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As filed with the Securities and Exchange Commission on November 18, 1998
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. [_]
Post-Effective Amendment No. 1 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 2 [X]
___________________
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
<PAGE>
It is proposed that this filing will become effective (check appropriate
box):
[_] Immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[_] on (date) pursuant to paragraph (a)(1)
[x] 75 days after filing pursuant to paragraph (a)(2)
[_] on (date) pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
[_] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
This Post-Effective Amendment No. 1 to Registrant's Registration Statement is
being filed solely for the purpose of registering Shares of Beneficial Interest
in eight new investment portfolios Goldman Sachs CORE Large Cap Value Fund,
Goldman Sachs CORE International Equity Fund, Goldman Sachs Short Duration
Government Fund, Goldman Sachs Conservative Strategy Fund, Goldman Sachs
Balanced Strategy Fund, Goldman Sachs Growth and Income Strategy Fund, Goldman
Sachs Growth Strategy Fund and Goldman Sachs Aggressive Growth Strategy
Fund.
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
Goldman Sachs CORE Large Cap Value Portfolio,
Goldman Sachs CORE International Equity Portfolio, and Goldman Sachs Short
Duration Government Portfolio
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; Risk Factors; Investment
Restrictions and 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>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED NOVEMBER 18, 1998
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO
SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN
ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS
February __, 1999
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, fixed-
income and asset allocation investment options. This Prospectus relates to
three of those options. Other portfolios offered by the Trust are described in
separate prospectuses.
GOLDMAN SACHS CORE LARGE CAP VALUE FUND
Seeks long-term growth of capital and dividend income through a broadly
diversified portfolio of equity securities of large cap U.S. issuers that are
selling at low to modest valuations relative to general market measures and that
are expected to have favorable prospects for capital appreciation and/or
dividend-paying ability.
GOLDMAN SACHS CORE INTERNATIONAL EQUITY FUND
Seeks long-term growth of capital through a broadly diversified portfolio of
equity securities of large cap companies that are organized outside the U.S. or
whose securities are principally traded outside the U.S.
GOLDMAN SACHS SHORT DURATION GOVERNMENT FUND
Seeks a high level of current income and secondarily, in seeking current income,
may also consider the potential for capital appreciation. The Fund invests
primarily in securities issued or guaranteed by the U.S. government, its
agencies, instrumentalities or sponsored enterprises.
--------------------
Goldman Sachs Asset Management ("GSAM"), New York, New York, a separate
operating division of Goldman, Sachs & Co. ("Goldman Sachs"), serves as
investment adviser to each Fund. GSAM is also referred to in this Prospectus as
the "Investment Adviser." Goldman Sachs serves as each Fund's distributor and
transfer agent.
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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.
A particular Fund listed in this Prospectus 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 February __, 1999, 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.
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.
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<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
FUND HIGHLIGHTS................................................ 4
OVERVIEW OF INVESTMENT STYLES.................................. 8
INVESTMENT OBJECTIVES AND POLICIES............................. 10
DESCRIPTION OF SECURITIES...................................... 12
INVESTMENT TECHNIQUES.......................................... 20
RISK FACTORS................................................... 26
INVESTMENT RESTRICTIONS........................................ 30
PORTFOLIO TURNOVER............................................. 31
MANAGEMENT..................................................... 31
NET ASSET VALUE................................................ 36
PERFORMANCE INFORMATION........................................ 37
SHARES OF THE TRUST............................................ 37
EXPENSES....................................................... 39
TAXATION....................................................... 39
ADDITIONAL INFORMATION......................................... 41
DIVIDENDS...................................................... 41
PURCHASE AND REDEMPTION OF SHARES.............................. 41
</TABLE>
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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). This Prospectus relates to three of those funds CORE Large Cap Value
Fund, CORE International Equity Fund and Short Duration Government Fund (the
"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. Each Fund is "diversified
open-end management company" as defined in the Investment Company Act of 1940,
as amended (the "Act"). For a complete description of each Fund's investment
objectives and policies, see "Investment Objectives and Policies," "Description
of Securities" and "Investment Techniques."
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Fund Name Investment Objectives Investment Criteria Benchmark
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<S> <C> <C> <C>
CORE Large Cap Long-term growth of capital and At least 90% of total assets in equity securities of U.S. Russell 1000
Value Fund dividend income. issuers, including certain foreign issuers traded in the U.S. Value Index
The Fund seeks to achieve its objective through a broadly
diversified portfolio of equity securities of large cap U.S.
issuers that are selling at low to modest valuations relative
to general market measures such as earnings, book value and
other fundamental accounting measures, and that are expected
to have favorable prospects for capital appreciation and/or
dividend-paying ability. 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 Value Index.
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CORE Long-term growth of capital. At least 90% of total assets in equity securities of EAFE Index
International companies organized outside the United States or whose (unhedged)
Equity Fund securities are principally traded outside the United States.
The Fund seeks broad representation of large cap issuers
across major countries and sectors of the international
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 unhedged Morgan Stanley
Capital International (MSCI) Europe, Australia and Far East
Index (the "EAFE Index"). The Fund may employ certain
currency management techniques.
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</TABLE>
<TABLE>
<CAPTION>
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FUND NAME INVESTMENT DURATION EXPECTED INVESTMENT CREDIT OTHER BENCHMARK
OBJECTIVES APPROXIMATE SECTOR QUALITY INVESTMENTS
INTEREST RATE
SENSITIVITY
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<S> <C> <C> <C> <C> <C> <C> <C>
Short Duration A high level Target = 2 2-year bond At least 65% U.S. Mortgage pass- 2-year
Government of current year U.S. of total assets Government through U.S.
Fund income, and Treasury in securities Securities securities Treasury
secondarily, Security plus or issued or and other Security
in seeking minus .5 years* guaranteed by securities
current years* the U.S. representing an
income, may government, interest in or
also consider Maximum = 3 its agencies, collateralized by
the potential years instrumental- mortgage loans.
for capital ities or
appreciation. sponsored
enterprises
("U.S.
Government
Securities")
and
repurchase
agreements
collateralized
by such
securities.
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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."
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 (or as in the
case of the expected introduction of the euro next year, the creation of new
currencies), 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. The CORE
International Equity Fund's investments in emerging markets and countries
("Emerging Countries") involves greater risks than investments in the developed
countries of Western Europe, the United States, Canada, Australia, New Zealand
and Japan. In addition, because the CORE International Equity Fund invests
primarily outside the United States, this Fund 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 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.
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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
flows to be returned earlier than expected. Call risk typically results when
interest rates have declined. Under such circumstances, 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. Extension risk typically
results when interest rates have increased. Under such circumstances, 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.
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?
Goldman Sachs Asset Management ("GSAM"), a separate operating division of
Goldman, Sachs & Co. ("Goldman Sachs") serves as investment adviser to the
Funds. GSAM is referred to in this Prospectus as the "Investment Adviser." As
of October 23,1998, the Investment Adviser, together with its affiliates, acted
as investment adviser for assets in excess of $177 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."
-7-
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WHEN ARE DIVIDENDS AND DISTRIBUTIONS PAID?
Investment income dividends and capital gains distributions are paid at least
annually by each Fund.
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. For further information concerning dividends, see
"Dividends."
OVERVIEW OF INVESTMENT STYLES
EQUITY FUNDS - CORE LARGE CAP VALUE AND CORE INTERNATIONAL EQUITY FUNDS
The Investment Adviser may purchase for the CORE Large Cap Value and CORE
International Equity Funds (the "CORE 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 Adviser utilizes first-hand fundamental research, including
visiting company facilities to assess operations and to meet decision-makers.
The Investment Adviser 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 Adviser
is able to draw on the research and market expertise of the Goldman Sachs Global
Investment Research Department and other affiliates of the Investment Adviser,
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.
QUANTITATIVE STYLE. 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 Large Cap Value Fund and a broad universe
of foreign equity securities for the CORE International Equity Fund. As
described more fully
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<PAGE>
below, the Investment Adviser uses proprietary multifactor models (the
"Multifactor Models") to forecast the returns of different markets, individual
securities and in the case of the CORE International Equity Fund, currencies.
The Investment Adviser may rely on research from both the Goldman Sachs Global
Investment Research Department (the "Research Department") and 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 composed of securities rated highest by the foregoing
investment process and has risk characteristics and industry weightings similar
to the relevant Fund's benchmark.
Multifactor Models. The Multifactor Models are rigorous computerized rating
------------------
systems for forecasting the returns of different equity markets, currencies and
individual equity securities according to fundamental investment
characteristics. The CORE Large Cap Value Fund uses one Multifactor Model to
forecast the returns of securities held in its portfolio. The CORE
International Equity Fund uses multiple Multifactor Models to forecast returns.
Currently, the CORE International Equity Fund uses one model to forecast equity
market returns, one model to forecast currency returns and 22 separate models to
forecast individual equity security returns in 22 different countries. Despite
this variety, all Multifactor Models incorporate 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, earnings stability and currency momentum
and country political risk ratings, as applicable). All of the factors used in
the Multifactor Models have been shown to significantly impact the performance
of the securities, currencies and markets they were designed to forecast.
The weightings assigned to the factors in the Multifactor Model used by the
CORE Large Cap Value Fund are derived using a statistical formulation that
considers each factor's historical performance in different market environments.
As such, the Multifactor Model used by the CORE Large Cap Value Fund is designed
to evaluate each security using only the factors that are statistically related
to returns in the anticipated market environment. Because they include many
disparate factors, the Investment Adviser believes that all the Multifactor
Models are broader in scope and provide a more thorough evaluation than most
conventional quantitative models. Securities and markets ranked highest by the
relevant 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
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<PAGE>
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 Models) 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 FUND - SHORT DURATION GOVERNMENT FUND
The Investment Adviser may, in accordance with the Short Duration Government
Fund's investment objectives and policies, purchase all types of U.S. Government
Securities and repurchase agreements collateralized by such securities.
The Short Duration Government 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, the Short Duration Government
Fund will estimate the duration of obligations that 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. The Short Duration Government 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.
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 certain 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.
CORE LARGE CAP VALUE 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 equity securities of large
cap U.S.
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<PAGE>
issuers that are selling at low to modest valuations relative to general market
measures such as earnings, book value and other fundamental accounting measures,
and that are expected to have favorable prospects for capital appreciation
and/or dividend-paying ability.
Primary Investment Focus. The Fund invests, under normal circumstances, at
least 90% of its total assets in equity securities of U.S. issuers, including
certain foreign issuers that are traded in the United States. 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 Value Index. The Fund seeks a portfolio composed of companies
with above average capitalizations and low to moderate valuations as measured by
price/earnings ratios, book value and other fundamental accounting measures.
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 -- Quantitative Style."
CORE INTERNATIONAL 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 large cap equity securities of companies that
are organized outside the United States or whose securities are principally
traded outside the United States.
Primary Investment Focus. The Fund invests, under normal circumstances, at
least 90% 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 seeks broad representation of large cap
issuers across major countries and sectors of the international 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 EAFE Index. In addition, the Fund seeks a portfolio composed of
companies with attractive valuations and stronger momentum characteristics than
the EAFE Index.
The Fund may allocate its assets among countries as determined by the
Investment Adviser from time to time, provided the Fund's assets are invested in
at least three foreign countries. The Fund may invest in securities of issuers
in Emerging Countries 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.
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<PAGE>
For a description of the investment process of the Fund, see "Overview of
Investment Styles -- Quantitative Style."
Other. The Fund may invest only in fixed-income securities that are considered
to be cash equivalents.
SHORT DURATION GOVERNMENT FUND
Objective. The Fund's investment objective is to provide 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 two-year U.S. Treasury
security, plus or minus .5 years. In addition, under normal interest rate
conditions, the Fund's maximum duration will not exceed three years. The
approximate interest rate sensitivity of the Fund is expected to be comparable
to a two-year bond.
Investment Sector. The Fund invests, under normal market conditions, at least
65% of its total assets in U.S. Government Securities and in repurchase
agreements collateralized by such securities. Substantially all of the Fund's
assets will be invested in U.S. Government Securities. 100% of the Fund's
portfolio will be invested in U.S. dollar-denominated securities.
Credit Quality. The Fund invests in U.S. Government Securities and repurchase
agreements collateralized by such securities.
Other. The Fund may employ certain active management techniques to manage its
duration and term structure 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), mortgage and interest rate swaps and
interest rate floors, caps and collars. 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."
DESCRIPTION OF SECURITIES
CONVERTIBLE SECURITIES
Each CORE 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
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<PAGE>
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 Adviser will give primary
emphasis to the attractiveness of the underlying common stock. The convertible
securities in which the CORE Funds invest are not subject to any minimum rating
criteria. Convertible debt securities are equity investments for purposes of
each Fund's investment policies.
REAL ESTATE INVESTMENT TRUSTS ("REITS")
Each CORE Fund 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 dependent upon cash
flow from their investments to repay financing costs and the ability of the
REITs' managers. 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.
FOREIGN INVESTMENTS
Foreign Securities. Each CORE Fund may invest in the securities of foreign
------------------
issuers (provided that the CORE Large Cap Value Fund may only invest in equity
securities of foreign issuers that are traded in the U.S.). Investments in
foreign securities may offer potential benefits that are not available from
investments exclusively in securities of domestic issuers quoted in U.S.
dollars. 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 certain special risks,
including those set forth below, which are not typically associated with
investing in U.S. dollar denominated or quoted securities of U.S. issuers. 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.,
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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. The expected introduction of a single
currency, the euro, on January 1, 1999 for participating European nations in the
Economic and Monetary Union ("EMU") presents unique uncertainties, including
whether the payment and operational systems of banks and other financial
institutions will be ready by the scheduled launch date; the creation of
suitable clearing and settlement payment systems for the new currency; the legal
treatment of certain outstanding financial contracts after January 1, 1999 that
refer to existing currencies rather than the euro; the establishment and
maintenance of exchange rates for currencies being converted into the euro and
the euro; the fluctuation of the euro relative to non-euro currencies during the
transition period from January 1, 1999 to December 31, 2001 and beyond; whether
the interest rate, tax and labor regimes of European countries participating in
the euro will converge over time; and whether the conversion of the currencies
of other EMU countries such as the United Kingdom and Denmark into the euro and
the admission of other non-EMU countries such as Poland, Latvia and Lithuania as
members of the EMU may have an impact on the euro. These or other factors,
including political and economic risks, could cause market disruptions before or
after the introduction of the euro, and could adversely affect the value of
securities and foreign currencies held by the Funds. 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 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
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or social instability or diplomatic developments which could affect investments
in those countries.
Concentration of the assets of the CORE International Equity Fund in one or a
few countries will subject the Fund to greater risks than if the Fund's assets
were not geographically concentrated.
Investments in ADRs, EDRs and GDRs. Each CORE Fund may invest in foreign
----------------------------------
securities which take the form of sponsored and unsponsored American Depository
Receipts ("ADRs"), Global Depository Receipts ("GDRs") and, in the case of the
CORE International Equity Fund, 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 may avoid currency risks during the
settlement period for purchases and sales.
Foreign Currency Transactions. Because investment in foreign issuers will
-----------------------------
usually involve currencies of foreign countries, and because the CORE
International Equity Fund may have currency exposure independent of its
securities positions, the value of the assets of a CORE 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
CORE International Equity Fund may enter into
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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 CORE International Equity Fund 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 CORE Fund enters into a forward foreign currency exchange contract to buy
foreign currency for any purpose or the CORE International Equity Fund enters
into forward foreign currency exchange contracts to sell foreign currency to
seek to increase total return, the Fund will segregate cash or liquid assets in
an amount equal to the value of the Fund's total assets committed to the
consummation of the forward contract, or otherwise to cover its position in a
manner permitted by the SEC. The 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 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
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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 CORE International Equity Fund may also engage in a variety of foreign
currency management techniques. However, due to the limited market for these
instruments with respect to the currencies of many Emerging Countries, the
Investment Adviser does not currently anticipate that a significant portion of
the Fund's currency exposure in Emerging Countries will be covered by such
instruments. For a discussion of such instruments and the risks associated with
their use, see "Investment Objectives and Policies" in the Additional Statement.
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 financial institutions, which
represent a proportionate interest in underlying U.S. Treasury securities.
Structured Securities. The CORE Funds 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
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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.
Zero Coupon, Deferred Interest, Pay-In-Kind and Capital Appreciation Bonds.
--------------------------------------------------------------------------
Each Fund may invest in zero coupon bonds and the Short Duration Government Fund
may invest in deferred interest, pay-in-kind and capital appreciation bonds.
These securities are 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
The Short Duration Government Fund 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 than is the case with
traditional fixed-income securities. During periods of declining interest
rates, prepayments can be expected to accelerate, and thus impair the Fund's
ability to reinvest the
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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 the 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."
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
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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. Stripped Mortgage-Backed Securities
-----------------------------------
("SMBS") 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.
INVESTMENT TECHNIQUES
OPTIONS ON SECURITIES AND SECURITIES INDICES
Each Fund (other than the CORE Large Cap Value Fund) 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 composed 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
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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
The CORE Funds may, to the extent they invest 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
CORE International Equity Fund 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, 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 CORE International Equity Fund 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
or securities prices, or in the case of the CORE Funds, currency exchange rates,
the Funds 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 (in the case of the
CORE International Equity Fund) securities indices and other financial
instruments and indices, whether domestic or foreign. The CORE Large Cap Value
Fund may enter into such transactions only with respect to a representative
index. A Fund will engage in futures and related
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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
"Description of Investment Securities and Practices-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. The Core
International Equity Fund may engage in futures transactions on foreign
exchanges. Foreign exchanges may not provide the same protection as U.S.
exchanges.
STANDARD AND POOR'S DEPOSITORY RECEIPTS
The CORE Large Cap Value Fund may, consistent with its objectives, and the
CORE International Equity Fund may, with respect to no more than 5% of its net
assets, purchase Standard & Poor's Depository Receipts ("SPDRs"). SPDRs are
American Stock
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Exchange-traded securities that represent ownership in the SPDR Trust, a trust
which has been established to accumulate and hold a portfolio of common stocks
that is intended to track the price performance and dividend yield of the S&P
500. This trust is sponsored by a subsidiary of the American Stock Exchange.
SPDRs may be used for several reasons, including but not limited to facilitating
the handling of cash flows or trading, or reducing transaction costs. The use of
SPDRs would introduce additional risk to the Fund as the price movement of the
instrument does not perfectly correlate with the price action of the underlying
index.
EQUITY SWAPS
Each CORE Fund may invest up to 10% of its total assets in equity swaps.
Equity swaps allow the parties to a swap agreement to exchange the dividend
income or other components of return on an equity investment (e.g., a group of
equity securities or an index) for a component of return on another non-equity
or equity investment. An equity swap may be used by a Fund to invest in a
market without owning or taking physical custody of securities in circumstances
in which direct investment may be restricted for legal reasons or is otherwise
impractical. Equity swaps are derivatives and their value can be very volatile.
To the extent that the Investment Adviser does not accurately analyze and
predict the potential relative fluctuation of the components swapped with
another party, a Fund may suffer a loss. The value of some components of an
equity swap (such as the dividends on a common stock) may also be sensitive to
changes in interest rates. Furthermore, during the period a swap is
outstanding, a Fund may suffer a loss if the counterparty defaults. In
connection with its investments in equity swaps, a Fund will either segregate
cash or liquid assets or otherwise cover its obligations in a manner required by
the SEC.
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 or sell securities on a forward commitment basis; that is,
make contracts to purchase or sell securities for a fixed price at a future date
beyond the customary three-day settlement period. 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.
Conversely, securities sold on a forward commitment basis involve the risk that
the value of the securities to be sold may increase 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
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forward commitments prior to settlement if the 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 a 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 under which the Investment Adviser determines
and monitors the liquidity of portfolio securities subject to the oversight of
the Trustees. 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 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 CORE International Equity Fund 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 the
Investment Adviser or its 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.
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LENDING OF PORTFOLIO SECURITIES
The Funds may seek to increase their 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 the 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 (including the loan collateral) of a CORE Fund or 5% of the net assets of
the short Duration Government 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.
MORTGAGE DOLLAR ROLLS
The Short Duration Government Fund may enter into mortgage "dollar rolls" in
which the 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
The CORE Funds may invest 35% of their respective total assets, and the Short
Duration Government Fund may hold up to 100% of its total assets, in U.S.
Government Securities and repurchase agreements collateralized by U.S.
Government
-25-
<PAGE>
Securities for temporary defensive purposes. The CORE Funds may also invest, for
temporary defensive purposes, 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 and non-convertible
corporate bonds with a remaining maturity of less than one year. 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, with
respect to the CORE Funds, World Equity Benchmark Shares, (ii) warrants, stock
purchase rights and unseasoned companies (CORE Funds only), (iii) mortgage
swaps, credit swaps and interest rate swaps, caps, floors and collars (Short
Duration Government Fund only), (iv) yield curve options and inverse floating-
rate securities (Short Duration Government Fund only), (v) custodial receipts,
(vi) currency swaps (CORE International Equity Fund only), and (vii) reverse
repurchase agreements for investment purposes (Short Duration Government 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 Equity Securities. In general, the CORE Funds are
subject to the risks associated with investments in common stocks and other
equity securities. Stock values fluctuate in response to the activities of
individual companies and in response to general market and economic conditions
and, accordingly, the value of the stocks that a Fund holds may decline over
short or extended periods. Stock markets tend to be cyclical, with periods when
stock prices generally rise and periods when prices generally decline. As of
the date of this Prospectus, domestic stock markets were trading close to record
high levels and there can be no guarantee that such levels will continue.
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 CORE International
Equity Fund may invest up to 25% of its total assets in securities of issuers in
Emerging Countries. Emerging Countries are generally located in
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<PAGE>
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 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 substantially greater degree of
economic, political and social instability and disruption 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 unrest in some Asian, Eastern European 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.
-27-
<PAGE>
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 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.
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<PAGE>
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. Call risk typically results when interest
rates have declined. Under such circumstances, 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. Extension risk typically results when
interest rates have increased. Under such circumstances, a Fund will suffer
from the inability to invest in higher yielding securities.
The investment characteristics of Mortgage-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 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
-29-
<PAGE>
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.
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.
Risks of Derivative Transactions. A Fund's transactions, if any, in options,
--------------------------------
futures, options on futures, swaps, interest rate caps, floors and collars,
structured securities, inverse floating-rate 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 (if
any) 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.
INVESTMENT 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 as defined in the Additional
Statement. Each Fund's investment objectives and all policies not specifically
designated as fundamental are non-fundamental and may be changed without
shareholder approval. If there is a change in a Fund's investment objectives,
investors should consider whether that Fund remains an appropriate investment in
light of their then current financial positions and needs.
-30-
<PAGE>
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
CORE Large Cap Value, CORE International Equity and Short Duration Government
Funds will generally not exceed 75%, __% and ___%, 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 investment objectives
and portfolio management policies. For the Short Duration Government Fund, 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 Adviser, 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 ADVISER
Investment Adviser. 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 Value, CORE International
Equity and Short Duration Government Funds. Goldman Sachs registered as an
investment adviser in 1981. As of October 23, 1998, GSAM, together with its
affiliates, acted as investment adviser or distributor for assets in excess of
$177 billion.
Under a Management Agreement with each Fund, the 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.
-31-
<PAGE>
In performing its investment advisory services, the Investment Adviser, while
remaining ultimately responsible for the management of the Funds, is able to
draw upon the research and expertise of its other affiliates for portfolio
decisions and management with respect to certain portfolio securities. In
addition, the Investment Adviser will have access to the research of, and
certain proprietary technical models developed by, Goldman Sachs and may apply
quantitative and qualitative analysis in determining the appropriate allocations
among the categories of issuers and types of securities.
Under the Management Agreement, the 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 Additional Statements 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>
Jonathan A. Beinner Senior Portfolio Manager- Since Mr. Beinner joined the Investment Adviser in
Managing Director and Short Duration Government 1999 1990.
Co-Head of U.S. Fixed-income
Department
====================================================================================================================================
</TABLE>
-32-
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Years Primarily Five Year
Name and Title Fund Responsibility Responsible Employment History
-------------- ------------------- ----------- ------------------
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Melissa Brown Senior Portfolio Manager- Since Ms. Brown joined the Investment Adviser in 1998.
Vice President CORE Large Cap Value 1999 From 1984 to 1998, she was the director of
CORE International Equity 1999 Quantitative Equity Research and served on the
Investment Policy Committee at Prudential
Securities.
- ------------------------------------------------------------------------------------------------------------------------------------
Mark M. Carhart Senior Portfolio Manager- Since Mr. Carhart joined the Investment Adviser as a
Vice President CORE International Equity 1999 member of the Quantitative Research and Risk
Management team in 1997. From August 1995 to
September 1997, he was Assistant Professor of
Finance at the Marshall School of Business at USC
and a Senior Fellow of the Wharton Financial
Institutions Center. From 1993 to 1995, he was a
lecturer and graduate student at the University of
Chicago Graduate School of Business.
- ------------------------------------------------------------------------------------------------------------------------------------
James B. Clark Portfolio Manager- Since Mr. Clark joined the Investment Advisor in 1994.
Vice President Short Duration Government 1999 From June 1994 to August 1994, Mr. Clark was a
senior trader at the Federal Home Loan Mortgage
Corporation. From 1992 to 1994, he was an investment
manager at Travelers Insurance Company.
- ------------------------------------------------------------------------------------------------------------------------------------
Kent A. Clark Senior Portfolio Manager - Since Mr. Clark joined the Investment Adviser in 1992.
Vice President CORE Large Cap Value 1999
CORE International Equity 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Peter A. Dion Portfolio Manager- Since Mr. Dion joined the Investment Adviser in 1992.
Vice President Short Duration Government 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Paul Greener Portfolio Manager- Since Mr. Greener joined the Investment Adviser as a
Associate CORE International Equity 1999 member of the Pan-European Equity Team responsible
for European general retailers, business services
and technology sectors in 1996. From 1994 to 1996,
he was an equity analyst at CIN Management.
- ------------------------------------------------------------------------------------------------------------------------------------
Raymond J. Iwanowski Portfolio Manager- Since Mr. Iwanowski joined the Investment Adviser as an
Vice President CORE International Equity 1999 associate and portfolio manager in 1997. From 1993
to 1997, he was a Vice President and head of the
Fixed Derivatives Client Research Group at Salomon
Brothers.
- ------------------------------------------------------------------------------------------------------------------------------------
Robert C. Jones Senior Portfolio Manager- Since Mr. Jones joined the Investment Adviser in 1989.
Managing Director CORE Large Cap Value 1999
CORE International Equity 1999
====================================================================================================================================
</TABLE>
-33-
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Years Primarily Five Year
Name and Title Fund Responsibility Responsible Employment History
-------------- ------------------- ----------- ------------------
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Richard C. Lucy Senior Portfolio Manager- Since Mr. Lucy joined the Investment Adviser in 1992.
Managing Director and Co-Head Short Duration Government 1999
of U.S. Fixed-income
Department
- ------------------------------------------------------------------------------------------------------------------------------------
James P. McCarthy Portfolio Manager Since Mr. McCarthy joined the Investment Adviser in 1995
Vice President Short Duration Government 1999 after working as a bond trader at Nomura Securities.
- ------------------------------------------------------------------------------------------------------------------------------------
Victor H. Pinter Senior Portfolio Manager- Since Mr. Pinter joined the Investment Adviser in 1990.
Vice President CORE Large Cap Value 1999
CORE International Equity 1999
====================================================================================================================================
</TABLE>
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 Adviser 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 Adviser's
brokerage allocation practices.
As compensation for its services rendered and assumption of certain
expenses pursuant to a Management Agreement, GSAM is entitled to the following
fees, computed daily and payable monthly at the annual rates listed below:
<TABLE>
<CAPTION>
Contractual
Rate
--------------------
<S> <C>
CORE Large Cap Value....................... 0.70%
CORE International Equity.................. 0.85%
Short Duration Government.................. 0.55%
</TABLE>
-34-
<PAGE>
The Investment Adviser has voluntarily agreed to reduce or limit certain
"Other Expenses" of the Funds (excluding management fees, taxes, interest and
brokerage fees and litigation, indemnification and other extraordinary expenses)
to the extent such expenses exceed 0.10%, 0.25% and 0.15% per annum of the
average daily net assets of the CORE Large Cap Value, CORE International Equity
and Short Duration Government Funds, respectively. Such reductions or limits,
if any, are calculated monthly on a cumulative basis, and may be discontinued or
modified by the 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 Adviser, 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. 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. In addition, the Funds may, from time to time, enter into transitions
in which other clients of Goldman Sachs have an adverse interest. 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.
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.
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.
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<PAGE>
YEAR 2000
Many computer systems were designed using only two digits to signify the year
(for example, "98" for "1998"). On January 1, 2000, if these computer systems
are not corrected, they may incorrectly interpret "00" as the year "1900" rather
than the year "2000," leading to computer shutdowns or errors (commonly known as
the "Year 2000 Problem"). To the extent these systems conduct forward-looking
calculations, these computer problems may occur prior to January 1, 2000. Like
other investment companies and financial and business organizations, the Funds
could be adversely affected in their ability to process securities trades, price
securities, provide shareholder account services and otherwise conduct normal
business operations if the computer systems used by the Investment Adviser or
other Fund service providers do not adequately address this problem in a timely
manner. The Investment Adviser has established a dedicated group to analyze
these issues and to implement the systems modifications necessary to prepare for
the Year 2000 Problem. Currently, the Investment Adviser does not anticipate
that the transition to the 21st Century will have any material impact on its
ability to continue to service the Funds at current levels. In addition, the
Investment Adviser has sought assurances from the Funds' other service providers
that they are taking the steps necessary so that they do not experience Year
2000 Problems, and the Investment Adviser will continue to monitor the
situation. At this time, however, no assurance can be given that the actions
taken by the Investment Adviser and the Funds' other service providers will be
sufficient to avoid any adverse effect on the Funds due to the Year 2000
Problem.
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
(which is normally, but not always, 3:00 p.m. Chicago time, 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.
-36-
<PAGE>
PERFORMANCE INFORMATION
From time to time each Fund may publish average annual total return and the
Short Duration Government Fund may publish its 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 Short Duration Government Fund computes its 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 (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. The
Short Duration Government Fund's quotations of distribution rates are calculated
by annualizing the most recent distribution of net investment income for a
specified 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.
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
-37-
<PAGE>
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.
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
-38-
<PAGE>
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: fees payable to the Investment Adviser; the fees
and expenses payable to the Trust's custodian and any subcustodians; transfer
agency fees; brokerage fees and commissions; filing fees for the registration or
qualification of the Trust's shares under federal or state securities laws;
organizational expenses; 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
and expenses; expenses of preparing and setting in type prospectuses, Additional
Statements, 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 the Trust's "non-interested" Trustees; and
extraordinary expenses, if any, incurred by the Trust.
