as Transfer Agent and Dividend Disbursing Agent and perform the
other services described herein with respect to the Trust and each Fund thereof.
1.03. Goldman Sachs agrees to provide the necessary facilities,
equipment and executive, administrative and clerical personnel to perform its
duties and obligations hereunder in accordance with the terms hereof.
2. TRANSFER AGENT
--------------
2.01. Goldman Sachs shall, subject to any Instructions (as
defined in Section 5 hereof), record
<PAGE>
the issuance, transfer and redemptions of Shares in accordance with the
following provisions of this Section 2.
2.02. After being notified by the Trust's custodian (the "Custodian")
or, if applicable, the Custodian's sub-custodian (the "Sub-Custodian") that the
purchase price in respect of orders to purchase Shares has been received in the
form of Federal funds, Goldman Sachs shall compute in accordance with the
Trust's Prospectus (the term "Prospectus," as used herein, shall be deemed to
mean the Trust's then current Prospectus, all supplements thereto, the Trust's
then current Statement of Additional Information and all supplements thereto
unless the context otherwise requires) the number of Shares to be purchased at
the net asset value of such Shares applicable to such order and shall (i) credit
the account of the purchaser with the number of Shares so purchased as of the
time contemplated by the Trust's Prospectus and (ii) subject to paragraph 2.05,
mail to the purchaser a confirmation of such purchase and notice of such credit.
2.03. Upon receipt of requests for transfer in proper form, Goldman
Sachs shall make appropriate entries to reflect the transfer of Shares on the
records of the Trust maintained by it.
2.04. Goldman Sachs shall make an adequate and accurate record of the
date and time of receipt of all requests for redemption of Shares transmitted or
delivered to it, and shall process such requests in accordance with the
following provisions. If such redemption requests comply with the standards for
redemption approved by the Trust (as evidenced by the Trust's Prospectus or by
Instructions), Goldman Sachs shall compute in accordance with the Trust's
Prospectus the amount of redemption proceeds payable to each Shareholder
requesting redemption. If any such request for redemption does not comply with
the standards for redemption approved by the Trust, Goldman Sachs shall take
such actions as it reasonably deems appropriate under the circumstances and
shall effect such redemption at the price applicable to the date and time of
receipt of a redemption request (including any necessary documents) complying
with such standards. At such times as may be agreed upon by Goldman Sachs and
the Custodian so as to provide for the timely payment of redemptions in
accordance with the Trust's Prospectus, Goldman Sachs shall advise the Custodian
of aggregate redemption requests for which the Custodian is authorized to effect
payment and shall advise the Custodian of the amount required to pay any portion
of such redemptions which is payable by wire and, if redemptions by check are
instituted in the future, the amount required to pay any portion of such
redemptions which is payable by check. Goldman Sachs shall, as applicable,
instruct the Custodian to wire transfer such redemptions to the Sub-Custodian or
to the Trust's checking account established and maintained at The Northern Trust
Company ("Northern") in accordance with Section 17(f) of the 1940 Act. At such
times as may be agreed upon by Goldman Sachs and the Sub-Custodian so as to
provide for the timely payment of redemptions in accordance with the provisions
of the Trust's Prospectus, Goldman Sachs shall give wiring instructions to the
Sub-Custodian so as to effect payment for redemptions to all Shareholders,
except for Shareholders who request redemption by check if such redemptions are
instituted in the future.
In accordance with the provisions of the resolutions of the Trust's
Board of Trustees and the Trust's Prospectus and with the terms of this
Agreement and if redemptions by check are instituted, Goldman Sachs shall
prepare and mail checks for redemptions to holders of Shares ("Shareholders")
who requested that redemption proceeds be remitted by check. Goldman Sachs
shall mail to the redeeming Shareholder a confirmation of the redemption.
2.05. In lieu of mailing the confirmation and notice to purchasers as
provided in paragraph 2.02
<PAGE>
and the confirmation of redeeming Shareholders as provided in paragraph 2.04,
Goldman Sachs may instead, if the Trust's Prospectus so provides, provide a
monthly statement to Shareholders, provided such statement complies with the
requirements of paragraph (c) of Rule 10b-10 under the Securities Exchange Act
of 1934 (the "1934 Act").
3. DIVIDENDS AND DISTRIBUTIONS
---------------------------
3.01. With respect to those Shareholders which have elected
reinvestment of dividends and distributions in additional Shares, Goldman Sachs
shall credit the account of such Shareholders with the requisite number of
additional Shares relative to each such dividend or distribution. With respect
to those Shareholders which have elected to receive such dividends and
distributions in cash, at such times as may be agreed upon by Goldman Sachs and
the Custodian so as to provide for the timely payment of dividends or
distributions to Shareholders in accordance with the provisions of the Trust's
Prospectus, Goldman Sachs shall advise the Custodian orally of and confirm to it
in writing, the aggregate amount of dividends or distributions payable to
Shareholders and shall advise the Custodian orally of and confirm to it in
writing, the amount required to pay any portion of any such dividend or
distribution which is payable by wire and, if dividends or distributions by
check are instituted in the future, the amount required to pay any portion of
any such dividend or distribution which is payable by check. Goldman Sachs
shall, as applicable, instruct the Custodian to wire transfer dividends or
distributions to the Sub-Custodian or to the Trust's checking account
established and maintained at Northern in accordance with Section 17(f) of the
1940 Act. At such times as may be agreed upon by Goldman Sachs and the Sub-
Custodian so as to provide for the timely payment of dividends and distributions
in accordance with the provisions of the Trust's Prospectus, Goldman Sachs shall
give wiring instructions to the Sub-Custodian so as to effect payment for
dividends and distributions to Shareholders who requested such payment by wire.
In accordance with the provisions of the resolutions of the Trust's Board of
Trustees and the Trust's Prospectus and with the terms of this Agreement and if
dividends or distributions by check are instituted, Goldman Sachs shall prepare
and mail checks for dividends or distributions to Shareholders who requested
payment thereof by check.
4. ADDITIONAL DUTIES
-----------------
4.01. Goldman Sachs shall establish and maintain a separate account
with respect to each Shareholder. Goldman Sachs shall perform such "master" and
"subaccounting" services, if any, as are described in the Trust's Prospectus,
provided that the Trust shall not change the description of such services in the
Prospectus without obtaining the advance consent of Goldman Sachs. Goldman
Sachs shall maintain records showing for each Shareholder's account the
following: (a) name, address, tax identifying number and number of Shares held;
historical information regarding the account, including dividends and
distributions paid and date and price for all transactions; (c) any stop or
restraining order placed against the account; (d) information with respect to
withholdings; (e) any dividend or distribution reinvestment order, dividend or
distribution address and correspondence relating to the current maintenance of
the account; and (f) any information required in order for Goldman Sachs to
perform the calculations and make the determinations contemplated or required by
this Agreement. Goldman Sachs shall maintain all records relating to its
activities and obligations under this Agreement in such manner as will enable
the Trust and Goldman Sachs to meet their respective obligations under: (i) the
Trust's Prospectus; (ii) the required recordkeeping and reporting provisions of
the 1934 Act, particularly Section 17A thereof, and of the 1940 Act,
particularly Sections 30 and 31 thereof, and state securities or Blue Sky laws,
and the rules and regulations thereunder; and (iii) applicable Federal and State
tax laws and regulations thereunder. All records maintained by Goldman Sachs in
connection with the performance of
<PAGE>
its duties under this Agreement will remain the property of the Trust, shall be
returned to the Trust promptly upon request and, in the event of termination of
this Agreement, will be promptly returned to or delivered as directed by the
Trust. Such records may be inspected by the Trust at reasonable times. In the
event such records are returned to or delivered as directed by the Trust,
Goldman Sachs may at its option retain copies of such records.
4.02. Goldman Sachs shall furnish to the Trust: (a) information as to
the Shares distributed or to be distributed in each State for "Blue Sky"
purposes at such times and in such degree of detail as is necessary for the
Trust to verify the satisfaction of or to satisfy its obligations to register
such Shares under applicable "Blue Sky" laws, and copies of Shareholder lists
and such other information and statistical data as may reasonably be requested
in Instructions.
4.03. Goldman Sachs shall prepare and file with the Internal Revenue
Service and with the appropriate State agencies, and, if required, mail to
Shareholders such returns for reporting (i) dividends and distributions paid,
credited or withheld as are required by the Trust's Prospectus or applicable law
or regulation to be so filed and mailed and (ii) expenses incurred by the Trust
as are required by applicable Federal law.
4.04. Goldman Sachs shall prepare and mail an individual monthly
statement for each Shareholder showing all activity in such Shareholder's
account for the month. Upon request from a Shareholder, Goldman Sachs shall
prepare and mail a year-to-date statement showing all activity in such
Shareholder's account on a year-to-date basis.
4.05. Goldman Sachs shall mail such Shareholder reports and such
proxy material, proxy cards and other material supplied to it by the Trust in
connection with Shareholder meetings of the Trust and shall receive, examine and
tabulate returned proxies and certify the vote to the Trust, all as and to the
extent requested by the Trust.
4.06. Goldman Sachs shall cooperate with the Trust and the Trust's
independent public accountants in connection with: (a) the preparation of
reports to Shareholders, to the Securities and Exchange Commission (including
all required periodic and other reports), to State securities commissioners, and
to others, annual and other audits of the books and records of the Trust, and
(c) other matters of a like nature.
4.07. Goldman Sachs shall maintain adequate procedures and systems to
safeguard from loss or damage attributable to fire, theft, misuse or any other
cause the Trust's records and other data and Goldman Sachs' records, data,
equipment, facilities and other property used in the performance of its
obligations hereunder.
4.08. Goldman Sachs shall comply with the provisions of Investment
Company Act Release No. 6863 dated December 8, 1971 entitled AGuidelines
Relating to Checking Accounts Established Pursuant to Section 17(f) of The
Investment Company Act of 1940, as Amended, by Investment Companies Having Bank
Custodians@ (the ARelease@) with regard to the establishment and maintenance of
any checking account for the Fund. Goldman Sachs shall establish and maintain
procedures reasonably designed to assure the safekeeping of checks delivered to
Goldman Sachs for signature by employees of Goldman Sachs and the security and
integrity of the signing of such checks. Goldman Sachs= employees are not
permitted to sign any such checks which are made payable to ACash@ or to the
order of the Fund or to
<PAGE>
any named petty cashier of the Fund or which are not made payable to the order
of designated payee.
4.09. Goldman Sachs shall maintain expedited redemption and dividend
instructions from Shareholders in the form of such records as are necessary to
honor telephone, telegraph or other redemption requests from Shareholders
without signature guarantee and to effect the payment of dividends and
distributions in accordance with the provisions of the Trust's Prospectus.
Goldman Sachs shall apply such instructions as necessary to effect dividends,
distributions, redemptions and other transactions in accordance with the
provisions of the Trust's Prospectus. Goldman Sachs shall establish and
maintain procedures reasonably designed to assure the accuracy, safekeeping and
proper application of records of expedited redemption and dividend instructions.
4.10. Goldman Sachs, in the performance of its duties hereunder:
(a) shall use the care, skill, prudence and diligence under the
circumstances then prevailing that a prudent person acting in a like capacity
and familiar with such matters would use in the conduct of an enterprise of a
like character and with like aims;
shall act in conformity with the Trust's Declaration of Trust dated
September 16, 1997 (such Declaration of Trust, as presently in effect and as
amended from time to time, is herein called the "Trust Agreement"), the Trust's
By-Laws (such By-laws, as presently in effect and as amended from time to time,
are herein called the "By-laws"), the Trust's Prospectus and any Instruction,
and will, subject to the standard set forth in paragraph 4.10(a) above, comply
with and conform to the requirements of the 1940 Act, the 1934 Act, particularly
Section 17A thereof, and all other applicable federal and state laws,
regulations and rulings; and
(c) shall not be liable for any damages, including those resulting
from its failure to perform its obligations under the terms of this Agreement,
provided such damages or failure are due to an act of God, equipment or
transmission failure, strike or other cause reasonably beyond its control.
