<PAGE>
Goldman
Sachs Variable Insurance Trust
PROSPECTUS
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
(LOGO)
March 1, 1999
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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 also considers 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 long-term capital appreciation and secondarily current income.
Goldman Sachs Aggressive Growth Strategy Portfolio
seeks long-term 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 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 March 1, 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.
Prospectus, March 1, 1999
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<TABLE>
<CAPTION>
TABLE OF CONTENTS Page
<S> <C>
PORTFOLIO HIGHLIGHTS....................................................... 3
INVESTMENT OBJECTIVES AND POLICIES......................................... 5
RISK FACTORS AND SPECIAL CONSIDERATIONS.................................... 6
DESCRIPTION OF UNDERLYING FUNDS............................................ 7
MANAGEMENT................................................................. 16
NET ASSET VALUE............................................................ 19
PERFORMANCE INFORMATION.................................................... 19
</TABLE>
<TABLE>
<S> <C>
SHARES OF THE TRUST......................................................... 19
EXPENSES.................................................................... 20
TAXATION.................................................................... 21
ADDITIONAL INFORMATION...................................................... 21
DIVIDENDS................................................................... 22
PURCHASE AND REDEMPTION OF SHARES........................................... 22
APPENDIX A.................................................................. A-1
</TABLE>
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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.
The investment objectives and policies of the Portfolios are similar to the
investment objectives and policies of other mutual funds that the Investment
Adviser manages. Although the objectives and policies may be similar, the
investment results of the Portfolios may be higher or lower than the results of
such other mutual funds. The Investment Advisor cannot guarantee, and makes no
representation, that the investment results of similar funds will be comparable
even though the funds have the same Investment Adviser.
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."
<TABLE>
<CAPTION>
Portfolio Name Investment Objectives Investment Criteria
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<C> <C> <S>
Goldman Sachs Conservative Current income, consistent Under normal conditions,
Strategy Portfolio with the preservation of approximately 80% of the
capital and secondarily Portfolio's assets will
also considers the be allocated among
potential for capital Underlying Fixed-Income
appreciation. 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.
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Goldman Sachs Balanced Current income and long- Under normal conditions,
Strategy Portfolio term capital appreciation. approximately 60% of the
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.
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Goldman Sachs Growth and Long-term capital Under normal conditions,
Income Strategy Portfolio appreciation and current approximately 60% of the
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.
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Goldman Sachs Growth Long-term capital Under normal conditions,
Strategy Portfolio appreciation and approximately 80% of the
secondarily 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.
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Goldman Sachs Aggressive Long-term capital Under normal conditions,
Growth Strategy Portfolio appreciation. substantially all of the
Portfolio's total assets
will be allocated among
Underlying Equity Funds,
with a greater focus on
small cap and
international
investments.
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</TABLE>
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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 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 for direct investment. By investing in the Underlying 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 December 31, 1998, the
Investment Adviser, together with its affiliates, acted as investment adviser
for assets in excess of $195 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
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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 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 a professional money
manager. 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 also
considers 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 long-term capital
appreciation and secondarily current income. The Aggressive Growth Strategy
Portfolio's investment objective is to seek long-term 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
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<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%
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, it is expected that the Conservative 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 (which may exceed 25%) of its equity
allocation in one or more of 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 Portfolio 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.
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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, 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.
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 for direct investment. By investing in the Underlying Funds
indirectly through a
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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.
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.
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<TABLE>
<CAPTION>
Fund Names Investment Objectives Investment Criteria
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<C> <C> <S>
Goldman Sachs Variable Insurance
Trust ("VIT") Equity Funds
VIT Growth and Long-term growth of capital At least 65% of total
Income Fund and growth of income. assets in equity
securities that the
Investment Adviser
considers to have
favorable prospects for
capital appreciation
and/or dividend-paying
ability.
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VIT CORE U.S. Equity Fund Long-term growth of capital At least 90% of total
and dividend income. assets in equity
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.
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VIT CORE Large Cap Long-term growth of At least 90% of total
Growth Fund capital. Dividend income is assets in equity
a secondary consideration. 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
expected to have better
prospects for earnings
growth than the growth
rate of the general
domestic economy. The
Fund's investments are
selected using both a
variety of quantitative
techniques and
fundamental research in
seeking to maximize the
Fund's expected return,
while maintaining risk,
style, capitalization
and industry
characteristics similar
to the Russell 1000
Growth Index.
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VIT CORE Large Cap Long-term growth of capital At least 90% of total
Value Fund and dividend income. assets in equity
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.
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</TABLE>
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<TABLE>
<CAPTION>
Fund Names Investment Objectives Investment Criteria
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<C> <C> <S>
VIT CORE Small Cap Long-term growth of At least 90% of total
Equity Fund capital. assets in equity
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.
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VIT CORE International Long-term growth of At least 90% of total
Equity Fund capital. assets in equity
securities of companies
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 unhedged
Morgan Stanley Capital
International (MSCI)
Europe, Australasia and
Far East Index (the
"EAFE Index"). The Fund
may employ certain
currency management
techniques.
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VIT Capital Growth Fund Long-term capital growth. At least 90% of total
assets in a diversified
portfolio of equity
securities. Long-term
capital appreciation
potential is considered
in selecting
investments.
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VIT Mid Cap Equity Fund Long-term capital At least 65% of total
appreciation. assets in equity
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).
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VIT International Equity Fund Long-term capital Substantially all, and
appreciation. at least 65%, of 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.
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</TABLE>
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<TABLE>
<CAPTION>
Fund Names Investment Objectives Investment Criteria
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<C> <C> <S>
Goldman Sachs Trust
("GST") Equity Funds
GST Small Cap Value Fund Long-term capital growth. At least 65% of total
assets in equity
securities of companies
with public stock market
capitalizations of $1
billion or less at the
time of investment.
- ---------------------------------------------------------------------------------------
GST Emerging Markets Equity Fund Long-term capital Substantially all, and
appreciation. at least 65%, of total
assets in equity
securities of emerging
country issuers. The
Fund may employ certain
currency management
techniques.
- ---------------------------------------------------------------------------------------
GST Asia Growth Fund Long-term capital Substantially all, and
appreciation. 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 Securities Fund Total return comprised of Substantially all, and
long-term growth of capital at least 80%, of total
and dividend income. assets in a diversified
portfolio of 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 Fund Long-term capital Substantially all, and
appreciation. at least 65%, of total
assets in equity
securities of Japanese
companies. The Fund may
employ certain currency
management techniques.
- ---------------------------------------------------------------------------------------
GST European Equity Fund Long-term capital Substantially all, and
appreciation. at least 65%, of total
assets in equity
securities of European
companies. The Fund may
employ certain currency
management techniques.
- ---------------------------------------------------------------------------------------
GST International Small Cap Fund Long-term capital Substantially all, and
appreciation. at least 65%, of 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>
10
<PAGE>
<TABLE>
<CAPTION>
Approximate
Investment Duration or Interest Rate Investment Credit Other
Fund Names Objectives Maturity Sensitivity Sector Quality Investments
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
VIT Fixed Income Funds
VIT Short Duration A high level Target 2-year U.S. At least 65% of U.S. Mortgage pass-
Government Fund of current Duration* = Treasury note total assets in Government through
income and 2-year U.S. securities issued Securities securities and
secondarily, Treasury or guaranteed by other
in seeking Security plus the U.S. securities
current or minus .5 government, its representing
income, may years Maximum agencies, an interest in
also consider Duration* = 3 instrumentalities or
the potential years or sponsored collateralized
for capital enterprises by mortgage
appreciation. ("U.S. Government loans.
Securities") and
repurchase
agreements
collateralized by
such securities.
- --------------------------------------------------------------------------------------------------------------------
VIT Global Income Fund A high total Target 6-year Securities of Minimum = Mortgage and
return, Duration* = government U.S. and foreign BBB/Baa asset- backed
emphasizing J.P. Morgan bond governments and At least 50% securities,
current Global corporations. = AAA/Aaa foreign
income, and, Government currencies and
to a lesser Bond Index repurchase
extent, (hedged) plus agreements
providing or minus 2.5 collateralized
opportunities years Maximum by U.S.
for capital Duration* = Government
appreciation. 7.5 years Securities or
certain
foreign
government
securities.
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
* Under normal interest rate conditions.
11
<PAGE>
<TABLE>
<CAPTION>
Approximate
Investment Duration or Interest Rate Investment Credit Other
Fund Names Objectives Maturity Sensitivity Sector Quality Investments
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
GST Fixed Income Funds
GST Financial Square Maximize Maximum Maturity of 3-month U.S. Money market High Quality N/A
Prime Obligations Fund current Individual Treasury note instruments (short-term
income to the Investments = 13 including U.S. ratings of A-
extent months at time of Government 1, P-1 or
consistent purchase Securities, U.S. comparable
with the Maximum Dollar- bank obligations, quality).
maintenance Weighted Average commercial paper and
of liquidity. Portfolio Maturity other short-term
= 90 days obligations of U.S.
corporations,
governmental and
other entities, and
related repurchase
agreements.
- ----------------------------------------------------------------------------------------------------------------------------
GST Adjustable Rate A high level Target Duration* = 9-month U.S. At least 65% of U.S. Fixed-rate
Government Fund of current 6-month to 1-year Treasury note total assets in U.S. Government mortgage pass-
income, U.S. Treasury Government Securities through
consistent Security Securities that are securities and
with low Maximum Duration* = adjustable rate repurchase
volatility of 2 years mortgage pass- agreements
principal. through securities collateralized
and other mortgage by U.S.
securities with Government
periodic interest Securities.
rate resets.