The imposition of the Investment Adviser's fee, as well as other operating
expenses, will have the effect of reducing the total return to investors. From
time to time, the 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 reimburse the Investment Adviser for any
amounts which may be assumed.
TAXATION
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
-39-
<PAGE>
Internal Revenue Code of 1986, as amended (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.
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.
-40-
<PAGE>
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, and will constitute all or substantially all of each Fund's net
investment income. Each Fund will also 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 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
-41-
<PAGE>
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 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
-42-
<PAGE>
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.
-43-
<PAGE>
GOLDMAN SACHS ASSET
MANAGEMENT
One New York Plaza
New York, New York 10004
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
______________________________
Independent Public Accountants
______________________________
______________________________
Independent Public Accountants
Toll Free (in U.S.): 800-292-4726
Prospectus
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
Goldman Sachs Conservative Strategy Portfolio, Goldman Sachs Balanced Strategy
Portfolio, Goldman Sachs Growth and Income Strategy Portfolio, Goldman Sachs
Growth Strategy Portfolio, and Goldman Sachs Aggressive Growth Strategy
Portfolio
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; Portfolio Highlights;
Investment Objectives and Policies;
Risk Factors and Special
Considerations; and Description of
Underlying Funds.
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>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED NOVEMBER 18, 1998
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO
SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN
ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS
February__, 1999
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, fixed-
income and asset allocation investment options. This Prospectus relates to five
asset allocation options. Other equity and fixed-income options offered by the
Trust are described in separate prospectuses.
GOLDMAN SACHS CONSERVATIVE STRATEGY PORTFOLIO seeks current income, consistent
with the preservation of capital, and, secondarily, may also consider the
potential for capital appreciation.
GOLDMAN SACHS BALANCED STRATEGY PORTFOLIO seeks current income and long-term
capital appreciation.
GOLDMAN SACHS GROWTH AND INCOME STRATEGY PORTFOLIO seeks long-term capital
appreciation and current income.
GOLDMAN SACHS GROWTH STRATEGY PORTFOLIO seeks capital appreciation and
secondarily current income.
GOLDMAN SACHS AGGRESSIVE GROWTH STRATEGY PORTFOLIO seeks capital appreciation.
______________________
Goldman Sachs Asset Management ("GSAM"), New York, New York, a separate
operating division of Goldman, Sachs & Co. ("Goldman Sachs"), serves as
investment adviser to each Portfolio. GSAM is also referred to in this
Prospectus as the "Investment Adviser." Goldman Sachs serves as each Portfolio's
distributor and transfer agent.
Shares of the Portfolios 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
<PAGE>
insurance policies. Shares of the Portfolios are not offered directly to the
general public.
A particular Portfolio 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 Portfolios are
available and should be read in conjunction with this Prospectus. Inclusion in
this Prospectus of a Portfolio 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 Portfolios
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 February __, 1999, containing further
information about the Trust and the Portfolios 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 PORTFOLIOS 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 PORTFOLIO INVOLVES
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
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.
-2-
<PAGE>
TABLE OF CONTENTS
Page
----
PORTFOLIO HIGHLIGHTS....................................................... 4
INVESTMENT OBJECTIVES AND POLICIES......................................... 8
RISK FACTORS AND SPECIAL CONSIDERATIONS.................................... 10
DESCRIPTION OF UNDERLYING FUNDS............................................ 12
MANAGEMENT................................................................. 22
NET ASSET VALUE............................................................ 27
PERFORMANCE INFORMATION.................................................... 27
SHARES OF THE TRUST........................................................ 28
EXPENSES................................................................... 30
TAXATION................................................................... 31
ADDITIONAL INFORMATION..................................................... 33
DIVIDENDS.................................................................. 33
PURCHASE AND REDEMPTION OF SHARES.......................................... 33
-3-
<PAGE>
PORTFOLIO 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 portfolios (mutual
funds). This Prospectus relates to five of those portfolios Conservative
Strategy Portfolio, Balanced Strategy Portfolio, Growth and Income Strategy
Portfolio, Growth Strategy Portfolio and Aggressive Growth Strategy Portfolio
(the "Portfolios"). Each Portfolio 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 Portfolio.
Each Portfolio pools the monies of these Separate Accounts and invests these
monies in a portfolio of securities designed to achieve that Portfolio's stated
investment objectives.
WHAT ARE THE INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS?
Each Portfolio has distinct investment objectives and policies. Each
Portfolio seeks to achieve its objectives by investing in a combination of
Underlying Funds for which Goldman Sachs, or an affiliate, now or in the future
acts as investment adviser or principal underwriter. Some of these Funds invest
primarily in fixed-income or money market securities (the "Underlying Fixed-
Income Funds"); other Funds invest primarily in equity securities (the
"Underlying Equity Funds"). In choosing a Portfolio, you should consider your
personal investment goals, risk tolerances and financial circumstances. For a
further description of the Portfolios' investment objectives and policies, see
"Investment Objectives and Policies."
-4-
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Portfolio Name Investment Objectives Investment Criteria
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
GOLDMAN SACHS CONSERVATIVE Current income, consistent with the Under normal conditions, approximately 80% of the
STRATEGY PORTFOLIO preservation of capital, and, Portfolio's assets will be allocated among Underlying
secondarily, capital appreciation. Fixed-Income Funds, with a focus on short-term
investments including money market funds. Allocation
to Underlying Equity Funds is intended to add
diversification and enhance returns, but will also add
some volatility.
- ------------------------------------------------------------------------------------------------------------------------------------
GOLDMAN SACHS BALANCED STRATEGY Current income and long-term capital Under normal conditions, approximately 60% of the
PORTFOLIO appreciation. Portfolio's total assets will be allocated among
Underlying Fixed-Income Funds. Allocation to
Underlying Equity Funds is intended to add
diversification and enhance returns, but will also add
some volatility.
- ------------------------------------------------------------------------------------------------------------------------------------
GOLDMAN SACHS GROWTH AND INCOME Long-term capital appreciation and Under normal conditions, approximately 60% of the
STRATEGY PORTFOLIO current income. Portfolio's total assets will be allocated among
Underlying Equity Funds, which are intended to provide
the capital appreciation component. Allocation to
Underlying Fixed-Income Funds is intended to provide
the income component.
- ------------------------------------------------------------------------------------------------------------------------------------
GOLDMAN SACHS GROWTH STRATEGY Capital appreciation and secondarily Under normal conditions, approximately 80% of the
PORTFOLIO current income. Portfolio's total assets will be allocated among
Underlying Equity Funds, with a blend of domestic
large cap, small cap and international exposure to
seek capital appreciation. Allocation to Underlying
Fixed-Income Funds is to provide diversification.
- ------------------------------------------------------------------------------------------------------------------------------------
GOLDMAN SACHS AGGRESSIVE GROWTH Capital appreciation. Under normal conditions, substantially all of the
STRATEGY PORTFOLIO Portfolio's total assets will be allocated among
Underlying Equity Funds, with a greater focus on small
cap and international investments.
====================================================================================================================================
</TABLE>
WHAT IS GOLDMAN SACHS ASSET MANAGEMENT'S GLOBAL ASSET ALLOCATION PROCESS?
The Quantitative Research Group at GSAM uses disciplined quantitative
models to determine the relative attractiveness of the world's stock, bond and
currency markets. GSAM's models use financial and economic variables to capture
fundamental relationships that it believes make sense. While GSAM's process is
rigorous and quantitative, it also incorporates clear economic reasoning behind
each recommendation.
Each Portfolio starts with a "base-line" or strategic allocation among the
various asset classes. GSAM will then tactically deviate from the strategic
allocations based on forecasts provided by the models. The tactical process
seeks to add value by overweighting attractive markets and underweighting
unattractive markets. Greater deviations from the strategic allocations of a
given portfolio result in higher risk that the tactical allocation will
underperform the strategic allocation. However, GSAM's risk control process
balances the amount any asset class can be overweighted or underweighted in
seeking to achieve higher expected returns against the amount of risk imposed by
that deviation from the strategic allocation. GSAM employs Goldman, Sachs &
Co.'s proprietary Black-Litterman asset allocation technique in an effort to
optimally balance these two goals. This technique combines the Quantitative
Research Group's
-5-
<PAGE>
market forecasts with economic equilibrium in seeking to construct risk-
controlled portfolios.
WHAT ARE THE RISK FACTORS AND SPECIAL CHARACTERISTICS THAT I SHOULD CONSIDER
BEFORE INVESTING?
The Portfolios are intended as an efficient and cost-effective method of
giving investors access to five different portfolio mixes. The risk/return
balance of each Portfolio is varied by the proportion of assets allocated to the
different kinds of investments. For example, the Aggressive Growth Strategy
Portfolio intends to invest substantially all of its assets in Underlying Funds
that invest in equity securities. An investor seeking capital appreciation
potential, with a longer time horizon and a tolerance for volatility, might
choose this Portfolio. Conversely, an investor seeking more income, with a
shorter time horizon and a lower tolerance for volatility, might choose the
Conservative Strategy Portfolio or Balanced Strategy Portfolio, which invest a
larger portion of their assets in Underlying Funds that invest in fixed income
securities.
Because the assets of each Portfolio are invested in Underlying Funds, each
Portfolio's investment performance is directly related to the investment
performance of the Underlying Funds held by it. The ability of a Portfolio to
meet its investment objective is, therefore, also directly related to the
ability of the Underlying Funds held to meet their objectives, as well as the
allocation among those Underlying Funds by the Investment Adviser.
The value of the Underlying Funds' investments, and the net asset values
("NAV") of the Shares of both the Underlying Funds and the Portfolios, will
fluctuate in response to changes in market and economic conditions, as well as
the financial condition and prospects of issuers in which the Underlying Funds
invest. An Underlying Fund's use of certain investment techniques, including
derivatives, forward contracts, options and futures, will subject the Fund to
greater risk than funds that do not employ such techniques. In addition,
investments by certain Underlying Funds in foreign issuers, currencies, real
estate investment trusts and small market capitalization companies will expose
those Funds to a higher degree of risk and price volatility. These investments
include securities of issuers located in countries in Asia, Latin America,
Eastern Europe and Africa whose economies or securities markets are considered
not to be fully developed ("Emerging Countries"). Some Underlying Funds may also
invest in non-investment grade fixed-income securities (commonly referred to as
"junk bonds"), which are considered to be speculative by traditional investment
standards.
An investor in the Portfolios should realize that certain of the Underlying
Funds are available to the general public for direct investment. By investing in
the Underlying
-6-
<PAGE>
Funds indirectly through the Portfolios, an investor will incur not only a
proportionate share of the expenses of the Underlying Funds (including operating
costs and investment management fees), but also expenses of the Portfolios.
While the Portfolios offer a greater level of diversification than many other
types of mutual funds, a single Portfolio may not provide a complete investment
program for an investor.
For a further description of the risks involved in an investment in the
Portfolios and the Underlying Funds, see "Risk Factors and Special
Considerations" and Appendix A to this Prospectus.
WHO MANAGES THE PORTFOLIOS?
GSAM serves as Investment Adviser to the Portfolios and, except as noted,
to each Underlying Fund. Goldman Sachs Funds Management, L.P. serves as
investment adviser to the Adjustable Rate Government Fund. Goldman Sachs Asset
Management International serves as investment adviser to the International
Equity, Japanese Equity, European Equity, International Small Cap, Emerging
Markets Equity, Asia Growth and Global Income Funds. As of October 23, 1998, the
Investment Adviser, together with its affiliates, acted as investment adviser
for assets in excess of $177 billion.
WHO DISTRIBUTES THE PORTFOLIOS' SHARES?
Goldman Sachs acts as distributor of each Portfolio's shares.
HOW DO I PURCHASE OR REDEEM SHARES?
Investors may purchase or redeem shares of the Portfolios 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 Portfolios 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 by each Portfolio.
All dividends and capital gain distributions will be automatically
reinvested in additional shares of a Portfolio 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
-7-
<PAGE>
payment in cash. For further information concerning dividends, see "Dividends."
INVESTMENT OBJECTIVES AND POLICIES
The five Portfolios described in this Prospectus are intended for investors
who prefer to have their asset allocation decisions made by professional money
managers. Each Portfolio seeks to achieve its investment objective by investing
within specified equity and fixed-income ranges among Underlying Funds having
different combinations of investments and different degrees of potential
investment risk and reward. An investor should choose a Portfolio based on
personal objectives, investment time horizon, tolerance for risk and personal
financial circumstances.
The Conservative Strategy Portfolio's investment objective is to seek
current income, consistent with the preservation of capital, and, secondarily,
may also consider the potential for capital appreciation. The Balanced Strategy
Portfolio's investment objective is to seek current income and long-term capital
appreciation. The Growth and Income Strategy Portfolio's investment objective is
to seek long-term capital appreciation and current income. The Growth Strategy
Portfolio's investment objective is to seek capital appreciation and secondarily
current income. The Aggressive Growth Strategy Portfolio's investment objective
is to seek capital appreciation. There can be no assurance that any Portfolio's
investment objective will be achieved.
In managing the Portfolios, the Investment Adviser will seek to maintain
different allocations among the Underlying Equity Funds and the Underlying
Fixed-Income Funds depending on a Portfolio's investment objective. The tables
below illustrate the initial Underlying Equity/Fixed-Income Fund allocation
targets and ranges for each Portfolio:
EQUITY/FIXED-INCOME RANGE
(PERCENTAGE OF EACH PORTFOLIO'S NET ASSETS)
<TABLE>
<CAPTION>
Name of Portfolio Target Range
----------------- -------- -------
<S> <C> <C>
Conservative Strategy Portfolio
Equity........................................... 20% 0%-25%
Fixed-Income..................................... 80% 75%-100%
Balanced Strategy Portfolio
Equity........................................... 40% 20%-60%
Fixed-Income..................................... 60% 40%-80%
Growth and Income Strategy Portfolio
Equity........................................... 60% 40%-80%
Fixed-Income..................................... 40% 20%-60%
Growth Strategy Portfolio
Equity........................................... 80% 60%-100%
Fixed-Income..................................... 20% 0%-40%
</TABLE>
-8-
<PAGE>
<TABLE>
<CAPTION>
Name of Portfolio Target Range
----------------- -------- -------
<S> <C> <C>
Aggressive Growth Strategy Portfolio
Equity........................................... 100% 75%-100%
Fixed-Income..................................... 0% 0%-25%
</TABLE>
The Investment Adviser will invest in particular Underlying Funds based on
various criteria. Among other things, the Investment Adviser will analyze the
Underlying Funds' respective investment objectives, policies and investment
strategies in order to determine which Underlying Funds, in combination with
other Underlying Funds, are appropriate in light of a Portfolio's investment
objectives.
Each Portfolio is authorized to invest in any or all of the Underlying
Funds. However, it is expected that a Portfolio will normally be invested in
only some of the Underlying Funds at any particular time. A Portfolio's
investment in any of the Underlying Funds may and, in some cases is expected to,
exceed 25% of its total assets. For example, the Growth Strategy and Aggressive
Growth Strategy Portfolios are each expected to invest initially more than 25%
of their assets in the CORE International Equity and CORE Large Cap Value Funds
described below. Similarly, it is expected that the Conservative Strategy,
Aggressive Growth Strategy and Balanced Strategy Portfolios will invest more
than 25% of their assets in the Short Duration Government Fund. The Investment
Adviser also expects that each Portfolio (except the Conservative Strategy
Portfolio) will initially invest a relatively significant percentage of its
equity allocation in the CORE Large Cap Value, CORE Large Cap Growth and CORE
International Equity Funds; that the Growth and Income Strategy Portfolio will
invest a relatively significant percentage of its assets in the Core Fixed
Income and Global Income Funds; that the Balanced Strategy Portfolio will invest
a relatively significant percentage of its assets in the Global Income Fund; and
that the Conservative Strategy Fund will invest a relatively significant
percentage of its assets in the Global Income Fund, Financial Square Prime
Obligations Fund and CORE Large Cap Value Fund. The Conservative Strategy
Portfolio may not invest in international equity funds. THE PARTICULAR
UNDERLYING FUNDS IN WHICH EACH PORTFOLIO MAY INVEST, THE EQUITY/FIXED-INCOME
FUND TARGETS AND RANGES AND THE INVESTMENTS IN EACH UNDERLYING FUND MAY BE
CHANGED FROM TIME TO TIME WITHOUT SEEKING THE APPROVAL OF THE PORTFOLIO'S
SHAREHOLDERS.
Changes in the NAVs of the Underlying Funds will affect a Portfolio's NAV.
Because each Portfolio invests primarily in other mutual funds, which fluctuate
in value, the Portfolios' Shares will correspondingly fluctuate in value.
Although the Portfolios normally seek to remain substantially invested in the
Underlying Funds, a Portfolio may invest a portion of its assets in high
quality, short-term debt obligations to maintain liquidity in order to meet
redemptions and other short-term cash needs. These obligations may include
commercial paper,
-9-
<PAGE>
certificates of deposit, bankers' acceptances, repurchase agreements, debt
obligations backed by the full faith and credit of the U.S. Government and
demand and time deposits of domestic and foreign banks and savings and loan
associations. There may be times when, in the opinion of the Investment Adviser,
abnormal market or economic conditions warrant that, for temporary defensive
purposes, a Portfolio invest without limitation in short-term obligations. A
Portfolio may also borrow money for temporary or emergency purposes.
Each Portfolio's turnover rate is expected not to exceed 50% annually. A
Portfolio may purchase or sell securities to: (a) accommodate purchases and
sales of its Shares; (b) change the percentages of its assets invested in each
of the Underlying Funds in response to economic or market conditions; and (c)
maintain or modify the allocation of its assets among the Underlying Funds
within the percentage ranges described above.
Each Portfolio is subject to certain investment restrictions that are
described in detail under "Investment Restrictions" in the Additional Statement.
Fundamental investment restrictions of a Portfolio cannot be changed without
approval of a majority of the outstanding Shares of that Portfolio. Each
Portfolio's investment objectives and all policies not specifically designated
as fundamental are non-fundamental and may be changed without shareholder
approval. If there is a change in a Portfolio's investment objective, investors
should consider whether that Portfolio remains an appropriate investment in
light of their then current financial positions and needs.
For information about the investment objectives of the Underlying Funds and
their investment securities, techniques and risks, see "Description of the
Underlying Funds" and Appendix A in this Prospectus, the Additional Statement
and the prospectus for each of the Underlying Funds.
RISK FACTORS AND SPECIAL CONSIDERATIONS
INVESTING IN UNDERLYING FUNDS
The investments of each Portfolio are concentrated in the Underlying Funds,
and each Portfolio's investment performance is directly related to the
investment performance of the Underlying Funds held by it. The ability of each
Portfolio to meet its investment objectives is directly related to the ability
of the Underlying Funds to meet their objectives as well as the allocation among
those Underlying Funds by the Investment Adviser. The share prices and yields of
both the Portfolios and the Underlying Funds will fluctuate in response to
various market and economic factors related to the equity and fixed-income
markets. There can be no assurance that the investment objectives of any
Portfolio or any Underlying Fund will be achieved.
-10-
<PAGE>
INVESTMENTS OF THE UNDERLYING FUNDS
Because each Portfolio invests in the Underlying Funds, investors in each
Portfolio will be affected by the investment policies of the Underlying Funds in
direct proportion to the amount of assets each Portfolio allocates to those
Funds. Each Portfolio may invest in Underlying Funds that in turn invest in
small capitalization companies and foreign issuers and thus are subject to
additional risks, including changes in foreign currency exchange rates and
political risk. Foreign investments may include securities of issuers located in
Emerging Countries in Asia, Latin America, Eastern Europe and Africa. Each
Portfolio may also invest in Underlying Funds that in turn invest in non-
investment grade fixed-income securities ("junk bonds"), which are considered
speculative by traditional standards. In addition, the Underlying Funds may
purchase derivative securities; enter into forward currency transactions; lend
their portfolio securities; enter into futures contracts and options
transactions; purchase zero coupon bonds and payment-in-kind bonds; purchase
securities issued by real estate investment trusts and other issuers in the real
estate industry; purchase restricted and illiquid securities; enter into forward
roll transactions; purchase securities on a when-issued or delayed delivery
basis; enter into repurchase agreements; borrow money; and engage in various
other investment practices. The risks presented by these investment practices
are discussed in Appendix A to this Prospectus, the Additional Statement and the
prospectus for each of the Underlying Funds.
AFFILIATED PERSONS
In managing the Portfolios, the Investment Adviser will have the authority
to select and substitute Underlying Funds. The Investment Adviser is subject to
conflicts of interest in allocating Portfolio assets among the various
Underlying Funds both because the fees payable to it and/or its affiliates by
some Underlying Funds are higher than the fees payable by other Underlying Funds
and because the Investment Adviser and its affiliates are also responsible for
managing the Underlying Funds. The Trustees and officers of the Trust may also
have conflicting interests in fulfilling their fiduciary duties to both the
Portfolios and the Underlying Funds.
EXPENSES
An investor in a Portfolio should realize that certain of the Underlying Funds
are available to the general public for direct investment. By investing in the
Underlying Funds indirectly through a Portfolio, an investor will incur not only
a proportionate share of the expenses of the Underlying Funds held by the
Portfolio (including operating costs and investment management fees), but also
expenses of the Portfolio.
-11-
<PAGE>
DESCRIPTION OF UNDERLYING FUNDS
The following is a concise description of the investment objectives and
practices for each of the Underlying Funds that are available for investment by
the Portfolios as of the date of the Prospectus. Currently, all of the
Underlying Funds are investment portfolios of either the Trust or Goldman Sachs
Trust ("GST"), a separately organized investment company sponsored by Goldman
Sachs. A Portfolio may also invest in other Underlying Funds that may become
available for investment in the future at the discretion of the Investment
Adviser without shareholder approval.
There can be no assurance that the investment objectives of the Underlying
Funds will be met. Additional information regarding the investment practices of
the Underlying Funds is located in Appendix A to this Prospectus, in the
Additional Statement and in the prospectus of each of the Underlying Funds. No
offer is made in this Prospectus of any of the Underlying Funds.
<TABLE>
<CAPTION>
Fund Names Investment Objectives Investment Criteria
- ---------- --------------------- ------------------
<S> <C> <C>
Goldman Sachs Variable Insurance Trust ("VIT") Equity Funds
VIT Growth and Long-term growth of capital and At least 65% of total assets in equity
Income Fund growth of income. securities that the Investment Adviser considers
to have favorable prospects for capital appreciation
and/or dividend-paying ability.
VIT CORE U.S. Equity Long-term growth of capital and At least 90% of total assets in equity
Fund dividend income. securities of U.S. issuers, including
certain foreign issuers traded in the U.S.
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. 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.
VIT CORE Large Cap Long-term growth of capital. At least 90% of total assets in equity
Growth Fund Dividend income is a secondary securities of U.S issuers, including certain
consideration. foreign issuers traded in the U.S. 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.
</TABLE>
-12-
<PAGE>
<TABLE>
<CAPTION>
Fund Names Investment Objectives Investment Criteria
- ---------- --------------------- ------------------
<S> <C> <C>
VIT CORE Large Cap Long-term growth of capital and At least 90% of total assets in equity
Value Fund dividend income. securities of U.S. issuers, including
certain foreign issuers traded in the U.S.
The Fund seeks to achieve its objective
through a broadly diversified portfolio of
equity securities of large cap U.S. issuers
that are selling at low to modest valuations
relative to general market measures such as
earnings, book value and other fundamental
accounting measures, and that are expected
to have favorable prospects for capital
appreciation and/or dividend-paying ability.
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 Value Index.
VIT CORE Small Cap Long-term growth of capital. At least 90% of total assets in equity
Equity Fund securities 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.
VIT CORE Long-term growth of capital. At least 90% of total assets in equity
International securities of companies organized outside
Equity Fund the United States or whose securities are
principally traded outside the United
States. The Fund seeks broad representation
of large cap issuers across major countries
and sectors of the international 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
unhedged Morgan Stanley Capital
International (MSCI) Europe, Australasia and
Far East Index (the "EAFE Index"). The Fund
may employ certain currency management
techniques.
VIT Capital Growth Long-term capital growth. At least 90% of total assets in a
Fund diversified portfolio of equity securities.
Long-term capital appreciation potential is
considered in selecting investments.
VIT Mid Cap Equity Long-term capital appreciation. At least 65% of total assets in equity
Fund securities of companies with public stock
market capitalizations within the range of
the market capitalization of companies
constituting the Russell Midcap Index at the
time of the investment (currently between
$400 million and $16 billion).
VIT International Long-term capital appreciation. Substantially all, and at least 65%, of
Equity Fund total assets in equity securities of
companies organized outside the United
States or whose securities are principally
traded outside the United States. The Fund
may employ certain currency management
techniques.
</TABLE>
-13-
<PAGE>
<TABLE>
<CAPTION>
Fund Names Investment Objectives Investment Criteria
- ---------- --------------------- ------------------
<S> <C> <C>
Goldman Sachs Trust ("GST") Equity Funds
GST Small Cap Value Long-term capital growth. At least 65% of total assets in equity
Fund securities of companies with public stock
market capitalizations of $1 billion or less
at the time of investment.
GST Emerging Markets Long-term capital appreciation. Substantially all, and at least 65%, of
Equity Fund total assets in equity securities of
emerging country issuers. The Fund may
employ certain currency management
techniques.
GST Asia Growth Fund Long-term capital appreciation. Substantially all, and at least 65%, of
total assets in equity securities of
companies in China, Hong Kong, India,
Indonesia, Malaysia, Pakistan, the
Philippines, Singapore, South Korea, Sri
Lanka, Taiwan and Thailand. The Fund may
employ certain currency management
techniques.
GST Real Estate Total return comprised of long-term Substantially all, and at least 80%, of
Securities Fund growth of capital and dividend total assets in a diversified portfolio of
income. equity securities of issuers that are
primarily engaged in or related to the real
estate industry. The Fund expects that a
substantial portion of its total assets will
be invested in real estate investment trusts
("REITS").
GST Japanese Equity Long-term capital appreciation. Substantially all, and at least 65%, of
Fund total assets in equity securities of
Japanese companies. The Fund may employ
certain currency management techniques.
GST European Equity Long-term capital appreciation. Substantially all, and at least 65%, of
Fund total assets in equity securities of
European companies. The Fund may employ
certain currency management techniques.
GST International Long-term capital appreciation. Substantially all, and at least 65%, of
Small Cap Fund total assets in equity securities of
companies with public stock market
capitalizations of $1 billion or less at the
time of investment that are organized
outside the United States or whose
securities are principally traded outside
the United States. The Fund may employ
certain currency management techniques.
</TABLE>
-14-
<PAGE>
<TABLE>
<CAPTION>
Approximate
-----------
Investment Interest Rate
---------- -------------
Fund Names Objectives Duration or Maturity Sensitivity Investment Sector
- ---------- ---------- -------------------- ----------- -----------------
<S> <C> <C> <C> <C>
VIT Fixed Income Funds
VIT Short A high level of Target Duration* = 2-year 2-year bond At least 65% of total
Duration current income and U.S. Treasury Security assets in securities
Government Fund secondarily, in plus or minus .5 years issued or guaranteed
seeking current Maximum Duration*= 3 years by the U.S. government,
income, may also its agencies, or
consider the potential instrumentalities
for capital sponsored enterprises
appreciation. ("U.S. Government
Securities") and
repurchase agreements
collateralized by such
securities.
VIT Global A high total return, Target Duration* = J.P. 6-year bond Securities of U.S. and
Income Fund emphasizing current Morgan Global Government foreign governments
income, and, to a Bond Index (hedged) plus and corporations.
lesser extent, or minus 2.5 years
providing Maximum Duration*= 7.5
opportunities for years
capital appreciation.
VIT High Yield A high level of Target Duration* = Lehman 6-year bond Except for temporary
Fund current income and Brothers High Yield Bond defensive purposes, at below
capital appreciation. Index plus or minus 2.5 least 65% of assets in
years fixed-income securities
Maximum Duration*= 7.5 rated below investment
years grade, including U.S. and
non-U.S. dollar corporate
debt, foreign government
securities, convertible
securities and preferred
stock.
<CAPTION>
Other
-----
Fund Names Credit Quality Investments
- ---------- -------------- -----------
<S> <C> <C>
VIT Fixed Income Funds
VIT Short U.S. Government Securities Mortgage pass-through securities
Duration and other securities representing
Government Fund an interest in or collateralized
by mortgage loans.
VIT Global Minimum = BBB/Baa Mortgage and asset- backed
Income Fund At least 50% = AAA/Aaa securities, foreign currencies
and repurchase agreements
collateralized by U.S. Government
Securities or certain foreign
government securities.
VIT High Yield At least 65% = BB/Ba or Mortgage-backed and asset-backed
securities, U.S. Government Securities,
investment grade corporate fixed-income
securities, structured securities,
foreign currencies and repurchase
agreements collateralized by U.S. Government
Securities.
</TABLE>
-15-
<PAGE>
<TABLE>
<CAPTION>
Approximate
-------------
Investment Interest Rate
---------- -------------
Fund Names Objectives Duration or Maturity Sensitivity Investment Sector
- ---------- ---------- -------------------- ------------- -----------------
<S> <C> <C> <C> <C>
GST Fixed Income
Funds
GST Financial Maximize current Maximum Maturity of 3-month note Money market
Square Prime income to the extent Individual Investments = instruments including
Obligations Fund consistent with the 13 months at time of U.S. Government
maintenance of purchase Securities, U.S. bank
liquidity. Maximum Dollar- Weighted obligations,
Average Portfolio commercial paper and
Maturity = 90 days other short-term
obligations of U.S.
corporations,
governmental and other
entities, and related
repurchase agreements.
GST Adjustable A high level of Target Duration* = 9-month note At least 65% of total
Rate Government current income, 6-month to 1-year U.S. assets in U.S.
Fund consistent with low Treasury Security Maximum Government Securities
volatility of Duration*= 2 years that are adjustable
principal. rate mortgage
pass-through
securities and other
mortgage securities
with periodic interest
rate resets.
GST Government A high level of Target Duration* = Lehman 5-year bond At least 65% of assets
Income Fund current income, Brothers Mutual Fund in U.S. Government
consistent with safety Government/Mortgage Index Securities, including
of principal. plus or minus 1 year mortgage-backed U.S.
Maximum Duration*= 6 years Government Securities
and repurchase
agreements
collateralized by such
securities.
GST Core Fixed Total return Target Duration* = Lehman 5-year bond At least 65% of assets
Income Fund consisting of capital Brothers Aggregate Bond in fixed-income
appreciation and Index plus or minus 1 year securities, including
income that exceeds Maximum Duration*= 6 years U.S. Government
the total return of Securities, corporate,
the Lehman Brothers mortgage- backed and
Aggregate Bond Index. asset-backed
securities.