5. INSTRUCTIONS
------------
5.01. Goldman Sachs shall be deemed to have received Instructions (as
that term is used herein) upon receipt of written instructions (including
receipt by telecopier, telegram, cable or Telex), which may be continuing
instructions, signed by a majority of the Board of Trustees of the Trust or by a
person that the Trustees shall have from time to time authorized to give the
particular class of Instructions in question. Different persons may be
authorized to give Instructions for different purposes, and Instructions may be
general or specific in terms. A certified copy of a By-law, resolution or
action of the Board of Trustees of the Trust may be received and accepted by
Goldman Sachs as conclusive evidence of the authority of any such persons to act
and may be considered to be in full force and effect until receipt by Goldman
Sachs of written notice to the contrary.
5.02. The Trust may also authorize one or more designated persons to
issue oral (such term as used herein including, without limitation, telephoned)
instructions, specifying the type or types of instructions that may be so
issued, in which case the Trust shall deliver to Goldman Sachs resolutions of
the Board of Trustees to such effect. One or more of the persons designated by
the Board of Trustees to give oral instructions shall promptly confirm such oral
instructions in writing to Goldman Sachs. Such instructions when given in
accordance with the provisions hereof and with such resolutions shall be
<PAGE>
deemed Instructions hereunder. In case of conflict between oral Instructions
given by a person designated in the resolution of the Board of Trustees referred
to in the first sentence of this paragraph 5.02 and any written Instructions
given by a person designated in the resolution of the Board of Trustees referred
to in the first sentence of this paragraph 5.01 and any written Instructions,
the Instructions most recently received by Goldman Sachs shall prevail, and in
case of conflict between oral Instructions given by a person designated in such
resolution and any written confirmation or purported confirmation of oral
Instructions, such written confirmation shall prevail; provided that any
transaction initiated by Goldman Sachs pursuant to such oral Instructions may,
but need not, be completed by Goldman Sachs notwithstanding Goldman Sachs'
receipt of conflicting written Instructions hereunder or written confirmation or
purported confirmation of oral Instructions hereunder subsequent to Goldman
Sachs' initiation of such transaction.
5.03. At any time Goldman Sachs may apply to any Trustee or officer
of the Trust or any person authorized to give instructions, and may consult with
legal counsel to the Trust with respect to any matter arising in connection with
the services to be performed by Goldman Sachs under this Agreement, and Goldman
Sachs and its agents or subcontractors shall not be liable and shall be
indemnified by the Trust for any action taken or omitted by it in reliance upon
such instructions or upon the opinion of such counsel.
6. COMPENSATION
------------
6.01. For the services provided and the expenses assumed by Goldman
Sachs pursuant to this Agreement, the Trust will pay to Goldman Sachs as full
compensation therefor the compensation set forth in the schedule of even date
herewith delivered by Goldman Sachs to the Trust until a different compensation
schedule shall be agreed upon in writing between the parties which schedule
shall be preceded by approval of a majority of the Trustees, including the
Trustees who are not interested persons of the Trust or Goldman Sachs.
6.02. Goldman Sachs shall be responsible for the cost of any and all
forms (excluding the cost of developing the format of such forms) prepared for
use in connection with its actions hereunder, as well as the cost of postage,
telephone and telegraph used in communicating with Shareholders of the Trust to
the extent such communications are required under the terms of this Agreement.
Goldman Sachs shall be entitled to all property rights to the format of all
forms it has prepared for use in connection with its actions hereunder. Goldman
Sachs hereby grants the Trust a perpetual, nonexclusive, royalty-free,
assignable license to use forms of identical or similar format to such forms.
Goldman Sachs shall be responsible for all microfiche, microfilm and other
mediums for the permanent storage of the Trust's records consumed by Goldman
Sachs in the performance of its obligations hereunder. Except as provided in
this paragraph 6.02, Goldman Sachs will pay all expenses incurred by it in
connection with the performance of its duties under this Agreement.
7. INDEMNIFICATION
---------------
7.01. The Trust hereby agrees to indemnify and hold harmless Goldman
Sachs, its officers, partners and employees and each person, if any, who
controls Goldman Sachs (collectively, the "Indemnified Parties") against any and
all losses, claims, damages or liabilities, joint or several, to which any such
Indemnified Party may become subject under the 1934 Act, the 1940 Act or other
Federal or State statutory law or regulation, at common law or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon Goldman Sachs' actions
<PAGE>
hereunder. The Trust will reimburse each Indemnified Party for any legal or
other expenses incurred by such Indemnified Party in connection with
investigating or defending any such loss, claim, damages, liability or action.
7.02. It is understood, however, that nothing in this Section 7
shall protect any Indemnified Party, or entitle any Indemnified Party to
indemnification against any liability to the Trust or its shareholders to which
such party would otherwise be subject by reason of willful misfeasance, bad
faith, or gross negligence, in the performance of his duties, or by reason of
his reckless disregard of his obligations and duties under this Agreement.
8. TERM OF AGREEMENT
-----------------
8.01. This Agreement shall continue in full force and effect until
terminated as hereinafter provided, may be amended at any time by mutual
agreement of the parties hereto, which agreement shall be preceded by approval
of the Trustees, including the Trustees who are not interested persons of the
Trust or Goldman Sachs, and may be terminated (except as to the second and third
sentences of paragraph 6.02 and as to paragraphs 7.01 and 7.02) by either party
by an instrument in writing delivered or mailed, postage prepaid, to the other
party, such termination to take effect no sooner than 120 days after the date of
such delivery or mailing.
8.02. Goldman Sachs and the Trust may agree from time to time, by
written instrument signed by both parties, on such provisions interpretative of
or in addition to the provisions of this Agreement as may in their joint opinion
be consistent with the general tenor of this Agreement. No interpretative or
additional provisions made as provided in the preceding sentence shall be deemed
to be an amendment of this Agreement.
9. MISCELLANEOUS
-------------
9.01. Without limiting the other provisions hereof, notice and other
writings delivered or mailed postage prepaid to the Trust in care of Goldman
Sachs Variable Insurance Trust, One New York Plaza, New York, NY 10004,
Attention: Michael Richman, or to Goldman Sachs at 4900 Sears Tower Chicago,
Illinois 60606, Attention: Nancy L. Mucker or to such other address as the Trust
or Goldman Sachs may hereafter specify by written notice to be the most recent
address specified by the party to whom such notice is addressed, shall be deemed
to have been properly delivered or given hereunder to the respective addressee.
9.02. This Agreement shall be binding on and shall inure to the
benefit of the Trust and Goldman Sachs and their respective successors, shall be
construed according to the laws of Illinois (except as to paragraph 9.03 hereof
which shall be construed in accordance with the laws of Delaware) and may be
executed in two or more counterparts, each of which shall be deemed an original.
This Agreement may not be assigned by Goldman Sachs nor may Goldman Sachs'
duties hereunder be performed by any other person without the prior written
consent of the Trust authorized and approved by a resolution of the Board of
Trustees. The term "assigned" shall be construed consistently with the term
"assignment" as defined in Section 2(a)(4) of the 1940 Act and Rule 2a-6
thereunder as if such Rule applied to transfer and dividend disbursing agents.
The headings in this Agreement have been inserted for convenience of reference
only and shall not affect the meaning or interpretation of this Agreement. If
any provision of this Agreement shall be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of
<PAGE>
this Agreement shall not be affected thereby. Any provision in this Agreement
requiring compliance with any statute or regulation shall mean such statute or
regulation as amended and in effect from time to time.
9.03. This Agreement is executed by or on behalf of the Trust and the
obligations hereunder are not binding upon any of the Trustees, officers or
Shareholders of the Trust individually but are binding only upon the Trust and
its assets and property. The Trust's Trust Agreement is on file with the
Secretary of the State of Delaware.
GOLDMAN SACHS VARIABLE INSURANCE TRUST
Attest:/s/ Michael Richman By:/s/ Douglas C. Grip
------------------- -------------------
Michael Richman Douglas C. Grip
Secretary President of the Trust
GOLDMAN, SACHS & CO.
Attest:/s/ Michael Richman By:/s/ David B. Ford
------------------- -----------------
Michael Richman David B. Ford
Counsel to the Funds Group Managing Director
<PAGE>
EXHIBIT 99.9(b)
FORM OF PARTICIPATION AGREEMENT
THIS AGREEMENT, made and entered into this __ day of ________, 1997 by
and between GOLDMAN SACHS VARIABLE INSURANCE TRUST, an unincorporated business
trust formed under the laws of Delaware (the "Trust"), GOLDMAN, SACHS & CO., a
New York limited partnership (the "Distributor"), and _________________ LIFE
INSURANCE COMPANY, a ________ life insurance company (the "Company"), on its own
behalf and on behalf of each separate account of the Company identified herein.
WHEREAS, the Trust is a series-type mutual fund offering shares of
beneficial interest (the "Trust shares") consisting of one or more separate
series ("Series") of shares, each such Series representing an interest in a
particular investment portfolio of securities and other assets (a "Fund"), and
which Series may be subdivided into various classes ("Classes") with each such
Class supporting a distinct charge and expense arrangement; and
WHEREAS, the Trust was established for the purpose of serving as an
investment vehicle for insurance company separate accounts supporting variable
annuity contracts and variable life insurance policies to be offered by
insurance companies and may also be utilized by qualified retirement plans; and
WHEREAS, the Distributor has the exclusive right to distribute Trust
shares to qualifying investors; and
WHEREAS, the Company desires that the Trust serve as an investment
vehicle for a certain separate account(s) of the Company and the Distributor
desires to sell shares of certain Series and/or Class(es) to such separate
account(s);
NOW, THEREFORE, in consideration of their mutual promises, the Trust,
the Distributor and the Company agree as follows:
ARTICLE I
ADDITIONAL DEFINITIONS
1.1. "Account" -- the separate account of the Company described more
specifically in Schedule 1 to this Agreement. If more than one separate account
is described on Schedule 1, the term shall refer to each separate account so
described.
1.2. "Business Day" -- each day that the Trust is open for business as
provided in the Trust's Prospectus.
1.3. "Code" -- the Internal Revenue Code of 1986, as amended, and any
successor thereto.
1.4. "Contracts" -- the class or classes of variable annuity
contracts and/or variable life insurance policies issued by the Company and
described more specifically on Schedule 2 to this Agreement.
1.5. "Contract Owners" -- the owners of the Contracts, as
distinguished from all Product Owners.
<PAGE>
1.6. "Participating Account" -- a separate account investing all or
a portion of its assets in the Trust, including the Account.
1.7. "Participating Insurance Company" -- any insurance company
investing in the Trust on its behalf or on behalf of a Participating Account,
including the Company.
1.8. "Participating Plan" -- any qualified retirement plan investing
in the Trust.
1.9. "Participating Investor" -- any Participating Account,
Participating Insurance Company or Participating Plan, including the Account and
the Company.
1.10. "Products" -- variable annuity contracts and variable life
insurance policies supported by Participating Accounts, including the Contracts.
1.11. "Product Owners" -- owners of Products, including Contract
Owners.
1.12. "Trust Board" -- the board of trustees of the Trust.
1.13. "Registration Statement" -- with respect to the Trust shares
or a class of Contracts, the registration statement filed with the SEC to
register such securities under the 1933 Act, or the most recently filed
amendment thereto, in either case in the form in which it was declared or became
effective. The Contracts' Registration Statement for each class of Contracts is
described more specifically on Schedule 2 to this Agreement. The Trust's
Registration Statement is filed on Form N-1A (File No. 333-35883).
1.14. "1940 Act Registration Statement" -- with respect to the Trust
or the Account, the registration statement filed with the SEC to register such
person as an investment company under the 1940 Act, or the most recently filed
amendment thereto. The Account's 1940 Act Registration Statement is described
more specifically on Schedule 2 to this Agreement. The Trust's 1940 Act
Registration Statement is filed on Form N-1A (File No. 811-08361).