- ----------------------------------------------------------------------------------------------------------------------------
GST Government A high level Target Duration* = 5-year U.S. At least 65% of U.S. Non-government
Income Fund of current Lehman Brothers Treasury note assets in U.S. Government mortgage pass-
income, Mutual Fund Government Securities through
consistent Government/Mortgage Securities, and non-U.S. securities,
with safety Index plus or minus including mortgage- Government asset-backed
of principal. 1 year backed U.S. Securities = securities and
Maximum Duration* = Government AAA/Aaa corporate
6 years Securities and fixed-income
repurchase securities.
agreements
collateralized by
such securities.
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Under normal interest rate conditions.
12
<PAGE>
<TABLE>
<CAPTION>
Approximate
Investment Duration or Interest Rate Investment Credit Other
Fund Names Objectives Maturity Sensitivity Sector Quality Investments
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
GST Core Fixed Total return Target 5-year U.S. At least 65% Minimum = Foreign fixed-
Income Fund consisting of Duration* = Treasury note of assets in BBB/Baa income,
capital Lehman fixed-income Minimum for municipal and
appreciation Brothers securities, non-dollar convertible
and income Aggregate including securities = securities,
that exceeds Bond Index U.S. AA/Aa foreign
the total plus or minus Government currencies and
return of the 1 year Securities, repurchase
Lehman Maximum corporate, agreements
Brothers Duration* = 6 mortgage- collateralized
Aggregate years backed and by U.S.
Bond Index. asset-backed Government
securities. Securities.
- ---------------------------------------------------------------------------------------------------------
GST High A high level Target 6-year U.S. Except for At least 65% Mortgage-
Yield Fund of current Duration* = Treasury note temporary = BB/Ba or backed and
income and Lehman defensive below asset-backed
capital Brothers High purposes, at securities,
appreciation. Yield Bond least 65% of U.S.
Index plus or assets in Government
minus 2.5 fixed-income Securities,
years securities investment
Maximum rated below grade
Duration* = investment corporate
7.5 years grade, fixed-income
including securities,
U.S. and non- structured
U.S. dollar securities,
corporate foreign
debt, foreign currencies and
government repurchase
securities, agreements
convertible collateralized
securities by U.S.
and preferred Government
stock. Securities.
- ---------------------------------------------------------------------------------------------------------
</TABLE>
* Under normal interest rate conditions.
13
<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 VIT Growth and Income, VIT Mid Cap Equity and
GST 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 difficulties and that, in the opinion of the investment adviser,
are available at attractive prices.
Domestic Growth Style Fund. The VIT 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 VIT CORE U.S. Equity, VIT CORE Large Cap Growth,
VIT CORE Large Cap Value, VIT CORE Small Cap Equity and VIT 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 VIT CORE U.S. Equity, VIT CORE
Large Cap Growth, VIT CORE Large Cap Value and VIT CORE Small Cap Equity Funds
(the "CORE U.S. Equity Funds"), and a broad universe of foreign equity
securities for the VIT 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. Equity Funds use one Multifactor
Model to forecast the returns of securities held in each Fund's portfolio. The
VIT CORE International Equity Fund uses multiple Multifactor Models to forecast
returns. Currently, the VIT 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.,
14
<PAGE>
- --------------------------------------------------------------------------------
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 VIT 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. Equity 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 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
Equity Fund seeks to capitalize on the strengths of each discipline.
Actively Managed International Funds. The VIT International Equity, GST
Japanese Equity, GST European Equity, GST International Small Cap, GST Emerging
Markets Equity and GST 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, 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.
GST Real Estate Securities Fund. The investment strategy of the GST 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 GST 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 GST 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 security to have met its minimum
credit rating requirement if the security receives the minimum required long-
term rating (or the equivalent short-term credit rating) at the time of
purchase from at least one rating organization (including, but not limited to,
Standard & Poor's Ratings Group ("S&P") and Moody's Investors
15
<PAGE>
- --------------------------------------------------------------------------------
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.
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 December 31, 1998, GSAM,
together with its affiliates, acted as investment adviser or distributor for
assets in excess of $195 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.
16
<PAGE>
Fund Managers
<TABLE>
<CAPTION>
Years Primarily
Name and Title Responsible Five Year Employment History
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Mark M. Carhart, Ph.D., Since 1999 Mr. Carhart joined the Investment Adviser in 1997 as a
CFA member of the Quantitative Research and Risk Management
Vice President, Co-Head team. From August 1995 to September 1997, he was
Quantitative Research Assistant Professor of Finance at the Marshall School of
and Business at USC and a Senior Fellow of the Wharton
Senior Portfolio Manager Financial Institutions Center. From 1993 to 1995, he was
a lecturer and graduate student at the University of
Chicago Graduate School of Business.
- --------------------------------------------------------------------------------------------------
Raymond J. Iwanowski Since 1999 Mr. Iwanowski joined the Investment Adviser in 1997.
Vice President, Co-Head Prior to joining the Investment Adviser, he spent three
Quantitative Research years at Salomon Brothers, where he was a Vice President
and and head of the Fixed Derivatives Client Research group.
Senior Portfolio Manager
- --------------------------------------------------------------------------------------------------
Neil Chriss, Ph.D. Since 1999 Mr. Chriss joined the Investment Adviser in 1997. From
Vice President and 1996 to 1998, he worked in the equity division of Morgan
Portfolio Manager 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 1998. From
Vice President and 1992 to 1998, he was Assistant Professor of Finance and
Portfolio Manager 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. From
Vice President and 1996 to 1998, he worked in the Firmwide Risk Group of
Portfolio Manager 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 1997,
Vice President and he worked in the Firmwide Risk Group of Goldman, Sachs &
Portfolio Manager Co. From 1992 to 1997, he worked at Quantitative
Financial Strategies, Inc.
- --------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
- --------------------------------------------------------------------------------
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.
The Investment Adviser has voluntarily agreed to reduce or limit certain "Other
Expenses" of the Portfolios (excluding management 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, are calculated monthly on
a cumulative basis. The Investment Adviser may discontinue or modify any
limitations in the future at 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 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," which may lead 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
Investment Adviser or other service providers do not adequately address this
problem in a timely manner.
18
<PAGE>
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In order to address the Year 2000 Problem, the Investment Adviser has taken the
following measures:
(i) 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. (ii) The Investment Adviser has sought assurances from the
Portfolios' and 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.
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 undertaken measures to appropriately
take into account available information concerning the Year 2000 preparedness
of the issuers of securities held by the Portfolios and the Underlying Funds.
The Investment Adviser may obtain such Year 2000 information from various
sources which the Investment Adviser believes to be reliable, including the
issuers' public regulatory filings. However, the Investment Adviser is not in a
position to verify the accuracy or completeness of such information.
At this time, however, no assurance can be given that the actions taken by the
Investment Adviser and the Portfolios' and the Underlying 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 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. Shares of the Underlying Funds
held by a Portfolio are valued based on the net asset value of the Underlying
Funds as determined under procedures established by the Trustees. Other
portfolio securities held by a Portfolio 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 Conservative Strategy, Balanced Strategy, Growth and Income Strategy and
Growth Strategy Portfolios may 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, 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.
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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 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,
shareholders 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.
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 management 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 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 Funds, and
provision of meaningful additional diversification benefits.
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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 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%
GST High Yield Fund 0.70% 0.76%
</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 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 of the Trust 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.
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 Investment Advisers, Distributor, and/or their affiliates may, from time to
time, pay compensation from their own assets (and not as an additional charge
to the Funds) to Participating Insurance Companies for administrative
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services that such Companies provide to their variable annuity and variable
life insurance contract owners who are invested in the Funds. In addition, the
Investment Advisers, Distributor, and/or their affiliates may, from time to
time, pay compensation from their own assets (and not as an additional charge
to the Funds) to various securities dealers (including affiliates of
Participating Insurance Companies) that distribute variable annuity contracts
and/or variable life insurance contracts of such Companies in connection with
the sale, distribution and/or servicing of such contracts and subject to
applicable NASD rules, contribute to various cash and non-cash incentive
arrangements to promote the sale of such contracts.
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 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.
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, through which variable
annuity contracts and variable life insurance policies are sold solely to
qualified pension and profit-sharing plans 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 sale of Portfolio shares to these
unaffiliated Separate Accounts may present certain conflicts of interests among
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 directly to qualified pension and
profit sharing plans. 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
VIT Short Duration Government and GST Adjustable Rate Government Funds invest
in U.S. Government Securities and related repurchase agreements, and neither of
these Funds, the GST Government Income Fund nor the GST Financial Square Prime
Obligations Fund makes foreign investments. The investments of the GST
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
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 GST 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. Foreign
investments involve special risks that are not typically associated with
investing in U.S. dollar denominated or quoted securities of U.S. issuers.
Foreign investments may be affected by changes in currency rates, changes in
foreign or U.S. laws or restrictions applicable to such investments and changes
in exchange control regulations (e.g., currency blockage). A decline in the
exchange rate of the currency (i.e., weakening of the currency against the U.S.
dollar) in which a portfolio security is quoted or denominated relative to the
U.S. dollar would reduce the value of the portfolio security. In addition, if
the currency in which a Fund receives dividends, interest or other payments
declines in value against the U.S. dollar
A-1
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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 dividends.
The introduction of a single currency, the euro, on January 1, 1999 for
participating nations in the European Economic and Monetary Union presents
unique uncertainties, including 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; 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 countries that now are or
may in the future become members of the European Union ("EU"), may have an
impact on the euro. These or other factors, including political and economic
risks, could cause market disruptions and could adversely affect the value of
securities and foreign currencies held by the Underlying Funds.