<CAPTION>
Other
-----
Fund Names Credit Quality Investments
- ---------- -------------- -----------
<S> <C> <C>
GST Fixed Income agreements collateralized by
Funds U.S. Government Securities
GST Financial High Quality (short-term N/A
Square Prime ratings of A-1, P-1 or
Obligations Fund comparable quality).
GST Adjustable U.S. Government Securities Fixed-rate
Rate Government mortgage
Fund pass-through
securities and
repurchase
agreements
collateralized
by U.S.
Government
Securities.
GST Government U.S. Government Securities Non-government
Income Fund and non-U.S. Government mortgage
securities = AAA/Aaa pass-through
securities,
asset-backed
securities and
corporate
fixed-income
securities.
GST Core Fixed Minimum = BBB/Baa Foreign
Income Fund Minimum for non-dollar fixed-income,
securities = AA/Aa municipal and
convertible
securities,
foreign
currencies and
repurchase
</TABLE>
-16-
<PAGE>
<TABLE>
<CAPTION>
Approximate
-------------
Investment Interest Rate
---------- -------------
Fund Names Objectives Duration or Maturity Sensitivity Investment Sector
- ---------- ---------- -------------------- ------------- -----------------
<S> <C> <C> <C> <C>
backed and asset-
backed securities.
<CAPTION>
Other
-----
Fund Names Credit Quality Investments
- ---------- -------------- -----------
<S> <C> <C>
agreements
collateralized
by U.S.
Government
Securities.
</TABLE>
* Under normal interest rate conditions.
-17-
<PAGE>
In pursuing their investment objectives and programs, each of the
Underlying Funds is permitted to engage in a wide range of investment policies.
The risks of the Underlying Funds are determined by the nature of the securities
held and the investment strategies used by the Funds' investment advisers.
Certain of these policies are described below and further information about the
investment policies, strategies and risks of the Underlying Funds is contained
in Appendix A to this Prospectus and in the Additional Statement as well as the
prospectuses of the Underlying Funds.
UNDERLYING EQUITY FUNDS
The Underlying Equity Funds may purchase 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 securities, a Fund's
investment adviser utilizes first-hand fundamental research, including visiting
company facilities to assess operations and to meet decision-makers. An
investment adviser may also use macro analysis of numerous economic and
valuation variables to anticipate changes in company earnings and the overall
investment climate. The investment advisers are able to draw on the research and
market expertise of the Goldman Sachs Global Investment Research Department and
other affiliates, as well as information provided by other securities dealers.
Equity securities held by an Underlying Fund will generally be sold when an
investment adviser believes that the market price fully reflects or exceeds the
securities' fundamental valuation or when other more attractive investments are
identified.
DOMESTIC VALUE STYLE FUNDS. The Growth and Income, Mid Cap Equity and Small
Cap Value Funds are managed using a value oriented approach. The Funds'
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
-18-
<PAGE>
difficulties and that, in the opinion of the investment adviser, are available
at attractive prices.
DOMESTIC GROWTH STYLE FUND. The Capital Growth Fund is managed using a
growth oriented approach. Equity securities for the Fund are selected based on
their prospects for above average growth. The Fund's 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. The Fund 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.
QUANTITATIVE STYLE FUNDS. The CORE U.S. Equity, CORE Large Cap Growth, CORE
Large Cap Value, CORE Small Cap Equity and CORE International Equity Funds (the
"CORE Equity 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.
QUANTITATIVE INVESTMENT PROCESS. The Funds' investment advisers begin with
a broad universe of U.S. equity securities for the CORE U.S. Equity, CORE Large
Cap Growth, CORE Large Cap Value, and CORE Small Cap Equity Funds (the "CORE
U.S. Equity Funds"), and a broad universe of foreign equity securities for the
CORE International Equity Fund. The investment advisers use proprietary
multifactor models (each a "Multifactor Model") to forecast the returns of
different markets, currencies and individual securities. An investment adviser
may rely on research from both the Goldman Sachs Global Investment Research
Department (the "Research Department") and other industry sources.
In building a diversified portfolio for each CORE Equity Fund, an
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 composed of securities rated highest by
the foregoing investment process and has risk characteristics and industry
weightings similar to the relevant Fund's benchmark.
QUANTITATIVE MULTIFACTOR MODELS. The Multifactor Models are rigorous
computerized rating systems for forecasting the returns of different equity
markets, currencies and individual equity securities according to fundamental
investment characteristics. The CORE U.S. Funds use one Multifactor Model
to forecast the returns of securities held in each Fund's portfolio. The CORE
-19-
<PAGE>
International Equity Fund uses multiple Multifactor Models to forecast returns.
Currently, the CORE International Equity Fund uses one model to forecast equity
market returns, one model to forecast currency returns and 22 separate models to
forecast individual equity security returns in 22 different countries. Despite
this variety, all Multifactor Models incorporate 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, earnings stability, and, in the case of
models for the CORE International Equity Fund, currency momentum and country
political risk ratings). All of the factors used in the Multifactor Models have
been shown to significantly impact the performance of the securities, currencies
and markets they were designed to forecast.
The weightings assigned to the factors in the Multifactor Model used by
the CORE U.S. Funds are derived using a statistical formulation that considers
each factor's historical performance in different market environments. As such,
the U.S. Multifactor Model is designed to evaluate each security using only the
factors that are statistically related to returns in the anticipated market
environment. Because they include many disparate factors, the CORE Funds'
investment advisers believe that all the Multifactor Models are broader in scope
and provide a more thorough evaluation than most conventional quantitative
models. Securities and markets ranked highest by the relevant 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 under perform." 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 Models) and a
qualitative (i.e., research enhanced) method of selecting securities, each CORE
Equity Fund seeks to capitalize on the strengths of each discipline.
ACTIVELY MANAGED INTERNATIONAL FUNDS. The International Equity, Japanese
Equity, European Equity, International Small Cap, Emerging Markets Equity and
Asia Growth Funds are managed using an active international approach, which
utilizes a consistent process of stock selection undertaken by portfolio
management teams located within each of the major investment regions, including
Europe, Japan, Asia and the United States. In selecting securities, the
investment adviser uses a long-term, bottom-up strategy based on first-hand
fundamental research that is designed to give broad exposure to the available
opportunities while seeking to add return primarily through stock selection.
Equity securities for these Funds are evaluated based on three key factors--the
business, the management and the valuation. The investment adviser ordinarily
seeks securities that have, in the investment adviser's opinion, superior
earnings growth potential,
-20-
<PAGE>
sustainable franchise value with management attuned to creating shareholder
value and relatively discounted valuations. In addition, the investment adviser
uses a multi-factor risk model which seeks to assure that deviations from the
benchmark are justifiable.
REAL ESTATE SECURITIES FUND. The investment strategy of the Real Estate
Securities Fund is based on the premise that property market fundamentals are
the primary determinant of growth underlying the success of companies in the
real estate industry. The Fund's research and investment process is designed to
identify those companies with strong property fundamentals and strong management
teams. This process is comprised of real estate market research and securities
analysis. The Fund's investment adviser will take into account fundamental
trends in underlying property markets as determined by proprietary models,
research of local real estate markets, earnings, cash flow growth and stability,
the relationship between asset values and market prices of the securities and
dividend payment history. The investment adviser will attempt to purchase
securities so that its underlying portfolio will be diversified geographically
and by property type.
UNDERLYING FIXED-INCOME FUNDS
The investment advisers of the Underlying Fixed-Income Funds may, in
accordance with the respective Funds' investment objectives and policies,
purchase 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 and preferred stock.
As stated above, each Underlying Fixed-Income Fund has policies relating to
its duration (or maturity in the case of the Financial Square Prime Obligations
Fund). 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, an Underlying Fund will estimate the duration of obligations
that 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.
Except for the Financial Square Prime Obligations Fund (which is subject to
more restrictive SEC regulations applicable to money market funds), an
Underlying Fixed-Income Fund will deem a
-21-
<PAGE>
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 & Poors 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 Fund's 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
Fund's investment adviser will consider what action, including the sale of such
security, is in the best interest of the Fund and its shareholders.
The Underlying Funds may employ certain active management techniques to
manage their duration and term structure, to seek to hedge exposure to foreign
currencies and to seek to enhance returns. These techniques include (with
respect to one or more of the Funds), 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, credit and interest rate swaps and interest rate floors,
caps and collars. Currency and interest rate management techniques involve risks
different from those associated with investing solely in U.S. dollar-denominated
fixed-income securities of U.S. issuers. Certain of the Funds may invest in
custodial receipts, municipal securities and convertible securities. The Funds
may also employ other investment techniques to seek to enhance returns, such as
lending portfolio securities and entering into mortgage dollar rolls, repurchase
agreements, reverse repurchase agreements and other investment practices, as
described in Appendix A to this Prospectus.
MANAGEMENT
TRUSTEES AND OFFICERS
The Trustees are responsible for deciding matters of general policy and
reviewing the actions of the Investment Adviser, distributor and transfer agent.
The officers of the Trust conduct and supervise the Portfolios' daily business
operations. The Additional Statement contains information as to the identity
of, and other information about, the Trustees and officers of the Trust.
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<PAGE>
INVESTMENT ADVISER
Investment Adviser. 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 each Portfolio and, except as noted, to each
Underlying Fund. Goldman Sachs registered as an investment adviser in 1981.
Goldman Sachs Funds Management, L.P., One New York Plaza, New York, New York
10004, a Delaware limited partnership which is an affiliate of Goldman Sachs,
serves as the investment adviser to the Adjustable Rate Government Fund. Goldman
Sachs Funds Management, L.P. registered as an investment adviser in 1990.
Goldman Sachs Asset Management International, 133 Peterborough Court, London
EC4A 2BB, England, an affiliate of Goldman Sachs, serves as the investment
adviser to the International Equity, Japanese Equity, European Equity,
International Small Cap, Emerging Markets Equity, Asia Growth and Global Income
Funds. Goldman Sachs Asset Management International became a member of the
Investment Management Regulatory Organization Limited in 1990 and registered as
an investment adviser in 1991. As of October 23, 1998, GSAM, together with its
affiliates, acted as investment adviser or distributor for assets in excess of
$177 billion.
Under an Asset Allocation Management Agreement ("Management Agreement") with
each Portfolio, the Investment Adviser, subject to the general supervision of
the Trustees, provides day-to-day advice as to each Portfolio's investment
transactions, including determinations concerning changes to (a) the Underlying
Funds in which the Portfolios may invest and (b) the percentage range of assets
of any Portfolio that may be invested in the Underlying Equity Funds and the
Underlying Fixed-Income Funds as separate groups. Goldman Sachs has agreed to
permit the Portfolios to use the name "Goldman Sachs" or a derivative thereof as
part of each Portfolio's name for as long as a Portfolio's Management Agreement
is in effect.
Under the Management Agreement, the Investment Adviser also: (a) supervises
all non-advisory operations of each Portfolio; (b) provides personnel to perform
such executive, administrative and clerical services as are reasonably necessary
to provide effective administration of each Portfolio; (c) at each Portfolio's
expense arranges for (i) the preparation of all required tax returns, (ii) the
preparation and submission of reports to existing shareholders, (iii) the
periodic updating of prospectuses and Additional Statements and (iv) the
preparation of reports to be filed with the SEC and other regulatory
authorities; (d) maintains each Portfolio's records; and (e) provides office
space and all necessary office equipment and services.
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<PAGE>
FUND MANAGERS
<TABLE>
<CAPTION>
Years
Primarily
NAME AND TITLE RESPONSIBLE FIVE YEAR EMPLOYMENT HISTORY
- ---------------------------- --------------- --------------------------------
<S> <C> <C>
Mark M. Carhart, Ph.D., CFA Since 1999 Mr. Carhart joined the Investment Adviser in 1997
Vice President, Co-Head as a member of the Quantitative Research and Risk
Quantitative Research and Management team. From August 1995 to September
Senior Portfolio Manager 1997, he was Assistant Professor of Finance at
the Marshall School of Business at USC and a
Senior Fellow of the Wharton Financial
Institutions Center.
Raymond J. Iwanowski Since 1999 Mr. Iwanowski joined the Investment Adviser in
Vice President, Co-Head 1997. Prior to joining the Investment Adviser, he
Quantitative Research and spent three years at Salomon Brothers, where he
Senior Portfolio Manager was a Vice President and head of the Fixed
Derivatives Client Research group.
Neil Chriss, Ph.D. Since 1999 Mr. Chriss joined the Investment Adviser in 1997.
Vice President and Portfolio From 1996 to 1998, he worked in the equity
Manager division of Morgan Stanley Dean Witter. From 1994
to 1996, he was a post-doctoral fellow in the
Mathematics Department of Harvard University.
Giorgio DeSantis, Ph.D. Since 1999 Mr. DeSantis joined the Investment Adviser in
Vice President and Portfolio 1998. From 1992 to 1998, he was Assistant
Manager Professor of Finance and Business Economics at
the Marshall School of Business at USC.
William J. Fallon, Ph.D. Since 1999 Mr. Fallon joined the Investment Adviser in 1998.
Vice President and Portfolio From 1996 to 1998, he worked in the Firmwide Risk
Manager Group of Goldman, Sachs & Co. From 1991 to 1996,
he attended Columbia University, where he earned
a Ph.D. in Finance.
Guang-Liang He, Ph.D. Since 1999 Mr. He joined the Investment Adviser in 1998. In
Vice President and Portfolio 1997, he worked in the Firmwide Risk Group of
Manager Goldman, Sachs & Co. From 1992 to 1997, he worked
at Quantitative Financial Strategies, Inc.
</TABLE>
It is the responsibility of the investment adviser of each Underlying Fund to
make the investment decisions for that Fund and to place the purchase and sale
orders for the Fund's portfolio transactions in 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 a Fund, its investment adviser
will seek the best price and execution of the 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
Underlying Fund. See the Additional Statement for a further description of the
investment adviser's brokerage allocation practices.
As compensation for its services and assumption of certain expenses pursuant
to the Management Agreement, GSAM is entitled to a fee, computed daily and
payable monthly, at the annual rate equal to 0.15% of each Portfolio's average
daily net assets.
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<PAGE>
The Investment Adviser has voluntarily agreed to reduce or limit certain
"Other Expenses" of the Portfolios (excluding asset allocation fees, taxes,
interest, brokerage fees, litigation, indemnification and other extraordinary
expenses) to the extent such expenses exceed 0.10% per annum of a Portfolio's
average daily net assets. Such reductions or limits, if any, may be discontinued
or modified by the Investment Adviser in its discretion at any time.
In addition, each Portfolio, as a shareholder in the Underlying Funds, will
indirectly bear its proportionate share of any investment management fees and
other expenses paid by the Underlying Funds. The contractual management fee
payable to GSAM and/or its affiliates by each of the Underlying Funds in which
the Portfolios may invest is set forth below under "Expenses."
In performing its investment advisory services, the investment adviser of an
Underlying Fund, while remaining ultimately responsible for the management of
the Fund, is able to draw upon the research and expertise of its asset
management affiliates for portfolio decisions and management with respect to
certain portfolio securities. In addition, the investment adviser will have
access to the research of, and certain proprietary technical models developed
by, Goldman Sachs and may apply quantitative and qualitative analysis in
determining the appropriate allocations among the categories of issuers and
types of securities.
Activities of Goldman Sachs and its Affiliates and Other Accounts Managed
-------------------------------------------------------------------------
by Goldman Sachs. The involvement of the Underlying Funds' 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 an Underlying Fund or limit the investment activities
of an Underlying Fund. Goldman Sachs and its affiliates engage in proprietary
trading and advise accounts and funds which have investment objectives similar
to those of the Underlying Funds and/or which engage in and compete for
transactions in the same type of securities, currencies and instruments.
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 Underlying Funds. The results of the
investment activities of an Underlying Fund, therefore, may differ from those of
Goldman Sachs and its affiliates and it is possible that the Portfolios and the
Underlying Funds 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. In addition, the Underlying Funds may, from
time to time, enter into
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<PAGE>
transactions in which other clients of Goldman Sachs have an adverse interest.
From time to time, the activities of an Underlying Fund 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.
DISTRIBUTOR
Goldman Sachs, 85 Broad Street, New York, New York 10004, serves as the
exclusive distributor (the "Distributor") of each Portfolio's shares at no cost
to the Portfolios.
CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company, 1776 Heritage Drive, North Quincy,
Massachusetts 02110, provides custodial services for the Portfolios and Goldman
Sachs provides transfer agency services for the Portfolios.
YEAR 2000
Many computer systems were designed using only two digits to signify the year
(for example, "98" for "1998"). On January 1, 2000, if these computer systems
are not corrected, they may incorrectly interpret "00" as the year "1900" rather
than the year "2000," leading to computer shutdowns or errors (commonly known as
the "Year 2000 Problem"). To the extent these systems conduct forward-looking
calculations, these computer problems may occur prior to January 1, 2000. Like
other investment companies and financial and business organizations, the
Portfolios and the Underlying Funds could be adversely affected in their ability
to process securities trades, price securities, provide shareholder account
services and otherwise conduct normal business operations if the computer
systems used by their investment advisers or other service providers do not
adequately address this problem in a timely manner. The Investment Adviser has
established a dedicated group to analyze these issues and to implement the
systems modifications necessary to prepare for the Year 2000 Problem.
Currently, the Investment Adviser does not anticipate that the transition to the
21st Century will have any material impact on its ability to continue to service
the Portfolios and the Underlying Funds at current levels. In addition, the
Investment Adviser has sought assurances from the Underlying Funds' other
service providers that they are taking the steps necessary so that they do not
experience Year 2000 Problems, and the Investment Adviser will continue to
monitor the situation. At this time, however, no assurance can be given that
the actions
-26-
<PAGE>
taken by the Investment Adviser and the Underlying Funds' other service
providers will be sufficient to avoid any adverse effect on the Underlying Funds
and the Portfolios due to the Year 2000 Problem.
NET ASSET VALUE
The net asset value per share of each Portfolio is calculated by the
Portfolio's custodian as of the close of regular trading on the New York Stock
Exchange (normally, but not always, 3:00 p.m., Chicago time, 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 Portfolio is calculated by
determining the net assets belonging to the Portfolio and dividing by the number
of outstanding shares of the Portfolio. Portfolio securities are valued based
on market quotations or, if accurate quotations are not readily available, at
fair value as determined in good faith under procedures established by the
Trustees.
PERFORMANCE INFORMATION
From time to time each Portfolio may publish average annual total return,
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 NAV. The total return calculation assumes a complete
redemption of the investment at the end of the relevant period. Each Portfolio
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
Portfolio 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 Portfolios 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 (semi-annual) basis and then
annualized. Net investment income per share is equal to the dividends and
interest earned during the period,
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<PAGE>
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 Portfolios' quotations of distribution rate are
calculated by analyzing the most recent distribution of net investment income
for a specified period and dividing this amount by the NAV per share on the last
day of the period for which the distribution rate is being calculated.
The investment results of a Portfolio 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 Portfolio's
performance may be in any future period. In addition to information provided in
shareholder reports, the Portfolios may, in their discretion, from time to time
make a list of their holdings available to investors upon request.
SHARES OF THE TRUST
Each Portfolio is classified as "diversified" under the Investment Company Act
of 1940, as amended (the "Act"). Each Portfolio 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.
Information about the Trust's other series is contained in separate
prospectuses.
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 Portfolio 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 NAVs
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 Portfolio. However, to the extent
required by law, (a) the Participating Insurance Companies will vote Portfolio
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
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<PAGE>
Portfolio 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. Portfolio shares held by
unregistered Separate Accounts or qualified plans will be voted for or against
any proposition in the same proportion as all other Portfolio 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 Portfolios 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 Portfolios and the market values of the investments and will
provide other information about the Portfolios and their operations.
The Trust does not intend to hold annual meetings of shareholders. However,
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 Portfolios' 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.
Portfolio shares and any dividends and distributions paid by the Portfolio are
reflected in account statements from the Transfer Agent.
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<PAGE>
EXPENSES
The Portfolios are responsible for the payment of their expenses. These
expenses include, without limitation, asset allocation, custodial and transfer
agency fees, brokerage fees and commissions, filing fees for the registration or
qualification of the Portfolios' shares under federal or state securities laws,
organizational expenses, fees and expenses incurred 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 Portfolios for violation of any law, legal and auditing
fees and expenses, expenses of preparing and setting in type prospectuses,
Additional Statements, proxy material, financial reports and notices and the
printing and distributing of the same to 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 Investment Adviser's fee, as well as other operating
expenses, will have the effect of reducing the total return to investors. From
time to time, the Investment Adviser may waive receipt of its fees and/or
voluntarily assume certain expenses of a Portfolio, which would have the effect
of lowering that Portfolio'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 Portfolio will not pay the Investment Adviser at a later time for any
amounts which may be waived, nor will the Portfolio reimburse the Investment
Adviser for any amounts which may be assumed.
The expenses associated with investing in a "fund of funds," such as the
Portfolios, are generally higher than those of investment companies that do not
invest in other mutual funds. These increased expenses stem from the fact that
investors must indirectly pay a portion of the operating costs of the Underlying
Funds. The structure of the Portfolios will, however, reduce any layering of
costs in the following manner: (a) any fees charged to the Portfolios under the
Management Agreement are for services that are in addition to, and not
duplicative of, services provided under any Underlying Fund's management
agreement; (b) the Portfolios do not pay any sales charges or distribution fees
related to the shares of the Underlying Funds; (c) custodial and other fees
charged by both the Portfolios and the Underlying Funds are not redundant
inasmuch as distinct services are being provided at each level; and (d) any
additional incremental cost incurred by investing in the Portfolios is in return
for a substantial investment management service, namely the initial and ongoing
asset allocation of investments made in the Underlying
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<PAGE>
Funds, and provision of meaningful additional diversification benefits.
The following chart shows the current total operating expense ratios
(management fee plus other operating expenses) of the class of shares of each
Underlying Fund in which the Portfolios may invest. In addition, the following
chart shows the contractual investment management fees payable to GSAM and its
affiliates by the Underlying Funds (in each case as an annualized percentage of
the Fund's average net assets). Absent voluntary fee waivers and/or expense
reimbursements, which may be discontinued at any time, the total operating
expense ratios of certain Underlying Funds would be higher.
<TABLE>
<CAPTION>
TOTAL
CONTRACTUAL OPERATING
MANAGEMENT EXPENSE
Underlying Funds FEE RATIO
---------------- --- -----
<S> <C> <C>
VIT Short Duration Government Fund.................. 0.55% 0.70%
VIT Global Income Fund.............................. 0.90% 1.05%
VIT High Yield Fund................................. 0.70% 0.85%
VIT Growth and Income Fund.......................... 0.75% 0.90%
VIT CORE U.S. Equity Fund........................... 0.70% 0.80%
VIT CORE Large Cap Growth Fund...................... 0.70% 0.80%
VIT CORE Large Cap Value Fund....................... 0.70% 0.80%
VIT CORE Small Cap Equity Fund...................... 0.75% 0.90%
VIT Capital Growth Fund............................. 0.75% 0.90%
VIT CORE International Equity Fund.................. 0.85% 1.10%
VIT Mid Cap Equity Fund............................. 0.80% 0.95%
VIT International Equity Fund....................... 1.00% 1.25%
GST Adjustable Rate Government Fund................. 0.40% 0.49%
GST Core Fixed-Income Fund.......................... 0.40% 0.54%
GST Government Income Fund.......................... 0.65% 0.58%
GST Small Cap Value Fund............................ 1.00% 1.10%
GST European Equity Fund............................ 1.00% 1.14%
GST Japanese Equity Fund............................ 1.00% 1.05%
GST International Small Cap Fund.................... 1.20% 1.40%
GST Emerging Markets Equity Fund.................... 1.20% 1.39%
GST Asia Growth Fund................................ 1.00% 1.20%
GST Real Estate Securities Fund..................... 1.00% 1.04%
GST Financial Square Prime Obligations Money Market
Fund........................................... 0.205% 0.18%
</TABLE>
TAXATION
Each Portfolio is treated as a separate corporate entity for tax purposes.
Each Portfolio intends to elect to be treated as a regulated investment company
and qualify for such treatment for each taxable year under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"). To qualify as such, a
Portfolio must satisfy certain requirements relating to the sources of its
income, diversification of its assets and
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<PAGE>
distribution of its income to shareholders. As a regulated investment company, a
Portfolio 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 Portfolio does not qualify for the special federal tax
treatment afforded regulated investment companies, all of the Portfolio's
taxable income would be subject to tax at regular corporate rates without any
deduction for distributions to shareholders. In such event, a Portfolio's
distributions to Separate Accounts holding shares of the Portfolio would be
taxable as ordinary income to the extent of the Portfolio's current and
accumulated earnings and profits. A failure of a Portfolio 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 Portfolio.
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 Portfolio
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 Portfolio will be adequately diversified. However, a
failure of a Portfolio 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.
Provided that a Portfolio and a Separate Account investing in the Portfolio
satisfy the above requirements, any distributions from the Portfolio 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.
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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 Portfolios.
ADDITIONAL INFORMATION
The term "a vote of the majority of the outstanding shares" of a Portfolio
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
Portfolio are present or represented by proxy, or (ii) more than 50% of the
outstanding shares of the Portfolio.
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 Portfolio
at least annually, and will constitute all or substantially all of each
Portfolio's net investment income. Each Portfolio will also 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 Portfolio 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
Portfolio's dividends may constitute a return of capital.
PURCHASE AND REDEMPTION OF SHARES
Investors may purchase or redeem shares of the Portfolios through variable
annuity contracts and variable life insurance policies 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 Portfolios
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<PAGE>
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 Portfolios 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 Portfolio at the Portfolio's NAV 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 Portfolio 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 Portfolios 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 Portfolios (as
well as new investment 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 Portfolios directly
to qualified pension and profit-sharing plans.
Shares of the Portfolios 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 Portfolios' 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 life insurance
policy owners and plan investors. The
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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 Portfolios. 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.
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APPENDIX A
This Appendix describes various investments and investment techniques that may
be used by the Underlying Funds. This Appendix also describes certain risks
associated with these investments and techniques. Further information is
provided in the Additional Statement and in the prospectuses of the Underlying
Funds.
As noted above, the Underlying Equity Funds invest primarily in common stocks
and other equity securities (including real estate investment trusts), and the
Underlying Fixed-Income Funds invest primarily in fixed income securities. The
Short Duration Government and Adjustable Rate Government Funds invest in U.S.
Government Securities and related repurchase agreements, and neither of these
Funds, the Government Income Fund nor the Financial Square Prime Obligations
Fund makes foreign investments. The investments of the Financial Square Prime
Obligations Fund are limited by SEC regulations applicable to money market funds
as described in its prospectus, and do not include many of the types of
investments discussed below that are permitted for the other Underlying Funds.
With these exceptions, and the further exceptions noted below, the following
description applies generally to the Underlying Funds.
(1) DESCRIPTION OF INVESTMENTS AND
INVESTMENT TECHNIQUES OF THE UNDERLYING FUNDS
CONVERTIBLE SECURITIES
The Underlying Funds 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 adviser will give primary
emphasis to the attractiveness of the underlying common stock. The convertible
securities in which certain of the Underlying Funds invest are not subject to
any minimum rating criteria. Convertible debt securities are equity investments
for purposes of each Underlying Fund's investment policies.
PREFERRED STOCK, WARRANTS AND RIGHTS
The Underlying Funds 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
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the preferred stock.
Warrants and other rights are options to buy a stated number of shares of
common stock at a specified price 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")
The Real Estate Securities Fund expects to invest a substantial portion of its
total assets in REITs, which are pooled investment vehicles that invest
primarily in either real estate or real estate related loans. In addition, the
other Underlying Equity Funds may invest in REITs from time to time. REITs are
dependent upon the ability of the REITs' managers, and are subject to heavy cash
flow dependency, default by borrowers and the qualification of the REITs under
applicable regulatory requirements for favorable federal income tax treatment.
REITs are also subject to risks generally associated with investments in real
estate including possible declines in the value of real estate, general and
local economic conditions, environmental problems and changes in interest rates.
To the extent that assets underlying a REIT are concentrated geographically, by
property type or in certain other respects, these risks may be heightened. Each
Underlying Fund will indirectly bear its proportionate share of any expenses,
including management fees, paid by a REIT in which it invests.
FOREIGN INVESTMENTS
Foreign Securities. Certain of the Underlying Funds may invest in foreign
securities in accordance with their investment objectives and policies.
Investing in the securities of foreign issuers involves risks that are not
typically associated with investing in 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. The expected
introduction of a single currency, the euro, on January 1, 1999 for
participating European nations in the Economic and Monetary Union ("EMU")
presents unique uncertainties, including whether the payment and operational
systems of banks and other financial institutions will be ready by the scheduled
launch date; the creation of suitable clearing and settlement payment systems
for the new currency; the legal treatment of certain outstanding financial
contracts after January 1, 1999 that refer to existing currencies rather than
the euro; the establishment and maintenance of exchange rates for currencies
being converted into the euro and the euro; the fluctuation of the euro relative
to non-euro currencies during the transition period from January 1, 1999 to
December 31, 2001 and beyond; whether the interest rate, tax and labor regimes
of European countries participating in the euro will converge over time; and
whether the conversion of the currencies of the other EU countries such as the
United Kingdom and Denmark into the euro and the admission of other non-EU
countries such as Poland, Latvia and Lithuania as members of the EU may have an
impact on the euro. These or other factors, including political and economic
risks, could cause market disruptions before or after the introduction of the
euro, and could adversely affect the value of securities and foreign currencies
held by the Underlying Funds. 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,
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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 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 Underlying Funds, political or
social instability or diplomatic developments which could affect investments in
those countries.
Investments in ADRs, EDRs, and GDRs. Investments in foreign securities may
take the form of sponsored and unsponsored American Depository Receipts
("ADRs"), Global Depository Receipts ("GDRs"), 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 an Underlying 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 Underlying 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 Receipts and the underlying securities are quoted. However, by
investing in Depository Receipts, such as ADRs, that are quoted in U.S. dollars,
the Underlying Funds may avoid currency risks during the settlement period for
purchases and sales.
Foreign Currency Transactions. Because investment in foreign issuers will
usually involve currencies of foreign countries, and because certain Underlying
Funds may have currency exposure independent of their securities positions, the
value of the assets of the Underlying Fund as measured in U.S. dollars will be
affected by changes in foreign currency exchange rates. The Underlying 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
Core Fixed Income, Global Income, High Yield, CORE International Equity,
International Equity, Japanese Equity, European Equity, International Small Cap,
Emerging Markets Equity and Asia Growth Funds may enter into such contracts to
seek to increase total return when the Underlying Fund's investment adviser
anticipates that the foreign currency will
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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 Underlying Fund's portfolio. When entered into to seek to enhance return,
forward foreign currency exchange contracts are considered speculative. Certain
Underlying 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 Underlying Fund's investment adviser determines that there is a
pattern of correlation between the two currencies.