1.15. "Prospectus" -- with respect to shares of a Series (or Class)
of the Trust or a class of Contracts, each version of the definitive prospectus
or supplement thereto filed with the SEC pursuant to Rule 497 under the 1933
Act. With respect to any provision of this Agreement requiring a party to take
action in accordance with a Prospectus, such reference thereto shall be deemed
to be to the version for the applicable Series, Class or Contracts last so filed
prior to the taking of such action. For purposes of Article IX, the term
"Prospectus" shall include any statement of additional information incorporated
therein.
1.16. "Statement of Additional Information" -- with respect to the
shares of the Trust or a class of Contracts, each version of the definitive
statement of additional information or supplement thereto filed with the SEC
pursuant to Rule 497 under the 1933 Act. With respect to any provision of this
Agreement requiring a party to take action in accordance with a Statement of
Additional Information, such reference thereto shall be deemed to be the last
version so filed prior to the taking of such action.
1.17. "SEC" -- the Securities and Exchange Commission.
1.18. "NASD" -- The National Association of Securities Dealers, Inc.
1.19. "1933 Act" -- the Securities Exchange Act of 1933, as amended.
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1.20. "1940 Act" -- the Investment Company Act of 1940, as amended.
ARTICLE II
SALE OF TRUST SHARES
2.1. AVAILABILITY OF SHARES
(a) The Trust has granted to the Distributor exclusive authority
to distribute the Trust shares and to select which Series or Classes of
Trust shares shall be made available to Participating Investors. Pursuant
to such authority, and subject to Article X hereof, the Distributor shall
make available to the Company for purchase on behalf of the Account, shares
of the Series and Classes listed on Schedule 3 to this Agreement, such
purchases to be effected at net asset value in accordance with Section 2.3
of this Agreement. Such Series and Classes shall be made available to the
Company in accordance with the terms and provisions of this Agreement until
this Agreement is terminated pursuant to Article X or the Distributor
suspends or terminates the offering of shares of such Series or Classes in
the circumstances described in Article X.
(b) Notwithstanding clause (a) of this Section 2.1, Series or
Classes of Trust shares in existence now or that may be established in the
future will be made available to the Company only as the Distributor may so
provide, subject to the Distributor's rights set forth in Article X to
suspend or terminate the offering of shares of any Series or Class or to
terminate this Agreement.
(c) The parties acknowledge and agree that: (i) the Trust may
revoke the Distributor's authority pursuant to the terms and conditions of
its distribution agreement with the Distributor; and (ii) the Trust
reserves the right in its sole discretion to refuse to accept a request for
the purchase of Trust shares.
2.2. REDEMPTIONS. The Trust shall redeem, at the Company's request,
any full or fractional Trust shares held by the Company on behalf of the
Account, such redemptions to be effected at net asset value in accordance with
Section 2.3 of this Agreement. Notwithstanding the foregoing, (i) the Company
shall not redeem Trust shares attributable to Contract Owners except in the
circumstances permitted in Article X of this Agreement, and (ii) the Trust may
delay redemption of Trust shares of any Series or Class to the extent permitted
by the 1940 Act, any rules, regulations or orders thereunder, or the Prospectus
for such Series or Class.
2.3. PURCHASE AND REDEMPTION PROCEDURES
(a) The Trust hereby appoints the Company as an agent of the
Trust for the limited purpose of receiving purchase and redemption requests
on behalf of the Account (but not with respect to any Trust shares that may
be held in the general account of the Company) for shares of those Series
or Classes made available hereunder, based on allocations of amounts to the
Account or subaccounts thereof under the Contracts, other transactions
relating to the Contracts or the Account and customary processing of the
Contracts. Receipt of any such requests (or effectuation of such
transaction or processing) on any Business Day by the Company as such
limited agent of the Trust prior to the Trust's close of business as
defined from time to time in the applicable Prospectus for such Series or
Class (which as of the date of execution of this Agreement is defined as
the close of regular trading on the New York Stock Exchange (normally 4:00
p.m. New York Time)) shall constitute receipt by the Trust on that same
Business Day, provided that the Trust receives actual and sufficient notice
of such request by 8:00 a.m. New York
3
<PAGE>
Time on the next following Business Day. Such notice may be communicated by
telephone to the office or person designated for such notice by the Trust,
and shall be confirmed by facsimile.
(b) The Company shall pay for shares of each Series or Class on
the same day that it provides actual notice to the Trust of a purchase
request for such shares. Payment for Series or Class shares shall be made
in Federal funds transmitted to the Trust by wire to be received by the
Trust by 12:00 noon New York Time on the day the Trust receives actual
notice of the purchase request for Series or Class shares (unless the Trust
determines and so advises the Company that sufficient proceeds are
available from redemption of shares of other Series or Classes effected
pursuant to redemption requests tendered by the Company on behalf of the
Account). In no event may proceeds from the redemption of shares requested
pursuant to an order received by the Company after the Trust's close of
business on any Business Day be applied to the payment for shares for which
a purchase order was received prior to the Trust's close of business on
such day. If the issuance of shares is canceled because Federal funds are
not timely received, the Company shall indemnify the respective Fund and
Distributor with respect to all costs, expenses and losses relating
thereto. Upon the Trust's receipt of Federal funds so wired, such funds
shall cease to be the responsibility of the Company and shall become the
responsibility of the Trust. If Federal funds are not received on time,
such funds will be invested, and Series or Class shares purchased thereby
will be issued, as soon as practicable after actual receipt of such funds
but in any event not on the same day that the purchase order was received.
(c) Payment for Series or Class shares redeemed by the Account
or the Company shall be made in Federal funds transmitted by wire to the
Company or any other person properly designated in writing by the Company,
such funds normally to be transmitted by 6:00 p.m. New York Time on the
next Business Day after the Trust receives actual notice of the redemption
order for Series or Class shares (unless redemption proceeds are to be
applied to the purchase of Trust shares of other Series or Classes in
accordance with Section 2.3(b) of this Agreement), except that the Trust
reserves the right to redeem Series or Class shares in assets other than
cash and to delay payment of redemption proceeds to the extent permitted by
the 1940 Act, any rules or regulations or orders thereunder, or the
applicable Prospectus. The Trust shall not bear any responsibility
whatsoever for the proper disbursement or crediting of redemption proceeds
by the Company; the Company alone shall be responsible for such action.
(d) Any purchase or redemption request for Series or Class
shares held or to be held in the Company's general account shall be
effected at the net asset value per share next determined after the Trust's
actual receipt of such request, provided that, in the case of a purchase
request, payment for Trust shares so requested is received by the Trust in
Federal funds prior to close of business for determination of such value,
as defined from time to time in the Prospectus for such Series or Class.
(e) Prior to the first purchase of any Trust shares hereunder,
the Company and the Trust shall provide each other with all information
necessary to effect wire transmissions of Federal funds to the other party
and all other designated persons pursuant to such protocols and security
procedures as the parties may agree upon. Should such information change
thereafter, the Trust and the Company, as applicable, shall notify the
other in writing of such changes, observing the same protocols and security
procedures, at least three Business Days in advance of when such change is
to take effect. The Company and the Trust shall observe customary
procedures to protect the confidentiality
4
<PAGE>
and security of such information, but the Trust shall not be liable to the
Company for any breach of security.
(f) The procedures set forth herein are subject to any
additional terms set forth in the applicable Prospectus for the Series or
Class or by the requirements of applicable law.
2.4. NET ASSET VALUE. The Trust shall use its best efforts to
inform the Company of the net asset value per share for each Series or Class
available to the Company as soon as reasonably practicable after the net asset
value per share for such Series or Class is calculated. The Trust shall
calculate such net asset value in accordance with the Prospectus for such Series
or Class.
2.5. DIVIDENDS AND DISTRIBUTIONS. The Trust shall furnish notice to
the Company as soon as reasonably practicable of any income dividends or capital
gain distributions payable on any Series or Class shares. The Company, on its
behalf and on behalf of the Account, hereby elects to receive all such dividends
and distributions as are payable on any Series or Class shares in the form of
additional shares of that Series or Class. The Company reserves the right, on
its behalf and on behalf of the Account, to revoke this election and to receive
all such dividends and capital gain distributions in cash; to be effective, such
revocation must be made in writing and received by the Trust at least ten
Business Days prior to a dividend or distribution date. The Trust shall notify
the Company promptly of the number of Series or Class shares so issued as
payment of such dividends and distributions.
2.6. BOOK ENTRY. Issuance and transfer of Trust shares shall be by
book entry only. Stock certificates will not be issued to the Company or the
Account. Purchase and redemption orders for Trust shares shall be recorded in
an appropriate ledger for the Account or the appropriate subaccount of the
Account.
2.7. PRICING ERRORS. Any material errors in the calculation of net
asset value, dividends or capital gain information shall be reported immediately
upon discovery to the Company. An error shall be deemed "material" based on our
interpretation of the SEC's position and policy with regard to materiality, as
it may be modified from time to time. Neither the Trust, any Fund, the
Distributor, nor any of their affiliates shall be liable for any information
provided to the Company pursuant to this Agreement which information is based on
incorrect information supplied by or on behalf of the Company or any other
Participating Company to the Trust or the Distributor.
2.8. LIMITS ON PURCHASERS. The Distributor and the Trust shall sell
Trust shares only to insurance companies and their separate accounts and to
persons or plans ("Qualified Persons") that qualify to purchase shares of the
Trust under Section 817(h) of the Code and the regulations thereunder without
impairing the ability of the Account to consider the portfolio investments of
the Trust as constituting investments of the Account for the purpose of
satisfying the diversification requirements of Section 817(h). The Distributor
and the Trust shall not sell Trust shares to any insurance company or separate
account unless an agreement complying with Article VIII of this Agreement is in
effect to govern such sales. The Company hereby represents and warrants that it
and the Account are Qualified Persons.
5
<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1. COMPANY. The Company represents and warrants that: (i) the
Company is an insurance company duly organized and in good standing under
[______________] insurance law; (ii) the Account is a validly existing separate
account, duly established and maintained in accordance with applicable law;
(iii) the Account's 1940 Act Registration Statement has been filed with the SEC
in accordance with the provisions of the 1940 Act and the Account is duly
registered as a unit investment trust thereunder; (iv) the Contracts'
Registration Statement has been declared effective by the SEC; (v) the Contracts
will be issued in compliance in all material respects with all applicable
Federal and state laws; (vi) the Contracts have been filed, qualified and/or
approved for sale, as applicable, under the insurance laws and regulations of
the states in which the Contracts will be offered; (vii) the Account will
maintain its registration under the 1940 Act and will comply in all material
respects with the 1940 Act; (viii) the Contracts currently are, and at the time
of issuance and for so long as they are outstanding will be, treated as annuity
contracts or life insurance policies, whichever is appropriate, under applicable
provisions of the Code; and (ix) the Company's entering into and performing its
obligations under this Agreement does not and will not violate its charter
documents or by-laws, rules or regulations, or any agreement to which it is a
party. The Company will notify the Trust promptly if for any reason it is
unable to perform its obligations under this Agreement.
3.2. TRUST. The Trust represents and warrants that: (i) the Trust
is an unincorporated business trust duly formed and validly existing under the
Delaware law; (ii) the Trust's 1940 Act Registration Statement has been filed
with the SEC in accordance with the provisions of the 1940 Act and the Trust is
duly registered as an open-end management investment company thereunder; (iii)
the Trust's Registration Statement has been declared effective by the SEC; (iv)
the Trust shares will be issued in compliance in all material respects with all
applicable federal laws; (v) the Trust will remain registered under and will
comply in all material respects with the 1940 Act during the term of this
Agreement; (vi) each Fund of the Trust intends to qualify as a "regulated
investment company" under Subchapter M of the Code and to comply with the
diversification standards prescribed in Section 817(h) of the Code and the
regulations thereunder; and (vii) the investment policies of each Fund are in
material compliance with any investment restrictions set forth on Schedule 4 to
this Agreement. The Trust, however, makes no representation as to whether any
aspect of its operations (including, but not limited to, fees and expenses and
investment policies) otherwise complies with the insurance laws or regulations
of any state.