Brokerage commissions, custodial services and other costs relating to
investment in international securities markets generally are more expensive
than in the United States. 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
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
GST Core Fixed Income, VIT Global Income, GST High Yield, VIT CORE
International Equity, VIT International Equity, GST Japanese Equity, GST
European Equity, GST International Small Cap, GST Emerging Markets Equity and
GST 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 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.
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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 GST Core Fixed Income, VIT Global Income,
GST High Yield, VIT CORE International Equity, VIT International Equity, GST
Japanese Equity, GST European Equity, GST International Small Cap, GST Emerging
Markets Equity and GST Asia Growth Funds may invest in debt obligations of
foreign governments and governmental agencies, including those of Emerging
Countries. Investment in sovereign debt obligations involves special risks not
present in debt obligations of corporate issuers. The issuer of the debt or the
governmental authorities that control the repayment of the debt may be unable
or unwilling to repay principal or interest when due in accordance with the
terms of such debt, and 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,
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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 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), may also invest in asset-backed securities ("Asset-Backed Securities").
GST Adjustable Rate Government and VIT Short Duration Government Funds'
investments in Asset-Backed Securities are limited to securities that are
issued or guaranteed by U.S. government agencies, instrumentalities or
sponsored enterprises. 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 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
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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 GST Core Fixed Income and GST 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 VIT Growth and Income, VIT Capital Growth, GST Small Cap
Value, VIT International Equity, GST Japanese Equity, GST European Equity, GST
International Small Cap, GST Emerging Markets Equity, GST Asia Growth and GST
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 VIT 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.
Options on Securities and Securities Indices
The Underlying Funds (other than the VIT CORE Large Cap Value, VIT CORE U.S.
Equity and VIT 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 GST Core Fixed Income,
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VIT Global Income, GST High Yield, VIT CORE International Equity, VIT
International Equity, GST Japanese Equity, GST European Equity, GST
International Small Cap, GST Emerging Markets Equity and GST 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
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,
in order to seek to increase total return; to hedge against changes in interest
rates, securities prices or currency exchange rates; or, to the extent
applicable, to otherwise manage their term structures or durations in
accordance with their investment objectives and policies. 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:
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 adviser does not accurately
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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 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 GST
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
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 GST Core Fixed Income, VIT Global Income, GST
High Yield, VIT CORE International Equity, VIT International Equity, GST
Japanese Equity, GST European Equity, GST International Small Cap, GST Emerging
Markets Equity and GST 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 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. 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.
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Mortgage Dollar Rolls
The Underlying Fixed-Income Funds (except the GST High Yield Fund) and the GST
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 GST 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 315% 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 GST Real Estate Securities Fund
only), (ii) yield curve options and inverse floating rate securities
(Underlying Fixed-Income Funds and GST Real Estate Securities Fund only), (iii)
loan participations (GST 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.
(2) Related Additional Risk Factors
Risks of Investing in Small Capitalization Companies and REITs
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
VIT International Equity, GST European Equity, GST International Small Cap, GST
Emerging Markets Equity and GST 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 VIT Growth and Income, GST Small Cap
Value, VIT Mid Cap Equity, GST High Yield and VIT CORE International Equity
Funds may each invest up to 25%, and the GST Core Fixed Income, VIT Global
Income and VIT 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
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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
Funds' 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. In addition, settlement procedures in
Emerging Countries are frequently less developed and reliable than those in the
United States and may involve an 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 an 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 GST 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 GST
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 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.
A-9
<PAGE>
------------------
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 VIT 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 VIT 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-10
<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 02171
ARTHUR ANDERSEN LLP
Independent Public Accountants
225 Franklin Street
Boston, Massachusetts 02110
Toll Free (in U.S.): 800-292-4726
505539 Prospectus
<PAGE>
Goldman
Sachs Variable Insurance Trust
PROSPECTUS
Goldman Sachs CORE Large Cap Value Fund
Goldman Sachs CORE International Equity Fund
Goldman Sachs Short Duration Government Fund
(LOGO)
March 1, 1999
<PAGE>
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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.
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 March 1, 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.
Prospectus, March 1, 1999
1
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<TABLE>
<CAPTION>
TABLE OF CONTENTS Page
<S> <C>
FUND HIGHLIGHTS............................................................ 3
OVERVIEW OF INVESTMENT STYLES.............................................. 5
INVESTMENT OBJECTIVES AND POLICIES......................................... 6
DESCRIPTION OF SECURITIES.................................................. 7
INVESTMENT TECHNIQUES...................................................... 10
RISK FACTORS............................................................... 13
INVESTMENT RESTRICTIONS.................................................... 15
PORTFOLIO TURNOVER......................................................... 15
MANAGEMENT................................................................. 16
</TABLE>
<TABLE>
<S> <C>
NET ASSET VALUE............................................................. 19
PERFORMANCE INFORMATION..................................................... 19
SHARES OF THE TRUST......................................................... 19
EXPENSES.................................................................... 20
TAXATION.................................................................... 20
ADDITIONAL INFORMATION...................................................... 21
DIVIDENDS................................................................... 21
PURCHASE AND REDEMPTION OF SHARES........................................... 21
</TABLE>
2
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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.
The investment objectives and policies of the Funds are similar to the
investment objectives and policies of other mutual funds that the Investment
Adviser manages. Although the objectives and policies may be similar, the
investment results of the Funds may be higher or lower than the results of such
other mutual funds. The Investment Adviser cannot guarantee, and makes no
representation, that the investment results of similar funds will be comparable
even though the funds have the same Investment Adviser.
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 a
"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."
<TABLE>
<CAPTION>
Fund Name Investment Objectives Investment Criteria Benchmark
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CORE Large Cap Value Long-term growth of At least 90% of total assets in equity Russell 1000 Value
Fund capital and dividend securities of U.S. issuers, including Index
income. 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.
- -----------------------------------------------------------------------------------------------------------
CORE International Long-term growth of At least 90% of total assets in equity EAFE Index
Equity Fund capital. securities of companies organized outside (unhedged)
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.
- -----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Expected
Approximate
Fund Investment Interest Rate Investment Credit Other
Name Objectives Duration Sensitivity Sector Quality Investments Benchmark
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Short A high level Target = 2-year At least 65% of U.S. Mortgage pass- 2-year
Duration of current 2 year U.S. total assets in Government through U.S.
Government income, and U.S. Treasury securities issued Securities securities and Treasury
Fund secondarily, Treasury note or guaranteed by other Security
in seeking Security the U.S. securities
current plus or government, its representing
income, may minus .5 agencies, an interest in
also consider years* instrumentalities or
the potential Maximum = or sponsored collateralized
for capital 3 years enterprises ("U.S. by mortgage
appreciation. Government loans.
Securities")
and repurchase
agreements
collateralized by
such securities.
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
* Under normal interest rate conditions.
3
<PAGE>
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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 recent introduction of the euro, 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.
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 December 31, 1998, the Investment Adviser, together with its affiliates,
acted as investment adviser for assets in excess of $195 billion.
Who Distributes the Funds' Shares?
Goldman Sachs acts as distributor of each Fund's shares.
How do I Purchase or Redeem Shares?
Investors may purchase or redeem shares of the Funds in connection with
variable annuity contracts and variable life insurance policies offered through
the Separate Accounts of Participating Insurance Companies. You should refer to
the prospectus of your Participating Insurance Company's Separate Account for
information on how to purchase a variable annuity contract or variable life
insurance policy, how to select specific Funds as investment options for your
contract or policy and how to redeem monies from the Trust. See "Purchase and
Redemption of Shares."
When are Dividends and Distributions Paid?
Investment income dividends and capital gains distributions are paid at least
annually 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."
4
<PAGE>
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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"). 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.
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 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 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 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
5
<PAGE>
- --------------------------------------------------------------------------------
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 usually
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. 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--Equity Funds--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.
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 U.S. Treasury note.
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
6
<PAGE>
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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 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.
Foreign investments involve special risks that are not typically associated
with investing in U.S. dollar denominated or quoted securities of U.S. issuers.
Foreign investments may be affected by changes in currency rates, changes in
foreign or U.S. laws or restrictions applicable to such investments and changes
in exchange control regulations (e.g., currency blockage). A decline in the
exchange rate of the currency (i.e., weakening of the currency against the U.S.
dollar) in which a portfolio security is quoted or denominated relative to the
U.S. dollar would reduce the value of the portfolio security. In addition, if
the currency in which a Fund receives dividends, interest or other payments
declines in value against the U.S. dollar before such income is distributed as
dividends to shareholders or converted to U.S. dollars, the Fund may have to
sell portfolio securities to obtain sufficient cash to pay such dividends.
The introduction of a single currency, the euro, on January 1, 1999 for
participating nations in the European Economic and Monetary Union presents
unique uncertainties, including 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; 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 countries that now are or may
in the future become members of the European Union ("EU"), may have an impact
on the euro. These or other factors, including political and economic risks,
could cause market disruptions and could adversely affect the value of
securities and foreign currencies held by the Funds.