An Underlying Fund will incur costs in connection with conversions between
various currencies. An Underlying Fund may hold foreign currency received in
connection with investments in foreign securities when, in the judgment of its
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
rates.
Currency exchange rates may fluctuate significantly over short periods of time
causing, along with other factors, an Underlying 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.
Certain of the Underlying Funds may enter into currency swaps, which involve
the exchange by the Underlying Fund with another party for 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.
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 an Underlying Fund of unrealized profits or the benefits
of a currency hedge or force the Underlying Fund to cover its purchase or sale
commitments, if any, at the current market price.
FIXED-INCOME SECURITIES
U.S. Government Securities. The Underlying Funds 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. 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.
Foreign Government Securities. The Core Fixed Income, Global Income, High
Yield, CORE International Equity, International Equity, Japanese Equity,
European Equity, International Small Cap, Emerging Markets Equity and Asia
Growth Funds may invest in debt obligations of foreign governments and
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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 the Underlying 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 the Underlying Fund's NAV, 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.
Mortgage-Backed Securities. The Underlying Funds (other than the five CORE
Equity 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.
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 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 the Underlying Fund from taking advantage
of such higher yields.
Adjustable Rate Mortgage-Backed Securities ("ARMS"). 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 the Underlying 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 the Underlying 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.
The Underlying Funds may invest in Mortgage-Backed Securities issued or
sponsored by both government and non-governmental entities. Privately issued
Mortgage-Backed Securities are generally backed by pools of conventional (i.e.,
non-government guaranteed or insured) mortgage loans. In order to receive a high
quality rating from the rating organizations (e.g, S&P or Moody's), privately
issued Mortgaged-Backed Securities normally are structured with one or more
types of "credit enhancement."
The Underlying Funds may also invest in 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
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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 Code, and
invests in certain mortgages principally secured by interests in real property
and other permitted investments.
The Underlying Fixed-Income Funds may also invest in stripped Mortgage-Backed
Securities ("SMBS") (including interest only and principal only securities),
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, an Underlying 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.
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.
Asset-Backed Securities. The Underlying Funds (other than the five CORE Equity
Funds, the Adjustable Rate Government Fund and the Short Duration Government
Fund) 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.
Corporate and Bank Obligations. The Underlying Funds may invest in obligations
issued or guaranteed by U.S. or foreign corporations and banks. 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 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. The Underlying Funds may invest in structured
securities. The value of the principal of and/or interest on such securities
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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 the Underlying 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.
Municipal Securities. The Core Fixed Income and High Yield Funds may make
limited investments in instruments issued by state and local governmental
issuers. These securities may include private activity bonds, municipal leases,
certificates of participation and "auction rate" securities.
Zero Coupon, Deferred Interest, Pay-In-Kind and Capital Appreciation Bonds.
Each Underlying Fund may invest in zero coupon, deferred interest and capital
appreciation bonds. These are securities issued at a discount from their face
value because interest payments are typically postponed until maturity. These
securities also may take the form of debt securities that have been stripped of
their interest payments. Each Underlying Fund may also invest in pay-in-kind
securities which 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.
Rating Criteria. The rating requirements for each of the Underlying Fixed-
Income Funds are stated above. Except as noted below, the Underlying Equity
Funds (other than the five CORE Equity 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. The Growth and Income, Capital Growth, Small Cap Value,
International Equity, Japanese Equity, European Equity, International Small Cap,
Emerging Markets Equity, Asia Growth and Real Estate Securities Funds may invest
up to 10%, 10%, 35%, 35%, 35%, 35%, 35%, 35%, 35% and 20%, respectively, of
their total assets in debt securities which are 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 Moody's. 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 "Risks of Investing in Non-
Investment Grade Fixed-Income Securities." See Appendix A to the Additional
Statement for a description of the corporate bond ratings assigned by Standard &
Poor's and Moody's.
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OPTIONS ON SECURITIES AND SECURITIES INDICES
The Underlying Funds (other than the CORE Large Cap Value, 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 composed 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 Underlying Fund's 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 the Underlying
Fund's investment portfolio, the investment performance of the Underlying Fund
will be less favorable than it would have been in the absence of such options
transactions. The writing of options could significantly increase the Underlying
Fund's portfolio turnover rate and, therefore, associated brokerage commissions
or spreads.
OPTIONS ON FOREIGN CURRENCIES
An Underlying 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, certain Underlying 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 the Underlying Fund has written is exercised, the Underlying 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 the Underlying
Fund's position, the Underlying 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 Core Fixed Income, Global Income, High Yield,
CORE International Equity, International Equity, Japanese Equity, European
Equity, International Small Cap, Emerging Markets Equity and Asia Growth Funds
may purchase call or put options on currency to seek to increase total return
when the Underlying Fund's 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 Underlying 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 Underlying 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
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rates, securities prices or currency exchange rates, an Underlying 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 Underlying 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, whether domestic or foreign. An Underlying
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. The Underlying 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 Underlying 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 Underlying Fund's net assets. These transactions involve brokerage costs,
require margin deposits and, in the case of contracts and options obligating the
Underlying Fund to purchase securities or currencies, require the Underlying
Fund to segregate and maintain cash or liquid assets with a value equal to the
amount of the Underlying 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 Policies--Futures Contracts and Options on Future
Contracts" in the Additional Statement. Thus, while the Underlying 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 Underlying 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 the
Underlying Fund may be exposed to risk of loss. The loss incurred by the
Underlying 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 the Underlying Fund's NAV. The profitability of the
Underlying Fund's trading in futures to seek to increase total return depends
upon the ability of the investment adviser to analyze correctly 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 the Underlying Fund. Further, futures contracts
and options on futures may be illiquid, and exchanges may limit fluctuations in
futures contract prices during a single day. The Underlying Funds may engage in
futures transactions on both U.S. and foreign exchanges. Foreign exchanges may
not provide the same protections as U.S. exchanges.
STANDARD AND POOR'S DEPOSITORY RECEIPTS
Each Underlying Equity Fund may, consistent with its objectives, purchase
Standard & Poor's Depository Receipts ("SPDRs"). SPDRs are American Stock
Exchange-traded securities that represent ownership in the SPDR Trust, a trust
which has been established to accumulate and hold a portfolio of common stocks
that is intended to track the price performance and dividend yield of the S&P
500. This trust is sponsored by a subsidiary of the American Stock Exchange.
SPDRs may be used for several reasons, including but not limited to:
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facilitating the handling of cash flows or trading, or reducing transaction
costs. The use of SPDRs would introduce additional risks to the portfolio as the
price movement of the instrument does not perfectly correlate with the price
action of the underlying index.
EQUITY SWAPS
Each Underlying Equity Fund may invest up to 10% of its total assets in equity
swaps. Equity swaps allow the parties to a swap agreement to exchange the
dividend income or other components of return on an equity investment (e.g., a
group of equity securities or an index) for a component of return on another
non-equity or equity investment. An equity swap may be used by a Fund to invest
in a market without owning or taking physical custody of securities in
circumstances in which direct investment may be restricted for legal reasons or
is otherwise impractical. Equity swaps are derivatives and their value can be
very volatile. To the extent that its Investment Advisor does not accurately
analyze and predict the potential relative fluctuation of the components swapped
with another party, a Fund may suffer a loss. The value of some components of an
equity swap (such as the dividends on a common stock) may also be sensitive to
changes in interest rates. Furthermore, during the period a swap is outstanding,
a Fund may suffer a loss if the counterparty defaults. In connection with its
investments in equity swaps, a Fund will either segregate cash or liquid assets
or otherwise cover its obligations in a manner required by the SEC.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
The Underlying Funds may purchase when-issued securities. When-issued
transactions arise when securities are purchased by the Underlying 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 Underlying Fund at the
time of entering into the transaction. Each Underlying Fund may also purchase or
sell securities on a forward commitment basis; that is, make contracts to
purchase or sell securities for a fixed price at a future date beyond the
customary three-day settlement period. 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. Conversely,
securities sold on a forward commitment basis involve the risk that the value of
the securities to be sold may increase prior to the settlement date. Although
the Underlying Fund would generally purchase securities on a when-issued or
forward commitment basis with the intention of acquiring securities for its
portfolio, the Underlying Fund may dispose of when-issued securities or forward
commitments prior to settlement if its investment adviser deems it appropriate
to do so. The Underlying Fund will segregate cash or liquid assets in an amount
sufficient to meet the purchase price until three days prior to the settlement
date. Alternatively, each Underlying Fund may enter into offsetting contracts
for the forward sale of other securities that it owns.
ILLIQUID AND RESTRICTED SECURITIES
No Underlying Fund will invest more than 15% (10% in the case of the Financial
Square Prime Obligations Fund) of its net assets in illiquid investments, which
include securities (both foreign and domestic) that are not readily marketable,
swap transactions, 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
A-10
<PAGE>
restricted security is eligible for resale under Rule 144A under the Securities
Act of 1933 and, therefore, is liquid. Investing in restricted securities
eligible for resale pursuant to Rule 144A may decrease the liquidity of an
Underlying 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 a discount, which may be significant, from the market price of
comparable securities for which a market exists.
REPURCHASE AGREEMENTS
The Underlying Funds 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 Core Fixed Income, Global Income, High Yield,
CORE International Equity, International Equity, Japanese Equity, European
Equity, International Small Cap, Emerging Markets Equity and Asia Growth Funds
may also enter into repurchase agreements involving certain foreign government
securities. If the other party or "seller" defaults, the Underlying Fund might
suffer a loss to the extent that the proceeds from the sale of the underlying
securities and other collateral 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, the Underlying 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. Each Underlying Fund, together with
other registered investment companies having management agreements with GSAM or
its 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.
LENDING OF PORTFOLIO SECURITIES
The Underlying Funds 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. The value of the securities loaned may not exceed 33 1/3% of the
value of the total assets of an Underlying Fund (including the loan collateral).
A loss or delay in the recovery of securities could result if the institution
which borrows securities breaches its agreement with the Underlying Fund.
SHORT SALES AGAINST-THE-BOX
Certain Underlying Funds may make short sales of securities or maintain a
short position, provided that at all times when a short position is open the
Underlying Fund owns 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). Not more than 25% of the Underlying Fund's
net assets (determined at the time of the short sale) may be subject to such
short sales.
A-11
<PAGE>
MORTGAGE DOLLAR ROLLS
The Underlying Fixed-Income Funds (except the High Yield Fund) and the Real
Estate Securities Fund may enter into mortgage "dollar rolls" in which the
Underlying Fund sells securities for delivery in the current month and
simultaneously contracts with the same counterparty to repurchase substantially
similar but not identical securities on a specified future date. During the roll
period, the Underlying Fund loses the right to receive principal and interest
paid on the securities sold. However, the Underlying 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 Underlying Fund.
TEMPORARY INVESTMENTS
Each Underlying Fund may, for temporary defensive purposes, invest 100% of its
total assets (except that the CORE Equity Funds and Emerging Markets Equity Fund
may only hold up to 35% of their respective total assets) in high quality fixed
income securities. When assets are invested in such instruments, an Underlying
Fund may not be achieving its investment objective.
PORTFOLIO TURNOVER
The turnover rates of the Underlying Funds have ranged from 41% to 396% during
their most recent fiscal years. There can be no assurance that the turnover
rates of these Underlying Funds will remain with this range during subsequent
fiscal years. Higher turnover rates may result in higher brokerage costs and
higher expenses being incurred by the Underlying Funds. In addition, higher
turnover rates may result in higher taxable realized gains being incurred by
shareholders.
MISCELLANEOUS TECHNIQUES
In addition to the techniques and investments described above, each Underlying
Fund may engage in the following techniques and investments: (i) mortgage swaps,
credit swaps, index swaps and interest rate swaps, caps, floors and collars
(Underlying Fixed-Income Funds and Real Estate Securities Fund only), (ii) yield
curve options and inverse floating rate securities (Underlying Fixed-Income
Funds and Real Estate Securities Fund only), (iii) loan participations (High
Yield Fund only), (iv) other investment companies (including, with respect to
the Underlying Equity Funds, World Equity Benchmark Shares), (v) unseasoned
companies, (vi) custodial receipts, and (vii) reverse repurchase agreements for
investment purposes (Underlying Fixed-Income Funds only).
In addition, each Underlying Fund may borrow up to 33 1/3% of its total assets
from banks for temporary or emergency purposes. An Underlying Fund may not make
additional investments if borrowings (excluding covered mortgage dollar rolls)
exceed 5% of its total assets.
(2) RELATED ADDITIONAL RISK FACTORS
Risks of Investing in Small Capitalization Companies and REITs
A-12
<PAGE>
Investing in the securities of small capitalization companies and REITs
involves greater risk and the possibility of greater portfolio price volatility.
Among the reasons for the greater price volatility of these securities are the
less certain growth prospects of smaller firms and the lower degree of liquidity
in the markets for such securities. Small capitalization companies and REITs may
have limited financial resources, may trade less frequently and in a limited
volume and may be subject to more abrupt or erratic price movements than larger
capitalization companies. An Underlying Fund may invest in securities of small
capitalization companies and REITs that have experienced financial difficulties
or are in an early development stage. Other risks associated with REITs are
discussed in this Appendix A under "Real Estate Investment Trust (`REITs')."
SPECIAL RISKS OF INVESTMENTS IN THE ASIAN AND OTHER EMERGING MARKETS
Investing in the securities of issuers in Emerging Countries involves risks in
addition to those discussed in this Appendix A under "Foreign Investments." The
International Equity, European Equity, International Small Cap, Emerging Markets
Equity and Asia Growth Funds may each invest without limit in the securities of
issuers in Emerging Countries. Up to 35% of the total assets of the Emerging
Markets Equity Fund may be invested in securities of issuers in any one Emerging
Country. The Growth and Income, Small Cap Value, Mid Cap Equity, High Yield and
CORE International Equity Funds may each invest up to 25%, and the Core Fixed
Income, Global Income and Capital Growth Funds may each invest up to 10%, of
their respective total assets in securities of issuers in Emerging Countries.
Many Emerging Countries are subject to a substantially greater degree of
economic, political and social instability and disruption than is the case in
Western Europe, the United States, Canada, Australia, New Zealand and Japan. The
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 unrest in some Asian, Eastern European and other
Emerging Countries. 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. For example, in the past, Eastern European governments have
expropriated substantial amounts of private property, and have not settled the
claims of property owners. Similar expropriations could occur in the future.
Additionally, 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.
The securities markets of Emerging Countries 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 Underlying 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
A-13
<PAGE>
volume and/or limitations on aggregate holdings of foreign investors. In
addition, settlement procedures in Emerging Countries are frequently less
developed and reliable than those in the United States and may involve the
Underlying Fund's delivery of securities before receipt of payment for their
sale. Significant delays are common in certain markets in registering the
transfer of securities. Settlement or registration problems may make it more
difficult for the Underlying Fund to value its portfolio securities and could
cause the Underlying 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 Underlying Fund has delivered or the
Underlying Fund's inability to complete its contractual obligations.
RISKS OF INVESTING IN FIXED-INCOME SECURITIES
The Financial Square Prime Obligations Fund attempts to maintain a stable NAV
of $1.00 per Share and values its assets using the amortized cost method in
accordance with SEC regulations. There is no assurance, however, that the
Financial Square Prime Obligations Fund will be successful in maintaining its
per share value at $1.00 on a continuous basis. The per share NAVs of the other
Underlying Funds are expected to fluctuate on a daily basis.
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
value will differ depending upon the security's duration, the issuer and the
type of instrument. Investments in fixed-income securities are subject to the
risk that the issuer could default on its obligations and an Underlying Fund
could sustain losses on such investments. A default could impact both interest
and principal payments.
The Underlying Funds may invest in various types of derivative debt securities
that present more complex types of interest rate risks. These risks include 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 an Underlying Fund will 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 the Underlying Fund may be unable to recoup all of its initial
investment and will also suffer from the inability to invest in higher yielding
securities.
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 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
A-14
<PAGE>
market liquidity. 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 the Underlying 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 the Underlying Fund of its initial investment and any anticipated
income or appreciation is uncertain.
RISKS OF OTHER DERIVATIVE TRANSACTIONS
An Underlying Fund's transactions, if any, in options, futures, options on
futures, swaps, structured securities and currency forward contracts involve
certain risks, including a possible lack of correlation between changes in the
value of hedging instruments and the portfolio assets (if any) 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.
NON-DIVERSIFICATION
The Global Income Fund is registered as a "non-diversified" Fund under the
1940 Act and is, therefore, more susceptible to adverse developments affecting
any single issuer. In addition, the Global Income Fund, and certain other
Underlying Funds, may invest more than 25% of their total assets in the
securities of corporate and governmental issuers located in a single foreign
country. Concentration of a 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 or economic
events which may occur in those countries.
A-15
<PAGE>
GOLDMAN SACHS ASSET
MANAGEMENT
One New York Plaza
New York, New York 10004
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
___________________
Independent Public Accountants
___________________
___________________
Independent Public Accountants
Toll Free (in U.S.): 800-292-4726
Prospectus
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
Goldman Sachs Core Large Cap Value Fund, Goldman Sachs Core International
Equity Fund, Goldman Sachs Short Duration Government Fund, Goldman Sachs
Conservative Strategy Portfolio, Goldman Sachs Balanced Strategy Portfolio,
Goldman Sachs Growth and Income Strategy Portfolio, Goldman Sachs Growth
Strategy Portfolio and Goldman Sachs Aggressive Growth Strategy Portfolio
Cross Reference Sheet
<TABLE>
<CAPTION>
Form N-1A Item Heading
-------------- -------
<S> <C>
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; Description of
Investment Securities and
Practices and 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......................... Not Applicable.
</TABLE>
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>
SUBJECT TO COMPLETION
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION
DATED NOVEMBER 18, 1998
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT COMPLETE
AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES EXCHANGE COMMISSION IS EFFECTIVE. THIS
STATEMENT OF ADDITIONAL INFORMATION IS NOT AN OFFER TO SELL THESE SECURITIES AND
IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
PART B
STATEMENT OF ADDITIONAL INFORMATION
GOLDMAN SACHS CORE LARGE CAP VALUE FUND
GOLDMAN SACHS CORE INTERNATIONAL EQUITY FUND
GOLDMAN SACHS SHORT DURATION GOVERNMENT FUND
GOLDMAN SACHS CONSERVATIVE STRATEGY PORTFOLIO
GOLDMAN SACHS BALANCED STRATEGY PORTFOLIO
GOLDMAN SACHS GROWTH AND INCOME STRATEGY PORTFOLIO
GOLDMAN SACHS GROWTH STRATEGY PORTFOLIO
GOLDMAN SACHS AGGRESSIVE GROWTH STRATEGY PORTFOLIO
(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
prospectuses for Goldman Sachs CORE Large Cap Value Fund, Goldman Sachs CORE
International Equity Fund, Goldman Sachs Short Duration Government Fund, Goldman
Sachs Conservative Strategy Portfolio, Goldman Sachs Balanced Strategy
Portfolio, Goldman Sachs Growth and Income Strategy Portfolio, Goldman Sachs
Growth Strategy Portfolio and Goldman Sachs Aggressive Growth Strategy Portfolio
each dated ________, 1999 as amended and/or supplemented from time to time (the
"Prospectuses"), 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 _______________, 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
INTRODUCTION............................................................ B-2
INVESTMENT OBJECTIVES AND POLICIES...................................... B-3
DESCRIPTION OF INVESTMENT SECURITIES AND PRACTICES...................... B-20
MANAGEMENT.............................................................. B-69
PORTFOLIO TRANSACTIONS AND BROKERAGE.................................... B-85
NET ASSET VALUE......................................................... B-87
PERFORMANCE INFORMATION................................................. B-90
SHARES OF THE TRUST..................................................... B-94
TAXATION................................................................ B-96
OTHER INFORMATION....................................................... B-104
APPENDIX A.............................................................. A-1
APPENDIX B.............................................................. B-1
</TABLE>
-i-
<PAGE>
GOLDMAN SACHS ASSET MANAGEMENT GOLDMAN, SACHS & CO.
Adviser to: Transfer Agent
Goldman Sachs CORE Large Cap Value Fund 4900 Sears Tower
Goldman Sachs CORE International Equity Fund Chicago, IL 60606
Goldman Sachs Short Duration Government Fund
Goldman Sachs Conservative Strategy Portfolio
Goldman Sachs Balanced Strategy Portfolio GOLDMAN, SACHS & CO.
Goldman Sachs Growth and Income Strategy Portfolio Distributor
Goldman Sachs Growth Strategic Portfolio 85 Broad Street
Goldman Sachs Aggressive Growth Strategy Portfolio New York, New York 10004
One New York Plaza
New York, New York 10004
Toll free.......800-292-4726
B-1
<PAGE>
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 directly to the general public. The following series of
the Trust are described in this Additional Statement: Goldman Sachs CORE Large
Cap Value Fund ("CORE Large Cap Value Fund") and Goldman Sachs CORE
International Equity Fund ("CORE International Equity Fund") (collectively
referred to herein as the "CORE Funds"); Goldman Sachs Short Duration Government
Fund ("Short Duration Government Fund"); and Goldman Sachs Conservative Strategy
Portfolio ("Conservative Strategy Portfolio"), Goldman Sachs Balanced Strategy
Portfolio ("Balanced Strategy Portfolio"), Goldman Sachs Growth and Income
Strategy Portfolio ("Growth and Income Strategy Portfolio"), Goldman Sachs
Growth Strategy Portfolio ("Growth Strategy Portfolio") and Goldman Sachs
Aggressive Growth Strategy Portfolio ("Aggressive Growth Strategy Portfolio")
(collectively referred to herein as the "Asset Allocation Portfolios" and
collectively with the CORE Funds and the Short Duration Government Fund referred
to herein as the "Funds"). Other series of the Trust are described in a
separate Additional Statement.
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. Each Asset
Allocation Portfolio has been constructed as a "fund of funds," which means that
it pursues its investment objective primarily by allocating its investments
among other investment portfolios (the "Underlying Funds") of the Trust
(including the CORE Funds and Short Duration Government Fund described in this
Additional Statement) and of Goldman Sachs Trust, a separately registered open-
end investment company ("GST").
Goldman Sachs Asset Management ("GSAM"), a separate operating division of
Goldman, Sachs & Co. ("Goldman Sachs"), serves as investment adviser to the
Funds. GSAM is referred to herein as the "Adviser." 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 its Prospectus. See the Prospectuses
for a fuller description of the Funds' investment objectives and policies.
There is no assurance that each Fund will achieve its objective.
B-2
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Each of the Funds' share price will fluctuate with market, economic and, to
the extent applicable, foreign exchange conditions, so that an investment in any
of those Funds may be worth more or less when redeemed than when purchased.
There is no assurance that any Fund will achieve its objective.
CORE LARGE CAP VALUE AND CORE INTERNATIONAL EQUITY FUNDS
Under normal circumstances, these Funds will invest at least 90% of their
total assets in equity securities.
The investment strategy of the CORE Large Cap Value and CORE International
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 CORE
Large Cap Value Fund may purchase futures contracts only with respect to a
representative index in order to keep the Fund's effective equity exposure close
to 100%. The CORE International Equity Fund may purchase other types of futures
contracts as described under "Investment Policies Futures Contracts and Options
on Futures Contracts."
THE MULTIFACTOR MODELS. The Multifactor Models are rigorous computerized
rating systems for evaluating different equity markets, currencies and
individual equity securities according to a variety of investment
characteristics (or factors). The factors used by the Multifactor Models
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 the equity securities, currencies and markets they
were designated to forecast.
Because they include many disparate factors, the Adviser believes that the
Multifactor Models are broader in scope and provide a more thorough evaluation
than most conventional, value-oriented quantitative models. As a result, the
securities, currencies and markets ranked highest by the Multifactor Models do
not have one dominant investment characteristic (such as a low price/earnings
ratio); rather, such securities or markets possess many different investment
characteristics. By using a variety of relevant factors to select securities,
currencies or markets, 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 such investments.
The Adviser will monitor, and may occasionally suggest and make changes to,
the method by which securities, currencies or markets are selected for or
weighted in a Fund. Such changes (which may be the result of changes in the
Multifactor Models or the method of applying the
B-3
<PAGE>
Multifactor Models) may include: (i) evolutionary changes to the structure of
the Multifactor Models (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 a Fund uses futures); or (iii) changes in the
method by which securities, currencies or markets are weighted in a Fund. Any
such changes will preserve a Fund's basic investment philosophy of combining
qualitative and quantitative methods of selecting securities using a disciplined
investment process.
SHORT DURATION GOVERNMENT FUND
Short Duration Government Fund is designed for investors who seek a high
level of current income, relative stability of principal and the high credit
quality of securities issued or guaranteed by the U.S. government, its agencies,
instrumentalities or sponsored enterprises, without incurring the administrative
and accounting burdens involved in direct investment.
Market and economic conditions may affect the investments of the Short
Duration Government Fund differently than the investments normally purchased by
such investors. Relative to U.S. Treasury and non-fluctuating money market
instruments, the market value of adjustable rate mortgage securities in which
the Short Duration Government Fund may invest may be adversely affected by
increases in market interest rates. Conversely, decreases in market interest
rates may result in less capital appreciation for adjustable rate mortgage
securities in relation to U.S. Treasury and money market investments.
HIGH CURRENT INCOME. The Short Duration Government Fund seeks a higher
-------------------
current yield than that offered by money market funds or by bank certificates of
deposit and money market accounts. However, the Short Duration Government Fund
does not maintain a constant net asset value per share and is subject to greater
fluctuations in the value of its shares than a money market fund. Unlike bank
certificates of deposit and money market accounts, investments in shares of the
Short Duration Government Fund are not insured or guaranteed by any government
agency. The Short Duration Government Fund seeks to provide such high current
income without sacrificing credit quality.
RELATIVE LOW VOLATILITY OF PRINCIPAL. The Short Duration Government Fund
-------------------------------------
seeks to minimize net asset value fluctuations by utilizing certain interest
rate hedging techniques and by maintaining a maximum duration of not more than
three years. The duration target of the Short Duration Government Fund is that
of the 2-year U.S. Treasury Security plus or minus .5 years. There is no
assurance that these strategies for the Short Duration Government Fund will
always be successful.
PROFESSIONAL MANAGEMENT AND ADMINISTRATION. Investors who invest in
-------------------------------------------
securities of the Government National Mortgage Association ("Ginnie Mae") and
other mortgage-backed securities may prefer professional management and
administration of their mortgage-backed securities portfolios. A well-
diversified portfolio of such securities emphasizing minimal fluctuation of net
asset value requires significant active management as well as significant
accounting and administrative resources. Members of Goldman Sachs' highly
skilled portfolio management team
B-4
<PAGE>
bring together many years of experience in the analysis, valuation and trading
of U.S. fixed-income securities.
ASSET ALLOCATION PORTFOLIOS
Normally, each of the Asset Allocation Portfolios will be predominantly
invested in shares of the Underlying Funds. The following description provides
additional information regarding the Underlying Funds and the types of
investments that the Underlying Funds may make. Further information about the
Underlying Funds and their respective investment objectives and policies is
included in their Prospectuses and Additional Statements.
DESCRIPTION OF UNDERLYING FUNDS
- -------------------------------
GOLDMAN SACHS VARIABLE INSURANCE TRUST ("VIT") GROWTH AND INCOME FUND
Objectives. This Fund seeks to provide investors with long-term growth of
----------
capital and growth of income.
Primary Investment Focus. This Fund invests, under normal circumstances,
------------------------
at least 65% of its total assets in equity securities that its investment
adviser considers to have favorable prospects for capital appreciation and/or
dividend-paying ability.
Other. This Fund may invest up to 35% of its total assets in fixed-income
-----
securities that, in the opinion of its 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.
VIT CORE U.S. EQUITY FUND
Objective. This Fund seeks 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. This Fund invests, under normal circumstances,
------------------------
at least 90% of its total assets in equity securities of U.S. issuers, including
certain foreign issuers that are traded in the United States. 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 composed 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.
B-5
<PAGE>
VIT CORE LARGE CAP GROWTH FUND
Objective. This Fund seeks 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. This Fund invests, under normal circumstances,
------------------------
at least 90% of its total assets in equity securities of U.S. issuers, including
certain foreign issuers that are traded in the United States. The Fund's
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 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 composed 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.
VIT CORE LARGE CAP VALUE FUND
Objective. This Fund seeks 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 equity securities of large cap U.S. issuers
that are selling at low to modest valuations relative to general market measures
such as earnings, book value and other fundamental accounting measures, and that
are expected to have favorable prospects for capital appreciation and/or
dividend-paying ability.
Primary Investment Focus. This Fund invests, under normal circumstances,
------------------------
at least 90% of its total assets in equity securities of U.S. issuers, including
certain foreign issuers that are traded in the United States. 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 Value Index. The Fund seeks a portfolio composed of companies
with above average capitalizations and low to moderate valuations as measured by
price/earnings ratios, book value and other fundamental accounting measures. The
Fund may invest only in fixed-income securities that are considered cash
equivalents.
VIT CORE SMALL CAP EQUITY FUND
Objective. This Fund seeks 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. This Fund invests, under normal circumstances,
------------------------
at least 90% of its total assets in equity securities of U.S. issuers, including
certain foreign issuers that are
B-6
<PAGE>
traded in the United States. 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 composed 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 Fund's 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. 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.
VIT CORE INTERNATIONAL EQUITY FUND
Objective. This Fund seeks to provide investors with long-term growth of
---------
capital. The Fund seeks to achieve its objective through a broadly diversified
portfolio of large cap equity securities of companies that are organized outside
the United States or whose securities are principally traded outside the United
States.
Primary Investment Focus. This Fund invests, under normal circumstances,
------------------------
at least 90% 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 seeks broad representation of large cap
issuers across major countries and sectors of the international 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 EAFE Index. In addition, the Fund seeks a portfolio composed of
companies with attractive valuations and stronger momentum characteristics than
the EAFE Index.
The Fund may allocate its assets among countries as determined by its
investment adviser from time to time, provided the Fund's assets are invested in
at least three foreign countries. The Fund may invest in securities of issuers
in Emerging Countries which involve certain risks which are not present in
investments in more developed countries.
VIT CAPITAL GROWTH FUND
Objective. This Fund seeks to provide investors with long-term growth of
---------
capital.
Primary Investment Focus. This Fund invests, under normal circumstances,
------------------------
at least 90% of its total assets in equity securities. The Fund seeks to achieve
its investment objective by investing in a diversified portfolio of equity
securities that are considered by its investment adviser to have long-term
capital appreciation potential.