3.3. DISTRIBUTOR. The Distributor represents and warrants that:
(i) the Distributor is a limited partnership duly organized and in good standing
under New York law; (ii) the Distributor is registered as a broker-dealer under
federal and applicable state securities laws and is a member of the NASD; and
(iii) the Distributor is registered as an investment adviser under federal
securities laws.
3.4. LEGAL AUTHORITY. Each party represents and warrants that the
execution and delivery of this Agreement and the consummation of the
transactions contemplated herein have been duly authorized by all necessary
corporate, partnership or trust action, as applicable, by such party, and, when
so executed and delivered, this Agreement will be the valid and binding
obligation of such party enforceable in accordance with its terms.
3.5. BONDING REQUIREMENT. Each party represents and warrants that
all of its directors, officers, partners and employees dealing with the money
and/or securities of the Trust are and shall continue to be at all times covered
by a blanket fidelity bond or similar coverage for the benefit of the Trust in
an amount not less than the amount required by the applicable
rules
6
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of the NASD and the federal securities laws. The aforesaid bond shall include
coverage for larceny and embezzlement and shall be issued by a reputable bonding
company. All parties shall make all reasonable efforts to see that this bond or
another bond containing these provisions is always in effect, shall provide
evidence thereof promptly to any other party upon written request therefor, and
shall notify the other parties promptly in the event that such coverage no
longer applies.
ARTICLE IV
REGULATORY REQUIREMENTS
4.1. TRUST FILINGS. The Trust shall amend the Trust's Registration
Statement and the Trust's 1940 Act Registration Statement from time to time as
required in order to effect the continuous offering of Trust shares in
compliance with applicable law and to maintain the Trust's registration under
the 1940 Act for so long as Trust shares are sold.
4.2. CONTRACTS FILINGS. The Company shall amend the Contracts'
Registration Statement and the Account's 1940 Act Registration Statement from
time to time as required in order to effect the continuous offering of the
Contracts in compliance with applicable law or as may otherwise be required by
applicable law, but in any event shall maintain a current effective Contracts'
Registration Statement and the Account's registration under the 1940 Act for so
long as the Contracts are outstanding unless the Company has supplied the Trust
with an SEC no-action letter or opinion of counsel satisfactory to the Trust's
counsel to the effect that maintaining such Registration Statement on a current
basis is no longer required. The Company shall be responsible for filing all
such Contract forms, applications, marketing materials and other documents
relating to the Contracts and/or the Account with state insurance commissions,
as required or customary, and shall use its best efforts: (i) to obtain any and
all approvals thereof, under applicable state insurance law, of each state or
other jurisdiction in which Contracts are or may be offered for sale; and (ii)
to keep such approvals in effect for so long as the Contracts are outstanding.
4.3. VOTING OF TRUST SHARES. With respect to any matter put to vote
by the holders of Trust shares ("Voting Shares"), the Company will provide
"pass-through" voting privileges to owners of Contracts registered with the SEC
as long as the 1940 Act requires such privileges in such cases. In cases in
which "pass-through" privileges apply, the Company will (i) solicit voting
instructions from Contract Owners of SEC-registered Contracts; (ii) vote Voting
Shares attributable to Contract Owners in accordance with instructions or
proxies timely received from such Contract Owners; and (iii) vote Voting Shares
held by it that are not attributable to reserves for SEC-registered Contracts or
for which it has not received timely voting instructions in the same proportion
as instructions received in a timely fashion from Owners of SEC-registered
Contracts. The Company shall be responsible for ensuring that it calculates
"pass-through" votes for the Account in a manner consistent with the provisions
set forth above and with other Participating Insurance Companies. Neither the
Company nor any of its affiliates will in any way recommend action in connection
with, or oppose or interfere with, the solicitation of proxies for the Trust
shares held for such Contract Owners, except with respect to matters as to which
the Company has the right under Rule 6e-2 or 6e-3(T) under the 1940 Act, to vote
Voting Shares without regard to voting instructions from Contract Owners.
4.4. STATE INSURANCE RESTRICTIONS. The Company acknowledges and
agrees that it is the responsibility of the Company and other Participating
Insurance Companies to determine investment restrictions and any other
restrictions, limitations or requirements under state insurance law applicable
to any Fund or the Trust or the Distributor, and that neither the Trust nor the
Distributor shall bear any responsibility to the Company, other Participating
Insurance Companies
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or any Product Owners for any such determination or the correctness of such
determination. Schedule 4 sets forth the investment restrictions that the
Company and/or other Participating Insurance Companies have determined are
applicable to any Fund and with which the Trust has agreed to comply as of the
date of this Agreement. The Company shall inform the Trust of any investment
restrictions imposed by state insurance law that the Company determines may
become applicable to the Trust or a Fund from time to time as a result of the
Account's investment therein, other than those set forth on Schedule 4 to this
Agreement. Upon receipt of any such information from the Company or any other
Participating Insurance Company, the Trust shall determine whether it is in the
best interests of shareholders to comply with any such restrictions. If the
Trust determines that it is not in the best interests of shareholders (it being
understood that "shareholders" for this purpose shall mean Product Owners) to
comply with a restriction determined to be applicable by the Company, the Trust
shall so inform the Company, and the Trust and the Company shall discuss
alternative accommodations in the circumstances. If the Trust determines that it
is in the best interests of shareholders to comply with such restrictions, the
Trust and the Company shall amend Schedule 4 to this Agreement to reflect such
restrictions, subject to obtaining any required shareholder approval thereof.
4.5. COMPLIANCE. Under no circumstances will the Trust, the
Distributor or any of their affiliates (excluding Participating Investors) be
held responsible or liable in any respect for any statements or representations
made by them or their legal advisers to the Company or any Contract Owner
concerning the applicability of any federal or state laws, regulations or other
authorities to the activities contemplated by this Agreement.
4.6. DRAFTS OF FILINGS. The Trust and the Company shall provide to
each other copies of draft versions of any Registration Statements,
Prospectuses, Statements of Additional Information, periodic and other
shareholder or Contract Owner reports, proxy statements, solicitations for
voting instructions, applications for exemptions, requests for no-action
letters, and all amendments or supplements to any of the above, prepared by or
on behalf of either of them and that mentions the other party by name. Such
drafts shall be provided to the other party sufficiently in advance of filing
such materials with regulatory authorities in order to allow such other party a
reasonable opportunity to review the materials.
4.7. COPIES OF FILINGS. The Trust and the Company shall provide to
each other at least one complete copy of all Registration Statements,
Prospectuses, Statements of Additional Information, periodic and other
shareholder or Contract Owner reports, proxy statements, solicitations of voting
instructions, applications for exemptions, requests for no-action letters, and
all amendments or supplements to any of the above, that relate to the Trust, the
Contracts or the Account, as the case may be, promptly after the filing by or on
behalf of each such party of such document with the SEC or other regulatory
authorities (it being understood that this provision is not intended to require
the Trust to provide to the Company copies of any such documents prepared, filed
or used by Participating Investors other than the Company and the Account).
4.8. REGULATORY RESPONSES. Each party shall promptly provide to all
other parties copies of responses to no-action requests, notices, orders and
other rulings received by such party with respect to any filing covered by
Section 4.7 of this Agreement.
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4.9. COMPLAINTS AND PROCEEDINGS
(a) The Trust and/or the Distributor shall immediately notify the
Company of: (i) the issuance by any court or regulatory body of any stop
order, cease and desist order, or other similar order (but not including an
order of a regulatory body exempting or approving a proposed transaction or
arrangement) with respect to the Trust's Registration Statement or the
Prospectus of any Series or Class; (ii) any request by the SEC for any
amendment to the Trust's Registration Statement or the Prospectus of any
Series or Class; (iii) the initiation of any proceedings for that purpose
or for any other purposes relating to the registration or offering of the
Trust shares; or (iv) any other action or circumstances that may prevent
the lawful offer or sale of Trust shares or any Class or Series in any
state or jurisdiction, including, without limitation, any circumstance in
which (A) such shares are not registered and, in all material respects,
issued and sold in accordance with applicable state and federal law or (B)
such law precludes the use of such shares as an underlying investment
medium for the Contracts. The Trust will make every reasonable effort to
prevent the issuance of any such stop order, cease and desist order or
similar order and, if any such order is issued, to obtain the lifting
thereof at the earliest possible time.
(b) The Company shall immediately notify the Trust and the
Distributor of: (i) the issuance by any court or regulatory body of any
stop order, cease and desist order, or other similar order (but not
including an order of a regulatory body exempting or approving a proposed
transaction or arrangement) with respect to the Contracts' Registration
Statement or the Contracts' Prospectus; (ii) any request by the SEC for any
amendment to the Contracts' Registration Statement or Prospectus; (iii) the
initiation of any proceedings for that purpose or for any other purposes
relating to the registration or offering of the Contracts; or (iv) any
other action or circumstances that may prevent the lawful offer or sale of
the Contracts or any class of Contracts in any state or jurisdiction,
including, without limitation, any circumstance in which such Contracts are
not registered, qualified and approved, and, in all material respects,
issued and sold in accordance with applicable state and federal laws. The
Company will make every reasonable effort to prevent the issuance of any
such stop order, cease and desist order or similar order and, if any such
order is issued, to obtain the lifting thereof at the earliest possible
time.
(c) Each party shall immediately notify the other parties when it
receives notice, or otherwise becomes aware of, the commencement of any
litigation or proceeding against such party or a person affiliated
therewith in connection with the issuance or sale of Trust shares or the
Contracts.
(d) The Company shall provide to the Trust and the Distributor
any complaints it has received from Contract Owners pertaining to the Trust
or a Fund, and the Trust and Distributor shall each provide to the Company
any complaints it has received from Contract Owners relating to the
Contracts.
4.10. COOPERATION. Each party hereto shall cooperate with the other
parties and all appropriate government authorities (including without limitation
the SEC, the NASD and state securities and insurance regulators) and shall
permit such authorities reasonable access to its books and records in connection
with any investigation or inquiry by any such authority relating to this
Agreement or the transactions contemplated hereby. However, such access shall
not extend to attorney-client privileged information.
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ARTICLE V
SALE, ADMINISTRATION AND SERVICING OF THE CONTRACTS
5.1. SALE OF THE CONTRACTS. The Company shall be fully responsible
as to the Trust and the Distributor for the sale and marketing of the Contracts.
The Company shall provide Contracts, the Contracts' and Trust's Prospectuses,
Contracts' and Trust's Statements of Additional Information, and all amendments
or supplements to any of the foregoing to Contract Owners and prospective
Contract Owners, all in accordance with federal and state laws. The Company
shall ensure that all persons offering the Contracts are duly licensed and
registered under applicable insurance and securities laws. The Company shall
ensure that each sale of a Contract satisfies applicable suitability
requirements under insurance and securities laws and regulations, including
without limitation the rules of the NASD. The Company shall adopt and implement
procedures reasonably designed to ensure that information concerning the Trust
and the Distributor that is intended for use only by brokers or agents selling
the Contracts (i.e., information that is not intended for distribution to
Contract Owners or offerees) is so used.
5.2. ADMINISTRATION AND SERVICING OF THE CONTRACTS. The Company
shall be fully responsible as to the Trust and the Distributor for the
underwriting, issuance, service and administration of the Contracts and for the
administration of the Account, including, without limitation, the calculation of
performance information for the Contracts, the timely payment of Contract Owner
redemption requests and processing of Contract transactions, and the maintenance
of a service center, such functions to be performed in all respects at a level
commensurate with those standards prevailing in the variable insurance industry.