Brokerage commissions, custodial services and other costs relating to
investment in international securities markets generally are more expensive
than in the United States. 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
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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 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
CORE 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 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 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
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other party to such instruments than is available for currency instruments
traded on an exchange. Such contracts are subject to the risk that the
counterparty to the contract will default on its obligations. Since these
contracts are not guaranteed by an exchange or clearinghouse, a default on the
contract would deprive the Fund of unrealized profits, transaction costs or the
benefits of a currency hedge or force the Fund to cover its purchase or sale
commitments, if any, at the current market price. A Fund will not enter into
forward foreign currency exchange contracts, currency swaps or other privately
negotiated currency instruments unless the credit quality of the unsecured
senior debt or the claims-paying ability of the counterparty is considered to
be investment grade by the Investment Adviser.
The 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 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
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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 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 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.
Asset-Backed Securities. The Short Duration Government Fund may invest in
asset-backed securities ("Asset-Backed Securities") that are issued or
guaranteed by U.S. government agencies, instrumentalities or sponsored
enterprises. The principal and interest payments on Asset-Backed Securities may
be collateralized by pools of assets such as receivables, leases, installment
contracts and personal property.
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
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fluctuations in securities prices or interest rates. The successful use of
options for hedging purposes also depends in part on the ability of the
Investment Adviser to manage future price fluctuations and the degree of
correlation between the options and securities markets. If the Investment
Adviser is incorrect in its expectation of changes in securities prices or
determination of the correlation between the securities indices on which
options are written and purchased and the securities in a Fund's investment
portfolio, the investment performance of the Fund will be less favorable than
it would have been in the absence of such options transactions. The writing of
options could significantly increase a Fund's portfolio turnover rate and,
therefore, associated brokerage commissions or spreads.
Options on Foreign Currencies
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
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, in
order to seek to increase total return; to hedge against changes in interest
rates, securities prices, or in the case of the CORE Funds, currency exchange
rates; or, to the extent applicable, to otherwise manage their term structure
or durations in accordance with their investment objectives and policies. 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 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
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fluctuations in futures contract prices during a single day. Each CORE 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 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 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
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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.
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 short-term
U.S. Government Securities and repurchase agreements collateralized by U.S.
Government 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 Ratings Group or P-2 by Moody's Investors Services,
Inc., 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 the
13
<PAGE>
- --------------------------------------------------------------------------------
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, and their respective affiliates, 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 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.
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.
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 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.
14
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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
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 mortgages. 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 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.
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
15
<PAGE>
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Short Duration Government Funds will generally not exceed 75%, 100% and 300%,
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 December 31, 1998, GSAM,
together with its affiliates, acted as investment adviser or distributor for
assets in excess of $195 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.
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.
16
<PAGE>
Fund Managers
<TABLE>
<CAPTION>
Years Primarily Five Year
Name and Title Fund Responsibility Responsible Employment History
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Jonathan A. Beinner Portfolio Manager- Since 1999 Mr. Beinner joined the Investment
Managing Director and Short Duration Adviser in 1990.
Co-Head of U.S. Fixed Government
Income Department
- ----------------------------------------------------------------------------------------------------
Melissa Brown Senior Portfolio Since 1999 Ms. Brown joined the Investment
Vice President Manager- Adviser in 1998. From 1984 to 1998,
CORE Large Cap Value she was the director of Quantitative
CORE International Equity Research and served on the
Equity Investment Policy Committee at
Prudential Securities.
- ----------------------------------------------------------------------------------------------------
Mark M. Carhart Senior Portfolio Since 1999 Mr. Carhart joined the Investment
Vice President Manager- Adviser as a member of the
CORE International Quantitative Research and Risk
Equity 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 1999 Mr. Clark joined the Investment
Vice President Short Duration Advisor in 1994 after working as an
Government investment manager in the mortgage
backed securities group at Travelers
Insurance Company.
- ----------------------------------------------------------------------------------------------------
Kent A. Clark Senior Portfolio Since 1999 Mr. Clark joined the Investment
Managing Director Manager- Adviser in 1992.
CORE Large Cap Value
CORE International
Equity
- ----------------------------------------------------------------------------------------------------
Peter A. Dion Portfolio Manager- Since 1999 Mr. Dion joined the Investment Adviser
Vice President Short Duration in 1992.
Government
- ----------------------------------------------------------------------------------------------------
Raymond J. Iwanowski Portfolio Manager- Since 1999 Mr. Iwanowski joined the Investment
Vice President CORE International Adviser as an associate and portfolio
Equity 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 Since 1999 Mr. Jones joined the Investment
Managing Director Manager- Adviser in 1989.
CORE Large Cap Value
CORE International
Equity
- ----------------------------------------------------------------------------------------------------
C. Richard Lucy Portfolio Manager- Since 1999 Mr. Lucy joined the Investment Adviser
Managing Director and Short Duration in 1992.
Co-Head of U.S. Fixed Government
Income Department
- ----------------------------------------------------------------------------------------------------
James P. McCarthy Portfolio Manager- Since 1999 Mr. McCarthy joined the Investment
Vice President Short Duration Adviser in 1995 after working four
Government years at Nomura Securities, where he
was an assistant vice president and an
adjustable rate mortgage trader.
- ----------------------------------------------------------------------------------------------------
Victor H. Pinter Senior Portfolio Since 1999 Mr. Pinter joined the Investment
Vice President Manager- Adviser in 1990.
CORE Large Cap Value
CORE International
Equity
- ----------------------------------------------------------------------------------------------------
</TABLE>
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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>
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
transactions 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.
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," which may lead 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 Investment Adviser or other Fund
service providers do not adequately address this problem in a timely manner.
In order to address the Year 2000 Problem, the Investment Adviser has taken the
following measures:
(i) 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. (ii) 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.
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 undertaken measures to appropriately
take into account available information concerning the Year 2000 preparedness
of the issuers of securities held by the Funds. The Investment Adviser may
obtain such Year 2000 information from
18
<PAGE>
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various sources which the Investment Adviser believes to be reliable, including
the issuers' public regulatory filings. However, the Investment Adviser is not
in a position to verify the accuracy or completeness of such information.
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.
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 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
19
<PAGE>
- --------------------------------------------------------------------------------
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,
shareholders may, under certain circumstances, as permitted by the Act,
communicate with other shareholders in connection with requiring a special
meeting of shareholders. The Trustees will call a special meeting of
shareholders for the purpose of electing Trustees if, at any time, less than a
majority of Trustees holding office at the time were elected by shareholders.
In the interest of economy and convenience, the Trust does not issue
certificates representing the Funds' shares. Instead, the Transfer Agent
maintains a record of each shareholder's ownership. Each shareholder receives
confirmation of purchase and redemption orders from the Transfer Agent. Fund
shares and any dividends and distributions paid by the Fund are reflected in
account statements from the Transfer Agent.
EXPENSES
The Trust is responsible for the payment of its expenses. The expenses include,
without limitation, management fees, custodial and 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.
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 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 of the Trust 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
20
<PAGE>
- --------------------------------------------------------------------------------
(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.
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 Investment Advisers, Distributor, and/or their affiliates may, from time to
time, pay compensation from their own assets (and not as an additional charge
to the Funds) to Participating Insurance Companies for administrative services
that such Companies provide to their variable annuity and variable life
insurance contract owners who are invested in the Funds. In addition, the
Investment Advisers, Distributor, and/or their affiliates may, from time to
time, pay compensation from their own assets (and not as an additional charge
to the Funds) to various securities dealers (including affiliates of
Participating Insurance Companies) that distribute variable annuity contracts
and/or variable life insurance contracts of such Companies in connection with
the sale, distribution and/or servicing of such contracts and, subject to
applicable NASD rules, contribute to various cash and non-cash incentive
arrangements to promote the sale of such contracts.
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 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.
21
<PAGE>
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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, through which variable annuity contracts and
variable life insurance policies are sold solely to qualified pension and
profit-sharing plans 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 sale of Fund shares to these
unaffiliated Separate Accounts may present certain conflicts of interests among
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 directly to qualified pension and
profit sharing plans. In addition, the Trust currently does not foresee any
disadvantages to the holders of variable annuity contracts and variable life
insurance policies arising from the fact that interests of the holders of
variable annuity contracts and variable life insurance policies may differ due
to differences of tax treatment or other considerations or due to conflicts
among the unaffiliated Participating Insurance Companies. If, however, a
material unreconcilable conflict arises between the holders of variable annuity
contracts and variable life insurance policies of unaffiliated Participating
Insurance Companies, a Participating Insurance Company may be required to
withdraw the assets allocable to some or all of the Separate Accounts from the
Funds. Any such withdrawal could disrupt orderly portfolio management to the
potential detriment of such holders. The variable annuity contracts and
variable life insurance policies are described in the separate prospectuses
issued by the Participating Insurance Companies.
22
<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 02171
ARTHUR ANDERSEN LLP
Independent Public Accountants
225 Franklin Street
Boston, Massachusetts 02110
Toll Free (in U.S.): 800-292-4726
505538 Prospectus
<PAGE>
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 March 1, 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 March 1, 1999.
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
Toll free.......800-292-4726
-i-
<PAGE>
TABLE OF CONTENTS
Page
----
INTRODUCTION................................................ B-1
INVESTMENT OBJECTIVES AND POLICIES.......................... B-2
DESCRIPTION OF INVESTMENT SECURITIES AND PRACTICES.......... B-19
MANAGEMENT.................................................. B-67
PORTFOLIO TRANSACTIONS AND BROKERAGE........................ B-85
NET ASSET VALUE............................................. B-87
PERFORMANCE INFORMATION..................................... B-89
SHARES OF THE TRUST......................................... B-93
TAXATION.................................................... B-96
OTHER INFORMATION........................................... B-99
APPENDIX A.................................................. A-1
APPENDIX B.................................................. B-1
-ii-
<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 Fund is a
separately managed, diversified mutual fund with its own investment objectives
and policies. 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").