B-7
<PAGE>
Other. Although this 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.
VIT MID CAP EQUITY FUND
Objective. This Fund seeks to provide investors with long-term capital
---------
appreciation.
Primary Investment Focus. This 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) within the range of the market capitalization of companies constituting
the Russell Midcap Index at the time of investment (currently between $400
million and $16 billion). If the capitalization of an issuer increases above
$16 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. This 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.
VIT INTERNATIONAL EQUITY FUND
Objective. This Fund seeks to provide investors with long-term capital
---------
appreciation.
Primary Investment Focus. This 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 its 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 Emerging Countries. Many of the
countries in which the Fund may invest have emerging markets or economies which
involve certain risks which are not present in investments in more developed
countries. The Fund intends to invest in companies with public stock market
capitalizations that are larger than those in which the International Small Cap
Fund primarily intends to invest.
Other. Up to 35% of the Fund's total assets may be invested in
-----
fixed-income securities.
VIT SHORT DURATION GOVERNMENT FUND
Objective. This Fund seeks to provide a high level of current income.
---------
Secondarily, the Fund may, in seeking current income, also consider the
potential for capital appreciation.
B-8
<PAGE>
Duration. Under normal interest rate conditions, the Fund's duration is
--------
expected to be equal to that of the Fund's benchmark, the two-year U.S. Treasury
security, plus or minus .5 years. In addition, under normal interest rate
conditions, the Fund's maximum duration will not exceed three years. The
approximate interest rate sensitivity of the Fund is expected to be comparable
to a two-year bond.
Investment Sector. This Fund invests, under normal market conditions, at
-----------------
least 65% of its total assets in U.S. Government Securities and in repurchase
agreements collateralized by such securities. Substantially all of the Fund's
assets will be invested in U.S. Government Securities. 100% of the Fund's
portfolio will be invested in U.S. dollar-denominated securities.
Credit Quality. This Fund invests in U.S. Government Securities and
--------------
repurchase agreements collateralized by such securities.
Other. This Fund may employ certain active management techniques to manage
-----
its duration and term structure 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), mortgage and
interest rate swaps and interest rate floors, caps and collars. 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.
VIT GLOBAL INCOME FUND
Objective. This Fund seeks 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.
B-9
<PAGE>
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 or Baa by an NRSRO. However, the Fund will
invest at least 50% of its total assets in securities rated, at the time of
investment, AAA or Aaa by a Nationally Recognized Statistical Rating
Organization (an "NRSRO"). Unrated securities will be determined by
the investment adviser to be of comparable quality. Fixed-income securities
rated BBB or Baa are considered medium-grade obligations with speculative
characteristics, and adverse economic conditions or changing circumstances may
weaken their issuers' capacity to pay interest and repay principal.
Other. This 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.
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 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.
B-10
<PAGE>
VIT HIGH YIELD FUND
Objective. This Fund seeks to provide investors with a high level of current
---------
income and may 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. This 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, Ba or below by an NRSRO, or, if unrated, 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 Fund's investment
adviser will attempt to take advantage of pricing inefficiencies in the fixed-
income markets.
Credit Quality. This Fund invests primarily in high yield, fixed-income
--------------
securities rated below investment grade, including securities of issuers in
default. Non-investment grade 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 A to this Additional Statement.
Other. This 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, credit and interest rate
swaps, and
B-11
<PAGE>
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.
GOLDMAN SACHS TRUST ("GST") SMALL CAP VALUE FUND
Objective. This Fund seeks to provide investors with long-term capital
---------
growth.
Primary Investment Focus. This Fund invests, under normal circumstances, at
------------------------
least 65% of its total assets in equity securities of companies with public
stock market capitalizations of $1 billion or less at the time of investment.
Under normal circumstances, the Fund's investment horizon for ownership of
stocks will be two to three years. Dividend income, if any, is an incidental
consideration. If the market capitalization of a company held by the Fund
increases above the amount stated above, the Fund may, consistent with its
investment objective, continue to hold the security.
Small Capitalization Companies. This Fund invests in companies which its
------------------------------
investment adviser believes are well managed niche businesses that have the
potential to achieve high or improving returns on capital and/or above average
sustainable growth. The Fund may invest in securities of small market
capitalization companies which may have experienced financial difficulties.
Investments may also be made in companies that are in the early stages of their
life and that the Fund's investment adviser believes have significant growth
potential. The investment adviser believes that the companies in which the Fund
may invest offer greater opportunity for growth of capital than larger, more
mature, better known companies. However, investments in such small market
capitalization companies involve special risks.
Other. This Fund may invest in the aggregate up to 35% of its total assets in
-----
the equity securities of companies with public stock market capitalizations in
excess of $1 billion at the time of investment and 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.
GST EMERGING MARKETS EQUITY FUND
Objective. This Fund seeks to provide investors with long-term capital
---------
appreciation.
Primary Investment Focus. This Fund invests, under normal market
------------------------
circumstances, substantially all, and at least 65%, of its total assets in
equity securities of Emerging Country issuers. For purposes of the Fund's
investment policies, Emerging Countries are countries with economies or
securities markets that are considered by the Fund's investment adviser not to
be fully developed. The investment adviser may consider classifications by the
World Bank, the
B-12
<PAGE>
International Finance Corporation or the United Nations and its agencies in
determining whether a country is emerging or developed. Currently, Emerging
Countries include, among others, most Latin American, African, Asian and Eastern
European nations. The Fund's investment adviser currently intends that the
Fund's investment focus will be in the following Emerging Countries: Argentina,
Botswana, Brazil, Chile, China, Colombia, the Czech Republic, Egypt, Greece,
Hong Kong, Hungary, 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.
An Emerging Country issuer is any entity that satisfies at least one of the
following criteria: (i) it derives 50% or more of its total revenue from goods
produced, sales made or services performed in one or more Emerging Countries;
(ii) it is organized under the laws of, or has a principal office in, an
Emerging Country; (iii) it maintains 50% or more of its assets in one or more of
the Emerging Countries; or (iv) the principal securities trading market for a
class of its securities is in an Emerging Country.
Investments in Emerging Countries involve certain risks which are not present
in investments in more developed countries. The Fund may purchase privately
placed equity securities, equity securities of companies that are in the process
of being privatized by foreign governments, securities of issuers that have not
paid dividends on a timely basis, equity securities of issuers that have
experienced difficulties, and securities of companies without performance
records.
Other. Under normal circumstances, this Fund maintains investments in at
-----
least six Emerging Countries, and will not invest more than 35% of its total
assets in securities of issuers in any one Emerging Country. Allocation of the
Fund's investments will depend upon the relative attractiveness of the Emerging
Country markets and particular issuers. In addition, macro-economic factors and
the portfolio managers' and Goldman Sachs economists' views of the relative
attractiveness of Emerging Countries and currencies are considered in allocating
the Fund's assets among Emerging Countries. Concentration of the Fund's assets
in one or a few Emerging Countries and currencies will subject the Fund to
greater risks than if the Fund's assets were not geographically concentrated.
The Fund may invest in the aggregate up to 35% of its total assets in (i) fixed-
income securities of private and governmental Emerging Country issuers; and (ii)
equity and fixed-income securities of issuers in developed countries.
GST ASIA GROWTH FUND
Objective. This Fund seeks to provide investors with long-term capital
---------
appreciation.
Primary Investment Focus. This Fund invests, under normal market
------------------------
circumstances, substantially all, and at least 65%, of its total assets in
equity securities of companies that satisfy at least one of the following
criteria: (i) their securities are traded principally on stock exchanges in one
or more of the Asian countries; (ii) they derive 50% or more of their total
revenue from goods produced, sales made or services performed in one or more of
the Asian countries; (iii) they maintain 50% or more of their assets in one or
more of the Asian countries; or (iv) they are
B-13
<PAGE>
organized under the laws of one of the Asian countries. The Fund seeks to
achieve its objective by investing primarily in equity securities of Asian
companies which are considered by the Fund's investment adviser to have long-
term capital appreciation potential. Many of the countries in which the Fund may
invest have emerging markets or economies which involve certain risks which are
not present in investments in more developed countries. The Fund may purchase
equity securities of issuers that have not paid dividends on a timely basis,
securities of companies that have experienced difficulties, and securities of
companies without performance records.
Other. This Fund may allocate its assets among the Asian countries as
-----
determined from time to time by its investment adviser. For purposes of the
Fund's investment policies, Asian countries are China, Hong Kong, India,
Indonesia, Malaysia, Pakistan, the Philippines, Singapore, South Korea, Sri
Lanka, Taiwan and Thailand as well as any other country in Asia (other than
Japan) to the extent that foreign investors are permitted by applicable law to
make such investments. Allocation of the Fund's investments will depend upon
the Fund's investment adviser's view of relative attractiveness of the Asian
markets and particular issuers. For example, on January 31, 1998 (the end of
the Fund's last fiscal year), more than 35% of the Fund's assets were invested
in securities traded in Hong Kong. Concentration of the Fund's assets in one or
a few of the Asian countries and Asian currencies will subject the Fund to
greater risks than if the Fund's assets were not geographically concentrated.
The Fund may invest in the aggregate up to 35% of its total assets in equity
securities of issuers in other countries, including Japan, and in fixed-income
securities.
GST REAL ESTATE SECURITIES FUND
Objective. This Fund seeks to provide investors with total return comprised
---------
of long-term growth of capital and dividend income.
Primary Investment Focus. This Fund will invest, under normal circumstances,
------------------------
substantially all, and at least 80%, of its total assets in issuers that are
primarily engaged in or related to the real estate industry. The Fund seeks to
achieve its investment objective by investing in a diversified portfolio of
equity securities of REITs and other real estate industry companies. A "real
estate industry company" is a company that derives at least 50% of its gross
revenues or net profits from the ownership, development, construction,
financing, management or sale of commercial, industrial or residential real
estate or interests therein.
Shares of REITs. The Fund may invest without limitation in shares of REITs.
---------------
REITs are pooled investment vehicles which invest primarily in income producing
real estate or real estate related loans or interests. REITs are generally
classified as equity REITs, mortgage REITs or a combination of 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. Similar
to investment companies such as the Fund, REITs are not taxed on income
distributed to shareholders provided they comply with several requirements
B-14
<PAGE>
of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund will
indirectly bear its proportionate share of expenses incurred by REITs in which
the Fund invests in addition to the expenses directly by the Fund.
Other. Under normal circumstances, this Fund may invest up to 20% of its
-----
total assets in fixed-income securities that, in the opinion of its 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 15% of its net assets in foreign securities.
GST JAPANESE EQUITY FUND
Objective. This Fund seeks 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
Japanese companies. Japanese companies include those organized under the laws
of Japan or whose shares are traded primarily on a Japanese stock exchange as
well as those whose shares are registered with the Japan Securities Dealers
Association for trading primarily on Japan's over-the-counter market. The
Fund's concentration in Japanese companies will expose it to the risk of adverse
social, political and economic events which occur in Japan or affect the
Japanese markets.
Other. The Fund may invest in the aggregate up to 35% of its total assets in
-----
equity securities of non-Japanese companies and in fixed-income securities.
GST EUROPEAN EQUITY FUND
Objective. This Fund seeks to provide investors with long-term capital
---------
appreciation.
Primary Investment Focus. The Fund invests, under normal market
------------------------
circumstances, substantially all, and at least 65%, of its total assets in
equity securities of European companies. Because of its focus, the Fund will be
more susceptible to European economic, market, political and local risks than a
fund that is more geographically diversified. "European companies" are
companies that satisfy at least one of the following criteria: (i) their
securities are traded principally on stock exchanges in one or more of the
European countries; (ii) they derive 50% or more of their total revenue from
goods produced, sales made or services performed in one or more of the European
countries; (iii) they maintain 50% or more of their assets in one or more of the
European countries; or (iv) they are organized under the laws of a European
country. The Fund may allocate its assets among different countries as
determined by its investment adviser, provided that the Fund's assets are
invested in at least three European countries. It is currently anticipated that
a majority of the Fund's assets will be invested in the equity securities of
large cap companies located in the developed countries of Western Europe.
However, the Fund may also invest, without limit, in mid cap companies and small
cap companies, as well as companies located in Emerging Countries in which the
Emerging Markets Equity Fund may invest, including Eastern European countries
and the states that formerly comprised the Soviet Union and Yugoslavia.
B-15
<PAGE>
Other. The Fund may invest in the aggregate up to 35% of its total assets in
-----
equity securities of non-European countries and in fixed-income securities.
GST INTERNATIONAL SMALL CAP FUND
Objective. This Fund seeks to provide investors with long-term capital
---------
appreciation.
Primary Investment Focus. The Fund invests, under normal market
------------------------
circumstances, substantially all, and at least 65%, of its total assets in
equity securities of companies with public stock market capitalizations of $1
billion or less at the time of investment that are organized outside the U.S. or
whose securities are principally traded outside the U.S. The Fund may allocate
its assets among countries as determined by its 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
small cap securities of companies in the developed countries of Western Europe,
Japan and Asia. However, the Fund may also invest in the securities of issuers
located in Australia, Canada, New Zealand and the Emerging Countries in which
the Emerging Markets Equity Fund may invest. Many of the countries in which the
Fund may invest have emerging markets economics which involve certain risks,
which are not present in investments in more developed countries. If the market
capitalization of a company held by the Fund increases above $1 billion, the
Fund may, consistent with its investment objective, continue to hold the
security.
Other. The Fund may invest in the aggregate up to 35% of its total assets in
-----
equity securities of larger cap companies with public stock market
capitalizations of more than $1 billion at the time of investment and in fixed-
income securities.
GST FINANCIAL SQUARE PRIME OBLIGATIONS FUND
Objective. This Fund seeks to maximize current income to the extent
---------
consistent with the preservation of capital and the maintenance of liquidity by
investing exclusively in high quality money market instruments.
Primary Investment Focus. This Fund invests in securities of the U.S.
------------------------
Government, its agencies, authorities and instrumentalities, obligations of U.S.
banks, commercial paper, and other short-term obligations of U.S. companies,
states, municipalities and other entities and repurchase agreements. Securities
purchased by the Fund will be determined by its investment adviser to present
minimal credit risks, and will have remaining maturities (as determined in
accordance with regulatory requirements) of 13 months or less at the time of
purchase. The dollar-weighted average maturity of the Fund will not exceed 90
days.
Other. The investments of this Fund are limited by regulations applicable to
-----
money market funds as described in its Prospectus, and do not include many of
the types of investments discussed below that are permitted for the other
Underlying Funds. Although this Fund attempts to maintain a stable net asset
value of $1.00 per share, there is no assurance that it will be able to
B-16
<PAGE>
do so on a continuous basis. Like investments in the other Underlying Funds, an
investment in this Fund is neither insured nor guaranteed by the U.S. Government
or any governmental authority.
GST ADJUSTABLE RATE GOVERNMENT FUND
Objective. This Fund seeks to provide investors with a high level of current
---------
income, consistent with low volatility of principal.
Duration. Under normal interest rate conditions, the Fund's duration is
--------
expected to be in a range approximately equal to that of a six-month to one-year
U.S. Treasury security. In addition, under normal interest rate conditions, the
Fund's maximum duration will not exceed two years. The approximate interest
rate sensitivity of the Fund is expected to be comparable to a nine-month note.
Investment Sector. This Fund invests, under normal circumstances, at least
-----------------
65% of its total assets in U.S. Government Securities that are adjustable rate
mortgage pass-through securities and other mortgage securities with periodic
interest rate resets. The remainder of the Fund's assets (up to 35%) may be
invested in other U.S. Government Securities, including fixed rate mortgage
pass-through securities, other securities representing an interest in or
collateralized by adjustable rate and fixed rate mortgage loans ("Mortgage-
Backed Securities") and repurchase agreements collateralized by U.S. Government
Securities. Substantially all of the Fund's assets will be invested in U.S.
Government Securities. 100% of the Fund's portfolio will be invested in U.S.
dollar-denominated securities.
Credit Quality. This Fund invests in U.S. Government Securities and
--------------
repurchase agreements collateralized by such securities.
Other. This Fund may employ certain active management techniques to manage
-----
its duration and term structure 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), mortgage and
interest rate swaps and interest rate floors, caps and collars. 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.
GST GOVERNMENT INCOME FUND
Objective. This Fund seeks to provide investors with a high level of current
---------
income, consistent with safety of principal.
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 Mutual
Fund Government/Mortgage Index, plus or minus one year. In addition, under
normal interest rate conditions, the Fund's
B-17
<PAGE>
maximum duration will not exceed six years. The approximate interest rate
sensitivity of the Fund is expected to be comparable to a five-year bond.
Investment Sector. This Fund invests, under normal circumstances, at least
-----------------
65% of its total assets in U.S. Government Securities and in repurchase
agreements collateralized by such securities. The remainder of the Fund's
assets may be invested in non-government securities such as privately issued
Mortgage-Backed Securities, Asset-Backed Securities and corporate securities.
100% of the Fund's portfolio will be invested in U.S. dollar-denominated
securities.
Credit Quality. This Fund's non-U.S. Government Securities will be rated, at
--------------
the time of investment, AAA or Aaa by an NRSRO or, if unrated, will be
determined by the Fund's investment adviser to be of comparable quality.
Other. This Fund may employ certain active management techniques to manage
-----
its duration and term structure 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), mortgage, credit and
interest rate swaps and interest rate floors, caps and collars. 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.
GST CORE FIXED INCOME FUND
Objective. This Fund seeks to provide investors with a total return
---------
consisting of capital appreciation and income that exceeds the total return of
the Lehman Brothers Aggregate Bond Index (the "Index").
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
Aggregate Bond Index, plus or minus one year. In addition, under normal interest
rate conditions, the Fund's maximum duration will not exceed six years. The
approximate interest rate sensitivity of the Fund is expected to be comparable
to a five-year bond.
Investment Sector. This Fund invests, under normal circumstances, at least
-----------------
65% of its total assets in fixed-income securities, including U.S. Government
Securities, corporate debt securities, Mortgage-Backed Securities, and Asset-
Backed Securities. The Fund may invest up to 25% of its total assets in
obligations of domestic and foreign issuers which are denominated in currencies
other than the U.S. dollar, 10% of which may be invested in issuers in countries
with emerging markets and economies. A number of investment strategies will be
used to achieve the Fund's investment objective, including market sector
selection, determination of yield curve exposure, and issuer selection. In
addition, the Fund's investment adviser will attempt to take advantage of
pricing inefficiencies in the fixed-income markets.
B-18
<PAGE>
The Index currently includes U.S. Government Securities and fixed-rate,
publicly issued, U.S. dollar-denominated fixed-income securities rated at least
BBB or Baa by an NRSRO. The securities currently included in the Index have at
least one year remaining to maturity; have an outstanding principal amount of at
least $100 million; and are issued by the following types of issuers, with each
category receiving a different weighting in the Index: U.S. Treasury; agencies,
authorities or instrumentalities of the U.S. government; issuers of Mortgage-
Backed Securities; utilities; industrial issuers; financial institutions;
foreign issuers; and issuers of Asset-Backed Securities. The Index is a
trademark of Lehman Brothers. Inclusion of a security in the Index does not
imply an opinion by Lehman Brothers as to its attractiveness or appropriateness
for investment. Although Lehman Brothers obtains factual information used in
connection with the Index from sources which it considers reliable, Lehman
Brothers claims no responsibility for the accuracy, completeness or timeliness
of such information and has no liability to any person for any loss arising from
results obtained from the use of the Index data.
Credit Quality. All U.S. dollar-denominated fixed-income securities purchased
--------------
by the Fund will be rated, at the time of investment, at least BBB or Baa by an
NRSRO. The non-U.S. dollar-denominated fixed-income securities in which the
Fund may invest will be rated, at the time of investment, at least AA or Aa by
an NRSRO or, if unrated, will be determined by the Fund's investment adviser to
be of comparable quality. Fixed-income securities rated BBB or Baa are
considered medium-grade obligations with speculative characteristics and adverse
economic conditions or changing circumstances may weaken their issuers'
capability to pay interest and repay principal.
Other. This 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, credit 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
invest in custodial receipts, Municipal Securities and convertible securities.
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.
DESCRIPTION OF INVESTMENT SECURITIES AND PRACTICES
This section describes in further detail certain investment securities and
practices that are applicable to the CORE Funds, Short Duration Government Fund
and other Underlying Funds. As stated in the Asset Allocation Portfolios'
Prospectus, the Asset Allocation Portfolios may also invest a portion of their
assets in high quality, short-term debt obligations and engage in certain
B-19
<PAGE>
other investment practices. The following description also applies to those
securities and practices of the Asset Allocation Portfolios, as applicable.
CORPORATE DEBT OBLIGATIONS
- --------------------------
Each Underlying Fund (other than the Adjustable Rate Government and Short
Duration Government Funds) may, under normal market conditions, invest in
corporate debt obligations, including obligations of industrial, utility and
financial issuers. CORE Large Cap Value, CORE U.S. Equity, CORE Large Cap
Growth, CORE Small Cap Equity and CORE International 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.
Fixed-income securities rated BBB or Baa are considered medium-grade
obligations with speculative characteristics, and adverse economic conditions or
changing circumstances may weaken their issuers' capacity to pay interest and
repay principal. 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 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 investment advisers of
the Underlying Funds 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.
Trust Preferreds. The Government Income, Core Fixed Income, Global Income and
----------------
High Yield Funds may invest in trust preferred securities. A trust preferred or
capital security is a long dated bond (for example 30 years) with preferred
features. The preferred features are that payment of interest can be deferred
for a specified period without initiating a default event. From a bondholder's
viewpoint, the securities are senior in claim to standard preferred but are
junior to other bondholders. From the issuer's viewpoint, the securities are
attractive because their interest is deductible for tax purposes like other
types of debt instruments.
High Yield Securities. Bonds rated BB or below by Standard & Poor's Ratings
---------------------
Group (Standard & Poor's) or Ba or below by Moody's Investors 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
B-20
<PAGE>
creditworthiness of issuers of high yield securities may be more complex than
for issuers of higher quality debt securities, and the ability of an Underlying
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 a Fund were investing in higher quality securities.
See Appendix A to this Additional Statement for a description of the corporate
bond and preferred stock ratings by Standard & Poor's, Moody's, Fitch IBCA, Inc.
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 tends 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 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 Underlying Funds
may 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 an Underlying 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 an Underlying Fund in already
defaulted securities poses an additional risk of loss should nonpayment of
principal and interest
B-21
<PAGE>
continue in respect of such securities. Even if such securities are held to
maturity, recovery by an Underlying Fund of its initial investment and any
anticipated income or appreciation is uncertain. An Underlying Fund may be
required to liquidate other portfolio securities to satisfy the Underlying
Fund's annual distribution obligations in respect of accrued interest income on
securities which are subsequently written off, even though the Underlying 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 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 an
Underlying 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 an
Underlying Fund's net asset value. A less liquid secondary market also may make
it more difficult for an Underlying 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, an Underlying Fund may have to replace such
security with a lower-yielding security, resulting in a decreased return for
investors. In addition, if an Underlying Fund experiences unexpected net
redemptions of its shares, it may be forced to sell its higher-rated securities,
resulting in a decline in the overall credit quality of the Underlying Fund's
portfolio and increasing the exposure of the Underlying Fund to the risks of
high yield securities. An Underlying 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 credit
analysis of an Underlying Fund's investment adviser than
B-22
<PAGE>
would be the case with investments in investment-grade debt obligations. An
Underlying Fund's 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 monitors the investments in an Underlying 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.
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-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 Underlying 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.
OBLIGATIONS OF THE UNITED STATES, ITS AGENCIES, INSTRUMENTALITIES AND SPONSORED
- -------------------------------------------------------------------------------
ENTERPRISES
- -----------
The CORE Large Cap Value, CORE International Equity, Short Duration Government
and each other Underlying 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,
B-23
<PAGE>
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.
The CORE Large Cap Value, CORE International Equity, Short Duration Government
and each Underlying Fund may also purchase U.S. Government Securities in private
placements, subject to the such Fund's limitation on investment in illiquid
securities.
The CORE Large Cap Value, CORE International Equity, Short Duration Government
and each other Underlying Fund 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").
BANK OBLIGATIONS
- ----------------
Certain of the Underlying Funds may invest in debt 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
B-24
<PAGE>
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
- -------------------------------------------------------------
Certain of the Underlying Funds (including the Short Duration Government Fund)
expect to 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 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
Underlying Fund.
ZERO COUPON BONDS
- -----------------
The investments of the CORE Large Cap Value, CORE International Equity, Short
Duration Government and other Underlying Funds 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
B-25
<PAGE>
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.
VARIABLE AND FLOATING RATE SECURITIES
- -------------------------------------
The interest rates payable on certain fixed-income securities in which the
CORE Large Cap Value, CORE International Equity, Short Duration Government and
other Underlying Funds 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 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.
Permissible investments for the Short Duration Government and certain of the
Underlying Funds include "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 of the CORE Large Cap Value, CORE International Equity, Short Duration
Government and other Underlying Funds may invest up to 5% of its net assets 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.
B-26
<PAGE>
MUNICIPAL SECURITIES
- --------------------
Certain of the Underlying Funds may invest in 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 ("Municipal Securities").
Municipal Securities are often issued to obtain funds for various public
purposes including refunding outstanding obligations, obtaining funds for
general operating expenses, and obtaining funds to lend to other public
institutions and facilities. Municipal Securities also include certain
"private activity bonds" or industrial development bonds, which are issued by or
on behalf of public authorities to provide financing aid to acquire sites or
construct or equip facilities within a municipality for privately or publicly
owned corporations.
The two principal classifications of Municipal Securities are "general
obligations" and "revenue obligations." General obligations are secured by the
issuer's pledge of its full faith and credit for the payment of principal and
interest, although the characteristics and enforcement of general obligations
may vary according to the law applicable to the particular issuer. Revenue
obligations, which include, but are not limited to, private activity bonds,
resource recovery bonds, certificates of participation and certain municipal
notes, are not backed by the credit and taxing authority of the issuer, and are
payable solely from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise or other
specific revenue source. Nevertheless, the obligations of the issuer of a
revenue obligation may be backed by a letter of credit, guarantee or insurance.
General obligations and revenue obligations may be issued in a variety of forms,
including commercial paper, fixed, variable and floating rate securities, tender
option bonds, auction rate bonds and zero coupon bonds, deferred interest bonds
and capital appreciation bonds.
In addition to general obligations and revenue obligations, there is a variety
of hybrid and special types of Municipal Securities. There are also numerous
differences in the security of Municipal Securities both within and between
these two principal classifications.
An entire issue of Municipal Securities may be purchased by one or a small
number of institutional investors such as the High Yield and Core Fixed Income
Funds. Thus, the issue may not be said to be publicly offered. Unlike some
securities that are not publicly offered, a secondary market exists for many
Municipal Securities that were not publicly offered initially and such
securities may be readily marketable.
The obligations of the issuer to pay the principal of and interest on a
Municipal Security are subject to the provisions of bankruptcy, insolvency and
other laws affecting the rights and remedies of creditors, such as the Federal
Bankruptcy Act, and laws, if any, that may be enacted by Congress or state
legislatures extending the time for payment of principal or interest or imposing
other constraints upon the enforcement of such obligations. There is also the
possibility that, as a result of litigation or other conditions, the power or
ability of the issuer to pay when due principal of or interest on a Municipal
Security may be materially affected.
B-27
<PAGE>
Municipal Leases, Certificates of Participation and Other Participation
-----------------------------------------------------------------------
Interests. Municipal Securities include leases, certificates of participation
- ---------
and other participation interests. A municipal lease is an obligation in the
form of a lease or installment purchase which is issued by a state or local
government to acquire equipment and facilities. Income from such obligations is
generally exempt from state and local taxes in the state of issuance. Municipal
leases frequently involve special risks not normally associated with general
obligations or revenue bonds. Leases and installment purchase or conditional
sale contracts (which normally provide for title to the leased asset to pass
eventually to the governmental issuer) have evolved as a means for governmental
issuers to acquire property and equipment without meeting the constitutional and
statutory requirements for the issuance of debt. The debt issuance limitations
are deemed to be inapplicable because of the inclusion in many leases or
contracts of "non-appropriation" clauses that relieve the governmental issuer of
any obligation to make future payments under the lease or contract unless money
is appropriated for such purpose by the appropriate legislative body on a yearly
or other periodic basis. In addition, such leases or contracts may be subject
to the temporary abatement of payments in the event the issuer is prevented from
maintaining occupancy of the leased premises or utilizing the leased equipment.
Although the obligations may be secured by the leased equipment or facilities,
the disposition of the property in the event of non-appropriation or foreclosure
might prove difficult, time consuming and costly, and result in a delay in
recovering or the failure to fully recover an Underlying Fund's original
investment.
Certificates of participation represent undivided interests in municipal
leases, installment purchase agreements or other instruments. The certificates
are typically issued by a trust or other entity which has received an assignment
of the payments to be made by the state or political subdivision under such
leases or installment purchase agreements.
Certain municipal lease obligations and certificates of participation may be
deemed to be illiquid for the purpose of an Underlying Fund's limitation on
investments in illiquid securities. Other municipal lease obligations and
certificates of participation acquired by an Underlying Fund may be determined
by its investment adviser, pursuant to guidelines adopted by the Trustees of the
Trust, to be liquid securities for the purpose of such limitation. In
determining the liquidity of municipal lease obligations and certificates of
participation, the investment adviser will consider a variety of factors
including: (1) the willingness of dealers to bid for the security; (2) the
number of dealers willing to purchase or sell the obligation and the number of
other potential buyers; (3) the frequency of trades or quotes for the
obligation; and (4) the nature of the marketplace trades. In addition, the
investment adviser will consider factors unique to particular lease obligations
and certificates of participation affecting the marketability thereof. These
include the general creditworthiness of the issuer, the importance to the issuer
of the property covered by the lease and the likelihood that the marketability
of the obligation will be maintained throughout the time the obligation is held
by an Underlying Fund.
The Underlying Funds may purchase participations in Municipal Securities held
by a commercial bank or other financial institution. Such participations
provide an Underlying Fund with the right to a pro rata undivided interest in
the underlying Municipal Securities. In addition,
B-28
<PAGE>
such participations generally provide an Underlying Fund with the right to
demand payment, on not more than seven days' notice, of all or any part of such
Fund's participation interest in the underlying Municipal Security, plus accrued
interest. An Underlying Fund will only invest in such participations if, in the
opinion of bond counsel, counsel for the issuers and such participations or
counsel selected by the investment advisors, the interest from such
participation is exempt from regular federal income tax.
Auction Rate Securities. Municipal Securities also include auction rate
-----------------------
Municipal Securities and auction rate preferred securities issued by closed-end
investment companies that invest primarily in Municipal Securities
(collectively, "auction rate securities"). Provided that the auction mechanism
is successful, auction rate securities usually permit the holder to sell the
securities in an auction at par value at specified intervals. The dividend is
reset by "Dutch" auction in which bids are made by broker-dealers and other
institutions for a certain amount of securities at a specified minimum yield.