The Company shall provide to Contract Owners all Trust reports, solicitations
for voting instructions including any related Trust proxy solicitation
materials, and updated Trust Prospectuses as required under the federal
securities laws.
5.3. CUSTOMER COMPLAINTS. The Company shall promptly address all
customer complaints and resolve such complaints consistent with high ethical
standards and principles of ethical conduct.
5.4. TRUST PROSPECTUSES AND REPORTS. In order to enable the Company
to fulfill its obligations under this Agreement and the federal securities laws,
the Trust shall provide the Company with a copy, in camera-ready form or form
otherwise suitable for printing or duplication of: (i) the Trust's Prospectus
for the Series and Classes listed on Schedule 3 and any supplement thereto; (ii)
each Statement of Additional Information and any supplement thereto; (iii) any
Trust proxy soliciting material for such Series or Classes; and (iv) any Trust
periodic shareholder reports. The Trust and the Company may agree upon
alternate arrangements, but in all cases, the Trust reserves the right to
approve the printing of any such material. The Trust shall provide the Company
at least 10 days advance written notice when any such material shall become
available, provided, however, that in the case of a supplement, the Trust shall
provide the Company notice reasonable in the circumstances, it being understood
that circumstances surrounding such supplement may not allow for advance notice.
The Company may not alter any material so provided by the Trust or the
Distributor (including without limitation presenting or delivering such material
in a different medium, e.g., electronic or Internet) without the prior written
consent of the Distributor.
5.5. TRUST ADVERTISING MATERIAL. No piece of advertising or sales
literature or other promotional material in which the Trust or the Distributor
is named (including, without limitation, material for prospects, existing
Contract Owners, brokers, rating or ranking agencies, or the press, whether in
print, radio, television, video, Internet, or other electronic medium) shall be
used by the Company or any person directly or indirectly authorized by the
Company, including without
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limitation, underwriters, distributors, and sellers of the Contracts, except
with the prior written consent of the Trust or the Distributor, as applicable,
as to the form, content and medium of such material. Any such piece shall be
furnished to the Trust for such consent prior to its use. The Trust or the
Distributor shall respond to any request for written consent on a prompt and
timely basis, but failure to respond shall not relieve the Company of the
obligation to obtain the prior written consent of the Trust or the Distributor.
After receiving the Trust's or Distributor's consent to the use of any such
material, no further changes may be made without obtaining the Trust's or
Distributor's consent to such changes. The Trust or Distributor may at any time
in its sole discretion revoke such written consent, and upon notification of
such revocation, the Company shall no longer use the material subject to such
revocation. Until further notice to the Company, the Trust has delegated its
rights and responsibilities under this provision to the Distributor.
5.6. CONTRACTS ADVERTISING MATERIAL. No piece of advertising or
sales literature or other promotional material in which the Company is named
shall be used by the Trust or the Distributor, except with the prior written
consent of the Company. Any such piece shall be furnished to the Company for
such consent prior to its use. The Company shall respond to any request for
written consent on a prompt and timely basis, but failure to respond shall not
relieve the Company of the obligation to obtain the prior written consent of the
Company. The Company may at any time in its sole discretion revoke any written
consent, and upon notification of such revocation, neither the Trust nor the
Distributor shall use the material subject to such revocation. The Company,
upon prior written notice to the Trust, may delegate its rights and
responsibilities under this provision to the principal underwriter for the
Contracts.
5.7. TRADE NAMES. No party shall use any other party's names,
logos, trademarks or service marks, whether registered or unregistered, without
the prior written consent of such other party, or after written consent therefor
has been revoked. The Company shall not use in advertising, publicity or
otherwise the name of the Trust, Distributor, or any of their affiliates nor any
trade name, trademark, trade device, service mark, symbol or any abbreviation,
contraction or simulation thereof of the Trust, Distributor, or their affiliates
without the prior written consent of the Trust or the Distributor in each
instance.
5.8. REPRESENTATIONS BY COMPANY. Except with the prior written
consent of the Trust, the Company shall not give any information or make any
representations or statements about the Trust or the Funds nor shall it
authorize or allow any other person to do so except information or
representations contained in the Trust's Registration Statement or the Trust's
Prospectuses or in reports or proxy statements for the Trust, or in sales
literature or other promotional material approved in writing by the Trust or its
designee in accordance with this Article V, or in published reports or
statements of the Trust in the public domain.
5.9. REPRESENTATIONS BY TRUST. Except with the prior written
consent of the Company, the Trust shall not give any information or make any
representations on behalf of the Company or concerning the Company, the Account
or the Contracts other than the information or representations contained in the
Contracts' Registration Statement or Contracts' Prospectus or in published
reports of the Account which are in the public domain or in sales literature or
other promotional material approved in writing by the Company in accordance with
this Article V.
5.10. ADVERTISING. For purposes of this Article V, the phrase
"sales literature or other promotional material" includes, but is not limited
to, any material constituting sales literature or advertising under the NASD
rules, the 1940 Act or the 1933 Act.
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ARTICLE VI
COMPLIANCE WITH CODE
6.1. SECTION 817(H). Each Fund of the Trust shall comply with
Section 817(h) of the Code and the regulations issued thereunder to the extent
applicable to the Fund as an investment company underlying the Account, and the
Trust shall notify the Company immediately upon having a reasonable basis for
believing that a Fund has ceased to so qualify or that it might not so qualify
in the future.
6.2. SUBCHAPTER M. Each Fund of the Trust shall maintain the
qualification of the Fund as a registered investment company (under Subchapter M
or any successor or similar provision), and the Trust shall notify the Company
immediately upon having a reasonable basis for believing that a Fund has ceased
to so qualify or that it might not so qualify in the future.
6.3. CONTRACTS. The Company shall ensure the continued treatment of
the Contracts as annuity contracts or life insurance policies, whichever is
appropriate, under applicable provisions of the Code and shall notify the Trust
and the Distributor immediately upon having a reasonable basis for believing
that the Contracts have ceased to be so treated or that they might not be so
treated in the future.
ARTICLE VII
EXPENSES
7.1. EXPENSES. All expenses incident to each party's performance
under this Agreement (including expenses expressly assumed by such party
pursuant to this Agreement) shall be paid by such party to the extent permitted
by law.
7.2. TRUST EXPENSES. Expenses incident to the Trust's performance of
its duties and obligations under this Agreement include, but are not limited to,
the costs of:
(a) registration and qualification of the Trust shares under the federal
securities laws;
(b) preparation and filing with the SEC of the Trust's Prospectuses,
Trust's Statement of Additional Information, Trust's Registration
Statement, Trust proxy materials and shareholder reports, and
preparation of a camera-ready copy of the foregoing;
(c) preparation of all statements and notices required by any Federal or
state securities law;
(d) printing and mailing of all materials and reports required to be
provided by the Trust to its existing shareholders;
(e) all taxes on the issuance or transfer of Trust shares;
(f) payment of all applicable fees relating to the Trust, including,
without limitation, all fees due under Rule 24f-2 in connection with
sales of Trust shares to qualified retirement plans, custodial,
auditing, transfer agent and advisory fees, fees for insurance
coverage and Trustees' fees; and
(g) any expenses permitted to be paid or assumed by the Trust pursuant to
a plan, if any, under Rule 12b-1 under the 1940 Act.
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7.3. COMPANY EXPENSES. Expenses incident to the Company's
performance of its duties and obligations under this Agreement include, but are
not limited to, the costs of:
(a) registration and qualification of the Contracts under the federal
securities laws;
(b) preparation and filing with the SEC of the Contracts' Prospectus and
Contracts' Registration Statement;
(c) the sale, marketing and distribution of the Contracts, including
printing and dissemination of Contracts' and the Trust's Prospectuses
and compensation for Contract sales;
(d) administration of the Contracts;
(e) solicitation of voting instructions with respect to Trust proxy
materials;
(f) payment of all applicable fees relating to the Contracts, including,
without limitation, all fees due under Rule 24f-2;
(g) preparation, printing and dissemination of all statements and notices
to Contract Owners required by any Federal or state insurance law
other than those paid for by the Trust; and
(h) preparation, printing and dissemination of all marketing
materials for the Contracts and Trust except where other arrangements
are made in advance.
7.4. 12B-1 PAYMENTS. The Trust shall pay no fee or other
compensation to the Company under this Agreement, except that if the Trust or
any Series or Class adopts and implements a plan pursuant to Rule 12b-1 under
the 1940 Act to finance distribution expenses, then payments may be made to the
Company in accordance with such plan. The Trust currently does not intend to
make any payments to finance distribution expenses pursuant to Rule 12b-1 under
the 1940 Act or in contravention of such rule, although it may make payments
pursuant to Rule 12b-1 in the future. To the extent that it decides to finance
distribution expenses pursuant to Rule 12b-1 and such formulation is required by
the 1940 Act or any rules or order thereunder, the Trust undertakes to have a
Board of Trustees, a majority of whom are not interested persons of the Trust,
formulate and approve any plan under Rule 12b-1 to finance distribution
expenses.
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ARTICLE VIII
POTENTIAL CONFLICTS
8.1. EXEMPTIVE ORDER. The parties to this Agreement acknowledge
that the Trust has filed an application with the SEC to request an order (the
"Exemptive Order") granting relief from various provisions of the 1940 Act and
the rules thereunder to the extent necessary to permit Trust shares to be sold
to and held by variable annuity and variable life insurance separate accounts of
both affiliated and unaffiliated Participating Insurance Companies and other
Qualified Persons (as defined in Section 2.8 hereof). It is anticipated that
the Exemptive Order, when and if issued, shall require the Trust and each
Participating Insurance Company to comply with conditions and undertakings
substantially as provided in this Article VIII. The Trust will not enter into a
participation agreement with any other Participating Insurance Company unless it
imposes the same conditions and undertakings on that company as are imposed on
the Company pursuant to this Article VIII.
8.2. COMPANY MONITORING REQUIREMENTS. The Company will monitor its
operations and those of the Trust for the purpose of identifying any material
irreconcilable conflicts or potential material irreconcilable conflicts between
or among the interests of Participating Plans, Product Owners of variable life
insurance policies and Product Owners of variable annuity contracts.
8.3. COMPANY REPORTING REQUIREMENTS. The Company shall report any
conflicts or potential conflicts to the Trust Board and will provide the Trust
Board, at least annually, with all information reasonably necessary for the
Trust Board to consider any issues raised by such existing or potential
conflicts or by the conditions and undertakings required by the Exemptive Order.
The Company also shall assist the Trust Board in carrying out its obligations
including, but not limited to: (a) informing the Trust Board whenever it
disregards Contract Owner voting instructions with respect to variable life
insurance policies, and (b) providing such other information and reports as the
Trust Board may reasonably request. The Company will carry out these
obligations with a view only to the interests of Contract Owners.
8.4. TRUST BOARD MONITORING AND DETERMINATION. The Trust Board
shall monitor the Trust for the existence of any material irreconcilable
conflicts between or among the interests of Participating Plans, Product Owners
of variable life insurance policies and Product Owners of variable annuity
contracts and determine what action, if any, should be taken in response to
those conflicts. A majority vote of Trustees who are not interested persons of
the Trust as defined in the 1940 Act (the "disinterested trustees") shall
represent a conclusive determination as to the existence of a material
irreconcilable conflict between or among the interests of Product Owners and
Participating Plans and as to whether any proposed action adequately remedies
any material irreconcilable conflict. The Trust Board shall give prompt written
notice to the Company and Participating Plan of any such determination.
8.5. UNDERTAKING TO RESOLVE CONFLICT. In the event that a material
irreconcilable conflict of interest arises between Product Owners of variable
life insurance policies or Product Owners of variable annuity contracts and
Participating Plans, the Company will, at its own expense, take whatever action
is necessary to remedy such conflict as it adversely affects Contract Owners up
to and including (1) establishing a new registered management investment
company, and (2) withdrawing assets from the Trust attributable to reserves for
the Contracts subject to the conflict and reinvesting such assets in a different
investment medium (including another Fund of the Trust) or submitting the
question of whether such withdrawal should be implemented to a vote of all
affected Contract Owners, and, as appropriate, segregating the assets supporting
the Contracts of any group of such owners that votes in favor of such
withdrawal, or offering to such
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owners the option of making such a change. The Company will carry out the
responsibility to take the foregoing action with a view only to the interests of
Contract Owners.