B-1
<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-2
<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-3
<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's investments in
fixed-income securities are limited to securities that are considered cash
equivalents.
B-4
<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's investments in fixed-income securities are limited to
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's investments in fixed-income securities are limited to 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-5
<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's
investments in fixed-income securities are limited to 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-6
<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-7
<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 U.S. Treasury Note
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 government 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-8
<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 a Nationally Recognized
Statistical Rating Organization ("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 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-9
<PAGE>
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 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,
B-10
<PAGE>
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 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
B-11
<PAGE>
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 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
B-12
<PAGE>
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.
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.
B-13
<PAGE>
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 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.
B-14
<PAGE>
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 U.S.
Treasury 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 maximum duration will not exceed six
years. The approximate interest rate sensitivity of the Fund is expected to be
comparable to a five-year U.S. Treasury note.
B-15
<PAGE>
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 U.S. Treasury note.
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.
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. 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. The securities currently included in the
B-16
<PAGE>
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 or, if unrated, will be determined by the Fund's investment adviser to be
of comparable quality. 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.
GST 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
B-17
<PAGE>
duration will not exceed 7.5 years. The approximate interest rate sensitivity of
the Fund is expected to be comparable to a 6-year U.S. Treasury note.
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 Investment
Securities and Practices." 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 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.
B-18
<PAGE>
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 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
B-19
<PAGE>
comparable rated and unrated securities) are commonly referred to as "junk
bonds" and are considered speculative. The ability of their issuers to make
principal and interest payments may be questionable. In some cases, such bonds
may be highly speculative, have poor prospects for reaching investment grade
standing and be in default. As a result, investment in such bonds will entail
greater risks than those associated with investment grade bonds (i.e., bonds
rated AAA, AA, A or BBB by Standard and Poor's or Aaa, Aa, A or Baa by Moody's).
Analysis of the creditworthiness of issuers of high yield securities may be more
complex than for issuers of higher quality debt securities, and the ability of
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.
B-20
<PAGE>
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 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 shrink or disappear suddenly and
without warning as a result of adverse market or economic conditions independent
of any specific adverse changes in the condition of a particular issuer.
Because of the lack of sufficient market liquidity, a Fund may incur losses
because it will be required to effect sales at a disadvantageous time and then
only at a substantial drop in price. 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.
B-21
<PAGE>
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 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
B-22
<PAGE>
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, 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
that 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
B-23
<PAGE>
may be limited to the issuing branch by 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. In addition, the profitability of the banking industry is largely
dependent upon the availability and cost of funds for the purpose of financing
lending operations under prevailing money market conditions. General economic
conditions as well as exposure to credit losses arising from possible financial
difficulties of borrowers play an important part in the operations of this
industry.
Deferred Interest, Pay-in-Kind and Capital Appreciation Bonds
- -------------------------------------------------------------
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.
B-24
<PAGE>
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 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
B-25
<PAGE>
receipts evidence ownership of future interest payments, principal payments or
both on certain notes or bonds issued by the U.S. Government, its agencies,
instrumentalities, political subdivisions or authorities. These custodial
receipts are known by various names, including "Treasury Receipts," "Treasury
Investors Growth Receipts" ("TIGRs"), and "Certificates of Accrual on Treasury
Securities" ("CATs"). For certain securities law purposes, custodial receipts
are not considered U.S. Government securities.
Municipal Securities
- --------------------
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.
B-26
<PAGE>
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.
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
B-27
<PAGE>
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, 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 of 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.
B-28
<PAGE>
Mortgage Loans and Mortgage-Backed Securities
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General Characteristics. The Short Duration Government Fund and certain of
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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, 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
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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. 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.
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
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<PAGE>
or as well for limitations on changes in the monthly payment on such ARMs.
Limitations on monthly payments can result in monthly payments which are greater
or less than the amount necessary to amortize a Negatively Amortizing ARM by its
maturity at the Mortgage Interest Rate in effect in any particular month. In the
event that a monthly payment is not sufficient to pay the interest accruing on a
Negatively Amortizing ARM, any such excess interest is added to the principal
balance of the loan, causing negative amortization, and will be repaid through
future monthly payments. It may take borrowers under Negatively Amortizing ARMs
longer periods of time to build up equity and may increase the likelihood of
default by such borrowers. In the event that a monthly payment exceeds the sum
of the interest accrued at the applicable Mortgage Interest Rate and the
principal payment which would have been necessary to amortize the outstanding
principal balance over the remaining term of the loan, the excess (or
"accelerated amortization") further reduces the principal balance of the ARM.
Negatively Amortizing ARMs do not provide for the extension of their original
maturity to accommodate changes in their Mortgage Interest Rate. As a result,
unless there is a periodic recalculation of the payment amount (which there
generally is), the final payment may be substantially larger than the other
payments. These limitations on periodic increases in interest rates and on
changes in monthly payments protect borrowers from unlimited interest rate and
payment increases.
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 resulting in lower yields to a Fund. 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 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
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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
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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
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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 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.
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4. "Due-on-Sale" Provisions. Fixed-rate mortgage loans may contain a so-
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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
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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.
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
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<PAGE>
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 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
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<PAGE>
guaranteed and privately issued mortgage pass-through securities ("Mortgage
Pass- Throughs"); that is, fixed or adjustable rate mortgage-backed
securities which provide for monthly payments that are a "pass-through" of the
monthly interest and principal payments (including any prepayments) made by the
individual borrowers on the pooled mortgage loans, net of any fees or other
amounts paid to any guarantor, administrator and/or servicer of the underlying
mortgage loans.
The following discussion describes only a few of the wide variety of
structures of Mortgage Pass-Throughs that are available or may be issued.
Description of Certificates. Mortgage Pass-Throughs may be issued in one or
---------------------------
more classes of senior certificates and one or more classes of subordinate
certificates. Each such class may bear a different pass-through rate.
Generally, each certificate will evidence the specified interest of the holder
thereof in the payments of principal or interest or both in respect of the
mortgage pool comprising part of the trust fund for such certificates.
Any class of certificates may also be divided into subclasses entitled to
varying amounts of principal and interest. If a REMIC election has been made,
certificates of such subclasses may be entitled to payments on the basis of a
stated principal balance and stated interest rate, and payments among different
subclasses may be made on a sequential, concurrent, pro rata or disproportionate
basis, or any combination thereof. The stated interest rate on any such
subclass of certificates may be a fixed rate or one which varies in direct or
inverse relationship to an objective interest index.
Generally, each registered holder of a certificate will be entitled to receive
its pro rata share of monthly distributions of all or a portion of principal of
the underlying mortgage loans or of interest on the principal balances thereof,
which accrues at the applicable mortgage pass-through rate, or both. The
difference between the mortgage interest rate and the related mortgage pass-
through rate (less the amount, if any, of retained yield) with respect to each
mortgage loan will generally be paid to the servicer as a servicing fee. Since
certain adjustable rate 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
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<PAGE>
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 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
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<PAGE>
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.
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.
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<PAGE>
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.
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.
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<PAGE>
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 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
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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 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 and CORE
Large Cap Growth Funds may only enter into such transactions with respect to a
representative index. CORE U.S. Equity Fund may enter into futures contracts
only with respect to the S&P 500 Index. 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
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<PAGE>
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 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, sector selection 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
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<PAGE>
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.
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, 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
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<PAGE>
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 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.
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 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 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.
The profitability of a Fund's trading in futures to seek to increase total
returns depends upon the ability of its investment adviser to analyze correctly
the futures markets.
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
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<PAGE>
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 segregated 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 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 segregating
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 segregating cash or liquid assets with a value
equal to the exercise price or by using the other methods described above.
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-
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<PAGE>
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.
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.
B-44
<PAGE>
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 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 the trading markets for these options may not be as
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.
B-45
<PAGE>
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 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 transactions. The use of options to seek to
increase total return involves the risk of loss if an 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 an investment adviser to predict future price fluctuations and
the degree of correlation between the options and securities markets. If an
investment adviser is incorrect in its expectation of changes in securities
prices or determination of the correlation between the securities indices on
which options are written and purchased and the securities in a Fund's
investment portfolio, the investment performance of the Fund will be less
favorable than it would have been in the absence of such options transactions.
The writing of options could increase a Fund's portfolio turnover rate and,
therefore, associated brokerage commissions or spreads.
Warrants and Stock Purchase Rights
- ----------------------------------
Certain of the 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. 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 the potential 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
B-46
<PAGE>
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 also involves, however, 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. To the extent that a
Fund is fully invested in foreign securities while also maintaining currency
positions it may be exposed for greater combined risk.
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. In addition, if the currency in which an Underlying
Fund receives dividends, interest 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
B-47
<PAGE>
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 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.
Investing in Emerging Markets. CORE International Equity, International
-----------------------------
Equity, European Equity, Japanese 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 (for certain Funds) 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
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<PAGE>
and Capital Growth Funds may invest, to a lesser extent, in equity and
equity-related securities of foreign issuers, including Emerging Country
issuers. The Core Fixed Income, Global Income and High Yield 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. Substantially less information may be
publicly available about Emerging Country issuers than is available about
issuers in the United States.