The dividend rate set by the auction is the lowest interest or dividend rate
that covers all securities offered for sale. While this process is designed to
permit auction rate securities to be traded at par value, there is some risk
that an auction will fail due to insufficient demand for the securities.
An Underlying Fund's investments in auction rate securities of closed-end
funds are subject to the limitations prescribed by the Act. An Underlying Fund
will indirectly bear its proportionate share of any management and other fees
paid by such closed-end funds in addition to the advisory fees payable directly
by the Underlying Funds.
Other Types of Municipal Securities. Other types of Municipal Securities in
-----------------------------------
which certain of the Underlying Funds may invest include municipal notes, tax-
exempt commercial paper, pre-refunded municipal bonds, industrial development
bonds and insured municipal obligations.
Call Risk and Reinvestment Risk. Municipal Securities may include "call"
-------------------------------
provisions which permit the issuers of such securities, at any time or after a
specified period, to redeem the securities prior to their stated maturity. In
the event that Municipal Securities held in an Underlying Fund's portfolio are
called prior to the maturity, the Underlying Fund will be required to reinvest
the proceeds on such securities at an earlier date and may be able to do so only
at lower yields, thereby reducing the Underlying Fund's return on its portfolio
securities.
MORTGAGE LOANS AND MORTGAGE-BACKED SECURITIES
- ---------------------------------------------
General Characteristics. The Short Duration Government Fund and certain of
-----------------------
the other Underlying Funds may invest in Mortgage-Backed Securities as described
in the Prospectuses. 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,
B-29
<PAGE>
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. 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, its
investment adviser 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
B-30
<PAGE>
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 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 a Fund's portfolio and therefore in the net asset value of a
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 Short
Duration Government Fund and certain of the Underlying 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 a Fund's
investments in Mortgage-Backed Securities (including those issued or guaranteed
by the U.S. government, its agencies or instrumentalities) by delaying a Fund's
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 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
B-31
<PAGE>
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.
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. An Underlying 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.
B-32
<PAGE>
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 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.
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
B-33
<PAGE>
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, 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 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. As described in the Prospectuses, the Short
--------------------------------
Duration Government Fund and certain of the Underlying 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
B-34
<PAGE>
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 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
distributions with respect to the underlying mortgage loans may be
B-35
<PAGE>
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 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.
B-36
<PAGE>
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. An Underlying 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 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 Underlying 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.
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<PAGE>
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.
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 Short Duration Government Fund and
-----------------------------------
certain of the other Underlying 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
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<PAGE>
be considered illiquid for purposes of a 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 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.
Certain Underlying Funds may invest in asset-backed securities. 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, an Underlying 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 an
Underlying 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 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
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<PAGE>
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
- --------------------------------------------------
The CORE Large Cap Value Fund, CORE International Equity Fund, Short Duration
Government Fund and each other Underlying Fund (other than Financial Square
Prime Obligations Fund) may purchase and sell futures contracts and may also
purchase and write options on futures contracts. CORE Large Cap Value, CORE
U.S. Equity and CORE Large Cap Growth 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 Value and CORE Large
Cap Growth 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"). 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. Neither the CFTC, National Futures Association nor any domestic
exchange regulates activities of any foreign exchange or boards of trade,
including the execution, delivery and clearing of transactions, or has the power
to compel enforcement of the rules of a foreign exchange or board of trade or
any applicable foreign law. This is true even if the exchange is formally
linked to a domestic market so that a position taken on the market may be
liquidated by a transaction on another market. Moreover, such laws or
regulations will vary depending on the foreign country in which the foreign
futures or foreign options transaction occurs. For these reasons, persons who
trade foreign futures or foreign options contracts may not be afforded certain
of the protective measures provided by the Commodity Exchange Act, the CFTC's
regulations and the rules of the National Futures Association and any domestic
exchange, including the right to use reparations proceedings before the CFTC and
arbitration proceedings provided by the National Futures Association or any
domestic futures exchange. In particular, a Fund's investments in foreign
futures or foreign options transactions may not be provided the same protections
in respect of transactions on United States futures 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, an Underlying
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, an Underlying 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, an Underlying Fund may
sell futures contracts on a specified currency to protect against a decline in
the value of such currency and its
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<PAGE>
portfolio securities which are quoted or denominated in such currency, or
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. The Underlying Fixed-Income Funds may also use
futures contracts to manage their term structure and duration in accordance with
their investment objectives and policies.
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 an Underlying 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
an Underlying Fund owns or proposes to acquire. An Underlying 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 Large Cap Value, 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, CORE International Equity and certain Underlying 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 an Underlying Fund's investment adviser,
there is a sufficient degree of correlation between price trends for an
Underlying Fund's portfolio securities and futures contracts based on other
financial instruments, securities indices or other indices, the Fund may also
enter into such futures contracts as part of its hedging strategy. Although
under some circumstances prices of securities in an Underlying Fund's portfolio
may be more or less volatile than prices of such futures contracts, its
investment adviser will attempt to estimate the extent of this volatility
difference based on historical patterns and compensate for any such differential
by having the Fund enter into a greater or lesser number of futures contracts or
by attempting to achieve only a partial hedge against price changes affecting
the Fund's portfolio securities. 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 an Underlying Fund's portfolio
securities would be substantially offset by a decline in the value of the
futures position.
On other occasions, an Underlying Fund may take a "long" position by
purchasing futures contracts. This may be done, for example, when an Underlying
Fund anticipates the subsequent purchase of 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.
B-41
<PAGE>
Options on Futures Contracts. The acquisition of put and call options on
----------------------------
futures contracts will give an Underlying 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, an Underlying 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 an Underlying Fund's assets. By
writing a call option, an Underlying 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
an Underlying Fund intends to purchase. However, an Underlying 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 an Underlying Fund in writing options on futures is
potentially unlimited and may exceed the amount of the premium received. An
Underlying 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. An Underlying 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. An Underlying 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. An Underlying 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 securities or instruments which it expects to
purchase. Except as stated below, an Underlying Fund's futures transactions
will be entered into for traditional hedging purposes for example, 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
denominated) it intends to purchase.
In addition to bona fide hedging, a CFTC regulation permits an Underlying Fund
to engage in other futures transactions if the aggregate initial margin and
premiums required to establish such positions in futures contracts and options
on futures do 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. Transactions in futures contracts and related options may also be
limited by
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<PAGE>
certain requirements that must be met in order for an Underlying Fund to qualify
as a regulated investment company for federal income tax purposes.
Transactions in futures contracts and options on futures involve brokerage
costs, require margin deposits and, in certain cases, require an Underlying 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 an Underlying 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 an Underlying Fund may be exposed to risk of loss.
Perfect correlation between an Underlying Fund's futures positions and
portfolio positions will be difficult to achieve because no futures contracts
based on individual equity or corporate fixed-income securities are currently
available. 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. The CORE International Equity, Short Duration
-----------------------
Government and certain of the other Underlying Funds may write (sell) covered
call and put options on any securities in which they may invest. An Underlying
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 an Underlying 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 an Underlying 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.
An Underlying Fund's purpose in writing covered call options is to realize
greater income than would be realized on portfolio securities transactions
alone. However, an Underlying Fund may forego the opportunity to profit from an
increase in the market price of the underlying security.
A put option written by an Underlying 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 an Underlying 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 Underlying Fund. However, in
return for
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<PAGE>
the option premium, an Underlying 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 an Underlying 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.
In addition, a written call option or put option may be covered by maintaining
cash or liquid assets (either of which may be quoted or denominated in any
currency), by entering into an offsetting forward contract and/or by purchasing
an offsetting option which, by virtue of its exercise price or otherwise,
reduces an Underlying Fund's net exposure on its written option position.
An Underlying 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.
An Underlying 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 which has been segregated by the Fund) upon conversion or exchange
of other securities in its portfolio. An Underlying 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.
An Underlying 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. The CORE International Equity, Short Duration Government
------------------
and certain other Underlying 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.
An Underlying 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 an Underlying Fund, in return for
the premium paid, to purchase specified securities at a specified price during
the option period. An Underlying 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 Fund
would realize either no gain or a loss on the purchase of the call option.
B-44
<PAGE>
An Underlying 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 an Underlying 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 an Underlying Fund's securities. Put options may also be purchased by
an Underlying Fund for the purpose of affirmatively benefiting from a decline in
the price of securities which it does not own. An Underlying 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.
An Underlying 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. The Short Duration Government Fund and each other
-------------------
Underlying Fixed-Income Fund 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.
An Underlying Fund may purchase or write yield curve options for the same
purposes as other options on securities. For example, an Underlying Fund may
purchase a call option on the yield spread between two securities if the 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. An Underlying Fund may also purchase or write yield curve options
in an effort to increase current income if, in the judgment of its investment
adviser, the Fund will be able to profit from movements in the spread between
the yields of the 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 an Underlying Fund will be "covered." A call
(or put) option is covered if an Underlying Fund holds another call (or put)
option on the spread between the same two securities and segregates cash or
liquid assets sufficient to cover the Fund's net liability under the two
options. Therefore, an Underlying Fund's liability for such a covered option is
generally limited to the difference between the amount of the Fund's liability
under the
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<PAGE>
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 an
Underlying 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 segregated assets until the options expire
or are exercised. Similarly, if an Underlying 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 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.
An Underlying 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.
Transactions by an Underlying 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 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. Thus, the number of options which an Underlying
Fund may write or purchase may be affected by options written or purchased by
other investment advisory clients of the Underlying Funds' investment 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
B-46
<PAGE>
transactions. The successful use of protective puts for hedging purposes depends
in part on the ability of an Underlying Fund's investment adviser to predict
future price fluctuations and the degree of correlation between the options and
securities markets.
WARRANTS AND STOCK PURCHASE RIGHTS
- ----------------------------------
The CORE Funds and certain of the other Underlying Funds may invest a portion
of their assets in warrants or rights (including 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. An Underlying Fund will
invest in warrants and rights only if such securities are deemed appropriate by
its investment adviser for investment by the Fund. The CORE 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 INVESTMENTS
- -------------------
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 a Fund's investment adviser, to
offer better opportunity for long-term growth of capital and income than
investments in U.S. securities, the opportunity to invest in 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 securities 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 Underlying 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. An Underlying Fund may be subject to currency
exposure independent of its 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. To the extent that a
substantial portion of an Underlying 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 susceptible to the risk of adverse economic and political developments
within those countries. An Underlying Fund's net currency positions may expose
it to risks independent of its securities positions. In addition, if the
currency in which an Underlying Fund receives dividends, interest
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or other payment 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.
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.
Foreign markets also have different clearance and settlement procedures, and
in certain markets there have been times when 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 an Underlying Fund's assets are uninvested and no return is
earned on such assets. The inability of an Underlying 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 an
Underlying 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 an Underlying 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.
Investments in foreign securities may take the form of sponsored and
unsponsored American Depository Receipts ("ADRs"), Global Depository Receipts
("GDRs"), 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 an Underlying Fund acquires Depository Receipts through banks
which do not have a contractual relationship with the foreign issuer of the
security underlying the
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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.
The CORE International Equity and certain of the other Underlying Funds may
invest in countries with emerging 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.
The CORE International Equity and certain of the other Underlying 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 Underlying 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 Underlying Funds
may invest in securities quoted or denominated in other currency "baskets."
Investing in Emerging Markets including Asia and Eastern Europe. CORE
---------------------------------------------------------------
International Equity, International Equity, European Equity, International Small
Cap, Asia Growth and Emerging Markets Equity Funds are 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 Country
issuers, as well as the risks associated with investments quoted or denominated
in foreign currencies. Growth and Income, Small Cap Value, 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 Core Fixed Income, Global Income and High Yield Bond Funds may invest in
debt securities of foreign issuers, including issuers in Emerging Countries. In
addition, certain of the potential investment and management techniques of these
Underlying Funds entail special risks.
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. 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.
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<PAGE>
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 limited liquidity of
Emerging Country securities may also affect a Fund's ability to accurately value
its portfolio securities or to acquire or dispose of such securities at the
price and times it wishes to do so. 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 repatriation of both investment income and capital from several of
the Emerging Countries (such as Malaysia) is subject to restrictions which
require government consents or prohibit repatriation entirely for a period of
time. Even where there is no outright restriction on repatriation of capital,
the mechanics of repatriation may affect certain aspects of the operation of an
Underlying Fund. An Underlying 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;
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(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 Underlying 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.
An Underlying 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.
Foreign markets may also have different clearance and settlement procedures
and in certain U.S. markets, there have been times when settlements have been
unable to keep pace with the volume of securities transactions making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when a portion of an Underlying Fund's assets is uninvested
and no return is earned thereon. The inability of an Underlying Fund to make
intended security purchases or sales 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 of the Fund to the purchaser.
Investing in Japan. The Japanese Equity Fund invests in the equity securities
------------------
of Japanese companies. Japan's economy, the second-largest in the world, has
grown substantially over the last three decades. The boom in Japan's equity and
property markets during the expansion of the late 1980's supported high rates of
investment and consumer spending on durable goods, but both of these components
of demand have now retreated sharply following the decline in asset prices.
Profits have fallen sharply, unemployment has reached a historical high and
consumer confidence is low. The banking sector continues to suffer from non-
performing loans and this economy is subject to deflationary pressures.
Numerous discount-rate cuts since its peak in 1991, a succession of fiscal
stimulus packages, support plans for the debt-burdened financial system and
spending for reconstruction following the Kobe earthquake may help to contain
the recessionary forces, but substantial uncertainties remain.
In addition to the cyclical downturn, Japan is suffering through structural
adjustments. Like the Europeans, the Japanese have seen a deterioration of their
competitiveness due to high wages, a strong currency and structural rigidities.
Finally, Japan is reforming its political process
B-51
<PAGE>
and deregulating its economy. This has brought about turmoil, uncertainty and a
crisis of confidence.
While the Japanese governmental system itself seems stable, the dynamics of
the country's politics have been unpredictable in recent years. The economic
crisis of 1990-92 brought the downfall of the conservative Liberal Democratic
Party, which had ruled since 1955. Since then, the country has seen a series of
unstable multi-party coalitions and several prime ministers come and go, because
of politics as well as personal scandals. While there appears to be no reason
for anticipating civic unrest, it is impossible to know when the political
instability will end and what trade and fiscal policies might be pursued by the
government that emerges.
Japan's heavy dependence on international trade has been adversely affected by
trade tariffs and other protectionist measures as well as the economic condition
of its trading partners. While Japan subsidizes its agricultural industry, only
19% of its land is suitable for cultivation and it is only 50% self-sufficient
in food production. Accordingly, it is highly dependent on large imports of
wheat, sorghum and soybeans. In addition, industry, its most important economic
sector, depends on imported raw materials and fuels, including iron ore, copper,
oil and many forest products. Japan's high volume of exports, such as
automobiles, machine tools and semiconductors, have caused trade tensions,
particularly with the United States. Some trade agreements, however, have been
implemented to reduce these tensions. The relaxing of official and de facto
barriers to imports, or hardships created by any pressures brought by trading
partners, could adversely affect Japan's economy. A substantial rise in world
oil or commodity prices could also have a negative affect. The strength of the
yen itself may prove an impediment to strong continued exports and economic
recovery, because it makes Japanese goods sold in other countries more expensive
and reduces the value of foreign earnings repatriated to Japan. Because the
Japanese economy is so dependent on exports, any fall-off in exports may be seen
as a sign of economic weakness, which may adversely affect the market.
Geologically, Japan is located in a volatile area of the world, and has
historically been vulnerable to earthquakes, volcanoes and other natural
disasters. As demonstrated by the Kobe earthquake in January of 1995, in which
5,000 people were killed and billions of dollars of damage was sustained, these
natural disasters can be significant enough to affect the country's economy.
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
an Underlying Fund may have limited recourse in the event of a default. During
periods of economic uncertainty, the market prices of sovereign debt, and an
Underlying 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.
B-52
<PAGE>
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. Certain of the Underlying Funds
may enter into forward foreign currency exchange contracts for hedging purposes.
CORE International Equity, International Equity, European Equity, Japanese
Equity, International Small Cap, Emerging Markets Equity, Asia Growth, Global
Income, Core Fixed Income and High Yield Funds may also enter into forward
foreign currency exchange contracts 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 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 an Underlying 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
often, but not always, effected with the currency trader who is a party to the
original forward contract.
An Underlying Fund may enter into forward foreign currency exchange contracts
in several circumstances. First, when an Underlying Fund enters into a contract
for the purchase or sale of a security denominated or quoted in a foreign
currency, or when the 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 Underlying 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 an Underlying Fund's investment 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 the Fund's portfolio securities quoted or
B-53
<PAGE>
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 an Underlying 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 an Underlying 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 an Underlying Fund's foreign assets.
The CORE International Equity, International Equity, European Equity, Japanese
Equity, International Small Cap, Emerging Markets Equity, Asia Growth, Core
Fixed Income, 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 a Fund's
investment adviser determines that there is a pattern of correlation between the
two currencies. These Underlying Funds may also purchase and sell forward
contracts to seek to increase total return when a Fund's investment 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.
Unless otherwise covered by applicable regulations, cash or liquid assets of
an Underlying Fund will be segregated in an amount equal to the value of the
Fund's total assets committed to the consummation of forward foreign currency
exchange contracts. If the value of the segregated assets 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 assets 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,
an Underlying Fund's ability to utilize forward foreign currency exchange
contracts may be restricted. The Core Fixed Income, Global Income and High
Yield Funds will not enter into a forward contract with a term of greater than
one year.
While an Underlying Fund will enter into forward contracts to reduce currency
exchange rate risks, transactions in such contracts involve certain other risks.
Thus, while an Underlying 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 an Underlying 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 an Underlying
Fund to sustain losses which will prevent the Fund from achieving a complete
hedge or expose the Fund to risk of foreign exchange loss.
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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 an
Underlying Fund of unrealized profits or force the Fund to cover its commitments
for purchase or resale, if any, at the current market price.
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 an Underlying 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. An
Underlying 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 its investment adviser.
WRITING AND PURCHASING CURRENCY CALL AND PUT OPTIONS. The CORE International
Equity Fund and certain of the other Underlying 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 an Underlying 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
an Underlying 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 an Underlying Fund will be traded on U.S. and foreign
exchanges or over-the-counter.
CORE International Equity, International Equity, European Equity, Japanese
Equity, International Small Cap, Emerging Markets Equity, Asia Growth, Core
Fixed Income, 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, CORE International Equity and certain other
Underlying Funds may purchase call or put options on currency to seek to
increase total return when a Fund's 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 included in the Fund's portfolio.
A call option written by an Underlying Fund obligates such 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 an
Underlying Fund would obligate such 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 the
Underlying Fund will, upon exercise of the option, be required to sell currency
subject to a call at
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<PAGE>
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.
An Underlying 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." An Underlying Fund would also
be able to enter into closing sale transactions in order to realize gains or
minimize losses on options purchased by the Underlying Fund.
An Underlying 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 the Fund are quoted or denominated. The purchase
of a call option would entitle the Underlying Fund, in return for the premium
paid, to purchase specified currency at a specified price during the option
period. An Underlying 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 Underlying Fund
would realize either no gain or a loss on the purchase of the call option.
An Underlying 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 an Underlying 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 an Underlying Fund's portfolio securities due to
currency exchange rate fluctuations. An Underlying 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, certain
Underlying Funds may use options on currency to seek to increase total return.
These Underlying 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, an Underlying Fund may forego the opportunity to profit from
an increase in the market value of the underlying currency. Also, when writing
put options, an Underlying Fund accepts, in return for the option premium, the
risk that it may be required to purchase the underlying currency at a price in
excess of the currency's market value at the time of purchase.
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
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<PAGE>
not be possible to effect closing transactions in particular options, with the
result that an Underlying 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 an Underlying 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.
An Underlying 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 risk that the other party
will be unable or unwilling to close out options purchased or written by an
Underlying Fund.
The amount of the premiums which an Underlying 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 Short Duration Government Fund and certain other Underlying Fixed-Income
Funds may enter into mortgage "dollar rolls" in which an Underlying 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, an Underlying Fund loses the right to receive principal and interest
paid on the securities sold. However, an Underlying 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 an Underlying 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
Underlying Fund. An Underlying 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 Underlying Funds treat mortgage
dollar rolls as two separate transactions; one involving the purchase of a
security and a separate transaction
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involving a sale. The Underlying Funds do 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 an Underlying Fund sells the security becomes insolvent,
an Underlying Fund's right to purchase or repurchase the mortgage-related
securities subject to the mortgage dollar roll may be restricted and the
instrument which an Underlying Fund is required to repurchase may be worth less
than an instrument which the Fund originally held. Successful use of mortgage
dollar rolls will depend upon the ability of an Underlying Fund's investment
adviser to manage the Fund's interest rate and mortgage prepayments exposure.
For these reasons, there is no assurance that mortgage dollar rolls can be
successfully employed.
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.
Convertible securities rank senior to common stocks in an issuer's capital
structure and consequently entail less risk than the issuer's common stock.
CURRENCY SWAPS, MORTGAGE SWAPS, CREDIT SWAPS, INDEX SWAPS AND INTEREST RATE
- ---------------------------------------------------------------------------
SWAPS, CAPS, FLOORS AND COLLARS
- -------------------------------
The CORE International Equity, International Equity, Emerging Markets Equity,
European Equity, Japanese Equity, Asia Growth, International Small Cap, Core
Fixed Income, 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 Short Duration Government Fund and certain other Underlying Funds may enter
into mortgage, credit, index 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 an
Underlying Fund with another party of their respective rights to make or receive
payments in specified currencies. Interest rate swaps involve the exchange by
an Underlying 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 an Underlying 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
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<PAGE>
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. Credit swaps
involve the receipt of floating or fixed rate payments in exchange for assuming
potential credit losses of an underlying security. Credit swaps give one party
to a transactions the right to dispose of or acquire an asset (or group of
assets), or the right to receive or make a payment from the other party, upon
the occurrence of specified credit events. 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,
mortgage and currency swaps and interest rate caps, floors and collars are
individually negotiated, each Underlying Fund expects to achieve an acceptable
degree of correlation between its portfolio investments and its swap, cap, floor
and collar positions.
An Underlying 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 Underlying Fund is contractually
obligated to make. If the other party to an interest rate, index or mortgage
swap defaults, the Underlying 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 the entire principal
amount of one designated currency in exchange for the other designated currency.
Therefore, the entire principal value of 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 an
Underlying 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
Underlying Funds and their investment 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 CORE International Equity Fund and the other Underlying Equity Funds 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 its investment adviser. The Short Duration Government Fund
and the other Underlying Fixed-Income Funds will not enter into any interest
rate, mortgage or credit 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,
if unrated by such rating agencies, determined to be of comparable quality by
the applicable investment adviser. The Core Fixed Income, Global Income and
High Yield Funds will not enter into any currency swap transactions unless the
unsecured commercial paper senior debt or claims-paying ability of the other
party thereto is rated investment grade by Standard & Poor's or Moody's or their
equivalent ratings or, if unrated by such rating agencies, determined to be of
comparable quality by the applicable investment adviser. If there is a default
by the other party to such a transaction, an
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<PAGE>
Underlying 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 Underlying
Funds' transactions in swaps, caps, floors and collars.
The use of interest rate, mortgage, credit, 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 Underlying Fund's
investment adviser is incorrect in its forecasts of market values, interest
rates and currency exchange rates, the investment performance of the Fund would
be less favorable than it would have been if this investment technique were not
used.
EQUITY SWAPS
- ------------
The CORE Large Cap Value Fund, CORE International Equity Fund and each of the
other Underlying Equity Funds may enter into equity swap contracts to invest in
a market without owning or taking physical custody of securities in
circumstances in which direct investment is restricted for legal reasons or is
otherwise impracticable. The counterparty to an equity swap contract will
typically be a bank, investment banking firm or broker/dealer. The counterparty
will generally agree to pay the Underlying Fund the amount, if any, by which the
notional amount of the equity swap contract would have increased in value had it
been invested in the particular stocks, plus the dividends that would have been
received on those stocks. The Underlying Fund will agree to pay to the
counterparty a floating rate of interest on the notional amount of the equity
swap contract plus the amount, if any, by which that notional amount would have
decreased in value had it been invested in such stocks. Therefore, the return
to the Underlying Fund on any equity swap contract should be the gain or loss on
the notional amount plus dividends on the stocks less the interest paid by the
Underlying Fund on the notional amount.
An Underlying Fund will enter into equity 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. Payments
may be made at the conclusion of an equity swap contract or periodically during
its term. Equity swaps do not involve the delivery of securities or other
underlying assets. Accordingly, the risk of loss with respect to equity swaps
is limited to the net amount of payments that an Underlying Fund is
contractually obligated to make. If the other party to an equity swap defaults,
an Underlying Fund's risk of loss consists of the net amount of payments that
such Fund is contractually entitled to receive, if any. The net amount of the
excess, if any, of an Underlying Fund's obligations over its entitlements with
respect to each equity swap will be accrued on a daily basis and an amount of
cash or liquid assets, having an aggregate net asset value at least equal to
such accrued excess will be maintained in a segregated account by the Fund's
custodian. Inasmuch as these transactions are
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<PAGE>
entered into for hedging purposes or are offset by segregated cash or liquid
assets, as permitted by applicable law, the Underlying Funds and their
investment 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 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 over-the-counter market. The investment
advisers, under the supervision of the Board of Trustees, are responsible for
determining and monitoring the liquidity of the Underlying Funds' transactions
in swaps, caps, floors and collars.
The Underlying 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 A or better by a nationally recognized statistical rating
organization. If there is a default by the other party to such a transaction,
an Underlying Fund will have contractual remedies pursuant to the agreements
related to the transaction.
The use of equity swaps is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If its investment adviser is incorrect in
its forecasts of market values, the investment performance of an Underlying Fund
would be less favorable than it would have been if this investment technique
were not used.
REAL ESTATE INVESTMENT TRUSTS
- -----------------------------
The CORE Large Cap Value, CORE International Equity Fund and other Underlying
Equity 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 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. An Underlying
Fund will indirectly bear its proportionate share of any expenses paid by REITs
in which it invests in addition to the expenses paid by the 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-
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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 Act. REITs (especially mortgage REITs) are also subject to
interest rate risks.
LENDING OF PORTFOLIO SECURITIES
- -------------------------------
The CORE Large Cap Value Fund, CORE International Equity Fund, Short Duration
Government Fund and other Underlying Funds may lend portfolio securities. 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. An Underlying 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, an Underlying 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.
An Underlying Fund would not have the right to vote any securities having voting
rights during the existence of the loan, but the 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 an Underlying Fund's investment adviser to be of good standing, and
when, in the judgment of the investment adviser, the consideration which can be
earned currently from securities loans of this type justifies the attendant
risk. If an investment adviser determines 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 an Underlying Fund (including the loan
collateral).
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
- ----------------------------------------------
The CORE Large Cap Value Fund, CORE International Equity Fund, Short Duration
Government Fund and other Underlying Funds may purchase securities on a when-
issued basis or purchase or sell securities on a forward commitment basis.
These transactions involve a commitment by an Underlying 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 negotiated directly with the other party, and such commitments
are not traded on exchanges. An Underlying 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, an Underlying Fund may dispose of or negotiate a commitment after
entering into it. The Underlying Funds may also realize a capital gain or loss
in connection with these transactions. For purposes of determining an Underlying
Fund's duration, the maturity of when-issued or forward commitment securities
will be calculated from the commitment date. An Underlying Fund is required to
segregate until three days prior to the settlement date, cash and liquid assets
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<PAGE>
in an amount sufficient to meet the purchase price. Alternatively, an Underlying
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
- ----------------------------------
The CORE Large Cap Value Fund, CORE International Equity Fund, Short Duration
Government Fund and other Underlying Funds may invest a portion of their net
assets 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 of the Underlying Funds may make limited investments in the securities of
other investment companies including, pursuant to an exemptive order obtained
from the SEC, money market funds for which the Adviser or any of its affiliates
serve as investment adviser. An Underlying Fund will indirectly 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 an Underlying Fund invests in
a money market fund for which the Adviser or any of its affiliates acts as
adviser, the advisory and administration fees payable by the Fund to the
investment adviser or its affiliates 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 investment adviser or its affiliates.
The CORE Funds and each other Underlying 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, an Underlying Fund 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
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<PAGE>
market. Upon redemption of a Creation Unit, the Underlying Fund 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.
The CORE International Equity Fund and certain other Underlying 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 foreign country or region.
The CORE Funds and certain other Underlying Funds may also invest in World
Equity Benchmark Shares ("WEBs") and similar securities that invest in
securities included in foreign securities indices.
REPURCHASE AGREEMENTS
- ---------------------
The CORE Large Cap Value Fund, CORE International Equity Fund, Short Duration
Government Fund and each other Underlying Fund may enter into repurchase
agreements with selected broker-dealers, banks or other financial institutions.
A repurchase agreement is an arrangement under which an Underlying 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 an Underlying Fund's custodian. The repurchase price may be
higher than the purchase price, the difference being income to an Underlying
Fund, or the purchase and repurchase prices may be the same, with interest at a
stated rate due to the Fund together with the repurchase price on repurchase.
In either case, the income to an Underlying 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 an Underlying Fund to the seller of the security.
For other purposes, it is not always clear whether a court would consider the
security purchased by an Underlying Fund subject to a repurchase agreement as
being owned by an Underlying Fund or as being collateral for a loan by the 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, an Underlying 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 an Underlying Fund has not perfected
a security interest in the security, the 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, an Underlying Fund would be at risk of losing
some or all of the principal and interest involved in the transaction.
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<PAGE>
As with any unsecured debt instrument purchased for an Underlying Fund, the
Underlying Fund's investment adviser seeks 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), an Underlying 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 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, an Underlying Fund, together with other registered investment
companies having advisory agreements with the adviser or its 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.
REVERSE REPURCHASE AGREEMENTS
- -----------------------------
The Short Duration Government Fund and certain other Underlying Funds may
borrow money for temporary purposes by entering into transactions called reverse
repurchase agreements. Under these arrangements, an Underlying Fund will sell
portfolio securities to dealers in U.S. Government Securities or members of the
Federal Reserve System, with an agreement to repurchase the security on an
agreed date, price and interest payment. The Core Fixed Income, Global Income
and High Yield Funds may also enter into reverse repurchase agreements involving
certain foreign government securities. Reverse repurchase agreements involve the
possible risk that the value of portfolio securities an Underlying Fund
relinquishes may decline below the price the Fund must pay when the transaction
closes. Borrowings may magnify the potential for gain or loss on amounts
invested resulting in an increase in the speculative character of an Underlying
Fund's outstanding shares.