8.6. WITHDRAWAL. If a material irreconcilable conflict arises
because of the Company's decision to disregard the voting instructions of
Contract Owners of variable life insurance policies and that decision represents
a minority position or would preclude a majority vote at any Fund shareholder
meeting, then, at the request of the Trust Board, the Company will redeem the
shares of the Trust to which the disregarded voting instructions relate. No
charge or penalty, however, will be imposed in connection with such a
redemption.
8.7. EXPENSES ASSOCIATED WITH REMEDIAL ACTION. In no event shall
the Trust be required to bear the expense of establishing a new funding medium
for any Contract. The Company shall not be required by this Article to
establish a new funding medium for any Contract if an offer to do so has been
declined by vote of a majority of the Contract Owners materially adversely
affected by the irreconcilable material conflict.
8.8. SUCCESSOR RULES. If and to the extent that Rule 6e-2 and Rule
6e-3(T) are amended, or Rule 6e-3 is adopted, to provide exemptive relief from
any provisions of the 1940 Act or the rules promulgated thereunder with respect
to mixed and shared funding on terms and conditions materially different from
those contained in the Exemptive Order, then (i) the Trust and/or the Company,
as appropriate, shall take such steps as may be necessary to comply with Rules
6e-2 and 6e-3(T), as amended, or Rule 6e-3, as adopted, as applicable, to the
extent such rules are applicable, and (ii) Sections 8.2 through 8.5 of this
Agreement shall continue in effect only to the extent that terms and conditions
substantially identical to such Sections are contained in such Rule(s) as so
amended or adopted.
ARTICLE IX
INDEMNIFICATION
9.1. INDEMNIFICATION BY THE COMPANY. The Company hereby agrees to,
and shall, indemnify and hold harmless the Trust, the Distributor and each
person who controls or is affiliated with the Trust or the Distributor within
the meaning of such terms under the 1933 Act or 1940 Act (but not any
Participating Insurance Companies or Qualified Persons) and any officer,
trustee, partner, director, employee or agent of the foregoing, against any and
all losses, claims, damages or liabilities, joint or several (including any
investigative, legal and other expenses reasonably incurred in connection with,
and any amounts paid in settlement of, any action, suit or proceeding or any
claim asserted), to which they or any of them may become subject under any
statute or regulation, at common law or otherwise, insofar as such losses,
claims, damages or liabilities:
(a) arise out of or are based upon any untrue statement of any
material fact contained in the Contracts Registration Statement,
Contracts Prospectus, sales literature or other promotional
material for the Contracts or the Contracts themselves (or any
amendment or supplement to any of the foregoing), or arise out of
or are based upon the omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances in which they
were made; provided that this obligation to indemnify shall not
apply if such statement or omission was made in reliance upon and
in conformity with information furnished in writing to the Company
by the Trust or the Distributor for use in the Contracts
Registration Statement, Contracts Prospectus or in the Contracts
or sales literature or promotional
material for the Contracts (or any amendment or supplement to any
of the foregoing) or otherwise
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for use in connection with the sale of the Contracts or Trust
shares; or
(b) arise out of any untrue statement of a material fact contained in
the Trust Registration Statement, any Prospectus for Series or
Classes or sales literature or other promotional material of the
Trust (or any amendment or supplement to any of the foregoing), or
the omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading in light of the circumstances in which they were made,
if such statement or omission was made in reliance upon and in
conformity with information furnished to the Trust or Distributor
in writing by or on behalf of the Company; or
(c) arise out of or are based upon any wrongful conduct of, or
violation of federal or state law by, the Company or persons under
its control or subject to its authorization, including without
limitation, any broker-dealers or agents authorized to sell the
Contracts, with respect to the sale, marketing or distribution of
the Contracts or Trust shares, including, without limitation, any
impermissible use of broker-only material, unsuitable or improper
sales of the Contracts or unauthorized representations about the
Contracts or the Trust; or
(d) arise as a result of any failure by the Company or persons under
its control (or subject to its authorization) to provide services,
furnish materials or make payments as required under this
Agreement; or
(e) arise out of any material breach by the Company or persons under
its control (or subject to its authorization) of this Agreement;
or
(f) any breach of any warranties contained in Article III hereof, any
failure to transmit a request for redemption or purchase of Trust
shares or payment therefor on a timely basis in accordance with
the procedures set forth in Article II, or any unauthorized use of
the names or trade names of the Trust or the Distributor.
This indemnification is in addition to any liability that the Company may
otherwise have; provided, however, that no party shall be entitled to
indemnification if such loss, claim, damage or liability is caused by the wilful
misfeasance, bad faith, gross negligence or reckless disregard of duty by the
party seeking indemnification.
9.2. INDEMNIFICATION BY THE TRUST. The Trust hereby agrees to, and
shall, indemnify and hold harmless the Company and each person who controls or
is affiliated with the Company within the meaning of such terms under the 1933
Act or 1940 Act and any officer, director, employee or agent of the foregoing,
against any and all losses, claims, damages or liabilities, joint or several
(including any investigative, legal and other expenses reasonably incurred in
connection with, and any amounts paid in settlement of, any action, suit or
proceeding or any claim asserted), to which they or any of them may become
subject under any statute or regulation, at common law or otherwise, insofar as
such losses, claims, damages or liabilities:
(a) arise out of or are based upon any untrue statement of any
material fact contained in the Trust Registration Statement, any
Prospectus for Series or Classes or sales literature or other
promotional material of the Trust (or any amendment or supplement
to any of the foregoing), or arise out of or are based upon the
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading
in light of the circumstances in which they were made; provided
that this obligation to indemnify shall not apply
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if such statement or omission was made in reliance upon and in
conformity with information furnished in writing by the Company to
the Trust or the Distributor for use in the Trust Registration
Statement, Trust Prospectus or sales literature or promotional
material for the Trust (or any amendment or supplement to any of
the foregoing) or otherwise for use in connection with the sale of
the Contracts or Trust shares; or
(b) arise out of any untrue statement of a material fact contained in
the Contracts Registration Statement, Contracts Prospectus or
sales literature or other promotional material for the Contracts
(or any amendment or supplement to any of the foregoing), or the
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading
in light of the circumstances in which they were made, if such
statement or omission was made in reliance upon information
furnished in writing by the Trust to the Company; or
(c) arise out of or are based upon wrongful conduct of the Trust or
its Trustees or officers with respect to the sale of Trust shares;
or
(d) arise as a result of any failure by the Trust to provide services,
furnish materials or make payments as required under the terms of
this Agreement; or
(e) arise out of any material breach by the Trust of this Agreement
(including any breach of Section 6.1 of this Agreement and any
warranties contained in Article III hereof);
it being understood that in no way shall the Trust be liable to the Company with
respect to any violation of insurance law, compliance with which is a
responsibility of the Company under this Agreement or otherwise or as to which
the Company failed to inform the Trust in accordance with Section 4.4 hereof.
This indemnification is in addition to any liability that the Trust may
otherwise have; provided, however, that no party shall be entitled to
indemnification if such loss, claim, damage or liability is caused by the wilful
misfeasance, bad faith, gross negligence or reckless disregard of duty by the
party seeking indemnification.
9.3. INDEMNIFICATION BY THE DISTRIBUTOR. The Distributor hereby
agrees to, and shall, indemnify and hold harmless the Company and each person
who controls or is affiliated with the Company within the meaning of such terms
under the 1933 Act or 1940 Act and any officer, director, employee or agent of
the foregoing, against any and all losses, claims, damages or liabilities, joint
or several (including any investigative, legal and other expenses reasonably
incurred in connection with, and any amounts paid in settlement of, any action,
suit or proceeding or any claim asserted), to which they or any of them may
become subject under any statute or regulation, at common law or otherwise,
insofar as such losses, claims, damages or liabilities:
(a) arise out of or are based upon any untrue statement of any
material fact contained in the Trust Registration Statement, any
Prospectus for Series or Classes or sales literature or other
promotional material of the Trust (or any amendment or supplement
to any of the foregoing), or arise out of or are based upon the
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading
in light of the circumstances in which they were made; provided
that this obligation to indemnify shall not apply if such
statement or omission was made in reliance upon and in conformity
with information furnished in writing by the Company to the Trust
or Distributor for
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use in the Trust Registration Statement, Trust Prospectus or sales
literature or promotional material for the Trust (or any amendment
or supplement to any of the foregoing) or otherwise for use in
connection with the sale of the Contracts or Trust shares; or
(b) arise out of any untrue statement of a material fact contained in
the Contracts Registration Statement, Contracts Prospectus or
sales literature or other promotional material for the Contracts
(or any amendment or supplement to any of the foregoing), or the
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading
in light of the circumstances in which they were made, if such
statement or omission was made in reliance upon information
furnished in writing by the Distributor to the Company; or
(c) arise out of or are based upon wrongful conduct of the Distributor
or persons under its control with respect to the sale of Trust
shares; or
(d) arise as a result of any failure by the Distributor or persons
under its control to provide services, furnish materials or make
payments as required under the terms of this Agreement; or
(e) arise out of any material breach by the Distributor or persons
under its control of this Agreement (including any breach of
Section 6.1 of this Agreement and any warranties contained in
Article III hereof);
it being understood that in no way shall the Distributor be liable to the
Company with respect to any violation of insurance law, compliance with which is
a responsibility of the Company under this Agreement or otherwise or as to which
the Company failed to inform the Distributor in accordance with Section 4.4
hereof. This indemnification is in addition to any liability that the
Distributor may otherwise have; provided, however, that no party shall be
entitled to indemnification if such loss, claim, damage or liability is caused
by the wilful misfeasance, bad faith, gross negligence or reckless disregard of
duty by the party seeking indemnification.
9.4. RULE OF CONSTRUCTION. It is the parties' intention that, in
the event of an occurrence for which the Trust has agreed to indemnify the
Company, the Company shall seek indemnification from the Trust only in
circumstances in which the Trust is entitled to seek indemnification from a
third party with respect to the same event or cause thereof.
9.5. INDEMNIFICATION PROCEDURES. After receipt by a party entitled
to indemnification ("indemnified party") under this Article IX of notice of the
commencement of any action, if a claim in respect thereof is to be made by the
indemnified party against any person obligated to provide indemnification under
this Article IX ("indemnifying party"), such indemnified party will notify the
indemnifying party in writing of the commencement thereof as soon as practicable
thereafter, provided that the omission to so notify the indemnifying party will
not relieve it from any liability under this Article IX, except to the extent
that the omission results in a failure of actual notice to the indemnifying
party and such indemnifying party is damaged solely as a result of the failure
to give such notice. The indemnifying party, upon the request of the
indemnified party, shall retain counsel reasonably satisfactory to the
indemnified party to represent the indemnified party and any others the
indemnifying party may designate in such proceeding and shall pay the reasonable
fees and disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such indemnified party unless (i) the
18
<PAGE>
indemnifying party and the indemnified party shall have mutually agreed to the
retention of such counsel or (ii) the named parties to any such proceeding
(including any impleaded parties) include both the indemnifying party and the
indemnified party and representation of both parties by the same counsel would
be inappropriate due to actual or potential differing interests between them.
The indemnifying party shall not be liable for any settlement of any proceeding
effected without its written consent but if settled with such consent or if
there be a final judgment for the plaintiff, the indemnifying party agrees to
indemnify the indemnified party from and against any loss or liability by reason
of such settlement or judgment.
A successor by law of the parties to this Agreement shall be entitled
to the benefits of the indemnification contained in this Article IX. The
indemnification provisions contained in this Article IX shall survive any
termination of this Agreement.