Emerging Country securities markets are typically 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. A Fund's investments in Emerging Countries are
subject to the risk that the liquidity of particular investments, or investments
generally, in such countries, will shrink or disappear suddenly and without
warning as a result of economic, market or political conditions, or adverse
investor perceptions, whether or not accurate. 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 certain Emerging Countries is
restricted or controlled to varying degrees. These restrictions may limit a
Fund's investment in certain Emerging Countries and may increase the expenses of
the Fund. Certain Emerging Countries
B-49
<PAGE>
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 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. This instability may result from, among
other things, the following: (i) authoritarian governments or military
involvement in political and economic decision making, including changes or
attempted changes in governments through extra-constitutional means; (ii)
popular unrest associated with demands for improved political, economic or
social conditions; (iii) internal insurgencies; (iv) hostile relations with
neighboring countries; and (v) ethnic, religious and racial disaffection or
conflict. Such economic, political and social instability could disrupt the
principal financial markets in which the 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.
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<PAGE>
The creditworthiness of the local securities firms used by a Fund in Emerging
Countries may not be as sound as the creditworthiness of firms used in more
developed countries, thus subjecting the Fund to a greater risk of loss if a
securities firm defaults in the performance of its responsibilities.
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. 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 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.
B-51
<PAGE>
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 involve
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.
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
B-52
<PAGE>
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 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, 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 requiring the
Fund to purchase foreign currencies and forward contracts entered into to seek
to increase total returns. The segregated assets will be
B-53
<PAGE>
marked to market. If the value of the segregated assets declines, additional
cash or liquid assets will be segregated so that the value of the account will
equal the amount of a Fund's commitments with respect to such contracts.
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 may 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.
Markets for trading foreign forward currency contracts offer less protection
against defaults than is available when trading in currency instruments on an
exchange. 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.
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 foreign
portfolio securities and against increases in the U.S. dollar cost of foreign
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
B-54
<PAGE>
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 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 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
B-55
<PAGE>
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 option
position may be closed out only on an options exchange which provides a
secondary market for an option of the same series. There is no assurance that a
liquid secondary market on an exchange will exist for any particular option, or
at any particular time. In such event, it might not be possible to effect
closing transactions in particular options, with the result that 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 may
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.
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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 segregate 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 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 obligations 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
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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 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 transaction
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
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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
are covered by segregated 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 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
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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 segregated. Inasmuch as these transactions are
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.
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 an Underlying 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-
B-60
<PAGE>
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
B-61
<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 NRSRO. 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 market. Upon redemption of a Creation Unit,
the Underlying Fund will receive Index Securities
B-62
<PAGE>
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.
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
B-63
<PAGE>
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
segregates cash or liquid assets 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, certain SMBS, certain municipal leases and
participation interests, certain over-the-counter options, repurchase agreements
and time deposits with a notice or demand 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
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<PAGE>
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.
Portfolio Turnover
- ------------------
Each Underlying Fund may engage in active short-term trading to benefit
from yield disparities among different issues of securities or among the markets
for fixed-income securities, or for other reasons. It is anticipated that the
portfolio turnover rate of each Fund will vary from year to year.
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. 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.
As a matter of fundamental policy, a Fund may not:
(1) make any investment inconsistent with the Fund's classification as
a diversified company under 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 investment companies and the U.S.
government or any of its agencies or
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<PAGE>
instrumentalities). (For the purposes of this restriction, state
and municipal governments and their agencies, authorities and
instrumentalities are not deemed to be industries; telephone
companies are considered to be a separate industry from water, gas
or electric utilities; personal credit finance companies and
business credit finance companies are deemed to be separate
industries; and wholly-owned finance companies are considered to
be in the industry of their parents if their activities are
primarily related to financing the activities of their parents).
This restriction does not apply to investments in municipal
securities which have been pre-refunded 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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<PAGE>
In addition to the fundamental policies mentioned above, the Trustees have
adopted the following non-fundamental policies which can be changed or amended
by action of the Trustees without approval of shareholders.
A Fund may not:
(a) Invest in companies for the purpose of exercising control or management
(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
The Trustees of the Trust are responsible for deciding matters of general
policy and reviewing the actions of the Adviser, distributor and transfer agent.
The officers of the Trust conduct and supervise each Fund's daily business
operations.
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.
B-67
<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 Chairman of the Board of Trustees
1325 Ave. of the Americas & Trustee Goldman Sachs Trust (registered
New York, NY 10019 investment company); Executive Vice
President Finance and Administration
and Chief Financial 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 Trustee Goldman Sachs Trust (registered
One New York Plaza investment company); Director,
New York, NY 10004 Commodities Corp. LLC (since April
1997); Managing Director, J. Aron &
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-68
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Name, Age Positions Principal Occupation(s)
And Address With Trust During Past 5 Years
- ----------- ---------- --------------------------------
*Douglas C. Grip, 36 Trustee Trustee and President Goldman Sachs
One New York Plaza & President Trust (registered investment company);
New York, NY 10004 Managing Director, Goldman, Sachs & Co.
Asset Management Division (since
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 Trustee Goldman Sachs Trust (registered
One New York Plaza investment company); Managing Director,
New York, NY 10004 Goldman Sachs (since 1996); General
Partner, J. Aron & 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 Trustee Goldman Sachs Trust (registered
The Andrew W. Mellon Foundation investment company); Vice President and
140 East 62nd Street Senior Program Officer, The Andrew W.
New York, NY 10021 Mellon Foundation (since October 1997);
President of Bryn Mawr College
(1978-1997); 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>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Name, Age Positions Principal Occupation(s)
And Address With Trust During Past 5 Years
- ----------- ---------- -----------------------------
*Alan A. Shuch, 49 Trustee Trustee Goldman Sachs Trust (registered
One New York Plaza investment company); Limited Partner,
New York, NY 10004 Goldman, Sachs & Co.(since 1994);
Consultant to Goldman 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 Trustee Goldman Sachs Trust (registered
One Northfield Plaza Suite 218 investment company); Chairman, Executive
Northfield, IL 60093 Committee, First Commonwealth, Inc. (a
managed dental 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 Trustee Goldman Sachs Trust (registered
701 Morningside Drive investment company); Director, Walgreen
Lake Forest, IL 60045 Co. (a retail drug store business)
(since April 1998); 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-70
<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 Trustee Goldman Sachs Trust (registered
737 N. Michigan Ave., Suite 1405 investment company); Managing Director,
Chicago, IL 60611 Tandem Partners, Inc. (since 1990);
Director of Kaynar 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 Trust
4900 Sears Tower (registered investment company); Vice
Chicago, IL 60606 President, Goldman, Sachs & Co. (since
April 1985); Co-Manager of Shareholder
Servicing of GSAM (since November 1989).
*John M. Perlowski, 34 Treasurer Treasurer Goldman Sachs Trust
One New York Plaza (registered investment company); Vice
New York, NY 10004 President, Goldman, Sachs & Co.
Incorporated (since July 1995);
Director, Investors Bank and Trust
(November 1993 July 1995).
*James A. Fitzpatrick, 38 Vice President Vice President Goldman Sachs Trust
4900 Sears Tower (registered investment company); Vice
Chicago, IL 60606 President of Goldman Sachs Asset
Management (since April 1997); Vice
President and General Manager, First
Data Corporation - Investor Services
Group (prior thereto).
</TABLE>
B-71
<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
And Address With Trust During Past 5 Years
- ----------- ----------- -----------------------
<S> <C> <C>
Jesse Cole, 35 Vice President Vice President Goldman Sachs Trust
4900 Sears Tower (registered investment company); Vice
Chicago, IL 60606 President, Goldman Sachs Asset
Management (June 1998 to Present); Vice
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 Treasurer Assistant Treasurer Goldman Sachs Trust
10 Hanover Square (registered investment company); Vice
New York, NY 10004 President, Goldman, Sachs & Co. (May
1992-Present); Tax Accountant, Goldman,
Sachs & Co. (December 1990-May 1992).
Anne Marcel, 40 Vice President Vice President Goldman Sachs Trust
4900 Sears Tower (registered investment company); Vice
Chicago, IL 60606 President, Goldman Sachs Asset
Management (June 1998-Present); Vice
President, Stein Roe & Farnham, Inc.
(October 1992-June 1998).
</TABLE>
B-72
<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation(s)
And Address With Trust During Past 5 Years
- ----------- ---------- -----------------------
<S> <C> <C>
*Michael J. Richman, 38 Secretary Secretary Goldman Sachs Trust
85 Broad Street (registered investment company); General
New York, NY 10004 Counsel of the Funds Group of Goldman
Sachs Asset Management (since 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 Secretary Assistant Secretary Goldman Sachs Trust
85 Broad Street (registered investment company);
New York, NY 10004 Assistant General Counsel, Goldman Sachs
Asset Management and Associate General
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 Secretary Assistant Secretary Goldman Sachs Trust
85 Broad Street (registered investment company);
New York, NY 10004 Assistant General Counsel, Goldman Sachs
Asset Management and Assistant General
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 Secretary Assistant Secretary Goldman Sachs Trust
85 Broad Street (registered investment company); Legal
New York, NY 10004 Products Analyst, Goldman, Sachs & Co.
(since June 1993); Funds Compliance
Officer, Citibank Global Asset
Management (August 1991 June 1993).
*Deborah A. Farrell, 27 Assistant Secretary Assistant Secretary Goldman Sachs Trust
85 Broad Street (registered investment company); Legal
New York, NY 10004 Assistant, Goldman, Sachs & Co. (since
January 1996); Executive Secretary,
Goldman, Sachs & Co. (January 1994
January 1996); Legal Secretary, Cleary,
Gottlieb, Steen and Hamilton (September
1990 January 1994).
*Kaysie P. Uniacke, 37 Assistant Secretary Assistant Secretary Goldman Sachs Trust
One New York Plaza (registered investment company);
New York, NY 10004 Managing Director, Goldman Sachs Asset
Management (since 1997); Vice President
and Senior Portfolio Manager, Goldman
Sachs Asset Management (since 1988).