When an Underlying Fund enters into a reverse repurchase agreement, it places
in a separate custodial account either liquid assets or other high grade debt
securities that have a value equal to or greater than the repurchase price. The
account is then continuously monitored by its investment adviser to make sure
that an appropriate value is maintained. Reverse repurchase agreements are
considered to be borrowings under the Act.
RESTRICTED AND ILLIQUID SECURITIES
- ----------------------------------
The CORE Large Cap Value Fund, CORE International Equity Fund, Short Duration
Government and other Underlying Funds may not invest more than 15% (10% in the
case of Financial Square Prime Obligations Fund) of their net assets in illiquid
investments, which include securities (both foreign and domestic) that are not
readily marketable, repurchase agreements maturing in more than seven days,
certain SMBS, certain municipal leases and participation interests, certain
over-the-counter options, time deposits with a notice or demand
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<PAGE>
period of more than seven days, and certain restricted securities, unless it is
determined, based upon a continuing review of the trading markets for the
specific instrument, that such instrument is liquid. The Trustees have adopted
guidelines under which the Underlying Funds' investment advisers determine and
monitor the liquidity of the Funds' portfolio securities. This investment
practice could have the effect of increasing the level of illiquidity in an
Underlying Fund to the extent that qualified institutional buyers become for a
time uninterested in purchasing these instruments.
The purchase price and subsequent valuation of restricted securities may
reflect a discount from the price at which such securities trade when they are
not restricted, since the restriction may make 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.
INVESTMENT RESTRICTIONS
The following investment restrictions have been adopted by the Trust as
fundamental policies that cannot be changed with respect to the CORE Funds,
Short Duration Government Fund and Asset Allocation Portfolios 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 of these Funds 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
Prospectuses. 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, investment companies and state and municipal
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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 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.
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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
(but this does not prevent an Asset Allocation Portfolio from
purchasing a controlling interest in one or more of the Underlying
Funds consistent with its investment objective and policies);
(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.
The Underlying Funds in which the Asset Allocation Portfolios may invest
have adopted certain investment restrictions which may be more or less
restrictive than those listed above, thereby allowing an Asset Allocation
Portfolio to participate in certain investment strategies indirectly that are
prohibited under the fundamental and non-fundamental investment restrictions and
policies listed above. The investment restrictions of these Underlying Funds
are set forth in their respective Additional Statements.
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.
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<PAGE>
<TABLE>
<CAPTION>
NAME, AGE Positions Principal Occupation(s)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -----------------------
<S> <C> <C>
Ashok N. Bakhru, 56 Chairman Executive Vice President Finance and
1325 Ave. of the Americas & Trustee Administration and Chief Financial
New York, NY 10019 Officer, Coty Inc. (since April 1996);
President, ABN Associates (July 1994
-March 1996); Senior Vice President of
Scott Paper Company (until June 1994);
Director of Arkwright Mutual Insurance
Company (1994-Present); Trustee of
International House of Philadelphia
(1989-Present); Member of Cornell
University Council (1992-Present);
Trustee of the Walnut Street Theater
(1992-Present).
*David B. Ford, 52 Trustee Director, Commodities Corp. LLC (since
One New York Plaza April 1997); Managing Director, J. Aron
New York, NY 10004 & Company (since November 1996);
Managing Director,. Goldman, Sachs & Co.
Investment Banking Division (since
November 1996); Director, CIN Management
(since August 1996); Chief Executive
Officer & Managing Director and
Director, Goldman Sachs Asset Management
International (since November 1995 and
December 1994, respectively); Co-Head,
Goldman, Sachs & Co. Asset Management
Division (since November 1995); Co-Head
and Director, Goldman Sachs Funds
Management Inc. (since November 1995 and
December 1994, respectively); Chairman
and Director, Goldman Sachs Asset
Management Japan Limited (since November
1994).
</TABLE>
B-69
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE Positions Principal Occupation(s)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -----------------------
<S> <C> <C>
*Douglas C. Grip, 36 Trustee Managing Director, Goldman, Sachs & Co.
One New York Plaza & President Asset Management Division (since
New York, NY 10004 November 1997); President, Goldman Sachs
Fund Group(since April 1996); President,
MFS Retirement Services Inc., of
Massachusetts Financial Services (prior
thereto).
*John P. McNulty, 46 Trustee Managing Director, Goldman Sachs (since
One New York Plaza 1996); General Partner, J. Aron &
New York, NY 10004 Company (since November 1995); Director
and Co-Head, Goldman Sachs Funds
Management Inc. (since November 1995);
Director, Goldman Sachs Asset Management
International (since January 1996);
Director, Global Capital Reinsurance
(since 1989); Director, Commodities
Corp. LLC (since April 1997); Limited
Partner of Goldman, Sachs & Co.(1994 -
November 1995).
Mary P. McPherson, 63 Trustee Vice President and Senior Program
The Andrew W. Mellon Officer, The Andrew W. Mellon Foundation
Foundation (since October 1997); President Emeritus
140 East 62nd Street of Bryn Mawr College (1978-1997);
New York, NY 10021 Director of Josiah Macy, Jr. Foundation
(since 1977); Director of the
Philadelphia Contributionship (since
1985); Director of Amherst College
(since 1986); Director of Dayton Hudson
Corporation (1988-1997); Director of the
Spenser Foundation (since 1993); and
member of PNC Advisory Board (since
1993).
</TABLE>
B-70
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE Positions Principal Occupation(s)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -----------------------
<S> <C> <C>
*Alan A. Shuch, 49 Trustee Limited Partner, Goldman, Sachs &
One New York Plaza Co.(since 1994); Consultant to Goldman
New York, NY 10004 Sachs Asset Management (since 1994);
Director, Chief Operating Officer and
Vice President of Goldman Sachs Funds
Management, Inc. (from November 1993 -
November 1994); President and Chief
Operating Officer, GSAM - Japan Limited
(November 1993 - November 1994);
Director, Goldman Sachs Asset Management
International (November 1993 - November
1994); General Partner, Goldman, Sachs &
Co. Investment Banking (December 1986 -
November 1994).
Jackson W. Smart, Jr. 68 Trustee Chairman, Executive Committee, First
One Northfield Plaza Suite 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) (November
1988 - December 1997); Director, Federal
Express Corporation (NYSE) (since 1976);
Director, Evanston Hospital Corporation
(since 1980).
William H. Springer, 69 Trustee Director, Walgreen Co. (a retail drug
701 Morningside Drive store business) (since April 1998);
Lake Forest, IL 60045 Director of Baker, Fentress & Co. (a
closed-end, non-diversified management
investment company) (April 1992 -
present); Trustee, Northern
Institutional Funds (since April 1984).
</TABLE>
B-71
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE Positions Principal Occupation(s)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -----------------------
<S> <C> <C>
Richard P. Strubel, 59 Trustee Managing Director, Tandem Partners, Inc.
737 N. Michigan Ave., Suite 1405 (since 1990); Director of Kaynar
Chicago, IL 60611 Technologies Inc. (since March 1997);
President and Chief Executive Officer,
Microdot, Inc. (a diversified
manufacturer of fastening systems and
connectors) (January 1984 - October
1994); Trustee, Northern Institutional
Funds (since December 1982).
*Nancy L. Mucker, 49 Vice President Vice President, Goldman, Sachs & Co.
4900 Sears Tower (since April 1985); Co-Manager of
Chicago, IL 60606 Shareholder Servicing of GSAM (since
November 1989).
*John M. Perlowski, 34 Treasurer Vice President, Goldman, Sachs & Co.
One New York Plaza Incorporated (since July 1995);
New York, NY 10004 Director, Investors Bank and Trust
(November 1993 - July 1995).
*James A. Fitzpatrick, 38 Vice President Vice President of Goldman Sachs Asset
4900 Sears Tower Management (since April 1997); Vice
Chicago, IL 60606 President and General Manager, First
Data Corporation - Investor Services
Group (prior thereto).
Jesse Cole, 35 Vice President Vice President, Goldman Sachs Asset
4900 Sears Tower Management (June 1998 to Present); Vice
Chicago, IL 60606 President, AIM Management Group, Inc.
(April 1996-June 1998); Assistant Vice
President, The Northern Trust Company
(June 1987-April 1996).
Philip V. Giuca , Jr., 36 Assistant Vice President, Goldman, Sachs & Co.
10 Hanover Square Treasurer (May 1992-Present); Tax Accountant,
New York, NY 10004 Goldman, Sachs & Co. (December 1990-May
1992).
</TABLE>
B-72
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE Positions Principal Occupation(s)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -----------------------
<S> <C> <C>
Anne Marcel, 40 Vice President Vice President, Goldman Sachs Asset
4900 Sears Tower Management (June 1998-Present); Vice
Chicago, IL 60606 President, Stein Roe & Farnham, Inc.
(October 1992-June 1998).
*Michael J. Richman, 38 Secretary General Counsel of the Funds Group of
85 Broad Street Goldman Sachs Asset Management (since
New York, NY 10004 December 1997); Associate General
Counsel of Goldman Sachs Asset
Management (February 1994 - December
1997); Vice President and Assistant
General Counsel of Goldman, Sachs & Co.
(since June 1992); Counsel to the Funds
Group, GSAM (June 1992 - December 1997);
Partner, Hale and Dorr (September 1991 -
June 1992).
*Howard B. Surloff, 33 Assistant Assistant General Counsel, Goldman Sachs
85 Broad Street Secretary Asset Management and Associate General
New York, NY 10004 Counsel to the Funds Group (since
December 1997); Assistant General
Counsel and Vice President, Goldman,
Sachs & Co.(since November 1993 and May
1994, respectively); Counsel to the
Funds Group, Goldman Sachs Asset
Management (November 1993 - December
1997); Associate of Shereff, Friedman,
Hoffman & Goodman (prior thereto).
</TABLE>
B-73
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE Positions Principal Occupation(s)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -----------------------
<S> <C> <C>
*Valerie A. Zondorak, 32 Assistant Assistant General Counsel, Goldman Sachs
85 Broad Street Secretary Asset Management and Assistant General
New York, NY 10004 Counsel to the Funds Group (since
December 1997); Vice President and
Assistant General Counsel, Goldman,
Sachs & Co. (since March 1997 and
December 1997, respectively); Counsel to
the Funds Group, Goldman Sachs Asset
Management (March 1997 - December 1997);
Associate of Shereff, Friedman, Hoffman
& Goodman (prior thereto).
*Steven E. Hartstein, 35 Assistant Legal Products Analyst, Goldman, Sachs &
85 Broad Street Secretary Co. (since June 1993); Funds Compliance
New York, NY 10004 Officer, Citibank Global Asset
Management (August 1991 - June 1993).
*Deborah A. Farrell, 27 Assistant Legal Assistant, Goldman, Sachs & Co.
85 Broad Street Secretary (since January 1996); Executive
New York, NY 10004 Secretary, Goldman, Sachs & Co. (January
1994 - January 1996); Legal Secretary,
Cleary, Gottlieb, Steen and Hamilton
(September 1990 - January 1994).
*Kaysie P. Uniacke, 37 Assistant Managing Director, Goldman Sachs Asset
One New York Plaza Secretary Management (since 1997), Vice President
New York, NY 10004 and Senior Portfolio Manager, Goldman
Sachs Asset Management (since 1988).
</TABLE>
B-74
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE Positions Principal Occupation(s)
AND ADDRESS WITH TRUST DURING PAST 5 YEARS
- ----------- ---------- -----------------------
<S> <C> <C>
*Elizabeth D. Anderson, 29 Assistant Portfolio Manager, Goldman Sachs Asset
One New York Plaza Secretary Management (since April 1996); Junior
New York, NY 10004 Portfolio Manager, Goldman Sachs Asset
Management (1995 - April 1996); Funds
Trading Assistant, Goldman Sachs Asset
Management (1993 - 1995); Compliance
Analyst, Prudential Insurance (1991 -
1993).
</TABLE>
The Trustees and officers of the Trust hold comparable positions with
certain other investment companies of which Goldman Sachs, GSAM or one of their
affiliates 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-75
<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 Trust Fund Expenses Funds)**
- --------------- -------------- ------------- --------
<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>
______________
* Includes compensation and Chairman of the Board of Trustees.
** As of the date of this Additional Statement, the Goldman Sachs Mutual
Funds consisted of - mutual funds.
B-76
<PAGE>
MANAGEMENT SERVICES
- ---------------------
GSAM, One New York Plaza, New York, New York, a separate operating division
of Goldman Sachs, serves as Adviser to the Core Large Cap Value Fund, CORE
International Equity Fund, Short Duration Government Fund, Conservative Strategy
Portfolio, Balanced Strategy Portfolio, Growth and Income Strategy Portfolio,
Growth Strategy Portfolio and Aggressive Growth Strategy Portfolio and, except
as noted, to each of the other Underlying Funds. Goldman Sachs Funds Management,
L.P. ("GSFM") serves as investment adviser to the Adjustable Rate Government
Fund. Goldman Sachs Asset Management International ("GSAMI") serves as
investment adviser to the International Equity, European Equity, Japanese
Equity, European Equity, International Small Cap, Emerging Markets Equity, Asia
Growth and Global Income Funds. As a company with unlimited liability under the
laws of England, GSAMI is regulated by the Investment Management Regulatory
Organization Limited, a United Kingdom self-regulatory organization, in the
conduct of its investment advisory business. See "Management" in the Funds'
Prospectuses for a description of the 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 Adviser and the Underlying Funds' investment advisers have access to
the substantial research and market expertise of Goldman Sachs whose investment
research effort is one of the largest in the industry. The Goldman Sachs Global
Investment Research Department covers approximately 2,000 companies, including
approximately 1,000 U.S. corporations in 60 industries. The in-depth information
and analyses generated by Goldman Sachs' research analysts are available to the
Advisers. 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.
B-77
<PAGE>
In managing the Funds, the 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.
In structuring Adjustable Rate Government Fund's and Short Duration
Government Fund's respective securities portfolios, their investment adviser
will review the existing overall economic and mortgage market trends. The
investment adviser will then study yield spreads, the implied volatility and the
shape of the yield curve. The investment adviser will then apply this analysis
to a list of eligible securities that meet the respective Fund's investment
guidelines. With respect to Adjustable Rate Government Fund, this analysis is
used to plan a two-part portfolio, which will consist of a "core" portfolio of
ARMs and a "relative value" portfolio of other mortgage assets that can enhance
portfolio returns and lower risk (such as investments in CMO floating-rate
tranches and interest only SMBS).
With respect to the Adjustable Rate Government Fund, Government Income
Fund, Short Duration Government Fund, High Yield Fund and Core Fixed Income
Fund, the Funds' investment advisers expect 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 investment 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 particular investment 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 investment 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
investment advisers will first evaluate the absolute level of a security's OAS
considering its liquidity and its interest rate, volatility and prepayment
sensitivity. The investment advisers will then analyze its value relative to
alternative investments and to its own investments. The investment advisers will
also measure a security's interest rate risk by computing an option adjusted
duration (OAD). The investment advisers believe a security's OAD is a better
measurement of its price sensitivity than cash flow duration, which
systematically misstates portfolio duration. The investment advisers also
evaluate returns for
B-78
<PAGE>
different mortgage market sectors and evaluate the credit risk of individual
securities. This sophisticated technical analysis allows the investment 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 Funds' 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
Underlying Funds' investment 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 Underlying Funds' investment 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 Underlying Funds. The investment adviser 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 Underlying Funds' investment
adviser, 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 investment adviser with respect to an Underlying 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
Underlying Funds' investment adviser 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 from
time to time may review the credit quality of a Fund's investments.
In allocating assets among foreign countries and currencies for the
Underlying Funds which can invest in foreign securities, the Underlying Funds'
investment adviser 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
investment adviser will estimate the
B-79
<PAGE>
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 an Underlying Fund given its investment objectives and criteria.
The management agreements for the Funds and the Underlying Funds provide
that their investment advisers may render similar services to others as long as
the services provided by the Advisers thereunder are not impaired thereby.
The management agreement for the CORE Funds, Short Duration Government Fund
and Asset Allocation Portfolios was 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 January __, 1999. These arrangements were
approved by the sole shareholder of each Fund on ____________, 1999 by consent
action to satisfy conditions imposed by the SEC in connection with the
registration of shares of the Funds under the Investment Company Act of 1940 and
the Securities Act of 1933. The management agreement will remain in effect with
respect to each Fund until _____________, 2000 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. The management agreement will terminate automatically with respect to
a Fund 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.
Under the Funds' management agreement, the Adviser also: (i) supervises all
non-advisory operations of each Fund; (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 Adviser, 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 Asset Allocation Portfolios and the Underlying Funds or impede their
investment activities.
Goldman Sachs and its affiliates, including, without limitation, the
Adviser and its 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
B-80
<PAGE>
investment objectives similar to those of the Asset Allocation Portfolios and
the Underlying Funds and/or which engage in transactions in the same types of
securities, currencies and instruments. 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
Underlying Funds invest. Such activities could affect the prices and
availability of the securities, currencies and instruments, 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 Adviser's and its advisory affiliates' asset management activities, will
be executed independently of the Underlying Funds' transactions and thus at
prices or rates that may be more or less favorable. When the Adviser and its
advisory affiliates seek to purchase or sell the same assets for their managed
accounts, including the Underlying 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 Underlying Funds.
From time to time, the Underlying 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 Adviser
and/or its affiliates will not initiate or recommend certain types of
transactions in certain securities or instruments with respect to which the
Adviser and/or its affiliates are performing services or when position limits
have been reached.
In connection with their management of the Underlying Funds, the Underlying
Funds' investment advisers may have access to certain fundamental analysis and
proprietary technical models developed by Goldman Sachs and other affiliates.
The investment advisers will not be under any obligation, however, to effect
transactions on behalf of the Underlying 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
Underlying Funds and it is not anticipated that the investment advisers will
have access to such information for the purpose of managing the Underlying
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 investment advisers in managing the Underlying Funds.
The results of each Underlying Fund's investment activities may differ
significantly from the results achieved by the investment 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 an Underlying Fund. Moreover, it is possible that an
Underlying Fund will sustain losses during
B-81
<PAGE>
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 Underlying Funds 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 an Underlying 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 Underlying 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
Underlying Fund invests.
In addition, certain principals and certain of the employees of the
Underlying Funds' investment 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.
The Underlying Funds' investment advisers may enter into transactions and
invest in currencies or instruments on behalf of an Underlying 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 an Underlying Fund, and such party may have no incentive to assure
that the Underlying 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 an Underlying Fund invests or which may be based on the performance of an
Underlying Fund. The Underlying 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 Underlying 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 Underlying
Funds will deal with Goldman Sachs and its affiliates on an arms-length basis.
Each Underlying Fund will be required to establish business relationships
with its counterparties based on the Underlying 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 an Underlying Fund's establishment of its
business relationships, nor is it expected that an Underlying Fund's
counterparties will rely on the credit of Goldman Sachs or any of its affiliates
in evaluating the Underlying Fund's creditworthiness.
B-82
<PAGE>
From time to time, Goldman Sachs or any of its affiliates may, but is not
required to, purchase and hold shares of an Underlying Fund in order to increase
the assets of the Underlying Fund. Increasing an Underlying Fund's assets may
enhance investment flexibility and diversification and may contribute to
economies of scale that tend to reduce the Underlying Fund's expense ratio.
Goldman Sachs reserves the right to redeem at any time some or all of the shares
of an Underlying Fund acquired for its own account. A large redemption of
shares of an Underlying Fund by Goldman Sachs could significantly reduce the
asset size of the Underlying Fund, which might have an adverse effect on the
Underlying Fund's investment flexibility, portfolio diversification and expense
ratio. Goldman Sachs will consider the effect of redemptions on an Underlying
Fund and other shareholders in deciding whether to redeem its shares.
It is possible that an Underlying 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 Underlying 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 Underlying
Funds' investment advisers may be prohibited from purchasing or recommending the
purchase of certain securities of that entity for the Underlying Funds.
DISTRIBUTOR AND TRANSFER AGENT
- ------------------------------
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 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.
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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 AND SUB-CUSTODIANS
- -----------------------------
State Street, P.O. Box 1776, Boston, Massachusetts 02171, 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.
INDEPENDENT PUBLIC ACCOUNTANTS
- ------------------------------
___________________, independent public accountants,
___________________________ _____________________, have been selected as
auditors of the Trust. In addition to audit services, ___________________
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 Adviser is responsible with respect to the Asset Allocation Portfolios,
CORE Large Cap Value Fund, CORE International Equity Fund and Short Duration
Government Fund (and the particular investment adviser is responsible with
respect to the other Underlying Funds) for decisions to buy and sell securities,
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
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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 Underlying 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 are traded on
exchanges at fixed commission rates.
In placing orders for portfolio securities of an Underlying Fund, the
Underlying Funds' advisers are generally required to give primary consideration
to obtaining the most favorable execution and net price available. This means
that an investment 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 Underlying Fund may pay a broker which
provides brokerage and research services an amount of disclosed commission 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 Underlying Funds' investment advisers generally seek reasonably
competitive spreads or commissions, an Underlying Fund will not necessarily be
paying the lowest spread or commission available. Within the framework of this
policy, the investment advisers will consider research and investment services
provided by brokers or dealers who effect or are parties to portfolio
transactions of an Underlying Fund, the investment 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 investment
advisers in the performance of their decision-making responsibilities. Such
services are used by the investment advisers in connection with all of their
investment activities, and some of such services obtained in connection with the
execution of transactions for an Underlying 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 an Underlying Fund, and the
services furnished by such brokers may be used by the investment 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 an Underlying Fund
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as well as shares of other investment companies or accounts managed by the
Underlying Funds' investment advisers. This policy does not imply a commitment
to execute all portfolio transactions through all broker-dealers that sell
shares of the Underlying Fund.
On occasions when an Underlying Fund's investment adviser deems the
purchase or sale of a security to be in the best interest of an Underlying Fund
as well as its other customers (including any other fund or other investment
company or advisory account for which such investment adviser acts as investment
adviser or subadviser), the investment adviser, to the extent permitted by
applicable laws and regulations, may aggregate the securities to be sold or
purchased for the Underlying Fund with those to be sold or purchased for such
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 particular investment 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 an Underlying 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 Underlying Funds' investment
advisers may use Goldman Sachs as a broker for an Underlying Fund. In order for
Goldman Sachs to effect any portfolio transactions for an Underlying 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, but
not always, 3:00 p.m. Chicago time and 4:00 p.m. New York time) on each Business
Day (as defined in the Prospectuses).
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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, 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.
In determining the net asset value of an Asset Allocation Portfolio, the
net asset value of the Underlying Funds' shares held by the Asset Allocation
Portfolio will be their net asset value at the time of computation.
Financial Square Prime Obligations Fund values all of its portfolio
securities using the amortized cost valuation method pursuant to Rule 2a-7 under
the Act. Other portfolio securities 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 will be valued at
the mean between the closing bid and asked prices, or if closing bid and asked
prices are not available, at the exchange defined close price on the exchange or
system in which such securities are principally traded. If the relevant
exchange or system has not closed by the above-mentioned time for determining
the Fund's net asset value, the securities will be valued at the mean between
the bid and the asked prices at the time the net asset value is determined; (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 price; (c) equity securities for which no prices are obtained
under sections (a) or (b) hereof, 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 their fair value in
accordance with procedures approved by the Board of Trustees; (d) fixed-income
securities with a remaining maturity of 60 days or more for which accurate
market quotations are readily available will be valued according to dealer-
supplied bid quotations or bid quotations from a recognized pricing service
(e.g., Merrill Lynch, J.J. Kenny, Muller Data Corp., Bloonberg, EJV, Reuters or
Standard & Poor's); (e) fixed-income securities for which quotations are not
readily available are valued by the investment adviser based on valuation models
that take into account spread and daily yield changes on government securities
in the appropriate market (i.e. matrix pricing); (f) debt securities with a
remaining maturity of 60 days or less are valued by the particular investment
adviser at amortized cost, which the Trustees have determined to approximate
fair value; and (g) all other instruments, 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 in
accordance with the valuation procedures approved by the Board of Trustees.
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.
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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 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 the calculation
of net asset values unless the Trust's Valuation Committee deems that the
particular event would materially affect net asset value, in which case an
adjustment will be made.
The proceeds received by each Fund 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. The
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.
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
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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 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
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Midcap Index; (n) the Russell 2000 Index- Total Return; (o) Russell 1000 Value
Index; (p) Russell 1000 Growth Index-Total Return; (q) the Value-Line Composite-
Price Return; (r) the Wilshire 4500 Index; (s) the FT-Actuaries Europe and
Pacific Index; (t) 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; (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:
. 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
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. 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 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.
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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 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 or
series shall be deemed to be affected by a matter unless the interests of each
class or series in the matter are substantially
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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, 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
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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.
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 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.
B-94
<PAGE>
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 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 Prospectuses. The
discussions below and in the Prospectuses 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,
Fund 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 Fund shares
because the Fund shares will be sold only to insurance companies. Thus,
purchasers of Fund shares must consult their own tax advisers regarding the
federal, state, and local tax consequences of owning Fund 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").
B-95
<PAGE>
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 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 for federal
income tax 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
B-96
<PAGE>
of shares owned by a shareholder of the Fund will be increased by an amount
equal under current law to 65% 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 CORE International Equity Fund 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 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
B-97
<PAGE>
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 Fund does not constitute a Closed Fund, the holders of the
contracts and annuities which invest in the Fund through a segregated asset
account may be treated as owners of Fund shares and may be subject to tax on
distributions made by the Fund.
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 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.
B-98
<PAGE>
Certain Underlying Funds will be subject to foreign taxes on their 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.
B-99
<PAGE>
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.
B-100
<PAGE>
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
Prospectuses, 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 normally 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 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 Prospectuses 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 Prospectuses. Certain
portions of the Registration Statement have been omitted from the Prospectuses
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 Prospectuses 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 Prospectuses and this Additional Statement form a part,
each such statement being qualified in all respects by such reference.
B-101
<PAGE>
APPENDIX A
DESCRIPTION OF BOND RATINGS, INCLUDING MUNICIPAL BONDS/1/
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.
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.
_____________________
/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>
B: Bonds which are rated B generally lack characteristics of a 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 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.
NOTE: Those bonds in the Aa, A, Baa, Ba, B and Caa groups which Moody's
believes possess the strongest investment attributes are designed by the symbols
Aa1, A1, Baa1 and B1.
A-2
<PAGE>
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 (or supporting institutions) rated Prime-1 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; and
- Well established access to a range of financial markets and
assured sources of alternate liquidity.
PRIME-2: Issuers (or supporting institutions) rated Prime-2 have a strong
ability for repayment of short-term debt obligations. This will normally be
evidenced by many of the 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.
A-3
<PAGE>
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 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 meet the financial commitment on the obligation is
extremely strong.
AA: Bonds and debt rated AA have a very strong capacity to meet the
financial commitment on the obligation and differ from the higher rated issues
only in small degree.
A: Bonds and debt rated A have a strong capacity to meet the financial
commitment on the obligation although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than bonds
in higher rated categories.
A-4
<PAGE>
BBB: Bonds and debt rated BBB are regarded as having an adequate capacity
to meet the financial commitment on the obligation. Whereas they normally
exhibit adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the obligor to
meet the financial commitment on the obligation 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 having significant speculative characteristics with respect to
capacity to meet the financial commitment on the obligation. BB indicates the
least degree of speculation and C the highest. While such bonds will likely have
some quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB: Bonds and debt rated BB have less vulnerability to non-payment 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 financial commitment on the obligation.
B: Bonds and debt rated B are more vulnerable to non-payment but
currently have the capacity to meet the financial commitment on the obligation.
Adverse business, financial or economic conditions will likely impair capacity
or willingness to meet the financial commitment on the obligation.
CCC: Bonds and debt rated CCC are currently vulnerable to non-payment, and
are dependent upon favorable business, financial, and economic conditions to
meet the financial commitment on the obligation. In the event of adverse
business, financial, or economic conditions, the obligor is not likely to have
the capacity to meet the financial commitment on the obligation.
CC: The rating CC is typically applied to bonds and debt that are
currently highly vulnerable to non-payment.
C: The rating C may be used to cover a situation where a bankruptcy
petition has been filed, but debt service payments on the obligations are being
continued.
D: Bonds and debt rated D are in 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 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 symbol is attached to ratings of instruments with significant
non-credit risks. Examples of such obligations are: securities whose principal
or interest return is indexed to equities, commodities, or currencies; certain
floaters; and interest-only and principal-only mortgage
A-5
<PAGE>
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.
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 capacity to meet the
financial commitment on the obligation is strong. Those issues determined to
possess strong capacity to meet the financial commitment on the obligation are
denoted with a plus sign (+) designation.
A-2: Capacity to meet the financial commitment on the obligation on issues
with this designation is satisfactory. However, the obligations are somewhat
more susceptible to the adverse effects of changes in circumstances and economic
conditions than obligations in higher rating categories.
A-3: Obligations exhibit adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity of the obligor to meet its financial commitment on the
obligation.
B: Obligations are regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
C: Obligations are currently vulnerable to nonpayment and are dependent
upon favorable business, financial, and economic conditions for the obligor to
meet its financial commitment on the obligation.
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. The D rating category will also
be used upon the filing of a bankruptcy petition or the taking of a similar
action if payments on an obligation are jeopardized.
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.
Note rating symbols are as follows:
A-6
<PAGE>
SP-1: Strong capacity to pay principal and interest. Those issues determined
to possess very strong 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 IBCA, INC.
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.
AAA: Bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong capacity for
timely repayment of financial commitments. This capacity is unlikely to be
adversely affected by foreseeable events.
AA: Bonds rated AA are considered to be investment grade and of very high
credit quality. The obligor's capacity for timely repayment of financial
commitments is very strong. This capacity is not significantly vulnerable to
foreseeable future events.
A: Bonds rated A are considered to be investment grade and of high
credit quality. The obligor's capacity for timely repayment of financial
commitments is considered to be strong. This capacity may, nevertheless, be more
vulnerable to adverse changes in economic conditions than bonds with higher
ratings.
BBB: Bonds rated BBB are considered to be investment grade and of good
credit quality. The obligor's capacity for timely repayment of financial
commitments is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to impair this capacity.
BB: Bonds are considered speculative. These ratings indicate that there
is a possibility of credit risk developing, particularly as the result of
adverse economic changes over time; however, business or financial alternatives
may be available to allow financial commitments to be met. Securities rated in
this category are not investment grade.
B: Bonds are considered highly speculative. These ratings indicate that
significant credit risk is present, but a limited margin of safety remains.
Financial commitments are currently
A-7
<PAGE>
being met; however, capacity for continued payment is contingent upon a
sustained, favorable business and economic environment.