ARTICLE X
RELATIONSHIP OF THE PARTIES; TERMINATION
10.1. RELATIONSHIP OF PARTIES. The Company is to be an independent
contractor vis-a-vis the Trust, the Distributor, or any of their affiliates for
all purposes hereunder and will have no authority to act for or represent any of
them (except to the limited extent the Company acts as agent of the Trust
pursuant to Section 2.3(a) of this Agreement). In addition, no officer or
employee of the Company will be deemed to be an employee or agent of the Trust,
Distributor, or any of their affiliates. The Company will not act as an
"underwriter" or "distributor" of the Trust, as those terms variously are used
in the 1940 Act, the 1933 Act, and rules and regulations promulgated thereunder.
10.2. NON-EXCLUSIVITY AND NON-INTERFERENCE. The parties hereto
acknowledge that the arrangement contemplated by this Agreement is not
exclusive; the Trust shares may be sold to other insurance companies and
investors (subject to Section 2.8 hereof) and the cash value of the Contracts
may be invested in other investment companies, provided, however, that until
this Agreement is terminated pursuant to this Article X:
(a) the Company shall promote the Trust and the Funds made
available hereunder on the same basis as other funding vehicles
available under the Contracts;
(b) the Company shall not, without prior notice to the
Distributor (unless otherwise required by applicable law), take any
action to operate the Account as a management investment company under
the 1940 Act;
(c) the Company shall not, without the prior written consent
of the Distributor (unless otherwise required by applicable law),
solicit, induce or encourage Contract Owners to change or modify the
Trust to change the Trust's distributor or investment adviser, to
transfer or withdraw Contract Values allocated to a Fund, or to
exchange their Contracts for contracts not allowing for investment in
the Trust;
(d) the Company shall not substitute another investment company for one or
more Funds without providing written notice to the Distributor at
least 60 days in advance of effecting any such substitution; and
(e) the Company shall not withdraw the Account's investment
in the Trust or a Fund of the Trust except as necessary to facilitate
Contract Owner requests and routine
19
<PAGE>
Contract processing.
10.3. TERMINATION OF AGREEMENT. This Agreement shall not terminate
until (i) the Trust is dissolved, liquidated, or merged into another entity, or
(ii) as to any Fund that has been made available hereunder, the Account no
longer invests in that Fund and the Company has confirmed in writing to the
Distributor, if so requested by the Distributor, that it no longer intends to
invest in such Fund. However, certain obligations of, or restrictions on, the
parties to this Agreement may terminate as provided in Sections 10.4 through
10.6 and the Company may be required to redeem Trust shares pursuant to Section
10.7 or in the circumstances contemplated by Article VIII. Article IX and
Sections 5.7, 10.8 and 10.9 shall survive any termination of this Agreement.
10.4. TERMINATION OF OFFERING OF TRUST SHARES. The obligation of the
Trust and the Distributor to make Trust shares available to the Company for
purchase pursuant to Article II of this Agreement shall terminate at the option
of the Distributor upon written notice to the Company as provided below:
(a) upon institution of formal proceedings against the
Company, or the Distributor's reasonable determination that
institution of such proceedings is being considered by the NASD, the
SEC, the insurance commission of any state or any other regulatory
body regarding the Company's duties under this Agreement or related to
the sale of the Contracts, the operation of the Account, the
administration of the Contracts or the purchase of Trust shares, or an
expected or anticipated ruling, judgment or outcome which would, in
the Distributor's reasonable judgment exercised in good faith,
materially impair the Company's or Trust's ability to meet and perform
the Company's or Trust's obligations and duties hereunder, such
termination effective upon 15 days prior written notice;
(b) in the event any of the Contracts are not registered,
issued or sold in accordance with applicable federal and/or state law,
such termination effective immediately upon receipt of written notice;
(c) if the Distributor shall determine, in its sole judgment
exercised in good faith, that either (1) the Company shall have
suffered a material adverse change in its business or financial
condition or (2) the Company shall have been the subject of material
adverse publicity which is likely to have a material adverse impact
upon the business and operations of either the Trust or the
Distributor, such termination effective upon 30 days prior written
notice;
(d) if the Distributor suspends or terminates the offering
of Trust shares of any Series or Class to all Participating Investors
or only designated Participating Investors, if such action is required
by law or by regulatory authorities having jurisdiction or if, in the
sole discretion of the Distributor acting in good faith, suspension or
termination is necessary in the best interests of the shareholders of
any Series or Class (it being understood that "shareholders" for this
purpose shall mean Product Owners), such notice effective immediately
upon receipt of written notice, it being understood that a lack of
Participating Investor interest in a Series or Class may be grounds
for a suspension or termination as to such Series or Class and that a
suspension or termination shall apply only to the specified Series or
Class;
(e) upon the Company's assignment of this Agreement
(including, without limitation, any transfer of the Contracts or the
Account to another insurance company
20
<PAGE>
pursuant to an assumption reinsurance agreement) unless the Trust
consents thereto, such termination effective upon 30 days prior
written notice;
(f) if the Company is in material breach of any provision of
this Agreement, which breach has not been cured to the satisfaction of
the Trust within 10 days after written notice of such breach has been
delivered to the Company, such termination effective upon expiration
of such 10-day period; or
(g) upon the determination of the Trust s Board to dissolve,
liquidate or merge the Trust as contemplated by Section 10.3(i), upon
termination of the Agreement pursuant to Section 10.3(ii), or upon
notice from the Company pursuant to Section 10.5 or 10.6, such
termination pursuant hereto to be effective upon 15 days prior written
notice.
Except in the case of an option exercised under clause (b), (d) or (g), the
obligations shall terminate only as to new Contracts and the Distributor shall
continue to make Trust shares available to the extent necessary to permit owners
of Contracts in effect on the effective date of such termination (hereinafter
referred to as "Existing Contracts") to reallocate investments in the Trust,
redeem investments in the Trust and/or invest in the Trust upon the making of
additional purchase payments under the Existing Contracts.
10.5. TERMINATION OF INVESTMENT IN A FUND. The Company may elect to
cease investing in a Fund, promoting a Fund as an investment option under the
Contracts, or withdraw its investment or the Account's investment in a Fund,
subject to compliance with applicable law, upon written notice to the Trust
within 15 days of the occurrence of any of the following events (unless provided
otherwise below):
(a) if the Trust informs the Company pursuant to Section 4.4
that it will not cause such Fund to comply with investment
restrictions as requested by the Company and the Trust and the Company
are unable to agree upon any reasonable alternative accommodations;
(b) if shares in such Fund are not reasonably available to meet the
requirements of the Contracts as determined by the Company (including
any non-availability as a result of notice given by the Distributor
pursuant to Section 10.4(d)), and the Distributor, after receiving
written notice from the Company of such non-availability, fails to
make available, within 10 days after receipt of such notice, a
sufficient number of shares in such Fund or an alternate Fund to meet
the requirements of the Contracts; or
(c) if such Fund fails to meet the diversification requirements specified
in Section 817(h) of the Code and any regulations thereunder and the
Trust, upon written request, fails to provide reasonable assurance
that it will take action to cure or correct such failure;
Such termination shall apply only as to the affected Fund and shall not apply to
any other Fund in which the Company or the Account invests.
10.6. TERMINATION OF INVESTMENT BY THE COMPANY. The Company may
elect to cease investing in all Series or Classes of the Trust made available
hereunder, promoting the Trust as
21
<PAGE>
an investment option under the Contracts, or withdraw its investment or the
Account s investment in the Trust, subject to compliance with applicable law,
upon written notice to the Trust within 15 days of the occurrence of any of the
following events (unless provided otherwise below):
(a) upon institution of formal proceedings against the Trust
or the Distributor (but only with regard to the Trust) by the NASD,
the SEC or any state securities or insurance commission or any other
regulatory body;
(b) if, with respect to the Trust or a Fund, the Trust or
the Fund ceases to qualify as a regulated investment company under
Subchapter M of the Code, as defined therein, or any successor or
similar provision, or if the Company reasonably believes that the
Trust may fail to so qualify, and the Trust, upon written request,
fails to provide reasonable assurance that it will take action to cure
or correct such failure within 30 days; or
(c) if the Trust or Distributor is in material breach of a
provision of this Agreement, which breach has not been cured to the
satisfaction of the Company within 10 days after written notice of
such breach has been delivered to the Trust or the Distributor, as the
case may be.
10.7. COMPANY REQUIRED TO REDEEM. The parties understand and
acknowledge that it is essential for compliance with Section 817(h) of the Code
that the Contracts qualify as annuity contracts or life insurance policies, as
applicable, under the Code. Accordingly, if any of the Contracts cease to
qualify as annuity contracts or life insurance policies, as applicable, under
the Code, or if the Trust reasonably believes that any such Contracts may fail
to so qualify, the Trust shall have the right to require the Company to redeem
Trust shares attributable to such Contracts upon notice to the Company and the
Company shall so redeem such Trust shares in order to ensure that the Trust
complies with the provisions of Section 817(h) of the Code applicable to
ownership of Trust shares. Notice to the Company shall specify the period of
time the Company has to redeem the Trust shares or to make other arrangements
satisfactory to the Trust and its counsel, such period of time to be determined
with reference to the requirements of Section 817(h) of the Code. In addition,
the Company may be required to redeem Trust shares pursuant to action taken or
request made by the Trust Board in accordance with the Exemptive Order described
in Article VIII or any conditions or undertakings set forth or referenced
therein, or other SEC rule, regulation or order that may be adopted after the
date hereof. The Company agrees to redeem shares in the circumstances described
herein and to comply with applicable terms and provisions. Also, in the event
that the Distributor suspends or terminates the offering of a Series or Class
pursuant to Section 10.4(d) of this Agreement, the Company, upon request by the
Distributor, will cooperate in taking appropriate action to withdraw the
Account's investment in the respective Fund.
10.8. MINIMUM INVESTMENT. The Company acknowledges its intention to
make the selected Funds of the Trust available under the Contracts for a
significant period of time and acknowledges further that a termination of this
Agreement or the availability of a Fund would prevent the Trust from benefitting
from the anticipated economies of scale and the Distributor from recovering its
up-front costs in establishing the systems and interface required under the
terms of this Agreement. Accordingly, in the event that the Company withdraws
all or substantially all of its investment in the Trust or a Fund less than
three years after the initial investment in the Trust or Fund (other than in
response to actions by the Distributor pursuant to Section 10.4(d) of this
Agreement), the Company, upon request, shall reimburse the Distributor for
reasonably identifiable costs attributable to the start-up of the Trust or Fund,
as applicable, and establishing the systems and interface contemplated by this
Agreement.
22
<PAGE>
10.9. CONFIDENTIALITY. The Company will keep confidential any
information acquired as a result of this Agreement regarding the business and
affairs of the Trust, the Distributor, and their affiliates.
ARTICLE XI
APPLICABILITY TO NEW ACCOUNTS AND NEW CONTRACTS
The parties to this Agreement may amend the schedules to this
Agreement from time to time to reflect, as appropriate, changes in or relating
to the Contracts, any Series or Class, additions of new classes of Contracts to
be issued by the Company and separate accounts therefor investing in the Trust.
Such amendments may be made effective by executing the form of amendment
included on each schedule attached hereto. The provisions of this Agreement
shall be equally applicable to each such class of Contracts, Series, Class or
separate account, as applicable, effective as of the date of amendment of such
Schedule, unless the context otherwise requires. The parties to this Agreement
may amend this Agreement from time to time by written agreement signed by all of
the parties.
ARTICLE XII
NOTICE, REQUEST OR CONSENT
Any notice, request or consent to be provided pursuant to this
Agreement is to be made in writing and shall be given:
If to the Trust:
Douglas C. Grip
President
Goldman Sachs Variable Insurance Trust
One New York Plaza
New York, NY 10004
If to the Distributor:
Douglas C. Grip
Vice President
Goldman Sachs & Co.