</TABLE>
B-74
<PAGE>
<TABLE>
<CAPTION>
Name, Age Positions Principal Occupation
And Address With Trust During Past 5 Years
- ----------- ---------- ----------------------
<S> <C> <C>
*Elizabeth D. Anderson, 29 Assistant Secretary Assistant Secretary Goldman Sachs Trust
One New York Plaza (registered investment company);
New York, NY 10004 Portfolio Manager, Goldman Sachs Asset
Management (since April 1996); Junior
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>
Each interested Trustee and officer of the Trust holds 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.
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<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:
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)**
- --------------------- -------------- ------------- --------
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
______________
* Includes compensation and Chairman of the Board of Trustees.
** As of the date of this Additional Statement, the Goldman Sachs Mutual
Funds consisted of 64 mutual funds.
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<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. 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.
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 are able to draw on
the substantial research and market expertise of Goldman Sachs whose investment
research effort is one of the largest in the industry. With an annual equity
research budget approaching $200 Million, the Goldman Sachs Global Investment
Research Department covers approximately 2,000 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.
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<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 investment advisers will use OAS analytics to choose what they believe is
an appropriate portfolio of investments for an Underlying Fund from a universe
of eligible investments. In connection with initial portfolio selections, in
addition to using OAS analytics as an aid to meeting each Fund's particular
composition and performance targets, the investment advisers will also take into
account important market criteria like the available supply and relative
liquidity of various mortgage securities in structuring the portfolio.
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
B-79
<PAGE>
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 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 22, 1999. These arrangements were
approved by the sole shareholder of each Fund on February 3, 1999 by consent
action to satisfy conditions imposed by the SEC in connection with the
registration of shares of the Funds. The management agreement will remain in
effect with respect to each Fund until June 30, 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.
B-80
<PAGE>
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 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 in which the Funds
invest, which could have an adverse impact on each Fund's performance. Such
transactions, particularly in respect of proprietary accounts or customer
accounts other than those included in the 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
B-81
<PAGE>
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 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
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<PAGE>
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.
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. Shares of the Funds are offered and sold on a
continuous basis by Goldman Sachs, acting as agent. 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
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<PAGE>
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.
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.
Expenses
- --------
The Funds are responsible for the payment of their expenses. These expenses
include, without limitation, management, custodial and transfer agency fees,
brokerage fees and commissions, filing fees for the registration or
qualification of the Funds' 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 Funds' 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 management fee, as well as other operating expenses,
will have the effect of reducing the total return to investors. From time to
time, the Adviser may waive receipt of its fees and/or voluntarily assume
certain expenses of a Fund, which would have the effect of
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<PAGE>
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.
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
- ------------------------------
Arthur Anderson LLP, independent public accountants, 225 Franklin Street,
Boston, Massachusetts 02110, have been selected as auditors of the Trust. In
addition to audit services, Arthur Anderson LLP prepares the Trust's federal and
state tax returns, and provides consultation and assistance on accounting,
internal control and related matters.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The 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 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
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<PAGE>
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 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
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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
instruments being purchased or sold on an 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. 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 (observed), Labor Day, Thanksgiving Day and
Christmas Day (observed).
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.
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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.
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. The impact of events that occur after the publication of
market quotations
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used by a Fund to price its securities but before the close of regular trading
on the New York Stock Exchange will normally not be reflected in the calculation
of net asset values unless the Trust, in its discretion, makes an adjustment in
light of the nature and materiality of the event, its effect on the Fund
operations and other relevant factors.
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 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.
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Each Portfolio may advertise total return or 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 mutual fund statistical
services and investments for which reliable performance information is
available.
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 Midcap Index; (n) the Russell 2000 Index
- - Total Return; (o) Russell 1000 Growth Index-Total Return; (p) the Value-Line
Composite-Price Return; (q) the Wilshire 4500 Index; (r) the FT-Actuaries Europe
and Pacific Index; (s) historical investment data supplied by the research
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departments of Goldman Sachs, Lehman Brothers, First Boston Corporation, Morgan
Stanley including (including the EAFE Indices, the Morgan Stanley Capital
International Combined Asia ex Japan Free Index and the Morgan Stanley Capital
International Emerging Markets Free Index), Salomon Brothers, Merrill Lynch,
Donaldson Lufkin and Jenrette or other providers of such data; (t)
CDA/Wiesenberger Investment Companies Services or Wiesenberger Investment
Companies Service; (u) The Goldman Sachs Commodities Index; (v) information
produced by Micropal, Inc. (w) the Shearson Lehman Government/Corporate (Total)
Index; (x) Shearson Lehman Government Index; (y) Merrill Lynch 1-3 Year Treasury
Index; (z) Merrill Lynch 2-Year Treasury Curve Index; (aa) the Salomon Brothers
Treasury Yield Curve Rate of Return Index; (bb) the Payden & Rygel 2-Year
Treasury Note Index; (cc) 1 through 3 year U.S. Treasury Notes; (dd) constant
maturity U.S. Treasury yield indices; (ee) the London Interbank Offered Rate;
(ff) historical data concerning the performance of adjustable and fixed-rate
mortgage loans; and (gg) the Tokyo Price Index. 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;
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. the benefits of establishing and maintaining a regular pattern of
investing and the benefits of dollar-cost averaging; and
. measures of portfolio risk, including but not limited to, alpha, beta
and standard deviation.
The Trust may from time to time use comparisons, graphs or charts in
advertisements to depict the following types of information:
. the performance of various types of securities (common stocks, small
company stocks, taxable money market funds, U.S. Treasury securities,
adjustable rate mortgage securities, government securities and municipal
bonds) over time. However, the characteristics of these securities are
not identical to, and may be very different from, those of a Fund's
portfolio;
. the dollar and non-dollar based returns of various market indices (i.e.,
Morgan Stanley Capital International EAFE Index, FT-Actuaries Europe &
Pacific Index and the 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
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information may include symbols, headlines or other material which highlight or
summarize the information discussed in more detail in the communication.
The Trust may from time to time summarize the substance of discussions
contained in shareholder reports in advertisements and publish the Adviser's
views as to markets, the rationale for a Fund's investments and discussions of a
Fund's current asset allocation.
In addition, from time to time, advertisements or information may include a
discussion of asset allocation models developed by GSAM and/or its affiliates,
certain attributes or benefits to be derived from asset allocation strategies
and the Goldman Sachs mutual funds that may be offered as investment options for
the 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. 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.
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 are freely transferable and have no preemptive,
subscription or conversion rights.
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
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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 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 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. 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.
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The Declaration of Trust authorizes the Trustees without shareholder
approval to cause the Trust, or any series thereof, to merge or consolidate with
any corporation, association, trust or other organization or sell or exchange
all or substantially all of the property belonging to the Trust or any series
thereof. In addition, the Trustees, without shareholder approval, may adopt a
master-feeder structure by investing all or a portion of the assets of a series
of the Trust in the securities of another open-end investment company.
The Declaration of Trust permits the Trustees to amend the Declaration of
Trust without a shareholder vote. However, shareholders of the Trust have the
right to vote on any amendment (i) that would affect the voting rights of
shareholders; (ii) that is required by law to be approved by shareholders; (iii)
that would amend the voting provisions of the Declaration of Trust; or (iv) that
the Trustees determine to submit to shareholders.
The Trustees may appoint separate Trustees with respect to one or more
series or classes of the Trust's shares (the "Series Trustees"). Series Trustees
may, but are not required to, serve as Trustees of the Trust or any other series
or class of the Trust. The Series Trustees have, to the exclusion of any other
Trustees of the Delaware Trust, all the powers and authorities of Trustees under
the Trust Instrument with respect to any other series or class.
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
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reimburse the Fund for the expense of any such advisers in the event
that the Trustees determine not to bring such action.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against liability to which he or she
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
or her office.
TAXATION
Shares of the Funds are offered only to Separate Accounts that fund
variable annuity contracts and variable insurance policies issued by
Participating Insurance Companies. See the Prospectus for such contracts for a
discussion of the special taxation of insurance companies with respect to the
Separate Accounts, the variable annuity contracts, variable insurance policies,
and the holders thereof.
The following is a summary of the principal U.S. federal income, and
certain state and local, tax considerations regarding the purchase, ownership
and disposition of shares in each Fund of the Trust. This summary does not
address special tax rules applicable to certain classes of investors, such as
tax-exempt entities, insurance companies and financial institutions. Each
prospective shareholder is urged to consult his or her 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.
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Each Fund is a separate taxable entity. Each of the Funds intends to
qualify for each taxable year as a regulated investment company under Subchapter
M of the Internal Revenue Code, as amended (the "Code").
Qualification as a regulated investment company under the Code requires,
among other things, that (a) a Fund derive at least 90% of its gross income for
its taxable year from dividends, interest, payments with respect to securities
loans and gains from the sale or other disposition of stocks or securities or
foreign currencies, or other income (including but not limited to gains from
options, futures, and forward contracts) derived with respect to its business of
investing in such stock, securities or currencies (the "90% gross income test");
and (b) such Fund diversify its holdings so that, at the close of each quarter
of its taxable year, (i) at least 50% of the market value of such 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
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shares of such undistributed amount, and (ii) will be entitled to credit their
proportionate shares of the tax paid by the Fund against their U.S. federal
income tax liabilities, if any, and to claim refunds to the extent the credit
exceeds such liabilities. For U.S. federal income tax purposes, the tax basis of
shares owned by a shareholder of the Fund will be increased by an amount equal
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
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treated as a life insurance contract or annuity contract under the Code for all
subsequent periods during which such account is not "adequately diversified" and
(b) the holders of such contract must include as ordinary income the "income on
the contract" for each taxable year. Further, the income on a life insurance
contract for all prior taxable years is treated as received or accrued during
the taxable year of the policyholder in which the contract ceases to meet the
definition of a "life insurance contract" under the Code. The "income on the
contract" is, generally, the excess of (i) the sum of the increase in the net
surrender value of the contract during the taxable year and the cost of the life
insurance protection provided under the contract during the year, over (ii) the
premiums paid under the contract during the taxable year. In addition, if a 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.