"CCC", "CC", "C" - Bonds have high default risk. Capacity for meeting
financial commitments is reliant upon sustained, favorable business or economic
developments. "CC" ratings indicate that default of some kind appears probable,
and "C" ratings signal imminent default.
DDD, DD, AND D: Bonds are in default. Such bonds are not meeting
obligations and are extremely speculative. DDD represents the highest potential
for recovery on these bonds, and D represents the lowest potential for recovery.
PLUS (+) AND MINUS (-) signs are used for ratings from and including AA to
B, to indicate the relative position of a credit within the rating category.
Short-Term Ratings
- ------------------
Fitch IBCA short-term ratings apply to debt obligations that have time
horizons of less than 12 months for most obligations, or up to three years for
U.S. public finance securities. The following summarizes the rating categories
used by Fitch IBCA for short-term obligations:
F1: Securities possess the highest credit quality. This designation
indicates the strongest capacity for timely payment of financial commitments and
may have an added "+" to denote any exceptionally strong credit feature.
F2: Securities possess good credit quality. This designation indicates a
satisfactory capacity for timely payment of financial commitments, but the
margin of safety is not as great as in the case of the higher ratings.
F3: Securities possess fair credit quality. This designation indicates
that the capacity for timely payment of financial commitments is adequate;
however, near-term adverse changes could result in a reduction to non-investment
grade.
B: Securities possess speculative credit quality. This designation
indicates minimal capacity for timely payment of financial commitments, plus
vulnerability to near-term adverse changes in financial and economic conditions.
C: Securities possess high default risk. This designation indicates that
the capacity for meeting financial commitments is solely reliant upon a
sustained, favorable business and economic environment.
D: Securities are in actual or imminent payment default.
A-8
<PAGE>
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.
Commercial Paper/Certificates of Deposits
- -----------------------------------------
D-1+: Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or ready access to alternative
sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
D-1: Very high certainty of timely payment. Liquidity factors are
excellent and supported by strong fundamental protection factors.
Risk factors are minor.
A-9
<PAGE>
D-1-: High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are
very small.
D-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.
D-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.
D-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.
D-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.
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-10
<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 MAKE AN UNUSUAL EFFORT TO IDENTIFY AND RECRUIT THE VERY BEST PERSON FOR
EVERY JOB. Although our activities are measured in billions of dollars, we
select our people one by one. In a service business, we know that without the
best people, we cannot be the best firm.
WE OFFER OUR PEOPLE THE OPPORTUNITY TO MOVE AHEAD MORE RAPIDLY THAN IS
POSSIBLE AT MOST OTHER PLACES. We have yet to find limits to the responsibility
that our best people are able to assume. Advancement depends solely on ability,
performance and contribution to the Firm's success, without regard to race,
color, religion, sex, age, national origin, disability, sexual orientation, or
any impermissible criterion or circumstance.
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.
THE DEDICATION OF OUR PEOPLE TO THE FIRM AND THE INTENSE EFFORT THEY GIVE
THEIR JOBS ARE GREATER THAN ONE FINDS IN MOST OTHER ORGANIZATIONS. We think
that this is an important part of our success.
WE CONSIDER OUR SIZE AN ASSET THAT WE TRY HARD TO PRESERVE. We want to be
big enough to undertake the largest project that any of our clients could
contemplate, yet small enough to
B-1
<PAGE>
maintain the loyalty, the intimacy and the esprit de corps that we all treasure
and that contribute greatly to our success.
WE CONSTANTLY STRIVE TO ANTICIPATE THE RAPIDLY CHANGING NEEDS OF OUR
CLIENTS AND TO DEVELOP NEW SERVICES TO MEET THOSE NEEDS. We know that the world
of finance will not stand still and that complacency can lead to distinction.
WE REGULARLY RECEIVE CONFIDENTIAL INFORMATION AS PART OF OUR NORMAL CLIENT
RELATIONSHIPS. To breach a confidence or to use confidential information
improperly or carelessly would be unthinkable.
OUR BUSINESS IS HIGHLY COMPETITIVE, AND WE AGGRESSIVELY SEEK TO EXPAND OUR
CLIENT RELATIONSHIPS. However, we must always be fair competitors and must
never denigrate other firms.
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.
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 $6.1 billion as of November 28, 1997.
With thirty-seven offices around the world, Goldman Sachs employs over
11,000 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).*
* SOURCE: SECURITIES DATA CORPORATION. COMMON STOCK RANKING EXCLUDES REITS,
INVESTMENT TRUSTS AND RIGHTS.
B-2
<PAGE>
The number one lead manager of U.S. common stock offerings for the past
eight years (1989-1996).
The number one lead manager for initial public offerings (IPOs) worldwide
(1989-1996).
B-3
<PAGE>
GOLDMAN, SACHS & CO.'S HISTORY OF EXCELLENCE
1865 End of Civil War
1869 Marcus Goldman opens Goldman Sachs
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 London office opens
1972 Dow Jones Industrial Average breaks 1000
1986 Goldman Sachs takes Microsoft public
1991 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 Telecom 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-4
<PAGE>
PART C - OTHER INFORMATION
Item 24. Financial Statements and Exhibits
---------------------------------
(a) Financial Statements:
Included or Incorporated by Reference into Part A and Part B hereof:
None
(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 is incorporated herein by reference to
exhibit (1)(b) of Pre-Effective Amendment No. 1 of the
Registration Statement on Form N-1A (No. 333-35883 and 811-
8854) filed with the Commission on December 23, 1997
(Accession No. 0000950130-97-005710) ("Pre-Effective
Amendment No. 1").
(c) Form of Amendment No. 2 dated __________, 1999 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.
C-1
<PAGE>
(5) (a) 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 is incorporated herein by
reference to exhibit (5) of Pre-Effective Amendment No.
1.
(b) Form of Amended Annex A to Management Agreement among
Registrant, Goldman Sachs Asset Management and Goldman Sachs
Asset Management International on behalf of the CORE Large
Cap Value, CORE International Equity, Short Duration
Government, Conservative Strategy, Balanced Strategy, Growth
and Income Strategy, Growth Strategy and Aggressive Growth
Strategy Funds.
(6) Amended and Restated Distribution Agreement between
Registrant and Goldman, Sachs & Co. dated November 2,
1998.
(7) Not Applicable.
(8) Custodian Agreement between Registrant and State Street Bank
and Trust Company dated December 31, 1997.
(9) (a) Transfer Agency Agreement between Registrant and
Goldman, Sachs & Co. dated October 21, 1997 is incorporated
herein by reference to exhibit (9)(a) of Pre-Effective
Amendment No. 1.
(b) Form of Participation Agreement is incorporated herein by
reference to Exhibit (9)(b) of Pre-Effective Amendment No.
1.
C-2
<PAGE>
(10) Opinion and consent of counsel relating to 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 is
incorporated herein by reference to exhibit (10)(a) of Pre-
Effective Amendment No. 1.
(11) Not Applicable.
C-3
<PAGE>
(12) Not Applicable.
(13) Purchase Agreement between Registrant and The Goldman Sachs
Group, L.P dated December 12, 1997 is incorporated herein by
reference to exhibit (13) of Pre-Effective Amendment No
1.
(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 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.
C-4
<PAGE>
<TABLE>
<CAPTION>
Number of Record Holders
Title of Class as of October 30, 1998
- ------------------------------- ------------------------
<S> <C>
Goldman Sachs Growth and Income Fund 17
Goldman Sachs CORE U.S. Equity Fund 13
Goldman Sachs CORE Large Cap Growth Fund 10
Goldman Sachs CORE Small Cap Equity Fund 13
Goldman Sachs Capital Growth Fund 10
Goldman Sachs Mid Cap Equity Fund 15
Goldman Sachs International Equity Fund 15
Goldman Sachs Global Income Fund 14
Goldman Sachs High Yield Fund 0
</TABLE>
Item 27. Indemnification
---------------
Article IV of the Agreement and 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 Amended and Restated 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.
Mutual fund and trustees and officers liability policies purchased
jointly by the Registrant, Goldman Sachs Trust, Goldman Sachs Money Market
Trust, Goldman Equity Portfolios, Inc., Trust for Credit Unions, The Northern
Institutional Funds (formerly The Benchmark Funds), The Commerce Funds and
Goldman, Sachs & Co. insure 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.
C-5
<PAGE>
Item 28. Business and Other Connections of Investment Adviser
----------------------------------------------------
The business and other connections of the officers and Managing
Directors of Goldman, Sachs & Co., Goldman Sachs Funds Management, L.P., 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.
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 Northern Institutional Funds (formerly 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.
C-6
<PAGE>
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.
Item 31. Management Services
-------------------
Not Applicable.
Item 32. Undertakings
------------
Registrant undertakes to provide its Annual Report upon request
without charge to any recipient of a Prospectus for the Funds.
C-7
<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 Post-
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 18th day of November, 1998.
GOLDMAN SACHS VARIABLE INSURANCE TRUST
Registrant
By: * Douglas C. Grip
--------------------
Douglas C. Grip
President
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment No. 1 to Registrant's Registration Statement has been signed
by the following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ------ --------
<S> <C> <C>
*Ashok N. Bakhru Chairman and November 18, 1998
- ------------------------
Ashok N. Bakhru Trustee
*Douglas C. Grip President and November 18, 1998
- ------------------------
Douglas C. Grip Trustee
*John M. Perlowski Treasurer November 18, 1998
- ------------------------
John M. Perlowski
*David B. Ford Trustee November 18, 1998
- ------------------------
David B. Ford
*John P. McNulty Trustee November 18, 1998
- ------------------------
John P. McNulty
*Mary P. McPherson Trustee November 18, 1998
- ------------------------
Mary P. McPherson
*Alan A. Shuch Trustee November 18, 1998
- ------------------------
Alan A. Shuch
*Jackson W. Smart, Jr. Trustee November 18, 1998
- ------------------------
Jackson W. Smart, Jr.
*William H. Springer Trustee November 18, 1998
- ------------------------
William H. Springer
</TABLE>
C-8
<PAGE>
<TABLE>
<S> <C> <C>
*Richard P. Strubel Trustee November 18, 1998
- ------------------------
Richard P. Strubel
*By: /s/ Valerie A. Zondorak
-------------------------
Valerie A. Zondorak
Attorney-in-Fact
</TABLE>
C-9
<PAGE>
GOLDMAN SACHS VARIABLE INSURANCE TRUST
Certificate of Assistant Secretary
The undersigned Assistant Secretary of Goldman Sachs Variable Insurance
Trust hereby certifies that the following resolution was duly adopted by the
Board of Trustees of said Trust on April 22, 1998 and remains in effect on the
date hereof:
FURTHER RESOLVED, that the Trustees and Officers of the Trusts 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, 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 Securities Act of
1933 and the Investment Company Act of 1940 of the Trusts 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 hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 18th day of November,
1998.
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, 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 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, John Perlowski, hereby
constitutes and appoints James A. Fitzpatrick, Douglas C. Grip, Scott M.
Gilman, John W. Mosior, Nancy L. Mucker, 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 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/ John Perlowski
----------------------
John Perlowski
<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 be 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.
Date: 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, 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>
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.
Date: 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.
Date: 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, 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.
Date: October 21, 1997
/s/ Richard P. Strubel
-------------------------
Richard P. Strubel
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
(1)(c) Form of Amendment No.2 dated_________, 1999
to Agreement and Declaration of Trust.
(5)(b) Form of Amended Annex A to Management
Agreement among Registrant, Goldman Sachs
Asset Management and Goldman Sachs Asset
Management International.
(6) Amended and Restated Distribution Agreement
between Registrant and Goldman, Sachs & Co.
dated November 2, 1998.
(8) Custodian Agreement between Registrant and State
Street Bank and Trust Company dated December
31, 1997.
<PAGE>
EXHIBIT 99.1C
GOLDMAN SACHS VARIABLE INSURANCE TRUST
AMENDMENT NO. 2 TO AGREEMENT
AND DECLARATION OF TRUST
The undersigned 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 __________________:
RESOLVED, that the Agreement and Declaration of Trust be amended as
contemplated in Article V, Section 1 by establishing and designating a
separate class of shares of beneficial interest of each of Goldman Sachs
CORE Large Cap Value Fund, Goldman Sachs CORE International Equity Fund,
Goldman Sachs Short Duration Government Fund, Goldman Sachs Conservative
Strategy Fund, Goldman Sachs Balanced Strategy Fund, Goldman Sachs Growth
and Income Strategy Fund, Goldman Sachs Growth Strategy Fund and Goldman
Sachs Aggressive Growth Strategy Fund to have the relative rights and
preferences set forth in the prospectus offering such class 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 _____________, 1999
Title: Assistant Secretary
---------------------------
<PAGE>
EXHIBIT
Amended Annex A
The compensation payable under Paragraph 5 of the Management Agreement between
Goldman Sachs Variable Insurance Trust and each of the undersigned shall be as
follows:
<TABLE>
<CAPTION>
Goldman Sachs Asset Management Annual Rate (%)
- ------------------------------ -----------------
<S> <C>
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 CORE Large Value Fund ----
Goldman Sachs CORE International Equity Fund ----
Goldman Sachs Short Duration Government Fund ----
Goldman Sachs Conservative Strategy Fund ----
Goldman Sachs Balanced Strategy Fund ----
Goldman Sachs Growth and Income Strategy Fund ----
Goldman Sachs Growth Strategy Fund ----
Goldman Sachs Aggressive Growth Strategy Fund ----
Goldman Sachs Asset Management International
- --------------------------------------------
Goldman Sachs Global Income Fund 0.90
Goldman Sachs International Equity Fund 1.00
</TABLE>
Dated: January 1999.
GOLDMAN SACHS VARIABLE INSURANCE TRUST
By: ______________________________
Title: ______________________________
GOLDMAN SACHS ASSET MANAGEMENT,
A DIVISION OF GOLDMAN, SACHS & CO.
By: ______________________________
Title: ______________________________
GOLDMAN SACHS ASSET MANAGEMENT INTERNATIONAL,
AN AFFILIATE OF GOLDMAN, SACHS & CO.
By: ______________________________
Title: ______________________________
-8-
<PAGE>
EXHIBIT 6
GOLDMAN SACHS VARIABLE INSURANCE TRUST
AMENDED AND RESTATED DISTRIBUTION AGREEMENT
November 2, 1998
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, no par value 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 thereto included in
<PAGE>
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, 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 333-35883) on Form N-1A with respect to an indefinite number of
Shares of the Funds and is duly registered as an 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.
-2-
<PAGE>
(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.
(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
-3-
<PAGE>
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 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
-4-
<PAGE>
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 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. SALES OF THE SHARES; OTHER SERVICES AS DISTRIBUTOR.
--------------------------------------------------
(a) The Trust hereby grants to you exclusive authority to distribute
the Trust shares to insurance companies ("Participating Insurance
-----------------------
Companies") and their separate accounts ("Participating Accounts") to fund
--------- ----------------------
certain variable annuity contracts or variable life insurance policies (the
"Contracts") and to other persons or plans ("Participating Plans") that
--------- -------------------
qualify to purchase shares of the Trust under Section 817(h) of the
Internal Revenue Code and the regulations thereunder without impairing the
ability of the Participating Accounts to consider the portfolio investments
of the Trust as constituting investments of such Accounts for the purpose
of satisfying the diversification requirements of Section 817(h) (all such
persons being referred to herein as "Qualified Persons"). Such
-----------------
-5-
<PAGE>
authority shall include the right to select which Series or Classes of
Shares shall be made available to any Qualified Person. Such Shares shall
be made available to a Qualified Person (each purchasing Qualified Person
being referred to herein as a "Participating Investor") consistent with
----------------------
this Agreement, with the relevant Prospectus, and with the terms and
conditions of any exemptive order obtained by the Trust from the SEC or SEC
rule or regulation relied upon by the Trust and, in the case of a
Participating Insurance Company or a Participating Plan owning more than
10% of the Trust's Shares, pursuant to an agreement containing provisions
consistent with the form of Participation Agreement attached hereto. You
are hereby authorized to enter into Participation Agreements with Qualified
Persons, and in connection therewith to make such changes to the form of
Participation Agreement attached hereto as you deem appropriate in the
circumstances, provided that the executed agreement is consistent with the
form of Participation Agreement attached hereto and with any other
Participation Agreements then in effect. You shall have the right to
suspend or terminate the offering of Shares to any Participating Investor
subject to any applicable conditions in the Participation Agreement with
such investor. In any event, the Trust reserves the right in its sole
discretion to refuse to accept a request for the purchase of Shares.
(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 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 (unless
otherwise agreed by the parties hereto). 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.
-6-
<PAGE>
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 as provided for in Section 3 of this Agreement. You
may also subscribe for Shares of a Fund as principal for resale to
Participating Investors, provided you qualify as a Qualified Person. 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. The Trust may
appoint Participating Insurance Companies that have entered into
Participation Agreements as an agent of the Trust for the limited purpose
or receiving purchase and redemption requests on behalf of their
Participating Account (but not with respect to any Trust shares that may be
held in the general account of such Company) for Shares of those Series or
Classes made available thereunder, based on allocations of amounts to the
Participating Account or subaccounts thereof under the Contracts, other
transactions relating to the Contracts or the Participating Account and
customary processing of the Contracts.
(b) The Trust shall redeem Shares of any Fund presented to it by
Participating Investors at the price determined in accordance with, and in
the manner set forth in, the Prospectus for such Fund and the Participation
Agreement with such investor, as applicable.
(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) It is not anticipated that any Shares will be subject to a sales
charge or a contingent deferred sales charge. In the event that any Shares
of a Class are subject to a sales charge or a contingent deferred sales
charge, you will be entitled to receive that portion of the sales charges
or contingent deferred sales charge applicable to sales of Shares of a
Class as set forth in the relevant Prospectus.
(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 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.
-7-
<PAGE>
(c) The Trust shall not be obligated to pay you compensation with
respect to your distribution of Shares that are not subject to a sales
charge, contingent deferred sales charge or Rule 12b-1 Plan. 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, to the extent
applicable to the Trust.
6. UNDERTAKINGS. The Trust agrees with you, for your benefit, that:
------------
(a) The Trust shall sell Shares of the Funds in accordance with the
terms of each Participation Agreement or otherwise so long as it has such
Shares available for sale and, in the case of sales covered by any
Participation Agreement, no suspensions or terminations thereunder are in
effect, 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 in accordance with the terms and conditions of any
Participation Agreements and the relevant Prospectus. The Trust will make
such filings under the Investment Company Act with, and pay such fees to,
the Commission as are necessary or required 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 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
-8-
<PAGE>
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, 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, so long as delivery of a Prospectus or SAI by you may be
required by law, the number of copies of each Prospectus and each SAI as
you may reasonably request for yourself.
(e) Consistent with the practice of mutual funds whose shares are made
available only to Qualified Persons, the Trust shall undertake to comply
with the terms and conditions of relevant exemptions from the securities
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 jurisdictions as you and the Trust may approve. To the extent that
exemptions from securities laws in any such jurisdiction are not available
to the Trust and its Shares, the Trust shall use its best efforts to comply
with the registration, notification or qualification requirements of such
laws in order for such Shares to be lawfully sold in such jurisdiction, and
will maintain any such registration, notification or 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.
-9-
<PAGE>
(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, 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) The Trust, if so requested, shall furnish to you a copy of the
opinion of counsel for the Trust to the effect that the Shares issued by
the Trust are 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 Section 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 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.
(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)
-10-
<PAGE>
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 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 Distributor, 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.
(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
-11-
<PAGE>
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.
(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, including
Participation Agreements, 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 exemption, registration,
notification and qualification of Shares of the Funds for sale in
the various jurisdictions in accordance with Section 6(c) of this
Agreement (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
-12-
<PAGE>
printing and mailing a Prospectus included with the confirmation
of such orders and, if requested by the purchaser, an SAI;
(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 extent not paid for by the Trust or
any Participating Insurance Company under a Participation
Agreement;
-13-
<PAGE>
(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 extent not paid for by the Trust or
any Participating Insurance Company under a Participation
Agreement;
(3) of advertising in connection with the offering of
Shares of the Funds to the extent not paid for by the Trust or
any Participating Insurance Company under a Participation
Agreement;
(4) incurred in connection with your registration as a
broker or dealer or the registration or qualification of 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.
-14-
<PAGE>
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 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
-15-
<PAGE>
commencement thereof the indemnifying party shall be entitled to
participate therein and, to the extent that it shall wish, 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 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
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<PAGE>
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 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.
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<PAGE>
(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.
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
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<PAGE>
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.
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.)
David B. Ford
Managing Director
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<PAGE>
AMENDED EXHIBIT A
-----------------
(November 13, 1998)
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 Short Duration Government 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
Goldman Sachs CORE Large Cap Value Fund
Goldman Sachs CORE International Equity Fund
Goldman Sachs Conservative Strategy Portfolio
Goldman Sachs Balanced Strategy Portfolio
Goldman Sachs Growth and Income Strategy Portfolio
Goldman Sachs Growth Strategy Portfolio
Goldman Sachs Aggressive Growth Strategy Portfolio
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<PAGE>
EXHIBIT 8
CUSTODIAN CONTRACT
Between
GOLDMAN SACHS VARIABLE INSURANCE TRUST
and
STATE STREET BANK AND TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
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
</TABLE>
<PAGE>
<TABLE>
<S> <C>
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
</TABLE>
<PAGE>
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 Custodian shall
have no
<PAGE>
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 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
2
<PAGE>
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 the Fund;
3
<PAGE>
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 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
4
<PAGE>
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 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
5
<PAGE>
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,
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
6
<PAGE>
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 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
7
<PAGE>
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;
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;
8
<PAGE>
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 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
9
<PAGE>
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
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
10
<PAGE>
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 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,
11
<PAGE>
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 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.
12
<PAGE>
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 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
13
<PAGE>
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.
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;
14
<PAGE>
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 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
15
<PAGE>
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 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
16
<PAGE>
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 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
17
<PAGE>
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
-------------------------------------------
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
18
<PAGE>
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 $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
19
<PAGE>
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.
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,
20
<PAGE>
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 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.
21
<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 31st day of December, 1997.
ATTEST GOLDMAN SACHS VARIABLE INSURANCE
TRUST
/s/ Valerie A. Zondorak By /s/ John Perlowski
- -------------------------------- -----------------------------------
Name: Valerie A. Zondorak Name: John Perlowski
Title: Assistant Secretary Title: Assistant Treasurer
ATTEST STATE STREET BANK AND TRUST COMPANY
/s/ Thomas M. Lenz By /s/ Ronald E. Logue
- -------------------------------- ----------------------------------
Thomas M. Lenz Ronald E. Logue
Vice President Executive Vice President
22
<PAGE>
Schedule A
17f-5 Approval
The Board of Trustees of GOLDMAN SACHS VARIABLE INSURANCE TRUST has
approved the following foreign banking institutions and foreign securities
depositories from among State Street's Global Custody Network for use as
subcustodians for the Fund's securities, cash and cash equivalents held outside
of the United States.
<TABLE>
<CAPTION>
Country Subcustodian Central depository
- ------- ------------ ------------------
<S> <C> <C>
Argentina Citibank, N.A. Caja de Valores S.A.
Australia Westpac Banking Corporation Austraclear Limited;
Reserve Bank Information and
Transfer System (RITS)
Austria ERSTE Bank Oesterreichische Kontrollbank AG
(Wertpapiersammelbank Division)
Bahrain The British Bank of the Middle East None
(as delegate of the Hongkong and
Shanghai Banking Corporation Limited)
Bangladesh Standard Chartered Bank None
Belgium Generale Bank Caisse Interprofessionnelle de Depots
et de Virements de Titres S.A. (CIK);
Banque Nationale de Belgique
Bermuda The Bank of Bermuda Limited None
Botswana Barclays Bank of Botswana Limited None
Brazil Citibank, N.A. Bolsa de Valores de Sao Paulo (Bovespa);
Banco Central do Brasil,
Systema Especial de Liquidacao e
Custodia (SELIC)
Canada Canada Trustco Mortgage Company The Canadian Depository
for Securities Limited (CDS)
</TABLE>
<PAGE>
Schedule A: 17f-5 Approval
Page 2
<TABLE>
<CAPTION>
Country Subcustodian Central Depository
- ------- ------------ ------------------
<S> <C> <C>
Chile Citibank, N.A. None
People's Republic The Hongkong and Shanghai Shanghai Securities Central Clearing and
of China Banking Corporation Limited, Registration Corporation (SSCCRC);
Shanghai and Shenzhen branches
Shenzhen Securities Central Clearing
Co., Ltd. (SSCC)
Colombia Cititrust Colombia S.A. None
Sociedad Fiduciaria
Cyprus Barclays Bank PLC None
Cyprus Offshore Banking Unit
Czech Republic Ceskoslovenska Obchodni Stredisko cennych papirft (SCP);
Banka A.S.
Czech National Bank (CNB)
Denmark Den Danske Bank Vaerdipapircentralen - The Danish
Securities Center (VP)
Ecuador Citibank, N.A. None
Egypt National Bank of Egypt None
Finland Merita Bank Limited The Finnish Central Securities Depositor
France Banque Paribas Societe Interprofessionnelle
pour la Compensation des
Valeurs Mobilieres (SICOVAM);
Banque de France,
Saturne System
Germany Dresdner Bank AG The Deutscher Kassenverein AG
Ghana Barclays Bank of Ghana Limited None
Greece National Bank of Greece S.A. The Central Securities Depository
(Apothetirion Titlon A.E.)
</TABLE>
<PAGE>
Schedule A: 17f-5 Approval
Page 3
<TABLE>
<CAPTION>
Country Subcustodian Central Depository
- ------- ------------ ------------------
<S> <C> <C>
Hong Kong Standard Chartered Bank The Central Clearing and
Settlement System (CCASS)
Hungary Citibank Budapest Rt, The Central Depository and Clearing
House (Budapest) Ltd. (KELER Ltd.)
India Deutsche Bank AG None
- --------- The HongKong and Shanghai None
Banking Corporation Limited
Indonesia Standard Chartered Bank None
Ireland Bank of Ireland None;
The Central Bank of Ireland,
The Gilt Settlement Office (GSO)
Israel Bank Hapoalim B.M. The Clearing House of the
Tel Aviv Stock Exchange
Italy Banque Paribas Monte Titoli S.p.A.;
(Future Subcustodian)
Banca d'Italia
Ivory Coast Societe Generale de Banques None
en Cote d'Ivoire
Japan The Daiwa Bank, Limited Japan Securities Depository
Center (JASDEC);
Bank of Japan Net System
The Fuji Bank, Limited Japan Securities Depository
Center (JASDEC);
Bank of Japan Net System
The Sumitomo Trust Japan Securities Depository
& Banking Co., Ltd. Center (JASDEC);
Bank of Japan Net System
</TABLE>
<PAGE>
Schedule A: 17f-5 Approval
Page 4
<TABLE>
<CAPTION>
COUNTRY SUBCUSTODIAN CENTRAL DEPOSITORY
- ------- ------------ ------- ----------
<S> <C> <C>
Jordan The British Bank of the Middle East None
Kenya Barclays Bank of Kenya Limited None
Republic of Korea SEOULBANK Korea Securities Depository (KSD)
Lebanon The British Bank of the Middle East Custodian and Clearing Center of
Financial Instruments for Lebanon
(MIDCLEAR) S.A.L;
Malaysia Standard Chartered Bank Malaysian Central Depository Sdn.
Malaysia Berhad Bhd. (MCD)
Mauritius The Hongkong and Shanghai None
Banking Corporation Limited
Mexico Citibank Mexico, S.A S.D INDEVAL, S.A. de C.V.
(Instituto para el Deposito de
Valores);
Banco de Mexico
Morocco Banque Commerciale du Maroc None
Netherlands MeesPierson N.V. Netherlands Centraal Instituut voor
Giraal Effectenverkeer B.V. (NECIGEF)
New Zealand ANZ Banking Group New Zealand Central Securities
(New Zealand) Limited Depository Limited (NZCSD)
Norway Christiania Bank og Verdipapirsentralen - The Norwegian
Kreditkasse Registry of Securities (VPS)
Oman The British Bank of the Middle East Muscat Securities Market (MSM)
(as delegate of the Hongkong and
Shanghai Banking Corporation Limited)
</TABLE>
<PAGE>
Schedule A: 17f-5 Approval
Page 5
<TABLE>
<CAPTION>
Country Subcustodian Central depository
- ------- ------------ ------------------
<S> <C> <C>
Pakistan Deutsche Bank AG None
Peru Citibank, N.A. Caja de Valores (CAVAL)
Philippines Standard Chartered Bank None
Poland Citibank Poland S.A. The National Depository of Securities
(Krajowy Depozyt Papierow
Wartosciowych);
National Bank of Poland
Portugal Banco Comercial Portugues Central de Valores Mobiliarios (Central)
Russia Credit Suisse, Zurich None
via Credit Suisse (Moscow) Limited
Singapore The Development Bank The Central Depository (Pte)
of Singapore Ltd. Limited (CDP)
Slovak Republic Ceskoslovenska Obchodna Stredisko Cennych Papierov (SCP)
Banka A.S.
National Bank of Slovakia
South Africa Standard Bank of South Africa Limited The Central Depository Limited
Spain Banco Santander, S.A. Servicio de Compensacion y
Liquidacion de Valores, S.A. (SCLV);
Banco de Espana,
Anotaciones en Cuenta
Sri Lanka The Hongkong and Shaghai Central Depository System
Banking Corporation Limited (Pvt) Limited
Swaziland Barclays Bank of Swaziland Limited None
Sweden Skandinaviska Enskilda Banken Vardepapperscentralen VPC AB -
The Swedish Central Securities Depository
</TABLE>
<PAGE>
Schedule A: 17f-5 Approval
Page 6
<TABLE>
<CAPTION>
Country Subcustodian Central Depository
- ------- ------------ ------------------
<S> <C> <C>
Switzerland Union Bank of Switzerland Schweizerische Effekten - Giro AG
(SEGA)
Taiwan - R.O.C. Central Trust of China The Taiwan Securities Central
Depository Company, Ltd. (TSCD)
Thailand Standard Chartered Bank Thailand Securities Depository
Company Limited (TSD)
Turkey Citibank, N.A. Takas ve Saklama Bankasi A.S.
(TAKASBANK);
Central Bank of Turkey
United Kingdom State Street Bank and Trust Company None;
The Bank of England,
The Central Gilts Office (CGO);
The Central Moneymarkets Office (CMO)
Uruguay Citibank, N.A. None
Venezuela Citibank, N.A. None
Zambia Barclays Bank of Zambia Limited Lusaka Central Depository (LCD)
Zimbabwe Barclays Bank of Zimbabwe Limited None
</TABLE>
Euroclear (The Euroclear System)/State Street London Limited
Cedel (Cedel Bank, societe anonyme)/State Street London Limited