One New York Plaza
New York, NY 10004
If to the Company:
[NAME]
[TITLE]
________________ Life Insurance Company
[STREET ADDRESS]
[CITY, STATE]
or at such other address as such party may from time to time specify in writing
to the other party. Each such notice, request or consent to a party shall be
sent by registered or certified United States mail with return receipt requested
or by overnight delivery with a nationally recognized courier, and shall be
effective upon receipt. Notices pursuant to the provisions of Article II may be
sent by facsimile to the person designated in writing for such notices.
23
<PAGE>
ARTICLE XIII
MISCELLANEOUS
13.1. INTERPRETATION. This Agreement shall be construed and the
provisions hereof interpreted under and in accordance with the laws of the state
of Delaware, without giving effect to the principles of conflicts of laws,
subject to the following rules:
(a) This Agreement shall be subject to the provisions of the 1933 Act,
1940 Act and Securities Exchange Act of 1934, as amended, and the
rules, regulations and rulings thereunder, including such exemptions
from those statutes, rules, and regulations as the SEC may grant, and
the terms hereof shall be limited, interpreted and construed in
accordance therewith.
(b) The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions
hereof or otherwise affect their construction or effect.
(c) If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the
Agreement shall not be affected thereby.
(d) The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are
entitled to under state and federal laws.
13.2. COUNTERPARTS. This Agreement may be executed simultaneously
in two or more counterparts, each of which together shall constitute one and the
same instrument.
13.3. NO ASSIGNMENT. Neither this Agreement nor any of the rights
and obligations hereunder may be assigned by the Company, the Distributor or the
Trust without the prior written consent of the other parties.
13.4. DECLARATION OF TRUST. A copy of the Declaration of Trust of
the Trust is on file with the Secretary of State of the state of Delaware, and
notice is hereby given that this instrument is executed on behalf of the
Trustees of the Trust as trustees, and is not binding upon any of the Trustees,
officers or shareholders of the Trust individually, but binding only upon the
assets and property of the Trust. No Series of the Trust shall be liable for
the obligations of any other Series of the Trust.
24
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and behalf by its duly authorized officer
on the date specified below.
GOLDMAN SACHS VARIABLE INSURANCE TRUST
(Trust)
Date: ___________ By: ______________________________________
Name:
Title:
GOLDMAN, SACHS & CO.
(Distributor)
Date: ___________ By: ______________________________________
Name:
Title:
__________________ LIFE INSURANCE COMPANY
(Company)
Date: ___________ By: ______________________________________
Name:
Title:
25
<PAGE>
SCHEDULE 1
----------
Accounts of the Company
Investing in the Trust
Effective as of the date the Agreement was executed, the following separate
accounts of the Company are subject to the Agreement:
<TABLE>
<CAPTION>
Date Established by
Name of Account and Subaccounts Board of Directors SEC 1940 Act Type of Product
of Registration Number Supported by Account
the Company
=====================================================================================================
<S> <C> <C> <C>
</TABLE>
[Form of Amendment to Schedule 1]
Effective as of _____________, the following separate accounts of the Company
are hereby added to this Schedule 1 and made subject to the Agreement:
<TABLE>
<CAPTION>
Date Established by
Name of Account and Subaccounts Board of Directors SEC 1940 Act Type of Product
of Registration Number Supported by Account
the Company
=====================================================================================================
<S> <C> <C> <C>
=====================================================================================================
</TABLE>
IN WITNESS WHEREOF, the Trust, the Distributor and the Company hereby amend this
Schedule 1 in accordance with Article XI of the Agreement.
- ---------------------------------------
Goldman Sachs Variable Insurance Trust [______________________________]
Life Insurance Company
- ---------------------------------------
Goldman, Sachs & Co.
26
<PAGE>
SCHEDULE 2
----------
Classes of Contracts
Supported by Separate Accounts
Listed on Schedule 1
Effective as of the date the Agreement was executed, the following classes of
Contracts are subject to the Agreement:
<TABLE>
<CAPTION>
Date Established by
Name of Account and Subaccounts Board of Directors SEC 1940 Act Type of Product
of Registration Number Supported by Account
the Company
=====================================================================================================
<S> <C> <C> <C>
=====================================================================================================
</TABLE>
[Form of Amendment to Schedule 2]
Effective as of _______, the following classes of Contracts are hereby added to
this Schedule 2 and made subject to the Agreement:
<TABLE>
<CAPTION>
Date Established by
Name of Account and Subaccounts Board of Directors SEC 1940 Act Type of Product
of Registration Number Supported by Account
the Company
=====================================================================================================
<S> <C> <C> <C>
=====================================================================================================
</TABLE>
IN WITNESS WHEREOF, the Trust, the Distributor and the Company hereby amend this
Schedule 2 in accordance with Article XI of the Agreement.
- ---------------------------------------
Goldman Sachs Variable Insurance Trust [______________________________]
Life Insurance Company
- ---------------------------------------
Goldman, Sachs & Co.
27
<PAGE>
SCHEDULE 3
----------
Trust Classes and Series
Available Under
Each Class of Contracts
Effective as of the date the Agreement was executed, the following Trust Classes
and Series are available under the Contracts:
<TABLE>
<CAPTION>
Contracts Marketing Name Trust Classes and Series
====================================================
<S> <C>
====================================================
</TABLE>
[Form of Amendment to Schedule 3]
Effective as of __________________, this Schedule 3 is hereby amended to reflect
the following changes in Trust Classes and Series:
<TABLE>
<CAPTION>
Contracts Marketing Name Trust Classes and Series
====================================================
<S> <C>
====================================================
</TABLE>
IN WITNESS WHEREOF, the Trust, the Distributor and the Company hereby amend this
Schedule 3 in accordance with Article XI of the Agreement.
- ---------------------------------------
Goldman Sachs Variable Insurance Trust [______________________________]
Life Insurance Company
- --------------------------------------
Goldman, Sachs & Co.
28
<PAGE>
SCHEDULE 4
----------
Investment Restrictions
Applicable to the Trust
Effective as of the date the Agreement was executed, the following investment
restrictions are applicable to the Trust:
- --------------------------------------------------------------------------------
[Form of Amendment to Schedule 4]
Effective as of ___________________, this Schedule 4 is hereby amended to
reflect the following changes:
IN WITNESS WHEREOF, the Trust, the Distributor and the Company hereby amend this
Schedule 4 in accordance with Article XI of the Agreement.
- -------------------------------------- --------------------------------
Goldman Sachs Variable Insurance Trust [______________________________]
Life Insurance Company
- -------------------------------------
Goldman, Sachs & Co.
29
<PAGE>
EXHIBIT 10(a)
Law Offices
DRINKER BIDDLE & REATH LLP
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, PA 19107-3496
Telephone: (215) 988-2700
TELEX: 834684
FAX: (215) 988-2757
December 19, 1997
Goldman Sachs Variable Insurance Trust
4900 Sears Tower
Chicago, IL 60606
Re: Registration Statement on Form N-1A/Issuance of Shares
------------------------------------------------------
Ladies and Gentlemen:
We have acted as counsel to Goldman Sachs Variable Insurance Trust, a
Delaware business trust (the "Trust") organized under an Agreement and
Declaration of Trust dated September 16, 1997 (the "Declaration of Trust"), in
connection with the registration under the Securities Act of 1933, as amended,
pursuant to a Registration Statement on Form N-1A (File No. 333-35883) (the
"Registration Statement"), of shares of beneficial interest ("Shares") in nine
series, or portfolios, of the Trust. The nine series are the Goldman Sachs
Growth and Income, Goldman Sachs CORE U.S. Equity, Goldman Sachs CORE Large Cap
Growth, Goldman Sachs CORE Small Cap Equity, Goldman Sachs Capital Growth,
Goldman Sachs Mid Cap Equity, Goldman Sachs International Equity, Goldman Sachs
Global Income and Goldman Sachs High Yield Funds. The Trust is authorized to
issue an unlimited number of Shares in each of the aforesaid series.
We have reviewed the Registration Statement and the Trust's Declaration of
Trust, its by-laws, and certain resolutions adopted by its Trustees, and have
considered such other legal and factual matters as we have deemed appropriate.
This opinion is based exclusively on the Delaware Business Trust Act and
the federal law of the United States of America.
Based on the foregoing, we are of the opinion that the Shares registered
under the Registration Statement will be, when issued against payment therefor
as described therein, legally issued,
<PAGE>
-2-
fully paid and non-assessable by the Trust, and that the holders of the Shares
will be entitled to the same limitation of personal liability extended to
stockholders of private corporations for profit organized under the general
corporation law of the State of Delaware (except that we express no opinion as
to such holders who are also Trustees of the Trust). Pursuant to Section 2 of
Article VIII of the Declaration of Trust, the Trustees have the power to cause
shareholders, or shareholders of a particular series, to pay certain custodian,
transfer, servicing or similar agent charges by setting off the same against
declared but unpaid dividends or by reducing Share ownership (or by both means).
We hereby consent to the filing of this opinion with the Securities and
Exchange Commission as part of Pre-Effective Amendment No. 1 to the Trust's
Registration Statement on Form N-1A. Except as provided in this paragraph, the
opinion set forth above is expressed solely for the benefit of the addressee
hereof in connection with the matters contemplated hereby and may not be relied
upon by, or filed with, any other person or entity or for any other purpose
without our prior written consent.
Very truly yours,
/s/ Drinker Biddle & Reath LLP
DRINKER BIDDLE & REATH LLP
<PAGE>
EXHIBIT 10(b)
[LETTERHEAD ARTHUR ANDERSEN LLP]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
for Goldman Sachs Variable Insurance Trust dated December 15, 1997 (and to all
references to our firm) included or incorporated by reference in Pre-Effective
Amendment No. 1 and Amendment No. 1 to Registration Statement File Nos.
333-35883 and 811-08361, respectively.
/s/ Arthur Andersen LLP
-----------------------
Arthur Andersen LLP
Boston, Massachusetts
December 15, 1997
<PAGE>
Exhibit 13
PURCHASE AGREEMENT
------------------
Goldman Sachs Variable Insurance Trust (the "Trust"), a Delaware
business trust, and The Goldman Sachs Group, L.P. ("Buyer") hereby agree with
each other as follows:
1. The Trust hereby offers Buyer and Buyer hereby purchases 10,000
share of beneficial interest of the Trust at a price of $10.00 per share (such
shares in the Trust being hereinafter collectively known as "Shares") in
consideration for the payment of $100,000. Buyer hereby acknowledges purchase of
the Shares and the Trust hereby acknowledges receipt from Buyer of funds in the
amount $100,000 in full payment for the Shares.
2. Buyer represents and warrants to the Trust that the Shares are being
acquired for investment purposes and not with a view to the distribution
thereof.
3. The Trust has incurred organizational expenses in connection with its
start-up and initial registration. Organizational costs will be amortized over
60 months on a straight-line basis beginning with the commencement of operations
of each of the Trust's nine initial investment portfolios (the "Funds"). If any
or all of the Shares held by the Buyer representing initial capital of the Funds
are redeemed during amortization period, the redemption proceeds will be reduced
by the pro rata portion of the unamortized organizational cost balance.
4. The name Goldman Sachs Variable Insurance Trust is the designation of
the Trustees for the time being under an Agreement and Declaration of the Trust
dated September 16, 1997 as amended from time to time, and all persons dealing
with the Trust or a Fund must look solely to the property of the Trust or such
Fund for the enforcement of any claims as none of Trustees, officers, agents or
shareholders assume any personal liability for obligations entered into on
behalf of the Trust. No Fund shall be liable for any claims against any other
Fund.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the 12th day of December, 1997.
(SEAL) GOLDMAN SACHS VARIABLE INSURANCE TRUST
By: /s/ John Perlowski
-----------------------------------
THE GOLDMAN SACHS GROUP, L.P.
By: /s/ David B. Ford
-----------------------------------