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.
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.
OTHER INFORMATION
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
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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.
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APPENDIX A
Commercial Paper Ratings
- ------------------------
A Standard & Poor's ("S&P") 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. The following summarizes the rating categories used by Standard
and Poor's for commercial paper:
"A-1" - Obligations are rated in the highest category indicating that the
obligor's capacity to meet its financial commitment on the obligation is strong.
Within this category, certain obligations are designated with a plus sign (+).
This indicates that the obligor's capacity to meet its financial commitment on
these obligations is extremely strong.
"A-2" - Obligations are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher
rating categories. However, the obligor's capacity to meet its financial
commitment on the obligation is satisfactory.
"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" - Obligations are in payment default. The "D" rating category is used
when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The "D" rating will be used upon the
filing of a bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.
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, unless explicitly noted. The following summarizes the
rating categories used by Moody's for commercial paper:
A-1
<PAGE>
"Prime-1" - Issuers (or supporting institutions) have a superior ability for
repayment of senior short-term debt obligations. Prime-1 repayment ability will
often be evidenced by many of the following characteristics: leading market
positions in well-established industries; high rates of return on funds
employed; conservative capitalization structure 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) have a strong ability for
repayment of senior 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 (or supporting institutions) have an acceptable ability
for repayment of senior short-term debt 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.
The three rating categories of Duff & Phelps for investment grade commercial
paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps employs
three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses the highest certainty of timely payment. Short-term
liquidity, including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment. Liquidity
factors are excellent and supported by good fundamental protection factors.
Risk factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity factors
are strong and supported by good fundamental protection factors. Risk factors
are very small.
"D-2" - Debt possesses 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" - Debt possesses 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.
A-2
<PAGE>
"D-4" - Debt possesses 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 has failed to meet scheduled principal and/or interest
payments.
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
default is a real possibility and 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.
Thomson BankWatch short-term ratings assess the likelihood of an untimely
payment of principal and interest of debt instruments with original maturities
of one year or less. The following summarizes the ratings used by Thomson
BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest category and
indicates a very high likelihood that principal and interest will be paid on a
timely basis.
"TBW-2" - This designation represents Thomson BankWatch's second-highest
category and indicates that while the degree of safety regarding timely
repayment of principal and interest is strong, the relative degree of safety is
not as high as for issues rated "TBW-1."
A-3
<PAGE>
"TBW-3" - This designation represents Thomson BankWatch's lowest investment-
grade category and indicates that while the obligation is more susceptible to
adverse developments (both internal and external) than those with higher
ratings, the capacity to service principal and interest in a timely fashion is
considered adequate.
"TBW-4" - This designation represents Thomson BankWatch's lowest rating
category and indicates that the obligation is regarded as non-investment grade
and therefore speculative.
Corporate and Municipal Long-Term Debt Ratings
- ----------------------------------------------
The following summarizes the ratings used by Standard & Poor's for corporate and
municipal debt:
"AAA" - An obligation rated "AAA" has the highest rating assigned by Standard
& Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated obligations
only in small degree. The obligor's capacity to meet its financial commitment
on the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits 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.
Obligations rated "BB," "B," "CCC," "CC" and "C" are regarded as having
significant speculative characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
"BB" - An obligation rated "BB" is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
"B" - An obligation rated "B" is more vulnerable to nonpayment than
obligations rated "BB", but the obligor currently has the capacity to meet its
financial commitment on the
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<PAGE>
obligation. Adverse business, financial or economic conditions will likely
impair the obligor's capacity or willingness to meet its financial commitment on
the obligation.
"CCC" - An obligation rated "CCC" is currently vulnerable to nonpayment, and
is dependent upon favorable business, financial and economic conditions for the
obligor to meet its 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 its financial commitment on the obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable to nonpayment.
"C" - The "C" rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on this
obligation are being continued.
"D" - An obligation rated "D" is in payment default. The "D" rating category
is used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless S&P 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 or the taking of a similar action if
payments on an obligation are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "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 the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
The following summarizes the ratings used by Moody's for corporate and municipal
long-term debt:
"Aaa" - Bonds 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 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
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<PAGE>
fluctuation of protective elements may be of greater amplitude or there may be
other elements present which make the long-term risk appear somewhat larger than
the "Aaa" securities.
"A" - Bonds 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 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," "B," "Caa," "Ca" and "C" - Bonds that possess one of these ratings
provide questionable protection of interest and principal ("Ba" indicates
speculative elements; "B" indicates a general lack of characteristics of
desirable investment; "Caa" are of poor standing; "Ca" represents obligations
which are speculative in a high degree; and "C" represents the lowest rated
class of bonds). "Caa," "Ca" and "C" bonds may be in default.
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 operating 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: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from "Aa" through "Caa". The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of its generic rating category.
The following summarizes the long-term debt ratings used by Duff & Phelps for
corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The risk
factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered to be of high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but adequate.
However, risk factors are more variable in periods of greater economic stress.
A-6
<PAGE>
"BBB" - Debt possesses below-average protection factors but such protection
factors are still considered sufficient for prudent investment. Considerable
variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD" and "DP" - Debt that possesses one of these ratings is
considered to be below investment grade. Although below investment grade, debt
rated "BB" is deemed likely to meet obligations when due. Debt rated "B"
possesses the risk that obligations will not be met when due. Debt rated "CCC"
is well below investment grade and has considerable uncertainty as to timely
payment of principal, interest or preferred dividends. Debt rated "DD" is a
defaulted debt obligation, and the rating "DP" represents preferred stock with
dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A," "BBB,"
"BB" and "B" ratings may be modified by the addition of a plus (+) or minus (-)
sign to show relative standing within these major categories.
The following summarizes the ratings used by Fitch IBCA for corporate and
municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest credit
quality. These ratings denote the lowest expectation of credit risk and are
assigned only in case of exceptionally strong capacity for timely payment of
financial commitments. This capacity is highly unlikely to be adversely
affected by foreseeable events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. These ratings denote a very low expectation of credit risk and
indicate very strong capacity for timely payment of financial commitments. This
capacity is not significantly vulnerable to foreseeable events.
"A" - Bonds considered to be investment grade and of high credit quality.
These ratings denote a low expectation of credit risk and indicate strong
capacity for timely payment of financial commitments. This capacity may,
nevertheless, be more vulnerable to changes in circumstances or in economic
conditions than is the case for higher ratings.
"BBB" - Bonds considered to be investment grade and of good credit quality.
These ratings denote that there is currently a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered adequate,
but adverse changes in circumstances and in economic conditions are more likely
to impair this capacity.
"BB" - Bonds considered to be 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.
A-7
<PAGE>
"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 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. Default is a real
possibility, and capacity for meeting financial commitments is solely 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. Securities are not meeting
obligations and are extremely speculative. "DDD" designates the highest
potential for recovery of amounts outstanding on any securities involved and "D"
represents the lowest potential for recovery.
To provide more detailed indications of credit quality, the Fitch IBCA ratings
from and including "AA" to "B" may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major rating categories.
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes
the rating categories used by Thomson BankWatch for long-term debt ratings:
"AAA" - This designation indicates that the ability to repay principal and
interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay principal and
interest on a timely basis, with limited incremental risk compared to issues
rated in the highest category.
"A" - This designation indicates that the ability to repay principal and
interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents the lowest investment-grade category and
indicates an acceptable capacity to repay principal and interest. Issues rated
"BBB" are more vulnerable to adverse developments (both internal and external)
than obligations with higher ratings.
"BB," "B," "CCC" and "CC" - These designations are assigned by Thomson
BankWatch to non-investment grade long-term debt. Such issues are regarded as
having speculative characteristics regarding the likelihood of timely payment of
principal and interest. "BB" indicates the lowest degree of speculation and
"CC" the highest degree of speculation.
A-8
<PAGE>
"D" - This designation indicates that the long-term debt is in default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may include a plus
or minus sign designation which indicates where within the respective category
the issue is placed.
Municipal Note Ratings
- ----------------------
A Standard and Poor's rating reflects the liquidity concerns and market
access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit a strong capacity
to pay principal and interest. Those issues determined to possess very strong
characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory
capacity to pay principal and interest, with some vulnerability to adverse
financial and economic changes over the term of the notes.
"SP-3" - The issuers of these municipal notes exhibit speculative
capacity to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term
loans are 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. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"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, with margins
of protection that are ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes favorable quality, with all
security elements accounted for but 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.
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"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 of margins of protection.
Fitch IBCA and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
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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
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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).*
The number one lead manager of U.S. common stock offerings for the past
eight years (1989-1996).
_________________________
* Source: Securities Data Corporation. Common stock ranking excludes REITs,
====================================
Investment Trusts and Rights.
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The number one lead manager for initial public offerings (IPOs) worldwide
(1989-1996).
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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
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